Conference Call
Second Quarter 2005 Earnings Release
July 22, 2005
(1)Second Quarter 2005 Earnings Conference Call
Jim von Riesemann:
Welcome to our 2005 second quarter earnings conference call. Moray Dewhurst, Chief Financial Officer of FPL Group, will provide an overview of our performance for the second quarter. Lew Hay, FPL Group’s Chairman and Chief Executive Officer, Armando Olivera, President of Florida Power & 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. Before I turn it over to Moray let me remind you that this earnings discussion on July 22, 2005 is based on unaudited financial information, all historical and current EPS figures are adjusted to reflect the March 15th two-for-one stock split, and …
(2)Safe Harbor Statement
Any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the Appendix to the presentation which you can access on our website,
Moray. . .
Moray Dewhurst:
Thank you, Jim, and good morning everyone.
(3)Overview of Second Quarter 2005
Overall, the second quarter of 2005 saw a continuation of some of the key trends of the first quarter of the year. Florida Power & Light delivered good results, although its performance was hampered by a decline in usage per customer, primarily a function of continued mild weather for much of the quarter. Customer growth continued strong, exceeding our expectations. And we passed a key milestone with the smooth introduction to service of the Martin and Manatee expansions, on schedule and under budget.
FPL Energy had a very good quarter and delivered good growth in adjusted earnings, despite a scheduled refueling outage at Seabrook. Strong performance from our merchant and contracted portfolios, along with additional wind projects, helped contribute to the improved adjusted earnings results. The improvements in forward commodity markets that we observed in the first quarter continued, enabling us to add to our 2006 hedge positions significantly. These additional increases in forward prices not surprisingly also produced additional mark-to-market losses in the non-qualifying hedge category, which I will describe in more detail later on. The commodity market improvements also helped solidify our optimistic expectations for 2007, which we outlined in April, and which are now fully supported by current forward curves. We also made good progress with our wind development and continue on track towards adding between 500 and 750 megawatts of new capacity this year.
During the quarter, we completed the acquisition of GEXA Corp., a retail electricity provider based in Houston. The addition of GEXA complements our existing asset position in the important ERCOT market.
And finally, in early July we announced an agreement to acquire a majority ownership stake in the DuaneArnoldEnergyCenter, a nuclear power facility located 15 miles northwest of Cedar Rapids, Iowa. The addition of this asset complements our existing wind portfolio and nearly doubles the size of our regional presence. The addition of Duane Arnold is expected to be immediately accretive to earnings and will enhance our earnings growth in 2006.
We continue to feel very comfortable with our 2005 earnings per share estimate of $2.45 to $2.55 assuming normal weather for the balance of the year and excluding the effect of adopting new accounting standards, as well as the mark-to-market effect of non-qualifying hedges, neither of which can be determined at this time. The better-than-expected performance from FPL Energy has mostly offset the somewhat weaker-than-expected FPL results. Given what we know today, we would expect FPL most likely to be towards the lower end of its range and FPL Energy to be towards the upper end of its range, but of course a lot can happen in the third and fourth quarters.
Now, let’s look at the financial results for the second quarter.
(4)FPL Group Results (Second Quarter)
In the 2005 second quarter, FPL Group’s GAAP results were $203 million or 52 cents per share compared to $257 million or 71 cents per share during the 2004 second quarter.
FPL Group’s adjusted 2005 second quarter earnings were $255 million or 66 cents per share compared to $251 million or 69 cents per share. Our adjusted results exclude the mark-to-market effect of non-qualifying hedges. 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 plan. FPL Group also uses earnings expressed in this fashion when communicating its earnings outlook to analysts and investors. FPL Group management believes that adjusted earnings provide a more meaningful representation of FPL Group’s fundamental earnings power.
(5)Florida Power & Light Overview (Second Quarter)
At Florida Power & Light, the relatively mild weather of the first quarter continued into April and much of May, reducing average usage per customer. In addition, we saw some indications of weakness in underlying usage growth, which we expect will be temporary, but which will act to hold back FPL’s performance this year. I will discuss this topic more in a moment. On the other hand, customer growth continued strong, as did the leading indicators of future territory growth. As I mentioned, the Martin and Manatee expansions began operations, adding 1,900 megawatts of needed capacity. This additional capacity supports our load growth and also helps replace some higher cost purchase power contracts. These projects were completed well under our original cost expectations, and the lower costs are reflected in our retail rate case, adding less pressure to rates than would otherwise have been the case.
In regulatory matters, earlier this week we received a decision on our storm recovery proceeding from the PSC, which, while not everything we had hoped, confirms the most important principles governing recovery of storm restoration costs. We continue to move forward with our rate case, which is progressing on schedule. I will provide updates on these issues later in the call.
(6)FPL Earnings (Second Quarter)
Second quarter 2005 earnings at Florida Power & Light were $201 million, down from $205 million a year ago. The corresponding earnings per share contribution was 52 cents per share versus 57 cents per share in 2004.
(7)FPL Historical Growth in Customer Accounts (Second Quarter)
Growth in new customer accounts continued at a strong pace in the second quarter. The average number of FPL customer accounts increased by 95,000, or 2.3%, over last year’s comparable period and this growth remains slightly above historical averages. This continuation of the trend from the first quarter is encouraging. As before, the fundamentals of the Florida economy, reflected in robust job and income growth, remain strong, and housing starts also are at encouraging levels. These dynamics are expected to remain strong into the foreseeable future.
(8)Retail Sales at FPL (Second Quarter)
Overall, retail kilowatt-hour sales fell 1.3 percent during the quarter, driven principally by milder weather. Cooling degree days, the common metric used for determining weather impacts on energy usage, were more than 14% below normal for the quarter compared with 8% above normal in last year’s second quarter, or roughly a 22% swing in weather patterns. As a result, usage growth associated with weather declined 3.5 percent quarter over quarter
Underlying, or weather-adjusted usage growth this quarter was well below long term averages. In this respect, the first half of 2005 has been somewhat similar to the first half of 2004. I have previously noted that underlying usage growth is more volatile from quarter to quarter than is customer growth, and it is not uncommon to have quarters with negative values for this indicator. Nevertheless, obviously this performance is a disappointment. We will be watching closely for trends, but at this point we do not believe this is anything more than a temporary effect. The fundamentals that have driven long term usage growth – gradually improving income levels, reflected in larger houses and greater use of appliances and electronic equipment, and the progressive development of parts of the service territory further inland – do not appear to have changed.
(9)Weather Index
As you know, weather remains the single biggest driver of quarterly earnings fluctuations at FPL. Last year, we began disclosing heating and cooling degree days, both actual and normal, on a quarterly basis. However, we have realized that many analysts look for a means of assessing prior to quarter’s end what the impact of weather may be, and the regional data on heating and cooling are sometimes quite unrepresentative of conditions in our service territory.
Accordingly, as we indicated in our first quarter call, we will be providing a monthly update of weather and its impact on sales volumes at FPL. These monthly figures will be loaded onto our web site around the 15th day of the following month.
As you can see from this chart, changes in degree days are not perfectly correlated to either production or usage, but they are indicative of directional changes. Production will differ from retail sales due to wholesale sales as well as line losses.
(10)FPL O&M And Depreciation (Second Quarter)
For the 2005 second quarter, FPL’s O&M expense, including amounts recovered through clauses, was $316 million, down from $319 million in the 2004 second quarter. While we continue to experience cost pressures in nuclear and fossil maintenance and employee benefit expenses, these items were well within our expectations. Much of the decrease in O&M for the quarter was related to timing differences associated with planned expenditures and we continue to expect O&M to increase year-over-year.
Depreciation and amortization at FPL increased from $227 million in the second quarter of 2004 to $232 million in 2005, primarily due to new plant in service.
Depreciation and O&M costs will continue to increase as we invest in generation and distribution expansion to support our underlying customer growth and of course more substantially in the second half now that the Martin and Manatee expansion are in service. The annual impact of these generation projects alone is about 9 cents per share for the balance of the year.
(11)FPL Earnings Contribution Drivers
To summarize, Florida Power & Light’s second quarter earnings per share were affected by the following:
-Customer growth / positive 3 cents-Usage due to weather / negative 5 cents
-Underlying usage growth, mix / negative 1 cent
-Depreciation / negative 1 cent
-O&M / positive 1 cent
-Other, including AFUDC and share dilution / negative 2 cents
For a total 5 cent decline for the quarter.
(12)Storm Reserve Deficiency Recovery Update
Now let me review the Public Service Commission decision on our storm reserve deficiency recovery that we received earlier this week on Tuesday, July 19th. On balance, we are satisfied with the outcome, which confirms key principles on which we have been relying; however, the PSC Staff’s recommendation as written leaves one issue open and conflicts with our past accounting practice, which we continue to believe is preferable.
You will recall that the costs associated with the restoration efforts due to hurricanes Charley, Frances and Jeanne were estimated to be $890 million net of what is expected to be recovered from insurance, or $536 million in excess of the balance in the storm reserve.
On Tuesday, the PSC voted to approve Staff’s primary recommendation regarding the retail portion of the deficiency, with the consequence that approximately $442 million will be collected through a monthly surcharge and $70 million will be capitalized. A decision on the remaining approximately $22 million was deferred pending a final determination of the appropriate accounting treatment.
We are pleased that the Commission and the Staff re-affirmed the fundamental regulatory framework governing storm restoration costs in the absence of commercially reasonable third-party insurance and rejected some of the unfair and unwise policy changes proposed by intervenors. We are, however, disappointed that the Staff recommended significant alterations to the way in which storm costs are accounted for, as we believe that the methodology we have consistently followed for over a decade, reflected in a 1993 study approved by the Commission in 1995, is in the long term best interests of both customer and shareholder. Nevertheless, we recognize that the Commission has had to deal with differences in accounting methodology among the Florida IOUs and we are encouraged that they have indicated a willingness to pursue this issue further, with the aim of harmonizing practice within the state.
(13)2006 Rate Case Key Dates
Turning now to the rate case, as you all know, we are well into the regulatory proceedings governing our first request for a base rate increase in twenty years. Let me give you a brief update on the process and some key upcoming dates. I caution that these dates could change.
Over the past several weeks the Florida Public Service Commission has held quality of service hearings at various locations throughout our service territory. These hearings provide an opportunity for all customers to testify, positively or negatively, on issues related to the quality of service we deliver. While some customers stated that they objected to our request to raise base rates, and a few raised genuine service issues, we were gratified that the overall assessment of our service and reliability was very positive. We recognize that there is never a good time for a utility to ask for a base rate increase, and we are committed to addressing those real service issues that were raised; nevertheless, we believe these service hearings reinforced our overall position in the proceedings. Objective benchmarking data consistently show that our overall cost, reliability and service performance are excellent and place us among the best utilities in the country.
In late June, the intervenors in our proceeding submitted their testimony. While this testimony is diverse and addresses numerous subjects, we believe we have good responses to all the issues raised. In particular, we believe that OPC’s conclusion that FPL’s base rates are approximately $700 million too high is not only factually and analytically flawed but not credible on its face. Again, independent benchmarks consistently show FPL to be one of the best performing utilities from both unit cost and service reliability perspectives. We remain confident in our position and look forward to the formal technical hearings in August.
Rebuttal testimony is to be filed next week on Thursday, July 28th. Hearings are currently scheduled to begin August 22nd and run through September 2nd.
The staff recommendation on the revenue requirements and allowed return is scheduled for October 28th with a decision currently slated during a special agenda meeting on November 10th.
(14)FPL Energy Second Quarter Overview
Turning now to the competitive generation business, FPL Energy had an excellent second quarter. I mentioned in our April call that we expected the second quarter to be roughly flat, largely because of the planned outage at Seabrook. In fact, adjusted earnings were up more than 13% over the year ago period, driven primarily by the performance of the existing portfolio. Project additions and the sale of two small project interests also helped. During the quarter we completed the first phase of the planned Seabrook power uprate, and while we were disappointed that for various technical reasons this delivered slightly less incremental output than we had hoped, we continue to expect to see a total of 84 incremental net megawatts after the second phase is completed next Fall.
Relative to the first quarter, our portfolio average wind resource improved significantly, although it was still below long term averages. The existing portfolio also benefited from the ongoing positive effect of prior restructurings.
The most significant market development during the quarter was a continuation of the encouraging price trends that we had noted in the first quarter. Gas continued to strengthen, and, just as important, forward spark spreads in key merchant markets, including ERCOT, continued to expand. While these led to additional non-cash, mark-to-market losses in the non-qualifying hedge category, they also increased the value of our open merchant positions, and we were able to lock in significant incremental value for 2006 and 2007. Overall, it was a very good quarter for the FPL Energy portfolio.
(15)FPL Energy Results (Second Quarter)
FPL Energy’s GAAP results were $20 million or 5 cents per share compared to $69 million or 19 cents per share in last year’s second quarter. FPL Energy’s results excluding the effect of non-qualifying hedges were $72 million or 19 cents per share compared to $63 million or 17 cents per share last year.