ES

Business Context and Reporting Period

Company: Northeast Utilities (NU) and its subsidiaries (The Connecticut Light and Power Company, Public Service Company of New Hampshire, Western Massachusetts Electric Company, and North Atlantic Energy Corporation).

Reporting Period: Fiscal year ended December 31, 1999.

Overview: NU is a holding company for one of the 20 largest electric utility systems in the U.S., serving approximately 30% of New England's electric needs. The system is undergoing significant restructuring in Connecticut, Massachusetts, and New Hampshire, transitioning from integrated utilities to transmission and distribution companies while divesting generation assets. NU operates competitive businesses in energy marketing (Select Energy), energy management (HEC), and telecommunications (Mode 1).

Key Financial Metrics

Revenue and Profit: The filing text does not provide consolidated revenue or net income figures for the NU system for 1999; these are incorporated by reference from the Annual Report to Shareholders. However, specific subsidiary data is available:

• Select Energy: Recorded revenues of $554.9 million and a net loss of $38.8 million in 1999.
• NU Parent Company: Reported earnings of $34.2 million ($0.26 per share) for 1999, driven primarily by equity in earnings of subsidiaries ($56.8 million).
• Dividends: NU resumed common share dividends in 1999, paying 10 cents per share in December 1999 and declaring a quarterly dividend of 10 cents per share in January 2000.

Debt and Liquidity:

• Total Debt: Total NU system debt (including short-term and capitalized leases) was $3.3 billion as of December 31, 1999, down from $3.9 billion in 1998.
• Short-Term Debt: Total short-term indebtedness to unaffiliated lenders was $278 million at year-end 1999.
• Credit Facilities: NU maintains a $350 million revolving credit facility. CL&P and WMECO maintain a $500 million facility.
• Equity Ratios: NU's consolidated common equity ratio was 35.31% at year-end 1999, exceeding the 30% covenant requirement.

Material Changes vs. Prior Period

• Merger Activity: On October 13, 1999, NU agreed to merge with Consolidated Edison, Inc. (Con Edison) for approximately $3.8 billion in cash and stock, subject to regulatory approval and divestiture of nuclear assets. On March 1, 2000, NU completed the acquisition of Yankee Energy System, Inc. for $478 million.
• Asset Divestitures: In December 1999, CL&P sold 2,235 MW of fossil-fueled generation assets for $460 million. In March 2000, CL&P and WMECO transferred hydroelectric assets to a new subsidiary (NGC) for approximately $865 million combined.
• Regulatory Restructuring: Connecticut and Massachusetts restructuring legislation mandated rate reductions and the unbundling of generation from distribution. New Hampshire reached a settlement agreement (pending approval) to resolve restructuring litigation, requiring PSNH to write off $225 million of stranded costs.
• Operational Performance: Retail sales grew 3.8% in 1999 due to weather and economic factors. Nuclear units (Millstone 2, Millstone 3, Seabrook) returned to service after extended outages, achieving high capacity factors in the latter half of 1999.

Guidance, Outlook, and Risks

Outlook and Financing Plans:

• 2000 Capital Requirements: Estimated at $947.3 million, primarily for construction ($309.7 million), nuclear fuel ($74.2 million), and debt maturities ($419.0 million).
• Securitization: NU expects to securitize stranded costs in Connecticut, Massachusetts, and New Hampshire in 2000, potentially generating over $2.5 billion to retire debt and preferred stock.
• Con Edison Merger: Closing is targeted for July 2000 or December 31, 2000, contingent on the sale of Millstone 2 and 3 interests.

Risks and Contingencies:

• Regulatory Approval: The Con Edison merger and New Hampshire restructuring settlement are subject to approval by state regulators, FERC, SEC, and NRC.
• Stranded Costs: Recovery of stranded costs is critical to financial stability. CL&P faces a potential $50 million impairment loss if it cannot recover certain nuclear capital costs.
• Competitive Markets: Select Energy faces intense competition and volatile power prices, resulting in significant losses in 1998 and 1999.
• Environmental Liabilities: NU has recorded approximately $24.8 million in liabilities for environmental remediation at known sites, with potential for higher costs.
• Legal Proceedings: Ongoing litigation includes shareholder class actions regarding nuclear outages and the Con Edison merger, as well as disputes with minority owners of Millstone 3.

Investor Verification Checklist

• Merger Closing Conditions: Verify the status of the Con Edison merger, specifically the divestiture of Millstone 2 and 3 interests and regulatory approvals.
• Stranded Cost Recovery: Confirm the final regulatory decisions on stranded cost recovery in Connecticut, Massachusetts, and New Hampshire, and the timing of securitization bond issuances.
• Competitive Subsidiary Performance: Monitor Select Energy's ability to return to profitability given the volatile New England power market.
• Debt Covenants: Review compliance with debt covenants, particularly the common equity ratio and interest coverage ratios, as restructuring proceeds.
• Environmental Reserves: Assess the adequacy of the $24.8 million environmental reserve against potential future remediation costs at Superfund and state-designated sites.