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Business Context and Reporting Period

This Form 10-Q is a combined quarterly report for FPL Group, Inc. and its primary subsidiary, Florida Power & Light Company (FPL), for the period ended March 31, 2007. FPL Group operates through two primary reportable segments: FPL, a rate-regulated electric utility serving Florida, and FPL Energy, a competitive energy business engaged in wind, nuclear, and gas generation and energy trading. The filing includes unaudited financial statements and management discussion.

Key Financial Metrics

Note: FPL Group's effective income tax rate for the quarter was 3.9%, significantly lower than the statutory rate due to production tax credits (PTCs) from wind projects.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated operating revenues decreased to $3,075 million from $3,584 million in Q1 2006. This was primarily driven by a $367 million decrease in FPL Energy revenues due to a shift from unrealized mark-to-market gains in 2006 to losses in 2007.
• Net Income Decrease: Consolidated net income fell to $150 million from $251 million in Q1 2006. The primary driver was a $109 million decrease in FPL Energy net income, largely attributable to a $149 million after-tax negative impact from changes in unrealized mark-to-market non-qualifying hedge activity.
• FPL Utility Performance: FPL's net income increased slightly to $126 million from $122 million, driven by customer growth and allowance for funds used during construction (AFUDC), offset by higher depreciation and lower tax benefits.
• Cash Flow Improvement: Operating cash flow for FPL Group turned positive at $1,219 million compared to a use of $117 million in the prior year, aided by the recovery of fuel costs and the return of margin cash deposits.

Outlook, Risks, and Unusual Items

• Derivative Mark-to-Market Volatility: A significant unusual item was the $126 million after-tax net unrealized loss on non-qualifying hedges in Q1 2007, compared to a $23 million gain in Q1 2006. Management notes that these fluctuations are driven by forward power and natural gas prices and do not necessarily reflect fundamental operating performance.
• Capital Expenditures: FPL plans to place Turkey Point Unit No. 5 (1,144 MW) into service on May 1, 2007. FPL Energy expects to close the acquisition of the Point Beach nuclear plant (approx. $1.0 billion) in Q3 2007.
• Regulatory and Legal Risks:
  • IRS Dispute: FPL Group is disputing IRS proposed adjustments for tax years 1988–2002 regarding capitalization of indirect service costs.
  • Environmental Litigation: Ongoing EPA action against Georgia Power (in which FPL has a 76% interest) regarding Clean Air Act violations at Scherer Unit No. 4.
  • Adelphia Litigation: A lawsuit alleging fraudulent transfer regarding a 1999 stock repurchase is set for trial in July 2008.
• Storm Secure Plan: FPL is investing in grid hardening against hurricanes, with costs expected to trend upward in 2007.

Investor Verification Checklist

• Derivative Exposure: Verify the sensitivity of earnings to commodity price fluctuations given the $149 million swing in unrealized hedge results.
• PTC Dependency: Assess the impact of Production Tax Credits on the effective tax rate; the 3.9% rate is heavily influenced by wind generation credits.
• Capital Commitments: Review the $10.1 billion in planned capital expenditures for FPL and $5.1 billion for FPL Energy through 2011, including the pending Point Beach acquisition.
• Liquidity Position: Confirm the availability of the $6.5 billion in new revolving credit facilities entered into in April 2007 to support operations and debt maturities.
• Regulatory Recovery: Monitor the status of storm cost recovery mechanisms and the resolution of the IRS tax dispute regarding unrecognized tax benefits.