First Trust New Opportunities MLP & Energy Fund
Q3 2006 Earnings Call Transcript

Published: 30 Oct 2006

[Operator:]

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

[Jim von Riesemann:]

Thank you. Good morning, and welcome to our 2006 third quarter earnings conference call. Lew Hay will start out our call with some comments about our recent announcement regarding the termination of our merger with Constellation Energy. Moray Dewhurst, FPL Group's Chief Financial Officer, will provide an overview of our performance for the third quarter. Armando Olivera, President of Florida Power and Light Company, and Jim Robo, President of FPL Energy, are also with us this morning. Following Moray’s remarks, our senior management team will be available to take your questions. Let me remind you that our comments today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made here-in about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the appendix here-in and in our SEC filings. Now, I would like to turn the call over to Lew Hay, FPL Group's Chairman, President, and Chief Executive Officer. Lew.

[Lewis Hay:]

Thanks, Jim, and good morning, everyone. As I am sure you all know, we announced last week that we have reached a joint and amicable agreement with Constellation Energy to terminate our merger. After considering the continued regulatory and judicial issues in Maryland, Constellation determined that the risks and uncertainties were too significant to overcome. They concluded that there was the potential for protracted and open-ended merger review process. As such, they initiated a request that we terminate our merger and our board, after reviewing the information at hand, considering our options and reviewing the proposed termination agreement, agreed to terminate. I am personally disappointed that we were not able to complete the merger, as I remain convinced that the combination of our two companies would have provided significant benefits to our shareholders and to customers, both in Maryland and in Florida. While this is not the outcome we would have preferred, we continue to have the utmost respect for Constellation Energy and its leadership team. I am pleased that we gave the deal our best shot. Despite the turmoil in Maryland, we tenaciously did everything possible to move the deal forward. Although it was frustrating, we never gave up. I am also pleased that our employees remain focused on continuing to deliver outstanding results for our customers and our shareholders. Our results for this quarter and year-to-date certainly reflect that. Moray will share those results with you in a few minutes, and also provide our outlook for 2007 and 2008, but let me just say that I have great optimism for the future of FPL Group as a standalone company. Florida Power and Light is a premier electric utility franchise with customer growth that exceeds the industry average. FPL Energy is one of the best and most consistent performing wholesale generation businesses in the nation, and has outstanding growth prospects. It is increasingly contributing a higher percentage of our earnings each year, while maintaining a lower risk profile than most unregulated generation companies. FPL Group has one of the strongest balance sheets in the industry, affording us the ability to consider a variety of opportunities to add to our portfolio, as well as to reinvest in our businesses. I am confident that FPL Group will continue to grow shareholder value in the near- and long-term. Now, I would like to turn things over to Moray.

[Moray P. Dewhurst:]

Thanks, Lew. Good morning, everyone. FPL Group’s 2006 third quarter results were very healthy overall, driven again by outstanding performance at FPL Energy. FPL Group's suggested per share results grew approximately 14% over last year’s comparable period, while FPL Energy’s grew 40%. The strong earnings growth at FPL Energy reflects significant contributions from new assets, as well as excellent performance in the existing portfolio and from our small marketing and trading organization. Florida Power and Light posted solid results, despite unfavorable weather-related sales comparisons. As a result, with three quarters now behind us, FPL Group is well-positioned to deliver at the upper end of the adjusted EPS range of $2.80 to $2.90 per share for 2006, which we originally shared with you at this time last year. This includes the negative $0.07 impact of Florida Power and Light from storm cost disallowances that we discussed earlier in the year. Looking forward, we are also well-positioned for continued earnings growth. I will provide more detail later in the call. Let me just note here that we now see a reasonable range for 2007 being $3.35 to $3.45, somewhat higher than we had indicated on our last call, and while there is necessarily more uncertainty about 2008, a range of $3.60 to $3.80 seems reasonable, based on drivers that we can see today. As a reminder, when we discuss FPL Group's earnings expectations, we assume normal weather and mark our currently open positions to the current forward curves. We also exclude the effect of adopting new accounting standards, if any, and the mark-to-market effect of non-qualifying hedges, neither of which can be determined at this time. Now let’s look at the results for the third quarter. In the 2006 third quarter, FPL Group’s GAAP results were $524 million, or $1.32 per share, compared to $339 million, or $0.87 per share during the 2005 third quarter. FPL Group's adjusted 2006 third quarter adjusted earnings was $457 million, or $1.15 per share, compared to $395 million, or $1.01 per share, during the 2005 third quarter. Our adjusted results exclude the mark-to-market effect of non-qualifying hedges and merger related costs. Please refer to this presentation’s appendix for a reconciliation of GAAP results to adjusted earnings. FPL Group's management uses adjusted earnings internally for financial planning, for analysis of performance, for reporting of results to the Board of Directors, and for the company’s employee incentive compensation plans. FPL Group also uses earnings expressed in this fashion when communicating its earnings outlook to analysts and investors. FPL Group management believes that adjusted earnings provide a more meaningful representation of FPL Group's fundamental earnings power. Florida Power and Light posted good results, generally in line with our expectations, although disadvantaged relative to last year’s third quarter by unfavorable weather comparisons. The weather impact this quarter was minor, while in the third quarter last year, it was well above normal. Comparisons with last year are also hurt by the impact of price elasticity on usage by the customer. Higher fuel costs, which are reflected in higher customer bills, have clearly had an impact on customer demand. Customer growth continues strong, although slightly below the 10- to 15-year historical average, which I will discuss in more detail in a moment. O&M expenses were roughly flat with last year, and depreciation was down, reflecting the impact of the 2005 base rate settlement agreement. Third quarter earnings at Florida Power and Light were $328 million in 2006, up from $311 million a year ago. The corresponding earnings per share contribution was $0.82 compared to $0.80 in 2005. Growth in new customer accounts continued at a healthy pace during the third quarter. The number of FPL customer accounts increased by 79,000, or 1.8% over last year’s comparable period. This growth is slower than our 15-year historical average of 2.1%, a level which outpaced the national average over the same time period. It may, however, be worth noting that within the quarter, the growth rate was lowest in August, with September showing an up-tick. For a variety of reasons, we believe that we will continue to see healthy growth for the next several years. Housing starts have dropped off quite substantially throughout much of our service territory, and we expect some adjustment in the housing stock, including a period of working off excess capacity in the apartment and condominium segments, but we continue to view the underlying trends positively. Florida’s economy, though it is cooling slightly from the extremely rapid pace of 2004 and 2005, is still performing well and out-performing much of the rest of the country. Absent some major shift in the fundamental attractiveness of the state, future customer growth of around 2% appears reasonable. Overall retail kilowatt hour sales fell 4.2% during the quarter. Cooling degree days, the common metric used for determining weather impact on energy usage, was slightly above normal, but about 11% below last year’s. As a result, usage growth associated with weather was at negative 4.9% quarter over quarter. The remaining 1.1% volume decline is primarily a function of increased retail prices, driven by the significant increase we have experienced in fuel costs. Looking forward, with moderating fuel prices likely to be reflected in lower retail rates next year, we expect to see a return to positive usage growth. For 2006 third quarter, FPL’s O&M expense, including amounts recovered through closes, was $335 million, up from $334 million in the 2005 third quarter. The flat O&M comparison for the quarter was related to timing differences associated with planned expenditures and unfortunately cannot be taken as indicative of a trend. We continue to expect O&M to increase year over year. Major drivers we have discussed before, including [liquid] maintenance and employee benefit costs, continue. In addition, we are now beginning to see the O&M impact of our storm secure initiative. While not material this year, it will become more important in the future, as our efforts to strengthen our infrastructure to make it more resilient in the face of tropical storms are expanded. Looking forward, we expect to spend very roughly around $40 million to $50 million in O&M each year and another $100 million to $150 million in capital for our storm secure initiatives. This remains an estimate, as our detailed implementation plans continue to evolve. Much of the O&M impact will be offset by continued productivity efforts in other areas, but for 2007, the combination of expanded storm secure plus increases in benefit costs is expected to lead to a more rapid growth in O&M overall than we have seen in past years. Depreciation and amortization declined from $246 million in the third quarter of 2005 to $197 million in the third quarter of 2006, owing to two main factors -- the extension of the useful lives on our generation fleet and the benefit from the elimination of a nuclear decommissioning accrual, both of which were implemented as a result of the August 2005 base rate stipulation and settlement agreement. To summarize, Florida Power and Light’s third quarter earnings per share were affected by the following

[Operator:]

(Operator Instructions) We will take our first question from John Kiani with Deutsche Bank.

[John Kiani:]

Good morning. Moray, what are your long-term plans? Should we assume that you are going to be staying at FPL as CEO now that the merger has been terminated? I believe you are under a five-year agreement.

[Moray P. Dewhurst:]

Let me correct the second part. There is no specific time length to my agreement. As I have said to many of you many times, my resignation letter is always on Lew’s desk, so whenever he tells me to go, I will go. That being said, I am happy in my current position. I have no current plans to change.

[John Kiani:]

Great, and one other question -- when you were talking about the load following contracts, I guess you were saying that, or are you saying that the short weather and price volatility position that is embedded in the load following contracts is priced into your return calculations and full requirements pricing, but at the same time, it is also somewhat back-stopped by any open generation positions? Is that the right way to think about it?

[Moray P. Dewhurst:]

I would not think of it as back-stopped. The first part is correct, that we price the variability into the transaction, so as a separate block of business, over time you would expect them to earn a return commensurate with the risk and the capital at stake. In the comment, I was really just pointing out that there is kind of an odd correlation. The load following business tends to struggle in periods where there is unexpectedly high demand and spiking power prices, so it will under-perform in those market conditions. Correspondingly, it will outperform its average where the load is more moderate and there is less volatility in prices. Well, the former conditions, the ones that challenge the load following business with spiking prices, are precisely the conditions that are good for, as physical assets that are really out-of-the-money options, or at-the-money options. Where there is volatility, those assets tend to produce a little bit more. It is an interesting phenomenon in the business that there is some degree of dampening of the aggregate earnings volatility, because we have both types of positions.

[John Kiani:]

Great, thank you.

[Operator:]

We will go next to Ashar Khan with SAC Capital.

[Ashar Khan:]

Good morning. Could you just go over -- I was looking through the forecast provided a year ago and in ’07. I guess a couple of things was that on the existing portfolio, the previous rate was $0.10 to $0.20. It is now $0.24 to $0.27, so I guess it has become much stronger. I was just trying to get a better sense as to the tightening of the range and the strength. Is it just because you relay higher prices? What is leading to that?

[Moray P. Dewhurst:]

First of all, Ashar, I have not gone back and actually done a bridge from the bridge that we gave you last year to the current bridge, if you see what I mean, so I can only give you some general comments on that. Clearly our expectations of that driver have increased, relative to last year, for a number of different reasons. You have capacity values, primarily in New England but also to a small extent, for us, and PJM, and our expectations now for 2007 are higher than they were, correspondingly last year. But each of the major commodity price drivers, where we have actually been able to lock the hedges in, have turned out to be rather better than I think we have anticipated at that time. Now, how much that was a degree of excessive conservatism at the time, all I can tell you is when we do those things, we mark the then open forward positions to the then forward curves. What has happened is a combination of forward price movements and what we have been able to actually lock prices in at. It has been a very good year in terms of what I would call the tactics of hedging as to when the team has been able to lock down prices for 2007. Overall, it is a variety of things.

[Ashar Khan:]

Going to 2008, 18 to 23, is that all wind? How many mega-watts can we assume, as you said, that would really depend upon your 2007 development cycle. Could you just tell us how much you are expecting in that $0.18 to $0.23?

[Moray P. Dewhurst:]

First of all, recall that we had said that the 2006 and 2007 wind programs would be together between 1250 and 1500, and because of the success in that program, we are now at the high end of that, probably a little bit above that. So the 2007 program, we are anticipating at least 750 mega-watts of new wind, and that will be the principal driver. I think there is probably $0.04 or $0.05 worth of contribution from anticipated ’08 development. Obviously that would depend upon continuation of the PTC, but as I said in the prepared remarks, since a given year’s program has its biggest impact on the subsequent year, the ’08 number is not greatly dependent upon the ’08 program.

[Ashar Khan:]

What historical mean do you use for the wind index? Is that one? How should we look at in terms of your projections?

[Moray P. Dewhurst:]

Yes, in the projections, everything is done to that long-term average of 100. The only thing to note there, of course, is that that wind index is a composite based on the way the portfolio looks today. Different regions have different inherent wind resources and the mix of new projects obviously will not necessarily map the mix of the existing projects. So the wind index itself migrates over time to reflect the then current mix of our actual projects.

[Ashar Khan:]

If I could just end up, Jim, just looking at FPL Energy in terms of apart from wind, what is the focus? What could we be looking at, strategizing? I guess CG was going to provide a different platform, but now FPL is standalone. Could you just share with us what is the focus going to be of FPL Energy beyond just the wind expansion?

[James L. Robo:]

Ashar, I think we have said in the past that we are focused not only on the wind business but also, as you know, we closed on Duane Arnold last year. We continue to be very interested in growing our nuclear portfolio. We are also continuing to look hard at non-wind assets, both from a new development standpoint as well as an acquisition standpoint. We tend, unlike many of our competitors, not to talk a lot about what we are working on, in part because we think it is to our advantage not to talk a lot about it. We feel very good about both our pipeline and development opportunities, as well as our potential growth prospects going forward.

[Lewis Hay:]

Ashar, let me just add a couple of notes to that. As we have discussed on many occasions, the basic strategy for FPL Energy has been a gradual expansion of its capabilities, and clearly part of what we saw in the Constellation deal was an ability in a sense to jump quicker there, but we will be continuing to expand the capabilities that FPL Energy has, and a couple of good examples have been the small load following business. I do not think it is going to be -- we are probably not going to scale it up by a factor of 10, but where we see good, additional opportunities to increase the size of that portfolio, we will do so. Another good example is the small retail position in Texas. We will continue to look for opportunities to make incremental steps out that enhance our long-term capabilities for competing in the business, and we will do that in the same way that we have done it in the past, i.e., on a small scale first, so we can learn and make our mistakes on a small scale before we scale up.

[Operator:]

We will go next to Greg Gordon at Citigroup.

[Greg Gordon:]

Thank you. Moray, I am sorry. I missed the first part of your presentation, but I caught the tail-end of a discussion about an accounting issue that could be accretive to the current guidance that you are not including. Could you refresh my memory on that?

[Moray P. Dewhurst:]

Yes, I just wanted to flag for people that some time either in the fourth quarter of this year or the first quarter of next year, we will have to change our accounting for major maintenance. There will be no economic substance to that change, so nothing will happen to the underlying business and the cash flows. The effect will be to draw forward in time some future earnings. The total, obviously, over the life of the projects will be the same, but up-front, we will see an increase in reported earnings, but it will be at the expense of a decrease in earnings further down the road. That will have the impact of distorting views of the growth rate, because obviously it will make the early year base higher, so it will appear to make the growth rate lower without any change in the underlying growth rate. I just wanted to flag that for people, so that when we do show you what the results are, it does not come as a complete surprise. We have not run the numbers yet. We are not sure whether we are going to do this in the fourth quarter or the first quarter, but when we do, we will break it out and show you explicitly how it works.

[Greg Gordon:]

What is the duration of the change? Is it going to impact the forecast period earnings?

[Moray P. Dewhurst:]

Yes.

[Greg Gordon:]

Okay.

[Moray P. Dewhurst:]

We will have to adjust everything for that.

[Greg Gordon:]

Of the 750 mega-watts or so that you think you are going to build in ’07 to impact ’08, how much of that has been identified? You have been very, very successful in meeting or achieving your targets in terms of wind growth, but how much of that 750 do you think is probably versus possible versus you are still looking for a site?

[Moray P. Dewhurst:]

We have well over 750 mega-watts projects in the development pipeline, so the 750 is based on our assessment of which ones are likely to get done in ’07, and sort of rank ordering. Obviously we push the best ones first, so there is always some uncertainty in them, but to a great extent, there are projects competing in the pipeline to be in that 750 for next year. Those that, if they do not completely fall by the wayside, those that do not make it in the 2007 program are likely to end up in the 2008 program. At this stage, I do not think we have ever been in such a good position going into a year as we are in 2007, because of the progress made in 2006 on the wind development pipeline. That 750 is looking very good right now.

[Greg Gordon:]

One last question. I know the earnings growth rate that you expect in ’07 versus ’06 at FPL was lower because of a step function increase in O&M, but one of the things that has not changed at all is the revenue growth expectation at $0.25 to $0.35. You did mention that we are seeing some of the froth come off the market in terms of the real estate backdrop in Miami. To what extent is there any risk that $0.25 to $0.35 earnings growth number, if we have a lot of empty condos in South Florida?

[Moray P. Dewhurst:]

I cannot say there is no risk. There is risk every time that we go into a year on what the revenue growth is going to be. What I would say is that we have become a little more comfortable that somewhere close to the 2% customer growth is likely to continue, and that a lot of what we are seeing is a sort of working out of a bubble, particularly in the condo and apartment area, but not something that is likely to change the fundamentals of the power of the state to draw people in. We are expecting to go back to positive usage growth, so we have about a percentage point of positive usage growth in our expectations, and that is really a function of the fact that we have had a step function increase in fuel prices that affected customer rates this year, but in January, assuming the PSC approves our new fuel filing, customer rates will come down by 4% or 5%. That should be enough to restart the basics of usage growth. Those are the base expectations. Now, is there uncertainty? Clearly there is uncertainty. I would say that relative to most years in the past, we have more uncertainty going into 2007 on the revenue growth side, but probably no more than we had going into this year.

[Operator:]

We will move to our next question from Annie Tsao at AllianceBernstein.

[Annie C. Tsao:]

Good morning. I just want to clarify, you mentioned in the call, you said in terms of the wind equipment, you have equipment reliability problems, supplier payment from a performance issue. Could you just touch on that, a little bit more detail?

[Moray P. Dewhurst:]

Sure. I guess the first thing I would say is that while wind as a technology has come a long, long way in the last 10 or 15 years, it is still not where we think it needs to be for the long haul for our business. Each of the major equipment vendors have strengths and weaknesses, but none of them has a system that is really at the reliability level yet that we think it needs to be in. Over the past year or so, we have had issues with just about all of the major equipment vendors, different types of issues. The result of those has been lower availability than we would normally expect from these kinds of projects. Now, many of the issues were while the turbines were still under warranty, others the suppliers had commitments to resolve certain outstanding issues. In the third quarter, our results were positively affected to the tune of -- I want to say about $10 million, pre-tax, from payments from vendors. If you look at the full year, we probably lost a little bit more than that from the availability issues of those equipment, the loss of availability that the equipment issues created. So net net for the year, we are about a wash, but it does affect the number that is in the third quarter results and consistent with our overall approach, I felt I should call it out.

[Annie C. Tsao:]

The ’07 numbers, do you have any assumptions in there?

[Moray P. Dewhurst:]

We have a normal availability assumption which, for wind projects, will typically be around 97%. I do not want to overstate it. These things are still exceptionally reliable, and as I have said many times, when they fail, they fail gracefully, so they fail one turbine at a time, which is obviously quite different from a nuclear facility or a large coal facility, which tends to be an all-or-nothing event. Again, as I said, long-term reliability is not where we would like to see it, and we need to keep working with the equipment manufacturers to get it there.

[Annie C. Tsao:]

How about in terms of cost? Do you have any problems with getting these turbines on time?

[Moray P. Dewhurst:]

Jim could speak more than I on the -- we have had some delays in one of our projects this year, not significant. Certainly worldwide turbine capacity is an issue for the industry overall, and we have to remember we are competing in a global business, so the manufacturers are going to look to their opportunities in other parts of the world for maximizing their margins. On the other hand, we are certainly the largest single customer out there and I think it is fair to say that provides us some advantages in our negotiations. Jim, I do not know if you have any other comments.

[James L. Robo:]

Other than to say, Moray, that we continue to have good access to turbines. I think we feel comfortable that we have a good match between our development pipeline and our equipment.

[Moray P. Dewhurst:]

To be specific, we certainly have the turbines for the 750 mega-watts for next year.

[Annie C. Tsao:]

Could you also talk about your retail business in Texas? You mentioned that part of -- for FPL Energy going forward, if there is any opportunity coming up, you do want to grow that business, right?

[Moray P. Dewhurst:]

Let me remind people that we acquired the business in the middle of last year. It is a very small business, but it does provide both a stepping stone for us to acquire some organizational capabilities and kind of test the market. More than that, it is a very good -- it interacts well with our overall Texas asset portfolio. It provides a natural short position against some of those assets, and Texas is a market that is not super liquid, so every time you engage in hedging with normal block transactions, those transactional costs which you avoid through the retail business. You may recall that we initially had some -- I would just call them basic control and operational issues, not perhaps surprising with a start-up operation, so we spent really the last year or so getting the business under control so it is in position to be scaled up, and really pushing to refine its processes. At the moment, it is actually ahead of where our original pro forma margin expectations had it. It is still small. We are going to grow it, but we are going to grow it cautiously, so do not look for us suddenly to become a major retail player all across the nation. But to the extent that we see good opportunities for incremental margin with limited incremental risk and limited incremental capital deployment that builds off the basic knowledge of a region that we already have, then certainly we are going to take advantage of that. Fundamentally, we have a huge commitment in the fixed asset base at FPL Energy and anything that we can do to essentially squeeze a little bit more margin through small, incremental commitment of risk and capital, really leverages that overall base significantly and increases its effective profitability. I view projects are falling into that category.

[Annie C. Tsao:]

Does that mean you will go to other regions?

[Moray P. Dewhurst:]

We certainly would look at other regions. We have no current plans, and Annie, I think we should let somebody else move on.

[Operator:]

We will go next to Paul Ridzon at KeyBanc.

[Paul Ridzon:]

Lew, as you look out strategically, what is the right size, from a balance of earnings from unregulated and regulated, in your mind?

[Lewis Hay:]

That is a hard one to answer, Paul. I would love to be able to give you a precise number, but let me just leave it at this. We still like having a balance of regulated business and unregulated business. Having said that, I think it is important for everybody to sort of break down any unregulated business into its component parts, because there are elements of that business that can be riskier than others. In particular, if you look at our business, and I would emphasize the wind business and the wind business that is under long-term contracts, I actually view that as being substantially less risky than a typical regulated business. Then, you look at other components like some of our assets that are deep in the money. I do not view them as having a tremendous amount of risk. So there is all different types of risks. I think trying to just look at your portfolio as regulated versus unregulated is overly simplistic. I know this sounds like I am waffling on your answer, but again, we would like to have a balance. We are always looking at the risky-ness of the portfolio and each of the individual components, relative to the return that we think we can get form it. As those assessments change over time, it would not be surprising that our mix changes.

[Paul Ridzon:]

With some of the very aggressive announcements coming out of Texas, what do you envision as your long-term strategy there?

[Lewis Hay:]

We are all looking at each other as to who is going to take a crack at that. First and foremost, just repeating some things we have already said, we are going to continue growing wind business in Texas. I will point out that both with the success we have had this year, as well as a number of the projects we have going forward, we will be adding a heck of a lot of mega-watts in Texas long before any of the other projects ever come to market. So we are pretty happy about that. That is one of the advantages of wind. We can move quickly. You do not have your money tied up for years and years before it starts earning a return, and we get our returns -- we get a lot of cash the first years of operation. We will also continue to grow the retail business that we were just talking about a few minutes ago. We are very happy with where that business is. Thirdly, we will be looking for opportunities to either acquire other assets or develop in that market, and again, we will have to weigh those opportunities versus opportunities in other markets. But we like the Texas market and we think there is a lot of room for everybody in that market.

[Paul Ridzon:]

One last question on the turbine reliability issues, is this a function of demand for turbines, perhaps?

[Moray P. Dewhurst:]

No. These are complex pieces of equipment. They have been getting much, much bigger, so the stresses on each of the components escalates. There are a lot of different issues, I would say. We have problems with gear boxes. We have problems with generators. Those tend to be the two weak spots. I guess really my view of the thing is we are still looking at an industry that is transitioning from what I will call the hobby shop stage to the industrial stage. They are just not quite there yet.

[James L. Robo:]

Let me just add one comment on it. I do not know if this will be helpful or not, but I will give it a shot. With each successive generation, if you will, of wind turbines, we have had early issues. Our generation people call it infant mortality. No matter how much experience these wind manufacturers have had, as they scale up and they try to get turbines that are not only bigger but can capture more wind under more dynamic wind conditions, new issues surface. The type of issues we are having with the latest tranche, if you will, of wind turbines is not at all that -- it is not really that different from what we have experienced before, and with each of these tranches, after a year or two of operating them, we have been able to get them to operate at very, very high levels of reliability. Remember, even with the issues we are having with this latest tranche, they are still operating at very high levels of reliability, so we are talking maybe eeking out another couple, two to three percentage points of availability. It is not huge, and this is not anything that -- I definitely can speak for myself, I am not losing any sleep over. It is not a particular concern. This is sort of business as usual. The manufacturers are supporting these turbines. We have a lot of expertise ourselves. I believe most of these problems are already -- most of the root causes have been identified, and most of the solutions have been identified. That is not to say that new issues will not surface. The earlier tranches are running at extremely high levels of reliability. I just want to put it all in perspective.

[Operator:]

We will move to our next question from Paul Patterson at Glenrock Associates.

[Paul Patterson:]

Good morning. First, it is a really quick M&A, big picture question. Listening to your statements and everything, it sounds like you guys are looking, obviously standalone, which makes sense, but what are your feelings about the lessons learned, M&A in the future? Any thoughts about that, or is it just too early to say, since this thing broke up? In theory, could you hook up with Constellation again if a year from now, things were more mellow in Maryland, if you know what I am saying? Or just at least had a little bit more clarity as to how things would theoretically be approved if they were to be approved? Do you know what I am saying?

[Lewis Hay:]

I will take that one. I am not going to speculate on any particular company or any situation, other than to say anything is potentially possible. You are absolutely right. At the moment, we are focused on our standalone prospects which, as we have said, are very good. I will remind you we said that both before we announced the deal, all throughout the deal, and we are continuing to say that now. Having said that, we do believe the industry will continue to consolidate. We clearly have a focus on adding to shareholder value. That is our job, and so we have to look at all possibilities. We will continue to look at that.

[Paul Patterson:]

Has anything changed, or has there been any -- as a result of this, is there any specific takeaway that you can impart on us, or is it just so unique that it really has no bearing on any M&A discussion in the future?

[Lewis Hay:]

I would love to say it was totally unique, but in light of other recent events, I think we have to look even harder at the state, regulatory, and political environment. I think if there is a lesson to be learned, it was a focus on the regulatory environment but not, frankly, fully comprehending and understanding the political environment, although I am not sure anybody could have anticipated everything that happened in Maryland. I can assure you, if we ever look at a deal going forward, we will look even harder at that. Having said that, both we and Constellation looked at all the circumstances leading up to what happened in Maryland and had comfort that it was manageable. Maybe this really was just the perfect storm of some interesting election dynamics and the merger and a one-time giant rate increase that I think Constellation had done a great job in communicating to politicians and regulators, but it still became a political football in the end.

[Paul Patterson:]

Finally, just to clarify, on 2007, I did notice that the guidance for the utility is down slightly, from at least the last time I saw you guys break it out, and also corporate and other. Is that because of storm secure spending?

[Moray P. Dewhurst:]

Yes.

[Paul Patterson:]

Okay, and the corporate and other, why is that a little bit higher?

[Moray P. Dewhurst:]

I would have to check. I am not sure. I can get back to you, Paul.

[Operator:]

We will go next to Andrea Feinstein at [D.B. Zorin].

[Andrea Feinstein:]

Just wanted to really press a little bit more on your thoughts with regard to the Texas retail market. This is this the first time that we have really heard you express a specific focus on growing the Gexa platform. I want to understand a little bit more what is driving that current focus, or if the prior lack thereof was driven more by the need to get the controls in place that you had mentioned? Maybe just a little bit more clarity on where your thoughts are.

[Moray P. Dewhurst:]

Sure, of course. Since I didn’t do a good job the first time, I am going to turn it over to Jim. Let me just say that there has been no real fundamental change. We bought the business with the expectation that it would be an experimental platform and if things worked well, that we would cautiously grow the business. We did have to spend more time than we expected on just basic controls, but I do not think there has been any fundamental shift in strategy, but I will let Jim have a go.

[James L. Robo:]

First of all, let me just put it in a little bit of context. This is a tiny business in the context of the total FPL Energy portfolio. Second of all, we have been working on growing it since we -- as well as putting in place the controls that you need in a business like that since we acquired it, I would say that it is a -- to reiterate something that Moray said, over half of the energy that we have sold through that business this year has come from our existing asset portfolio in Texas. It is a wonderful hedge for our merchant position there. It is a natural hedge for it. We like the retail market in Texas. We are making money in it and we think we can continue to make money in it going forward. It has good growth, and we are going to continue to grow it and we are going to look to potentially grow it in other states where we already know the market. We know the markets extremely well in New England, the mid-Atlantic, and elsewhere, so it is kind of a natural growth of our existing capabilities. By and large, it is not big and it is not going to be big in the context of the total business, just because of the size of the platform and the size of the retail business in general.

[Andrea Feinstein:]

If there was an opportunity to grow that platform in more of a step change fashion, in a way that you felt comfortable with, given the experience you had thus far with Gexa, would you be interested in doing so? Would a larger increase in that business be dependent on your ability to secure physical assets, such that you are still making somewhat of a matchbook? Or would you be willing to more forward where you are using more financial instruments on the hedging side, if you got significantly bigger?

[James L. Robo:]

I think when you look at what are the markets outside of Texas that we think are attractive, they are by and large places where we already own assets. There may be a market or two where we think it may be an attractive market, where we do not already own an existing asset, but we will know those markets through our load following business anyway. I will also say there is a lot of synergy between our load following business and the retail business in terms of how you price those loads. Since they are all together, organizationally in our shop, we get a lot of synergy from managing that network.

[Moray P. Dewhurst:]

Andrea, as to the step change part of your question, you never say never, but I think our focus right now is really on organic growth, or starting new small positions, rather than ratcheting it up by five- or ten-fold. I think we have time for one or two more.

[Operator:]

Thank you. We will take our next one from Andrew Levy of Bear, Wagner.

[Andrew Levy:]

Three of us in a row, Andrew, me, and Paul. Anyway, I think most of my questions were asked. I have been off and on, so I apologize if you answered this -- the accounting change is not included in your current guidance, so when you up ’07, ’08 --

[Moray P. Dewhurst:]

Correct.

[Andrew Levy:]

Okay, so obviously it would be higher earnings. Thank you.

[Moray P. Dewhurst:]

This will be the last one, then.

[Operator:]

We will go to Shalini Mahajan at UBS.

[Shalini Mahajan:]

Good morning. Could you update us on your capital expenditure forecast for ’07 and ’08?

[Moray P. Dewhurst:]

Sure. I think starting at FPL for each of the next few years, you can expect to see us spend on the order of $2 billion a year, plus or minus a little bit. For ’07, at FPL Energy, the big driver of cap-ex obviously is the wind program. Absent new development, there is only a small amount of cap-ex at FPL Energy at all. I would say on the order of $150 million to $200 million. Based on the numbers that we talked about and the 750 or so of new wind, that would be a capital program of a little over $1 billion, so I would think 1.2, 1.3 in total for FPL Energy is a good number for ’07 for right now. ’08 obviously is going to depend on the size of the ’08 wind program. I think we talked recently on increasing costs per KW for wind, but a range of somewhere between 1400 and 1600 per KW is not a bad range for today’s market realities, maybe higher if it is in a really complex terrain, far away from everything. Maybe a bit lower if it is flat land and easy to get to, but somewhere in that range. That is a good guide that you can use for multiplying a number like that by the size of the expected program to scale the cap-ex.

[Shalini Mahajan:]

Your wind cap-ex through ’08 would be dependent on the PTCs getting extended?

[Moray P. Dewhurst:]

The magnitude would certainly be dependent upon what happens with the PTC program. As I think we have discussed before, if we do not see an extension of the PTCs, I think we are definitely going to see a drop-off in the market size in ’08, but I think it will pick back up. At this stage, we have a high degree of confidence that we will see some continuation of public policy support, just given the overall energy environment. There is continued strong support on both sides of the aisle for the wind development.

[Shalini Mahajan:]

Finally, could you talk about your development policy going forward? At the current rate, and given the earnings are growing 10% to 15%, the payout would be dipping to mid-40s, or even lower. Would you be looking at stepping up the dividend at the same rate as earnings?

[Moray P. Dewhurst:]

I would say on that that we have, since the announcement about the merger last week, we have not sat down and discussed dividend policy in the standalone mode going forward with our board. We will do so at probably the December and February board meetings, but I would not expect that the board would really reconsider the overall policy until February of next year. Sorry to duck the question, but frankly, we have not really focused on that. There are a lot of things that we now need to get back to, since hopes for the deal have been disappointed. A number of things that just got put on hold for the standalone case, we now need to revisit them, and dividend policy is clearly one of them.

[Operator:]

That does conclude the question-and-answer session. I will turn it back to Mr. von Riesemann.

[Jim von Riesemann:]

Thank you, everyone, for joining us today. That concludes our call.

[Operator:]

That does conclude today’s conference. Again, thank you for your participation.