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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, for FPL Group, Inc. and its primary subsidiary, Florida Power & Light Company (FPL). FPL Group operates through two main reportable segments: FPL, a rate-regulated electric utility serving Florida, and FPL Energy, a non-regulated subsidiary engaged in independent power generation and development. The filing includes unaudited condensed consolidated financial statements and management discussion regarding regulatory developments, market risks, and capital resources.

Key Financial Metrics

Note: Net Income for the six months ended June 30, 2002, includes a one-time after-tax charge of $222 million due to the adoption of FAS 142 (Goodwill and Other Intangible Assets).

Material Changes vs. Prior Period

• Revenue: Consolidated operating revenues increased 3.8% for the quarter ($2,248M vs. $2,166M) but decreased slightly for the six-month period ($4,092M vs. $4,107M). FPL's retail base revenues increased due to warmer weather and higher customer usage, partially offset by a 7% rate reduction effective April 2002. FPL Energy revenues grew due to new wind assets.
• Profitability: Adjusted earnings (excluding non-recurring items) increased for both the quarter and six-month periods. Reported Net Income for the six months dropped significantly year-over-year ($194M vs. $329M) primarily due to the $222M goodwill impairment charge under FAS 142.
• Expenses: Fuel and purchased power costs decreased for the six-month period ($1,894M vs. $2,005M) due to lower fuel prices. However, Other Operations and Maintenance (O&M) expenses increased due to higher employee benefits, insurance, and nuclear maintenance costs.
• Balance Sheet: Total assets increased to $18.15 billion from $17.46 billion. Cash and cash equivalents rose significantly to $384 million from $82 million at year-end 2001, driven by financing activities and operating cash flow.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• FPL Energy Market Conditions: Management notes a decline in the wholesale energy market since early June 2002, characterized by deteriorating forward prices and reduced liquidity. This makes risk management and contracting more difficult. FPL Energy is reconsidering the extent of its commitment to new power plant development.
• Capital Expenditures: FPL projects capital expenditures of approximately $820 million for the remainder of 2002. FPL Energy expects total capital expenditures through 2005 to range between $3.4 billion and $4.4 billion, including the $837 million acquisition of Seabrook Nuclear Generating Station.
• Regulatory: The Florida Public Service Commission (FPSC) approved a new retail base rate settlement in April 2002, though an appeal was filed by the South Florida Hospital & Healthcare Association. FPL intends to contest the appeal.

Risks and Contingencies

• Adelphia/Olympus Note: FPL Group holds a $127 million note receivable from Olympus (an Adelphia subsidiary), which is currently in default following Adelphia's Chapter 11 bankruptcy filing. Collectibility is uncertain.
• MCI Leveraged Leases: FPL Group has approximately $63 million invested in leveraged leases with MCI, which filed for Chapter 11 bankruptcy in July 2002. The impact on these investments is being evaluated.
• FPL FiberNet: Due to the decline in the telecommunications industry, FPL FiberNet revised its capital expenditure forecast downward and is assessing the recoverability of its $350 million fiber network and inventory.
• Legal Proceedings: Several lawsuits are pending, including derivative suits regarding executive compensation related to the failed Entergy merger and a Clean Air Act action involving the Scherer Unit No. 4 (in which FPL owns a 76% interest).

Investor Verification Checklist

• FAS 142 Impact: Verify the long-term implications of the $222 million goodwill impairment charge on FPL Energy's future earnings and asset valuation.
• Wholesale Market Exposure: Assess the risk to FPL Energy's earnings given the reported decline in wholesale electricity prices and the company's reduced ability to hedge or contract output.
• Contingent Liabilities: Monitor the status of the $127 million Olympus note receivable and the $63 million MCI leveraged lease investments following their respective bankruptcies.
• Regulatory Appeals: Track the outcome of the South Florida Hospital & Healthcare Association's appeal of the FPSC rate settlement, which could impact FPL's revenue recovery.
• Capital Commitments: Review the progress and funding requirements for the $837 million Seabrook acquisition and the $1.6 billion buildout of fossil-fueled projects.