ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1998, for Northeast Utilities (NU) and its 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 includes unaudited consolidated financial statements and management discussion regarding the impact of nuclear plant outages, regulatory restructuring, and accounting restatements related to nuclear compliance costs.

Key Financial Metrics (Nine Months Ended Sept 30, 1998)

Material Changes vs. Prior Period

• Profitability Improvement: NU reported a net loss of $6.7 million for the nine months ended Sept 30, 1998, a significant improvement from the restated loss of $77.0 million in the same period of 1997. Third-quarter 1998 results showed a net income of $5.0 million compared to a restated loss of $30.8 million in Q3 1997.
• Cost Reductions: Operating expenses decreased primarily due to a $144 million reduction in nuclear-related O&M costs (Millstone and Yankee units) and lower pension/insurance costs. Replacement power costs for Millstone units dropped to $221 million (9M 1998) from $292 million (9M 1997).
• Revenue Trends: Total operating revenues decreased slightly ($48 million or 2%) due to retail rate reductions in Connecticut, New Hampshire, and Massachusetts, partially offset by a 2.0% increase in retail kilowatt-hour sales.
• Non-Recurring Items: Results included a $25 million write-off of unrecoverable costs related to the Millstone 1 entitlement formerly held by CMEEC and a $13.7 million gain on the sale of equity in NorthEast Optic Network, Inc. (NEON).

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Millstone 2 Restart: Management projects Millstone 2 will restart in March 1999. Until then, replacement power costs are estimated at $11 million/month for CL&P and $3 million/month for WMECO.
• Millstone 1 Decommissioning: Restart activities ceased; the unit is being prepared for final decommissioning. Approximately $676 million of unrecovered costs are expected to be recovered from retail customers.
• Restructuring: CL&P filed a plan to divest generation assets by Jan 1, 2000. PSNH is awaiting a federal court trial on its deregulation plan (expected Q1 1999). WMECO is in the auction phase for its fossil generation assets.
• Year 2000 Compliance: Estimated remaining cost is $32 million, with mission-critical systems expected to be ready by mid-1999.

Risks and Contingencies

• Regulatory Risk: Ongoing litigation and regulatory proceedings regarding restructuring in Connecticut, New Hampshire, and Massachusetts could impact cost recovery and asset valuation.
• Financial Covenants: CL&P and WMECO renegotiated credit agreement covenants in September 1998 to maintain a 31% common equity ratio (down from 32%) and specific interest coverage ratios.
• Environmental Liability: Net liability for estimated remediation costs is approximately $19 million (range $19M–$32M).
• Derivatives: CL&P holds fuel price risk instruments with a negative mark-to-market position of $21 million; NAEC holds interest rate swaps with a negative position of $3.2 million.

Investor Verification Checklist

• Millstone 2 Timeline: Verify the March 1999 restart date for Millstone 2 and the associated monthly replacement power costs ($14M combined).
• Millstone 1 Cost Recovery: Confirm regulatory approval for the recovery of the $676 million in unrecovered costs from retail customers.
• Restructuring Progress: Monitor the status of the federal court trial for PSNH's deregulation plan and the final DTE decision on WMECO's restructuring plan.
• Debt Covenants: Track compliance with the renegotiated interest coverage ratios (1.25x in Q3 1998, rising to 2.0x by Q4 1999) for CL&P and WMECO.
• Year 2000 Budget: Review actual spending against the $32 million estimated remaining budget for Y2K remediation.