ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005, for EverSource Energy (filing as Northeast Utilities and subsidiaries, including The Connecticut Light and Power Company, Public Service Company of New Hampshire, and Western Massachusetts Electric Company). The company operates in two primary segments: the Utility Group (regulated electric and gas distribution/transmission) and NU Enterprises (competitive energy businesses). The reporting period is characterized by a strategic shift announced in March 2005 to exit the wholesale marketing business and divest energy services businesses.

Key Financial Metrics (Six Months Ended June 30, 2005)

Material Changes vs. Prior Period

• Net Loss vs. Profit: The company reported a consolidated net loss of $145.4 million for the first half of 2005, a reversal from the $91.4 million profit in the same period of 2004. This decline is primarily attributed to charges at NU Enterprises.
• Wholesale Contract Market Changes: NU Enterprises recorded a pre-tax charge of $258.5 million related to the mark-to-market valuation of wholesale electricity contracts being divested. This compares to no such charge in 2004.
• Restructuring and Impairment: Pre-tax restructuring and impairment charges totaled $47.9 million in 2005 (vs. $0 in 2004), driven by the decision to exit wholesale marketing and divest energy services. This included a $38.3 million goodwill impairment in the energy services segment.
• Utility Group Performance: The regulated Utility Group earned $75.6 million in the first half of 2005, down slightly from $80.5 million in 2004. This decrease was due to a $4.4 million after-tax charge at CL&P regarding streetlight billing refunds and higher pension/interest expenses, partially offset by rate increases.
• Cash Flow Decline: Operating cash flows decreased by $217 million year-over-year, primarily due to higher regulatory refunds to ratepayers for past overcollections.

Guidance, Outlook, and Risks

• Utility Group Guidance: Management projects Utility Group earnings for 2005 to be between $1.22 and $1.30 per share. This includes $0.96–$1.00 per share from distribution/generation and $0.26–$0.30 per share from transmission.
• NU Enterprises Guidance: No earnings guidance is provided for NU Enterprises due to volatility from mark-to-market accounting on wholesale contracts and potential further impairments during the divestiture process.
• Parent and Other Costs: Estimated at $0.08 to $0.13 per share for 2005.
• Divestiture Progress: NU Enterprises is actively soliciting bids to sell its wholesale portfolio and energy services businesses, with a goal to complete divestitures by the end of 2005. Six of 15 long-dated municipal contracts have been settled.
• Regulatory Risks:
  • LICAP Implementation: The Federal Energy Regulatory Commission (FERC) is expected to decide on the Locational Installed Capacity (LICAP) mechanism by September 2005. Implementation could generate significant capacity revenues for NU Enterprises' generation assets.
  • Decommissioning Costs: Ongoing FERC proceedings regarding increased decommissioning costs for the Connecticut Yankee Atomic Power Company (CYAPC) could impact rate recovery.
  • Environmental Legislation: Potential New Hampshire legislation limiting mercury emissions could require capital investment or plant retirement at PSNH.
• Liquidity: The company maintains adequate liquidity with $55.5 million in cash and access to $500 million and $400 million revolving credit facilities. A $50 million bond issuance by Yankee Gas in July 2005 was used to repay short-term borrowings.

Investor Verification Checklist

• Divestiture Timeline: Verify the progress of selling the wholesale marketing portfolio and energy services businesses, as delays could extend mark-to-market volatility.
• Wholesale Contract Valuation: Monitor the fair value of the $250 million net liability in wholesale contracts, as price fluctuations will directly impact earnings until divestiture.
• Regulatory Decisions: Track the FERC decision on LICAP (expected late 2005) and the outcome of the CYAPC decommissioning cost recovery proceeding.
• Utility Group Rate Cases: Confirm the finalization of CL&P's streetlighting refund decision and the impact of new Connecticut transmission tracking legislation on earnings.
• Capital Expenditures: Review the execution of the $740 million projected capital spend for 2005, particularly the $1.5 billion transmission investment program in Connecticut.