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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, 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 utility serving Florida) and FPL Energy (a wholesale generation subsidiary). The filing includes a combined report for both entities. Notable events during the period include the acquisition of Gexa Corp. in June 2005 and the impact of Hurricanes Dennis, Katrina, and Rita in the third quarter, followed by Hurricane Wilma in October 2005 (post-period).

Key Financial Metrics (Nine Months Ended Sept 30, 2005)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 9.4% to $8.682 billion (from $7.933 billion in 2004). FPL revenues rose 9.5%, driven by a 2.3% increase in customer accounts and improved weather conditions.
• Net Income Decline: Consolidated net income decreased 5.0% to $679 million (from $715 million in 2004). This decline was primarily due to $139 million in after-tax unrealized mark-to-market losses on non-qualifying hedges at FPL Energy, compared to only $2 million in the prior year.
• Storm Impacts: Hurricanes Dennis, Katrina, and Rita caused approximately $10 million in lost revenues for FPL in Q3 2005, compared to $36 million in lost revenues from hurricanes in Q3 2004. However, storm restoration costs remain a significant factor, with a storm reserve deficiency of approximately $517 million as of September 30, 2005.
• Acquisition: The acquisition of Gexa Corp. (Texas retail provider) added approximately $17 million to third-quarter net income and contributed to revenue growth.
• Expense Increases: Operating expenses increased due to higher fuel costs, increased depreciation from new generating units (Martin and Manatee), and higher employee benefit expenses.

Guidance, Outlook, and Risks

• Hurricane Wilma: Occurring in October 2005, this hurricane caused extensive damage to FPL's transmission and distribution systems. Management expects restoration costs to exceed $500 million. Recovery methods (securitization vs. surcharge) are pending FPSC approval.
• Regulatory Environment: A new 2005 rate agreement was approved by the Florida Public Service Commission (FPSC), effective through December 31, 2009. It includes a revenue-sharing mechanism where excess revenues are refunded to customers. FPL suspended contributions to its nuclear decommissioning fund ($79 million/year) and storm reserve ($20.3 million/year) under this agreement.
• Derivative Risk: FPL Energy faces significant volatility from commodity price fluctuations. Unrealized losses on non-qualifying hedges significantly impacted earnings. Management notes that these losses are offset by increases in the fair value of physical asset positions not marked to market.
• Capital Projects: FPL Energy plans to acquire a 70% interest in the Duane Arnold Energy Center (nuclear) for approximately $387 million, expected to close in Q1 2006. FPL plans to add 1,150 MW at Turkey Point by mid-2007.
• Legal Proceedings: Significant litigation includes the Adelphia bankruptcy fraud claim (trial set for August 2007) and various environmental and transmission rate disputes with FMPA and the EPA.

Investor Verification Checklist

• Storm Cost Recovery: Verify the FPSC's decision on the recovery mechanism (securitization vs. surcharge) for Hurricane Wilma costs, estimated at over $500 million.
• Hedge Accounting Impact: Monitor the reversal of unrealized mark-to-market losses on FPL Energy's non-qualifying hedges and their impact on future earnings volatility.
• Nuclear Maintenance: Track the progress and cost of reactor vessel head replacements and steam generator repairs at St. Lucie and Turkey Point units, with estimated remaining costs of $310 million.
• Regulatory Rate Case: Confirm the implementation of the 2005 rate agreement revenue-sharing thresholds and the impact on future earnings retention.
• Acquisition Integration: Assess the integration of Gexa Corp. and the impact of Texas market regulatory changes on its operations.