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FPL Group, Inc. (FPL-OLD)

Q2 2009 Earnings Call

July 28, 2009 9:00 am ET

Executives

Jim von Riesemann – Director, Investor Relations

Lewis Hay – Chairman and Chief Executive Officer

Armando Pimental – Chief Financial Officer

James Robo – President and Chief Operating Officer

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

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

Analysts

Greg Gordon – Morgan Stanley

Daniel Eggers – Credit Suisse

Ryan Mooney – Duquense Capital

Daniele Seitz - Dudack Research Group

Riza [Hattisi] – [KK] Capital

Brian Chin – Citigroup

Andrew Levy – Incremental Capital

Paul Ridzon - Keybanc Capital Markets

Paul Patterson – Glenrock Associates

Operator

Good day everyone and welcome to today’s FPL Group second quarter 2009 earnings release conference. Today’s call is being recorded. There will be a question and answer session after today’s presentation. (Operator Instructions)

Now for opening remarks and introductions I’d like to turn the conference over to Jim von Riesemann. Please go ahead, sir.

Jim von Riesemann

Good morning everyone and welcome to our second quarter 2009 earnings conference call. Lew 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. He 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, Armando Olivera, President and CEO of Florida Power & Light, 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.

We will be making statements during this call are forward-looking. This statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today’s earnings press release and the comments made during this conference call in the risk factor section accompanying this presentation and in our latest reports and filings with the Securities and Exchange Commission, each of which can be found in the investor’s section of our website, www.fplgroup.com. We do not undertake any duty to update any forward-looking statements.

Please also note that today’s presentation includes references to adjusted earnings which is a non-GAAP financial measure. You should refer to the information contained in the slides accompanying this presentation for additional information and reconciliations of the non-GAAP measures to the closest GAAP financial measure.

Now I’d like to turn the call over to Lew Hay.

Lewis Hay

Thank you, Jim and good morning everyone. Let me begin by saying that the economic conditions that we and our industry are facing remain very challenging. Even so, on an adjusted basis we were able to grow FPL Group’s earnings per share for the second quarter by more than 6% from $0.93 to $0.99. On the same basis, our year-to-date earnings per share have grown 11% versus last year.

NextEra Energy Resources had another strong quarter with adjusted EPS growing 29% year-over-year. The principal drivers were the company’s investments in new end energy projects which were up by roughly 1,370 megawatts year-over-year, the positive effects of the American Recovery and Reinvestment Act, which allows us to take the value of Federal wind production tax credits in the form of cash grants, and strong performance from our wholesale marketing and trading business.

These results were achieved despite additional challenges during the second quarter in the form of poor wind resource and unfavorable market conditions for our fossil power plants in Texas. At Florida Power & Light, earnings per share declined by 4% in the second quarter on a year-over-year basis. These results were negatively impacted by the ongoing weakness in the Florida economy with retail sales declining by 2.8% and usage per retail customer declining by 2.5% year-over-year.

Meanwhile, our long term commitment to providing our customers with affordable, reliable, and clean energy continued in the quarter. We recently submitted our request to the Florida Public Service Commission to build a new underground natural gas pipeline which will diversify and protect the state’s supply of natural gas.

We believe that the investments we are making in Florida combined with NextEra Energy Resources growing renewable energy fleet are positioning FPL Group exceptionally well for the low carbon economy of the future. That future came closer to reality last month when the US House of Representatives passed the American Clean Energy and Security Act, also known as the Waxman Markey Bill. For the first time ever, a body of the US Congress voted to regulate the carbon emissions believed to contribute to climate change.

The central provision of the bill is the cap and trade mechanism that would set a price on carbon dioxide and other greenhouse gas emissions. Over the long term, pricing carbon is the only way to create a level playing field between renewable energy and higher emitting fuels.

The bill would also create a national renewal electricity standard for utilities to derive a growing percentage of their electricity from renewable resources over time. This is an exceptionally important part of the bill and one that would fuel the future growth of renewable in the United States.

Just as important, the bill would provide financial protections for utility customers to ensure that the transition to a low carbon future is affordable, which his especially critical during an economic downturn.

The US Senate is scheduled to take up its own energy and climate bill this fall. While the road to 60 votes in the Senate is more challenging than the road to 218 in the House, I sincerely hope the right compromises can be found to ensure passage.

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

Armando Pimental

Thank you, Lew, and good morning everyone. In the second quarter of 2009 FPL Group’s GAAP net income results were $370 million or $0.91 per share compared to $209 million or $0.52 per share during the second quarter of 2008. FPL Group’s adjusted 2009 second quarter earnings and EPS were $401 million and $0.99 respectively compared with $375 million or $0.93 per share in 2008.

The difference between the GAAP results and the adjusted results this quarter is a negative mark in our non-qualifying hedge category and the exclusion of other than temporary impairments or OTTI which were zero in the just completed quarters.

Before moving to our quarterly results details, let me remind everyone that weather, which includes the wind resource, can significantly affect our financial results. The accompanying slide provides two columns that reflect the effects of weather in the quarter compared to both the prior year’s comparable quarter and normal.

Based on normal weather, our quarterly results for 2008 and 2009 would have been $0.87 and $1.08 per share respectively. Favorable weather helped the EPS contributions by $0.03 in each year. However, for NextEra Energy Resources, the story is mixed. In 2008 weather was favorable by $0.03 per share but in 2009 it was unfavorable by $0.06 per share. Thus the comparative quarterly share results adjusted for weather are actually $0.15 higher rather than the $0.06 we reported.

As I mentioned a moment ago, FPL Group’s 2009 and 2008 adjusted EPS were $0.99 and $0.93 respectively. As a reminder, our adjusted results that we communicate to the investment community include only adjustments for non-qualifying hedges and OTTI. So all the weather effects are included in adjusted earnings. We felt it was important in this quarter to specifically communicate this variance.

For several quarters now we have been providing to you information that gives you a very good idea as to how actual wind resource results differ from expected long term averages. We have again provided that information in the appendix. In the second quarter the wind resource was approximately 89% of the long term expected average. During the second quarter last year, the comparable percentage was 106%.

As we have been noting for some time, Florida Power & Light continues to be challenged on the revenue front given the downturn in both the state and national economies. The second quarter results reflect the continuation of those trends. Underlying sales volumes which are a function of customer growth and electricity usage continue to experience downward pressure. We expect this downward pressure to continue for the immediate future.

In just a few moments I will provide the additional color on the Florida economy and how it is affecting some of the key metrics that we closely monitor.

O&M expense was essentially flat with last year’s comparable quarter. For the full year notwithstanding the second quarter results we continue to see increases in nuclear and fossil generation costs, higher employee benefits expense, and higher customer service costs and being the main drivers of full year base O&M growth.

Our strategy of growing our wholesale business moved forward in June with the approval of two new contracts by the Federal Energy Regulatory Commission. The first approval was for a long term full requirements contract with the Leed County Electric Co-op will provide about 1100 megawatts of power of the life of the contract that runs from 2014 to 2033.

The second FERC approval was a wholesale opportunity with the seminal co-op where we’ve agreed to provide up to 200 megawatts of firm capacity as associated firm energy beginning in 2014 and ending in mid 2021. As part of our new nuclear generation project, on June 30 we filed the combined license application with the US Nuclear Regulatory Commission. This application is part of a step wise approach to preserve the option to build additional nuclear generation for the benefit of our customers at the current Turkey Point Nuclear Site. [inaudible] process normally takes 3.5 years.

Now before moving to the specifics of the quarter, let me briefly address the pending rate proceeding at Florida Power & Light. As many of you know, we are well into the regulatory proceedings governing our base rate increase request. Hearings are currently scheduled to begin August 24 and run through September 4. A decision on our rate case is currently slated for a special agenda meeting on October 28. Select filings and testimony related to the rate case can be found on our website.

Now let’s turn to a review of the factors underpinning FPL’s results. Second quarter 2009 earnings at Florida Power & Light were $213 million, down from $217 million a year ago. The corresponding earnings per share contribution was $0.52 this year versus $0.54 in 2008.

As I mentioned a moment ago, Florida Power & Light continues to be challenged by the state of the economy. To help put into perspective the trends that we are seeing in terms of customer metrics, the June 2009 statistics show that Florida unemployment rate is 10.6% or approximately 110 basis points above the national average. At this time last year, the state’s unemployment rate stood at 6%.

With this as a backdrop, let’s now turn to the four graphs on the accompanying slide starting with the two on the top. The upper left hand graph shows customer growth. We experienced a decline in customer growth this quarter. Keep in mind that some of the improvement during the first quarter can be attributed to seasonality. The same holds true for the second quarter.

On a relative basis, as of June 30, 2009, we had approximately 16,000 fewer customers that we did at the end of June 2008. The table in the upper right hand corner of this slide shows the change in retail kilowatt sales growth versus last year’s comparable period. Overall, retail kilowatt hour sales fell 2.8% during the quarter, primarily due to lower usage which is driven by an increase in low usage and inactive customer accounts. Usage growth associated with weather only decreased 0.1% quarter-over-quarter.

The graph in the lower left 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 about 68,500 to approximately 313,000. This figure is higher by approximately 12,000 since the end of the first quarter of 2009.

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.

In sum, the general economic environment remains problematic. There are some glimmers that at least the rate of economic decline appears to have slowed, but there is not enough evidence to suggest that the Florida economy is starting to recover.

The table shown here summarizes the earnings drivers for Florida Power & Light for the just completed quarter. In total, the quarterly comparison was down by $0.02 per share. Relative to our plan we ended the quarter a few pennies below our expectations.

Let me now turn to NextEra Energy Resources where adjusted earnings per share improved by 29% year-over-year. The growth in NextEra Energy Resources earnings contribution was driven by new investments, our wholesale marketing and trading business, and our retail energy business, but was partially offset by a poor wind resource and lower ERCOT spark spreads.

Our wind development continues to make progress and we have approximately 820 megawatts of new wind projects under construction or already approved towards our goal of adding about 1000 megawatts this year. I will have more to say about our renewable development pipeline momentarily.

Our gross margins are significantly hedged for 2009 and 2010 and I will also have more to say on this later in the call. For the second quarter of 2009, NextEra Energy Resources GAAP earnings were $186 million or $0.46 per share compared with $3 million or $0.01 per share in the prior period results.

Adjusted earnings for the same period which exclude the effect of non-qualifying hedges and net OTTI were $217 million compared to $169 million. The equivalent earnings per share contributions were $0.54 and $0.42 respectively. NextEra Energy Resources second quarter adjusted EPS increased $0.12 from last year’s comparable quarter. New investments contributed $0.09 per share driven by approximately 1370 megawatts of new wind relative to last year’s second quarter. Of this $0.09 incremental contribution, approximately $0.04 per share can be attributed to our decision to utilize convertible ITCs on 685 megawatts of wind build expected this year.

The existing portfolio is down $0.02 relative to a year ago with several puts and takes across our existing wind merchant and contracted portfolios. A lower wind resource was the primary driver behind a $0.06 per share incremental decline in the existing wind portfolio.

As I indicated before, the wind resource in last year’s second quarter was a bit above average; this year, it was quite a bit below. Our exiting merchant fleet produced mixed performance. The absence of a refueling outage at our Seabrook nuclear facility coupled with higher priced hedges helped a comparative NEPOOL results by $0.08 per share but lower sparks spread than our ERCOT gas fleet largely offset this.

Meanwhile, our retail business in Texas which is included as part of our existing business on this slide added about $0.05 per share incrementally given favorable margins. As a reminder, we look at the entire ERCOT operation including the Texas retail business as a single portfolio. Excluding the lower wind resources, we are about $0.03 below planned for the year-to-date.

Wholesale [inaudible] activity increased by $0.09. A major driver of this is a significant mark to market loss recorded in last year’s second quarter as a result of economic hedges placed on some of our asset positions that did not meet our strict non-qualifying our NQH criteria versus a strong gain for similar reasons this year.

As a reminder, the types of transactions we classify as non qualifying hedges are those that we can identify as offsetting economic results in our physical assets. As I’ve indicated before, quarterly results from this segment will often be higher or lower than we expect based on a number of factors including market volatility and opportunities.

On a full year basis for 2009 we expect that the contribution percentage from this segment will remain similar to what it has been historically as part of the greater NextEra Energy Resources business. All other factors netted to a loss of $0.04 per share. Of this, $0.02 is attributable to incremental interest expense and $0.01 to general and administrative expenses associated with the growth of the asset base.

Let me now turn to the American Recovery and Reinvestment Act of 2009, also known as the stimulus package, which was enacted into law in February. You’ll recall that under the legislation the accounting implications were known for those who expected to elect to take cash grants in lieu of tax credits but that the Treasury rules regarding these grants were still not known. Earlier this month the Treasury released its guidelines and they were consistent with the intent of the stimulus package.

I want to spend just a brief moment highlighting the key provisions under these Treasury rules for companies like FPL Group who will opt to take these cash grants in lieu of tax credits, also known as convertible ITCs. First, the convertible ITC provides for a cash payment of approximately 30% of the qualified costs for specified energy property within 60 days of the later of the application date or the projects in service date. Specified energy properties include wind, solar, and incremental hydro. Applications for these Treasury grants must be received before October, 2011.

Second, the energy property must be placed into service during 2009 or 2010 or have begun construction by the end of 2010. For wind, construction must be completed by the end of 2012, and for solar, the expiration date is 2016.

Finally, the definition of in construction means that a significant physical work has begun. An entire wind farm may qualify if more than 5% of the total cost of the property has been incurred.

We have continued to evaluate each of our 2009 wind projects on their economics over several different scenarios and may decide in the future to increase a number of projects that we currently have slated to take convertible ITCs. As a reminder, this new tax credit policy has created valuable options for us and has enhanced our ability to provide earnings growth and cash flows through 2012 for wind and 2016 for solar.

While we will have more to say regarding our longer term wind development plans in the third quarter earnings call, it is appropriate to spend some time here talking about certain drivers.

First, it is becoming clear that the economic situation in the United States is causing some entities to delay consideration of signing longer term power purchase agreements for wind generated energy. Primarily this appears to be manifesting itself as a result of the significant reduction in load growth across most of the US during the last several quarters.

Second, although the long term view of renewable energy tax credit policy is very positive for our industry, this longer term transparency is causing some buyers of wind generated energy to delay decisions on signing long term contracts in the short term.

Third, although we are very excited about the House passage of the Waxman Markey bill, the political uncertainty regarding Federal renewable portfolio standards and carbon pricing may be negatively impacting customer demand for renewable energy projects in the short term.

We believe these are temporary issues associated directly or indirectly with the current economic situation in the US and expect these challenges to sort themselves out as soon as the economy picks up. To be clear, we still expect to add approximately 1000 megawatts of wind this year and roughly 1000 megawatts of wind next year. Those are substantial amounts in and of themselves, especially when you consider that our closest competitor only had approximately 2000 megawatts of wind energy in the US at the end of last year.

In addition, we remain quite content with the longer term development of many of our wind projects. We are also seeing increased activity on the solar development side of our business and although the lead time for solar development from development to construction to completion will be longer than wind, the activity in this area is positive.

However, based on our visibility today, getting to the low end of our previously announced 2008 to 2012 new wind range of 7000 to 9000 megawatts may be overly optimistic given the current economic environment. We expect to have more to say regarding our longer term development plans during our third quarter earnings call.

At the same time we continue to be active in looking at certain distressed wind plants which, absent the current economic situation, these opportunities would likely not be available.

Let’s now focus on our 2010 expected gross margin and hedging status. The midpoint of our expected equivalent gross margin for 2010 is approximately $65 million lower relative to the one we shared with you during the first quarter earnings call. Keep in mind that this is a pre-tax figure. It reflects a somewhat lower level of investment and associated costs and that we manage the cost components aggressively so not all of this reduction will necessarily fall to the bottom line.

Let me explain the key differences among the puts and takes between the hedging slide shown here and the one we showed you previously. The most significant changes in the new asset addition category, specifically the reduction in new wind build I referenced a moment ago and the flow through that affects our revenue, production tax credit, and convertible ITC expectations. Combined, these three items reflect the majority of the expected $90 million gross margin decline for this category.

Our expected ERCOT spark spread gross margin contributions are lower by about $55 million, mostly reflecting continued spark spread weakness and lower anticipated margins on ancillary service and option sales.

Conversely, our NEPOOL portfolio was higher by about $35 million and is being driven primarily by a combination of lower fuel costs, greater expected production, and improved spark spreads. The improvement in our non-asset based business gross margin of about $35 million reflects improved performance in our wholesale business as well as our retail energy business and is consistent with the performance we have seen in these businesses to date.

As a reminder, the gross margin figures and hedged percentages that we share with you are based on the expected output from the assets. Intrinsic value of the unhedged portion and the extrinsic or option value of the assets are marked to current market forward prices. We utilize historical market clearing prices to estimate the ancillary services value of the portfolio and we build in a small amount of judgment based on our market expectations.

We continue to take steps to minimize the risks and improve the visibility of the earnings and cash flow profiles of the portfolio. A recent example is our Calhoun project, a 668 megawatt peaking facility that currently sells capacity and energy to a southeast utility through 2011. During the second quarter of this year we finalized an extension of the contract that provides us with fixed capacity payments through 2022. The project went from having a potential merchant exposure and a bilateral market with low pricing and dispatch to one with fixed capacity payments that could support non-recourse financing.

The end result is NextEra Energy Resources’ remaining risk is essentially operational. This is not the only example of us entering into additional non-wind long term power sales agreements. Over the last year and a half or so we have either extended or signed new long term power sales agreements on approximately 1,250 megawatts of natural gas powered generation plants that are scheduled to take effect in 2010.

The earnings sensitivity to changes in natural gas prices on our 2010 open positions is modest. For every $1 for [MMB] change in gas prices, the annualized impact is approximately $15 million in after-tax gross margin, equating to roughly $0.047 per share on an after-tax basis at FPL Group. The appendix to this presentation contains detailed slides on our 2009 gross margin and hedging positions. We plan to provide details on our 2011 hedge position in conjunction with the third quarter earnings call which is expected in late October.

To summarize, 2009 second quarter results on an adjusted basis, FPL contributed $0.52, NextEra Energy Resources contributed $0.54, and corporate and other was a negative $0.07 contribution. That is a total of $0.99 compared to $0.93 in the 2008 second quarter or about a 6.5% increase year-over-year.

Before turning the call back to Lew, let me take a few moments to discuss our earnings outlook. For 2009 and 2010 we are reaffirming our adjusted earnings per share expectations of $4.20 to $4.40 and $4.65 to $5.05 respectively.

However, in light of a continued weak economy and the poor wind resource experienced in the second quarter we currently feel more comfortable with the bottom half of the range provided for 2009.

As a reminder, we have only included the convertible ITC financial results of 685 megawatts of new wind in our adjusted EPS guidance for this year. Also recall that our adjusted earnings expectations include among other things the assumptions of normal weather and operating conditions, no further significant decline in the national or Florida economy, a reasonable capital markets and regulatory 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 the base in 2006 of $3.04.

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

Lewis Hay

Thanks, Armando. In my view, the clean energy future we hear so much about is inevitable. The global consensus on the need to address climate change is firm and while nations differ on how quickly to reduce carbon emissions, they are surprisingly united in their desire to become a clean energy leader.

For many years now our goal at FPL Group has been to position ourselves for the coming clean energy economy. We think we’ve done a pretty good job. Our wind fleet is the largest in the nation and we continue to add more capacity each year than any of our competitors. We operate the world’s largest solar fleet, we are building three utility scale solar projects in Florida, and we’re seeing strong interest from our renewable customers for new solar plants.

Our nuclear fleet has grown to become the third largest in the nation and our energy efficiency programs at FPL have avoided the need to build 12 power plants. Along the way we have been careful not to sacrifice shareholder value – quite the contrary. We have outperformed both our peers on the market as a whole, and that’s our commitment going forward as well; that we will execute our strategy in a way that creates long term shareholder value.

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 Greg Gordon – Morgan Stanley.

Greg Gordon – Morgan Stanley

So just to make sure I heard you correctly because I think you were pretty explicit, it’s obvious market conditions and ERCOT have deteriorated, so that adjustment makes sense in terms of the gross margin outlook for ’10 for NextEra Energy Resources, and the lower wind guidance is a function of being at 1000 megawatts of planned new build next year versus the prior range which was 1000 to 2000, so it’s mainly lower expected megawatts, not lower economic performance on the megawatts that you actually construct, is that fair?

Lewis Hay

That’s fair, Greg. I can summarize the 2010 changes to the gross margin side that you have by saying that the new wind, the new asset additions, is down by about $90 million in gross margin. Our NEPOOL assets gross margin are up by about $35 million. ERCOT spark spread is down by about $55 million and then there’s some additional puts and takes that are about $35 million or so, that’s essentially the summary, but you’re right. It’s not the economics of the wind, it’s the fact that we expect at this point to build approximately 1000 megawatts of wind and the last time we showed you and others this slide, we had about 1400 megawatts of wind built into 2010.

Greg Gordon – Morgan Stanley

So you do still expect to be able to contract the megawatts you build but you’re sizing the capital spend to the amount that you expect to be able to contract, or are you expecting to run some of these plants on a merchant basis now because people are reticent to sign contracts?

Lewis Hay

No, it’s the former. That’s exactly the reason why we reduced our expectations for 2010. As we’re sizing up the market this year, we’re looking to next year. Obviously we have discussions with our customers on a regular basis and it’s exactly as you said, we’re bringing it down because we continue to believe this is not the market to be building merchant plans. They certainly can’t be financed in this market.

Greg Gordon – Morgan Stanley

You’ve increased your expected gross margin contribution from the non-asset based businesses. What specific areas have you seen improvement in that portfolio of businesses that gets you comfortable with that? I know you’ve also increased the amount of margin and backlogs. Obviously your visibility is increasing on an absolute and relative basis, but which businesses are performing to the extent that you were comfortable raising that number?

Lewis Hay

Virtually all of that increase in 2010 which is about $35 million or so on the gross margin level is really two things. It’s really improved operations at our retail business in Texas which is a little less than maybe half of that. I won’t give you all the specifics. The other piece is the wholesale business, a large contract that we signed in Ohio that received some media attention a couple of months ago. It worked out very favorably for us. It’s clearly something that we’re interested in on a deal-by-deal basis, not something we’re kind of go whole hog into, but if those opportunities exist out there, we think we can be competitive.

Greg Gordon – Morgan Stanley

One more question on the utility. It looks like accounts receivable are actually down a lot versus the second quarter last year so I guess that goes to the question of whether that’s just a timing issue on when the books closed and begs the question of what you’re seeing in terms of customers paying their bills.

Lewis Hay

Let me take the last bit of that first. When you look at the bad debt results for Florida Power & Light, I mentioned in the first quarter that our receivables greater than 60 days at the end of the first quarter were actually better than they were at the end of the first quarter in ’08 and ’07 and I can tell you that at 6/30, they were better than they were in that same metric, greater than 60 days, greater than ’08, approximately the same in ’07. So we’re very happy. We spent a lot of time monitoring that but we’re very happy with our bad debt collection and our aging of customer receivables.

Your first comment of why it’s lower, it’s a function of timing and fuel prices and so on. There’s nothing else to read into that.

Operator

Your next question comes from Daniel Eggers – Credit Suisse.

Daniel Eggers – Credit Suisse

Just on the wind development and kind of adjusting plans for the economy, really understand the slowdown until people can sign contracts. Are you guys seeing a fundamental change do you think in the rate of growth for when beyond the 2009, 2010 time period and what would be your thinking as far as a policy that needs to be passed or transmission development to kind of buck it out somewhere between 1000 and 2000 megawatts a year?

Armando Pimental

Dan, that’s a good question. Whenever we’ve given out longer term guidance for wind development, as you know, we have a list of caveats that go along with that. Those caveats are continued public policy support, selective transmission build, decent economy, and so on, and I can tell you that the reduction that we’re talking about today really is reflective just of one of them, or mainly one of them, and that’s the economy.

I’m sure you’ve seen the same statistics that we’ve seen this year where load growth across the United States on average is down almost 4%, I think it’s 3.9% or so, on a year-over-year basis. That’s significant.

Some of these utilities that would otherwise be signing longer term agreements now with the increased visibility of tax credits for wind through 2012 are taking their time, especially in light of the economy. I would say that this is not a longer term issue that we’re trying to communicate in pieces. This is what we’re seeing today. We’re talking to our customers today. This is what they’re telling us.

We’re not going to build merchant wind and for us to size our build to what we believe the PPA market is, that’s about 1000 megawatts. We’re still very bullish on wind longer term, but as I indicated, in the third quarter this year we’ll have more to say on our longer term wind and solar development plans.

Mitch Davidson

Let me just chime in here for a minute, Armando. One other factor that’s going on in the wind business that makes me even more optimistic is some of the smaller competitors are going bankrupt. This is a tough business and we’re really well positioned to get our fair share of the business going forward.

Daniel Eggers – Credit Suisse

Are you seeing a window, I know you hadn’t seen any yet, but are you seeing a window now or are you getting closer to the point where you think you’re going to be able to buy some of these smaller developers projects either from the banks or from some sort of bankruptcy arrangement?

Lewis Hay

What I said in the first quarter is that things were going a bit slow, the [bid mask] was still a bit, a little wide, and my expectations were that those things would work themselves out in the third and fourth quarter this year as kind of reality set in and by reality I mean the financial environment that we’re in. There’s just not enough capital at least at this point even with the stimulus package for all developers and I’ll hold to that. I think in the third and fourth quarter this year you’ll see some things getting done. If you see us in it, you can be assured that it’s driven by good economics, it’s not driven by the fact that we just want to add to the megawatt total, but I’m optimistic that some things are get done later in the year.

Daniel Eggers – Credit Suisse

What would be though process for you to raise the amount of wind being built this year and next year that’s going to get ITC treatment versus PTC treatment?

Lewis Hay

I’m sorry Dan, you cut off there at the end.

Daniel Eggers – Credit Suisse

What would cause you to change the allocation between ITC treatment and PTC treatment on the new development projects, some kind of --

Lewis Hay

For this year?

Daniel Eggers – Credit Suisse

Yes.

Lewis Hay

There’s some obvious things. Anything that would reduce our taxable income, an unfortunate event… You figure out what those might be. A good economic event like maybe the passage of bonus appreciation for 2010, that would make us kind of take a look back at all the projects that we are not planning to date to take convertible ITC on and change our mind. We continue to look at those on a quarterly basis to determine whether in fact increasing from the 685 megawatts this year to some other amount makes a lot of sense. You can rest assured that whatever decision we make, we’re going to make on the best available information and it will be an economic decision. It’s not going to be an earnings decision or any other decision. It will be based purely on the economics as we understand it. So we’ll look at it again in the third quarter and decide whether we should take that up from 685 or not.

Operator

Your next question comes from Ryan Mooney – Duquense Capital.

Ryan Mooney – Duquense Capital

A couple questions on the transmission lines that you’re building in Texas right now. My understanding of it is right now you’re building some from the Horse Hollow wind farm in West Texas to South [Sung] but I was wondering if you could provide an update on the timing and size of those lines.

Lewis Hay

I guess a couple of things, just to clear up a couple things. We are as you know, we have been allocated a portion of CREZ. The $5 billion CREZ project we’ve been allocated about $600 million of that. We are currently working to apply for our certificate of need, our CCN, which we expect to file sometime early next year. I think what you’re specifically referring to are some media reports that I’m not going to comment on right now. There is a transmission line being built from West Texas to South Texas. Clearly we’ve seen those reports. We’re not ready to comment on what is happening there, but I did indicate I think the fourth quarter of last year that we have some significant assets in West Texas with a lot of value to us and we weren’t just going to sit around and wait for the market to improve, that there might be other actions that we would take, so I would just repeat the same thing today.

Operator

Your next question comes from Daniele Seitz - Dudack Research Group.

Daniele Seitz - Dudack Research Group

I was just wondering if you could give more information on the pipeline and the schedule as well as which of your organizations [inaudible] to be giving you the [inaudible] to build and how long it will take?

Lewis Hay

I’m sorry Daniele, are you referring to our wind pipeline?

Daniele Seitz - Dudack Research Group

I was thinking of the gas pipeline you have been planning on building?

Lewis Hay

I’m going to let Armando Olivera address that question.

Armando Olivera

As you probably know, we started hearings, four more hearings on the pipeline, and the pipeline probably worked it back up. As you know we got the need certification for the modernization of our Cape Canaveral and our Riviera plants, Canaveral in 2013, at least what we filed as part of the need, and Riviera in 2014. Both of those plants are very efficient combined cycle plants but they have a greater need for gas than the plants they are replacing, in total about 400 MCF of daily gas transportation, and when we went through an RFP process in determining how to increase the gas transportation requirements for those plants and ultimately chose a combination of a self-built portion of the gas pipeline in Florida and then for the interstate portion we chose another company that we have yet to announce because we haven't finalized negotiations with them, but it was pipeline that would go from Stark, Florida to Butler, Alabama, and that also has the added benefit of giving us far greater access to other supply ports in Arkansas, Texas, Oklahoma, and so forth. So the hearings began on the self-build option of the pipeline, the intrastate portion. We’re proposing that pipeline be the base rate as any other FPL asset, so it has to go through two step process, the need determination which is currently what’s on their way at the Florida Public Service Commission, and secondly, that it has to go through the same process that a power plant goes through in Florida, the site certification process where the Governor and the cabinet vote on that. We anticipate that the Florida Public Service Commission will vote on the need determination later on in August, just before the end of August, and we anticipate that the site certification process at the state level will occur sometime in the spring of 2010.

Daniele Seitz - Dudack Research Group

Construction will be beginning?

Armando Olivera

Construction would begin in the 2011, 2012 time frame.

Daniele Seitz - Dudack Research Group

I think that the original assessment was somewhere around $1.6 billion?

Armando Olivera

Somewhere in that range, correct.

Operator

Your next question comes from Riza [Hattisi] – [KK] Capital.

Riza [Hattisi] – [KK] Capital

Just to clarify, the ERCOT spark spread margins, is that interrelated with the Gexa operations in Texas or is there a retail hedge embedded within getting to those ERCOT spark spread margins?

Lewis Hay

Not necessarily with the spark spread margins, but there is somewhat of a natural hedge between those assets and our retail customers at Gexa and it really deals with ancillaries so not necessarily the market price of power that you’re selling on a daily basis but the ancillaries that the plants, the gas plants, receive from being available on a short term basis or maybe a longer term basis, and by longer term I mean more than 15 minutes and so on. That’s all revenue to the gas plants which is essentially paid by the retail providers. So when one goes up, the other one goes down. There is a natural hedge there that does work to our benefit, but it really doesn’t have to do with the spark spreads.

Riza [Hattisi] – [KK] Capital

Maybe you can talk a little bit more about… You touched on it earlier but it seems like a dramatic shift from first quarter call to this call in terms of your outlook for wind and earnings power and so forth. Can you maybe talk a little bit more about that? It just seems like a dramatic, kind of a sudden shift.

Lewis Hay

I can go back and tell you that during the fourth quarter and first quarter calls we indicated that the base on the environment, we’re really talking about two things, and I specifically pointed them out in the third quarter of last year. One was the economic environment. One was the financial environment or the financing environment. Clearly the financing environment has picked up, but the economic environment really hasn’t and we indicated that we have the opportunity to increase or decrease the amount of megawatts based on what we saw in the environment and that one of the things that we were going to do was we were going to contract our wind assets. We were not going to build merchant wind assets.

The discussions with our customer over the last three months or so, as their load keeps dropping month over month, those discussions indicate at least to us that the PPA market, the longer term power purchase agreement market for next year isn’t going to be as robust as we believed three months ago. I’ll tell you, three months from now, I may be sitting on this same call saying things have turned around, the economic recovery, the green shoots if you will, have actually picked up in the second quarter.

The Senate may get more serious about a climate bill. It doesn’t have to be a large climate bill. If at the end of the day we end up with nothing other than a Federal renewable portfolio standard, I may be sitting here in the third quarter saying, “Guys, we cranked it down too low for 2010.” But we like to give the best available information based on the evidence that we see today and what we see today is a lower PPA market for 2010.

Operator

Your next question comes from Brian Chin – Citigroup.

Brian Chin – Citigroup

Have you seen any changes in wind construction costs given the poor economy and how that might actually lower the standards you might otherwise have normally asked for in order to proceed with development?

Lewis Hay

No. Obviously the question gets asked all the time is what’s going on with turbine pricing. At this point that appears to have moderated. Now who knows what will happen over the next six months or so because clearly the manufacturers have taken a lot of capacity out of their system but we’re not seeing… the economics of what we’re looking at today when we are approving new wind projects is no different than the economics that we were looking at a year ago and we continue to look at unlevered after-tax RRs in the low double digits, so it’s not an issue of the economics aren’t as attractive as they were a year ago. It’s really an issue of we don’t believe this is the right time to be building uncontracted plans, but I wouldn’t say that the cost side of the equation has changed significantly in the last six months or so.

Operator

Your next question comes from Andrew Levy – Incremental Capital.

Andrew Levy – Incremental Capital

Just two quick questions. 2010, I assume you have a rate increase built in, I know you can’t tell us how much, but you have one as far as the power company side?

Lewis Hay

I cannot comment at this point on what we have for Florida Power & Light.

Andrew Levy – Incremental Capital

Not the amount, but you do have an increase, I assume, right?

Lewis Hay

I will tell you that we have a current rate case going on and the terms that we’ve asked for clearly are public and those are terms that we believe are reasonable especially in today’s market as we try to uphold our strong financial position at Florida Power & Light which we’re going to need in order to keep building the generation that saves our customers money, but I can’t talk specifically about our financial plans and what we’ve got built in.

Andrew Levy – Incremental Capital

The second question I have is on NextEra Energy Resources. Just looking at page 15, the hedge amounts for NEPOOL and ERCOT, looking at NEPOOL, let’s say the spark spread, you see a large reduction in the spark spread as far as on a percent basis. Not large, but close to 10% or a little over 10% but you hedged only an incremental 3% and it’s kind of the same thing in ERCOT too except you hedged considerably more, another incremental 11% I believe the number is. Can we read into that as far as… I guess you assume that the prices you must have hedged at were considerably lower than the numbers that you are currently hedged at?

Lewis Hay

I wouldn’t read into that that way. Most of the decrease in ERCOT for us from the first quarter to the second quarter was actually related to changes in our expectations of ancillary revenue. The spark spread difference between the first and second quarter was only about $15 million or so. So I wouldn’t read into that, that we’re necessarily hedging at lower cost. As I indicated, and I’m surprised, I think you’re the seventh caller and the question hasn’t been asked, the question about 2011 hedging. I think you guy s are just being nice today. But as I’ve indicated before, we’ll share that in the third quarter, essentially when we wake up every day, because of the amount of contracted assets that we have, and we continue to add, our 2009 assets will be contracted, our 2010 assets will be contracted. As I mentioned on the script, we’ve taken some of our gas plants that were merchant and we’ve contracted those. It’s not unreasonable to assume that three-quarters of our margin is hedged, at the very beginning, early stages before we start laying on hedges. So a lot of these hedges that you’re seeing for 2010 and contracts were put on not just this year. Now we did in the second quarter make a push to try to lock in more of ERCOT. As you see there, we’ve gone from 9% to 22%.

Operator

Your next question comes from Paul Ridzon - Keybanc Capital Markets.

Paul Ridzon - Keybanc Capital Markets

I know Ohio wasn’t in your guidance when you first gave it. Can you just kind of quantify just how big that is?

Lewis Hay

I don’t think that’s in our best interests. I hope you understand that. It’s a good deal for us, a very good deal for us, and we certainly would look for other opportunities where we have a chance to sign up a large muni base and then have the opportunity to go out in the market and buy that power. Clearly it’s good but I’m not going to comment on the margins or the overall gross margin impact.

Paul Ridzon - Keybanc Capital Markets

On the wind side, on the backs of what we are seeing in Mid-American, to what extent are you maybe seeing an increased appetite for utilities to kind of do homegrown projects and actually rate that’s based on giving favorable tax treatments as opposed to kind of relying on someone like FPL.

Lewis Hay

I’m going to have Jim Robo respond to that.

James Robo

It’s actually… it’s mixed. Obviously you see Mid-Am is looking to build a significant rate base in Iowa but we’ve had just as many utilities call us up and say, “Capital is tight right now and we’re not going to be able to… Please help us out.” And we enter into discussions with them about a PPA. I think the reality is that it’s not a heck of a lot different than we’ve seen over the last three years, that there’s a rate base component to this market. We don’t see it growing any faster or slower than it has been over the last several years.

Operator

Your last question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

You mentioned that trading and marketing margin being at historical levels for 2009 in your expectations. Could you just refresh our memory what that is?

Lewis Hay

I mentioned in the first quarter that those percentages from the very first time we started showing this gross margin slide, we’re between 6% and 8% , and our expectations are that it might be on the high side of that, but it will be somewhere within that range.

Paul Patterson – Glenrock Associates

6% to 8% of next year’s gross margin?

Lewis Hay

Yes.

Paul Patterson – Glenrock Associates

Then to sort of follow up on Paul Ridzon’s question on Gexa and the opportunity that you currently are exploiting pretty well in northern Ohio, are you seeing any other opportunities given the low power prices around the country and maybe in the southern part of the state or what have you? Any flavor you can give us in terms of other things that you guys might be looking at similar to what you’re doing in northern Ohio?

Lewis Hay

One, I can tell you that we are looking at other opportunities, but I don’t want to specifically comment on any specific region. We have mentioned in the past that this is the type of business that we think we can do well, that we can manage both sides of it well. The requirements piece, we’ve been in the full requirements business for a number of years, and as you and others know, we’re in the market buying power or fuel or selling power and fuel quite a bit around our assets, so we think we’ve got a competitive advantage there and when those opportunities come up, whether it’s in Ohio or other states, it’s reasonable to assume that we’re somewhere in the mix. Again, if we come out, I always like to say this, if we come out on the winning edge, I think you can assume it’s a good economic deal, it’s not something that we’re just trying to add to the revenue line.

Paul Patterson – Glenrock Associates

The settlement discussion, you guys mentioned earlier I think that you might have settlement discussions in July or August of this year in the rate case and they’ll interview some final testimony. Any sense as to how that is going or not going?

Lewis Hay

I’m going to have Armando Olivera just make a couple of comments.

Armando Olivera

Right now we’re really just focused on the formal rate proceedings. We’re getting ready for the hearings. We frankly have a very strong case. Low cost, high reliability, and if an opportunity arises we will engage but right now it’s all about the formal proceedings coming up.

Lewis Hay

That concludes our call today everyone. Thanks for joining us.

Operator

Thank you. Again, that does conclude today’s conference. Thank you for your participation.

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Source: FPL Group, Inc. Q2 2009 Earnings Call Transcript
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