ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, 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 is a holding company operating regulated utility businesses (Utility Group) and competitive energy businesses (NU Enterprises). During the period, NU announced a strategic shift to exit all competitive businesses, including wholesale marketing, energy services, retail marketing, and merchant generation, to focus exclusively on regulated operations.

Key Financial Metrics (Nine Months Ended Sept 30, 2005)

Note: The Utility Group (regulated) reported net income of $114.3 million for the nine months, while NU Enterprises (competitive) reported a net loss of $344.1 million.

Material Changes vs. Prior Period

• Significant Losses: The consolidated net loss of $239.9 million in 2005 contrasts sharply with the $83.5 million net income in 2004. This reversal is primarily driven by NU Enterprises.
• Wholesale Contract Charges: NU Enterprises recorded pre-tax wholesale contract market changes of $359.7 million (nine months 2005) due to mark-to-market accounting on contracts being divested. In 2004, this line item was zero.
• Restructuring and Impairment: Pre-tax restructuring and impairment charges totaled $53.2 million in 2005 (nine months) related to the exit from wholesale marketing and energy services businesses. There were no such charges in the comparable 2004 period.
• Discontinued Operations: Certain energy services businesses (SESI, SECI-NH, Woods Network, Woods Electrical) are now classified as discontinued operations, resulting in a loss of $21.4 million for the nine months ended September 30, 2005.
• Revenue Growth: Consolidated operating revenues increased 12% year-over-year, driven by higher regulated distribution revenues (pass-through of higher energy costs) and rate increases, partially offset by lower revenues from the competitive segment.

Guidance, Outlook, and Risks

Management Commentary and Guidance

• Utility Group Guidance: NU projects Utility Group earnings of $1.22 to $1.30 per share for 2005 and $1.21 to $1.31 per share for 2006. This excludes the competitive businesses.
• NU Enterprises: No earnings guidance is provided for NU Enterprises due to volatility from mark-to-market accounting, potential asset impairments, and closure costs associated with the divestiture plan.
• Divestiture Plan: Management expects to complete the divestiture of all competitive businesses in 2006. Proceeds, if any, will be used to fund regulated capital programs and repay debt.

Risks and Contingencies

• Divestiture Costs: Exiting the wholesale business has proven costlier than anticipated. NU has paid or agreed to pay approximately $242 million to extinguish wholesale obligations. Additional charges of approximately $37 million (pre-tax) are expected in the fourth quarter for load forecast increases.
• Accounting Changes: The exit from retail marketing may require a shift from accrual to mark-to-market accounting, potentially resulting in a material charge in the fourth quarter. The estimated fair value of retail contracts not yet marked-to-market is a negative $75 million.
• Liquidity and Collateral: If NU's credit ratings are downgraded to sub-investment grade, Select Energy could be required to post approximately $533 million in collateral. NU currently maintains adequate liquidity but is seeking to increase borrowing limits and sell $300 million of common equity.
• Regulatory Litigation: Significant contingencies exist regarding nuclear decommissioning costs (CYAPC/Bechtel litigation) and the Consolidated Edison merger litigation (CEI claims damages of at least $314 million).

Investor Verification Checklist

• Divestiture Progress: Verify the status of sales for NU Enterprises' wholesale, retail, and generation assets and the actual cash proceeds received versus projected costs.
• Fourth Quarter Charges: Monitor the magnitude of mark-to-market charges and restructuring costs expected in Q4 2005 related to the exit from competitive businesses.
• Regulatory Outcomes: Track the FERC decision on CYAPC decommissioning costs (expected December 2005) and the outcome of the CEI merger litigation appeal.
• Capital Expenditures: Confirm the funding sources for the projected $740 million in 2005 capital expenditures, particularly the $2.3 billion transmission program planned for 2006-2010.
• Debt Ratings: Monitor credit rating agency actions regarding NU's senior unsecured debt (currently Baa2/BBB-) given the increased leverage and liquidity strain from contract buyouts.