Northeast Utilities Business Information, Profile, and History

Company Perspectives:

Our Vision is clear: we're focused on becoming the leading energy delivery and marketing company in the Northeast region. Our approach to growth is a balanced one--concentrating on what we do well, not trying to be all things to all markets. We're focused on the 11-state geographic region where 25 percent of the nation's energy is consumed. Our strategy is standing the test of time. Continuing to deliver on a path set several years ago is a testament to the strength of our vision and our team.

History of Northeast Utilities

Northeast Utilities (NU) is New England's largest utility company. NU serves 1.8 million electricity customers in Connecticut, Massachusetts, and New Hampshire. Its Yankee Energy System supplies nearly 200,000 customers in Connecticut with natural gas.

Origins

In 1966, Northeast Utilities was formed by combining Western Massachusetts Electric Company with Connecticut Light and Power Company and Hartford Electric Light Company. Western Massachusetts Companies, a voluntary association, had been organized in 1927 to acquire 11 utility companies in western Massachusetts. These were subsequently consolidated into Western Massachusetts Electric Company (WMECO), based in Springfield, Massachusetts. The company added Huntington Electric Light Company to its holdings in 1959.

An early NU project, begun in 1968, was the construction of a million-kilowatt, $72 million pumped-storage hydroelectric power project on the Connecticut River in Franklin County, Massachusetts. In a pumped-storage system, power is produced from high-elevation lakes during high demand periods; during less busy times, the water is pumped back to the high elevation.

Energy Alternatives for the 1970s

Lelan F. Sillin, Jr., became president of NU in April 1968. Sillin was committed to developing New England's use of nuclear power. The region's electricity prices were higher than the national average, and Sillin viewed nuclear power as the least expensive, most efficient, and cleanest energy option. In 1973, NU generated 24 percent of its energy from nuclear units. By 1974, it was 33 percent, and by 1980 nuclear energy supplied almost half the company's requirements. As of 1992 nuclear power accounted for 60 percent of NU's energy needs.

Before joining the holding company, the individual utilities had invested together in four nuclear plants in New England known as the Yankee Rowe, Vermont Yankee, Maine Yankee, and Connecticut Yankee plants. NU added its Millstone Point nuclear power station, whose first unit went into commercial operation in 1970. Its second unit was completed in 1975. Millstone Point Company was established to construct and operate these two units. In 1972, the company launched a new program for nuclear fuel financing in which the fuel itself served as security on long-term debt. Plans for a third Millstone unit were set in 1975, and two more installations were planned for Montague, Massachusetts.

During the 1970s, the Middle East oil embargo, escalating inflation, and rising construction cost and time requirements began eroding NU's financial viability. The Montague units, originally set for 1981 and 1983, were rescheduled to start up in 1988 and 1992, and the third Millstone unit's in-service date was first pushed up from 1978 to 1980, then to 1982, and finally to 1986 to reduce the company's financial burden. The delay in the Millstone unit, along with inflation and regulatory requirements, increased its cost from $400 million to $2.49 billion. The company decreased its overall building budget by $2.5 billion from 1974 to 1982.

The 1970s were punctuated by annual tussles with the regulatory boards in Connecticut and Massachusetts. In all, the company filed eight rate increase requests in Connecticut and six in Massachusetts. Never successful in obtaining its full request, NU averaged about 51 percent of the total amount applied for. In 1976, for instance, the Connecticut regulatory commission answered the company's request for a $56 million increase with a rate reduction of $22 million.

The company had borrowed all that it could under federal laws by 1976 but still did not have enough money to remain financially stable. NU stock fell from 120 percent of book value in 1970 to 65 percent in 1981, and bond ratings deteriorated from AA to BAA standing in the same period.

Recovery in the 1980s

By the early 1980s, NU had revamped its demand outlook considerably. In 1970, it had anticipated a decade of growth at 9 percent per year, and intended to build 6,238 megawatts of capacity, but the company actually experienced cumulative growth of only 25 percent during the entire decade and added only 2,813 megawatts of capacity. By 1980, its projected annual growth rate was reduced to just 1.7 percent with a target zone of no more than 1.5 percent annually.

NU would change its direction during the 1980s, largely due to its new chief executive officer, William B. Ellis. At Sillin's behest, Ellis left the consulting firm of McKinsey & Co. in 1976 to become NU's chief financial officer. In that year, total income was $85 million on revenues of $830 million. Two years later he was named president, and in 1983 he became chief executive officer. By 1982, revenues were up to $1.8 billion, but income had risen to only $151 million; by 1986, however, margins had improved, with sales of $2 billion and income of $300.9 million.

Ellis was able to create a more friendly relationship with regulators, one of his most successful negotiations being the Connecticut rate case settlement of 1986, the year Millstone's third unit came into full production. NU initially requested a $155.5 million increase, $133 million of which would go toward the Millstone unit's expenses. The request was denied, and the state ordered NU to put $46.5 million in a fund to offset rate increases in 1987. NU sued to protest the state's demand for this fund; eventually, in an out-of-court settlement, the state agreed to restore this amount, as well as to allow a rate increase phased in over five years, beginning in 1988, to cover Millstone. NU's Connecticut Light and Power subsidiary agreed not to ask for any more rate increases until 1988.

NU's financial recovery strategy also included a massive conservation effort. The utility planned to reduce all energy consumption, especially oil-generated energy. Oil-based production, already reduced from 74 percent in 1973 to 47 percent in 1980, was to be 10 percent by 1987. The Massachusetts legislature and the regulatory commissions of both Connecticut and Massachusetts allowed the company to use two-thirds of the fuel-cost savings to fund the conversion of facilities from oil- to coal-burning. The other third was passed on to customers immediately. The Mt. Tom plant was converted to coal in 1981 at a cost of about $35 million, recovered through oil-cost savings in about three years. The company planned to convert seven more plants, which originally had been oil-burning units but were switched to coal in 1971 in order to meet more stringent air pollution-control standards.

Other conservation efforts included ongoing research on "fuel cells," modular plants that cleanly and efficiently converted various fuels directly into electricity without burning them. NU also gave conservation tips to customers and gave school districts rebates for switching to energy-efficient equipment, such as fluorescent rather than incandescent lighting.

Despite these efforts, Connecticut regulators ruled during a 1988 rate-increase hearing that NU must greatly expand its conservation efforts. The company subsequently put up $250,000 to fund a collaborative project between itself, on the one hand, and, on the other, the Conservation Law Foundation of New England and attorneys general, consumer counsels, and other agencies in Massachusetts and Connecticut. The first project began in Connecticut in February 1988, and a multi-utility process followed in Massachusetts, with WMECO as a participant. This effort identified new areas for conservation by bringing the company into closer contact with the communities it served; for example, a conservation program for public housing projects was a result of the process.

Changes and Crises in the 1990s

In April 1990, NU took over management of Public Service Company of New Hampshire (PSNH), which had filed for bankruptcy in 1988, substantially because of its investment in the Seabrook nuclear power plant. NU offered to buy PSNH outright, and PSNH accepted pending regulatory approval. In late 1991, the companies were awaiting approval from the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, and the Connecticut Department of Public Utility Control. With NU's purchase of PSNH's stock, valued at $750 million, and assumption of its liabilities, the deal's total price was $2.36 billion. The company would have enough capacity to sell over $100 million worth of excess electricity to other utilities each year. NU projected $516 million in savings from its management and operation of PSNH and Seabrook. The addition of Seabrook would eliminate the need for significant construction during the next decade.

The NU/PSNH merger was approved in spite of anticompetitive concerns from other utilities in the region. In another sweeping change, the Energy Policy Act was passed in 1992, allowed utilities to compete for wholesale customers. NU's most difficult challenges were just around the corner.

In May 1992, one of NU's nuclear plants went offline for seven months, costing the company $190 million. This problem recurred in late 1995 and 1996, when the Nuclear Regulatory Commission shut down NU's Millstone and Connecticut Yankee plants. By March 1996, Connecticut Yankee was closed, never to reopen, and two of the three remaining Connecticut plants (one partially-owned) were offline, costing NU $30 million a month for replacement power.

In September 1996, NU hired former South Carolina Electric & Gas Co. chief Bruce D. Kenyon to head its nuclear operations. At the time, only one of NU's five nuclear plants, PSNH-run Seabrook, was operating. Deregulation and the huge costs associated with fixing its nuclear plants dropped net income to $1.8 million in 1996 from $282.4 million the previous year.

Bernard Fox, chairman since 1987 and CEO since 1993, retired in the summer of 1997. He was succeeded by Michael G. Morris, former president and chief executive officer of Consumers Energy, the principal subsidiary of CMS Energy. In the late 1990s, NU sold off most of its fossil fuel and hydroelectric power plants in Connecticut and Massachusetts. The Millstone plants were also divested; Dominion Nuclear Connecticut took over operations there in April 2001. NU's regulated business became a "wire and pipe" operation concerned with the transmission and distribution of energy.

NU was broadening its offerings in response to the new competitive environment. Its unregulated, or "competitive," businesses included Select Energy, Inc., New England's largest energy marketer; Select Energy Services, Inc. (formerly HEC Inc.), an energy engineering firm; Northeast Generation Company; Northeast Generation Services Company; and high-speed telecom specialist Mode 1 Communications.

NU acquired Yankee Energy System in the summer of 1999. It paid $478 million in cash and stock and agreed to assume $201 million of its debt. Yankee Energy, though its Yankee Gas Services Company subsidiary, was a large, modern natural gas distributor serving 183,000 customers in Connecticut.

In the last half of 1999, Consolidated Edison Inc. was preparing to acquire NU in a bid to become a national reseller of electricity. Con Ed, a power company with 3 million customers, was paying $3.3 billion in cash and stock and assuming more than $4 billion of debt in the deal.

The merger dragged on through 2000 without being finalized. It ultimately disintegrated into a courtroom brawl. The two parties sued each other for breach of contract; NU sought $1 billion to compensate for the value lost by its shareholders.

In 2001 and 2002, NU was aiming to grow the unregulated side of its business as the potential for profits for regulated service dwindled. Select Energy, NU's marketing subsidiary, was the default electric provider for Connecticut Light & Power customers but was losing money on the contract. Nevertheless, the unit was able to post a $30 million profit in 2000. NU's telecom subsidiary, Mode 1 Communications, was investing in a 28-mile fiber optic ring in downtown Hartford, Connecticut.

Principal Subsidiaries: The Connecticut Light and Power Company (CL&P); Mode 1 Communications, Inc.; NorConn Properties, Inc.; North Atlantic Energy Corporation (NAEC); North Atlantic Energy Service Corporation (NAESCO); Northeast Generation Company; Northeast Generation Services Company; Northeast Utilities Service Company (NUSCO); NU Enterprises, Inc.; Properties Inc.; Public Service Company of New Hampshire (PSNH); The Quinnehtuk Company; The Rocky River Realty Company; Select Energy, Inc.; Select Energy New York, Inc.; Select Energy Services, Inc.; Western Massachusetts Electric Company (WMECO); Yankee Gas Services Company.

Principal Divisions: Regulated Businesses; Unregulated Businesses.

Principal Operating Units: Transmission; Generation.

Principal Competitors: Energy East Corporation; National Grid USA; NiSource Inc.

Chronology

• Key Dates:
• 1927: Western Massachusetts Companies is formed.
• 1959: Western Massachusetts Electric Company (WMECO) acquires Huntington Electric Light Co.
• 1966: WMECO and Connecticut Light and Power join to form Northeast Utilities (NU).
• 1970: Millstone Point nuclear power station goes into operation.
• 1990: NU takes over Public Service Company of New Hampshire (PSNH).
• 1992: The Energy Policy Act is passed.
• 1996: Three of NU's four Connecticut nuclear plants shut down.
• 1999: NU enters natural gas business through Yankee Energy System acquisition.
• 2001: Planned Con Ed acquisition of NU falls through.