ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007, 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 primarily as a regulated utility holding company with segments for electric distribution, gas distribution, transmission, and a shrinking competitive energy business (NU Enterprises). NU Enterprises is in the process of exiting its wholesale marketing and competitive generation businesses, which were largely divested in 2006.

Key Financial Metrics (Six Months Ended June 30, 2007)

Note: Operating cash flow for the first half of 2007 was negative primarily due to a one-time payment of $398.5 million in federal and state income taxes related to the 2006 sale of competitive generation assets. Excluding this tax payment, operating cash flow was $361 million.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 19% ($712 million) compared to the first half of 2006. This was driven by a $622 million decrease in NU Enterprises revenues due to the exit from competitive businesses and a $90 million decrease in regulated company revenues.
• Profit Surge: Net income increased significantly to $123.6 million from $12.1 million in the prior year. This improvement is attributed to:
  • Regulated companies earning $108.6 million (vs. $88.1 million in 2006), driven by rate increases and higher transmission investment bases.
  • NU Enterprises turning a loss of $76.9 million in 2006 into a profit of $7.4 million in 2007, aided by favorable resolutions of contingencies from prior divestitures.
  • Absence of significant restructuring and impairment charges that impacted 2006 results.
• Expense Reduction: Fuel, purchased, and net interchange power expenses decreased by $778 million (29%) due to the divestiture of competitive generation and lower supply costs in regulated segments.
• Dividend Increase: NU declared a quarterly dividend of $0.20 per share, a 6.7% increase over the previous rate.

Guidance, Outlook, and Risks

• Earnings Guidance: NU projects consolidated 2007 earnings between $1.30 and $1.55 per share. This guidance excludes the impact of marking-to-market NU Enterprises' remaining wholesale energy contracts.
  • Regulated Companies: $0.80 - $0.90 per share.
  • NU Enterprises: Modestly positive results projected.
• Capital Expenditures: Total 2007 capital expenditures are forecast at approximately $1.3 billion, with $750 million allocated to transmission projects. This is higher than previously forecasted due to accelerated transmission projects in southwest Connecticut.
• Regulatory Developments:
  • CL&P: Filed an application for a $189 million distribution rate increase effective Jan 1, 2008. A decision is expected in early 2008.
  • PSNH: Received approval for a rate settlement effective July 1, 2007, resulting in a $37.7 million annualized increase.
  • Yankee Gas: Received approval for a 4.2% base rate increase effective July 1, 2007.
• Risks and Contingencies:
  • Wholesale Contracts: NU Enterprises holds remaining wholesale contracts with a net fair value liability of $89.6 million. Fluctuations in energy prices could impact earnings.
  • Legal Proceedings: Ongoing litigation with Consolidated Edison (Con Edison) regarding a failed merger; NU claims ~$32 million in costs, while Con Edison claims damages of at least $314 million. A recent court ruling favored CL&P in a separate dispute with NRG Energy regarding congestion charges.
  • Environmental: Potential additional remediation costs at a Holyoke Water Power (HWP) river site in Massachusetts; current reserve is $0.8 million, but future costs could be material.

Investor Verification Checklist

• Tax Payment Impact: Verify the one-time $398.5 million tax payment's impact on liquidity and confirm the company's ability to fund future capital expenditures without excessive leverage.
• Wholesale Portfolio Exposure: Review the mark-to-market valuation of NU Enterprises' remaining wholesale contracts ($89.6 million liability) and the sensitivity of this position to energy price volatility.
• Regulatory Rate Cases: Monitor the outcome of CL&P's pending rate case (decision expected early 2008) and the implementation of new rates for PSNH and Yankee Gas to ensure projected ROE targets are met.
• Transmission Project Costs: Track the progress and cost overruns of major transmission projects (e.g., Middletown to Norwalk, Glenbrook Cables) which are driving the increased capital expenditure forecast.
• Con Edison Litigation: Follow the status of the Con Edison merger litigation, specifically the motion for partial summary judgment regarding the $314 million damage claim.