NEE

Business Context and Reporting Period

This Form 10-K represents the combined annual report for FPL Group, Inc. (the holding company) and Florida Power & Light Company (FPL, the principal regulated utility subsidiary) for the fiscal year ended December 31, 2004. FPL Group operates primarily through FPL, which serves over 8 million people in Florida, and FPL Energy, a wholesale generation subsidiary with a diversified portfolio of wind, natural gas, nuclear, and hydro assets. The company is subject to regulation by the Florida Public Service Commission (FPSC) and the Federal Energy Regulatory Commission (FERC).

Key Financial Metrics

Note: Per share data does not reflect the two-for-one stock split effective March 15, 2005.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 9.3% to $10.52 billion, driven by customer growth and higher cost recovery clause revenues (fuel and purchased power) due to higher energy prices.
• Net Income Stability: Net income remained relatively flat at $887 million compared to $890 million in 2003. This stability was achieved despite reduced earnings at FPL Energy, which were offset by improved results at FPL.
• Hurricane Impact: FPL was significantly impacted by Hurricanes Charley, Frances, and Jeanne in Q3 2004. These storms caused over 5.4 million customer outages and reduced FPL's net income by approximately $26 million due to lost revenues and increased O&M expenses. Storm restoration costs accrued totaled approximately $890 million.
• Storm Reserve Deficiency: At year-end, storm costs expected to be recoverable from customers exceeded the storm reserve balance by approximately $536 million. This deficiency was recorded as a regulatory asset pending FPSC approval for recovery.
• FPL Energy Performance: FPL Energy's net income decreased to $172 million from $194 million in 2003, primarily due to $50 million in restructuring charges (including a $48 million contract termination payment) and higher interest expense, partially offset by improved market conditions and new project additions.

Guidance, Outlook, and Risks

• Rate Proceedings: FPL notified the FPSC in January 2005 of its intent to initiate a base rate proceeding in March 2005. FPL expects to request an annual base rate increase of $400 million to $450 million effective January 1, 2006, and an additional $130 million increase in mid-2007 to cover a new 1,150 MW natural gas unit.
• Capital Expenditures: FPL plans to add approximately 1,900 MW of generation capacity in 2005. Estimated capital expenditures for 2005 through 2009 total $8.49 billion for FPL and $1.065 billion for FPL Energy.
• Dividend Increase: In February 2005, FPL Group announced an increase in its quarterly dividend from $0.68 to $0.71 per share (pre-split).
• Key Risks:
  • Regulatory Risk: The FPSC has the authority to disallow cost recovery for costs deemed excessive or imprudent. Changes in regulation could impact earnings.
  • Weather Risk: Severe weather events (hurricanes) can cause significant property damage and restoration costs, as seen in 2004.
  • Market Risk: FPL Energy faces volatility in wholesale energy markets, including commodity price fluctuations and counterparty credit risk.
  • Nuclear Operations: Risks include NRC regulatory actions, spent fuel storage limitations, and potential decommissioning cost increases.

Investor Verification Checklist

• Storm Cost Recovery: Verify the outcome of the April 2005 FPSC hearing regarding the $536 million storm reserve deficiency and the amount of restoration costs allowed for recovery from customers.
• Base Rate Proceeding: Monitor the March 2005 base rate filing and the final FPSC decision expected by the end of 2005 to confirm the approved rate increase amounts.
• FPL Energy Restructuring: Review the impact of the $81 million restructuring charge at FPL Energy (Marcus Hook steam contract) on future earnings and the status of the Texas combined-cycle plant sale.
• Nuclear Maintenance: Track the execution and costs of reactor vessel head replacements and steam generator repairs at St. Lucie and Turkey Point units scheduled for 2005-2007.
• Legal Proceedings: Monitor the status of the EPA lawsuit regarding Scherer Unit No. 4 (in which FPL owns a 76% interest) and the Adelphia bankruptcy complaint alleging fraudulent transfer.