ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Northeast Utilities (NU) and its subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The company operates in two primary segments: the Utility Group (regulated electric and gas utilities) and NU Enterprises (competitive energy marketing, generation, and services).

Key Financial Metrics (Six Months Ended June 30, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 30% ($719 million) driven by higher wholesale revenues at NU Enterprises and increased retail sales volumes in the Utility Group.
• Profitability Surge: Net income increased 83% ($40 million). This was primarily due to a turnaround at NU Enterprises, which moved from a $29.7 million loss in 2002 to a $17.1 million profit in 2003. The 2002 prior period included $10 million in after-tax write-downs and $13 million in investment tax credits that were absent in 2003.
• Utility Group Decline: Despite the consolidated gain, Utility Group net income decreased $21.2 million year-over-year due to the absence of investment tax credits, lower pension income, and the sale of the Seabrook nuclear unit in late 2002.
• Cash Flow Reduction: Operating cash flows decreased $126.4 million, largely due to a $190.6 million tax payment related to the gain on the sale of Seabrook and changes in working capital.

Guidance, Outlook, and Risks

Management Guidance

• 2003 Full Year EPS: NU projects net income between $1.10 and $1.30 per share.
• Segment Outlook: Utility Group is projected at $1.05–$1.15 per share; NU Enterprises at $0.15–$0.25 per share.
• Capital Expenditures: Projected at approximately $600 million for 2003.

Key Risks and Contingencies

• Standard Market Design (SMD) & LMP Costs: Implementation of SMD in New England created significant incremental Locational Marginal Pricing (LMP) costs. CL&P incurred $62 million in incremental costs from March–June 2003. Management expects total 2003 incremental costs to be between $170 million and $180 million. Responsibility for these costs (utility vs. supplier) is currently before the FERC, with a decision expected in early 2004.
• NRG Energy Bankruptcy: NRG filed for Chapter 11 bankruptcy in May 2003. NU has exposures regarding standard offer service contracts, station service payments, and congestion charges. While management does not expect a material adverse effect on consolidated financials, liquidity impacts are possible pending resolution.
• Credit Ratings: Moody's and Fitch placed NU and CL&P on a negative outlook due to higher forecasted capital spending and NRG contract termination efforts.
• Pension Income: Expected to decline from $73 million in 2002 to $32 million in 2003, reducing pretax earnings by approximately $29 million.

Investor Verification Checklist

• LMP Cost Resolution: Monitor the FERC decision on who bears the $170M+ in incremental LMP costs (CL&P customers vs. suppliers like Select Energy).
• NRG Exposure: Track the outcome of bankruptcy proceedings regarding the $7.9 million in excess spot market costs and station service disputes.
• Pension Liability: Verify the impact of the projected $41 million decline in pension income on 2003 earnings targets.
• Capital Spending: Confirm the execution of the $600 million capital plan, specifically the $200M–$500M transmission projects in Connecticut.
• Dividend Sustainability: Assess the ability to maintain the increased dividend ($0.15/share declared for Q3) given the negative credit outlook and lower pension income.