新世紀能源 (NEE) 2005 Q3 法說會逐字稿

Good day, everyone.

And welcome to the FPL Group third 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.

Thank you, Deanna.

And good morning, everyone.

Welcome to our 2005 third quarter earnings conference call.

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

Also with us this morning are Lou Hay, FPL Group's Chairman, President, and Chief Executive Officer;

Armando Olivera, President of Florida Power & Light Company; and Jim Robo, President of FPL Energy.

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 November 4, 2005 is based on unaudited financial information.

All historical and current earnings per share figures are adjusted to reflect the March 15th 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 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 our SEC filings and the Appendix to this presentation, which you can access on our website, www.fplgroup.com.

Moray?

Thank you, Jim.

Good morning, everyone.

Before we begin, let me note that Florida Power & Light is presently still heavily engaged in restoration activities following Hurricane Wilma, which crossed our service territory last Monday, October 24th, leaving three-quarters of our customers without power and massive disruptions throughout South Florida.

We have not yet begun to tally the cost and other consequences of this storm, but they will be significant.

Later in the call, I will make some comments about our expectations for earnings for the next two years.

It's important to note that these do not yet reflect any impacts from Wilma.

As we develop a better perspective on the consequences of this storm, we may need to adjust our expectations for Florida Power & Light accordingly.

Overall, FPL Group had a good quarter driven heavily by double-digit adjusted earnings growth at FPL Energy and warm weather at Florida Power & Light.

FPL Energy continued to perform very well and enjoy the benefits of rising power prices.

The business remains on track to deliver at the high-end of our original expectations for the year.

Meanwhile, the above-average weather impact at FPL in the quarter essentially reversed the below-normal impacts from earlier in the year.

As a result, excluding any fourth quarter impact from Wilma, we would be reverting to our original full-year expectations of 250 to 260 per share as always, excluding the effects of any new accounting standards and the impact of the non-qualifying hedge category, neither of which can be determined at this time, as well as presuming normal temperatures for the balance of the year.

However, we know that Wilma will have a negative impact in the fourth quarter, but at this point, we do not know how much.

Looking beyond 2005 with the satisfactory resolution of FPL's base rate case, the extension of the production tax credits as a result of the passage of the Energy Policy Act and the extensive hedging of FPL Energy's 2006 and 2007 positions, we are now in a position to offer core expectations for good earnings growth for the next several years.

I will have more to say about the outlook for the remainder of the year and to 2006 and 2007 later in the call.

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

In the 2005 third quarter, FPL Group's GAAP results were 339 million or $0.87 per share, compared to 320 million or $0.88 per share during the 2004 third quarter.

FPL Group's adjusted 2005 third quarter net income was 395 million or $1.01 per share, compared to 326 million or $0.90 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 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 provides a more meaningful representation of FPL Group's fundamental earnings power.

FPL's performance for the third quarter was roughly in-line with our expectations with the exception of weather, which was unusually favorable.

We told you last year that the second half of the year would present challenges as the introduction to service of the Martin and Manatee of generation expansions without any change in base rates was bound to pressure profitability.

This affect is masked in FPL's current period earnings by two factors.

Last year's third quarter results were depressed going to the negative impact of hurricanes Charlie, Francis and Jean, and this year's third quarter results benefited from the warm weather.

Costs increased in-line with our expectations, and the only other notable trend is that customer growth continues to be slightly stronger than we expected.

Operational performance remains strong and the on-time introduction to service of the Martin Manatee expansions helped us meet several new old-time peak loads without any supply issues.

During the quarter, FPL reached a settlement agreement with all parties that satisfactorily resolved the base rate proceedings.

The agreement, which goes into effect at the end of this year, provides regulatory clarity and a framework that should allow the business to deliver average earnings growth over the next four years of 3 to 4%.

The [shop] went up in natural gas prices during the quarter and the disruption of Gulf of Mexico-based fuel supplies occasioned by hurricanes Katrina and Rita have significantly increased both the under recovery of this year's fuel cost and the outlook for next year's fuel bill.

The resulting rise in the fuel factor that our customers will see next year will undoubtedly lead to some slowing of demand growth, which we have reflected in our expectations for next year.

Third quarter earnings at Florida Power & Light were 311 million in 2005 up from 275 million a year ago.

The corresponding earnings per share contribution was $0.80 per share, compared to $0.76 per share in 2004; however, last year's results included an adverse impact equivalent to about $0.07 from hurricanes.

Growth in new customer accounts continues to be very strong.

The average number of FPL customer accounts increased by 98,000 or 2.3% over last year's comparable period, and this growth remains slightly above historical averages.

The Florida economy remains strong reflected in job and income growth and housing starts, while our overall growth is expected to remain strong going forward we expect customer growth to more approximate the longer term historical average of about 2%.

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

Cooling degree days, the common metric used for determining weather impacts on energy usage were more than 18% above normal for the quarter while last year's third quarter was roughly 4.5% above average.

The weather index is updated monthly on our website and contains both weather and sales volume information for FPL.

As a reminder, 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.

Weather comparisons between 2004 and 2005 are complicated by the impact of hurricanes in both years.

Last year's third quarter saw a significant loss of revenues associated with hurricanes Charlie, Francis and Jean.

This year, FPL received a direct hit from Hurricane Katrina, fortunately at that point only a category one storm, and minor brushes from Dennis and Rita.

The effects of Hurricane Wilma will be seen in the fourth quarter.

At this stage, all we can say is that we expect an impact on both revenue and costs.

Overall, retail kilowatt hour sales grew 10.8% during the third quarter, with 2.3% coming from custom growth and the remaining 8.5% primarily from higher usage.

The net effect of weather, which is the combination of warmer weather this year and less adverse revenue impact from storms was about 7.5%.

The remaining 1% is attributable to underlying usage growth, mix, and all other affects.

For the 2005 third quarter FPL's O&M expense, including amounts recovered through clauses was 334 million, up from 323 million in the 2004 third quarter.

Depreciation and amortization increased from 227 million in the third quarter of 2004 to 246 million in the third quarter of 2005.

The most important factors driving increases in O&M and depreciation are the introduction of the Martin and Manatee expansions which began operations at the end of June, as well as continued cost pressures in the nuclear maintenance and employee benefits areas.

In addition, fossil maintenance expenses increased during the period as a result of outage schedules.

The addition of the Martin and Manatee expansions also resulted in a reduction in AFUDC and will also effect fourth quarter comparisons.

To summarize, Florida Power & Light's third quarter earnings per share were affected by the following: Usage due to weather, net positive $0.13; customer growth, positive $0.04; underlying usage growth mix and other, positive $0.01; depreciation, negative $0.03;

O&M, negative $0.02;

AFUDC, negative $0.02; all other, including interest and share dilution, negative $0.07, for a total of $0.04 improvement for the quarter.

As you can see, stripping out the effects of weather, FPL's results were down for the quarter consistent with what we had indicated at this time last year.

In August, we reached the settlement with all the interveners in our general base rate proceeding, which was subsequently affirmed by the Florida Public Service Commission.

The settlement continues and extends the fundamental incentive based framework of our prior 1999 and 2002 agreements and is effective at least through the end of 2009.

FPL agreed to hold base rates flat for 2006, or base rates in the future will be increased sufficiently to account for the addition of preapproved generation projects through what is called the Generation Base Rate Adjustment.

On the cost side, FPL suspended its annual accruals for nuclear decommissioning and storm reserves and has the option to continue to accrue a special depreciation credit of 125 million per year.

The settlement provides for the recovery of prudently incurred storm restoration costs without the application of any form of earnings test, as well as the reestablishment of a funded reserve, if any, either through base rate surcharges or through the securitization mechanism provided by statute earlier this year.

The Commission will determine which route is more appropriate given the facts and circumstances at the time.

Let me now review where we are with respect to storm costs.

Again, I will exclude the impact of Wilma which we do not know at this time, but which is likely to be substantial.

At present, we are recovering the deficit left in the storm reserve after last year's hurricane season through a base rate surcharge which will run until approximately February of 2008.

As of September 30th, we had recovered 119 million of the approximately 442 million, plus accrued interest to be collected through this specific mechanism.

In addition to these amounts, we have also incurred significant restoration costs in connection with this year's season.

As you all know, this has been one of the most active seasons ever and will go down as the most costly in U.S. history to date.

We were fortunate to be spared the massive damage inflicted on parts of the Gulf Coast, but Katrina, nevertheless, departed Florida having caused nearly 1.5 million customer outages, which required eight days and the hard work of nearly 15,000 crews to restore.

Coupled with minor restoration efforts for Dennis and Rita, we estimate that we have incurred roughly 180 to 200 million of costs to date.

Wilma's costs will, of course, add to this total.

Wilma has been by far the most expensive natural disaster in the Company's history measured by customer outages and damage to system infrastructure, and it has correspondingly required the largest restoration effort in our history.

The overall framework governing recovery of these costs is spelled out in our new rate agreement.

The relevant sections acknowledged the prudently incurred restoration costs are recoverable and provide two options for recovery; base rate surcharge and/or securitization.

We are currently developing our proposal for how best to handle these additional costs and expect to bring that forward to the PSC before the end of the year.

FPL Energy enjoyed a very strong quarter, driven both by the performance of the existing portfolio, as well as by contributions from new assets.

The rapid run-up in natural gas was reflected in rising power prices, particularly, in New England and Texas, and this benefited our existing assets, even though much of our capacity had been hitched.

While some of the run-up appears to be short-term in nature and the forward gas curve is backward dated, we also took advantage of rises in 2006 and 2007 forward prices and added to the hedges we have in place for those years.

The 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 further solidified our expectations for 2006 and 2007, which we outlined at a Merrill Lynch conference at the end of September, and which remains supported by the current forward curves.

Our wind development continues to make good progress, thus far in 2005, FPL Energy has 521 MW of new wind projects that have either been completed or expected to reach commercial operation around the end of the year, and of this, over 400 MW are already in operation.

In volume terms, this is a little less than our stretched target for the year.

However, we are very pleased with the profitability profile of the 2005 portfolio.

With the two-year extension of the production tax credit program authorized by the Energy Policy Act, we expect to add a further 625 to 750 MW per year through 2007.

The combination of new wind projects and the expected increase in contributions from our merchant assets as all the hedges roll off and are replaced by sales at higher prices are the two major drivers that we expect to power the growth of FPL Energy's earnings for the next few years.

FPL Energy's 2005 for the quarter GAAP results were 44 million or $0.11 per share, compared to 61 million or $0.17 per share in last year's third quarter.

FPL Energy's results, excluding the effect of non-qualifying hedges were 100 million or $0.25 per share, compared to 67 million or $0.19 per share in the third quarter 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 to this presentation; however, a couple of comments are warranted here.

The increase in prices during the third quarter was, in general, even greater than the increase seen in the entire first half.

Thus, even though 27 million of prior period mark-to-market losses in the non-qualified hedge category rolled off during the period, effectively reversing themselves, due mark-to-market movements caused the remaining hedges in this category to decrease in value by nearly 84 million.

These losses will reverse in future periods as the underlying contracts go to delivery.

As you would expect, the majority of the reversal will occur in 2006 when most of the hedges roll off.

As of September 30, 2005, there was an aftertax derivative liability for the non-qualifying hedge category of transactions of 118 million, representing losses that 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 31 in the Appendix, if there were no new transactions and no movement in market prices, we would expect about 87 million of this amount to reverse in 2006 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.

This year has resulted in larger volatility because the underlying hedge positions are larger in volume and the market movements have been much larger than in prior years.

The wind portfolio resource index for the quarter came in at 96, equating to about a 6 million shortfall in net income contribution, all else being equal.

However, the overall wind resource, which was very poor in the early part of the year, improved over the course of the quarter and September was about normal.

Accumulatively, year-to-date shortfalls in wind resources have resulted in roughly a 25 million shortfall in net income contribution relative to normal conditions.

As a reminder, on average, a change of plus or minus one in the annual wind index equates to roughly a plus or minus $0.02 to $0.03 per share change in earnings per share contribution this year.

However, it is not possible to interpellate this relationship down to a quarterly or monthly basis.

The Appendix to this presentation provides more details on the construction of the wind index, which is now based on 21 reference towers located near our various projects.

Turning to the drivers of the growth in FPL Energy's adjusted earnings, new projects added $0.04 per share, while earnings from existing assets were up $0.08.

All parts of the portfolio should improve adjusted results with increases from our [ERCOT] portfolio being the most notable accounting for $0.04 of the $0.08.

Asset optimization and trading activities were essentially flat with the year-ago results and there were no asset restructuring activities this quarter.

All other affects netted to a negative $0.06 per share, primarily driven by increases in interest expense associated with an expanding asset base.

In each of the past two quarters, we have provided updates on changes in forward prices and key markets affecting FPL Energy.

As you know, we saw significant increases in the first half of the year.

The chart shown here indicates that these trends continued and even accelerated in the third quarter.

In fact, natural gas ran up almost twice as much during the third quarter as it did during the entire first half.

While some of this was undoubtedly driven by short-term concerns occasioned by hurricanes Katrina and Rita, and 2007 forward prices have pulled back some from their absolute peaks, it appears we are in for a sustained period of significantly higher prices than most of us anticipated a year ago.

The rise in forward natural gas prices is generally good for most of FPL Energy's merchant assets.

Seabrook and our hydro assets in Maine benefit as rising gas prices push power prices higher, while our combined cycle assets, particularly those in North ERCOT, benefit as their efficiency advantage over the price-setting unit in that market causes their spark spreads to increase.

As an example, since the beginning of the year the 2006 forward spark spreads for our North ERCOT assets have increased by roughly $13 per mwh, of which slightly more than half is attributable to rising gas prices.

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.

As you know, we were heavily hedged for 2006 at the end of the second quarter and while we have seen some increase in the value of the 2006 positions, the bigger benefit will be felt in 2007, as I will discuss later on.

Let me turn now to our hedging progress.

At the end of the second quarter, about 75% of our 2006 expected capacity was hedged.

This has increased modestly and the comparable figure at September 30th was 82%.

These numbers represent hedges expressed against capacity, as a percentage of expected gross margin the comparable figures are higher.

At September 30th, approximately 86% of the expected 2006 gross margin is hedged against commodity-price volatility.

We would not expect to see the hedge ratios increase much further as we always like to keep a portion of our positions open to accommodate tactical opportunities.

In addition to our progress with 2006 hedging, we continue to layer in hedges for 2007 and beyond.

We have made good progress with our 2007 positions and now have about 60% of our expected capacity hedged which translates to about 75 -- 70% of our expected gross margin.

We will continue to add to our 2007 positions over time but recall that we generally average in over time rather than seeking to try and sell all at once.

To summarize the third quarter of 2005 on an adjusted basis FPL contributed $0.80 per share, FPL Energy contributed $0.25, and corporate and other contributed a negative $0.04, out of the total of $1.01 per share, compared with a $0.90 per share in the 2004 third quarter.

Now, I would like to spend a little time discussing our outlook for the next few years.

Let me remind everyone that these are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

As always, when discussing our earnings expectations we assume normal weather and we exclude the effect of adopting new accounting standards, if any, as well as the mark-to-market effect of non-qualifying hedges, neither of which can be determined at this time.

First, for 2005 and ignoring for the moment the effects of Hurricane Wilma, we would have expected to end the year in the range of 250 to 260 per share, consistent with the original expectations we shared with you at this time last year.

You may recall that relatively weak revenues at FPL driven by mild weather caused us to drop this range by $0.05 earlier in the year.

The weather-driven revenue shortfall has now been made up in the third quarter and, therefore, we would be reverting to our original range.

However, Wilma will have a negative impact in the fourth quarter, although at this point, we have no way of estimating how much.

You will also recall that we started the year with an expectation of executing a modest share repurchase program.

However, with the outlook of [capital] deployment available to us, as well as cash flow needs at Florida Power & Light, we elected to defer this, and in effect, the stronger-than-expected performance of FPL Energy coupled with slightly stronger customer growth at FPL, will be enough to offset a diluted impact of not repurchasing shares and still leave us within our original EPS expectations.

Obviously, therefore, we are now expecting adjusted income to be higher than we originally thought.

These expectations exclude any impact from Wilma, which is hard to assess at this point.

Much of Wilma's financial impact will not be felt until next year; however, at this point we would certainly expect some fourth quarter impact in terms of lost revenues.

Wilma caused roughly three-quarters of our customers to lose power and for the first few days of the restoration effort, our loads were far lower than we would normally expect at this time of year.

While we can not yet estimate with any confidence the impact, for reference, a typical day's base revenue at this time of year would be about 10 to $11 million.

Since we had several days with half or more of our customers out of service, a lost revenue impact in the 30 to 40 million range would not be unreasonable.

Turning to 2006 and 2007, in September at the Merrill Lynch conference we shared our initial views of EPS expectations for these years.

The ranges shown here are the same and we are now in a position to give you more insight into why we believe these level of performances are attainable.

For 2006, we currently expect a range of 280 to 290, and for 2007 a range of 315 to 335 per share.

Looking beyond 2007 is, of course, more speculative, but we feel confident that if commodity markets stay roughly in their present range, we can average 9 to 10% EPS growth from now through the end of the decade.

Again, these numbers exclude the impact of Wilma.

Let's now look a little more closely at the expected drivers of earnings growth.

At Florida Power & Light, we believe the rate settlement provides the basic framework that should enable the business to deliver average earnings growth in the 3 to 4% per year range over the next four years.

We expect customer growth of around 2% consistent with U.S.

Census Bureau projections and average usage growth of about 1%.

Coupled with continued effective management of the cost structure and assuming no rapid acceleration of inflation, this should translate to about 3 to 4% earnings growth.

I should note, however, that we expect little or no growth in usage per customer next year, as the affects of rising fuel costs are reflected in demand of elasticity.

Our outlook also assumes that the Turkey Point expansion due to come into service in mid 2007 remains on schedule as it is today.

Wilma is likely to affect these numbers modestly.

Under the rate settlement and consistent with the pre-existing regulatory framework, prudently incurred restoration costs are recoverable; however, it will inevitably be some time before all costs are recovered and in the meantime, FPL's balance sheet will have to bear the strain.

We believe all parties will have an incentive to address storm cost recovery expeditiously, but the exact timing and the specific resolution of these issues can not be determined at this time.

In addition, we must repeat a caution that we mentioned last year, which is that we have no way of estimating whether there will be an impact on our long-term customer growth rate from what are now two extraordinary storm seasons in succession.

At FPL Energy, there are two primary drivers that are crucial to enabling us to deliver against our expectations.

They are, continued new wind development, and something approximating the commodity market conditions we have seen over the last few months.

In addition, the time we close the Duane Arnold acquisition is important, as is operational performance primarily in the area of [indiscernible] liability consistent with our historically excellent levels.

While none of these drivers is entirely within our control, we have a high degree of confidence today that with reasonable fortune we will be successful in each area.

More specifically, built into our expectations for 2006 and 2007 is the assumption that we will add between 625 and 750 MW of new wind each year.

Our wind development pipeline is healthy, the Energy Policy Act assures us of PDCs during this period, we have major equipment orders and options in place consistent with these levels, and our Board has already approved projects totaling over 400 MW for the 2006 program.

When setting out earnings expectations, our normal practice is to mark the presently unhedged positions to the current forward curves.

In the present case, however, given the extra volatility in the fuels market occasioned by this year's hurricane season, we have built in a modest cushion to reflect our belief that there maybe some near-term pullback from the historically high current levels.

A literal roll-up based strictly on September 30th forwards would produce somewhat higher values for our merchant assets in 2006 and 2007.

At the corporate level, we have marked our open interest rate positions to the current yield curves and we expect to maintain a balance financing plan designed to support our current corporate credit position.

We continue to examine opportunities to use incremental non-recourse debt where the net credit impact is favorable.

Let me now show you how we see the major drivers of income growth playing out for FPL Energy over the next two years.

For these purposes, I will use EPS ranges to focus on the relative magnitude of the different drivers.

In bridging from 2005 to 2006, we expect new investments to add between $0.24 and $0.28 per share and existing assets to be between $0.08 to $0.12 per share.

Our marketing and trading operations, including asset restructuring activities are also likely to be about the same as this year, perhaps better or worse by a penny or two.

Although within this, we generally expect less contribution from asset restructuring and more from marketing activities, such as, full requirement contracts.

Interest expense is expected to reduce EPS by $0.05 to $0.07 per share.

All other factors, primarily corporate G&A are likely to reduce EPS growth by $0.02 to $0.04.

From this you can see immediately that FPL Energy's growth next year is largely a function of new assets.

The new investment contribution is likely to be more than twice the increase coming from existing assets.

Although older lower-priced hedges start to roll off next year, the bigger effect does not occur until 2007, and the 2000 base for the merchant portfolio looks at to come in at better-than-expected levels subsetting a strong base to comparison.

Consequently, we are looking for only modest improvements in 2006.

As I mentioned earlier, there may be some upside to this depending upon market movements.

We expect the majority of the contribution from new assets to come from new wind with the remainder from Duane Arnold.

Of the new wind contribution, about 80% is expected to come from projects that our Board has already approved and for which we have equipment orders in place.

Given the heavy dependence on contributions from new some projects that are already identified and approved, coupled with the relatively high degree of hedging of the merchant portfolio, we believe 2006 for FPL Energy will be a year dependent even more than usual on solid execution.

While there is uncertainty around a number of the drivers, we have a high degree of confidence that with sound execution, we will see FPL Energy's contribution in the range of $0.90 to $1 per share.

Turning to 2007, we see a more balanced picture.

In bridging from 2006 to 2007, we expect new investments to add between $0.12 and $0.24 per share, and existing assets to add $0.10 to $0.20 per share.

Our marketing and trading operations, including asset restructuring activities are likely to be about flat.

Interest expense is expected to reduce EPS by $0.03 to $0.05 per share as we continue to build out the asset base.

All other activities, primarily corporate G&A, are likely to be plus or minus $0.02 per share.

You can see from this that 2007 represents a more balanced picture.

FPL Energy's growth in 2007 is driven by contributions from the existing portfolio, as well as new investments.

The effect of the older lower-priced hedges rolling off is more evident in 2007.

You will also see a broader range of potential increased contribution from both new investments and existing portfolio, reflecting the greater uncertainty around 2007 at this stage relative to 2006.

Nevertheless, at this point, we feel comfortable that a good range for FPL Energy is between $1.15 and $1.35 per share.

Let me now describe some of the key sensitivities which may affect our 2006 earnings.

I must first caution you that these are not the only factors that could cause our future results to differ from our current expectations and refer you, again, to the cautionary statement and discussion of risk factors contained elsewhere in this presentation.

The sensitivities I will discuss, however, are ones that will very likely have some impact on our future results and which we expect to monitor closely as we go through the year.

First to Florida Power & Light, as always, the largest single driver of variability is likely to be weather.

A reasonable expectation of weather variability based on our long-term history of degree day volatility is plus or minus $0.07 per share with about an 80% confidence interval.

Other important sensitivities will be revenue growth where each percentage point of revenue growth is worth approximately $0.02 to $0.03 per share.

And O&M expenses were a 2% variation, amounts to a little less than $0.04 per share.

Our exposure to interest rate changes is on the order of $0.02 per a 100 basis point shift in the shorter end of the yield curve.

At FPL Energy, the largest single source of variability is, again, likely to be weather-related, specifically, the wind resource available to our large and growing wind portfolio.

Each point of wind index variability is worth roughly $0.03 per share for the full year and a two-standard deviation variance from the mean would be on the order of six or seven points of wind index.

In addition, we can expect variability in water resource available to our hydro assets.

Because of higher prices next year this impact is greater than in the past for the 20% variation in resource translating to roughly $0.04 per share.

Although we are well-hedged in 2006 there is still room for variability around commodity prices.

This year, it is harder than ever to approximate what might be a reasonable range for commodity price variability.

There is obviously huge uncertainty around natural gas prices and this is the single largest exposure in the FPL Energy portfolio.

For simplicity, we have here shown the exposure to a $2 movement in 2006 natural gas prices, which equates to roughly plus or minus $0.07.

Other exposures will most likely be smaller, but we have not included them here.

Another logical consequence of our high-degree of hedging for 2006 is exposure to plant reliability issues.

We always plan for a modest number of forced outage hours in the year consistent with our historical performance, and for 2006, an increase in forced outage rate of one percentage point, which would be a large and disappointing result, could cost anywhere from $0.01 to $0.03 per share.

As we have just discussed, new wind development is crucial to our ability to meet the earnings expectations we have communicated; however, because we are well-along with our development program for 2006, the variability around the impact of new wind development is likely to be modest.

Based strictly on our judgement at this stage, we think the variability from timing and numbers of megawatts is likely to be on the order of $0.02 per share relative to our base line expectations.

Finally, while we continue to pursue a number of attractive asset restructuring opportunities, we are not expecting that these will have a significant impact on FPL Energy's 2006 earnings contributing up to a couple of percent of net income.

Before leaving this topic, let me make a few comments about 2007.

We have not calculated the same range of sensitivities at this stage as I have discussed for 2006.

Obviously, however, since the degree of hedging is much less at this point in 2007 than in 2006, there will be much greater variability around the commodity price exposure in the 2007 portfolio.

Clearly, if gas prices were to drop precipitously before we were able to execute further hedges, we would be challenged in reaching the earning levels I have described.

However, we believe that markets are likely to remain robust for some time and we intend to continue with our well-tested strategy of hedging progressively over time acknowledging the value of time diversification and the limits imposed by transaction costs and liquidity.

We will keep you updated on our hedging progress and any affect it may have on our earnings outlook.

But at this stage, we feel comfortable that unless the 2007 forward gas curve falls below about 650 per MMBTU the earnings range of $1.15 to $1.35 is attainable.

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

Thank you.

Thank you. [OPERATOR INSTRUCTIONS].

We'll go first to Paul Patterson of Glenrock Associates.

Good morning.

Good morning.

Listen, great thorough explanations.

What I have a question about is I guess the storm recovery accounting.

Last time you guys recovered lost revenue and what have you, what actually happens with respect to the damages that you guys incur from Wilma?

And how do you account for it?

I mean, do you defer some of these expenses and recover them later or -- can you just elaborate a little bit more on what would happen?

Yes, before I address the substance of the question, let me just make a note about the impact of lost revenues.

Lost revenues are not explicitly recoverable.

They in effect, they have an impact only to the extent that we are allowed to recover our regular straight-time costs to the extent that we had lost revenue over those costs.

It's kind of a complicated issue, but just to set the record straight.

Now, substantively, on how we go in to recover these, certainly the recovery will be spread out over time.

If you look at last year's, the surcharge is in effect enough to recover those over roughly a three-year period.

If we were to go forward with a securitization proposal, which I think is quite likely -- I would say very likely at this stage -- then obviously the recovery can be over a longer period than that.

If you do -- for example, and this wouldn't necessarily be the only possibility -- but for example, if you could do a 10-year storm recovery bond.

So that would in effect spread the impact out over 10 years.

So it will be recovered over time.

And part of what we need to balance and what the commission will need to balance is how best to spread that impact.

Obviously, there will be an impact on customer bills.

And neither we nor the customers will be happy about that.

So we need to figure out what is the right balance between sort of the current generations of customers and the future generations of customers.

So how does it impact net income, I guess?

In other words, from earnings, you mentioned that your earnings guidance for 2005 doesn't account for Wilma.

But if you're able to defer it and recover it, then how does it -- how would it show up, I guess?

Or how would it impact -- let's leave lost revenues alone for a second.

But how would, in general, show up at all if you're able to recover it, if you follow me?

Well, there is several possibilities.

First of all, we will have to demonstrate prudency in all these expenditures.

So there is always the possibility that the Commission, the staff or other parties might take the view that some portion of the costs that we believe are legitimately recoverable -- in fact, are not.

Okay.

So, we have -- this can be no absolute guarantees at this stage.

I think the second impact to mention is, as I said in the prepared remarks, pending the time when the recovery gets set, it is the FPL balance sheet that is supporting all of these amounts.

So, depending upon how the -- the sort of financing costs are reflected in any final order, there could be a net income affect there.

There are always incremental costs that we incur around storm restoration efforts that are not directly associated with the restoration itself and, therefore, are not chargeable against the storm reserve.

As I'm sure you can imagine, when one of these systems, particularly, one as massive as Wilma comes through, the whole organization is turned upside down, it's committed to storm restoration, but existing work doesn't go away.

So, there is a lot of additional inefficiency introduced in how we get back to normal operations and effectively, our unit costs go up for that reason.

So, there's a whole series of those.

Obviously, they're lost revenues themselves would be a direct impact on net income.

Okay.

Great.

So that's really why I say that on balance because the biggest affect, obviously is the direct restoration costs.

Those are recoverable to the extent they are prudently incurred, but there will be some additional effects that do have an impact on net income.

We'll try and give you a much better sense of that as the -- later in the year or with the fourth quarter call.

Okay, and then just on elasticity.

How much have rates -- are rates going up?

And I wasn't clear exactly the difficulty -- the actual relationship between the increase in rates and how much your usage is going down.

I saw that usage was flat for 2006 in your projections.

And I guess it was 1% before and you have 1% in 2007.

But how much of that is -- for every percentage increase what is the negative impact associated with the usage in your models on elasticity?

Well, not to be too flip about the response, but I wish we knew.

The question of what elasticity actually is both short-term and long-term is one that, as can you imagine, exercises us extensively.

To be honest, we don't have sufficiently good statistical data of which to be certain, and in any case, even if we had good historical data, every situation is a different one.

So, the assumption that we have made is based on looking at historical data around other significant price movements, both positive and negative in the past, and then sort of taking a reasonable mid point on that elasticity.

So that brings us out to the belief that it will be about flat usage per customer next year.

The impact on customer bills, which you asked about will be on the order of a 15% increase next year.

15, one, five?

Correct.

Thanks a lot.

[OPERATOR INSTRUCTIONS].

Thank you.

We'll go next to Steve Fleishman of Merrill Lynch.

Hi, actually, Paul asked all my questions.

Thanks.

Thank you.

We'll go next to Annie Tsao of Alliance Capital.

Good morning.

Good morning.

Oh, I just wonder on Page 23 and 24 where you highlight the drivers for FPL Energy, I'm just wondering on the, particularly the two asset restructuring marketing and trading from '05 to '06, you're a negative two to a positive $0.02.

And when you turn to the next page, you have negative a penny to a penny.

Can you give us a little bit more color to that?

And I was wondering in '07, how come the range is kind of narrow instead of -- in my thinking, I just think it should be a little bit wider.

Right.

So let me remind everybody what these activities are and how we approach them.

We are, as I think you all know, fundamentally an asset-focussed business at FPL Energy, and our, fundamental ability to make money is based on ultimately the profitability of those physical assets.

In order to manage the inherent risks around those assets to market their output effectively, we have to have a marketing and trading organization.

Having a competent marketing and trading organization also inevitably offers you additional opportunities to participate in margin-adding activities, asset optimization activities, it gives us knowledge in certain key markets, which allows us to take very limited direct trading positions.

But that activity is really all an adjunct to the assets.

We do not plan to expand that activity independent of the assets.

So, it will continue to essentially add value around the base of assets that we have.

Over the next two years, the big increase in the asset base is coming either from new wind projects or the addition of Duane Arnold, neither of which significantly enhances the opportunities for asset optimization.

So, as a result, we are effectively looking for the incremental value-added from the front office to remain pretty consistent from year-to-year for the next couple of years.

So, I take your point on 2007, and perhaps that should be plus or minus $0.02.

But I think the message we would like you to take away from that is that the activity is basically going to be on the same scale for each of the next two years.

We don't see a lot of difference in the potential market conditions.

We expect continued degree of volatility, which will provide opportunities for asset optimization activity.

So we expect them to contribute roughly the same as they have contributed this year and, in fact, roughly the same as they contributed last year.

Thanks.

See you next week.

Thank you.

Thank you.

We'll go next to Steven Rountos of Talon Capital.

Hi, good morning.

Good morning.

First on the 9 to 10% EPS growth rate, I guess that was through 2009?

True.

And what base year is that off of?

Is that off a 2004 number?

Correct.

Okay.

And then the 115 to 135 FPL Energy earnings guidance for '07, what is the sensitivity to that earnings given a $2 change in gas price?

I haven't -- we haven't done that calculation.

As I said in the prepared remarks, we haven't gone through and done the sensitivities for 2007 at this stage.

Obviously, it would be a lot larger.

I mean just that you can get that from the fact that now 86% of our expected gross margin for '06 is hedged, only 70% is for '07.

And obviously, '07 is bigger, so it's going to be a bigger number.

So obviously, there is a much bigger spread there at this stage.

I don't know what the exact spread is.

To my mind, it's not that relevant at this stage.

We are -- the basis for that $1.15 to $1.35, as I said, is something approximating current market conditions.

It's not the peak that we saw at early September 30th, but something like the early September numbers which are fairly consistent with where the markets are today.

And as I indicated, we feel pretty good that it might be a struggle and we might be at the low-end of the range, but even at a 650 gas price in 2007, we could still get there.

Okay.

And the flat usage for customer that you're expecting year-over-year, was that kind of demand adjusted or -- does that reflect the weather for this year or -- [multiple speakers]?

Yes.

That's always -- forward-looking is always on a weather normalized basis.

A weather normalized basis?

Yes.

Okay, great.

Thank you.

Yes, just for reference for everybody, historically we have seen, over a long period an average of about 1% to 1.5% a year usage per customer growth.

So for 2006 because the price elasticity effect we're expecting that to be roughly flat.

It could be up a little.

It could be down a little.

We just don't know at this stage.

Great.

Thank you.

Thank you.

We'll go next to Ashar Khan of SAC Capital.

Good morning.

And congrats on a good quarter.

Thank you.

Going back to the more -- growth going to '06 and '07 on FPL Energy, could you break like in '06 and the new investment column, what is wind and what is non-wind?

Is there some way to get that?

It's somewhere between two-thirds and three-quarters of it is coming from new wind and the remainder is Duane Arnold.

As you know, we don't put any -- in our expectations, we don't make any assumptions about currently unidentified acquisitions.

So the only thing we've really got in there that's driving next year is Duane Arnold.

So it's somewhere between two-thirds and three-quarters is probably new wind and the rest Duane Arnold.

Okay, and then in '07, is that all new wind?

That's all new wind.

Okay.

And then in the existing portfolio, I know because you had hedged some in Seabrook to '07, could you tell us how much in '06 and '07 is the Seabrook affect?

Is there some way to quantify that?

There really isn't at this stage.

We have really just done the numbers on an aggregate basis.

I would say a very large chunk of the increase is really driven by Seabrook and other assets that are most directly exposed to just pure natural gas prices.

So for example, the hydro assets in Maine, as you can tell by the greater variability in 2006 is a much more increase built in for those two.

And because we don't hedge the hydro assets as extensively, you are seeing some of that come in in 2006.

But I don't have the detail breakout.

Okay.

But then, if we go to 2007 where in new investments it's 12 to 24, so that's basically if you're coming in at the higher portion of your wind, you will hit then more then 24, right?

Is that a way to do it, correct?

Yes, it's a combination of a number of things.

It's not just the number of megawatts but where they occur in time, particularly in 2006 because the, 2006 and early 2007.

For example, if we don't get a 2007 project, let's say we have a 200 MW project and it comes in in September of '07, it's not going to contribute a lot to 2007 results.

If we had that same project coming in in December of 2007, it would contribute a great deal. [multiple speakers].

Timing.

So there's volume, variability and also at this stage, some of those projects are very much in the development stage, so there is also variability in here for the ultimate margin at which we will do the deal.

So as a result, there is several factors that make that more uncertain.

Okay.

Thank you very, very much.

Thank you.

Thank you.

We'll go next to Paul Ridzon of KeyBanc McDonald.

Good morning, Moray.

How are you?

Good morning.

You said that you had some cushion built into your forecast for kind of a retracing of natural gas.

Can you kind of give us some flavor as to how big your cushion is?

I don't know, is the short answer.

Let me explain that a little bit more.

Normally when we do these things, we would be marking the portfolio as of the end of the quarter; so September 30th.

Now, it turns out if you look at the history of the forward curves, September 30th was pretty close to the peak and markets have backed off since then.

The numbers that we have got here are really based on forwards as they were as of the early part of September.

It's slightly different dates for different markets.

So, as a result, that -- the value of the portfolio, the value of the open positions relative to where we have them marked and these expectations ran up to September 30th.

They have subsequently come back down.

So I would say today they probably consistent of very roughly with where markets are.

Kind of on a related topic, when you see fundamentals or pricing get away from fundamentals, like probably they were at 930, have you reassessed your hedging strategy to get more aggressive and try to be opportunistic?

Well, as I am sure you can imagine, the subject of where the markets are and what the impact on our hedging strategy should be has been a subject of intense debate over the last few months.

I guess a couple of reactions.

It's much easier to see in retrospect that the market was at a peak or overheated than it is to see it at the time.

So when everybody was looking at the forward curves right around the time of Katrina and Rita, it was by no means clear that they were not going to continue to go even higher.

So, our general policy has been, particularly with respect to natural gas, to take the view that we don't have any special insight into the fundamentals of natural gas and, therefore, not to be significantly aggressive in adjusting our overall hedging profile on the basis of our perceptions of where fundamentals might be.

When it comes to spark spreads, we have -- taking a slightly different approach because we have -- we believe a better basis for insight into the development and level of spark spreads in some of these markets.

We have used situations where we believe that the forward spark spreads were either over or undervalued to kind of modulate how aggressive we were at the margin on adding to our hedging profile.

But that's kind of a tactical decision.

Still our basic strategy is to layer in hedges fairly consistently as market opportunities, as liquidity offers us.

I would remind people that the basic role of hedging at the energy portfolio is to give us a clearer profile, a clearer view and the profile of near-term earnings.

It, over time, will simply act to smooth the path of earnings relative to the underlying commodity exposure.

And then you've touched on the topic, but can you kind of talk about your market position in buying turbines?

And any exposure to, I guess there is some scarcity pricing out there, and are you seeing any of that or are your options dated enough that you're not subject to that?

I think what I would like to say on that is we feel very comfortable that we have access to all the equipment, turbines and other equipments that we will need to meet the 625 to 750 per-year range and that we will be able to do projects at, at least as good profitability levels that we historically have been able to do.

And beyond that, I think it's probably not wise for me to go.

And is there rationalization in that market?

Are people realizing that against current gas prices these are more valuable assets?

Or is there still just -- you described it as mom-and-pop making a quick buck at one point.

We still see some of that and I would still say that one of the challenges for us as we continue to grow the business is to really to increase the value that we get of the total value-added chain that's being offered.

Because with the commodity prices where they are clearly wind is a much better total economic deal to the end-consumer.

So the challenge for us is to, in essence, grow our share of the economics of that.

There are some constraints on that one which is the one that you mentioned, which is we have competition that doesn't always have the same perspective on price levels.

But, nonetheless, I think if I look at the 2005 program we're pretty pleased with the profitability profile.

Thank you very much, Moray.

I think we have time for one more.

Thank you.

We'll take our last question from Michael Goldenberg of Luminous Management.

Good morning, guys.

Good morning.

I just had a question on the overall situation in Florida.

Obviously, you're lucky to be in a very good political environment with very amicable relationships with both staff and commissioners.

But as these rates keep increasing and increasing has there been any noise from customers with the Hurricane Wilma and the $6 billion fuel cause bill, do you think, in general, customers are understanding that this is a gas-fueled environment and there is -- it really has nothing to do with FPL?

That's a hard question to answer because you're asking me to generalize, obviously, over millions of people in the State of Florida.

So let me just say that I think that our team has done a good job of communicating the drivers of the fuel increase, communicating the fact that we don't directly make any money off these, off the fuel cause, and I would say there's pretty widespread understanding of that, of those facts along, certainly the better-informed portion of the customer base.

Having said that, I don't think there is a single customer out there and I include in that all the employees of FPL who are customers, who is happy with where fuel prices are going.

But to the extent that you're asking if people turn around and blame FPL, I am sure there are some who do, but broadly speaking, I think most people understand that this is a much broader phenomena.

They see it in the gas pump when they go to fell up their car, they read about it in the newspaper for all other regions of the country.

So, I guess that's the best I can say.

So, in general, you would expect to recover all of your [current day] expense, the fuel-related and hurricane-related costs --?

Yes.

-- in the future?

Yes.

And just what would you expect the bill to be, average residential bill to be in 2006?

Per megawatt hour or --?

The average residential bill based on the fuel price increase that we have requested would be about 106 for the typical low, which is 1,000 kWh bill.

Okay.

And that's -- another good point despite the fact that we have a disadvantageous fuel mix relative to the industry as a whole because we don't have a lot of cheap dirty coal.

We, nonetheless, are able to keep those rates pretty reasonable.

Those will still be rates that are below national averages, I believe.

Oh, it's only reasonable compared to New York.

Okay, thank you.

Thank you, that will conclude today's question-and-answer session.

At this time, I would like to turn the conference back over to Mr. Jim von Riesemann for any additional or closing remarks.

Thank you for joining us today and we look forward to seeing you at the Edison Electric Institute Conference.

Thank you for your participation, that will conclude today's conference.

You may disconnect at this time.