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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1998, for FPL Group, Inc. and its principal subsidiary, Florida Power & Light Company (FPL). The registrants are Florida-based electric utility companies engaged in the generation, transmission, distribution, and sale of electric energy. FPL Group also holds independent power investments through FPL Energy, Inc.

Key Financial Metrics (FPL Group Consolidated)

Amounts in millions, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 7.5% for the three months and 2.8% for the nine months ended September 30, 1998, compared to 1997. This was driven by a 5.3% increase in energy usage per retail customer (three months) and 1.9% customer growth, largely attributed to weather conditions.
• Profitability: Net income rose 9.5% for the quarter and 8.1% for the nine-month period. Growth was primarily fueled by improved results from FPL Energy's independent power investments and higher FPL customer usage, partially offset by increased depreciation and O&M expenses.
• Expense Trends: Fuel, purchased power, and interchange expenses decreased year-over-year for both periods. However, "Other operations and maintenance" expenses increased due to spending on distribution system reliability. Depreciation and amortization increased due to higher base revenues.
• Capital Structure: Interest charges and preferred stock dividends declined due to reductions in average debt and preferred stock balances. FPL Group repurchased 856,200 shares of common stock during the nine-month period.

Outlook, Risks, and Management Commentary

• Regulatory Environment: The Florida Public Service Commission (FPSC) deferred a recommendation to reduce FPL's regulatory return on equity and equity ratio, directing parties to negotiate a settlement by December 1, 1998. Failure to settle may lead to a formal proceeding.
• Nuclear Decommissioning: Updated studies indicate a $536 million deficiency in the nuclear decommissioning reserve. FPL proposes to recover this through a special amortization program while maintaining the annual expense accrual at $85 million.
• Capital Expansion: FPL announced plans to accelerate power generation expansion, including repowering two existing plants by 2001 and 2003 and building two new gas-fired units at the Martin power plant within ten years. Capital expenditures for 1998 are estimated at $600 million.
• Year 2000 Compliance: Approximately 60% of necessary modifications have been tested. Total estimated costs are $50 million, with 20% incurred through September 30, 1998. Management anticipates completion by mid-1999.
• Legal Proceedings: Significant litigation includes a dispute with qualifying facility plant owners (antitrust claims dismissed, summary judgment pending) and a suit by the Florida Municipal Power Agency (FMPA) regarding transmission service. FPL Group believes it has meritorious defenses.
• Market Risk: An interest rate swap was undesignated as a hedge in Q3 1998. A hypothetical 10% decrease in interest rates would increase the fair value of an interest rate lock agreement by $13 million.

Investor Verification Checklist

• Verify the outcome of the FPSC negotiations regarding the regulatory return on equity and equity ratio by December 1, 1998.
• Monitor the status of the $536 million nuclear decommissioning reserve deficiency and the FPSC's approval of the recovery mechanism.
• Track progress on the $600 million 1998 capital expenditure budget and the timeline for the Martin power plant expansion.
• Review developments in the FMPA transmission service litigation and the qualifying facility plant owner dispute.
• Assess the impact of the Year 2000 compliance costs and any potential service disruptions as the deadline approaches.