ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1998, for NEST Utilities (NU) and its wholly-owned subsidiaries: 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 NU system provides electric service in Connecticut, New Hampshire, and western Massachusetts. The filing includes restated financial data for 1997 to reflect an SEC-mandated change in accounting for nuclear compliance costs.

Key Financial Metrics (Six Months Ended June 30, 1998)

Material Changes vs. Prior Period

• Profitability Improvement: NU reported a net loss of $11.7 million for the first six months of 1998, a significant improvement from the restated loss of $46.1 million in the same period of 1997. Second-quarter 1998 results turned profitable ($6.3 million) compared to a $47.0 million loss in Q2 1997.
• Cost Reductions: Nonfuel operation and maintenance costs decreased by approximately $140 million in Q2 1998 compared to Q2 1997. This was driven by lower costs at permanently shut-down nuclear units (Millstone 1, Connecticut Yankee, Maine Yankee) and reduced spending at Millstone 3 and Seabrook.
• Revenue Decline: Operating revenues decreased by approximately $45 million (2%) for the six months ended June 30, 1998, primarily due to retail rate cuts in Connecticut, New Hampshire, and Massachusetts, and the removal of Millstone 2 from CL&P's rate base.
• Insurance Proceeds: The company recognized approximately $32 million in expense reductions due to insurance settlements for environmental matters and reimbursement for a severe January 1998 ice storm.

Outlook, Risks, and Management Commentary

Millstone Nuclear Units

• Millstone 3: Successfully restarted in June 1998 and operating at 100% power by July 14, 1998. Expected to save the NU system approximately $8 million per month in replacement power costs.
• Millstone 2: Targeted for return to service by the end of 1998, contingent on NRC approval and completion of corrective actions. Ongoing restart costs remain a financial challenge.
• Millstone 1: NU decided in July 1998 to cease restart activities and proceed with final decommissioning. Estimated decommissioning costs are $642.1 million, with approximately $250.3 million currently funded.

Liquidity and Credit

• Covenant Concerns: Management estimates it will be difficult for NU, CL&P, and WMECO to meet certain interest coverage and capital ratio tests in their revolving credit agreements after Q2 1998. Amendments to these covenants are being sought.
• Rating Actions: In July 1998, Moody's raised CL&P and WMECO ratings to Ba2, and S&P removed NU and subsidiaries from Credit Watch (negative) following the Millstone 3 restart.
• Share Repurchase: The NU Board authorized the repurchase of up to 10 million common shares through July 1, 2000, though no immediate repurchases are contemplated.

Restructuring and Regulatory

• Connecticut: CL&P is scheduled to file a restructuring plan by October 1, 1998. Rate reductions totaling 3.4% were filed in June 1998.
• New Hampshire: Litigation regarding the enforceability of the 1989 Rate Agreement is pending. A preliminary injunction bars the NHPUC from implementing restructuring orders until a trial in November 1998.
• Massachusetts: WMECO's restructuring plan is under review by the DTE, with a final decision expected later in 1998.

Year 2000 Issue

The estimated remaining cost for Year 2000 remediation is $34 million. The inventory phase is on target for completion by August 1998, with mission-critical systems expected to be ready by mid-1999.

Investor Verification Checklist

• Covenant Compliance: Verify the status of amendments to the revolving credit agreement covenants for NU, CL&P, and WMECO, as failure to meet these could restrict access to capital.
• Millstone 2 Timeline: Monitor the NRC's progress on licensing reviews for Millstone 2, as delays will increase replacement power costs and impact liquidity.
• Decommissioning Funding: Confirm the regulatory approval for recovering the remaining $391.8 million in estimated decommissioning costs for Millstone 1.
• Restructuring Outcomes: Track the final regulatory decisions on restructuring plans in Connecticut, New Hampshire, and Massachusetts, which will determine the recoverability of stranded costs.
• Year 2000 Costs: Watch for any material increases in the $34 million estimated budget for Year 2000 compliance as the assessment phase concludes.