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FPL Group (FPL-OLD)

Q3 2007 Earnings Call

October 30, 2007 9:00 am ET

Executives

James von Riesemann - IR

Moray P. Dewhurst - CFO

Lew Hay – Chairman, CEO

Jim Robo – President, COO

Analysts

John Kiani - Deutsche Bank

Greg Gordon - Citigroup

Leslie Rich - ColumbiaManagement

Dan Eggers - Credit Suisse

Ashar Khan - SAC Capital

Paul Patterson - Glenrock Associates

Daniele Seitz - Dahlman Rose

Operator

Welcome to the FPL Group 2007 third quarter earningsconference call. This conference is being recorded. At this time for openingremarks, I would like to turn the conference over to Mr. Jim von Riesemann.Please go ahead, sir.

James von Riesemann

Good morning and welcome to our 2007 third quarter earningsconference call. Moray Dewhurst, the Chief Financial Officer of FPL Group, willprovide an overview of our performance for the quarter. Also with us thismorning are Lew Hay, FPL Group’s Chairman and Chief Executive Officer; JimRobo, President and Chief Operating Officer of FPL Group; Armando Olivera,President, Florida Power & Light Company; and Mitch Davidson, President ofFPL Energy. Following Moray’s remarks our senior management will be availableto take your questions.

Let me remind you that our comments today will includeforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Any statements made herein about futureoperating results or other future events are forward-looking statements underthe Safe Harborprovisions of the Private Securities Litigation Reform Act of 1995. Actualresults may differ materially from such forward-looking statements. Adiscussion of factors that could cause actual results or events to vary iscontained in the appendix herein and in our SEC filings and in the investorsection of our website www.FPLGroup.com.

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

Moray P. Dewhurst

Thank you, Jim good morning everyone. FPL Group’s 2007 thirdquarter results were very good overall, driven again by outstanding performanceat FPL Energy. FPL Group adjusted per share results grew approximately 7% overlast year’s comparable period while FPL Energy’s grew 25%. The strong earningsgrowth at FPL Energy reflects higher realized pricing following the roll-off oflower-priced hedges in the existing portfolio as well as contributions from newassets; both of which were anticipated. The merchant portfolio and thewholesale marketing operations also took advantage of market opportunities anddelivered slightly better result than we had expected.

Florida Power & Light was roughly flat for the quarter,which was inline with expectations as good revenue growth was offset by costincreases. Customer growth continued at a healthy rate.

Looking forward to likely full year results with threequarters now behind us, we are well positioned to deliver another very goodyear financially. We expect results to be at or near the top end of the rangeof what we shared with you last fall, which equates to approximately $3.45 pershare.

We expect FPL Energy to come in at or slightly above thehigh end of the range we originally set out for you at this time last year,while Florida Power & Light will likely come in at the low end. We saidlast year that this will be a challenging year financially for Florida Power& Light in part because of the impact of our Storm Secure Program and thishas proved to be the case. In addition to the fact as we anticipated however,weather effects in the first half were unfavorable and at this point we wouldnot expect to be able to make up the lost ground unless we see unusuallyfavorable weather impacts in the last couple of months of the year.

While we still have much work to do to bring 2007 to a satisfactoryclose, over the past month or so we have been going through our normal annualplanning process as well a complete review of our strategy and our view of FPLGroup’s prospects for the next few years has been developing positively. Webelieve we have put in place the foundation to enable us to deliver a sustainedperiod of about average growth with a very moderate risk profile and one whichis supported by one of the strongest financial positions in the industry.

FPL Energy’s growth would be driven heavily by new winddevelopment that will likely encompass growth in a number of other areas aswell, while Florida Power & Light should benefit from service territorygrowth and sustained reinvestment. We expect to deliver average adjusted earningsper share growth of at least 10% through 2012 off a 2006 base year.

I will provide more detail around 2008 and 2009 expectationslater in the call. For the moment, let me just note that we now see areasonable range for 2008 of $3.83 to $3.93 per share, a bit higher than wehave previously suggested. For 2009, we see a reasonable range being $4.15 to$4.35 given the drivers we can see today.

As a reminder, when we discuss FPL Group’s earningsexpectations, we assume normal weather and mark our currently open positions tothe current forward curves. We also exclude the effect of adopting newaccounting standards, if any, and the mark-to-market effect of non-qualifyinghedges, neither of which can be determined at this time.

Now, let’s look at the results for the third quarter. In thethird quarter of 2007, FPL Group’s GAAP results were $533 million or $1.33 pershare compared to $527 million or $1.32 per share during the 2006 thirdquarter. FPL Group’s adjusted 2007 third quarter net income and EPS were $493million and $1.23 per share respectively compared with $460 million or $1.15per share in 2006. The primary difference between the reported results and theadjusted 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 acomplete reconciliation of GAAP results to adjusted earnings. FPL Group’smanagement uses adjusted earnings internally for financial planning, foranalysis of performance, for reporting of results to the board of directors,and its input in determining whether performance targets are met forperformance-based compensation under the company’s employee incentivecompensation plan. FPL Group also uses earnings expressed in this fashion whencommunicating its earnings outlook to analysts and investors. FPL Groupmanagement believes that adjusted earnings provide a more meaningfulrepresentation of FPL Group’s fundamental earnings power.

Please note that all prior-period amounts have been adjustedto reflect the application in the fourth quarter of 2006 of an accountingstandard change related to planned major maintenance activities which had theeffect of increasing 2006 third quarter results by $3 million or less than $0.01a share.

Florida Power & Light performed in line with ourexpectations in the third quarter. Customer growth continued strong though withsome indications of a possible tapering off late in the period. Unfortunately,the influence of weather on the quarter was more complicated than normal as Iwill explain in a minute, and this makes it more difficult to detect anypossible change in trend in underlying usage growth. Nevertheless, at themoment we still do not see any significant change in underlying i.e., weatheradjusted usage growth.

Cost increased in the period, but overall were in line withour expectations. We indicated last year that higher than typical costincreases driven in part by our Storm Secure Program would inhibit FPL’searnings growth in 2007 and this was the case in the third quarter. Fortunatelywe expect to be able to revert to more typical growth patterns in 2008.

Results were aided by the impact of the 1144 megawattgenerating facility which went into service in May slightly ahead of scheduleand under budget. The addition of this facility to our portfolio is beneficialboth to customers and to shareholders with a slight increase in base rates morethan offset by the fuel savings arising from the incremental efficiency of thenew unit.

Also during the quarter, we announced important steps in ourgeneration expansion plan designed to support continued strong long-term growthin Florida. We announced ourintention to implement further power upgrades at all four existing FloridaNuclear units subject to various regulatory approvals and we filed the petitionfor need to termination for two new nuclear units to be constructed at ourTurkey Point site, also subject to numerous required regulatory approvals andsatisfactory resolution for outstanding technical and economic uncertainties.If all goes well, the upgrades will provide roughly 400 megawatts ofincremental base load capacity with zero greenhouse gas emissions by the end of2012, while the new units will come into service by 2020.

In July, Governor Charlie Crist hosted a Florida GlobalClimate Summit and laid out important new policy directions for the entirestate on this issue. Of the most direct significance to Florida Power &Light are two executive orders setting targets for renewable energy suppliesand for greenhouse reductions. While specific implementation plans remain to beworked out, the policy direction is consistent with FPL Group’s view of theclimate change issue and we support the establishment of stretch goals.

Partly in response to the Governor’s challenge to the state we have accelerated plans for newinitiatives in Florida. Amongthese are plans for new solar generation projects and we continue to seek waysto take advantage of the limited wind resource generally available in Florida.

We also announced our intention to invest significantly inupgrading our network infrastructure to create a smart network using advancedtechnology and two-way communication with customer premises to enable moreautomation and network intelligence.

As part of this effort, we expect our advanced meteringinitiative currently in a test phase and proceeding well to enable us toleverage our existing industry leading energy conservation program portfolio.Overall, we expect to commit up the $500 million to this effort over the nextseveral years.

For the third quarter, Florida Power & Light reportednet income of $326 million compared with $328 million in last year’s thirdquarter. The corresponding contributions to EPS were $0.81 this year comparedto $0.82 last year.

For the third quarter 2007, the average number of FPLcustomer accounts increased by 90,000 or 2%. While this is a very strong growthlevel and consistent with our long run history, I should note that we saw flatmonth-to-month change in customer accounts from August to September when wewould normally expect to see some increase. The preliminary data for October donot show growth at levels we would normally see at this time of the year.Whether this is indicative of a real slowdown or is just a transitoryphenomenon, we do not yet know. We will continue to monitor short-termdevelopments and keep you informed, but I should also reiterate that we expectany slowdown to be temporary.

As we’ve said before, Floridaremains an attractive place to live and work, its economy continues to performwell and we certainly anticipate that the beginnings of the baby boomer retirementwave will support FPL’s long-term growth.

Despite weakness in the housing sector, economic growth asreflected in the growth in real personal income continues at a healthy pacewhich is generally positive for growth and use per customer.

Unfortunately, analysis of usage trends in the quarter ismade challenging by the large and somewhat atypical impact of weather. Averagetemperatures were above normal and this typically translates into higher usagein a fairly predictable pattern. We estimate that the temperature effect byitself would have been positive for sales volume by about 4.1%. However, the thirdquarter had a high incidence of afternoon showers and thunderstorms whichinvariably reduce peak loads and usage. Our modeling of these effects is morelimited than our knowledge of the temperature relationship, but rough estimatesuggest this in fact could be as much a negative 6%, and thus the net weatherimpact relative to “normal” was negative 1.9% or negative 0.3% relative to lastyear, which would imply that underlying growth was a healthy 1.8%.

Because of the high degree of uncertainty about the rainfalleffect, however, especially relative to prior years, we are a little skepticalof these analyses. Perhaps the best we can say at the moment is that there isenough statistical noise in the weather data to overwhelm any signal in theunderlying usage data and thus we cannot at this stage draw any meaningfulconclusions about trends and usage.

In prior earnings calls we have noted uncertainty in ourunderlying usage outlook near term and this continues to be the case eventhough it remains hard to see much of an impact on our recent results. Commonsense tells us there must be some effect, for example an unused condo clearlywon’t have the same electricity pattern as one that’s occupied, but at least sofar that doesn’t seem to be much of an effect showing up in the data.

As a reminder, over the long term we have seen annual usagegrowth of about 1%, but this figure has always been quite volatile from quarterto quarter and year to year. As with customer growth, we will continue tomonitor usage trends and let you know if we see any reason to change ouroutlook.

For the third quarter, FPL’s 2007 O&M expense was $378million, up $43 million from the prior year figures driven by higherdistribution, nuclear power generation, employee benefits and customer servicecosts. For the full year, we continue to see increases in distribution, nuclearand fossil generation as well as employee benefits and customer service costsand of course our Storm Secure Program as being the main drivers of O&Mgrowth.

We indicated last year that we did not expect to be able tooffset the one-time ratcheting effect on O&M of the full implementation ofStorm Secure through productivity gains in other areas. This is the main reasonwhy we expected FPL’s income growth to be challenged in 2007. For the next fewyears, we expect to spend about $50 million in O&M expense and a $100 millionto $150 million in capital per year on Storm Secure activities.

Depreciation in the third quarter fell $3 million to $194million as higher distribution and generation depreciation including the impactfrom the addition of the Turkey Point 5 unit were offset by reductions incertain amounts recovered through the capacity clause. Underlying basedepreciation increased by $7 million.

The accompanying chart summarizes the third quarter 2007earnings drivers of Florida Power & Light which netted to a decrease of $0.01per share. In the interest of time, I will not read each numbers for you. Forthose of you without immediate access to the slides, they are available in theinvestor section of our website, www.FPLGroup.com.

To summarize, Florida Power & Light’s earnings werelargely inline with our expectations, a combination of customer growth, usagegrowth and the addition of the Turkey Point 5 natural gas facility were offsetby higher operating expenses, increased base depreciation and a number of othersmall negative effects.

FPL Energy had another very strong quarter with adjustedearnings increasing 25% over last year’s comparable period. Last fall, weindicated that 2007 would show very healthy growth, owing primarily to two keydrivers: the rollover of older, lower-priced hedges to more current marketvalues, and the additional contributions from new wind. Both drivers areplaying out very much as we expected, but FPL Energy is a bit ahead of where weexpected it to be, primarily because the existing portfolio has been strongerthan anticipated and because the opportunities available to our wholesalemarketing and trading arm have been better. This has helped us more than offsetdisappointing wind resource availability in the first part of the year.

FPL Energy is very well positioned for further sustainedgrowth beyond 2007. Inlate September, we closed the acquisition of Point Beach, adding 1023 megawatts to ournuclear portfolio. The long-term contract on Point Beach will be increasinglyaccretive to EPS over the years, and we expect to be able to add output throughcapacity upgrades as well. Our wind development program is proceeding well, andwe continue to see 8,000 to 10,000 new megawatts in the 2007 through 2012period as being a realistic program.

We are pursuing a number of other growth opportunities,including solar and transmission projects, and are exploring selective greenfieldgas development opportunities in our core markets. Finally, the business iswell-positioned relative to longer-term fundamentals including commodity pricesand the likely impact of climate change initiatives on wholesale power markets.

FPL Energy’s 2007 third quarter reported results were $220million or $0.55 per share compared with $218 million or $0.55 per share in theprior period results. Adjusted earnings for the third quarter of 2007, whichexclude the effect of non-qualifying hedges, were $180 million or $0.45 pershare compared to $144 million or $0.36 per share.

In the third quarter of 2007 we recorded a gain in thenon-qualifying hedge category of $40 million after tax with $35 millionreflecting the decrease in forward commodity prices we experienced during thequarter and $5 million representing the reversal of prior period losses.

A gain in the non-qualifying hedge category is typicallyassociated with the reduction in the value of our open or unhedged positionsand is thus a negative indicator for future expectations and vice verse.

Fortunately, the net market movement in the quarter wassmall as I will discuss in a moment, and so the impact on our expectations isnot significant. As a reminder of the types of transactions that we classify asnon-qualifying are those that must be mark-to-market under GAAP, but to providean economic hedge to a position that is not mark-to-market thus creating anunavoidable mismatch in current period GAAP results. We continue to believe itis more useful to think of FPL Energy results excluding the impact of thenon-qualifying hedge category whether that impact is positive or negative.Comparisons of period to period GAAP results can be quite misleading when thereis significant volatility in the non-qualifying hedge category.

FPL Energy’s third quarter adjusted EPS contributionincreased $0.09. New investment, primarily new wind projects, contributed $0.02per share, the existing portfolio added $0.05 per share and asset optimizationand trading added $0.03 relative to last year’s comparable period. Much of thegrowth in the existing portfolio came from the anticipating rollover of olderlower price hedges, but we also saw better market conditions and additionalopportunities for asset optimization. All parts of the existing merchantportfolio contributed to the strong performance.

The existing wind portfolio was roughly flat with last year.You may recall that our wind index was abnormally low particularly in Texasin the second quarter owing to unusual weather patterns. These trends continuethrough July and then reverted to more normal conditions.

Across the entire portfolio, the wind index for the quarterwas good although ironically this was one quarter in which the correlationbetween our wind index and actual realized wind speeds at our sites was notparticularly strong.

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

Operationally, the fleet continued to perform very well. Allother factors were a negative $0.01 per share, driven primarily by additionalinterest expense and overhead, which reflects continuing investment in thegrowth of the business.

During the quarter, we saw continued volatility in commodityprices, but not a great deal of net change. As this chart shows, the ten-yearnatural gas strip decline modestly over the period, which is consistent withgain in the non-qualifying hedge category. Although this trend by itself asnegative for our future expectations, the magnitude of the impact is not largeand as the chart also shows the ten year strip remains above the levels of latelast year. Further, since the end of quarter prices have risen again. Focusingfor a moment on the fundamentals rather the short-term fluctuations, we continuesto like the inherent long position of the FPL Energy portfolio relative tonatural gas and to spot spreads in New England and Texas.

To summarize the 2007 third quarter, on an adjusted basisFPL contributed $0.81, FPL Energy contributed $0.45 and corporate and other wasa negative $0.03. That is a total of $1.23 per share compared to $1.15 pershare in the 2006 third quarter on an adjusted basis.

Let me now turn to our earnings outlook. For 2007, we expectadjusted EPS to be at or near the high-end of the range we set out last fall orin other words, around $3.45. FPL Energy has had very strong performance forthe first three quarters and is likely to be at or above the top of its range,while Florida Power & Light hindered by the weather driven revenueshortfalls earlier in the year, it is likely to be at the lower end of itsrange.

For 2008, our current expectations are better than the earlyview we shared with you this time last year, based on everything we see today,we believe a range of $3.83 to $3.93 is reasonable, which should mean at leastan 11% growth in adjusted earnings per share. With normal weather, we expectFlorida Power & Light to show modest growth, while at FPL Energy we seeanother year of growth in excess of 20%.

Looking out to 2009, the range of likely outcomes is ofcourse larger, but the drivers we can see today suggest a range of $4.15 into $4.35,again the big growth driver will be FPL Energy. Beyond 2009, we expect tocontinue strong growth. For the period of 2006 through 2011, we expect to seeadjusted EPS grow by an average of at least 10% per year.

As always our EPS expectations assume normal weather andmark our currently open positions to the current forward curves. We alsoexclude the effect of adopting new accounting standards, if any, and themark-to-market effective non-qualifying hedges neither which could bedetermined at this time.

Our outlook for sustained high EPS growth will naturallyraise the question about the implications for the dividend. While the dividenddecision is of course one that the board will make, our current thinking isthat the company is well positioned to offer more rapid dividend growth than wehave seen in the past.

Because of our growth profile, our capital investments needsare substantial and so we want to maintain a moderate payout ratio, but a dividendgrowth rate of about 8% appears to us to be a reasonable balance between immediateshareholder return and supporting the continued growth of the business.

Let me now provide a little more detail around the driversof our growth expectations starting with the 2007 to 2008 bridge for FloridaPower & Light. Broadly speaking, we look for a normal year of growth fromFPL with the positive effects of regular revenue growth and AFUDC being partiallyoffset by modestly rising cost levels. On the revenue side, we expect about 5%volume growth or 3% on a weather adjusted basis and we will also see the fullyear impact of Turkey Point 5, which will add about 1% to base revenues.Construction projects, most notably the West County combined cycle units, willadd to AFUDC and environmental capital projects and some of our fossilfacilities will contribute to earnings through the environmental clause. As aremainder, prudent environmental investments are entitled to recovery at a fairof rate of return through the environmental clause.

We anticipate O&M growth of about 6% with the primarydrivers being continued cost pressures in nuclear, employee costs and anincrease in the number of plant fossil unit outages. Depreciation, interest andother factors will grow roughly inline with the general growth of the businesswith additional modest increases due to the full year impact of Turkey Point 5.

The FPL bridge for 2008 to 2009 looks broadly similar. AFUDCwill grow with spending on generation projects, primarily the West County combined cycle units due toenter service in 2009 and 2010. The first West County unit is due to enter serviceduring the period of the existing rate agreement and therefore is expected tobring with it a base rate adjustment, thus contributing to revenue growth.Depreciation expense will increase a little more rapidly, reflecting thecontinued growth of the business and the introduction of West County Unit I. Otherdrivers will be roughly the same as from 2007 to 2008. All this should lead toanother year of moderate growth.

As you know, Florida Power & Light’s rate agreementcomes to an end at the end of 2009 and this will us an opportunity to resetbase rates for 2010 and beyond to reflect the significant capital expendituresthat we have been and will be continuing to commit to the business during thisfixed rate agreement.

Turning to the earnings growth outlook for FPL Energy, thischart shows the bridge from 2007 expectations to 2008. Not surprisingly thestory is one primarily of growth from new asset additions, but with additionalgrowth anticipated from the existing portfolio and from related marketing andtrading activities, the opportunities for which grow along with the overallgrowth in the business.

These positives will be partially offset by the cost of a growingbusiness, primarily increased interest expense and increased G&A. Of course,the growth in these itself is a function of our success with the growth plan overalland they can be relatively easily scaled to match the level of success we havein building the portfolio.

The $0.07 to $0.11 of growth from the existing portfolio isa function of a number of smaller parts. In 2008, we still have a certainamount of built-in momentum from the roll-off of older and lower priced hedgesand forward capacity pricing in key markets primarily in New England,is a bit stronger. Together these would account for roughly $0.20 of growth. Offsettingthese and some smaller positives will be the fact that 2008 is an outage yearfor Seabrook which 2007 was not, as well as the roll-off of some favorablepricing on older contracted assets.

Turning finally to the 2008 to 2009 bridge for FPL Energy.Again, we expect the primary driver of growth to be new asset additions. Atthis stage, we anticipate little if any growth in the existing portfolio in2009 for a combination of reasons. In 2009, we’ll have outages at Seabrook,Duane Arnold and Point Beach.We also have plans for this time period some significant work on some of thefossil units. 2009 will be the firstyear where the roll-off of PTCs and all the wind projects has any impact. Wethink it is a testament to the strength of the business that despite thesecombined effects, the existing portfolio still shows the potential formaintaining its earnings power while being positioned for return to growth in2010 and beyond.

Before closing, let me address potential drivers ofvariability in our results. As always, I urge you to consult our SEC filingsand the risk factors described in our cautionary statement attached to thispresentation for a fuller discussion of risks. My comments here relate only toa subset of the possible reasons while actual reported results might be differentfrom our current expectations.

In the appendix, we have included what I refer to as ourplus and minus charts which show somekey sensitivities. With the chart shown here I’d like to address hedging andcommodity price exposure and try and explain some refinements to our thinkingabout communicating with you on this topic.

Last January we introduced a slightly modest and moredetailed description of our commodity exposure and we have built on that here. AsFPL Energy’s business has grown and become more complex, it has become lesseasy to speak simply of the percentage of the portfolio that it has hedged orunhedged. In fact, we do not think it is meaningful to think about a singlemeasure of the exposure of the entire business since it is made up from verydifferent pieces.

For these purposes it is useful to think of FPL Energy’sportfolio in three broad categories:

First, the existing portfolio of physical assets withvarying degrees of contract coverage and hedging and varying degrees ofexposure to different commodity prices.

Second, new assets primarily wind for the next couple ofyears, which for the purposes of these charts are defined as assets not in theportfolio as of December 31st of this year.

Third, non-asset based activities, which are driven by ourmarketing and trading capability.

The nature of the exposure to commodity prices in thesethree categories is somewhat different. Please note also that the definition ofnew assets here is different from what we use when reporting quarterly resultsand on the previous bridge charts for which purposes we used an approachsimilar to the same-store sales concept often used in retail businesses.

The first category is relatively straightforward. Thesensitivity of existing assets to commodity prices can be roughly thought of interms of the percent of expected gross margin that is covered by a contract oris hedged and the two basic types of exposure in our portfolio are to naturalgas and to spot spreads. For these purposes we have grossed up wind productiontax credits to equivalent pre-tax values for comparability, so the equivalentgross margin measure is not a normal accounting measure. Obviously PTCs onexisting projects do not have commodity risk.

We have also included our share of expected revenues, net offuel costs, for equity method investments to put these projects on a comparablebasis. As you can see the existing portfolio is heavily hedged for 2008 withmore than 90% of our expected gross margin from this category protected againstcommodity price volatility.

The third category -- that is the non-asset based businesses-- is also relatively straightforward. In general, FPL Energy’s non-asset basedactivities of which wholesale forward requirements is the most notable areindependent of specific levels of commodity prices. A more useful way ofthinking about these activities when thinking about the potential variabilityof their contribution to a particular year’s expected earnings is to considerhow much of the expected gross margin associated with them will come from dealsthat are already executed i.e., in backlog as opposed to deals that have yet tobe originated.

As youcan see for 2008 32% of the margin we expect from this category of activitiesis associated with deals already on the books. Of course this does not meanthere is no uncertainty about these gross margin dollars; we must still executeeffectively and many other risk factors beyond commodity prices come into play.But it does mean that the origination effort has been successfullycompleted.

As a general guide, we would expect these kinds ofactivities to add about 5% to 10% to the FPL Energy portfolio gross margin, andto enter a year with about one-quarter to one-third of our expected activityand backlog. This was the case going into 2007 and it also the case going into2008.

The middle category, the newer assets, can be a little morecomplex. For a new contracted wind project that has past all its developmenthurdles, it is easy to determine the commodity exposure. But for many new windprojects particularly those a couple of years out it is much less so. We managea development portfolio with many different projects in different states ofdevelopment at any point in time. If one project slips in its developmentschedule, it is likely that another would be a little ahead thus the commodityexposure of a wind development portfolio is not obvious. Clearly a higher powerpricing environment makes a new wind project relatively more attractive but therelationship is not as clear as, for example, the impact of an extra $1 permegawatt hour on Seabrook’s margins.

For the purposes this chart we assumed that PTCs on futureprojects are independent to commodity prices and we have made rough assumptionsabout the mix of likely wind projects and particularly the percentage thatwould be PTA-type deals.

As you can see from the chart on this basis roughly 40% ofthe expected growth margin is protected from commodity price volatility, but werecognize that different assumptions could cause this figure to vary somewhat.

Perhaps more important, we believe the bigger driver to beconsidered for this category is development success. While a higher commodityprice environment certainly enhances our odds of meeting our volume goals, itis by no means the most important factor.

As you can also see from this chart, the equivalent grossmargin contribution from this category to 2008 expected results is modest, asyou would expect. This is a function of the fact that projects that are not inthe portfolio at the beginning of the year are likely to come in late in theyear, and thus contribute little to that year’s results.

The 2008 wind program is much more important for 2009expected results, and so on. Because the nature of these three categories isquite different, we do not think it is meaningful to try and use a singlemeasure to capture a hedging for the entire portfolio.

This chart provides the same information as the previous onefor FPL Energy’s 2009 positions. As you can see, about 80% of our expectedequivalent gross margin from existing assets is hedged, and the mostsignificant open positions are with spot spread sensitive assets. In prioryears, we have typically hedged out underlying gas exposure a bit further thanspot spread exposure, and this is still true today, largely owing to our beliefand experience that the greater depth and liquidity of the gas market makesforwards based on gas prices more reliable as indicators of a fair level offuture prices.

Not surprisingly, the expected contribution from new assets,which to repeat for these charts means assets not in the portfolio as of theend of 2007, is much larger. But, because most of this is wind projects, andbecause of the nature of wind economics, the exposure of this expected marginto commodity prices remains proportionally similar to 2008.

Finally, again as you would expect very little of thenon-asset based business activity that we expect to realize in 2009 is inbacklog today. Our activities in this area, both wholesale and retail tend tobe conservative, and among other characteristics the tenure of the book ofbusiness is typically quite short. Most of the activity is originated in a yearfor delivery and settlement within the same year.

Again, I would note that our growth plans call for thesekinds of activities to grow roughly in line with the overall growth of theportfolio. Historically, they have consistently delivered an increment of about5% to 10% to the equivalent gross margin of the asset portfolio and we expectthem to continue to do so in the future.

Summing up therefore, we are pleased with 2007 performanceto-date and also closed the year at the high end of the range we set up for youat this time last year. We have solid plans in place which we expect to yieldcontinue strong growth for 2008 and 2009, the drivers of which are clear andthe range of variability readily understandable.

We remain well positioned for longer term, with what webelieve are the right exposures to the likely fundamentals of commodity pricesand the important issue of global climate change. We are confident that achievingaverage adjusted EPS growth of at least 10% from 2006 through 2012 as arealistic expectation.

With that, we will believe happy to take your questions.

Question-and-AnswerSession

Operator

Your first question comes from John Kiani - Deutsche Bank.

John Kiani - DeutscheBank

Moray, can you talk a little bit about your current level ofinterest in pursuing some sort of a separation or spin or monetization of aportion of the wind business, especially in light of some of the activity in Europethat’s obviously fetched some very attractive valuations? I know you’vementioned it before obviously.

Moray P. Dewhurst

By way of an update of our thinking, the bottom line is, ourthinking remains really where it has been, so let me just reiterate that. Theway we operate our businesses, they are real operational linkages between thewind and solar portfolios and all other aspects of generation. So, there wouldbe some real costs incurred in separation, a real loss of value as well asincremental cost obviously in creating a separate entity. Before we would bewilling to undertake that we’ve to be convinced that the gain from such aseparation would more than offset the loss of value.

To-date, we have not been convinced that there would be thatmuch fundamental value creation. Here we are most concerned with making surethat whatever the effect of a partial spin might be that it flows value back toexisting shareholders, not simply create a good trading platform in the newentity, but has to create value for existing shareholders.

We spent a lot of time looking at historical examples ofseparations everywhere from partial to full. Simply at this stage have not beenconvinced that we can reliably count on enough, what I would call value flowbackto more than offset the real cost increments to the business.

At the same time, we have not by any means ruled it out as afuture possibility, and one thing that we did indicate earlier in the year isthat we were going to be looking with great interest that [inaudible] partialIPO when it occurs to see how that trades and see if we can develop anyadditional information from that.

We really haven’t changed that view, I think its still makessense based on everything that we see today, but as I said, that doesn’t ruleout possible changes in that view in the future.

John Kiani - DeutscheBank

As far as development is concerned, do you have any interestor is it possible for you to invest in wind outside of the USin other markets?

Moray P. Dewhurst

It’s certainly possible, we certainly have interest. We haveactually for the last couple of years spent quite a bit of time evaluating windprojects in Europe. But frankly, we at the moment thatwe just see a more attractive opportunities for us in the US, given that we areessentially growing the capability in the business as rapidly as we canconsistent with maintaining very effective level of profitability we reallywant to go up to the most attractive opportunities first and we have more thanenough for those keep our plate very full here in the US.

So, it certainly doesn’t preclude the possibility of usgoing elsewhere in the future, but at least for the short term, as I said we’revery happy with the opportunities that in front of us in the US.

Operator

We’ll go next to Greg Gordon - Citigroup.

Greg Gordon -Citigroup

You have given sort of rough rule of thumb based on yourcurrent sort of point of view on wind economics and how you finance your windbusiness as to the earnings accretion from every 100 megawatts of windadditions. Is there in fact a number out there and what is it?

Moray P. Dewhurst

We said that every 100 megawatts, you can figure an averageof sort of a penny to a penny and a half of accretion averaged over the firstfew years of the project’s life. There is quite range in that obviously dependsin part on how we finance it, what type of project it is, but that’s areasonable range.

Greg Gordon -Citigroup

When I look at the ‘08 and the ‘09 earnings drivers forFPLE, you are targeting 1100 megawatts in ‘08 and 1500, 1600 megawatts in 09’. So by that math you are looking ataccretion of about $0.15 to $0.20 in ’08 and $0.25 to $0.30 in ‘09 but the newinvestment driver for ’07 to ‘08 and‘08 to ‘09 is materially higher thanthat. What explains the delta if it’s all wind?

Moray P. Dewhurst

You can’t just take that penny to a penny and a half andapply it the way you are applying, because there is a specific timing of whenthe new projects come in. That math doesn’t work; you’re going to have to do itslightly differently. In the interest of everybody else’s time, I can take youthrough that separately.

Greg Gordon -Citigroup

In ‘08 probably a part of it is the nuclear plant additionwhich is a new investment?

Moray P. Dewhurst

Both ‘08 and ’09. Point Beach is showing up in the newcategory.

Greg Gordon -Citigroup

We would subtract Point Beach from the new investmentsnumber, but if we could walkthrough that offline that would be great. I am sureit’s an easy explanation, but the driver seems to be higher than what the ruleof thumb would suggest.

Moray P. Dewhurst

It’s a little bit of a complicated sort of laying out of thenumbers. It’s conceptually simple, but I prefer to do it separately.

Greg Gordon -Citigroup

When you look at your earnings aspiration in aggregateobviously there is review out there somewhere in the distant future in ‘09. Sowhen you look at your posted 2010 earnings aspirations what types of equityreturns and capital structures do you assume or ranges of potential returns andcash structures do you assume you will be able to earn at FP&L?

Moray P. Dewhurst

Let me take the capital structure first. We have maintaineda very consistent structure at FPL for many, many years., certainly longer thanI have been around and it has served as well, and I see no reason why thatwould change going forward. On the actual return, I think all I would say isthat Florida as a jurisdiction has historically provided the opportunity forwell-managed companies to earn a little bit above the nationwide average rateof return and we see no reason why that would not be the case going forward.

Operator

We will go next to Leslie Rich - Columbia Management.

Leslie Rich - Columbia Management

I wondered if you could walk through the non-asset-basedbusinesses with a little bit more detail? I am not sure I understand what’s inthat bucket. And then as you look at your contribution from I guess you call ittrading and asset optimization, strategically has your approach to that changedat all? How do you look at that?

Moray P. Dewhurst

Well let me take the second part of that first.Strategically it hasn’t really changed, not greatly although it would benon-asset based businesses now include the retail operation in Texas,which of course was not true a few years ago.

But me talk a little bit about what we call the non-assetbase businesses. This is really an umbrella term to capture everything that isbased on the core marketing and trading capability that we have built up to beable to handle the risk positions that are inherent in the physical assets.Once you have that capability it sort of automatically provides you opportunitiesbeyond just what the assets themselves bring along.

The biggest single area for us particularly this year is ourwholesale requirements business which has been growing reasonably steadily overthe last few years. That is a business that we got into because we knew a gooddeal initially about the New England market andsubsequently expanded to other markets, typically where we have assets althoughnot necessarily so. It is in a sense a freestanding business even though itsexistence hinges on capabilities that were developed in connection with runningthe assets.

There was also a small amount of just pure spec tradinginvolved in there, again once you have a significant position in a market andyou have an information based sort of automatically provides you certainopportunities to take limited positions.

The three big ones, I would note in the non-asset basecategory, wholesale requirements, the retail business, and then pure spectrading. This pure spec trading can range anything from just arbitragingreal-time day ahead markets to trading around transmission nodes those kinds ofthings.

Collectively if you look back over five to six years ofhistory, the sum of those kinds of activities even though the specificactivities themselves have changed, the sum of those activities has contributedan increment of about 5% to 10% beyond the gross margin that we just extractfrom the assets themselves. So, as the portfolio builds we have beenconsistently building our capability and exploiting it in these other areas.

So the growth plant calls for essentially a continuation ofthat again keeping it roughly in the same proportion as the rest. We’re notchanging our overall risk profile. We’re not planning to build a largestandalone trading platform, but as that overall portfolio grows there are justmore opportunities in absolute terms for these kinds of activities.

Leslie Rich - Columbia Management

What is your outlook for the retail business? Do you plan tojust stay in Texas. Are youadding customers, are you trying to grow it or is it just sort of added growth?

Moray P. Dewhurst

No the business is growing. It’s done quite well. We’llcontinue to grow it, but I guess the best way to say it is it will be acontrolled growth consistent with the existing market structure in Texas.I think there is a significant opportunity for a relatively small or handful ofrelatively small share of players to make money given the market structure, butI don’t think it’s a market where you want to effectively challenge the marketleaders shall we say.

Operator

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

Dan Eggers - CreditSuisse

Can we just talk a little bit about the implications oflanguage floating around Congress as part of the Energy Bills as far aspotential for a national RPS standard, potential for renewable energy credit ona national basis, what that would mean for your existing fleet and how youcontract forward construction programs?

Moray P. Dewhurst

Historically we have been really more in favor of lettingstates decide what they wanted to do in the way of RPS. Over the time there hasbecome a lot more activity and it’s become lot more diverse and it has changedour view to the point that we are now supportive of a national renewableportfolio standard.

The reason we’ve really changed is because what has grown upis a bit of a patchwork quilt with different definitions, different categorieswhich is probably not the most efficient way at the national level of movingthe country where we think it needs to go in order to help address the climatechange issue. We do believe that theprimary importance of renewable energy in a power sector is to support climatechange issue.

So, at this point we believe it would be more efficient tohave a national system which would have a single definition that can beuniformly traded everywhere. But whether that is a practical proposition atthis stage is certainly something that we could debate.

As a business, we’re certainly quite prepared to continue tooperate in the existing patchwork quilt environment obviously we havesuccessful in that. I think we would probably have a little more upside in auniform national market.

Lewis Hay

Dan, I just want to add a point though, we have to berealistic about what the targets are for a national program, and some of theproposals that floating around up there are in our opinion, unreasonablyaggressive.

Dan Eggers - CreditSuisse

Any desire to comment on what unreasonable was?

Lewis Hay

I just prefer not to comment on that at this point, but justto point out, how much renewables would be required in a pretty short period oftime under the current proposals. So, I think the targets either have to berelaxed or the definition of what’s renewable has to be expanded.

I would say the other point we have on that is, you don’twant to start slicing it, whatever the requirement is and saying for instancethat, if the target is 15% by a certain date that 5% of that has to be solar orsomething like that, we can’t put it onto constraints, just given geographiclimitations.

Dan Eggers - CreditSuisse

Jim, could you comment on pricing economics for new windprojects as we see more of the Europeans come into the USwith presumably a low cost of equity, it seems. Are project economics changing atall at this point?

Jim Robo

Dan, we remain pretty comfortable with the returns thatwe’re seeing in the projects that we’re developing. You have to remember, wehave a very large scale advantage from adevelopment standpoint, relative to our competitors here in the US.We have been working very hard to capture more of the wind value chain in ourprojects. We are very comfortable with the economics that we’re seeing.

So, I think the short answer is our wind project economicsare strong or stronger now than they ever have been.

Moray P. Dewhurst

Dan, let me see if I can tie a couple of those responsestogether for you. One of the key things that led us to the 8,000 to 10,000program was the realization that the market opportunity here is just growing.It is larger than perhaps we had previously anticipated.

So I think in the context of impact on margins, that’s oneof the reasons why we’re not seeing any noticeable trend in margins, becausethere is plenty of room for a number of competitors to play.

At the same time, that is to Lewis comments about being realistic about the RPS standards. Thatmarket expansion is consistent with State Level RPS targets that we’re alreadyseeing today. I think it actually tiesin very neatly with what Lew said. There is a limit to how much we collectivelyas an industry can do in any given period of time. If we try to force muchbeyond that, all we will do is end up incurring a lot of extra cost withoutactually creating a lot of additional renewable energy in a given time periodor avoiding carbon emissions.

So, it’s perfectly possible to have a very, very healthyrate of growth for the renewable space overall without going to extremes on thespecific targets for the national renewable portfolio standard.

Operator

Our next question will go to Ashar Khan - SAC Capital.

Ashar Khan - SACCapital

Could you tell us what kind of ROE we will be at FPL in2009, based on your projections roughly?

Moray P. Dewhurst

At the moment what we are looking at is probably a littlebelow 10%.

Ashar Khan - SACCapital

Moray, you mentioned in your remarks that as part of the Florida’sgreen initiative you were looking at solar and other energy efficiency measureson green. How do you contemplate getting the return on that CapEx? I justwanted to get an understanding of where that was and how does the company get areturn on those spendings, apart fromthe rate deal or separate from the rate deal or how is it being anticipated aswe look forward?

Moray P. Dewhurst

Right. Well, obviously going to depend on what the specificinvestments are because some are already covered under the existing regulatoryframework. For example, capital investments in energy efficiency programs arerecovered with a return through the conservation clause. So, there is already aframework that exists for that. That doesn’t preclude the possibility ofotherwise thinking about that going forward, but at least at the moment wealready have that that piece of the framework in place.

On things like renewable energy, again there is an existingframework which is the resource planning process that the state employs, andany new generation that came in under the existing rate agreement would beentitled to its generation base rate adjustment. So, right now there is aframework that accommodates anything that might be contemplated.

For example the 2008 test year would then get rolled into2009 rate resetting process. So, there is an existing framework and again itdoesn’t preclude the possibility that there might be changes to that framework.

For example, in implementing the governor’s target of arenewable portfolio standard the PSC has been charged with examining that issueand looking at possible different rules that might help encourage utilities tobe able to retain that standard. We don’t yet know what may come out of thatprocess. But certainly there is a possibility for some change to that frameworkso we are particularly supportive of renewable development.

Ashar Khan - SACCapital

When do you expect those CapEx to be put into the budget,what -- when should be we looking?

Moray P. Dewhurst

There is some in ‘08 budgets, but it will start really tobuild in ‘09 and ‘10.

Ashar Khan - SACCapital

If I can just end up, in your opening remarks you mentioned‘09 FPL Energy had a negative from PTCs rolling off, could you quantify howmuch that is?

Moray P. Dewhurst

I think it’s in the order of $10 million.

Operator

We will next to Paul Patterson - Glenrock Associates.

Paul Patterson -Glenrock Associates

I just want to ask you about the four capacity markets inNew England , with the auction coming up I know the results in terms of thefinancial impact it might be not exactly completely within the timeframe thatyou guys are providing earnings guidance, but could you just give a little bitof flavor as to what you see there now that we are getting closer to thatauction and what the potential impact might be for you guys?

Jim Robo

First of all, I would say it’s not getting any easier tobuild power plants anywhere in the country, but particularly in the Northeast.

Secondly you are right any results from this upcomingauction really will have only a few months of impact in the ‘09 guidance wehave given you, it’s really more of a 2010 and beyond type of impact. We feellike the markets are, we feel like this is a favorable and positive developmentand we expect auction to clear at a number that is higher than the currentfixed price numbers.

We will see. It is going to depend a lot on how manyprojects come out of the wood work and bid into the auction, but I thinkfundamentally it’s not very easy to develop right now in the Northeast. I think this will be a positive earningsdriver for us out in the next decade.

Paul Patterson - GlenrockAssociates

The ISO New England has put out those same statements thatthere is 17,000 megawatts. I mean, obviously a very large number that couldtheoretically be available to it. When you are looking at this, what do yourealistically think might show up in the form of new capacity? I mean, can yougive us any flavor on that?

Moray P. Dewhurst

No, Paul. We have a view it’s not a view given that it’sgoing to be an auction and we may or may not be participating in it. I am notreally in a position to give you exact numbers around what our view is, what sgoing to be available and what we think is actually going to happen in themarket.

Paul Patterson -Glenrock Associates

Okay, fair enough. Finally on offshore versus onshore wind,have you guys seen a difference with respect to response that we have seen, Imean obviously we had the [Lippa] situation, but there is also been some otherstuff that’s happened with other developers that maybe indicate a little moreresistance to offshore. Are you guys seeing that, or is that just sort ofanecdotal stuff?

Jim Robo

First of all, offshore in the USis challenged by fundamentally by two things: one is none of the manufacturershave ever manufactured an offshore wind turbine for the USmarket. There needs to be a real demand in the USfor offshore wind before; it’s a bit ofa chicken and egg issue there. But there needs to be a real demand out therefor offshore wind before any of the manufactures are going to step up to theplate and do the R&D and tooling and all the things you need to do in orderto produce offshore wind turbine for the USmarket. That’s a challenge.

The second piece of it is that many of the cost associatedwith offshore winds have been escalating very quickly outside the tower and turbine.There are significant steel and EPC and marine costs that you’re competing in aglobal market for those things and other industries such as the oil and gasindustry that really put a lot of inflationary pressure on those costs. So, Ithink overall offshore wind economics are very challenged relative to onshore.

Moray P. Dewhurst

But, let me just add that that’s been our view of offshorewind in the US for sometime, now, we just don’t see a major opportunity anywhere comparable to the onshore opportunity at least for a long time. So, ourinterest has been strictly limited by specific projects particularly where wemight have an existing strong customer relationship.

The offshore sector has not been something that we havereally focused on. There are plenty of opportunities for us onshore, theeconomics are much better. It just makes a whole lot of sense for this countryto focus on exploiting its best onshore resources first. So, there is a longway to go before we really frankly need to go offshore.

Operator

We will have our final question from Daniele Seitz - DahlmanRose.

Daniele Seitz -Dahlman Rose

I just was wondering if you had any estimates on solarconstruction in terms of capacity factor and how does that compare to wind power?

Moray P. Dewhurst

Daniele could I ask that we get back to you separately onthat?

Daniele Seitz -Dahlman Rose

Sure.

Moray P. Dewhurst

The answer is, it depends on a great many different factors.We can give you some reasonable ranges for different types of technologies indifferent situations.

Daniele Seitz -Dahlman Rose

Does it compare to wind easily or is it a totally different world?

Moray P. Dewhurst

Well, it’s a very different type of resource. Bottom linethough at least in the UScontext even the best solar projects are still well off the typical good windprojects. So, it’s still got a long ways to go. But the answer to your questionis, we’re happy to tackle it, but it will take a little bit longer.

Daniele Seitz -Dahlman Rose

In terms of the schedule of the 10 gigawatts you’re planningon the wind side, if you wanted to extrapolate to further years out it isroughly a maximum of 2,500 ayear, given the logistics, do you feel? Or do you feel that number is not themaximum, you can do more than that?

Moray P. Dewhurst

Daniele, at this stage I don’t think we are in a position tosay what a maximum might be. Let me tell you what is baked into that.Essentially what we are doing is taking a development and construction systemthat’s capable of delivering about 1,000 megawatts a year today and scaling it up to one that’s capable ofdelivering roughly twice that in that five or six-year period. What we might beable to do beyond that, obviously, if we continue to grow if the marketscontinue to be attractive, but that is just too far out for us to say. In factwe were talking about doubling our throughput capability.

James von Riesemann

Thank you everyone. That concludes today’s conference call.

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Source: FPL Group Q3 2007 Earnings Call Transcript

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