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Executives

Jim von Riesemann – Director, Investor Relations

James Robo – President and Chief Operating Officer

Lewis Hay – Chief Executive Officer

Armando Pimental – Chief Financial Officer

Mitch Davidson – President and Chief Executive Officer of NextEra Energy Resources

Analysts

Daniel Eggers – Credit Suisse

Greg Gordon – Citi Investment Research

[Asur Kahn] – Incremental Capital

Jonathan Arnold – Merrill Lynch

Steve Fleishman – Catapult

Paul Patterson – Glenrock Associates

Annie Tsao – AllianceBernstein

FPL Group Inc. (FPL-OLD) Q1 2009 Earnings Call April 28, 2009 9:00 AM ET

Operator

Welcome to FPL Group first quarter 2009 earnings release conference call. Today's conference is being recorded. At this time for opening remarks I would like to turn the conference over to Mr. Jim von Riesemann, Director of Investor Relations.

Jim von Riesemann

Welcome to our first quarter 2009 earnings conference call. Lou Hay, FPL Group's Chairman and Chief Executive Officer will provide an overview of FPL Group's performance, recent accomplishments, long-term goals and industry observations. Lou will be followed by Armando Pimental our Chief Financial Officer who will discuss the specifics of our financial results. Also joining us this morning are Jim Robo, President and Chief Operating Officer of FPL Group and Mitch Davidson, President and CEO of NextEra Energy Resources. 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 about future operating results or other future events are forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary as contained in the appendix to the accompanying presentation and in our SEC filings. Each of which could be found in the investor section of our website www.fplgroup.com.

Before turning the call over to Lou, in today's presentation we will mention the term adjusted earnings, which is a non-GAAP financial measure. As defined by FPL Group, adjusted earnings represents net income excluding the mark-to-market affects of non-qualifying hedges and the net effects of other than temporary impairments on certain investments.

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 input in determining whether certain performance targets are met for performance-based compensation under the company's employee incentive compensation plans. 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, but it does not represent a substitute for the most comparable GAAP financial measure net income. The accompanying presentation and its appendix contain additional details concerning non-GAAP financial information, including a reconciliation of historical adjusted earnings amounts to net income as prepared in accordance with GAAP.

Now, I would like to turn the call over to Lou Hay.

Lewis Hay

I'm going to begin with a quick overview of how FPL Group did in the first quarter before turning my attention to the larger trends that are shaping the electric power industry, which we expect will drive our results going forward. Despite the weak economy both in Florida and nationwide, I'm pleased to report strong performance by FPL Group for the first quarter of 2009 with adjusted earnings per share rising 18% year-over-year.

NextEra Energy Resources had another great quarter with adjusted EPS growing 13% year-over-year. The principal drivers were new wind projects and the favorable effects of the American Recovery and Reinvestment Act of 2009 more commonly known as the federal stimulus package, which was enacted into law in February. Armando will discuss these factors in greater detail later in the call.

Although Florida Power and Light's earnings rose during the quarter when compared to last year, a good bit of that is attributable to timing of O&M expenses this year. Our new investments in clean and efficient generation helped produce additional earnings as well. Overall sales and customer numbers continue to decline albeit at a lower rate than what we were seeing last year. Nonetheless, we continue to invest in the future of the business.

We're busy constructing what will be the largest combined cycle natural gas power plant in the nation in western Palm Beach County. We're building three state of the art solar power plants that will provide 110 megawatts of emission free renewable energy and make the sunshine state number two in America in solar energy, and we're adding approximately 400 megawatts of nuclear energy in total at our two Florida nuclear power plant locations through major equipment revamps known as uprates.

As pleased as we are with FPL Group's current result, we are even more optimistic about the future. The reason is simple. The policy climate in the nation appears to be trending in a direction highly favorable to power companies with low emissions profiles and significant clean energy development capabilities. We have seen this already in the stimulus package I mentioned a moment ago.

We believe this legislation makes a significant down payment on helping the country transition to clean energy economy of the future while creating much needed jobs this year and next. We expect that the public policy support it provides for renewable energy and a smarter grid will transform the industry, reduce emissions and help lead our country out of this recession.

For example, the legislation which extended the wind production tax credit for three years provides us with much needed long-term certainty in our investment planning for new wind development. Based on what we know right now, we are still planning to add over 1,000 megawatts of new wind capacity this year and continue to grow our position as the North American wind power leader.

The stimulus legislation also created the option to temporarily elect either a 30% investment tax credit or a convertible ITC in lieu of the PTC. These additional options enhance our ability to fund new wind development and send a strong signal that policymakers are committed on a longer term basis to expanding the use of renewable energy.

Last week we announced the energy smart Miami initiative. The initiative has the potential to be the most extensive and holistic smart grid implementation in the country. The backbone will be the deployment of more than 1 million advanced wireless smart meters to every home and most business in Miami Dade County, which will be connected by a two-way wireless network, along with expected pilot programs involving renewable energy integration, deployment of plug-in hybrid electric vehicles and associated charging stations, and consumer technology trials of in-home energy displays and home energy controllers.

In addition, we are targeting distribution and substation enhancements that will result in a fully automated digital infrastructure with enhanced reliability in downtown Miami. More broadly on the issue of climate change we are seeing growing support in Washington for meaningful action to slow the emissions of greenhouse gases into the atmosphere.

In January, the U.S. Climate Action Partnership, a 30-member coalition of leading corporations and environmental organizations to which FPL Group belongs, released a blueprint for legislative action. The blueprint recommends that Congress take urgent action to cap overall emission and put a price on carbon dioxide through a regime of tradable emissions allowances. Also in January, the Edison Electric Institute, the national trade group for the electric power sector, released its own principles of agreement on climate change.

For the first time the industry spoke with united voice on the need to set a price on carbon as the best solution to the challenge of climate change and agreed to a methodology for allocating allowances. The Obama Administration has made addressing global warming one of its top priorities. In his February 24 address before a joint session of Congress, President Obama said the country must make clean renewable energy profitable and asked Congress to send him a bill that would place a market-based cap on carbon emissions.

Just a few weeks later, the first comprehensive energy and climate bill of the 111th session was introduced. A 650 page discussion draft from Representative Henry Waxman of California Chairman of the House Energy and Commerce Committee, and Representative Ed Markey of Massachusetts Chairman of the Select Committee on Energy Independence and Global Warming.

The Waxman-Markey Bill addresses all three areas considered essential for a significant expansion of renewable energy. First, it would establish a cap in trade program to set a price on carbon. Second, it would create a national renewable electricity standard requiring utilities to generate 25% of their electricity from renewable sources by the year 2025 with enhanced efficiency counting towards 1/5 of the goal. And third, it would encourage the development of additional transmission lines to carry renewable energy from remote regions where it is produced to populated areas where it's consumed.

Now, these happen to be the first three elements of the seven-point national energy plan I laid out in the February policy speech before [inaudible] and I am pleased that they have been included in federal legislation. The other elements that I believe are essential to the nation's energy future are conversion of the nation's automobile fleet to plug in hybrids, a national program for improving energy efficiency, research and development and deployment of carbon capture and storage technology, and a significant expansion of nuclear power.

The Waxman-Markey Bill also provides support for efficiency programs, carbon capture and sequestration technology, and plug-in hybrids. Though the Waxman-Markey Bill on the House side ahs generated the most attention on Capital Hill for the energy industry, we also see some hopeful developments in the Senate.

Senator Udall has introduced legislation calling for the establishment of the federal renewable portfolio standard. Senators Bingaman, Dorgan and Reid] have each introduced bills to spur the expansion of the nation's transmission infrastructure, which is welcomed news for the renewable energy industry in particular. And Senator Baucus has introduced legislation extending the 2003 dividend tax rate reductions.

While each of these initiatives need to be further refined and none is a slam-dunk to pass, the point is this. Federal policy appears to be finally catching up to FPL Group. We are well positioned for where federal policy is heading.

With that, I'll turn the call over to Armando Pimental and I'll be back later to provide some concluding remarks.

Armando Pimental

In the first quarter of 2009 FPL Group's GAAP net income results were $364 million or $0.90 per share compared to $249 million or $0.62 per share during the 2008 first quarter. FPL Group's adjusted 2009 first quarter net income NDPS were $364 million and $0.90 respectively compared with $305 million or $0.76 per share in 2008. The reported and adjusted results were identical in the first quarter of 2009.

There were no differences between the reported GAAP results and the adjusted results in this quarter because the positive in our non-qualifying hedge category was offset b y the exclusion of other than temporary impairments or OTTI. Both of these adjustments affect NextEra Energy Resources results from time to time.

As I mentioned during the fourth quarter conference call, 2009 was expected to be a challenging year on the revenue front for Florida Power and Light given the uncertainty of the state and national economies. The first quarter results reflect that. Weather was slightly down relative to last year and close to normal. Customer growth and usage remain weak and that, along with the effects of the economy, reduced retail kilowatt sales about 4.8% this quarter compared to the prior year's comparable quarter.

Although O&M expenses in the just completed quarter fell nearly 10% compared to last year's first quarter, the majority of that is attributable to the timing with the spend this year. Our allowance for funds used during construction, or AFUDC, contributed to the comparative results as all three West County natural gas units are now under construction. When completed, the West County Energy Center will bring an additional 3,660 megawatts of clean and more efficient generation to FPL's portfolio.

Now, before moving to the specifics of the quarter, let me briefly address recent developments at Florida Power and Light. Earlier this month, Florida Power and Light filed a proposal with the Florida Public Service Commission for the construction of a new 300 mile underground natural gas pipeline in Florida to meet increasing demand for natural gas as a clean fuel for generating electricity, while helping to diversify and secure the state's access to natural gas supplies.

And finally, as many of you know, in March we filed our petition for new rates to be effective beginning in January 2010. I will provide more details about our pipeline proposal and our rate petition later in the call. For the first quarter, Florida Power and Light reported net income of $127 million compared with $108 million in last year's first quarter. The corresponding contributions to EPS were $0.31 this year compared to $0.27 last year.

Many of you continue to ask about the various customer statistics and Florida's current economic state. Let's look at the four graphs on the accompanying slides starting with the two on the top. The upper left hand graph shows customer growth. We have experienced a sequential improvement after three consecutive quarterly declines, though some of the first quarter improvement can be attributed to seasonality.

On a relative basis, as of March 31, 2009, we had about 17,000 fewer customers than we did at the end of March 2008. The graph in the upper right hand corner of the page shows inactive and low usage customers, which we believe depicts the level of empty homes in our service territory. Since year end 2007, the number of inactive accounts has increased by 56,000 to about 300,000. This figure is, however, about flat with the number of inactive accounts at the end of the fourth quarter of 2008.

Let me address bad debt and customer accounts receivable for just a moment, which is shown in the lower left hand corner. We remain keenly focused on this issue and continue to manage the risk of loss through prudent deployment of collection resources. To put our situation in some context, accounts receivable greater than 60 days past due as a percentage of total receivables is lower this quarter than in both previous comparable quarters.

While net write-offs increased $1.7 million to $8.6 million in the current quarter compared to $6.9 million in last year's first quarter, the declining trend in past due receivables, points to a possible stabilizing of write-off rates for subsequent months. And finally, let me put some color on that chart in the lower right hand corner, which looks at existing home and condo sales for the State of Florida.

The message here appears to be positive, as the data shows that the number of units sold on a rolling 12-month basis may be forming a bit of a bottom. We've seen increases in the number of existing home and condo sales in many localities across the state. For the first quarter, FPL's 2009 O&M GAAP expense was $340 million, a decline of approximately $38 million with the comparable year ago figures.

In addition to the timing of spend I mentioned a moment ago, in March of this year FPL, along with certain NextEra Energy Resources subsidiaries, agreed to settle claims against the U.S. government related to spent nuclear fuel disposal. The total settlement helped FPL Group's net income by about $0.04 per share, half of which was at Florida Power and Light.

For the full year, not withstanding the first quarter results, we continue to see in creases in nuclear an d fossil generation costs, higher employee benefits expense, and higher customer service costs as the main drivers of full year base O&M growth. The table shown here summarizes the earnings derivers for Florida Power and Light for the just completed quarter.

For those of you without immediate access to the slides, they are available in the investors section of our website www.fpl.com. In total, the quarterly comparison was up by $0.04 per share. Relative to our plan we ended the quarter a little ahead of where we had expected.

Earlier this month Florida Power and Light filed a proposal with the Florida Public Service Commission for the construction of a new 300 mile underground natural gas pipeline to be located in the eastern part of the Florida peninsula with an estimated capacity of 600 MMcf per day at a projected cost of $1.6 billion. A decision on the need determination is expected in July 2009. If approved, construction is expected to take about one year and could be ready in 2014 to supply natural gas to the Cape Canaveral and Riviera Next Generation Clean Energy Centers once they are modernized.

Currently, there are two major natural gas pipelines servicing FPL's service territory working at or near full capacity. FPL receives large volumes of gas from these pipelines and is dependant on supply from the Gulf of Mexico creating some vulnerability in our natural gas supply, especially in the event of hurricanes and tropical storms.

By continuing to diversify our source of natural gas from offshore to onshore, we broadened access to additional competitive markets for the supply of natural gas while helping to offset the risk of disruption.

It's important to remember that in addition to normal customer growth, wind generation will have to supply increased load requirements as a result of increased wholesale activity that we've previously discussed and it will also have to replace approximately 1,925 megawatts of Purchase Power Agreements that start rolling off beginning in 2009. Importantly, no pipeline infrastructure exists to supply our additional natural gas requirements associated with future generation needs in the state.

I would like to now provide an update on the key regulatory topics facing Florida Power and Light this year. As most of you know, in mid-March of this year FPL filed a petition with the Florida Public Service Commission requesting a permanent increase in base rates and charges effective January 2010 and an additional permanent base rate increase effective January 2011.

FPL is also requesting that the PSC approve a continuation of the generation base rate adjustment mechanism, also known as GBRA, which was previously approved by the PSC as part of the stimulation settlement agreement in FPL's last base rate case in 2005. If approved, the requested 2010 and 2011 permanent base rate increases would increase annual retail base revenues year-over-year by approximately $1 billion in 2010 and approximately $250 million in 2011.

The requested increases are based on a regulatory return on common equity of 12.5% and a capital structure consisting of 55.8% equity on an adjusted basis. The rate petition excludes amounts associated with the proposed extension of the GBRA mechanism and certain proposed Cost Recovery Clause adjustments.

While our proposal would include an increase in the base rate, a typical customer bill would actually decrease by about $5 per month thanks to lower forecasted fuel costs and our continuing efforts to make our power generation fleet more efficient. We're proud of our track record of keeping customer bills low. At 19% below the state's average, FPL's typical residential customer bill is among the very lowest in Florida and below the national average as well.

Looking specifically at our base rates, they are 17% lower now than in 1985. This is despite inflation of approximately 99% during that period. This filing has triggered a resource intensive process that is expected to last roughly eight months. The Florida Public Service Commission will hold a quality of service hearings at various locations throughout our service [tory] in late June. The technical hearings begin the latter part of August and are scheduled to run through the first week of September.

The staff recommendation on the revenue requirements and rate design is scheduled for October 19, with a second staff recommendation to finalize rates on October, I'm sorry November 6. A final order is scheduled for December 4 and any order may approve rates and other terms that are different than those for which we have applied. Keep in mind that all of these dates are subject to change. Select filings and testimony related to the rate case can be found on our website.

Let me now turn to NextEra Energy Resources where the adjusted earnings growth was driven by a combination of new asset additions, strong operations from our NEPOOL assets, the ability to realize state incentives for renewables, and an additional equity investment we made in our current Canadian operations that allowed us to reduce previously deferred taxes.

In addition, in lieu of selecting production tax credits for certain new wind projects for 2009, we expect to be selecting convertible investment tax credit as provided by the stimulus package, and have thus recorded approximately $0.04 of EPS associated with these enhanced tax credit alternatives. I will discuss this in more detail in a minute.

Our current period results compare favorably to last year, even though NextEra Energy Resources also had a strong 2008 first quarter. To refresh your memories, in the first quarter of 2008 NextEra Energy Resources benefited from strong wind resources, the absence of a refueling outage at the Duane Arnold nuclear facility, and unique opportunities at our wholesale marketing and trading business. About the only significant headwind was an unplanned outage at the Seabrook nuclear plant.

Now, let's come back to 2009's first quarter. Our wind development continues to make very good progress. Thus far in 2009 NextEra Energy Resources has approximately 800 megawatts of new wind projects either under construction or approved for construction. We continue to believe that we will be able to add over 1,000 megawatts this year and plan to add 1,000 to 2,000 megawatts in 2010.

NextEra Energy Resources reported first quarter 2009 GAAP earnings were $252 million or $0.62 per share compared with $164 million or $0.41 per share in the prior period results. Adjusted earnings for the same periods, which exclude the effect of non-qualifying hedges and net OTTI, were $252 million compared to $220 million, the equivalent per share contributions were $0.62 and $0.55 cents respectively.

NextEra Energy Resources first quarter adjusted EPS growth was approximately 13%. New investments contributed $58 million after tax or $0.14 per share primarily driven by our investment in 1,325 megawatts of new wind projects relative to last year's first quarter, of this, roughly $17 million reflects our ability to realize a state investment tax credit on some of our wind projects. As always, we will continue to seek opportunities for enhanced economics in states with incremental incentives.

This quarter's results also include a $15 million benefit as a result of additional incentives granted under the stimulus package in the form of tax credits. This new tax benefit is essentially a new way to record something that you are already very familiar with, production tax credits on wind projects. I will discuss the accounting in greater detail momentarily.

The existing portfolio declined $0.08 quarter-over-quarter. Our contracted segment was down $0.04 owing primarily to a refueling outage at our Duane Arnold nuclear plant this year, and certain favorable contractual provisions in one of our contracted natural gas facilities in the Northeast which benefited last year's first quarter.

Our merchant assets in ERCOT were down $0.03 due to softer market conditions, partially offset by an incremental penny contribution from our retail provider Gexa. While our NEPOOL merchant assets were up $0.03, owing primarily to an unplanned outage at our Seabrook nuclear facility in last year's first quarter.

Our existing wind portfolio is down quarter-over-quarter by $0.03 due to a particularly strong wind resource in last year's first quarter, all other factors net to a negative $0.02, wholesale marketing and trading activities decreased by $0.02 from last year's exceptionally strong first quarter.

Restructuring activities and asset sales increased by a penny compared with last year's first quarter. All other factors were a positive $0.02, driven primarily by an additional equity investment we made during 2009 in our current Canadian operations that allowed us to reduce previously deferred taxes. This benefit was approximately $0.04 per share in the quarter.

The 2009 hedging information is contained in the appendix to this presentation. And it shows only small changes in hedged ratios from what we have previously provided. This table on slide 17 provides the same information, except that it represents the 2010 position. As you can see, about 88% of our expected equivalent gross margin from our existing assets is hedged. The more significant open positions are with sparks spread sensitive assets. New asset additions include new wind projects in 2009 and 2010.

Let me discuss two topics that have been of interest to the investment community recently. First, our earning sensitivity to changes in natural gas prices on our 2010 open positions is modest. For every $1 per MMBtu change in gas prices, the annualized impact is approximately $19 million in after tax gross margin, equating to roughly $0.05 per share on an after tax basis at FPL Group.

Secondly, our non-asset based category consists of three businesses, wholesale marketing, trading and retail better known as Gexa. We have previously indicated that these non-asset based businesses are planned to grow only proportionately with the rest of the planned growth in the business. To put this in perspective, we have back tested this.

In fact, using the midpoint of the expected equivalent gross margin ranges as shown on this slide, the gross margin from the non-asset based business has been within a range of 5% to 8% since late 2006, which is when we first started presenting the gross margin information in this fashion.

You'll note that the midpoint of our expected equivalent gross margin for 2010 is $330 million where roughly 7.5% of the midpoint for total expected equivalent gross margin for NextEra Energy Resources. We plan to provide an initial view of our 2011 outlook together with associated hedging data in conjunction with our third quarter earnings release.

As you know, Texas has extensive wind energy resources that are not located near the population load centers. The Competitive Renewable Energy Zone or CREZ was a collaborative effort involving the Public Utilities Commission of Texas, ERCOT and interested stakeholders to deliver more renewable wind energy to customers in Texas.

In late January, the Texas Commission voted to implement the approximately $5 billion CREZ build-out and awarded Lone Star Transmission, a FPL Group subsidiary, approximately 11% of the CREZ project totaling $565 million. Lone Star is expected to add approximately 250 miles of 345 kv lines that are capable of transporting significant amounts of renewable generation from West Texas to the Dallas-Fort Worth metroplex.

Lone Star anticipates filing its rate case sometime in late 2011 or 2012. The next steps in the CREZ process by Lone Star will be to file for a Certificate of Convenience and Necessity in early 2010. The PUCT will rule on Lone Star's Certificate of Convenience and Necessity application within six months of filing. Construction is projected to begin in early 2011 with a completion date expected in mid to late 2012.

As we've indicated before, we are very interested in the transmission business. Over the past decade we have been building transmission facilities associated with some of our wind farms. We believe we have the requisite skills and experience to be a significant player in future transmission projects that we believe fit with our overall strategy.

As many of you know, the American Recovery and Reinvestment Act of 2009 also known as the stimulus package was enacted into law in February. I want to spend just a brief moment highlighting the key provisions of the legislation before moving on to the accounting implications under the package. Foremost, we believe the stimulus package is critical to the wind and solar industry and to the broader economy.

First, let's talk about tax credits. For wind, we now have three alternatives for monetizing the tax incentives of the projects, some for potentially longer periods than others. First, we can continue to elect production tax credits, which have been extended through the end of 2012. However, if we so choose, we can elect to receive an investment tax credit equal to 30% of the qualified construction costs of the project and give up our rights to production tax credits for the individual project.

We can elect an ITC instead of production tax credit for any project that has reached commercial delivery before the end of 2012. The third alternative for wind allows us to elect to receive a convertible ITC from the U.S. Treasury equal to approximately 30% of the qualified construction cost of the facility.

According to the legislation, if we choose to elect the convertible ITC, we would receive the cash from the U.S. Treasury at the later of 60 days after the COD date or 60 days after our application is filed. We can elect to receive a convertible ITC for any project which has begun construction by the end of 2010 as completed construction by the end of 2012. We can also choose this third alternative on a project-by-project basis.

For new solar construction, two of the three alternatives are available. Production tax credits are not. However, for solar development, we can take the ITC through 2016 or on a project-by-project basis, instead elect to receive the convertible ITC for any project that is under construction by the end of 2010 and as completed construction by the end of 2016.

In summary, on the tax credit of public policy side, the stimulus package provides incentives for renewables through 2016. Besides the well publicized additional tax credit incentives, the stimulus package provides meaningful incentives in the form of loan guarantees and matching grants for modernizing the grid.

In terms of which wind project we may elect to receive the convertible ITC, we have been studying that issue for the last couple of months. We have and will continue to look at each of our wind projects on its economics over several different scenarios and then decide which path to take. What is important to note is that this new tax credit policy has created valuable options for us and has enhanced our ability to provide earnings growth.

As I mentioned before, during the first quarter, we concluded that it was probable that we would take the convertible ITC for a number of projects that would be completed this year instead of production tax credits, and as such recorded an earnings benefit that was approximately $15 million after tax in the quarter.

Keep in mind that production tax credits are recorded in earnings after commercial delivery of a project, while convertible ITC's will be recorded based on our assessment of the probability of applying for and receiving Treasury money for renewable projects expected to be completed during the year. The cash flow effect on our company relating to convertible ITC's is straightforward. For every project that we choose to receive a convertible ITC, we will receive cash proceeds equal to 30% of the qualified construction cost of the project.

Now, let's talk about the accounting in some detail, and to do that we'll go through a typical 100 megawatt wind investment project. Many of you are already familiar with the accounting for production tax credits and investment tax credits, so I will not go over those in detail here today.

The first slide should be familiar to you because we've used it before to lay out a typical wind project investment. The assumptions shown on this page were used to derive the results for the next slide. This slide not only shows cash flow and income effects over the project accepting a convertible ITC, but also shows some of the other economics associated with a typical 100 megawatt wind project which has been project financed.

The accounting for convertible ITC's has been the subject of discussion for quite some time now. Our accounting policy for these convertible ITC's will follow the guidelines of GAAP income tax accounting. As such, under the existing accounting guidelines, 1/2 of the moneys received will be accounted for as a difference between the tax basis of the asset and the book basis.

We will apply the guidelines of GAAP income tax accounting and record a deferred tax asset, which will be equal to our statutory tax rate, times the basis difference between book and tax. As I mentioned, the basis difference will essentially be 1/2 of the convertible ITC amount. However, since GAAP income tax accounting requires you to record the benefits of an annual lower effective tax rate on a quarterly basis, we are required to estimate the benefit on a quarterly basis and record it through the year.

Notice that a project that receives a convertible ITC has a significant amount of cash and earnings that are reflected in the first year of operation. But also notice that the net income from the project increases again after year two. That's the case with the EPS effective as well. The ROE and un-levered internal rate of return on a typical wind project using convertible ITC's is very consistent with what we have shown you before when using production tax credits.

So what's important to remember here is that both our earnings and cash flow patterns will be different under these rules when we take the convertible ITC instead of production tax credits. As I indicated before, the stimulus package has provided a very long runway in terms of tax credit visibility in the future.

In summary, the public policy support for renewable energy development as it relates to tax credits has changed significantly as a result of the stimulus package. The package has created longer term certainty by extending the period for which wind production tax credits are available for new construction through the end of 2012.

We have never had such long-term certainty in this market. But in addition, the stimulus package has provided alternatives for taking advantage of the tax attributes of these projects. For those entities, like ours, with taxable incomes, the alternatives are meaningful.

In the chart on this page, I have attempted to lay out the various alternatives available to wind and solar development. As you can see, public policy in terms of tax support now extends through 2012 for wind and 2016 for solar, by far the longest forward-looking support that this industry has ever enjoyed.

To summarize the 2009 first quarter on an adjusted basis, FPL contributed $0.31, NextEra Energy Resources contributed $0.62, and corporate and other was a negative $0.03 contribution. That is a total $0.90 compared to $0.76 in the 2008 first quarter, or about an 18% increase year-over-year.

Before turning the call back over to Lou, let me take a few moments to discuss our earnings outlook. Today, we are revising our previous adjusted EPS ranges for both 2009 and 2010 based on the earnings attributable to taking convertible ITC's instead of production tax credits for certain of our wind projects in 2009 and 2010.

Our revised adjusted EPS range for 2009 is 420 to 440, and our 2010 adjusted EPS range is 465 to 505. The revisions for each year are $0.15 a share higher on both the lower and upper ranges from our prior expectations. As I indicated earlier, the options provided by the stimulus package for the use of tax credits represents a fundamental and significant shift in public policy that lays the foundation for many years to come.

Today, we have provided you with our view of the accounting, tax, and project economic implications of our renewable plans for this year based on our best interpretations of the stimulus package. However, many detailed rules of the stimulus package are not yet known. Our interpretations are based on the spirit of the legislation, as well as numerous discussions that we've had with those who will be charged with interpreting its provisions.

Those interpretations could change if the detailed rules are not written in a way that it's consistent with our understanding of the spirit of what Congress and the administration wanted to get accomplished. I cannot stress enough how the stimulus package will have, in our view, longer term benefits for us and our industry.

As a reminder, our adjusted earnings expectations include, among other things, the assumption of normal weather and operating conditions, no further significant decline in the national or Florida 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 a list of additional key assumptions and cautionary statements. Additionally, we continue to feel comfortable with our longstanding goal of growing adjusted EPS by an annual average of at least 10% per year through 2012 off a 2006 space of $3.04.

Let me talk briefly about the market for debt. Although the financing environment has not yet returned to "normal", we feel more confident today than we did in January about our financing prospects. That said we remain cautious because of the unprecedented nature of this recession.

And lastly, later this week we will file with the SEC details of our Enhanced Dividend Reinvestment Program, or DRIP to accommodate more flexibility into the program. The new DRIP will include a direct stock purchase feature that will permit new investors to participate. The change comes following numerous requests we have had from our shareholders and others for additional flexibility to buy the common stock of the company.

Our current DRIP produces about $30 million per year in new share issuances, and although we have incorporated certain additional benefits into the new program, in the short-term we see the opportunity for only very modest additional issuances with these changes. Of course, this summary of the new program does not constitute an offer of any securities for sale.

With that, let me now turn the call back over to Lou for some concluding remarks.

Lewis Hay

We really do think this is a fabulous time to be in the renewable energy business. As a company, we remain committed to financial discipline, financial strength and operational excellence. This is reflected in the fact that we were recently named number one on Fortune Magazine's list of the most admired electric power companies for the third year in a row. We also remain exceptionally well positioned for a carbon constrained world.

We are the nation's number one producer of wind and solar power. We operate the nation's third largest nuclear fleet and one of the largest fleets of natural gas generators, which emit only half the carbon of coal plants. At Florida Power and Light, we've sponsored efficiency programs for decades and have avoided the need to build 12 power plants, more than any other utility in the nation. And we will continue to lay the foundation for more energy conservation and improve the reliability for our customers with energy smart Miami.

Together, the FPL Group Companies have one of the lowest CO2 emission rates in the nation. In fact, if every utility were as clean as FPL Group, carbon dioxide emissions from the power sector would be reduced by 49%. Total U.S. carbon emissions would be reduced by 20%, which is the equivalent of removing 209 million cars from the road, that's roughly 80% of all the vehicles in the nation.

We will continue to expand our renewables fleet to take advantage of the opportunities presented by the nation's growing commitment to clean energy. By the end of 2010, we expect to have roughly 9,000 megawatts of renewable energy capacity, larger than the entire generation fleets of most utilities in the nation. We are particularly excited about the prospects for solar power. In fact, we think solar today is where wind was ten years ago, on the cusp of a dramatic expansion that will change the shape of the electricity industry.

Now, this is not to deny that we are affected by the current economic downturn. Of course we are. The protracted slump in Florida has had a negative impact on FPL and sharply lower natural gas prices are impacting NextEra Energy Resources. But we believe both of those trends are cyclical and will reverse along with the fortunes of the broader economy. As for the secular trend in the industry it is clear. We expect demand for low carbon energy will continue to rise, spurred by a C change in government policy and that's good news for FPL Group.

Finally, I want to say a word about our team. It's one thing to have great plans, sound finances, great technology and the like. But at the end of the day it takes great people to bring it all together and deliver value for our shareholders, especially during trying times like those we've all endured over the last few months. Without a doubt, from an overall industry perspective the number of high quality growth opportunities has dropped due to the weakness in our economy.

Nonetheless, we continue to grow and we continue to find attractive growth opportunities because our entire team is very focused and they understand the importance of out-hustling the competition every single day. And I can assure you, they are out there hustling every single day to make the most of the opportunities that are out there. Day in, day out, I'm just amazed and I'll leave it at that.

Thank you for joining us today and for your continued interest in FPL Group. With that, I'll turn the call over to the conference moderator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Daniel Eggers - Credit Suisse.

Daniel Eggers – Credit Suisse

Armando, can you, just on this convertible ITC structure the $0.15 EPS improvement if I just look at the table you guys give. Is that kind of implying that you expect somewhere between 600 and 700 megawatts of the new build this year to be full year qualifying under the convertible ITC. If I just take the two point two cents at 100 megawatts and multiply it back into $0.15 is that fair?

Armando Pimental

Yes, I think that's a reasonable assumption. I think you're right in the range.

Daniel Eggers – Credit Suisse

I apologize, I'm trying to play catch-up a little bit this morning, but if I were to compare the shape of EPS contribution from the convertible ITC at 100 megawatts versus a traditional PTC driven structure with a ten-year PTC structure, how does EPS or how does your earnings shape vary between this. I guess it's flat, I suppose for the first ten years mostly of a PTC, but how does that reshape earnings?

Armando Pimental

Very generally, by taking the convertible ITC instead of the PTC what you're going to do is you're going to have higher earnings the first year. You'll have essentially lower earnings after that from about years two through ten, and then you will have higher earnings after year ten.

And the reason for that, just to give you a little bit more flavor, the reason for that obviously we take the PTC s away, PTCs last through year ten, so you will have a little lower earnings, on the ITC basis, but after year ten because the convertible ITC actually reduces the basis in your fixed assets from day one you actually have lower appreciation expense after year ten.

But what's important to remember, because obviously earnings are very important to us and they're very important to you and to our investors. What's important to remember is a couple of other things that we look at. One, we look at what the ROEs and the un-levered IRRs are for the project and those have a great deal to do with the company taxable position, but also have a great deal to do with on a wind project, how much the wind blows. The higher it blows the more production tax credits, obviously, you would get.

And the other thing that it does, when taking the convertible ITCs, as opposed to the production tax credits, it gives you a whole heck of a lot of certainty when it comes to cash. Convertible ITC, you essentially get 30% of the qualified construction cost of the project in cash 60 days after COD or 60 days after application.

When you're dealing with production tax credits, you need to estimate what your taxable income is going to be in the future and determine when in essence you're going to be able to use those tax credits in the future, which is an easy enough calculation if you can determine what additional tax incentives Congress and others may give you in the future.

But cash shouldn't be overlooked. It's a big, big amount for us. Your example there of the 600 to 700, if you just use 700 megawatts and you multiply that times $2,000 of KW, it's about $1.4 billion, 30% of that's over $500 million that would be coming back to us within the next 12 months or so.

Daniel Eggers – Credit Suisse

If I think about that $500 million and then I think about you have some of the other incentives in this stimulus as far as broader cumulative or slow rated depreciation programs. How much extra cash do you think you're going to pull in for 2009 because of government programs and you probably thought going into the year, and how is that affecting the thought process as far as maybe buying assets or accelerating some of the capital programs on the wind pipeline or solar projects?

Armando Pimental

First, it took three questions to get to what are the M&A possibilities around the wind sector, so I'm surprised. The way that I look at it and this is kind of rough, right, and everyone can do their own calculations, but when we build wind projects we try to build them randomly throughout the year. But really what's been happening the last couple of years is a bunch of the wind projects we actually complete during the fourth quarter of any year.

And so remember what I said about the cash. You get the cash 60 days after COD or 60 days after application for the convertible ITCs. So I would expect roughly 1/5 of the amount of any one year, 1/5 to 1/4 of the amount of the cash for you to get in the current year. So that'd be about $80 to $100 million or so in 2009, and the rest of that hypothetical $500 million that we talked about we'd essentially be getting in the first quarter of 2010.

We've got all sorts, obviously, of opportunities to use the cash. There are a number of projects out there that are looking for new owners. We don't comment on those. There's a reason why none have been announced in the industry by us and others, and my view is that the bid and ask is still a little too far a part.

Daniel Eggers – Credit Suisse

And one last question. I apologize for commandeering, but where do you guys stand on the wind development pipeline? Has that changed any from prior calls?

Armando Pimental

It has and we have been saying approximately 1,100 for 2009 and today we said over 1,000. I wouldn't read too much into that change. We round up or we round down and, in some cases, an addition that we might be willing to make to a plant that was under construction, we decide later on that it's not a good idea to do. So we're still on track with where we were in the first quarter for 2009, and for 2010, 1,000 to 2,000 and we'll refine that probably in the third quarter this year.

Dan, I'd like to go on to the next person.

Lewis Hay

Can I just say one thing on that, though, Armando. We really have firmed things up. When we were talking about our development programs even just a quarter ago, in light of the economy, we said, hey, the numbers could go up, they could go down, they could stay the same, and that we were trying to be very flexible. So this has really helped us, at least for the moment and under the conditions as they stand today, firmed up our development plans.

Operator

Your next question comes from Greg Gordon – Citi Investment Research.

Greg Gordon – Citi Investment Research

Just to be a dead horse a little bit, but a quick question. Last time we talked about the earnings impact of an average project under what I'll call the traditional accounting using a PTC, for lack of a better terminology, the average earnings impact per 100 megawatts was, and correct me if I'm wrong, a little over a penny and sort of level to rising modestly over the first ten years because there's escalators in the average contract, right?

Armando Pimental

Right, and what we had said is about a penny or so for the first five years, I think is what we've said, and that's the information that we've provided in a very similar format to what we provided today.

Greg Gordon – Citi Investment Research

That's perfect. That gives us context on how the structure changes through this selection. Obviously, the ROEs are much higher because you're getting a lot more of your cash back now up front, in addition to the makers.

Armando Pimental

They're higher they're not totally inconsistent with what we had seen before.

Greg Gordon – Citi Investment Research

On the regulatory front, switching to FP&L, at what point on this time line, if you were looking at prior precedent would you be in a window where settlement negotiations would traditionally occur?

Armando Pimental

It's a popular question, so you'd think I'd have, well, here are the three bullet points and here they are, but there are different perspectives. I would say if we look at where we were in the future, I mean last time it was the evening, very late in the evening before we were actually supposed to start the rate hearings that we reached a settlement. If the same thing happened this time, it would be the third week of August.

Others would say, and by others I would mean interested others at the company or outside the company, that a good time would be sometime in June or July. As interveners have provided us some information, we have provided them more information, so you and start seeing some of the details.

I, personally, would think that it would be sometime in July and August. That's an educated, not a total guess, that's an educated guess on my part, but I wouldn't hold out a lot of hope on the investor community that we would see a settlement.

We are absolutely prepared to go into hearings in the third and fourth week of August and we think we have a great case and that's what we're prepared to do. But as always, we are willing to negotiate and to listen and to see if we can come up with something that will save both us and others some time.

Greg Gordon – Citi Investment Research

On the financing needs of the company, given that you're obviously in a position now to bring more cash in upfront, at least at the wind business, if anything it looks like the consolidated cash flow profile of the company is better, at least for fiscal year '09 and probably as long as the selection period is open than it otherwise would be. Can you talk about what your needs for incremental debt and/or equity look like now versus what they might have looked like before you had the option to take these selections?

Armando Pimental

Let me give you a brief summary of '09. We expect cash flow from operations of about $4.5 billion this year. If you remove CapEx and dividends and you add what we have to refinance, you essentially get new financings that we would have to come up this year of about $3.1 billion or so. Through the first three months of this year, we've got $1.6 billion out the door in grand style, I might add.

I think our treasury folks have really done a terrific job the first three months of this year, and I have pretty good, I'd say darn good visibility into the other $1.6 billion, so I feel fairly comfortable with our position this year and what remains to be done. And for 2010, one of the nice things about 2010, by taking convertible ITCs you're adding a significant amount of cash in 2010, but we also have no significant bullet maturities in 2010.

In 2009, we have bullet maturities of about $1.2 billion or so and for 2010, I think it's more in the neighborhood of $200 million. So, it's never a good time for a slowdown in the credit markets, but this one happened at a time where we're in good position.

Operator

Your next question come from [Asur Kahn] – Incremental Capital.

[Asur Kahn] – Incremental Capital

I just wanted to understand, you booked $0.04 so that means you're going to book $0.04 each quarter, right? That will be incremental earnings versus prior year as we go throughout the year, there'll be $0.04 additional to the convertible ITC in the second, third and fourth quarters, is that correct?

Armando Pimental

Yes, that's roughly correct. I say roughly and I kind of cringe a little bit because the accounting is a little more precise than that. It actually needs to follow the pattern of taxable income throughout the year and, as you and others will recall our taxable income tends to be higher in the third quarter than it does in other quarters. But the $0.16 or so, I think if you have that in your mind that's reasonable. Just don't assume that's $0.04, $0.04, $0.04 and $0.04.

[Asur Kahn] – Incremental Capital

And the other thing, if I can ask, there's been a change in the 2010 new asset additions. Previously, you had no wind development in 2010 now you're saying wind development in 2009 and 2010. Can you give us roughly what you're projecting in that line?

Armando Pimental

The reason that we didn't have it in there before, we generally provide that guidance again with our third quarter call, but in the third quarter last year things were a little hairy, as you remember, so we decided that we would just say that we expected 1,000 to 2,000 megawatts, but we weren't willing to add that into the gross margin tables at that point.

We also didn't do it in the fourth quarter. So this is the first time that we do it. The 1,000 to 2,000 we're not really saying how much is in there at this point, but if you estimate a number right around I'd say the mid range, you're not going to be too far off.

Operator

Your next question comes from Jonathan Arnold – Merrill Lynch.

Jonathan Arnold – Merrill Lynch

Just a quick question on the way you're thinking about this convertible ITC, I'm sorry to come back to this. How much variability would you see in the potential number of projects that you'd make the selection for and how likely is it that that would change much as you look at the pipeline moving forward?

Would it be a similar assumption on 2010 or is the nature of the projects in the pipeline such that you can see a very different type of election each year?

Armando Pimental

By the way, this is an important issue to us and should be an important issue to you, so I don't mind answering this and other questions related to it. The way I'd look at it is, once we make the estimate for the year like we have this year which is roughly 600 to 700 megawatts, I wouldn't expect that number to go down.

We spend a lot of time looking at the individual projects, assessing their individual economics and so on, and so I would not expect that number to go down. And so, you figure that's a roughly 70%, or let's just use 70% at this point, or 2/3 of what we expect to build this year. I think using a number around 2/3 for your estimates of what you think we're going to get done in 2010 is reasonable. I think using a number around 2/3 for 2011 is probably on the top end, but we'll know more about that in the third quarter of this year.

I tried to say a couple of times, hopefully you guys picked it up I'll say it again. We've been talking to a lot of people, we have read the stimulus package at least 1,000 times, and we believe we have great interpretations. We've spoken to the accounting firms and so on. If for some reason the detailed rules surprise, not just us, but surprise everybody when they come out on how tax credits are supposed to be applied for and what they will be applied to and so on, then our interpretations will change. So will everybody else's, but ours will change.

But holding that out to the side a second because I really don't expect that to happen, if you use a 2/3 number for '09, a 2/3 number for 2010, and no more than 2/3 for 2011, you'll be right in the ballpark of what we expect.

Jonathan Arnold – Merrill Lynch

And if I may, just on the state tax incentives that you referenced in this quarter are those something we should think of as more of an ongoing item or were they just specific to some certain projects?

Armando Pimental

Yes, it won't be ongoing all the time. In other words, you won't see it every quarter, but there are a number of states that have state tax incentives. This one was an investment tax credit. Investing in states with additional incentives is very, very attractive to us, as you might imagine. So, it wouldn't be something that I would just regard as a one-time item never to be seen again. I would expect to be taking these in the future again.

Jonathan Arnold – Merrill Lynch

But was this one unusually large or is this kind of a normal course of business?

Armando Pimental

No, not unusually large. Recall that NextEra Energy Resources for ITC, investment tax credits, is on the flow-through method. And so the flow-through method means when you actually take the investment tax credit, the whole amount flows to income.

So you take the qualified capital cost of the project, you multiply it times the ITC rate in the effective state, and that flows to the bottom line. So it's not that, I guess it could be unusually large if you believe that the project was unusually large, and it wasn't it was an average size project. A smaller project would get you a smaller ITC.

Jonathan Arnold – Merrill Lynch

But this quarter's number was just like on one project, is that …?

Armando Pimental

Ninety-seven percent of the number, if you will, was on one project, yes.

Operator

Your next question comes from Steve Fleishman – Catapult.

Steve Fleishman – Catapult

You may have said this, but just one clarification. The rules for the stimulus bill, the convertible ITC, etc. When do you expect the detailed rules to be available?

Armando Pimental

Let me break that up between rules, accounting rules if you will, which those interpretations are done, and break it out between the applications and when all the detailed rules for making the application and what qualifies and so on. And I would expect those out sometime in July.

Steve Fleishman – Catapult

Okay, so the accounting interpretations are done, but the rules for what it takes to get to apply for it?

Armando Pimental

Yes, right. I mean, at some point we will get the actual application from the Department of Treasury, we'll get interpretations on how item A should be applied and whether item B falls into the convertible ITC camp, and we'll get a whole what needs to be done and filed and so on. And when all that comes out, which we would expect to happen late second quarter maybe early third quarter, then those will hopefully be consistent with everything that we're hearing based on the discussions we're having with the folks that are supposed to write those interpretations.

Lewis Hay

Steve, this is Lou. I want to add one thing though and I don't think I'm going out on a limb in saying this. As we read the legislation, it is much more specific and clear in regard to the ITC and convertible ITC than it is in regard to things like loans and grants. So that doesn't mean our interpretation is, how it's going to work is absolutely spot on but we have a lot more confidence in that than the other kinds of programs that have been laid out in the stimulus bill.

Operator

Your next question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

The slide 17, the non-asset based margin is decreasing versus last quarter for 2010. I'm sorry if I missed this. What's causing that?

Armando Pimental

It's a reclassification. In the fourth quarter call, we took an asset-based business from the new additions category of the 2010 slide and we moved it to non-asset based businesses. And so I had to answer a lot of calls, a lot of questions in the fourth quarter, why are you increasing non-asset based businesses, and we really weren't increasing it, we were just re-classing asset-based business down. So all I've done for this quarter is just brought it back up into asset-based.

Paul Patterson – Glenrock Associates

And then on page 14 of the press release, deferred income taxes, if I'm reading its small print, but I think deferred income taxes went way up for NextEra Energy Resources to about $200 million.

Armando Pimental

I think it should have gone bonus depreciation in 2009 is the result of that.

Paul Patterson – Glenrock Associates

But I mean, so when we're looking at this for, what should we expect I mean I guess from a cash flow perspective, is this going to even out I guess this year? It just seems like a sort of large negative number.

Armando Pimental

Yes, it will even out. Let me say it this way, it's not going to even out, the more bonus depreciation that you have, right, and we have bonus depreciation in 2009, we don't have bonus deprecation yet in 2010. The more bonus depreciation you have, the more your deferred income taxes are going to go up.

Now, if you're particularly focused on the cash flow statement, the cash flow statement for 2009 is sort of what I went through before, which is going to be we now expect about $4.5 billion of cash flow from operations, and that cash flow from operations is being helped by the convertible ITC around $80 to $100 million that we're going to get this year.

The difference though, if you will, again, I'm just trying to, if you're focused on the cash flow statement, the big difference for the quarter on the cash flow statement is really just margin cash that we were getting in the first quarter of last year as opposed to the first quarter of this year. But I wouldn't expect deferred taxes to make a big impact on the cash flow statement for this year.

Operator

Your final question comes from Annie Tsao – AllianceBernstein.

Annie Tsao – AllianceBernstein

Just wondering on the Florida Power & Light, can you break it down to your retail kilowatt sales in terms of the usage growth, weather, and underlying usage growth for the quarter?

Armando Pimental

The weather was about 0.2% negative and usage was 4.6% negative.

Annie Tsao – AllianceBernstein

Customer growth?

Armando Pimental

I'm sorry. Customer growth was, hold on just a second, Annie. I've got it right here. Customer growth was 0.4% negative and the other, so 0.2% for weather and 4.2% for usage.

Annie Tsao – AllianceBernstein

Can you also, in terms of ERCOT, can you talk about review the quarter because you talked about the assets of wind and the low commodity prices. How should we think about that going forward and what happened in the first quarter?

Armando Pimental

ERCOT in the first quarter was, our gas assets in ERCOT were about down $0.03 or so. It was actually not such a bad quarter in ERCOT because our wind assets actually did better than last year. There was less congestion, even though the wind resource was down a little. And our Gexa retail operations were up about a penny or so from last year. Remember, in ERCOT we're very highly hedged for 2009. And in 2010, we're also very well hedged on the wind side in ERCOT and about 9% hedged on our gas assets in ERCOT.

Operator

That does conclude today's question and answer session. I'd like to turn it back over to management for any additional or closing remarks.

Jim von Riesemann

Thanks, everyone, for joining us today and that concludes our call.

Operator

Once again, ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may now disconnect.

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Source: FPL Group Inc. Q1 2009 Earnings Call Transcript
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