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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000072741-04-000025.txt : 20040312
<SEC-HEADER>0000072741-04-000025.hdr.sgml : 20040312
<ACCEPTANCE-DATETIME>20040312111907
ACCESSION NUMBER: 0000072741-04-000025
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 27
CONFORMED PERIOD OF REPORT: 20031231
FILED AS OF DATE: 20040312
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-00404
FILM NUMBER: 04664587
BUSINESS ADDRESS:
STREET 1: SELDEN STREET
CITY: BERLIN
STATE: CT
ZIP: 06037-1616
BUSINESS PHONE: 8606655000
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-07624
FILM NUMBER: 04664585
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06392
FILM NUMBER: 04664586
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
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-05324
FILM NUMBER: 04664584
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10kedgar.txt
<DESCRIPTION>2003 FORM 10-K
<TEXT>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
-----------------
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
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Registrant Title of Each Class on Which Registered
---------- ------------------- ---------------------
<S> <C> <C>
Northeast Utilities Common Shares, $5.00 par value New York Stock Exchange,Inc.
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Registrant Title of Each Class
---------- -------------------
The Connecticut Light and Preferred Stock, par value $50.00 per share,
Power Company issuable in series, of which the following
series are outstanding:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
$1.90 Series of 1947 4.96% Series of 1958
$2.00 Series of 1947 4.50% Series of 1963
$2.04 Series of 1949 5.28% Series of 1967
$2.20 Series of 1949 $3.24 Series G of 1968
3.90% Series of 1949 6.56% Series of 1968
$2.06 Series E of 1954
$2.09 Series F of 1955
4.50% Series of 1956
</TABLE>
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Act).
Yes X No ___
The aggregate market value of Northeast Utilities' Common Shares, $5.00 Par
Value, held by nonaffiliates, computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of Northeast Utilities' most
recently completed second fiscal quarter (June 30, 2003) was $2,124,888 based
on a closing sales price of $16.74 per share for the 126,934,753 common
shares outstanding on June 30, 2003. Northeast Utilities holds all of the
6,035,205 shares, 301 shares, and 434,653 shares of the outstanding common
stock of The Connecticut Light and Power Company, Public Service Company of
New Hampshire and Western Massachusetts Electric Company, respectively.
Documents Incorporated by Reference:
Part of Form 10-K
into Which Document
Description is Incorporated
----------- -------------------
Portions of Annual Reports of the following
companies for the year ended December 31, 2003:
Northeast Utilities Part II
The Connecticut Light and Power Company Part II
Public Service Company of New Hampshire Part II
Western Massachusetts Electric Company Part II
Portions of the Northeast Utilities Proxy
Statement dated April 2, 2004 Part III
GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or
acronyms that are found in this report:
COMPANIES
<TABLE>
<CAPTION>
<S> <C>
Acumentrics............................... Acumentrics Corporation
Baycorp................................... Baycorp Holdings, Ltd.
Bechtel................................... Bechtel Power Corporation
BMC....................................... BMC Energy LLC
Boulos.................................... E.S. Boulos Company
CL&P...................................... The Connecticut Light and Power Company
Con Edison................................ Consolidated Edison, Inc.
CRC....................................... CL&P Receivables Corporation
CVEC...................................... Connecticut Valley Electric Company, Inc.
CVPS...................................... Central Vermont Public Service Corporation
CYAPC..................................... Connecticut Yankee Atomic Power Company
DNCI...................................... Dominion Nuclear Connecticut, Inc.
Entergy................................... Entergy Corporation
FPL....................................... FPL Group, Inc.
Funding Companies......................... CL&P Funding LLC, PSNH Funding LLC,
PSNH Funding LLC 2, and WMECO Funding LLC
HEC/CJTS.................................. HEC/CJTS Energy Center LLC
HEC/Tobyhanna............................. HEC/Tobyhanna Energy Project, LLC
HP&E...................................... Holyoke Power and Electric Company
HWP....................................... Holyoke Water Power Company
MGT....................................... Meriden Gas Turbines, LLC
Mode 1.................................... Mode 1 Communications, Inc.
MYAPC..................................... Maine Yankee Atomic Power Company
NAEC...................................... North Atlantic Energy Corporation
NAESCO.................................... North Atlantic Energy Service Corporation
NEON...................................... NEON Communications, Inc.
NGC....................................... Northeast Generation Company
NGS....................................... Northeast Generation Services Company
NNECO..................................... Northeast Nuclear Energy Company
NRG....................................... NRG Energy, Inc.
NRG-PMI................................... NRG Power Marketing, Inc.
NU or the company......................... Northeast Utilities
NU system................................. Northeast Utilities System
NUEI...................................... NU Enterprises, Inc.
NUSCO..................................... Northeast Utilities Service Company
PSNH...................................... Public Service Company of New Hampshire
RMS....................................... R.M. Services, Inc.
RRR....................................... The Rocky River Realty Company
Select Energy............................. Select Energy, Inc.
SESI...................................... Select Energy Services, Inc.
VYNPC..................................... Vermont Yankee Nuclear Power Corporation
WMECO..................................... Western Massachusetts Electric Company
Woods Electrical.......................... Woods Electrical Co., Inc.
Woods Network............................. Woods Network Services, Inc.
YAEC...................................... Yankee Atomic Electric Company
Yankee.................................... Yankee Energy System, Inc.
Yankee Companies.......................... CYAPC, MYAPC, VYNPC, and YAEC
Yankee Gas................................ Yankee Gas Services Company
GENERATING UNITS
Millstone 1............................... Millstone Unit No. 1, a 660 megawatt
nuclear unit completed in 1970; Millstone 1
is currently in decommissioning status and
was sold to a subsidiary of Dominion in
March 2001.
Millstone 2............................... Millstone Unit No. 2, an 870 megawatt
nuclear electric generating unit completed
in 1975; Millstone 2 was sold to a
subsidiary of Dominion in March 2001.
Millstone 3............................... Millstone Unit No. 3, a 1,154 megawatt
nuclear electric generating unit completed
in 1986; Millstone 3 was sold to a
subsidiary of Dominion in March 2001.
Seabrook.................................. Seabrook Unit No. 1, a 1,148 megawatt
nuclear electric generating unit completed
in 1986. Seabrook 1 went into service in
1990. Seabrook 1 was sold to a subsidiary
of FPL in November 2002.
REGULATORS
CSC....................................... Connecticut Siting Council
CDEP...................................... Connecticut Department of
Environmental Protection
DOE....................................... United States Department of Energy
DPUC...................................... Connecticut Department of
Public Utility Control
DTE....................................... Massachusetts Department of
Telecommunications and Energy
EPA....................................... United States Environmental
Protection Agency
FERC...................................... Federal Energy Regulatory Commission
NHPUC..................................... New Hampshire Public Utilities
Commission
NRC....................................... Nuclear Regulatory Commission
SEC....................................... Securities and Exchange Commission
OTHER
1935 Act.................................. Public Utility Holding Company
Act of 1935
ABO....................................... Accumulated Benefit Obligation
AFUDC..................................... Allowance for Funds Used During
Construction
ARO....................................... Asset Retirement Obligation
BFA....................................... Business Finance Authority
CAAA...................................... Clean Air Act Amendments of 1990
CTA....................................... Competitive Transition Assessment
District Court............................ United States District Court for the
Southern District of New York
EDIT...................................... Excess Deferred Income Taxes
EITF...................................... Emerging Issues Task Force
EMF....................................... Electric and Magnetic Fields
Energy Act................................ Energy Policy Act of 1992
EPS....................................... Earnings Per Share
ESOP...................................... Employee Stock Ownership Plan
ESPP...................................... Employee Stock Purchase Plan
IERM...................................... Infrastructure Expansion Rate
Mechanism
FASB...................................... Financial Accounting Standards Board
FPPAC..................................... Fuel and Purchased-Power
Adjustment Clause
FSP....................................... FASB Staff Position
FTR....................................... Financial Transmission Rights
GSC....................................... Generation Service Charge
Incentive Plan............................ Northeast Utilities Incentive Plan
IPP....................................... Independent Power Producer
ISO-NE.................................... New England Independent System
Operator
ITC....................................... Investment Tax Credits
kWh....................................... Kilowatt-hour
LMP....................................... Locational Marginal Pricing
LNS....................................... Local Network Service
LOC....................................... Letter of Credit
Merger Agreement.......................... Agreement and Plan of Merger, as
amended and restated as of January 11,
2000, between NU and Con Edison
MGP....................................... Manufactured Gas Plant
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited
NEPOOL.................................... New England Power Pool
NPDES..................................... National Pollutant Discharge
Elimination System
NYMEX..................................... New York Mercantile Exchange
O&M....................................... Operation and Maintenance
PBO....................................... Projected Benefit Obligation
PBOP...................................... Postretirement Benefits Other
Than Pensions
PCRBs..................................... Pollution Control Revenue Bonds
Pool...................................... Northeast Utilities System Money Pool
Restructuring Settlement.................. "Agreement to Settle PSNH Restructuring"
RMR....................................... Reliability Must Run
RNS....................................... Regional Network Service
ROC....................................... Risk Oversight Council
ROE....................................... Return on Equity
RRBs...................................... Rate Reduction Bonds
RRCs...................................... Rate Reduction Certificates
RTO....................................... Regional Transmission Organization
SBC....................................... System Benefits Charge
SCRC...................................... Stranded Cost Recovery Charge
SERP...................................... Supplemental Executive Retirement Plan
SFAS...................................... Statement of Financial Accounting
Standards
SMD....................................... Standard Market Design
SPE....................................... Special Purpose Entity
TCC....................................... Transmission Congestion Contracts
TS........................................ Transition Energy Service
TSO....................................... Transitional Standard Offer
VIE....................................... Variable Interest Entity
VRP....................................... Voluntary Retirement Program
VSP....................................... Voluntary Separation Program
</TABLE>
NORTHEAST UTILITIES
THE CONNECTICUT LIGHT AND POWER COMPANY
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
WESTERN MASSACHUSETTS ELECTRIC COMPANY
2003 Form 10-K Annual Report
Table of Contents
PART I
Page
Item 1. Business................................................. 1
The Northeast Utilities System................................ 1
Safe Harbor Statement......................................... 2
Rates and Electric Industry Restructuring..................... 3
General.................................................. 3
Connecticut Rates and Restructuring...................... 4
Massachusetts Rates and Restructuring.................... 9
New Hampshire Rates and Restructuring.................... 10
Competitive System Businesses................................. 10
Retail and Wholesale Marketing........................... 11
Electric Generation...................................... 14
Competitive Energy Subsidiaries' Market
and Other Risks........................................ 14
Energy Management Services............................... 16
Telecommunications....................................... 17
Financing Program............................................. 17
2003 Financings.......................................... 17
2004 Financing Requirements.............................. 19
2004 Financing Plans..................................... 20
Financing Limitations.................................... 20
Construction and Capital Improvement Program.................. 26
Regulated Electric Operations................................. 26
Distribution and Sales................................... 26
Regional and System Coordination......................... 27
Transmission Access and FERC Regulatory Changes.......... 28
Regulated Gas Operations...................................... 29
Nuclear Generation............................................ 30
General.................................................. 30
Nuclear Fuel............................................. 31
Decommissioning.......................................... 32
Other Regulatory and Environmental Matters.................... 34
Environmental Regulation................................. 34
Electric and Magnetic Fields............................. 37
FERC Hydroelectric Project Licensing..................... 38
Employees..................................................... 39
Internet Information.......................................... 39
Item 2. Properties............................................... 39
Item 3. Legal Proceedings........................................ 43
Item 4. Submission of Matters to a Vote of Security Holders...... 48
PART II
Item 5. Market for Registrants' Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities........................................ 49
Item 6. Selected Financial Data.................................. 51
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 51
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 51
Item 8. Financial Statements and Supplementary Data.............. 51
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 52
Item 9A. Controls and Procedures.................................. 52
PART III
Item 10. Directors and Executive Officers of the Registrants...... 53
Item 11. Executive Compensation................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters............... 64
Item 13. Certain Relationships and Related Transactions........... 66
Item 14. Principal Accountant Fees and Services................... 66
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................... 69
Signatures......................................................... 71
NORTHEAST UTILITIES
THE CONNECTICUT LIGHT AND POWER COMPANY
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
WESTERN MASSACHUSETTS ELECTRIC COMPANY
PART I
ITEM 1. BUSINESS
THE NORTHEAST UTILITIES SYSTEM
Northeast Utilities (NU) is the parent company of the Northeast Utilities
system (the NU system). The NU system furnishes franchised retail electric
service to over 1.8 million customers in 420 cities and towns in Connecticut,
New Hampshire and western Massachusetts through three of NU's wholly-owned
subsidiaries (The Connecticut Light and Power Company [CL&P], Public Service
Company of New Hampshire [PSNH] and Western Massachusetts Electric Company
[WMECO]).
The NU system also furnishes franchised retail natural gas service in a
large part of Connecticut through Yankee Gas Services Company (Yankee Gas), a
subsidiary of Yankee Energy System, Inc. (Yankee), the largest natural gas
distribution company in Connecticut. Yankee Gas serves approximately 192,000
residential, commercial and industrial customers in 71 cities and towns in
Connecticut, including large portions of the central and southwest sections of
the state.
NU, through its wholly owned subsidiary, NU Enterprises, Inc. (NUEI), owns
a number of competitive energy and related businesses, including Northeast
Generation Company (NGC), Northeast Generation Services Company (NGS), Select
Energy, Inc. (Select Energy), Select Energy Services, Inc. (SESI; formerly HEC
Inc.), Mode 1 Communications, Inc. (Mode 1) and Woods Network Services, Inc.
(Woods Network). Holyoke Water Power Company (HWP), a subsidiary of NU, is a
resource of NUEI through an output contract with Select Energy. For
information regarding the activities of these subsidiaries, see "Competitive
System Businesses."
Several other wholly owned subsidiaries of NU provide support services for
the NU system companies and, in some cases, for other New England utilities.
Northeast Utilities Service Company (NUSCO) provides centralized accounting,
administrative, information technology, engineering, financial, legal,
operational, planning, purchasing and other services to the NU system
companies. Three other subsidiaries construct, acquire or lease some of the
property and facilities used by the NU system companies.
The NU system is regulated in virtually all aspects of its business by
various federal and state agencies, including the Securities and Exchange
Commission (SEC), the Federal Energy Regulatory Commission (FERC), the Nuclear
Regulatory Commission (NRC) and various state and/or local regulatory
authorities with jurisdiction over the industry and the service areas in which
each company operates, including the Connecticut Department of Public Utility
Control (DPUC), the New Hampshire Public Utilities Commission (NHPUC) and the
Massachusetts Department of Telecommunications and Energy (DTE). In recent
years, there has been significant legislative and regulatory activity changing
the nature of regulation of the industry. For more information regarding these
restructuring initiatives, see "Rates and Electric Industry Restructuring" and
"Regulated Electric Operations."
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), NU and its reporting subsidiaries
are hereby filing cautionary statements identifying important factors that
could cause NU or its subsidiaries' actual results to differ materially from
those projected in forward looking statements (as such term is defined in the
Reform Act) made by or on behalf of NU or its subsidiaries in this combined
Form 10-K, in any subsequent filings with the SEC, in presentations, in
response to questions, or otherwise. Any statements that express or involve
discussions as to expectations, beliefs, plans, objectives, assumptions or
future events, or performance (often, but not always, through the use of words
or phrases such as will likely result, are expected to, will continue, is
anticipated, estimated, projection, outlook) are not statements of historical
facts and may be forward looking. Forward looking statements involve estimates,
assumptions and uncertainties that could cause actual results to differ
materially from those expressed in the forward looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause NU
or its subsidiaries' actual results to differ materially from those contained
in forward looking statements of NU or its subsidiaries made by or on behalf of
NU or its subsidiaries.
Any forward looking statement speaks only as of the date on which such
statement is made, and NU and its subsidiaries undertake no obligation to
update any forward looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time and it
is not possible for management to predict all of such factors, nor can it
assess the impact of each such factor on the business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward looking statements.
Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward looking statements
include prevailing governmental policies and regulatory actions, including
those of the SEC, the NRC, the FERC, and state regulatory agencies, with
respect to allowed rates of return, industry and rate structure, acquisition
and disposal of assets and facilities, operation and construction of plant
facilities, recovery of purchased-power costs, stranded costs, decommissioning
costs, and present or prospective wholesale and retail competition (including
but not limited to retail wheeling and transmission costs).
The business and profitability of NU and its subsidiaries are also
influenced by economic and geographic factors including political and economic
risks, changes in environmental and safety laws and policies, weather
conditions (including natural disasters), population growth rates and
demographic patterns, competition for retail and wholesale customers, pricing
and transportation of commodities, market demand for energy from plants or
facilities, changes in tax rates or policies or in rates of inflation, changes
in project costs, unanticipated changes in certain expenses and capital
expenditures, capital market conditions, competition for new energy development
opportunities, and legal and administrative proceedings (whether civil or
criminal) and settlements.
All such factors are difficult to predict, contain uncertainties which may
materially affect actual results and are beyond the control of NU or its
subsidiaries.
RATES AND ELECTRIC INDUSTRY RESTRUCTURING
GENERAL
NU's electric utility subsidiaries, CL&P, WMECO and PSNH, have undergone
fundamental changes in their business operations as a result of the
restructuring of the electric industry in their respective jurisdictions. In
2002, a four-year process of selling the regulated generating assets of CL&P
and WMECO was completed. CL&P and WMECO have divested all of their generation
assets and are now acting as transmission and distribution companies. CL&P,
PSNH and WMECO have divested all ownership of nuclear generation. The mandate
for divestiture of PSNH's fossil and hydro generation has been markedly changed
by state statute enacted during 2003. PSNH may not divest its assets until
April 2006 at the earliest; thereafter, divestiture may occur only if the NHPUC
determines that such divestiture is in the economic interest of retail
customers of PSNH.
Critical to this restructuring is the companies' ability to recover their
stranded costs. Stranded costs are expenditures incurred, or commitments for
future expenditures made, on behalf of customers with the expectation such
expenditures would continue to be recoverable in the future through rates.
CL&P, PSNH and WMECO have received regulatory orders allowing each to recover
all or substantially all of their prudently incurred stranded costs. All three
companies have recovered significant portions of their stranded costs through
the issuance of rate reduction bonds (RRBs) and rate reduction certificates
(RRCs) (securitization) and are recovering the costs of securitization through
rates. As of December 31, 2003, CL&P had fully recovered all stranded costs
except those being recovered through RRB-related charges, ongoing independent
power producer costs, costs associated with the ongoing decommissioning of the
Maine Yankee, Connecticut Yankee and Yankee Rowe nuclear units and annual
decontamination and decommissioning costs payable under federal law.
All electric operating company customers are now able to choose their
energy suppliers, with the electric companies furnishing "standard offer,"
"default" or "transition" service to those customers who do not choose a
competitive supplier. Electric utility restructuring in Connecticut, New
Hampshire and Massachusetts provides for a transition period of several years
following the opening of each state's electric market to customer choice.
During that interim period, the energy delivery companies, including CL&P,
WMECO and PSNH, are responsible for arranging for the supply of power to
customers who do not select competitive energy suppliers. Management recognizes
that in other states electric companies have been negatively affected by the
inability to recover supply costs on a timely basis. However, the Company
believes that current statutes and regulatory policy in Connecticut,
Massachusetts and New Hampshire will permit timely recovery.
In accordance with amendments passed in 2003 to Connecticut's electric
restructuring legislation, CL&P signed fixed-price contracts with five
wholesale suppliers who together will serve all of CL&P's transitional standard
offer (TSO) requirements in 2004. CL&P's obligation to provide "standard offer
service" to its customers ended on December 31, 2003, but under the 2003
amendments, an equivalent obligation to provide TSO began on January 1, 2004.
One of these suppliers is the company's competitive marketing affiliate, Select
Energy. The other four suppliers are unaffiliated with CL&P. CL&P is fully
recovering all of the payments it is making to those suppliers and has
financial guarantees from each supplier to shield CL&P from risk in the event
any of the suppliers encounters financial difficulties. CL&P has filled a
portion of its TSO requirements for 2005 and 2006, and will initiate a new
solicitation process in the future to procure generation supply for the
unfilled portion of its TSO load obligation for those years. See "Connecticut
Rates and Restructuring."
After a competitive solicitation, WMECO signed supply agreements for
standard offer service in October 2003 for the period January 1, 2004 through
February 28, 2005 (the transition period in which standard offer service is to
be available terminates on February 28, 2005). Select Energy was one of two
winning bidders; the second was an unaffiliated supplier. The DTE approved the
standard offer contract and approved rates which will allow WMECO to recover
fully its standard offer service supply costs. In addition, in Massachusetts
there is a second type of service supplied by electric distribution companies
called default service. Default service is provided to those customers not on
competitive supply that are not eligible for standard offer service. Pursuant
to a DTE order issued in 2003, there are now two separate solicitations for
default service. For larger customers, WMECO default service rates are set for
a three-month period. For smaller customers, WMECO default service rates are
set for a six-month period. Accordingly, default service has been solicited
and rates approved for larger customers for the period January 1, 2004 through
March 31, 2004. A single unaffiliated entity is the supplier. Default service
has been solicited and rates have been approved for smaller customers for the
period January 1, 2004 through June 30, 2004. Two unaffiliated entities will
provide this service. WMECO will solicit default service for the remainder of
calendar 2004 at appropriate times.
Retail competition for all PSNH customers began on May 1, 2001. PSNH
provides transition service (TS) energy to its retail customers from its
generating plants, from power purchased under long-term contracts and from open
market purchases. PSNH reconciles its cost and rate recovery in its annual
stranded cost recovery case. See "New Hampshire Rates and Restructuring."
CONNECTICUT RATES AND RESTRUCTURING
Since retail competition began in Connecticut in 2000, most of CL&P's
customers have chosen to buy their power from CL&P at standard offer rates and
only a small number of CL&P customers (nearly 25,000 out of 1.2 million) have
opted for a competitive retail supplier. Through December 2003, 50 percent of
CL&P's standard offer supply requirements were purchased from Select Energy, 45
percent from NRG Power Marketing, Inc. (NRG-PMI), and 5 percent from Duke
Energy.
On June 25, 2003, Public Act 03-135, An Act Concerning Revisions To The
Electric Restructuring Legislation (Act) became law. The Act, among other
things: (i) approved a three-year TSO service to replace CL&P's standard offer
service, which was set to expire on December 31, 2003; (ii) directed CL&P to
file a rate case on or before January 1, 2004, including a four-year plan to
provide electric distribution and transmission services; (iii) authorized CL&P
to recover from customers its Federally Mandated Congestion Costs (FMCCs),
which are essentially costs resulting from the FERC-approved Standard Market
Design (SMD) for the New England electricity market and other wholesale power
market costs administered by ISO New England Inc. under rules approved by the
FERC; and (iv) authorized CL&P's total TSO rate to be up to 11.1 percent higher
than the company's standard offer rates (Rate Cap), but clarified that certain
costs, including FMCCs and costs recovered under CL&P's Energy Adjustment
Clause (EAC), are exempt from the Rate Cap. In addition, the Act also
authorizes CL&P to recover a fixed fee of five-tenths of one mill per kilowatt
hour for power supplied under the company's TSO load obligation. The Act
potentially allows CL&P to earn an additional incentive fee of one-quarter of
one mill per kilowatt hour if the DPUC concludes that CL&P's actual TSO power
supply contract prices fall below a price threshold as specified in the Act.
In furtherance of the Act, on July 1, 2003, CL&P filed with the DPUC an
application to establish its three-year TSO rates. On December 19, 2003, the
DPUC issued a final decision that set CL&P's TSO rates for January 1 through
December 31, 2004, approved the critical elements of CL&P's proposal and
confirmed that the Act exempted FMCCs, EAC charges and certain other costs from
the Rate Cap. The total base rate change from 2003 to 2004 is an increase of
7.1 percent. The DPUC could not set CL&P's total TSO rates for 2005 and 2006
because CL&P has not yet procured all of the power supply necessary to satisfy
its TSO load obligation for those years. The Connecticut Office of Consumer
Counsel (OCC) filed multiple appeals of this decision with the Connecticut
Superior Court during February 2004. The OCC claims that the decision
improperly implements an energy adjustment charge under Connecticut law, fails
to properly define and identify the fees that CL&P will be allowed to collect
from customers and improperly calculates base rates for purposes of determining
the Rate Cap.
Also in furtherance of the Act, on August 1, 2003, CL&P filed an
application with the DPUC to set the distribution and transmission components
of its retail rates. The final decision, issued December 17, 2003 and
effective January 1, 2004, authorized rate recovery of approximately $900
million over four years for its distribution capital program; approved
incremental distribution rate increases totaling approximately $42.1 million
between January 1, 2004 and December 31, 2007; applied $120 million of prior
year Generation Service Charge overcollections as credits against the
authorized rate increases in the amount of $30 million per year; authorized a
transmission rate increase of $28.4 million for 2004 with the understanding
that CL&P could seek DPUC approval to reflect any future transmission-related
revenue requirement increases in rates; and approved a return on equity (ROE)
of 9.85 percent with earnings above that level to be shared 50/50 between
customers and shareholders. These rates are included in CL&P's total TSO
rates. On December 31, 2003, CL&P filed a petition for reconsideration
(Petition) of the DPUC's final decision on the grounds that the final decision
improperly (i) disallowed $15.73 million of CL&P's pension-related costs, (ii)
concluded that the Connecticut statute of limitations does not apply to claims
alleging that the Company over-billed municipalities for streetlighting costs,
and (iii) failed to implement additional revenue requirement adjustments equal
to approximately $5.27 million, $3.57 million, $4.04 million and $4.08 million
in 2004-2007, respectively. On January 21, 2004, the DPUC reopened the CL&P
rate case for the limited purpose of reconsidering the issues raised in CL&P's
petition. On January 30, 2004, CL&P initiated an appeal of the December 17
decision on the issues of pension-related costs and streetlight over-billings,
as a precaution in the event the DPUC does not act favorably on these issues in
CL&P's reconsideration petition. There is conflicting law in Connecticut with
respect to whether the initial agency decision or the decision after
reconsideration is the one from which the appeal must be taken.
In light of the deteriorating financial condition of NRG Energy, Inc.,
(NRG), the parent company of NRG-PMI, one of CL&P's standard offer suppliers
through 2003, CL&P exercised its contractual right to withhold past due
congestion costs from the August 5, 2002 standard offer payment to NRG-PMI
pending the outcome of litigation between the parties concerning contractual
liability for congestion costs ongoing in the United States District Court for
the District of Connecticut. All subsequent standard offer payments to NRG-PMI
were similarly reduced to reflect continued withholding of congestion costs.
On May 14, 2003, NRG and 25 affiliates, including NRG-PMI, filed for
Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court in the Southern
District of New York (Bankruptcy Court). NRG's May 14 filing included a
request by NRG-PMI to terminate service to CL&P under its standard offer supply
agreement (SOS Agreement). In an effort to prevent NRG-PMI from ceasing to
perform its obligations under the SOS Agreement, CL&P participated in
proceedings before the FERC, the Bankruptcy Court, the United States District
Court for the Southern District of New York, the Second Circuit Court of
Appeals and the D.C. Circuit Court of Appeals. On June 2, 2003, the Bankruptcy
Court issued an order permitting NRG-PMI to reject the SOS Agreement, but the
FERC issued orders on June 25, 2003 and August 15, 2003 directing NRG-PMI to
continue to perform under the agreement. Subsequent efforts by NRG-PMI to
overturn the FERC order and terminate the SOS Agreement were unsuccessful. On
November 4, 2003, CL&P, the Connecticut Attorney General, the DPUC and the
Connecticut Office of Consumer Counsel entered into a settlement agreement with
NRG-PMI and NRG's Official Committee of Unsecured Creditors that required NRG-
PMI to perform its obligations for the remainder of the term of the SOS
Agreement with no change in price or terms, in exchange for a commitment by
CL&P to make payments for services rendered on a revised schedule. The
settlement also provided for an exchange of releases between the parties of all
claims associated with the litigation to terminate the SOS Agreement and
required NRG-PMI to bear responsibility for replacement power costs incurred by
CL&P during a 20-day period after the initial Bankruptcy Court order during
which NRG-PMI ceased performing. CL&P's pending litigation with NRG regarding
pre-SMD congestion costs, post-SMD locational marginal pricing (LMP) costs and
station service were not affected by the settlement. On November 21, 2003, the
Bankruptcy Court approved the settlement and the FERC approved the settlement
on December 18, 2003.
In October 2002, CL&P filed a complaint at the FERC seeking interpretation
of a FERC-filed interconnection agreement in which NRG agreed to pay CL&P's
applicable retail rates for station service power (if procured from CL&P) and
delivery of such power (whether procured from CL&P or a third party supplier).
By order dated December 20, 2002, the FERC affirmed the language in its Order
888 concerning state jurisdiction over the delivery of power to end users, even
in the absence of distribution facilities, and the state's authority to impose
certain charges on end users, such as those associated with stranded cost
recovery. CL&P subsequently made a demand upon NRG for payment of $13.3
million in station service charges through January 2003 and initiated a
proceeding at the DPUC seeking a declaratory ruling that its DPUC approved
rates were appropriately charged to NRG. Prior to a DPUC ruling, NRG filed a
petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On
September 18, 2003, the Bankruptcy Court approved a stipulation between CL&P
and NRG to submit the station service dispute to arbitration. As part of the
CL&P rate case decision dated December 17, 2003, the DPUC determined that CL&P
had appropriately administered its station service rates. Subsequently,
however, in unrelated proceedings, the FERC issued a series of orders with
conflicting policy direction which call into question its December 20, 2003
NRG order. In July 2004, CL&P filed a request with the FERC for further
clarification of this issue. Arbitration proceedings have been initiated by
the parties, but no hearing dates have been scheduled. For further information
relating to NRG-related litigation, see Item 3, "Legal Proceedings."
On March 1, 2003, New England independent system operator (ISO-NE)
implemented SMD. As part of this effort, LMP is utilized to assign value and
causation to transmission congestion and losses. Transmission congestion and
losses costs are assigned to the load zone in which the congestion and losses
occur. Prior to March 1, 2003, those costs were spread across virtually all
New England electric customers. In addition, the implementation of SMD has
impacted wholesale energy contracts with respect to the energy delivery points
contained in these contracts. See "Competitive System Businesses - Retail and
Wholesale Marketing."
Connecticut has been designated a single load zone by ISO-NE. Due to
transmission constraints and inadequate generation, Connecticut has experienced
significant additional congestion costs and losses under SMD. In 2003,
congestion and losses under SMD associated with CL&P's standard offer load
totaled approximately $186 million. CL&P asserted that under the terms of its
2000-2003 standard offer service contracts with its standard offer suppliers,
those costs were the responsibility of its customers, and initiated a
proceeding at the DPUC to collect these costs from customers. On May 1, 2003,
as supplemented by a second interim decision dated June 30, 2003, the DPUC
issued an interim decision allowing CL&P to collect these costs subject to
refund, but directing CL&P to commence litigation at the FERC seeking a
determination that the standard offer suppliers are responsible for such costs.
CL&P initiated the FERC proceeding on May 27, 2003, and the case included two
of the suppliers, the DPUC, the Connecticut Attorney General and Office of
Consumer Counsel, among others. CL&P subsequently received permission from the
Bankruptcy Court to include its third supplier, NRG-PMI, in the FERC
proceeding. Following six days of hearings, the parties initiated settlement
discussions. The settlement, which allocates 55.6 percent of SMD costs to
suppliers and 44.4 percent of costs to customers, was filed with the FERC on
March 3, 2004 and is expected to be approved by the FERC in the first half of
2004.
Another factor dampening the level of congestion costs is the designation
of certain Connecticut generating units by ISO-NE as units needed for system
reliability. During 2003, some of these generating units were found to be
"reliability must run" (RMR) units by ISO-NE and, as a result, the FERC allowed
the favorable financial treatment. This treatment varied as two of the units
received total cost-of-service based payments while a majority of the units
only received payments to cover specific maintenance and major repair costs.
The units receiving the specific maintenance and repair costs also received
benefits from a relaxed form of bid mitigation created by the FERC consisting
of a peaking unit safe harbor (PUSH) bid limit, intended to allow applicants to
recover their fixed costs in the energy market. Currently all of these
existing RMR and PUSH applicants are again before the FERC seeking an extension
for their treatment. The RMR contracts have been requested for extension at or
near the current rates whereas the PUSH applicants have once again requested
full fixed cost recovery methodology allowed in combination with the PUSH
methodology. Any cost increase that may result from these current applications
would be captured in rates to customers through the federally mandated
congestion charge line item on customers' bills.
For further information on SMD and transmission-related issues, see
"Regulated Electric Operations - Transmission Access and FERC Regulatory
Charges."
On May 17, 2002, CL&P filed an application with the DPUC for approval of
the auction results in the sale of Seabrook, a nuclear power plant located in
Seabrook, New Hampshire, to the FPL Group, Inc. CL&P was a 4.06 percent owner
of Seabrook prior to its sale in 2002. A final decision approving the sale was
issued in September 2002 and the sale closed on November 1, 2002. On May 1,
2003, CL&P filed its application for approval of the disposition of proceeds
from the sale. The application described and requested DPUC approval for
CL&P's treatment of its share of the proceeds from the sale, including CL&P's
proposal that $13 million of its $37.2 million (gross) share of the sale
proceeds be used to mitigate stranded costs. On March 3, 2004, the DPUC issued
a final decision that approved CL&P's application, with the exception that net
proceeds of approximately $0.7 million after taxes from the sale of Seabrook
Unit 2, which CL&P sought to retain, be applied to stranded costs.
On September 9, 2003, the Connecticut Siting Council (CSC) issued a final
decision approving CL&P's proposed $200 million project to build a new 345,000-
volt transmission line between Bethel and Norwalk, Connecticut. The decision
has been appealed and CL&P has moved for dismissal. A ruling on CL&P's motion
is expected in 2004. On October 9, 2003, CL&P filed an application with the
CSC for approval to build a 69-mile, 345,000-volt line between Norwalk and
Middletown, Connecticut. Public comment sessions on this project concluded in
February 2004. Evidentiary hearings will be held in March, April and May,
2004. The two projects are needed to relieve transmission constraints in the
import-dependent Norwalk-Stamford and southwest Connecticut load pockets. For
additional information on CL&P's proposed expansion of its transmission system,
see "Construction and Capital Improvement Program."
On August 1, 2002, Yankee Gas filed testimony and exhibits with the DPUC
reflecting its proposal for its capital investment ratemaking recovery
mechanism (Infrastructure Expansion Rate Mechanism or IERM) and the projects
that met certain DPUC defined financial criteria and were expected to be placed
in service before December 31, 2003.
Yankee Gas proposed no IERM charge for 2003 and that any over-collection
for 2003 be carried forward to the 2004 IERM period. A decision was issued on
June 25, 2003 and the DPUC concluded that 10 projects met its IERM
requirements, but that all or portions of 12 projects did not meet the relevant
criteria. In addition, the DPUC ordered Yankee Gas to refund to customers the
estimated over-collection over the three-month period of December 2003 through
February 2004. On October 1, 2003, Yankee Gas filed its 2003-2004 IERM
application, but on November 20, 2003, the DPUC notified Yankee Gas that the
filing was found to be deficient. Yankee Gas filed a motion on December 3,
2003 requesting the DPUC to reconsider its November 20, 2003 letter and on
January 12, 2004, the DPUC granted the motion and indicated that it will review
Yankee Gas' October 1, 2003 compliance filing and specifically approve it or
explain why the DPUC believes the filing does not comply with the DPUC's
June 25, 2003 decision. On February 5, 2004, the DPUC permitted Yankee Gas to
include projects filed in 2003 provided customers are insulated from any
financial shortfall below a 10 percent internal rate of return. The DPUC also
stated that if a project did not initially meet a specified financial test,
that project will not be allowed as an IERM project. Yankee Gas is currently
evaluating the impact of the DPUC clarification. By letter dated February 5,
2004, the DPUC provided clarification of Yankee Gas' December 3, 2003 motion
for reconsideration. The DPUC directed Yankee Gas to refile its compliance
filing based on the clarification provided in its February 5, 2004 letter;
Yankee Gas made this filing on February 27, 2004. No procedural schedule has
been set by the DPUC at this time.
Yankee Gas sought rate approval from the DPUC to build a two billion cubic
foot liquefied natural gas (LNG) production and storage facility in Waterbury,
Connecticut, at an estimated cost of $60 million. On November 12, 2003, the
DPUC issued a decision supportive of a 1.2 billion cubic foot LNG facility and
authorized Yankee to proceed with issuing a request for proposals (RFP). The
DPUC will review the results of the RFP before its final ruling.
MASSACHUSETTS RATES AND RESTRUCTURING
Massachusetts enacted comprehensive electric utility industry
restructuring in November 1997. That legislation required each electric
company to submit a restructuring plan and to reduce its rates by 15 percent
adjusted for inflation by September 1999. The 15 percent rate reduction is a
rate cap for standard offer service customers that extends until February 2005,
the end of the restructuring transition period. The restructuring plan
approved by the DTE in 1999 allows WMECO's customers to choose their energy
suppliers and WMECO to recover stranded costs. Two parties have appealed the
DTE's decision on WMECO's restructuring plan to the Massachusetts Supreme
Judicial Court. One appeal was dismissed without prejudice by the Supreme
Judicial Court in 2001 because the appellant has failed to prosecute the
appeal. The second appeal was dismissed on May 27, 2003.
In December 2003, the DTE approved WMECO's proposal to maintain its total
overall rates at the 2003 level. See "Rates and Electric Industry
Restructuring-General" for information relating to WMECO's standard offer
service and default service supply.
On March 31, 2003, WMECO filed its fourth annual stranded cost
reconciliation with the DTE for calendar year 2002. This filing was
subsequently updated on September 22, 2003. Hearings are scheduled in the
matter in the first quarter of 2004.
NEW HAMPSHIRE RATES AND RESTRUCTURING
On January 1, 2004, PSNH acquired the franchise and electric system of
Connecticut Valley Electric Company, Inc. (CVEC), a subsidiary of Central
Vermont Public Service Corporation (CVPS) that serves approximately 10,000
customers in western New Hampshire. PSNH paid CVEC approximately $9 million
for its assets and an additional $21 million for intangibles related to
termination of a wholesale power contract between CVPS and CVEC. Upon closing,
customers of CVEC became customers of PSNH. PSNH will be allowed to recover
the $21 million payment with a return consistent with Part 3 stranded cost
treatment under the "Agreement to Settle PSNH Restructuring" (Restructuring
Settlement). Part 3 stranded costs are non-securitized regulatory assets which
must be recovered by a recovery end date determined in accordance with the
April 2000 Restructuring Settlement or be written off.
On February 1, 2004, in accordance with New Hampshire law, PSNH raised the
TS rate for all retail customers to 5.36 cents per kilowatt-hour (kWh) from
4.60 cents per kWh for residential and small commercial customers and 4.67
cents per kWh for large commercial and industrial customers. PSNH expects those
rates to be adequate to recover its generation and purchased power costs,
including the recovery of carrying costs on PSNH's generation investment. If
recoveries exceed PSNH's costs, the difference will be credited against PSNH's
Part 3 stranded cost balance. Part 3 stranded costs are non-securitized
regulatory assets which must be recovered by a recovery end date determined in
accordance with the Restructuring Settlement or be written off. If actual
costs exceed those recoveries, PSNH will defer those costs for future recovery
from customers through its Stranded Cost Recovery Charge. PSNH's TS rate may
be updated on August 1, 2004 through an interim review ordered by the NHPUC.
PSNH's delivery rates were fixed until February 1, 2004. Pursuant to the
Restructuring Settlement and New Hampshire statute, PSNH filed a delivery
service rate case on December 29, 2003. PSNH requested a rate increase of
$21.4 million (2.6 percent). PSNH also requested annual recovery of the FERC
regulated transmission costs through a Transmission Cost Adjustment Mechanism.
On December 31, 2003, the NHPUC suspended the new rates subject to hearings.
Hearings are scheduled for August 2004; a decision is expected early in the
fourth quarter of 2004 with rates retroactively applied to February 1, 2004.
COMPETITIVE SYSTEM BUSINESSES
NU is engaged in a variety of competitive businesses, primarily the retail
and wholesale marketing of electricity and natural gas in the Northeast United
States and the provision of energy related services to large government,
industrial, commercial and institutional facilities.
NUEI is the lead competitive energy business within NU. NUEI is a wholly
owned subsidiary of NU and acts as the holding company for certain of NU's
competitive energy subsidiaries. These subsidiaries include SESI, a provider
of energy management, demand-side management and related consulting services
for commercial, industrial and institutional customers and electric utility
companies; NGC, a corporation that acquires and manages generation facilities;
NGS, a corporation that maintains and services fossil and hydroelectric
facilities and provides high-voltage electrical contracting services, and
Select Energy, a corporation engaged in the marketing, transportation, storage
and sale of energy commodities, at wholesale and retail, in designated
geographical areas. The generation operations of HWP are also included in the
results of NUEI. NUEI and its integrated competitive energy business
affiliates had aggregate revenues of approximately $2.6 billion in 2003 as
compared to approximately $1.8 billion in 2002 and had losses of $3.5 million
in 2003 (which includes a fourth quarter after-tax write-off of approximately
$36 million associated with the settlement of costs related to a contract
between Select Energy and CL&P (SMD settlement)), as compared to a loss of
approximately $53.2 million in 2002. For further information on the SMD
settlement, see "Rates and Electric Industry Restructuring - Connecticut Rates
and Restructuring."
NGC is the competitive generating subsidiary of NU and a major provider of
pumped storage and conventional hydroelectric power in the northeastern United
States. NGC sells all its generation output to Select Energy, which in turn
markets it to customers. Select Energy also buys and manages the entire
generation output of HWP, which consists of approximately 147 megawatts (MW) of
coal-fired generation at the Mt. Tom station in Holyoke, Massachusetts under an
evergreen contract. NGC's assets and Mt. Tom perform functions that are
critical to NUEI's wholesale and retail businesses by providing Select Energy
with access to electric generation within New England and thus reducing its
exposure to energy price fluctuations.
During 2004, NU expects that NUEI will produce net income 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 and between $4 million and $7 million form
the energy services business. Those ranges are heavily dependent on NUEI's
ability to achieve targeted wholesale and retail origination margins,
successfully manage its contract portfolio and achieve targeted growth in the
services business.
RETAIL AND WHOLESALE MARKETING
NUEI, through Select Energy, sells multiple energy products including
electricity and natural gas to wholesale and retail customers in the
northeastern United States. Select Energy procures and delivers energy and
capacity required to serve its electric and gas customers. Select Energy is
one of the largest wholesale and retail electric energy marketers in New
England as measured by megawatt load. In order to support and complement its
growing wholesale and retail business, Select Energy contracted in December of
1999 with NGC to purchase and market all of NGC's 1,293 MW for a six-year
period. The contract was extended for one year, through December 2006, in
December 2003. In addition, during 2003 Select Energy purchased approximately
147 MW of coal generating plant output from its affiliate, HWP, and more than
3,583 MW of electrical supply from various New England generating facilities on
a long-term basis to meet its New England load obligations. Select Energy
utilizes generation failure insurance, options and energy futures to hedge its
supply requirements. NUEI also offers energy management consulting and
construction services through its affiliate, SESI, discussed more fully below.
In 2003, Select Energy reported revenues of $2.3 billion and had retail
and wholesale marketing sales of approximately 40,000 gigawatt-hours (GWh) of
electricity and 46 billion cubic feet (BcF) of natural gas to approximately
26,000 customers. During 2002, Select Energy reported revenues of $1.6 billion
and had retail and wholesale marketing sales of approximately 26,000 GWh of
electricity and 52 BcF of natural gas to approximately 19,000 customers.
There are a number of large energy companies bidding for business in the
restructured Northeast market. During 2003, the breadth and depth of the
market for energy trading and marketing products in Select Energy's market
continued to be adversely affected by the withdrawal or financial weakening of
a number of companies who have historically done significant amounts of
business with Select Energy. In general, the market for such products has
become shorter term and less liquid in nature and participants are more often
unable to meet Select Energy's credit standards without additional credit
support. Select Energy's business has been adversely affected by these factors
and they could continue to adversely affect Select Energy's results in 2004.
Changes are occurring in the administration of transmission systems in
territories in which Select Energy does business. Regional transmission
organizations (RTO) are being contemplated, 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. The impact of SMD on the wholesale marketing business has
been significant. As the market continues to evolve, there could be additional
adverse effects that management cannot determine at this time. For more
information on the proposed changes, see "Regulated Electric Operations-
Transmission Access and FERC Regulatory Charges" and "Rates and Electric
Industry Restructuring-Connecticut Rates and Restructuring."
Retail Marketing
Select Energy is licensed to provide retail electric supply in
Connecticut, Delaware, Maryland, New Jersey, Maine, Pennsylvania, Virginia, New
York, Massachusetts, Rhode Island and New Hampshire. Within these states,
Select Energy is currently registered with approximately 36 electric
distribution companies and 55 gas distribution companies to provide retail
services.
Select Energy's retail marketing business had a $25.9 million improvement
in performance during 2003 compared to 2002, with losses of $1.8 million and
$27.7 million, respectively. The stronger performance is attributed to
increased electric sales and better delivery margins from both electric and
gas commodity sales. Select Energy expects its retail marketing business to be
modestly profitable in 2004. Changes to the size and operational scope of the
retail organization implemented in 2003 are expected to have a continuing
impact in 2004. This projection also assumes that Select Energy will be
successful in securing and managing a significant amount of new business at
acceptable margins.
As of December 31, 2003, Select Energy had contracts with retail electric
customers in states throughout the Northeast which produced revenues of
approximately $420 million, from over 2,000 MW of peak load at approximately
17,500 locations, including predominately commercial, industrial, institutional
and governmental accounts. As over 650 MW of this load is in New England,
Select Energy is among the largest competitive retail suppliers of electricity
in New England as measured by megawatt load. No single retail electric
customer accounted for more than ten percent of Select Energy's retail
revenues.
During 2003, Select Energy's competitive natural gas business, primarily
retail in nature, produced revenues of approximately $285 million, an increase
from 2002 revenues of approximately $247 million. This increase was primarily
due to changes in gas prices. As of December 31, 2003, Select Energy provided
over 37 BcF of natural gas to approximately 8,300 retail gas customers,
primarily located in Connecticut, Massachusetts, New York and Pennsylvania.
These contracts generally have one-year terms and include primarily commercial,
institutional, industrial and governmental accounts. No single retail gas
customer accounted for more than ten percent of Select Energy's retail gas
revenues. In 2003, Select Energy's retail gas revenues were approximately $228
million, representing approximately a 27 percent increase compared to 2002.
Wholesale Marketing
Select Energy's goal is to be the regional leader in providing electric
service to the Northeastern competitive markets. In 2003, Select Energy
supplied more than 6,100 MW of standard offer and default service load in the
region, making it one of the largest providers of standard offer service in the
Northeast. Revenues from these services comprised in the aggregate
approximately 56 percent of Select Energy's 2003 revenues.
During 2003, the wholesale marketing business line earned $31.8 million
(before the SMD settlement write-off) versus a loss of $24.7 million in 2002
(including a $24.3 million loss in the trading business line).
On January 1, 2000, Select Energy began serving one-half of CL&P's
standard offer load for a four-year period at fixed prices. This equated to
approximately 2,500 MW annually for each of the four contract years.
Approximately 23 percent of Select Energy's 2003 competitive energy revenues
came from CL&P's supply contract. Above-normal river conditions at NGC's
hydroelectric plants, in contrast to the near-drought conditions New England
experienced during much of 2002, also helped to improve 2003 results. In 2004,
Select Energy will continue to focus on management of power supply associated
with its full requirements contracts. To meet its profit target in 2004,
Select Energy must also secure a significant amount of new business at
acceptable margins.
In addition to its contract with CL&P, Select served 2,100 MW of New
Jersey's basic generation supply (BGS) load through July 31, 2003, and is
serving 1,200 MW of BGS load from August 1, 2003 through May 31, 2004 and 500
MW of BGS load from June 1, 2004 through May 31, 2006. In addition, on
January 1, 2003, Select Energy began serving the approximately 450 megawatt
standard offer load of its affiliate, WMECO, for a 14-month period. Beginning
in 2004, Select Energy will serve approximately 1,875 MW of transition standard
offer load of its affiliate, CL&P. There are also approximately 350 MW of
fixed price market-based wholesale contracts throughout New England that were
previously supplied by WMECO and CL&P that are now the responsibility of Select
Energy.
During 2003, the trading operations were significantly scaled back,
reflecting Select Energy's commitment to focus on its marketing business. In
this new role, trading activities are now limited primarily to price discovery,
risk management and deal execution for merchant energy activities.
ELECTRIC GENERATION
NGC, NU's competitive electric generating affiliate, owns and operates a
portfolio of approximately 1,293 MW of hydroelectric and pumped storage
generating assets in Connecticut and Massachusetts. The generation facilities
owned by NGC were acquired at auction from CL&P and WMECO. NGC's portfolio
consists of seven hydro facilities along the Housatonic River System (121 MW),
the three facilities comprising the Eastern Connecticut System, including one
gas turbine (27 MW), all located in Connecticut, and the Northfield Mountain
pumped storage station (1,080 MW) and the Cabot and Turners Falls No. 1
hydroelectric stations (65 MW) located in Massachusetts. NGC sells all of its
energy and capacity to its affiliate, Select Energy. Select Energy's
performance under its contract with NGC is guaranteed by NU through 2006.
Select also buys and manages the entire generation output of approximately 147
MW from HWP's Mt. Tom generating plant under a contract renewable on an annual
basis. Select Energy uses the NGC and Mt. Tom generation to furnish a portion
of the resources it uses to meet supply commitments to its marketing customers.
NGC's contract with Select Energy extends through December 2006. About 83
percent of NGC's revenues from this contract (including all of the revenues
from Northfield Mountain) are in the form of predetermined, fixed monthly
payments based on the capacity of specified facilities. The remaining 17
percent of the revenues are in the form of monthly payments at predetermined
rates per unit of actual energy output. NGC currently derives approximately 78
percent of its revenues from Northfield Mountain.
This contract provides NGC with a stable stream of revenues at prices that
are currently higher than average wholesale electricity prices in the markets
served by NGC's facilities. If NGC's agreement with Select Energy were to
terminate at the end of its term in 2006, NGC may, depending upon market
conditions, pursue similar contracts or choose to optimize the value of its
assets in another manner. NGC plans to continue to evaluate growth
opportunities in the northeastern United States; however, its ability to pursue
such opportunities is limited by capital and regulatory constraints.
COMPETITIVE ENERGY SUBSIDIARIES' MARKET AND OTHER RISKS
NU's competitive energy subsidiaries, primarily Select Energy, are exposed
to certain market and other risks inherent in their business activities. The
merchant energy business enters contracts of varying lengths of time to buy and
sell energy commodities, including electricity, natural gas and oil. Market
risk represents the loss that may affect Select Energy's financial results due
to adverse changes in commodity market prices.
Risk management within Select Energy is organized to address the market,
credit and operational exposures arising from its wholesale marketing business
(which includes limited energy trading for market and price discovery purposes)
and its retail marketing activities. A significant portion of the retail and
wholesale marketing business is providing full requirements service to
customers, primarily regulated distribution companies. The "full requirements"
obligation commits these companies to supply the total energy requirement for
the customers' load at all times. An important component of their risk
management strategy is to manage the volume and price risks of their full
requirements contracts. These risks include unexpected fluctuations in both
supply and demand due to numerous factors which are not within their control,
such as weather, plant availability, exposure to transmission congestion costs
and price volatility.
In serving its marketing customers, Select Energy utilizes derivative
financial and commodity instruments, including options and forward contracts,
to manage the risk of fluctuating market prices. At December 31, 2003, Select
Energy had hedging derivative assets of $55.8 million, as compared to
derivative assets of $22.8 million at December 31, 2002. Generally, such
derivatives impact earnings over the life of the contracts which they hedge,
but in certain cases the impact is accelerated and affects earnings
immediately.
Select Energy's trading portfolio had a net positive $32.5 million fair
value at December 31, 2003, as compared to a net positive $41 million fair
value at December 31, 2002. Approximately 99 percent of the $32.5 million was
priced from external sources and only a nominal amount was based on exchange
quotes. Of the $32.5 million of net fair value in the trading portfolio at
December 31, 2003, $7.1 million will mature in 2004, $9.7 million in 2005-2007
and $15.7 million after 2007.
Accordingly, there is a risk that the trading portfolio will not be
realized in the amount recorded. Realization of cash will depend upon a number
of factors over which Select Energy has limited or no control, including the
accuracy of its valuation methodologies, the volatility of commodity prices,
changes in market design and settlement mechanisms, the outcome of future
transactions, the performance of counterparties, the breadth and depth of the
trading market and other factors.
In addition, the application of derivative accounting principles is
complex and requires management judgment in identification of derivatives and
embedded derivatives, election and designation of the "normal purchases and
sales" exceptions, identifying hedge relationships and assessing hedge
effectiveness, determining the fair value of derivatives and measuring hedge
ineffectiveness. All of these judgments, depending upon their timing and
effect, can have a significant impact on the competitive subsidiaries'
performance and, ultimately, NU's consolidated net income.
Risk management within the competitive energy subsidiaries, including
Select Energy, is organized to address the market, credit and operational
exposures arising from the company's primary business segments, including
wholesale and retail marketing. 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 overall risk
management policies and procedures. As a means to monitor and control
compliance with these policies and procedures, NU has formed a Risk Oversight
Council (ROC) to monitor competitive energy risk management processes
independently from the businesses that create or manage these risks. The ROC
ensures that the policies pertaining to these risks are followed and makes
recommendations to the Board of Trustees regarding periodic adjustment to the
metrics used in measuring and controlling portfolio risk while also confirming
the methodologies employed by management to discern portfolio values.
ENERGY MANAGEMENT SERVICES
NUEI has two affiliated companies in the energy management business: NGS
and SESI.
NGS was formed in 1999 to provide a full range of integrated energy-
related services to owners of generation facilities and the industrial market
in the Northeast. NGS manages, operates, maintains and supports electric power
generating equipment, facilities and associated transmission and distribution
equipment and provides turnkey management and operation services to owners of
electric generation facilities. NGC and HWP have contracted with NGS to
operate and maintain all of their generating plants.
Through its wholly owned subsidiaries, E.S. Boulos Company (Boulos)and
Woods Electrical Co., Inc. (Woods Electrical), NGS provides electrical
construction and contracting services. These services focus on high and medium
voltage installations and upgrades and substation and switchyard construction.
Woods Network, a subsidiary of NUEI, is a network products and services
company. Both Woods Electrical and Woods Network were acquired in 2002.
NGS provides consulting services to its customers, including due
diligence reviews and environmental regulatory compliance and permitting
services and laboratory analyses.
During 2003, NGS's revenues were approximately $103 million and are
forecasted to grow by approximately 13 percent in 2004. This anticipated
growth is expected to be driven by NGS's increased geographical scope and
additional contracts with both new and repeat customers. Forty-two percent of
NGS's revenues in 2003 were derived from contracts with its affiliates.
SESI was acquired in 1990 and provides energy efficiency, design and
construction solutions to government, institutional and commercial facilities.
In delivering its services, SESI focuses on reducing its customers' energy
costs, improving the efficiency and reliability of their energy-consuming
equipment and conserving energy and other resources. SESI also designs, builds
and maintains central energy plants producing power, heating and cooling for
their hosts. SESI's engineering and construction management services have been
directed primarily to markets in the eastern United States. SESI's subsidiary,
Select Energy Contracting, Inc. (SECI), provides service contracts and
mechanical and electrical contracting, primarily directed to energy systems in
commercial markets.
In competitive procurements by the United States Departments of Defense
and Energy and the General Services Administration, SESI has been selected as
an "Energy Saving Performance Contractor" (ESPC) for all fifty states and
overseas facilities. Over the last several years, SESI became one of the major
providers of design, construction, financing and long-term operation and
maintenance of energy-efficient and environmentally clean systems to replace
older infrastructure. SESI is under contract to operate and maintain the
plants for at least 20 years. In 2003, federal ESPC work constituted 35
percent of SESI's revenues, which were approximately $52.8 million. In 2004,
SESI's revenues are anticipated to grow by approximately three percent based on
existing backlog and continuing success in its existing business lines.
TELECOMMUNICATIONS
Mode 1 is a wholly owned exempt telecommunications subsidiary of NUEI.
Mode 1 is a licensed competitive local exchange carrier authorized to provide
local phone service within the state of Connecticut.
At December 31, 2003, NU's net investment in Mode 1 was approximately
$14.7 million, most of which was used to fund Mode 1's investment in NEON
Communications, Inc. (NEON). NEON is a wholesale provider of high bandwidth,
advanced optical networking solutions and services to communications carriers
on intercity, regional and metro networks in the twelve-state Northeast and
mid-Atlantic markets, utilizing a portion of the NU system companies' and other
electric utilities' transmission and distribution facilities. An officer and
trustee of NU is a member of the Board of Directors of NEON.
Under NEON's December 2002 plan of reorganization, Mode 1 acquired seven
percent of NEON's common stock for approximately $3.2 million. In July 2003,
Mode 1 acquired another one percent of NEON's common stock for approximately
$1.4 million.
Mode 1 also provides dark fiber service over a high-speed, fiber-optic
network within the city of Hartford, Connecticut and serves the City of
Hartford's schools and libraries with an optical network.
FINANCING PROGRAM
2003 FINANCINGS
On January 6, 2003, SESI entered into an assignment of delivery order
payments (Assignment) with a financing entity, BFL Funding IV LLC (BFL), to
repay an existing financing of the installation of certain energy conservation
measures at a federal government facility as referred to in the delivery order
issued by the federal government. Pursuant to the Assignment, SESI assigned
the payments due under the delivery order to BFL. BFL then issued $9.52
million of trust certificates at an interest rate of 5.95 percent that mature
in March 2010. Certain obligations of SESI under the transaction documents and
the delivery order payments due from the government are backed by an NU parent
guaranty of SESI's performance under the delivery order.
On February 10, 2003, SESI entered into another Assignment with BFL to
finance the construction and installation of certain energy conservation
measures at three federal government facilities, including an expansion of the
above-referenced delivery order, as well as two additional orders issued by the
federal government. Pursuant to this Assignment, SESI assigned the payments
due under the three delivery orders to BFL. BFL then issued $30.41 million of
trust certificates at an interest rate of 5.95 percent that mature in March
2018. Certain obligations of SESI under the transaction documents and the
delivery order payments due from the government are backed by an NU parent
guaranty of SESI's performance under the delivery orders.
On March 31, 2003, SESI entered into an assignment of certain contract
payments (Contract Assignment) with a financing entity, PFG Energy Capital
(PFG), to finance the construction and installation of energy conservation
measures at a municipal facility in Maine. Pursuant to the Contract
Assignment, SESI assigned the fixed portion of the monthly contract payments
due under the contract between SESI and the municipal facility. PFG paid SESI
$1.85 million for the fixed payment stream which ceases in April 2013. The
rate of this financing is 8.929 percent.
On June 3, 2003, NU issued $150 million of fixed rate, senior unsecured
notes (the Series B Notes) with a coupon of 3.30 percent and a maturity of
June 1, 2008. The proceeds were used to refinance approximately $82 million of
short-term debt used to finance the competitive businesses under the existing
revolving bank credit facility and invest in the competitive subsidiaries to
enable them to refinance their respective short-term debt. The Series B Notes
are not callable prior to maturity.
On July 9, 2003, CL&P renewed its accounts receivable securitization bank
credit line and extended its termination date to July 7, 2004. The credit line
capacity remained the same at $100 million.
On September 30, 2003, WMECO issued $55 million of fixed rate, senior
unsecured notes (the Series A Notes) with a coupon of 5.00 percent and a
maturity of September 1, 2013. The proceeds were used to refinance a portion
of WMECO's short-term debt. The Series A Notes are redeemable at any time and
permit redemptions upon WMECO making a make-whole payment.
On October 1, 2003, CL&P converted its $62 million 1996 Series A Pollution
Control Revenue Bonds (PCRBs) from a weekly interest rate mode to a multi-
annual mode and fixed the rate on the bonds at 3.35 percent for the next five
years through October 1, 2008.
On November 10, 2003, CL&P, WMECO, PSNH and Yankee Gas entered into a new
unsecured 364-day revolving credit facility for $300 million, replacing a
similar $300 million facility that was due to expire on November 11, 2003.
CL&P may draw up to $150 million, and WMECO, PSNH and Yankee Gas may draw up to
$100 million each, subject to the $300 million maximum for the entire facility.
Unless extended, this credit facility will expire on November 8, 2004.
On November 10, 2003, NU entered into a new unsecured 364-day revolving
credit facility for $350 million, replacing a similar $350 million facility
that was due to expire on November 11, 2003. The new facility provides a total
commitment of $350 million which is available subject to two overlapping sub-
limits. First, subject to the notional amount of any letters of credit
outstanding under this facility, amounts up to $350 million are available for
advances to NU. Second, subject to the advances outstanding, letters of credit
may be issued in an aggregate amount of up to $250 million in the name of NU or
any of its subsidiaries. Unless extended, the credit facility will expire on
November 8, 2004.
On December 10, 2003, SESI entered into an Assignment with a financing
entity, Hannie Mae, LLC (Hannie Mae), to finance the construction and
installation of energy conservation measures at two governmental facilities.
Pursuant to this Assignment, SESI assigned the payments due under two delivery
orders to Hannie Mae for approximately $8.794 million and $10.216 million,
respectively. The proceeds will be used to fund the construction of energy
conservation projects at the facilities. The interest rate applicable to each
is 6.23 percent and the amortizing debt will mature in July 2019 and July 2024,
respectively. An NU parent guaranty of SESI's performance under the delivery
orders is provided.
On December 29, 2003, Boulos, a subsidiary of NGS, entered into a secured
bank revolving credit facility which permits borrowings up to a maximum of $6
million at the prime rate. The facility terminates on June 30, 2004 and may be
renewed annually thereafter.
NU paid common dividends totaling $73.1 million in 2003, compared to $67.8
million paid in 2002, reflecting increases in the quarterly dividend rate that
were effective September 30, 2002 and September 30, 2003. The higher levels of
dividends were easily accommodated by rising general liquidity at the NU parent
level, due in part to the continued payment of common dividends from the
regulated electric subsidiaries to the parent. Liquidity at the parent company
is also reinforced by the absence of debt maturities and minimal sinking fund
payments in the near term ($24 million in 2004 and $26 million in 2005).
Total NU system debt, including short-term and capitalized lease
obligations, but not including RRCs and RRBs, was $2.7 billion as of
December 31, 2003, compared with $2.4 billion as of December 31, 2002.
The increase was primarily due to new debt issuances by NU, WMECO and SESI.
For more information regarding NU system financing, see "Notes to
Consolidated Statements of Capitalization" in NU's financial statements, other
footnotes related to long-term debt, short-term debt and the sale of accounts
receivables, as applicable, in the notes to NU's, CL&P's, PSNH's, and WMECO's
financial statements and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
2004 FINANCING REQUIREMENTS
The NU system's aggregate capital requirements for 2004 are approximately
as follows:
Yankee NU
CL&P PSNH WMECO Gas Other System
---- ---- ----- ------- ----- ------
(Millions)
Construction $447 $191 $36 $62 $ 39 $775
Maturities 0 0 0 0 0 0
Cash Sinking Funds 0 0 0 1 64 65
---- ---- --- --- ---- ----
Total $447 $191 $36 $63 $103 $840
==== ==== === === ==== ====
* CL&P, WMECO and PSNH have sinking funds associated with RRCs and RRBs that
are not included in the capital requirements subtotal. All interest and
principal payments for these bonds are collected through a non-bypassable
charge assessed to customers and do not represent additional capital
requirements.
For further information on the NU system's 2004 financing requirements,
see "Notes to Consolidated Statements of Capitalization" in NU's financial
statements, "Long-Term Debt" in the notes to CL&P's, PSNH's and WMECO's
financial statements and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
2004 FINANCING PLANS
NU projects a moderate level of system financings in 2004.
CL&P is contemplating the issuance of up to $250 million of debt,
primarily to finance its distribution and transmission businesses and general
corporate purposes. See "Financing Program - Construction and Capital
Improvement Program."
PSNH is contemplating the issuance of up to $50 million of debt to
refinance portions of its existing short-term debt and to finance other planned
capital expenditures for 2004. See "Rates and Electric Industry Restructuring
- - New Hampshire Rates and Restructuring."
WMECO is contemplating the issuance of up to $52 million of debt to
refinance its pre-1983 spent nuclear fuel obligations, subject to receipt of
regulatory authority.
Yankee Gas issued $75 million of ten-year unsecured notes on January 30,
2004 at an interest rate of 4.8 percent and used the proceeds to repay short-
term debt. Yankee Gas may also require additional debt issuances in later
years, depending on the extent of its capital program. Yankee Gas is currently
implementing a number of capital projects and is planning the construction of a
liquefied natural gas storage and production facility in Waterbury,
Connecticut. See "Financing Program - Construction and Capital Improvement
Program."
SESI is forecasting the issuance of up to $27 million of long-term debt in
2004 to fund government contracts for the construction and installation of
energy conservation measures at certain governmental facilities.
FINANCING LIMITATIONS
Many of the NU system companies' charters and borrowing facilities contain
financial limitations that must be satisfied before borrowings can be made and
for outstanding borrowings to remain outstanding. In addition, the NU system
companies are subject to certain federal and state orders and policies which
limit their financial activities.
Under their current revolving credit facility agreement, CL&P, WMECO, PSNH
and Yankee Gas are allowed to maintain a ratio of debt to total capitalization
(leverage ratio) of no more than 65 percent. At December 31, 2003, CL&P's,
WMECO's, PSNH's, and Yankee Gas's leverage ratios were 47 percent, 50 percent,
55 percent and 32 percent, respectively. This agreement also requires the
companies to maintain 12-month earnings before interest and taxes to interest
expense ratio (interest coverage ratio) of at least 2.25 to 1.0. At
December 31, 2003, CL&P's, WMECO's, PSNH's and Yankee Gas' interest coverage
ratios were 3.34 to 1, 7.16 to 1, 5.67 to 1 and 2.31 to 1, respectively. These
ratios do not include RRBs and RRCs and the leverage ratio for Yankee Gas does
not exclude goodwill from capitalization.
NU is allowed, under its current revolving short-term credit agreement
facility, to maintain a debt to total capitalization (leverage ratio) of no
more than 65 percent. At December 31, 2003, NU's leverage ratio was 5.5
percent. In addition, NU is required to maintain a 12-month consolidated
interest coverage ratio of at least 2.0 to 1.0. At December 31, 2003, NU's
consolidated interest coverage ratio was 2.33 to 1.0. These ratios do not
include RRBs and RRCs.
The amount of short-term debt that may be incurred by NU, CL&P, PSNH,
WMECO, North Atlantic Energy Corporation (NAEC), Northeast Nuclear Energy
Company (NNECO), Yankee, Yankee Gas and HWP is also subject to periodic
approval by the SEC under the Public Utility Holding Company Act of 1935 (1935
Act). On June 30, 2003, the SEC extended the short-term debt authority for
these companies through June 30, 2006 and authorized these companies to
participate in the Northeast Utilities System Money Pool (Pool) through
June 30, 2004. The order also authorized the participation of the competitive
subsidiaries in the Pool through June 30, 2004. PSNH's and NAEC's short-term
debt in excess of 10 percent of net fixed plant is also regulated by the NHPUC.
The following table shows the amount of short-term borrowings authorized by the
SEC or the NHPUC for each company, as the case may be, as of December 31, 2003,
and the amounts of outstanding short-term debt of those companies at the end of
2003 and as of March 1, 2004 (in millions):
Maximum
Authorized Outstanding
Short-Term Debt Short-Term Debt (1)
--------------- -------------------
December 31, 2003 March 1, 2004
----------------- -------------
NU $400 $ 0 $ 0
CL&P 375 91.1 152.9
PSNH (2) 100 58.9 47.7
WMECO 200 41.4 50.4
Yankee Gas 100 87.5 3.5
Yankee
Energy System 50 0 0
NAEC (3) (4) 10 0 0
NNECO (4) 10 0 0
HWP (4) 5 1.4 0
Other (5) N/A 102.7 73.2
------ ------
Total $383.0 $327.7
====== ======
(1) These columns include borrowings of various NU system companies from NU and
other NU system companies. Total NU system short-term indebtedness to
unaffiliated lenders was $105 million at December 31, 2003 and $40 million at
March 1, 2004.
(2) Under applicable NHPUC regulations, PSNH can incur short-term debt up to
ten percent of fixed net plant or such other amount as approved by the NHPUC.
Pursuant to an order issued by the NHPUC, PSNH can incur short-term debt up to
$100 million.
(3) Under applicable NHPUC regulations, NAEC can incur short-term debt up to
ten percent of net fixed plant or such other amount as approved by the NHPUC.
NAEC has no plans to incur any future short-term borrowings.
(4) As of June 30, 2003, SEC authorization is limited to borrowings through
the Pool.
(5) Pursuant to SEC order, the SEC has limited, as indicated, the following
companies' borrowings from the Pool (but not borrowings from either parent
companies or non-affiliates): NUEI ($100 million); Select Energy ($200
million); SESI ($35 million); The Rocky River Realty Company (RRR) ($30
million); NGS ($25 million); Yankee Financial ($10 million); YESCO ($10
million); Quinnehtuk ($10 million); NorConn Properties, Inc. (NorConn) ($10
million); Boulos ($10 million); Woods Electrical ($10 million); and Select
Energy New York, Inc. ($10 million). NU, Yankee, Woods Network, NGC and Mode 1
may lend to, but are not authorized to borrow from, the Pool.
The supplemental indentures under which NU issued $175 million in
principal amount of 8.58 percent amortizing notes in December 1991 and $75
million in principal amount of 8.38 percent amortizing notes in March 1992
contain restrictions on dispositions of certain NU system companies' stock,
limitations of liens on NU assets and restrictions on distributions on and
acquisitions of NU stock. Under these provisions, NU, CL&P, PSNH and WMECO may
not dispose of voting stock of CL&P, PSNH or WMECO other than to NU or another
NU system company, except that CL&P may sell voting stock for cash to third
persons if so ordered by a regulatory agency so long as the amount sold is not
more than 19 percent of CL&P's voting stock after the sale. The restrictions
also generally prohibit NU from pledging voting stock of CL&P, PSNH or WMECO or
granting liens on its other assets in amounts greater than five percent of the
total common equity of NU. Many of the NU system companies' credit agreements
have similar restrictions. As of December 31, 2003, no NU debt was secured by
liens on NU assets. Furthermore, NU may not declare or make distributions on
its capital stock, acquire its capital stock (or rights thereto), or permit an
NU system company to do the same, at times when there is an event of default
existing under the supplemental indentures under which the amortizing notes
were issued.
The indenture under which NU issued $263 million in principal amount of
7.25 percent notes in April 2002 and $150 million in principal amount of 3.30
percent notes in June 2003 contains a limitation on liens on NU assets and a
limitation on sale and leaseback transactions involving those assets.
WMECO's debt indenture, under which it issued $55 million in principal
amount of 5.00 percent notes in September 2003, contains similar restrictions.
CL&P's charter contains preferred stock provisions restricting the amount
of additional unsecured debt it may incur. At shareholders' meetings on
November 25 and 26, 2003, CL&P obtained authorization from its preferred
stockholders to issue unsecured indebtedness with a maturity of less than ten
years in excess of ten percent of capitalization (but not in excess of 20
percent of capitalization) for a ten-year period expiring March 2014. As of
December 31, 2003, the amount of additional unsecured debt it could incur was
$366 million.
The indenture securing the outstanding first mortgage bonds of CL&P
provides that additional bonds may not be issued, except for certain refunding
purposes, unless: (1) net earnings during a period of twelve consecutive
calendar months during the period of fifteen consecutive calendar months
immediately preceding the first day of the month in which the application for
additional bonds is made are at least twice the pro forma annual interest
charges on outstanding bonds, certain prior lien obligations and bonds to be
issued, and (2) CL&P has available property credits equal to 1662/3 percent of
the principal amount of bonds to be issued. The indenture also allows CL&P to
issue first mortgage bonds equal to the available amount of bonds previously
issued but retired. At December 31, 2003, CL&P could not issue any bonds under
the interest/property coverage test, but could issue up to approximately $625
million based on available retired bond credits. As of December 31, 2003,
CL&P's net earnings were 11.6 times the annual interest charges on its
outstanding bonds.
The preferred stock provisions of CL&P's charter also prohibit the
issuance of additional preferred stock (except for refinancing purposes) unless
income before interest charges (as defined and after income taxes and
depreciation) is at least 1.5 times the pro forma annual interest charges on
indebtedness and the annual dividend requirements on preferred stock that will
be outstanding after the additional stock is issued. At December 31, 2003,
CL&P's income before interest charges was approximately 2.4 times the pro forma
annual interest and dividend requirements. CL&P has no current plans to issue
any preferred stock.
The indenture securing the outstanding first mortgage bonds of Yankee Gas
provides that additional bonds may not be issued unless it meets an interest
coverage test similar to that of CL&P as discussed above. As of December 31,
2003, Yankee's net earnings were 2.02 times the annual interest charges on its
outstanding bonds.
Boulos has a $6 million line of credit that prohibits the company from
incurring additional indebtedness (including borrowings from the NU money pool)
from its parent, NGS, or any other affiliate without prior consent of the
lender. In addition, the line of credit must be reduced to $0 for 30
consecutive days of each fiscal year.
Certain consolidated subsidiaries have dividend restrictions imposed by
their long-term debt agreements. These restrictions also limit the amount of
retained earnings available for NU common dividends. At December 31, 2003,
retained earnings available for the payment of dividends totaled $810 million.
The Federal Power Act and the 1935 Act both limit the payment of dividends
by PSNH, NAEC, CL&P and WMECO to retained earnings. At December 31, 2003,
retained earnings for these companies were $224 million, $4 million, $317
million and $72 million, respectively.
New Hampshire statutes also limit the payment of dividends by PSNH and
NAEC to the amount of retained earnings.
CL&P's first mortgage bond indenture limits dividend payments and share
repurchases to an amount equal to (i) retained earnings accumulated after
December 31, 1966; plus (ii) retained earnings accumulated prior to January 1,
1967, not exceeding $13.5 million; plus (iii) any additional amounts authorized
by the SEC. In 2000 and 2002, the SEC approved CL&P's proposal to pay
dividends and repurchase shares from capital or unearned surplus of up to $410
million in aggregate from proceeds derived from industry restructuring
transactions, and CL&P has utilized $400 million of this authority through
share repurchases in 2001 and 2002.
Applicable merger accounting rules required that upon acquisition by NU,
Yankee's and its subsidiaries' retained earnings were reclassified as capital
surplus. Also, the merger premium NU paid to acquire Yankee was allocated
among Yankee and its subsidiaries and "pushed down" to their balance sheets.
Under accounting conventions in existence at the time of the merger, the
majority of the merger premium would be amortized over 40 years. In June 2001,
the Financial Accounting Standards Board issued a statement that, effective
January 1, 2002, no longer requires companies to amortize goodwill as an
expense to the income statement. Instead goodwill is required to be evaluated
for impairment and any impairment to goodwill would be charged to expense. In
2003, no impairment was charged to expense.
NGC's bond covenants prevent NGC from making dividend payments unless (i)
no default or event of default will occur from doing so, (ii) the debt service
reserve account has been sufficiently funded with six months of principal and
interest on the outstanding bonds, and (iii) the debt service coverage ratio
for the previous four fiscal quarters (or, if shorter, since the bond issuance
closing date) and projected debt service coverage ratio for the next eight
fiscal quarters is greater than or equal to (a) 1.35 if contracted generating
capacity is greater than 75 percent or (b) 1.70 if contracted generating
capacity is less than 75 percent. At December 31, 2003, NGC's contracted
generating capacity was greater than 75 percent. NGC expects to meet its debt
service coverage ratio requirements under this covenant and to pay dividends in
2004.
Boulos' line of credit has a covenant that restricts dividend payments
(including any stock repurchase payments and other distributions or cash
advances to the direct or indirect holders of Boulos' stock) to no more than 40
percent of its net income. However, Boulos may pay dividends without this
restriction as long as no event of default has occurred and is continuing or
would result from the payment of dividends, and there are no unpaid and
outstanding borrowings at the time of the dividend payment.
NU is required under the 1935 Act to maintain its consolidated common
equity at a level equal to at least 30 percent of its consolidated
capitalization. In planning for the issuance of RRBs and RRCs by CL&P, WMECO
and PSNH in 2001, these companies obtained SEC consent for their common equity
ratios falling below 30 percent through December 31, 2004. As of December 31,
2003, NU's, CL&P's, WMECO's and PSNH's ratios were 34.2 percent, 30.5 percent,
35.0 percent and 29.0 percent, respectively. These ratios include RRBs and
RRCs as debt.
NU provides credit assurance in the form of guarantees and letters of
credit for the financial performance obligations of certain of its unregulated
and regulated subsidiaries. NU currently has authorization from the SEC to
provide up to $500 million of such guarantees for the benefit of its
unregulated subsidiaries through June 30, 2004 and has applied for authority to
increase this amount to $750 million and extend the authorization period
through September 30, 2007. As of December 31, 2003, the amount of guarantees
outstanding in compliance with the SEC limit for the unregulated subsidiaries
was $288.5 million. NU has also issued indirect guarantees of its regulated
companies by issuing guarantees to surety companies. These guarantees for the
regulated companies are subject to a separate $50 million SEC limitation apart
from the $500 million guarantee limit. As of December 31, 2003, $48.0 million
of guarantees were outstanding for the regulated entities of which $31.1
million is related to surety bonds obtained by CL&P to comply with an LMP order
issued by the DPUC. As of December 31, 2003, NU had $106.9 million of letters
of credit issued for the benefit of the unregulated subsidiaries.
Certain NU system credit financing agreements have trigger events tied to
the credit ratings of certain NU system companies, as discussed below.
RRR is a real estate subsidiary that owns NU's Connecticut headquarters
site. It has approximately $5.3 million of debt outstanding that could be
affected by a ratings change. If NU, CL&P, PSNH or WMECO ratings fall below a
B1 Moody's rating or a B+ Standard & Poor's rating, bondholders would have the
right to demand mandatory prepayments.
NGC has a debt reserve account related to its two senior secured debt
series that can be funded with cash, an NU guarantee or a letter of credit
(LOC) from an acceptable counterparty. The account may be funded with a
guarantee from NU if NU has an investment grade rating by Standard & Poor's and
Moody's. While NU does have investment grade ratings, the debt service reserve
account is currently funded with cash.
NU and its subsidiaries have $650 million of revolving credit agreements
with a number of banks. There are no ratings triggers that would result in a
default, but lower ratings would increase interest on future borrowings from
the credit lines.
A number of Select Energy's contracts require the posting of additional
collateral in the form of cash or letters of credit in the event NU's ratings
were to decline and in increasing amounts dependent upon the severity of the
decline. At NU's present investment grade ratings, Select Energy has not had
to post any collateral based on credit downgrades. Were NU's unsecured ratings
to decline two to three levels to sub-investment grade, Select Energy could,
under its present contracts, be asked to provide approximately $231 million of
collateral or letters of credit to various unaffiliated counterparties and
approximately $65 million to several independent system operators (ISO) and
unaffiliated local distribution companies, which management believes NU would
currently be able to provide. 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.
CONSTRUCTION AND CAPITAL IMPROVEMENT PROGRAM
The NU system's construction program expenditures, including allowance for
funds used during construction, is estimated to total $738 million in 2004. Of
such total amount, approximately $440 million is expected to be expended by
CL&P, $160 million by PSNH, $60 million by Yankee Gas, $38 million by WMECO and
up to $40 million by other system entities. This construction program data
includes all anticipated costs necessary for committed projects and for those
reasonably expected to become committed projects in 2004, regardless of whether
the need for the project arises from environmental compliance, reliability
requirements or other causes. The construction program's main focus is
maintaining, upgrading and expanding the existing transmission and distribution
system and natural gas distribution system. The system expects to evaluate its
needs beyond 2004 in light of future developments, such as restructuring,
industry consolidation, performance and other events.
The $40 million in construction expenditures planned for other system
entities in 2004 includes $22 million for NUEI which is mostly due to forecast
expenditures at NGC's Northfield pumped storage facility.
CL&P has announced plans to invest approximately $696 million by the end
of 2008 to construct two new 345,000 volt transmission lines from inland
Connecticut to Norwalk, Connecticut and another $45 million to replace an
existing 138,000 volt transmission line beneath Long Island Sound. The
investment in transmission lines and continued upgrading of the electric
distribution system are expected to increase CL&P's net investment in electric
plant by approximately $1.35 billion over the 2004 through 2008 timeframe. All
of these projects are in the developmental or governmental approval stage and
management cannot yet determine whether the projects will be built as proposed.
If current plans are implemented on schedule, the NU system would likely
require additional external financing to construct these projects. If all of
the transmission projects are built as proposed, the NU system's net investment
in electric transmission would increase to nearly $1.1 billion by the end of
2008. See "Rates and Electric Industry Restructuring-Connecticut Rates and
Restructuring."
Yankee Gas will continue to emphasize system expansion of its natural gas
distribution system in Connecticut and has recently received DPUC support for
the installation of a 1.2 billion cubic foot liquid natural gas production and
storage facility in Waterbury, Connecticut estimated to cost approximately $54
million. Construction on the facility is expected to begin in mid 2004. See
"Connecticut Rates and Restructuring" for information on Yankee Gas' DPUC
filing and the related decision.
REGULATED ELECTRIC OPERATIONS
DISTRIBUTION AND SALES
CL&P, PSNH and WMECO furnish retail franchise electric service in 149, 201
and 59 cities and towns in Connecticut, New Hampshire and Massachusetts,
respectively. In December 2003, CL&P provided retail franchise service to
approximately 1.2 million customers in Connecticut, PSNH provided retail
service to approximately 456,000 customers in New Hampshire and WMECO served
approximately 206,000 retail customers in Massachusetts.
The following table shows the sources of 2003 electric franchise retail
revenues based on categories of customers (exclusive of HWP):
Total NU
CL&P PSNH WMECO System
---- ---- ----- --------
Residential 47% 42% 45% 46%
Commercial 39% 38% 36% 39%
Industrial 12% 19% 18% 14%
Other 2% 1% 1% 1%
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
The actual changes in retail kWh sales for the last two years and the
forecasted retail sales growth estimates for the ten-year period 2003 through
2013 for CL&P, PSNH and WMECO are set forth below:
Forecast
2003-2013
2003 over 2002 over Compound Rate
2002 2001 Of Growth
--------- --------- -------------
NU System 3.6% 1.3% 1.9%
CL&P 3.3% 1.8% 1.7%
PSNH 4.7% -0.1% 2.7%
WMECO 2.6% 1.9% 1.2%
Consolidated NU retail sales rose by 3.6 percent in 2003, compared with
2002, primarily due to higher heating and cooling requirements and increased
residential usage. In addition, an adjustment to estimated unbilled electric
sales in September 2003 increased retail sales. Residential electric sales
were up 6.5 percent. Commercial sales were up by 2.6 percent for the year and
industrial sales decreased by 0.7 percent. Retail sales for CL&P, WMECO and
PSNH were up 3.3 percent, 2.6 percent and 4.7 percent, respectively.
REGIONAL AND SYSTEM COORDINATION
The NU system companies and most other New England utilities are parties
to an agreement (NEPOOL Agreement) which provides for coordinated planning and
operation of the region's generation and transmission facilities. The NEPOOL
Agreement was restated and revised as of March 1997 to provide for (i) a pool-
wide open access transmission tariff; (ii) the creation of an ISO; and (iii) a
broader governance structure for the New England Power Pool (NEPOOL) and a more
open, competitive market structure. Under these arrangements, ISO-NE, a
nonprofit corporation whose board of directors and staff are not controlled by
or affiliated with market participants, ensures the reliability of the NEPOOL
transmission system, administers the NEPOOL tariff and oversees the efficient
and competitive functioning of the regional power market.
The NEPOOL tariff provides for nondiscriminatory open access to the
regional transmission network at a single rate regardless of transmitting
distance for all transactions. The rate is a formula rate, structured to
ensure that each transmission provider under the NEPOOL tariff recovers its
revenue requirements.
In 1999, the FERC approved a comprehensive settlement of certain issues
concerning the NEPOOL transmission tariff. Among other items, the settlement
included a ROE component which set the ROEs for each individual transmission
provider owning NEPOOL transmission facilities. NU's ROE was set at 11.75
percent as a result of the settlement. On August 26, 2003, NU filed at the
FERC amendments to its transmission tariff to change the rate fixed by the
comprehensive settlement to a formula rate methodology that is designed to
ensure recovery of NU's entire transmission revenue requirement, including
those costs that are not recovered through the NEPOOL transmission tariff. NU
also requested that the FERC keep in effect the 11.75 ROE until such time as it
is superceded by a RTO transmission tariff. On October 22, 2003, the FERC
ordered that the new rate filing (and the ROE) would be effective October 28,
2003, subject to refund after the conclusion of settlement negotiations or a
hearing on limited issues raised by intervening parties. On January 23, 2004,
the FERC concluded that settlement discussions had proven ineffective and
remanded the remaining issues for hearing. Hearings are scheduled to commence
on August 24, 2004 and a final order is expected during the fourth quarter of
2004.
Transmission revenues are allocated between CL&P, HWP and its wholly-
owned subsidiary, Holyoke Power and Electric Company (HP&E), WMECO and PSNH
based upon a net revenue requirement allocation methodology.
TRANSMISSION ACCESS AND FERC REGULATORY CHANGES
Pursuant to FERC Order 888 (issued in April 1996) and the NEPOOL
Agreement, NU system companies operate their transmission system under a system
of two open access, non-discriminatory transmission tariffs (OATTs). The NEPOOL
OATT, which is administered by ISO-NE, covers access to and the operation of
regional transmission facilities and the NU companies' OATT covers access to
and operation of local transmission facilities.
In December 1999, the FERC issued an order calling on all transmission
owners to voluntarily join RTOs in order to advance competition in electric
markets (Order 2000).
On October 31, 2003, ISO-NE and the New England transmission owners filed
a joint application with the FERC to create a New England RTO (RTO-NE). As
proposed, RTO-NE would be an independent operator of all New England
transmission facilities, and would perform, among other functions, tariff
administration, transmission, planning, construction and reliability management
for the region's transmission system and the design and administration of
regional markets. Transmission owners would retain rights over their revenue
requirements and rate design and share certain other rights with RTO-NE, and
elements of the NEPOOL transmission tariff and the individual utilities'
tariffs will be combined into a single regional tariff. In conjunction with
this filing, on November 4, 2003, the New England transmission owners filed
with the FERC a proposed base ROE of 12.8 percent for the combined facilities,
with a request for additional basis points for joining an RTO and incentives
for future transmission expansions. The total requested ROE is 13.3 percent
for existing facilities and 14.3 percent for new facilities. Various parties
and state regulatory commissions have challenged both the justification for the
formation of RTO-NE and the requested ROEs. An order from the FERC is expected
by the second quarter of 2004.
In July 2002, the NEPOOL Participants Committee and ISO-NE management
jointly proposed a new NEPOOL market rule to implement SMD in New England. SMD
adopts LMP as a congestion tool, as well as other market features similar to
market rules in New York and the Pennsylvania-New Jersey-Maryland (PJM)
Interconnection. The New England SMD proposal was approved by the FERC on
December 20, 2002 and was implemented on March 1, 2003. Since that time,
changes have been made to SMD as a result of subsequent FERC orders and
proceedings, particularly with regard to market mitigation and the utilization
of RMR contracts to ensure the availability of certain generating plants to run
when it would otherwise be uneconomic for such plants to do so in order to
maintain system reliability. As a result of controversy over NRG and other
generators' attempts to utilize cost-based RMR contracts (which are paid for by
all transmission customers), the FERC ordered a temporary market solution until
the ISO could implement a locational capacity (LICAP) solution in June of 2004.
LICAP requires that CL&P support enough generation to meet peak demand (plus a
reserve to protect against higher demand than expected or generating plant
outages) in its service territory. Connecticut, because of insufficient
generation and transmission, is expected to have high LICAP costs. As a result
of the FERC order, ISO intends to file with the FERC in March of 2004 market
rules changes that will implement some form of LICAP. NU has been working with
ISO-NE and state regulators to defer or phase-in LICAP in order to mitigate
cost increases for its customers.
On July 31, 2003, NEPOOL and ISO-NE submitted to the FERC amendments to
the NEPOOL Tariff and Agreement that implement a comprehensive transmission
cost allocation methodology, intended to promote construction of new
transmission facilities by using a combination of regional cost support and
participant funding, depending on the type of upgrade. On December 18, 2003,
the FERC accepted the amendments, which will enable most of the costs of
transmission expansion projects already identified in ISO's 2002 and 2003
regional transmission expansion plan as reliability upgrades benefiting the
region (including NU's Phase I and Phase II southwest Connecticut projects) to
be spread across the New England region. Several parties have challenged these
amendments and the FERC has not indicated a date by which it will act.
REGULATED GAS OPERATIONS
In 2000, NU acquired Yankee and Yankee became a wholly owned subsidiary of
NU. Yankee is the parent of Yankee Gas, the largest natural gas distribution
company in Connecticut. Yankee continues to act as the holding company of
Yankee Gas and its two active non-utility subsidiaries, NorConn, which holds
the property and facilities of Yankee and its subsidiaries, and Yankee Energy
Financial Services Company, which provides customers with financing for energy
equipment installations.
Yankee Gas operates the largest natural gas distribution system in
Connecticut as measured by number of customers and size of service territory.
Total throughput (sales and transportation) for 2003 was 47.1 billion cubic
feet. In 2003, total gas operating revenues of $361 million were comprised of
the following: 49 percent residential; 29 percent commercial; 21 percent
industrial; and the remaining 1 percent other. Yankee Gas provides firm gas
sales service to customers who require a continuous gas supply throughout the
year, such as residential customers who rely on gas for their heating, hot
water and cooking needs. Yankee Gas also provides interruptible gas sales
service to certain commercial and industrial customers that have the capability
to switch from natural gas to an alternative fuel on short notice. Yankee Gas
can interrupt service to these customers during peak demand periods. Yankee Gas
offers firm and interruptible transportation services to customers who purchase
gas from sources other than Yankee Gas. In addition, Yankee Gas performs gas
sales, gas exchanges and capacity releases to marketers to reduce its overall
gas expense.
Although Yankee Gas is not subject to the FERC's jurisdiction, the FERC
does regulate the interstate pipelines serving Yankee Gas' service territory.
Yankee Gas, therefore, is directly and substantially affected by the FERC's
policies and actions. Accordingly, Yankee Gas closely follows and, when
appropriate, participates in proceedings before the FERC.
Yankee Gas is subject to regulation by the DPUC, which, among other
things, has jurisdiction over rates, accounting procedures, certain
dispositions of property and plant, mergers and consolidations, issuances of
securities, standards of service, management efficiency and construction and
operation of distribution, production and storage facilities. For information
relating to Yankee Gas DPUC proceedings, see "Rates and Electric Industry
Restructuring - Connecticut Rates and Restructuring."
For information on the proposed expansion of Yankee Gas' natural gas
delivery system in Connecticut, see "Construction and Capital Improvement
Program."
NUCLEAR GENERATION
GENERAL
During 2003, certain NU system companies owned equity interests in four
regional nuclear companies (the Yankee Companies) that separately own the
Connecticut Yankee nuclear unit (CY), the Maine Yankee nuclear unit (MY), the
Vermont Yankee nuclear unit (VY) (prior to sale) and the Yankee Rowe nuclear
unit (Yankee Rowe). Yankee Rowe, CY and MY have been permanently removed from
service and are being decontaminated and decommissioned. In July 2002, the
company that owned VY, Vermont Yankee Nuclear Power Company (VYNPC), sold it to
a subsidiary of Entergy Corporation, which assumed responsibility for the
decommissioning of that unit.
CL&P, PSNH, WMECO and other New England electric utilities are the
stockholders of the Yankee Companies. Each Yankee Company, other than VYNPC,
owns a single nuclear generating unit. The stockholder-sponsors of each Yankee
Company are responsible for proportional shares of the operating and
decommissioning costs of the respective Yankee Company. CL&P's, PSNH's and
WMECO's stock ownership percentages in the Yankee Companies are set forth
below:
CL&P PSNH WMECO NU System
Connecticut Yankee Atomic
Power Company (CYAPC) 34.5% 5.0% 9.5% 49.0%
Maine Yankee Atomic Power
Company (MYAPC) 12.0% 5.0% 3.0% 20.0%
Yankee Atomic Electric
Company (YAEC) 24.5% 7.0% 7.0% 38.5%
CL&P, PSNH and WMECO sold their shares of VYNPC back to VYNPC as of
October 31, 2003. Prior to the sale of VY, NU subsidiaries owned 17 percent of
VYNPC and, under the terms of the sale, will continue to buy 16 percent of VY's
output through March 2012 at a range of fixed prices.
The NRC has broad jurisdiction over the design, construction and operation
of nuclear generating stations, including the decommissioning activities at the
Yankee Companies.
NUCLEAR FUEL
GENERAL
Nuclear fuel costs associated with nuclear plant operations include
amounts for disposal of spent nuclear fuel. The NU system companies include in
their nuclear fuel expense spent fuel disposal costs accepted by the DPUC,
NHPUC and DTE in rate case or fuel adjustment decisions. Spent fuel disposal
costs also are reflected in the FERC-approved wholesale charges.
HIGH-LEVEL RADIOACTIVE WASTE
The Nuclear Waste Policy Act of 1982 (NWPA) provides that the federal
government is responsible for the permanent disposal of spent nuclear reactor
fuel (SNF) and other high-level waste. As required by the NWPA, electric
utilities generating SNF and high-level waste are obligated to pay fees into a
fund which would be used to cover the cost of siting, constructing, developing
and operating a permanent disposal facility for this waste. The NU system
companies have been paying for such services for fuel burned on or after
April 7, 1983, on a quarterly basis since July 1983. The DPUC, NHPUC and DTE
permit the fee to be recovered through rates. For nuclear fuel used to generate
electricity prior to April 7, 1983 (prior-period fuel), payment must be made
upon the first delivery of spent fuel to the United States Department of Energy
(DOE). The DOE's current estimate for an available site is 2010 at the
earliest.
In 2002, Congress designated the Yucca Mountain site in Nevada as the
nation's repository for used nuclear fuel. In return for payment of the fees
prescribed by the NWPA, the federal government is to take title to and dispose
of the utilities' high-level wastes and SNF. There have been numerous
litigation proceedings involving the DOE's statutory and contractual obligation
to accept high-level waste and SNF. While the courts have declined to order
the DOE to begin accepting spent fuel for disposal on January 31, 1998, the
courts have left open the utilities' ability to bring damage claims against the
DOE.
In 1998, YAEC, CYAPC and MYAPC filed separate complaints against the DOE
in the United States Court of Federal Claims seeking monetary damages resulting
from DOE's failure to accept spent nuclear fuel for disposal. In decisions
later that year, the court found liability on the part of DOE to the companies
for breach of the standard contract, based upon the DOE's failure to begin
disposal of spent nuclear fuel. The damages owed to YAEC, CYAPC and MYAPC as a
result of DOE's failure to begin disposing of spent nuclear fuel is in
litigation and a trial date has been set for July 12, 2004.
On January 23, 2004, Dominion Nuclear Connecticut, Inc. (DNCI) and
Dominion Resources, Inc., on behalf of themselves, CL&P, WMECO and NUSCO, filed
a similar complaint in the United States Court of Federal Claims against the
DOE, with respect to the DOE's failure to accept spent nuclear fuel for
disposal from the Millstone nuclear power station. The complaint is subject to
an automatic stay imposed by the United States Court of Federal Claims until
the lead cases (including the case filed by CYAPC) go to trial on their damages
claims.
Until the federal government begins accepting nuclear waste for disposal,
nuclear generating plants will need to retain high-level waste and spent fuel
onsite or make some other provisions for its storage.
Construction of dry spent fuel storage facilities, to hold the spent
nuclear fuel and other high level waste generated at those facilities until the
DOE accepts this waste, is in progress at CY, MY and Yankee Rowe. No fuel has
yet been moved to the dry storage facility site at CY, as this move is expected
to begin by spring of 2004 and targeted completion of the facility is by the
summer of 2005. Approximately 90 percent of the spent fuel has been
transferred to the storage facility at MY, with completion estimated during the
first quarter of 2004. All of the spent fuel at Yankee Rowe has been moved to
the storage site as of June 2003.
DECOMMISSIONING
As a result of the sales of Millstone in 2001 and Seabrook and the VY
nuclear units in 2002, respectively, NU shareholders, the NU system companies
and their ratepayers have no further obligation related to decommissioning with
respect to those units.
Although the purchasers of NU's ownership shares of the Millstone,
Seabrook and VY plants assumed the obligations of decommissioning those plants,
NU still has significant decommissioning and plant closure cost obligations to
the Yankee Companies. The Yankee Companies collect decommissioning and closure
costs through wholesale FERC-approved rates charged under power purchase
agreements to CL&P, PSNH and WMECO. These companies in turn pass these costs
on to their customers through state regulatory commission-approved retail
rates. A portion of these decommissioning and closure costs have already been
collected, but a substantial portion relating to the decommissioning of CY has
not been filed at and approved for collection by the FERC.
During 2002, NU was notified by CYAPC and YAEC that the estimated cost of
decommissioning these units and other closure costs increased over prior
estimates due to higher anticipated costs for spent fuel storage, security and
liability and property insurance. NU's share of this increase is $177.1
million. Following FERC rate cases by the Yankee Companies, NU expects to
recover the higher decommissioning costs from the retail customers of CL&P,
PSNH and WMECO.
NU cannot at this time predict the timing or outcome of the FERC
proceeding required for the collection of these remaining decommissioning and
closure costs. Although management believes that these costs will ultimately
be recovered from the customers of CL&P, PSNH and WMECO, there is a risk that
the FERC may not allow these costs, the estimates of which have increased
significantly in 2003 and 2002, to be recovered in wholesale rates. If the
FERC does not allow these costs to be recovered in wholesale rates, NU would
expect the state regulatory commissions to disallow those costs in retail rates
as well. As owners of equity investments in the Yankee Companies, CL&P, PSNH
and WMECO are subject to losses if the Yankee Companies are not successful in
rate proceedings at the FERC.
YAEC and MYAPC are currently collecting revenues for the decommissioning
of the related sites through their power purchase agreements. YAEC ceased
decommissioning collections in June 2000 but began collections again on June 1,
2003. The table below sets forth the NU system companies' estimated share of
remaining decommissioning costs of the Yankee Companies' units as of
December 31, 2003, net of amounts collected in rates. The estimates are based
on the latest decommissioning cost estimates. For information on the equity
ownership of the NU system companies in each of the Yankee Companies' units,
see "Nuclear Generation-General."
CL&P PSNH WMECO NU System
---- ---- ----- ---------
(Millions)
CY* $229.9 $33.3 $63.3 $326.5
MY* $ 43.7 $18.2 $11.0 $ 72.9
Rowe* $ 44.4 $12.7 $12.7 $ 69.8
------ ----- ----- ------
Total $318.0 $64.2 $87.0 $469.2
====== ===== ===== ======
* The costs shown include the expected future revenue requirements associated
with the funding of decommissioning, recovery of remaining assets and other
closure costs associated with the early retirement of Yankee Rowe, CY and MY as
of December 31, 2003, which have been recorded as an obligation on the books of
the NU system companies.
As of December 31, 2003, the Yankee Companies' share of the external
decommissioning trust fund balances (at market), reflecting the contribution
share provided by the NU system companies, is as follows:
CL&P PSNH WMECO NU System
---- ---- ----- ---------
(Millions)
CY $74.0 $10.7 $20.4 $105.1
MY $ 8.4 $ 3.5 $ 2.0 $ 13.9
Rowe $14.2 $ 4.1 $ 4.1 $ 22.4
----- ----- ----- ------
Total $96.6 $18.3 $26.5 $141.4
===== ===== ===== ======
The cost estimate for CY not yet approved for recovery by FERC at
December 31, 2003 is $258.2 million.
CYAPC is required to file with the FERC no later than mid-2004 for
increased costs associated with the decommissioning of CY. YAEC filed with the
FERC in April 2003 for its unrecovered decommissioning costs. A settlement was
approved by the FERC on October 2, 2003 and collections began on June 1, 2003.
The delay in YAEC's fuel transfer activities is expected to extend the
completion of decommissioning activities to 2005. MYAPC filed with the FERC in
October 2003 for new rates and is currently negotiating a settlement with the
FERC and intervening parties. In the case of each of CYAPC, YAEC and MYAPC,
the precise annual collection amounts and duration will be determined as part
of the FERC approval process.
For information on litigation between CYAPC and Bechtel Power Corporation
(Bechtel) relating to the decommissioning of CY, see Item 3, "Legal
Proceedings."
In October 2001, NU issued a report, following an extensive search,
concerning two missing fuel pins at the retired Millstone 1 nuclear unit which
was subsequently sold to DNCI. As of December 31, 2003, costs related to this
search totaled $9.4 million. The report concluded that the pins are currently
located in one of four facilities licensed to store low or high-level nuclear
waste and that they are not a threat to public health and safety. A follow-up
inspection by the NRC concluded that NU's investigation was thorough and
complete and its conclusions were reasonable and supportable. These events
have, however, resulted in the issuance of an NRC notice of violation and the
imposition of a $288,000 civil penalty in 2002. The NRC is expected to conclude
its review of this matter in 2004.
OTHER REGULATORY AND ENVIRONMENTAL MATTERS
ENVIRONMENTAL REGULATION
GENERAL
The NU system and its subsidiaries are subject to various federal, state
and local requirements with respect to water quality, air quality, toxic
substances, hazardous waste and other environmental matters. Additionally, the
NU system's major generation and transmission facilities may not be constructed
or significantly modified without a review by the applicable state agencies of
the environmental impact of the proposed construction or modification.
Compliance with increasingly more stringent environmental laws and regulations,
particularly air and water pollution control requirements, may limit operations
or require substantial investments in new equipment at existing facilities.
SURFACE WATER QUALITY REQUIREMENTS
The federal Clean Water Act requires every "point source" discharger of
pollutants into navigable waters to obtain a National Pollutant Discharge
Elimination System (NPDES) permit from the United States Environmental
Protection Agency (EPA) or state environmental agency specifying the allowable
quantity and characteristics of its effluent. States may also require
additional permits for discharges into state waters. NU system facilities are
in the process of obtaining or renewing all required NPDES or state discharge
permits in effect. Compliance with NPDES and state discharge permits has
necessitated substantial expenditures, which are difficult to estimate, and may
require further significant expenditures because of additional requirements or
restrictions that could be imposed in the future. For information regarding
civil lawsuits related to alleged violations of certain facilities' NPDES
permits, see Item 3, "Legal Proceedings."
The Federal Oil Pollution Act of 1990 (OPA 90) sets out the requirements
for facility response plans and periodic inspections of spill response
equipment at facilities that can cause substantial harm to the environment by
discharging oil or hazardous substances into the navigable waters of the United
States and onto adjoining shorelines. The NU system companies are currently in
compliance with the requirements of OPA 90. OPA 90 includes limits on the
liability that may be imposed on persons deemed responsible for release of oil.
The limits do not apply to oil spills caused by negligence or violation of laws
or regulations. OPA 90 also does not preempt state laws regarding liability
for oil spills. In general, the laws of the states in which the NU system owns
facilities and through which the NU system transports oil could be interpreted
to impose strict liability for the cost of remediating releases of oil and for
damages caused by releases. The NU system currently carries general liability
insurance in the total amount of $160 million annual coverage, which includes
liability coverage for oil spills.
AIR QUALITY REQUIREMENTS
The Clean Air Act Amendments of 1990 (CAAA), as well as state laws in
Connecticut, Massachusetts and New Hampshire, impose stringent requirements on
emissions of sulfur dioxide (SO2) and nitrogen oxide (NOX) for the purpose of
controlling acid rain and ground level ozone. In addition, the CAAA address
the control of toxic air pollutants. Installation of continuous emissions
monitors and expanded permitting provisions also are included. Compliance with
CAAA requirements has cumulatively cost the NU system approximately $78 million
as of December 31, 2003: $11 million for CL&P, $60 million for PSNH, $1 million
for WMECO and $6 million for HWP. In addition, PSNH expects to spend
approximately $3.8 million a year for SO2 compliance and approximately $3
million for annual operational costs for NOX controls.
Massachusetts and New Hampshire are both imposing significant new emission
reduction requirements on power plants, in addition to the Federal
requirements. In Massachusetts, new emission standards for power plants were
signed into law in September 2001. The four pollutants regulated under these
standards are NOX, SO2, carbon dioxide (CO2) and mercury, with emission rates
and caps for all but mercury effective in October 2006. Interim levels for NOX
and SO2 were also set for HWP. The mercury standards were proposed in October
2003 and are not yet final. The capital cost for Mt. Tom Station to meet
current Massachusetts emission limits is estimated to be approximately $2
million Completion of this work, coupled with possible output reductions, will
reduce Mt. Tom's NOX emissions, thus lowering the amount of NOX allowances
required compared to prior years. SO2 requirements will be controlled by
purchasing lower sulfur coals. Additional costs for compliance with expected
mercury and carbon dioxide limits are unknown at this time.
In New Hampshire, the emissions reduction Clear Air Bill was signed into
law in May 2002. This law addresses emissions reductions of the same four
pollutants as in Massachusetts. NOX, SO2 and CO2 have their emission caps
established for current compliance beginning in 2007. The mercury emission cap
is expected to be set prior to July 1, 2005. Estimates for compliance
(excluding mercury control) are between $4 and $5 million dollars and will be
better known after the mercury reduction requirement is established.
HAZARDOUS MATERIALS REGULATIONS
As many other industrial companies have done in the past, the NU system
companies disposed of residues from operations by depositing or burying such
materials on-site or disposing of them at off-site landfills or facilities.
Typical materials disposed of include coal gasification waste, fuel oils, ash,
gasoline and other hazardous materials that might contain polychlorinated
biphenyls (PCBs). It has since been determined that deposited or buried
wastes, under certain circumstances, could cause groundwater contamination or
create other environmental risks. The NU system has recorded a liability for
what it believes is, based upon currently available information, its estimated
environmental investigation and/or remediation costs for waste disposal sites
for which the NU system companies expect to bear legal liability, and continues
to evaluate the environmental impact of its former disposal practices. Under
federal and state law, government agencies and private parties can attempt to
impose liability on NU system companies for such past disposal. At
December 31, 2003, the liability recorded by the NU system for its estimated
environmental remediation costs for known sites needing investigation and/or
remediation, including those sites described below, exclusive of recoveries
from insurance or from third parties, was approximately $40.8 million,
representing 50 sites. This total includes liabilities recorded by Yankee Gas
of $18.9 million. All cost estimates were made in accordance with generally
accepted accounting principles where investigation and/or remediation costs are
probable and reasonably estimable. These costs could be significantly higher
if additional remedial actions become necessary. These liabilities break down
as follows:
1. Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, commonly known as Superfund, EPA has the
authority to clean up or order the clean up of hazardous waste sites and to
impose the clean up costs on parties deemed responsible for the hazardous waste
activities on the sites. Responsible parties include the current owner of a
site, past owners of a site at the time of waste disposal, waste transporters
and waste generators. The NU system currently is involved in five Superfund
matters: one in Connecticut, one in New Jersey, two in New Hampshire and one in
Kentucky, which could have a material impact on the NU system. The NU system
has established a reserve of approximately $1.3 million to its share of the
clean up of these sites. For further information on litigation relating to the
Connecticut matter, see Item 3, "Legal Proceedings."
2. The greatest liabilities currently relate to former manufactured gas
plant (MGP) facilities which represent the largest share of future clean up
costs. These facilities were owned and operated by predecessor companies to
the NU system from the mid-1800's to mid-1900. Byproducts from the manufacture
of gas using coal resulted in fuel oils, hydrocarbons, coal tar, purifier
wastes, metals and other waste products that may pose risks to human health and
the environment. The NU system currently has partial or full ownership
responsibilities at 29 former MGP sites. Of the total NU system liabilities,
a reserve of $36.3 million has been established to address future investigation
and/or remediation costs at MGP sites.
3. Other sites undergoing comprehensive investigations or remediation
actions under state programs located in Connecticut, Massachusetts or New
Hampshire include two former fuel oil releases, two landfills, three asbestos
hazard abatement projects and nine miscellaneous projects. To date, a reserve
of approximately $3.2 million has been established to address future
investigation and/or remediation costs at these sites.
In the past, the NU system has received other claims from government
agencies and third parties for the cost of remediating sites not currently
owned by the NU system but affected by past NU system disposal activities and
may receive more such claims in the future. The NU system expects that the
costs of resolving claims for remediating sites about which it has been
notified will not be material, but cannot estimate the costs with respect to
sites about which it has not been notified.
ELECTRIC AND MAGNETIC FIELDS
Published reports have discussed the possibility of adverse health effects
from electric and magnetic fields (EMF) associated with electric transmission
and distribution facilities and appliances and wiring in buildings and homes.
Most researchers, as well as numerous scientific review panels considering all
significant EMF epidemiological and laboratory studies to date, agree that
current information remains inconclusive, inconsistent and insufficient for
characterizing EMF as a health risk.
Based on this information, management does not believe that a causal
relationship between EMF exposure and adverse health effects has been
established or that significant capital expenditures are appropriate to
minimize unsubstantiated risks. The NU system companies have closely monitored
research and government policy developments for many years and will continue to
do so.
If further investigation were to demonstrate that the present electricity
delivery system is contributing to increased risk of cancer or other health
problems, the industry could be faced with the difficult problem of delivering
reliable electric service in a cost-effective manner while managing EMF
exposures. To date, no courts have concluded that individuals have been harmed
by EMF from electric utility facilities, but if utilities were to be found
liable for damages, the potential monetary exposure for all utilities,
including the NU system companies, could be enormous. Without definitive
scientific evidence of a causal relationship between EMF and health effects,
and without reliable information about the kinds of changes in utilities'
transmission and distribution systems that might be needed to address the
problem, if one is found, no estimates of the cost impacts of remedial actions
and liability awards are available.
FERC HYDROELECTRIC PROJECT LICENSING
New Federal Power Act licenses may be issued for hydroelectric projects
for terms of 30 to 50 years as determined by the FERC. Upon the expiration of
an existing license, (i) the FERC may issue a new license to the existing
licensee, or (ii) the United States may take over the project or the FERC may
issue a new license to a new licensee, upon payment to the existing licensee of
the lesser of the fair value or the net investment in the project, plus
severance damages, less certain amounts earned by the licensee in excess of a
reasonable rate of return.
The NU system companies currently hold the FERC licenses for 11
hydroelectric projects totaling 16 plants. In addition, the NU system
companies own and operate five unlicensed hydroelectric projects that are
currently deemed non-jurisdictional by the FERC. These licensed and unlicensed
hydroelectric projects are located in Connecticut, Massachusetts and New
Hampshire and aggregate approximately 1,367 MW of capacity. CL&P's and WMECO's
five licensed projects and four unlicensed projects with approximately 1,302 MW
of capacity were transferred to NGC in March 2000.
NGC's FERC licenses for operation of the Falls Village and Housatonic
hydroelectric projects expired in August 2001. Annual operating licenses allow
NGC to continue plant operations until new licenses are granted. NGC filed an
application for a new license which proposed to combine both projects under one
license. In August 1999, the Connecticut Department of Environmental
Protection (CDEP) issued its Section 401 water quality certification for the
combined Housatonic River Project. A draft environmental impact statement for
the relicensing was issued in July 2003. A final environmental impact
statement is expected during the first half of 2004. A new license for the
Housatonic Project is likely to be issued in late 2004 or in 2005. At this
time, it is impossible to determine the terms and conditions of any new
license, or to predict the effect of any terms and conditions on project
economics.
PSNH's FERC license for the Merrimack River Hydroelectric Project that
consists of the Amoskeag, Hooksett and Garvins Falls hydroelectric generating
stations expires on December 31, 2005. In December 2003, PSNH filed an
application for a new license for the project. The FERC's tentative
relicensing schedule provides for the issuance of a scoping document in July
2004; issuance of notice that the application is ready for environmental review
in January 2005; availability of an environmental assessment in June 2005 and
readiness for commission decision in December 2005. If a new license is not
issued by the expiration of the current license (December 31, 2005), it is
expected that the FERC will issue an annual license for the project. Annual
licenses are commonly issued under the same terms and conditions as the current
license, but may include new conditions if such conditions are authorized by
the existing license.
Licensed operating hydroelectric projects are not generally subject to
decommissioning during the license term in the absence of a specific license
provision which expressly permits the FERC to order decommissioning during the
license term. However, the FERC has taken the position that under appropriate
circumstances it may order decommissioning of hydroelectric projects at
relicensing or may require the establishment of decommissioning trust funds as
a condition of relicensing. The FERC may also require project decommissioning
during a license term if a hydroelectric project is abandoned, the project
license is surrendered or the license is revoked.
At this time, it appears unlikely that the FERC will order decommissioning
of NGC or PSNH hydroelectric projects at relicensing or that the projects will
be abandoned, surrendered or the project licenses revoked. However, it is
impossible to predict the outcome of the FERC relicensing proceedings with
certainty, or to determine the impact of future regulatory actions on project
economics. Until such time as a project is ordered to be decommissioned and
the terms and conditions of a decommissioning order are known, it is not
possible to accurately estimate or predict the cost of project decommissioning.
EMPLOYEES
As of December 31, 2003, the NU system companies had 6,757 employees on
their payrolls, excluding temporary employees, of which 2,141 were employed by
CL&P, 1,282 by PSNH, 408 by WMECO, 488 by Yankee Gas, 300 by NGS, 1,437 by
NUSCO, 159 by Select, 104 by SESI and 438 by SECI. NU, NGC, NAEC, Mode 1 and
NUEI have no employees.
In response to changing market conditions and state funding reductions,
CL&P and NUSCO eliminated some of their organizational lines and otherwise
reduced their workforce in 2003. As a result, NGS reduced its workforce by 12
employees, CL&P reduced its workforce by 17 employees and NUSCO reduced its
workforce by 22 employees, at a total cost of approximately $1.7 million.
Approximately 2,445 employees of CL&P, PSNH, WMECO, HWP, NUSCO and Yankee
Gas are covered by 17 union agreements, none of which were in negotiation as of
the end of January 2004, and the remainder of which will expire between June 1,
2004 and May 31, 2006.
INTERNET INFORMATION
The NU system's website address is http://www.nu.com/investors. The
company makes available through its website a link to the SEC's EDGAR site, at
which site NU's, CL&P's, WMECO's and PSNH's annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports may be reviewed. Printed copies of these reports may be
obtained free of charge by writing to the Company's Investor Relations
Department at Northeast Utilities, 107 Selden Street, Berlin, Connecticut
06037.
ITEM 2. PROPERTIES
The physical properties of NU are owned or leased by subsidiaries of NU.
CL&P's properties are located either on land which is owned in fee or on land,
as to which CL&P owns perpetual occupancy rights adequate to exclude all
parties except possibly state and federal governments, which has been reclaimed
and filled pursuant to permits issued by the United States Army Corps of
Engineers. The principal properties of PSNH are held by it in fee. In March of
2002, PSNH moved its headquarters to a refurbished former PSNH generating
station site. A major portion of WMECO's properties are owned in fee. In
addition, CL&P, PSNH and WMECO lease certain data processing equipment,
vehicles, and office space. Also CL&P and WMECO lease certain substation
equipment. With few exceptions, NU's lines are located on or under streets or
highways, or on properties either owned or leased, or in which they have
appropriate rights, easements, licenses or permits from the owners or the
appropriate governmental authorities.
Yankee Gas' property consists primarily of its natural gas distribution
facilities including distribution lines (mains and services), meters, valves,
pressure regulators and flow controllers. Yankee Gas also owns five propane
peak-shaving facilities with a combined storage capacity equivalent to
approximately 245,000 million cubic feet and service buildings and rents or
leases certain other property.
CL&P, PSNH, NGC and Yankee Gas' properties are subject to the lien of each
company's respective first mortgage indentures. In addition, CL&P's interest
in transmission assets is subject to a second mortgage lien for the benefit of
the PCRBs. Various properties are also subject to minor encumbrances which do
not substantially impair the usefulness of the properties to the owning
company.
NU's properties are well maintained and are in good operating condition.
TRANSMISSION AND DISTRIBUTION SYSTEM
At December 31, 2003, NU owned 108 transmission and 350 distribution
substations that had an aggregate transformer capacity of 17,496,990
kilovoltamperes (kVa) and 9,073,362 kVa, respectively; 3,088 circuit miles of
overhead transmission lines ranging from 69 kilovolt (kV) to 345 kV, and 196
cable miles of underground transmission lines ranging from 69 kV to 138 kV;
33,351 pole miles of overhead and 2,429 conduit bank miles of underground
distribution lines; and 437,470 line transformers in service with an aggregate
capacity of 19,436,865 kVa.
ELECTRIC GENERATING PLANTS
As of December 31, 2003, the electric generating plants of NU were as
follows:
Claimed
Year Capability*
Owner Name of Plant (Location) Type Installed (kilowatts)
----- ------------------------ ---- --------- -----------
PSNH Total - Fossil-Steam Plants (6 units) 1952-74 986,805
Total - Hydro-Conventional (20 units) 1917-83 67,690
Total - Internal Combustion (5 units) 1968-70 102,792
---------
Total PSNH Generating Plant (31 units) 1,157,287
=========
HWP Total - Fossil-Steam Plants (1 unit) 1960 147,000
=========
NGC Total - Hydro-Conventional (36 units) 1903-55 157,930
Total - Hydro-Pumped Storage (7 units) 1928-73 1,109,000
Total - Internal Combustion (1 unit) 1969 20,800
---------
Total NGC Generating Plant (44 units) 1,287,730
=========
NU Total - Fossil-Steam Plants (7 units) 1952-74 1,133,805
Total - Hydro-Conventional (56 units) 1903-83 225,620
Total - Hydro-Pumped Storage (7 units) 1928-73 1,109,000
Total - Internal Combustion (6 units) 1968-70 123,592
--------- ---------
Total NU Generating Plant (76 units) 2,592,017
========= =========
*Claimed capability represents winter ratings as of December 31, 2003.
FRANCHISES
CL&P. Subject to the power of alteration, amendment or repeal by the
General Assembly of Connecticut and subject to certain approvals, permits and
consents of public authority and others prescribed by statute, CL&P has,
subject to certain exceptions not deemed material, valid franchises free from
burdensome restrictions to provide electric transmission and distribution
services in the respective areas in which it is now supplying such service.
In addition to the right to provide electric transmission and distribution
services as set forth above, the franchises of CL&P include, among others,
limited rights and powers, as set forth in Title 16 of the Connecticut General
Statutes and the special acts of the General Assembly constituting its charter,
to manufacture, generate, purchase and sell electricity at retail, including to
provide standard offer, backup, and default service, to sell electricity at
wholesale to other utility companies and municipalities and to erect and
maintain certain facilities on public highways and grounds, all subject to such
consents and approvals of public authority and others as may be required by
law. The franchises of CL&P include the power of eminent domain.
PSNH. The NHPUC, pursuant to statutory requirement, has issued orders
granting PSNH exclusive franchises free from burdensome restrictions to
distribute electricity in the respective areas in which it is now supplying
such service.
In addition to the right to distribute electricity as set forth above, the
franchises of PSNH include, among others, rights and powers to manufacture,
generate, purchase, and transmit electricity, to sell electricity at wholesale
to other utility companies and municipalities and to erect and maintain certain
facilities on certain public highways and grounds, all subject to such consents
and approvals of public authority and others as may be required by law. The
franchises of PSNH include the power of eminent domain.
WMECO. WMECO is authorized by its charter to conduct its electric
business in the territories served by it, and has locations in the public
highways for transmission and distribution lines. Such locations are granted
pursuant to the laws of Massachusetts by the Department of Public Works of
Massachusetts or local municipal authorities and are of unlimited duration, but
the rights thereby granted are not vested. Such locations are for specific
lines only, and for extensions of lines in public highways, further similar
locations must be obtained from the Department of Public Works of Massachusetts
or the local municipal authorities. In addition, WMECO has been granted
easements for its lines in the Massachusetts Turnpike by the Massachusetts
Turnpike Authority.
Pursuant to the Massachusetts restructuring legislation, the DTE is
required to define service territories for each distribution company, including
WMECO, based on the service territories actually served on July 1, 1997, and
following municipal boundaries to the extent possible. The DTE has not yet
defined service territories. After these service territories are established
by the DTE, until they are terminated by effect of law or otherwise, the
distribution company shall have the exclusive obligation to provide
distribution service to all retail customers within its service territory, and
no other person shall provide distribution service within such service
territory without the written consent of such distribution company.
HWP and HP&E. HWP, and its wholly owned subsidiary HP&E, are authorized
by their charters to conduct their businesses in the territories served by
them. HWP's electric business is subject to the restriction that sales be made
by written contract in amounts of not less than 100 horsepower to purchasers
who use the electricity in their own business in the counties of Hampden or
Hampshire, Massachusetts and cities and towns in these counties, and customers
who occupy property in which HWP has a financial interest, by ownership or
purchase money mortgage. The two companies have locations in the public
highways for their transmission and distribution lines. Such locations are
granted pursuant to the laws of Massachusetts by the Department of Public Works
of Massachusetts or local municipal authorities and are of unlimited duration,
but the rights thereby granted are not vested. Such locations are for specific
lines only and, for extensions of lines in public highways, further similar
locations must be obtained from the Department of Public Works of Massachusetts
or the local municipal authorities. HP&E has no retail service territory area
and sells electric power exclusively at wholesale. In connection with the sale
of certain of HWP's and HP&E's assets to the city of Holyoke Gas and Electric
Department (HG&E) effective December 2001, HWP agreed to cause the charters of
HWP and HP&E to be amended to eliminate their rights to distribute electricity
at retail in Holyoke and surrounding towns unless other sellers can legally
compete with HG&E, and not to exercise such rights prior to such amendment.
NGC. NGC is an exempt wholesale generator (EWG) and, as it currently
operates its business, is not regulated by the DPUC or the DTE. The FERC's
authorization for EWGs such as NGC to sell wholesale electric power at market-
based rates typically contains an exemption from much of the traditional public
utility company rate regulation. As an EWG, NGC is a "public utility" subject
to the Federal Power Act. The market-based rate authorization that NGC has
received from the FERC exempts NGC from some, but not all, of Federal Power Act
regulations, including traditional cost-based rate regulation. However, NGC is
required to file summary information concerning its power transactions on a
quarterly basis with FERC.
Yankee Gas. Yankee Gas and its predecessors in interest hold valid
franchises to sell gas in the areas in which Yankee Gas supplies gas service.
Generally, Yankee Gas holds franchises to serve customers throughout
Connecticut, so long as the area is not occupied and served by another gas
utility. Such franchises are perpetual but remain subject to the power of
alteration, amendment or repeal by the General Assembly of the State of
Connecticut, the power of revocation by the DPUC and certain approvals, permits
and consents of public authorities and others prescribed by statute. Yankee
Gas' franchises include, among other rights and powers, rights and powers to
manufacture, generate, purchase, transmit and distribute gas, to sell gas at
wholesale to other utility companies and municipalities and to erect and
maintain certain facilities on public highways and grounds, all subject to such
consents and approvals of public authorities and others as may be required by
law. The franchises include the power of eminent domain.
ITEM 3. LEGAL PROCEEDINGS
1. Consolidated Edison, Inc. v. NU - Merger Appeals and Related Litigation
This litigation consists of the consolidated civil lawsuits filed in the
United States District Court for the Southern District of New York (District
Court) by Consolidated Edison, Inc. (Con Edison) and NU regarding the parties'
October 19, 1999 Agreement and Plan of Merger, as amended and restated as of
January 11, 2000 (Merger Agreement). In its amended complaint, Con Edison
alleges that NU failed to perform material obligations under the Merger
Agreement, that there has been a "Material Adverse Change" with respect to NU
and that certain conditions precedent to Con Edison's obligation to merge with
NU have not been and cannot be satisfied. (Con Edison's amended complaint
further asserts claims for fraud and negligent misrepresentation which were
dismissed on summary judgment on March 15, 2003.) In its counterclaim, NU
seeks damages in excess of $1 billion alleging that Con Edison is in material
breach of the Merger Agreement based on its repudiation thereof and its refusal
to proceed with the merger.
The companies completed discovery in the litigation and submitted cross
motions for summary judgment. The District Court has denied Con Edison's
motion in its entirety, leaving intact NU's claim for breach of the Merger
Agreement and has partially granted NU's motion for summary judgment by
eliminating Con Edison's claims against NU for fraud and negligent
misrepresentation.
As of June 19, 2003, the parties' motions in limine were fully briefed and
remain pending before the District Court. On December 24, 2003, the District
Court issued orders dismissing Con Edison's July 1, 2003 motion to dismiss NU's
"lost premium" counterclaim without prejudice and granting Robert Rimkoski's
July 24, 2003 motion to intervene. NU has filed a cross-claim against Rimkoski
seeking a declaratory ruling that NU's current shareholders are the proper
third party beneficiaries under the Merger Agreement. On March 26, 2004, the
District Court will hear oral argument on the issue of who are the proper
beneficiaries under the Merger Agreement, the March 5, 2001 class Rimkowski
seeks to represent or the current shareholders. No trial date has been set. At
this stage of the litigation, management can predict neither the outcome of
this matter nor its ultimate effect on NU.
2. Sale of Millstone to DNCI
On March 8, 2001, the Connecticut Coalition Against Millstone (CCAM) and
other parties filed a lawsuit in Connecticut Superior Court against the CDEP,
NNECO and DNCI challenging (1) the validity of Millstone's NPDES permit
(Permit) and a previously issued CDEP emergency authorization allowing
Millstone to discharge wastewater not expressly authorized by the facility's
Permit and (2) CDEP's authority to transfer both Millstone's permit and
emergency authorization to DNCI. On March 29, 2001, CCAM's request for a
temporary restraining order enjoining CDEP from transferring both the Permit
and emergency authorization to DNCI prior to a full hearing was denied.
Subsequently, on July 19, 2001, the entire matter was dismissed. On
September 20, 2002, the Connecticut Supreme Court assigned the matter to
itself. On December 23, 2003, the Connecticut Supreme Court dismissed CCAM's
appeal. On January 2, 2004, CCAM filed a motion for reconsideration en banc,
which was denied on February 4, 2004.
3. Retirement Plan Litigation
This matter involves 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 that caused them to retire prematurely, since as a result of
these alleged misrepresentations they came to believe incorrectly that no
particular future enhancement of employee benefits was being seriously
considered at the time by the companies. Plaintiffs are seeking the benefits
of retirement plan enhancements adopted subsequent to their retirements.
The cases were tried together in a summary bench trial in the United
States District Court in Hartford, Connecticut in April-May 2002; post-trial
briefs have been filed and the parties are awaiting the judge's decision.
4. Wisvest-Connecticut, LLC (Wisvest) v. Select Energy
Wisvest filed suit in July 2002 against Select Energy in the Superior
Court at New Britain, Connecticut. In its complaint, Wisvest alleges that
Select Energy breached its Load Asset Contract for Electrical Load dated
November 23, 1999 (the Agreement), which contract expired on December 31, 2003,
by unilaterally reducing the amount of electricity it proposed to purchase from
Wisvest. The complaint seeks monetary damages and a declaratory judgment.
Select Energy has filed an Answer to the complaint, denying any liability.
It has also filed several special defenses and counterclaims to recover
approximately $5.8 million for congestion charges incurred and paid by Select
Energy prior to the implementation of SMD on March 1, 2003. No trial date has
been set.
5. NRG Bankruptcy
On May 14, 2003, NRG and certain of its affiliates filed for Chapter 11
protection in the United States Bankruptcy Court for the Southern District of
New York (Bankruptcy Court). The filing affects relationships between various
NU companies and the NRG companies.
A. CL&P Standard Offer Contract
NRG's May 14, 2003 bankruptcy filing included a request by NRG-PMI to
terminate service to CL&P under its standard offer supply agreement (SOS
Agreement). The U.S. Bankruptcy Court authorized NRG-PMI to reject the SOS
Agreement, but the FERC then directed NRG-PMI to continue to perform under its
SOS Agreement until the FERC fully considers the matter.
Subsequently, the U.S. District Court for the Southern District of New
York issued a ruling deferring to FERC on this matter. On July 18, 2003, NRG-
PMI and the Creditors Committee filed an appeal with the U.S. Court of Appeals
for the Second Circuit to enjoin the FERC order. On August 15, 2003, FERC
issued an order stating that NRG-PMI had failed to demonstrate that premature
termination of its SOS Agreement with CL&P would be in the public interest, and
therefore, NRG-PMI must continue to perform under the SOS Agreement.
On November 21, 2003, the Bankruptcy Court approved a settlement between
CL&P, the Connecticut Attorney General, the DPUC, the Office of Consumer
Counsel, NRG-PMI and the Official Committee of Unsecured Creditors. On
December 18, 2003, the settlement was approved by the FERC. The settlement
required NRG-PMI to serve out the remainder of the SOS Agreement with no change
in price or terms, in exchange for a commitment by CL&P to make payments for
services rendered on a revised schedule.
B. Station Service
NRG has disputed its responsibility to pay for the provision of station
service by CL&P to NRG's Connecticut generating plants. The FERC issued a
decision on December 20, 2002 that NRG had agreed that station service from
CL&P would be subject to CL&P's applicable retail rates, and that states (i.e.,
the DPUC) have jurisdiction over the delivery of power to end users even where,
as here, power is not delivered via distribution facilities. NRG refused
CL&P's subsequent demand for payment, and on April 3, 2003, CL&P petitioned the
DPUC for a declaratory order enforcing the FERC's December 20, 2002 decision.
No action was taken by the DPUC prior to NRG's bankruptcy filing.
On September 9, 2003, the Bankruptcy Court approved the parties'
stipulation to submit the station service issue to arbitration for a
determination of liability and damages which will fix CL&P's claim in
bankruptcy. The parties are currently pursuing arbitration of the issues in
dispute but no hearing dates have been scheduled. On December 17, 2003, the
DPUC issued a decision in CL&P's rate case that addressed the issue that CL&P
had first raised to the DPUC in its April 3, 2003 filing. The DPUC
affirmatively stated that CL&P has been appropriately administering its station
service rates. Subsequently, however, in unrelated proceedings, the FERC
issued a series of orders with conflicting policy direction, which call into
question its December 20, 2002 NRG order. In January 2004, CL&P filed a
request with the FERC for further clarification of this issue.
C. Yankee Gas
On October 9, 2002, NRG informed Yankee Gas that its affiliate, Meriden
Gas Turbines, LLC (MGT) was permanently shutting down or abandoning its Meriden
power plant project, and requested that Yankee Gas cease its construction
activities and begin an orderly wind down of its work relating to the project.
Based on NRG's statement that it expected that Yankee Gas would draw on a $16
million LOC, Yankee Gas drew down the full amount of the LOC. On November 12,
2002, MGT filed suit against Yankee Gas in Meriden Superior Court, claiming
that Yankee Gas breached the agreement with MGT (MGT Agreement) and seeking a
declaratory ruling from the court that Yankee Gas wrongfully drew down the $16
million LOC. In April 2003, Yankee Gas filed its answer to MGT's complaint and
asserted several counterclaims to recover its losses arising out of MGT's
termination of the MGT Agreement. The parties are currently in the discovery
phase of the lawsuit.
For additional information on NRG-related matters, see "Item 1. Business-
Rates and Electric Industry Restructuring-Connecticut Rates and Restructuring."
6. Enron Power Marketing, Inc. (Enron)/Select Energy
On January 13, 2003, Select Energy received notice from the United States
Bankruptcy Court for the Southern District of New York of an adverse proceeding
filed by Enron against Select Energy for approximately $2.5 million. In its
complaint, Enron alleges that Select Energy improperly set off pre-petition
debt arising from the termination of transactions entered into under a power
purchase agreement between Select Energy and Enron against post-petition
amounts owed for deliveries of power under transactions entered into under the
same agreement. On December 22, 2003, the court approved a Settlement
Agreement between the parties resolving all issues in this proceeding.
7. 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 is proceeding along three broad tracks: (a) an attempt by various
defendants to persuade the Multi-District Litigation (MDL) Judicial Panel to
transfer the case to the United States District Court for the Southern District
of Texas; (b) an attempt to consolidate this case with a case now pending,
which itself is subject to a conditional order of the MDL Judicial Panel
transferring it to the Southern District of Texas; and (c) an attempt to remand
this case to Connecticut's state court. No further action in this case is
anticipated until the MDL Judicial Panel rules, as the United States District
Court judge has stayed all proceedings pending such ruling. The NU defendants
had not yet responded to the apportionment complaint at the time the
proceedings were stayed.
8. Environmental Litigation
On September 25, 2002, NUSCO, among other defendants, was sued by the
Joseph A. Schiavone Corporation (Schiavone) under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 for the costs
associated with the investigation and remediation of a commercial property
owned by Schiavone in North Haven, Connecticut. Schiavone alleges that from
1968 through 1978, NUSCO sold transformers containing PCBs to a company named
H. Kasden & Sons, a co-defendant, which owned the property before Schiavone and
operated a scrap yard at the site. The property is currently involved in an EPA
and CDEP monitored investigation and remediation of PCB contamination and
related costs are estimated at approximately $4 million. On June 6, 2003, CL&P
was added as a defendant.
NUSCO and CL&P have answered the complaint denying the material
allegations. Discovery is ongoing and the parties are awaiting a date to be
scheduled for court-ordered remediation.
9. CYAPC Decommissioning Dispute
On June 13, 2003, CYAPC gave notice of the termination of its contract
with Bechtel for the decommissioning of the Connecticut Yankee nuclear power
plant. CYAPC terminated the contract, after the failure of settlement
discussions that occurred over an eight month period, due to Bechtel's history
of incomplete and untimely performance and refusal to perform the remaining
decommissioning work. Under the agreement, Bechtel had 30 days to remedy its
defaults before the termination became effective.
On June 23, 2003, Bechtel filed a complaint against CYAPC in Connecticut
Superior Court in Middletown, Connecticut. Bechtel's complaint asserts a
number of claims and seeks a variety of remedies, including monetary and
punitive damages and rescission of the contract. Bechtel has since amended its
complaint to add claims for wrongful termination.
On August 22, 2003, CYAPC filed its answer and counterclaims, including
counts for breach of contract, negligent misrepresentation and breach of duty
of good faith and fair dealing. Bechtel has departed the site and the
decommissioning responsibility has been transitioned to CYAPC, which has
recommenced the decommissioning process. Discovery is ongoing and a trial has
been tentatively scheduled for 2006. Management cannot predict the outcome of
this litigation or its impact on NU.
NU's electric operating subsidiaries collectively own 49.0 percent of
CYAPC, as follows: CL&P - 34.5 percent, PSNH - 5.0 percent and WMECO - 9.5
percent.
10. Other Legal Proceedings
The following sections of Item 1, "Business" discuss additional legal
proceedings: See "Rates and Electric Industry Restructuring" for information
about various state restructuring and rate proceedings, civil lawsuits related
thereto and the implementation of SMD; "Regulated Electric Operations" and
"Regulated Gas Operations" for information about proceedings relating to power,
transmission and pricing issues; "Nuclear Generation" for information related
to high-level and low-level radioactive waste disposal and decommissioning
matters; "Other Regulatory and Environmental Matters" for information about
proceedings involving surface water and air quality, toxic substances and
hazardous waste, EMF, licensing of hydroelectric projects, and other matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No event that would be described in response to this item occurred with
respect to NU, PSNH or WMECO.
CL&P. A special meeting of the holders of common and preferred stock of
CL&P was held on November 25, 2003 (Special Meeting), but such meeting was
adjourned to a later date without action being taken by shareholders. At the
adjourned session of the Special Meeting held on November 26, 2003, the
preferred stockholders voted to waive, for a ten-year period, the ten percent
limitation on the issuance of unsecured indebtedness with a maturity of less
than ten years. Of the total number of outstanding shares of preferred stock
outstanding on the record date and eligible to vote as a single class for this
proposal, 1,165,074 shares (50.13 percent) voted in favor, 651,885 shares
(28.05 percent) voted against, 28,021 shares (1.20 percent) abstained and
479,020 shares (20.62 percent) were not cast. A proposal to amend CL&P's
certificate of incorporation to eliminate the provision which limits CL&P's
ability to issue unsecured indebtedness with a maturity of less than ten years
to no more than ten percent of CL&P's capitalization and unsecured indebtedness
of whatever maturity to twenty percent of capitalization was also considered by
the holders of common and preferred stock of CL&P at this meeting, but this
proposal failed to pass. Of the total number of outstanding shares of common
stock outstanding on the record date and eligible to vote as a single class,
6,035,205 shares (100 percent) voted in favor of this proposal. Of the total
number of outstanding shares of preferred stock outstanding on the record date
and eligible to vote as a single class for this proposal, 1,090,833 shares
(46.93 percent) voted in favor, 729,970 shares (31.41 percent) voted against,
24,177 shares (1.04 percent) abstained and 479,020 shares (20.62 percent) were
not cast.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
NU. The common shares of NU are listed on the New York Stock Exchange.
The ticker symbol is "NU," although it is frequently presented as "Noeast Util"
and/or "NE Util" in various financial publications. The high and low closing
sales prices for the past two years, by quarters, are shown below.
Year Quarter High Low
---- ------- ---- ---
2003 First $16.06 $13.38
Second 16.77 13.98
Third 18.28 15.76
Fourth 20.17 18.12
2002 First $19.87 $17.61
Second 20.57 18.05
Third 18.45 13.84
Fourth 16.97 13.20
As of January 31, 2004, there were 63,896 common shareholders of record of
NU. As of the same date, there were a total of 131,009,465 common shares
issued, including 3,156,377 unallocated Employee Stock Ownership Plan (ESOP)
shares held in the ESOP trust.
On January 12, 2004, the NU Board of Trustees approved the payment of a 15
cent per share dividend, payable on March 31, 2004, to shareholders of record
as of March 1, 2004.
On January 13, 2003, the NU Board of Trustees approved the payment of a
13.75 cent per share dividend, payable on March 31, 2003, to shareholders of
record as of March 1, 2003.
On April 8, 2003, the NU Board of Trustees approved the payment of a 13.75
cent per share dividend, payable on June 30, 2003, to shareholders of record as
of June 1, 2003.
On May 13, 2003, the NU Board of Trustees approved the payment of a 15
cent per share dividend, payable on September 30, 2003, to shareholders of
record as of September 1, 2003.
On October 14, 2003, the NU Board of Trustees approved the payment of a 15
cent per share dividend, payable on December 31, 2003, to shareholders of
record as of December 1, 2003.
On January 8, 2002, the NU Board of Trustees approved the payment of a
12.5 cent per share dividend, payable on March 29, 2002, to shareholders of
record as of March 1, 2002.
On April 19, 2002, the NU Board of Trustees approved the payment of a 12.5
cent per share dividend, payable on June 28, 2002, to shareholders of record as
of June 1, 2002.
On May 14, 2002, the NU Board of Trustees approved the payment of a 13.75
cent per share dividend, payable on September 30, 2002, to shareholders of
record as of September 1, 2002.
On October 8, 2002, the NU Board of Trustees approved the payment of a
13.75 cent per share dividend, payable on December 31, 2002, to shareholders of
record as of December 1, 2002.
Information with respect to dividend restrictions for NU and its
subsidiaries is contained in Item 1. Business under the caption "Financing
Program - Financing Limitations" and in Note A to the "Consolidated Statements
of Shareholders' Equity" within NU's 2003 Annual Report to Shareholders, which
information is incorporated herein by reference.
CL&P, PSNH and WMECO. There is no established public trading market for
the common stock of CL&P, PSNH and WMECO. The common stock of CL&P, PSNH and
WMECO is held solely by NU.
During 2003 and 2002, CL&P approved and paid $60.1 million of common stock
dividends to NU.
During 2003 and 2002, PSNH approved and paid $16.8 million and $45 million
of common stock dividends, respectively, to NU.
During 2003 and 2002, WMECO approved and paid approximately $22 million
and $16 million of common stock dividends, respectively, to NU.
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
fourth quarter of the year ended December 31, 2003.
<TABLE>
<CAPTION>
Total Number of Maximum Number of
Shares Purchased Shares That May Yet
Total Number Average as Part of Publicly Be Purchased Under
of Shares Price Paid Announced Plans the Plans or
Period Purchased (1) Per Share or Programs Programs
------ ------------- ---------- ------------------- -------------------
<S> <C> <C> <C> <C>
Month #1
(October 1, 2003 to
October 31, 2003) 333 $18.03 0 N/A
Month #2
(November 1, 2003
to November 30, 2003) 0 N/A 0 N/A
Month #3
(December 1, 2003 to
December 31, 2003) 0 N/A 0 N/A
--- ------ --- ---
Total 333 $18.03 0 N/A
--- ------ --- ---
</TABLE>
(1) Purchases were made in open market transactions as a result of the election
by certain members of the Board of Trustees to receive their compensation
in NU common shares.
ITEM 6. SELECTED FINANCIAL DATA
NU. Reference is made to information under the heading "Selected
Consolidated Financial Data" contained within NU's 2003 Annual Report to
Shareholders, which information is incorporated herein by reference.
CL&P. Reference is made to information under the heading "Selected
Consolidated Financial Data" contained within CL&P's 2003 Annual Report, which
information is incorporated herein by reference.
PSNH. Reference is made to information under the heading "Selected
Consolidated Financial Data" contained within PSNH's 2003 Annual Report, which
information is incorporated herein by reference.
WMECO. Reference is made to information under the heading "Selected
Consolidated Financial Data" contained within WMECO's 2003 Annual Report, which
information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS;
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NU. Reference is made to information under the heading "Management's
Discussion and Analysis and Results of Operations" and Note 3, "Derivative
Instruments, Market Risk and Risk Management," contained within NU's 2003
Annual Report to Shareholders, which information is incorporated herein by
reference.
CL&P. Reference is made to information under the heading "Management's
Discussion and Analysis and Results of Operations" and Note 3, "Derivative
Instruments and Risk Management Activities," contained within CL&P's 2003
Annual Report, which information is incorporated herein by reference.
PSNH. Reference is made to information under the heading "Management's
Discussion and Analysis and Results of Operations" and Note 4, "Derivative
Instruments and Risk Management Activities," contained within PSNH's 2003
Annual Report, which information is incorporated herein by reference.
WMECO. Reference is made to information under the heading "Management's
Discussion and Analysis and Results of Operations" and Note 3, "Derivative
Instruments and Risk Management Activities," contained within WMECO's 2003
Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NU. Reference is made to information under the headings "Company Report,"
"Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated
Statements of Income," "Consolidated Statements of Comprehensive Income,"
"Consolidated Statements of Shareholders' Equity," "Consolidated Statements of
Cash Flows," "Consolidated Statements of Capitalization," "Consolidated
Statements of Income Taxes," "Notes to Consolidated Financial Statements," and
"Consolidated Statements of Quarterly Financial Data" contained within NU's
2003 Annual Report to Shareholders, which information is incorporated herein by
reference.
CL&P. Reference is made to information under the headings "Independent
Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statements of
Income," "Consolidated Statements of Comprehensive Income," "Consolidated
Statements of Common Stockholder's Equity," "Consolidated Statements of Cash
Flows," "Notes to Consolidated Financial Statements," and "Consolidated
Quarterly Financial Data" contained within CL&P's 2003 Annual Report, which
information is incorporated herein by reference.
PSNH. Reference is made to information under the headings "Independent
Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statements of
Income," "Consolidated Statements of Comprehensive Income," "Consolidated
Statements of Common Stockholder's Equity," "Consolidated Statements of Cash
Flows," "Notes to Consolidated Financial Statements," and "Consolidated
Quarterly Financial Data" contained within PSNH's 2003 Annual Report, which
information is incorporated herein by reference.
WMECO. Reference is made to information under the headings "Independent
Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statements of
Income," "Consolidated Statements of Comprehensive Income," "Consolidated
Statements of Common Stockholder's Equity," "Consolidated Statements of Cash
Flows," "Notes to Consolidated Financial Statements," and "Consolidated
Quarterly Financial Data" contained within WMECO's 2003 Annual Report, which
information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No events that would be described in response to this item have occurred
with respect to NU, CL&P, PSNH or WMECO.
ITEM 9A. 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 Annual Report on Form 10-K. The principal executive officer
and principal financial officer have concluded, based on their review, that the
companies' disclosure controls and procedures, as defined at Exchange Act Rules
13a-15(e) and 15(d)-15(e), 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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The information in Item 10 is provided as of March 5, 2004 except where
otherwise indicated.
NU.
In addition to the information provided below concerning the executive
officers of NU, incorporated herein by reference is the information contained
in the sections "Proxy Statement", "Election of Trustees", "Board Committees
and Responsibilities", "Selection of Trustees", and "Section 16(a) Beneficial
Ownership Reporting Compliance", of the definitive proxy statement for
solicitation of proxies by NU's Board of Trustees, to be dated April 2, 2004,
which will be filed with the Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934.
Positions
Name Held
- --------------------------- ---------
Gregory B. Butler (*) SVP, SEC, GC
John H. Forsgren (*) EVP, CFO, VC, T
Cheryl W. Grise (*) P
Michael G. Morris (*)(**) CHB, P, CEO, T
Charles W. Shivery (*)(***) P
CL&P.
Positions
Name Held
- --------------------------- ---------
David H. Boguslawski VP, D
Gregory B. Butler (*) OTH
John H. Forsgren (*) EVP, CFO
Cheryl W. Grise (*) CEO, D
Michael G. Morris (*)(**) OTH
Leon J. Olivier (*) P, COO, D
Charles W. Shivery (*)(***) OTH
PSNH.
Positions
Name Held
- --------------------------- ---------
David H. Boguslawski VP, D
Gregory B. Butler (*) OTH
John H. Forsgren (*) EVP, CFO, D
Cheryl W. Grise (*) CEO, D
Gary A. Long (*) P, COO, D
Michael G. Morris (*)(**) CH, D
Charles W. Shivery (*)(***) OTH
WMECO.
Positions
Name Held
- --------------------------- ---------
David H. Boguslawski VP, D
Gregory B. Butler (*) OTH
John H. Forsgren (*) EVP, CFO, D
Cheryl W. Grise (*) CEO, D
Kerry J. Kuhlman (*) P, COO, D
Michael G. Morris (*)(**) CH, D
Charles W. Shivery (*)(***) OTH
* Executive Officer
** Retired as of the end of 2003.
*** Provides corporate oversight and governance as interim President of NU
effective January 1, 2004.
Key:
CEO - Chief Executive Officer OTH - Listed because of policy-
CFO - Chief Financial Officer making function for NU system
CH - Chairman P - President
CHB - Chairman of the Board SEC - Secretary
COO - Chief Operating Officer SVP - Senior Vice President
D - Director T - Trustee
EVP - Executive Vice President VP - Vice President
GC - General Counsel VC - Vice Chairman
<TABLE>
<CAPTION>
Name Age Business Experience During Past 5 Years
- ------------------------ --- ---------------------------------------
<S> <C> <C>
David H. Boguslawski 49 Vice President - Transmission Business of
CL&P, PSNH and WMECO since May 1, 2001 and a
Director of CL&P, PSNH and WMECO since June 30,
1999; previously Vice President - Energy Delivery
of CL&P, PSNH and WMECO from September 1996 to
May 2001.
Gregory B. Butler 46 Senior Vice President, Secretary and
General Counsel of NU since August 31, 2003 and a
Director of Northeast Utilities Foundation, Inc.
since December 1, 2002; previously Vice
President, Secretary and General Counsel of NU
from May 1, 2001 through August 30, 2003; Vice
President - Governmental Affairs of NUSCO from
January 1997 to May 2001.
John H. Forsgren (1) 57 Vice Chairman of NU since May 1, 2001;
Executive Vice President and Chief Financial
Officer of NU since February 1, 1996; Executive
Vice President and Chief Financial Officer of
CL&P, PSNH, and WMECO since February 27, 2003 and
from February 1996 to June 1999; Director of
WMECO since June 10, 1996 and of PSNH since
August 5, 1996 and a Director of Northeast
Utilities Foundation, Inc. since September 23,
1998; Director of CL&P from June 1996 to June
1999.
Cheryl W. Grise (2) 51 President - Utility Group of NU since May
2001, Chief Executive Officer of CL&P, PSNH and
WMECO since September 10, 2002 a Director of CL&P
since May 1, 2001, PSNH since May 14, 2001 and
WMECO since June 2001, and a Director of
Northeast Utilities Foundation, Inc. since
September 23, 1998; previously President of CL&P
from May 2001 to September 2001, Senior Vice
President, Secretary and General Counsel of NU
from July 1998 to May 2001, Senior Vice
President, Secretary and General Counsel of CL&P,
and PSNH and Senior Vice President, Secretary,
Assistant Clerk and General Counsel of WMECO from
July 1998 to June 1999 and Senior Vice President,
Secretary and General Counsel of NGC from January
1999 to June 1999; previously Director of CL&P
and WMECO (January 1994 through November 1997)
and PSNH (February 1995 through November 1997);
Senior Vice President and Chief Administrative
Officer of CL&P and PSNH, and Senior Vice
President of WMECO from 1995 to 1998.
Kerry J. Kuhlman 53 President and Chief Operating Officer
and a Director of WMECO since April 1999;
previously Vice President-Customer Operations of
WMECO from October 1998 to April 1999; Vice
President - Central Region of CL&P from August
1997 to October 1998; and Vice President-Eastern
Region of CL&P from July 1994 to August 1997.
Gary A. Long 52 President and Chief Operating Officer
and a Director of PSNH since July 1, 2000;
previously Senior Vice President - PSNH of PSNH
from February 2000 through June 2000 and Vice
President - Customer Service and Economic
Development of PSNH from January 1994 to February
2000.
Michael G. Morris (3) 57 Chairman of the Board, President and Chief
Executive Officer and a Trustee of NU and
Chairman and a Director of PSNH and WMECO from
August 19, 1997 through December 31, 2003 and a
Director of Northeast Utilities Foundation, Inc.
from September 23, 1998 through December 31,
2003; Chief Executive Officer of PSNH from
August 19, 1997 through March 1, 2000 and from
July 1, 2000 through September 10, 2002; Chief
Executive Officer of WMECO from June 30, 1999 to
September 10, 2002; Chairman and a Director of CL&P
from August 1997 to June 1999.
Leon J. Olivier 55 President and Chief Operating Officer
and a Director of CL&P since September 2001;
previously Senior Vice President of Entergy
Nuclear Corp. from April 2001 to September 2001;
Senior Vice President and Chief Nuclear Officer
of Northeast Nuclear Energy Company from October
1998 to May 2001.
Charles W. Shivery 58 President (interim) of NU since January 1,
2004 and a Director of Northeast Utilities
Foundation since March 3, 2004; previously
President - Competitive Group of NU from June 2002
through December 31, 2003 and President and
Chief Executive Officer of NU Enterprises, Inc.,
from June 2002 through December 18, 2003;
Co-President of Constellation Energy Group, Inc.
from October 2000 to February 2002; President and
Chief Executive Officer of Constellation Power
Source Holdings, Inc., from 1997 to December 2001;
Chief Executive Officer and President of
Constellation Enterprises, Inc. from 1998 to
February 2002; and Chairman of the Board,
President and Chief Executive Officer of
Constellation Power Source, Inc., from 1997 to
December 2001.
</TABLE>
(1) Mr. Forsgren is a Director of NEON Communications, Inc. and CuraGen
Corporation.
(2) Mrs. Grise is a Director of MetLife, Inc., Metropolitan Life Insurance
Company, and Dana Corporation.
(3) Mr. Morris is a director of Cincinnati Bell, the Webster Financial
Corporation, and the Spinnaker Exploration Co.
There are no family relationships between any director or executive
officer and any other director or executive officer of NU, CL&P, PSNH or WMECO.
NU, CL&P, PSNH, WMECO
Each of the registrants has adopted a Code of Ethics for Senior Financial
Officers. The registrants undertake to provide a copy of the Code of Ethics
to any person without charge upon request made in writing and mailed to:
Mr. Gregory B. Butler, Senior Vice President,
Secretary and General Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, CT 06141-0270
ITEM 11. EXECUTIVE COMPENSATION
NU
Incorporated herein by reference is the information contained in the
sections "Executive Compensation," "Long-Term Incentive Plans - Awards in Last
Fiscal Year," "Pension Benefits," "Trustee Compensation," "Employment Contracts
and Termination of Employment Arrangements," "Compensation Committee Report on
Executive Compensation" and "Share Performance Chart" of the definitive proxy
statement for solicitation of proxies by NU's Board of Trustees, to be dated
April 2, 2004, which will be filed with the Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934.
CL&P, PSNH, WMECO
SUMMARY COMPENSATION TABLE
The following tables present the cash and non-cash compensation received
by the Chief Executive Officer and the next four highest paid executive
officers of CL&P, PSNH, and WMECO in accordance with rules of the SEC:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------- -----------------------------------------------
Awards Payouts
------------------------- ---------------------
Restricted Securities Long-Term All
Stock Underlying Incentive Other
Other Annual Award(s) Options/Stock Program Compen-
Name and Salary Bonus ($) Compensation ($) Appreciation Payouts sation ($)
Principal Position Year ($) (Note 1) (Note 2) (Note 3) Rights (#) ($) (Note 4)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael G. Morris 2003 957,692 2,600,000 227,914 1,060,500 - - 28,731
Chairman of the
Board, President 2002 915,385 558,000 209,883 - 630,600 - 27,462
and Chief Executive
Officer of NU and 2001 900,000 869,805 238,924 - 220,000 - 27,000
Chairman of
PSNH and WMECO
(retired end of
2003)
John H. Forsgren 2003 574,615 1,086,175 17,384 427,495 - - 187,574
Executive Vice
President and 2002 556,154 165,000 - - 54,400 - 179,674
Chief Financial
Officer and Vice 2001 524,423 200,000 - - 98,000 - 5,100
Chairman of NU
Cheryl W. Grise 2003 451,538 581,513 13,216 324,994 - - 184,587
President -
Utility Group of NU 2002 409,231 280,000 - - 39,600 - 180,523
and Chief Executive
Officer of CL&P, 2001 338,654 180,000 - - 76,000 - 10,119
PSNH and WMECO
Gregory B. Butler 2003 244,615 232,200 4,473 109,995 - - 6,000
Senior Vice Presi-
dent, Secretary 2002 206,154 70,000 - - 13,200 - 6,000
and General Counsel
of NU and NUSCO 2001 189,269 70,000 - - 7,600 - 5,100
Leon J. Olivier 2003 317,100 275,000 3,192 78,505 - - 18,343
President and Chief
Operating Officer 2002 303,908 138,000 - - 9,900 - 9,117
of CL&P
(CL&P Table Only) 2001 194,232 123,000 - 100,009 22,500 - -
Gary A. Long 2003 185,154 140,000 2,643 65,002 - - 5,555
President and Chief
Operating Officer 2002 178,154 70,000 - - 8,100 - 5,345
of PSNH
(PSNH Table Only) 2001 171,846 55,000 - - 6,750 - 5,100
Kerry J. Kuhlman 2003 180,015 125,000 2,542 62,499 - - 5,400
President and Chief
Operating Officer 2002 173,093 62,000 - - 7,900 - 5,193
of WMECO
(WMECO Table Only) 2001 166,846 45,000 - - 6,200 - 5,005
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
- ------------------------------------------------------------------------------------------------------------------
Shares With
Respect to Number of Securities Value of Unexercised
Which Underlying Unexercised In-the-Money
Options Were Value Options/SARs Options/SARs
Exercised Realized at Fiscal Year End (#) at Fiscal Year End ($)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Morris 150,000 994,650 863,124 660,402 4,812,597 1,952,103
John H. Forsgren 81,919 153,940 83,464 68,936 33,598 60,048
Cheryl W. Grise - - 119,492 51,736 217,469 43,809
Gregory B. Butler 15,716 55,726 18,466 11,334 22,589 13,992
Leon J. Olivier - - 9,967 9,933 6,847 11,294
Gary A. Long - - 20,399 7,651 46,669 8,586
Kerry J. Kuhlman - - 21,529 7,335 50,850 8,375
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Summary Compensation and Option/SAR Grants Tables:
1. Payment of 50 percent of the 2003 bonuses for Mr. Forsgren and
Mrs. Grise was made in the form of restricted share units vesting
over three years, payable upon vesting.
2. Other annual compensation for Mr. Morris includes personal use of
the Company's airplane, having a cost to the Company of $170,984 in
2003, $180,886 in 2002, and $219,088 in 2001.
3. At December 31, 2003, the aggregate restricted stock holdings by the
individuals named in the table for CL&P, PSNH and WMECO were 122,439,
119,634 and 119,811 common shares of NU, respectively, with a value
of $2,469,595, $2,413,018, and 2,416,588, respectively. Restricted
stock was awarded as long term incentive compensation to each of
these individuals in 2003, except that Mr. Morris's award was in
restricted share units that were forfeited upon his retirement;
payment of 50 percent of the 2002 and 2001 annual bonuses of each of
Mr. Morris, Mr. Forsgren, and Mrs. Grise was made in the form of
restricted shares vesting over three years. Dividends on restricted
stock are paid out.
4. "All Other Compensation" for 2003 consists of employer matching
contributions under the Northeast Utilities Service Company 401k
Plan, generally available to all eligible employees (each of Messrs.
Morris, Forsgren, Butler and Olivier and Mrs. Grise - $6,000, Mr.
Long - $5,555 and Mrs. Kuhlman - $5,400) and matching contributions
under the Deferred Compensation Plan for Executives (Mr. Morris -
$22,731, Mrs. Grise - $7,546 and Mr. Olivier - $3,513). For Mr.
Forsgren and Mrs. Grise, it also includes vested deferred
compensation paid out in 2003 of $181,574 and $171,041, respectively
(See Employment Contracts and Termination of Employment and Change in
Control Arrangements, Below), and for Mr. Olivier it includes $8,830
in non-qualified pension payments in accordance with his employment
agreement.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Grants of performance units were made during 2003 under the Northeast
Utilities Incentive Plan to the Company's officers. Payments will be made in
cash following the close of the performance period. Threshold, target, and
maximum payouts will be determined based on net income over the performance
period. Grants to the executive officers named in the Summary Compensation
Table were as follows:
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price-Based Plans
---------------------------------
(a) (b) (c) (d) (e) (f)
Number of Performance
Shares, or Other
Units or Period Until
Other Maturation
Rights Or Payout Threshold Target Maximum
Name (#) ($) ($) ($)
- ----- -------- ------------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Michael G. Morris 10,450 1/1/2003-12/31/2005 418,000 1,045,000 1,463,000
John H. Forsgren 4,275 1/1/2003-12/31/2005 171,000 427,500 598,500
Cheryl W. Grise 3,250 1/1/2003-12/31/2005 130,000 325,000 455,000
Gregory B. Butler 1,100 1/1/2003-12/31/2005 44,000 110,000 154,000
Leon J. Olivier 785 1/1/2003-12/31/2005 31,400 78,500 109,900
Gary A. Long 650 1/1/2003-12/31/2005 26,000 65,000 91,000
Kerry J. Kuhlman 625 1/1/2003-12/31/2005 25,000 62,500 87,500
</TABLE>
PENSION BENEFITS
The tables on the following pages show the estimated annual retirement
benefits payable to an executive officer of CL&P, PSNH or WMECO upon
retirement, assuming that retirement occurs at age 65 and that the officer is
at that time not only eligible for a pension benefit under the Northeast
Utilities Service Company Retirement Plan (the Retirement Plan) but also
eligible for either the make-whole benefit or the make-whole benefit plus the
target benefit under the Supplemental Executive Retirement Plan for Officers
of Northeast Utilities System Companies (the Supplemental Plan). The
Supplemental Plan is a non-qualified pension plan providing supplemental
retirement income to system officers. The make-whole benefit under the
Supplemental Plan, available to all officers, makes up for benefits lost
through application of certain tax code limitations on the benefits that may
be provided under the Retirement Plan, and includes as "compensation" awards
under the executive incentive plans and deferred compensation (as earned).
The target benefit further supplements these benefits and is available to
officers at the Senior Vice President level and higher who are selected by
the Board of Trustees to participate in the target benefit and who remain in
the employ of Northeast Utilities companies until at least age 60 (unless the
Board of Trustees sets an earlier age).
Mr. Morris's Employment Agreement provides that upon retirement (or upon
disability or termination or following a change of control, as defined) he
will be entitled to receive a special retirement benefit calculated by
applying the benefit formula of the CMS Energy/Consumers Energy Company (CMS)
Supplemental Executive Retirement Plan to all compensation earned from the
Northeast Utilities system (the Company) and to all service rendered to the
Company and CMS. Mr. Morris's Employment Agreement also provides that if he
retires after age 60, his special retirement benefit will be no less than
that which he would have received had he been eligible for a make-whole
benefit plus a target benefit under the Supplemental Plan.
Messrs. Butler and Forsgren and Mrs. Grise are currently eligible for a
make-whole plus a target benefit. Messrs. Olivier and Long and Mrs. Kuhlman
are eligible for the make-whole benefit but not the target benefit.
Mr. Forsgren's Employment Agreement provides for supplemental pension
benefits based on crediting up to ten years of additional service and
providing payments equal to 25 percent of final average compensation (not to
exceed 170 percent of highest average base compensation received in any 36
month period) for up to 15 years following retirement, reduced by four
percentage points for each year that his age is less than 65 years at
retirement. In addition, if Mr. Forsgren retires after age 58, he will be
eligible for a make-whole plus a target benefit under the Supplemental Plan
based on crediting three extra years of service, unreduced for early
commencement.
The terms of Mr. Olivier's employment provide for certain supplemental
pension benefits in lieu of a make-whole benefit if certain requirements are
met, in order to provide a benefit similar to that provided by his previous
employer. If Mr. Olivier remains in continuous employment with the Company
until September 10, 2011 (or earlier with the Company's permission), he will
be eligible for a special benefit, subject to reduction for termination prior
to age 65, of three percent of Final Average Compensation for each of his
first 15 years of service since September 10, 2001 plus one percent of Final
Average Compensation for each of the second 15 years of service.
Alternatively, if he does not voluntarily terminate his employment with the
Company prior to his 60th birthday, or upon earlier termination upon a Change
of Control, as defined in the Special Severance Program, he may receive upon
retirement a lump sum payment of $2,050,000 in lieu of the make-whole benefit
and the benefit described in the preceding sentence.
ANNUAL BENEFIT FOR OFFICERS ELIGIBLE FOR MAKE-WHOLE BENEFIT
Final Years of Credited Service
Average
Compensation 15 20 25 30 35
$200,000 $43,264 $57,686 $72,107 $86,760 $101,413
$250,000 $54,514 $72,686 $90,857 $109,260 $127,663
$300,000 $65,764 $87,686 $109,607 $131,760 $153,913
$350,000 $77,014 $102,686 $128,357 $154,260 $180,163
$400,000 $88,264 $117,686 $147,107 $176,760 $206,413
$450,000 $99,514 $132,686 $165,857 $199,260 $232,663
$500,000 $110,764 $147,686 $184,607 $221,760 $258,913
$600,000 $133,264 $177,686 $222,107 $266,760 $311,413
$700,000 $155,764 $207,686 $259,607 $311,760 $363,913
$800,000 $178,264 $237,686 $297,107 $356,760 $416,413
$900,000 $200,764 $267,686 $334,607 $401,760 $468,913
$1,000,000 $223,264 $297,686 $372,107 $446,760 $521,413
$1,100,000 $245,764 $327,686 $409,607 $491,760 $573,913
$1,200,000 $268,264 $357,686 $447,107 $536,760 $626,413
$1,300,000 $290,764 $387,686 $484,607 $581,760 $678,913
$1,400,000 $313,264 $417,686 $522,107 $626,760 $731,413
$1,500,000 $335,764 $447,686 $559,607 $671,760 $783,913
ANNUAL BENEFIT FOR OFFICERS ELIGIBLE FOR
MAKE-WHOLE PLUS TARGET BENEFIT
Final Years of Credited Service
Average
Compensation 15 20 25 30 35
$ 200,000 $ 72,000 $ 96,000 $120,000 $120,000 $120,000
250,000 90,000 120,000 150,000 150,000 150,000
300,000 108,000 144,000 180,000 180,000 180,000
350,000 126,000 168,000 210,000 210,000 210,000
400,000 144,000 192,000 240,000 240,000 240,000
450,000 162,000 216,000 270,000 270,000 270,000
500,000 180,000 240,000 300,000 300,000 300,000
600,000 216,000 288,000 360,000 360,000 360,000
700,000 252,000 336,000 420,000 420,000 420,000
800,000 288,000 384,000 480,000 480,000 480,000
900,000 324,000 432,000 540,000 540,000 540,000
1,000,000 360,000 480,000 600,000 600,000 600,000
1,100,000 396,000 528,000 660,000 660,000 660,000
1,200,000 432,000 576,000 720,000 720,000 720,000
1,300,000 468,000 624,000 780,000 780,000 780,000
1,400,000 504,000 672,000 840,000 840,000 840,000
1,500,000 540,000 720,000 900,000 900,000 900,000
The benefits presented in the tables above are based on a straight life
annuity beginning at age 65 and do not take into account any reduction for
joint and survivorship annuity payments. Final average compensation for
purposes of calculating the target benefit is the highest average annual
compensation of the participant during any 36 consecutive months compensation
was earned. Final average compensation for purposes of calculating the make-
whole benefit is the highest average annual compensation of the participant
during any 60 consecutive months compensation was earned. Compensation for
these benefits includes the annual salary and bonus shown in the Summary
Compensation Table and, for the make-whole benefit for officers hired before
November 1, 2001, and for the target benefit for officers who were hired
before November 1, 2001 and eligible for the target benefit prior to October
2003, an amount that represents the annual value of long-term incentive
compensation. Compensation for purposes of these benefits does not include
employer matching contributions under the 401k Plan. In the event that an
officer's employment terminates because of disability, the retirement
benefits shown above would be offset by the amount of any disability benefits
payable to the recipient that are attributable to contributions made by
Northeast Utilities and its subsidiaries under long-term disability plans and
policies.
Mr. Morris is not eligible to participate in the Supplemental Plan, but
he does participate in the Retirement Plan. The amount of his annual
compensation covered by the Retirement Plan was limited by the IRS to
$200,000 for 2003. The compensation covered by the Supplemental Plan in 2003
for Mr. Forsgren, Mrs. Grise, Mr. Butler, Mr. Olivier, Mr. Long, and Mrs.
Kuhlman was $1,871,931, $1,169,601, $508,140, $634,627, $348,005 and
$328,233, respectively.
As of December 31, 2003, the executive officers named in the Summary
Compensation Table had approximately the following years of credited service
for purposes of the Supplemental Plan: Mr. Forsgren - 7, Mrs. Grise - 23, Mr.
Butler - 7, Mr. Olivier - 5, Mr. Long - 28, and Mrs. Kuhlman - 23. Mr.
Morris had 25 years of service for purpose of his special retirement benefit.
In addition, Mr. Forsgren had 15 years of service for purposes of his
supplemental pension benefit and would have 28 years of service for such
purpose if he were to retire at age 65.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Northeast Utilities has entered into an employment agreement with Mr.
Morris and NUSCO has entered into employment agreements or arrangements with
Messrs. Butler, Forsgren and Olivier and Mrs. Grise; Mr. Olivier and each of
the other named executive officers participate in the Special Severance
Program for Officers of Northeast Utilities Companies. The agreements and
the Special Severance Program, are also binding on Northeast Utilities and on
certain majority-owned subsidiaries of Northeast Utilities.
The agreements with Messrs. Morris, Butler and Forsgren and Mrs. Grise
obligate the officer to perform such duties as may be directed by the NUSCO
Board of Directors or the Northeast Utilities Board of Trustees, protect the
Company's confidential information, refrain, while employed by the Company
and for a period of time thereafter, from competing with the Company in a
specified geographic area, and provide that the officer's base salary will
not be reduced below certain levels without the consent of the officer.
These agreements also provide that the officer will participate in specified
benefits under the Supplemental Executive Retirement Plan or other
supplemental retirement programs (see Pension Benefits, above) and/or in
certain executive incentive programs at specified incentive opportunity
levels, for a specified employment term and for automatic one-year extensions
of the employment term unless at least six months' notice of non-renewal is
given by either party. The employment term may also be ended by the Company
for "cause", as defined, at any time (in which case no supplemental
retirement benefit, if any, shall be due), or by the officer on thirty days'
prior written notice for any reason. Absent "cause", the Company may remove
the officer from his or her position on sixty days' prior written notice, but
in the event the officer is so removed and signs a release of all claims
against the Company, the officer will receive one or two years' base salary
and annual incentive payments, specified employee welfare and pension
benefits, and vesting of specified long-term incentive compensation.
Under the terms of these agreements and the Special Severance Program,
upon any termination of employment following a change of control, as defined,
between (a) the earlier of the date shareholders approve a change of control
transaction or a change of control transaction occurs and (b) the earlier of
the date, if any, on which the Board of Trustees abandons the transaction or
the date two years following the change of control, if the officer signs a
release of all claims against the Company, the officer will be entitled to
certain payments including a multiple (not to exceed three) of annual base
salary, annual incentive payments, specified employee welfare and pension
benefits, and vesting of stock appreciation rights, options and restricted
stock. Certain of the change of control provisions may be modified by the
Board of Trustees prior to a change of control, on at least two years' notice
to the affected officer(s).
Besides the terms described above, the agreements of Messrs. Morris and
Forsgren provide for a specified salary, cash, restricted stock and/or stock
options upon employment, special incentive programs and/or special retirement
benefits. See Pension Benefits, above, for further description of these
provisions. The agreements of Mr. Forsgren and Mrs. Grise were supplemented
during 2001 to provide for special deferred compensation of $520,000 and
$500,000, respectively, vesting in even installments (adjusted to reflect
investment performance) on June 28, 2002, 2003 and 2004, so long as such
officer remains in the employ of Northeast Utilities Service Company, and
vesting sooner in the event of a change of control of the Company or
involuntary termination without cause.
Letter agreements reflecting the terms of employment of Messrs.
Boguslawski and Olivier provide for specified salary, cash, restricted stock,
stock options or other benefits upon employment.
The descriptions of the various agreements set forth above are for
purpose of disclosure in accordance with the proxy and other disclosure rules
of the SEC and shall not be controlling on any party; the actual terms of the
agreements themselves determine the rights and obligations of the parties.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
NU.
Incorporated herein by reference is the information contained in the
sections "Common Stock Ownership of Certain Beneficial Owners," "Common Stock
Ownership of Management," and "Securities Authorized for Issuance Under
Equity Compensation Plans" of the definitive proxy statement for solicitation
of proxies by NU's Board of Trustees, to be dated April 2, 2004, which will
be filed with the Commission pursuant to Rule 14a-6 under the Securities
Exchange Act of 1934.
CL&P, PSNH, and WMECO.
NU owns 100 percent of the outstanding common stock of registrants CL&P,
PSNH, and WMECO. As of March 1, 2004, (except that Mr. Morris's beneficial
ownership is given as of December 31, 2003, his last day as an Executive
Officer of these companies) the Directors and Executive Officers of CL&P,
PSNH, and WMECO beneficially owned the number of shares of each class of
equity securities of NU listed below. No equity securities of CL&P, PSNH, or
WMECO are owned by the Directors and Executive Officers of CL&P, PSNH, and
WMECO. Unless otherwise noted, each Director and Executive Officer of CL&P,
PSNH, and WMECO has sole voting and investment power with respect to the
listed shares.
Title of Amount and Nature of Percent of
Class Name Beneficial Ownership Class
NU Common David H. Boguslawski (1) 39,807 (2)
NU Common Gregory B. Butler (3) 39,832 (2)
NU Common John H. Forsgren (4) 150,120 (2)
NU Common Cheryl W. Grise (5) 182,553 (2)
NU Common Kerry J. Kuhlman (6) 37,222 (2)
NU Common Gary A. Long (7) 35,715 (2)
NU Common Michael G. Morris (8) 974,832 (2)
NU Common Leon J. Olivier (9) 22,498 (2)
Amount beneficially owned by Directors and Executive Officers as a group:
Amount and Nature of Percent of
Company Number of Persons Beneficial Ownership Outstanding
CL&P 7 1,436,049 (10) 1.12%
PSNH 7 1,449,265 (10) 1.13%
WMECO 7 1,450,773 (10) 1.13%
(1) Includes 29,154 shares that could be acquired by Mr. Boguslawski
pursuant to currently exercisable options and 3,978 shares as to which
Mr. Boguslawski has sole voting and no dispositive power.
(2) As of March 1, 2004, each Director and Executive Officer of CL&P, PSNH,
or WMECO owned less than one percent of the shares outstanding.
(3) Includes 25,400 shares that could be acquired by Mr. Butler pursuant to
currently exercisable options and 5,835 shares as to which Mr. Butler
has sole voting and no dispositive power.
(4) Includes 112,598 shares that could be acquired by Mr. Forsgren pursuant
to currently exercisable options and 28,343 shares as to which Mr.
Forsgren has sole voting and no dispositive power.
(5) Includes 141,359 shares that could be acquired by Mrs. Grise pursuant to
currently exercisable options, 25,426 shares as to which Mrs. Grise has
sole voting and no dispositive power, and 265 shares held by Mrs.
Grise's husband as custodian for her children, with whom she shares
voting and dispositive power.
(6) Includes 26,230 shares that could be acquired by Mrs. Kuhlman pursuant
to currently exercisable options and 3,315 shares as to which Ms.
Kuhlman has sole voting and no dispositive power.
(7) Includes 25,349 shares that could be acquired by Mr. Long pursuant to
currently exercisable options and 3,448 shares as to which Mr. Long has
sole voting and no dispositive power.
(8) Includes 863,124 shares that could have been acquired by Mr. Morris as
of December 31, 2003 pursuant to then exercisable options and 31,732
shares as to which Mr. Morris had sole voting and no dispositive power
until his retirement in 2004.
(9) Includes 13,266 shares that could be acquired by Mr. Olivier pursuant to
currently exercisable options and 5,837 shares as to which Mr. Olivier
has sole voting and no dispositive power.
(10) Includes 9,674 shares that could be acquired by an executive officer
other than those named in the table pursuant to currently exercisable
options, 401 shares held in an ESOP by such officer, as to which he has
sole voting power and no dispositive power, and 11,670 shares as to
which such officer has sole voting and no dispositive power.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth the number of Common Shares of Northeast
Utilities issuable under the equity compensation plans of the Northeast
Utilities System, as well as their weighted exercise price, in accordance
with the rules of the SEC:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
Plan Category warrants and rights and rights reflected in column (a))
- --------------------------------------------------------------------------------------------------
(a) (b) (c)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity 3,225,593 $17.033 See Note 1
compensation
plans approved by
security holders
Equity 350,000 $ 9.625 None
compensation
plans not
approved by
security holders
Total 3,575,593 $16.308 See Note 1
</TABLE>
Notes to table:
1. Under the Northeast Utilities Incentive Plan, 5,385,371 shares were
available for issuance as of December 31, 2003. In addition, an amount equal
to one percent of the outstanding shares as of the end of each year becomes
available for issuance under the Incentive Plan the following year. Under
the Northeast Utilities Employee Share Purchase Plan II, 6,921,265 additional
shares are available for issuance. Each such plan expires in 2008.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information contained in the
section "Certain Relationships and Related Transactions" of the definitive
proxy statement for solicitation of proxies by NU's Board of Trustees, to be
dated April 2, 2004, which will be filed with the Commission pursuant to Rule
14a-6 under the Securities Exchange Act of 1934.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
NU
Incorporated herein by reference is the information contained in the
sections "Pre-Approval of Services Provided by Principal Auditors" and "Fees
Paid to Principal Auditor" of the definitive proxy statement for solicitation
of proxies by NU's Board of Trustees, to be dated April 2, 2004, which will
be filed with the Commission pursuant to Rule 14a-6 under the Securities
Exchange Act of 1934.
CL&P, WMECO, PSNH
None of CL&P, WMECO and PSNH are subject to the audit committee
requirements of the SEC, the national securities exchanges or the national
securities associations. CL&P, WMECO and PSNH obtain audit services from the
independent auditor engaged by the Audit Committee of NU's Board of Trustees.
The NU Audit Committee has established policies and procedures regarding the
pre-approval of services provided by the principal auditors. Those policies
and procedures delegate pre-approval of services to the NU Audit Committee
Chair and/or Vice Chair provided that such offices are held by NU Trustees
who are "independent" within the meaning of the Sarbanes-Oxley Act of 2002
(SOX) and that all such pre-approvals are presented to the Audit Committee at
the next regularly scheduled meeting of the Committee. The following relates
to fees and services for the entire Northeast Utilities System, including
CL&P, WMECO, and PSNH:
The Company's principal auditor was paid fees aggregating $1,735,113 and
$2,236,280 for the years ended December 31, 2003 and 2002, respectively,
comprised of the following:
1. Audit Fees
The aggregate fees billed to NU and its subsidiaries by Deloitte &
Touche LLP, the member firms of Deloitte Touche Tohmatsu and their respective
affiliates (collectively, the Deloitte Entities) for audit services rendered
for the years ended December 31, 2003 and 2002 totaled $1,441,700 and
$2,045,000, respectively. The audit fees were incurred for audits of the
annual consolidated financial statements of NU and its subsidiaries, reviews
of financial statements included in quarterly reports on Form 10-Q of NU and
its subsidiaries, comfort letters, consents and other costs related to
registration statements, and fees for accounting consultations related to the
application of new accounting standards and rules. For 2002, this amount also
includes fees and expenses of $911,000 in conjunction with performing the
reaudit of NU's 2001 consolidated financial statements and those of a
principal subsidiary.
2. Audit Related Fees
The aggregate fees billed to NU and its subsidiaries by the Deloitte
Entities for audit related services rendered for the years ended December 31,
2003 and 2002 totaled $150,200 and $97,800, respectively, primarily related
to certain agreed-upon procedures and other attestation engagements and the
audit of the Company's 401k Plan. Included in 2002 audit related fees paid to
the Deloitte Entities is $12,800 (0.6 percent of total fees) of services
where pre-approval was not required, as such services were de minimis. There
were no de minimis audit-related services in 2003.
3. Tax Fees
The aggregate fees billed to NU and its subsidiaries by the Deloitte
Entities for tax services for the years ended December 31, 2003 and 2002
totaled $47,500 and $51,932, respectively. There were no de minimis tax
services in 2003 or 2002.
4. All Other Fees
The aggregate fees billed to NU and its subsidiaries by the Deloitte
Entities for the years ended December 31, 2003 and 2002 for services other
than the services described above totaled $95,713 and $41,549, respectively,
primarily related to training classes provided by the Deloitte Entities.
Included in 2003 and 2002 "all other fees" are $16,620 (1 percent of total
fees) and $14,708 (0.7 percent of total fees), respectively, of services
where pre-approval was not required, as such services were de minimis.
The NU Audit Committee has considered whether the provision by the
Deloitte Entities of the non-audit services described above was allowed under
Rule 2-01(c)(4) of Regulation S-X and was compatible with maintaining auditor
independence and has concluded that the Deloitte Entities were and are
independent of the Company in all respects.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The Independent Auditors' Reports and financial statements of CL&P,
PSNH and WMECO are hereby incorporated by reference and made a part
of this report (see "Item 8. Financial Statements and Supplementary
Data").
Independent Auditors' Report S-1
2. Schedules:
Financial Statement Schedules for NU (Parent),
NU and Subsidiaries, CL&P and Subsidiaries,
PSNH and Subsidiaries, and WMECO and Subsidiary
are listed in the Index to Financial
Statements Schedules S-2
3. Exhibits Index E-1
(b) Reports on Form 8-K:
NU filed a current report on Form 8-K dated January 28, 2003, disclosing:
o NU's earnings press release for the fourth quarter and full year 2002.
NU and CL&P filed current reports on Form 8-K dated May 14, 2003, disclosing:
o The filing by NRG and certain of its affiliates, including NRG-PMI, of
voluntary petitions for reorganization under the bankruptcy code in the
southern district of New York.
WMECO filed a current report on Form 8-K dated September 30, 2003,
disclosing:
o The completion of the issuance and sale to the public of $55 million of
5 percent Senior Notes, Series A, due 2013.
NU, CL&P, PSNH, and WMECO filed current reports on Form 8-K dated
November 25, 2003 disclosing:
o The increase in CY decommissioning costs due to the termination of the
decommissioning contractor, Bechtel, in July, 2003.
NU filed a current report on Form 8-K dated December 16, 2003 disclosing:
o The departure of Michael G. Morris, Chairman, President and Chief
Executive Officer of NU, announcements regarding management transition and
interim senior management transition.
NU and CL&P filed current reports on Form 8-K dated December 17, 2003
disclosing:
o A decision by the DPUC granting CL&P a four-year rate increase.
NU and CL&P filed current reports on Form 8-K dated December 22, 2003
disclosing:
o CL&P and other parties had reached an agreement in principle to settle
the SMD dispute, with a definitive settlement agreement to be filed with
the hearing judge by January 22, 2004.
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.
NORTHEAST UTILITIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NORTHEAST UTILITIES
-------------------
(Registrant)
Date: March 12, 2004 By /s/ Charles W. Shivery
-------------- ------------------------------------
Charles W. Shivery
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Title Signature
- ---- ----- ---------
March 12, 2004 President /s/ Charles W. Shivery
- -------------- (Principal ---------------------------------
Executive Officer) Charles W. Shivery
March 12, 2004 Vice Chairman, /s/ John H. Forsgren
- -------------- Executive Vice ---------------------------------
President and Chief John H. Forsgren
Financial Officer
and a Trustee
March 12, 2004 Vice President - /s/ John P. Stack
- -------------- Accounting and ---------------------------------
Controller John P. Stack
March 12, 2004 Trustee /s/ Richard H. Booth
- -------------- ---------------------------------
Richard H. Booth
March 12, 2004 Trustee /s/ Cotton M. Cleveland
- -------------- ---------------------------------
Cotton M. Cleveland
March 12, 2004 Trustee /s/ Sanford Cloud, Jr.
- -------------- ---------------------------------
Sanford Cloud, Jr.
March 12, 2004 Trustee /s/ James F. Cordes
- -------------- ---------------------------------
James F. Cordes
March 12, 2004 Trustee /s/ E. Gail de Planque
- -------------- ---------------------------------
E. Gail de Planque
March 12, 2004 Trustee /s/ John G. Graham
- -------------- ---------------------------------
John G. Graham
March 12, 2004 Trustee /s/ Elizabeth T. Kennan
- -------------- ---------------------------------
Elizabeth T. Kennan
March 12, 2004 Trustee /s/ Robert E. Patricelli
- -------------- ---------------------------------
Robert E. Patricelli
March 12, 2004 Trustee /s/ John F. Swope
- -------------- ---------------------------------
John F. Swope
THE CONNECTICUT LIGHT AND POWER COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE CONNECTICUT LIGHT AND POWER COMPANY
---------------------------------------
(Registrant)
Date: March 12, 2004 By /s/ Cheryl W. Grise
-------------- ------------------------------------
Cheryl W. Grise
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Title Signature
- ---- ----- ---------
March 12, 2004 Chief Executive /s/ Cheryl W. Grise
- -------------- Officer and ---------------------------------
a Director Cheryl W. Grise
March 12, 2004 President and /s/ Leon J. Olivier
- -------------- Chief Operating ---------------------------------
Officer and Leon J. Olivier
a Director
March 12, 2004 Executive Vice /s/ John H. Forsgren
- -------------- President and ---------------------------------
Chief Financial John H. Forsgren
Officer
March 12, 2004 Vice President - /s/ John P. Stack
- -------------- Accounting and ----------------------------------
Controller John P. Stack
March 12, 2004 Director /s/ David H. Boguslawski
- -------------- ---------------------------------
David H. Boguslawski
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
---------------------------------------
(Registrant)
Date: March 12, 2004 By /s/ Cheryl W. Grise
-------------- ----------------------------
Cheryl W. Grise
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Title Signature
- ---- ----- ---------
March 12, 2004 Chief Executive /s/ Cheryl W. Grise
- -------------- Officer and ---------------------------------
a Director Cheryl W. Grise
March 12, 2004 President and /s/ Gary A. Long
- -------------- Chief Operating ---------------------------------
Officer and Gary A. Long
a Director
March 12, 2004 Executive Vice /s/ John H. Forsgren
- -------------- President and ---------------------------------
Chief Financial John H. Forsgren
Officer and
a Director
March 12, 2004 Vice President - /s/ John P. Stack
- -------------- Accounting and ---------------------------------
Controller John P. Stack
March 12, 2004 Director /s/ David H. Boguslawski
- -------------- ---------------------------------
David H. Boguslawski
WESTERN MASSACHUSETTS ELECTRIC COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
--------------------------------------
(Registrant)
Date: March 12, 2004 By /s/ Cheryl W. Grise
-------------- ---------------------------
Cheryl W. Grise
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Title Signature
- ---- ----- ---------
March 12, 2004 Chief Executive /s/ Cheryl W. Grise
- -------------- Officer and ---------------------------------
a Director Cheryl W. Grise
March 12, 2004 President and /s/ Kerry J. Kuhlman
- -------------- Chief Operating ---------------------------------
Officer and Kerry J. Kuhlman
a Director
March 12, 2004 Executive Vice /s/ John H. Forsgren
- -------------- President and ---------------------------------
Chief Financial John H. Forsgren
Officer and
a Director
March 12, 2004 Vice President - /s/ John P. Stack
- -------------- Accounting and ---------------------------------
Controller John P. Stack
March 12, 2004 Director /s/ David H. Boguslawski
- -------------- ---------------------------------
David H. Boguslawski
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of Northeast Utilities and the
Boards of Directors of The Connecticut Light and Power Company, Public
Service Company of New Hampshire and Western Massachusetts Electric Company:
We have audited the consolidated financial statements of Northeast Utilities
and subsidiaries (the "Company"), The Connecticut Light and Power Company
("CL&P") and Public Service Company of New Hampshire ("PSNH") as of
December 31, 2003 and 2002 and for each of the three years in the period
ended December 31, 2003, and the consolidated financial statements of Western
Massachusetts Electric Company ("WMECO") as of and for the years ended
December 31, 2003 and 2002 (collectively "the Companies"), and have issued
our reports thereon dated February 23, 2004; such financial statements and
reports are included in Northeast Utilities' 2003 Annual Report to
Shareholders and in CL&P's, PSNH's and WMECO's 2003 annual reports, all of
which are incorporated herein by reference. Our report on the consolidated
financial statements of Northeast Utilities expresses an unqualified opinion
and includes an explanatory paragraph with respect to the Company's adoption
of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, effective January 1,
2001; its adoption in 2002 of SFAS No. 142, Goodwill and Other Intangible
Assets; and its adoption in 2003 of EITF 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 (EITF 03-11)
and the Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities. Our report on the consolidated
financial statements of PSNH expresses an unqualified opinion and includes an
explanatory paragraph with respect to PSNH's adoption of EITF 03-11 in 2003.
Our audits also included the 2003, 2002 and 2001 financial statement
schedules of Northeast Utilities, CL&P and PSNH and the 2003 and 2002
financial statement schedules of WMECO, listed in Item 15. These financial
statement schedules are the responsibility of the Companies' management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules audited by us, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein. The 2001 consolidated
financial statements and financial statement schedule of WMECO were audited
by other auditors who have ceased operations. Those auditors expressed an
opinion, in their report dated January 22, 2002, that such financial
statement schedules, when considered in relation to the 2001 basic financial
statements taken as a whole, presented fairly, in all material respects, the
information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Hartford, Connecticut
February 23, 2004
INDEX TO FINANCIAL STATEMENTS SCHEDULES
Schedule
I. Financial Information of Registrant:
Northeast Utilities (Parent) Balance
Sheets at December 31, 2003 and 2002 S-3
Northeast Utilities (Parent) Statements
of Income for the Years Ended December 31,
2003, 2002, and 2001 S-4
Northeast Utilities (Parent) Statements
of Cash Flows for the Years Ended December 31,
2003, 2002, and 2001 S-5
II. Valuation and Qualifying Accounts and Reserves
for 2003, 2002, and 2001:
Northeast Utilities and Subsidiaries S-6 - S-8
The Connecticut Light and Power Company
and Subsidiaries S-9 - S-11
Public Service Company of New Hampshire
and Subsidiaries S-12 - S-14
Western Massachusetts Electric Company
and Subsidiary S-15 - S-17
All other schedules of the companies' for which provision is made in the
applicable regulations of the SEC are not required under the related
instructions or are not applicable, and therefore have been omitted.
SCHEDULE I
NORTHEAST UTILITIES (PARENT)
FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AT DECEMBER 31, 2003 AND 2002
(Thousands of Dollars)
<TABLE>
<CAPTION>
2003 2002
--------- ---------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash $ - $ 625
Notes receivable from affiliated companies 259,600 289,100
Notes and accounts receivable 3,116 551
Receivables from affiliated companies 1,973 2,620
Taxes receivable 2,314 -
Prepayments 313 73
---------- ----------
267,316 292,969
Deferred Debits and Other Assets:
Investments in subsidiary companies, at equity 2,544,819 2,322,902
Other 14,565 18,159
---------- ----------
2,559,384 2,341,061
---------- ----------
Total Assets $2,826,700 $2,634,030
========== ==========
LIABILITIES AND CAPITALIZATION
- ------------------------------
Current Liabilities:
Notes payable to banks $ 65,000 $ 49,000
Long-term debt - current portion 24,000 23,000
Accounts payable 1,834 2,285
Accounts payable to affiliated companies 25 290
Accrued taxes - 2,460
Accrued interest 6,048 5,883
Derivative liabilities 3,576 -
Other 346 363
---------- ----------
100,829 83,281
---------- ----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 4,261 6,087
Other 1,375 141
---------- ----------
5,636 6,228
---------- ----------
Capitalization:
Long-Term Debt 456,115 334,000
---------- ----------
Common Shareholders' Equity:
Common shares, $5 par value - authorized
225,000,000 shares; 150,398,403 shares issued and
127,695,999 shares outstanding in 2003 and
149,375,847 shares issued and
127,562,031 outstanding in 2002 751,992 746,879
Capital surplus, paid in 1,108,924 1,108,338
Deferred contribution plan - employee stock
stock ownership plan (73,694) (87,746)
Retained earnings 808,932 765,611
Accumulated other comprehensive income 25,991 14,927
Treasury stock (358,025) (337,488)
---------- ----------
Common Shareholders' Equity 2,264,120 2,210,521
---------- ----------
Total Capitalization 2,720,235 2,544,521
---------- ----------
Total Liabilities and Capitalization $2,826,700 $2,634,030
========== ==========
</TABLE>
SCHEDULE I
NORTHEAST UTILITIES (PARENT)
FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Thousands of Dollars, Except Share Information)
<TABLE>
<CAPTION>
2003 2002 2001
------------- ------------- ------------
<S> <C> <C> <C>
Operating Revenues $ - $ - $ -
------------- ------------- ------------
Operating Expenses:
Other 7,720 12,787 11,917
------------- ------------- ------------
Operating Loss (7,720) (12,787) (11,917)
------------- ------------- ------------
Interest Expense 22,186 30,630 32,696
------------- ------------- ------------
Other Income/(Loss):
Equity in earnings of subsidiaries 123,647 158,191 188,783
Gain related to sale of nuclear plants - 14,255 147,935
Loss on share repurchase contracts - - (35,394)
Other, net 11,041 13,002 10,863
------------- ------------- ------------
Other Income, Net 134,688 185,448 312,187
------------- ------------- ------------
Income Before Income Tax (Benefit)/Expense 104,782 142,031 267,574
Income Tax (Benefit)/Expense (11,629) (10,078) 24,064
------------- ------------- ------------
Earnings for Common Shares $ 116,411 $ 152,109 $ 243,510
============= ============= ============
Basic Earnings Per Common Share $ 0.91 $ 1.18 $ 1.80
============= ============= ============
Fully Diluted Earnings Per Common Share $ 0.91 $ 1.18 $ 1.79
============= ============= ============
Basic Common Shares Outstanding (average) 127,114,743 129,150,549 135,632,126
============= ============= ============
Fully Diluted Common Shares Outstanding (average) 127,240,724 129,341,360 135,917,423
============= ============= ============
</TABLE>
SCHEDULE I
NORTHEAST UTILITIES (PARENT)
FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
AT DECEMBER 31, 2003, 2002 AND 2001
(Thousands of Dollars)
<TABLE>
<CAPTION>
2003 2002 2001
------------ ----------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income $ 116,411 $ 152,109 $ 243,510
Adjustments to reconcile to net cash flows
provided by operating activities:
Equity in earnings of subsidiary companies (123,647) (158,191) (188,783)
Deferred income taxes (411) (565) (233)
Other sources of cash 15,286 16,504 40,747
Other uses of cash (8,492) (5,011) (4,225)
Changes in current assets and liabilities:
Receivables, net (1,918) 19,097 (24,295)
Other current assets (excludes cash) (6,130) 1,020 2,651
Accounts payable (716) (24,197) 25,788
Accrued taxes (2,460) 2,211 (886)
Other current liabilities 17,340 51,132 (38,709)
------------ ---------- ----------
Net cash flows provided by operating activities 5,263 54,109 55,565
------------ ---------- ----------
Investing Activities:
NU system Money Pool borrowing/(lending) 29,500 (164,300) (30,400)
Investment in subsidiaries (213,191) 102,019 396,257
Payment for acquisitions, net of cash acquired - - (25,823)
Cash dividends received from subsidiary companies 114,921 126,154 120,072
Other investment activities 3,782 1,595 1,415
------------ ---------- ----------
Net cash flows (used in)/provided by investing activities (64,988) 65,468 461,521
------------ ---------- ----------
Financing Activities:
Issuance of common shares 13,654 7,458 1,751
Repurchase of common shares (20,537) (57,800) (291,789)
Increase/(decrease) in short-term debt 16,000 9,000 (396,000)
Issuance of long-term debt 150,000 263,000 263,000
Reacquisitions and retirements of long-term debt (23,000) (286,000) (21,000)
Cash dividends on common shares (73,090) (67,793) (60,923)
Other financing activities (3,927) - -
------------ ---------- ----------
Net cash flows provided by/(used in) financing activities 59,100 (132,135) (504,961)
------------ ---------- ----------
Net (decrease)/increase in cash (625) (12,558) 12,125
Cash - beginning of year 625 13,183 1,058
------------ ---------- ----------
Cash - end of year $ - $ 625 $ 13,183
============ ========== ==========
Supplemental Cash Flow Information:
Cash paid/(refunded) during the year for:
Interest, net of amounts capitalized $ 21,496 $ 25,213 $ 35,453
============ ========== ==========
Income taxes $ (16,818) $ (10,677) $ 32,126
============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2003
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $15,425 $23,229 $17,205 (a) $15,013 (b) $40,846
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $67,127 $17,688 $ - $16,157 (c) $68,658
======= ======= ======= ======= =======
(a) Amount relates to regulatory assets recorded in conjunction with the bankruptcy of NRG
and certain of its subsidiaries and to uncollectible amounts reserved for related to
capital projects and New Hampshire's low income assistance program.
(b) Amounts written off, net of recoveries.
(c) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, inventory reserves and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2002
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $16,353 $16,590 $ - $17,518 (a) $15,425
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $69,085 $18,959 $ - $20,917 (b) $67,127
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and damages, employee
medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
NORTHEAST UTILITIES AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2001
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $12,500 $15,947 $ - $12,094 (a) $16,353
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $79,281 $25,936 $ - $36,132 (b) $69,085
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and
damages, employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2003
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 525 $ 5,164 $16,924 (a) $ 823 (b) $21,790
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $18,241 $ 9,712 $ - $ 6,589 (c) $21,364
======= ======= ======= ======= =======
(a) Amount relates to regulatory assets recorded in conjunction with the bankruptcy of NRG
and certain of its subsidiaries and to uncollectible amounts reserved for related to
capital projects.
(b) Amounts written off, net of recoveries.
(c) Principally payments for environmental remediation, various injuries and damages, employee
medical expenses, inventory reserves and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2002
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 525 $ 398 $ - $ 398 (a) $ 525
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $11,387 $13,755 $ - $ 6,901 (b) $18,241
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2001
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 300 $ 551 $ - $ 326 (a) $ 525
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $13,660 $ 5,735 $ - $ 8,008 (b) $11,387
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2003
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 1,990 $ 1,379 $ 102 (a) $ 1,881 (b) $ 1,590
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $14,089 $ 2,585 $ - $ 3,106 (c) $13,568
======= ======= ======= ======= =======
(a) Amount relates to regulatory assets recorded in conjunction with uncollectible amounts
reserved for related to New Hampshire's low income assistance program.
(b) Amounts written off, net of recoveries.
(c) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2002
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 1,736 $ 1,840 $ - $ 1,586 (a) $ 1,990
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $13,842 $ 3,088 $ - $ 2,841 (b) $14,089
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2001
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 1,869 $ 1,787 $ - $ 1,920 (a) $ 1,736
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $11,650 $ 7,393 $ - $ 5,201 (b) $13,842
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2003
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 1,958 $ 4,107 $ 179 (a) $ 3,693 (b) $ 2,551
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $ 2,855 $ 1,501 $ - $ 1,385 (c) $ 2,971
======= ======= ======= ======= =======
(a) Amounts relates to uncollectible amounts reserved for related to capital projects.
(b) Amounts written off, net of recoveries.
(c) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2002
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 2,028 $ 2,755 $ - $ 2,825 (a) $ 1,958
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $ 7,506 $ 1,598 $ - $ 6,249 (b) $ 2,855
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
<TABLE>
<CAPTION>
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 2001
(Thousands of Dollars)
- -------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible accounts $ 1,886 $ 2,887 $ - $ 2,745 (a) $ 2,028
======= ======= ======= ======= =======
RESERVES NOT APPLIED AGAINST ASSETS:
Operating reserves $ 6,760 $ 3,767 $ - $ 3,021 (b) $ 7,506
======= ======= ======= ======= =======
(a) Amounts written off, net of recoveries.
(b) Principally payments for environmental remediation, various injuries and damages,
employee medical expenses, and expenses in connection therewith.
</TABLE>
EXHIBIT INDEX
Each document described below is incorporated by reference to the files
identified, unless designated with a (*), which exhibits are filed herewith.
Exhibit
Number Description
1 Underwriting Agreement
(A) Western Massachusetts Electric Company
1.1 Underwriting Agreement between WMECO and the Underwriters named
therein, dated September 25, 2003 (Exhibit 99.1, WMECO Form 8-K
filed October 8, 2003, File No. 0-7624)
2 Plan of acquisition, reorganization, arrangement, liquidation or
succession
(A) NU
2.1 Amended and Restated Agreement and Plan of Merger (Exhibit 1 to NU
Form 8-K dated December 2, 1999, File No. 1-5324).
(B) NU and CL&P
2.1 Purchase and Sale Agreement for the Seabrook Nuclear Power Station
dated April 13, 2002 (Exhibit 10.63 to NU Form 10-Q for the quarter
ended March 31, 2002, File No. 1-5324)
3 Articles of Incorporation and By-Laws
(A) Northeast Utilities
3.1 Declaration of Trust of NU, as amended through May 13, 2003.
(Exhibit 4.1 to NU Form S-8 filed June 11, 2003, File No. 333-
106008).
(B) The Connecticut Light and Power Company
3.1 Certificate of Incorporation of CL&P, restated to March 22, 1994.
(Exhibit 3.2.1, 1993 NU Form 10-K, File No. 1-5324)
3.1.2 Certificate of Amendment to Certificate of Incorporation
of CL&P, dated December 26, 1996. (Exhibit 3.2.2, 1996 NU
Form 10-K, File No. 1-5324)
3.1.3 Certificate of Amendment to Certificate of Incorporation
of CL&P, dated April 27, 1998. (Exhibit 3.2.3, 1998 NU
Form 10-K, File No. 1-5324)
3.4 By-laws of CL&P, as amended to January 1, 1997. (Exhibit 3.2.3,
1996 NU Form 10-K, File No. 1-5324)
(C) Public Service Company of New Hampshire
3.1 Articles of Incorporation, as amended to May 16, 1991. (Exhibit
3.3.1, 1993 NU Form 10-K, File No. 1-5324)
3.2 By-laws of PSNH, as amended to November 1, 1993. (Exhibit 3.3.2,
1993 NU Form 10-K, File No. 1-5324)
(D) Western Massachusetts Electric Company
3.1 Articles of Organization of WMECO, restated to February 23, 1995.
(Exhibit 3.4.1, 1994 NU Form 10-K, File No. 1-5324)
3.2 By-laws of WMECO, as amended to April 1, 1999. (Exhibit 3.1, 1999
NU Form 10-Q for the Quarter Ended June 30, 1999, File No. 1-5324)
3.1.2 By-laws of WMECO, as further amended to May 1, 2000.
(Exhibit 3.1, 2000 NU Form 10-Q for the Quarter Ended
June 30, 2000, File No. 1-5324)
4 Instruments defining the rights of security holders, including
indentures
(A) Northeast Utilities
4.1 Indenture dated as of December 1, 1991 between Northeast Utilities
and IBJ Schroder Bank & Trust Company, with respect to the issuance
of Debt Securities. (Exhibit 4.1.1, 1991 NU Form 10-K, File No.
1-5324)
4.1.1 First Supplemental Indenture dated as of December 1, 1991
between Northeast Utilities and IBJ Schroder Bank & Trust
Company, with respect to the issuance of Series A Notes.
(Exhibit 4.1.2, 1991 NU Form 10-K, File No. 1-5324)
4.1.2 Second Supplemental Indenture dated as of March 1, 1992
between Northeast Utilities and IBJ Schroder Bank & Trust
Company with respect to the issuance of 8.38 percent
Amortizing Notes. (Exhibit 4.1.3, 1992 NU Form 10-K,
File No. 1-5324)
4.2 Rights Agreement dated as of February 23, 1999, between Northeast
Utilities and Northeast Utilities Service Company, as Rights Agent.
(Exhibit 1 to NU's Registration Statement on Form 8-A, filed on
April 12, 1999, File No. 001-05324).
4.2.1 Amendment to Rights Agreement. (Exhibit 3 to NU Form 8-K
dated October 13, 1999, File No. 1-5324).
4.2.2 Second Amendment to Rights Agreement. (Exhibit B-3 to NU
35-CERT, dated February 1, 2002, File No. 070-09463).
4.3 Indenture dated as of April 1, 2002, between NU and the Bank of New
York as Trustee. (Exhibit A-3 to NU 35-CERT filed April 9, 2002,
File No. 70-9535)
4.3.1 First Supplemental Indenture dated as of April 1, 2002,
between NU and the Bank of New York as Trustee, relating
to $263M of Senior Notes, Series A, due 2012. (Exhibit A-
4 to NU 35-CERT filed April 9 2002, File No. 70-9535)
4.3.2 Second Supplemental Indenture dated as of June 1, 2003,
between NU and the Bank of New York as Trustee, relating
to $150M of Senior Notes, Series B, due 2008. (Exhibit A-
1.3 to NU 35-CERT filed June 6, 2003, File No. 70-10051)
4.4 Credit Agreement among Northeast Utilities, the Banks Named
Therein, Union Bank of California, N.A. as Administrative Agent and
Bank One, N.A., as Fronting Bank, dated as of November 10, 2003.
(Exhibit B-5 to NU 35-CERT filed November 17, 2003, File No. 70-
9755)
(B) The Connecticut Light and Power Company
4.1 Indenture of Mortgage and Deed of Trust between CL&P and Bankers
Trust Company, Trustee, dated as of May 1, 1921. (Composite
including all twenty-four amendments to May 1, 1967.) (Exhibit
4.1.1, 1989 NU Form 10-K, File No. 1-5324)
4.1.1 Supplemental Indenture to the Composite May 1, 1921
Indenture of Mortgage and Deed of Trust between CL&P and
Bankers Trust Company, dated as of June 1, 1994.
(Exhibit 4.2.15, 1994 NU Form 10-K, File No. 1-5324)
4.1.2 Supplemental Indentures to the Composite May 1, 1921
Indenture of Mortgage and Deed of Trust between CL&P and
Bankers Trust Company, dated as of October 1, 1994.
(Exhibit 4.2.16, 1994 NU Form 10-K, File No. 1-5324)
4.2 Financing Agreement between Industrial Development Authority of the
State of New Hampshire and CL&P (Pollution Control Bonds, 1986
Series) dated as of December 1, 1986. (Exhibit C.1.47, 1986 NU
Form U5S, File No. 30-246)
4.3 Financing Agreement between Industrial Development Authority of the
State of New Hampshire and CL&P (Pollution Control Bonds, 1988
Series) dated as of October 1, 1988. (Exhibit C.1.55, 1988 NU Form
U5S, File No. 30-246)
4.4 Loan and Trust Agreement among Business Finance Authority of the
State of New Hampshire, CL&P and the Trustee (Pollution Control
Bonds, 1992 Series A) dated as of December 1, 1992. (Exhibit
C.2.33, 1992 NU Form U5S, File No. 30-246)
4.5 Loan Agreement between Connecticut Development Authority and CL&P
(Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as
of September 1, 1993. (Exhibit 4.2.21, 1993 NU Form 10-K, File No.
1-5324)
4.6 Loan Agreement between Connecticut Development Authority and CL&P
(Pollution Control Bonds - Series B, Tax Exempt Refunding) dated as
of September 1, 1993. (Exhibit 4.2.22, 1993 NU Form 10-K, File No.
1-5324)
4.7 Amended and Restated Loan Agreement between Connecticut Development
Authority and CL&P (Pollution Control Revenue Bond - 1996A Series)
dated as of May 1, 1996 and Amended and Restated as of January 1,
1997. (Exhibit 4.2.24, 1996 NU Form 10-K, File No. 1-5324)
4.8 Amended and Restated Indenture of Trust between Connecticut
Development Authority and the Trustee (CL&P Pollution Control
Revenue Bond-1996A Series), dated as of May 1, 1996 and Amended and
Restated as of January 1, 1997. (Exhibit 4.2.24.1, 1996 NU Form
10-K, File No. 1-5324)
4.9 Standby Bond Purchase Agreement among CL&P, Bank of New York as
Purchasing Agent and the Banks Named therein, dated October 24,
2000. (Exhibit 4.2.24.2 of 2000 NU Form 10-K, File No. 1-5324)
4.9.1 Amendment No. 2 to the Standby Bond Purchase Agreement
dated as of September 9, 2002, among CL&P, The Bank of
New York, and the Participating Banks referred to
therein. (Exhibit 4.2.7.4, 2002 NU Form 10-Q for the
Quarter Ended September 30, 2002, File No. 1-5324)
4.10 AMBAC Municipal Bond Insurance Policy issued by the Connecticut
Development Authority (CL&P Pollution Control Revenue Bond-1996A
Series), effective January 23, 1997.(Exhibit 4.2.24.3, 1996 NU Form
10-K, File No. 1-5324)
4.11 Compensation and Multiannual Mode Agreement among the Connecticut
Development Authority and BNY Capital Markets, Inc. dated
September 23, 2003 (Exhibit 4.2.7.5, 2003 NU Form 10-Q for the
Quarter Ended September 30, 2003, File No. 1-5324)
4.12 Amended and Restated Receivables Purchase and Sale Agreement dated
as of March 30, 2001). (Exhibit 4.2.8, 2002 NU Form 10-K, File No.
1-5324)
4.12.1 Amendment No. 2 to the Purchase and Sale Agreement dated
as of July 10, 2002 (Exhibit 4.2.24.2, 2002 NU Form 10-K,
File No. 1-5324)
4.12.2 Amendment No. 3 to the Amended and Restated Receivables
Purchase and Sales Agreement dated as of July 9, 2003
(Exhibit 4.2.8.2, 2003 NU Form 10-Q for the Quarter Ended
September 30, 2003, File No. 1-5324)
4.13 Purchase and Contribution Agreement dated as of September 30, 1997
(Exhibit 10.49.1, 1997 NU Form 10-K, File No. 1-5324)
4.13.1 Amendment No. 2 to the Purchase and Contribution
Agreement dated as of March 30, 2001 (Exhibit 4.2.9 of
2002 NU Form 10-K, File No. 1-5324)
4.14 Credit Agreement among WMECO, CL&P, PSNH, Yankee Gas, the Banks
Named Therein and Citibank, N.A. as Administrative Agent, dated as
of November 10, 2003. (Exhibit B-6 to NU 35-CERT filed November 17,
2003, File No. 70-9755).
(C) Public Service Company of New Hampshire
4.1 First Mortgage Indenture dated as of August 15, 1978 between PSNH
and First Fidelity Bank, National Association, New Jersey, now
First Union National Bank, Trustee, (Composite including all
amendments to May 16, 1991). (Exhibit 4.4.1, 1992 NU Form 10-K,
File No. 1-5324)
4.1.1 Tenth Supplemental Indenture dated as of May 1, 1991
between PSNH and First Fidelity Bank, National
Association, now First Union National Bank. (Exhibit
4.1, PSNH Form 8-K dated February 10, 1992, File No. 1-
6392)
4.1.2 Twelfth Supplemental Indenture dated as of December 1,
2001 between PSNH and First Union National Bank.
(Exhibit 4.3.1.2, 2001 NU Form 10-K, File No. 1-5324)
4.2 Series D (Tax Exempt Refunding) Amended and Restated PCRB Loan and
Trust Agreement dated as of April 1, 1999. (Exhibit 4.3.6, 1999 NU
Form 10-K, File No. 1-5324)
4.3 Series E (Tax Exempt Refunding) Amended & Restated PCRB Loan and
Trust Agreement dated as of April 1, 1999. (Exhibit 4.3.7, 1999 NU
Form 10-K, File No. 1-5324)
4.4 Series A Loan and Trust Agreement among Business Finance Authority
of the State of New Hampshire and PSNH and State Street Bank and
Trust Company, as Trustee (Tax Exempt Pollution Control Bonds)
dated as of October 1, 2001. (Exhibit 4.3.4, 2001 NU Form 10-K,
File No. 1-5324)
4.5 Series B Loan and Trust Agreement among Business Finance Authority
of the State of New Hampshire and PSNH and State Street Bank and
Trust Company, as Trustee (Tax Exempt Pollution Control Bonds)
dated as of October 1, 2001. (Exhibit 4.3.5, 2001 NU Form 10-K,
File No. 1-5324)
4.6 Series C Loan and Trust Agreement among Business Finance Authority
of the State of New Hampshire and PSNH and State Street Bank and
Trust Company, as Trustee (Tax Exempt Pollution Control Bonds)
dated as of October1, 2001. (Exhibit 4.3.6, 2001 NU Form 10-K, File
No. 1-5324)
4.7 Credit Agreement among WMECO, CL&P, PSNH, Yankee Gas, the Banks
Named Therein and Citibank, N.A. as Administrative Agent, dated as
of November 10, 2003. (Exhibit B-6 to NU 35-CERT filed November 17,
2003, File No. 70-9755).
(D) Western Massachusetts Electric Company
4.1 Loan Agreement between Connecticut Development Authority and WMECO,
(Pollution Control Bonds - Series A, Tax Exempt Refunding) dated as
of September 1, 1993. (Exhibit 4.4.13, 1993 NU Form 10-K, File No.
1-5324)
4.2 Indenture Agreement between WMECO and the Bank of New York, as
Trustee, dated as of September 1, 2003 (Exhibit 99.2, WMECO Form 8-K
filed October 8, 2003, File No. 0-7624)
4.3 First Supplemental Indenture Agreement between WMECO and the Bank
of New York, as Trustee, dated as of September 1, 2003 (Exhibit
99.3, WMECO Form 8-K filed October 8, 2003, File No. 0-7624)
4.4 Credit Agreement among WMECO, CL&P, PSNH, Yankee Gas, the Banks
Named Therein and Citibank, N.A. as Administrative Agent, dated as
of November 10, 2003. (Exhibit B-6 to NU 35-CERT filed November 17,
2003, File No. 70-9755).
10 Material Contracts
(A) NU
10.1 Lease dated as of April 14, 1992 between The Rocky River Realty
Company and Northeast Utilities Service Company with respect to the
Berlin, Connecticut headquarters. (Exhibit 10.29, 1992 NU Form
10-K, File No. 1-5324)
10.2 Loan Agreement dated as of December 2, 1991, by and between NU and
Mellon Bank, N.A., as Trustee, with respect to NU's loan of $175
million to an ESOP Trust. (Exhibit 10.46, 1991 NU Form 10-K, File
No. 1-5324)
10.2.1 First Amendment to Loan Agreement dated February 7, 1992.
(Exhibit 10.36.1, 1993 NU Form 10-K, File No. 1-5324)
10.2.2 Second Amendment to Loan Agreement dated April 9, 1992.
(Exhibit 10.36.3, 1993 NU Form 10-K, File No. 1-5324)
10.3 Loan Agreement dated as of March 19, 1992 by and between NU and
Mellon Bank, N.A., as Trustee, with respect to NU's loan of $75
million to the ESOP Trust. (Exhibit 10.49.1, 1992 NU Form 10-K,
File No. 1-5324)
10.4 Indenture Mortgage, dated as of October 18, 2001 between NGC and
The Bank of New York, as trustee. (Exhibit 4.1 to NGC Registration
Statement on Form S-4 dated December 6, 2001, File No. 333-74636)
10.4.1 First Supplemental Indenture Mortgage, dated as of
October 18, 2001 between NGC and The Bank of New York, as
trustee. (Exhibit 4.2 to NGC Registration Statement on
Form S-4 dated December 6, 2001, File No. 333-74636)
10.5 Indenture of Mortgage and Deed of Trust dated July 1, 1989 between
Yankee Gas Services Company and the Connecticut National Bank, as
Trustee (Exhibit 4.7, Yankee Form 10-K for the fiscal year ended
September 30, 1990, File No. 0-10721)
10.5.1 First Supplemental Indenture of Mortgage and of Trust
dated April 1, 1992 between Yankee Gas Services Company
and The Connecticut National Bank, as Trustee (YES
Registration Statement on Form S-3, dated October 2, 1992
Form 1992 File No. 33-52750).
10.5.2 Second Supplemental Indenture of Mortgage and Deed of
Trust dated December 1, 1992 between Yankee Gas Services
Company and The Connecticut National Bank, as Trustee
(YES Form 10-K for the fiscal year ended September 30,
1992, File No. 0-17605).
10.5.3 Third Supplemental Indenture of Mortgage and Deed of
Trust dated June 1, 1995 between Yankee Gas and Shawmut
Bank Connecticut, N.A. (formerly The Connecticut National
Bank), as Trustee. (Exhibit 4.14 YES Form 10-K for the
fiscal year ended September 30, 1995, File No. 0-10721).
10.5.4 Fourth Supplemental Indenture of Mortgage and Deed of
Trust dated April 1, 1997 between Yankee Gas and Fleet
National Bank (formerly The Connecticut National Bank),
as Trustee. (Exhibit 4.15 YES Form 10-K for the fiscal
year ended September 30, 1997, File No. 0-10721).
10.5.5 Fifth Supplemental Indenture of Mortgage and Deed of
Trust dated January 1, 1999 between Yankee Gas Services
Company and The Bank of New York, as Successor Trustee to
Fleet Bank (formerly The Connecticut National Bank)
(Exhibit 4.2 YES Form 10-Q for the fiscal quarter ended
March 31, 1999, File No. 0-10721).
(B) NU, CL&P, PSNH and WMECO
10.1 Service Contract dated as of July 1, 1966 between each of NU, CL&P
and WMECO and Northeast Utilities Service Company (NUSCO).
(Exhibit 10.20, 1993 NU Form 10-K, File No. 1-5324)
10.2 Form of Annual Renewal of Service Contract. (Exhibit 10.20.3, 1993
NU Form 10-K, File No. 1-5324)
10.3 Memorandum of Understanding between CL&P, HELCO, HP&E, HWP and
WMECO dated as of June 1, 1970 with respect to pooling of
generation and transmission. (Exhibit 13.32, File No. 2-38177)
10.3.1 Amendment to Memorandum of Understanding between CL&P,
HELCO, HP&E, HWP and WMECO dated as of February 2, 1982
with respect to pooling of generation and transmission.
(Exhibit 10.21.1, 1993 NU Form 10-K, File No. 1-5324)
10.3.2 Amendment to Memorandum of Understanding between CL&P,
HELCO, HP&E, HWP and WMECO dated as of January 1, 1984
with respect to pooling of generation and transmission.
(Exhibit 10.21.2, 1994 NU Form 10-K, File No. 1-5324)
10.3.3 Second Amendment to Memorandum of Understanding between
CL&P, HELCO, HP&E, HWP and WMECO dated as of June 8, 1999
with respect to pooling of generation and transmission.
(Exhibit 10.23.3, 1999 NU Form 10-K, File No. 1-5324)
10.4 Stockholder Agreement dated as of July 1, 1964 among the
stockholders of CYAPC. (Exhibit 10.1, 1994 NU Form 10-K, File No.
1-5324)
10.5 Capital Funds Agreement dated as of September 1, 1964 between CYAPC
and CL&P, HELCO, PSNH and WMECO. (Exhibit 10.3, 1994 NU Form 10-K,
File No. 1-5324)
10.6 Power Purchase Contract dated as of July 1, 1964 between CYAPC and
each of CL&P, HELCO, PSNH and WMECO. (Exhibit 10.2, 1994 NU Form
10-K, File No. 1-5324)
10.7 Additional Power Purchase Contract dated as of April 30, 1984,
between CYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.2.1,
1994 NU Form 10-K, File No. 1-5324)
10.8 Supplementary Power Contract dated as of April 1, 1987, between
CYAPC and each of CL&P, PSNH and WMECO. (Exhibit 10.2.6, 1987 NU
Form 10 K, File No. 1-5324)
*10.9 Form of 1996 Amendatory Agreement between CYAPC and CL&P dated
December 4, 1996
*10.9.1 Form of First Supplemental to the 1996 Amendatory
Agreement dated as of February 10, 1997.
10.10 Stockholder Agreement dated December 10, 1958 between YAEC and
CL&P, HELCO, PSNH and WMECO. (Exhibit 10.4, 1993 NU Form 10-K,
File No. 1-5324)
10.11 Amended and Restate Power Purchase Contract dated as of April 1,
1985, between YAEC and each of CL&P, PSNH and WMECO. (Exhibit 10.5,
1988 NU Form 10-K, File No. 1-5324.)
10.11.1 Amendment No. 4 to Power Contract, dated May 6, 1988,
between YAEC and each of CL&P, PSNH and WMECO. (Exhibit
10.5.1, 1989 NU Form 10-K, File No. 1-5324)
10.11.2 Amendment No. 5 to Power Contract, dated June 26, 1989,
between YAEC and each of CL&P, PSNH and WMECO. (Exhibit
10.5.2, 1989 NU Form 10-K, File No. 1-5324)
10.11.3 Amendment No. 6 to Power Contract, dated July 1, 1989,
between YAEC and each of CL&P, PSNH and WMECO. (Exhibit
10.5.3, 1989 NU Form 10-K, File No. 1-5324)
10.11.4 Amendment No. 7 to Power Contract, dated February 1,
1992, between YAEC and each of CL&P, PSNH and WMECO.
(Exhibit 10.5.4, 1993 NU Form 10-K, File No. 1-5324)
*10.11.5 Form of Amendment No. 8 to Power Contract, dated June 1,
2003, between YAEC and each of CL&P, PSNH and WMECO.
10.12 Stockholder Agreement dated as of May 20, 1968 among stockholders
of MYAPC. (Exhibit 10.6, 1997 NU Form 10-K, File No. 1-5324)
10.13 Capital Funds Agreement dated as of May 20, 1968 between MYAPC and
CL&P, PSNH, HELCO and WMECO. (Exhibit 10.8, 1997 NU Form 10-K,
File No. 1-5324)
10.13.1 Amendment No. 1 to Capital Funds Agreement, dated as of
August 1, 1985, between MYAPC, CL&P, PSNH and WMECO.
(Exhibit No. 10.8.1, 1994 NU Form 10-K, File No. 1-5324)
10.14 Power Purchase Contract dated as of May 20, 1968 between MYAPC and
each of CL&P, HELCO, PSNH and WMECO. (Exhibit 10.7, 1997 Form
10-K, File No. 1-5324)
10.14.1 Amendment No. 1 to Power Contract dated as of March 1,
1983 between MYAPC and each of CL&P, PSNH and WMECO.
(Exhibit 10.7.1, 1993 NU Form 10-K, File No. 1-5324)
10.14.2 Amendment No. 2 to Power Contract dated as of January 1,
1984 between MYAPC and each of CL&P, PSNH and WMECO.
(Exhibit 10.7.2, 1993 NU Form 10-K, File No. 1-5324)
10.14.3 Amendment No. 3 to Power Contract dated as of October 1,
1984 between MYAPC and each of CL&P, PSNH and WMECO.
(Exhibit No. 10.7.3, 1994 NU Form 10-K, File No. 1-5324)
10.14.4 Additional Power Contract dated as of February 1, 1984
between MYAPC and each of CL&P, PSNH and WMECO. (Exhibit
10.7.4, 1993 NU Form 10-K, File No. 1-5324)
10.15 Sharing Agreement between CL&P, WMECO, HP&E, HWP and PSNH dated as
of June 1, 1992. (Exhibit 10.17, 1992 NU Form 10-K, File No. 1-
5324)
10.16 Agreements among New England Utilities with respect to the Hydro-
Quebec interconnection projects. (Exhibits 10(u) and 10(v); 10(w),
10(x), and 10(y), 1990 and 1988, respectively, Form 10-K of New
England Electric System, File No. 1-3446)
10.17 NU Incentive Plan, effective as of January 1, 1998. (Exhibit
10.35.1, 1998 NU Form 10-K, File No. 1-5324)
10.17.1 Amendment to NU Incentive Plan, effective as of
February 23, 1999. (Exhibit 10.35.1.1, 1998 NU Form
10-K, File No. 1-5324)
10.18 Supplemental Executive Retirement Plan for Officers of NU System
Companies, Amended and Restated effective as of January 1, 1992.
(Exhibit 10.45.1, NU Form 10-Q for the Quarter Ended June 30, 1992,
File No. 1-5324)
10.18.1 Amendment 1 to Supplemental Executive Retirement Plan,
effective as of August 1, 1993.(Exhibit 10.35.1, 1993 NU
Form 10-K, File No. 1-5324)
10.18.2 Amendment 2 to Supplemental Executive Retirement Plan,
effective as of January 1, 1994.(Exhibit 10.35.2, 1993 NU
Form 10-K, File No. 1-5324)
10.18.3 Amendment 3 to Supplemental Executive Retirement Plan,
effective as of January 1, 1996.(Exhibit 10.36.3, 1995 NU
Form 10-K, File No. 1-5324)
10.18.4 Amendment 4 to Supplemental Executive Retirement Plan,
effective as of February 26, 2002. (Exhibit 10.35.4,
2001 NU Form 10-K, File No. 1-5324)
10.18.5 Amendment 5 to Supplemental Executive Retirement Plan,
effective as of November 1, 2001. (Exhibit 10.35.5, 2001
NU Form 10-K, File No. 1-5324)
*10.18.6 Amendment 6 to Supplemental Executive Retirement Plan,
effective as of December 9, 2003.
10.19 Trust under Supplemental Executive Retirement Plan dated May 2,
1994. (Exhibit 10.33, 2002 NU Form 10-K, File No. 1-5324)
*10.19.1 First Amendment to Trust, effective as of December 10,
2002.
10.20 Special Severance Program for Officers of NU System Companies, as
adopted on July 15, 1998. (Exhibit 10.37, 1998 NU Form 10-K, File
No. 1-5324)
10.20.1 Amendment to Special Severance Program, effective as of
February 23, 1999. (Exhibit 10.37.1, 1998 NU Form 10-K,
File No. 1-5324)
10.20.2 Amendment to Special Severance Program, effective as of
September 14, 1999. (Exhibit 10.3, 1999 NU Form 10-Q for
the Quarter Ended September 30, 1999, File No. 1-5324)
10.21 Employment Agreement with Michael G. Morris. (Exhibit 10.39, 1997
NU Form 10-K, File No. 1-5324)
10.21.1 Amendment to Morris Employment Agreement, dated as of
February 23, 1999. (Exhibit 10.39.1, 1998 NU Form 10-K,
File No. 1-5324)
10.21.2 Amendment to Morris Employment Agreement, dated as of
June 28, 2001. (Exhibit 10.41.2 to 2001 NU Form 10-Q for
the Quarter Ending September 30, 2001, File No. 1-5324)
10.21.3 Amendment to Morris Employment Agreement, dated as of
September 11, 2001. (Exhibit 10.41.3 to 2001 NU Form
10-Q for the Quarter Ending September 30, 2001, File No.
1-5324)
10.22 Employment Agreement with Michael G. Morris dated as of August 20,
2002. (Exhibit 10.38.4 to 2002 NU Form 10-Q for the Quarter Ending
September 30, 2002, File No. 1-5324)
10.23 Arrangement with Michael G. Morris with Respect to Seabrook.
(Exhibit 10.38.4 to 2002 NU Form 10-Q for the Quarter Ending
September 30, 2002, File No. 1-5324)
10.24 Arrangement with Michael G. Morris with respect to use of corporate
airplane. (Exhibit 10.39, 2002 NU Form 10-K, File No. 1-5324)
10.25 Consulting Agreement with Bruce M. Kenyon, dated as of December 21,
2002. (Exhibit 10.41.5, 2002 NU Form 10-K, File No. 1-5324)
10.26 Employment Agreement with John H. Forsgren.(Exhibit 10.41, 1996 NU
Form 10-K, File No. 1-5324)
10.26.1 Amendment to Forsgren Employment Agreement Exhibit 10.43,
dated as of January 13, 1998. (Exhibit 10.42.1, 1998 NU
Form 10-K, File No. 1-5324)
10.26.2 Amendment to Forsgren Employment Agreement, dated as of
February 23, 1999. (Exhibit 10.42.2, 1998 NU Form 10-K,
File No. 1-5324)
10.26.3 Amendment to Forsgren Employment Agreement, dated as of
May 10, 1999. (Exhibit 10.1, 1999 NU Form 10-Q for the
Quarter Ended March 31, 1999, File No. 1-5324)
10.26.4 Amendment to Forsgren Employment Agreement, dated as of
September 14, 1999. (Exhibit 10.4, 1999 NU Form 10-Q for
the Quarter Ended September 30, 1999, File No. 1-5324)
10.26.5 Amendment to Forsgren Employment Agreement, dated as of
September 19, 2001. (Exhibit 10.44.7 to 2001 NU Form 10-Q
for the Quarter Ending September 30, 2001, File No. 1-
5324)
10.26.6 Supplemental Retirement Benefit with John H. Forsgren,
dated as of August 8, 2001. (Exhibit 10.44.5, 2001 NU
Form 10-Q for Quarter Ended September 30, 2001, File No.
1-5324)
10.26.7 Supplemental Compensation Arrangement with John J.
Forsgren, dated as of September 5, 2001. (Exhibit
10.44.6, 2001 NU Form 10-Q for Quarter Ended
September 30, 2001, File No. 1-5324)
10.27 Employment Agreement with John H. Forsgren, dated as of April 1,
2003 (Exhibit 10.42.6 to 2003 NU Form 10-Q for Quarter Ended
March 31, 2003, File No. 1-5324)
10.28 Employment Agreement with Cheryl W. Grise. (Exhibit 10.44, 1998 NU
Form 10-K, File No. 1-5324)
10.28.1 Amendment to Grise Employment Agreement, dated as of
January 13, 1998. (Exhibit 10.44.1, 1998 NU Form 10-K,
File No. 1-5324)
10.28.2 Amendment to Grise Employment Agreement, dated as of
February 23, 1999. (Exhibit 10.44.2, 1998 NU Form 10-K,
File No. 1-5324)
10.28.3 Amendment to Grise Employment Agreement, dated as of
September 14, 1999. (Exhibit 10.5, 1999 NU Form 10-Q for
the Quarter Ended September 30, 1999, File No. 1-5324)
10.28.4 Amendment to Grise Employment Agreement dated as of
September 19, 2001. (Exhibit 10.46.5 to 2001 NU Form
10-Q for the Quarter Ending September 30, 2001, File No.
1-5324)
10.28.5 Supplemental Compensation Arrangement with Cheryl W.
Grise, dated as of September 17, 2001. (Exhibit 10.46.4
to 2001 NU Form 10-Q for Quarter Ended September 30,
2001, File No. 1-5324)
10.29 Employment Agreement with Cheryl W. Grise, dated as of April 1,
2003 (Exhibit 10.45.6 to 2003 NU Form 10-Q for Quarter Ended
March 31, 2003, File No. 1-5324)
10.30 Employment Agreement with Charles W. Shivery, dated as of June 1,
2002. (Exhibit 10.64 to NU Form 10-Q for the quarter ended June 30,
2002, File No. 1-5324)
*10.31 Employment Agreement with Gregory B. Butler, dated as of October 1,
2003.
10.32 Northeast Utilities Deferred Compensation Plan for Trustees,
Amended and Restated December 13, 1994. (Exhibit 10.39, 1995 NU
Form 10-K, File No. 1-5324)
10.32.1 Amendment to Deferred Compensation Plan, effective
November 5, 2001. (Exhibit 10.46.1, 2001 NU Form 10-K,
File No. 1-5324)
10.33 Northeast Utilities Deferred Compensation Plan for Executives,
adopted January 13, 1998. (Exhibit A.5 to NU Form U-1 filed
March 5, 1998, File No. 70-09185)
(C) NU and CL&P
10.1 CL&P Transition Property Purchase and Sale Agreement dated as of
March 30, 2001. (Exhibit 10.55, 2001 CL&P Form 10-K, File No. 0-
11419)
10.2 CL&P Transition Property Servicing Agreement dated as of March 30,
2001. (Exhibit 10.56, 2001 NU Form 10-K, File No. 1-5324)
*10.3 Description of terms of employment of Leon J. Olivier.
(D) NU and PSNH
10.1 Revised and Conformed Agreement to Settle PSNH Restructuring, dated
August 2, 1999, conformed June 23 and executed on September 22,
2000. (Exhibit 10.15.1, 2001 NU Form 10-K, File No. 1-5324)
10.2 PSNH Purchase and Sale Agreement with PSNH Funding LLC dated as of
April 25, 2001. (Exhibit 10.57, 2001 NU Form 10-K, File No. 1-
5324)
10.3 PSNH Servicing Agreement with PSNH Funding LLC dated as of
April 25, 2001. (Exhibit 10.58, 2001 NU Form 10-K, File No. 1-
5324)
10.4 PSNH Purchase and Sale Agreement with PSNH Funding LLC2 dated as of
January 30, 2002. (Exhibit 10.59 2001 NU Form 10-K, File No. 1-
5324)
10.5 PSNH Servicing Agreement with PSNH Funding LLC2 dated as of
January 30, 2002. (Exhibit 10.60, 2001 NU Form 10-K, File No. 1-
5324)
10.6 Service Contract dated as of June 5, 1992 between PSNH and NUSCO.
(Exhibit 10.12.4, 1992 NU Form 10-K, File No. 1-5324)
(E) NU and WMECO
10.1 Lease and Agreement, dated as of December 15, 1988, by and between
WMECO and Bank of New England, N.A., with BNE Realty Leasing
Corporation of North Carolina. (Exhibit 10.63, 1988 NU Form 10-K,
File No. 1-5324)
10.2 WMECO Transition Property Purchase and Sale Agreement dated as of
May 17, 2001. (Exhibit 10.61, 2001 NU Form 10-K, File No. 1-5324)
10.3 WMECO Transition Property Servicing Agreement dated as of May 17,
2001. (Exhibit 10.62, 2001 NU Form 10-K, File No. 1-5324)
*12 Ratio of Earnings to Fixed Charges
13 Annual Report to Security Holders (Each of the Annual Reports is filed
only with the Form 10-K of that respective registrant)
13.1 Portions of the Annual Report to shareholders of NU that have been
incorporated by reference into this Form 10-K.
13.2 Annual Report of CL&P
13.3 Annual Report of PSNH
13.4 Annual Report of WMECO
*21 Subsidiaries of the Registrant
*23 Independent Auditors' Consent
*31
(a) Northeast Utilities
Certification of Charles W. Shivery, President of NU, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
March 12, 2004
(b) The Connecticut Light and Power Company
Certification of Cheryl W. Grise, Chief Executive Officer of CL&P,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated March 12, 2004
(c) Public Service Company of New Hampshire
Certification of Cheryl W. Grise, Chief Executive Officer of PSNH,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated March 12, 2004
(d) Western Massachusetts Electric Company
Certification of Cheryl W. Grise, Chief Executive Officer of WMECO,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated March 12, 2004
*31.1
(a) Northeast Utilities
Certification of John H. Forsgren, Vice Chairman, Executive Vice
President and Chief Financial Officer of NU, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated March 12, 2004
(b) The Connecticut Light and Power Company
Certification of John H. Forsgren, Executive Vice President and
Chief Financial Officer of CL&P, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated March 12, 2004
(c) Public Service Company of New Hampshire
Certification of John H. Forsgren, Executive Vice President and
Chief Financial Officer of PSNH, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated March 12, 2004
(d) Western Massachusetts Electric Company
Certification of John H. Forsgren, Executive Vice President and
Chief Financial Officer of WMECO, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, dated March 12, 2004
*32
(a) Northeast Utilities
Certification of Charles W. Shivery, President of NU and John H.
Forsgren, Vice Chairman, Executive Vice President and Chief
Financial Officer of NU, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
dated March 12, 2004
(b) The Connecticut Light and Power Company
Certification of Cheryl W. Grise, Chief Executive Officer of CL&P
and John H. Forsgren, Executive Vice President and Chief Financial
Officer of CL&P, pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
March 12, 2004
(c) Public Service Company of New Hampshire
Certification of Cheryl W. Grise, Chief Executive Officer of PSNH
and John H. Forsgren, Executive Vice President and Chief Financial
Officer of PSNH, pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
March 12, 2004
(d) Western Massachusetts Electric Company
Certification of Cheryl W. Grise, Chief Executive Officer of WMECO
and John H. Forsgren, Executive Vice President and Chief Financial
Officer of WMECO, pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
March 12, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>4
<FILENAME>nuannualreport.txt
<DESCRIPTION>NU 2003 ANNUAL REPORT
<TEXT>
EXHIBIT 13.1
ANNUAL REPORT OF NORTHEAST UTILITIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND BUSINESS ANALYSIS
- -------------------------------------------------------------------------------
OVERVIEW
Consolidated: Northeast Utilities and subsidiaries (NU or the company)
reported 2003 earnings of $116.4 million, or $0.91 per share, compared with
earnings of $152.1 million, or $1.18 per share, in 2002 and $243.5 million,
or $1.79 per share, in 2001. All earnings per share (EPS) amounts are
reported on a fully diluted basis.
The 2003 earnings of $116.4 million, or $0.91 per share include a charge of
$36.9 million, or $0.29 per share, associated with a loss recorded for the
settlement of a wholesale power contract dispute between The Connecticut
Light and Power Company (CL&P) and its three 2003 standard offer power
suppliers, including an NU subsidiary, Select Energy, Inc. For more
information about this contract dispute and the settlement, see the "Impacts
of Standard Market Design" section of this Management's Discussion and
Analysis. Also included in 2003 earnings was a negative $4.7 million after-
tax cumulative effect of an accounting change as a result of the adoption of
Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." Excluding the effects of
these two items, net income would have been $158 million, or $1.24 per share.
NU's 2003 results benefited from improved performance at NU Enterprises and
lower corporate-wide interest costs. The better performance at NU
Enterprises reflected improved margins on Select Energy, Inc.'s (Select
Energy) energy supply contracts, higher volumes, improved operation of NU
Enterprises' generating facilities, and the absence of natural gas trading
losses that occurred in the first half of 2002. Those factors were offset by
lower pension income and the absence of earnings related to the Seabrook
nuclear unit (Seabrook).
During 2003, pre-tax pension income for NU declined $41.6 million, from a
credit of $73.4 million in 2002 to a credit of $31.8 million in 2003. Of the
$31.8 million and $73.4 million of pension credits recorded during 2003 and
2002, $16.4 million and $47.2 million, respectively, were recognized in the
consolidated statements of income as reductions to operating expenses. The
remaining $15.4 million in 2003 and $26.2 million in 2002 relate to employees
working on capital projects and were reflected as reductions to capital
expenditures. The pre-tax $30.8 million decrease in pension income that
reduces operating expenses was reflected evenly throughout 2003, resulting in
a decline of $4.6 million in net income per quarter during 2003.
NU's EPS also benefited modestly from a share repurchase program. In the
first quarter of 2003, NU repurchased approximately 1.5 million of its shares
at an average price of $13.73. There were no share repurchases during the
remainder of 2003. On May 13, 2003, the company's Board of Trustees
authorized the repurchase of up to 10 million shares through July 1, 2005.
NU had 127.7 million shares outstanding at December 31, 2003.
NU's revenues for 2003 increased to $6.1 billion from $5.2 billion in 2002,
or an increase of $0.9 billion. Of the $0.9 billion increase in NU's
revenues, $0.8 billion related to NU Enterprises. NU Enterprises' revenues
in 2003 increased primarily due to higher wholesale and retail sales volumes
of $0.4 billion and higher prices of $0.3 billion. The increase in revenues
is also due to increases in electric sales at the Utility Group in 2003 as
compared to 2002.
Earnings decreased $91.4 million for the year ended December 31, 2002 as
compared to 2001. This decrease is primarily the result of several items
recorded in 2001, including an after-tax gain of $115.6 million, or $0.85 per
share associated with the sale of the Millstone nuclear units (Millstone),
offset by an after-tax loss of $22.4 million, or $0.17 per share related to
the adoption of Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
and a charge of $35.4 million, or $0.26 per share related to an agreement
with two financial institutions to repurchase NU common shares. This
earnings decrease is also attributable to after-tax losses totaling $11
million, or $0.09 per share recorded in 2002, associated with the write-down
of investments in NEON Communications, Inc. (NEON) and Acumentrics
Corporation (Acumentrics), offset by after-tax gains totaling $24.5 million,
or $0.19 per share, associated with the sale of Seabrook, which were also
recorded in 2002.
Utility Group: Earnings at all of NU's Utility Group subsidiaries were lower
in 2003 as compared with 2002. The Utility Group is comprised of CL&P,
Public Service Company of New Hampshire (PSNH), Western Massachusetts
Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), and
Yankee Gas Services Company (Yankee Gas). Utility Group net income was lower
due to the absence of approximately $13 million of investment tax credits
(ITC) that were reflected in the second quarter of 2002 at WMECO, as well as
lower pension income and the loss of earnings related to Seabrook. Lower
pension income and the lack of Seabrook earnings resulted in a net income
decrease in 2003 as compared to 2002 of $18.4 million and $16.3 million,
respectively. These decreases were partially offset by lower Utility Group
controllable operation and maintenance costs.
As a result of an adjustment to estimated unbilled electric revenues
resulting from a process to validate and update the assumptions used to
estimate unbilled revenues, 2003 Utility Group retail electric sales
increased 3.6 percent compared to 2002. Absent that adjustment, Utility
Group retail electric sales increased 2.1 percent. Adjustments to estimated
unbilled revenues had a negative impact on Yankee Gas. Yankee Gas firm gas
sales decreased 0.6 percent in 2003 as compared to 2002. Absent those
adjustments, Yankee Gas firm gas sales increased 7.8 percent. Combined, the
adjustments to estimated unbilled revenues increased NU's net income by
approximately $4.6 million for 2003. For further information regarding the
estimate of unbilled revenues, see "Critical Accounting Policies and
Estimates - Utility Group Unbilled Revenues," included in this Management's
Discussion and Analysis.
CL&P earnings before preferred dividends totaled $68.9 million in 2003,
compared with $85.6 million in 2002. The lower income was primarily
attributable to lower pension income, after-tax write-offs of approximately
$5 million related to a distribution rate case that was decided in December
2003, and a loss of approximately $1 million recorded for the settlement of
the wholesale power contract dispute.
PSNH earned $45.6 million in 2003, compared with $62.9 million in 2002. The
decline in earnings is due to a lower level of regulatory assets earning a
return, the positive resolution of certain contingencies related to a
regulatory proceeding decided in 2002, and higher pension costs. Also, as a
result of the sale of Seabrook, earnings at NAEC were essentially eliminated
in 2003, compared with earnings of $26.3 million for 2002. NAEC's 2002
earnings included $13.9 million related to the elimination of reserves
associated with its ownership share of Seabrook assets.
WMECO earnings were $16.2 million in 2003 compared to $37.7 million in 2002.
The decline in earnings related primarily to the recognition of $13 million
of ITC in the second quarter of 2002 and to the positive financial impact of
an approval of a regulatory settlement in the fourth quarter of 2002.
Yankee Gas earned $7.3 million in 2003, compared with $17.6 million in 2002.
Yankee Gas earnings were reduced by $6.2 million in 2003 as a result of both
the aforementioned downward adjustments in estimated unbilled revenues and
certain gas cost adjustments.
NU Enterprises: NU Enterprises, Inc. is the parent company of 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 lines: the merchant energy business line and the
energy services business line.
The financial performance of NU Enterprises improved in 2003, losing $3.5
million, or $0.03 per share, compared with losses of $53.2 million, or $0.41
per share in 2002 and earnings of $6.1 million, or $0.05 per share in 2001,
prior to the negative cumulative effect of an accounting change associated with
the adoption of SFAS No. 133. The 2003 loss of $3.5 million includes an
after-tax loss of approximately $36 million, or $0.28 per share, related to
Select Energy's share of the cost of settling the contract dispute between
affiliate CL&P and its suppliers over the responsibility for costs related to
the March 2003 implementation of Standard Market Design (SMD) in New England.
The settlement was filed with the Federal Energy Regulatory Commission (FERC)
on March 3, 2004 and is expected to be approved by the FERC in the first half
of 2004. Excluding the settlement loss, NU Enterprises earned $32.2 million
or $0.25 per share.
NU Enterprises' net income improved due to increased margins on wholesale and
retail contracts, improved performance at NGC, which owns nearly 1,300
megawatts (MW) of primarily hydroelectric and pumped storage generating
capacity in Massachusetts and Connecticut, and the absence of natural gas
trading losses in 2003. Natural gas trading positions in the first half of
2002 resulted in $17.6 million of trading losses. Over the past year, Select
Energy has significantly reduced its trading activities, which are now
limited primarily to price discovery and transaction and risk management for
the merchant energy business line.
FUTURE OUTLOOK
Consolidated: NU estimates that it will earn 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.
In 2004, NU is projecting to record pre-tax pension expense of $2.9 million.
Pension expense is annually adjusted during the second quarter based on
updated actuarial valuations, and the 2004 estimate may change.
Utility Group: The NU consolidated earnings estimate of $1.20 per share to
$1.40 per share includes Utility Group earnings of between $1.08 per share
and $1.20 per share. The range reflects uncertainties over the outcome of a
pending PSNH rate case before the New Hampshire Public Utilities Commission
(NHPUC) and the outcome of the NU transmission rate case before the FERC.
Management expects both cases to be decided in the second half of 2004. The
earnings range also reflects a continued reduction in pension income.
NU Enterprises: NU projects that the financial performance of NU Enterprises
will continue to improve in 2004. The NU consolidated earnings range of
$1.20 per share to $1.40 per share for 2004 reflects projected earnings of
between $0.22 per share and $0.30 per share at NU Enterprises.
LIQUIDITY
Consolidated: After four years of reducing its indebtedness, NU's total
debt, excluding rate reduction bonds, rose to $2.7 billion at the end of
2003, compared with $2.4 billion at the end of 2002. The higher debt levels
reflect the issuance of new debt by NU parent, WMECO and SESI during 2003, as
well as a $49 million increase in borrowings on NU's revolving credit lines.
NU parent sold $150 million of notes at a coupon rate of 3.3 percent during
2003. These notes mature in 2008. The proceeds from this issuance were
primarily used to refinance Select Energy's short-term debt.
At December 31, 2003, NU had $105 million in notes payable to banks, compared
with $56 million of notes payable to banks at December 31, 2002. In
addition, NU had $83.7 million of cash, including cash and cash equivalents
and unrestricted cash from counterparties at December 31, 2003, compared with
$67.2 million at December 31, 2002.
NU's net cash flows provided by operating activities totaled $573.6 million
in 2003 as compared to $589.7 million in 2002 and $302.4 million in 2001.
Cash flows provided by operating activities in 2003 decreased due to
decreases in working capital items, primarily accounts payable and accrued
taxes. Accrued taxes decreased as the taxes related to the 2002 sale of
Seabrook were paid in March of 2003. Accounts payable decreased as a result
of the timing of payments on amounts outstanding at NU Enterprises. The
decreases in these working capital items were offset by an increase in
regulatory overrecoveries in 2003 as compared to 2002, primarily associated
with CL&P's Competitive Transition Assessment (CTA), Generation Service
Charge (GSC) and System Benefits Charge (SBC), as well as PSNH's Stranded
Cost Recovery Charge (SCRC). For a description of the costs recovered through
these mechanisms, see Note 1H - "Summary of Significant Accounting Policies -
Utility Group Regulatory Accounting," to the consolidated financial statements.
Cash flows provided by operating activities in 2002 increased due to
increases in working capital items, primarily accrued taxes, offset by a
reduction in net income, primarily due to the gain associated with the sale
of Millstone in 2001. Accrued taxes increased due to the taxable gain on the
sale of Seabrook. Those taxes were not paid until March of 2003. The
increase in cash flows provided by operating activities in 2002 related
primarily to more collections of receivables and unbilled revenues in 2002
compared to 2001 associated with the sales growth of NU Enterprises.
NU projects that cash flows provided by operating activities will decline
significantly in 2004 from 2003, even if net income increases, as a result of
expected refunds to CL&P's customers or applications of previous
overcollections to current costs as a result of recent regulatory decisions.
There was a lower level of investing and financing activity in 2003 as
compared to 2002, which was primarily due to the sale of Seabrook, the
acquisition of Woods Electrical Co., Inc. (Woods Electrical) and Woods
Network and the issuance of rate reduction bonds in 2002. Cash flows used
for investments in plant increased to $550 million in 2003 from $485 million
in 2002 and $451.4 million in 2001 as a result of increased levels of capital
expenditures at the Utility Group. NU expects capital expenditures to reach
$738 million in 2004.
There was a lower level of investing and financing activity in 2002 as
compared to 2001, primarily due to the following items that occurred in 2001:
the issuance of long-term debt, the issuance of rate reduction bonds, the
use of proceeds from the sale of Millstone, the buyout and buydown of
independent power producer (IPP) contracts, the retirement of preferred stock
and other preferred securities and the retirement of certain other capital
lease obligations.
The retirement of rate reduction bonds does not equal the amortization of
rate reduction bonds because the retirement represents principal payments,
while the amortization represents amounts recovered from customers for future
principal payments. The timing of recovery does not exactly match the
expected principal payments.
Aside from the rate reduction bonds outstanding, NU has a modest level of
sinking fund payments and debt maturities due between 2004 and 2011,
averaging $56.3 million annually and totaling $64.9 million in 2004. Most of
the debt that must be repaid during that time was issued by NU parent, NGC,
Yankee Gas, and SESI. No CL&P, PSNH or WMECO debt issues mature during that
eight-year period.
The level of common dividends totaled $73.1 million in 2003, compared with
$67.8 million in 2002 and $60.9 million in 2001. The 2003 increase resulted
from NU paying a dividend of $0.1375 per share in the first two quarters of
2003 and $0.15 per share in the second two quarters of 2003. The level of
dividends in 2002 was $0.125 per share in the first two quarters and $0.1375
per share in the second two quarters. Management expects to continue to
increase the dividend level, subject to NU's ability to meet earnings targets
and the judgment of its Board of Trustees at the time dividends are declared.
In recent years, NU's Trustees have addressed dividend increases at the
company's annual meeting, the next of which is on May 11, 2004. On January 12,
2004, the NU Board of Trustees approved the payment of a dividend of
$0.15 per share on March 31, 2004, to shareholders of record at March 1,
2004.
Overall liquidity remained high at December 31, 2003, despite the increase in
the common dividend and the repurchase of 1.5 million shares in 2003 at a
cost of $20.5 million, due primarily to cash earnings from the Utility Group
subsidiaries. NU's liquidity was also strengthened by the aforementioned
issuance of $150 million in notes by NU parent.
Excluding rate reduction bonds as they are non-recourse to NU, NU's
consolidated capitalization was comprised of 46 percent common shareholders'
equity, and 54 percent preferred stock and long-term debt at December 31,
2003, as compared with 47 percent common shareholders' equity and 53 percent
preferred stock and long-term debt at December 31, 2002. As a result of the
Utility Group's proposed expansion plans, management expects capital
requirements to increase over the next several years but will continue to
target a 45 percent equity and 55 percent debt capitalization structure.
Utility Group: NU's higher debt levels reflect the sale of $55 million of 10-
year senior unsecured notes by WMECO on September 30, 2003, at a coupon rate
of 5.0 percent. WMECO used the proceeds from this debt issue to reduce its
level of short-term borrowings from the NU Money Pool. On October 1, 2003,
CL&P fixed the interest rate on $62 million of variable-rate, tax-exempt
notes for five years at 3.35 percent. These notes mature in 2031. On
January 30, 2004, Yankee Gas closed on the private placement of $75 million
of 10-year first-mortgage bonds carrying an interest rate of 4.8 percent.
The proceeds from these bonds were used to reduce short-term debt.
By the end of 2003, NU had completed the first stage of a comprehensive
restructuring of its business profile. For CL&P that marked the sale of all
electric generation in the period of 1999 through 2002 and the recovery of
almost all of its unsecuritized stranded costs. The sale of assets and
recovery of stranded costs have provided CL&P with extremely strong cash
flows over the past five years. Those proceeds allowed CL&P to repay more
than half of its debt and preferred securities and to return hundreds of
millions of dollars of equity capital to NU. CL&P has not issued any new
long-term debt since mid-1997. Aided by relatively low cost power supply
contracts from 2000 through 2003, CL&P was able to maintain retail rates that
were relatively low for New England and generally 10 percent below those
charged by CL&P in 1996.
The year 2004, however, will show a significant change in CL&P's financial
statements, even if net income remains relatively stable. The settlement of
the dispute between CL&P and its standard offer service suppliers over a
portion of the incremental costs incurred following the implementation of SMD
on March 1, 2003, will have a significant negative impact on CL&P's cash
flows in 2004 as compared to 2003. In 2003, CL&P was withholding payment of
a portion of the incremental SMD costs from suppliers pending resolution but
was recovering the costs from ratepayers at the same time. Through January
31, 2004, CL&P collected approximately $155 million from customers. Of this
amount, $31.1 million was used in CL&P's operating cash flows and is secured
by a surety bond. The remaining $124 million was deposited into an escrow
account, and escrow account deposits through December 31, 2003 were $93.6
million and are included in restricted cash - LMP costs on the accompanying
consolidated balance sheets. As a result of the settlement, CL&P will pay
approximately $83 million to suppliers and return the remainder to its
customers.
Another significant negative impact to CL&P's cash flows will be the refund
of previously overcollected stranded costs to CL&P's customers. The
Connecticut Department of Public Utility Control (DPUC) stated in CL&P's
transitional standard offer (TSO) docket that CL&P should either refund $262
million of overcollections back to customers or use these overcollections to
pay for cash expenses over the next four years, beginning in 2004.
These refunds or applications of past cash collections to future expenses,
combined with CL&P's capital expansion program, will require CL&P to issue
debt securities and receive equity infusions from NU parent over the next
several years. CL&P is expected to issue up to $250 million of first
mortgage bonds in 2004.
CL&P will continue to increase its distribution and transmission construction
program to meet Connecticut's electric service reliability needs. CL&P
projects capital spending of approximately $440 million in 2004, compared
with $314.6 million in 2003 and $239.6 million in 2002. Over time, the
capital program will add to CL&P's asset base and net income.
Under FERC policy, transmission owners cannot bill customers for new plant
until it enters service. However, transmission owners may capitalize debt
and equity costs during the construction period through an allowance for
funds used during construction (AFUDC). Debt costs capitalized offset
interest expense with no impact on net income, while equity costs capitalized
increase net income. CL&P expects to fund its construction expenditures with
approximately 45 percent equity and 55 percent debt. As a result of the size
of the projects and the duration of the construction, a growing level of
CL&P's earnings over the next four years is expected to be in the form of
equity-related AFUDC. While the return on and recovery of the capitalized
debt and equity AFUDC benefits earnings and cash flows after the projects
enter service, AFUDC has no positive effect on cash flows until the projects
are reflected in rates.
Capital spending at PSNH totaled $105.6 million in 2003, compared with $108.7
million in 2002. In 2003, PSNH spent over $20 million to buy down contracts
with 14 small power producers and funded $30.1 million to acquire the assets
of Connecticut Valley Electric Company (CVEC) and buy out a related wholesale
power contract. The $30.1 million was placed in escrow at December 31, 2003
and is included in special deposits on the accompanying consolidated balance
sheets. PSNH expects to increase its capital spending to approximately $160
million in 2004, assuming it receives satisfactory regulatory approval for a
$70 million conversion of a 50 megawatt generating unit at its Schiller Station
to burn wood chips. Such a level of spending is likely to require PSNH to
issue in 2004 its first new debt since it exited bankruptcy in 1991.
Yankee Gas has also been investing heavily in its infrastructure since it was
acquired by NU in March 2000. In November 2003, Yankee Gas received
regulatory support to build a 1.2 billion cubic foot natural gas storage
facility in Waterbury, Connecticut. As a result of that project and other
initiatives, Yankee Gas projects $60 million of capital expenditures in 2004,
compared with $55.2 million in 2003.
In November 2003, the Utility Group renewed its $300 million credit line
under terms similar to the previous arrangement that expired in November
2003. There were $40 million in borrowings outstanding on this credit line
at December 31, 2003.
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. At December 31, 2003 and 2002, CL&P had sold accounts
receivable of $80 million and $40 million, respectively, to that financial
institution. For more information on the sale of receivables, see "Off-
Balance Sheet Arrangements" in this Management's Discussion and Analysis and
Note 1P, "Summary of Significant Accounting Policies - Sale of Customer
Receivables" to the consolidated financial statements.
In November 2003, CL&P received approval from its preferred shareholders for
an extension of a 10-year waiver that allows CL&P's unsecured debt to rise to
20 percent of total capitalization. CL&P preferred shareholders approved a
similar waiver in 1993 that will expire in March 2004. The approval waives a
requirement that unsecured debt represent no more than 10 percent of total
capitalization.
Rate reduction bonds are included on the consolidated balance sheets of NU,
CL&P, PSNH, and WMECO, even though the debt is non-recourse to these
companies. At December 31, 2003, these companies had a total of $1.7 billion
in rate reduction bonds outstanding, compared with $1.9 billion outstanding
at December 31, 2002. All outstanding rate reduction bonds of CL&P are
scheduled to amortize by December 30, 2010. PSNH's rate reduction bonds are
scheduled to fully amortize by May 1, 2013, and those of WMECO are scheduled
to fully amortize by June 1, 2013. Interest on the bonds totaled $108.4
million in 2003, compared with $115.8 million in 2002 and $87.6 million in
2001, the year of issuance. Cash flows from the amortization of rate
reduction bonds totaled $153.2 million in 2003, compared with $148.6 million
in 2002 and $98.4 million in 2001. Over the next several years, retirement
of rate reduction bonds will increase, and interest payments will steadily
decrease, resulting in no material changes to debt service costs on the
existing issues. CL&P, PSNH and WMECO fully recover the amortization and
interest payments from customers through stranded cost revenues each year,
and the bonds have no impact on net income. Moreover, as the rate reduction
bonds are non-recourse, the three rating agencies that rate the debt and
preferred stock securities of these companies do not reflect the revenues,
expenses, or outstanding securities related to the rate reduction bonds in
establishing the credit ratings of these companies or of NU.
NU Enterprises: NU's higher debt levels reflect SESI borrowings of $63.4
million in 2003 to finance the implementation of energy saving improvements
at customer facilities. Cash flows from SESI's share of customer energy
savings will repay the debt. While NU parent guarantees SESI's performance
under most of the contracts, NU parent does not guarantee repayment of the
debt, nor is the debt recourse to NU parent.
Select Energy was one of CL&P's standard offer service suppliers that
incurred incremental locational marginal pricing (LMP) costs during 2003.
CL&P did not pay Select Energy for these costs, which negatively impacted the
operating cash flows of NU Enterprises in 2003. If the FERC approves the
settlement of the wholesale power contract dispute over the responsibility
for LMP costs, then there will be a positive impact on NU Enterprises' cash
flows in 2004.
In November 2003, NU parent renewed its $350 million credit line with terms
similar to its previous arrangement that expired in November 2003. There
were $65 million in borrowings outstanding on this credit line at December
31, 2003. In addition, Select Energy had $106.9 million in letters of credit
outstanding under this credit line primarily to support its marketing
activities.
NU Enterprises continues to have a minimal level of capital spending. In
2002, NU Enterprises acquired certain assets and assumed certain liabilities
of Woods Electrical, an electrical services company, and Woods Network, a
network design, products and service company. The acquisitions were for
$16.3 million in cash. NU Enterprises made no other business acquisitions in
2002 or 2003.
IMPACTS OF STANDARD MARKET DESIGN
On March 1, 2003, the New England Independent System Operator (ISO-NE)
implemented SMD. As part of SMD, 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.
The costs associated with transmission congestion and line losses are now
assigned to the pricing zone in which they occur, and the calculation of line
losses is now based on an economic formula. Prior to March 1, 2003, those
costs were spread across virtually all New England electric customers based on
engineering data of actual line losses experienced. As part of the
implementation of SMD, ISO-NE established eight separate pricing zones in
New England: three in Massachusetts and one in each of the five other New
England states. The three components of the LMP for each zone are 1) an energy
cost, 2) congestion costs and 3) line loss charges assigned to the zone. LMP
is increasing costs in zones that have inadequate or less cost-efficient
generation and/or transmission constraints, such as Connecticut, and decreasing
costs in zones that have sufficient or excess generation, such as Maine.
CL&P was billed $186 million of incremental LMP costs by its standard offer
service suppliers or by ISO-NE. CL&P recovered a portion of these costs
through an additional charge on customer bills beginning on May 1, 2003.
Billings were on a two-month lag and were recorded as operating revenues when
billed. Amounts were recovered subject to refund.
CL&P and its suppliers, including affiliate Select Energy, disputed the
responsibility for the $186 million of incremental LMP costs incurred. NU
recorded a pre-tax loss in 2003 of approximately $60 million (approximately
$37 million after-tax) related to the settlement of this dispute. A
settlement agreement was reached among all the parties involved. This
settlement agreement was filed with the FERC on March 3, 2004 and will not be
final until the FERC approves it. Management expects to receive FERC
approval in the first half of 2004.
The pre-tax loss of approximately $60 million was reflected in two line items
on the consolidated statements of income. Approximately $58 million was
recorded as a reduction to operating revenues, and approximately $2 million
was recorded in operating expenses.
NRG ENERGY, INC. EXPOSURES
Certain subsidiaries of NU have entered into various transactions with
subsidiaries of NRG Energy, Inc. (NRG). On May 14, 2003, NRG and certain of
its subsidiaries filed voluntary bankruptcy petitions in the United States
Bankruptcy Court for the Southern District of New York. On December 5, 2003,
NRG emerged from bankruptcy. NRG-related exposures to certain subsidiaries
of NU as a result of these transactions are as follows:
Standard Offer Service Contract: NRG Power Marketing, Inc. (NRG-PMI)
contracted with CL&P to supply 45 percent of CL&P's standard offer service
load through December 31, 2003. In May 2003, NRG-PMI attempted to terminate
the contract with CL&P, but the FERC ordered NRG-PMI to continue serving CL&P
under its standard offer service contract. Subsequently, NRG-PMI received a
temporary restraining order from the United States District Court for the
Southern District of New York (District Court) and stopped serving CL&P with
standard offer supply on June 12, 2003. NRG-PMI was ultimately ordered by
the FERC and the District Court to resume serving CL&P's standard offer
service load and did so on July 2, 2003. During the period NRG-PMI did not
serve CL&P under its standard offer service contract, CL&P's net replacement
power cost amounted to $8.5 million, which was collected by CL&P from its
customers and withheld from standard offer service contract payments to NRG-
PMI.
On November 4, 2003, CL&P, NRG, the NRG Creditors' Committee, the DPUC, the
Office of Consumer Counsel, and the attorney general of Connecticut entered
into a comprehensive settlement agreement. Under the settlement agreement,
approved by the bankruptcy court and the FERC on November 21, 2003 and
December 18, 2003, respectively, NRG was required to continue to deliver
power to CL&P under the terms and conditions of the standard offer service
contract through the end of its term, which was December 31, 2003, in
exchange for a commitment by CL&P to make payments to NRG on a revised weekly
schedule. The settlement agreement also allowed CL&P to retain the
aforementioned $8.5 million withheld from NRG for replacement power purchased
by CL&P during the period June 12, 2003 through July 2, 2003. CL&P will seek
to refund this amount to its customers in 2004 pending DPUC approval. On
January 19, 2004, CL&P paid NRG-PMI its last weekly payment.
Pre-March 1, 2003 Congestion Charges: In November 2001, CL&P filed suit
against NRG in Connecticut Superior Court seeking judgment for unpaid pre-
March 1, 2003 congestion charges under its standard offer supply contract.
On August 5, 2002, CL&P withheld the then unpaid congestion charges from
payments due to NRG for standard offer service and continued to withhold
those amounts through December 31, 2003, the end of the contract term. The
total amount of congestion costs withheld from NRG was $28.4 million. If it
is ultimately concluded that CL&P is responsible for pre-March 1, 2003
congestion costs, then management believes that CL&P would be allowed to
recover these costs from its customers. This litigation is ongoing.
Station Service: Since December 1999, CL&P has provided NRG's Connecticut
generating plants with station service, which includes energy and/or delivery
services provided when a generator is off-line or unable to satisfy its
station service energy requirements. Pursuant to the parties'
interconnection agreement dated July 1, 1999, CL&P provides this service at
DPUC-approved retail rates. In October 2002, CL&P filed a complaint with the
FERC seeking interpretation of a FERC-filed interconnection agreement in
which NRG agreed to pay CL&P's applicable retail rates for station service
and delivery services. The FERC issued a decision on December 20, 2002 that
agreed that station service from CL&P would be subject to CL&P's applicable
retail rates and that states have jurisdiction over the delivery of power to
end users even where, as with station service, power is not delivered by
distribution facilities. NRG disputed its obligation and refused to pay
CL&P.
In September 2003, the bankruptcy court approved a stipulation between CL&P
and NRG to submit the station service dispute to arbitration, and arbitration
proceedings have been initiated by the parties. No hearing dates have been
scheduled. On December 17, 2003, the DPUC determined that CL&P had
appropriately administered its station service rates in providing NRG station
service. In unrelated proceedings, the FERC has issued decisions with
conflicting policy direction. In January 2004, CL&P filed a request with the
FERC for further clarification of this issue.
Management will continue to pursue recovery from NRG of the station service
balance, including approximately $4 million NRG placed in an escrow account
related to this matter. In 2003, as a result of NRG's bankruptcy, the amount
due from NRG in excess of the escrow amount was reserved. Management
believes that amounts not collected from NRG are ultimately recoverable from
CL&P's customers. Therefore, a regulatory asset of $11.4 million was
recorded. At December 31, 2003, NRG owed CL&P $16 million for station
service. The $16 million owed to CL&P includes $0.6 million billed to NRG
subsequent to its emergence from bankruptcy on December 5, 2003.
Legal Costs: Through December 31, 2003, legal costs incurred by CL&P related
to NRG's bankruptcy and the SMD dispute amounted to $2.3 million. This
amount has been recorded as a regulatory asset, and CL&P received approval to
recover $1.6 million in its recent rate case. CL&P will continue to defer
these legal costs as they are incurred, and management believes that amounts
in excess of $1.6 million will also be recovered from customers.
Meriden Gas Turbines, LLC: Yankee Gas, E.S. Boulos Company (Boulos), which
is a subsidiary of NGS, and CL&P are or have been involved in ongoing
litigation with Meriden Gas Turbines, LLC (MGT), an NRG subsidiary that was
not included in NRG's voluntary bankruptcy proceeding, related to the
construction of a generating plant that MGT stated it was abandoning.
Yankee Gas has expended costs in excess of $16 million in the construction of
a natural gas pipeline to the generating plant that MGT was constructing.
Yankee Gas drew down on an MGT $16 million letter of credit (LOC) when MGT
stated that it was abandoning construction of the generating plant. MGT has
contested the draw down on the LOC in a lawsuit filed in Connecticut Superior
Court. Yankee Gas has a counterclaim pending against MGT to recover
additional monies in accordance with the contract that are in excess of the
$16 million LOC. This litigation is ongoing.
Boulos has a 50 percent interest in a joint venture that was building
switchyards for the MGT generating plant. In the fourth quarter of 2003,
Boulos settled all outstanding claims against MGT with no material financial
impact.
MGT also currently owes CL&P $0.5 million for work on the South Kensington
switching station, which was to be the interconnection point for the MGT
generating plant. CL&P has joined pending foreclosure proceedings in an
effort to recover the outstanding balance.
Management does not expect that the resolution of the aforementioned NRG
exposures will have a material adverse effect on the financial condition or
results of operations of NU and its subsidiaries.
NU ENTERPRISES
Business Lines: NU Enterprises aligns its activities into two business
lines, the merchant energy business line and the energy services business
line. The merchant energy business line includes Select Energy's wholesale
and retail marketing activities. Also included are 1,440 MW of generation
capacity, consisting of 1,293 MW at NGC and 147 MW at HWP, which support the
merchant energy business line. The energy services business line 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. SESI engages in
energy-related construction services. NGS operates and maintains NGC's and
HWP's generation assets and provides third-party electrical services. In
2003, NGS also performed engineering contracting services.
Results and Outlook: Financial performance at NU Enterprises improved in
2003, losing $3.5 million, compared with losses of $53.2 million in 2002.
The 2003 loss includes the after-tax loss of approximately $36 million
associated with the aforementioned settlement of the wholesale power contract
dispute with CL&P. Excluding that loss, NU Enterprises earned $32.2 million
in 2003. During 2004, NU expects that NU Enterprises will continue to be
successful and will produce net income 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 line and between $4 million and $7 million from the energy
services business line. 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 line.
Select Energy's merchant energy business line includes wholesale marketing
and retail marketing activities. Wholesale marketing activities include
wholesale origination, portfolio management and the operation of more than
1,400 MW of pumped storage, hydroelectric and coal-fired generation assets.
Wholesale marketing activities earned $31.8 million in 2003, excluding the
after-tax loss associated with the settlement of the aforementioned wholesale
power contract dispute, compared to losses of $24.7 million in 2002. NGC
earned $38.5 million in 2003, compared with $30.4 million in 2002. HWP lost
$0.5 million in 2003 compared with a loss of $0.9 million in 2002. NGC's
results benefit from an above-market contract with Select Energy. The above-
market price continues through 2005, but the contract has been extended
through 2006, though at a lower cost to Select Energy. NU parent will
continue to guarantee the performance of Select Energy in that contract
through 2006. Wholesale marketing activities benefited from above-average
precipitation in western New England during 2003, which increased conventional
hydroelectric output, as compared with near drought conditions during 2002.
This increase in output resulted in $5 million of additional net income in
2003, as compared to 2002. Wholesale marketing activities also benefited
from the absence of natural gas trading losses in 2003.
Select Energy signed a number of wholesale marketing contracts in 2003 for
delivery to electric utilities in 2004. All contracts were won in competitive
bidding processes. Total wholesale sales in 2004 are expected to exceed 40
million megawatt-hours, based on the contracts in effect as of January 1, 2004.
The most significant contracts are with CL&P, NSTAR, National Grid USA, WMECO,
Jersey Central Power & Light, and Atlantic City Electric Co. Most of the
contracts noted above will expire in 2004. Select Energy will bid on
additional 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' overall profitability. Select Energy must
realize enough gross margin from its sales to cover its overhead and taxes and
produce a reasonable profit for NU. Overhead includes personnel and facility
costs, credit requirements and carrying costs on NGC and HWP generation.
The Northfield Mountain pumped storage facility, a 1,080 megawatt unit in
Northfield, Massachusetts, plays a critical role in the success of Select
Energy. Northfield's ability to generate large amounts of on-peak energy using
water that was pumped uphill during off-peak hours and its ability to react
rapidly to changing demand allow Select Energy to economically hedge much of
the 2004 earnings risk that results from entering into full requirements supply
obligations. As a result of a new competitively bid contract, Select Energy
will continue to be CL&P's largest wholesale supplier in 2004, but at a
significantly higher rate. Management expects that the improved terms of
Select Energy's new CL&P contract will have a positive impact on NU
Enterprises' 2004 earnings.
The second activity included in NU Enterprises' merchant energy business line
is retail marketing, which also improved its financial performance in 2003
compared to 2002. Select Energy's retail marketing activities had a $25.9
million improvement in financial performance during 2003 compared to 2002 with
losses of $1.8 million and $27.7 million in 2003 and 2002, respectively.
The 2003 improved retail results are primarily due to improved margins and
growth in retail electric sales, along with improved management of retail gas
contracts. Over time, management expects that Select Energy's retail sales
and financial performance will improve as more commercial and industrial
customers move from buying energy through their electric distribution company
to purchasing energy directly from suppliers such as Select Energy. Select
Energy does not sell electricity or natural gas to residential customers, but
actively markets energy to commercial and industrial customers throughout the
Northeast between Maine and Maryland with the exception of Vermont. Vermont
does not allow retail customers to choose their electric suppliers.
NU Enterprises' energy services business line, including SESI, NGS, and Woods
Network earned approximately $2.6 million in 2003 as compared to 2002 when
this business line was essentially breakeven. Financial performance at SESI
continues to benefit from an expanding level of business with the United States
Department of Defense, with net income rising to $4.6 million in 2003 from $3
million in 2002. NGS, which continues to be negatively affected by the lower
level of electrical contracting resulting from the slow economy in New England,
lost $2.2 million in 2003, following a loss of $3.2 million in 2002. Woods
Network earned $0.2 million in both 2003 and 2002.
NU Enterprises parent costs totaled $0.4 million in 2003, compared to $0.8
million in 2002.
In 2002, NU Enterprises concluded a study of the depreciable lives of certain
generation assets. The impact of this study was to lengthen the useful lives
of those generation assets by 32 years to an average of 70 years. In
addition, the useful lives of certain software was revised and shortened to
reflect a remaining life of 1.5 years. As a result of these studies, NU
Enterprises' operating expenses decreased by $8.6 million in 2003 and $5.1
million in 2002 as compared to 2001.
Intercompany Transactions: CL&P's standard offer purchases from Select
Energy represented approximately $558 million of revenues in 2003, compared
with $501 million in 2002. CL&P's TSO purchases from Select Energy in 2004
are expected to total approximately $500 million. Other transactions between
CL&P and Select Energy totaled $130 million in 2003 and 2002. Additionally,
WMECO's purchases from Select Energy represented approximately $143 million in
2003, compared with $14 million in 2002. All of these amounts are eliminated
in consolidation. The CL&P standard offer amounts have been reduced by the
loss related to the wholesale power contract settlement.
NU ENTERPRISES' MARKET AND OTHER RISKS
Overview: NU Enterprises is exposed to certain market risks inherent in its
business activities. The merchant energy business line enters into contracts
of varying lengths of time to buy and sell energy commodities, including
electricity, natural gas, and oil. Market risk represents the loss that may
affect Select Energy's financial results due to adverse changes in commodity
market prices.
Risk management within Select Energy is organized to address the market,
credit and operational exposures arising from the merchant energy business
line, including wholesale marketing activities (which include limited energy
trading for market and price discovery purposes) 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. As a means to monitor and control compliance with these policies
and procedures, NU's Risk Oversight Council (ROC) monitors NU Enterprises' risk
management processes independently from the business lines that create or
manage risks. The ROC ensures that the policies pertaining to these risks
are followed and makes recommendations to the Board of Trustees regarding
periodic adjustment to the metrics used in measuring and controlling
portfolio risk. The ROC also confirms methodologies employed to estimate
portfolio values.
Wholesale and Retail Marketing Activities: A significant portion of Select
Energy's wholesale marketing activities is providing energy to full
requirements customers, primarily regulated distribution companies. Under
full requirements contract terms, Select Energy is required to provide for
the customers' load at all times. Wholesale and retail marketing
transactions, including the full requirements contracts, are intended to be
part of Select Energy's normal purchases and sales and are recognized on the
accrual basis of accounting.
An important component of Select Energy's risk management strategy focuses on
managing the volume and price risks of full requirements contracts. These
risks include significant fluctuations in both supply and demand due to
numerous factors such as weather, plant availability, transmission
congestion, and potentially volatile price fluctuations. Select Energy uses
energy contracts to mitigate these risks. These contracts, which are
included in the wholesale and retail marketing portfolios and are subject to
accrual accounting, are important to Select Energy's risk management.
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 December 31, 2003, the
wholesale marketing portfolio, which includes the CL&P TSO service contract
that extends through December 31, 2004 and other contracts that extend to
2013, had a positive fair value. This positive fair value indicates a
positive impact on Select Energy's gross margin in the future. However,
there may 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 on its
wholesale marketing portfolio.
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
purchases for firm sales commitments to certain customers. Select Energy
also utilizes derivatives, including financial 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 for accounting purposes and are used to reduce the market risk
associated with fluctuations in the price of electricity, natural gas or oil.
A derivative that effectively 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 other comprehensive income,
which is a component of equity. Hedges impact earnings 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. At December 31, 2003, Select Energy had hedging derivative
assets of $55.8 million and hedging derivative liabilities of $12.7 million.
At December 31, 2002, Select Energy had hedging derivative assets of $22.8
million and hedging derivative liabilities of $2 million.
The increase in hedging derivative assets and liabilities from December 31,
2002 to December 31, 2003 resulted primarily from new financial contracts
entered into during 2003 to hedge gas-indexed power purchases in New England
and new financial transmission rights (FTR) contracts to hedge congestion in
both New England and the Pennsylvania, New Jersey, Maryland, and Delaware
(PJM) regions.
Non-trading: Non-trading derivative contracts are used for delivery of
energy related to wholesale and retail marketing activities. These contracts
are not entered into for trading purposes, but are subject to fair value
accounting because these contracts cannot be designated as normal purchases
and sales, as defined in applicable accounting principles or because
management has not elected hedge accounting or normal purchases and sales
accounting. At December 31, 2003, Select Energy had non-trading derivative
assets of $1.6 million and non-trading derivative liabilities of $0.8
million, compared to non-trading derivative assets of $2.9 million and no non-
trading derivative liabilities at December 31, 2002. Changes to the non-
trading derivatives portfolio, which are not significant, were recognized in
revenues.
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 December 31, 2003, Select Energy had trading derivative assets of $123.9
million and trading derivative liabilities of $91.4 million on a counterparty-
by-counterparty basis, for a net positive position of $32.5 million for the
entire trading portfolio. At December 31, 2002, trading derivative assets
were $102.9 million and trading derivative liabilities were $61.9 million.
The increase in both asset and liability amounts relates primarily to price
increases, as trading activity has decreased. These amounts are combined
with other derivatives and are included in derivative assets and derivative
liabilities on the accompanying consolidated balance sheets.
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 either could 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
December 31, 2003. 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. The option component
of a forward electricity purchase contract had a fair value of $4.5 million at
December 31, 2002, and was the only amount included in this method of
determining fair value at December 31, 2002. The fair value of the option
component of this contract was reduced to zero in 2003 with a credit reserve
that was established in 2003, and at December 31, 2003, Select Energy has no
other contracts for which fair value is determined based on a model or other
valuation method. Broker quotes for electricity are available through the
year 2005. 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 changes in commodity prices
are not expected to affect Select Energy's earnings.
As of and for the years ended December 31, 2003 and 2002, the sources of the
fair value of trading contracts and the changes in fair value of these
trading contracts are included in the following tables. Intercompany
transactions are eliminated and not reflected in the amounts below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(Millions of Dollars) Fair Value of Trading Contracts at December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Maturity Less Than Maturity of One to Maturity in Excess
Sources of Fair Value One Year Four Years of Four Years Total Fair Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prices actively quoted $0.2 $0.1 $ - $ 0.3
Prices provided by external sources 6.9 9.6 15.7 32.2
Prices based on models or other
valuation methods - - - -
- --------------------------------------------------------------------------------------------------------------------
Totals $7.1 $9.7 $15.7 $32.5
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(Millions of Dollars) Fair Value of Trading Contracts at December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Maturity Less Than Maturity of One to Maturity in Excess
Sources of Fair Value One Year Four Years of Four Years Total Fair Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prices actively quoted $(1.2) $ 0.1 $ - $(1.1)
Prices provided by external sources 2.8 20.2 14.6 37.6
Prices based on models or other
valuation methods - 4.5 - 4.5
- --------------------------------------------------------------------------------------------------------------------
Totals $ 1.6 $24.8 $14.6 $41.0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated in the tables above and below, the fair value of energy trading
contracts decreased $8.5 million from $41 million at December 31, 2002 to
$32.5 million at December 31, 2003. The change in the fair value of the
trading portfolio is attributable to several items, including the termination
and realization in 2003 of a contract with a positive fair value of $5.7
million and the establishment of a credit reserve on a long-term trading
contract. The change in fair value attributable to changes in valuation
techniques and assumptions of $2.3 million in 2003 resulted from a change in
the discount rate management uses to determine the fair value of trading
contracts. In the second quarter of 2003, the rate was changed from a fixed
rate of 5 percent to a market-based LIBOR discount rate to better reflect
current market conditions.
In 2002, in connection with management's review of the contracts in the
trading portfolio, the significant changes in the energy trading market and
the change in the focus of the energy trading activities, certain long-term
derivative energy contracts that were included in the trading portfolio and
valued at $33.9 million at November 30, 2002, were designated as normal
purchases and sales. The impact of this designation is that the contracts
were adjusted to fair value at November 30, 2002 and were not and will not be
adjusted subsequently for changes in fair value. The $33.9 million carrying
value of these contracts was reclassified from trading derivative assets to
other long-term assets and is being amortized on a straight-line basis to
fuel, purchased and net interchange power expense over the remaining terms of
the contracts, some of which extend to 2011. This amount is included in
changes in fair values attributable to changes in valuation techniques and
assumptions.
The other negative $6 million reflected in changes in fair value attributable
to changes in valuation techniques and assumptions relates to $12 million of
contracts held by Select Energy New York, Inc. at acquisition that in 2002
were determined to be held for non-trading purposes by Select Energy.
Accordingly, the $12 million of contracts were removed from the trading
portfolio. Long-term trading contracts with maturities in excess of four
years and transmission congestion contracts (TCC) were revalued during 2002
based on the availability of market information, which added $6 million to
the value of the trading portfolio.
- -------------------------------------------------------------------------------
Years Ended December 31,
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
(Millions of Dollars) Total Portfolio Fair Value
- -------------------------------------------------------------------------------
Fair value of trading contracts outstanding
at the beginning of the year $41.0 $56.4
Contracts realized or otherwise settled
during the period (10.7) (4.0)
Fair value of new contracts when entered
into during the year - 13.7
Changes in fair values attributable to changes
in valuation techniques and assumptions 2.3 (39.9)
Changes in fair value of contracts (0.1) 14.8
- -------------------------------------------------------------------------------
Fair value of trading contracts outstanding
at the end of the year $32.5 $41.0
- -------------------------------------------------------------------------------
Changing Market: The breadth and depth of the market for energy trading and
marketing products in Select Energy's markets continue to be adversely
affected by the withdrawal or financial weakening of a number of companies
who have historically done significant amounts of business with Select
Energy. In general, the market for such products has become shorter term in
nature with less liquidity, 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. 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 contemplated, 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, see "Impacts of Standard Market Design" 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,
letters of credit, 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 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 December 31, 2003, approximately 89 percent of
Select Energy's counterparty credit exposure to wholesale and trading
counterparties was cash collateralized or rated BBB- or better. Another one
percent of the counterparty credit exposure was to unrated municipalities.
Select Energy held $46.5 million and $16.9 million of counterparty cash
advances at December 31, 2003 and 2002, respectively.
Asset Concentrations: At December 31, 2003, positions with four
counterparties collectively represented approximately $89 million, or 72
percent, of the $123.9 million trading derivative assets. The largest
counterparty's position is secured with letters of credit and cash
collateral. Select Energy holds parent company guarantees at 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 December 31, 2003.
Select Energy's Credit: A number of Select Energy's contracts require the
posting of additional collateral in the form of cash or letters of credit in
the event NU's ratings were to decline and in increasing amounts dependent
upon the severity of the decline. At NU's present investment grade ratings,
Select Energy has not had to post any collateral based on credit downgrades.
Were NU's unsecured ratings to decline two to three levels to sub-investment
grade, Select Energy could, under its present contracts, be asked to provide
approximately $231 million of collateral or letters of credit to various
unaffiliated counterparties and approximately $65 million to several
independent system operators and unaffiliated local distribution companies,
which management believes NU would currently be able to provide. 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 Securities and Exchange Commission (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 at this time. 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 in
early 2004.
If the application is not granted in early 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 December 31, 2003, NU parent could guarantee an
additional $211.5 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.
For further information regarding Select Energy's activities and risks, see
Note 3, "Derivative Instruments, Market Risk and Risk Management," and Note
10, "Accumulated Other Comprehensive Income/(Loss)," to the consolidated
financial statements.
BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES
Utility Group: NU anticipates that it will continue to increase its level of
capital expenditures at the Utility Group to meet customers' increasing needs
for additional and more reliable energy supplies. Investments in Utility
Group plant totaled $505.8 million in 2003, compared with $447 million in
2002 and $411.9 million in 2001.
Connecticut - CL&P: Over the next several years, the majority of NU's
capital spending will be at CL&P, where the company is seeking to upgrade and
expand an aging and, in some locations, stressed distribution and
transmission system. CL&P's capital expenditures totaled $314.6 million in
2003, compared with $239.6 million in 2002 and $236.2 million in 2001. CL&P
expects capital expenditures to increase to $440 million in 2004. CL&P spent
$246 million on distribution in 2003 and anticipates spending $228 million on
distribution in 2004.
In its final 2003 CL&P rate decision, the DPUC authorized rate recovery of
distribution capital expenditures totaling $236 million in 2004, $220 million
in 2005, $216 million in 2006, and $225 million in 2007.
On July 14, 2003, the Connecticut Siting Council (CSC) approved a 345,000
volt transmission line project from Bethel, Connecticut to Norwalk,
Connecticut, proposed in October 2001 by CL&P. The configuration of the new
transmission line, enhancements to an existing 115,000 volt transmission
line, and work in related substations are estimated to cost approximately
$200 million. The line will 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, but management does not expect the appeal to be successful. CL&P
anticipates placing the new transmission line in service 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
December 31, 2003, CL&P has capitalized $12.4 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. CL&P expects
the CSC to rule on the application in 2004 and for construction to occur from
2005 through 2007. At December 31, 2003, CL&P has capitalized $9.2 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 December 31, 2003, CL&P
has capitalized $5.2 million associated with this project.
Construction of these three projects would significantly enhance CL&P's
ability to provide reliable electric service to the rapidly growing energy
market in southwestern Connecticut. Despite the need for such facilities,
significant opposition has been raised. As a result, management cannot be
certain as to the expected in-service dates or the ultimate cost of these
projects. Should the plans proceed, applicable law provides that CL&P will
be able to recover its operating cost and carrying costs through federally-
approved transmission tariffs.
Management believes that construction of the 345,000 volt projects is
critical to maintaining service reliability in southwest Connecticut. The
345,000 volt projects, in addition to additional transmission spending
planned between 2004 and 2007, also represent a significant source of
potential earnings growth for NU. Management believes that if the projects
now being considered are all built over the next four years, NU's net
transmission plant investment would triple. Revenues and earnings for NU's
transmission system are established by the FERC.
Connecticut - Yankee Gas: Yankee Gas has also proposed expansion of its
natural gas distribution system in Connecticut. Yankee Gas' capital
expenditures totaled $55.2 million in 2003, compared with $70.6 million in
2002 and $47.8 million in 2001. Yankee Gas expects capital expenditures to
total $60 million in 2004 as it continues to expand its distribution system
and begins work on two major projects; a liquefied natural gas storage
facility in Waterbury, Connecticut and a new 9-mile pipeline in southeast
Connecticut to connect the existing Yankee Gas delivery system with that of
the New England Gas Company (NEGASCO), a Rhode Island natural gas delivery
company. The NEGASCO project would cost approximately $5 million, provide
Yankee Gas with additional revenue, improve service reliability in the
Stonington, Connecticut area, and expand natural gas delivery into additional
areas of southeastern Connecticut. Construction of this project is
contingent upon receiving satisfactory regulatory approval.
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 December
31, 2003, Yankee Gas has capitalized approximately $1.9 million related to
this project.
New Hampshire: PSNH capital spending totaled $105.6 million in 2003 and is
projected to total $160 million in 2004. The primary reason for the increase
is PSNH's proposal to convert a 50 megawatt oil and coal burning unit at
Schiller Station in Portsmouth, New Hampshire to burn wood chips. The $70
million project will commence if PSNH receives satisfactory approval from the
NHPUC. PSNH believes that the conversion can be accomplished without
impacting retail rates because of certain government incentives to promote
renewable resource projects. Another reason for the projected increase in
capital spending is PSNH's transmission projects.
Effective January 1, 2004, PSNH completed the purchase of the electric system
and retail franchise of CVEC, a subsidiary of Central Vermont Public Service
Corporation (CVPS), for $30.1 million. CVEC's 11,000 customers in western
New Hampshire have been added to PSNH's customer base of more than 460,000
customers. The purchase price included the book value of CVEC's plant assets
of approximately $9 million and an additional $21 million to terminate an
above-market wholesale power purchase agreement CVEC had with CVPS. CVEC is
expected to add approximately $1.1 million to PSNH's annual earnings.
Massachusetts: WMECO's capital expenditures totaled $30.4 million in 2003,
compared with $23.1 million in 2002 and $30.7 million in 2001. WMECO's
capital expenditures are expected to total $38 million in 2004.
NU Enterprises: Capital expenditures at NU Enterprises generation
subsidiaries, NGC and HWP, are expected to be modest in 2004, with $13
million at NGC and $1 million at HWP. In 2003, NGC's and HWP's capital
expenditures totaled $11.1 million and $1.8 million, respectively. NU
continues to examine acquisitions in the energy services business. In 2002,
NU acquired Woods Electrical and Woods Network for $16.3 million.
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 a RTO for
New England. 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.
ISO-NE, as a RTO, will have a new independent governance structure and will
also become the transmission provider for New England by exercising
operational control over New England's transmission facilities pursuant to a
detailed contractual arrangement with the New England transmission owners.
Under this contractual arrangement, the RTO will have clear authority to
direct the transmission owners to operate their facilities in a manner that
preserves system reliability, including requiring transmission owners to
expand existing transmission lines or build new ones when needed for
reliability. Transmission owners will retain their rights over revenue
requirements, rates and rate designs. The filing requests that the FERC
approve the RTO arrangements for an effective date of March 1, 2004.
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 return on equity (ROE) for regional and local rates
that would consist of a base ROE as well as incentive adders of 50 basis
points for joining a RTO and 100 basis points 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. The outcome of this request and its impact on NU cannot be
determined at this time.
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, NU
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. NU requested that the FERC maintain NU's
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. A final decision in the rate case is expected in 2004.
Increasing transmission rates are generally recovered from distribution
companies through FERC-approved transmission rates. Electric distribution
companies pass through higher transmission rates to retail customers as
approved by the appropriate state regulatory commission. Distribution
companies need to file for retail rate increases if transmission costs exceed
what is currently allowed in rates. Currently, WMECO has a tracking
mechanism to reset rates annually for transmission costs with overcollections
refunded to customers and undercollections deferred and then collected from
customers in later years. In its 2003 rate case, CL&P sought a tracking
mechanism to allow it to recover changes in transmission expenses on a timely
basis. While the DPUC approved a $28.4 million increase in transmission
rates for CL&P's retail customers effective January 1, 2004, it did not grant
a tracking mechanism in rates. As a result, CL&P will need to reapply to the
DPUC to adjust transmission rates when its revenues are not adequate to
recover transmission costs. PSNH requested a tracking mechanism from the
NHPUC when it filed its rate case on December 29, 2003, which will allow it to
recover changes in transmission expenses on a timely basis.
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 (Act) that amended
Connecticut's 1998 electric utility industry legislation. Among key
features, the Act created a TSO period from 2004 through 2006 that allowed
the base rate cap to return to 1996 levels, which represented a potential
increase of up to 11.1 percent. Additional costs related to Federally
Mandated Congestion Charges (FMCC) are not included in the cap.
Additionally, if energy supply costs were to exceed levels established in the
TSO rate, these costs could be recovered through an energy adjustment clause
or through the FMCC. The Act also allowed CL&P to collect a procurement fee
of at least 0.50 mills per kilowatt-hour (kWh) from customers who continue to
purchase TSO service. That fee can increase to 0.75 mills if CL&P beats
certain regional benchmarks. Management expects that the procurement fee
will be between $11 million and $12 million annually, which will add $6
million to $7 million to CL&P's net income. One mill is equal to one-tenth
of a cent.
ISO-NE and the New England Power Pool are currently debating the
implementation of locational installed capacity (LICAP). LICAP is the
requirement that CL&P support enough generation to meet peak demand (plus a
reserve to protect against higher demand than expected or generating plant
outages) in its service territory. Connecticut, because of its lack of
sufficient generation and transmission, is expected to have high LICAP costs.
LICAP rules are subject to the jurisdiction of the FERC. ISO-NE filed a
proposal with the FERC on March 1, 2004 for implementation in June 2004.
Until the exact proposal is approved by the FERC, the financial impact on
CL&P's customers cannot be determined. CL&P expects to recover LICAP from
its customers as a FMCC.
On July 1, 2003, CL&P filed with the DPUC to establish TSO service and to set
the TSO rates equal to December 31, 1996 total rate levels. On December 19,
2003, the DPUC issued a final decision setting the average TSO rate at
$0.1076 per kWh for 2004, which the DPUC found to be within the statutory
cap. That rate incorporated nine key elements, which combined produced the
average TSO rate. The most significant element was an average GSC of
$0.05744 per kWh. That charge will allow CL&P to fully recover from
customers the amounts to be paid in 2004 to its five TSO suppliers. These
suppliers include Select Energy, which was awarded 37.5 percent of CL&P's TSO
load through a request for proposal process overseen by the DPUC, and four
other suppliers, all of which are investment grade rated by major rating
agencies.
The Act also required CL&P to file a four-year transmission and distribution
plan with the DPUC. Accordingly, on August 1, 2003, CL&P filed a rate case
that amended rate schedules and proposed changes to increase distribution
rates. On December 19, 2003, the DPUC issued its final decision in the rate
case. In that decision, the DPUC chose to apply $120 million of
overcollections from CL&P's customers in prior years against higher
distribution rates in the form of credits of $30 million per year. Net of
those overcollections, the DPUC ordered that distribution rates be lowered by
$1.9 million in 2004 and be raised by $25.1 million in 2005, $11.9 million in
2006, and $7 million in 2007. The decision approved a transmission rate
increase of $28.4 million in 2004, but did not allow the tracking mechanism
and did not set transmission rates beyond 2004. The DPUC also approved rate
recovery of approximately $900 million of CL&P's proposed $1 billion
distribution capital budget over the four-year period. The decision set
CL&P's authorized ROE at 9.85 percent. Earnings above 9.85 percent will be
shared equally by shareholders and ratepayers. The sharing mechanism is not
affected by earnings from the procurement fee.
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; however, CL&P also filed an appeal with the Connecticut Superior Court
on January 30, 2004, which was within the time frame required by law. The
appeal was filed in the event that the DPUC's reconsideration is still not
acceptable to CL&P.
Disposition of Seabrook Proceeds: CL&P sold its share of the Seabrook
nuclear unit on November 1, 2002. The net proceeds in excess of the book
value of Seabrook of $16 million were recorded as a regulatory liability and,
after being offset by accelerated decommissioning funding and other
adjustments, will be refunded to customers. On May 1, 2003, CL&P filed its
application with the DPUC for approval of the disposition of the proceeds
from the sale. This filing described CL&P's treatment of its share of the
proceeds from the sale. Hearings in this docket were held in September 2003,
and a draft decision was received on February 3, 2004. The final decision,
which was received on March 3, 2004, did not have a material effect on CL&P's
net income or financial position.
CTA and SBC Reconciliation Filing: On April 3, 2003, CL&P filed its annual
CTA and SBC reconciliation with the DPUC. For the year ended December 31,
2002, total CTA revenues and excess GSC revenues exceeded the CTA revenue
requirement by $93.5 million. This amount was recorded as a regulatory
liability. For the same period, SBC revenues exceeded the SBC revenue
requirement by $22.4 million. In compliance with a prior decision of the
DPUC, a portion of the SBC overcollection reduced regulatory assets, and the
remaining overcollection of $18.6 million was applied to the CTA. The DPUC's
December 19, 2003 TSO decision addressed $41 million of SBC overcollections and
$64 million of CTA overcollections that had been estimated as of December 31,
2003. In its decision, the DPUC ordered that $80 million of the
overcollections be used to reduce CTA costs during the 2004 through 2006 TSO
period. The DPUC also ordered that $25 million of the overcollections be used
to offset SBC costs during the TSO period. The DPUC also ordered that $37
million of GSC overcollections be used to pay CL&P's 0.50 mill per kWh
procurement fee during the TSO period.
Connecticut - Yankee Gas:
Infrastructure Expansion Rate Mechanism (IERM): On June 25, 2003, the DPUC
issued a final decision in the 2002 IERM docket. The DPUC concluded that the
basic concept of IERM is valid, appropriate and beneficial. The DPUC ordered
Yankee Gas to provide a credit to customers for 2002 and 2003
overcollections. That credit was recorded as a regulatory liability and
refunded to Yankee Gas customers from December 2003 through February 2004.
On October 1, 2003, Yankee Gas filed with the DPUC its IERM compliance filing.
This filing is required annually on October 1 of each year to provide a
reconciliation of the system expansion program and the earnings sharing
mechanism projection.
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,
management expects that the financial performance will continue to underearn
the DPUC-authorized ROE. Yankee Gas is evaluating the filing of a rate case
before the end of 2004 for a rate increase to take effect in 2005.
New Hampshire:
Transition Energy Service: In accordance with the "Agreement to Settle PSNH
Restructuring" (Restructuring Settlement) and state law, PSNH must file for
updated transition energy service (TS) rates annually. The TS rate recovers
PSNH's generation and purchased power costs, including a return on PSNH's
generation investment. During the February 1, 2004 through January 31, 2005
time period when current rates will be effective, PSNH will defer any
difference between its TS revenues and the actual costs incurred. On
December 19, 2003, the NHPUC approved a $0.0536 per kWh TS rate effective
February 1, 2004.
Delivery Rate Case: PSNH's delivery rates were fixed by the 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 approximately 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 expected in August 2004,
and a decision is expected in the third quarter of 2004 with rates
retroactively applied to February 1, 2004.
SCRC Reconciliation Filings: On an annual basis, PSNH files with the NHPUC
an SCRC reconciliation filing for the preceding calendar year. This filing
includes the reconciliation of stranded cost revenues with stranded costs,
and TS revenues with TS costs. The NHPUC reviews the filing, including a
prudence review of PSNH's generation operations.
On May 1, 2003, PSNH filed with the NHPUC an SCRC reconciliation filing for
the period January 1, 2002, through December 31, 2002. This filing included
the reconciliation of stranded cost revenues with stranded costs and a net
proceeds calculation related to the sale of NAEC's share of Seabrook and the
subsequent transfer of those net proceeds to PSNH. Upon the completion of
discovery and technical sessions with the NHPUC staff and the New Hampshire
Office of the Consumer Advocate (OCA), PSNH, the NHPUC Staff and the OCA
entered into a stipulation and settlement agreement that was filed with the
NHPUC on August 15, 2003. An order from the NHPUC approving the settlement
agreement on October 24, 2003 did not have a material impact on PSNH's net
income or financial position.
The 2003 SCRC filing is expected to be filed on May 1, 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. The recovery of stranded costs is
expected to be a significant source of cash flow for PSNH through 2007. On
May 22, 2003, the NHPUC issued an order approving a settlement between PSNH,
owners of 14 small hydroelectric power producers, the NHPUC staff and the OCA
calling for the termination of PSNH's obligations to purchase power from the
hydroelectric units at above market prices. On May 30, 2003, under the terms
of this settlement, PSNH made lump sum payments to those owners amounting to
$20.4 million. The buyout payments were recorded as regulatory assets and will
be recovered, including a return, over the initial term of the obligations as
Part 2 stranded costs. PSNH is entitled to retain 20 percent of the estimated
savings from the buyouts. PSNH is expected to recover $21 million of the
purchase price of CVEC over the next three to four years.
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 from the DTE 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.
Standard Offer and Default Service: In December 2003, the DTE approved
WMECO's standard offer service rate of $0.05607 per kWh for the period of
January 1, 2004 through February 28, 2005. The DTE also approved a default
service rate of $0.05829 for the period of January 1, 2004 through June 30,
2004 for residential customers and a rate of $0.0616 for the period
January 1, 2004 through March 31, 2004 for commercial and industrial
customers.
For information regarding commitments and contingencies related to
restructuring and rate matters, see Note 7A, "Commitments and Contingencies -
Restructuring and Rate Matters," to the consolidated financial statements.
CONSOLIDATED EDISON, INC. MERGER LITIGATION
On March 5, 2001, Consolidated Edison, Inc. (Con Edison) advised NU that it
was unwilling to close its merger with NU on the terms set forth in the
parties' 1999 merger agreement. On March 12, 2001, NU filed suit against Con
Edison seeking damages in excess of $1 billion.
On May 11, 2001, Con Edison filed an amended complaint seeking damages for
breach of contract, fraudulent inducement and negligent misrepresentation.
Con Edison claimed that it is entitled to recover a portion of the merger
synergy savings estimated to have a net present value in excess of $700
million. NU disputes both Con Edison's entitlement to any damages as well as
its method of computing its alleged damages.
The companies completed discovery in the litigation and both submitted
motions for summary judgment. The court denied Con Edison's motion in its
entirety, leaving NU's claim for breach of the merger agreement and partially
granted NU's motion for summary judgment by eliminating Con Edison's claims
against NU for fraud and negligent misrepresentation.
Various other motions in the case are pending. No trial date has been set.
At this stage of the litigation, management can predict neither the outcome
of this matter nor its ultimate effect on NU.
NUCLEAR GENERATION ASSET DIVESTITURES
Millstone: On March 31, 2001, CL&P and WMECO consummated the sale of
Millstone 1 and 2 and CL&P, PSNH and WMECO sold their ownership interests in
Millstone 3.
Seabrook: On November 1, 2002, CL&P, NAEC, and certain other joint owners
consummated the sale of their ownership interests in Seabrook.
Vermont Yankee: On July 31, 2002, Vermont Yankee Nuclear Power Corporation
(VYNPC) consummated the sale of its nuclear generating unit. In November
2003, CL&P, PSNH and WMECO collectively sold back to VYNPC their shares of
stock for approximately $1.5 million. CL&P, PSNH and WMECO continue to
purchase their respective shares of approximately 16 percent of the plant's
output under new contracts.
Nuclear Decommissioning and Plant Closure Costs: Although the purchasers of
NU's ownership shares of the Millstone, Seabrook and Vermont Yankee plants
assumed the obligation of decommissioning those plants, 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) plants (collectively 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 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. A
portion of the decommissioning and closure costs has already been collected,
but a substantial portion related to the decommissioning of CY has not yet
been filed at and approved for collection by the FERC. The cost estimate for
CY that has not yet been approved for recovery by the FERC at December 31,
2003 is $258.3 million.
NU cannot at this time predict the timing or outcome of the FERC proceeding
required for the collection of these remaining decommissioning and closure
costs or the Bechtel Power Corporation litigation referred to in Note 7G,
"Commitments and Contingencies - Nuclear Decommissioning and Plant Closure
Costs," to the consolidated financial statements. Although management
believes that these costs will ultimately be recovered from the customers of
CL&P, PSNH, and WMECO, there is a risk that the FERC may not allow these
costs, the estimates of which have increased significantly in 2003 and 2002,
to be recovered in wholesale rates. If the FERC does not allow these costs
to be recovered in wholesale rates, NU would expect the state regulatory
commissions to disallow these costs in retail rates as well.
OFF-BALANCE SHEET ARRANGEMENTS
Utility Group: The CL&P Receivables Corporation (CRC) was incorporated on
September 5, 1997, and is a wholly owned subsidiary of CL&P. CRC has an
arrangement with a highly rated financial institution under which CRC can
sell up to $100 million of accounts receivable. At December 31, 2003 and
2002, CRC had sold accounts receivable of $80 million and $40 million,
respectively, to that financial institution with limited recourse.
CRC was established for the sole purpose of selling CL&P's accounts
receivable and unbilled revenues and is included in the consolidation of NU's
financial statements. On July 9, 2003, CRC renewed its Receivables Purchase
and Sale Agreement with CL&P and the financial institution. The agreement
expires on July 7, 2004. 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." Accordingly, the $80 million and $40
million outstanding under this facility are not reflected as debt or included
in the consolidated financial statements at December 31, 2003 and 2002,
respectively.
This off-balance sheet arrangement is not significant to NU's liquidity or
other benefits. There are no known events, demands, commitments, trends, or
uncertainties that will, or are reasonably likely to, result in the
termination, or material reduction in the amount available to the company
under this off-balance sheet arrangement.
NU Enterprises: During 2001, SESI created HEC/CJTS Energy Center, LLC
(HEC/CJTS) which is a special purpose entity (SPE). Management decided to
create HEC/CJTS for the sole purpose of providing a bankruptcy-remote entity
for the financing of a construction project. The construction project was
the construction of an energy center to serve the Connecticut Juvenile
Training School (CJTS). The owner of CJTS, the State of Connecticut, entered
into a 30-year lease with HEC/CJTS for the energy center. Simultaneously,
HEC/CJTS transferred its interest in the lease with the State of Connecticut
to investors who are unaffiliated with NU in exchange for the issuance of
$19.2 million of Certificates of Participation. The transfer of HEC/CJTS's
interest in the lease was accounted for as a sale under SFAS No. 140. The
debt of $19.2 million created in relation to the transfer of interest and
issuance of the Certificates of Participation was derecognized and is not
reflected as debt or included in the consolidated financial statements. No
gain or loss was recorded. HEC/CJTS does not provide any guarantees or on-
going services, and there are no contingencies related to this arrangement.
SESI has a separate contract with the State of Connecticut to operate and
maintain the energy center. The transaction was structured in this manner to
obtain tax-exempt rate financing and therefore to reduce the State of
Connecticut's lease payments.
This off-balance sheet arrangement is not significant to NU's liquidity,
capital resources or other benefits. There are no known events, demands,
commitments, trends, or uncertainties that will, or are reasonably likely to,
result in the termination of this off-balance sheet arrangement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and at times difficult, subjective
or complex judgments. Changes in these estimates, assumptions and judgments,
in and of themselves, could materially impact the financial statements of NU.
Management communicates to and discusses with NU's Audit Committee of the
Board of Trustees all critical accounting policies and estimates. The
following are the accounting policies and estimates that management believes
are the most critical in nature.
Presentation: In accordance with current accounting pronouncements, NU's
consolidated financial statements include all subsidiaries upon which control
is maintained and all variable interest entities (VIE) for which NU is the
primary beneficiary, as defined. All intercompany transactions between these
subsidiaries are eliminated as part of the consolidation process.
NU has less than 50 percent ownership interests in the Connecticut Yankee
Atomic Power Company, Yankee Atomic Electric Company, Maine Yankee Atomic
Power Company, and two companies that transmit electricity imported from the
Hydro-Quebec system. NU does not control these companies and does not
consolidate them in its financial statements. NU accounts for the
investments in these companies using the equity method. Under the equity
method, NU records its ownership share of the earnings or losses at these
companies. Determining whether or not NU should apply the equity method of
accounting for an investee company requires management judgment.
NU has investments in NEON and Acumentrics. These investments are carried at
cost, and these companies are VIEs, as defined by FIN 46. NU adopted FIN 46
on July 1, 2003. FIN 46 requires that the party to a VIE that absorbs the
majority of the VIE's losses, defined as the primary beneficiary, consolidate
the VIE. NU is not the primary beneficiary of NEON or Acumentrics and is not
required to consolidate them.
NU also has a preferred stock investment in R. M. Services, Inc. (RMS). Upon
adoption of FIN 46, management determined that NU was the primary beneficiary
of RMS and that NU would have to consolidate RMS into its financial
statements. The consolidation of RMS resulted in a negative $4.7 million
after-tax cumulative effect of an accounting change in the third quarter of
2003. For more information on RMS, see Note 1E, "Summary of Significant
Accounting Policies - Accounting for R.M. Services, Inc. Variable Interest
Entity," to the consolidated financial statements.
The required adoption date of FIN 46 was delayed from July 1, 2003 to
December 31, 2003 for NU. However, NU elected to adopt FIN 46 at the
original adoption date, which impacted both the amount of the cumulative
effect of the accounting change and the classification of losses NU recorded
after RMS became a consolidated entity.
Determining whether the company is the primary beneficiary of a VIE is
subjective and requires management's judgment. There are certain variables
taken into consideration to determine whether the company is considered the
primary beneficiary to the VIE. A change in any one of these variables could
require the company to reconsider whether or not it is the primary
beneficiary of the VIE.
In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R). FIN
46R could result in fewer NU investments meeting the definition of a VIE.
FIN 46R is effective for NU for the first quarter of 2004, but is not
expected to have an impact on NU's consolidated financial statements.
Revenue Recognition: Utility Group retail revenues are based on rates
approved by the state regulatory commissions. These regulated rates are
applied to customers' use of energy to calculate a bill. In general, rates
can only be changed through formal proceedings with the state regulatory
commissions.
Certain Utility Group companies utilize regulatory commission-approved
tracking mechanisms to track the recovery of certain incurred costs. The
tracking mechanisms allow for rates to be changed periodically, with
overcollections refunded to customers or undercollections collected from
customers in future periods.
The determination of the energy sales to individual customers is based on the
reading of meters, which occurs on a systematic basis throughout the month.
Billed revenues are based on these meter readings. At the end of each month,
amounts of energy delivered to customers since the date of the last meter
reading are estimated, and an estimated amount of unbilled revenues is
recorded.
Wholesale transmission revenues are based on rates and formulas that are
approved by the FERC. Most of NU's wholesale transmission revenues are
collected through a combination of the New England Regional Network Service
(RNS) tariff and NU's Local Network Service (LNS) tariff. The RNS tariff,
which is administered by ISO-NE, recovers the revenue requirements associated
with transmission facilities that are deemed by the FERC to be Pool
Transmission Facilities. The LNS tariff which was accepted by the FERC on
October 22, 2003, provides for the recovery of NU's total transmission
revenue requirements, net of revenue credits received from various rate
components, including revenues received under the RNS rates.
NU Enterprises recognizes revenues at different times for its different
business lines. Wholesale and retail marketing revenues are recognized when
energy is delivered to customers. Trading revenues are recognized as the
fair value of trading contracts changes. Service revenues are recognized as
services are provided, often on a percentage of completion basis.
Revenues and expenses for derivative contracts that are entered into for
trading purposes are recorded on a net basis in revenues when these
transactions settle. The settlement of wholesale non-trading derivative
contracts for the sale of energy or gas by both the Utility Group and NU
Enterprises that are not related to customers' needs are recorded in operating
expenses. Derivative contracts that hedge an underlying transaction and that
qualify for hedge accounting affect earnings 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 an accumulated other comprehensive loss and when
the hedge and the forecasted transaction being hedged are in a loss position
on a combined basis. The settlement of hedge derivative contracts is
recorded in the same revenue or expense line as the transaction being hedged.
For further information regarding the accounting for these contracts, see
Note 1G, "Summary of Significant Accounting Policies - Accounting for Energy
Contracts," to the consolidated financial statements.
Utility Group 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.
The estimate of unbilled revenues is sensitive to numerous factors that can
significantly impact the amount of revenues recorded. Estimating the impact
of these factors is complex and requires management's judgment. The estimate
of unbilled revenues is important to NU's consolidated financial statements
as adjustments to that estimate could significantly impact operating revenues
and earnings. Two potential methods for estimating unbilled revenues are the
requirements and the cycle method.
The Utility Group estimates unbilled revenues monthly using the requirements
method. The requirements method utilizes the total monthly volume of
electricity or gas delivered to the system and applies a delivery efficiency
(DE) factor to reduce the total monthly volume by an estimate of delivery
losses in order to calculate total estimated monthly sales to customers. The
total estimated monthly sales amount less total monthly billed sales amount
results in a monthly estimate of unbilled sales. Unbilled revenues are
estimated by applying an average rate to the estimate of unbilled sales.
Differences between the actual DE factor and the estimated DE factor can have
a significant impact on estimated unbilled revenue amounts.
In 2003, the unbilled sales estimates for all Utility Group companies were
tested using the cycle method. The cycle method uses the billed sales from
each meter reading cycle and an estimate of unbilled days in each month based
on the meter reading schedule. The cycle method is historically more
accurate than the requirements method when used in a mostly weather-neutral
month. The cycle method resulted in adjustments to the estimate of unbilled
revenues that had a net positive after-tax earnings impact of approximately
$4.6 million in 2003. The positive after-tax impacts on CL&P, PSNH, and
WMECO were $7.2 million, $3.3 million, and $0.3 million, respectively. There
was a negative after-tax impact on Yankee Gas of $6.2 million, including
certain gas cost adjustments.
The testing of the requirements method with the cycle method will be done on
at least an annual basis using a weather-neutral month.
Derivative Accounting: Effective January 1, 2001, NU adopted SFAS No. 133,
as amended.
Select Energy uses derivative instruments in its wholesale and retail
marketing activities, and many Utility Group contracts for the purchase or
sale of energy or energy-related products are derivatives. The application
of derivative accounting under SFAS No. 133, as amended, is complex and
requires management judgment in the following respects: identification of
derivatives and embedded derivatives, election and designation of the normal
purchases and sales exception, identifying hedge relationships, assessing
and measuring hedge ineffectiveness, and determining the fair value of
derivatives. All of these judgments, depending upon their timing and effect,
can have a significant impact on NU's consolidated net income.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amended existing
derivative accounting guidance. This new statement incorporates
interpretations that were included in previous Derivative Implementation
Group (DIG) guidance, clarifies certain conditions, and amends other existing
pronouncements. It was effective for contracts entered into or modified
after June 30, 2003. Management has determined that the adoption of SFAS No.
149 did not change NU's accounting for wholesale and retail marketing
contracts or the ability of NU Enterprises to elect the normal purchases and
sales exception. The adoption of SFAS No. 149 resulted in fair value
accounting for certain Utility Group contracts that are subject to unplanned
netting and do not meet the definition of capacity contracts. These non-
trading derivative contracts are recorded at fair value at December 31, 2003
as derivative assets and liabilities with offsetting amounts recorded as
regulatory liabilities and assets because the contracts are part of providing
regulated electric or gas service. The fair values of these Utility Group
contracts at December 31, 2003 were derivative assets of $1.6 million and
derivative liabilities of $1.6 million.
Emerging Issues Task Force (EITF) Issue No. 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 EITF Issue No. 02-3,"
was derived from EITF Issue No. 02-3, which requires net reporting in the
income statement of energy trading activities. Issue No. 03-11 addresses
income statement classification of revenues related to derivatives that
physically deliver and are not related to energy trading activities. Prior
to Issue No. 03-11, there was no specific accounting guidance that addressed
the classification in the income statement of Select Energy's retail
marketing and wholesale contracts or the Utility Group's power supply
contracts, many of which are non-trading derivatives.
On July 31, 2003, the EITF reached a consensus in Issue No. 03-11 that
determining whether realized gains and losses on contracts that physically
deliver and are not held for trading purposes should be reported on a net
(sales and purchases both in expenses) or gross (sales in revenues and
purchases in expenses) basis is a matter of judgment that depends on the
relevant facts and circumstances. The EITF indicated that existing
accounting guidance should be considered and provided no new guidance in
Issue No. 03-11. In Issue No. 03-11, the EITF did not provide transition
guidance, which management could have interpreted as becoming applicable on
October 1, 2003 for revenues from that date forward. However, management
applied its conclusion on net or gross reporting to all periods presented to
enhance comparability.
Select Energy reports the settlement of long-term derivative contracts that
physically deliver and are not held for trading purposes on a gross basis,
generally with sales in revenues and purchases in expenses. Short-term sales
and purchases represent power that is purchased to serve full requirements
contracts but is ultimately not needed based on the actual load of the full
requirements customers. This excess power is sold to the independent system
operator or to other counterparties. As of December 31, 2003, settlements
of short-term derivative contracts that are not held for trading purposes,
though previously reported in revenues, are reported on a net basis in
expenses. Select Energy applied the new classification to revenues for all
years presented in order to enhance comparability. Short-term and non-
requirements sales and other reclassifications that amounted to $595.7 million
for the first nine months of 2003 were reflected as revenues in quarterly
reporting but are now included in expenses.
Though previously reported on a gross basis, after reviewing the relevant
facts and circumstances, the Utility Group also reported the settlement of
all short-term sales contracts that are part of procurement activities on a
net basis in expenses. The Utility Group applied this new classification to
revenues for all years presented in order to enhance comparability. These
sales that amounted to $50.2 million for the first nine months of 2003 were
reflected as revenues in quarterly reporting but are now included in expenses.
The amounts reclassified from 2002 and 2001 revenues to operating expenses
are included in Note 1C, "Summary of Significant Accounting Policies - New
Accounting Standards," to the consolidated financial statements.
On June 25, 2003, the DIG cleared Issue No. C-20, which addressed the meaning
of "not clearly and closely related regarding contracts with a price
adjustment feature" as it relates to the election of the normal purchase and
sales exception to derivative accounting. The implementation of this
guidance was required for the fourth quarter of 2003 for NU. The
implementation of Issue No. C-20 resulted in CL&P recording the fair value of
two existing power purchase contracts as derivatives, one as a derivative
asset, and one as a derivative liability. An offsetting regulatory liability
and an offsetting regulatory asset were recorded, as these contracts are part
of stranded costs, and management believes that these costs will continue to
be recovered or refunded in rates. The fair values of these long-term power
purchase contracts include a derivative asset with a fair value of $112.4
million and a derivative liability with a fair value of $54.6 million at
December 31, 2003.
At December 31, 2003, Select Energy recorded approximately $4.3 million of
TCCs at fair value. Market information for these TCCs is not available, and
management believes the amounts paid for these contracts are equal to their
fair value. Select Energy, as well as CL&P and PSNH, hold FTR contracts to
mitigate the risk associated with the congestion price differences associated
with LMP in New England. FTR contracts in New England held by NU
subsidiaries were recorded at a fair value of $6.2 million. FTR contracts
held by Select Energy in the PJM region were recorded at a fair value of $0.8
million. Management continues to believe the amount to be paid for both the
TCC and the FTR contracts best represents their fair value. If new markets
for these contracts develop, then there may be an impact on NU's consolidated
financial statements in future periods.
Regulatory Accounting: The accounting policies of NU's regulated utility
companies historically reflect the effects of the rate-making process in
accordance with 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' distribution
business, continue to be cost-of-service rate regulated, and management
believes the application of SFAS No. 71 to that portion of those businesses
continues to be appropriate. Management must reaffirm this conclusion at
each balance sheet date. If, as a result of a change in circumstances, it is
determined that any portion of these companies no longer meets the criteria
of regulatory accounting under SFAS No. 71, that portion of the company will
have to discontinue regulatory accounting and write-off the respective
regulatory assets and liabilities. Such a write-off could have a material
impact on NU's consolidated financial statements.
The application of SFAS No. 71 results in recording regulatory assets and
liabilities. Regulatory assets represent the deferral of incurred costs that
are probable of future recovery in customer rates. In some cases, NU records
regulatory assets before approval for recovery has been received from the
applicable regulatory commission. Management must use judgment to conclude
that costs deferred as regulatory assets are probable of future recovery.
Management bases its conclusion on certain factors, including changes in the
regulatory environment, recent rate orders issued by the applicable
regulatory agencies and the status of any potential new legislation.
Regulatory liabilities represent revenues received from customers to fund
expected costs that have not yet been incurred or probable future refunds to
customers.
Management uses its best judgment when recording regulatory assets and
liabilities; however, regulatory commissions can reach different conclusions
about the recovery of costs, and those conclusions could have a material
impact on NU's consolidated financial statements. Management believes it is
probable that the Utility Group companies will recover the regulatory assets
that have been recorded.
Goodwill and Other Intangible Assets: SFAS No. 142, "Goodwill and Other
Intangible Assets," requires that goodwill balances be reviewed for
impairment at least annually by applying a fair value-based test. NU
selected October 1 as the annual goodwill impairment testing date. The
goodwill impairment analysis impacts the Utility Group - Gas and NU
Enterprises segments. 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 of the goodwill. If goodwill is deemed
to be impaired it will be written off, which could have a significant impact
on NU's consolidated financial statements.
NU has completed its impairment analyses as of October 1, 2003, for all
reporting units that maintain goodwill and has determined that no impairments
exist.
In performing the impairment evaluation required by SFAS No. 142, NU
estimates the fair value of each reporting unit and compares it to the
carrying amount of the reporting unit, including goodwill. NU estimates the
fair values of its reporting units using discounted cash flow methodologies
and an analysis of comparable companies or transactions. The discounted cash
flow analysis requires the input of several critical assumptions, including
future growth rates, operating cost escalation rates, allowed ROE, a risk-
adjusted discount rate, and long-term earnings multiples of comparable
companies. These assumptions are critical to the estimate and are
susceptible to change from period to period.
Modifications to the aforementioned assumptions in future periods,
particularly changes in discount rates, could result in future impairments of
goodwill. Actual financial performance and market conditions in upcoming
periods could also impact future impairment analyses.
Pension and Postretirement Benefits Other Than Pensions (PBOP): NU's
subsidiaries participate in a uniform noncontributory defined benefit
retirement plan (Pension Plan) covering substantially all regular NU
employees. NU also participates in a postretirement benefit plan (PBOP Plan)
to provide certain health care benefits, primarily medical and dental, and
life insurance benefits through a benefit plan to retired employees. For
each of these plans, the development of the benefit obligation, fair value of
plan assets, funded status and net periodic benefit credit or cost is based
on several significant assumptions. If these assumptions were changed, the
resulting change in benefit obligations, fair values of plan assets, funded
status and net periodic benefit credits or costs could have a material impact
on NU's consolidated financial statements.
Results: Pre-tax periodic pension income for the Pension Plan, excluding
settlements, curtailments and special termination benefits, totaled $31.8
million, $73.4 million and $101 million for the years ended December 31,
2003, 2002 and 2001, respectively. The pension income amounts exclude one-
time items recorded under SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," associated with early termination programs and the sale of the
Millstone and Seabrook nuclear units. Net SFAS No. 88 items totaled $22.2
million in income for the year ended December 31, 2002. This amount was
recorded as a liability for refund to customers.
The pre-tax net PBOP Plan cost, excluding settlements, curtailments and
special termination benefits, totaled $35.1 million, $34.5 million and $28.3
million for the years ended December 31, 2003, 2002 and 2001, respectively.
The PBOP Plan cost excludes one-time items associated with the sale of the
Seabrook nuclear units. These items totaled $1.2 million in income for the
year ended December 31, 2002.
Long-Term Rate of Return Assumptions: In developing the expected long-term
rate of return assumptions, NU evaluated input from actuaries, consultants
and economists, as well as long-term inflation assumptions and NU's historical
20-year compounded return of approximately 11 percent. NU's expected long-term
rate of return on assets is based on certain target asset allocation
assumptions and expected long-term rates of return. The Pension Plan's and
PBOP Plan's target asset allocation assumptions and expected long-term rates
of return assumptions by asset category are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
At December 31,
- -----------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Target Assumed Target Assumed Target Assumed Target Assumed
Asset Rate of Asset Rate of Asset Rate of Asset Rate of
Asset Category Allocation Return Allocation Return Allocation Return Allocation Return
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities:
United States 45.00% 9.25% 45.00% 9.75% 55.00% 9.25% 55.00% 9.75%
Non-United States 14.00% 9.25% 14.00% 9.75% 11.00% 9.25% - -
Emerging markets 3.00% 10.25% 3.00% 10.75% 2.00% 10.25% - -
Private 8.00% 14.25% 8.00% 14.75% - - - -
Debt Securities:
Fixed income 20.00% 5.50% 20.00% 6.25% 27.00% 5.50% 45.00% 6.25%
High yield fixed
income 5.00% 7.50% 5.00% 7.50% 5.00% 7.50% - -
Real estate 5.00% 7.50% 5.00% 7.50% - - - -
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The actual asset allocations at December 31, 2003 and 2002 approximated these
target asset allocations. NU regularly reviews the actual asset allocations
and periodically rebalances the investments to the targeted asset allocations
when appropriate. For information regarding actual asset allocations, see
Note 4A, "Employee Benefits - Pension Benefits and Postretirement Benefits
Other Than Pensions," to the consolidated financial statements.
NU reduced the long-term rate of return assumption 50 basis points from 9.25
percent to 8.75 percent in 2003 for the Pension Plan and PBOP Plan due to
lower expected market returns. NU believes that 8.75 percent is a reasonable
long-term rate of return on Pension Plan and PBOP Plan assets for 2003, and
NU expects to use 8.75 percent in 2004. NU will continue to evaluate the
actuarial assumptions, including the expected rate of return, at least
annually, and will adjust the appropriate assumptions as necessary.
Actuarial Determination of Income and Expense: NU bases the actuarial
determination of Pension Plan and PBOP Plan income/expense on a market-
related valuation of assets, which reduces year-to-year volatility. This
market-related valuation calculation recognizes investment gains or losses
over a four-year period from the year in which they occur. Investment gains
or losses for this purpose are the difference between the expected return
calculated using the market-related value of assets and the actual return
based on the fair value of assets. Since the market-related valuation
calculation recognizes gains or losses over a four-year period, the future
value of the market-related assets will be impacted as previously deferred
gains or losses are recognized. There will be no impact on the fair value of
Pension Plan and PBOP Plan assets.
At December 31, 2003, the Pension Plan had cumulative unrecognized investment
losses of $106 million, which will increase pension expense over the next
four years by reducing the expected return on Pension Plan assets. At
December 31, 2003, the Pension Plan also had cumulative unrecognized
actuarial losses of $189 million, which will increase pension expense over
the expected future working lifetime of active Pension Plan participants, or
approximately 13 years. The combined total of unrecognized investment and
actuarial losses at December 31, 2003 is approximately $295 million. These
losses impact the determination of pension expense and the actuarially
determined prepaid pension amount recorded on the consolidated balance sheets
but have no impact on expected Pension Plan funding.
At December 31, 2003, the PBOP Plan had cumulative unrecognized investment
losses of $11 million, which will increase PBOP Plan cost over the next four
years by reducing the expected return on plan assets. At December 31, 2003,
the PBOP Plan also had cumulative unrecognized actuarial losses of $103
million, which will increase PBOP Plan expense over the expected future
working lifetime of active PBOP Plan participants, or approximately 13 years.
The combined total of unrecognized investment and actuarial losses at
December 31, 2003 is approximately $114 million. These losses impact the
determination of PBOP Plan cost and the actuarially determined accrued PBOP
Plan cost recorded on the consolidated balance sheets.
Discount Rate: The discount rate that is utilized in determining future
pension and PBOP obligations is based on a basket of long-term bonds that
receive one of the two highest ratings given by a recognized rating agency.
To compensate for the Pension Plan's longer duration, 25 basis points were
added to the benchmark. The discount rate determined on this basis has
decreased from 6.75 percent at December 31, 2002 to 6.25 percent at
December 31, 2003.
Expected Pension Expense: Due to the effect of the unrecognized actuarial
losses and based on an expected rate of return on Pension Plan assets of 8.75
percent, a discount rate of 6.25 percent and various other assumptions, NU
estimates that expected contributions to and pension expense for the Pension
Plan will be as follows (in millions):
- ----------------------------------------------------
Expected
Year Contributions Pension Expense
- ----------------------------------------------------
2004 $ - $ 2.9
2005 $ - $21.2
2006 $ - $26.6
- ----------------------------------------------------
Future actual pension income/expense will depend on future investment
performance, changes in future discount rates and various other factors
related to the populations participating in the Pension Plan.
Sensitivity Analysis: The following represents the increase/(decrease) to
the Pension Plan's reported cost and to the PBOP Plan's reported cost as a
result of the change in the following assumptions by 50 basis points (in
millions):
- ---------------------------------------------------------------------
At December 31,
- ---------------------------------------------------------------------
Pension Plan Postretirement Plan
- ---------------------------------------------------------------------
Assumption Change 2003 2002 2003 2002
- ---------------------------------------------------------------------
Lower long-term
rate of return $10.7 $10.7 $0.9 $1.1
Lower discount rate $12.3 $11.0 $1.0 $1.1
Lower compensation
increase $(5.9) $(5.0) N/A N/A
- ---------------------------------------------------------------------
Plan Assets: The value of the Pension Plan assets has increased from $1.6
billion at December 31, 2002 to $1.9 billion at December 31, 2003. The
investment performance returns, despite declining discount rates, have
increased the funded status of the Pension Plan on a projected benefit
obligation (PBO) basis from an underfunded position of $157.5 million at
December 31, 2002 to an overfunded position of $3.8 million at December 31,
2003. The PBO includes expectations of future employee compensation
increases. The accumulated benefit obligation (ABO) of the Pension Plan was
approximately $240 million less than Pension Plan assets at December 31, 2003
and approximately $78 million less than Pension Plan assets at December 31,
2002. The ABO is the obligation for employee service and compensation
provided through December 31, 2003. If the ABO exceeds Pension Plan assets
at a future plan measurement date, NU will record an additional minimum
liability. NU has not made employer contributions since 1991.
The value of PBOP Plan assets has increased from $147.7 million at December 31,
2002 to $178 million at December 31, 2003. The investment performance returns,
despite declining discount rates, have decreased the underfunded status of the
PBOP Plan on an accumulated projected benefit obligation basis from $250.1
million at December 31, 2002 to $227 million at December 31, 2003. NU has
made a contribution each year equal to the PBOP Plan's postretirement benefit
cost, excluding curtailments, settlements and special termination benefits.
Health Care Cost: The health care cost trend assumption used to project
increases in medical costs is 9 percent for 2003, decreasing one percentage
point per year to an ultimate rate of 5 percent in 2007. The effect of
increasing the health care cost trend by one percentage point would have
increased 2003 service and interest cost components of the PBOP Plan cost by
$0.8 million in 2003 and $0.9 million in 2002.
Accounting for the Effect of Medicare Changes on PBOP: On December 8, 2003,
the President 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.
Specific authoritative accounting guidance on how to account for the effect
the Medicare federal subsidy has on NU's PBOP Plan has not been issued by the
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.
Reflecting the impact of the Medicare change 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 $19.5 million
actuarial gain 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.
When accounting guidance is issued by the FASB, it may require NU to change
the accounting described above and change the information included in this
annual report.
Income Taxes: Income tax expense is calculated each year in each of the
jurisdictions in which NU operates. This process involves estimating NU's
actual current tax exposures as well as assessing temporary differences
resulting from differing treatment of items, such as timing of the deduction
and expenses for tax and book accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in NU's
consolidated balance sheets. The income tax estimation process impacts all
of NU's segments. Adjustments made to income taxes could significantly
affect NU's consolidated financial statements. Management must also assess
the likelihood that deferred tax assets will be recovered from future taxable
income, and to the extent that recovery is not likely, a valuation allowance
must be established. Significant management judgment is required in
determining income tax expense, deferred tax assets and liabilities and
valuation allowances.
NU accounts for deferred taxes under SFAS No. 109, "Accounting for Income
Taxes." For temporary differences recorded as deferred tax liabilities that
will be recovered in rates in the future, NU has established a regulatory
asset. The regulatory asset amounted to $253.8 million and $326.4 million at
December 31, 2003 and 2002, respectively. Regulatory agencies in certain
jurisdictions in which NU's Utility Group companies operate require the tax
effect of specific temporary differences to be "flowed through" to utility
customers. Flow through treatment means that deferred tax expense is not
recorded on the consolidated statements of income. Instead, the tax effect
of the temporary difference impacts both amounts for income tax expense
currently included in customers' rates and the company's net income. Flow
through treatment can result in effective income tax rates that are
significantly different than expected income tax rates. Recording deferred
taxes on flow through items is required by SFAS No. 109, and the offset to
the deferred tax amounts is the regulatory asset referred to above. A
reconciliation from expected tax expense at the statutory federal income tax
rate to actual tax expense recorded is included on the accompanying
consolidated statements of income taxes.
The estimates that are made by management in order to record income tax
expense, accrued taxes and deferred taxes are compared each year to the
actual tax amounts filed on NU's income tax returns. The income tax returns
were filed in the fall of 2003 for the 2002 tax year. In the fourth quarter,
NU recorded differences between income tax expense, accrued taxes and
deferred taxes on its consolidated financial statements and the amounts that
were on its income tax returns. Recording these differences in income tax
expense resulted in a positive impact of approximately $6 million on NU's
2003 earnings.
Depreciation: Depreciation expense is calculated based on an asset's useful
life, and judgment is involved when estimating the useful lives of certain
assets. A change in the estimated useful lives of these assets could have a
material impact on NU's consolidated financial statements absent timely rate
relief for Utility Group assets.
Accounting for Environmental Reserves: Environmental reserves are accrued
using a probabilistic model approach when assessments indicate that it is
probable that a liability has been incurred and an amount can be reasonably
estimated. The estimation of environmental liabilities impacts the Utility
Group - Electric and the Utility Group - Gas segments. Adjustments made to
environmental liabilities could have a significant effect on earnings. The
probabilistic model approach estimates the liability based on the most likely
action plan from a variety of available remediation options, ranging from
no action to remedies ranging from establishing institutional controls to
full site remediation and long-term monitoring. The probabilistic model
approach estimates the liabilities associated with each possible action plan
based on findings through various phases of site assessments. These
estimates are based on currently available information from presently enacted
state and federal environmental laws and regulations and several cost
estimates from outside engineering and remediation contractors. These
amounts also take into consideration prior experience in remediating
contaminated sites and data released by the United States Environmental
Protection Agency and other organizations.
These estimates are subjective in nature partly because there are usually
several different remediation options from which to choose when working on a
specific site. These estimates are subject to revisions in future periods
based on actual costs or new information concerning either the level of
contamination at the site or newly enacted laws and regulations. The amounts
recorded as environmental liabilities on the consolidated balance sheets
represent management's best estimate of the liability for environmental costs
based on current site information from site assessments and remediation
estimates. These liabilities are estimated on an undiscounted basis.
Under current rate-making policy, PSNH and Yankee Gas have regulatory
recovery mechanisms in place for environmental costs. Accordingly,
regulatory assets have been recorded for certain of PSNH's and Yankee Gas'
environmental liabilities. As of December 31, 2003 and 2002, $26.3 million
and $24.3 million, respectively, have been recorded as regulatory assets on
the accompanying consolidated balance sheets. CL&P recovers a certain level
of environmental costs currently in rates but does not have an environmental
cost recovery tracking mechanism. Accordingly, changes in CL&P's
environmental reserves impact CL&P's earnings. WMECO does not have a
regulatory mechanism to recover environmental costs from its customers, and
changes in WMECO's environmental reserves impact WMECO's earnings.
Asset Retirement Obligations: NU adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," on January 1, 2003. SFAS No. 143 requires that
legal obligations associated with the retirement of property, plant and
equipment be recorded as a liability on the balance sheet at fair value when
incurred and when a reasonable estimate of the fair value can be made. SFAS
No. 143 defines an asset retirement obligation (ARO) as a legal obligation
that is required to be settled due to an existing or enacted law, statute,
ordinance, or a written or oral promise to remove an asset. AROs may stem
from environmental laws, state laws and regulations, easement agreements,
building codes, contracts, franchise grants and agreements, oral promises
made upon which third parties have relied, or the dismantlement, restoration,
or reclamation of properties.
Upon adoption of SFAS No. 143, certain removal obligations were identified
that management believes are AROs but either have not been incurred or are
not material. These removal obligations arise in the ordinary course of
business or have a low probability of occurring. The types of obligations
primarily relate to transmission and distribution lines and poles,
telecommunication towers, transmission cables and certain FERC or state
regulatory agency re-licensing issues. There was no impact to NU's earnings
upon adoption of SFAS No. 143; however, if there are changes in certain laws
and regulations, orders, interpretations or contracts entered into by NU,
there may be future AROs that need to be recorded.
Under SFAS No. 71, regulated utilities, including NU's Utility Group
companies, currently recover amounts in rates for future costs of removal of
plant assets. Future removals of assets do not represent legal obligations
and are not AROs. Historically, these amounts were included as a component
of accumulated depreciation until spent. At December 31, 2003 and 2002,
these amounts totaling $334 million and $321 million, respectively, were
reclassified to regulatory liabilities on the accompanying consolidated
balance sheets.
In June 2003, the FASB issued a proposed FSP, "Applicability of SFAS No. 143,
'Accounting for Asset Retirement Obligations', to Legislative Requirements on
Property Owners to Remove and Dispose of Asbestos or Asbestos-Containing
Materials." In the FSP, the FASB staff concludes that current legislation
creates a legal obligation for the owner of a building to remove and dispose
of asbestos-containing materials. In the FSP, the FASB staff also concludes
that this legal obligation constitutes an ARO that should be recognized as a
liability under SFAS No. 143. This FSP changes a FASB staff interpretation
of SFAS No. 143 that an obligating event did not occur until a building
containing asbestos was demolished. In November 2003, the FASB indicated
that, based on the diverse views it received in comment letters on the
proposed FSP, it was considering a proposal for a FASB agenda project to
address this issue. If this FSP is adopted in its current form, then NU
would be required to record an ARO. Management has not estimated this
potential ARO at December 31, 2003.
Special Purpose Entities: In addition to SPEs that are described in the "Off-
Balance Sheet Arrangements" section of this Management's Discussion and
Analysis, during 2001 and 2002, to facilitate the issuance of rate reduction
bonds and certificates intended to finance certain stranded costs, NU
established four SPEs: CL&P Funding LLC, PSNH Funding LLC, PSNH Funding LLC
2 and WMECO Funding LLC (the funding companies). The funding companies were
created as part of state-sponsored securitization programs. The funding
companies are restricted from engaging in non-related activities and are
required to operate in a manner intended to reduce the likelihood that they
would be included in their respective parent company's bankruptcy estate if
they ever became involved in a bankruptcy proceeding. The funding companies
and the securitization amounts are consolidated in the accompanying
consolidated financial statements.
During 1999, SESI established an SPE, HEC/Tobyhanna Energy Project, LLC
(HEC/Tobyhanna), in connection with a federal energy savings performance
project located at the United States Army Depot in Tobyhanna, Pennsylvania.
HEC/Tobyhanna sold $26.5 million of Certificates related to the project and
used the funds to repay SESI for the costs of the project. HEC/Tobyhanna's
activities and Certificates are included in NU's consolidated financial
statements.
For further information regarding the matters in this "Critical Accounting
Policies and Estimates" section see Note 1, "Summary of Significant
Accounting Policies," Note 3, "Derivative Instruments, Market Risk and Risk
Management," Note 4, "Employee Benefits," Note 5, "Goodwill and Other
Intangible Assets," and Note 7C, "Commitments and Contingencies -
Environmental Matters," to the consolidated financial statements.
OTHER MATTERS
Commitments and Contingencies: For further information regarding other
commitments and contingencies, see Note 7, "Commitments and Contingencies,"
to the consolidated financial statements.
Contractual Obligations and Commercial Commitments: Information regarding
NU's contractual obligations and commercial commitments at December 31, 2003
is summarized through 2008 and thereafter as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(Millions of
Dollars) 2004 2005 2006 2007 2008 Thereafter
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Notes payable
to banks (a) $ 105.0 $ - $ - $ - $ - $ -
Long-term debt (a) 64.9 92.1 27.8 9.6 161.2 1,941.7
Capital leases (b)(c) 3.1 3.1 2.9 2.6 2.3 20.1
Operating leases (c)(d) 21.9 19.6 17.6 14.2 12.0 27.4
Long-term contractual
arrangements (c)(d) 546.3 528.3 522.4 430.0 301.7 1,759.7
Select Energy
purchase
agreements (c)(d)(e) 4,471.0 761.5 142.9 84.3 84.7 275.4
- ------------------------------------------------------------------------------------------------------
Totals $5,212.2 $1,404.6 $713.6 $540.7 $561.9 $4,024.3
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Included in NU's debt agreements are usual and customary positive,
negative and financial covenants. Non-compliance with certain covenants, for
example the timely payment of principal and interest, may constitute an event
of default, which could cause an acceleration of principal in the absence of
receipt by the company of a waiver or amendment. Such acceleration would
change the obligations outlined in the table of contractual obligations and
commercial commitments.
(b) The capital lease obligations include imputed interest of $18.2 million.
(c) NU has no provisions in its capital or operating lease agreements or
agreements related to its long-term contractual arrangements or Select Energy
purchase commitments that could trigger a change in terms and conditions,
such as acceleration of payment obligations.
(d) Amounts are not included on NU's consolidated balance sheets.
(e) Select Energy's purchase agreement amounts can exceed the amount
expected to be reported in fuel, purchased and net interchange power because
energy trading purchases are classified in revenues.
Rate reduction bond amounts are non-recourse to NU, have no required payments
over the next five years and are not included in this table. The Utility
Group's standard offer service contracts and default service contracts and
NU's expected contribution to the PBOP Plan in 2004 of $41.3 million are also
not included in this table. For further information regarding NU's
contractual obligations and commercial commitments, see the Consolidated
Statements of Capitalization and related footnotes, and Note 2, "Short-Term
Debt," Note 9, "Leases," and Note 7F, "Commitments and Contingencies - Long-
Term Contractual Arrangements," 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
The following table provides the variances in income statement line items for
the consolidated statements of income included in this annual report for the
past two years.
<TABLE>
<CAPTON>
- ---------------------------------------------------------------------------------------------------
Income Statement Variances 2003 over/(under) 2002 2002 over/(under) 2001
(Millions of Dollars) Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
<S> <C>
Operating Revenues $832 16% $(524) (9)%
Operating Expenses:
Fuel, purchased and net interchange power 683 22 (382) (11)
Other operation 148 20 (21) (3)
Maintenance (31) (12) 5 2
Depreciation (1) (1) 5 2
Amortization (130) (42) (572) (65)
Amortization of rate reduction bonds 4 3 50 51
Taxes other than income taxes 5 2 8 4
Gain on sale of utility plant 187 100 455 71
- ---------------------------------------------------------------------------------------------------
Total operating expenses 865 18 (452) (9)
- ---------------------------------------------------------------------------------------------------
Operating Income (33) (7) (72) (13)
- ---------------------------------------------------------------------------------------------------
Interest expense, net (24) (9) (9) (3)
Other (loss)/income, net (44) (a) (144) (77)
- ---------------------------------------------------------------------------------------------------
Income before tax expense (53) (22) (207) (46)
Income tax expense (22) (27) (92) (53)
Preferred dividends of subsidiaries - - (2) (23)
- ---------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting changes, net of tax benefits (31) (20) (113) (43)
Cumulative effect of accounting changes,
net of tax benefits (5) (100) 22 100
- ---------------------------------------------------------------------------------------------------
Net income $(36) (23)% $ (91) (38)%
===================================================================================================
</TABLE>
(a) Percent greater than 100.
OPERATING REVENUES
Total revenues increased $832 million in 2003, compared with 2002, due to
higher revenues from NU Enterprises ($775 million or $588 million after
intercompany eliminations), higher Utility Group electric revenues ($160
million or $165 million after intercompany eliminations) and higher Utility
Group gas revenues ($79 million).
The NU Enterprises' revenue increase is primarily due to higher wholesale and
retail requirements sales volumes ($386 million) and higher prices ($339
million).
The Utility Group revenue increase is primarily due to higher retail electric
revenue ($217 million), partially offset by lower wholesale revenue ($57
million). The regulated retail electric revenue increase is primarily due to
higher CL&P recovery of incremental LMP costs net of amounts to be returned
to customers ($72 million), higher sales volumes ($73 million), an adjustment
to unbilled revenues ($46 million) and a higher average price resulting from
the mix among customer classes for the regulated companies ($25 million).
The higher Yankee Gas revenue is primarily due to higher recovery of gas
costs ($77 million), higher gas sales volumes ($8 million) and price
variances among customer classes ($7 million), partially offset by an
adjustment to unbilled revenues ($13 million). Regulated retail electric kWh
sales increased by 2.1 percent, and firm natural gas sales increased by 7.8
percent in 2003, before the adjustments to unbilled revenues. The regulated
wholesale revenue decrease is primarily due to lower PSNH 2003 sales as a
result of the sale of Seabrook.
Total revenues decreased by $524 million in 2002, compared with 2001,
primarily due to lower competitive energy revenues ($245 million after
intercompany eliminations) and lower regulated subsidiaries revenues due to
lower wholesale and transmission revenues ($143 million after intercompany
eliminations), and lower regulated retail revenues ($136 million).
The competitive energy companies' revenue decrease in 2002 is primarily due
to lower wholesale marketing revenues from Select Energy full requirements
contracts, primarily due to lower energy prices. The decrease in regulated
wholesale revenues is primarily due to lower sales associated with purchased-
power contracts ($91 million) and the 2001 revenue associated with the sale
of Millstone output ($42 million). The regulated retail revenue decrease is
primarily due to the May 2001 rate decrease for PSNH ($23 million), and the
2002 decrease in the WMECO standard offer energy rate ($77 million), lower
Yankee Gas revenue due to lower purchased gas adjustment clause revenue ($59
million) and a combination of the April 2002 rate decrease and lower gas
sales ($27 million), partially offset by an increase resulting from the
collection of CL&P deferred fuel costs ($25 million) and higher retail
electric sales ($25 million). Regulated retail electric kWh sales increased
by 1.3 percent, and firm natural gas volume sales decreased by 4.3 percent in
2002.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power expense increased $683 million in
2003, primarily due to higher wholesale energy purchases at NU Enterprises
($629 million), and higher gas costs ($77 million), partially offset by lower
nuclear fuel ($20 million).
Fuel, purchased and net interchange power expense decreased by $382 million
in 2002, primarily due to lower wholesale sales from the merchant energy
business line ($168 million after intercompany eliminations), lower Yankee
Gas expense primarily due to lower gas prices ($80 million), and lower
purchased-power costs for the regulated subsidiaries ($131 million after
intercompany eliminations).
OTHER OPERATION
Other operation expense increased $148 million in 2003, primarily due to
higher expenses for NU Enterprises resulting from service business growth
($57 million), higher regulated business administrative and general expenses,
primarily due to higher health care costs ($16 million), lower pension income
($31 million), higher reliability must run related transmission expense ($30
million), higher conservation and load management expenditures ($16 million),
higher distribution expense ($6 million), and higher load and dispatch
expenses ($6 million), partially offset by lower nuclear expense due to the
sale of Seabrook ($29 million).
Other operation expense decreased $21 million in 2002, primarily due to lower
nuclear expenses as a result of the sale of the Millstone units at the end of
the first quarter in 2001 ($26 million), partially offset by higher load and
dispatch expenses ($7 million).
MAINTENANCE
Maintenance expense decreased $31 million in 2003, primarily due to lower
nuclear expense resulting from the sale of Seabrook ($26 million) and lower
competitive expenses associated with the services contracting business ($7
million), partially offset by higher gas distribution expenses ($2 million).
Maintenance expense increased $5 million in 2002, primarily due to higher
competitive companies' expenses associated with the expansion of new services
businesses ($23 million), higher fossil fuel expenses ($7 million) and higher
distribution expenses ($3 million), partially offset by lower nuclear
expenses as a result of the sale of the Millstone units at the end of the
first quarter in 2001 ($29 million).
DEPRECIATION
Depreciation decreased $1 million in 2003 primarily due to lower
decommissioning and depreciation expenses resulting from 2002 depreciation of
Seabrook as compared to no 2003 Seabrook-related depreciation ($7 million)
and lower NU Enterprises depreciation due to a study which resulted in
lengthening the estimated lives of certain generation assets ($3 million),
partially offset by higher Utility Group depreciation resulting from higher
plant balances ($9 million).
Depreciation increased $5 million in 2002, primarily due to higher expense
resulting from higher regulated plant balances ($11 million), partially
offset by the higher Millstone-related decommissioning expenses recorded in
2001 ($8 million).
AMORTIZATION
Amortization decreased $130 million in 2003 primarily due to the 2002
amortization of stranded costs upon the sale of Seabrook ($183 million),
partially offset by higher amortization in 2003 related to the Utility
Group's recovery of stranded costs ($53 million), in part resulting from
higher wholesale revenue from the sale of IPP related energy.
Amortization decreased $572 million in 2002, primarily due to the
amortization in 2001 related to the gain on sale of the Millstone units ($641
million) and Seabrook deferred returns ($39 million), and lower amortization
related to recovery of the Millstone investment ($45 million), partially
offset by the higher PSNH amortization in 2002 primarily related to the gain
on the sale of Seabrook ($155 million).
AMORTIZATION OF RATE REDUCTION BONDS
Amortization of rate reduction bonds increased $4 million in 2003 due to the
repayment of principal.
Amortization of rate reduction bonds increased $50 million in 2002. All
amortization was fully recovered by payments from customers in 2002 and 2003,
and the bonds had no impact on net income.
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $5 million in 2003, primarily due to
a credit recorded in 2002 recognizing a Connecticut sales and use tax audit
settlement ($8 million), partially offset by a lower 2003 payment to
compensate the Town of Waterford for lost property tax revenue as a result of
the sale of Millstone ($4 million) and lower New Hampshire property taxes due
to the sale of Seabrook ($2 million).
Taxes other than income taxes increased $8 million in 2002, primarily due to
CL&P's payments to the Town of Waterford for its loss of property tax revenue
resulting from electric utility restructuring ($15 million) and the favorable
2001 property tax settlement with the City of Meriden for CL&P and Yankee,
which decreased 2001 taxes ($15 million). These increases were partially
offset by the 2002 recognition of a Connecticut sales and use tax audit
settlement for the years 1993 through 2001 ($8 million), lower gross earnings
taxes ($6 million), lower New Hampshire franchise taxes ($3 million) and
lower property taxes ($4 million).
GAIN ON SALE OF UTILITY PLANT
Gain on the sale of utility plant decreased $187 million in 2003 due to the
gain recognized in 2002 resulting from CL&P's and NAEC's sale of Seabrook
($187 million).
Gain on the sale of utility plant decreased $455 million in 2002 primarily
due to the gain recognized in the 2001 sale of CL&P's and WMECO's ownership
interests in the Millstone units ($642 million), partially offset by CL&P's
and NAEC's 2002 sale of Seabrook ($187 million).
INTEREST EXPENSE, NET
Interest expense, net decreased $24 million in 2003 primarily due to lower
interest for the regulated subsidiaries resulting from lower rates ($12
million), lower interest at NU parent as a result of the interest rate swap
related to its $263 million fixed-rate senior notes ($8 million), capitalized
interest on prepayments for generator interconnections ($4 million) and lower
NAEC interest due to the retirement of debt ($3 million), partially offset by
higher competitive business interest as a result of higher debt levels ($6
million).
Interest expense, net decreased $9 million in 2002, primarily due to NAEC's
reduction of debt.
OTHER (LOSS)/INCOME, NET
Other (loss)/income, net decreased $44 million primarily due to the 2002
elimination of certain reserves associated with NU's ownership share of
Seabrook ($25 million), 2002 Seabrook related gains ($15 million), lower
equity in earnings from the Yankee companies in 2003 ($7 million), a higher
level of donations in 2003 ($5 million), RMS losses recorded in 2003 ($4
million) and lower 2003 conservation and load management incentive income
($2 million), partially offset by 2002 investment write-downs ($18 million).
Other (loss)/income, net decreased $144 million in 2002 primarily due to the
2001 gain related to the Millstone sale ($202 million) and the 2002
investment write-downs ($18 million), partially offset by the 2002 Seabrook
related gains ($39 million) and the 2001 loss on share repurchase contracts
($35 million).
INCOME TAX EXPENSE
The consolidated statement of income taxes provides a reconciliation of
actual and expected tax expense. The tax effect of temporary differences is
accounted for in accordance with the rate-making treatment of the applicable
regulatory commissions. In past years, this rate-making treatment has
required the company to provide the customers with a portion of the tax
benefits associated with accelerated tax depreciation in the year it is
generated (flow through depreciation). As these flow through differences
turn around, higher tax expense is recorded.
Income tax expense decreased by $22 million in 2003, primarily due to lower
taxable income.
Income tax expense decreased by $92 million in 2002, primarily due to the
recognition of WMECO ITC in the second quarter of 2002 and the tax impacts of
the Millstone sale in 2001, partially offset by tax impacts of the sale of
Seabrook in 2002.
PREFERRED DIVIDENDS OF SUBSIDIARIES
Preferred dividends decreased $2 million or 23 percent in 2002 primarily due
to a lower amount of preferred stock outstanding.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET OF TAX BENEFITS
A cumulative effect of an accounting change, net of tax benefit ($5 million)
was recorded in the third quarter of 2003 in connection with the adoption of
FIN 46, which required NU to consolidate RMS into NU's financial statements and
adjust its equity interest as a cumulative effect of an accounting change.
The cumulative effect of an accounting change, net of tax benefit, recorded in
2001, represents the effect of the adoption of SFAS No. 133, as amended ($22
million).
COMPANY REPORT
- --------------
Management is responsible for the preparation, integrity, and fair
presentation of the accompanying consolidated financial statements of
Northeast Utilities and subsidiaries and other sections of this annual
report. These financial statements, which were audited by Deloitte & Touche
LLP, have been prepared in conformity with accounting principles generally
accepted in the United States of America using estimates and judgments, where
required, and giving consideration to materiality.
The company has endeavored to establish a control environment that encourages
the maintenance of high standards of conduct in all of its business
activities. Management is responsible for maintaining a system of internal
control over financial reporting that is designed to provide reasonable
assurance, at an appropriate cost-benefit relationship, to the company's
management and Board of Trustees regarding the preparation of reliable,
published financial statements. The system is supported by an organization
of trained management personnel, policies and procedures, and a comprehensive
program of internal audits. Through established programs, the company
regularly communicates to its management employees their internal control
responsibilities and obtains information regarding compliance with policies
prohibiting conflicts of interest and policies segregating information
between regulated and unregulated subsidiary companies. The company has
standards of business conduct for all employees, as well as a code of ethics
for senior financial officers.
The Audit Committee of the Board of Trustees is composed entirely of
independent trustees and includes two members that the Board of Trustees
considers "audit committee financial experts." The Audit Committee meets
regularly with management, the internal auditors and the independent auditors
to review the activities of each and to discuss audit matters, financial
reporting matters, and the system of internal controls over financial
reporting. The Audit Committee also meets periodically with the internal
auditors and the independent auditors without management present.
Because of inherent limitations in any system of internal controls, errors or
irregularities may occur and not be detected. The company believes, however,
that its system of internal controls over financial reporting and control
environment provide reasonable assurance that its assets are safeguarded from
loss or unauthorized use and that its financial records, which are the basis
for the preparation of all financial statements, are reliable. Additionally,
management believes that its disclosure controls and procedures are in place
and operating effectively. Disclosure controls and procedures are designed
to ensure that information included in reports such as this annual report is
recorded, processed, summarized, and reported within the time periods
required and that the information disclosed is accumulated and reviewed by
management for discussion and approval.
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Trustees and
Shareholders of Northeast Utilities:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Northeast Utilities and subsidiaries (a
Massachusetts Trust) (the "Company") 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. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Northeast Utilities and
subsidiaries (a Massachusetts Trust) as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1C to the consolidated financial statements, effective
January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, and, in 2003, the Company adopted EITF 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 retroactively restated the 2002 and 2001
consolidated financial statements. As discussed in Notes 1E and 5, the
Company adopted Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, effective July 1, 2003, and SFAS
No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002,
respectively.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 23, 2004
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
At December 31, 2003 2002
- -------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 37,196 $ 50,333
Unrestricted cash from counterparties 46,496 16,890
Restricted cash - LMP costs 93,630 -
Special deposits 79,120 30,716
Investments in securitizable assets 166,465 178,908
Receivables, less provision for uncollectible accounts
of $40,846 in 2003 and $15,425 in 2002 704,893 767,089
Unbilled revenues 125,881 126,236
Fuel, materials and supplies, at average cost 154,076 119,853
Derivative assets 301,194 130,929
Prepayments and other 63,780 110,261
------------- -------------
1,772,731 1,531,215
------------- -------------
Property, Plant and Equipment:
Electric utility 5,465,854 5,141,951
Gas utility 743,990 679,055
Competitive energy 885,953 866,294
Other 221,986 205,115
------------- -------------
7,317,783 6,892,415
Less: Accumulated depreciation 2,244,263 2,163,613
------------- -------------
5,073,520 4,728,802
Construction work in progress 356,396 320,567
------------- -------------
5,429,916 5,049,369
------------- -------------
Deferred Debits and Other Assets:
Regulatory assets 2,974,022 3,076,095
Goodwill 319,986 321,004
Purchased intangible assets, net 22,956 24,863
Prepaid pension 360,706 328,890
Other 428,567 433,444
------------- -------------
4,106,237 4,184,296
------------- -------------
Total Assets $ 11,308,884 $ 10,764,880
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------
At December 31,