EEI International Financial Conference February 20 – 23, 2005
Cautionary Statements And Risk Factors That May Affect Future Results 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 herein.
FPL Group – A Premier U.S. Electric Company… Proven ability to operate effectively in regulated and de-regulated markets Track record of operational excellence and continuous improvement Among the leaders in environmental excellence Strong financial position Commitment to creating shareholder value 5-year Total Shareholder Return (12/31/99– 12/31/04)
… With Two Strong Businesses One of the largest U.S. electric utilities Vertically integrated, retail rate- regulated utility 18,940 mw in operation 4.2 million customers $8.7 billion operating revenue Successful wholesale generator U.S. market leader in wind-generation 11,520 mw in operation $1.7 billion operating revenue Financial data as of 12/31/04
FPL – One of the Best Electric Utilities in the U.S. Historically In 2005 1 Beyond 2005 1 Among strongest customer growth rates in the nation Slowdown possible due to 2004 hurricanes Expect growth to continue at historic pace Investing to meet the demands of customer growth Addition of 1,900 gas-fired mw at Martin and Manatee Addition of 1,150 gas-fired mw at Turkey Point in 2007 Focus on operational excellence and productivity Top quartile reliability Managing continued cost pressures Continued cost management One of the lowest emitting utilities in the U.S. Increasing natural gas usage Plans to introduce LNG into our fuel mix Constructive regulatory environment Regulatory issues: storm cost recovery and rate base case Evaluating the addition of solid fuel generation 5-yr Adjusted EPS CAGR of 2.8% 2 EPS estimates of $3.95 to $4.10 Long-term EPS growth potential of 3% to 4% See appendix for reference notes
Strong Customer Growth… Average Customer Accounts (millions) CAGR 2.1%
…Requires Significant Investment Capital Expenditures (billions) 2001-2005 cumulative CapEx of $7.0 bn
Florida has a Constructive Regulatory Environment Appointed public service commission 5 commissioners with staggered terms Fuel, purchased power directly passed through History of progressive and innovative regulatory solutions “Rate certainty” through end of 2005 incentive-based agreement allowing shareholders to benefit from productivity improvements “win-win” revenue sharing provision instead of ROE measure No current activity on wholesale or retail restructuring
First Base Rate Increase Request in More Than 20 years Major investment in infrastructure due to strong customer growth and higher operating expenses prompted the request Base rate request between $400 and $450 million likely If approved, new rates would go into effect on Jan 1, 2006 when the current agreement expires Additional increase of $65 million ($130 million on an annualized basis) necessary in mid-2007 to cover costs of Turkey Point expansion
Estimated Base Rate Case Timeline Month Event January Notified FPSC of upcoming request Now – March Prepare Minimum Filing Requirements (MFRs) and testimony March File formal rate request May – June Quality of service hearings June – August Intervenor, staff, and FPL rebuttal testimony August Rate hearings November Final decision by FPSC expected
FPL Base Rate Case History Nature of Case Amount ($mm) 1983 FPL Request 238 3 1984 84 3 1985 120 3 1990 Tax Savings - Settlement (42) 3 1999 Negotiated Settlement (350) 3 2000 Yr 1 Refund (22) 4 2001 Yr 2 Refund (105) 4 2002 Yr 3 Refund (85) 4 (250) 3 (11) 4 2003 (3) 4 See appendix for reference notes
Outage Time per Customer (minutes) 5 O&M per Retail kwh (cents) Beginning Base Rate Review with One of the Best Track Records in the Industry Outage Time per Customer (minutes) 5 Excellent operational performance Superior cost management Among leaders in environmental performance Outstanding hurricane restoration efforts Meeting FPSC-required 20% reserve margin 6 O&M per Retail kwh (cents) Industry FPL See appendix for reference notes
Overview of Storm Reserve Fund Established in 1946 as an unfunded reserve and first funded in 1958 Designed to cover non-insured storm losses and insurance deductibles Became more significant after 1992 due to lack of affordable insurance after Hurricane Andrew FPL maintains commercial insurance for its power plants Lost revenues are not recoverable Regulated by the FPSC sets ratemaking and accounting treatment establishes estimated reserve, annual accrual and contributions has no specific investment restrictions FPL currently accrues $20 million per year for the storm reserve rate case requests substantial increase Current rate agreement contemplated possibility of restoration costs above reserve and recovery of deficit
Restoration Cost Recovery Update Accrued restoration costs to date of $890 million Costs exceed the storm reserve by $536 million they have been deferred FPSC granted approval to begin recovery of the excess through a customer surcharge starting in mid-February, subject to refund All amounts subject to prudency hearing in April Final decision to be rendered in July
Solid Earnings and Good Growth Prospects at FPL 2005 Drivers Good revenue growth but with some uncertainty Addition of 1,900 mw at Martin and Manatee mid-year Managing continued cost pressures Long-term Growth Drivers Strong customer growth Track record of good cost management Continued consistent and fair regulation Historical Adjusted EPS 2 $4.10 1, 7 See appendix for reference notes
FPL 2005 Earnings Contribution Drivers Relative to 2004 Weather-normalized 2005 EPS contribution range of $3.95 to $4.10 1, 9 See appendix for reference notes
FPL Energy Portfolio By Asset Type 11,520 Net mw in Operation As of 12/31/04
FPL Energy – A Growing, Profitable Wholesale Generator Historically In 2005 1 Beyond 2005 U.S. leader in wind energy Addition of 250 – 750 mw, with 220 mw under construction Potential to add 200 – 500 mw annually over 5 yrs, dependant on PTCs Seabrook nuclear plant – great performer in a good market Uprate of 71 mw during Spring outage 2nd phase of uprate (13 mw) in Fall 2006 outage Continued solid earnings, due to new contracts at higher prices Contracted assets – favorable QF contracts with stable earnings Improving income due to prior restructurings Expect steady income and further potential contract restructurings Gas merchant portfolio well positioned, but in depressed markets Drag on EPS of $0.30 to $0.40, but cash flow positive Upside leverage could be worth up to $1.00/share when equilibrium returns Disciplined risk management and training 78% of mw under contract and over 85% margin hedged Expect to continue our practice of hedging ~75%. New hedges placed at higher prices 5-yr Adjusted EPS CAGR of 23.3% 2 EPS estimates of $1.30 to $1.45 Free cash flow positive Positioned for strong earnings and cash flow in the future
U.S. Leader in Wind Energy Wind Generation Market Share Public policy support required Long-term contracts 15-25 years Superior returns ROEs in high teens/low 20s accretive in first full year Capital market financing validates business model
Contracted Portfolio Profile 2,236 Net mw in Operation Contract Maturity Fuel Diversity As of 2/4/05
Merchant Portfolio Profile Regional Diversity Premier nuclear asset in the Northeast Seabrook 1,095 net mw Low cost, efficient base load combined cycle units Gas assets well positioned in liquid, gas-on-margin markets Long-term upside potential 6,663 net mw Financial data as of 2/4/05; projected year-end 2005
More than 85 percent of expected 2005 gross margin hedged Contract Coverage in 2005 More than 85 percent of expected 2005 gross margin hedged As of 12/31/04. See appendix for reference notes
Excellent Growth Prospect at FPL Energy 2005 Drivers Build-out of new wind generation Uprate and refueling outage at Seabrook Modest drag from Marcus Hook Increased interest expense Long-term Growth Drivers Wind projects Acquisitions Contract restructurings Improving merchant markets Historical Adjusted EPS 2 $1.45 13 1, 14 See appendix for reference notes
Potential 2005 EPS contribution range of $1.30 to $1.45 1 FPL Energy 2005 Earnings Contribution Drivers Relative to 2004 Potential 2005 EPS contribution range of $1.30 to $1.45 1 See appendix for reference notes
FPL Group – Financially Strong and Positioned for Long-term Growth Historically In 2005 1 Beyond 2005 1 Conservative balance sheet warrants strong credit rating Moody’s upgraded outlook on Capital to Stable Fitch reaffirmed all ratings Maintain a conservative balance sheet Build-out of merchant meant CapEx exceeded cash generation Gas merchant build-out complete. Free cash flow positive Expect to remain cash flow positive – subject to investment opportunities Dividend raised every year since 1995 Strong financial position can support continued competitive dividend payout Dividend payout comparable to that of our peers 5-yr EPS CAGR of 4.4% 2 EPS estimates of $5.00 to $5.20 Potential 5-yr EPS growth rate of 5% to 9% See appendix for reference notes
Sound Credit Profile Reflected on Balance Sheet and Credit Ratings Total Debt to Total Capitalization S&P Moody’s Fitch FPL Group, Inc. Issuer A/ Negative A2/ Stable A/ Stable FPL First Mortgage Bonds Aa3/ Stable AA-/ Stable FPL Group Capital Senior Unsecured A-/ Negative 15 Total Debt to Total Capitalization as of 12/31/04 for FPL Group and 9/30/04 for the Industry Average. See appendix for reference notes
Growing, Stable Dividend Raised dividend by 13% Historical Dividend Dividend Payout 16 See appendix for reference notes
Growth Prospects at FPL Group 2005 Drivers Challenging year at FPL Expect strong growth at FPL Energy Free cash flow positive Dilution due to conversion of equity units Share repurchase Long-term Growth Drivers Continued strong growth at FPL and FPL Energy Continued strong cash flow Disciplined approach to transactions that create shareholder value Historical Adjusted EPS 2 $5.20 1, 17 See appendix for reference notes
A Powerful Investment Sound fundamentals, disciplined approach attractive Florida service territory culture of operational excellence financial discipline strong corporate governance policies Proven track record meeting commitments creating shareholder value Attractive, realistic growth prospects Clean energy strategy Moderate risk profile
Appendix
Although the Damage Was Extensive… Jeanne Frances Hurricane Charley Frances Jeanne Landfall on 08/13 09/05 09/26 Category 4 2 3 Affected: Customers 874,000 2,786,300 1,737,400 Counties 22 35 Replaced: Poles 7,226 3,890 2,390 Transformers 5,159 3,011 3,037 Miles of conductor 925 575 254 Personnel 13,500 16,738 16,566 Days of restoration 13 12 8 Charley Data as of 12/03/04
… Progress Was Quickly Made During Restoration Efforts Jeanne Frances Charley Data as of 12/03/04
FPL Group Schedule of Total Debt and Equity As of 01/21/05. See appendix for reference notes
Selected Cash Flow Items 20 See appendix for reference notes
FPL - Reconciliation GAAP to Adjusted EPS There were no adjustments to GAAP earnings in 2002, 2003, and 2004
FPL Energy - Reconciliation GAAP to Adjusted EPS
FPL Group - Reconciliation GAAP to Adjusted EPS
Reference Notes Estimates include share dilution of 3-4%. Excluding the cumulative 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 See pages 39 - 41 for reconciliation of GAAP to adjusted amounts Represents a permanent change in base rates Represents a 1-year refund to customers Preliminary 2004 for FPL; 2003 for the industry Excluding the impact of the three hurricanes that hit FPL’s service territory EPS estimates of $3.95 to $4.10 in 2005 Includes impact on depreciation, interest and AFUDC Normalizes for 2004 weather, including the impact of 2004 hurricanes. Typical weather variability around 2005 expectations would be approximately ±15¢ with 80% probability Weighted to reflect in-service dates, planned maintenance, and a refueling outage at Seabrook Reflects Round-the-Clock mw Reflects on-peak mw Includes the impact of the Marcus Hook contract restructuring, $(0.26)/share and the receipt of a portion of the Karaha Bodas claim, $0.03/share EPS estimates of $1.30 to $1.45 in 2005 See page 37 for more detailed credit statistics Annualized latest quarterly dividend divided by 2005 First Call EPS estimate EPS estimates of $5.00 to $5.20 in 2005 Ratios exclude impact of imputed debt for purchase power obligations Adjusted to reflect preferred stock characteristics of these securities (preferred trust securities) See page 43 for cautionary statements and risk factors Excludes preferred stock dividends
Cautionary Statements And Risk Factors That May Affect Future Results In connection with the safe harbor provisions of the Reform Act, FPL Group and FPL are hereby filing cautionary statements identifying important factors that could cause FPL Group's or FPL's actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of FPL Group and FPL in this combined Form 10-K, in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as will likely result, are expected to, will continue, is anticipated, believe, could, estimated, may, plan, potential, projection, target, outlook) are not statements of historical facts and may be forward-looking. Forward-looking statements involve estimates, assumptions and uncertainties. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors (in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements) that could cause FPL Group's or FPL's actual results to differ materially from those contained in forward-looking statements made by or on behalf of FPL Group and FPL. Any forward-looking statement speaks only as of the date on which such statement is made, and FPL Group and FPL undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. The following are some important factors that could have a significant impact on FPL Group's and FPL's operations and financial results, and could cause FPL Group's and FPL's actual results or outcomes to differ materially from those discussed in the forward-looking statements: FPL Group and FPL are subject to changes in laws or regulations, including the PURPA, and the Holding Company Act, changing governmental policies and regulatory actions, including those of the FERC, the FPSC and the utility commissions of other states in which FPL Group has operations, and the NRC, with respect to, among other things, allowed rates of return, industry and rate structure, operation of nuclear power facilities, operation and construction of plant facilities, operation and construction of transmission facilities, acquisition, disposal, depreciation and amortization of assets and facilities, recovery of fuel and purchased power costs, decommissioning costs, return on common equity and equity ratio limits, and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs). The FPSC has the authority to disallow recovery by FPL of costs that it considers excessive or imprudently incurred. The regulatory process generally restricts FPL's ability to grow earnings and does not provide any assurance as to achievement of earnings levels. FPL Group and FPL are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, wildlife mortality, natural resources and health and safety that could, among other things, restrict or limit the output of certain facilities or the use of certain fuels required for the production of electricity and/or require additional pollution control equipment and otherwise increase costs. There are significant capital, operating and other costs associated with compliance with these environmental statutes, rules and regulations, and those costs could be even more significant in the future.
FPL Group and FPL operate in a changing market environment influenced by various legislative and regulatory initiatives regarding deregulation, regulation or restructuring of the energy industry, including deregulation of the production and sale of electricity. FPL Group and its subsidiaries will need to adapt to these changes and may face increasing competitive pressure. FPL Group's and FPL's results of operations could be affected by FPL's ability to renegotiate franchise agreements with municipalities and counties in Florida. The operation of power generation facilities involves many risks, including start up risks, breakdown or failure of equipment, transmission lines or pipelines, use of new technology, the dependence on a specific fuel source or the impact of unusual or adverse weather conditions (including natural disasters such as hurricanes), as well as the risk of performance below expected or contracted levels of output or efficiency. This could result in lost revenues and/or increased expenses. Insurance, warranties or performance guarantees may not cover any or all of the lost revenues or increased expenses, including the cost of replacement power. In addition to these risks, FPL Group's and FPL's nuclear units face certain risks that are unique to the nuclear industry including the ability to store and/or dispose of spent nuclear fuel, as well as additional regulatory actions up to and including shutdown of the units stemming from public safety concerns, whether at FPL Group's and FPL's plants, or at the plants of other nuclear operators. Breakdown or failure of an FPL Energy operating facility may prevent the facility from performing under applicable power sales agreements which, in certain situations, could result in termination of the agreement or incurring a liability for liquidated damages. FPL Group's and FPL's ability to successfully and timely complete their power generation facilities currently under construction, those projects yet to begin construction or capital improvements to existing facilities is contingent upon many variables and subject to substantial risks. Should any such efforts be unsuccessful, FPL Group and FPL could be subject to additional costs, termination payments under committed contracts, and/or the write-off of their investment in the project or improvement. FPL Group and FPL use derivative instruments, such as swaps, options, futures and forwards to manage their commodity and financial market risks, and to a lesser extent, engage in limited trading activities. FPL Group could recognize financial losses as a result of volatility in the market values of these contracts, or if a counterparty fails to perform. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative instruments involves management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts. In addition, FPL's use of such instruments could be subject to prudency challenges and if found imprudent, cost recovery could be disallowed by the FPSC. There are other risks associated with FPL Group's non-rate regulated businesses, particularly FPL Energy. In addition to risks discussed elsewhere, risk factors specifically affecting FPL Energy's success in competitive wholesale markets include the ability to efficiently develop and operate generating assets, the successful and timely completion of project restructuring activities, maintenance of the qualifying facility status of certain projects, the price and supply of fuel, transmission constraints, competition from new sources of generation, excess generation capacity and demand for power. There can be significant volatility in market prices for fuel and electricity, and there are other financial, counterparty and market risks that are beyond the control of FPL Energy. FPL Energy's inability or failure to effectively hedge its assets or positions against changes in commodity prices, interest rates, counterparty credit risk or other risk measures could significantly impair FPL Group's future financial results. In keeping with industry trends, a portion of FPL Energy's power generation facilities operate wholly or partially without long-term power purchase agreements. As a result, power from these facilities is sold on the spot market or on a short-term contractual basis, which may affect the volatility of FPL Group's financial results. In addition, FPL Energy's business depends upon transmission facilities owned and operated by others; if transmission is disrupted or capacity is inadequate or unavailable, FPL Energy's ability to sell and deliver its wholesale power may be limited.
FPL Group is likely to encounter significant competition for acquisition opportunities that may become available as a result of the consolidation of the power industry. In addition, FPL Group may be unable to identify attractive acquisition opportunities at favorable prices and to successfully and timely complete and integrate them. FPL Group and FPL rely on access to capital markets as a significant source of liquidity for capital requirements not satisfied by operating cash flows. The inability of FPL Group, FPL Group Capital and FPL to maintain their current credit ratings could affect their ability to raise capital on favorable terms, particularly during times of uncertainty in the capital markets, which, in turn, could impact FPL Group's and FPL's ability to grow their businesses and would likely increase interest costs. FPL Group's and FPL's results of operations are affected by changes in the weather. Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities, and can affect the production of electricity at wind and hydro-powered facilities. In addition, severe weather can be destructive, causing outages and/or property damage, which could require additional costs to be incurred. FPL Group and FPL are subject to costs and other effects of legal and administrative proceedings, settlements, investigations and claims, as well as the effect of new, or changes in, tax laws, rates or policies, rates of inflation, accounting standards, securities laws or corporate governance requirements. FPL Group and FPL are subject to direct and indirect effects of terrorist threats and activities. Generation and transmission facilities, in general, have been identified as potential targets. The effects of terrorist threats and activities include, among other things, terrorist actions or responses to such actions or threats, the inability to generate, purchase or transmit power, the risk of a significant slowdown in growth or a decline in the U.S. economy, delay in economic recovery in the United States, and the increased cost and adequacy of security and insurance. FPL Group's and FPL's ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by national, local or geographic events as well as company-specific events. FPL Group and FPL are subject to employee workforce factors, including loss or retirement of key executives, availability of qualified personnel, collective bargaining agreements with union employees or work stoppage. The issues and associated risks and uncertainties described above are not the only ones FPL Group and FPL may face. Additional issues may arise or become material as the energy industry evolves. The risks and uncertainties associated with these additional issues could impair FPL Group's and FPL's businesses in the future.