ML040350104

Guarantees of Payments of Deferred Premiums

ML040350104
Person / Time
Site:	Seabrook
Issue date:	01/30/2004
From:	Peschel J Florida Power & Light Energy Seabrook
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
NYN-03107
Download: ML040350104 (136)

Text

FPL Energy Seabrook Station FPL Energy Seabrook Station P.O. Box 300 Seabrook, NH 03874 (603) 773-7000 JAN 30 2004 Docket 50-443 NYN-03107 U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, DC 20555-0001 Seabrook Station Guarantees of Payments of Deferred Premiums Pursuant to IOCFR 140.21(e) and IOCFR 50.71 (b), FPL Energy Seabrook, LLC, on behalf of the licensees named in Facility Operating License NPF-86, provides the Annual Reports for 2002.

The Annual Reports demonstrate the collective ability of the licensees to meet their obligation for payment of deferred premiums.

Annual Reports for 2002 (containing certified financial statements) are enclosed for the following:

FPL Group (for subsidiary FPL Energy Seabrook)

Massachusetts Municipal Wholesale Electric Company Hudson Light and Power Department The 2002 Annual Report for Taunton Municipal Lighting Plant will be provided when it becomes available.

1AYIdI an FPL Group company

21 I

U.S. Nuclear Regulatory Commission NYN-03107 / Page 2 Should you have any questions regarding this matter, please contact Mr. James M. Peschel, Regulatory Programs Manager, at (603) 773-7194.

Very truly yours, FPL ENERGY SEABROOK, LLC

/Wan,]

M. Pe-schcl Lvggulatory Programs Manager cc:

(without enclosures):

H. J. Miller, NRC Region I Administrator V. Nerses, NRC Project Manager, Project Directorate 1-2 G. T. Dentel, NRC Senior Resident Inspector Mr. Anthony J. Monteiro, Manager Hudson Light and Power Mr. Joseph M. Blain, Manager Taunton Municipal Lighting Mr. Joseph 0. Roy, Manager of Operating Projects, Massachusetts Municipal Wholesale Electric Co.

Ms. Liza Kuzel, Business Manager FPL Energy, LLC cc: (with enclosures):

U. S. Nuclear Regulatory Commission Attention: James Dyer Director of Nuclear Reactor Regulation One White Flint North 11555 Rockville Pike Rockville, Maryland 20852-2738

ENCLOSURE TO NYN-03107

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FINANCIAL HIGHLIGHTS FPL Group 2002 Annual Report I

For the Years Ended December 31, FINANCIAL RESULTS (millions, except per share amounts)

Net Income excluding after-tax effect of non-recurring items and net unrealized mark-to-market gains associated with non-managed hedges*

Net Income Earnings Per Share excluding non-recurring items and net unrealized mark-to-market gains associated with non-managed hedges (assuming dilution)*

Earnings Per Share (assuming dilution)

Operating Revenues Operating Income Cash Flow from Operating Activities Total Assets COMMON STOCK DATA 2001

% change

$792

$781 4.9 (39.4)

$4.69

$4.62 2.3 (40.9)

$8,326

$1,396

$1,942

$17,463 (0.2)

(12.0) 20.4 13.3 Weighted-Average Shares Outstanding (millions)

Dividends Per Share Book Value Per Share Market Price Per Share (high/low)

OPERATING DATA Utility Energy Sales (millions kwh)

FPL Customer Accounts (year end)

Employees (year end) 169

$2.24

$35.59

$71.63-$51.21 93,488 3,970 10,992 2.4 3.6 1.7 5.5 2.4 5.3

• See page 24 for more details about the non-recurring items.

CONTENTS 2 To Our Shareholders 8 Florida Power & Ught 16 FPL Energy 20 FPL FiberNet 21 Financial and Operating Statistics 22 Management's Discussion and Analysis 35 Managements Report 35 Independent Auditor's Report 36 Financial Statements 70 Board of Directors 70 Company Officers 71 Investor Information SAFE HARBOR STATEMENT:

Any statements made herein about future operating results or other future events are forward-looldng statements under the Safe Harbor Provislons of the Private Securities Lftigation Reform Act of 1995.

Actual results may differ substantially from such fonward-Iooking statements.

A discussion of factors that could cause actual results or events to vary is contained In FPL GroupIs 2002 SEC Forn 10-K (See the hulG statement on page 69 LI

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Dear Shareholders:

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_ C ast year I wrote to you detailing the stormy year experienced in 2001 by American industry in general and the'electric power industry in particular. Well, 2002 wasn't much kinder and, in many ways, the seas got even choppier. Difficult economic conditions, overcapacity in many electricity markets and lower power prices persisted. Moreover, financial scandals and other mismanagement -

such as so-called "wash trading" to artificially inflate revenues and the apparent aggressive use of mark-to-market accounting -

that at first appeared limited to energy trading companies and some independent power producers later threatened to sink some of the most well-respected companies in our business.

FPL Group weathered this period of uncertainty remarkably well. Because of our financial strength, flexibility and discipline, our integrity and accountability, and our strong business performance and attractive growth

.~~~~~~

prospects, we not only have avoided the problems other companies have faced, but also we have delivered strong results for shareholders and positioned our company to continue to "light the way" as one of the nation's finest energy services companies. Let me discuss each of these attributes in greater detail.:

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TO OUR SHAREHOLDERS FPL Group 2002 Annual Report Because of ourfinancial strength, flexibility and discipline, our integrity and accountability, and our strong business performance and attractive growth prospects,-

we not only have avoided the

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problems other companies hha've_

faced, but also we have delivered strong results for shareholders and positioned our company.,

to continue to "light the way" as one of the hation's finest energy services companies.,,,--

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i FPL Group 2002 Annual Report TO OUR SHAREHOLDERS FINANCIAL STRENGTH, FLEXIBILITY AND DISCIPLINE Thanks to contributions from our outstanding team of employees, FPL Group delivered significant value to our shareholders in 2002, providing an 11% total shareholder return. FPL Group shares significantly out-performed the S&P 500 Index this year -

and a key peer group, the S&P 500 Electric Utilities Index.

FPL Group Comparative Total Shareholder Return 12/31/01 -12/31/02 11%

FPL Group S&P 500 Electric Utilities Index

-15%

S&P 500 Index

-22%

Our strong business franchises combined in 2002 to deliver record earnings.

• Net income, excluding the after-tax effect of certain non-recurring items and the mark-to-market effect of non-managed hedges, reached $831 million -

an all-time high -compared with $792 million in 2001. Including the after-tax effect of these items (totalling $358 million after-tax) -

virtually all non-cash items and the majority of which is associated with a goodwill accounting change -

net income was $473 million. (See page 24 for more details about the non-recurring charges.)

• Related earnings per share were up 2.3% at $4.80, compared to $4.69 in 2001.

We continued to emphasize the importance of financial strength, flexibility and discipline -

hallmarks of this company for many years. We enhanced our already strong financial position by issuing $1.4 billion of equity and equity-linked securities by mid-year. In a year when liquidity was sometimes difficult to obtain, we successfully expanded the short-term credit resources available to us.

Credit rating agencies continued to recognize our financial strength and integrity. In June, Moody's reconfirmed FPL's senior secured credit rating at Aa3 and FPL Group Capital's senior unsecured credit rating at A2. Standard & Poor's reaffirmed its A corporate credit ratings on FPL Group and FPL in November.

Reflecting our confidence in the sustainability of our earnings power, our board continued our past practice of raising the dividend modestly each year.

INTEGRITY AND ACCOUNTABILITY I believe you can tell a lot about a company by how it approaches "corporate governance" matters those principles, policies and activities that determine how a company is led and managed.

We have long been committed to unquestioned integrity in all aspects of our business. For example, we were one of 14 companies given an A+ rating in the first national survey of corporate responsibility policies conducted by the California Public Employees Retirement System.

You have my personal commitment that FPL Group will continue to take tangible and meaningful actions to uphold and further strengthen our outstanding record of integrity and accountability. For example:

• As we did last year, our Chief Financial Officer Moray Dewhurst, our Controller and Chief Accounting Officer Mike Davis and I are voluntarily signing the management's report contained in this annual report. In addition, on a regular reporting basis since August and in accord with the Sarbanes-Oxley Act, Moray and I personally attest to the completeness and accuracy of our annual and quarterly reports.

• Our senior executive team stays close to the day-to-day operations of our business. We know where our revenues come from and how the company makes its money. We understand the risks the company is undertaking in the course of carrying out our business, and we have strong controls in place for managing those risks.

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• Today, 11 of our 13 directors are independent.

Our compensation and audit committees have been comprised solely of independent directors for many years, as has our corporate governance committee since its inception in 2001.

• Additionally, the agenda for every regularly scheduled board meeting includes an executive session where the independent directors, if they so choose, can meet without members of management.

• A Code of Conduct for our employees has been updated, and we're requiring our top 200+ officers and managers to certify annually, in writing, their compliance with this code.

STRONG PERFORMANCE AND ATTRACTIVE GROWTH PROSPECTS Our three businesses are positioned well for attractive long-term growth. Each is guided by a talented leader-ship team and a sound, disciplined business strategy.

Florida Power & Light:

A Premier Integrated Utility Florida Power & Light Company, the largest investor-owned utility in Florida, is one of the nation's top-performing utilities. It produced strong average annual earnings growth of more than 4% over the past decade and is expected to provide 85% of FPL Group's earnings this year.

2003 Projected Earnings Contribution

• Net income for Florida Power & Light increased to

$717 million or $4.14 per share in 2002, from $695 million or $4.11 per share in 2001, excluding an after-tax non-recurring expense of $16 million in 2001.

• FPL added almost 94,000 new customer accounts during the year, a 2.4% increase over 2001. During the year we turned on power to our 4 millionth customer.

Electricity usage per retail customer also grew -

by 3.5% -

reflecting warmer than normal weather.

• Our operational performance continues to place us near the very top among U.S. utilities. The amount of time our power plants are available to produce power is among the highest in the industry, and the reliability of our electric transmission and delivery systems is also among the best in the business.

• Our residential rates are 13% below national average.

• Our power plant emissions, on a per megawatt-hour basis, are among the lowest in the industry.

• Of special note, the Nuclear Regulatory Commission in 2002 granted 20-year license extensions to our two nuclear power generating units at Turkey Point, allowing FPL customers to continue to benefit from this clean, reliable and low-cost power source.

We hope to receive similar license extensions for our two St. Lucie units this year.

• We continued to expand our electric system to meet growing customer demand, while remaining a low-cost provider. Both our operations and maintenance costs and our capital investment per customer are well below industry averages.

Florida Power & Light expects to see healthy earnings growth of 4-5% in 2003, which equates to $725 to

$735 million in net income, adjusting the comparative 2002 results for normal weather. This assumes continued growth in customer accounts, normal weather and gains in productivity in 2003. Our strategy is to:

• Capitalize on growing demand for electricity in our service territory.

• Continue to improve our outstanding operating performance.

A rgy er In 2002, FPL produced excellent results despite a

,_~1~ 7% reduction in base rates approved by the Office of Public Counsel and Florida Public Service Commission in March that will remain in effect through 2005.

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• Seek opportunities to profitably grow our core utility business.

• Work to maintain the collaborative and progressive regulatory environment that has resulted in incentive-based ratemaking that benefits both our shareholders and our customers.

FPL Energy: Disciplined Wholesale Power Generation Business FPL Energy, our unregulated wholesale energy subsidiary operating outside the state of Florida, continued its growth in 2002 despite substantial turmoil in the wholesale generation market.

• Excluding the mark-to-market effect of non-managed hedges and non-recurring charges that totalled $295 million after-tax in 2002 (virtually all non-cash items and the majority of which is associated with a goodwill accounting change) and a net gain of $8 million in 2001, FPL Energy's net income was up 20% over 2001 to a record $126 million, and its contribution to earnings per share was up 18%. Factors contributing to this record performance included our commitment to efficient, low-cost operations, portfolio additions, and ongoing asset and contract restructuring activities.

• We increased our portfolio by more than 40%,

to 7,250 net-megawvatts, including leased capacity.

Most notably, we acquired a controlling interest in the Seabrook Station nuclear power plant in New Hampshire, the premier nuclear power plant in the Northeast. This plant will complement our portfolio in the region and further diversify our fuel mix.

• We remained the U.S. leader in wind power by adding 324 megawatts to our wind portfolio, which now totals more than 1,700 megawatts -

or more than one-third of the U.S. total. All of our wind plants have long-term power sales contracts.

• To reduce risk and lend stability to our earnings profile, approximately 80% of the power we generated in 2002 was sold under forward contracts.

• In response to soft market conditions, we took decisive actions -

reducing overhead costs, renegotiating purchase agreements for fewer combustion turbines, and canceling and/or postponing new gas-fired power plant projects.

We expect the wholesale generation industry to be weak for the next several years. Nonetheless, we have built a solid, profitable portfolio of generating assets, and our outlook for continued profitable growth is strong. In 2003, we expect FPL Energy to produce healthy earnings growth of 30-50% as more than 90% of our expected gross margin for the year is already under contract.

Our strategy for achieving our 2003 and longer-term goals is multi-faceted:

• Remain a low-cost provider.

• Maintain a portfolio of assets diversified by region and by fuel source.

• Reduce risk by contracting to sell the majority of expected future output and correspondingly hedge our fuel requirements.

• Add 700 to 1,200 megawatts of wind energy in 2003 and sell the output under long-term sales contracts.

• Complete in 2003 four natural gas-fired power plants currently under construction that will add nearly 3,000 net-megawatts.

• Continue to search for opportunities to further optimize our portfolio, capturing additional value through asset sales, contract restructurings, and related strategies.

Given the financial pressures on other generation companies, and with a reported 20,000 megawatts of generation capacity for sale, we may purchase additional generation assets if attractive opportunities present themselves. However, we will be extremely selective in doing so, only pursuing accretive acquisitions that fit our strategy and are financeable in today's environment. Going forward, we are better positioned than most companies in this sector today, and we are well positioned to capitalize on market opportunities when business conditions improve.

FPL FiberNet: Adjusting to Difficult Market Conditions Given the ongoing difficulties in the telecommunica-tions sector, the short-term growth prospects for FPL FiberNet are not good. We expect this to be roughly K)

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TO OUR SHAREHOLDERS FPL Group 2002 Annual Report a break-even business over the next year or so. FPL FiberNet remains focused on its core mission of operating one of the leading metropolitan-area fiber-optic networks in the United States. However, we will be minimizing the amount of new investment in this business until market conditions improve.

IN OTHER IMPORTANT ACTIONS...

• Frank G. Zarb and James L. Camaren were elected to serve as directors of FPL Group, and Jim Robo was named president of FPL Energy. Each has valuable expertise that will serve us well in our changing industry.

• FPL Group again received the highest ranking in environmental performance among 28 electric utilities in the United States evaluated by Innovest Strategic Value Advisors, an internationally recognized investment research firm. It was the second straight time our company earned this #1 ranking.

And we have a relatively low-risk profile.

Approximately 85% of our expected 2003 earnings will be generated by Florida Power & Light, and more than 90% of the expected 2003 gross margin at FPL Energy has been hedged. We have a strong balance sheet, we're well diversified by region and fuel source, and our modest, low-risk trading business is focused almost exclusively on reducing risk and extracting maximum value from our assets.

Consistent Growth in Earnings Per Share 6% compound annual growth rate

$4.38

$3i57 $3.85 $3.98 I

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$6 02 01 02 0

LIGHTING THE WAY Amidst the turbulent seas that have characterized our industry in the recent past, FPL Group continues to hold steady as a reliable beacon and a solid investment.

97 98 99 00 We are a company built on solid fundamentals. We consistently experience healthy growth in demand for electricity in our utility service territory, we manage high quality assets, and we have a longstanding culture of operational excellence and financial discipline.

We have a proven track record. We have long been known for meeting our earnings expectations and enhancing shareholder value, we act proactively to meet challenges, and our actions often exceed the levels of performance required by law or regulation.

With the interest of shareholders and customers in mind, we have avoided many industry fads that have proven later to be of questionable worth or value for many of the companies that have pursued them.

We continue to capitalize on attractive, realistic growth prospects, both at our regulated utility -

especially due to customer and usage growth -

and at our unregulated wholesale energy subsidiary.

Excluding mark-to-market effects of non-managed hedges and non-recurring items.

Benefiting from a carefully crafted strategy, a very talented team of employees and a commitment to continuous improvement, 2003 is shaping up to be another year of record financial and operating performance for FPL Group, and a year in which we expect to further enhance our reputation as one of the very best companies in our industry.

As always, we at FPL Group appreciate the support of our shareholders. Please be assured that we'll continue to do our best each day to sustain that support and grow shareholder value.

Lewis Hay III Chairman, President and Chief Executive Officer March 28, 2003 CO4-

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Florida Power & Light Flo lorida Power & Light stood out as a beacon of stability within the electric industry during 2002 as it delivered another year of superior performance. Continued growth, improvements in reliability and service, and a favorable rate agreement helped solidify FPL's position as a low-cost, high-quality provider of electricity and one of the top utilities in the country.

MEETING FLORIDA'S GROWING ENERGY NEEDS FPL is among America's largest and fastest growing electric utilities. During the year the utility added 94,000 new accounts, a 2.4% increase, including our four millionth customer. Electricity usage per retail customer grew by 3.5%, due primarily to warmer than normal weather and the elasticity of demand in the aftermath of a reduction in base electricity rates. Energy sales reached an all-time high of 98.6 billion kilowatt-hours.

For 2003, we expect customer growth of about 1.9%

and weather normalized usage growth of about 2.1%.

2002 Customer Mix (FPL revenues by customer segment)

Other 6%

~

Industrial 3%

To meet future growth -and as part of an on-going expansion plan -

FPL increased its generating capability by 1,022 net-megawatts during 2002 with the successful completion of the Fort Myers plant repowering project and the first half of the Sanford plant repowering project. The utility's total generating capability at year-end 2002 was nearly 21,000 mega-watts, including purchased power. The completion in 2003 of the Sanford project and additional peaking units being built at Fort Myers will add nearly 1,300 more megawatts to the FPL system.

Following an analysis of 134 other proposals in two competitive capacity solicitations, the Florida Public Service Commission unanimously approved FPL's proposed expansion projects at the Manatee and Martin plant sites. Subject to additional regulatory approvals, the expansion at Manatee and Martin will provide an additional 1,900 megawatts of power in 2005, enough to meet the needs of approximately 400,000 new customers and maintain a reserve margin of 20%.

FPL is expanding its system facilities and infrastructure to support the increased generating capacity and demand. During 2002 the company added 11 new substations, 36 miles of transmission lines, and more than 400 miles of distribution lines. In 2003, the company expects to add 14 new substations, nearly 90 miles of transmission, and approximately 415 miles of distribution.

While building plants and facilities to meet the growing demand on its system, FPL works with customers to help them conserve or reduce their use of electricity. Its conservation and demand side This is the control room of FPL's state-of-the-art combined-cycle power plant at Fort Myers. A four-year project to repower the Fort Myers plant culminated in Spring 2002. With a new generating capability of more than 1,400 megawatts, the project nearly tripled the plant's former capacity while substantially reducing emissions. The installation of additional peaking units here, as well as the repow-ering of the Sanford plant, will be completed this year.

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management programs are among the most effective in the nation and to date have reduced the need for new generation by approximately 3,200 megawatts -

the equivalent of not building six large power plants.

SUPERIOR RELIABILITY FPL's power plants operate at world-class levels.

The percentage of time they are available to generate power is among the highest in the industry. During 2002 the "availability" of FPL's nuclear facilities rose to a record 97%, well above the most recent industry average of 89%. In addition, the company's nuclear operations received a rating of 99.3 from the World Association of Nuclear Operators, placing us among the top quarter of the nation's 103 nuclear units.

An Industry Leader in Plant Performance Nuclear Plant Availability Fossil Plant Availability

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Industry average 93% 93% 97%

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94 96 98 00 02 FPL's reliability and customer service continue to improve. Over the past five years the average annual amount of time that customers were without power has been cut nearly in half, from more than 137 minutes to 69 minutes. In addition, the duration and frequency of interruptions have been reduced by 35% and 23%, respectively.

IMPROVING CUSTOMER SERVICE FPL continually strives to be a customer-friendly company. For example, as the result of an initiative begun in 2000, customers are being kept better informed about the status of planned power outages and the restoration of power. Improvements in Web-based options allow customers to access their accounts and other important energy information, as well as pay their bills more conveniently. These and other quality initiatives have enabled the company to receive continued high marks in its annual customer surveys of both residential and business customers.

After more than a decade of steady reductions, FPL's operating and maintenance costs per kilowatt-hour rose in 2002, driven by higher expenses for nuclear maintenance, property insurance and employee medical costs, and a one-time voluntary accrual of $35 million -

in addition to the normal

$20 million -

in the storm fund to be better prepared should a major storm strike within its service area.

Nonetheless, the company's O&M expenses as measured in dollars per customer remained at 42%

below the industry average. With a goal of further improving both service levels and cost effectiveness, FPL is intensifying its efforts to improve its quality, productivity and operational efficiency.

MILESTONES FOR NUCLEAR OPERATIONS FPL's nuclear facilities at Turkey Point, located south of Miami, and at St. Lucie, on Hutchinson Island, combined to produce more than 26 billion kilowatt-hours of electricity during 2002. This is more than a 5% increase over the previous year and an all-time high.

90 920 The availability of the company's fossil-fueled plants was 94%, just off last year's record and also well above the industry average of 87%.

Healthy population growth in the Sunshine State and increased customer electric use make FPL one of the largest and fastest-growing electric utilities in the nation. FPL added its four millionth customer in 2002, and its annual customer growth rate continues to be higher than that of most other utilities. Retail customer energy use also increased by 3.5% in 2002. Both of these drivers contributed to record energy sales of 98.6 billion kilowatt-hours.

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After an extensive four-year application and review process, the Nuclear Regulatory Commission extended the operating licenses of Turkey Point nuclear units 3 and 4 until 2032 and 2033, respectively.

The NRC is currently reviewing FPL's application to renew the operating licenses of its two St. Lucie units, a process expected to be completed in the fall of 2003.

Successful refueling outages were conducted at both Turkey Point and St. Lucie. The outage at Turkey Point's unit 4 was the shortest conducted by any similarly-designed nuclear power plant in the United States. Reflecting its overall success, Turkey Point received the 2002 Utility Achievement Award from the American Nuclear Society for its outstanding performance coupled with production costs that are among the lowest in the nation.

The nuclear division's top priorities continue to be safety and security, and during 2002 a number of security measures were added to the plants' already extensive security program. Also, in response to an NRC directive to nuclear plants nationwide, FPL visually inspected the reactor vessel heads at all four of its nuclear units and no problems were found. Additional volumetric and visual testing performed on the reactor vessel heads at St. Lucie unit 1 and Turkey Point unit 3 during scheduled refueling outages confirmed these results. These tests also will be conducted on FPL's two other nuclear units during their scheduled refueling outages this year. As a cost-effective measure, FPL plans to replace the reactor vessel heads over a three-year period beginning in 2004 rather than undergo expensive supplemental inspections.

PROGRESSIVE REGULATORY ACTION Under an agreement, negotiated between FPL and the Office of Public Counsel and approved by the Florida Public Service Commission in March of 2002, FPL reduced its base rates by 7%, or $250 million annually. As a result, at year-end 2002, the utility's residential rates were 13% below the national average and the lowest of all the major investor-owned utilities in Florida. The agreement avoided a full-scale rate hearing and will provide savings to customers of approximately $1 billion through 2005.

FPL is working harder and smarter to provide customers with high quality, reliable service, including how the company responds to restore electric service following interruptions caused by storms. Improved work processes, new tech-nologies and enhanced communications to keep customers better informed about restoration status represent some of these improvements.

In addition, the agreement provided for revenue sharing between FPL and its customers if revenues exceed certain levels. In February of this year, FPL returned approximately $11 million to its customers as a result of the revenue-sharing feature. The agreement is incentive-based in that the company benefits from productivity gains and has no stated return on equity limitation.

Diverse Energy Sources at FPL (based on kilowatt-hours produced in 2002)

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In With the state's progressive regulatory environment, any actions to restructure the electric industry in Florida are unlikely in the near future.

In other regulatory actions, progress continued on the development of GridFlorida, a non-profit Independent System Operator (ISO) for the state. The ISO was presented to the Florida Public Service Commission as a regional transmission organization, as mandated by the Federal Energy Regulatory Commission.

The Commission approved a proposal by FPL and two other major Florida utilities for an ISO in 2002, but the Office of Public Counsel protested this decision to the Florida Supreme Court on jurisdictional grounds. A ruling is expected in 2003.

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at reducing greenhouse gas emissions. Partnering with the EPA is an important next step in assessing and reducing emissions at power plants in Florida and throughout the country.

FPL's efforts to protect and preserve the environment at the Turkey Point plant site have attracted world-wide attention. The site contains fresh and estuarine wetlands and subtropical hardwood forests as well as 26 state-and 17 federally protected animal species, including the endangeredAmerican crocodile. The nuclear power units attracted additional attention in 2002 when the Nuclear Regulatory Commission extended their operating licenses for an additional 20 years.

FPL Group's environmental achievements resulted in the company being recognized for a second straight time as having the strongest environmental program in the electric power industry. Innovest, an international independent investment research firm, ranked FPL Group number one among more than two dozen U.S. electric companies surveyed.

Reducing Emission Rates at FPL Group (Pounds per megawatt-hour)

ENVIRONMENTAL LEADERSHIP As one of the nation's cleanest electric utilities, FPL's rates of emission of sulfur dioxide, carbon dioxide and nitrogen oxides are among the lowest of major investor-owned utilities throughout the nation.

Over the past decade, the company has dramatically reduced emissions from its power plants while adding thousands of megawatts of additional power.

For example, FPL's process of repowering-converting existing oil-burning plants to state-of-the-art natural gas operations -

not only increases plant output, but reduces emissions as well. The repowering of its Fort Myers plant reduced nitrogen oxide emissions from 7.23 pounds per megawatt-hour to 0.26; sulfur dioxide from 20.94 lbs/mwh to 0.02; and carbon dioxide from 1,722 to 774 lbs/mwh.

In addition, FPL recently received the support of the Florida Department of Environmental Protection to proceed with the installation of pollution control technology to lower nitrogen oxide emissions at its two existing oil-fired units at the Manatee plant located near Bradenton, Florida.

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Sulfur Dioxide Nitrogen Oxide 98 99 00 01 02

^ Projected (Pounds per kilowatt-hour) 03 2.0 1.5 Being one of America's cleanest electric utilities benefits all of the citizens of Florida and also allows FPL to avoid many of the costs other companies must incur to bring their operations into compliance with environmental laws and regulations.

Early in 2002, FPL Group participated as a charter partner in the Environmental Protection Agency's new voluntary Climate Leaders program aimed 1.0 Carbon Dioxide

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T sccessfully navigating the turbulent waters of the wholesale energy sector during 2002, FPL Energy ened with a strong performance and in a solid position to benefit from future market opportunities.

By adhegng to a disciplined and moderate-risk strategy -

and continuing to focus on clean energy -

net income at the company's unregulated wholesale energy subsidiary rose 20% to a record $126 million, or 73 cents per share, excluding the mark-to-market effect of non-managed hedges and certain non-recurring charges that totalled $295 million after-tax in 2002 (virtually all non-cash items and the majority of which is associated with a goodwill accounting change) and excluding a net gain of $8 million in 2001. Earnings growth was driven both by generation capacity additions -

primarily wind projects and the acquisition of the Seabrook Station in New Hampshire -

and by project restructuring activities.

A Diversified Portfolio at FPL Energy (7,250 net-megawatts in operation at 12/31/02) turbines from 32 to 7, as well as the cancellation or postponement of new gas-fired power plant projects.

The company's generating portfolio grew by nearly 2,200 megawatts during 2002 with the completion of several wind and natural gas projects and the acquisition of a majority interest of the Seabrook Station nuclear power plant in New Hampshire. Total generation is now more than 7,200 net-megawatts, including leased capacity.

FPL Energy currently has projects in operation or construction in 22 states. With more than 80%

of its generation fueled by natural gas, nuclear or renewable sources, we are among America's leading clean energy providers.

FPL Energy continues to successfully execute its strategy of:

• Profitably growing a geographically diverse portfolio;

• Focusing on clean energy generation; and

• Optimizing its assets through operational excellence, sound business management, and conservative marketing and trading practices.

Hydro 5%

Other 2%

Acquiring a controlling interest in one of the nation's newest nuclear power plants, Seabrook Station in New Hampshire, was a major achievement for FPL Energy in 2002. The 1,161-megawatt facility strengthens our competitive position in the Northeast and is an excellent complement to our clean energy portfolio in the region. More than 95% of Seabrook's 2003 generating output is contracted to be sold. Substantial amounts also are under contract through 2006.

During the year, FPL Energy restructured to better align the company's organization and business strategy to the current realities of the marketplace. Wholesale energy markets across the nation have witnessed dramatic change, with sharp price decreases and the withdrawal of a number of key players. Responding to these changes, the restructuring included a reduction of general and administrative expenses and the corporation's financial obligation for additional gas qCc

KUJ FPL Energy expanded its Stateline wind energy facility on the Oregon/Washington border in 2002, making it the largest wind facility in the U.S. The company also completed or acquired new wind projects in four other states. This performance further solidifies FPL Energy's position as the nation's leader in wind power development and operation, with more than one-third of the installed capacity.

In 2003, FPL Energy plans to focus on portfolio growth through building new wind assets, completing existing gas-fired power plant construction projects and making selective acquisitions that strategically fit the portfolio and add long-term value.

1. 1 IN WIND POWER Wind is the nation's fastest growing source of power and a profitable business for FPL Energy. We lead the nation in the development and operation of wind power with more than one-third of the installed capacity, and our share is increasing. In 2002, FPL Energy was responsible for roughly half of all new wind power projects completed in the U.S.

The company's 28 wind facilities -

located in 10 states -

provide approximately 1,700 megawatts of electricity, or nearly 25% of our total generation capacity. Despite the current surplus in generating capacity across much of the U.S., demand for new wind generation remains strong, and due to its many environmental benefits, it is encouraged by numerous laws at both the state and federal levels.

In early 2002 the federal wind production tax credit, which provides for tax credits of 1.8 cents per kilowvatt-hour for the first ten years of a facility's operation, was extended through 2003. The company is currently working with members of Congress in efforts to extend the tax credit beyond 2003.

During 2002 new wind energy centers were completed in Waest Virginia (66 megawatts) and Iowa (98 mega-watts). In addition, the Stateline facility on the Oregon/Washington border was expanded by 37 megawatts to 300 megawatts, making it the largest wind facility in the United States. Also, 123 megawatts of wind assets were acquired in Texas and Pennsylvania.

FPL Energy is targeting to add another 700 to 1,200 megawatts of wind power in 2003. Announced projects include a 204-megawvatt facility in eastern New Mexico, a 150-megawatt facility in northern California, and 40-megawatt facilities in both North Dakota and South Dakota.

NATURAL GAS ENHANCES "CLEAN" PORTFOLIO Clean-burning natural gas is the fuel source for approximately 45% of FPL Energy's generation, and nearly 900 megawatts of new gas-fired facilities were placed into operation during 2002. These included combined-cycle power plants in Rhode Island (550 megawatts of leased capacity) and Texas (283 net-megawatts), and a 54-megawatt peaking unit in New York City. Combined-cycle technology enables a plant to produce electricity more efficiently and cost effectively, while peaking units are used to provide power during short-term periods of high energy demand.

FPL Energy expects to add nearly 3,000 megawatts of combined-cycle power during 2003 from projects that include:

• A 517-megawatt plant in Blythe, California, which is strategically located to serve California, Arizona and Nevada (mid-2003);

• A 668-megawvatt facility in northeastern Alabama, which has a long-term purchase power agreement with a regional utility (mid-2003);

• A 1,700-net-megawatt facility near Dallas that is well positioned to serve the growing north Texas market (mid-2003), and;

• A 54-megawatt peaking unit to supply electricity to the Long Island Power Authority for the Rockaway Peninsula in Queens County, New York City (mid-2003).

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t FPL Group 2002 Annual Report FPL ENERGY I FPL FIBERNET In addition, a 744-megawatt plant is scheduled to begin operation in Pennsylvania in mid-2004.

SELECTIVE ACQUISITIONS A major achievement for FPL Energy in 2002 was acquiring a controlling interest in New England's premier nuclear power facility -the 1,161-megawatt Seabrook Station -

in early November.

Strategically located just north of Boston, Seabrook provides more than 7% of the electricity used in New England and is similar in design to Florida Power &

Light's Turkey Point and St. Lucie nuclear power plants.

The plant has a strong history of safe and reliable operations since its start-up in 1991. As one of the nation's newest nuclear power plants, Seabrook is well positioned to provide the region with long-term, reliable and low-cost energy. FPL Energy is drawing upon the expertise of FPL's nuclear division to help manage and operate the Seabrook plant.

Acquiring Seabrook enables FPL Energy to add nuclear power to its already diversified clean energy portfolio.

It also complements the company's hydro-electric and fossil-fueled holdings in New England and strengthens our position as a major energy provider in the Northeast.

More than 95% of the plant's 2003 generating output is contracted to be sold. Approximately 80% of the plant's 2004 generation is under contract, with about 60% under contract for 2005 and about 50% for 2006.

OUTLOOK Although market conditions in the wholesale energy sector are not expected to improve appreciably over the next 1-2 years, FPL Energy is in a strong position to continue its profitable growth. More than 90%

of our expected gross margin for generation in 2003 is already under contract. Earnings growth of 30-50% is expected in 2003.

FPL FiberNet S*W 4r-ON METRO MARKETS Goup's fiber-optic subsidiary, FPL FiberNet, W4 s wholesale telecommunications services in ida to major local, long-distance, and wireless PL FiberNet Network riterconnection Agreement West Pair, Beach

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telecommunications companies and Internet service providers. The company supplies long-haul network capability to Florida Power & Light, ensuring a robust and cost-effective communications link among FPL plants and operations.

Florida is the nation's fourth largest telecommunica-tions market. Since its inception in 2000, FPL FiberNet has successfully focused on building its intra-city network in major metropolitan areas in the state, where demand continues to grow.

The company anticipates little improvement in the depressed telecommunications market in the near term. As a result, it will make very limited investments in the business and expects to be at or near break even in 2003. Longer term, the company is well positioned to profit from the strong underlying growth of data communications usage.

OF ol' CAD

FINANCIAL INFORMATION FPL Group 2002 Annual Report 21 FINANCIAL AND OPERATING STATISTICS Years Ended December 31, 2-02 2001 2000 1999 1998 1997 1992 FPL GROUP, INC. (millions)

Operating Revenues

$8,326

$7,062

$6,438

$6,661

$6,369

$5,186 Operating Expenses

$7,083

$6,930

$5,822

$5,518

$5,409

$5,141

$4,159 Operating Income

$.?;

$1,396

$1,240

$920

$1,252

$1,228

$1,027 Income Before Cumulative Effect of a Change in Accounting Principle 895jb-

$7812)

$70411)

$6974)

$664

$618

$467 Cumulative Effect of Adopting FAS 142, Net of Income Taxes of $143 Net Income L

$781)2?

$704'3'

$69701

$664

$618

$467 Total Assets

$1};$*

$17,463

$15,300

$13,441

$12,029

$12,449

$12,306 Long-Term Debt()

$4,858

$3,976

$3,478

$2,347

$2,949

$3,960 Preferred Stock of FPL with Sinking Fund Requirements(')

$551 FLORIDA POWER &

LIGHT COMPANY Operating Revenues (millions)

V;

$7,477

$6,361

$6,057

$6,366

$6,132

$5,100 Energy Sales (millions of kwh) 93,488 91,969 88,067 89,362 82,734 69,290 Customer Accounts-Average (thousands)

. i; 3,935 3,848 3,756 3,680 3,616 3,281 Peak Load, Winter (mw 60-minute)M

0.

17,585 18,219 17,057 16,802 13,047 12,964 Peak Load, Summer (mw 60-minute)

- I9F 18,754 17,808 17,615 17,897 16,613 14,661 Reserve Margin (summer peak, %)(SI 14 13 14 10 20 17 Total Capability (mw)"'

18,871 19,069 18,649 18,509 18,715 16,627 Net Energy for Load (%):

Oil 26 25 25 27 18 26 Natural Gas 3

24 25 25 26 29 17 Nuclear 24 26 27 26 25 27 Net Purchased Power and Interchange 20' 20 17 16 14 20 27 Coal 6-6 7

7 7

8 3

COMMON STOCK DATA Average Shares Outstanding (millions)

Earnings Per Share of Common Stock:

Earnings Per Share Before Cumulative Effect of Adopting FAS 142 Cumulative Effect of Adopting FAS 142 Earnings Per Share Earnings Per Share of Common Stock -

Assuming Dilution:

Earnings Per Share Before Cumulative Effect of Adopting FAS 142 Cumulative Effect of Adopting FAS 142 Earnings Per Share Dividends Paid Per Share Book Value Per Share (year end)

Market Price Per Share (year end)

Market Price Per Share (high-low)

Number of Registered Shareholders (year end) 117

$4$27

5I

60.¶i

169

$4.632)

$4.63?2) 170 172 173 173

$4.14(3)

$3.85

$3.85

$4.62)?)

$4.62(l)

$4.07(o

$4.07'4

$3.85

$3.85

$3.57

$3.57

$3.57

$3.57

$1.92

$28.03

$59.19

$60-42.63 60,493 176

$2.65

$2.65

$2.65

$2.65

$2.43

$20.99

$36.25

$38.38-32 83,109

$2.24

$35.59

$56.40

$71.63-51.21 40,990

$2.16

$33.22

$71.75

$2.08

$31.47

$42.81

$2.00

$29.76

$61.63

$73-36.38 $61.94-41.13 $72.56-56.06 45,066 50,215 55,149 (1) Includes impairment and restructuring charges, charges related to certain wind projects and leveraged leases, a favorable settlement of litigation with the IRS and net unrealized mark-to-market gains associated with non-managed hedges.

(2) Includes merger-related expenses and net unrealized mark-to-market gains associated with non-managed hedges. Excluding these items, net income and earnings per share (assumung dilution) would have been $792 million and $4.69, respectively (3) Includes merger-related expenses. Excluding these expenses, net income and earnings per share (assuming dilution) would have been $745 million and

$4.38, respectively.

(4) Includes effects of gains on divestiture of cable investments, impairment loss and litigation settlement Excluding these items, net income and earnings per share (assuming dilution) would have been $681 million and $3.98, respectively (5) Includes the cumulative effect of an accounting change, impairment and restructuring charges, charges related to certain wind projects and leveraged leases, a favorable settlement of litigation with the IRS and net unrealized mark-to-market gains associated with non-managed hedges. Excluding these items, net income would have been $831 million and eamings per share (assuming dilution) would have been $4.80.

(6) Excludes current maturities.

(7) Winter season includes November and December of the current year and January to March of the following year.

(8) Represents installed capability plus purchased power. Reserve margin is based on peak load net of load management

Iii ii

P L G ro u p 2 0 0 2 Ann u a I Re p ort FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Notes to Consolidated Financial Statements contained herein. In the discussion of Results of Operations below, all comparisons are with the corresponding items in the prior year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles requires management to exercise judgment and make estimates and assump-tions where amounts are not subject to precise measurement or are dependent on future events.

Critical accounting policies and estimates, which are important to the portrayal of both FPL Group's financial condition and results of operations and which require complex, subjective judgments are as follows:

Accounting for Derivatives and Hedging Activities - On January 1, 2001, FPL Group adopted FAS 133, "Accounting for Derivatives and Hedging Activities," as amended by FAS 137 and FAS 138 (collectively, FAS 133). FPL Group uses deriv-ative instruments (primarily forward purchases and sales, swaps, options and futures) to manage the commodity price risk inherent in fuel purchases and electricity sales, as well as to optimize the value of power generation assets and related contracts. To a lesser extent, FPL Group also engages in limited energy trading activities to take advantage of expected favorable price movements. These accounting pronouncements, which require the use of fair value accounting if certain conditions are met, apply not only to traditional financial deriva-tive instruments, but to any contract having the accounting character-istics of a derivative.

FAS 133 requires that derivative instruments be recorded on the balance sheet at fair value. Fair values for some of the longer-term contracts where liquid markets are not available are based on inter-nally developed models. The estimation of fair value for long-term contracts requires the use of internally developed models based on the forward prices for electricity. Forward prices represent the price at which a buyer or seller could contract today to purchase or sell a commodity at a future date. In general, the models estimate the fair value of a contract by calculating the present value of the difference between the prices in the contract and the forward prices. The market for electricity in the first one to two years of a contract is generally liquid and therefore the prices in the early years of the forward curves reflect observable market quotes. However, in the later years, the market is much less liquid and forward price curves must be devel-oped. Factors used in developing forward curves for electricity include the forward prices for the commodities used as fuel to generate elec-tricity, the expected system heat rate (which measures the efficiency of power plants in converting fuel to electricity) in the region where the purchase or sale takes place, and a fundamental forecast of expected spot prices based on modeled supply and demand in the region. The assumptions in these models are critical since any changes therein could have a significant impact on the fair value of the contract.

'Substantially all changes in the fair value of derivatives held by FPL are deferred as a regulatory asset or liability until the contracts are settled. Upon settlement, any gains or losses will be passed through the fuel and capacity clauses. In the non-rate regulated operations, predominantly FPL Energy, changes in the derivatives' fair values are recognized in current earnings, unless certain hedge accounting crite-ria are met. For those transactions for which hedge accounting can be applied, much of the effects of changes in fair value are reflected in other comprehensive income (a component of shareholders' equity) rather than being recognized in current earnings.

Since FAS 133 became effective in 2001, the Financial Accounting Standards Board (FASB) has discussed and, from time to lime, issued implementation guidance related to FAS 133. In particu-lar, much of the interpretive guidance affects when certain contracts for the purchase and sale of power and certain fuel supply contracts can be excluded from the provisions of FAS 133. Despite the large volume of implementation guidance, FAS 133 and the supplemental guidance does not provide specific guidance on all contract issues. As a result, significant judgment must be used in applying FAS 133 and its interpretations. The interpretation of FAS 133 continues to evolve.

One possible result of changes in interpretation could be that certain contracts would have to be recorded on the balance sheet at fair value, with changes in fair value recorded in the income statement.

See Note 5.

Accounting for Pensions and Other Post Employment Benefits - FPL Group and its subsidiaries sponsor a noncontributory defined benefit pension plan and defined benefit postretirement plans for health care and life insurance benefits

,:other benefits) for substantially all employees. Both the pension and life insurance plans have funded trusts dedicated to providing

,he benefits.

FPL Group's pension income net of the cost of other benefits was approximately $82 million, $84 million and $89 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Pension income and the cost of other benefits are included in O&M expenses, and are calculated using a number of actuarial assump-

,ions. Those assumptions include an expected long-term rate of return on qualified plan assets of 7.75% for all years, assumed increases in future compensation levels of 4.5% for 2002 and 5.5% for 2001 and 2000, and a weighted-average discount rate used in determining the benefit obligations of 6.00% and 6.25% for 2002 and 2001, respec-tively. Based on current health care costs (as related to other bene-fits), the projected 2003 trend assumptions used to measure the expected cost of benefits covered by the plans are 10% for all age

FINANCIAL INFORMATION FPL Group 2002 Annual Report groups. The rate is assumed to decrease over the next ten years to the ultimate trend rate of 5% for all age groups and remain at that level thereafter. In developing these assumptions, FPL Group evalu-ated input from its actuaries, as well as information available in the market place. For the expected long-term rate of return on fund assets, FPL Group considered 10-year and 20-year long-term median returns for a portfolio with a 50/50 equity/bond asset mix similar to its funds. FPL Group also considered its historical 10-year and 20-year compounded returns which have been in excess of these broad equity and bond benchmark indices. FPL Group believes that 7.75%

is a reasonable long-term rate of return on its plan assets, despite the recent market downturn. FPL Group will continue to evaluate all of its actuarial assumptions, including its expected rate of return, at least annually, and will adjust them as necessary.

FPL Group bases its determination of pension and other benefits expense or income on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recog-nizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return realized on those assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be affected as previously deferred gains or losses are recognized. Such gains and losses together with other differences between actual results and the estimates used in the actuarial valuations are deferred and recognized in determining pension and other benefits expense and income only when they exceed 10% of the greater of projected benefit obligations or the market-related value of assets.

Lowering the expected long-term rate of return on plan assets by 0.5% (from 7.75% to 7.25%) would have reduced FPL Group's net income for 2002 by approximately $13 million. Lowering the discount rate assumption by 0.5% would have decreased FPL Group's net income for 2002 by approximately $5 million. Lowering the salary increase assumption by 0.5% would have increased FPL Group's net income for 2002 by approximately $2 million. Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. An increase or decrease of 1 % in assumed health care cost trend rates would have a corresponding effect on the service and interest cost components and the accumulated obligation of other benefits of approximately $1 million and

$8 million, respectively.

The fair value of plan assets has decreased from $2.5 billion at September 30, 2001 to $2.4 billion at September 30, 2002 for the pension plan and from $74 million at September 30, 2001 to $45 million at September 30, 2002 for other benefits. Despite the recent reductions in the funded status of FPL Group's pension plan, manage-ment believes that, based on the actuarial assumptions and the well funded status of the pension plan, FPL Group will not be required to make any cash contributions to the pension plan in the near future.

FPL Group does not anticipate making cash contributions to the postretirement plans during 2003 but is studying the feasibility of transferring pension plan assets to fund claims associated with retiree medical benefits, as allowed by current tax law. See Note 3.

Carrying Value of Long-Lived Assets - FPLGroupeval-uates on an ongoing basis the recoverability of its assets for impair-ment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable as described in FAS 144, MAccounting for the Impairment or Disposal of Long-Lived Assets.

Under that standard, an impairment loss is required to be recog-nized if the carrying value of the asset exceeds the undiscounted future net cash flows associated with that asset. The impairment loss to be recognized is the amount by which the carrying value of the long-lived asset exceeds the asset's fair value. In most instances, the fair value is determined by discounting estimated future cash flows using an appropriate interest rate.

The amount of future net cash flows, the timing of the cash flows and the determination of an appropriate interest rate all involve esti-mates and judgments about future events. In particular, the aggregate amount of cash flows determines whether an impairment exists, and the timing of the cash flows is critical in determining fair value.

Because each assessment is based on the facts and circumstances associated with each long-lived asset, the effects of changes in assumptions cannot be generalized.

Nuclear Decommissioning and Fossil Dismantlement - FPL's current plans provide for prompt dismantlement of the Turkey Point Units Nos. 3 and 4 with decommis-sioning activities commencing upon license expiration in 2012 and 2013. In June 2002, the U.S. Nuclear Regulatory Commission (NRC) approved extension of the operating licenses for Turkey Point Units Nos. 3 and 4, which will allow operation of these units until 2032 and 2033, respectively. FPL has not yet decided whether to exercise the option to operate past the original license expiration dates. Current plans provide for St. Lucie Unit No. 1 to be mothballed upon license expiration in 2016 with decommissioning activities to be integrated with the prompt dismantlement of St. Lucie Unit No. 2 when its license expires in 2023. In 2001, FPL filed with the NRC applications for 20-year license extensions for the St. Lucie units and expects a ruling from the NRC in the fall of 2003.

FPL accrues and funds a reserve for nuclear decommissioning costs over the expected service life of each unit based on studies that are filed with the FPSC at least every five years. The FPSC approved new decommissioning studies in 2001 and, effective in May 2002, reduced the annual decommissioning accrual from $85 million to approximately $79 million. The studies assume that FPL will be storing spent fuel on site pending removal to a U.S. government facility. The studies indicate that FPL's portion of the future cost of decommissioning its four nuclear units, including spent fuel storage, is $6.4 billion, or $2.0 billion in 2002 dollars. At December 31, 2002, the accumulated provision for nuclear decommissioning totaled approximately $1.7 billion.

Upon the adoption of FAS 143 on January 1, 2003, the accumu-lated provision for nuclear decommissioning was moved from the accumulated depreciation caption on FPL Group's balance sheet to a noncurrent liability, the amount of the obligation was adjusted to reflect the then current fair value of the obligation, an asset was recognized

III iiI FPL Group 2002 Annual Report FINANCIAL INFORMATION for the undepreciated present value of the initial obligation and any difference was recognized as a regulatory liability.

FPL also accrues the estimated cost of dismantling its fossil fuel plants over the expected service life of each unit. However, unlike nuclear decommissioning, fossil dismantlement costs are not funded.

Dismantlement studies are filed with the FPSC at least every four years. The most recent studies became effective January 1, 1999 and indicated that FPL's portion of the ultimate cost to dismantle its fossil units is $482 million. At December 31, 2002, the accumulated provi-sion for fossil dismantlement was $260 million. The liability that was recognized for obligations associated with the retirement of FPL's fossil fuel plants under FAS 143 was not significant.

Upon acquisition of its interest in Seabrook, FPL Energy recorded a liability for the present value of Seabrook's expected decommissioning costs. The liability will be accreted using the interest method over an assumed license extension period that runs through 2050. Seabrook's existing license expires in 2026, but FPL Energy plans to file with the NRC an application to extend the license period to 2050. Comprehensive studies are filed with New Hampshire's Nuclear Decommissioning Financing Committee every four years, with updates provided annually. The next comprehensive study will be filed in mid-2003. The September 1999 studies indicate that FPL Energy's portion of the future cost of decommissioning Seabrook, including spent fuel storage, is $1.7 billion, or $516 million in 2002 dollars. The nuclear decommissioning obligation recorded in connection with the acquisition of Seabrook was determined in a manner similar to that prescribed by FAS 143. At December 31, 2002, the accumulated provision for nuclear decommissioning totaled approximately $152 million. See Note 1 - Decommissioning and Dismantlement of Generating Plant and Accounting for Asset Retirement Obligations.

The calculation of the future cost of retiring long-lived assets, including nuclear decommissioning and fossil dismantlement costs, involves the use of estimates and judgments concerning the amount and timing of future expenditures. FPL Group also makes interest rate, rate of return and inflation projections to determine funding requirements related to decommissioning. Periodically, FPL Group will be required to update its estimates and projections which can affect the annual expense amounts recognized, the liabilities recorded and the annual funding requirements for nuclear decommissioning costs.

Regulatory Accounting - FPL follows the accounting prac-tices set forth in FAS 71, "Accounting for the Effects of Certain Types of Regulation." FAS 71 indicates that regulators can create assets and impose liabilities that would not be recorded by non-rate regulated entities. Regulatory assets and liabilities represent probable future revenues that will be recovered from or refunded to customers through the ratemaking process. If FPL were no longer subject to cost-based rate regulation, the existing regulatory assets and liabilities would be written off unless regulators specify an alternative means of recovery or refund. In addition, the FPSC has the authority to disallow recovery of costs that it considers excessive or imprudently incurred.

Such costs may include, among others, O&M expenses, the cost of replacing power lost when fossil and nuclear units are unavailable and costs associated with the construction or acquisition of new facilities.

The continued applicability of FAS 71 is assessed each reporting period. See Note 1 - Regulation.

See Note 1 for a discussion of FPL Group's other significant accounting policies.

RESULTS OF OPERATIONS FPL Group's net income decreased by approximately $308 million in 2002 compared to 2001, while net income increased $77 million in 2001 compared to 2000. The decrease in 2002 net income is due to a number of charges aggregating $389 million after tax recorded at FPL Energy and at Corporate and Other. The charges consisted primarily of the cumulative effect of an accounting change

($222 million after tax), impairment and restructuring charges ($127 million after tax) and charges related to certain wind projects ($10 million after tax) and leveraged leases ($30 million after tax). These charges were partially offset by a gain from an income tax settlement 1$30 million). Merger-related charges reduced FPL Group's net income in 2001 by $19 million and in 2000 by $41 million. Unrealized gains from non-managed hedge activities increased FPL Group's net income by $1 million and $8 million for the years ended December 31, 2002 and 2001, respectively. Management assesses the economic performance of its business segments excluding these charges, gains and the effects of non-managed hedges. Although such items are properly included in the determination of net income in accordance with generally accepted accounting principles, both the size and nature of such items make year to year comparisons of operations difficult and potentially confusing. Excluding these items, net income would have been $831 million, $792 million and $745 million in 2002, 2001 and 2000, respectively. The restructuring activities discussed above are not expected to have a significant effect on FPL Group's future results of operations, liquidity or capital resources.

Beginning January 1, 2002, FPL Group segregated unrealized mark-to-market gains and losses on derivative transactions into two categories. Prior year amounts have been reclassified into these cate-gories. The first category, referred to as trading and managed hedge activities, represents the net unrealized effect of actively traded posi-lions entered into to take advantage of market price movements and lo optimize the value of generation assets and related contracts. The unrealized gains from trading and managed hedge activities were $8 million and $0 for the years ended December 31, 2002 and 2001, respectively, and are reported net in operating revenues. The second category, referred to as non-managed hedges, represents the net unrealized effect of derivative transactions entered into as economic hedges (but which do not qualify for hedge accounting under FAS 133) and the ineffective portion of transactions accounted for as cash flow hedges. These transactions have been entered into to reduce our aggregate risk, and any mark-to-market gains or losses during the period prior to realization will continue to be reported outside of oper-ating income in other - net in FPL Group's consolidated statements of income. Any position that is moved between non-managed hedge activity and trading and managed hedge activity is transferred at its

'air value on the date of reclassification. For additional information regarding derivative instruments, see Note 5.

FINANCIAL INFORMATION FPL Group 2002 Annual Report 25 FPL -

FPL's net income available to FPL Group for 2002, 2001 and 2000 was $717 million, $679 million and $607 million, respectively, representing more than 85% of FPL Group's consolidated net income in each year. During 2002, FPL's net income benefited from higher revenues from retail base operations (net of the revenue refund provi-sion), lower depreciation expense and lower interest charges.

However, higher O&M expenses partially offset these positives. During 2001, higher revenues from retail base operations and lower deprecia-bon were partially offset by higher O&M expenses and higher interest charges. Also in 2001 and 2000, FPL recorded merger-related expenses totaling $26 million ($16 million after tax) and $62 million

($38 million after tax), respectively. For additional information regard-ing these expenses, see Note 9. Excluding merger-related expenses, net income would have been $717 million, $695 million and $645 million in 2002, 2001 and 2000, respectively.

In March 2002, the FPSC approved a new rate agreement regarding FPL's retail base rates, which became effective April 15, 2002 and expires December 31, 2005. The 2002-2005 rate agree-ment replaced a rate agreement that was effective April 15, 1999 through April 14, 2002. Both agreements include a revenue sharing mechanism for each of the twelve-month periods covered by the agreement, whereby revenues from retail base operations in excess of a stated threshold are required to be shared on the basis of two-thirds refunded to retail customers and one-third retained by FPL.

Revenues from retail base operations in excess of a second threshold are required to be refunded 100% to retail customers.

The 1999-2002 rate agreement allowed FPL at its discretion to recover, as special depreciation, up to $100 million in each year of the three-year agreement period. The additional depreciation recovery was required to be applied to nuclear andlor fossil generating assets based on future depreciation studies. See Note 1 - Revenues and Rates and Electric Plant, Depreciation and Amortization. During the term of the agreement, FPL's ROE was from time to time outside the 10% - 12% authorized range. However, the revenue sharing mecha-nism described above was specified as the appropriate and exclusive mechanism to address that circumstance. The agreement included provisions which limited depreciation rates and accruals for nuclear decommissioning and fossil dismantlement costs to the then approved levels and limited amounts recoverable under the environmental clause during the term of that agreement.

The 2002-2005 rate agreement provides for a $250 million annual reduction in retail base revenues allocated to all customers by reducing customers' base rates and service charges by approximately 7%. The revenue sharing thresholds specified in the 2002-2005 rate agreement are as follows:

Years Ended December 31, (millions) 2OO2k 2003 2004 2005 66 2/3% to customers

$3,680

$3,780

$3,880 100% to customers

$3,840

$3,940

$4,040 (a) Refund is limited to 71.5% (representing the period April 15 through December31, 2002) of the revenues from base rate operations exceeding the thresholds.

During the term of the 2002-2005 rate agreement, FPL will not have an authorized regulatory ROE range for the purpose of address-ing earnings levels. However, FPL will continue to file monthly earn-ings surveillance reports with the FPSC and if the reported ROE falls below 10% during the term of the 2002-2005 rate agreement, FPL may petition the FPSC to amend its base rates. The 2002-2005 rate agreement would terminate on the effective date of any final order issued in a proceeding that changes FPL's base rates. See Note 1 -

Revenues and Rates. In addition, depreciation rates will not be changed during the term of the agreement; however, FPL will reduce its recorded depreciation expense by $125 million annually. As a result of that provision and other FPSC actions affecting accumulated nuclear amortization, FPL reclassified $170 million of special deprecia-tion recorded in 1999 and 2000 and $99 million of nuclear amortiza-tion from accumulated depreciation to a regulatory liability, which is included in other liabilities on FPL Group's consolidated balance sheet. FPL also reduced depreciation expense in 2002 by $125 million. The nuclear amortization will be amortized ratably over the remaining life of the nuclear units based on the term of the existing operating licenses of the units at a rate of $7 million per year.

In April 2002, the South Florida Hospital and Healthcare Association and certain hospitals filed a joint notice of administrative appeal with the FPSC and the Supreme Court of Florida appealing the FPSC's approval of the 2002-2005 rate agreement. The appel-lants contend that the FPSC rushed to judgment and approved the settlement without the benefit of any evidentiary record to support its actions, and requested that the Supreme Court remand the case to the FPSC for additional proceedings. Initial briefs, answer briefs and a reply brief were filed by the parties during 2002. Oral arguments are expected to take place in mid-2003. FPL intends to vigorously contest this appeal and believes that the FPSC's decision approving the 2002-2005 rate agreement will be upheld.

I2 FPL Group 2002 Annual Report FINANCIAL INFORMATION FPL's operating revenues consisted of the following:

Years Ended December 31, (millions) 2002 2001 2000 Retail base operations

$3,603

$3,616

$3,507 Revenue refund provision (34)

(110)

(60)

Cost recovery clauses and other pass-through costs

> 3,793w 3,955 2,902 Other 6

16 12 Total

$7,378:

$7,477

$6,361 For the year ended December 31, 2002, the increase in retail base revenues, due to an increase in the number of retail customer accounts and an increase in usage per retail customer, was more than offset by the 7% reduction in retail rates pursuant to the 2002-2005 rate agreement that was effective in mid-April 2002. A 2.1 % increase in the number of retail customer accounts increased revenues by $78 million, while the balance of the increase, or $112 million, was prima-rily due to a 3.5% increase in electricity usage per retail customer.

About half of the growth in usage for the year was associated with weather, with both the late spring and early fall months being signifi-cantly warmer than usual. The remaining increase in usage was due to stronger economic conditions and price elasticity associated with lower rates. The 7% rate reduction equated to a $203 million reduction in retail base revenues.

The increase in retail base revenues in 2001 was due to a 2.3%

increase in retail customer accounts which contributed $66 million to revenues while the balance of the increase, or $43 million, was prima-rily due to a 0.4% increase in electricity usage per retail customer.

These increases occurred despite a slowing economy and a decline in tourism following the terrorist attacks on the United States on September 11, 2001.

Revenues from cost recovery clauses, franchise fees and revenue taxes represent a pass-through of costs and do not signifi-cantly affect net income. However, differences between actual revenues and costs incurred can significantly affect FPL Group's oper-ating cash flows. Fluctuations in these revenues, as well as in fuel, purchased power and interchange expenses, are primarily driven by changes in energy sales, fuel prices and capacity charges. Ordinarily, the fuel charge is set annually based on estimated fuel costs and esti-mated customer usage, plus or minus a true-up for prior period esti-mates. During 2002, clause revenues (primarily fuel-related) declined due to lower fuel costs. Significant volatility in oil and gas prices during 2001 and 2000 resulted in a significant increase in clause revenues in 2001 and, to a lesser extent, in 2000. FPL's annual fuel filing for 2001, as approved by the FPSC, included approximately $518 million of under-recovered fuel costs from 2000, of which one-half ($259 million) was recovered in 2001 and the balance was recovered in 2002. FPL agreed to this two-year recovery, rather than the typical one-year time frame, to ease the impact on customers' bills. FPL also agreed that, instead of receiving a return at the commercial paper rate on this unrecovered portion through the fuel clause, the under-recovery would be included as a rate base regulatory asset over the two-year recov-ery period. In March 2003, the FPSC approved a fuel adjustment increase totaling $347 million beginning in April 2003 due to higher

han projected oil and natural gas prices. See Note 1 - Regulation.

FPUs O&M expenses increased $143 million in 2002.

Approximately $42 million of the increase is attributable to higher nuclear costs associated with more comprehensive inspections of the reactor vessel heads at FPL's nuclear facilities as ordered by the NRC, as well as increased outage and plant maintenance costs. In February 2003, the NRC issued an order, subsequent to an NRC bulletin issued in August 2002, requiring all pressurized water reactor licensees, including FPL, to perform visual and volumetric inspections of reactor vessel heads at each unit's scheduled refueling outage to identify if degradation such as cracking or corrosion has occurred.

During the scheduled refueling outages for St. Lucie Unit No. 1 in October 2002 and Turkey Point Unit No. 3 in March 2003, FPL performed visual and volumetric inspections and found no degradation associated with the reactor vessel heads. Visual inspections at St.

Lucie Unit No. 2 during 2001 and at Turkey Point Unit No. 4 during 2002 revealed no degradation associated with the reactor vessel heads and visual and volumetric inspections will be performed during their next scheduled refueling outages in 2003. The cost to perform inspections and any necessary repairs for all of the four nuclear units until the reactor vessel heads are replaced is estimated at $67 million.

During 2002, the FPSC authorized recognition of this amount on a levelized basis over a five-year period beginning in 2002. FPL antici-pates that it will replace the reactor vessel heads at all of its nuclear units over a three-year period beginning in 2004 and has placed orders for long-lead time components. The estimated cost for the reactor vessel heads is included in FPLs estimated capital expendi-tures. See Note 17 - Commitments.

In addition to the increase in nuclear O&M expenses in 2002, employee benefit costs, primarily medical-related, increased $15 million and property insurance costs increased $9 million due to lower refunds under nuclear insurance policies. These pressures are expected to carry over into 2003. In addition, in December 2002, the FPSC approved a one-time $35 million addition to the storm fund reserve, which was accrued in 2002. The balance of the increase in O&M expenses primarily related to costs associated with work force reductions, overhaul of fossil plants and system reliability efforts.

FPL's O&M expenses increased $20 million in 2001, of which $5 million related to higher transmission and distribution costs mainly due to system growth and reliability improvements, $9 million related to generation costs primarily those incurred at fossil production plants to comply with regulations and maintain operating service availability, and the balance of the increase primarily reflects additional reserves for uncollectible accounts due to weaker economic conditions.

N

'-_2

FINANCIAL INFORMATION FPL Group 2002 Annual Report 27 Depreciation and amortization expense declined during the year ended December 31, 2002 due to the $125 million credit to deprecia-tion expense authorized under the 2002-2005 rate agreement. This credit was partially offset by higher depreciation expense associated with the amortization of a regulatory asset recorded as a result of a liti-gation settlement. The amortization approximates $44 million annually over a 5-year period beginning in January 2002 and is being recov-ered over the 5-year period through the fuel and capacity clauses.

See Note 10. The remaining depreciation expense variance is prima-rily due to overall growth in the asset base reflecting the completion of the Fort Myers and Sanford repowering projects. The decrease in depreciation expense during 2001 reflects the absence of special depreciation under the previous rate agreement partially offset by higher depreciation expense associated with overall growth in the asset base. In 2000, FPL recorded approximately $101 million related to special depreciation.

In June 2002, the NRC approved an extension of the operating licenses for Turkey Point Units Nos. 3 and 4, which will allow opera-tion of these units until 2032 and 2033, respectively. FPL has not yet decided whether to exercise the option to operate past the original license expiration dates of 2012 and 2013. Nevertheless, FPL is continuing to take actions to ensure the long-term viability of the units in order to preserve this option. This decision will be made by 2007.

Any adjustment to depreciation and decommissioning rates would require FPSC approval. In 2001, FPL filed applications with the NRC for 20-year license extensions for the St. Lucie units and expects a ruling from the NRC in the fall of 2003.

Interest charges for 2002 decreased primarily due to lower inter-est rates, as well as lower average debt balances as a result of the recovery of previously under-recovered fuel costs. In 2001, the increase in interest charges primarily reflects increased debt activity to fund FPL's capital expansion program. Also in 2001, taxes other than income taxes increased significantly primarily due to higher franchise and gross receipts taxes associated with higher retail customer fuel charges that do not have a material effect on net income.

FPL currently faces competition from other suppliers of electrical energy to wholesale customers and from alternative energy sources and self-generation for other customer groups, primarily industrial customers. In 2002, operating revenues from wholesale and industrial customers combined represented approximately 4% of FPL's total operating revenues. Various states, other than Florida, have enacted legislation or have state commissions that have issued orders designed to allow retail customers to choose their electricity supplier.

This regulatory restructuring is expected to result in a shift from cost-based rates to market-based rates for energy production and other services provided to retail customers. Although the legislation and initiatives vary substantially, common areas of focus include when market-based pricing will be available for wholesale and retail customers, what existing prudently incurred costs in excess of the market-based price will be recoverable and whether generating assets should be separated from transmission, distribution and other assets.

It is generally believed transmission and distribution activites would remain regulated. Recently, these state restructuring efforts have diminished and several states have delayed the implementation or reversed previously approved restructuring legislation and rules.

Management believes that it is unlikely there will be any state actions to restructure the electric industry in Florida in the near future.

The FPSC promotes competition for building major new steam generating capacity by requiring investor-owned electric utilities, such as FPL, to issue a request for proposal. The request for proposal process allows independent power producers and others to bid to supply the needed generating capacity. If a bidder has the most cost-effective altemative, meets other criteria such as financial viability and demonstrates adequate expertise and experience in building and/or operating generation capacity of the type proposed, the investor-owned electric utility would seek to negotiate a power purchase agree-ment with the selected bidder and request that the FPSC authorize the construction of the bidder's generation capacity under the terms of the power purchase agreement. In 2002, FPL received approval to construct new generation at its Martin and Manatee sites.

The FERC has jurisdiction over potential changes which could affect competition in wholesale transactions. In 1999, the FERC issued its final order on RTOs which, under a variety of structures, provides for the independent operation of transmission systems for a given geographic area. In March 2001, the FERC approved GridFlorida (FPLs, Progress Energy Florida, Inc.'s and Tampa Electric Company's proposed RTO) as the RTO for peninsular Florida. In December 2001, the FPSC determined that the RTO as proposed was not in the best interest of Florida customers and required the companies to develop a modified proposal. In March 2002, FPL, Progress Energy Florida, Inc. and Tampa Electric Company filed a modified RTO proposal with the FPSC changing the structure of GridFlorida from a for-profit transmission company to a non-profit ISO.

Under the proposal, FPL would continue to own its transmission lines and the ISO would manage them. In September 2002, the FPSC approved many of the aspects of the modified RTO proposal, allowing recovery of GridFlorida's incremental costs through the capacity clause and setting a hearing date of October 31, 2002 on market design and other outstanding issues. In October 2002, Public Counsel filed a notice of administrative appeal with the Supreme Court of Florida seeking an appeal of the FPSC's order, which caused an auto-matic stay of the proceedings. On October 28, 2002, the FPSC ordered that the GridFlorida proceedings be held in abeyance pending Public Counsel's appeal. On December 12, 2002, Public Counsel filed their brief. Public Counsel contends that the FPSC should not approve the ISO proposal because the FPSC cannot voluntarily abdicate its jurisdiction over retail transmission rates and transmission planning and the ISO will not be subject to the FPSC's jurisdiction. Oral arguments are scheduled for May 6, 2003. A ruling from the Supreme Court of Florida is expected in late 2003.

III I

IiI F PL G ro up 2 0 0 2 Ann u a I Repo r t FINANCIAL INFORMATION In July 2002, the FERC issued a notice of proposed rulemaking to reform public utilities' transmission tariffs and implement a standard-ized design for electric markets in the United States. The proposed rule would, among other things, require FERC regulated entities, including FPL, that own, control or operate transmission facilities to hire an independent transmission provider, which can be an RTO such as GridFlorida for the operation of those facilities. The proposed rule also will require the independent transmission provider to administer various spot markets for the sale of electricity and ancillary services and to manage congestion on the transmission system using financial congestion rights. State regulators from the southeast and western states have expressed strong reservations about FERC's proposal.

FPL is evaluating the proposed rule. The FERC has announced it will be issuing a "white paper" in April 2003 incorporating comments received on its proposed rule and is currently unable to determine the effects, if any, on FPL's operations. The "white paper" will re-examine the schedule, which had originally proposed full implementation of the standard market design by September 2004. The FERC will allow parties to file comments on the 'white paper' before issuing its final order this fall.

In the event the basis of regulation for some or all of FPL's busi-ness changes from cost-based regulation, existing regulatory assets and liabilities would be written off unless regulators specify an alterna-tive means of recovery or refund. Further, other aspects of the busi-ness, such as generation assets and long-term power purchase commitments, would need to be reviewed to assess their recoverabil-ity in a changed regulatory environment. See Note 1 - Regulation.

FPL Energy-FPL Energy's net income (loss) for 2002, 2001 and 2000 was $(169) million, $113 million and $82 million, respectively.

FPL Energy's net income has become a greater portion of FPL Group's consolidated net income increasing from 1% in 1997 to 14%

in 2001. The net loss for 2002 was the result of FPL Energy recording impairment and other charges totaling $485 million ($295 million after tax). The impairment and other charges consisted of a goodwill impairment charge of $365 million ($222 million after tax) representing the cumulative effect of adopting FAS 142, "Goodwill and Other Intangible Assets," and restructuring and other charges totaling $120 million ($73 million after tax) due to the unfavorable market conditions in the wholesale energy market. For further discussion of FAS 142, see Note 7, and for the restructuring and other charges, see below. In addition, during 2002, FPL Energy recorded less than $1 million of after-tax net unrealized mark-to-market gains from non-managed hedges compared to gains of $8 million during 2001. For further discussion of derivative instruments, see Note 5. In 2000, FPL Energy recorded merger-related expenses totaling $2 million ($1 million after tax). For additional information regarding these expenses, see Note 9.

Excluding these items, FPL Energy's net income would have been

$126 million, $105 million and $83 million in 2002, 2001 and 2000, respectively.

As a result of depressed economic conditions coupled with an oversupply of energy generating facilities in certain markets, projected profit margins for certain natural gas projects had declined and were not sufficient to cover the cost of capital. Therefore, FPL Energy made a strategic decision during 2002 to substantially exit the fossil-fueled greenfield power plant development business for the foreseeable future and, as a result, recorded the following charges as restructuring and impairment charges in FPL Group's consolidated statements of income:

• $67 million ($41 million after tax) to write-off previously capitalized development costs,

• $16 million ($10 million after tax) related to the renegotiation of an agreement to significantly reduce the commitment to purchase gas turbines and other related equipment and

• $20 million ($12 million after tax) related to the realignment of the organization and the termination of an operating lease agreement with an SPE and related credit facility used to finance certain turbine purchases.

For additional information concerning these charges, see Note 4 - FPL Energy.

Also in 2002, FPL Energy recorded a charge of approximately

$17 million ($10 million after tax) against its investment in two wind projects due to regulatory issues associated with another investor in the projects. The resulting expense is included in equity in earnings of equity method investees in FPL Group's consolidated statements of income. At December 31, 2002, FPL Energy's net investment in the two wind projects totaled approximately $14 million. For additional information concerning these wind projects, see Note 17 - Other Contingencies.

Despite the downturn in the wholesale energy industry, FPL Energy's 2002 net income benefitted from project additions, primarily wind assets in the central and western regions of the United States and the purchase of an 88.23% interest in Seabrook in November 2002, as well as a leased natural gas-fired power plant that began operations during the fourth quarter of 2002. Project additions totaling more than 1,000 mw in 2001 and more than 2,200 mw in 2002 contributed $41 million to net income, $22 million coming from the full-year effect of new wind projects that came on line in the second half of 2001 and the 324 mw added in 2002, and the balance from earn-ings from other project additions, including Seabrook. For additional information concerning the Seabrook acquisition, see Note 2. FPL Energy's operating revenues and operating expenses for 2002 increased $109 million and $233 million, respectively, primarily driven by project additions coupled with the previously discussed restructur-ing charges that added $103 million to operating expenses. These project additions resulted in increases to operating revenues of $149 million and operating expenses of $128 million (including fuel-related costs of $37 million, O&M expenses of $54 million and depreciation expense of $37 million) during 2002. Increased revenues from project additions were partially offset by lower revenues of $41 million from the balance of the consolidated portfolio primarily due to reduced energy prices driven by new entrants in the market, as well as mild weather in the Northeast including drought conditions, which had a negative impact on the performance of the hydro assets.

FINANCIAL INFORMATION FPL Group 2002 Annual Report Earnings from investments in partnerships and joint ventures, presented as equity in earnings of equity method investees, declined

$5 million in 2002 reflecting the $17 million charge recorded against investments in two wind projects discussed above and a gain of $23 million on the restructuring of a gas supply contract that was renegoti-ated to yield lower fuel costs and is expected to improve future cash flows, as well as improve equity in earnings from the project. In addi-tion, equity in earnings of equity method investees in 2001 included a gain of $34 million resulting from the sale of a partnership interest in a geothermal project. This gain was almost entirely offset by the write-off of affiliate debt associated with the partnership interest, which was included in other - net. Excluding these events, earnings in 2002 from FPL Energy's investment in equity method investees increased approximately $20 million over 2001. This increase is primarily due to increased contract prices, as the majority of the output of the projects is sold under long-term contracts with counterparties, as well as reduced fuel prices in the northeast region.

FPL Energy is currently constructing five gas-fired power plants with a total capacity of approximately 3,700 mw, and expects to add 700 to 1,200 mw of new wind generation by the end of 2003. FPL Energy expects its future portfolio growth to come from a mix of asset acquisitions and wind development (assuming the extension of the production tax credits beyond 2003).

Interest charges increased $12 million during 2002 associated with higher debt balances due to growth in the business, partly offset Q) by lower average interest rates. Interest income in 2002 declined approximately $14 million and includes, in 2001, interest from a favor-able settlement with the Intemal Revenue Service. In addition, the decline in interest income reflects lower interest rates.

FPL Energy's 2001 net income growth of $31 million was driven mainly by the expansion of its independent power generation portfolio.

Portfolio additions contributed $22 million to the earnings growth including $11 million from a 495 mw natural gas-fired unit in Texas, which became operational in late 2000, $2 million from a 171 mw natural gas-fired peaking unit in the Mid-Atlantic region and $9 million from five new wind projects totaling 843 mw in the Central and West regions. FPL Energy's 2001 operating revenues and operating expenses increased by $108 million and $95 million, respectively, primarily due to project additions. These project additions resulted in increases to operating revenues of $124 million and operating expenses of $102 million (including fuel-related costs of $61 million, O&M expenses of $17 million and depreciation expense of $24 million) during 2001. Increased revenues from project additions were partially offset by lower revenues of $11 million from the remaining consolidated portfolio mainly because sales of excess fuel at a natural gas-fired generating facility in the Mid-Atlantic region that occurred in 2001 did not recur in 2002. Operating expenses related to the remain-ing consolidated projects declined as a result of lower fuel costs of

$13 million due to reduced fuel sales.

Equity in earnings of equity method investees in 2001 increased

$36 million due to a gain resulting from the sale of a partnership inter-est in a geothermal project which totaled $34 million. Earnings in 2001 also included a loss recognized in connection with the write-off of affili-ate debt associated with the sale, which was included in other - net.

The remaining increase in equity in earnings during 2001 was mainly due to higher energy prices.

Interest charges increased $7 million during 2001 associated with higher debt balances due to growth in the business, partially offset by the effect of lower average interest rates.

Since early June 2002, there has been a decline in the whole-sale energy market, including deterioration in forward prices and reduced liquidity, as well as increasing credit concerns that have limited the number of counterparties with which FPL Energy does business. These market conditions have made it more difficult for FPL Energy to manage the risk associated with fluctuating commodity prices, to optimize the value of its assets and to contract the output of its plants. Any uncontracted output from the plants has been and will be sold into the market place at prevailing prices. FPL Energy expects, as its existing power sales agreements expire, more of the energy produced will be sold through shorter-term contracts and into competitive wholesale markets.

Competitive wholesale markets in the United States continue to evolve and vary by geographic region. Expanded competition in a relaxed regulatory environment presents both opportunities and risks for FPL Energy. Some of the factors affecting success in these markets include the ability to operate generating assets efficiently, the price and supply of fuel, transmission constraints, wind and hydro resources (weather conditions), competition from new sources of generation, demand growth and exposure to legal and regulatory changes. Opportunities exist for the selective acquisition of generation assets divested under deregulation plans and for the construction and operation of efficient plants that can sell power in competitive markets.

Wholesale energy markets have experienced lower demand and lower wholesale electricity prices as a result of weather and economic conditions and the oversupply of generation in certain regions. FPL Energy seeks to minimize its market risk by having a diversified port-folio, by fuel type and location, as well as by contracting for the sale of a significant amount of the electricity output of its plants.

F P L G r o up 2 0 0 2 Ann u a Repo r t FINANCIAL INFORMATION FPL Energy's 2003 earnings are subject to variability due to commodity price exposure, counterparty performance, weather condi-tions and project restructuring activities. FPL Energy's exposure to commodity price risk is reduced by the high degree of contract cover-age or hedging obtained for 2003. FPL Energy's target is to have approximately 75% of its capacity under contract or hedged over the following twelve-month period. As of December 31, 2002, FPL Energy's capacity under contract for 2003 is as follows:

Available

% MW Asset Class MW'a' Hedged Windlb' 1,924 100%

Non-wind assets under long-term contract 1,255 98%

Merchants:

Seabrook 955 96%

NEPOOUPJM/NYPP 1,558 440/6'C' ERCOT 2,301 750/

Other (WECC/SERC) 862 42%

Total portfolio 8,855 77%

(a) Weighted to reflect in-service dates; all assets adjusted for planned 2003 outages, including a refueling outage for Seabrook (b) For further discussion regarding two wind projects involved in litigation that could potentially terminate long-term power sales agreements, see Note 17-Other Contingencies.

(c) Represents on-peak mw hedged.

In managing its exposure to commodity prices, FPL Energy is dependent upon its counterparties to perform under their contractual obligations. FPL Energy actively manages the trade-off between market risk and credit risk, as well as exposure with individual coun-terparties as a function of their creditworthiness. The majority of FPL Energy's 2003 contracted revenues are with investment grade coun-terparties.

FPL Energy's results are affected by natural fluctuations in weather. In addition to the effect of temperature, which is reflected in commodity prices and demand, changes in weather affect the wind portfolio as well as the hydro units in Maine.

FPL Energy expects project restructuring activities to contribute 10-15% to its net income in 2003. FPL Energy's wind development activities are expected to add between 700 and 1,200 mw during 2003, of which 434 mw have been announced. The majority of the new wind assets are expected to go into service during the second half of 2003, and consequently will have a greater impact on 2004 results of operations.

Corporate and Other-Corporate and Other is primarily comprised of FPL FiberNet and other corporate income and expenses such as interest income and interest expense. FPL FiberNet's net income (loss) was $(55) million, $15 million and $8 million, in 2002, 2001 and 2000, respectively. The net loss for 2002 includes impairment charges as a result of declines in the telecommunications market. FPL FiberNet completed valuation studies to assess the recoverability of its assets and as a result, in 2002, recorded charges of approximately

$104 million ($64 million after tax). Of this amount, $85 million ($52 million after tax) represents an impairment charge related to property, plant and equipment, the fair value of which was determined based on a discounted cash flow analysis. Additionally, FPL FiberNet decided not to pursue the planned build-out of metro fiber rings in certain cities, and restructuring charges of $19 million ($12 million after tax) were recognized related to the write-off of development costs and nventory. These charges are included in restructuring and impairment charges in FPL Group's consolidated statements of income.

Although the demand for telecommunication capacity continues o grow, many telecommunication companies have filed for bankruptcy Protection under Chapter 11 as market conditions deteriorated. This las caused customer credit to become a primary focus for the indus-try as credit downgrades have increased. Most of FPL FiberNet's customers are required to pay in advance and past due amounts are closely monitored and actively pursued. Several of FPL FiberNet's customers have filed for bankruptcy protection under Chapter 11 and reserves for any pre-petition receivables due to FPL FiberNet have been established. As a result of this deterioration and general economic conditions, FPL FiberNet has experienced a slowdown in its longhaul (intercity transport) business. FPL FiberNet's metropolitan network continues to benefit from an expanding customer base and increasing use of FPL FiberNet's network by its existing customers.

FPL FiberNet's capital expenditure forecast for 2003-07 is approxi-mately $50 million.

An indirect subsidiary of FPL Group has investments in several leveraged leases, two of which are with MCI Telecommunications Corporation (MCI). In July 2002, MCI filed for bankruptcy protection under Chapter 11. Due to the uncertainty of collectibility associated with these leveraged leases, FPL Group recorded a reserve during 2002 totaling $48 million ($30 million after tax), which is included in reserve for leveraged leases in FPL Group's consolidated statements of income. This reserve amount was offset by the favorable settlement of a prior year income tax matter. See Note 6. Also in 2001 and 2000, Corporate and Other recorded merger-related expenses totaling

$4 million ($3 million after tax) and $3 million ($2 million after tax),

respectively. For additional information regarding these expenses, see Note 9.

In connection with the redemption in 1999 of its one-third owner-ship interest in Olympus Communications, L.R (Olympus), an indirect subsidiary of FPL Group holds a note receivable from a limited part-nership, of which Olympus is a general partner. The note receivable is secured by a pledge of the redeemed ownership interest. Olympus is an indirect subsidiary of Adelphia Communications Corp. (Adelphia).

In June 2002, Adelphia and a number of its subsidiaries, including Olympus, filed for bankruptcy protection under Chapter 11. The note receivable plus accrued interest totaled approximately $127 million at December 31, 2002 and are included in other investments on FPL Group's consolidated balance sheets. The note was due on July 1, 2002 and is currently in default.

FINANCIAL INFORMATION FPL Group 2002 Annual Report

-i 31 Based on the most recent publicly available financial information set forth in Olympus' Quarterly Report on Form 1 0-0 for the quarterly period ended September 30, 2001, total assets of Olympus exceeded liabilities by approximately $3.6 billion and Olympus served 1,787,000 basic subscribers. Olympus has not filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2001 or its subsequent Quarterly Reports on Form 1 0-Q with the SEC, and consequently the September 30, 2001 financial information may not be indicative of Olympus' current financial position. In July 2002, the SEC filed suit against Adelphia and certain of its officers alleging that Adelphia fraud-ulently excluded billions of dollars of debt from its financial statements, misstated its financial and operating results and concealed rampant self-dealing by the Rigas family, which controlled Adelphia. Pursuant to a bankruptcy court order, Olympus is required to file with the court updated financial information. After a number of motions to extend being granted by the court, updated financial information is now required to be filed by June 23, 2003.

In August 2002, an affidavit was filed in the bankruptcy court proceedings by a director of Lazard Freres & Co. LLC stating that, based on his analysis, the market value of FPL Group's secured inter-est in Olympus exceeded the carrying value of the note receivable plus accrued interest. In February 2003, FPL Group obtained an eval-uation of the Olympus assets from an independent third party. The results of the evaluation, which was based on the limited information available, indicated that there is no impairment. However, the ultimate Y) 2collectibility of the note receivable cannot be assured. FPL Group will continue to monitor these developments.

LIQUIDITY AND CAPITAL RESOURCES FPL Group and its subsidiaries require funds to support and to grow their businesses. These funds are used for working capital, capital expenditures, investments in or acquisitions of assets and businesses and, among other things, to redeem debt or pay maturing debt obligations. It is anticipated that these requirements will be satisfied through a combination of internally generated funds and the issuance, from time to time, of debt and equity securities, consistent with FPL Group's objective of maintaining, on a long-term basis, a capital structure that will support a strong investment grade credit rating. Credit ratings can affect FPL Group's ability to obtain short-and long-term financing, the cost of such financing and the execution of its financing strategies.

In 2002, FPL Group raised approximately $1.4 billion through the issuance of 5.75 million shares of common stock and 21.62 million Corporate Units. Also during 2002, FPL redeemed $750 million and issued $600 million of first mortgage bonds and FPL Group Capital entered into two variable-rate term loans totaling $175 million. See Note 16. In October 2002, FPL and FPL Group Capital renewed their bank lines of credit that were scheduled to expire. Bank lines of credit available to FPL Group and its subsidiaries at December 31, 2002 aggregated approximately $3.1 billion ($2.1 billion for FPL Group Capital and $1 billion for FPL). Approximately one-half of these facili-ties expire in the second half of 2003, with the remainder expiring in 2004. These facilities are available to support the companies' commercial paper programs as well as for general corporate purposes. In 2002, FPL received a $230 million tax refund out of an estimated $300 million it expects to receive as a result of an IRS ruling, and paid special dividends totaling $375 million to FPL Group.

Also, in 2002, 2001 and 2000, FPL paid, as dividends to FPL Group, its net income available to FPL Group on a one-month lag basis.

FPL's charter and mortgage contain provisions which, under certain conditions, restrict the payment of dividends and the issuance of additional unsecured debt, first mortgage bonds and preferred stock. In light of FPL's current financial condition and level of earnings, management does not expect that planned financing activities or dividends would be affected by these limitations.

FPL Group and its subsidiaries, have no credit rating downgrade triggers that would accelerate the maturity dates of debt outstanding.

-A change in ratings is not an event of default under applicable debt instruments, and while there are conditions to drawing on the credit facilities maintained by FPL Group Capital and FPL, the maintenance of a specific minimum level of credit rating is not a condition to draw-ing upon those credit facilities. However, interest rates on loans under the credit facilities agreements and commitment fees are tied to credit ratings and would increase or decrease when ratings are changed. A ratings downgrade also could reduce the accessibility and Increase the cost of commercial paper issuances and additional or replacement credit facilities, and could result in the requirement that FPL Group subsidiaries, post collateral under certain power purchase and other agreements.

b Securities of FPL Group and its subsidiaries are currently rated by Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Ratings Services (S&P). At February 28, 2003, Moody's and S&P had assigned the following credit ratings to FPL Group, FPL and FPL Group Capital:

Moody's' S&P4 FPL Group:

Corporate credit rating FPL:

Corporate credit rating First mortgage bonds Pollution control, solid waste disposal and industrial development revenue bonds Preferred stock Commercial paper FPL Group Capital:

Corporate credit rating Debentures Commercial paper N/A Al Aa3 Aa3NMIG-1 A3 P-1 A

A/A-1 A

ANA-i BBB+

A-1 N/A AIA-1 A2 A-P-1 A-1 (a) A security rating is not a recommendation to buy, sell or hold secu-I rities and should be evaluated independently of any other rating.

The rating is subject to revision or withdrawal at any time by the assigning rating organization.

(324 FPL Group 2002 Annual Report FINANCIAL INFORMATION In June 2002, Moody's confirmed its credit ratings for FPL and FPL Group Capital. The outlook indicated by Moody's for the ratings of FPL is stable, while the outlook for the ratings of FPL Group Capital is negative reflecting uncertainty in the wholesale generation market. In April 2002, following the announcement of the Seabrook acquisition, S&P placed FPL Group's credit rating on CreditWatch with negative implications. In November 2002, S&P removed the CreditWatch with negative implications for FPL Group. The outlook was revised to negative, and the "A" corporate credit rating was affirmed for FPL Group and subsidiaries.

FPL Group's commitments at December 31, 2002 were as follows:

(millions)

Long-Term Debt:

FPL FPL Energy Corporate and Other Standby letters of credit:

FPL FPL Energy Corporate and Other Guarantees:

FPL Energy Corporate and Other Other commitments:

FPL(a)

FPL Energy(b)

Corporate and Other Total 2003 2004-05 2006-07 Thereafter Total

$ 70 35

$ 500 78 275 57 1,675

$1,875 212 1,136

$ 2,445 382 3,086 9

320 4

9 320 4

105 6

2 214 1,925 262 332 657 3

1,365 224 2,635 325 5,925 188 999 10 10

$2,142

$3,821

$4,133

$3,744

$13,840 (a) Represents projected capital expenditures through 2007 to meet increased electricity usage and customer growth. Excludes minimum payments under purchased power and fuel contracts which are recoverable through various cost recovery clauses. See Note 17 - Contracts.

(b) Represents firm commitments in connection with the acquisition, development and expansion of independent power projects.

In 2000, subsidiaries of FPL Energy entered into two off-balance sheet financing arrangements with SPEs. In the first transaction, FPL Energy's subsidiary entered into an operating lease agreement to lease a 550 mw combined-cycle power generation plant. In the second transaction, the SPE was established to fund the construction of certain turbines and related equipment. This SPE arrangement was terminated in 2002. The SPE that remains had arranged funding commitments through debt and equity contributions from investors who are not affiliated with FPL Group. At December 31, 2002, $380 million had been drawn on these commitments. FPL Group Capital has guaranteed the obligations of the FPL Energy subsidiaries under these agreements, which are included in the table above. In addition, in 2002, FPL Energy received approximately $282 million which had previously been posted as collateral in connection with this off-balance sheet financing arrangement. See Note 17 - Off-Balance Sheet Financing Arrangement.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities,' which will replace the current accounting guidance for SPEs. As a result, entities that are deemed to be VIEs in which FPL Group or one of its subsidiaries is considered to be the "primary beneficiary" will be consolidated. Variable interests are considered to be contractual, ownership, or other monetary interests in an entity that fluctuate with changes in the entity's net asset value.

Under its current structure, FPL Group believes that the SPE discussed above will be required to be consolidated beginning in July 2003. At December 31, 2002, FPL Group's maximum exposure to loss as a result of its involvement with this SPE was $215 million.

FPL Energy has guaranteed certain performance obligations of a power plant owned by a wholly-owned subsidiary as part of a power purchase agreement (PPA) that expires in 2027. Under the PPA, the subsidiary could incur market-based liquidated damages for failure to meet a stated mechanical availability and guaranteed average output.

Based on past performance of similar projects, management believes that the exposure associated with this guarantee is not material.

FPL Group has guaranteed certain payment obligations of FPL Group Capital, including those under the FPL Group Capital debt, commercial paper and guarantees discussed above. FPL has no outstanding guarantees.

FPL self-insures for damage to certain transmission and distribu-1:ion properties and maintains a funded storm and property insurance reserve to reduce the financial impact of storm losses. The balance of the storm fund reserve at December 31, 2002 and 2001 was approxi-mately $298 million and $235 million, respectively, representing the amount in the storm fund plus related deferred income taxes. The December 31, 2002 balance includes a one-time accrual of $35 million as approved by the FPSC. The FPSC has indicated that it would consider future storm losses in excess of the funded reserve (or possible recovery from customers. FPL's bank lines of credit discussed above are also available if needed to provide cash for storm restoration costs.

FINANCIAL INFORMATION FPL Group 2002 Annual Report 33 ENERGY MARKETING AND TRADING AND MARKET RISK SENSITIVITY Energy Marketing and Trading - Certain of FPL Group's subsidiaries, including FPL and FPL Energy, use derivative instruments (primarily swaps, options, futures and forwards) to manage the commodity price risk inherent in fuel purchases and electricity sales, as well as to optimize the value of power generation assets. To a lesser extent, FPL Energy engages in limited energy trading activities to take advantage of expected future favorable price movements.

Derivative instruments are recorded on FPL Group's balance sheets as either an asset or liability (in other current assets, other assets, other current liabilities and other liabilities) measured at fair value. At FPL, substantially all changes in fair value are deferred as a regulatory asset or liability until the contracts are settled. Upon settlement, any gains or losses are passed through the fuel clause and the capacity clause. For FPL Group's non-rate regulated operations, predominantly FPL Energy, changes in the derivatives' fair value are recognized net in operating revenues for trading and managed hedge activities and in other - net for non-managed hedges in FPL Group's consolidated statements of income unless hedge accounting is applied. Settlement gains and losses are included within the line items in the statements of income to which they relate. See Note 5.

The changes in the fair value of FPL Group's derivative instruments for the year ended December 31, 2002, were as follows:

Year Ended December 31, 2002 Non-Managed Hedges &

Hedges in Trading &

Managed FPL Group (millions)

Hedges OCI Total Fair value of contracts outstanding at beginning of period

$ 1

$ (7)

$ (6)

Contracts realized or settled (8)

(14)

(22)

Fair value of new contracts when entered into 9

9 Changes in valuation assumptions 2

2'.)

Other changes in fair values 2

67 69 Fair value of contracts outstanding at December 31, 2002

$ 4

$ 48

$ 52(b)

(a) Change in valuation assumption of correlation between power and fuel prices.

(b) Includes the fair value of FPL's derivative instnuments of approximately $12 million at December31, 2002.

The sources of fair value and maturity of derivative instruments at December 31, 2002 were as follows:

Maturity (millions) 2003 2004 2005 2006 2007 Thereafter Total Sources of Fair Value:

Prices actively quoted

$50

$(2)

$(2)

$46 Prices provided by other external sources, primarily broker quotes 1

1 Prices based on models and other valuation methods 1

(1) 1 1

1 2

5

$51

$(2)

$(1)

$ 1

$ 1

$ 2

$52 Market Risk Sensitivity - Substantially all financial instruments and positions affecting the financial statements of FPL Group described below are held for purposes other than trading. Market risk is measured as the potential loss in fair value resulting from hypothetical reasonably possible changes in commodity prices, interest rates or equity prices over the next year. Management has established risk management policies to monitor and manage market risks. FPL Group's Exposure Management Committee (EMC), which is comprised of certain members of senior management, is responsible for the overall approval of market risk management policies and the delegation of approval and authorization levels.

The EMC receives periodic updates on market positions and related exposures, credit exposures and overall risk management activities. FPL Group manages its interest rate exposure by monitoring current interest rates in relation to total capitalization.

FPL Group 200 2 Annual Report FINANCIAL INFORMATION Commodity price risk - FPL Group uses a value-at-risk (VaR) model to measure market risk in its trading and mark-to-market portfolios.

The VaR is the estimated loss based on a one-day holding period at a 95% confidence level using historical simulation methodology. As of December 31, 2002 and 2001, the VaR figures are as follows:

Non-Managed Hedges Trading and Managed Hedges and Hedges in OCI Total FPL FPL FPL FPL FPL FPL (millions)

FPL Energy Group FPL Energy Group FPL Energy Group December31, 2001

$ 1

$ 1

$2

$3

$5

$2

$2

$ 4 December 31, 2002

$1

$3

$4

$1

$3

$ 4 Average for the period ended December 31, 2002

$ 1

$ 1

$1

$8

$9

$2

$8

$10 Interest rate risk - The special use funds of FPL Group include restricted fLnds set aside to cover the cost of storm damage for FPL and for the decommissioning of FPL Group's nuclear power plants. A portion of these funds is invested in fixed income debt securities carried at their market value of approximately $1.184 billion and $1.020 billion at December 31, 2002 and 2001, respectively. Adjustments to market value result in a corresponding adjustment to the related liability accounts based on current regulatory treatment for FPL. The market value adjustments of FPL Group's non-rate regulated operations result in a corresponding adjustment to other comprehensive income. Because the funds set aside by FPL for storm damage could be needed at any time, the related investments are generally more liquid and, therefore, are less sensitive to changes in interest rates. The nuclear decommissioning funds, in contrast, are generally invested in longer-term securities, as decommissioning activities are not expected to begin until at least 2012. See Note 12.

At December 31, 2002, the carrying amount and estimated fair value of long-term debt (including current maturities) was $5.895 billion and

$6.222 billion, respectively; the corresponding amounts at December 31, 2001 were $4.890 billion and $5.080 billion. The estimated fair values were based on quoted market prices for these or similar issues.

Based upon a hypothetical 10% decrease in interest rates, which is a reasonable near-term market change, the net fair value of the net liabilities would increase by approximately $134 million at December 31, 2002.

Equity price risk - Included in the special use funds of FPL Group are marketable equity securities carried at their market value of approximately

$689 million and $576 million at December 31, 2002 and 2001, respectively. A hypothetical 10% decrease in the prices quoted by stock exchanges, which is a reasonable near-term market change, would result in a $69 million reduction in fair value and corresponding adjustments to the related liability accounts based on current regulatory treatment at December 31, 2002.

NEW ACCOUNTING RULES AND INTERPRETATIONS Goodwill and Other Intangible Assets - Effective January 1, 2(002, FPL Group adopted FAS 142, "Goodwill and Other Intangible Assets." For information concerning the adoption of FAS 142, see Note 1 - Goodwill and Other Intangible Assets.

Accounting for Asset Retirement Obligations - Beginning in 2003, FPL Group will be required to adopt FAS 143, 'Accounting for Asset Retirement Obligations." See Note 1 - Accounting for Asset Retirement Obligations.

Guarantees - In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." See Note 1 - Guarantees.

Variable Interest Entities - In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." See Note 1 -

Variable Interest Entities (VIEs).

Derivative Instruments - FPL Group is currently analyzing the effect on its financial statements of a change in interpretation of Derivative Implementation Group Issue C11. For further discussion, see Note 5.

FINANCIAL INFORMATION FPL Group 2002 Annual Report i

I MANAGEMENT'S REPORT The management of FPL Group is responsible for the integrity and objectivity of the financial information and representations contained in the consolidated financial statements and other sections of this Annual Report. The consolidated financial statements, which in part are based on informed judgments and estimates made by management, have been prepared in conformity with generally accepted accounting principles applied on a consistent basis.

To aid in carrying out this responsibility, management maintains a system of internal accounting control, which is established after weighing the cost of such controls against the benefits derived.

The overall system of internal accounting control, in the opinion of management, provides reasonable assurance that the assets of FPL Group and ts subsidiaries are safeguarded and transactions are exe-cuted in accordance with management's authorization and are properly recorded for the preparation of financial statements. In addition, management believes the overall system of internal accounting con-trol provides reasonable assurance that material errors or irregularities would be prevented or detected on a timely basis by employees in the normal course of their duties. Due to the inherent limitations of the effectiveness of any system of internal accounting control, manage-ment cannot provide absolute assurance that the objectives of internal accounting control will be met. The system of internal accounting control is supported by written policies and guidelines, the selection and training of qualified employees, an organizational structure that provides an appropriate division of responsibility and a program of internal auditing. To further enhance the internal accounting control environment, management has prepared and distributed to all employees a Code of Conduct which states management's policy on conflict of interest and ethical conduct.

FPL Group's independent auditors, Deloitte & Touche LLP, are engaged to express an opinion on FPL Group's financial statements.

Their report is based on procedures believed by them to provide a reasonable basis to support such an opinion. The Board of Directors pursues its oversight responsibility for financial reporting and account-ing through is Audit Committee. This Committee, which is comprised entirely of outside directors, meets periodically with management, the internal auditors and the independent auditors to make inquiries as to the manner in which the responsibilities of each are being discharged.

The independent auditors and the internal audit staff have free access to the Committee without management's presence to discuss auditing, internal accounting control and financial reporting matters.

Lewis Hay lil Chairman, President and Chief Executive Officer Moray R Dewhurst Vice President, Finance and Chief Financial Officer K. Michael Davis Controller and Chief Accounting Officer INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, FPL GROUP, INC:

We have audited the accompanying consolidated balance sheets of FPL Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, sharehold-ers' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assur-ance about whether the financial statements are free of material mis-statement. An audit includes examining, on a test basis, evidence sup-porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and sig-nificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of FPL Group, Inc.

and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 7 to the consolidated financial statements, in 2002 FPL Group, Inc. and subsidiaries changed their method of accounting for goodwill to conform to Statement of Financial Accounting Standards No. 142.

g o ' C L LLP DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida February 13, 2003

__ II II I

II FPL Group 2002 Annual Report FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF INCOME 2002--

Years Ended December 31, (millions, except per share amounts)

OPERATING REVENUES

$,311

=

2001 2000

$8,326

$7,062

-- t I-OPERATING EXPENSES Fuel, purchased power and interchange Other operations and maintenance Restructuring and impairment charges Merger-related Depreciation and amortization Taxes other than income taxes

.3,711^

..1,s492 207.-

952 3,881 1,325 30 983 711 2,848 1,257 67 1,032 618 Total operating expenses 7,083 6,930 5,822 OPERATING INCOME 1,228 1,396 1,240 OTHER INCOME (DEDUCTIONS)

Interest charges (311)

(324)

(278)

Preferred stock dividends-FPL (15) 115)

(15)

Reserve for leveraged leases r (48)

Equity in earnings of equity method investees r

76 81 45 Other-net 9

22 48 Total other deductions -net (289)

(236)

(200)

INCOME FROM OPERATIONS BEFORE INCOME TAXES 939 1,160 1,040 INCOME TAXES 244 379 336 INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 695:

781 704 CUMULATIVE EFFECT OF ADOPTING FAS 142, "GOODWILL AND OTHER INTANGIBLE ASSETS,"

NET OF INCOME TAXES OF S143 (222)

NET INCOME

$473

$ 781

$ 704 Earnings per share of common stock:

Earnings per share before cumulative effect of adopting FAS 142 Cumulative effect of adopting FAS 142 Earnings per share Earnings per share of common stock -

assuming dilution:

Earnings per share before cumulative effect of adopting FAS 142 Cumulative effect of adopting FAS 142 Earnings per share Dividends per share of common stock Weighted-average number of common shares outstanding:

Basic Assuming dilution

$4.02

...-.$2.74-

..$4.01

$(1.28)

K$2.73,

$2.32 1-72.9 1 733

$4 63

$4.14

$4.14

$4.63

$4.62

$4.62

$2.24

$4.14

$4.14

$2.16 168.7 168.9 169.9 1702 The accompanying Notes to Consolidated Financial Statements are an integral pall of these statements.

FINANCIAL INFORMATION F P I r

r n i, n 9 n n 9 A

j
I P


r t

.. -, _. 1 37
-

CONSOLIDATED BALANCE SHEETS December 31,

.002 2001 (millions)

PROPERTY, PLANT AND EQUIPMENT Electric utility plant in service and other property

$4!3464

$ 21,272 Nuclear fuel -

net 20Z 133 Construction work in progress 2.639 1,983 Less accumulated depreciation and amortization i f2bj)

(11,726)

Total property, plant and equipment net 11,662 CURRENT ASSETS Cash and cash equivalents 82 Customer receivables, net of allowances of $26 and $8, respectively 636 Other receivables 223 144 Materials, supplies and fossil fuel inventory -at average cost 349 Deferred clause expenses 13f' 304 Other 198 87 Total current assets 90 1,602 OTHER ASSETS Special use funds 1921 1,608 Other investments 1,035 Other 0

1,556 Total other assets 337,8 4,199 TOTAL ASSETS

$19,790

$17,463 CAPITALIZATION Common shareholders' equity

$ 0B8o

$ 6,015 Preferred stock of FPL without sinking fund requirements 226.

226 Long-term debt

.- 5,70.-

4,858 Total capitalization 1 2,406 11,099 CURRENT LIABILITIES Commercial paper 1,822 1,680 Notes payable V75 302 Current maturities of long-term debt 105 32 Accounts payable 453 473 Customers' deposits 16 285 Accrued interest and taxes 160 Deferred clause revenues 62 144 Other 4

563 Total current liabilities 3,639 OTHER LIABILITIES AND DEFERRED CREDITS Accumulated deferred income taxes T1OO.47 1,302 Deferred regulatory credit-income taxes

73 88 Unamortized investment tax credits 120 140 Storm and property insurance reserve 235 Other 1A35 960 Total other liabilities and deferred credits

,473 2,725 COMMITMENTS AND CONTINGENCIES TOTAL CAPITALIZATION AND LIABILITIES KS.19.790

$ 17,463 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

38 F P L G r ou p 2 0 0 2 Ann u a I Repo r t FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002 2001 2000 (millions)

CASH FLOWS FROM OPERATING ACTIVITIES Net income v

u473

$ 781

$ 704 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 908 983 1,032 Goodwill impairment 365 Restructuring and impairment charges 207 Increase (decrease) in deferred income taxes and related regulatory credit 219 (91) 283 Cost recovery clauses 35 411 (810)

(Increase) decrease in restricted cash 232 (260)

(Increase) decrease in customer receivables (6) 6 (155)

(Increase) decrease in material, supplies and fuel (56) 19 (27)

(Increase) decrease in other current assets (88) 70 (152)

Increase (decrease) in accounts payable (15)

(91) 157 Increase (decrease) in customers' deposits 3f 31 (30)

Increase (decrease) in accrued interest and taxes 9

58 (36)

Increase in other current liabilities 2

55 87 Equity in earnings of equity method investees (76)

(102)

(45)

Distribution of earnings from equity method investees 968 62 80 Increase in deterred pension debit (83)

(110)

(112)

Increase (decrease) in other liabilities (28) 98 10 Other -

net (11) 22 (10)

Net cash provided by operating activities LR 2,338-1,942 976 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures of FPL

, - (1,256)

(1,154)

(1,299)

Independent power investments A}-- (2,103)

(1,977)

(507)

Capital expenditures of FPL FiberNet (21)

(128)

(88)

Increase in special use funds (88)(77)

(97)

Other-net 199 67 48 Net cash used in investing activities (3,267)

(3,269)

(1.943)

CASH FLOWS FROM FINANCING ACTIVITIES Issuances of long-term debt

- 1770920 947 Retirements of long-term debt (79 7)(87)

(515)

Increase in commercial paper and notes payable 214 824 819 Issuances of common stock 378 Repurchases of common stock (150)

Dividends on common stock (400)

(377)

(366)

Other -

net (52)

Net cash provided by financing activities 1,113 1,280 735 Net increase (decrease) in cash and cash equivalents 1 84-(47)

(232)

Cash and cash equivalents at beginning of year 82 129 361 Cash and cash equivalents at end of year i

$ 266 82

$ 129 Supplemental Disclosures of Cash Flow Information Cash paid for interest (net of amount capitalized)

$ 311 Cash paid for income taxes (net of refunds totaling $256 in 2002)

(9)

Supplemental Schedule of Noncash Investing and Financing Activities.

Additions to capital lease obligations

$, 74 Accrual for premium on publicly-traded equity units known as Corporate Units

$ 111 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

$ 373

$ 433 70

$ 301

$ 160 43

FINANCIAL INFORMATION FPL Group 2002 Annual Report CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Common Stock(

Additional Other Common Aggregate Paid-In Unearned Comprehensive Retained Shareholders' (millions)

Shares Par Value Capital Compensation Income (Loss)N Earnings Equity Balances, December 31, 1999 179

$2

$3,148

$(244)

$(1)

$2,465 Net income 704 Repurchases of common stock (3)

(150)

Dividends on common stock (366)

Earned compensation under ESOP 12 15 Other comprehensive income 1

Other (2) 9 Balances, December 31, 2000 176("

2 3,008 (220) 2,803 Net income 781 Dividends on common stock (377)

Earned compensation under ESOP 15 15 Other comprehensive loss (8)

Other 2

(6)

Balances, December 31, 2001 176

2 3,025 (211)

(8) 3,207

$6,015 Net income 473 Issuances of common stock, net of issuance cost of $10 7

378 Dividends on common stock (400)

Earned compensation under ESOP 16 16 Premium on publicly-traded equity units known as Corporate Units (111)

Unamortized issuance cost on publicly-traded equity units knows as Corporate Units (29)

Other comprehensive income 24 Other 5

3 Balances, December 31, 2002 18311'

$ 2

$3,284

$(192)

$16

$3,280

$6,390 (a) $0.01 par value, authorized-300,000,000 shares; outstanding 182,754,905 and 175,854,056 at December 31, 2002 and 2001, respectively (b) Comprehensive income, which includes net income and other comprehensive income (loss), totaled $497 million, $773 million and $705 million for 2002. 2001 and 2000, respectively (c) Outstanding and unallocated shares held by the Employee Stock Ownership Plan Trust totaled 6 million, 7 million and 7 million at December 31, 2002, 2001 and 2000, respectively The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F P L G r o up 2 0 0 2 Ann u a l Report FINANCIAL INFORMATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001 and 2000

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Basis of Presentation - FPL Group, Inc.'s (FPLGroup) opera-tions are conducted primarily through its wholly-owned subsidiary Florida Power & Light Company (FPL) and its wholly-owned indirect subsidiary FPL Energy, LLC (FPL Energy). FPL, a rate-regulated public utility, supplies electric service to approximately 4.0 million customers throughout most of the east and lower west coasts of Florida. FPL Energy invests in independent power projects through both controlled and consolidated entities and non-controlling owner-ship interests in joint ventures essentially all of which are accounted for under the equity method.

The consolidated financial statements include the accounts of its respective majority-owned and controlled subsidiaries. All signifi-cant intercompany balances and transactions have been eliminated in consolidation. Certain amounts included in prior years' consolidated financial statements have been reclassified to conform to the current year's presentation. The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclo-sure of contingent assets and liabilities. Actual results could differ from those estimates.

Regulation - FPL is subject to regulation by the Florida Public Service Commission (FPSC) and the Federal Energy Regulatory Commission (FERC). Its rates are designed to recover the cost of providing electric service to its customers including a reasonable rate of return on invested capital. As a result of this cost-based regulation, FPL follows the accounting practices set forth in Statement of Financial Accounting Standards No. (FAS) 71, "Accounting for the Effects of Certain Types of Regulation." FAS 71 indicates that regulators can create assets and impose liabilities that would not be recorded by non-rate regulated entities. Regulatory assets and liabili-ties represent probable future revenues that will be recovered from or refunded to customers through the ratemaking process.

FPL's regulatory assets and liabilities are as follows:

(millions)

December 31, 2002 2001 Assets (current and long-term):

Unamortized debt reacquisition costs Deferred Department of Energy assessment Litigation settlement (see Note 10)

Deferred losses on sale of utility property Liabilities:

Deferred regulatory credit -

income taxes Unamortized investment tax credits Storm and property insurance reserve (see Note 17-Insurance)

Discretionary depreciation and nuclear amortization Unamortized gains on reacquired debt Deferred gains on sale of utility property

$ 41

$24,

$178>

$1 73

$120

$298

$140

$-5

$ 17

$ 30

$223

$ 1

$ 88

$140

$235

$ 5

$ 5 During 2002 in accordance with the terms of the current rate agreement with the FPSC, which became effective April 15, 2002, as well as other FPSC actions with regard to accumulated nuclear amor-tization, FPL reclassified certain amounts that were previously classi-fied within accumulated depreciation to a regulatory liability, which is included in other liabilities on the consolidated balance sheet. The amounts reclassified include $170 million of special depreciation which will be credited to depreciation expense at up to $125 million per year over the term of the rate agreement, which extends through December 31, 2005, and $99 million of nuclear amortization which will be credited to depreciation expense ratably over the remaining life of the plants, based on the term of the existing operating licenses of the plants, at a rate of $7 million per year.

The amounts presented in the table above exclude clause-related regulatory assets and liabilities that are recovered or refunded over the next twelve-month period. Those amounts are included in deferred clause expenses and deferred clause revenues on the consolidated balance sheets. Cost recovery clauses, which are designed to permit full recovery of certain costs and provide a return on certain assets allowed to be recovered through the various clauses, include substantially all fuel, purchased power and inter-change expenses, conservation and certain environmental-related expenses, certain revenue taxes and franchise fees. Revenues from cost recovery clauses are recorded when billed; FPL achieves match-ing of costs and related revenues by deferring the net under-or over-recovery. Any under-recovered costs or over-recovered revenues are collected from or returned to customers in subsequent periods.

FINANCIAL INFORMATION FPL Group 2002 Annual Report 41 Although deferred clause revenues and expenses do not significantly affect net income, under-or over-recoveries of such can significantly affect operating cash flows.

Significant regulatory assets and liabilities have been recorded on FPL Group's books as a result of FAS 71. If FPL were no longer subject to cost-based rate regulation, these regulatory assets and liabilities would be written off unless regulators specify an alternative means of recovery or refund. In addition, the FPSC has the authority to disallow recovery of costs that it considers excessive or imprudently incurred. The continued applicability of FAS 71 is assessed at each reporting period.

Various states, other than Florida, have enacted legislation or have state commissions that have issued orders designed to allow retail customers to choose their electricity supplier. This regulatory restructuring is expected to result in a shift from cost-based rates to market-based rates for energy production and other services provided to retail customers. Although the legislation and initiatives vary substantially, common areas of focus include when market-based pric-ing will be available for wholesale and retail customers, what existing prudently incurred costs in excess of the market-based price will be recoverable and whether generating assets should be separated from transmission, distribution and other assets. It is generally believed transmission and distribution activities would remain regulated.

Recently, these state restructuring efforts have diminished and several states have delayed the implementation or reversed previously approved restructuring legislation and rules. Management believes it is unlikely there will be any state actions to restructure the electric industry in Florida in the near future.

The FPSC promotes competition for building major new steam generating capacity by requiring investor-owned electric utilities, such as FPL, to issue a request for proposal. The request for proposal process allows independent power producers and others to bid to supply the needed generating capacity. If a bidder has the most cost-effective altemative, meets other criteria such as financial viability and demonstrates adequate expertise and experience In building and/or operating generation capacity of the type proposed, the investor-owned electric utility would seek to negotiate a power purchase agree-ment with the selected bidder and request that the FPSC authorize the construction of the bidder's generation capacity under the terms of the power purchase agreement. In 2002, FPL received approval to construct new generation at its Martin and Manatee sites.

The FERC has jurisdiction over potential changes which could affect competition in wholesale transactions. In 1999, the FERO issued its final order on RTOs which, under a variety of structures, provides for the independent operation of transmission systems for a given geographic area. In March 2001, the FERC approved GridFlorida LLC (FPL's, Progress Energy Florida, Inc.'s and Tampa Electric Company's proposed RTO) as the RTO for peninsular Florida.

In December 2001, the FPSC determined that the RTO as proposed was not in the best interest of Florida customers and required the companies to develop a modified proposal. In March 2002, FPL, Progress Energy Florida, Inc. and Tampa Electric Company filed a modified RTO proposal with the FPSC changing the structure of GridFlorida LLC (GridFlorida) from a for-profit transmission company to a non-profit ISO. Under the proposal, FPL would continue to own its transmission lines and the ISO would manage them. In September 2002, the FPSC approved many of the aspects of the modified RTO proposal, allowing recovery of GridFlorida's incremental costs through the capacity cost recovery clause (capacity clause) and setting a hear-ing date of October 31, 2002 on market design and other outstanding issues. In October 2002, State of Florida Office of Public Counsel (Public Counsel) filed a notice of administrative appeal with the Supreme Court of Florida seeking an appeal of the FPSC's order, which caused an automatic stay of the proceedings. On October 28, 2002, the FPSC ordered that the GridFlorida proceedings be held in abeyance pending Public Counsel's appeal. On December 12, 2002, Public Counsel filed their brief. Public Counsel contends that the FPSC should not approve the ISO proposal because the FPSC cannot voluntarily abdicate its jurisdiction over retail transmission rates and transmission planning and the ISO will not be subject to the FPSC's jurisdiction. Oral arguments are scheduled for May 6, 2003. A ruling from the Supreme Court of Florida is expected in late 2003.

In July 2002, the FERC issued a notice of proposed rulemaking to reform public utilities' transmission tariffs and implement a standard-ized design for electric markets in the United States. The proposed rule would, among other things, require FERC regulated entities, including FPL, that own, control or operate transmission facilities to hire an independent transmission provider, which can be an RTO such as GridFlorida for the operation of those facilities. The proposed rule also will require the independent transmission provider to administer various spot markets for the sale of electricity and ancillary services and to manage congestion on the transmission system using financial congestion rights. State regulators from the southeast and western states have expressed strong reservations about FERC's proposal.

FPL is evaluating the proposed rule. The FERC has announced it will be issuing a 'white paper" in April 2003 incorporating comments received on its proposed rule and is currently unable to determine the effects, if any, on FPL's operations. The 'white paper" will re-examine the schedule, which had originally proposed full implementation of the standard market design by September 2004. The FERC will allow parties to file comments on the 'white paper" before issuing its final order this fall.

Revenues and Rates - FPL's retail and wholesale utility rate schedules are approved by the FPSC and the FERC, respectively.

FPL records unbilled base revenues for the estimated amount of energy delivered to customers but not yet billed. Unbilled base revenues are included in customer receivables and amounted to $140 million and $146 million and at December 31, 2002 and 2001, respectively. FPL's operating revenues also include amounts resulting from cost recovery clauses (see Regulation), franchise fees and gross receipts taxes. Franchise fees and gross receipts taxes are imposed on FPL however, the FPSC allows FPL to include in rates charged to customers the amount of the gross receipts tax for all customers and the franchise amount for those customers located in the jurisdiction that imposes the fee. Accordingly, franchise fees and gross receipts taxes are reported gross in operating revenues and taxes other than income taxes on the consolidated statements of income and were

I I

F P L G r o up 2 0 0 2 Ann u a l Report FINANCIAL INFORMATION approximately $372 million, $388 million and $316 million in 2002, 2001 and 2000, respectively. FPL also collects municipal utility taxes which are reported gross in customer receivables and accounts payable on the consolidated balance sheets. FPL Energy's revenue is recorded as electricity is delivered, which is when revenue is earned.

In March 2002, the FPSC approved a new rate agreement regarding FPL's retail base rates, which became effective April 15, 2002 and expires December 31, 2005. The 2002-2005 rate agree-ment replaced a rate agreement that was effective April 15, 1999 through April 14, 2002. Both agreements include a revenue sharing mechanism for each of the twelve-month periods covered by the agreement, whereby revenues from retail base operations in excess of a stated threshold are required to be shared on the basis of two-thirds refunded to retail customers and one-third retained by FPL.

Revenues from retail base operations in excess of a second threshold are required to be refunded 100% to retail customers.

During the term of the 1999-2002 rate agreement, FPL's return on common equity (ROE) was from time to time outside the 10% -

12% authorized range. However, the revenue sharing mechanism described above was specified as the appropriate and exclusive mechanism to address that circumstance. The agreement included provisions which limited depreciation rates and accruals for nuclear decommissioning and fossil dismantlement costs to the then approved levels and limited amounts recoverable under the environmental compliance cost recovery clause during the term of that agreement.

The 2002-2005 rate agreement provides for a $250 million annual reduction in retail base revenues allocated to all customers by reducing customers' base rates and service charges by approximately 7%. The revenue sharing thresholds specified in the 2002-2005 rate agreement are as follows:

settlement without the benefit of any evidentiary record to support its actions, and requested that the Supreme Court remand the case to the FPSC for additional proceedings. Initial briefs, answer briefs and a reply brief were filed by the parties during 2002. Oral arguments are expected to take place in mid-2003. FPL intends to vigorously contest this appeal and believes that the FPSC's decision approving the 2002-2005 rate agreement will be upheld.

Under both the 1999-2002 and the 2002-2005 rate agreements, the accrual for the refund associated with the revenue sharing mecha-nism is computed monthly for each twelve-month period of the rate agreement. At the beginning of each twelve-month period, planned revenues are reviewed to determine if it is probable that the threshold will be exceeded. If so, an accrual is recorded each month for a portion of the anticipated refund based on the relative percentage of year-to-date planned revenues to the total estimated revenues for the twelve-month period, plus accrued interest. In addition, if in any month actual revenues are above or below planned revenues, the accrual is increased or decreased as necessary to recognize the effect of this variance on the expected refund amount. Under the 2002-2005 rate agreement, the annual refund (including interest) is paid to customers as a credit to their February electric bill beginning in 2003. At December 31, 2002, the accrual for the revenue refund was approxi-mately $11 million.

Electric Plant, Depreciation and Amortization -The cost of additions to units of utility property of FPL and FPL Energy is added to electric utility plant. In accordance with regulatory account-ing, the cost of FPLs units of utility property retired, less net salvage, is charged to accumulated depreciation. Maintenance and repairs of property as well as replacements and renewals of items determined to be less than units of utility property are charged to other operations and maintenance (O&M) expenses. At December 31, 2002, the elec-tric generating, transmission, distribution and general facilities of FPL represented approximately 44%, 13%, 37% and 6%, respectively, of FPL's gross investment in electric utility plant in service. Substantially all electric utility plant of FPL is subject to the lien of a mortgage securing FPL's first mortgage bonds. FPL Energy's Doswell generat-ing facility is encumbered by liens against its assets securing bonds issued by an FPL Energy subsidiary in July 2001. Substantially all of the assets of Doswell serve as collateral and approximated $394 million at December 31, 2002.

Depreciation of FPUs electric property is primarily provided on a straight-line average remaining life basis. FPL includes in depreciation expense a provision for fossil plant dismantlement and nuclear plant decommissioning (see Decommissioning and Dismantlement of Generating Plant). For substantially all of FPL's property, depreciation studies are performed and filed with the FPSC at least every four years. In April 1999, the FPSC granted final approval of FPL's most recent depreciation studies, which were effective January 1, 1998.

The weighted annual composite depreciation rate for FPUs electric plant in service, including intangible software but excluding the effects of decommissioning and dismantlement, was approximately 4.4% for 2002, 4.4% for 2001 and 4.5% for 2000. Further, these rates exclude Years Ended December 31,

-. 2002&' 2003 2004 2005 (millions) 66 2/3% to customers 100% to customers

$3,580-

$3,680

$3,740,$3,840

$3,780

$3,880

$3,940

$4,040 (a) Refund is limited to 71.5% (representing the period April 15 through December 31, 2002) of the revenues from base rate operations exceeding the thresholds.

During the term of the 2002-2005 rate agreement, FPL will not have an authorized regulatory ROE range for the purpose of address-ing earnings levels. However, FPL will continue to file monthly earn-ings surveillance reports with the FPSC and if the reported ROE falls below 10% during the term of the 2002-2005 rate agreement, FPL may petition the FPSC to amend its base rates. The 2002-2005 rate agreement would terminate on the effective date of any final order issued in a proceeding that changes FPLs base rates.

In April 2002, the South Florida Hospital and Healthcare Association and certain hospitals filed a joint notice of administrative appeal with the FPSC and the Supreme Court of Florida appealing the FPSC's approval of the 2002-2005 rate agreement. The appel-lants contend that the FPSC rushed to judgment and approved the

FINANCIAL INFORMATION FPL Group 2002 Annual Report the depreciation adjustments discussed below. FPL Energy's electric plants in service less salvage value are depreciated using the straight-line method over their estimated useful lives. FPL Energy's effective depreciation rates were 4.0%, 4.0% and 3.7% for 2002, 2001 and 2000, respectively.

The 1999-2002 rate agreement (see Revenues and Rates) allowed FPL at its discretion to recover, as special depreciation, up to

$100 million in each year of the three-year agreement period. The additional depreciation recovery was required to be applied to nuclear and/or fossil generating assets based on future depreciation studies.

Under the 1999-2002 rate agreement, on a calendar year basis FPL recorded nothing in 2002 and 2001 and $101 million of special depre-ciation in 2000. Under the 2002-2005 rate agreement (see Revenues and Rates), depreciation will be reduced on FPL's plant in service by

$125 million in each year 2002 through 2005. These depreciation adjustments are included in earnings and will be allocated to the appropriate assets when FPL files its comprehensive depreciation studies at the end of 2005.

Nuclear Fuel - FPL leases nuclear fuel for all four of its nuclear units. Nuclear fuel lease expense was $71 million, $70 million and $82 million in 2002, 2001 and 2000, respectively. Included in this expense was an interest component of $3 million, $5 million and $9 million in 2002, 2001 and 2000, respectively. Nuclear fuel lease payments and a charge for spent nuclear fuel disposal are charged to fuel expense on a unit of production method. These costs are recovered through the fuel and purchased power cost recovery clause (fuel clause).

Under certain circumstances of lease termination, FPL is required to purchase all nuclear fuel in whatever form at a purchase price designed to allow the lessor to recover its net investment cost in the fuel, which totaled $140 million at December 31, 2002. For ratemak-ing, these leases are classified as operating leases. For financial reporting, the capital lease obligation is recorded at the amount due in the event of lease termination.

Seabrook Station (Seabrook) has several long-term contracts for the supply, enrichment, conversion and fabrication of nuclear fuel. See Note 17 - Contracts. Seabrook's nuclear fuel costs are charged to fuel expense on a unit of production method.

Decommissioning and Dismantlement of Generating Plant - FPL accrues nuclear decommissioning costs over the expected service life of each nuclear generating unit.

Nuclear decommissioning studies are performed at least every five years and are submitted to the FPSC for approval. FPL's latest nuclear decommissioning studies were approved by the FPSC in December 2001 and became effective in May 2002. The changes included a reduction in the annual decommissioning expense accrual to $79 million from $85 million and the reclassification of approxi-mately $99 million of accumulated nuclear amortization to a regulatory liability, which is amortized as a reduction of depreciation expense over the remaining life of the nuclear units. These studies assume prompt dismantlement for the Turkey Point Units Nos. 3 and 4 with decommissioning activites commencing in 2012 and 2013, respec-tively, when the original operating licenses were to expire. Current plans, which are consistent with the term of the existing operating licenses, call for St. Lucie Unit No. 1 to be mothballed beginning in 2016 with decommissioning activities to be integrated with the prompt dismantlement of St. Lucie Unit No. 2 beginning in 2023. These stud-ies also assume that FPL will be storing spent fuel on site pending removal to a U.S. government facility. The studies indicate FPL's portion of the ultimate costs of decommissioning its four nuclear units, including costs associated with spent fuel storage, to be $6.4 billion.

Decommissioning expense accruals, included in depreciation and amortization expense, were $81 million in 2002 and $85 million in each of 2001 and 2000. FPL's portion of the ultimate cost of decom-missioning its four units, expressed in 2002 dollars, is estimated by the studies to aggregate $2.0 billion. At both December 31, 2002 and 2001, the accumulated provision for nuclear decommissioning totaled approximately $1.7 billion and is included in accumulated deprecia-tion. See Electric Plant, Depreciation and Amortization and Accounting for Asset Retirement Obligations.

Similarly, FPL accrues the cost of dismantling its fossil fuel plants over the expected service life of each unit. Fossil fuel plant dismantle-ment studies are performed and filed with the FPSC at least every four years. FPL's latest fossil fuel plant dismantlement studies became effective January 1, 1999. Fossil dismantlement expense was $16 million in 2002, $16 million in 2001 and $14 million in 2000 and is included in depreciation and amortization expense. The studies indi-cate that FPL's portion of the ultimate cost to dismantle its fossil units is $482 million. At December 31, 2002 and 2001, the accumulated provision for fossil dismantlement totaled $260 million and $253 million, respectively, and is included in accumulated depreciation. See Electric Plant, Depreciation and Amortization and Accounting for Asset Retirement Obligations.

Restricted trust funds for the payment of future expenditures to decommission FPL's nuclear units are included in special use funds.

Consistent with regulatory treatment, securities held in the decommis-sioning funds are carried at market value with market adjustments resulting in a corresponding adjustment to the accumulated provision for nuclear decommissioning. See Note 12 - Special Use Funds.

Contributions to the funds are based on current period decommission-ing expense. Additionally, fund earnings, net of taxes, are reinvested in the funds. The tax effects of amounts not yet recognized for tax purposes are included in accumulated deferred income taxes.

In accounting for the purchase of its interest in Seabrook, FPL Energy recorded a nuclear decommissioning liability of approximately

$150 million which represents the fair value of its ultimate decommis-sioning liability as determined by an independent study. See Note 2.

During 2002, the liability was accreted using the interest method over an assumed license extension period that runs through 2050. In 2002, FPL Energy recorded approximately $2 million of accretion expense related to Seabrook's nuclear decommissioning liability, which is included in depreciation and amortization expense on the consolidated statements of income. As of December 31, 2002, FPL Energy's accumulated provision for Seabrook's nuclear decommis-sioning totaled approximately $152 million and is included in other

F FPL Group 2002 Annual Report FINANCIAL INFORMATION liabilities on the consolidated balance sheet. See Accounting for Asset Retirement Obligations.

Seabrook's current decommissioning funding plan provides for accelerated funding through 2006 and completion of funding by 2026. The funding plan is based on a comprehensive nuclear decommissioning study reviewed by the New Hampshire Nuclear Decommissioning Financing Committee (NDFC) in 1999 and is effec-tive for four years. Seabrook will file an updated nuclear decommis-sioning study in mid-2003 with the NDFC. The decommissioning study filed with the NDFC in 1999 indicates that FPL Energy's 88.23% of the ultimate cost of decommissioning Seabrook, including costs associ-ated with spent fuel storage, is $1.7 billion, or $516 million, expressed in 2002 dollars.

As of December 31, 2002, FPL Energy's 88.23% portion of Seabrook's restricted trust fund for the payment of future expenditures to decommission Seabrook is approximately $229 million and is included in special use funds on the consolidated balance sheet.

Marketable securities held in the decommissioning fund are classified as available for sale and are carried at market value with market adjustments resulting in a corresponding adjustment to other compre-hensive income. Fund earnings, net of taxes, are reinvested in the funds. The tax effects of amounts not yet recognized for tax purposes are included in accumulated deferred income taxes. See Note 12 -

Special Use Funds.

expense for restricted stock and performance shares is the same under the fair value and the intrinsic value based methods. The following table illustrates the effect on net income and earnings per share if FPL Group's compensation expense relating to options had been determined using the fair value based method:

(millions, except per share amounts)

Years Ended December 31,

72002, 2001 2000 Net income, as reported 473

$781

$704 Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects (7)

(6)

(8)

Pro forma net income

$ 466

$775

$696 Earnings per share:

Basic -

as reported Basic -

pro forma Assuming dilution -

as reported Assuming dilution -

pro forma

$2.74'

$2.69'

$4.63

$4.14

$4.60

$4.10

$4.62

$4.14

$4.59

$4.09 Accrual for Major Maintenance Costs - Consistentwith regulatory treatment, FPL's estimated nuclear maintenance costs for each nuclear unit's next planned outage are accrued over the period from the end of the last outage to the end of the next planned outage.

During 2002, the FPSC authorized deferral and amortization of the estimated costs for inspection and repair of FPL's four reactor vessel heads on a levelized basis over a five-year period beginning in 2002.

The accrual for nuclear maintenance costs at December 31, 2002 and 2001 totaled $51 million and $23 million, respectively, and is included in other liabilities. Any difference between the estimated and actual costs is included in O&M expenses when known.

FPL Energy's estimated major maintenance costs for each generating unit's next planned outage are accrued over the period from the end of the last outage to the end of the next planned outage.

The accrual for FPL Energy's major maintenance costs totaled $47 million and $28 million at December 31, 2002 and 2001, respectively.

Any difference between the estimated and actual costs is included in O&M expenses when known.

Stock-Based Compensation - FAS 123, Accounting for Stock-Based Compensation," encourages a fair value based method cf accounting for stock-based compensation. FPL Group, however, uses the intrinsic value based method of accounting as permitted by the statement. Stock-based compensation expense was approxi-mately $23 million, $22 million and $80 million in 2002, 2001 and 2000, respectively. Stock-based compensation expense in 2000 reflects merger-related costs associated with the change in control provision in FPL Group's long-term incentive plan. Compensation The fair value of the options granted in 2002, 2001 and 2000 were estimated on the date of the grant using the Black-Scholes option-pricing model with a weighted-average expected dividend yield of 4.04%, 4.23% and 3.82%, a weighted-average expected volatility of 19.18%, 19.01% and 20.27%, a weighted-average risk-free interest rate of 4.99%, 4.98% and 6.59% and a weighted-average expected term of 7 years, 7 years and 10 years, respectively.

Construction Activity - Allowance for funds used during construction (AFUDC) is a non-cash item which represents the allowed cost of capital, including a return on common equity, used to finance construction projects. The portion of AFUDC attributable to borrowed funds is recorded as a reduction of interest expense and the remainder is recorded as other income. The FPSC rules limit the recording of AFUDC to projects that cost in excess of 0.5% of a utility's plant in service balance and require more than one year to complete. The FPSC rules allow construction projects below the 0.5%

threshold as a component of rate base. During 2002, FPL did not capitalize AFUDC on any construction projects. During 2003, FPL's Martin and Manatee expansion projects will qualify for AFU DC.

FPL's construction work in progress at December 31, 2002 is primarily attributable to the addition of two new gas-fired combustion Turbines at its Fort Myers site, the repowering of Sanford Unit No. 4 and the addition of combined cycle generation at its Martin and Manatee sites. Included in construction work in progress are construc-lion materials, progress payments on turbine generators, third party engineering costs and other costs directly associated with the construction of a project. Upon commencement of plant operation, these costs are transferred to electric utility plant in service.

FINANCIAL INFORMATION FPL Group 2002 Annual Report FPL Energy capitalizes project development costs once t is probable that such costs will be realized through the ultimate construction of a power plant. At December 31, 2002 and 2001, FPL Energy's capitalized development costs totaled $31 million and $61 million, respectively, which are included in other assets on the consoli-dated balance sheets. These costs include professional services, permits and other third party costs directly associated with the devel-opment of a new project. Upon commencement of operations these costs are transferred to electric utility plant or other assets, depending upon the nature of the cost. Capitalized development costs are charged to O&M expenses when the development of a project Is no longer probable. See Note 4. In addition to capitalized development costs, FPL Energy capitalizes interest on its construction projects.

Interest capitalized on construction projects amounted to $90 million,

$55 million and $23 million during 2002, 2001 and 2000, respectively.

FPL Energy's interest charges are based on an assumed capital structure of 50% debt for operating projects and 100% debt for projects under construction.

FPL Energy's construction work in progress at December 31, 2002 is primarily attributable to new gas and wind projects under construction. Included in construction work in progress are construc-tion materials, prepayments on turbine generators, third party engineering costs, interest and other costs directly associated with the construction of the project. Upon commencement of plant operation, these costs are transferred to electric utility plant in KJ service and other property.

Storm Fund - The storm fund provides coverage toward FPLs storm damage costs and possible retrospective premium assess-ments stemming from a nuclear incident under the various insurance programs covering FPL's nuclear generating plants. Securities held in the fund are carried at market value with market adjustments resulting in a corresponding adjustment to the storm and property insurance reserve. See Note 12 - Special Use Funds and Note 17 - Insurance.

Fund eamings, net of taxes, are reinvested in the fund. The tax effects of amounts not yet recognized for tax purposes are included in accu-mulated deferred income taxes. Accordingly, at December 31, 2002, the storm and property insurance reserve (approximately $298 million) equals the amount in the storm fund (approximately $183 million) plus related deferred income taxes (approximately $115 million).

Investments In Leveraged Leases - Subsidiaries of FPL Group have investments in leveraged leases, which at December 31, 2002 and 2001, totaled $106 and $155 million, respectively, and are included in other investments on the consolidated balance sheets.

The related deferred tax liabilities totaled $108 million and $135 million at December 31, 2002 and 2001, respectively, and are included in accumulated deferred income taxes. See Note 17 - Other Contingencies.

<a/, Impairment of Long-Lived Assets - FPL Group evaluates on an ongoing basis the recoverability of its assets for impairment whenever events or changes in circumstances indicate that the cany-ing amount may not be recoverable as described in FAS 144, MAccounting for the Impairment or Disposal of Long-Lived Assets."

See Note 4.

Cash Equivalents - Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less.

Restricted Cash - At December 31, 2002, FPL Group had approximately $36 million of restricted cash included in other current assets on the consolidated balance sheets, essentially all of which is restricted for the payment of operating and/or construction expendi-tures. At December 31, 2001, FPL Group had approximately $267 million of restricted cash included in other assets on the consolidated balance sheets, most of which was posted as cash collateral for an off-balance sheet financing arrangement. See Note 17 - Off-Balance Sheet Financing Arrangement.

Allowance for Doubtful Accounts - FPLmaintainsan accumulated provision for uncollectible customer accounts receivable that is determined by multiplying the previous six months of revenues by a bad debt percentage, which represents an average of the past two years actual write-offs. Additional amounts are included in the provision to address specific items that are not considered in the calculation described above. FPL Energy and FPL FiberNet, LLC (FPL FiberNet) regularly review collectibility of their receivables and establish a provision for losses when necessary using the specific identification method.

Inventory - FPL values materials, supplies and fossil fuel inven-tory using a weighted-average cost method. FPL Energy's oil and gas inventories are carried at the lower of cost or market using a weighted-average cost basis. FPL Energy's spare parts are carried at the lower of cost or market using specifically identified cost. FPL FiberNet utilizes a weighted-average cost method to value its inventory.

Retirement of Long-Term Debt -The excess of FPLs reacquisition cost over the book value of long-term debt which is retired is deferred and amortized to expense ratably over the remain-ing life of the original issue, which is consistent with its treatment in the ratemaking process. See Regulation. FPL Group Capital Inc (FPL Group Capital) recognizes as expense any such excess at time of retirement.

Income Taxes - Deferred income taxes are provided on all signif-icant temporary differences between the financial statement and tax bases of assets and liabilities. FPL Group's subsidiaries are included in the consolidated federal income tax return and determine their income tax provisions on the 'separate return method." The deferred regulatory credit - income taxes of FPL represents the revenue equiv-alent of the difference in accumulated deferred income taxes computed under FAS 109, 'Accounting for Income Taxes," as compared to regulatory accounting rules. This amount is being amor-

II

_(
Y III F P L G ro u p 2 0 0 2 Ann u a I Re po r t FINANCIAL INFORMATION tized in accordance with the regulatory treatment over the estimated lives of the assets or liabilities which resulted in the initial recognition of the deferred tax amount. Investment tax credits (ITC) for FPL are deferred and amortized to income over the approximate lives of the related property in accordance with the regulatory treatment. A valua-tion allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. See Note 6.

Energy Trading - FPL Energy engages in limited energy trading activities to optimize the value of electricity and fuel contracts and generating facilities, as well as to take advantage of expected favor-able commodity price movements. These activities are accounted for at market value. Beginning in the third quarter of 2002, FPL Group adopted guidance provided in the June consensus of Emerging Issues Task Force (EITF) Issue No. 02-3, which requires realized gains and losses from all trading contracts, including those where physical delivery is required, to be recorded net and comparative financial statement amounts for prior periods to be reclassified.

Previously, FPL Energy's realized gains and losses from trading in financial instruments were recorded net in operating revenues and realized gains and losses from trading in physical power contracts were recorded gross in operating revenues and fuel, purchased power and interchange in the consolidated statements of income. The netting of realized gains from physical trading and managed hedge activities resulted in reduced revenues and fuel, purchased power and inter-change expenses by $193 million for the six months ended June 30, 2002 (the guidance was adopted in the beginning of the third quarter of 2002) and $149 million and $20 million for the years ended December 31, 2001 and 2000, respectively. Effective January 1, 2003, FPL Group adopted the provisions of the EITF 02-3 October consen-sus, which did not have a significant effect on the financial statements.

The guidance requires that trading activities that meet the definition of a derivative under FAS 133 be marked-to-market and reported on a net basis.

Goodwill and Other Intangible Assets - Effective January 1, 2002, FPL Group adopted FAS 142, 'Goodwill and Other Intangible Assets." Under this statement, the amortization of goodwill is no longer permitted. Instead, goodwill is assessed for impairment at least annually by applying a fair-value based test. See Note 7.

Accounting for Asset Retirement Obligations -

Effective January 1, 2003, FPL Group adopted FAS 143, 'Accounting for Asset Retirement Obligations." The statement requires that a liabil-ity for the fair value of an asset retirement obligation be recognized in the period in which it is incurred with the offsetting associated asset retirement cost capitalized as part of the carrying amount of the long-lived asset. The asset retirement cost is subsequently allocated to expense using a systematic and rational method over the useful life of the related asset. Changes in the asset retirement obligation resulting from the passage of time are recognized as an increase in the carry-ing amount of the liability and as accretion expense. Prior to January 1, 2003, FPL accrued asset retirement obligations over the life of the related asset through depreciation expense. See Decommissioning and Dismantlement of Generating Plant. Upon adoption of FAS 143, with respect to amounts for nuclear decommissioning, FPL reversed the approximately $1.6 billion it had previously recorded in accumu-lated depreciation and recorded an asset retirement obligation of approximately $1.8 billion. FPL capitalized a net asset related to the asset retirement obligation of approximately $231 million. The differ-ence, approximately $29 million, was deferred as a regulatory liability.

FPL's asset retirement obligations other than nuclear decommission-ing were not significant. The adoption of FAS 143 results in timing differences in the recognition of legal asset retirement costs for financial reporting purposes and the method the FPSC allows FPL to recover in rates. Accordingly, any differences between the ongoing expense recognized under FAS 143 and the amount recoverable through rates will be deferred in accordance with FAS 71.

Approximately $1.8 billion remains in accumulated depreciation for previously recorded asset retirement costs that are not considered legal obligations.

In addition to the amounts recorded by FPL, the adoption of FAS t43 by FPL Energy resulted in an increase in asset retirement obliga-tions of approximately $6 million, an increase to net property, plant and equipment of approximately $6 million and a decrease to invest-ments in partnerships and joint ventures of approximately $1 million.

The difference, a loss of approximately $1 million, was recorded as the cumulative effect of a change in accounting principle.

Guarantees - In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The interpretation requires that guarantors recognize at the inception of a guarantee a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and meas-urement provisions of the interpretation are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. See additional disclosures in Note 17-Commitments.

Variable Interest Entities (VIEs) - In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." The interpretation will require FPL Group to assess the variable interests it holds and to determine if those entities are VIEs. If FPL Group holds the majority of the variable interests in a VIE that was in existence at January 31, 2003, it will be required to consolidate that entity on July

1. 2003. For interests in VIEs created after January 31, 2003, the new rules must be applied immediately. Under its current structure, FPL Group believes that the special purpose entity (SPE) discussed in Note 17 - Off-Balance Sheet Financing Arrangement, will be required to be consolidated beginning in July 2003. FPL Group is in the process of evaluating the effects that FIN 46 would have on its interests in entities accounted for under the equity method and other potential VIEs.

FINANCIAL INFORMATION FPL Group 2002 Annual Report g

2. SEABROOK To strengthen its competitive position in the northeast electric utility market, on November 1, 2002, FPL Energy completed the purchase of an 88.23% undivided interest, or 1,024 megawatts (mw), in Seabrook located in New Hampshire. The transaction was financed through general funds of FPL Group Capital. See Note 11. Since November 1, 2002, FPL Energy's proportionate share of Seabrook's results have been included in the consolidated financial statements. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (millions).

Property, plant and equipment Decommissioning trust fund

$ 774 227 Other assets 61 Total assets acquired 1,062 Nuclear decommissioning liability 150 Other liabilities 104 Total liabilities assumed 254 Net assets acquired

$ 808

3.

EMPLOYEE RETIREMENT BENEFITS FPL Group and its subsidiaries sponsor a noncontributory defined benefit pension plan and defined benefit postretirement plans for health care and life insurance benefits (other benefits) for substantially all employees. Effective November 1, 2002, FPL Group acquired Seabrook. The liabilities and obligations shown below reflect the acquisition. The following tables provide a reconciliation of the changes in the plans' benefit obli-gations, fair value of assets and a statement of the funded status:

Pension Benefits U070 F 2001 Other Benefits

)<

,0d F 2001 (millions)

Change in benefit obligation:

Obligation at October 1 of prior year

$$1,205

$ 350 Service cost 48 6

Interest cost 82

24.

23 Participant contributions 1

Plan amendments 42 Acquisition.

Special termination benefits Actuarial (gains) losses -net 55 A

29 Benefit payments

___(79)

(3Q)

(22)

Obligation at September 30 1,353 489 387 Change in plan assets:

Fair value of plan assets at October 1 of prior year 2,750 98 Actual return on plan assets (117)

(1)

Participant contributions 1

Benefit payments

__(87)

(24)

Fair value of plan assets at September 30 2,546

-45 74 Funded Status:

Funded status at September 30 1,193 (313)

Unrecognized prior service cost

3)

(39)

Unrecognized transition (asset) obligation (70) 0 38 Unrecognized (gain) loss E

(591) 53 Prepaid (accrued) benefit cost at December 31

$155V

$ 493 I(2 2)

$(222)

"

1

IIII

^1.

1-P L G r o up 2 0 0 2 Ann u a I Repo r t FINANCIAL INFORMATION 4u1 The following table provides the components of net periodic benefit cost for the plans:

Pension Benefits Other Benefits Years Ended December 31, Years Ended December 31, (millions) 2002 2001 2000 2002.

2001 2000 Service cost Interest cost Expected return on plan assets Amortization of transition (asset) obligation Amortization of prior service cost Amortization of (gains) losses Cost of special termination benefits

$ 52

<1.,

- (32)

>4.

$ 48 82 (185)

(23) 5 (37)

$ 44 77 (172)

(23)

(7)

(31) 24,

. (6)-

,3 1A

$ 6 24 (7) 3

$ 5 21 (7) 4 Net periodic benefit (income) cost I$(110)

$(110)

$(112)

'- $2

$26

$23

$0

_(12

,.2 r

.26..2 The weighted-average discount rate used in determining the benefit obligations was 6.00% and 6.25% for 2002 and 2001, respec-tively. The assumed level of increase in future compensation levels was 4.5% for 2002 and was 5.5% for 2001 and 2000. The expected long-term rate of return on plan assets was 7.75% for all years.

Based on current health care costs (as related to other benefits),

the projected 2003 trend assumptions used to measure the expected cost of benefits covered by the plans are 10% for all age groups. The rate is assumed to decrease over the next ten years to the ultimate trend rate of 5% for all age groups and remain at that level thereafter.

Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. An increase or decrease of 1 % in assumed health care cost trend rates would have a corresponding effect on the service and interest cost compo-nents and the accumulated obligation of other benefits of approxi-mately $1 million and $8 million, respectively.

4. RESTRUCTURING AND IMPAIRMENT CHARGES FPL Group recorded charges totaling $207 million ($127 million after tax) in the third quarter of 2002 due to unfavorable market condi-tions in the wholesale energy and telecommunications markets. As of September 30, 2002, approximately $29 million of the total nonrecur-ring charges were recognized as liabilities and were included in other current liabilities on the consolidated balance sheets. During 2002, approximately $3 million was charged against the liabilities. Following is a discussion of the charges by segment.

FPL Energy - The wholesale energy sector continues to face diffi-cult market conditions including a deterioration in forward prices and reduced liquidity, as well as increasing credit concerns that may limit the number of counterparties with which FPL Energy does business.

During 2002, FPL Energy conducted a thorough review of its business development plans, organizational structure and expenses. As a result, FPL Energy decided to substantially exit fossil-fueled greenfield power plant development activities, which resulted in the write-of of approximately $67 million ($41 million after tax) of previously capital-ized development costs.

An agreement for the supply of gas turbines and other related equipment was renegotiated during 2002 to significantly reduce the commitment to purchase such equipment, resulting in a charge total-ing approximately $16 million ($10 million after tax). FPL Group remains committed to purchase seven gas turbines through 2003, of wvhich six will be used at FPL and are included in FPL's projected capital expenditures (see Note 17 - Commitments). The use of one gas turbine has not been determined and is included in Corporate and Other's projected capital expenditures (see Note 17-Commitments).

FPL Energy also realigned its organizational structure during 2002 to lower general and administrative expenses and took other actions associated with the restructuring. The operating lease agree-ment with an SPE and the related credit facility used to finance certain turbine purchases were terminated during 2002. Together these resulted in a charge of approximately $20 million ($12 million after tax).

Corporate and Other - Due to the changing telecommunica-tions market, FPL FiberNet completed valuation studies to assess the recoverability of its assets and as a result in 2002 recorded charges of approximately $104 million ($64 million after tax). Of this amount, $85 million ($52 million after tax) represents an impairment charge related to property, plant and equipment, the fair value of which was deter-mined based on a discounted cash flow analysis. Additionally, FPL FiberNet decided not to pursue the planned build-out of metro fiber rings in certain cities, and restructuring charges of $19 million ($12 million after tax) were recognized related to the write-off of develop-ment costs and inventory.

5. DERIVATIVE INSTRUMENTS Effective January 1, 2001, FPL Group adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 137 and 138 (collectively, FAS 133). As a result, beginning in January 2001, derivative instruments are recorded on the balance sheets as either an asset or liability (in other current assets, other assets, other current liabilities and other liabilities) measured at fair value. FPL Group uses derivative instruments (primarily swaps, options, futures and forward purchases and sales) to manage the commodity price risk inherent in fuel purchases and electricity sales, as well as to optimize the value of power generation assets.

FINANCIAL INFORMATION FPL Group 2002 Annual Report 49 At FPL, substantially all changes in fair value are deferred as a regulatory asset or liability until the contracts are settled. Upon settle-ment, any gains or losses will be passed through the fuel clause and the capacity clause. For FPL Group's non-rate regulated operations, predominantly FPL Energy, changes in the derivatives' fair value are recognized net in operating revenues for trading and managed hedge activities and in other - net for non-managed hedges in the consoli-dated statements of income unless hedge accounting is applied. See further discussion of the two derivative-related categories below. While substantially all of FPL Energy's derivative transactions are entered into for the purposes described above, hedge accounting is only applied where specific criteria are met and it is practicable to do so. In order to apply hedge accounting, the transaction must be designated as a hedge and it must be highly effective. The hedging instrument's effectiveness is assessed utilizing regression analysis at the inception of the hedge and on at least a quarterly basis throughout its life.

Hedges are considered highly effective when a correlation coefficient of.8 or higher is achieved. Substantially all of the transactions that FPL Group has designated as hedges are cash flow hedges which have expiration dates through December 2016. The effective portion of the gain or loss on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period(s) during which the transaction being hedged affects eamings. The ineffective portion of these hedges flows through earnings in the current period.

KJ2 Settlement gains and losses are included within the line items in the statements of income to which they relate.

Beginning January 1, 2002, FPL Group segregated unrealized mark-to-market gains and losses on derivative transactions into two categories. Prior year amounts have been reclassified into these cate-gories. The first category, referred to as trading and managed hedge activities, represents the net unrealized effect of actively traded posi-tions entered into to take advantage of market price movements and to optimize the value of generation assets and related contracts. The unrealized gains from trading and managed hedge activities were $8 million and $0 for the years ended December 31, 2002 and 2001, respectively, and are reported net in operating revenues. The second category, referred to as non-managed hedges, represents the net unrealized effect of derivative transactions entered into as economic hedges (but which do not qualify for hedge accounting under FAS

.133) and the ineffective portion of transactions accounted for as cash flow hedges. These transactions have been entered into to reduce our aggregate risk, and any mark-to-market gains or losses during the period prior to realization will continue to be reported outside of oper-ating income in other - net in the consolidated statements of income.

Unrealized gains from non-managed hedge activities were $1 million and $12 million (including the cumulative effect loss of $4 million recorded in other - net) for the years ended December 31, 2002 and 2001, respectively. Any position that is moved between non-managed hedge activity and trading and managed hedge activity is transferred at its fair value on the date of reclassification.

Beginning in the third quarter of 2002, FPL Group adopted guid-ance provided in the June consensus of EITF Issue No. 02-3, which requires realized gains and losses from all trading contracts, including those where physical delivery is required, to be recorded net and comparative financial statement amounts for prior periods to be reclassified. Previously, FPL Energy's realized gains and losses from trading in financial instruments were recorded net in operating revenues and realized gains and losses from trading in physical power contracts were recorded gross in operating revenues and fuel, purchased power and interchange in the consolidated statements of income. The netting of realized gains from physical trading and managed hedge activities resulted in reduced revenues and fuel, purchased power and interchange expenses by $193 million for the six months ended June 30, 2002 (the guidance was adopted in the beginning of the third quarter of 2002), and $149 million and $20 million for the years ended December 31, 2001 and 2000, respec-tively. Effective January 1, 2003, FPL Group adopted the provisions of the EITF 02-3 October consensus, which did not have a significant effect on the financial statements. The guidance requires that trading activities that meet the definition of a derivative under FAS 133 be marked-to-market and reported on a net basis.

Since the adoption of Derivatives Implementation Group Issue C11 in July 2001, FPL Group has considered any contract with its total sales price indexed to the consumer price index (CPI) or any similar broad market index to not be eligible for the normal purchases and normal sales exception under FAS 133, since its price was not clearly and closely related to the asset being sold. However, electricity contracts with a price based on the fuel used to generate the electric power being sold have been considered to be eligible for the normal sales exception, even when that price also contained an additional payment for incremental operations and maintenance expenses that was indexed to CPI. FPL Group believed that the types of expenses incurred as incremental operations and maintenance expenses, such as labor and materials, would be expected to fluctuate with CPI and as such believed the overall price in the contract was clearly and closely related to the electric power being sold. At its January 2003 meeting the EITF was asked, but declined, to address a similar issue relating to CPI indexing. It is unclear whether the FASB will further deliberate this issue. However, certain parties at the EITF meeting questioned whether the accounting for similar contracts under the normal exception should continue. Based on these discussions, FPL Group has concluded that, unless the FASB decides to address this issue further, this application of Issue C11 will no longer be acceptable and that contracts containing any reference to CPI will no longer qual-ify for the normal exception. Accordingly, beginning April 1, 2003, any such contracts will be accounted for at fair value. An analysis is currently underway to determine which of these contracts held by FPL Group may be amended to eliminate the reference to CPI. FPL Group is currently unable to determine the effect, if any, on its financial state-ments, that will result from this change in interpretation.

5 FPL Group 2002 Annual Report FINANCIAL INFORMATION

6. INCOME TAXES The components of income taxes are as follows:

The income tax effects of temporary differences giving rise to consolidated deferred income tax liabilities and assets are as follows:

Years Ended December 31,

[2002-2001 2000 December 31,

<20021 2001 (millions)

I'millions)

Federal:

D Current

$ (70)

$432

$ 77 Deferred 337.

(49) 239 ITC and other -net (74)

(49)

(35)

Total federal 193 334 281 State:

Current (22) 55 6

Deferred

- 73 (10) 49 Total state

- 51 45 55 Total income taxes

$244

$379

$336 Deferred tax liabilities:

Property-related

$1:,768

$1,294 Investment-related MS-51 466 Other 491 545 Total deferred tax liabilities 2,777, 2,305 Deferred tax assets and valuation allowance:

Asset writedowns 250 109 Unamortized ITC and deferred regulatory credit -

income taxes 74 88 Storm and decommissioning reserves 331 292 Post retirement benefits 102 91 Other 494i 448 Valuation allowance (21)

(25)

Net deferred tax assets 1,230:

1,003 Accumulated deferred income taxes

$1,547'

$1,302_

A reconciliation between the effective income tax rates and the applicable statutory rates is as follows:

Years Ended December 31, l20021 2001 2000 Statutory federal income tax rate 35.0%

35.0%

35.0%

Increases (reductions) resulting from:

State income taxes -

net of federal income tax benefit 3.5 2.5 3.5 Amortization of ITC (2.1.

(1.9)

(2.1)

Production tax credits -FPL Energy (5.7)'

(2.3)

(1.3)

Amortization of deferred regulatory credit -

income taxes (1.1)

(1.0)

(1.2)

Adjustments of prior years' tax matters

.-(3.2).-

(0.8)

(2.7)

Preferred stock dividends -

FPL K0.6.'

0.5 0.5 Other-net (1.0) 0.7 0.6 Effective income tax rate

26.0%

32.7%

32.3%

A capital loss from the disposition in a prior year of an FPL Group Capital subsidiary was limited by Internal Revenue Service dRS) rules. FPL Group challenged the IRS loss limitation and in March 2002, the IRS conceded the issue. Accordingly, FPL Group recognized approximately $30 million of net tax benefits in the first quarter of 2002. In 2002, FPL received a $230 million tax refund out of an estimated $300 million it expects to receive as a result of an IRS ruling.

T. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, FPL Group adopted FAS 142, "Goodwill and Other Intangible Assets." Under this statement, the amortization of goodwill is no longer permitted. Instead, goodwill is assessed for impairment at least annually by applying a fair-value based test. In January 2002, FPL Energy recorded an impairment loss of $365 million ($222 million after tax) as the cumulative effect of adopting FAS 142, eliminating all goodwill previously included in other assets on the consolidated balance sheets. Estimates of fair value were determined using discounted cash flow models.

FINANCIAL INFORMATION FPL Group 2002 Annual Report The following table provides reported net income and earnings per share excluding the impact of adopting FAS 142 and the proforma effect on prior years of excluding goodwill amortization expense:

Years Ended December 31, (millions, except per share amounts)

II10O2r rosa 2001 2000 Net income

$ 781

$ 704 Add back: Cumulative effect of adopting FAS 142, net of income taxes of $143 Net income excluding cumulative effect 781 704 Add back: Goodwill amortization, net of income taxes of $4 each 6

6 Adjusted net income

$ 787

$ 710 Earnings per share (basic)

$4.63

$4.14 Add back: Cumulative effect of adopting FAS 142 Earnings per share excluding cumulative effect 4.63 4.14 Add back: Goodwill amortization 0.03 0.04 Adjusted earnings per share (basic)

$4.66

$4.18 Earnings per share (assuming dilution)

$4.62

$4.14 Add back: Cumulative effect of adopting FAS 142 B

Earnings per share excluding cumulative effect 4.62 4.14 Add back: Goodwill amortization 0.04 0.03 Adjusted earnings per share (assuming dilution)

$4.66

$4.17

8. COMPREHENSIVE INCOME The following table provides the components of comprehensive income and accumulated other comprehensive income (loss):

Accumulated Other Comprehensive Income (Loss)

Net Unrealized Gains (Losses)

On Cash Flow Comprehensive (millions)

Net Income Hedges Other Total Income Balances, December31, 1999

$(1)

$(1)

Net income

$704

$704 Net unrealized gain on securities (net of $1 tax expense) 1 1

1 Balances, December 31, 2000

$705 Net income

$781

$781 Net unrealized loss on cash flow hedges:

FAS 133 transition adjustment (net of $6 tax expense) 10 10 10 Effective portion of net unrealized loss (net of $13 tax benefit)

(21)

(21)

(21)

Reclassification adjustment (net of $2 tax expense) 3 3

3 Balances, December 31, 2001 (8)

(8)

$773 Net income

$473

$473 Net unrealized gain on cash flow hedges:

Effective porton of net unrealized gain (net of $21 tax expense)")

33 33 33 Reclassification adjustment (net of $4 tax benefit)"'

(6)

(6)

(6)

Minimum supplemental executive retirement plan liability adjustment (net of $3 tax benefit)

(4)

(4)

(4)

Net unrealized gain on available for sale securities (net of $1 tax expense) 1 1

1 Balances, December 31, 2002

$ 19

$(3)

$16

$497 (a) Approximately $22 million of accumulated other comprehensive income at December 31, 2002 will be reclassified into earnings within the next 12 months as the hedged fuel is consumed or as electricity is sold.

(b) Includes gains and (losses) reclassified into earnings due to settlements of approximately $8 million and discontinuance of cash flow hedges of approximately $1 million.

IIII P L G r 0 LI D 2 0 0 2 A n n tj a I R e p o r tFINANCIAL INFORMATION I

II

9.

MERGER In July 2000, FPL Group and Entergy Corporation (Entergy) announced a proposed merger, which was approved by the shareholders of the respective companies in December 2000.

Subsequently, a number of factors led FPL Group to conclude the merger would not achieve the synergies or create the shareholder value originally contemplated when the merger was announced. As a result, on April 1, 2001, FPL Group and Entergy mutually terminated the merger agreement. Both companies agreed that no termination fee is payable under the terms of the merger agreement as a result cf this termination. Each company paid its own merger-related expenses. FPL Group recorded $30 million and $67 million in merger-related expenses in 2001 and 2000, respectively, of which FPL recorded $26 million ($16 million after tax) and $62 million ($38 million after tax). FPL Energy recorded $2 million ($1 million after tax) in 2000 and Corporate and Other recorded $4 million ($3 million after tax) and

$3 million ($2 million after tax) in 2001 and 2000, respectively.

10. SETTLEMENT OF LITIGATION In September 2000, a bankruptcy court approved the settlement of a contract dispute between FPL and two qualifying facilities. The settlement was approved by the FPSC in October 2000. In December 2000, under the terms of the settlement, the trustee was paid $222.5 million plus security deposits. The funds were subsequently distributed by the trustee as directed by the bankruptcy court. FPL will recover the cost of the settlement through the fuel and capacity clauses over a five-year period beginning January 1, 2002. Also, from the payment date to December 31, 2001, FPL did not receive a return on the unre-covered amount through the fuel and capacity clauses, but instead, tie settlement amount was included as a rate base regulatory asset over that period. See Note 1 - Regulation.

11. JOINTLY-OWNED ELECTRIC PLANT The following FPL Group subsidiaries own undivided interests in the jointly-owned facilities described below, and are entitled to a proportionate share of the output from those facilities. Accordingly, each subsidiary includes its proportionate share of the facilities and related revenues and expenses in the appropriate balance sheet and income statement captions. FPL Group's and FPL's share of direct expenses for these facilities are included in fuel, purchased power and interchange, other operations and maintenance, depreciation and amortization and taxes other than income taxes on the consolidated statements of income.

FPL - FPL owns approximately 85% of St. Lucie Unit No. 2, 20% of the St. Johns River Power Park units and coal terminal and approxi-mately 76% of Scherer Unit No. 4. At December 31, 2002, the propor-tionate share of FPL's gross investment in these units was $1.168 billion, $327 million and $571 million, respectively; accumulated depreciation was $782 million, $188 million and $330 million, respec-tively. FPL is responsible for its share of the operating costs, as well as providing its own financing. These costs are included in the consol-idated statements of income. At December 31, 2002, there was no significant balance of construction work in progress on these facilities.

See Note 17 - Litigation.

IFPL Energy - FPL Energy owns approximately 88.23% of Seabrook. At December 31, 2002, the proportionate share of FPL Einergy's gross investment was $945 million and accumulated depre-ciation was $3 million. FPL Energy is responsible for its share of the operating costs, as well as providing its own financing. These costs are included in the consolidated statements of income. At December

31, 2002, there was $16 million of construction work in progress for capital projects underway at Seabrook. See Note 2.

FPL Energy owns approximately 61.78% of Wyman Station Unit No. 4, an oil burning unit located in Maine. At December 31, 2002,

':he proportionate share of FPL Energy's gross investment was $98 million and accumulated depreciation was $20 million. FPL Energy is responsible for its share of the operating costs, as well as providing its own financing. These costs are included in the consolidated state-ments of income. At December 31, 2002. there was approximately 53 million of construction work in progress for capital projects inderway at Wyman Station.

12. FINANCIAL INSTRUMENTS The carrying amounts of cash equivalents, commercial paper and notes payable approximate fair values. At December 31, 2002 and 2001, other investments included financial instruments of approxi-mately $280 million and $600 million, respectively, the majority of

,vhich consist of notes receivable that are carried at estimated fair value or cost, which approximates fair value. See Note 13.

The following estimates of the fair value of financial instruments

,lave been made using available market information. However, the use of different market assumptions or methods of valuation could result in different estimated fair values.

At December 31, 2002 and 2001, the carrying amount of FPL Group's long-term debt, including current maturities, was $5.895 billion and $4.890 billion, respectively. The estimated fair value of such amounts based on quoted market prices for these or similar issues was $6.222 billion and $5.080 billion, respectively.

Special Use Funds - The special use funds consist of FPL's storm fund assets totaling $183 million and $145 million, and FPL Group's nuclear decommissioning fund assets totaling $1.738 billion and $1.463 billion at December 31, 2002 and 2001, respectively.

Securities held in the special use funds are carried at estimated fair value based on quoted market prices. FPL Group's nuclear decom-missioning funds consist of approximately 40% equity securities and 60% municipal, government, corporate and mortgage-and other asset-backed debt securities with a weighted-average maturity of approximately eight years. FPL's storm fund primarily consists of municipal debt securities with a weighted-average maturity of approximately four years. The cost of securities sold is determined on the specific identification method.

FINANCIAL INFORMATION FPL Group 2002 Annual Report is3 The following tables provide the special use funds approximate gains and losses and proceeds from the sale of securities:

Summarized combined unaudited information for these four entities is as follows:

Years Ended December'31, 502_1 ~2001 2000 (millions) 2001 Realized gains Realized losses Proceeds from sale of securities 30 16

$1,778 8

15

$1,959 December 31, "D

2001 Net income i 1

~

40 Total assets

.1568,

$1,592 Total liabilities

-,O7.

$1,205 Partners' equity

$.90

$ 387 FPL Energy's share of underlying equity in the four entities 3

$ 196 Difference between investment carrying amount and underlying equity in net assets)O)

(23)

FPL Energy's investment carrying amount for the four entities

$ 3

$ 173 (millions)

Unrealized gains Unrealized losses 43

$208

$ 9 Regulations issued by the FERC and the Nuclear Regulatory Commission (NRC) provide general risk management guidelines to protect nuclear decommissioning trust funds and to allow such funds to earn a reasonable retum. The FERC regulations set forth in the Code of Federal Regulations prohibit investments in any securities of FPL Group or its subsidiaries, affiliates, or associates, excluding investments tied to market indices or other mutual funds. Similar restrictions applicable to the decommissioning trust fund for FPL Energy's Seabrook nuclear plant are contained in the NRC operating license for that facility. Effective December 24, 2003, NRC regulations applicable to NRC licensees not in cost-of-service environments will require similar investment restrictions. With respect to the decommis-sioning trust fund for FPL Energy's Seabrook nuclear plant, decom-missioning trust fund withdrawals are also regulated by the NDFC pursuant to New Hampshire law.

The special use funds are managed by investment managers who must comply with the guidelines and rules of the applicable regu-latory authorities, FPL Group and FPL, respectively. The special use fund assets are invested in order to optimize the after-tax earnings of these funds, giving consideration to liquidity, risk, diversification and other prudent investment objectives.

13. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES FPL Energy has non-controlling non-majority owned interests in various partnerships and joint ventures, essentially all of which are electricity producers. At December 31, 2002 and 2001, FPL Energy's investment in partnerships and joint ventures totaled approximately

$310 million and $276 million, respectively, which is included in other investments on the consolidated balance sheets. FPL Energy's inter-est in these partnerships and joint ventures range from approximately 20% to 50%. At December 31, 2002, the principal entities included in FPL Energy's investments in partnerships and joint ventures were Bastrop Energy Partners, LP, Northeast Energy, LP and Luz Solar Partners LTD., VIII and IX.

(a) The majority of the difference between the investment carrying amount and the underlying equity in net assets is being amortized over the remaining life of the investee's assets.

Certain subsidiaries of FPL Energy provide services to the partnerships and joint ventures, including O&M and business management services. FPL Group's operating revenues for the years ended December 31, 2002, 2001 and 2000 include approximately

$16 million, $14 million and $15 million, respectively, related to such services. The receivables at December 31, 2002 and 2001, for these services, as well as payroll and other payments made on behalf of these investments, were approximately $15 million and $23 million, respectively, and are included in other current assets on the consoli-dated balance sheets.

Notes receivable (long-and short-term) include approximately

$94 million and $120 million at December 31, 2002 and 2001, respec-tively, due from partnerships and joint ventures in which FPL Energy has an ownership interest. The notes receivable mature 2004-14 and the majority bear interest at variable rates, which ranged from approxi-mately 5.0% to 6.8% at December 31, 2002 and 5.6% to 8.7% at December 31, 2001. Interest income on these notes totaling approxi-mately $12 million, $12 million and $13 million for the years ended December 31, 2002, 2001 and 2000, respectively, is included in other

- net in the consolidated statements of income. The associated inter-est receivables as of December 31, 2002 and 2001 were approxi-mately $0.2 million and $0.5 million, respectively, and are included in other current assets on the consolidated balance sheets.

F P L G rou p 2 0 0 2 Ann u a I Report FINANCIAL INFORMATION

14. COMMON STOCK Earnings per share - The reconciliation of basic and diluted earrings per share is shown below:

Years Ended December 31, (millions, except per share amounts)

[:20021 2001 2000 Numerator (basic and assuming dilution):

Net income$473

$ 781

$ 704 Denominator:

Weighted-average number of shares outstanding -basic 172.94 168.7 169.9 Performance share awards and shareholder value awards, options and equity unitsa

. 0.4.

0.2 0.3 Weighted-average number of shares outstanding -

assuming dilution

173.3 168.9 170.2 Earnings per share:

Basic

$2.74

$ 4.63

$ 4.14 Assuming dilution

$ 2.73,

$ 4.62

$ 4.14 (a) Performance share awards and shareholder value awards are included in diluted weighted-average number of shares outstanding based upon what would be issued if the end of the reporting period was the end of tfe term of the award. Options and equity units (known as Corporate Units) are included in diluted weighted-average number of shares outstanding by applying the treasury stock method.

Shares issuable upon the exercise of stock options and settlement of purchase contracts that form a part of equity units (known as Corporate Units), which were not included in the denominator above due to their antidilutive effect, were 11 million in 2002, 1.6 million in 2001 and none in 2000.

Common Stock Dividend Restrictions - FPL Group's charter does not limit the dividends that may be paid on its common stock. As a practical matter. the ability of FPL Group to pay dividends on its common stock is dependent upon dividends paid to it by its subsidiaries, prima-rily FPL. FPLs charter and a mortgage securing FPL's first mortgage boids contain provisions that, under certain conditions, restrict the payment of dividends and other distributions to FPL Group. These restrictions do not currently limit FPUs ability to pay dividends to FPL Group. In 2002, 2001 and 2000, FPL paid, as dividends to FPL Group, its net income available to FPL Group on a one-month lag basis. In addition, during 2002, FPL paid special dividends totaling $375 million to FPL Group.

Employee Stock Ownership Plan (ESOP) - The employee thrift plans of FPL Group include a leveraged ESOP feature. Shares of common stock held by the trust for the thrift plans (Trust) are used to provide all or a portion of the employers' matching contributions. Dividends received on all shares, along with cash contributions from the employers, are used to pay principal and interest on an ESOP loan held by FPL Group Capital. Dividends on shares allocated to employee accounts and used by the Trust for debt service are replaced with an equivalent amount of shares of common stock at prevailing market prices. For purposes of computing basic and fully diluted earnings per share, ESOP shares that have been committed to be released are considered outstanding.

ESOP-related compensation expense of approximately $24 million. $24 million and $22 million in 2002, 2001 and 2000, respectively, was recognized based on the fair value of shares allocated to employee accounts during the period. Interest income on the ESOP loan is eliminated in consolidation. ESOP-related unearned compensation included as a reduction of shareholders' equity at December 31, 2002 was approximately

$186 million, representing 6 million unallocated shares at the original issue price of $29 per share. The fair value of the ESOP-related unearned compensation account using the closing price of FPL Group stock at December 31, 2002 was approximately $386 million.

Long-Term Incentive Plan - At December 31, 2002, approximately 9 million shares of common stock are reserved and 8.0 million available for awards to officers and employees of FPL Group and its subsidiaries under FPL Group's long-term incentive plan. Restricted stock is issued at market value at the date of grant, typically vests within four years and is subject to, among other things, restrictions on transferability.

Performance share awards and shareholder value awards are typically payable at the end of a three-or four-year performance period if the specified performance criteria are met.

FINANCIAL INFORMATION FPL Group 2002 Annual Report I5 The changes in awards under the incentive plan are as follows:

Balances, December 31, 1999 Granted Paid/released/exercised Forfeited Balances, December 31, 2000 Granted Paid/released/exercised Forfeited Balances, December 31, 2001 Granted Paid/releasedlexercised Forfeited Balances, December 31, 2002 Restricted Stock 413,400 28,350(

(264,800)

(95,700) 81,250 263,825)

(6,600)

(30,750) 307,725 1 27,325(-

(123,095)

(13,250) 298,705 Performance Share and Shareholder Value Awards 646,615 465,61 4-(1,038,375)

(54,854) 19,000 61 7,420a' (41,492)

(49,849) 545,079 206,605-(246,246)

(86,949) 418,489 Options Weighted-Average Number Exercise Price 1,100,000

$51.59 564,950)

$39.64 (1,060,726)

$49.88 (212,056)

$50.51 392,168

$39.58 2,009,200-

$62.04 (120,380)

$39.01 (137,174)

$62.61 2,143,814

$59.19 1,669,625-

$54.27 (69,101)

$41.19 (99,208)

$59.09 3,645,130'-

$57.29 (a) The weighted-average grant date fair value of restricted stock granted in 2002, 2001 and 2000 was $54.82, $60.19 and $45.55 per share, respectively (b) The weighted-average grant date fair value of performance share and shareholder value awards in 2002, 2001 and 2000 was $56.95, $70.25 and $41.25 per share, respectively K>

(c)

The exercise price of each option granted in 2002,2001 and2000 equaled the marketprice of common stock on the date of grant.

Accordingly the weighted-average grant date fair value of all options granted is $0.

(d) Of the options outstanding at December 31, 2002, 826,174 options were exercisable and had exercise prices ranging from $38.13 to $65.13 per share with a weighted-average exercise price of $55.58 per share and a weighted-average remaining contractual life of 8. years. The remainder of the outstanding options had exercise prices ranging from $52.64 to $65.13 per share with a weighted-average exercise price of

$57.79 per share and a weighted-average remaining contractual life of 8.8 years.

Other - Each share of common stock has been granted a Preferred Share Purchase Right (Right), at an exercise price of $120, subject to adjustment, in the event of certain attempted business combinations. The Rights will cause substantial dilution to a person or group attempting to acquire FPL Group on terms not approved by FPL Group's board of directors.

FPL Group 2002 Annual Report FINANCIAL INFORMATION

15. PREFERRED STOCK FPL Group's charter authorizes the issuance of 100 million shares of serial preferred stock, $0.01 par value. None of these shares is outstanding. FPL Group has reserved 3 million shares for issuance upon exercise of preferred share purchase rights which expire in June 2006.

Preferred stock of FPL consists of the following:','

December 31 2002 (millions)

.i

.Shares-Redemption.-

December 31, Outslandlngb Price

'2002 l 2001 Cumulative, $100 Par Value, without sinking fund requirements, i. ;

authorized 15,822,500 shares:

41/2% Series

.00,000

$101 0.

$id

$ 10 41/2% Series A 50000

$10100 5

41/2% Series B 50,000

$101.00 5

4 1/2% Series C i62500 i

$103.00 A 6 6

4.32% Series D 50,000

$10350 5

5 4.35% Series E 50s000 s$10 o 5

6.98% Series S 7 -50,000 -

$10345' 0 s

7 75 7.05% Series T

,$00,000

$103.52(

50-50 6.75% Series U 50,000

$103.37.

65.

65 Total preferred stock of FPL 2,262,500 -

'$226

$226 (a) FPL's charter also authorizes the issuance of 5 million shares of subordinated preferred stock, no par value. None of these shares is outstanding. There were no issuances or redemptions of preferred stock in 2002, 2001 or 2000.

(b) FPL's preferred shares are entitled to dividends at the stated rates in preference to FPLs common stockholder, FPL Group. In the event of voluntary liquidation, the outstanding preferred shares have preference cver common shares until an amount equal to the current redemption price of all shares has been paid. In the event of involuntary liquidation, outstanding preferred shares shall have preference over common shares until the full par value of all shares and all unpaid accumulated dividends thereon have been paid.

(c) Shares outstanding from Series S, Series T and Series U are redeemable on or after March 1, June 1 and August 1, 2003, respectively

FINANCIAL INFORMATION FPL Group 2002 Annual Report

{a

16. DEBT Long-term debt consists of the following:

December 31, i 20021 2001 (millions)

FPL:

First mortgage bonds:

Maturing through 2005-6 5/8% to 6 7/8%

$ 725 Maturing 2008 through 2016-4.85% to 7.3%

0' 650 Maturing 2023 through 2033-5.85% to 7 3/4%

4 516 Medium-term notes -

maturing 2003-5.79%

70 Pollution control and industrial development series -maturing 2023 through 2027-6.7% to 7.15%

24 Pollution control, solid waste disposal and industrial development revenue bonds -maturing 2020 through 2029-variable, 1.6% and 2.8% average annual interest rates, respectively 609 609 Unamortized discount

1)

(15)

Total long-term debt of FPL 2,434 2,579 Less current maturities 70 Long-term debt of FPL, excluding current maturities

.364 2,579 FPL Group Capital:

Debentures -

maturing 2004 through 2009-6 1/8% to 7 5/8%

1,900 Debentures, related to FPL Group's equity units -

maturing 2007 and 2008-4.75% and 5%, respectively A1,01 Other long-term debt-maturing 2013-7.35%

5 Term loan facility -

maturing 2004-variable, 2.04% average annual interest rate 100 Unamortized discount (8)

Total long-term debt of FPL Group Capital

.09 1,897 FPL Energy:

Senior secured bonds -

maturing 2019-7.52%

'382 414 Less current maturities 32 Long-term debt of FPL Energy, excluding current maturities 347 382 Total long-term debt

$5?!90

$4,858 L

In December 2002, FPL redeemed $225 million principal amount of first mortgage bonds maturing 2016, $125 million principal amount of first mortgage bonds maturing 2023 and $175 million principal amount of first mortgage bonds maturing 2024, bearing interest at 7.30%, 7 3/4%

and 7 5/8%, respectively. In December 2002, FPL sold $400 million principal amount of first mortgage bonds maturing 2013 and $200 million prin-cipal amount of first mortgage bonds maturing 2033, with interest rates of 4.85% and 5.85%, respectively.

Minimum annual maturities of long-term debt are approximately $105 million, $312 million, $541 million, $635 million and $1.097 billion for 2003, 2004, 2005, 2006 and 2007, respectively.

At December 31, 2002, commercial paper borrowings and notes payable had a weighted-average interest rate of 1.58%. Available lines of credit aggregated approximately $3.1 billion ($2.1 billion for FPL Group Capital and $1 billion for FPL) at December 31, 2002, all of which were based on firm commitments.

In February 2002, FPL Group sold a total of 11.5 million publicly-traded equity units known as Corporate Units, and In connection with that financing, FPL Group Capital issued $575 million principal amount of 4.75% debentures due February 16, 2007. The interest rate on the deben-tures is expected to be reset on or after November 16, 2004. The interest rate resets, upon a successful remarketing of the debentures, as the rate the debentures should bear to have an approximate market value of 100.5% of par. Payment of FPL Group Capital debentures is absolutely, irrevocably and unconditionally guaranteed by FPL Group. Each Corporate Unit initially consisted of a $50 FPL Group Capital debenture and a purchase contract pursuant to which the holder will purchase $50 of FPL Group common shares on or before February 16, 2005, and FPL Group will make payments of 3.75% of the unit's $50 stated value untl the shares are purchased. Under the terms of the purchase contracts, FPL Group will issue between 9,271,300 and 10,939,950 shares of common stock in connection with the settlement of the purchase contracts (subject to adjustment under certain circumstances).

In June 2002, FPL Group sold concurrently a total of 5.75 million shares of common stock and 10.12 million 8% Corporate Units. In connec-tion with the corporate units financing, FPL Group Capital issued $506 million principal amount of 5% debentures due February 16, 2008. The interest rate on the debentures is expected to be reset on or after August 16, 2005. The interest rate resets, upon a successful remarketing of the debentures, as the rate the debentures should bear to have an approximate market value of 100.5% of par. Payment of FPL Group Capital

F PL G ro up 2 0 0 2 Ann u a I Repo r t FINANCIAL INFORMATION debentures is absolutely, irrevocably and unconditionally guaranteed by FPL Group. Each 8% Corporate Unit initially consisted of a $50 FPL Group Capital debenture and a purchase contract pursuant to which the holder will purchase $50 of FPL Group common shares on or before February 16, 2006, and FPL Group will make payments of 3% of the unit's $50 stated value until the shares are purchased. Under the terms of the purchase contracts, FPL Group will issue between 7,450,344 and 8,940,008 shares of common stock in connection with the settlement of the purchase contracts (subject to adjustment under certain circumstances). Prior to the issuance of FPL Group's common stock, the purchase contracts will be reflected in FPL Group's diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of FPL Group common stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares that would be issued upon settlement of the purchase contracts over the number of shares that could be purchased by FPL Group in the market, at the average market price during the period, using the proceeds receivable upon settlement.

17. COMMITMENTS AND CONTINGENCIES Commitments - FPL Group and its subsidiaries have made commitments in connection with a portion of their projected capital expenditures.

Capital expenditures at FPL consist of the cost for construction or acquisition of additional facilities and equipment to meet customer demand. At FPL Energy, capital expenditures include costs for the acquisition, development and expansion of independent power projects. Capital expendi-tures for Corporate and Other primarily relate to FPL FiberNet. At December 31, 2002, capital expenditures for 2003 through 2007 are estimated to be as follows:

(millions) 2003 2004 2005 2006 2007 Total FPL:

Generation

$ 595

$ 605

$ 425

$200

$165

$1,990 Transmission 150 185 140 135 140 750 Distribution 510 520 510 515 525 2,580 General and other 110 135 115 125 120 605 Total

$1,365

$1,445

$1,190

$975

$950

$5,925 FPL Energy:

Wind"'

$1,165

$1,165 Gas 405 65 10 70 15 565 Nuclear 20 20 25 15 15 95 Total

$1,590 85 35

$ 85

$ 30

$1,825 Corporate and Other 20 10 10

$ 10

$ 10

$ 60 (a) FPL Energy has projected capital expenditures for 1,200 mw of wind through 2003 when the production tax credits are scheduled to expire.

As of December 31, 2002, FPL Energy had $999 million in firm commitments for a portion of its capital expenditures, natural gas transporta-tion and storage contracts and minimum lease payments associated with the off-balance sheet financing arrangement discussed below. See Contracts below. FPL Group has guaranteed certain payment obligations of FPL Group Capital, including all those under FPL Group Capital's debt and commercial paper issuances, as well as the guarantees discussed above.

At December 31, 2002, subsidiaries of FPL Group have guaranteed a firm gas transportation agreement obligation with a letter of credit, purchase and sale of power and fuel agreement obligations and debt service payments. The term of the guarantees is equal to the term of the related debt, firm transportation agreement, or purchase and sale of power and fuel agreement, which can be as short as 30 days or as long as 20 years. The maximum potential amount of future payments that could be required under these guarantees at December 31, 2002 is approxi-mately $21 million, of which $2 million relates to a guarantee for the performance of an unrelated party. At December 31, 2002, FPL Group does not have any liabilities recorded for these guarantees. In certain instances, FPL Group can seek recourse from third parties for 50% of any amount paid under the guarantee.

FPL Energy has guaranteed certain performance obligations of a powe r plant owned by a wholly-owned subsidiary as part of a power purchase agreement (PPA) that expires in 2027. Under the PPA, the subsidiary could incur market-based liquidated damages for failure to meet a stated mechanical availability and guaranteed average output. Based on past performance of similar projects, management believes that the exposure associated with this guarantee is not material.

Contracts - During 2002, FPL Group amended its long-term agreement for the supply of gas turbines. At December 31, 2002, FPL Group remains committed to purchase seven gas turbines through 2003, and parts, repairs and on-site service through 2011. Six of the turbines will be

FINANCIAL INFORMATION FPL Group 2002 Annual Report

{a used at FPL and are included in FPL's commitments above. The use of one gas turbine has not been determined and is included in Corporate and Other's commitments above.

FPL Energy has entered into several contracts for the supply of wind turbines and towers to support a portion of the new wind generation planned. In addition, FPL Energy has entered into various engineering, procurement and construction contracts with expiration dates through 2004 to support its development activities. All of these contracts are intended to support expansion, and the related commitments as of December 31,

.2002 are included in Commitments above.

FPL has entered into long-term purchased power and fuel contracts. FPL is obligated under take-or-pay purchased power contracts with the Jacksonville Electric Authority (JEA) and with subsidiaries of The Southem Company (Southem Companies) to pay for approximately 1,300 mw of power through mid-2010 and 382 mw thereafter through 2021. FPL also has various firm pay-for-performance contracts to purchase approxi-mately 900 mw from certain cogenerators and small power producers (qualifying facilities) with expiration dates ranging from 2005 through 2026.

The purchased power contracts provide for capacity and energy payments. Energy payments are based on the actual power taken under these contracts, and the Southern Companies' contract is subject to minimum quantities. Capacity payments for the pay-for-performance contracts are subject to the qualifying facilities meeting certain contract conditions. In 2001, FPL entered into agreements with several electricity suppliers to purchase an aggregate of up to 1,100 mw of power with expiration dates ranging from 2003 through 2007. In general, the agreements require FPL to make capacity payments and supply the fuel consumed by the plants under the contracts. FPL has medium-to long-term contracts for the transportation and supply of natural gas, coal and oil with various expiration dates through 2022. FPL Energy has long-term contracts for the transportation, supply and storage of natural gas with expiration dates ranging from 2006 through 2017. FPL Energy also has several contracts for the supply, conversion, enrichment and fabrication of Seabrook's nuclear fuel with expiration dates ranging from 2003 to 2008.

The required capacity and minimum payments under these contracts as of December 31, 2002 are estimated to be as follows:

(millions) 2003 2004 2005 2006 2007 Thereafter FPL:

Capacity payments:

JEA and Southern Companies

$ 190

$190

$190

$200

$200

$1,300 i

Qualifying facilities

$ 350

$360

$350

$300

$300

$4,700 Other electricity suppliers

$ 91

$ 89

$ 50

$ 41

$ 4 Minimum payments, at projected prices:

Southern Companies -

energy 60

$ 50

$ 60

$ 60

$ 58

$ 200 Natural gas, including transportation

$1,161

$441

$345

$201

$201

$1,870 Coal

$ 55

$ 27

$ 26

$ 12

$ 8 Oil

$ 357 FPL Energy:

Natural gas transportation and storage 15

$ 15

$ 15

$ 15

$ 15

$ 160 Nuclear fuel 10

$ 5 Charges under these contracts were as follows:

~~~~~~~~~~2001 Charges 2000 Charges V-:

ggy~~~~~~~~~~~Energy Enery (millions)ba*

Capacity Fuel Capacity Fuel FPL:

Qualifying facilities 3f

$314

$124

(

b $318('1

$135lb Other electricity suppliers

- 0 1

$ 25'c

$ 6b)

Natural gas, including transportation

$763° '

$567(b)

Coal

$ 49()

5 -

$ 50(b)

Oil

$2941

$3541)

FPL Energy:

Natural gas, including transportation K.../

and storage 1

$ 17 Nuclear fuel (a) Recoverable through base rates and the capacity clause.

(b) Recoverable through the fuel clause.

(c) Recoverable through the capacity clause.

60 P L G r o up 2 0 0 2 An r. u a I Repo rt FINANCIAL INFORMATION Off-Balance Sheet Financing Arrangement - In 2000, an FPL Energy subsidiary entered into an operating lease agreement with an SPE lessor to lease a 550-mw combined-cycle power genera-tion plant through 2007. At the inception of the lease, the lessor obtained the funding commitments required to complete the acquisi-tion, development and construction of the plant through debt and equity contributions from investors who are not affiliated with FPL Group. At December 31, 2002 and 2001, the lessor had drawn $380 million and $298 million, respectively. The $380 million commitment includes $364 million of debt and $16 million of equity. The conditions to achieve project completion were satisfied as of December 27, 2002, at which time the base lease term began. The FPL Energy subsidiary will begin making lease payments March 31, 2003. The amounts are intended to cover the lessor's debt service, which includes a stated yield to equity holders and certain other costs. The minimum annual lease payments are estimated to be $21 million in 2003, $23 million in 2004, $26 million in 2005, $19 million in 2006 and

$210 million in 2007 (includes residual value guarantee of $192 million). The lease payments are based on a floating interest rate, tied to three month LIBOR, which adjusts quarterly.

The FPL Energy subsidiary has the option to purchase the plant at any time during the remaining lease term for 100% of the outstand-ing principal balance of the loans and equity contributions made to the SPE, all accrued and unpaid interest and yield, and all other fees, costs and amounts then due and owing pursuant to the provisions of the related financing documents. However, under certain limited events of default, it can be required to purchase the plant for the same cost. If the FPL Energy subsidiary does not elect to purchase the plant at the end of the lease term, a residual value guarantee (included in the minimum lease payments above) must be paid, and the plant will be sold. Any proceeds received by the lessor in excess of the outstanding debt and equity will be given to the FPL Energy subsidiary. FPL Group Capital has guaranteed the FPL Energy subsidiary's obligations under the lease agreement. The equity holder controls the lessor. The lessor has represented that it has essentially no assets or obligations other than the plant and the related debt and that total assets, total liabilities and equity of the lessor at December 31, 2002 were $383 million, $369 million and $14 million, respectively.

In June 2002, the cash collateral requirement related to this transac-tion was removed and the collateral was returned to FPL Energy as a result of the lessor's syndication of its debt.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities," which will replace the current accounting guidance for SPEs. As a result, entities that are deemed to be VIEs in which FPL Group or one of its subsidiaries is considered to be the

'primary beneficiary" will be consolidated. Variable interests are considered to be contractual, ownership or other monetary interests in an entity that fluctuate with changes in the entity's net asset value.

Under its current structure, FPL Group believes that the SPE discussed above will be required to be consolidated beginning in July 2003. At December 31, 2002, FPL Group's maximum exposure to loss as a result of its involvement with this SPE was $215 million.

Insurance - Liability for accidents at nuclear power plants is governed by the Price-Anderson Act, which limits the liability of nuclear reactor owners to the amount of insurance available from private sources and under an industry retrospective payment plan. In accordance with this Act, effective January 1, 2003, FPL Group main-tains $300 million of private liability insurance per site, which is the maximum obtainable, and participates in a secondary financial protec-tion system under which it is subject to retrospective assessments of up to $454 million per incident at any nuclear utility reactor in the UJnited States, payable at a rate not to exceed $54 million per incident per year. FPL Group is contractually entitled to recover a proportionate share of such assessments from the owners of minority interests in Seabrook and St. Lucie Unit No. 2, which approximates $11 million and $14 million, respectively. The Price-Anderson Act expired on August 1, 2002 but the liability limitations did not change for plants, including FPUs four nuclear units and Seabrook, with operating licenses issued by the NRC prior to August 1, 2002.

FPL Group participates in nuclear insurance mutual companies that provide $2.75 billion of limited insurance coverage per occurrence per site for property damage, decontamination and premature decom-missioning risks at its nuclear plants. The proceeds from such insur-

.nce, however, must first be used for reactor stabilization and site decontamination before they can be used for plant repair. FPL Group also participates in an insurance program that provides limited cover-age for replacement power costs if a nuclear plant is out of service because of an accident. In the event of an accident at one of FPL Group's or another participating insured's nuclear plants, FPL Group could be assessed up to $93 million in retrospective premiums. FPL Group is contractually entitled to recover a proportionate share of such assessments from the owners of minority interests in Seabrook and St. Lucie Unit No. 2, which approximates $3 million and $3 million, respectively.

In the event of a catastrophic loss at one of FPL Group's nuclear olants, the amount of insurance available may not be adequate to over property damage and other expenses incurred. Uninsured losses, to the extent not recovered through rates in the case of FPL, wvould be borne by FPL Group and could have a material adverse effect on FPL Group's financial condition and results of operations.

FPL self-insures the majority of its transmission and distribution (T&D) property due to the high cost and limited coverage available from third-party insurers. As approved by the FPSC, FPL maintains a funded storm and property insurance reserve, which totaled approxi-mately $298 million at December 31, 2002, for uninsured property storm damage or assessments under the nuclear insurance program.

The current annual accrual approved by the FPSC is $20.3 million. In addition, the storm and property insurance reserve balance includes a one-time accrual in 2002 of $35 million as approved by the FPSC.

Recovery from customers of any losses in excess of the storm and property insurance reserve will require the approval of the FPSC.

FPL's available lines of credit provide additional liquidity in the event of a T&D property loss.

Litigation - In 1999, the Attorney General of the United States, on behalf of the U.S. Environmental Protection Agency (EPA), brought an

FINANCIAL INFORMATION FPL Group 2002 Annual Report 61 action against Georgia Power Company and other subsidiaries of The Southern Company for certain alleged violations of the Clean Air Act.

In May 2001, the EPA amended its complaint. The amended complaint alleges, among other things, that Georgia Power Company constructed and is continuing to operate Scherer Unit No. 4, in which FPL owns a 76% interest, without obtaining proper permitting, and without complying with performance and technology standards as required by the Clean Air Act. It also alleges that unspecified major modifications have been made at Scherer Unit No. 4 that require its compliance with the aforementioned Clean Air Act provisions. The EPA seeks injunctive relief requiring the installation of best available control technology and civil penalties of up to $25,000 per day for each violation from an unspecified date after June 1, 1975 through January 30, 1997, and $27,500 per day for each violation thereafter.

Georgia Power Company has answered the amended complaint, asserting that it has complied with all requirements of the Clean Air Act, denying the plaintiffs allegations of liability, denying that the plain-tiff is entitled to any of the relief that it seeks and raising various other defenses. In June 2001, a federal district court stayed discovery and administratively closed the case pending resolution of the EPA's motion for consolidation of discovery in several Clean Air Act cases that was filed with a Multi-District Litigation (MDL) panel. In August 2001, the MDL panel denied the motion for consolidation. In September 2001, the EPA moved that the federal district court reopen this case for purposes of discovery. Georgia Power Company has Yt } opposed that motion asking that the case remain closed until the Eleventh Circuit Court of Appeals rules on the Tennessee Valley Authority's appeal of an EPA administrative order relating to legal issues that are also central to this case. In August 2002, the federal district court denied without prejudice the EPA's motion to reopen.

In 2001, J. W. and Ernestine M. Thomas, Chester and Marie Jenkins, and Ray Norman and Jack Teague, as Co-Personal Representatives on behalf of the Estate of Robert L. Johns, filed suit against FPL Group, FPL, FPL FiberNet, FPL Group Capital and FPL Investments, Inc. in the Florida circuit court. This action is purportedly on behalf of all property owners in Florida (excluding railroad and public rights of way) whose property is encumbered by easements in favor of defendants, and on whose property defendants have installed or intend to install fiber-optic cable which defendants currently lease, license or convey or intend to lease, license or convey for non-electric transmission or distribution purposes. The lawsuit alleges that FPL's easements do not permit the installation and use of fiber-optic cable for general communication purposes. The plaintiffs have asserted claims for unlawful detainer, unjust enrichment and constructive trust and seek injunctive relief and compensatory damages. In May 2002, plaintiffs -

filed an amended complaint, adding allegations regarding the Installa-tion of wireless communications equipment on some easements, and adding a claim for declaratory relief. In July 2002, defendants' motion to dismiss the amended complaint for, among other things, the failure to state a valid cause of action was denied. Defendants have filed an answer and affirmative defenses to the amended complaint. The K>

parties are pursuing discovery regarding class certification.

In August 2001, Florida Municipal Power Agency (FMPA) filed with the United States Court of Appeals for the District of Columbia (DC Circuit) a petition for review asking the DC Circuit to reverse and remand orders of the FERC denying FMPA's request for credits for transmission facilities owned by FMPA members. The transmission credits sought by FMPA would offset the transmission charges that FPL bills FMPA for network transmission service to FMPA's member cities. FMPA member cities have been taking network transmission service under FPL's open access transmission tariff (OATT) since the mid-1990s. In the orders appealed by FMPA, FERC ruled that FMPA would be entitled to credits for any FMPA facilities that were "inte-grated" with the FPL transmission system. Based on the evidence submitted, FERC concluded that none of the FMPA facilities met the integration test and, therefore, FMPA was not entitled to credits against FPL's charges for transmission service. On January 21, 2003, the DC Circuit upheld FERC's order denying FMPA credits for its facili-ties, finding that substantial evidence supported FERC's conclusion that FMPA's facilities do not satisfy the integration test. FMPA since has requested that FERC decide the crediting issue again in a sepa-rate FERC proceeding. That proceeding dates back to a filing by FPL on March 19, 1993, as completed on July 26, 1993, of a comprehen-sive restructuring of its then-existing tariff structure. A FERC adminis-trative law judge issued an order in that proceeding on December 13, 1995. The judge's order, which did not address credits, is currently pending at FERC on rehearing. FPL has argued that, particularly in light of the DC Circuit's order, FERC should not issue another order addressing FMPA's request for credits. If FERC does decide the cred-iting issue in this separate proceeding, and reverses its previous find-ing that FMPA is not entitled to transmission credits, FMPA is likely to seek refunds for amounts collected from FMPA member cities taking service under FPL's OATT. FPL estimates that through December 31, 2002 its maximum exposure to refunds, including interest, is approxi-mately $50 million to $60 million.

In January 2002, Roy Oorbeek and Richard Berman filed suit against FPL Group (as an individual and nominal defendant); all its current directors (except James L. Camaren and Frank G. Zarb);

certain former directors; and certain current and former officers of FPL Group and FPL, including James L. Broadhead, Lewis Hay IlIl, Dennis R Coyle, Paul J. Evanson and Lawrence J. Kelleher. The lawsuit alleges that the proxy statements relating to shareholder approval of FPL Group's Long Term Incentive Plan (LTIP) and FPL Group's proposed, but unconsummated, merger with Entergy were false and misleading because they did not affirmatively state that payments made to certain officers under FPL Group's LTIP upon shareholder approval of the merger would be retained by the officers even H the merger with Entergy was not consummated and did not state that under some circumstances payments made pursuant to FPL Group's LTIP might not be deductible by FPL Group for federal Income tax purposes. It also alleges that FPL Group's LTIP required either consummation of the merger as a condition to the payments or the return of the payments if the transaction did not close, and that the actions of the director defendants in approving the proxy statements, causing the payments to be made, and failing to demand their return constitute corporate waste. The plaintiffs seek to have the shareholder votes approving FPL Group's LTIP and the merger declared null and void, the return to FPL Group of $62 million of payments received by

FPL Group 2002 Annual Report FINANCIAL INFORMATION the officers, compensatory damages of $92 million (including the $62 million of payments received by the officers) all defendants (except FPL Group) and attorneys' fees. FPL Group's board of directors estab-lished a special committee to investigate a demand by another share-holder that the board take action to obtain the return of the payments made to the officers and expanded that investigation to include the allegations in the Oorbeek and Berman complaint.

In March 2002, William M. Klein, by Stephen S. Klein under power of attorney, on behalf of himself and all others similarly situated, filed suit against FPL Group (as nominal defendant); all its current directors (except James L. Camaren and Frank G. Zarb); certain former directors; and certain current and former officers of FPL Group and FPL, including James L. Broadhead, Paul J. Evanson, Lewis Hay IIl and Dennis P. Coyle. The lawsuit alleges that the payments made to certain officers under FPL Group's LTIP upon shareholder approval of the proposed merger with Entergy were improper and constituted breaches of fiduciary duties by the individual defendants because the LTIP required consummation of the merger as a condition to the payments. The plaintiff seeks the return to FPL Group of the payments received by the officers ($62 million); contribution, restitution and/or damages from the individual defendants; and attorneys' fees.

These allegations also were referred to the special committee of FPL Group's board of directors investigating the allegations in the Oorbeek and Berman lawsuit.

In August 2002, the special committee filed under seal with the court its report of its investigation. The report concluded that pursuit of the claims identified by the plaintiffs in the Oorbeek and Berman and the Klein lawsuits is not in the best interest of FPL Group or its share-holders generally, and recommended that FPL Group seek dismissal of the lawsuits. After reviewing the special committee's report, FPL Group's board of directors (with only independent directors participat-ing) concluded likewise. In September 2002, FPL Group, as nominal defendant, filed the special committee's report in the public docket and filed with the court a Statement of Position setting forth the special committee's and the board's conclusions and authorizing the filing of a motion to dismiss. The Statement of Position also reported that during the course of the special committee's investigation of the allegations in the lawsuits a separate question arose concerning the interpretation of the provisions of the LTIP pursuant to which the payments to eight senior officers were calculated. The board, the affected officers (two of whom have retired from FPL Group), and their respective legal coun-sel are discussing resolution of the issue. Any change from the origi-nal interpretation could result in a repayment to FPL Group of up to approximately $9 million.

In February 2003, Donald E. and Judith B. Phillips filed suit against FPL Group (as nominal defendant); all its current directors (except James L. Camaren and Frank G. Zarb); certain former direc-tors; and certain current and former officers of FPL Group and FPL, including James L. Broadhead, Paul J. Evanson, Lewis Hay Ill, Dennis R Coyle and Lawrence J. Kelleher. The lawsuit alleges that the proxy statements relating to shareholder approval of FPL Group's LTIP and FPL Group's proposed, but unconsummated, merger with Entergy were false and misleading because they did not affirmatively state that payments made to certain officers under FPL Group's LTIP upon shareholder approval of the merger would be retained by the officers even if the merger with Entergy was not consummated and did not state that under some circumstances payments made pursuant to FPL Group's LTIP might not be deductible by FPL Group for federal income tax purposes. It also alleges that FPL Group's LTIP required either consummation of the merger as a condition to the payments or the return of the payments if the transaction did not close, and that the actions of the director defendants in approving the proxy statements, causing the payments to be made, and failing to demand their return constitute corporate waste. The plaintiffs seek to have the shareholder votes approving FPL Group's LTIP and the merger declared null and void, the return to FPL Group of $62 million of payments received by the officers, compensatory damages of $92 million (including the $62 million of payments received by the officers) from all defendants (except FPL Group) and attorney's fees.

In February 2003, Scott and Rebecca Finestone brought an action on behalf of themselves and their son Zachary Finestone in the Florida district court alleging that their son has developed cancer (neuroblastoma) as a result of the release and/or dissipation into the air, water, soil and underground areas of radioactive and non-radioac-tive hazardous materials, including strontium 90, and the release of other toxic materials from FPL's St. Lucie nuclear power plant. The complaint includes counts against FPL for strict liability for allegedly engaging in an ultra-hazardous activity and for alleged negligence in operating the plant in a manner that allowed emissions of the forego-ing materials and failing to limit its release of nuclear fission products as prescribed by federal and state laws and regulations. The plaintiffs seek damages in excess of $1 million.

In March 2003, James J. and Lori Bradstreet brought an action on behalf of themselves and their son, Matthew Bradstreet, in the Circuit Court of the 18th Judicial Circuit in and for Brevard County, Florida, against Aventis Pasteur and a number of other named and unnamed drug manufacturing and distribution companies, the American Dental Association, the Florida Dental Association, FPL and the Orlando Utilities Commission (OUC), alleging that their son has suffered toxic neurological effects from mercury poisoning. The sources of mercury exposure are alleged to be vaccines containing a preservative called thimerosal that were allegedly manufactured and distributed by the drug companies, mercury amalgam dental fillings, and emissions from FPL and OUC power plants in Florida, including Brevard County. The complaint includes counts against all defendants for civil battery and against FPL for alleged negligence in operating the plants such that the son was exposed to mercury and other heavy metals emissions. The damages demanded from FPL are for injuries and losses allegedly suffered by the son as a result of his exposure to the plants' mercury emissions and the parents' alleged pain and suffer-ing, medical expenses, loss of wages, and loss of their son's services and companionship. No amount of damages is specified. FPL has not yet responded to the complaint but expects to do so in the near future.

FPL Group believes that it has meritorious defenses to the pend-ing litigation discussed above and is vigorously defending the lawsuits.

Management does not anticipate that the liabilities, if any, arising from the proceedings would have a material adverse effect on the financial statements.

FINANCIAL INFORMATION FPL Group 2002 Annual Report G3 In addition to those legal proceedings discussed herein, FPL Group and its subsidiaries are involved in a number of other legal proceedings and claims in the ordinary course of their businesses.

While management is unable to predict with certainty the outcome of these other legal proceedings and claims, it is not expected that their ultimate resolution, individually or collectively, will have a material adverse effect on the financial statements.

Other Contingencies - In connection with the redemption in 1999 of its one-third ownership interest in Olympus Communications, L.P. (Olympus), an indirect subsidiary of FPL Group holds a note receivable from a limited partnership, of which Olympus is a general partner. The note receivable is secured by a pledge of the redeemed ownership interest. Olympus is an indirect subsidiary of Adelphia Communications Corp. (Adelphia). In June 2002, Adelphia and a number of its subsidiaries, including Olympus, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code (Chapter 11). The note receivable plus accrued interest totaled approximately

$127 million at December 31, 2002 and are included in other invest-ments on the consolidated balance sheets. The note was due on July 1, 2002 and is currently in default.

Based on the most recent publicly available financial informabon set forth in Olympus' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, total assets of Olympus exceeded liabilities by approximately $3.6 billion and Olympus served 1,787,000

\\_J basic subscribers. Olympus has not filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2001 or its subsequent Quarterly Reports on Form 10-Q with the Securities and Exchange Commission (SEC), and consequently the September 30, 2001 finan-cial information may not be indicative of Olympus' current financial position. In July 2002, the SEC filed suit against Adelphia and certain of its officers alleging that Adelphia fraudulently excluded billions of dollars of debt from its financial statements, misstated its financial and operating results and concealed rampant self-dealing by the Rigas family, which controlled Adelphia. Pursuant to a bankruptcy court order, Olympus is required to file with the court updated financial information.

After a number of motions to extend being granted by the Court, updated financial information is now required to be filed by June 23, 2003.

In August 2002, an affidavit was filed in the bankruptcy court proceedings by a director of Lazard Freres & Co. LLC stating that, based on his analysis, the market value of FPL Group's secured inter-est in Olympus exceeded the carrying value of the note receivable plus accrued interest. In February 2003, FPL Group obtained an evaluation of the Olympus assets from an independent third party.

The results of the evaluation, which was based on the limited information available, indicated that there is no impairment. However, the ultimate collectibility of the note receivable cannot be assured.

FPL Group will continue to monitor these developments.

FPL Energy owns a 50% interest in two wind projects that are qualifying facilities under the Public Utility Regulatory Policies Act of 1978, as amended (PURPA) and sell 100% of their output to Southem California Edison (SCE). The projects' qualifying facility status is based on an application filed by FPL Energy's partner in the projects.

FERC regulations preclude more than 50% of the equity in qualifying facilities to be owned directly or indirectly by utilities or utility holding companies. However, the ownership restriction does not apply to utility holding companies that are exempt from the Public Utility Holding Company Act of 1935, as amended (Holding Company Act) under section 3(a)(3) or 3(a)(5). FPL Energy and its partner both are utility holding companies, but its partner currently has exemptions from the Holding Company Act under both section 3(a)(3) and 3(a)(5). Thus, FPL Energy and its partner currently satisfy the 50% ownership test of PURPA. SCE has filed a motion with the SEC requesting that the SEC revoke the Holding Company Act exemptions currently held by FPL Energy's partner prospectively, as well as retroactively, on the basis that the Holding Company Act exemption applications filed by FPL Energy's partner were not filed in good faith. On February 6, 2003, an administrative law judge issued a decision revoking FPL Energy's partner's exemptions from the Holding Company Act. FPL Energy's partner has filed for an appeal of this decision with the SEC.

On February 27, 2003, in response to the administrative law judge's decision, FPL Energy's partner transferred the ownership of its affili-ates, which are partners in the partnership, to a trust with an inde-pendent non-utility trustee. The partnerships plan to apply with the FERC for recertification of the facilities as qualifying facilities under the new ownership arrangements. In addition, on October 24, 2002, the FERC issued an Order Initiating Investigation and Hearing on the issue of whether three facilities, including the two wind projects described above and a third in which FPL Energy has no interest, satisfied statutory and regulatory requirements for qualifying facility status following the 1997 transfer of ownership interests in the facili-ties from FPL Energy's partner to a third party. This investigation resulted in a tentative settlement with SCE. The tentative settlement, if approved by the FERC and the California Public Utilities Commission, would result in the facilities no longer having to satisfy qualifying facility ownership requirements and would not materially affect FPL Energy's results of operations. if the SEC upholds the administrative law judge's decision, the FERC rejects the recertification application and/or FPL Energy or its partner did not take appropriate remedial steps, the projects could lose their qualifying facility status, the settle-ment with SCE might not be consummated and SCE could seek to terminate its long-term power sales agreements with the partnerships.

If the long-term power sales agreements were terminated, the projects would have to sell their output into the marketplace. FPL Energy recorded a charge in 2002 associated with these regulatory issues of approximately $17 million ($10 million after tax), which is included in equity in earnings of equity method investees in the consolidated statements of income. At December 31, 2002, FPL Energy's net investment in these two wind projects totaled approximately $14 million, which is included in other investments and other current assets on the consolidated balance sheets.

Subsidiaries of FPL Group have investments in several leveraged leases, two of which are with MCI Telecommunications Corporation (MCI). In July 2002, MCI filed for bankruptcy protection under Chapter 11. Due to the uncertainty of collectibility associated with these leveraged leases, FPL Group recorded reserves totaling

$48 million ($30 million after tax) in 2002.

II II

-L-\\

FPL Group 2002 Annual Report FINANCIAL INFORMATION

18. SEGMENT INFORMATION FPL Group's reportable segments include FPL, a rate-regulated utility, and FPL Energy, a non-rate regulated energy generating subsidiary.

Corporate and Other represents other business activities, other segments that are not separately reportable and eliminating entries. Operating revenues derived from the sale of electricity represented approximately 96%, 97% and 97% of FPL Group's operating revenues in 2002, 2001 and 2000, respectively. Less than 1% of operating revenues were from foreign sources for each of the three years ended December 31, 2002.

At December 31, 2002 and 2001, less than 1% of long-lived assets were located in foreign countries.

Segment information is as follows:

r

.. 2 O Z

2001 2000 (millions)

Operating revenues Operating expenses Interest charges Depreciation and amortization Equity in earnings of equity method investees Income tax expense (benefit)

Income (loss) before cumulative effect of change in accounting principle&)I)"

Cumulative effect of adopting FAS 142, net of income taxes Net income (loss)blM Significant noncash investing and financing activities Capital expenditures and investments Total assets Investment in equity method investees Corp.

.iFpL xand FPL Energy"

.Other Total

$7,378 I 829

$104

$8,311-S6,052-t $ 842 Z$'1189

$7,083

$.J 166 So 86--$

59 311

$ -831:$-S107

$1

. t14 S 952

$o

.::* $ -76 76

$ '413. $ aX(54) K$(115Y) "$ 244

-7 ~

~

I 717 $ 53~' '$(75)$

69

$;,ti0);w*X (2

$ _.N-$

(222) _

717. $ (169:

(

.473,

$- 74$

~t5-Sil

$S' 185

$11,256V $2,103

$(99)~ $ 3,260

$ 12,637. $6,35

$795

$9,,790,

$ -@ i~ $310\\

310 Corp.

FPL and FPL Energy"&

Other Corp.

FPL and Total FPL

Energy, Other

$ 7,477

$ 6,200 187 as 720 609 74

$129 $ 8,326

$121

$ 6,930

$ 63 $

324

$ 6,361

$ 5,210 176

$ 612 514 67

$ 89

$ 98

$ 35

$ 7,062

$ 5,822 278 Total 898 77 81 383 25

$ 679

$ 113 679

$ 113 70

$ 1,154

$1,977

$11,924

$4,957

$ 276

$ 8

$983 975 50

$ 7 $ 1,032

$81 45

$ (29)

$379 341 36

$ (41) 45 336

$ (11)

$781

$ 607 82

$ 15 704

$ (11)

$781 607 $

82

$ 15 $

704

$70 (57) $

$100 43

$131

$3,262

$582

$17,463

$276

$ 1,299 $ 507

$ 90 $ 1,896

$12,020

$2,679

$601

$15,300

$ 196 196 (a) FPL Energy's interest charges are based on an assumed capitalstructure of 50% debt for operating projects and 100% debt for projects under construction.

(b) Includes merger-related expense recognized in 2001 and 2000 totaling $19 million after tax and $41 million after tax, respectively, of which

$16 million and $38 million was recognized by FPL, none and $1 million by FPL Energy and $3 million and $2 million by Corporate and Other (see Note 9).

(c) Includes, in 2002, restructuring and other charges of $73 million after tax at FPL Energy, restructuring and impairment charges of $64 million after tax at FPL FiberNet and a reserve for leveraged leases of $30 million after tax at Corporate and Other.

(d) Includes favorable settlement of litigation with the IRS for which a net tax benefit of $30 million was recognized.

(e) See Note 7.

FINANCIAL INFORMATION FPL Group 2002 Annual Report

19. SUMMARIZED FINANCIAL INFORMATION OF FPL GROUP CAPITAL FPL Group Capital, a 100% owned subsidiary of FPL Group, provides funding for and holds ownership interest in FPL Group's operating subsidiaries other than FPL. The majority of FPL Group Capital's debt, including its debentures, are fully and unconditionally guaranteed by FPL Group. Condensed consolidating financial information is as follows:

Condensed Consolidating Statements of Income Year Ended December 31, 2001 Year Ended December 31, 2000 FPL Group FPL Group Capital FPL Group Consoli-Otherza dated (millions)

Operating revenues Operating expenses Interest charges Other income (deductions) -

net Income before income taxes Income tax expense (benefit)

Net income (loss) before cumulative effect of change in accounting principle Cumulative effect of adopting FAS 142, net of income taxes Net income (loss)

FPL Group FPL Group Capital FPL Group Consoli-Other" dated

$ 850 $ 7,476 $ 8,326

$ 701 $ 6,361

$7,062 (730)

(6,200)

(6,930)

(612)

(5,210) (5,822)

(29)

(136)

(159)

(324)

(31)

(102)

(145)

(278) 788 147 (847) 88 726 135 (783) 78 759 131 270 1,160 695 122 223 1,040 (22) 18 383 379 (9) 4 341 336 781 113 (113) 781 704 118 (118) 704

$781

$ 113 $ (113) $ 781

$704 $ 118 $ (118) $ 704 (a) Represents FPL and consolidating adjustments.

F P L G r ou p 2 0 0 2 Ann u a l Report FINANCIAL INFORMATION Condensed Consolidating Balance Sheets Deceber 31, 2002' December 31, 2001 I, FPL

Group.,

.-1FPI...:.FPL Group

Gtoup

-- Consl-CapitEJ

.- Other!:

-dated FPL FPL Group Group Capital FPL Group Consoli-Other' dated (millions)

PROPERTY, PLANT AND EQUIPMENT Electric utility plant in service and other property

$5,745: $20,760, $26,505

$3,606 $19,782 $23,388 Less accumulated depreciation and amortization (360). (11,841)

(12,201)

(246)

(11,480) (11,726)

Total property, plant and equipment -net 5,385 8,919.

14,304 3,360 8,302 11,662 C URRE NT ASSETS Cash and cash equivalents 5

26

j.

266 81 1

82 Receivables 460 261 36 865 7

442 331 780 Other 240 537 777 114 626 740 Total current assets 465 R-771 -:

673;:

1,908 7

637 958 1,602 OTHER ASSETS Investment in subsidiaries 6,221 (6,221) 6,485 (6,485)

Other 103.

1,28 2,191 3,578 108 2,066 2,025 4,199 Total other assets 6,324 1,28-4-1 (4,030): 3,578 6,593 2,066 (4,460) 4,199 TOTAL ASSETS

$6,789

$7,439 $ 5,562 $19,790

$6,600

$6,063 $ 4,800

$17,463 CAPITALIZATION Common shareholders'equity

$6,390

$S 831.S (839) $ 6,390-

$6,015

$1,040 $(1,040) $ 6,015 Preferred stock of FPL without sinking fund requirements 226

.226 226 226 Long-term debt 3,423 2,364:5,790 2,279 2,579 4,858 Total capitalization 6,390r-4,265.. -1,751 12,406; 6,015 3,319 1,765 11,099 CURRENT LIABILITIES Accounts payable and short-term debt 1,583 1,092 2,655 1,815 640 2,455 Other 1.-

.t7 81:2 427.

1 =^<

in -

i,2 56 20 1,256 284 699 1,184 Total current liabilities 17 2,375 1,519' 3,911 s 201 2,099 1,339 3,639 OTHER LIABILITIES AND DEFERRED CREDITS Accumulated deferred income

=

taxes and unamortized tax credits (5) 412 1,333.

1,740 513 1017 1,530 Other 387

• 387 959:

1,733 384 132 679 1,195 Total other liabilities and deferred credits 382

-^.793 -

2,292.

3,473 384 645 1,696 2,725 COMMITMENTS AND CONTINGENCIES TOTAL CAPITALIZATION AND LIABILITIES

$,8

$7,433 5,562', $19,790,

$6,600

$6,063 $ 4,800 $17,463

. t.

(a) Represents FPL and consolidating adjustments.

FINANCIAL INFORMATION FPL Group 2002 Annual Report i

I K-'

Condensed Consolidating Statements of Cash Flows Year Ended December 31, 2001 Year Ended December 31, 2000 FPL FPL Group Group Capital FPL Group Consoli-OtherfZ dated FPL FPL Group Group Capital F1L Group Consoli-OtherZ dated (millions)

NET CASH PROVIDED BY (USED IN)

OPERATING ACTIVITI ES

$ 769 $

15 $ 1,158 $ 1,942

$959

$ 159 $ (142) $ 976 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures and independent power investments Capital contributions to FPL Group Capital and FPL Other-net (2,105)

(1,154)

(3,259)

(595)

(1,299) (1,894)

(400)

(4) 400 69 (75)

(418)

(10) 3 418 54 (106)

(49)

.. a 5 a,

. he. i Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Issuances of long-term debt Retirements of long-term debt Increase (decrease) in short-term debt Capital contributions from FPL Group Issuances of common stock Repurchases of common stock Dividends Other -

net (404)

(2,036)

(829)

(3,269)

(415)

(541)

(987)

(1,943) 920 920 947 947 (21)

(66)

(87)

(515)

(515) 1,152 (328) 824 353 466 819 18 (18)

(150)

(150)

(377)

(377)

(366)

(314) 314 (366)

(377) 2,051 (394) 1,280 (516) 57 1,194 735 (12) 30 (65)

(47) 28 (325) 65 (232) 12 51 66 129 (16) 376 1

361 81 $

1 $

82

$ 12

$ 51 $

66 $ 129 Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year I :;=.

Cash and cash equivalents at end of year

_ i._. ' KA._

(a) Represents FPL and consolidating adjustments.

68I i P L G r o u p 2 0 0 2 A n n u a l R e p o r IFINANCIAL INFORMATION

20. QUARTERLY DATA (UNAUDITED)

Condensed consolidated quarterly financial information is as follows:

(millions, except per share amounts) 2002 March 31'^'

June 30

September 3Qe)

December 31l'"

Operating revenues Operating income Income before cumulative effect of a change in accounting principle Cumulative effect of adopting FAS 142 Net income (loss)

Earnings per share before cumulative effect of adopting FAS 142 (basic and assuming dilution),

Cumulative effect of adopting FAS 142d Earnings (loss) per share (basic and assuming dilution)(0 Dividends per share High-low common stock sales prices

$1,771

$ 256

$ 166(b)

$ (222)

$ (56)b

$2,128

$ 409

$ 250

$ 250

$2,353

$ 315(e)

$ 1i50s

$ 1 02

$2,059

$ 248

$ 129

$ 129

$ 0.98,b

$ 1.46

$ (1.31)

$ (0.33)(b)

$ 1.46

$ 0.58

$ 0.58

$60.10-51.13

$65.31 -56.30

$ 0.850

$ 0.73

$ 0.85(c)

$ 0.73

$ 0.58

$ 0.58

$60.08 - 45.00 $61.40 - 48.35 2001 Operating revenues Operating income Net income Earnings per share (basic and assuming dilution)(d' Dividends per share High-low common stock sales prices

$1,903

$2,129

$ 240'1'

$ 380

$ 110'"'

$ 219

$ 0.65P'

$ 1.30

$ 0.56

$ 0.56

$71.63 -54.81

$63.15-54.55

$2,490

$ 543

$ 334

$ 1.98

$ 0.56

$60.50-51.21

$1,804

$ 233

$ 118

$ 0.70

$ 0.56

$57.28 - 52.16 (a) In the opinion of FPL Group, all adjustments, which consist of normal recurring accruals necessary to present a fair statement of the amounts shown for such periods, have been made. Results of operations for an interim period may not give a true indication of results for the year.

(b) Includes a gain from an income tax settlement.

(c) Includes restructuring, impairment and/or other charges.

(d) The sum of the quarterly amounts may not equal the total for the year dus to rounding and changes in weighted-average number of common shares outstanding.

(e) Includes merger-related expenses.

FINANCIAL INFORMATION FPL Group 2002 Annual Report 69 SAFE HARBOR STATEMENT In connection with the safe harbor provisions of the Private Securities Utigation Refo m Act of 1995 (Reform Act), FPL Group Is hereby filing caution-ary statements Identifying important factors that could cause FPL Group's actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of FPL Group in this Annual Report, in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as will likely result, are expected to, will continue, is anticipated, estimated, projection, target, outlook) are not statements of historical facts and may be forward-looking. Forward-look-ing statements involve estimates, assumptions and uncertainties. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following Important factors (in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements) that could cause FPL Group's actual results to differ materially from those contained in forward-looking statements made by or on behalf of FPL Group.

Any forward-looking statement speaks only as of the date on which such statement is made, and FPL Group undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for manage-ment to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

The following are some important factors that could have a significant impact on FPL Group's operations and financial results, and could cause FPL Group's actual results or outcomes to differ materially from those discussed in the forward-looking statements:

FPL Group is subject to changes in laws or regulations, including the Public Utility Regulatory Policies Act of 1978, as amended (PURPA) and the Public Utility Holding Company Act of 1935, as amended (Holding Company Act),

' )

dchanging governmental policies and regulatory actions, including those of the FERC, the FPSC and the utility commissions of other states in which FPL Group has operations, and the NRC, with respect to, among other things, allowed rates of return, industry and rate structure, operation of nuclear power facilities, operation and construction of plant facilities, operation and construc-tion of transmission facilities, acquisition, disposal, depreciation and amortiza-ton of assets and facilities, recovery of fuel and purchased power costs, decommissioning costs, ROE and equity ratio limits, and present or prospec-tive wholesale and retail competition (including but not limited to retail wheel-ing and transmission costs). The FPSC has the authority to disallow recovery of costs that it considers excessive or imprudently Incurred.

• The regulatory process generally restricts FPL's ability to grow earnings and does not provide any assurance as to achievement of earnings levels.

• FPL Group is subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources and health and safety that could, among other things, restrict or limit the use of certain fuels required for the production of electricity. There are significant capital, operating and other costs associ-ated with compliance with these environmental statutes, rules and regulations, and those costs could be even more significant in the future.

• FPL Group operates in a changing market environment influenced by various legislative and regulatory Initiatives regarding deregulation, regulation or restructuring of the energy industry, including deregulation of the production and sale of electricity. FPL Group and its subsidiaries will need to adapt to these changes and may face increasing competitive pressure.

• The operation of power generation facilities involves many risks, including start up risks, breakdown or failure of equipment, transmission lines or pipelines, the dependence on a specific fuel source or the impact of unusual or adverse weather conditions (including natural disasters such as huni-canes), as well as the risk of performance below expected levels of output or efficiency. This could result in lost revenues and/or Increased expenses.

Insurance, warranties or performance guarantees may not cover any or all of the lost revenues or increased expenses, including the cost of replacement power. In addition to these risks, FPL Group's nuclear units face certain risks that are unique to the nuclear industry including additional regulatory actions up to and including shut down of the units stemming from public safety concerns, whether at FPL Group's plants, or at the plants of other nuclear operators. Breakdown or failure of an FPL Energy operating facility may prevent the facility from performing under applicable power sales agreements which, in certain situations, could result in termination of the agreement or incurring a liability for liquidated damages.

• FPL Group's ability to successfully and timely complete their power generation facilities currently under construction, those projects yet to begin construction or capital improvements to existing facilities is contingent upon many variables and subject to substantial risks. Should any such efforts be unsuccessful, FPL Group could be subject to additional costs, termination payments under committed contracts and/or the write-off of their investment in the project or improvement.

• FPL Group uses derivative instruments, such as swaps, options, futures and forwards to manage their commodity and financial market risks, and to a lesser extent, engage in limited trading activities. FPL Group could recognize financial losses as a result of volatility in the market values of these contracts, or if a counterparty fails to perform. In addition, FPL's use of such instruments could be subject to prudency challenges by the FPSC and if found imprudent, cost disallowance.

• There are other risks associated with FPL Group's nonregulated businesses, particularly FPL Energy. In addition to risks discussed elsewhere, risk factors specifically affecting FPL Energy's success In competitive wholesale markets include the ability to efficiently develop and operate generating assets, the price and supply of fuel, transmission constraints, competition from new sources of generation, excess generation capacity and demand for power.

There can be significant volatility in market prices for fuel and electricity, and there are other financial, counterparty and market risks that are beyond the control of FPL Energy. FPL Energy's inability or failure to effectively hedge its assets or positions against changes in commodity prices, interest rates, coun-terparly credit risk or other risk measures could significantly impair its future financial results. In keeping with Industry trends, a portion of FPL Energy's power generation facilities operate wholly or partially without long-term power purchase agreements. As a result, power from these facilities Is sold on the spot market or on a short-term contractual basis, which may affect the volatility of FPL Group's financial results. In addition, FPL Energy's business depends upon transmission facilities owned and operated by others; if transmission is disrupted or capacity is inadequate or unavailable FPL Energy's ability to sell and deliver its wholesale power may be limited.

• FPL Group is likely to encounter significant competition for acquisition opportu-nities that may become available as a result of the consolidation of the power industry. In addition, FPL Group may be unable to identify attractive acquisition opportunities at favorable prices and to successfully and timely complete and Integrate them.

• FPL Group relies on access to capital markets as a significant source of liquid-ity for capital requirements not satisfied by operating cash flows. The inability of FPL Group and its subsidiaries to maintain their current credit ratings could affect their ability to raise capital on favorable terms, particularly during times of uncertainty in the capital markets which, in turn, could impact FPL Group's ability to grow its businesses and would likely increase interest costs.

• FPL Group's results of operations can be affected by changes In the weather.

Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities, and can affect the production of electricity at wind and hydro-powered facilities. In addition, severe weather can be destructive, causing outages and/or property damage, which could require additional costs to be incurred.

• FPL Group Is subject to costs and other effects of legal and administrative proceedings, settlements, investigations and claims; as well as the effect of new, or changes in, tax rates or policies, rates of inflation or accounting standards.

• FPL Group Is subject to direct and indirect effects of terrorist threats and activi-ties. Generation and transmission facilities, in general, have been identified as potential targets. The effects of terrorist threats and activities Include, among other things, terrorist actions or responses to such actions or threats, the inability to generate, purchase or transmit power, the risk of a significant slow-down in growth or a decline in the U.S. economy, delay In economic recovery in the U.S., and the increased cost and adequacy of security and insurance.

• FPL Group's ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by national events as well as company-specific events.

• FPL Group is subject to employee workforce factors, including loss or retire-ment of key executives, availability of qualified personnel, collective bargaining agreements with union employees or work stoppage.

The issues and associated risks and uncertainties described above are not the only ones FPL Group may face. Additional issues may arise or become material as the energy industry evolves. The risks and uncertainties associated with these additional issues could impair FPL Group's businesses in the future.

Pl Group 2002 Annual Report FINANC

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Lewis Hay III Chairman, President and Chief Executive Officer Dennis R. Coyle General Counsel and Secretary Moray P. Dewhurst Vice President, Finance and Chief Financial Officer FLORIDA POWER & LIGHT Lewis Hay III Chairman and Chief Executive Officer Paul J. Evanson President Dennis R. Coyle General Counsel and Secretary Moray R Dewhurst Senior Vice President, Finance and Chief Financial Officer FPL ENERGY, LLC Lewis Hay III Chairman and Chief Executive Officer James L. Robo President Michael L Leighton Senior Vice President and Chief Operating Officer Mark Maisto President, Power Marketing, Inc.

Lawrence J. Kelleher Vice President, Human Resources Paul Cutler Treasurer K. Michael Davis Controller and Chief Accounting Officer James R. Higgins Vice President, Tax Mary Lou Kromer Vice President Corporate Communications Lawrence J. Kelleher Senior Vice President, Human Resources and Corporate Services Robert L. McGrath Senior Vice President, Engineering and Construction Division Armando J. Olivera Senior Vice President, Power Systems Antonio Rodriguez Senior Vice President Power Generation Division Michael O'Sullivan Senior Vice President, Development Mark R. Sorensen Vice President, Finance and Chief Financial Officer Edward F. Tancer Vice President, General Counsel andAssistant Secretary FPL FIBERNET, LLC Neil Flynn President John A. Stall Senior Vice President, Nuclear Division

'NV

1. 'ORPORATE OFFICES

~

Group, Inc.

700 Universe Blvd.

P.O. Box 14000 Juno Beach, FL 33408-0420 EXCHANGE LISTINGS Common Stock New York Stock Exchange Ticker Symbol: FPL Options American Stock Exchange Chicago Board Options Exchange Pacific Exchange Philadelphia Stock Exchange NEWSPAPER LISTING Common Stock: FPL Gp REGISTRAR, TRANSFER, AND PAYING AGENTS FPL Group Common Stock and FPL Preferred Stock FPL Group, Inc.

c/o EquiServe 0,O Box 43010 US'rov'idence, RI 02940-301 0 (888) 218-4392 Florida Power & Light CO.

First Mortgage Bonds Deutsche Bank Corporate Trust & Agency Group 648 Grassmere Park Road Nashville, TN 37211 (800) 735-7777 DUPLICATE MAILINGS Financial reports must be mailed to each account unless you instruct us otherwise.

If you wish to discontinue multiple mailings to your address, please call EquiServe.

SHAREHOLDER INQUIRIES Communications concerning transfer requirements, lost certificates, dividend checks, address changes, stock

• accounts and the dividend reinvestment plan should be directed to EquiServe:

(888) 218-4392 or www~equiserve.com Other shareholder communications to:

Shareholder Services (800) 222-4511 (561) 694-4694 (561) 694-4620 (Fax)

DIRECT DEPOSIT OF DIVIDENDS Cash dividends may be deposited directly to personal accounts at financial institutions.

Call EquiServe for authorization forms.

DIVIDEND REINVESTMENT PLAN FPL Group offers a plan for holders of common stock and FPL preferred stock to reinvest their dividends or make optional cash payments for the purchase of addi-tional common stock. Enrollment materials may be obtained by calling EquiServe or by accessing www.equiserve.com.

ONLINE INVESTOR INFORMATION Visit our expanded investor information site at www.investor~fplgroup.com to get stock quotes, earnings reports, financial releases, SEC filings and other news. You can also request and receive information via e-mail. Shareholders of record can receive secure online account access through a link to our transfer agent, EquiServe.

ELECTRONIC PROXY MATERIAL Registered shareholders may receive proxy materials electronically by accessing www.econsent.com/fpl. Beneficial share-holders should contact their brokerage firm to determine the availability of electronic proxy material distribution.

NEWS AND FINANCIAL INFORMATION Investors can get the latest news and financial information about FPL Group through our Shareholder Direct toll-tree line at (888) 375-1329. In addition to hearing recorded announcements, you can request information to be sent via mail, fax or e-mail.

ANALYST INQUIRIES Investor Relations (561) 694-4697 (561) 694-4620 (Fax)

NEWS MEDIA INQUIRIES Corporate Communications P.O. Box 029100 Miami, FL 33102-91 00 (305) 552-3888 (305) 552-2144 (Fax)

CERTIFIED PUBLIC ACCOUNTANTS Deloitte & Touche LLP 200 S. Biscayne Boulevard, Suite 400 Miami, FL 33131-231 0 SEC FILINGS Copies of filings with the Securities and Exchange Commission are available without charge by writing to FPL Group, Shareholder Services, or by accessing www.investor.fplgroup.com.

ANNUAL MEETING May 23, 2003, 1 0 a~m.

PGA National Resort 400 Avenue of the Champions Palm Beach Gardens, FL PROPOSED 2003 COMMON STOCK DIVIDEND DATES*

OPTIONAL CASH PAYMENT DATES Declaration Ex-Dividend Record Payment Qtr.Nr.

Acceptance begins Must be received by

~February 14 February 26 February 28 March 17 2nd103 May 17 June 9 (9May23 June 4 June 6 June 16 3rd/03 August 16 September 8 August 15 August 27 August29 September 15 4th/03 November 15 December 8 October 17 November 25 November 28 December 15 l st/04 February 14 March 8 ODeclaration of dividenids and dates shown are subject tothe discretion of theboard of directors of FPL Group. Dates shown are based on the assumption that paat patternswill prevail.

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Massachusetts Municipal Wholesale Electric Company Financial Statements For the years ended December 31, 2002 and 2001

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY FINANCIAL STATEMENTS WITH SUPPLEMENTARY INFORMATION DECEMBER 31. 2002 AND 2001 TABLE OF CONTENTS Page Independent Auditors' Report 1

Financial Statements Statements of Financial Position 2

Statements of Operations 3

Statements of Cash Flows 4

Notes to Financial Statements 5

K~

Supplementary Schedules Independent Auditors' Report on Supplementary Information 18 Schedule I - Project Statements of Financial Position 19 Schedule II - Project Statements of Operations 20 Schedule III - Project Statements of Cash Flows 21

. pPUCEWATERHOUSEgOPERS Ki

.PricewaterhouseCoopers LLP One International Place Boston MA 02110 Telephone (617) 478 5000 Facsimile (617) 478 3900 Report of Independent Accountants To the Board of Directors and Members of Massachusetts Municipal Wholesale Electric Company:

In our opinion, the accompanying balance sheet as of December 31, 2002 and the related statements of operations and of cash flows present fairly, in all material respects, the financial position of Massachusetts Municipal Wholesale Electric Company at December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 2001, and for the year then ended were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated March 8, 2002.

March 13, 2003

-I-

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2002 AND 2001 (In Thousands)

ASSETS 2002 200 Electric plant In service (Note 5)

Accumulated depreciation

$ 1,256,118 (634,239) 621,879 2,226 11,438 635,543

$ 1,241,219 (589,328) 651,891 6,114 11,279 669,284 Construction work in progress Nuclear fuel - net of amortization Total electric plant Special funds (Notes 2, 4 and 6)

Current assets Cash and temporary investments (Note 6)

Accounts receivable Unbilled revenues (Note 3)

Inventories Prepaid expenses Total current assets Total special funds and current assets Deferred charges Amounts recoverable under terms of the power sales agreements (Note 2)

Unamortized debt discount and expenses Nuclear decommissioning trusts Other 237,895 2,256

-7,836 7,107 14,475 6,614 38,288 276,183 234,353 13,166 29,816 5,328 282,663

$ 1,194,389 225,306 552 8,594 6,721 19,270 6,554 41,691 266,997 258,016 16,685 27,442 9,130 311,273

$ 1,247,554 LIABILITIES Long-term debt (Note 4)

Current liabilities Current maturities of long-term debt (Note 4)

Short-term debt (Note 4)

Accounts payable Accrued expenses Member and participant advances and reserves Deferred credits Commitments and contingencies (Note 9) 965,095 64,735 15,591 9,639 39,846 69,617 199,428 29,866

$ 1,194,389

$ 1,037,845 44,730 20,560 9,695 37,610 70,599 183,194 26,515

$ 1,247,554 The accompanying notes are an integral part of these financial statements.

MASSACHUSETTS MUJNICIPAL WHOLFSALF EL TECTRIC COMPANY STATEMENTS OF OPERATIONS YEARS ENDFD DECEMBER 31, 2002 AND 2001 (In Thousands) 2002 200 Revenues (Note 3)

Interest income Total revenues and interest income Operating and service expenses:

Fuel used in electric generation Purchased power Other operating Maintenance Depreciation Taxes other than income Interest expense:

Interest charges Interest charged to projects during construction (Note 2)

Total operating costs and interest expense

$ 249,504 7,944

$ 257,448 31,549 60,992 37,400 11,177 46,048 3,790 190,956 258,711 14,932 273,643 31,205 74,923 33,562 11,184 45,368 4,611 200,853 40,032 56,981 (64) 39,968 230,924 (60) 56,921 257,774 Other credits (5)

Loss on refinancing - net (Note 4)

Total costs and expenses (Increase) decrease in amounts recoverable under terms of the power sales agreements (Note 2) 230,924 26,524

$ 257,448 56,813 314,582 (40,939) 273,643 The accompanying notes are an integral part of these financial statements.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31. 2002 AND 2001 (In Thousands) 2002 2001 Cash flows from operating activities:

Total revenues and interest income Total costs and expenses, net Adjustments to arrive at net cash provided by operating activities:

Depreciation and decommissioning Amortization of debt discount and nuclear fuel Change in current assets and liabilities:

Accounts receivable Unbilled revenues Inventories Prepaid expenses Accounts payable Accrued expenses and other Member and participant advances and reserves Net cash provided by operating activities 257,448 (230,924) 273,643 (316,185) 48,314 391.

48,312 25,374 758 (386) 4,795 (60)

(56) 4,920 1,211 5,483 (5,591)

(120) 410 2,247 (982) 84,218 14,650 49,434 Cash flows from investing activities:

Construction expenditures and purchases of nuclear fuel Interest charged to projects during construction Net (increase) decrease in special funds Decommissioning trust payments, net Other Net cash provided by (used for) investing activities Cash flows from financing activities:

Payments for principal of long-term debt and short-term debt Proceeds from bonds Payments for bond and commercial paper issue costs Bond issue premium Payment for defeasance of bonds Net cash used for financing activities (17,828)

(64)

(12,589)

(2,374) 52 (32,803)

(49,699)

(12)

(49,711)

(10,168)

(60) 34,085 (3,252) 1,415 22,020 (59,215) 1,130,530 (18,565) 49,203 (1,173,770)

(71,817)

Net increase (decrease) in cash and temporary investments Cash and temporary investments at beginning of year Cash and temporary investments at end of year Cash paid during the year for interest (Net of amount capitalized as shown above) 1,704 552 2,256 30,551 (363) 915 552 49,709 The accompanying notes are an integral part of these financial statements.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31. 2002 and 2001 (1)

Nature of Operations The Massachusetts Municipal Wholesale Electric Company (MMWEC) is a public corporation and a political subdivision of the Commonwealth of Massachusetts (Commonwealth) formed to be a joint action agency and to develop a bulk power supply for its member Massachusetts municipal electric systems and other utilities. Among other things, MMWEC is authorized to construct, own, or purchase ownership interests in, and to issue revenue bonds to finance electric facilities secured by revenues received by MMvWEC in each of its Projects.

A Project is MMWEC's ownership interest in electric generation facilities (Note 5). Project revenues are derived, in part, from Power Sales Agreements (PSAs) with its members and other utilities who are Participants in a Project. The bulk power supply program consists of power purchase arrangements, power brokering services, planning and financial services, and the Projects relating to generating facilities either built and operated by MMWEC or other regional utilities.

A Massachusetts city or town having a municipal electric system, authorized by majority vote of the city or town, may become a member of MMWEC by applying for admission and agreeing to c

comply with the terms and conditions of membership as the MMIvWEC By-Laws may require.

As of December 31, 2002, twenty-two Massachusetts municipal electric systems were members. Termination of membership does not relieve a system of its PSA obligations.

(2)

Significant Accounting Policies MMWEC presents its financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) as promulgated by the Financial Accounting Standards Board (FASB). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates.

Interest Charged to Projects During Construction MMWEC capitalizes interest as an element of the cost of electric plant and nuclear fuel in process. A corresponding amount is reflected as a reduction of interest expense. The amount of interest capitalized is based on the cost of debt, including amortization of debt discount and expenses, related to each Project, net of investment gains and losses and interest income derived from unexpended Project funds.

Nuclear Fuel Nuclear fuel, net of amortization, includes MMWEC's ownership interest of spent fuel, fuel in use, in stock and in process for Millstone Unit 3 and Seabrook Station. The cost of nuclear fuel is amortized to fuel used in electric generation for each nuclear unit based on the relationship of energy produced in the current period to total expected energy production for fuel in the reactor. A provision for fuel disposal costs is included in fuel used in electric generation based upon disposal contracts with The Department of Energy (DOE).

In addition, fuel used in electric generation includes the annual assessment, under the Energy Policy Act of 1992, for the cost of decontamination and decommissioning of uranium enrichment plants operated by the DOE. Billings from the DOE will occur over the next five KYyears.

At December 31, 2002, MMWEC's share of Millstone Unit 3 and Seabrook Station unbilled assessments was $199,000 and $303,000, respectively.

These amounts are included in other deferred charges and deferred credits on the Statements of Financial Position.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 and 2001 (2)

Significant Accounting Policies (continued)

Special Funds In accordance with the General Bond Resolution (GBR) covering MMWEC's long-term debt, numerous special funds are required. The special funds, other than certain working capital funds and other funds, are invested in accordance with the provisions of the GBR which was amended and restated during 2001. Changes to the GBR are discussed in Note 4. None of these changes affect the names of the funds specified below, except each such fund is now specific to a Project.

The composition of special funds is as follows:

Fund 2002 2001 (In Thousands)

Bond Fund Interest, Principal and Retirement Account to pay principal and interest on bonds

$ 52,849

$ 17,818 Bond Fund Reserve Account set at the maximum annual interest obligation to make up any deficiencies in the Bond Fund Interest, Principal and Retirement Account 59,911 59,100 Reserve and Contingency Fund to make up deficiencies in the Bond Funds and pay for repairs and extraordinary costs 26,705 27,435 Revenue Fund to receive revenues and disburse them to other funds 61,177 90,177 Working Capital Funds to maintain funds to cover operating expenses 27,399 21,416 Other Funds 9,854 9,360 Total Special Funds

$237,895

$225,306 Cash and Temporary Investments Certain cash and temporary investment amounts used for power purchases and working capital requirements of I~M4WEC are not subject to the provisions of the GBR.

In addition to the investment securities delineated in the GBR, IMvMWEC may invest in repurchase agreements with banks where MMVWTEC has established accounts. Temporary investments have maturities of less than ninety days.

Inventories Fuel oil and spare parts inventory are recorded and accounted for by the average cost method.

At December 31, 2002 and 2001, total fuel oil inventory was valued at $4.7 and $9.7 million, and spare parts inventory amounted to $9.8 and $9.6 million, respectively.

Amounts Recoverable Under Terms of the Power Sales Agreements Billings to Project Participants are structured to recover costs in accordance with the PSAs, which generally provide for billing debt service, operating funds and reserve requirements. Expenses are reflected in the Statements of Operations in accordance with GAAP. The timing difference between amounts billed and expensed is charged or credited to amounts recoverable under terms of the PSAs. Such amounts will be recovered through future billings or an expense will be recognized to offset credit balances.

The principal differences include depreciation, fuel amortization, costs associated with canceled Projects (or assets abandoned within a Project), cost of refinancing, billing for certain interest, reserves, net unrealized

_>gains or losses on securities available for sale and other costs. Individual Projects have a cumulative deferral of costs which total $246.0 and $268.2 million and have cumulative billings in excess of costs which total

$11.6 and $10.2 million at December 31, 2002 and 2001, respectively. In accordance with the PSAs, these amounts have been offset in the Statements of Financial Position.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31. 2002 and 2001 K>

(2)

Significant Accounting Policies (continued)

Amounts Recoverable Under Terms of the Power Sales Agreements (continued)

The December 31, 2002 and 2001 balances of $234.4 and $258.0 million, respectively, reflect the Statements of Operations net decrease (increase) of $26.5 and ($40.9) million for the years then ended, the change in net unrealized gain (loss) on securities available for sale and minimum pension liability adjustments that would otherwise be recorded as other comprehensive income. These amounts were ($2.9) and $0.2 million for 2002 and 2001, respectively.

Depreciation Electric plant in service is depreciated using the straight-line method. The aggregate annual provisions for depreciation for 2002 and 2001 averaged 4% of the original cost of depreciable property.

Nuclear Decommissioning Trusts As required by the Nuclear Regulatory Commission and respective state statutes and regulations, MMWEC has funded trust funds maintained by external trustees to provide for the decommissioning activities of Millstone Unit 3 and Seabrook Station. The December 31, 2002 Millstone Unit 3 and Seabrook Station balances of $13.0 and $16.8 million, respectively, are stated at market value and are included as part of the deferred charges and deferred credits on the Statements of Financial Position.

IMMWEC's share of the estimated reserve requirement for the prompt dismantling and removal of the Millstone Unit 3 and Seabrook Station, at the expiration of their original operating licenses in 2025 and K 2026, is $28.1 and $71.3 million, respectively, in year end 2002 dollars. The new accounting standard described below could change the accounting for the decommissioning liability.

New Accounting Standards The FASB has issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs.

SFAS 143 was effective on January 1, 2003. MMWEC is currently evaluating its asset obligations related to its various Projects in accordance with SFAS 143.

The FASB issued SFAS No. 144, Accountingfor the Impairment or Disposal of Long-Lived Assets (SFAS 144), which became effective January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets.

The implementation of SFAS 144 has had no effect on MMWEC's operations or financial position.

The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) that requires entities to record a liability for costs related to exit or disposal activities when the costs are incurred. MMWEC is required to comply with SFAS 146 beginning January 1, 2003, and anticipates that the implementation of this standard will not have an impact on its operations or financial position.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 and 2001 (2)

Significant Accounting Policies (continued)

New Accounting Standards (continued)

The FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the "Interpretation") effective December 15, 2002. The Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees it has issued. It also clarifies that a guarantor is required to recognize, at the -inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The application of this Interpretation is not expected to materially impact IVMIWEC's operations, financial position or cash flows.

Adjustments to Prior Year - Unaudited MMWEC has consolidated trust assets with a fair market value of $9.4 million and recorded a corresponding increase to member and participant advances and reserves as of December 31, 2001, net of unrealized gains.

In addition, prepaid pension costs of $1.6 million were recorded, and nuclear decommissioning trust assets were increased $1.4 million to reflect their market value.

Amounts recoverable under terms of the PSAs were reduced as a result of these adjustments.

(3)

Revenues and Unbilled Revenues Revenues include electric sales for resale provided through MMWEC's bulk power supply

- program. Revenues consist of billings under the PSAs, Power Purchase Agreements (PPAs), and related

\\~. power brokering arrangements.

MMWEC also provides its members with power supply planning and related services which are billed pursuant to the MMWEC Service Agreement, or the All-Requirements Bulk Power Sales Agreement as service revenues. Amounts that are not yet billed are included in unbilled revenues on the Statements of Financial Position. Revenues are comprised of the following:

Revenues 2002 2001 (In Thousands)

Electric sales for resale

$248,022

$256,103 Service 1,482 1,482 Millstone Unit 3 Settlement 56 Other

-1.070 Total Revenues

$249,504

$258,711 In October 2001, MMWEC received a payment of approximately $1.1 million in settlement of an arbitration against Central Maine Power Company (CMP) and FPL Energy, Inc. under the W.F.

Wyman Unit No. 4 Joint Ownership Agreement. MMVWEC and the other W.F. Wyman Unit No. 4 minority owners filed a claim related to the 1999 sale of CMP's majority ownership in W.F. Wyman Unit No. 4 to FPL Energy Wyman IV LLC, which required CMP to make payments to the joint owners as a result of the sale. This payment was recorded in other revenues and as a decrease to amounts recoverable under terms of the PSAs and was refunded to the Wyman IV Project Participants in 2002.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 and 2001 (4)

Debt General Bond Resolution MMWEC has eight Projects which were originally financed through the issuance of a multiple series of Power Supply System Revenue Bonds (Bonds) under the GBR, originally adopted by MMWEC in 1976. Security for those Bonds included a pledge of the revenues derived by MMWEC from all its Project PSAs, without regard to Project or series of Bonds.

Amended and Restated General Bond Resolution In November 2001, through a refinancing of all of its outstanding Bonds, MMWEC amended and restated its GBR to eliminate this "cross-pledge" of revenues. In refinancing all of its debt, MMWEC issued separate issues of Bonds for each of the eight Projects, which are payable solely from, and secured solely by, the revenues derived from the Project to which such issue relates, plus available funds pledged under the Amended and Restated GBR, with respect to the Bonds of such issues. The revenues derived from each Project are used solely to provide for the payment of the Bonds of any Bond issue relating to such Project, and to pay MMWEC's cost of owning and operating such Project, and are not used to provide for the payment of the Bonds of any Bond issue relating to any other Project. Pursuant to all of the Project PSAs, each Project Participant is obligated to pay its share of the actual costs relating to the Project's generating unit(s), and these obligations are not contingent upon the operational status of the Project's unit(s).

As part of the plan to refund and restructure its debt and amend the existing GBR, MMWEC developed a plan to enable it to refund all the existing long-term debt, which was accomplished with two transactions. MMWEC expects to realize gross debt service savings from this debt-restructuring program of approximately $136.1 million over the life of the Bonds, with annual savings between $58,000 and $13.5 million. The January 2001 and November 2001 portions, as described below, of this restructuring program c

produced economic gains (the present value of -debt service savings adjusted for additional cash paid) of approximately $7.8 million and $38.8 million, respectively.

In January 2001, MMWEC issued $94.2 million of 2001 Series A and $1.6 million of 2001 Series B refunding Bonds which were utilized to purchase for cancellation $95.4 million of portions of the 1992 Series A, 1992 Series C, 1992 Series E, 1993 Series A, 1994 Series A and 1994 Series B Bonds. The net cost of the refinancing equalled $6 million, plus $.7 million of net expenses.

In November 2001, MMWEC issued $726.3 million of Series A Bonds at a premium of

$49.2 million, $137.7 million of Series B Bonds and $170.8 million of Series One refunding Bonds, the total proceeds of which were utilized to purchase for cancellation $1,078.3 million of previously issued Bonds consisting of the 1987 Series A, 1992 Series A, 1992 Series B, 1992 Series C, 1992 Series D, 1992 Series E, 1993 Series A, 1994 Series A, 1994 Series B, 1994 Series C and 2001 Series A Bonds. The net cost of the refinancing equaled $50.8 million, plus $1.0 million of net expenses.

Power Supply System Revenue Bonds MMWEC's issuance of debt, other than obligations with a maturity of less than one year, requires authorization by the Massachusetts Department of Telecommunications and Energy (DTE).

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31. 2002 and 2001 (4)

Debt (continued)

Power Supply System Revenue Bonds (continued)

Bonds payable consist of serial and variable-rate bonds and are comprised of the following issues:

Net Interest Cost Issue Stony Brook Peaking Project, Series A Stony Brook Intermediate Project, Series A W.F. Wyman Unit No. 4 Project, Series A Nuclear Mix No. 1, Series A Nuclear Project No. 3, Series A Nuclear Project No. 4, Series A Nuclear Project No. 5, Series A Project No. 6, Series A Nuclear Project No. 3, Series B Nuclear Project No. 4, Series B Nuclear Project No. 5, Series B Project No. 6, Series B Nuclear Mix No. 1, Series One Nuclear Project No. 3, Series One Nuclear Project No. 4, Series One Nuclear Project No. 5, Series One Project No. 6, Series One Bonds payable Unamortized premium Less: Current maturities Total long-term debt 3.1%

3.5%

3.5%

4.0%

4.2%

4.3%

4.2%

4.2%

4.9%

4.5%

3.8%

3.5%

Variable Variable Variable Variable December 31, 2002 2001 (In Thousands) 13,345 16,435 59,645 66,270 2,940 3,255 85,210 90,015 47,930 47,930 112,695 112,695 42,170 42,170 347,535 347,535 60,160 41,175 5,510 910 11,350 62,975 35,325 9,025 65,290 48,450 7,765 16,145 11,350 62,975 35,325 9,025 52.100 1,034,730 47,845 (44.730)

$ 1.037,845 Variable 52,100 990,000 39,830 (64,735)

$ 965,095 The Series A Bonds issued in November 2001 and maturing on and prior to July 1, 2011, and the Series B Bonds issued in November 2001, are not subject to redemption prior to maturity at the option of MMVWEC.

The Series A Bonds maturing on and after July 1, 2012 are subject to redemption prior to maturity at the option of MMWEC at 101% of the principal amount from January 1, 2012 to December 31, I<

2012 and at 100% from January 1, 2013 and thereafter.

The Series One Bonds of each issue are subject to redemption at the option of M[MIWEC, in whole or in part, at a redemption price of 100% of the principal amount.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31. 2002 and 2001 (4)

Debt (continued)

Power Supply System Revenue Bonds (continued)

Long-term debt maturities are as follows (In Thousands):

Series A Series B Series One Total 2003

$ 42,175

$ 22,560

$ 64,735 2004 46,305 22,665 68,970 2005 50,125 21,175 71,300 2006 51,465 18,895 70,360 2007 62,465 10,540 73,005 Thereafter 458.935 11.920 170,775 641.630

$711,470

$107,755

$170,775

$990,000 The interest rates on the Series One variable rate Bonds may be converted at the option of MMWEC to a daily, weekly, flexible, term or fixed mode. The interest rate on the Series One variable rate Bonds during 2002 and 2001 was 1.3% and 1.5%, respectively.

Debt Service Forward Delivery Agreement In 1994, MMWEC entered into a seven year Debt Service Forward Delivery Agreement (Forward Agreement) for purposes other than trading. The Forward Agreement expired on June 30, 2002.

_MIVWEC made monthly deposits to the various accounts within the Bond Fund for each Project for the semiannual payment of its debt service on its outstanding bonds for each Project. In exchange for the right to direct the investment of such monies, the counterparty paid a fixed amount to MIMWEC on a periodic basis, providing MMWEC a fixed yield that could be earned on a security with a five to seven year maturity purchased at the time the Forward Agreement was executed, while complying with the maturity limitations for investments in the Bond Fund for each Project under the terms of the GBR. The counterparty had the right to sell to vMIMWEC government obligations that mature prior to the relevant debt service payment dates during the term of the Forward Agreement.

Net Revenue Available for Debt Service In accordance with the provisions of MMWEC's Amended and Restated GBR, MMWEC covenants that it shall fix, revise and collect rates, tolls, rents and other fees and charges sufficient to produce revenues to pay all operating and maintenance expenses and principal of, premium and the interest on the Bonds and to pay all other obligations against its revenues for each Project. Revenues for each Project, which include applicable interest earnings from investments, are required to equal 1.10 times the annual debt service for each contract year ending June 30, after deduction of certain operating and maintenance expenses and exclusive of depreciation. As such, these amounts do not agree with those in the accompanying Statements of Operations. For the contract years ended June 30, 2002 and 2001, MvWEC met the Amended and Restated GBR and the original GBR debt service coverage requirements for the applicable MMWEC Projects, respectively.

-I-

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 and 2001

'--'(4)

Debt (continued)

Net Revenue Available for Debt Service (continued)

Contract Year Ended June 30, 2002 2001 Debt Service Coverage:

(In Thousands)

Revenues

$170,879

$191,732 Other Billings 587 577 Reserve and Contingency Fund Billings

-11,116 I 11.21 Total 182,582 203,430 Less: Operating & Maintenance Expenses (60,307)

(81.102)

Available Revenues Net of Expenses

$ 122275

$122,328 Debt Service Requirement

$ 111.159

$111207 Coverage (110% Required) 110%

110%

Short-Term Debt MMWEC maintains a $5 million revolving line of credit to finance temporarily certain power purchases made by MMWEC for resale under power purchase contracts. Borrowings outstanding under the line of credit were $56,000 and $0 as of December 31, 2002 and 2001, respectively. During 2002 and 2001, the maximum outstanding balance under the line of credit was $0.4 and $3.9 million, respectively. Interest charged on borrowings under the line of credit is at minus one percent of the bank's

\\

prime rate (3.25% at December 31, 2002). In addition, a commitment fee of one quarter of 1% per annum is charged on the unused portion of the line based on the average daily principal amount of the borrowing outstanding. This line of credit expires June 30, 2003, at which time MMWEC expects to be able to renew the line for an additional year.

1/4-The Series B Power Purchase commercial paper program notes are a special obligation of MMWEC payable solely from the revenues and other monies as specified in the Series B Power Purchase Resolution (Resolution). The commercial paper notes are not subject to redemption prior to maturity but are subject to acceleration upon the occurrence of an event of default under the Resolution. As of December 31, 2002, MMWEC had a bank letter of credit in the amount of $16.9 million that provides security for the

_z payment of principal and interest on the Series B Power Purchase notes. The December 31, 2002 and 2001 outstanding balances of commercial paper program notes were $15.5 and $20.6 million, respectively. At December 31, 2002, the interest rate on the Series B Power Purchase notes was 1.4%.

(5)

Electric Generation Facilities and Financing MMWEC's power supply capacity includes ownership interests in the Stony Brook Peaking and Intermediate units which it operates. MMWEC is a nonoperating joint owner in the W.F. Wyman Unit No. 4, Millstone Unit 3 and Seabrook Station. Electric plant in service also includes MMWEC's service operations which totaled $2.7 and $2.4 million in 2002 and 2001, respectively. The following is a summary of Projects included in electric plant in service and construction work in progress, as well as MMWEC's share of capability in megawatts (MW).

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY

- NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 and 2001 (5)

Electric Generation Facilities and Financing (continued)

Facility and MIIVWEC Share of Capability in MW Projects Peaking Project Intermediate Project Wyman Project Nuclear Project No. 3 Nuclear Mix No. 1 Nuclear Mix No. 1 Nuclear Project No. 4 Nuclear Project No. 5 Project No. 6 Stony Brook Stony Brook W.F. Wyman No. 4 Millstone Unit 3 Millstone Unit 3 Seabrook Station Seabrook Station Seabrook Station Seabrook Station 170.0 319.5 22.7 36.8 18.4 1.9 49.8 12.6 69.0 Amounts as of December 31 2002 2001 (In Thousands) 56,671 56,636 165,044 155,488 7,387 7,341 131,045 130,653 52,017 51,818 8,651 8,644 260,585 260,374 71,279 71,226 503.011 502,719 K1.255.690

$1,244,899 On November 1, 2002, an indirect subsidiary of FPL Group Inc., FPL Energy Seabrook, LLC completed the purchase of an approximately 88% share of the Seabrook nuclear plant from all of the joint owners of Seabrook Station, except MMWEC and two other owners.

In April 2001, Dominion Resources, Inc. purchased an approximately 93.5% ownership interest in Millstone Unit 3 from all of the joint owners of Millstone Unit 3, except MIVIMWEC and one other joint owner.

(6)

Investments and Deposits All bank deposits are maintained at one financial institution. Such deposits amounted to $1.2 million at December 31, 2002, and are included in both cash and temporary investments and special funds.

The Federal Deposit Insurance Corporation currently insures up to $100,000 per depositor. At December 31, 2002 and 2001, investments are classified as available for sale and reported at market value with unrealized gains of $2.4 and $2.3 million, respectively, and unrealized losses of $1,000 and $151,000, respectively. The net losses and gains are excluded from earnings and are reported as a component of amounts recoverable under the terms of the PSAs on the Statements of Financial Position.

At December 31, 2002, all securities underlying repurchase agreements, and all other investments, were held in MMWEC's name by custodians consisting of the Bond Fund Trustee or MMWEC's depository bank.

Investments, representing the special funds and cash and temporary investments, as well as certain additional amounts disbursed but available for investment, and accrued interest, are presented below:

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31. 2002 and 2001 (6)

Investments and Deposits (continued) 2002 2001 Amortized Market Amortized Market Type of Investment Cost Basis Value Cost Basis Value (In Thousands)

Cash Equivalents 399 399 739 739 Other Investments U.S. Treasury bills 91,948 91,951 17,904 17,902 U.S. Treasury notes 26,033 27,212 39,254 40,533 U.S. Agency bonds 100,873 102,045 127,750 128,639 U.S. Agency discount notes 17,488 17,487 33.873 33,873 Total Other Investments 236,342 238,695 218,781 220,947 Total Investments 236,741 239,094 219,520 221,686 Invested Cash 1,057 1,057 4,172 4,172 Total Cash and Investments

$237,798 8240,151 -

223,692

$225,858 During 2002 and 2001, the proceeds from the sale of available for sale securities were $386.0 and $222.4 million, respectively, resulting in gross realized gains of $395,000 and $1.0 million, respectively, and gross realized losses of $31,000 and $8,000, respectively. The basis on which cost was determined in computing realized gain or loss was specific identification. The average contractual maturity of the investments in debt securities at December 31, 2002 and 2001 was 593 and 814 days, respectively.

Due to seasonal cash flows during 2002 and 2001, MMWEC, from time-to-time, invested in repurchase agreements with its depository bank that were collateralized by securities in MMWEC's name held by the depository bank.

(7)

Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Long-Term Debt - The fair value is estimated based on quoted market prices for the same or similar issues.

Debt Service Forward Delivery Agreement - The fair value reflects the estimated amounts that MMWEC would receive to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts.

The estimated fair values of MMWEC's financial instruments are as follows:

2002 2001 Carrying

-Estimated Carrying Estimated Value Fair Value Value Fair Value (In Thousands)

~,_-Financial Liabilities:

Long-Term Debt, excluding current maturities

$ 965,095

$ 998,001

$1,037,845 $1,018,783 Unrecognized Financial Instruments Debt Service Forward Delivery Agreement 643 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 and 2001 (7)

Fair Values of Financial Instruments (continued)

The carrying amounts for cash, accounts receivable, notes payable and accounts payable approximate their fair value due to the short-term nature of these instruments.

(8)

Benefit Plans MNWEC has two non-contributory defined benefit pension plans covering substantially all full-time active employees. One plan covers union employees (union plan) and the other plan covers non-union employees (non-union plan). The amount shown below as the benefit obligation for MMWEC is a standardized disclosure measure of the present value of pension benefits, adjusted for the effect of projected salary increases, estimated to be payable in the future as a result of employee service to date. The measure is the actuarial present value of credited projected benefits and is independent of the funding method used to determine contributions to the plans.

The benefit obligation was determined by an actuarial valuation performed as of January 1 of each of the years presented below.

Significant actuarial assumptions used in the valuation include a weighted-average discount rate of 6.5% in 2002 and 7.0% in 2001 and projected salary increases of 4.0% in 2002 and 2001, respectively. The benefit obligation, plan assets, funded status, amounts recognized in the statements of financial position and components of net periodic benefit cost for both plans are as follows:

Amounts as of December 31, 2002 2001 (In Thousands)

Changes in benefit obligation Benefit obligation at beginning of year

$ 10,307

$ 8,004 Service cost 465 458 Interest cost 730 650 Actuarial loss 1,261 1,313 Benefits paid (84)

(118)

Benefit obligation at end of year 10,307 Change in plan assets Fair value of plan assets at beginning of year

$ 8,227

$ 8,119 Actual return on plan assets (792)

(336)

Employer contribution 623 562 Benefits paid (84)

(118)

Other 7

Fair value of plan assets at end of year

$ 7.981

$ 8.227 Funded status S (4,698)

$ (2,080)

Unrecognized net actuarial loss 5,541 2,949 Unrecognized prior service cost 595 661 Unrecognized transition obligation 58 73 Prepaid pension cost

$ 1,496

$ 1,603 MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31. 2002 and 2001 (8)

Benefit Plans (continued)

Amounts as of December 31, 2002 2001 (In Thousands)

Amounts recognized in the Statements of Financial Position consist of:

Prepaid benefit costs

$ 1,603 Accrued benefit liability (1,113)

Intangible asset 653 Amounts recoverable under terms of the Power Sales Agreements 1,956 Net amount recognized 1.496

$ 1.603 Components of net periodic benefit cost Service cost 465 458 Interest cost 730 650 Expected return on plan assets (721)

(689)

Amortization of transition obligation 15 15 Amortization of prior service cost 70 70 Recognized net actuarial loss 171 97 Net periodic benefit cost S

730 601 Annual contributions to the pension plans were $623,000 and $562,000, for the years ended December 31, 2002 and 2001, respectively. These amounts were billed through the PSAs, PPAs and Service Agreement with MMWEC members and are included in other operating expense in the Statements of Operations.

The union plan uses the aggregate actuarial cost method and the non-union plan uses the frozen initial liability actuarial cost method in determining pension expense. In addition to the actuarial assumptions outlined above, the assumed long-term rate of return used in determining pension expense was 8.5% in 2002 and 2001, respectively.

Pension costs applicable to prior years' service are amortized over thirty years.

MMWEC contributes to an employee savings plan administered by an insurance company.

All full-time employees meeting the service requirements are eligible to participate in this defined contribution plan. Under the provisions of the plan, MMVWEC's contributions vest immediately. MMWEC contributed $115,000 and $108,000, while the employees contributed $190,000 and $180,000 during-the years ended December 31, 2002 and 2001, respectively.

(9)

Commitments and Contingencies Power Purchases MMWEC entered into agreements for participation in the transmission interconnection between New England utilities and the Hydro-Quebec electric system near Sherbrooke, Quebec (Phase I),

which began commercial operation in October 1986. The New England portion of the interconnection was constructed at a total cost of about $140 million, of which 3.65% or $5 million is MMWEC's share to K'support Phase I. MMWEC also entered into similar agreements for participation in the interconnection between New England utilities and the Hydro-Quebec electric system for the expansion of the Hydro-Quebec interconnection (Phase II), which went into commercial operation in November 1990. MMWEC's MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 and 2001

< (9)

Commitments and Contingencies (continued)

Power Purchases (continued)

Phase II equity investment approximates 0.6% or $3.3 million. MMWEC has corresponding agreements with certain of its members and another utility to recover MMWEC's share of the costs associated with the Phase II interconnection.

On a limited basis, MIVIWEC may enter into agreements providing financial assurance to third parties. At December 31, 2002, outstanding guarantees consisted of $0.5 million related to its equity interest in the Hydro-Quebec transmission companies.

Management believes the likelihood MMWEC would be required to perform or otherwise incur any significant losses associated with this guarantee is remote.

Legal Actions MIvIWEC is involved in various legal actions. Based on bond counsel's opinions regarding the validity of the PSAs and legal counsel's representations regarding the litigation, discussions with such counsel and other considerations, management believes that the ultimate resolution of litigation in which MMWEC is currently involved will not have a material, adverse effect on the financial position of MMWEC.

Nuclear Insurance The Price-Anderson Act (the Act), a federal statute, mandates an industry-wide program of liability insurance for nuclear facilities. The Act now provides approximately $9.5 billion for public liability claims from a single incident at a nuclear facility. The $200 million primary layer of insurance for the liability has been purchased in the commercial market. Secondary coverage is to be provided through an approximately $88.1 million per incident assessment of each of the currently licensed nuclear units in the United States. The maximum assessment is $10 million per incident per unit in any year.

Under the Act, MMWEC's ownership interests in Millstone Unit 3 and Seabrook Station could result in a maximum assessment of $4.2 and $10.2 million, limited to payments of $.5 and $1.2 million per incident per year, respectively.

Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover the cost of repair, replacement, decontamination or premature decommissioning of utility property resulting from insured occurrences at Millstone Unit 3 and Seabrook Station. The NEIL insurance is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer.

MMWEC is potentially subject to a $0.9 and $2.7 million assessment for its participation in Millstone Unit 3 and Seabrook

Station, respectively, for excess property

damage, decontamination and premature decommissioning.

Environmental and Other Issues MNvflVEC is not currently covered under gradual pollution liability insurance related to MMWEC's Stony Brook power plant.

Nothing has come to management's attention concerning any material pollution liability claims made during 2002 or outstanding as of December 31, 2002.

MMWEC has established a trust fund to enhance its Directors' and Officers' liability coverage.

The purpose of the trust fund is to make available funds for the purchase of Directors' and Officers' liability insurance and/or indemnification of the Directors or Officers.

IRICLW4ATERHOUSEGCOPER X

PricewaterhouseCoopers LLP One International Place Boston MA 02110 Telephone (617) 478 5000 Facsimile (617) 478 3900 Report of Independent Accountants on Accompanying Consolidating Information To the Board of Directors of Massachusetts Municipal Wholesale Electric Company:

The report on our audit of the consolidated financial statements of Massachusetts Municipal Wholesale Electric Company as of December 31, 2002 and for the year then ended appears on page 1 of this document. That audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual companies. Accordingly, we do not express an opinion on the financial position, results of operations and cash flows of the individual companies. However, the consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.

March 13, 2003

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MASSACHUSETTS MUNICIPAL WHOLESALE ElEFCTRIC COMPANY (2

C.

I' PROJECT STATFMFNTS OF FINANCTAT. POSITION DECFMBFR 311 2002 (In Thousands)

NUCLEAR NUCLEAR NUCLEAR NUCLEAR PROJECT SERVICE MIX I PROJ. 3 PROJ. 4 PROJ. 5 NO. 6 PEAKING ASSETS Electric plant.

In service Accumulated depreciation Construction work in progress Nuclear fuel-net of amortization Total electric plant Special funds Bond funds Interest, principal and retirement account Reserve account Reserve and contingency fund Revenue fund Working capital funds Other funds Current assets Cash and temporary investments Accounts receivable Unbilled revenues Inventories Advances to (from) projects Prepaid expenses Total current assets Total special funds and current assets Deferred charges Amounts recoverable (payable) under terms of the power sales agreements Unamortized debt discount and expenses Nuclear decommissioning trusts Other INTERMEDIATE WYMAN 5

2,654 60,596 (2,299)

(29,544) 355 31.052 72 1,066 355 32,190

$ 130,959 (65,733) 65,226 86 1,903 67,215

$ 259,801 (111,526) 148,275 784 3,190 152,249 71,081 501,925 56,671 (30,604)

(217,902)

(45,066) 40,477 284,023 11,605 198 1,086 810 4,469 41,485 289,578 11,605 165,044 (126,325) 38,719 38,719 7,387 (5.240) 2,147 2,147 IlYDRO QUEBEC PIIASE 11 TOTAL 1,256,118 (634,239) 621,879 2,226 11,438 635,543 27,418 9,854 37,272 2,233 6,306 7,107 679 203 16,528 53,800 5,458 4,566 3,572 5,682 6,995 8,152 4,393 7,990 8,593 9,348 5,737 10,441 2,740 2,822 1,488 2,729 19,816 31,107 8,775 18,041 2,530 670 894 6,413 6,438 3,136 1,597 7,916 279 110 249 1,965 (19) 19,278 27,530 34,119 9,779 77,739 10,507 19,087 2,603 (19) 52,849 59,9 11 26,705 61,177 27,399 9,854 237,895 2,256 7,836 7,107 14,475 6,614 38,288 276,183 2

66 (29) 810 849 20,127 (46) 1,502 1,456 28,986 55 1,774 (55) 1,514 3,289 37,408 2

14 76 18 449 2,456 2,273 (18)

(101) 405 385 2,097 33 830 4,530 2,729 10,609 82,269 13,236 1,289 7,350 (822) 70 7,887 26,974 36 107 (13) 130 2,733 20 40 60 41 14,908 57 578 15,543

$ 69,698 52,988 1,235 4,585 Ill 58,919 111,236 82,842 2,236 8,673 157 93.908

$ 190,109 15,556 2,577 6,276 853 25,262

$ 214,919 9,418 65,501 (9,712) 771 5,588 94 1,589 8,693 216 1,182 483 11,994 80964 (9,135) 64,088 452.811 1_59'706 4,740 579 899 6,218 S

71.91 1 (1,039) 29 (1,010) 3.870 (849) 849 41 234,353 13,166 29,816 5,328 282,663

$ I,194,399 LIABILITIES Long-term debt S

93,614 S 165,323 S

186,427 56,007 S

399,316 9,308 S

52,590 2,510 S

965,095 Current liabilities Current maturities of long-term debt Short-term debt Accounts payable Accrued expenses Member and participant advances and reserves Deferred credits 15,591 2,791 8,920 42,396 69,698 6,980 383 2,275 3,789 13,427 4,195 8,840 621 2,867 4,597 16,925 7,861 9,665 1,680 7,172 3,224 21,741 6,751 3,145 427 2,002 21,395 2,347 13,835 4,415 40 334 9,840 1,158 2,240 6,083 19,321 455 169 201 535 1,360 23 18 41 64,735 15,591 9,639 39,846 69,617 199.428 29,866 798 6,568 1,609 6,372 44,145 6,398 1,709 9,350 Eon C)

Ca9In Commitments and contingencies S 69,698 S

111,236 S

190,109

$ 214,919 S

64,088 452,811 15,706 The accompanying notes are an integral part of this supplemental schedule.

71,911 3,870 41 S

1,194,389

( j (I

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MASSACTUS TTS MUNICIPAL WHO(,ALF FLECTRIC COMPANY PROJECT STATEMENTS OF OPERATIONS YEAR FNDFD DECEMBER 31.2002 (In Thousands)

NUCLEAR NUCLEAR NUCLEAR NUCLEAR SERVICE MIX I PROJ. 3 PROJ. 4 PROJ. 5 PROJECT IIYDRO QUEBEC NO. 6 PEAKING INTERMEDIATE WYMAN PHASE II TOTAL Revenues Interest income Total revenues and interest income 66,528 798 67,326 S

15,243 673 15,916

$ 21,226 1.057

$ 22,283 29,712 1,250 S

30,962 8,669 356 9,025 56,136 2,423 58,559 8,818 360 9,178

$ 42,181 867

$ 43,048 S

535 121 656 456 39 S

495 249,504 7.944 257,448 Operating and service expenses:

Fuel used in electric generation Purchased power Other operating Maintenance Depreciation Taxes other than income 60,490 1,557 38 12 2

62,099 640 1,156 2,867 5,072 829 1,453 1,990 4,184 176 306 6,502 12,171 1,746 7,358 2,653 9,526 616 21,899 443 1,910 672 2,601 156 5,782 2,433 1,664 10,302 1,797 3,674 189 18,268 2,312 853 395 35,530 6,357 22,936 6,116 1,669 6,923 1,092 38,736 531 421 232 194 1,378 50 502 502 31,549 60,992 37,400 11,177 46,048 3,790 190,956 Interest expense:

.I>-

Interest charges

° Interest charged to projects during construction Total operating costs and interest expense 406 3,809 6,386 7,765 2,292 16,412 530 2,317 115 40,032 6

3 7_____

(12)

(38)

(5)

(2)

(7) 406 3,797 6,348 7,760 2,290 16,405 530 (64) 2,317 115 39,968 41,053 1,493 502 230,924 62,505 10,299 18,519 29,659 8,072 51,935 6.887 (Increase) decrease in amounts recoverable under terms of the power sales agreements 4,821 5,617 3,764 1,303 953 6,624 2,291 67,326 15,916 S

22,283 30,962 9,025 58,559 9,178 1,995 (837)

(7) 26,524

$ 43,048 656 495 257,448

• Allocation between maintenance and other operating is not available.

The accompanying notes are an integral part of this supplemental schedule.

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MASSACH F7TS MUNICIPAL WHOTESAL E

PLECTRIC COMPANF PROJECT STATrMFNTS. Or rAqfH FlOWq C

YEAR ENDFD DECEMBER 31 2002 (In Thousands)

Cash flows from operating activities:

Total revenues and interest income Total costs and expenses, net Adjustments to arrive at net cash provided by operating activities:

Depreciation and decommissioning Amortization of debt discount and nuclear fuel Change in current assets and liabilities:

Accounts receivable Unbilled revenues Inventories Prepaid expenses Accounts payable Accrued expenses and other Member and participant advances and reserves Net cash provided by (used for) operating activities Cash flows from investing activities:

Construction expenditures and purchases of nuclear fuel -

Interest charged to projects during construction Net (increase) decrease in special funds Decommissioning trust payments, net Other Net cash provided by (used for) investing activities Cash flows from financing activities:

Payments for principal of long-term and short-term debt Payments for bond issue costs Net cash used for financing activities Net decrease in cash and temporary investments Cash and temporary investments at beginning of year Cash and temporary investments at end of year Cash paid during the year for interest (Net of amount capitalized as shown above)

SERVICE

$ 67,326 (62.505) 12 114 (235)

(386)

(74) 2,170 695 6,498 13.615 (290)

(6,476)

(196)

(6,962)

(4,969)

(4,969) 1,684 549 2,233 NUCLEAR MIX 1 15,916 (10,299) 2,234 58 248 (I)

(79)

(215)

(734)

(133) 6,995 (952)

(12)

(959)

(348) 82 (2.189)

(4,805)

(1)

(4,806)

NUCLEAR PROJ. 3 S

22,283 (18,519) 4,625 969 308 (173)

(375)

(2,291) 406 7,233 (1,767)

(38) 218 (656) 142 (2,101)

(5,130)

(5,1.32)

NUCLEAR NUCLEAR PROJECT IIYDRO QUEBEC PROJ. 4 PROJ. 5 NO. 6 PEAKING INTERMEDIATE WYMAN PHASE 11 S

30.962 $

9,025 S

58,559 9,178 S

43,048 S

656 495 (29,659)

(8,072)

(51,935)

(6,887)

(41,053)

(1,493)

(502) 10,140 2,757 19,120 2,303 1,000 110 (887)

(183) 341 101 674 194 (39) v (10)

(54) 540 132 33 183 (26)

(545)

(151)

(998)

(828) 35 136 2,756 158 (1,572)

(428)

(3,116) 831 10,795 3,501 24,302 5,280 (1,709)

(432)

(2,366)

(43)

(5)

(2)

(7)

(1,070)

(640)

(6,011)

(2,145)

(520)

(131)

(719)

(214)

(40) 41 (2)

(3,518)

(1,245)

(9,062)

(2,190)

(7,275)

(2,255)

(15,235)

(3,090)

(2)

(1)

(5)

(7,277)

(2,256)

(15,240)

(3,090) 6,891 (795)

(920) 4,227 (56) 764 4,134 (3,363) 12,877 (10,222) 3,726 245 (6,251)

(6,625)

(6,626) 232 (7) 132 101 39 (66)

(401)

(47) 769 (6) 716 (315)

(315)

S 54 21 (8)

(39) 21 (I)

(1)

TOTAL S

257,448 (230,924) 48,314 391 758 (386) 4,795 (60)

(56) 4,920 (982) 84 218 (17,828)

(64)

(12,589)

(2,374) 52 (32,803)

(49,699)

(12)

(49,711) 20 1,704 552 S

20 2,256 I

2 I

S 2

353 S

2,882 4,508 5

5,532 S

1,715 S

12,891 505 S

2,089 76 5

30,551 The accompanying notes are an integral part of this supplemental schedule.

Hudson Light and Power tbepartment Financial Statements tbecember 31, 2002 and 2001

'4V Town of Hudson, Massachusetts Office of Light and Power Department 49 Forest Avenue Hudson, MA 01749

)Years ce" (978) 568-8736 December 18, 2003 FPL Energy Seabrook Station P.O. Box 300 Seabrook, NH 03874

Dear Dave:

Enclosed is Hudson Light & Power Department Annual Report for year ending December 31, 2002 as requested.

Sincerely, Enc. 1

I HUDSON LIGHT AND POWER DEPARTMENT Financial Statements December 31, 2002 and 2001

HUDSON LIGHT AND POWER DEPARTMENT TABLE OF CONTENTS DECEMBER 31, 2002 AND 2001 Page Independent Auditors' Report 1

Management's Discussion and Analysis 24 Financial Statements:

Operating Fund:

Statements of Net Assets 5-6 Statements of Revenues, Expenses and Changes in Net Assets 7

Statements of Cash Flows 8-10 Rate Stabilization Trust Fund and Retirement Trust Fund:

Statements of Net Assets 11 Statements of Revenues, Expenses and Changes in Net Assets 12 Statements of Cash Flows 13 Notes to Financial Statements 14-27 Supplemental Information:

Independent Auditors' Report on Supplemental Information 28 Schedules of Operating Revenues 29 Schedules of Operations and Maintenance Expenses 30,31

Goulet, Salvidio & Associates, RC.

Certified Public Accountants James F. Goulet, CPA, MST Michael A. Salvidio, CPA Catherine A. Kuzmeskus, CPA James R. Dube, CPA INDEPENDENT AUDITORS' REPORT The Board of Commissioners Hudson Light and Power Department We have audited the accompanying financial statements of Hudson Light and Power Department of Hudson, Massachusetts, as of and for the years ended December 31, 2002 and 2001, as listed in the table of contents. These financial statements are the responsibility of the Department's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 'Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and v_,

significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Hudson Light and Power Department as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Department adopted the provisions of Governmental Accounting Standards Board Statement of Accounting Standards No. 34 in 2001.

The Management's Discussion and Analysis on pages two through four is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurements and presentation of the supplementary information. However, we did not audit the information and express no opinion on it.

Goulet, Salvidio & Associates, P.C.

AMiUd Jizii, &

"a/zs AC A

Worcester, Massachusetts May 16, 2003 Nine Irving Street Worcester, MA 01609 Tel: 508-757-5957 Fax: 508-753-0948

• E-mall: admin@gsamycpa.com The ENever Underestimate The Value!

MANAGEMENT'S DISCUSSION AND ANALYSIS Within this section of the Hudson Light and Power Department's annual financial report, management provides narrative discussion and analysis of the financial activities of the Hudson Light and Power Department for the years ended December 31, 2002 and 2001. The Department's performance is discussed and analyzed within the context of the accompanying financial statements and disclosures following this section.

Overview of the Financial Statements:

The basic financial statements include (1) the statements of net assets (2) the statements of revenues, expenses and changes in net assets (3) the cash flow statements and (4) notes to the financial statements.

The Statements of Net Assets are designed to indicate our financial position as of a specific point in time. At December 31, 2002, it shows our net worth has increased 1.5% compared to the year ended December 31, 2001.

The Statements of Revenues, Expenses and Changes in Net Assets summarizes our operating results and reveals how much, if any, of a profit was earned for the year. As discussed in more detail below, our net profit for December 31, 2002 and 2001 was $1,247,129 and $889,222, respectively.

The Statements of Cash Flows provides information about the cash receipts and cash payments during the accounting period. It also provides information about the investing and financing activities for the same period. A review of our Statements of Cash Flows indicates that the cash receipts from operating activities, (that is, electricity sales and related services) adequately covers our operating expenses.

Summary of Net Assets - Operating Fund 2002 2001 Current Assets Noncurrent Assets

$ 10,833,193 11.546.861

$ 11,023,390 10.782.146 S 21,805,536 Total Assets S 22,380.054 Current Liabilities Noncurrent Liabilities

$ 2,026,229 731.722

$ 2,053,920 420.538 Total Liabilities 2.757.951 Net Assets:

Restricted for Debt Service Invested in Capital Assets, Net of Related Debt Unrestricted 1,925,000 5,392,630 12.304.473 2.474.458 1,925,000 5,288,396 12.117.682 19.331.078 Total Net Assets 19.622.103 Total Liabilities and Net Assets S 21805,536 2

Summary of Changes in Net Assets - Operating Fund 2002 2001 Operating Revenues Operating Expenses

$ 31,773,059 30.918.501

$ 32,433,584 31.949.194 484,390 404.832 Operating Income Nonoperating Revenues (Expenses) 854,558 392.571 Increase in Net Assets before Transfers 1,247,129 889,222 Transfers Out - Payment in Lieu of Taxes Transfers Out - Rate Stabilization Trust Fund Claims and Judgments Beginning Net Assets (225,000)

(2,409,987) 1,678,883 19.331.078 (225,000)

(1,411,653) 353,115 19.725.394

$ 19.31.07 Ending Net Assets 1,622,103 Financial Highlights:

Operating revenues decreased by $660,525 in 2002, or 2%. This decrease in revenue can be attributed primarily to two issues: there were two rate reductions in 2002, 2.5% in March and 14% in August. There was also a 10% increase in power consumption.

Operating expenses decreased by $1,030,693 in 2002, or 3%. This decrease in expense can be attributed to the decrease in energy costs.

Utility Plant and Debt Administration:

Utility Plant Net utility plant increased by $104,234 from 2002. This increase is the difference between the current year additions of $757,562 and the annual depreciation (3%) write off of $631,094 and amortization of nuclear fuel of $22,234. During 2002, the Department upgraded the distribution system for approximately $640,000, which accounted for 87% of current year additions. The additions to the general plant accounted for the balance.

In December 2001, the Department approved a substation redesign to improve reliability by taling advantage of a second transmission line being built by National Grid. The substation redesign started in 2002 and will be completed in 2003.

Debt Administration The Hudson Light and Power Department remains a vertically integrated utility, as do all Municipal Light Departments in Massachusetts. This means that we are allowed under the Massachusetts Utility Restructuring Laws to retain our ownership and control over our electrical generation assets. Investor owned utilities, such as Massachusetts Electric Company, have been required to sell their generation assets as a result of the same restructuring laws.

3

Debt Administration - Continued The generation assets, which we have a vested interest in through a Purchase Sales Agreement along with the other municipal electrical systems in New England, are financed through municipal bonds. The collective debt service owed under these bonds stands at approximately $1.3 billion, of which Hudson Light and Power Department's share is just over $148 million.

In an effort to ensure stable costs for electricity in future years the Hudson Light and Power Department, worked with the Massachusetts Municipal Wholesale Electric Company, on a bond refinancing in 2001. This refinancing is expected to save the Hudson Light and Power Department approximately $15 million in interest over the life of the bonds.

Though we will not gain any immediate benefit from the refinancing, it is part of a longer-term, strategic effort to maintain the competitive rates and reliable electric service into the future. The bulk of the savings from the refinancing program will be used to stabilize our power costs beginning in 2010. During this timeframe competition in the power markets is expected to intensify, and reduced debt service will place us in a better position to control costs.

Significant Balances and Transactions:

Retirement Trust Fund The Retirement Trust Fund's purpose is to directly reimburse the Town of Hudson for retirement costs attributable to the Hudson Light and Power Department's retirees for whom the Town of Hudson is assessed annually by the Middlesex County Retirement System, and to satisfy the Department's anticipated future pension liabilities for it's current employees.

Rate Stabilization Trust Fund The Rate 'Stabilization Trust Fund's purpose is to fund future power supply costs for which the department is presently obligated to make, so as to eliminate or reduce future power supply costs, in order to remain competitive within the electric industry and for other supply-related issues which the Trustees designate by vote.

Depreciation Fund Hudson Light and Power Department maintains a depreciation fund, which is managed by the Town of Hudson Treasurer. This fund is used to pay for large capital investments such as new trucks and other long-term assets. Items such as these would be purchased from the operating funds, which would then be replenished by funds transferred from the depreciation fund. The depreciation fund is required by state statute.

We set aside 3% of our cost of plant annually to be used for capital improvements and additions.

Purchased Power Working Capital The purchased power working capital is an amount held by Massachusetts Municipal Wholesale Electric Company (MMWEC), our power supply agent. MMWEC requires that they hold a set amount of capital from which it may pay our power obligations when they are due. They replenish the fund as needed from our monthly invoice payments.

4

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF NET ASSETS DECEMBER 31, 2002 AND 2001 OPERATING FUND ASSETS 2002 2001 CURRENT ASSETS:

Funds on Deposit with Town Treasurer Operating Fund Petty Cash Customer Accounts Receivable Other Receivables Materials and Supplies Purchased Power Prepayments Purchased Power Working Capital 6,349,867 500 2,850,356 27,854 812,520 162,297 629,799 5,596,250 500 3,370,192 226,334 944,516 255,799 629,799 TOTAL CURRENT ASSETS 10,833,193 11,023,390 NONCURRENT ASSETS:

Funds on Deposit with Town Treasurer Depreciation Fund Depreciation Investment Fund Customer Deposits Customer Deposits - Interest Insurance Escrow Reserve Investment Utility Plant Assets, Net 413,455 4,793,790 484,542 220,496 160,000 81,948 5,392,630 292,539 4,602,207 315,891 194,696 0

88,417 5,288,396 TOTAL NONCURRENT ASSETS 11,546,861 10,782,146 21,805,536 TOTAL ASSETS 22,380,054 See Accompanying Notes to Financial Statements 5

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF NET ASSETS DECEMBER 31, 2002 AND 2001 OPERATING FUND LIABILITIES CURRENT LIABILITIES:

Accounts Payable Miscellaneous Current and Accrued Liabilities Insurance Escrow Reserve Deferred Credit - Fuel Charge TOTAL CURRENT LIABILITIES 2002 1,317,441 509,183 23,000 176,605 2,026,229 2001 1,351,631 525,684 0

176,605 2,053,920 NONCURRENT LIABILITIES:

Customer Deposits Customer Deposits - Interest Customer Advances for Construction Insurance Escrow Reserve TOTAL NONCURRENT LIABILITIES TOTAL LIABILITIES 483,537 109,085 2,100 137,000 315,981 102,457 2,100 0

731,722 420,538 2,757,951 2,474,458 NET ASSETS Restricted for Debt Service I

Invested in Capital Assets, Net of Related Debt Unrestricted 1,925,000 5,392,630 12,304,473 1,925,000 5,288,396 12,117,682 TOTAL NET ASSETS TOTAL LIABILITIES AND NET ASSETS 19,622,103 22,380,054 19,331,078 21,805,536 See Accompanying Notes to Financial Statements 6

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 I>

OPERATING FUND OPERATING REVENUES OPERATING EXPENSES:

Operations and Maintenance Depreciation Expense TOTAL OPERATING EXPENSES OPERATING INCOME NONOPERATING REVENUES (EXPENSES):

Interest and Dividend Income Interest Expense TOTAL NONOPERATING REVENUES (EXPENSES) 2002 31,773,059 30,287,407 631,094 30,918,501 854,558 392,587 (16) 392,571 2001 32,433,584 31,321,473 627,721 31,949,194 484,390 404,928 (96) 404,832 Income Before Contributions and Transfers 1,247,129 889,222 NET ASSETS - JANUARY 1 Transfers Out - Payment in Lieu of Taxes Transfers Out - Rate Stabilization Trust Fund Claims and Judgments NET ASSETS - DECEMBER 31 19,331,078 (225,000)

(2,409,987) 1,678,883 19,622,103 19,725,394 (225,000)

(1,411,653) 353,115 19,331,078 See Accompanying Notes to Financial Statements 7

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 OPERATING FUND 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES:

Cash Received from Customers 3

Cash Paid to Suppliers and Employees (2

Cash Paid for Benefits Payment in Lieu of Taxes Cash Received for Claims and Judgments Net Cash Provided by Operating Activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:

Interest Expense CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:

Purchases of Utility Plant Assets KgPurchases of Nuclear Fuel Net Cash Used in Capital and Related Financing Activities CASH FLOWS FROM INVESTING ACTIVITIES:

Rate Stabilization Reserve

(

Interest and Dividend Income Net Proceeds from Maturities (Purchases) of Investments

(

Net Cash Used by Investing Activities

(

INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS - JANUARY 1 CASH AND CASH EQUIVALENTS - DECEMBER 31 32,471,440 28,888,195)

(848,052)

(225,000) 1,678,883 4,189,076 33,802,400 (30,863,848)

(768,844)

(225,000) 353,115 2,297,823 (16)

(96)

(738,180)

(19,382)

(451,676)

(25,541)

(757,562)

(477,217) 2,409,987) 392,587 1,261,687) 3,279,087) 152,411 7,912,748 8,065,159 (1,411,653) 404,928 732,743 (273,982) 1,546,528 6,366,220 7,912,748 See Accompanying Notes to Financial Statements 8

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 OPERATING FUND RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

2002 2001 Operating Income Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities:

Depreciation Amortization of Nuclear Fuel Payment in Lieu of Taxes Cash Received for Claims and Judgments Changes in Assets and Liabilities:

(Increase) Decrease in:

Customer Accounts Receivable Other Receivables Deferred Debit - Fuel Charge Materials and Supplies Purchased Power Prepayments Purchased Power Working Capital Increase (Decrease) in:

Accounts Payable Customer Deposits Customer Deposits - Interest Tax Collections Payable Deferred Credit - Fuel Charge Miscellaneous Current and Accrued Liabilities Insurance Escrow Reserve Net Cash Provided by Operating Activities 854,558 484,390 631,094 22,234 (225,000) 1,678,883 627,721 22,649 (225,000) 353,115 519,836 198,480 0

131,996 93,502 0

(34,190) 167,556 6,628 13,330 0

(29,831) 160,000 4,189,076 (155,421)

(199,774) 1,535,547 114,316 365,388 7,028 (889,823)

(5,657) 17,516 (17,306) 176,605 86,529 0

2,297,823 See Accompanying Notes to Financial Statements 9

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 OPERATING FUND SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

The following amounts are considered to be cash or cash equivalents for the purpose of the statements of cash flows:

Operating Fund Petty Cash Depreciation Fund Depreciation Investment Fund (Note 8)

Insurance Escrow Reserve Customer Deposits Customer Deposits - Interest 2002 6,349,867 500 413,455 436,299 160,000 484,542 220,496 8,065,159 2001 5,596,250 500 292,539 1,512,872 0

315,891 194,696 7,912,748 See Accompanying Notes to Financial Statements 10

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF NET ASSETS DECEMBER 31, 2002 AND 2001 RATE STABILIZATION TRUST FUND ASSETS NONCURRENT ASSETS:

Funds on Deposit with Town Treasurer Cash and Cash Equivalents Investments TOTAL ASSETS 2002 906,093 10,114,649 11,020,742 11,020,742 2001 2,474,284 5,278,082 7,752,366 7,752,366 NET ASSETS NET ASSETS - Restricted RETIREMENT TRUST FUND ASSETS NONCURRENT ASSETS:

Funds on Deposit with Town Treasurer Cash and Cash Equivalents Investments TOTAL ASSETS 2002 3,020,403 4,166,661 7,187,064 7,187,064 2001 2,378,373 4,555,521 6,933,894 6,933,894 NET ASSETS NET ASSETS - Restricted See Accompanying Notes to Financial Statements 11

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 RATE STABILIZATION TRUST FUND NONOPERATING REVENUES (EXPENSES):

Interest Earned on Invested Funds Accrued Interest Paid at Purchase Loss from Security Redemption Annual Contribution from Operations Annual Purchased Power Stabilization Transfer NET INCOME (LOSS)

NET ASSETS - JANUARY 1 Transfers In - Operating Fund NET ASSETS - DECEMBER 31 2002 378,352 (21,484) 0 501,521 0

858,389 7,752,366 2,409,987 11,020,742 2001 439,363 (2,258)

(41) 692,322 (1,600,000)

(470,614) 6,811,327 1,411,653 7,752,366 RETIREMENT TRUST FUND NONOPERATING REVENUES (EXPENSES):

Interest Earned on Invested Funds Accrued Interest Paid at Purchase Gain from Security Redemption Annual Contribution from Operations Annual Pension Expense NET INCOME NET ASSETS - JANUARY 1 NET ASSETS - DECEMBER 31 2002 338,711 (43,858) 2,000 414,913 (458,596) 253,170 6,933,894 7,187,064 2001 481,174 (7,431) 437 384,007 (500,215) 357,972 6,575,922 6,933,894 See Accompanying Notes to Financial Statements 12

HUDSON LIGHT AND POWER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 RATE STABILIZATION TRUST FUND 2002 2001 CASH FLOWS FROM INVESTING ACTIVITIES:

Net Interest Income Net Proceeds from Maturities (Purchases) of Investments Loss on Security Redemption Appropriation from Net Assets - Operating Fund Annual Contribution from Operations Annual Purchased Power Stabilization Transfer INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS - JANUARY 1 CASH AND CASH EQUIVALENTS - DECEMBER 31 356,868 (4,836,567) 0 2,409,987 501,521 0

(1,568,191) 2,474,284 906,093 437,105 784,327 (41) 1,411,653 692,322 (1,600,000) 1,725,366 748,918 2,474,284 RETIREMENT TRUST FUND 2002

-2001 CASH FLOWS FROM INVESTING ACTIVITIES:

Net Interest Income Net Proceeds from Maturities (Purchases) of Investments Gain on Security Redemption Annual Contribution from Operations Annual Pension Expense INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS - JANUARY 1 CASH AND CASH EQUIVALENTS - DECEMBER 31 294,853 388,860 2,000 414,913 (458,596) 642,030 2,378,373 3,020,403 473,743 1,669,826 438 384,007 (500,215) 2,027,799 350,574 2,378,373 See Accompanying Notes to Financial Statements 13

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 1 - SUJMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The significant accounting policies of Hudson Light and Power Department are as follows:

Reporting Entity The Hudson Light and Power Department is a component unit of the Town of Hudson, Massachusetts. The Department purchases power from various sources and sells it to the ultimate customers at rates submitted to the Massachusetts Department of Telecommunications and Energy (DTE). The Municipal Light Board appoints a manager of municipal lighting who shall, under the direction and control of the Municipal Light Board, have fill charge of the operation and management of the Department.

Regulation and Basis of Accounting The Town of Hudson complies with Generally Accepted Accounting Principles (GAAP). The Town's reporting entity applies all relevant Governmental Accounting Standards Board (GASB) pronouncements. Proprietary funds and similar component units apply Financial Accounting Standards Board (FASB) pronouncements and Accounting Principles Board (APB) opinions issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements, in which case GASB prevails.

The Department uses the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred.

The Department adopted the provisions of Governmental Accounting Standards Board (GASB)

Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis -

for State and Local Governments in 2001.

Under Massachusetts law, electric rates of the Department are set by the Municipal Light Board and may be changed not more often than once every three months. Rate schedules are filed with the Massachusetts Department of Telecommunications and Energy (DTE). While the DTE exercises general supervisory authority over the Department, the Department's rates are not subject to DTE approval.

Depreciation The general laws of Massachusetts allow utility plant to be depreciated at an annual rate of 3%.

In order to change this rate, approval must be obtained from the Department of Telecommunications and Energy. Changes in annual depreciation rates may be made for financial factors relating to cash flow rather than for engineering factors relating to estimates of useful lives. The Department used a depreciation rate of 3% 'for 2002 and 2001.

The Department charges maintenance to expense when incurred. Replacements and betterments are charged to utility plant.

14

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 1 -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued):

Revenues Revenues from sales of electricity are recorded on the basis of bills rendered from monthly readings taken on a cycle basis. The revenues are based on rates established by the Department which are applied to the customers' consumption of electricity.

The Department has a fuel cost adjustment clause pursuant to which increased fuel costs (fuel costs in excess of amounts recovered through base rates) are billable to customers. The Department records estimated unbilled fuel adjustment charge revenue at the end of accounting periods.

Materials and Supplies Materials and supplies are valued using the average cost method.

Taxes The Department is exempt from federal and state income taxes. Although also exempt from property taxes, the Department pays amounts in lieu of taxes to the Town of Hudson. Taxes are paid to the State of New Hampshire resulting from ownership in the Seabrook, New Hampshire Nuclear Power Plant.

Use of Estimates KJ' The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents For purposes of the statements of cash flows, the Department considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Advertising The Department expenses advertising costs as incurred. At December 31, 2002 and 2001, advertising expense was $2,481 and $474, respectively.

Reclassification Certain amounts in the 2001 financial statements have been reclassified to conform with the 2002 presentation with no effect on previously reported net income.

Compensated Absences In accordance with Town and Light Department policies, employees are allowed to accumulate sick days up to a maximum of 960 hours0.0111 days <br />0.267 hours <br />0.00159 weeks <br />3.6528e-4 months <br />. Upon termination of employment with the Light Department, the employee will not be paid for accumulated sick days. Upon retirement, employees are paid up to 50% of their accumulated sick time at their regular rate of pay. The percentage is based on employee's age and number of years of service with the Light Department.

15

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 1 -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued):

Compensated Absences (continued)

Employees are permitted to carry vacation time from one year to the next. Upon termination of employment with the Light Department, the employee will be paid for unused vacation time based on the employee's base rate of pay at the time of termination. Union employees have to use their vacation by April of the following year.

Accounts Receivable The Light Department carries its accounts receivable at cost. On a periodic basis, the Department evaluates its accounts receivable. The Department's policy is to consider an invoice past due if payment has not been received by the Department within 60 days. Letters are sent out requesting payment. If payment is still not received, a shutoff process is started.

Allowance for Doubtful Accounts Accounts are charged to bad debt expense as they are deemed uncollectible based upon a periodic review of the accounts. At December 31, 2002 and 2001, no allowance for uncollectible accounts was considered necessary.

NOTE 2 - UNBILLED REVENUE:

No recognition is given to the amount of sales to customers which are unbilled at the end of the accounting period.

NOTE 3 - CONCENTRATION OF CREDIT RISK:

The Hudson Light and Power Department's deposits with the Town Treasurer are commingled and invested with deposits from other Town funds. Accordingly, it is not practical to disclose the related bank balance and credit risk of such cash deposits for the Light Department. Funds on deposit with financial institutions are subject to the insurance coverage limits imposed by the Federal Deposit Insurance Corporation (FDIC). The amount of insurance coverage for the Light Department deposits is not determinable because the limits of insurance are computed on a Town-wide basis.

NOTE 4 - INVESTMENT:

The Department owns shares of Hydro Quebec Phase II stock. The securities are stated at cost.

Fair market value approximates stated value.

16

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 5 - DEPRECIATION FUND:

Pursuant to provisions of the Commonwealth General Laws, cash in an amount equivalent to the annual depreciation expense is transferred from unrestricted funds to the depreciation fund.

Interest earned on the balance of the fund must also remain in the fund. Such cash may be used for the cost of plant, nuclear decommissioning costs, the costs of contractual commitments, and deferred costs related to such commitments which the Municipal Light Board determines are above market value.

NOTE 6 - PURCHASED POWER WORKING CAPITAL:

The purchased power working capital is an amount held by Massachusetts Municipal Wholesale Electric Company (MMWEC), our power supply agent. The implementation of the Working Capital Program began August 1, 1985. MMWEC Participants approved certain working capital amendments to the various power purchase agreements. MMWEC requires that they hold a set amoun( of capital from which it may pay our power obligations when they are due. They replenish the fund as needed from our monthly invoice payments. The income earned allocated to the Light Department will be applied as a credit to MMWEC Power Sales Billing. The balance in the fund is $629,799 as of December 31, 2002 and 2001.

NOTE 7 - MAJOR CUSTOMER:

The Department's revenues include approximately $13,136,000 and $11,744,600 billed to one major customer during 2002 and 2001, respectively. Amounts due from this customer included in accounts receivable were $983,152 and $1,082,342 at December 31, 2002 and 2001, respectively.

NOTE 8 - CASH EQUIVALENTS:

The Department's cash, cash equivalents and investments are held by the Hudson Town Treasurer. The Department's investments are classified as held to maturity and are recorded at unamortized cost plus accrued interest paid at purchase. The Depreciation Investment Fund is allocated between investments and cash equivalents as follows:

2002 2001 Investments 4,357,491 3,089,335 Cash Equivalents 436.299 1.512.,872 X Total

$ 472379 4.602207

~ gross unrealized holding gains on the U.S. Treasury Notes were $25,745 and $14,642 at

"-; ember 31, 2002 and 2001, respectively.

17

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 9 - UTILITY PLANT ASSETS:

Balance January 1, 2002 Balance December 31, 2002 Increases Decreases Capital Assets Not Being Depreciated.

Land Intangible Plant Construction in Progress 60,557 3,880 0

o 0

0 60,557 0

3,880 0

31,399 31,399 Total 64,437 31,399 0

95,836 Capital Assets Being Depreciated Production Plant Nuclear Fuel Transmission Plant Distribution Plant General Plant 7,019,902 374,556 1,598,003 10,112,193 2,306,358 1,110 19,382 5,812 571,468 128,391 (455,165) 0 (145,606)

(319,866)

(70,295) 6,565,847 393,938 1,458,209 10,363,795 2,364,454 Total 21,411,012 726,163 (990,932) 21,146,243 Less Accumulated Depreciation For:

Production Plant Nuclear Fuel Transmission Plant Distribution Plant General Plant Total Accumulated Depreciation Capital Assets Being Depreciated, Net (5,729,281)

(317,730)

(1,494,364)

(7,164,648)

(1,481,030)

(16,187,053) 5,223,959

, (167,781)

(22,234)

(11,400)

(299,849)

(152,064)

(653,328) 72,835 455,165 0

145,606 319,866 70,295 990,932 0

(5,441,897)

(339,964)

(1,360,158)

(7,144,631)

(1,562,799)

(15,849,449) 5,296,794 Utility Plant Assets, Net 5,288,396 104,234 S

0 5,392630 18

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 10 - INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT:

2002 2001 Cost of Capital Assets Acquired

$ 21,242,079

$ 21,475,449 Less: Accumulated Depreciation 15.849.449 16.187.053 Invested in Capital Assets, Net of Related Debt 5 392 630 S 5288,396 NOTE 11 - CLAIMS AND JUDGMENTS:

The vMMWEC Board of Directors voted in 2002 to refund $1,378,709 of decommissioning reserves that were deemed unnecessary for the Millstone 3 and Seabrook Projects. The Department also received $231,278 in 2002 from the Vermont Legal Settlement, $60,171 in 2002 from New England Power for adjustment of deferred taxes and ICAP Final Settlement Adjustment of $8,725. In 2001, the Department received a $278,557 refund for the Pilgrim Decommissioning settlement and $74,558 from the Mass Self Insurance Trust.

NOTE 12 - RELATED PARTY TRANSACTIONS:

In the ordinary course of business, the Department sells electricity to various town departments.

During the years ended December 31, 2002 and 2001, sales to these departments totaled

$840,444 and $904,714, respectively. At December 31, 2002 and 2001, the amounts due from these departments were $56,893 and $78,778, respectively.

The Department reimburses the town for various employee benefits and services, including health insurance and retirement. During the years ended December 31, 2002 and 2001, the total amount paid for these services was $860,990 and $807,161, respectively. The amounts payable to the town as of December 31, 2002 was $1,872 and as of December 31, 2001 was $977.

NOTE 13 - CONSTRUCTION IN PROGRESS:

The Hudson Light and Power Department is managing a project to construct a second transmission line to the substation. The project is in the preliminary phase and is to be completed in 2003. The Department has incurred costs totaling $31,399 as of December 31, 2002. Total cost of the project is approximately $1,400,000.

19

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER31, 2002 AND 2001 NOTE 14 - RISK MANAGEMENT:

Self Insurance Trust Hudson Light and Power Department participates in Mass Municipal Self Insurance Trust (the Trust) with 17 other municipal light departments for the purpose of sharing excess liability and officers' liability risks. Hudson Light and Power Department is commercially insured for

$500,000 per occurrence, with a $50,000 deductible that would be paid by the Trust. Each participating light department contributes to the Trust based on its share of the group's total kilowatt-hour sales. In 2002 and 2001, the Trust required no contributions from its members as the Trust was overfunded and experienced favorable claims experience. Payments for claims under the deductible limit are funded by trust assets or, if required, additional contributions from the participants.

NOTE 15 - MMWEC PARTICiPATION:

Town of Hudson acting through its Light Department is a Participant in certain Projects of the Massachusetts Municipal Wholesale Electric Company (MMWEC).

MMWEC is a public corporation and a political subdivision of the Commonwealth of Massachusetts created as a means to develop a bulk power supply for its Members and other utilities. MMWEC is authorized to construct, own or purchase ownership interests in and to issue revenue bonds to finance electric facilities (Projects). MMWEC has acquired ownership interests in electric facilities operated by other utilities and also owns and operates its own electric facilities. MMWEC sells all of the capability (Project Capability) of each of its Projects to its Members and other utilities (Project Participants) under Power Sales Agreements (PSAs).

Among other things, the PSAs require each Project Participant to pay its pro rata share of MMWEC's costs related to the Project, which costs include debt service on the revenue bonds issued by MMWEC to finance the Project, plus 10% of MMiWEC's debt service to be paid into a Reserve and Contingency Fund. In addition, should any Project Participant fail to make any payment when due, other Project Participants may be required to increase (step-up) their payments and correspondingly their Participants' share of Project Capability to an additional amount not to exceed 25% of their original Participants' share of the Project Capability. Project Participants have covenanted to fix, revise, and collect rates at least sufficient to meet their obligations under the PSAs.

Hudson Light and Power Department has entered into PSAs and PPAs with MMWEC. Under both the PSAs and PPAs, the Department is required to make certain payments to MMWEC payable solely from Municipal Light Department revenues. Under the PSAs, each Participant is unconditionally obligated to make payments due to MMWEC whether or not the Project(s) is completed or operating and notwithstanding the suspension or interruption of the output of the Project(s).

20

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 16 - PENSION PLAN:

The Department is a member of the Middlesex Retirement System, which, in turn is a member of the Massachusetts Contributory Retirement System, which is governed by M.G.L. c.32 of the Massachusetts General Laws. Membership in the plan is mandatory immediately upon the commencement of employment for all permanent, full-time employees. The plan is a contributory defined benefit plan for all county employees and employees of participating towns and districts except those employees who are covered by the teachers retirement board.

Massachusetts Contributory Retirement System benefits are uniform from system to system. The System provides for retirement allowance benefits up to a maximum of 80% of a member's highest three year average annual rate of regular compensation. Benefit payments are based upon a member's age, length of creditable service, level of compensation, and group classification.

A $30,000 salary cap, upon which members' benefits were calculated, was removed by the Middlesex Retirement System effective January 1, 1991. Members become vested after ten years of creditable service. A superannuation retirement allowance may be received upon the completion of twenty years of service or upon reaching the age of 55 with ten years of service.

Normal retirement for most employees occurs at age 65 (for certain hazardous duty and public safety positions normal retirement is at age 55).

A retirement allowance consists of two parts: an annuity and a pension. A member's accumulated total contributions and a portion of the interest they generate constitute the annuity. The differential between the total retirement benefit and the annuity is the pension. The average retirement benefit is approximately 80-85% pension and 15-20% annuity.

Active members contribute either 5, 7, 8, or 9% of their gross regular compensation. The percentage rate is keyed to the date upon which an employee's membership commences.

Members hired after 1978 contribute an additional 2% of annual pay above $30,000. These contributions are deposited in the Annuity Savings Fund and earn interest at a rate determined by the Public Employees' Retirement Administration's Commission (PERAC's) actuary. When a member's retirement becomes effective, his/her deductions and related interest are transferred to the Annuity Reserve Fund.

Members who become permanently and totally disabled for further duty may be eligible to receive a disability retirement allowance. The amount of benefits to be received in such cases is dependent upon several factors, including: whether or not the disability is work related, the member's age, years of creditable service, level of compensation, veterans' status, and group classification. Employees who resign from service and who are not eligible to receive a retirement allowance or are under the age of 55 are entitled to request a refund of their accumulated total contributions. In addition, depending upon the number of years of creditable service, such employees are entitled to receive either zero (0%) percent, fifty (50%) percent, or one hundred (100%) percent of the regular interest which has accrued upon those contributions.

21

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 16 - PENSION PLAN (continued):

Survivor benefits are extended to eligible beneficiaries of members whose death occurs prior to or following retirement.

The Town of Hudson is assessed annually for its share of the current year pension payments which includes the retired employees of the Town of Hudson Light and Power Department. The Department then reimburses the Town for the Department's share of this assessment. The Department paid to the Town $458,596 in 2002, $500,215 in 2001 and $507,728 in 2000.

The Plan's separately issued financial statements can be obtained by contacting Middlesex Retirement System at 25 Linnell Circle, Billerica, MA 01865.

The Department is making provisions for their share of the Town of Hudson's unfunded actuarial liability by setting up the Town of Hudson Light and Power Department Employees' Retirement Trust to which they make contributions as deemed necessary by an actuary hired every two years to analyze the trust's estimated actuarial liability and assets. In addition to its annual town assessment, the Department has set aside amounts totaling $7,187,064 and $6,933,894 as of December 31, 2002 and 2001, for the Department's anticipated future liabilities for its current employees.

NOTE 17 - RETIREMENT TRUST FUND:

The Department's cash equivalents and investments are held by the Hudson Town Treasurer. The Department's investments are classified as held to maturity and are recorded at unamortized cost plus accrued interest paid at purchase.

At December 31, 2002, the gross unrealized holding gains on the U.S. Treasury Notes were

$42,420. The gross unrealized holding gains on Certificate of Deposits were $6,115.

At December 31, 2001, the gross unrealized holding gains on the U.S. Treasury Notes were

$36,977, the gross unrealized holding losses were $3,698 and the gross unrealized holding gains on Certificate of Deposits were $4,732.

NOTE 18 - RATE STABILIZATION TRUST FUND:

The Hudson Light and Power Board of Commissioners voted (January 11, 1997) to establish a Rate Stabilization Trust Fund for the purpose of providing the necessary funds to meet future power supply costs. Under the terms of the trust any assets remaining after the final payment of Power Sales Agreement obligations will revert back to the Department.

22

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 18 - RATE STABILIZATION TRUST FUND (continued):

The Department's cash equivalents and investments are held by the Hudson Town Treasurer. The Department's investments are classified as held to maturity and are recorded at unamortized cost plus accrued interest paid at purchase.

At December 31, 2002 the gross unrealized holding gains on the U.S. Treasury Notes were

$54,962, and the gross unrealized holding gains on Certificates of Deposit were $14,698.

At December 31, 2001, the gross unrealized holding losses on the U.S. Treasury Notes were

$24,143. The gross unrealized holding gains on Certificates of Deposit were $10,098.

NOTE 19 - COMMITMENTS AND CONTINGENCIES:

Environmental Matters Hudson Light and Power Department is subject, like other electric utilities, to evolving standards administered by federal, state and local authorities relating to the quality of the environment.

These standards affect the siting of electric property, ambient air and water quality, plant safety and other environmental factors. These standards have had an impact on Hudson Light and Power Department's operations in the past and they will continue to have an impact on future operations, capital costs and construction schedules.

Mirant and Taunton Purchase Power Commitments Hudson Light and Power Department has entered into a purchase power contract with Mirant Americas Energy Marketing, LP to purchase a minimum of 5 MW of power through June 1, 2006. The power purchase contract calls for Hudson Light and Power Department to make monthly payments based on the amount of energy supplied.

Hudson Light and Power Department has entered into a unit contract with Taunton Municipal Light Plant for power through life of the Cleary 9 unit (2012). The power purchase contract calls for Hudson Light and Power Department to make certain monthly payments based on their percent share of the operations of the unit, regardless of actual energy generated.

The estimated contract entitlements required are as follows:

For years ended December 31, 2003 2,424,800 2004 2,430,320 2005 2,424,800 2006 1,243,520 2007 410,000 2008-2012 2.050.000 10983440 Total 23

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 19 - COMMITMENTS AND CONTINGENCIES (continued):

MMWEC Commitments and Litigation Through its participation in MMWEC, the Hudson Light and Power Department is contingently liable on the various Projects in which they participate as detailed below.

MMWEC has eight Projects. MMWEC originally financed all eight Projects through the issuance of multiple series of revenue bonds under the General Bond Resolution adopted by MMWEC in 1976 (GBR). Security for these bonds included a pledge of the revenues derived by MMWEC from all its Project PSAs, without regard to Project or series of bonds. In 2001, through a refinancing of all of its outstanding bonds, MIMWEC amended and restated its GBR to eliminate this "joint-pledge" of revenues. In refinancing its debt, MMWEC issued a separate issue of bonds for each of the eight Projects, which are payable solely from, and secured solely by, the revenues derived from the Project to which such issue relates plus available funds pledged under the Amended and Restated GBR with respect to the bonds of such issue. The M1vWEC revenues derived from each Project are used solely to provide for the payment of the bonds of any bond issue relating to such Project and to pay MMWEC's cost of owning and operating such Project and are not used to provide for the payment of the bonds of any bond issue relating to any other Project.

MMWEC operates the Stony Brook Intermediate Project and the Stony Brook Peaking Project fossil-fueled power plants. MMWEC has a 22.7 MW interest in the W.F. Wyman Unit No. 4 plant, owned and operated by subsidiaries of Florida Power & Light and a 4.8% ownership interest in the Millstone Unit 3 nuclear unit operated by Dominion Nuclear Connecticut, Inc.

(DNCI) a subsidiary of Dominion Resources, Inc. DNCI has stated its intention to file an application with the Nuclear Regulatory Commission (NRC) for an extension of the Millstone Unit 3 operating license, which currently will expire in 2025. DNCI has not yet filed its application with the NRC.

MMWEC's 11.6% ownership interest in the Seabrook Station nuclear generating unit which represents a substantial portion of its plant investment and financing program. On November 1, 2002, an indirect subsidiary of FPL Group Inc.,

PL Energy Seabrook, LLC purchased an approximate 88% share in the Seabrook nuclear plant from seven other owners. MMWEC is now one of three, minority non-operating owners of the Seabrook Station.

Pursuant to the PSAs the MMviWEC Seabrook and Millstone Project Participants are liable for their proportionate share of the costs associated with decommissioning the plants, which is being funded through monthly Project billings. The Project Participants are also liable for their proportionate share of the uninsured costs of a nuclear incident that might be imposed by the Price-Anderson Act. By its terms, the Price-Anderson Act expired in August 2002. Congress is currently considering extending the Act.

24

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 NOTE 19 - COMMITMENTS AND CONTINGENCIES (continued):

In November 1997, the Commonwealth of Massachusetts enacted legislation effective March 1, 1998 to restructure the electric utility industry. MMWEC and the municipal light departments, including the Massachusetts Project Participants, are not specifically subject to this legislation.

However, it is management's belief that industry restructuring and customer choice promulgated by the legislation will have an effect on MNviWEC and the Participant's operations.

MMWEC is involved in various legal actions. In the opinion of management, the outcome of such litigation or claims will not have a material adverse effect on the financial position of the Department.

As of December 31, 2002, total capital expenditures amounted to $1,499,827,000, of which

$162,911,000 represents the amount associated with the Department's Project Capability.

MMWEC's debt outstanding for the Projects and PPAs included Power Supply System Revenue Bonds and commercial paper notes totals $1,005,535,000, of which $107,986,000 is associated with the Department's share of Project Capability and PPAs. As of December 31, 2002, MNMWEC's total future debt service requirement on outstanding bonds issued for Projects and commercial paper notes for the PPAs is $1,333,835,000, of which $148,389,000 is anticipated to be billed to the Department.

The aggregate amount of Hudson Light and Power Department's required payments under the PSAs and PPAs, exclusive of the Reserve and Contingency Fund billings, to MMWEC at December 31, 2002 and estimated for future years is shown below.

For years ended December 31, 2003 2004 2005 2006 2007 2008-2012 2013-2017 2018-2019 TOTAL ANNUAL COSTS 11,317,000 11,343,000 11,341,000 11,343,000 11,349,000 49,397,000 40,085,000 2.214.000 148 389 000 In addition, the Department is required to pay its share of the Operation and Maintenance (O&M) costs of the Projects in which they participate. The Department's total O&M costs including debt service under the PSAs were $13,737,000 and $17,240,000 for the years ended December 31, 2002 and 2001, respectively.

25

(

HUDSON LIGHT AN vVER DEPARTMENT NOTES TO FINANKIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (000)

C PERCENTAGE SHARE TOTAL PROJECT EXPENDITURES TO DATE PARTICIPANTS SHARE DEBT ISSUED

& OUTSTANDING 12/31/02 TOTAL DEBT SERVICE ON BONDS OUTSTANDING PARTICIPANTS SHARE PARTICIPANTS SHARE Stony Brook Peaking Project Stony Brook Intermediate Project Nuclear Mix No. 1-SBK Nuclear Mix No. 1-MLS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL Commercial Paper Program S

56,840 S

161,988 15,056 512 111,341 3,784 137,876 2,206 314,433 13,301 85,900 1,599 7,563 700 608,830 140,809 1,499,827 S

162,911 S

OPERATION &

MAINTENANCE PARTICIPANTS 12/31/01 SHARE 11,762 S

46,235 1,881 64 15,620 531 29,084 465 32,372 1,369 9,390 175 2,434 225 62,310 14,411 S

211,088 17,240 S

S 13,345 59,645 11,502 391 85,058 2,891 171,065 2,737 189,195 8,003 56,705 1,055 2,940 272 400,545 92,637 S

990,000 s

107,986 S

15,535 S

OPERATION &

MAINTENANCE PARTICIPANTS 12/31/02 SHARE 8,967 38,404 1,515 51 12,528 426 20,388 326 25,812 1,092 7,582 141 1,498 139 49,993 11,562 S

166,687 13,737 S

S-S 11,569 63,580 14,521 493 107,391 3,650 231,357 3,701 256,494 10,850 76,581 1,425 3,058 283 553,392 127,987 S

1,317,943 S

148,389 s

15,892 S

PERCENTAGE SHARE Stony Brook Peaking Project Stony Brook Intermediate Project Nuclear Mix No. 1-SBK Nuclear Mix No. I-MLS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL Commercial Paper Program 26

(

HUDSON LIGHT AND POWER DEPARTMENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (000)

(

2003 ANNUAL COST 2004 ANNUAL COST 2005 ANNUAL COST PERCENTAGE SHARE PARTICIPANTS SHARE PARTICIPANTS SHARE PARTICIPANTS SHARE Stony Brook Peaking Project Stony Brook Intermediate Project Nuclear Mix No. I-SBK Nuclear Mix No. I-MLS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL Commercial Paper Program 4,920 12,874 1,361 46 10,066 342 16,867 270 19,255 814 5,991 112 559 52 41,860 9,681 113,753 11,317 15,892 S

2006 ANNUAL COST PARTICIPANTS SHARE S

12,428 1,361 46 10,064 342 16,955 271 19,926 843 6,109 114 528 49 41,847 9,678 109,218 11,343 s

S 4,569 S

12,875 1,357 46 10,039 341 16,929 271 19,847 840 6,094 113 563 52 41,855 9,680 S

114,128 S

11,343 S

2007 ANNUAL COST PARTICIPANTS SHARE 9,262 1,361 46 10,067 342 16,972 272 19,939 843 6,107 114 586 54 41,845 9,678 S

106,139 S

11,349 S

S S

2,080 12,873 1,357 46 10,036 341 16,947 271 19,903 842 6,099 114 523 48 41,848 9,679 111,666 11,341 S

AFTER 2007 PARTICIPANTS SHARE S-3,268 7,724 263 57,119 1,942 146,687 2,346 157,624 6,668 46,181 858 299 28 344,137 79,591 S

763,039 91,696 S-PERCENTAGE SHARE Stony Brook Peaking Project Stony Brook Intenediate Project Nuclear Mix No. 1-SBK Nuclear Mix No. 1-MLS Nuclear Project No. 3-MLS Nuclear Project No. 4-SBK Nuclear Project No. 5-SBK Wyman Project Project No. 6-SBK 3.3984 3.3984 1.5997 4.2300 1.8613 9.2536 23.1278 TOTAL Commercial Paper Program 27

Goulet, Salvidio & Associates, PC.

Certified Public Accountants L

James F. Goulet, CPA, MST Catherine A. Kuzmeskus, CPA Michael A. Salvidio, CPA James R. Dube, CPA INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL INFORMATION The Board of Commissioners Hudson Light and Power Department Our audits were made for the purpose of forming an opinion on the financial statements of Hudson Light and Power Department for the years ended December 31, 2002 and 2001, which are presented in the preceding section of this report. The supplemental information presented on pages 29-31 is for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Goulet, Salvidio & Associates, P.C.

3 Soi k

£oia 6 &A"";~AZ& e Worcester, Massachusetts May 16, 2003 Nine Irving Street

• Worcester, MA 01609 Tel: 508-757-5957 Fax: 508-753-0948 E-mall: admin@gsamycpa.com The wENevm Underestirnate The Value

HUDSON LIGHT AND POWER DEPARTMENT SCHEDULES OF OPERATING REVENUES FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 K>

2002 2001 Sales to Residential Customers Sales to Commercial Customers Sales to Power Customers Private Property Lighting Sales Municipal Sales Hudson Street Lights Hudson Municipal Buildings Hudson Municipal Power All Electric Municipal Buildings Stow and Berlin Street Lights Stow, Maynard and Other Municipal Services 6,831,927 1,829,846 13,364,798 79,699 7,171,091 1,849,972 12,947,863 88,763 115,089 68,934 367,082 380,759 7,468 98,271 113,012 74,863 384,240 400,122 8,108 102,418 Total Revenue from Sales of Electricity 23,143,873 23,140,452 Power Adjustment Charges Residential Sales Commercial Sales Power Sales Private Property Lighting Municipal Power Adjustment Charges Street Lighting Stow, et al Municipal Power Hudson Municipal Commercial Hudson Municipal Power Stow, et al Municipal Commercial Stow, et al Municipal All Electric Fuel Charge Adjustment Total Power Adjustment Charges Other Income Other Electric Revenues 1,674,164 478,916 6,102,549 16,174 1,290 139,755 18,230 28,157 3,819 109,750 0

1,953,390 602,488 6,702,800 21,192 1,655 168,100 23,550 33,142 4,946 127,997 (390,710) 8,572,804 9,248,550 56,382 44,582 TOTAL OPERATING REVENUES 31,773,059 32,433,584 See Independent Auditors' Report on Supplemental Information 29

HUDSON LIGHT AND POWER DEPARTMENT SCHEDULES OF OPERATIONS AND MAINTENANCE EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 2002 2001 PRODUCTION EXPENSES:

Nuclear Power Generation:

Operation Supervision Fuel Coolants and Water Steam Expenses Electric Expenses Miscellaneous Nuclear Power Expenses Maintenance Supervision Maintenance of Structures Maintenance of Reactor Plant Equipment Maintenance of Generation and Electric Plant 18,691 31,797 2,008 18,378 473 46,240 10,517 2,816 17,185 14,359 18,997 29,512 1,746 14,414 81 38,033 8,797 2,269 6,602 10,794 Total Nuclear Power Generation Expenses Other Power Generation:

Operation Supervision Fuel-Oil Fuel-Natural Gas Generation Expenses Generation Expenses-Lube Miscellaneous Other Power Generation Expenses Maintenance Supervision Maintenance of Structures Maintenance of Generation and Electric Plant Total Other Power Generation Expenses TOTAL PRODUCTION EXPENSES 162,464 131,245 34,820 50,612 99,142 81,463 4,116 125,006 35,819 245,346 77,536 33,977 75,394 67,934 73,398 4,164 152,915 33,529 73,387 111,318 753,860 626,016 916,324 757,261 PURCHASED POWER EXPENSES:

Purchased Power-Entitlement Purchased Power-Nepex System Control and Load Dispersion 20,228,582 4,312,311 7,544 22,474,256 3,939,007 7,723 TOTAL PURCHASED POWER EXPENSES 24,548,437 26,420,986 K>

See Independent Auditors' Report on Supplemental Information 30

i HUDSON LIGHT AND POWER DEPARTMENT SCHEDULES OF OPERATIONS AND MAINTENANCE EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 2002 2001 TRANSMISSION EXPENSES DISTRIBUTION EXPENSES:

Operation Supervision and Engineering Station Expenses Overhead Line Expenses Underground Line Expenses Street Lighting and Signal Expenses Meter Expenses Customer Installation Expenses Miscellaneous Distribution Expenses Maintenance Supervision and Engineering Maintenance of Station Equipment Maintenance of Overhead Lines Maintenance of Underground Lines Maintenance of Line Transformer Maintenance of Street Lighting Maintenance of Meters TOTAL DISTRIBUTION EXPENSES J.GENERAL EXPENSES:

Supervision Meter Reader Expenses Customer Records and Collection Expenses Uncollectible Accounts Miscellaneous Sales Expenses Administrative and General Salaries Office Supplies and Expenses Outside Services Employed Property Insurance Injuries and Damages Employee Pension and Benefits General Advertising Expense Miscellaneous General Expenses Maintenance of General Plant Transportation Expenses TOTAL GENERAL EXPENSES REAL ESTATE AND OTHER TAXES TOTAL OPERATIONS AND MAINTENANCE 1,856,552 1,463,054 36,534 34,778 140,382 155,092 13,812 11,247 6,553 858 10,788 9,681 96,005 83,907 4,758 4,487 1,482 4,700 39,784 35,831 10,304 5,282 377,084 361,619 23,078 13,599 16,774 16,433 9,018 11,953 2,018 403 788,374 749,870 15,692 15,544 60,148 62,451 245,307 228,896 131,696 46,946 15,827 11,374 494,436 465,060 17,388 15,387 87,335 88,367 36,387 28,844 75,033 59,558 848,052 768,844 2,481 474 34,148 34,361 51,229 54,052 48,044 32,296 2,163,203 1,912,454 14,517 17,848 30,287,407 31,321,473 See Independent Auditors' Report on Supplemental Information 31