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Business Context and Reporting Period

This Form 10-K is a combined annual report for FPL Group, Inc. and its principal subsidiary, Florida Power & Light Company (FPL), for the fiscal year ended December 31, 2003. FPL Group is a public utility holding company, while FPL is a rate-regulated utility serving approximately 4.1 million customer accounts in Florida. The group also operates FPL Energy, a non-rate regulated subsidiary engaged in wholesale power generation, and FPL FiberNet, a telecommunications subsidiary.

Key Financial Metrics

Note: 2002 Net Income was significantly reduced by a $222 million cumulative effect charge related to the adoption of FAS 142 (Goodwill). 2003 Net Income includes a $3 million charge related to the adoption of FIN 46 (Variable Interest Entities).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 18% to $9.63 billion, driven by higher retail base revenues at FPL (due to customer growth and usage) and increased cost recovery clause revenues (due to higher fuel costs).
• Profitability: Net income nearly doubled to $890 million. This improvement was driven by strong performance at FPL and FPL Energy, the absence of the significant goodwill impairment and restructuring charges recorded in 2002, and favorable tax settlements.
• Segment Performance:
  • FPL: Net income available to FPL Group rose to $733 million (from $717 million), aided by retail base revenue growth, partially offset by higher O&M expenses and depreciation.
  • FPL Energy: Net income turned positive at $194 million (from a $169 million loss in 2002), benefiting from the addition of 3,904 MW of generation capacity and the absence of 2002 write-offs.
  • Corporate & Other: Net loss narrowed to $37 million (from $75 million) due to the absence of 2002 impairment charges related to FPL FiberNet.
• Debt Levels: Long-term debt increased by approximately $2.9 billion to $8.7 billion to fund capital expansion and acquisitions.

Guidance, Outlook, and Risks

• Regulatory Environment: FPL operates under a 2002-2005 rate agreement with the Florida Public Service Commission (FPSC) that includes a revenue-sharing mechanism. An appeal of this agreement by the South Florida Hospital and Healthcare Association is pending before the Florida Supreme Court.
• Capital Expenditures: Estimated capital expenditures for 2004-2008 total $7.63 billion for FPL and $400 million for FPL Energy, focusing on generation expansion (including a new natural gas plant at Turkey Point) and transmission/distribution upgrades.
• Nuclear Operations: FPL received license extensions for its four nuclear units (Turkey Point and St. Lucie). However, NRC-mandated inspections of reactor vessel heads are ongoing, with some units requiring vessel head replacements that will extend outage durations. FPL Energy's Seabrook unit also faces similar inspection requirements.
• Legal Contingencies:
  • Adelphia/Olympus: FPL Group holds a $127 million note receivable from Olympus (an Adelphia subsidiary) which is in default. Collectibility is uncertain as Adelphia is in bankruptcy reorganization.
  • Environmental Litigation: Various lawsuits allege health impacts from emissions (mercury, radiation) from FPL plants. Management believes it has meritorious defenses.
  • LTIP Litigation: Shareholder lawsuits regarding Long-Term Incentive Plan payments related to a failed merger with Entergy are ongoing, though FPL Group was removed as a defendant in February 2004.
• Market Risks: FPL Energy faces volatility in wholesale energy markets, commodity price fluctuations, and credit risk from counterparties. FPL faces risks related to fuel price volatility and severe weather (hurricanes).

Investor Verification Checklist

• Rate Agreement Status: Monitor the outcome of the Florida Supreme Court appeal regarding the 2002-2005 FPL rate agreement, as a reversal could impact future revenue sharing and earnings.
• Nuclear Maintenance Costs: Verify the actual costs and outage durations associated with the NRC-mandated reactor vessel head replacements at Turkey Point and St. Lucie, as these could impact O&M expenses and capacity availability.
• Adelphia Note Recovery: Track the bankruptcy proceedings of Adelphia Communications to assess the recoverability of the $127 million note receivable held by FPL Group.
• Fuel Cost Pass-Through: Review the "Deferred Clause Expenses" on the balance sheet ($348 million in 2003 vs. $131 million in 2002) to understand the cash flow impact of under-recovered fuel costs.
• Capital Expenditure Execution: Confirm the timeline and cost of the planned 1,100 MW Turkey Point expansion and the 1,900 MW Martin/Manatee combined cycle projects.