ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 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 NU system operates regulated electric utilities and unregulated energy marketing services in Connecticut, New Hampshire, and Massachusetts.

Key Financial Metrics

Note: Subsidiary results vary. CL&P reported a net loss of $13.7 million, while PSNH reported net income of $25.3 million.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 8% ($85 million) driven by a 4.0% increase in retail sales and a significant surge in unregulated energy marketing revenues from Select Energy, Inc. ($86.4 million vs. $0.4 million in Q1 1998).
• Profitability Turnaround: The system moved from a net loss of $17.9 million in Q1 1998 to a net income of $18.4 million in Q1 1999. This improvement was primarily due to higher sales and an 8.6% reduction in non-fuel operation and maintenance (O&M) costs.
• Cost Reductions: Lower O&M costs were attributed to the completion of restart activities at Millstone 3, a less severe winter storm season compared to the major ice storm in Q1 1998, and continued cost controls.
• Regulatory Impact: A February 1999 rate decision in Connecticut reduced CL&P rates by 4% ($96 million annually) and increased amortization of regulatory assets by $136 million annually, partially offsetting operational gains.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Millstone 2 Restart: The NRC granted permission to restart Millstone 2 on April 29, 1999. A court ruling on May 7, 1999, dissolved a temporary restraining order sought by environmental groups. Management expects Millstone 2 to reach 100% power by the end of May 1999, restoring $6.6 million/month in noncash revenues and reducing fuel expenses by $8 million/month.
• Credit Ratings: Standard & Poor's revised its outlook to "Positive" in March 1999. Moody's placed securities under review for a possible upgrade, and Fitch IBCA raised ratings, citing improved cash flow and Millstone 2 progress.
• Unregulated Segment: Despite a $5 million loss in Q1 1999, management projects the unregulated business will be profitable for the full year 1999 due to new contracts.

Risks and Contingencies

• Restructuring Litigation:
  • Connecticut: CL&P filed for $4.3 billion in stranded costs; a decision is expected by June 30, 1999.
  • New Hampshire: PSNH restructuring is frozen pending a federal court order on stranded cost charges.
  • Massachusetts: WMECO is awaiting a final decision on its restructuring plan and the sale of generation assets.
• Year 2000 Compliance: As of March 31, 1999, 82% of software and 86% of hardware were Y2K ready. The total projected cost is $30 million, with $17 million remaining. Management anticipates mission-critical remediation by mid-1999.
• Market Risk: CL&P holds fuel-price risk-management instruments with a negative mark-to-market position of approximately $52 million (as of March 31, 1999).

Investor Verification Checklist

• Millstone 2 Operational Status: Verify the unit has successfully restarted and achieved the 100% power target by end of May 1999 to realize projected cost savings.
• Stranded Cost Recovery: Monitor the June 30, 1999, Connecticut DPUC decision regarding the $4.3 billion stranded cost filing by CL&P.
• Year 2000 Readiness: Confirm completion of remediation for mission-critical systems by mid-1999 to avoid operational disruptions.
• Unregulated Segment Profitability: Track Select Energy's performance to ensure it meets the full-year 1999 profitability projection.
• Regulatory Settlements: Watch for resolutions in New Hampshire (PSNH) and Massachusetts (WMECO) restructuring proceedings.