First Trust New Opportunities MLP & Energy Fund
Q3 2007 Earnings Call Transcript

Published: 30 Oct 2007

[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

[Operator:]

Your first question comes from John Kiani - Deutsche Bank.

[John Kiani:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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

[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.