NORTHEAST UTILITIES SYSTEM - 10-K Annual Report

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 2001
-----------------

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ________ to ________

Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------

1-5324 NORTHEAST UTILITIES 04-2147929
-------------------
(a Massachusetts voluntary association)
174 Brush Hill Avenue
West Springfield, Massachusetts 01090-2010
Telephone: (413) 785-5871

0-11419 THE CONNECTICUT LIGHT AND POWER COMPANY 06-0303850
---------------------------------------
(a Connecticut corporation)
107 Selden Street
Berlin, Connecticut 06037-1616
Telephone: (860) 665-5000

1-6392 PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE 02-0181050
---------------------------------------
(a New Hampshire corporation)
1000 Elm Street
Manchester, New Hampshire 03105-0330
Telephone: (603) 669-4000

0-7624 WESTERN MASSACHUSETTS ELECTRIC COMPANY 04-1961130
--------------------------------------
(a Massachusetts corporation)
174 Brush Hill Avenue
West Springfield, Massachusetts 01090-2010
Telephone: (413) 785-5871

333-74636 NORTHEAST GENERATION COMPANY 06-1533879
----------------------------
(a Connecticut corporation)
107 Selden Street
Berlin, Connecticut 06037-1616
Telephone: (860) 655-5154

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

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.

Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of Northeast Utilities' Common Shares, $5.00 Par
Value, held by nonaffiliates, was $2,458,357,404 based on a closing sales
price of $18.38 per share for the 133,751,763 common shares outstanding on
February 28, 2002. Northeast Utilities holds all of the 7,584,884 shares,
388 shares, 509,696 shares, and 6 shares of the outstanding common stock of
The Connecticut Light and Power Company, Public Service Company of New
Hampshire, Western Massachusetts Electric Company, and Northeast Generation
Company, respectively.

Documents Incorporated by Reference:

Part of Form 10-K
into Which Document
Description is Incorporated
----------- --------------------

Portions of Annual Reports of the following
companies for the year ended December 31, 2001:

Northeast Utilities Part II
The Connecticut Light and Power Company Part II
Public Service Company of New Hampshire Part II
Western Massachusetts Electric Company Part II
Northeast Generation Company Part II

Portions of the Northeast Utilities Proxy
Statement dated March 25, 2002 Part III

GLOSSARY OF TERMS

The following is a glossary of frequently used abbreviations or acronyms
that are found in this report:

COMPANIES

Boulos.......................... E.S. Boulos Company
CL&P............................ The Connecticut Light and Power Company
CL&P LP......................... CL&P Capital LP
Con Edison...................... Consolidated Edison, Inc.
CRC............................. CL&P Receivables Corporation
CYAPC........................... Connecticut Yankee Atomic Power Company
DNCI............................ Dominion Nuclear Connecticut, Inc.
HWP............................. Holyoke Water Power Company
Mode 1.......................... Mode 1 Communications, Inc.
MYAPC........................... Maine Yankee Atomic Power Company
NAEC............................ North Atlantic Energy Corporation
NAESCO.......................... North Atlantic Energy Service Corporation
NEON............................ NEON Communications, Inc.
NGC............................. Northeast Generation Company
NGS............................. Northeast Generation Services Company
NMEM............................ Niagara Mohawk Energy Marketing, Inc.
NNECO........................... Northeast Nuclear Energy Company
NU or the company............... Northeast Utilities
NU system....................... Northeast Utilities System
NUEI............................ NU Enterprises, Inc.
NUSCO........................... Northeast Utilities Service Company
PSNH............................ Public Service Company of New Hampshire
RRR............................. The Rocky River Realty Company
Select Energy................... Select Energy, Inc.
SENY............................ Select Energy New York, Inc.
SEPPI........................... Select Energy Portland Pipeline, Inc.
SES or SESI..................... Select Energy Services, Inc.
VYNPC........................... Vermont Yankee Nuclear Power Corporation
WMECO........................... Western Massachusetts Electric Company
YAEC............................ Yankee Atomic Electric Company
Yankee.......................... Yankee Energy System, Inc.
Yankee Companies................ CYAPC, MYAPC, VYNPC, and YAEC
Yankee Gas...................... Yankee Gas Services Company

GENERATING UNITS

Millstone 1..................... Millstone Unit No. 1, a 660 megawatt
nuclear unit completed in 1970; Millstone 1
is currently in decommissioning status and
was sold to DNCI in March 2001.
Millstone 2..................... Millstone Unit No. 2, an 870 megawatt
nuclear electric generating unit completed in
1975; Millstone 2 was sold to DNCI in March
2001.
Millstone 3..................... Millstone Unit No. 3, a 1,154 megawatt
nuclear electric generating unit completed in
1986; Millstone 3 was sold to DNCI in March
2001.
Seabrook........................ Seabrook Unit No. 1, a 1,148 MW nuclear
electric generating unit completed in 1986.
Seabrook 1 went into service in 1990.

REGULATORS

CDEP............................ Connecticut Department of
Environmental Protection
DOE............................. United States Department of Energy
DPUC............................ Connecticut Department of
Public Utility Control
DTE............................. Massachusetts Department of
Telecommunications and Energy
EPA............................. United States Environmental Protection Agency
FERC............................ Federal Energy Regulatory Commission
NHPUC........................... New Hampshire Public Utilities Commission
NRC............................. Nuclear Regulatory Commission
SEC............................. Securities and Exchange Commission

OTHER

1935 Act........................ Public Utility Holding Company
Act of 1935
BFA............................. Business Finance Authority
CAAA............................ Clean Air Act Amendments of 1990
District Court.................. United States District Court for the
Southern District of New York
EITF............................ Emerging Issues Task Force
Energy Act...................... Energy Policy Act of 1992
EPS............................. Earnings Per Share
ESOP............................ Employee Stock Ownership Plan
ESPP............................ Employee Stock Purchase Plan
Exchange........................ New York Mercantile Exchange
FASB............................ Financial Accounting Standards Board
FPPAC........................... Fuel and Purchased-Power Adjustment Clause
Incentive Plan.................. Northeast Utilities Incentive Plan
ISO............................. Independent System Operator
ITC............................. Independent Transmission Company
kWh............................. Kilowatt-hour
Merger Agreement................ Agreement and Plan of Merger, as
amended and restated as of January 11,
2000, between NU and Con Edison
MIPs............................ Monthly Income Preferred Securities
MW.............................. Megawatts
NDFC............................ Nuclear Decommissioning Financing Committee
NEPOOL.......................... New England Power Pool
NUG&T........................... Northeast Utilities Generation and
Transmission Agreement
O&M............................. Operation and Maintenance
PCRBs........................... Pollution Control Revenue Bonds
Pool............................ Northeast Utilities System Money Pool
RTO............................. Regional Transmission Organization
SERP............................ Supplemental Executive Retirement Plan
Settlement Agreement............ "Agreement to Settle PSNH Restructuring"
SFAS............................ Statement of Financial Accounting Standards
VSP............................. Voluntary Separation Program

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

2001 Form 10-K Annual Report
Table of Contents

PART I
Page

Item 1. Business............................................. 1

The Northeast Utilities System............................ 1

Safe Harbor Statement..................................... 2

Mergers and Acquisitions.................................. 3

Consolidated Edison, Inc. Merger..................... 3
Competitive Business Acquisitions.................... 3

Rates and Electric Industry Restructuring................. 4

General.............................................. 4
Connecticut Rates and Restructuring.................. 5
Massachusetts Rates and Restructuring................ 7
New Hampshire Rates and Restructuring................ 8

Competitive System Businesses............................. 9

Energy-Related Products and Services and
Gas Investments.................................... 10
Electric Generation and Services..................... 13
Energy Management Services........................... 14
Gas Investments...................................... 15
Telecommunications................................... 15

Financing Program......................................... 16

2001 Financings...................................... 16
2002 Financing Requirements.......................... 18
2002 Financing Plans................................. 19
Financing Limitations................................ 19

Construction and Capital Improvement Program.............. 24

Regulated Electric Operations............................. 25

Distribution and Sales............................... 25
Regional and System Coordination..................... 26
Transmission Access and FERC Regulatory Changes...... 27

Regulated Gas Operations.................................. 28

Nuclear Generation........................................ 29

General.............................................. 29
Nuclear Plant Performance............................ 31
Nuclear Insurance.................................... 31
Nuclear Fuel......................................... 32
Decommissioning...................................... 33

Other Regulatory and Environmental Matters................ 37

Environmental Regulation............................. 37
Electric and Magnetic Fields......................... 39
FERC Hydroelectric Project Licensing................. 40

Employees................................................. 41

Item 2. Properties........................................... 42

Item 3. Legal Proceedings.................................... 47

Item 4. Submission of Matters to a Vote of Security Holders.. 52

PART II

Item 5. Market for Registrants' Common Equity and Related
Shareholder Matters.................................. 53

Item 6. Selected Financial Data.............................. 54

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 54

Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 54

Item 8. Financial Statements and Supplementary Data.......... 55

Item 9. Changes in Disagreements with Accountants on
Accounting and Financial Disclosure.................. 56

PART III

Item 10. Directors and Executive Officers of the Registrants.. 58

Item 11. Executive Compensation............................... 64

Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 74

Item 13. Certain Relationships and Related Transactions....... 76

PART IV

Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................. 76

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

PART I
ITEM 1. BUSINESS

THE NORTHEAST UTILITIES SYSTEM

Northeast Utilities (NU) is the parent company of the Northeast
Utilities system (the NU system). The NU system furnishes franchised retail
electric service in Connecticut, New Hampshire and western Massachusetts
through three of NU's wholly- owned subsidiaries (The Connecticut Light and
Power Company [CL&P], Public Service Company of New Hampshire [PSNH] and
Western Massachusetts Electric Company [WMECO]).

The NU system also furnishes retail natural gas service in most of
Connecticut through Yankee Gas Services Company (Yankee Gas), a subsidiary of
Yankee Energy System, Inc. (Yankee), the largest natural gas distribution
company in Connecticut. Yankee Gas serves approximately 191,000 residential,
commercial and industrial customers in 69 cities and towns in Connecticut.

NU, through its wholly owned subsidiary, NU Enterprises, Inc. (NUEI),
owns a number of competitive energy and telecommunications related
businesses, including Northeast Generation Company (NGC), Northeast
Generation Services Company (NGS), Select Energy, Inc. (Select Energy),
Select Energy Services, Inc. (SESI; formerly HEC Inc.) and Mode 1
Communications, Inc. (Mode 1). For information regarding the activities of
these subsidiaries, see "Competitive System Businesses."

North Atlantic Energy Corporation (NAEC) is a wholly owned special-
purpose operating subsidiary of NU that owns a 35.98 percent interest in the
Seabrook station nuclear unit (Seabrook) in Seabrook, New Hampshire, and
sells its share of the capacity and output from Seabrook to PSNH under two
life-of-unit, full-cost recovery contracts (Seabrook Power Contracts).

Several wholly owned subsidiaries of NU provide support services for the
NU system companies and, in some cases, for other New England utilities.
Northeast Utilities Service Company (NUSCO) provides centralized accounting,
administrative, information technology, engineering, financial, legal,
operational, planning, purchasing, and other services to the NU system
companies. North Atlantic Energy Service Corporation (NAESCO) has operational
responsibility for Seabrook. Three other subsidiaries construct, acquire or
lease some of the property and facilities used by the NU system companies.

The NU system is regulated in virtually all aspects of its business by
various federal and state agencies, including the Securities and Exchange
Commission (SEC), the Federal Energy Regulatory Commission (FERC), the
Nuclear Regulatory Commission (NRC) and various state and/or local regulatory
authorities with jurisdiction over the industry and the service areas in
which each company operates, including the Connecticut Department of Public
Utility Control (DPUC), the New Hampshire Public Utilities Commission (NHPUC)
and the Massachusetts Department of Telecommunications and Energy (DTE). In
recent years, there has been significant legislative and regulatory activity
changing the nature of regulation of the industry. For more information
regarding these restructuring initiatives, see "Rates and Electric Industry
Restructuring" and "Regulated Electric Operations."

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), NU and its reporting subsidiaries
are hereby filing cautionary statements identifying important factors that
could cause NU or its subsidiaries' actual results to differ materially from
those projected in forward looking statements (as such term is defined in the
Reform Act) made by or on behalf of NU or its subsidiaries in this combined
Form 10-K, in any subsequent filings with the SEC, in presentations, in
response to questions, or otherwise. Any statements that express or involve
discussions as to expectations, beliefs, plans, objectives, assumptions or
future events, or performance (often, but not always, through the use of
words or phrases such as will likely result, are expected to, will continue,
is anticipated, estimated, projection, outlook) are not statements of
historical facts and may be forward looking. Forward looking statements
involve estimates, assumptions and uncertainties that could cause actual
results to differ materially from those expressed in the forward looking
statements. Accordingly, any such statements are qualified in their entirety
by reference to, and are accompanied by, the following important factors that
could cause NU or its subsidiaries' actual results to differ materially from
those contained in forward looking statements of NU or its subsidiaries made
by or on behalf of NU or its subsidiaries.

Any forward looking statement speaks only as of the date on which such
statement is made, and NU and its subsidiaries undertake no obligation to
update any forward looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect
the occurrence of unanticipated events. New factors emerge from time to time
and it is not possible for management to predict all of such factors, nor can
it assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward looking statements.

Some important factors that could cause actual results or outcomes to
differ materially from those discussed in the forward looking statements
include prevailing governmental policies and regulatory actions, including
those of the SEC, the NRC, the FERC, and state regulatory agencies, with
respect to allowed rates of return, industry and rate structure, operation of
nuclear power facilities, acquisition and disposal of assets and facilities,
operation and construction of plant facilities, recovery of purchased-power
costs, stranded costs, decommissioning costs, and present or prospective
wholesale and retail competition (including but not limited to retail
wheeling and transmission costs).

The business and profitability of NU and its subsidiaries are also
influenced by economic and geographic factors including political and
economic risks, changes in environmental and safety laws and policies,
weather conditions (including natural disasters), population growth rates and
demographic patterns, competition for retail and wholesale customers, pricing
and transportation of commodities, market demand for energy from plants or
facilities, changes in tax rates or policies or in rates of inflation,
changes in project costs, unanticipated changes in certain expenses and
capital expenditures, capital market conditions, competition for new energy
development opportunities, and legal and administrative proceedings (whether
civil or criminal) and settlements.

All such factors are difficult to predict, contain uncertainties which
may materially affect actual results and are beyond the control of NU or its
subsidiaries.

MERGERS AND ACQUISITIONS

CONSOLIDATED EDISON, INC. MERGER

Pursuant to an October 13, 1999 Agreement and Plan of Merger, as
restated and amended on January 11, 2000 (the "Merger Agreement"),
Consolidated Edison, Inc. ("Con Edison") and NU agreed to a merger pursuant
to which Con Edison and NU would become wholly owned subsidiaries of a new
entity ("New Con Edison") and NU shareholders would receive cash and New Con
Edison common stock in exchange for their NU shares. On March 5, 2001, Con
Edison advised NU that it was unwilling to close the merger on the terms set
forth in the Merger Agreement, and NU advised Con Edison that it would treat
Con Edison's refusal to proceed with the transaction as a repudiation and
breach of the Merger Agreement. Subsequently, NU and Con Edison each filed
a lawsuit in the United States District Court for the Southern District of
New York, alleging, among other things, breach of the Merger Agreement by the
other. The companies' claims against each other are pending, and NU regards
the proposed merger as effectively terminated. For further information on
the litigation relating to the proposed merger, see "Item 3. Legal
Proceedings."

COMPETITIVE BUSINESS ACQUISITIONS

As of December 31, 2000, NGS acquired substantially all of the assets of
E.S. Boulos Company, and its affiliates E.S. Boulos Electrical Co., Inc. and
E.S.B., Inc. (collectively "Boulos"), construction and maintenance companies
located in Westbrook, Maine, for approximately $10 million, subject to
adjustment. Boulos, the largest electrical contractor in Maine, specializes
in high voltage electrical construction and maintenance in Massachusetts, New
Hampshire and Maine.

On November 30, 2001, Select Energy completed the acquisition of Select
Energy New York, Inc. (formerly Niagara Mohawk Energy Marketing, Inc., or
SENY), the competitive energy marketing and services subsidiary of Niagara
Mohawk Holdings, Inc., for approximately $31.7 million. SENY, based in
Syracuse, New York, is engaged in the wholesale and retail sales of natural
gas and electricity in the Northeastern U.S. and Canada and is now a wholly-
owned subsidiary of Select Energy.

RATES AND ELECTRIC INDUSTRY RESTRUCTURING

GENERAL

NU's electric utility subsidiaries, CL&P, WMECO and PSNH, have undergone
fundamental changes in their business operations as a result of the
restructuring of the electric industry in their respective jurisdictions.
Most notably, CL&P and WMECO have divested their generation assets and will
act solely as transmission and distribution companies in the future, while
divestiture of PSNH's generation has been postponed until 2004. All
customers are now able to choose their energy suppliers, with the electric
utility companies furnishing "standard offer" or "transition" service to
those customers who do not choose a competitive supplier. Critical to this
restructuring is the companies' ability to recover their stranded costs.
Stranded costs are expenditures incurred, or commitments for future
expenditures made, on behalf of customers with the expectation such
expenditures would continue to be recoverable in the future through rates.

As discussed more fully below, CL&P and WMECO have recovered
substantially all of their prudently incurred stranded costs. Under an April
2000 settlement agreement among NU, PSNH and the State of New Hampshire
(Settlement Agreement), PSNH expects to recover all of its remaining stranded
costs.

Electric utility restructuring in Connecticut, New Hampshire and
Massachusetts provides for a transition period of several years following the
opening of each state's electric market to customer choice. During that
interim period, the energy delivery companies, including CL&P, WMECO and
PSNH, are responsible for arranging for the supply of power to customers who
do not select alternative energy suppliers. Management recognizes that in
other states electric companies have been negatively affected by the
inability to recover supply costs on a timely basis. However, the Company
believes that current statutes and regulatory policy in the three states in
which NU subsidiaries operate electric delivery businesses will permit timely
recovery.

CL&P has signed fixed-price contracts with three suppliers who together
will serve all of CL&P's standard offer requirements through 2003. One of
these suppliers is the Company's competitive marketing affiliate, Select
Energy, and the other two suppliers are unaffiliated with CL&P. CL&P is
fully recovering all of the payments it is making to those suppliers and has
financial guarantees from each supplier to shield CL&P from risk in the event
any of the suppliers encounters financial difficulties. See "Connecticut
Rates and Restructuring."

WMECO signed supply agreements with unaffiliated suppliers for standard
offer service in October 2001 for the 2002 calendar year. The DTE approved
the contracts and approved new rates which allow WMECO to recover fully its
standard offer supply costs. In addition, in Massachusetts there is a second
type of WMECO-supplied service called default service. WMECO has signed
supply agreements with unaffiliated suppliers for default service through
June 2002. The DTE approved the contracts and the rules which allow WMECO to
recover fully its default service supply costs.

Retail competition for all PSNH customers began on May 1, 2001. PSNH
provides transition service energy to its retail customers from its owned
generating plant and from purchase power obligations. See "New Hampshire
Rates and Restructuring."

CONNECTICUT RATES AND RESTRUCTURING

Since retail competition began in Connecticut in 2000, an extremely
small number of CL&P customers have opted to choose their retail supplier.
As of December 31, 2001, only 2,400-virtually all of them residential-of more
than 1.2 million CL&P customers were not procuring their electricity through
CL&P's standard offer. Through December 2003, 50 percent of CL&P's standard
offer supply requirements will be purchased from Select Energy, 45 percent
from NRG Energy, and 5 percent from Duke Power Marketing. On November 18,
2001, at the request of NRG Energy, CL&P filed a request with the DPUC to
raise the standard offer rate from an average of $0.0495 per kilowatt-hour to
$0.0595 per kilowatt-hour, which would help promote competition in advance of
the January 1, 2004 termination of the standard offer period. On December 5,
2001, the DPUC rejected CL&P's request, but subsequently opened two new
dockets to examine the provision of default service beginning on January 1,
2004 and the viability of the standard offer supply contracts. In the first
docket, on December 8, 2001 the DPUC conducted a joint hearing with the
Connecticut Office of Consumer Counsel (OCC) to consider issues related to
default service commencing on January 1, 2004. A decision in that docket was
issued on February 15, 2002 that discussed four options for providing default
service, the lack of retail competition and means of spurring competition.
In the second docket, the DPUC commenced hearings on February 19, 2002 to
consider issues related to the viability of the standard offer supply
contracts. A decision in that docket is pending.

In November 2000, the DPUC authorized CL&P to securitize approved
eligible stranded costs through the issuance of up to $1.55 billion of rate
reduction certificates (RRCs). In December 2000, the OCC appealed the DPUC's
decision to the Connecticut Superior Court. On March 2, 2001, CL&P and the
OCC entered into a settlement agreement that resolved all issues raised in
the OCC's appeal. The DPUC approved the settlement on March 12, 2001 and the
OCC withdrew its appeal. Approximately $1.44 billion of the RRCs were issued
at the end of the first quarter of 2001. Included in the securitized amounts
were $1.026 billion in buy down and buy out payments for contracts with 15
independent power producers (IPPs) and one wholesale contract. See
"Financing Program - 2001 Financings."

On March 31, 2001, CL&P, WMECO, PSNH and other selling joint owners
closed on the sale of Millstone 1, Millstone 2 and 94 percent of Millstone 3
to Dominion Nuclear Connecticut, Inc. (DNCI), an affiliate of Dominion
Resources, Inc. (Dominion), for $1.3 billion. See "Nuclear Generation."

On September 27, 2001, CL&P filed its application with the DPUC for
approval of the disposition of the proceeds from the sale of the Millstone
units to DNCI. This application described and requested DPUC approval for
CL&P's treatment of its share of the proceeds from the sale, including CL&P's
retention of approximately $75 million of capital additions at Millstone
during the approximately four years prior to sale. A decision from the DPUC
is expected in the first half of 2002.

On December 3, 2001, JP Morgan, on behalf of the DPUC and the NHPUC,
announced the commencement of an auction that will lead to the sale of the
Seabrook nuclear plant. Under Connecticut and New Hampshire restructuring
laws, each utility commission is charged with the responsibility for
conducting the auctions. Eighty-eight percent of the plant is being offered
for sale in the auction, including 100 percent of CL&P's and NAEC's shares in
Unit 1 and Unit 2. It is expected that a winning bidder will be selected in
the first half of 2002. Management expects that the sale of CL&P's and
NAEC's interests in Seabrook will occur by the end of 2002. The Vermont
Yankee nuclear unit is also being sold; see "Nuclear Generation - General"
for information on that sale.

CL&P was unable to negotiate buy down or buy out arrangements with 15
IPPs that produce approximately 345 MW. CL&P is selling the output from the
projects into the market and will, pursuant to DPUC authority, continue to
collect the difference between the contract prices and the market revenues as
stranded costs. These stranded costs cannot be securitized.

On December 1, 2000, the Attorney General of the State of Connecticut
(AG) and the OCC each filed a petition requesting that the DPUC initiate a
proceeding to consider whether an interim decrease in the rates charged by
CL&P is required. The applicable statute requires the DPUC to commence a
special public hearing on the need for an interim rate decrease when, among
other reasons, a public service company has for six consecutive months earned
a return on equity (ROE) that exceeds the return authorized by the DPUC by at
least one percentage point. The AG and the OCC petitions were filed after
CL&P reported ROEs of 13.12 percent for the second quarter of 2000 and 14.17
percent for the third quarter of 2001.

In June 2001, the DPUC concluded its investigation on potential
overearnings by CL&P and ordered a $21.1 million reduction in CL&P's electric
transmission and distribution rates and an equal increase in CL&P's
generation services charge. The DPUC also implemented an earnings sharing
mechanism under which earnings in excess of a 10.3 percent ROE will be shared
equally by shareholders and ratepayers. On September 28, 2001, the DPUC
ordered a $21.3 million annual reduction in CL&P's System Benefits Charge as
a result of a sharp reduction in decommissioning collections and an equal
increase in the competitive transition assessment, effective March 1, 2002.
Also, on July 26, 2001, the DPUC authorized CL&P to assess a charge of
approximately $0.002 per kilowatt-hour through December 2003 to collect
approximately $98.5 million of deferred fuel costs. The net result of the
decisions noted above will be to reduce CL&P's pretax earnings by $21.1
million beginning June 20, 2001, accelerate CL&P's recovery of stranded costs
in 2002 and 2003.

On December 18, 2001, the AG filed a new petition seeking an
investigation into CL&P's potential overearnings. On February 6, 2002, the
DPUC rejected the petition.

On July 24, 2001, Yankee Gas filed an application to increase customers'
rates by approximately $29.2 million, or an average of 7.64 percent. Yankee
Gas requested the increase to fund system reliability projects and a proposed
expansion of its distribution system. On January 30, 2002, the DPUC issued a
final decision in the case, ordering a $4.0 million reduction in Yankee Gas
rates, effective March 1, 2002. The DPUC authorized an 11 percent return on
equity for Yankee Gas and a sharing formula for earnings above that level
from 2002 through 2005. The DPUC also approved an infrastructure recovery
mechanism which will allow Yankee Gas the opportunity to recover the carrying
costs of its planned distribution system expansion on an annual basis. The
OCC and the AG have requested a reconsideration of the DPUC decision. On
March 5, 2002, the DPUC issued a draft decision reopening the docket to
review the bill credit calculation that is required to implement the rate
reduction and to clarify the rate treatment for system expansion projects
that fail to meet the profitability standards established by the DPUC. It is
now expected that the rate decrease will become effective on April 1, 2002.
On March 14, 2002, the OCC appealed the January 30, 2002 decision.

MASSACHUSETTS RATES AND RESTRUCTURING

Massachusetts enacted comprehensive electric utility industry
restructuring in November 1997. That legislation required each electric
company to submit a restructuring plan and to reduce its rates by 15 percent
adjusted for inflation by September 1999. The 15 percent rate reduction is a
rate cap for standard offer service customers that extends until February
2005, the end of the restructuring transition period. WMECO filed, and in
1999 the DTE approved, WMECO's restructuring plan. The plan allows WMECO's
customers to choose their energy suppliers and allows WMECO to recover
generation-related stranded costs. Two parties have appealed the DTE's
decision on WMECO's restructuring plan to the Massachusetts Supreme Judicial
Court. One appeal has been dismissed without prejudice by the Supreme
Judicial Court because the appellant has failed to prosecute the appeal.
There has been no significant action in the other appeal since it was filed
in December 1999.

In addition, the DTE-approved plan requires WMECO to procure
competitively priced standard offer service and default service. These
services provide power to customers that decline to purchase energy from a
competitive supplier. For 2001, standard offer service was procured at a
composite rate of 7.383 cents per kilowatt-hour (kWh), including congestion
costs. Default service was procured for 2001 at a somewhat higher rate.
WMECO signed a new one-year standard offer supply agreement with unaffiliated
suppliers in October 2001 for the 2002 calendar year at a rate of $0.04829
cents per kilowatt-hour. The DTE approved the contracts and approved new
rates which allow WMECO to fully recover its standard offer supply costs.

On December 29, 2001, the DTE approved a 14 percent reduction in WMECO's
overall bills, primarily reflecting a reduction in WMECO's standard offer
supply costs from 2001 to 2002 to $0.04829 per kilowatt-hour. Additionally,
supply costs for the approximately 30 percent of WMECO customers taking
default service declined to an average rate of $0.0757 per kilowatt-hour in
the first half of 2002 from $0.0853 in the second half of 2001. The
significant reduction in supply costs in 2002 will result in a material
reduction in WMECO revenue and purchased power costs in 2002, but should not
have a meaningful impact on financial performance since electric supply costs
are passed through to customers.

On February 7, 2001, the DTE approved the securitization of $155 million
of stranded costs and issued the required financing order. In March 2001,
WMECO received the approvals of two Massachusetts state agencies directed by
statute to oversee the bond issuance. The stranded costs to be securitized
include the unrecovered plant balances of Millstone 2 and 3 and the buydown
and buyout payments of two IPP contracts. On May 17, 2001, WMECO Funding LLC
(WMECO Funding), a subsidiary of WMECO, sold $155 million of notes to
Massachusetts RRB Special Purpose Trust WMECO-1, a special purpose trust.
The trust in turn sold, through underwriters, $155 million of rate reduction
certificates to the public. The notes were issued in a single class. WMECO
Funding applied the proceeds from the sale of the notes to the purchase of
certain transition property from WMECO. The certificates were issued in a
single class with a maturity and other terms identical to the notes. See
"Financing Program - 2001 Financings."

WMECO is in the process of finalizing its 2001 annual transition cost
reconciliation which is expected to be filed with the DTE on or about March
29, 2002. This filing reconciles the recovery of stranded generation costs
for calendar year 2001. Also included in this filing will be the sales
proceeds from WMECO's portion of Millstone, the impact of securitization and
an approximate $13 million benefit to ratepayers from WMECO's nuclear
performance-based ratemaking process. The inclusion of these items as part
of the reconciliation filing allows WMECO to accelerate the recovery of total
stranded generation assets. Management anticipates a formal hearing in 2002
regarding this filing after a period of discovery by the DTE and other
intervenors.

NEW HAMPSHIRE RATES AND RESTRUCTURING

On May 1, 2001, PSNH became the last of NU's three electric operating
subsidiaries to implement industry restructuring. On that date, the
Settlement Agreement was implemented and all of PSNH's approximately 440,000
retail electric customers were allowed to begin choosing their electric
suppliers. They also received an overall reduction of more than 10 percent
in their bills, in addition to the five percent reduction they received on
October 1, 2000. The implementation of restructuring followed a ruling by
the New Hampshire Supreme Court in January 2001 upholding the NHPUC's final
restructuring order and the sale of $525 million of PSNH rate reduction bonds
on April 25, 2001. In June 2001, the U.S. Supreme Court refused to hear an
appeal of the New Hampshire Supreme Court's decision.

The stranded cost recovery charge (SCRC) varies by customer class.
Under the terms of the Settlement Agreement, the SCRC cannot exceed an
average rate of 3.4 cents per kilowatt-hour. This charge recovers principal
and interest on rate reduction bonds, nuclear decommissioning costs, mandated
payments to small power producers and so-called Part 3 stranded costs. PSNH
had approximately $432.5 million of Part 3 stranded costs as of December 31,
2001, down from $464.8 million when competition began on May 1, 2001. Part 3
stranded costs consist primarily of costs deferred under PSNH's fuel and
purchased power adjustment clause (FPPAC), deferred independent power
producer (IPP) costs, acquisition premium, future contract obligations to the
four regional Yankee nuclear companies, and a portion of the over-market
value of Millstone 3.

On May 22, 2001, the state's 1996 and 2000 electric industry
restructuring laws were modified to forbid PSNH from selling its fossil and
hydro plants until at least 33 months after restructuring takes effect, or
February 1, 2004. The revisions also fixed the charges retail customers will
pay PSNH for electric energy supply, or transition service. If PSNH's costs
to serve its load are not fully collected through rates, costs will be
deferred and recovered, subject to NHPUC prudence review, as Part 3 stranded
costs.

PSNH and NAEC have entered into two contracts under which PSNH is
obligated to purchase NAEC's 35.98 percent ownership of the capacity and
output of Seabrook (Seabrook Power Contracts). The 2001 amended
restructuring bill requires the NHPUC to complete the sale of NAEC's share of
Seabrook in an expeditious manner. The sale is expected to be consummated in
late 2002. NAEC's proceeds will be used to repay all $90 million of NAEC's
outstanding debt and return all of NAEC's equity, which totaled $35 million
as of December 31, 2001, to NU. The sale of NAEC's share of Seabrook will
terminate the Seabrook Power Contracts, and any net proceeds from the sale
will be used to reduce PSNH's stranded costs. See "Connecticut Rates and
Restructuring" for information on the sale of Seabrook.

On April 19, 2000, when the NHPUC approved the Settlement Agreement, it
found the FPPAC treatment proposed in the settlement to be reasonable with
recovery of the outstanding FPPAC deferral to be allowed through Part 3
stranded costs. On July 27, 2001, PSNH filed testimony and exhibits
substantiating its claim to recover all of its FPPAC costs (approximately
$209 million) from August 2, 1999 through April 30, 2001 when the FPPAC was
terminated pursuant to the Settlement Agreement. The extension of the
Seabrook refueling outage and the repairs being made to Newington Station
contributed to an increase in the FPPAC underrecovery. Hearings at the NHPUC
have not been scheduled but are expected to be held during the spring of
2002. PSNH believes it will fully recover these costs.

On May 31, 2000, the New Hampshire Legislature passed Senate Bill 472
which permits the issuance of up to $130 million in rate reduction bonds to
finance the buy down or buy out of certain rate orders with six wood-fired
small power producers and one waste-to-energy plant. Renegotiation of these
NHPUC rate orders would permit PSNH to retain up to 20 percent of the savings
generated. House Bill 489, signed into law on May 22, 2001, provides that
PSNH will be entitled to retain a fixed 20 percent of any savings obtained
from renegotiated power purchase obligations. The bill became effective upon
the Governor's signature on May 22, 2001.

On April 19, 2001, PSNH made filings with the NHPUC concerning
agreements that would reduce the costs of purchases from three of the six
wood-fired plants. The NHPUC approved two of the proffered agreements and
PSNH subsequently closed those transactions. One of the transactions was
financed through the issuance of $50 million in additional rate reduction
bonds on January 30, 2002. The third restructured arrangement will not go
forward as currently structured and PSNH has requested that the related NHPUC
docket be closed.

COMPETITIVE SYSTEM BUSINESSES

NU is engaged in a variety of competitive businesses. They are grouped
essentially into two separate and distinct business activities: the
competitive energy business and the telecommunications business. Select
Energy is the lead competitive energy business within NU. Select Energy is an
integrated energy business that buys, sells, markets and trades electricity,
gas and oil and energy-related products and services. Under the umbrella of
the Select Energy brand, Select Energy, collectively with its affiliated
competitive energy businesses, provides a wide range of energy products and
energy services. These affiliated competitive energy companies include SESI,
NGC, HWP, NGS, SENY and Select Energy Portland Pipeline, Inc. (SEPPI) and
their subsidiaries. With the exception of SESI, the competitive businesses
operate primarily in the Northeast region of the United States.
Collectively, the competitive businesses generated over $3 billion in revenue
during 2001.

NGC is the competitive generating subsidiary of NU and a major provider
of pumped storage and conventional hydroelectric power in the northeastern
United States. NGC owns and operates a portfolio of approximately 1,289
megawatts of generating assets in New England. The generation facilities
owned by NGC were acquired at auction from CL&P and WMECO. NGC's portfolio
consists of seven hydro facilities along the Housatonic River System (123
MW), the three facilities comprising the Eastern Connecticut System,
including one gas turbine (27 MW), all located in Connecticut, and the
Northfield Mountain pumped storage station (1,080 MW) and the Cabot and
Turners Fall No. 1 hydroelectric stations (59 MW) located in Massachusetts.
NGC sells all its generation output to Select Energy, which in turn markets
it to customers. Select Energy's payments to NGC are guaranteed by NU.

NU's vision is to continue to strengthen its position as one of the
major energy providers in the northeastern United States. The deregulated
energy business is a core focus of NU. NGC performs functions that are
critical to NU's strategy on both the wholesale and retail levels by
providing access to electric generation within the NU system and thus
limiting the exposure of Select Energy to the risk of energy price
fluctuations.

ENERGY-RELATED PRODUCTS AND SERVICES AND GAS INVESTMENTS

Select Energy sells multiple energy products including electricity,
natural gas and oil to wholesale and retail customers in the northeastern
United States. Select Energy procures and delivers energy and capacity
required to serve its electric, gas and oil customers. Select Energy is the
largest wholesale and retail electric energy marketer in New England as
measured by MW load. In order to support and complement its growing
wholesale and retail business, Select Energy contracted in December of 1999
with NGC to purchase and market all of NGC's 1,289 MWs for a 6-year period.
In addition, during 2001 Select Energy purchased approximately 190 MW of coal
and hydroelectric generating output from its affiliate, Holyoke Water Power
Company (HWP), and more than 3,500 MW of electrical supply from various New
England generating facilities on a long-term basis. Select Energy also
utilizes generation failure insurance, options and energy futures to hedge
its supply requirements. Moreover, Select Energy markets natural gas and
develops and markets energy-related products and services. It offers energy
management consulting and construction services through its affiliate, SESI,
discussed more fully below. Select Energy and its integrated competitive
energy business affiliates had aggregate revenues of approximately $3 billion
in 2001 as compared to approximately $1.9 billion in 2000 and contributed $5
million to consolidated earnings before extraordinary items in 2001, as
compared to earnings of approximately $13.6 million in 2000.

Select Energy is licensed to provide retail electric supply in
Connecticut, Delaware, Maryland, New Jersey, Maine, Pennsylvania, Virginia,
New York, Massachusetts, Rhode Island, and New Hampshire. Within these
states, Select Energy is currently registered with approximately 36 electric
distribution companies and 55 gas distribution companies to provide retail
services.

Select Energy's goal is to be the regional leader in providing electric
service to those Northeast markets opened to retail competition. In 2001,
Select Energy supplied more than 5,000 MWs of standard offer and default
service load, making it the largest provider of standard offer service in the
Northeast. Revenues from these services comprise in the aggregate
approximately 93 percent of Select Energy's 2001 revenues.

Select Energy's retail business has contracted with approximately 14,000
electric, gas and energy-related products and service customers within the
Northeastern region, most of which are medium and large industrial,
commercial and governmental customers.

On January 1, 2000, Select Energy began serving one half of CL&P's
standard offer load for a four-year period at fixed prices. This equates to
approximately 2,000 MW annually for each of the four contract years.
Approximately 22 percent of Select Energy's 2001 competitive energy revenues
came from CL&P's supply contract. Select Energy has entered into purchase
contracts with other energy providers to supply or hedge essentially all of
the standard offer requirement, including its contracts with NGC, the
purchase of 850 MW of output from the Millstone and Seabrook nuclear units
through 2001 and other resources in the energy marketplace. The nuclear
contracts that expired in 2001 have been replaced with other energy supply
contracts that place Select Energy in a stronger position since they are not
tied to specific generation units. Select Energy's profits from its
wholesale electric sales in 2001 were reduced due to CL&P's supply contract.

During 2000 and 2001, the energy markets were very volatile. This
period was marked by extremely high energy prices beginning by the end of the
first quarter of 2001 and continuing into the latter part of the year. To
reduce risk, Select Energy has already procured almost 100 percent of the
projected on-peak and the vast majority of the off-peak electricity
requirements to serve the CL&P standard offer service load. In addition,
management continues to work with state regulators to increase CL&P's
standard offer service price to make it more competitive with alternative
energy suppliers. If such relief is not granted, this contract may adversely
affect Select Energy's earnings in 2002 and 2003. See "Rates and Electric
Industry Restructuring - Connecticut Rates and Restructuring."

Select Energy has also entered into contracts with various retail
customers to provide energy services at fixed rates. Under these retail
contracts, Select Energy has the option to have the host utility provide
energy services and is obligated to compensate the customer as defined in the
contracts for differences (CFD Payments) to the extent the host utility's
rates exceed the contracted rates. For the 12 months ended December 31,
2001, the CFD Payment obligations for 2001 totaled approximately $30 million.
As the energy market prices decreased from the end of the first quarter of
2001 through the end of 2001, Select Energy re-established and re-enrolled
many of the CFD customers, as provided for under the contracts, and secured
the associated supply at reasonable prices, thereby mitigating the effects of
many of the future CFD Payments. Policies and procedures have been
established to manage these exposures, including the use of risk management
instruments.

In addition, beginning in January 2000, Select Energy assumed
responsibility for serving approximately 500 MW of fixed price market-based
wholesale contracts throughout New England with electric energy supply that
was previously provided by CL&P and WMECO.

In addition to the CFD contracts, as of December 31, 2001, Select Energy
had contracts with high volume retail electric customers in states throughout
the Northeast with primarily one-year terms. These contracts represent
approximately 325 MW of load at about 9,000 service locations and include
predominantly commercial, institutional, industrial and governmental
accounts. This retail load establishes Select Energy among the largest
competitive retail suppliers in New England as measured by MW load. No
single retail customer accounts for more than ten percent of Select Energy's
expected retail revenues.

The energy marketing business is intensely competitive. There are many
large energy companies bidding for business in the increasingly restructured
New England market. In 2000 and early 2001, the sharp increases in the cost
of power supply caused by the extreme increases in oil and gas fuel costs,
among other things, during the early part of the year provided significant
challenges for Select Energy. However, as energy prices began to decrease at
the end of the first quarter of 2001, Select Energy was presented with some
offsetting opportunities. In 2001, Select Energy increased its revenue by
about 55 percent over the 2000 revenue level, reporting $2.8 billion in 2001
as compared with $1.8 billion in 2000 due to the renewal of existing
contracts and the addition of new customers.

Disputes with respect to interpretation and implementation of the New
England Power Pool (NEPOOL) market rules have arisen with respect to various
competitive product markets. In certain cases, Select Energy and the NU
operating companies stand to gain if such disputes can be favorably resolved.
In other cases, Select Energy and the NU operating companies could incur
additional costs as a result of resolution of the disputes. These disputes
are in various stages of resolution through regulatory and judicial review.
It is too early to ascertain the level of potential gain or loss that may
result upon resolution of these issues. For further information on these
disputes, see "Item 3. Legal Proceedings."

During 2001, Select Energy's competitive natural gas business (wholesale
and retail) produced revenues of approximately $200 million, a decrease from
2000 revenues of approximately $221 million. This decrease was due to
changes in gas prices and decreased volume. As of December 31, 2001, Select
Energy had contracts with approximately 5,300 retail gas customers, primarily
located in Connecticut, Massachusetts and Pennsylvania. These contracts
generally have one-year terms and include primarily commercial,
institutional, industrial and governmental accounts. No single retail gas
customer accounts for more than five percent of Select Energy's expected
retail gas revenues. In 2001, Select Energy's retail gas revenues were
approximately $152 million representing approximately a 124 percent increase
compared to 2000.

During 2001, Select Energy increased its energy commodity trading
abilities. In order to better serve and supply the Northeast energy markets,
Select Energy expanded its business lines to include wholesale, retail,
energy products and services and trading. Additional experienced energy
traders were added and a reorganization of reporting, policy and procedure
development and oversight was implemented. While trading of energy
commodities entails significant risk, it is an essential and integral part of
being a major energy provider. The trading segment of the business can buy,
sell, hold or trade any energy futures, options, third party or counter-party
positions for energy commodities. The energy trading business also includes
entering into associated risk management products, including derivatives, as
part of managing the exposure and risk of energy commodity trading.

NU provides credit assurance in the form of guarantees and letters of
credit for the financial performance obligations of certain of its
competitive energy subsidiaries, including Select Energy. NU currently has
authorization from the SEC to provide up to $500 million of guarantees, and
has applied for authority to increase this amount to $750 million. As of
December 31, 2001, NU had provided approximately $268.2 million of such
guarantees and $45 million of letters of credit. In addition, NU's
"aggregate investment" in Select Energy and its other energy service
companies (but not including NGC, HWP or SESI) (which is inclusive of most
such credit assurances) is limited by SEC rule to 15 percent of NU's most
recent quarterly consolidated capitalization. In light of the increasing
size of the energy marketing and trading businesses, NU has applied for
authority to exempt Select Energy and SENY from this limitation.

ELECTRIC GENERATION AND SERVICES

NGC, NU's competitive business affiliate formed in 1999 to acquire
generation facilities, currently sells all of its energy and capacity to its
affiliate, Select Energy. Select Energy's performance under its contract
with NGC is guaranteed by NU. In March 2000, NGC acquired 1,289 MW of
hydroelectric and pumped storage generating assets in Connecticut and
Massachusetts from CL&P and WMECO.

NGC's contract with Select Energy extends through December 2005. About
85 percent of NGC's revenues from this contract (including all of the
revenues from Northfield Mountain) are in the form of predetermined, fixed
monthly payments based on the capacity of specified facilities. The
remaining 15 percent of the revenues are in the form of monthly payments at
predetermined rates per unit of actual energy output. NGC currently derives
approximately 80 percent to 85 percent of its revenues from Northfield
Mountain.

NGC plans to renew the agreement with Select Energy after 2005. If
NGC's agreement with Select Energy were to terminate, however, NGC's plan
would be to aggressively market its power at times of peak usage and maximize
revenues from the quick-start and reserve capabilities of its pumped storage
facilities. NGC plans to pursue growth opportunities in the northeastern
United States through acquisition of existing power plants and the
development of new plants; however, its ability to do so is limited by
capital and regulatory constraints.

HWP is another part of the competitive energy businesses. Select Energy
buys and manages the entire generation output from HWP. This generation
consisted of about 190 MW until December 13, 2001, when HWP sold 43.6 MW of
its hydroelectric generation and its retail electric distribution business to
the City of Holyoke's Gas and Electric Department for approximately $17.5
million. HWP is selling all of its capacity and output to Select Energy
through December 2002, with annual or longer contract renewals available
thereafter.

NGS was formed in 1999 to provide a full range of integrated energy-
related services to owners of generation facilities and the industrial market
in the Northeast. NGS designs, builds, manages, operates, maintains and
supports electric power generating equipment, facilities and associated
transmission and distribution equipment and provides turnkey management and
operation services to owners of electric generation facilities. NGC and HWP
have contracted with NGS to operate and maintain all of their generating
plants.

Through its wholly-owned subsidiary, Boulos, NGS provides electrical
construction and contracting services. These services focus on high and
medium voltage installations and upgrades and substation and switchyard
construction.

NGS's industrial services include maintenance, permitting, environmental
and specialized electrical testing services. NGS also provides consulting
services to these customers, including engineering and design, construction
management, asset development, due diligence reviews and environmental
regulatory compliance and permitting services.

During 2001, NGS's revenues were approximately $112 million and are
forecast to grow by approximately 10 percent in 2002. This anticipated
growth is expected to be driven by NGS's increased geographical scope, an
acquisition and additional contracts with both new and repeat customers.

ENERGY MANAGEMENT SERVICES

As part of the Select Energy portfolio of products and services, SESI
markets energy efficiency and design solutions to customers. In general,
SESI contracts to reduce its customers' energy costs, improve the efficiency
and reliability of their energy-consuming equipment, and conserve energy and
other resources. SESI's engineering, construction management and financing
assistance services have been directed primarily to governmental and
institutional markets and utilities in the eastern United States. SESI's
subsidiary, Select Energy Contracting, Inc. (SECI), provides service
contracts and mechanical and electrical contracting, primarily directed to
energy systems in commercial markets.

In competitive procurements by the U.S. Departments of Defense and
Energy and the General Services Administration, SESI has been selected as an
"Energy Saving Performance Contractor" (ESPC) for all fifty states and
overseas facilities. During 2000 and 2001, SESI became one of the major
providers of design, construction, financing and long-term operation and
maintenance of energy-efficient and environmentally clean systems to replace
older infrastructure. SESI has recently installed the largest fuel cell-
based energy plant in the United States (at a state school in Connecticut)
and is building the new stand-alone energy plant at Bradley International
Airport in Connecticut. These plants provide electricity, heat and cooling.
SESI is under contract to operate and maintain the plants for at least 20
years. In 2001, federal ESPC work constituted ten percent of SESI's
revenues, which were approximately $102 million (an increase of 22 percent
over 2000).

GAS INVESTMENTS

SEPPI was formed in March 1999 to hold a five percent partnership
interest in the Portland Natural Gas Transmission System (PNGTS). Effective
June 28, 2001, SEPPI sold its five percent interest to three of the current
partners of PNGTS for aggregate consideration of $3.27 million.

TELECOMMUNICATIONS

Mode 1 was established in 1996 to participate in a wide range of
telecommunications activities both within and outside New England. Mode 1 is
a licensed competitive local exchange carrier authorized to provide local
phone service within the state of Connecticut. Mode 1 provides
telecommunication network services at the retail and wholesale levels,
primarily dark fiber. It has built high speed fiberoptic connectivity to
secondary and tertiary markets within cities such as Hartford and serves the
City of Hartford's schools and libraries with an optical network.

NU has invested approximately $21 million in Mode 1 since it was
established, which investment was principally used to fund Mode 1's
investment in NEON Communications, Inc., a wholesale telecommunication
infrastructure provider of dark and light fiber-optic services along the
Atlantic seaboard (NEON). Mode 1 is the largest equity investor in NEON and
currently owns approximately 19.3 percent of the common shares of NEON.

On June 15, 2001, NEON and Mode 1 entered into a purchase agreement
pursuant to which Mode 1 purchased from NEON an 18 percent subordinated
convertible note due 2008 in the principal amount of $15 million (Note).
Mode 1 may convert the Note at any time into common stock of NEON at a
conversion price of $6 per share, or 2.5 million shares, subject to certain
anti-dilution provisions. The interest payments under the Note may be paid
in cash, shares of common stock or additional 18 percent subordinated
convertible notes, at the option of NEON. To date, NEON has failed to make
any scheduled interest payments on the Note. NEON has announced that as a
result of its evaluation of strategic alternatives, discussions concerning a
restructuring of its outstanding debt are underway.

NEON is constructing a fiber optic communications network through New
England, New York, Philadelphia and Washington, D.C., utilizing a portion of
the NU system companies' transmission and distribution facilities. An
officer and trustee of NU and an officer of NUSCO are members of the Board of
Directors of NEON. In addition, NU is a party to an agreement with Central
Maine Power Company (CMP), an owner of approximately 19.2 percent of NEON's
common shares, fully diluted, wherein NU and CMP each agree that, as long as
NU owns at least 10 percent of the outstanding common stock of NEON, fully
diluted, and the cumulative holdings of NU and CMP are at least 33 1/3
percent, fully diluted, neither NU nor CMP will take action without the other
which will allow NEON to merge, consolidate, liquidate or sell, lease or
transfer substantially all of its assets or commence or acquiesce to any
action or proceeding under any bankruptcy laws.

In September 2000, Consolidated Edison Communications, Inc. (CECI), a
subsidiary of Con Edison, and another, unaffiliated company, Exelon Ventures
(Exelon), acquired 10.75 and 9.25 percent, respectively, of NEON's common
shares in exchange for contributions to NEON by each company of
telecommunications assets in kind and cash. Mode 1 is party to two
reciprocal agreements which commit it to vote for CMP's, CECI's and Exelon's
nominees for director of NEON and such companies agree to support Mode 1's
nominees. Under these arrangements, Mode 1 can presently designate two
directors and CMP, CECI and Exelon can designate two, one and one
director(s), respectively.

FINANCING PROGRAM

2001 FINANCINGS

On February 28, 2001, NU issued $263 million of floating rate senior
notes, which replaced a $263 million term-loan credit facility which was used
to finance the Yankee acquisition. The senior notes bear an effective
interest cost of 3.48 percent at December 31, 2001 and mature in February
2003.

On March 30, 2001, CL&P completed the sale of $1.44 billion of RRCs
under a November 2000 DPUC ruling approving the securitization of up to $1.55
billion of CL&P's stranded costs (including costs associated with generation
assets, purchase power agreement buy outs/buy downs and nuclear generation
assets). The average cost of the RRCs, which were issued in several series
that vary in maturity from approximately two to ten years, is 5.95 percent.
Proceeds from this issue were used to buy out and buy down purchase power
agreements, retire debt and cover transaction costs.

On April 25, 2001, PSNH completed the sale of $525 million of rate
reduction bonds (RRBs), subsequent to a NHPUC ruling approving the
securitization of up to $670 million of PSNH's stranded costs. The average
cost of the bonds, which were issued in several series that vary in maturity
from approximately two to twelve years, is 5.9 percent. Proceeds from this
issue were used to buy down the Seabrook Power Contracts, retire preferred
stock, return capital to NU and cover fees and interest and other reserves.

On May 17, 2001, WMECO completed the sale of $155 million of RRCs,
subsequent to a DTE ruling approving the securitization of up to $155 million
of WMECO's stranded costs. The cost of the RRCs, which are expected to
mature in twelve years, is 6.53 percent. The proceeds from this issue were
primarily used to reduce WMECO's capitalization and to buy down and buy out
two purchase power contracts.

All RRBs and RRCs are payable solely from collections from customers of
PSNH, CL&P and WMECO, respectively, and are non-recourse to the companies.

On July 11, 2001, CL&P renewed its accounts receivable securitization
credit line and extended its termination date to July 10, 2002. In addition,
the credit line capacity was reduced from $200 million to $100 million to
better reflect CL&P's short-term borrowing requirements.

On October 10, 2001, CL&P entered into a replacement standby bond
purchase agreement supporting the Series 1996A pollution control bonds. The
$62.9 million, 364-day agreement replaces a similar agreement and expires on
October 22, 2002. The original transaction was approved by the DPUC in 1997.

On October 18, 2001, NGC sold $440 million of senior secured bonds and
used the proceeds primarily to repay $346.5 million of bank debt and to
return $75 million of equity to NU. The bonds were issued in two series:
$120 million of Series A amortizing bonds with an average life of 2.4 years,
a coupon of 4.998 percent and a final maturity of October 15, 2005; and $320
million of Series B amortizing bonds with an average life of 18.9 years, a
coupon of 8.812 percent and a final maturity of October 15, 2026.

On November 9, 2001, NAEC entered into an unsecured $90 million, 364-day
credit facility. The new facility provided for a one-time draw at closing of
$90 million, which replaced a $200 million unsecured 364-day facility that
expired on November 9, 2001 (the original facility had an outstanding balance
of $90 million). The new facility has a provision that will require the
company to pay down 100 percent of the remaining balance within two days of
the sale of the Seabrook nuclear power plant. The expiration date for this
facility is November 8, 2002.

On November 16, 2001, CL&P, WMECO, PSNH and Yankee Gas entered into a
new unsecured 364-day revolving credit facility for $350 million, replacing a
$250 million facility for CL&P and WMECO and a $60 million facility for
Yankee Gas. CL&P may draw up to $150 million, and WMECO, PSNH and Yankee Gas
may draw up to $100 million each, subject to the $350 million maximum for the
entire facility. Unless extended, the credit facility will expire on
November 15, 2002.

Also on November 16, 2001, NU entered into a new unsecured 364-day
revolving credit facility for $300 million, replacing a similar $400 million
facility that expired on November 16, 2001. The facility supports the
working capital needs of NU and its unregulated subsidiaries. The new
facility provides a total commitment of $300 million which is available
subject to two over-lapping sub-limits. First, subject to the notional
amount of any letters of credit outstanding, amounts up to $300 million are
available for advances. Second, subject to the advances outstanding, letters
of credit may be issued in notional amounts up to $200 million. The
agreement provides for letters of credit to be issued in the name of NU or
any of its subsidiaries. Unless extended, the credit facility will expire on
November 15, 2002.

On December 19, 2001, PSNH issued $287.5 million of tax-exempt bonds.
The new issuance consists of three series: the 2001 Tax-Exempt Series A and
2001 Tax-Exempt Series B Auction Rate Pollution Control Revenue Bonds (PCRBs)
and the 2001 Tax-Exempt Series C 5.45 percent Fixed Rate PCRBs. The proceeds
of this issuance were used to retire the 1991 Tax Exempt Series A, Series B
and Series C PCRBs, which were used to finance PSNH's share of costs relating
to the construction of certain pollution control, sewage and solid waste
disposal facilities. The variable interest rate for both the Series A and B
bonds was 1.55 percent as of December 31, 2001.

In 2001, NU retired $1.3 billion of debt and preferred stock with the
RRB and RRC issuance proceeds and the proceeds from the sale of the Millstone
power plant.

NU paid common dividends totaling $60.9 million in 2001, compared to
$57.4 million paid in 2000. The increase was a result of NU paying a $0.45
per share quarterly common dividend for 2001, as compared to payment of a
$0.40 per share dividend in 2000.

Total NU system debt, including short-term and capitalized lease
obligations, was $2.7 billion as of December 31, 2001, compared with $3.8
billion as of December 31, 2000. The decrease was primarily due to the
retirement of debt with proceeds from the issuances of RRBs and RRCs as well
as from the sale of the Millstone power plant. For more information
regarding NU system financing, see "Notes to Consolidated Statements of
Capitalization" in NU's financial statements, other footnotes related to long-
term debt, short-term debt and the sale of accounts receivables, as
applicable, in the notes to NU's, CL&P's, PSNH's, WMECO's, and NGC's
financial statements and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

2002 FINANCING REQUIREMENTS

The NU system's aggregate capital requirements for 2002 are
approximately as follows:

CL&P PSNH WMECO NAEC Yankee Other NU
Gas System
(Millions)
Construction $244 $110 $25 $ 5 $103 $106 $593
Nuclear Fuel 0 0 0 8 0 0 8
Maturities 0 0 0 0 0 0 0
Cash Sinking
Funds* 0 0 0 0 1 50 51
---- ---- --- --- ---- ---- ----
Total $244 $110 $25 $13 $104 $156 $652
==== ==== === === ==== ==== ====

*CL&P, WMECO and PSNH have sinking funds associated with RRCs and RRBs that
are not included in the capital requirements subtotal. All interest and
principal payments for these bonds are collected through a non-bypassable
charge assessed to customers and do not represent additional capital
requirements.

For further information on the NU system's 2002 financing requirements,
see "Notes to Consolidated Statements of Capitalization" in NU's financial
statements, "Long-Term Debt" in the notes to CL&P's, PSNH's, WMECO's and
NGC's financial statements and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."

2002 FINANCING PLANS

On January 30, 2002, PSNH sold $50 million of RRBs, the proceeds of
which were used to pay the costs associated with the buy out of high-cost
power contracts with wood-fired generating plants. The bonds are scheduled
to mature in 2008.

In April 2002, NU expects to issue $263 million in long-term debt to
replace its $263 million senior two-year note, which matures in 2003. NU has
also filed an application with the SEC seeking authorization to issue up to
$600 million of long-term debt through the period ending June 30, 2005,
including the $263 million proposed issuance of notes.

Yankee Gas is considering a number of capital projects including
construction of a liquefied natural gas storage terminal in Waterbury,
Connecticut that could cost in excess of $50 million. Yankee Gas may issue
up to $100 million of long-term debt in 2002 to finance its capital needs and
may require additional debt issuances in later years, depending on the extent
of its capital program. See "Financing Program - Construction and Capital
Improvement Program."

CL&P has announced plans for the construction of various transmission
facilities. The projects require numerous federal and state regulatory
approvals. If approved, construction of these facilities would require
external financing. See "Financing Program - Construction and Capital
Improvement Program."

FINANCING LIMITATIONS

Many of the NU system companies' charters and borrowing facilities
contain financial limitations that must be satisfied before borrowings can be
made and for outstanding borrowings to remain outstanding.

Under their current revolving credit facility agreement, CL&P, WMECO,
PSNH, and Yankee Gas are allowed to maintain a ratio of debt to total
capitalization (leverage ratio) of no more than 65 percent. At December 31,
2001, CL&P's, WMECO's, PSNH's, and Yankee Gas's leverage ratios were 49
percent, 43 percent, 59 percent and 29 percent, respectively. This agreement
also requires the companies to maintain 12-month earnings before interest and
taxes to interest expense ratio (interest coverage ratio) of at least 2.25 to
1.0. At December 31, 2001, CL&P's, WMECO's, PSNH's and Yankee Gas' interest
coverage ratios were 4.22 to 1, 3.38 to 1, 4.98 to 1 and 3.88 to 1,
respectively. The ratios do not include rate reduction bonds.

NU is allowed, under its revolving short-term credit agreement facility,
to maintain a debt to total capitalization (leverage ratio) of no more than
66 percent. At December 31, 2001, NU's leverage ratio was 58 percent. In
addition, NU is required to maintain a 12-month consolidated interest
coverage ratio of at least 2.25 to 1.0. At December 31, 2001, NU's
consolidated interest coverage ratio was 3.08 to 1.0. The ratios do not
include RRBs and RRCs.

NAEC is party to a 364-day term credit agreement which provides that
outstanding advances on the credit thereunder can be terminated or
accelerated if NAEC does not maintain specified minimum ratios of common
equity to capitalization (as defined in the agreement). For NAEC, the
minimum common equity ratio under its term loan credit agreement is 25
percent; at December 31, 2001, NAEC's common equity ratio was 27.9 percent.
The agreement also requires a 12-month adjusted net income to interest
expense ratio (interest coverage ratio) of not less than 1.50 to 1.00. At
December 31, 2001, the ratio for NAEC was 3.20 to 1.00. The credit agreement
also provides for mandatory prepayment of 100 percent of the aggregate
principal amount of advances outstanding within two days of the sale of the
Seabrook nuclear facility. The 364-day term credit agreement also limits
NAEC's other unsecured debt to $60 million. NAEC had no such debt
outstanding at December 31, 2001.

The amount of short-term debt that may be incurred by NU, CL&P, PSNH,
WMECO, NAEC, Northeast Nuclear Energy Company (NNECO), Yankee and Yankee Gas
is also subject to periodic approval by the SEC under the 1935 Act. PSNH's
and NAEC's short-term debt in excess of 10 percent of net fixed plant is also
regulated by the NHPUC. The following table shows the amount of short-term
borrowings authorized by the SEC or the NHPUC for each company, as the case
may be, as of December 31, 2001, and the amounts of outstanding short-term
debt of those companies at the end of 2001 and as of March 1, 2002:

Maximum Authorized Outstanding
Short-Term Debt Short-Term Debt (1)

December 31, 2001 March 1, 2002
(Millions)
NU $400 $ 40.0 $ 60.0
CL&P 375 0 0
PSNH (2) 225 83.5 11.2
WMECO 250 59.2 62.7
HWP (3) N/A 9.6 9.6
NAEC (4) 260 90.0 90.0
NNECO 75 0 0
Yankee 50 0 0
Yankee Gas 100 52.5 41.1
Select N/A 155.5 157.5
Energy (3)
NGS (3) N/A 12.5 11.7
SESI (3) N/A 14.5 11.7
RRR (3) N/A 25.3 28.5
Other N/A 9.8 8.0
------ ------
Total $552.4 $492.0
====== ======

(1) These columns include borrowings of various NU system companies from NU
and other NU system companies. Total NU system short-term indebtedness to
unaffiliated lenders was $290.5 million at December 31, 2001 and $200 million
at March 1, 2002.

(2) Under applicable NHPUC provisions, PSNH can incur short-term debt up to
$100 million.

(3) The SEC limits, as indicated, the following companies' borrowings from
the NU system money pool (but not borrowings from either parent companies or
non-affiliates): HWP ($5 million); Select Energy ($200 million); NGS ($20
million); SESI ($20 million) and the Rocky River Realty Company (RRR) ($30
million). NU, NGC and Mode 1 are not authorized to participate in the money
pool.

(4) Under applicable NHPUC regulations, NAEC can incur short term debt up to
10 percent of net fixed plant or such other amount as approved by the NHPUC.
NAEC currently has authorization from the NHPUC to issue up to $260 million
of short-term debt.

The supplemental indentures under which NU issued $175 million in
principal amount of 8.58 percent amortizing notes in December 1991 and $75
million in principal amount of 8.38 percent amortizing notes in March 1992
contain restrictions on dispositions of certain NU system companies' stock,
limitations of liens on NU assets and restrictions on distributions on and
acquisitions of NU stock. Under these provisions, NU, CL&P, PSNH and WMECO
may not dispose of voting stock of CL&P, PSNH or WMECO other than to NU or
another NU system company, except that CL&P may sell voting stock for cash to
third persons if so ordered by a regulatory agency so long as the amount sold
is not more than 19 percent of CL&P's voting stock after the sale. The
restrictions also generally prohibit NU from pledging voting stock of CL&P,
PSNH or WMECO or granting liens on its other assets in amounts greater than
five percent of the total common equity of NU. Many of the NU system
companies' credit agreements have similar restrictions. As of December 31,
2001, no NU debt was secured by liens on NU assets. Furthermore, NU may not
declare or make distributions on its capital stock, acquire its capital stock
(or rights thereto), or permit an NU system company to do the same, at times
when there is an event of default existing under the supplemental indentures
under which the amortizing notes were issued.

CL&P's charter contains preferred stock provisions restricting the
amount of additional unsecured debt it may incur. As of December 31, 2001,
the amount of additional unsecured debt it could incur was $535 million.

The indentures securing the outstanding first mortgage bonds of CL&P
provide that additional bonds may not be issued, except for certain refunding
purposes, unless earnings are at least twice the pro forma annual interest
charges on outstanding bonds, and certain prior lien obligations and bonds to
be issued.

The preferred stock provisions of CL&P's charter also prohibit the
issuance of additional preferred stock (except for refinancing purposes)
unless income before interest charges (as defined and after income taxes and
depreciation) is at least 1.5 times the pro forma annual interest charges on
indebtedness and the annual dividend requirements on preferred stock that
will be outstanding after the additional stock is issued. CL&P's earnings
currently permit it to meet those earnings tests.

Certain consolidated subsidiaries have dividend restrictions imposed by
their long-term debt agreements. These restrictions also limit the amount of
retained earnings available for NU common dividends. At December 31, 2001,
retained earnings available for the payment of dividends totaled $267.5
million.

The Federal Power Act limits the payment of dividends by PSNH, NAEC,
CL&P, and WMECO to retained earnings. At December 31, 2001, retained
earnings for these companies were $ 176.4 million, -$1 million, $286.9
million, and $55.4 million, respectively.

New Hampshire statutes also limit the payment of dividends by PSNH and
NAEC to retained earnings.

CL&P's first-mortgage bond indenture limits dividend payments to an
amount equal to (i) retained earnings accumulated after December 31, 1966;
plus (ii) retained earnings accumulated prior to January 1, 1967, not
exceeding $13.5 million; plus (iii) any additional amounts authorized by the
SEC.

Applicable merger accounting rules required that upon acquisition by NU,
Yankee's and its subsidiaries' retained earnings were reclassified as capital
surplus. Also, the merger premium NU paid to acquire Yankee was allocated
among Yankee and its subsidiaries and "pushed down" to their balance sheets.
Under accounting conventions in existence at the time of the merger, the
majority of the merger premium would be amortized over 40 years. In June
2001, the Financial Accounting Standards Board issued a statement that,
effective January 1, 2002, no longer requires companies to amortize goodwill
as an expense to the income statement. Instead goodwill is required to be
evaluated for impairment and any impairments to goodwill would be charged to
expense. A study of the impairment of goodwill is underway. It is expected
that the effect of the new accounting standard, assuming no write-down for
impairment is required, will be an approximately $9 million annual reduction
in goodwill amortization expense.

Under the 1935 Act, subsidiaries of registered holding companies are
only allowed to pay dividends out of retained earnings unless the SEC allows
otherwise. The effect of this rule would be to prevent Yankee from paying
dividends to NU from any source other than post-merger earnings, as reduced
by the merger premium amortization. NU has received permission from the SEC,
through June 2002, for Yankee and Yankee Gas to pay dividends (i) out of
additional paid-in capital up to the amount of their respective retained
earnings just prior to the merger with NU and (ii) out of earnings before the
amortization of the merger goodwill (gross earnings) in the case of Yankee
Gas and out of distributed earnings in the case of Yankee. To assure that
Yankee Gas has sufficient cash to fund operations, Yankee Gas will not pay
dividends in excess of 80 percent of gross earnings on a rolling five-year
average basis. In no case would dividends be paid by Yankee or Yankee Gas if
their common equity to total capitalization ratios were below 35 percent. NU
has also received permission from the SEC, through June 2002, for Yankee and
Yankee Gas to repurchase their common stock such that their common equity to
total capitalization ratios do not fall below 35 percent.

NGC bond covenants prevent NGC from making dividend payments unless (i)
no default or event of default will occur from doing so, (ii) the debt
service reserve account has been sufficiently funded with six months of
principal and interest on the outstanding bonds, and (iii) the debt service
coverage ratio for the previous four fiscal quarters (or, if shorter, since
the bond issuance closing date) and projected debt service coverage ratio for
the next eight fiscal quarters is (a) greater than or equal to 1.35 if
contracted generating capacity is greater than 75 percent or (b) greater than
or equal to 1.70 if contracted generating capacity is less than 75 percent.
At December 31, 2001, NGC's contracted generating capacity was greater than
75 percent. NGC expects to meet its debt service coverage ratio requirements
under this covenant and to pay dividends in 2002.

NU is required under the 1935 Act to maintain its consolidated common
equity at a level equal to at least 30 percent of its consolidated
capitalization. Following the issuance of RRBs and RRCs by its subsidiaries,
NU was temporarily unable to meet this standard because such bonds and
certificates, although nonrecourse to the NU system company issuers, are
considered to be indebtedness of the companies under generally accepted
accounting principles. The SEC had authorized the consolidated common equity
ratio of NU to fall below 30 percent through December 31, 2001. NU's
consolidated common equity ratio was greater than 30 percent as of December
31, 2001 and is expected to remain above this level in the future. The 30
percent test also applies to NU's electric operating subsidiaries. The SEC
had consented to the common equity ratios of CL&P, WMECO and PSNH falling
below 30 percent through December 31, 2004.

NU provides credit assurance in the form of guarantees and letters of
credit for the financial performance obligations of certain of its
unregulated subsidiaries. NU currently has authorization from the SEC to
provide up to $500 million of such guarantees and has applied for authority
to increase this amount to $750 million. As of December 31, 2001, NU had
provided approximately $268.2 million and $45 million, respectively, of such
guarantees and letters of credit. As of February 20, 2002, NU had provided
approximately $320 million and $150 million, respectively, of such guarantees
and letters of credit.

Certain NU system credit financing agreements have trigger events tied
to the credit ratings of certain NU system companies, as discussed below.

RRR is a real estate subsidiary that owns NU's Connecticut headquarters
site. It has approximately $8 million of debt outstanding that could be
affected by a ratings change. If NU, CL&P, PSNH or WMECO ratings fall below
a B1 Moody's rating or a B+ Standard & Poor's rating, bondholders would have
the right to demand mandatory prepayments.

NGC has a debt reserve account related to the $440 million bond issue
that can be funded with cash, an NU guarantee or a letter of credit from an
acceptable counterparty. The account is currently funded with cash and may
be funded with a guarantee from NU only if NU has an investment grade rating
by Standard & Poor's and Moody's.

NU and its subsidiaries have $650 million of revolving credit agreements
with a number of banks. There are no ratings triggers that would result in a
default, but lower ratings would increase fees on future borrowings from the
credit lines.

CONSTRUCTION AND CAPITAL IMPROVEMENT PROGRAM

The NU system's construction program expenditures, including allowance
for funds used during construction, is estimated to total as much as $593
million in 2002. Of such total amount, approximately $244 million is
expected to be expended by CL&P, $110 million by PSNH, $103 million by Yankee
Gas, $25 million by WMECO, $5 million by NAEC, $1 million by NGS and up to
$105 million by other system entities. This construction program data
includes all anticipated costs necessary for committed projects and for those
reasonably expected to become committed projects in 2002, regardless of
whether the need for the project arises from environmental compliance,
reliability requirements, nuclear safety or other causes. The construction
program's main focus is maintaining, upgrading and expanding the existing
transmission and distribution system and natural gas distribution system. The
system expects to evaluate its needs beyond 2002 in light of future
developments, such as restructuring, industry consolidation, performance and
other events.

The $105 million in construction expenditures planned for other system
entities in 2002 includes NU's proposed construction of a new direct current
transmission line from Norwalk, Connecticut to western Long Island. NU has
sought FERC approval to conduct an open season auction and negotiate final
contracts for the scheduling rights on the line. The project's final size
and cost will be determined after an auction process, which NU plans to
complete in 2002. As a result, management cannot determine if all of the
construction expenditures planned for 2002 will actually be expended.

CL&P has announced plans to invest approximately $520 million by the end
of 2006 to construct two new 345,000 volt transmission lines from inland
Connecticut to Norwalk, Connecticut and another $40 million to help rebuild
an existing 138,000 volt transmission line beneath Long Island Sound. The
investment in transmission lines and continued upgrading of the electric
distribution system are expected to increase CL&P's net investment in
electric plant to between $244 million and $353 million in each of the years
2002 through 2005. All of these projects are in the developmental or
governmental approval stage and management cannot yet determine whether the
projects will be built as proposed. If current plans are implemented on
schedule, NU would likely require additional external financing to construct
these projects. If all of the transmission projects are built as proposed,
the NU system's net investment in electric transmission would increase to
nearly $1.4 billion by the end of 2006.

In January 2002, Yankee Gas received approval for a significant
expansion of its natural gas distribution system in Connecticut. See
"Connecticut Rates and Restructuring" for information on Yankee Gas' DPUC
filing and the related decision.

In addition to the projects noted above, NU is considering purchasing
additional electric generating capacity in the Northeast United States to
enhance its competitive energy marketing activities. Management has not
committed to purchase any specific generation and at this time cannot
estimate the capital requirements of such a purchase should an agreement be
reached.

REGULATED ELECTRIC OPERATIONS

DISTRIBUTION AND SALES

CL&P, PSNH and WMECO furnish retail franchise service in 149, 198 and 59
cities and towns in Connecticut, New Hampshire and Massachusetts,
respectively. In December 2001, CL&P furnished retail franchise service to
approximately 1.2 million customers in Connecticut, PSNH provided retail
service to approximately 440,000 customers in New Hampshire and WMECO served
approximately 201,000 retail franchise customers in Massachusetts. HWP
served 32 retail customers in Holyoke, Massachusetts prior to the sale of
certain of its assets in December 2001.

The following table shows the sources of 2001 electric franchise retail
revenues based on categories of customers (exclusive of HWP):

Total NU
CL&P PSNH WMECO System
---- ---- ----- --------
Residential 46% 40% 42% 44%

Commercial 39% 37% 37% 39%

Industrial 13% 22% 20% 16%

Other 2% 1% 1% 1%
--- --- --- ---
Total 100% 100% 100% 100%
=== === === ===

The actual changes in retail kWh sales for the last two years and the
forecasted retail sales growth estimates for the ten-year period 2001 through
2011 for CL&P, PSNH and WMECO are set forth below:

Forecast 2001-
2011 Compound
2000 over 2001 over Rate of
1999 2000 Growth
--------- --------- -------------
NU system 0.9% 2.3% 1.3%
CL&P 0.4% 2.4% 1.3%
PSNH 2.6% 3.9% 1.8%
WMECO -0.1% -0.9% 0.7%

Consolidated NU retail sales rose by 2.3 percent in 2001, compared with
2000, primarily due to higher heating and cooling requirements.
Approximately 0.6 percent of growth in NU total retail sales was due to the
ending of the New Hampshire pilot program in November 2000. During the
program, sales to the pilot participants were excluded from the retail class
totals. When the pilot program ended, sales to these customers were again
included in retail totals. Residential electric sales were up 3.0 percent.
Commercial sales were up by 5.6 percent for the year and industrial sales
decreased by 4.8 percent. Retail sales for CL&P, WMECO and PSNH were up 2.4
percent, down 0.9 percent and up 3.9 percent, respectively.

REGIONAL AND SYSTEM COORDINATION

The NU system companies and most other New England utilities are parties
to an agreement (NEPOOL Agreement), which provides for coordinated planning
and operation of the region's generation and transmission facilities. The
NEPOOL Agreement was restated and revised as of March 1997 to provide for (i)
a pool-wide open access transmission tariff; (ii) the creation of an
Independent System Operator (ISO); and (iii) a broader governance structure
for NEPOOL and a more open, competitive market structure. Under these new
arrangements the ISO, a nonprofit corporation whose board of directors and
staff are not controlled by or affiliated with market participants, ensures
the reliability of the NEPOOL transmission system, administers the NEPOOL
tariff and oversees the efficient and competitive functioning of the regional
power market.

The NEPOOL tariff provides for nondiscriminatory open access to the
regional transmission network at a single rate regardless of transmitting
distance for all transactions. The rate is a formula rate, structured to
ensure that each transmission provider under the NEPOOL tariff recovers its
revenue requirements.

In 1999, the NEPOOL Executive Committee filed a comprehensive settlement
of all issues set for hearing concerning the NEPOOL transmission tariff. The
settlement resolves disputes concerning the calculation of revenue
requirements for transmission over NEPOOL facilities and resolves disputes
over alleged "double charges" under grandfathered transmission contracts
retained by individual transmission providers, including the NU system. The
settlement also includes an ROE component which sets the ROE for each
individual transmission provider owning NEPOOL transmission facilities with
respect to those facilities from March 1, 1997 through at least June 1, 2000,
provided no changes to individual network transmission tariff rates are made
after December 31, 1999. NU's ROE has been set at 11.75 percent. NU has
made no changes to its transmission tariff rates since the settlement was
reached; accordingly, its ROE has remained unchanged.

As part of the settlement, ISO is required to independently audit the
charges in effect for the period June 1997 through May 2000 or direct that
such an audit be conducted under its supervision. In June 2000, ISO engaged
an independent auditing firm to conduct such an audit. The audit remains
ongoing and the results of the audit will be filed at FERC as an
informational filing.

In December 2000, NU was notified by FERC that it, along with several
other companies, would be the subject of a separate FERC industry-wide audit
of the accounting related to formula rate transmission tariffs. FERC
commenced its audit of NU in February 2001 and an exit conference was held on
February 12, 2002.

Two agreements determine the manner in which costs and savings are
allocated among the NU system electric operating companies. Under an
agreement (NUG&T) among CL&P, WMECO and HWP, these companies pool their
electric production costs and the costs of their principal transmission
facilities. The NUG&T was revised in 1999 to eliminate the generation
aspects of the agreement. Final agreement from FERC on this revision was
granted in October 2000. Pursuant to the merger agreement between NU and
PSNH, these companies and PSNH entered into a 10-year sharing agreement
(Sharing Agreement), expiring in June 2002, that provides, among other
things, for the allocation of the capability responsibility savings and
energy expense savings resulting from a single-system dispatch through
NEPOOL.

Under the Settlement Agreement between PSNH and the State of New
Hampshire, NU filed for and received FERC approval to terminate the Sharing
Agreement effective December 31, 2000. Only minor revenue changes are
expected in the future as no energy or capacity transactions have taken place
under the Sharing Agreement since CL&P and WMECO relinquished their
responsibilities to meet customer loads on January 1, 2000. Transmission
revenues will be allocated going forward based upon the respective companies'
cost of service where these revenues had been split equally between PSNH and
the signatories of the NUG&T (CL&P, HWP and WMECO) under the Sharing
Agreement.

TRANSMISSION ACCESS AND FERC REGULATORY CHANGES

Pursuant to FERC Order 888 (issued in April 1996), NU system companies
operate their transmission system under an open access, nondiscriminatory
transmission tariff.

In December 1999, the FERC issued an order calling on all transmission
owners to voluntarily join regional transmission organizations (RTOs) in
order to boost competition in electric markets (Order 2000). In general,
each such organization would be an independent operator over all transmission
facilities, and would perform, among other functions, tariff administration,
construction planning and reliability management for the particular regional
transmission system.

On January 16, 2001, NU along with the ISO and five other New England
transmission owning utilities (National Grid, USA, The United Illuminating
Company, Bangor Hydro-Electric Company, Central Maine Power and Vermont
Electric Company) filed a proposal to establish a New England Regional
Transmission Organization (NERTO) in compliance with FERC's order. As
proposed, NERTO would consist of the ISO and a newly formed for-profit
independent transmission company (Northeast ITC). Pursuant to an RTO
agreement, both entities would share the minimum required functions of an RTO
set forth in the FERC order. ISO would be primarily responsible for short-
term reliability functions and Northeast ITC would operate the transmission
assets of the participating transmission owners, develop and administer a
transmission tariff and engage in transmission planning and expansion
activities.

FERC ruled in July 2001 that the three existing Northeast pools should
merge to form a single RTO. NU has been working with utilities in the three
regions to extend the New England Binary RTO model into the Northeast.

In January 2002, the New England and New York ISOs proposed to FERC that
the two pools combine to form an RTO. The ISOs supported a binary model
similar to the New England model proposed in January 2001 to FERC. The ISOs
intend to file with FERC the structure of such an RTO by the end of June
2002. NU continues to work with transmission owners in New York and New
England to create an independent transmission company within the RTO.

Since NEPOOL established competitive wholesale markets in 1999,
congestion costs (the cost of higher energy prices within the New England
market due to transmission constraints) have grown steadily surpassing $276
million in total by year end 2001. ISO New England made a filing at FERC in
March 2000 to implement a congestion management system (CMS) similar to those
in use in the New York ISO and Pennsylvania - New Jersey - Maryland
Interconnection (PJM). CMS uses locational based pricing to assign costs to
regional loads, or zones, within New England. Individual load zones will
experience higher or lower congestion costs as the CMS replaces the current
practice of distributing and averaging congestion costs across all New
England loads. In March 2001, ISO New England and the PJM Interconnection
announced their intention to create a standard marked design (SMD) for use in
both markets. The SMD will incorporate a congestion management system and
will be heavily based on the existing PJM rules. It is expected that the
system will be operational in 2003.

REGULATED GAS OPERATIONS

In March 2000, NU acquired Yankee and Yankee became a wholly owned
subsidiary of NU. Yankee is the parent of Yankee Gas, the largest natural
gas distribution company in Connecticut. Yankee continues to act as the
holding company of Yankee Gas and its two active nonutility subsidiaries,
NorConn Properties, Inc. (NorConn), which holds the property and facilities
of Yankee and its subsidiaries, and Yankee Energy Financial Services Company,
which provides customers with financing for energy equipment installations.

Yankee Gas operates the largest natural gas distribution system in
Connecticut as measured by number of customers and size of service territory.
Total throughput (sales and transportation) for 2001 was 47.5 billion cubic
feet. In 2001, total gas operating revenues of $378 million were comprised
of the following: 50.3 percent residential; 28.6 percent commercial; 19
percent industrial; and the remaining 2.1 percent other. Yankee Gas provides
firm gas sales service to customers who require a continuous gas supply
throughout the year, such as residential customers who rely on gas for their
heating, hot water and cooking needs. Yankee Gas also provides interruptible
gas sales service to certain commercial and industrial customers that have
the capability to switch from natural gas to an alternative fuel on short
notice. Yankee Gas can interrupt service to these customers during peak
demand periods. Yankee Gas offers firm and interruptible transportation
services to customers who purchase gas from sources other than Yankee Gas.
In addition, Yankee Gas performs gas sales, gas exchanges and capacity
releases to marketers to reduce its overall gas expense. Effective November
1, 2001, Yankee Gas brought back in-house the management of its gas supply
function. This change will allow Yankee Gas to have more control over its
supply/storage portfolio and is expected to create opportunities to reduce
gas costs through off-system sales and capacity release transactions.

Although Yankee Gas is not subject to FERC jurisdiction, the FERC does
regulate the interstate pipelines serving Yankee Gas' service territory.
Yankee Gas, therefore, is directly and substantially affected by the FERC's
policies and actions. Accordingly, Yankee Gas closely follows and, when
appropriate, participates in proceedings before the FERC.

Yankee Gas is subject to regulation by the DPUC, which, among other
things, has jurisdiction over rates, accounting procedures, certain
dispositions of property and plant, mergers and consolidations, issuances of
securities, standards of service, management efficiency and construction and
operation of distribution, production and storage facilities. For
information relating to Yankee Gas DPUC proceedings, see "Rates and Electric
Industry Restructuring - Connecticut Rates and Restructuring."

For information on the proposed expansion of Yankee Gas' natural gas
delivery system in Connecticut, see "Construction and Capital Improvement
Program."

NUCLEAR GENERATION

GENERAL

During 2001, certain NU system companies had ownership interests in four
nuclear units, Millstone 1, 2 and 3 and Seabrook, and equity interests in
four regional nuclear companies (the Yankee Companies) that separately own
the Connecticut Yankee nuclear unit (CY), the Maine Yankee nuclear unit (MY),
the Vermont Yankee nuclear unit (VY) and the Yankee Rowe nuclear unit (Yankee
Rowe). One NU system company operates Seabrook. A different NU system
company operated Millstone 2 and 3 until the sale of the units in on March
2001. Yankee Rowe, CY, MY and Millstone 1 have been permanently removed from
service and are being decontaminated and decommissioned.

On March 31, 2001, CL&P and WMECO consummated the sale of Millstone 1
and 2 to a subsidiary of Dominion, DNCI. CL&P, PSNH, WMECO and certain other
of the joint owners collectively sold 93.47 percent of Millstone 3 to DNCI.
This sale included all of the respective joint ownership interests of CL&P,
PSNH and WMECO in Millstone 3. The NU system received approximately $1.2
billion of cash proceeds from the sale and has or will apply the proceeds to
payment of taxes and reductions of debt and equity of CL&P, PSNH and WMECO.
As part of the sale, DNCI assumed responsibility for decommissioning
Millstone 1 and for the eventual decommissioning of Millstone 2 and 3 when
those units cease operations.

Before Millstone 1 and 2 were sold to DNCI, CL&P and WMECO owned 100
percent of Millstone 1 and 2 as tenants in common. Their respective
ownership interests in each unit were 81 percent and 19 percent.

CL&P, PSNH and WMECO had agreements with other New England utilities
covering their joint ownership as tenants in common of Millstone 3. CL&P's,
PSNH's and WMECO's ownership interests in the unit prior to the sale to
Dominion were 52.93, 2.85 and 12.24 percent, respectively.

In 1996, one of the joint owners of Millstone 3, the Vermont Electric
Generation and Transmission Cooperative, Inc. (VEG&T), filed for bankruptcy.
The subsequent liquidation resulted in the offering of VEG&T's 0.35 percent
share of Millstone 3 for sale to the joint owners of Millstone 3. None of
the non-NU joint owners accepted the offer and CL&P took over responsibility
for the costs of that interest. The VEG&T ownership interest in Millstone 3
was included in the sale of the unit to DNCI as part of CL&P's share.

The NU companies own 40.04 percent of Seabrook: NAEC has a 35.98 percent
ownership interest and CL&P a 4.06 percent ownership interest. For
information on the sale of Seabrook, see "Connecticut Rates and
Restructuring."

CL&P, PSNH, WMECO and other New England electric utilities are the
stockholders of the Yankee Companies. Each Yankee Company owns a single
nuclear generating unit. The stockholder-sponsors of each Yankee Company are
responsible for proportional shares of the operating and decommissioning
costs of the respective Yankee Company. They are also entitled to
proportional shares of the electrical output of VY, which is the only
operating unit of the four Yankee Companies. The relative rights and
obligations with respect to the Yankee Companies are approximately
proportional to the stockholders' percentage stock holdings, but vary
slightly to reflect arrangements under which nonstockholder electric
utilities have contractual rights to some of the output of particular units.
CL&P's, PSNH's and WMECO's stock ownership percentages in the Yankee
Companies are set forth below:

CL&P PSNH WMECO NU system
---- ---- ----- ---------
Connecticut Yankee Atomic
Power Company (CYAPC) ...... 34.5% 5.0% 9.5% 49.0%
Maine Yankee Atomic Power
Company (MYAPC) ............ 12.0% 5.0% 3.0% 20.0%
Vermont Yankee Nuclear
Power Corporation (VYNPC)... 10.1% 4.3% 2.6% 17.0%
Yankee Atomic Electric
Company (YAEC).............. 24.5% 7.0% 7.0% 38.5%

The ownership interests of CL&P, PSNH and WMECO in VYNPC increased
slightly in early 2002 when VYNPC redeemed the stock owned by certain Vermont
municipal electric systems which had previously owned about five percent of
VYNPC's stock.

In March 2001, the board of VYNPC voted to proceed to auction the plant.
J.P. Morgan was selected to conduct the auction. In August 2001, the owners
of VYNPC announced they would sell the VY unit to a subsidiary of Entergy
Corporation for approximately $180 million (approximately $145 million for
the plant, materials and supplies and $35 million for the nuclear fuel). NU
subsidiaries own 17 percent of the VY unit and, under the terms of the sale,
will continue to buy 17 percent of the plant's output through March 2012 at
fixed prices. The sale requires several regulatory approvals and is
scheduled to close during the first half of 2002.

The operators of Seabrook and VY hold full term operating licenses from
the NRC and are subject to the jurisdiction of the NRC. The NRC has broad
jurisdiction over the design, construction and operation of nuclear
generating stations, including matters of public health and safety, financial
qualifications, antitrust considerations and environmental impact. The NRC
issues 40 year initial operating licenses to nuclear units and NRC
regulations permit renewal of licenses for an additional 20 year period. The
NRC also has jurisdiction over the decommissioning activities at Yankee Rowe,
CY and MY.

The NRC also regularly conducts generic reviews of technical and other
issues, a number of which may affect the nuclear plants in which NU system
companies have interests. The cost of complying with any new requirements
that may result from these reviews cannot be estimated at this time, but such
costs could be substantial.

NUCLEAR PLANT PERFORMANCE

MILLSTONE 3

Millstone 3 has a license expiration date of November 25, 2025. In
2001, Millstone 3 operated at a capacity factor of 30.5 percent through the
date of sale of the unit to DNCI (March 31, 2001). Upon the sale to DNCI,
Millstone 3 had a lifetime capacity factor of 62.8 percent.

MILLSTONE 2

Millstone 2 has a license expiration date of July 31, 2015. For the
period from January 1 to April 1, 2001, Millstone 2 operated at a capacity
factor of 99.6 percent. Upon the sale to DNCI, Millstone 2 had a lifetime
capacity factor of 56.2 percent.

SEABROOK

Seabrook has a license expiration date of October 17, 2026. In 2001,
Seabrook operated at a capacity factor of 85.9 percent. After returning from
a scheduled refueling outage on January 28, 2001, Seabrook operated at a
capacity factor of 93.4 percent through the end of the year. Seabrook is
scheduled to undergo a refueling outage in spring 2002 before the expected
sale of 88 percent of the unit. For information on the upcoming auction of
Seabrook, see "Connecticut Rates and Restructuring."

VERMONT YANKEE

VY has a license expiration date of March 21, 2012. In 2001, VY
operated at a capacity factor of 93.4 percent. VY began its 22nd refueling
outage on April 27, 2001 and returned to service on May 20, 2001, the
shortest outage in its history. For information on the sale of VY, see
"Nuclear Generation - General."

NUCLEAR INSURANCE

For information regarding nuclear insurance, see "Commitments and
Contingencies - Nuclear Insurance Contingencies" in the notes to NU's,
CL&P's, PSNH's and WMECO's financial statements.

NUCLEAR FUEL

GENERAL

The supply of nuclear fuel for the NU system's existing unit requires
the procurement of uranium concentrates, followed by the conversion,
enrichment and fabrication of the uranium into fuel assemblies suitable for
use in the NU system's unit. Fuel may also be purchased at a point after any
of the above processes are completed. The NU system expects that uranium
concentrates and related services for the units operated by the NU system and
for the other units in which the NU system companies are participating that
are not covered by existing contracts will be available for the foreseeable
future on reasonable terms and prices.

In 1998, an action was initiated by the owners of Millstone in the U.S.
Court of Federal Claims against the United States Department of Energy (DOE)
regarding the special annual assessment that the DOE imposes on purchasers of
enriched uranium to meet the future costs of decontaminating and
decommissioning (D&D) government owned uranium enrichment facilities.
Similar actions for Seabrook and CY were also filed. The lawsuits challenge
the imposition of the D&D assessment on federal constitutional grounds and
are similar to actions filed by a number of other utilities against DOE.
Proceedings in the Millstone, Seabrook and CY cases are stayed pending the
final resolution of a similar claim brought against the DOE by MYAPC. In
July 1999, the claims court dismissed MYAPC's complaint. In November 2001,
the Federal circuit court affirmed the dismissal of MYAPC's claims. On
February 6, 2002, MYAPC filed a petition for certiorari, asking the United
States Supreme Court to review the decision of the Federal circuit court.

Nuclear fuel costs associated with nuclear plant operations include
amounts for disposal of spent nuclear fuel. The NU system companies include
in their nuclear fuel expe