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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2000, for FPL Group, Inc. and its principal subsidiary, Florida Power & Light Company (FPL). The filing represents a combined report for the utility holding company and the regulated utility. FPL Group operates primarily through two segments: FPL (rate-regulated utility) and FPL Energy (non-regulated energy generation). A significant corporate development is the July 30, 2000, agreement to merge with Entergy Corporation, expected to close in late 2001.

Key Financial Metrics (Nine Months Ended Sept 30, 2000)

Segment Performance (Nine Months 2000): FPL contributed $553 million to net income, while FPL Energy contributed $12 million. Corporate and Other contributed $74 million.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 6.2% year-over-year, driven by higher energy sales and increased customer accounts (up 2.5%), partially offset by rate reduction agreements and revenue refund accruals.
• Profitability: Net income rose 10.7% to $639 million. This improvement is largely due to increased earnings at FPL and FPL Energy, excluding non-recurring items in 1999 (a $176 million impairment loss in FPL Energy and a $149 million gain on Adelphia stock sales).
• Expense Trends: Fuel and purchased power costs increased significantly ($1,992 million vs. $1,788 million) due to unanticipated rises in oil and natural gas prices. However, depreciation and amortization expenses decreased due to lower special depreciation charges.
• Cash Flow: Operating cash flow declined 30.5% to $1,055 million, primarily due to higher fuel costs and timing differences, despite strong earnings.
• Liquidity: Short-term debt increased substantially to $1,178 million (from $464 million) to fund unrecovered fuel costs and capital expansion. Commercial paper increased by $597 million.

Guidance, Outlook, Risks, and Unusual Items

• Merger with Entergy: FPL Group and Entergy agreed to a merger creating WCB Holding Corp. FPL Group shareholders will own 57% of the combined entity. The deal requires shareholder and regulatory approval, expected by late 2001. FPL Group expects to incur approximately $47 million in additional expenses related to change-in-control provisions upon approval.
• Fuel Cost Recovery: Under-recovered fuel costs totaled $491 million as of September 30, 2000. FPL has filed with the Florida Public Service Commission (FPSC) to recover these costs over a two-year period starting January 2001, rather than the typical one-year period.
• Legal Settlements: FPL reached a conditional settlement regarding a dispute with two qualifying facilities for $222.5 million plus security deposits. The FPSC approved the settlement in October 2000, though a protest was filed in November. FPL expects to recover this cost over five years starting in 2002.
• Regulatory Risks: FPL is participating in the formation of a Regional Transmission Organization (RTO) called GridFlorida. Additionally, the "Energy 2020 Study Commission" is developing a state energy plan, with recommendations due in December 2001.
• Accounting Changes: FPL Group expects to adopt FAS 133/138 in the first quarter of 2001, which will impact the accounting for derivative instruments and hedging activities. The cumulative effect on earnings has not been estimated.

Investor Verification Checklist

• Fuel Cost Recovery Approval: Verify the FPSC's final ruling on the proposal to recover $491 million in under-recovered fuel costs over two years.
• Merger Timeline: Monitor the status of shareholder and regulatory approvals for the Entergy merger and the associated $47 million in expected transaction costs.
• Legal Settlement Finality: Confirm the resolution of the protest filed against the FPSC's approval of the $222.5 million qualifying facility settlement.
• Short-Term Debt Levels: Track the reduction of the $1,178 million in debt due within one year, which was elevated due to commercial paper issuance for fuel costs.
• FAS 133/138 Impact: Review the Q1 2001 filing for the cumulative effect of the new accounting standard on derivatives and hedging.