CONNECTICUT LIGHT & POWER CO - Quarter Report: 2005 June (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days:

Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act):

Indicate the number of share outstanding of each of the issuers’ classes of common stock, as of the latest practicable date:

NORTHEAST UTILITIES AND SUBSIDIARIES
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY

TABLE OF CONTENTS

NORTHEAST UTILITIES AND SUBSIDIARIES

NORTHEAST UTILITIES AND SUBSIDIARIES

THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES

WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (All Companies)

A.

Presentation

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with this complete report on Form 10-Q and the Annual Reports of Northeast Utilities (NU or the company), The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO), which were filed as part of the NU 2004 Form 10-K, and the current reports on Form 8-K disclosed in Part II, Item 6,"Other Information - Exhibits and Reports on Form 8-K."  The accompanying condensed consolidated financial statements contain, in the opinion of management, all adjustments (including normal, recurring adjustments) necessary to present fairly NU's and the above companies' financial position at June 30, 2005, and the results of operations for the three months and six months ended June 30, 2005 and 2004 and cash flows for the six months ended June 30, 2005 and 2004.  The results of operations for the three and six months ended June 30, 2005 and 2004 and statements of cash flows for the six months ended June 30, 2005 and 2004, are not necessarily indicative of the results expected for a full year.  

The condensed consolidated financial statements of NU and of its subsidiaries, as applicable, include the accounts of all their respective subsidiaries.  Intercompany transactions have been eliminated in consolidation.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Certain reclassifications of prior period data included in the accompanying condensed consolidated financial statements have been made to conform with the current period presentation.  These reclassifications related to other operation and maintenance expense and maintenance expense on the accompanying condensed consolidated statements of (loss)/income which totaled $19.4 million and $34.9 million for the three and six months ended June 30, 2004, respectively.  

In the company's condensed consolidated statement of cash flows for the six months ended June 30, 2004, the company changed the classification of the change in restricted cash - LMP costs balances to present that change as an investing activity.  The company previously presented that change as an operating activity which resulted in a $30.3 million increase to net cash flows used in investing activities and a corresponding increase to operating cash flows from the amounts previously reported.  

The NU, CL&P, PSNH and WMECO condensed consolidated statements of cash flows for the six months ended June 30, 2004 have also been reclassified to exclude from cash flows from operations the change in accounts payable related to capital projects consistent with the December 31, 2004 presentation.  These amounts totaled sources/(uses) of cash of $8.8 million, $15.8 million, $(3.9) million, and $(0.4) million for the six months ended June 30, 2004 for NU, CL&P, PSNH, and WMECO, respectively.

B.

New Accounting Standards

Share-Based Payments:  On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), "Share-Based Payments," (SFAS No. 123R), which amended SFAS No. 123, "Accounting for Stock-Based Compensation."  SFAS No. 123R will require NU to recognize compensation expense for the unvested portion of previously granted awards that remain outstanding on January 1, 2006, the effective date of SFAS No. 123R, and any new awards after that date.  NU is currently determining the amount of compensation expense to be recognized, but management believes that the adoption of SFAS No. 123R will not have a material impact on NU’s consolidated financial statements.  For further information regarding equity-based compensation, see Note 1F, "Equity-Based Compensation," to the condensed consolidated financial statements.

Asset Retirement Obligations:  On January 1, 2003, NU implemented SFAS No. 143, "Accounting for Asset Retirement Obligations," requiring legal obligations associated with the retirement of property, plant and equipment to be recognized as a liability at fair value when incurred and when a reasonable estimate of the fair value of the liability can be made.  Management identified certain potential asset retirement obligations relating to transmission and distribution lines and poles, telecommunication towers, transmission cables, certain assets containing asbestos, and certain Federal Energy Regulatory Commission (FERC) or state regulatory agency re-licensing issues, and determined that no material asset retirement obligations had been incurred.  In March 2005, the FASB issued Interpretation No. 47 (FIN 47), "Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143."  FIN 47 requires an entity to recognize a liability for the fair value of an asset retirement obligation that is conditional on a future event if the liability’s fair value can be reasonably estimated.  FIN 47 is required to be implemented on December 31, 2005, with a liability for conditional asset retirements and the cumulative effect of implementation to be recognized in the financial statements.  Management is currently evaluating NU’s conditional asset retirement obligations and cannot yet reasonably estimate the impact of FIN 47 on NU’s financial statements.

C.

Guarantees

NU provides credit assurance on behalf of subsidiaries in the form of guarantees and letters of credit (LOCs) in the normal course of business, primarily for the financial performance obligations of NU Enterprises, Inc. (NU Enterprises).  NU would be required to perform under these guarantees in the event of non-performance by NU Enterprises, primarily Select Energy, Inc. (Select Energy).  At June 30, 2005, the maximum level of exposure in accordance with FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," under guarantees by NU, primarily on behalf of NU Enterprises, totaled $967.1 million.  A majority of these guarantees do not have established expiration dates.  Additionally, NU had $78.3 million of LOCs issued, of which $76.3 million were issued for the benefit of NU Enterprises at June 30, 2005.

At June 30, 2005, NU had outstanding guarantees on behalf of the Utility Group and Rocky River Realty (RRR) of $13 million and $11.1 million, respectively.  These amounts are included in the total outstanding NU guarantee exposure amount of $967.1 million.  The remaining guarantee amount of $943 million is for NU Enterprises, of which $663.8 million relates to Select Energy and $279.2 million relates to the energy services businesses.  The $279.2 million in guarantees related to the energy services businesses is comprised of $97.8 million related to guarantees of Select Energy Services, Inc.'s (SESI) obligations under certain financing arrangements and $181.4 million related to performance obligations of the energy services businesses.

Several underlying contracts that NU guarantees, as well as certain surety bonds, contain credit ratings triggers that would require NU to post collateral in the event that NU’s credit ratings are downgraded below investment grade.

NU currently has authorization from the Securities and Exchange Commission (SEC) to provide up to $750 million of guarantees for its non-utility subsidiaries through June 30, 2007.  The $13 million in outstanding guarantees to the Utility Group are subject to a separate $50 million SEC limitation apart from the current $750 million NU Enterprises guarantee limit.  The amount of guarantees outstanding for compliance with the SEC limit for NU Enterprises at June 30, 2005 is $458.5 million.  The amount of guarantees outstanding for compliance with the SEC limit for the Utility Group at June 30, 2005 is $0.3 million.  These amounts are calculated using different, more probabilistic and fair-value based criteria than the maximum level of exposure required to be disclosed under FIN 45.  FIN 45 includes all exposures even though they are not reasonably likely to result in exposure to NU.

On October 19, 2004, the SEC authorized NU to issue guarantees of up to an aggregate $100 million through June 30, 2007 of the debt or other obligations of two of its subsidiaries, Northeast Utilities Service Company and RRR.  These companies provide certain specialized support and real estate services and occasionally enter into transactions that require financial backing from NU.  The amount of guarantees outstanding for compliance with the SEC limit under this category at June 30, 2005 is $0.2 million.

D.

Regulatory Accounting

The accounting policies of the Utility Group conform to accounting principles generally accepted in the United States of America applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."

The transmission and distribution businesses of CL&P, PSNH and WMECO, along with PSNH's generation business and Yankee Gas Services Company's (Yankee Gas) distribution business, continue to be cost-of-service rate regulated, and management believes that the application of SFAS No. 71 to those businesses continues to be appropriate.  Management also believes that it is probable that the Utility Group will recover its investments in long-lived assets, including regulatory assets.  In addition, all material net regulatory assets are earning an equity return, except for securitized regulatory assets, which are not supported by equity.

Regulatory Assets:  The components of regulatory assets are as follows:  

Included in WMECO's other regulatory assets/(overrecoveries) are $43.1 million and $50.7 million at June 30, 2005 and December 31, 2004, respectively, of amounts related to WMECO's rate cap deferral.  The rate cap deferral allows WMECO to recover stranded costs and these amounts represent the cumulative excess of transition cost revenues over transition cost expenses.

Additionally, the Utility Group had $12.8 million and $11.6 million of regulatory costs at June 30, 2005 and December 31, 2004, respectively, that are included in deferred debits and other assets - other on the accompanying condensed consolidated balance sheets.  These amounts represent regulatory costs that have not yet been approved by the applicable regulatory agency.  Management believes these assets are recoverable in future rates.

As discussed in Note 6D, "Commitments and Contingencies - Deferred Contractual Obligations," a substantial portion of the unrecovered contractual obligations regulatory asset has not yet been approved for recovery.  At this time management believes that these regulatory assets are probable of recovery.

Regulatory Liabilities:  The Utility Group had $1.1 billion of regulatory liabilities at both June 30, 2005 and December 31, 2004.  These amounts include revenues subject to refund which are classified as regulatory liabilities on the accompanying condensed consolidated balance sheets.  These amounts are comprised of the following:

E.

Allowance for Funds Used During Construction

The allowance for funds used during construction (AFUDC) is a non-cash item that is included in the cost of Utility Group utility plant and represents the cost of borrowed and equity funds used to finance construction.  The portion of AFUDC attributable to borrowed funds is recorded as a reduction in other interest expense and the cost of equity funds is recorded as other income on the condensed consolidated statements of (loss)/income as follows:

The average AFUDC rate is based on a FERC-prescribed formula that develops an average rate using the cost of the company’s short-term financings as well as the company’s capitalization (preferred stock, long-term debt and common equity).  The average rate is applied to eligible construction work in progress amounts to calculate AFUDC.

F.

Equity-Based Compensation

NU maintains an Employee Stock Purchase Plan and other long-term, equity-based incentive plans under the Northeast Utilities Incentive Plan.  NU accounts for these plans under the recognition and measurement principles of Accounting Principles Board (APB)  Opinion No. 25, "Accounting for Stock Issued to Employees," (APB No. 25) and related interpretations.  No equity-based employee compensation cost for stock options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share (EPS) if NU had applied the fair value recognition provisions of SFAS No. 123 to equity-based employee compensation:  

Net (loss)/income, as reported, includes $1 million and $0.6 million for the three months ended June 30, 2005 and 2004, respectively, and $1.4 million and $1 million for the six months ended June 30, 2005 and 2004, respectively, of expense for restricted stock and restricted stock units.  NU accounts for restricted stock in accordance with APB No. 25 and amortizes the intrinsic value of the award over the related service period.

NU assumes an income tax rate of 40 percent to estimate the tax effect on total equity-based employee compensation expense determined under the fair value-based method for all awards.

During the six-month period ended June 30, 2005, no stock options were awarded.

For information regarding new accounting standards issued but not yet effective associated with equity-based compensation, see Note 1B, "New Accounting Standards," to the condensed consolidated financial statements.

G.

Sale of Customer Receivables

At June 30, 2005 and December 31, 2004, CL&P had sold an undivided interest in its accounts receivable of $60 million and $90 million, respectively, to a financial institution with limited recourse through CL&P Receivables Corporation (CRC), a wholly owned subsidiary of CL&P.  CRC can sell up to $100 million of an undivided interest in its accounts receivable and unbilled revenues.  At June 30, 2005 and December 31, 2004, the reserve requirements calculated in accordance with the Receivables Purchase and Sale Agreement were $14.3 million and $18.8 million, respectively.  These reserve amounts are deducted from the amount of receivables eligible for sale at the time.  Concentrations of credit risk to the purchaser under this agreement with respect to the receivables are limited due to CL&P’s diverse customer base within its service territory.

At June 30, 2005 and December 31, 2004, amounts sold to CRC by CL&P but not sold to the financial institution totaling $247.9 million and $139.4 million, respectively, are included in investments in securitizable assets on the accompanying condensed consolidated balance sheets.  These amounts would be excluded from CL&P’s assets in the event of CL&P’s bankruptcy.  On July 6, 2005, CRC renewed its Receivables Purchase and Sale Agreement with CL&P and the financial institution through July 5, 2006, and in 2004 extended the termination date of the facility to July 3, 2007.  CL&P’s continuing involvement with the receivables that are sold to CRC and the financial institution is limited to servicing those receivables.  

The transfer of receivables to the financial institution under this arrangement qualifies for sale treatment under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - A Replacement of SFAS No. 125."

H.

Other Investments

Yankee Energy System, Inc. (Yankee) maintains a long-term note receivable from BMC Energy, LLC (BMC), an operator of renewable energy projects.  In the first quarter of 2004, based on revised information that negatively impacted undiscounted cash flow projections and fair value estimates, management determined that the fair value of the note receivable from BMC had declined and that the note was impaired.  As a result, management recorded a pre-tax investment write-down of $2.5 million ($1.5 million on an after-tax basis) in the first quarter of 2004.  In the second quarter of 2005, based upon additional revised information that negatively impacted the fair value of the BMC note receivable, management recorded an additional pre-tax investment write-down of $0.8 million ($0.5 million on an after-tax basis).  Yankee's remaining note receivable from BMC totaled $0.5 million at June 30, 2005.

NU has an investment in the common stock of a developer of fuel cell and power quality equipment.  Based on revised information that affected the fair value of NU's investment, management determined that at June 30, 2004, the value of NU's investment had declined and that decline was other than temporary in nature.  An after-tax investment write-down of $2.4 million ($3.8 million on a pre-tax basis) was recorded to reduce the carrying value of the investment.  

NU owns 49 percent of the common stock of the Connecticut Yankee Atomic Power Company (CYAPC) with a carrying value of $22 million at June 30, 2005.  CYAPC is involved in litigation over the termination of its decommissioning contract with Bechtel Power Corporation (Bechtel).  CYAPC filed with the FERC to recover the increased estimate of decommissioning and plant closure costs.  The FERC proceeding is ongoing.  Management believes that this litigation and the FERC proceeding have not impaired the value of its investment in CYAPC at June 30, 2005 but will continue to evaluate the impacts that the litigation and the FERC proceeding have on NU's investment.  For further information regarding the Bechtel litigation, see Note 6D, "Commitments and Contingencies - Deferred Contractual Obligations," to the condensed consolidated financial statements.

I.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and short-term cash investments that are highly liquid in nature and have original maturities of three months or less.  At the end of each reporting period, overdraft amounts are reclassified from cash and cash equivalents to accounts payable.

J.

Special Deposits

Special deposits represents amounts Select Energy has on deposit with unaffiliated counterparties and brokerage firms in the amount of $82.2 million and amounts included in escrow for SESI that have not been spent on construction projects of $12.3 million at June 30, 2005.  Similar amounts totaled $46.3 million and $20 million, respectively, at December 31, 2004.  Special deposits at December 31, 2004 also included $16.3 million in escrow for Yankee Gas, which represented payment for Yankee Gas' first mortgage bonds due on June 1, 2005.

K.

Counterparty Deposits

Balances collected from counterparties resulting from Select Energy’s credit management activities totaled $102.2 million at June 30, 2005 and $57.7 million at December 31, 2004.  These amounts are recorded as current liabilities and included as counterparty deposits on the accompanying condensed consolidated balance sheets.  To the extent Select Energy requires collateral from counterparties, cash is received as a part of the total collateral required.  The right to receive such cash collateral in an unrestricted manner is determined by the terms of Select Energy’s agreements.  Key factors affecting the unrestricted status of a portion of this cash collateral include the financial standing of Select Energy and of NU as its credit supporter.

L.

Other Income/(Loss)

The pre-tax components of NU’s other income/(loss) items are as follows:

Investment income includes equity in earnings of regional nuclear generating and transmission companies of $1 million and $0.8 million of income for the three months ended June 30, 2005 and 2004, respectively, and $1.9 million and $0.9 million for the six months ended June 30, 2005 and 2004, respectively.  Equity in earnings relates to NU’s investment in the Yankee Companies and the Hydro-Quebec system.

None of the amounts in either other income - other or other loss - other are individually significant based on applicable accounting rules.

2.

WHOLESALE CONTRACT MARKET CHANGES (NU, NU Enterprises)

NU Enterprises recorded $69.6 million and $258.5 million of pre-tax wholesale contract market changes for merchant energy for the three months and six months ended June 30, 2005, respectively, related to the changes in the fair value of wholesale contracts that the company is in the process of divesting.  These amounts are reported as wholesale contract market changes, net on the condensed consolidated statements of (loss)/income for the three months and six months ended June 30, 2005.  A summary of those pre-tax charges (credits) is as follows (millions of dollars):  

Second Quarter:  The $64.2 million for the second quarter ended June 30, 2005, relates to the change since March 31, 2005 in the negative mark-to-market on certain long-term below-market wholesale electricity contracts.  The decision in March 2005 to exit the wholesale marketing business changed management’s conclusion regarding the likelihood that these wholesale marketing contracts would result in physical delivery to customers.  This in turn resulted in a change in the first quarter of 2005 from accrual accounting to fair value accounting for the wholesale marketing contracts.  The company is seeking to divest these contracts.

The $5.4 million relates to a decrease in the mark-to-market on certain retail marketing supply contracts and other wholesale contracts  related to electricity for delivery to customers primarily in 2005 and 2006.  

Included in the mark-to-market on long-term wholesale electricity contracts is a $15.7 million and $70.2 million pre-tax mark-to-market charge for the three and six months ended June 30, 2005, respectively, related to an intercompany contract between Select Energy and CL&P.  The contract extends through 2013 at below current market prices for CL&P.  This contract is part of CL&P’s stranded costs, and benefits received by CL&P under this contract are provided to CL&P’s ratepayers.  A $2.8 million pre-tax mark-to-market charge for the three months ended March 31, 2005, was recorded as wholesale contract market changes by Select Energy for the intercompany contract between Select Energy and WMECO for default service from April to June of 2005.  There were no wholesale contract market changes in the second quarter of 2005 as this contract expired on June 30, 2005.  WMECO’s benefits under this contract will be provided to ratepayers in the form of lower than market default service rates.  These charges were not eliminated in consolidation because on a consolidated basis NU retains the over-market obligation to the ratepayers of CL&P and WMECO.

First Quarter:  The $294.3 million first quarter 2005 loss in the above table was reflected as follows in the first quarter Form 10-Q:

·

$257.7 million pre-tax mark-to-market loss on long-term wholesale electricity contracts for the three months ended March 31, 2005 was previously included in restructuring and impairment charges;

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$36.6 million pre-tax mark-to-market contract asset write-offs were previously included in restructuring and impairment charges.  These mark-to-market contract asset write-offs directly related to the long-term wholesale electricity contracts.

The $105.4 million first quarter 2005 gain in the above table was reflected as follows in the first quarter Form 10-Q:  

·

$94 million pre-tax mark-to-market gains on retail marketing supply contracts which NU Enterprises was seeking to divest.  During the second quarter of 2005, management elected to retain some of these contracts.  Changes in the mark-to-market for those contracts which are being retained are and will continue to be reflected in fuel, purchased and net interchange power.  Originally, retail electric supply was sourced along with the wholesale supply by the wholesale marketing business.  As a result of the decision to exit the wholesale marketing business, these purchase contracts with a positive market value of $94 million at March 31, 2005 were required to be marked-to-market.  

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$25.8 million of pre-tax mark-to-market gains on other wholesale contracts for the three months ended March 31, 2005 was previously included in restructuring and impairment charges;

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$14.4 million pre-tax loss primarily associated with a contract termination payment was previously included in restructuring and impairment charges.

For information regarding wholesale current and long-term derivative assets and liabilities that are being divested, see Note 4, "Derivative Instruments," to the condensed consolidated financial statements.

3.

RESTRUCTURING AND IMPAIRMENT CHARGES AND ASSETS HELD FOR SALE (NU, NU Enterprises)

Restructuring and Impairment Charges:  NU Enterprises recorded $2.3 million and $47.8 million of pre-tax restructuring and impairment charges for the three and six months ended June 30, 2005 related to the decision to exit the wholesale marketing business and to divest its energy services businesses.  These amounts are included as restructuring and impairment charges on the condensed consolidated statements of (loss)/income.  A summary of those pre-tax charges is as follows (millions of dollars):  

On March 9, 2005, NU announced that it had completed its comprehensive review of the NU Enterprises businesses.  In the first quarter of 2005, an exclusivity agreement intangible asset totaling $7.2 million related to the merchant energy business was written off.  

NU Enterprises has hired an outside firm to assist in valuing its energy services businesses and their divestiture.  Based in part on that firm's work, the company concluded that $29.1 million of goodwill associated with those businesses and $9.2 million of intangible assets were impaired as of March 31, 2005.  An impairment charge of $38.3 million was recorded for the three months ended March 31, 2005.  

In the second quarter of 2005, pre-tax restructuring costs totaling $1 million were recorded by merchant energy related to professional fees, employee-related and other costs.  In the second quarter of 2005, the energy services businesses and NU Enterprises parent recorded an additional impairment charge of $0.8 million due to the impairment of certain fixed assets and other pre-tax restructuring costs totaling $0.5 million related to professional fees, employee-related and other costs in conjunction with the divestiture of the energy services businesses.  Additional restructuring charges will be recognized as incurred and may include net losses on the disposition of wholesale marketing contracts (including the value of full requirements electricity contract quantities to be delivered in excess of their notional amounts recognized in wholesale market contract changes), professional fees and employee-related and other costs.

Assets Held for Sale:  On March 9, 2005, NU Enterprises announced that it would explore ways to divest its energy services businesses in a manner that would maximize their value.  Certain assets and liabilities of Select Energy Contracting, Inc. - New Hampshire (SECI-NH), a division of Select Energy Contracting, Inc. (SECI) that provides mechanical and electrical contracting services in new construction and service contracts, and Woods Network Services, Inc. (Woods Network), a subsidiary of NU Enterprises that is a network products and services company, are currently being accounted for as held for sale, at the lower of carrying amount or fair value less cost to sell.  SECI-NH and Woods Network are reported as part of the services and other segment of NU Enterprises.  Management expects to complete these sales by the end of 2005.  

For SECI-NH, the major classes of assets and liabilities held for sale were accounts receivable of $5 million and accounts payable of $3 million.  For Woods Network, the major classes of assets and liabilities held for sale were accounts receivable of $3 million and accounts payable of $1 million.

4.

DERIVATIVE INSTRUMENTS (NU, CL&P, Select Energy, Yankee Gas)

Contracts that are derivatives and do not meet the definition of a cash flow hedge and cannot be designated as being used for normal purchases or normal sales are recorded at fair value with changes in fair value included in earnings.  For those contracts that meet the definition of a derivative and meet the cash flow hedge requirements, the changes in the fair value of the effective portion of those contracts are generally recognized in accumulated other comprehensive income until the underlying transactions occur.  For contracts that meet the definition of a derivative but do not meet the hedging requirements, and for the ineffective portion of contracts that meet the cash flow hedge requirements, the changes in fair value of those contracts are recognized currently in earnings.  Derivative contracts designated as fair value hedges and the item they are hedging are both recorded at fair value with changes in fair value recognized currently in earnings.  Derivative contracts that are entered into as a normal purchase or sale and will result in physical delivery, and are documented as such, are recognized in revenue and expense when such deliveries occur.  

For the six months ended June 30, 2005, a negative $0.3 million, net of tax, was reclassified as expense from other comprehensive income in connection with the consummation of the underlying hedged transactions and recognized in earnings and a negative $2.4 million, net of tax, was reclassified as expense from other comprehensive income related to the mark-to-market changes for wholesale contracts that NU Enterprises is in the process of divesting.  Also during the first half of 2005, new cash flow hedge transactions were entered into that hedge cash flows through 2010.  As a result of the consummation of the transactions, these new transactions and market value changes since January 1, 2005, accumulated other comprehensive income increased by $5.4 million, net of tax.  Accumulated other comprehensive income at June 30, 2005, was a positive $1.9 million, net of tax (increase to equity), relating to hedged transactions, and it is estimated that a positive $0.6 million included in this net of tax balance will be reclassified as an increase to earnings within the next twelve months.  Cash flows from hedge contracts are reported in the same category as cash flows from the underlying hedged transaction.  

There was a negative pre-tax impact of $0.3 million recognized in earnings in the second quarter 2005 for the ineffective portion of cash flow hedges.  A negative pre-tax $0.7 million was recognized in earnings in the second quarter 2005 for the ineffective portion of fair value hedges.  The changes in the fair value of both the fair value hedges and the natural gas inventory being hedged are recorded in fuel, purchased, and net interchange power on the accompanying condensed consolidated statements of (loss)/income.  

The table below summarizes current and long-term derivative assets and liabilities at June 30, 2005.  At June 30, 2005, derivative assets and liabilities have been segregated between wholesale, retail and hedging amounts.  Management is in the process of divesting the contracts included in the wholesale category as a result of the March 9, 2005 decision to exit this portion of the business.  

The business activities of NU Enterprises that result in the recognition of derivative assets include concentrations of credit risk to energy marketing and trading counterparties.  At June 30, 2005, Select Energy had $419.4 million of derivative assets from retail, wholesale, and hedging activities.  These assets are exposed to counterparty credit risk.  However, a significant portion of these assets is contracted with investment grade rated counterparties or collateralized with cash.  

The amounts above do not include option premiums paid, which are recorded as prepayments and amounted to $14.6 million and $29.3 million related to wholesale activities at June 30, 2005 and December 31, 2004, respectively.  These amounts also do not include option premiums received, which are recorded as other current liabilities and amounted to $13.3 million and $27.1 million related to wholesale activities at June 30, 2005 and December 31, 2004, respectively.  

NU Enterprises - Wholesale:  Certain derivative contracts are part of Select Energy's wholesale activities that the company is in the process of exiting.  These contracts also include other wholesale and retail short-term and long-term electricity supply and sales contracts, which include contracts to sell electricity to utilities under full requirements contracts and contracts to sell electricity to municipalities with terms up to eight remaining years.  The fair value of the natural gas contracts was primarily determined by prices provided by external sources and actively quoted markets.  The fair value of electricity contracts was determined by prices from external sources for years through 2008 and by models based on natural gas prices and a heat-rate conversion factor to electricity for subsequent periods.  In addition, to gather market intelligence and utilize this information in risk management activities for the wholesale marketing activities, Select Energy conducted limited energy trading activities in electricity, natural gas, and oil, and therefore, experienced net open positions.  Select Energy manages open trading positions with strict policies that limit its exposure to market risk and require daily reporting to management of potential financial exposures.   

Derivatives used in wholesale activities are recorded at fair value and included in the condensed consolidated balance sheets as derivative assets or liabilities.  Changes in fair value are recognized in the condensed consolidated statements of (loss)/income in the period of change.  The net fair value position of the wholesale portfolio at June 30, 2005 was a liability of $250 million.    

NU Enterprises - Retail:  Select Energy manages its portfolio of retail marketing contracts to maximize value while operating within NU's corporate risk tolerance.  Select Energy generally acquires retail customers in smaller increments than it acquired wholesale customers, which while requiring careful sourcing, allows energy purchases to be acquired in smaller increments with lower risk.  However, fluctuations in prices, fuel costs, competitive conditions, regulations, weather, transmission costs, lack of market liquidity, plant outages and other factors can all impact the retail business adversely from time to time.

From time to time, the retail marketing business line is required to enter into contracts that cannot immediately receive accrual accounting and therefore, changes in fair value are required to be marked-to-market via the income statement.  

Derivatives used in retail activities are recorded at fair value and included in the condensed consolidated balance sheets as derivative assets or liabilities.  Changes in fair value are recognized in fuel, purchased and net interchange power in the condensed consolidated statements of (loss)/income in the period of change.  The net fair value position of the retail portfolio at June 30, 2005 was an asset of $21.2 million.    

Select Energy's retail portfolio includes New York Mercantile Exchange (NYMEX) futures, financial swaps, and options, the fair value of which is based on closing exchange prices; over-the-counter forwards, and financial swaps, the fair value of which is based on the mid-point of bid and ask market prices; and bilateral contracts for the purchase or sale of electricity or natural gas, the fair value of which is determined using available information from external sources, financial transmission rights and transmission congestion contracts, the fair value of which is based on historical settlement prices as well as external sources.

NU Enterprises - Hedging:  Select Energy utilizes derivative financial and commodity instruments, including futures and forward contracts, to reduce market risk associated with fluctuations in the price of electricity and natural gas purchased to meet firm sales and purchase commitments to certain retail 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 and delivery requirements.  These derivatives have been designated as cash flow hedging instruments and are used to reduce the market risk associated with fluctuations in the price of electricity or natural gas.  A derivative that hedges exposure to the variable cash flows of a forecasted transaction (a cash flow hedge) is initially recorded at fair value with changes in fair value recorded in accumulated other comprehensive income.  Cash flow hedges impact net income when the forecasted transaction being hedged occurs, when hedge ineffectiveness is measured and recorded, when the forecasted transaction being hedged is no longer probable of occurring, or when there is accumulated other comprehensive loss and the hedge and the forecasted transaction being hedged are in a loss position on a combined basis.   

Select Energy maintains natural gas service agreements with certain customers to supply gas at fixed prices for terms extending through 2010.  Select Energy has hedged its gas supply risk under these agreements through NYMEX futures contracts.  Under these contracts, which also extend through 2010, the purchase price of a specified quantity of gas is effectively fixed over the term of the gas service agreements.  At June 30, 2005 the NYMEX futures contracts had notional values of $44.9 million and were recorded at fair value as derivative assets totaling $6.4 million and derivative liabilities of a negative $0.4 million.   

Select Energy also maintains various physical and financial instruments to hedge its electric and gas purchases and sales through 2006. These instruments include forwards, futures, options, financial collars, financial transmission rights and swaps.  These hedging contracts, which are valued at the mid-point of bid and ask market prices, were recorded as derivative assets of $4 million and derivative liabilities of $6 million at June 30, 2005.   

Select Energy hedges certain amounts of natural gas inventory with gas futures, options and swaps, some of which are accounted for as fair value hedges.  Changes in the fair value of hedging instruments and natural gas inventory are recorded in earnings.  The change in fair value of the futures, options and swaps were included in derivative liabilities and amounted to $0.7 million at June 30, 2005.  The change in fair value of the hedged natural gas inventory was recorded as a reduction to fuel, materials and supplies of $37,000 at June 30, 2005.   

The table below summarizes current and long-term derivative assets and liabilities at December 31, 2004.  Prior to the decision to exit the wholesale marketing business, these current and long-term derivative assets and liabilities were classified as trading, non-trading and hedging derivative assets and liabilities.

Utility Group - Gas - Hedging:  Yankee Gas maintains a master swap agreement with a financial counterparty to purchase gas at fixed prices.  Under this master swap agreement, the purchase price of a specified quantity of gas for an unaffiliated customer is effectively fixed over the term of the gas service agreements with that customer for a period not extending beyond 2005.  At June 30, 2005 the commodity swap agreement had a notional value of $0.3 million and was recorded at fair value as a derivative asset of $0.3 million. The firm commitment contract that is hedged is also recorded as a liability on the accompanying condensed consolidated balance sheets, and changes in fair values of the hedge and firm commitment have offsetting impacts in earnings.

In May 2005, Yankee Gas entered into an interest rate lock to hedge the interest cash outflows associated with its proposed $50 million July 2005 debt issuance.  Under the cash flow hedge, Yankee Gas intended to lock the treasury rate that would be realized on its planned debt issuance.  The interest rate lock is based on a United States government 30-year treasury rate and matches the index used for the debt issuance.  As a cash flow hedge at June 30, 2005, the change in fair value of the lock is recorded as a $1.8 million derivative liability on the condensed consolidated balance sheets with an offsetting amount included in other comprehensive income.

Utility Group - Electric - Non-Trading:  CL&P has two independent power producer (IPP) contracts to purchase power that contain pricing provisions that are not clearly and closely related to the price of power and therefore do not qualify for the normal purchases and sales exception.  The fair values of these IPP non-trading derivatives at June 30, 2005 include a derivative asset with a fair value of $278.9 million and a derivative liability with a fair value of $41.2 million.  An offsetting regulatory liability and an offsetting regulatory asset were recorded, as these contracts are part of the stranded costs, and management believes that these costs will continue to be recovered or refunded in rates.   

NU Parent - Hedging:  In March of 2003, NU parent entered into a fixed to floating interest rate swap on its $263 million, 7.25 percent fixed rate note that matures on April 1, 2012.  As a fair value hedge, the changes in fair value of the swap and the hedged debt instrument are recorded on the condensed consolidated balance sheets but are offsetting in the condensed consolidated statements of (loss)/income.  At June 30, 2005, the cumulative change in the fair value of the hedged debt of $3.8 million is included as a decrease to long-term debt on the condensed consolidated balance sheets.  The hedge is recorded as a derivative asset of $3.8 million. The resulting changes in interest payments made are recorded as adjustments to interest expense.

5.

GOODWILL AND OTHER INTANGIBLE ASSETS (Yankee Gas, NU Enterprises)

SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and intangible assets deemed to have indefinite useful lives be reviewed for impairment at least annually by applying a fair value-based test.  NU uses October 1st as the annual goodwill impairment testing date.  Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value and if the implied fair value of goodwill based on the estimated fair value of the reporting unit is less than the carrying amount.

NU's reporting units that maintain goodwill are generally consistent with the operating segments underlying the reportable segments identified in Note 11, "Segment Information," to the condensed consolidated financial statements.  Consistent with the way management reviews the operating results of its reporting units, NU's reporting unit under the NU Enterprises reportable segment that maintains goodwill is the merchant energy reporting unit.  The merchant energy reporting unit is comprised of the operations of Select Energy, Northeast Generation Company (NGC), the generation operations of Holyoke Water Power Company (HWP), and Northeast Generation Services Company (NGS).  As a result, NU's reporting units that maintain goodwill are as follows: the Yankee Gas reporting unit, which is classified under the Utility Group - gas reportable segment, and the merchant energy reporting unit, which is classified under the NU Enterprises - merchant energy reportable segment.  The goodwill balances of these reporting units are included in the table herein.

A summary of NU's goodwill balances at June 30, 2005 and December 31, 2004, by reportable segment and reporting units is as follows:

On March 9, 2005, NU announced that it had completed its comprehensive review of the NU Enterprises businesses.  During this review, certain goodwill balances and intangible assets were deemed to be impaired, and adjustments were recorded in the first quarter of 2005 to write these assets off.  The goodwill balance in the NU Enterprises energy services reporting unit was determined to be impaired in its entirety, and a $29.1 million write-off was recorded.  Energy services intangible assets not subject to amortization were also impaired, and an $8.5 million pre-tax write-off was recorded while an additional $0.7 million pre-tax of other intangible assets were impaired.  At June 30, 2005, NU's remaining intangible assets totaled $2.6 million.  This amount will be amortized $0.6 million for the remainder of 2005, $1 million in 2006, and $1 million in 2007.  

The exclusivity agreement intangible asset, which was included in the merchant energy business, was also written off.  The $7.9 million balance at December 31, 2004 was amortized by $0.7 million in the first quarter of 2005 and the remaining $7.2 million was written off.  

There were no impairments or adjustments to the goodwill balances during the second quarter of 2005 or the first six months of 2004.  

The goodwill recorded related to the acquisition of Yankee Gas is not being recovered from the customers of Yankee Gas.

NU recorded amortization expense of $0.2 million and $0.9 million for the three months ended June 30, 2005 and 2004, respectively, and amortization expense of $1.1 million and $1.8 million for the six months ended June 30, 2005 and 2004, respectively, related to intangible assets subject to amortization.  

6.

COMMITMENTS AND CONTINGENCIES

A.

Regulatory Issues and Rate Matters (CL&P, PSNH, WMECO)

Connecticut:

CTA and SBC Reconciliation: The Competitive Transition Assessment (CTA) allows CL&P to recover stranded costs, such as securitization costs associated with the rate reduction bonds, amortization of regulatory assets, and independent power producer (IPP) over market costs, while the System Benefits Charge (SBC) allows CL&P to recover certain regulatory and energy public policy costs, such as public education outreach costs, hardship protection costs, transition period property taxes, and displaced worker protection costs.   

On April 1, 2005, CL&P filed its 2004 CTA and SBC reconciliation with the Connecticut Department of Public Utility Control (DPUC), which compared CTA and SBC revenues to revenue requirements.  For the year ended December 31, 2004, total CTA revenues exceeded the CTA revenue requirements by $14.1 million.  This amount was recorded as a regulatory liability on the accompanying condensed consolidated balance sheets.  For the same period, SBC revenues exceeded the SBC revenue requirement by $3.6 million which was recorded as a regulatory liability.  Management expects a decision in this docket from the DPUC by the end of 2005.  

In the 2001 CTA and SBC reconciliation filing, and subsequently in a September 10, 2002 petition to reopen related proceedings, CL&P requested that a deferred intercompany tax liability associated with the intercompany sale of generation assets be excluded from the calculation of CTA revenue requirements.  This liability is currently included as a reduction in the calculation of CTA revenue requirements.  On September 10, 2003, the DPUC issued a final decision denying CL&P's request, and on October 24, 2003, CL&P appealed the DPUC's final decision to the Connecticut Superior Court.  The appeal has been fully briefed and argued.  If CL&P's request is granted and upheld through these court proceedings, there would be additional amounts due to CL&P from its customers.  The amount due is contingent upon the findings of the court, however, management believes that CL&P's pre-tax earnings would increase by a minimum of $17 million in 2005.   

New Hampshire:

SCRC Reconciliation Filing:  The Stranded Cost Recovery Charge (SCRC) allows PSNH to recover its stranded costs.  On an annual basis, PSNH files with the New Hampshire Public Utilities Commission (NHPUC) a SCRC reconciliation filing for the preceding calendar year.  This filing includes the reconciliation of stranded cost revenues and costs and transition energy service/default energy service (TS/DS) revenues and costs.  The NHPUC reviews the filing, including a prudence review of the operation of PSNH's generation assets.  The cumulative deferral of SCRC revenues in excess of costs was $227.4 million at June 30, 2005.  This cumulative deferral will decrease the amount of non-securitized stranded costs that will have to be recovered from PSNH's customers in the future from $386.7 million to $159.3 million.

The 2004 SCRC reconciliation filing was filed with the NHPUC on May 2, 2005.  The NHPUC has scheduled a hearing in late October 2005.  Management does not expect the NHPUC's review of the 2004 SCRC filing to have a material impact on PSNH's net income or financial position.

The SCRC and TS/DS rate mechanisms currently reconcile accrued expenses with billed revenues on a monthly basis.  PSNH has included a request, and supporting testimony, to include unbilled revenues as part of the reconciliation process in its annual 2004 SCRC and TS/DS reconciliation filing.  This request will allow for the reconciliation of revenues on an accrual basis with the current accrued expenses recovered through the SCRC and TS/DS rate mechanisms, consistent with accrual accounting.  At June 30, 2005, PSNH’s unbilled revenue balance related to SCRC and TS/DS was $11.7 million and $16.7 million, respectively.  If approved, this change will allow for the inclusion of accrued unbilled revenue balances in the recovery of SCRC and TS/DS costs.  Management believes that the unbilled revenue balance related to SCRC and TS/DS is probable of being recovered from PSNH's customers.

Environmental Legislation:  The New Hampshire legislature will be considering a bill in its 2006 legislative session that would place strict limitations on the level of mercury that PSNH’s existing generation plants can emit.  This bill was first proposed in the 2005 session, but was subsequently set aside and retained for the 2006 session.  Management has been reviewing the proposed legislation and assessing how PSNH might meet any required reduction in mercury emissions should such strict limitations be established.  PSNH’s alternatives range from the installation of additional pollution control equipment, reducing operating capacity of its plants and possible retirement of one or more of its generating units.  PSNH conducted testing of one control technology at its Merrimack Station during the summer of 2005.  While state law and PSNH's restructuring agreement provide for the recovery of its generation costs, including the cost to comply with state environmental regulations, at this time management is unable to determine the impact of any potential new legislation on PSNH's net income or financial position.

Massachusetts:

Transition Cost Reconciliation and Other Filings: On March 31, 2005, WMECO filed its 2004 transition cost reconciliation with the Massachusetts Department of Telecommunications and Energy (DTE).  The DTE has combined the 2003 and 2004 transition cost reconciliation filings, the standard offer service and default service reconciliations, and the transmission cost adjustment filings into a single proceeding.  The timing of a decision in the combined proceeding is uncertain, but management does not expect the outcome to have a material adverse impact on WMECO's net income or financial position.

B.

NRG Energy, Inc. Exposures (CL&P, Yankee Gas)

Certain subsidiaries of NU, including CL&P and Yankee Gas, entered into transactions with NRG Energy, Inc. (NRG) and certain of its subsidiaries.  On May 14, 2003, NRG and certain of its subsidiaries filed voluntary bankruptcy petitions.  On December 5, 2003, NRG emerged from bankruptcy.  NU's NRG-related exposures as a result of these transactions relate to 1) the recovery of congestion charges incurred by NRG prior to the implementation of standard market design on March 1, 2003, 2) the recovery of CL&P's station service billings from NRG, and 3) the recovery of Yankee Gas' and CL&P's expenditures that were incurred related to an NRG subsidiary's generating plant construction project that has ceased.  While it is unable to determine the ultimate outcome of these issues, management does not expect that their resolution will have a material adverse effect on NU's consolidated financial condition or results of operations.

C.

Long-Term Contractual Arrangements (CL&P, PSNH, Merchant Energy)

CL&P:  These amounts represent commitments for various services and materials primarily associated with the Bethel, Connecticut to Norwalk, Connecticut and the Middletown, Connecticut to Norwalk, Connecticut projects as of June 30, 2005.  For further information regarding these projects, see the "Business Development and Capital Expenditures" section included in the Management's Discussion and Analysis section of this combined report on Form 10-Q.

PSNH:  PSNH has a contract for capacity on the Portland Natural Gas Transmission System (PNGTS) pipeline which extends through 2018.  Estimate future annual costs under this contract are as follows:

Merchant Energy:   Select Energy maintains off-balance sheet long-term agreements to purchase energy as part of its portfolio of resources to meet its actual or expected sales commitments.  These sale commitments are accounted for on the accrual basis.  The aggregate amount of these purchase contracts was $824 million at June 30, 2005, as follows (millions of dollars):

Select Energy's purchase contract amounts can exceed the amount expected to be reported in fuel, purchased and net interchange power.

Select Energy maintains certain wholesale energy commitments whose mark-to-market values have been recorded on the condensed consolidated balance sheet as derivative assets and liabilities.  The aggregate amount of these purchase contracts was $4.2 billion at June 30, 2005, the majority of which settle in 2005 and 2006.

In March 2005, HWP notified Massachusetts environmental regulators that it planned to install a selective catalytic reduction system at the 147 megawatt Mt. Tom coal-fired station in Holyoke, Massachusetts.  The $14 million project commenced in July 2005 and is expected to be complete by mid-2006.  The following amounts represent commitments for various services and materials associated with this project:

In July 2005, HWP entered into a $50.4 million contract to purchase coal to fuel the Mt. Tom coal-fired station in Holyoke, Massachusetts.  Estimated future obligations under this contract will commence in 2006 are as follows:

D.

Deferred Contractual Obligations (NU, CL&P, PSNH, WMECO)

FERC Proceedings:  In 2003, CYAPC increased the estimated decommissioning and plant closure costs for the period 2000 through 2023 by approximately $395 million over the April 2000 estimate of $436 million approved by the FERC in a 2000 rate case settlement.  The revised estimate reflects the increases in the projected costs of spent fuel storage, increased security and liability and property insurance costs, and the fact that CYAPC is now self performing all work to complete the decommissioning of the plant due to the termination of the decommissioning contract with Bechtel in July 2003.  NU's share of CYAPC's increase in decommissioning and plant closure costs is approximately $194 million.  On July 1, 2004, CYAPC filed with the FERC for recovery of these increased costs.  In the filing, CYAPC sought to increase its annual decommissioning collections from $16.7 million to $93 million for a six-year period beginning on January 1, 2005.  On August 30, 2004, the FERC issued an order accepting the rates, with collection beginning on February 1, 2005, subject to refund.

Both the DPUC and Bechtel filed testimony in the FERC proceeding claiming that CYAPC was imprudent in its management of the decommissioning project.  The DPUC has claimed that CYAPC did not terminate the contract with Bechtel soon enough, and Bechtel has claimed that CYAPC terminated the contract too soon.  In its testimony, the DPUC recommended a disallowance of $225 million to $234 million out of CYAPC's requested rate increase of approximately $395 million.  NU's share of the DPUC's recommended disallowance is between $110 million to $115 million.  The FERC staff also filed testimony that did not take a position on prudence but recommended a $36 million decrease in the requested rate increase claiming that CYAPC should have used a different gross domestic product (GDP) escalator.  NU's share of this recommended decrease is $17.6 million.  Management expects that if the FERC staff's position on the decommissioning GDP cost escalator is found by the FERC to be more appropriate than that used by CYAPC to develop its proposed rates, then CYAPC would review whether to reduce its estimated decommissioning obligation and reduce the customers' obligation, including CL&P, PSNH and WMECO.  Hearings in this proceeding began on June 1, 2005 and have concluded.  A post-trial briefing schedule has been set, and a FERC administrative law judge decision in this proceeding is scheduled to be rendered in December 2005.

The company cannot at this time predict the timing or outcome of the FERC proceeding required for the collection of the increased CYAPC decommissioning costs.  The company believes that the costs have been prudently incurred and will ultimately be recovered from the customers of CL&P, PSNH and WMECO.  However, there is a risk that some portion of these increased costs may not be recovered, or will have to be refunded if recovered, as a result of the FERC proceedings.  

On June 10, 2004, the DPUC and the Connecticut Office of Consumer Counsel (OCC) filed a petition seeking a declaratory order that CYAPC be allowed to recover all decommissioning costs from its wholesale purchasers, including CL&P, PSNH and WMECO, but that such purchasers may not be allowed to recover in their retail rates any costs that the FERC might determine to have been imprudently incurred.  On August 30, 2004, the FERC denied this petition.  On September 29, 2004, the DPUC and OCC asked the FERC to reconsider the petition.  On October 29, 2004, the FERC issued an order granting further consideration regarding the DPUC's and OCC's petition for reconsideration.  No date has been established for this reconsideration.

Bechtel Litigation:  CYAPC is currently in litigation with Bechtel in Connecticut Superior Court (the Court) over the termination of its decommissioning contract.  On June 13, 2003, CYAPC gave notice of the termination of its contract with Bechtel for the decommissioning of its nuclear power plant.  CYAPC terminated the contract due to Bechtel's incomplete and untimely performance and refusal to perform the remaining decommissioning work.  Bechtel has departed the site and the decommissioning responsibility has been transitioned to CYAPC, which has recommenced the decommissioning process.

On June 23, 2003, Bechtel filed a complaint against CYAPC asserting a number of claims and seeking a variety of remedies, including monetary and punitive damages and rescission of the contract.  Bechtel has since amended its complaint to add claims for wrongful termination.  On August 22, 2003, CYAPC filed its answer and counterclaims, including counts for breach of contract, negligent misrepresentation and breach of duty of good faith and fair dealing.  The parties are proceeding with depositions in the case.  Bechtel filed an offer of judgment for CYAPC to pay Bechtel the amount of $20 million, which was rejected by CYAPC.  CYAPC filed an offer of judgment for Bechtel to pay the amount of $65 million to CYAPC, which was rejected by Bechtel.  If either party prevails in litigation with an award equal to or higher than its offer, then the Court will add 12 percent annual interest to the award to the prevailing party, computed from the date of the party's claim (from June 23, 2003 for Bechtel or August 22, 2003 for CYAPC).  A trial has been scheduled for spring of 2006.  

In the prejudgment remedy proceeding before the Court, Bechtel sought garnishment of the CYAPC decommissioning trust and related payments.  In October 2004, Bechtel and CYAPC entered into an agreement under which Bechtel waived its right to seek garnishment of the decommissioning trust and related payments in return for the potential attachment of CYAPC's real property in Connecticut and the escrowing of $41.7 million the sponsors are scheduled to pay to CYAPC through June 30, 2007 in respect to CYAPC's common equity.  This stipulation is subject to approval of the Court and would not be implemented until the Court found

that such assets were subject to attachment.  CYAPC has contested the attachability of such assets.  The DPUC is an intervenor in this proceeding.  NU cannot predict the timing and the outcome of the litigation with Bechtel.

Spent Nuclear Fuel Litigation:  CYAPC, Yankee Atomic Electric Company (YAEC) and Maine Yankee Atomic Power Company (MYAPC) (collectively, the Yankee Companies) also commenced litigation in 1998 charging that the federal government breached contracts it entered into with each company in 1983 under the Nuclear Waste Policy Act of 1982 (the Act).  Under the Act, the DOE was to begin removing spent nuclear fuel from the nuclear plants of the Yankee Companies no later than January 31, 1998 in return for payments by each company into the nuclear waste fund.  No fuel has been collected by the DOE, and spent nuclear fuel is stored on the sites of the Yankee Companies' plants.  The Yankee Companies collected the funds for payments into the nuclear waste fund from wholesale utility customers under FERC-approved contract rates.  The wholesale utility customers in turn collect these payments from their retail electric customers.  The Yankee Companies' individual damage claims attributed to the government's breach totaling $548 million are specific to each plant and include incremental storage, security, construction and other costs through 2010.  The CYAPC damage claim is $197 million, the YAEC damage claim is $191 million and the MYAPC damage claim is $160 million.

The DOE trial ended on August 31, 2004 and a verdict has not been reached.  The current Yankee Companies' rates do not include an amount for recovery of damages in this matter.  Management can predict neither the outcome of this matter nor its ultimate impact on NU.

E.

Consolidated Edison, Inc. Merger Litigation

Certain gain and loss contingencies continue to exist with regard to the 1999 merger agreement between NU and Consolidated Edison, Inc. and the related litigation.  At this stage of the litigation, management can predict neither the outcome of this matter nor its ultimate effect on NU.  

7.

MARKETABLE SECURITIES

The following is a summary of NU’s available-for-sale securities related to NU's SERP securities and NU's investment in Globix Corporation (Globix), which are included in deferred debits and other assets - other on the accompanying condensed consolidated balance sheets, and WMECO's prior spent nuclear fuel trust:  

(a)

At December 31, 2004, NU's investment in NEON was not a marketable equity security.  On March 8, 2005, NEON merged with Globix, and NU's investment in Globix became a marketable equity security at that time.    

At June 30, 2005 and December 31, 2004, NU has evaluated the securities in an unrealized loss position and has determined that none of the related unrealized losses are deemed to be other-than-temporary in nature.

For information related to the change in net unrealized holding gains and losses included in shareholders' equity, see Note 8, "Comprehensive Income," to the condensed consolidated financial statements.

For the three months and six months ended June 30, 2005 and 2004, realized gains and losses recognized on the sale of available-for-sale securities are as follows (in millions):

NU utilizes the specific identification basis method for the Globix and SERP securities and the average cost basis method for the WMECO prior spent nuclear fuel trust to compute the realized gains and losses on the sale of available-for-sale securities.

Proceeds from the sale of these securities totaled $17.6 million and $4.3 million for the three months ended June 30, 2005 and 2004, respectively, and $30.5 million and $6.1 million for the six months ended June 30, 2005 and 2004, respectively.

At June 30, 2005, the contractual maturities of the available-for-sale securities are as follows (in millions):

NU's investment in Globix is included in the one to five years maturity category in the table above.  

8.

COMPREHENSIVE INCOME (NU, CL&P, PSNH, WMECO, NU Enterprises)

Total comprehensive income, which includes all comprehensive (loss)/income items by category, for the three months and six months ended June 30, 2005 and 2004 is as follows (millions of dollars):

*After preferred dividends of subsidiary.

Comprehensive income amounts included in the Other column primarily relate to NU parent and Northeast Utilities Service Company.

Accumulated other comprehensive income fair value adjustments in NU’s qualified cash flow hedging instruments for the six months ended June 30, 2005 and the twelve months ended December 31, 2004 are as follows:

Accumulated other comprehensive income items unrelated to NU's qualified cash flow hedging instruments totaled $0.8 million in losses and $2.3 million in gains at June 30, 2005 and December 31, 2004, respectively.  These amounts relate to unrealized gains on investments in marketable debt and equity securities and minimum pension liability adjustments, net of related income taxes.

9.

EARNINGS PER SHARE (NU)

EPS is computed based upon the weighted average number of common shares outstanding during each period.  Diluted EPS is computed on the basis of the weighted average number of common shares outstanding plus the potential dilutive effect if certain securities are converted into common stock.  At June 30, 2005 and 2004, 223,900 options and 626,302 options, respectively, were excluded from the following table as these options were antidilutive.  The following table sets forth the components of basic and fully diluted EPS:

10.

PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (All Companies)

NU’s subsidiaries participate in a uniform noncontributory defined benefit retirement plan (Pension Plan) covering the majority of regular NU employees and also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (PBOP Plan).  The components of net periodic benefit expense for the Pension Plan and the PBOP Plan for the three months and six months ended June 30, 2005 and 2004 are estimated as follows:

A portion of these amounts is capitalized related to current employees working on capital projects.  Amounts capitalized were $2.3 million and $4.7 million for the three months and six months ended June 30, 2005, respectively, and $0.7 million and $1.4 million for the three months and six months ended June 30, 2004, respectively.  

NU does not currently expect to make any contributions to the Pension Plan in 2005.  NU contributed and anticipates contributing approximately $12.6 million quarterly totaling approximately $50 million in 2005 to fund its PBOP Plan.  

11.

SEGMENT INFORMATION (All Companies)

NU is organized between the Utility Group and NU Enterprises businesses based on a combination of factors, including the characteristics of each business' products and services, the sources of operating revenues and expenses and the regulatory environment in which they operate.  Effective January 1, 2005, the portion of NGS' business that supports NGC's and HWP's generation assets has been reclassified from the services and other segment to the merchant energy segment within the NU Enterprises segment.  Segment information for all periods presented has been restated to conform to the current presentation.  

The Utility Group segment, including both the regulated electric distribution and transmission businesses, as well as the gas distribution business comprised of Yankee Gas, represents approximately 70 percent of NU's total revenues for both the six months ended June 30, 2005 and 2004 and includes the operations of the regulated electric utilities, CL&P, PSNH and WMECO, whose complete condensed consolidated financial statements are included in this combined report on Form 10-Q.  PSNH's distribution segment includes generation activities.  Also included in this combined report on Form 10-Q is detailed information regarding CL&P's, PSNH's, and WMECO's transmission businesses.  Utility Group revenues from the sale of electricity and natural gas primarily are derived from residential, commercial and industrial customers and are not dependent on any single customer.

The NU Enterprises merchant energy business segment includes Select Energy, NGC, NGS, and the generation operations of HWP,  while the NU Enterprises services and other business segment includes E. S. Boulos Company, Woods Electrical Co., Inc., and NGS Mechanical, Inc., which are subsidiaries of NGS, SESI, SECI, Reeds Ferry Supply Co. Inc., HEC/Tobyhanna Energy Project, Inc., ERI/HEC EFA Med LLC, and HEC/CJTS Energy Center LLC, Woods Network, and intercompany eliminations.  The results of NU Enterprises parent are also included within services and other.  For further information regarding NU Enterprises' merchant energy business and services businesses, see Note 2, "Wholesale Contract Market Changes" and Note 3, "Restructuring and Impairment Charges and Assets Held for Sale," to the condensed consolidated financial statements.  In the first quarter of 2005, the decision was made to exit the wholesale marketing business and the energy services businesses.  NU Enterprises is retaining its retail marketing and merchant generation businesses.  

There were no CL&P transitional standard offer (TSO) purchases from Select Energy for the six months ended June 30, 2005.  Total Select Energy revenues from CL&P for other transactions with CL&P, represented $12.5 million and $26.7 million for the three and six months ended June 30, 2005.  Effective January 1, 2004, Select Energy began serving a portion of CL&P's TSO load for 2004.  Total Select Energy revenues from CL&P for CL&P's TSO load and for other transactions with CL&P, represented $136 million or 22 percent and $314.5 million or 22 percent for the three and six months ended June 30, 2004, respectively, of total NU Enterprises' revenues.  Total CL&P purchases from Select Energy are eliminated in consolidation.

WMECO's purchases from Select Energy for standard offer and default service and for other transactions with Select Energy represented $17.4 million and $37.9 million for the three and six months ended June 30, 2005, respectively, and $21 million and $53 million for the three and six months ended June 30, 2004, respectively.  Total WMECO purchases from Select Energy are eliminated in consolidation.  

Select Energy revenues related to contracts with NSTAR companies represented $82.2 million and $288.6 million for the three and six months ended June 30, 2005, respectively,  and $69.7 million and $158.4 million the three and six months ended June 30, 2004, respectively.  Revenues related to New Jersey Basic Generation Service represented $73.5 million and $143.2 million for the three and six months ended June 30, 2005.  No other individual customer represented in excess of 10 percent of NU Enterprises' revenues for the three and six months ended June 30, 2005 or 2004.  

Due to merchant energy's decision to exit the wholesale business, all wholesale revenues, including intercompany revenues, have been included in fuel, purchased and net interchange power beginning in the second quarter of 2005.

Other in the NU consolidated tables includes the results for Mode 1 Communications, Inc., an investor in Globix, the results of the non-energy-related subsidiaries of Yankee (Yankee Energy Services Company, Yankee Energy Financial Services Company, and NorConn Properties, Inc.), the non-energy operations of HWP, and the results of NU's parent and service companies.  Interest expense included in other primarily relates to the debt of NU parent.  

NU's segment information for the three and six months ended June 30, 2005 and 2004 is as follows (some amounts between the financial statements and between segment schedules may not agree due to rounding):