新世紀能源 (NEE) 2005 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 to turn the call over to the Director of Investor Relations, Mr. Jim von Riesemann.

Please go ahead, sir.

Thanks, Audra.

Welcome to our 2005 second quarter earnings conference call.

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

Lew Hay, FPL Group's Chairman and Chief Executive Officer, Armando Olivero, President of Florida Power and Light Company, and Jim Robo, President of FPL Energy, are also on this call 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 this earnings discussion on July 22, 2005, is based on unaudited financial information.

All historical and current EPS figures are adjusted to reflect the March 15 two-for-one stock split, and any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor provision 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 to the presentation which you can access on our website, www.fplgroup.com.

Moray?

Thank you, Jim.

Good morning, everyone.

Overall, the second quarter 2005 saw a continuation of some of the key trends of the first quarter in the year.

Florida Power & Light delivered good results, although its performance was hampered by a decline in usage per customer, primarily a function of continued mild weather for most of the quarter.

Customer growth continued strong, exceeding our expectations.

And we passed a key milestone with a smooth introduction to service with the Martin and Manatee expansions on schedule and under budget.

FPL Energy had a very good quarter, and delivered good growth in adjusted earnings despite the scheduled refueling outage at Seabrook.

Strong performance from our merchant and contracted portfolios, along with additional wind projects, helped contribute to the improved adjusted earnings results.

The improvements in forward commodity markets that we observed in the first quarter continued, enabling us to add to our 2006 hedge position significantly.

These additional increases in forward prices, not surprisingly, also produced additional mark to market losses in the non qualifying hedge category, which I will describe in more detail later on.

The commodity market improvements also helped solidify our optimistic expectations for 2007, which we outlined in April and which are now fully supported by current forward curves.

We also made good progress with our wind development and continue on track towards adding between 500 and 750 megawatts of new capacity this year.

During the quarter, we completed the acquisition of Gexa Corp, a retail electricity provider based in Houston.

The addition of Gexa complements our existing asset position in the important hook-up market.

And finally, in early July, we announced an agreement to acquire a majority ownership stake in the Duane Arnold Energy Center, a nuclear power facility located 15 miles northwest of Cedar Rapids, Iowa.

The addition of this asset complements our existing wind portfolio and nearly doubles the size of our regional presence.

The addition of Duane Arnold is expected to be immediately accretive to earnings and will enhance our earnings growth in 2006.

We continue to feel comfortable with our 2005 earnings per share estimate of $2.45 to $2.55 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 could be determined at this time.

The better than expected performance from FPL Energy has mostly offset the somewhat weaker than expected FPL results.

Given what we know today, we would expect FPL most likely to be towards the lower end of is its range, and FPL Energy to be towards the upper end of its range; but of course, a lot can happen in the third and fourth quarters.

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

In the 2005 second quarter, FPL Group's GAAP results were 203 million or $0.52 per share compared to 257 million or $0.71 per share during the 2004 second quarter.

FPL Group's adjusted 2005 second quarter earnings were 255 million or $0.66 per share compared to 251 million or $0.69 per share.

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

Please refer to this presentation's appendix 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 incentive 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.

At Florida Power & Light, the relatively mild weather in the first quarter continued into April and much of May, reducing average usage per customer.

In addition, we saw some indications of weakness in underlying usage growth, which we expect will be temporary but which will act to hold back FPL's performance this year.

I will discuss this topic more in a moment.

On the other hand, customer growth continued strong, as did the leading indicators of future territory growth.

As I mentioned, the Martin and Manatee expansions began operations, added 19 megawatts of needed capacity.

This additional capacity supports our load growth and also helps replace some higher cost purchased power contracts.

These projects were completed well under our original cost expectations, and the lower costs are reflected in our retail rate case, adding less pressure to rates than would otherwise have been the case.

In regulatory matters, earlier this week we received a decision on our storm recovery proceeding from the PSC, which, while not everything we had hoped, confirms the most important principles governing recovery of storm restoration costs.

We continue to move forward with our rate case, which is progressing on schedule.

And I will provide updates on these issues later in the call.

Second quarter 2005 earnings at Florida Power & Light were 201 million, down from 205 million a year ago.

The corresponding earning per share earning contribution was $0.52 per share versus $0.57 per share in 2004.

Growth in new customer accounts continued at a strong pace in the second quarter.

The average number of FPL customer accounts increased by 95,000 or 2.3% over last year's comparable period, and this growth remains slightly above historical averages.

This continuation of the trend from the first quarter is encouraging.

As before, the fundamentals of the Florida economy reflected in robust job and income growth remain strong, and housing starts also at encouraging levels.

These dynamics are expected to remain strong into the foreseeable future.

Overall, retail kilowatt hour sales fell 1.3% during the quarter, driven principally by milder weather.

Cooling degree days, the common metric used for determining weather impact on energy usage, were more than 14% below normal for the quarter, compared with 8% above normal in last year's second quarter, or roughly a 22% swing in weather patterns.

As a result, the usage growth associated with weather declined 3.5% quarter over quarter.

Underlying, or weather adjusted usage growth this quarter, was well below long term averages.

In this respect, the first half of 2005 has been somewhat similar to the first half of 2004.

I have previously noted that underlying usage growth is more volatile from quarter to quarter than its customer growth, and it is not uncommon to have quarters with negative values for this indicator.

Nevertheless, obviously this performance is a disappointment.

We will be watching closely for trends; but at this point, we do not believe this is anything more than a temporary effect.

The fundamentals that have driven long term usage growth, gradually improving income levels reflected in larger houses, greater use of appliances and electronic equipment, and the progressive development of parts of the service territory further inland, do not appear to have changed.

As you know, weather remains the single biggest driver of quarterly earnings fluctuations at FPL.

Last year, we began disclosing heating and cooling degree days, both actual and normal, on a quarterly basis.

However, we have realized many analysts look for a means of assessing prior to quarter's end what the impact of weather may be; and the regional data on heating and cooling are sometimes quite unrepresentative of conditions in our service territory.

Accordingly, as we indicated in our first quarter call, we will be providing a monthly update of weather and its impact on sales volume at FPL.

These monthly figures will be loaded onto our website around the 15th day of the following month.

As you can see from this chart, changes in degree days are not perfectly correlated to either production or usage, but they are indicative of directional changes.

Production will differ from retail sales due to wholesale sales as well as line losses.

For the 2005 second quarter, FPL's O&M expense, including amounts recovered through closes, was 316 million, down from 319 million in the 2004 second quarter.

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

Much of the decrease in O&M for the quarter was related to timing differences associated with planned expenditures, and we continue to expect O&M to increase year-over-year.

Depreciation and amortization at FPL increased from 227 million in the second quarter 2004 to 232 million in 2005, primarily due to new plant in service.

Depreciation and O&M costs will continue to increase as we invest in generation and distribution expansion to support our underlying customer growth; and of course more substantially in the second half, now that the Martin and Manatee expansions are in service.

The annual impact of these generation projects alone is about $0.09 per share for the balance of the year.

To summarize, Florida Power & Light's second quarter earnings per share were affected by the following: Customer growth, positive $0.03; usage due to weather, negative $0.05; underlying usage growth mix, negative $0.01;

Depreciation, negative $0.01;

O&M, positive $0.01; other, including AFUDC, and share dilution, negative $0.02; for a total $0.05 decline for the quarter.

Now let me review the Public Service Commission's decision on our storm reserve deficiency recovery that we received earlier this week, Tuesday, July 19th.

On balance, we are satisfied with the outcome, which confirms key principles on which we have been relying; however, the PSC staff's recommendation, as written, leaves one issue open and conflicts with our past accounting practice, which we continue to believe is preferable.

You will recall that the costs associated with the restoration efforts due to Hurricanes Charley, Frances and Jeanne were estimated to be 890 million net of what is expected to be recovered from insurance, or 536 million in excess of the balance in the storm reserve.

On Tuesday, the PSC voted to approve staff's primary recommendation regarding the retail portion of the deficiency, with the consequence that approximately 442 million will be collected through a monthly surcharge and 70 million will be capitalized.

A decision on the remaining approximately 22 million was deferred pending a final determination of the appropriate accounting treatment.

We are pleased that the Commission and the staff reaffirmed the fundamental regulatory framework governing storm restoration costs in the absence of commercially reasonable third party insurance, and rejected some of the unfair and unwise policy changes proposed by intervenors.

We are, however, disappointed that the staff recommended significant alterations to the way in which storm costs are accounted for, as we believe that the methodology we have consistently followed for over a decade reflected in a 1993 study approved by the Commission in 1995, is in the long-term best interest of both customer and shareholder.

Nevertheless, we recognize that the Commission has had to deal with differences in accounting methodology among the Florida IOUs, and we are encouraged that they have indicated a willingness to pursue this issue further with the aim of harmonizing practice within the state.

Turning now to the rate case, as you all know, we're well into the regulatory proceedings governing our first request for a base rate increase in 20 years.

Let me give you a brief update on the process and some key upcoming dates.

I caution that these dates could change.

Over the past several weeks, the Florida Public Service Commission has held quality of service hearings at various locations throughout our service territory.

These hearings provide an opportunity for all customers to testify positively or negatively on issues related to the quality of service we deliver.

While some customers stated that they objected to our request to raise base rates and a few raised genuine service issues, we were gratified that the overall assessment of our service and reliability was very positive.

We recognize that there is never a good time for a utility to ask for a base rate increase, and we are committed to addressing those real service issues that were raised; nevertheless, we believe these service hearings reinforced our overall position in the proceedings.

Objective benchmarking data consistently show that our overall cost reliability and service performance are excellent and place us among the best utilities in the country.

In late June, the intervenors in our proceeding submitted their testimony.

While this testimony is diverse and addresses numerous subjects, we believe we have good responses to all the issues raised.

In particular, we believe that OPC's conclusion that FPL's base rates are approximately 700 million too high, is not only factually and analytically flawed, but not credible on its face.

Again, independent benchmarks consistently show FPL to be one of the best performing utilities from both unit cost and service reliability perspectives.

We remain confident in our position and look forward to the formal technical hearings in August.

Rebuttal testimony is to be filed next week, Thursday, July 28.

Hearings are currently scheduled to begin August 22nd and run through September 2nd.

Staff recommendation on the revenue requirements and allowed return is scheduled for October 28th, with a decision currently slated during the special agenda meeting on November 10th.

Turning now to the competitive generation business, FPL Energy had an excellent second quarter.

I mentioned in our April call that we expected the second quarter to be roughly flat, largely because of the planned outage at Seabrook.

In fact, adjusted earnings were up more than 13% over the year ago period, driven primarily by the performance of the existing portfolio.

Project additions in the sale of two small project interests also helped.

During the quarter, we completed the first phase of the planned Seabrook power upgrade.

And while we were disappointed that for various technical reasons this delivered slightly less incremental output than we had hoped, we continue to expect to see a total of 84 incremental net megawatts after the second phase is completed next fall.

Relative to the first quarter, our portfolio average wind resource improved significantly, although it was still below long term averages.

The existing portfolio also benefited from the ongoing positive effects of prior restructurings.

The most significant market development during the quarter was a continuation of the encouraging price trends that we had noted in the first quarter.

Gas continued to strengthen; and just as important, forward spark spreads in key merchant markets, including ERCOT, continued to expand.

While these led to additional noncash mark to market losses in the non qualifying hedge category, they also increased the value of our open merchant positions, and we were able to lock in significant incremental value for 2006 and 2007.

Overall, it was a very good quarter for the FPL Energy portfolio.

FPL Energy's GAAP results were 20 million or $0.05 per share compared to 69 million or $0.19 per share in last year's second quarter.

FPL Energy's results, excluding the effect of non qualifying hedges, were 72 million or $0.19 per share compared to 63 million or $0.17 per share last year.

As in prior periods, we provide more details on the balance sheet impact and expected future reversal of currently marked non qualifying hedge transactions in the appendix.

As of June 30th, 2005, there was an after tax derivative liability for this category of transactions of 61 million, representing losses that would have been recorded in the non qualifying hedge category, but which we believe are more usefully considered in the context of future periods' performance.

These losses will turn around in future periods.

As indicated in Chart 34 in the appendix, if there were no new transactions and no movement in market prices, we would expect 25 million of this amount to reverse in 2005 and the remainder in future years.

As a reminder, the types of transactions that we classify as non qualifying are those that must be mark to market under GAAP, but that provide an economic hedge to a position that is not mark to market, thus creating an unavoidable mismatch in current period GAAP results.

In the past, quarterly marks in the non qualifying hedge category have ranged from an after tax gain of 12 million to an after tax loss of 31 million.

This year, not only are the underlying hedge conditions larger in volume, but also the market movements have been much larger than in prior years.

As I mentioned, FPL Energy's adjusted results increased by more than 13%, and its contribution to adjusted EPS increased by 12% in a period when we had expected it to be flat.

New project investments added approximately a penny a share, with new wind and solar assets more than offsetting a slight drag for the Marcus Hook facility.

Earnings from existing assets contributed an incremental $0.03 a share, despite the effect of the Seabrook refueling outage.

The ongoing effect of prior contract restructuring, favorable market conditions and greater hydro generation were the major positive contributors to the favorable earnings comparisons.

The Seabrook refueling outage negatively impacted earnings by approximately $0.07 per share, underscoring the strength of FPL Energy's quarterly results.

In addition to the negative impact of the Seabrook outage poorer wind resources in the same period a year ago also hurt year to year comparisons.

Asset optimization and trading activities were down a penny per share in the quarterly comparisons, with development in asset restructuring activities offsetting this.

All other factors, primarily interest expense, netted to a net negative of $0.02 per share.

I mentioned that the wind resource was down from last year.

The portfolio index -- wind index in the quarter came in at 94 compared to 98 during the 2004 second quarter; nonetheless, this was much better than in the first quarter, and in fact the wind index improved fairly steadily over the course of the quarter.

I indicated in our last earnings call that we would begin providing monthly updates to the wind index later in the year, and we are now ready to do so.

These updates will be released and added to our website on a similar schedule as the monthly degree day updates for FPL.

As you can see from the chart, the last year has seen wind speeds generally below their long term averages; but the beginning of this year was particularly poor, with February being especially low.

Nevertheless, these sorts of monthly swings are quite consistent with the longer term record, and well within the balance of statistical expectation.

Accordingly, we continue to have confidence that they represent merely random variations around the long term average.

The appendix to this presentation provides more details on the construction of wind index, which is now based on 22 reference towers near to our various projects.

As a reminder, on average, a change of plus or mine one in the annual wind index equates to roughly a plus or minus two or three cents per share change in EPS contribution.

However, I should caution you that it is not possible to interpolate this relationship down to a monthly basis.

We expect to provide additional disclosure on the sometimes complex relationship between wind resource and earnings at a future date.

Let me review now review changes in key market indicators during the quarter.

You can see from this chart that we saw continued improvements in NEPOOL and ERCOT.

The most significant change was in forward spark spreads for ERCOT.

Over the course of the last six months, we have seen 2006 forwards improve from about $12 to nearly 20, and nearly double where they were this time last year.

While we expect to see continued volatility in forward markets and while we continue to expect economic equilibrium only later in the decade, we are very encouraged by the strengthening we have seen.

Of course, this improvement in markets will only show up in our results over time as we are able to roll in newer hedges at higher prices.

The immediate effect is more muted, and in fact is economically neutral for positions that have already been hedged, notwithstanding the impact on GAAP results.

Let me now turn to the negative mark in the second quarter in the non qualifying hedge category, which is a direct consequence of the market improvements I have just noted.

As shown on this slide, there two are general categories that together comprise the 52 million of losses in this category.

First, there was 5.8 million attributed to unrealized gains that had been recognized in prior periods that reversed as the underlying contracts rolled off during the second quarter.

The larger impact in the second quarter, however, is attributable to increases in forward power and gas prices during the quarter.

More than 60% of those came in ERCOT, where increasing spark spreads contributed 30.5 million.

Rising gas prices during the quarter also caused us to record 15.9 million, primarily against two gas short positions used as an inexpensive hedge for power positions that are correlated or indexed to GAAP.

Again, as a reminder, the offsetting positions to these hedges are not marked to market under GAAP, but have increased in value by amounts corresponding to the losses in the non qualifying category.

Economically, for the hedge positions, FPL Energy remains where it was before the market movement, and the non qualifying hedge gains and losses will continue to reverse themselves when the underlying transactions are realized at future periods.

While the impact of increasing forward prices created a negative mark in the quarter, it also provided us excellent opportunities for hedging future results, as you will see on the next chart.

First, let me remind you that we continue to be well hedged in 2005.

Overall, our contract coverage on a capacity basis for 2005 is 84% for the balance of the year; and more than 95% of our expected gross margin for the balance of 2005 from our wholesale generation fleet is now protected against fuel and power market volatility.

The chart shown here concentrates on our 2006 positions and shows how they have changed since the end of the first quarter.

Included here are transactions up through the middle of July.

You will see that our overall 2006 contract coverage has increased very substantially, and we are now at the 75% level that we typically target going into a year.

More significant is the fact that most of the increase has come through additional hedging in ERCOT, where our asset coverage is now 82%, which is, for all practical purposes, fully hedged.

As a consequence, we now have a better perspective on next year's likely earnings contribution much earlier in the year than we would normally expect, and I will provide some observations in a moment.

Before addressing the outlook for 2006 and 2007, let me first update you on several portfolio transactions.

First, we completed the acquisition of Gexa, a retail energy provider in Texas which I will discuss further.

We continued to make good progress on our wind development activities.

The approximately 107 megawatt Weatherford wind facility in Oklahoma reached commercial operation during the quarter.

We now have placed approximately 221 megawatts of new wind facilities into service this year, and nearly 270 megawatts since last year's second quarter.

We have announced an additional 250 megawatts of wind projects.

We feel very positive about the quality of our wind pipeline and remain comfortable with our projections for adding 500 to 750 megawatts of new wind by the end of this year.

Finally, just after the end of the quarter, we announced the we had reached an agreement to purchase Alliant Energy's 30% interest in the Duane Arnold Energy Center.

Many of you have asked about Gexa.

Gexa Corp. is one of the fastest growing retail electricity providers in Texas, serving approximately 1,000 megawatts of peak load associated with over 125,000 small commercial and residential customers throughout the state.

The transaction is financially attractive and is expected to create yearly earnings accretion of $0.02 to $0.03 per share over the next five years.

The transaction creates significant synergies with the FPL Energy ERCOT portfolio by creating a natural hedge for our Texas assets, thereby avoiding potentially significant transaction costs.

It also provides a green product marketing outlet for renewable energy.

Finally, Gexa helps expand FPL Energy's commercial and operational capabilities across the energy value chain in the state.

Earlier this month, we announced plans to acquire from Interstate Power & Light, an affiliate of Alliant Energy, their 70% interest in the Duane Arnold Energy Center, a 598-megawatt nuclear facility located in Iowa.

The total purchase price of $387 million includes the plant, nuclear fuel and other non fuel components.

The acquisition is anticipated to be immediately accretive to both earnings and cash flow, expected to grow over time given the nature of the long dated purchase power contract with Interstate Power.

We expect to extend the life of the plant through license renewal, and the additional 20-year operating period will also add value.

As we've previously indicated, the combination of new wind projects, accretive asset acquisitions and strengthening of merchant markets will be the keys to FPL Energy's ability to continue to grow profitably over the next few years.

Given recent developments in all these areas, we feel very positive about the prospects for the business.

While we are not yet in a position to offer definitive earnings guidance for 2006 and 2007, we do believe it makes sense to discuss the potential range of contributions from FPL Energy.

Let me stress that the 2006 and 2007 figures shown here do not represent a forecast in the same fashion that we share our annual expectations with you.

They are not based detailed budgeting, and we would expect some changes as we get deeper into the planning process.

Nevertheless, we believe they can serve as good indicative ranges, appropriate for this point in time.

First, in terms of this year, FPL Energy is somewhat ahead of where we had expected it be, and seems likely to come in above the midpoint of the band of EPS contributions we had previously discussed, even without any share repurchase.

Second, based on the significantly increased hedging recently completed, we are establishing an initial range of adjusted earnings expectations for FPL Energy in 2006 from 320 to 360 million.

This assumes closing on the Duane Arnold Energy Center on January 1, 2006.

This range is supported by our normal practice of marking the currently open merchant positions to the current forward curves.

Third, we are updating the 2007 outlook that we discussed in April to a range of 420 to 460 million.

While the principal change to the number stems from the anticipated addition of Duane Arnold, an equally important change, we believe, is the strength of basis for this range.

In April, we indicated the 2007 earnings numbers would require some additional strengthening of commodity markets.

Today, I would note that this range is fully supported by current forward curves.

Of course, markets can retreat as well as advance; but if overall conditions stay roughly as they are today, we feel comfortable that FPL Energy should be able to deliver in the range of 420 to 460 million.

To summarize the second quarter of 2005, on an adjusted basis, FPL contributed $0.52 per share, FPL Energy contributed $0.19, and Corporate and Other contributed a negative $0.05.

That is a total of $0.66 per share compared with the $0.69 per share in the 2004 second quarter.

Turning to the balance of 2005 for FPL Group as a whole, we continue to expect adjusted EPS to be in the range 2.45 to 2.45 (ph), as we discussed in April.

The continuation of the mild weather in Florida well into the second quarter, coupled with a slight weakness in usage, suggest that FPL will most likely be towards the low end of its range, while the strong performance in FPL Energy suggests that it will be in the upper part of its range; but the overall range remains valid.

At FPL, we expect the remainder of the year to be challenging.

We had always expected the second half to be a challenge because of the introduction to service of the Martin and Manatee expansions with their associated impact on depreciation, interest, and equity AFUDC.

In addition, we have seen a weak first half performance owing to weather and weaker underlying usage growth than we had expected.

As a result, if weather is normal for the balance of the year, we will likely come in at the low end of the EPS contribution range.

Of course, weather could also be better than normal; and on the bright side, we continue to see higher customer growth.

At FPL Energy, we continue to expect to see growth from new wind projects, the incremental contributions from the Seabrook uprate, a modest drag from the Marcus Hook unit, and increased interest expense.

Let me remind you also that our expectations for FPL Energy always reflect our current contractual commitments, coupled with marking the merchant component of the portfolio to market based upon current forward curves.

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

As always, these expectations exclude the effects 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.

At corporate, we anticipate modest earnings dilution but positive cash flow from FPL FiberNet, coupled with moderately higher interest expense.

In February, as many of you know, we issued approximately 18.5 million shares in association with the conversion of the first of a set of equity units.

While we had originally expected to repurchase some shares during the year, this now appears less likely given the encouraging capital deployment opportunities that have opened up for FPL Energy since we prepared our original 2005 budget.

The earnings per share impact of not repurchasing stock is approximately $0.05 per share on 2005 full year results; however, we do not expect it to have any impact going forward, as we have another opportunity to adjust our capital structure with the conversion of the second set of equity units early next year.

We will continue to evaluate the economics of incremental new investment, assuming a balanced capital structure, whether the equity component comes from internal cash flow, new equity or deferred repurchases.

We continue to view repurchase as an efficient way of returning to shareholders free cash throw in excess of our investment opportunities.

And now, we'll be happy to answer your questions.

Thank you.

The question-and-answer session will be conduct electronically.

If you would like to ask a question, please do so by press the star key followed by the digit one on your touch-tone telephone.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We ask that you please limit yourself to one question and one follow up to allow everyone a chance to ask their question.

And again, that is star 1.

We'll go first to Greg Gordon at Smith Barney.

Thanks, good morning.

Good morning.

Focusing on the Texas market, if you will, looking at the run-up in spark spreads we saw over the course of the quarter, are you trying to infer that we should assume that you've achieved spark spreads where they are currently today for '06 in your hedging, or should we think about any more layering in hedges over the course of the quarter?

Very definitely the latter.

Greg, as you know, we have a longstanding practice of laddering in hedges fairly systematically over time.

Obviously, when market conditions are favorable like these, we will tend to, you know, as Jim likes to put it, lean into it one way or the other.

So we have been a little more aggressive in the volume of hedging we have done; but you could definitely assume that they've been layered in, so the average is clearly going to be lower.

I should also point out that the spark spread numbers on the chart are standard market reference points, and the spark spreads that any individual asset would receive would typically be lower than those because of line losses, any locational issues, and other transaction costs.

Isn't there also still a positive differential on what you've received, given you're on the north side of the Texas constraint?

Yes, that is true, and that piece of it is reflected in those market values.

The north ERCOT zone is a well defined market zone, so those prices are readily available, so that aspect of it is built into it.

If we were to show you the seller's choice or effectively the rest of Texas, it would be anywhere from $2 to 4 back from there.

Do these types of spark spreads actually support the underlying economic hurdle rates that went into the decision to build the plants, or would you need to see significantly higher spark spreads to support in hindsight the build decision?

No, as I tried to say in the prepared remarks, I don't think we're quite there yet.

And, you know, the way these things go, we may well see some retreat before we see some further advance.

So we're not at levels that we would consider replacement cost levels yet, but we are obviously much better.

Recall that in the, you know, $10 spark spread ranges, we were cash flow positive on these assets, so obviously the change since then is very welcome.

Thank you.

Next we'll go to Ashar Khan at SAC Capital.

Good morning.

Good morning.

Going to FPL Energy, if I'm right, in '07 the forecast has gone up from the April by about roughly 40 million.

And I was just trying to, if you could just give us a little bit more background as to what that 40 million comprises of?

And my assumption was that Duane Arnold has an outage in '07.

I could be wrong in that.

Is that correct, starting with -- first with that assumption?

Yes, that's correct.

Okay, good.

So Moray, could you just tell what's in the 40 million increase, of which areas you're seeing that 40 million increase from?

Well, as I said, the biggest single driver there is simply the addition of Duane Arnold.

Beyond that, off the top of my head I couldn't break out the changes.

The different market components have changed, I think, relative to what we had in April.

Clearly the piece from [Burkhart] would be relatively higher, the piece from Blythe to the West Coast asset, I think it would be low -- we've seen actually a decrease in forward spreads in that market, but I can't tell you the exact magnitude.

Okay.

And then my -- just follow up question would be, just as you look at second half of the year, just concentrating on the utility, I guess the positive in the third quarter is that you don't have a lot of the storm costs which were there in the third quarter of last year; so the real negative variance in the utility results should really show up in the fourth quarter versus the third quarter.

Is that a fair assumption?

I don't think that's right because the biggest single factor for the entire second half is the presence of Martin and Manatee and that's obviously spread pretty evenly over the two quarters.

I honestly haven't looked at what impact on the year on year comparison for the third quarter, the extra cost we had in storm last year, might bring.

I would just caution everybody that the third quarter last year will end up being a very hard comparison point, so you should be careful of making any -- drawing too many conclusions from a comparison with the third quarter last year.

Okay.

But the third quarter last year had had some, you know, storm impacts and user impact because of the storm.

Those should not be there, right?

Those were negative items which impacted the fourth quarter -- rationally, those things should not repeat themselves, of course, unless we have hurricanes again.

That's correct.

Certainly we had, you know, lost revenue impacts there; and, yes, we certainly hope those will not recur, but obviously we are watching the current storm season very closely.

Okay.

Thank you very much.

Next we'll go to Steve Fleishman with Merrill Lynch.

Hi, Moray.

Good morning.

Couple questions.

First, in the growth projections you're providing for FPL Energy, do you have additional wind projects in there beyond 2005?

Yes, we do.

They're -- in the appendix, there's sort of a general assumption sheet for 2006 and 2007, but it does assume some continuation of additional wind.

I would say that, you know, the three big drivers for us for FPL Energy growth are merchant market improvements, continued wind development, and thirdly, the opportunistic addition of incremental assets.

So there is no assumption about further asset acquisitions built in to those 2006-2007 numbers, but they do assume continuation of wind development.

Okay, and then secondly, do you have any sense in '07 on those projections what the gas merchants are doing?

I know in '05, they're expected to lose, I guess, $0.15 to $0.20 a share.

Something like that.

Yes, right.

I don't know based on those numbers -- I haven't looked at what the implied earnings contribution strictly from the merchant portfolio would be.

Okay.

In the third quarter, we will be in a position, I expect, to do a -- you know, a closer look at '06, so we may have some more to say on that subject at that time.

Okay, couple of other quick ones.

The issue of disagreement on accounting on storm costs, could you just elaborate on what you disagree with?

Yes.

There are a number of issues, and some of this gets quite technical and I apologize for that; but broadly speaking, our approach to recording storm costs has been to record the actual costs that we incur in getting the system back to its preexisting state.

So it's a sort of actual restoration cost approach.

A couple of key changes that the staff has made in their recommendation, the most important one has to do with the amount that ends up being the 70 million that will get capitalized.

Where we would have said that the efforts involved in restoring the network -- which include placing new poles, new transformers, and splicing cable and everything involved -- really just gets the network back to where it was before.

The underlying principle of Staff's approach is that, in fact, we have improved the network, so where we place a new pole in service the real asset value has increased.

And therefore, they are arguing that the incremental -- the difference between the value of a freshly installed pole versus whatever was on the books for the pole that was there should be capitalized.

That's probably the single biggest difference.

For a variety of reasons, which I probably don't have time to go into here, we're not convinced that that's the right way to do it.

There are also some other differences having to do with sort of what is called straight time -- the regular hours that would otherwise be spent on other activities which they are arguing should not be charged to storm.

But I assume the capitalized investment would be treated like any other new investment and be able to earn a return and et cetera in the future?

That will go into rate base and will be -- you know, will ripple through pricing ultimately.

Okay.

And then one last question.

Just any updated thoughts on the likelihood that the final rate case outcome is litigated versus settled?

I think we're still very much where we were before.

I think there's very little odds that we'll see anything before the full hearings.

We're very confident in our position.

We want the opportunity to lay that out in those hearings, so we're looking forward to that.

I think there is some possibility in the period after that; but I would say, you know, right now I would say the most likely is that we would look for a final order -- but let me let Armando comment on that as well.

Yes, just to echo what Moray said, our thoughts are that -- our thinking is still the same that it was before.

We have to get through the hearings before we can really look at any kind of negotiations in earnest.

As I'm sure you've read, OPC has -- the Office of Public Counsel -- has been very vocal in their oppositions to the rate case, and actually did a filing for a reduction.

Nevertheless, we still think that there is a possibility for a settlement; but certainly not before the August hearings are completed.

Okay.

Thank you very much.

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

Did I hear you mention there were gains at FPL Energy in the quarter from asset sales?

Yes, there was a few million from the sale of -- couple of small interests in projects.

But nothing really material?

No.

Okay, thank you.

Next we'll go to Paul Clegg at Natexis.

Good morning.

Just a quick question on the wind portfolio.

Yes.

Obviously you've seen capital costs rising for building wind.

I've seen estimates as high as 1500 per kW, although I'm not sure that those are right.

Historically you have spoken about returns in the teens.

Can you comment on how returns have changed recently?

Broadly speaking, the types of returns we're seeing for the projects that we're pushing with are similar to what we've seen in the past.

If anything, I would say our economics probably marginally better just as we've incrementally gotten better at the development construction process.

So we're still seeing cash on cash, unlevered IRRs in the 10, 11, 12, 13% ROEs.

You know, the average of a project's life in the high teens, low twenties -- actually higher if we count in the effect of the wind portfolio deals.

We definitely have seen some pressure up-front on capital costs, but we're not seeing capital costs anywhere near 1500 per kW in the projects that we're pursuing.

Okay, and when you calculate your ROEs, are you using the allocated 50/50 -- debt to cap at FPL Energy?

Yes, when I said that, the high teens to low 20s is based on a nominal 50/50 capital structure.

Now, of course, you know that with these wind portfolio deals, we've effectively been able to get more leverage on the wind portfolio, so that's an odd comparison.

But since we've reported as part of FPL Energy overall and since our policy is 50/50 allocation overall, I think that's probably the best way to think about it.

Okay, and if I may, just one quick follow up on Duane Arnold.

Any discussion about FPLE picking up the other 30%?

Nothing at this time.

Okay, thanks very much.

We'll go next to Debra Bromberg at Jefferies & Company.

Hi, good morning.

Good morning.

In the past, you had provided expectations for margin improvement at Seabrook in 2007 versus 2009.

Have you done that recently?

And if so I imagine it's a lot higher than 80 to 90 million that you had previously provided?

2007 over 2004?

Yes.

Okay.

Yes, we haven't updated those.

They will be somewhat better, but not a lot better because Seabrook in '07 had been hedged fairly significantly for quite some time, so when we gave you those numbers we were, you know, at the point where we were feeling pretty comfortable with them.

So certainly on the marginal it had not yet been hedged [INAUDIBLE] upside.

The biggest driver of the upside recently really has been the expansion and spark spreads for Texas.

Okay.

And separately, could you share any thoughts you might have on how the LICAP will play out?

A couple of comments on that.

First no, assumption about LICAP is build in to any of these outlook numbers.

There is obviously considerable regulatory uncertainty as to whether it's going to happen and if so, when.

But beyond that, I would say that it would be clearly a net positive for the FPL Energy portfolio, but we really at this stage couldn't say how much, it's so uncertain exactly when, how, and what form it will be implemented.

So all I would say is it's a potential up side that's not in these numbers, but we're not in a position to quantify it at the moment.

Okay, thank you.

We'll go next to Michael Goldberg at [Luminous] Management.

Good morning, guys.

Good morning.

Just had a question on Texas spark spreads.

It seems that Texas spark spreads is more than just a temporary event, and yet you were saying that $20 spark spreads are not enough for equilibrium.

I guess I'm trying to understand as to what exactly is causing the spark spread expansion?

Is it weather or is there a real fundamental shift in the average heat rate?

Let me let Jim give you little more detail on what's going on down there.

Yes, one of the key things that's driven it, frankly, has been -- it's been hot in '05, and our markets are somewhat strange in that when it gets hot in the summer of the year where folks are trading, that that impact spreads in '06 and '07 as well.

So that's certainly been a part of it.

And I think the other thing I would say is that at least relative to our fundamental analysis of the Texas market that these spark spreads are a little high relative to what we would expect them to be from on the D (ph) from a fundamental view.

Yes, and let me take you back to things that we've said in the past.

I mean, if you look at the fundamentals in Texas, you still do have significant excess capacity.

We've seen good demand growth overall in the region, and we had indicated a long time ago that we expected 2003-2004 to be kind of the bottom.

So we are -- we would expect to see some improvement, some expansion in the market heat rate, just because of supply and demand factors.

But as Jim has indicated, our feeling is that some of the -- in '06, the '06 effect, may be a little sort of psychological or frothy.

And the other point to make for our portfolio, because we are -- our units are well below the market heat rate, any increase in gas prices just automatically expands our margins as well, so you have that element in there.

But on its fundamentals, we're a little skeptical that the -- this sort of $18 to $20 range is sustainable in the short term.

We're still looking for equilibrium, as I indicated in the prepared remarks, you know, toward the end of the decade.

Got you.

And my other question -- I'm sorry, I do not have the slides in front of me -- the 420 to 460 million net income number for FPL Energy in 2007, I think that's a number I heard --

Correct.

Hello?

Correct.

Yes.

I'm just trying to understand, did you model in any equity issuance for Duane Arnold or anything like that from just modeling perspective?

I don't know if you have EPS numbers there because I just don't have the slide in front of me.

No, that's a good question.

And let me explain.

We're not in a position at this stage -- given where we are in the rate cases, we just don't have enough visibility I think at this stage on the FPL side.

Without that we can't do the consolidation, and therefore we're really not in a position to do aggregate group EPS impact.

What I would tell you is the FPL Energy piece is based on the continued assumption of a balanced 50/50 capital structure, because that's the way we report results.

And given the incremental assets we are adding, I think that's fine from a credit perspective as an incremental assumption, i.e., that it would not be detrimental to credit if we continue to support the new assets that we're adding, both Duane Arnold and wind, with a balanced 50/50 capital structure.

So I don't think there's any hidden negatives staring at us implicitly up at Corporate and Other.

I think that's a fair look at the contribution this stage.

Okay, and just so that I understand, when you said that the FPL Energy number now looks more certain, you are using the current forward spread, especially in Texas, which you're saying right now may or may not hold up?

Yes, that's fair.

Got it.

Okay, thank you very much.

Good luck, guys.

Thank you.

And we'll go next to [Vic Katan] at Deutsche Asset Management.

Yes, thank you, Moray, and thank you.

I had a question regarding strategy that you show disciplined small acquisitions here and there, and at what stage do you think that opportunities might come along for making a major situation, particularly if the energy bill and [INAUDIBLE] bill goes away?

And Lewis is also on the line, so he may want to comment a little bit about the prospect of the bill.

Well, I was just going to say, let me turn that over to Lew.

Hi, Vic.

How are you?

Thank you.

Lewis Hay, III: Let me take it in reverse order.

First the energy bill.

I've kind of given up trying to assess the odds of whether we'll get an energy bill or not.

At least I'll say my track record historically hasn't been all that great.

But in talking to other people in the industry and talking to our lobbyists, I think everybody's encouraged by the bipartisan effort that seems to be going on right now, and just the level of activity.

Our lobbyists tell me that they were just absolutely shocked at how much activity was going on even over last weekend, and how hard the push is to get something done.

So I pushed him pretty hard to give me odds, because I always like numbers.

Nobody likes to give you numbers, lawyers or lobbyists, but he assessed it at 70%.

So I'll tell you that's my guess as of today, but that could change moment by moment.

In regard to larger transactions, generally our philosophy on that sort of thing is to not comment.

You know, clearly, there's been a number of big deals in the industry.

I have been pretty public about my feelings that the industry should consolidate.

I know that's not a novel thought, but the economic drivers are there for consolidation.

We tend to think that we're a pretty well run company, so that we could be a good partner with somebody else.

If all the stars and moon, and suns aligned to make a deal possible -- so I think there's upside there, but I will remind you all, there's just an incredible amount of work to make these deals work.

And when you look at both the gross synergies but the net synergies, you know, they really aren't that big in the grand scheme of things, typically.

And we're pretty happy with the progress we've been making doing small deals as we move along.

And I'll remind, you when you look at the numbers for '07 for FPL Energy, in terms of earnings, that's the kind of earnings level we're seeing from medium sized utilities today.

So obviously that's taken a little work to get there, but we feel that if we stay disciplined and keep working at it that we can continue to grow that business.

So you know, there's a lot of upside at FPL Energy.

We continue to be pleased with the upside long term at FPL with the kind of growth that Florida is going to continue to experience, so we don't feel undue pressure to run out and do a deal, whether we have PUHCA repeal or not.

That's a good answer.

The only question is that, are there benefit of first movers or there is something which takes time over course of time?

Lewis Hay, III: I think in most industries there are first mover advantages; but I think you also have to make sure that you avoid doing bad deals and make sure you do the right ones.

And our industry is -- you know, has a long history of, say, more companies, tripping up and doing not so smart things as opposed to companies doing intelligent deals.

So that should by no means be interpreted that I think any of the existing deals that have been announced are bad.

I'm just saying that if you just look at the last 15, 20 years in our industry it's -- people who have been disciplined and focused have tended to do better than those who have jumped out and jumped on the latest fad, so to speak.

So we're just going to be careful and cautious, and if the right opportunity comes along, if it's good for our shareholders, we'll be pursuing it.

Thank you, Lew.

Next we'll good to Rudy [Telintino] at Prudential Equity Group.

Hi, good morning.

You mentioned earlier on the call that you've seen -- you're seeing that the opportunities for capital deployment are improving.

Can you give a little bit more color?

I mean, what type of investment opportunities are you finding attractive, and are you -- maybe I'll just let you answer that.

Sure.

Let me say that nothing has really changed in terms of the priorities -- the things that we pursue or the priorities with which we pursue them.

On the asset acquisition front, first and foremost, we've always looked to continue to build the wind portfolio, and we have had good opportunities in the past, and we continue to think that there will be additional asset acquisition opportunities in the wind sector.

Second, as you know, we are clearly a participant in the consolidation of the nuclear industry.

And we look for every opportunity that makes sense in that area -- and obviously we're delighted with the Duane Arnold addition.

Third, we look for additional -- I call them stand-alone projects for want of a better term -- that fit with the existing portfolio, and a great example of that would be the [INAUDIBLE] CEG (ph) solar deal that we did earlier in the year.

It's a small deal, but it fits perfectly with the kind of thing with do.

And then in terms of rounding out the rest of the FPL Energy portfolio, we have consistently looked to continue to build portfolio strengths.

So in order of priority I would say probably New England, North Texas, and then after that, the PJM area and potentially Southern California, those areas where we have existing assets where it would make sense to continue to try and build regional scale or critical mass.

We have not had much interest in pure merchant assets.

We look for things that will be accretive pretty early on.

So things that will either have some degree of contract coverage up front or assets that are pretty deep in the money, and that was the case with Seabrook, for example.

So those criteria really haven't changed.

In the last two years, I feel like we've repeatedly been on these calls saying we're disappointed that we haven't seen additional opportunities, or haven't been able to get to the finish line on opportunities.

We've already had a couple this year so -- and we feel good about some of the things that we're currently looking at, which I'm not going to comment on.

So all in all, I think we're seeing better than expected opportunities relative to the 2005 plan at FPL Energy, so we're just delighted with that.

What's driving that?

Do you think -- is it because the spark spreads are recovering, and you know, the asset sellers aren't -- you know, have not reflected their prices?

What do you think is driving that?

No, I don't think there's any sort of systematic trend there.

Each of these deals is different.

It's unique; and you know, sometimes you get close but you just don't get to the finish line.

Of course, you know, you guys never see that, so I don't see any real systematic trend.

I think things have just been falling a little more in our favor lately.

We probably have time for one or at most two more questions.

And we'll go next to David [Grumhaus] at Copia Capital.

On your FPL Energy contract coverage page, when you talk about available megawatts -- and I guess I'm focusing mainly on NEPOOL and ERCOT -- how do you come up with those?

And you know, given the strengthening of those markets and potential increases in heat rates, is there an opportunity for those to increase, or is there a capacity factor that you think is going to stay the same as we go forward?

Let me let Jim take that.

First of all, these aren't capacity factor weighted numbers, right?

These are the gross output -- these are the outputs available out of the plant.

But they are around the clock -- they are the on-peak contract coverage megawatts.

And so where we do have opportunities, in Texas, for example, is that given that the expansion in spark spreads -- the 2x16, the weekends and off peak evenings now, and many -- many more months are now in the money -- in many more months than they were previously.

So that's been positive.

That wouldn't be reflected, though, on this chart.

Yes, the direct answer to the question of how these are constructed, they're basically the available megawatts adjusted for planned outages for any variable resource, wind or hydro.

They are set at the expected resource availability level, because obviously we would not hedge to the nameplate capacity for example of a wind facility if we were ever in that situation.

So I mentioned in the prepared remarks that the 82% for ERCOT for '06 is kind of the practical limit.

Why I said that is because the remaining capacity in ERCOT that's uncontracted for '06 is primarily the duct firing capacity in the 40 units, which is high heat rate stuff which we expect to keep for peaking and for the volatility; so we would not normally expect to sell that forward.

One more.

Thank you.

We'll go next to [Vedula Murti] at Tribeca Global Management.

Good morning.

Good morning, Vedula.

Just a couple of things unrelated.

One, I'm wondering if you can give us a bit of an update as to how you're looking at fuel costs going forward and managing the high price of natural gas and trying to minimize fuel rate increases going forward.

And my second question, unrelated, is obviously you're clearly the industry leader in wind generation.

There were other very -- there are other small developers who have projects and everything like that.

Should you be able to have the opportunity to acquire any of those producers, I'm wondering if you can remind me whether in fact the production tax credit gets grandfathered and you continue to accrue that, or whether a change in ownership for any reason would alter the status of the production tax credit.

Well, let me address the second one first -- there's a simple answer to that.

The production tax credit attaches to the asset, so that whatever state that's in when the asset changes hands goes to the new owner.

So that if you have one that has five years left to go and it's a ten year window, that's what you get.

On the source of fuel at FPL, here's two key points.

First of all, we do have a very extensive and active hedging program, which significantly reduces volatility in the short term.

But the -- sort of that's point number one.

The second point, though, is obviously at the end of the day, fuel prices are what they are, and that is just a -- simply a cost of doing business.

So what we can expect to do, I think, is modify the path of any increase or decrease that's driven by underlying markets, reduce volatility, the rate sharp impact on customer bills.

But what we can't really do through fuel cost management is alter the fundamental path of fuel prices -- so that's going to be whatever it's going to be.

And obviously, on that side of the house we're not happy with sustained rises in natural gas and oil prices.

The other thing that we can do and are actively doing, but it is much longer term in nature, is obviously work on the fuel mix of the portfolio.

And that's one of the reasons why we are very aggressively pursuing new clean coal development in South Florida; but obviously that will take time to come in and have an impact.

In the -- the sort of short to medium term, we are very constrained in what we can do.

We have significant incremental capacity needs, we have growth that we need to support -- we have to supply our customers with power -- but few alternatives in the short to medium term, in terms of how we meet those needs.

So we are going to see significant additional pressure on fuel here in Florida, at least for awhile until the overall fuel markets start to settings down or come back down.

All right.

Thank you very much.

Okay.

Thank you.

That concludes today's conference call.

Please call us if there are further questions.

And that does conclude today's conference.

Again, thank you for your participation.