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Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2005, for FPL Group, Inc. and its principal subsidiary, Florida Power & Light Company (FPL). FPL Group operates as a holding company with two primary reportable segments: FPL, a rate-regulated utility serving over 4.3 million customer accounts in Florida, and FPL Energy, a competitive energy subsidiary focused on wholesale power generation (primarily wind, natural gas, and nuclear). In December 2005, FPL Group announced a proposed merger with Constellation Energy Group, Inc., pending regulatory and shareholder approval.

Key Financial Metrics

Segment Performance: FPL reported net income of $748 million, while FPL Energy reported $187 million. Corporate and Other incurred a net loss of $50 million.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 12.6% to $11.8 billion, driven by higher retail base revenues (due to customer growth and usage) and increased cost recovery clause revenues (primarily due to higher fuel prices).
• Net Income Decline: Net income decreased slightly by $2 million (0.2%) to $885 million. This was due to higher O&M expenses, depreciation, and interest charges at FPL, partially offset by improved results at FPL Energy.
• Hurricane Impact: FPL was impacted by Hurricanes Dennis, Katrina, Rita, and Wilma in 2005. Storm restoration costs incurred exceeded the storm and property insurance reserve, resulting in a storm reserve deficiency of approximately $1.1 billion at year-end.
• Derivative Losses: FPL Group and FPL Energy recognized unrealized mark-to-market losses of $112 million on non-qualifying hedges in 2005, compared to $3 million in 2004, primarily due to increased forward power and natural gas prices.
• Acquisitions: FPL Energy acquired Gexa Corp. (Texas retail provider) in June 2005 for approximately $73 million and a 70% interest in the Duane Arnold nuclear plant in January 2006 for approximately $373 million.

Guidance, Outlook, and Risks

• Merger Outlook: The proposed merger with Constellation Energy is expected to create the nation's largest competitive energy supplier. Completion is targeted for the end of 2006, subject to regulatory approvals.
• Storm Cost Recovery: FPL petitioned the Florida Public Service Commission (FPSC) in January 2006 to recover approximately $1.7 billion of storm costs via the issuance of $1.05 billion in storm recovery bonds. A decision is expected in May 2006.
• Capital Expenditures: FPL estimates capital expenditures of $9.1 billion for 2006-2010, focusing on generation expansion and transmission/distribution upgrades. FPL Energy plans to add 625-750 MW of new wind generation annually in 2006 and 2007.
• Key Risks:
  • Regulatory: Changes in federal or state energy laws, including the 2005 Energy Act, and potential restructuring of the retail electric industry in Florida.
  • Environmental: Compliance costs related to the Clean Air Act (mercury, NOx, SO2) and Clean Water Act.
  • Market: Volatility in wholesale energy prices and fuel costs affecting FPL Energy's merchant assets.
  • Legal: Pending litigation regarding Clean Air Act violations at Scherer Unit No. 4 and disputes over transmission credits with the Florida Municipal Power Agency (FMPA).

Investor Verification Checklist

• Storm Reserve Recovery: Verify the FPSC's decision on the securitization of $1.7 billion in hurricane costs and the potential impact on future rate structures.
• Merger Status: Monitor progress on regulatory approvals and shareholder votes for the Constellation Energy merger.
• Derivative Exposure: Review the impact of mark-to-market accounting on non-qualifying hedges and the company's hedging strategy for 2006.
• Nuclear Operations: Assess the status of reactor vessel head replacements and steam generator repairs at St. Lucie Unit No. 2 and Turkey Point units.
• Capital Structure: Confirm the company's ability to maintain investment-grade credit ratings given the high capital expenditure requirements and debt levels.