新世紀能源 (NEE) 2006 Q3 法說會逐字稿

Good day everyone and welcome to the FPL Group third-quarter earnings conference call. [OPERATOR INSTRUCTIONS] At this time for opening remarks I would like the turn the call over to Mr. Jim von Riesemann, Director of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning and welcome to our 2006 third-quarter earnings conference call.

Lew Hay will start out our call with some comments about our recent announcement regarding the termination of our merger with Constellation Energy.

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

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

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

Let me remind you that our comments today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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 the appendix herein and in our SEC filings.

And now I would like the turn the call over to Lew Hay, FPL Group's Chairman, President and Chief Executive Officer.

Lew.

Thanks, Jim and good morning, everyone.

As I am sure you all know, we announced last week that we have reached a joint and amicable agreement with Constellation Energy to terminate our merger.

After considering the continued regulatory and judicial issues in Maryland, Constellation determined that the risks and uncertainties were too significant to overcome.

They concluded that there was the potential for protracted and open-ended merger review process.

As such, they initiated a request that we terminate our merger and our Board, after reviewing the information at hand, considering our options and reviewing the proposed termination agreement, agreed to terminate.

I am personally disappointed we were not able to complete the merger as I remain convinced the combination of our two companies would have provided significant benefits to our shareholders and to customers both in Maryland and in Florida.

While this is not the outcome we would have preferred, we continue to have the utmost respect for Constellation Energy and its leadership team.

I am pleased that we gave the deal our best shot.

Despite the turmoil in Maryland, we tenaciously did everything possible to move the deal forward.

Although it was frustrating, we never gave up.

I am also pleased that our employees remain focused on continuing to deliver outstanding results for our customers and our shareholders.

Our results for this quarter and year-to-date certainly reflect that.

Moray will share those results with you in a few minutes and also provide our outlook for 2007 and 2008.

But let me just say that I have great optimism for the future of FPL Group as a stand alone company.

Florida Power & Light is a premier electric utility franchise with customer growth that exceeds the industry average.

FPL Energy is one of the best and most consistent performing wholesale generation businesses in the nation and has outstanding growth prospects.

It is increasingly contributing a higher percentage of our earnings each year while maintaining a lower risk profile than most unregulated generation companies.

FPL Group has one of the strongest balance sheets in the industry affording us the ability to consider a variety of opportunities to add to our portfolio as well as to reinvest in our businesses.

I am confident that FPL Group will continue to grow shareholder value in the near and long-term.

Now I would like the turn things over to Moray.

Thanks, Lew.

Good morning, everyone.

FPL Group's 2006 third quarter results were very healthy overall, driven again by outstanding performance at FPL Energy.

FPL Group's suggested per share results grew approximately 14% over last year's comparable period while FPL Energy's grew 40%.

The strong earnings growth at FPL Energy reflects significant contributions from new assets, as well as excellent performance in the existing portfolio and from our small marketing and trading organization.

Florida Power & Light posted solid results despite unfavorable weather related sales comparisons.

As a result with three quarters now behind us FPL Group is well positioned to deliver at the upper end of the adjusted EPS range of $2.80 to $2.90 per share for 2006, which we originally shared with you at this time last year.

This includes the negative $0.07 impact of Power & Light from storm costs disallowances that we discussed earlier in the year.

Looking forward, we are also well positioned for continued earnings growth.

I will provide more detail later in the call.

Let me just note here that we now see a reasonable range for 2007 being $3.35 to $3.45, somewhat higher than we had indicated on our last call, and while there is necessarily more uncertainty about 2008, a range of $3.60 to $3.80 seems reasonable based on drivers that we can see today.

As a reminder, when we discuss FPL Group's earnings expectations, we assume normal weather and mark our currently open positions to the current forward curves.

We also exclude the effect of adopting new accounting standards if any and the mark-to-market effect of nonqualifying hedges neither of which can be determined at this time.

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

In the 2006 third quarter FPL Group's GAAP results were $524 million or $1.32 per share compared to $339 million or $0.87 per share during the 2005 third quarter.

FPL Group's adjusted 2006 third quarter adjusted earnings was $457 million or $1.15 per share compared to $395 million or $1.01 per share during the 2005 third quarter.

Our adjusted results exclude the mark-to-market effect of nonqualifying hedges and merger related costs.

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

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

Florida Power & Light posted good results generally in line with our expectations although disadvantaged relative to last year's third quarter by unfavorable weather comparisons.

The weather impact this quarter was minor while in the third quarter last year it was well above normal.

Comparisons with last year are also hurt by the impact of price elasticity on usage per customer.

Higher fuel costs which are reflected in higher customer bills have clearly had an impact on customer demand.

Customer growth continues strong although slightly below the 10 to 15 year historical average, which I will discuss in more detail in a moment.

O&M expenses were roughly flat with last year and depreciation was down, reflecting the impact of the 2005 base rate settlement agreement.

Third-quarter earnings at Florida Power & Light were $328 million in 2006 up from $311 million a year ago.

The corresponding earnings per share contribution was $0.82 compared to $0.80 in 2005.

Growth in new customer accounts continued at a healthy pace during the third quarter.

The number of FPL customer accounts increased by 79,000 or 1.8% over last year's comparable period.

This growth is slower than our 15 year historical average of 2.1% , a level which outpaced the national average over the same time period.

It may, however, be worth noting that within the quarter the growth rate was lowest in August with September showing an uptick.

For a variety of reasons we believe that we will continue to see healthy growth for the next several years.

Housing starts have dropped off quite substantially throughout much of our service territory and we expect some adjustment in the housing stock including a period of working off excess capacity in the apartment and condominium segments.

But we continue to view the underlying trends positively.

Florida's economy, though it is cooling slightly from the extremely rapid pace of 2004 and 2005, is still performing well and out performing much of the rest of the country.

Absent some major shift in the fundamental attractiveness of the state, future customer growth of around 2% appears reasonable.

Overall retail kilowatt hour sales fell 4.2% during the quarter.

Cooling degree days, the common metric used in determining weather impacts on energy usage, were slightly above normal but about 11% below last year's.

As a result, usage growth associated with weather was a negative 4.9% quarter-over-quarter.

The remaining 1.1% volume decline is primarily a function of increased retail prices driven by the significant increase we have experienced in fuel costs.

Looking forward, with moderating fuel prices likely to be reflected in lower retail rates next year, we expect to see a return to positive usage growth.

For 2006 third quarter FPL's O&M expense, including amounts recovered through closes was $335 million up from $334 million in the 2005 third quarter.

The flat O&M comparison for the quarter was related to timing differences associated with planned expenditures and unfortunately cannot be taken as indicative of a trend.

We continue to expect O&M to increase year-over-year.

Major drivers we have discussed before, including nuclear maintenance and employee benefit costs, continue.

In addition, we're now beginning to see the O&M impact of our Storm Secure initiative.

While not material this year, it will become more important in the future as our efforts to strengthen our infrastructure to make it more resilient in the face of tropical storms are expanded.

Looking forward, we expect to spend very roughly around $40 to $50 million in O&M each year and another $100 to $150 million in capital for our Storm Secure initiatives.

This remains an estimate as our detailed implementation plans continue to evolve.

Much of the O&M impact will be offset by continued productivity efforts in other areas, but for 2007 the combination of expanded Storm Secure plus increases in benefit costs is expected to lead to a more rapid growth in O&M overall than we have seen in past years.

Depreciation and amortization declined from $246 million in the third quarter 2005 to $197 million in the third quarter of 2006 owing to two main factors, the extension of the useful lives on our generation fleet and the benefit from the elimination of the nuclear decommissioning accrual, both of which were implemented as a result of the August 2005 base rate stipulation and settlement agreement.

To summarize, Florida Power & Light's third-quarter earnings per share were affected by the following; customer growth, positive $0.03; usage due to weather, negative $0.07; underlying usage growth, mix and other, negative $0.03; depreciation, positive $0.08;

O&M flat, AFUDC positive $0.01, share dilution, negative $0.02 and all other including interest positive $0.02, for a total $0.02 per share improvement for the quarter.

FPL Energy had another very strong quarter driven primarily by contribution from new assets, both new wind projects and the January 2006 acquisition of a majority stake in the Duane Arnold nuclear center, as well as by growth in our wholesale load-following businesses and strong performance in the existing portfolio.

We were particularly pleased with the comparative performance of the existing merchant portfolio, which had a strong third quarter last year but nevertheless did slightly better this year.

These positives were partially offset by below average wind resource and increases in interest cost and overhead expenses.

The increase in overhead primarily reflects additional investments in growing the business for the future.

FPL Energy's 2006 third quarter GAAP results were $215 million or $0.54 per share compared to $44 million or $0.11 per share in last year's third quarter.

FPL Energy's results excluding the effect of nonqualifying hedges were $141 million or $0.35 per share compared to $100 million or $0.25 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 nonqualifying hedge transactions in the appendix to this presentation.

However, a couple of comments are warranted here.

In the third quarter last year we recorded a non-qualifying hedge loss of $56 million after tax, our largest quarterly loss in this category.

This loss reflected a significant increase in commodity prices we experienced during the third quarter last year.

In the third quarter of 2006, we recorded a nonqualifying hedge gain of $74 million after tax, our largest gain, reflecting the decrease in commodity prices we experienced the this quarter.

Of the $74 million gain this quarter, $32 million represents the rolloff of prior period losses in this category while $42 million represents the impact of market price changes.

The market price changes were heavily concentrated in the front end of the forward curves, particularly 2007 and 2008 where we are well hedged.

Thus the decline in prices has had only a muted effect on our expectations for future growth, as I will discuss later.

As of September 30, 2006, there was an after-tax derivative liability for nonqualifying hedge category of $14 million representing losses that have been recorded in the nonqualifying 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 27 in the appendix.

As a reminder the types of transactions we classify as nonqualifying 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.

Turning now to the drivers of growth in FPL Energy's adjusted earnings, contributions from new assets, namely wind and Duane Arnold, accounted for $0.07 per share improvement in the quarterly results.

Our new wind development program for 2006 has already exceeded our original expectations despite some hold ups in the construction process for our largest project.

In the last twelve months we have added 932 megawatts of new wind.

The existing wind portfolio fell somewhat short of expectations, owing to a below average wind resource.

The wind index for the third quarter was 96, about the same as last year.

Relative to normal the lower wind index represented a drag of approximately $0.02 per share.

Please refer to the appendix of the presentation for additional detail on the wind index.

The wind portfolio has also suffered slightly this year from equipment reliability problems which differ in their specific nature from supplier to supplier.

This quarter's results were positively impacted by supplier payments in resolution of certain outstanding warranty and other operational performance issues.

Overall for the year-to-date, the losses from shortfalls in asset availability relative to our expectations have been partially offset by vendor settlements and the net impact is not material.

The merchant portfolio overall improved relative to a strong third quarter last year helped by good conditions in NEPOOL.

Our small positions in PJM and California also showed improved results.

Texas was down slightly for the quarter but remains ahead for the year-to-date period.

All together the existing portfolio added $0.03 to the FPL Energy contribution.

Asset optimization and trading added $0.03.

Last year's third quarter, with very high loads and spiking power prices, was a challenge for any load following businesses.

The environment this year was much more benign and our small load following business did very well.

It may be worth noting that there is a degree of negative correlation between some of our asset positions and our load following business.

In general, the market conditions that most challenge the load following portfolio also provide additional opportunities for unhedged asset positions and vice versa.

While we do not enter into load following deals specifically with this intent, but instead with the expectation that on average they will earn acceptable levels of return for the risk and capital committed, as a practical matter there is some degree of dampening of earnings volatility created by this small segment of the business.

Other effects netted to a negative $0.03 impact almost all due to either additional resources committed to supporting the future growth of FPL Energy or to incremental interest expense associated with the growth in the asset base.

As you all know, the energy markets have been very volatile, and while the front end of the forward curve has come down significantly in the last few months we remain well positioned for 2007 and 2008.

The graph shown here shows over the last 12 months or so the calendar 2007 strip has fallen about $1.75 to around $8 per MMBTU.

Meanwhile, the decline in the 2008 calendar strip has been less precipitous over the same time, falling about $0.25 to $8.35 per MMBTU.

While some of the interim volatility was undoubtedly driven by short-term concerns such as gas storage levels and whether the 2006 hurricane season would be as severe as predicted, it nevertheless appears to us that we are in for a sustained period of higher prices and more volatility than most of us envisioned several years ago, when $4.50 gas was considered extreme.

This is indicated in this chart by the history of the ten-year forward strip price, which also has shown some volatility but which is actually higher today than at this time last year.

This consistency in forward natural gas price strength is generally good for most of our merchant assets.

To summarize the third quarter 2006, on an adjusted basis FPL contributed $0.82 per share, FPL Energy contributed $0.35, and corporate and other contributed a negative $0.02.

That is a total of $1.15 per share compared with $1.01 per share in the 2005 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 and the mark-to-market effect of nonqualifying hedges which cannot be determined at this time.

You may recall that at the end of the second quarter we said that we expected 2006 earnings to be at or near the high-end of the range of $2.80 to $2.90 in adjusted EPS that we had previously communicated.

That view has not changed, and with three quarters of the year complete we expect to end the year within a penny or so of the high-end which includes the adverse impact of $0.07 from the PSC storm cost decision absent which we would have expected to be well above the upper end of the range.

Before moving onto 2007, I would like to alert you to two items that may affect our fourth quarter and full year GAAP results that are not reflected in the $2.80 to $2.90 range.

First, some of you may be aware that for many years we have been party to a dispute concerning an Indonesian geothermal project.

After protracted and sometimes tortuous legal proceedings, it now appears we and our partners have finally prevailed and we expect to record a gain in the fourth quarter reflecting the outcome of these legal proceedings.

This amount is not yet final but is likely to be on the order of $90 million pretax and will be both book and cash gain.

Second, it is possible that we may be changing our method of accounting for major maintenance.

Since the FASB has eliminated the approach that we have been using which is known as the accrue in advance method, effective no later than the first quarter of next year.

Whether we change our approach in the fourth quarter of this year or the first quarter of next year, there will be an impact on our reported results without any change in the economic substance of our business.

Unfortunately, this change, whenever it is made, is likely to introduce some distortion into assessment of FPL Energy's growth rate.

Broadly speaking the effect will be to increase FPL Energy's current earnings at the expense of future earnings.

While this will improve reported results initially, it will also appear to reduce FPL Energy's growth trajectory.

We will provide a detailed explanation of the impact when we make the change whether that is in the fourth quarter or next year.

Turning now to the outlook for 2007, you will recall that in our second quarter call we indicated that the main drivers of our earnings outlook suggested we would be in the upper half of our previously stated range of $3.15 to $3.35.

Since then we have begun our detailed financial planning for the year ahead and are in a position to share with you more specific expectations.

Please note that our budgeting process is not yet final and there may be some modest changes to the numbers in the fourth quarter.

Overall, we now see a reasonable range for Group adjusted EPS to be $3.35 to $3.45 implying growth of at least 15% off the expected 2006 number.

Although commodity price movements have been somewhat unfavorable to the 2007 outlook since the end of the second quarter, other changes have more than offset this impact and closer examination of our opportunities and challenges makes us comfortable that this range is a good one based on everything we can see today.

Within the overall range, we are again expecting very strong growth from FPL Energy, driven both by contributions from new investment as well as the roll over of existing hedges to new values more closely approximating current market conditions.

Florida Power & Light faces a more challenging year with significant impact from the Storm Secure program, but we still look for modest growth from that business.

I will discuss the specific drivers in more detail in a moment.

We have not spent as much time on 2008 and in any case there is inherently more uncertainty further out.

However, based on what we know at the moment, we believe a reasonable range of expectations is $3.60 to $3.80.

We expect continued strong growth from FPL Energy although not at the same pace as in 2007, and we expect stronger growth from Florida Power & Light.

Looking beyond 2008 is necessarily more speculative, but we see no reason to change the view expressed in 2005 that average growth of 9% to 10% per year off the 2005 base through the end of the decade is reasonable.

Assuming commodity prices stabilize somewhat we would naturally expect less growth from hedges rolling to current market values and proportionally more of the growth to come from the impact of new investment, primarily in the wind area at FPL Energy and from organic growth at Florida Power & Light.

In the appendix to this presentation we provided some key sensitivities around our 2007 expectation in what I refer to as our plus and minus charts.

I must emphasize these are not intended to be a comprehensive analysis of all the factors that could cause our results to differ from our expectation and they should be read in conjunction with our cautionary statement and full list of risk factors.

Nevertheless, they should provide some sense of the way in which our earnings will respond to drivers that very likely will end up being somewhat different from our current expectations.

I would like to draw your attention to two points.

First, for 2007 FPL Energy is very well hedged against commodity exposure with well over 90% of our expected gross margin hedged in one form or another.

In fact, at the moment our natural gas exposure is actually slightly the reverse of what we normally see and what you may be accustomed to, that is, a decrease in natural gas prices is associated with a slight increase in earnings and vice versa.

Because we are so close to being fully hedged for 2007, this relationship could swing around relatively easily with small changes in underlying positions including, for example, the rate of growth of our small retail business in Texas.

As a result, I caution you against extrapolating from the value provided.

For practical purposes our overall natural gas exposure in 2007 at FPL Energy is small compared with other exposures inherent in the portfolio.

Second, some of you may have noticed we have not provided a breakout of contract coverage by asset class as has been our custom.

With the growth of FPL Energy's business and the more complex nature of its portfolio, we believe that our contract coverage measures have out lived their usefulness as an indicator of our exposure to commodity prices.

Over the coming months we will be working to develop more suitable disclosure which we expect to share in January.

In the meantime I would simply note that on a comparable basis to 2007, roughly 80% of FPL Energy's 2008 expected gross margin is hedged against commodity price movements.

Turning now to the drivers of year-to-year changes in expected EPS, I mentioned that 2007 will be a challenging year for Florida Power & Light.

This is because it will be the first full year with significant O&M impact from the Storm Secure program.

While we always expect incremental productivity improvements from our functional groups, we will most likely not be able to offset all of the increased O&M associated with Storm Secure in one year.

The extra O&M impact, coupled with normal increases in depreciation and other costs associated with the growing business, will significantly offset the positive impact of revenue growth.

Built into our expectations is the assumption of volume growth of a little less than 3%.

For 2008 we expect Florida Power & Light to return to more normal earnings growth patterns since much of the O&M impact of Storm Secure will be a ratcheting up of costs to a new higher level, the year-to-year growth rate of O&M should slow in 2008 compared with 2007.

As a result, EPS growth of around 4% or so should return.

At FPL Energy we obviously now expect to finish this year with a higher EPS contribution than we originally anticipated, thus setting the starting point for 2007 growth higher.

For many months now we have been discussing with you the two primary growth drivers for 2007, namely the contributions from new investments, primarily wind, and the impact of rolling over older hedges entered into when prices were lower to new hedges at today's higher prices.

As you can see from this chart on slide 19 for 2007, the impact of the latter is the largest single growth driver, but the impact of new investments is also very substantial.

Some of you may recall that we had previously discussed the impact of hedges at Seabrook entered into in 2002 and 2003 when NEPOOL prices were in the mid 30s for megawatt hour, which roll off at the end of 2006.

Obviously this results in significant margin expansion.

Offsetting the positive growth drivers will be modest increases in interest and overhead costs associated with growing the business.

Looking further out to 2008 the impact of hedge rollover at FPL Energy becomes much smaller.

The most important driver of 2008 growth will be our success in 2007 wind development.

As you know, any given year's wind program tends to have its biggest impact on earnings in the subsequent year.

For this reason, our 2008 expectations are not greatly affected by the size of the 2008 wind program although of course our 2009 expectations will be.

To summarize, FPL Group enjoyed an excellent quarter and is well positioned both for the balance of this year and for the next several years in terms of visible drivers of earnings growth.

Our balance sheet remains strong and well capable of supporting our growth strategies even with the stresses that have been placed on it by fuel cost under-recoveries, and unprecedented storm costs at Florida Power & Light.

We believe our fundamental strategic position within a complex and constantly changing industry is strong.

We will continue energetically to pursue opportunities to create shareholder value wherever we see them but we will always remain disciplined in the process.

And now I will be happy to take questions.

Thank you.

[Operator Instructions] We'll take our first question from John Kiani at Deutsche Bank.

Good morning.

Good morning, John.

Moray, what are your long-term plans?

Should we assume that you are going to be staying at FPL as CFO now that the merger has been terminated?

I believe you're under a five-year agreement.

Let me correct the second part.

There is no specific time length to my agreement, and I've said to many of you many times my resignation letter is always on Lew's desk so whenever he tells me to go, I will go.

That being said, I am happy in my current position.

I have no current plans to change.

Great.

And one other question.

When you were talking about the load following contracts, I guess you were saying that, or are you saying that the short weather and price volatility position that's embedded in the load following contracts is priced into your return calculations and full requirements pricing but at the same time it is also somewhat backstopped by any open generation positions.

Is that the right way to think about it?

I wouldn't think of it as back-stopped.

The first part is correct, that we price the variability into the transaction, so as a separate block of business over time, you would expect them to earn a return commensurate with the risk and the capital at stake.

I was in the comment I was really just pointing out there is kind of an odd corellation.

The load-following business tends to struggle in periods where there is unexpectedly high demand and spiking power prices, so it will under perform in those market conditions, and correspondingly it will outperform its average where the load is more moderate and there's less volatility in prices.

Well, the former conditions, the ones that challenge the load following business with spiking prices are precisely the conditions that are good for physical assets that are really out of the money options or at the money options.

Where there is volatility, those assets tend to produce a little bit more.

So it is just an interesting phenomenon in the business that there is some degree of dampening of the aggregate earnings volatility because we have both types of positions.

Great.

Thank you.

We'll go next to Asher Kahn at SAC Capital.

Good morning.

Good morning.

Moray, could I just go over, I was I was looking through the forecast provided a year ago and in '07, and I guess a couple of things was that on the existing portfolio the previous range was $0.10 to $0.20.

It's like now $0.24 to $0.27, so I guess it has become much more stronger, and I was just trying to get a better sense as to the tightening of the range and the strength.

It it just because you have realized higher prices or what's leading to that?

Well, first of all, Asher, is I have not gone back and actually done a bridge from the -- the bridge that we gave you last year to the current bridge if you see what I mean.

I can only give you some general comments on that, but it is clearly our expectations of that driver have increased relative to last year for a number of different reasons.

You've got capacity values, primarily in New England but also to a small extent for us in PJM, and our expectations now for 2007 are higher than they were correspondingly last year.

But each of the major commodity price drivers where we have actually been able to lock the hedges in have turned out to be rather better than I think we had anticipated at that time.

Now, how much that was a degree of excessive conservativism at the time, all I can tell you is that when we do those things, we mark the then open forward positions to the then forward curves, so what's happened is the combination of forward price movements and what we have been able to actually lock prices in at.

It has been a very good year in terms of what I would call the tactics of hedging as to when the team has been able to lock down prices for 2007.

So overall it is a variety of things.

Going to 2008, $0.18 to $0.23, is that all wind and how many megawatts can we assume?

As you said that will really depend on your 2007 development cycle.

Could you just tell us how much you're expecting in that $0.18 to $0.23?

Well, first of all, recall that we had said that the 2006 and 2007 wind programs would be together between 1,250 and 1,500, and because of the success in that program, we're now at the high-end of that, probably a little bit above that, so the 2007 program we're anticipating at least 750 megawatts of new wind.

That will be the principle driver.

I think there is probably $0.04 or $0.05 worth of contribution from anticipated '08 development.

Obviously that would depend upon continuation of the PTC, but since as I said in the prepared remarks, since the given year's program has the biggest impact on the subsequent year, the '08 number is not greatly dependent upon the '08 program.

Do you still, Moray, what historic mean do you use for the wind index?

Is that one or how should we look at it in terms of the projections.

Yes, in the projections, everything is done to that long-term average of 100.

The only thing to note there of course is that the wind index is a composite of -- based on the way the portfolio looks today at different regions have different inherent wind resources and the mix of new projects obviously will not necessarily map the mix of the existing projects.

So the wind index itself migrates over time to reflect the then-current mix of our actual projects.

And if I can just stand up, Jim, for Mr. Robos, just looking at FPL Energy in terms of apart from wind, what is the focus?

What could we be looking at strategizing, you know, I guess CEG was going to provide a different platform but now FPL has downed a lot.

Could you just share with us what is the focus going to be of FPL Energy beyond just the wind expansion?

Asher, I think we've said in the past that we are focused not only on the wind business but also as you know, we closed on Duane Arnold last year.

We continue to be very interested in growing our nuclear portfolio.

We are also continuing to look hard at non-wind assets both from a new development standpoint as well as an acquisition standpoint.

We tend unlike many of our competitors not to talk a lot about what we're working on in part because we think it is to our advantage not to talk a lot about it, but we feel very good about both our pipeline of development opportunities as well as our potential growth prospects going forward.

Asher, let me add a couple of notes to that.

As we have discussed on many occasions, the basic strategy for FPL Energy has been a gradual expansion of its capabilities and clearly part of what we saw in the Constellation deal was an ability in a sense to jump quicker there.

But we will be continuing to expand the capabilities that FPL Energy has and a couple of good examples have been the small load following business.

I don't think it is going to be -- we're probably not going to scale it up by a factor of 10.

But where we see good additional opportunities to increase the size of that portfolio, we will do so.

Another good example is the small retail position in Texas.

So we will continue to look for opportunities to make incremental steps out that enhance our long-term capabilities for competing in the business, and we will do that in the same way we have done it in the past.

On a small scale first so we can learn and make our mistakes on a small scale before we scale up.

Thank you.

We'll go next to Greg Gordon at Citigroup.

Thanks, Moray.

I am sorry I missed the first part of your presentation. but I caught the tail end of a discussion about an accounting issue that could be accretive to the current guidance that you're not including.

Can you refresh our memories on that.

Yes, I just wanted to flag for people that sometime either in the fourth quarter of this year or the first quarter of next year we will have to change our accounting for major maintenance.

There will be no economic substance to that change.

So nothing will happen to the underlying business and the cash flows.

The effect will be to draw forward in time some future earnings.

So the total obviously over the life of the projects will be the same, but up front we'll see an increase in reported earnings but it will be at the expense of a decrease in earnings further down the road.

That will have the impact of distorting views of the growth rate because obviously it will make the early year base higher, so it will appear to make the growth rate lower without any change in the underlying growth rate.

I just wanted to flag that for people so when we do show you what the results are it doesn't come as a complete surprise.

We haven't run the numbers yet and we're not sure whether we're going to do this in in the fourth quarter or the first quarter, but when we do we will break it out and show you explicitly how it works.

What is the duration of the change?

I mean, is it going to impact the forecast trade earnings?

Yes.

We will have to adjust everything for that.

And of the 750 megawatts or so you that you think you're going to build in '07, to impact '08, how much of that has sort of been identified?

I mean, you've been very, very successful in meeting or achieving your targets in terms of wind growth, but how much that 750 do you think is is probable versus possible versus if you're still looking for a site.

We have well over of 750 megawatts of projects in the development pipeline.

So the 750 is based on our assessment of which ones are likely to get done in '07 and rank ordering obviously we push the best ones first, so there is always some uncertainty in them.

But to a great extent there are projects competing in the pipeline to be in that 750 next year.

Those that if they don't completely fall by the wayside, those that don't make it in the 2007 program are likely to end up in the 2008 program.

So at this stage I don't think we have ever been in such a good position going into a year as we are in 2007 because of the progress made in 2006 on the wind development pipeline.

So that 750 is looking very good right now.

One last question.

I know the earnings growth rate that you expect in '07 versus '06 at FP&L is lower because of the step function increase in O&M.

But one of the things that hasn't changed at all is the revenue growth expectations at $0.25 to $0.35.

You did mention that we're seeing some of the froth come off the market in terms of the real estate backdrop in Miami.

To what extent is there any risk to that $0.25 to $0.35 earnings growth number if we have a lot of empty condos in south Florida ?

Well, I can't say there is no risk.

There is risk every time that we go into a year what the revenue growth is going to be.

What I would say is we have become a little more comfortable that somewhere close to the 2% customer growth is likely to continue and that a lot of what we're seeing is a working out of a bubble particularly in the condo and apartment area but not something that's likely to change the fundamentals of the power of the state to draw people in.

And then we are expecting to go back to positive usage growth so we've got about a percentage point of positive usage growth in our expectations.

And that's really a function of the fact that we have had a step function increase in fuel prices that effected customer rates this year, but in January assuming the PSC approves our new fuel filing, customer rates will come down by 4 or 5%, so that should be enough to kind of restart the basics of usage growth.

So those are the base expectations.

Now, Is there uncertainty, clearly there is uncertainty.

I would say that relative to most years in the past we have more uncertainty going into 2007 on the revenue growth side, but probably no more than we had going into this year.

Thanks, Moray.

We'll move to our next question from [Annie So] at Alliance For Energy.

Good morning.

Good morning, Annie.

Hi, I just want to clarify, you mentioned in the call you said, in terms of when you have equipment reliability problems, supplier payment from performance issues.

Can you just expand on that a little more detail going forward?

Sure.

I guess the first thing I would say that while wind as a technology has come a long, long way in the last 10 or 15 years, it is still not where we think it needs to be for the long haul for our business.

Each of the major equipment vendors has strengths and weaknesses but none of them has a system that is really at the reliability level yet that we think it needs to be in.

Over the past year or so we've had issues with just about all the major equipment vendors, different types of issues.

The result of those has been lower availability than we would normally expect from these kinds of projects.

Now, many of the issues were while the turbines were still under warranty, others the suppliers had commitments to results of outstanding issues.

So in the third quarter results were positively affected to the tune of, I want to say about $10 million pretax from payments from vendors.

If you look at the full year, we probably lost a little bit more than that from the availability issues of those equipment loss of availability of the equipment issues created.

So net net for the year we're about a wash.

But it does affect -- it is a number that is in the third quarter results, and consistent with our over all approach, I felt I should call it out.

And '07 numbers, do you have any assumption in there?

We have a normal availability assumption which for wind projects will typically be around 97%.

And I don't want to overstate it.

I mean, these things are still exceptionally reliable and as I've said many times when they fail, they fail gracefully.

So they fail one turbine at a time which is obviously quite different from a nuclear facility or large coal facility, which tends to be an all or nothing event.

But again, as I said, the long-term reliability is not where we would like to see it, and we need to keep working with the equipment manufacturers to get it there.

How about in terms of costs?

And do you have any problem with getting these turbines on time?

Jim could speak more than I on the -- we've had some delays in one of our projects this year, not significant, certainly worldwide turbine capacity is an issue for the industry overall, and we have to remember we're competing in a global business, so the manufacturer is going to look to their opportunities in other parts of the world for maximizing their margins.

On the other hand we are certainly the largest single customer out there, and I think it is fair to say that that provides us some advantages in our negotiations, but, Jim, I don't know if you have any other comments.

Other than to say, Moray, we continue to have good access to turbines.

I think we feel comfortable that we have a good match between our development pipeline and our equipment.

And to be specific, we certainly have the turbines for the 750 megawatts for next year.

Can you also talk about your retail business in Texas and, you know, you mentioned that part of -- you know, for FPL Energy going forward, if there is any opportunity coming up, you do want to grow that business, right?

Yes.

Let me remind people that we acquired the business in the middle of last year.

It is a very small business.

But it does provide both a stepping stone for us to acquire some organizational capabilities and kind of test the market.

More than that, it is a very good -- it interacts well with our overall Texas asset portfolio and provides a natural short position against some of those assets, and Texas is a market that is not super liquid, so every time you engage in hedging with normal block transactions there is transactional costs which you avoid through the retail business.

You may recall that we initially had some, I would just call them basic control and operational issues, not perhaps surprising with a start-up operation, so we spent really the last year or so getting the business under control so it is in position to be scaled up and really pushing to refine its processes.

At the moment it is actually ahead of where our original pro forma margin expectations had it.

It is still small.

We're going to grow, it but we're going to grow it cautiously.

So don't look for it - don't look for us suddenly to become a major retail player all across the nation.

But to the extent that we see good opportunities for incremental margin with limited incremental risk and limited incremental capital deployment that builds off the basic knowledge of a region that we already have, then certainly we're going to take advantage of that.

You know, fundamentally we have a huge commitment in the fixed asset base at FPL Energy and anything that we can do to essentially squeeze a little bit more margin through small incremental commitment of risk and capital really leverages that overall base significantly and increases its effective profitibility.

And I view projects there as falling into that category.

Does that mean you will go to other regions?.

We certainly would look at other regions.

We have no current plans and Annie I think we should let somebody else move on.

All right.

Thank you.

We'll go next to Paul Ridzon at Keybanc.

Lew, as you look out strategically, what's the right size from a balance of earnings from unregulated and regulated in your mind?

That's a hard one to answer, Paul.

I would love to be able to give you a precise number, but let me just leave it at this.

I think we still like having a balance of regulated business and unregulated business.

Having said that, I think it is important for everybody to sort of break down any unregulated business into its component parts, because there is elements of that business that can be riskier than others, and in particular if you look at our business, and I would emphasize the wind business and the wind business that's under long-term contracts, I actually view that as being substantially less risky than a typical regulated business.

And then you look at our components like some of our assets that are deep in the money, I don't view them as having tremendous amount of risk, but there is all different types of risk.

So we -- I think trying to just look at your portfolio as regulated versus unregulated, is overly simplistic.

I know this sounds like I am waffling on your answer, but again we like to have a balance.

We're always looking at the riskiness of the portfolio and each of the individual components relative to the return that we think we can get from it, so as those assessments change over time, it wouldn't be surprising that our mix changes.

That's fair enough.

With some of the very aggressive announcements coming out of Texas, what do you envision as your long-term strategy there?

[silence] We are all looking at each other as to who is going to take a crack at that.

First and foremost just repeating some things we've already said, we're going to continue growing wind business in Texas, and I will point out that both with the success we've had in year as well as a number of the projects we have going forward, we'll be adding a heck of a lot of megawatts in Texas long before any of the other projects ever come to market.

So we're pretty happy about that, and it is one of the advantages of wind.

We can move quickly.

You don't have your money tied up for years and years before it starts earning a return, and we get our returns -- you know we get a lot of cash the first years of operations.

We will also continue to grow the retail business that we were just talking about a few minutes ago, and we're very happy with where that business is, but thirdly, and I will be looking for opportunities to either acquire other assets or develop in that market, and again we'll have to weigh those opportunities versus opportunities in other markets.

But we like the Texas market, and we think there is a lot of room for everybody in that market.

One last question on the turbine reliability issues.

Is this a function of demand for turbines perhaps?

No, no.

This is, these are are complex pieces of equipment and they've been getting much, much bigger, so the stressors on each of the components escalates.

There are lots of different issues I would say.

We have problems with gear boxes, we have problems with generators.

Those tend to be the two weak spots.

I guess really my view of the thing is we're still looking at an industry that's transitioning from what I will call the hobby shop stage to the industrial stage.

They're just not quite there yet.

Paul, let me just add one comment on it.

I don't know if itis will be helpful or not but I will give it a shot.

With each successive generation if you will of wind turbines, we have had early issues, our generation people call it infant mortality.

And no matter how much experience these wind manufacturers have had, as they scale up and try to get turbines that are not only bigger but can capture more wind under more sort of dynamic wind conditions, new issues surface.

And so the type of issues we're having with the latest tranche if you will of wind turbines is not at all that -- it is not really that different from what we've experienced before, and with each of these tranches after a year or two of operating them we have been able to get them to operate at very, very high levels of reliability and remember even with the issues we're having with this latest tranche, they're still operating at high levels of reliability.

So we're talking maybe eking out another couple 2 to 3 percentage points of availability, so it is not huge, and this is not anything that I think -- I definitely can speak for myself.

I am not losing any sleep over, and it is not a particular concern, this is sort of business as usual.

The manufacturers are supporting these turbines.

We have got a lot of expertise ourselves, and I believe most of these problems are already -- most of the root causes have been identified and most of the solutions have been identified.

That's not to say that new issues won't surface, but, and the earlier tranches are running at extremely high levels of reliability.

So I just want to put it all in perspective.

Thanks again and congratulations on the quarter.

Thank you.

We'll move to our next question from Paul Patterson at Glenrock Associates.

Good morning.

Good morning, Paul.

First it's a really quick M&A big picture question, listening to your statements and everything it sounds like you guys are looking obviously stand alone, which makes sense, but I mean what are your feelings about lessons learned, sort of M&A in the future, any thoughts about that or is it too early to say since this thing broke up?

And in theory could you hook up with Constellation again if a year from now things were more mellow in Maryland, if you know what I'm saying, or just at least had a little bit more clarity as to how things would be theoretically approved if they were to be approved?

Do you know what I am saying?

Paul, I'll take that one.

I am not going to speculate on any particular company or any situation other than to say anything is potentially possible.

You're absolutely right.

At the moment we are focused on our stand alone prospects which as we've said are very good.

I will remind you we've said that both before we announced the deal, all throughout the deal, and we're continuing to say that now.

Having said that, we do believe the industry will continue to consolidate.

We clearly have a focus on adding to shareholder value.

That's our job.

And so we have to look at all possibilities, and so we're -- we will continue to look at that.

Has anything changed?

Or as a result of this is there any specific take away that you can impart on this or is it just so unique it really has no bearing sort of on any M&A discussion in the future ?

I would love to say it was totally unique.

But in light of other recent events, I think we have to look even harder at the state regulatory and political environment, and I think if there is a lesson to be learned, it was a focus on the regulatory environment but not frankly fully comprehending and understanding the political environment.

Although I am not sure anybody could have anticipated everything that happened in Maryland, and I can assure you if we ever look at a deal going forward we will look even harder at that.

But having said that, both we and Constellation looked at all the circumstances leading up to what happened in Maryland, and had comfort that it was manageable, and maybe this really was just the perfect storm of some interesting election dynamics and the merger and a one-time giant rate increase that I think Constellation had done a great job in communicating to politicians and regulators, but it still became a political football in the end.

OK.

And finally just to clarify, on 2007 I did notice that the guidance for the utility is down slightly from at least the last time I saw you guys break it out and also corporate and others.

Is that because of Storm Secure spending?

Yes.

And then the corporate and otherwise, is that a little bit higher?

I would have to check.

I am not sure.

I can get back to you, Paul.

Thanks a lot.

We'll go next to Andrea Feinstein at DB Zorin.

Hi, guys,it is Andrea.

Good morning.

Just wanted to really press a little bit more on your thoughts with regard to the Texas retail market.

This is the first time that we have really heard you express a specific focus on growing the Gexa platform, and I want to understand a little bit more what's driving that current focus or if the prior lack thereof was driven more by the need to get the controls in place that you had mentioned and maybe a little more clarity on where your thoughts are.

Sure..

Well, since I didn't do a good job the first time, I am going to turn it over to Jim.

Let me just say that there's been no real fundamental change, I mean we bought the business with the expectation that it would be sort of an experimental platform, and if things worked well that we would cautiously grow the business.

We did have to spend more time than we expected on just basic controls, but I don't think there has been any fundamental shift in strategy.

But let Jim have a go.

First of all, let me just put it in a little bit of context.

This is a tiny business in the context of the total FPL Energy portfolio.

Second of all, we have been working on growing it all since -- as well as putting in place the controls that you need in a business like that -- since we we acquired it.

I would say that it is a -- to reiterate something that Moray said.

Over half of the energy that we've sold through that business this year has come from our existing asset portfolio in Texas.

It is a wonderful hedge for our merchant position there.

It is a natural hedge for it, and we like the retail market in Texas.

And we're making money in it, and we think we can continue to make money in it going forward, it has good growth and we're going to continue to grow it, and we're going to look to potentially grow it in other states where we already know the market.

We know the markets extremely well in new England and the mid-Atlantic and elsewhere, and so it is kind of a natural growth of our existing capabilities.

So-- but by and large it is not big, and it is not going to be big in the context of the total business just because of the size of the platform and the size of the retail business in general.

If there was an opportunity to grow that platform in more of a step-change fashion in a way that you felt comfortable with given the experience you've had thus far with Gexa, would you be interested in doing so and would a larger increase in that business be dependent on your ability to secure physical assets such that you were still maintaining somewhat of a matched book or would you be willing to move forward where you were using more financial instruments on the hedging side, if you got significantly bigger.

Yeah, I think when you look at what are the markets outside of Texas that we think are attractive, they are by and large in places where we already own assets.

So there may be a market or two where we think it may be -- a attractive market where we don't already own an existing asset, but we will know those markets through our load following business anyway.

So, I will also say there is a lot of synergy between our load following business and the retail business in terms of how you price those loads, and so we -- and since they are altogether organizationally in our shop, we get a lot of synergy from managing it that way.

Andrea, to the step change part of your question, you never say never, but I think our focus right now is really on organic growth or starting new small positions rather than racheting it up by 5 or 10 fold.

Thanks.

That really helps.

Good job, Moray.

I think we have time for one or two more.

Thank you.

We'll take our next one from Andrew Levi of Bear Wagner.

God!

Three of my -- three of us in a row, Andrea, me, and Paul.

Anyway, I think most of my questions were asked.

Just - I have been off and on.

So I apologize if you answered this.

The accounting change is not included in your current guidance when you -- so when you upped '07 and '08.

Correct.

Okay, so obviously it would be higher earnings.

Okay, Thank you.

Okay, this will be the last one, then.

We'll go to Shalini Mahajan at UBS.

Good morning.

Good morning.

Could you update us on your capital expenditure forecast for '07 and '08?

Sure.

I think starting at FPL for each of the next few years you can expect to see us spend on the order of $2 billion a year, you know, plus or minus a little bit.

For '07 at FPL Energy, the big driver of CapEx obviously is the wind program, absent new development there is pretty -- only a small amount of CapEx at FPL Energy at all, I would say on the order of $150 to $200 million.

We would -- based on the numbers that we talked about and the 750 or so of new wind, that will be a capital program of a little over $1 billion , so I would think $1.2, $1.3 in total for FPL Energy is a good number for '07 for right now. '08 obviously is going to depend on the size of the '08 wind program, and I think we talked recently on the increasing cost per KW for wind but a range of somewhere between $1400 and $1600 per KW is not a bad range for today's market realities, maybe higher if it is in a really complex terrain far away from everything, maybe a bit lower if it's flatland and easy to get to, but somewhere in that range.

So that's a good guide you can use multiplying a number like that by the size of the expected program to scale the CapEx.

Okay.

And your wind CapEx for '08 would be dependent on the PTCs getting extended.

The magnitude would certainly be dependent on what happens with the PTC program.

As I think we've discussed before, if we don't see an extension of the PTCs I think we will definitely see a dropoff in the market size in '08.

But then I think it will pick back up.

But at this stage we have a high degree of confidence that we will see some continuation of public policy and support, I think that given the overall energy environment there is continued strong support on both sides of the aisle for wind development.

Okay.

And finally, could you just talk about your dividend policy going forward at the current rate and given the earnings are growing 10 to 15%, the payout would be dipping to, you know, mid-40's or even lower?

Would you be looking at stepping up the dividend at the same rate as earnings?

I would say on that that we have since the announcement about the merger last week, we have not sat down and discussed dividend policy in the stand alone mode going forward with our Board.

We will do so at the, probably the December and February board meetings.

But I would not expect that the Board would really reconsider the overall policy until February of next year.

So I'm sorry to duck the question but frankly we haven't really focused on that.

And there are a lot of things that we now need to get back to since our hopes for the deal have been disappointed we need to -- a number of things that just got put on hold for the stand alone case, we now need to revisit them, and dividend policy is clearly one of them.

Okay, great.

Thank you so much.

Thank you.

That does conclude the Question and Answer Session.

I will turn it back to Mr. von Riesemann.

Thank you everybody for joining us today.

And that concludes our call.

Again, that concludes today's conference.

Thank you for your participation.