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Northeast Utilities
2002 Annual Report

Table of contents

  • Page 1
    Northeast Utilities 2002 Annual Report

  • Page 2
    Energy is at the heart of everything we do. Our customers' energy needs are changing.

  • Page 3
    From the energy of our 6,560 employees, to the electric and natural gas energy we deliver to 2 million customers in Connecticut, western Massachusetts and New Hampshire, to anticipating the region's needs for an upgraded energy transmission system, to managing our competitive businesses from Maine ...

  • Page 4
    ... and statistical data) 2002 2001 % Change Operating Revenues Operating Income Net Income Fully Diluted Earnings Per Common Share Fully Diluted Common Shares Outstanding (Average) Dividends Per Share Sales of Electricity (kWh-millions) Electric Customers (Average) Gas Customers (Average) Property...

  • Page 5
    ... NU as our industry's average credit profile declined. Delivered solid profits from all four regulated operating companies, while earning impressive customer service ratings. Completed the divestiture of nuclear generation, receiving fair treatment from regulators on the recovery of stranded costs...

  • Page 6
    ... The energy business plays a unique and critical role in our society, with many touch points. Our collaborative partnerships with regional officials, community leaders and environmental organizations afford us a connection to our customers beyond the physical reach of power and gas lines. These...

  • Page 7
    ... line into East Lyme, Connecticut, and continue to refine plans and secure approvals for a liquefied natural gas storage and production facility at our Waterbury work center. Our goal is to provide a secure, reliable natural gas supply that will help keep prices stable for our customers. With New...

  • Page 8
    ...assets and franchise of Connecticut Valley Electric Company, which serves some 10,000 electric customers in western New Hampshire. We have not moved forward on purchasing additional merchant generation, feeling that the prices do not reï¬,ect true market conditions. Competitive Businesses Must Make...

  • Page 9
    ...our wholesale and retail marketing business. The net result of changes in our business portfolio is NU's position as a smaller, more agile company. In recent years we added Yankee Energy and our competitive businesses, and sold Millstone, Seabrook and the fossil plants owned by CL&P and WMECO. Given...

  • Page 10
    ... reliable gas-fired power and thermal energy for a new terminal's electrical, heating and cooling needs. NU's Northeast Generation Services Company handles day-to-day operations. Yankee Gas both transports natural gas to serve the building and is working with the airport on alternate fuel vehicles...

  • Page 11
    ... area. Thanks to PSNH, Fidelity's customer service, bond trading, Internet and data center operations can run smoothly. Yankee Gas delivered more energy options to homeowners and businesses across Connecticut, installing 12 miles of new natural gas pipeline. The choice of clean, reliable natural gas...

  • Page 12
    ... learning while saving Connecticut towns energy and money, to offering a PRIME program - Process Reengineering for Increased Manufacturing Efficiency - for commercial customers such as the Simmons Company mattress makers in WMECO's area, to our competitive businesses supporting facilities like the...

  • Page 13
    PSNH's New Central Warehouse, Bow, New Hampshire Located on 17 acres, PSNH's new 32,200-square-foot facility features a state-of-the-art warehouse, testing facility, loading area, offices and outdoor storage for electrical equipment, transformers and wire. PSNH area work locations across the state ...

  • Page 14
    ... first-time homeowners in the spring of 2002. Their Windsor, Connecticut, home meets federal ENERGY STAR® standards to save electricity, gas and money every day, all year. Thanks to a partnership with NU, Hartford Area Habitat for Humanity is now constructing all their homes to these valuable...

  • Page 15
    ... of shrubland nesting birds in power line rights of way. These birds are in decline throughout the New England area. The Massachusetts Audubon and NU will use the data from the study to safeguard important habitats. NU's Northeast Generation Company and Northeast Generation Services Company were...

  • Page 16
    ... help customers save money and energy every month. With 14 generation facilities, PSNH has an ample and diverse supply of energy that is part of New Hampshire's continued economic growth. Northeast Generation Services Company Business and Services NGS provides power plant management and operations...

  • Page 17
    ... to a rate decrease at Public Service Company of New Hampshire (PSNH), a decrease of the Western Massachusetts Electric Company (WMECO) standard offer rate and a decrease in Yankee Gas Services Company (Yankee Gas) revenues associated with lower gas sales and lower 2002 rates. NU's earnings per...

  • Page 18
    ...its energy services businesses, NGS and SESI, will also be profitable in the aggregate. NU also projects that parent company expenses, primarily related to three long-term debt issuances, will cost the company approximately $0.10 per share in 2003. Liquidity Consolidated: The year 2002 represented...

  • Page 19
    ... to the rate reduction bonds in establishing the credit ratings of NU or its subsidiaries. CL&P and Yankee Gas have embarked upon significant upgrade programs within their service territories. Over the past five years, CL&P has increased its annual level of investment in electric utility plant by...

  • Page 20
    ... costs are now spread across virtually all New England electric customers. In addition, the implementation of SMD will impact wholesale energy contracts with respect to the energy delivery points contained in those contracts. Regulated Utilities: Connecticut has been designated a single load zone...

  • Page 21
    ... engages in energy related construction services. NGS operates and maintains NGC's and HWP's generation assets and provides third-party electrical, mechanical, and engineering contracting services. Outlook: NU is taking a number of steps to return the competitive energy businesses to profitability...

  • Page 22
    ... Select Energy's wholesale marketing business is providing energy to full requirements customers, primarily regulated distribution companies. Under full requirements contract terms, Select Energy is required to provide the total energy requirement for the customers' load at all times. Wholesale and...

  • Page 23
    ... of an accounting change as of October 1, 2002. In connection with management's review of the contracts in the trading portfolio, the significant changes in the energy trading market and the change in the focus of the energy trading business, certain long-term derivative energy contracts that were...

  • Page 24
    ... on new meters and customer services, and $17 million on substations in 2002. In 2001, CL&P announced plans for three transmission projects. In September 2002, the Connecticut Siting Council (CSC) approved the first project, a plan to replace an undersea electric transmission line between Norwalk...

  • Page 25
    ... generation plants. On December 5, 2002, PSNH announced an agreement to acquire the franchise and electric system of Connecticut Valley Electric Company, Inc. (CVEC), a subsidiary of Central Vermont Public Service Corporation (CVPS) that serves approximately 10,000 customers in western New Hampshire...

  • Page 26
    ...see NU's 2002 report on Form 10-K, Item 1, "Business." Restructuring and Rate Matters Connecticut - CL&P: Since retail competition began in Connecticut in 2000, an extremely small number of customers have opted to choose an alternate supplier. At December 31, 2002, virtually all of CL&P's customers...

  • Page 27
    ... electricity it needs to serve retail customers from its own generating plants or purchased-power obligations and to purchase the remainder in the wholesale market. On February 1, 2003, in accordance with the Restructuring Settlement, PSNH raised the transition service rate for residential and small...

  • Page 28
    ... ownership interests in the Connecticut Yankee Atomic Power Company, Yankee Atomic Electric Company, Maine Yankee Atomic Power Company,VYNPC, two companies that transmit electricity imported from the Hydro-Quebec system, NEON, Acumentrics, and R.M. Services, Inc., which are classified as variable...

  • Page 29
    .... Pension and Postretirement Benefit Obligations: NU's subsidiaries participate in a uniform noncontributory defined benefit retirement plan (Plan) covering substantially all regular NU employees and also provide certain health care benefits, primarily medical and dental, and life insurance bene...

  • Page 30
    ...not initiate an event of bankruptcy without a vote of its sole member and all directors, including independent directors. Pursuant to an engineering, procurement, and construction agreement with the State, SESI constructed a power plant to provide energy and heat to the Connecticut Juvenile Training...

  • Page 31
    ... in economic conditions, changes in weather patterns, changes in laws, developments in legal or public policy doctrines, technological developments, volatility in electric and natural gas commodity markets, and other presently unknown or unforeseen factors. Results of Operations The components...

  • Page 32
    ... operation and maintenance expenses (O&M) decreased $16 million in 2002, primarily due to lower expenses associated with the regulated businesses ($56 million), partially offset by higher competitive companies' expenses associated with Select Energy's costs of goods sold and the expansion of new...

  • Page 33
    ... see the Consolidated Statements of Income Taxes. Gain on Sale of Utility Plant Gain on the sale of utility plant decreased $455 million in 2002 primarily due to the gain recognized in the 2001 sale of CL&P's and WMECO's ownership interests in the Millstone units ($642 million), partially offset by...

  • Page 34
    ... statements of Northeast Utilities and subsidiaries and other sections of this annual report. These financial statements, which were audited by Deloitte & Touche LLP in 2002 and 2001, and Arthur Andersen LLP in 2000, have been prepared in conformity with accounting principles generally accepted in...

  • Page 35
    ... taken as a whole. Report of Independent Public Accountants To the Board of Trustees and Shareholders of Northeast Utilities: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Northeast Utilities (a Massachusetts trust) and subsidiaries as...

  • Page 36
    ... utility Gas utility Competitive energy Other Less: Accumulated depreciation Construction work in progress Nuclear fuel, net Deferred Debits and Other Assets: Regulatory assets Goodwill and other purchased intangible assets, net Prepaid pension Nuclear decommissioning trusts, at market Other...

  • Page 37
    ... in 2001 Capital surplus, paid in Deferred contribution plan - employee stock ownership plan Retained earnings Accumulated other comprehensive income/(loss) Treasury stock, 18,022,415 shares in 2002 and 14,359,628 in 2001 Common Shareholders' Equity Total Capitalization 746,879 1,108,338 (87,746...

  • Page 38
    ...information) 2002 For the Years Ended December 31, 2001 2000 Operating Revenues Operating Expenses: Operation - Fuel, purchased and net interchange power Other Maintenance Depreciation Amortization Taxes other than income taxes Gain on sale of utility plant Total operating expenses Operating Income...

  • Page 39
    ... subsidiaries have dividend restrictions imposed by their long-term debt agreements. These restrictions also limit the amount of retained earnings available for NU common dividends. At December 31, 2002, retained earnings available for payment of dividends totaled $318.3 million. The accompanying...

  • Page 40
    .../(deferral) of recoverable energy costs Gain on sale of utility plant Cumulative effect of accounting change, net of tax Prepaid pension Net other sources/(uses) of cash Changes in working capital: Receivables and unbilled revenues, net Fuel, materials and supplies Accounts payable Accrued taxes...

  • Page 41
    ...similar terms and provisions as the applicable series of PCRBs. For financial reporting purposes, these first mortgage bonds would not be considered outstanding unless PSNH failed to meet its obligations under the PCRBs. $2,117,640 Common Shareholders' Equity Preferred Stock: CL&P Preferred Stock...

  • Page 42
    ... temporary differences as follows: Deferred tax asset associated with net operating losses Depreciation, leased nuclear fuel, settlement credits and disposal costs Regulatory deferral Regulatory disallowance Sale of generation assets Pension Loss on bond redemptions Securitized contract termination...

  • Page 43
    ... of the Northeast Utilities system. NU's regulated utilities furnish franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through three wholly owned subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH) and...

  • Page 44
    ...effect of an accounting change. The second consensus requires that companies engaged in energy trading activities classify revenues and expenses associated with energy trading contracts on a net basis in revenues effective January 1, 2003. NU adopted net reporting effective July 1, 2002, before this...

  • Page 45
    ... Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: CL&P, PSNH and WMECO own common stock in four regional nuclear companies (Yankee Companies). NU's ownership interests in the Yankee Companies at December 31, 2002 and 2001, which are accounted for on the equity method are...

  • Page 46
    ... generating plants. The Energy Act requires that regulators treat D&D Assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost. CL&P, PSNH and WMECO are currently recovering these costs through rates. At December 31, 2002 and 2001, NU...

  • Page 47
    ... are charged to or credited to customers. Differences between the actual purchased gas costs and the current rate recovery are deferred and recovered in or refunded in future periods. These amounts are recorded as recoverable energy costs, net. J. Accounting for Competitive Energy Contracts The...

  • Page 48
    ... up to a maximum of $260 million. Currently, NAEC has no plans to incur any future short-term borrowings. Regulated Companies Credit Agreement: On November 12, 2002, CL&P, PSNH, WMECO, and Yankee Gas entered into a 364-day unsecured revolving credit facility for $300 million. This facility replaced...

  • Page 49
    Guarantees: NU provides credit assurance in the form of guarantees and letters of credit in the normal course of business for the financial performance obligations of certain of its competitive energy subsidiaries of which most are revocable with no term specifications. NU would be required to ...

  • Page 50
    ...line basis to fuel, purchased and net interchange power expense over the remaining terms of the contracts, which extend to 2011. Competitive Energy Subsidiaries Nontrading: Nontrading derivative contracts are for delivery of energy related to the competitive energy subsidiaries' retail and wholesale...

  • Page 51
    ... and electric utilities, oil and gas producers, financial institutions, and other energy marketers. Margin accounts exist within this diverse group, and NU realizes interest receipts and payments related to balances outstanding in these margin accounts. This wide customer and supplier mix generates...

  • Page 52
    ... of this income through the Seabrook Power Contracts with NAEC. PSNH also credited this income as a reduction to stranded costs, and as such, there was no impact on 2002 PSNH earnings. Additionally, in conjunction with the divestiture of its generation assets, NU recorded $1.2 million in curtailment...

  • Page 53
    ... service cost Unrecognized net loss/(gain) Prepaid/(accrued) benefit cost The following actuarial assumptions were used in calculating the plans' year end funded status: At December 31, Pension Benefits 2002 2001 Postretirement Benefits 2002 2001 Discount rate Compensation/progression rate...

  • Page 54
    ...quarters of 2002. Currently, NU's policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code. Pension and trust assets are invested primarily in domestic and international equity securities...

  • Page 55
    ... 2002, employees purchased 188,774 shares at discounted prices of $14.15 and $15.39. At December 31, 2002, 1,811,226 shares remained registered for future issuance under the ESPP. Incentive Plans: NU has long-term incentive plans authorizing various types of awards, including stock options and...

  • Page 56
    ... of 2002, consistent with changes in the way management reviews the operating results of its reporting units, NU's reporting units under the competitive energy subsidiaries reportable segment were revised to include: 1) the wholesale marketing reporting unit, 2) the retail marketing reporting unit...

  • Page 57
    ... Generation Asset Divestitures Seabrook: On November 1, 2002, CL&P and NAEC consummated the sale of their 40.04 percent combined ownership interest in Seabrook to a subsidiary of FPL. CL&P, NAEC and certain other of the joint owners collectively sold 88.2 percent of Seabrook to FPL. NU received...

  • Page 58
    ... on PSNH's earnings. Massachusetts: On March 30, 2001, WMECO filed its second annual stranded cost reconciliation with the Massachusetts Department of Telecommunications and Energy (DTE) for calendar year 2000. On March 29, 2002, WMECO filed its 2001 annual transition cost reconciliation with...

  • Page 59
    ... contracts, amounted to $158 million in 2002, $195.8 million in 2001, and $148.2 million in 2000. Hydro-Quebec: Along with other New England utilities, CL&P, PSNH, WMECO, and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec...

  • Page 60
    ..., see Note 4E, "Employee Benefits - Supplemental Executive Retirement and Other Plans" to the consolidated financial statements. Preferred Stock, Long-Term Debt and Rate Reduction Bonds: The fair value of NU's fixed-rate securities is based upon the quoted market price for those issues or similar...

  • Page 61
    ... in 2000. Operating lease rental payments charged to expense were $7.8 million in 2002, $7 million in 2001, and $10.1 million in 2000. Future minimum rental payments excluding executory costs, such as property taxes, state use taxes, insurance, and maintenance, under long-term noncancelable leases...

  • Page 62
    ...the period ended December 31, 2002, respectively, and primarily includes the operations of CL&P, PSNH and WMECO, whose complete financial statements are included in NU's combined report on Form 10-K. The regulated gas utilities segment includes the operations of Yankee Gas. The reclassification of...

  • Page 63
    For the Year Ended December 31, 2002 Regulated Utilities (Millions of Dollars) Electric Gas Competitive Energy Subsidiaries Eliminations And Other Total Operating revenues Depreciation and amortization Other operating expenses Operating income/(loss) Other income/(loss), net Interest expense, net ...

  • Page 64
    ...June 30 September 30 December 31 2002 Operating Revenues Operating Income Net Income Basic and Fully Diluted Earnings per Common Share 2001 Operating Revenues Operating Income Income Before Cumulative Effect of Accounting Change Cumulative Effect of Accounting Change, Net of Tax Benefit Net Income...

  • Page 65
    ... (Average) Dividends Per Share Market Price - Closing (high) (c) Market Price - Closing (low) (c) Market Price - Closing (end of year) (c) Book Value Per Share (end of year) Tangible Book Value Per Share (end of year) Rate of Return Earned on Average Common Equity (%) Market-to-Book Ratio (end...

  • Page 66
    ... Other Utilities Streetlighting and Railroads Nonfranchised Sales Total Customers: (Average) Residential Commercial Industrial Other Total Electric Gas Total Average Annual Use Per Residential Customer (kWh) Average Annual Bill Per Residential Customer Average Revenue Per kWh: Residential...

  • Page 67
    ... and Power Company PSNH - Public Service Company of New Hampshire WMECO - Western Massachusetts Electric Company Yankee - Yankee Gas Services Company Michael G. Morris Chairman, PSNH, WMECO and Yankee Roger C. Zaklukiewicz Vice President-Transmission Engineering and Operations, CL&P, PSNH and WMECO...

  • Page 68
    ...shares. Northeast Utilities is the parent company of the NU system (collectively referred to as NU). NU operates New England's largest energy delivery system with 1,809,528 million electric customers in Connecticut, New Hampshire and Massachusetts and 190,855 natural gas customers in Connecticut. It...

  • Page 69
    Design: Cole Design Group, Canton, CT Major Photography: Al Ferreira Photography, Ltd., East Hartford, CT Printing: Allied Printing Services, Inc., Manchester, CT

  • Page 70
    Northeast Utilities P.O. Box 270 Hartford, Connecticut 06141-0270 1-800-286-5000 www.nu.com