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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1999, for FPL Group, Inc. and its subsidiary Florida Power & Light Company (FPL). FPL Group operates through two primary segments: FPL, a regulated electric utility, and FPL Energy, an unregulated energy generation subsidiary. The filing includes a Safe Harbor statement regarding forward-looking statements and notes that FPL Energy was converted to a limited liability company effective September 30, 1999.

Key Financial Metrics (Nine Months Ended Sept 30, 1999)

Capital Structure: Total capitalization for FPL Group was $8.675 billion, with common shareholders' equity of $5.358 billion. FPL Group repurchased 1.57 million shares of common stock during the nine-month period.

Material Changes vs. Prior Period

• Revenue Decline: FPL Group operating revenues decreased to $4.918 billion from $5.030 billion in the prior year. FPL retail base revenues declined due to a rate reduction agreement effective April 1999 and warmer weather in 1998 reducing usage comparisons.
• Net Income Stability: Despite lower revenues, FPL Group net income remained nearly flat at $577 million (vs. $571 million prior year). This stability was driven by non-operating items offsetting operational changes.
• Impairment Loss: FPL Energy recorded a $176 million pre-tax impairment loss ($104 million after-tax) in Q2 1999 related to fossil assets acquired from Central Maine Power Company (CMP). This reduced year-to-date EPS by $0.61.
• Investment Gain: FPL Group Capital recorded a $149 million gain ($96 million after-tax) from the sale of Adelphia Communications Corporation stock in Q1 1999.
• Expense Reductions: Depreciation and amortization expenses decreased significantly due to lower special depreciation under the new rate agreement ($103 million YTD 1999 vs. $238 million YTD 1998).

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management attributes earnings growth primarily to FPL Energy's improved results and new projects, excluding the one-time impairment and investment gain. FPL's earnings are supported by cost control and lower depreciation, though retail revenues are capped by the three-year rate reduction agreement with the Florida Public Service Commission (FPSC).

Unusual Items and Contingencies

• Settlement of Litigation: In October 1999, FPL settled a lawsuit with the Florida Municipal Power Agency (FMPA). The settlement is expected to reduce FPL's fourth-quarter 1999 net income by approximately $42 million.
• Subsequent Gain: In October 1999, FPL Group Capital redeemed an interest in a cable limited partnership, resulting in an after-tax gain of approximately $66 million.
• Year 2000 Readiness: The company estimates total Year 2000 costs at $40 million, with 83% spent by September 30, 1999. Risks include potential temporary service disruptions due to fuel, water, or telecommunications failures.

Risks

Key risks include regulatory actions by FERC and FPSC regarding rates and nuclear operations, weather conditions (hurricanes), and the impact of wholesale/retail competition. The company also faces potential liabilities from ongoing litigation regarding qualifying facilities, though management believes defenses are meritorious.

Investor Verification Checklist

• Rate Agreement Impact: Verify the long-term revenue implications of the $350 million annual retail base rate reduction and the revenue-sharing thresholds.
• Impairment Details: Review the discounted cash flow analysis used to determine the fair value of the Maine fossil assets and the $176 million impairment charge.
• Q4 Earnings Impact: Confirm the $42 million reduction in Q4 1999 net income due to the FMPA settlement.
• Debt Maturities: Monitor the $230 million in FPL bonds maturing in July 1999 and the company's refinancing activities.
• Year 2000 Costs: Assess the remaining 17% of estimated Year 2000 costs and the adequacy of contingency plans for supply chain disruptions.