新世紀能源 (NEE) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the FPL Group Second Quarter 2008 earnings release conference call.

Today's conference is being recorded.

At this time for opening remarks I would like to turn the call over to Jim von Riesemann.

Please go ahead, sir.

Thank you, Kim.

Good morning, everyone.

Welcome to our Q2 2008 earnings conference call.

Lou Hay, FPL Group's Chairman and Chief Executive Officer, will provide general comments on our quarterly performance and discuss our earnings expectations.

He will be followed by Armando Pimentel, our Chief Financial Officer, who will discuss the specifics of our financial performance.

Also joining us this morning are Jim Robo, President and Chief Operating Officer of FPL Group, Armando Olivera, President and CEO of Florida Power & Light Company, and Mitch Davidson, President and CEO of FPL Energy..

Following our prepared 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 the actual results or events to vary is contained in the appendix to our presentation and in our SEC filings.

And now I would like to turn the call over to Lou Hay.

Lou.

Thanks, Jim.

Good morning, everybody.

This morning I'm happy to be able to report very good performance by FPL Group for the second quarter 2008.

During the quarter adjusted earnings per share increased about 8% year-over-year.

FPL Energy had another outstanding quarter and Florida Power & Light delivered solid results despite what we believe are very challenging marketplace conditions..

I will give you a few highlights for the quarter from each of the Companies and then Armando will provide greater detail for each.

Florida Power & Light's earnings per share contribution increased about 2% year-over-year, mainly because of favorable weather.

FPL's business continues to be negatively impacted due to weak economic conditions in the country and the state.

In the quarter, customer growth was lower than our historical norms, but still increased by 0.005%.

Although overall usage was up due to weather, non-weather related usage was down.

We have also seen a steady increase in the number of very low usage customers.

Those are customers with usage below 200-kilowatt hours in a month, which we believe indicates the homes are empty.

We continue to have a very constructive regulatory framework in Florida, as reflected by a number of important actions in the quarter.

Governor Crist signed into law new energy legislation that focuses on reducing carbon, promoting renewables and improving the State's emissions profile.

The Governor signed that legislation at his climate change conference in Miami on June 25th, where we joined him to announce our plans to build 110 megawatts of solar generation at three facilities in Florida.

These facilities include the world's largest photovoltaic array and the first hybrid energy center that couples solar thermal technology with an existing combined cycle generation unit.

We also received approval from the Florida Public Service Commission for recovery of $746 million in fuel costs, which were above our original fuel estimates for the year.

As a reminder, in Florida we do not earn any profit from fuel, so the charges represent a pass through to our customers.

While we recognize that higher fuel charges have a detrimental impact on our customers, they also contribute to a positive economic rational for projects such as our modernization of older fossil plants at Riviera and Cape Canaveral.

Turning to FPL Energy.

We grew adjusted earnings per share on a year over basis by 17%.

Underlying the results of a strong performance within the existing portfolio and contributions from our new assets, primarily new win projects developed and put into service last year at our Point Beach nuclear facility acquired in September of 2007.

With respect to new wind assets, since the second quarter of the last year, we have added about 1400 megawatts to our portfolio.

For the full fiscal year we are on target to add 1200 to 1300 megawatts of new wind assets.

As we indicated on our first quarter call, we remain confident that 2008 will be another record year for FPL Energy in terms of adjusted earnings and correspondingly it will be another record year FPL Group.

For FPL Group we are reaffirming our 2008 and 2009 adjusted earnings per share expectations, as well as our goal for at least a 10% average annual earnings per share growth through 2012, using our 2006 adjusted earnings per share as the base.

For 2008, we continue to see a reasonable range for adjusted earnings of $3.83 to $3.93 a share, given normal weather and no further material decline in the Florida economy.

Although we are not updating our segment guidance at this time, if we experience normal weather for the balance of the year and subject to our normal caveats, we believe FPL's earnings per share contribution will fall short of our original expectations, while FPL Energy's contributions will be above our original expectations.

For 2009 we continue to believe that $4.15 to $4.35 is a reasonable expectation for our adjusted earnings per share.

We expect to provide more detail on our 2009 expectations and provide our initial view on 2010 expectations sometime early this fall.

Now I will turn the call over to Armando Pimentel to provide more details on our second quarter results and I will come back to provide some additional comments with respect to our longer term outlook after he is finished.

Armando.

Thank you, Lou.

Good morning, everyone.

The second quarter 2008 FPL Group's GAAP net income was $209 million or $0.52 per share compared to $405 million or $1.01 per share during the 2007 second quarter.

FPL Group's adjusted 2008 second quarter net income and EPS were $375 million and $0.93 respectively compared with $348 million and $0.86 per share in 2007.

The difference between the reported results and the adjusted results is a negative mark in our non-qualifying hedge category, which I will discuss in more detail later in the call, and the exclusion of other than temporary impairments or OTTI.

Both of these adjustments effect FPL Energy's results.

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 in determine whether certain 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 management believes that adjusted earnings provide a more meaningful representation of FPL Group's fundamental earnings power.

As was the case when I spoke to you in the first quarter, customer growth and weather adjusted usage continue to be affected by the downturn in Florida's housing market and broader economy.

Taking into account Florida's economic environment, Florida Power & Light's second quarter results were about what we had expected.

Weather in the quarter was warmer than normal and last year and therefore provided a increase in our earnings when compared to the prior year's quarter.

Increases in O&M and interest expense, plus increases in AFUDC on the West County energy center and the nuclear upgrade projects were largely in line with our expectations.

As Lou mentioned, on June 25th, Governor Crist signed into law the 2008 Omnibus energy bill.

The legislation is intended to address Florida's impact on climate change and includes numerous provisions that will effect the State's electric utilities.

We have provided greater detail in two slides in the appendix, but let me take a moment to address several areas of the law that might be of particular interest.

First, the Public Service Commission is directed to develop rules for renewable portfolio standard by February 1, 2009.

These RPS rules must be ratified by the legislature to become affective.

Before the RPS becomes effective, the new law also allows for full cost recovery for up to 110 megawatts of in-term renewable projects, which will allow us to recover our costs on the solar projects Lou mentioned in his opening remarks.

In addition, the Department of Environmental Protection is directed to develop rules for a cap and trade program to reduce greenhouse gas emissions.

The DEP cannot implement the rules before January 1, 2010 at the earliest and the legislature must ratify them before they become affective.

As a reminder our emissions rates at Florida Power & Light make us one of the cleanest electric utilities in the country.

CO2 emissions rate is 35% below the national average, based on the most recent 2006 data from the Department of Energy.

We have met new electricity demands with more efficient, state of the art, generating facilities that produce less carbon dioxide, sulfur dioxide and nitrogen oxide emissions per megawatt of electricity generated.

We are also helping our customers reduce electricity usage through conservation and demand side management programs that further reduce emissions.

In fact,, FPL is the nation's leader among electric utilities for its partnership with customers and energy conservation.

We like to say that energy efficiency is our first fuel.

Even though FPL serves only 3% of US electric consumers, the company has achieved 13% of all US energy efficiency.

Each time we seek permission to build a new power plant, we must first prove to the PSC that we have implemented all energy efficiency options determined to be cost effective by PSC criteria.

Since 1979 FPL has been able too avoid the need for 12 medium sized power plants.

As noted in mid-July, the PSC approved cost recovery of our proposed 110 megawatts of generation, which should be in service by year-end 2010.

The total cost of the three projects is expected to be approximately $700 million.

Through the environmental clause we will earn a return on equity on this investment, which is currently set at 11.75%.

Finally, earlier this month we received PSC approval to recover $746 million in increased fuel costs during the next 17 months.

Half of that amount will be recovered in the remaining months of 2008 and the other half in 2009.

We are also permitted to recover the costs of carrying these under recoveries at a commercial paper rate.

Significant increases in fuel prices since our annual fuel filing last year made it necessary for the company to ask for this mid-year fuel correction.

The PSC decision, which we received, confirms the most important principals governing fuel costs recoverability in Florida.

Some of you have asked for additional detail regarding when we think the Florida economy will improve.

And although we are in no position to predict such timing, we can share with you certain Florida economic indicators and the impact these are collectively having on Florida Power & Light's underlying trends.

Historically, Florida has been a leader in job creation, outpacing the rest of the country.

Florida job growth peeked in the fall of 2005 and current with the housing boom and the reconstruction following the 2004 and 2005 hurricane seasons.

Since then, employment growth has been contracting and the state is now experiencing negative employment growth.

The primary driver behind the employment decline is the reduction in construction related jobs, as well as related supporting service functions.

Florida's 5.5% unemployment rate now matches the US average.

Personal income also remains weak.

The revised 2007 figures released in May, 2008 by Global Insight, indicated that personal income in Florida was essentially flat from August, 2007 to December, 2007.

Turning now to slide seven, the chart on the left shows single family housing starts.

This chart is quite similar to the one we shared with you on our year-end conference call in late January.

It was a lag of about two years before our customer growth figures reflected these decreases in housing starts.

This lag is largely reflect of the time between the initiation of the construction permit and when the building is finished and the new meter is set.

The graph on the right shows that multifamily housing starts in Florida do not appear to have experienced the same run up as seen in the single family market.

However, the multifamily starts have also decreased significantly from a peak in 2005.

Let's turn to slide eight.

As this chart indicates, the average number of FPL customer accounts increased by 21,000 or 0.005% from last year's comparable quarter.

That rate is below our 15 year long-term historical growth rate of about 2% and well below that experienced in our recent past.

Consistent with what we said in the first quarter, for the rest of the year we expect customer growth rates that are roughly consistent with our actual results for the first half of the year.

We have also seen an uptick in low usage customers.

This graph shows a percentage of residential customers who used less than 200 kilowatt hours in a given month.

Historically, we experience some level of low usage each month representing normal customer movement.

For instance, a customer whose meter is read within a day or two of opening his or her account will likely fall into this category.

However, since the second quarter of 2005 the share of customers in this category has increased almost 10%.

Our average residential customer, including low usage customers, currently uses about 1140 kilowatt hours each month after adjusting for normal weather.

We believe this increase in low usage customers is primarily a result of empty homes.

Although the current economic environment remains challenging, we continue to believe the long-term outlook for Florida is favorable.

Many economists and economic consulting firms believe that the current downturn is one that is cyclical in nature and not secular.

The University of Florida and the US Census Bureau project that Florida's population growth will outpace the rest of the nation in the coming decade.

This inward migration should have a obvious benefit in employment growth as well.

The table on the accompanying slide summaries the drivers of retail kilowatt hour sales growth for Florida Power & Light, which we have discussed over the course of the previous five slides.

As I indicated, second quarter weather comparisons were favorable.

As a result usage growth associated with weather increased 3.8% quarter over quarter.

However, underlying usage growth, mix and other was a negative 1.1%.

Combined with 0.005% customer growth, retail kilowatt hour sales increased 3.2% in the second quarter versus the year ago period.

For the second quarter Florida Power & Light reported net income of $217 million compared with $211 million in last year's second quarter The corresponding contributions to the EPS were $0.54 this year compared to $0.53 last year.

For the second quarter FPL's 2008 O&M expense was $379 million, up $13 million from the prior year figures.

The primary drivers of the increase in O&M for the quarter were fossil generation owing to the timing of outage work and structural maintenance, as well as transmission and distribution costs and a small uptick in bad debt expense.

For the full year we continue to see increases in nuclear and fossil generation costs due to the full year impact of Turkey Point unit five and customer service costs, particularly bad debt expense, as being the main drivers of O&M growth.

Let me address bad debt and accounts receivable for just a moment.

To give you a brief snapshot of our aged accounts receivable at the end of the current quarter, consider that accounts between 31 to 90 days past due increased about 9.5% compared to the prior year's comparable quarter.

Although total accounts receivable balances over 90 days is only roughly $8 million, that is a increase of approximately 26% from the prior year's quarter.

To put things in perspective, however, our bad debt expense net of recoveries for the second quarter was $1 million more than the second quarter last year.

We are very focused on this issue and have added additional resources and processes to actively monitor our aged accounts receivable.

The table on the accompanying chart summarizes the driver of our earnings growth for Florida Power & Light, which netted to an increase of $0.01 per share.

In the interest of time I will not read each number to 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 where we expected them to be after taking into consideration the trends that I just discussed.

Modest customer growth and warmer weather offset lower core usage, higher operating expenses and a number of other small negative effects.

Let's now turn to FPL Energy.

FPL Energy had another very strong quarter, driven primarily by contributions from new assets, both new win projects and the September, 2007 acquisition of the Point Beach nuclear facility, as well as by strong performance in the existing portfolio.

Excluding the scheduled Seabrook refueling outage, we benefited from higher pricing across most areas of the portfolio.

Although we felt some pricing pressure in west Texas, our entire ERCOT operations were roughly in line with what we had planned.

We look at our entire ERCOT operations under a single portfolio approach and we are pleased that our EBIT numbers for our existing ERCOT assets were 28% better than last year.

In general, the wind resource was favorable versus a year ago and relative to our expectations.

These positives were partially offset by the scheduled Seabrook refueling outage, which alone effected earnings by $0.10 per share.

We continue to be highly hedged against the major sources of commodity price volatility for 2008 and 2009, with more than 98% of expected equivalent gross margin for 2008 on our existing assets protected.

The equivalent figure for 2009 is 87%.

Thus there has been no real material change in these figures since we last shared them with you on our first quarter earnings call.

The charts supporting these figures are contained in the appendix.

We will provide initial detail on our 2010 hedging status during our third quarter earnings call.

We are also making excellent progress in our wind development pipeline.

We have acquired and/or built and placed into service approximately 400 megawatts of new wind assets this year and I expect a total of 1200 to 1300 megawatts to be placed into service by the year-end 2008.

Needless to say, we have quite a number of wind assets under construction at this point, with most being placed into service in the fourth quarter of this year.

We continue to expect to add between 7000 to 9000 megawatts of wind over the 2008 to 2012 timeframe.

This goal comes with the usual caveats, that we need continued public policy support, additional transmission capacity that is capable of transporting renewable power to load centers and a healthy supply chain.

FPL Energy's 2008 second quarter GAAP earnings were $3 million or $0.01 per share compared to $203 million or $0.51 per share in last year's second quarter.

Adjusted earnings, which exclude the effect of non-qualifying hedges and other than temporary impairments or OTTI, were $169 million or $0.42 per share compared to $146 million or $0.36 per share last year.

The after tax impact of the non-qualifying hedge category was a loss of $157 million, primarily as a result of increased power and natural gas prices that negatively affected the value of the derivatives used to hedge our power output.

As we have indicated before, losses in this category mean that the value of our future cash inflows, as well as our unhedged assets, is increasing.

As always, we have provided more detail on these transactions in the appendix and we continue to believe that FPL Energy's current period performance is best understood by excluding these amounts, whether gains or losses, from consideration.

Additionally, gains or losses in this category will turn around in future periods as the underlying contracts go to delivery.

Our adjusted earnings also include an adjustment to GAAP results for the effect of other than temporary impairment losses on our investments in nuclear decommissioning funds at FPL Energy.

We first called this item out during our first quarter earnings call.

Continued losses in these funds' performance as a result of the large decline in equity prices during the quarter, required us to record a $9 million in net losses.

Turning now to the drivers of the growth in FPL Energy's adjusted earnings.

Contributions from new assets, namely wind and Point Beach, accounted for an $0.11 per share improvement in quarterly results.

Roughly $0.08 of this can be attributed to incremental wind assets.

As Lou mentioned at the outset, in the last 12 months we have added about 1400 megawatts of new wind and acquired 1023 megawatts of nuclear capacity.

The earnings from our existing assets came in virtually flat compared to the prior year second quarter.

The existing wind portfolio came in ahead of the prior year's comparable quarter owing to an above average wind resource, primarily driven by the wind resource in Texas, offset by some unfavorable pricing in Texas.

On its own, the existing wind assets were up $0.03 compared to the prior year's second quarter.

Absent the Seabrook refueling outage and its impact on the quarterly results, the non-wind merchant portfolio improved relative to a strong second quarter last year, helped primarily by our ERCOT gas assets, which posted results which benefited earnings per share by $0.05 compared to the prior year's quarter.

So although the Seabrook outage costs us $0.10 per share and last year's second quarter had a very strong financial performance in our existing assets, the existing portfolio is flat year-over-year.

Our wholesale marketing and trading operations contributed $0.04 less this quarter, primarily as a result of economic hedges placed on some of our asset positions that do not meet our strict non-qualifying hedge or NQH criteria..

As a reminder, the types of transactions we classify as non-qualifying hedges are those that are specifically identified with each of our assets.

All other impacts netted to $0.01per share.

Of this, nearly $0.05 per share is attributed to supporting the future growth of the business or incremental interest expense associated with the growth in the asset base.

This was partially offset by lower income tax expense, primarily associated with favorable tax impacts.

As many of you know, gas price volatility has been very high this year.

During the second quarter of 2008 gas prices for 2009 through 2012 increased over $2 per Mmbtu for each year.

As of a couple of days ago, however, except for the very short-term part of the curve, prices were fairly consistent with March 31,2008.

The near-term effect on our portfolio's significant changes in gas prices is small because we were generally highly hedged in the short-term.

However, changes to our asset values caused by significant changes in gas prices in outyears where we are less hedged is often significant.

Many of you have asked for a little more information on our Texas wind assets.

As a reminder, we run our Texas assets under a single portfolio approach.

I would like to spend some time discussing market conditions in the ERCOT west zone and the impacts on our hedged wind portfolio in that region.

During the first half of 2008 we saw a decrease in ERCOT west prices attributed to a number of factors, including a significant number of major transmission line outages between west and north zones for maintenance, higher than average wind resources resulting in higher wind generation, and a continued build out of new wind projects.

A majority of our merchant wind assets in Texas are highly hedged with power derivatives at the west zone through 2009, thereby mitigating most exposure to market prices.

While the forward market pricing has reflected the increased amount of time wind is on the margin in ERCOT west, this has been partially offset by higher gas prices resulting in higher power prices when gas is on the margin in ERCOT west.

In mid-July the Public Utilities Commission in Texas approved an approximately $5 billion plan to build 2300 miles of new transmission lines that will connect the renewable rich zones of ERCOT with the north and south ERCOT zones.

This plan, which is upgradable in the future, will support 18,500 megawatts of renewable capacity in Texas.

We are encouraged by the actions of the Texas legislature, ERCOT and the Public Utilities Commission of Texas to build transmission from west Texas to the load areas in north and east Texas.

The competitive renewable energy process, commonly referred to as the CREZ process, is a collaborative effort among all stakeholders, generators and load a like to invest in new transmission infrastructure which supports the energy future of Texas.

The current high gas prices are translating into higher power prices for the electric consumers in Texas, since gas plants are typically setting the marginal costs in the market.

This new transmission will allow Texas to tap into vast wind resources in the west and deliver this competitively priced energy to the population centers.

This transmission investment provides not only a highly favorable economic return for consumers, but also provides an environmental return by displacing fossil fuel generation with clean wind generation.

Due to its overwhelming benefits, we expect that this new transmission infrastructure in Texas will become a reality over the next three to four years.

I also want to spend just a minute to emphasize that we have many development opportunities outside of Texas.

As we have said before, we have the scale to take actions that others may not.

We are a national wind developer, which gives us the option to move turbans between regions to maximize shareholder value.

We continuously monitor several factors, including regional market pricing, long-term power contracting potential, and wind resource to optimize the location of each turban constructed.

Investment in self owned transmission lines to move power from high wind resource areas to high load areas is a consideration factored into our economic decision making process for each project.

One of the ways that you can gauge our wind asset pipeline is by the amount of land that we have under contract, which will serve future wind projects.

We have previously shared with you information on our wind pipeline, including land secured for our wind development activities.

This slide is setup just a bit differently and has updated information.

The table shown here indicates that a significant amount of our secured land, which supports new build and advanced stage projects, is in regions outside of Texas.

When we first discussed our land program with you last year, we had secured signed agreements for about 1 million acres of land.

A year later that number is now over 2 million acres.

In addition, we continue to pursue almost twice as much land as we have currently secured.

To summarize the slide, our wind development pipeline continues to grow and is supported by our activities in the land area.

Within the Lone Star State our secured land is longer dated to coincide with the buildout of transmission that I referenced earlier.

This, of course, can change and we have flexibility built into all of our plans to take advantage of economic changes or trends that we identify.

To summarize the 2008 second quarter, on an adjusted basis FPL contributed $0.54, FPL Energy contributed $0.42, and corp and other was a negative $0.03.

That's a total of $0.93 compared to $0.86 in the 2007 second quarter or about an 8% increase year-over-year.

With that, let me turn the call back over to Lou.

Okay, thanks.

Armando.

Clearly there are some challenges ahead, especially in Florida over the next year or so.

But as I look into the future, I'm very bullish about our long-term prospects.

We are well positioned for what must inevitably be a clean energy future.

Let's look first at Florida Power & Light Company.

There is no question that the economy in Florida is unusually difficult.

That has affected us and it will continue to effect us until economic conditions improve.

We believe this is a cyclical rather than a secular trend, and as such will turn around in the future.

Frankly, I'm not interested in calling the turn.

I will leave that to the economists.

But what I can tell you is that FPL will continue to be well positioned when the turn comes.

We have the best utility franchise in the country and we think that, despite any near-term weakness in the economy, our franchise is favored by great long-term demographic trends.

We have a constructive regulatory framework that has created a set of win/win scenarios for our customers and our shareholders.

We have planned for significant investments in new generation over the next few years that will substitute capital for lower fuel costs for our customers.

Also for higher efficiency and for lower emissions.

During this difficult economic period we are optimizing our expenses, but we are not doing so at the expense of investing in a robust infrastructure that will meet the needs of our customers in the future.

FPL Energy is well positioned for continued leadership in a world increasingly and correctly focused on the urgent need to address climate change.

I said back in March when we hosted many of you at our investor conference and I will say it again, this is a wonderful time to be in renewables.

This does not mean that we aren't focused on the challenges ahead.

We are very mindful of transmission issues in Texas, for example, but we are optimistic that these issues will be successfully resolved.

This a business where a consistent track record of success matters and scale matters and we have both.

Over the next five years we have a very sizeable investment opportunities with superior returns and which will create a lot of value for our shareholders.

And as much as we like wind, we also believe the future is bright for solar.

We intend to be leaders in this area.

Finally, those of you have followed us over the years know our commitment to operational excellence, to financial strength and financial discipline.

All three of these form the critical underpinnings of everything we do and we believe are absolutely critical to long-term success in this industry.

Together FPL and FPL Energy perform in a very complimentary fashion.

We are delivering value for our customers and investors alike with our current leadership in clean energy and we are well positioned for the inevitable congressional action that will be required to address reductions in carbon in the future.

I want to thank you for joining us today and for your continued interest in FPL Group.

With that, we will turn the call over to questions.

(OPERATOR INSTRUCTIONS) Our first question is from Dan Eggers from Credit Suisse.

Good morning.

With some of the pressure we are seeing at the utility and there was already concerns that you were going to earn under your allot ROE, is there any thought or opportunity maybe to accelerate when you file the rate case and maybe do this sooner rather than waiting another year to do it?

Let me go ahead and give you a point on that and then I'll turn it to Armando Olivera.

We don't expect, we didn't address what our ROE is for the quarter.

We don't expect to be under 10%, which is the minimum that we agreed to back in the 2000 rate agreement, either for this year or for next year.

If we were, that would be an opportunity to do something a little bit sooner.

But let me turn it over to Armando just for a couple more comments.

I think Armando addressed that.

If you look at our most recent filings with the PSC, we are above the 10% threshold that was embedded in the rate agreement.

We don't see a path that would have us below that range before this current agreement expires.

Okay, great.

Just looking at how well the Texas plants did in the second quarter, I don't know if you guys could share any color whether you think there is more of a sustainable trend going on as far their higher profitability or was this a little bit more of a opportunistic event given the huge volatility we saw in the second quarter.

I will make a couple comments, I don't know whether anybody else will have anything.

I hate to say it was just opportunistic.

We believe that the environment where those plants are, which is up in the north Texas area, is favorable for those gas assets long-term.

If you look at, to be fair, if you look at forward sparks spreads in that area, they wouldn't necessarily be all that encouraging.

Some of the current clearing prices that we are seeing on a daily basis don't necessarily reflect what we are seeing in the forward market.

We remain confident that those assets are in the right place.

I don't know that we can say certainly say that we would expect to see what we had in the second quarter every quarter.

We are pretty confident that those assets are in the right place.

Okay.

The last one I appreciate the color on the Texas wind development.

But over the next say two or three years, is there going to be much capital to put in Texas wind ahead of these transmission lines getting done.

Are you guys effectively done in Texas, going to put money elsewhere for the time being?

I wouldn't say we are done in Texas.

I did have a comment on one of my earlier prepared remarks that said just please remember that west Texas isn't the only place to build wind in Texas.

I took that out because I thought it was a little too cute.

But I will go ahead and say it here and there are other opportunities in Texas, not necessarily out in the west where transmission was an issue in the first quarter.

Okay.

I think Jim wants to add some to that.

Dan, the only other thing I would add is we have a national development program and as we look at both '08 and '09, and 2010 and our opportunities across the country, we have the flexibility given our pipeline to move equipment to where the best opportunities are.

We have lots of options of which projects to develop.

We constantly optimize that and we look at -- we look every, frankly, every month that where are the best places for us to be developing and target our equipment to where we think both in the near-term and long-term are the best places for us to be putting it.

I think we have a great national pipeline of wind projects and I feel as good as I ever have about the quality of that pipeline and our opportunities for building renewables going forward.

Not to prolong it, but that was, what Jim just said was in our prepared remarks.

It's all very true.

We have got a great development pipeline, we shared with you some of our land acres that we have got secured and some of which we are pursuing, which is actively pursuing those acres.

So we feel good about our prospects even outside of Texas which I addressed.

Thank you, guys.

Moving on we will hear from John Kiani from Deutsche bank.

On slide 27, you provided an update of your 2009 hedge portfolio.

Can you talk a little bit about why the other category in ERCOT decreased about $100 million from your last disclosure down to about $250 million, what's driving thar?

I thought actually nobody looked at those slides.

That's good.

We will have to keep these in in the future.

It's primarily some pricing pressure that we have talked about and we saw during the first quarter.

The buildout of additional megawatts out in, wind megawatts out in Texas.

We have adjusted that a little bit down.

I don't -- overall, that didn't really change our view of what 2009 would look like.

So I'm sorry, so some of the wind assets you said show up in ERCOT other?

They do, absolutely.

Because if you look at this chart it starts with contracted wind.

Right and most of the ERCOT wind is hedged financially shorter term, is that the right way to think about it?

Yes, that's right, it's hedged wind, is what we call it.

No, we don't call it merchant wind.

So if you look at ERCOT sparks spread would be our gas assets, other would include our other assets in ERCOT which is wind.

If 90%, or 89% now, 90% before, of ERCOT other, being largely wind I guess, since LaMar and Thorny probably show up in the sparks spread line, was hedged, how did it decline by 33%?

Because it's hedged with power, but we do a very good job in predicting wind.

But we are not perfect at it.

One of things that we have to do to manage our hedges is we have to determine what the wind forecast is for the next day, the next week, the next month.

Therefore we adjust our hedges going forward.

Very quick example, on the day ahead basis if we believe that the wind is going to blow more than what we had hedged, we will go out and we will try to hedge that.

We could wait for the day of.

If the wind is going to blow a little less, we might have to go out and buy that.

The net effect of that, which is -- I don't want to give the impression that that's hugely significant.

Sure.

But the effect of that effects its contribution margin.

Sure.

So did the volume assumption come down or is it the fact that perhaps whatever you, whatever power contractor, whatever power you sold forward isn't necessarily correlating with your forecast for the underlying price that you might realize?

You can think of it, you just said it.

The realized price.

The hedge price doesn't change.

We've hedged that in 2009.

The hedge price doesn't change.

Do you have basis exposure?

Meaning are you selling forward ERCOT west zone or are you selling forward - ?

West.

It's not -- we have a very, very small basis exposure from west to north but what you're seeing right here, I don't want to get too off (multiple speakers) what you're seeing right here is what I just said.

Small price changes caused not by our hedges, hedges are at a fixed price, but caused by the fact that wind is a variable resource, sometimes it blows more and sometimes it blows less, we have to adjust that to manage our hedges.

Is that clear?

I think it makes a little bit more sense.

You mentioned that there are other places in Texas to build wind.

Are you referring to the south zone perhaps?

I'm going to let Jim answer that question.

John, we don't, just for competitive reasons, don't like to talk about where we are developing things.

I will go back to what I said before, which is we continue to think Texas overall is a good place to be developing winds, it is a, just a part of our portfolio of what we are looking at.

We have projects -- we just did a pretty detailed review, Mitch and the team, last week.

And we have projects in 12 or 13 states we are looking at right now.

It's been historically an important part of what we are doing.

It is going to continue to be an important part.

I think what has gone on with the CREZ decision is very positive for the long-term growth of wind in Texas and we continue to, as Armando said in his remarks, we operate our Texas business as a single portfolio and it actually performed extremely well in the second quarter, we are very happy with our overall results in Texas in the second quarter.

Thank you very much.

Thanks, John

(OPERATOR INSTRUCTIONS) Our next question comes from Steve Fleishman from Catapult.

I had a couple of questions maybe related on the same issue, just why would the expected gross margin still be about 89% or 90% when the actual EBIT came down $100 million?

And if you are not going to get it there, where -- were you going to get the $100 million somewhere else?

These are ranges, pretty wide ranges in certain categories.

With this what is not on here, by the way, just so that we are all on the same page, what is not on here is interest expense is not on here, contract restructurings, which we reported in the past, are not on here, G&A is not on here, so there is plenty of places to get it from.

The fact that we didn't change one of the other ranges, doesn't mean that in our internal forecast that everything has stayed the same.

I wouldn't look at it as, gee whiz,, other ERCOT has gone down by x million and no other ranges have changed so that must be $10 million less.

That's not necessarily the way to look at the slide.

Okay.

One other general question maybe related to Texas but more broadly is -- first of all I don't know exactly the number, maybe you could help, but how much generally the wind in Texas plants run, kind of capacity factors on peak and then off peak.

I have heard something like they run 60% of their hours are capacity factors off peak and 20% on peak.

I don't know if that's roughly where you are.

Steve, Don't have those numbers in front of me, I'm sorry.

I guess, it really is just on a curiosity, do you guys think it makes economic sense to add 18,000 megawatts of wind in Texas?

Even with the transmission there getting it to the market, what did it do to the power market?

What will it do to the prices in north and south is your question, right?

Well, also kind of off peak -- if the plants run more off peak and not as much on peak, are you really addressing on peak issues.

I can address it generally and it's probably not going to be sufficient for your purposes.

Clearly when we go in and we determine whether we are going to put in a project or not we look at a whole bunch of factors, transmission being one of the things that we look at.

We also look at what is going to happen to prices in other regions.

Before some of these transmission issues started creeping up in Texas, when we were determining whether to put a plant up in Texas or, in west Texas or not we were concerned with what was going to happen to the prices not only in west Texas but also north Texas.

Clearly with CREZ, whether you put the wind project in the west or some other area, that electricity is going to make its way to the north and to the south and it is going to effect prices there which is going to effect the economics of your decision making.

So for us, I don't think I can give you a general, a general answer but I would say that prices will be effected by adding 18,000 megawatts of wind and we are looking at how prices are effected in order to determine whether it's economic for us to build it or not.

Let me add a couple of things, first of all, just through the whole CREZ process, the Texas PUC looked at a lot of factors, but obviously they wouldn't be investing $5 billion in more transmission if they didn't think more wind in west Texas made any sense economically.

Secondly, just to maybe a related comment and maybe this is really what you're driving at, Steve, but I think this could have, as Armando said, we're not going to do things that we don't think they are economic and I think one of the things we talked had about for years is our financial discipline on these matters.

So we will continue to monitor what is going on in the market.

We still think we are putting in -- we have great assets already and we have some interesting plays, both short-term and long-term in Texas so I would say stay tuned .

I think this could have some pretty significant implications if maybe you own some coal assets in Texas, for instance, or because there is a awful lot of generation that -- you're right, a certain amount of the wind is definitely off peak and this could have some implications and therefore some sizable benefits for the environment in Texas.

So let's just see how it all plays

Okay.

One last specific question, just on you mentioned the wind resource was, I think, 117% in the quarter, used to have a rule of thumb and it's been hard to use that exactly recently, but just roughly is there a way to estimate how much that above normal resource helped in the quarter?

Yes, I think the best way to look at our wind index is really as a trend line.

We continue to work internally on a better way to show our investors and our shareholders and others a better predictor, if you will.

We don't have a better predictor now, the wind index for the second quarter this year was 117, for the second quarter last year I think it was somewhere around 97 or the high 90s.

But it's not appropriate to assume that since the wind index was 117 and 100 was normal, that our wind assets were up 17%.

We tried to lay that out in the slide, we build that wind index from information that theoretically you or others could go out on the website and get anemometer information, wind speed information from airports and others, but it is a delicate, it is a complicated and delicate process.

You have got to go from that information that is publicly available and you have got to get back to where our wind turbans actually are.

So on slide 32 we go through the whole process of how we get from that to our earnings per share earnings contribution.

And as we have seen and I addressed this in the first quarter also when a question came up, as we have seen, our wind index is not a great predictor of the earnings contribution of our wind assets.

So short answer is we think it should be used in a trend analysis.

If it goes up, you should expect higher earnings from our wind and if it goes down, you should expect less earnings.

Okay.

Great, thank you very much.

Our next question today comes from Paul Ridzon from KeyBanc.

On an incremental basis what did the Seabrook outage cost and can you just give a little more flavor as to what happened at existing assets, rather than the consolidated flat.

The Seabrook outage was I think that was in the prepared comments.

It was $0.10 for the quarter.

Were there costs still last year?

I'm sorry, Paul?

Was there an outage there last year?

Not in the second quarter.

It was a scheduled outage this year in the second quarter.

There was no scheduled outage at Seabrook in last year's quarter, so it was $0.10.

And the existing assets really could be -- that's a $0.10 negative, if you will, on existing assets and the rest of the story on existing assets is a positive $0.03 on existing wind assets and a positive $0.05 on our gas assets in ERCOT.

There is $0.02 in there kind of flopping around, but those are the three significant points.

So the, looks like 20 basis points of wind resource was about $0.03 in the quarter?

How did you get to 20 basis points?

97 to 117 wind resource.

I guess they are not basis points.

No, no because you're mixing apples, oranges, tangerines and a bunch of other fruits there.

The wind index is a total index for the entire portfolio.

The $0.03 that I just gave you is existing assets.

The new wind assets and, again, we are mixing things but I'm going to just to let you know the new wind assets were up $0.08, I believe, from -- they weren't there last year, they are this year, so that's $0.08.

Problem is you just can't say $0.08 plus $0.03, $0.11 is 20 basis points because those new wind assets came in over a 12 month period.

That's why I know we -- we owe you something.

We owe you a better way to predict what is going on with our wind so you can use it in your models and so on.

But for right now I would use our wind index only on a trend basis.

If it's gone up we should expect higher earnings from our wind assets and if it's gone down you should expect less.

Aside from generation in Texas, what happened at your retail business with all the volatility and other players going out of business.

The retail business was slightly down.

But we are still signing up customers and we are still committed, at least at this point, to conduct business.

You're comfortable with your hedging strategy there that you're not going to see some of the troubles others have.

We are comfortable with our hedging strategy.

We certainly hope not to see the troubles that others have.

In, I think it was May and June, maybe it was just June, it was a pretty volatile market.

But we were comfortable with our hedging strategy then and we continue to be on the same one.

Just lastly any read through on what is happening in Washington with PTC extension?

Yes.

I'm going to let Lou comment on that.

Gee, thanks, what made me the expert on the PTC extension?

It seems like every week there is either a new proposal in the Senate or the House.

Frankly, nothing has really changed.

We still have, I think, both the the Senate, the House, republicans and democrats want to see it, something happen on this front.

But it's just a battle over PAYGo, and we are hearing talk in the aisles about some possibility of some bipartisan compromise proposal but I'm not holding my breath waiting for that to happen.

Something could break soon or we could be the whole way into sometime in a new administration before something happens there.

I wish I could tell you more, but I really don't have anything more to say.

Hurry up and wait, right?

Just be prepared and be flexible.

Thank you very much.

Our next question will come from Phyllis Gray from Dwight Asset Management .

Good morning, my question has been answered, thank you.

We are going to take, we have got time for one more question.

That question will come from Angie Storozynski from Macquarie.

Good morning, Angie.

Good morning.

I have a question.

So we have 400 megawatts out of it so far.

We have a goal of 1200 to 1300, and we have a production tax credit expiring by the end of the year, should we think that this is a risk that some of your assets will not qualify for the subsides, that's one question.

And second question, I know I spoke about it with you guys but I want you to address it again, if you think that recent changes to the interpretation by the IRS of the federal tax credits and the eligibility of utilities for it will somehow impact your growth perspective for wind assets, Basically it is rate based wind will and anyway threaten the pace of growth, basically, of your wind portfolio.

I have a quick answer to the first one, which is no, but I never like to give quick answers because I like to just place it in context.

We are committed and our schedules show that all of the assets that we have in construction right now will be built by 12/31.

But just as a clarification, because some people really don't understand this concept, I'm sure you do, Angie, but the way the tax law works it's a per turban kind of installation concept.

Even if you have a -- think of a 200 megawatt wind farm that you're putting up.

If that wind farm doesn't get connected, if you will, until January 10th, but you got let's say 95% of it up and connected at 12/31, you actually do get, you get it in under the wire, if you will, for whatever is up and running.

It would only be that additional 5% that you don't get PTC on.

It is a turban by turban measure.

That's the longer answer, but the shorter answer was we expect all that we talked about today to be operational by 12/31.

On your second question -- your second question is a , I don't want to say it depends, I would rather say no.

It is not going to effect our plans, We don't think it's more competition.

The reality is that utilities could have earned the PTC's even before this court decision, it's a structural issue.

If they actually would have owned 100% of the wind plant, they would have been able to use those PTC's for the benefit, presumably, of their own rate payers or through deregulated for their own shareholders.

It was only in those situations where those utilities were trying to get into partnerships and owned, as an example, 50% of the partnership that they were not unable then to buy the total output from that partnership and sell to it to the rate payers, that reselling provision if you will, and take the PTC.

From where I stand, they could have done it before, for structure purposes, for whatever reason they didn't take advantage of it.

I'm not sure it's really going to increase the competition that much.

Clearly I'm aware of at least one utility in the northwest that said this is a great thing for them.

Honestly, they could have done it before with a different structure.

I hope that's responsive to your

That concludes our call today, thanks for joining us, everyone.

That does conclude our conference call for today, thank you all for your participation.