FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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) 1000 Elm Street Manchester, New Hampshire 03105-0330 Telephone: (603) 669-4000 0-7624 WESTERN MASSACHUSETTS ELECTRIC COMPANY 04-1961130 (a Massachusetts corporation) 174 Brush Hill Avenue West Springfield, Massachusetts 01090-2010 Telephone: (413) 785-5871 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: Company - Class of Stock Outstanding at July 31, 2001 - ------------------------ ---------------------------- Northeast Utilities Common shares, $5.00 par value 133,892,185 shares The Connecticut Light and Power Company Common stock, $10.00 par value 7,584,884 shares Public Service Company of New Hampshire Common stock, $1.00 par value 388 shares Western Massachusetts Electric Company Common stock, $25.00 par value 509,696 shares GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report: COMPANIES CL&P.......................... The Connecticut Light and Power Company NAEC.......................... North Atlantic Energy Corporation NU............................ Northeast Utilities NU system..................... The Northeast Utilities system companies, including NU and its wholly owned operating subsidiaries: CL&P, PSNH, WMECO, NAEC, and Yankee Gas PSNH.......................... Public Service Company of New Hampshire Select Energy................. Select Energy, Inc. WMECO......................... Western Massachusetts Electric Company Yankee........................ Yankee Energy System, Inc. Yankee Gas.................... Yankee Gas Services Company NUCLEAR UNIT Seabrook...................... Seabrook Unit No. 1, a 1,148 megawatt nuclear electric generating unit completed in 1986; Seabrook went into service in 1990. REGULATORS DPUC.......................... Connecticut Department of Public Utility Control FERC.......................... Federal Energy Regulatory Commission OTHER EPS........................... Earnings per share FASB.......................... Financial Accounting Standards Board NU 2000 Form 10-K............. The NU system combined 2000 Form 10-K as filed with the Securities and Exchange Commission O&M........................... Operation and maintenance SFAS.......................... Statement of Financial Accounting Standards Northeast Utilities and Subsidiaries The Connecticut Light and Power Company and Subsidiaries Public Service Company of New Hampshire and Subsidiaries Western Massachusetts Electric Company and Subsidiary TABLE OF CONTENTS Page ---- Part I. Financial Information Item 1. Financial Statements (Unaudited) and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the following companies: Northeast Utilities and Subsidiaries Consolidated Balance Sheets - June 30, 2001 and December 31, 2000..................... 2 Consolidated Statements of Income - Three Months and Six Months Ended June 30, 2001 and 2000.................................. 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000................. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 6 Report of Independent Public Accountants................ 18 The Connecticut Light and Power Company and Subsidiaries Consolidated Balance Sheets - June 30, 2001 and December 31, 2000..................... 20 Consolidated Statements of Income - Three Months and Six Months Ended June 30, 2001 and 2000.................................. 22 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000................. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 24 Public Service Company of New Hampshire and Subsidiaries Consolidated Balance Sheets - June 30, 2001 and December 31, 2000..................... 30 Consolidated Statements of Income - Three Months and Six Months Ended June 30, 2001 and 2000.................................. 32 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000................. 33 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 34 Western Massachusetts Electric Company and Subsidiary Consolidated Balance Sheets - June 30, 2001 and December 31, 2000..................... 38 Consolidated Statements of Income - Three Months and Six Months Ended June 30, 2001 and 2000.................................. 40 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000................. 41 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 42 Notes to Financial Statements (unaudited - all companies).................................. 46 Part II. Other Information Item 1. Legal Proceedings.................................. 58 Item 4. Submission of Matters to a Vote of Security Holders................................ 60 Item 6. Exhibits and Reports on Form 8-K................... 61 Signatures............................................................. 63 NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ---------------- ---------------- (Thousands of Dollars) <S> <C> <C> ASSETS - ------ Utility Plant, at Cost: Electric...............................................$ 5,988,999 $ 9,370,176 Gas and other........................................... 863,859 861,727 ---------------- ---------------- 6,852,858 10,231,903 Less: Accumulated provision for depreciation......... 3,435,530 7,041,279 ---------------- ---------------- 3,417,328 3,190,624 Construction work in progress........................... 222,884 228,330 Nuclear fuel, net....................................... 26,038 128,261 ---------------- ---------------- Total net utility plant.............................. 3,666,250 3,547,215 ---------------- ---------------- Other Property and Investments: Nuclear decommissioning trusts, at market............... 59,903 740,058 Investments in regional nuclear generating companies, at equity................................... 59,442 62,477 Other, at cost.......................................... 192,345 137,291 ---------------- ---------------- 311,690 939,826 ---------------- ---------------- Current Assets: Cash and cash equivalents............................... 197,646 200,017 Investments in securitizable assets..................... 40,599 98,146 Receivables, net........................................ 784,053 472,863 Unbilled revenues....................................... 85,909 121,090 Fuel, materials and supplies, at average cost........... 102,583 163,711 Prepayments and other................................... 178,269 94,528 ---------------- ---------------- 1,389,059 1,150,355 ---------------- ---------------- Deferred Charges: Regulatory assets ...................................... 4,077,781 3,910,801 Goodwill and other purchased intangible assets, net..... 325,846 324,389 Unamortized debt expense, net........................... 25,632 33,475 Prepaid pensions........................................ 190,145 139,546 Other .................................................. 174,305 171,542 ---------------- ---------------- 4,793,709 4,579,753 ---------------- ---------------- Total Assets.............................................$ 10,160,708 $ 10,217,149 ================ ================ </Table> The accompanying notes are an integral part of these financial statements. NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ---------------- ---------------- (Thousands of Dollars) <S> <C> <C> CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common shareholders' equity: Common shares, $5 par value - authorized 225,000,000 shares; 148,888,790 shares issued and 133,864,193 shares outstanding in 2001 and 148,781,861 shares issued and 143,820,405 shares outstanding in 2000.................................$ 744,444 $ 693,345 Capital surplus, paid in.............................. 902,562 927,059 Temporary equity from stock forward................... - 215,000 Deferred contribution plan - employee stock ownership plan...................................... (108,122) (114,463) Retained earnings..................................... 610,248 495,873 Accumulated other comprehensive income................ (26,470) 1,769 ---------------- ---------------- Total common shareholders' equity.............. 2,122,662 2,218,583 Preferred stock......................................... 116,200 151,200 Long-term debt.......................................... 1,930,142 2,029,593 ---------------- ---------------- Total capitalization........................... 4,169,004 4,399,376 ---------------- ---------------- Rate Reduction Bonds...................................... 2,118,400 - ---------------- ---------------- Minority Interest in Consolidated Subsidiary.............. - 100,000 ---------------- ---------------- Obligations Under Capital Leases.......................... 17,180 47,234 ---------------- ---------------- Current Liabilities: Notes payable to banks.................................. 455,400 1,309,977 Long-term debt and preferred stock - current portion.... 24,365 340,041 Obligations under capital leases - current portion...... 931 112,645 Accounts payable........................................ 685,485 538,983 Accrued taxes........................................... 83,032 54,088 Accrued interest........................................ 55,899 41,131 Other................................................... 120,409 144,931 ---------------- ---------------- 1,425,521 2,541,796 ---------------- ---------------- Deferred Credits and Other Long-Term Liabilities: Accumulated deferred income taxes....................... 1,447,536 1,585,494 Accumulated deferred investment tax credits............. 126,422 153,155 Decommissioning obligation - Millstone 1................ - 692,560 Deferred contractual obligations........................ 228,701 244,608 Other................................................... 627,944 452,926 ---------------- ---------------- 2,430,603 3,128,743 ---------------- ---------------- Commitments and Contingencies (Note 2) Total Capitalization and Liabilities.....................$ 10,160,708 $ 10,217,149 ================ ================ </Table> The accompanying notes are an integral part of these financial statements. NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <Table> <Caption> Three Months Ended Six Months Ended June 30, June 30, --------------------------------------------------------------- 2001 2000 2001 2000 -------------- -------------- -------------- -------------- (Thousands of Dollars, except share information) <S> <C> <C> <C> <C> Operating Revenues....................................$ 1,583,294 $ 1,414,973 $ 3,383,838 $ 2,797,294 -------------- -------------- -------------- -------------- Operating Expenses: Operation - Fuel, purchased and net interchange power......... 1,009,877 795,089 2,140,717 1,563,461 Other............................................. 189,014 214,036 407,942 415,497 Maintenance.......................................... 59,738 70,722 148,419 121,490 Depreciation......................................... 49,891 58,946 110,520 119,338 Amortization of regulatory assets, net............... 86,098 68,318 805,954 113,450 Federal and state income taxes....................... 46,801 47,445 91,182 109,870 Taxes other than income taxes........................ 55,204 61,325 131,091 119,687 Gain on sale of utility plant........................ - - (653,872) - -------------- -------------- -------------- -------------- Total operating expenses........................ 1,496,623 1,315,881 3,181,953 2,562,793 -------------- -------------- -------------- -------------- Operating Income....................................... 86,671 99,092 201,885 234,501 -------------- -------------- -------------- -------------- Other Income/(Loss): Gain related to Millstone sale....................... - - 202,159 - Gain/(loss) on share repurchase contracts............ 8,049 - (35,394) - Nuclear related costs................................ - (15,572) - (18,373) Other, net........................................... 7,673 (8,362) 6,155 (3,213) Income taxes......................................... 18,321 21,119 (49,597) 28,955 -------------- -------------- -------------- -------------- Other income/(loss), net........................ 34,043 (2,815) 123,323 7,369 -------------- -------------- -------------- -------------- Income before interest charges.................. 120,714 96,277 325,208 241,870 -------------- -------------- -------------- -------------- Interest Charges: Interest on long-term debt........................... 62,063 52,300 105,731 108,184 Other interest....................................... 9,482 27,858 33,009 38,222 -------------- -------------- -------------- -------------- Interest charges, net........................... 71,545 80,158 138,740 146,406 -------------- -------------- -------------- -------------- Income after interest charges................... 49,169 16,119 186,468 95,464 Preferred Dividends of Subsidiaries.................... 2,437 3,913 5,141 8,671 -------------- -------------- -------------- -------------- Income before cumulative effect of accounting change............................. 46,732 12,206 181,327 86,793 Cumulative effect of accounting change, net of tax benefit of $14,908........................ - - (22,432) - -------------- -------------- -------------- -------------- Net Income............................................$ 46,732 $ 12,206 $ 158,895 $ 86,793 ============== ============== ============== ============== Basic Earnings Per Common Share: Income before cumulative effect of accounting change.................................$ 0.35 $ 0.09 $ $1.30 $ $0.62 Cumulative effect of accounting change, net of tax benefit................................. - - (0.16) - -------------- -------------- -------------- -------------- Basic Earnings per Common Share.......................$ 0.35 $ 0.09 $ 1.14 $ 0.62 ============== ============== ============== ============== Fully Diluted Earnings Per Common Share: Income before cumulative effect of accounting change.................................$ 0.35 $ 0.08 $ 1.30 $ $0.62 Cumulative effect of accounting change, net of tax benefit................................ - - (0.16) - -------------- -------------- -------------- -------------- Fully Diluted Earnings Per Common Share...............$ 0.35 $ 0.08 $ 1.14 $ 0.62 ============== ============== ============== ============== Basic Common Shares Outstanding (average)............. 133,908,739 143,284,493 138,910,719 139,476,432 ============== ============== ============== ============== Fully Diluted Common Shares Outstanding (average)......134,149,873 143,907,964 139,256,968 140,055,610 ============== ============== ============== ============== </Table> The accompanying notes are an integral part of these financial statements. NORTHEAST UTILITIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <Table> <Caption> Six Months Ended June 30, ------------------------ 2001 2000 ------------ ----------- (Thousands of Dollars) <S> <C> <C> Operating Activities: Income after interest charges.............................. $ 186,468 $ 95,464 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation............................................. 110,520 119,338 Deferred income taxes and investment tax credits, net.... (120,505) (18,035) Amortization of regulatory assets, net................... 805,954 113,450 Net deferral of recoverable energy costs................. (19,051) (1,435) Gain on sale of utility plant............................ (678,884) - Cumulative effect of accounting change................... (22,432) - Net other (uses)/sources of cash......................... (1,353) 26,903 Changes in working capital: Receivables and unbilled revenues, net................... (276,009) (87,260) Fuel, materials and supplies............................. 61,128 4,595 Accounts payable......................................... 146,502 179,674 Accrued taxes............................................ 28,944 (39,305) Investments in securitizable assets...................... 57,547 41,691 Other working capital (excludes cash).................... (63,509) (167,876) ------------ ----------- Net cash flows provided by operating activities.............. 215,320 267,204 ------------ ----------- Investing Activities: Investments in plant: Electric, gas and other utility plant.................... (214,227) (137,143) Nuclear fuel............................................. (1,092) (28,983) ------------ ----------- Net cash flows used for investments in plant............... (215,319) (166,126) Investments in nuclear decommissioning trusts.............. (122,456) (32,911) Net proceeds from the sale of utility plant................ 1,035,135 - Buyout/buydown of IPP contracts............................ (1,128,502) - Other investment activities, net........................... (52,019) (25,696) Payment for the purchase of Yankee, net of cash acquired... - (260,347) ------------ ----------- Net cash flows used in investing activities.................. (483,161) (485,080) ------------ ----------- Financing Activities: Issuance of common shares.................................. 1,725 2,456 Repurchase of common shares................................ (219,237) - Issuance of long-term debt................................. 268,145 26,477 Issuance of rate reduction bonds........................... 2,118,400 - Net (decrease)/increase in short-term debt................. (854,577) 756,000 Reacquisitions and retirements of long-term debt........... (658,457) (357,227) Reacquisitions and retirements of preferred stock.......... (60,868) (126,039) Retirement of monthly income preferred securities.......... (100,000) - Retirement of capital lease obligation..................... (180,000) - Cash dividends on preferred stock.......................... (5,141) (8,671) Cash dividends on common shares............................ (44,520) (28,638) ------------ ----------- Net cash flows provided by financing activities.............. 265,470 264,358 ------------ ----------- Net (decrease)/increase in cash and cash equivalents......... (2,371) 46,482 Cash and cash equivalents - beginning of period.............. 200,017 255,154 ------------ ----------- Cash and cash equivalents - end of period.................... $ 197,646 $ 301,636 ============ =========== Supplemental schedule of noncash investing and financing activities: In conjunction with the Yankee acquisition on March 1, 2000, common stock was issued and debt was assumed as follows: Fair value of assets acquired, net of liabilities assumed $ 712,484 Cash paid (261,370) NU common stock issued (217,114) ----------- $ 234,000 =========== </Table> The accompanying notes are an integral part of these financial statements. NORTHEAST UTILITIES AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the consolidated financial statements and footnotes in this Form 10-Q, the First Quarter 2001 Form 10-Q, current reports on Form 8-K dated April 11, 2001, April 24, 2001, April 25, 2001, May 17, 2001, June 28, 2001, July 10, 2001, and July 24, 200l, and the 2000 Form 10-K. FINANCIAL CONDITION Overview Northeast Utilities (NU) reported second quarter 2001 earnings of $46.7 million, or $0.35 per share on a fully diluted basis, compared with earnings of $12.2 million, or $0.08 per share on a fully diluted basis, for the same period of 2000. Second quarter 2001 results included an after-tax gain of $8 million, or $0.06 per share, as a result of the closing out of certain equity forward purchase arrangements for 10.1 million NU common shares in April 2001, at a share price of $18.30. Including the effects related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, NU reported earnings of $158.9 million, or $1.14 per share, for the six months ended June 30, 2001, compared with earnings of $86.8 million, or $0.62 per share, for the six months ended June 30, 2000. Excluding the effect of the adoption of SFAS No. 133, NU earned $181.3 million, or $1.30 per share, for the six months ended June 30, 2001. The marked improvement in NU's second quarter earnings in 2001 resulted from better results at NU's competitive energy subsidiaries and the absence of write-offs related to the settlement of litigation. In the second quarter of 2001, NU's competitive energy subsidiaries earned $13.6 million, or $0.10 per share, compared with essentially break-even results for the same period of 2000. Also, second quarter 2000 results included after-tax charges of $8.1 million, or $0.06 per share, associated with the settlement of litigation related to the Millstone nuclear units, which NU sold to Dominion Resources, Inc. (Dominion) on March 31, 2001. NU's results in the first half of 2001 were aided considerably by the sale of Millstone to Dominion. In the first quarter of 2001, NU received approximately $1.2 billion as a result of the sale and recorded a gain and a corresponding amount of amortization expense in the amount of $653.9 million for the portion of the total gain related to The Connecticut Light and Power Company (CL&P) and Western Massachusetts Electric Company (WMECO). The majority of the $1.2 billion of cash proceeds was received by CL&P and WMECO. NU also recognized an after-tax gain of $124.8 million, or $0.87 per share, related to the sale of the Millstone 3 interests of Public Service Company of New Hampshire (PSNH) and several unaffiliated owners and not to the Millstone interests of CL&P and WMECO. The aforementioned $8 million after-tax gain NU recorded in the second quarter of 2001, related to the equity forward purchase arrangements, offset a portion of a $43.4 million, or $0.30 per share, after-tax charge in the first quarter of 2001, related to the same forward purchase arrangements. As a result, NU's net after-tax charge in the first half of 2001, related to these forward purchase arrangements amounted to $35.4 million, or $0.24 per share. NU contracted with certain financial institutions to purchase these shares prior to NU's March 1, 2000, merger with Yankee Energy System, Inc. (Yankee). The shares were purchased at an average share price of $21.26. Effective January 1, 2001, the accounting for the forward purchase arrangements was revised requiring NU to treat the arrangements as derivative instruments and mark them to market. As a result of the company's actions to close out these forward purchase arrangements, no further gains or losses are anticipated. In the first half of 2001, NU had increased electric sales, a reduced number of outstanding shares, lower interest and preferred dividend costs and a full six months of Yankee earnings, compared to four months in 2001. Regulated retail electric sales increased by 3.1 percent in the second quarter of 2001, as compared to the same period of 2000 and increased by 2.2 percent over the first six months of 2001, as compared to the same period of 2000. NU currently projects operating earnings of between $1.35 per share and $1.50 per share in 2001. That estimate excludes nonrecurring items. That range is lower than the $1.40 per share to $1.60 per share NU had previously projected. The lower earnings range reflects the delay in the timing of additional share repurchases. As a result, NU now projects a higher than previously estimated average share count for 2001, resulting in a lower earnings per share estimate for the year. In July 2001, the NU Board of Trustees authorized the repurchase of up to 15 million additional NU common shares by July 1, 2003. This is above and beyond the shares represented by the aforementioned 10.1 million equity forward purchase arrangements and the 217,400 NU common shares repurchased in June 2001. Subsequent to June 2001, no additional NU common shares have been repurchased. Liquidity NU's liquidity was strengthened considerably by the receipt of approximately $3.3 billion of cash proceeds in the first half of 2001 from the Millstone sale (approximately $1.2 billion) and the securitization of stranded costs (approximately $2.1 billion). On April 25, 2001, PSNH issued $525 million of rate reduction bonds and on May 17, 2001, WMECO issued $155 million of rate reduction certificates. Previously, at the end of the first quarter of 2001, the NU system received, in excess of, $2.6 billion of cash proceeds from the Millstone sale and CL&P securitization. The NU system utilized most of the proceeds from these transactions by the end of the second quarter of 2001. Approximately $1.1 billion was used to buyout or buydown 16 high-cost, long-term purchased-power contracts CL&P and WMECO had with certain independent power producers. CL&P and WMECO used another $180 million to repay their respective obligations under the Niantic Bay Fuel Trust. CL&P used $100 million to repay the notes associated with its monthly income preferred securities and also used a portion of the proceeds to repay all but $199 million of its first mortgage bonds. Combined, PSNH and WMECO used $60.9 million of the proceeds to repay the last of their preferred stock and WMECO used $100 million to repay all of its first mortgage bonds and extinguish its mortgage indenture. As a result of WMECO repaying its first mortgage bonds, Fitch upgraded WMECO's unsecured debt ratings on July 9, 2001, to BBB+ from BBB. PSNH used most of its rate reduction bond proceeds to buydown its power contracts with North Atlantic Energy Corporation (NAEC). In turn, NAEC repaid all $135 million of its outstanding first mortgage bonds and more than half of its outstanding bank debt. Together, CL&P, PSNH, WMECO, and NAEC, returned approximately $436 million to the parent company in the first half of 2001 either in the form of dividends or subsidiary stock repurchases. The parent company used $215 million of that amount to repurchase 10.1 million NU common shares under the aforementioned forward purchase arrangements and another $4.2 million to buy back 217,400 additional NU common shares in June 2001. In June 2001, NU also purchased $15 million of 18 percent convertible subordinated notes of NEON Communications, Inc., due in 2008. As of June 30, 2001, the parent company had approximately $205 million of cash in the NU system Money Pool. Management plans to use that cash for either new investments or the repurchase of additional shares. Primarily as a result of the cash held by the parent company and another $177 million held by CL&P as of June 30, 2001, NU, CL&P, WMECO, and Yankee Gas Services Company (Yankee Gas) had no borrowings outstanding under their aggregate $710 million of lines of credit as of June 30, 2001. On June 28, 2001, NU's Board of Trustees declared a quarterly dividend of $0.125 per share, payable on September 28, 2001, to shareholders of record as of September 1, 2001, an increase of 25 percent from a quarterly dividend of $0.10 per share declared in the previous six quarters. Competitive Energy Subsidiaries NU's competitive energy subsidiaries engage in a variety of energy- related activities, primarily in the competitive energy retail and wholesale commodity, marketing and services fields. In addition, these subsidiaries own and manage 1,481 megawatts (MW) of capacity, as well as provide services to the electric generation market and large commercial and industrial customers in the Northeast. NU's competitive energy subsidiaries earned $9.4 million before the cumulative effect of an accounting change related to the adoption of SFAS No. 133 for the six months ended June 30, 2001, compared with earnings of $3.5 million for the six months ended June 30, 2000. Unconsolidated revenues for the competitive energy subsidiaries were $1.3 billion for the six months ended June 30, 2001, compared with $881.7 million for the six months ended June 30, 2000. The increased revenues are the result of sales growth and higher energy prices. CL&P's standard offer purchases from Select Energy, Inc. (Select Energy) represented $326.7 million of the total competitive energy subsidiaries' revenues for the six months ended June 30, 2001, compared with $318.5 million for the six months ended June 30, 2000. These amounts are eliminated in consolidation. Competitive Energy Subsidiaries' Market and Other Risks NU's competitive energy subsidiaries, as major providers of electricity and natural gas, are exposed to certain market risks which are inherent in their business activities. The competitive energy subsidiaries enter into contracts of varying length of time to buy and sell energy commodities, primarily electricity, natural gas and oil. Market risk represents the risk of loss that may impact the companies' financial statements due to adverse changes in commodity market prices. The competitive energy subsidiaries manage their portfolio of contracts and assets to maximize value and minimize associated risks. The length of contracts to buy and sell energy vary in duration from daily/hourly to several years. At any point in time, the portfolio may be long (purchases exceed sales) or short (sales exceed purchases). Portfolio and risk management disciplines are used to manage exposures to market risks. Policies and procedures have been established to manage these risks. At market spot prices in effect at June 30, 2001, the portfolio had a negative mark-to-market position. There is significant volatility in the energy commodities market, and for certain of the energy products and contracts there has been limited liquidity. Management does not believe the ultimate settlement through physical delivery of its energy portfolio will result in realization of this negative mark-to-market position. The negative mark-to-market position at June 30, 2001, has declined since December 31, 2000, due to the decline in energy prices in the region and new transactions entered into during the first six months of 2001. The servicing of CL&P's standard offer load was one such risk for Select Energy, as this contract is for a 4-year period ending December 31, 2003, at fixed prices. Select Energy has contracted to acquire the vast majority of the energy supplies it expects to need in 2002 and 2003 to serve its current power supply obligations, including CL&P's standard offer load. Recently, given the sharp reduction in energy prices, Select Energy has acquired significant additional resources within its target price range. As a result, management considers Select Energy's energy supply book to be satisfactorily hedged for both 2002 and 2003. Select Energy also engages in the trading of commodity derivatives, which are accounted for using the mark-to-market method under Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." All other nontrading transactions are recognized when settled. For further information see Note 3, "Market Risk and Risk Management Instruments," and Note 4, "Comprehensive Income," to the consolidated financial statements. Business Development On June 28, 2001, NU announced four preliminary proposals to enhance the high-voltage electric transmission grid around southwest Connecticut. Each of these preliminary proposals is subject to the approval by various federal and state regulatory agencies. One proposal would involve the replacement of an underwater 138,000 volt electric cable between Norwalk, Connecticut and Northport, Long Island. That project would cost approximately $80 million and would be jointly sponsored by the Long Island Power Authority, which will have a 50 percent interest in the new cable. A second project involves the construction of a 20-mile, 345,000 volt transmission line along an existing CL&P right-of-way between Bethel, Connecticut and Norwalk, Connecticut, estimated to cost approximately $120 million. If approved, the construction of these two projects would begin in 2002. A third project involves the construction of a 65-mile, 345,000 volt transmission line from Middlefield, Connecticut to Norwalk, Connecticut, estimated to cost approximately $400 million. This project would likely begin around the time the Bethel/Norwalk project is completed. Finally, a new NU transmission subsidiary would build a 30-mile, 300,000 volt direct current cable from Norwalk, Connecticut to Hempstead Harbor, Long Island. Construction is estimated to begin in late 2002 and end in 2004. No cost estimate has yet been made for that project. Restructuring and Rate Matters Connecticut - CL&P: The Connecticut Department of Public Utility Control (DPUC) issued an interim order effective March 1, 2001, directing CL&P to pay down stranded costs using 50 percent of all earnings in excess of an 11.3 percent return on equity. On June 20, 2001, the DPUC issued a final order in CL&P's over- earnings docket ordering a $21.1 million write-off of CL&P's stranded costs through reduced transmission and distribution rates. Also, the Generation Services Charge (GSC) was ordered to be increased by $21.1 million, with any excess GSC revenues to be applied to write-off stranded costs. The DPUC also ordered that 50 percent of CL&P's earnings above a 10.3 percent return on equity be used to amortize stranded costs. While total rates will not change, amortization of regulatory assets will be increased without a corresponding increase in revenues resulting in reduced earnings in the second half of 2001 and in 2002. Connecticut - Yankee Gas: On July 24, 2001, Yankee Gas filed an application with the DPUC to increase customers' rates by an average of 7.64 percent. Yankee Gas requested the increase primarily as a result of a proposed significant expansion of its gas delivery system in Connecticut. In May 2001, Yankee Gas announced $23 million of expansion projects in Connecticut, which would add approximately 70 miles of additional gas main when constructed. Additional projects, including the aforementioned expansion projects, are expected to increase Yankee Gas' construction expenditures to an annual amount in excess of $60 million through 2003, significantly in excess of previous levels. New Hampshire: On April 25, 2001, PSNH Funding LLC, a subsidiary of PSNH, sold $525 million of rate reduction bonds, at an average interest rate of 5.90 percent. The bonds, which were rated AAA by three credit agencies, were issued in three different tranches having maturity dates between one and 12 years. PSNH used the net proceeds of the issue to buydown and securitize $498 million of its over-market Seabrook Power Contract obligations, and securitize $18 million of Millstone 3 stranded costs. May 1, 2001, was designated as the beginning of electric competition (Competition Day) in New Hampshire. On that date, PSNH's average retail rates were reduced by an additional 11 percent resulting in a total rate decrease in excess of 15 percent from rates in effect on September 30, 2000, as required by the "Agreement to Settle PSNH Restructuring." PSNH's retail customers were also permitted to purchase generation service from third parties commencing on Competition Day. Massachusetts: In April 2001, the Massachusetts Department of Telecommunications and Energy approved WMECO's default service rates effective for the six-month periods July 1, 2001, through December 31, 2001, and January 1, 2002, through June 30, 2002. These six-month average rates ranged from $0.0749 per kilowatt-hour to $0.0855 per kilowatt-hour for the 2001 six-month period and $0.0669 per kilowatt- hour to $0.0763 per kilowatt-hour for the 2002 six-month period for WMECO's estimated 97 MW default service load. These rates were based on the results of a competitive bidding process. A contract was signed with the unaffiliated winning bidder on April 9, 2001. On May 17, 2001, WMECO Funding LLC, a subsidiary of WMECO, sold $155 million of rate reduction certificates at an interest rate of 6.59 percent. The certificates, which were rated AAA by three credit agencies, were issued in a single series with a maturity date in 2013. WMECO used the proceeds of the sale of the certificates to reduce its purchased-power obligations and to repay short-term debt. During September 2001, WMECO will issue a request for proposal to parties interested in supplying energy to WMECO's standard offer service customers beginning on January 1, 2002. For information regarding commitments and contingencies related to restructuring and rate matters, see Note 2A, "Commitments and Contingencies - Restructuring," to the consolidated financial statements. Nuclear Plant Performance Seabrook operated at a capacity factor of 75.2 percent through the first six months of 2001. The unit began a scheduled refueling outage on October 21, 2000. This outage was extended by approximately ten weeks as a result of repairs to a back-up diesel generator. Seabrook returned to service on January 28, 2001. On December 15, 2000, NU filed its divestiture plan for Seabrook with the New Hampshire Public Utilities Commission and the DPUC. An agent to administer the sales process is expected to be named by the end of August 2001, and NU believes the sale will be completed in 2002. Other Matters Other Commitments and Contingencies: For further information regarding other commitments and contingencies, see Note 2, "Commitments and Contingencies," to the consolidated financial statements. Forward Looking Statements: This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, 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 historical weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors. RESULTS OF OPERATIONS The components of significant income statement variances for the second quarter of 2001 and the first six months of 2001 are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 ---------------------- Second Six Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $ 168 12% $ 586 21% Operating Expenses: Fuel, purchased and net interchange power 214 27 577 37 Other operation (25) (12) (8) (2) Maintenance (11) (16) 27 22 Depreciation (9) (15) (9) (7) Amortization of regulatory assets, net 18 26 693 (a) Federal and state income taxes (1) (1) (19) (17) Taxes other than income taxes (6) (10) 12 10 Gain on sale of utility plant - - (654) (a) ---- --- ---- --- Total operating expenses 180 14 619 24 ---- --- ---- --- Operating income (12) (13) (33) (14) ---- --- ---- --- Other Income/(Loss): Gain related to Millstone sale - - 202 (a) Gain/(loss)on share repurchase contracts 8 (a) (35) (a) Nuclear related costs 16 (a) 18 (a) Other, net 16 (a) 9 (a) Income taxes (3) (13) (78) (a) ---- --- ---- --- Other income, net 37 (a) 116 (a) Interest charges, net (8) (11) (8) (5) Preferred dividends of subsidiaries (1) (38) (3) (41) ---- --- ---- --- Income before cumulative effect of accounting change 34 (a) 94 (a) ---- --- ---- --- Cumulative effect of accounting change, net of tax benefit - - (22) (a) ---- --- ---- --- Net income $ 34 (a)% $ 72 83% ==== === ==== === (a) Percent greater than 100. Comparison of the Second Quarter 2001 to the Second Quarter of 2000 Operating Revenues Total revenues increased by $168 million or 12 percent in the second quarter of 2001, compared with the same period in 2000, primarily due to higher revenues from the competitive energy companies ($225 million), higher Yankee revenues ($4 million), and higher regulated retail revenues ($9 million), partially offset by lower regulated wholesale revenues for the regulated subsidiaries ($60 million) and lower transmission revenues ($11 million). The competitive energy companies' increase is primarily due to higher revenues from Select Energy as a result of new contracts for energy services. The regulated retail increase is primarily due to higher retail sales ($13 million) and the increase in WMECO's standard offer service rate ($15 million), partially offset by 5 and 11 percent rate decreases for PSNH that were effective October 1, 2000 and May 1, 2001, respectively ($23 million). Regulated retail kilowatt-hour sales also increased by 3.1 percent in 2001. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 2001, primarily due to higher purchased energy and capacity costs as a result of higher sales for Select Energy ($201 million, of which $3 million represents purchases from other NU affiliates), Yankee expenses ($10 million) and higher purchased power costs for the regulated subsidiaries ($6 million). Other Operation and Maintenance Other operation and maintenance (O&M) expenses decreased by $36 million in 2001, primarily due to lower nuclear expenses ($52 million) as a result of the sale of the Millstone units at the end of the first quarter in 2001, partially offset by higher O&M expenses for the competitive energy companies ($13 million). Depreciation Depreciation expense decreased in 2001, primarily due to the sale of the Millstone units at the end of the first quarter in 2001. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to higher amortization related to restructuring. Taxes Other Than Income Taxes Taxes other than income taxes decreased in 2001, primarily due to lower local property taxes as a result of the sale of the Millstone units in the first quarter of 2001. Gain/(Loss) On Share Repurchase Contracts In the second quarter of 2001, NU recorded a noncash gain of approximately $8 million associated with the marking to market of 10.1 million NU common shares acquired through forward share repurchase arrangements. Nuclear Related Costs Nuclear related costs decreased in 2001, primarily due to costs associated with the settlement of Millstone litigation in 2000. Other, Net Other, net increased primarily due to costs associated with nonrecurring legal costs in 2000 ($5 million), higher environmental reserves in 2000 ($3 million) and the gain on the disposition of property for PSNH in 2001 ($4 million). Interest Charges, Net Interest charges, net decreased in 2001, primarily due to reacquisitions and retirements of long-term debt in 2001 and higher short-term borrowings in 2000 associated with asset transfers and the Yankee merger, partially offset by interest associated with the issuance of rate reduction bonds in 2001. Comparison of the First Six Months of 2001 to the First Six Months of 2000 Operating Revenues Total revenues increased by $586 million or 21 percent in the first six months of 2001, compared with the same period in 2000, primarily due to higher revenues from the competitive energy companies ($441 million) higher Yankee revenues ($144 million) and higher regulated retail revenues ($34 million), partially offset by lower transmission revenues ($23 million) and lower wholesale regulated revenues ($11 million). The competitive energy companies' increase is primarily due to higher revenues from Select Energy as a result of new contracts for energy services. The regulated retail increase is primarily due to higher retail sales ($36 million) and the increase in WMECO's standard offer service rate ($29 million), partially offset by the 5 and 11 percent rate decreases for PSNH that were effective October 1, 2000 and May 1, 2001, respectively ($34 million). Regulated retail kilowatt-hour sales also increased by 2.2 percent in 2001. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 2001, primarily due to higher purchased energy and capacity costs as a result of higher sales for Select Energy ($393 million, of which $9 million represents purchases from other NU affiliates), Yankee expenses ($102 million) and higher purchased power costs for the regulated subsidiaries ($82 million). Other Operation and Maintenance Other O&M expenses increased $19 million in 2001, primarily due to higher O&M expenses for the competitive energy companies ($39 million), partially offset by lower nuclear expenses ($18 million) as a result of the sale of the Millstone units at the end of the first quarter. Depreciation Depreciation expense decreased in 2001, primarily due to the sale of the Millstone units at the end of the first quarter of 2001. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to the amortization in 2001 related to the gain on sale of the Millstone units by CL&P and WMECO ($654 million) and higher amortization related to restructuring. Federal and State Income Taxes Federal and state income taxes combined increased in 2001, primarily due to the tax impacts of the Millstone sale. Taxes Other Than Income Taxes Taxes other than income taxes increased in 2001, primarily due to higher Connecticut gross earnings taxes ($14 million) resulting from the phase-in of restructuring in Connecticut in 2000, partially offset by lower property taxes ($4 million). Gain on Sale of Utility Plant NU recorded gains on the sale of CL&P's and WMECO's ownership interests in Millstone. A corresponding amount of amortization expense was recorded. Gain Related to Millstone Sale NU recognized an after-tax gain of approximately $125 million primarily related to the sale of the Millstone 3 interests of PSNH and several unaffiliated owners. Nuclear Related Costs Nuclear related costs decreased in 2001, primarily due to the CL&P/WMECO settlement in 2000 of Millstone litigation. Other, Net Other, net increased primarily due to costs associated with nonrecurring legal costs in 2000 ($5 million), higher environmental reserves in 2000 and the gain on the disposition of property for PSNH in 2001 ($4 million), partially offset by lower miscellaneous interest income in 2001. Interest Charges, Net Interest charges, net decreased in 2001, primarily due to reacquisitions and retirements of long-term debt and higher short-term borrowings in 2000 associated with asset transfers and the Yankee merger, partially offset by the interest expense associated with the issuance of rate reduction bonds in 2001. Gain/(Loss) on Share Repurchase Contracts In the first half of 2001, NU recorded a net noncash charge of approximately $35 million related to the forward purchase of 10.1 million NU common shares in December 1999 and January 2000. Under the new accounting standard EITF Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," NU was required to recognize a net charge for the difference between the average purchase price and the price of the NU shares upon the closing of these forward repurchase arrangements, plus carrying charges. Cumulative Effect of Accounting Change, Net of Tax Benefit The cumulative effect of accounting change, net of tax benefit, recorded in 2001, represents the effect of the adoption of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ($22 million). REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Northeast Utilities: We have reviewed the accompanying consolidated balance sheet of Northeast Utilities (a Massachusetts trust) and subsidiaries as of June 30, 2001, and the related consolidated statements of income for the three and six-month periods ended June 30, 2001 and 2000 and the consolidated statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet and consolidated statement of capitalization as of December 31, 2000 and the related consolidated statements of income, comprehensive income, shareholders' equity, cash flows, and income taxes for the year then ended (not presented herein), and, in our report dated January 23, 2001 (except with respect to the matters discussed in Note 15, as to which the date is March 13, 2001), we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP Arthur Andersen LLP Hartford, Connecticut August 9, 2001 THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ------------- ------------- (Thousands of Dollars) <S> <C> <C> ASSETS - ------ Utility Plant, at Original Cost: Electric................................................ $ 3,047,411 $ 5,756,098 Less: Accumulated provision for depreciation......... 1,224,771 4,210,429 ------------- ------------- 1,822,640 1,545,669 Construction work in progress........................... 114,010 128,835 Nuclear fuel, net....................................... 2,625 79,672 ------------- ------------- Total net utility plant.............................. 1,939,275 1,754,176 ------------- ------------- Other Property and Investments: Nuclear decommissioning trusts, at market............... 6,077 536,912 Investments in regional nuclear generating companies, at equity................................... 39,182 41,395 Other, at cost.......................................... 71,451 33,708 ------------- ------------- 116,710 612,015 ------------- ------------- Current Assets: Cash.................................................... 611 5,461 Investment in securitizable assets...................... 40,599 98,146 Notes receivable from affiliated companies.............. 177,100 38,000 Receivables, net........................................ 232,812 29,245 Accounts receivable from affiliated companies........... 53,167 103,763 Accrued utility revenues................................ 7,554 - Fuel, materials and supplies, at average cost........... 33,625 36,332 Prepayments and other................................... 5,255 32,291 ------------- ------------- 550,723 343,238 ------------- ------------- Deferred Charges: Regulatory assets....................................... 2,046,161 1,835,967 Prepaid pension......................................... 202,839 170,672 Unamortized debt expense................................ 6,359 14,794 Other................................................... 56,939 33,336 ------------- ------------- 2,312,298 2,054,769 ------------- ------------- Total Assets.............................................. $ 4,919,006 $ 4,764,198 ============= ============= </Table> The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ------------- ------------- (Thousands of Dollars) <S> <C> <C> CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock, $10 par value - authorized 24,500,000 shares; 7,584,884 shares outstanding in 2001 and 2000......................................... $ 75,849 $ 75,849 Capital surplus, paid in.................................. 413,743 413,192 Retained earnings......................................... 267,272 243,197 Accumulated other comprehensive income.................... 204 506 ------------- ------------- Total common stockholder's equity................ 757,068 732,744 Preferred stock........................................... 116,200 116,200 Long-term debt............................................ 821,365 1,072,688 ------------- ------------- Total capitalization............................. 1,694,633 1,921,632 ------------- ------------- Rate Reduction Bonds........................................ 1,438,400 - ------------- ------------- Minority Interest in Consolidated Subsidiary................ - 100,000 ------------- ------------- Obligations Under Capital Leases............................ 15,779 39,910 ------------- ------------- Current Liabilities: Notes payable to banks.................................... - 115,000 Long-term debt and preferred stock - current portion...... - 160,000 Obligations under capital leases - current portion........ 507 89,959 Accounts payable.......................................... 133,887 153,944 Accounts payable to affiliated companies.................. 115,463 122,106 Accrued taxes............................................. 79,828 32,901 Accrued interest.......................................... 30,870 13,995 Other..................................................... 25,963 31,324 ------------- ------------- 386,518 719,229 ------------- ------------- Deferred Credits and Other Long-term Liabilities: Accumulated deferred income taxes......................... 840,321 977,439 Accumulated deferred investment tax credits............... 97,297 99,771 Decommissioning obligation - Millstone 1.................. - 580,320 Deferred contractual obligations.......................... 150,069 160,590 Other..................................................... 295,989 165,307 ------------- ------------- 1,383,676 1,983,427 ------------- ------------- Commitments and Contingencies (Note 2) Total Capitalization and Liabilities........................ $ 4,919,006 $ 4,764,198 ============= ============= </Table> The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <Table> <Caption> Three Months Ended Six Months Ended June 30, June 30, ------------------- ----------------------- 2001 2000 2001 2000 --------- --------- ----------- ----------- (Thousands of Dollars) <S> <C> <C> <C> <C> Operating Revenues................................. $610,275 $683,585 $1,344,180 $1,431,561 --------- --------- ----------- ----------- Operating Expenses: Operation - Fuel, purchased and net interchange power..... 337,164 392,286 763,966 822,710 Other......................................... 73,081 99,708 171,625 201,036 Maintenance...................................... 18,909 39,122 65,753 66,701 Depreciation..................................... 22,204 28,876 51,108 61,396 Amortization of regulatory assets, net........... 60,773 18,721 619,016 26,439 Federal and state income taxes................... 26,606 27,359 48,939 65,950 Taxes other than income taxes.................... 30,030 34,790 70,226 68,585 Gain on sale of utility plant.................... - - (530,724) - --------- --------- ----------- ----------- Total operating expenses................... 568,767 640,862 1,259,909 1,312,817 --------- --------- ----------- ----------- Operating Income................................... 41,508 42,723 84,271 118,744 --------- --------- ----------- ----------- Other Income/(Loss): Gain related to Millstone sale................... - - 29,402 - Other, net....................................... 5,246 (13,737) 1,819 (16,083) Income taxes..................................... 6,830 14,466 (1,035) 15,722 --------- --------- ----------- ----------- Other income/(loss), net................... 12,076 729 30,186 (361) --------- --------- ----------- ----------- Income before interest charges............. 53,584 43,452 114,457 118,383 --------- --------- ----------- ----------- Interest Charges: Interest on long-term debt....................... 35,031 22,030 56,361 46,129 Other interest................................... (259) 2,236 984 3,425 --------- --------- ----------- ----------- Interest charges, net...................... 34,772 24,266 57,345 49,554 --------- --------- ----------- ----------- Net Income......................................... $ 18,812 $ 19,186 $ 57,112 $ 68,829 ========= ========= =========== =========== </Table> The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <Table> <Caption> Six Months Ended June 30, ----------------------- 2001 2000 ------------ ---------- (Thousands of Dollars) <S> <C> <C> Operating Activities: Net income................................................. $ 57,112 $ 68,829 Adjustments to reconcile to net cash flows (used in)/provided by operating activities: Depreciation............................................. 51,108 61,396 Deferred income taxes and investment tax credits, net.... (127,859) 11,682 Amortization of regulatory assets, net................... 619,016 26,439 Gain on sale of utility plant............................ (530,724) - Net other (uses)/sources of cash......................... (84,138) 35,206 Changes in working capital: Receivables and accrued utility revenues................. (160,525) (103,002) Fuel, materials and supplies............................. 2,707 (489) Accounts payable......................................... (26,700) 147,723 Accrued taxes............................................ 46,927 (131,928) Investments in securitizable assets...................... 57,547 41,691 Other working capital (excludes cash).................... 38,550 (59,415) ------------ ---------- Net cash flows (used in)/provided by operating activities.... (56,979) 98,132 ------------ ---------- Investing Activities: Investments in plant: Electric utility plant................................... (113,734) (80,495) Nuclear fuel............................................. (648) (13,851) ------------ ---------- Net cash flows used for investments in plant............... (114,382) (94,346) Investment in NU system Money Pool......................... (139,100) (36,700) Investments in nuclear decommissioning trusts.............. (95,263) (24,336) Other investment activities, net........................... (35,530) 560 Net proceeds from the sale of utility plant................ 832,353 686,807 Buyout/buydown of IPP contracts............................ (1,028,802) - ------------ ---------- Net cash flows (used in)/provided by investing activities.... (580,724) 531,985 ------------ ---------- Financing Activities: Net decrease in short-term debt............................ (115,000) (11,700) Issuance of rate reduction bonds........................... 1,438,400 (179,071) Retirement of capital lease obligation..................... (145,800) - Retirement of monthly income preferred securities.......... (100,000) - Reacquisitions and retirements of long-term debt........... (411,932) (99,539) Repurchase of common shares................................ - (300,000) Cash dividends on preferred stock.......................... (2,779) (4,622) Cash dividends on common stock............................. (30,036) (25,000) ------------ ---------- Net cash flows provided by/(used in) financing activities.... 632,853 (619,932) ------------ ---------- Net (decrease)/increase in cash for the period............... (4,850) 10,185 Cash - beginning of period................................... 5,461 364 ------------ ---------- Cash - end of period......................................... $ 611 $ 10,549 ============ ========== </Table> The accompanying notes are an integral part of these financial statements. THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations CL&P is a wholly owned subsidiary of NU. This discussion should be read in conjunction with NU's management's discussion and analysis of financial condition and results of operations, consolidated financial statements and footnotes in this Form 10-Q, the First Quarter 2001 Form 10-Q, the current report on Form 8-K dated April 11, 2001, and the NU 2000 Form 10-K. RESULTS OF OPERATIONS The components of significant income statement variances for the second quarter of 2001 and the first six months of 2001 are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 ---------------------- Second Six Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $(73) (11)% $ (87) (6)% Operating Expenses: Fuel, purchased and net interchange power (55) (14) (59) (7) Other operation (26) (27) (29) (15) Maintenance (20) (52) (1) (1) Depreciation (7) (23) (11) (17) Amortization of regulatory assets, net 42 (a) 593 (a) Federal and state income taxes (1) (3) (17) (26) Taxes other than income taxes (5) (14) 2 2 Gain on sale of utility plant - - (531) (a) ---- --- ----- --- Total operating expenses (72) (11) (53) (4) ---- --- ----- --- Operating income (1) (3) (34) (29) ---- --- ----- --- Other Income/(Loss): Gain related to Millstone sale - - 29 (a) Other, net 19 (a) 18 (a) Income taxes (8) (53) (16) (a) ---- --- ----- --- Other income, net 11 (a) 31 (a) Interest charges, net 11 43 8 16 ---- --- ----- --- Net income $ - - % $ (11) (17)% ==== === ===== === (a) Percent greater than 100. Comparison of the Second Quarter 2001 to the Second Quarter of 2000 Operating Revenues Total revenues decreased by $73 million or 11 percent in the second quarter of 2001, compared with the same period in 2000, primarily due to lower wholesale revenues ($82 million) and lower other electric revenues ($8 million), partially offset by higher retail revenues ($17 million). Wholesale revenues were lower primarily as a result of the sale of the Millstone units at the end of the first quarter of 2001. Other electric revenues decreased primarily due to lower transmission revenues. Retail revenues increased primarily due to higher retail sales. Retail sales increased 4.2 percent compared to the second quarter of 2000. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2001, primarily due to lower purchased power costs resulting from the buydown and buyout of various contracts. Other Operation and Maintenance Other O&M expenses decreased $46 million in 2001, primarily due to lower nuclear expenses ($31 million) as a result of the sale of the Millstone units at the end of the first quarter of 2001, lower distribution maintenance expenses ($4 million) and lower transmission expenses ($9 million). Depreciation Depreciation decreased in 2001, primarily due to the sale of the Millstone units. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to higher amortization related to restructuring. Federal and State Income Taxes Federal and state income taxes combined increased in 2001, primarily due to higher taxable income. Taxes Other Than Income Taxes Taxes other than income taxes decreased in 2001, primarily due to lower local property taxes as a result of the sale of the Millstone units. Other, Net Other, net increased in 2001, primarily due to the settlement, in 2000, of Millstone-related litigation, net of insurance proceeds ($9 million) and a write-off associated with the former Connecticut Municipal Electric Energy Cooperative (CMEEC) nuclear entitlement ($3 million) in 2000 and higher miscellaneous income in 2001. Interest Charges, Net Interest charges, net increased in 2001, primarily due to the interest expense associated with the issuance, in 2001, of rate reduction bonds, partially offset by lower long-term debt outstanding as a result of reacquisitions and retirements of long-term debt in 2001. Comparison of the First Six Months of 2001 to the First Six Months of 2000 Operating Revenues Total revenues decreased by $87 million or 6 percent in the first six months of 2001, compared with the same period in 2000, primarily due to lower wholesale revenues ($98 million) and lower other electric revenues ($16 million), partially offset by higher retail revenues ($26 million). Wholesale revenues were lower primarily as a result of the sale of the Millstone units at the end of the first quarter of 2001. Other electric revenues decreased primarily due to lower transmission revenues. Retail revenues increased primarily due to higher retail sales. Retail sales increased 2.9 percent compared to 2000. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2001, primarily due to lower purchased power costs resulting from the buydown and buyout of various contracts. Other Operation and Maintenance Other O&M expenses decreased by $30 million in 2001, primarily due to lower nuclear expenses ($11 million) as a result of the sale of the Millstone units and lower transmission expenses ($18 million). Depreciation Depreciation decreased in 2001, primarily due to the sale of the Millstone units. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to the amortization in 2001 of the gain on sale of the Millstone units ($531 million) and higher amortization related to restructuring. Gain on Sale of Utility Plant CL&P recorded a gain on the sale of its ownership share in the Millstone units. A corresponding amount of amortization expense was recorded. Gain Related to Millstone Sale CL&P recognized a gain related to the former CMEEC's portion of Millstone 2. Other, Net Other, net increased in 2001, primarily due to the settlement, in 2000, of Millstone-related litigation, net of insurance proceeds ($9 million) and a write-off associated with the former CMEEC nuclear entitlement ($6 million). Interest Charges, Net Interest charges, net increased in 2001, primarily due to the interest expense associated with the issuance, in 2001, of rate reduction bonds, partially offset by lower long-term debt outstanding as a result of reacquisitions and retirements of long-term debt in 2001. LIQUIDITY At the end of the first quarter of 2001, CL&P received, in excess of, $1.4 billion of cash proceeds from securitization. CL&P utilized most of the proceeds from this transaction by the end of the second quarter of 2001. Approximately $1 billion was used to buyout or buydown 15 high-cost, long-term purchased-power contracts CL&P had with certain independent power producers. CL&P and WMECO used another $180 million to repay their respective obligations under the Niantic Bay Fuel Trust. CL&P used $100 million to repay the notes associated with its monthly income preferred securities, used a portion of the proceeds to repay all but $199 million of its first mortgage bonds, and also used $170 million to repay its obligation related to the receivables program. CL&P returned approximately $15 million to the parent company in the first half of 2001 in the form of dividends. Primarily as a result of the cash held by the parent company and another $177 million held by CL&P as of June 30, 2001, CL&P, NU, WMECO, and Yankee Gas had no borrowings outstanding under their aggregate $710 million of lines of credit as of June 30, 2001. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ------------- ------------- (Thousands of Dollars) <S> <C> <C> ASSETS - ------ Utility Plant, at Cost: Electric................................................ $ 1,407,909 $ 1,505,967 Other................................................... 6,221 - ------------- ------------- 1,414,130 1,505,967 Less: Accumulated provision for depreciation......... 677,508 711,340 ------------- ------------- 736,622 794,627 Construction work in progress........................... 31,989 27,251 Nuclear fuel, net....................................... - 1,924 ------------- ------------- Total net utility plant.............................. 768,611 823,802 ------------- ------------- Other Property and Investments: Nuclear decommissioning trusts, at market............... - 7,362 Investments in regional nuclear generating companies and subsidiary company, at equity............ 9,670 16,293 Other, at cost.......................................... 14,673 3,225 ------------- ------------- 24,343 26,880 ------------- ------------- Current Assets: Cash and cash equivalents............................... 6,237 115,135 Receivables, net........................................ 70,950 71,992 Accounts receivable from affiliated companies........... 11,355 2,798 Taxes receivable from affiliated companies.............. 212,386 9,983 Accrued utility revenues................................ 36,957 41,844 Fuel, materials and supplies, at average cost........... 39,849 28,760 Prepayments and other................................... 23,692 14,750 ------------- ------------- 401,426 285,262 ------------- ------------- Deferred Charges: Regulatory assets....................................... 989,053 924,847 Deferred receivable from affiliated company............. - 3,240 Unamortized debt expense................................ 10,300 9,067 Other................................................... 12,656 9,096 ------------- ------------- 1,012,009 946,250 ------------- ------------- Total Assets.............................................. $ 2,206,389 $ 2,082,194 ============= ============= </Table> The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ------------- ------------- (Thousands of Dollars) <S> <C> <C> CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock, $1 par value - authorized 100,000,000 shares; 388 shares outstanding in 2001, and 1,000 shares outstanding in 2000.......... $ - $ 1 Capital surplus, paid in................................ 165,000 424,909 Retained earnings....................................... 147,665 123,177 Accumulated other comprehensive income.................. 658 1,207 ------------- ------------- Total common stockholder's equity.............. 313,323 549,294 Long-term debt.......................................... 407,285 407,285 ------------- ------------- Total capitalization........................... 720,608 956,579 ------------- ------------- Rate Reduction Bonds...................................... 525,000 - ------------- ------------- Obligations Under Seabrook Power Contracts and Other Capital Leases................................. 72,879 91,702 ------------- ------------- Current Liabilities: Notes payable to affiliated company..................... 26,200 - Preferred stock - current portion............ - 24,268 Obligations under Seabrook Power Contracts and other capital leases - current portion....................... 25,907 537,528 Accounts payable........................................ 45,244 45,847 Accounts payable to affiliated companies................ 230,941 54,157 Accrued taxes........................................... 17,331 656 Accrued interest........................................ 13,919 4,962 Other................................................... 9,716 13,112 ------------- ------------- 369,258 680,530 ------------- ------------- Deferred Credits and Other Long-term Liabilities: Accumulated deferred income taxes....................... 379,261 179,723 Accumulated deferred investment tax credits............. 16,708 27,348 Deferred contractual obligations........................ 38,935 41,499 Deferred pension costs.................................. 38,968 41,216 Deferred revenue from affiliated company................ - 3,240 Other................................................... 44,772 60,357 ------------- ------------- 518,644 353,383 ------------- ------------- Commitments and Contingencies (Note 2) Total Capitalization and Liabilities...................... $ 2,206,389 $ 2,082,194 ============= ============= </Table> The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <Table> <Caption> Three Months Ended Six Months Ended June 30, June 30, --------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ----------- (Thousands of Dollars) <S> <C> <C> <C> <C> Operating Revenues................................. $ 286,799 $ 326,458 $ 627,634 $ 655,152 ---------- ---------- ---------- ----------- Operating Expenses: Operation - Fuel, purchased and net interchange power..... 181,083 212,809 418,763 423,339 Other......................................... 33,096 30,520 63,995 63,542 Maintenance...................................... 19,304 12,607 34,794 24,566 Depreciation..................................... 11,296 10,727 21,810 23,049 Amortization of regulatory assets, net........... 1,438 11,469 12,905 22,939 Federal and state income taxes................... 10,283 12,759 18,588 25,812 Taxes other than income taxes.................... 9,574 11,133 21,138 22,229 ---------- ---------- ---------- ----------- Total operating expenses................... 266,074 302,024 591,993 605,476 ---------- ---------- ---------- ----------- Operating Income................................... 20,725 24,434 35,641 49,676 ---------- ---------- ---------- ----------- Other Income/(Loss): Gain related to Millstone sale................... - - 25,913 - Other, net....................................... 4,393 1,851 12,575 8,365 Income taxes..................................... 3,020 (1,755) (10,088) (5,188) ---------- ---------- ---------- ----------- Other income, net.......................... 7,413 96 28,400 3,177 ---------- ---------- ---------- ----------- Income before interest charges............. 28,138 24,530 64,041 52,853 ---------- ---------- ---------- ----------- Interest Charges: Interest on long-term debt....................... 12,747 10,307 20,349 21,104 Other interest................................... (126) (29) (187) 66 ---------- ---------- ---------- ----------- Interest charges, net...................... 12,621 10,278 20,162 21,170 ---------- ---------- ---------- ----------- Net Income......................................... $ 15,517 $ 14,252 $ 43,879 $ 31,683 ========== ========== ========== =========== </Table> The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <Table> <Caption> Six Months Ended June 30, ------------------------ 2001 2000 ------------ ----------- (Thousands of Dollars) <S> <C> <C> Operating activities: Net income................................................. $ 43,879 $ 31,683 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation............................................. 21,810 23,049 Deferred income taxes and investment tax credits, net.... 186,753 2,129 Net deferral of recoverable energy costs................. (28,300) (16,786) Amortization of regulatory assets, net................... 12,905 22,939 Gain on sale of utility plant............................ (25,012) - Net other sources/(uses) of cash......................... 8,393 (10,815) Changes in working capital: Receivables and accrued utility revenues................. (2,628) 8,809 Fuel, materials and supplies............................. (11,089) 5,200 Accounts payable......................................... 176,181 3,884 Accrued taxes............................................ 16,675 27,965 Taxes receivable......................................... (202,403) - Other working capital (excludes cash).................... (3,381) (8,535) ------------ ----------- Net cash flows provided by operating activities.............. 193,783 89,522 ------------ ----------- Investing Activities: Investments in plant: Electric utility plant................................... (46,332) (26,596) Nuclear fuel............................................. (37) (4) ------------ ----------- Net cash flows used for investments in plant............... (46,369) (26,600) Investment in nuclear decommissioning trusts............... (1,625) (320) Other investment activities, net........................... (4,825) 586 ------------ ----------- Net cash flows used in investing activities.................. (52,819) (26,334) ------------ ----------- Financing Activities: Net increase in short-term debt............................ 26,200 - Issuance of rate reduction bonds........................... 525,000 - Repurchase of common shares................................ (260,000) - Reacquisitions and retirements of preferred stock.......... (24,268) (25,000) Buydown of capital lease obligation........................ (497,508) - Cash dividends on preferred stock.......................... (1,286) (2,650) Cash dividends on common stock............................. (18,000) - ------------ ----------- Net cash flows used in financing activities.................. (249,862) (27,650) ------------ ----------- Net (decrease)/increase in cash and cash equivalents......... (108,898) 35,538 Cash and cash equivalents - beginning of period.............. 115,135 182,588 ------------ ----------- Cash and cash equivalents - end of period.................... $ 6,237 $ 218,126 ============ =========== </Table> The accompanying notes are an integral part of these financial statements. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations PSNH is a wholly owned subsidiary of NU. This discussion should be read in conjunction with NU's management's discussion and analysis of financial condition and results of operations, consolidated financial statements and footnotes in this Form 10-Q, the First Quarter 2001 Form 10-Q, the current report on Form 8-K dated April 25, 2001, and the NU 2000 Form 10-K. RESULTS OF OPERATIONS The components of significant income statement variances for the second quarter of 2001 and the first six months of 2001 are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 ---------------------- Second Six Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $ (40) (12)% $(28) (4)% Operating Expenses: Fuel, purchased and net interchange power (32) (15) (5) (1) Other operation 2 8 - - Maintenance 7 53 10 42 Depreciation 1 5 (1) (5) Amortization of regulatory assets, net (10) (87) (10) (44) Federal and state income taxes (2) (19) (7) (28) Taxes other than income taxes (2) (14) (1) (5) Gain on sale of utility plant - - - - ---- --- ---- --- Total operating expenses (36) (12) (14) (2) ---- --- ---- --- Operating income (4) (15) (14) (28) ---- --- ---- --- Other Income/(Loss): Gain related to Millstone sale - - 26 (a) Other, net 2 (a) 4 50 Income taxes 5 (a) (5) (94) ---- --- ---- --- Other income, net 7 (a) 25 (a) Interest charges, net 2 23 (1) (5) ---- --- ---- --- Net income $ 1 9% $ 12 38% ==== === ==== === (a) Percent greater than 100. Comparison of the Second Quarter 2001 to the Second Quarter of 2000 Operating Revenues Total operating revenues decreased $40 million or 12 percent in the second quarter of 2001, compared with the same period of 2000, primarily due to lower retail revenue ($22 million), lower wholesale revenues from lower capacity and energy sales to the market ($15 million) and lower miscellaneous revenues ($3 million). Retail revenues decreased due to 5 and 11 percent rate decreases that were effective October 1, 2000 and May 1, 2001, respectively ($23 million), partially offset by higher retail sales. Retail kilowatt-hour sales increased by 2.0 percent in 2001. Miscellaneous revenues decreased primarily due to lower transmission revenues ($3 million). Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2001, primarily due to lower purchased power expenses as a result of the lower wholesale sales, and lower expenses from NAEC as a result of the buydown of the Seabrook Power Contracts. Other Operation and Maintenance Other O&M expenses increased in 2001, primarily due to higher costs associated with fossil production ($10 million) and higher administrative and general expenses ($2 million), partially offset by lower transmission expense ($3 million). Federal and State Income Taxes Federal and state income taxes decreased in 2001, as compared to 2000, primarily due to lower book taxable income. Other, Net Other, net increased in 2001, primarily due to a $4 million gain on the disposition of property in 2001 and higher environmental reserves recorded in 2000. Interest Charges, Net Interest charges, net were higher in 2001, primarily due to the issuance of rate reduction bonds in 2001, partially offset by lower long-term debt outstanding in 2001. Comparison of the First Six Months of 2001 to the First Six Months of 2000 Operating Revenues Total operating revenues decreased $28 million or 4 percent in the first six months of 2001, compared to the same period of 2000, primarily due to lower retail revenues ($29 million) and lower miscellaneous revenues ($5 million), partially offset by higher wholesale revenues from higher capacity and energy sales to the market ($6 million). Retail revenues decreased due to 5 and 11 percent rate decreases that were effective October 1, 2000 and May 1, 2001, respectively ($34 million), partially offset by higher retail sales. Retail kilowatt-hour sales increased by 1.3 percent in 2001. Miscellaneous revenues decreased due to lower transmission revenues in 2001. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in 2001, primarily due to lower expenses from NAEC as a result of the buydown of the Seabrook Power Contracts, partially offset by higher purchased power expenses as a result of the higher wholesale sales. Other Operation and Maintenance Other O&M expenses increased in 2001, primarily due to higher costs associated with fossil production ($12 million), the costs associated with the early retirement program ($2 million) and higher costs at Millstone 3 due to an extended outage ($1 million), partially offset by lower transmission expenses ($5 million). Federal and State Income Taxes Federal and state income taxes combined decreased in 2001, as compared to 2000, primarily due to lower book taxable income. Gain Related to Millstone Sale PSNH recognized a gain as a result of the sale of its ownership share in Millstone 3. Other, Net Other, net increased in 2001, primarily due to a gain on the disposition of property in 2001 and higher environmental reserves recorded in 2000. Interest Charges, Net Interest charges, net were lower in 2001, primarily due to lower long- term debt outstanding in 2001, partially offset by the issuance of rate reduction bonds in 2001. LIQUIDITY On April 25, 2001, PSNH issued $525 million of rate reduction bonds. PSNH used $24.3 million of the proceeds to repay the last of its preferred stock. PSNH used most of the remainder of its rate reduction bond proceeds to buydown its power contract with NAEC. PSNH returned approximately $278 million to the parent company in the first half of 2001 either in the form of dividends or subsidiary stock repurchases. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ------------- ------------ (Thousands of Dollars) <S> <C> <C> ASSETS - ------ Utility Plant, at Original Cost: Electric................................................ $ 553,715 $ 1,112,405 Less: Accumulated provision for depreciation......... 182,838 792,923 ------------- ------------ 370,877 319,482 Construction work in progress........................... 16,149 22,813 Nuclear fuel, net....................................... - 18,296 ------------- ------------ Total net utility plant.............................. 387,026 360,591 ------------- ------------ Other Property and Investments: Nuclear decommissioning trusts, at market............... - 144,921 Investments in regional nuclear generating companies, at equity................................... 10,590 11,117 Other, at cost.......................................... 4,903 6,249 ------------- ------------ 15,493 162,287 ------------- ------------ Current Assets: Cash.................................................... 1 985 Receivables, net........................................ 41,459 36,364 Accounts receivable from affiliated companies........... 7,330 16,146 Taxes receivable........................................ 12,882 - Accrued utility revenues................................ 13,298 21,222 Fuel, materials and supplies, at average cost........... 1,591 1,606 Prepayments and other................................... - 4,817 ------------- ------------ 76,561 81,140 ------------- ------------ Deferred Charges: Regulatory assets....................................... 324,100 392,247 Prepaid pension......................................... 52,696 45,473 Unamortized debt expense................................ 790 1,822 Other................................................... 4,197 4,258 ------------- ------------ 381,783 443,800 ------------- ------------ Total Assets.............................................. $ 860,863 $ 1,047,818 ============= ============ </Table> The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS <Table> <Caption> June 30, 2001 December 31, (Unaudited) 2000 ------------- ------------ (Thousands of Dollars) <S> <C> <C> CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock, $25 par value - authorized 1,072,471 shares; 509,696 shares outstanding in 2001 and 590,093 shares outstanding in 2000......... $ 12,742 $ 14,752 Capital surplus, paid in................................ 82,224 94,010 Retained earnings....................................... 60,670 62,952 Accumulated other comprehensive income.................. 98 182 ------------- ------------ Total common stockholder's equity.............. 155,734 171,896 Preferred stock......................................... - 35,000 Long-term debt.......................................... 100,435 139,425 ------------- ------------ Total capitalization........................... 256,169 346,321 ------------- ------------ Rate Reduction Bonds...................................... 155,000 - ------------- ------------ Obligations Under Capital Leases.......................... 99 5,935 ------------- ------------ Current Liabilities: Notes payable to banks.................................. - 110,000 Notes payable to affiliated company..................... 38,700 600 Long-term debt and preferred stock - current portion.... - 61,500 Obligations under capital leases - current portion...... 20 20,986 Accounts payable........................................ 49,891 25,298 Accounts payable to affiliated companies................ 6,061 8,611 Accrued taxes........................................... 243 8,471 Accrued interest........................................ 2,130 4,703 Other................................................... 8,248 7,671 ------------- ------------ 105,293 247,840 ------------- ------------ Deferred Credits and Other Long-term Liabilities: Accumulated deferred income taxes....................... 230,946 224,711 Accumulated deferred investment tax credits............. 4,166 17,580 Decommissioning obligation - Millstone 1................ - 136,130 Deferred contractual obligations........................ 39,697 42,519 Other................................................... 69,493 26,782 ------------- ------------ 344,302 447,722 ------------- ------------ Commitments and Contingencies (Note 2) Total Capitalization and Liabilities...................... $ 860,863 $ 1,047,818 ============= ============ </Table> The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <Table> <Caption> Three Months Ended Six Months Ended June 30, June 30, ------------------- ---------------------- 2001 2000 2001 2000 --------- --------- ---------- ----------- (Thousands of Dollars) <S> <C> <C> <C> <C> Operating Revenues............................. $106,866 $120,090 $ 250,166 $ 249,500 --------- --------- ---------- ----------- Operating Expenses: Operation - Fuel, purchased and net interchange power. 79,332 58,383 169,451 124,628 Other..................................... 13,352 15,811 32,147 34,313 Maintenance.................................. 2,677 10,503 12,549 18,048 Depreciation................................. 3,118 4,357 7,551 8,945 Amortization of regulatory assets............ (1,080) 14,167 125,410 21,485 Federal and state income taxes............... 2,752 2,733 5,909 8,195 Taxes other than income taxes................ 3,061 4,162 7,924 9,130 Gain on sale of utility plant................ - - (123,148) - --------- --------- ---------- ----------- Total operating expenses............... 103,212 110,116 237,793 224,744 --------- --------- ---------- ----------- Operating Income............................... 3,654 9,974 12,373 24,756 --------- --------- ---------- ----------- Other Income/(Loss): Other, net................................... 434 (1,810) (690) (1,624) Income taxes................................. (184) 940 434 4,600 --------- --------- ---------- ----------- Other income/(loss), net............... 250 (870) (256) 2,976 --------- --------- ---------- ----------- Income before interest charges......... 3,904 9,104 12,117 27,732 --------- --------- ---------- ----------- Interest Charges: Interest on long-term debt................... 1,621 3,317 4,615 8,108 Other interest............................... 765 2,831 2,665 5,615 --------- --------- ---------- ----------- Interest charges, net.................. 2,386 6,148 7,280 13,723 --------- --------- ---------- ----------- Net Income..................................... $ 1,518 $ 2,956 $ 4,837 $ 14,009 ========= ========= ========== ========== </Table> The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <Table> <Caption> Six Months Ended June 30, ----------------------- 2001 2000 ----------- ----------- (Thousands of Dollars) <S> <C> <C> Operating Activities: Net income................................................. $ 4,837 $ 14,009 Adjustments to reconcile to net cash flows provided by operating activities: Depreciation............................................. 7,551 8,945 Deferred income taxes and investment tax credits, net.... 8,183 (14,458) Net amortization of recoverable energy costs............. 3,437 4,742 Amortization of regulatory assets, net................... 125,410 21,485 Gain on sale of utility plant............................ (123,148) - Net other sources of cash................................ 23,256 2,051 Changes in working capital: Receivables and accrued utility revenues................. 11,645 (10,232) Fuel, materials and supplies............................. 15 1,517 Accounts payable......................................... 22,043 12,025 Accrued taxes............................................ (8,228) 19,223 Other working capital (excludes cash).................... (10,061) (18,690) ----------- ----------- Net cash flows provided by operating activities.............. 64,940 40,617 ----------- ----------- Investing Activities: Investments in plant: Electric utility plant................................... (15,315) (9,207) Nuclear fuel............................................. (140) (2,929) ----------- ----------- Net cash flows used for investments in plant............... (15,455) (12,136) Investments in nuclear decommissioning trusts.............. (21,767) (4,043) Other investment activities, net........................... 1,873 (14) Net proceeds from the sale of utility plant................ 177,821 185,787 Buyout of IPP contract..................................... (99,700) - Investment in NU system Money Pool......................... - (9,600) ----------- ----------- Net cash flows provided by investing activities.............. 42,772 159,994 ----------- ----------- Financing Activities: Net decrease in short-term debt............................ (71,900) (14,400) Issuance of rate reduction bonds........................... 155,000 - Reacquisitions and retirements of long-term debt........... (99,022) (94,150) Reacquisitions and retirements of preferred stock.......... (36,500) (1,500) Retirement of capital lease obligation..................... (34,200) - Repurchase of common shares................................ (15,000) (90,000) Cash dividends on preferred stock.......................... (1,076) (1,399) Cash dividends on common stock............................. (5,998) - ----------- ----------- Net cash flows used in financing activities.................. (108,696) (201,449) ----------- ----------- Net decrease in cash for the period.......................... (984) (838) Cash - beginning of period................................... 985 950 ----------- ----------- Cash - end of period......................................... $ 1 $ 112 =========== =========== </Table> The accompanying notes are an integral part of these financial statements. WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations WMECO is a wholly owned subsidiary of NU. This discussion should be read in conjunction with NU's management's discussion and analysis of financial condition and results of operations, consolidated financial statements and footnotes in this Form 10-Q, the First Quarter 2001 Form 10-Q, current reports on Form 8-K dated April 11, 2001, and May 17, 2001, and the NU 2000 Form 10-K. RESULTS OF OPERATIONS The components of significant income statement variances for the second quarter of 2001 and the first six months of 2001 are provided in the table below. Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 ---------------------- Second Six Quarter Percent Months Percent ------- ------- ------ ------- Operating Revenues $(13) (11)% $ 1 -% Operating Expenses: Fuel, purchased and net interchange power 21 36 45 36 Other operation (3) (15) (2) (6) Maintenance (8) (75) (6) (30) Depreciation (1) (28) (2) (16) Amortization of regulatory assets, net (15) (a) 104 (a) Federal and state income taxes - - (2) (28) Taxes other than income taxes (1) (26) (1) (13) Gain on sale of utility plant - - (123) (a) ---- ---- ---- --- Total operating expenses (7) (6) 13 6 ---- ---- ---- --- Operating income (6) (63) (12) (50) ---- ---- ---- --- Other Income/(Loss): Other, net 2 (a) 1 58 Income taxes (1) (a) (4) (91) ---- ---- ---- --- Other income, net 1 (a) (3) (a) Interest charges, net (4) (61) (6) (47) ---- ---- ---- --- Net income $ (1) (49)% $ (9) (65)% ==== ==== ==== === (a) Percent greater than 100. Comparison of the Second Quarter 2001 to the Second Quarter of 2000 Operating Revenues Total revenues decreased by $13 million or 11 percent in the second quarter of 2001, compared with the same period in 2000, primarily due to lower wholesale revenues ($23 million), partially offset by higher retail revenues ($10 million). Wholesale revenues decreased primarily due to the sale of the Millstone units at the end of the first quarter of 2001. Retail revenues were higher primarily due to an increase in the standard offer service rate. Retail sales were the same as the second quarter of 2000. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 2001, primarily due to higher purchased power costs associated with the standard offer supply. Other Operation and Maintenance Other O&M expenses decreased by $11 million in 2001, primarily due to lower nuclear expenses ($12 million) as a result of the sale of the Millstone units at the end of the first quarter of 2001. Depreciation Depreciation decreased in 2001, primarily due to the sale of the Millstone units. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net decreased in 2001, primarily due to lower amortization related to restructuring. Other, Net Other, net increased in 2001, primarily due to the settlement, in 2000, of Millstone-related litigation, net of insurance proceeds ($3 million). Interest Charges, Net Interest charges, net decreased in 2001, primarily due to lower long- term debt outstanding in 2001. Comparison of the First Six Months of 2001 to the First Six Months of 2000 Operating Revenues Total revenues were slightly higher by $1 million in the first six months of 2001, as compared to the same period in 2000. Higher retail revenues ($30 million) were partially offset by lower wholesale revenues ($29 million). Retail revenues were higher primarily due to an increase in the standard offer service rate. Retail sales were 0.9 percent higher in 2001. Wholesale revenues decreased due to the sale of the Millstone units at the end of the first quarter of 2001. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 2001, primarily due to higher purchased power costs associated with the standard offer supply. Other Operation and Maintenance Other O&M expenses decreased by $8 million in 2001, primarily due to lower nuclear expenses ($9 million) as a result of the sale of the Millstone units, and lower transmission expenses ($3 million), partially offset by higher administrative and general expenses ($6 million), primarily due to pension credits recorded in the second quarter of 2000 associated with the sale of certain fossil and hydroelectric generation assets. Depreciation Depreciation decreased in 2001, primarily due to the sale of the Millstone units. Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in 2001, primarily due to the amortization in 2001 of the gain on sale of the Millstone units ($123 million), partially offset by lower amortization related to restructuring. Gain on Sale of Utility Plant WMECO recorded a gain on the sale of its ownership share in the Millstone units. A corresponding amount of amortization expense was recorded. Other, Net Other, net increased in 2001, primarily due to the settlement, in 2000, of Millstone-related litigation, net of insurance proceeds ($3 million). Interest Charges, Net Interest charges, net decreased in 2001, primarily due to lower long- term debt outstanding in 2001. LIQUIDITY Although WMECO's earnings declined for the six months ended June 30, 2001, as compared to the same period in 2000, its cash flows provided by operating activities increased primarily due to the effects of the Millstone sale. The earnings decline in 2001 is attributed to the delay in the transfer of certain hydroelectric generation assets to an affiliated company in 2000. On May 17, 2001, WMECO issued $155 million of rate reduction certificates. WMECO utilized most of the proceeds from this transaction by the end of the second quarter of 2001. Approximately $100 million was used to buyout a high-cost, long-term purchased-power contract WMECO had with a certain independent power producer. WMECO and CL&P used another $180 million to repay their respective obligations under the Niantic Bay Fuel Trust. WMECO used $36.6. million of the proceeds to repay the last of its preferred stock and used $100 million to repay all of its first mortgage bonds and extinguish its mortgage indenture. As a result of WMECO repaying its first mortgage bonds, Fitch upgraded WMECO's unsecured debt ratings on July 9, 2001, to BBB+ from BBB. WMECO returned approximately $18 million to the parent company in the first half of 2001 either in the form of dividends or subsidiary stock repurchases. Primarily as a result of the cash held by the parent company and another $177 million held by CL&P as of June 30, 2001, WMECO, NU, CL&P, and Yankee Gas had no borrowings outstanding under their aggregate $710 million of lines of credit as of June 30, 2001. Northeast Utilities and Subsidiaries The Connecticut Light and Power Company and Subsidiaries Public Service Company of New Hampshire and Subsidiaries Western Massachusetts Electric Company and Subsidiary NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (All Companies) A. Presentation The accompanying unaudited financial statements should be read in conjunction with management's discussion and analysis of financial condition and results of operations in this Form 10-Q, the First Quarter 2001 Form 10-Q and the Annual Reports of Northeast Utilities (NU), The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO), which were filed as part of the NU 2000 Form 10-K, and the current reports on Form 8-K dated April 11, 2001, April 24, 2001, April 25, 2001, May 17, 2001, June 28, 2001, July 10, 2001, and July 24, 2001. The accompanying financial statements contain, in the opinion of management, all adjustments necessary to present fairly NU's and each NU system company's financial position as of June 30, 2001, the results of operations for the three-month and six-month periods ended June 30, 2001 and 2000, and statements of cash flows for the six-month periods ended June 30, 2001 and 2000. All adjustments are of a normal, recurring nature except those described in Notes 1C and 2. The results of operations for the three-month and six-month periods ended June 30, 2001 and 2000, are not indicative of the results expected for a full year. The consolidated financial statements of NU and of its subsidiaries include the accounts of all their respective subsidiaries. Intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior period data have been made to conform with the current period presentation. B. Regulatory Accounting and Assets The accounting policies of the NU system operating companies and the accompanying consolidated financial statements conform to accounting principles generally accepted in the United States applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." In 1999, CL&P and WMECO discontinued the application of SFAS No. 71 for the generation portion of their businesses. During the fourth quarter of 2000, PSNH discontinued the application of SFAS No. 71 for the generation portion of its business. In March 2001, CL&P and WMECO sold their ownership interests in the Millstone units, and the gain on the sale was used to offset recoverable nuclear costs. Also in March 2001, CL&P issued rate reduction bonds and used a portion of those proceeds to buyout or buydown certain contracts with independent power producers. These payments were recorded as regulatory assets. In April 2001, PSNH issued rate reduction bonds and used a portion of those proceeds to retire preferred stock and buydown the Seabrook Power Contracts with North Atlantic Energy Corporation (NAEC), an affiliated company. In May 2001, WMECO issued rate reduction certificates and used those proceeds to reduce its purchased-power obligations and to repay short-term debt. As a result of the issuance of rate reduction bonds and certificates, certain regulatory assets, which are collateral, have been separately segregated as securitized regulatory assets and are being collected through a specified reconciling customer charge. CL&P's, PSNH's and WMECO's transmission and distribution businesses will continue to be cost-based, and management believes the application of SFAS No. 71 to that portion of those businesses continues to be appropriate. Management also believes it is probable that the NU system operating companies will recover their investments in long-lived assets, including regulatory assets, through charges to their transmission and distribution customers. These costs will be recovered over a period of time ranging from 7 to 26 years, subject to certain adjustments. Stranded costs for CL&P and WMECO will be recovered through a transition charge over a 12-year period. PSNH has three categories of stranded costs. Part 1 costs are securitized regulatory assets that are recovered over the life of the rate reduction bonds. Part 2 costs are ongoing costs consisting of nuclear decommissioning and independent power producer costs that are recovered as incurred, over the time period PSNH is responsible for those costs. Part 3 costs are nonsecuritized regulatory assets which must be recovered by a recovery end date to be determined in accordance with the "Agreement to Settle PSNH Restructuring" (Settlement Agreement), or which will be written off as stipulated by that Settlement Agreement. Based on current projections, PSNH expects to fully recover all of its Part 3 costs by the recovery end date. In addition, all material regulatory assets are earning a return. The components of the NU system companies' regulatory assets are as follows: -------------------------------------------------------------- June 30, December 31, (Millions of Dollars) 2001 2000 -------------------------------------------------------------- Recoverable nuclear costs $1,509.7 $2,565.8 Securitized assets 1,375.3 - Income taxes, net 473.7 504.7 Unrecovered contractual obligations 79.1 255.8 Recoverable energy costs, net 351.5 332.5 Other 288.5 252.0 -------------------------------------------------------------- Totals $4,077.8 $3,910.8 -------------------------------------------------------------- C. New Accounting Standards Derivative Instruments: Effective January 1, 2001, NU adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. All derivative instruments have been identified and recorded at fair value effective January 1, 2001. In addition, for those derivative instruments which are hedging an identified risk, NU has designated and documented all hedging relationships anew. For those contracts that do not meet the hedging requirements, the changes in fair value of those contracts were recognized currently in earnings. As explained within Note 3, commodity derivatives that are utilized for trading purposes, are accounted for using the mark-to-market method, under Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." Transfer of Assets and Securitization: In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125." This statement revises the accounting standards for securitizations and other transfers and servicing of financial assets and collateral and requires certain disclosures. SFAS No. 140 is effective for transfers and servicing of financial assets occurring after March 31, 2001. This statement is also effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Business Combinations: In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This statement addresses financial accounting and reporting for business combinations. All business combinations in the scope of this statement are to be accounted for using the purchase method. Goodwill and Other Intangible Assets: Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. It requires that certain goodwill and intangible assets acquired after June 30, 2001, not be amortized and certain other goodwill and intangible assets not be amortized effective January 1, 2002. This statement also requires that goodwill will be subject to at least an annual assessment for impairment by applying a fair value-based test. Based on the goodwill and intangible assets maintained by the NU system companies, management believes that upon adoption of SFAS No. 142, annual goodwill amortization expense will be reduced by approximately $10.4 million. However, upon adoption of the impairment testing rules under SFAS No. 142, there may be a cumulative effect of an accounting change which management has not evaluated at this time. 2. COMMITMENTS AND CONTINGENCIES A. Restructuring (PSNH, WMECO) New Hampshire: In January 2001, the New Hampshire Supreme Court upheld a comprehensive restructuring order based on the Settlement Agreement. On April 16, 2001, two of the appellants requested a review of the New Hampshire Supreme Court decision by the United States Supreme Court (Court). On June 18, 2001, the Court refused to hear the appeal. In April 2001, the New Hampshire legislature passed a bill amending the existing restructuring legislation and materially changing a portion of the Settlement Agreement. This legislation was signed by the Governor of New Hampshire on May 22, 2001. The new legislation delays the sale of PSNH's approximately 1,200 megawatts of fossil and hydroelectric generation assets to no sooner than 33 months after May 1, 2001, the day customer choice was implemented in New Hampshire (Competition Day), or February 2004. The new legislation requires PSNH to supply transition service to residential and small commercial customers until at least 57 months after Competition Day, and requires that transition service be provided at fixed rates for certain classes of customers for the first 33 months after Competition Day. The old law would have required divestiture of PSNH's fossil and hydroelectric generation assets during 2001. The delay in the sale of PSNH's fossil and hydroelectric generation assets should minimize any deferrals caused by the provision for transition service at fixed prices. However, management cannot precisely quantify the impacts of the delay in the sale of PSNH's fossil and hydroelectric generation assets and the extension of transition service at fixed rates on its financial position, including the recovery of certain stranded costs, as well as its results of operations. Although PSNH no longer applies SFAS No. 71 for the generation portion of its business, it expects to fully recover all operating costs related to its generation assets, including a return, under the terms of the Settlement Agreement. In addition, management believes that an adverse impact related to the recovery of certain stranded costs is unlikely. The new legislation did not delay the planned sale of CL&P's and NAEC's shares of Seabrook. An agent to administer the sales process is expected to be named by the end of August 2001, and NU believes the sale will be completed in 2002. Massachusetts: During the first quarter of 2000 WMECO filed its first annual stranded cost reconciliation filing covering the period March 1, 1998 through December 31, 1999. The hearing and briefing processes related to this filing were completed during the second quarter of 2001. A Massachusetts Department of Telecommunications and Energy (DTE) decision is expected by the end of 2001. On March 30, 2001, WMECO also filed its second annual stranded cost reconciliation with the DTE for calendar year 2000 with the related review and hearing processes scheduled for the second half of 2001. The cumulative deferral of unrecovered stranded costs as filed, is approximately $4 million. Management believes these costs are fully recoverable. B. Long-Term Contractual Arrangements (Select Energy) Select Energy, Inc. (Select Energy) maintains long-term agreements to purchase energy in the normal course of business as part of its portfolio of resources to meet its actual or expected sales commitments. The aggregate amount of these purchase contracts was $2.1 billion at June 30, 2001. These contracts extend through 2005 as follows (millions of dollars): Year ---- 2001 $ 921.5 2002 717.1 2003 408.3 2004 41.2 2005 28.4 -------- Total $2,116.5 ======== 3. MARKET RISK AND RISK MANAGEMENT INSTRUMENTS (Select Energy, Yankee, Yankee Gas) Competitive Energy Subsidiaries: Select Energy provides both firm requirement energy services to its customers and engages in energy trading and marketing activities. Select Energy manages its exposure to risk from existing contractual commitments and provides risk management services to its customers through forward contracts, futures, over-the-counter swap agreements, and options (commodity derivatives). Select Energy has utilized the sensitivity analysis methodology to disclose the quantitative information for its commodity price risks. Sensitivity analysis provides a presentation of the potential loss of future earnings, fair values or cash flows from market risk-sensitive instruments over a selected time period due to one or more hypothetical changes in commodity prices, or other similar price changes. Commodity Price Risk - Trading Activities: As a market participant in the Northeast area of the United States, Select Energy conducts commodity-trading activities in electricity and its related products, natural gas and oil and, therefore, experiences net open positions. Select Energy manages these open positions with strict policies which limit its exposure to market risk and require daily reporting to management of potential financial exposure. Commodity derivatives utilized for trading purposes are accounted for using the mark-to-market method, under EITF No. 98-10. Under this methodology, these instruments are adjusted to market value, and the unrealized gains and losses are recognized in income in the current period in the consolidated statements of income as fuel, purchased and net interchange power and in the consolidated balance sheets as prepayments and other. The mark-to-market position at June 30, 2001, was a positive $68 million. Under sensitivity analysis, the fair value of the portfolio is a function of the underlying commodity, contract prices and market prices represented by each derivative commodity contract. For swaps, forward contracts and options, market value reflects management's best estimates considering over-the-counter quotations, time value and volatility factors of the underlying commitments. Exchange-traded futures and options are recorded at market, based on closing exchange prices. As of June 30, 2001, Select Energy has calculated the market price resulting from a 10 percent unfavorable change in forward market prices. That 10 percent change would result in approximately a $4 million decline in the fair value of the Select Energy trading portfolio. In the normal course of business, Select Energy also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include credit risk, which is not reflected in the sensitivity analysis above. Commodity Price Risk - Nontrading Activities: Select Energy utilizes derivative financial and commodity instruments (derivatives), including futures and forward contracts, to reduce market risk associated with fluctuations in the price of electricity and natural gas sold under firm commitments with certain customers. Select Energy also utilizes derivatives, including price swap agreements, call and put option contracts, and futures and forward contracts, to manage the market risk associated with a portion of its anticipated supply requirements. These derivative instruments have been designated as cash flow hedging instruments. When conducting sensitivity analysis of the change in the fair value of Select Energy's electricity, natural gas and oil nontrading portfolio, which would result from a hypothetical change in the future market price of electricity, natural gas and oil, the fair value of the contracts are determined from models which take into account estimated future market prices of electricity, natural gas and oil, the volatility of the market prices in each period, as well as the time value factors of the underlying commitments. In most instances, market prices and volatility are determined from quoted prices on the futures exchange. Select Energy has determined a hypothetical change in the fair value for its nontrading electricity, natural gas and oil contracts, assuming a 10 percent unfavorable change in forward market prices. As of June 30, 2001, an unfavorable 10 percent change in forward market price would have resulted in a decrease in fair value of approximately $17 million. The impact of a change in electricity, natural gas and oil prices on Select Energy's nontrading contracts on June 30, 2001, is not necessarily representative of the results that will be realized when these contracts are physically delivered. Select Energy also maintains natural gas service agreements with certain customers to supply gas at fixed prices for terms extending through 2003. Select Energy has hedged its gas supply risk under these agreements through NYMEX contracts. Under these contracts, the purchase price of a specified quantity of gas is effectively fixed over the term of the gas service agreements, which extend through 2003. As of June 30, 2001, the NYMEX contracts had a notional value of $75.2 million and a negative mark-to-market position of $17.2 million. Derivative Cash Flow Hedge Accounting: Derivative instruments recorded which were effective cash flow hedges resulted in an increase in other comprehensive income of $19.5 million upon the adoption of SFAS No. 133. During the first six months of 2001, $13.7 million was reclassified from other comprehensive income upon the conclusion of these hedged transactions and recognized in earnings. An additional $1 million was recognized in earnings for those derivatives that were determined to be ineffective. Also, during the second quarter of 2001, new cash flow hedge transactions were entered into which hedge cash flows through 2005. As a result of these new transactions and market value changes since January 1, 2001, other comprehensive income decreased by $34 million. Accumulated other comprehensive income at June 30, 2001 was a negative $27.3 million (decrease to equity) relating to hedged transactions and it is estimated that $19.9 million will be reclassified as a charge to earnings within the next twelve months. Cash flows from the hedge contracts are reported in the same category as cash flows from the hedged assets. These estimates do not include certain long-term energy and option-type contracts which management believes represent "normal purchases and sales." The accounting for these types of contracts has been cleared by the FASB in the second quarter of 2001 and will be implemented in the third quarter of 2001. Management does not believe that the recording of these transactions in accordance with the aforementioned FASB guidelines will have a material effect on the consolidated financial statements. Regulated Entities: Interest Rate Risk - Nontrading Activities: NU manages its interest rate risk exposure by maintaining a mix of fixed and variable rate debt. In addition, Yankee Energy System, Inc. (Yankee) has entered into an interest rate sensitive derivative. Yankee uses swap instruments with financial institutions to exchange fixed-rate interest obligations to a blend between fixed and variable-rate obligations without exchanging the underlying notional amounts. These instruments convert fixed interest rate obligations to variable rates. The notional amounts parallel the underlying debt levels and are used to measure interest to be paid or received and do not represent the exposure to credit loss. As of June 30, 2001, Yankee had outstanding agreements with a total notional value of $48 million and a negative mark-to- market position of $0.4 million. Commodity Price Risk - Nontrading Activities: Yankee Gas Services Company (Yankee Gas) maintains a master swap agreement with one customer to supply gas at fixed prices for a 10-year term extending through 2005. Under this master swap agreement, the purchase price of a specified quantity of gas is effectively fixed over the term of the gas service agreement, which extends through 2005. As of June 30, 2001, the commodity swap agreement had a notional value of $15.4 million and a negative mark-to- market position of $0.3 million, which is included within the $27.3 million reported for accumulated other comprehensive income related to hedging activities. 4. COMPREHENSIVE INCOME (NU, CL&P, PSNH, WMECO) The total comprehensive income, which includes all comprehensive income items, for the NU system is as follows: Six Months Ended June 30, ------------------------- 2001 2000 ---- ---- (Millions of Dollars) NU Consolidated $130.7 $86.8 CL&P 54.0 64.2 PSNH 42.0 29.0 WMECO 3.7 12.6 Accumulated other comprehensive income mark-to-market adjustments of NU's qualified cash flow hedging instruments are as follows: ------------------------------------------------------------------- (Millions of Dollars) June 30, 2001 ------------------------------------------------------------------- Balance at January 1, 2001 (Inception date) $ 19.5 ------ Hedged transactions recognized into earnings (12.8) Change in fair value (14.8) Cash flow transactions entered into for the period (19.2) ------ Net change associated with the current period hedging transactions (46.8) ------------------------------------------------------------------- Total included in accumulated other comprehensive income $(27.3) ------------------------------------------------------------------- 5. EARNINGS PER SHARE (NU) Earnings per share (EPS) is computed based upon the weighted average number of common shares outstanding during each period. Diluted EPS is computed on the basis of the weighted average number of common shares outstanding plus the potential dilutive effect if certain securities are converted into common stock. The following table sets forth the components of basic and diluted EPS: -------------------------------------------------------------------- (Millions of Dollars, Six Months Ended June 30, except share information) 2001 2000 -------------------------------------------------------------------- Income after interest charges $186.4 $95.5 Preferred dividends of subsidiaries 5.1 8.7 -------------------------------------------------------------------- Income before cumulative effect of accounting change $181.3 $86.8 Cumulative effect of accounting change, net of tax benefit (22.4) - -------------------------------------------------------------------- Net income $158.9 $86.8 -------------------------------------------------------------------- Basic EPS common shares outstanding (average) 138,910,719 139,476,432 Dilutive effect of employee stock options 346,249 579,178 -------------------------------------------------------------------- Diluted EPS common shares outstanding (average) 139,256,968 140,055,610 -------------------------------------------------------------------- Basic and Diluted EPS: Income before cumulative effect of accounting change $1.30 $0.62 Cumulative effect of accounting change, net of tax benefit (0.16) - -------------------------------------------------------------------- Net income $1.14 $0.62 -------------------------------------------------------------------- 6. SEGMENT INFORMATION (NU) The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries. The regulated utilities segment represented approximately 73 percent and 87 percent of the NU system's total revenues for the six months ended June 30, 2001 and 2000, respectively, and is comprised of several business units. Regulated utilities revenues primarily are derived from residential, commercial and industrial customers and are not dependent on any single customer. The competitive energy subsidiaries segment has two major customers, one unaffiliated company and CL&P. The purchases by these customers represented approximately 14 percent and 25 percent, respectively, of total competitive energy subsidiaries' revenues for the six months ended June 30, 2001. The purchases by these customers represented approximately 19 percent and 36 percent, respectively, of total competitive energy subsidiaries' revenues for the six months ended June 30, 2000. The competitive energy subsidiaries segment in the following table includes Select Energy Services, Inc. (formerly HEC Inc.), a provider of energy management, demand-side management and related consulting services for commercial, industrial and institutional electric companies and electric utility companies; Holyoke Water Power Company, a company engaged in the production and distribution of electric power; Northeast Generation Company, a corporation that acquires and manages generation facilities; Northeast Generation Services Company, a corporation that maintains and services any fossil or hydroelectric facility that is acquired or contracted with for fossil or hydroelectric generation services, and its subsidiaries and; Select Energy, a corporation engaged in the marketing, transportation, storage, and sale of energy commodities, at wholesale, in designated geographical areas and in the marketing of electricity to retail customers. Other, in the following table, includes the results of Mode 1 Communications, Inc., an investor in a fiber-optic communications network. Other also includes the results of the nonenergy related subsidiaries of Yankee. Interest expense included in Other primarily relates to the debt of NU parent. Inter-segment eliminations of revenues and expenses are also included in Other. - ------------------------------------------------------------------------- For the Six Months Ended June 30, 2001 - ------------------------------------------------------------------------- Competitive Eliminations (Millions of Regulated Utilities Energy and Dollars) Electric Gas Subsidiaries Other Total - ------------------------------------------------------------------------- Operating revenues $ 2,219.5 $ 240.4 $ 1,324.2 $(400.3) $ 3,383.8 Operating expenses (2,071.1) (222.7) (1,295.4) 407.2 (3,182.0) - ------------------------------------------------------------------------- Operating income 148.4 17.7 28.8 6.9 201.8 Other income/ (loss) 62.6 (0.1) 3.6 57.2 123.3 Interest charges (94.7) (7.0) (23.0) (14.0) (138.7) Preferred dividends (5.1) - - - (5.1) - ------------------------------------------------------------------------- Income before cumulative effect of accounting change 111.2 10.6 9.4 50.1 181.3 Cumulative effect of accounting change, net of tax benefit - - (22.0) (0.4) (22.4) - ------------------------------------------------------------------------- Net income/ (loss) $ 111.2 $ 10.6 $ (12.6) $ 49.7 $ 158.9 - ------------------------------------------------------------------------- Total assets $ 9,155.7 $ 848.4 $ 670.4 $(513.8) $10,160.7 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- For the Six Months Ended June 30, 2000 Competitive Eliminations (Millions of Regulated Utilities Energy and Dollars) Electric Gas Subsidiaries Other Total - ------------------------------------------------------------------------- Operating revenues $ 2,332.6 $ 91.3 $ 881.7 $(508.3) $ 2,797.3 Operating expenses (2,116.2) (84.1) (858.8) 496.3 (2,562.8) - ------------------------------------------------------------------------- Operating income/ (loss) 216.4 7.2 22.9 (12.0) 234.5 Other income/ (loss) 15.9 (1.7) 2.1 (8.9) 7.4 Interest charges (101.8) (5.1) (21.5) (18.0) (146.4) Preferred dividends (8.7) - - - (8.7) - ------------------------------------------------------------------------- Net income/ (loss) $ 121.8 $ 0.4 $ 3.5 $ (38.9) $ 86.8 - ------------------------------------------------------------------------- Total assets $ 8,466.4 $848.2 $ 720.5 $ 727.1 $10,762.2 - ------------------------------------------------------------------------- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. Merger-Related Shareholder Lawsuits An action was brought in the federal court in New York alleging that NU, Consolidated Edison, Inc. (Con Edison), and NU's Trustees violated their fiduciary duties and Section 14(a) of the Securities Exchange Act of 1934 by failing to disclose, in the joint proxy statement relating to the proposed merger between NU and Con Edison (Merger), material information about the Indian Point nuclear generating plant. To avoid a preliminary injunction proceeding in this action, and the possibility of the cancellation of the April 14, 2000, shareholders' vote on the Merger, Con Edison and NU sent a supplement to the joint proxy statement to the companies' shareholders concerning Indian Point issues. The parties recently reached a final settlement of this action, subject to court approval, by which a class will be certified, any counsel fees awarded by the court will be paid by Con Edison, the Section 14(a) claim will be dismissed with prejudice and the breach of fiduciary claim will be dismissed without prejudice. The court issued a preliminary order certifying the class action for settlement purposes and on July 13, 2001, entered judgment approving the settlement. Related class actions pending in the New York state courts have also been dismissed as moot. 2. Property Tax Litigation - City of Meriden, Connecticut In fiscal year 1996, both Yankee Gas and CL&P received revised property tax bills from the City of Meriden (City) for tax years 1991 through 1994. The revised tax bills reflected a reassessment of property using a different methodology than the method previously accepted by the City. As a result of the City's reassessment, CL&P's total assessment doubled, while Yankee Gas' nearly tripled. For the tax years 1995 through 1999, the City continued to assess the personal property of CL&P and Yankee Gas using the new method. Yankee Gas and CL&P filed a lawsuit against the City, which included, among other things, an appeal of the reassessments and a claim of wrongful assessment. A trial commenced in December 2000. Throughout the dispute with the City concerning the revaluation of personal property for the tax years 1991 through 1999, Yankee Gas and CL&P continued to pay their respective tax obligations to the City, however withholding 25 percent of that amount as allowed by law. On April 20, 2001, the Connecticut Superior Court ruled in favor of Yankee Gas and CL&P and ordered that the City refund a total of approximately $15.6 million to the two companies. This amount includes interest at 8 percent plus the payments made under protest. In total, the City was ordered to pay Yankee Gas $10.4 million and CL&P $5.2 million. On May 7, 2001, the City filed its appeal of the April 20, 2001 decision, raising nine separate issues for the Connecticut Appellate Court to consider. On May 8, 2001, and as amended on May 25, 2001, the City filed a motion to stay the execution of the judgment pending the appeal of the decision. On June 27, 2001, the City was ordered to pay Yankee Gas and CL&P by July 15, 2001, all interest on the judgment and also make monthly interest payments. Accordingly, the City's first payment was due July 15, 2001, in the approximate amount of $0.4 million and, thereafter, payments of approximately $0.1 million must be made by the 15th of each month. The July 2001 payment was not made per agreement of the parties, as settlement discussions are in process covering the lawsuit, all related appeals and any disputes relating to the companies' October 1, 2000 assessment. 3. Federal Energy Regulatory Commission (FERC) - Installed Capability (ICAP) Deficiency Charge On March 30, 2001, the First Circuit U.S. Appeals Court (First Circuit) granted a request for stay in the ICAP proceeding and, in response, FERC made effective a $0.17 per kilowatt-month charge for an indefinite period beginning April 1, 2001. On April 27, 2001, NU filed a request for a rehearing of FERC's order claiming that it was unlawful to put into effect a rate that has never been found to be just and reasonable under the Federal Power Act. On May 4, 2001, FERC denied the rehearing request. On June 4, 2001, the Independent System Operator (ISO) filed a proposed ICAP charge that would range from $2.00 to $4.87, depending on whether a load-serving entity had been deficient in prior months and on market conditions. The ISO requested that the proposed rate be made effective August 1, 2001, until it files a superseding proposal for implementation beginning in 2002. On June 8, 2001, the First Circuit issued its decision supporting the $8.75 charge and lifting its stay. The court permitted the FERC to reinstate the $8.75 charge "at once" or at a "future date." On June 15, 2001, NU filed a motion with FERC to reinstitute the $8.75 rate immediately to make it effective as of April 1, 2001 (the date specified in the order on appeal). A number of parties have filed pleadings both supporting and opposing immediate reinstatement of the $8.75 deficiency charge. On July 2, 2001, NU filed its appeal of the March 30, 2001, and May 4, 2001, FERC orders imposing the $0.17 rate from August 1, 2000 to April 1, 2001. 4. Yankee Gas Rate Filing On July 24, 2001, Yankee Gas filed a request with the Connecticut Department of Public Utility Control to raise the base rate that Yankee Gas charges for natural gas service by an average of 7.64 percent, or $29.2 million annually. If approved, the new rates would take effect January 1, 2002. Yankee Gas is also requesting approval of a special mechanism to recover future capital costs for an estimated $190 million system expansion effort, which is already under way, and construction of a new liquefied natural gas facility. In addition, Yankee Gas is proposing an earnings sharing mechanism under which all earnings in excess of 100 basis points, above an allowed return on equity, be shared 50 percent/50 percent between customers and shareholders. The rate filing also includes a service quality plan that would either reward or penalize Yankee Gas based on its performance relative to five service quality measures. The rate case will be conducted in two phases. The first phase will determine Yankee Gas' revenue requirements. A decision on Phase 1 is expected in late 2001. Phase 2 is expected to commence in early 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NU. At the Annual Meeting of Shareholders of NU held on June 28, 2001, the following eleven nominees were elected to serve on the Board of Trustees by the votes set forth below: For Withheld Total 1. Cotton M. Cleveland 112,932,772 2,851,595 115,784,367 2. Sanford Cloud, Jr. 112,984,106 2,800,261 115,784,367 3. E. Gail de Planque 113,009,834 2,774,533 115,784,367 4. John H. Forsgren 113,052,343 2,732,024 115,784,367 5. Raymond L. Golden 113,019,643 2,764,724 115,784,367 6. Elizabeth T. Kennan 112,821,779 2,962,588 115,784,367 7. Michael G. Morris 112,886,927 2,897,440 115,784,367 8. William J. Pape II 112,760,975 3,023,392 115,784,367 9. Robert E. Patricelli 112,988,008 2,796,359 115,784,367 10. John F. Swope 112,980,651 2,803,716 115,784,367 11. John F. Turner 113,000,749 2,783,618 115,784,367 NU's shareholders also adopted an employee share purchase plan. The vote approving such plan was 108,593,824 votes in favor and 5,787,587 votes against, with 1,402,956 abstentions and broker nonvotes. NU's shareholders also ratified the Board of Trustees' selection of Arthur Andersen LLP to serve as independent auditors of NU and its subsidiaries for 2001. The vote ratifying such selection was 112,667,082 votes in favor and 2,244,457 votes against, with 872,828 abstentions and broker nonvotes. CL&P. In a written Consent in Lieu of an Annual Meeting of Stockholders of CL&P (Consent) dated May 1, 2001, stockholders voted to fix the number of directors for the ensuing year at three. The vote fixing the number of directors at three was 7,584,884 shares in favor, representing 100 percent of the issued and outstanding shares of common stock of CL&P. Through the Consent, the following three directors were elected, each by a vote of 7,584,884 shares in favor, to serve on the Board of Directors for the ensuing year: David H. Boguslawski, Cheryl W. Grise, and Rodney O. Powell. PSNH. At the Annual Meeting of Stockholders of PSNH held on May 14, 2001, stockholders voted to fix the number of directors for the ensuing year at eight. The vote fixing the number of directors at eight was 388 shares in favor, representing 100 percent of the issued and outstanding shares of common stock of PSNH. At the Annual Meeting, the following eight directors were elected, each by a vote of 388 shares in favor, to serve on the Board of Directors for the ensuing year: David H. Boguslawski, John C. Collins, John H. Forsgren, Cheryl W. Grise, Gerald Letendre, Gary A. Long, Michael G. Morris, and Jane E. Newman. WMECO. In a written Consent in Lieu of an Annual Meeting of Stockholders of WMECO (Consent) dated June 7, 2001, stockholders voted to fix the number of directors for the ensuing year at eight. The vote fixing the number of directors at eight was 590,093 shares in favor, representing 100 percent of the issued and outstanding shares of common stock of WMECO. Through the Consent, the following eight directors were elected, each by a vote of 590,093 shares in favor, to serve on the Board of Directors for the ensuing year: David H. Boguslawski, James E. Byrne, John H. Forsgren, Cheryl W. Grise, Kerry J. Kuhlman, Paul J. McDonald, Michael G. Morris, and Melinda M. Phelps. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits Exhibit No. Description ----------- ----------- 15 Arthur Andersen LLP Letter Regarding Unaudited Financial Information (b) Reports on Form 8-K: NU, CL&P and WMECO filed current reports on Form 8-K dated April 11, 2001, disclosing: o NU's news release announcing the retirement of $830 million of public debt and preferred securities. NU filed a current report on Form 8-K dated April 24, 2001, disclosing: o NU's earnings press release for the first quarter ended March 31, 2001. NU, PSNH and PSNH Funding LLC (PSNH Funding) filed current reports on Form 8-K dated April 25, 2001, disclosing: o The closing on the sale of $525 million of rate reduction bonds through PSNH's subsidiary, PSNH Funding. NU, WMECO and WMECO Funding LLC (WMECO Funding) filed current reports on Form 8-K dated May 17, 2001, disclosing: o The closing on the sale of $155 million of rate reduction certificates through WMECO's subsidiary, WMECO Funding. NU filed a current report on Form 8-K dated June 28, 2001, disclosing: o The declaration of a dividend of $0.125 per share payable on September 28, 2001, to shareholders of record as of September 1, 2001, and the announcement of three proposed strategic transmission projects. NU filed a current report on Form 8-K dated July 10, 2001, disclosing: o The authorization by the NU Board of Trustees of the repurchase of up to 15 million NU common shares by July 1, 2003, and the election of two new trustees. NU filed a current report on Form 8-K dated July 24, 2001, disclosing: o NU's earnings press release for the second quarter and six months ended June 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NORTHEAST UTILITIES ------------------- Registrant Date: August 9, 2001 By /s/ John H. Forsgren ------------------------------------- John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer Date: August 9, 2001 By /s/ John J. Roman ------------------------------------- John J. Roman Vice President and Controller - ------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE CONNECTICUT LIGHT AND POWER COMPANY --------------------------------------- Registrant Date: August 9, 2001 By /s/ Randy A. Shoop ------------------------------------- Randy A. Shoop Treasurer Date: August 9, 2001 By /s/ John P. Stack ------------------------------------- John P. Stack Controller - ------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE --------------------------------------- Registrant Date: August 9, 2001 By /s/ David R. McHale ------------------------------------- David R. McHale Vice President and Treasurer Date: August 9, 2001 By /s/ John J. Roman ------------------------------------- John J. Roman Vice President and Controller - ------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WESTERN MASSACHUSETTS ELECTRIC COMPANY -------------------------------------- Registrant Date: August 9, 2001 By /s/ David R. McHale ------------------------------------- David R. McHale Vice President and Treasurer Date: August 9, 2001 By /s/ John J. Roman ------------------------------------- John J. Roman Vice President and Controller Exhibit 15 To Northeast Utilities: We are aware that Northeast Utilities has incorporated by reference in its Registration Statements No. 33-34622, No. 33-40156, No. 33-44814, No. 33-63023, No. 33-55279, No. 33-56537, No. 333-52413, No. 333- 52415, and No. 333-85613, its Form 10-Q for the quarter ended June 30, 2001, which includes our report dated August 9, 2001, covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. It should be noted that we have not performed any procedures subsequent to August 9, 2001. /s/ Arthur Andersen LLP Arthur Andersen LLP Hartford, Connecticut August 9, 2001