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Business Context and Reporting Period

This Form 10-K is a combined annual report for FPL Group, Inc. (a public utility holding company) and its principal subsidiary, Florida Power & Light Company (FPL), for the fiscal year ended December 31, 1998. FPL is a regulated utility serving approximately 3.7 million customer accounts in Florida, generating roughly 96% of FPL Group's operating revenues. FPL Group's other operations, primarily conducted through FPL Energy, Inc., focus on independent power projects and unregulated energy generation.

Key Financial Metrics

Profitability & Margins: FPL Group's net income increased 7.4% year-over-year. FPL reported a retail regulatory return on common equity (ROE) of 12.6% in 1998, within its allowed range of 11% to 13%. Operating margins were impacted by higher depreciation and amortization expenses due to a special regulatory amortization program.

Liquidity: Cash and cash equivalents totaled $187 million at year-end. The company maintains $1.9 billion in available bank lines of credit. A funded storm reserve of $259 million is held to mitigate financial impacts from storm losses.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 4.6% to $6.661 billion, driven by an 8.0% increase in total energy sales (kwh) and improved results from FPL Energy's independent power projects.
• Expense Increases: Other operations and maintenance (O&M) expenses rose to $1.284 billion, primarily due to costs associated with improving distribution system reliability. Depreciation and amortization increased significantly to $1.284 billion (from $1.061 billion) due to the FPSC-approved special amortization program.
• Debt Reduction: Long-term debt decreased by approximately $602 million as the company reduced debt and preferred stock balances by $1.0 billion over the past three years, partially offset by the cost of terminating interest rate swap agreements.
• Capital Expenditures: Total capital expenditures were $946 million (FPL: $617 million; FPL Energy: $329 million), reflecting investments in distribution reliability and new power plants in the Northeast.

Guidance, Outlook, Risks, and Contingencies

Regulatory Outlook: In December 1998, a proposed settlement with the Florida Public Service Commission (FPSC) suggested a lower allowed ROE range (10.2% to 12.2%) for 1999. However, FPL withdrew from this settlement in February 1999. In January 1999, the Office of Public Counsel petitioned for a full rate proceeding, the outcome of which is uncertain.

Capital Plan: FPL projects capital expenditures of approximately $2.8 billion for the 1999-2001 period, including $910 million in 1999. Plans include repowering units at Fort Myers and Sanford and building three new gas-fired units.

Legal Contingencies:

• Qualifying Facilities Litigation: FPL is defending against counterclaims of approximately $2 billion from owners of two qualifying facilities that failed to achieve commercial operation. Antitrust claims were dismissed in October 1998.
• FMPA Antitrust Suit: The Florida Municipal Power Agency (FMPA) seeks $140 million in damages and injunctive relief regarding transmission service. The case is pending after the FERC declined to issue a declaratory ruling.
• Central Maine Acquisition: FPL Energy is involved in litigation regarding a $846 million contract to purchase Central Maine Power Company's non-nuclear assets, citing FERC rulings as a material adverse effect.

Other Risks:

• Year 2000 Compliance: Estimated costs are capped at $50 million. Approximately 80% of modifications were tested and implemented by year-end.
• Deregulation: Potential shifts from cost-based to market-based regulation could impact the recoverability of regulatory assets and long-term power purchase commitments.
• Nuclear Decommissioning: Updated studies indicate a reserve deficiency of approximately $535 million for nuclear decommissioning, which FPL proposes to recover through the special amortization program.

Investor Verification Checklist

• Regulatory Settlement Status: Verify the outcome of the FPSC rate proceeding initiated by Public Counsel in January 1999 and its impact on the allowed ROE for 1999.
• Legal Exposure: Monitor the status of the $2 billion counterclaim from qualifying facility owners and the FMPA antitrust suit for potential material adverse effects.
• Central Maine Transaction: Confirm the resolution of the litigation regarding the $846 million Central Maine asset purchase and whether the deal will proceed.
• Decommissioning Reserve: Track FPSC approval of the proposed recovery mechanism for the $535 million nuclear decommissioning reserve deficiency.
• Year 2000 Readiness: Confirm completion of confirmatory testing at St. Lucie Unit No. 1 scheduled for the October 1999 refueling outage.