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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 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 electric utility serving Florida, and FPL Energy, a wholesale power generation subsidiary. The filing includes a combined report for both entities. Notably, FPL Group completed the acquisition of Gexa, a Texas retail electric provider, in June 2005, though the financial impact was not material to the second quarter.

Key Financial Metrics (Six Months Ended June 30, 2005)

Note: FPL Energy results include unrealized mark-to-market losses on non-qualifying hedges of $83 million for the six-month period.

Material Changes vs. Prior Period

• Net Income Decline: FPL Group's net income decreased to $340 million for the six months ended June 30, 2005, compared to $395 million in the prior year. This decline was primarily driven by $83 million in unrealized mark-to-market after-tax losses at FPL Energy due to increased forward power and natural gas prices, compared to gains of $5 million in 2004.
• Revenue Growth: Consolidated operating revenues increased 4.6% to $5,178 million, driven by FPL's strong customer growth (2.3% increase in accounts) and higher fuel cost recovery clauses, partially offset by milder weather reducing usage per customer.
• Storm Recovery: FPL began recovering storm restoration costs from the 2004 hurricane season via a surcharge in February 2005. Approximately $63 million was collected in the first six months of 2005. A remaining deficiency of approximately $480 million is recorded as a regulatory asset.
• Expense Increases: Operating expenses rose due to higher fuel costs, increased depreciation from transmission/distribution expansion, and higher employee benefit expenses (absence of pension transition credits).

Guidance, Outlook, and Risks

• Rate Case: FPL filed a petition in March 2005 requesting a permanent rate increase to generate an additional $430 million in annual revenues starting January 1, 2006. A ruling is expected in November 2005.
• Capital Expenditures: Planned capital expenditures for the remainder of 2005 through 2009 are estimated at $7.695 billion for FPL and $1.195 billion for FPL Energy. Major projects include new generation units at Martin and Manatee (operational June 2005) and a 1,150 MW plant at Turkey Point (expected 2007).
• Acquisitions: FPL Energy entered an agreement on July 2, 2005, to acquire a 70% interest in the Duane Arnold Energy Center (nuclear) for approximately $387 million, expected to close in late 2005 or early 2006.
• Key Risks:
  • Regulatory: Dependence on Florida Public Service Commission (FPSC) approval for cost recovery and rate increases.
  • Weather: Exposure to severe weather (hurricanes) causing property damage and operational disruptions.
  • Market Volatility: FPL Energy's earnings are subject to commodity price fluctuations and counterparty credit risk.
  • Legal: Ongoing litigation regarding transmission credits (FMPA), environmental compliance (Clean Air Act), and nuclear liability.

Investor Verification Checklist

• Storm Reserve Recovery: Verify the final FPSC order regarding the recovery of the remaining $480 million storm reserve deficiency and the timeline for amortization.
• Rate Case Outcome: Monitor the November 2005 FPSC ruling on the $430 million rate increase request, which is critical for future earnings stability.
• FPL Energy Hedging: Assess the impact of unrealized mark-to-market losses on FPL Energy's reported earnings versus "adjusted earnings" used by management for internal planning.
• Nuclear Maintenance Costs: Review the projected costs for reactor vessel head replacements and steam generator repairs at St. Lucie and Turkey Point units, estimated at $355 million.
• Acquisition Integration: Evaluate the financial integration of the Gexa acquisition and the progress of the Duane Arnold Energy Center purchase.