-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EashNPjpZsxpJNSwDBljnFycP4NwqlxDLJKjvN72Saor4xNhBSL1ISBeE/ffBPBi GNy+Jzs7AiUvZ/ggMDCgBQ== 0000072741-02-000135.txt : 20021108 0000072741-02-000135.hdr.sgml : 20021108 20021108142221 ACCESSION NUMBER: 0000072741-02-000135 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNECTICUT LIGHT & POWER CO CENTRAL INDEX KEY: 0000023426 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 060303850 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00404 FILM NUMBER: 02813934 BUSINESS ADDRESS: STREET 1: SELDEN STREET CITY: BERLIN STATE: CT ZIP: 06037-1616 BUSINESS PHONE: 8606655000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHEAST UTILITIES SYSTEM CENTRAL INDEX KEY: 0000072741 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 042147929 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05324 FILM NUMBER: 02813931 BUSINESS ADDRESS: STREET 1: 174 BRUSH HILL AVE CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0010 BUSINESS PHONE: 4137855871 MAIL ADDRESS: STREET 1: 107 SELDON ST CITY: BERLIN STATE: CT ZIP: 06037-1616 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN MASSACHUSETTS ELECTRIC CO CENTRAL INDEX KEY: 0000106170 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041961130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07624 FILM NUMBER: 02813932 BUSINESS ADDRESS: STREET 1: 174 BRUSH HILL AVE CITY: WEST SPRINGFIELD STATE: MA ZIP: 01089 BUSINESS PHONE: 4137855871 MAIL ADDRESS: STREET 1: 107 SELDON ST CITY: BERLIN STATE: CT ZIP: 06037-1616 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NEW HAMPSHIRE CENTRAL INDEX KEY: 0000315256 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 020181050 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06392 FILM NUMBER: 02813933 BUSINESS ADDRESS: STREET 1: 1000 ELM ST CITY: MANCHESTER STATE: NH ZIP: 03105 BUSINESS PHONE: 6036694000 MAIL ADDRESS: STREET 1: 1000 ELM STREET CITY: MANCHESTER STATE: NH ZIP: 03105 10-Q 1 cover.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 1-5324 NORTHEAST UTILITIES 04-2147929 (a Massachusetts voluntary association) 174 Brush Hill Avenue West Springfield, Massachusetts 01090-2010 Telephone: (413) 785-5871 0-11419 THE CONNECTICUT LIGHT AND POWER COMPANY 06-0303850 (a Connecticut corporation) 107 Selden Street Berlin, Connecticut 06037-1616 Telephone: (860) 665-5000 1-6392 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 02-0181050 (a New Hampshire corporation) Energy Park 780 North Commercial Street Manchester, New Hampshire 03101-1134 Telephone: (603) 669-4000 0-7624 WESTERN MASSACHUSETTS ELECTRIC COMPANY 04-1961130 (a Massachusetts corporation) 174 Brush Hill Avenue West Springfield, Massachusetts 01090-2010 Telephone: (413) 785-5871 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: Company - Class of Stock Outstanding at October 31, 2002 - ------------------------ ------------------------------- Northeast Utilities Common shares, $5.00 par value 128,507,340 shares The Connecticut Light and Power Company Common stock, $10.00 par value 6,811,994 shares Public Service Company of New Hampshire Common stock, $1.00 par value 388 shares Western Massachusetts Electric Company Common stock, $25.00 par value 434,653 shares GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report: COMPANIES CL&P....................... The Connecticut Light and Power Company NAEC....................... North Atlantic Energy Corporation NGC........................ Northeast Generation Company NGS........................ Northeast Generation Services Company NU or the company.......... Northeast Utilities NU system.................. The Northeast Utilities system companies, including NU and its wholly owned operating subsidiaries: CL&P, PSNH, WMECO, NAEC, and Yankee Gas NUEI Parent................ NU Enterprises, Inc. PSNH....................... Public Service Company of New Hampshire Select Energy.............. Select Energy, Inc. (including its wholly owned subsidiary SENY) SENY....................... Select Energy New York, Inc. SESI....................... Select Energy Services, Inc. WMECO...................... Western Massachusetts Electric Company Yankee..................... Yankee Energy System, Inc. Yankee Gas................. Yankee Gas Services Company YESCO...................... Yankee Energy Services Company NUCLEAR UNIT Seabrook................... Seabrook Unit No. 1, a 1,148 megawatt nuclear electric generating unit completed in 1986; Seabrook went into service in 1990. REGULATORS DPUC....................... Connecticut Department of Public Utility Control DTE........................ Massachusetts Department of Telecommunications and Energy NHPUC...................... New Hampshire Public Utilities Commission SEC........................ Securities and Exchange Commission OTHER CSC........................ Connecticut Siting Council EITF....................... Emerging Issues Task Force EPS........................ Earnings per share FASB....................... Financial Accounting Standards Board FPPAC...................... Fuel and purchased-power adjustment clause IERM....................... Infrastructure Expansion Rate Mechanism kWh........................ Kilowatt-hour MW......................... Megawatts NU 2001 Form 10-K.......... The NU system combined 2001 Form 10-K as filed with the SEC O&M........................ Operation and maintenance SFAS....................... Statement of Financial Accounting Standards Northeast Utilities and Subsidiaries The Connecticut Light and Power Company and Subsidiaries Public Service Company of New Hampshire and Subsidiaries Western Massachusetts Electric Company and Subsidiary TABLE OF CONTENTS ----------------- Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the following companies: Northeast Utilities and Subsidiaries Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.............. 2 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 2002 and 2001........................... 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001......... 5 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 6 Independent Accountants' Report....................... 29 Notes to Consolidated Financial Statements (unaudited - all companies)................................. 30 The Connecticut Light and Power Company and Subsidiaries Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.............. 50 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 2002 and 2001........................... 52 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001......... 53 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 54 Public Service Company of New Hampshire and Subsidiaries Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.............. 60 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 2002 and 2001........................... 62 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001......... 63 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 64 Western Massachusetts Electric Company and Subsidiary Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.............. 70 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 2002 and 2001........................... 72 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001......... 73 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 74 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 77 Item 4. Controls and Procedures............................... 77 Part II. Other Information Item 1. Legal Proceedings..................................... 78 Item 6. Exhibits and Reports on Form 8-K...................... 79 Signatures and Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.................................... 82 NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 -------------- -------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash and cash equivalents............................ $ 70,726 $ 96,658 Investments in securitizable assets.................. 156,797 206,367 Receivables, net..................................... 665,205 659,759 Unbilled revenues.................................... 96,719 126,398 Fuel, materials and supplies, at average cost........ 131,937 108,516 Special deposits..................................... 12,702 13,036 Unrealized gains on mark-to-market transactions...... 135,147 147,217 Prepayments and other................................ 142,716 69,824 -------------- -------------- 1,411,949 1,427,775 -------------- -------------- Property, Plant and Equipment: Electric utility..................................... 5,981,390 5,743,575 Gas utility.......................................... 666,971 634,884 Competitive energy................................... 995,250 994,901 Other................................................ 200,418 195,741 -------------- -------------- 7,844,029 7,569,101 Less: Accumulated provision for depreciation....... 3,531,643 3,418,577 -------------- -------------- 4,312,386 4,150,524 Construction work in progress........................ 308,720 289,889 Nuclear fuel, net.................................... 22,797 32,564 -------------- -------------- 4,643,903 4,472,977 -------------- -------------- Deferred Debits and Other Assets: Regulatory assets ................................... 3,089,272 3,287,537 Goodwill and other purchased intangible assets, net.. 343,871 333,123 Prepaid pension...................................... 287,834 232,398 Nuclear decommissioning trusts, at market............ 63,486 61,713 Other ............................................... 475,886 468,007 -------------- -------------- 4,260,349 4,382,778 -------------- -------------- Total Assets........................................... $ 10,316,201 $ 10,283,530 ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 -------------- -------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks............................... $ 315,733 $ 290,500 Long-term debt - current portion..................... 52,439 50,462 Accounts payable..................................... 571,550 622,320 Accrued taxes........................................ 49,957 26,203 Accrued interest..................................... 58,198 35,659 Unrealized losses on mark-to-market transactions..... 53,416 90,808 Other................................................ 210,949 161,277 -------------- -------------- 1,312,242 1,277,229 -------------- -------------- Rate Reduction Bonds................................... 1,935,467 2,018,351 -------------- -------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes.................... 1,489,232 1,491,394 Accumulated deferred investment tax credits.......... 110,584 120,071 Deferred contractual obligations..................... 191,117 216,566 Other................................................ 699,706 633,523 -------------- -------------- 2,490,639 2,461,554 -------------- -------------- Capitalization: Long-Term Debt....................................... 2,272,402 2,292,556 -------------- -------------- Preferred Stock...................................... 116,200 116,200 -------------- -------------- Common Shareholders' Equity: Common shares, $5 par value - authorized 225,000,000 shares; 149,375,000 shares issued and 129,257,380 shares outstanding in 2002 and 148,890,640 shares issued and 130,132,136 shares outstanding in 2001............................... 746,875 744,453 Capital surplus, paid in........................... 1,109,798 1,107,609 Deferred contribution plan - employee stock ownership plan................................... (91,982) (101,809) Retained earnings.................................. 727,204 678,460 Accumulated other comprehensive income/(loss)...... 6,095 (32,470) Treasury stock 16,143,264 shares in 2002 and 14,359,628 shares in 2001.................... (308,739) (278,603) -------------- -------------- Common Shareholders' Equity.......................... 2,189,251 2,117,640 ------------- ------------- Total Capitalization................................... 4,577,853 4,526,396 ------------- ------------- Commitments and Contingencies (Note 2) Total Liabilities and Capitalization................... $ 10,316,201 $ 10,283,530 ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------------------ 2002 2001 2002 2001 -------------- -------------- -------------- -------------- (Thousands of Dollars, except share information) Operating Revenues..................................... $ 1,361,045 $ 1,530,669 $ 3,770,092 $ 4,669,663 -------------- -------------- -------------- -------------- Operating Expenses: Operation - Fuel, purchased and net interchange power......... 797,498 985,065 2,133,833 2,880,938 Other............................................. 184,110 194,778 580,865 592,757 Maintenance.......................................... 68,271 59,733 194,032 208,152 Depreciation......................................... 48,150 43,562 146,775 154,082 Amortization......................................... 97,336 94,505 211,112 900,459 Taxes other than income taxes........................ 47,585 39,648 177,043 170,739 Gain on sale of utility plant........................ - - - (643,909) -------------- -------------- -------------- -------------- Total operating expenses........................ 1,242,950 1,417,291 3,443,660 4,263,218 -------------- -------------- -------------- -------------- Operating Income....................................... 118,095 113,378 326,432 406,445 Other Income, Net...................................... 32,059 17,724 19,715 190,644 -------------- -------------- -------------- -------------- Income Before Interest and Income Tax Expense.......... 150,154 131,102 346,147 597,089 -------------- -------------- -------------- -------------- Interest Expense: Interest on long-term debt........................... 35,347 30,995 107,105 109,906 Interest on rate reduction bonds..................... 28,751 30,883 87,539 57,703 Other interest....................................... 3,615 8,404 8,964 41,413 -------------- -------------- -------------- -------------- Interest expense, net........................... 67,713 70,282 203,608 209,022 -------------- -------------- -------------- -------------- Income Before Income Tax Expense....................... 82,441 60,820 142,539 388,067 Income Tax Expense..................................... 32,476 25,185 42,296 165,964 -------------- -------------- -------------- -------------- Income Before Preferred Dividends of Subsidiaries...... 49,965 35,635 100,243 222,103 Preferred Dividends of Subsidiaries.................... 1,390 1,004 4,169 6,145 -------------- -------------- -------------- -------------- Income Before Cumulative Effect of Accounting Change... 48,575 34,631 96,074 215,958 Cumulative effect of accounting change, net of tax benefit of $14,908.......................... - - - (22,432) -------------- -------------- -------------- -------------- Net Income............................................. $ 48,575 $ 34,631 $ 96,074 $ 193,526 ============== ============== ============== ============== Basic and Fully Diluted Earnings Per Common Share: Income before cumulative effect of accounting change. $ 0.38 $ 0.26 $ 0.74 $ 1.57 Cumulative effect of accounting change, net of tax benefit................................. - - - (0.16) -------------- -------------- -------------- -------------- Basic and Fully Diluted Earnings Per Common Share...... $ 0.38 $ 0.26 $ 0.74 $ 1.41 ============== ============== ============== ============== Basic Common Shares Outstanding (average).............. 129,344,724 133,540,631 129,508,840 137,120,689 ============== ============== ============== ============== Fully Diluted Common Shares Outstanding (average)...... 129,508,794 133,869,227 129,737,249 137,457,694 ============== ============== ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------------------- 2002 2001 --------------- -------------- (Thousands of Dollars) Operating Activities: Income before preferred dividends of subsidiaries........... $ 100,243 $ 222,103 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation.............................................. 146,775 154,082 Deferred income taxes and investment tax credits, net..... (54,207) (141,460) Amortization.............................................. 211,112 900,459 Net amortization/(deferral) of recoverable energy costs... 19,557 (37,402) Gain on sale of utility plant............................. - (643,909) Cumulative effect of accounting change.................... - (22,432) Net other (uses)/sources of cash.......................... 4,524 (53,016) Changes in working capital: Receivables and unbilled revenues, net.................... 29,223 (14,067) Fuel, materials and supplies.............................. (23,285) 60,145 Accounts payable.......................................... (52,846) 95,841 Accrued taxes............................................. 23,754 58,571 Investments in securitizable assets....................... 49,570 (107,446) Other working capital (excludes cash)..................... 12,678 (72,294) ------------ ------------- Net cash flows provided by operating activities............... 467,098 399,175 ------------ ------------- Investing Activities: Investments in plant: Electric, gas and other utility plant..................... (326,885) (314,543) Nuclear fuel.............................................. (434) (3,502) ------------ ------------- Cash flows used for investments in plant.................... (327,319) (318,045) Investments in nuclear decommissioning trusts............... (7,100) (119,272) Net proceeds from the sale of utility plant................. - 1,027,733 Buyout/buydown of IPP contracts............................. - (1,128,708) Payment for acquisition of competitive energy subsidiaries.. (15,300) - Other investment activities, net............................ 14,057 (146,260) ------------ ------------- Net cash flows used in investing activities................... (335,662) (684,552) ------------ ------------- Financing Activities: Issuance of common shares................................... 7,445 1,751 Repurchase of common shares................................. (30,136) (241,589) Issuance of long-term debt.................................. 263,000 263,000 Issuance of rate reduction bonds............................ 50,000 2,118,400 Retirement of rate reduction bonds.......................... (132,883) - Net increase/(decrease) in short-term debt.................. 25,233 (873,477) Reacquisitions and retirements of long-term debt............ (285,146) (660,385) Reacquisitions and retirements of preferred stock........... - (60,768) Retirement of monthly income preferred securities........... - (100,000) Retirement of capital lease obligation...................... - (180,000) Cash dividends on preferred stock........................... (4,169) (6,145) Cash dividends on common shares............................. (50,164) (44,514) Other financing activities, net............................. (548) - ------------ ------------- Net cash flows (used in)/provided by financing activities..... (157,368) 216,273 ------------ ------------- Net decrease in cash and cash equivalents..................... (25,932) (69,104) Cash and cash equivalents - beginning of period............... 96,658 200,017 ------------ ------------- Cash and cash equivalents - end of period..................... $ 70,726 $ 130,913 ============ ============== The accompanying notes are an integral part of these consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the consolidated financial statements and footnotes in this Form 10-Q, the First and Second Quarter 2002 Form 10-Qs, current reports on Form 8-K dated July 23, 2002, August 2, 2002, August 14, 2002, October 8, 2002, and October 21, 2002, and the 2001 Form 10-K. All per share amounts are reported on a fully diluted basis. FINANCIAL CONDITION Overview Northeast Utilities and subsidiaries (NU or the company) earned $48.6 million, or $0.38 per share, during the third quarter of 2002, compared with earnings of $34.6 million, or $0.26 per share, during the same period of 2001. For the first nine months of 2002, NU earned $96.1 million, or $0.74 per share, compared with $193.5 million, or $1.41 per share, during the same period of 2001. During the third quarter of 2002, NU recorded a net after-tax gain of $14.5 million, or $0.11 per share, primarily related to the elimination of reserves associated with NU's ownership shares of Seabrook unit 2. During the first quarter of 2002, NU recorded after-tax charges of $10 million, or $0.08 per share, associated with the write-down of our investments in NEON Communications, Inc. (NEON) and Accumentrics Corporation. Excluding these items, NU earned $34.1 million, or $0.27 per share, during the third quarter of 2002 and $91.6 million, or $0.71 per share, during the first nine months of 2002. On November 1, 2002, a subsidiary of the FPL Group, Inc. (FPL) purchased NU's 40.04 percent combined shares of Seabrook. During the fourth quarter NU will record approximately $10 million of additional net after-tax gains associated with the sale. During the first nine months of 2001, NU recorded a gain related to the sale of the Millstone nuclear units, which occurred in March 2001, a loss related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, and a loss related to the forward repurchase of 10.1 million NU common shares. Excluding these items, NU earned $126.5 million, or $0.92 per share, during the first nine months of 2001. The decline in NU's earnings for the first nine months of 2002 resulted primarily from weaker performance at the competitive energy subsidiaries. During the first nine months of 2002, NU's competitive energy subsidiaries lost $39.9 million, compared with essentially break-even results during the same period of 2001, before the cumulative effect of an accounting change of $22 million. These weaker results are related primarily to mild weather in the first quarter of 2002, which caused significant losses serving unregulated retail gas and electric customers, natural gas trading losses in March and April 2002, and low water flows, which reduced conventional hydroelectric production. NU's competitive energy subsidiaries lost $9 million, or $0.07 per share, in the third quarter of 2002, compared with a loss of $9.7 million, or $0.07 per share, during the same period of 2001. NU's revenues during the first nine months of 2002 decreased to $3.8 billion from $4.7 billion during the same period of 2001. The decrease in revenues relates to lower wholesale marketing revenues at the competitive energy subsidiaries as a result of wholesale contracts not being renewed at the same prices and volumes for 2002. Also contributing to the revenue decrease is lower regulated company wholesale revenues from lower sales of energy and capacity in New Hampshire and from 2001 sales of output from the Millstone units. Regulated retail revenues also decreased, primarily due to rate decreases associated with industry restructuring and lower industrial sales to New Hampshire customers. NU's regulated electric subsidiaries benefited from an extremely hot summer. Third quarter 2002 residential electric sales increased 10.9 percent and commercial electric sales increased 6.0 percent, while industrial sales decreased 1.6 percent due to weaker economic conditions compared with the same period of 2001. Overall, third quarter 2002 total electric sales increased 6.4 percent compared with the same period of 2001. During the first nine months of 2002, total electric sales increased 0.6 percent compared with the same period of 2001. Revenues of NU's competitive energy subsidiaries were reduced significantly from amounts previously reported as a result of recently released accounting guidance related to the classification of revenues and expenses associated with energy trading contracts. As a result, NU's revenues and expenses for the first six months of 2002 have been reduced by $1.2 billion with no change in net income. The retroactive reclassification of revenues and expenses, combined with the unavailability of the company's previous independent public accountants, has resulted in the requirement to have the company's financial information as of and for the year ended December 31, 2001, reaudited. Management does not expect the reaudit of this financial information to have a material impact on amounts previously reported other than the reclassification of revenues and expenses itself. NU's trading revenues and expenses for all periods presented have been reclassified. The changes to 2001 information that was previously reported are included in Note 1C, "New Accounting Standards," to the consolidated financial statements. On October 25, 2002, the Emerging Issues Task Force (EITF) decided to rescind the consensus reached in EITF Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities," under which the competitive energy subsidiaries currently account for trading activities on a mark-to-market basis. For information regarding this change in accounting, which will impact the competitive energy subsidiaries in the future, see Note 1C, "New Accounting Standards," to the consolidated financial statements. NU's earnings per share in both 2002 and 2001 benefited from the company's ongoing share repurchase program. NU had approximately 129.3 million shares outstanding as of September 30, 2002, compared with 130.1 million shares outstanding as of December 31, 2001. NU repurchased approximately 14.3 million shares in 2001 and approximately 1.8 million additional shares during the first nine months of 2002. NU's Board of Trustees has authorized the repurchase of approximately 9 million additional shares through June 30, 2003. NU has repurchased approximately 880,000 shares at an average share price of $14.98 from October 1, 2002 through October 31, 2002. Earnings before preferred dividends at The Connecticut Light and Power Company (CL&P), NU's largest regulated subsidiary, totaled $29.3 million for the third quarter of 2002, and $62.4 million for the first nine months of 2002, compared with $18.8 million for the third quarter of 2001 and $75.9 million for the first nine months of 2001. The third quarter 2002 increase was primarily due to a weather-driven 7.6 percent increase in retail sales, compared with the same period of 2001. The lower earnings for the first nine months of 2002 were primarily due to an after-tax gain of $19.1 million recorded during the first quarter of 2001 as a result of the Millstone sale, offset by the aforementioned increase in retail sales. Combined earnings before preferred dividends at Public Service Company of New Hampshire (PSNH) and North Atlantic Energy Corporation (NAEC) totaled $36.4 million for the third quarter of 2002, and $67.1 million for the first nine months of 2002, compared with $21.8 million for the third quarter of 2001 and $76.1 million for the first nine months of 2001. The third quarter 2002 increase was primarily due to the elimination of the Seabrook-related reserve at NAEC. The lower earnings for the first nine months of 2002 were primarily due to an after-tax gain of $15.5 million recorded during the first quarter of 2001 associated with the sale of PSNH's share of the Millstone 3 nuclear unit and to a greater than 10 percent retail rate reduction that took effect on May 1, 2001, in connection with industry restructuring, offset by the aforementioned elimination of the Seabrook reserve at NAEC. Earnings before preferred dividends at Western Massachusetts Electric Company (WMECO) totaled $4.7 million during the third quarter of 2002, and $26.9 million for the first nine months of 2002, compared with $3.9 million for the third quarter of 2001 and $8.7 million for the first nine months of 2001. The third quarter 2002 increase was primarily due to hotter weather, compared with the same period of 2001. The higher earnings for the first nine months of 2002 were primarily due to the recognition during 2002 of approximately $13 million in tax credits as a result of a regulatory decision received during the second quarter of 2002 and due to a first quarter 2001 refueling outage at the Millstone 3 nuclear unit. Yankee Energy System, Inc. (Yankee) lost $5.8 million during the third quarter of 2002 and earned $6.3 million during the first nine months of 2002, compared with earnings of $3.2 million during the third quarter of 2001 and earnings of $12.1 million during the first nine months of 2001. The lower earnings for 2002 were primarily due to the recording of approximately $10 million after-tax in August of 2001 related to a favorable property tax settlement. Future Outlook NU currently estimates it will earn between $1.10 per share and $1.30 per share in 2002. That estimate assumes that NU will earn between $0.36 and $0.56 per share in the fourth quarter of 2002, including net after-tax gains of approximately $10 million related to the sale of Seabrook in the fourth quarter of 2002, compared to $0.38 per share in 2001. The range also assumes losses of between $10 million and $20 million at NU's competitive energy subsidiaries in the fourth quarter of 2002, compared with earnings of $5.3 million in the fourth quarter of 2001. The reduction in fourth quarter 2002 earnings compared to the fourth quarter of 2001 is primarily due to reduced gains related to contract restructuring. Offsetting weaker projected performance at NU's competitive businesses will be a lower share count and an expected return to normal weather from the mild November and December of 2001. The earnings range also reflects management's uncertainty over the outcome of regulatory dockets in Connecticut, New Hampshire and Massachusetts related to the recovery of certain stranded costs, which management believes were prudently incurred and are probable of recovery. NU also expects to earn between $1.10 per share and $1.30 per share in 2003. That estimate assumes earnings of between $1.05 per share and $1.15 per share at NU's regulated businesses and between $0.15 and $0.25 at NU's competitive energy subsidiaries. NU also assumes it will incur after-tax costs of approximately $0.10 per share at the parent company, primarily related to debt expenses. The 2003 earnings range assumes significantly lower earnings at NU's regulated businesses and significantly improved results at NU's competitive businesses, compared with 2002. Lower earnings at the regulated businesses are related primarily to the absence of 2002 gains related to Seabrook, lower investment tax credits and to much lower pension income. Improved results at NU's competitive energy subsidiaries are projected as a result of an improvement to modest profitability in its trading function and to break-even in its retail marketing function. The competitive energy subsidiaries are expected to lose approximately $50 million to $60 million in 2002. As a result of continued poor performance in the equity markets in 2002, the NU system is projecting approximately $34 million of pre-tax pension income in 2003, a decrease from approximately $73 million in 2002 and approximately $101 million in 2001. The lower 2003 pension income primarily affects NU's regulated businesses, particularly CL&P and WMECO. Offsetting the impact the lower pension income will have on earnings is the amount of pension income that will be capitalized as utility plant. Approximately 30 percent of pension income has been capitalized as utility plant in the past along with other costs related to employees who work on capital projects. The percentage of pension income capitalized depends on the scope of capital programs at the regulated businesses. The lower pension income and higher projected health care costs will also be partially offset by a reduction in the number of employees at NU. In September 2002, the NU system reduced its workforce by approximately 200 employees and expects to reduce its contractor workforce by approximately 100 contractors by the beginning of 2003. Together, these workforce reductions are expected to result in approximately a $20 million pre-tax reduction in costs in 2003. Management believes that most of the cost of the workforce reduction, which was approximately $5 million, is recoverable from ratepayers as a stranded cost related to industry restructuring. Liquidity NU maintained a high level of liquidity throughout the first nine months of 2002, and maintaining liquidity remains a significant focus for NU. As of September 30, 2002, NU had $70.7 million in cash and cash equivalents on hand. In addition to cash and cash equivalents on hand, NU has access to approximately $415 million through available credit facilities. NU expects its cash position to further improve in the fourth quarter of 2002 due to the sale of CL&P's and NAEC's combined 40.04 percent shares of Seabrook on November 1, 2002. CL&P and NAEC received approximately $370 million in total gross proceeds, which are subject to certain true-up adjustments. Of the total cash proceeds NU received from the Seabrook sale, a portion of these proceeds were used to repay all $90 million of NAEC's outstanding debt, and will be used to return all of NAEC's equity, which totaled $55.7 million as of September 30, 2002, to NU and pay between $90 million and $100 million in taxes. The remaining proceeds were refunded to PSNH through the Seabrook Power Contracts. PSNH will use the proceeds refunded from NAEC to recover stranded costs and repay approximately $60 million of debt with any remaining amounts being available to be returned to NU. The net gain from the sale related to CL&P's share of Seabrook primarily will be used to offset stranded costs, and the cash proceeds received by CL&P will be used to meet its capital requirements. NU additionally received approximately $14 million from an unaffiliated owner of Seabrook upon the close of the sale. NU expects to use these additional proceeds, the $55.7 million from NAEC and any amounts received from PSNH to reduce short-term borrowings, fund continued share repurchases, and continue to maintain a high level of liquidity within the NU system. NU had no significant financing activity in the third quarter of 2002. In November 2002, NU expects to refinance its two principal credit lines. It expects to decrease to $300 million from $350 million a line of credit for its regulated subsidiaries. It also expects to increase to $350 million its $300 million line of credit for the parent company and NU's competitive energy subsidiaries. As of September 30, 2002, PSNH, WMECO and Yankee had $55 million, $55 million, and $40 million, respectively, outstanding under the regulated company credit line. Also, as of September 30, 2002, NU parent and NU's competitive energy subsidiaries had a total of $75 million of direct borrowings and $70.4 million of letters of credit outstanding. Total direct borrowings included $55 million, $10 million, and $10 million advanced by NU parent through the NU system Money Pool to Select Energy, Inc. (Select Energy) Northeast Generation Services Company (NGS) and Select Energy Services, Inc. (SESI), respectively. The $70.4 million represents letters of credit issued to counterparties with whom Select Energy has energy contracts and to other parties. NU projects a modest level of system financings over the next three to six months. CL&P is currently contemplating the issuance of up to $200 million of debt to refinance its spent nuclear fuel obligations. WMECO has applied to the Massachusetts Department of Telecommunications and Energy (DTE) to issue $100 million of debt to refinance its existing short-term debt and spent nuclear fuel obligations. Yankee Gas Services Company (Yankee Gas) may seek to issue up to $75 million of debt to reduce short-term debt, which totaled $66 million as of September 30, 2002. In 2001, NU applied to the Securities and Exchange Commission (SEC) to increase to $750 million from $500 million its authority to provide credit assurance in the form of guarantees and letters of credit for the financial performance obligations of certain of its competitive energy subsidiaries, including Select Energy. In addition, NU has applied to the SEC for authority to exempt Select Energy, Select Energy New York, Inc. (SENY) and certain other subsidiaries from the SEC rule limiting NU's "aggregate investment" in such companies to 15 percent of NU's most recent quarterly capitalization. The SEC has not indicated when, or if, it will authorize these increases, and its failure to do so could restrict Select Energy's future growth potential. Over the longer term, a low level of maturities and sinking fund payments will mitigate the NU system's need to obtain funds from the capital markets. In 2003, 2004, and 2005, total system maturities total $54 million, $58 million, and $87 million, respectively. NU's net cash flows provided by operating activities increased to $467.1 million in the first nine months of 2002, compared with $399.2 million during the same period of 2001. Cash flows provided by operating activities increased primarily due to taxes payable in 2001 in connection with the sale of the Millstone units. Also contributing to the increase is the amortization of recoverable energy costs in 2002 compared with deferrals in 2001. Changes in working capital items also contributed to the increase. There was a lower level of investing and financing activities in the first nine months of 2002, as compared to the same period of 2001, primarily due to the sale of the Millstone units, the buyout and buydown of independent power producer contracts, and the issuance of CL&P, PSNH and WMECO rate reduction certificates and bonds in 2001. The level of NU's common dividends totaled $50.2 million in the first nine months of 2002, compared with $44.5 million in the same period of 2001. This increase was a result of NU paying a $0.10 per share quarterly common dividend in the first two quarters of 2001, a $0.125 per share quarterly common dividend in the last two quarters of 2001 and the first two quarters of 2002, and a $0.1375 dividend in the third quarter of 2002. The increase in common dividends was partially offset by a lower share count. On May 14, 2002, NU's Board of Trustees approved payment of a quarterly cash dividend of $0.1375 per share, payable on September 30, 2002, to shareholders of record as of September 1, 2002. This increase is consistent with the company's announced intention of raising the dividend by 10 percent annually. Management has stated that NU may consider raising the dividend target beyond the previously stated goal of paying out approximately 50 percent of regulated company earnings. Such a program will be dependent upon numerous factors, including NU's ability to meet earnings targets and the judgment of its Board of Trustees at the time dividends are declared. Competitive Energy Subsidiaries Subsidiaries: NU's competitive energy subsidiaries include Select Energy and its subsidiary SENY (collectively Select Energy), Northeast Generation Company (NGC), Holyoke Water Power Company (HWP), SESI and NGS. Select Energy engages in wholesale and retail energy marketing activities and energy trading activities. NU's competitive energy subsidiaries own 1,439 megawatts (MW) of generation capacity, consisting of 1,292 MW at NGC and 147 MW at HWP. On June 17, 2002, the air circuit breaker in one of NGC's four 270-megawatt pumped storage units at Northfield Mountain was damaged by fire. This unit returned to service on September 4, 2002. Northfield Mountain's other three units were not damaged and continued to operate. NGC carries property insurance and business interruption insurance for Northfield Mountain. As a result, the fire did not have a material effect on NU's or NGC's financial position or results of operations. SESI performs energy management services for large industrial, commercial and institutional facilities, including the United States Department of Defense, and engages in energy related construction services. NGS operates and maintains NGC's and HWP's generation assets and provides third-party electrical and engineering contracting services. Consistent with its business strategy, the competitive energy subsidiaries acquired certain assets and assumed certain liabilities of an electrical services company and a telecommunications, construction and service company for an aggregate purchase price of $15.3 million on July 1, 2002. Financial results of the acquired companies are included in NU's results of operations since July 1, 2002. For further information regarding this acquisition, see Note 3, "Goodwill and Other Intangible Assets," to the consolidated financial statements. Results: NU's competitive businesses lost $39.9 million after-tax through the first three quarters of 2002 and are expected to lose another $10 million to $20 million after-tax in the fourth quarter of 2002. This compares to break-even results in the first three quarters of 2001 and a profit of approximately $5 million after-tax in the fourth quarter of 2001. Those break-even results for the first three quarters of 2001 exclude a $22 million cumulative effect of an accounting change related to the negative fair value of derivative contracts, primarily at Select Energy's retail marketing business. Most of these contracts expire in 2002. In the first quarter of 2002, NU's competitive businesses lost approximately $22 million, which included after-tax gains of $7 million associated with the renegotiation of certain long-term supply contracts. The first quarter losses included an after-tax loss of $10.6 million in the energy trading area, primarily as a result of a steep increase in the cost of natural gas in the month of March. The competitive retail business lost $13.9 million in the first quarter of 2002 primarily due to unusually mild weather that reduced the consumption of natural gas, requiring Select Energy to sell excess natural gas back into the market at lower prices. In the second quarter of 2002, the competitive businesses lost approximately $9 million. Much of that loss was related to $7.1 million of after-tax losses in the trading area, again resulting from higher natural gas prices in April 2002. In the third quarter of 2002, the competitive businesses lost approximately $9 million, primarily due to unexpectedly high demand brought on by an extremely hot summer. The hot weather caused Select Energy to buy electricity in the spot market as wholesale electricity prices were rising. The trading function lost $1.3 million after-tax in the third quarter. Outlook: In the fourth quarter of 2002 management expects Select Energy to continue to be negatively affected by energy price volatility. However, management has taken steps to purchase virtually all of its projected electricity requirements for November and December, providing more predictability to the quarter's financial results. Management is taking a number of steps to return the competitive energy businesses to profitability in 2003. It has acquired additional businesses in the energy services field and expects that projected profits of $5 million in 2002 will increase in 2003. It has considerably reduced the amount of capital at risk in the trading operation and projects that after-tax losses in the range of $16 million to $19 million in 2002 will turn into modest profits in 2003. Many unprofitable retail contracts expire in 2002. Select Energy plans to size the retail organization to fit a reduced level of business and expects to better manage volumetric risk, particularly in the winter heating months. As a result, management expects to roughly break-even in the retail business in 2003, compared with projected losses of $25 million to $28 million in 2002. In the wholesale marketing area, Select Energy, including NGC, expects to have modest profits in 2003, compared with projected losses of $15 million to $19 million in 2002. Select Energy expects the improvement to come from improved results on its contract with CL&P, which has negatively impacted Select Energy's results by approximately $36.4 million after-tax for the first nine months of 2002, and improved management of the supplies associated with its full requirements contracts. This forecast assumes that Select Energy will be successful in securing a significant amount of new business at acceptable margins. CL&P's standard offer service purchases from Select Energy represented $375.7 million of total competitive energy subsidiaries' revenues for the first nine months of 2002, compared with $378.5 million for the first nine months of 2001. Other transactions between CL&P and Select Energy amounted to $97.2 million in revenues for Select Energy for the first nine months of 2002, compared with $116.8 million for the same period in 2001. These amounts are eliminated in consolidation. In the second quarter of 2002, the competitive energy subsidiaries conducted studies of the depreciable lives of certain generation and software assets. The impact of these studies was to lengthen the useful lives of those generation assets by 20 years to an average of 58 remaining years and to shorten the useful lives of that software to 1.5 remaining years effective for the second quarter of 2002. As a result of these studies, NU's operating expenses decreased by approximately $3 million since the beginning of the second quarter of 2002 and are expected to decrease by approximately $6 million annually. Competitive Energy Subsidiaries' Market and Other Risks Overview: NU's competitive energy subsidiaries are exposed to certain market risks inherent in their business activities. Certain competitive energy subsidiaries, primarily Select Energy, enter into contracts of varying lengths of time to buy and sell energy commodities, including electricity, natural gas and oil. Market risk represents the risk of loss that may impact Select Energy's financial results due to adverse changes in commodity market prices. Wholesale and Retail Marketing: A significant portion of Select Energy's wholesale marketing business is providing energy to full requirements customers, primarily regulated distribution companies. Under full requirements contract terms, Select Energy is required to provide the total energy requirement for the customers' load at all times. A key component of Select Energy's risk management strategy is focused on managing the volume and price risks of full requirements contracts. These risks include significant fluctuations in supply and demand due to numerous factors such as weather, plant availability, transmission congestion, and potentially volatile price fluctuations. As discussed above, Select Energy's year to date 2002 results were negatively impacted by weather patterns that resulted in contracted supply exceeding demand in the warmer than expected winter and committed supply during certain summer months purchased at prices higher than those forecasted. The competitive energy subsidiaries manage their portfolio of wholesale and retail marketing contracts and assets to maximize value and minimize associated risks. The lengths of contracts to buy and sell energy vary in duration from daily/hourly to several years. At any point in time the wholesale and retail marketing portfolio may be long (purchases exceed sales) or short (sales exceed purchases). Portfolio and risk management disciplines with established policies and procedures are used to manage exposures to market risks. At forward market prices in effect at September 30, 2002, the wholesale marketing portfolio, which includes the CL&P standard offer service contract and other contracts that extend to 2013, had a positive mark-to- market position. This positive mark-to-market position will impact Select Energy's gross margin in the future. However, there is significant volatility in the energy commodities market that will impact this position between now and when the contracts are settled. Portfolio volatility reflects fluctuations in value due to changes in energy prices in the region, new transactions entered into during the period and positions settling during the period. Accordingly, there can be no assurances that Select Energy will realize the gross margin corresponding to the present positive mark-to-market position on its wholesale marketing portfolios. The gross margin realized could be at a level that is not sufficient to cover Select Energy's other operating costs, including the cost of corporate overhead. Wholesale and retail marketing transactions, including the full requirements contracts, are intended to be part of Select Energy's normal purchases and sales and are recognized on the accrual basis of accounting. Hedging: Select Energy utilizes derivative financial and commodity instruments (derivatives), including futures and forward contracts, to reduce market risk associated with fluctuations in the price of electricity and natural gas sold under firm commitments. Select Energy also utilizes derivatives, including price swap agreements, call and put option contracts, and futures and forward contracts, to manage the market risk associated with a portion of its anticipated supply requirements. These derivative instruments have been designated as cash flow hedging instruments. Cash flow hedges are recorded as assets or liabilities and included in accumulated other comprehensive income, which is a component of equity. These activities impact Select Energy's earnings when the forecasted hedged transaction is settled, when hedge ineffectiveness is measured and recorded, when the hedge is terminated and the forecasted transaction is expected to be break-even or less, or when the forecasted hedged transaction is no longer probable of occurring. During the third quarter of 2002, Select Energy determined that cash flow hedges related to the CL&P standard offer service contract were ineffective. In the third quarter, as a result of this ineffectiveness, Select Energy transferred $3.9 million from accumulated other comprehensive income to expense on the income statement related to these cash flow hedges. In September 2002, Select Energy terminated these cash flow hedges and realized pre-tax income of $5.6 million. Energy Trading: Select Energy's trading of energy contracts is accounted for using the mark-to-market method under EITF Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." Energy trading transactions at Select Energy include financial transactions and physical delivery transactions for electricity, natural gas and oil in which Select Energy is attempting to profit from changes in market prices. For information regarding changes in accounting for energy trading transactions that will impact Select Energy in the future, see Note 1C, "New Accounting Standards," to the consolidated financial statements. As of September 30, 2002, Select Energy had unrealized gains on mark-to-market trading transactions of $135.1 million and unrealized losses on mark-to-market trading transactions of $53.4 million on a counterparty-by-counterparty basis, for a net positive position of $81.7 million on the entire trading portfolio. Additional information on the trading contract portfolio is included in the following tables. There can be no assurances that Select Energy will actually realize cash corresponding to the present positive net mark-to-market amount on its trading contracts. Numerous factors could either positively or negatively affect the realization in cash of the net mark-to-market amount. These include the volatility of commodity prices, changes in market design or settlement mechanisms, the outcome of future transactions, the performance of counterparties and other factors. Select Energy has policies and procedures requiring all trading positions to be marked-to-market at the end of each trading day. Controls are in place segregating responsibilities between individuals actually trading (front office) and those confirming the trades (middle office). The mark-to-market calculations are performed by individuals in the middle office independent from the front office. The methods used to mark-to-market energy trading contracts are identified and segregated in the table of fair value of contracts at September 30, 2002. A description of each method is as follows: 1) prices actively quoted primarily represent New York Mercantile Exchange futures and options that are marked to closing exchange prices; 2) prices provided by external sources primarily include over-the-counter forwards and options, including bilateral contracts for the purchase or sale of electricity or natural gas, and are marked to the mid-point of bid and ask quotes; and 3) prices based on models or other valuation methods primarily include forwards and options and other transactions for which specific quotes are not available. Long-term electric power prices are modeled using available information from external sources based on recent transactions and validated with a gas forward curve with an estimated heat rate conversion. Broker quotes are available through the year 2005, and models are used for the years 2006 and thereafter. Generally, valuations of short-term contracts derived from quotes or other external sources are more reliable should there be a need to liquidate the contracts, while valuations based on models or other methods for longer-term contracts are less certain. Accordingly, there is a risk that contracts will not be realized at the amounts recorded. As of and for the three and nine months ended September 30, 2002, the sources of the fair value of trading contracts and the changes in fair value of these trading contracts are included in the following tables. Intercompany transactions are eliminated and not reflected in the amounts below. - ------------------------------------------------------------------------------- (Millions of Dollars) Fair Value of Contracts at September 30, 2002 - ------------------------------------------------------------------------------- Maturity Maturity of Maturity in Total Less than One to Four Excess of Fair Sources of Fair Value One Year Years Four Years Value - ------------------------------------------------------------------------------- Prices actively quoted $ 1.8 $ 1.6 $ - $ 3.4 Prices provided by external sources 12.2 35.5 15.0 62.7 Prices based on models or other valuation methods - 7.0 8.6 15.6 - ------------------------------------------------------------------------------- Totals $14.0 $44.1 $23.6 $81.7 - ------------------------------------------------------------------------------- At June 30, 2002, the mark-to-market of trading contracts maturing in less than one year with prices based on models or other valuation methods was a negative $1.9 million. During the third quarter of 2002, prices from external sources became available to mark these contracts to market. These contracts are now valued at a positive $1.6 million. $2.5 million of the $3.5 million change in value is included in the following table as a change in fair value attributable to changes in valuation techniques and assumptions. Additionally, during the third quarter market information regarding certain long-term contracts with prices based on models or other valuation methods became available based on recent transactions. Select Energy used this market information in determining the estimated fair value of these contracts as of September 30, 2002. The result was a decrease in value of $4.1 million, which is also included in the following table as a change in fair value attributable to changes in valuation techniques and assumptions. The positive $2.5 million change and the negative $4.1 million change are reflected in the negative $1.6 million in the table below. The decrease in the number of counterparties participating in the market for long-term energy contracts continues to impact Select Energy's ability to determine the estimated value of its long-term energy contracts. - ------------------------------------------------------------------------------- (Millions of Dollars) Total Fair Value - ------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, 2002 September 30, 2002 - ------------------------------------------------------------------------------- Fair value of contracts outstanding at the beginning of the period $75.5 $56.4 Contracts realized or otherwise settled during the period (5.0) (2.9) Fair value of new contracts when entered into during the period - 13.7 Changes in fair values attributable to changes in valuation techniques and assumptions (1.6) (6.0) Changes in fair value of contracts 12.8 20.5 - ------------------------------------------------------------------------------- Fair value of contracts outstanding at the end of the period $81.7 $81.7 - ------------------------------------------------------------------------------- During the first quarter of 2002, Select Energy terminated certain long-term energy contracts. Coincident with these contract terminations, new contracts were entered into with different terms and conditions. Select Energy also entered into other new contracts with existing counterparties. These new energy trading contracts are derivatives, and collectively they had a positive mark-to-market of $13.7 million when entered into and $14.8 million as of September 30, 2002. As indicated in the table above, the fair value of energy trading contracts increased $25.3 million from $56.4 million as of January 1, 2002 to $81.7 million as of September 30, 2002. This increase, which is more than offset by realized losses on positions taken and closed in 2002, is included in Select Energy's gross margin and included in the $16 million to $19 million the trading operations are expected to lose for 2002. Counterparty Credit: Counterparty credit risk relates to the risk of loss that Select Energy would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. Select Energy has established written credit policies with regard to its counterparties to minimize overall credit risk. These policies require an evaluation of potential counterparties' financial conditions (including credit ratings), collateral requirements under certain circumstances (including cash in advance, letters of credit, and parent guarantees), and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. This evaluation results in establishing credit limits prior to Select Energy entering into trading activities. The appropriateness of these limits is subject to continuing review. Concentrations among these counterparties may impact Select Energy's overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes to economic, regulatory or other conditions. As of September 30, 2002, approximately 70 percent of Select Energy's counterparty credit exposure to wholesale marketing and trading counterparties is cash collateralized or rated BBB- or better. More than two-thirds of the remaining credit exposure is to unrated municipalities. As of September 30, 2002, two counterparties collectively represented approximately 33 percent of the $135.1 million unrealized gains on mark-to- market transactions. Select Energy believes the risk associated with collecting amounts from these counterparties is minimal, primarily due to collateral balances or other security maintained. Select Energy Credit: A number of Select Energy's contracts require the posting of additional collateral in the form of cash or letters of credit in the event NU's ratings were to decline and in increasing amounts dependent upon the severity of the decline. At NU's present investment grade ratings, Select Energy has not had to post any collateral based on credit downgrades. Were NU's unsecured ratings to decline two to three notches to sub-investment grade, Select Energy would, under its present contracts, have to provide approximately $162 million of collateral to various counterparties, which NU, under present circumstances, would be able to provide Select Energy from available sources of funds. NU's ratings are currently stable, and management does not believe that at this time there is a significant risk of a ratings downgrade to sub-investment grade levels. Changing Market: The breadth and depth of the market for energy trading and marketing products in Select Energy's market has been adversely affected by the withdrawal or financial weakening of a number of companies who have historically done significant amounts of business with Select Energy. In general, the market for such products has become shorter term in nature, with less liquidity and participants less able to meet Select Energy's credit standards without providing cash or letter of credit support. Select Energy is being adversely affected by these factors, and there could be a continuing adverse impact on Select Energy's business prospects. Changes are occurring in the administration of transmission systems in territories in which Select Energy does business. Regional transmission organizations are being contemplated, and other changes are occurring within transmission regions. For example, the implementation of a standard market design in New England is expected to occur in 2003, and will create challenges and opportunities for Select Energy. The impact of standard market design implementation on Select Energy's existing positions cannot yet be determined but could have an adverse effect. For further information regarding Select Energy's activities and risks see Note 4, "Market Risk and Risk Management Instruments," and Note 6, "Comprehensive Income," to the consolidated financial statements. Business Development and Capital Expenditures NU's capital expenditures totaled $327.3 million in the first nine months of 2002, compared with $318 million in the first nine months of 2001. NU currently projects year end 2002 capital expenditures to approximate $500 million, approximately $100 million lower than the company had projected at the beginning of 2002. The primary reasons for the lower 2002 capital expenditure projection are delays in commencing work on high voltage electric transmission projects and lower projected capital spending at Yankee Gas. Those changes have been partially offset by increased capital expenditures for CL&P's electric distribution system. In 2001, CL&P announced plans for three high voltage transmission projects in southwestern Connecticut. The Connecticut Siting Council (CSC) approved the first project, replacement of an existing 138,000 volt line between Norwalk, Connecticut and Northport - Long Island, New York, in September 2002. Additional approvals are required from federal and New York state agencies. CL&P currently expects to complete the manufacture and installation of the cable in 2003 and early 2004, respectively. CL&P would share the $80 million cost of this project with the Long Island Power Authority (LIPA), which jointly owns the existing cable. As of September 30, 2002, CL&P has capitalized approximately $3.8 million related to this project. For the second project, CL&P proposed building a new 345,000 volt transmission line facility along an existing right-of-way between Norwalk, Connecticut and Bethel, Connecticut at an estimated cost of $135 million. The restart of CSC hearings on that project has been postponed until at least November 2002, and a decision is now expected in April 2003. As of September 30, 2002, CL&P has capitalized approximately $1.3 million related to this project. In May 2002, legislation was adopted in Connecticut authorizing a moratorium on the approval of additional electric and natural gas transmission crossings of Long Island Sound, which included a delay of decisions on the Bethel to Norwalk project and established task forces to study certain issues associated with siting electric and natural gas lines. As a result, no decision can be made by the CSC any earlier than February 1, 2003. The aforementioned CL&P-LIPA replacement cable is exempt from the moratorium. For the third project, CL&P announced plans for a separate $400 million 345,000 volt transmission line between Norwalk, Connecticut and Middletown, Connecticut. CL&P expects to apply to the CSC for approval of the project in 2003. As of September 30, 2002, CL&P has capitalized approximately $4.4 million related to this project. Merchant Energy Company Counterparty Exposures Certain subsidiaries of NU have entered into various transactions with subsidiaries of NRG Energy, Inc. (NRG). NRG's credit rating has been downgraded to below investment grade by all three major rating agencies, and is presently in default on debt service payments. CL&P - Standard Offer Supply: NRG's subsidiary, NRG Power Marketing, Inc. (NRG-PM), is under contract to supply a significant portion of CL&P's standard offer service requirement through December 31, 2003. NRG-PM is currently in default under the credit rating standards in the CL&P standard offer service contract. At the present time, CL&P has not terminated the contract for purposes of supply continuity, and NRG-PM continues to deliver standard offer supply service. CL&P continues to evaluate NRG-PM's ability to meet its obligations under the standard offer service contract. If NRG-PM ceases to deliver supply under the contract, CL&P would immediately seek alternate sources of energy to serve NRG-PM's portion of the standard offer service requirement. The price of this replacement supply could be greater than the current contract price. See below for management's discussion of the recovery of these costs from ratepayers. CL&P - Congestion Charges: Shortly after beginning to provide standard offer service to CL&P, NRG-PM ceased paying CL&P for congestion charges. In view of the deterioration of NRG-PM's financial condition, CL&P exercised its right of offset to withhold past due congestion costs from the July 2002 and subsequent standard offer payments to NRG-PM pending the outcome of litigation between the parties concerning contractual liability for congestion costs in the United States District Court for the District of Connecticut. See NU's 2001 Form 10-K, Item 3, "Legal Proceedings," for further information on this litigation. CL&P - Station Service: Under a Federal Energy Regulatory Commission (FERC) approved interconnection agreement with NRG, CL&P is providing station electric service to NRG's Connecticut subsidiaries at a standard retail rate. The NRG subsidiaries use this service when they are not generating at their plants. CL&P has been billing the NRG subsidiaries for this service since 2000. NRG has disputed and refused to pay all such billings, claiming that CL&P should not be utilizing a retail rate. Billings through September 30, 2002, amounted to approximately $12 million. CL&P has filed with the FERC to resolve this dispute. The outcome of this proceeding cannot be predicted, and management continues to evaluate the collectibility of the amounts in dispute as well as the financial condition of NRG and its subsidiaries. Yankee Gas: In 2002, both the Connecticut Department of Public Utility Control (DPUC) and the CSC approved construction of a natural gas pipeline and other gas distribution facilities by Yankee Gas to a 544 megawatt generating plant that Meriden Gas Turbines LLC (MGT), an NRG subsidiary, was constructing in Meriden, Connecticut. In October 2002, MGT notified Yankee Gas that it was permanently shutting down or abandoning construction of the generating plant. As a result, Yankee Gas immediately drew upon the full amount of a $16 million irrevocable letter of credit issued for the accounting of MGT. MGT has since disputed Yankee Gas's interpretation of the circumstances leading to the exercise of the irrevocable letter of credit and the appropriateness of the draw. Yankee Gas and MGT are currently discussing several options to address and remedy these contract disputes while preserving the project investment. Select Energy: Select Energy entered into certain energy trading contracts with NRG-PM. During the third quarter, Select Energy terminated those contracts as a result of failure to provide adequate financial assurances under those contracts by NRG-PM. In connection with the termination, Select Energy paid NRG-PM $3.1 million to close out the transactions. NRG-PM has disputed the amount owed and believes an additional $5.3 million is due. NGS: E.S. Boulos Company, a subsidiary of NGS, entered into a joint venture arrangement with an unaffiliated entity under which each party is a 50 percent owner. This joint venture is one of several subcontractors performing work on the generating plant that MGT was constructing. As discussed above, construction of this generating facility has been permanently shut down or abandoned. As a result of the situation and the uncertainty with respect to the completion of the plant, NGS has financial exposure of approximately $1.7 million related to collection of accounts receivable and settlements of other obligations. NGS is pursuing various options to minimize this financial exposure, including the filing of liens against the construction company and MGT. Management does not expect that the resolution of these disputes will have a material adverse effect on the NU's and its subsidiaries' financial condition or results of operations. Additionally, NU and its subsidiaries do not have a significant level of exposure to other merchant energy companies. Restructuring and Rate Matters Connecticut - CL&P: In 2002, 50 percent of CL&P's standard offer service requirements are served by Select Energy, 40 percent by NRG-PM and 10 percent by an affiliate of Duke Energy Corporation (Duke). In 2003, Select Energy will continue to serve 50 percent of CL&P's standard offer service requirements, but the percentage served by NRG-PM will rise to 45 percent, and the amount served by Duke will decline to 5 percent. As discussed above, CL&P continues to evaluate NRG-PM's ability to meet its obligations under the standard offer service contract. If CL&P is required to seek an alternate source of supply, CL&P would pursue recovery of any additional costs associated with obtaining such supply from NRG-PM pursuant to the contract and may be required to seek DPUC approval to flow through any such costs to customers. Management believes that recovery of these costs is consistent with the provisions of Connecticut's electric utility restructuring legislation and with the DPUC's prior decisions. On September 27, 2001, CL&P filed its application with the DPUC for approval of the disposition of the proceeds from the sale of the Millstone units to Dominion Nuclear Connecticut, Inc. (DNCI). This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale. The company hopes to receive a decision from the DPUC in 2002. On May 17, 2002, CL&P filed an application with the DPUC for the approval of the auction results in the sale of Seabrook to a subsidiary of FPL. The proceeds from the sale of Seabrook unit 1 will be utilized to offset stranded costs. Hearings were held in July 2002, and a final decision approving the sale was issued in September 2002. Connecticut - Yankee Gas: On October 1, 2002 Yankee Gas filed supplemental testimony and exhibits to its original Infrastructure Expansion Rate Mechanism (IERM) filing with the DPUC on August 1, 2002. This IERM filing reflected those 2001 through 2003 system expansion projects that Yankee Gas has undertaken or plans to undertake by June 30, 2003, and that meet certain financial criteria outlined by the DPUC. Yankee Gas is currently proposing no IERM charge for 2003, that current rates remain unchanged and that the projected 2003 revenue requirement be carried forward to the 2004 IERM period. A final decision from the DPUC regarding this filing is scheduled for the first quarter of 2003. New Hampshire: In July 2001, the New Hampshire Public Utilities Commission (NHPUC) opened a docket to review the fuel and purchased-power adjustment clause (FPPAC) costs incurred between August 2, 1999, and April 30, 2001. Hearings at the NHPUC concluded in June 2002, and PSNH filed its closing brief with the NHPUC in July 2002. Under the "Agreement to Settle PSNH Restructuring," FPPAC deferrals are recovered as a Part 3 stranded cost through the stranded cost recovery charge. Management believes the recoverability of these costs is probable and expects the NHPUC will issue its order by the end of 2002. On June 28, 2002, PSNH made its first stranded cost recovery charge reconciliation filing with the NHPUC for the period May 1, 2001, through December 31, 2001. This filing reconciles stranded cost revenues against actual stranded cost charges with any difference being recovered or deferred. Included in the stranded cost charges are the net generation revenues and generation costs for the filing period. Where generation revenues exceed costs, additional stranded costs were amortized; where generation costs exceed revenues, costs were deferred for future recovery. The generation costs included in this filing are subject to a prudence review by the NHPUC, and hearings have been scheduled for early 2003. Management does not expect this prudence review to have a material impact on PSNH's earnings. On September 12, 2002, the NHPUC issued a final decision approving the auction results in the sale of Seabrook to a subsidiary of FPL. On November 1, 2002, CL&P and NAEC consummated the sale of their 40.04 percent combined ownership interest in Seabrook to a subsidiary of FPL. CL&P, NAEC and certain other of the joint owners collectively sold 88.2 percent of Seabrook to FPL. Following the sale of NAEC's share of Seabrook, the proceeds received by NAEC, after NAEC repays its debt, will be refunded to PSNH through the Seabrook Power Contracts. PSNH will use the proceeds received from NAEC to recover stranded costs and repay debt with remaining amounts being available to be returned to NU. As part of the sale, FPL assumed responsibility for decommissioning Seabrook. Massachusetts: On March 30, 2001, WMECO filed its second annual stranded cost reconciliation with the DTE for calendar year 2000. On March 29, 2002, WMECO filed its 2001 annual transition cost reconciliation with the DTE. This filing reconciles the recovery of stranded generation costs for calendar year 2001 and includes sales proceeds from WMECO's portion of the Millstone units, the impact of securitization and approximately a $13 million benefit to ratepayers from WMECO's nuclear performance-based ratemaking process. On July 8, 2002, WMECO submitted a compliance filing in accordance with the DTE's June 7, 2002, order in WMECO's 1998 through 1999 stranded cost reconciliation proceedings. This filing reflected changes to the 1998 through 1999 reconciliations as agreed to by WMECO and/or ordered by the DTE and also included a revised transition charge filing for 2000 and 2001 to reflect the June 7, 2002 order. Subsequent to the July 8, 2002 filing, WMECO and the office of the Massachusetts Attorney General have participated in settlement discussions with regard to all transition charge issues for the 1998 through 2001 reconciliations. WMECO hopes to reach an agreement by the end of 2002. On July 1, 2002, WMECO completed a competitive bid process for a six-month contract from July 1, 2002 to December 31, 2002, to serve approximately 100 MW of WMECO default service. Affiliate Select Energy was the winner of the bid process and estimates that this contract will result in approximately $13.2 million of revenues in 2002. For further information regarding commitments and contingencies related to restructuring and rate matters, see Note 2A, "Commitments and Contingencies - Restructuring and Rate Matters," to the consolidated financial statements. Nuclear Plant Performance and Other Matters Seabrook: Seabrook operated at a capacity factor of 89 percent through the first nine months of 2002. Seabrook returned to service on June 1, 2002, after the completion of a 28-day scheduled refueling outage that began on May 4, 2002. Excluding the scheduled refueling outage, Seabrook operated at a capacity factor of 92 percent through the first nine months of 2002. On November 1, 2002, CL&P, NAEC, and certain other joint owners consummated the sale of their ownership interests in Seabrook to FPL. Other Matters Other Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 2, "Commitments and Contingencies," to the consolidated financial statements. Forward Looking Statements: This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, regulatory proceedings, the use of proceeds from restructuring, and the recovery of operating costs. Words such as estimates, expects, anticipates, intends, plans, and similar expressions identify forward looking statements. Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory bodies, competition and industry restructuring, changes in economic conditions, changes in weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, volatility in electric and natural gas commodity markets, and other presently unknown or unforeseen factors. RESULTS OF OPERATIONS The components of significant income statement variances for the third quarter of 2002 and the first nine months of 2002 are provided in the table below. The following table also includes the effects of the reclassification of trading revenues and expenses, which has been retroactively applied to all periods presented. For further information regarding this accounting change, see Note 1C, "New Accounting Standards," to the consolidated financial statements. Income Statement Variances (Millions of Dollars) 2002 over/(under) 2001 ----------------------------------- Third Nine Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $(169) (11)% $(900) (19)% Operating Expenses: Fuel, purchased and net interchange power (188) (19) (747) (26) Other operation (11) (5) (12) (2) Maintenance 9 14 (14) (7) Depreciation 5 11 (7) (5) Amortization 3 3 (690) (77) Taxes other than income taxes 8 20 6 4 Gain on sale of utility plant - - 644 100 ----- ---- ----- ---- Total operating expenses (174) (12) (820) (19) ----- ---- ----- ---- Operating income 5 4 (80) (20) ----- ---- ----- ---- Other income, net 14 81 (170) (90) Interest expense, net (2) (4) (5) (3) ----- ---- ----- ---- Income before income tax expense 21 36 (245) (63) Income tax expense 7 29 (124) (75) Preferred dividends of subsidiaries - - (2) (32) ----- ---- ----- ---- Income before cumulative effect of accounting change 14 40 (119) (56) ----- ---- ----- ---- Cumulative effect of accounting change, net of tax benefit - - 22 100 ----- ---- ----- ---- Net income $ 14 40% $ (97) (50)% ===== ==== ===== ==== Comparison of the Third Quarter of 2002 to the Third Quarter of 2001 Operating Revenues Total revenues decreased by $169 million or 11 percent in the third quarter of 2002, compared with the same period in 2001, primarily due to lower competitive energy revenues ($181 million, after intercompany eliminations), partially offset by higher regulated revenues ($11 million). The competitive energy companies' revenue decrease is primarily due to lower wholesale marketing revenues for Select Energy from full requirements contracts. The regulated revenue increase is primarily due to higher retail sales ($36 million), partially offset by lower revenue due to the net decrease in the WMECO standard offer energy rates ($21 million) and lower wholesale sales of energy and capacity ($10 million). Regulated retail electric kilowatt-hour (kWh) sales increased by 6.4 percent, and firm natural gas volume sales increased by 1.7 percent in the third quarter of 2002. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2002, primarily due to lower costs of goods sold for wholesale marketing activities at the competitive businesses. Other Operation and Maintenance Other operation expense decreased $11 million in the third quarter of 2002, primarily due to lower competitive energy service companies' expenses associated with the costs of goods sold. Maintenance expense is higher due to higher transmission costs for the competitive companies due to increased load responsibilities. Depreciation Depreciation increased in 2002 due to higher regulated plant balances resulting from the recent level of construction expenditures. Taxes Other Than Income Taxes Taxes other than income taxes increased primarily due to the favorable 2001 property tax settlement with the City of Meriden which decreased the 2001 amount by $14 million, partially offset by the recognition in 2002 of a Connecticut sales and use tax audit settlement for the years 1993 through 2001 ($8 million). Other Income, Net Other income, net increased primarily due to the elimination of reserves associated with NU's ownership shares of Seabrook unit 2 in 2002 ($25 million), partially offset by the recording in 2001 of interest related to the City of Meriden property tax settlement ($6 million) and the 2001 recording of interest related to an income tax settlement ($6 million). Income Tax Expense Income tax expense increased due to higher taxable income. Comparison of the First Nine Months of 2002 to the First Nine Months of 2001 Operating Revenues Total revenues decreased by $900 million or 19 percent in the first nine months of 2002, compared with the same period in 2001, primarily due to lower competitive energy revenues ($497 million after intercompany eliminations), and lower regulated subsidiaries revenues due to lower wholesale revenues ($258 million), and lower regulated retail revenues ($145 million). The competitive energy companies' revenue decrease is primarily due to lower wholesale marketing revenues from Select Energy from full requirements contracts. The decrease in regulated wholesale revenues is due to lower PSNH wholesale sales ($77 million), the 2001 revenue associated with the sale of Millstone output ($42 million) and lower sales associated with other purchased-power contracts ($107 million). The regulated retail revenue decrease is due to rate decreases for PSNH and the decrease in the WMECO standard offer energy rate ($84 million), lower Yankee revenue due to a lower purchased gas adjustment clause rate ($61 million) and a combination of the rate decrease and lower gas sales ($28 million), partially offset by an increase for CL&P resulting from the collection of deferred fuel costs ($24 million) and higher retail electric sales ($5 million). Regulated retail electric kWh sales increased by 0.6 percent, and firm natural gas volume sales decreased by 7.9 percent in 2002. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2002, primarily due to lower wholesale sales from the competitive businesses ($472 million) and lower purchased-power costs for the regulated subsidiaries ($274 million). Other Operation and Maintenance Other operation and maintenance (O&M) expenses decreased $26 million in 2002, primarily due to lower expenses associated with the regulated businesses ($48 million), partially offset by higher costs of goods sold for the competitive energy companies ($23 million). The regulated O&M decrease is primarily due to lower nuclear expenses as a result of the sale of the Millstone units at the end of the first quarter in 2001 ($48 million), lower distribution costs ($6 million), lower administration and general expenses ($6 million) and lower fossil and hydroelectric expenses ($2 million), partially offset by higher charges from the ISO for capacity, reliability and availability ($13 million). Depreciation Depreciation decreased in 2002 primarily due to the Millstone units decommissioning expenses recorded in 2001 ($7 million), lower NAEC expense due to the 2001 buydown which reduced plant balances ($3 million), lower Yankee expense resulting from lower depreciation allowed in the 2001 rate decision ($3 million), and lower competitive energy companies' expense resulting from generation assets life extensions ($1 million), partially offset by higher expense resulting from higher regulated balances ($7 million). Amortization Amortization decreased in 2002, primarily due to the amortization of the gain in 2001 related to the sale of the Millstone units ($644 million), higher amortization in 2001 related to recovery of the Millstone investment ($45 million) and the NAEC discontinuance of amortizing Seabrook deferred return in 2001 as a result of PSNH's restructuring ($16 million), partially offset by higher amortization related to the regulated companies' recovery of stranded costs ($15 million). Taxes Other Than Income Taxes Taxes other than income taxes increased primarily due to the favorable 2001 property tax settlement with the City of Meriden which decreased the 2001 amount by $14 million, partially offset by the recognition in 2002 of a Connecticut sales and use tax audit settlement for the years 1993 through 2001 ($8 million). Gain on Sale of Utility Plant In 2001, NU recorded gains on the sale of CL&P's and WMECO's ownership interests in the Millstone units. A corresponding amount of amortization expense was recorded. Other (Loss)/Income, Net Other (loss)/income, net decreased primarily due to NU's 2001 recognition of a gain in connection with the sale of Millstone units to DNCI ($202 million pre-tax), a 2002 charge reflecting a write-down in NU's investment in NEON ($15 million pre-tax), by the recording in 2001 of interest related to the City of Meriden property tax settlement ($6 million) and the 2001 recording of interest related to an income tax settlement ($6 million) and the gain on the disposition of property for PSNH in 2001 ($3 million), partially offset by a 2001 noncash charge related to the forward purchase of NU common shares ($35 million) and the elimination of reserves associated with NU's ownership shares of Seabrook unit 2 in 2002 ($25 million). Income Tax Expense Income tax expense decreased in 2002, primarily due to the recognition of WMECO investment tax credits in the second quarter of 2002 and the tax impacts of the Millstone sale in 2001. Cumulative Effect of Accounting Change, Net of Tax Benefit The cumulative effect of accounting change, net of tax benefit, recorded in 2001, represents the effect of the adoption of SFAS No. 133, as amended ($22 million). INDEPENDENT ACCOUNTANTS' REPORT To the Board of Trustees Northeast Utilities Berlin, Connecticut We have reviewed the accompanying condensed consolidated balance sheet of Northeast Utilities and subsidiaries ("the Company") as of September 30, 2002, and the related condensed consolidated statements of income for the three-month and nine-month periods then ended and the related condensed consolidated statement of cash flows for the nine-month period then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Hartford, Connecticut November 7, 2002 Northeast Utilities and Subsidiaries The Connecticut Light and Power Company and Subsidiaries Public Service Company of New Hampshire and Subsidiaries Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (All Companies) A. Presentation The accompanying unaudited financial statements should be read in conjunction with the management's discussion and analysis of financial condition and results of operations in this Form 10-Q, the First and Second Quarter 2002 Form 10-Qs and the Annual Reports of Northeast Utilities (NU or the company), The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO), which were filed as part of the NU 2001 Form 10-K, and the current reports on Form 8-K dated July 23, 2002, August 2, 2002, August 14, 2002, October 8, 2002, and October 21, 2002. The accompanying financial statements contain, in the opinion of management, all adjustments necessary to present fairly NU's and each NU system company's financial position as of September 30, 2002, the results of operations for the three-month and nine-month periods ended September 30, 2002 and 2001, and statements of cash flows for the nine-month periods ended September 30, 2002 and 2001. All adjustments are of a normal, recurring nature except those described in Notes 1C and 2. Due primarily to the seasonality of NU's business, the results of operations for the three-month and nine-month periods ended September 30, 2002 and 2001, and statements of cash flows for the nine-month periods ended September 30, 2002 and 2001, are not indicative of the results expected for a full year. The consolidated financial statements of NU and of its subsidiaries, as applicable, include the accounts of all their respective subsidiaries. Intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior period data have been made to conform with the current period presentation. B. Regulatory Accounting and Assets The accounting policies of the NU system regulated operating companies conform to accounting principles generally accepted in the United States applicable to rate-regulated enterprises and reflect the effects of the rate-making process in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." CL&P's, PSNH's and WMECO's transmission and distribution businesses continue to be cost-of-service rate regulated, and management believes the application of SFAS No. 71 to those portions of those businesses continues to be appropriate. Management also believes it is probable that the NU system operating companies will recover their investments in long-lived assets, including regulatory assets. In addition, all material regulatory assets are earning a return, except for securitized regulatory assets. The components of the NU system companies' regulatory assets are as follows: --------------------------------------------------------------------- September 30, December 31, (Millions of Dollars) 2002 2001 --------------------------------------------------------------------- Recoverable nuclear costs $ 193.7 $ 231.6 Securitized regulatory assets 1,926.5 2,004.1 Income taxes, net 311.4 312.8 Unrecovered contractual obligations 70.3 78.3 Recoverable energy costs, net 307.6 327.2 Other 279.8 333.5 --------------------------------------------------------------------- Totals $3,089.3 $3,287.5 --------------------------------------------------------------------- C. New Accounting Standards Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires that legal obligations associated with the retirement of property, plant and equipment be recognized as a liability at fair value when incurred when a reasonable estimate of the fair value can be made. SFAS No. 143 is effective for NU's 2003 calendar year, and management is in the process of assessing the impact of SFAS No. 143 on NU's consolidated financial statements. Upon adoption of SFAS No. 143, there may be an impact on NU's consolidated financial statements which management has not determined at this time. Energy Trading and Risk Management Activities: In June 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue No. 02-3, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," requiring energy trading companies to classify revenues and expenses associated with certain energy trading contracts on a net basis within revenues, rather than recording the gross revenues and expenses. NU currently accounts for energy trading activities using the mark- to-market method under EITF Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." EITF Issue No. 98-10 allows energy trading activities to be presented as revenues and as expenses or on a net basis in revenues in the statements of income. Effective July 1, 2002, NU adopted net reporting of revenues and expenses as allowed by EITF Issue No. 98-10. Prior to July 1, 2002, NU presented energy trading activities as revenues and expenses as allowed by EITF Issue No. 98-10. The adoption of net reporting was applied retroactively to all periods presented but will have no effect on net income. The three and nine months ended September 30, 2002, reflect net reporting. The revenues and expenses impacted relate to energy trading contracts that physically settle which were previously recorded as operating revenues for sales and fuel, purchased and net interchange power for the costs of the sales. The effects of this reporting for the three and nine months ended September 30, 2001, which have been previously reported, are as follows: --------------------------------------------------------------------- Competitive Energy NU Subsidiaries Consolidated --------------------------------------------------------------------- Three Nine Three Nine (Millions of Dollars) Months Months Months Months --------------------------------------------------------------------- Operating Revenues: As previously reported $777.2 $2,101.5 $1,723.9 $5,107.7 Impact of reclassification (193.2) (438.0) (193.2) (438.0) --------------------------------------------------------------------- As currently reported $584.0 $1,663.5 $1,530.7 $4,669.7 --------------------------------------------------------------------- --------------------------------------------------------------------- Competitive Energy NU Subsidiaries Consolidated --------------------------------------------------------------------- Three Nine Three Nine (Millions of Dollars) Months Months Months Months --------------------------------------------------------------------- Fuel, Purchased and Net Interchange Power: As previously reported $719.0 $1,863.8 $1,178.3 $3,318.9 Impact of reclassificaton (193.2) (438.0) (193.2) (438.0) --------------------------------------------------------------------- As currently reported $525.8 $1,425.8 $ 985.1 $2,880.9 --------------------------------------------------------------------- On October 25, 2002, the EITF reached additional consensuses in EITF Issue No. 02-3. These consensuses supercede the consensus the EITF reached in June 2002. The first consensus rescinds EITF Issue No. 98-10, under which Select Energy, Inc. (Select Energy) currently accounts for energy trading activities. The consensus will require energy trading companies to follow SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, for energy trading activities and to discontinue mark-to- market accounting for contracts that are not derivatives. Management is currently evaluating the extent of trading contracts that are not derivatives. The second consensus requires net reporting of derivative energy trading activities effective January 1, 2003. Management has already adopted net reporting of trading activities and will continue to evaluate EITF Issue No. 02-3 as additional guidance becomes available. D. Other (Loss)/Income, Net The components of NU's other (loss)/income, net items are as follows: --------------------------------------------------------------------- For the Nine Months Ended --------------------------------------------------------------------- September 30, September 30, (Millions of Dollars) 2002 2001 --------------------------------------------------------------------- Loss on investments $(17.1) $ - Gain related to Millstone sale - 201.9 Loss on share repurchase contracts - (35.4) Seabrook-related 23.3 - Other, net 13.5 24.1 --------------------------------------------------------------------- Totals $ 19.7 $190.6 --------------------------------------------------------------------- E. Change in Estimated Useful Lives In the second quarter of 2002, NU conducted studies of the depreciable lives of certain generation and software assets maintained by the competitive energy subsidiaries. The impact of these studies was to lengthen the useful lives of those generation assets by 20 years to an average of 58 remaining years and to shorten the useful lives of that software to 1.5 remaining years effective for the second quarter of 2002. As a result of these studies, NU's operating expenses decreased by approximately $3 million since the beginning of the second quarter of 2002. F. Sale of Customer Receivables As of September 30, 2002, CL&P had sold accounts receivable of $40 million to a subsidiary of Citigroup, Inc. with limited recourse through the CL&P Receivables Corporation (CRC), a wholly owned subsidiary of CL&P. Additionally as of September 30, 2002, $4.2 million of assets were designated as collateral under the agreement with the CRC. Concentrations of credit risk to the purchaser under the this agreement with respect to the receivables are limited due to CL&P's diverse customer base within its service territory. 2. COMMITMENTS AND CONTINGENCIES A. Restructuring and Rate Matters (CL&P, PSNH, WMECO) Connecticut: On September 27, 2001, CL&P filed its application with the Connecticut Department of Public Utility Control (DPUC) for approval of the disposition of the proceeds in the amount of approximately $1.2 billion from the sale of the Millstone units to a subsidiary of Dominion Resources, Inc., Dominion Nuclear Connecticut, Inc. (DNCI). This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale. In accordance with Connecticut's electric utility industry restructuring legislation, CL&P was required to utilize any gains from the Millstone sale to offset stranded costs. There are certain contingencies related to this filing regarding the potential disallowance of what management believes were prudently incurred costs. Management believes the recoverability of these costs is probable. The company hopes to receive a decision from the DPUC in 2002. New Hampshire: In July 2001, the New Hampshire Public Utilities Commission (NHPUC) opened a docket to review the fuel and purchased- power adjustment clause (FPPAC) costs incurred between August 2, 1999, and April 30, 2001. Hearings at the NHPUC concluded in June 2002, and PSNH filed its closing brief with the NHPUC in July 2002. Under the "Agreement to Settle PSNH Restructuring," FPPAC deferrals are recovered as a Part 3 stranded cost through the stranded cost recovery charge. Management believes the recoverability of these costs is probable and expects the NHPUC will issue its order by the end of 2002. On June 28, 2002, PSNH made its first stranded cost recovery charge reconciliation filing with the NHPUC for the period May 1, 2001, through December 31, 2001. This filing reconciles stranded cost revenues against actual stranded cost charges with any difference being recovered or deferred. Included in the stranded cost charges are the net generation revenues and generation costs for the filing period. Where generation revenues exceed costs, additional stranded costs were amortized; where generation costs exceed revenues, costs were deferred for future recovery. The generation costs included in this filing are subject to a prudence review by the NHPUC, and hearings have been scheduled for early 2003. Management does not expect this prudence review to have a material impact on PSNH's earnings. Massachusetts: On March 30, 2001, WMECO filed its second annual stranded cost reconciliation with the Massachusetts Department of Telecommunications and Energy (DTE) for calendar year 2000. On March 29, 2002, WMECO filed its 2001 annual transition cost reconciliation with the DTE. This filing reconciles the recovery of stranded generation costs for calendar year 2001 and includes sales proceeds from WMECO's portion of the Millstone units, the impact of securitization and approximately a $13 million benefit to ratepayers from WMECO's nuclear performance-based ratemaking process. On July 8, 2002, WMECO submitted a compliance filing in accordance with the DTE's June 7, 2002, order in WMECO's 1998 through 1999 stranded cost reconciliation proceedings. This filing reflected changes to the 1998 through 1999 reconciliations as agreed to by WMECO and/or ordered by the DTE and also included a revised transition charge filing for 2000 and 2001 to reflect the June 7, 2002 order. Subsequent to the July 8, 2002 filing, WMECO and the office of the Massachusetts Attorney General have participated in settlement discussions with regard to all transition charge issues for the 1998 through 2001 reconciliations. WMECO hopes to reach an agreement by the end of 2002. B. Long-Term Contractual Arrangements (Select Energy) Select Energy maintains long-term agreements to purchase energy in the normal course of business as part of its portfolio of resources to meet its actual or expected sales commitments. The aggregate amount of these purchase contracts was $4.3 billion at September 30, 2002. These contracts extend through 2006 as follows (millions of dollars): --------------------------------------------------------------------- Year --------------------------------------------------------------------- 2002 $1,496.5 2003 2,110.2 2004 405.4 2005 240.4 2006 68.4 --------------------------------------------------------------------- Total $4,320.9 --------------------------------------------------------------------- C. Other Investments Yankee Energy Services Company (YESCO), a subsidiary of Yankee Energy System, Inc. (Yankee), received a note receivable of $4.7 million from BMC Energy LLC (BMC Energy) in connection with the sale of certain renewable energy generation assets in 2001. On October 28, 2002, NU, on behalf of YESCO, delivered to BMC Energy a notice of an event of default with respect to the note. Under the terms of such note, BMC Energy has an obligation to provide certain financial information to determine the extent to which current cash flows are available to service the outstanding note balance of $4.7 million. If the event of default is not remedied by November 29, 2002, pursuant to the terms of note, all obligations will become immediately due and payable. YESCO is currently evaluating the recoverability of the note through either payments on the note or reacquisition of assets. 3. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, NU adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which ceases amortization of goodwill and certain intangible assets with indefinite useful lives. SFAS No. 142 also requires that goodwill and intangible assets deemed to have indefinite useful lives be reviewed for impairment upon adoption of SFAS No. 142 and at least annually thereafter by applying a fair value-based test. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value and if the implied fair value of goodwill based on the estimated fair value of the reporting unit exceeds the carrying amount of the goodwill. In July 2002, the competitive energy subsidiaries acquired certain assets and assumed certain liabilities of Woods Electrical Co., Inc., an electrical services company and Woods Network Services, Inc., a telecommunications, construction and service company, for an aggregate purchase price of $15.3 million. The aggregate purchase price consisted of $3.3 million of tangible net assets, $0.5 million of intangible assets subject to amortization with a weighted average amortization period of 2.6 years, $5 million of intangible assets not subject to amortization, and $6.5 million of goodwill. This purchase price allocation is preliminary and subject to adjustment. Financial results of the acquired companies are included in NU's results of operations since July 1, 2002. The goodwill recognized in these transactions in the aggregate amount of $6.5 million was assigned to the competitive energy subsidiaries reportable segment and is expected to be fully deductible for tax purposes. Additionally, as part of these purchase agreements an additional payment of not more than $9.2 million would be contingently payable by 2005 if certain earnings targets are met. Any contingent payments made will be accounted for as part of the purchase price. Inclusive of the aforementioned acquisitions, as of September 30, 2002, NU maintains $319.4 million of goodwill that is no longer being amortized, $19.5 million of identifiable intangible assets which continue to be amortized over a period ranging from one to 15 years with a weighted average amortization period of 14.7 years and $5 million of intangible assets not subject to amortization. These amounts are included on the consolidated balance sheets as goodwill and other purchased intangible assets, net. NU's reporting units that maintain goodwill are generally consistent with the operating segments underlying the reportable segments identified in Note 8, "Segment Information," and are as follows: Yankee Gas Services Company (Yankee Gas), Select Energy Services, Inc. (SESI), Northeast Generation Services Company (NGS), NU Enterprises, Inc. (NUEI Parent), and YESCO. Yankee Gas is included in the regulated utilities - gas reportable segment and SESI, NGS, NUEI Parent, and YESCO are included in the competitive energy subsidiaries segment. The goodwill balances of these reporting units are included in the table below. NU has completed its initial impairment analysis for all reporting units that maintained goodwill upon adoption of SFAS No. 142 and has determined that no impairment exists. In completing this analysis, the fair values of the reporting units were estimated using both discounted cash flow methodologies and an analysis of comparable companies or transactions. A summary of NU's goodwill as of September 30, 2002, by reportable segment and reporting unit is as follows (millions of dollars): -------------------------------------------- Goodwill (Millions of Dollars) Balance -------------------------------------------- Regulated Utilities - Gas: Yankee Gas $287.6 Competitive Energy Subsidiaries: SESI 18.0 NGS 11.7 NUEI Parent 1.7 YESCO 0.4 -------------------------------------------- Total $319.4 -------------------------------------------- Except for the aforementioned acquisitions, there were no impairments or adjustments to these goodwill balances since January 1, 2002. As of September 30, 2002 and December 31, 2001, NU's intangible assets and related accumulated amortization consisted of the following: -------------------------------------------------------------------------- As of September 30, 2002 -------------------------------------------------------------------------- (Millions of Gross Accumulated Net Dollars) Balance Amortization Balance -------------------------------------------------------------------------- Intangible assets subject to amortization: Exclusivity agreement $17.7 $3.9 $13.8 Customer list 6.6 1.4 5.2 Employment related agreements and other 0.5 - 0.5 -------------------------------------------------------------------------- Totals $24.8 $5.3 $19.5 -------------------------------------------------------------------------- Intangible assets not subject to amortization: Customer relationships $ 2.0 Tradenames 3.0 -------------------------------------------------------------------------- Totals $ 5.0 -------------------------------------------------------------------------- -------------------------------------------------------------------------- As of December 31, 2001 -------------------------------------------------------------------------- (Millions of Gross Accumulated Net Dollars) Balance Amortization Balance -------------------------------------------------------------------------- Intangible assets subject to amortization: Exclusivity agreement $17.7 $3.1 $14.6 Customer list 6.6 1.1 5.5 -------------------------------------------------------------------------- Totals $24.3 $4.2 $20.1 -------------------------------------------------------------------------- NU recorded amortization expense of $1.1 million and $1.2 million during the first nine months of 2002 and 2001, respectively, related to these intangible assets. Based on the current amount of intangible assets subject to amortization, the estimated annual amortization expense for each of the succeeding 5 years from 2003 through 2007 is $1.8 million, $1.8 million, $1.7 million, $1.6 million, and $1.6 million, respectively. These amounts may vary as purchase price allocations are finalized and acquisitions and dispositions occur in the future. The results for the three months and nine months ended September 30, 2001, on a historical basis, do not reflect the provisions of SFAS No. 142. Had NU adopted SFAS No. 142 on January 1, 2001, historical net income and basic and fully diluted earnings per share (EPS) amounts would have been adjusted as follows: -------------------------------------------------------------------------- Fully (Millions of Dollars, except Net Basic Diluted share information) Income EPS EPS -------------------------------------------------------------------------- Three Months Ended September 30, 2001: -------------------------------------------------------------------------- Reported net income $34.6 $0.26 $0.26 Add back: goodwill amortization 2.3 0.02 0.02 -------------------------------------------------------------------------- Adjusted net income $36.9 $0.28 $0.28 -------------------------------------------------------------------------- Three Months Ended September 30, 2002: -------------------------------------------------------------------------- Reported net income $48.6 $0.38 $0.38 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Fully (Millions of Dollars, except Net Basic Diluted share information) Income EPS EPS -------------------------------------------------------------------------- Nine Months Ended September 30, 2001: -------------------------------------------------------------------------- Reported net income $193.5 $1.41 $1.41 Add back: goodwill amortization 6.8 0.05 0.05 -------------------------------------------------------------------------- Adjusted net income $200.3 $1.46 $1.46 -------------------------------------------------------------------------- Nine Months Ended September 30, 2002: -------------------------------------------------------------------------- Reported net income $ 96.1 $0.74 $0.74 -------------------------------------------------------------------------- 4. MARKET RISK AND RISK MANAGEMENT INSTRUMENTS (NU, Select Energy, Yankee Gas) Derivative Instruments: Effective January 1, 2001, NU adopted SFAS No. 133, as amended. For those contracts that meet the definition of a derivative and meet the cash flow hedge requirements, the changes in the fair value of the effective portion of those contracts are recognized in accumulated other comprehensive income until the underlying transactions occur. For contracts that meet the definition of a derivative but do not meet the hedging requirements and for the ineffective portion of those that meet the hedging requirements, the changes in fair value of those contracts are recognized currently in earnings. Commodity derivatives that are utilized for trading purposes are currently accounted for using the mark-to-market method, under EITF Issue No. 98- 10, with changes in fair value included in earnings. For information regarding the rescission of EITF Issue No. 98-10, see Note 1C, "New Accounting Standards." There have been changes to interpretations of SFAS No. 133 and the FASB continues to consider changes and amendments which could affect the recording and disclosure of derivative and hedging activities. Competitive Energy Subsidiaries: Select Energy provides both full requirement energy services to its customers and engages in energy trading and marketing activities. Select Energy manages its exposure to risk from its contractual commitments and provides risk management services to its customers through forward contracts, futures, over-the- counter swap agreements, and options (commodity derivatives). Select Energy has utilized the sensitivity analysis methodology to disclose quantitative information for its commodity price risks. Sensitivity analysis provides a presentation of the potential loss of future earnings, fair values or cash flows from market risk-sensitive instruments over a selected time period due to one or more hypothetical changes in commodity prices, or other similar price changes. Commodity Price Risk - Trading Activities: As a market participant in the Northeast United States, Select Energy conducts commodity-trading activities in electricity and its related products, natural gas and oil, and therefore, experiences net open positions. Select Energy manages these open positions with strict policies which limit its exposure to market risk and require daily reporting to management of potential financial exposure. Under EITF Issue No. 98-10, these instruments are currently adjusted to market value, and the unrealized gains and losses are recognized in income in the current period in the consolidated statements of income in operating revenues, and in the consolidated balance sheets as unrealized gains and losses on mark-to-market transactions. The net mark-to-market positions at September 30, 2002 and December 31, 2001, were assets of $81.7 million and $56.4 million, respectively. Under sensitivity analysis, the fair value of the portfolio is a function of the underlying commodity, contract prices and market prices represented by each derivative commodity contract. For swaps, forward contracts and options, market value reflects management's best estimates considering over-the-counter quotations, time value and volatility factors of the underlying commitments. Exchange-traded futures and options are recorded at market based on closing exchange prices. As of September 30, 2002, Select Energy has calculated the market price resulting from a 10 percent unfavorable change in forward market prices. That 10 percent change would result in approximately a $3.3 million decline in the fair value of the Select Energy trading portfolio. In the normal course of business, Select Energy also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include credit risk, which is not reflected in this sensitivity analysis. Commodity Price Risk - Nontrading Derivative Activities: Select Energy utilizes derivative financial and commodity instruments (derivatives), including futures and forward contracts, to reduce market risk associated with fluctuations in the price of electricity and natural gas sold under firm commitments to certain customers. Select Energy also utilizes derivatives, including price swap agreements, call and put option contracts, and futures and forward contracts, to manage the market risk associated with a portion of its anticipated supply requirements. These derivative instruments have been designated as cash flow hedging instruments. When conducting sensitivity analyses of the change in the fair value of Select Energy's electricity, natural gas and oil nontrading derivatives portfolio, which would result from a hypothetical change in the future market price of electricity, natural gas and oil, the fair values of the contracts are determined from models which take into account estimated future market prices of electricity, natural gas and oil, the volatility of the market prices in each period, as well as the time value factors of the underlying commitments. In most instances, market prices and volatility are determined from quoted prices on the futures exchange. Select Energy has determined a hypothetical change in the fair value for its nontrading derivatives and electricity, natural gas and oil contracts, assuming a 10 percent unfavorable change in forward market prices. As of September 30, 2002, an unfavorable 10 percent change in market price would have resulted in a decline in fair value of approximately $15 million. The impact of a change in electricity, natural gas and oil prices on Select Energy's nontrading derivatives contracts on September 30, 2002, is not necessarily representative of the results that will be realized when these contracts are physically delivered. Select Energy also maintains natural gas service agreements with certain customers to supply gas at fixed prices for terms extending through 2004. Select Energy has hedged its gas supply risk under these agreements through New York Mercantile Exchange (NYMEX) contracts. Under these contracts, the purchase price of a specified quantity of gas is effectively fixed over the term of the gas service agreements, which also extend through 2004. As of September 30, 2002, the NYMEX contracts had a notional value of $50.3 million and a mark-to-market asset value of $4.7 million. Regulated Entities: Commodity Price Risk - Nontrading Activities: Yankee Gas maintains a master swap agreement with a financial counterparty to purchase gas at fixed prices. Under this master swap agreement, the purchase price of a specified quantity of gas for two customers, an affiliate of the Rand- Whitney Group, Inc. and Kimberly Clark Corporation, is effectively fixed over the term of the gas service agreements with those customers for a period of time not extending beyond 2005. As of September 30, 2002, the commodity swap agreement had a notional value of $12.3 million and a mark-to-market asset value of $0.8 million, which is included in the $6.9 million reported for accumulated other comprehensive income related to hedging activities. Other Interest Rate and Credit Risk Activities: Interest Rate Risk - Nontrading Activities: NU manages its interest rate risk exposure by maintaining a mix of fixed and variable rate debt. As of September 30, 2002, approximately 79 percent of NU's long-term debt, including the current portion, is at a fixed interest rate. The remaining long-term debt is variable-rate and is subject to interest rate risk. Assuming a one percentage point increase in NU's variable interest rates, annual interest expense would have increased by $4.9 million. Credit Risk: Credit risk relates to the risk of loss that NU would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. NU serves a wide variety of customers and suppliers that include independent power producers, industrial companies, gas and electric utilities, oil and gas producers, financial institutions, and other energy marketers. Margin accounts exist within this diverse group, and NU realizes interest receipts and payments related to balances outstanding in these accounts. This wide customer and supplier mix generates a need for a variety of contractual structures, products and terms which, in turn, requires NU to manage the portfolio of market risk inherent in those transactions in a manner consistent with the parameters established by NU's risk management process. Market risks at the competitive energy subsidiaries are monitored regularly by a Risk Oversight Council operating outside of the business units that create or actively manage these risk exposures to ensure compliance with NU's stated risk management policies. NU tracks and re-balances the risk in its portfolio in accordance with mark-to-market and other risk management methodologies that utilize forward price curves in the energy markets to estimate the size and probability of future potential exposure. NYMEX traded futures and option contracts are guaranteed by the NYMEX and have a lower credit risk. Select Energy has established written credit policies with regard to its counterparties to minimize overall credit risk on all types of transactions. These policies require an evaluation of potential counterparties' financial conditions (including credit ratings), collateral requirements under certain circumstances (including cash in advance, letters of credit, and parent guarantees), and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. This evaluation results in establishing credit limits prior to NU entering into trading activities. The appropriateness of these limits is subject to continuing review. Concentrations among these counterparties may impact NU's overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes to economic, regulatory or other conditions. 5. NUCLEAR GENERATION ASSETS DIVESTITURE (NU, CL&P, NAEC) In the third quarter of 2002, CL&P and North Atlantic Energy Corporation (NAEC) received regulatory approvals for the sale of Seabrook from the DPUC and the NHPUC. As a result of these approvals, CL&P and NAEC eliminated $0.6 million and $13.9 million, respectively, on an after-tax basis, of reserves related to their respective ownership shares of certain Seabrook assets. On November 1, 2002, CL&P and NAEC consummated the sale of their 40.04 percent combined ownership interest in Seabrook to a subsidiary of FPL Group, Inc. (FPL). CL&P, NAEC and certain other of the joint owners collectively sold 88.2 percent of Seabrook to FPL. The NU system received approximately $384 million of cash proceeds from the sale subject to certain true-up adjustments, and a portion of these proceeds were used to repay all $90 million of NAEC's outstanding debt, and will be used to return all NAEC's equity, which totaled $55.7 million as of September 30, 2002, to NU and pay between $90 million and $100 million in taxes. The remaining proceeds received by NAEC were refunded to PSNH through the Seabrook Power Contracts. As part of the sale, FPL assumed responsibility for decommissioning Seabrook. On October 10, 2000, NU reached an agreement with Baycorp Holdings, Ltd. (Baycorp), a 15 percent joint owner of Seabrook, under which NU guaranteed a minimum sale price and NU and Baycorp would share the excess proceeds if the sale of Seabrook resulted in proceeds of more than $87.2 million related to the sale of this 15 percent ownership interest. The agreement also limited any top-off amount required to be funded by Baycorp for decommissioning as part of the sale process. In connection with this agreement, NU received approximately $14 million in the fourth quarter of 2002. 6. COMPREHENSIVE INCOME (NU, CL&P, PSNH, WMECO) Total comprehensive income, which includes all comprehensive income items, for the NU system is as follows: -------------------------------------------------------------------------- Nine Months Ended September 30, -------------------------------------------------------------------------- (Millions of Dollars) 2002 2001 -------------------------------------------------------------------------- NU consolidated $134.6 $158.8 CL&P 57.8 71.3 PSNH 45.8 63.4 WMECO 26.8 7.9 -------------------------------------------------------------------------- Accumulated other comprehensive income/(loss) mark-to-market adjustments of NU's qualified cash flow hedging instruments are as follows: -------------------------------------------------------------------------- (Millions of Dollars, Net of Tax) -------------------------------------------------------------------------- Balance at January 1, 2002 $(36.9) -------------------------------------------------------------------------- Hedged transactions recognized into earnings 19.5 Change in fair value 23.0 Cash flow transactions entered into for the period 1.3 -------------------------------------------------------------------------- Net change associated with the current period hedging transactions 43.8 ------------------------------------------------------------------------- Total mark-to-market adjustments included in accumulated other comprehensive income at September 30, 2002 $ 6.9 -------------------------------------------------------------------------- Accumulated other comprehensive income items unrelated to NU's qualified cash flow hedging instruments totaled $4.4 million in income and $0.8 million in losses as of January 1, 2002, and September 30, 2002, respectively. During the third quarter of 2002, Select Energy determined that cash flow hedges related to the CL&P standard offer service contract were ineffective. In the third quarter, as a result of this ineffectiveness, Select Energy transferred $3.9 million from accumulated other comprehensive income to expense on the income statement related to these cash flow hedges. In September 2002, Select Energy terminated these cash flow hedges and realized pre-tax income of $5.6 million. 7. EARNINGS PER SHARE (NU) EPS is computed based upon the weighted average number of common shares outstanding during each period. Diluted EPS is computed on the basis of the weighted average number of common shares outstanding plus the potential dilutive effect if stock options granted under the NU Incentive Plan are converted into common stock. The following table sets forth the components of basic and fully diluted EPS: -------------------------------------------------------------------------- (Millions of Dollars, Nine Months Ended September 30, except share information) 2002 2001 -------------------------------------------------------------------------- Income before preferred dividends of subsidiaries $100.3 $222.1 Preferred dividends of subsidiaries 4.2 6.2 ------------------------------------------------------------------------- Income before cumulative effect of accounting change $ 96.1 $215.9 Cumulative effect of accounting change, net of tax benefit - (22.4) -------------------------------------------------------------------------- Net income $ 96.1 $193.5 -------------------------------------------------------------------------- Basic EPS common shares outstanding (average) 129,508,840 137,120,689 Dilutive effect of employee stock options 228,409 337,005 -------------------------------------------------------------------------- Fully diluted EPS common shares outstanding (average) 129,737,249 137,457,694 -------------------------------------------------------------------------- Basic and fully diluted EPS: Income before cumulative effect of accounting change $0.74 $1.57 Cumulative effect of accounting change, net of tax benefit - (0.16) -------------------------------------------------------------------------- Net income $0.74 $1.41 -------------------------------------------------------------------------- 8. SEGMENT INFORMATION (NU) The NU system is organized between regulated utilities (electric and gas) and competitive energy subsidiaries. The regulated utilities segment represents approximately 84 percent and 76 percent of the NU system's total revenues for the nine months ended September 30, 2002 and 2001, respectively, and is comprised of several business units. The reclassification of trading revenues and expenses, which has been retroactively applied to all periods presented, resulted in an increase in these percentages from amounts reported in prior periods. Regulated utilities revenues primarily are derived from residential, commercial and industrial customers and are not dependent on any single customer. In 2002, the competitive energy subsidiaries segment had one customer with revenues in excess of 10 percent of its total revenues, which was CL&P. The total purchases by CL&P represented approximately 43 percent of total competitive energy subsidiaries' revenues for the nine months ended September 30, 2002. In 2001, the total purchases by two customers, NSTAR and CL&P, represented approximately 15 percent and 30 percent, respectively, of total competitive energy subsidiaries' revenues for the nine months ended September 30, 2001. Total CL&P purchases from the competitive energy subsidiaries are eliminated in consolidation. The competitive energy subsidiaries segment in the following table includes SESI, a provider of energy management, demand-side management and related consulting services for commercial, industrial and institutional electric companies and electric utility companies; Holyoke Water Power Company, a company engaged in the production of electric power; Northeast Generation Company, a corporation that acquires and manages generation facilities; NGS, a corporation that maintains and services fossil or hydroelectric facilities and provides third-party electrical and engineering contracting services, and Select Energy, a corporation engaged in the trading, marketing, transportation, storage, and sale of energy commodities, at wholesale, in designated geographical areas and in the marketing of energy products to retail customers. Other in the following table includes the results for Mode 1 Communications, Inc., an investor in a fiber-optic communications network. Other also includes the results of the nonenergy related subsidiaries of Yankee. Interest expense included in Other primarily relates to the debt of NU parent. Inter-segment eliminations of revenues and expenses are also included in Other. - ------------------------------------------------------------------------------- For the Three Months Ended September 30, 2002 - ------------------------------------------------------------------------------- Regulated Utilities Competitive Eliminations (Millions of ------------------- Energy and Dollars) Electric Gas Subsidiaries Other Total - ------------------------------------------------------------------------------- Operating revenues $1,106.2 $ 37.8 $ 396.0 $(179.0) $ 1,361.0 Operating expenses (975.0) (43.4) (397.8) 173.2 (1,243.0) - ------------------------------------------------------------------------------- Operating income/ (loss) 131.2 (5.6) (1.8) (5.8) 118.0 Other income/ (loss), net 31.3 (0.5) 0.2 1.1 32.1 Interest expense, net (46.6) (3.5) (11.1) (6.5) (67.7) Income tax (expense)/ benefit (45.5) 3.8 3.7 5.6 (32.4) Preferred dividends (1.4) - - - (1.4) - ------------------------------------------------------------------------------- Net income/ (loss) $ 69.0 $ (5.8) $ (9.0) $ (5.6) $ 48.6 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- For the Nine Months Ended September 30, 2002 - ------------------------------------------------------------------------------- Regulated Utilities Competitive Eliminations (Millions of ------------------- Energy and Dollars) Electric Gas Subsidiaries Other Total - ------------------------------------------------------------------------------- Operating revenues $2,962.6 $192.8 $1,107.3 $(492.6) $ 3,770.1 Operating expenses (2,620.0) (171.0) (1,133.8) 481.2 (3,443.6) - ------------------------------------------------------------------------------- Operating income/ (loss) 342.6 21.8 (26.5) (11.4) 326.5 Other income/ (loss), net 33.4 (0.5) (3.0) (10.2) 19.7 Interest expense, net (140.5) (10.9) (32.9) (19.3) (203.6) Income tax (expense)/ benefit (79.0) (4.2) 22.5 18.4 (42.3) Preferred dividends (4.2) - - - (4.2) - ------------------------------------------------------------------------------- Net income/ (loss) $ 152.3 $ 6.2 $ (39.9) $ (22.5) $ 96.1 - ------------------------------------------------------------------------------- Total assets $7,973.7 $893.6 $1,854.5 $(405.6) $10,316.2 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- For the Three Months Ended September 30, 2001 - ------------------------------------------------------------------------------- Regulated Utilities Competitive Eliminations (Millions of ------------------- Energy and Dollars) Electric Gas Subsidiaries Other Total - ------------------------------------------------------------------------------- Operating revenues $1,083.9 $ 39.5 $ 584.0 $ (176.7) $ 1,530.7 Operating expenses (955.4) (34.7) (592.0) 164.8 (1,417.3) - ------------------------------------------------------------------------------- Operating income/ (loss) 128.5 4.8 (8.0) (11.9) 113.4 Other income, net 5.0 3.8 2.1 6.8 17.7 Interest expense, net (53.5) (3.6) (9.2) (4.0) (70.3) Income tax (expense)/ benefit (35.5) (1.8) 5.4 6.7 (25.2) Preferred dividends (1.0) - - - (1.0) - ------------------------------------------------------------------------------- Net income/ (loss) $ 43.5 $ 3.2 $ (9.7) $ (2.4) $ 34.6 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- For the Nine Months Ended September 30, 2001 - ------------------------------------------------------------------------------- Regulated Utilities Competitive Eliminations (Millions of ------------------- Energy and Dollars) Electric Gas Subsidiaries Other Total - ------------------------------------------------------------------------------- Operating revenues $3,284.0 $279.9 $1,663.5 $ (557.7) $ 4,669.7 Operating expenses (2,918.0) (248.5) (1,636.2) 539.4 (4,263.3) - ------------------------------------------------------------------------------- Operating income/ (loss) 366.0 31.4 27.3 (18.3) 406.4 Other income, net 72.2 3.7 5.4 109.3 190.6 Interest expense, net (148.3) (10.6) (32.2) (17.9) (209.0) Income tax expense (129.2) (10.6) (0.9) (25.3) (166.0) Preferred dividends (6.1) - - - (6.1) - ------------------------------------------------------------------------------- Income/(loss) before cumulative effect of accounting change 154.6 13.9 (0.4) 47.8 215.9 Cumulative effect of accounting change, net of tax benefit - - (22.0) (0.4) (22.4) - ------------------------------------------------------------------------------- Net income/ (loss) $ 154.6 $ 13.9 $ (22.4) $ 47.4 $ 193.5 - ------------------------------------------------------------------------------- Total assets $9,176.9 $867.6 $1,526.7 $(1,279.1) $10,292.1 - ------------------------------------------------------------------------------- THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 ---------------- ---------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash and cash equivalents............................ $ 7,827 $ 773 Investments in securitizable assets.................. 156,797 206,367 Notes receivable from affiliated companies........... 26,200 77,200 Receivables, net..................................... 92,840 77,801 Accounts receivable from affiliated companies........ 59,353 22,134 Unbilled revenues.................................... 4,380 7,492 Fuel, materials and supplies, at average cost........ 34,010 33,085 Prepayments and other................................ 26,295 17,703 ---------------- --------------- 407,702 442,555 ---------------- --------------- Property, Plant and Equipment: Electric utility..................................... 3,275,993 3,127,548 Less: Accumulated provision for depreciation...... 1,285,985 1,236,638 ---------------- --------------- 1,990,008 1,890,910 Construction work in progress........................ 129,038 134,964 Nuclear fuel, net.................................... 2,322 3,299 ---------------- --------------- 2,121,368 2,029,173 ---------------- --------------- Deferred Debits and Other Assets: Regulatory assets.................................... 1,734,386 1,877,191 Prepaid pension...................................... 272,198 233,692 Nuclear decommissioning trusts, at market............ 6,442 6,231 Other ............................................... 133,174 138,715 ---------------- --------------- 2,146,200 2,255,829 ---------------- --------------- Total Assets........................................... $ 4,675,270 $ 4,727,557 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 ---------------- ---------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Accounts payable...................................... $ 142,912 $ 132,593 Accounts payable to affiliated companies.............. 135,733 85,057 Accrued taxes......................................... 37,316 34,823 Accrued interest...................................... 10,149 10,369 Other................................................. 55,278 47,342 ---------------- ---------------- 381,388 310,184 ---------------- ---------------- Rate Reduction Bonds.................................... 1,271,834 1,358,653 ---------------- ---------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes..................... 752,537 820,444 Accumulated deferred investment tax credits........... 94,045 95,996 Deferred contractual obligations...................... 124,471 141,497 Other................................................. 368,415 283,399 ---------------- ---------------- 1,339,468 1,341,336 ---------------- ---------------- Capitalization: Long-Term Debt........................................ 827,071 824,349 ---------------- ---------------- Preferred Stock....................................... 116,200 116,200 ---------------- ---------------- Common Stockholder's Equity: Common stock, $10 par value - authorized 24,500,000 shares; 6,811,994 shares outstanding in 2002 and 7,584,884 shares outstanding in 2001... 68,120 75,849 Capital surplus, paid in............................ 369,794 414,018 Retained earnings................................... 301,775 286,901 Accumulated other comprehensive (loss)/income....... (380) 67 ---------------- ---------------- Common Stockholder's Equity........................... 739,309 776,835 ---------------- ---------------- Total Capitalization.................................... 1,682,580 1,717,384 ---------------- ---------------- Commitments and Contingencies (Note 2) Total Liabilities and Capitalization.................... $ 4,675,270 $ 4,727,557 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------- 2002 2001 2002 2001 ------------------------------------------------- (Thousands of Dollars) Operating Revenues.................................. $ 687,938 $ 675,578 $ 1,874,089 $ 2,019,758 --------- --------- ----------- ----------- Operating Expenses: Operation - Fuel, purchased and net interchange power...... 406,194 395,554 1,109,391 1,159,520 Other.......................................... 80,834 74,416 229,610 238,204 Maintenance....................................... 23,949 23,415 56,217 89,168 Depreciation...................................... 24,445 22,431 73,851 73,539 Amortization of regulatory assets, net............ 51,283 65,440 115,429 684,456 Taxes other than income taxes..................... 28,287 31,219 107,006 101,445 Gain on sale of utility plant..................... - - - (522,887) --------- --------- ----------- ----------- Total operating expenses........................ 614,992 612,475 1,691,504 1,823,445 --------- --------- ----------- ----------- Operating Income.................................... 72,946 63,103 182,585 196,313 Other Income, Net................................... 7,911 7,430 14,094 38,651 --------- --------- ----------- ----------- Income Before Interest and Income Tax Expense....... 80,857 70,533 196,679 234,964 --------- --------- ----------- ----------- Interest Expense: Interest on long-term debt........................ 10,844 12,357 33,177 48,141 Interest on rate reduction bonds.................. 18,789 20,224 57,273 40,801 Other interest.................................... 486 - (143) 984 --------- --------- ----------- ----------- Interest expense, net........................... 30,119 32,581 90,307 89,926 --------- --------- ----------- ----------- Income Before Income Tax Expense.................... 50,738 37,952 106,372 145,038 Income Tax Expense.................................. 21,441 19,128 43,984 69,102 --------- --------- ----------- ----------- Net Income.......................................... $ 29,297 $ 18,824 $ 62,388 $ 75,936 ========= ========= =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ----------------------------------- 2002 2001 ---------------- ------------- (Thousands of Dollars) Operating Activities: Net income......................................................... $ 62,388 $ 75,936 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation..................................................... 73,851 73,539 Deferred income taxes and investment tax credits, net............ (59,570) (148,330) Net amortization/(deferral) of recoverable energy costs.......... 23,463 (5,923) Amortization of regulatory assets, net........................... 115,429 684,456 Gain on sale of utility plant.................................... - (522,887) Net other sources/(uses) of cash................................. 25,992 (90,652) Changes in working capital: Receivables and unbilled revenues, net........................... (49,146) 733 Fuel, materials and supplies..................................... (925) 2,497 Accounts payable................................................. 60,995 (2,452) Accrued taxes.................................................... 2,493 60,456 Investments in securitizable assets.............................. 49,570 (107,446) Other working capital (excludes cash)............................ (1,383) 47,886 -------------- -------------- Net cash flows provided by operating activities...................... 303,157 67,813 -------------- -------------- Investing Activities: Investments in plant: Electric utility plant........................................... (159,892) (167,068) Nuclear fuel..................................................... (54) (895) -------------- -------------- Cash flows used for investments in plant........................... (159,946) (167,963) Investment in NU system Money Pool................................. 51,000 (123,200) Investments in nuclear decommissioning trusts...................... (842) (95,494) Net proceeds from the sale of utility plant........................ - 827,691 Buyout/buydown of IPP contracts.................................... - (1,029,008) Other investment activities, net................................... 159 (97,233) -------------- -------------- Net cash flows used in investing activities.......................... (109,629) (685,207) -------------- -------------- Financing Activities: Repurchase of common shares........................................ (49,996) - Issuance of rate reduction bonds................................... - 1,438,400 Retirement of rate reduction bonds................................. (86,819) - Net decrease in short-term debt.................................... - (115,000) Reacquisitions and retirements of long-term debt................... - (416,000) Retirement of monthly income preferred securities.................. - (100,000) Retirement of capital lease obligation............................. - (145,800) Cash dividends on preferred stock.................................. (4,169) (4,169) Cash dividends on common stock..................................... (45,091) (45,054) Other financing activities, net.................................... (399) - -------------- -------------- Net cash flows (used in)/provided by financing activities............ (186,474) 612,377 -------------- -------------- Net increase/(decrease) in cash and cash equivalents................. 7,054 (5,017) Cash and cash equivalents - beginning of period...................... 773 5,461 -------------- -------------- Cash and cash equivalents - end of period............................ $ 7,827 $ 444 ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations CL&P is a wholly owned subsidiary of NU. This discussion should be read in conjunction with NU's management's discussion and analysis of financial condition and results of operations, consolidated financial statements and footnotes in this Form 10-Q, the First and Second Quarter 2002 Form 10-Qs, current report on Form 8-K dated October 21, 2002, and the NU 2001 Form 10-K. RESULTS OF OPERATIONS The components of significant income statement variances for the third quarter of 2002 and the first nine months of 2002 are provided in the table below. Income Statement Variances (Millions of Dollars) 2002 over/(under) 2001 ----------------------------------- Third Nine Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $12 2% $(146) (7)% Operating Expenses: Fuel, purchased and net interchange power 11 3 (50) (4) Other operation 6 9 (9) (4) Maintenance - - (33) (37) Depreciation 2 9 - - Amortization (14) (22) (569) (83) Taxes other than income taxes (3) (9) 6 5 Gain on sale of utility plant - - 523 100 --- --- ---- --- Total operating expenses 2 - (132) (7) --- --- ---- --- Operating income 10 16 (14) (7) Other income, net - - (25) (64) Interest expense, net (2) (8) - - --- --- ---- --- Income before income tax expense 12 34 (39) (27) Income tax expense 2 12 (25) (36) --- --- ---- --- Net income $10 56% $(14) (18)% === === ==== === Comparison of the Third Quarter of 2002 to the Third Quarter of 2001 Operating Revenues Operating revenues increased by $12 million or 2 percent in the third quarter of 2002, primarily due to higher retail revenues ($40 million), partially offset by lower wholesale revenues ($22 million). Retail revenues increased due to higher retail sales of 7.6 percent compared to the same period in 2001. Wholesale revenues were lower primarily due to lower sales of energy and capacity ($15 million), and lower revenue from market based contracts ($5 million). Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in the third quarter of 2002, primarily due to the retail sales increase and the 2002 amortization of deferred fuel expenses. Other Operation Other operation expense increased by $6 million in the third quarter of 2002, primarily due to higher transmission expenses ($4 million) and higher administrative and general expenses ($2 million). Depreciation Depreciation expense increased in the third quarter of 2002 due to higher utility plant balances. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net decreased in the third quarter of 2002 due to lower amortizations related to the recovery of stranded costs ($8 million), and lower amortization of the nuclear investment ($6 million). Taxes Other Than Income Taxes Taxes other than income taxes decreased in the third quarter of 2002 due to the recognition in 2002 of a Connecticut sales and use tax audit settlement for years 1993-2001 ($7 million), partially offset by the 2001 recognition of a property tax settlement with the City of Meriden. Interest Expense, Net Interest expense decreased in the third quarter of 2002, primarily due to the reacquisitions and retirements of long-term debt in 2001, and lower interest paid on rate reduction bonds. Income Tax Expense Income tax expense increased in the third quarter of 2002 due to higher book taxable income. Comparison of the First Nine Months of 2002 to the First Nine Months of 2001 Operating Revenues Operating revenues decreased by $146 million or 7 percent in 2002, primarily due to lower wholesale and other revenues ($183 million), partially offset by higher retail revenues ($37 million). Wholesale revenues were lower due to the sale of the Millstone units in the first quarter of 2001 ($62 million), lower revenues from sales of energy and capacity ($70 million) resulting from the buyout of cogenerator purchase contracts and lower wholesale market prices, and lower revenue from market based contracts ($24 million). Retail revenues were higher due to the recovery of previously deferred fuel costs ($24 million) and higher sales. Retail sales were 1.4 percent higher than last year. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased by $50 million in 2002, due to lower purchased-power costs resulting from the buydown and buyout of various cogeneration contracts ($46 million), lower market-based contracts ($20 million) and lower nuclear fuel expense ($7 million), partially offset by the 2002 amortization of deferred fuel expenses which are being recovered ($24 million). Other Operation and Maintenance Other O&M expense decreased by $42 million in 2002, primarily due to lower nuclear expenses as a result of the sale of the Millstone units at the end of the first quarter of 2001 ($51 million), partially offset by higher administrative and general expenses ($7 million). Amortization of Regulatory Assets, Net Amortization of regulatory assets, net decreased in 2002, primarily due to higher amortization in 2001 related to the sale of the Millstone units ($523 million), lower amortization of the nuclear investment ($42 million), and lower amortizations related to the recovery of stranded costs ($2 million). Taxes Other Than Income Taxes Taxes other than income taxes increased in 2002, primarily due to the DPUC's order for CL&P to compensate the Town of Waterford for its loss of property tax revenue resulting from electric utility restructuring ($20 million), partially offset by the recognition of a Connecticut sales and use tax audit settlement for years 1993-2001 ($7 million), decreases in payroll taxes ($3 million) and local property taxes ($2 million). CL&P is recovering through rates the additional property tax payments to the Town of Waterford. Gain on Sale of Utility Plant In 2001, CL&P recorded a gain on the sale of its ownership share in the Millstone units. A corresponding amount of amortization expense was recorded. Other Income, Net Other income, net decreased in 2002, primarily due to the gain recognized in 2001 on the sale of the Millstone units ($29 million). Income Tax Expense Income tax expense decreased in 2002 primarily due to lower book taxable income. LIQUIDITY CL&P expects its cash position to further improve in the fourth quarter of 2002 due to the sale of CL&P's 4.06 percent share of Seabrook on November 1, 2002. The net gain from the sale related to CL&P's share of Seabrook primarily will be used to offset stranded costs, and the cash proceeds received by CL&P will be used to meet its capital requirements. CL&P had no significant financing activity in the third quarter 2002. In November 2002, NU expects to decrease to $300 million from $350 million a line of credit for its regulated subsidiaries, including CL&P. CL&P did not have any borrowings outstanding under this facility as of September 30, 2002. CL&P projects a modest level of system financings over the next three months to six months. CL&P is currently contemplating the issuance of up to $200 million of debt to refinance its prior spent nuclear fuel obligations pursuant to the Nuclear Waste Policy Act of 1982 for nuclear fuel burned prior to April 6, 1983. CL&P's net cash flows provided by operating activities increased to $303.2 million in the first nine months of 2002, compared with net cash flows provided by operating activities of $67.8 million during the same period of 2001. Cash flows provided by operating activities increased primarily due to taxes payable in 2001 in connection with the sale of the Millstone units. Also contributing to the increase is the amortization of recoverable energy costs in 2002 compared with deferrals in 2001. Changes in working capital items also contributed to the increase. There was a lower level of investing and financing activities in the first nine months of 2002, as compared to the same period of 2001, primarily due to the sale of the Millstone units, the buyout and buydown of independent power producer contracts, and the issuance rate reduction certificates in 2001. The level of common dividends totaled $45.1 million in the first nine months of 2002 and 2001. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 ---------------- ---------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash................................................. $ 718 $ 1,479 Receivables, net..................................... 79,037 70,540 Accounts receivable from affiliated companies........ 178 13,055 Unbilled revenues.................................... 26,153 29,268 Fuel, materials and supplies, at average cost........ 40,527 42,047 Prepayments and other................................ 18,187 10,211 ---------------- ---------------- 164,800 166,600 ---------------- ---------------- Property, Plant and Equipment: Electric utility..................................... 1,500,101 1,447,955 Other................................................ 6,221 6,221 ---------------- ---------------- 1,506,322 1,454,176 Less: Accumulated provision for depreciation...... 710,125 689,397 ---------------- ---------------- 796,197 764,779 Construction work in progress........................ 47,731 44,961 ---------------- ---------------- 843,928 809,740 ---------------- ---------------- Deferred Debits and Other Assets: Regulatory assets.................................... 1,012,804 1,046,760 Other ............................................... 97,208 71,414 ---------------- ---------------- 1,110,012 1,118,174 ---------------- ---------------- Total Assets........................................... $ 2,118,740 $ 2,094,514 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 ---------------- ---------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks................................ $ 55,000 $ 60,500 Notes payable to affiliated companies................. 17,200 23,000 Obligations under Seabrook Power Contracts and other capital leases - current portion.......... 19,347 24,164 Accounts payable...................................... 35,571 32,285 Accounts payable to affiliated companies.............. 360 18,727 Accrued taxes......................................... 27,244 2,281 Accrued interest...................................... 14,684 9,428 Overcollections on rate reduction bonds............... 25,310 12,479 Other................................................. 14,569 12,685 ---------------- ---------------- 209,285 195,549 ---------------- ---------------- Rate Reduction Bonds.................................... 518,654 507,381 ---------------- ---------------- Obligations under Seabrook Power Contracts and Other Capital Leases.............................. 77,043 86,111 ---------------- ---------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes..................... 421,212 423,050 Accumulated deferred investment tax credits........... 5,014 12,015 Deferred contractual obligations...................... 33,829 37,712 Accrued pension....................................... 37,580 37,326 Other................................................. 45,925 46,260 ---------------- ---------------- 543,560 556,363 ---------------- ---------------- Capitalization: Long-Term Debt........................................ 407,285 407,285 ---------------- ---------------- Common Stockholder's Equity: Common stock, $1 par value - authorized 100,000,000 shares; 388 shares outstanding in 2002 and 2001................................... - - Capital surplus, paid in............................ 164,093 165,000 Retained earnings................................... 199,044 176,419 Accumulated other comprehensive (loss)/income....... (224) 406 ---------------- ---------------- Common Stockholder's Equity........................... 362,913 341,825 ---------------- ---------------- Total Capitalization.................................... 770,198 749,110 ---------------- ---------------- Commitments and Contingencies (Note 2) Total Liabilities and Capitalization.................... $ 2,118,740 $ 2,094,514 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------ 2002 2001 2002 2001 ------------------------------------------------ (Thousands of Dollars) Operating Revenues................................ $ 324,818 $ 299,711 $ 816,113 $ 927,345 --------- --------- --------- --------- Operating Expenses: Operation - Fuel, purchased and net interchange power.... 190,152 166,889 460,575 585,652 Other........................................ 33,309 31,102 94,315 95,097 Maintenance..................................... 13,342 12,165 45,585 46,959 Depreciation.................................... 10,377 8,199 30,681 30,009 Amortization of regulatory assets, net.......... 27,813 26,676 49,271 39,581 Taxes other than income taxes................... 8,896 9,117 27,003 30,255 --------- --------- --------- --------- Total operating expenses...................... 283,889 254,148 707,430 827,553 --------- --------- --------- --------- Operating Income.................................. 40,929 45,563 108,683 99,792 Other Income/(Loss), Net.......................... 231 538 (887) 39,026 --------- --------- --------- --------- Income Before Interest and Income Tax Expense..... 41,160 46,101 107,796 138,818 --------- --------- --------- --------- Interest Expense: Interest on long-term debt...................... 4,127 7,383 13,554 22,398 Interest on rate reduction bonds................ 7,584 7,932 23,022 13,266 Other interest.................................. 390 135 291 (52) --------- --------- --------- --------- Interest expense, net......................... 12,101 15,450 36,867 35,612 --------- --------- --------- --------- Income Before Income Tax Expense.................. 29,059 30,651 70,929 103,206 Income Tax Expense................................ 9,577 9,021 24,487 37,697 --------- --------- --------- --------- Net Income........................................ $ 19,482 $ 21,630 $ 46,442 $ 65,509 ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ----------------------------- 2002 2001 ------------ ------------ (Thousands of Dollars) Operating activities: Net income.......................................................... $ 46,442 $ 65,509 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation...................................................... 30,681 30,009 Deferred income taxes and investment tax credits, net............. (17,446) 184,001 Net amortization/(deferral) of recoverable energy costs........... 12,494 (32,010) Amortization of regulatory assets, net............................ 49,271 39,581 Gain on sale of utility plant..................................... - (25,924) Net other (uses)/sources of cash.................................. (30,058) (30,010) Changes in working capital: Receivables and unbilled revenues, net............................ 7,496 1,870 Fuel, materials and supplies...................................... 1,520 (7,906) Accounts payable.................................................. (15,081) 10,984 Accrued taxes..................................................... 24,963 141,248 Taxes receivable.................................................. - (177,590) Other working capital (excludes cash)............................. 11,365 27,362 ------------ ------------ Net cash flows provided by operating activities....................... 121,647 227,124 ------------ ------------ Investing Activities: Investments in plant: Electric utility plant............................................ (75,817) (65,438) Nuclear fuel...................................................... - (37) ------------ ------------ Cash flows used for investments in plant............................ (75,817) (65,475) Investment in NU system Money Pool.................................. (5,800) 27,000 Investments in nuclear decommissioning trusts....................... - (1,625) Net proceeds from sale of utility plant............................. - 24,888 Other investment activities, net.................................... (8,179) (32,661) ------------ ------------ Net cash flows used in investing activities........................... (89,796) (47,873) ------------ ------------ Financing Activities: Repurchase of common shares......................................... - (260,000) Issuance of rate reduction bonds.................................... 50,000 525,000 Retirement of rate reduction bonds.................................. (38,727) - Net decrease in short-term debt..................................... (5,500) - Reacquisitions and retirements of preferred stock................... - (24,268) Buydown of capital lease obligation................................. - (497,508) Cash dividends on preferred stock................................... - (1,929) Cash dividends on common stock...................................... (24,500) (27,000) Other financing activities, net..................................... (13,885) - ------------ ------------ Net cash flows used in financing activities........................... (32,612) (285,705) ------------ ------------ Net decrease in cash.................................................. (761) (106,454) Cash - beginning of period............................................ 1,479 115,135 ------------ ------------ Cash - end of period.................................................. $ 718 $ 8,681 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations PSNH is a wholly owned subsidiary of NU. This discussion should be read in conjunction with NU's management's discussion and analysis of financial condition and results of operations, consolidated financial statements and footnotes in this Form 10-Q, the First and Second Quarter 2002 Form 10-Qs, current report on Form 8-K dated October 21, 2002, and the NU 2001 Form 10-K. RESULTS OF OPERATIONS The components of significant income statement variances for the third quarter of 2002 and the first nine months of 2002 are provided in the table below. Income Statement Variances (Millions of Dollars) 2002 over/(under) 2001 ----------------------------------- Third Nine Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $25 8% $(111) (12)% Operating Expenses: Fuel, purchased and net interchange power 23 14 (125) (21) Other operation 2 7 (1) (1) Maintenance 1 10 (1) (3) Depreciation 2 27 1 2 Amortization of regulatory assets, net 1 4 9 24 Taxes other than income taxes - - (3) (11) --- --- ---- --- Total operating expenses 29 12 (120) (15) --- --- ---- --- Operating income (4) (10) 9 9 --- --- ---- --- Other income, net - - (40) (a) Interest expense, net (3) (22) 1 4 --- --- ---- --- Income before income tax expense (1) (5) (32) (31) Income tax expense 1 6 (13) (35) --- --- ---- --- Net income $(2) (10)% $(19) (29)% === === ==== === (a) Percent greater than 100. Comparison of the Third Quarter of 2002 to the Third Quarter of 2001 Operating Revenues Total operating revenues increased $25 million or 8 percent in the third quarter of 2002 compared with the same period of 2001, primarily due to higher wholesale revenues from sales of capacity and energy primarily due to a reduction in prices and a lower volume of bilateral transactions and sales of excess capacity and energy ($15 million) and higher retail revenues ($10 million) due to higher retail sales. Retail kilowatt-hour (kWh) sales increased by 4.5 percent in the third quarter of 2002. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 2002, primarily due to higher wholesale and retail sales. Other Operation and Maintenance Other O&M expense increased $3 million in 2002, primarily due to higher maintenance costs associated with the generating plants ($2 million) and higher administrative and general costs ($1 million). Depreciation Depreciation increased in 2002, primarily due to the new Energy Park facility. Interest Expense Interest expense decreased $3 million in 2002, primarily due to the December 2001 refinancing of long-term debt at lower rates. Comparison of the First Nine Months of 2002 to the First Nine Months of 2001 Operating Revenues Total operating revenues decreased $111 million or 12 percent in the first nine months 2002 compared with the same period of 2001, primarily due to lower retail revenues ($35 million) and lower wholesale revenues from sales of capacity and energy ($77 million) primarily due to a reduction in prices and a lower volume of bilateral transactions and sales of excess capacity and energy. Retail revenues decreased primarily due to a rate decrease on May 1, 2001 ($25 million) and lower retail sales ($10 million). Retail kWh sales decreased by 1.7 percent in 2002. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased $125 million or 21 percent in 2002, primarily due to lower wholesale and retail sales. Other Operation and Maintenance Other O&M expense decreased ($2 million) in 2002, primarily due to lower operating costs for the fossil plants ($2 million) and lower nuclear expense ($2 million), which were partially offset by higher transmission and dispatch costs ($2 million). Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2002, due to higher amortizations resulting from restructuring in 2001. Taxes Other than Income Taxes Taxes other than income taxes decreased $3 million in 2002, primarily due to lower New Hampshire franchise taxes. Other Income, Net Other income, net decreased in 2002, primarily due to the sale of Millstone 3 in 2001 ($26 million), a gain on the disposition of property in 2001 ($4 million) and lower interest and dividend income in 2002 ($3 million). Interest Expense Interest expense increased in 2002, primarily due the issuance of rate reduction bonds in April 2001 and January 2002, partially offset by the December 2001 refinancing of long-term debt at lower rates. Income Tax Expense Income tax expense decreased in 2002, primarily due to the sale of Millstone 3 in 2001. LIQUIDITY PSNH expects its cash position to further improve in the fourth quarter of 2002 due to the sale of NAEC's 35.98 percent share of Seabrook on November 1, 2002. Following the sale of NAEC's share of Seabrook, PSNH will use the proceeds refunded from NAEC to recover stranded costs and repay approximately $60 million of debt with any remaining amounts being available to be returned to NU. PSNH had no significant financing activity in the third quarter of 2002. In November 2002, NU expects to decrease to $300 million from $350 million a line of credit for its regulated subsidiaries, including PSNH. As of September 30, 2002, PSNH had $55 million outstanding under this facility. PSNH's net cash flows provided by operating activities decreased to $121.6 million in the first nine months of 2002, compared with $227.1 million during the same period of 2001. Cash flows provided by operating activities decreased primarily due to the tax impact related to the buydown of the Seabrook Power Contracts during 2001. Additionally, cash flows provided by operating activities decreased as a result of a $19.1 million decrease in net income in 2002. These decreases were partially offset by higher net amortization of recoverable energy costs in 2002 as compared to net deferrals in 2001. There was a lower level of investing and financing activities in the first nine months of 2002, as compared to the same period of 2001, primarily due to the issuance of rate reduction bonds and the buydown of the Seabrook Power Contracts in 2001. In 2002, PSNH issued $50 million of rate reduction bonds. The level of common dividends totaled $24.5 million in the first nine months of 2002 and $27 million in the first nine months of 2001. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 ---------------- ---------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash................................................. $ 1 $ 599 Receivables, net..................................... 42,156 43,761 Accounts receivable from affiliated companies........ 32 2,208 Unbilled revenues.................................... 6,756 12,746 Fuel, materials and supplies, at average cost........ 1,689 1,457 Prepayments and other................................ 1,063 1,544 ---------------- ---------------- 51,697 62,315 ---------------- ---------------- Property, Plant and Equipment: Electric utility..................................... 585,608 564,857 Less: Accumulated provision for depreciation...... 194,461 186,784 ---------------- ---------------- 391,147 378,073 Construction work in progress........................ 9,851 18,326 ---------------- ---------------- 400,998 396,399 ---------------- ---------------- Deferred Debits and Other Assets: Regulatory assets.................................... 275,907 320,222 Prepaid pension...................................... 64,490 54,226 Other ............................................... 18,328 19,500 ---------------- ---------------- 358,725 393,948 ---------------- ---------------- Total Assets........................................... $ 811,420 $ 852,662 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2002 2001 ---------------- ---------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks................................ $ 55,000 $ 50,000 Notes payable to affiliated companies................. 29,700 9,200 Accounts payable...................................... 13,573 34,970 Accounts payable to affiliated companies.............. 540 2,982 Accrued taxes......................................... 4,780 3,691 Accrued interest...................................... 1,369 2,201 Other................................................. 12,641 10,127 ---------------- ---------------- 117,603 113,171 ---------------- ---------------- Rate Reduction Bonds.................................... 144,980 152,317 ---------------- ---------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes..................... 226,725 229,893 Accumulated deferred investment tax credits........... 3,746 3,998 Deferred contractual obligations...................... 32,817 37,357 Other................................................. 32,424 64,309 ---------------- ---------------- 295,712 335,557 ---------------- ---------------- Capitalization: Long-Term Debt........................................ 101,805 101,170 ---------------- ---------------- Common Stockholder's Equity: Common stock, $25 par value - authorized 1,072,471 shares; 434,653 shares outstanding in 2002 and 509,696 shares outstanding in 2001..... 10,866 12,742 Capital surplus, paid in............................ 69,774 82,224 Retained earnings................................... 70,739 55,422 Accumulated other comprehensive (loss)/income....... (59) 59 ---------------- ---------------- Common Stockholder's Equity........................... 151,320 150,447 ---------------- ---------------- Total Capitalization.................................... 253,125 251,617 ---------------- ---------------- Commitments and Contingencies (Note 2) Total Liabilities and Capitalization.................... $ 811,420 $ 852,662 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------------------------- 2002 2001 2002 2001 -------------------------------------------------- (Thousands of Dollars) Operating Revenues.................................... $ 95,684 $ 120,679 $ 278,880 $ 370,845 ---------- ---------- ---------- ---------- Operating Expenses: Operation - Fuel, purchased and net interchange power........ 46,927 75,803 140,510 245,254 Other............................................ 12,516 20,740 37,083 50,761 Maintenance......................................... 3,798 3,575 10,029 16,124 Depreciation........................................ 3,415 3,124 11,038 10,675 Amortization of regulatory assets, net.............. 14,281 180 33,357 125,590 Taxes other than income taxes....................... 2,223 2,436 7,966 10,360 Gain on sale of utility plant....................... - - - (121,022) ---------- ---------- ---------- ---------- Total operating expenses...................... 83,160 105,858 239,983 337,742 ---------- ---------- ---------- ---------- Operating Income...................................... 12,524 14,821 38,897 33,103 Other Income/(Loss), Net.............................. 742 (3,074) (2,342) (3,764) ---------- ---------- ---------- ---------- Income Before Interest Expense and Income Tax Expense/(Benefit)........................ 13,266 11,747 36,555 29,339 ---------- ---------- ---------- ---------- Interest Expense: Interest on long-term debt.......................... 806 814 2,417 4,520 Interest on rate reduction bonds.................... 2,379 2,727 7,245 3,636 Other interest...................................... 616 599 1,132 3,264 ---------- ---------- ---------- ---------- Interest expense, net............................ 3,801 4,140 10,794 11,420 ---------- ---------- ---------- ---------- Income Before Income Tax Expense/(Benefit)............ 9,465 7,607 25,761 17,919 Income Tax Expense/(Benefit).......................... 4,735 3,727 (1,181) 9,202 ---------- ---------- ---------- ---------- Net Income............................................ $ 4,730 $ 3,880 $ 26,942 $ 8,717 ========== ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------------------ 2002 2001 ------------ ------------- (Thousands of Dollars) Operating Activities: Net income........................................................ $ 26,942 $ 8,717 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation.................................................... 11,038 10,675 Deferred income taxes and investment tax credits, net........... (19,312) 13,626 Net amortization of recoverable energy costs.................... 322 3,548 Amortization of regulatory assets, net.......................... 33,357 125,590 Gain on sale of utility plant................................... - (121,022) Net other (uses)/sources of cash................................ (20,510) 13,411 Changes in working capital: Receivables and unbilled revenues, net.......................... 9,771 10,547 Fuel, materials and supplies.................................... (232) 80 Accounts payable................................................ (23,839) 23,298 Accrued taxes................................................... 1,089 (8,164) Other working capital (excludes cash)........................... 2,039 (968) ------------ ------------- Net cash flows provided by operating activities..................... 20,665 79,338 ------------ ------------- Investing Activities: Investments in plant: Electric utility plant.......................................... (14,739) (23,957) Nuclear fuel.................................................... - (140) ------------ ------------- Cash flows used for investments in plant.......................... (14,739) (24,097) Investment in NU system Money Pool................................ 20,500 50,100 Investments in nuclear decommissioning trusts..................... - (21,767) Net proceeds from the sale of utility plant....................... - 175,154 Buyout of IPP contract............................................ - (99,700) Other investment activities, net.................................. 1,334 (3,557) ------------ ------------- Net cash flows provided by investing activities..................... 7,095 76,133 ------------ ------------- Financing Activities: Repurchase of common shares....................................... (13,999) (15,000) Issuance of rate reduction bonds.................................. - 155,000 Retirement of rate reduction bonds................................ (7,337) - Net increase/(decrease) in short-term debt........................ 5,000 (110,000) Reacquisitions and retirements of long-term debt.................. - (100,000) Reacquisitions and retirements of preferred stock................. - (36,500) Retirement of capital lease obligation............................ - (34,200) Cash dividends on preferred stock................................. - (690) Cash dividends on common stock.................................... (12,005) (8,998) Other financing activities, net................................... (17) - ------------ ------------- Net cash flows used in financing activities......................... (28,358) (150,388) ------------ ------------- Net (decrease)/increase in cash..................................... (598) 5,083 Cash - beginning of period.......................................... 599 985 ------------ ------------- Cash - end of period................................................ $ 1 $ 6,068 ============ ============= The accompanying notes are an integral part of these consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations WMECO is a wholly owned subsidiary of NU. This discussion should be read in conjunction with NU's management's discussion and analysis of financial condition and results of operations, consolidated financial statements and footnotes in this Form 10-Q, the First and Second Quarter 2002 Form 10-Qs, current report on Form 8-K dated October 21, 2002, and the NU 2001 Form 10-K. RESULTS OF OPERATIONS The components of significant income statement variances for the third quarter of 2002 and the first nine months of 2002 are provided in the table below. Income Statement Variances (Millions of Dollars) 2002 over/(under) 2001 ----------------------------------- Third Nine Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $(25) (21)% $ (92) (25)% Operating Expenses: Fuel, purchased and net interchange power (29) (38) (105) (43) Other operation (8) (40) (14) (27) Maintenance - - (6) (38) Depreciation - - - - Amortization 14 (a) (92) (73) Taxes other than income taxes - - (2) (23) Gain on sale of utility plant - - 121 100 ---- --- ----- --- Total operating expenses (23) (21) (98) (29) ---- --- ----- --- Operating income (2) (15) 6 18 ---- --- ----- --- Other income, net 4 (a) 1 38 Interest expense, net - - (1) (5) ---- --- ----- --- Income before income tax expense 2 24 8 44 Income tax expense 1 27 (10) (a) ---- --- ----- --- Net income $ 1 22% $ 18 (a)% ==== === ===== === (a) Percent greater than 100. Comparison of the Third Quarter of 2002 to the Third Quarter of 2001 Operating Revenues Operating revenues decreased by $25 million or 21 percent in 2002, primarily due to lower retail revenues ($21 million) and lower wholesale and other revenues ($4 million). Retail revenues were lower primarily due to a decrease in the standard offer service rate resulting from a competitive bid process required by the DTE ($30 million) partially offset by an increase in the transition charge rate ($9 million) and higher distribution revenues from higher sales. The decrease in revenues related to the decrease in the standard offer service rate is offset by a corresponding decrease in fuel, purchased and net interchange power. Retail sales increased by 5.3 percent. Wholesale revenues were lower primarily due to the expiring of long-term contracts ($2 million). Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2002, primarily due to the lower supply price for standard offer service ($29 million). Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in the third quarter of 2002 primarily due to higher amortizations related to the recovery of stranded costs ($12 million). Other Operation Other operation expense decreased by $8 million in 2002 primarily due to a one-time pension charge in 2001 ($6 million). Other Income, Net Other income, net increased in 2002, primarily due to environmental costs recorded in 2001. Comparison of the First Nine Months of 2002 to the First Nine Months of 2001 Operating Revenues Operating revenues decreased by $92 million or 25 percent in 2002, primarily due to lower retail revenues ($57 million) and lower wholesale and other revenues ($35 million). Retail revenues were lower primarily due to a decrease in the standard offer service rate resulting from a competitive bid process required by the DTE ($84 million) partially offset by an increase in the transition charge rate ($23 million) and higher distribution revenues. The decrease in revenues related to the decrease in the standard offer service rate is offset by a corresponding decrease in fuel, purchased and net interchange power. Retail sales increased by 0.8 percent. Wholesale revenues were lower primarily due to lower sales of energy and capacity due to buydown and buyout of various cogenerator contracts ($13 million), the inclusion in 2001 of revenue from the output of the Millstone units ($14 million) and lower sales of Vermont Yankee ($4 million). The buydown and buyout of cogeneration contracts has a corresponding decrease in fuel, purchased and net interchange power. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2002, primarily due to the lower supply price for standard offer service ($85 million), the buydown and buyout of various cogeneration contracts ($12 million) and lower nuclear fuel expense ($4 million). Other Operation and Maintenance Other O&M expense decreased by $19 million in 2002, primarily due to lack of nuclear expenses in 2002 as a result of the sale of Millstone units at the end of the first quarter in 2001 ($12 million) and lower general and administrative expenses ($6 million). Amortization of Regulatory Assets, Net Amortization of regulatory assets, net decreased in 2002 ($92 million) primarily due to the amortization in 2001 related to the sale of the Millstone units ($121 million) offset by higher amortizations in 2002 related to the recovery of stranded costs ($31 million). Gain on Sale of Utility Plant In 2001, WMECO recorded a gain on the sale of its ownership share in the Millstone units. A corresponding amount of amortization expense was recorded. Income Tax Expense Income tax expense decreased in 2002 primarily due to the recognition in 2002 of investment tax credits as a result of a regulatory decision ($13 million). LIQUIDITY WMECO had no significant financing activities in the third quarter of 2002. In November 2002, NU expects to decrease to $300 million from $350 million a line of credit for its regulated subsidiaries, including WMECO. As of September 30, 2002, WMECO had $55 million outstanding under this facility. WMECO projects a modest level of system financings over the next three months to six months. WMECO has applied to the DTE to issue $100 million of debt to refinance existing short-term debt and its prior spent nuclear fuel obligations pursuant to the Nuclear Waste Policy Act of 1982 for nuclear fuel burned prior to April 6, 1983. WMECO's net cash flows provided by operating activities decreased to $20.7 million in the first nine months of 2002, compared with $79.3 million during the same period of 2001. Changes in working capital items were the primary drivers of the decrease. There was a lower level of investing and financing activities in the first nine months of 2002, as compared to the same period of 2001, primarily due to the sale of the Millstone units, the buyout and buydown of independent power producer contracts, and the issuance of rate reduction certificates in 2001. The level of common dividends totaled $12 million in the first nine months of 2002 and $9 million in the first nine months of 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are set forth in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," herein. ITEM 4. CONTROLS AND PROCEDURES NU, CL&P, PSNH and WMECO (collectively, the companies) evaluated the design and operation of their disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Exchange Act and the rules and forms of the Securities and Exchange Commission (SEC). These evaluations were made under the supervision and with the participation of management, including the companies' principal executive officer and principal financial officer, within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q. The principal executive officer and principal financial officer have concluded, based on their review, that the companies' disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and 15(d)- 14(c), are effective to ensure that information required to be disclosed by the companies in reports that it files under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. No significant changes were made to the companies' internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. Bridgeport Energy, LLC v. Northeast Utilities Service Company and Select Energy, Inc. In July 2001, Select Energy filed a lawsuit against Bridgeport Energy, LLC (Bridgeport) (a subsidiary of Duke Energy) in Connecticut Superior Court regarding termination of a July 1998 contract to purchase installed capability (ICAP) from Bridgeport. The contract, which had been assigned to Select Energy by Holyoke Power and Electric Company, contained a termination clause allowing either party to terminate if the Federal Energy Regulatory Commission (FERC), NEPOOL or the Independent System Operator - New England (ISO - New England) either eliminated ICAP or made material changes to ICAP which affected the parties and such changes could not be resolved through negotiation. Select Energy sought to terminate the contract under the termination clause after ISO - New England filed with FERC to eliminate the ICAP product. Bridgeport filed a lawsuit shortly thereafter alleging Select Energy was in default under the contract and requesting damages for the remainder of the contract. The complaints have been transferred to the complex litigation docket of the court with a scheduling order contemplating a trial in October 2003. The parties are engaged in discovery. Select Energy has also requested that the court strike the portion of Bridgeport's complaint alleging that Select Energy engaged in unfair trade practices under Connecticut law. Bridgeport has scheduled a series of depositions of Northeast Utilities Service Company (NUSCO) and Select Energy personnel to be completed by December 6, 2002. Non-binding mediation occurred on October 17, 2002, but no settlement has been reached. 2. Millstone Station - Damage to Fish Population Lawsuits On April 26, 2000, a lawsuit was filed in Hartford Superior Court naming as defendants the Commissioner of the Connecticut Department of Environmental Protection (DEP), Northeast Nuclear Energy Company (NNECO) and NUSCO. This lawsuit, brought by the Connecticut Coalition Against Millstone (CCAM), the Long Island Coalition Against Millstone, The Connecticut Green Party, Don't Waste Connecticut and the STAR Foundation, challenged the validity of previously issued DEP emergency and temporary authorizations allowing Millstone to discharge wastewater not expressly authorized by the facility's water discharge National Pollutant Discharge Elimination System Permit (NPDES Permit). On October 16, 2000, this matter was dismissed by the Superior Court. The plaintiffs filed an appeal of the dismissal with the Connecticut Appellate Court. On June 26, 2002, the Appellate Court granted NUSCO's motion to dismiss the appeal as moot. On August 6, 2002, CCAM moved to reopen this appeal with the Appellate Court. CCAM's motion was denied on September 11, 2002, and CCAM has requested the Connecticut Supreme Court to hear an appeal of the Appellate Court decision. 3. Sale of Millstone to Dominion Nuclear Connecticut, Inc. In March 2001, CCAM filed suit against the DEP, NNECO and DNCI challenging the validity of Millstone's NPDES Permit and a previously issued DEP emergency authorization allowing Millstone to discharge wastewater not expressly authorized by the facility's NPDES Permit. The suit also challenged DEP's authority to transfer both Millstone's NPDES Permit and emergency authorization to DNCI. In July 2001, this matter was dismissed by the Connecticut Superior Court and in August 2001, CCAM filed an appeal with the Connecticut Appellate Court. On September 20, 2002, the Connecticut Supreme Court assigned the matter to itself. The suit has not yet been scheduled for oral argument. 4. Federal Energy Regulatory Commission - Installed Capability Deficiency Charge In July 2001, NU filed an appeal of the FERC orders imposing a $0.17 per kilowatt-month ICAP charge from August 1, 2000 to April 1, 2001. In December 2001, FERC denied rehearing of its order allowing the $0.17 rate during the court-imposed stay period, April through August 2001. NU appealed this decision to the First Circuit Court of Appeals (First Circuit) and on October 4, 2002, the First Circuit denied the appeal. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits (NU) Exhibit No. Description ----------- ----------- 10.38.4 Arrangement with Respect to Seabrook 10.38.5 Employment Agreement with Michael Morris dated as of August 20, 2002 15 Deloitte & Touche LLP Letter Regarding Unaudited Financial Information 99.1 Certification of Michael G. Morris, Chairman, President and Chief Executive Officer of Northeast Utilities and John H. Forsgren, Vice Chairman, Executive Vice President and Chief Financial Officer of Northeast Utilities, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 7, 2002 (a) Listing of Exhibits (CL&P) 4.2.7.4 Amendment No. 2 to the Standby Bond Purchase Agreement dated as of September 9, 2002, among CL&P, The Bank of New York, and the Participating Banks referred to therein 99.1 Certification of Cheryl W. Grise, Chief Executive Officer of The Connecticut Light and Power Company (the Company) and John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, dated November 7, 2002 (a) Listing of Exhibits (PSNH) 99.1 Certification of Cheryl W. Grise, Chief Executive Officer of Public Service Company of New Hampshire (the Company) and John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 7, 2002 (a) Listing of Exhibits (WMECO) 99.1 Certification of Cheryl W. Grise, Chief Executive Officer of Western Massachusetts Electric Company (the Company) and John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, dated November 7, 2002 (b) Reports on Form 8-K: NU filed a current report on Form 8-K dated July 23, 2002, disclosing: o NU's earnings press release for the second quarter and six months ended June 30, 2002. NU filed a current report on Form 8-K dated August 2, 2002, disclosing: o NU's submission to the SEC of certain Statements under Oath of the Principal Executive Officer and Principal Financial Officer in accordance with the SEC's June 27, 2002 Order requiring the filing of sworn statements pursuant to Section 21(a)(1) of the Securities and Exchange Act of 1934. NU filed a current report on Form 8-K dated August 14, 2002, disclosing: o NU's submission to the SEC of certain Statements under Oath of the Principal Executive Officer and Principal Financial Officer in accordance with the SEC's June 27, 2002 Order requiring the filing of sworn statements pursuant to Section 21(a)(1) of the Securities and Exchange Act of 1934. NU filed a current report on Form 8-K dated October 8, 2002, disclosing: o NU's announcement of the lowering of its 2002 earnings guidance and the declaration of a regular common dividend. NU filed a current report on Form 8-K dated October 21, 2002, disclosing: o NU's earnings press release for the third quarter and nine months ended September 30, 2002. NU, CL&P, PSNH, and WMECO filed current reports on Form 8-K dated October 21, 2002, disclosing: o Presentation information related to earnings guidance for 2002 and 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NORTHEAST UTILITIES ------------------- Registrant Date: November 7, 2002 By /s/ John H. Forsgren ---------------- -------------------------------------- John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer Date: November 7, 2002 By /s/ John P. Stack ---------------- -------------------------------------- John P. Stack Vice President - Accounting and Controller CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael G. Morris, Chairman, President and Chief Executive Officer of Northeast Utilities (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ Michael G. Morris (Signature) Michael G. Morris Chairman, President and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. Forsgren, Vice Chairman, Executive Vice President and Chief Financial Officer of Northeast Utilities (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ John H. Forsgren (Signature) John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE CONNECTICUT LIGHT AND POWER COMPANY --------------------------------------- Registrant Date: November 7, 2002 By /s/ Randy A. Shoop ---------------- -------------------------------------- Randy A. Shoop Treasurer Date: November 7, 2002 By /s/ John P. Stack ---------------- -------------------------------------- John P. Stack Vice President - Accounting and Controller CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Cheryl W. Grise, Chief Executive Officer of The Connecticut Light and Power Company (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company as Agent for The Connecticut Light and Power Company (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE --------------------------------------- Registrant Date: November 7, 2002 By /s/ David R. McHale ---------------- -------------------------------------- David R. McHale Vice President and Treasurer Date: November 7, 2002 By /s/ John P. Stack ---------------- -------------------------------------- John P. Stack Vice President - Accounting and Controller CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Cheryl W. Grise, Chief Executive Officer of Public Service Company of New Hampshire (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company as Agent for Public Service Company of New Hampshire (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WESTERN MASSACHUSETTS ELECTRIC COMPANY -------------------------------------- Registrant Date: November 7, 2002 By /s/ David R. McHale ---------------- -------------------------------------- David R. McHale Vice President and Treasurer Date: November 7, 2002 By /s/ John P. Stack ---------------- -------------------------------------- John P. Stack Vice President - Accounting and Controller CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Cheryl W. Grise, Chief Executive Officer of Western Massachusetts Electric Company (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company as Agent for Western Massachusetts Electric Company (the Company), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company EX-10.38.4 3 exh10384.txt EXHIBIT 10.38.4 Exhibit 10.38.4 Arrangement re: Compensation On September 10, 2002, the Compensation Committee of the Northeast Utilities Board of Trustees resolved to give Michael G. Morris a special payment of $100,000 upon the closing of the sale of the Seabrook Nuclear Generating Station, which occurred on November 1, 2002. EX-10.38.5 4 exh10385.txt EXHIBIT 10.38.5 Exhibit 10.38.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") entered into as of August 20, 2002, by and between Northeast Utilities ("Northeast Utilities" or "NU"), a Massachusetts business trust (together with its successors and assigns permitted under the Agreement and each direct and indirect affiliated company that shall adopt this Agreement pursuant to Section 18 hereof, the "Company"), with its principal office in West Springfield, Massachusetts, and its general office in Berlin, Connecticut, and Michael G. Morris, a resident of Northville, Michigan ("Executive"). WHEREAS, both parties desire to enter into an agreement to reflect Executive's executive capacities in the Company's business and to provide for Executive's continued employment by the Company, upon the terms and conditions set forth herein: NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Employment. The Company hereby agrees to employ Executive, and Executive hereby accepts such employment and agrees to perform Executive's duties and responsibilities, in accordance with the terms, conditions and provisions hereinafter set forth. 1.1. Employment Term. The term of Executive's employment under this Agreement shall commence as of the date hereof (the "Effective Date") and shall continue until August 20, 2007, unless sooner terminated in accordance with Section 5 or Section 6 hereof, and shall automatically renew for periods of one year unless one party gives written notice to the other, at least six months prior to August 20, 2007 or at least six months prior to the end of any one-year renewal period, that the Agreement shall not be further extended. The period commencing as of the Effective Date and ending on the date on which the term of Executive's employment under the Agreement shall terminate is hereinafter referred to as the "Employment Term." 1.2. Duties and Responsibilities. Executive shall serve as Chairman, President and Chief Executive Officer of Northeast Utilities and in such other senior positions, if any, to which he may be elected during the Employment Term. During the Employment Term, Executive shall perform all duties and accept all responsibilities incident to such positions as may be assigned to him by the Northeast Utilities' Board of Trustees (the "Trustees"). 1.3. Extent of Service. During the Employment Term, Executive agrees to use Executive's best efforts to carry out Executive's duties and responsibilities under Section 1.2 hereof and, consistent with the other provisions of this Agreement, to devote substantially all Executive's business time, attention and energy thereto. Except as provided in Section 3 hereof, the foregoing shall not be construed as preventing Executive from making minority investments in other businesses or enterprises provided that Executive agrees not to become engaged in any other business activity which, in the reasonable judgment of the Trustees, is likely to interfere with Executive's ability to discharge Executive's duties and responsibilities to the Company. 1.4. Base Salary. For all the services rendered by Executive hereunder, the Company shall pay Executive a base salary ("Base Salary"), commencing on the Effective Date, at the annual rate of $950,000, payable in installments at such times as the Company customarily pays its other senior level executives (but in any event no less often than monthly). Executive's Base Salary shall be reviewed annually for appropriate adjustment (but shall not be reduced below that in effect on the Effective Date without Executive's written consent) by the Trustees pursuant to its normal performance review policies for senior level executives. 1.5. Retirement and Benefit Coverages. (a) During the Employment Term, Executive shall be entitled to participate in all (a) employee pension and retirement plans and programs ("Retirement Plans") and (b) welfare benefit plans and programs ("Benefit Coverages"), in each case made available to the Company's senior level executives as a group or to its employees generally, as such Retirement Plans or Benefit Coverages may be in effect from time to time, but not the Company's Supplemental Executive Retirement Plan for Officers (the "Supplemental Plan"). Executive shall also be covered by an individual term life insurance policy in the face amount of $2,700,000. (b) In lieu of coverage under the Supplemental Plan, Executive shall also be entitled to receive a special retirement benefit (the "Special Retirement Benefit") equal to the excess of (i) the annual benefit payable at normal or early retirement, as applicable, under the benefit formula (including any actuarial subsidy for early retirement) of the Gross Supplemental Benefit Plan, as set forth in Appendix A to this Agreement, over (ii) the retirement benefit actually due to Executive, at his normal or early retirement date, as applicable, under the Northeast Utilities Service Company Retirement Plan (the "Retirement Plan of the Company"). Appendix A also governs the time and form of payment of the Special Retirement Benefit. In the event of Executive's death prior to retirement and without regard to the length of the Employment Term, a survivor benefit (the "Survivor Benefit") shall be paid as follows: a Survivor Benefit shall be paid to Executive's surviving spouse, if any, equal to the excess of (i) the survivor benefit that would be calculated for such spouse under the Supplemental Plan if (x) Executive's Special Retirement Benefit, as calculated above, had been a vested "Target Benefit" (the "Target Benefit") under the Supplemental Plan and (y) Executive's surviving spouse had been entitled to a pre-retirement death benefit with respect to that Target Benefit under the Supplemental Plan over (ii) the survivor benefit actually due to such spouse under the Retirement Plan of the Company. (c) Notwithstanding the foregoing, if at the end of the Employment Term Executive is at least age 60, Executive will be entitled to a retirement benefit, in lieu of the Special Retirement Benefit, which is equal to the benefit that Executive would have been entitled to receive had he been eligible for a Make-Whole Benefit and a Target Benefit under the Supplemental Plan, based on all of the Accredited Service (as defined in Appendix A) used in determining the Special Retirement Benefit (such benefit to be referred to herein as the "Modified Special Retirement Benefit"); provided, however, that the Modified Special Retirement Benefit shall only be substituted for the Special Retirement Benefit if it will produce a greater benefit on an actuarial basis (determined by using the definition of "Actuarially Equivalent" in the Retirement Plan of the Company and including survivor benefits in such determination) than the Special Retirement Benefit. If at the end of the Employment Term Executive has not yet attained age 60, the Trustees (or a Committee thereof) retain the right to award Executive the Modified Special Retirement Benefit provided pursuant to this Section 1.5 (c) in their sole discretion. 1.6. Reimbursement of Expenses and Dues; Vacation. Executive shall be provided with reimbursement of expenses related to Executive's employment by the Company on a basis no less favorable than that which may be authorized from time to time for senior level executives as a group, and shall be entitled to five weeks of vacation annually and holidays in accordance with the Company's normal personnel policies for senior level executives. In addition, Executive shall be entitled to (i) the annual dues of a luncheon club in Hartford, Connecticut and (ii) the use of an automobile including all operating and maintenance expenses, both to be used primarily in pursuit of the business of the Company. 1.7 Short-Term Incentive Compensation. Executive shall be entitled to participate in any short-term incentive compensation programs established by the Company for its senior level executives generally, depending upon achievement of certain annual individual or business performance objectives specified and approved by the Trustees (or a Committee thereof) in its sole discretion; provided, however, that Executive's "target opportunity" and "maximum opportunity" under any such program shall be at least 150% and 300% respectively of Executive's Base Salary, except that the Trustees may change these "target opportunity" and "maximum opportunity" percentages as part of a general revision of executive compensation which also applies to other senior level executives of the Company. Executive's short- term incentive compensation, either in shares of NU or cash, as applicable from time to time, shall be paid to Executive, subject to the Trustees' reasonable discretion, not later than such payments are made to the Company's senior level executives generally. 1.8 Long-Term Incentive Compensation. Executive shall also be entitled to participate in any long-term incentive compensation programs established by the Company for its senior level executives generally, depending upon achievement of certain business performance objectives specified and approved by the Trustees (or a Committee thereof) in its sole discretion; provided, however, that Executive's "target opportunity" and "maximum opportunity" under any such program shall be at least 220% and 440% respectively of Executive's Base Salary, except that the Trustees may change these "target opportunity" and "maximum opportunity" percentages as part of a general revision of executive compensation which also applies to other senior level executives of the Company. Executive's long-term incentive compensation, either in shares of NU, restricted stock units, options or cash, as applicable from time to time, shall be paid to Executive, subject to the Trustees' reasonable discretion, not later than such payments are made to the Company's senior level executives generally. 1.9 Relocation of Residence. In the event Executive decides to relocate his principal residence to Connecticut from Northville, Michigan, the Company shall purchase Executive's residence in Northville, Michigan and Executive's vacation home in Green Oak Township, Michigan (if Executive is unable to sell either or both such properties, in each case within 90 days of placing such property on the market) for fair market value as determined in accordance with the Company's normal policy for senior level executives. 1.10 Stock Option Grant. On November 1, 2002, or as soon as practicable thereafter, Executive shall be granted, in addition to any stock options heretofore granted, a nonqualified stock option (for a term expiring August 20, 2012 or, if earlier, three years after the date of Executive's termination from employment by the Company for any reason other than cause, as defined in Section 5.3, in which case the term shall expire immediately and be forfeited) to purchase 500,000 shares of common stock of NU at a purchase price of $16.55 for each share purchased (the "Special Option"). Executive's right to exercise the Special Option shall vest on August 20, 2007, but only if, on such date, Executive is still employed as Chief Executive Officer. In the event, prior to August 20, 2007, of Executive's death, Executive's involuntary termination without cause pursuant to Section 5.4(b), or termination following the occurrence of a Change of Control pursuant to Section 6.1(f), Executive will be immediately vested in the right to purchase shares equal to a percentage of 500,000 shares which is 20% multiplied by the number of anniversaries of the Effective Date which have occurred on or prior to such event. Except as provided in the preceding two sentences, the right to exercise the Special Option shall be forfeited upon termination of employment. The terms of the Special Option, to the extent not inconsistent with the provisions outlined in this Section, shall be made subject to the terms of the Northeast Utilities Incentive Plan. 2. Confidential Information. Executive recognizes and acknowledges that by reason of Executive's employment by and service to the Company during and, if applicable, after the Employment Term Executive will continue to have access to certain confidential and proprietary information relating to the business of the Company, which may include, but is not limited to, trade secrets, trade "know-how", customer information, supplier information, cost and pricing information, marketing and sales techniques, strategies and programs, computer programs and software and financial information (collectively referred to as "Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and Executive covenants that Executive will not, unless expressly authorized in writing by the Trustees, at any time during the course of Executive's employment use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Executive also covenants that at any time after the termination of such employment, directly or indirectly, Executive will not use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation, unless such information is in the public domain through no fault of Executive or except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order Executive to divulge, disclose or make accessible such information, in which case Executive will inform the Company in writing promptly of such required disclosure, but in any event at least two business days prior to disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive's possession during the course of Executive's employment shall remain the property of the Company. Except as required in the performance of Executive's duties for the Company, or unless expressly authorized in writing by the Trustees, Executive shall not remove any written Confidential Information from the Company's premises, except in connection with the performance of Executive's duties for the Company and in a manner consistent with the Company's policies regarding Confidential Information. Upon termination of Executive's employment, Executive agrees immediately to return to the Company all written Confidential Information in Executive's possession. For the purposes of this Section 2, the term "Company" shall be deemed to include the Affiliates, as defined in Section 6.1(a), of the Company. 3. Non-Competition; Non-Solicitation. (a) During Executive's employment by the Company and for a period of two years after Executive's termination of employment for any reason, within the Company's "Service Area," as defined below, Executive will not, except with the prior written consent of the Trustees, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executive's name to be used in connection with, any business or enterprise which is engaged in any business that is competitive with any regulated business or enterprise in which the Company is engaged ("Competitive Company"). For the purposes of this Section, "Service Area" shall mean the geographic area within the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, or any other state in which the Company, in the aggregate, generates 25% or more of its revenues in the fiscal year of NU in which Executive's termination of employment occurs. Further, for the purposes of this Section, "Competitive Company" shall mean Consolidated Edison, Inc., Energy East Corporation, Hydro-Quebec, KeySpan Energy, National Grid USA, NSTAR, or The United Illuminating Company, their assigns or successors, or any other company which in the future engages in competition with the regulated business of the Company in the Service Area. Executive acknowledges that the listed Service Area is the area in which the Company presently does business. (b) The foregoing restrictions shall not be construed to prohibit the ownership by Executive of less than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising Executive's rights as a shareholder, or seeks to do any of the foregoing. (c) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, directly or indirectly, (i) solicit, divert, take away, or attempt to solicit, divert or take away, any of the Company's "Principal Customers," defined for the purposes hereof to include any customer of the Company, from which $100,000 or more of annual gross revenues are derived at such time, or (ii) encourage any Principal Customer to reduce its patronage of the Company. (d) Executive further covenants and agrees that during Executive's employment by the Company and for the period of two years thereafter, Executive will not, except with the prior written consent of the Trustees, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who was a managerial or higher level employee of the Company at any time during the term of Executive's employment by the Company by any employer other than the Company for any position as an employee, independent contractor, consultant or otherwise. The foregoing covenant of Executive shall not apply to any person after 12 months have elapsed subsequent to the date on which such person's employment by the Company has terminated. (e) Nothing in this Section 3 shall be construed to prohibit Executive from being connected as a partner, principal, shareholder, associate, counsel or otherwise with another lawyer or a law firm which performs services for clients engaged in any business or enterprise that is competitive with any business or enterprise in which the Company is engaged, provided that Executive is not personally involved, directly or indirectly, in performing services for any such clients during the period specified in Section 3(a) and provided further that such lawyer or law firm takes reasonable precautions to screen Executive from participating for the period specified in Section 3(a) in the representation of any such clients. The parties agree that any such personal performance of services by Executive for any such clients during such period would create an unreasonable risk of violation by Executive of the provisions of Section 2 of this Agreement, and Executive agrees (and the Company may elect) to notify in writing any lawyer or law firm with which Executive may be connected during the period specified in Section 3(a) of Executive's Agreement as set forth herein. Executive agrees to notify the Company in writing in advance of the precautions to be taken by such lawyer or law firm to screen Executive from any representation of such competing client by such lawyer or law firm. (f) For the purposes of this Section 3, the term "Company" shall be deemed to include the Affiliates, as defined in Section 6.1(a), of the Company. 4. Equitable Relief. (a) Executive acknowledges and agrees that the restrictions contained in Sections 2 and 3 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Company should Executive breach any of the provisions of those Sections. Executive represents and acknowledges that (i) Executive has been advised by the Company to consult Executive's own legal counsel in respect of this Agreement, and (ii) that Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with Executive's counsel. (b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 2 and 3 cannot be adequately compensated by monetary damages. Executive agrees that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 2 or 3 hereof, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. In the event that any of the provisions of Sections 2 or 3 hereof should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision shall be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment shall apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law. (c) If Executive breaches any of Executive's obligations under Sections 2 or 3 hereof, and such breach constitutes "cause," as defined in Section 5.3 hereof, or would constitute cause if it had occurred during the Employment Term, the Company shall thereafter remain obligated only for the compensation and other benefits provided in any plans, policies or practices then applicable to Executive in accordance with the terms thereof. (d) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Sections 2 or 3 hereof, including without limitation, any action commenced by the Company for preliminary and permanent injunctive relief and other equitable relief, may be brought in the United States District Court for the District of Connecticut, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Hartford, Connecticut, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. Executive also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 10 hereof. (e) Executive agrees that for a period of five years following the termination of Executive's employment by the Company Executive will provide, and that at all times after the date hereof the Company may similarly provide, a copy of Sections 2 and 3 hereof to any business or enterprise (i) which Executive may directly or indirectly own, manage, operate, finance, join, control or of which he may participate in the ownership, management, operation, financing, or control, or (ii) with which Executive may be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise, or in connection with which Executive may use or permit to be used Executive's name; provided, however, that this provision shall not apply in respect of Section 3 hereof after expiration of the time periods set forth therein. (f) For the purposes of this Section 4, the term "Company" shall be deemed to include the Affiliates, as defined in Section 6.1(a), of the Company. 5. Termination. The Employment Term shall terminate upon the occurrence of any one of the following events: 5.1. Disability. The Company may terminate the Employment Term if Executive is unable substantially to perform Executive's duties and responsibilities hereunder to the full extent required by the Trustees by reason of illness, injury or incapacity for six consecutive months, or for more than six months in the aggregate during any period of twelve calendar months; provided, however, that the Company shall continue to pay Executive's Base Salary until the Company acts to terminate the Employment Term. If the Company terminates the Employment Term, Executive shall be entitled to receive (i) any amounts earned, accrued or owing but not yet paid under Section 1 above, (ii) a continuation of his Base Salary until the later of August 20, 2007 or the date on which any one-year anniversary renewal pursuant to Section 1.1 terminates (the "Target Employment Termination Date"), (iii) the greater of the Special Retirement Benefit or the Modified Special Retirement Benefit, payable commencing on the Target Employment Termination Date, calculated on the basis of all Base Salary (including Base Salary to be paid pursuant to clause (ii) above) and all service that would have been credited through the Target Employment Termination Date, and using his age on the Target Employment Termination Date for eligibility for the Modified Special Retirement Benefit and for calculating the actuarial reduction for determining the amount of such benefit, and (iv) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation to Executive for compensation under this Agreement. Executive agrees, in the event of a dispute under this Section 5.1, to submit to a physical examination by a licensed physician selected by the Trustees. 5.2. Death. The Employment Term shall terminate in the event of Executive's death. In such event, the Company shall pay to Executive's executors, legal representatives or administrators, as applicable, an amount equal to the installment of Executive's Base Salary set forth in Section 1.4 hereof for the month in which Executive dies and to Executive's surviving spouse the Survivor Benefit. In addition, Executive's estate shall be entitled to receive (i) any other amounts earned, accrued or owing but not yet paid under Section 1 above and (ii) any other benefits in accordance with the terms of any applicable plans and programs of the Company. Otherwise, the Company shall have no further liability or obligation under this Agreement to Executive's executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through Executive. 5.3. Cause. The Company may terminate the Employment Term, at any time, for "cause" upon written notice, in which event all payments under this Agreement shall cease, except for Base Salary to the extent already accrued, but Executive shall remain entitled to any other benefits in accordance with the terms of any applicable plans and programs of the Company. Executive shall be entitled to the retirement benefit provided pursuant to Section 1.5(b) or (c), as the case may be, provided, however, that the Trustees (or a Committee thereof) shall have the right to deny entitlement to such retirement benefit in their sole discretion. For purposes of this Agreement, Executive's employment may be terminated for "cause" if (i) Executive is convicted of a felony, (ii) in the reasonable determination of the Trustees, Executive has (x) committed an act of fraud, embezzlement, or theft in connection with Executive's duties in the course of Executive's employment with the Company, (y) caused intentional, wrongful damage to the property of the Company or intentionally and wrongfully disclosed Confidential Information, or (z) engaged in gross misconduct or gross negligence in the course of Executive's employment with the Company or (iii) Executive materially breached Executive's obligations under this Agreement and shall not have remedied such breach within 30 days after receiving written notice from the Trustees specifying the details thereof. For purposes of this Agreement, an act or omission on the part of Executive shall be deemed "intentional" only if it was not due primarily to an error in judgment or negligence and was done by Executive not in good faith and without reasonable belief that the act or omission was in the best interest of the Company. 5.4. Termination Without Cause and Non-Renewal. (a) The Company may remove Executive, at any time, without cause from the position in which Executive is employed hereunder (in which case the Employment Term shall be deemed to have ended) upon not less than 60 days' prior written notice to Executive; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and, subject to the provisions of Section 3 hereof, shall be allowed to seek other employment. Upon any such removal or if the Company informs Executive that the Agreement will not be renewed after August 20, 2007 or at the end of any subsequent renewal period, Executive shall be entitled to receive, as liquidated damages for the failure of the Company to continue to employ Executive, only the amount due to Executive under the Company's then current severance pay plan for employees. No further payments or benefits shall be due under this Agreement to Executive, except that Executive shall be entitled to the Special Retirement Benefit, or to the extent provided in Section 1.5(c), based on his actual age, the Modified Special Retirement Benefit, and any benefits due in accordance with the terms of any applicable plans and programs of the Company. Notwithstanding anything in this Agreement to the contrary, on or after the date Executive attains age 65, no action by the Company shall be treated as a removal from employment or non-renewal if on the effective date of such action Executive satisfies all of the requirements for the executive or high policy-making exception to applicable provisions of state and federal age discrimination legislation. (b) Notwithstanding the provisions of Section 5.4(a) (other than the last sentence), in the event that Executive executes a written release upon such removal or nonrenewal, substantially in the form attached hereto as Annex 1, (the "Release"), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive's employment by the Company (other than any entitlements under the terms of this Agreement or under any other plans or programs of the Company in which Executive participated and under which Executive has accrued a benefit), or the termination thereof, Executive shall be entitled to receive, in lieu of the payment described in Section 5.4(a), which Executive agrees to waive, (i) as liquidated damages for the failure of the Company to continue to employ Executive, a single cash payment, within 30 days after the effective date of the removal or non-renewal, equal to Executive's Base Compensation, as defined in Section 6.1 (b) below, which shall not constitute a "severance benefit" to Executive for purposes of the Target Benefit under the Supplemental Plan; (ii) for a period equal to two years following the end of the Employment Term, Executive and Executive's spouse and dependents shall be eligible for a continuation of those Benefit Coverages, as in effect at the time of such termination or removal, and as the same may be changed from time to time, as if Executive had been continued in employment during said period or to receive cash in lieu of such benefits or premiums, as applicable, where such Benefit Coverages may not be continued (or where such continuation would adversely affect the tax status of the plan pursuant to which the Benefit Coverage is provided) under applicable law or regulations; (iii) any other amounts earned, accrued or owing but not yet paid under Section 1 above; (iv) any other benefits in accordance with the terms of any applicable plans and programs of the Company; (v) as additional consideration for the non-competition and non-solicitation covenant contained in Section 3, a single cash payment, within 30 days after the effective date of the removal or non-renewal, equal to Executive's Base Compensation, as defined in Section 6.1 (b) below; and (vi) in addition, (x) Executive's years of service with the Company shall be increased by two years following the end of the Employment Term and shall be taken into account in determining the amount of the Special Retirement Benefit, or to the extent provided in Section 1.5(c), based on his actual age, the Modified Special Retirement Benefit, and (y) two years of Base Compensation shall be taken into account as compensation during such additional two year period in determining Executive's Special Retirement Benefit, or to the extent provided in Section 1.5(c), based on his actual age, the Modified Special Retirement Benefit Special Retirement Benefit, but only if the effect is to increase the amount of such benefit. (vii) All stock option grants, to the extent not already vested prior to the removal or non-renewal, shall be fully vested and immediately exercisable as if Executive had remained actively employed by the Company, and had satisfied all time requirements as to exercise, including the right of exercise, where appropriate, within 36 months after the removal or non-renewal; provided, however, that the Special Option shall not be subject to this clause, and shall only vest as set forth in Section 1.10. 5.5. Voluntary Termination. Executive may voluntarily terminate the Employment Term upon 30 days prior written notice for any reason. In such event, after the effective date of such termination, no further payments shall be due under this Agreement except that Executive shall be entitled to the Special Retirement Benefit, or to the extent provided in Section 1.5(c), based on his actual age, the Modified Special Retirement Benefit, and any benefits due in accordance with the terms of any applicable plan and programs of the Company. 6. Payments Upon a Change in Control. 6.1. Definitions. For all purposes of this Section 6, the following terms shall have the meanings specified in this Section 6.1 unless the context otherwise clearly requires: (a) "Affiliate" shall mean an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (b) "Base Compensation" shall mean, for a calendar year, Executive's annualized Base Salary as would be reported for federal income tax purposes on Form W-2 for such calendar year, together with any and all salary reduction authorized amounts under any of the Company's benefit plans or programs for such calendar year, and all short-term incentive compensation at the target level to be paid to Executive in all employee capacities with the Company attributable to such calendar year and taxable in the following calendar year. "Base Compensation" shall be the higher of (i) Base Compensation for the calendar year in which occurs the Change of Control or, if no Change of Control occurs, the calendar year in which occurs the involuntary termination; or (ii) Base Compensation for the full calendar year immediately prior thereto. "Base Compensation" shall not include the value of the Special Option, any other stock options, performance units, or other elements of Long-Term Incentive Compensation or any exercise thereunder. (c) "Change of Control" shall mean the occurrence of any of the following: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than the Company, its Affiliates, or any Company employee benefit plan (including any trustee of such plan acting as trustee), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of NU representing more than 20% of the combined voting power of either (i) the then outstanding shares of common stock of NU (the "Outstanding Common Stock") or (ii) the then outstanding voting securities of NU entitled to vote generally in the election of directors (the "Voting Securities"); or (ii) Individuals who, as of the beginning of any twenty-four month period, constitute the Trustees (the "Incumbent Trustees") cease for any reason to constitute at least a majority of the Trustees or cease to be able to exercise the powers of the majority of the Trustees, provided that any individual becoming a trustee subsequent to the beginning of such period whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the trustees then comprising the Incumbent Trustees shall be considered as though such individual were a member of the Incumbent Trustees, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Trustees of NU (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) Consummation by NU of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Voting Securities immediately prior to such Business Combination do not, following consummation of all transactions intended to constitute part of such Business Combination, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation, business trust or other entity resulting from or being the surviving entity in such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Common Stock and Voting Securities, as the case may be; or (iv) Consummation of a complete liquidation or dissolution of NU or sale or other disposition of all or substantially all of the assets of NU other than to a corporation, business trust or other entity with respect to which, following consummation of all transactions intended to constitute part of such sale or disposition, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Common Stock and Voting Securities, as the case may be, immediately prior to such sale or disposition. (d) "Termination Date" shall mean the date of receipt of a Notice of Termination of this Agreement or any later date specified therein. (e) "Termination of Employment" shall mean the termination of Executive's actual employment relationship with the Company, including a failure to renew the Agreement after August 20, 2007 or at the end of any subsequent renewal period, in either case occasioned by the Company's action. (f) "Termination upon a Change of Control" shall mean a Termination of Employment during the period beginning on the earlier of (a) approval by the shareholders of NU of a Change of Control or (b) consummation of a Change of Control and, in either case, ending on the second anniversary of the consummation of the transaction that constitutes the Change of Control (or if such period started on shareholder approval and after such shareholder approval the Board abandons the transaction, on the date the Board abandoned the transaction), which Termination of Employment is either: (i) initiated by the Company for any reason other than Executive's (w) disability, as described in Section 5.1 hereof, (x) death, (y) retirement on or after attaining age 65, or (z) "cause," as defined in Section 5.3 hereof, or (ii) initiated by Executive (A) upon any failure of the Company materially to comply with and satisfy any of the terms of this Agreement, including any significant reduction by the Company of the authority, duties or responsibilities of Executive, any reduction of Executive's compensation or benefits as in effect immediately prior to the Change of Control, or the assignment to Executive of duties which are materially inconsistent with the duties of Executive's position as defined in Section 1.2 above, or (B) if Executive is transferred, without Executive's written consent, to a location that is more than 50 miles from Executive's principal place of business immediately preceding such approval or consummation; provided, that the imposition on Executive following a Change of Control of a limitation of Executive's scope of authority such that Executive's responsibilities relate primarily to a company or companies whose common equity is not publicly held shall be considered a "significant reduction by the Company of the authority, duties or responsibilities of Executive" for purposes hereof. Notwithstanding the foregoing, for purposes of this definition: (i) a Termination of Employment which occurs prior to consummation of a Change of Control shall not constitute a Termination upon a Change of Control, as determined above, unless it is specifically approved by the Trustees in their sole discretion; and (ii) a Termination initiated by Executive prior to consummation of a Change of Control shall not constitute a Termination upon a Change of Control if the failure, reduction, assignment or transfer is determined by the Trustees to be unrelated to the impending Change of Control. 6.2. Notice of Termination. Any Termination upon a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) briefly summarizes the facts and circumstances deemed to provide a basis for a Termination of Employment and the applicable provision hereof, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than 15 days after the giving of such notice). 6.3. Payments Upon Termination. Subject to the provisions of Section 6.6 hereof, in the event of Executive's Termination upon a Change of Control, the Company agrees, in the event Executive executes the Release required by Section 5.4(b), to pay to Executive, in a single cash payment, within thirty days after the Termination Date, an amount equal to two (2) multiplied by Executive's Base Compensation, which payment shall not constitute a "severance benefit" to Executive for purposes of the Target Benefit under the Supplemental Plan. In addition, all amounts, benefits and Benefit Coverages described in Section 5.4(b)(ii), (iii), (iv) and (v) shall also be due to Executive, provided that in (ii) Benefit Coverages shall continue for three years instead of two. In the event Executive fails or refuses to execute the Release required by Section 5.4(b), the Company shall only pay to Executive, in a single cash payment, within thirty days after the Termination Date, the amount due under Section 5.4(a) above and, in addition, all other amounts and benefits described in Section 5.4(a). 6.4. Other Payments, Special Retirement Benefit, Stock Option and Stock Grants, etc. Subject to the provisions of Section 6.6 hereof, in the event of Executive's Termination upon a Change of Control, and the execution of the Release required by Section 5.4(b): (a) Executive's years of service with the Company through the 36th month following the Termination Date shall be taken into account in determining Executive's eligibility for, but not amount of cost sharing under, the Company's retiree health plan and, in addition, such number of months shall be added to Executive's age for this purpose; (b) Executive shall be entitled to the greater of: (i) the Special Retirement Benefit; or (ii) the Modified Special Retirement Benefit set forth in Section 1.5 without regard to whether Executive is then age 60. In making such calculations: (x) the period through the 36th month following the Termination Date shall be taken into account as Executive's years of service with the Company with respect to the Special Retirement Benefit or Modified Special Retirement Benefit, and 36 months shall be added to Executive's age for purposes of determining eligibility and actuarial reduction with respect to the Special Retirement Benefit or Modified Special Retirement Benefit; and (y) the payments made under the first sentence of Section 6.3, together with an additional year of Base Compensation, shall be taken into account as additional compensation over the period in which it would have been paid in determining Executive's Special Retirement Benefit, but only if the effect is to increase the amount of the Special Retirement Benefit. Notwithstanding the first sentence of this subsection (b), if Executive's Termination upon a Change of Control is exclusively based on the assertion, pursuant to the proviso in Section 6.1(f)(ii) above, that Executive's authority, duties or responsibilities have been significantly reduced solely by virtue of the Company ceasing to be a company whose equity is publicly held as a result of a "Rule 13e-3 transaction", as defined in Rule 13(e)-3(a) of the Exchange Act (i.e., there is no other failure, reduction, assignment or transfer pursuant to Section 6.1(f)(ii)), he will only be entitled to the Special Retirement Benefit as calculated above, or to the extent provided in Section 1.5(c), based on his actual age, the Modified Special Retirement Benefit, but he shall not be entitled to the Modified Special Retirement Benefit if his actual age, without regard to the additions described in the second sentence of this paragraph, is not then age 60. (c) Unless the Compensation Committee of the Northeast Utilities Board of Trustees is comprised of the same members as those on the Committee immediately before the Change of Control and determines otherwise, (i) all stock option grants previously granted to Executive, to the extent not already vested prior to such occurrence, shall be fully vested and immediately exercisable as if Executive had satisfied all requirements as to exercise, including the right of exercise where appropriate within 36 months of such occurrence, and if the Change of Control resulted in the Voting Securities of NU ceasing to be traded on a national securities exchange or through the national market system of the National Association of Securities Dealers Inc., the value of a share of stock on the day the option is exercised shall be deemed to be the closing price on the day such Voting Securities cease trading; and (ii) if the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), those portions of any such options that have not been exercised shall be assumed by, or replaced with comparable options or rights by, the surviving corporation; provided, however, that the Special Option shall not be subject to this clause, and shall only vest as set forth in Section 1.10. Notwithstanding the foregoing, such Committee (if comprised of the same members as those on the Committee immediately before the Change of Control) may require Executive to surrender the remainder of any or all such options, in each case in exchange for a payment by the Company, in cash or common shares as determined by the Committee, in an amount equal to the amount by which the then fair market value of the common shares subject to such option exceeds the exercise price per share of such option, or, after giving Executive an opportunity to exercise such option, terminate the option at such time as the Committee deems appropriate. 6.5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company and for which Executive may qualify; provided, however, that if Executive becomes entitled to and receives all of the payments provided for in this Agreement, Executive hereby waives Executive's right to receive payments under any severance plan or similar program applicable to all employees of the Company. 6.6. Certain Increase in Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Payment"), would constitute an "excess parachute payment" within the meaning of Section 2806 of the Internal Revenue Code of 1986, as amended (the "Code"), Executive shall be paid an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (b) All determinations to be made under this Section 6 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and Executive within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and Executive. Within five days after the Accounting Firm's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to Executive after taking into account the provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in subsection (a) above, in the manner determined by the Accounting Firm. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (b) and (c) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 7. Survivorship. The respective rights and obligations of the parties under this Agreement shall survive any termination of Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 8. Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. 9. Arbitration; Expenses. In the event of any dispute under the provisions of this Agreement other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, the parties shall be required to have the dispute, controversy or claim settled by arbitration in the City of Hartford, Connecticut in accordance with National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association, before a panel of three arbitrators, two of whom shall be selected by the Company and Executive, respectively, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable (except as provided in Section 52-418 of the Connecticut General Statutes) and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Company shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Company's and Executive's reasonable attorneys' fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys' fees and expenses) and shall share the fees of the American Arbitration Association. 10. Notices. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: Northeast Utilities P.O. Box 270 Hartford, CT 06141-0270 Attention: Senior Vice President, Secretary and General Counsel If to Executive, to: Michael G. Morris 996 Elmsmere Northville, MI 48167 or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section. 11. Contents of Agreement: Amendment and Assignment. (a) This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Trustees and executed on its behalf by a duly authorized officer and by Executive. (b) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the extent the Company would be required to perform if no such succession had taken place. 12. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 13. Remedies Cumulative; No Waiver. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion. 14. Beneficiaries/References. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive's beneficiary, estate or other legal representative. 15. Miscellaneous. All section headings used in this Agreement are for convenience only. This Agreement may be executed in counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 16. Withholding. The Company may withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Executive shall bear all expense of, and be solely responsible for, all federal, state and local taxes due with respect to any payment received under this Agreement. 17. Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of Connecticut without giving effect to any conflict of laws provisions. 18. Adoption by Affiliates; Obligations. (a) The obligations under this Agreement shall, in the first instance, be paid and satisfied by the Company; provided, however, that the Company will use its best efforts to cause the Company and each entity in which the Company (or its successors or assigns) now or hereafter holds, directly or indirectly, more than a 50 percent voting interest (an "Employer") to approve and adopt this Agreement and, by such approval and adoption, to be bound by the terms hereof as though a signatory hereto. If the Company shall be dissolved or for any other reason shall fail to pay and satisfy the obligations, each individual Employer shall thereafter shall be jointly and severally liable to pay and satisfy the obligations to Executive. (b) The Declaration of Trust of the Company provides that no shareholder of the Company shall be held to any liability whatever for the payment of any sum of money, or for damages or otherwise under any contract, obligation or undertaking made, entered into or issued by the trustees of the Company or by any officer, agent or representative elected or appointed by the trustees and no such contract, obligation or undertaking shall be enforceable against the trustees or any of them in their or his individual capacities or capacity and all such contracts, obligations and undertakings shall be enforceable only against the trustees as such and every person, firm, association, trust and corporation having any claim or demand arising out of any such contract, obligation or undertaking shall look only to the trust estate for the payment or satisfaction thereof. Any liability for benefits under this Agreement incurred by the Company shall be subject to the provisions of this Subsection (b). 19. Establishment of Trust. The Company may establish an irrevocable trust fund pursuant to a trust agreement to hold assets to satisfy any of its obligations under this Agreement. Funding of such trust fund shall be subject to the Trustees's discretion, as set forth in the agreement pursuant to which the fund will be established. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. NORTHEAST UTILITIES /s/ Michael G. Morris By: /s/ Robert E. Patricelli MICHAEL G. MORRIS ROBERT E. PATRICELLI Chair, Compensation Committee APPENDIX A GROSS SUPPLEMENTAL BENEFIT PLAN INTRODUCTION This document describes the Gross Supplemental Benefit for Michael G. Morris ("Participant") cited in his employment agreement. SECTION I: DEFINITIONS Whenever used in this special retirement benefit plan, the following terms shall have the meanings set forth below, unless the context clearly indicates otherwise. "Accredited The period beginning on August 1, 1978, and Service" ending on the date service with the Company ends for which the Participant had Earnings. "Accrued The Retirement Income beginning at Age 66 Retirement which would be payable to the Participant Income" at the rates provided in Section II.1, on the basis of his Accredited Service rendered to the date of computation. "Company" The Northeast Utilities System. "Committee" The Compensation Committee of the Board of Trustees. "Early The date, which shall be the first day of a Retirement month, on which the Participant retires at Date" his election before Normal Retirement Date. "Earnings" (A) The regular straight-time salary paid to the Participant during each calendar year, or (B) in the case of a Participant who is credited with at least 1,000 hours of Accredited Service within a calendar year, the product of his average hourly rate within such calendar year and 2,000, but only if such product is greater than clause (A) above. "Executive Amounts awarded to the Participant under Incentive any short-term compensation programs Compensation" established by the Company for its senior level executives, as described in the Participant's employment agreement plus, prior to 2002, any long-term incentive compensation programs established by the Company for its senior level executives plus, in February 2002 and every February thereafter while the Participant is an active employee of Northeast Utilities, $990,000. "Final 1/12th of the average of the Earnings plus Executive Pay" Executive Incentive Compensation (if any) of the Participant, including any such amounts deferred, for his five years of highest totals of Earnings plus Executive Incentive Compensation (if any) during the period of his Accredited Service. "Normal The first day of the month following the Retirement date upon which the Participant attains Age Date" 66, notwithstanding that his actual retirement may occur during the month in which he attains Age 66. "Plan" or The Northeast Utilities Service Company "Pension Plan" Retirement Plan, as amended. "Provisional Any person designated by a Participant Payee" pursuant to Section III to receive Retirement Income upon the death of the Participant. "Retirement The monthly retirement income provided for Income" by this Gross Supplemental Benefit Plan. "Supplemental The Gross Supplemental Benefit Plan as it Plan" is described in this document. SECTION II: RETIREMENT INCOME 1. Normal Retirement Income. The monthly Retirement Income payable to the Participant who retires from the service of the Company on or after his Normal Retirement Date will be an amount equal to the product of the Participant's Final Executive Pay times the sum of the percentages determined below, minus 0.5% multiplied by 1/12th of his "Covered Compensation" (as this term is defined in Section 401(l) of the Internal Revenue Code) for each year of Accredited Service. 2.1% for each of the first 20 years of Accredited Service 1.5% for each of the next 15 years of Accredited Service 2. Early Retirement Income. The monthly Retirement Income payable to the Participant who, on an Early Retirement Date, retires from the service of the Company will be an amount of his Accrued Retirement Income on the date his retirement commences, reduced by 5/12th of 1% for each month by which his Early Retirement Date precedes Age 63. 3. Single Sum Payment. The Committee, after discussion with the retiring Participant, may pay in a single sum to such Participant, at the time of the Participant's retirement, the present value of the Participant's Retirement Income in excess of the benefits from the Pension Plan. The present value will be actuarially determined using the Pension Benefit Guaranty Corporation Immediate Annuity Rate, as of the date of the distribution, increased to 120%. The discussion with the retiring Participant is for the purpose of assuring the Committee of accurate current information for use in making its independent decision as to whether or not to make payment in a single sum. In making its independent decision, the Committee may take into account any financial hardship of the Participant, the health or disability of the Participant, or any other factor it considers relevant. The decision of the Committee shall be in the sole discretion of said Committee and shall be final, binding, and conclusive. Discussion with respect to such a payment and the decision with respect thereto will take place at least three months before retirement. The Committee will not render a decision regarding a single sum payment any earlier than six months prior to the Participant's actual retirement date. 4. Post-Retirement Adjustments. The Retirement Income of the retired Participant may be increased from time to time by such reasonable amounts as determined by the Company, to counter the effects of inflation, provided that the percentage amount of such increases will be made uniformly for all similarly situated retired executives, as may be determined by the Company. The provision shall not apply to the Participant if he has received his benefit as a single lump sum. SECTION III: POST-RETIREMENT PROVISIONAL PAYEE OPTIONS AND PRE-RETIREMENT SURVIVING SPOUSE BENEFITS 1. Post-Retirement Provisional Payee Options. The Participant may have his Retirement Income adjusted to provide, at his option, either (a) 88% of his Retirement Income [reduced by 0.5% for each year his Provisional Payee's birth date follows his birth date, or increased by 0.5% for each year his Provisional Payee's birth date precedes his birth date (such difference to be determined to the nearest full years), provided, however, that the maximum percent shall not exceed 99%] payable to him for his lifetime with the provision that such reduced amount will be continued after his death to his Provisional Payee until the death of such Provisional Payee, or (b) 94% of his Retirement Income [reduced by 0.5% for each year his Provisional Payee's birth date follows his birth date, or increased by 0.5% for each year his Provisional Payee's birth date precedes his birth date (such difference to be determined to the nearest full years), provided, however, that the maximum percent shall not exceed 99%] payable to him for his lifetime with the provision that one-half of such reduced amount will be continued after his death to his Provisional Payee until the death of such Provisional Payee, or (c) 96% of his Retirement Income and, in the event of his death within a period of 10 years after his retirement, the same amount will be continued after his death for the remainder of such 10- year period to his Provisional Payee, if alive, otherwise to the estate of either the Participant or the Provisional Payee, whoever is the last deceased, or (d) 91% of his Retirement Income [reduced by 0.5% for each year his Provisional Payee's birth date follows his birth date, or increased by 0.5% for each year his Provisional Payee's birth date precedes his birth date (such difference to be determined to the nearest full years), provided, however, that the maximum percent shall not exceed 99%] payable to him for his lifetime with the provision that three-fourths of such reduced amount will be continued after his death to his Provisional Payee until the death of such Provisional Payee. A Provisional Payee may be designated, changed, or rescinded and option (a), (b), (c) or (d) provided for in this Section III may be elected or changed, by the Participant at any time prior to payment of the first Retirement Income check. Once an option is designated and accepted by the Company, it cannot be rescinded or changed by the Participant after the payment of the first Retirement Income check. If the Provisional Payee designated by the Participant dies before the payment of the first Retirement Income check, the designation of the Provisional Payee shall be inoperative and the regular provisions of this plan shall again become applicable as if a Provisional Payee under option (a), (b), (c) or (d) had not been designated. If a Provisional Payee under option (a), (b) or (d) designated by the Participant dies after the payment of the first Retirement Income check, and prior to the death of the Participant, the Retirement Income being paid to the Participant shall be increased, beginning with the first payment after the Provisional Payee's death, to the amount it would have been if the option had not been in effect. If a Provisional Payee under option (c) designated by the Participant dies after the payment of the first Retirement Income check and prior to the death of the Participant, the Retirement Income being paid to the Participant shall continue in unchanged amount to his death. Except as provided in the preceding paragraph, there shall be no benefits payable under the Plan to the Provisional Payee designated by the Participant under option (a), (b), (c) or (d) if such Participant dies prior to the payment of the first Retirement Income check except as available to the Participant's surviving spouse in accordance with the Participant's employment agreement. A Provisional Payee may elect, upon the death of the Participant and the agreement of the Committee, to then receive the present value of the amount of the payments to which he otherwise would be entitled, as determined by the Committee using such actuarial tables and interest assumptions as may be adopted for this purpose by the Committee and in use at the time of the Participant's death. 2. Pre-Retirement Surviving Spouse Benefit. The terms of the Participant's employment agreement shall apply. ANNEX 1 CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE THIS AGREEMENT, made and entered into on this ___ day of ____________, _____, by and between Northeast Utilities, a Massachusetts business trust, with its principal office in West Springfield, Massachusetts, (together with each direct and indirect affiliated company that has adopted the Employment Agreement entered into as of August 20, 2002 (the "Employment Agreement"), with _______________, hereinafter, the "Company"), and _________________, a resident of ______________, Connecticut ("Executive"). WITNESSETH: WHEREAS, the Company had heretofore employed Executive under the Employment Agreement; and WHEREAS, Executive's employment [has been terminated\has not been renewed]; and WHEREAS, the Company and Executive wish to enter into an agreement to provide for a mutual release as to any claims including, without limitation, claims that might be asserted by Executive under the Employment Agreement and the Age Discrimination in Employment Act, as further described herein, and reaffirm Executive's right to indemnification; NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Company and Executive hereby agree that [Executive's termination of employment\the non-renewal] shall be effective on __________, _____ and that the Employment Agreement shall continue only to the extent provided therein as to obligations that survive the termination of Executive's employment. 2. Executive agrees and acknowledges that the Company, on a timely basis, has paid, or agreed to pay, to Executive all other amounts due and owing based on Executive's prior services in accordance with the terms of the Employment Agreement or any other contract with Executive, whether express or implied, and that the Company has no obligation, contractual or otherwise to Executive, except as provided herein, in the Employment Agreement or any other such contract with Executive, nor does it have any obligation to hire, rehire or re-employ Executive in the future. 3. In full and complete settlement of any claims that Executive may have against the Company, including any possible violations of the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et seq., ("ADEA") in connection with Executive's termination of employment, and for and in consideration of the undertakings of the Company described herein, Executive does hereby REMISE, RELEASE, AND FOREVER DISCHARGE the Company, and each of its subsidiaries and affiliates, their officers, directors, shareholders, partners, employees and agents, and their respective successors and assigns, heirs, executors and administrators (hereinafter all included within the term "the Company"), of and from any and all manner of actions and causes of actions, suits, debts, claims and demands whatsoever in law or in equity, which Executive ever had, now has, or hereafter may have, or which Executive's heirs, executors or administrators hereafter may have, by reason of any matter, cause or thing whatsoever from the beginning of Executive's employment to the date of this Agreement; and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to Executive's employment relationship or the Employment Agreement to the extent of any obligation that does not survive Executive's [termination of employment/non-renewal] and Executive's termination from that employment relationship, including but not limited to, any claims which have been asserted, could have been asserted, or could be asserted now or in the future under any federal, state or local laws, including any claims under ADEA, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e et seq. ("Title VII"), the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Rehabilitation Act of 1973, the Americans with Disabilities Act, the Family and Medical Leave Act, the Energy Reorganization Act of 1974, as amended, Section 11(c) of the Occupational Safety and Health Act, and the Energy Policy Act, and any common law claims now or hereafter recognized and all claims for counsel fees and costs. Notwithstanding the foregoing, nothing contained in this Agreement shall prevent Executive from requiring the Company to fulfill its obligations under this Agreement, under the Employment Agreement, to the extent of any continuing obligations thereunder, under any employee benefit plan, as defined in Section 3(3) of ERISA, maintained by the Company and in which Executive participated or any other contract with Executive, whether express or implied. Nothing in this Agreement shall be construed to prohibit Executive from reporting any suspected instance of illegal activity of any nature, any nuclear safety concern, any workplace safety concern, or any public safety concern to the Nuclear Regulatory Commission (NRC), the United States Department of Labor, or any other federal or state governmental agency. This Agreement shall not be construed to prohibit Executive from providing information to the NRC or to any other federal or state governmental agency or governmental officials, or testifying in any civil or criminal proceedings concerning any matter. This Agreement shall not be construed as a waiver or withdrawal of safety concerns, if any, which Executive may have reported to the NRC, or the withdrawal of participation by Executive in any NRC proceedings. Nothing in this Agreement shall limit or impair any right Executive may otherwise have to indemnity and defense by the Company, and, notwithstanding any contrary provision of this Agreement, (i) the Company shall indemnify and defend Executive in connection with any action, suit or proceeding in which Executive may be involved or with which Executive may be threatened by reason of Executive's being or having been an officer of the Company in the same manner contemplated by (including the payment or advancement of any reasonable expenses as incurred) and to the fullest extent permitted by the Declaration of Trust of Northeast Utilities as of the date hereof, unless later limited in accordance with applicable law, or under applicable law, (in which case Executive shall notify the Company within five business days after receiving service of process as to the commencement of the action, suit or proceeding and give the Company the right to control the defense of any such action, suit or proceeding, provided that no delay in giving such notice shall result in a forfeiture of any rights by Executive unless, and then only to the extent that, the Company is actually prejudiced by such delay), and (ii) Executive may join the Company in any action, suit or proceeding, or bring any action, suit or proceeding against the Company, as may be necessary for the protection or enforcement of such rights of indemnification and defense by the Company. 4. Except to the extent permitted by paragraph 3, Executive further agrees and covenants that neither Executive, nor any person, organization or other entity on Executive's behalf, will file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief against the Company, involving any matter occurring at any time in the past up to the date of this Agreement, or involving any continuing effects of any actions or practices which may have arisen or occurred prior to the date of this Agreement, including any charge of discrimination under ADEA, Title VII, the Workers' compensation Act or state or local laws. In addition, Executive further agrees and covenants that should Executive, or any other person, organization or entity on Executive's behalf, file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief, despite Executive's agreement not to do so under this Agreement, or should Executive otherwise fail to abide, in any material respect, by any of the terms of this Agreement, then the Company will be relieved of all further obligations owed under the Employment Agreement and this Agreement, Executive will forfeit all monies paid to Executive under the Employment Agreement following Executive's [termination of employment/non-renewal] and Executive will pay all of the costs and expenses of the Company (including reasonable attorneys' fees) incurred in the defense of any such action or undertaking. 5. In full and complete settlement of any claims that the Company may have against Executive, other than the fulfillment of Executive's obligations under this Agreement or under the Employment Agreement, and for and in consideration of the undertakings of Executive described herein, the Company does hereby REMISE, RELEASE, AND FOREVER DISCHARGE Executive and Executive's heirs, executors and administrators (hereinafter all included within the term "Executive"), of and from any and all manner of actions and causes of actions, suits, debts, claims and demands whatsoever in law or in equity, which the Company ever had, now has, or hereafter may have, by reason of any civil (but specifically not any criminal act) matter, cause or thing whatsoever by reason of Executive's being or having been an officer of the Company from the beginning of Executive's employment with the Company to the date of this Agreement; and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to actions taken by Executive by reason of Executive's being or having been an officer of the Company and Executive's termination from those relationships with the Company. 6. The Company further agrees and covenants that neither it, nor any person, organization or other entity on its behalf, will file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief against Executive, involving any matter occurring at any time in the past up to the date of this Agreement, or involving any continuing effects of any actions or practices which may have arisen or occurred prior to the date of this Agreement, by reason of Executive's being or having been an officer of the Company, so long as Executive meets, in all material respects, Executive's obligations under this Agreement and the Employment Agreement. In addition, the Company further agrees and covenants that should it, or any other person, organization or entity on its behalf, file, charge, claim, sue or cause or permit to be filed, charged, or claimed, any action for damages, including injunctive, declaratory, monetary or other relief, despite its agreement not to do so under this Agreement, then it will pay all of the costs and expenses of Executive (including reasonable attorneys' fees) incurred in the defense of any such action or undertaking. 7. Executive hereby agrees and acknowledges that under this Agreement, the Company has agreed to provide Executive with compensation and benefits that are in addition to any amounts to which Executive otherwise would have been entitled under the Employment Agreement or otherwise in the absence of this Agreement, and that such additional compensation is sufficient to support the covenants and agreements by Executive herein. 8. Executive and the Company, its officers and directors, will not, disparage the name, business reputation or business practices of the other. In addition, by signing this Agreement, Executive agrees not to pursue any internal grievance with the Company. 9. Executive hereby certifies that Executive has read the terms of this Agreement, that Executive has been advised by the Company to consult with an attorney and that Executive understands its terms and effects. Executive acknowledges, further, that Executive is executing this Agreement of Executive's own volition, without any threat, duress or coercion and with a full understanding of its terms and effects and with the intention, as expressed in paragraph 3 hereof, of releasing all claims recited herein in exchange for the consideration described herein, which Executive acknowledges is adequate and satisfactory to Executive provided the Company meets all of its obligations under this Agreement. The Company has made no representations to Executive concerning the terms or effects of this Agreement other than those contained in this Agreement. 10. Executive hereby acknowledges that Executive was presented with this Agreement on ____________, ____, and that Executive was informed that Executive had the right to consider this Agreement and the release contained herein for a period of twenty-one (21) days prior to execution. Executive also understands that Executive has the right to revoke this Agreement for a period of seven (7) days following execution, by giving written notice to the Company at 107 Selden Street, Berlin, CT 06037, in which event the provisions of this Agreement shall be null and void, and the parties shall have the rights, duties, obligations and remedies afforded by applicable law. 11. This Agreement shall be interpreted and enforced under the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. ATTEST: NORTHEAST UTILITIES By: Secretary Witness Executive EX-15 5 exhibit15.txt EXHIBIT 15 Exhibit 15 To the Board of Trustees Northeast Utilities Berlin, Connecticut We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Northeast Utilities and subsidiaries for the period ended September 30, 2002, as indicated in our report dated November 7, 2002; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, is incorporated by reference in Registration Statement Nos. 33-34622, 333-55142 and 33-40156 on Forms S-3 and Nos. 33-44814, 33-63023, 333-52413 and 333- 52415 on Forms S-8 of Northeast Utilities. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Hartford, Connecticut November 7, 2002 EX-99.1 6 nuexhibit991.txt NU EXHIBIT Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Northeast Utilities (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission (the Report), we, Michael G. Morris, Chairman, President and Chief Executive Officer of the Company and John H. Forsgren, Vice Chairman, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael G. Morris (Signature) Michael G. Morris Chairman, President and Chief Executive Officer /s/ John H. Forsgren (Signature) John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer November 7, 2002 EX-4.2.7.4 7 exhibit4274.txt EXHIBIT 4.2.7.4 Exhibit 4.2.7.4 AMENDMENT NO. 2 TO STANDBY BOND PURCHASE AGREEMENT This AMENDMENT NO. 2 TO STANDBY BOND PURCHASE AGREEMENT (this "Amendment") dated as of September 9, 2002 among THE CONNECTICUT LIGHT AND POWER COMPANY, a Connecticut corporation (the "Company"), the PARTICIPATING BANKS, and THE BANK OF NEW YORK, as Purchasing Bank. WHEREAS, the Company, the Participating Banks and The Bank of New York, as Purchasing Bank, are parties to the Standby Bond Purchase Agreement dated as of October 24, 2000 relating to the $62,000,000 Pollution Control Revenue Bonds (The Connecticut Light and Power Company Project - 1996A Series) (as amended by Amendment No. 1 dated as of October 10, 2001, the "Standby Bond Purchase Agreement"); WHEREAS, the Company has requested that the Stated Expiration Date under the Standby Bond Purchase Agreement be extended from October 22, 2002 to October 21, 2003; and WHEREAS, the Banks are willing to agree to so extend the Stated Expiration Date subject to the terms and conditions hereof; NOW, THEREFORE, the parties hereto agree as follows: 1. Defined Terms. Terms defined in the Standby Bond Purchase Agreement and not otherwise defined herein are used herein as therein defined. 2. Amendment. Subject to satisfaction of the conditions precedent set forth in Section 4 below, effective as of October 22, 2002, the definition of "Stated Expiration Date" in Section 1.01 of the Standby Bond Purchase Agreement shall be amended by replacing the date "October 22, 2002" with the date "October 21, 2003." 3. Representations and Warranties. In order to induce each Bank to enter into this Amendment, the Company hereby represents and warrants as follows: (a) The execution, delivery and performance by the Company of this Amendment, and the performance by the Company of the Standby Bond Purchase Agreement as amended by this Amendment, are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and (i) do not contravene, violate or breach: (A) Applicable Law; (B) the Certificate of Incorporation or By-laws of the Company; or (C) any indenture, mortgage, loan agreement or other contract or instrument to which the Company is a party or by which it or its assets are bound; and (ii) do not result in or require the creation of any Lien except as provided in or contemplated by the Standby Bond Purchase Agreement or the Related Documents upon or with respect to any of the Company's properties. (b) This Amendment and the Standby Bond Purchase Agreement as amended by this Amendment are legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (c) No authorization of, approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Company of this Amendment or the performance of the Standby Bond Purchase Agreement as amended by this Amendment, except those that have been, or will be simultaneously with the execution hereof, duly obtained or made and are in full force and effect. (d) Each of the representations and warranties of the Company contained in Article IV of the Standby Bond Purchase Agreement is true and correct on and as of the date hereof; provided that, in making such representation and warranty with respect to Section 4.05 of the Standby Bond Purchase Agreement, (i) each reference therein to December 31, 1999 shall be deemed to be a reference to December 31, 2001, (ii) the reference therein to June 30, 2000 shall be deemed to be a reference to June 30, 2002 and (iii) the reference therein to Company Disclosure Documents shall be deemed to mean the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 2002 and June 30, 2002, and the Company's Current Reports on Form 8-K dated March 15, 2002 and June 17, 2002. (e) No event has occurred and is continuing, or would result from the effectiveness of this Amendment, that constitutes a Default. 4. Conditions to Effectiveness. The amendment provided for in Section 2 above shall become effective as of October 22, 2002, but shall not become effective as of such date unless and until each of the following conditions precedent have been satisfied: (a) The Purchasing Bank shall have received each of the following, in form and substance satisfactory to the Purchasing Bank: (i) This Amendment, duly executed on behalf of each of the parties hereto. (ii) A certificate of the secretary or an assistant secretary of the Company, certifying the names and true signatures of the officers of the Company authorized to execute this Amendment on behalf of the Company. (iii) Evidence that all necessary action required to be taken by (A) the Company and (B) any Governmental Authority, in connection with the authorization, execution, delivery and performance of this Amendment, and the performance of the Standby Bond Purchase Agreement as amended by this Amendment, has been taken. (iv) Evidence that the notice with respect to this Amendment required to be given by the Company to Moody's and S&P under Section 14.1 of the Indenture has been given. (v) A certificate of the Company signed by an authorized officer, stating that, to the best of such authorized officer's knowledge after due inquiry, the representations and warranties set forth in Section 3(d) and (e) above are true and correct. (vi) Legal opinions of (A) Day, Berry & Howard LLP, special counsel to the Company and (B) in-house counsel to Northeast Utilities Service Company, in each case, as to such matters incident to this Amendment, the Standby Bond Purchase Agreement as amended by this Amendment, and the transactions contemplated hereby and thereby as the Purchasing Bank shall have reasonably requested. (vii) Such other documents, instruments, opinions and approvals (and, if requested by any Bank, certified duplicates or executed copies thereof) as any Bank shall have reasonably requested. (b) The Company shall have paid to the Purchasing Bank, for the account of the Banks in accordance with their respective Participation Shares, an extension fee equal to 0.05% of the Commitment. (c) All amounts payable pursuant to Section 7.06 of the Standby Bond Purchase Agreement for which invoices have been delivered to the Company on or prior to such date, shall have been paid in full. 5. Distribution of Extension Fee by the Purchasing Bank. The Purchasing Bank shall, promptly upon receipt, pay to each Participating Bank such Participating Bank's Participation Share of the extension fee referred to in Section 4(b) above. 6. Confirmation of Amended Agreement. The Standby Bond Purchase Agreement (as amended by this Amendment) is and shall continue to be in full force and effect and is hereby in all respects confirmed, approved and ratified. 7. Governing Law. PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same agreement. 9. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. [The next page is the signature page.] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers all as of the date first set forth above. COMPANY THE CONNECTICUT LIGHT AND POWER COMPANY By: /s/ Randy A. Shoop --------------------------------- Name: Randy A. Shoop Title: Treasurer PURCHASING BANK THE BANK OF NEW YORK By: /s/ John N. Watt --------------------------------- Name: John N. Watt Title: Vice President PARTICIPATING BANK BANK HAPOALIM B.M. By: /s/ Marc Bosc --------------------------------- Name: Marc Bosc Title: Vice President By: /s/ Laura Anne Raffa --------------------------------- Name: Laura Anne Raffa Title: Senior Vice President & Operations Manager PARTICIPATING BANK CITIC KA WAH BANK LIMITED By: /s/ Shi Ping Chen --------------------------------- Name: Shi Ping Chen Title: Vice President & Operations Manager PARTICIPATING BANK CITIZENS BANK OF MASSACHUSETTS By: /s/ Michael Ouellet --------------------------------- Name: Michael Ouellet Title: Vice President EX-99.1 8 clpexhibit991.txt CL&P EXHIBIT Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Connecticut Light and Power Company (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission (the Report), we, Cheryl W. Grise, Chief Executive Officer of the Company and John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, agent for the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company November 7, 2002 EX-99.1 9 psnhexhibit991.txt PSNH EXHIBIT Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Public Service Company of New Hampshire (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission (the Report), we, Cheryl W. Grise, Chief Executive Officer of the Company, and John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, agent for the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company November 7, 2002 EX-99.1 10 wmecoexhibit991.txt WMECO EXHIBIT Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Western Massachusetts Electric Company (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission (the Report), we, Cheryl W. Grise, Chief Executive Officer of the Company and John H. Forsgren, Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, agent for the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer of Northeast Utilities Service Company, as Agent for the Company November 7, 2002 -----END PRIVACY-ENHANCED MESSAGE-----