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Business Context and Reporting Period

This Form 10-Q is a combined quarterly report for FPL Group, Inc. and its primary subsidiary, Florida Power & Light Company (FPL), for the period ended September 30, 2001. FPL Group operates as a holding company with two primary reportable segments: FPL (a rate-regulated electric utility) and FPL Energy (a non-regulated energy generation subsidiary). The filing includes unaudited financial statements and management discussion regarding operations, regulatory proceedings, and market risks.

Key Financial Metrics (Nine Months Ended Sept 30, 2001)

Note: FPL Group consolidated figures include FPL Energy and Corporate segments. FPL figures represent the regulated utility operations.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 27% year-over-year (from $5,225 million to $6,636 million), driven primarily by higher fuel costs passed through to customers and increased energy sales.
• Profitability: Net income rose 4% to $663 million. FPL's net income increased due to customer growth and lower depreciation, partially offset by higher O&M expenses and interest charges. FPL Energy's earnings benefited from a growing portfolio and higher margins in the Northeast.
• Expense Increases: Fuel, purchased power, and interchange expenses surged to $3,247 million (from $1,992 million in 2000) due to rising commodity prices. Interest charges increased to $250 million (from $201 million) to fund capital expansion.
• Accounting Changes: Adoption of FAS 133 (Derivatives) resulted in a $4 million gain for the nine-month period. Merger-related expenses of $30 million were recorded in the first nine months of 2001.

Guidance, Outlook, Risks, and Contingencies

Regulatory and Operational Outlook

• Rate Proceedings: FPL filed minimum filing requirements for a base rate proceeding in October 2001. Hearings are scheduled for April 2002, with potential rate changes effective April 2002.
• Storm Fund: FPL petitioned to increase its annual storm fund accrual to $50.3 million and establish a $500 million reserve objective. The current reserve stands at approximately $256 million.
• RTO Participation: The Florida Public Service Commission (FPSC) deemed the formation of GridFlorida prudent but requires a modified proposal. FPL is participating in discussions for a Southeast Regional Transmission Organization (RTO).

Material Risks and Contingencies

• California Utility Exposure: FPL Energy has significant exposure to Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) due to the California energy crisis. Approximately $14 million in receivables are past due. PG&E is in Chapter 11 bankruptcy; an agreement with SCE is contingent on its financing plan. Total net investment in California projects is approximately $290 million.
• Legal Proceedings: The EPA has sued Georgia Power (in which FPL owns a 76% interest) regarding Clean Air Act violations at the Scherer Unit No. 4. FPL believes it has meritorious defenses.
• Market Risk: A hypothetical 40% decrease in gas/power prices and 25% decrease in oil prices would result in a negative fair value of $61 million for FPL Group's derivative instruments.
• September 11 Impact: FPL noted a decline in load demand due to reduced tourism in Florida following the terrorist attacks, though the lasting economic impact remains unclear.

Investor Verification Checklist

• California Receivables: Verify the status of PG&E's reorganization plan and SCE's financing plan, as these directly impact the collectability of ~$14 million in past-due receivables and the valuation of $290 million in assets.
• Storm Fund Approval: Monitor the FPSC vote (scheduled for November 19, 2001) on the proposed increase in the storm fund accrual and reserve objective.
• Base Rate Outcome: Track the April 2002 hearings regarding FPL's base rate proceeding, which will determine future revenue recovery mechanisms.
• Derivative Accounting: Review the impact of the FASB's revised conclusions on derivative accounting (effective Jan 1, 2002), which may require fair value recording of power purchase/sales contracts.
• Capital Commitments: Confirm progress on the $3.3 billion capital expenditure forecast for 2001-2003, particularly the $1.1 billion committed by FPL Energy for independent power projects.