ES

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1999, for Northeast Utilities (NU) and its wholly owned 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 recovery of the NU system following nuclear plant outages and significant regulatory restructuring orders in Connecticut, Massachusetts, and New Hampshire.

Key Financial Metrics (Nine Months Ended Sept 30, 1999)

Note: NU Consolidated Net Income for the nine months ended Sept 30, 1998, was a loss of $14.8 million.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 18% ($514 million) compared to the first nine months of 1998. This was driven by a 27% increase in the third quarter, attributed to hot summer weather, economic growth, and a surge in revenues from the unregulated affiliate, Select Energy ($389 million vs. $2 million in 1998).
• Profitability Turnaround: NU reported a net income of $49.9 million for the nine-month period, a significant improvement from a net loss of $14.8 million in the same period of 1998. This turnaround was primarily due to the return to service of Millstone 2 and 3 nuclear units, which lowered replacement power costs.
• Cost Management: Non-fuel operation and maintenance (O&M) costs decreased due to lower spending at Millstone Station, partially offset by higher storm costs and transmission expenses.
• Asset Sales: WMECO recorded a $21.2 million pre-tax gain on the sale of its fossil and hydroelectric generation assets to Consolidated Edison Energy, Massachusetts, Inc.

Guidance, Outlook, and Material Events

Merger with Consolidated Edison

On October 13, 1999, NU and Consolidated Edison announced a merger agreement valued at approximately $7.5 billion. NU shareholders are to receive $25 per share in a mix of cash and stock. The transaction is subject to regulatory approvals (FERC, SEC, NRC) and shareholder votes, with closing anticipated in 12 to 18 months.

Merger with Yankee

NU's proposed merger with Yankee (parent of Yankee Gas Services) was approved by Yankee shareholders on October 12, 1999. Yankee will become a wholly owned subsidiary of NU. This transaction is expected to close in early to mid-2000.

Regulatory Restructuring

• Connecticut (CL&P): The DPUC issued a final decision on October 1, 1999, mandating a 10% rate reduction and unbundling rates. CL&P must write off $11 million of Millstone capital expenditures. Nuclear assets are to be auctioned.
• Massachusetts (WMECO): The DTE issued a restructuring order on September 17, 1999, allowing recovery of stranded costs but disallowing equity returns on Millstone 1 and during outages of Millstone 2 and 3.
• New Hampshire (PSNH): An agreement to settle restructuring was signed on August 2, 1999, allowing recovery of approximately $1.5 billion in stranded costs, contingent on a $367 million pre-tax write-off. Regulatory hearings are ongoing.

Litigation and Contingencies

• Millstone 3 Joint Owner Litigation: NU agreed in principle on October 27, 1999, to settle claims with two joint owners for approximately $31.5 million. Approximately $150 million in claims remain outstanding from other joint owners.
• Environmental Compliance: NU subsidiaries NUSCO and NNECO pled guilty to federal Clean Water Act and Atomic Energy Act violations, resulting in fines totaling $6.7 million and probation.

Liquidity and Capital Resources

NU expects to repurchase approximately $215 million of outstanding shares over the next year in connection with the Yankee merger. On September 14, 1999, the Board approved the first common stock dividend since March 1997 (10 cents per share, payable December 30, 1999).

Investor Verification Checklist

• Merger Approvals: Monitor the status of regulatory approvals for the Consolidated Edison and Yankee mergers, as delays could impact the transaction timeline and value.
• Nuclear Asset Auctions: Verify the outcome of the upcoming auctions for Millstone 2, 3, and Seabrook assets, as the sale price will impact stranded cost recovery and future earnings.
• Restructuring Settlements: Track the final approval of the PSNH restructuring agreement and the resolution of post-1991 capital addition prudence reviews in Massachusetts.
• Legal Exposure: Assess the financial impact of the remaining $150 million in outstanding Millstone 3 litigation claims and the $31.5 million settlement.
• Select Energy Performance: Review the profitability of Select Energy, which generated significant revenue but recorded a $32.1 million after-tax loss for the nine-month period due to high purchased power costs.