ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 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 wholesale and retail energy marketing and services).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $404 million (31%) driven by higher NU Enterprises revenues ($231 million increase) and Utility Group revenues ($173 million increase). The Utility Group saw an 8.9% increase in regulated retail electric sales and an 18.3% increase in firm natural gas sales due to colder weather.
• Profitability Surge: Net income increased by $41.6 million (223%). Q1 2002 included $10 million in after-tax write-downs related to investments in NEON Communications and Acumentrics, which were absent in 2003.
• Segment Performance:
  • NU Enterprises: Turned a $20.1 million loss in Q1 2002 into a $5.2 million profit in Q1 2003, primarily due to improved wholesale marketing management and the absence of trading losses.
  • Utility Group: CL&P earnings increased to $26.7 million (from $21.7 million) aided by weather and a regulatory decision on Millstone sale proceeds. PSNH and WMECO earnings declined slightly despite sales increases, due to lower pension income and the absence of Seabrook nuclear plant earnings.
• Cash Flow: Net cash provided by operating activities decreased to $144.9 million from $221.0 million, primarily due to a $125.2 million tax payment on the gain from the Seabrook sale.

Guidance, Outlook, and Risks

• 2003 Earnings Guidance: Management projects full-year 2003 earnings between $1.10 and $1.30 per share. This includes $1.05–$1.15 per share from the Utility Group and $0.15–$0.25 per share from NU Enterprises.
• Standard Market Design (SMD) Risk: The implementation of SMD by ISO-NE on March 1, 2003, introduced locational marginal pricing (LMP). CL&P incurred $15.5 million in incremental LMP costs in March 2003. While management believes these are recoverable from customers, the Connecticut DPUC has directed CL&P to pursue legal remedies against suppliers to assign liability. Failure to recover these costs could impact earnings.
• Counterparty Risk (NRG Energy): NRG Energy, a key supplier for CL&P's standard offer service, is in default on debt payments and has been downgraded to below investment grade. CL&P is evaluating NRG's ability to meet obligations and may need to secure replacement supply at higher costs.
• Dividends: The quarterly common dividend was $0.1375 per share. Management expects to consider a dividend increase at the annual meeting in May 2003.

Investor Verification Checklist

• LMP Cost Recovery: Verify the status of CL&P's legal actions against standard offer suppliers regarding the $15.5 million+ in incremental LMP costs and the likelihood of full regulatory recovery.
• NRG Energy Exposure: Assess the potential financial impact if NRG Energy defaults on its supply obligations to CL&P and the cost of securing replacement power.
• NU Enterprises Margins: Monitor the realization of gross margins on NU Enterprises' wholesale marketing portfolio, as current fair values are subject to commodity price volatility.
• Regulatory Decisions: Track upcoming decisions by the Connecticut DPUC regarding the Millstone sale proceeds and the New Hampshire PUC regarding PSNH's stranded cost reconciliation.
• Capital Expenditures: Review the funding status for major transmission projects, including the $185 million Norwalk-Bethel line and the $500 million Norwalk-Middletown line.