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FPL Displays Solid Earnings Despite Merger Cancellation

Companies that are contemplating a merger better have a complete grasp of the state political environment before diving in, said FPL Group CEO Lew Hay Monday in a conference call with analysts, regarding the FPL's third quarter financial results and the cancellation of its merger last week with Constellation Energy Group (see Daily GPI, Oct. 26).

"I would love to say [ours] was totally unique [situation], but in light of other recent events I think we have to look harder at the state regulatory and political environment... But I'm not sure anyone could have anticipated everything that happened in Maryland," Hay said.

"I can assure you if we ever get a deal going forward we'll look harder at 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 the perfect storm of election dynamics and the merger and a one-time giant rate increase."

Despite the failure of the merger, Hay said FPL's stand-alone prospects are "very good." He also said despite the tough regulatory and political environment, which has claimed not only the FPL-Constellation deal but also the proposed merger of Exelon and Public Service Enterprise Group, he believes the industry will continue to consolidate. "We clearly have a focus on adding to shareholder value, that's our job and so we have to look at all possibilities."

He said FPL will continue to focus on adding wind generation and is looking for opportunities to build new nuclear power plants.

The company continued to show solid stand-alone earnings growth in the third quarter with adjusted earnings per share up 14% to $1.15 ($457 million) and net income, including a $74 million gain and $7 million in merger costs, rising 55% to $524 million, or $1.32 per share. Earnings from its nonregulated energy division, FPL Energy, rose 40%.

"FPL Group had very healthy third quarter results, once again driven by the strength of FPL Energy," said Hay. "FPL Group's adjusted results increased approximately 14%, with FPL Energy's adjusted results increasing 40% over the prior year quarter. Florida Power & Light posted solid results, although weather-related sales comparisons were unfavorable quarter over quarter.

"With three-quarters of the year now behind us, FPL Group remains on track to deliver at the upper end of its 2006 adjusted earnings expectations of $2.80-$2.90, including the $0.07 impact of storm cost disallowances earlier this year."

Regulated utility Florida Power & Light, which serves 4.4 million customers in Florida, reported a 5.5% increase in third quarter 2006 net income to $328 million or $0.82 per share, compared to $311 million or $0.80 per share for the prior-year quarter. In the last 12 months, the average number of FPL regulated utility service accounts increased by 1.8%, or 79,000, which is below the average growth experienced in the last several years, and slightly below longer term historical levels. Retail sales of electricity were down 4.2% during the third quarter, which witnessed temperatures about normal but below the prior-year quarter. Weather-normalized usage per customer was down, largely due to the impact of higher retail prices, driven by fuel costs, the company said.

Operations and maintenance (O&M) expense were essentially flat, but the company anticipates continued increases in employee benefit costs, and distribution expenses and capital expenditures to increase as a result of a Storm Secure initiative, a 10-year program to harden FPL's infrastructure to be more resilient to hurricanes.

During the quarter, FPL announced plans to build an advanced technology coal-fired power plant, comprised of two 980 MW generating units in Glades County, FL, to meet the growing demand for electricity in the state and help diversify its existing fuel supply. FPL plans to file a site certification application with the Florida Department of Environmental Protection by the end of 2006. Licensing is expected to take 12-18 months. Unit 1 is scheduled to become operational in 2012 and Unit 2 in 2013.

"FPL posted good results, despite weak revenue comparisons to the year-ago quarter, which were largely a function of weather," said Hay. "Customer growth continues to be strong, although it is slightly below the 10 to 15 year historical average. While the Florida economy appears to be cooling, it is still strong, as reflected in continued job and income growth. Housing starts have fallen significantly and we expect that the market will need to work off some excess capacity. Looking forward we see moderate customer growth and a return to positive usage growth in 2007."

FPL Energy's growth primarily resulted from the addition of new wind projects and its 70% ownership interest in the Duane Arnold Nuclear Plant, together with good results from wholesale load, and solid performance in its merchant generation fleet. These favorable conditions were partially offset by increases in overhead costs to support the future growth of the business and by increased interest expense.

During the quarter the merchant energy unit made progress selling forward the output from its power plants primarily for 2008. For 2007, the company has more than 90% of its expected gross margin from its wholesale generation fleet protected against fuel and power market volatility. About 80% of its 2008 expected gross margin from its wholesale generation fleet is protected against fuel and power market volatility.

FPL Energy's 2006 wind program is expected to add 760 MW of new wind projects by the end of the year. In the last 12 months, FPL Energy has added 932 MW of new wind to its portfolio.

"The strong performance through three-quarters of the year at FPL Energy positions us well to deliver results at FPL Group at the high end of our previously announced range for 2006 adjusted earnings per share of $2.80-$2.90, including the $0.07 negative impact from the storm cost disallowance," said Hay. "For 2007, our business plans are now sufficiently far along for us to share adjusted earnings expectations in a range of $3.35 to $3.45. For 2008, our prospects are also strong and we presently see a range of $3.60 to $3.80 per share."

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