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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1999, for FPL Group, Inc. and its subsidiary Florida Power & Light Company (FPL). The registrants are Florida-based electric utility companies. The filing includes a combined report for both entities, with FPL Group serving as the parent holding company. As of March 31, 1999, FPL Group had 180,164,535 shares of common stock outstanding.

Key Financial Metrics

FPL Subsidiary Specifics: FPL reported Net Income Available to FPL Group of $104 million for Q1 1999 compared to $103 million in Q1 1998. Operating revenues for FPL were $1,359 million.

Material Changes vs. Prior Period

• Net Income Surge: FPL Group net income nearly doubled to $209 million from $108 million. This increase was primarily driven by a one-time $149 million pre-tax gain ($96 million after-tax) from the sale of Adelphia Communications Corporation stock.
• Operating Performance: Operating income decreased slightly to $208 million from $218 million due to higher fuel costs ($506 million vs. $436 million) and increased depreciation/amortization ($279 million vs. $249 million), partially offset by lower other operations and maintenance expenses.
• Revenue Growth: Operating revenues increased 5.5% to $1,412 million, driven by a 1.2% increase in energy usage per customer and a 1.9% increase in customer accounts.
• Liquidity Improvement: Cash and cash equivalents increased significantly to $548 million from $187 million at year-end 1998, supported by strong operating cash flows of $680 million.

Guidance, Outlook, and Risks

Regulatory Agreement

In March 1999, the Florida Public Service Commission (FPSC) approved a three-year agreement effective April 15, 1999. Key terms include:

• A $350 million reduction in annual revenue from retail base operations.
• Lowered authorized Return on Equity (ROE) range to 10% to 12% (previously 11% to 13%).
• Revenue sharing mechanisms requiring refunds to customers if revenues exceed specific thresholds.
• Termination of the previous special amortization program, replaced by a discretionary special depreciation allowance of up to $100 million annually.

Impairment Warning

Following the April 7, 1999, acquisition of Central Maine Power Company's (CMP) non-nuclear assets, management anticipates recording an impairment loss of $160 million to $180 million ($95 million to $107 million after-tax) in the second quarter of 1999. This is expected to reduce 1999 earnings per share by $0.56 to $0.63.

Risks and Contingencies

• Litigation: FPL is defending against a lawsuit by the Florida Municipal Power Agency (FMPA) seeking $140 million in damages plus treble damages for alleged antitrust violations. FPL also faces a dispute with owners of two qualifying facilities involving potential counterclaims of approximately $2 billion, though antitrust claims were dismissed in October 1998.
• Year 2000 Compliance: Approximately 90% of necessary modifications have been implemented. Total estimated costs are not expected to exceed $50 million.
• Nuclear Liability: FPL maintains $200 million in private liability insurance and participates in industry retrospective payment plans. Catastrophic losses could exceed insurance coverage.

Investor Verification Checklist

• Adelphia Gain: Verify the sustainability of earnings given the $149 million one-time gain from the Adelphia stock sale.
• CMP Impairment: Monitor Q2 1999 results for the anticipated $160-$180 million impairment charge related to the CMP acquisition.
• Regulatory Impact: Assess the long-term impact of the new FPSC agreement, specifically the $350 million annual revenue reduction and the lowered ROE cap.
• Debt Management: Review the company's strategy for retiring high-cost debt, evidenced by the $125 million debenture redemption and new bond issuances.
• Litigation Exposure: Track the status of the FMPA antitrust suit and the qualifying facilities dispute, which involve significant potential liabilities.