新世紀能源 (NEE) 2004 Q2 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead, sir.

Good morning and welcome to our 2004 second quarter earnings conference call.

Lew Hay, FPL Group's Chairman and Chief Executive Officer will give some opening remarks, and then Moray Dewhurst, Chief Financial Officer of FPL Group will provide an overview of our performance for the second quarter.

Armando Olivera, President of Florida Power & Light Company and Jim Robo, President of FPL Energy are also with us this morning.

Following Lew's and Moray's remarks, our senior management team will be available to take your questions.

Before I turn it over to Lew, 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.

Lew?

Thanks, Bob, and good morning, everyone.

I'm very pleased to report that FPL Group had another strong performance in the second quarter of 2004.

Despite the mild weather in April and May, Florida Power & Light had a great quarter primarily due to a warm month of June, unexpectedly strong customer growth and continued success in managing our costs.

Likewise, FPL Energy has continued to perform well delivering earnings growth at the upper end of our expectations.

Moray will elaborate further on the quarters results in just a moment.

With strong results in the first half of the year and positive momentum going into the second half, including the fact that we are well over 90% of our gross margin has been hedged at FPL Energy, we are confident that we can now narrow the range of earnings expectations for 2004.

Assuming normal weather for the rest of the year and excluding the effect of adopting new accounting standards, as well as the mark-to-market effect of nonqualifying hedges, neither of which can be determined at this time, we now expect FPL Group's earnings per share to be between $5.05 a share and $5.15 a share.

Moray will give you the revised estimates by segment later in our presentation.

We've also indicated that we expect to become cash -- to begin generating cash in excess of our internal needs this year.

Considering our financial strength and our anticipated ongoing attractive growth prospects, our Board has approved a 10% dividend increase, raising our quarterly dividend from 62 cents to 68 cents.

This increase provides immediate value to our shareholders and positions our dividend pay out to be more in line with some of our peers while still providing us financial flexibility to invest in profitable growth opportunities.

The increase will take effect with our next regular quarterly dividend payment ,which is September 15.

Before turning it over to Moray, I would like to share a few thoughts with you about how 2005 is shaping up.

While we have not yet begun our budgeting process for 2005, and as such, cannot give a range of expectations at this time, we know enough about the major drivers to provide some general direction.

I recognize everybody is concerned about the negative impact of the conversion of the equity units in the first quarter next year, as well as the additions -- the plant additions at Martin and Manatee in the middle of the year.

While they will certainly prevent a challenge for us, there are other drivers that will help carry our performance and overall we are very encouraged about the prospects for FPL Group next year.

First, Florida Power & Light will benefit from the stronger than expected customer growth that it has been experiencing this year, and we expect strong growth to continue next year.

Second, we are very optimistic that FPL Energy will be able to sustain its track record of rapid growth.

We've made significant progress in hedging our 2005 output at relatively attractive prices and are on track for increasing the output of Seabrook through a power up rate in the spring.

Although wholesale markets are still depressed, we believe the worst is now behind us, and we will see gradual improvement going forward.

We also remain optimistic about future wind development as we continue to expect the production tax credits to be extended, although the exact timing is still uncertain.

We have a growing belong of projects ready to move into construction, and we are set to move quickly once the PTCs are in place.

In addition to these business drivers, our balance sheet and cash flow remain strong, and we remain -- and we continue to expect to be free cash flow positive this year, leaving us with flexibility either to add to earnings through productive capital redeployment or to return incremental value directly to the shareholders.

Given all of this, we believe that we will be able to deliver earnings per share in 2005 that are better than in 2004.

As is our normal practice, we expect to provide you with a range of expectations later this fall following the completion of our budgeting process.

I'm extremely proud of the results that we continue to deliver at FPL and FPL Energy, and I am optimistic that we will continue to create value for our shareholders going forward.

Moray will now discuss the results for the quarter in more detail.

Thank you, Lew.

FPL Group's second quarter result good performance from each of our two main businesses.

Florida Power & Light's strong results were driven primarily by record-setting customer growth.

Usage associated with weather was above normal for the quarter, but negative compared to last year's second quarter.

FPL Energy continued to deliver double-digit earnings growth.

Wholesale markets, particularly NEPOOL, began to improve.

We enjoyed the benefits of having added significantly to our wind energy portfolio last year, as well as from improved wind resource, and our operational performance continued at high levels.

As Lew indicated, given the likely range of non-weather drivers for the remainder of the year, we expect earnings to be between 5.05 and 5.15 per share assuming normal weather for the balance of the year.

These expectations also exclude the possible effect of adopting new accounting standards, as well as the mark-to-market of nonqualifying hedges, neither of which can be determined at this time.

Now let's look at the financial results for the second quarter.

In the 2004 second quarter, FPL's Group's GAAP results were 257 million, or $1.43 per share, compared to 239 million, or $1.34 per share during the 2003 second quarter.

FPL Group's adjusted 2004 second quarter net income was 251 million, or $1.40 per share, compared to 241 million, or $1.35 per share last year.

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

Please refer to the appendix to this presentation for a 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 employee insensitive 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.

Earnings at Florida Power & Light were 205 million in the second quarter, up from 199 million a year ago, and the earnings per share contribution was $1.14, compared to $1.12 in 2003.

Growth in new customer accounts continued at an extraordinary pace.

The average number of FPL customer accounts increased by 113,000, the highest level of increase in 10 years, really since the 1980s.

Today we serve more than 4.2 million customers.

While we do not expect the current extraordinary levels of growth to continue indefinitely, the fundamental attractiveness of Florida's economy and environment should continue to support customer growth in excess of 2% for at least the next several years.

Overall, retail kilowatt hour sales grew 1.2%.

We ended the second quarter with customer growth at 2.7%, while the net usage and mix effect was a negative 1.5%, driven primarily by unfavorable weather comparisons to last year's extraordinary quarter.

April and May of this year continued the trend of milder weather that we had seen earlier in the year, while June saw a dramatic turn around.

As a result, the net effect of weather in the second quarter was slightly positive compared with normal, but it was below what we experienced last year.

So weather-driven usage per customer compared to the last year quarter was down 1.2%, underlying usage growth mix and all other was down 0.3%.

For the second quarter, FPL's O&M expense, including amounts recovered through closes, was 319 million, up from 308 million in the 2003 second quarter.

While we continue to experience cost pressures in nuclear maintenance, employee benefit expenses and insurance costs, these items were well within our expectations.

We also experienced higher O&M in transmission and distribution primarily due to growth.

Our target of maintaining full-year O&M cents per kilowatt hour, roughly flat with last year, remains on track.

Depreciation and amortization at FPL increased from 223 million to 227 million, primarily due to the Fort Myers and Sanford expansions that went into service last year.

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

We expect that depreciation expense will grow modestly through the middle of next year when Martin and Manatee come on line.

These projects will add about 1,900 megawatts of generation and are on schedule to be in service by mid- 2005 at an expected cost of 1.1 billion.

In addition, in June, the Florida Public Service Commission approved the proposed 1,100 megawatt gas fire power plant at FPL's Turkey Point site, as the best, most cost-effective project to meet customers' needs for electricity beginning in 2007.

Additional reviews and approvals are needed from several state and federal agencies, and a final decision on the project is expected from the Governor and the Cabinet early next year.

To summarize, Florida Power & Light's second quarter earnings per share were affected by the following: Customer growth, a positive 9 cents; usage due to weather, negative 4 cents; underlying usage growth mix and all other, negative 2 cents; depreciation, negative 2 cents;

O&M, negative 3 cents; and other, including AFUDC and share dilution, a positive 4 cents; for a total of 2 cent improvement for the quarter.

Now let's turn to the financial results of FPL Energy.

FPL Energy's GAAP results were 69 million compared to 49 million in last year's second quarter.

FPL Energy's results, excluding the effect of nonqualifying hedges, were 63 million compared to 51 million 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 marked transactions in the nonqualifying hedge category.

FPL Energy delivered strong growth at 24% in adjusted earnings in the second quarter, primarily from our world-leading wind position, better market conditions, particularly in NEPOOL, and solid operational performance across the portfolio.

Project additions contributed 9 cents per share, with strong contributions from our wind portfolio being modestly offset by the drag from new gas merchant assets.

Earnings from existing assets were up 5 cents per share, driven primarily by improved wind resource and improved market conditions in NEPOOL.

These improvements were somewhat offset by unfavorable comparisons in ERCOT.

Asset optimization and trading activities were also up 2 cents per share compared with last year.

There were no contributions from development and asset restructuring activities this quarter or in the prior year second quarter.

Higher interest expense due to the expansion of the asset base in the second quarter of 2003, negatively affected results by 7 cents per share, all other factors netted to a negative 3 cents.

We've also provided in our appendix pages our wind index for the quarter.

You will you note that, although slightly below normal, the wind resource for the quarter was better than last year.

I'd now like to update you on our hedging progress.

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

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

As we indicated to you during the first quarter call, our hedging effort for 2004 is largely complete.

Therefore, I want to turn your attention to the substantial progress we have made in 2005.

As of the end of the second quarter, we now have 75 -- 70% of our 2005 output hedged, which would typically translate into about 85% of our expected gross margin, assuming that remaining open positions will mark to current market forward curves.

Over the quarter, we have more than doubled our 2005 megawatts hedged in ERCOT, from 24% at the end of the first quarter to 52% at the end of the second quarter.

We saw prices in the north zone of ERCOT firm up over the quarter and we were able to take advantage of that.

Let me also remind you that our other category in 2005 reflects the megawatts of the Marcus Hook facility, but as is our normal practice, we do not expect to execute significant hedges against this asset until it is fully tested and operational.

In addition to our progress for 2005 hedging, we continue to layer in some hedges for 2006 and 2007 as opportunities present themselves.

The roll off of some of the early Seabrook hedges during this period provides us additional upside at current market prices.

Given where we are in our 2005 hedging program at this early stage of the year, we can afford to be patient over the coming months.

Unless market conditions are unusually favorable, we would not expect to add greatly to our existing 2005 hedge levels over the summer months.

We will continue to take advantage of the natural volatility of forward markets in executing our hedging strategy, as you have seen us do in the past.

We continue to be delighted with the excellent performance of Seabrook and the opportunities we see for incremental growth.

Since the acquisition in late 2002, the integration of the team and the operations of the assets have exceeded our initial expectations.

The first phase of a planned upgrade will add 72 net megawatts and will be performed in the spring of 2005.

The second phase of the upgrade will add an additional 17 net megawatts and is currently scheduled for the fall of 2006.

Given current forward prices, this upgrade will be substantially accretive to ongoing earnings.

Also we continue to make excellent progress hedging Seabrooks output several years into the future at prices substantially higher than we are realizing today.

By 2007, the combination of the additional megawatts associated with the upgrade and increased prices equates to roughly 85 million in incremental net contribution margin, and 60% of 2007 is now hedged.

During the quarter we also announced plans to build a 106.5 megawatt wind facility in Oklahoma, contingent on the extension of the production tax credits.

Although we are disappointed that the PTCs have not yet been extended, we are optimistic that they will be extended by the end of the year.

We have a strong pipeline of wind development opportunities that are just waiting for PTC extension.

Therefore, we feel confident that wind development activities will be a growth driver for 2005 earnings.

Finally, we completed the sale of Bastrop that we announced in the first quarter results.

The elimination of the earnings drag from this asset should add roughly 3 cents per share to FPL Energy's contributions for each of the next several years.

To summarize the second quarter, FPL contributed $1.14, FPL Energy contributed 35 cents, and corporate and other contributed a negative 9 cents.

That is a total of $1.40 compared to $1.35 in the 2003 second quarter on an adjusted basis.

The corporate and other category was negatively impacted by a 2-cent loss at FPL FiberNet with the remainder being higher interest expense.

Given that the half year is now complete, we currently project FPL FiberNet to be modestly dilutive from an earnings perspective this year.

To conclude, we are refining our expectations for 2004 earnings to a range of 5.05 to 5.15 per share at the FPL Group level.

We expect contributions from Florida Power & Light of 4.25 to 4.30, from FPL Energy of $1.15 to $1.25, and a drag from corporate and other of 35 to 40 cents 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 nonqualifying hedges, neither of which can be determined at this time.

Now we will be happy to take your questions.

Thanks.

Thank you, sir.

If you do have any questions today, simply press the star key followed by the digit 1 on your touchtone telephone.

If you are joining us by speakerphone, please be sure to pick up you handset and remove your mute function before signalling.

Again, that's star 1 for questions.

We also ask that you please limit yourself to only 2 questions so that everyone may have the opportunity to pose their questions.

We'll pause for just a moment.

We'll first hear from Asher Khan at SAC Capital.

Mr. Khan, your line is open.

Hearing no response, we'll move on to Paul Patterson at Glenrock Associates.

Hi.

Can you hear me?

Yep.

What I wanted to ask about, I guess first, is the dividend.

You mentioned that you guys are trying to get -- that you guys were below the average for the group and I was wondering just what is the dividend philosophy going forward.

It seems you could still increase it a significant amount.

And then I wanted to ask you a little bit about the growth in your service territory.

Well, let me make a couple of comments on the dividend issue first.

Lew may want to add something as well.

In terms of overall philosophy, I don't think a lot has changed.

We have indicated in the past that we want to attempt to maintain a reasonable balance between decent yield and an appropriate pay-out ratio that still provides us enough internally generated funds to support our ongoing growth initiatives.

We continue to be very optimistic on the growth side.

But we did recognize that we were, partly as a result of others actions over the course of the last year or so, slipping behind a little bit in terms of the industry average.

So this is a move to try and bring us a little more back into the balance that we had had before.

I think it's also, obviously, indicative of confidence in the ongoing cash-flow profile that we expect to see.

But it still maintains, I think, the appropriate balance that allows us to fund our internal -- with internal generated cash the bulk of our growth opportunities.

Lew, do you have any other comment?

Not really, Moray.

I think you've summarized it very well.

I think you should view it as an indication of our confidence in our business going forward.

Our dividend pay-out ratio has drifted somewhat south over the last few years, as our growth has exceeded the growth in the dividends and this is a recognition of that.

I think our Board was a little reluctant to do anything with the dividend the last several years, because even though our prospects looked very good, we were cash-flow negative over the last several years, and we've got through that phase and so from a cash standpoint we are quite optimistic.

I agree with your comment, Paul, that we could possibly do more, but I think it's consistent with our conservative nature to not do too much at any one time.

Paul, you indicated you had a question on the service territory?

Right.

The question on service territory was, is there anything that's actually changed in terms of -- you guys seem a little bit more enthusiastic or a little bit more optimistic in terms of just the future growth in your service territory than I heard the last couple quarters.

I was wondering, has anything actually specifically changed or particularly changed that you can point to or a combination of factors?

I mean, you did mention it on the -- you did mention it in your prepared remarks that the economy, et cetera looks really good and stuff, is there anything in particular that you can point to that's driving this, or a few factors or?

I think the fundamentals remain attractive and we try to indicate that.

Maybe the only thing that's changed is just how sustained this particular period of kind of above average customer growth has been.

And just, frankly, just looking around, if you drive around the state, the extent of the new construction that's going on, the new permitting activities, and the relative health of the Florida economy, and the steadiness of that all give us great encouragement that we are going to continue to see this boom for some time.

As I indicated in the prepared remarks, we don't think it's going to maintain itself at the 2.7% level indefinitely.

We do see it tapering off.

But certainly maintaining an average in excess of 2% seems very realistic for the next few years.

Thank you.

Moving on, we will now here from Laura Blanco at Credit Suisse First Boston.

Good morning.

Good morning.

I have a question regarding the outlook for prices in your merchant [ph] region.

It looks like you are much more optimistic of this, it seems to me that you are much more optimistic on the outlook for prices and I would like to get more flavor on that and what kind of changes are you seeing?

Initially you mentioned NEPOOL, is that down at the capacity market that is getting better, could you provide a little flavor on that?

Sure.

Thank you.

Let me start out by saying that in all matters relating to forward prices for these competitive markets, some caution is warranted.

We are by no means looking at strong and healthy markets at this stage.

We are still very much in the trough of the commodity cycle.

Having said that, however, if we go back to just basic fundamentals, we do see the cycle beginning to turn here.

We are seeing reasonably good volume growth in most of the major markets and, of course, there's not a lot of new capacity coming in.

So over time that presumably will mean a tightening of these reduction of reserve margins, tightening of the markets.

And we know that from experience that you don't have to necessarily get a lot of tightening to see a few periods of increased volatility and that can mean quite an impact in earnings turns if you're prepared for it.

Specifically with respect to NEPOOL, I think the energy market as if anything has been stronger than the capacity market, the capacity market still is fairly weak there.

Some of that is structural from the way it's organized and until we get some clarity as to whether the rules are going to change or not going to change, that may remain the same.

So primarily on the energy side.

Jim, you may want to comment too?

Moray, the only thing I would add is we're starting to see customers contract for a little bit longer terms than they have been willing to do over the last couple years.

And that's obviously healthy for the market.

I have a follow up on that.

The first one is, I remember in your analyst meeting you were talking about 2 possibilities in terms of your merchant segment or subsidiary getting better.

And I think you were talking about 2006 and 2008 added to [inaudible].

Are you closer to 2006 now versus 2008?

No, I think what you may be referring to is for the period when equilibrium might return.

Right.

And we painted rough gold posts of somewhere between actually 2008 and 2012, as I recall.

Okay.

I don't know that we see anything that would change that expectation.

So I think equilibrium in these markets is still quite a ways off.

But between the bottom of the market and equilibrium, there's a lot of good things that can happen again as long as we are prepared to take advantage of them.

So I don't want to get people totally worked up because it's not the beginning of the end, but it may be the end of the beginning, I believe Mr. Churchill once said.

Moving on, we will now here from Andy Smith at J.P. Morgan.

Good morning.

Good morning.

I wanted to see if you guys could give a little clarity on the market pricing issue and the way your hedge outlook changed.

I think you made a comment in your prepared remarks that you saw ERCOT being a little less favorable, NEPOOL being a little more favorable in the quarter.

And it looks like the bulk of your hedge book change was at ERCOT.

Could you just sort of maybe give a little background and color on how those 2 issues reconcile?

And then on an unrelated issue, it looks like tax rate improved.

Is that all just production tax credit at wind or is there something else going on there?

On the second question, it's fundamentally due to the PTCs, the mix effect that that has.

Okay.

On the first one, the slight decrease in ERCOT was really due to the run off of some overhedges that we had in place, so just on a comparative basis that put us down a little bit.

The current hedges, I think we've said for some time that we've seen north ERCOT trading in the $8 to $12 a megawatt hour range.

Most of these hedges were put in at the 10 to 11 range.

So towards the upper part of that, which is some of the best pricing -- forward pricing we've seen there for time.

In terms of NEPOOL, to take you back to the fall of '02 when we were looking at forward prices for '03 and beyond in the $34, $35 a megawatt hour, were of course, around the clock prices now, forward prices for that market are $10-plus north of there.

So obviously all of the new hedges that are being layered on NEPOOL are significantly up.

However, I would say that we already had some length in the NEPOOL hedging profile, because they there had been more length and liquidity already in NEPOOL.

So most of the hedges that we have been adding in NEPOOL have been out in the 2006, 2007, even 2008 time frame.

So they won't have a big impact on the 2005 profile.

The biggest plus for the 2005 outlook is really coming from the hedges led in at ERCOT.

Okay.

Gotcha.

And so if I am understanding what you are saying is that your -- the change in the hedge percentage from 1Q to 2Q, there's a mix change in there that you guys are seeing a benefit of?

Correct.

Okay.

Great.

Thanks.

We will next hear from Paul Clegg at Calyon Securities.

Good morning.

Could you just provide a little more detail on the decline in per-customer usage at the utility?

This is the quarter second quarter in a row that we've seen this, and last quarter it seemed more like an aberration, but could it be possible that there's just a little more price sensitivity in your region with so many people on fixed income and fuel prices being higher?

Let me say first that the -- that the decline in other usage is much lower this quarter than it was last quarter.

We still do see some of what we think is the same effect, which is that the simple weather adjustment model that we use, which really has 2 factors in it, cooling degree days and heating degree days, doesn't capture the full richness of how weather affects the territory in any particular quarter, and we are currently actually working on a more finely detailed model to see if we can get a better explanation of that.

Having said all that, I do think it's possible that there may be a little bit more of a price elasticity or income elasticity, in fact, than our model would suggest in any particular period.

However, what I would say is, the model obviously is calibrated over an extended period, which is particularly appropriate in terms of variables like price elasticity or income elasticity.

And we have seen this phenomenon at other times in the past.

So the volatility of the growth of usage per customer is much higher than the volatility of customer growth.

So we have seen other periods, for short periods, for 2 or 3 quarters where the usage has been negative -- other usage has been negative, but then it's come back.

So at this stage, we go back to the fundamentals of what drives usage per customer, which is fundamentally steadily improving economics that translates into larger average house size, more appliances, those kind of measures.

And we don't really see any change in those fundamentals.

So I think we may be looking at kind of a little bit of a short term slow down in that.

But at this stage, no, we don't see anything that would change the longer term outlook.

I still think somewhere in the 1% a year growth in usage per customer looking ahead over the next 5 years is a realistic number to look at.

Okay.

Great.

Maybe just a quick question for Jim.

Jim, the last time we heard from you on the subject of acquisitions you sounded fairly pessimistic in terms of the opportunities that were out there.

Would you like to take an opportunity to just update us, give us a little more color on if you see more reasonably priced opportunities out there?

I think we continue to be disappointed that the opportunities we've looked at have been sold at prices that we think are higher than warrant, and so we're going to continue to be disciplined, and I don't think much has changed since the last time I spoke to you about this.

Thank you.

Moving on, we'll now hear from Vic Katan at Deutsche Asset Management.

Yes, thank you.

Lew, if I can follow up on that dividend question as to whether the Company is now embarking on a new dividend policy in terms of pay-out ratio, that is future dividend will be more in line with earnings or will be rising because you want to raise the pay-out ratio?

The second question is on CapEx.

I will come back to that.

Dick, it's hard to give a precise answer to that since it's really dividend policy is something that's decided by our Board.

I think the key take away from this is an acknowledgment that we were drifting south of the rest of the industry and we tried to bring it back up in line.

I would say more in line with the industry.

Depending on which people you look at in the industry, ones you consider to be our peers, I think it puts us at about a 53% pay-out ratio based on this year's earnings, and the way we look at the rest -- our peer group, probably averaging around 55 but a fairly good dispersion around that.

I am not going to make any commitments to exactly growing this in line with earnings, but if you look at what our past practice has been, I would say we're -- it's still going to be fairly consistent, that we would be -- my goal would be to be able to consistently grow our dividends, but also make sure that we have ample cash to fund our organic growth in both of our businesses.

Vic, you had a question on CapEx?

Yes, just to clarify that going forward, what level of CapEx could one expect beyond the maintenance CapEx, that is for growth CapEx.

And if your reinvestments are going to be again vested or so, so could you comment on that?

Sure.

Let me start first of all with just Florida Power & Light for the next few years and that we really can't distinguish between growth and maintenance.

We are maintaining as we grow.

But we can expect on the order of 1.5 billion a year for certainly for the next several years just given the growth profile and the large generation projects that we have underway.

In terms of FPL Energy, we have really very little that's programmed in at this stage.

We have just the final parts of the Marcus Hook facility, the Seabrook upgrade along with some associated reinvestment in that asset, long life and maintainability.

But we are talking about a couple hundred million there this year.

Beyond that we are into just nominal levels of maintenance CapEx at FPL Energy.

Now, to that we need to add the wind -- spending on new wind projects, and there, as we've indicated in the past, looking out over a 5-year period, we think that we will probably be able to average somewhere between 200 and 500 megawatts per year of incremental new wind, although it will be lumpy depending on when and how the PTCs get reauthorized.

And that translates to roughly 200 to 500 million in CapEx.

So we can't say exactly what the timing of those will be.

But as I indicated in the prepared remarks, we've got one formally announced project that's ready to go and several others kind of waiting in the wings.

So I think as soon as we get resolution on the PTCs, you can expect to see some healthy spending on the wind side.

But other than that, it comes back to the question that Jim just addressed which is really the opportunistic pursuit of assets and there we are going to continue to look patiently, but we are going to continue to be very disciplined.

It's only going to be something that we do if we really see the possibility of good value accretion and earnings accretion.

We'll next hear from Paul Ridzon at Key McDonald.

Could you elaborate on beyond Oklahoma, the 106 megawatts, what's in the wind pipeline?

And then aside from pricing, in NEPOOL, what are you seeing on spark spreads?

And then lastly, if you can give us some idea of what the long-term strategic outlook is for fiber?

In terms of the wind pipeline, at this stage I can't go into a lot of details about specific projects.

I can tell you that the sum total of what we are looking at there, the so-called belong which includes projects that up to the 99% probability level on down to those in the Early Development 5% level, is about 3,000 megawatts of total stuff that we are looking at.

And a good portion of that is well along in development.

So as I say, looking out over the next 5 years I think we feel very comfortable in that range in 200 to 500 a year on average.

In terms of the NEPOOL market, the gas spark spreads have been kind of in the mid-teens, around the 15 level.

Now one thing, of course, that works in our favor up there is we have the oil fired assets in May and with the relative volatility of oil and gas recently we've had some good opportunities to be able to flip back and forth a bit, periods actually where the attainable spark spreads on the oil assets have been better than what the gas market will give you, and that will turn around and then you can by back the positions against these oil assets.

But gas spark spreads in the mid-teens.

And then the third question, long-term outlook for fiber, not a lot of change there really.

We are continuing to make progress in growing the business in the metro markets, which is where we have very strong competitive positions.

That's offset by the continued decline in the long-haul market.

We don't see any change in the long-haul market.

There is an absolute glut of fiber and there is likely to remain an absolute glut of fiber in that market for as long as the eye can see.

But clearly the metro markets are relatively attractive and as the demand growth continues there, eventually that will start to, just from a mix impact, have more weight in the FiberNet portfolio and we will eventually start to take the whole thing up.

So we still feel very good about the competitive position, but obviously the absolute level of results is not where we would like it to be, but we think we are doing the right things in terms of just managing the business for minimal expense, minimal CapEx so that it's not a significant drag on earnings and has a very small contribution to cash-flow.

If Congress passed a wind credit extension tomorrow, what could you get on line in '05?

Let me turn that question over to Jim.

If it was literally tomorrow, we would be able to do what Moray has laid out that we expected to do on an ongoing basis, which is anywhere from 200 to 500 megawatts.

A lot depends on how much suppliers are, of the equipment or how much inventory they've built.

Obviously, with the uncertainty, suppliers have taken a different perspective around the U.S. market and supplying the U.S. market.

So the reality is its not going to happen tomorrow, and so we feel very good about how we are positioned.

We feel very good about our pipeline.

And we continue to develop new projects with our customers.

That goes on a pace.

And we feel good about the prospects for '05.

Obviously, it will be dependent on Congress passing a bill sometime by the end of the year.

I think it's fair to say, that -- in a hypothetical case if we had the PTCs tomorrow, we could certainly get a couple hundred megawatts done by the end of this year.

The big uncertainty really is the timing of the PTCs.

Thank you.

We'll next hear from Daniele Seitz at Maxcor Financial.

Good morning.

What makes you feel sure that this will happen before year end?

I'm sorry, could you repeat the question?

You mentioned that there was a high degree of probability that PTC would pass before year end and I was wondering why you felt so sure?

Yeah, let me turn this question over to Lew.

Thanks, Moray.

There obviously continues to be widespread support for the PTCs, really both in the House and the Senate, Republicans and Democrats alike.

This has been a very tough year for passing any kind of legislation, although my comment is based primarily on input from our lobbyists who are staying pretty close to the situation, and although it is an election year, it is unclear what's going to happen before the elections.

We still have this legislation called the FSCETI bill which is considered "must pass" legislation.

Now even though it's considered that, there's no guarantee it will get passed, but it does have the extension of the PTCs in it and there is, I think, a good probability there will be a session of Congress post the election.

And if you had to put odds on the situation, that's probably the time period where this will get passed.

We are hearing from our lobbyists that there's a possibility that it could pass prior to the election, but it's really hard to tell.

But nonetheless the reason we are optimistic is because there's widespread support for it.

Sooner or later this log jam in Congress has to break.

On another subject, could you -- how do you visualize your next rate review in Florida?

Perhaps Armando you would like to comment on that?

Daniele, could you repeat the question?

Yes.

How do you visualize the next rate review in Florida, through settlements?

And the likely dates if you don't mind?

As you know the current rate agreement expires at the end of '05.

So we are preparing for the possibility of a rate agreement, a rate case, while at the same time looking for an opportunity for a settlement as we've had in the past.

I think it's unlikely that we would get a settlement this year, but I'm optimistic that we would have a shot at a settlement some time in the first, second quarter of next year.

If not, we are prepared to go through a full-blown rate case.

Daniele, perhaps we should also add that you recall that there was legislative proposal in this last year's legislative session, it's also a possibility that there might be another legislative approach in the next session.

That's not something that we would put high odds on, but it's definitely a factor that we need to keep in the backs of our mind.

We certainly would be open to some legislative solution.

But as you know, there are a lot of different players that would have to be part of that.

We'll next hear from Steve Fleishman at Merrill Lynch.

Hi, guys.

Good morning, Steve.

First on the Seabrook comments you made, this 85 million of additional, I guess that's net margin, by '07?

Yes.

That's pretax margin?

That's pretax, yeah.

If you could give us some flavor, I guess 2 things on that.

One is, is there away to split that between the benefit of the up-rates versus the benefits of higher priced hedges?

And the seconds is, are you assuming any price, certain price for your still remaining unhedged generation out there?

Will you give that number?

I don't have the number off the top of my head, but I think you can get that just by taking the 72 megawatts in the spring of '05, the 17 in the fall of '06, that gives you 89, kind of work it out from the pricing.

You can see how much that piece must contribute.

The prices out in that range are in the mid-forties, actually I'm just being slipped a note here that says that roughly 2/3 of that amount is -- let me reverse it, 1/3 is from the up-rate, 2/3 from the uptick on the rehedging.

Okay.

But just to clarify on the rehedging part of it, when you give those numbers, what are you assuming -- I think you said you were about 60% hedged in '07?

60% in '07, now.

Are you assuming a certain price for the unhedged piece, or are you assuming they will stay where they are, or as to where the forwards are?

Yeah, let me -- Jim's going to give you the details.

Thanks.

Effectively we -- we give you that number we assume that we hedge that remaining 40% at now current market prices.

Okay.

Which are in the mid-40s.

Which are in the mid-40s.

Maybe higher.

So the bottom line is, between the hedges you have on, which I think for '07 which are probably around the current market, plus assume the unhedged at the current market and the up-rate, there's about 85 million of additional margin, '07 versus '04?

Yeah, over '04.

Okay.

One other question on the, just on this PTC issue, if for some reason this doesn't get resolved this year, can you still have an up year in '05?

Or would that make it hard to achieve.

Yes, I think definitely.

Where it would start to become really tough is if we don't get the PTCs before the early part of next year.

So even if they don't get passed next year, and gets passed early in the next session because we have these projects that are kind of lined up and ready to go we would still be able to get contribution in '05.

If it starts to slip beyond that, then that would definitely -- we would have to be looking for some other source to fill in that gap.

Up next is Michael Goldenberg at Illuminous Management.

Good morning, guys.

Can you hear me?

Yes.

Good morning, Michael.

Just wanted to follow up on Daniele's question on the upcoming rate case, outcome of the rate case.

I guess in terms of ideal outcome if you can comment on timing and also the design of the rate case, if you would prefer it to look the way it looks now or if you would still consider fixed rates?

Well, an ideal outcome would be to have a resolution tomorrow that had an increase in prices.

Ideal realistic outcome.

I'm being a little facetious because ultimately this is a product of negotiation.

So I think the more I say, actually the worse I make our situation.

Let me just go back to some basic principals.

I think we certainly believe, we think there's strong evidence that the existing structure has been a good one for both customers and shareholders.

The structure is clearly well accepted in Florida.

It's been used by another IOU as a pattern for an agreement of their own.

It's one that the commission and other important actors in the state are well familiar with.

The commission is on record as having indicated that it would like to see negotiated solutions rather than full-blown rate cases.

So clearly, we like the structure and we'd be very happy to see a continuation of that.

But not at all costs.

The fundamentals of the deal have to be appropriate.

Second principal is we would in general prefer a longer period of rate certainty to a lesser one.

However, as we look out over the next few years, we have got 2 key things that we have to watch out for, one is, because we are growing very rapidly, we are going to have to continue to face the need to potentially add CapEx for generation, so if our growth forecast turns out to be a little bit off, we need a mechanism to accommodate that so that the shareholder doesn't get left holding the bag in the fixed rate period and then all the benefits flow through just strictly to the customer in a subsequent period.

And of course, we are also facing a much less certain environment on the inflation and interest rate side.

So in principal, we would like it to be longer, but if it's going to be longer we've got to have enough flexibility built into the structure to accommodate some of those uncertainties.

So I think that's probably as far as I should go today.

And my second question is just more specific.

What's your hedge Seabrook in '06, I think I missed that number, I know it's 60 in '07, what's it in '06?

Percent of Seabrook outlook hedged?

Yeah, I'm not sure that we've got that figure.

Okay.

Stand by just one second.

It's over 85%.

I was just passed a note that says 88%.

Okay.

And in general pricing kind of increases every year gradually from somewhere today to '07, your average price increases?

Yeah, I think that's fair.

Although there will be a big kick up, the biggest kick up will be in '07 because we had some early period hedges that ran, were actually put in place in the fall of '02 that ran through '06 and those are some of the lowest price hedges.

So as they say roll off, I think there was a couple hundred megawatts that will kind of jump from the low 30s to sort of the high 40s.

We'll now hear from Wen Wen Chen at ABN Amro.

Hi.

How much equity is coming in at the beginning of 2005?

Coming from the conversion?

575 million, and it translates to roughly 9 million shares.

And is this a situation where the debt security gets remarketed or is this a straight solution?

It's one of the remarkets.

Okay.

Are you still expecting 200 to 300 million of free cash flow this year?

Absent new wind spending, yeah, we would expect to be somewhere at that level.

It depends a little bit on what happens with the fuel clause at FPL which moves the aggregate numbers quite a bit.

From where we sit today, yeah, on that order of magnitude.

We'll now hear from Shallini Mahajan at UBS.

Hi.

Most of my questions have been answered, but I have one more.

For the utility, the trailing EPS is $3.95, your guidance is at 4.25, 4.30.

What factors should we be thinking about as we model the second half?

That's a question I'm not well prepared for.

I would have to think back on the second half of last year.

My recollection is that the summer was relatively flat and then September and October were very strong from the a weather perspective.

Would you have the [inaudible] number for the second half of '03?

No, but why don't I commit that we will get that out on the website in due course.

I think that would be a useful comparison for people to have.

Okay.

Aside from weather, anything else that you know -- and from the customer growth, any other specific issues we should be thinking about?

Not that I can recall off the top of my head.

But we'll have a look at whether there were any sort of unusual issues in the profile of O&M spending last year.

I don't recall any at the moment, but there may have been some.

If you do find that your question has been answered, please press the pound sign.

We will next hear from Kerry Stevens at Morgan Stanley.

Hi.

I just wanted to clarify, I think for the first time you are now saying that the hedge prices for '05 are higher than '04.

And it sounded to me like that was mainly in ERCOT and you were talking about $10 to $11and the range being 8 to 12.

So should we assume that this year pricing was kind of at that lower end of that range?

No, I don't think that's fair.

I think for '04 we are probably in the middle of that range.

There will be a slight uptick in the average hedge price for ERCOT.

There should also be a slight uptick in the average hedge price in NEPOOL as well.

Were those both Seabrook and spark spreads or mainly --?

Yes, both, for both.

Okay, so for both.

Can you know what that delta is on the spark spread side?

I think you've gone over Seabrook clear enough.

I don't have those numbers immediately available.

Okay.

But you said 15 is now what you are kind of currently seeing for NEPOOL, right?

Yes.

That's right.

Okay.

Some of the questions you're asking we will address a little more directly later in the year as we go through our profit planning, we will do sort of the more direct comparisons between '04 and '05.

So when we actually put out a range of expectations -- specific range of expectations, we will try and get you some more of that.

But we don't really have all that collected together in sufficient detail that we are real comfortable with it right now.

We will now hear from Ashar Khan at FAC Capital.

Good morning.

Sorry for the mix up in the morning.

Moray, you mentioned the negatives, the dilution from the convert and the plans coming out in the utility and you will be able to overcome that in '05, could you just tell us what those negatives amount to in Earning per share?

The short answer is no, let me tell you why.

On the equity units, the conversion of the equity units, I have said all along that people should expect the first set of units to convert kind of on schedule and that still remains true.

However, depending upon the spending profile at FPL Energy, and given where we are now are on the free cash-flow profile overall, I do now believe that we should be able to offset a portion of that through share repurchase if we don't have significant new spending at FPL Energy.

So that you can think of a series of scenarios if you like really depending upon what our wind investment opportunity is and if we are at the low end of that, then I think there would be more share repurchase.

Which is if we are at the high end of that there probably wouldn't be any.

I just don't know the answer to that right now.

On the second one, the Martin and Manatee, I believe we have put out the sort of swing in depreciation and AFUDC, if not, we can certainly get that.

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

Okay.

Thank you very much.

We will now hear from Peter Vistica at Smith Barney.

Hi.

I have 2 questions actually.

First of all, when would you consider buying back your convertible at all?

As I just said, we do expect the convert itself to come in, but based on the current outlook for free cash-flow, I would expect to offset some portion of that, a variable portion depending upon the spending of wind with share repurchases.

Right.

And second one, given your sort of gas plant in Texas, can you just comment philosophically on whether you would repurchase or JV, say with TXE's [inaudible] to enhance the competitive position in that market?

I don't think I could say as a general answer to that question, I'm not sure there's either a yes or no.

Right.

Other than we don't comment on things that we look at from an acquisition standpoint.

Moving on, we'll hear from Zack Schreiber at Duquesne Capital.

Hi, guys, it's Zack Schreiber, can you hear me?

Good morning, Zack.

Good morning.

Congratulations on a good quarter.

In terms of the ERCOT hedging numbers, I don't want to beat a dead dog here, but I just want to make sure I understand what exactly you are saying in terms of average realized sparks for '04 in the midpoint of the range, and '05.

Again, I don't have the numbers down to the penny.

Sure.

My recollection is that the hedges for '04 were laid in at around the $10 level.

And what we've been seeing, I think it's fair to say that you can assume that the increment that we laid in in the second quarter of this year for '05 was more around an average of 11.

Got it.

That's about on 15 million megawatt hours or so?

Zack, you --

Okay.

-- better numbers than I do right now.

Okay.

I can calculate it for you.

Just moving along, the second question, on NEPOOL and Seabrook and so forth, going back a year, year and a half we were selling most of that on a unit contingent basis.

And as we got more comfortable we were gradually sequeing it into more of a firm liquidated damages product.

No, that's not correct.

That's not correct.

No.

Pretty much all our transactions in New England have been done on a portfolio basis.

Got it.

Which raises a good point.

We talk about Seabrook being specifically hedged a certain percentage out in '06 and '07.

That's kind of a full convenience.

We may have put those positions against Seabrook, but in general we manage the entire portfolio as a whole.

So we obviously have all the units available to back each other up from an operational reliability point of view.

But they are all firm sales.

We generally found that the discount that you take for unit contingent just is not worth it given the excellence of our operational history.

We'll now hear from Vicas Dwivedi at Prudential Equity Group.

I think after this we can take one more.

Just one quick question on Seabrook.

With respect to your eventual goals for production cost targets, where is the plant running now on a dollar per megawatt hour basis?

That's not a number that we have disclosed, nor do I think we are likely to disclose it for competitive reasons.

Okay.

That's all I had.

Thank you.

Thanks.

Our final question today will come from Nancy Doyle at MetLife.

I'm sorry, could you give some information about the status of your coal inventory and information about how you hedged your coal requirements going forward and what you are seeing as far as pricing in the coal market?

Well, first of all, let's remind people that we have essentially no coal at FPL Energy and only about 6% of FPL's supply needs are coal-fired facilities.

And those facilities are managed by others.

So I don't have any details on the coal situation there.

Obviously, the fuel associated with those assets would be passed through the fuel clause.

In general, coal is under a long-term contract.

So I've certainly not heard of any significant issues in terms of either availability or pricing.

Those units cost continue to perform and deliver well.

Coal for us is really not an issue.

All right.

Thank you.

Thank you very much.

Mr. Barrett, would you like to make any additional comments or closing comments?

I just want to thank everyone for joining us this morning.

Thank you.

Good bye.

That will conclude today's conference.

Thank you for joining us.

You may now disconnect.