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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, for FPL Group, Inc. and its primary subsidiary, Florida Power & Light Company (FPL). FPL Group operates as a holding company with two main reportable segments: FPL, a rate-regulated electric utility serving Florida, and FPL Energy, a competitive energy business focused on wind, nuclear, and gas generation. The filing notes the termination of a proposed merger with Constellation Energy Group in October 2006 due to regulatory uncertainties.

Key Financial Metrics (Nine Months Ended Sept 30, 2006)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 39% to $12.1 billion (from $8.7 billion in 2005), driven by higher fuel cost recovery revenues and growth in FPL Energy's portfolio.
• Profitability: Net income rose 49% to $1.01 billion. FPL Energy net income surged 349% to $458 million, primarily due to a $216 million swing in unrealized mark-to-market gains on non-qualifying hedge activity compared to losses in the prior year.
• Storm Costs: FPL recorded a $28 million reduction in net income due to disallowed storm costs from 2005 hurricanes, net of interest income. The storm reserve deficiency stood at approximately $940 million.
• Merger Termination: Corporate and Other segment losses increased due to $13 million in after-tax costs associated with terminating the Constellation Energy merger.
• Debt Levels: Long-term debt increased to $9.6 billion from $8.0 billion to fund capital expansion and storm recovery.

Guidance, Outlook, and Risks

• Capital Plan: FPL projects capital expenditures of approximately $8.65 billion from 2006 through 2010, including costs for the "Storm Secure Plan" to harden the grid against hurricanes. FPL Energy expects to add at least 1,500 MW of new wind generation in 2006 and 2007.
• Regulatory Outlook: The Florida Public Service Commission (FPSC) approved the issuance of approximately $708 million in bonds to recover storm costs. FPL received an exemption from the FPSC bid rule for two proposed advanced technology coal units.
• Operational Risks:
  • Equipment Failures: FPL experienced compressor blade failures in three combustion turbines, with repairs expected to be completed by January 2007.
  • Nuclear Maintenance: Significant capital is allocated for reactor vessel head and steam generator replacements at St. Lucie Unit No. 2 in 2007.
  • Spent Fuel Storage: FPL anticipates reaching on-site spent fuel storage capacity at Turkey Point Units 3 and 4 by 2010-2012, necessitating a shift to dry cask storage.
• Legal Contingencies: FPL Energy faces a lawsuit from Indonesia's state-owned oil company regarding a suspended project, with damages sought up to $316 million (FPL Energy's share approx. $142 million). However, a subsequent court judgment in October 2006 awarded FPL Energy approximately $90 million pretax.

Investor Verification Checklist

• Storm Recovery Status: Verify the timeline for the issuance of the $708 million storm recovery bonds approved by the FPSC.
• Derivative Exposure: Review the volatility of FPL Energy's earnings driven by mark-to-market accounting on non-qualifying hedges, which contributed significantly to the Q3 profit surge.
• Capital Expenditure Execution: Monitor the progress of the "Storm Secure Plan" and the $1.3 billion in FPL Energy investments, particularly the acquisition of the Duane Arnold nuclear plant.
• Legal Resolution: Track the status of the Indonesia/KBC litigation and the FMPA/FERC transmission rate disputes, which could impact future cash flows.
• Debt Covenants: Confirm continued compliance with funded debt to total capitalization ratios required by credit facilities.