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Energy for home, business, life.
Northeast utilities
2003 Annual Report

Table of contents

  • Page 1
    N ortheast u tilities 2 0 0 3 A n n u a l R e port Energy for home, business, life.

  • Page 2
    ... electricity and natural gas, to marketing energy commodities, to operating and maintaining power plant facilities, NU is committed to safety, reliability and expanding consumers' energy options. For more information on Northeast Utilities and its subsidiaries, visit the NU family of Web sites...

  • Page 3
    At home, in business, for life, Northeast Utilities is there, providing safe and reliable energy and services. Every day. 24/7.

  • Page 4
    ... Nothing is more precious than the safety and security of home. Northeast Utilities companies provide light, warmth and comfort to millions of homes every day, every night. Our customers value our commitment to them - today, and for tomorrow. Electricity and natural gas. For peace of mind. For...

  • Page 5
    Olivia Beaudoin sleeps soundly knowing the constant glow of her night-light will keep her safe from the monsters in the closet. Thanks to its strategic capital investment plan, CL&P achieved record reliability in 2003. And Yankee Gas achieved a 92 percent customer satisfaction rating.

  • Page 6
    ... businesses to support a major university expansion project. Over 10 years, UConn will add one million square feet of facilities to its main and regional campuses and rely on a new cogeneration energy center designed and being built by NU's Select Energy Services, Inc. and Northeast Generation...

  • Page 7
    ... design solutions for unique and optimally efficient energy systems, right through construction, operation and maintenance. Northeast Utilities companies provide the technical know-how, energy choices and reliable services to support our customers' expansion plans. Growing together for the future.

  • Page 8
    ...all the time. In our increasingly digital world, vast amounts of data are sent electronically, in real time, from business to business and person to person. That flow of energy supports commerce, communication and community. And Northeast Utilities provides that energy, dependably, for customers big...

  • Page 9
    Dr. Kedar Gupta (right) and Jonathan Talbott of GT Equipment Technologies, Inc, Merrimack, New Hampshire, rely on PSNH's dependable service for manufacturing build-to-order furnaces used to produce the light-sensitive materials found in photovoltaic cells.

  • Page 10
    WMECO lineworkers Lloyd Graham (left) and James Di Bernardo keep the power up and running across western Massachusetts.

  • Page 11
    ... our best efforts, Mother Nature's storms and New England's trees occasionally clash, with power outages sometimes the result. Even before the weather turns, Northeast Utilities' employees are planning and preparing - routinely trimming trees, monitoring the most sophisticated weather forecasts...

  • Page 12
    our vision To become the highest performing regional provider of energy products and services, strengthening our region's security, stability and vitality. Charles W. Shivery and Elizabeth T. Kennan

  • Page 13
    ... power contract settlement and an accounting change at R.M. Services, NU earned $158.0 million, or $1.24 per share, in 2003, in line with our projections. • Safe and reliable delivery of energy to our customers, with signal leadership for the entire northeast in returning the grid to operation...

  • Page 14
    ... turnaround in performance in 2003. NU Enterprises saw strengthened margins on Select Energy's energy supply contracts, improved risk and portfolio management, and optimized operation of NU's competitive generation facilities. Excluding the costs of the wholesale power dispute, our competitive...

  • Page 15
    ... offer a strong financial profile and credit ratings, supporting our position as the largest energy delivery company in New England and a leading energy marketer in the Northeast and mid-Atlantic states. Customer Care For customers, we deliver reliable service at competitive prices and ensure that...

  • Page 16
    ... a major Select Energy contract with the U.S. General Service Administration's facilities in New York. The multi-year agreement includes wind power for two facilities making them the first federal facilities to be entirely powered by wind-generated electricity. In March 2003, eight NU facilities and...

  • Page 17
    ... every work site across the NU system. As we closed the year, our leadership changed as Michael Morris left NU to join American Electric Power, and the NU Board of Trustees appointed an interim leadership team. The Board and an executive search committee hope to announce before NU's Annual Meeting...

  • Page 18
    ...regulated businesses Company The Connecticut Light and Power Company (CL&P) Employees 2,300 Market CL&P is the largest electric utility in Connecticut serving nearly 1.2 million residential and commercial customers in 149 cities and towns. Business, Services Delivers safe and reliable electricity...

  • Page 19
    ... NU Enterprises, Inc. Employees 5 Market Primarily the 11-state Northeast and mid-Atlantic region from Maine to Maryland Business, Services The holding company for NU's competitive energy businesses; main business lines are wholesale and retail merchant energy and energy/generation services...

  • Page 20
    Service area The Northeast Utilities System family of companies' regulated and competitive businesses serve the 11 northeastern states and beyond. Connecticut Delaware Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Rhode Island Vermont 18

  • Page 21
    2003 financial information Management's Discussion and Analysis Company Report Independent Auditors' Report Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash ...

  • Page 22
    ...were lower in 2003 as compared with 2002. The Utility Group is comprised of CL&P, Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), and Yankee Gas Services Company (Yankee Gas). Utility Group net income was lower...

  • Page 23
    ... primarily to price discovery and transaction and risk management for the merchant energy business line. Pension expense is annually adjusted during the second quarter based on updated actuarial valuations, and the 2004 estimate may change. Utility Group: The NU consolidated earnings estimate of...

  • Page 24
    ... of equity capital to NU. CL&P has not issued any new long-term debt since mid-1997. Aided by relatively low cost power supply contracts from 2000 through 2003, CL&P was able to maintain retail rates that were relatively low for New England and generally 10 percent below those charged by CL&P in...

  • Page 25
    ... offer service suppliers that incurred incremental locational marginal pricing (LMP) costs during 2003. CL&P did not pay Select Energy for these costs, which negatively impacted the operating cash ï¬,ows of NU Enterprises in 2003. If the FERC approves the settlement of the wholesale power contract...

  • Page 26
    ... policy direction. In January 2004, CL&P filed a request with the FERC for further clarification of this issue. Management will continue to pursue recovery from NRG of the station service balance, including approximately $4 million NRG placed in an escrow account related to this matter. In 2003...

  • Page 27
    ... rate. Management expects that the improved terms of Select Energy's new CL&P contract will have a positive impact on NU Enterprises' 2004 earnings. NU Enterprises Business Lines: NU Enterprises aligns its activities into two business lines, the merchant energy business line and the energy services...

  • Page 28
    ... to the wholesale power contract settlement. Risk management within Select Energy is organized to address the market, credit and operational exposures arising from the merchant energy business line including wholesale marketing activities (which include limited energy trading for market and price...

  • Page 29
    ... and physical delivery transactions for electricity, natural gas and oil in which Select Energy is attempting to profit from changes in market prices. Energy trading contracts are recorded at fair value, and changes in fair value affect net income. At December 31, 2003, Select Energy had trading...

  • Page 30
    ... the rate was changed from a fixed rate of 5 percent to a market-based LIBOR discount rate to better reï¬,ect current market conditions. In 2002, in connection with management's review of the contracts in the trading portfolio, the significant changes in the energy trading market and the change in...

  • Page 31
    ...an estimated cost of $90 million. CL&P and the Long Island Power Authority each own approximately 50 percent of the line. The project still requires federal and New York state approvals. Given the approval process, changing pricing and operational rules in the New England and New York energy markets...

  • Page 32
    ... a 14.3 percent ROE for new transmission facilities. The outcome of this request and its impact on NU cannot be determined at this time. Restructuring and Rate Matters Utility Group: On August 26, 2003, NU's electric operating companies filed their first transmission rate case at the FERC since...

  • Page 33
    ... in the TSO rate, these costs could be recovered through an energy adjustment clause or through the FMCC. The Act also allowed CL&P to collect a procurement fee of at least 0.50 mills per kilowatt-hour (kWh) from customers who continue to purchase TSO service. That fee can increase to 0.75 mills...

  • Page 34
    ... service rate case and tariffs with the NHPUC on December 29, 2003 to increase electricity delivery rates by approximately $21 million, or approximately 2.6 percent, effective February 1, 2004. In addition, PSNH is requesting that recovery of FERC-regulated transmission costs be adjusted annually...

  • Page 35
    ... has been shut down and is undergoing decommissioning. The Yankee Companies collect decommissioning and closure costs through wholesale FERC-approved rates charged under power purchase agreements to NU electric utility companies CL&P, PSNH, and WMECO. These companies in turn pass these costs on to...

  • Page 36
    ... the RNS rates. NU Enterprises recognizes revenues at different times for its different business lines. Wholesale and retail marketing revenues are recognized when energy is delivered to customers. Trading revenues are recognized as the fair value of trading contracts changes. Service revenues are...

  • Page 37
    ... instruments in its wholesale and retail marketing activities, and many Utility Group contracts for the purchase or sale of energy or energy-related products are derivatives. The application of derivative accounting under SFAS No. 133, as amended, is complex and requires management judgment in the...

  • Page 38
    ..., "Accounting for the Effects of Certain Types of Regulation." The transmission and distribution businesses of CL&P, PSNH and WMECO, along with PSNH's generation business and Yankee Gas' distribution business, continue to be cost-of-service rate regulated, and management believes the application of...

  • Page 39
    ... percent to 8.75 percent in 2003 for the Pension Plan and PBOP Plan due to lower expected market returns. NU believes that 8.75 percent is a reasonable long-term rate of return on Pension Plan and PBOP Plan assets for 2003, and NU expects to use 8.75 percent in 2004. NU will continue to evaluate the...

  • Page 40
    ..., it may require NU to change the accounting described above and change the information included in this annual report. Income Taxes: Income tax expense is calculated each year in each of the jurisdictions in which NU operates. This process involves estimating NU's actual current tax exposures as...

  • Page 41
    ... are changes in certain laws and regulations, orders, interpretations or contracts entered into by NU, there may be future AROs that need to be recorded. Under SFAS No. 71, regulated utilities, including NU's Utility Group companies, currently recover amounts in rates for future costs of removal...

  • Page 42
    ... reported in fuel, purchased and net interchange power because energy trading purchases are classified in revenues. Rate reduction bond amounts are non-recourse to NU, have no required payments over the next five years and are not included in this table. The Utility Group's standard offer service...

  • Page 43
    ... in 2002. Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased $683 million in 2003, primarily due to higher wholesale energy purchases at NU Enterprises ($629 million), and higher gas costs ($77 million), partially offset by lower nuclear fuel ($20...

  • Page 44
    ... Other operation expense increased $148 million in 2003, primarily due to higher expenses for NU Enterprises resulting from service business growth ($57 million), higher regulated business administrative and general expenses, primarily due to higher health care costs ($16 million), lower pension...

  • Page 45
    ...Seabrook related gains ($15 million), lower equity in earnings from the Yankee companies in 2003 ($7 million), a higher level of donations in 2003 ($5 million), RMS losses recorded in 2003 ($4 million) and lower 2003 conservation and load management incentive income ($2 million), partially offset by...

  • Page 46
    ... annual report is recorded, processed, summarized, and reported within the time periods required and that the information disclosed is accumulated and reviewed by management for discussion and approval. Independent Auditors' Report To the Board of Trustees and Shareholders of Northeast Utilities...

  • Page 47
    ... 2003 2002 2001 (Thousands of Dollars, except share information) Operating Revenues Operating Expenses: Operation - Fuel, purchased and net interchange power Other Maintenance Depreciation Amortization Amortization of rate reduction bonds Taxes other than income taxes Gain on sale of utility plant...

  • Page 48
    ... uncollectible accounts of $40,846 in 2003 and $15,425 in 2002 Unbilled revenues Fuel, materials and supplies, at average cost Derivative assets Prepayments and other Property, Plant and Equipment: Electric utility Gas utility Competitive energy Other Less: Accumulated depreciation Construction work...

  • Page 49
    ... At December 31, 2003 2002 (Thousands of Dollars) Liabilities and Capitalization Current Liabilities: Notes payable to banks Long-term debt - current portion Accounts payable Accrued taxes Accrued interest Derivative liabilities Other Rate Reduction Bonds Deferred Credits and Other Liabilities...

  • Page 50
    ... shares (1,495,608) Capital stock expenses, net Other comprehensive income Balance as of December 31, 2003 127,695,999 (a) The Federal Power Act, the Public Utility Holding Act of 1935 (the 1935 Act), and certain state statutes limit the payment of dividends by CL&P, PSNH, WMECO and NAEC to their...

  • Page 51
    ..., net Amortization Amortization of rate reduction bonds Amortization/(deferral) of recoverable energy costs Gain on sale of utility plant Increase in prepaid pension Cumulative effect of accounting change Regulatory overrecoveries/(refunds) Other sources of cash Other uses of cash Changes in current...

  • Page 52
    ...rate will be adjusted. (d) Other long-term debt - other at December 31, 2003, includes the issuance of $150 million, $63.4 million and $55 million of long-term debt related to NU parent, SESI and WMECO in 2003. (e) For information regarding fees and interest due for spent nuclear fuel disposal costs...

  • Page 53
    ...effects of temporary differences as follows: Deferred tax asset associated with net operating losses Depreciation Net regulatory deferral Sale of generation assets Pension Loss on bond redemptions Contract termination costs, net of amortization Change in fair value of energy contracts Other Deferred...

  • Page 54
    ..., information technology, legal, operational, planning, purchasing, and other services to NU's companies. Three other subsidiaries construct, acquire or lease some of the property and facilities used by NU's companies. Utility Group: The Utility Group furnishes franchised retail electric service in...

  • Page 55
    ... the line of credit balance with its financial statements. CL&P has obtained surety bonds in the amount of $31.1 million related to the collection of March 2003 and April 2003 incremental locational marginal pricing (LMP) costs in compliance with a Connecticut Department of Public Utility Control...

  • Page 56
    ...requirements, net of revenue credits received from various rate components, including revenues received under the RNS rates. NU Enterprises: NU Enterprises' revenues are recognized at different times for its different business lines. Wholesale and retail marketing revenues are recognized when energy...

  • Page 57
    ...460 million at December 31, 2003 and 2002, respectively. 55 H. Utility Group Regulatory Accounting The accounting policies of NU's Utility Group conform to accounting principles generally accepted in the United States of America applicable to rate-regulated enterprises and historically reï¬,ect the...

  • Page 58
    ...charge of approximately $0.002 per kilowatt-hour (kWh) to collect these costs from August 2001 through December 31, 2003, at which time no unrecovered costs remained. The majority of the recoverable energy costs are recovered in rates currently from the customers of CL&P, PSNH, WMECO, and Yankee Gas...

  • Page 59
    ...Jointly Owned Electric Utility Plant Regional Nuclear Companies: At December 31, 2003, CL&P, PSNH and WMECO own common stock in three regional nuclear companies (Yankee Companies). NU's ownership interests in the Yankee Companies at December 31, 2003, which are accounted for on the equity method are...

  • Page 60
    ... of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No equity-based employee compensation cost for stock options is reï¬,ected in net income, as all options granted under those plans had an exercise price equal to the market...

  • Page 61
    ...that may be incurred by NU and its operating companies is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators. On June 30, 2003, the SEC granted authorization allowing NU, CL&P, PSNH, WMECO, and Yankee Gas to incur total short-term borrowings up to...

  • Page 62
    ... June 30, 2004. NAEC currently has a short-term debt limit set by the NHPUC equal to 10 percent of net fixed plant and has no plans at this time to incur any future short-term borrowings. Utility Group Credit Agreement: On November 10, 2003, CL&P, PSNH, WMECO, and Yankee Gas entered into a 364-day...

  • Page 63
    ...$67.0 NU Enterprises - Trading: To gather market intelligence and utilize this information in risk management activities for the wholesale marketing activities, Select Energy conducts limited energy trading activities in electricity, natural gas and oil, and therefore experiences net open positions...

  • Page 64
    ... realized when these contracts are physically delivered. NU Enterprises - Trading Contracts: At December 31, 2003, Select Energy has calculated the market price resulting from a 10 percent change in forward market prices. That 10 percent change would result in a $0.4 million increase or decrease in...

  • Page 65
    ...by NU's risk management process. The Utility Group has a lower level of credit risk related to providing electric and gas distribution service than NU Enterprises. However, Utility Group companies are subject to credit risk from certain long-term or high-volume supply contracts with energy marketing...

  • Page 66
    ... Plan). These benefits are available for employees retiring from NU who have met specified service requirements. For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost. These costs are charged to expense over the estimated work...

  • Page 67
    ... following actuarial assumptions were used in calculating the plans' year end funded status: Pension Benefits Balance Sheets 2003 At December 31, Postretirement Benefits 2003 2002 2002 Discount rate Compensation/progression rate Health care cost trend rate 6.25% 3.75% N/A 6.75% 4.00% N/A 6.25...

  • Page 68
    ... The annual per capita cost of covered health care benefits was assumed to decrease by one percentage point each year through 2007. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of changing the assumed health care cost...

  • Page 69
    ....00% 100.00% 100.00% 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. NU does not expect to make any contributions to the Pension Plan in 2004 and expects to make...

  • Page 70
    ...Under the Northeast Utilities Incentive Plan (Incentive Plan), NU is authorized to grant various types of awards, including restricted stock, performance units, restricted stock units, and stock options to eligible employees and board members. The number of shares that may be utilized for grants and...

  • Page 71
    ... the generation operations of HWP, while the energy services business line reporting unit is comprised of the operations of SESI, NGS and Woods Network. As a result, NU's reporting units that maintain goodwill are as follows: Yankee Gas, which is classified under the Utility Group - gas reportable...

  • Page 72
    ... CL&P recovered a portion of these costs through an additional charge on customer bills beginning on May 1, 2003. Billings were on a two-month lag and were recorded as operating revenues when billed. Amounts were recovered subject to refund. CL&P and its suppliers, including affiliate Select Energy...

  • Page 73
    ... of NU, including CL&P and Yankee Gas, have entered into transactions with NRG Energy, Inc. (NRG) and certain of its subsidiaries. On May 14, 2003, NRG and certain of its subsidiaries filed voluntary bankruptcy petitions. On December 5, 2003, NRG emerged from bankruptcy. NU's NRG-related...

  • Page 74
    ... As this information becomes available management will continue to assess the potential exposure and adjust the reserves as necessary. Rate Recovery: PSNH and Yankee Gas have rate recovery mechanisms for environmental costs. CL&P recovers a certain level of environmental costs currently in rates but...

  • Page 75
    ...decommissioning. The Yankee Companies collect decommissioning and closure costs through wholesale FERC-approved rates charged under power purchase agreements to NU electric utility companies CL&P, PSNH and WMECO. These companies in turn pass these costs on to their customers through state regulatory...

  • Page 76
    ..., 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...

  • Page 77
    ... item is as follows: December 31, 2002 Current Period December 31, Change 2003 (Millions of Dollars) Qualified cash ï¬,ow hedging instruments Unrealized (losses)/gains on securities Minimum supplemental executive retirement pension liability adjustments Accumulated other comprehensive income $15...

  • Page 78
    ... of the electric utilities, CL&P, PSNH and WMECO, whose complete financial statements are included in NU's combined report on Form 10-K. The Utility Group - gas segment also includes the operations of Yankee Gas. Utility Group revenues from the sale of electricity and natural gas primarily are...

  • Page 79
    ... the Year Ended December 31, 2003 (Millions of Dollars) Utility Group Electric Gas NU Enterprises Eliminations And Other Total Operating revenues Depreciation and amortization Other operating expenses Operating income/(loss) Interest expense, net Other income/(loss), net Income tax (expense)/bene...

  • Page 80
    ... of Dollars, except per share information) March 31, June 30, September 30, December 31, 2003 Operating Revenues Operating Income Income/(Loss) Before Cumulative Effect of Accounting Change Cumulative Effect of Accounting Change, Net of Tax Benefit Net Income Basic and Fully Diluted Earnings...

  • Page 81
    ...assets were not adjusted for cost of removal prior to 2002. Includes portions due within one year. Operating revenue amounts have been reclassified from those reported in 2002 and 2001 related to the adoption of EITF Issue No. 03-11. Market price information reï¬,ects closing prices as presented in...

  • Page 82
    ... Commercial Industrial Other Utilities Streetlighting and Railroads Non-franchised 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...

  • Page 83
    ...ficer David R. McHale Vice President and Treasurer, PSNH, WMECO and Yankee Cheryl W. Grisé President-Utility Group John J. Roman Vice President and Controller, NUEI James A. Muntz Vice President - Customer Operations, CL&P Gregory B. Butler Senior Vice President, Secretary and General Counsel...

  • Page 84
    ...,816 natural gas customers in Connecticut. It is one of the largest competitive energy suppliers in New England. Current NU subsidiaries are listed below: Common Share Information The common shares of Northeast Utilities are listed on the New York Stock Exchange. The ticker symbol is "NU," although...

  • Page 85
    P.O. Box 270 • Hartford, Connecticut • 06141-0270 • 1-800-286-5000 • www.nu.com