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FPL Group, Inc. (FPL-OLD)

Q2 2007 Earnings Call

July 30, 2007 9:00 am ET

Executives

Jim von Riesemann - Investor Relations

Moray P. Dewhurst - Chief Financial Officer, Vice President - Finance

James L. Robo - President, Chief Operating Officer

Lewis Hay - Chairman of the Board, Chief Executive Officer

Analysts

John Kiani - Deutsche Bank

Asha Khan - FAC Capital Markets

Greg Gordon - Citigroup

Dan Eggers - Credit Suisse

Paul Patterson - Glenrock Associates

Paul Ridzon - KeyBanc Capital Markets

Dick Hayden - Deutsche Asset Management

Jeff Quizinowski - George Life Associates

Danielle Fyfe

Presentation

Operator

Good day, everyone and welcome to the FPL Group 2007 second quarter earnings conference call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Jim von Riesemann, Director of Investor Relations. Please go ahead, sir.

Jim von Riesemann

Thank you, Kim. Good morning, everyone and welcome to our 2007 second quarter earnings conference call. Moray Dewhurst, Chief Financial Officer of FPL Group, will provide an overview of our performance for the quarter. Also with us this morning are Lew Hay, FPL Group's Chairman and Chief Executive Officer; Jim Robo, President and Chief Operating Officer of FPL Group; Armando Olivera, President of Florida Power & Light Company; and Mitch Davidson, President of FPL Energy. Following Moray’s remarks, our senior management team will be available to take your questions.

Let me remind you that our comments today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the appendix herein and our SEC filings and in the investor section of our website, www.fplgroup.com.

Now I would like to turn the call over to Moray Dewhurst. Moray.

Moray P. Dewhurst

Thank you, Jim. Good morning, everyone. FPL Group delivered very good results overall in the second quarter despite extremely unfavorable weather impacts at both main businesses. FPL's results were hurt by very weak cooling degree comparisons, while FPL Energy’s wind portfolio experienced its worst quarter in over a decade in terms of resource availability.

Together, these weather effects amounted to over $50 million lower earnings for the quarter. Despite these impacts, adjusted earnings per share grew by 30%. The underlying operating performance of both businesses remains solid.

Looking forward, even with the disappointing weather impacts in the second quarter, we remain confident that we are on track to deliver adjusted EPS for the full year at or near the high-end of our original range of $3.35 to $3.45 per share, assuming as always that the weather for the balance of the year is normal.

Our prospects for 2008 remain strong and the outlook for 2009 and beyond has been reinforced by developments in the second quarter. We have been examining ways to accelerate the growth of our wind business and are announcing new growth targets today, which I will discuss in more detail later.

We now expect our 2007 and 2008 combined program to be at least 2,000 megawatts rather than the 1,500 or so that we had previously discussed. For the period 2007 to 2012, we believe adding at least 8,000 megawatts, and hopefully as much as 10,000 megawatts, is achievable.

This will be favorable to our earnings prospects primarily for 2009 and beyond but also, to some extent, for 2008. For 2008, we now believe an appropriate range for adjusted EPS expectations is $3.70 to $3.90, rather than the $3.60 to $3.80 that we first noted last fall.

We will provide a more detailed update with the third quarter, consistent with our practice of the last few years.

Given the fundamentals we see driving commodity prices for the next several years, coupled with the new growth goals we are announcing today for the wind business, we believe a period of average annual EPS growth of around 10% out through at least 2012 is reasonably achievable.

As with all forward-looking statements, this expectation depends upon a variety of factors and I will discuss this topic more later on. As a reminder, when we discuss FPL Group's earnings expectations, we assume normal weather and mark our currently open positions to the current forward curves. We also exclude the effect of adopting new accounting standards, if any, and the mark-to-market effect of non-qualifying hedges, neither of which can be determined at this time.

Now let’s look at the results for the second quarter.

In the second quarter of 2007, FPL Group’s GAAP results were $405 million, or $1.01 per share, compared to $236 million, or $0.60 per share during the 2006 second quarter. FPL Group's adjusted 2007 second quarter net income and EPS were $347 million and $0.86 respectively, compared with $260 million, or $0.66 per share in 2006. The difference between the reported results and the adjusted results is the positive mark in our non-qualifying hedge category, which I will discuss in more detail later in the call.

Please refer to the appendix of the presentation for a complete reconciliation of GAAP results to adjusted earnings. FPL Group's management uses adjusted earnings internally for financial planning, for analysis of performance, for reporting of results to the Board of Directors, and as input in determining whether performance targets are met for performance-based compensation under the company’s employee incentive compensation plan. FPL Group also uses earnings expressed in this fashion when communicating its earnings outlook to analysts and investors. FPL Group management believes that adjusted earnings provides a more meaningful representation of FPL Group's fundamental earnings power.

Please note that all prior period amounts have been adjusted to reflect the application in the fourth quarter of 2006 of an accounting standard change related to planned major maintenance activities, which had a $2 million impact on 2006’s second quarter results, equating to less than $0.01 per share.

Florida Power and Light performed well in the second quarter despite the negative weather comparisons I mentioned earlier. Customer growth continued at a healthy pace as the Florida economy continues to perform well, despite the housing slowdown. Weather-adjusted usage growth was positive as the lagged effect of last year’s price increases rolled off, and while we continue to believe there is a bit more uncertainty about underlying usage growth than perhaps we’ve seen in the past, at this point we don’t believe we are seeing any fundamental shift in usage patterns.

In May we placed the 1,144 megawatts Turkey Point 5 generating facility into service, slightly ahead of schedule and under budget. The addition of this facility to our portfolio will be beneficial both to customers and to shareholders, with a slight increase in base rates more than offset by the fuel savings arising from the incremental efficiency of the new unit.

O&M expenses in the quarter were up slightly and the general trend this year is roughly consistent with our expectations.

In May, an FPL subsidiary issued $652 million of storm bonds for the repayment of prudently incurred restoration costs associated primarily with the 2004 and 2005 storm seasons and to replenish our storm reserve. We are pleased with the pricing of this debt --set a new benchmark for utility securitization transactions. As part of this issuance, our storm reserve was replenished to give us the capacity to absorb up to about $200 million in possible future restoration costs. The issuance of these securitized bonds was enabled by legislation enacted in 2005 and authorized by the Florida Public Service Commission last summer.

We continue to build generation to meet the growth in our service territory. The first of two 1,220 megawatt units at our West County energy center is currently under construction and is expected to be placed into service in 2009. The second unit should enter service in 2010.

In early June, the Florida Public Service Commission rejected our proposal to build an ultra super-critical pulverized coal facility in Glades County, citing uncertainties about the long-term economics of the project. This decision has no material impact today, and the likely practical consequence is that Florida Power and Light will see moderately increased reliance on natural gas during the middle years of the next decade. However, the PSC's discussions, together with Governor Crist's orders coming out of the Florida Global Climate Summit, suggest to us that the outlook for new nuclear construction is becoming more favorable. We continue to pursue all necessary steps to ensure that we can add new nuclear capacity if and when both economics and regulatory circumstances justify it.

For the second quarter, Florida Power and Light reported net income of $211 million, compared with $182 million in last year’s second quarter. The corresponding contributions to EPS were $0.53 this year compared to $0.46 last year. As a reminder, last year’s results were affected by the write-off of certain unrecoverable storm restoration costs.

Customer growth remained strong. For the second quarter of 2007, the average number of FPL customer accounts increased by 95,000, or 2.2%, slightly ahead of our long-term historical growth rate. This continuation of the trend from the first quarter is encouraging and should help allay fears that some of you have expressed regarding the housing slowdown and the potential impact it might have on our underlying customer growth rates. Of course, we continue to monitor developments in the housing market and the potential impact they may have on future results. However, at this point we do not believe we will see a major decline in growth as long as the economic fundamentals in the state remain strong. We do see significant supply demand imbalances in certain segments of the market that will take some time to work through and these may have local effects.

I should also note that we have seen a number of articles generally covering the Florida housing market, not all of which have cited correct facts. For example, one report incorrectly stated that the housing industry accounts for 28% of all employment in Florida, when the correct figure is actually closer to 9%. Although it is true that employment growth has slowed in Florida, it continues at a pace in excess of the rest of the country. Despite job losses in the construction sector, overall employment growth in Florida for the year ending May 2007 was a healthy 1.7%.

As I indicated at the outset of the call, the second quarter weather comparisons were quite unfavorable. Florida experienced a very mild quarter in terms of heat and humidity, especially in South Florida, and this had its typical dampening effect on demand. As a result, usage growth associated with weather declined 7.4% quarter over quarter, which reduced earnings by about $0.11 per share.

Underlying usage growth and all other effects amount to a positive 2.1% impact. As we’ve noted in the past, usage growth can be quite volatile from quarter to quarter but the return to positive values is consistent with the drivers of our revenue model and encouraging.

For the second quarter, FPL's 2007 O&M expense were $366 million, up $7 million from the prior year figures. Higher nuclear employee benefits and customer service costs were offset by lower distribution expenses. Last year’s second quarter saw unusually high distribution spending, driven by additional maintenance and repair activities after the 2005 hurricane season.

For the full year, we continue to see increases in nuclear and fossil generation, as well as employee benefits and customer service costs, and of course our Storm Secure program as being the main drivers of O&M growth. Overall, our expectations for O&M for the full year are a little better now than when we developed our initial view last fall.

So far this year we’ve spent roughly $20 million in incremental O&M on our Storm Secure initiative. For the next few years, we expect to spend about $50 million of incremental O&M per year and between $75 million and $200 million per year in incremental capital for Storm Secure activities.

Depreciation in the second quarter fell $3 million to $194 million as higher distribution and generation depreciation, including the impact from the addition of the Turkey Point 5 unit, were offset by reductions in certain amounts recovered through the capacity clause. Underlying base depreciation increased by $9 million.

The table on the accompanying chart summarizes the drivers of the earnings growth for Florida Power and Light, which netted to an increase of $0.07 per share. In the interest of time, I will not read each number for you. For those of you without immediate access to the slides, they are available in the investors section of our website, www.fplgroup.com.

To summarize, however, despite a drag from unfavorable weather comparisons, which more than offset the absence of last year’s storm costs disallowances, Florida Power and Light’s earnings grew at a healthy pace. A number of small positive effects combined to yield better overall performance than we expected, given the disappointing weather comparison. If we experience normal weather for the balance of the year, FPL's EPS contribution will still likely show good growth over last year but will probably fall a little short of our original expectations.

Let me now turn to FPL Energy, where adjusted earnings per share improved by nearly 30% year over year, despite the weakest wind resource in at least the last 13 years. The growth in earnings contribution was driven by new assets and strong performance from the merchant portfolio, which benefited from the replacement of older, lower-priced hedges.

These positive drivers were generally consistent with our expectations, although the magnitude has been somewhat better than expected, thus helping us offset the poor wind resource.

Our outlook for the balance of the year remains strong, with the drivers of growth generally consistent with the experience of the first-half of the year and our expectations from last fall. We remain on track to add the Point Beach Nuclear Facility to the portfolio later in the year. Our 2007 wind program is moving along nicely, and absent extreme market conditions, our high degree of hedging for 2007 means that this year’s adjusted results should not be significantly affected by commodity price movements.

For 2008 and beyond, we see continued growth at FPL Energy, driven first and foremost by new wind development. For the past several quarters, we have indicated that we expected our 2007 and 2008 wind programs to add at least 1,500 megawatts of incremental wind capacity to our portfolio. We now expect to do much better than this, with at least 2,000 megawatts of new capacity over the same time frame. We are in the process of ramping up our development efforts to take advantage of the favorable environment for wind energy and I will discuss this further in a couple of slides. For the period 2007 to 2012, we expect to add at least 8,000 megawatts of new capacity and hope to reach as much as 10,000.

FPL Energy’s 2007 second quarter reported results were $203 million, or $0.51 per share, compared with $90 million, or $0.23 per share, in the prior period’s results. Adjusted earnings for the second quarter of 2007, which exclude the effect of non-qualifying hedges, were $145 million, or $0.36 per share, compared to $110 million, or $0.28 per share.

In the second quarter of 2007, we recorded a gain in the non-qualifying hedge category of $58 million after tax, reflecting the decrease in forward commodity prices we experienced this quarter. Of the $58 million gain this quarter, $11 million represents the roll-off of prior period losses in this category while $47 million represents the impact of market price changes.

The market price changes were heavily concentrated in the front-end of the forward curves, particularly 2007 and 2008, where we are well hedged and forward prices for 2009 and beyond increased slightly. Thus, the decline in prices has had little effect on our expectations for future growth.

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

We continue to believe it is more useful to think of FPL Energy results excluding the impact of the non-qualifying hedge category, whether that impact is positive or negative. Comparisons of period-to-period GAAP results can be quite misleading when there is significant volatility in the non-qualifying hedge category.

FPL Energy’s second quarter adjusted EPS contribution increased $0.08, or nearly 30%. New investment contributed $0.04 per share, primarily driven by roughly 770 megawatts of new wind relative to last year’s second quarter. The contribution of the existing portfolio improved by $0.07 per share, operational performance was strong, and the only real negative in the quarter was the poor wind resource. Unfortunately, looking back over 13 years of data, which is as far back as we have constructed the composite wind index that seeks to measure the naturally varying resource available to the portfolio, the second quarter of 2007 is the lowest on record.

The shortfall in wind resource relative to long-term averages equated to about $20 million of net income contribution. Simple extrapolation of the wind index would have suggested an even greater impact but in fact our actual performance was slightly better than the raw wind resource comparison would suggest.

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

Elsewhere in our existing fleet, the NEPO portfolio experienced the anticipated expansion of margins associated with the rollover of old hedges to higher values, along with favorable capacity revenues. Seabrook Nuclear Facility was the primary contributor to these results.

Hydro performance in Maine was a bit better than we expected and we had some good opportunities for the Maine fossil assets. Market conditions were also favorable in ERCOT. The improved performance from NEPO and ERCOT more than offset decreases from the non-wind contracted projects.

Asset optimization and trading activities increased by $0.01 a share from last year’s second quarter, driven primarily by our full requirements business. Market conditions remained favorable for this piece of our portfolio.

Restructuring activities were flat compared with last year’s first quarter.

All other factors were a negative $0.04 per share, driven primarily by additional interest expense and overhead, which reflects continuing investment in the growth of the business.

As many of you know, there’s been a lot of movement in forward gas prices recently. The first quarter saw an upward shift in the curve, while the second quarter saw a significant drop-off for the balance of 2007 and to a lesser extent for 2008. Forward prices for the out years increased modestly. The net effect on our portfolio was small. Because of the high degree of hedging for 2007 and 2008, there is little net impact on our expected results for these years, while the continued strength in longer term forward prices is positive for our longer term outlook.

Our hedge position for 2007 changed little. As a practical matter, commodity price fluctuations for 2007, unless they are extreme, will have little impact on our expected results for this year. Our hedge position for 2008 increased slightly and more than 85% of our expected gross margin for next year is protected against market price movements.

During the quarter, we continued to layer in additional hedges for future years as conditions warranted. We will provide an initial view of our 2009 outlook together with associated hedging data with our third quarter release.

Before closing, I would like to continue to try and add to the information available to you about the prospects and value of our wind portfolio. As you probably know, no other company in the world has developed more wind capacity then FPL Energy and we are by far the largest wind energy producer in this country. The general environment has been favorable for renewables businesses generally for some time and we believe that the prospect for our wind business for at least the next five years or so has if anything improved over the course of the last year.

Given our current competitive position, we believe there is a real opportunity to accelerate the growth of our business and for the past several months, we have been challenging our development team to see how quickly we should be seeking to grow the business.

Many of you have asked us whether we are constrained by availability of sites or by turbine manufacturing capacity, or by some other factor. We have consistently answered that there is no one limiting factor but that there are real trade-offs to be considered between how quickly we seek to grow and the expected profitability of that growth. Our goal is to find the growth path that maximizes value for the shareholder.

We are by no means finished in our efforts to implement a new higher growth strategy but we are in a position to provide some measure of our increased expectations for new wind development. Specifically for the 2007 and 2008 programs combined, where previously we have indicated that we expected to add at least 1,500 megawatts, we now believe that we will be able to achieve at least 2,000 megawatts.

Looking out beyond 2008, we believe that an annual program averaging 1,500 to 2,000 megawatts, while sustaining good levels of expected profitability, is realistic. As a consequence, today we are announcing that our goal for the six-year period 2007 through 2012 is to add between 8,000 to 10,000 megawatts to our portfolio, effectively more than tripling it.

To achieve these levels of growth obviously will require certain supporting conditions. Chief among these is continued public policy support, most likely in the form of a continuing combination of meaningful state and/or federal renewable portfolio standards and the production tax credit.

In addition, adequate transmission facilities will need to be developed on a timely basis to support utilization of some of the most attractive wind regions and the global supply chain will need to continue to expand, as it has been doing successfully over the last few years.

Our expectations for 2007 and 2008 are at this stage underpinned by a portfolio of advanced stage construction projects. Beyond 2008, there is obviously a greater degree of uncertainty. However, rather than focus on specific projects and their probability weighted expected contribution, we can look to the scale of activities that we undertake that in due course lead to the introduction to service of new megawatts.

On the accompanying chart, we have tried to segment our pipeline of new projects and prospects and show how they relate to likely new megawatts and service. Today we have roughly 1,000 megawatts either already under construction or ready to proceed to construction. This means all prerequisites, land acquisition, permits, transmission agreements, customer contract or marketing plan and equipment, are all in place. These of course are the backbone of our 2007 program.

We have another roughly 2,000 megawatts of what we consider an advanced stage of development. This typically means that we have good site data and met towers have been installed and gathering data for at least a year, nearly all necessary land easements have been acquired, a transmission interconnect application has been filed, and either a contract is under negotiation with a specific customer or a marketing plan has been developed.

To meet our criteria for late stage status, we must be confident that there is a high likelihood that the project will actually proceed, even though all the i's may not yet have been dotted and the t’s crossed.

In general, unless we subsequently uncover a fatal flaw, late stage projects will become active, producing megawatts within 12 to 18 months. Thus today, the late stage pipeline is expected to feed the 2008 construction program and a portion of the 2009 program.

Beyond late stage development, we have another roughly 7,500 megawatts of potential projects in various earlier stages of development. While there is more variability here, typically this means that wind modeling has been completed and we have begun gathering on-site data with met towers, although we may not yet have the full set of data without which we will not make a decision to proceed. Feasibility screens, a transmission service, environmental issues, market demand, et cetera, have been completed and a fatal flaw analysis passed.

Roughly speaking, early stage projects have good potential but could fail to materialize for any one of a number of reasons. We certainly would not expect all 7,500 megawatts to end up as active projects but a good proportion of them will.

In general, these are the projects that will form the backbone of our 2010 and 2011 programs, although one or two of the best will likely move along swiftly enough to become part of the 2009 program.

Finally, we have many more potential projects in what we call the prospecting stage. Today we can identify roughly 5,000 megawatts in this category, but this is an area that is constantly being expanded and the size is less relevant than the fact that we have an active effort to screen potential new sites.

In general, we would not expect today’s prospects to become active projects before the 2011 and 2012 timeframe, but we know from experience that we need to maintain the effort since today’s prospects will be next year’s early stage projects and so on. As you can see, even with reasonable allowance for attrition, our pipeline today clearly supports our growth goals and of course we expect to add to the pipeline over time.

Another measure of our development effort, albeit a very rough one, is our land development program. Today we have exclusive access to over 1 million acres of high wind potential land. To put that in perspective, a megawatt of producing capacity may have around 75 to 125 acres of land supporting it, so 1 million acres equate very roughly to anywhere from 8,000 to 13,000 megawatts of capacity. Again, not all of this will ultimately turn out to be commercially viable but of course we will be adding to the total as we go along.

Before leaving this topic, I should note that there is no consistent definition across the industry of the various stages of development. Another measure of the likelihood of our achieving our growth goals, of course, is our past success. We have clearly demonstrated that we can manage an annual wind program of about 1,000 megawatts. We are effectively looking to double this capacity over the course of the next three or four years. To do so will require scaling up the various supporting functions as we go -- everything from land prospecting to wind studies to marketing activities, but assuming that the commercial environment remains attractive, which we think it will, our growth goals mean accelerating what we have already proven we can do very effectively. We look forward to that challenge.

Of course, the increased scale of our wind development will be good for earnings growth. While we view five-year growth numbers with a degree of skepticism, we are confident that with continued strong performance of our core businesses and the execution of the 8,000 to 10,000 megawatt wind development plan, we will be able to sustain average EPS growth of about 10% over the five-year period. As a rough guide, each 100 megawatts of new wind can add $0.01 to $0.015 per share to EPS.

Another topic that many of you have raised questions about is our exposure to carbon pricing. As you probably know, we are taking an active part in the ongoing public policy dialog about how carbon controls should be imposed but we continue to believe that we will see some form of carbon constraint in the U.S. before too long. Our business strategy has always anticipated the potential for tightening environmental regulations and we believe we are well ahead of many others, as we have one of the nation’s cleanest portfolios.

Because of the wide range of control options that have been suggested or are actively being debated, it is impossible to know just how FPL Group might be affected. Most likely there will be both positive effects and negative effects. Nevertheless, we recognize that a number of analysts have started modeling the potential impact of various forms of carbon control and we have noted that the data for these analyses are not always readily available.

To assist in understanding our economic position, at least in part, we prepared the chart shown here, which provides a rough estimate of exposure to carbon pricing at FPL Energy. Specifically, the chart shows an estimate of potential megawatt hours of carbon-free generation for future years. As such, of course, it depends on a number of assumptions. We have included potential wind, solar, nuclear and hydro production and we have included those megawatt hours where FPL Energy retains the value of or exposure to carbon pricing.

So, for example, a contracted win project where the customer has the exposure to carbon pricing is not included. For these purposes, we have included all new wind projects and the range shown on the chart encompasses the 8,000 to 10,000 megawatt development program I have just discussed.

As you can see from the chart, by the early part of the next decade, we expect to have roughly 40 million to 50 million megawatt hours of carbon-free generation being produced at FPL Energy. To the extent that carbon constraints are reflected in the market price of energy, obviously such generation can be expected to benefit.

Of course, this chart cannot capture the full effects of carbon constraints and there may be other parts of our portfolio that either do not benefit or are hurt by carbon constraints, depending upon the exact form in which these are imposed.

Nevertheless, we believe we are well-positioned to succeed in a carbon-constrained environment. We have worked hard to position ourselves so that our portfolio is well adapted to what we believe will be the energy markets of the future, not just those of today.

Turning now to our updated outlook for 2007 and 2008 results, we are making no major changes for 2007, relative to what we shared with you in April. We expect adjusted EPS to be at or near the higher end of the range, $3.35 to $3.45. FPL Energy is ahead of where we would have otherwise expected, while Florida Power and Light will clearly be challenged by the tough weather comparisons from the second quarter and, as I indicated earlier, is likely to come in around the low-end of our original range. Corporate and other is likely to be a bit better than our original expectations, owing to favorable state tax mix effects.

Our prospects for 2008 continue to be encouraging and with the expanded size of our wind development program, we expect to see a modest incremental benefit in 2008, although the major effect will be in 2009 and beyond.

Based on what we see today, we think a range of $3.70 to $3.90 per share, up from the $3.60 to $3.80 range we discussed earlier, is now appropriate. As has been our practice in recent years, we will share with you the results of our more detailed financial planning that occurs in the early fall when we discuss third quarter results in October.

Beyond 2008, the expansion of our wind business, coupled with continuing strength in commodities markets, leaves us optimistic we will be able to sustain average growth in adjusted EPS of about 10%, at least through the 2012 timeframe.

As always, our EPS expectations assume normal weather and mark our currently open positions to the current forward curves. We also exclude the effect of adopting new accounting standards, if any, and the mark-to-market effect of non-qualifying hedges, neither of which could be determined at this time.

To summarize the 2007 second quarter, on an adjusted basis, FPL contributed $0.53, FPL Energy contributed $0.36, and corporate and other was a negative $0.03 contribution. That is a total of $0.86 compared to $0.66 in the 2006 second quarter on an adjusted basis. Corporate and other was a little better than we had expected, owing to favorable state tax effects driven by the growth in FPL Energy.

To conclude therefore, we are pleased with our performance thus far for the year. We look forward to continuing to deliver very strong results for our shareholders for this year and beyond. Now we will be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from John Kiani, Deutsche Bank.

John Kiani - Deutsche Bank

Good morning. How will this wind pipeline that you’ve provided for us today be broken up? I guess can you tell us higher level between projects with traditional long-term PPAs compared to merchant facilities with more shorter term financial hedges, sort of like you’ve been doing with the ERCOT projects recently.

Moray P. Dewhurst

I don’t think at this stage looking out that far, as far as 2012, we can really say what that mix is going to be. All I can say is we fully expect to do both kinds of projects. Today the portfolio is roughly 75% contracted. If I were to guess, I would guess that that percentage would go down over time but how much, I don’t know. A lot is going to depend upon how the marketplace for wind evolves and a lot can happen in that time period. But we are pretty comfortable that we have at least two models that work commercially, depending upon what the particular marketplace is.

John Kiani - Deutsche Bank

Great, that’s helpful. And then, Moray, you talked a little bit about carbon and obviously you all provided your CO2 long megawatt hours. Do you think that once formally implemented longer term that carbon pricing could take the place of production tax credits for wind projects?

Moray P. Dewhurst

Bottom line, yes. I don’t think going out more than about five years, you should be conceptually double-counting carbon pricing and PTCs. I think PTCs in a way are a sort of economic substitute which reflect the subtle values of the wind portfolio, but one of them being a carbon-free nature, in the economics today. So I do think that over the longer term, that’s a reasonable expectation. But given it will probably take some time for a carbon control regime to be instituted and also to ramp up to prices that would be equivalent to the value of the PTCs, I think we can expect to see some kind of transition period.

John Kiani - Deutsche Bank

Great. Thank you. That’s very helpful.

Operator

Our next question comes from [Asha Khan], FAC Capital Markets.

Asha Khan - FAC Capital Markets

Good morning. Moray, if I could just -- you mentioned that each 1,000 megawatts is between $0.01 to $0.015 --

Moray P. Dewhurst

Each 100 megawatts.

Asha Khan - FAC Capital Markets

100 megawatts, sorry. So if I was to go to the 10% growth rate, which is approximately around $0.40 going forward after 2008, is it fair to assume that you are expecting FPL Energy to contribute $0.30 out of that $0.40, so it is like $0.30 coming from FPL Energy and $0.10 coming from Florida Power and Light?

Moray P. Dewhurst

I haven’t done the analysis exactly that way. Let me just turn it around and say if you take the 8,000 to 10,000 megawatts and apply that rule of thumb of $0.01 to $0.015 and work that out over the five-year period, I think you’ll find that it implies that we can expect somewhere, at the corporate level, somewhere between 5% and 6% EPS growth from that growth in the wind portfolio. So in other words, all other parts of the portfolio, Florida Power and Light and the remaining parts of FPL Energy, would make up the difference to get you to the 10%. Clearly it’s a very significant driver of expectations for overall corporate growth, no question about that.

Asha Khan - FAC Capital Markets

And then can I just ask you, I know you are talking about wind but I know you’ve been working a lot on solar. Could you just tell us where you are and where can we expect anything from the solar pipeline during this five-year time period going forward?

Moray P. Dewhurst

I guess the first thing to say is that I think at least at this stage, new solar for us needs to be thought of more on a project opportunistic base, in contrast to the wind business which we clearly see as an integrated business. We can think about growing a whole business. Solar projects, at least as we see it at the moment, are likely to be one-off projects. Having said that, we are working on a couple of possibilities. I don’t have a lot of specifics that I can give you on that at this stage but I personally would be surprised and disappointed if somewhere in the next three or four years we don’t have a new project coming in that’s enough magnitude to be noticeable in terms of EPS impact. Beyond that, I really can’t go at this stage.

Asha Khan - FAC Capital Markets

If I can just end up, looking at FPL Florida Power and Light, we have the two gas fire plants coming in, right, in ’09 and ’10. Are you budgeting any AFUDC for a nuclear project going forward? How should we look at -- I’m trying to figure out how to profile for the regulated businesses.

Moray P. Dewhurst

There is nothing specific in our expectations for nuclear AFUDC at this stage just because the exact schedule for new nuclear is still very uncertain but obviously, or perhaps not obviously, under the new Florida regulatory framework, pre-construction costs would be eligible for ongoing recovery, whereas construction costs and post-construction initiation costs would be capitalized in the normal way and subject to AFUDC.

I think the best I can say on that is stay tuned for -- as we get some sense of really when the schedule is likely to be, we’ll then be in a better position to see how it lays out. But if for modeling purposes, you want to arbitrarily put in a cost curve, you can assume that we would be accruing regular AFUDC through the construction period.

Asha Khan - FAC Capital Markets

Thank you.

Operator

We’ll take our next question from Greg Gordon, Citigroup.

Greg Gordon - Citigroup

Thanks. When we talk about the wind business, obviously this is a tremendous opportunity for FPL. How dramatically has the size of the market increased, or are you presuming simply a better penetration rate relative to the size of the market? The second question is what is your base case in terms of assumptions on financing in terms of debt equity and relative financing costs when you talk about that $0.01 to $0.015?

Moray P. Dewhurst

Greg, on the first question, I don’t know that we’ve really thought of it specifically in increased penetration versus increased market size but I would say that by far the bulk of the expectation is increased market size. We’re certainly not expecting that we are going to get radically more competitively effective. But I think you can see just from the nature of the policy discussions that are going on that there is a much more serious focus in this country, both at the federal level and at the state level, about making changes to the fundamental generating infrastructure. When you look at the relative economics of wind compared with other carbon-free alternatives, it just comes out looking very, very good.

We really feel like there is an opportunity. Now, having said that, I would also say that in part, expansion of the market is going to come about through the activities of companies like FPL Energy and its big competitors, so it is not just purely on the demand side but it is us going out and making things happen. So they are a little bit intertwined there.

But the answer to your first question fundamentally is the market effect that we’re looking at.

On the second, base case financing is a little trickier to address in ratio terms at this stage. Let me go back and reiterate what we said many times, which is that when we think about our financing plan each year, we really work to maintain a target set of credit metrics and those credit metrics typically will have a number of adjustments depending upon the exact nature of the financing instruments that we get to put in there. So for example, some of the non-recourse project level debt associated with the wind projects to date is beneficial to our corporate credit profile. So you have to make some assumptions about how those factors will vary in the future, so it’s a little hard to put those in numbers. But that’s the basic principal that we use. We plan to a target set of credit metrics that will support an overall credit position and rating that we like.

Having said that, I think realistically going forward, I suppose for modeling purposes, somewhere in the 50-50 range is not a bad assumption. I think we may be able to do a little bit better than that but I wouldn’t count on doing a lot more than that. Certainly when we look at the economics of these projects, when we think about the accretive impact, we look at a base case of 50-50 debt and equity, so we expect it to be attractively accretive at that kind of financing.

Greg Gordon - Citigroup

So the $0.01 to $0.015 is not assuming an -- that was really the answer to the question -- I mean, the really aggressive leverage or a high degree of off balance sheet or financing did you get to those numbers?

Moray P. Dewhurst

No, that was a long-winded way of saying the $0.01 to $0.015 modeling assumes a 50-50.

Greg Gordon - Citigroup

Thanks. We seem to have universal support for PTC in congress but absolutely no agreement on how to actually finance that, so are we looking at just another one-year extension at the end of the year, like we have historically? Or do you believe that there’s a chance that you would actually get a more lengthy extension?

Moray P. Dewhurst

As usual, we’re looking at a number of different scenarios. I think there is a chance that we’ll get a multi-year, four- or five-year program. However, I think it is higher odds that we’ll see a shorter term extension. And that’s fine with us. We’re comfortable with that. The main thing is that, as you pointed out, there is very strong support on both sides of the aisle for renewables overall, so I think we’re going to see continued support. It may not be in a nice, easily predicted, laid out pattern.

Greg Gordon - Citigroup

Thank you, Moray.

Operator

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

Dan Eggers - Credit Suisse

Good morning. Touching on the Glades decision and California’s policy from an environmental perspective, I was wondering if you could give a little comment on gas, natural gas import capacity coming into Florida and the ability really to meet demand below it effectively. Gulf streams are expanding. When do you guys run out of room and you’d need another pipe or fuel diversity becomes a much bigger issue?

Moray P. Dewhurst

That’s a big topic there. Clearly if you are not going to add significant generation within Florida through solid fuel in this kind of timeframe, we are going to need to see some expansion of the infrastructure, not just transportation but storage as well. I think really all I can say on that is that we are well aware of that, we are planning for it and we are actively engaged in discussions and negotiations that will ensure that we have the gas capacity that we need. Beyond that, I really don’t want to go.

I think we will be fine through that period. One of our biggest concerns, quite frankly, is the physical reliability. As we saw a couple of years ago, we can have situations with tropical storms, hurricanes in the Gulf affecting production, which have a real impact on our service territory, even when our service territory is unaffected by the tropical storm itself.

So we have some work that we need to do to make sure that we have sufficient inventory and flex capacity to maintain physical reliability. But as for meeting the ongoing demand, I feel very confident that we will be able to see that the additional gas infrastructure that is needed does get added.

Dan Eggers - Credit Suisse

Okay, and then I guess just on the wind index; it’s been a while since we’ve been at a normal wind index level. Do we need to be rethinking about what normal wind index should be going forward, and is there any sort of consistent regionalization we should be aware of, or think about that you’ve seen in the index?

Moray P. Dewhurst

Right. The answer to the first part is no, I don’t think so at this stage. We’ve spent a lot of time studying the long-term cycles as best we can and I would say that although the variability is big, it’s kind of what you expect given the natural variability and average wind speeds.

On the second part, it probably is important. Maybe I should have mentioned it in the prepared remarks but there is a huge effect this quarter really coming about from Texas. If you look at the specifics of the reference tower wind speeds, and there’s a chart in the appendix, you will see that it’s the Texas reference towers that fall well short, so their indices down there are something like 85%, 86%.

Now what we don’t know, you may also be aware that Texas has had some other interesting weather phenomena over the second quarter, including a lot of rain and floods. We don’t know if there is any direct connection there but the fact that Texas weather has been quite out of the ordinary in a number of dimensions -- it probably shouldn’t surprise us that it is out of the ordinary on the wind side, too. Because obviously the portfolio has a large weighting in Texas, that has had a big impact in dragging the overall index down. In contrast, the upper Midwest was pretty much in general about normal.

So I don’t think there is anything specific to be concerned with there. There is significant natural variability in wind resource and we can expect to see these kinds of swings. You know that wind is a huge driver of FPL Energy’s earnings so obviously if the wind resource swings around one way or the other, it is going to have a significant quarterly impact. But at this stage, I don’t see any reason to recast long-term history and think that something fundamental has changed.

Dan Eggers - Credit Suisse

Okay. Thank you.

Operator

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

Paul Patterson - Glenrock Associates

Good morning. I have a sort of a mundane question here. The year-to-date weather impact, as Dan was mentioning earlier, the wind resource wasn’t so great the second quarter of last year. If we were to sort of normalize weather, what would we -- what’s the impact, I guess, year over year for both the -- if you have a breakdown for between FPL and Energy and the utilities?

Moray P. Dewhurst

For the second quarter, we estimate that it is about $50 million of missing earnings based on natural resources. About 20 of that is the wind effect at FPL Energy and 30 of that is the normal weather effect, or the abnormal weather effect at Florida Power and Light. The hurt at this quarter is you get hit with both of them at the same time.

Paul Patterson - Glenrock Associates

Okay, so that’s versus normal?

Moray P. Dewhurst

Yes, very roughly.

Paul Patterson - Glenrock Associates

And then, what was it for the -- for the first quarter, what were we looking at?

Moray P. Dewhurst

I don’t recall.

Paul Patterson - Glenrock Associates

-- follow up later on it.

Moray P. Dewhurst

Yes, it was much smaller. Once you follow-up with us, we’ll get you that information. It was a much smaller effect in the first quarter.

Paul Patterson - Glenrock Associates

Okay, and then the usage turnaround, you mentioned the lag effect you thought was part of that. If you just elaborate a little more on that, it did seem to be quite remarkable quarter over quarter. Do you think there could be any tie-in with weather? I guess maybe weather being mild, people -- I don’t know, use something else more. I was just wondering if you could elaborate a little bit more on it.

Moray P. Dewhurst

Sure. I guess first of all, the other usage, the non-weather usage is typically from quarter to quarter much more volatile than, for example, the customer growth component. The basic revenue forecasting model that we use, which is based on historical statistics, suggests that any time you have a price change you see a lagged response to that price change. Now, we had a big price increase because of the pass through of higher fuel costs in 2006. So 2006 prices as customers saw them were much increased, so the lagged effect of that then affects revenues from the second quarter of ’06 through the first quarter of ’07, so we continued to see some of that effect in the first quarter of ’07. So then in the second quarter of ’06, we are now comparing a -- actually, a slightly reduced price because there was a slight price reduction in 2007, so what the customer perceives is a flat to slightly lower price. But it is basically a more normal pricing environment and so that, consistent with the model, drives a return to the remaining underlying drivers of usage growth, which are continuing economic growth and long-term trends.

So that’s kind of what’s going on there. So the fact that there was a turnaround from negative to positive was consistent with our expectations. It was a little better than I personally would have expected but that’s just part of the natural pluses and minuses of it. I wouldn’t expect that 2% to be sustained. I still think over the long haul, in a flat pricing environment, somewhere around 1% a year growth in average usage per customer is reasonable but that’s going to fluctuate quite a bit on a quarter-to-quarter basis.

Paul Patterson - Glenrock Associates

Okay, great. Thanks.

Operator

Our next question comes from Paul Ridzon, KeyBanc.

Paul Ridzon - KeyBanc Capital Markets

Good morning. IGCC has caused some headlines in Florida. Is that something FP&L would take a look at?

Moray P. Dewhurst

Well, we had been taking a long hard look at IGCC actually before we proposed the Glades ultra super-critical. There was a lot of work that went into deciding which of the two alternatives were better. At this stage, what we see based on our review of the technology and the economics is that in most situations, all-in, even including guessing at what it may be like for carbon capture, ultra super-critical is a better deal than IGCC. Now that may change in the future, and that’s certainly a technology that we are going to continue to work with but that’s kind of how we see it at the moment. But yes, we are very actively involved in looking to see whether it makes sense.

Paul Ridzon - KeyBanc Capital Markets

As you are seeing wind equipment pricing increase, how are we seeing returns impacted by that?

Moray P. Dewhurst

To date, we haven’t seen a huge impact on our expected returns of new projects. Where it has really been reflected is in pricing of contracted projects. So there hasn’t been a great deal of impact to date. We are also optimistic that we are going to see a much slower rate of increase going forward in equipment prices because a big portion of that in the past couple of years has just been driven by underlying commodity price increases which has started to level out, increases of steel prices and things like that.

Paul Ridzon - KeyBanc Capital Markets

It’s a pretty aggressive wind portfolio. What are the plans for financing it?

Moray P. Dewhurst

The base plan for financing it is we’ve had great success with these project finance deals around collections of wind projects, portfolio deals, so I expect we will continue to do those. And as we discussed earlier, we’ll have a balanced mix of new equity and new debt. We may mix in some corporate level debt at some points in there but as long as we can continue to do good, attractive project level debt with clusters of assets, I think that would be my first choice.

Paul Ridzon - KeyBanc Capital Markets

And at one point you discussed that, relative to some of your competitors, extension of production tax credits on a onesy, twosy, as opposed to a five or 10 year was better for you. Could you explain that dynamic again?

Moray P. Dewhurst

Well, I think we are fundamentally comfortable with the basic opportunity for the wind business and therefore we have a degree of confidence that we will see continued political support and that if there should be a temporary delay in the renewal of the PTCs, we can accommodate that by flexing our resources so there won’t be a big hit to our income in that way.

I can’t speak to what other people may or may not be able to do but as I said, we feel pretty comfortable with that. Relative to what some other people have expressed, that seems perhaps to be less a concern for us.

Paul Ridzon - KeyBanc Capital Markets

Thank you very much.

Operator

We’ll go next to Dick Hayden, Deutsche Asset Management.

Dick Hayden - Deutsche Asset Management

Thank you. Just a question for either Lew or Jim or even Moray about the growth beyond wind in the unregulated generation, and given the recent sector price coming down, does that give you opportunity to acquire assets or do you go with more wind and greenfield type of projects?

Moray P. Dewhurst

Let me ask Jim to comment.

James L. Robo

Dick, I think you have heard us talk about the other non-wind opportunities at FPLE and I think we feel very comfortable that we have a long list of opportunities there that we continue to pursue. We’ve talked a little bit about solar today. You’ve seen that we’ve announced a proposed transmission project in Texas. We are working very hard at fossil development, given the decreasing reserve margins in some of our key markets. We’ve continued, as you’ve seen from the results this year, we’ve continued to grow our full requirements business at PMI, and we continue to be very focused in the nuclear acquisition market and we’ll continue to be opportunistic there.

We feel very good about the portfolio of non-wind growth opportunities and we think that several of those are going to continue to help us keep the balance of growth at FPL Energy.

Lewis Hay

Dick, it seems like your question was focused mostly on asset acquisitions and, as you know, we’ve said for a number of years that we’ve been doing a lot of window shopping and not a lot of buying. In part, that was mostly due to very cheap debt, lots of liquidity and a pretty aggressive private equity market. The last week or two there’s been a lot of rumblings in the market. Interest rates have gone up some and there’s lots of concerns about the backlog of debt to be placed to support some private equity deals.

I think it is premature to say what is going to happen there but clearly our strategy of having a strong balance sheet gives us a competitive advantage when money is a little bit more expensive and there’s not as much liquidity. So I think that’s another one where we have to stay tuned, but to the extent that this is the beginning of a trend, it could mean that we’d be back in the business of acquiring assets, other than nuclear assets where there’s just a limited number of buyers.

So it’s something we’re interested in but to date, recent history there hasn’t been a whole lot of opportunities. But if they present themselves and they fit within our portfolio, we’ll definitely be pursuing them but they have to make sense from an economic standpoint in terms of creating shareholder value.

Moray P. Dewhurst

Just a final comment on that, Dick, just a reminder to everybody that when we think about asset acquisitions, we always think about them opportunistically in the sense that the expectations of incremental EPS growth are not baked into the numbers that we share with you.

Dick Hayden - Deutsche Asset Management

I understand but one of the questions was, or part of the question is that with the commodity prices, volatility and predictability of some of the earnings is being questioned, does it make sense to have more contractual basis or do you prefer to have more merchant basis?

Moray P. Dewhurst

We’ll still very comfortable with the mix that we have. We are certainly very comfortable accepting merchant risk with physical assets if they are good physical assets in the right place. We’re comfortable with the long-term commodity price outlook. We just don’t see a lot of long-term trends that are going to bring commodity prices back down anytime soon. So we are comfortable with continued exposure to merchant prices.

Dick Hayden - Deutsche Asset Management

Thank you.

Moray P. Dewhurst

I think we have time for maybe a couple more questions.

Operator

Our next question comes from Jeff [Quizinowski], [George Life] Associates.

Jeff Quizinowski - George Life Associates

Good morning. I had a question for you. I guess over the past several years, you’ve seen the energy business continue to grow its earnings. I guess looking out a few years, we can see it where it is going to be on par to the utility or perhaps exceed the utility. Internally, how do you guys think of yourselves? Do you think of yourselves as a utility with a merchant portfolio or a generation company with a regulated utility subsidiary?

Moray P. Dewhurst

I don’t think we think of ourselves either way. We think of ourselves as a little bit unique. You have to remember that FPL Energy and a good chunk of its growth is itself coming from something, namely the wind business, which is a little outside the context of the typical paradigm of utility and generation company. So we’re a mix of all three elements.

We clearly continue to have what we believe is one of the best utilities in the country. We like that business. It continues to grow. We have some very nice generating assets, conventional generating assets that compete very effectively in good market structures and are productive economic assets, and then we have a great business in the wind business which has huge potential for additional growth.

So we don’t characterize ourselves as either a utility with a generating platform or a generator with a utility as well. We are what we are. In terms of the implications for future development, we are going to continue to seek ways to try and develop all of those businesses as best we can to increase shareholder value. So we won’t be swayed from investing in one particular area just on the thought that it might change the balance in some way. That by itself would not upset us.

Jeff Quizinowski - George Life Associates

Thank you very much.

Moray P. Dewhurst

Maybe the last question.

Operator

We’ll go next to Danielle Fyfe, [inaudible].

Danielle Fyfe

Thank you. Actually, most of my questions have been answered. What do you see -- did you feel that actually technologically it was going to be easier, I mean, it has improved, the availability of the turbines in particular, et cetera, that made you change your outlook? Or is it simply the market was just so overwhelmingly positive?

Moray P. Dewhurst

It is much more the market opportunity. Nothing much has changed on the technology front in the last year or so, but we clearly see that there is going to be a big opportunity. We are very well positioned to take advantage of that opportunity and we need to, as we indicated, to scale up and grow as quickly as we can as long as we can maintain good profitability.

Danielle Fyfe

And at this point, just to make it easier, what is your average cost per kilowatt as you see it for the future? And on the [inaudible], sort of an escalation rate we should put on it? I understand it is impossible to figure it out but just your own sentiment about it.

Moray P. Dewhurst

I think today, probably most projects we are seeing are somewhere in the 1700 to 1900 KW range. We might see a good one around 1600 if it were in a real flat area that’s really easy to get to.

On how quickly that’s going up, hopefully that’s not going to grow real rapidly now. As I indicated earlier, I think we’ve seen the big wave of steel price increases work its way through, so we’re optimistic that that’s not going to grow much more than inflation going forward. But I have to say --

Danielle Fyfe

And it doesn’t seem that there is a lot of competition coming into it, or is it just because we don’t hear about it?

Moray P. Dewhurst

No, I don’t think that that’s fair. I think it is very strongly competitive and all of the major manufacturers are working hard to expand but they are in turn dependent upon a global supply chain, which I touched on in my prepared remarks, that also needs to expand.

Danielle Fyfe

Thank you very much.

Operator

That concludes the question-and-answer session today. At this time, Mr. Dewhurst, I will turn the conference back over to you for any additional or closing remarks.

Moray P. Dewhurst

We have no closing remarks other than thank you all for your attendance. We look forward to talking to you again after the third quarter.

Operator

That concludes today’s conference. Thank you for your participation. You may disconnect at this time.

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Source: FPL Group Q2 2007 Earnings Call Transcript
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