CONNECTICUT LIGHT & POWER CO - Quarter Report: 2005 March (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 registrant 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

The accompanying notes are an integral part of these condensed consolidated financial statements.

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," included in this report on Form 10-Q.  The accompanying condensed consolidated financial statements contain, in the opinion of management, all adjustments necessary to present fairly NU's and the above companies' financial position at March 31, 2005, and the results of operations and cash flows for the three-month periods ended March 31, 2005 and 2004.  All adjustments are of a normal, recurring nature except those described in Notes 1B and 2.  The results of operations and statements of cash flows for the three-month periods ended March 31, 2005 and 2004, are not 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.

B.

New Accounting Standards

Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations."  This statement requires that legal obligations associated with the retirement of property, plant and equipment 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.  SFAS No. 143 was effective on January 1, 2003 for NU.  Management has completed its review process for potential asset retirement obligations (ARO) and has not identified any material AROs that have been incurred.  However, management has identified certain removal obligations that arise in the ordinary course of business or have a low probability of occurring.  These types of obligations primarily relate to transmission and distribution lines and poles, telecommunication towers, transmission cables, and certain Federal Energy Regulatory Commission (FERC) or state regulatory agency re-licensing issues.  These obligations are AROs that have not been incurred or are not material in nature.

On March 30, 2005, the FASB issued FASB Interpretation No. (FIN) 47, "Accounting for Conditional Asset Retirement Obligations."  FIN 47 requires an entity to recognize a liability for the fair value of an ARO that is conditional on a future event if the liability’s fair value can be reasonably estimated.  FIN 47 is effective for NU no later than December 31, 2005.  Management is currently evaluating the impact of FIN 47 on NU.

Share-Based Payments: On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payments," (SFAS No. 123R), which amended SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123R requires all companies to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees.  NU will recognize compensation expense for the unvested portion of previously granted awards that remain outstanding at the effective date of SFAS No. 123R, and any new awards after that date.

On April 14, 2005, the Securities and Exchange Commission (SEC) announced the adoption of a rule that deferred the required effective date of SFAS No 123R until January 1, 2006 for calendar year companies, including NU.  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.

C.

Guarantees

NU provides credit assurance 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.  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 March 31, 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 $984 million.  A majority of these guarantees do not have established expiration dates.  Additionally, NU had $106.4 million of LOCs issued, of which $91.4 million were issued for the benefit of NU Enterprises at March 31, 2005.

At March 31, 2005, NU had outstanding guarantees on behalf of the Utility Group and Rocky River Realty (RRR) of $12.4 million and $11.3 million, respectively.  These amounts are included in the total outstanding NU guarantee exposure amount of $984 million.  The remaining guarantee amount of $960.3 million is related to NU Enterprises, of which $265.6 million relates to the energy services business.  The guarantees related to the energy services businesses totaled $92.6 million and were comprised of guarantees of Select Energy Services, Inc.'s (SESI) debt obligations and $173 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 SEC to provide up to $750 million of guarantees for NU Enterprises through June 30, 2007.  The $12.4 million in 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 March 31, 2005 is $516.1 million.  The amount of guarantees outstanding for compliance with the SEC limit for the Utility Group at March 31, 2005 is $0.2 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 parent.  The amount of guarantees outstanding for compliance with the SEC limit under this category at March 31, 2005 is $0.2 million.

D.

Regulatory Accounting

The accounting policies of NU's Utility Group conform to accounting principles generally accepted in the United States of America applicable to rate-regulated enterprises and historically 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 NU's Utility Group companies will recover their 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 are $46.9 million and $50.7 million at March 31, 2005 and December 31, 2004, respectively, of amounts related the 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.

Included in the NU consolidated amounts above at March 31, 2005 and December 31, 2004, are $60.2 million and $87.8 million, respectively, of regulatory assets associated with Yankee Gas' environmental clean-up costs, hardship receivables, and income taxes.

Additionally, the Utility Group had $12.1 million and $11.6 million of regulatory costs at March 31, 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 5D, "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 maintained $1.1 billion of regulatory liabilities at both March 31, 2005 and December 31, 2004, respectively.  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:

Included in the NU consolidated amounts above at March 31, 2005 and December 31, 2004, are $108.3 million and $106.5 million, respectively, of regulatory liabilities associated with Yankee Gas' cost of removal, pension, purchased gas adjustment clause and other regulatory liabilities.

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 Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," 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 $0.6 million of expense for restricted stock and restricted stock units for the three months ended March 31, 2005 and 2004, respectively.  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 three-month period ended March 31, 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 March 31, 2005 and December 31, 2004, CL&P had sold an undivided interest in its accounts receivable of $100 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 March 31, 2005 and December 31, 2004, the reserve requirements calculated in accordance with the Receivables Purchase and Sale Agreement were $23.1 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 March 31, 2005 and December 31, 2004, amounts sold to CRC by CL&P but not sold to the financial institution totaling $189.7 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 7, 2004, CRC renewed its Receivables Purchase and Sale Agreement with CL&P and the financial institution through July 6, 2005, and the termination date of the facility was extended to July 3, 2007. CL&P’s continuing involvement with the receivables that are sold to CRC and the financial institution is limited to the servicing of 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 late-March 2004, based on revised information that impacts 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 an after-tax investment write-down of $1.5 million ($2.5 million on a pre-tax basis) in the first quarter of 2004.  

NU has an investment in the common stock of NEON, a provider of optical networking services.  On March 8, 2005, NEON merged with Globix Corporation (Globix), an unaffiliated publicly-owned entity, and NU received 1.2748 shares of Globix common stock for each of the 2.1 million shares of NEON stock it owned.  In connection with the closing of the merger, a $0.1 million after-tax loss was recognized in the first quarter of 2005.  A pre-tax positive $0.4 million change in fair value subsequent to March 8, 2005 is included in accumulated other comprehensive income.  For further information, see Note 7, "Comprehensive Income," to the condensed consolidated financial statements.

NU owns 49 percent of the common stock of the Connecticut Yankee Atomic Power Company (CYAPC) with a carrying value of $21.7 million at March 31, 2005.  CYAPC is involved in litigation over the termination of the 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 March 31, 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 5D, "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 $17.1 million and amounts included in escrow for SESI that have not been spent on construction projects of $15.3 million at March 31, 2005.  Similar amounts totaled $46.3 million and $20 million, respectively, at December 31, 2004.  Special deposits at both March 31, 2005 and December 31, 2004 also included $16.3 million in escrow for Yankee Gas.  The $16.3 million represents Yankee Gas’ June 1, 2005 first mortgage bond payment.

K.

Counterparty Deposits

Balances collected from counterparties resulting from Select Energy’s credit management activities totaled $95.6 million at March 31, 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

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 $0.9 million and $0.1 million of income for the three months ended March 31, 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.

M.

Unbilled Revenues

In the first quarter of 2005, management adopted a new method to estimate unbilled revenues for CL&P, PSNH, WMECO, and Yankee Gas.  The new method allocates billed sales to the current calendar month based on the daily load for each billing cycle.  The billed sales are subtracted from total calendar month sales to estimate unbilled sales.  The impact of adopting the new method was not material.  The new method replaces the requirements method and the cycle method that were used periodically to test the requirements method.

2.

RESTRUCTURING AND IMPAIRMENT CHARGES (NU, NU Enterprises)

NU Enterprises recorded $234.4 million of pre-tax restructuring and impairment charges in the first quarter of 2005 directly related to the decision to exit the wholesale marketing business, to divest its energy services businesses and to reevaluate the generation and retail businesses.  A summary of those pre-tax charges (credits) is as follows (millions of dollars):  

The $234.4 million pre-tax restructuring and impairment charges above includes losses and gains as described below.  The first component is a pre-tax loss of $257.7 million associated with the 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.  

This loss was offset by pre-tax gains totaling $94 million associated with marking-to-market certain wholesale electricity positions that were obtained to support Select Energy's retail marketing contracts.  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 were required to be marked-to-market.

In addition, a pre-tax gain of $25.8 million was recorded for other wholesale contracts related to electricity that would have been delivered to customers primarily in 2005 and 2006.  As a result of exiting the wholesale marketing business, these contracts were also required to be marked-to-market.  Prior to the decision to exit the wholesale marketing business, it was management's intention to deliver the electricity to the customer.  As such, accrual accounting was used through December 31, 2004.  Under accrual accounting, earnings would have been recorded as the electricity would have been delivered in 2005 and 2006.

The restructuring and impairment charges above also include pre-tax charges of $58.2 million associated with other costs from exiting the wholesale marketing business, such as termination payments and contract asset write-offs.  

In March 2005, NU Enterprises hired an outside firm to assist in valuing its energy services businesses and assist in 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.  An impairment charge of $38.3 million was recorded.  NU Enterprises has initiated the process of divesting those businesses and may record additional charges as the divestiture is completed.

The after-tax impact of these charges totaling $150.2 million is net of a $84.2 million income tax benefit which is included as a reduction to income tax expense.  

Included in Select Energy’s restructuring and impairment charges is a negative $54.5 million pre-tax mark-to-market charge 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 loss was recorded by Select Energy for the intercompany contract between Select Energy and WMECO for default service from April to June of 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.

3.

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

Derivatives that are utilized for trading purposes are recorded at fair value with changes in fair value included in earnings.  Other contracts that are derivatives but do not meet the definition of a cash flow hedge and cannot be designated as being used for normal purchases or normal sales are also 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 on the condensed consolidated balance sheets.  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 three months ended March 31, 2005, a positive $2.4 million, net of tax, was reclassified as revenue from other comprehensive income in connection with the consummation of the underlying hedged transactions and recognized in earnings.  Also during the first quarter 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 $7.3 million, net of tax.  Accumulated other comprehensive income at March 31, 2005, was a positive $3.8 million, net of tax (increase to equity), relating to hedged transactions, and it is estimated that a positive $3.7 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 positive pre-tax impact of $0.6 million recognized in earnings in 2005 for the ineffective portion of cash flow hedges.  A negative pre-tax $0.1 million was recognized in earnings in 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 tables below summarize current and long-term derivative assets and liabilities at March 31, 2005 and December 31, 2004.  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 March 31, 2005, Select Energy had $485.5 million of derivative assets from trading, non-trading, 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 below do not include option premiums paid, which are recorded as prepayments and amounted to $6.3 million and $5.4 million related to energy trading activities and $0.6 million and $5.2 million related to marketing activities at March 31, 2005 and December 31, 2004, respectively.  These amounts also do not include option premiums paid of $13.6 million and $18.7 million related to non-trading gas options at March 31, 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 $5.5 million and $7 million related to energy trading activities and $0.1 million and $1.1 million related to marketing activities at March 31, 2005 and December 31, 2004, respectively.  Also not included at March 31, 2005 and December 31, 2004 are option premiums received of $13.8 million and $19 million, respectively, related to non-trading gas options.

NU Enterprises - Trading:  Historically, 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.  Limited trading activities will continue for price discovery and deal execution to support the retail marketing business.  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 trading 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 operating revenues in the condensed consolidated statements of (loss)/income in the period of change.  The net fair value positions of the trading portfolio at March 31, 2005 and December 31, 2004 were assets of $47.5 million and $29.6, respectively.   A portion of this increase in the fair value position of the trading portfolio was the result of change in valuation technique used to model a certain contract.  

Select Energy's trading 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, financial swaps, and options, 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.  Select Energy's trading portfolio also includes transmission congestion contracts (TCC).  The fair value of the TCCs included in the trading portfolio is based on published market data.   

NU Enterprises - Non-Trading:  Certain non-trading derivative contracts are part of Select Energy's wholesale and retail marketing activities.  These contracts include the electricity contracts and the wholesale natural gas contracts that were used in Select Energy's energy sourcing activities.  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 over terms up to eight years.  The fair value of the natural gas contracts was 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 conversion factor to electricity.  

The fair value of non-trading contracts, both assets and liabilities combined, decreased by $139.4 million from a negative $78.6 million to a negative $218 million, as follows (in millions):  

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 March 31, 2005 the NYMEX futures contracts had notional values of $33 million and were recorded at fair value as derivative assets of $10.6 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 and swaps.  These hedging contracts, which are valued at the mid-point of bid and ask market prices, were recorded as derivative assets of $2.4 million and derivative liabilities of $6.9 million at March 31, 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 fair value of the futures, options and swaps were included in derivative assets and amounted to a negative $0.2 million at March 31, 2005. The fair value of the hedged natural gas inventory was recorded as a reduction to fuel, materials and supplies of $0.1 million at March 31, 2005.  For the three months ended March 31, 2005, Select Energy recorded a positive pre-tax of $0.6 million in earnings related to contracts settled for its hedging instruments and natural gas inventory.  In 2004, certain of these fair value hedges were redesignated as cash flow hedges, and future changes in fair value during the hedge designation will be included in accumulated other comprehensive income (equity), unless ineffective.

Utility Group - Gas - Non-Trading:  Yankee Gas' non-trading derivatives consist of peaking supply arrangements to serve winter load obligations and firm sales contracts with options to curtail delivery.  These contracts are subject to fair value accounting because these contracts are derivatives that cannot be designated as normal purchases or sales, as defined, because of the optionality in the contract terms.  Non-trading derivatives at March 31, 2005 included liabilities of $0.1 million.

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 March 31, 2005 the commodity swap agreement had a notional value of $1.3 million and was recorded at fair value as a derivative asset of $1.4 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.   

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 March 31, 2005 include a derivative asset with a fair value of $281.3 million and a derivative liability with a fair value of $40.9 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 matched-terms 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 equal and offsetting in the condensed consolidated statements of (loss)/income.  The cumulative change in the fair value of the hedged debt of $6.2 million is included as a decrease to long-term debt on the condensed consolidated balance sheets.  The hedge is recorded as a derivative liability of $6.2 million.  The resulting changes in interest payments made are recorded as adjustments to interest expense.

4.

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 remaining reporting units that maintain goodwill are generally consistent with the operating segments underlying the reportable segments identified in Note 10, "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 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 March 31, 2005 and December 31, 2004, by reportable segment and reporting unit 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.  

For information regarding the completion of the comprehensive review and these asset impairments, see Note 2, "Restructuring and Impairment Charges," to the condensed consolidated financial statements.  

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 write-off was recorded.  An additional $0.7 million of other intangible assets were impaired, and the total write off of $38.3 million is included in restructuring and impairment charges.  

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

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

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

At March 31, 2005 and December 31, 2004, NU's intangible assets and related accumulated amortization, all of which related to NU Enterprises, consisted of the following:

NU recorded amortization expense of $0.9 million for both the three months ended March 31, 2005 and 2004, respectively, related to intangible assets subject to amortization.  Based on the remaining amount of intangible assets subject to amortization, the estimated annual amortization expense for 2005 and for each of the succeeding 5 years from 2006 through 2010 is approximately $1 million in 2005 through 2007 and no amortization expense in 2008, 2009 or 2010.  These amounts may vary as acquisitions and dispositions occur in the future.

5.

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 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 compares 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.  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.  A decision from the court is not expected to be issued until the second quarter of 2005 at the earliest.  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.   

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 billed with stranded costs, and transition energy service/default energy service (TS/DS) revenues billed with TS/DS costs.  The NHPUC reviews the filing, including a prudence review of PSNH's generation operations.  The cumulative deferral of SCRC revenues in excess of costs was $224.2 million at March 31, 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 $399.1 million to $174.9 million.  

The 2004 SCRC reconciliation filing was filed with the NHPUC on May 2, 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 March 31, 2005, the PSNH 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 is considering a bill that would place strict limitations on the level of mercury that PSNH’s existing generation plants can emit.  Management is reviewing possible legislation and 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, non-generation mercury mitigation programs, and possible retirement of one or more of its generating units.  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.  On May 4, 2005, the New Hampshire legislature voted to retain the bill for further consideration in the 2006 session.

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).  This filing reconciled the recovery of generation-related stranded costs for calendar year 2004.  The DTE has combined the 2003 transition cost reconciliation filing, standard offer service and default service reconciliation, the transmission cost adjustment filing, and the 2004 transition cost reconciliation filing into a single proceeding.  A hearing schedule for the combined proceeding is expected to be set in May 2005.  While the timing of a decision in the combined proceeding is uncertain, 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, Select Energy)

CL&P:  These amounts represent commitments for various services and materials associated with the Bethel, Connecticut to Norwalk, Connecticut and the Middletown, Connecticut to Norwalk, Connecticut projects as of March 31, 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.

Select 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 $703.2 million at March 31, 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.

D.

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

CYAPC's estimated decommissioning and plant closure costs for the period 2000 through 2023 have increased 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, and scheduled hearings for June 2005.

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.

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.  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 are expected to begin in June 2005.  A FERC administrative law judge decision in this proceeding could be rendered in the fall of 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.  

As mentioned above, 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.

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.  

6.

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, 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 is a marketable equity security at March 31, 2005.  

At March 31, 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 7, "Comprehensive Income," to the condensed consolidated financial statements.

For the quarters ended March 31, 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 $12.9 million and $1.8 million for the quarters ended March 31, 2005 and 2004, respectively.

At March 31, 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.  

7.

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 ended March 31, 2005 and 2004 is as follows:

*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 three months ended March 31, 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 $1.7 million and $2.3 million in gains at March 31, 2005 and December 31, 2004, respectively.  These amounts relate to unrealized gains on investments in marketable debt and equity securities and minimum person liability adjustments, net of related income taxes.

8.

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 March 31, 2005 and 2004, 433,980 options and 655,326 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:

9.

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 ended March 31, 2005 and 2004 are estimated as follows:

A portion of this net periodic expense is capitalized related to current employees working on capital projects.  Amounts capitalized were $2.3 million and $0.6 million for the three months ended March 31, 2005 and 2004, respectively.  

NU does not 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.  

10.

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 62 percent and 69 percent of NU's total revenues for the three months ended March 31, 2005 and 2004, respectively, 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, the generation operations of HWP and NGS, 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, Select Energy Contracting, Inc., Reeds Ferry Supply Co. Inc., HEC/Tobyhanna Energy Project, Inc., ERI/HEC EFA Med LLC, and HEC/CJTS Energy Center LLC, which are subsidiaries of SESI, Woods Network Services, Inc., and intercompany eliminations.  The results of NU Enterprises parent are also included within services and other.

There were no CL&P transitional standard offer (TSO) purchases from Select Energy in the first quarter of 2005.  Total Select Energy revenues from CL&P for other transactions with CL&P, represented $14.2 million or 2 percent for the three months ended March 31, 2005, of total NU Enterprises' revenues.  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 $178.5 million or 22 percent for the three months ended March 31, 2004, 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 $20.5 million and $32 million, or 2 percent and 4 percent, of total NU Enterprises' revenues for the three months ended March 31, 2005 and 2004, respectively.  Total WMECO purchases from Select Energy are eliminated in consolidation.  

Select Energy revenues related to contracts with NSTAR companies represented $206.4 million or 23 percent and $88.7 million or 11 percent of total NU Enterprises' revenues for the three months ended March 31, 2005 and 2004, respectively.  No other individual customer represented in excess of 10 percent of NU Enterprises' revenues for the three months ended March 31, 2005 or 2004.  

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 months ended March 31, 2005 and 2004 is as follows (some amounts between the financial statements and between segment schedules may not agree due to rounding):

(1)

Includes PSNH's generation activities.  

(2)

Information for segmenting total assets between electric distribution and transmission is not available at March 31, 2005.  On a NU consolidated basis, these distribution and transmission assets are disclosed in the electric distribution column above.  

Utility Group segment information related to the regulated electric distribution and transmission businesses for CL&P, PSNH and WMECO for the three months March 31, 2005 and 2004 is as follows:

(1)

Includes PSNH's generation activities.  

(1)

Includes PSNH's generation activities.  

NU Enterprises' segment information for the three months ended March 31, 2005 and 2004 is as follows.  Eliminations are included in the services and other column:  

11.

RESTATEMENT AND RECLASSIFICATION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (NU, Select Energy)

NU concluded that it incorrectly classified as unrestricted cash from counterparties amounts that should have been classified as cash and cash equivalents at December 31, 2003 and March 31, 2004.  Corrections were made to reclassify unrestricted cash from counterparties to cash and cash equivalents because those funds were unrestricted and were used to fund or were available to fund the company's operations.  The condensed consolidated statement of cash flows for the three months ended March 31, 2004, has been restated for these corrections.  

The effects of the corrections and other reclassifications to conform with the current period presentation on the condensed consolidated statement of cash flows for the three months ended March 31, 2004 are summarized in the following table (in thousands):

(1) These amounts relate to the restatement of the balances in unrestricted cash from counterparties and cash and cash equivalents.  

Certain other reclassifications of prior period data included in the accompanying condensed consolidated financial statements, primarily related to fuel, purchased and net interchange power, and other operation and maintenance expenses totaling $15.4 million on the accompanying condensed consolidated statements of (loss)/income have been made to conform with the current period presentation.  The condensed consolidated statement of cash flows has also been reclassified to exclude from cash flows from operations the change in accounts payable related to capital projects.  This accounts payable reclassification was also made for CL&P, PSNH and WMECO.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of Northeast Utilities

We have reviewed the accompanying condensed consolidated balance sheet of Northeast Utilities and subsidiaries ("the Company") as of March 31, 2005, and the related condensed consolidated statements of (loss)/income and cash flows for the three-month periods ended March 31, 2005 and 2004.  These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2, the Company's competitive business subsidiary, NU Enterprises, Inc., recorded significant restructuring and impairment charges in the quarter ended March 31, 2005 in connection with its decision to exit certain businesses.  

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and consolidated statement of capitalization of Northeast Utilities and subsidiaries as of December 31, 2004, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 16, 2005, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

As discussed in Note 11, the Company has restated the condensed consolidated statement of cash flows for the three months ended March 31, 2004.  

Hartford, Connecticut

May 9, 2005

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THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES