CONNECTICUT LIGHT & POWER CO - Quarter Report: 2006 September (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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

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

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

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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

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NORTHEAST UTILITIES AND SUBSIDIARIES

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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

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  The accompanying unaudited condensed consolidated financial statements should be read in conjunction with this complete report on Form 10-Q, the first and second quarter 2006 reports 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 Northeast Utilities and subsidiaries combined 2005 Form 10-K (NU 2005 Form 10-K) with the SEC, and the current report on Form 8-K dated June 7, 2006 that updated the 2005 Form 10-K to present certain portions of the business as discontinued operations for all periods.  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 September 30, 2006, and the results of operations for the three and nine months ended September 30, 2006 and 2005 and cash flows for the nine months ended September 30, 2006 and 2005.  The results of operations and statements of cash flows for the nine months ended September 30, 2006 and 2005 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.

In NU's condensed consolidated statements of income/(loss) and CL&P's, PSNH's and WMECO's condensed consolidated statements of income, the classification of expense amounts relating to compensation costs not recoverable from regulated customers, advertising costs, environmental charges and rate reduction bond service fees previously included in other income, net was changed to a preferable presentation.  These expense amounts, which were reclassified to other operation expense for NU, CL&P, PSNH, and WMECO, totaled $3.9 million, $1.3 million, $1.1 million and $0.2 million, respectively, for the three months ended September 30, 2005.  Similar amounts for the nine months ended September 30, 2005 for NU, CL&P, PSNH, and WMECO totaled $13.1 million, $4.1 million, $3 million and $0.6 million, respectively.  These reclassifications had no impact on the companies' results of operations, cash flows, financial condition or changes in shareholders' equity.  

NU's condensed consolidated statements of income/(loss) for all periods presented classify the operations for the following as discontinued operations, which were reflected in the report on Form 8-K dated June 7, 2006 and the second quarter 2006 report on Form 10-Q:

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Northeast Generation Company (NGC),

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The Mt. Tom generating plant (Mt. Tom) owned by Holyoke Water Power Company (HWP),

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Select Energy Services, Inc. (SESI) and its wholly owned subsidiaries HEC/Tobyhanna Energy Project, Inc. and HEC/CJTS Energy Center LLC,

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A portion of Woods Electrical Co., Inc. (Woods Electrical),

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Select Energy Contracting, Inc. - New Hampshire (SECI-NH) (including Reeds Ferry Supply Co., Inc. (Reeds Ferry)), a division of Select Energy Contracting, Inc. (SECI), and

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Woods Network Services, Inc. (Woods Network).

At September 30, 2006, all assets and liabilities of NGC and Mt. Tom have been classified as assets held for sale and liabilities of assets held for sale on the accompanying condensed consolidated balance sheet.  At December 31, 2005, assets held for sale and

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liabilities of assets held for sale consisted of certain assets and liabilities of SESI and Woods Electrical.  For further information regarding these companies, see Note 4, "Assets Held for Sale and Discontinued Operations."

B.

Accounting Standards Issued But Not Yet Adopted

Accounting for Servicing of Financial Assets:  In March of 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156, "Accounting for Servicing of Financial Assets - An Amendment of FASB Statement No. 140."  SFAS No. 156 requires an entity to recognize a servicing asset or liability at fair value each time it undertakes an obligation to service a financial asset by entering into a servicing contract in a transfer of the servicer's financial assets that meets the requirements for sale accounting and in other circumstances.  Servicing assets and liabilities may be subsequently measured through either amortization or recognition of fair value changes in earnings.  SFAS No. 156 is required to be applied prospectively to transactions beginning in the first quarter of 2007 and may affect the accounting treatment of CL&P Receivables Corporation (CRC), a wholly owned subsidiary of CL&P.  Implementation of SFAS No. 156 is not expected to have a material effect on the company's financial statements.

Uncertain Tax Positions:  On July 13, 2006, the FASB issued FASB Interpretation No. (FIN) 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109."  FIN 48 addresses the methodology to be used in estimating and reporting amounts associated with uncertain tax positions, including interest and penalties.  FIN 48 is required to be implemented prospectively in the first quarter of 2007 as a change in accounting principle with a cumulative effect adjustment reflected in the January 1, 2007 balance of retained earnings.  The company is currently evaluating the potential impacts of FIN 48 on its financial statements.

  

Fair Value Measurements:  On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which establishes a framework for identifying and measuring fair value and is required to be implemented in the first quarter of 2008.  SFAS No. 157 provides a fair value hierarchy, giving the highest priority to quoted prices in active markets, and is expected to be applied to fair value measurements of derivative contracts that are subject to mark-to-market accounting and other assets and liabilities reported at fair value.  In most cases, SFAS No. 157 is required to be implemented prospectively with adjustments to fair value reflected as a cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2008.  The company is evaluating the potential impacts of SFAS No. 157 on its financial statements.  

Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans:  On September 29, 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans."  Effective prospectively beginning on December 31, 2006, SFAS No. 158 requires balance sheet recognition of the funded status of pension and postretirement benefit plans, with the difference between the funded status and the accrued or prepaid position recognized as a charge or credit to shareholders' equity through other comprehensive income.  The company is currently evaluating the potential balance sheet impacts of implementing SFAS No. 158 and whether NU's regulated companies will report regulatory assets or liabilities rather than charges or credits to shareholders' equity in recognition of the recovery of pension and postretirement expenses in rates.  Implementing SFAS No. 158 could have a material negative effect on NU's and its subsidiaries shareholders' equity balances, the amount of which would depend upon the plans' funded status at December 31, 2006 and whether regulatory accounting is determined to apply to NU's regulated companies upon adoption of the standard.  At December 31, 2005, the total difference between the funded status and the accrued or prepaid positions for NU's pension and postretirement plans was over $700 million on a pre-tax basis.  

  

C.

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, and substantial portions of the unrecovered contractual obligations regulatory assets.  Amortization and deferrals of regulatory assets are included on a net basis in amortization expense on the accompanying condensed consolidated statements of income/(loss).  

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

At September 30, 2006, CL&P's Competitive Transition Assessment (CTA) was recorded as a $65.6 million regulatory asset as CTA unrecovered costs were in excess of CTA collections due to refunds to customers.  At December 31, 2005, CTA collections were in excess of CTA costs, and a $26 million regulatory liability was recorded.  The change relates to refunds made to customers between January and August of 2006 ordered by the Connecticut Department of Public Utility Control (DPUC) in anticipation of future overrecoveries.

Included in NU's other regulatory assets/(overrecoveries) above are regulatory assets recorded in accordance with FIN 47, "Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143," totaling $53.3 million at September 30, 2006 and $47.3 million at December 31, 2005.  A portion of these asset retirement obligations regulatory assets totaling $17.8 million at September 30, 2006 and $17.3 million at December 31, 2005 has been approved for future recovery.  At this time, management believes that the remaining regulatory assets are also probable of recovery.  

The restructuring settlement agreement between PSNH and the state of New Hampshire, which was implemented in May of 2001, requires that non-securitized stranded costs be recovered from PSNH's customers prior to a recovery end date of October 31, 2007.  On June 30, 2006, under the terms of the restructuring settlement agreement, PSNH completed the recovery of its non-securitized stranded costs and offset the remaining stranded cost regulatory asset balances totaling $345.8 million against an offsetting regulatory liability for the cumulative deferral of Stranded Cost Recovery Charge (SCRC) revenues.  At September 30, 2006, PSNH had $338.2 million of Part 1 securitized stranded costs and $26.2 million of Part 2 non-securitized stranded costs, including $6.5 million of SCRC costs in excess of SCRC revenues.  This amount is a reconciling item that will be included in the calculation of the 2007 SCRC rate.

Included in WMECO's other regulatory assets/(overrecoveries) are $20.2 million and $37.8 million at September 30, 2006 and December 31, 2005, 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 $15.3 million and $11.2 million of costs at September 30, 2006 and December 31, 2005, respectively, that are included in deferred debits and other assets - other on the accompanying condensed consolidated balance sheets.  These amounts represent costs that have not yet been approved by the applicable regulatory agency.  Management believes these assets are recoverable in future cost of service regulated rates.

As discussed in Note 7D, "Commitments and Contingencies - Deferred Contractual Obligations," substantial portions of the unrecovered contractual obligations regulatory assets have not yet been approved for recovery.  On August 15, 2006, a settlement agreement was filed with the Federal Energy Regulatory Commission (FERC) that, if approved, would allow for the collection of these costs.  Management expects that the FERC will rule on the settlement agreement by the end of 2006 and believes that these regulatory assets are probable of recovery.

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Regulatory Liabilities:  The Utility Group had $773.5 million of regulatory liabilities at September 30, 2006 and $1.3 billion at December 31, 2005, including revenues subject to refund.  These amounts are comprised of the following:

For information regarding derivative assets, see Note 5, "Derivative Instruments."

D.

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 income/(loss), as follows:

The average Utility Group AFUDC rate is based on a FERC prescribed formula that develops an average rate using the cost of a company's short-term financings as well as a 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.  Fifty percent of construction work in progress (CWIP) of CL&P's four major transmission projects in southwest Connecticut is recovered currently in rates for the portion under FERC jurisdiction.  The increase in AFUDC from borrowed and equity funds during the three and nine months ended September 30, 2006 as compared to the three and nine months ended September 30, 2005 results from higher levels of CWIP due to CL&P's transmission projects, PSNH's Northern Wood project and Yankee Gas' liquefied natural gas project.  The increase in the average AFUDC rate in 2006 is primarily due to the increased CWIP being financed by permanent capital and higher short-term debt rates.

E.

Share-Based Payments

NU maintains an Employee Stock Purchase Plan (ESPP) and other long-term equity-based incentive plans under the Northeast Utilities Incentive Plan (Incentive Plan).  In the first quarter of 2006, NU adopted SFAS No. 123(R), "Share-Based Payments," under the modified prospective method.  Adoption of SFAS No. 123(R) had a de minimus effect on NU's net income/(loss) and no effect on NU's income/(loss) per share.  For the nine months ended September 30, 2006, a tax benefit in excess of compensation cost totaling $0.5 million increased cash flows from financing activities.  

SFAS No. 123(R) requires that share-based payments be recorded using the fair value-based method based on the fair value at the date of grant and applies to share-based compensation awards granted on or after January 1, 2006 or to awards for which the requisite service period has not been completed.  For prior periods, as permitted by SFAS No. 123, "Accounting for Stock-Based

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Compensation," and related guidance, NU used the intrinsic value method and disclosed the pro forma effects as if NU recorded equity-based compensation under the fair value-based method.  

NU accounts for its various share-based plans as follows:

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For grants of restricted stock and restricted stock units (RSUs), NU continues to record compensation expense over the vesting period based upon the fair value of NU's common stock at the date of grant, but records this expense net of estimated forfeitures.  Previously, forfeitures were recorded as they occurred.  Dividend equivalents on RSUs, previously included in compensation expense, are charged to retained earnings net of estimated forfeitures.  

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For shares granted under the ESPP, an immaterial amount of compensation expense was recorded in the first quarter of 2006, and no future compensation expense was recorded in the second and third quarters of 2006 or will be recorded in future periods as a result of a plan amendment that was effective on February 1, 2006.  

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NU has not granted any stock options since 2002, and no compensation expense has been recorded.  All options were fully vested prior to January 1, 2006.

Incentive Plans:  Under the Incentive Plan, NU is authorized to grant new shares for various types of awards, including restricted shares, restricted share units, performance units, and stock options to eligible employees and board members.  The number of shares that may be utilized for grants and awards during a given calendar year may not exceed the aggregate of one percent of the total number of NU common shares outstanding as of the first day of that calendar year plus the shares not utilized in previous years.

Restricted Shares and Restricted Share Units:  NU has granted restricted shares under the 2002, 2003 and 2004 incentive programs that are subject to three-year and four-year graded vesting schedules.  NU has granted RSUs under the 2004, 2005 and 2006 incentive programs that are subject to three-year and four-year graded vesting schedules.  RSUs are paid in shares plus cash sufficient to satisfy withholdings subsequent to vesting.  A summary of restricted shares and RSUs for the nine months ended September 30, 2006 is as follows:

The per share and total weighted average grant date fair value for restricted shares vested was $14.60 and $1.4 million, respectively, for the nine months ended September 30, 2005.  No shares vested during the three months ended September 30, 2005.  

The total compensation cost recognized during the three and nine months ended September 30, 2006 was $0.1 million and $0.4 million, net of taxes of approximately $0.1 million and $0.3 million, respectively.  The total compensation cost recognized during the three and nine months ended September 30, 2005 was $0.2 million and $0.5 million, net of taxes of approximately $0.1 million and $0.3 million, respectively.  

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The weighted average grant date fair value per share for RSUs granted during the three and nine months ended September 30, 2005 was $19.95 and $18.81, respectively.  The weighted average grant date fair value per share for RSUs paid during the three and nine months ended September 30, 2005 was $19.02 and $19.06, respectively.  The total weighted average fair value of RSUs paid during the three and nine months ended September 30, 2005 was approximately $48 thousand and $1.9 million, respectively.  

The total compensation cost recognized for the three and nine months ended September 30, 2006 was $0.7 million and $2.1 million, respectively, net of taxes of approximately $0.5 million and $1.4 million, respectively.  The total compensation cost recognized during the three and nine months ended September 30, 2005 was $0.3 million and $1.4 million, net of taxes of approximately $0.2 million and $0.9 million, respectively.  

Stock Options:  Prior to 2003, NU granted stock options to certain employees.  These options were fully vested as of December 31, 2005.  The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model.  The weighted average remaining contractual lives for the options outstanding at September 30, 2006 is 4 years.

A summary of stock option transactions is as follows:

Cash received for options exercised during the three and nine months ended September 30, 2006 totaled $2 million and $3.2 million, respectively.  

Employee Share Purchase Plan:  NU maintains an ESPP for all eligible employees.  Prior to February 1, 2006, NU common shares were purchased by employees at six-month intervals at 85 percent of the lower of the price on the first or last day of each six-month period.  Employees were permitted to purchase shares having a value not exceeding 25 percent of their compensation as of the beginning of the purchase period.  Effective February 1, 2006, the ESPP was amended to change the discount rate to 5 percent of the closing market price on the last day of the purchase period.  As a result, the ESPP qualifies as a non-compensatory plan under SFAS No. 123(R), and no compensation expense will be recorded for ESPP purchases.

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Pro Forma Impact:  The following table illustrates the pro forma effect if NU had applied the recognition provisions of SFAS No. 123 to share-based compensation:

An income tax rate of 40 percent is used to estimate the tax effect on total share-based payments determined under the fair value-based method for all awards.  

F.

Sale of Customer Receivables

At September 30, 2006 and December 31, 2005, CL&P had sold an undivided interest in its accounts receivable of $100 million and $80 million, respectively, to a financial institution with limited recourse through the CRC, a consolidated, 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 September 30, 2006 and December 31, 2005, the reserve requirements calculated in accordance with the Receivables Purchase and Sale Agreement were $20.6 million and $21 million, respectively.  These reserve amounts are deducted from the amount of receivables eligible for sale.  At their present levels, these reserve amounts do not limit CL&P's ability to access the full amount of the facility.  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.

At September 30, 2006 and December 31, 2005, amounts sold to CRC by CL&P but not sold to the financial institution totaling $273.1 million and $252.8 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 5, 2006, CRC renewed the bank commitment for the Receivables Purchase and Sale Agreement with CL&P and the financial institution through July 3, 2007 to coincide with the date this agreement terminates, unless otherwise extended.  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."  See Note 1B, "Accounting Standards Issued But Not Yet Adopted," for further information.

G.

Investment in CYAPC

The operating subsidiaries of NU collectively own 49 percent of the common stock of Connecticut Yankee Atomic Power Company (CYAPC) with a carrying value of $20.8 million at September 30, 2006 and $22.7 million at December 31, 2005.  These amounts are included in deferred debits and other assets - other on the accompanying condensed consolidated balance sheets.  On August 15, 2006, a settlement agreement was filed with the FERC that, if approved, would allow for the recovery of CYAPC's decommissioning and plant closure costs.  For further information, see Note 7D, "Commitments and Contingencies - Deferred Contractual Obligations," Note 1C, "Summary of Significant Accounting Policies - Regulatory Accounting," and Note 1K, "Summary of Significant Accounting Policies - Other Income, Net."

H.

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.

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I.

Special Deposits

Special deposits represent amounts Select Energy, Inc. (Select Energy) has on deposit with unaffiliated counterparties and brokerage firms in the amount of $34.4 million and $103.8 million at September 30, 2006 and December 31, 2005, respectively.  SESI special deposits totaling $10.2 million at December 31, 2005 are included in assets held for sale on the accompanying condensed consolidated balance sheets.  SESI was sold in the second quarter of 2006.

J.

Counterparty Deposits

Balances collected from counterparties resulting from Select Energy's credit management activities totaled $0.2 million at September 30, 2006 and $28.9 million at December 31, 2005.  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 use 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.

K.

Other Income, Net

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

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Investment income for NU includes equity in earnings/(losses) of regional nuclear generating and transmission companies of $0.8 million and $0.6 million for the three months ended September 30, 2006 and 2005, respectively, and $(0.4) million and $2.5 million for the nine months ended September 30, 2006 and 2005, respectively.  Equity in earnings relates to NU, CL&P, PSNH and WMECO's investment in CYAPC, Maine Yankee Atomic Power Company (MYAPC), Yankee Atomic Electric Company (YAEC) (Yankee companies) and the Hydro-Quebec transmission system.

Based on developments in July of 2006, CYAPC management concluded that $10 million of CYAPC's regulatory assets were no longer probable of recovery and should be written off.  Because the contingency surrounding these regulatory assets existed at June 30, 2006, the write-off was recorded in the second quarter.  NU recorded a total after-tax write-off of $3 million ($2.1 million, $0.3 million and $0.6 million for CL&P, PSNH and WMECO, respectively) for its ownership share of this charge, which is included in investment income for the nine months ended September 30, 2006 in the tables above.  For further information regarding CYAPC, see Note 7D, "Commitments and Contingencies - Deferred Contractual Obligations," and Note 1C, "Summary of Significant Accounting Policies - Regulatory Accounting."  

None of the amounts in either other income - other or other loss - other are individually significant.  

2.

WHOLESALE CONTRACT MARKET CHANGES (NU, NU Enterprises)

NU recorded a pre-tax benefit of $4.8 million and a pre-tax charge of $101.2 million for wholesale contract market changes in the three months ended September 30, 2006 and 2005, respectively, and charges of $14.9 million and $359.7 million for the nine months ended September 30, 2006 and 2005, respectively.  Wholesale contract market changes are changes in the fair value of wholesale contracts being divested.  These changes are comprised of the following items:

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A benefit of $4.6 million and charges of $14.1 million for the three and nine months ended September 30, 2006 and charges of $80.6 million and $439.1 million for the three and nine months ended September 30, 2005, respectively, associated with the mark-to-market on certain long-dated wholesale electricity contracts in New England, New York and PJM and contracts to purchase generation products in New England and New York.  The decision in March of 2005 to exit the wholesale marketing business changed management's conclusion regarding the likelihood that these wholesale marketing contracts would result in

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physical delivery to customers.  This in turn resulted in a change in the first quarter of 2005 from accrual accounting to mark-to-market accounting for the wholesale marketing contracts.  Included in the third quarter 2005 charge of $80.6 million is a pre-tax charge of $11.7 million related to a portfolio of contracts that Select Energy assigned to a third-party wholesale power marketer, obligating that marketer to assume responsibility for those contracts that Select Energy had in New England, beginning on January 1, 2006, in exchange for a $15 million payment Select Energy made in December of 2005.  

·

A benefit of $0.2 million and charges of $0.8 million, respectively, for the three and nine months ended September 30, 2006 related to the fair value of certain asset-specific sales and forward sales of electricity at hub points for generation contracts.  

·

A benefit of $79.4 million in the first nine months of 2005 comprised of a positive mark-to-market of $100 million in the first half of 2005, partially offset by a charge of $20.6 million in the third quarter of 2005.  The $20.6 million charge in the third quarter of 2005 includes approximately $37 million relating to certain wholesale contracts in the PJM power pool where NU Enterprises increased its estimates of customer load above its original expectations and $3.1 million of other charges related to contract assignments.  Offsetting these charges is a net pre-tax benefit of $19.5 million associated with the marking-to-market of the supply contracts that previously were held to serve certain retail electric load and other mark-to-market impacts.

Included in the mark-to-market on long-term wholesale electricity contracts is a $44 million and $114.2 million pre-tax mark-to-market charge for the three and nine months ended September 30, 2005, respectively, related to an intercompany contract between Select Energy and CL&P.  This contract was included in the portfolio of contracts Select Energy assigned to a third party wholesale power marketer, and Select Energy stopped serving CL&P on December 31, 2005.  This contract was part of CL&P's stranded costs, and benefits received by CL&P under this contract were provided to CL&P's ratepayers in the form of lower-than-market standard offer service rates.  A $2.8 million pre-tax mark-to-market charge in the first quarter of 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 or third quarter of 2005, as this contract expired on June 30, 2005.  WMECO's benefits under this contract were provided to its ratepayers in the form of lower-than-market default service rates.  These charges were not eliminated in consolidation because on a consolidated basis NU retained the over-market obligation to its ratepayers of CL&P and WMECO.

 

For further information regarding derivative assets and liabilities, see Note 5, "Derivative Instruments."

3.

RESTRUCTURING AND IMPAIRMENT CHARGES (NU, NU Enterprises)

The company evaluates long-lived assets such as property, plant and equipment to determine if these assets are impaired when events or changes in circumstances occur, such as the 2005 announced decisions to exit the NU Enterprises businesses.  

When the company believes one of these events has occurred, a determination needs to be made whether a long-lived asset should be classified as an asset to be held and used or whether that asset should be classified as held for sale.  For assets classified as held and used, the company estimates the undiscounted future cash flows associated with the long-lived asset or asset group, and an impairment loss is recognized if the carrying amount of an asset is not recoverable.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset.  For assets held for sale, a long-lived asset or disposal group is measured at the lower of its carrying amount or fair value less cost to sell.  

NU Enterprises recorded $10.4 million and $5.3 million of pre-tax restructuring and impairment charges for the three months ended September 30, 2006 and 2005, respectively, and $26 million and $53.2 million for the nine months ended September 30, 2006 and 2005, respectively, related to exiting the merchant energy businesses and the energy services businesses.  The amounts related to continuing operations are included as restructuring and impairment charges on the condensed consolidated statements of income/(loss) with the remainder included in discontinued operations.  These charges are included as part of the NU Enterprises reportable segment in Note 12, "Segment Information."  A summary of these pre-tax charges is as follows:  

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For segment reporting purposes, $0.1 million and $0.1 million of wholesale marketing restructuring charges, $0.3 million and $3.2 million of retail marketing restructuring charges and $6.8 million and $9.5 million of competitive generation restructuring charges for the three and nine months ended September 30, 2006, respectively, are included in the NU Enterprises - Services and Other reportable segment, as these amounts were recorded by NU Enterprises parent.

Wholesale Marketing:  For the three and nine months ended September 30, 2006, $0.1 million and $0.3 million, respectively, of restructuring charges were recorded in the wholesale marketing segment for consulting fees, legal fees, employee-related and other costs.  Similar amounts for the three and nine months ended September 30, 2005 were $4.2 million and $5.2 million, respectively.  

Retail Marketing:  On June 1, 2006, NU Enterprises completed the sale of Select Energy New York, Inc. (SENY) to Hess Corporation (Hess).  In connection with the closing of this transaction, NU Enterprises recorded restructuring charges in the second quarter of $0.3 million in the retail marketing segment, which is included in restructuring and impairment charges on the accompanying condensed consolidated statements of income/(loss) for the nine months ended September 30, 2006.  In addition to the $0.3 million charge, restructuring charges of $0.6 million and $6.1 million, respectively, were recorded for the three and nine months ended September 30, 2006, respectively, for consulting fees, legal fees, employee-related costs and other costs.  There were no restructuring charges for the three and nine months ended September 30, 2005.

In the first quarter of 2005, an exclusivity agreement intangible asset included in the retail marketing segment totaling $7.2 million was written off.

Competitive Generation:  In the second quarter of 2006, $0.3 million of impairments were recorded in the competitive generation segment related to certain long lived assets of Northeast Generation Services Company (NGS) that were no longer recoverable.  Additional restructuring charges of $6.8 million and $9.5 million, respectively, were recorded for the three and nine months ended September 30, 2006 for consulting fees, legal fees, sale-related environmental fees, employee-related and other costs.  There were no restructuring charges related to competitive generation for the three and nine months ended September 30, 2005.  

Energy Services and Other:  On May 5, 2006, NU Enterprises completed the sale of SESI to Ameresco, Inc. (Ameresco).  In connection with the closing of this transaction, NU Enterprises paid Ameresco approximately $7.7 million and recorded a pre-tax restructuring charge of $6.5 million.  In the third quarter of 2006, an additional restructuring charge of $1.6 million was recorded related to additional charges incurred for the sale of SESI to Ameresco.  These charges are included in loss from sale of discontinued operations on the accompanying condensed consolidated statements of income/(loss).

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For the three and nine months ended September 30, 2006, restructuring charges included $0.3 million and $2 million in charges related to consulting fees, legal fees, employee-related costs, and other costs and $1 million of charges related to NU's guarantee of SESI's performance under government contracts.  These guarantee-related charges represent estimated purchase and refinancing costs for two projects' contract payments.  See Note 7F, "Commitments and Contingencies - Guarantees and Indemnifications," for further information.

Offsetting the charges for the first nine month of 2006 is a benefit of $1.7 million from the gain on the sale of Massachusetts service location of Select Energy Contracting, Inc. - Connecticut (SECI-CT) recorded in the first quarter of 2006.  

The amounts described above are included in the Services and Other reportable segment.  See Note 12, "Segment Information," for further information.

In 2005, the company concluded that $29.1 million of goodwill associated with the energy services businesses and $9.2 million of intangible assets were impaired as of March 31, 2005.  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 resulting in a total impairment charge of $39.1 million for the first half of 2005, included in the Energy Services and Other segment.

For the three and nine months ended September 30, 2005, restructuring costs totaling $1.1 million and $1.7 million were recorded for the energy services business related to professional fees, employee-related and other costs.  

The following table summarizes the liabilities related to restructuring costs which are recorded in accounts payable and other current liabilities on the accompanying condensed consolidated balance sheets at September 30, 2006 and December 31, 2005:  

In addition to the $0.6 million of retail marketing severance costs included in restructuring charges above, $3.7 million of other retail marketing severance costs and other employee benefits were recorded in other operating expenses on the accompanying condensed consolidated statements of income/(loss) for the nine months ended September 30, 2006 because these amounts are for severance under an existing benefit arrangement.  For further information, see Note 11, "Pension Benefits and Postretirement Benefits Other Than Pensions."

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4.

ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (NU, NU Enterprises)

A summary of the NU Enterprises businesses held for sale status as of September 30, 2006 and December 31, 2005, as well as the discontinued operations status for all periods presented including date sold, is as follows: