NEE

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2002, for FPL Group, Inc. (FPL Group) and its principal subsidiary, Florida Power & Light Company (FPL). FPL Group is a public utility holding company operating primarily in Florida. Its business is divided into three segments: FPL (rate-regulated utility), FPL Energy (non-rate regulated independent power projects), and Corporate and Other (including FPL FiberNet). As of December 31, 2002, FPL Group employed 11,577 persons.

Key Financial Metrics

Note: Reported 2002 Net Income includes a $222 million cumulative effect of adopting FAS 142 (Goodwill) and $127 million in restructuring/impairment charges.

Material Changes vs. Prior Period

• Net Income Decline: Consolidated net income decreased by approximately $308 million (39%) compared to 2001. This decline was driven primarily by non-recurring charges totaling $389 million after tax, including the adoption of FAS 142 ($222 million), impairment and restructuring charges ($127 million), and charges related to wind projects and leveraged leases.
• Segment Performance:
  • FPL (Utility): Net income available to FPL Group increased to $717 million from $679 million in 2001, driven by higher retail base revenues and lower depreciation/interest expenses, partially offset by higher O&M costs.
  • FPL Energy: Reported a net loss of $169 million compared to net income of $113 million in 2001. The loss was due to a $365 million goodwill impairment charge and $120 million in restructuring charges resulting from the decision to exit fossil-fueled greenfield development.
  • Corporate & Other: Reported a net loss of $75 million, primarily due to $104 million in impairment charges related to FPL FiberNet assets and a $48 million reserve for leveraged leases with MCI.
• Rate Agreement: A new rate agreement effective April 2002 reduced retail base rates by approximately 7% ($250 million annual reduction) but included a revenue sharing mechanism.
• Acquisition: FPL Energy acquired an 88.23% interest in the Seabrook nuclear station in November 2002.

Guidance, Outlook, and Risks

• Outlook: Management expects FPL Energy's 2003 earnings to be subject to variability due to commodity prices and weather. FPL Energy targets having approximately 75% of its capacity under contract or hedged for 2003. FPL Energy expects project restructuring activities to contribute 10-15% to its 2003 net income.
• Capital Expenditures: Projected capital expenditures for 2003-2007 are estimated at $5.9 billion for FPL and $1.8 billion for FPL Energy. FPL Energy plans to add 700 to 1,200 MW of wind generation by the end of 2003.
• Regulatory Risks:
  • GridFlorida: Proceedings regarding the Regional Transmission Organization (RTO) for Florida are stayed pending an appeal to the Supreme Court of Florida.
  • Rate Appeal: The South Florida Hospital and Healthcare Association has appealed the FPSC's approval of the 2002-2005 rate agreement.
  • Environmental: Potential impacts from multi-pollutant legislation and climate change initiatives could be material.
• Legal Contingencies:
  • Executive Compensation Litigation: Multiple shareholder lawsuits seek the return of $62 million in payments made to officers under the Long Term Incentive Plan (LTIP) related to a failed merger with Entergy. A special committee recommended dismissal, but a potential repayment of up to $9 million is under discussion regarding interpretation of the LTIP.
  • Adelphia/Olympus Note: FPL Group holds a $127 million note receivable from Olympus (subsidiary of Adelphia) which is in default. While an evaluation indicated no impairment, ultimate collectibility is not assured.
  • Wind Project Status: Regulatory issues regarding the qualifying facility status of two wind projects could result in the termination of long-term power sales agreements.

Investor Verification Checklist

• Adjusted Earnings: Verify the "Adjusted Net Income" of $831 million (excluding FAS 142 and restructuring charges) to assess core operational performance versus the reported $473 million.
• FPL Energy Restructuring: Confirm the strategic shift away from fossil-fueled greenfield development and the impact of the $485 million in impairment/restructuring charges on future growth.
• Regulatory Rate Agreement: Monitor the status of the appeal against the 2002-2005 rate agreement, which mandates a 7% rate reduction and revenue sharing.
• Executive Compensation Litigation: Track the resolution of the shareholder lawsuits regarding the $62 million LTIP payments and the potential $9 million repayment.
• Adelphia Exposure: Review the status of the $127 million defaulted note receivable from Olympus/Adelphia and the likelihood of recovery.
• Wind Project Contracts: Assess the risk of losing qualifying facility status for two wind projects and the potential loss of long-term power sales agreements with Southern California Edison.