ES

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2005, for Northeast Utilities (NU) and its wholly-owned regulated subsidiaries: The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO). The system provides regulated electric service to approximately 1.9 million customers and natural gas service to approximately 199,000 customers in Connecticut, New Hampshire, and western Massachusetts.

A defining strategic shift in 2005 was NU's decision to exit all competitive energy businesses (wholesale marketing, retail marketing, and merchant generation) to transition to a 100% regulated business model. The company expects to complete these divestitures by the end of 2006.

Key Financial Metrics

Revenue and Profit: The filing text does not provide consolidated revenue or net income figures for the NU system in the narrative sections; these are incorporated by reference from the Annual Report to Shareholders. However, specific segment data is available:

• NU Enterprises (Competitive): Reported revenues of approximately $2.0 billion in 2005 (down from $2.7 billion in 2004) and incurred a loss of $398.2 million (compared to a $15.1 million loss in 2004).
• Wholesale Marketing: Incurred a loss of $349 million in 2005, primarily due to mark-to-market adjustments and exit costs during a period of price volatility.
• NU Parent Company: Reported a net loss of $253.5 million for 2005, driven by a $240.2 million equity loss in subsidiaries.
• Yankee Gas: Reported total gas operating revenues of $503.3 million.

Debt and Liquidity:

• Total Debt: Total NU system debt (excluding securitization bonds) was $3.1 billion as of December 31, 2005.
• Equity Issuance: On December 12, 2005, NU issued 23 million common shares for gross proceeds of $439.1 million to finance capital expenditures and the exit from competitive businesses.
• Credit Facilities: NU maintains a $700 million revolving credit facility (increased from $500 million in December 2005) and a $400 million facility for its operating subsidiaries.
• Dividends: NU paid common dividends totaling $87.6 million in 2005.

Material Changes Versus Prior Period

• Strategic Pivot: In 2005, NU announced the exit from all competitive businesses, a significant departure from its previous mixed regulated/merchant model. This resulted in substantial losses in the wholesale marketing segment ($349 million) and a sharp decline in NU Enterprises revenue.
• Regulatory Changes: The Public Utility Holding Company Act of 1935 (PUHCA) was repealed on February 8, 2006, shifting jurisdiction over certain areas to the FERC. Additionally, ISO New England began operations as the Regional Transmission Operator (RTO) on February 1, 2005.
• Rate Adjustments: CL&P received approval for a 17.5% increase in Transitional Standard Offer (TSO) rates effective January 1, 2006, and an additional 4.9% increase in April 2006, to recover higher generation supply costs. WMECO saw an overall average rate increase of 44% effective January 1, 2006, driven by energy costs.
• Capital Expenditures: Transmission capital expenditures in Connecticut totaled $207.8 million in 2005, with a projected increase to $400 million in 2006.

Guidance, Outlook, Risks, and Contingencies

Outlook and Guidance:

• Divestiture Completion: NU expects to complete the sale of its competitive businesses by the end of 2006. Proceeds will be used for debt reduction and financing regulated capital programs.
• Capital Program: The NU system estimates construction expenditures of approximately $900 million for 2006, with a long-term plan to invest $2.3 billion in electric transmission infrastructure between 2006 and 2010.
• Rate Recovery: Management anticipates continued timely recovery of supply costs in Connecticut, Massachusetts, and New Hampshire, though higher rates may reduce sales volumes in 2006.

Risks and Contingencies:

• Exit Costs: Exiting the competitive portfolio carries risks of additional charges, particularly regarding the settlement of wholesale contracts which may exceed mark-to-market values. The net fair value of the wholesale portfolio was a liability of $230.1 million at year-end.
• Regulatory Uncertainty: FERC proceedings regarding the Return on Equity (ROE) for transmission rates are ongoing. A lower ROE than currently assumed (11.5%) could impact earnings. Additionally, the implementation of the Forward Capacity Market (FCM) in New England is expected to require operating companies to pay significant transition costs (e.g., CL&P estimated at $470 million).
• Nuclear Decommissioning: NU faces significant decommissioning obligations for the Yankee nuclear units (CY, MY, YA). Estimated remaining costs net of collections are $225.7 million. FERC proceedings are ongoing to recover increased decommissioning costs.
• Environmental Liabilities: The company has recorded a liability of approximately $30.7 million for environmental remediation at 52 sites, primarily former Manufactured Gas Plants (MGP).
• Legal Proceedings: Significant litigation includes the merger dispute with Consolidated Edison (Con Edison), where NU seeks damages in excess of $1 billion, and disputes regarding nuclear decommissioning costs with Bechtel Power Corporation.

Key Facts for Investor Verification

• Divestiture Timeline and Proceeds: Verify the actual completion date of the competitive business sales in 2006 and the net proceeds realized versus the book value of $825 million for generation assets.
• FERC ROE Determination: Monitor the final FERC order on the transmission Return on Equity, as a reduction from the assumed 11.5% would negatively impact regulated earnings.
• Wholesale Contract Settlements: Track the final settlement costs for the remaining wholesale marketing portfolio, specifically the large contracts expiring in 2007 and 2013, to assess potential additional charges.
• Nuclear Cost Recovery: Confirm the outcome of FERC proceedings regarding the recovery of increased decommissioning costs for the Yankee nuclear units, which could impact future rate cases.
• Transmission Project Costs: Monitor the cost escalation and in-service dates for the major southwest Connecticut transmission projects (e.g., Middletown to Norwalk), as delays or cost overruns could affect rate recovery and liquidity.