ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, for Northeast Utilities (NU) and its wholly owned operating 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 filing details the financial condition and results of operations for the NU system, highlighting a period of significant restructuring, nuclear unit returns to service, and the announcement of a merger with Yankee Energy System, Inc.

Key Financial Metrics (Six Months Ended June 30, 1999)

Material Changes vs. Prior Period

• Revenue Growth: NU consolidated operating revenues increased 14% ($248 million) compared to the first six months of 1998. This was driven by a 19% increase in the second quarter, attributed to hotter weather, an improving regional economy, and the growth of the unregulated affiliate, Select Energy.
• Profitability Turnaround: NU reported a net income of $18.7 million for the six months ended June 30, 1999, reversing a net loss of $11.7 million in the same period of 1998. Second-quarter 1999 earnings were break-even ($0.23 million) compared to $6.3 million in Q2 1998.
• Nuclear Performance: The return to service of Millstone Units 2 and 3 significantly reduced fuel and purchased power expenses. Millstone 2 returned to service on May 11, 1999, and Millstone 3 on June 29, 1999. Seabrook also returned to service on May 13, 1999.
• Unregulated Segment Losses: Select Energy, NU's competitive power marketing affiliate, reported an after-tax loss of $16.9 million for the six months ended June 30, 1999, compared to a loss of $4.8 million in 1998. This was primarily due to high market prices for energy during unseasonably hot weather in June.
• Regulatory Impacts: Regulatory decisions in Connecticut and Massachusetts decreased revenues by approximately $62 million for the six-month period, primarily due to retail rate decreases and the accounting impact of Millstone 2 being removed from CL&P's rates prior to its return.

Guidance, Outlook, and Management Commentary

Merger and Acquisitions

• Yankee Energy Merger: On June 15, 1999, NU announced an agreement to merge with Yankee Energy System, Inc. (Yankee), the parent of Yankee Gas Services Company. The transaction is valued at $679 million, including the assumption of $201 million in Yankee debt. Yankee shareholders will receive $45 per share (45% in NU stock, 55% in cash). Closing is expected in mid-2000.
• Asset Sales: CL&P and WMECO signed agreements to sell approximately 3,564 MW of fossil and hydro generation assets for roughly $1.3 billion. The net gain (estimated at $984 million for CL&P and $141 million for WMECO) will be used to reduce stranded costs.

Restructuring and Regulatory Settlements

• New Hampshire (PSNH): On August 2, 1999, PSNH and NU filed a comprehensive settlement agreement with the New Hampshire Public Utilities Commission (NHPUC). Key terms include an average rate decrease of 18.3%, a $225 million after-tax write-off by PSNH, and the issuance of $725 million in Rate Reduction Bonds. Implementation is contingent on regulatory and legislative approvals, expected in the first half of 2000.
• Connecticut (CL&P): The Connecticut DPUC approved approximately $3.5 billion of stranded costs for CL&P. CL&P is seeking proposals for Standard Offer Service contracts to meet customer supply requirements starting January 1, 2000.

Liquidity and Capital Resources

• Credit Ratings: Standard & Poor's upgraded all debt and preferred stock securities of the NU system in May 1999, citing the return of Millstone 2 to the rate base. Moody's and Fitch also placed ratings under review for possible upgrades.
• Dividends: The NU Board began considering resuming the payment of a common dividend, which was suspended in 1997. A review of the dividend policy is expected in the fall of 1999.
• Share Repurchases: The Board authorized the repurchase of an additional 15 million NU common shares through July 1, 2001, related to merger activity and industry restructuring.

Risks and Contingencies

• Year 2000: The NU system announced on June 30, 1999, that its mission-critical systems were Year 2000 ready. The total estimated cost is $23 million, with $6 million remaining to be funded.
• Environmental: The NU system's liability for estimated remediation costs was approximately $23 million as of June 30, 1999.
• Legal Proceedings: NU has signed a preliminary agreement to settle shareholder class action lawsuits regarding nuclear problems at Millstone for approximately $5 million (plus insurance proceeds).

Investor Verification Checklist

• Merger Approval: Verify the status of shareholder and regulatory approvals for the Yankee Energy merger and the expected closing timeline.
• Asset Sale Closing: Confirm the closing dates and final proceeds from the sale of CL&P and WMECO generation assets to NRG and NGC.
• PSNH Settlement Implementation: Monitor the New Hampshire Legislature's passage of securitization legislation and the NHPUC's final order approving the PSNH restructuring agreement.
• Select Energy Performance: Assess the impact of volatile energy market prices on Select Energy's profitability and its ability to achieve profitability in the remainder of 1999.
• Dividend Resumption: Watch for the Board's decision on resuming common dividends in the fall of 1999.
• Millstone Decommissioning: Review the final cost estimates and funding status for the Millstone 1 decommissioning, currently estimated at $692 million.