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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Northeast Utilities
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[NORTHEAST UTILITIES LOGO]
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2001 ANNUAL MEETING OF SHAREHOLDERS
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Dear Shareholder:
It is my pleasure to invite you to attend the 2001 Annual Meeting of
Shareholders of Northeast Utilities on Thursday, June 28, 2001, at 10:30 a.m.,
at La Renaissance, East Windsor, Connecticut (directions are on the reverse
side).
Information concerning the matters to be acted upon at the meeting is
provided in the accompanying Notice of Annual Meeting and Proxy Statement. In
addition, our meeting agenda will include a discussion of the operations of
Northeast Utilities system companies and a question and answer period.
Whether or not you plan to attend the meeting, it is important that you
complete, date, sign and return your proxy in the enclosed envelope as soon as
possible. This will ensure that your shares will be represented at the meeting
in accordance with your wishes.
On behalf of your Board of Trustees, thank you for your continued support
and interest in Northeast Utilities.
Very truly yours,
/s/ Michael G. Morris
Michael G. Morris
Chairman of the Board, President and
Chief Executive Officer
May 11, 2001
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DIRECTIONS TO LA RENAISSANCE
FROM SPRINGFIELD AND HARTFORD:
Interstate 91 to Exit 44 -- Turn left at first traffic light on to Route 5; La
Renaissance will be 1/4 mile on your left at the top of the hill.
[MAP TO LA RENAISSANCE]
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 28, 2001
To the Shareholders of Northeast Utilities:
The Annual Meeting of Shareholders of Northeast Utilities will be held on
Thursday, June 28, 2001, at 10:30 a.m., at La Renaissance, East Windsor,
Connecticut, for the following purposes:
1. To elect Trustees for the ensuing year;
2. To approve an employee share purchase plan;
3. To ratify the selection of Arthur Andersen LLP as independent auditors
for 2001; and
4. To transact any other business that may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on April 30, 2001 are
entitled to receive notice of and to vote at the meeting or any adjournment
thereof. You are cordially invited to be present at the meeting and to vote.
Whether or not you plan to attend the meeting, please complete, date and sign
the enclosed proxy card and return it in the envelope enclosed for that purpose.
By order of the Board of Trustees,
/s/ Gregory B. Butler
107 Selden Street Gregory B. Butler
Berlin, Connecticut Vice President, Secretary
and General Counsel
Mailing Address:
Post Office Box 270
Hartford, Connecticut 06141-0270
May 11, 2001
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IMPORTANT
SHAREHOLDERS CAN HELP AVOID THE NECESSITY AND EXPENSE OF FOLLOW-UP LETTERS
TO ENSURE THAT A QUORUM IS PRESENT AT THE ANNUAL MEETING BY PROMPTLY RETURNING
THE ENCLOSED PROXY. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE, IF MAILED IN THE
UNITED STATES.
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PROXY STATEMENT
The accompanying proxy is solicited on behalf of the Board of Trustees of
Northeast Utilities for use at the Annual Meeting of Shareholders to be held on
June 28, 2001, and at any adjournment thereof.
Please read this proxy statement and fill in, date, sign and return the
enclosed form of proxy. The proxy may be revoked at any time before it is voted
by filing a letter with the Secretary of Northeast Utilities or by a duly
executed proxy card bearing a later date. Properly executed proxies not revoked
will be voted according to their terms.
Only holders of common shares of record at the close of business on April
30, 2001 (the record date) are entitled to receive notice of and to vote at the
meeting or any adjournment thereof. On the record date, there were 138,674,531
common shares outstanding. Each such share is entitled to one vote on each
matter to be voted on at the Annual Meeting of Shareholders.
The principal office of Northeast Utilities is located at 174 Brush Hill
Avenue, West Springfield, Massachusetts. The general offices of Northeast
Utilities and its subsidiaries are located at 107 Selden Street, Berlin,
Connecticut (mailing address: Post Office Box 270, Hartford, Connecticut
06141-0270). This proxy statement and the accompanying proxy card are being
mailed to shareholders commencing May 11, 2001.
An affirmative vote of a majority of the common shares outstanding as of
the record date will be required to elect the nominees named below.
1. ELECTION OF TRUSTEES
Unless a shareholder specifies otherwise, the enclosed proxy will be voted
to elect the nominees named below as Trustees to serve until the next Annual
Meeting and until their successors have been elected and shall have qualified.
Each nominee has been previously elected as a Trustee by shareholders and is
currently serving as a Trustee. Mr. Emery G. Olcott, who was first elected a
Trustee by shareholders in 2000 following 11 years of service on the board of
directors of Yankee Energy System, Inc., will not stand for re-election on
account of other commitments to his own business. In accordance with the Board's
retirement policy for Trustees, Mr. William F. Conway, who was first elected a
Trustee by shareholders in 1997, is not a nominee for re-election.
If one or more of the nominees should become unavailable for election, the
proxy may be voted for a substitute person or persons, but not more than the
nominees proposed. In accordance with Northeast Utilities' Declaration of Trust,
the number of Trustee positions will continue to be thirteen, as set by the
shareholders last year, in order to afford the Board of Trustees flexibility to
add targeted expertise as appropriate between Annual Meetings of Shareholders.
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THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS VOTE FOR ELECTION OF THE
NOMINEES LISTED BELOW.
Set forth below is each nominee's name, age, date first elected as a
Trustee, and a brief summary of the nominee's business experience during the
past five years.
[PHOTO OF COTTON MATHER COTTON MATHER CLEVELAND
CLEVELAND] (49 YEARS) 1992
President of Mather Associates, New London, New Hampshire (a
firm specializing in leadership and organizational
development for corporate and nonprofit organizations). From
1991 until 1998, founding Executive Director of Leadership
New Hampshire. Ms. Cleveland is a Director of The National
Grange Mutual Insurance Company and of the Ledyard National
Bank and serves on the Board of the New Hampshire Center for
Public Policy. She is the moderator of the Town of New
London, New Hampshire. She has served on the University
System of New Hampshire Board of Trustees as Chair, Vice
Chair and a member and served on the Bank of Ireland First
Holdings Board of Directors from 1986 to 1996. She was
formerly Co-Chair of the Governor's Commission on New
Hampshire in the 21st Century and an Incorporator for the
New Hampshire Charitable Foundation.
[PHOTO OF SANFORD
CLOUD, JR.] SANFORD CLOUD, JR.
(56 YEARS) 2000
President and Chief Executive Officer of The National
Conference for Community and Justice, New York, New York.
From 1993 to 1994, he was a partner in the law firm of
Robinson and Cole, Hartford, Connecticut. Previously Vice
President of Aetna Life and Casualty Company and served for
two terms as a state senator of Connecticut. Mr. Cloud is a
Director of The Advest Group, Incorporated and Tenet
Healthcare Corporation and Chairman of the Board of
Ironbridge Mezzanine Fund, L.P.
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E. GAIL DE PLANQUE
[PHOTO OF E. GAIL DE (56 YEARS) 1995
PLANQUE] President, Strategy Matters, Inc., and Director, Energy
Strategies Consultancy, Ltd. From 1991 to 1995, Dr. de
Planque was a Commissioner with the United States Nuclear
Regulatory Commission. In 1967, Dr. de Planque joined the
Health and Safety Laboratory of the United States Atomic
Energy Commission. She served at the Laboratory, now known
as the Environmental Measurements Laboratory, until December
1991, as Deputy Director beginning in 1982 and as Director
in 1987. Dr. de Planque is a Fellow and past President of
the American Nuclear Society, a member of the National
Academy of Engineering and the National Council on Radiation
Protection and Measurements, a Director of British Nuclear
Fuels, plc., a Director of British Nuclear Fuels, Inc. and
President of the International Nuclear Societies Council.
She is a member of the Texas Utilities Electric Operations
Review Committee; the Diablo Canyon Independent Safety
Committee; the External Advisory Committee; Amarillo
National Resource Center for Plutonium; the visiting
Committee for the Department of Nuclear Engineering,
Massachusetts Institute of Technology; and a consultant to
the United Nations International Atomic Energy Agency.
[PHOTO OF JOHN H. JOHN H. FORSGREN
FORSGREN] (54 YEARS) 2000
Vice Chairman of NU since May 2001 and Executive Vice
President and Chief Financial Officer of NU since February
1996. Previously Managing Director of the Chase Manhattan
Bank from 1995 to 1996 and Senior Vice President of The Walt
Disney Company from 1990 to 1994. Mr. Forsgren is a Director
of NEON Communications, Inc. and The Circle Trust Company
and a member of the Board of Regents of Georgetown
University.
[PHOTO OF RAYMOND L.
GOLDEN] RAYMOND L. GOLDEN
(63 YEARS) 1999
Independent Consultant. Previously served as Chairman
Emeritus of BT Wolfensohn, New York, New York, a business
unit of BT Alex Brown Incorporated. From August 1996 to
December 1997, he was Chairman of BT Wolfensohn. Prior to
that, he served as President of Wolfensohn & Company. Mr.
Golden serves as a Trustee on the National Wildlife
Federation Endowment and the Board of the Jewish Federation
of Palm Beach County, Florida.
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[PHOTO OF ELIZABETH T. ELIZABETH T. KENNAN
KENNAN] (63 YEARS) 1980
President Emeritus of Mount Holyoke College, South Hadley, Massachusetts. Previously
President of Mount Holyoke College. Dr. Kennan is a Director of The Putnam Funds and
Talbots. She is a member of the Folger Shakespeare Library Committee and is Chairman of
Cambus Kenneth Bloodstock, Inc.
[PHOTO OF MICHAEL G.
MORRIS] MICHAEL G. MORRIS
(54 YEARS) 1997
Chairman of the Board, President and Chief Executive Officer of NU. Previously President
and Chief Executive Officer of Consumers Power Company from 1994 to 1997 and Executive
Vice President and Chief Operating Officer of Consumers Power Company from 1992 to 1994.
Mr. Morris is a Director of the Institute of Nuclear Power Operations, the Nuclear Energy
Institute, the Edison Electric Institute, the Association of Edison Illuminating
Companies, Connecticut Business & Industry Association, Spinnaker Exploration Company,
and the Webster Financial Corporation. Mr. Morris is also a Regent of Eastern Michigan
University.
[PHOTO OF WILLIAM J.
PAPE II] WILLIAM J. PAPE II
(69 YEARS) 1974
Publisher, Waterbury Republican-American, Waterbury, Connecticut (newspaper) and
President of American-Republican, Inc. Mr. Pape is a Director of Platt Bros. & Co. and
Paper Delivery, Inc. He is a Trustee of the Connecticut Policy and Economic Council, Inc.
and the Waterbury Y.M.C.A.
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[PHOTO OF ROBERT E.
PATRICELLI] ROBERT E. PATRICELLI
(61 YEARS) 1993
Chairman, President and Chief Executive Officer of Women's Health USA, Inc. (provides
women's health care services), and of Evolution Health, LLC (provides employee benefit
services), both of Avon, Connecticut. From 1987 to 1997, he was Chairman, President and
Chief Executive Officer of Value Health, Inc., Avon, Connecticut. Previously Executive
Vice President of CIGNA Corporation and President of CIGNA's Affiliated Businesses Group.
He has held various positions in the federal government, including White House Fellow in
1965; counsel to a United States Senate Subcommittee; Deputy Undersecretary of the
Department of Health, Education and Welfare; and Administrator of the United States Urban
Mass Transportation Administration. Mr. Patricelli is a Director of Curagen Corporation,
the Connecticut Business & Industry Association, and The Bushnell, and a Trustee of
Wesleyan University.
[PHOTO OF JOHN F. JOHN F. SWOPE
SWOPE] (62 YEARS) 1992
Previously President and Chief Executive Officer, Public Broadcasting Service,
Alexandria, Virginia from 1999 to March 1, 2000. Retired in 1997 as of counsel to the law
firm of Sheehan Phinney Bass + Green, Professional Association, Manchester, New
Hampshire. Previously President of Chubb Life Insurance Company of America, Concord, New
Hampshire (retired December 1994). Mr. Swope is a Director of the Public Broadcasting
Service, PBS Enterprises and the New Hampshire Business Committee for the Arts. He is
President of The Currier Gallery of Art and a Trustee of Tabor Academy.
JOHN F. TURNER
[PHOTO OF JOHN F. (59 YEARS) 1995
TURNER] President and Chief Executive Officer of The Conservation Fund, Arlington, Virginia (a
national nonprofit organization dedicated to land and water conservation and economic
development). From 1989 to 1993, he was Director of the United States Fish & Wildlife
Service in the United States Department of the Interior. He has also served as President
of the Wyoming State Senate. A former Chairman of the Board of Directors of the Bank of
Jackson Hole, Mr. Turner continues as a partner in the family ranch business in Wyoming.
Mr. Turner has assisted schools of natural resources at Duke University, the University
of Michigan and Yale University with wildlife and land use projects. He is a member of
the National Coal Council and is Chairman of the Institute of the Environment and Natural
Resources at the University of Wyoming.
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BOARD COMMITTEES AND RESPONSIBILITIES
The Board of Trustees of Northeast Utilities has Audit, Compensation,
Corporate Governance, Executive, Finance and Nuclear Committees. The Board of
Trustees does not have a Nominating Committee.
The Audit Committee meets independently with the internal and independent
auditors of Northeast Utilities and its subsidiaries to review the auditors'
activities, procedures and recommendations. Following each meeting, the
Committee reports to the full Board. The Committee recommends annually the
appointment of Northeast Utilities' independent auditors for the coming year.
The Audit Committee met five times in 2000. The members of the Committee are
Messrs. Swope (Chair), Conway, Golden and Turner (Vice Chair) and Drs. de
Planque and Kennan, none of whom is an employee of Northeast Utilities or its
subsidiaries. A report from the Audit Committee is included in this proxy
statement and the Audit Committee's Charter is included as Appendix A.
The Compensation Committee reviews and adjusts, as appropriate, the
compensation policies of Northeast Utilities and its subsidiaries and
establishes and implements an evaluation process for the Chief Executive Officer
in conjunction with the Corporate Governance Committee. Following each meeting,
the Committee reports to the full Board. The Compensation Committee met five
times in 2000. The members of the Committee are Messrs. Patricelli (Chair), Pape
(Vice Chair) and Swope, Ms. Cleveland, and Drs. de Planque and Kennan, none of
whom is an employee of Northeast Utilities or its subsidiaries. A report from
this Committee with respect to executive compensation is included in this proxy
statement.
The Corporate Affairs Committee reviews the policies and practices of
Northeast Utilities and its subsidiaries on public issues in areas such as
health, safety, environment and equal employment opportunity. Following each
meeting, the Committee reports to the full Board. The Corporate Affairs
Committee met three times in 2000. The members of the Committee are Messrs.
Turner (Chair), Cloud, Pape and Swope, Dr. Kennan and Ms. Cleveland (Vice
Chair), none of whom is an employee of Northeast Utilities or its subsidiaries.
The Corporate Governance Committee recommends criteria for new Trustees and
identifies prospective Board candidates. The Committee also evaluates the
Board's performance and, in conjunction with the Compensation Committee,
establishes and implements an evaluation process for the Chief Executive
Officer. Following each meeting, the Committee reports to the full Board. The
Corporate Governance Committee met four times in 2000. The members of the
Committee are Dr. Kennan (Chair), Ms. Cleveland (Vice Chair) and Mr. Turner,
none of whom is an employee of Northeast Utilities or its subsidiaries.
The Executive Committee is empowered to exercise all the authority of the
Board, subject to certain limitations set forth in Northeast Utilities'
Declaration of Trust, during the intervals between meetings of the Board. The
Executive Committee met two times in 2000. The members of the Executive
Committee are Messrs. Morris (Chair), Patricelli and Swope and Drs. de Planque
and Kennan (Vice Chair). Other than Mr. Morris, no Committee member is an
employee of Northeast Utilities or its subsidiaries.
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The Finance Committee assists the Board in fulfilling its fiduciary
responsibilities relating to financial plans, policies and programs for
Northeast Utilities and its subsidiaries. Following each meeting, the Committee
reports to the full Board. The Finance Committee met six times in 2000. The
members of the Finance Committee are Messrs. Golden (Chair), Forsgren, Morris
(Vice Chair), Olcott and Patricelli and Dr. Kennan. Other than Messrs. Forsgren
and Morris, no Committee member is an employee of Northeast Utilities or its
subsidiaries.
The Nuclear Committee provides the Board with an independent basis for
overseeing the safety and effectiveness of the nuclear program of the Northeast
Utilities system. More recently, specific attention has been given to oversight
of the recovery of Millstone Units 2 and 3; operation of Seabrook Unit 1;
decommissioning activities of Connecticut Yankee Atomic Power Station and
Millstone Unit 1; management's attention to nuclear safety; progress in
resolving issues with the Nuclear Regulatory Commission, the Institute of
Nuclear Power Operations and other independent evaluations of nuclear
operations; and progress in resolving employee and community concerns. With the
exception of meetings held by conference telephone, following each meeting the
Committee reports to the full Board. The Nuclear Committee met fifteen times in
2000. The members of the Committee are Dr. de Planque (Chair), Ms. Cleveland and
Messrs. Conway (Vice Chair), Pape and Turner, none of whom is an employee of
Northeast Utilities or its subsidiaries.
In 2000, the Board of Trustees held seventeen meetings and the Board and
Committees of the Board held a total of fifty-seven meetings. All of the
nominees for Trustee attended 75 percent or more of the aggregate number of
meetings of the Board and the Committees of which they were members.
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COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides, as of December 31, 2000, information with
respect to persons who are known to Northeast Utilities to beneficially own more
than five percent of the common shares of Northeast Utilities. Northeast
Utilities has no other class of voting securities.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------
Barrow, Hanley, Mewhinney & Strauss, Inc. 11,274,868(1) 7.84%
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, TX
Capital Research and Management Company 10,938,200(2) 7.61%
333 South Hope Street
Los Angeles, California 90071
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(1) According to a Statement on Schedule 13G dated February 12, 2001, Barrow,
Hanley, Mewhinney & Strauss, Inc. holds 11,274,868 common shares of
Northeast Utilities. According to the Schedule 13G, Barrow, Hanley,
Mewhinney & Strauss, Inc. has sole voting power for 7,238,468 shares, shared
voting power for 4,036,400 shares and sole dispositive power for 11,274,868
shares.
(2) According to an Amendment to Schedule 13G dated February 9, 2001, Capital
Research and Management Company holds 10,938,200 common shares of Northeast
Utilities. According to the Amendment, Capital Research and Management
Company has sole voting power for 0 shares, shared voting power for 0
shares, sole dispositive power for 10,938,200 shares and shared dispositive
power for 0 shares. The Schedule 13G states that beneficial ownership is
disclaimed pursuant to Rule 13d-4.
COMMON STOCK OWNERSHIP OF MANAGEMENT
The following table provides information as of February 28, 2001, as to the
beneficial ownership of the common shares of Northeast Utilities by each Trustee
and nominee for Trustee, each of the five highest paid executive officers of
Northeast Utilities and its subsidiaries, and all Trustees, nominees for Trustee
and executive officers as a group. Unless otherwise noted, each Trustee, nominee
and executive officer has sole voting and investment power with respect to the
listed shares.
AMOUNT AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP OF CLASS(1)
---- -------------------- -----------
Cotton Mather Cleveland 15,169(2)
Sanford Cloud, Jr. 10,913(3)
William F. Conway 14,280(2)(4)
E. Gail de Planque 12,256(2)
John H. Forsgren 115,014(5)
Raymond L. Golden 13,210(6)
Cheryl W. Grise 51,396(7)
Elizabeth T. Kennan 13,600(2)
Bruce D. Kenyon 10,458(8)
Hugh C. MacKenzie 18,360(9)
Michael G. Morris 621,767(10)
Emery G. Olcott 17,751(3)
William J. Pape II 9,203(11)
Robert E. Patricelli 17,877(2)
John F. Swope 15,814(2)
John F. Turner 9,705(2)(12)
All Trustees and Executive Officers as a Group (18
persons) 1,147,925(13)
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COMMON STOCK OWNERSHIP OF MANAGEMENT (CONTINUED)
NOTES TO TABLE ON PREVIOUS PAGE
(1) As of February 28, 2001, the Trustees and executive officers of Northeast
Utilities, as a group, beneficially owned less than one percent of the
Northeast Utilities common shares outstanding.
(2) Includes 8,750 shares that could be acquired by the beneficial owner
pursuant to currently exercisable options.
(3) Includes 3,750 shares that could be acquired by the beneficial owner
pursuant to currently exercisable options.
(4) Includes 5,530 shares held jointly by Mr. Conway and his wife, who share
voting and investment power.
(5) Includes 2,738 restricted shares, as to which Mr. Forsgren has sole voting
power but no dispositive power. Includes 107,087 shares that could be
acquired by Mr. Forsgren pursuant to currently exercisable options.
(6) Includes 6,250 shares that could be acquired by Mr. Golden pursuant to
currently exercisable options.
(7) Includes 1,643 restricted shares, as to which Mrs. Grise has sole voting
power, but no dispositive power. Includes 33,724 shares that could be
acquired by Mrs. Grise pursuant to currently exercisable options. Includes
265 shares held by Mrs. Grise's husband as custodian for her children, with
whom she shares voting and dispositive power.
(8) Includes 1,734 restricted shares, as to which Mr. Kenyon has sole voting
power but no dispositive power. Includes 41,772 shares that could be
acquired by Mr. Kenyon pursuant to currently exercisable options.
(9) Mr. MacKenzie retired effective January 1, 2001. Beneficial ownership is
given as of December 31, 2000, and includes 3,285 restricted shares, as to
which Mr. MacKenzie had sole voting power but no dispositive power, and
22,067 shares that could be acquired by Mr. MacKenzie pursuant to then
exercisable options. Mr. MacKenzie's restricted stock and 28,141 unvested
options vested upon his retirement.
(10) Includes 7,779 restricted shares, as to which Mr. Morris has sole voting
power but no dispositive power. Includes 573,476 shares that could be
acquired by Mr. Morris pursuant to currently exercisable options. Includes
13,499 shares held jointly by Mr. Morris and his wife, who share voting and
investment power.
(11) Includes 5,176 shares as to which Mr. Pape shares voting and dispositive
power. Includes 1,250 shares that could be acquired by Mr. Pape pursuant to
currently exercisable options. In addition, Mr. Pape shares beneficial
ownership of 800 shares of CL&P 4.50% Preferred Series 1956.
(12) Includes 955 shares held jointly by Mr. Turner and his wife, who share
voting and investment power.
(13) Includes 2,053 restricted shares held by executive officers other than
those named in the table above as to which they have sole voting power but
no dispositive power. Includes 70,623 shares that could be acquired by them
pursuant to currently exercisable options.
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EXECUTIVE COMPENSATION
The following tables present the cash and non-cash compensation received by
the Chief Executive Officer and the next four highest paid executive officers of
Northeast Utilities, in accordance with rules of the SEC:
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- -------------------------- ---------
LONG
OTHER RESTRICTED SECURITIES TERM
ANNUAL STOCK UNDERLYING INCENTIVE ALL OTHER
COMPEN- AWARD(S) OPTIONS/STOCK PROGRAM COMPENSATION
NAME AND PRINCIPAL SALARY BONUS SATION ($) ($) APPRECIATION PAYOUTS ($)
POSITION YEAR ($) ($) (NOTE 1) (NOTE 2) RIGHTS (#) ($) (NOTE 3)
------------------ ---- ------- --------- ---------- ---------- ------------- --------- ------------
Michael G. Morris 2000 830,770 1,200,000 -- -- 118,352 -- 27,326
Chairman of the Board, 1999 783,173 1,253,300 92,243 348,611 64,574 -- 23,210
President and Chief 1998 757,692 891,000 134,376 255,261 500,000 -- 22,731
Executive Officer
Bruce D. Kenyon 2000 504,616 475,000 -- -- 20,804 -- 16,274
President -- 1999 500,000 -- -- 77,690 21,236 462,500 15,000
Generation Group 1998 500,000 300,000 -- -- 139,745 -- 14,800
John H. Forsgren 2000 444,615 450,000 -- -- 32,852 -- 5,100
Vice Chairman, 1999 429,904 400,000 -- 122,682 73,183 87,003 12,888
Executive Vice President and 1998 373,077 -- -- -- 184,382 -- 104,800
Chief Financial Officer
Hugh C. MacKenzie 2000 270,000 250,000 -- -- 19,712 -- 5,100
President -- 1999 270,000 250,000 -- 73,612 15,496 -- 108,100
Retail Business Group 1998 270,000 -- -- -- 142,549 42,972 7,500
Cheryl W. Grise 2000 279,616 290,000 -- -- 19,712 -- 8,795
President -- 1999 244,712 250,000 -- 73,612 12,916 -- 82,247
Utility Group 1998 209,231 -- -- -- 89,467 20,720 6,123
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING
OPTIONS/SARS % OF TOTAL OPTIONS/SARS EXERCISE OR GRANT DATE
GRANTED (#) GRANTED TO EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME (NOTE 4) IN FISCAL YEAR ($/SH) DATE VALUE ($)
---- ------------ ----------------------- ----------- ---------- ----------
Michael G. Morris 140,000 22.1% 18.4375 2/20/2010 1,027,600
Bruce D. Kenyon 20,000 3.2% 18.4375 2/20/2010 146,800
John H. Forsgren 36,000 5.7% 18.4375 2/20/2010 264,240
Hugh C. MacKenzie 15,000 2.4% 18.4375 2/20/2010 110,100
Cheryl W. Grise 23,000 3.6% 18.4375 2/20/2010 168,820
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AGGREGATED OPTIONS/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
SHARES WITH NUMBER OF SECURITIES VALUE OF UNEXERCISED
RESPECT TO UNDERLYING UNEXERCISED IN-THE-MONEY
WHICH OPTIONS/SARS OPTIONS/SARS
SARS WERE VALUE AT FISCAL YEAR END (#) AT FISCAL YEAR-END ($)
EXERCISED REALIZED ---------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Michael G. Morris -- -- 495,692 327,234 6,543,905 3,221,429
Bruce D. Kenyon -- -- 66,424 33,869 658,708 245,405
John H. Forsgren -- -- 134,605 57,901 1,244,361 413,203
Hugh C. MacKenzie 39,020 380,445 61,087 28,141 618,289 209,563
(Note 5)
Cheryl W. Grise -- -- 43,977 36,141 436,164 256,063
NOTES TO SUMMARY COMPENSATION AND OPTION/SAR GRANTS AND EXERCISES TABLES:
1. Other annual compensation for Mr. Morris consists of 1998 and 1999 relocation
expense reimbursements.
2. The aggregate restricted stock holdings by the five individuals named in the
table were, at December 31, 2000, 31,070 shares with a value of $753,448.
Awards shown for 1998 have vested. Awards shown for 1999 vest one-third on
February 23, 2000, one-third on February 23, 2001, and one-third on February
23, 2002. No restricted shares were awarded to these individuals during 2000.
Dividends paid on restricted stock are either paid out or reinvested into
additional shares.
3. "All Other Compensation" for 2000 consists of employer matching contributions
under the Northeast Utilities Service Company 401k Plan, generally available
to all eligible employees ($5,100 for each named officer) and matching
contributions under the Deferred Compensation Plan for Executives (Mr.
Morris -- $22,226, Mr. Kenyon -- $11,174, and Mrs. Grise -- $3,695).
4. These options were granted on February 22, 2000 under the Incentive Plan. All
options granted vest one-third on February 22, 2001, one-third on February
22, 2002 and one-third on February 22, 2003. Valued using the Black-Scholes
option pricing model, with the following assumptions: Volatility: 26.06
percent (36 months of monthly data); Risk-free rate: 6.55 percent; Dividend
yield: 1.82 percent; Exercise date: February 22, 2010.
5. Mr. MacKenzie's unvested stock options vested and became exercisable upon his
retirement on January 1, 2001.
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PENSION BENEFITS
The table on the following page shows the estimated annual retirement
benefits payable to an executive officer of Northeast Utilities upon retirement,
assuming that retirement occurs at age 65 and that the officer is at that time
not only eligible for a pension benefit under the Northeast Utilities Service
Company Retirement Plan (the Retirement Plan) but also eligible for the
make-whole benefit and the target benefit under the Supplemental Executive
Retirement Plan for Officers of Northeast Utilities System Companies (the
Supplemental Plan). The Supplemental Plan is a non-qualified pension plan
providing supplemental retirement income to system officers. The make-whole
benefit under the Supplemental Plan, available to all officers, makes up for
benefits lost through application of certain tax code limitations on the
benefits that may be provided under the Retirement Plan, and includes as
"compensation" awards under the executive incentive plans and deferred
compensation (as earned). The target benefit further supplements these benefits
and is available to officers at the Senior Vice President level and higher who
are selected by the Board of Trustees to participate in the target benefit and
who remain in the employ of Northeast Utilities companies until at least age 60
(unless the Board of Trustees sets an earlier age).
The benefits presented in the table on the following page are based on a
straight life annuity beginning at age 65 and do not take into account any
reduction for joint and survivorship annuity payments. Final average
compensation for purposes of calculating the target benefit is the highest
average annual compensation of the participant during any 36 consecutive months
compensation was earned. Compensation taken into account under the target
benefit described above includes salary, bonus, restricted stock awards, and
long-term incentive payouts shown in the Summary Compensation Table, but does
not include employer matching contributions under the 401k Plan. In the event
that an officer's employment terminates because of disability, the retirement
benefits shown above would be offset by the amount of any disability benefits
payable to the recipient that are attributable to contributions made by
Northeast Utilities and its subsidiaries under long term disability plans and
policies.
Each of the executive officers of Northeast Utilities named in the Summary
Compensation Table on page 10 is currently eligible for a target benefit, except
Messrs. Morris and Kenyon, whose Employment Agreements provide specially
calculated retirement benefits, based on their previous arrangements with CMS
Energy/Consumers Energy Company (CMS) and South Carolina Electric and Gas,
respectively. Mr. Morris's agreement provides that upon retirement after
reaching the fifth anniversary of his employment date (or upon disability or
termination without cause or following a change in control, as defined) he will
be entitled to receive a special retirement benefit calculated by applying the
benefit formula of the CMS Supplemental Executive Retirement Plan to all
compensation earned from the Northeast Utilities system (the Company) and to all
service rendered to the Company and CMS. If Mr. Kenyon retires with at least
three years of service with the Company, he will be deemed to have two extra
years of service for purpose of his special retirement benefit. If after
achieving three years of service he voluntarily terminates employment following
a "substantial change in responsibilities resulting from a material change in
the business of Northeast Utilities", he will be deemed to have an additional
year of service for purpose of his special retirement benefit, and if he retires
with at least three years of service with the Company, he will receive a lump
sum payment of $500,000.
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In addition, Mr. Forsgren's Employment Agreement provides for supplemental
pension benefits based on crediting up to ten years additional service and
providing payments equal to 25 percent of salary for up to 15 years following
retirement, reduced by four percentage points for each year that his age is less
than 65 years at retirement.
As of December 31, 2000, the executive officers named in the Summary
Compensation Table had the following years of credited service for purposes of
calculating target benefits under the Supplemental Plan (or in the case of
Messrs. Morris and Kenyon, for purposes of calculating the special retirement
benefits under their respective Employment Agreements): Mr. Morris -- 22, Mr.
Kenyon -- 6, Mr. Forsgren -- 4, Mr. MacKenzie -- 35, and Mrs. Grise -- 20. In
addition, Mr. Forsgren had 9 years of service for purposes of his supplemental
pension benefit and would have 25 years of service for such purpose if he were
to retire at age 65. Assuming that retirement were to occur at age 65 for these
officers, retirement would occur with 33, 13, 15, 41 and 36 years of credited
service, respectively.
ANNUAL TARGET BENEFIT
YEARS OF CREDITED SERVICE
----------------------------------------------------
FINAL AVERAGE COMPENSATION 15 20 25 30 35
-------------------------- -------- -------- -------- -------- --------
$ 200,000 $ 72,000 $ 96,000 $120,000 $120,000 $120,000
250,000 90,000 120,000 150,000 150,000 150,000
300,000 108,000 144,000 180,000 180,000 180,000
350,000 126,000 168,000 210,000 210,000 210,000
400,000 144,000 192,000 240,000 240,000 240,000
450,000 162,000 216,000 270,000 270,000 270,000
500,000 180,000 240,000 300,000 300,000 300,000
600,000 216,000 288,000 360,000 360,000 360,000
700,000 252,000 336,000 420,000 420,000 420,000
800,000 288,000 384,000 480,000 480,000 480,000
900,000 324,000 432,000 540,000 540,000 540,000
1,000,000 360,000 480,000 600,000 600,000 600,000
1,100,000 396,000 528,000 660,000 660,000 660,000
1,200,000 432,000 576,000 720,000 720,000 720,000
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TRUSTEE COMPENSATION
During 2000, each Trustee who was not an employee of Northeast Utilities or
its subsidiaries was compensated at an annual rate of $20,000 cash plus 500
common shares of Northeast Utilities, and received $1,000 for each meeting
attended of the Board or its Committees. A non-employee Trustee who participates
in a meeting of the Board or any of its Committees by conference telephone
receives $675 per meeting. Also, a non-employee Trustee who is asked by either
the Board of Trustees or the Chairman of the Board to perform extra services in
the interest of the Northeast Utilities system may receive additional
compensation of $1,000 per day plus necessary expenses. The Chairs of the Audit,
the Compensation, the Corporate Affairs, the Corporate Governance and the
Nuclear Committees were compensated at an additional annual rate of $3,500. In
addition to the above compensation, Dr. Kennan is paid at the annual rate of
$30,000 for the extra services performed as Lead Trustee. The Chair of the
Nuclear Committee receives an additional retainer at the rate of $25,000 per
year.
Under the terms of the Northeast Utilities Incentive Plan (Incentive Plan)
adopted by shareholders at the 1998 Annual Meeting, each non-employee Trustee is
eligible for stock-based grants. During 2000 each such Trustee was granted
non-qualified options to purchase 2,500 common shares of Northeast Utilities.
Receipt of shares acquired on exercise of these options may be deferred pursuant
to the terms of the Northeast Utilities Deferred Compensation Plan for
Executives.
In February 2001 each non-employee Trustee was granted non-qualified
options to purchase 2,500 common shares.
Prior to the beginning of each calendar year, each non-employee Trustee may
irrevocably elect to have all or any portion of the annual retainer fee paid in
the form of common shares of Northeast Utilities. Pursuant to the Northeast
Utilities Deferred Compensation Plan for Trustees, each Trustee may also
irrevocably elect to defer receipt of some or all cash and/or share
compensation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Trustees and
certain officers of Northeast Utilities and persons who beneficially own more
than ten percent of the outstanding common shares of Northeast Utilities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (SEC) and the New York Stock Exchange. Based on review of copies of
such forms furnished to Northeast Utilities, or written representations that no
Form 5 was required, Northeast Utilities believes that for the year ended
December 31, 2000, all such reporting requirements were complied with in a
timely manner except that Mr. Cloud failed to include on his Form 3 shares of
Northeast Utilities acquired in the Yankee Energy System, Inc. merger, and Mr.
Pape failed to report until 2001 800 shares of CL&P preferred stock acquired in
1994 by a privately held corporation of which he is a 7.9 percent owner.
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EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Northeast Utilities Service Company (NUSCO) has entered into employment
agreements (the Officer Agreements) with each of the named executive officers.
The Officer Agreements are also binding on Northeast Utilities and on each
majority-owned subsidiary of Northeast Utilities.
Each Officer Agreement obligates the officer to perform such duties as may
be directed by the NUSCO Board of Directors or the Northeast Utilities Board of
Trustees, protect the Company's confidential information, and refrain, while
employed by the Company and for a period of time thereafter, from competing with
the Company in a specified geographic area. Each Officer Agreement provides that
the officer's base salary will not be reduced below certain levels without the
consent of the officer, and that the officer will participate in specified
benefits under the Supplemental Executive Retirement Plan or other supplemental
retirement programs (see Pension Benefits, above) and/or in certain executive
incentive programs at specified incentive opportunity levels.
Each Officer Agreement provides for a specified employment term and for
automatic one-year extensions of the employment term unless at least six months'
notice of non-renewal is given by either party. The employment term may also be
ended by the Company for "cause", as defined, at any time (in which case no
supplemental retirement benefit, if any, shall be due), or by the officer on
thirty days' prior written notice for any reason. Absent "cause", the Company
may remove the officer from his or her position on sixty days' prior written
notice, but in the event the officer is so removed and signs a release of all
claims against the Company, the officer will receive one or two years' base
salary and annual incentive payments, specified employee welfare and pension
benefits, and vesting of stock appreciation rights, options and restricted
stock.
Under the terms of an Officer Agreement, upon any termination of employment
following a change of control, as defined, between (a) the earlier of the date
shareholders approve a change of control transaction or a change of control
transaction occurs and (b) the earlier of the date, if any, on which the Board
of Trustees abandons the transaction or the date two years following the change
of control, if the officer signs a release of all claims against the Company,
the officer will be entitled to certain payments including a multiple (not to
exceed three) of annual base salary, annual incentive payments, specified
employee welfare and pension benefits, and vesting of stock appreciation rights,
options and restricted stock. Certain of the change in control provisions may be
modified by the Board of Trustees prior to a change in control, on at least two
years' notice to the affected officer(s).
Besides the terms described above, the Officer Agreements of Messrs.
Morris, Kenyon and Forsgren provide for a specified salary, cash, restricted
stock and/or stock options upon employment, special incentive programs and/or
special retirement benefits. See Pension Benefits, above, for further
description of these provisions.
The descriptions of the various agreements set forth above are for purpose
of disclosure in accordance with the proxy and other disclosure rules of the SEC
and shall not be controlling on any party; the actual terms of the agreements
themselves determine the rights and obligations of the parties.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW AND STRATEGY
The Compensation Committee of the Board of Trustees (the Committee) is the
administrator of executive compensation for the executives of the Northeast
Utilities system (the Company) with authority to establish and interpret the
terms of the Company's executive salary and incentive programs. The goal of the
committee's executive compensation program for 2000 was to provide a competitive
compensation package to enable the Company to attract and retain key executives
with an eye towards the future in a more competitive environment. To help
achieve this, the Committee drew upon information from a variety of sources,
including compensation consultants, utility and general industry surveys, and
other publicly available information, including proxy statements. The Committee
further sought to align executive interests with those of Northeast Utilities'
shareholders and with Company performance by continuing with the use of
share-based incentives as a significant part of executives' compensation.
BASE SALARY
The Committee sets the annual base salary for each executive officer except
for the Chief Executive Officer (CEO), whose base salary is set by the Board of
Trustees following a recommendation by the Committee pursuant to an evaluation
process developed by the Committee in conjunction with the Corporate Governance
Committee of the Board of Trustees. The Committee periodically adjusts officers'
base salaries to reflect considerations such as changes in responsibility,
market sensitivity, individual performance and internal equity. In 2000 the
Committee reviewed the average salary growth of officers, as reported by several
national surveys, with the goal of maintaining the current competitive salary
positions. The CEO's base salary was increased by 12.5 percent in 2000 based on
the market review and the Committee's judgment as to his past and expected
future performance.
ANNUAL INCENTIVE AWARDS
The Committee again implemented an Annual Incentive Program during 2000.
The incentive payout target was 80 percent of base salary for the CEO, and
varied from 25 to 50 percent of base salary for the other officers. The Annual
Incentive Program was designed to calculate actual aggregate payouts based on
the Company's performance against a net income goal and pre-established
individual goals. Individual awards were made in cash in January 2001. The CEO
received an award under this program of $1,200,000, or 180 percent of target,
determined on the fulfillment of the net income goal and the successful
achievement of critical strategic, restructuring, and operational goals.
LONG-TERM INCENTIVE GRANTS
Long-term stock-based incentive grants were made in February 2000 to each
executive officer and other officers and certain key employees of the Company.
The Committee targeted these awards, which were made entirely in the form of
stock options, such that long-term incentive awards for the officer group would
generally be at the 50th percentile of general industry. The CEO's grant was
targeted at 158 percent of base salary based upon the Committee's dual goals of
market competitiveness and alignment with shareholder interests.
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INTERNAL REVENUE SERVICE LIMITATION ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Committee believes that its compensation program adequately responds to
issues raised by the deductibility cap placed on executive salaries by Section
162(m) of the Internal Revenue Code because of the use of stock options and
qualified performance-based compensation in Company incentive programs.
Respectfully submitted,
Robert E. Patricelli, Chair
William J. Pape II, Vice Chair
Cotton Mather Cleveland
E. Gail de Planque
Elizabeth T. Kennan
John F. Swope
Dated: February 27, 2001
SHARE PERFORMANCE CHART
The following chart compares the cumulative total return on an investment
in Northeast Utilities common shares with the cumulative total return of the S&P
500 Stock Index and the S&P Electric Companies Index over the last five fiscal
years, in accordance with the rules of the SEC, assuming $100 invested on
January 1, 1996 in Northeast Utilities common shares, S&P 500 Index and S&P
Electric Companies Index with all dividends reinvested. Total return of
Northeast Utilities common shares assumes reinvestment of all dividends on
payment date. Values shown are as of December 31 of each year.
[GRAPH]
NU COMMON S&P ELECTRIC COMPANIES S&P 500
--------- ---------------------- -------
100 100 100
1996 59 100 123
1997 55 126 164
1998 75 146 211
1999 97 117 255
2000 116 203 232
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2. APPROVAL OF EMPLOYEE SHARE PURCHASE PLAN
To encourage employee ownership of the Company, in 1998 the Board adopted
and shareholders approved an employee share purchase plan (the 1998 Plan). The
1998 Plan was terminated in December 2000 in anticipation of the merger of the
Company with Consolidated Edison, Inc., which was subsequently abandoned. The
Board approved a new plan (the Plan) on April 9, 2001, to be effective following
shareholder and regulatory approval. The Plan generally provides all eligible
employees of the Company with a means to purchase, through payroll deductions,
common shares at a discount, consistent with the provisions of the Internal
Revenue Code of 1986, as amended (the Code); under the 1998 Plan, officers
eligible to receive stock options were not eligible for the discounted share
price, though they could otherwise participate. The Board reserved a number of
common shares equal to one-half of one percent of the total number of
outstanding common shares for issuance pursuant to the terms of the Plan each
fiscal year, subject to adjustment in the event of stock splits, stock
dividends, recapitalization, or other changes in the outstanding common shares.
If and to the extent that the reserved shares are not purchased by participants
in any fiscal year, such shares again will be available for purchase in
subsequent years. Under current accounting rules, the issuance of shares at a
discount under the Plan does not adversely affect earnings. The text of the Plan
is included in Appendix B of this proxy statement.
Eligibility. Regular full or part-time employees of the Company are
eligible to participate in the Plan, on a purely voluntary basis, if they meet
certain conditions. To be eligible, an employee's customary employment must be
greater than both twenty hours per week and five months per calendar year. The
employee must also have completed one year of service with the Company. An
employee who owns 5 percent or more of the total combined voting power or value
of all classes of shares of the Company will not be eligible to participate in
the Plan. Temporary employees will not be eligible to participate in the Plan.
Employees whose terms and conditions of employment are subject to negotiation
with a collective bargaining agent may not participate until the agreement
between the Company and such agent provides for such participation.
Approximately 4,900 employees would have been eligible to participate as of
April 1, 2001.
Administration. The Plan is administered by the Compensation Committee of
the Board, or its delegate (the Committee). All funds received or held by the
Company under the Plan will be kept in a segregated account not commingled with
any other funds and may not be used for any corporate purpose except in
connection with the Plan itself. No interest on such funds will be credited to
or paid to any participant under the Plan.
Share Purchases. Eligible employees participate in the Plan through
exercising options to purchase common shares. In general, there will be two
purchase periods beginning in each calendar year. Options are granted to each
participant at the beginning of each purchase period and, assuming that the
participant is an employee at the end of the purchase period, will be
automatically exercised on the last day of the purchase period. Option exercises
will be funded through a participant's payroll deductions at a stated dollar
amount not less than $20 nor more than 25 percent of compensation per pay
period, as determined by the participant, at a price equal to 85 percent of fair
market value of the common shares as of the first or the last trading day of
each purchase period, whichever is lower, unless the Committee determines to use
a different discount not to exceed 15 percent. The fair market value of the
common shares will be determined as the closing
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price of a Northeast Utilities common share for each relevant date. No employee
will be permitted to purchase common shares in any calendar year under the Plan
whose fair market value (determined at the beginning of each purchase period)
exceeds $25,000.
Transferability. An option granted under the Plan may not be transferred
by an employee other than by will or by the laws of descent and distribution.
Only the employee may exercise the option during his or her lifetime.
Withdrawals, Discontinuance or Suspension of Participation. A participant
may voluntarily suspend his or her payroll deductions at any time, but will not
be permitted to resume the payroll deductions until the beginning of the next
purchase period following the date of suspension of payroll deductions. A
participant may change the rate of his or her payroll deductions effective as of
the beginning of any purchase period. A participant may withdraw shares from his
or her account at any time; provided that all shares must be held (and thus may
not be distributed or sold) for at least six months subsequent to purchase. If a
participant terminates his or her employment with the Company, his or her
participation in the Plan will automatically terminate as of the date of
termination of employment, all amounts withheld through payroll deduction that
have not been applied to purchase common shares under the Plan will be paid to
the participant, and the shares held in his or her account will either be sold
for the account of the terminated participant or distributed to the terminated
participant, at his or her election.
Amendment and Termination. The Board may terminate, suspend or amend the
Plan in any respect at any time, except that shareholder approval is required to
broaden the eligibility criteria or increase the number of shares available for
purchase. Unless earlier terminated, the Plan will continue in effect for 10
years.
Federal Income Tax Treatment. The Plan is intended to qualify as an
employee stock purchase plan within the meaning of section 423 of the Code.
Under the Code, an employee who elects to participate in the Employee Share
Purchase Plan will not realize income at the time the offering commences or when
the shares are actually purchased under the Plan. If an employee disposes of
such shares after two years from the date the offering of such shares commences
under the Plan and after one year from the actual date of purchase of such
shares under the Plan (collectively, the Holding Period), the employee will be
required to include in income, as capital gain for the year in which such
disposition occurs, an amount equal to the lesser of (1) the excess of the fair
market value of such shares at the time of disposition over the purchase price
and (2) the excess of the fair market value of such shares at the time the
offering commenced over the purchase price. If any employee disposes of the
shares purchased under the Plan during the Holding Period, the employee will be
required to include in income, as compensation for the year in which such
disposition occurs, an amount equal to the excess, if any, of the fair market
value of such shares on the date of purchase over the purchase price. The
employee's basis in such shares disposed of will be increased by an amount equal
to the amount includable in his or her income as compensation, and any gain or
loss computed with reference to such adjusted basis that is recognized at the
time of disposition will be capital gain or loss, either short-term or
long-term, depending on the length of the holding period for such shares. In the
event of a disposition during the Holding Period, the Company will be entitled
to a deduction from income equal to the amount the employee is required to
include in income as a result of such disposition.
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Regulatory Approvals. The SEC has issued an order under the Public Utility
Holding Company Act of 1935 authorizing the solicitation of proxies seeking
approval of the Plan. The Company has applied for SEC authorization to issue new
common shares, subject to the limits set forth above, for purchases under the
Plan. SEC action on the application is expected later in 2001.
Share Purchases Under Plan. No purchases will be made under the Plan until
after shareholder approval of the Plan is obtained. Because share purchases
under the Plan are made solely at the election of the eligible employee, it is
not possible to ascertain the employees who will purchase shares under the Plan
in the current fiscal year.
An affirmative vote of a majority of the common shares present or
represented at the Annual Meeting of Shareholders will be required for the
adoption of this proposal.
THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS VOTE FOR THIS PROPOSAL.
3. RATIFICATION OF THE SELECTION OF AUDITORS
The firm of Arthur Andersen LLP, independent public accountants, was
selected by the Board of Trustees, and approved by the shareholders, to serve as
independent auditors of Northeast Utilities and its subsidiaries for 2000.
Pursuant to the recommendation of the Audit Committee, the Board of Trustees
recommends that shareholders ratify the selection by the Board of Trustees of
Arthur Andersen LLP to audit the accounts of Northeast Utilities and its
subsidiaries for 2001. Representatives of Arthur Andersen LLP are expected to be
present at the meeting. They will have the opportunity to make a statement, if
they desire to do so, and to respond to appropriate questions raised at the
meeting.
THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS VOTE FOR THIS PROPOSAL.
RELATIONSHIP WITH INDEPENDENT AUDITORS
Arthur Andersen LLP has been the independent accounting firm that audits
the financial statements of Northeast Utilities and its subsidiaries since 1977.
Audit services performed by Arthur Andersen for fiscal 2000 consisted of an
examination of and report on the financial statements of Northeast Utilities and
its principal subsidiaries and benefit plans and services with respect to
filings with government agencies such as the Securities and Exchange Commission,
the Federal Energy Regulatory Commission, and the Connecticut Department of
Public Utility Control. Arthur Andersen also provided certain non-audit services
during 2000, in the areas of tax return preparation and review and assistance on
audit, assistance with private letter ruling, internal controls, agreed-upon
procedures, financings, accounting and tax research, litigation support, and
restructuring.
Audit Fees.................................................. $972,000
Financial Information Systems Design and Implementation
Fees...................................................... $ 0
All Other Fees.............................................. $521,300
The Audit Committee has considered whether the provision of non-audit
services by Arthur Andersen is compatible with maintaining auditor independence.
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REPORT OF THE AUDIT COMMITTEE
The Audit Committee is responsible for oversight of the relationship of
Northeast Utilities with its independent accountants on behalf of the Board of
Trustees. A copy of the Audit Committee's charter is included as Appendix A to
this proxy statement. As part of its responsibilities, the Audit Committee has
received the written disclosures and the letter from the independent accountants
required by the Independence Standards Board, has discussed these matters and
the independent accountant's independence with the independent accountants as
required pursuant to generally accepted auditing standards, and has reviewed and
discussed the audited financial statements of Northeast Utilities for the year
ending December 31, 2000 with management. Based on the review and discussions
referred to in the previous sentence, the Audit Committee recommended to the
Board of Trustees that the audited financial statements be included in Northeast
Utilities' Annual Report on Form 10-K for the year ending December 31, 2000 for
filing with the Securities and Exchange Commission.
Respectfully submitted,
John F. Swope, Chair
John F. Turner, Vice Chair
William F. Conway
E. Gail de Planque
Raymond L. Golden
Elizabeth T. Kennan
Dated: April 9, 2001
4. OTHER MATTERS
The Board of Trustees knows of no matters other than the foregoing to come
before the meeting. However, if any other matters come before the meeting, the
persons named in the enclosed proxy will vote in their discretion with respect
to such other matters.
ANNUAL REPORT
Certain portions of Northeast Utilities' Annual Report to Shareholders for
the year ended December 31, 2000, including audited financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are included with this proxy solicitation material as Appendix C. A
Summary Annual Report containing condensed financial statements and other
information accompanies this proxy statement. An additional copy of this proxy
statement including the Annual Report will be mailed to any shareholder upon
request.
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CERTAIN LEGAL PROCEEDINGS
On October 13, 1999, and October 19, 1999, shortly after Northeast
Utilities and Consolidated Edison, Inc. agreed to merge, virtually identical
complaints were filed in the Supreme Court of New York against NU and its Board
of Trustees. Both complaints purport to be "class action complaints" and allege
that the trustees have breached their fiduciary duties to the plaintiffs and
other members of the class by acting in their own interest in (i) not obtaining
the best price for NU's assets and businesses and (ii) failing to seek other
offers through an auction process. The plaintiffs seek equitable relief,
including an order that the trustees maximize shareholder value and award
attorneys fees. The cases are now pending in state court in New York and have
been inactive during the pendency of the Federal action referred to below. An
additional action was brought in Federal court in New York by the plaintiffs in
the shareholder state court actions, alleging that NU, Con Edison and NU's
Trustees have, in addition to violating fiduciary duties, violated Section 14(a)
of the Securities Exchange Act of 1934 by filing a joint proxy statement that
fails to disclose material information about Con Edison's Indian Point nuclear
generating plant. To avoid a preliminary injunction proceeding and the
possibility of the cancellation of the April 14, 2000, shareholders' vote to
approve the merger, Con Edison and NU agreed to send a supplement to the proxy
to their shareholders addressing recent developments concerning Indian Point. At
a status conference on November 3, 2000, in the Federal case, a tentative
settlement agreement was reached by which a class would be certified, counsel
fees would be paid by Con Edison and the Section 14(a) claim would be dismissed
with prejudice. The parties executed the settlement agreement which was
submitted to the Court, for approval, at the status conference on March 16,
2001. At the conference, the Court, as a result of the termination of the merger
agreement, dismissed the fiduciary duty claims without prejudice, and scheduled
a hearing for approval of the settlement for July 13, 2001. Notice of the
hearing accompanies this proxy statement. After dismissal of the Federal action,
the Trustees will move to dismiss the state court actions, without prejudice,
because the issues raised therein are moot.
COST OF SOLICITATION OF PROXIES
The cost of soliciting proxies on behalf of the Board of Trustees will be
borne by Northeast Utilities. In addition to the use of the mails, proxies may
be solicited by personal interview, telephone or telegraph, by Trustees,
officers or employees of Northeast Utilities or Northeast Utilities Service
Company, by employees of The Bank of New York, Transfer Agent and Registrar, or
by an independent company, Morrow & Co., Inc., which has been retained to assist
in the solicitation of proxies from banks, brokerage firms, nominees and
individual shareholders for a fee of $12,000 plus reimbursement for expenses.
Arrangements will be made to reimburse brokerage firms, nominees, custodians and
fiduciaries for expenses incurred in forwarding solicitation materials to the
beneficial owners of common shares held as of April 30, 2001.
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SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
To be included in the proxy statement and form of proxy for the 2002 Annual
Meeting of Shareholders, proposals by shareholders must be received no later
than December 4, 2001, and must satisfy the conditions established by the SEC.
Shareholder proposals submitted to be considered at the 2002 Annual Meeting
without inclusion in next year's proxy materials must be received no later than
February 14, 2002. If Northeast Utilities is not notified of a shareholder
proposal by February 14, 2002, then proxies held by management may provide the
discretion to vote against such proposal, even though such proposal is not
discussed in the proxy statement. Proposals should be addressed to O. Kay
Comendul, Assistant Secretary, Post Office Box 270, Hartford, Connecticut
06141-0270.
By order of the Board of Trustees,
/s/ Gregory B. Butler
Gregory B. Butler
Vice President, Secretary
and General Counsel
ANNUAL REPORT ON FORM 10-K
Northeast Utilities will provide shareholders with a copy of its 2000
Annual Report on Form 10-K to the SEC, including the financial statements and
schedules thereto, without charge, upon receipt of a written request sent to:
O. KAY COMENDUL
ASSISTANT SECRETARY
NORTHEAST UTILITIES
POST OFFICE BOX 270
HARTFORD, CONNECTICUT 06141-0270
23
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[NORTHEAST UTILITIES LOGO]
DETACH PROXY CARD HERE
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[ ]
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THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
1. Election of the eleven Trustees nominated
FOR all nominees [ ] WITHHOLD AUTHORITY to [ ] FOR ALL EXCEPT [ ]
vote for all nominees AS MARKED
TO VOTE FOR ALL NOMINEES, MARK THE "FOR" BOX. TO WITHHOLD VOTING FOR A PARTICULAR NOMINEE(S), MARK THE "FOR
ALL EXCEPT AS MARKED" BOX AND STRIKE A LINE THROUGH THE NAME OF THE NOMINEE(S) IN THE LIST BELOW. TO WITHHOLD
VOTING ON ALL NOMINEES, MARK THE "WITHHELD" BOX. <
Nominees: Cotton Mather Cleveland, Sanford Cloud, Jr., E. Gail de Planque, John H. Forsgren, Raymond L. Golden, PLEASE
Elizabeth T. Kennan, Michael G. Morris, William J. Pape II, Robert E. Patricelli, John F. Swope, John F. Turner DETACH
----------------------------------------------------------------------------------------------------------------- HERE
2. Approval of the Employee Share Purchase Plan. 3. Ratification of Arthur Andersen LLP as independent
auditors for 2001. YOU
MUST
FOR [ ] AGAINST [ ] ABSTAIN [ ] FOR [ ] AGAINST [ ] ABSTAIN [ ] DETACH
----------------------------------------------------------------------------------------------------------------- THIS
PORTION
Address Change [ ] OF THE
Mark Here PROXY CARD
The undersigned hereby acknowledges BEFORE
receipt of notice of meeting RETURNING
and related proxy statement. IT IN THE
Dated: , 2001 ENCLOSED
--------------------------- ENVELOPE
<
----------------------------------------
Signature
----------------------------------------
Signature
Please sign in the same form as name appears
hereon. If the shares are registered in more
than one name, each joint owner of fiduciary
should sign. Fiduciaries and corporate officers
should indicate their titles.
(PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED VOTES MUST BE INDICATED [X]
POSTAGE PREPAID ENVELOPE.) (x) IN BLACK OR BLUE INK.
29
PROXY PROXY
NORTHEAST UTILITIES
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS - JUNE 28, 2001
The undersigned appoints MICHAEL G. MORRIS and ELIZABETH T. KENNAN, and either
of them, proxies of the undersigned, with power of substitution, to act for and
to vote all common shares of the undersigned at the Annual Meeting of
Shareholders of Northeast Utilities to be held on June 28, 2001, and any
adjournment thereof, upon the matters set forth in the notice of said meeting
as indicated below. The proxies are further authorized to vote, in their
discretion, upon such other business as may properly come before the meeting or
any adjournment thereof.
When properly executed, this proxy will be voted as specified by the
undersigned. Unless otherwise instructed, this proxy will be voted FOR
proposals 1, 2 and 3.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
(Continued and to be dated and signed on the reverse side.)
NORTHEAST UTILITIES
P.O. BOX 11236
NEW YORK, N.Y. 10203-0236
30
APPENDIX A
AUDIT COMMITTEE CHARTER
(ADOPTED MAY 9, 2000)
ROLE, ORGANIZATION AND INDEPENDENCE
The Audit Committee (the Committee) of the Board of Trustees assists the Board
in fulfilling its responsibility for oversight of the quality and integrity of
the accounting, auditing, control and reporting practices of Northeast Utilities
(the Company) and such other duties as directed by the Board. The Committee
consists of three or more Trustees who are generally knowledgeable in financial
matters, including at least one member with accounting or related financial
management expertise. Each member shall be free of any relationship that, in the
opinion of the Board, would interfere with his or her individual exercise of
independent judgment. The Committee shall maintain free and open communication
(including private executive sessions) with the independent auditors and
internal auditors. The Committee is empowered to investigate any matter brought
to its attention, and to retain appropriate resources for such purpose.
The independent auditor is accountable to the Board of Trustees and the
Committee. The Board of Trustees, with input from the Committee, has authority
and responsibility to select, evaluate and replace the independent auditor. The
Board will propose the outside auditor to shareholders for approval.
RESPONSIBILITIES
The Committee's responsibilities are to:
-- Maintain an understanding and general overview of the Company's
operational and financial risks and risk management strategies.
-- Ensure that the independent auditor submits, on at least an annual
basis, a formal written statement delineating all relationships between the
auditor and the Company, including audit and non-audit services. The Committee
shall discuss such disclosed relationships or services that may impact on the
objectivity or independence of the independent auditor and make appropriate
recommendations to the Board to assure the independence of the auditor.
-- Review the adequacy of the Committee's charter annually, and submit
charter revisions to the Board for consideration, as required.
-- Review annual financial statements with the independent auditors and
with management, including both the acceptability and quality of such financial
statements and underlying accounting principles.
-- Review with management and the independent auditors the Company's
quarterly financial results. These reviews may be conducted by the Committee or
its Chairman.
-- Annually prepare a report to shareholders as required by the Securities
and Exchange Commission for inclusion in the Company's annual proxy statement.
-- Provide guidance and oversight for the internal audit department of the
Company, as appropriate, and review and discuss the reports issued by the
internal auditors and implementation by management of recommendations made by
the auditors. The Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities, and it has direct access to the
independent auditors as well as anyone in the organization. The Committee has
the ability to retain, at the Company's expense, special legal, accounting, or
other consultants or experts it deems necessary in the performance of its
duties.
-- Discuss with management any legal or regulatory matters that may have a
material impact on the Company's financial statements.
-- Report Committee activities to the Board.
To discharge its duties, the Committee shall hold meetings as it deems
necessary, but shall meet a minimum of four times annually, and it shall have
open and free access to all information or require any officer or employee of
the Company, or its subsidiaries, to furnish it with information, documents or
reports that it deems necessary or desirable to carry into effect the intent and
purpose of this charter.
In exercising its obligations under this charter, it is intended that the
Committee will comply with all applicable audit committee requirements of the
Securities and Exchange Commission and the New York Stock Exchange.
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APPENDIX B
NORTHEAST UTILITIES EMPLOYEE SHARE PURCHASE PLAN II
ARTICLE I - PURPOSE
The purpose of the Northeast Utilities Employee Share Purchase Plan II (the
"Plan") is to provide a means whereby the Company (as hereinafter defined) may
provide eligible employees an opportunity to purchase shares of Company Stock
(as hereinafter defined). The Board of Trustees of Northeast Utilities believes
that employee participation in share ownership will be to the mutual benefit of
both the employees and the Company. The Plan is intended to constitute an
"employee stock purchase plan" within the meaning of section 423 of the Internal
Revenue Code of 1986, as amended (the "Code") and is not intended and shall not
be construed as constituting an "employee benefit plan," within the meaning of
section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.
ARTICLE II - DEFINITIONS
Affiliate. "Affiliate" means each direct and indirect affiliated company that
through one or more intermediaries, controls, is controlled by, or is under
common control with NU.
Board. "Board" means the board of trustees of NU.
Code. "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
Committee. "Committee" means the Board's Compensation Committee, or the person
or persons to which such committee delegates any of its functions under the
Plan.
Company. "Company" means NU and any Affiliate which is authorized by the
Committee to adopt the Plan and cover its Eligible Employees and whose
designation as such has become effective upon acceptance of such status by the
board of directors of the Affiliate. An Affiliate may revoke its acceptance of
such designation at any time, but until such acceptance has been revoked, all
the provisions of the Plan, including the authority of the Board and the
Committee, and amendments thereto shall apply to the Eligible Employees of the
Affiliate. In the event the designation is revoked by the board of directors of
an Affiliate, the Plan shall be deemed terminated only with respect to such
Affiliate.
Company Stock. "Company Stock" means common shares in NU, par value $5.00.
Effective Date. "Effective Date" shall mean the first Election Date beginning
after (a) the later of the approval of the Plan (i) by the shareholders of NU
and (ii) the Securities and Exchange Commission pursuant to the Public Utility
Holding Company Act of 1935, and (b) the authorization of elections by the
Board.
Election Date. "Election Date" means each date as the Committee shall specify.
Eligible Employee. "Eligible Employee" means each employee of the Company (i)
who is classified by the Company as an employee (and not as an independent
contractor no matter how characterized by a court or administrative agency),
(ii) whose customary employment is for more than 20 hours per week and for more
than five months per year, (iii) who is not deemed for purposes of section
423(b)(3) of the Code to own shares possessing five percent or more of the total
combined voting power or value of all classes of shares of NU or any subsidiary,
and (iv) who has completed at least one Year of Service with the Company after
being classified as an employee (without regard to any retroactive
recharacterization); provided, however, that an "Eligible Employee" whose terms
and conditions of employment are subject to negotiation with a collective
bargaining agent shall be deemed not to have elected to file a Purchase
Agreement until the agreement between the Company and such collective bargaining
agent with respect to the employee provides for participation in the Plan.
Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and as the same may hereafter be amended.
Market Value. "Market Value" means the closing price of the Company Stock for
the relevant date (or the latest date for which such price was reported if such
date is not a business day), or if not available, (x) if the principal trading
market for the Company Stock is the New York Stock Exchange, the last reported
sale price thereof on
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the relevant date or (if there were no trades on that date) the latest preceding
date upon which a sale was reported, (y) if the principal trading market for the
Company Stock is a national securities exchange other than the New York Stock
Exchange or is the Nasdaq National Market, the last reported sale price thereof
on the relevant date or (if there were no trades on that date) the latest
preceding date upon which a sale was reported, or (z) if the Company Stock is
not principally traded on such exchange or market, the mean between the last
reported "bid" and "asked" prices of Company Stock on the relevant date, as
reported on Nasdaq or, if not so reported, as reported by the National Daily
Quotation Bureau, Inc. or as reported in a customary financial reporting
service, as applicable and as the Committee determines. If the Company Stock is
not publicly traded or, if publicly traded, is not subject to reported
transactions or "bid" or "asked" quotations as set forth above, the Fair Market
Value per share shall be as determined by the Committee.
NU. "NU" means Northeast Utilities, a Massachusetts business trust, and its
successors and assigns.
Participant. "Participant" means an Eligible Employee who elects to participate
in the Plan.
Plan. "Plan" means the Northeast Utilities Employee Share Purchase Plan II, as
amended from time to time.
Plan Year. "Plan Year" means each calendar year during which the Plan is in
effect.
Purchase Agreement. "Purchase Agreement" means the instrument prescribed by the
Committee pursuant to which an Eligible Employee may enroll as a Participant and
subscribe for the purchase of shares of Company Stock on the terms and
conditions offered by the Company. The Purchase Agreement is intended to
evidence the Company's offer of an option to the Eligible Employee to purchase
Company Stock on the terms and conditions set forth therein and herein.
Purchase Date. "Purchase Date" means the last day of each Purchase Period.
Purchase Period. "Purchase Period" means the period that begins on each
Election Date on and following the Effective Date and ending on the last trading
day before the next Election Date or other period specified by the Committee
during which the Participant's Company Stock purchase is funded through payroll
deduction accumulations.
Purchase Price. "Purchase Price" means the purchase price for shares of Company
Stock purchased under the Plan, determined as set forth in Section 4.3.
Year of Service. "Year of Service" means a "Year of Service" credited to a
Participant under the Northeast Utilities Service Company Retirement Plan prior
to the Election Date.
ARTICLE III - ADMISSION TO PARTICIPATION
3.1 Initial Participation. An Eligible Employee may elect to participate
in the Plan and may become a Participant effective as of any Election Date, by
executing and filing with the Committee a Purchase Agreement at such time in
advance of such Election Date as the Committee shall prescribe. The Purchase
Agreement shall remain in effect until modified or canceled in accordance with
the terms of this Plan.
3.2 Discontinuance of Participation. A Participant may voluntarily cease
his or her participation in the Plan and stop payroll deductions at any time by
filing a notice of cessation of participation on such form and at such time in
advance of the effective date as the Committee shall prescribe. Notwithstanding
anything in the Plan to the contrary, if a Participant ceases to be an Eligible
Employee, his or her participation automatically shall cease and no further
purchase of Company Stock shall be made for the Participant.
3.3 Readmission to Participation. Any Eligible Employee who has
previously been a Participant, who has discontinued participation (whether by
cessation of eligibility or otherwise), and who wishes to be reinstated as a
Participant may again become a Participant by executing and filing with the
Committee a new Purchase Agreement. Reinstatement to Participant status shall be
effective as of any Election Date, provided the Participant files a new Purchase
Agreement with the Committee at such time in advance of the Election Date as the
Committee shall prescribe.
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ARTICLE IV - COMPANY STOCK PURCHASE AND RESALE
4.1 Reservation of Shares. There shall be a number of shares of Company
Stock equal to one-half of one percent (0.5%) of the total number of shares of
Company Stock outstanding in each Plan Year reserved for issuance or transfer
under the Plan during or for that Plan Year, subject to adjustment in accordance
with the antidilution provisions hereinafter set forth. If and to the extent
that less than the full number of shares of Company Stock reserved for issuance
or transfer under the Plan, as set forth above, are actually so issued or
transferred, then the remaining shares shall again be available for issuance or
transfer under the Plan. Except as provided in Section 5.2, the aggregate number
of shares of Company Stock that may be purchased under the Plan shall not exceed
five percent (5%) of the total number of shares of Company Stock outstanding as
of December 31, 2000.
4.2 Limitation on Shares Available. The maximum number of shares of
Company Stock that may be purchased for each Participant on a Purchase Date is
the lesser of (a) the number of whole and fractional shares of Company Stock
that can be purchased by applying the full balance of the Participant's withheld
funds to the purchase of shares of Company Stock at the Purchase Price, or (b)
the Participant's proportionate part of the maximum number of shares of Company
Stock available under the Plan, as stated in Section 4.1. Moreover, (a) the
maximum number of shares of Company Stock that may be purchased by a Participant
during the first Purchase Period in a Plan Year is an amount determined by
dividing the $25,000 limit under Section 4.4(c) by the per share Market Value of
Company Stock as determined on the first day of such Purchase Period; and (b)
the maximum number of shares of Company Stock that may be purchased by a
Participant during the second Purchase Period in a Plan Year is an amount
determined by dividing (i) the difference determined by subtracting the total
Purchase Price paid for all shares of Company Stock purchased during the first
Purchase Period in that Plan Year from the $25,000 limit under Section 4.4(c),
by (ii) the per share Market Value of Company Stock as determined on the first
day of the second Purchase Period. Notwithstanding the foregoing, if any person
entitled to purchase shares pursuant to any offering under the Plan would be
deemed for purposes of section 423(b)(3) of the Code to own stock (including any
number of shares of Company Stock that such person would be entitled to purchase
hereunder) possessing five percent or more of the total combined voting power or
value of all classes of shares of the Company, the maximum number of shares of
Company Stock that such person shall be entitled to purchase pursuant to the
Plan shall be reduced to that number which, when added to the number of shares
that such person is deemed to own (excluding any number of shares of Company
Stock that such person would be entitled to purchase hereunder), is one less
than such five percent. Any amounts withheld from a Participant's compensation
that cannot be applied to the purchase of Company Stock by reason of the
foregoing limitation shall be returned to the Participant as soon as
practicable.
4.3 Purchase Price of Shares. The Purchase Price per share of the Company
Stock sold to Participants pursuant to any offering under the Plan shall be the
lower of (i) 85% of the Market Value of such share on the first trading day of
the Purchase Period or (ii) 85% of the Market Value of such share on the
Purchase Date. Notwithstanding the foregoing, the Committee, acting on behalf of
the Company, may determine that the Purchase Price shall be the Market Value, or
a percentage of the Market Value, on either of such dates or the lower of such
dates, so long as the percentage shall not be lower than 85% of such Market
Value.
4.4 Exercise of Purchase Privilege.
(a) Each Participant shall be granted an option to purchase shares of
Company Stock as of the first day of each Purchase Period at the Purchase Price
specified in Section 4.3. The option shall continue in effect through the
Purchase Date for the Purchase Period. Subject to the provisions of Section 4.2
above and of paragraph (c) of this Section 4.4, on each Purchase Date, the
Participant shall automatically be deemed to have exercised his or her option to
purchase shares of Company Stock, unless he or she notifies the Committee, in
such manner and at such time in advance of the Purchase Date as the Committee
shall prescribe, of his or her desire not to make such purchase.
(b) There shall be purchased for the Participant on each Purchase Date, at
the Purchase
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Price for the Purchase Period, the largest number of whole shares of Company
Stock as can be purchased with the amounts withheld from the Participant's
compensation during the Purchase Period. Each such purchase shall be deemed to
have occurred on the Purchase Date occurring at the close of the Purchase Period
for which the purchase was made.
(c) A Participant may not purchase shares of Company Stock having an
aggregate Market Value of more than $25,000, determined at the beginning of each
Purchase Period, for any calendar year in which one or more offerings under this
Plan are outstanding at any time, and a Participant may not purchase a share of
Company Stock under any offering after the expiration of the Purchase Period for
the offering.
4.5 Payroll Deductions. Each Participant shall authorize payroll
deductions from his or her compensation for the purpose of funding the purchase
of Company Stock pursuant to his or her Purchase Agreement. In the Purchase
Agreement, each Participant shall authorize an after-tax payroll deduction from
each payment of compensation during a Purchase Period of an amount not less than
$20 per paycheck and not more than 25% of such Participant's compensation. A
Participant may change the deduction to any permissible level effective as of
any Election Date. A change shall be made by the Participant's filing with the
Committee a notice in such form and at such time in advance of the date on which
the change is to be effective as the Committee shall prescribe.
4.6 Payment for Company Stock. The Purchase Price for all shares of
Company Stock purchased by a Participant under the Plan shall be paid out of the
Participant's authorized payroll deductions. All funds received or held by the
Company under the Plan will be kept in a segregated account not commingled with
any other funds of the Company and may not be used for any corporate purpose
except in connection with the Plan itself.
4.7 Share Ownership; Issuance of Certificates.
(a) The shares of Company Stock purchased by a Participant on a Purchase
Date shall, for all purposes, be deemed to have been issued or sold at the close
of business on the Purchase Date. Prior to that time, none of the rights or
privileges of a shareholder of the Company shall inure to the Participant with
respect to such shares of Company Stock. All the shares of Company Stock
purchased under the Plan shall be delivered by the Company in a manner as
determined by the Committee.
(b) The Committee, in its sole discretion, may determine that shares of
Company Stock shall be delivered by the Company by (i) issuing and delivering to
the Participant a certificate for the number of shares of Company Stock
purchased by the Participant on a Purchase Date or during a calendar year or
other period determined by the Committee, (ii) issuing and delivering
certificates for the number of shares of Company Stock purchased by all
Participants on a Purchase Date or during a calendar year or other period
determined by the Committee to a firm which is a member of the National
Association of Securities Dealers, as selected by the Committee from time to
time, which shares shall be maintained by such firm in a separate brokerage
account for each Participant, or (iii) issuing and delivering certificates for
the number of shares of Company Stock purchased by all Participants on a
Purchase Date or during the calendar year or other period determined by the
Committee to a bank or trust company or affiliate thereof, as selected by the
Committee from time to time, which shares may be held by such bank or trust
company or affiliate in street name, but with a separate account maintained by
such entity for each Participant reflecting such Participant's share interests
in the Company Stock. Each certificate or account, as the case may be, may be in
the name of the Participant or, if he or she so designates on the Participant's
Purchase Agreement, in the Participant's name jointly with the Participant's
spouse, with right of survivorship. A Participant who is a resident of a
jurisdiction that does not recognize such joint tenancy may have a certificate
or account held in the Participant's name as tenant in common with the
Participant's spouse, with or without right of survivorship. No fractional
shares may be purchased under the Plan and the balance of any amounts withheld
from a Participant's compensation which are not applied to the purchase of
Company Stock shall be held in the account established in Section 4.6 and
applied to the purchase of additional shares for the Participant during the next
Purchase Period or, at the Participant's election, returned to the Participant.
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(c) The Committee, in its sole discretion, may impose such restrictions or
limitations as it shall determine on the resale of Company Stock, the issuance
of individual share certificates or the withdrawal from any shareholder accounts
established for a Participant.
(d) Any dividends payable with respect to shares of Company Stock credited
to a shareholder account of a Participant established pursuant to Section 4.7(b)
hereof will be reinvested in shares of Company Stock and credited to the
Participant's account.
4.8 Withdrawal of Shares or Resale of Company Stock.
(a) A Participant may request a withdrawal of shares of Company Stock
purchased for the Participant under the Plan or order the sale of such shares at
any time by making a request in such form and at such time as the Committee
shall prescribe. Notwithstanding the foregoing and section 4.7(c), no such
shares may be withdrawn, sold, or otherwise distributed for at least six months
following their purchase for the Participant.
(b) If a Participant terminates his or her employment with the Employer or
otherwise ceases to be an Eligible Employee, the Participant shall receive a
distribution of his or her shares of Company Stock held in any shareholder
account established pursuant to Section 4.7(b).
(c) If a Participant is to receive a withdrawal or distribution of shares
of Company Stock, or if shares are to be sold, the withdrawal, distribution or
sale shall be made in whole shares of Company Stock, with fractional shares paid
in cash.
ARTICLE V - SPECIAL ADJUSTMENTS
5.1 Shares Unavailable. If, on any Purchase Date, the aggregate funds
available for the purchase of Company Stock would purchase a number of shares in
excess of the number of shares of Company Stock then available for purchase
under the Plan, the number of shares of Company Stock that would otherwise be
purchased by each Participant for that Plan Year shall be proportionately
reduced on the Purchase Date in order to eliminate such excess. The balance of
any amounts withheld from a Participant's compensation which had not by such
time been applied to the purchase of Company Stock shall be returned to the
Participant.
5.2 Anti-Dilution Provisions. The aggregate number of shares of Company
Stock reserved for purchase under the Plan, as provided in Section 4.1, and the
calculation of the Purchase Price per share shall be appropriately adjusted to
reflect any increase or decrease in the number of issued shares of Company Stock
resulting from a subdivision or consolidation of shares or other capital
adjustment, or the payment of a share dividend, or other increase or decrease in
such shares, if effected without receipt of consideration by the Company. Any
such adjustment shall be made by the Committee acting with the consent of, and
subject to the approval of, the Board.
5.3 Effect of Certain Transactions. Subject to any required action by the
shareholders, if the Company shall be the surviving corporation in any merger or
consolidation, any offering hereunder shall pertain to and apply to the shares
of the Company. However, in the event of a dissolution or liquidation of the
Company, or of a merger or consolidation in which the Company is not the
surviving corporation, the Plan and any offering hereunder shall terminate upon
the effective date of such dissolution, liquidation, merger or consolidation,
and the balance of any amounts withheld from a Participant's compensation which
had not by such time been applied to the purchase of Company Stock shall be
returned to the Participant.
ARTICLE VI - MISCELLANEOUS
6.1 Non-Alienation. The right to purchase shares of Company Stock under
the Plan is personal to the Participant, is exercisable only by the Participant
during the Participant's lifetime, except as hereinafter set forth, and may not
be assigned or otherwise transferred by the Participant. If a Participant dies,
there shall be delivered to the executor, administrator or other personal
representative of the deceased Participant such shares of Company Stock and such
residual amounts as may remain to the Participant's credit from amounts withheld
from the Participant's compensation as of the Purchase Date occurring at the
close of the period in which the Participant's death occurs, including shares of
Company Stock purchased as of that date or prior thereto with moneys withheld
from the Participant's compensation.
6.2 Administrative Costs. The Company shall pay all administrative
expenses associated
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with the operation of the Plan including expenses of issuance and sale of shares
but excluding brokerage commissions on the sale of shares of Company Stock
pursuant to Section 4.8.
6.3 The Committee. The Committee shall have the authority and power to
administer the Plan and to make, adopt, construe, and enforce rules and
regulations not inconsistent with the provisions of the Plan and to make all
required determinations including factual determinations. The Committee shall
adopt and prescribe the contents of all forms required in connection with the
administration of the Plan, including, but not limited to, the Purchase
Agreement, payroll withholding authorizations, withdrawal documents, and all
other notices required hereunder. The Committee shall have the fullest
discretion permissible under law in the discharge of its duties. The Committee's
interpretations and decisions with respect to the Plan shall be final and
conclusive.
6.4 Amendment of the Plan. The Board may, at any time and from time to
time, amend the Plan in any respect, except that no amendment may increase the
number of shares reserved for purposes of the Plan, or allow any person who is
not an Eligible Employee to become a Participant, without the approval of the
shareholders of NU.
6.5 Expiration and Termination of the Plan. The Plan shall continue in
effect for 10 years from the Effective Date, unless terminated prior to that
date pursuant to the provisions of the Plan or pursuant to action by the Board.
The Board shall have the right to terminate the Plan at any time without prior
notice to any Participant and without liability to any Participant. Upon the
expiration or termination of the Plan, the balance, if any, then standing to the
credit of each Participant from amounts withheld from the Participant's
compensation which has not, by such time, been applied to the purchase of shares
of Company Stock shall be refunded to the Participant.
6.6 Repurchase of Company Stock. The Company shall not be required to
purchase or repurchase from any Participant any of the shares of Company Stock
that the Participant acquires under the Plan.
6.7 Notice. A Purchase Agreement and any notice that a Participant files
pursuant to the Plan shall be on the form prescribed by the Committee and shall
be effective only when received by the Committee. Delivery of such forms may he
made by hand or by certified mail, sent postage prepaid, to Northeast Utilities
Service Company, 107 Selden Street, Berlin, CT 06037, Attention: Employee Stock
Purchase Plan Administrator. Delivery by any other mechanism shall be deemed
effective at the option and discretion of the Committee.
6.8 Government Regulation. The Company's obligation to sell and to
deliver the Company Stock under the Plan is at all times subject to all
approvals of any governmental authority required in connection with the
authorization, issuance, sale or delivery of such Company Stock.
6.9 Headings, Captions, Gender. The headings and captions herein are for
convenience of reference only and shall not be considered as part of the text.
The masculine shall include the feminine, and vice versa.
6.10 Severability of Provisions, Prevailing Law. The provisions of the
Plan shall be deemed severable. In the event any such provision is determined to
be unlawful or unenforceable by a court of competent jurisdiction or by reason
of a change in an applicable statute, the Plan shall continue to exist as though
such provision had never been included therein (or, in the case of a change in
an applicable statute, had been deleted as of the date of such change). The Plan
shall be governed by the laws of the state of Connecticut to the extent such
laws are not in conflict with, or superseded by, federal law.
6.11 Disclaimer of Liability. The Declaration of Trust of NU provides
that no shareholder of NU shall be held to any liability whatever for the
payment of any sum of money, or for damages or otherwise under any contract,
obligation or undertaking made, entered into or issued by the Board or by any
officer, agent or representative elected or appointed by the Board, and no such
contract, obligation or undertaking shall be enforceable against the Board or
any of them in their or his or her individual capacities or capacity and all
such contracts, obligations and undertakings shall be enforceable only against
the Board as such, and every person or entity, having any claim or demand
arising out of any such contract, obligation or undertaking shall look only to
the trust estate for the payment or satisfaction thereof.
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APPENDIX C
ANNUAL REPORT INFORMATION
Table of Contents Page
Management's Discussion and Analysis C-2
Financial Condition C-2
Results of Operations C-11
Company Report C-14
Report of Independent Public Accountants C-14
Consolidated Statements of Income C-15
Consolidated Balance Sheets C-16
Consolidated Statements of Shareholders' Equity C-18
Consolidated Statements of Cash Flows C-19
Consolidated Statements of Capitalization C-20
Notes to Consolidated Statements of Capitalization C-21
Consolidated Statements of Income Taxes C-22
Notes to Consolidated Financial Statements C-23
Consolidated Statements of Quarterly Financial Data
(Unaudited) C-44
Consolidated Generation Statistics (Unaudited) C-44
Selected Consolidated Financial Data (Unaudited) C-45
Executive Officers of Northeast Utilities C-45
Forward-Looking Statements -- These materials may include statements
("forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended) as to expectations, beliefs, plans,
objectives, assumptions or future events or performance, often indicated, but
not always, through the use of words or phrases such as will likely result, are
expected to, will continue, is anticipated, estimated, projection, or outlook.
Forward-looking statements are not statements of historical fact, but may
involve estimates, assumptions and uncertainties that could cause actual results
to differ materially from those expressed. Some important factors that could
cause actual results or outcomes to differ materially from those expressed
include prevailing governmental policies and regulatory actions of federal and
state regulatory agencies with respect to allowed rates of return, industry and
rate structure, operation of nuclear power facilities, acquisition and disposal
of assets and facilities, operation and construction of plant facilities,
recovery of purchased-power costs, stranded costs, decommissioning costs, and
present or prospective wholesale and retail competition (including but not
limited to retail wheeling and transmission costs). The business and
profitability of Northeast Utilities and its subsidiaries are also influenced by
economic and geographic factors including political and economic risks, changes
in environmental and safety laws and policies, weather conditions (including
natural disasters), population growth rates and demographic patterns,
competition for retail and wholesale customers, pricing and transportation of
commodities, market demand for energy from plants or facilities, changes in tax
rates or policies or in rates of inflation, changes in project costs,
unanticipated changes in certain expenses and capital expenditures, capital
market conditions, competition for new energy development opportunities, and
legal and administrative proceedings (whether civil or criminal) and
settlements. Such factors are difficult to predict, contain uncertainties which
may materially affect actual results, and are generally beyond the control of
Northeast Utilities or its subsidiaries. New factors emerge from time to time
and it is not possible for management to predict all of such factors, nor can it
assess the impact of each such factor on the business or the extent to which any
factor or combination of factors could cause actual results to differ materially
from those contained in any forward-looking statement. Each forward-looking
statement speaks only as of the date made, and NU has no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events. All forward-looking statements are intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform
Act of 1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
Northeast Utilities (NU or the company) reported year end 2000 earnings before
extraordinary items of $205.3 million, or $1.45 per share on a fully diluted
basis, compared with earnings of $34.2 million, or $0.26 per share, in 1999 and
a loss of $146.8 million, or $1.12 per share in 1998. Because of extraordinary
charges totaling $233.9 million after-tax, NU reported a net loss of $28.6
million, or $0.20 per share, on a fully diluted basis, for the year. These
extraordinary charges are associated with the impacts of industry restructuring
and the discontinuation of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation." The most
significant write-off occurred at Public Service Company of New Hampshire (PSNH)
during the fourth quarter as a result of the "Agreement to Settle PSNH
Restructuring" (Settlement Agreement) with the State of New Hampshire.
Increases in competitive energy subsidiaries' sales pushed total NU revenues to
a record $5.9 billion in 2000, up 31 percent from $4.47 billion in 1999.
Revenues were $3.77 billion in 1998. The growth in competitive energy
subsidiaries' revenues more than offset a 5 percent retail rate decrease on
January 1, 2000, for customers of The Connecticut Light and Power Company (CL&P)
and a 5 percent rate reduction on October 1, 2000, for PSNH retail customers.
Regulated retail electric sales increased by 0.8 percent in 2000, as compared to
1999, primarily due to economic growth in NU's service territories. However,
retail electric sales would have increased 1.9 percent had it not been for mild
summer temperatures.
Many areas of the Northeast Utilities system (NU system) contributed to the
better operating performance in 2000. The most significant improvement occurred
at CL&P, NU's largest operating subsidiary. CL&P's earnings totaled $148.1
million in 2000, compared with a loss of $13.6 million in 1999 and $195.7
million in 1998. The 2000 results represented CL&P's first annual profit since
1995. CL&P benefited from the return to service of the Millstone 2 unit in May
1999 and the strong performance of the Millstone 2 and 3 units in 2000.
Millstone 2 operated at a capacity factor of 82 percent in 2000, while Millstone
3 operated at a capacity factor of virtually 100 percent in 2000. However,
management projects that CL&P's earnings will decline in 2001 as a result of the
expected sale of CL&P's share of the Millstone units, other rate adjustments and
the pending resolution of the over-earnings docket. Although CL&P's earnings are
expected to decline, its return on equity is not expected to be compromised.
NU's competitive energy subsidiaries achieved a significant improvement in
operating results in 2000 over 1999. The competitive energy subsidiaries
contributed $13.6 million before extraordinary charges in 2000 toward NU's
consolidated earnings, compared with a net loss of $37 million in 1999. During
2000, the Holyoke Water Power Company (HWP) recorded an extraordinary charge of
$19.7 million after-tax, or $0.14 per share, as a result of the discontinuation
of SFAS No. 71 for certain hydroelectric generation assets.
Absent the extraordinary charge, PSNH earned $67.6 million in 2000, compared
with $84.2 million in 1999 and $91.7 million in 1998. North Atlantic Energy
Corporation (NAEC) earned $32.5 million in 2000, compared with $29.6 million in
1999 and $29.5 million in 1998. Operating earnings at PSNH and NAEC are expected
to decline significantly after the first quarter of 2001, as a result of the
retail rate reductions and capital redeployment that will accompany the
introduction of industry restructuring in New Hampshire.
Similar to CL&P, Western Massachusetts Electric Company (WMECO) also experienced
a significant improvement in operating results in 2000, primarily as a result of
the return to service of Millstone 2 and the absence of restructuring charges.
In 2000, WMECO earned $35.3 million, compared with $2.9 million in 1999 and a
loss of $9.6 million in 1998.
NU projects earnings will be between $1.40 per share and $1.60 per share during
2001, not including significant nonrecurring gains and losses.
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CONSOLIDATED EDISON, INC. MERGER
In 2000, NU and Consolidated Edison, Inc. (Con Edison) received most of the
approvals needed to complete the merger announced in October 1999. Shareholders
from both companies approved the merger in April 2000, and all state regulatory
approvals were granted by the end of the year. Additionally, the Federal Energy
Regulatory Commission (FERC) approved the merger in May 2000, the Nuclear
Regulatory Commission approved the transaction in August 2000, and the United
States Department of Justice approved the merger in February 2001. Necessary
approval from the Securities and Exchange Commission (SEC) was expected to be
received in mid-March 2001.
On February 28, 2001, NU's Board of Trustees requested that Con Edison provide
reasonable assurance, in writing, that it intended to comply with the terms of
the definitive merger agreement between the two companies. This included
assurances that Con Edison would consummate the pending merger at the price set
forth in the agreement promptly following the receipt of SEC approval. The
original request for assurance was to be received by March 2, 2001, however that
date was later extended to March 5, 2001. On March 5, 2001, Con Edison advised
NU that it was not willing to close the merger on the agreed terms. NU notified
Con Edison that it was treating its refusal to proceed on the terms set forth in
the merger agreement as a repudiation and breach of the merger agreement, and
that NU would file suit to obtain the benefits of the transaction as negotiated
for NU shareholders. On March 6, 2001, Con Edison filed suit in the U.S.
District Court for the Southern District of New York (Southern District),
seeking declaratory judgment that NU failed to satisfy conditions precedent
under the merger agreement. On March 12, 2001, NU filed suit against Con Edison
in the Southern District seeking damages in excess of $1 billion arising from
Con Edison's breach of the merger agreement. NU cannot predict the outcome of
this matter nor its effect on NU.
Under the terms of the proposed transaction, had it proceeded to closing, NU
shareholders would have received a base price of $25 per share, in a combination
of cash and Con Edison common stock, plus $0.0034 per share per day, or
approximately $0.10 per share per month, for each day that the merger did not
close after August 5, 2000. Additionally, NU shareholders would have received
another $1 per share as a result of a recommendation by the Connecticut
Department of Public Utility Control's (DPUC) Utility Operations Management
Analysis Unit that the DPUC accept the results of the Millstone auction that
were announced on August 7, 2000. The DPUC approved the sale in January 2001.
The $25 per share base price, the $0.0034 per share per day compensation and the
additional $1 per share resulting from the Millstone auction would have been
subject to the collar mechanism described in the merger proxy statement dated
February 29, 2000, to the extent NU shareholders received Con Edison stock.
Assuming that Con Edison's stock price had averaged between $36 and $46 per
share during the applicable pricing period, as defined, NU shareholders would
have received approximately $26.84 per share, were the merger to have closed on
April 10, 2001.
YANKEE ENERGY SYSTEM, INC. MERGER
On March 1, 2000, NU completed its acquisition of Yankee Energy System, Inc.
(Yankee), the parent company of Connecticut's largest natural gas distribution
company. Under the terms of the merger, NU issued approximately 11.1 million NU
common shares and paid $261.4 million of cash to Yankee's shareholders. As
expected, the transaction was dilutive for NU earnings per share in 2000, in
part because the merger was closed at the end of the winter heating season and
near the end of Yankee's strongest earnings period. Yankee lost $0.7 million
during the 10 months of 2000 it has been part of the NU system. Substantially
better financial results are anticipated in 2001 during which Yankee's
operations will include the months of January and February. Yankee anticipates
filing a rate case in the second quarter of 2001.
On August 9, 2000, Yankee Gas Services Company (Yankee Gas) was ordered by the
DPUC to file a rate application. This review of Yankee Gas' rates is required
under Connecticut law because four years have passed since its last rate review.
In accordance with the most recent schedule approved by the DPUC, Yankee Gas
filed a cost of service study on February 14, 2001, which reflected a historical
test year ending September 30, 2000. Yankee Gas has asked the DPUC to approve a
schedule that would call for Yankee Gas to file a letter of intent in May 2001,
and its full filing in July 2001.
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LIQUIDITY
NU's net cash flows provided by operating activities declined slightly to $578.4
million in 2000 compared with $614.2 million in 1999 and $663.3 million in 1998.
Industry restructuring in Connecticut which required retail rate cuts reduced
cash flows from operating activities. Industry restructuring resulted in a
reduction of depreciation and amortization expense of $382.8 million for the
year, as compared to 1999. Changes in working capital, primarily a decrease in
accrued taxes and an increase in prepayments and other, also decreased cash
flows from operating activities. The increase in prepayments and other is
primarily due to increases in prepaid property taxes. In addition, an increase
in prepaid pension, which is a component of other sources and uses, contributed
to the decrease in cash flows from operating activities. Those factors were
partially offset by a $162.5 million increase in income after interest charges
for the year ended December 31, 2000, compared with the same period in 1999.
Cash flows from operations, however, was more than adequate to meet the payment
of the NU system's common and preferred dividends ($71.6 million) and
investments in electric and other utility plant, nuclear fuel and nuclear
decommissioning trusts ($453.6 million). The level of common dividends totaled
$57.4 million in 2000, as compared to $13.2 million paid in 1999 and no cash
dividends in 1998. This increase was a result of NU paying a $0.10 per share
quarterly common dividend for all of 2000, as compared to only the fourth
quarter of 1999. The level of preferred dividends decreased to $14.2 million in
2000, compared with $22.8 million in 1999 and $26.4 million in 1998, reflecting
NU's ongoing effort to reduce preferred stock outstanding. The NU system
companies currently forecast construction expenditures ranging from $395 million
to $420 million for the year 2001.
The transfer of 1,289 megawatts (MW) of hydroelectric generation assets to
Northeast Generation Company (NGC), an affiliated company, from CL&P and WMECO
in March 2000, produced a significant source of cash for CL&P and WMECO. NGC
financed the transfer with a short-term credit agreement collateralized by the
generation assets transferred and an equity infusion from NU. CL&P and WMECO
used this cash to retire long-term debt, preferred stock and to return equity
capital to the parent company. Consolidated financing activities for 2000
included $812.3 million for the retirement of long-term debt and preferred
stock, compared with $864 million for 1999.
Aside from the NGC borrowings, the largest new financing for the NU system in
2000 was the borrowing of $263 million to finance the cash portion of the Yankee
acquisition. NU refinanced that borrowing on February 28, 2001, when it issued
$263 million of two-year variable-rate notes. Based on the initial rate of those
notes, NU expects to save more than $1 million annually as a result of the
refinancing.
The NU system also renewed a series of other borrowing facilities over the
course of 2000. In November 2000, NU parent increased its revolving credit
agreement to $400 million from $350 million, primarily to meet Select Energy
Inc.'s (Select Energy) increased working capital needs to support a rapidly
growing level of business. NU parent provides credit assurance in the form of
guarantees, letters of credit, performance guarantees, and other assurances for
the financial performance obligations of certain of its competitive energy
subsidiaries, particularly Select Energy. Also in November 2000, CL&P and WMECO
reduced their revolving credit agreement to $350 million from $500 million to
reflect lower borrowing needs post-restructuring, NAEC renewed its $200 million
term credit agreement for 364 days, and Yankee Gas renewed a $60 million
revolving credit agreement. All of those facilities were renewed with more
favorable terms as a result of the NU system's improving credit profile. In
April 2000, Moody's Investors Service (Moody's) upgraded its credit ratings for
NU, PSNH and NAEC, and in October 2000, Fitch IBCA (Fitch) upgraded its credit
ratings for PSNH and NAEC. In January 2001, Moody's and Standard and Poor's
upgraded their credit ratings for NU, CL&P, PSNH, WMECO, and NAEC, primarily as
a result of the New Hampshire Supreme Court's decision to uphold that state's
restructuring plan, the anticipated sale of the Millstone units and NU's general
financial recovery. In February 2001, Fitch upgraded its credit ratings for NU,
CL&P and WMECO. These upgrades return NU's unsecured debt to investment grade
ratings for the first time in five years and will save the NU system in excess
of $4.7 million annually in financing costs.
For further information regarding the NU system's borrowing facilities, see Note
2, "Short-
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Term Debt," to the consolidated financial statements.
PSNH terminated its $75 million revolving credit agreement in April 1999 and
continues to fund its operations and capital program with cash on hand and
operating cash flows. In August and September 2000, PSNH repaid $109.2 million
of variable-rate taxable pollution control bonds from cash on hand. PSNH also
paid a $50 million common dividend to NU on October 2, 2000, PSNH's first common
dividend to NU since February 1997. Despite those cash outflows, PSNH maintained
$115.1 million of cash on hand as of December 31, 2000.
On January 2, 2001, NU modified its forward share purchase arrangements for
approximately 10 million NU common shares. To initially effect these
arrangements, the financial institutions (counterparties) purchased
approximately 10 million NU common shares on the open market in December 1999
and January 2000, in a total aggregate amount of $215 million at an average
price of $21.26. The counterparties maintain ownership of the shares until the
transactions are settled. NU will continue to accrue charges on the total
aggregate amount at LIBOR plus an agreed upon percentage per annum until the
transactions are settled. These transactions can be settled in cash or NU common
shares at the company's discretion. NU expects to repurchase the shares from the
counterparties in the first half of 2001 with proceeds from restructuring.
However, if prior to the settlement date, NU's share price falls below $18.06
per share, NU may be required to provide the counterparties with additional
collateral. This amount has been classified as temporary equity from stock
forward on NU's consolidated balance sheets at December 31, 2000 and 1999.
For further information regarding the forward share purchase arrangements, see
Note 1C, "Summary of Significant Accounting Policies -- New Accounting
Standards," to the consolidated financial statements.
In 2001, NU expects to reduce the capitalization of its regulated electric
operating companies significantly as a result of continued asset sales and
securitization of stranded costs. CL&P, PSNH and WMECO expect to receive gross
proceeds of $843.2 million, $26 million and $196.2 million, respectively, as a
result of the sale of their ownership interests in the Millstone units to
Dominion Resources, Inc. (Dominion). This sale is expected to close as early as
the end of March 2001. The cash proceeds are expected to be used to repay
subsidiary debt and capital lease obligations and to return equity capital to
the parent company.
By the end of 2002, PSNH expects to complete the auction of approximately 1,200
MW of fossil and hydroelectric generation assets, as well as CL&P's and NAEC's
share of the Seabrook Station nuclear unit (Seabrook). PSNH's restructuring
settlement was predicated upon receiving approximately $400 million of net
proceeds from those sales. Cash proceeds will be used to retire debt and to
return equity capital to the parent company.
In November 2000, the DPUC approved CL&P's request to securitize an amount not
to exceed $1.55 billion of approved, eligible stranded costs, primarily related
to above-market purchased-power contracts and generation-related regulatory
assets. CL&P plans to use approximately $400 million of those proceeds to reduce
debt with the remaining proceeds to be used to buydown and buyout above-market
purchased-power contracts and to return equity capital to the parent company.
However, the Office of Consumer Counsel (OCC) has appealed the securitization
order to the Connecticut Superior Court. On March 1, 2001, CL&P and the OCC
entered into an agreement to settle this issue. Under the agreement, pending
DPUC approval, the OCC agreed to withdraw its appeal of the securitization order
and not take any action that would affect the timing and amount of
securitization financing to be undertaken. The DPUC approved the agreement on
March 12, 2001. The OCC withdrew is appeal on March 16, 2001. Securitization for
CL&P is expected to take place by the end of the first quarter 2001.
In September 2000, the New Hampshire Public Utilities Commission (NHPUC)
approved a comprehensive restructuring settlement that allows PSNH to securitize
up to $670 million of stranded costs. In January 2001, the New Hampshire Supreme
Court upheld this restructuring order on appeal. However, one of the appellants
indicated publicly it would request a review of the New Hampshire Supreme Court
decision by the United States Supreme Court. Such a request must be filed by May
1, 2001. Management believes that such an appeal would have a low probability of
success, but cannot determine
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what effect it might have on the timing of the issuance of securitization bonds
and the implementation of customer choice in New Hampshire. PSNH currently
expects to work with the State of New Hampshire to issue securitization bonds
early in the second quarter of 2001. Cash proceeds would be combined with cash
on hand and used primarily to buydown the power contract between PSNH and NAEC,
retire debt at the two companies of approximately $300 million and to return
equity capital to the parent company from PSNH and NAEC of another $375 million.
During February 2001, the Massachusetts Department of Telecommunications and
Energy (DTE) approved the securitization of $155 million of stranded costs by
WMECO. A significant portion of those proceeds will be used to buyout a
purchased-power contract with the remainder used to retire WMECO's debt and to
return equity capital to the parent company. Securitization for WMECO is
expected to take place early in the second quarter of 2001.
Should NU's regulated companies successfully complete the aforementioned asset
sales and securitization transactions, between 1999 and 2002, these regulated
companies would receive in excess of $5 billion of cash, including approximately
$1.4 billion previously received related to the sale and transfer of CL&P's and
WMECO's fossil and hydroelectric generation assets during 1999 and 2000. In
total, management currently expects these operating subsidiaries to use these
proceeds in four primary ways. More than $2 billion would be used to repay debt
and preferred stock; more than $1 billion to buyout and buydown high-cost
purchased-power contracts; approximately $600 million to pay taxes on gains from
the sales of generation assets, and; approximately $1.2 billion would be
returned to NU from these operating companies. Of that $1.2 billion, CL&P and
WMECO repurchased $390 million of their common stock from NU in March 2000, the
proceeds of which were immediately invested in NGC. NU will also use another
$215 million of these proceeds to settle the aforementioned forward share
purchase arrangement.
RESTRUCTURING
As a result of industry restructuring, CL&P and WMECO stopped supplying power
directly to customers in 2000. Instead, CL&P and WMECO became energy delivery
companies, delivering electricity to customers that is produced by other
companies and sometimes bought by customers through intermediaries. In 2000,
customers in both states had the option of choosing alternative power suppliers
or relying on CL&P and WMECO to acquire the power for them through standard
offer service.
In 1999, under the oversight of the DPUC, CL&P secured four-year fixed-price
contracts with three suppliers to provide power to customers who choose standard
offer service. CL&P is fully recovering from retail customers the cost of buying
power from these three standard offer suppliers and expects to continue recovery
through the expiration of the contracts on December 31, 2003. As of January 1,
2000, Select Energy, an affiliated company, became responsible for 50 percent of
CL&P's standard offer load for the entire standard offer period, or
approximately 2,000 MW annually at peak. Two other unaffiliated suppliers became
responsible for the balance of CL&P's standard offer load also for the entire
standard offer period.
CL&P and WMECO continue to generate power through either direct ownership of
generating plants, such as Millstone 2 and 3 and Seabrook, or through
purchased-power contracts. CL&P and WMECO sold the capacity associated with
Millstone 2 and 3 and Seabrook to Select Energy and five unaffiliated companies.
These contracts will expire on December 31, 2001. The revenues generated from
these contracts are expected to recover CL&P's and WMECO's share of the nuclear
operating costs through the divestiture of the Millstone units.
In 2000, WMECO supplied power to standard offer customers at a rate of slightly
more than $0.045 per kilowatt-hour. As a result of new one-year standard offer
supply contracts signed in December 2000, that rate will increase significantly
in 2001 to approximately $0.073 per kilowatt-hour. In January 2001, the DTE
approved an average overall rate increase of approximately 17.4 percent for
WMECO standard offer customers, allowing WMECO to fully recover these increased
power procurement costs. A higher rate was also approved for customers who take
default service from WMECO. Under the new standard offer contracts, three
unaffiliated companies provide up to 630 MW of power to WMECO's standard offer
customers and one unaffiliated company serves WMECO's default load of up to 70
MW through December 31, 2001.
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WMECO renegotiates its standard offer supply contracts on an annual basis.
Because of delays in implementing restructuring in New Hampshire, PSNH remained
a vertically integrated utility in 2000 with a fuel and purchased-power
adjustment charge. For the first nine months following restructuring, PSNH will
meet the load requirements of those customers who do not choose an alternative
supplier (Transition Service or standard offer service) through its own
generation assets and purchased-power obligations. Because PSNH's generation
assets are heavily weighted toward coal and nuclear generation, PSNH is somewhat
insulated from rising oil and natural gas prices. Following that initial
nine-month period, PSNH expects to sell its generation assets and acquire power
for up to two years from third-party suppliers for customers who remain on
transition service. Under the restructuring statute and the conforming
Settlement Agreement, PSNH will utilize its own generation capability to provide
Transition Service and Default Service for the Initial Transition Service Period
(ITSP, the first nine months after competition day). At the conclusion of the
ITSP, PSNH will be required to contract for Transition Service for the remaining
24-month Transition Service period with third party suppliers through a
competitive bidding process administered by the NHPUC. As part of its
negotiation with state legislature, PSNH has agreed to expense the first $7
million of costs for the first 12-month period following the ITSP, if the cost
of acquiring Transition Service exceeds the rate charged to customers. PSNH will
be permitted to defer and recover, as unsecuritized stranded costs, all
Transition Service costs in excess of the initial $7 million.
Provisions for Transition Service are but one element of Settlement Agreement
which during 2000 was approved by the New Hampshire House and Senate, signed
into law by the Governor of New Hampshire and approved by the NHPUC. Other
provisions allow for issuing rate reduction bonds to securitize stranded costs;
implementing a rate decrease of approximately 15.5 percent, 5 percent of which
was implemented on a temporary basis on October 1, 2000; an after-tax write-off
of stranded costs in excess of $200 million, which was recorded in the fourth
quarter; selling NAEC's share of Seabrook no later than December 31, 2003, and;
fixing PSNH's delivery rates at $0.028 per kilowatt-hour for the first 33 months
after the Settlement Agreement takes effect. PSNH and NAEC will also terminate
the Seabrook Power Contracts upon the sale of Seabrook. Restructuring is
expected to take effect the first day of the month after PSNH issues rate
reduction bonds, which is anticipated to be May 1, 2001.
For further information regarding commitments and contingencies related to
restructuring, see Note 6A, "Commitments and Contingencies -- Restructuring," to
the consolidated financial statements.
REGIONAL TRANSMISSION ORGANIZATION
Pursuant to FERC Order 888 (issued in April 1996), the NU system companies
operate their transmission system under an open access, nondiscriminatory
transmission tariff.
In December 1999, the FERC issued an order calling on all transmission owners to
voluntarily join Regional Transmission Organizations (RTOs) in order to boost
competition in electric markets. In general, each of these organizations would
be an independent operator over all transmission facilities, and would perform,
among other functions, tariff administration, construction planning and
reliability management for the particular regional transmission system. NU's
active voting interest in such an organization would be limited to 5 percent
under the proposal.
The NU system companies and other parties have appealed this order. Of primary
concern to NU is the ratemaking authority granted to RTOs and its impact on the
ability of transmission owners to earn appropriate returns on their transmission
investment under the organizational structure and the minimum functions proposed
in the order. The NU system companies were required to participate in a
collaborative process established by the FERC beginning in March of 2000. On
January 16, 2001, NU along with the Independent System Operator and five other
New England transmission owning utilities filed a proposal to establish a New
England RTO.
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
1,521 MW of capacity, as well as provide services to the electric generation
market and large com-
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mercial and industrial customers in the Northeast.
NU's competitive energy subsidiaries contributed $13.6 million before
extraordinary items in 2000 towards NU's consolidated earnings, compared with a
net loss of $37 million in 1999. In July 1999, NGC was announced as one of the
winning bidders of certain CL&P and WMECO hydroelectric generation assets.
Management expected this transaction to close by January 1, 2000. The
transaction actually closed on March 14, 2000. This transaction has allowed the
competitive energy subsidiaries to better balance their energy purchase and
supply commitments, improving profitability. Since January 1, 2000, these assets
have been managed by the competitive energy subsidiaries and earnings of $6.9
million have been included in the contributed earnings reported above of $13.6
million. As a result of the delayed closing, however, the $6.9 million was
recorded by CL&P and WMECO for the period from January 1, 2000 to March 14,
2000. Unconsolidated revenues for the competitive energy subsidiaries were $1.9
billion in 2000, compared with $648.9 million in 1999. CL&P's standard offer
purchases from Select Energy, represented $651.9 million of total competitive
energy subsidiaries' revenues in 2000, which is eliminated in consolidation.
NUCLEAR PLANT PERFORMANCE AND
DIVESTITURE
Millstone: The Millstone units completed one of their best years ever in 2000.
Millstone 2 operated at a capacity factor of 82 percent in 2000 and completed a
refueling outage in early June more than four days ahead of schedule. The
40-day, 21-hour outage set a world record for a refueling that included a full
generator rewind. Millstone 3 operated at virtually a 100 percent capacity
factor in 2000 and ran for 585 consecutive days before beginning a scheduled
refueling outage on February 3, 2001. Millstone 3 is expected to return to
service by the end of the first quarter of 2001. Along with the higher output,
NU benefited from lower costs. NU's share of the nonfuel operation and
maintenance (O&M) expenses associated with Millstone 2 and 3 totaled $193.6
million in 2000, compared with $269.4 million in 1999.
On August 7, 2000, CL&P, WMECO and certain other joint owners reached an
agreement to sell substantially all of the Millstone units, located in
Waterford, Connecticut, to Dominion, for approximately $1.3 billion, including
approximately $105 million for nuclear fuel. Dominion has also agreed to assume
responsibility for decommissioning the three units and NU will transfer to
Dominion all funds in the Millstone decommissioning trust. Additionally, NU is
obligated to top-off the decommissioning trust if its value does not equal an
agreed upon amount at closing. That amount is pursuant to the purchase and sale
agreement (PSA) with Dominion, subject to adjustment for delays in the closing
of the sale and Millstone 1 not meeting the "cold and dark" condition specified
in the PSA.
If the transaction is consummated as proposed, CL&P and WMECO would receive
gross proceeds of approximately $843.2 million and $196.2 million on a pretax
basis for their respective ownership interests. The proceeds from the sale of
these interests will be used to reduce the companies' stranded costs under
restructuring and the cash proceeds will be used to repay subsidiary debt and
capital lease obligations and to return equity capital to the parent company.
PSNH will receive $26 million on a pretax basis, which will be reflected as a
gain in accordance with the Settlement Agreement.
In preparation for the divestiture of the Millstone units, it was discovered
that two full-length irradiated fuel rods are missing. The company believes that
the two rods remain stored in the Millstone 1 spent fuel pool or were shipped in
a shielded cask to a facility licensed to accept radioactive material. The
company's investigation into the location of the two rods is ongoing. NU is
responsible for any potential liabilities, which are not determinable at this
time, related to these missing fuel rods.
In connection with the prior settlement of Millstone 3 joint owner claims, if
the aforementioned transaction is consummated as proposed, the NU system will
record a pretax gain in excess of $150 million.
NU currently expects to close on the sale of Millstone as early as the end of
March 2001. In anticipation of the sale of Millstone, in December 2000, NU
announced a voluntary separation program designed to reduce generation-related
support staff in 2001. NU will reflect this program's cost in the first quarter
of 2001.
Seabrook: Seabrook operated at a capacity factor of 78 percent in 2000. The unit
began a sched-
C-8
45
uled refueling outage on October 21, 2000. The outage was extended by
approximately two months as a result of the need to repair extensive problems
with a back-up diesel generator. Seabrook returned to service on January 29,
2001.
On December 15, 2000, NU filed its divestiture plan for Seabrook with the NHPUC
and the DPUC. NU hopes to complete the sale in 2002.
In October 2000, NU reached an agreement with an unaffiliated joint owner, who
owns approximately 15 percent of Seabrook, to auction its share of the plant
with NU's share. As part of the agreement, if the unaffiliated joint owner's
share of the proceeds from the sale of Seabrook is less than $87.2 million, NU
will provide up to $17.4 million to compensate for any shortfall. NU also will
share in the benefits if the proceeds from the sale of that share of Seabrook
exceeds $87.2 million. Additionally, under the agreement, NU will top-off
certain decommissioning obligations above a defined level.
Yankee Companies: In 1999, the Vermont Yankee Nuclear Power Corporation (VYNPC)
agreed to sell its nuclear generating unit for $22 million to an unaffiliated
company. Among other commitments, the acquiring company agreed to assume the
obligation to decommission the unit after it is taken out of service, and the
owners of VYNPC (including CL&P, WMECO and PSNH) agreed to fund their shares of
the decommissioning costs up to a negotiated amount. Subsequent to the time that
the agreement was executed, the original proposed acquiring company increased
its purchase price and three other unaffiliated companies have indicated their
interest in buying VYNPC's generating unit on terms that have not been
disclosed. On February 14, 2001, the Vermont Public Service Board dismissed the
acquiring company's petition for approval and VYNPC agreed to work with the
Vermont regulators to develop an auction process for the sale of the unit. At
present, CL&P, WMECO and PSNH expect that the unit will be sold, but the
identity of the owner and the terms of sale, including price, future
decommissioning obligations and future power purchase obligations, are not
known.
NUCLEAR DECOMMISSIONING
In connection with the aforementioned sale of the Millstone units, Dominion has
agreed to assume responsibility for decommissioning the Millstone units.
For further information regarding nuclear decommissioning, see Note 7, "Nuclear
Decommissioning and Plant Closure Costs," to the consolidated financial
statements.
SPENT NUCLEAR FUEL DISPOSAL COSTS
The United States Department of Energy (DOE) originally was scheduled to begin
accepting delivery of spent nuclear fuel in 1998. However, delays in confirming
the suitability of a permanent storage site continually have postponed plans for
the DOE's long-term storage and disposal site. Extended delays or a default by
the DOE could lead to consideration of costly alternatives. NU has the primary
responsibility for the interim storage of its spent nuclear fuel prior to
divestiture of its nuclear units.
For further information regarding spent nuclear fuel disposal costs, see Note
6D, "Commitments and Contingencies -- Spent Nuclear Fuel Disposal Costs," to the
consolidated financial statements.
COMPETITIVE ENERGY SUBSIDIARIES' MARKET AND OTHER RISKS
NU's competitive energy subsidiaries, as major providers of electricity and
natural gas, have certain market risks 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. Through
December 31, 2000, the competitive energy subsidiaries increased their volume of
electricity and gas marketing activities, increasing these risks.
The competitive energy subsidiaries manage its 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 exceeds sales) or short
(sales exceeds 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 December 31, 2000, the
portfolio had a negative mark to market.
C-9
46
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.
The servicing of CL&P's standard offer load is a significant risk for Select
Energy, as this contract is for a 4-year period, ending December 31, 2003, at
fixed prices. Approximately 26 percent of the 2000 competitive energy revenues
came from this contract. This risk is partially mitigated by Select Energy
entering into purchase contracts with other energy providers to supply a portion
of the standard offer requirement, including its contracts with NGC, the
purchase of 850 MW of output from the Millstone and Seabrook units through 2001
and other resources in the energy marketplace. Although there can be no
assurance that it will be able to do so, management believes that Select Energy
will be able to source its remaining load requirement at reasonable prices. If
Select Energy is unable to source its remaining load requirement at prices below
the standard offer contract price as a result of energy price increases, Select
Energy's earnings would be adversely impacted. For further information see Note
8, "Market Risk and Risk Management Instruments," to the consolidated financial
statements.
OTHER MATTERS
Derivative Instruments and Market Risk: Select Energy engages in the trading of
commodity derivatives which are accounted for using the mark-to-market method
under Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading
and Risk Management Activities." All other nontrading transactions are
recognized where settled. For further information regarding these topics, see
Note 8, "Market Risk and Risk Management Instruments," to the consolidated
financial statements.
Environmental Matters: NU is subject to environmental laws and regulations
structured to mitigate or remove the effect of past operations and to improve or
maintain the quality of the environment. For further information regarding
environmental matters, see Note 6C, "Commitments and
Contingencies -- Environmental Matters," to the consolidated financial
statements.
Other Commitments and Contingencies: For further information regarding other
commitments and contingencies, see Note 6, "Commitments and Contingencies," to
the consolidated financial statements.
C-10
47
RESULTS OF OPERATIONS
The components of significant income statement variances for the past two
years are provided in the table below.
Income Statement Variances
(Millions of Dollars)
--------------------------
2000 over/ 1999 over/
(under) 1999 (under) 1998
------------ ------------
Amount Percent Amount Percent
Operating Revenues $1,405 31% $704 19%
Operating Expenses:
Fuel, purchased and net
interchange power 1,423 75 428 29
Other operation (6) (1) 53 7
Maintenance (85) (25) (58) (15)
Depreciation (62) (21) (31) (9)
Amortization of regulatory
assets, net (321) (54) 393 (a)
Federal and state income taxes 49 27 99 (a)
Taxes other than income taxes (22) (9) 9 4
Gain on sale of utility plant 309 100 (309) --
------ --- ---- ---
Total operating expenses 1,285 31 584 16
------ --- ---- ---
Operating income 120 35 120 53
------ --- ---- ---
Other Income:
Equity in earnings of regional
nuclear generating and
transmission companies 10 (a) (7) (59)
Nuclear related costs 53 75 72 50
Other, net 29 95 (19) (a)
Other income taxes (14) (17) 6 8
------ --- ---- ---
Net other income 78 (a) 52 69
Interest charges, net 36 14 (5) (2)
Preferred dividends of
subsidiaries (9) (38) (4) (14)
------ --- ---- ---
Income before extraordinary loss 171 (a) 181 (a)
------ --- ---- ---
Extraordinary loss (234) (a) -- --
------ --- ---- ---
Net (loss)/income $ (63) (a) $181 (a)
====== === ==== ===
(a) Percent greater than 100.
OPERATING REVENUES
Total revenues increased by $1,405 million or 31 percent in 2000, primarily due
to higher revenues from the competitive energy subsidiaries ($1,246 million of
which $669 million represents sales to other NU affiliates which are eliminated
in consolidation), the acquisition of Yankee ($262 million) and higher regulated
wholesale revenues ($727 million of which $281 million represents sales to other
NU affiliates which are eliminated in consolidation), partially offset by lower
regulated retail revenues ($26 million). The competitive energy companies'
increase is primarily due to higher revenues from Select Energy as a result of
new contracts for energy sales and services. The regulated wholesale revenue
increase is primarily due to higher PSNH energy sales and higher CL&P and WMECO
revenue from the sale of the output from Millstone 2 and 3. The regulated retail
decrease is primarily due to retail rate reductions for CL&P and PSNH ($108 and
$8 million, respectively), partially offset by the impact of Millstone 2 being
returned to CL&P's rate base ($33 million), higher retail sales ($18 million),
higher fuel revenues for PSNH ($15 million) and higher retail revenue attributed
to lower price discounts in 2000 and changing customer mix ($24 million).
Regulated retail kilowatt-hour sales increased by 0.8 percent in 2000.
Total revenues increased by $704 million or 19 percent in 1999, primarily due to
higher revenues from the competitive energy subsidiaries ($552 million), higher
regulated wholesale revenue ($107 million) and higher regulated retail revenue
($45 million). The competitive energy companies' increase is primarily due to
higher revenues from Select Energy as a result of new contracts for energy
sales. The regulated wholesale revenue increase is primarily due to higher
energy sales and related capacity and transmission revenues. The regulated
retail increase is primarily due to higher retail sales ($99 million) and the
impact of Millstone 2 and 3 being returned to CL&P's rate base ($13 million).
These retail increases were partially offset by retail rate reductions for CL&P
and WMECO ($55 and $12 million, respectively). Regulated retail kilowatt-hour
sales increased by 3.8 percent.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power expense increased in 2000, primarily
due to higher purchased energy and capacity costs as a result of higher sales
for Select Energy ($1,053 million of which $660 million represents purchases
from NU other affiliates which are eliminated in consolidation), Yankee expenses
($135 million) and higher purchased power for regulated subsidiaries ($235
million).
Fuel, purchased and net interchange power expense increased in 1999, primarily
due to higher purchased energy and capacity costs as a result of higher sales
for Select Energy ($521 million), regulated wholesale ($86 million) and
regulated retail ($36 million), partially offset by lower replacement power
costs due to the return to service of Millstone 2 and 3 ($215 million).
C-11
48
OTHER OPERATION AND MAINTENANCE
Other O&M expenses decreased $91 million in 2000, primarily due to lower
spending at the nuclear units due to better performance ($75 million), lower
expenses due to the sale of certain CL&P and WMECO fossil generation assets ($74
million), lower corporate support ($38 million), the decommissioning status of
Millstone 1 ($17 million), lower environmental-related costs ($12 million), and
higher 1999 expenses associated with the Con Edison merger ($12 million),
partially offset by the addition of Yankee ($60 million), higher O&M expenses
for the competitive energy businesses ($54 million), primarily due to the
business expansion, and higher distribution expenses ($29 million), including
increased conservation program expenses.
Other O&M expenses decreased in 1999, primarily due to lower costs at the
Millstone units ($125 million), partially offset by the recognition of
environmental insurance proceeds in 1998 and additional environmental reserves
in 1999 ($30 million), higher transmission and power exchange expenses ($35
million), higher spending at Seabrook ($10 million) as a result of the refueling
outage, higher expenditures for HEC Inc. and the competitive energy businesses
($32 million), and expenses associated with the Con Edison merger ($12 million)
in 1999.
DEPRECIATION
Depreciation decreased in 2000, primarily due to the effect of discontinuing
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," for
the portion of the generation business for CL&P and WMECO and the resulting
reclassification of depreciable nuclear plant balances to regulatory assets ($84
million) and the sale of certain CL&P and WMECO fossil and hydroelectric
generation assets, partially offset by the addition of Yankee ($23 million).
Depreciation decreased in 1999, primarily due to the retirement of Millstone 1.
AMORTIZATION OF REGULATORY ASSETS, NET
Amortization of regulatory assets, net decreased in 2000, primarily due to the
amortization in 1999 as a result of the gain on the sale of fossil and
hydroelectric generation assets for CL&P and WMECO ($309 million) and changes in
amortization levels as a result of industry restructuring ($95 million). These
decreases were partially offset by higher amortization associated with the
reclassified nuclear plant balances ($84 million).
Amortization of regulatory assets, net increased in 1999, primarily due to the
increased amortization associated with the gain on the sale of CL&P's and
WMECO's fossil and hydroelectric generation assets ($309 million), the
amortization of CL&P's and WMECO's Millstone 1 remaining investment ($56
million) and the amortization of stranded nuclear plant balances reclassified as
regulatory assets ($23 million).
FEDERAL AND STATE INCOME TAXES
The consolidated statement of income taxes provides a reconciliation of actual
and expected tax expense. The tax effect of temporary differences is accounted
for in accordance with the rate-making treatment of the applicable regulatory
commission. In past years, this rate-making treatment has required the company
to provide the customers with a portion of the tax benefits associated with
accelerated tax depreciation in the year it is generated (flow-through
depreciation). As these flow-through differences turn around, higher tax expense
is recorded.
Federal and state income tax expense increased approximately $63 million in
2000. Significant variances responsible for this increase include higher pretax
earnings ($90 million) and lower adjustments to the tax valuation allowance ($21
million). Reduction in flow-through depreciation and amortization ($51 million)
partially offset the overall change.
Federal and state income tax expense increased approximately $93 million in
1999, primarily due to the significant increase in book pretax earnings.
Significant variances of other items include a $10 million increase in
flow-through depreciation turnaround and $4.6 million of nontax deductible
merger-related expenditures, offset by the elimination of a $23 million deferred
tax asset valuation reserve.
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes decreased in 2000, primarily due to lower
Connecticut gross earnings taxes ($12 million) and lower payroll taxes ($7
million).
Other income taxes increased in 1999, primarily due to higher local property
taxes ($3 million) and higher gross earnings taxes ($2 million).
C-12
49
GAIN ON SALE OF UTILITY PLANT
CL&P and WMECO recorded gains on the sale of their fossil and hydroelectric
generation assets in 1999. A corresponding amount of amortization expense was
recorded.
EQUITY IN EARNINGS OF REGIONAL NUCLEAR GENERATING AND TRANSMISSION COMPANIES
Equity in earnings of regional nuclear generating and transmission companies
increased in 2000, primarily due to higher earnings from the Connecticut Yankee
Atomic Power Company (CYAPC) as a result of a rate settlement.
Equity in earnings of regional nuclear generating and transmission companies
decreased in 1999, primarily due to lower earnings from CYAPC.
NUCLEAR RELATED COSTS
Nuclear related costs in 2000 are comprised of a CL&P/WMECO settlement of
Millstone 3 joint owner litigation, net of insurance proceeds ($11 million), and
CL&P/WMECO regulatory settlements ($6 million). In comparison, 1999 is comprised
of one-time charges related to the CL&P write-off of Connecticut Municipal
Electric Energy Cooperative (CMEEC) nuclear costs ($20 million), the CL&P
write-off of capital projects as a result of the Connecticut standard offer
decision ($11 million), the CL&P/WMECO settlement of Millstone 3 joint owner
litigation, net of insurance proceeds ($27 million), and WMECO return
disallowances on Millstone 1 plant ($13 million). Recoverable costs in 1998 are
comprised of the write-off of the Millstone 1 entitlement formerly held by CMEEC
($28 million) and the write-off of unrecoverable Millstone 1 costs as a result
of the February 1999 CL&P rate decision ($115 million).
OTHER, NET
Other, net increased in 2000, primarily due to a one-time gain related to Mode 1
Communications, Inc.'s investment in NEON Communications, Inc. ($17 million) and
the loss in 1999 on the CL&P assignment of market-based contracts to Select
Energy ($15 million).
Other income/(loss), net decreased in 1999, primarily due to the PSNH settlement
with the New Hampshire Electric Cooperative ($6 million) and the loss on the
CL&P assignment of market-based contracts to Select Energy ($15 million).
INTEREST CHARGES, NET
Interest charges, net increased in 2000, primarily due to higher short-term
borrowings associated with the NGC asset transfer and the Yankee merger,
partially offset by lower long-term debt as a result of reacquisitions and
retirements.
Interest charges, net decreased in 1999, primarily due to lower long-term debt
as a result of reacquisitions and retirements.
PREFERRED DIVIDENDS
Preferred dividends decreased in 1999 and 2000, primarily due to lower preferred
stock outstanding.
EXTRAORDINARY LOSS
The extraordinary loss is primarily due to an after-tax write-off by PSNH of
approximately $225 million of stranded costs under an industry restructuring
settlement with the state of New Hampshire, combined with other positive effects
on PSNH from the discontinuance of SFAS No. 71 ($11 million) and a loss
associated with the pending sale of certain HWP assets ($20 million).
C-13
50
COMPANY REPORT
The accompanying consolidated financial statements of Northeast Utilities and
subsidiaries and other sections of this annual report were prepared by the
company. These financial statements, which were audited by Arthur Andersen LLP,
were prepared in accordance with accounting principles generally accepted in the
United States using estimates and judgments, where required, and giving
consideration to materiality.
The company has endeavored to establish a control environment that encourages
the maintenance of high standards of conduct in all of its business activities.
The company maintains a system of internal controls over financial reporting,
which is designed to provide reasonable assurance to the company's management
and Board of Trustees regarding the preparation of reliable, published financial
statements. The system is supported by an organization of trained management
personnel, policies and procedures, and a comprehensive program of internal
audits. Through established programs, the company regularly communicates to its
management employees their internal control responsibilities and policies
prohibiting conflicts of interest.
The Audit Committee of the Board of Trustees is composed entirely of independent
trustees. The Audit Committee meets periodically with management, the internal
auditors and the independent auditors to review the activities of each and to
discuss audit matters, financial reporting and the adequacy of internal
controls.
Because of inherent limitations in any system of internal controls, errors or
irregularities may occur and not be detected. The company believes, however,
that its system of internal accounting controls and control environment provide
reasonable assurance that its assets are safeguarded from loss or unauthorized
use and that its financial records, which are the basis for the preparation of
all financial statements, are reliable.
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 of December 31, 2000 and 1999, and the related consolidated
statements of income, comprehensive income, shareholders' equity, cash flows,
and income taxes for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northeast Utilities and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 23, 2001 (except with
respect to the matters discussed
in Note 15, as to which the
date is March 13, 2001)
C-14
51
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------------
(Thousands of Dollars, except share information) 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Operating Revenues $ 5,876,620 $ 4,471,251 $ 3,767,714
------------ ------------ ------------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power 3,321,226 1,898,314 1,470,200
Other 850,192 855,917 803,419
Maintenance 255,884 340,419 399,165
Depreciation 239,798 302,305 332,807
Amortization of regulatory assets, net 276,139 596,437 203,132
Federal and state income taxes 230,031 180,883 82,332
Taxes other than income taxes 238,587 261,353 251,932
Gain on sale of utility plant - (308,914) -
------------ ------------ ------------
Total operating expenses 5,411,857 4,126,714 3,542,987
------------ ------------ ------------
Operating Income 464,763 344,537 224,727
------------ ------------ ------------
Other Income/(Loss):
Equity in earnings of regional nuclear generating and
transmission companies 14,586 5,034 12,420
Nuclear related costs (17,907) (71,066) (143,239)
Other, net (1,689) (30,855) (12,225)
Minority interest in loss of subsidiary (9,300) (9,300) (9,300)
Income taxes 68,306 82,272 76,393
------------ ------------ ------------
Other income/(loss), net 53,996 (23,915) (75,951)
------------ ------------ ------------
Income before interest charges 518,759 320,622 148,776
------------ ------------ ------------
Interest Charges:
Interest on long-term debt 200,697 258,093 273,824
Other interest, net 98,605 5,558 (4,735)
------------ ------------ ------------
Interest charges, net 299,302 263,651 269,089
------------ ------------ ------------
Income/(loss) after interest charges 219,457 56,971 (120,313)
Preferred Dividends of Subsidiaries 14,162 22,755 26,440
------------ ------------ ------------
Income/(Loss) before extraordinary loss 205,295 34,216 (146,753)
Extraordinary loss, net of tax benefit of $169,562 (233,881) - -
------------ ------------ ------------
Net (Loss)/Income $ (28,586) $ 34,216 $ (146,753)
============ ============ ============
Basic and Fully Diluted (Loss)/Earnings Per Common Share:
Income/(loss) before extraordinary loss $ 1.45 $ 0.26 $ (1.12)
Extraordinary loss, net of tax benefit (1.65) - -
------------ ------------ ------------
Basic (Loss)/Earnings Per Common Share $ (0.20) $ 0.26 $ (1.12)
============ ============ ============
Basic Common Shares Outstanding (average) 141,549,860 131,415,126 130,549,760
============ ============ ============
Fully Diluted Common Shares Outstanding (average) 141,967,216 132,031,573 130,549,760
============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
---------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------------
(Thousands of Dollars) 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Net (Loss)/Income $ (28,586) $ 34,216 $ (146,753)
------------ ------------ ------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments - 1 -
Unrealized gains on securities 245 118 2,019
Minimum pension liability adjustments - - (613)
------------ ------------ ------------
Other comprehensive income, net of tax 245 119 1,406
------------ ------------ ------------
Comprehensive (Loss)/Income $ (28,341) $ 34,335 $ (145,347)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
C-15
52
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------
At December 31,
-------------------------
---------------------------------------------------------------------------------------
(Thousands of Dollars) 2000 1999
---------------------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------------------
Utility Plant, at cost:
Electric $ 9,370,176 $9,185,272
Gas and other 861,727 226,002
----------- ----------
10,231,903 9,411,274
Less: Accumulated provision for depreciation 7,041,279 6,088,310
----------- ----------
3,190,624 3,322,964
Unamortized PSNH acquisition costs - 324,437
Construction work in progress 228,330 177,504
Nuclear fuel, net 128,261 122,529
----------- ----------
Total net utility plant 3,547,215 3,947,434
----------- ----------
Other Property and Investments:
Nuclear decommissioning trusts, at market 740,058 711,910
Investments in regional nuclear generating companies, at
equity 62,477 81,503
Other, at cost 137,291 94,768
----------- ----------
939,826 888,181
----------- ----------
Current Assets:
Cash and cash equivalents 200,017 255,154
Investments in securitizable assets 98,146 107,620
Receivables, less accumulated provision for uncollectible
accounts of $12,500 in 2000 and $4,895 in 1999 472,863 310,190
Unbilled revenues 121,090 75,728
Fuel, materials and supplies, at average cost 163,711 172,973
Recoverable energy costs, net -- current portion - 73,721
Prepayments and other 94,528 75,225
----------- ----------
1,150,355 1,070,611
----------- ----------
Deferred Charges:
Regulatory assets 3,910,801 3,642,439
Unamortized debt expense 33,475 39,192
Goodwill and other purchased intangible assets 324,389 23,542
Prepaid pensions 139,546 669
Other 171,542 75,984
----------- ----------
4,579,753 3,781,826
----------- ----------
Total Assets $10,217,149 $9,688,052
=========== ==========
The accompanying notes are an integral part of these financial statements.
C-16
53
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------
At December 31,
---------------------------------------------------------------------------------------
(Thousands of Dollars) 2000 1999
---------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
---------------------------------------------------------------------------------------
Capitalization:
Common shares, $5 par value -- authorized 225,000,000
shares; 148,781,861 shares issued and 143,820,405
shares outstanding in 2000 and 137,393,829 shares
issued and 131,870,284 shares outstanding in 1999 $ 693,345 $ 636,405
Capital surplus, paid in 927,059 776,290
Temporary equity from stock forward 215,000 215,000
Deferred contribution plan -- employee stock ownership
plan (114,463) (127,725)
Retained earnings 495,873 581,817
Accumulated other comprehensive income 1,769 1,524
----------- ----------
Total common shareholders' equity 2,218,583 2,083,311
Preferred stock not subject to mandatory redemption 136,200 136,200
Preferred stock subject to mandatory redemption 15,000 121,289
Long-term debt 2,029,593 2,372,341
----------- ----------
Total capitalization 4,399,376 4,713,141
----------- ----------
Minority Interest in Consolidated Subsidiary 100,000 100,000
----------- ----------
Obligations Under Capital Leases 47,234 62,824
----------- ----------
Current Liabilities:
Notes payable to banks 1,309,977 278,000
Long-term debt and preferred stock -- current portion 340,041 503,315
Obligations under capital leases -- current portion 112,645 118,469
Accounts payable 538,983 347,321
Accrued taxes 54,088 158,684
Accrued interest 41,131 37,904
Other 144,931 126,768
----------- ----------
2,541,796 1,570,461
----------- ----------
Deferred Credits and Other Long-term Liabilities:
Accumulated deferred income taxes 1,585,494 1,688,114
Accumulated deferred investment tax credits 153,155 140,407
Decommissioning obligation -- Millstone 1 692,560 702,351
Deferred contractual obligations 244,608 358,387
Other 452,926 352,367
----------- ----------
3,128,743 3,241,626
----------- ----------
Commitments and Contingencies (Note 6)
Total Capitalization and Liabilities $10,217,149 $9,688,052
=========== ==========
The accompanying notes are an integral part of these financial statements.
C-17
54
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------
Accumulated
Capital Deferred Other
Common Surplus, Contribution Retained Comprehensive
(Thousands of Dollars) Shares (a) Paid In (a) Plan-ESOP Earnings (b) Income Total
--------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 1998 $684,211 $ 932,494 $(154,141) $ 707,522 $ (1) $2,170,085
--------- ---------- ------------ ---------- ------ ----------
Net loss for 1998 (146,753) (146,753)
Issuance of 189,094 common
shares, $5 par value 945 1,714 2,659
Allocation of benefits --
ESOP (4,769) 13,522 8,753
Unearned stock compensation (537) (537)
Capital stock expenses, net 3,560 3,560
Gain on equity investment 8,140 8,140
Gain on repurchase of
preferred stock 59 59
Other comprehensive income 1,406 1,406
--------- ---------- ------------ ---------- ------ ----------
Balance as of December 31, 1998 685,156 940,661 (140,619) 560,769 1,405 2,047,372
--------- ---------- ------------ ---------- ------ ----------
Net income for 1999 34,216 34,216
Cash dividends on common
shares -- $0.10 per share (13,168) (13,168)
Issuance of 362,565 common
shares, $5 par value 1,813 3,505 5,318
Allocation of benefits --
ESOP (3,053) 12,894 9,841
Unearned stock compensation (1,194) (1,194)
Capital stock expenses, net 807 807
Other comprehensive income 119 119
--------- ---------- ------------ ---------- ------ ----------
Balance as of December 31, 1999 686,969 940,726 (127,725) 581,817 1,524 2,083,311
--------- ---------- ------------ ---------- ------ ----------
Net loss for 2000 (28,586) (28,586)
Cash dividends on common
shares -- $0.40 per share (57,358) (57,358)
Issuance of 11,388,032 common
shares, $5 par value 56,940 164,443 221,383
Common share repurchase
transaction fee (13,786) (13,786)
Allocation of benefits --
ESOP (1,617) 13,262 11,645
Redemption of preferred stock (749) (749)
Capital stock expenses, net 2,478 2,478
Other comprehensive income 245 245
--------- ---------- ------------ ---------- ------ ----------
Balance as of December 31, 2000 $743,909 $1,091,495 $(114,463) $ 495,873 $1,769 $2,218,583
--------- ---------- ------------ ---------- ------ ----------
(a) In conjunction with NU's forward share purchase arrangement, 10,112,879
shares or $50.6 million and $164.4 million, respectively, have been
reclassified from Common Shares and Capital Surplus, Paid In, at December
31, 2000 and 1999, to Temporary Equity from Stock Forward.
(b) Certain consolidated subsidiaries have dividend restrictions imposed by
their long-term debt agreements. These restrictions also limit the amount of
retained earnings available for NU common dividends. At December 31, 2000,
retained earnings available for payment of dividends totaled $180.1 million.
Pursuant to certain credit agreements, NU may not declare or make
distributions in an amount not to exceed $60 million for any twelve month
period.
The accompanying notes are an integral part of these financial statements.
C-18
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
(Thousands of Dollars) 2000 1999 1998
-------------------------------------------------------------------------------------------------
Operating Activities:
Income/(loss) after interest charges $ 219,457 $ 56,971 $(120,313)
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation 239,798 302,305 332,807
Deferred income taxes and investment tax credits, net (16,117) (183,356) 23,502
Amortization of regulatory assets, net 276,139 596,437 203,132
Net (deferral)/amortization of recoverable energy costs (30,603) 44,526 38,356
Nuclear related costs 17,907 71,066 143,239
Gain on sale of utility plant - (308,914) -
Net other sources/(uses) of cash (88,549) (79,232) 53,346
Changes in working capital:
Receivables and unbilled revenues, net (104,868) (106,566) (27,553)
Fuel, materials and supplies 12,450 29,688 10,060
Accounts payable 171,148 8,709 (64,258)
Accrued taxes (128,107) 107,929 4,739
Investments in securitizable assets 9,474 74,498 48,787
Other working capital (excludes cash) 254 157 17,424
--------- --------- ---------
Net cash flows provided by operating activities 578,383 614,218 663,268
--------- --------- ---------
Investing Activities:
Investments in plant:
Electric, gas and other utility plant (352,736) (287,081) (217,009)
Nuclear fuel (61,286) (42,471) (17,026)
--------- --------- ---------
Net cash flows used for investments in plant (414,022) (329,552) (234,035)
Investments in nuclear decommissioning trusts (39,550) (74,231) (75,551)
Investment in competitive energy assets - (23,542) -
Net proceeds from the sale of utility plant - 565,436 -
Other investment activities, net (28,478) 13,084 14,342
Payment for the purchase of Yankee, net of cash acquired (260,347) - -
--------- --------- ---------
Net cash flows (used in)/provided by investing activities (742,397) 151,195 (295,244)
--------- --------- ---------
Financing Activities:
Issuance of common shares 4,269 5,318 2,659
Issuance of long-term debt 26,477 200 275
Net increase/(decrease) in short-term debt 961,977 248,000 (20,000)
Reacquisitions and retirements of long-term debt (685,555) (817,759) (269,555)
Reacquisitions and retirements of preferred stock (126,771) (46,250) (62,211)
Cash dividends on preferred stock (14,162) (22,755) (26,440)
Cash dividends on common shares (57,358) (13,168) -
--------- --------- ---------
Net cash flows provided by/(used in) financing activities 108,877 (646,414) (375,272)
--------- --------- ---------
Net (decrease)/increase in cash and cash equivalents (55,137) 118,999 (7,248)
Cash and cash equivalents -- beginning of period 255,154 136,155 143,403
--------- --------- ---------
Cash and cash equivalents -- end of period $ 200,017 $ 255,154 $ 136,155
========= ========= =========
Supplemental schedule of noncash investing and financing
activities:
In conjuction 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 liabilites assumed $ 712,484
Cash paid (261,370)
NU common stock issued (217,114)
---------
$ 234,000
=========
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 269,735 $ 266,823 $ 238,990
========= ========= =========
Income taxes $ 253,383 $ 86,183 $ 19,454
========= ========= =========
Increase in obligations:
Niantic Bay Fuel Trust and other capital leases $ 8,067 $ 5,865 $ 12,583
========= ========= =========
The accompanying notes are an integral part of these financial statements.
C-19
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CONSOLIDATED STATEMENTS OF CAPITALIZATION
--------------------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------------------------------------------
(Thousands of Dollars) 2000 1999
-------------------------------------------------------------------------------------------------------------
Common Shareholders' Equity (a) $2,218,583 $2,083,311
Cumulative Preferred Stock of Subsidiaries:
$25 par value -- authorized 36,600,000 shares at
December 31, 2000 and 1999; 1,630,722 shares
outstanding in 2000 and 2,720,000 shares outstanding
in 1999
$50 par value -- authorized 9,000,000 shares at
December 31, 2000 and 1999; 2,324,000 shares
outstanding in 2000 and 4,314,774 shares outstanding
in 1999
$100 par value -- authorized 1,000,000 shares at
December 31, 2000 and 1999; 200,000 shares
outstanding in 2000 and 1999
-------------------------------------------------------------------------------------------------------------
Current Redemption Current Shares
Dividend Rates Prices (b) Outstanding
-------------------------------------------------------------------------------------------------------------
Not Subject to Mandatory Redemption:
$50 par value -- $1.90 to $3.28 $50.50 to $54.00 2,234,000 116,200 116,200
$100 par value -- $7.72 $103.51 200,000 20,000 20,000
---------- ----------
Total Preferred Stock Not Subject to Mandatory Redemption 136,200 136,200
---------- ----------
Subject to Mandatory Redemption: (c)
$25 par value -- $1.90 to $2.65 $25.00 to $25.26 1,630,722 40,768 68,000
$50 par value -- $2.65 to $3.615 - - - 99,539
---------- ----------
Total Preferred Stock Subject to Mandatory Redemption 40,768 167,539
Less: Preferred Stock to be Redeemed Within One Year 25,768 46,250
---------- ----------
Preferred Stock Subject to Mandatory Redemption, Net 15,000 121,289
---------- ----------
Long-Term Debt: (d)
First Mortgage Bonds --
Maturity Interest Rates
-------------------------------------------------------------------------------------------------------------
2000 5.75% to 6.875% - 159,000
2001 7.375% to 7.875% 220,000 220,000
2002 7.75% to 9.05% 375,000 489,150
2005 6.75% 20,000 -
2009-2012 6.20% to 7.19% 80,000 -
2019-2024 7.375% to 10.07% 313,050 325,000
---------- ----------
Total First Mortgage Bonds 1,008,050 1,193,150
---------- ----------
Other Long-Term Debt --
Pollution Control Notes and Other Notes -- (e)
2000 Adjustable Rate and 7.67% - 206,011
2003-2006 6.24% to 8.58% 139,600 158,000
2013-2018 Adjustable Rate and 5.90% 33,400 33,400
2020 Adjustable Rate 15,300 15,300
2021-2022 Adjustable Rate and 5.85% to 7.65% 443,285 552,485
2028 5.85% to 5.95% 369,300 369,300
2031 Adjustable Rate 62,000 62,000
---------- ----------
Total Pollution Control Notes and Other Notes 1,062,885 1,396,496
Fees and interest due for spent nuclear fuel disposal costs 240,303 226,463
Other 38,978 15,346
---------- ----------
Total Other Long-Term Debt 1,342,166 1,638,305
Unamortized premium and discount, net (6,350) (2,049)
---------- ----------
Total Long-Term Debt 2,343,866 2,829,406
Less: Amounts due within one year 314,273 457,065
---------- ----------
Long-Term Debt, Net 2,029,593 2,372,341
---------- ----------
Total Capitalization $4,399,376 $4,713,141
========== ==========
The accompanying notes are an integral part of these financial statements.
C-20
57
NOTES TO CONSOLIDATED STATEMENTS OF CAPITALIZATION
(a) On January 2, 2001, NU modified its forward share purchase arrangements for
approximately 10 million NU common shares. To initially effect these
arrangements, the financial institutions (counterparties) purchased
approximately 10 million NU common shares on the open market in December 1999
and January 2000, in a total aggregate amount of $215 million, at an average
price of $21.26. The counterparties maintain ownership of the shares until the
transactions are settled. NU will continue to accrue charges on the total
aggregate amount at LIBOR plus an agreed upon percentage per annum, until the
transactions are settled. These transactions can be settled in cash or NU common
shares at the company's discretion. NU expects to repurchase the shares from the
counterparties in the first half of 2001 with the proceeds from restructuring.
This amount has been classified as temporary equity from stock forward on NU's
consolidated balance sheets at December 31, 2000 and 1999.
(b) Each of these series is subject to certain refunding limitations for the
first five years after issuance. For preferred stock subject to mandatory
redemption, redemption prices reduce in future years.
(c) The minimum sinking fund requirements of the series subject each year to
mandatory redemption aggregate $25.8 million in 2001 and $1.5 million in 2002,
2003, 2004, and 2005. In case of default on sinking fund payments, no payments
may be made on any junior stock by way of dividends or otherwise (other than in
shares of junior stock) so long as the default continues. If a subsidiary is in
arrears in the payment of dividends on any outstanding shares of preferred
stock, the subsidiary is prohibited from redeeming or purchasing less than all
of the outstanding preferred stock.
(d) Long-term debt maturities and cash sinking fund requirements, excluding fees
and interest due for spent nuclear fuel disposal costs, on debt outstanding at
December 31, 2000, for the years 2001 through 2005 are $314.3 million, $331.5
million, $26.6 million, $26.4 million, and $48.5 million, respectively.
Essentially all utility plant of CL&P, PSNH, WMECO, and NAEC, is subject to the
liens of each company's respective first mortgage bond indenture. NAEC's first
mortgage bonds are also secured by payments made to NAEC by PSNH under the terms
of two life-of-unit, full cost recovery contracts.
CL&P and WMECO have secured $369.3 million of pollution control notes with
second mortgage liens on Millstone 1, junior to the liens of their respective
first mortgage bond indentures.
CL&P has $62 million of tax-exempt Pollution Control Revenue Bonds (PCRBs) with
bond insurance secured by the first mortgage bonds and a liquidity facility.
Concurrent with the issuance of PSNH's Series A and B first mortgage bonds, PSNH
entered into financing arrangements with the Business Finance Authority (BFA) of
the state of New Hampshire. Pursuant to these arrangements, the BFA issued five
series of PCRBs and loaned the proceeds to PSNH. At December 31, 2000 and 1999,
$407.3 million and $516.5 million, respectively, of the PCRBs were outstanding.
PSNH's obligation to repay each series of PCRBs is secured by the first mortgage
bonds. Each such series of first mortgage bonds contains similar terms and
provisions as the applicable series of PCRBs. For financial reporting purposes,
these bonds would not be considered outstanding unless PSNH failed to meet its
obligations under the PCRBs.
(e) The average effective interest rates on the variable-rate pollution control
notes ranged from 3.2 percent to 6.8 percent for 2000 and 2.2 percent to 6.1
percent for 1999.
C-21
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CONSOLIDATED STATEMENTS OF INCOME TAXES
-----------------------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------
(Thousands of Dollars) 2000 1999 1998
-----------------------------------------------------------------------------------------------
The components of the federal and state income tax
provisions charged to operations are:
Current income taxes:
Federal $154,790 $ 248,012 $(13,660)
State 23,052 33,955 (3,903)
-------- --------- --------
Total current 177,842 281,967 (17,563)
-------- --------- --------
Deferred income taxes, net:
Federal 7,297 (134,773) 51,913
State (5,529) (28,789) (12,948)
-------- --------- --------
Total deferred 1,768 (163,562) 38,965
Investment tax credits, net (17,885) (19,794) (15,463)
-------- --------- --------
Total income tax expense $161,725 $ 98,611 $ 5,939
======== ========= ========
The components of total income tax expense are classified as
follows:
Income taxes charged to operating expenses $230,031 $ 180,883 $ 82,332
Other income taxes (68,306) (82,272) (76,393)
-------- --------- --------
Total income tax expense $161,725 $ 98,611 $ 5,939
======== ========= ========
Deferred income taxes are comprised of the tax effects of
temporary differences as follows:
Deferred tax asset associated with net operating losses $ 1,563 $ 14,801 $ 69,212
Depreciation, leased nuclear fuel, settlement credits
and disposal costs 9,514 (4,580) 16,217
Regulatory deferral (34,486) (27,297) (38,287)
Regulatory disallowance - (30,719) (18,080)
Sale of fossil and hydroelectric generation assets - (125,807) -
Pension 25,751 8,936 10,950
Other (574) 1,104 (1,047)
-------- --------- --------
Deferred income taxes, net $ 1,768 $(163,562) $ 38,965
======== ========= ========
A reconciliation between income tax expense and the expected
tax expense at 35 percent of pretax income:
Expected federal income tax $133,413 $ 54,454 $(40,031)
Tax effect of differences:
Depreciation 7,775 24,583 25,793
Amortization of regulatory assets 11,942 45,825 30,740
Amortization of PSNH acquisition costs 9,946 9,946 17,301
Investment tax credit amortization (17,885) (19,794) (15,463)
State income taxes, net of federal benefit 11,390 3,358 (10,953)
Nondeductible penalties 38 17 3,589
Adjustment for prior years' taxes - (2,796) (7,338)
Employee stock ownership plan (999) 1,166 (1,670)
Dividends received deduction (8,618) (1,314) (3,218)
Adjustment to tax asset valuation allowance (2,136) (23,129) 7,000
Merger-related expenditures 5,829 4,597 -
Deferred intercompany gain 5,038 786 630
Other, net 5,992 912 (441)
-------- --------- --------
Total income tax expense $161,725 $ 98,611 $ 5,939
======== ========= ========
The accompanying notes are in integral part of these financial statements.
C-22
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ABOUT NORTHEAST UTILITIES
Northeast Utilities (NU or the company) is the parent company of the Northeast
Utilities system (NU system). Through its regulated utilities and competitive
energy subsidiaries, the NU system serves in excess of 30 percent of New
England's electric needs and is one of the 25 largest electric utility systems
in the country as measured by revenues. The NU system'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 Western Massachusetts Electric Company (WMECO). Another wholly owned
subsidiary, North Atlantic Energy Corporation (NAEC), sells all of its
entitlement to the capacity and output of the Seabrook Station nuclear unit
(Seabrook) to PSNH under the terms of two life-of-unit, full cost recovery
contracts (Seabrook Power Contracts). A fifth wholly owned subsidiary, Holyoke
Water Power Company (HWP), also is engaged in the production and distribution of
electric power.
On March 1, 2000, NU completed its acquisition of Yankee Energy System, Inc.
(Yankee), the parent company of Yankee Gas Services Company (Yankee Gas),
Connecticut's largest natural gas distribution system.
NU is registered with the Securities and Exchange Commission (SEC) as a holding
company under the Public Utility Holding Company Act of 1935 (1935 Act), and the
NU system is subject to the provisions of the 1935 Act. Arrangements among the
NU system companies, outside agencies and other utilities covering
interconnections, interchange of electric power and sales of utility property
are subject to regulation by the Federal Energy Regulatory Commission (FERC)
and/or the SEC. The operating subsidiaries are subject to further regulation for
rates, accounting and other matters by the FERC and/or applicable state
regulatory commissions.
NU Enterprises, Inc. is a wholly owned subsidiary of NU and acts as the holding
company for certain of NU's competitive energy subsidiaries. Northeast
Generation Company (NGC) was formed to acquire and manage generation facilities.
Northeast Generation Services Company and its subsidiaries (NGS) was formed to
maintain and service any fossil or hydroelectric facility that is acquired or
contracted with for these services. HEC Inc. and its subsidiaries (HEC), Mode 1
Communications, Inc. (Mode 1), Select Energy, Inc. (Select Energy), and Select
Energy Portland Pipeline, Inc. engage in a variety of energy-related and
telecommunications activities, as applicable, primarily in the competitive
energy retail and wholesale commodity, marketing and services fields.
Several wholly owned subsidiaries of NU provide support services for the NU
system companies and, in some cases, for other New England utilities. Northeast
Utilities Service Company provides centralized accounting, administrative,
information resources, engineering, financial, legal, operational, planning,
purchasing, and other services to the NU system companies. Northeast Nuclear
Energy Company acts as agent for the NU system companies and other New England
utilities in operating the Millstone nuclear units. North Atlantic Energy
Service Corporation has operational responsibility for Seabrook. Three other
subsidiaries construct, acquire or lease some of the property and facilities
used by the NU system companies.
B. PRESENTATION
The consolidated financial statements of the NU system include the accounts of
all 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 years' data have been made to conform with
the current year's presentation.
C-23
60
C. NEW ACCOUNTING STANDARDS
Derivative Instruments: Effective January 1, 2001, NU adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. SFAS No. 133 requires that
derivative instruments be recorded as an asset or liability measured at its fair
value and that changes in the fair value of derivative instruments be recognized
currently in earnings unless specific hedge accounting criteria are met.
In order to implement SFAS No. 133 by January 1, 2001, NU established a
cross-functional project team to identify all derivative instruments, measure
the fair value of those derivative instruments, designate and document various
hedge relationships, and evaluate the effectiveness of those hedge
relationships. NU has completed the process of identifying all derivative
instruments and has established appropriate fair value measurements of those
derivative instruments in place at January 1, 2001. In addition, for those
derivative instruments which are hedging an identified risk, NU has designated
and documented all hedging relationships anew.
NU believes that the majority of its nontrading energy and capacity contracts,
purchased-power agreements, power sale agreements, and gas and electric retail
contracts, qualify for the "normal purchases and sales" exception of the new
standard, and therefore are not required to be recognized at fair value.
However, NU believes that its electric, oil and gas swap contracts, interest
rate swap agreements, and gas and oil futures are derivatives and will be
recorded on its consolidated balance sheets at fair value on January 1, 2001. NU
believes that certain of these contracts meet specific hedge accounting
criteria; accordingly, changes in the fair value of these contracts will be
recorded in other comprehensive income on the consolidated balance sheets. For
those contracts that do not meet the hedging requirements, the changes in fair
value of those contracts will be recognized currently in earnings. As explained
within Note 8 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."
Management will record the effects of SFAS No. 133 in the first quarter of 2001
through a cumulative effect of a change in accounting principle and estimates
that the effect will be to reduce pretax earnings by approximately $37.4 million
and increase shareholders' equity by $21.7 million. These estimates do not
include certain long-term energy and capacity contracts which management
believes represent "normal purchases and sales." The accounting for these types
of contracts is currently being evaluated by the Financial Accounting Standards
Board (FASB). Further guidance from the FASB may change management's conclusions
regarding these contracts and require them to be accounted for as derivatives.
Transfers of Financial Assets: In September 2000, the FASB issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities -- a Replacement of FASB Statement No. 125." SFAS No. 140 revises
the criteria for accounting for securitizations, other financial asset transfers
and collateral and introduces new disclosures, but otherwise carries forward
most of the provisions of SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," without amendment. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of the disclosure requirements under SFAS No.
140 did not have a material impact on NU's consolidated financial statements.
Revenue Recognition: In December 1999, the SEC issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition." The adoption of SAB No. 101, as amended,
did not have a material impact on NU's consolidated financial statements.
Forward Share Purchase Arrangement: EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," requires that all contracts be initially measured at fair
value and subsequently accounted for based on the current classification and the
assumed or required settlement method. As NU's forward share purchase
arrangements can be settled in cash or NU common shares at the company's
discretion, this amount was classified as tempo-
C-24
61
rary equity from stock forward on the consolidated balance sheets at December
31, 2000 and 1999.
On January 2, 2001, these arrangements were modified. As a result of applying
the revised guidance under EITF Issue No. 00-19, the aforementioned forward
share purchase transactions no longer meet the temporary equity criteria and
will be classified as an asset or liability in the first quarter of 2001. The
difference between the fair value and contract value will be included in
earnings. NU expects to repurchase the shares from the counterparties in the
first half of 2001 with the proceeds from restructuring.
D. INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT
Regional Nuclear Generating Companies: CL&P, PSNH and WMECO own common stock in
four regional nuclear companies (Yankee Companies). The NU system's ownership
interests in the Yankee Companies at December 31, 2000 and 1999, which are
accounted for on the equity method due to the NU system companies' ability to
exercise significant influence over their operating and financial policies are
49 percent of the Connecticut Yankee Atomic Power Company (CYAPC), 38.5 percent
of the Yankee Atomic Electric Company (YAEC), 20 percent of the Maine Yankee
Atomic Power Company (MYAPC), and 16 percent of the Vermont Yankee Nuclear Power
Corporation (VYNPC). The NU system's total equity investment in the Yankee
Companies at December 31, 2000 and 1999, is $62.5 million and $81.5 million,
respectively. Each Yankee Company owns a single nuclear generating unit.
However, VYNPC is the only unit still in operation at December 31, 2000.
Millstone: CL&P and WMECO together own 100 percent of both Millstone 1, a 660
megawatt (MW) nuclear unit, which is currently in decommissioning status, and
Millstone 2, an 870 MW nuclear generating unit. CL&P, PSNH and WMECO together
have a 68.02 percent joint ownership interest in Millstone 3, a 1,154 MW nuclear
generating unit. On August 7, 2000, CL&P, WMECO and certain other joint owners
reached an agreement to sell substantially all of the Millstone units to
Dominion Resources, Inc. (Dominion) for approximately $1.3 billion, including
approximately $105 million for nuclear fuel. NU currently expects to close on
the sale of Millstone as early as the end of March 2001.
Seabrook: CL&P and NAEC together have a 40.04 percent joint ownership interest
in Seabrook, a 1,148 MW nuclear generating unit. NAEC sells all of its share of
the power generated by Seabrook to PSNH under the Seabrook Power Contracts. CL&P
and NAEC expect to auction their joint ownership interests in Seabrook in 2001
with a closing on the sale expected in 2002.
Plant-in-service and the accumulated provision for depreciation for the NU
system's share of Millstone 2 and 3 and Seabrook are as follows:
-----------------------------------------------
At December 31,
--------------------
-----------------------------------------------
(Millions of Dollars) 2000 1999
-----------------------------------------------
Plant-in-service
Millstone 2 $ 962.0 $ 952.1
Millstone 3 2,427.2 2,414.9
Seabrook 909.3 901.9
Accumulated provision for
depreciation
Millstone 2 $ 953.6 $ 910.0
Millstone 3 2,214.3 2,220.5
Seabrook 821.3 318.8
-----------------------------------------------
Hydro-Quebec: NU has a 22.66 percent equity ownership interest, totaling $15
million and $16.5 million at December 31, 2000 and 1999, respectively, in two
companies that transmit electricity imported from the Hydro-Quebec system in
Canada.
E. DEPRECIATION
The provision for depreciation is calculated using the straight-line method
based on the estimated remaining useful lives of depreciable utility
plant-in-service, adjusted for salvage value and removal costs, as approved by
the appropriate regulatory agency where applicable. Except for major facilities,
depreciation rates are applied to the average plant-in-service during the
period. Major facilities are depreciated from the time they are placed in
service. When plant is retired from service, the original cost of the plant,
including costs of removal less salvage, is charged to the accumulated provision
for depreciation. The costs of closure and removal of nonnuclear facilities are
accrued over the life of the plant as a component of depreciation. The
depreciation rates for the several classes of electric plant-in-service are
equivalent to a composite rate of 3.1 percent in 2000 and 3.3 percent in 1999
and 1998.
C-25
62
As a result of discontinuing the application of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," for CL&P's and WMECO's generation
businesses in 1999, including CL&P's ownership interest in Seabrook, NU recorded
a charge to accumulated depreciation for the nuclear plant in excess of the
estimated fair market value at the time in the amount of $2 billion and a
corresponding regulatory asset was created. Also, in 2000, HWP discontinued SFAS
No. 71 and recorded a charge to accumulated depreciation for the plant in excess
of fair value for certain hydroelectric generation assets, which was recorded as
an extraordinary loss.
F. REVENUES
Regulated utility revenues are based on authorized rates applied to each
customer's use of electricity. In general, rates can be changed only through a
formal proceeding before the appropriate regulatory commission. Regulatory
commissions also have authority over the terms and conditions of nontraditional
rate-making arrangements. At the end of each accounting period, CL&P, PSNH,
WMECO, Select Energy, and Yankee Gas accrue a revenue estimate for the amount of
energy delivered but unbilled.
Revenues for NU's competitive energy subsidiaries, primarily Select Energy, are
recognized when the energy is delivered.
G. PSNH ACQUISITION COSTS
PSNH acquisition costs represent the aggregate value placed by the 1989 rate
agreement with the state of New Hampshire (Rate Agreement) on PSNH's assets in
excess of the net book value of PSNH's non-Seabrook assets, plus the $700
million value assigned to Seabrook by the Rate Agreement as part of the
bankruptcy resolution on June 5, 1992. The Rate Agreement provided for the
recovery through rates, with a return, of the PSNH acquisition costs. In
connection with the "Agreement to Settle PSNH Restructuring" (Settlement
Agreement) approximately $219.4 million was written off and the balance of $76.6
million has been reclassified as a regulatory asset.
H. 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 SFAS No. 71. As a result of final restructuring orders issued 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, the Settlement Agreement
became probable of implementation, therefore, PSNH discontinued the application
of SFAS No. 71 for the generation portion of its business.
CL&P's, WMECO's and PSNH's transmission and distribution business will continue
to be cost-based and management believes the application of SFAS No. 71
continues to be appropriate. Management continues to believe 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 generally over periods of 7 to 26 years, subject to
certain adjustments. The majority for CL&P and WMECO will be recovered through a
transition charge over a 12-year period. PSNH will recover securitized assets
over a 12-year period. Nuclear decommissioning and IPP costs will be recovered
over the period PSNH is responsible for those costs. The third type of PSNH
stranded costs are nonsecuritized regulatory assets (type three regulatory
assets). Any type three regulatory assets not collected by the recovery end date
will be written off. Based on current projections, PSNH expects to fully
recovery all of its type three regulatory assets by the recovery end date
stipulated in the Settlement Agreement. In addition, all material regulatory
assets are earning a return. The components of the NU system companies'
regulatory assets are as follows:
-----------------------------------------------
At December 31,
--------------------
-----------------------------------------------
(Millions of Dollars) 2000 1999
-----------------------------------------------
Recoverable nuclear costs $2,565.8 $2,210.8
Income taxes, net 504.7 636.6
Unrecovered contractual
obligations 255.8 349.2
Recoverable energy costs,
net 332.5 228.2
Other 252.0 217.6
-----------------------------------------------
Totals $3,910.8 $3,642.4
-----------------------------------------------
C-26
63
As a result of discontinuing the application of SFAS No. 71 in 1999 for CL&P's
and WMECO's generation businesses, CL&P and WMECO reclassified nuclear plant in
excess of its estimated fair market value from plant to regulatory assets. As of
December 31, 2000 and 1999, both the CL&P unamortized balance ($1.35 billion and
$1.38 billion, respectively) and the WMECO unamortized balance ($286.9 million
and $316.1 million, respectively) are classified as recoverable nuclear costs.
Also included in that regulatory asset component for 2000 and 1999 are $449.2
million and $514.7 million, respectively, which includes Millstone 1 recoverable
nuclear costs relating to the recoverable portion of the undepreciated plant and
related assets ($90.8 million and $145.7 million, respectively) and the
decommissioning and closure obligation ($358.4 million and $369 million,
respectively).
As a result of discontinuing the application of SFAS No. 71 in 2000 for PSNH's
generation business, PSNH recorded an after-tax charge of $214.2 million in the
fourth quarter of 2000. In addition, a regulatory asset was created for the
Seabrook over market generation in the amount of $484.7 million, which is
classified as recoverable nuclear costs. It is anticipated this regulatory asset
will be securitized.
I. INCOME TAXES
The tax effect of temporary differences (differences between the periods in
which transactions affect income in the financial statements and the periods in
which they affect the determination of taxable income) is accounted for in
accordance with the rate-making treatment of the applicable regulatory
commissions.
The tax effect of temporary differences, including timing differences accrued
under previously approved accounting standards, that give rise to the
accumulated deferred tax obligation is as follows:
-----------------------------------------------
At December 31,
--------------------
-----------------------------------------------
(Millions of Dollars) 2000 1999
-----------------------------------------------
Accelerated depreciation
and other plant-related
differences $1,364.9 $1,388.0
Regulatory assets --
income tax gross-up 189.1 241.2
Other 31.5 58.9
-----------------------------------------------
Totals $1,585.5 $1,688.1
-----------------------------------------------
J. UNRECOVERED CONTRACTUAL
OBLIGATIONS
Under the terms of contracts with the Yankee Companies, the
shareholder-sponsored companies are responsible for their proportionate share of
the remaining costs of the units, including decommissioning. As management
expects that the NU system companies will be allowed to recover these costs from
their customers, the NU system companies have recorded regulatory assets, with
corresponding obligations, on their respective balance sheets.
K. RECOVERABLE ENERGY COSTS
Energy Policy Act of 1992: Under the Energy Policy Act of 1992 (Energy Act),
CL&P, PSNH, WMECO, and NAEC are assessed for their proportionate shares of the
costs of decontaminating and decommissioning uranium enrichment plants owned by
the United States Department of Energy (DOE) (D&D Assessment). 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, WMECO, and NAEC are currently recovering these costs through rates.
As of December 31, 2000 and 1999, the NU system's total D&D Assessment deferrals
were $34.5 million and $38.4 million, respectively.
CL&P: Through December 31, 1999, CL&P had an energy adjustment clause under
which fuel prices above or below base-rate levels were charged to or credited to
customers. Coincident with the start of restructuring, the energy adjustment
clause was terminated. Energy costs deferred and not yet collected under the
energy adjustment clause amounted to $61.1 million and $62.6 million at December
31, 2000 and 1999, respectively. This balance is recorded as a
generation-related stranded cost and will be recovered through a transition
charge mechanism pending final Connecticut Department of Public Utility Control
(DPUC) approval.
PSNH: The Rate Agreement includes a fuel and purchased-power adjustment clause
(FPPAC) permitting PSNH to pass through to retail customers, for a 10-year
period that began in May 1991, the retail portion of differences between the
fuel and purchased-power costs assumed in the Rate Agreement and PSNH's actual
costs, which include the costs related to the Seabrook Power Contracts and the
Clean Air Act
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64
Amendment. The cost components of the FPPAC are subject to a prudence review by
the New Hampshire Public Utilities Commission (NHPUC). At December 31, 2000 and
1999, PSNH had $230.1 million and $120.5 million, respectively, of recoverable
energy costs deferred under the FPPAC. Under the Settlement Agreement, the FPPAC
will be recovered as a type three regulatory asset through a transition charge.
L. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and short-term cash investments
which are highly liquid in nature and have original maturities of three months
or less.
2. SHORT-TERM DEBT
Limits: The amount of short-term borrowings that may be incurred by NU and the
NU system operating companies is subject to periodic approval by either the SEC
under the 1935 Act or by the respective state regulators. Currently, SEC
authorization allows NU, CL&P, WMECO, and Yankee Gas to incur total short-term
borrowings up to a maximum of $400 million, $375 million, $250 million, and $100
million, respectively. In addition, the charters of CL&P and WMECO contain
preferred stock provisions restricting the amount of unsecured debt those
companies may incur. As of December 31, 2000, CL&P's and WMECO's charters permit
CL&P and WMECO to incur $245 million and $94 million, respectively, of
additional unsecured debt. PSNH and NAEC are authorized by the NHPUC to incur
short-term borrowings up to a maximum of $71.3 million and $260 million,
respectively.
Credit Agreements:
NGC: In March 2000, CL&P and WMECO transferred 1,289 MW of hydroelectric
generation assets in Connecticut and Massachusetts to NGC, an affiliated
company, for approximately $865.5 million. To finance the transfer, on March 9,
2000, NGC entered into a new short-term credit agreement with a total commitment
amount of $865.5 million, collateralized by the generation assets transferred.
Under the short-term credit agreement, $435.5 million of the commitment matured
on March 14, 2000, and was repaid. This credit agreement, with an original
maturity date of December 29, 2000, was extended for a minimum of six months.
NGC expects to replace the short-term credit agreement with up to $440 million
of permanent financing in the first half of 2001. At December 31, 2000, there
were $402.4 million in borrowings under the credit agreement.
Yankee Merger: To finance the cash portion of the Yankee merger, on March 1,
2000, NU entered into an unsecured term loan agreement for $266 million. The
term loan agreement will expire on February 28, 2001. NU expects to replace this
financing with permanent, long-term financing prior to its maturity date. At
December 31, 2000, there were $263 million in borrowings under the term loan
agreement.
CL&P and WMECO: On November 17, 2000, CL&P and WMECO entered into a 364-day
revolving credit facility for $350 million, replacing the previous $500 million
facility which was to expire on November 17, 2000. CL&P and WMECO may draw up to
$200 million and $150 million, respectively, under the facility which, until the
nuclear divestiture, is secured by second mortgages on Millstone 2 and 3. Once
CL&P and WMECO receive the proceeds from securitization, the $350 million
revolving credit facility will be reduced to $250 million, with a $150 million
limit for CL&P and a $100 million limit for WMECO. Unless extended, the credit
facility will expire on November 16, 2001. At December 31, 2000 and 1999, there
were $225 million and $213 million, respectively, in borrowings under these
facilities.
NAEC: On November 9, 2000, NAEC entered into an unsecured 364-day term credit
agreement for $200 million, replacing a $225 million term loan which was to
expire on November 9, 2000. The proceeds from the term credit agreement were
used to repay the $200 million outstanding under the previous term loan.
Additionally, the interest rate swaps and collar related to the previous term
loan expired and were not replaced. The term credit agreement also contains two
mandatory prepayment provisions; the first is a 50 percent mandatory principal
repayment of amounts outstanding to $100 million within two days of the buydown
of the Seabrook Power Contracts and the second is 100 percent prepayment within
two days of the sale of Seabrook. Any amounts prepaid can not be reborrowed.
Unless extended, the term credit agreement will expire on November 8, 2001. At
December 31, 2000 and 1999, there were $200 million in borrowings under the
credit agreement and previous term loan.
C-28
65
NU Parent: To continue to support the working capital needs of NU and its
competitive energy subsidiaries, NU replaced its $350 million 364-day unsecured
revolving credit facility which was to expire on November 17, 2000, with a 364-
day unsecured revolving credit facility on November 17, 2000. This facility
provides a total commitment of $400 million which is available subject to two
overlapping sub-limits. First, subject to the notional amount of any letters of
credit outstanding, amounts up to $300 million are available for advances.
Second, subject to the advances outstanding, letters of credit may be issued in
notional amounts up to $200 million. Unless extended, this credit facility will
expire on November 16, 2001. At December 31, 2000 and 1999, there were $173
million and $65 million, respectively, in borrowings under the new and previous
facilities. With regard to credit support, NU had $40 million and $29 million,
respectively, in letters of credit issued under the new and previous agreements
at December 31, 2000 and 1999.
Yankee Gas: Yankee Gas has arranged a $60 million unsecured revolving credit
facility. On November 17, 2000, the expiration date of this facility was
extended to November 16, 2001. At December 31, 2000, there were $46.6 million in
borrowings under this credit facility.
NU provides credit assurance in the form of guarantees, letters of credit and
other assurances for the financial performance obligations of certain of its
competitive energy subsidiaries. NU currently has authorization from the SEC to
provide up to $500 million of such assurances. As of December 31, 2000 and 1999,
NU had provided approximately $284 million and $190 million, respectively, of
such credit assurances.
Under the aforementioned credit agreements, the respective borrowers may borrow
at fixed or variable rates plus an applicable margin based upon certain debt
ratings, as rated by the lower of Standard and Poor's or Moody's Investors
Service. The weighted average interest rate on the NU system companies' notes
payable to banks outstanding on December 31, 2000 and 1999, was 8.85 percent and
7.93 percent, respectively. Maturities of short-term debt obligations were for
periods of three months or less.
These credit agreements provide that the parties to these agreements must comply
with certain financial and nonfinancial covenants as are customarily included in
such agreements, including, but not limited to, common equity ratios, interest
coverage ratios, cash flow ratios, and dividend payment restrictions. The
parties to the credit agreements currently are and expect to remain in
compliance with these covenants.
3. LEASES
CL&P and WMECO finance their nuclear fuel for Millstone 2 and their respective
shares of the nuclear fuel for Millstone 3 under the Niantic Bay Fuel Trust
(NBFT) capital lease agreement. This capital lease agreement has an expiration
date of June 1, 2040. At December 31, 2000 and 1999, the present value of the
capital lease obligation to the NBFT was $139.2 million and $157 million,
respectively. In connection with the planned nuclear divestiture the NBFT
capital lease agreement will be terminated, the nuclear fuel will be transferred
to Dominion and the related $180 million Series G Intermediate Term Note
Agreement will be extinguished with the divestiture proceeds.
CL&P and WMECO make quarterly lease payments for the cost of nuclear fuel
consumed in the reactors based on a units-of-production method at rates which
reflect estimated kilowatt-hours of energy provided plus financing costs
associated with the fuel in the reactors. Upon permanent discharge from the
reactors, ownership of the nuclear fuel transfers to CL&P and WMECO.
The NU system companies also have entered into lease agreements, some of which
are capital leases, for the use of data processing and office equipment,
vehicles, nuclear control room simulators, and office space. The provisions of
these lease agreements generally provide for renewal options.
Capital lease rental payments charged to operating expense were $50.1 million in
2000, $20.8 million in 1999 and $31 million in 1998. Interest included in
capital lease rental payments was $11.6 million in 2000, $13.7 million in 1999
and $18.3 million in 1998. Operating lease rental payments charged to expense
were $10.1 million in 2000, $7.5 million in 1999 and $15.7 million in 1998.
Future minimum rental payments, excluding annual nuclear fuel lease payments and
executory costs, such as property taxes, state use taxes, insurance, and
maintenance, under long-term
C-29
66
noncancelable leases, as of December 31, 2000 are as follows:
-----------------------------------------------
(Millions of Dollars)
-----------------------------------------------
Capital Operating
Year Leases Leases
-----------------------------------------------
2001 $ 4.9 $ 25.0
2002 3.2 20.0
2003 3.2 15.0
2004 3.0 11.5
2005 2.8 9.4
After 2005 27.7 23.2
-----------------------------------------------
Future minimum lease
payments 44.8
Less amount representing
interest 24.1 104.1
-----------------------------------------------
Present value of future
minimum lease payments
for other than nuclear
fuel 20.7
Present value of future
nuclear fuel lease
payments 139.2
-----------------------------------------------
Present value of future
minimum lease payments $159.9
-----------------------------------------------
4. EMPLOYEE BENEFITS
A. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The NU system companies, participate in a uniform noncontributory defined
benefit retirement plan covering substantially all regular NU system employees.
Benefits are based on years of service and the employees' highest eligible
compensation during 60 consecutive months of employment. The total pension
credit, part of which was credited to utility plant, was $97.9 million in 2000,
$33.7 million in 1999 and $44.1 million in 1998.
Currently, the NU system companies' 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.
The NU system companies also provide certain health care benefits, primarily
medical and dental, and life insurance benefits through a benefit plan to
retired employees. These benefits are available for employees retiring from the
NU system 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
life of the employee. The NU system companies annually fund postretirement costs
through external trusts with amounts that have been rate-recovered and which
also are tax deductible. Pension and trust assets are invested primarily in
domestic and international equity securities and bonds.
In December 2000, NU announced the details of a voluntary separation program
designed to reduce NU's generation-related support staff in 2001. NU will
reflect the program's costs in first quarter 2001 results.
The following table represents information on the plans' benefit obligation,
fair value of plan assets, and the respective plans' funded status:
-------------------------------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------------------------------
Postretirement
Pension Benefits Benefits
-------------------------------------------------------------------------------------------------
(Millions of Dollars) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $(1,516.6) $(1,479.2) $(306.8) $(305.2)
Yankee merger (66.7) - (26.9) -
Service cost (41.2) (43.7) (7.6) (7.6)
Interest cost (118.5) (106.3) (25.5) (21.8)
Employee contribution - - (0.1) -
Plan amendment - (79.6) - -
Actuarial (loss)/gain (39.4) 133.8 (13.6) (1.3)
Benefits paid 109.5 78.3 27.5 28.9
Settlements and other 2.0 (19.9) 0.7 0.2
-------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $(1,670.9) $(1,516.6) $(352.3) $(306.8)
-------------------------------------------------------------------------------------------------
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67
-------------------------------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------------------------------
Postretirement
Pension Benefits Benefits
-------------------------------------------------------------------------------------------------
(Millions of Dollars) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 2,330.2 $ 2,098.0 $ 170.7 $ 151.2
Yankee merger 107.5 - 16.1 -
Actual return on plan assets (8.8) 310.5 8.6 18.7
Employer contribution - - 29.6 29.7
Employee contribution - - 0.1 -
Benefits paid (109.5) (78.3) (27.5) (28.9)
-------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 2,319.4 $ 2,330.2 $ 197.6 $ 170.7
-------------------------------------------------------------------------------------------------
Funded status at December 31 $ 648.5 $ 813.6 $(154.7) $(136.1)
Unrecognized transition (asset)/obligation (5.8) (7.4) 180.9 196.6
Unrecognized prior service cost 90.9 99.2 - -
Unrecognized net gain (594.1) (904.7) (35.5) (60.4)
-------------------------------------------------------------------------------------------------
PREPAID/(ACCRUED) BENEFIT COST $ 139.5 $ 0.7 $ (9.3) $ 0.1
-------------------------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the plans' year end
funded status:
----------------------------------------------------------------------------------------------
At December 31,
----------------------------------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
----------------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
Discount rate 7.50% 7.75% 7.50% 7.75%
Compensation/progression rate 4.50 4.75 4.50 4.75
Health care cost trend rate (a) N/A N/A 5.26 5.57
----------------------------------------------------------------------------------------------
(a) The annual per capita cost of covered health care benefits was assumed to
decrease to 4.91 percent by 2001.
The components of net periodic benefit (credit)/cost are:
-------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
(Millions of Dollars) 2000 1999 1998 2000 1999 1998
-------------------------------------------------------------------------------------------------
Service cost $ 41.2 $ 43.7 $ 37.4 $ 7.6 $ 7.6 $ 6.6
Interest cost 118.5 106.3 96.8 25.5 21.8 20.9
Expected return on plan assets (205.1) (175.5) (153.2) (15.3) (11.7) (9.9)
Amortization of unrecognized net
transition (asset)/obligation (1.4) (1.5) (1.5) 15.1 15.1 15.1
Amortization of prior service cost 7.9 7.9 2.1 - - -
Amortization of actuarial gain (52.4) (33.5) (25.7) - - -
Other amortization, net - - - (4.3) (3.1) (3.8)
Settlements and other (6.6) 18.9 - - - -
-------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT (CREDIT)/COST $ (97.9) $ (33.7) $ (44.1) $ 28.6 $ 29.7 $28.9
-------------------------------------------------------------------------------------------------
C-31
68
For calculating pension and postretirement benefit costs, the following
assumptions were used:
-------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
-------------------------------------------------------------------------------------------------
Discount rate 7.75% 7.00% 7.25% 7.75% 7.00% 7.25 %
Expected long-term rate of return 9.50 9.50 9.50 N/A N/A N/A
Compensation/ progression rate 4.75 4.25 4.25 4.75 4.25 4.25
Long-term rate of return --
Health assets, net of tax N/A N/A N/A 7.50 7.50 7.75
Life assets N/A N/A N/A 9.50 9.50 9.50
-------------------------------------------------------------------------------------------------
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 trend rate by one percentage point in each year would have the
following effects:
--------------------------------------------------------
One Percentage One Percentage
(Millions of Dollars) Point Increase Point Decrease
--------------------------------------------------------
Effect on total
service and interest
cost components $ 1.6 $ (1.6)
Effect on
postretirement
benefit obligation $17.9 $(16.6)
--------------------------------------------------------
The trust holding the health plan assets is subject to federal income taxes.
B. 401(k) SAVINGS PLAN
NU maintains a 401(k) Savings Plan for substantially all NU system employees.
This savings plan provides for employee contributions up to specified limits. NU
matches employee contributions up to a maximum of 3 percent of eligible
compensation with cash and NU stock. The matching contributions made by NU were
$13.6 million in 2000, $13.8 million in 1999 and $13.2 million in 1998.
C. ESOP
NU maintains an Employee Stock Ownership Plan (ESOP) for purposes of allocating
shares to employees participating in the NU system's 401(k) Savings Plan. Under
this arrangement, NU issued unsecured notes during 1991 and 1992 totaling $250
million, the proceeds of which were lent to the ESOP trust for the purchase of
10.8 million newly issued NU common shares (ESOP Shares). The ESOP trust is
obligated to make principal and interest payments on the ESOP notes at the same
rate that ESOP Shares are allocated to employees. NU makes annual contributions
to the ESOP equal to the ESOP's debt service, less dividends received by the
ESOP. All dividends received by the ESOP on unallocated shares are used to pay
debt service and are not considered dividends for financial reporting purposes.
During the fourth quarter of 1999 through December 31, 2000, NU paid a 10 cent
per share quarterly dividend.
In 2000 and 1999, the ESOP trust issued 572,863 and 556,978 of NU common shares,
respectively, to satisfy 401(k) Savings Plan obligations to employees. As of
December 31, 2000 and 1999, the total allocated ESOP shares were 5,854,699 and
5,281,836, respectively, and total unallocated ESOP shares were 4,945,486 and
5,518,349, respectively. The fair market value of unallocated ESOP shares as of
December 31, 2000 and 1999, was $119.9 million and $113.5 million, respectively.
D. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan (ESPP): Since July 1998, the NU system maintained
an ESPP for all eligible employees. Under the ESPP, shares of NU common stock
were purchased at 6-month intervals at 85 percent of the lower of the price on
the first or last day of each 6-month period. Employees purchased shares having
a value not exceeding 25 percent of their compensation at the beginning of the
purchase period. During 2000 and 1999, employees purchased 199,520 and 253,853
shares, respectively, at discounted prices ranging from $17.48 to $18.49 in
2000, and $13.76 to $14.93 per share in 1999. At December 31, 2000 and 1999,
1,417,156 and 1,616,676 shares remained reserved for future issuance under the
ESPP, respectively. Effective January 1, 2001, the ESPP was terminated.
Incentive Plans: The NU system has long-term incentive plans authorizing various
types of
C-32
69
share-based awards, including stock options, to be made to eligible employees
and board members. The exercise price of stock options, as set at the time of
grant, is generally equal to the fair market value per share at the date of
grant. Under the Northeast Utilities Incentive Plan (Incentive Plan), the number
of shares which may be utilized for awards granted during a given calendar year
may not exceed one percent of the total number of shares of NU common stock
outstanding as of the first day of that calendar year.
Stock option transactions for 1998, 1999 and 2000, including those options
acquired in connection with the Yankee merger, are as follows:
------------------------------------------------------------------------------------------------
Exercise Price Per Share
------------------------
Weighted
Options Range Average
------------------------------------------------------------------------------------------------
Outstanding December 31, 1997 500,000 $9.6250 $ 9.6250
Granted 741,273 $14.8750 - $16.8125 $16.1780
Forfeited (7,595) $16.3125 $16.3125
------------------------------------------------------------------------------------------------
Outstanding December 31, 1998 1,233,678 $ 9.6250 - $16.8125 $13.5213
Granted 644,123 $14.9375 - $21.1250 $15.2514
Exercised (19,368) $16.3125 - $16.8125 $16.3986
Forfeited (32,177) $14.9375 - $16.3125 $15.8714
------------------------------------------------------------------------------------------------
Outstanding December 31, 1999 1,826,256 $ 9.6250 - $21.1250 $14.0585
Granted 669,470 $18.4375 - $22.2500 $18.7029
Yankee merger 10,167 $ 9.3640 - $12.6888 $10.7653
Exercised (43,750) $14.9375 - $19.5000 $16.0658
Forfeited (28,281) $14.9375 - $19.5000 $16.6515
------------------------------------------------------------------------------------------------
OUTSTANDING DECEMBER 31, 2000 2,433,862 $ 9.3640 - $22.2500 $15.2569
------------------------------------------------------------------------------------------------
Exercisable December 31, 1998 232,936 $14.8750 - $16.8125 $16.2972
Exercisable December 31, 1999 711,787 $ 9.6250 - $21.1250 $14.0102
------------------------------------------------------------------------------------------------
EXERCISABLE DECEMBER 31, 2000 1,298,339 $ 9.3640 - $22.2500 $14.2021
------------------------------------------------------------------------------------------------
The vesting schedule for the options granted in 1998 is one-third upon grant,
two-thirds after one year and the total award after two years. For the options
that were granted in 1999 and for certain options that were granted in 2000, the
vesting schedule for these options is ratably over three years from the date of
grant. Other options granted in 2000 vest 50 percent at the date of grant and 50
percent one year from the date of grant.
Also under the Incentive Plan, the NU system awarded 91,120 of restricted shares
in 1999. These shares have the same vesting schedule as the options granted
under the Incentive Plan. The NU system has also made several small grants of
restricted stock and other incentive-based stock compensation. During 2000, 1999
and 1998, $1.9 million, $2.2 million and $0.8 million, respectively, was
expensed for stock-based compensation.
Had compensation cost been determined for the ESPP and the incentive plan stock
options under the fair value method as opposed to the intrinsic value method
followed by the NU system, net (loss)/income and net (loss)/income per share
would have been as follows:
-------------------------------------------------
(Millions of Dollars,
except per share
amounts) 2000 1999 1998
-------------------------------------------------
Net (loss)/income $(33.9) $29.6 $(149.1)
Basic (loss)/income
per common share $(0.24) $0.23 $ (1.14)
Diluted (loss)/
income per common
share $(0.24) $0.22 $ (1.14)
-------------------------------------------------
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70
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
-----------------------------------------------------
2000 1999 1998
-----------------------------------------------------
Risk-free interest
rate 6.56% 5.69% 5.82%
Expected life 10 years 10 years 10 years
Expected volatility 26.15% 36.21% 35.05%
Expected dividend
yield 1.82% 1.89% 5.46%
---------------------------------------------------------
The weighted average grant date fair values of options granted during 2000, 1999
and 1998 were $7.50, $6.79 and $3.98, respectively. As of December 31, 2000 and
1999, the weighted average remaining contractual lives for those options
outstanding are 7.92 years and 8.47 years, respectively.
5. SALE OF CUSTOMER RECEIVABLES
As of December 31, 2000 and 1999, CL&P had sold accounts receivable of $170
million to a third-party purchaser with limited recourse through the CL&P
Receivables Corporation (CRC), a wholly owned subsidiary of CL&P. In addition,
at December 31, 2000 and 1999, $18.9 million and $22.5 million, respectively, of
accounts receivable were designated as collateral under the agreement with the
CRC.
Concentrations of credit risk to the purchaser under the company's agreement
with respect to the receivables are limited due to CL&P's diverse customer base
within its service territory.
6. COMMITMENTS AND CONTINGENCIES
A. RESTRUCTURING
Connecticut: The 1999 restructuring orders allowed for securitization of CL&P's
nonnuclear regulatory assets and the costs to buyout or buydown the various
purchased-power contracts. On November 8, 2000, the DPUC approved CL&P's request
to securitize an amount not to exceed $1.55 billion of approved, eligible
stranded costs, primarily related to above-market purchased-power contracts and
generation related regulatory assets. However, the Office of Consumer Counsel
(OCC) appealed the securitization order to the Connecticut Superior Court and it
remains unclear when securitization financing can be undertaken.
New Hampshire: In September 2000, the NHPUC approved a comprehensive
restructuring order that would allow PSNH to securitize up to $670 million of
stranded costs. In January 2001, the New Hampshire Supreme Court upheld this
restructuring order on appeal. However, one of the appellants indicated publicly
it would request a review of the New Hampshire Supreme Court decision by the
United States Supreme Court. Such a request must be filed by May 1, 2001.
Management believes that such an appeal would have a low probability of success,
but cannot determine what effect it might have on the timing of the issuance of
securitization bonds and the implementation of customer choice in New Hampshire.
PSNH currently expects to work with the State of New Hampshire to issue
securitization bonds early in the second quarter of 2001.
In October 2000, NU reached an agreement with an unaffiliated joint owner, who
owns approximately 15 percent of Seabrook, to auction its share of the plant
with NU's share. As part of the agreement, if the unaffiliated joint owner's
share of Seabrook sells for less than $87.2 million, NU will provide up to $17.4
million to compensate for any shortfall. NU also will share in the benefits if
that share of Seabrook exceeds $87.2 million. Additionally, under the agreement,
NU will top-off certain decommissioning obligations above a defined level.
Massachusetts: A settlement has been reached with the Massachusetts Attorney
General finalizing a $155 million securitization plan. WMECO expects to receive
approval of its securitization plan in February 2001.
B. NUCLEAR GENERATION ASSETS
DIVESTITURE
On August 7, 2000, CL&P, WMECO and certain other joint owners reached an
agreement to sell substantially all of the Millstone units, located in
Waterford, Connecticut, to Dominion, for approximately $1.3 billion, including
approximately $105 million for nuclear fuel. Dominion has also agreed to assume
responsibility for decommissioning the three units and NU will transfer to
Dominion all funds in the Millstone decommissioning trust. Additionally, NU is
obligated to top-off the decommissioning trust if its value does not equal a
previously agreed upon level as defined. NU expects to close on the sale of
Millstone as early as the end of March 2001.
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71
If the transaction is consummated as proposed, CL&P and WMECO would receive
gross proceeds of approximately $843.2 million and $196.2 million on a pretax
basis for their respective ownership interests. The proceeds from the sale of
these interests will be used to reduce the companies' stranded costs under
restructuring and the cash proceeds will be used to repay subsidiary debt and
capital lease obligations and to return equity capital to the parent company.
The DPUC approved the recovery of Millstone-related stranded costs not offset by
asset divestiture proceeds. Pursuant to the DPUC order, CL&P will seek recovery
of Millstone post-1997 capital additions totaling $50 million. The OCC has
appealed CL&P's ability to recover these costs. PSNH will receive $26 million on
a pretax basis, which will be reflected as a gain in accordance with the
Settlement Agreement.
In connection with the prior settlement of Millstone 3 joint owner claims, if
the aforementioned transaction is consummated as proposed, the NU system will
record a pretax gain in excess of $150 million. These settlements included
clauses which allowed NU to retain sale proceeds for the joint owners interests
in the units in excess of certain agreed upon amounts.
By the end of 2002, PSNH expects to complete the sale of its fossil and
hydroelectric generation assets, as well as NAEC's ownership share of Seabrook.
CL&P intends to sell its interest in Seabrook, when NAEC sells theirs.
C. ENVIRONMENTAL MATTERS
The NU system is subject to environmental laws and regulations intended to
mitigate or remove the effect of past operations and improve or maintain the
quality of our environment. As such, the NU system has an active environmental
auditing and training program and believes it is substantially in compliance
with the current laws and regulations.
However, the normal course of operations may involve activities and substances
that expose the NU system to potential liabilities of which management cannot
determine the outcome. Additionally, management cannot determine the outcome for
liabilities that may be imposed for past acts, even though such past acts may
have been lawful at the time they occurred. Management does not believe,
however, that this will have a material impact on the NU system's financial
statements.
Based upon currently available information for the estimated remediation costs
as of December 31, 2000 and 1999, including Yankee in 2000, the liability
recorded by the NU system for its estimated environmental remediation costs
amounted to $58.2 million and $24.8 million, respectively.
D. SPENT NUCLEAR FUEL DISPOSAL COSTS
Under the Nuclear Waste Policy Act of 1982, CL&P, PSNH, WMECO, and NAEC must pay
the DOE for the disposal of spent nuclear fuel and high-level radioactive waste.
The DOE is responsible for the selection and development of repositories for,
and the disposal of, spent nuclear fuel and high-level radioactive waste. For
nuclear fuel used to generate electricity prior to April 7, 1983 (Prior Period
Fuel), an accrual has been recorded for the full liability and payment must be
made prior to the first delivery of spent fuel to the DOE. Until such payment is
made, the outstanding balance will continue to accrue interest at the 3-month
treasury bill yield rate. As of December 31, 2000 and 1999, fees due to the DOE
for the disposal of Prior Period Fuel were $240.3 million and $226.5 million,
respectively, including interest costs of $158.2 million and $144.3 million,
respectively.
Fees for nuclear fuel burned on or after April 7, 1983, are billed currently to
customers and paid to the DOE on a quarterly basis. NU is responsible for fees
to be paid for fuel burned until the divestiture of the Millstone and Seabrook
nuclear units.
E. NUCLEAR INSURANCE CONTINGENCIES
Insurance policies covering the NU system's nuclear facilities have been
purchased for the primary cost of repair, replacement or decontamination of
utility property, certain extra costs incurred in obtaining replacement power
during prolonged accidental outages and the excess cost of repair, replacement
or decontamination or premature decommissioning of utility property.
The NU system is subject to retroactive assessments if losses under those
policies exceed the accumulated funds available to the insurer. The maximum
potential assessments with respect to losses arising during the current policy
year for the primary property insurance program, the replacement power policies
and the excess property damage policies are $8.2 million, $4.1
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72
million and $10.2 million, respectively. In addition, insurance has been
purchased in the aggregate amount of $200 million on an industry basis for
coverage of worker claims.
Under certain circumstances, in the event of a nuclear incident at one of the
nuclear facilities covered by the federal government's third-party liability
indemnification program, the NU system could be assessed liabilities in
proportion to its ownership interest in each of its nuclear units up to $83.9
million. The NU system's payment of this assessment would be limited to, in
proportion to its ownership interest in each of its nuclear units, $10 million
in any one year per nuclear unit. In addition, if the sum of all claims and
costs from any one nuclear incident exceeds the maximum amount of financial
protection, the NU system would be subject to an additional 5 percent, or $4.2
million, liability, in proportion to its ownership interests in each of its
nuclear units. Based upon its ownership interests in the Millstone units and in
Seabrook, the NU system's maximum liability, including any additional
assessments, would be $271 million per incident, of which payments would be
limited to $30.8 million per year. In addition, through purchased-power
contracts with VYNPC, the NU system would be responsible for up to an additional
assessment of $14.1 million per incident, of which payments would be limited to
$1.6 million per year.
NU expects to terminate its nuclear insurance upon the divestiture of its
nuclear units.
F. LONG-TERM CONTRACTUAL
ARRANGEMENTS
Yankee Companies: Under the terms of their agreements, the NU system companies
paid their ownership (or entitlement) shares of costs, which included
depreciation, operation and maintenance (O&M) expenses, taxes, the estimated
cost of decommissioning, and a return on invested capital. These costs were
recorded as purchased-power expenses. The total cost of purchases under
contracts with VYNPC amounted to $24.9 million in 2000, $29.2 million in 1999
and $27.3 million in 1998. VYNPC is in the process of selling its nuclear unit.
Upon completion of the sale, these long-term contracts will be terminated.
Nonutility Generators (NUGs): CL&P, PSNH and WMECO have entered into various
arrangements for the purchase of capacity and energy from NUGs. The total cost
of purchases under these arrangements amounted to $482.1 million in 2000, $461.8
million in 1999 and $459.7 million in 1998. The companies are in the process of
renegotiating the terms of these contracts through either a contract buydown or
buyout. The companies expect any payments to the NUGs as result of these
renegotiations to be recovered from the companies' customers.
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 system in Canada. CL&P, PSNH, WMECO,
and HWP are obligated to pay, over a 30-year period ending in 2020, their
proportionate shares of the annual O&M expenses and capital costs of those
facilities.
Estimated Annual Costs: The estimated annual costs of the NU system's
significant long-term contractual arrangements, absent the effects of any
contract terminations, buydowns or buyouts are as follows:
-----------------------------------------------------------------
(Millions of Dollars) 2001 2002 2003 2004 2005
-----------------------------------------------------------------
VYNPC $ 28.5 $ 28.9 $ 29.1 $ 32.0 $ 30.1
NUGs 480.2 489.2 500.6 487.3 496.8
Hydro-Quebec 27.9 27.0 26.0 25.0 24.1
-----------------------------------------------------------------
Select Energy: Select Energy maintains long-term agreements to purchase energy
in the normal course of business as part of its portfolio of resources to meet
its actual or expected sales commitments. The aggregate amount of these purchase
contracts was $1.94 billion at December 31, 2000.
These contracts extend through 2004 as follows:
-----------------------------------------------
(Millions of Dollars)
-----------------------------------------------
Year
-----------------------------------------------
2001 $1,418.3
2002 266.2
2003 228.5
2004 28.0
-----------------------------------------------
Total $1,941.0
-----------------------------------------------
7. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS
Millstone and Seabrook: The NU system operating nuclear power plants, Millstone
2 and 3 and Seabrook, have service lives that are expected to end during the
years 2015 through 2026, and
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73
upon retirement, must be decommissioned. Millstone 1's expected service life was
to end in 2010, however, in July 1998, restart activities were discontinued and
decommissioning of the unit began. In connection with the sale of the Millstone
units, Dominion has agreed to assume responsibility for decommissioning. Until
the divestiture, CL&P, PSNH and WMECO recover sufficient amounts through their
allowed rates related to decommissioning costs.
The estimated cost of decommissioning Millstone 2, in year end 2000 dollars, is
$430.6 million. The NU system's ownership share of the estimated cost of
decommissioning Millstone 3 and Seabrook, in year end 2000 dollars, is $440.8
million and $234.6 million, respectively. Nuclear decommissioning costs are
accrued over the expected service lives of the units and are included in
depreciation expense and the accumulated provision for depreciation. Nuclear
decommissioning expenses for these units amounted to $35.5 million in 2000,
$30.6 million in 1999 and $27.9 million in 1998. Nuclear decommissioning
expenses for Millstone 1 were $23.1 million in 2000, $25.7 million in 1999 and
$19.8 million in 1998. Through December 31, 2000 and 1999, total decommissioning
expenses of $304.4 million and $260.6 million, respectively, have been collected
from customers and are reflected in the accumulated provision for depreciation.
External decommissioning trusts have been established for the costs of
decommissioning the Millstone units. Payments for the NU system's ownership
share of the cost of decommissioning Seabrook are paid to an independent
decommissioning financing fund managed by the state of New Hampshire. Funding of
the estimated decommissioning costs assumes after-tax earnings on the Millstone
and Seabrook decommissioning funds of 5.5 percent and 6.5 percent, respectively.
As of December 31, 2000 and 1999, $278.5 million and $239.7 million,
respectively, have been transferred to external decommissioning trusts. Earnings
on the decommissioning trusts increase the decommissioning trust balances and
the accumulated provisions for depreciation. Unrealized gains and losses
associated with the decommissioning trusts also impact the balance of the trusts
and the accumulated provisions for depreciation. The fair values of the amounts
in the external decommissioning trusts were $450.8 million and $410.2 million at
December 31, 2000 and 1999, respectively. Upon divestiture, balances in the
decommissioning trusts will be transferred to the buyer. NU is obligated to top-
off the Millstone decommissioning trust if its value does not equal an agreed
upon amount at closing, pursuant to the conditions set forth in the purchase and
sale agreement.
Yankee Companies: VYNPC owns and operates a nuclear generating unit with a
service life that is expected to end in 2012. The NU system's ownership share of
estimated costs, in year end 2000 dollars, of decommissioning this unit is $72.3
million. In 1999, VYNPC agreed to sell its nuclear generating unit for $22
million to an unaffiliated company. Among other commitments, the acquiring
company agreed to assume the obligation to decommission the unit after it is
taken out of service, and the owners of VYNPC (including CL&P, WMECO and PSNH)
agreed to fund their shares of the decommissioning costs up to a negotiated
amount. Subsequent to the time that agreement was executed, the original
proposed acquiring company has increased the price it agreed to pay and three
other unaffiliated companies have indicated their interest in buying VYNPC's
generating unit on terms that have not been disclosed. At present, CL&P, WMECO
and PSNH expect that the unit will be sold, but the identity of the owner and
the terms of sale, including price, future decommissioning obligations and
future power purchase obligations, are not known.
As of December 31, 2000 and 1999, NU's remaining estimated obligation, including
decommissioning for the units owned by CYAPC, YAEC and MYAPC, which have been
shut down was $244.6 million and $358.4 million, respectively.
8. MARKET RISK AND RISK MANAGEMENT INSTRUMENTS
Competitive Energy Subsidiaries: Select Energy provides both firm requirement
energy services to its customers and performs 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 the commodity price risks. Sensitivity
C-37
74
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, oil and natural gas 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 Issue No. 98-10, "Accounting for Energy
Trading and Risk Management Activities." 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 operating expenses - other and in the consolidated balance sheets as
prepayments and other. The mark-to-market position at December 31, 2000, was a
positive $13.8 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 subject to market, based on closing
exchange prices.
As of December 31, 2000, 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 $1 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.
Gains or losses on derivatives associated with firm commitments are recognized
as adjustments to cost of sales or revenues when the associated transactions
affect earnings. Gains and losses on derivatives associated with forecasted
transactions are recognized when such forecasted transactions affect earnings.
If a derivative instrument is terminated early because it is probable that a
transaction or forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings.
When conducting sensitivity analysis of the change in the fair value of Select
Energy's electricity, oil and natural gas portfolio, which would result from a
hypothetical change in the future market price of electricity, oil and natural
gas, the fair value of the contracts are determined from models which take into
account estimated future market prices of electricity, oil and natural gas, 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 December 31, 2000, an
unfavorable 10 percent change in forward market price would have resulted in a
decrease in fair value of approximately $52 million.
The impact of a change in electricity, natural gas and oil prices on Select
Energy's nontrading contracts on December 31, 2000, is not necessarily
representative of the results that will be realized when these contracts go to
eventual physical delivery.
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
C-38
75
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 2002. As of December 31,
2000, the NYMEX contracts had a notional value of $18.8 million and a positive
mark-to-market position of $14.9 million.
Regulated Entities:
Interest Rate Risk -- Nontrading Activities: The company manages its interest
rate risk exposure by maintaining a mix of fixed and variable rate debt. In
addition, 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 December 31,
2000, Yankee had outstanding agreements with a total notional value of $48
million and a negative mark-to-market position of $0.8 million.
For the fair value, see Note 10 for the disclosure of NU's debt.
Commodity Price Risk -- Nontrading Activities: Yankee Gas maintains a master
swap agreement with a certain 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 December 31,
2000, the commodity swap agreement had a notional value of $17.1 million and a
positive mark-to-market position of $5.4 million.
9. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
CL&P Capital LP (CL&P LP), a subsidiary of CL&P, previously had issued $100
million of cumulative 9.3 percent Monthly Income Preferred Securities (MIPS),
Series A. CL&P has the sole ownership in CL&P LP, as a general partner, and is
the guarantor of the MIPS securities. Subsequent to the MIPS issuance, CL&P LP
loaned the proceeds of the MIPS issuance, along with CL&P's $3.1 million capital
contribution, back to CL&P in the form of an unsecured debenture. CL&P
consolidates CL&P LP for financial reporting purposes. Upon consolidation, the
unsecured debenture is eliminated, and the MIPS securities are accounted for as
a minority interest.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value due to
the short-term nature of cash and cash equivalents.
Supplemental Executive Retirement Plan (SERP) Investments: Investments held for
the benefit of the SERP are recorded at fair market value. The investments
having a cost basis of $6.5 million and $5.8 million held for benefit of the
SERP were recorded at their fair market values at December 31, 2000 and 1999, of
$10.1 million and $9.2 million, respectively.
Nuclear decommissioning trusts: The investments held in the NU system companies'
nuclear decommissioning trusts were marked-to-market by $117.6 million as of
December 31, 2000, and $129 million as of December 31, 1999, with corresponding
offsets to the accumulated provision for depreciation. The amounts adjusted in
2000 and in 1999 represent cumulative net unrealized gains. Cumulative gross
unrealized holding losses were immaterial for both 2000 and 1999.
Preferred stock and long-term debt: The fair value of the NU system's fixed-rate
securities is based upon the quoted market price for those issues or similar
issues. Adjustable rate securities are assumed to have a fair value equal to
their carrying value. The carrying amounts of the NU system's financial
instruments and the estimated fair values are as follows:
----------------------------------------------------------
At December 31, 2000
----------------------------------------------------------
Carrying Fair
(Millions of Dollars) Amount Value
----------------------------------------------------------
Preferred stock not subject to
mandatory redemption $ 136.2 $ 159.9
Preferred stock subject to
mandatory redemption 40.8 42.0
Long-term debt -
First mortgage bonds 1,008.1 1,012.5
Other long-term debt 1,342.2 1,290.6
MIPS 100.0 100.5
----------------------------------------------------------
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76
----------------------------------------------------------
At December 31, 1999
----------------------------------------------------------
Carrying Fair
(Millions of Dollars) Amount Value
----------------------------------------------------------
Preferred stock not subject to
mandatory redemption $ 136.2 $ 164.0
Preferred stock subject to
mandatory redemption 167.5 166.8
Long-term debt -
First mortgage bonds 1,193.2 1,209.5
Other long-term debt 1,638.3 1,593.1
MIPS 100.0 97.3
----------------------------------------------------------
11. OTHER COMPREHENSIVE INCOME
The accumulated balance for each other comprehensive income item is as follows:
------------------------------------------------------------
Current
(Thousands of December 31, Period December 31,
Dollars) 1999 Change 2000
------------------------------------------------------------
Foreign currency
translation
adjustments $ - $ - $ -
Unrealized gains on
securities 2,137 245 2,382
Minimum pension
liability
adjustments (613) - (613)
------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE
INCOME $ 1,524 $ 245 $ 1,769
------------------------------------------------------------
------------------------------------------------------------
Current
(Thousands of December 31, Period December 31,
Dollars) 1998 Change 1999
------------------------------------------------------------
Foreign currency
translation
adjustments $ (1) $ 1 $ -
Unrealized gains on
securities 2,019 118 2,137
Minimum pension
liability
adjustments (613) - (613)
------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE
INCOME $ 1,405 $ 119 $ 1,524
------------------------------------------------------------
The changes in the components of other comprehensive income are reported net of
the following income tax effects:
----------------------------------------------------
(Thousands of Dollars) 2000 1999 1998
----------------------------------------------------
Foreign currency translation
adjustments $ - $ - $ -
Unrealized gains on
securities (147) (71) (1,222)
Minimum pension liability
adjustments - - 398
----------------------------------------------------
OTHER COMPREHENSIVE INCOME $(147) $(71) $ (824)
----------------------------------------------------
12. EARNINGS PER SHARE
Earnings per share (EPS) is computed based upon the weighted average number of
common shares outstanding during each year. Diluted earnings per share 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, except share information) 2000 1999 1998
----------------------------------------------------------------------------------------------------
Income/(loss) after interest charges $ 219.5 $ 57.0 $ (120.4)
Preferred dividends of subsidiaries 14.2 22.8 26.4
Income/(loss) before extraordinary loss 205.3 34.2 (146.8)
Extraordinary loss, net of tax benefit 233.9 - -
Net (loss)/income $ (28.6) $ 34.2 $ (146.8)
Basic EPS common shares outstanding (average) 141,549,860 131,415,126 130,549,760
Dilutive effect of employee stock options 417,356 616,447 -(a)
Diluted EPS common shares outstanding (average) 141,967,216 132,031,573 130,549,760
Basic earnings/(loss) per common share:
Income/(loss) before extraordinary loss $ 1.45 $ 0.26 $ (1.12)
Extraordinary loss, net of tax benefit $ (1.65) $ - $ -
Net (loss)/income $ (0.20) $ 0.26 $ (1.12)
Diluted earnings/(loss) per common share:
Income/(loss) before extraordinary loss $ 1.45 $ 0.26 $ (1.12)
Extraordinary loss, net of tax benefit $ (1.65) $ - $ -
Net (loss)/income $ (0.20) $ 0.26 $ (1.12)
----------------------------------------------------------------------------------------------------
(a) The addition of dilutive potential common shares would be anti-dilutive for
1998 and was not included.
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13. MODE 1
On November 23, 1999, NEON Communications, Inc. (NEON) entered into agreements
with two unaffiliated companies. Under the terms of the agreements, NEON will
provide network transport and carrier services in its service areas and that of
the two unaffiliated companies and each company will provide connectivity from
the backbone system to their respective local loops. Additionally, each company
will manage their local distribution into their respective end-users' locations.
NEON will also develop, operate and market the combined telecommunications
infrastructure created under the two agreements. As the agreements are
implemented, the two unaffiliated companies will ultimately obtain a total of
approximately 4.6 million shares of NEON common stock, or approximately 12
percent and 10 percent ownership interests, respectively. Each unaffiliated
company will also nominate one member to the NEON Board of Directors. Prior to
the implementation of these agreements, Mode 1 had approximately a 29 percent
ownership interest in the common shares of NEON.
In conjunction with the consummation of the agreements on September 14, 2000, a
portion of the total common shares to be issued were issued to the two
unaffiliated companies. The remainder of these shares will be issued as the two
unaffiliated companies complete certain milestones, as defined in their
respective agreements.
The issuance of these shares had the effect of decreasing Mode 1's ownership
interest in NEON's outstanding common shares to approximately 25 percent.
However, these shares were issued at an amount greater than Mode 1's investment,
resulting in a $19.8 million pretax increase to Mode 1's equity. NU's accounting
policy is to recognize the gain or loss from this type of change in ownership
interest in net income.
14. SEGMENT INFORMATION
The NU system is organized between regulated utilities (electric and gas for the
12 months and 10 months, respectively, ended December 31, 2000, and electric
only for the year ended December 31, 1999) and competitive energy subsidiaries.
The regulated utilities segment represents approximately 85 percent and 86
percent of the NU system's total revenues for the year ended December 31, 2000
and 1999, 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. Their purchases represented approximately 15
percent and 34 percent, respectively, of total competitive energy subsidiaries'
revenues for the year ended December 31, 2000. Purchases from the unaffiliated
company represented approximately 43 percent of total competitive energy
subsidiaries' revenues for the year ended December 31, 1999. There were no
purchases from CL&P in 1999.
The competitive energy subsidiaries segment in the following table includes HEC,
a provider of energy management, demand-side management and related consulting
services for commercial, industrial and institutional electric companies and
electric utility companies; HWP, a company engaged in the production and
distribution of electric power; NGC, a corporation that acquires and manages
generation facilities; NGS, a corporation that maintains and services any fossil
or hydroelectric facility that is acquired or contracted with for fossil or
hydroelectric generation services, 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.
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Other in the following table includes the results for Mode 1, an investor in a
fiber-optic communications network. Mode 1 had earnings of $3.8 million and a
net loss of $4.3 million for years ended December 31, 2000 and 1999,
respectively. See Note 13 for further information related to Mode 1's earnings
for the year ended December 31, 2000. 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 Year Ended December 31, 2000
-----------------------------------------------------------------------------------------------------
Regulated Utilities Competitive Eliminations
------------------- Energy and
(Millions of Dollars) Electric Gas Subsidiaries Other Total
-----------------------------------------------------------------------------------------------------
Operating revenues $ 4,738.5 $ 251.2 $ 1,894.9 $ (1,008.0) $ 5,876.6
Operating expenses (4,311.3) (233.7) (1,831.7) 964.9 (5,411.8)
-----------------------------------------------------------------------------------------------------
Operating income/(loss) 427.2 17.5 63.2 (43.1) 464.8
Other income/(loss) 48.2 (4.1) (3.1) 13.0 54.0
Interest expense (191.9) (12.2) (53.4) (41.8) (299.3)
Preferred dividends (14.2) - - - (14.2)
-----------------------------------------------------------------------------------------------------
Income/(loss) before extraordinary
loss 269.3 1.2 6.7 (71.9) 205.3
Extraordinary loss, net of tax benefit 214.2 - 19.7 - 233.9
-----------------------------------------------------------------------------------------------------
Net income/(loss) $ 55.1 $ 1.2 $ (13.0) $ (71.9) $ (28.6)
-----------------------------------------------------------------------------------------------------
Total assets $ 9,620.0 $ 912.6 $ 684.1 $ (999.6) $10,217.1
-----------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999
--------------------------------------------------------------------------------------------------
Regulated Competitive Eliminations
Electric Energy and
(Millions of Dollars) Utilities Subsidiaries Other Total
--------------------------------------------------------------------------------------------------
Operating revenues $ 3,846.1 $ 648.8 $ (23.7) $ 4,471.2
Operating expenses (3,454.3) (688.2) 15.8 (4,126.7)
--------------------------------------------------------------------------------------------------
Operating income/(loss) 391.8 (39.4) (7.9) 344.5
Other (loss)/income (43.2) 5.6 13.7 (23.9)
Interest expense (245.5) (3.2) (14.9) (263.6)
Preferred dividends (22.8) - - (22.8)
--------------------------------------------------------------------------------------------------
Net income/(loss) $ 80.3 $ (37.0) $ (9.1) $ 34.2
--------------------------------------------------------------------------------------------------
Total assets $ 9,302.6 $ 308.2 $ 77.3 $ 9,688.1
--------------------------------------------------------------------------------------------------
15. SUBSEQUENT EVENTS
A. MERGER AGREEMENT WITH
CONSOLIDATED EDISON, INC.
In 2000, NU and Consolidated Edison, Inc. (Con Edison) received most of the
approvals needed to complete the merger announced in October 1999. Shareholders
from both companies approved the merger in April 2000, and all state regulatory
approvals were granted by the end of the year. Additionally, the FERC approved
the merger in May 2000, the Nuclear Regulatory Commission approved the
transaction in August 2000, and the United States Department of Justice approved
the merger in February 2001. Necessary approval from the SEC was expected to be
received in mid-March 2001.
On February 28, 2001, NU's Board of Trustees requested that Con Edison provide
reasonable assurance, in writing, that it intended to comply with the terms of
the definitive merger agreement between the two companies. This included
assurances that Con Edison would consummate the pending merger at the price set
forth in the agreement promptly following the receipt of SEC approval. The
original request for assurance was to be received by March 2, 2001, however that
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79
date was later extended to March 5, 2001. On March 5, 2001, Con Edison advised
NU that it was not willing to close the merger on the agreed terms. NU notified
Con Edison that it was treating its refusal to proceed on the terms set forth in
the merger agreement as a repudiation and breach of the merger agreement, and
that NU would file suit to obtain the benefits of the transaction as negotiated
for NU shareholders. On March 6, 2001, Con Edison filed suit in the U.S.
District Court for the Southern District of New York (Southern District),
seeking declaratory judgment that NU failed to satisfy conditions precedent
under the merger agreement. On March 12, 2001, NU filed suit against Con Edison
in the Southern District seeking damages in excess of $1 billion arising from
Con Edison's breach of the merger agreement.
Under the terms of the proposed transaction, had it proceeded to closing, NU
shareholders would have received a base price of $25 per share, in a combination
of cash and Con Edison common stock, plus $0.0034 per share per day, or
approximately $0.10 per share per month, for each day that the merger did not
close after August 5, 2000. Additionally, NU shareholders would have received
another $1 per share as a result of a recommendation by the DPUC's Utility
Operations Management Analysis Unit that the DPUC accept the results of the
Millstone auction that were announced on August 7, 2000. The DPUC approved the
sale in January 2001. The $25 per share base price, the $0.0034 per share per
day compensation and the additional $1 per share resulting from the Millstone
auction would have been subject to the collar mechanism described in the merger
proxy statement dated February 29, 2000, to the extent NU shareholders received
Con Edison stock. Assuming that Con Edison's stock price had averaged between
$36 and $46 per share during the applicable pricing period, as defined, NU
shareholders would have received approximately $26.84 per share, were the merger
to have closed on April 10, 2001.
B. FERC DECISION
On March 6, 2001, the FERC issued an order on rehearing related to the price for
installed capacity (ICAP) in New England. The FERC reinstituted the previously
approved $8.75 per kilowatt-month charge for installed capacity, but made the
price effective April 1, 2001. In an earlier decision in December 2000, the FERC
had made the charge effective as of August 1, 2000, but in its revised decision,
the FERC substituted a $0.17 per kilowatt-month charge for the period of August
2000 through March 2001. Because NU was a major seller of installed generating
capacity during the last five months of 2000, the FERC's revised decision with
respect to the August through March time period reduced NU's fourth quarter
revenues by $24.6 million and lowered earnings by $14.8 million, or $0.10 per
share. Although it is important that FERC understood the going forward need for
a capacity charge that approximates the cost of installing new generation in New
England, management currently plans on requesting that FERC review the
inconsistency of their decision with regard to the change in the effective date
of the $8.75 charge.
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CONSOLIDATED STATEMENTS OF QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------------------
Quarter Ended (a) (b)
--------------------------------------------------------------------------------------------
(Thousands of Dollars,
except per share information) March 31 June 30 September 30 December 31
--------------------------------------------------------------------------------------------
2000
Operating Revenues $1,382,321 $1,414,973 $ 1,581,947 $ 1,497,379
Operating Income 135,409 99,092 115,761 114,501
Income Before Extraordinary Loss 74,587 12,206 65,543 52,959
Extraordinary Loss, Net of Tax Benefit - - - (233,881)
---------- ---------- ------------ -----------
Net Income/(Loss) $ 74,587 $ 12,206 $ 65,543 $ (180,922)
========== ========== ============ ===========
Basic Earnings/(Loss) Per Common
Share:
Income Before Extraordinary Loss $ 0.55 $ 0.09 $ 0.46 $ 0.37
Extraordinary Loss, Net of Tax
Benefit - - - (1.63)
---------- ---------- ------------ -----------
Net Income/(Loss) $ 0.55 $ 0.09 $ 0.46 $ (1.26)
========== ========== ============ ===========
Diluted Earnings/(Loss) Per Common
Share:
Income Before Extraordinary Loss $ 0.55 $ 0.08 $ 0.45 $ 0.37
Extraordinary Loss, Net of Tax
Benefit - - - $ (1.63)
---------- ---------- ------------ -----------
Net Income/(Loss) $ 0.55 $ 0.08 $ 0.45 $ (1.26)
========== ========== ============ ===========
1999
Operating Revenues $1,043,407 $1,038,569 $ 1,240,539 $ 1,148,736
Operating Income $ 89,638 $ 56,492 $ 110,544 $ 87,863
Net Income/(Loss) $ 18,444 $ 228 $ 31,218 $ (15,674)
Basic and Diluted Earnings/(Loss)
Per Common Share $ 0.14 $ - $ 0.24 $ (0.12)
(a) Certain reclassifications of prior years' data have been made to conform
with the current year's presentation.
(b) Summation of quarterly data may not equal annual data due to rounding.
CONSOLIDATED GENERATION STATISTICS (UNAUDITED)
-----------------------------------------------------------------------------------------------
(kWh-millions) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------
Source of Electric Energy:
Nuclear -- Steam (a) 16,306 13,558 5,679 3,778 9,405
Fossil -- Steam 5,584 10,959 12,505 13,155 9,188
Hydro -- Conventional 686 1,206 1,510 1,260 1,544
Hydro -- Pumped Storage 240 944 819 959 1,217
Internal Combustion 7 262 80 184 206
Energy Used for Pumping (343) (1,318) (1,130) (1,327) (1,668)
------ ------ ------ ------ ------
Net Generation 22,480 25,611 19,463 18,009 19,892
Purchased and Net Interchange 56,280 43,849 24,945 24,377 22,111
Company Use and Unaccounted For (3,100) (2,612) (2,566) (2,802) (2,473)
------ ------ ------ ------ ------
Net Energy Sold 75,660 66,848 41,842 39,584 39,530
====== ====== ====== ====== ======
(a) Includes the NU system's entitlements in regional nuclear generating
companies, net of capacity sales and purchases.
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SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(Thousands of Dollars,
except percentages and 2000 1999 1998 1997 1996
share information) ---- ---- ---- ---- ----
Balance Sheet Data:
Net Utility Plant $ 3,547,215 $ 3,947,434 $ 6,170,881 $ 6,463,158 $ 6,732,165
Total Assets 10,217,149 9,688,052 10,387,381 10,414,412 10,741,748
Total Capitalization (a) 4,739,417 5,216,456 6,030,402 6,472,504 6,659,617
Obligations Under Capital Leases (a) 159,879 181,293 209,279 207,731 206,165
Income Data:
Operating Revenues $ 5,876,620 $ 4,471,251 $ 3,767,714 $ 3,834,806 $ 3,792,148
Income/(Loss) Before Extraordinary Loss 205,295 34,216 (146,753) (129,962) 38,929
Extraordinary Loss, Net of Tax Benefit (233,881) - - - -
------------ ------------ ------------ ------------ ------------
Net (Loss)/Income $ (28,586) $ 34,216 $ (146,753) $ (129,962) $ 38,929
============ ============ ============ ============ ============
Common Share Data:
Basic and Diluted Earnings/(Loss)
Per Common Share:
Income/(Loss) Before Extraordinary
Loss $ 1.45 $ 0.26 $ (1.12) $ (1.01) $ 0.30
Extraordinary Loss, Net of Tax Benefit (1.65) - - - -
------------ ------------ ------------ ------------ ------------
Net (Loss)/Income $ (0.20) $ 0.26 $ (1.12) $ (1.01) $ 0.30
============ ============ ============ ============ ============
Basic Common Shares Outstanding (Average) 141,549,860 131,415,216 130,549,760 129,567,708 127,960,382
Fully Diluted Common Shares Outstanding
(Average) 141,967,216 132,031,573 130,549,760 129,567,708 128,073,261
Dividends Per Share $ 0.40 $ 0.10 $ - $ 0.25 $ 1.38
Market Price -- Closing (high) $ 24.25 $ 22.00 $ 17.25 $ 14.25 $ 25.25
Market Price -- Closing (low) $ 18.25 $ 13.56 $ 11.69 $ 7.63 $ 9.50
Market Price -- Closing (end of year) $ 24.25 $ 0.56 $ 16.00 $ 11.81 $ 13.13
Book Value Per Share (end of year) $ 15.43 $ 15.80 $ 15.63 $ 16.67 $ 18.02
Rate of Return Earned on Average Common
Equity (%) (1.3) 1.6 (7.0) (5.8) 1.6
Market-to-Book Ratio (end of year) 1.6 1.3 1.0 0.7 0.7
Capitalization:
Common Shareholders' Equity 47% 40% 34% 34% 35%
Preferred Stock (a) (b) 4 5 5 6 6
Long-Term Debt (a) 49 55 61 60 59
------------ ------------ ------------ ------------ ------------
100% 100% 100% 100% 100%
============ ============ ============ ============ ============
(a) Includes portions due within one year.
(b) Excludes $100 million of MIPS.
--------------------------------------------------------------------------------
Executive Officers of Northeast Utilities
Michael G. Morris
Chairman, President and Chief Executive Officer
John H. Forsgren
Vice Chairman, Executive Vice President
and Chief Financial Officer
Cheryl W. Grise
President -- Utility Group
Bruce D. Kenyon
President -- Generation Group
Gary D. Simon
Senior Vice President --
Enterprise Development and Analysis
Northeast Utilities Service Company
Gregory B. Butler
Vice President, Secretary and General Counsel
Lisa J. Thibdaue
Vice President --
Rates, Regulatory Affairs and Compliance
Northeast Utilities Service Company
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