ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2000, for Northeast Utilities (NU) and its subsidiaries, including The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), and North Atlantic Energy Corporation (NAEC). The filing also details the financial results of the recently acquired Yankee Energy System, Inc. (Yankee), which was acquired on March 1, 2000.

Key Financial Metrics (Six Months Ended June 30, 2000)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 34% year-over-year, driven primarily by a 275% increase in unregulated energy service revenues ($916.1 million vs. $244.5 million) and the inclusion of Yankee revenues.
• Profitability Surge: Net income increased 364% to $86.8 million. This was fueled by strong nuclear unit performance (Millstone 3 achieved a 100% capacity factor) and improved results in unregulated businesses.
• Acquisition Impact: The acquisition of Yankee resulted in a 5-cent per share dilutive impact on earnings for the quarter due to share issuance and short-term debt financing. However, Yankee contributed $99 million in revenues for the six-month period.
• Cash Flow Dynamics: Operating cash flow decreased 43% to $267.2 million, primarily due to a 5% retail rate reduction at CL&P and changes in working capital. Investing cash outflows increased significantly due to the $260.3 million cash payment for the Yankee acquisition and hydroelectric asset transfers.
• Debt Structure: Short-term debt increased by $756 million to finance the Yankee merger and hydroelectric asset transfers, while long-term debt and preferred stock retirements totaled $483.3 million.

Guidance, Outlook, and Risks

• Merger with Con Edison: NU expects to complete its proposed merger with Consolidated Edison, Inc. (Con Edison) in 2000. The Federal Energy Regulatory Commission (FERC) approved the merger on May 31, 2000. A settlement agreement with the New Hampshire Public Utilities Commission (NHPUC) was filed, guaranteeing PSNH customers 75% of net merger-related savings after a 33-month fixed rate period.
• Nuclear Asset Divestiture: On August 7, 2000 (subsequent to the reporting period), NU subsidiaries reached an agreement to sell the Millstone nuclear units to Dominion Resources Inc. for approximately $1.3 billion. Proceeds will be used to reduce stranded costs and capital structures.
• Restructuring: NU aims to securitize over $2 billion of stranded costs in 2000 to reduce capitalization and buyout purchased-power contracts. PSNH rates are scheduled to decrease by 5% on October 1, 2000.
• Risks:
  • Market Risk: Unregulated subsidiaries face exposure to commodity price fluctuations. Select Energy has significant fixed-price contracts for standard offer loads.
  • Regulatory Risk: The merger and restructuring plans are subject to approvals from multiple state and federal agencies (DOJ, NRC, SEC).
  • Legal Proceedings: Ongoing DOJ investigation into the New England wholesale market for Installed Capability.

Investor Verification Checklist

• Merger Completion: Verify the final regulatory approvals for the Con Edison merger and the specific terms of the New Hampshire settlement agreement.
• Millstone Sale: Confirm the closing of the $1.3 billion sale of Millstone units to Dominion Resources and the allocation of proceeds.
• Debt Refinancing: Monitor the refinancing of the $756 million increase in short-term debt, which is due in late 2000 and early 2001.
• Unregulated Performance: Assess the sustainability of the unregulated energy segment's profitability given the volatility in wholesale energy markets.
• Rate Reductions: Track the impact of the 5% rate reduction at CL&P and the upcoming 5% reduction at PSNH on future cash flows.