-----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, FQZ9EZUZflVPmbjz5EcC0akqDDT9hXHaTpPlYgUM+8797rjcUPv5KZzBnP6sotIJ Sx1EvM0AW5KaCMPbc81WpA== 0000072741-04-000048.txt : 20040507 0000072741-04-000048.hdr.sgml : 20040507 20040507164705 ACCESSION NUMBER: 0000072741-04-000048 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 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: 04789727 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: 04789724 BUSINESS ADDRESS: STREET 1: 174 BRUSH HILL AVE CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0010 BUSINESS PHONE: 4137855871 MAIL ADDRESS: STREET 1: 107 SELDEN 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: 04789725 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: 04789726 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 march2004.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 -------------- 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 by check mark whether the following registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act): Northeast Utilities Yes X No --- --- The Connecticut Light and Power Company Yes No X --- --- Public Service Company of New Hampshire Yes No X --- --- Western Massachusetts Electric Company Yes No X --- --- 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 April 30, 2004 - ------------------------ ----------------------------- Northeast Utilities Common shares, $5.00 par value 127,981,582 shares The Connecticut Light and Power Company Common stock, $10.00 par value 6,035,205 shares Public Service Company of New Hampshire Common stock, $1.00 par value 301 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 in this report: NU COMPANIES OR SEGMENTS CL&P.......................... The Connecticut Light and Power Company CRC........................... CL&P Receivables Corporation HWP........................... Holyoke Water Power Company NGC........................... Northeast Generation Company NGS........................... Northeast Generation Services Company NU or the company............. Northeast Utilities NU Enterprises................ NU's competitive subsidiaries comprised of Select Energy, NGC, SESI, NGS, HWP, and Woods Network. For further information, see Note 8, "Segment Information," to the consolidated financial statements. PSNH.......................... Public Service Company of New Hampshire RMS........................... R. M. Services, Inc. Select Energy................. Select Energy, Inc. (including its wholly owned subsidiary SENY) SENY.......................... Select Energy New York, Inc. SESI.......................... Select Energy Services, Inc. Utility Group................. NU's regulated utilities comprised of CL&P, PSNH, WMECO, and Yankee Gas. For further information, see Note 8, "Segment Information," to the consolidated financial statements. WMECO......................... Western Massachusetts Electric Company Woods Network................. Woods Network Services, Inc. Yankee........................ Yankee Energy System, Inc. Yankee Gas.................... Yankee Gas Services Company THIRD PARTIES Bechtel....................... Bechtel Power Corporation CYAPC......................... Connecticut Yankee Atomic Power Company NRG........................... NRG Energy, Inc. REGULATORS CSC........................... Connecticut Siting Council DPUC.......................... Connecticut Department of Public Utility Control DTE........................... Massachusetts Department of Telecommunications and Energy FERC.......................... Federal Energy Regulatory Commission NHPUC......................... New Hampshire Public Utilities Commission SEC........................... Securities and Exchange Commission OTHER Act, the...................... Public Act No. 03-135 CTA........................... Competitive Transition Assessment EPS........................... Earnings per Share FASB.......................... Financial Accounting Standards Board FIN........................... FASB Interpretation FMCC.......................... Federally Mandated Congestion Costs FSP........................... FASB Staff Position GSC........................... Generation Service Charge IERM.......................... Infrastructure Expansion Rate Mechanism Incentive Plan................ Northeast Utilities Incentive Plan ISO-NE........................ New England Independent System Operator kWh........................... Kilowatt-hour LMP........................... Locational Marginal Pricing LOCs.......................... Letters of Credit MW............................ Megawatts NU 2003 Form 10-K............. The Northeast Utilities and Subsidiaries combined 2003 Form 10-K as filed with the SEC NYMEX......................... New York Mercantile Exchange Restructuring Settlement.................. "Agreement to Settle PSNH Restructuring" ROE........................... Return on Equity RTO........................... Regional Transmission Organization S&P........................... Standard & Poor's SBC........................... System Benefits Charge SCRC.......................... Stranded Cost Recovery Charge SFAS.......................... Statement of Financial Accounting Standards SMD........................... Standard Market Design TSO........................... Transitional Standard Offer VIE........................... Variable Interest Entity 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 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 - (Unaudited) March 31, 2004 and December 31, 2003................. 2 Consolidated Statements of Income - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 4 Consolidated Statements of Cash Flows - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 5 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 6 Independent Accountants' Report........................... 25 Notes to Consolidated Financial Statements (unaudited - all companies)............................... 26 The Connecticut Light and Power Company and Subsidiaries Consolidated Balance Sheets - (Unaudited) March 31, 2004 and December 31, 2003................. 52 Consolidated Statements of Income - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 54 Consolidated Statements of Cash Flows - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 55 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 56 Public Service Company of New Hampshire and Subsidiaries Consolidated Balance Sheets - (Unaudited) March 31, 2004 and December 31, 2003................. 60 Consolidated Statements of Income - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 62 Consolidated Statements of Cash Flows - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 63 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 64 Western Massachusetts Electric Company and Subsidiary Consolidated Balance Sheets - (Unaudited) March 31, 2004 and December 31, 2003................. 68 Consolidated Statements of Income - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 70 Consolidated Statements of Cash Flows - (Unaudited) Three Months Ended March 31, 2004 and 2003........... 71 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 72 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 74 Item 4. Controls and Procedures.............................. 76 Part II. Other Information Item 1. Legal Proceedings.................................... 77 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............ 78 Item 6. Exhibits and Reports on Form 8-K..................... 79 Signatures.......................................................... 82 NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 -------------- -------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash and cash equivalents $ 76,050 $ 37,196 Unrestricted cash from counterparties 70,905 46,496 Restricted cash - LMP costs 123,681 93,630 Special deposits 35,477 79,120 Investments in securitizable assets 186,821 166,465 Receivables, net 727,378 704,893 Unbilled revenues 117,121 125,881 Fuel, materials and supplies, at average cost 122,487 154,076 Derivative assets 426,660 301,194 Prepayments and other 57,413 63,780 --------------- --------------- 1,943,993 1,772,731 --------------- --------------- Property, Plant and Equipment: Electric utility 5,556,220 5,465,854 Gas utility 757,869 743,990 Competitive energy 888,700 885,953 Other 224,972 221,986 --------------- --------------- 7,427,761 7,317,783 Less: Accumulated depreciation 2,283,625 2,244,263 --------------- --------------- 5,144,136 5,073,520 Construction work in progress 375,262 356,396 --------------- --------------- 5,519,398 5,429,916 --------------- --------------- Deferred Debits and Other Assets: Regulatory assets 2,921,973 2,974,022 Goodwill 319,986 319,986 Purchased intangible assets, net 22,054 22,956 Prepaid pension 359,982 360,706 Other 451,364 428,567 --------------- --------------- 4,075,359 4,106,237 --------------- --------------- Total Assets $ 11,538,750 $ 11,308,884 =============== =============== The accompanying notes are an integral part of these consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 -------------- -------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks $ 10,000 $ 105,000 Long-term debt - current portion 67,676 64,936 Accounts payable 839,865 768,783 Accrued taxes 66,192 51,598 Accrued interest 58,123 41,653 Derivative liabilities 228,510 164,689 Other 238,975 249,576 --------------- --------------- 1,509,341 1,446,235 --------------- --------------- Rate Reduction Bonds 1,682,500 1,729,960 --------------- --------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,313,425 1,287,354 Accumulated deferred investment tax credits 101,714 102,652 Deferred contractual obligations 455,995 469,218 Regulatory liabilities 1,218,243 1,164,288 Other 243,239 247,526 --------------- --------------- 3,332,616 3,271,038 --------------- --------------- Capitalization: Long-Term Debt 2,564,737 2,481,331 --------------- --------------- Preferred Stock of Subsidiaries - Non-Redeemable 116,200 116,200 --------------- --------------- Common Shareholders' Equity: Common shares, $5 par value - authorized 225,000,000 shares; 150,562,489 shares issued and 127,942,036 shares outstanding in 2004 and 150,398,403 shares issued and 127,695,999 shares outstanding in 2003 752,812 751,992 Capital surplus, paid in 1,110,094 1,108,924 Deferred contribution plan - employee stock ownership plan (70,665) (73,694) Retained earnings 857,197 808,932 Accumulated other comprehensive income 42,857 25,991 Treasury stock, 19,566,929 shares in 2004 and 19,518,023 shares in 2003 (358,939) (358,025) --------------- --------------- Common Shareholders' Equity 2,333,356 2,264,120 --------------- --------------- Total Capitalization 5,014,293 4,861,651 --------------- --------------- Commitments and Contingencies (Note 4) Total Liabilities and Capitalization $ 11,538,750 $ 11,308,884 =============== =============== The accompanying notes are an integral part of these consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, --------------------------------- 2004 2003 -------------- -------------- (Thousands of Dollars, except share information) Operating Revenues $ 1,838,287 $ 1,584,183 -------------- -------------- Operating Expenses: Operation - Fuel, purchased and net interchange power 1,176,215 965,041 Other 227,621 189,272 Maintenance 57,211 45,892 Depreciation 54,573 49,473 Amortization 29,291 57,299 Amortization of rate reduction bonds 42,999 39,200 Taxes other than income taxes 77,589 73,974 -------------- -------------- Total operating expenses 1,665,499 1,420,151 -------------- -------------- Operating Income 172,788 164,032 Interest Expense: Interest on long-term debt 32,738 32,940 Interest on rate reduction bonds 25,695 27,861 Other interest 4,347 2,744 -------------- -------------- Interest expense, net 62,780 63,545 -------------- -------------- Other Income, Net 1,687 576 -------------- -------------- Income Before Income Tax Expense 111,695 101,063 Income Tax Expense 42,863 39,469 -------------- -------------- Income Before Preferred Dividends of Subsidiaries 68,832 61,594 Preferred Dividends of Subsidiaries 1,390 1,390 -------------- -------------- Net Income $ 67,442 $ 60,204 ============== ============== Basic and Fully Diluted Earnings Per Common Share $ 0.53 $ 0.47 ============== ============== Basic Common Shares Outstanding (average) 127,879,766 127,013,678 ============== ============== Fully Diluted Common Shares Outstanding (average) 128,061,086 127,111,272 ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ------------------------------- 2004 2003 ------------- ------------ (Thousands of Dollars) Operating Activities: Income before preferred dividends of subsidiaries $ 68,832 $ 61,594 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation 54,573 49,473 Deferred income taxes and investment tax credits, net 20,028 (22,468) Amortization 29,291 57,299 Amortization of rate reduction bonds 42,999 39,200 Amortization of recoverable energy costs 10,189 6,269 Increase/(decrease) in prepaid pension 724 (7,650) Regulatory overrecoveries 13,670 54,301 Other sources of cash 9,884 9,737 Other uses of cash (42,504) (46,365) Changes in current assets and liabilities: Restricted cash - LMP costs (30,051) - Unrestricted cash from counterparties (24,409) (17,936) Receivables and unbilled revenues, net (13,725) 74,564 Fuel, materials and supplies 31,589 8,622 Investments in securitizable assets (20,356) 23,149 Other current assets (67,493) (87,989) Accounts payable 71,082 (88,484) Accrued taxes 14,594 (56,908) Other current liabilities 87,245 69,338 ------------- ------------ Net cash flows provided by operating activities 256,162 125,746 ------------- ------------ Investing Activities: Investments in plant: Electric, gas and other utility plant (132,073) (91,808) Competitive energy assets (5,697) (4,984) ------------- ------------ Cash flows used for investments in plant (137,770) (96,792) Other investment activities 6,087 6,571 ------------- ------------ Net cash flows used in investing activities (131,683) (90,221) ------------- ------------ Financing Activities: Issuance of common shares 2,522 6,979 Repurchase of common shares (915) (23,209) Issuance of long-term debt 82,438 44,338 Retirement of rate reduction bonds (47,460) (42,901) (Decrease)/increase in short-term debt (95,000) 39,000 Reacquisitions and retirements of long-term debt (6,405) (14,324) Cash dividends on preferred stock of subsidiaries (1,390) (1,390) Cash dividends on common shares (19,177) (17,469) Other financing activities (238) (204) ------------- ------------ Net cash flows used in financing activities (85,625) (9,180) ------------- ------------ Net increase in cash and cash equivalents 38,854 26,345 Cash and cash equivalents - beginning of period 37,196 54,678 ------------- ------------ Cash and cash equivalents - end of period $ 76,050 $ 81,023 ============= ============ 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, current reports on Form 8-K dated January 22, 2004 and March 30, 2004, and the NU 2003 Form 10-K. All per share amounts are reported on a fully diluted basis. FINANCIAL CONDITION AND BUSINESS ANALYSIS Overview - -------- Consolidated Results: Northeast Utilities (NU or the company) earned $67.4 million, or $0.53 per share, in the first quarter of 2004, compared with earnings of $60.2 million, or $0.47 per share, in the first quarter of 2003. Higher first quarter earnings in 2004 were primarily a result of improved results at NU Enterprises. NU Enterprises earned $18.8 million in the first quarter of 2004, compared with $5.2 million in the first quarter of 2003. NU's revenues in the first quarter of 2004 increased to $1.8 billion from $1.6 billion in the same period of 2003. The increase in revenues primarily was due to an increase in revenues at NU Enterprises' merchant energy business segment and an increase in Utility Group retail electric rates and sales. NU Enterprises: NU Enterprises, Inc. is the parent company of Select Energy, Inc. (Select Energy), Northeast Generation Company (NGC), Select Energy Services, Inc. (SESI), Northeast Generation Services Company (NGS), and their respective subsidiaries, and Woods Network Services, Inc. (Woods Network), all of which are collectively referred to as "NU Enterprises." The generation operations of Holyoke Water Power Company (HWP) are also included in the results of NU Enterprises. The companies included in the NU Enterprises segment are grouped into two business segments: the merchant energy business segment and the energy services business segment. The merchant energy business segment is comprised of Select Energy's wholesale businesses, which includes approximately 1,440 megawatts (MW) of primarily pumped storage and hydroelectric generation assets and Select Energy's retail business. The energy services business segment consists of the operations of NGS, SESI and Woods Network. NU Enterprises earned $18.8 million, or $0.15 per share, in the first quarter of 2004, compared with $5.2 million, or $0.04 per share, in the first quarter of 2003. The performance of Select Energy's retail business improved in the first quarter of 2004, earning $2.3 million compared with a loss of $1.9 million in the first quarter of 2003. The improved retail results are primarily due to improved margins and growth in retail electric sales. Select Energy's wholesale business earned $16.8 million in the first quarter of 2004, compared with $6.8 million in the same period of 2003. Select Energy's earnings profile in the first half of 2004 will be quite different from the first six months of 2003, particularly in the wholesale business. Select Energy's cost per kilowatt-hour (kWh) for procuring electricity is relatively flat throughout 2004. However, contracted sales prices to some of Select Energy's wholesale customers were relatively high in the first quarter and will be lower in the second quarter, creating better wholesale margins in the first quarter of 2004 and lower margins in the second quarter. As a result, earnings at NU Enterprises in the second quarter of 2004 are expected to be significantly below the $11.9 million NU Enterprises earned in the second quarter of 2003. However, NU Enterprises' earnings in the first half of 2004 are expected to be higher than the $17.1 million earned in the first half of 2003. The energy services business segment lost $0.2 million in the first quarter of 2004, compared with earnings of $0.4 million in the first quarter of 2003 primarily due to project delays as a result of colder than average January weather and the slow commercial construction sector in New England. NU Enterprises parent company expenses totaled $0.1 million in the first quarter of both 2004 and 2003. Utility Group: Earnings at the Utility Group were lower, totaling $54.8 million, or $0.43 per share in the first quarter of 2004, compared with $59.4 million, or $0.47 per share in 2003, primarily due to higher depreciation and pension expense during the first quarter of 2004 as compared with the first quarter of 2003. These factors were partially offset by an increase in retail electric sales of 2.7 percent in the first quarter of 2004, compared with the first quarter of 2003. Higher earnings at The Connecticut Light and Power Company (CL&P) and Public Service Company of New Hampshire (PSNH) were more than offset by lower results at Yankee Gas Services Company (Yankee Gas) and Western Massachusetts Electric Company (WMECO). Included in Utility Group earnings in 2004 and 2003 are $7.3 million and $8 million, respectively, related to the regulated transmission business. Transmission business earnings for the first quarter of 2004 are lower than the same period in 2003 due to lower revenues and higher interest charges. Transmission revenues are lower in 2004 due to a revenue tracking mechanism that was put in place in 2004 to match revenues and costs of providing transmission service. In the first quarter of 2003, revenues were not subject to such a tracking mechanism and were positively impacted by high usage. For further information see Note 8, "Segment Information," to the consolidated financial statements. Earnings after preferred dividends of $1.4 million in both periods at CL&P totaled $26.2 million in the first quarter of 2004, compared with $25.3 million in 2003. CL&P's higher earnings resulted from distribution rate increases which took effect on January 1, 2004, transmission rate increases and a 2 percent increase in retail electric sales offset by higher depreciation and pension expense in the first quarter of 2004, compared with the first quarter of 2003. PSNH earned $11.8 million in the first quarter of 2004, compared with $10.8 million in 2003. The increase in earnings at PSNH was primarily due to a 6.9 percent increase in retail electric sales offset by higher pension expense in the first quarter of 2004, compared with the first quarter of 2003. Earnings at WMECO totaled $3.5 million in the first quarter of 2004, compared with $6.1 million in 2003. Lower earnings at WMECO were primarily due to lower pension income and higher interest expense in the first quarter of 2004 compared with the first quarter of 2003 due to the issuance of 10-year notes on September 30, 2003, as well as a 0.7 percent decrease in retail sales. Yankee Gas earned $11.9 million in the first quarter of 2004, compared with $15.8 million in 2003. Lower Yankee Gas earnings resulted from higher pension expense and an August 2003 change in the Yankee Gas rate design. Yankee Gas' current rate design is intended to recover more costs based on stable, fixed monthly charges rather than based on variable, usage-based charges as was the rate design in place in 2003. That shift from more variable to more fixed charges will reduce quarterly earnings in the higher- use first and fourth quarters and improve quarterly results in the lower- use second and third quarters compared to Yankee Gas' previous rate design. This decrease was offset by a 6.8 percent increase in firm natural gas sales in the first quarter of 2004, compared with the first quarter of 2003, which reflected a negative adjustment to the estimate of unbilled revenues in the first quarter of 2003. Excluding the adjustment to the estimate of unbilled revenues, firm natural gas sales decreased by 0.5 percent in the first quarter of 2004, compared with the first quarter of 2003. Future Outlook - -------------- Consolidated: NU continues to project consolidated earnings of between $1.20 per share and $1.40 per share in 2004, including approximately $0.10 per share of parent company interest and other expenses. Utility Group: The NU consolidated earnings estimate of $1.20 per share to $1.40 per share for 2004 includes Utility Group earnings of between $1.08 per share and $1.20 per share. NU Enterprises: The NU consolidated earnings estimate for 2004 continues to reflect earnings of between $0.22 per share and $0.30 per share or earnings of between $28 million and $38 million at NU Enterprises. Based on first quarter 2004 results, management expects 2004 NU Enterprises' earnings to be in the mid to upper end of that range. NU continues to project 2004 merchant energy business segment earnings of $24 million to $31 million. Earnings for the remainder of 2004, specifically the second quarter, at the merchant energy business will be negatively impacted by the change in Select Energy's earnings profile discussed previously. The energy services business segment, comprised of NGS, SESI and Woods Network, was below forecast for the first quarter, but is still expected to earn between $4 million and $7 million in 2004. Liquidity - --------- Consolidated: NU continues to maintain a high level of liquidity. NU had $147 million of cash, including cash and cash equivalents and unrestricted cash from counterparties at March 31, 2004, compared with $83.7 million at December 31, 2003. NU's net cash flows provided by operating activities increased to $256.2 million in the first quarter of 2004 from $125.7 million in the first quarter of 2003. Cash flows provided by operating activities increased due to increases in working capital items, primarily accounts payable and accrued taxes. Accounts payable increased in the first quarter of 2004 due primarily to an increase in CL&P accounts payable resulting from transitional standard offer (TSO) supply purchases at higher prices and an increased percentage of TSO purchases from unaffiliated suppliers. In the first quarter of 2003, accounts payable decreased due to a lower level of Select Energy wholesale electricity purchases. Accrued taxes decreased in 2003 due to the payment of taxes on the gain on the sale of Seabrook. These first quarter 2003 decreases were partially offset by a decrease in accounts receivable related to a lower level of Select Energy sales in the first quarter of 2003 compared to the last quarter of 2002 and a decrease in investments in securitizable assets. Regulatory overrecoveries also decreased primarily due to lower stranded cost and generation service collections in the first quarter of 2004 compared to 2003. The lower level of collections caused lower current taxable income and an increase in deferred income taxes from 2003. During the first quarter of 2004 NU issued $82.4 million in long-term debt, including $75 million at Yankee Gas and $7.4 million at SESI. NU also repaid $47.5 million of rate reduction bonds. On March 31, 2004, NU paid a dividend of $0.15 per share. On April 13, 2004, the NU Board of Trustees approved a dividend of $0.15 per share, payable June 30, 2004, to shareholders of record as of June 1, 2004. Subject to the NU Board of Trustees' approval and future earnings levels, management anticipates recommending increases to the NU common dividend. The NU Board of Trustees will address the issue of a dividend increase at the company's annual meeting on May 11, 2004. NU's capital expenditures totaled $137.8 million in the first quarter of 2004, compared with a budget of $173.7 million. The lower level of capital expenditures was primarily related to delays in certain transmission projects. NU's 2004 capital spending is projected to total $701 million, including $412 million by CL&P, $150 million by PSNH, $39 million by WMECO, $60 million by Yankee Gas, and $40 million by other NU subsidiaries. Delays in certain major projects could cause NU's actual capital spending to be below this projection. On April 14, 2004, Standard & Poor's (S&P) lowered the outlook for NU to "negative" from "stable," citing increased competitive business exposure, increased projected capital expenditures at CL&P and the relatively low return on equity (ROE) at CL&P that was authorized by the Connecticut Department of Public Utility Control (DPUC) in the December 2003 rate case decision. Utility Group: At March 31, 2004, the Utility Group had $10 million in borrowings outstanding on its $300 million revolving credit line. This credit line is scheduled to mature in November 2004 and will be renewed for at least one year. In addition to its revolving credit line, CL&P has an arrangement with a financial institution under which CL&P can sell up to $100 million of accounts receivable and unbilled revenues. At March 31, 2004, CL&P had sold accounts receivable totaling $80 million to that financial institution. For more information regarding the sale of receivables, see Note 1H, "Summary of Significant Accounting Policies - Sale of Customer Receivables" to the consolidated financial statements. On January 30, 2004, Yankee Gas sold $75 million of first mortgage bonds carrying an interest rate of 4.8 percent that will mature on January 1, 2014. The proceeds from these bonds were primarily used to reduce short- term debt, which was increasing as a result of Yankee Gas' capital expenditures. CL&P has an application pending with the DPUC to issue up to $280 million of long-term debt in 2004 and another $600 million for the period 2005 through 2007. The majority of that debt would be issued to finance CL&P's electric transmission and distribution initiatives. CL&P also has $59 million of first mortgage bonds that can be called at a premium beginning June 1, 2004. At March 31, 2004, CL&P had $160.5 million in short-term debt outstanding from the NU Money Pool. PSNH has an application pending with the New Hampshire Public Utilities Commission (NHPUC) to issue up to $50 million of debt. At March 31, 2004, PSNH had $35 million in short-term debt outstanding from the NU Money Pool. NU Enterprises: At March 31, 2004, NU Enterprises had no borrowings and $63.8 million in letters of credit (LOCs) outstanding on NU parent's $350 million revolving credit line. This credit line is scheduled to mature in November 2004 and is expected to be renewed. Additionally, SESI had borrowed $7.4 million during the first quarter of 2004 to finance the implementation of energy saving improvements at customer facilities. These borrowings are recovered under the terms of SESI's energy savings contracts. On March 26, 2004, Moody's Investors Service placed NGC's bonds under review for possible downgrade, but expected NGC's bonds to maintain an investment grade rating after the review was completed. On April 14, 2004, S&P lowered the ratings on NGC's bonds to BB+, S&P's highest non-investment grade rating, from BBB-, S&P's lowest investment grade rating. The S&P rating decrease was based in part on its own forecast of NGC's profitability in a merchant energy market which included a low forecasted level of natural gas prices. S&P also lowered its outlook on NU to "negative" from "stable" at the same time. The downgrade is not expected to have an impact on NGC's financial performance. Impacts of Standard Market Design - --------------------------------- On March 1, 2003, the New England Independent System Operator (ISO-NE) implemented Standard Market Design (SMD). As part of SMD, locational marginal pricing (LMP) is utilized to assign value and causation to transmission congestion and line losses. Transmission congestion costs represent the additional costs incurred due to the need to run uneconomic generating units in certain areas that have transmission constraints, which prevent these areas from obtaining alternative lower-cost generation. Line losses represent losses of electricity as it is sent over transmission lines. CL&P was billed $186 million of incremental LMP costs by its standard offer service suppliers, including affiliate Select Energy, or by ISO-NE in 2003. CL&P and its suppliers disputed the responsibility for the $186 million of incremental LMP costs incurred. A settlement agreement was reached among all the parties involved and was filed with the Federal Energy Regulatory Commission (FERC) on March 3, 2004. NU recorded a pre-tax loss in 2003 of approximately $60 million (approximately $37 million after-tax) related to this settlement agreement. This settlement agreement will not be final until it is approved by the FERC, and management expects to receive FERC approval of the settlement agreement in the first half of 2004. Nuclear Decommissioning and Plant Closure Costs - ----------------------------------------------- The purchasers of NU's ownership shares of the Millstone, Seabrook and Vermont Yankee plants assumed the obligation of decommissioning those plants, but NU still has significant decommissioning and plant closure cost obligations to the companies that own the Yankee Atomic (YA), Connecticut Yankee (CY) and Maine Yankee (MY) nuclear power plants (collectively, the Yankee Companies). Each plant has been shut down and is undergoing decommissioning. The Yankee Companies collect decommissioning and closure costs through wholesale, FERC-approved rates charged under power purchase agreements to NU's electric utility companies CL&P, PSNH and WMECO. These companies in turn pass these costs on to their customers through state regulatory commission-approved retail rates. YA has received FERC approval to collect all presently estimated decommissioning costs. MY is currently negotiating a settlement with the FERC and others to collect its presently estimated decommissioning costs. CY's estimated decommissioning and plant closure costs for the period 2000 through 2023 have increased approximately $390 million over the April 2000 estimate of $434 million approved by the FERC in a rate case settlement. The revised estimate reflects the fact that CY is now self-performing all work to complete the decommissioning of the plant due to the termination of the decommissioning contract with Bechtel Power Corporation in July 2003, the increases in the projected costs of spent fuel storage, and increased security and liability and property insurance. NU's share of CY's increased decommissioning and plant closure costs is approximately $191 million. CY has not yet applied to the FERC for recovery of this amount. In total, NU's estimated remaining decommissioning and plant closure obligation to CY is $320.7 million. NU cannot at this time predict the timing or outcome of the FERC proceeding required for the collection of the increased decommissioning costs. Management believes that these costs have been prudently incurred and will ultimately be recovered from the customers of CL&P, PSNH and WMECO. However, there is a risk that some portion of these increased costs may not be recovered as a result of the FERC proceedings. NU Enterprises - -------------- Business Segments: NU Enterprises aligns its businesses into two business segments, the merchant energy business segment and the energy services business segment. The merchant energy business segment includes Select Energy's wholesale and retail marketing businesses. Also included are 1,440 MW of generation assets, consisting of 1,293 MW of primarily pumped storage and hydroelectric generation assets at NGC and 147 MW of coal-fired generation at HWP. These generation assets support the merchant energy business segment. The energy services business segment includes the operations of SESI, NGS, and Woods Network. SESI performs energy management services for large commercial customers, institutional facilities and the United States government and energy-related construction services. NGS operates and maintains NGC's and HWP's generation assets and provides third-party electrical services. Results and Outlook: NU Enterprises earned $18.8 million in the first quarter of 2004, compared with $5.2 million in the first quarter of 2003. During 2004, NU expects that NU Enterprises will earn in the range of $28 million to $38 million, or $0.22 to $0.30 per share. Management estimates that between $24 million and $31 million of those earnings in 2004 will come from the merchant energy business segment and between $4 million and $7 million from the energy services business segment. Those ranges are heavily dependent on NU Enterprises' ability to achieve targeted wholesale and retail origination margins, successfully manage its contract portfolios and achieve targeted growth in the energy services business segment. Based on first quarter 2004 results, management expects 2004 NU Enterprises' earnings to be in the mid to upper end of that range. In the first quarter of 2004, Select Energy won contracts in the New Jersey Basic Generation Service and Maryland utility auctions. As a result of these contracts, Select Energy will serve a peak load of 1,300 MW in 2004, 450 MW in 2005 and 350 MW in 2006. Select Energy will continue to bid on contracts in 2004 that will take effect in 2004 and beyond. Select Energy's ability to secure a significant amount of wholesale load is a critical factor in NU Enterprises' ongoing profitability. Based upon March 31, 2004 market information, Select Energy's wholesale electric business has already contracted for more than 80 percent of the business needed to reach its 2004 gross margin targets, assuming satisfactory portfolio management for the remainder of the year. The second activity included in NU Enterprises' merchant energy business segment is retail marketing. Select Energy's retail marketing businesses earned $2.3 million in the first quarter of 2004, compared with a loss of $1.9 million for the same period in 2003. The improved retail results are primarily due to improved margins and growth in retail electric sales. Select Energy's retail business has already contracted for more than 70 percent of the business needed to achieve 2004 margin targets. Intercompany Transactions: CL&P's standard offer purchases from Select Energy represented $148.5 million in the first quarter of 2004, compared with $141 million during the same period in 2003. Other energy purchases between CL&P and Select Energy totaled $30 million in the first quarter of 2004 and $36 million in the first quarter of 2003. Additionally, WMECO's purchases from Select Energy represented $32 million in the first quarter of 2004, compared with $39 million in the first quarter of 2003. These amounts are eliminated in consolidation. NU Enterprises' Market and Other Risks - -------------------------------------- Overview: For further information on risk management activities, see "Competitive Energy Subsidiaries' Market and Other Risks" in NU's combined report on Form 10-K. Risk management within Select Energy is organized to address the market, credit and operational exposures arising from the merchant energy business segment, which include: wholesale marketing activities (including limited energy trading for market and price discovery purposes as well as asset optimization) and retail marketing activities. The framework and degree to which these risks are managed and controlled is consistent with the limitations imposed by NU's Board of Trustees as established and communicated in NU's risk management policies and procedures. Merchant Energy Marketing Activities: Select Energy manages its portfolio of wholesale and retail marketing contracts and assets to maximize value while maintaining an acceptable level of risk. At forward market prices in effect at March 31, 2004, the wholesale marketing portfolio had a positive fair value. This positive fair value indicates a likely positive impact on Select Energy's gross margin in the future. However, there could be significant volatility in the energy commodities markets that may affect this position between now and when the contracts are settled. Accordingly, there can be no assurances that Select Energy will realize the gross margin corresponding to the present positive fair value of its wholesale marketing portfolio. Hedging and Non-Trading: For information on derivatives used for hedging purposes and non-trading derivatives, see Note 2, "Derivative Instruments," to the consolidated financial statements. Wholesale Contracts Defined as "Energy Trading": 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. Energy trading contracts are recorded at fair value, and changes in fair value affect net income. At March 31, 2004, Select Energy had trading derivative assets of $188.3 million and trading derivative liabilities of $160.9 million, for a net positive position of $27.4 million for the entire trading portfolio. These amounts are combined with other derivatives and are included in derivative assets and derivative liabilities on the accompanying consolidated balance sheets. The increase in both derivative asset and liability amounts from December 31, 2003, relates primarily to price increases, as trading activity has decreased. Information regarding non-trading and other derivatives is included in Note 2, "Derivative Instruments," to the consolidated financial statements. There can be no assurances that Select Energy will realize cash corresponding to the present positive net fair value of its trading positions. Numerous factors could either positively or negatively affect the realization of the net fair value amount in cash. 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 business day and segregating responsibilities between the individuals actually trading (front office) and those confirming the trades (middle office). The determination of the portfolio's fair value is the responsibility of the middle office independent from the front office. The methods used to determine the fair value of energy trading contracts are identified and segregated in the table of fair value of contracts at March 31, 2004. 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 market prices; and 3) prices based on models or other valuation methods primarily include transactions for which specific quotes are not available. Currently, Select Energy has no contracts for which fair value is determined based on a model or other valuation method. Broker quotes for electricity are available through the year 2006. Broker quotes for natural gas are available through 2013. 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 for longer-term contracts are less certain. Accordingly, there is a risk that contracts will not be realized at the amounts recorded. However, Select Energy has obtained corresponding purchase or sale contracts for substantially all of the trading contracts that have maturities in excess of one year. Because these contracts are sourced, changes in the value of these contracts due to fluctuations in commodity prices are not expected to affect Select Energy's earnings. As of and for the three months ended March 31, 2004, 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 Trading Contracts at March 31, 2004 - ------------------------------------------------------------------------------- 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 $0.2 $0.2 $ - $ 0.4 Prices provided by external sources 5.4 6.8 14.8 27.0 - ------------------------------------------------------------------------------- Totals $5.6 $7.0 $14.8 $27.4 - ------------------------------------------------------------------------------- The fair value of energy trading contracts decreased $5.1 million from $32.5 million at December 31, 2003 to $27.4 million at March 31, 2004. The change in the fair value of the trading portfolio is primarily attributable to contracts realized or otherwise settled during the period. There were no changes in valuation techniques or assumptions in the first quarter of 2004. - ------------------------------------------------------------------------------- Total Portfolio Fair Value - ------------------------------------------------------------------------------- Three Months Ended (Millions of Dollars) March 31, 2004 - ------------------------------------------------------------------------------- Fair value of trading contracts outstanding at the beginning of the period $32.5 Contracts realized or otherwise settled during the period (5.7) Changes in fair value of contracts 0.6 - ------------------------------------------------------------------------------- Fair value of trading contracts outstanding at the end of the period $27.4 - ------------------------------------------------------------------------------- Changing Market: The breadth and depth of the market for energy marketing products in Select Energy's areas of business continue to be adversely affected by the withdrawal or financial weakening of a number of companies, particularly power marketers, 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, market pricing information is becoming less readily available, and participants are more often unable to meet Select Energy's credit standards without providing cash or LOC support. Select Energy is being adversely affected by these factors, and there could be a continuing adverse impact on Select Energy's business lines due to its increasing reliance on business arrangements with a more limited number of counterparties, primarily power generators. The decrease in the number of counterparties participating in the market for long-term energy contracts also continues to affect Select Energy's ability to estimate the fair value of its long-term wholesale energy contracts. Changes are occurring in the administration of transmission systems in territories in which Select Energy does business. Regional transmission organizations (RTO) are being proposed and approved, and other changes in market design are occurring within transmission regions. For example, SMD was implemented in New England on March 1, 2003 and has created both challenges and opportunities for Select Energy. For information regarding the effects of SMD on Select Energy and RTOs, see "Impacts of Standard Market Design," and "Regional Transmission Organization," in this Management's Discussion and Analysis. As the market continues to evolve, there could be additional adverse effects that management cannot determine at this time. Counterparty Credit: Counterparty credit risk relates to the risk of loss that Select Energy would incur because 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 advances, LOCs, and parent guarantees), and the use of standardized agreements that 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's entering into contracts. The appropriateness of these limits is subject to continuing review. Concentrations among these counterparties may affect 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. At March 31, 2004, approximately 83 percent of Select Energy's counterparty credit exposure to wholesale and trading counterparties was cash collateralized or rated BBB- or better. Select Energy held $70.9 million and $46.5 million of counterparty cash advances at March 31, 2004 and December 31, 2003, respectively. For further information, see Note 1K, "Unrestricted Cash from Counterparties," to the consolidated financial statements. Asset Concentrations: At March 31, 2004, positions with five counterparties collectively represented approximately $132.2 million, or 70 percent, of the $188.3 million trading derivative assets. The largest counterparty's position is secured with LOCs and cash collateral. Select Energy holds parent company guarantees at above investment grade ratings supporting the remaining positions of the counterparties. None of the other counterparties represented more than 10 percent of trading derivative assets at March 31, 2004. Select Energy's Credit: A number of Select Energy's contracts require the posting of additional collateral in the form of cash or LOCs 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 levels to sub-investment grade, Select Energy could, under its present contracts, be asked to provide approximately $311 million of collateral or LOCs to various unaffiliated counterparties and approximately $52 million to several independent system operators and unaffiliated local distribution companies, which management believes NU would currently be able to provide, subject to the Securities and Exchange Commission (SEC) limits described below. NU's credit ratings outlooks are currently stable or negative, but management does not believe that at this time there is a significant risk of a ratings downgrade to sub-investment grade levels. NU has applied to the SEC for authority to expand its financial support of NU Enterprises. NU primarily seeks to 1) increase its allowable investments in certain of its unregulated businesses, presently 15 percent of its consolidated capitalization as permitted by SEC regulation, by an additional $500 million, 2) increase the limit for its guarantees of all of its competitive affiliates from $500 million to $750 million, and 3) increase its allowable investments in exempt wholesale generators (EWGs) from $481 million to $1 billion. If granted, the SEC's order would permit NU's future investment in Select Energy above the amount now allowed. NU has no present plans to significantly expand its EWG portfolio. However, if an investment opportunity becomes available, NU would be able to pursue it within the new allowable EWG investment level. NU expects SEC approval by mid-2004. If the application is not granted by mid-2004 as management expects, then there could be a negative impact on the merchant energy business line's ability to achieve its 2004 earnings estimate. This business line depends on NU parent guarantees to support the energy contracts that make up both its revenues and expenses. At March 31, 2004, NU parent could guarantee an additional $191 million of merchant energy business line contracts, but guarantee levels constantly fluctuate with the market value of the contracts that are guaranteed and NU's ability to issue new guarantees may be constrained due to the aforementioned SEC limitation. In addition, at March 31, 2004, the SEC's 15 percent-of-capitalization test would have enabled NU to invest only up to an additional $95 million in these businesses, regardless of NU's liquidity resources. This restriction might, depending upon the amounts and types of obligations being guaranteed or collateralized limit the ability of NU to utilize its full remaining guarantee and collateral capacity. In the event such a limit is approached, NU would seek regulatory relief or would be required to reduce its investment in such businesses sufficiently to allow it to provide additional collateral. For further information regarding Select Energy's activities and risks, see Note 2, "Derivative Instruments," and Note 5, "Comprehensive Income," to the consolidated financial statements. Utility Group Business Development and Capital Expenditures - ----------------------------------------------------------- Connecticut - CL&P: On July 14, 2003, the Connecticut Siting Council (CSC) approved a 345,000 volt transmission line project from Bethel, Connecticut to Norwalk, Connecticut. The project is estimated to cost approximately $200 million and will help alleviate identified reliability issues in southwest Connecticut and help reduce congestion costs for all of Connecticut. An appeal of the CSC decision by the City of Norwalk is pending. Management does not expect the appeal to be successful. Management, however, does not know if the pending appeal will affect CL&P's schedule in constructing the project or the in service date, which is anticipated to be by the end of 2005. This project is exempt from the State of Connecticut's moratorium on the approval of new electric and natural gas transmission projects. At March 31, 2004, CL&P has capitalized $20.3 million associated with this project. On October 9, 2003, CL&P and United Illuminating (UI) filed for approval of a separate 345,000 volt transmission line from Norwalk, Connecticut to Middletown, Connecticut. Estimated construction costs of this project are approximately $620 million. CL&P will jointly site this project with UI and CL&P will own 80 percent, or approximately $496 million, of the project. This project is also exempt from the State of Connecticut's moratorium on the approval of new electric and natural gas transmission projects. Hearings before the CSC began in February 2004. CL&P expects the CSC to rule on the application by the end of 2004 and for construction to take place from 2005 through 2007. At March 31, 2004, CL&P has capitalized $10.7 million related to this project. In September 2002, the CSC approved a plan to replace an undersea electric transmission line between Norwalk, Connecticut and Northport - Long Island, New York, at an estimated cost of $90 million. CL&P and the Long Island Power Authority each own approximately 50 percent of the line. The project still requires federal and New York state approvals. Given the approval process, changing pricing and operational rules in the New England and New York energy markets and pending business issues between the parties, the expected in-service date remains under evaluation. This project is also exempt from the State of Connecticut's moratorium on the approval of new electric and natural gas transmission projects. At March 31, 2004, CL&P has capitalized $5.2 million related to this project. Connecticut - Yankee Gas: Yankee Gas received a decision from the DPUC supporting the construction and operation of a 1.2 billion cubic foot liquefied natural gas storage and production facility in Waterbury, Connecticut. Construction of the facility, which is expected to take approximately three years, could begin in the second half of 2004. The decision allows for the deferral of prudently incurred costs related to the project and requires Yankee Gas to file a rate case to recover this investment when the facility is placed in service. This project is also exempt from the State of Connecticut's moratorium on the approval of new electric and natural gas transmission projects. At March 31, 2004, Yankee Gas has capitalized approximately $2.7 million related to this project. On March 25, 2004, the DPUC approved a nine mile extension of Yankee Gas' distribution system in southeastern Connecticut to the New England Gas Company system in Rhode Island. Yankee Gas hopes to place the extension in service by October 1, 2004 at an approximate cost of $5 million. New Hampshire: On February 6, 2004, the NHPUC approved a $70 million proposal by PSNH to replace a nearly 50 year old coal and oil-burning boiler at Schiller Station in Portsmouth, New Hampshire with a boiler that would burn wood. However, PSNH will not commence the project based on a risk and reward sharing mechanism specified in the NHPUC's order. On March 3, 2004, PSNH filed a joint motion for consideration with the New Hampshire Office of the Consumer Advocate, the state Office of Energy and Planning and the New Hampshire Timberland Owners' Association that, if approved, would modify the sharing mechanism. If the NHPUC approves the modification and other approvals are received in a timely manner, then PSNH anticipates completion of the project in 2006. Regional Transmission Organization - ---------------------------------- The FERC has required all transmission owning utilities to voluntarily form RTOs or to state why this process has not begun. On October 31, 2003, ISO-NE, along with NU and six other New England transmission companies filed a proposal with the FERC to create an RTO for New England. On March 24, 2004, the FERC issued an order accepting the New England RTO proposal. The RTO is intended to strengthen the independent and efficient management of the region's power system while ensuring that customers in New England continue to have the most reliable system possible to realize the benefits of a competitive wholesale energy market. In a separate filing made on November 4, 2003, NU along with six other New England transmission owners requested, consistent with the FERC's pricing policy for RTOs and Order-2000-compliant independent system operators, that the FERC approve a single ROE for regional and local rates that would consist of a proposed 12.8 percent base ROE as well as incentive adders of 0.5 percent for joining a RTO and 1.0 percent for constructing new transmission facilities approved by the RTO. If the FERC approves the request, then the transmission owners would receive a 13.3 percent ROE for existing transmission facilities and a 14.3 percent ROE for new transmission facilities. In its March 24, 2004 order the FERC partially accepted this ROE proposal, but set certain issues to hearing. Restructuring and Rate Matters - ------------------------------ Utility Group: On August 26, 2003, NU's electric operating companies filed their first transmission rate case at the FERC since 1995. In the filing, these companies requested implementation of a formula rate that would allow recovery of increasing transmission expenditures on a timelier basis and that the changes, including a $23.7 million annual rate increase through 2004, take effect on October 27, 2003. These companies requested that the FERC maintain their existing 11.75 percent ROE until a ROE for the New England RTO is established by the FERC. On October 22, 2003, the FERC accepted this filing implementing the proposed rates subject to refund effective on October 28, 2003. The FERC set certain issues to hearing, and a final decision in the rate case is expected in 2005. Connecticut - CL&P: Public Act No. 03-135 and Rate Proceedings: On June 25, 2003, the Governor of Connecticut signed into law Public Act No. 03-135 (the Act) that amended Connecticut's 1998 electric utility industry legislation. The Act required CL&P to file a four-year transmission and distribution plan with the DPUC. On December 17, 2003, the DPUC issued its final decision in the rate case. CL&P filed a petition for reconsideration of certain items in the rate case on December 31, 2003. Other parties also filed petitions for reconsideration. On January 21, 2004, the DPUC agreed to reconsider CL&P's items. Hearings were held in April 2004 and a final decision is expected to be issued in June 2004. However, CL&P also filed an appeal with the Connecticut Superior Court on January 30, 2004. The appeal was filed in the event that the outcome of the DPUC's reconsideration is still not acceptable to CL&P. CTA and SBC Reconciliation: The Competitive Transition Assessment (CTA) allows CL&P to recover stranded costs, such as securitization costs associated with the rate reduction bonds, amortization of regulatory assets, and independent power producer over market costs while the System Benefits Charge (SBC) allows CL&P to recover certain regulatory and energy public policy costs, such as public education outreach costs, hardship protection costs, transition period property taxes, and displaced workers protection costs. The Generation Service Charge (GSC) allows CL&P to recover the costs of the procurement of energy for standard offer service. On April 1, 2004, CL&P filed its annual CTA and SBC reconciliation with the DPUC. For the year ended December 31, 2003, total CTA revenues and excess GSC revenues exceeded the CTA revenue requirement by $148.3 million. This amount was recorded as a regulatory liability on the accompanying consolidated balance sheets. For the same period, SBC revenues exceeded the SBC revenue requirement by $25.5 million. Management expects a decision in this docket from the DPUC by the end of 2004. Connecticut - Yankee Gas: Rate Case: In 2003, Yankee Gas earned a ROE below the DPUC-authorized level of 11 percent. As a result of higher pension costs and other factors not addressed by current rate levels, management expects that Yankee Gas will continue to underearn the DPUC-authorized ROE. Yankee Gas expects to file a rate case in July 2004 for a rate increase to take effect in January of 2005. IERM Settlement: On April 29, 2004, Yankee Gas and the Office of Consumer Counsel filed a settlement agreement which provides for the termination of Yankee Gas' Infrastructure Expansion Rate Mechanism (IERM). The settlement finalizes ratemaking treatment for all Yankee Gas IERM projects and returns Yankee Gas to a traditional capital investment test. The filing seeks DPUC approval in the second quarter. New Hampshire: Delivery Rate Case: PSNH's delivery rates were fixed by the "Agreement to Settle PSNH Restructuring" (Restructuring Settlement) until February 1, 2004. Consistent with the requirements of the Restructuring Settlement and state law, PSNH filed a delivery service rate case and tariffs with the NHPUC on December 29, 2003 to increase electricity delivery rates by approximately $21 million, or 2.6 percent, effective February 1, 2004. In addition, PSNH is requesting that recovery of FERC-regulated transmission costs be adjusted annually through a tracking mechanism. The NHPUC suspended the proposed rate increase until the conclusion of the delivery rate case. Hearings are scheduled for August 2004, and a decision is expected in the third or fourth quarter of 2004 with rates retroactively applied to February 1, 2004. SCRC Reconciliation Filing: The Stranded Cost Recovery Charge (SCRC) allows PSNH to recover its stranded costs. On an annual basis, PSNH files with the NHPUC a SCRC reconciliation filing for the preceding calendar year. This filing includes the reconciliation of stranded cost revenues with stranded costs, and transition energy service (TS) revenues with TS costs. The NHPUC reviews the filing, including a prudence review of PSNH's generation operations. The 2003 SCRC filing was made on April 30, 2004. Management does not expect the review of the 2003 SCRC filing to have a material effect on PSNH's net income or financial position. Massachusetts: Transition Cost Reconciliations: On March 31, 2003, WMECO filed its 2002 transition cost reconciliation with the Massachusetts Department of Telecommunications and Energy (DTE). This filing reconciled the recovery of generation-related stranded costs for calendar year 2002 and included the renegotiated purchased power contract related to the Vermont Yankee nuclear unit. On July 15, 2003, the DTE issued a final order on WMECO's 2001 transition cost reconciliation, which addressed WMECO's cost tracking mechanisms. As part of that order, the DTE directed WMECO to revise its 2002 annual transition cost reconciliation filing. The revised filing was submitted to the DTE on September 22, 2003. Hearings have been held, and the timing of a final decision is uncertain. Management does not expect the outcome of this docket to have a material adverse impact on WMECO's net income or financial position. On March 31, 2004, WMECO filed its 2003 transition cost reconciliation with the DTE. This filing reconciled the recovery of generation-related stranded costs for calendar year 2003. The timing of a final decision is uncertain. Management does not expect the outcome of this docket to have a material adverse impact on WMECO's net income or financial position. Critical Accounting Policies and Estimates Update - ------------------------------------------------- Accounting for Transmission Revenues Subject to Refund: The $23.7 million transmission rate increase that NU's electric operating companies requested began being billed subject to refund on October 28, 2003. The rate increase was based on a proposed ROE of 11.75 percent, which is unchanged from the ROE included in previous transmission rates and is currently being billed. Subsequent to this transmission rate case filing, the FERC approved ISO New England as a RTO. The FERC set for hearing a proposed 12.8 percent ROE with a 0.5 percent adder for joining a RTO and a 1.0 percent adder for future transmission expansion. The higher proposed RTO rate and adders are not currently being billed. Since October 27, 2003, management has evaluated the increase in transmission revenues that has been collected to determine if any amounts are probable of refund to customers in the future. Any amounts probable of refund to customers would reduce revenues and be recorded as a regulatory liability. However, at this time management believes that its request will be approved by the FERC, and as a result, that no refunds are likely. Accounting for PSNH Rate Case: PSNH requested that an increase in rates be included in bills starting on February 1, 2004 subject to refund. The NHPUC denied that request but indicated that any rate changes from the rate case would be effective from February 1, 2004 forward. The rate case is not expected to be concluded until the third or fourth quarter of 2004. The method for recovering any retroactive rate increase from customers has not yet been determined. The costs driving the need for the rate increase, which include pension expense, depreciation expense, and transmission and reliability expenses, that have been incurred from February 1, 2004 through March 31, 2004 have been expensed as incurred. When those incurred costs become probable of recovery in rates management will record those costs as regulatory assets. This may result in lower PSNH earnings for the first two or three quarters of 2004 with an adjustment in the third or fourth quarter of 2004 to reflect the final rate increase retroactive to February 1, 2004. Accounting for the Effect of Medicare Changes on Postretirement Benefits Other Than Pension (PBOP): On December 8, 2003, the President of the United States signed into law a bill that expands Medicare, primarily by adding a prescription drug benefit and by adding a federal subsidy to qualifying plan sponsors of retiree health care benefit plans. Management believes that NU currently qualifies for the subsidy for certain retiree groups. Specific authoritative accounting guidance on how to account for the effect the Medicare federal subsidy has on NU's PBOP Plan has not been finalized by the Financial Accounting Standards Board (FASB). FASB Staff Position (FSP) No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," required NU to make an election for 2003 financial reporting. The election was to either defer the impact of the subsidy until the FASB issues guidance or to reflect the impact of the subsidy on December 31, 2003 reported amounts. NU chose to reflect the impact on December 31, 2003 reported amounts, which decreased the PBOP benefit obligation by $19.5 million and increased actuarial gains by $19.5 million with no impact on 2003 expenses, assets, or liabilities. The actuarial gain, the estimate of which was refined in the first quarter of 2004 to $20 million, will be amortized as a reduction to PBOP expense over 13 years beginning in 2004. PBOP expense in 2004 will also reflect a lower interest cost due to the reduction in the December 31, 2003 benefit obligation. Management estimates that the reduction in PBOP expense in 2004 will be approximately $2 million. On March 12, 2004, the FASB issued a draft FSP that would supersede FSP No. FAS 106-1. This draft FSP concludes that the effects of the federal subsidy should be considered an actuarial gain and treated like similar gains and losses and requires certain disclosures for employers that sponsor postretirement health care plans that provide prescription drug benefits. The accounting treatment under the proposed FSP is consistent with NU's accounting treatment at December 31, 2003. The estimated 2004 reduction in PBOP expense of approximately $2 million could change as a result of the completion of an actuarial estimate of the subsidy based on recent prescription drug claim experience. The subsidy estimate could also change as regulations are promulgated by the federal agencies responsible for administration of the Medicare program. Other Matters - ------------- Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 4, "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. Website: Additional financial information is available through NU's website at www.nu.com. RESULTS OF OPERATIONS - NU CONSOLIDATED The following table provides the variances in income statement line items for the consolidated statements of income for NU included in this report on Form 10-Q for the three months ended March 31, 2004: Income Statement Variances (Millions of Dollars) 2004 over/(under) 2003 ---------------------- Amount Percent ------ ------- Operating Revenues: $254 16% Operating Expenses: Fuel, purchased and net interchange power 211 22 Other operation 38 20 Maintenance 11 25 Depreciation 5 10 Amortization (28) (49) Amortization of rate reduction bonds 4 10 Taxes other than income taxes 4 5 ---- ---- Total operating expenses 245 17 ---- ---- Operating income 9 5 ---- ---- Interest expense, net (1) (1) Other income, net 1 (a) ---- ---- Income before income tax expense 11 11 Income tax expense 4 9 Preferred dividends of subsidiaries - - ---- ---- Net Income $ 7 12% ==== ==== (a) Percent greater than 100. Comparison of the First Quarter of 2004 to the First Quarter of 2003 Operating Revenues Total revenues increased by $254 million in the first quarter of 2004, compared with the same period in 2003, due to higher revenues from NU Enterprises ($183 million), higher Utility Group electric revenues ($49 million or $46 million after intercompany eliminations) and higher Utility Group gas revenues ($20 million). The NU Enterprises' revenues increase is primarily due to higher wholesale revenues for the merchant energy segment resulting from higher electric prices and higher gas volumes. The Utility Group electric revenues increase is primarily due to higher retail revenue ($105 million), partially offset by lower wholesale revenue ($54 million). The electric retail revenue increase is primarily due to increases in the energy service revenues for CL&P, PSNH and WMECO ($76 million), Federally Mandated Congestion Cost revenues for CL&P ($40 million), and higher sales volume ($14 million), offset by lower CL&P EAC revenue as a result of the end of EAC billings in December 2003 ($12 million) and lower rates for CL&P and WMECO stranded cost recovery ($10 million). Electric retail kWh sales increased by 2.7 percent in the first quarter of 2004. The electric wholesale revenue decrease is primarily due to lower short-term transactions ($46 million) and the expiration of long-term contracts ($8 million). The higher Utility Group gas revenue increase is primarily due to the recovery of higher gas costs. Firm natural gas sales increased by 6.8 percent in the first quarter of 2004 from the same period of 2003, which reflected a negative adjustment to the estimate of unbilled revenues in the first quarter of 2003. Excluding the adjustment to the estimate of unbilled revenues, firm natural gas sales decreased by 0.5 percent in the first quarter of 2004 from the same period in 2003. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased by $211 million in the first quarter of 2004, primarily due to higher wholesale activity at NU Enterprises ($138 million after intercompany eliminations) and higher purchased power costs for the Utility Group ($73 million after intercompany eliminations). The increase for the Utility Group is primarily due to an increase in the standard offer service requirements rates for CL&P ($76 million) and WMECO ($6 million), higher Yankee Gas expenses due to increased gas prices and higher sales volume ($25 million), offset by lower fuel EAC amortization for CL&P ($12 million), lower wholesale transactions for CL&P ($15 million), and lower expenses for PSNH due to lower regulated wholesale purchases ($10 million). Other Operation Other operation expenses increased $38 million in the first quarter of 2004, primarily due to higher competitive business expenses resulting from business growth ($16 million), higher regulated business administrative and general expenses ($7 million) primarily due to higher pension costs, higher transmission expense ($9 million), higher fossil production expense ($3 million), and higher nuclear related expenses as a result of the absence of the 2003 CL&P Millstone use of proceeds docket ($2 million). That docket resulted in the recovery of certain other operations costs and maintenance costs that were expensed in periods prior to 2003. The recovery of these costs through the use of proceeds docket resulted in credits to these accounts in the first quarter of 2003. Maintenance Maintenance expenses increased $11 million in the first quarter of 2004, primarily due to the absence of the 2003 positive resolution of the CL&P Millstone use of proceeds docket ($5 million), higher fossil production expense ($2 million), higher competitive transmission expense ($2 million), and higher distribution expense ($2 million). Depreciation Depreciation increased by $5 million in the first quarter of 2004 due to higher Utility Group plant balances. Amortization Amortization decreased by $28 million in the first quarter of 2004 primarily due to lower Utility Group recovery of stranded costs and a decrease in amortization expense resulting from the implementation of the CL&P distribution rate case decision effective in January 2004 ($7 million). Amortization of Rate Reduction Bonds Amortization of rate reduction bonds increased by $4 million in the first quarter of 2004 due to the repayment of more principal as compared to 2003. Taxes Other Than Income Taxes Taxes other than income taxes increased by $4 million in the first quarter of 2004 primarily due to an increase in Connecticut gross earnings tax as a result of an increase in revenues for NU Enterprises, CL&P and Yankee Gas. Income Tax Expense Income tax expense increased due to higher income before tax expense. INDEPENDENT ACCOUNTANTS' REPORT To the Board of Trustees and Shareholders of Northeast Utilities: We have reviewed the accompanying condensed consolidated balance sheet of Northeast Utilities and subsidiaries ("the Company") as of March 31, 2004, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2004 and 2003. These interim financial statements are the responsibility of the Company's management. We conducted our reviews 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 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 reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets and consolidated statements of capitalization of Northeast Utilities and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, shareholders' equity, cash flows, and income taxes for each of the three years in the period ended December 31, 2003 (not presented herein) and in our report dated February 23, 2004, we expressed an unqualified opinion (which includes an explanatory paragraph with respect to the Company's adoption in 2001 of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended, its adoption in 2003 of Emerging Issues Task Force Issue 03-11, "Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and not 'Held for Trading Purposes' as Defined in Issue No. 02-3," and Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities," and its adoption in 2002 of SFAS No. 142 "Goodwill and Other Intangible Assets") on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Hartford, Connecticut May 7, 2004 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 this complete report on Form 10-Q 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 2003 Form 10-K, and the current reports on Form 8-K dated January 22, 2004 and March 30, 2004. The accompanying financial statements contain, in the opinion of management, all adjustments necessary to present fairly NU's and the above companies' financial position at March 31, 2004 and the results of operations and cash flows for the three-month periods ended March 31, 2004 and 2003. All adjustments are of a normal, recurring nature except those described in Note 1B. Due primarily to the seasonality of NU's business and to the quarterly earnings profile of the merchant energy business segment in 2004, the results of operations and statements of cash flows for the three-month periods ended March 31, 2004 and 2003, 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 of America 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. Reclassifications have been made to the accompanying consolidated balance sheets and statements of cash flows. B. New Accounting Standards Consolidation of Variable Interest Entities: In December 2003, the Financial Accounting Standards Board (FASB) issued a revised version of FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities," (FIN 46R). FIN 46R was effective for NU for the first quarter of 2004 and did not have an impact on any of NU's previously identified variable interest entities (VIE). Based on management's review of NU's independent power producer (IPP) contracts, no new VIEs have been identified. C. Guarantees NU provides credit assurance in the form of guarantees and letters of credit (LOCs) in the normal course of business, primarily for the financial performance obligations of NU Enterprises. NU would be required to perform under these guarantees in the event of non- performance by NU Enterprises, primarily Select Energy, Inc. (Select Energy). At March 31, 2004, the maximum level of exposure in accordance with FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," under guarantees by NU, primarily on behalf of NU Enterprises, totaled $748.1 million. Additionally, NU had $63.8 million of LOCs issued for the benefit of NU Enterprises outstanding at March 31, 2004. In conjunction with its investment in R. M. Services, Inc. (RMS), NU guarantees a $3 million line of credit through 2005, of which $2.2 million was outstanding at March 31, 2004, and is included in the $748.1 million of total guarantees outstanding. Effective July 1, 2003, the financial statements of RMS, including its line of credit balance, are consolidated with NU's financial statements. CL&P has obtained surety bonds in the amount of $31.1 million related to the collection of March 2003 and April 2003 incremental locational marginal pricing (LMP) costs in compliance with a Connecticut Department of Public Utility Control (DPUC) order. On April 30, 2004, the DPUC approved CL&P's request to remove this surety bond requirement prior to renewal. At March 31, 2004, NU had outstanding guarantees primarily to the Utility Group of $42.3 million, including the LMP-related surety bonds. This amount is included in the total outstanding NU guarantee amount of $748.1 million. Several underlying contracts that NU guarantees and certain surety bonds contain credit ratings triggers that would require NU to post collateral in the event that NU's credit ratings are downgraded. NU currently has authorization from the Securities and Exchange Commission (SEC) to provide up to $500 million of guarantees for NU Enterprises through June 30, 2004, and has applied for authority to increase this amount to $750 million through September 30, 2007. The guarantees to the Utility Group are subject to a separate $50 million SEC limitation apart from the current $500 million guarantee limit. The amount of guarantees outstanding for compliance with the SEC limit for NU Enterprises and RMS is $309 million, which is calculated using different, more probabilistic and fair-value based criteria than the maximum level of exposure required to be disclosed under FIN 45. D. Unbilled Revenues Unbilled revenues represent an estimate of electricity or gas delivered to customers that has not been billed. Unbilled revenues represent assets on the balance sheet that become accounts receivable in the following month as customers are billed. Billed revenues are based on meter readings, whereas unbilled revenues are based on estimates of electricity and gas delivered to customers. Such estimates are subject to adjustment when actual meter readings become available, when changes in estimating methodology occur and under other circumstances. E. Regulatory Accounting The accounting policies of NU's Utility Group conform to accounting principles generally accepted in the United States of America applicable to rate-regulated enterprises and historically 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." The transmission and distribution businesses of CL&P, PSNH and WMECO, along with PSNH's generation business and Yankee Gas Services Company's (Yankee Gas) distribution business, continue to be cost-of-service rate regulated, and management believes that the application of SFAS No. 71 to those business portions of the aforementioned companies continues to be appropriate. Management also believes that it is probable that NU's operating companies will recover their investments in long-lived assets, including regulatory assets. In addition, all material net regulatory assets are earning an equity return, except for securitized regulatory assets, which are not supported by equity. Regulatory Assets: The components of regulatory assets are as follows: -------------------------------------------------------------------------- At March 31, 2004 -------------------------------------------------------------------------- NU (Millions of Dollars) Consolidated CL&P PSNH WMECO -------------------------------------------------------------------------- Recoverable nuclear costs $ 64.9 $ 1.2 $ 32.4 $ 31.3 Securitized assets 1,614.1 1,089.2 454.5 70.4 Income taxes, net 248.0 144.8 43.1 58.6 Unrecovered contractual obligations 370.9 218.4 68.0 84.5 Recoverable energy costs 263.2 47.2 212.5 3.5 Other 360.9 139.1 156.2 17.7 ---------------------------------------------------------------------------- Totals $2,922.0 $1,639.9 $966.7 $266.0 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- At December 31, 2003 ---------------------------------------------------------------------------- NU (Millions of Dollars) Consolidated CL&P PSNH WMECO ---------------------------------------------------------------------------- Recoverable nuclear costs $ 82.4 $ 16.4 $ 33.3 $ 32.7 Securitized assets 1,664.0 1,123.7 465.3 75.0 Income taxes, net 253.8 140.9 44.2 60.1 Unrecovered contractual obligations 378.6 221.8 69.9 86.9 Recoverable energy costs 255.7 30.1 218.3 3.7 Other 339.5 140.1 138.4 9.8 ---------------------------------------------------------------------------- Totals $2,974.0 $1,673.0 $969.4 $268.2 ---------------------------------------------------------------------------- At March 31, 2004 and December 31, 2003, NU also maintained $49.4 million and $63.4 million, respectively, of additional other regulatory assets, associated with Yankee Gas' income taxes, net and other regulatory assets related to environmental clean-up costs and hardship receivables. Additionally, NU had approximately $13 million and approximately $12 million of regulatory assets at March 31, 2004 and December 31, 2003, respectively, that are included in deferred debits and other assets - other on the accompanying consolidated balance sheets. These amounts represent regulatory assets that have not yet been approved by the applicable regulatory agency. Management believes these assets are recoverable in future rates. Regulatory Liabilities: The Utility Group maintained $1.2 billion of regulatory liabilities at both March 31, 2004 and December 31, 2003. These amounts are comprised of the following: -------------------------------------------------------------------------- At March 31, 2004 -------------------------------------------------------------------------- NU (Millions of Dollars) Consolidated CL&P PSNH WMECO -------------------------------------------------------------------------- Cost of removal $ 334.2 $149.5 $ 87.9 $25.1 CTA, GSC and SBC overcollections 325.4 325.4 - - SCRC overcollections 172.4 - 172.4 - Regulatory liabilities offsetting Utility Group derivative assets 147.1 146.9 0.2 - LMP overcollections 83.8 83.8 - - Other 155.3 72.6 23.3 6.9 -------------------------------------------------------------------------- Totals $1,218.2 $778.2 $283.8 $32.0 -------------------------------------------------------------------------- -------------------------------------------------------------------------- At December 31, 2003 -------------------------------------------------------------------------- NU (Millions of Dollars) Consolidated CL&P PSNH WMECO -------------------------------------------------------------------------- Cost of removal $ 334.0 $150.0 $ 88.0 $25.0 CTA, GSC and SBC overcollections 333.7 333.7 - - SCRC overcollections 160.4 - 160.4 - Regulatory liabilities offsetting Utility Group derivative assets 116.9 115.4 1.5 - LMP overcollections 83.6 83.6 - - Other 135.7 70.3 22.2 2.8 -------------------------------------------------------------------------- Totals $1,164.3 $753.0 $272.1 $27.8 -------------------------------------------------------------------------- At March 31, 2004 and December 31, 2003, NU also maintained $124.2 million and $111.4 million, respectively, of additional other regulatory liabilities, associated with Yankee Gas' cost of removal, deferred gas costs, pension and other regulatory liabilities. F. Allowance for Funds Used During Construction The allowance for funds used during construction (AFUDC) is a non- cash item that is included in the cost of Utility Group utility plant and represents the cost of borrowed and equity funds used to finance construction. The portion of AFUDC attributable to borrowed funds is recorded as a reduction of other interest expense, and the cost of equity funds is recorded as other income on the consolidated statements of income: --------------------------------------------------------------------- For the Three Months Ended --------------------------------------------------------------------- (Millions of Dollars) March 31, 2004 March 31, 2003 --------------------------------------------------------------------- Borrowed funds $1.3 $1.3 Equity funds 1.3 1.5 --------------------------------------------------------------------- Totals $2.6 $2.8 --------------------------------------------------------------------- Average AFUDC rates 3.4% 4.3% --------------------------------------------------------------------- G. Equity-Based Compensation NU maintains an Employee Stock Purchase Plan and other long-term, equity-based incentive plans under the Northeast Utilities Incentive Plan. NU accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No equity-based employee compensation cost for stock options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share (EPS) if NU had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to equity-based employee compensation: --------------------------------------------------------------------- For the Three Months Ended --------------------------------------------------------------------- (Millions of Dollars, March 31, March 31, except per share amounts) 2004 2003 --------------------------------------------------------------------- Net income, as reported $67.4 $60.2 Total equity-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects 0.5 0.5 --------------------------------------------------------------------- Pro forma net income $66.9 $59.7 --------------------------------------------------------------------- EPS: Basic and fully diluted - as reported $0.53 $0.47 Basic and fully diluted - pro forma $0.52 $0.47 --------------------------------------------------------------------- Net income as reported includes $0.6 million and $0.1 million expensed for restricted stock and restricted stock units for the three months ended March 31, 2004 and 2003, respectively. NU accounts for restricted stock in accordance with APB No. 25 and amortizes the intrinsic value of the award over the service period. NU assumes an income tax rate of 40 percent to estimate the tax effect on total equity-based employee compensation expense determined under the fair value-based method for all awards. During the three-month period ended March 31, 2004, no stock options were awarded. On March 31, 2004, the FASB issued an exposure draft that, if finalized as proposed, would require NU to expense equity-based employee compensation under the fair value-based method beginning on January 1, 2005. H. Sale of Customer Receivables CL&P has an arrangement with a financial institution under which CL&P can sell up to $100 million of accounts receivable and unbilled revenues. At both March 31, 2004 and December 31, 2003, CL&P had sold accounts receivable of $80 million to the financial institution with limited recourse through CL&P Receivables Corporation (CRC), a wholly owned subsidiary of CL&P. At March 31, 2004, the reserve requirements calculated in accordance with the Receivables Purchase and Sale Agreement were $23.6 million. This reserve amount is deducted from the amount of receivables eligible for sale at the time. Concentrations of credit risk to the purchaser under this agreement with respect to the receivables are limited due to CL&P's diverse customer base within its service territory. At March 31, 2004, amounts sold to CRC by CL&P but not sold to the financial institution totaling $186.8 million are included in investments in securitizable assets on the accompanying consolidated balance sheets. This amount would be excluded from CL&P's assets in the event of CL&P's bankruptcy. On July 9, 2003, CL&P renewed this arrangement. This agreement expires on July 7, 2004, and management plans to renew this agreement prior to its expiration. The transfer of receivables to the financial institution under this arrangement qualifies for sale treatment under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - A Replacement of SFAS No. 125." I. Other Investment Yankee Energy System, Inc. (Yankee) maintains a long-term note receivable from BMC Energy LLC (BMC), an operator of renewable energy projects. In late-March 2004, based on revised information that impacts undiscounted cash flow projections and fair value estimates, management determined that the fair value of the note receivable from BMC had declined and that the note was impaired. As a result, management recorded an after-tax impairment charge of $1.5 million in the first quarter of 2004. This charge is included in other income, net on the accompanying consolidated statements of income and disclosed in Note 1N, "Summary of Significant Accounting Policies - Other Income," and in the Eliminations and Other segment in Note 8, "Segment Information," to the consolidated financial statements. Yankee's remaining note receivable from BMC totaled $1.5 million at March 31, 2004 and is included in other deferred debits and other assets on the accompanying consolidated balance sheets. J. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand and short-term cash investments that are highly liquid in nature and have original maturities of three months or less. At the end of each reporting period, overdraft amounts are reclassified from cash and cash equivalents to accounts payable. K. Unrestricted Cash From Counterparties Unrestricted cash on deposit from counterparties represents balances collected from counterparties resulting from Select Energy's credit management activities. An offsetting liability has been recorded in other current liabilities for the amounts collected. To the extent Select Energy requires collateral from counterparties, cash is held as a part of the total collateral required. The right to hold such cash collateral in an unrestricted manner is determined by the terms of Select Energy's agreements. Key factors affecting the unrestricted status of a portion of this cash collateral include the financial standing of Select Energy and its credit support provider. L. Special Deposits Special deposits represents amounts Select Energy has on deposit with counterparties and brokerage firms in the amount of $4.8 million and amounts included in escrow for Select Energy Services, Inc. (SESI) that have not been spent on construction projects of $30.7 million at March 31, 2004. Similar amounts totaled $17 million and $32 million at December 31, 2003, respectively. Special deposits at December 31, 2003 also included $30.1 million in escrow that PSNH funded to acquire Connecticut Valley Electric Company, Inc. on January 1, 2004. M. Restricted Cash - LMP Costs Restricted cash - LMP costs represents incremental LMP cost amounts that have been collected by CL&P and deposited into an escrow account. At March 31, 2004 and December 31, 2003, restricted cash - LMP costs totaled $123.7 million and $93.6 million, respectively. N. Other Income The pre-tax components of NU's other income items are as follows: --------------------------------------------------------------------- For the Three Months Ended --------------------------------------------------------------------- (Millions of Dollars) March 31, 2004 March 31, 2003 --------------------------------------------------------------------- Investment income $ 3.3 $ 3.9 Charitable donations (1.0) (2.3) AFUDC - equity funds 1.3 1.5 Other, net (1.9) (2.5) --------------------------------------------------------------------- Totals $ 1.7 $ 0.6 --------------------------------------------------------------------- 2. DERIVATIVE INSTRUMENTS (NU, CL&P, Select Energy, Yankee Gas) Derivatives that are utilized for trading purposes are recorded at fair value with changes in fair value included in earnings. Other contracts that are derivatives but do not meet the definition of a cash flow hedge and cannot be designated as being used for normal purchases or normal sales are also recorded at fair value with changes in fair value included in earnings. 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 generally 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 contracts that meet the cash flow hedge requirements, the changes in fair value of those contracts are recognized currently in earnings. Derivative contracts designated as fair value hedges and the item they are hedging are both recorded at fair value on the consolidated balance sheets. Derivative contracts that are entered into as a normal purchase or sale and are probable of resulting in physical delivery, and are documented as such, are recorded under accrual accounting. During the first quarter of 2004, a negative $18.3 million, net of tax, was reclassified from other comprehensive income in connection with the consummation of the underlying hedged transactions and recognized in earnings. An additional $0.2 million, net of tax, was recognized in earnings for those derivatives that were determined to be ineffective and for the ineffective portion of cash flow hedges. Also during the first quarter of 2004, new cash flow hedge transactions were entered into that hedge cash flows through 2006. As a result of these new transactions and market value changes since January 1, 2004, accumulated other comprehensive income increased by $16.5 million, net of tax. Accumulated other comprehensive income at March 31, 2004, was a positive $41.3 million, net of tax (increase to equity), relating to hedged transactions, and it is estimated that $40.1 million of this net of tax balance will be reclassified as an increase to earnings within the next twelve months. Cash flows from hedge contracts are reported in the same category as cash flows from the underlying hedged transaction. Through the first quarter of 2004 there were no changes to interpretations of SFAS No. 133, but the FASB continues to consider changes that could affect the way NU records and discloses derivative and hedging activities. The tables below summarize the derivative assets and liabilities at March 31, 2004. These amounts do not include option premiums paid, which are recorded as prepayments and amounted to $6.5 million and $9.1 million related to energy trading activities and $9.4 million and $7.6 million related to marketing activities at March 31, 2004 and December 31, 2003, respectively. These amounts also do not include option premiums received, which are recorded as other current liabilities and amounted to $8.4 million and $12.2 million related to energy trading activities at March 31, 2004 and December 31, 2003, respectively. --------------------------------------------------------------------- At March 31, 2004 --------------------------------------------------------------------- (Millions of Dollars) Assets Liabilities Total --------------------------------------------------------------------- NU Enterprises: Trading $188.3 $(160.9) $ 27.4 Non-trading 0.6 (0.1) 0.5 Hedging 81.7 (12.1) 69.6 Utility Group - Gas: Non-trading - (0.3) (0.3) Hedging 3.2 - 3.2 Utility Group - Electric: Non-trading 147.2 (55.1) 92.1 NU Parent: Hedging 5.7 - 5.7 --------------------------------------------------------------------- Total $426.7 $(228.5) $198.2 --------------------------------------------------------------------- --------------------------------------------------------------------- At December 31, 2003 --------------------------------------------------------------------- (Millions of Dollars) Assets Liabilities Total --------------------------------------------------------------------- NU Enterprises: Trading $123.9 $ (91.4) $ 32.5 Non-trading 1.6 (0.8) 0.8 Hedging 55.8 (12.7) 43.1 Utility Group - Gas: Non-trading 0.2 (0.2) - Hedging 2.8 - 2.8 Utility Group - Electric: Non-trading 116.9 (56.0) 60.9 NU Parent: Hedging - (3.6) (3.6) --------------------------------------------------------------------- Total $301.2 $(164.7) $136.5 --------------------------------------------------------------------- NU Enterprises - Trading: To gather market intelligence and utilize this information in risk management activities for the wholesale marketing activities, Select Energy conducts limited energy trading activities in electricity, natural gas, and oil, and therefore, experiences net open positions. Select Energy manages these open positions with strict policies that limit its exposure to market risk and require daily reporting to management of potential financial exposures. Derivatives used in trading activities are recorded at fair value and included in the consolidated balance sheets as derivative assets or liabilities. Changes in fair value are recognized in operating revenues in the consolidated statements of income in the period of change. The net fair value positions of the trading portfolio at March 31, 2004 and at December 31, 2003 were assets of $27.4 million and $32.5 million, respectively. Select Energy's trading portfolio includes New York Mercantile Exchange (NYMEX) futures and options, the fair value of which is based on closing exchange prices; over-the-counter forwards and options, the fair value of which is based on the mid-point of bid and ask market prices; and bilateral contracts for the purchase or sale of electricity or natural gas, the fair value of which is determined using available information from external sources. Select Energy's trading portfolio also includes transmission congestion contracts (TCC). The fair value of TCCs included in the trading portfolio is based on published market data. NU Enterprises - Non-trading: Non-trading derivative contracts are used for delivery of energy related to Select Energy's wholesale and retail marketing activities. These contracts are subject to fair value accounting because these contracts are derivatives that cannot be designated as normal purchases or sales, as defined. These contracts cannot be designated as normal purchases or sales either because they are included in the New York energy market that settles financially or because management did not elect the normal purchases and sales designation. Changes in fair value of a negative $0.3 million of non- trading derivative contracts were recorded in revenues in the first quarter of 2004. Market information for TCCs included in non-trading is not available, and those contracts cannot be reliably valued. Management believes the amounts paid for these contracts, which total $2.8 million and are included in premiums paid, are equal to their fair value. NU Enterprises - Hedging: Select Energy utilizes derivative financial and commodity instruments, including futures and forward contracts, to reduce market risk associated with fluctuations in the price of electricity and natural gas purchased to meet firm sales 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 and delivery requirements. These derivatives have been designated as cash flow hedging instruments and are used to reduce the market risk associated with fluctuations in the price of electricity, natural gas, or oil. A derivative that hedges exposure to the variable cash flows of a forecasted transaction (a cash flow hedge) is initially recorded at fair value with changes in fair value recorded in accumulated other comprehensive income. Cash flow hedges impact net income when the forecasted transaction being hedged occurs, when hedge ineffectiveness is measured and recorded, when the forecasted transaction being hedged is no longer probable of occurring, or when there is accumulated other comprehensive loss and the hedge and the forecasted transaction being hedged are in a loss position on a combined basis. Select Energy maintains natural gas service agreements with certain customers to supply gas at fixed prices for terms extending through 2006. Select Energy has hedged its gas supply risk under these agreements through NYMEX futures contracts. Under these contracts, which also extend through 2006, the purchase price of a specified quantity of gas is effectively fixed over the term of the gas service agreements. At March 31, 2004 the NYMEX futures contracts had notional values of $53.5 million and were recorded at fair value as derivative assets of $13.5 million. Select Energy maintains power swaps to hedge purchases in New England as well as financial gas contracts and gas futures to hedge electricity purchase contracts that are indexed to gas prices. These hedging contracts, which are valued at the mid-point of bid and ask market prices, were recorded as derivative assets of $45.4 million and derivative liabilities of $12.7 million at March 31, 2004. To hedge the congestion price differences associated with LMP in the New England and the Pennsylvania, New Jersey, Maryland and Delaware (PJM) regions, Select Energy holds Financial Transmission Rights (FTR) contracts recorded as a derivative asset at a fair value of $1.1 million at March 31, 2004. Other hedging derivative assets, which are valued at the mid-point of bid and ask market prices, include forwards, futures, options and swaps to hedge Select Energy's basic generation service (BGS) contracts in the PJM region and were recorded at fair value as derivative assets of $10.9 million at March 31, 2004. Select Energy New York, Inc. maintains financial power swaps to hedge its retail sales portfolio through 2004, which were also valued at the mid-point of bid and ask market prices. These contracts were recorded at fair value as derivative assets of $7.1 million at March 31, 2004. In the first quarter of 2004, Select Energy began hedging natural gas inventory with gas futures that qualify as fair value hedges. The changes in fair value of the futures and the hedged inventory are recorded on the consolidated balance sheets. Utility Group - Gas - Non-trading: Yankee Gas' non-trading derivatives consist of firm sales contracts with options to curtail delivery. These contracts are subject to fair value accounting because these contracts are derivatives that cannot be designated as normal purchases or sales, as defined, because of the optionality in their contract terms. The net fair values of non-trading derivatives at March 31, 2004 were liabilities of $0.3 million. Utility Group - Gas - Hedging: 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 an unaffiliated customer is effectively fixed over the term of the gas service agreements with that customer for a period not extending beyond 2005. At March 31, 2004 the commodity swap agreement had a notional value of $5.3 million and was recorded at fair value as a derivative asset of $3.2 million. Utility Group - Electric - Non-trading: CL&P has two IPP contracts to purchase power that contain pricing provisions that are not clearly and closely related to the price of power and therefore do not qualify for the normal purchases and sales exception to SFAS No. 133, as amended. The fair values of these IPP non-trading derivatives at March 31, 2004 include a derivative asset with a fair value of $145.5 million and a derivative liability with a fair value of $55 million. An offsetting regulatory liability and an offsetting regulatory asset were recorded, as these contracts are part of the stranded costs, and management believes that these costs will continue to be recovered or refunded in rates. To mitigate the risk associated with certain supply contracts, CL&P purchased FTRs. FTRs are derivatives that do not qualify for the normal purchases and sales exception. The fair value of these FTR non-trading derivatives at March 31, 2004 was an asset of $1.5 million. NU Parent - Hedging: In March of 2003, NU parent entered into a fixed to floating interest rate swap on its $263 million, 7.25 percent fixed- rate note that matures on April 1, 2012. As a matched-terms fair value hedge, the changes in fair value of the swap and the hedged debt instrument are recorded on the consolidated balance sheets but are equal and offsetting in the consolidated statements of income. The cumulative change in the fair value of the hedged debt of $5.7 million is included as long-term debt on the consolidated balance sheets. The resulting changes in interest payments made are recorded as adjustments to interest expense. 3. GOODWILL AND OTHER INTANGIBLE ASSETS (Yankee Gas, NU Enterprises) SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and intangible assets deemed to have indefinite useful lives be reviewed for impairment at least annually by applying a fair value-based test. NU uses October 1 as the annual goodwill impairment testing date. 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 is less than the carrying amount. There were no impairments or adjustments to the goodwill balances during the three-month periods ended March 31, 2004 and 2003. NU's reporting units that maintain goodwill are generally consistent with the operating segments underlying the reportable segments identified in Note 8, "Segment Information," to the consolidated financial statements. Consistent with the way management reviews the operating results of its reporting units, NU's reporting units under the NU Enterprises reportable segment include: 1) the merchant energy reporting unit and 2) the energy services reporting unit. The merchant energy unit is comprised of the operations of Select Energy, Northeast Generation Company (NGC) and the generation operations of Holyoke Water Power Company (HWP), while the energy services reporting unit is comprised of the operations of SESI, Northeast Generation Services Company (NGS) and Woods Network Services, Inc. (Woods Network). As a result, NU's reporting units that maintain goodwill are as follows: the Yankee Gas reporting unit, which is classified under the Utility Group - gas reportable segment; the merchant energy reporting unit, which is classified under the NU Enterprises - merchant energy reportable segment; and the energy services reporting unit, which is classified under NU Enterprises - eliminations and other. The goodwill balances of these reporting units are included in the table herein. At March 31, 2004, NU maintained $319.9 million of goodwill that is no longer being amortized, $13.5 million of identifiable intangible assets subject to amortization and $8.5 million of intangible assets not subject to amortization. At December 31, 2003, NU maintained $319.9 million of goodwill that is no longer being amortized, $14.4 million of identifiable intangible assets subject to amortization and $8.5 million of intangible assets not subject to amortization. A summary of NU's goodwill balances at March 31, 2004 and December 31, 2003, by reportable segment and reporting unit is as follows: -------------------------------------------------------------------------- (Millions of Dollars) March 31, 2004 December 31, 2003 -------------------------------------------------------------------------- Utility Group - Gas: Yankee Gas $287.6 $287.6 NU Enterprises: Merchant Energy 3.2 3.2 Energy Services 29.1 29.1 -------------------------------------------------------------------------- Totals $319.9 $319.9 -------------------------------------------------------------------------- The goodwill recorded related to the acquisition of Yankee Gas is not being recovered from the customers of Yankee Gas. At March 31, 2004 and December 31, 2003, NU's intangible assets and related accumulated amortization, all of which related to NU Enterprises, consisted of the following: -------------------------------------------------------------------------- At March 31, 2004 -------------------------------------------------------------------------- Gross Accumulated Net (Millions of Dollars) Balance Amortization Balance -------------------------------------------------------------------------- Intangible assets subject to amortization: Exclusivity agreement $17.7 $ 7.9 $ 9.8 Customer list 6.6 2.9 3.7 Customer backlog, employment related agreements and other 0.1 0.1 - -------------------------------------------------------------------------- Totals $24.4 $10.9 $13.5 -------------------------------------------------------------------------- Intangible assets not subject to amortization: Customer relationships $5.2 Tradenames 3.3 ------------------------------------------------- Totals $8.5 ------------------------------------------------- -------------------------------------------------------------------------- At December 31, 2003 -------------------------------------------------------------------------- Gross Accumulated Net (Millions of Dollars) Balance Amortization Balance -------------------------------------------------------------------------- Intangible assets subject to amortization: Exclusivity agreement $17.7 $ 7.2 $10.5 Customer list 6.6 2.7 3.9 Customer backlog, employment related agreements and other 0.1 0.1 - -------------------------------------------------------------------------- Totals $24.4 $10.0 $14.4 -------------------------------------------------------------------------- Intangible assets not subject to amortization: Customer relationships $5.2 Tradenames 3.3 ------------------------------------------------- Totals $8.5 ------------------------------------------------- NU recorded amortization expense of $0.9 million for the three months ended March 31, 2004 and 2003, respectively, related to intangible assets. Based on the current amount of intangible assets subject to amortization, the estimated annual amortization expense for 2004 and for each of the succeeding 5 years from 2005 through 2009 is $3.6 million in 2004 through 2007 and no amortization expense in 2008 or 2009. These amounts may vary as acquisitions and dispositions occur in the future. 4. COMMITMENTS AND CONTINGENCIES A. Restructuring and Rate Matters (CL&P, PSNH, WMECO) Connecticut: Impacts of Standard Market Design: On March 1, 2003, the New England Independent System Operator (ISO-NE) implemented Standard Market Design (SMD). As part of SMD, LMP is utilized to assign value and causation to transmission congestion and line losses. CL&P was billed $186 million of incremental LMP costs by its standard offer service suppliers, including affiliate Select Energy, or by ISO-NE in 2003. CL&P and its suppliers disputed the responsibility for the $186 million of incremental LMP costs incurred. A settlement agreement was reached among all the parties involved and was filed with the Federal Energy Regulatory Commission (FERC) on March 3, 2004. NU recorded a pre-tax loss in 2003 of approximately $60 million (approximately $37 million after- tax) related to this settlement agreement. This settlement agreement will not be final until it is approved by the FERC, and management expects to receive FERC approval of the settlement agreement in the first half of 2004. CTA and SBC Reconciliation: On April 1, 2004, CL&P filed its annual Competitive Transition Assessment (CTA) and System Benefits Charge (SBC) reconciliation with the DPUC. For the year ended December 31, 2003, total CTA revenues and excess Generation Service Charge (GSC) revenues exceeded the CTA revenue requirement by $148.3 million. This amount was recorded as a regulatory liability on the accompanying consolidated balance sheets. For the same period, SBC revenues exceeded the SBC revenue requirement by $25.5 million. Management expects a decision in this docket from the DPUC by the end of 2004. New Hampshire: SCRC Reconciliation Filing: On an annual basis, PSNH files with the New Hampshire Public Utilities Commission (NHPUC) a Stranded Cost Recovery Charge (SCRC) reconciliation filing for the preceding calendar year. This filing includes the reconciliation of stranded cost revenues with stranded costs, and transition energy service (TS) revenues with TS costs. The NHPUC reviews the filing, including a prudence review of PSNH's generation operations. The 2003 SCRC filing was made on April 30, 2004. Management does not expect the review of the 2003 SCRC filing to have a material effect on PSNH's net income or financial position. Massachusetts: Transition Cost Reconciliations: On March 31, 2003, WMECO filed its 2002 transition cost reconciliation with the Massachusetts Department of Telecommunications and Energy (DTE). This filing reconciled the recovery of generation-related stranded costs for calendar year 2002 and included the renegotiated purchased power contract related to the Vermont Yankee nuclear unit. On July 15, 2003, the DTE issued a final order on WMECO's 2001 transition cost reconciliation, which addressed WMECO's cost tracking mechanisms. As part of that order, the DTE directed WMECO to revise its 2002 annual transition cost reconciliation filing. The revised filing was submitted to the DTE on September 22, 2003. Hearings have been held, and the timing of a final decision is uncertain. Management does not expect the outcome of this docket to have a material adverse impact on WMECO's net income or financial position. On March 31, 2004, WMECO filed its 2003 transition cost reconciliation with the DTE. This filing reconciled the recovery of generation-related stranded costs for calendar year 2003. The timing of a final decision is uncertain. Management does not expect the outcome of this docket to have a material adverse impact on WMECO's net income or financial position. B. NRG Energy, Inc. Exposures (CL&P, Yankee Gas, NGS) Certain subsidiaries of NU, including CL&P and Yankee Gas, have entered into transactions with NRG Energy, Inc. (NRG) and certain of its subsidiaries. On May 14, 2003, NRG and certain of its subsidiaries filed voluntary bankruptcy petitions. On December 5, 2003, NRG emerged from bankruptcy. NU's NRG-related exposures as a result of these transactions relate to 1) the recovery of congestion charges incurred by NRG prior to the implementation of SMD on March 1, 2003, 2) the recovery of CL&P's station service billings from NRG, and 3) the recovery of Yankee Gas' and CL&P's expenditures that were incurred related to an NRG subsidiary's generating plant construction project that is now abandoned. While it is unable to determine the ultimate outcome of these issues, management does not expect their resolution will have a material adverse effect on NU's consolidated financial condition or results of operations. C. 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 $5.9 billion at March 31, 2004, as follows (millions of dollars): --------------------------------------------------------------------- Year --------------------------------------------------------------------- 2004 $3,842.5 2005 1,372.5 2006 204.8 2007 109.1 2008 93.3 Thereafter 295.6 --------------------------------------------------------------------- Total $5,917.8 --------------------------------------------------------------------- Select Energy's purchase contract amounts can exceed the amount expected to be reported in fuel, purchased and net interchange power as energy trading purchases are classified net with the corresponding revenues. NU's other long-term contractual arrangements have not changed significantly from the amounts reported at December 31, 2003. D. Deferred Contractual Obligations (NU, CL&P, PSNH, WMECO) The purchasers of NU's ownership shares of the Millstone, Seabrook and Vermont Yankee plants assumed the obligation of decommissioning those plants, but NU still has significant decommissioning and plant closure cost obligations to the companies that own the Yankee Atomic (YA), Connecticut Yankee (CY) and Maine Yankee (MY) nuclear power plants (collectively, the Yankee Companies). Each plant has been shut down and is undergoing decommissioning. The Yankee Companies collect decommissioning and closure costs through wholesale, FERC-approved rates charged under power purchase agreements to NU's electric utility companies CL&P, PSNH and WMECO. These companies in turn pass these costs on to their customers through state regulatory commission-approved retail rates. YA has received FERC approval to collect all presently estimated decommissioning costs. MY is currently negotiating a settlement with the FERC and others to collect its presently estimated decommissioning costs. CY's estimated decommissioning and plant closure costs for the period 2000 through 2023 have increased approximately $390 million over the April 2000 estimate of $434 million approved by the FERC in a rate case settlement. The revised estimate reflects the fact that CY is now self-performing all work to complete the decommissioning of the plant due to the termination of the decommissioning contract with Bechtel Power Corporation in July 2003, the increases in the projected costs of spent fuel storage, and increased security and liability and property insurance. NU's share of CY's increased decommissioning and plant closure costs is approximately $191 million. CY has not yet applied to the FERC for recovery of this amount. In total, NU's estimated remaining decommissioning and plant closure obligation to CY is $320.7 million. NU cannot at this time predict the timing or outcome of the FERC proceeding required for the collection of the increased decommissioning costs. Management believes that these costs have been prudently incurred and will ultimately be recovered from the customers of CL&P, PSNH and WMECO. However, there is a risk that some portion of these increased costs may not be recovered as a result of the FERC proceedings. E. Consolidated Edison, Inc. Merger Litigation There were no material developments in the first quarter of 2004 in the litigation between NU and Consolidated Edison, Inc. (Con Edison). Certain gain and loss contingencies continue to exist with regard to the 1999 merger agreement between NU and Con Edison and the related litigation. 5. COMPREHENSIVE INCOME (NU, CL&P, PSNH, WMECO, NU Enterprises) Total comprehensive income, which includes all comprehensive income items by category, for the three months ended March 31, 2004 and 2003 is as follows:
- ---------------------------------------------------------------------------------------------- Three Months Ended March 31, 2004 - ---------------------------------------------------------------------------------------------- NU (Millions of Dollars) NU CL&P PSNH WMECO Enterprises Other - ---------------------------------------------------------------------------------------------- Net income* $67.4 $26.2 $11.8 $3.5 $18.8 $7.1 Comprehensive income items: Qualified cash flow hedging instruments 16.5 - - - 16.5 - Unrealized gains on securities 0.4 - - - - 0.4 - ---------------------------------------------------------------------------------------------- Net change in comprehensive income items 16.9 - - - 16.5 0.4 - ---------------------------------------------------------------------------------------------- Total comprehensive income $84.3 $26.2 $11.8 $3.5 $35.3 $7.5 - ----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- Three Months Ended March 31, 2003 - ---------------------------------------------------------------------------------------------- NU (Millions of Dollars) NU CL&P PSNH WMECO Enterprises Other - ---------------------------------------------------------------------------------------------- Net income* $60.2 $25.3 $10.8 $6.1 $5.2 $12.8 Comprehensive income items: Qualified cash flow hedging instruments (3.7) - - - (2.3) (1.4) Unrealized (losses)/gains on securities (0.1) 0.4 0.6 0.1 - (1.2) - ---------------------------------------------------------------------------------------------- Net change in comprehensive (loss)/income items (3.8) 0.4 0.6 0.1 (2.3) (2.6) - ---------------------------------------------------------------------------------------------- Total comprehensive income $56.4 $25.7 $11.4 $6.2 $2.9 $10.2 - ----------------------------------------------------------------------------------------------
*Net income after preferred dividends of subsidiaries. Amounts included in the Other column primarily relate to NU parent and Northeast Utilities Service Company (NUSCO). Accumulated other comprehensive income fair value adjustments in NU's qualified cash flow hedging instruments are as follows: -------------------------------------------------------------------------- At March 31, At December 31, (Millions of Dollars, Net of Tax) 2004 2003 -------------------------------------------------------------------------- Balance at beginning of period $24.8 $15.5 Hedged transactions recognized into earnings (18.3) (5.3) Change in fair value 30.8 5.0 Cash flow transactions entered into for the period 4.0 9.6 -------------------------------------------------------------------------- Net change associated with the current period hedging transactions 16.5 9.3 -------------------------------------------------------------------------- Total fair value adjustments included in accumulated other comprehensive income $41.3 $24.8 -------------------------------------------------------------------------- Accumulated other comprehensive income items unrelated to NU's qualified cash flow hedging instruments totaled $1.6 million and $1.2 million in gains at March 31, 2004 and December 31, 2003, respectively. These amounts primarily relate to unrealized gains on investments in marketable debt and equity securities, net of related income taxes. 6. 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 certain securities are converted into common stock. At March 31, 2004 and 2003, 655,326 options and 3,226,913 options, respectively, were excluded from the following table as these options were antidilutive. The following table sets forth the components of basic and fully diluted EPS: -------------------------------------------------------------------------- (Millions of Dollars, Three Months Ended March 31, Except for Share Information) 2004 2003 -------------------------------------------------------------------------- Income before preferred dividends of subsidiaries $68.8 $61.6 Preferred dividends of subsidiaries 1.4 1.4 -------------------------------------------------------------------------- Net income $67.4 $60.2 -------------------------------------------------------------------------- Basic EPS common shares outstanding (average) 127,879,766 127,013,678 Dilutive effects of employee stock options 181,320 97,594 -------------------------------------------------------------------------- Fully diluted EPS common shares outstanding (average) 128,061,086 127,111,272 -------------------------------------------------------------------------- Basic and fully diluted EPS $0.53 $0.47 -------------------------------------------------------------------------- 7. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (All Companies) NU's subsidiaries participate in a uniform noncontributory defined benefit retirement plan (Pension Plan) covering substantially all regular NU employees and also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (PBOP Plan). The components of net periodic benefit expense/(income) for the Pension Plan and the PBOP Plan for the three months ended March 31, 2004 and 2003 are estimated as follows: -------------------------------------------------------------------------- For the Three Months Ended March 31, -------------------------------------------------------------------------- Pension Benefits Postretirement Benefits -------------------------------------------------------------------------- (Millions of Dollars) 2004 2003 2004 2003 -------------------------------------------------------------------------- Service cost $ 9.9 $ 8.8 $ 1.5 $ 1.3 Interest cost 29.5 29.3 6.3 6.7 Expected return on plan assets (43.7) (45.6) (3.1) (3.7) Amortization of unrecognized net transition (asset)/obligation (0.4) (0.4) 3.0 3.0 Amortization of prior service cost 1.8 1.8 (0.1) (0.1) Amortization of actuarial loss/(gain) 3.6 (1.8) - - Other amortization, net - - 2.7 1.6 -------------------------------------------------------------------------- Total - net periodic expense/(income) $ 0.7 $(7.9) $10.3 $ 8.8 -------------------------------------------------------------------------- A portion of these expenses/(income) is capitalized related to employees working on capital projects. NU does not expect to make any contributions to the Pension Plan in 2004. NU continues to anticipate contributing approximately $10.3 million quarterly totaling $41 million in 2004 to fund its PBOP Plan. As a result of ongoing litigation with nineteen former employees, in April 2004 NU was ordered by the court to modify its retirement plan to include special retirement benefits for fifteen of these former employees retroactive to the dates of their retirement. As NU appealed the ruling, these amounts are not included in the pension and PBOP information above. There is no immediate impact of the court order, and if NU is ultimately required to provide retroactive benefits, then the amount of the benefits would be recorded as a pension plan amendment, which would be amortized as a prior service cost and would increase pension expense over a 13-year amortization period. For further information regarding this matter, See Part II - Item 1. "Legal Proceedings," included in this combined report on Form 10-Q. 8. SEGMENT INFORMATION (All Companies) NU is organized between the Utility Group and NU Enterprises businesses based on a combination of factors, including the characteristics of each business' products and services, the sources of operating revenues and expenses and the regulatory environment in which they operate. Based on enhanced information that is reviewed by NU's chief operating decision maker, separate detailed information regarding the Utility Group's transmission businesses and NU Enterprises' merchant energy business is now included in the following segment information. Segment information for all periods has been restated to conform to the current presentation except for total asset information for the transmission business segment. The Utility Group segment, including both the regulated electric distribution and transmission businesses, as well as the gas distribution business comprised of Yankee Gas, represents approximately 68 percent and 75 percent of NU's total revenues for the three months ended March 31, 2004 and 2003, respectively, and includes the operations of the regulated electric utilities, CL&P, PSNH and WMECO, whose complete financial statements are included in NU's combined report on Form 10-Q. PSNH's distribution segment includes generation activities. Also included in this combined report on Form 10-Q is detailed information regarding CL&P's, PSNH's, and WMECO's transmission businesses. Utility Group revenues from the sale of electricity and natural gas primarily are derived from residential, commercial and industrial customers and are not dependent on any single customer. The NU Enterprises merchant energy business segment includes Select Energy, NGC, the generation operations of HWP, and their respective subsidiaries, while the eliminations and other business segment includes SESI, NGS, Woods Network, and their respective subsidiaries and intercompany eliminations. The results of NU Enterprises parent are also included within eliminations and other. Effective January 1, 2004, Select Energy began serving a portion of CL&P's transitional standard offer (TSO) load for 2004. Total Select Energy revenues from CL&P for CL&P's standard offer load, TSO load and for other transactions with CL&P, represented approximately $179 million or 22 percent for the three months ended March 31, 2004 and approximately $177 million or 29 percent for the three months ended March 31, 2003, of total NU Enterprises' revenues. Total CL&P purchases from NU Enterprises are eliminated in consolidation. Additionally, WMECO's purchases from Select Energy for standard offer and default service and for other transactions with Select Energy represented approximately $32 million and $39 million of total NU Enterprises' revenues for the three months ended March 31, 2004 and 2003, respectively. Total WMECO purchases from NU Enterprises are eliminated in consolidation. Select Energy revenues related to contracts with NSTAR represented $88.7 million or 11 percent of total NU Enterprises' revenues for the three months ended March 31, 2004. Select Energy also provides BGS in the New Jersey market. Select Energy revenues related to these contracts represented $110 million or 16 percent of total NU Enterprises' revenues for the three months ended March 31, 2003. No other individual customer, including BGS, represented in excess of 10 percent of NU Enterprises' revenues for the three months ended March 31, 2004 or 2003. Eliminations and other in the NU consolidated following tables includes the results for Mode 1 Communications, Inc., an investor in a fiber- optic communications network, the results of the nonenergy-related subsidiaries of Yankee Energy System, Inc., (Yankee Energy Services Company, RMS, Yankee Energy Financial Services, and NorConn Properties, Inc.) the results of NU's parent and service companies, and the company's investment in Acumentrics Corporation. Interest expense included in eliminations and other primarily relates to the debt of NU parent. Inter-segment eliminations of revenues and expenses are also included in eliminations and other. Eliminations and other includes NU's investment in RMS, which was consolidated with NU effective July 1, 2003. NU's segment information for the three months ended March 31, 2004 and 2003 is as follows (some amounts between segment schedules may not agree due to rounding):
- ------------------------------------------------------------------------------------------------ For the Three Months Ended March 31, 2004 - ------------------------------------------------------------------------------------------------ Utility Group ------------------------------------- Distribution (Millions of --------------------- Regulated NU Eliminations Dollars) Electric Gas Transmission Enterprises and Other Totals - ------------------------------------------------------------------------------------------------ Operating revenues $1,059.7 $ 171.2 $ 31.1 $ 796.3 $(220.0) $1,838.3 Depreciation and amortization (110.2) (6.4) (5.0) (4.7) (0.6) (126.9) Other operating expenses (856.6) (139.8) (13.2) (747.6) 218.6 (1,538.6) - ------------------------------------------------------------------------------------------------ Operating income/ (loss) 92.9 25.0 12.9 44.0 (2.0) 172.8 Interest expense, net (39.9) (3.9) (2.3) (13.6) (3.0) (62.7) Other income/ (loss), net 3.2 (0.5) (0.2) 1.2 (2.1) 1.6 Income tax (expense)/ benefit (20.6) (8.7) (3.1) (12.8) 2.3 (42.9) Preferred dividends (1.4) - - - - (1.4) - ------------------------------------------------------------------------------------------------ Net income/(loss) $ 34.2 $ 11.9 $ 7.3 $ 18.8 $ (4.8) $ 67.4 - ------------------------------------------------------------------------------------------------ Total assets (1) $8,336.8 $1,066.2 N/A $2,246.0 $(110.2) $11,538.8 - ------------------------------------------------------------------------------------------------ Total investments in plant $ 97.0 $ 7.8 $ 24.9 $ 5.7 $ 2.4 $ 137.8 - ------------------------------------------------------------------------------------------------
(1) Information for segmenting total assets between distribution and transmission is not available at March 31, 2004. On a NU consolidated basis, these distribution and transmission assets are disclosed in the electric distribution column above.
- ------------------------------------------------------------------------------------------------ For the Three Months Ended March 31, 2003 - ------------------------------------------------------------------------------------------------ Utility Group ------------------------------------- Distribution (Millions of --------------------- Regulated NU Eliminations Dollars) Electric Gas Transmission Enterprises and Other Totals - ------------------------------------------------------------------------------------------------ Operating revenues $1,010.3 $ 151.0 $ 31.2 $ 612.9 $(221.2) $1,584.2 Depreciation and amortization (130.3) (5.7) (4.6) (4.8) (0.6) (146.0) Other operating expenses (778.2) (114.9) (13.2) (588.1) 220.2 (1,274.2) - ------------------------------------------------------------------------------------------------ Operating income/ (loss) 101.8 30.4 13.4 20.0 (1.6) 164.0 Interest expense, net (42.4) (3.2) (1.3) (11.2) (5.5) (63.6) Other(loss)/ income, net (0.4) (0.5) (0.1) 0.6 1.0 0.6 Income tax (expense)/ benefit (23.4) (10.9) (4.0) (4.2) 3.1 (39.4) Preferred dividends (1.4) - - - - (1.4) - ------------------------------------------------------------------------------------------------ Net income/(loss) $ 34.2 $ 15.8 $ 8.0 $ 5.2 $ (3.0) $ 60.2 - ------------------------------------------------------------------------------------------------ Total investments in plant $ 68.5 $ 8.9 $ 13.7 $ 5.0 $ 0.7 $ 96.8 - ------------------------------------------------------------------------------------------------
Utility Group segment information related to the regulated electric distribution and transmission businesses for CL&P, PSNH and WMECO for the three months ended March 31, 2004 and 2003 is as follows: --------------------------------------------------------------------- CL&P - For the Three Months Ended March 31, 2004 --------------------------------------------------------------------- (Millions of Dollars) Distribution Transmission Totals --------------------------------------------------------------------- Operating revenues $ 727.7 $ 21.0 $ 748.7 Depreciation and amortization (53.9) (3.6) (57.5) Other operating expenses (618.2) (8.7) (626.9) --------------------------------------------------------------------- Operating income 55.6 8.7 64.3 Interest expense, net (25.5) (1.6) (27.1) Other income/ (loss), net 5.2 (0.1) 5.1 Income tax expense (12.8) (1.9) (14.7) Preferred dividends (1.4) - (1.4) --------------------------------------------------------------------- Net income $ 21.1 $ 5.1 $ 26.2 --------------------------------------------------------------------- Total investments in plant $ 60.9 $ 19.7 $ 80.6 --------------------------------------------------------------------- --------------------------------------------------------------------- CL&P - For the Three Months Ended March 31, 2003 --------------------------------------------------------------------- (Millions of Dollars) Distribution Transmission Totals --------------------------------------------------------------------- Operating revenues $ 686.1 $ 19.8 $ 705.9 Depreciation and amortization (76.8) (3.4) (80.2) Other operating expenses (547.5) (9.1) (556.6) --------------------------------------------------------------------- Operating income 61.8 7.3 69.1 Interest expense, net (27.7) (1.0) (28.7) Other income/ (loss), net 0.9 (0.2) 0.7 Income tax expense (12.6) (1.8) (14.4) Preferred dividends (1.4) - (1.4) --------------------------------------------------------------------- Net income $ 21.0 $ 4.3 $ 25.3 --------------------------------------------------------------------- Total investments in plant $ 46.4 $ 10.0 $ 56.4 --------------------------------------------------------------------- --------------------------------------------------------------------- PSNH - For the Three Months Ended March 31, 2004 --------------------------------------------------------------------- (Millions of Dollars) Distribution Transmission Totals --------------------------------------------------------------------- Operating revenues $ 237.7 $ 6.5 $ 244.2 Depreciation and amortization (45.9) (0.8) (46.7) Other operating expenses (163.0) (3.0) (166.0) --------------------------------------------------------------------- Operating income 28.8 2.7 31.5 Interest expense, net (10.9) (0.4) (11.3) Other loss, net (1.7) - (1.7) Income tax expense (5.9) (0.8) (6.7) --------------------------------------------------------------------- Net income $ 10.3 $ 1.5 $ 11.8 --------------------------------------------------------------------- Total investments in plant $ 28.7 $ 5.1 $ 33.8 --------------------------------------------------------------------- --------------------------------------------------------------------- PSNH - For the Three Months Ended March 31, 2003 --------------------------------------------------------------------- (Millions of Dollars) Distribution Transmission Totals --------------------------------------------------------------------- Operating revenues $ 223.6 $ 7.2 $ 230.8 Depreciation and amortization (36.7) (0.7) (37.4) Other operating expenses (159.3) (2.7) (162.0) --------------------------------------------------------------------- Operating income 27.6 3.8 31.4 Interest expense, net (11.3) (0.2) (11.5) Other (loss)/ income, net (1.3) 0.1 (1.2) Income tax expense (6.6) (1.3) (7.9) --------------------------------------------------------------------- Net income $ 8.4 $ 2.4 $ 10.8 --------------------------------------------------------------------- Total investments in plant $ 17.8 $ 3.6 $ 21.4 --------------------------------------------------------------------- --------------------------------------------------------------------- WMECO - For the Three Months Ended March 31, 2004 --------------------------------------------------------------------- (Millions of Dollars) Distribution Transmission Totals --------------------------------------------------------------------- Operating revenues $ 94.3 $ 3.6 $ 97.9 Depreciation and amortization (10.5) (0.4) (10.9) Other operating expenses (75.4) (1.6) (77.0) --------------------------------------------------------------------- Operating income 8.4 1.6 10.0 Interest expense, net (3.5) (0.3) (3.8) Other loss, net (0.3) - (0.3) Income tax expense (1.9) (0.5) (2.4) --------------------------------------------------------------------- Net income $ 2.7 $ 0.8 $ 3.5 --------------------------------------------------------------------- Total investments in plant $ 7.4 $ 0.1 $ 7.5 --------------------------------------------------------------------- --------------------------------------------------------------------- WMECO - For the Three Months Ended March 31, 2003 --------------------------------------------------------------------- (Millions of Dollars) Distribution Transmission Totals --------------------------------------------------------------------- Operating revenues $ 100.6 $ 4.2 $ 104.8 Depreciation and amortization (16.8) (0.4) (17.2) Other operating expenses (71.5) (1.4) (72.9) --------------------------------------------------------------------- Operating income 12.3 2.4 14.7 Interest expense, net (3.4) (0.1) (3.5) Income tax expense (4.2) (0.9) (5.1) --------------------------------------------------------------------- Net income $ 4.7 $ 1.4 $ 6.1 --------------------------------------------------------------------- Total investments in plant $ 4.3 $ 0.1 $ 4.4 --------------------------------------------------------------------- NU Enterprises' segment information for the three months ended March 31, 2004 and 2003 is as follows: -------------------------------------------------------------------------- NU Enterprises - For the Three Months Ended March 31, 2004 -------------------------------------------------------------------------- (Millions of) Eliminations Dollars) Merchant Energy and Other Totals -------------------------------------------------------------------------- Operating revenues $ 734.4 $ 61.9 $ 796.3 Depreciation and amortization (4.2) (0.5) (4.7) Other operating expenses (686.9) (60.7) (747.6) -------------------------------------------------------------------------- Operating income 43.3 0.7 44.0 Interest expense, net (11.1) (2.5) (13.6) Other (loss)/ income, net (0.2) 1.4 1.2 Income tax (expense)/ benefit (12.9) 0.1 (12.8) -------------------------------------------------------------------------- Net income/(loss) $ 19.1 $ (0.3) $ 18.8 -------------------------------------------------------------------------- Total assets $1,956.5 $ 289.5 $2,246.0 -------------------------------------------------------------------------- Total investments in plant $ 4.7 $ 1.0 $ 5.7 -------------------------------------------------------------------------- -------------------------------------------------------------------------- NU Enterprises - For the Three Months Ended March 31, 2003 -------------------------------------------------------------------------- (Millions of) Eliminations Dollars) Merchant Energy and Other Totals -------------------------------------------------------------------------- Operating revenues $ 563.0 $ 49.9 $ 612.9 Depreciation and amortization (4.3) (0.5) (4.8) Other operating expenses (538.9) (49.2) (588.1) -------------------------------------------------------------------------- Operating income 19.8 0.2 20.0 Interest expense, net (9.8) (1.4) (11.2) Other (loss)/ income, net (1.1) 1.7 0.6 Income tax expense (4.0) (0.2) (4.2) -------------------------------------------------------------------------- Net income $ 4.9 $ 0.3 $ 5.2 -------------------------------------------------------------------------- Total investments in plant $ 4.5 $ 0.5 $ 5.0 -------------------------------------------------------------------------- THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 ---------------- ---------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash $ 1 $ 5,814 Restricted cash - LMP costs 123,681 93,630 Investments in securitizable assets 186,821 166,465 Receivables, net 54,422 60,759 Accounts receivable from affiliated companies 88,308 73,986 Unbilled revenues 6,491 6,961 Materials and supplies, at average cost 31,934 31,583 Derivative assets 146,943 115,370 Prepayments and other 18,567 12,521 ---------------- ---------------- 657,168 567,089 ---------------- ---------------- Property, Plant and Equipment: Electric utility 3,415,572 3,355,794 Less: Accumulated depreciation 1,033,195 1,018,173 ---------------- ---------------- 2,382,377 2,337,621 Construction work in progress 236,635 224,277 ---------------- ---------------- 2,619,012 2,561,898 ---------------- ---------------- Deferred Debits and Other Assets: Regulatory assets 1,639,935 1,673,010 Prepaid pension 308,695 305,320 Other 102,817 99,577 ---------------- ---------------- 2,051,447 2,077,907 ---------------- ---------------- Total Assets $ 5,327,627 $ 5,206,894 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 ---------------- ---------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to affiliated companies $ 160,525 $ 91,125 Accounts payable 250,107 138,155 Accounts payable to affiliated companies 149,125 176,948 Accrued taxes 26,151 65,587 Accrued interest 10,845 10,361 Derivative liabilities 54,960 54,566 Other 41,560 49,674 ---------------- ---------------- 693,273 586,416 ---------------- ---------------- Rate Reduction Bonds 1,090,277 1,124,779 ---------------- ---------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 623,971 609,068 Accumulated deferred investment tax credits 90,243 90,885 Deferred contractual obligations 309,310 318,043 Regulatory liabilities 778,221 752,992 Other 77,650 79,935 ---------------- ---------------- 1,879,395 1,850,923 ---------------- ---------------- Capitalization: Long-Term Debt 830,644 830,149 ---------------- ---------------- Preferred Stock - Non-Redeemable 116,200 116,200 ---------------- ---------------- Common Stockholder's Equity: Common stock, $10 par value - authorized 24,500,000 shares; 6,035,205 shares outstanding in 2004 and 2003 60,352 60,352 Capital surplus, paid in 331,573 326,629 Retained earnings 326,248 311,793 Accumulated other comprehensive loss (335) (347) ---------------- ---------------- Common Stockholder's Equity 717,838 698,427 ---------------- ---------------- Total Capitalization 1,664,682 1,644,776 ---------------- ---------------- Commitments and Contingencies (Note 4) Total Liabilities and Capitalization $ 5,327,627 $ 5,206,894 ================ ================ 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 March 31, --------------------------- 2004 2003 -------------- ------------ (Thousands of Dollars) Operating Revenues $ 748,690 $ 705,916 ------------ ----------- Operating Expenses: Operation - Fuel, purchased and net interchange power 469,657 420,205 Other 92,137 75,839 Maintenance 16,431 11,178 Depreciation 28,625 25,416 Amortization of regulatory (liabilities)/assets, net (560) 27,343 Amortization of rate reduction bonds 29,462 27,486 Taxes other than income taxes 48,657 49,362 ------------ ----------- Total operating expenses 684,409 636,829 ------------ ----------- Operating Income 64,281 69,087 Interest Expense: Interest on long-term debt 9,899 10,112 Interest on rate reduction bonds 16,590 18,144 Other interest 581 403 ------------ ----------- Interest expense, net 27,070 28,659 ------------ ----------- Other Income, Net 5,067 744 ------------ ----------- Income Before Income Tax Expense 42,278 41,172 Income Tax Expense 14,665 14,450 ------------ ----------- Net Income $ 27,613 $ 26,722 ============ =========== 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)
Three Months Ended March 31, -------------------------------- 2004 2003 ------------- ------------ (Thousands of Dollars) Operating Activities: Net income $ 27,613 $ 26,722 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation 28,625 25,416 Deferred income taxes and investment tax credits, net 10,851 (21,708) Amortization of regulatory (liabilities)/assets, net (560) 27,343 Amortization of rate reduction bonds 29,462 27,486 Amortization of recoverable energy costs (17,112) (6,116) Increase in prepaid pension (3,375) (6,850) Regulatory overrecoveries 15,336 48,973 Other sources of cash 3,906 14,042 Other uses of cash (19,008) (17,215) Changes in current assets and liabilities: Restricted cash - LMP costs (30,051) - Receivables and unbilled revenues, net (7,515) (15,409) Materials and supplies (351) (140) Investments in securitizable assets (20,356) 23,149 Other current assets (6,046) (5,273) Accounts payable 84,129 2,270 Accrued taxes (39,436) 21,269 Other current liabilities (7,645) (7,571) ----------- ---------- Net cash flows provided by operating activities 48,467 136,388 ----------- ---------- Investing Activities: Investments in plant (80,644) (56,390) NU system Money Pool borrowing/(lending) 69,400 (28,300) Other investment activities (205) (900) ----------- ---------- Net cash flows used in investing activities (11,449) (85,590) ----------- ---------- Financing Activities: Retirement of rate reduction bonds (34,502) (32,187) Capital contribution from Northeast Utilities 5,000 - Cash dividends on preferred stock (1,390) (1,390) Cash dividends on common stock (11,769) (10,018) Other financing activities (170) (148) ----------- ---------- Net cash flows used in financing activities (42,831) (43,743) ----------- ---------- Net (decrease)/increase in cash (5,813) 7,055 Cash - beginning of period 5,814 159 ----------- ---------- Cash - end of period $ 1 $ 7,214 =========== ========== 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 current report on Form 8-K dated January 22, 2004, and the NU 2003 Form 10-K. RESULTS OF OPERATIONS The following table provides the variances in income statement line items for the consolidated statements of income for CL&P included in this report on Form 10-Q for the three months ended March 31, 2004: Income Statement Variances (Millions of Dollars) 2004 over/(under) 2003 ---------------------- Amount Percent ------ ------- Operating Revenues: $ 43 6% Operating Expenses: Fuel, purchased and net interchange power 50 12 Other operation 16 21 Maintenance 5 47 Depreciation 3 13 Amortization of regulatory (liabilities)/assets, net (28) (a) Amortization of rate reduction bonds 2 7 Taxes other than income taxes - - --- --- Total operating expenses 48 7 --- --- Operating income (5) (7) --- --- Interest expense, net (2) (6) Other income/(loss), net 4 (a) --- --- Income before income tax expense 1 3 Income tax expense - - --- --- Net Income $ 1 4% === === (a) Percent greater than 100. Comparison of the First Quarter of 2004 to the First Quarter of 2003 Operating Revenues Operating revenues increased by $43 million in the first quarter of 2004, compared with the same period in 2003, due to higher retail revenues ($80 million), partially offset by lower wholesale revenues ($35 million). Retail revenues were higher due to an increase in the TSO rate ($50 million), Federally Mandated Congestion Costs ($40 million), higher sales volume ($7 million), partially offset by the 2003 recovery of certain fuel costs ($12 million) and lower rates for the recovery of system benefit costs ($8 million). Retail sales in the first quarter of 2004 were 2.0 percent higher than the same period last year. Wholesale revenues are lower due to a lower number of wholesale transactions. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased by $50 million in the first quarter of 2004, primarily due to higher standard offer service supply costs resulting from new contracts effective January 1, 2004 ($76 million), partially offset by the 2003 recovery of certain fuel costs ($12 million) and lower wholesale purchases ($14 million). Other Operation Other operation expenses increased $16 million in the first quarter of 2004, primarily due to higher transmission expenses ($9 million) resulting from higher reliability must run costs, higher administrative expense ($3 million) primarily due to lower pension income, higher customer-related expenses ($2 million), which are due to an increase in uncollectible accounts expense as a result of higher revenues and higher conservation and load management expenses, and due to the 2003 positive resolution of the CL&P Millstone use of proceeds docket ($2 million). Maintenance Maintenance expenses increased $5 million in the first quarter of 2004, primarily due to the 2003 positive resolution of the CL&P Millstone use of proceeds docket ($5 million). Depreciation Depreciation increased by $3 million in the first quarter of 2004 due to higher utility plant balances and higher depreciation rates resulting from the distribution rate case decision effective in January 2004. Amortization of Regulatory Liabilities/Assets, Net Amortization of regulatory liabilities/assets, net decreased by $28 million in the first quarter of 2004 primarily due to lower amortization related to the recovery of stranded costs ($21 million), and a reduction to amortization expense ($7 million) resulting from the implementation of the distribution rate case decision effective in January 2004. Amortization of Rate Reduction Bonds Amortization of rate reduction bonds increased by $2 million in the first quarter of 2004 due to the repayment of a higher amount of principal obligations. Interest Expense Interest expense, net decreased in the first quarter of 2004 by $2 million primarily due to lower rate reduction bond interest resulting from lower principal balances outstanding. Other Income, Net Other income, net increased $4 million in the first quarter of 2004, primarily due to the recognition beginning in 2004 of a procurement fee ($3 million) approved in the TSO docket decision. LIQUIDITY CL&P's net cash flows provided by operating activities decreased to $48.5 million for the three months ended March 31, 2004 from $136.4 million for the same period in 2003. Cash flows provided by operating activities decreased due to decreased regulatory overrecoveries and decreases in working capital items, primarily restricted cash - LMP costs, investments in securitizable assets and accrued taxes. These decreases were partially offset by an accounts payable increase in the first quarter of 2004 resulting from TSO supply purchases at higher prices and an increased percentage of TSO purchases from unaffiliated suppliers. The decrease in regulatory overrecoveries is primarily due to lower stranded cost and generation service collections in the first quarter of 2004 compared to 2003. The lower level of collections caused lower current taxable income and an increase in deferred income taxes from 2003. CL&P's net cash flows used in investing activities decreased to $11.4 million for the first three months of 2004 from $85.6 million for the same period in 2003. The decrease in investing activities is primarily due to the level of NU Money Pool borrowings offset by higher capital expenditures during the first quarter of 2004 as compared to the same period in 2003. CL&P's capital expenditures totaled $80.6 million in the first three months of 2004 compared to $56.4 million in the first three months of 2003 and are projected to total $412 million in 2004. The level of financing activities in 2004 included a capital contribution from NU in the amount of $5 million. CL&P also paid $11.8 million in dividends to NU during the three months ended March 31, 2004 and $10 million during the three months ended March 31, 2003. At March 31, 2004, CL&P had no borrowings outstanding on the Utility Group's $300 million revolving credit line. This credit line is scheduled to mature in November 2004 and will be renewed for at least one year. In addition to its revolving credit line, CL&P has an arrangement with a financial institution under which CL&P can sell up to $100 million of accounts receivable and unbilled revenues. At March 31, 2004 CL&P had sold accounts receivable totaling $80 million to that financial institution. For more information regarding the sale of receivables, see Note 1H, "Summary of Significant Accounting Policies - Sale of Customer Receivables" to the consolidated financial statements. CL&P has an application pending with the DPUC to issue up to $280 million of long-term debt in 2004 and another $600 million for the period 2005 through 2007. The majority of that debt would be issued to finance CL&P's electric transmission and distribution initiatives. CL&P also has $59 million of first mortgage bonds that can be called at a premium beginning June 1, 2004. At March 31, 2004, CL&P had $160.5 million in short-term debt outstanding from the NU Money Pool. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 ---------------- ---------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash $ 6,065 $ 2,737 Special deposits - 30,104 Receivables, net 71,575 67,121 Accounts receivable from affiliated companies 17,301 11,291 Unbilled revenues 41,623 39,220 Fuel, materials and supplies, at average cost 56,395 54,533 Derivative assets 210 1,510 Prepayments and other 1,739 9,945 ------------- -------------- 194,908 216,461 ------------- -------------- Property, Plant and Equipment: Electric utility 1,545,495 1,517,513 Other 5,707 5,707 ------------- -------------- 1,551,202 1,523,220 Less: Accumulated depreciation 646,267 635,029 ------------- -------------- 904,935 888,191 Construction work in progress 43,765 37,401 ------------- -------------- 948,700 925,592 ------------- -------------- Deferred Debits and Other Assets: Regulatory assets 966,652 969,434 Other 60,578 60,324 ------------- -------------- 1,027,230 1,029,758 ------------- -------------- Total Assets $ 2,170,838 $ 2,171,811 ============= ============== The accompanying notes are an integral part of these consolidated financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 ---------------- ---------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks $ - $ 10,000 Notes payable to affiliated companies 35,000 48,900 Accounts payable 45,533 48,408 Accounts payable to affiliated companies 25,623 13,911 Accrued taxes 17,198 2,543 Accrued interest 14,060 10,894 Unremitted rate reduction bond collections 11,193 11,051 Derivative liabilities 132 1,414 Other 12,774 16,689 -------------- -------------- 161,513 163,810 -------------- -------------- Rate Reduction Bonds 461,974 472,222 -------------- -------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 329,642 338,930 Accumulated deferred investment tax credits 1,978 2,096 Deferred contractual obligations 62,156 64,237 Regulatory liabilities 283,809 272,081 Accrued pension 47,416 44,766 Other 29,130 26,124 -------------- -------------- 754,131 748,234 -------------- -------------- Capitalization: Long-Term Debt 407,285 407,285 -------------- -------------- Common Stockholder's Equity: Common stock, $1 par value - authorized 100,000,000 shares; 301 shares outstanding in 2004 and 2003 - - Capital surplus, paid in 156,510 156,555 Retained earnings 229,520 223,822 Accumulated other comprehensive loss (95) (117) -------------- -------------- Common Stockholder's Equity 385,935 380,260 -------------- -------------- Total Capitalization 793,220 787,545 -------------- -------------- Commitments and Contingencies (Note 4) Total Liabilities and Capitalization $ 2,170,838 $ 2,171,811 ============== ============== 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 March 31, ------------------------------ 2004 2003 -------------- -------------- (Thousands of Dollars) Operating Revenues $ 244,148 $ 230,768 ------------- ------------ Operating Expenses: Operation - Fuel, purchased and net interchange power 101,122 110,938 Other 39,612 28,906 Maintenance 16,208 13,445 Depreciation 11,331 10,607 Amortization of regulatory assets, net 24,515 17,570 Amortization of rate reduction bonds 10,856 9,246 Taxes other than income taxes 9,020 8,673 ------------- ------------ Total operating expenses 212,664 199,385 ------------- ------------ Operating Income 31,484 31,383 Interest Expense: Interest on long-term debt 4,007 3,847 Interest on rate reduction bonds 6,957 7,410 Other interest 312 247 ------------- ------------ Interest expense, net 11,276 11,504 ------------- ------------ Other Loss, Net (1,773) (1,211) ------------- ------------ Income Before Income Tax Expense 18,435 18,668 Income Tax Expense 6,675 7,841 ------------- ------------ Net Income $ 11,760 $ 10,827 ============= ============ 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)
Three Months Ended March 31, ------------------------------- 2004 2003 ------------- ------------ (Thousands of Dollars) Operating activities: Net income $ 11,760 $ 10,827 Adjustments to reconcile to net cash flows provided by/(used in) operating activities: Depreciation 11,331 10,607 Deferred income taxes and investment tax credits, net (8,251) (8,256) Amortization of regulatory assets, net 24,515 17,570 Amortization of rate reduction bonds 10,856 9,246 Amortization of recoverable energy costs 5,847 5,847 Regulatory recoveries (5,691) (3,154) Other sources of cash 6,128 7,345 Other uses of cash (3,956) (6,184) Changes in current assets and liabilities: Receivables and unbilled revenues, net (12,867) (3,439) Fuel, materials and supplies (1,862) (3,916) Other current assets 8,207 5,998 Accounts payable 8,837 (3,152) Accrued taxes 14,655 (50,172) Other current liabilities (597) 1,396 ----------- ----------- Net cash flows provided by/(used in) operating activities 68,912 (9,437) ----------- ----------- Investing Activities: Investments in plant (33,764) (21,411) NU system Money Pool (lending)/borrowing (13,900) 19,700 Other investment activities 8,448 3,493 ----------- ----------- Net cash flows (used in)/provided by investing activities (39,216) 1,782 ----------- ----------- Financing Activities: Retirement of rate reduction bonds (10,248) (8,191) (Decrease)/increase in short-term debt (10,000) 15,000 Cash dividends on common stock (6,062) - Other financing activities (58) (48) ----------- ----------- Net cash flows (used in)/provided by financing activities (26,368) 6,761 ----------- ----------- Net increase/(decrease) in cash 3,328 (894) Cash - beginning of period 2,737 5,319 ----------- ----------- Cash - end of period $ 6,065 $ 4,425 =========== =========== 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 and the NU 2003 Form 10-K. RESULTS OF OPERATIONS The following table provides the variances in income statement line items for the consolidated statements of income for PSNH included in this report on Form 10-Q for the three months ended March 31, 2004: Income Statement Variances (Millions of Dollars) 2004 over/(under) 2003 ---------------------- Amount Percent ------ ------- Operating Revenues: $ 13 6% Operating Expenses: Fuel, purchased and net interchange power (10) (9) Other operation 11 37 Maintenance 3 21 Depreciation 1 7 Amortization of regulatory assets, net 7 40 Amortization of rate reduction bonds 1 17 Taxes other than income taxes - - ---- ---- Total operating expenses 13 7 ---- ---- Operating income - - ---- ---- Interest expense, net - - Other loss, net - - Income before income tax expense - - ---- ---- Income tax expense (1) (15) ---- ---- Net Income $ 1 9% ==== ==== Comparison of the First Quarter of 2004 to the First Quarter of 2003 Operating Revenues Operating revenues increased $13 million in the first quarter of 2004, as compared to the same period in 2003, primarily due to higher retail revenue ($27 million), partially offset by lower wholesale revenue ($14 million). Retail revenue increased primarily due to higher retail sales volumes ($8 million) and higher TS revenues ($20 million). Retail kWh sales increased by 6.9 percent in 2004. The regulated wholesale revenue decrease is primarily due to a lower number of wholesale transactions. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power decreased $10 million primarily as result of lower regulated wholesale purchases. Other Operation Other operation expenses increased $11 million primarily due to higher transmission expenses ($3 million), higher fossil steam expense ($3 million), higher healthcare and pension costs ($3 million), and higher power pool related load dispatch expenses ($1 million). Maintenance Maintenance expense increased $3 million primarily due to higher fossil steam expenses ($2 million) and higher tree trimming expenses ($1 million). Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased $7 million primarily due to an increase in the recovery of stranded costs ($5 million) resulting from the SCRC reconciliation of stranded cost revenues against actual stranded costs. Amortization of Rate Reduction Bonds Amortization of rate reduction bonds increased $1 million as a result of the repayment of principal. Income Tax Expense Income tax expense decreased $1 million primarily as a result of lower unitary taxable income which resulted in lower state income taxes. LIQUIDITY PSNH's net cash flows provided by operating activities totaled $68.9 million for the three months ended March 31, 2004, compared with net cash flows used in operating activities of $9.4 million for the same period in 2003. Cash flows provided by operating activities increased due to changes in working capital items, primarily accrued taxes. Accrued taxes decreased in 2003 due to the payment of taxes on the gain of the sale of Seabrook. There was a higher level of investing activities in the first quarter of 2004 primarily due to lendings to the NU Money Pool. There was also a higher level of financing activities during the first quarter of 2004 primarily due to a decrease in short-term debt and the payment of $6.1 million in dividends to NU. PSNH did not pay dividends to NU during the first quarter of 2003. PSNH's capital expenditures totaled $33.8 million in the first three months of 2004 compared to $21.4 million in the first three months of 2003 and are projected to total $150 million in 2004. At March 31, 2004, PSNH had no borrowings outstanding on the Utility Group's $300 million revolving credit line. This credit line is scheduled to mature in November 2004 and will be renewed for at least one year. PSNH has an application pending with the NHPUC to issue up to $50 million of debt. At March 31, 2004, PSNH had $35 million in short-term debt outstanding from the NU Money Pool. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 ---------------- ---------------- (Thousands of Dollars) ASSETS - ------ Current Assets: Cash $ 1 $ 1 Receivables, net 39,221 40,103 Accounts receivable from affiliated companies 11,066 20 Unbilled revenues 9,178 10,299 Materials and supplies, at average cost 1,616 1,584 Prepayments and other 706 1,139 ---------------- ---------------- 61,788 53,146 ---------------- ---------------- Property, Plant and Equipment: Electric utility 615,423 612,450 Less: Accumulated depreciation 180,049 177,803 ---------------- ---------------- 435,374 434,647 Construction work in progress 16,839 13,124 ---------------- ---------------- 452,213 447,771 ---------------- ---------------- Deferred Debits and Other Assets: Regulatory assets 265,999 268,180 Prepaid pension 76,436 75,386 Other 19,065 19,081 ---------------- ---------------- 361,500 362,647 ---------------- ---------------- Total Assets $ 875,501 $ 863,564 ================ ================ The accompanying notes are an integral part of these consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2004 2003 ---------------- ---------------- (Thousands of Dollars) LIABILITIES AND CAPITALIZATION - ------------------------------ Current Liabilities: Notes payable to banks $ 10,000 $ 10,000 Notes payable to affiliated companies 22,400 31,400 Accounts payable 21,643 10,173 Accounts payable to affiliated companies 15,293 13,789 Accrued taxes 3,774 765 Accrued interest 1,234 2,544 Other 9,277 9,785 ---------------- ---------------- 83,621 78,456 ---------------- ---------------- Rate Reduction Bonds 130,248 132,960 ---------------- ---------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 215,853 216,547 Accumulated deferred investment tax credits 3,242 3,326 Deferred contractual obligations 84,528 86,937 Regulatory liabilities 31,969 27,776 Other 8,302 8,357 ---------------- ---------------- 343,894 342,943 ---------------- ---------------- Capitalization: Long-Term Debt 157,326 157,202 ---------------- ---------------- Common Stockholder's Equity: Common stock, $25 par value - authorized 1,072,471 shares; 434,653 shares outstanding in 2004 and 2003 10,866 10,866 Capital surplus, paid in 76,024 69,544 Retained earnings 73,602 71,677 Accumulated other comprehensive loss (80) (84) ---------------- ---------------- Common Stockholder's Equity 160,412 152,003 ---------------- ---------------- Total Capitalization 317,738 309,205 ---------------- ---------------- Commitments and Contingencies (Note 4) Total Liabilities and Capitalization $ 875,501 $ 863,564 ================ ================ 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 March 31, ------------------------------- 2004 2003 ------------- ------------ (Thousands of Dollars) Operating Revenues $ 97,922 $ 104,786 ------------ ----------- Operating Expenses: Operation - Fuel, purchased and net interchange power 56,611 53,003 Other 13,860 13,770 Maintenance 3,349 3,134 Depreciation 3,687 3,471 Amortization of regulatory assets, net 4,555 11,273 Amortization of rate reduction bonds 2,681 2,469 Taxes other than income taxes 3,132 2,972 ------------ ----------- Total operating expenses 87,875 90,092 ------------ ----------- Operating Income 10,047 14,694 Interest Expense: Interest on long-term debt 1,463 792 Interest on rate reduction bonds 2,149 2,308 Other interest 237 376 ------------ ----------- Interest expense, net 3,849 3,476 ------------ ----------- Other Loss, Net (281) (5) ------------ ----------- Income Before Income Tax Expense 5,917 11,213 Income Tax Expense 2,371 5,145 ------------ ----------- Net Income $ 3,546 $ 6,068 ============ =========== The accompanying notes are an integral part of these consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ------------------------------- 2004 2003 ------------- ------------ (Thousands of Dollars) Operating Activities: Net income $ 3,546 $ 6,068 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation 3,687 3,471 Deferred income taxes and investment tax credits, net (317) (3,795) Amortization of regulatory assets, net 4,555 11,273 Amortization of rate reduction bonds 2,681 2,469 Amortization of recoverable energy costs 149 149 Increase in prepaid pension (1,050) (1,675) Regulatory (refunds)/overrecoveries (1,011) 710 Other sources of cash 124 602 Other uses of cash (3,752) (4,921) Changes in current assets and liabilities: Receivables and unbilled revenues, net (9,043) 4,258 Materials and supplies (32) (538) Other current assets 433 161 Accounts payable 12,974 3,362 Accrued taxes 3,009 2,776 Other current liabilities (1,817) 604 ----------- ---------- Net cash flows provided by operating activities 14,136 24,974 ----------- ---------- Investing Activities: Investments in plant (7,539) (4,382) NU system Money Pool lending (9,000) (16,700) Other investment activities 245 (482) ----------- ---------- Net cash flows used in investing activities (16,294) (21,564) ----------- ---------- Financing Activities: Retirement of rate reduction bonds (2,712) (2,522) Increase in short-term debt - 3,000 Capital contribution from Northeast Utilities 6,500 - Cash dividends on common stock (1,621) (4,003) Other financing activities (9) (7) ----------- ---------- Net cash flows provided by/(used in) financing activities 2,158 (3,532) ----------- ---------- Net decrease in cash - (122) Cash - beginning of period 1 123 ----------- ---------- Cash - end of period $ 1 $ 1 =========== ========== 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 and the NU 2003 Form 10-K. RESULTS OF OPERATIONS The following table provides the variances in income statement line items for the consolidated statements of income for WMECO included in this report on Form 10-Q for the three months ended March 31, 2004: Income Statement Variances (Millions of Dollars) 2004 over/(under) 2003 ---------------------- Amount Percent ------ ------- Operating Revenues $ (7) (7)% Operating Expenses: Fuel, purchased and net interchange power 4 7 Other operation - - Maintenance - - Depreciation - - Amortization of regulatory assets, net (6) (60) Amortization of rate reduction bonds - - Taxes other than income taxes - - ---- ---- Total operating expenses (2) (2) ---- ---- Operating income (5) (32) ---- ---- Interest expense, net - - Other loss, net - - ---- ---- Income before income tax expense (5) (47) Income tax expense (3) (54) ---- ---- Net Income $ (2) (42)% ==== ==== Operating Revenues Operating revenues decreased $7 million in 2004, compared with the same period in 2003, primarily due to lower wholesale revenues ($4 million) and lower retail revenues ($2 million). Wholesale revenues were lower primarily due to a decrease in wholesale sales transactions. Retail revenues decreased as a result of lower retail sales. The standard offer service rate was increased with an offsetting decrease to the transition charge. Retail sales decreased 0.7 percent. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased $4 million primarily due to higher standard offer supply costs. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net expense decreased $6 million primarily due to the lower recovery of stranded costs as a result of the decrease in the transition component of retail rates. Income Tax Expense Income tax expense decreased $3 million primarily due to lower book taxable income. LIQUIDITY WMECO's net cash flows provided by operating activities decreased to $14.1 million for the first three months of 2004 from $25 million for the same period of 2003. Net cash flows provided by operating activities decreased primarily due to decreases in accounts receivable and amortization of regulatory assets, partially offset by an increase in accounts payable. WMECO's net cash flows used in investing activities were $16.3 million for the three months ended March 31, 2004, compared with $21.6 million for the same period of 2003. The lower level of investing activities is primarily due to a lower level of NU Money Pool lendings offset by higher capital expenditures during the first quarter of 2004. WMECO's capital expenditures totaled $7.5 million in the first three months of 2004 compared to $4.4 million in the first three months of 2003 and are projected to total $39 million in 2004. WMECO paid $1.6 million in dividends to NU during the three months ended March 31, 2004 compared with $4 million during the three months ended March 31, 2003. Also during the first quarter of 2004, NU made a capital contribution to WMECO totaling $6.5 million. At March 31, 2004, WMECO had $10 million of borrowings outstanding on the Utility Group's $300 million revolving credit line. This credit line is scheduled to mature in November 2004 and will be renewed for at least one year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Information Select Energy utilizes 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. 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, fair 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 fair value based on closing exchange prices. NU Enterprises - Wholesale and Retail Marketing Portfolio: When conducting sensitivity analyses of the change in the fair value of Select Energy's electricity, natural gas and oil on the wholesale and retail marketing 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 that take into consideration 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 wholesale and retail marketing portfolio, which includes cash flow hedges and electricity, natural gas and oil contracts, assuming a 10 percent change in forward market prices. At March 31, 2004, a 10 percent change in market price would have resulted in an increase or decrease in fair value of between $14.3 million and $16.6 million. The impact of a change in electricity, natural gas and oil prices on Select Energy's wholesale and retail marketing portfolio at March 31, 2004, is not necessarily representative of the results that will be realized when these contracts are physically delivered. NU Enterprises - Trading Contracts: At March 31, 2004, Select Energy has calculated the market price resulting from a 10 percent change in forward market prices. That 10 percent change would result in a $0.8 million increase or decrease in the fair value of the Select Energy trading portfolio. In the normal course of business, Select Energy also faces risks that are either non-financial or non-quantifiable. These risks principally include credit risk, which is not reflected in this sensitivity analysis. Other Risk Management Activities Interest Rate Risk Management: NU manages its interest rate risk exposure in accordance with written policies and procedures by maintaining a mix of fixed and variable rate debt. At March 31, 2004, approximately 83 percent (73 percent including the debt subject to the fixed-to-floating interest rate swap in variable rate debt) of NU's long-term debt, including fees and interest due for spent nuclear fuel disposal costs, is at a fixed interest rate. The remaining long-term debt is variable-rate and is subject to interest rate risk that could result in earnings volatility. Assuming a one percentage point increase in NU's variable interest rates, including the rate on debt subject to the fixed-to-floating interest rate swap, annual interest expense would have increased by $4.4 million. At March 31, 2004, NU parent maintained a fixed-to-floating interest rate swap to manage the interest rate risk associated with its $263 million of fixed-rate debt. Credit Risk Management: 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 IPPs, 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 margin 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. The Utility Group has a lower level of credit risk related to providing regulated electric and gas distribution service than NU Enterprises. However, Utility Group companies are subject to credit risk from certain long- term or high-volume supply contracts with energy marketing companies. Credit risks and market risks at NU Enterprises are monitored regularly by a Risk Oversight Council operating outside of the business lines 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 fair value 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 cleared off the NYMEX exchange are ultimately guaranteed by NYMEX to Select Energy. 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 condition (including credit ratings), collateral requirements under certain circumstances (including cash in advance, LOCs, 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 energy contracts. 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. At March 31, 2004 and December 31, 2003, Select Energy maintained collateral balances from counterparties of $70.9 million and $46.5 million, respectively. These amounts are included in both unrestricted cash from counterparties and other current liabilities on the accompanying consolidated balance sheets. Additional 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," to the consolidated financial statements 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 SEC. These evaluations were made under the supervision and with the participation of management, including the companies' principal executive officer and principal financial officer, as of the end of the period covered by 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 are effective to ensure that information required to be disclosed by the companies in reports that it files under the Exchange Act i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 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. Retirement Plan Litigation This matter involved four separate but related federal court lawsuits brought by nineteen former employees of NUSCO, WMECO and CL&P who retired between 1991 and 1994. The complaints generally allege that the companies breached their fiduciary duties to the plaintiffs by making affirmative misrepresentations to them in response to specific inquiries that caused them to retire prematurely. The cases were tried together in a summary bench trial in the United States District Court in Hartford, Connecticut in April - May 2002. In a ruling issued on April 1, 2004, the judge found in favor of fifteen of the nineteen plaintiffs and ordered NU to modify its retirement plan so as to include the successful plaintiffs in the special retirement plans at issue, retroactive to the dates of their retirement. NU appealed the court's decision to the United States Court of Appeals for the Second Circuit on a number of legal and factual grounds. For further information on retirement-related matters, see Part I, Item 2, Note 7, of the "Notes to Consolidated Financial Statements." 2. Hawkins, Delafield & Wood (Hawkins) v. NU, NUSCO and CL&P On December 12, 2002, Hawkins, a New York law firm sued by the Connecticut Resources Recovery Authority (CRRA) as a result of the Enron bankruptcy, brought an apportionment complaint against a number of former Enron officers, directors and outside accountants. In addition to the Enron defendants, Hawkins also named as defendants in its complaint NU, NUSCO and CL&P. Hawkins asserts in its complaint that in the event it is found liable to CRRA, then the apportionment defendants, including NU, NUSCO and CL&P, are responsible for some or all of the $220 million claimed as damages. The case was subsequently removed to federal court where it has been stayed pending a final transfer order. 3. Enron Bankruptcy Claim CL&P is asserting damages of in excess of approximately $15 million in Enron's bankruptcy proceeding arising out of the rejection in March 2003 of CL&P's power purchase agreement with Enron Power Marketing, Inc. for power from CRRA's South Meadow project. The Connecticut Attorney General (AG), on behalf of CRRA, has objected to this claim being heard on the grounds that it might interfere with the AG's attempt to obtain rescission of the original CRRA-Enron transaction. 4. CRRA Lawsuit On March 31, 2004, CL&P was served with two state court complaints from CRRA (one suit is on behalf of CRRA, the other on behalf of the directors of CRRA) claiming that CL&P either negligently or fraudulently allowed CRRA and its directors to become involved with Enron. Damages in excess of $200 million are claimed. CL&P intends to vigorously defend the matter. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The table below sets forth the information with respect to purchases made by or on behalf of NU or any "affiliated purchaser" (as defined in Rule 10b- 18(a)(3) under the Securities Exchange Act of 1934), of common stock during the quarter ended March 31, 2004.
- -------------------------------------------------------------------------------------------- Total Number of Maximum Number Shares Purchased of Shares That as Part of May Yet Be Total Number Publicly Purchased Under of Shares Average Price Announced Plans the Plans or Period Purchased (1) Paid Per Share or Programs Programs - -------------------------------------------------------------------------------------------- Month #1 (January 1, 2004 to January 31, 2004) 332 $20.16 - N/A - -------------------------------------------------------------------------------------------- Month #2 (February 1, 2004 to February 29, 2004) - N/A - N/A - -------------------------------------------------------------------------------------------- Month #3 (March 1, 2004 to March 31, 2004) - N/A - N/A - -------------------------------------------------------------------------------------------- Total 332 $20.16 - N/A - --------------------------------------------------------------------------------------------
(1) Purchases were made in open market transactions related to a compensation plan for certain management employees. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits (NU) Exhibit No. Description ----------- ----------- 15 Deloitte & Touche LLP Letter Regarding Unaudited Financial Information 31 Certification of Charles W. Shivery, Chairman, President and Chief Executive Officer of Northeast Utilities, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 31.1 Certification of John H. Forsgren, Vice Chairman, Executive Vice President and Chief Financial Officer of Northeast Utilities, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 32 Certification of Charles W. Shivery, 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 May 7, 2004 (a) Listing of Exhibits (CL&P) 4.14.1 Amendment to Credit Agreement dated as of March 31, 2004 to Credit Agreement dated as of November 10, 2003, among WMECO, CL&P, PSNH, Yankee Gas, the Banks Named Therein and Citibank, N.A. as Administrative Agent, (Exhibit B-7 to NU 35-CERT filed April 27, 2004, File No. 70-9755) 31 Certification of Cheryl W. Grise, Chief Executive Officer of The Connecticut Light and Power Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 31.1 Certification of John H. Forsgren, Executive Vice President and Chief Financial Officer of The Connecticut Light and Power Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 32 Certification of Cheryl W. Grise, Chief Executive Officer of The Connecticut Light and Power Company and John H. Forsgren, Executive Vice President and Chief Financial Officer of The Connecticut Light and Power Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 (a) Listing of Exhibits (PSNH) 4.7.1 Amendment to Credit Agreement dated as of March 31, 2004 to Credit Agreement dated as of November 10, 2003, among WMECO, CL&P, PSNH, Yankee Gas, the Banks Named Therein and Citibank, N.A. as Administrative Agent, (Exhibit B-7 to NU 35-CERT filed April 27, 2004, File No. 70-9755) 31 Certification of Cheryl W. Grise, Chief Executive Officer of Public Service Company of New Hampshire, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 31.1 Certification of John H. Forsgren, Executive Vice President and Chief Financial Officer of Public Service Company of New Hampshire, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 32 Certification of Cheryl W. Grise, Chief Executive Officer of Public Service Company of New Hampshire and John H. Forsgren, Executive Vice President and Chief Financial Officer of Public Service Company of New Hampshire, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 (a) Listing of Exhibits (WMECO) 4.4.1 Amendment to Credit Agreement dated as of March 31, 2004 to Credit Agreement dated as of November 10, 2003, among WMECO, CL&P, PSNH, Yankee Gas, the Banks Named Therein and Citibank, N.A. as Administrative Agent, (Exhibit B-7 to NU 35-CERT filed April 27, 2004, File No. 70-9755) 31 Certification of Cheryl W. Grise, Chief Executive Officer of Western Massachusetts Electric Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 31.1 Certification of John H. Forsgren, Executive Vice President and Chief Financial Officer of Western Massachusetts Electric Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 32 Certification of Cheryl W. Grise, Chief Executive Officer of Western Massachusetts Electric Company and John H. Forsgren, Executive Vice President and Chief Financial Officer of Western Massachusetts Electric Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 7, 2004 (a) Listing of Exhibits (NU, CL&P, PSNH and WMECO) 10.30.1 Arrangement with Charles W. Shivery with respect to interim compensation, effective as of January 1, 2004 10.32 Northeast Utilities Deferred Compensation Plan for Trustees, amended and restated effective January 1, 2004 10.33 Northeast Utilities Deferred Compensation Plan for Executives, amended and restated effective January 1, 2004 (b) Reports on Form 8-K: NU and CL&P filed current reports on Form 8-K dated January 22, 2004 disclosing: o The delay in filing the agreement reached in principle to settle the SMD dispute with the FERC. NU filed a current report on Form 8-K dated March 30, 2004 disclosing: o The announcement by the NU Board of Trustees that Charles W. Shivery has been named chairman, president and chief executive officer of NU, effective immediately. SIGNATURE 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: May 7, 2004 By /s/ John H. Forsgren ----------- ----------------------------------- John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer (for the Registrant and as Principal Financial Officer) SIGNATURE 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: May 7, 2004 By /s/ John H. Forsgren ----------- ----------------------------------- John H. Forsgren Executive Vice President and Chief Financial Officer (for the Registrant and as Principal Financial Officer) SIGNATURE 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: May 7, 2004 By /s/ John H. Forsgren ----------- ----------------------------------- John H. Forsgren Executive Vice President and Chief Financial Officer (for the Registrant and as Principal Financial Officer) SIGNATURE 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: May 7, 2004 By /s/ John H. Forsgren ----------- ----------------------------------- John H. Forsgren Executive Vice President and Chief Financial Officer (for the Registrant and as Principal Financial Officer) EX-15 2 exhibit15.txt Exhibit 15 May 7, 2004 Northeast Utilities 107 Selden Street Berlin, CT 06037 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 periods ended March 31, 2004 and 2003, as indicated in our report dated May 7, 2004; 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 March 31, 2004, is incorporated by reference in Registration Statement Nos. 33-34622, 333-55142, 33-40156, 333-105273, and 333-108712 on Forms S-3 and Nos. 33-44814, 33- 63023, 333-52413, 333-52415, 333-106008, and 333-63144 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 EX-31 3 exh31shivery.txt Exhibit 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Charles W. Shivery, Chairman, President and Chief Executive Officer of Northeast Utilities (the registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ Charles W. Shivery (Signature) Charles W. Shivery Chairman, President and Chief Executive Officer (Principal Executive Officer) EX-31.1 4 exh31forsgren.txt Exhibit 31.1 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 registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ John H. Forsgren (Signature) John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer (Principal Financial Officer) EX-31 5 clpgrise31.txt Exhibit 31 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 registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer (Principal Executive Officer) EX-31.1 6 forsgrenclp311.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. Forsgren, Executive Vice President and Chief Financial Officer of The Connecticut Light and Power Company (the registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer (Principal Financial Officer) EX-32 7 ex32nu.txt Exhibit 32 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 registrant) on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission (the Report), we, Charles W. Shivery, Chairman, President and Chief Executive Officer of the registrant and John H. Forsgren, Vice Chairman, Executive Vice President and Chief Financial Officer of the registrant, 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 registrant. /s/ Charles W. Shivery (Signature) Charles W. Shivery Chairman, President and Chief Executive Officer /s/ John H. Forsgren (Signature) John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer May 7, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 8 griseclp32.txt Exhibit 32 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 registrant) on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission (the Report), we, Cheryl W. Grise, Chief Executive Officer of the registrant and John H. Forsgren, Executive Vice President and Chief Financial Officer of the registrant, 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 registrant. /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 May 7, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 9 grisepsnh31.txt Exhibit 31 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 registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer (Principal Executive Officer) EX-31.1 10 forsgrenpsnh311.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. Forsgren, Executive Vice President and Chief Financial Officer of Public Service Company of New Hampshire (the registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer (Principal Financial Officer) EX-32 11 grisepsnh32.txt Exhibit 32 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 registrant) on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission (the Report), we, Cheryl W. Grise, Chief Executive Officer of the registrant, and John H. Forsgren, Executive Vice President and Chief Financial Officer of the registrant, 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 registrant. /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 May 7, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request. EX-31 12 grisewme31.txt Exhibit 31 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 registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ Cheryl W. Grise (Signature) Cheryl W. Grise Chief Executive Officer (Principal Executive Officer) EX-31 13 forsgrenwme31.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John H. Forsgren, Executive Vice President and Chief Financial Officer of Western Massachusetts Electric Company (the registrant), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ John H. Forsgren (Signature) John H. Forsgren Executive Vice President and Chief Financial Officer (Principal Financial Officer) EX-32 14 exh32wmeco.txt Exhibit 32 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 registrant) on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission (the Report), we, Cheryl W. Grise, Chief Executive Officer of the registrant, and John H. Forsgren, Executive Vice President and Chief Financial Officer of the registrant, 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 registrant. /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 May 7, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request. EX-10.30.1 15 exh10301compagmt.txt Exhibit 10.30.1 Compensation Arrangement for Interim President of Northeast Utilities As Approved by the Compensation Committee of the NU Board of Trustees on January 13, 2004, Effective as of January 1, 2004 The following supplemental compensation arrangement shall apply while Mr. C. W. Shivery holds the position of interim President of Northeast Utilities: o The Company shall provide Mr. Shivery a one-time payment of $7,500. o The Company shall provide supplemental payments at the rate of $15,000 per month. These additional payments shall be included for benefit program purposes and for determining the 2004 Annual Incentive Program target payout, but shall not be used in determining the size of the 2004 Long-Term Incentive Program grant. o During Mr. Shivery's tenure as interim President, target and maximum payout for the 2004 Annual Incentive Program shall be set at 80% and 160%, respectively, of base pay (including the $15,000 per month supplemental payments), and the Special Net Income Incentive Program described in his employment agreement shall be suspended. EX-10.32 16 exh1032defcomtr.txt Exhibit 10.32 NORTHEAST UTILITIES DEFERRED COMPENSATION PLAN FOR TRUSTEES AS AMENDED EFFECTIVE JANUARY 1, 2004 Each Trustee of Northeast Utilities (NU) who is not an employee of NU or any of its affiliated companies may elect to defer payment to him or her of compensation for his or her services as a member of the NU Board of Trustees and committees thereof during any calendar year (excluding from the term "compensation" reimbursement of travel and other incidental expenses incurred for the benefit of, and in the course of rendering services to, NU) on the following basis: l. An election by a Trustee to defer payment of compensation shall apply to all or any portion of cash and/or NU common share compensation earned during a calendar year and shall be made in writing to the Secretary of NU prior to the beginning of each calendar year, provided, that each newly elected Trustee may make an election to defer payment of compensation for services to be rendered during the year of his or her election as a Trustee at the time of, or following his or her election but prior to the date of the rendering of the first services for which compensation is to be deferred. Such election, once made, shall be irrevocable for the period for which it is made. 2. NU shall establish for each Trustee who elects to defer cash compensation a "Deferred Cash Compensation Account" (which shall be solely a book account) to which NU shall credit, on each date that compensation would otherwise have been paid, an amount equal to the cash compensation which would otherwise have been paid to such Trustee on such date. Each Deferred Cash Compensation Account credit shall accrue simple interest daily from the date thereof until the date of distribution at the rate set forth in Section 37-l of the Connecticut General Statutes (as amended from time to time) on the amount standing in such Trustee's Deferred Cash Compensation Account from time to time. NU shall establish for each Trustee who elects to defer NU common share compensation a "Deferred Stock Compensation Account" (which shall be solely a book account) to which NU shall credit (a) on the next business day following each date such shares would otherwise have been paid to such Trustee, an amount equal to the number of shares which would otherwise have been paid to such Trustee on such date and (b) on each date on which a dividend, stock split, split up, stock dividend, or dividend in kind or similar payment is made or corporate change resulting in a payment to NU common shareholders becomes effective ("accretions"), an amount equal to the number of NU common shares that could have been purchased with such accretions with respect to the shares in such Deferred Stock Compensation Account, assuming that each such accretion was reinvested in additional NU common hares on the date paid, at a rate equal to the closing price of an NU common share on the New York Stock Exchange on such date. Within thirty days following the end of each calendar year NU shall provide each Trustee for whom a Deferred Cash and/or Deferred Stock Compensation Account has been established with a statement of the amount standing to his or her credit as of the end of that year. 3. At the time of each election to defer payment of compensation, a Trustee shall also elect to receive distribution of the amounts credited to his or her Deferred Cash and/or Deferred Stock Compensation Account, as the case may be, during the period for which such election is made, together with he interest and/or accretions thereon, as the case may be, upon, or commencing with, the occurrence of one of the following events: termination of service on the Board for any reason or a specified date which is after the period for which the election is made. Such election, once made, shall be irrevocable as to amounts credited with respect to the period for which the election is made. 4. At the time of each election to defer payment of compensation, a Trustee shall designate whether, upon or commencing with the occurrence of one of the events set forth in paragraph 3, the amounts credited to his or her Deferred Cash and/or Deferred Stock Compensation Account, as the case may be, during the period for which such election is made, together with the interest and/or accretions thereon, as the case may be, shall be paid to him or her in a lump sum or in not more than five approximately equal annual installments. Such election, once made, shall be irrevocable as to amounts credited with respect to the period for which the election is made. 5. In the event that a Trustee shall die prior to the payment to him or her of all amounts credited to his or her Deferred Cash and Deferred Stock Compensation Accounts, the balance credited to such accounts at the time of his or her death shall be paid to such beneficiaries as he or she shall have designated in writing to the Secretary of NU (which designation may be changed from time to time) or, in the absence of such a designation, to the estate of such Trustee. 6. The amounts standing in Deferred Cash or Deferred Stock Compensation Accounts shall be unfunded obligations of NU payable only under the terms stated herein, and Trustees shall have no right or claim against any specified assets of NU and shall have only a contractual right against NU hereunder. Any payment to a Trustee from a Deferred Stock Compensation Account shall be made in NU common shares purchased in the open market, except as otherwise may be provided from time to time by the Board of Trustees. 7. No Deferred Cash or Deferred Stock Compensation Account shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by a Trustee or any person claiming under or through him or her, nor shall it be subject to the debts, contracts, liabilities, engagements or torts of a Trustee or anyone else prior to actual payment thereof. 8. This Plan may be amended or terminated by the Board of Trustees at any time; provided, no such amendment or termination shall serve to diminish the rights of a Trustee with respect to amounts credited to his or her Deferred Cash and/or Deferred Stock Compensation Accounts or accelerate payment of such amounts. 9. Nothing contained in this Plan shall be construed as an obligation of NU to secure the re-election of any person as a Trustee of NU, or as an obligation of any person to stand for re-election as a Trustee of NU or as a prohibition against the resignation of any person as a Trustee. 10. Upon the request of a Trustee in order to meet legal or regulatory requirements applicable to such Trustee, NU and the Trustee may agree to value the Trustee's Deferred Stock Compensation Account, including all deposits and accretions thereto, for some period of time utilizing an investment benchmark other than NU common shares, and to pay such Account, including accretions, in cash at the time or times of distribution in accordance with the Trustee's original deferral election, so long as such agreement does not have the effect of accelerating payment of such account. Said agreement shall be in writing and be maintained with the records of the Company relating to the Trustee's compensation. EX-10.33 17 exh1033defcompex.txt Exhibit 10.33 Northeast Utilities Deferred Compensation Plan for Executives Adopted by Northeast Utilities Board of Trustees on January 13, 1998 As amended effective January 1, 2004 ARTICLE 1 PURPOSE The purpose of the Northeast Utilities Deferred Compensation Plan for Executives (the "Plan") is to provide a means whereby the Company (as hereinafter defined) may afford increased financial security, on a tax-favored basis, to a select group of "key management or other highly compensated employees" of the Company, within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended. These individuals have rendered and continue to render valuable services to the Company which constitute an important contribution towards the Company's continued growth and success. This Plan will provide for additional future compensation so that such employees may be recruited and retained and their productive efforts encouraged. ARTICLE 2 DEFINITIONS Account. "Account" means, with respect to a Participant, the account, including any subaccounts, established on the books of account of the Company, pursuant to Section 5.1, to record the Participant's interest in the Plan. Administrator. "Administrator" means the Administrator as defined in the Retirement Plan, or the person or persons to whom such entity delegates any of its functions under the Plan. Affiliate. "Affiliate" means each direct and indirect affiliated company that directly or through one or more intermediaries, controls, is controlled by, or is under common control with NU. Base Salary. "Base Salary" means with respect to a Participant for any Plan Year such Participant's annual base salary, before deferral pursuant to this Plan or any agreement or any other plan of the Company whereby compensation is deferred, including, without limitation, a plan whereby compensation is deferred in accordance with Code Section 401(k) or reduced in accordance with Code Section 125. Base Salary Deferral. "Base Salary Deferral" means that portion of Base Salary as to which an Eligible Employee has made an annual irrevocable election to defer receipt. Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Section 12.3. Board. "Board" means the Board of Trustees of NU. Bonus Compensation. "Bonus Compensation" means with respect to a Participant for any Plan Year such Participant's annual bonus compensation under the Incentive Plan or any other incentive plan of the Company before deferral pursuant to this Plan or pursuant to any agreement or any other plan of the Company whereby compensation is deferred, including, without limitation, a plan whereby compensation is deferred in accordance with Code Section 401(k) or reduced in accordance with Code Section 125. Bonus Compensation Deferral. "Bonus Compensation Deferral" means that portion of cash Bonus Compensation as to which an Eligible Employee has made an annual irrevocable election to defer receipt. Change of Control. "Change of Control" shall mean the happening 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 or NU 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 common shares of NU (the "Outstanding Common Shares") or (ii) 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 shareholders 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 hreatened 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 Shares 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 75% 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 Shares 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 75% 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 Shares and Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Common Shares and Voting Securities, as the case may be, immediately prior to such sale or disposition. Code. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Committee. "Committee" means the Board's Compensation Committee, or the person or persons to which such committee delegates any of its functions under the Plan. Company. "Company" means NU and any Affiliate which is authorized by the Board to adopt the Plan and cover its Eligible Employees and whose designation as such has become effective upon acceptance of such status by the board of directors of the Affiliate. An Affiliate may revoke its acceptance of such designation at any time, but until such acceptance has been revoked, all the provisions of the Plan, including the authority of the Board and the Committee, and amendments thereto shall apply to the Eligible Employees of the Affiliate. In the event the designation is revoked by the board of directors of an Affiliate, the Plan shall be deemed terminated only with respect to such Affiliate. Disabled. "Disabled" means a mental or physical condition which qualifies a Participant for benefits under the Company's long term disability plan. Earnings Crediting Options. "Earnings Crediting Options" means the options selected by the Participant from time to time pursuant to which earnings are credited to the Participant's Account. The option for Matching Contributions shall be deemed investments in Voting Securities and any deemed dividends shall be deemed reinvested in additional Voting Securities. Effective Date. "Effective Date" means the effective date of the Plan which is January 1, 1998. Eligible Employee. "Eligible Employee" means an Employee who is a member of the group of selected management and/or highly compensated Employees of the Company designated by the Committee, acting on behalf of the Company, as eligible to participate in the Plan. Employee. "Employee" means any person employed by the Company on a regular full-time salaried basis or who is an officer of the Company, or a member of the Board. End Termination Date. "End Termination Date" means the date of termination of a Participant's Service with the Company and its Affiliates. Enrollment Agreement. "Enrollment Agreement" means the authorization form which an Eligible Employee executes and files with the Administrator to participate in the Plan, as described in Section 4.1. Incentive Plan. "Incentive Plan" means the Northeast Utilities Incentive Plan, effective January 1, 1998, and as amended from time to time. Matching Contributions. "Matching Contributions" are those contributions credited to the Participant's Account by the Company pursuant to Section 4.3. NU. "NU" means Northeast Utilities, a Massachusetts business trust and its successors and assigns. Participant. "Participant" means an Eligible Employee who has filed a completed and executed Enrollment Agreement with the Administrator and is participating in the Plan in accordance with the provisions of Article 4. Pension Committee. "Pension Committee" means the Pension Committee as defined in the Retirement Plan. Plan. "Plan" means this plan, called the Northeast Utilities Deferred Compensation Plan for Executives, as amended from time to time. The Plan shall supersede the Deferred Compensation Plan for Officers of Northeast System Companies as of the Effective Date and the benefits payable to participants thereunder shall instead be payable under the Plan. Plan Year. "Plan Year" means the 12 month period beginning on each January 1 and ending on the following December 31. Retires or Retirement. "Retires" or "Retirement" means the termination of the Participant's Service with the Employer (for reasons other than death) on any retirement date of the Participant permitted under the Retirement Plan or as otherwise agreed upon by the Board. Retirement Plan. "Retirement Plan" means the Northeast Utilities Service Company Retirement Plan. Savings Plan. "Savings Plan" means the Northeast Utilities Service Company 401k Plan. Service. "Service" means the period of time during which an employment relationship exists between an Employee and the Company as credited under the Retirement Plan or, in the case of a member of the Board who is not a participant in the Retirement Plan, his or her tenure as such. Vesting or Vested. "Vesting" or "Vested" refers to the permanent ownership rights to the Matching Contributions and related earnings that a Participant earns through Years of Service. A Participant does not vest until the Participant has been credited with three Years of Service after the end of the Plan Year for which the Matching Contributions were made. Matching Contributions and related earnings are forfeited when Service terminates, to the extent not then Vested. A Participant is 100% Vested automatically if a Change of Control occurs or if the Participant becomes Disabled, Retires, or dies. A Participant is always 100% Vested in Base Salary Deferrals, Bonus Compensation Deferrals, and related earnings. Voting Securities. "Voting Securities" means the common shares of NU, par value $5.00 or any successor security of NU which carries the right to vote generally in the election of the Board. Year of Service. "Year of Service" for Vesting purposes is each year of service credited to a the Participant under the Retirement Plan. ARTICLE 3 ADMINISTRATION OF THE PLAN The Administrator is hereby authorized to administer the Plan and establish, adopt, or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. The Administrator shall have discretionary authority to construe and interpret the Plan, to make determinations, including factual determinations, and to determine the rights, if any, of Participants and Beneficiaries under the Plan which, subject to the claims procedure set forth in Section 12.2, shall be final and binding upon any Participant and Beneficiary affected thereby. The Administrator and members of the Committee and the Pension Committee shall be eligible to participate in the Plan while serving as such, but no such person shall vote or act upon any matter which relates solely to such person's interest in the Plan as a Participant. ARTICLE 4 PARTICIPATION 4.1 Annual Election to Participate. Annually, all Eligible Employees will be offered the opportunity to make Base Salary and Bonus Compensation Deferrals. Any Eligible Employee may enroll in the Plan effective as of the first day of a Plan Year by filing a completed and fully executed Enrollment Agreement with the Administrator prior to the end of December of the Plan Year preceding the Plan Year for which the deferral is to occur (or June 30 of the Plan Year preceding the Plan Year in which Bonus Compensation subject to a Bonus Compensation Deferral is to be paid). Pursuant to said Enrollment Agreement, the Eligible Employee shall irrevocably elect the percentages (up to 100%) by which Base Salary or cash Bonus Compensation (in each case after non- deferrable payroll tax deductions) of such Eligible Employee for the Plan Year will be deferred and shall provide such other information as the Administrator shall require. The Enrollment Agreement filed by an Eligible Employee for any Plan Year must also set forth the Participant's election as to the time and manner of distribution from the Participant's Account which may be (i) the second day of any Plan Year that begins at least three Plan Years after the Plan Year of the deferral (as to all amounts then credited to the Participant's Account that are Vested) or the Participant's attainment of age 65, if earlier, (ii) the Participant's End Termination Date, (iii) the earlier of (i) or (ii), or (iv) the later of (i) or (ii). 4.2 New Eligible Employees. The Administrator, acting on behalf of the Company, may permit Employees who first become Eligible Employees after the beginning of a Plan Year to enroll in the Plan for that Plan Year by filing a completed and fully executed Enrollment Agreement, in accordance with Section 4.1, as soon as practicable following the date the Employee becomes an Eligible Employee but, in any event, within 30 days after such date. Notwithstanding the foregoing, however, any election by an Eligible Employee, pursuant to this section, to defer Base Salary or Bonus Compensation shall apply only to such amounts as are otherwise to be paid or shares of Voting Securities to be received by the Eligible Employee after the date on which such Enrollment Agreement is filed. 4.3 Matching Contributions. An Eligible Employee who elects to participate in the Plan pursuant to Section 4.1 or Section 4.2 shall be eligible to receive Matching Contributions by the Company. The amount of such Matching Contributions for a Plan Year shall be 100% of the Base Salary and Bonus Compensation Deferrals for the Plan Year, not to exceed the amount by which 3% of the Participant's Base Salary for the Plan Year exceeds the amount of matching contributions made for the Participant for the Plan Year under the Savings Plan. Matching Contributions will be credited as frequently as determined by the Administrator, acting on behalf of the Company, but in any event at least once per year. Matching Contributions will be credited as soon as practicable in the Participant's final year of participation in the Plan. ARTICLE 5 ACCOUNTS 5.1 Accounts. The Administrator shall establish and maintain a separate Account with respect to a Participant. The amount of Base Salary and/or Bonus Compensation deferred pursuant to Section 4.1 or Section 4.2 shall be credited by the Company to the Participant's Account no later than the first day of the month following the month in which such Base Salary and/or Bonus Compensation would otherwise have been paid. Any amount once taken into account as Base Salary and/or Bonus Compensation for purposes of this Plan shall not be taken into account thereafter. The Participant's Account shall be reduced by the amount of payments made by the Company to the Participant or the Participant's Beneficiary pursuant to this Plan. 5.2 Earnings on Accounts. A Participant's Account shall be credited with earnings in accordance with the Earnings Crediting Options elected by the Participant from time to time for deferrals credited to the Account. Participants may allocate their Account among the Earnings Crediting Options available under the Plan only in whole percentages of not less than five percent. The deemed rate of return, positive or negative, credited under each Earnings Crediting Option is based upon the actual investment performance of the corresponding investment portfolios under the Savings Plan (except that Matching Contributions and earnings thereon shall at all times be deemed invested and reinvested in Voting Securities) and shall equal the total return of such investment fund net of asset based charges, including, without limitation, money management fees and fund expenses. The Company reserves the right, on a prospective basis, to add or delete Earnings Crediting Options. 5.3 Earnings Crediting Options. Except as otherwise provided pursuant to Section 5.2, the Earnings Crediting Options available under the Plan shall consist of options which correspond to the investment funds maintained from time to time under the Savings Plan. In the event of a stock split, stock dividend, reclassification, reorganization or other capital adjustment in the Voting Securities, the number of deemed shares of Voting Securities then credited to the Participant's Account shall be adjusted in the same manner as the shares of Voting Securities are adjusted. Notwithstanding that the rates of return credited to Participants' Accounts under the Earnings Crediting Options are based upon the actual performance of the corresponding investment funds (or the number of Voting Securities), or such other investment funds as the Company may designate, the Company shall not be obligated to invest any Base Salary and/or Bonus Compensation deferred by Participants under this Plan, Matching Contributions, or any other amounts, in such portfolios or in any other investment funds. 5.4 Changes in Earnings Crediting Options. A Participant may change the Earnings Crediting Options to which the Participant's Account is deemed to be allocated not more frequently than is permitted under the Savings Plan. Each such change may include (a) reallocation of the Participant's existing Account in whole percentages of not less than five percent, and/or (b) change in investment allocation of amounts to be credited to the Participant's Account in the future, as the Participant may elect. Notwithstanding the foregoing, however, in the event the Company deletes an Earnings Crediting Option, a Participant whose Account is allocated to such Earnings Crediting Option, in whole or in part, shall be entitled to reallocate the Account and/or any amounts to be credited in the future to such Account among the remaining Earnings Crediting Options, at the time of such deletion, without regard to any annual limit on such changes. 5.5 Valuation of Accounts. The value of a Participant's Account as of any date shall equal the amounts theretofore credited to such Account, including any earnings (positive or negative) deemed to be earned on such Account in accordance with Section 5.2 through the day preceding such date, less the amounts theretofore deducted from such Accounts. The value of that portion of the Participant's Account attributable to Matching Contributions shall equal the value of the number of shares of Voting Securities credited to the Participant's Account plus the number of such shares deemed purchased by reinvesting the earnings on Voting Securities already deemed credited to the Participant's Account. 5.6 Statement of Accounts. The Administrator shall provide to each Participant, not less frequently than quarterly, a statement in such form as the Administrator deems desirable setting forth the balance standing to the credit of each Participant in the Participant's Account. 5.7 Distributions from Accounts. Any distribution made to or on behalf of a Participant from the Participant's Account in an amount which is less than the entire balance of such Account shall be made pro rata from each of the Earnings Crediting Options to which such Account is then allocated. ARTICLE 6 DISTRIBUTION OPTIONS 6.1 Election of Distribution Option. In each Enrollment Agreement filed with the Administrator for a Plan Year, an Eligible Employee shall elect the time and manner of payment pursuant to which all deferrals credited to the Eligible Employee's Account for that Plan Year (and earnings thereon) will be distributed, by electing distribution at a date certain in the future, which may be (i) the second day of any Plan Year that begins at least three Plan Years after the Plan Year of the deferral (as to all amounts then credited to the Participant's Account that are Vested) or the Participant's attainment of age 65, if earlier, (ii) the Participant's End Termination Date, (iii) the earlier of (i) or (ii), or (iv) the later of (i) or (ii). 6.2 Distribution following Change of Control. In the event that a Participant terminates Service for any reason within two years following a Change of Control, notwithstanding anything else in this Plan to the contrary, the Participant's Account shall be distributed, in a single lump sum, in cash, as provided in Article VII, within 30 days following the date of the termination of Service. ARTICLE 7 BENEFITS TO PARTICIPANTS 7.1 Benefits Elected to be Paid On or After End Termination Date. Benefits elected to be paid to a Participant on or after the End Termination Date shall be paid as follows: (a) Benefits Upon Retirement. In the case of a Participant whose Service with the Company terminates on account of Retirement, the Participant's Account shall be distributed in one of the following methods, as elected by the Participant in writing either in the Enrollment Agreement or in a separate election made prior to the last day of the Plan Year in which occurs the date of the Participant's Retirement: (i) in a lump sum; or (ii) in the event the balance to be distributed is at least $250,000, in 5, 10, 15, or 20 annual installments. Any lump-sum benefit payable in accordance with this paragraph shall be paid in cash not later than January 31 of the Plan Year following the Plan Year in which occurs the Participant's Retirement or, if later, attainment of age 65 as elected by the Participant in accordance with this Section or Section 6.1, in an amount equal to the value of such Account as of the last business day of the Plan Year preceding the date of payment. Annual installment payments in cash shall commence not later than January 31 of the Plan Year following the Plan Year in which occurs the Participant's Retirement or if later, attainment of age 65, as elected by the Participant in accordance with this Section or Section 6.1, in an amount equal to (i) the value of such Account as of the last business day of the Plan Year preceding the date of payment, divided by (ii) the number of annual installment payments elected by the Participant in the Enrollment Agreement or in the separate election. The remaining annual installments shall be paid not later than January 31 of each succeeding Plan Year in an amount equal to (i) the value of such Account as of the last business day of the immediately preceding Plan Year divided by (ii) the number of installments remaining. (b) Benefits Upon Termination of Employment. In the case of a Participant whose Service with the Company terminates prior to the earliest date on which the Participant is eligible for Retirement, other than on account of becoming Disabled or by reason of death, the Vested portion of a Participant's Account shall be distributed in a lump sum, in cash, as soon as practicable following the Participant's End Termination Date. 7.2 Benefits Elected to be Paid at a Date Certain. (a) Benefits Prior to Occurrence of End Termination Date. Benefits elected to be paid to a Participant at a date certain shall be paid as follows: The portion of such Participant's Account for any date certain election shall be paid to the Participant commencing no later than January 31 of the Plan Year irrevocably elected by the Participant in the Enrollment Agreement pursuant to which such date certain was elected, which may be no earlier than the second day of any Plan Year that begins at least three Plan Years after the Plan Year of the deferral, in one lump sum or in annual installments payable over 2, 3 or 4 years. Any lump-sum benefit payable in accordance with this paragraph shall be paid in cash not later than January 31 of the Plan Year elected by the Participant in accordance with Section 6.1, in an amount equal to the value of the portion of such Account for which a date certain distribution was elected, as of the last business day of the Plan Year preceding the date of payment. Annual installment payments, if any, shall commence not later than January 31 of the Plan Year as elected by the Participant in accordance with this Section, in cash, in an amount equal to (i) the value of the portion of such Account for which a date certain distribution was elected, as of the last business day of the Plan Year preceding the date of payment, divided by (ii) the number of annual installment payments elected by the Participant. The remaining annual installments shall be paid not later than January 31 of each succeeding year in an amount equal to (i) the value of such Account as of the last business day of the immediately preceding Plan Year divided by (ii) the number of installments remaining. (b) Benefits Upon Occurrence of End Termination Date. In the case of a Participant whose Service with the Company terminates prior to the completion of any distribution for which a date certain election is then in effect, other than on account of Retirement, Disability or death, the Vested portion of the Participant's Account (or any remaining installments thereof, in the case of a distribution in installments not completed as of the End Termination Date) shall be distributed either in installments or in a lump sum, according to the Participant's date certain election in the Enrollment Agreement. If the End Termination Date occurs prior to the date certain, the Participant's Account shall be distributed in one of the following methods, as elected by the Participant in writing either in the Enrollment Agreement or in a separate election made prior to the last day of the Plan Year in which occurs the Participant's End Termination Date: (i) in a lump sum; or (ii) in annual installments payable over 2, 3 or 4 years. Any lump-sum benefit payable in accordance with this paragraph shall be paid in cash, not later than January 31 of the Plan Year following the Plan Year in which occurs the Participant's End Termination Date, in an amount equal to the value of such Account as of the last business day of the Plan Year preceding the date of payment. ARTICLE 8 DISABILITY In the event a Participant becomes Disabled, the Participant's right to make any further deferrals under this Plan shall terminate as of the date for which the Participant first receives benefits under the Company's long term disability plan, as amended from time to time. The Participant's Account shall continue to be credited with earnings in accordance with Section 5.2 until such Account is fully distributed. For purposes of this Plan, a Disabled Participant will not be treated as having terminated Service. The Participant's Account shall be distributed to the Participant in accordance with Section 7.1 or 7.2 as applicable, provided, however, that distribution of the Participant's Account, to the extent distributable under Section 7.1, shall commence not later than January 31 of the Plan Year immediately following the earlier of (a) the Plan Year in which the Participant first becomes eligible for Retirement, or (b) the Plan Year in which the Participant first received benefits under the Company's long term disability plan, as amended from time to time. The Participant's Account to the extent distributable under section 7.2 will be distributed to the Participant without regard to the fact that the Participant became Disabled. ARTICLE 9 SURVIVOR BENEFITS 9.1 Death of Participant Prior to the Commencement of Benefits. In the event of a Participant's death prior to the commencement of benefits in accordance with Article 7, benefits shall be paid to the Participant's Beneficiary, as determined under Section 12.3, pursuant to Section 9.2 or 9.3, whichever is applicable, in lieu of any benefits otherwise payable under the Plan to or on behalf of such Participant. 9.2 Survivor Benefits at Retirement. To the extent a Participant elected distribution on or after Retirement and dies prior to the commencement of benefits pursuant to Section 7.1, distribution of such portion of the Participant's Account shall be made (a) in a lump sum in cash, as soon as practicable following the Participant's death, or (b) in the manner and at such time as such Account would otherwise have been distributed in accordance with Section 7.1 had the Participant lived, as elected by the Participant in the Enrollment Agreement pursuant to which such election to distribute on or after Retirement was made. The amount of any lump sum benefit payable in accordance with this Section shall equal the value of such portion of the Participant's Account as of the last business day of the calendar month immediately preceding the date on which such benefit is paid. The amount of any annual installment benefit payable in accordance with this Section shall equal (a) the value of such portion of the Participant's Account as of the last business day of the calendar month immediately preceding the date on which such installment is paid, divided by (b) the number of annual installments remaining to be paid pursuant to the election of the Participant. 9.3 Survivor Benefits Under the Date Certain Election. In the case of a Participant who elected a date certain distribution of all or a portion of the Participant's Account and who dies prior to the date certain on which all or a portion of the Participant's Account is to be paid pursuant to Section 7.2, distribution of such portion of the Participant's Account shall be made (a) in a lump sum in cash, as soon as practicable following the Participant's death, or (b) at such time and in such form as such distribution would otherwise have been distributed in accordance with Section 7.2 had the Participant lived, as irrevocably elected by the Participant in the Enrollment Agreement pursuant to which such date certain election was made. The amount of any lump sum benefit payable in accordance with this Section shall equal the value of such portion of the Participant's Account as of the last business day of the calendar month immediately preceding the date on which such benefit is paid. 9.4 Death of Participant After Benefits Have Commenced. In the event a Participant dies after annual installment benefits payable under Section 7.1 or 7.2 from the Participant's Account have commenced, but before the entire balance of such installments have been paid, any remaining installments shall continue to be paid to the Participant's Beneficiary at such times and in such amounts as they would have been paid to the Participant had the Participant survived. 9.5 Changes in Earnings Crediting Options. In the event of a deferred distribution under this Article, the Beneficiary shall be permitted to make changes in the Earnings Crediting Options to the same extent that the Participant would have been entitled to make such changes under Section 5.4 during such deferral period. ARTICLE 10 EMERGENCY BENEFIT In the event that the Pension Committee, upon written request of a Participant, determines, in its sole discretion, that the Participant has suffered an unforeseeable financial emergency, the Company shall pay to the Participant from the Vested portion of the Participant's Account, as soon as practicable following such determination, an amount necessary to meet the emergency, after deduction of any and all taxes as may be required pursuant to Section 12.8 (the "Emergency Benefit"). For purposes of this Plan, an unforeseeable financial emergency is an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence. Cash needs arising from foreseeable events such as the purchase of a house or education expenses for children shall not be considered to be the result of an unforeseeable financial emergency. Emergency Benefits shall be paid in cash. Notwithstanding anything in this Plan to the contrary, a Participant who receives an Emergency Benefit in any Plan Year shall not be entitled to make any further deferrals for the remainder of such Plan Year. It is intended that the Pension Committee's determination as to whether a Participant has suffered an "unforeseeable financial emergency" shall be made consistent with the requirements under Section 457(d) of the Code. ARTICLE 11 ACCELERATED DISTRIBUTION 11.1 Availability of Withdrawal Prior to Retirement. Upon written election to the Administrator, a Participant may elect to withdraw all or a portion of the Participant's Account at any time prior to the time such Distribution Account otherwise becomes payable under the Plan, provided the conditions specified in Section 11.3, Section 11.4, and Section 11.5 are satisfied. 11.2 Acceleration of Periodic Distributions. Upon written election to the Administrator, a Participant or Participant's Beneficiary who is receiving installment payments under the Plan may elect to have the remaining installments distributed in the form of an immediately payable lump sum, provided the condition specified in Section 11.3 is satisfied. 11.3 Forfeiture Penalty. In the event of a withdrawal pursuant to Section 11.1, or an accelerated distribution pursuant to Section 11.2, the Participant shall forfeit from the Participant's Account an amount equal to 10% of the amount of the withdrawal or accelerated distribution, as the case may be. The forfeited amount shall be deducted from the Account prior to giving effect to the requested withdrawal or acceleration. The Participant and the Participant's Beneficiary shall not have any right or claim to the forfeited amount, and the Company shall have no obligation whatsoever to the Participant, the Participant's Beneficiary or any other person with regard to the forfeited amount. 11.4 Minimum Withdrawal. In no event shall the amount withdrawn in accordance with Section 11.1 be less than 25% of the amount credited to the Participant's Account immediately prior to the withdrawal taking into account any other distributions from the Participant's Account that were made at the same time. 11.5 Suspension from Deferrals. In the event of a withdrawal pursuant to Section 11.1, a Participant who is otherwise eligible to make deferrals under Article 4 shall be prohibited from making any deferrals with respect to the Plan Year immediately following the Plan Year during which the withdrawal was made, and any election previously made by the Participant with respect to deferrals for the Plan Year of the withdrawal shall be void and of no effect with respect to subsequent deferrals in such Plan Year. ARTICLE 12 MISCELLANEOUS 12.1 Amendment and Termination. The Plan may be amended, suspended, discontinued or terminated at any time by NU; provided, however, that no such amendment, suspension, discontinuance or termination shall reduce or in any manner adversely affect the rights of any Participant with respect to benefits that are payable or may become payable under the Plan based upon the balance of the Participant's Account as of the effective date of such amendment, suspension, discontinuance or termination. 12.2 Claims Procedure. (a) Claim. A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Administrator, setting forth his claim. (b) Claim Decision. Upon receipt of a claim, the Administrator shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Human Resources Department of the Company may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Claimant shall be provided a written opinion, using language calculated to be understood by the Claimant, setting forth: (i) The specific reason or reasons for such denial; (ii) The specific reference to pertinent provisions of this Plan on which such denial is based; (iii) A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary; (iv) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (v) The time limits for requesting a review under subsection (c) and for review under subsection (d) hereof. (c) Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Pension Committee review the determination of the Administrator. The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comment in writing for consideration by the Pension Committee. If the Claimant does not request a review of the initial determination within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the determination. (d) Review of Decision. Within sixty (60) days after the Pension Committee's receipt of a request for review, it will review the initial determination. After considering all materials presented by the Claimant, the Pension Committee will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Pension Committee will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 12.3 Designation of Beneficiary. Each Participant may designate a Beneficiary or Beneficiaries (which Beneficiary may be an entity other than a natural person) to receive any payments which may be made following the Participant's death. Such designation may be changed or canceled at any time without the consent of any such Beneficiary. Any such designation, change or cancellation must be made in a form approved by the Administrator and shall not be effective until received by the Administrator. If no Beneficiary has been named, or the designated Beneficiary or Beneficiaries shall have predeceased the Participant, the Beneficiary shall be the Participant's Savings Plan beneficiary, or, if none, the Participant's estate. If a Participant designates more than one Beneficiary, the interests of such Beneficiaries shall be paid in equal shares, unless the Participant has specifically designated otherwise. 12.4 Limitation of Participant's Right. Nothing in this Plan shall be construed as conferring upon any Participant any right to continue in the employment of the Company, nor shall it interfere with the rights of the Company to terminate the employment of any Participant and/or to take any personnel action affecting any Participant without regard to the effect which such action may have upon such Participant as a recipient or prospective recipient of benefits under the Plan. 12.5 No Limitation on Company Actions. Nothing contained in the Plan shall be construed to prevent the Company from taking any action which is deemed by it to be appropriate or in its best interest; provided, however, that no such action may diminish the then balance or value of the Participant's Account. No Participant, Beneficiary, or other person shall have any claim against the Company as a result of such action. Any decisions, actions or interpretations to be made under the Plan by the Company or the Board, or the Committee acting on behalf of the Company, shall be made in its respective sole discretion, not as a fiduciary, need not be uniformly applied to similarly situated individuals and shall be final, binding and conclusive on all persons interested in the Plan. 12.6 Obligations to Company. If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to theCompany, then the Company may offset such amount owed to it against the amount of benefits otherwise distributable. Such determination shall be made by the Administrator. 12.7 Nonalienation of Benefits. Except as expressly provided herein, no Participant or Beneficiary shall have the power or right to transfer (otherwise than by will or the laws of descent and distribution), alienate, or otherwise encumber the Participant's interest under the Plan. The Company's obligations under this Plan are not assignable or transferable except to (a) any corporation or partnership which acquires all or substantially all of the Company's assets or (b) any corporation or partnership into which the Company may be merged or consolidated. The provisions of the Plan shall inure to the benefit of each Participant and the Participant's Beneficiaries, heirs, executors, administrators or successors in interest. 12.8 Withholding Taxes. The Company may make such provisions and take such action as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether Federal, state or local, to withhold in connection with any benefits under the Plan from any amount otherwise payable to the Participant (or Beneficiary). Each Participant, however, shall be responsible for the payment of all individual tax liabilities relating to any such benefits. 12.9 Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan of deferred compensation for Participants. Benefits payable hereunder shall be payable out of the general assets of the Company, and no segregation of any assets whatsoever for such benefits shall be made. Notwithstanding any segregation of assets or transfer to a grantor trust, with respect to any payments not yet made to a Participant, nothing contained herein shall give any such Participant any rights to assets that are greater than those of a general creditor of the Company. 12.10 Severability. If any provision of this Plan is held unenforceable, the remainder of the Plan shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Plan. 12.11 Governing Law. The Plan shall be construed in accordance with and governed by the laws of the State of Connecticut, without reference to the principles of conflict of laws. 12.13 Headings. Headings are inserted in this Plan for convenience of reference only and are to be ignored in the construction of the provisions of the Plan. 12.14 Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may read as the plural and the plural as the singular. 12.15 Notice. Any notice or filing required or permitted to be given to the Committee, the Pension Committee, or the Administrator under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Human Resources Department, or to such other entity as the Administrator may designate from time to time. Such notice shall be deemed given as to the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 12.16 Disclaimer of Liability. The Declaration of Trust of NU provides that no shareholder of NU 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 Board or by any officer, agent or representative elected or appointed by the Board, and no such contract, obligation or undertaking shall be enforceable against the Board or any of them in their or his or her individual capacities or capacity and all such contracts, obligations and undertakings shall be enforceable only against the Board as such, and every person or entity, 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. -----END PRIVACY-ENHANCED MESSAGE-----