新世紀能源 (NEE) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the FPL Group 2007 third quarter earnings conference call.

This conference is being recorded.

At this time, for opening remarks, I would like to turn the conference over to Mr.

Jim von Riesemann.

Please go ahead, sir.

Thank you, Sherlon.

Good morning, everyone, and welcome to our 2007 third quarter earnings conference call.

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

Also with us are Lew Hay, FPL Group's Chairman and Chief Executive Officer; Jim Robo, President and Chief Operating Officer of FPL Group; Armando Olivera, President of Florida Power & Light Company, and Mitch Davidson, President of FPL Energy.

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 our SEC filings and on the investor section of our website www.FPLgroup.com.

And now I would like to turn the call over to Moray Dewhurst.

Moray?

Thank you, Jim.

Good morning, everyone.

FPL Group's 2007 third quarter results were very good overall driven again by outstanding performance at FPL Energy.

FPL Group's adjusted per share results grew approximately 7% over last year's comparable period while FPL Energy's grew 25%.

The strong earnings growth at FPL Energy reflects higher realized pricing following the rolloff of lower-priced hedges in the existing portfolio as well as contributions from new assets, both of which were anticipated.

the merchant portfolio and our wholesale marketing operations also took advantage of market opportunities and delivered slightly better results than we had expected.

Florida Power & Light was roughly flat for the quarter, which was in line with expectations, as good revenue growth was offset by cost increases.

Customer growth continued at a healthy rate.

Looking forward to likely full year's results, with three quarters now behind us, we are well positioned to deliver another good year financially.

We expect results to be at or near the top end of the range of what we shared with you last fall, which equates to approximately $3.45 per share.

We expect FPL Energy to come in at or slightly above the high end of the range we originally set out for you at this time last year, while Florida Power & Light will likely come in at the low end.

We said last year that this would be a challenging year financially for Florida Power & Light, in part because of the impact of our Storm Secure program, and this has proved to be the case.

In addition to the factors we anticipated, however, weather effects in the first half were unfavorable and at this point, we would not expect to be able to make up the lost ground unless we see unusually favorable weather impacts in the last couple of months of the year.

While we still have much work to do to bring 2007 to a satisfactory close, over the past month or so we've been going through our normal annual planning process as well as a complete review of our strategy and our view of FPL Group's prospects for the next few years has been developing positively.

We believe we have put in place the foundation to enable us to deliver a sustained period of above average growth with a very moderate risk profile and one which is supported by one of the strongest financial positions in the industry.

FPL Energy's growth will be driven heavily by new wind development, but will likely encompass growth in a number of other areas as well while Florida Power & Light should benefit from service territory growth and sustained reinvestment.

We expect to deliver average adjusted earnings per share growth of at least 10% through 2012 of the 2006 base year.

I will provide more detail around 2008 and 2009 expectations later in the call.

For the moment let me just note that we now see a reasonable range for 2008 of $3.83 to $3.93 a share, a bit higher than we had previously suggested.

For 2009, we see a reasonable range being $4.15 to $4.35 given the drivers 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 non-qualifying hedges, neither of which can be determined at this time.

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

In the third quarter of 2007, FPL Group's GAAP results were $533 million or $1.33 a share, compared to $527 million or $1.32 a share during the 2006 quarter.

FPL Group's adjusted 2007 third quarter net income and EPS were $493 million or $1.23 a share respectively compared to $460 million or $1.15 a share in 2006.

The primary difference between the reported results and the adjusted results is the positive mark in our non-qualifying hedge category which I will discuss in more detail later in the call.

Please refer to the appendix of the presentation for a complete 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 as input into determining whether performance targets are met for performance based compensation under 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's management believes that adjusted earnings provide a more meaningful representation of FPL Group's fundamental earnings power.

Please note the prior period amounts have been adjusted to reflect the application in the fourth quarter of 2006 of an accounting standard change related to planned major maintenance activities, which had the effect of increasing 2006 third quarter results by $3 million or less than $0.01 a share.

Florida Power & Light performed in line with our expectations for the third quarter.

Customer growth continued strong, though with some indications of a possible tapering off late in the period.

Unfortunately, the influence of weather on the quarter was more complicated than normal, as I'll explain in a minute, and this makes it more difficult to detect any possible change in trend in underlying usage growth.

Nevertheless, at the moment we still do not see any significant change in underlying, i.e.

weather adjusted usage growth.

Costs increased for the period but overall were in line with our expectations.

We indicated last year that higher than typical cost increases, driven in part by our Storm Secure program, would inhibit FPL's earnings growth in 2007, and this was the case in the third quarter.

Fortunately, we expect to to be able to revert to more typical growth patterns in 2008.

Results were aided by the impact of the 1,144 megawatt Turkey Point 5 generating facility, which went into service in May slightly ahead of schedule and under budget.

The addition of this facility to our portfolio is beneficial both to customers and to shareholders, with a slight increase in base rates more than offset by the fuel savings arising from the incremental efficiency of the new unit.

Also during the quarter, we announced important steps in our generation expansion plan designed to support continued strong long term growth in Florida.

We announced our intention to implement further power uprates at all four existing Florida nuclear units, subject to various regulatory approvals, and we filed a petition for need determination for two new [nuclear] units to be constructed at our Turkey Point site, also subject to numerous required regulatory approvals and satisfactory resolution of outstanding technical and economic uncertainties.

If all goes well, the uprates will provide more than 400 megawatts of incremental baseload capacity with 0 greenhouse gas emissions by the end of 2012 while the new units will come into service by 2020.

In July, Governor Charlie Crist hosted a Florida Global Climate Summit and laid out important new policy directions for the entire state on the issue.

Of most direct significance to Florida Power & Light are two executive orders setting targets for renewable energy supplies and for greenhouse gas reductions.

While specific implementation plans remain to be worked out, the board policy direction is consistent with FPL group's view of the climate change issue and we support the establishment of stretch goals.

Partly in response to the governor's challenge to the state, we have accelerated plans for new initiatives in Florida.

Among these plans for new solar generation projects, and we continue to seek ways to take advantage of the limited wind resource generally available in Florida.

We also announced our intention to invest significantly in upgrading our network infrastructure to create a smart network using advanced technology and two-way communication with customer premises to enable more automation and network intelligence.

As part of this effort, we expect our advanced metering initiative, currently in a test phase and proceeding well, to enable us to leverage our existing industry leading energy conservation program portfolio.

Overall, we expect to commit up to $500 million to the effort over the next several years.

For the third quarter, Florida Power & Light reported net income of $326 million compared with $328 million in last year's third quarter.

The corresponding contributions to EPS were $0.81 this year compared to $0.82 last year.

For the third quarter of 2007, the average number of FPL customer accounts increased by 90,000 or 2%.

While this is a very strong growth level and consistently with our long run history, I should note that we saw a flat month-to-month change in customer account from August to September when we would normally expect to see some increase and the preliminary data for October do not show growth at levels we would normally see at this time of year.

Whether this is indicative of a real slowdown or just a transitory phenomenon, we do not yet know.

We will continue to monitor shape developments and keep you informed, but I should also reiterate that we expect any slowdown to be temporary.

As we said before, Florida remains an attractive place to live and work, its economy continues to perform well, and we certainly anticipate that the beginnings of the baby boom retirement wave will support FPL's long term growth.

Despite weakness in the housing sector, economic growth as reflected in the growth in real personal income continues at a healthy pace which is generally positive in growth for use per customer.

Unfortunately, analysis of usage trends in the quarter is made challenging by the large and somewhat atypical impact of weather.

Average temperatures were above normal, and this typically translates into higher usage in a fairly predictable pattern.

We estimate that the temperature effect by itself would have been positive for sales volume by about 4.1%.

However, the third quarter had a high incidence of afternoon showers and thunderstorms, which invariably reduced peak loads and usage.

Our modeling of these effects is more limited than our knowledge of the temperature relationship, but rough estimates suggest this, in fact, could be as much a negative 6%, and thus the net weather impact relative to, quote, "normal" was negative 1.9% or negative 0.3% relative to last year, which would imply that underlying growth was a healthy 1.8%.

Because of the high degree of uncertainty about the rainfall effect, however, especially relative to prior years, we are a little skeptical of these analyses.

Perhaps the best we can say at the moment is that there is enough statistical noise in the weather data to overwhelm any signal in the underlying usage data, and thus we cannot at this stage draw any meaningful conclusions about trends in usage.

In prior earnings calls, we have noted uncertainty in our underlying usage outlook near-term, and this continues to be the case, even though it remains hard to see much of an impact on our recent results.

Common sense tells us there must be some effect.

For example, an unused condo clearly won't have the same electricity pattern as one that's occupied.

But at least so far there doesn't seem to be much effect showing up in the data.

As a reminder, over the long term we've seen annual usage growth of about 1%, but this figure has always been quite volatile from quarter to quarter and year to year.

As with customer growth, we will continue to monitor usage trends and let you know if we see any reason to change our outlook.

For the third quarter, FPL's 2007 O&M expense was $378 million, up $43 million from the prior year figures, driven by higher distribution, nuclear power generation, employee benefits and customer service costs.

For the full year, we continue to see increases in distribution, nuclear and fossil generation as well as employee benefits and customer service costs and, of course, our Storm Secure program as being the main drivers of O&M growth.

We indicated last year that we did not expect to be able to offset the onetime ratcheting effect on O&M that the full implementation of Storm Secure through productivity gains in other areas.

This is the main reason why we expected FPL's income growth to be challenged in 2007.

For the next few years, we expect to spend about $50 million in O&M expense and $100 million to $150 million a year in capital per year on Storm Secure activities.

Depreciation in the third quarter fell $3 million to $194 million, as higher distribution and generation depreciation, including the impact from the addition of the Turkey Point 5 unit, were offset by reductions in certain amounts recovered through the capacity clause.

Underlying base depreciation increased by $7 million.

The accompanying chart summarizes the 2007 third quarter earnings drivers for Florida Power & Light, which netted to a decrease of $0.01 per share.

In the interest of time, I will not read each number for you.

For those of you without immediate access to the slides, they are available in the investor section of our website www.FPLgroup.com.

To summarize, Florida Power & Light's earnings were largely in line with our expectations.

The combination of customer growth, usage growth and the addition of the Turkey Point 5 natural gas facility were offset by higher operating expenses, increased base depreciation and a number of other small negative effects.

FPL Energy had another very strong quarter with adjusted earnings increasing 25% over last year's comparable period.

Last fall, we indicated that 2007 would show healthy growth, owing primarily due to two key drivers: the rollover of older lower priced hedges to more current market values and the additional contributions from New Wind.

Both drivers are playing out very much as we expected, but FPL Energy is a bit ahead of where we expected it to be primarily because the existing portfolio has been stronger than anticipated and because the opportunities available to our wholesale marketing and trading arm have been better.

This has helped us more than offset disappointing wind resource availability in the first part of the year.

FPL Energy is very well positioned for further sustained growth beyond 2007.

In late September, we closed the acquisition of Point Beach, adding 1,023 megawatts to our nuclear portfolio.

The long term contract on Point Beach will be increasingly accreted to EPS over the years, and we expect to be able to add output through capacity uprates as well.

Our wind development program is proceeding well, and we continue to see 8,000 to 10,000 new megawatts in the 2007 through 2012 period as being a realistic program.

We are pursuing a number of other growth opportunities, including solar and transmission projects, and are exploring selective greenfield gas development opportunities in our core markets.

Finally, the business is well positioned relative to likely longer term fundamentals, including commodity prices and the likely impact of climate change initiatives on wholesale power markets.

FPL Energy's 2007 third quarter reported results were $220 million or $0.55 per share compared with $218 million or $0.55 per share in the prior period results.

Adjusted earnings for the third quarter of 2007, which exclude the effect of non-qualifying hedges, were $180 million or $0.45 per share, compared to $144 million or $0.36 per share.

In the third quarter of 2007, we recorded a gain in the non-qualifying hedge category of $40 million after tax, with $35 million reflecting the decrease in forward commodity prices we experienced during the quarter and $5 million representing the reversal of prior period losses.

A gain in the non-qualifying hedge category is typically associated with a reduction in the value of our open or unhedged positions, and is thus a negative indicator for future expectations and vice versa.

Fortunately, the net market movement in the quarter was small, as I will discuss in a moment, and so the impact on our expectations is not significant.

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

We continue to believe it is more useful to think of FPL Energy results excluding the impact of the non-qualifying hedge category, whether that impact is positive or negative.

Comparisons of period to period GAAP results can be quite misleading when there is significant volatility in the non-qualifying hedge category.

FPL Energy's third quarter adjusted EPS contribution increased $0.09.

New investment -- primarily new wind projects -- contributed $0.02 per share.

The existing portfolio added $0.05 per share and asset optimization and trading added $0.03 relative to last year's comparable period.

Much of the growth in the existing portfolio came from the anticipated rollover of older lower priced hedges, but we also saw better market conditions and additional opportunities for asset optimization.

All parts of the existing merchant portfolio contributed to the strong performance.

The existing wind portfolio was roughly flat with last year.

You may recall that our wind index was abnormally low, particularly in Texas in the second quarter, owing to unusual weather patterns.

These trends continued through July and then reverted to more normal conditions.

Across the entire portfolio, the wind index for the quarter was good, although ironically this was one quarter in which the correlation between our wind index and actual realized wind speeds at our sites was not particularly strong.

As I mentioned before, the wind index is a reasonable approximation of the underlying resource available to our projects based on easily verifiable data from reference towers, but the correlation between the index and the actual output of the portfolio is not perfect.

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

Operationally, the fleet continued to perform very well.

All other factors were a negative $0.01 per share driven primarily by additional interest expense in overhead, which reflects continuing investment in the growth of the business.

During the quarter, we saw continued volatility in commodity prices but not a great deal of net change.

As this chart shows, the 10-year natural gas strip declined modestly over the period, which is consistent with the gain in the non-qualifying hedge category.

Although this trend by itself is negative for our future expectations, the magnitude of the impact is not large, and as the chart also shows, the 10-year strip remains above the levels of late last year.

Further, since the end of the quarter, prices have risen again.

Focusing for a moment on the fundamentals rather than the short term fluctuations, we continue to like the inherent long position of the FPL Energy portfolio relative to natural gas and to spark spreads in New England and Texas.

To summarize the 2007 third quarter, on an adjusted basis, FPL contributed $0.81, FPL Energy contributed $0.45, and corporate and other was a negative $0.03.

That's a total of $1.23 per share compared to $1.15 per share compared to the 2006 third quarter on an adjusted basis.

Now let me turn to our earnings outlook.

For 2007, we expected adjusted EPS to be at or near the high end of the range we set out last fall or, in other words, around $3.45.

FPL Energy has had very strong performance for the first three quarters and is likely to be at or above the top of its range while Florida Power & Light, hindered by the weather driven revenue shortfalls earlier in the year, is likely to be at the lower end of its range.

For 2008, our current expectations are better than the early view we shared with you this time last year.

Based on everything we see today, we believe a range of $3.83 to $3.93 is reasonable, which would mean at least an 11% growth in adjusted earnings per share.

With normal weather, we expect Florida Power & Light to show modest growth, while at FPL Energy we see another year of growth in excess of 20%.

Looking out to 2009, the range of likely outcomes is of course larger, but the drivers we can see today suggest a range of $4.15 to $4.35.

Again the big growth driver will be FPL Energy.

Beyond 2009, we expect to continue strong growth.

For the period 2006 through 2012, we expect to see adjusted EPS grow by an average of at least 10% per year.

As always, our EPS expectations assume normal weather and mark our currently open position as to the current forward curves.

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

Our outlook for sustained high EPS growth will naturally raise a question about the implications for the dividend.

While a dividend decision is, of course, one that the board will make, our current thinking is that the company is well positioned to offer more rapid dividend growth than we have seen in the past.

Because of our growth profile, our capital investment needs are substantial, and so we will want to maintain a moderate payout ratio.

But a dividend growth rate of about 8% appears to us to be a reasonable balance between immediate shareholder return and supporting the continued growth of the business.

Let me now provide a little more detail around the drivers of our growth expectations, starting with the 2007 to 2008 bridge for Florida Power & Light.

Broadly speaking, we need to look for a normal year of growth for FPL with the positive effects of regular revenue growth and AFUDC being partially offset by moderately rising cost levels.

On the revenue side, we expect about 5% volume growth or 3% on a weather adjusted basis, and we will also see the full year impact of Turkey Point 5, which will add about 1% to base revenues.

Construction projects, most notably the West County combined cycle units, will add to AFUDC and environmental capital projects at some of our fossil facilities will contribute to earnings through the environmental clause.

As a reminder, prudent environmental investments are entitled to recovery and a fair rate of return through the environmental clause.

We anticipate O&M growth of about 6% with the primary drivers being continued cost pressures in nuclear, employee costs and an increase in the number of plant fossil unit outages.

Depreciation, interest and other factors will grow roughly in line with the general growth of the business, with additional modest increases due to the full-year impact of Turkey Point 5.

The FPL bridge for 2008 to 2009 looks broadly similar.

AFUDC will grow with spending on generation projects, primarily the west County combined cycle units due to enter service in 2009 and 2010.

The first West County unit is due to enter service during the period of the existing rate agreement, and therefore is expected to bring with it a base rate adjustment, thus contributing to revenue growth.

Depreciation expense will increase a little more, rapidly reflecting the continued growth of the business and the introduction of West County Unit One.

Other drivers will be roughly the same as 2007 to 2008.

All this should lead to another year of moderate growth.

As you know, Florida Power & Light's rate agreement comes to an end at the end of 2009, and this will give us an opportunity to reset base rates for 2010 and beyond to reflect the significant capital expenditures that we have been and will be continuing to commit to the business during this fixed rate agreement.

Turning to the earnings growth outlook for FPL Energy, this chart shows the bridge from 2007 expectations to 2008.

Not surprisingly, the story is one primarily of growth from new asset additions, but with additional growth anticipated from the existing portfolio and from related marketing and trading activities, the opportunities for which grow along with the overall growth in the business.

These positives will be partially offset by the costs of a growing business, primarily increased interest expense and increased G&A.

Of course the growth in these itself is a function of our success with the growth plan overall and they can be relatively easily scaled to match the level of success that we have in building the portfolio.

The $0.07 to $0.11 of growth from the existing portfolio is a function of a number of smaller parts.

In 2008, we still have a certain amount of built-in momentum from the roll-off of older lower priced hedges and forward capacity pricing in key markets.

primarily New England.

is a bit stronger.

Together these would account for roughly $0.20 of growth.

Offsetting these and some smaller positives will be the fact that 2008 is an outage year for Seabrook which 2007 was not, as well as the roll-off of some favorable pricing on older contracted assets.

Turning finally to the 2008 to 2009 bridge for FPL Energy, again we expect the primary driver of growth to be new asset additions.

At this state, we anticipate little if any growth in the existing portfolio in 2009 for a combination of reasons.

In 2009, we will have outages at Seabrook, Duane Arnold and Point Beach.

We also have planned for this time period some significant work on some of the fossil units, and 2009 will be the first year when the roll-off of PDCs on all the wind projects has any effect.

We think it is a testament to the strength of the business that despite these combined effects, the existing portfolio still shows the potential for maintaining its earning power while being positioned for a return to growth in 2010 and beyond.

Before closing, let me address potential drivers of variability in our results.

As always, I urge you to consult our SEC filings and the risk factors described in our cautionary statement attached to this presentation for a fuller discussion of risks.

My comments here relate only to a subset of the possible reasons why actual reported results might be different from our current expectations.

In the appendix, we have included what I refer to as our plus and minus charts which show some key sensitivities.

With the chart shown here, I would like to address hedging and commodity price exposure, and try and explain some refinements to our thinking about communicating with you on this topic.

Last January, we introduced a slightly modified and more detailed description of our commodity exposure, and we have built on that here.

As FPL Energy's business has grown and become more complex, it has become less easy to speak simply of the percentage of the portfolio that is hedged or unhedged.

In fact, we do not think it is meaningful to think about a single measure of the exposure of the entire business, since it is made up of very different pieces.

For these purposes, it is useful to think of FPL Energy's portfolio in three broad categories, first -- the existing portfolio of physical assets with varying degrees of contract exposure to hedging and varying degrees of exposures to different commodity prices, second -- new assets, primarily wind for the next couple of years, which for the purposes of these charts are defined as assets not in the portfolio as of December 31st of this year, and third -- non-asset based activities which are driven by our marketing and trading capability.

The nature of the exposure to commodity prices in these three categories is somewhat different.

Please note also that the definition of new assets here different from what we use when reporting quarterly results and on the previous bridge charts, for which purposes we use an approach similar to the same store sales concept often used in retail businesses.

The first category is relatively straightforward.

The sensitivity of existing assets to commodity prices can be roughly thought of in terms of the percent of expected gross margin that is covered by a contract or is hedged and the two basic types of exposure in our portfolio are to natural gas and to spark spreads or heat rates.

For these purposes, we have grossed up wind production tax credits to equivalent pre-tax values for comparability.

So the equivalent gross margin measure is not a normal accounting measure.

Obviously PTCs on existing projects do not have commodity risk.

We have also included our share of expected revenues net of fuel costs for equity method investments to put these projects on a comparable basis.

As you can see, the existing portfolio is heavily hedged for 2008 with more than 90% of our expected gross margin from this category protected against commodity price volatility.

The third category, that is the non-asset based businesses, is also relatively straightforward.

In general FPL Energy's non-asset based activities, of which wholesale full requirements is the most notable, are independent of specific levels of commodity prices.

A more useful way of thinking about these activities when thinking about the potential variability of their contribution to a particular year's expected earnings is to consider how much of the expected gross margin associated with them will come from deals that are already executed -- i.e., in backlog -- as opposed to deals that are yet to be originated.

As you can see, for 2008, 32% of the margin we expect from this category of activities is associated with deals already on the books.

Of course, this does not mean there is no uncertainty about these gross margin dollars.

We must still execute effectively, and many other risk factors beyond commodity prices come into play.

But it does mean that the origination effort has been successfully completed.

As a general guide, we would expect these kinds of activities to add about 5 to 10% to the FPL Energy portfolio gross margin, and to enter a year with about one-quarter to one-third of our expected activity in backlog.

This was the case going into 2007, and it is also the case going into 2008.

The middle category, the new assets, can be a little more complex.

For a new contracted wind project that has passed all of its development hurdles, it is easy to determine the commodity exposure.

But for many new wind projects, particularly those a couple years out, it is much less so.

We manage a development portfolio with many different projects in different states of development at any point in time.

And if one project slips in its development schedule, it's likely that another will be a little ahead.

Thus the commodity exposure of a wind development portfolio is not obvious.

Clearly a higher power price environment makes a new wind project relatively more attractive, but the relationship is not as clear as, for example, the impact of an extra $1 per megawatt hour on Seabrook's margins.

For the purposes of this chat, we have assumed the PTCs on future projects are independent of commodity prices and we have made rough assumptions about the mix of likely wind projects and particularly the percentage that will be PPA type deals.

As you can see from the chart on this basis, roughly 40% of the expected gross margin is protected from commodity price volatility, but we recognize that different assumptions could cause this figure to vary somewhat.

Perhaps more important, we believe the bigger driver to be considered for this category is development success.

While a high commodity price environment certainly enhances our odds of meeting our volume goals, it is by no means the most important factor.

As you can also see from this chart, the equivalent gross margin contribution from this category to 2008 expected results is modest, as you would expect.

This is a function of the fact the projects that are not in the portfolio at the beginning of the year are likely to come in late in the year and thus contribute little to that year's results.

The 2008 wind program is much more important for 2009 expected results and so on.

Because the nature of these three categories is quite different, we do not think it is meaningful to try and use a single measure to capture hedging for the entire portfolio.

This chart provides the same information as the previous one for FPL Energy's 2009 positions.

As you can see, about 80% of our expected equivalent gross margin from existing assets is hedged, and the more significant open positions are with spark spread sensitive assets.

In prior years, we have typically hedged out underlying gas exposure a bit further than spark spread exposure.

And this is still true today, largely owing to our belief and experience that the greater depth and liquidity in the gas market makes [forwards] based on gas prices more reliable as indicators of a fair level of future prices.

Not surprisingly, expected contribution from new assets -- which to repeat, for these charts, means assets not in the portfolio as of the end of 2007 -- is much larger.

But because most of this is wind projects and because of the nature of wind economics, the exposure of this expected margin to commodity prices remains proportionately similar to 2008.

Finally, again, as you would expect, very little of the non-asset based activity that we expect to realize in 2009 is in backlog today.

Our activities in this area, both wholesale and retail, tend to be conservative, and among other characteristics, the tenor of the books of business is typically quite short.

Most of the activity is originated in a year for delivery and settlement within the same year.

Again, I would note that our growth plans call for these kinds of activities to grow roughly in line with the overall growth of the portfolio.

Historically, they have consistently delivered an increment of about 5 to 10% to the equivalent gross margin of the asset portfolio, and we expect them to continue to do so in the future.

Summing up, therefore, we're pleased with 2007 performance to date, and hope to close the year at the high end of the range we set out for you at this time last year.

We have solid plans in place which we expect to yield continued strong growth in 2008 and 2009, the drivers of which are clear and the range of variability readily understandable.

And we remain well positioned for the longer term with what we believe are the right exposures to the likely fundamentals in commodity prices and the important issue of global climate change.

We are confident that achieving average adjusted EPS growth of at least 10% from 2006 through 2012 is a realistic expectation, and with that, we will be happy to take your questions.

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

(OPERATOR INSTRUCTIONS) We'll have our first question from John Kiani, Deutsche Bank.

Good morning.

Good morning.

Moray, can you talk a little bit about your current level of interest in pursuing some sort of a separation spin or monetization of a portion of the wind business, especially in light of some of the activity in Europe that's obviously fetched some very attractive valuations?

Yes.

Let me try to bring everybody up to --

I know you mentioned it before obviously.

Yes.

Just by way of sort of an update of our thinking, I guess.

The bottom line is our thinking remains broadly where it has been, so let me just reiterate that.

The way we operate businesses, there are real operational linkages between the wind and solar portfolios and the -- all other aspects of generation.

So there would be some real costs incurred in separation, real loss of value as well as incremental cost obviously in creating a separate entity.

So before we would be willing to undertake that, we'd have to be convinced that the gain from such a separation would more than offset the loss of value.

To date, we have not been convinced that there would be that much fundamental sort of value creation.

And here we are most concerned with making sure that whatever the effect of a partial spin might be, that it flows value back to existing shareholders -- not that it simply create a good trading platform in the new entity, but has created value for existing shareholders.

We spent a lot of time looking at historical examples of separations, everywhere from partial to full, and simply at this stage, have not been convinced that we can reliably count on enough what I would call value flow-back to more than offset the real cost increments to the business.

At the same time, we have not by any means ruled it out as a future possibility, and one thing that we did indicate earlier in the year was that we were going to be looking with great interest at (inaudible) partial IPO if and when it occurs to see how that trades and see if we can develop any additional information from that.

So we really haven't changed that view.

I think it still makes sense based on everything that we see today.

But as I said, that doesn't rule out possible changes in that view in the future.

Thanks.

That's helpful.

And just one more question.

As far as development is concerned, do you have any interest, or is it possible for you to invest in wind outside of the U.S.

in other markets?

It's certainly possible.

We certainly have interest.

We have actually for the last couple of years spent quite a bit of time looking at evaluating wind projects in Europe.

But frankly, we have -- at the moment, we just see more attractive opportunities for us in the U.S., and given that we are essentially growing capability in a business as rapidly as we can, consistent with maintaining very attractive levels of profitability, we really want to go out to the most attractive opportunities first, and we have more than enough of those to keep our plate very full here in the U.S.

So it certainly doesn't preclude the possibility of us going elsewhere in the future; but at least for the short term, as I say, we're very happy with the opportunity set in front of us in the U.S.

Okay.

Great.

Thanks, Moray.

Thanks.

We'll go next to Greg Gordon, Citigroup.

Good morning.

Good morning, Greg.

Can you refresh my memory -- you've given sort of a rough rule of thumb based on your current sort of point of view of wind economics and how you finance your wind business as to the earnings accretion from every sort of 100 megawatts of wind additions.

As I recall is there, in fact, a number out there, and what is it?

Yes.

Stand by.

Let me just pull the right page and make sure we get you the right number.

We said that every 100 megawatts, you can figure an average of sort of $0.01 to $0.015 of accretion averaged over the first few years of the project's life.

Great.

And there is quite a range in that.

Obviously depends in part on how we finance it, what type of project it is, but that's a reasonable range.

So when I look at the '08 and '09 earnings drivers for FPLE, you're targeting 1,100 megawatts in '08 and 1,500 to 1,600 megawatts in '09.

So by that math, you're looking at an accretion of about $0.15 to $0.20 in '08 and $0.25 to $0.30 in '09, but the new investment driver as far for '07 to '08 and '08 to '09 is materially higher than that?

So what explains the delta if it's all wind?

You can't just take that $0.01 to $0.015 and apply it the way you're applying.

Because there is specific timing of when the new projects come in.

That math doesn't work.

You're going to have to do it slightly differently.

Probably in the interest of everybody else's time, I can take you through that separately.

In '08, probably part of it is the nuclear plant addition which is a new investment.

Yes, both '08 and '09, Point Beach showing up in the new category.

Okay.

So we would subtract Point Beach from the new investments number.

So if we could walk through that offline that would be great, because I'm sure it's an easy explanation, but the driver seems to be higher than what the rule of thumb would suggest.

Right.

It's a little bit of a complicated laying out of the numbers.

It's conceptually simple, but I prefer to do it separately.

Okay.

Second question, when you look at your earnings aspiration in aggregate, obviously there's a rate review out there somewhere in the distant future in '09.

So when you look at your 2000 -- your post-2010 earnings aspirations, what types of equity returns and capital structure do you assume or ranges of potential returns and Cap structures do you assume you'll be able to earn in FP&L?

Well, let me take the capital structure first.

We have maintained a very consistent capital structure at FPL for many, many years, certainly longer than I've been around.

It served us well, and I see no reason why that would change going forward.

On the actual return, I think all I would say is that Florida as a jurisdiction has historically provided the opportunity for well managed companies to earn a little bit above the nationwide average rate of return, and we see no reason why that would not be the case going forward.

Thanks, Moray.

Take care.

Thank you.

We'll go next to Leslie Rich, Columbia Management.

Hi Moray.

Good morning.

I wondered if you could walk through this non-asset based businesses with a little bit more detail.

I'm not sure I understand what's in that bucket.

And then as you look at your contribution from -- I guess you call it trading and asset optimization, strategically has your approach to that changed at all?

Sort of -- how do you look at that?

Well, let me take the second part of that first.

Strategically has it really changed?

Not greatly, although it would be non-asset based businesses now include GEXA, our retail operation in Texas, which, of course, was not true a few years ago.

But let me talk a little bit about what we're calling the non-asset based businesses.

This is really sort of an umbrella term to capture everything that is based on the core marketing and trading capability that we have built up to be able to handle the risk positions that are inherent in the physical assets.

Once you have that capability, it sort of automatically provides you opportunities beyond just what the assets themselves bring along.

The biggest single area for us in particularly this year is our wholesale [full] requirements business, which has been growing reasonably steadily over the last few years.

And that's the business that we got into because we knew a good deal initially about the new England market and subsequently expanded to other markets typically where we have assets, although not necessarily.

But in the sense of freestanding business, even though its existence hinges on capabilities that were developed in connection with running the assets.

There is also a small amount of just pure spec trading involved in there.

Once you have a significant position in the market and you have an information base, it sort of automatically provides you certain opportunities to take limited positions.

So the three big ones -- excuse me -- that I would note in the non-asset-based category -- wholesale full requirements, the retail business and then pure spec trading -- and the pure spec trading can range anything from just arbitraging real-time day-ahead markets to trading around transmission nodes, those kinds of things.

Collectively, if you look back over five, six years of history, the sum of those kinds of activities, even though the specific activities themselves have changed, the sum of those activities has contributed an increment of about 5 to 10% beyond the gross margin that we just extract from the assets themselves.

So as the portfolio builds, we have been consistently building our capability and exploiting it in these other areas.

So the growth plan calls for essentially a continuation of that, get keeping it roughly in the same proportion as the rest.

So we're not changing our overall risk profile.

We're not planning to build a large stand-alone trading platform.

But as the overall portfolio grows, there are just more opportunities in absolute terms for these kinds of activities.

And what is your outlook for the retail business?

You plan to just stay in Texas?

Are you adding customers?

Are you trying to grow it?

Or is it status quo?

No.

The business is growing.

It's done quite well.

We will continue to grow it, but I guess the best way to say it is it will be a controlled growth consistent with the existing market structure in Texas.

I think there is a significant opportunity for a relatively -- handful of relatively small-share players to make money given the market structure.

But I don't think it's a market where you want to effectively challenge the market leaders, shall we say.

Thank you.

We'll go next to Dan Eggers, Credit Suisse.

Good morning.

Good morning.

Can we talk a little bit about the implications of language floating around Congress as part of the Energy Bill as far as potentials for a national RPS standard, potential for renewable energy credit on a national basis and kind of what that would mean for your existing fleet, how you contract for construction programs?

Sure.

Historically, we have been really more in favor of letting states decide what they wanted to do in the way of RPS.

Over time, as there has become a lot more activity and it's become a lot more diverse, we've kind of changed our view to the point that we are now supportive of a national renewable portfolio standard, and the reason we've really changed is because what has grown up has a bit of a patchwork quilt with different definitions and different categories -- which is probably not the most efficient way at the national level of moving the country where we think it needs to go in order to help address the climate change issue.

And we do believe that the primary importance of renewable energy in the power sector is to support the climate change issue.

So at this point, we believe it would be more efficient to have a national system, which would have a single definition of a wreck that could be uniformly traded everywhere.

But whether that is a practical political proposition at this stage is certainly something that we could debate.

As a business, we're certainly quite prepared to continue to operate in the existing patchwork quilt environment.

Obviously that's been -- we've been successful in that.

But I think we would probably have a little more upside in a uniform national market.

As we --

Sorry, Dan.

Lew Hay.

Dan, I just wanted to add a point, though.

We have to be realistic about what the targets are for a national program, and some of the proposals that are floating around out there are, in our opinion, unreasonably aggressive.

Any desire to comment on what unreasonable is?

I think -- I'd just prefer not to comment on that at this point, but just -- to point out how much renewables would be required in a pretty short period of time under the current proposal.

So I think the targets either have to be relaxed or the definition of what's renewable has to be expanded, and I'd say the other point we have on that is you don't want to start slicing it -- whatever the requirement is -- and saying, for instance, that if the target is 15% by a certain date, that 5% of that has to be solar or something like that.

We can't put undue constraints, just given geographic limitations.

Jim, I didn't know if you could comment a little bit on pricing economics for new wind projects as we see more of the Europeans come into the U.S.

with presumably a low cost of equity it seems.

Are project economics changing at all at this point?

Dan, we remain pretty comfortable with the returns we're seeing with the projects we're developing.

You have to remember, we have a very large scale advantage relative to -- from a development standpoint relative to our competitors here in the U.S., and we -- we have been working very hard to capture more of the wind value chain in our projects, and we are very comfortable with the economics that we're seeing.

So I think -- I think the short answer is our wind project economics are strong, stronger now than they ever have been.

Dan, let me see if I can tie a couple of those responses together for you.

One of the key things that led us to the 8,000 to 10,000 program, if you like, was the realization that the market opportunity here is just growing, and is larger than perhaps we had previously anticipated.

So I think, in the context of impact on margins, that's one of the reasons why we're not seeing any noticeable trend in margins, because there's plenty of room for a number of competitors to play.

At the same time, that is -- Lew's comments about being realistic about the RPS standards, those -- that market expansion is consistent with state level RPS targets that we're already seeing today.

So I think it actually ties in very neatly with what Lou said.

There is a limit to how much we collectively as an industry can do in any given period of time, and if we as a political system try to force much beyond that, all we will do is end up incurring a lot of extra cost without actually creating a lot of additional renewable energy in a given time period or avoiding carbon emissions.

So it's perfectly possible to have a very healthy rate of growth for the renewable space overall without going to extremes on the specific targets for a national renewable portfolio standard.

Great.

Thank you.

Our next question we'll go to Ashar Khan, SAC Capital.

Good morning, Moray.

Good morning.

Can you tell us what kind of ROE we will be at FPL in 2009 based on your projections roughly?

Yes.

At the moment, what we're looking at is probably a little below 10%.

Okay.

And then Moray, you mentioned in your remarks that as part of Florida's Green initiative, you were looking at solar and other energy efficiency measures and on the green.

How do you contemplate those being -- the CapEx -- you getting the return on that CapEx?

And I just wanted to get an understanding of where that was, and how does the company get a return on those spendings?

Is it apart from the rate deal, separate from the rate deal, or how is it being anticipated as we look forward?

Right.

Well, obviously it's going to depend on what the specific investments are, because some are already covered under the existing regulatory framework.

For example, capital investments in energy efficiency programs are recovered with a return through the conservation clause.

So there is already a framework that exists for that.

That doesn't preclude the possibility of other ways of thinking about that going forward, but at least at the moment, we already have that piece of the framework in place.

On the things like renewable energy, again, there is an existing framework which is the resource planning process that the state employs, and any new generation that came in under the existing rate agreement would be entitled to its generation base rate adjustment.

So right now there is a framework that accommodates them and, of course, anything that might be contemplated in, for example, for the 2000 (sic) test year would then get rolled into a 2009 rate resetting process.

So that there's an existing framework, and again, it doesn't preclude the possibility that there might be changes to that framework.

For example, in implementing the governor's target of a renewable portfolio standard, the PSC has been charged with examining that issue and looking at possible different rules that might help encourage utilities to be able to retain that standard.

We do not yet know what may come out of that process, but certainly there is the possibility for some change to that framework that would be, shall we say, particularly supportive of renewable development.

Moray, when do you expect those CapEx to be put into the budget?

When should we be looking?

Is it more '09, '10, '11 timeframe?

Or when is a more realistic timeframe for those CapEx to come in?

I think it will start to build -- obviously there is some in the '08 budgets, but it will really start to build in '09 and '10.

If I could just end up -- in your opening remarks, you mentioned the '09 FPL energy had a negative from PTC's drawing off.

Can you quantify how much that is?

I think it's on the order of $10 million.

$10 million.

Thank you, sir, very much.

We'll go next to Paul Patterson, Glenrock Associates.

Good morning.

Good morning.

Just want to ask you about the forward capacity markets in New England.

The auction is coming up.

I know the results in terms of financial impact might be not exactly completely within the timeframe that you guys are providing earnings guidance, but could you just give us a little bit of the flavor of what you see there now that we're getting closer to the auction and what the potential impact might be for you guys?

Yes.

I'll let Jim address that.

Sure, Paul.

First of all, I would say it's not getting any easier to build power plants anywhere in the country, but particularly in the Northeast.

Secondly, you're right.

Any results from this upcoming auction really will have only a few months of impact in the '09 guidance we've given you.

It's really more of a 2010 and beyond type of impact, and we feel like the markets -- we feel like this is a favorable and positive development, and we expect the auction to clear at a number that's higher than the current fixed price numbers, and we will see.

It's going to depend a lot on -- it's going depend a lot on how many projects come out of the woodwork and bid into the auction, but I think fundamentally it's not very easy to develop right now in the Northeast, and I think this will be a positive earnings driver for us out in the next decade.

Okay.

The ISE of New England has put out this thing saying there's 17,000 megawatts -- obviously that's a very large number -- that could theoretically be available to it.

When you're looking at this, what do you realistically think might show up in the form of new capacity?

Can you give us any flavor on that?

No, Paul.

I mean, we don't -- we have a view.

It's not a view given that it's going to be an auction, and we may or may not be participating in it.

I'm not really in a position to give you exact numbers around what our view of what's going to be available and what we think is actually going to happen in the market.

Okay.

Fair enough.

And then just finally on offshore versus onshore wind, have you guys see an difference with respect to -- with respect to costs?

And I guess the response we've seen -- obviously we had the LIFO situation, but there's also been some other things that happened with other developers that maybe indicate a little more resistance to offshore.

Are you guys seeing that, or is that sort of anecdotal stuff?

First of all, offshore in the U.S.

is challenged by fundamentally by two things.

One is none of the manufacturers have ever manufactured an off-shore wind turbine for the U.S.

market, and so you need -- there needs to be -- there needs to be a real demand in the U.S.

for offshore wind before -- it's a bit of a chicken and egg issue there.

But there needs to be a real demand out there for off-shore wind before any of the manufacturers are going step up to the plate and do the R&D, and tooling and all of the things you need to do in order to produce an offshore wind turbine for the U.S.

market.

That's a challenge.

And the second piece of it is is that many of the costs associated with off-shore winds have been escalating very quickly outside the tower and turbine.

There are significant steel and EPC and marine costs that -- you're competing in a global market for those things and other industries such as the oil and gas industry that have put a lot of inflationary pressure on those costs.

So I think overall offshore wind economics are very challenged relative to onshore.

Let me just add that that's been our view of offshore wind in the U.S.

for some time now.

We just don't see a major opportunity anywhere comparable to the onshore opportunity at least for a long time.

So our interest has been strictly limited by specific projects, particularly where we might have an existing strong customer relationship.

But the off-shore sector has not been something that we have really focused on.

There are plenty of opportunities for us on shore.

The economics are much better.

It just make a whole lot of sense for this country to focus on exploiting its best onshore resources first.

There's a long way to go before we really frankly need to go offshore.

Okay.

Great.

Thanks a lot.

I think we have time for one more question.

We'll have our final question from Daniele Seitz, Dahlman Rose.

Hi.

I was just wondering if you had any estimates on solar construction in terms of also capacity factor and how does that compare to wind power?

Daniele, could I ask that we get back to you separately on that?

Sure.

The answer is it depends on a great many different factors.

We could give you some reasonable ranges for different types of technologies and different situations.

Does it compare to wind easily, or is it a totally different world?

Well, it's a very different type of resource.

Bottom line, though, at least in the U.S.

context, even the best solar projects are still well off the typical good wind projects.

So it's still got a long way to go.

But the answer to your question -- we're happy to tackle it, but it will take a little longer than --

I can understand.

Can I just ask a quick one?

In terms of the schedule of the 8 to 10 gigawatt that you are planning on the wind side, is it -- I mean, if you wanted to extrapolate to further years out, it's roughly a maximum of 2,500 a year given the larger stake?

Or you feel that number is not a maximum, you could do more than that?

Daniele, at this stage, I don't think we're in a position to say what a maximum come 2013 might be.

Let me tell you what's sort of baked into that.

Essentially, what we are doing is taking a development and construction system that's capable of delivering about 1000 megawatts a year today.

Okay.

And scaling it up to one that's capable of delivering roughly twice that in that five or six-year period.

What we might be able to do beyond that, obviously it could continue to grow if the market continues to be attractive.

But that's just too far out for us to say.

No.

It's really helpful.

We're talking about doubling our (inaudible) capability.

Yes.

Great.

Thank you very much.

Okay.

Thank you.

Thank you, everyone.

That concludes today's conference call.

That concludes today's conference.

You may disconnect at this time.