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Executives

Jim von Riesemann – Director, Investor Relations

Lewis Hay – Chief Executive Officer

Armando Pimental – Chief Financial Officer

Armando Olivera – President & Chief Executive Officer, Florida Power & Light Co.

Analysts

John Kiani - Deutsche Bank

Greg Gordon – Citigroup

Jonathan Arnold - BAS-ML

Daniel Eggers – Credit Suisse

Paul Patterson – Glenrock Associates

FPL Group, Inc. (FPL-OLD) Q4 2008 Earnings Call January 27, 2009 9:00 AM ET

Operator

(Operator Instructions) Welcome to the FPL Group's fourth quarter 2008 earnings release conference call. At this time for opening remarks, I would like to turn the call over to Mr. Jim von Reisemann, Director of Investor Relations.

Jim von Reisemann

Welcome to our fourth quarter and full year 2008 earnings conference call. Lew Hay, FPL Group's Chairman and Chief Executive Officer will provide an overview of FPL’s performance, recent accomplishments, and long-term goals. Lew will be followed by Armando Pimental, 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 and Light Company; and Mitch Davidson, President and CEO of NextEra Energy Resources. Following our prepared remarks, our senior management team will be able 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 the factors that could cause actual results or events to vary is contained in the appendix herein and in our SEC filings, which can be found in the Investor section of our website www.fplgroup.com.

In today’s presentation we will mention the terms GAAP and 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 is inputted determining 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 the 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. The appendix accompanying this presentation contains a complete reconciliation of GAAP results to adjusted earnings.

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

Lewis Hay

Good morning everybody. 2008 was a great year at FPL Group where we achieved record adjusted earnings of more than $1.5 billion. FPL Group’s adjusted return on equity for 2008 was 13.8%, which tied for the highest in 20 years. We grew adjusted earnings per share by 10%, the third consecutive year of double-digit growth and FPL Group’s stock price, while down approximately 25%, outperformed the S&P utility index and the S&P 500, just as we have for six of the last seven years.

Our results for 2008 were driven by NextEra Energy Resources, which we recently renamed from FPL Energy to better reflect the company’s clean energy mission and market focus.

NextEra Energy Resources had record 2008 earnings of $821.0 million on an adjusted basis.

At Florida Power and Light we continue to exercise prudent management in the face of an unprecedented Florida economic downturn. While our utilities’ fourth quarter and full-year results were significantly impacted by the national and state economic downturn, our long-term plans advanced with the approval of new, cleaner, and more efficient generation projects that will benefit customers and shareholders alike.

We are extremely fortunate to have two world-class businesses under one roof. At NextEra Energy Resources our status as the nation’s number one renewal energy provider and our clean overall generation fleet, position us exceptionally well for the low-carbon and renewable policies advocated by the new administration and Congress.

At FPL we continue to believe that owning a premier utility in a location attractive to long-term demographic trends is a position most would envy. We believe that FPL Group’s demonstrated ability to generate double-digit earnings growth in a highly challenging year is a powerful endorsement of our long-term strategy, our commitment to financial discipline, and our dedicated and talented employees.

We were particularly pleased to be named the nation’s most admired electric utility by Fortune magazine for the second year in a row.

Now before I turn the call over to Armando Pimental to discuss our results in greater detail, I would like to focus on a few of the significant accomplishments that drove our success.

Perhaps most significant is the fact that despite the economic downturn, we were able to add approximately 1,300 megawatts of new wind capacity at NextEra Energy Resources, the biggest single one-year increase in our history.

We led the Unites States in new wind capacity put into service in 2008, just as we have for seven of the last eight years. By year end NextEra Energy Resources had about 6,375 megawatts of installed wind capacity in North America, vastly outpacing all other players in the market.

At Florida Power and Light the downturn in the economy overshadowed a number of important developments, most notably approval to build additional generation that will reduce fuel costs for our customers, improve our emissions profile, and reduce the state’s reliance on imported fuels.

For example, we were granted approval and cost recovery for our three solar power plants, the first utility-scale solar projects anywhere in the State of Florida. We were also the first utility to receive state regulatory approval to pursue additional nuclear units and we can recover preconstruction costs as they are incurred.

Of course, the ultimate decision to build Turkey Points 6 and 7 will depend on the benefits that can be achieved for our Florida customers and our shareholders. We will not subject either to undue risk.

Meanwhile, we continue to move forward on our $1.8 billion investment in nuclear upgrades to Turkey Point and St. Lucie, which are scheduled to be completed during the 2011/2012 time frame and are expected to boost capacity by 400 megawatts. These upgrades will deliver tremendous benefits for our customers in terms of lower fuel costs, increased energy independence, and reduced greenhouse gas emissions.

As we previously announced, we will also be initiating a rate proceeding with the Florida Public Service Commission in 2009. We recognize how difficult the current economic downturn has been on our Florida customers and we are taking significant steps to keep our costs under control.

For example, during the third quarter earnings call we announced capital expenditure reductions at FPL of approximately $500.0 million in 2008 and $400.0 million in 2009. We are committed to seeking a rate adjustment that keeps our customers’ bills well below the national average, even as it funds investments that will make our electrical systems stronger, smarter, cleaner, and more efficient and less reliant on any single source of fuel.

Finally a word about the capital markets. When countless businesses were huddled in a defensive crouch wondering whether they would be able to access capital, FPL Group’s commitment to financial discipline, attractive projects, and a strong balance sheet meant that capital remained available. Indeed, we were able to raise approximately $1.3 billion on favorable terms in the fourth quarter alone, including close to $600.0 million in wind-project financing.

For all of these reasons, our industry-leading renewables business, our solid utility, and our unquestioned financial strength, FPL Group has been able to grow earnings per share by double-digits despite the downturn and is in a very strong position to take advantage of future opportunities.

With that, I will turn the call over to Armando Pimental before providing some concluding remarks.

Armando Pimental

In the fourth quarter of 2008 FPL Group’s GAAP net income results were $408.0 million, or $1.01 per share, compared to $224.0 million, or $0.56 per share during 2007 fourth quarter.

FPL Group’s adjusted 2008 fourth quarter net income and EPS were $360.0 million, and $0.90 respectively, compared to $284.0 million, or $0.72 per share, in 2007.

The difference between the reported results and the adjusted results is the positive mark in our non-qualifying hedge category, partially offset by the exclusion of other than temporary impairments, or OTTI. Both of these adjustments affect NextEra Energy Resources’s results. I will discuss both of these in more detail later in the call.

For the full year, FPL Group’s 2008 GAAP net income was $1.64 billion, or $4.07 per share, compared to $1.31 billion, or $3.27 per share, in 2007. Excluding the mark to market effect of non-qualifying hedges and OTTI, FPL Group’s 2008 adjusted earnings were $1.55 billion, or $3.84 per share, compared to $1.4 billion, or $3.49 per share, in 2007. Again, please refer to the appendix of the presentation for a reconciliation of GAAP results to adjusted earnings.

Turning now to Florida Power and Light, the results for 2008 were lower than what we had expected when we began the year as the company continued to be affected by the national and state economic slowdown. In the fall of 2007 we indicated that Florida Power and Light would face significant uncertainty on the revenue front owing to slowing customer growth and lower usage patterns. The slowdown in both has been more pronounced than we had originally expected. I will discuss these topics in more detail later.

Customer growth for the full year came in well below historical performance. We are reporting essentially flat annual customer growth after several years of growth around a range of 2%.

Usage was also lower, for both the quarterly and annual comparisons. We had expected some price elasticity effect given the large rise in commodity prices in the first half of the year. The deteriorating economy, especially in the latter part of the year, also contributed to lower usage. The increase in the number of inactive accounts also rose significantly. And finally, the weather impact for the full year was down relative to a year ago but slightly above the 59-year average. I will discuss all of these factors in more detail in just a moment.

On the positive side, we continued on our track record of delivering strong cost management, which allowed us to reduce our O&M costs by approximately 10% relative to our original expectations.

Our bed debt expense is increasing but as of this point remains manageable. For the year ended 2008 our bad debt net write-offs were less than 0.25% of revenues at Florida Power and Light. Our total accounts receivable balances over 90 days is roughly $16.0 million. That is an increase of approximately $2.0 million from the comparable year’s period.

Florida Power and Light’s initiatives to continue to position the company for the long term are progressing. Continuing capital expenditures at FPL are needed in order to ensure that we are able to deliver important benefits to customers, such as increased fuel efficiency and reduced emissions in the short term, and enhanced fuel diversity over the longer term, as well as storm heartening.

In 2009 we expect to place two highly efficient natural gas units, collectively known as the West County Energy Center, into service. The first 1,220 megawatt unit should be online in the second quarter and the second identical unit should come online in the fourth quarter.

The total cost of these two facilities is anticipated to be approximately $1.3 billion. The addition of these facilities to our portfolio is expected to be 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 units.

As a reminder, the revenue requirement associated with these two facilities is already approved under the application of the application of the generation-based rate adjustment, or GBRA, that allows FPL to increase base rates for the cost of the pre-approved new generation facilities that are placed into service prior to the expected expiration of our current rate agreement at the end of 2009.

In 2011 we expect to bring a third identical unit into service at the West County Energy Center and in 2013 and 2014 we expect to complete the modernizations of the Cape Canaveral and Riviera plants. These three facilities will add approximately 3,650 megawatts of highly-efficient generation at a cost of approximately $3.3 billion.

We remain on track with our program to build a total of 110 megawatts of solar generation by year end 2010. The total cost of these three projects is approximately $700.0 million. In mid-December we broke ground at the 75 megawatt Baron County site. We plan to break ground on the two remaining solar sites, which will add 35 megawatts in the aggregate, next month.

And finally, last November we filed a letter of intent with the Florida Public Service Commission notifying them the company plans to initiate a base rate proceeding in March 2009. I will have more to discuss on our pending rate case in a few minutes.

For the fourth quarter Florida Power and Light reported net income of $151.0 million compared with $173.0 million in last year’s fourth quarter. The corresponding contributions to EPS were $0.38 per share and $0.43 per share respectively.

For the full year Florida Power and Light reported net income of $789.0 million compared with $836.0 million in 2007. Earnings per share for 2008 were $1.96 versus $2.09 in the comparable period a year ago. The quarterly and yearly results include an after-tax gain of approximately $27.0 million, or $0.07 per share, as a result of a contract termination.

However, in the fourth quarter FPL also recorded one-time after-tax expenses associated with ongoing or resolved regulatory issues as well as employee severance costs of approximately $22.0 million, or $0.05 per share.

Fourth quarter weather was below normal. Heating and cooling degree days were roughly 12% below normal. If we would have experienced normal weather, that is weather based on a 59-year period of observations, FPL earning’s would have been higher by approximately $0.03 per share.

I would now like to spend a few minutes updating you on what we are experiencing in terms of customer metrics. Let’s look at the four graphs on the accompanying slide, starting with the two on the top. On the left of the top line we show full-year customer growth figures. Although on an average full-year basis we gained approximately 13,000 customers, at December 31, 2008, we actually had about 11,000 fewer customers than we did at December 31, 2007.

On the right side of the top line, where we show the fourth quarter, the customer growth rate was modestly negative, at 0.2%.

The bottom part of the page shows two graphs related to inactive low-usage customers as well as some housing metrics. First, the graph in the lower left hand of the page looks closely at inactive at low-usage customers, which as you can see, the percentage of both continues to increase. Low-usage customers are defined as residential customers using less than 200 kilowatt hours per month, while inactive accounts are those where a meter is installed but there is no customer name or account associated with that meter.

As you can see in the accompanying chart, since year end 2007 the number of inactive accounts has increased by 57,000 to 302,000. By way of comparison, the number of inactive accounts stood at 288,000 at the end of the third quarter.

While customer movements in and out of service territory naturally cause a nominal level of low-usage and inactive actives, we believe the increases we have experienced over the last year in both of these metrics are indicative of empty or near-empty homes in our Florida territory. Inactive accounts are not included in our total customer count of roughly 4.5 million.

And finally, let me put some color on the chart in the lower right-hand corner which looks at existing home sales for the State of Florida. These are the sales of single-family residences and condos.

As you can see, over the last several months existing home sales in 2008 have eclipsed to 2007 numbers. That trend continued in December 2008 as Florida single-family sales increased by 27% over 2007. Amidst other signals of a troubled economy that we all hear and read about every day, this trend reversal in home sales is a bit of good news.

The table on the accompanying slide summarized the drivers of retail kilowatt hours sales growth for both the fourth quarter and full year 2008 for Florida Power and Light, which were down 8.4% and 2.4% over last year’s comparable periods respectively.

Usage growth associated with weather decreased 6.2% quarter-over-quarter and 12.9% year-over-year.

During the quarter weather had a negative impact of $0.09 per share relative to a year ago and was $0.03 negative relative to normal. Similarly for the year, weather was a drag on FPL’s results of $0.06 per share relative to a year ago, however, it was $0.05 above normal.

We have also experienced a decline in usage per retail customer compared to the fourth quarter of 2007. For the quarter, underlying usage declined 2% and for the year it fell 1.8%. The most recent data from the economists at the University of Florida forecast annual population growth in Florida of 1% to 1.5% over the long term and we would expect to see the growth in underlying customers and sales rise commensurately with the population increases, although we certainly don’t expect that type of growth in 2009.

I would now like to provide you with an update on the key regulator topic we will be facing this year. In November 2008 Florida Power and Light filed a letter of intent with the Florida Public Service Commission notifying them the company plans to initiate a base rate proceeding in March 2009. The new rates would take effect January 1, 2010, upon approval by the PSC.

FPL’s retail base rates are 17% lower now than they were in 1985, the last time a general base rate increase was sought and granted, despite inflation of 107% for the same period. According to the most recent data available from the Florida Municipal Electric Association and the Edison Electric Institute, FPL bills are 13% lower than the average bill in Florida and 17% lower than the national average, even as FPL has made investments that make the company one of the cleanest and most energy efficient generators in the United States.

We remain mindful of the difficult economy but we are also responsible for making prudent, long-lead time investments in the electrical infrastructure. A general base rate increase will help customers by supporting investments in clean energy that is safe and efficient.

This rate case filing is expected to trigger a process that could last the better part of eight months, with a decision by the end of 2009.

The table shown here summarizes the earnings drivers for Florida Power and Light for both the quarter and year. 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.

In total, the quarterly comparison was down and the comparative annual figure is lower by $0.13 per share. Relative to the original expectations we shared with you in the fall of 2007, we ended the year $0.19 per share below the lower end of the range, due almost entirely in the slowdown in revenues.

Let me now turn to NextEra Energy Resources which turned in another excellent quarter and an outstanding year overall, with adjusted EPS growing 62% and 30% respectively. The annual growth as driven primarily by contributions from new assets, both new wind projects and the September 2007 acquisition of the Point Beach facility, as well as strong contributions from our NEPOOL assets and ERCOT fossil assets that benefited from favorable market conditions.

While all these factors were to some degree built into the expectations we shared with you a year or so ago, the existing portfolio performed better than expected, due to favorable hydro generation and favorable market conditions in NEPOOL and ERCOT, as well as strong asset optimization.

Operationally the fleet continued to perform very well with a total portfolio forced outage rate under 3% despite an unplanned outage at our Seabrook facility during the first quarter of 2008 that cost us about $0.05 in EPS.

In addition, we were able to fund certain incremental G&A expenditures, primarily for new renewal development, that should help us continue to drive growth into the future.

We remain well hedged for 2009 and 2010. For 2009 we are essentially hedged to the impacts of natural gas prices and very significantly hedged against other price movements, including spark spreads. Over 90% of the equivalent gross margin we expect of our existing asset portfolio to generate in 2009 is protected against commodity price volatility. For 2010 the comparable figure is 80%. The appendix to this presentation contains additional information on our hedging status.

Our wind development program continues to make excellent progress. We finished the year having added 1,300 megawatts of new wind capacity. This is about 200 megawatts more than we had originally expected as opportunities to develop more projects and acquire additional wind assets, at attractive rates, presented themselves during the year.

For 2009 we continue to expect to add approximately 1,100 megawatts of wind. To date, we have more than 480 megawatts either under construction or already approved for construction. We believe our original goal of adding 7,000 megawatts to 9,000 megawatts over the 2008 to 2012 time frame is still within reason, assuming the usual caveats, including continued public policy support, the addition of selective transmission to support renewable development, and continued wind-supply chain expansion, among others.

In addition, our 2009 and future goals rely on the availability of capital at reasonable cost. We continue to be cautiously optimistic that financing for renewable energy projects that have longer-term PPAs with investment-grade counter parties will be available on terms that will enhance long-term shareholder value.

As I indicated in the third quarter call, as conditions in the financial markets warrant, we will have the opportunity to scale up or down our wind-build program in 2009.

NextEra Energy Resources 2008 fourth quarter reported GAAP earnings were $265.0 million, or $0.66 per share, compared with $72.0 million, or $0.18 per share, in the prior year period results.

Adjusted earnings for the same periods, which exclude the effects of non-qualifying hedges and net OTTI, were $218.0 million compared to $132.0 million. The equivalent per share contributions were $0.55 and $0.34 respectively. Excluded from adjusted results are the effects of transaction in the non-qualifying category in OTTI.

During the quarter the forward curves for power and natural gas fell significantly and this led to GAAP book gains in the non-qualifying hedge category, as a result of the contracts that we have in place to hedge our future power sales. These gains are, of course, offset by roughly equivalent losses in the economic value of the underlying physical asset positions, which losses do not appear in the GAAP financial statements.

Because of the very nature of these one-sided GAAP effects, we continue to exclude non-qualifying hedge results, whether positive or negative, from adjusted earnings that we report to you.

In the fourth quarter we continued to see pressure in both equity valuations and interest rates. Those results affected NextEra Energy Resources’ nuclear decommissioning funds, which suffered significant OTTI losses consistent with the overall market performance during the period. Net OTTI losses for the quarter were $47.0 million. As a reminder, under GAAP OTTI losses on investments must be recognized as the difference between carrying value and fair value if a company’s investments are managed by an outside agent and the company does not have full control of when investments can be sold.

For nuclear decommissioning trust funds regulators generally prohibit a company from giving day-to-day management direction as to when trust investments may be bought or sold. For adjusted earnings, net OTTI losses are presented on an after-tax basis, net of any gains on the sales of such securities during the period to the extent OTTI losses were previously recognized.

For the full year NextEra Energy Resources’ reported GAAP earnings were $915.0 million, or $2.27 per share, compared with $540.0 million, or $1.35 per share, in 2007. Adjusted earnings were $821.0 million, or $2.04 per share, versus $632.0 million, or $1.57 per share, last year.

The full year impact of the non-qualifying hedge category was a positive $170.0 million, reflecting a large decrease in forward prices that we observed over the latter part of the year.

Net OTTI losses for the year were $76.0 million, or $0.19 per share.

NextEra Energy Resources’ fourth quarter adjusted EPS grew by 62%. New asset contributions, primarily new wind, accounted for a $0.07 improvement. The 2008 fourth quarter results benefitted from approximately 2,056 megawatts of additional wind capacity compared with a year ago. You will recall that this includes the 85 megawatts of Canadian wind we acquired in June 2008.

The existing portfolio added $0.12 in the quarter, driven primarily by favorable market conditions at both our NEPOOl and ERCOT fleets. The existing wind business declined modestly.

Results from wholesale marketing and trading activities declined by $0.01, owing to lower full requirements earnings relative to a year ago and this was offset by a gain from the sale of project and development. All other factors were a positive $0.02, owing primarily to certain state income tax allocation changes, partially offset by higher overhead associated with continued growth of the business.

For the full year NextEra Energy Resources’ adjusted net earnings per share increased $0.47.

To summarize the 2008 fourth quarter on an adjusted basis, FPL contributed $0.38, NextEra Energy Resources contributed $0.55, and corporate and other was a negative $0.03 contribution. That is a total of $0.90 compared to $0.72 in the 2007 fourth quarter, on an adjusted basis.

For the full year 2008, again on an adjusted basis, FPL contributed $1.96, NextEra Energy Resources contributed $2.04, and corporate and other contributed a negative $0.16. That is a total of $3.84 a share, or an increase of $0.35, over the same period in 2007.

For the year the corporate and other drag was a little less than we had expected, primarily owing to higher interest expense, partially offset by more favorable impact from certain consolidating income tax adjustments. We finished the year within the $3.83 to $3.93 range that we originally set out in October 2007 and delivered in adjusted EPS of about 10%. It was an excellent year overall for FPL Group.

Our previous 2009 adjusted EPS target range remains at $4.05 to $4.25 and we feel comfortable with this range with what we see today. As a reminder, our adjusted expectations include the assumption of normal weather and operating conditions, no further decline in the national or state economy, a reasonable capital markets atmosphere, and exclude the cumulative effect of adopting new accounting standards, if any, the mark to market effect of non-qualifying hedges and OTTI, none of which can be determined at this time. Please see the appendix accompanying this presentation for additional key assumptions and cautionary statements.

For 2010 the adjusted EPS target range of $4.50 to $4.90 remains unchanged.

As I mentioned during our third quarter earnings call, and am reiterating today, based on our current plans and taking into account the earnings assumptions that are included in the appendix, we continue to feel comfortable with our goal of growing adjusted EPS by an average of at least 10% per year through 2012 off of 2006 base of $3.04.

As I also indicated in our previous earnings call, we did not commit to an even 10% increase every year, although it certainly worked out that way this year.

Before turning the call back to Lew I would like to take a few moments to discuss our financing plans and recent achievements in the capital markets. We expect to continue to use a mix of project lending, differential partnership interest, hybrid corporate, capital issuances, as well as conventional corporate debt, first mortgage bonds, and perhaps a limited amount of new equity capital over the next four years as we continue to support strong capital expenditure profiles at both of our main businesses.

During the fourth quarter credit turmoil we had continued daily access to the commercial paper market and the rates we are seeing today are either at or below where they were before the credit crisis worsened in September 2008.

As an indication of our short-term borrowing rates, at December 31, 2008, our average annual interest rates for 30-day commercial paper at FPL was approximately 30 basis points and 45 basis points at FPL Group Capital.

The longer-dated credit markets have also been accessible, and as Lew mentioned, we tapped those markets. In December we issued approximately $1.3 billion in debt at very attractive rates. This includes close to $600.0 million in limited-recourse-project-finance related debt that was issued in support of some our existing wind projects.

Although the available financial players are more limited than they were at this time last year, as I said before, we continue to believe there is appetite for project finance debt capacity provided a long-dated PPA agreement contract exists with investment-grade utility.

Our commitment to maintaining a strong balance sheet with disciplined investing has served us well during this very difficult period. Our debt ratings are currently A by the three rating agencies and our goal is to maintain these ratings. We have said all along that our capital spending needs would not be met entirely by internally-generated fund or through incremental debt.

Today we have filed with the SEC to offer up to $400.0 million in common stock through a continuous equity offering program, sometimes referred to an at-the-market or equity-dribble program. We plan on issuing equity under this program in 2009 and 2010 as conditions warrant. However, there is a chance that we could issue much less than $400.0 million, even zero perhaps, if we are not comfortable with market conditions or other factors.

We have designed the program to maximize our flexibility, both in terms of how much equity we issue and over what time frame. We are very pleased that we now have an additional tool that will help us achieve our growth goals while allowing us to retain our strong and efficient corporate capital structure and credit position.

And now I would like to turn the call back over to Lew who will provide some concluding remarks.

Lewis Hay

Let me make just one final point before we turn to the question and answer session.

In the wake of the last election we believe a fundamental policy shift has taken place in the United States, one that will create strong incentives for low carbon generation, especially renewable, and equally strong disincentives for high-carbon fuels.

Shortly after the election President Obama made it clear that despite a weak economy he will continue to seek to put a price on carbon dioxide through a federal cap-and-trade program and we have supported that approach through our membership in the U.S. Climate Action Partnership and our active participation in the EEI Climate Task Force.

The Edison Electric Institute, which represents the industry in Washington, has come out in support of a major reduction in carbon dioxide emissions, 80% by 2050, and has agreed on an allowance allocation mechanism. The administration and Congress have also pledged strong support for renewable energy and we look forward to working with both to ensure that the right incentives are put in place.

We believe that no energy company in the United States is better positioned for a carbon-constrained world than FPL Group. Our investments in clean and renewable energy, our leading position in wind and solar generation development, combined with our low overall emissions profile, mean that we can capture the upside potential of a meaningful price on carbon while avoiding the downside risk.

We now these are exceptionally challenging times and we appreciate the support FPL Group shareholders have shown over the years. Our track record is one of consistently delivering strong results. In fact, since 2002, FPL Group has outperformed 84% of the companies in the S&P Utility Index and 85% of the companies in the S&P 500. Our total shareholder return during this period was 127% compared with 32% for the S&P Utility Index and (10%) for the S&P 500.

Our commitment in the current environment is to maintain our focus on financial discipline, superior execution, and strategic investments. And our goal over the long term is to remain the company best positioned to profit from national and global trends that will shape the industry. We are confident in our ability to achieve that goal.

I want to thank you for joining us today and for your continued interest in FPL Group. And with that, I’ll turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Kiani - Deutsche Bank.

John Kiani - Deutsche Bank

Regarding Slides 23 and 24 in your presentation, on Slide 23 and also it looks like on Slide 24 as well, where you show your expected equivalent gross margin, it appears that from what I’m seeing here in 2009 and also in 2010, the asset-based gross margin declined. It looked like 2009 declined about $0.10 per share after tax and 2010 declined about $0.21 per share after tax. And it looks like those were partially offset by about a $0.04 after tax pick up in 2009, on the non-asset based businesses. And about a $0.09 per share pick up in 2010 on the non-asset based businesses.

So two questions, first can you talk a little about what some of the offsets were that allow you to maintain and reaffirm your 2009 and 2010 guidance considering the fact that net of the asset-based business offset there is still a, it roughly looks like a $0.07 decline in 2009 and a $0.12 decline in 2010, on those two slides.

And then second, if you could talk about what the pickup is the non-asset based business I would appreciate it.

Armando Pimental

Let me first talk about what you picked up there on the difference, or the adjustment, on new asset additions and non-asset based businesses. That’s really just a re-class. There is nothing more to that or nefarious about it. We looked over some of the detail and we actually believe that some of the information that we previously had in new asset additions really belonged in that bottom line.

And frankly, that non-asset based businesses, that is something that we may actually rename in the future because not everything that is in there is actually considered non-asset based. So that is just a re-class between the two. Whatever one decreased, the other one kind of went up.

To answer your bigger question, in 2009, we have got some slight reductions in some of the gross margin line items but nothing very significant, frankly. This thing is going to move around every quarter. There are going to be some puts and takes every quarter, even in situations I will talk about in a second in 2010.

When items are significantly hedged you might see some movement and you will see some movement because of basis positions and so on. What you don’t see here, obviously, is what I call what is below the line, a whole bunch of items that are below the line.

And taking everything into account I actually consider the 2009 differences to be rather minimal and we continue to feel very comfortable with the guidance that we have given.

2010 is a slightly different story. Some of the numbers did move around a little bigger. The spark spread line that you see down there in ERCOT, that line has come down $30.0 million to $35.0 million or so and that is really a result of the decrease in natural gas. A lot of that position in ERCOT are gas assets. We are unhedged so we have kind of brought that down. I think that should be expected by you and others when you look at this chart.

Now you would ask, your NEPOOL spark spread line item kind of stayed the same, you’re only about 56% hedged there, which is the same thing as the last quarter, but there again there are other puts and takes there. We have got some assets that are spark spread, not necessarily natural gas, that were helpful so we feel comfortable with that line.

The biggest change, you didn’t mention it specifically, the biggest change in that 2010 hedging position actually appears in the other ERCOT. And those are wind assets out in ERCOT. I think we have taken that down about $40.0 million. And although that was 99% hedged the last time we reported it to you and continues to be 98% hedged there, we do update that. We have got hedges there that are not all in the wind zone. We’ve got some basis differences there. We also update it for what we are seeing in transmission. You can expect that to change this year and next year until we get the right transmission out in West Texas.

But even bringing that down $40.0 million, we still have a pretty big range for earnings in 2010. I do not want you to take my comment as us coming to the lower end of the range for 2010. We feel very comfortable with everything else we’ve got going on in the business, including the amounts that affect adjusted earnings that are outside of gross margin in NextEra Energy Resources, we continue to feel comfortable with the $4.50 to $4.90.

John Kiani - Deutsche Bank

On the ERCOT wind that you mentioned, how should we think about beyond 2010, from a hedge profile perspective and how those hedges roll off and then when you end up re-hedging those assets?

Armando Pimental

We are going to not provide 2010 hedging guidance until later this year. It is not the right time to do so. There are competitive reasons to not do it. We usually do it in the third quarter of the year and that is probably going to be very consistent with what we do this year.

Operator

Your next question comes from Greg Gordon – Citigroup.

Greg Gordon – Citigroup

When you say embedded in guidance normal operating conditions, what do you consider normal in terms of customer growth and usage growth for customer, and what are your O&M expectations off of the 2008 actuals, for 2009?

Armando Pimental

What do we consider normal? What we consider normal may not necessarily be what others consider normal. But we did include a question in the script about long-term customer growth around 1% to 1.5%. But I also said that we do not expect that growth in 2009.

For 2009, if that’s what you’re thinking about, normal for us would essentially be flat. Maybe slightly negative, slightly positive, but I would really be looking at flat customer numbers for us. I would consider that normal.

Greg Gordon – Citigroup

So we should reverse the loss you took versus normal on weather?

Armando Pimental

Yes. I would expect normal weather. Weather is never normal. Sometimes it’s positive, sometimes it’s negative. Fourth quarter 2007 was a very warm weather period here and so when you compare both the full year and fourth quarter 2008 to 2007, we have got I think it was $0.09 for the quarter and I can’t remember what it was, $0.06 for the year. I may be wrong on that second number.

But, yes, you should consider normal weather for the year. So you could reverse the effects of what I said a little while ago in the script about the quarter and the year.

In terms of O&M, we were able to reduce O&M as customer growth lowered this year, but that is not something that we are going to continue to be able to do on a significant basis. A lot of that O&M is O&M related to plants. Our customers expect good service. So I would maybe be looking closer to the 2007 numbers than the 2008 numbers, but at this point I would not expect any significant reductions in O&M.

Potentially, though, they’ll be a little higher as some of the things that we were able to defer last year we will have to do this year.

Greg Gordon – Citigroup

Looking at the last surveillance report I saw, I think it was October, I think the trailing 12 ROE at FPL had declined to 10.74%. Is there an updated number for that?

Armando Pimental

The regulatory ROE for Florida Power and Light Company, 12 month trailing, at December 31, 2008, is about 10.3%.

Greg Gordon – Citigroup

That continues to decline. And when you think about the 2010 guidance, I look at the actual authorized [audio break] across all electric and gas utilities in 2008 and there actually were about just a hair under 10.5%, nationally.

Armando Pimental

Let me just correct myself. I said 10.3%, it’s about 10.8%.

Greg Gordon – Citigroup

So the national average is around 10.5%. You have always been able to do, at least marginally, better than the national average. What type of assumptions are you embedding in your 2010 guidance vis-à-vis the outcome of the rate case?

Armando Pimental

I’m not going to provide a lot of detail there. Obviously we are at the tail end of a very long agreement. There have been some things that clearly have happened that we were not anticipating back in 2005. We are not comfortable with the 10.8%, gliding in here to the end of the agreement. We have always had a very constructive regulatory framework in Florida. We expect that to continue. We have no reason to believe that it won’t. But it doesn’t serve any of us well to discuss at this point what our expectations are for ROE going into a rate case.

Operator

Your next question comes from Jonathan Arnold - BAS-ML.

Jonathan Arnold - BAS-ML

On the legislative moves to change the arrangements for recovery of cost of building nuclear plants, can you comment at all on the genesis or what kind of traction you see with that effort and should we be concerned about that at all?

Armando Pimental

You are talking about some media reports from Florida that there may be some that are looking to change the legislative rules that we have here in Florida for new nuclear cost recovery, is that right?

Jonathan Arnold - BAS-ML

Yes.

Armando Pimental

I guess my comment is that it has received a heck of a lot more media attention than I believe is the political reality. There continues to be a strong support for the legislation here in Florida. Clearly the type of generation that we can build here in Florida is limited. I think our regulatory commissioners and our legislators understand that. They understand the risks of building new nuclear and are supportive.

And I think evidence of that is our first filing earlier this year to recover over $200.0 million of costs during the first year, which was approved. That’s my take. I’m going to turn it over to Armando Olivera for a second to see if he has any additional comments.

Armando Olivera

Not much. There continues to be a pretty strong political support in the state for nuclear and I think there is a recognition that otherwise reliance on natural gas will continue to increase. As Armando said, it has gotten a lot of publicity but at least at this point is our assessment is it is limited to a couple of state legislators.

Jonathan Arnold - BAS-ML

You talked about this equity issue, this dribble program, to be clear, with this $400.0 million over the course of 2009 and 2010 would be the base assumption although you haven’t said anything specific on timing, but it would be reasonable to assume that was over the two years, is that right?

Armando Pimental

Yes, that’s exactly what I said in the script. I am limited in what we can actually talk about regarding the new program. I would just say we filed our offering documents and they can be accessed at the SEC’s website. And because of SEC rules I can’t get into any more detail on the program itself.

But your question, I think I answered that specifically a little bit ago, which was our expectation is that it would be 2009 and 2010. If we do anything at all.

Operator

Your next question comes from Daniel Eggers – Credit Suisse.

Daniel Eggers – Credit Suisse

With your success in being able to get the project financing done in the fourth quarter and more constructive credit markets plus the dribble option, what is the thought process as far as the capital budget? You talked in the third quarter about flexibility to spend based on access to capital. Since it seems to be more available does that mean there is more willingness to put more capital to work this year?

Armando Pimental

There clearly might be an opportunity. And I also addressed that in the prepared remarks a bit earlier. But as of right now our capex budget remains the same, which is approximately $5.3 billion for our two main businesses for 2009. But again, as I said in the third quarter, we will continue to look at how the markets are behaving, how commodity prices are behaving, and then we will, we believe there will be opportunities for us to increase that. We will take advantage of those opportunities if we believe they are in the long-term interest of our shareholders.

But you know, there’s a lot of doom and gloom also out there. It is sometimes difficult to see exactly what’s around the corner, what exactly will happen if some of these governmental programs start tapering off or continued. So I don’t want to leave everyone with the impression that our capex budget can only go up this year. Certainly there is a chance that things might happen that we don’t expect and it would go down.

Daniel Eggers – Credit Suisse

You have some of these smaller project developers on the renewable side of the business having a hard time finding capital. Are you either one, seeing opportunities to buy assets more cheaply to fill your development pipeline, or are you seeing any change in pricing from the $2,000 a kw level for wind turbines that we saw last year?

Armando Pimental

One, I think you and others probably understand that there are a lot of opportunities out there. There are many entities that were hoping to get tax equity financing done in the fourth quarter of last year. Those financings, for a variety of reasons, did not get done. You have got some banks that have lent construction financing to those developers that were hoping to get taken out by the tax equity financing. Those banks have now not been taken out. They’re wondering what the next step is. But you’ve still got some developers that believe their projects may be worth a heck of a lot more than maybe reality would show today.

So, yes, there are a lot of opportunities out there. I don’t know whether those opportunities are things that we would be able to take advantage of. Clearly, with all of the discussion in the stimulus bill, that’s got some of those smaller, if you will, developers that were thinking they were in a lot of trouble two months ago now thinking that maybe they’re not in as much trouble. And maybe they will hold out a little bit longer.

So, yes, one, there are opportunities. Two, we are looking at the, as you would expect us to. I am not ready to say anything else on that front.

Your comment on $2,000 a kw, I think expectations are that this is no longer a seller’s market, it’s a buyer’s market so the price pressure on that is clearly down and not up and we will just have to wait and see how it plays out the rest of the year.

Daniel Eggers – Credit Suisse

With the drop in natural gas prices what are you expecting from a year-on-year change in rates for the utility customers in Florida?

Armando Pimental

I think your question is, as fuel prices are coming down, just the fuel price decrease, what we would expect for a bill in January 2010? Is that it?

Daniel Eggers – Credit Suisse

No, for all of 2009 rates the customers are going to pay given how much gas prices have come in. Rates, I assume, are going to be down in 2009 versus 2008. I didn’t know if you had a way to quantify that at this point.

Armando Olivera

I have been through enough of these cycles to say it is way too early in the year for us to be speculating. I think a lot can happen between now and November when we go in for the 2010 fuels. So I don’t think it’s appropriate for us to be speculating right now.

Lewis Hay

Remember, we just went in for fuel hearings in November. I guess the PSC ruled on that. Keep in mind that we do hedge a certain portion of our fuel on a rolling basis so if you recall when we did our initial fuel filing we had thought that rates were going to go up some in 2009 and then we revised that because fuel came down so hard.

The current rates reflect a lot of our thinking in fuel. Fuel may be coming down a little bit. But we’ll have to see. It seeming like it’s a pretty cold winter and we have yet to see what happens in the summer. So as Armando said, it’s awfully early. But from our customer standpoint it’s encouraging that fuel is down versus going up.

Armando Olivera

And remember, a significant portion of our supply comes from the Gulf of Mexico and so a very active hurricane season can arguable put some upward pressure on prices.

Operator

Your last question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

On the OTTI, previously that was in adjusted earnings and now it’s out, is that right?

Armando Pimental

That’s right. It’s been minimal in prior years, though. It was about $0.01, $0.015 in 2007. It was only in the first quarter of this year that we started adjusting it, and when we did we go back and change on a pro forma basis what we have done in the past.

Paul Patterson – Glenrock Associates

And the reason for that was just because of the big move?

Armando Pimental

Actually, no. As you all remember, at the beginning of the year maybe the credit markets were suffering a little bit but the equity markets for the most part still believed it was gung-ho time. It was really jus the regular analysis that we underwent, the types of items that should or should not be included in adjusted earnings that we report to investors. So we actually made this change, I think it was the first week of March in 2008, before significant decreases. And then we’ve just been consistent throughout the year.

The fourth quarter obviously saw some big decreases in equity prices and interest rates. A decrease in interest rates obviously also affects fixed income bonds. But it wasn’t just something that just happened in the fourth quarter.

Paul Patterson – Glenrock Associates

Did I understand the most recent ROE you had on the utility was about 10.8% for 2008?

Armando Pimental

That’s correct.

Paul Patterson – Glenrock Associates

And 2009, did you give a projection for what you thought it would be?

Armando Pimental

No, we do not at this point. Just to go back on the OTTI question, one other comment. That change, it’s pretty consistent with what others do. I don’t know whether we were first or second or last or whatever, but essentially if you look at utilities or power companies that have large unregulated nuclear plants, because this really affects nuclear decommissioning in an unregulated environment, everybody is pretty much doing the same thing we are.

Operator

There are no further questions in the queue.

Lewis Hay

Thank you for joining us and I look forward to seeing you at the first quarter’s earnings call.

Operator

This concludes today’s conference call.

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Source: FPL Group, Inc. Q4 2008 Earnings Call Transcript
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