ML021230081
| ML021230081 | |
| Person / Time | |
|---|---|
| Site: | Millstone, Seabrook, Vermont Yankee File:NorthStar Vermont Yankee icon.png |
| Issue date: | 04/25/2002 |
| From: | Blackburn M Northeast Utilities Service Co |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| Download: ML021230081 (150) | |
Text
F " Northeast Utilities System 107 Selden Street, Berlin, CT 06037 Northeast Utilities Service Company P.O. Box 270 Hartford, CT 06141-0270 (860) 665-5000 April 25, 2002 Director Nuclear Reactor Regulation U. S. Nuclear Regulatory Commission Washington, DC 20555
Dear Sir/Madam:
In Accordance with paragraph 50.71(b) of 10CFR, Part 50, enclosed is one copy of the 2001 Annual Financial Reports for The Connecticut Light and Power Company, Western Massachusetts Electric Company, and Public Service Company of New Hampshire, license holders.
Please acknowledge receipt by returning the duplicate of this letter in the stamped, self addressed envelope enclosed for your convenience.
Respectfully yours, M. J. Blackburn Associate Accountant Northeast Utilities Service Company MJB Enclosures c: S. J. Sinnott N
K:Accting\\Fr\\Er\\Annrpt2001 \\
Filing Letters\\NRC1.doc
N158 RFV. 1-94 Northeast Utilities System P.O. Box 270 Hartford, CT 06141-0270 Northeast Utilities Attn: Meredith Blackburn Corporate Accounting - NUEG P.O. Box 270 Hartford, CT 06141-0270
iM Northeast Utilities System 107 Selden Street, Berlin, CT 06037 Northeast Utilities Service Company P.O. Box 270 Hartford, CT 06141-0270 (860) 665-5000 April 25, 2002 Director Nuclear Reactor Regulation U. S. Nuclear Regulatory Commission Washington, DC 20555
Dear Sir/Madam:
In Accordance with paragraph 50.71(b) of 10CFR, Part 50, enclosed is one copy of the 2001 Annual Financial Reports for The Connecticut Light and Power Company, Western Massachusetts Electric Company, and Public Service Company of New Hampshire, license holders.
Please acknowledge receipt by returning the duplicate of this letter in the stamped, self addressed envelope enclosed for your convenience.
Respectfully yours, M. J. Blackburn Associate Accountant Northeast Utilities Service Company MVJB Enclosures c: S. J. Sinnott RECEIPT ACKNOWLEDGED By:.
Dated:
K:\\Accting\\Fr\\Er\\Annrpt2001\\
Filing Letters\\NRC1.doc
Public Service of New Hampshire Fol 2001 Annual Report U Its
Directors Officers David H. Boguslawski Vice President-Transmission Business Northeast Utilities Service Company John C. Collins Chief Executive Officer Dartmouth -Hitchcock Clinic John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer Northeast Utilities Cheryl W. Gris6 President-Utility Group Northeast Utilities Gerald Letendre President Diamond Casting &Machine Co., Inc.
Gary A. Long President and Chief Operating Officer Public Service Company of New Hampshire Michael G. Morris Chairman of the Board, President and Chief Executive Officer Northeast Utilities Jane E. Newman Executive Dean Harvard University John E Kennedy School of Government Executive Committee of the Board of Directors Michael G. Morris, Chairman David H. Boguslawski John H. Forsgren Cheryl W Grist Gary A. Long, Alternate Michael G. Morris Chairman and Chief Executive Officer Gary A. Long President and Chief Operating Officer David H. Boguslawski Vice President-Transmission Business John M. MacDonald Vice President-Operations David R. McHale Vice President and Treasurer Paul E. Ramsey Vice President-Customer Services John P Stack Vice President-Accounting and Controller Roger C. Zaklukiewicz Vice President-Transmission Engineering and Operations
- 0. Kay Comendul Secretary Deborah L. Canyock Assistant Controller-Management Information and Budgeting Services Lori A. Mahler Assistant Controller-Accounting Services William L. Starr Assistant Controller-Taxes Robert A. Bersak Assistant Secretary William J. Quinlan Assistant Secretary Randy A. Shoop Assistant Treasurer-Finance
2001 Annual Report Public Service Company of New Hampshire and Subsidiaries Index Contents Management's Discussion and Analysis of Financial Condition and Results of Operations.......................
Report of Independent Public Accountants....................
Consolidated Statements of Income...........................
Consolidated Statements of Comprehensive Income.............
Consolidated Balance Sheets.................................
Consolidated Statements of Common Stockholder's Equity......
Consolidated Statements of Cash Flows.......................
Notes to Consolidated Financial Statements..................
Selected Consolidated Financial Data........................
Consolidated Quarterly Financial Data (Unaudited)...........
Consolidated Statistics (Unaudited).........................
Bondholder Information......................................
1 11 13 13 14-15 16 17 18 38 38 39 Back Cover Page
This Page Intentionally Left Blank
Public Service Company of New Hampshire and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Overview Public Service Company of New Hampshire (PSNH or the company),
is a
wholly owned subsidiary of Northeast Utilities (NU) and is part of the Northeast Utilities system (NU system).
PSNH's earnings before preferred dividends totaled $81.8 million in
- 2001, compared with a loss of $146.7 million in 2000 and earnings of $84.2 million in 1999.
The PSNH results included an after-tax gain of
$15.5 million associated with the Millstone sale in 2001 and an after-tax $214.2 million extraordinary charge associated with electric industry restructuring in 2000.
Management expects operating results at PSNH to continue to decline in 2002, reflecting the effects of a full year of electric utility restructuring.
Future Outlook During 2000, PSNH and the state of New Hampshire were able to reach a settlement regarding restructuring, which was subsequently approved by the New Hampshire Public Utilities Commission (NHPUC).
The "Agreement to Settle PSNH Restructuring,"
(Settlement Agreement) ended several years of uncertainty related to restructuring and the recovery of stranded costs for PSNH and the state of New Hampshire.
On May 1,
- 2001, PSNH implemented industry restructuring allowing its customers to begin choosing their electric suppliers (competition day).
On that date, PSNH's customers received an overall rate reduction of more than 10 percent, in addition to the 5 percent reduction they received on October 1, 2000.
In April 2001, legislation was passed in the state of New Hampshire, related to transition and default service and the sale of generation assets by PSNH that effectively amended the previously approved Settlement Agreement.
The legislation requires PSNH to supply transition service to its residential and small commercial customers until at least February 1, 2006,. and requires that transition service be provided at fixed rates for certain classes of customers until February 1, 2004.
The legislation also requires PSNH to delay the sale of its fossil and hydroelectric generation assets until no sooner then February 1, 2004.
PSNH will initially supply transition and default service from its generation assets, and when necessary, through supplemental power purchases.
PSNH will use the net revenues from the sale of transition and default service to recover non-securitized stranded costs when those revenues exceed service costs.
PSNH will be permitted, subject to NHPUC
- review, to defer and recover as non-securitized stranded
- costs, generation service costs in excess of transition and default 1
IALL service revenues.
As a result of the Settlement Agreement and the legislation passed in April 2001, PSNH expects that its financial performance will be relatively stable and predictable in 2002, absent any unexpected significant adverse events.
Liquidity The year 2001 was marked by tremendous inflows of cash into the NU system and PSNH as a result of the securitization of stranded costs and the sale of the Millstone units. PSNH's liquidity benefited from the issuance of $525 million in rate reduction bonds and the receipt of approximately $25 million from the sale of the Millstone units. The largest share of the proceeds was used for buydown of the Seabrook Power Contracts. Capital lease obligations declined to $110.3 million at the end of 2001 from $629.2 million at the end of 2000.
PSNH's long-term debt other than rate reduction bonds decreased to $407.3 million at the end of 2001 from $431.6 million at the end of 2000.
PSNH also repaid all of its preferred stock in 2001.
PSNH paid approximately another $50 million in December 2001 to buyout other purchased-power contracts and issued an equivalent amount of rate reduction bonds in January 2002, to pay for those costs.
PSNH continues to negotiate buyout or buydown arrangements with other plant operators and may require additional funds if successfully renegotiated agreements are approved by the NHPUC and result in upfront payments.
The remaining proceeds were used primarily to return equity capital to NU parent.
Including both return of capital and common dividends, PSNH paid $287 million to NU parent in 2001.
On December 19,
- 2001, PSNH refinanced $287.5 million of tax-exempt pollution control revenue bonds by issuing $109 million of insured lower fixed-rate bonds and $178.5 million of insured variable-rate bonds.
At current rates, that refinancing is expected to save PSNH in excess of $10 million annually.
Including capital lease obligations, but excluding rate reduction
- bonds, as these bonds are nonrecourse to PSNH, PSNH's capitalization ratio was 63.7 percent debt and 36.3 percent common equity at the end of
- 2001, compared with 64.4 percent
- debt, 1.5 percent preferred securities and 34.1 percent common equity at the end of 2000.
The improved capitalization ratio and lowered overall risk profile resulted in a series of upgrades of the NU system securities through 2001.
At the end of 2001, senior debt ratings on PSNH's securities were A3, BBB+
and BBB.
Overall, these ratings were the highest for PSNH securities in decades and those ratings are expected to continue to enhance PSNH's access to low-cost capital.
PSNH's net cash flows provided by operating activities increased to
$251.2 million in
- 2001, compared with $190.9 million in 2000 and
$199.2 million in 1999.
In
- 2001, cash flows provided by operating 2
activities, increased primarily due to the tax impact of the buydown of the Seabrook Power Contracts.
The level of common dividends totaled $27 million in 2001, as compared to $50 million in 2000 and no common dividends in 1999.
The level of preferred dividends decreased to $1.3 million in
- 2001, compared with $4 million in 2000 and $6.6 million in
- 1999, reflecting PSNH's reduced preferred stock outstanding.
PSNH currently forecasts construction expenditures of up to $110 million for the year 2002.
Over the coming
- years, PSNH is expected to pay out most of its earnings in the form of dividends to the parent company.
There may also be an additional dividend to NU near the end of 2002, depending on the amount of cash received as a result of the sale of Seabrook.
Beyond 2001, management expects that current debt levels at PSNH may
- decline, contingent upon the results of the sale of North Atlantic Energy Corporation's (NAEC) share of Seabrook.
Capital investments in electric utility plant at PSNH totaled $92.6 million in
- 2001, as compared to $69.5 million in 2000.
The company anticipates no material increase in capital expenditures in the next several years.
Restructuring and Rate Matters On May 1, 2001, PSNH implemented industry restructuring allowing its customers to begin choosing their electric suppliers (competition day).
They also received an overall reduction of more than 10
- percent, in addition to the 5 percent reduction they received on October 1, 2000.
On May 22, 2001, the Governor of New Hampshire signed a bill modifying the state's 1996 and 2000 electric utility industry restructuring laws.
The revisions delay the sale of PSNH's fossil and hydroelectric generation assets to no sooner than 33 months after restructuring takes effect, or February 1, 2004.
The revisions also fixed the charges retail customers will pay PSNH for electric
- supply, or transition service.
PSNH and NAEC have entered into two contracts where PSNH is obligated to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook.
The 2001 amended restructuring bill requires the NHPUC to complete the sale of NAEC's share of Seabrook in an expeditious manner.
In late 2001, the NHPUC and the Connecticut Department of Public Utility Control named J.P. Morgan as the selling agent for all owners seeking to sell their Seabrook shares.
Those owners, which include NAEC with its 35.98 percent
- share, collectively own approximately 88 percent of Seabrook.
J.P.
Morgan expects to consummate the sale in late 2002.
NAEC's proceeds will be used to repay all $90 million of NAEC's outstanding debt and return all NAEC's
- equity, which totaled $35 million as of December 31,
- 2001, to NU.
Following the sale of NAEC's share of Seabrook, the Seabrook Power 3
Contracts will be terminated.
PSNH will use these proceeds to more quickly amortize stranded costs.
On October 10, 2000, NU reached an agreement with an unaffiliated joint owner of Seabrook under which that joint owner would include its aggregate 15 percent ownership share of Seabrook in the upcoming sale.
Under the terms of the agreement, in the event that the sale yields proceeds for that joint owner of more than $87.2 million, NU and that joint owner would share the excess proceeds.
Should those sales proceeds be less than $87.2 million, NU would make up the difference below that amount up to a maximum of $17.4 million.
The agreement also limits any top-off amount required to be funded by that joint owner for decommissioning as part of the sale process at the amount required by the Nuclear Regulatory Commission regulations.
For further information regarding commitments and contingencies related to restructuring, see Note 10A, "Commitments and Contingencies
- Restructuring," to the consolidated financial statements.
Regional Transmission Organization The Federal Energy Regulatory Commission (FERC) has required all transmission owning utilities, including PSNH, to voluntarily start forming regional transmission organizations (RTO) or to state why this process has not begun.
In July 2001, the FERC stated that the three existing Northeastern Independent System Operators (ISO)
(PJM, New York and New England) should work together to form one RTO.
The FERC initiated a mediation effort between all interested parties to begin the process of forming such an entity.
NU has been discussing with the other transmission owners in the three pool area the potential to form an Independent Transmission Company (ITC).
The ITC would be a for-profit entity and would perform certain transmission functions required by the FERC including tariff
- control, system planning and system operations.
The remaining functions required by the FERC would be performed by the ISO and deal with the energy market and short-term reliability.
Together, the ITC and ISO form the FERC desired RTO.
In January 2002, the New York and New England ISOs announced their intention to form an RTO.
NU is working with the other transmission owners in these two power pools to create an ITC.
The agreements needed to create the ITC and to define the working relationships among the ISO, the ITC and the transmission owners should be created in 2002 and will allow the ITC to begin operation shortly thereafter. The ITC and/or ISO will have the responsibility to collect the revenue requirements of each transmission owning entity from the market place through FERC approved tariffs.
The creation of the ITC and/or RTO will require a FERC rate case and the impact on NU's return on equity as a result of this rate case cannot be estimated at this time.
4
Nuclear Plant Performance and Other Matters Seabrook: Seabrook operated at a capacity factor of 85.9 percent in 2001.
After returning from a scheduled refueling outage in January 2001, Seabrook operated at a capacity factor of 93.4 percent. Seabrook is scheduled to undergo a refueling outage in the spring of 2002.
PSNH is obligated to purchase the capacity and output from NAEC's 35.98 percent joint ownership in Seabrook under the Seabrook Power Contracts.
Vermont Yankee: In August 2001, the owners of Vermont Yankee announced they would sell the unit to an unaffiliated company for $180 million, including $145 million for the plant and materials and supplies and
$35 million for the nuclear fuel.
PSNH owns 4 percent of the unit, and under the terms of the sale, will continue to buy 4 percent of the plant's output through March 2012 at a range of fixed prices.
The sale requires several regulatory approvals and is scheduled to close during the first half of 2002.
Millstone:
On March 31,
- 2001, PSNH, The Connecticut Light and Power Company and Western Massachusetts Electric Company sold their ownership interests in Millstone 3
to a
subsidiary of Dominion Resources, Inc.,
Dominion Nuclear Connecticut, Inc.
(DNCI).
Nuclear Decommissioning In connection with the aforementioned sale of the Millstone units, DNCI has agreed to assume responsibility for decommissioning those units.
For further information regarding nuclear decommissioning, see Note 11, "Nuclear Decommissioning and Plant Closure Costs,"
to the consolidated financial statements.
Spent Nuclear Fuel Disposal Costs The United States Department of Energy (DOE) originally was scheduled to begin accepting delivery of spent nuclear fuel on January 31, 1998.
- However, delays in confirming the suitability of a permanent storage site continually have postponed plans for the DOE's long-term storage and disposal site.
Extended delays or a default by the DOE could lead to consideration of costly alternatives.
PSNH has the primary responsibility for the interim storage of its spent nuclear fuel prior to divestiture of its remaining operating nuclear units, Seabrook and Vermont
- Yankee, as well as the three nuclear units currently undergoing decommissioning, Connecticut
- Yankee, Maine Yankee and Yankee Rowe.
For further information regarding spent nuclear fuel disposal costs, see Note
- 10C, "Commitments and Contingencies Spent Nuclear Fuel Disposal Costs," to the consolidated financial statements.
5
1 1 Other Matters Critical Accounting Policies:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and at times difficult, subjective or complex judgments.
Accounting policies related to the recoverability of certain regulatory assets and the assumptions used in developing the pension and postretirement benefit obligations are the accounting principles that management believes are critical and could have a significant impact on PSNH's consolidated financial statements.
Regulatory Assets: The accounting policies of the NU system's regulated operating companies historically reflect the effects of the rate-making process in accordance with Statement of Financial Accounting and Standards (SFAS)
No.
71, "Accounting for the Effects of Certain Types of Regulation."
Through its cost-of service rate regulated transmission and distribution business, PSNH is currently recovering its investments in long-lived assets, including regulatory assets, and management believes that the application of SFAS No.
71 to that portion of their business continues to be appropriate.
Management must reaffirm this conclusion at each balance sheet date.
If, as a result of a change in circumstances, it is determined that any portion of these investments is no longer recoverable under SFAS No.
71, that portion would be written off. Such a write-off could have a material impact on PSNH's consolidated financial statements.
Management currently believes that all long-lived
- assets, including regulatory assets, are recoverable.
Pension and Postretirement Benefit Obligations: PSNH participates in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees and also provides certain health care benefits, primarily medical and
- dental, and life insurance benefits through a benefit plan to retired employees.
For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status, and net periodic benefit credit or cost is based on several significant assumptions.
These assumptions primarily relate to the application of a discount rate, expected long-term rate of return and other trend rates.
If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status, and net periodic benefit credits or costs could have a material impact on PSNH's consolidated financial statements.
For further information regarding these types of activities, see Note 1G, "Regulatory Accounting and Assets," and Note 8, "Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial statements.
6
Environmental Matters:
The NU system, including PSNH, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment.
For further information regarding environmental matters, see Note 10B, "Commitments and Contingencies -
Environmental Matters," to the consolidated financial statements.
Other Commitments and Contingencies:
For further information regarding other commitments and contingencies, see Note 10, "Commitments and Contingencies,"
to the consolidated financial statements.
Contractual Obligations and Commercial Commitments:
Aggregated information regarding PSNH's contractual obligations and commercial commitments as of December 31, 2001, is summarized as follows:
(Millions of Dollars) 2002 2003 2004 2005 2006 Totals Notes payable to banks
$ 60.5
$ 60.5 Capital leases 0.4 0.4 0.4 0.4 0.3 1.9 Operating leases 5.9 4.3 3.8 3.2 2.8 20.0 Long-term contractual obligations 151.6 154.7 159.0 160.3 154.8 780.4 Totals
$218.4
$159.4
$163.2
$163.9
$157.9
$862.8 For further information regarding PSNH's contractual obligations and commercial commitments, see Note 3,
"Short-Term Debt,"
Note 4,
"Leases,"
and Note 10E, "Long-Term Contractual Arrangements," to the consolidated financial statements.
Forward Looking Statements:
This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, the use of proceeds from restructuring, and the recovery of operating costs.
Words such as estimates,
- expects, anticipates,
- intends, plans, and similar expressions identify forward looking statements.
Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory
- bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in
- laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors.
7
RESULTS OF OPERATIONS The components of significant income statement variances for the past two years are provided in the table below.
Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 2000 over/(under) 1999 Amount Percent Amount Percent Operating Revenues
($120)
(9)%
$ 131 11%
Operating Expenses:
Fuel, purchased and net interchange power (140)
(16) 162 23 Other operation 1
1 (5)
(4)
Maintenance 9
19 (5)
(10)
Depreciation (4)
(9)
(4)
(8)
Amortization of regulatory assets, net 20 43 11 31 Taxes other than income taxes (4)
(9)
(1)
(3)
Total operating expenses (118)
(i0)
(158) 16 Operating Income (2)
(1)
(27)
(16)
Other income/(loss),
net 22 (a) 9 (a)
Interest expense, net 13 36 (5)
(13)
Income before income tax expense 7
7 (13)
(10)
Income tax expense (7)
(15) 4 10 Income before extraordinary loss 14 21 (17)
(20)
Extraordinary loss 214 (a)
(214)
Net income/(loss)
- 228 a)
$(231) a)
(a) percent greater than 100.
Operating Revenues Operating revenue decreased
$120 million or 9 percent in
- 2001, primarily due to lower retail and wholesale revenues. Retail revenues decreased
$75
- million, primarily due to 5
and 11 percent rate decreases that were effective October 1, 2000 and May 1, 2001, respectively
($89 million),
partially offset by higher retail sales
($14 million).
Retail kilowatt-hour (kWh) sales increased 1.2 percent.
Wholesale revenues decreased
$43 million due to lower sales of capacity and energy.
Operating revenues increased by $131 million or 11 percent in
- 2000, primarily due to higher wholesale and retail revenues.
Wholesale revenues increased by $128 million primarily due to higher wholesale energy and capacity sales.
Retail revenues were higher primarily due to higher retail sales
($12 million),
partially offset by a rate 8
decrease as part of PSNH restructuring ($8 million).
Retail kWh sales increased by 2.1 percent.
Fuel, Purchased and Net Interchange Power
- Fuel, purchased and net interchange power expense decreased in
- 2001, primarily due to lower purchased power expenses and lower expenses from NAEC as a result of the buydown of the Seabrook Power Contracts.
- Fuel, purchased and net interchange power expense increased in
- 2000, primarily due to higher wholesale energy sales.
Other Operation and Maintenance Other operation and maintenance (O&M) expenses increased $10 million in
- 2001, primarily due to higher fossil and hydro expenses
($12 million) and higher transmission and distribution expenses
($2 million), partially offset by lower nuclear expenses
($2 million) and lower administrative and general expenses ($1 million).
Other O&M expenses decreased in
- 2000, primarily due to lower transmission and distribution expenses
($6 million) and lower fossil maintenance expenses ($5 million).
Depreciation Depreciation expense decreased in 2001, primarily due to lower fixed assets resulting from the sale of Millstone unit three at the end of the first quarter 2001.
Depreciation expense decreased in 2000, primarily due to an increase in Distribution Plant depreciable lives.
Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in
- 2001, primarily due to higher amortizations related to restructuring.
Amortization of regulatory assets, net increased in
- 2000, primarily due to the completion of the amortization of regulatory obligations related to net operating loss carryforwards in 1999 as a result of the Global Settlement.
Taxes Other Than Income Taxes Taxes other than income taxes decreased in
- 2001, primarily due to lower New Hampshire franchise taxes in 2001.
There were no significant changes to taxes other than income taxes in 2000.
Other Income/(Loss),
Net Other Income/(loss),
net increased in 2001 as a result of PSNH's sale of its ownership in Millstone 3.
9
I 1LL Other income/(loss),
net increased in 2000, primarily due to the 1999 settlement with the New Hampshire Electric Cooperative which resulted in a $6.2 million write-off in 1999.
Interest Expense, Net Interest expense, net increased in
- 2001, primarily due to interest associated with the issuance of rate reduction bonds in
- 2001, partially offset by lower interest on long-term debt resulting from the retirement and refinancing of long-term debt.
Interest on long-term debt decreased in
- 2000, primarily due to refinancing of long-term debt to lower interest rates.
Income Tax Expense Income tax expense decreased in 2001, primarily due to the additional investment tax credits amortization associated with Seabrook.
Income tax expense increased in
- 2000, primarily due to 1999 utilization of net operating loss carryforwards.
Extraordinary Loss The extraordinary loss in 2000 is due to an after-tax write-off by PSNH of approximately $225 million of stranded costs under an industry restructuring settlement with the state of New Hampshire, combined with other positive effects relating to the discontinuation of SFAS No.
71 ($11 million).
10
Public Service Company of New Hampshire and Subsidiaries REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Public Service Company of New Hampshire:
We have audited the accompanying consolidated balance sheets of Public Service Company of New Hampshire and subsidiaries (a New Hampshire corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
- fairly, in all material respects, the financial position of Public Service Company of New Hampshire and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31,
- 2001, in conformity with accounting principles generally accepted in the United States.
Is! ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut January 22, 2002 11
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PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 (Thousands of Dollars)
Operating Revenues.......................................
Operating Expenses:
Operation Fuel, purchased and net interchange power...........
Other...............................................
Maintenance............................................
Depreciation...........................................
Amortization of regulatory assets, net.................
Taxes other than income taxes..........................
Total operating expenses.............................
Operating Income.........................................
Other Income, Net........................................
Income Before Interest and Income Tax Expense............
Interest Expense:
Interest on long-term debt.............................
Interest on rate reduction bonds.......................
Other interest.........................................
Interest expense, net................................
Income Before Income Tax Expense.........................
Income Tax Expense.......................................
Income Before Extraordinary Loss.........................
Extraordinary loss, net of tax benefit of $155,783............................................
Net Income/(Loss)........................................
STATEMENTS OF COMPREHENSIVE INCOME Net Income/(Loss)........................................
Other comprehensive (loss)/income, net of tax:
Unrealized (losses)/gains on securities................
Comprehensive Income/(Loss)..............................
1,171,686 713,668 123,533 56,276 39,741 65,445 38,375 1,037,038 134,648 36,643 171,291 30,201 20,721 22 50,944 120,347 38,571 81,776 81,776 81,776 (801) 80,975 1,291,332 853,563 122,268 47,429 43,873 45,874 42,321 1,155,328 136,004 14,360 150,364 37,510 47 37,557 112,807 45,256 67,551 (214,217)
(146,666)
(146,666) 133 (146,533) 1,160,589 691,743 127,635 52,481 47,695 34,915 43,409 997,878 162,711 5,837 168,548 42,728 547 43,275 125,273 41,064 84,209 84,209 84,209 70 84,279 The accompanying notes are an integral part of these financial statements.
13
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At December 31, 2001 2000 (Thousands of Dollars)
ASSETS Current Assets:
C a s h............................................................
Receivables, less accumulated provision for uncolleccible accounts of $1,737 in 2001 and $1,869 in 2000..............
Accounts receivable from affiliated companies...................
Taxes receivable................................................
Unbilled revenues...............................................
Fuel, materials and supplies, at average cost...................
Prepayments and other...........................................
Property, Plant and Equipment:
Electric utility O th e r............
Less: Accumulated provision for depreciation.................
Construction work in progress...................................
Nuclear fuel, net...............................................
Deferred Debits and Other Assets:
Regulatory assets...............................................
Nuclear decommissioning trusts, at market.......................
O th e r Tota l Assets......................................................
1,479 116,482 70,540 13,055 29,268 42,047 10,211 166,600 1,447,955 6,221 1,454,176 689,397 764,779 44,961 809,740 1,046,760 71,414 1,118,174 2,094,514 71,992 2,239 10,005 41,844 28,760 14,783 286,105 1,506,168 8,588 1,514,756 714,792 799,964 27,251 1,924 829,139 924, 847 7,362 34,843 967,052 2,082,296 The accompanying notes are an integral part of these financial statements.
14
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At December 31, 2001 (Thousands 2000 of Dollars)
LIABILITIES AND CAPITALIZATION Current Liabilities:
Notes payable to banks.................................
Notes payable to affiliated company....................
Preferred stock - current portion......................
Obligations under Seabrook Power Contracts and other capital leases -
current portion...........
Accounts payable.......................................
Accounts payable to affiliated companies...............
Accrued taxes..........................................
Accrued interest.......................................
Other..................................................
Rate Reduction Bonds.....................................
Obligations under Seabrook Power Contracts and Other Capital Leases...............................
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes......................
Accumulated deferred investment tax credits............
Deferred contractual obligations.......................
Accrued pension........................................
Other..................................................
Capitalization:
Long-Term Debt.........................................
Common stock, $1 par value - authorized 100,000,000 shares; 388 shares outstanding in 2001 and 1,000 shares outstanding in 2000........
Capital surplus, paid in.............................
Retained earnings.........................
Accumulated other comprehensive income...............
Common Stockholder's Equity............................
Total Capitalization.....................................
60,500 23,000 24,164 32,285 18,727 2,281 9,428 25,164 195,549 507,381 86,111 423,050 12,015 37,712 37,326 46,260 556,363 407,285 165,000 176,419 406 341,825 749,110 24,268 537,528 45,892 54,008 657 4,962 13,112 680,427 91,702 179,928 27,348 41,499 41,216 63,597 353,588 407,285 1
424,909 123, 177 1,207 549,294 956,579 Commitments and Contingencies (Note 10)
Total Liabilities and Capitalization.......................
2,094,514 The accompanying notes are an integral part of these financial statements.
2,082,296 15
PUBLIC SERVICE COMPANY OF IFS HAMPSHIRE aND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Comm-on Stock Capital
- Surplus, Paid In
'Thousands of Dollars)
Balance at Januarv 1, 1999........................
Net income for 1999...........................
Cash dividends on preferred stock.............
"Capital stock expenses, net..................
Allocation of benefits -
ESOP (b).............
Other comprehensive income....................
Balance at December 31, 1999......................
Net loss for 2000.............................
Cash dividends on preferred stock.............
Cash dividends on common stock Capital stock expenses, net...................
Allocation of benefits -
ESOP (bý.............
0 aher comprehensive income....................
Balance at December 31, 20C0......................
Net Income for 2001...........................
Cash dividends on preferred stock.............
Cash dividends on common stock...............
Repurchase of common stock....................
Capital stock expenses, net...................
Allocation of benefits ESOF (b).............
Other comprehensive loss......................
Balance at December 31, 2001 1
424,250 414 424, 654 255 424,909 (1
(259,999) 90 252,912 1,004 678,167 84,209 t6,625)
(10,558) 3 1 9, 938 (146,666)
(3,962)
(5, 000) 3, 66' 1,23,177 81,776 (1,286)
'27,000) 165,000 176,419 70 1,074 133 1,207 (801) 406 84,209 (6,625) 4C4 (10,558) 70 745,66, (146, 666j (3,962)
(50,000) 255 3,867, 133 549,294 81,776 (1,286)
(27,000, (260, 0) 90
,248)
(801) 341,825 (a) The company has no dividend restrictions.
- However, the company has two tests it must meet before it can pay out any dividends. The most restrictive of which limits the company to paying out no greater than $99.6 million of equity at December 31, 2001.
(b) in June 1999, PSNH paid NU parent $10.6 million for NU shares issued from 1992 through 1998 on behalf of its employees in accordance with NU's 401(k) plan. This transaction resulted in a reduction of the NU parent loss and a tax benefit to PSNH.
The amount in 2000 represents the remaining previously allocated 1993 through 1999 NU parent losses.
The accompanying notes are an integral part of these financial statements.
16 Retained Earnings Accumulated Other Comprehensive Incomei(Loss)
Total (a)
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS S..........................................................................................................
For the Years Ended December 31, 2001 2000 S....................................................................................(..ous..ds.of.Dollars)
(Thousands of Dollars)
Operating activities:
Income before extraordinary loss..............................
Adjustments to reconcile to net cash flows provided by operating activities:
Depreciation.................................................
Deferred income taxes and investment tax credits, net........
Net (deferral)/amortization of recoverable energy costs, net.
Amortization of regulatory assets, net.......................
Net other (uses)/sources of cash.............................
Changes in working capital:
Receivables and unbilled revenues, net......................
Fuel, materials and supplies.................................
Accounts payable.............................................
Accrued taxes.................................................
Other working capital (excludes cash)........................
Net cash flows provided by operating activities..................
Investing Activities:
Investments in regulated plant:
Electric utility plant.......................................
Nuclear fuel.................................................
Net cash flows used for investments in regulated plant.........
Investments in nuclear decommissioning trusts..................
Other investment activities, net...............................
Net proceeds from the sale of utility plant....................
Buyout of IPP contract......................................
Net cash flows used in investing activities......................
Financing Activities:
Repurchase of common stock.....................................
Issuance of long-term debt.....................................
Issuance of rate reduction bonds...............................
Retirement of rate reduction bonds.............................
Net increase in short-term debt................................
Reacquisitions and retirements of long-term debt...............
Reacquisitions and retirements of preferred stock..............
Buydown of capital lease obligation............................
Cash dividends on preferred stock..............................
Cash dividends on conrnon stock.................................
Net cash flows used in financing activities......................
Net (decrease)/increase in cash.................................
Cash - beginning of year.........................................
Cash - end of year...............................................
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized...........................
Income taxes...................................................
Decrease in obligations:
Seabrook Power Contracts.......................................
81,776 67,551 84,209 39,741 195,422 (21,234) 65,445 (83,746) 3,212 (13,287)
(48,888) 1,624 31,095 251,160 (92,626)
(37)
(92,663)
(137)
(30,906) 24,888 (48,164)
(146,982)
(260,000) 287,485 525,000 (17,619) 83,500 (287,485)
(24,268)
(497,508)
(1,286)
(27,000)
(219,181)
(115,003) 116,482 1,479 47,369 168,021 (517,998) 43,873 (521)
(35,886) 45,874 43,412 20,597 9,316 23,110 (33,048) 6,646 190,924 (69,500)
(1,153)
(70,653)
(686) 2,268 (69,071)
(109,200)
(25,732)
(3,962)
(50,000)
(188,894)
(67,041) 183,523 116,482 38,819 22,575 (96,208) 47,695 (5,304) 27,065 34,915 38,601 5,987 (1,434) 22,307 (49,385)
(5,496) 199,160 (46,096)
(1,168)
(47,264)
(678) 2,214 (45,728)
(25,000)
(6,625)
(31,625) 121,807 61,716 183,523 39,895 38,942 (115,065)
The accompanying notes are an integral part of these financial statements.
17 1999
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES A.
About Public Service Company of New Hampshire Public Serjice Company of New Hampshire (PSNH or the company) along with The Connecticut Light and Power Company (CL&P),
Wqeslern Massachusetts Electric Company (WMECO),
North Atlantic Energy Corporation (NAEC),
Holyoke Water Power Company (HWP),
and Yankee Energy System, Inc.
(Yankee) are the operating companies comQrising the Northeast Utilities system (NU system) and are wholly owned by Northeast Utilities (NU).
The NU system furnishes franchised retail electric service in New Hampshire, Connecticut, and wesrter Massachusetts through
- PSNH, CL&P and WMECO.
NAEC sells all of its entitlement to the capacity and output of Seabrook Station nuclear unit (Seabrook) to PSNH under the terms of =wo life-of-unit, full cost recovery contracts (Seabrook Power oacts).
HWP also is engaged in the production of electric power.
- Yankee, the parent company of Yankee Gas Services Company
ýYankee Gas),
is Connecticut's largest natural gas distribution system.
NU is registered with the Securities and Exchange Commission (SEC) as a
holding company under the Public Utility Holding Company Act of 1935 (1935 Act) and the NU system, including PSNH,
's subject to the provisions of the 1935 Act. Arrangements among the NU systerrm companies, outside agencies and other utilities co-ering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC.
PSNH is subject to further regulation for rates, accounting and other
.a<Cers by the FERC and the New Hampshire Public Utilities Commission (NHPUC).
Several wholly owned subsidiaries of NU provide support services for the NU system companies, including PSNH,
- and, in some cases, for other New England utilities.
Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, engineering, financial, information resources,
- legal, operational, planning, purchasing, and other services to the NU system companies, including PSNH.
North Atlantic Energy Service Corporation has operational responsibility for Seabrook.
In
- addition, PSNH has established two special purpose subsidiaries whose operations are solely related to the issuance of rate reduction bonds.
B.
Presentation The consolidated financial statements of PSNH include the accounts of all subsidiaries.
Intercompany transactions have been eliminated in consolidation.
18
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain reclassifications of prior years' data have been made to conform with the current year's presentation.
All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies and the NHPUC.
C.
New Accounting Standards Asset Retirement Obligations: In June
- 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No.
- 143, "Accounting for Asset Retirement Obligations."
This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees.
SFAS No.
143 is effective for PSNH's 2003 calendar year.
Upon adoption of SFAS No.
- 143, there may be an impact on PSNH's consolidated financial statements which management has not estimated at this time.
Long-Lived Assets:
In August 2001, the FASB issued SFAS No.
- 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No.
144 is effective for PSNH's 2002 calendar year.
Currently, management does not expect the adoption of SFAS No.
144 to have a material impact on PSNH's consolidated financial statements.
D.
Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies:
PSNH owns common stock in four regional nuclear companies (Yankee Companies).
PSNH's ownership interests in the Yankee Companies at December 31, 2001 and 2000, which are accounted for on the equity method due to PSNH's ability to exercise significant influence over their operating and financial policies are 5 percent of the Connecticut Yankee Atomic Power Company (CYAPC),
7 percent of the Yankee Atomic Electric Company (YAEC),
5 percent of Maine Yankee Atomic Power Company (MYAPC),
and 4 percent of Vermont Yankee Nuclear 19
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Power Corporation (VYNPC).
PSNH's total equity investment in the vankee Companies at December 31, 2001 and 2000 is
$8.5 million and S`0 million, respectively.
Each Yankee Company owns a
single
-uclear generating unit.
- However, VYNPC was the only unit still i
operation at December 31, 2001.
>yman Unit 4:
PSNH has a 3.14 percent ownership interest in Wyman Unit 4, a 632 megawatt oil-fired generating unit.
At December 31, 2001 and
- 2000, plant-in-service included
$6.1 million and the accumuFlated provision for depreciation included $4.5 million and S4.3 million, respectively, related to Wyman Unit
- 4.
E.
Depreciation The pr vision for depreciation is calculated using the straight lrne method based on the estimated remaining useful lives of depreciable utility plant-in-service, adjusted for salvage value and removal
- costs, as approved by the appropriate regulatory agency where applicable.
Depreciation rates are applied to plant-in-service from the time they are placed in service.
When plant is retired from service, the original cost of the plant, including costs of removal less
- salvage, is charged to the accumulated provision for depreciation.
The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3 percent in
- 2001, 3.2 percent in 2000 and 3.7 percent in 1999.
F.
Revenues Revenaes are based on authorized rates applied to each customer's use of energy.
In
- general, rates can be changed only through a formal proceeding before the NHPUC.
Regulatory commissions also have authority over the terms and conditions of nontraditional raýe-making arrangements.
At the end of each accounting
- period, PSNH accrues a
revenue estimate for the amount of energy delivered but unbilled.
G.
Regulatory Accounting and Assets The accounting policies of PSNH conform to accounting principles generally accepted in the United States applicable to rate regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation."
PSNH's transmission and distribution business continues to be cost-of-service rate regulated, and management believes the application of SFAS No.
71 continues to be appropriate.
Management also believes it is probable that PSNH will recover its investments in long-lived
- assets, including regulatory assets.
PSNH has three categories of stranded costs.
Part 1
costs are securitized regulatory assets that are recovered over 20
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the life of the rate reduction bonds.
Part 2 costs are ongoing costs consisting of nuclear decommissioning and independent power producer costs that are recovered as incurred, over the time period PSNH is responsible for those costs.
Part 3 costs are nonsecuritized regulatory assets which must be recovered by a recovery end date to be determined in accordance with the "Agreement to Settle PSNH Restructuring" (Settlement Agreement) or which will be written off as stipulated by that Settlement Agreement.
Based on current projections, PSNH expects to fully recover all of its Part 3 costs by the recovery end date.
In addition, all material regulatory assets are earning a return.
The components of PSNH's regulatory assets are as follows:
At December 31, 2001 2000 (Millions of Dollars)
Recoverable nuclear costs.............
29.0
$484.7 Securitized regulatory assets.........
498.2 Income taxes, net....
99.4 68.1 Unrecovered contractual obligations...
38.8 41.5 Recoverable energy costs, net.........
251.6 230.3 Other.................................
129.8 100.2 Totals..................................
$1,046.8
$924.8 In March 2001, PSNH recorded a regulatory asset in the amount of
$46.5 million in conjunction with the sale of the Millstone units.
A portion of the Millstone regulatory asset has been securitized and the remaining unamortized balance of $29 million as of December 31,
- 2001, is included in recoverable nuclear costs.
In 2000, PSNH discontinued the application of SFAS No.
71 for its generation business, and created a regulatory asset for Seabrook over market generation, which was classified as recoverable nuclear costs.
The unamortized balance of the regulatory asset created was $484.7 million as of December 31, 2000.
In April
- 2001, PSNH issued rate reduction bonds in the amount of $525 million.
PSNH used the majority of this amount to buydown its power contracts with NAEC.
The Seabrook over market generation was securitized at that time and was reclassified as a
securitized regulatory asset as of December 31, 2001.
- PSNH, under the terms of contracts with the Yankee Companies, is responsible for its proportionate share of the remaining costs of the units, including decommissioning.
These amounts are recorded as unrecovered contractual obligations.
A portion of these obligations was securitized in 2001 and is included in securitized regulatory assets.
21
_141L Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- PSNH, under
-he Energy Policy Act of 1992 (Energy Act),
is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (DOE)
(D&D Assessment).
The Energy Act requires that regulators treat D&D Assessments as a reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost.
PSNH is currently recovering these costs through rates.
As of December 31, 2001 and
- 2000, the PSNH's total D&D Assessment de-errals were
$0.2
- million, and have been recorded as recoverable energy costs, net.
i n conjuction with the implementation of restructuring under the
ýe&tlement Agreement on May 1,
- 2001, the fuel and purchased-power adjustment clause (FPPAC) was discontinued.
At December 31, 2001 and
- 2000, PSNH had S251.4 million and
$230.1
- million, resoec-tivey, of recoverable energy costs deferred under the
- FPPAC, including previous deferrals of purchases from independent power producers.
Under the Settlement Agreement, the FPPAC ceferrals are recovered as a Part 3 regulatory asset through a
astion
- charge, subject to a prudence determination by the H.
Income Taxes The tax effect of temporary differences (differences between the ceriods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate making treatment of the applicable regulatory commissions.
The tax effect f temporary differences, including timing differences accrued under previously approved accounting standards, that give rise Lo the accumulated deferred tax obligation including the i-macts of the buydown of the Seabrook Power Contracts and the sale of the Millstone units, is as follows:
December 31, 2001 2000 (Millions of Dollars)
Accelerated depreciation and other plant-related differences
$ 85.8 93.8 Regulatory assets:
Securitized contract termination costs and other.......................
177.9 Income tax gross-up.....................
37.8 25.1 Other.................................
121.6 61.0 Totals................................
$423.1
$179.9 22
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS I.
Other Income, Net The components of PSNH's other income, net items are as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Gain related to Millstone sale........
$25.9 Other, net.................
10.7 14.4 5.8 Totals.....................
$36.6
$14.4
$5.8
- 2.
SEABROOK POWER CONTRACTS PSNH and NAEC have entered into two power contracts that obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook for the term of Seabrook's operating license.
Under these power contracts, PSNH is obligated to pay NAEC's cost of service during this
- period, regardless of whether Seabrook is operating.
NAEC's cost of service includes all of its Seabrook related costs, including operation and maintenance (O&M)
- expenses, fuel expense, income and property tax expense, depreciation expense, certain overhead and other
- costs, and a return on its allowed investment.
With the implementation of the Settlement Agreement, PSNH and NAEC restructured the power contracts and bought down the value of the Seabrook plant asset, as defined within the Settlement Agreement, to
$100 million.
The Settlement Agreement also requires NAEC to sell via public auction its share of Seabrook, with the sale to occur no later than December 31, 2003.
NAEC expects to sell its investment in Seabrook around the end of 2002 through a public auction.
Upon a successful sale of NAEC's share of Seabrook, the existing Seabrook Power Contracts between PSNH and NAEC will be terminated.
PSNH has included its right to buy power from NAEC on its balance sheet as part of utility plant with a corresponding obligation. Under the current Seabrook Power Contracts which will be terminated following the sale of Seabrook, if Seabrook is shut down prior to the expiration of its operating license, PSNH will be unconditionally required to pay NAEC termination costs for 39 years, less the period during which Seabrook has operated.
These termination costs will reimburse NAEC for its share of Seabrook shut-down and decommissioning costs, and will pay NAEC a return of and on any undepreciated balance of its initial investment over the remaining term of the power contracts, and the return of and on any capital additions to the plant made after the acquisition date over a period of five years after shut down (net of any tax benefits to NAEC attributable to the cancellation).
Contract payments, excluding the buydown of the Seabrook plant asset in
- 2001, charged to operating expenses in
- 2001, 2000 and 1999 were 23
I II Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$158.6 million, $268 million and $280 million, respectively. Interest included in the contract payments in
- 2001, 2000 and 1999 was $21.8 million, $44 million and $49 million, respectively.
- 3.
SHORT-TERM DEBT Limits:
The amount of short-term borrowings that may be incurred by PSNH is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators.
PSNH is authorized by the NHPUC to incur short-term borrowings up to a maximum of $100 million.
Credit Agreement:
On November 16,
- 2001, PSNH, CL&P,
- WMECO, and Yankee Gas entered into a
364-day unsecured revolving credit facility for $350 million.
PSNH may draw up to $100 million under the facility, subject to the maximum facility limit of $350 million.
Unless extended, the credit facility will expire on November 15, 2002.
At December 31, 2001 and 2000, there were $60.5 million and no borrowings, respectively, in borrowings under these facilities.
Under the aforementioned credit agreement, PSNH may borrow at fixed or variable rates plus an applicable margin based upon certain debt
- ratings, as rated by the lower of Standard and Poor's or Moody's Investors Service.
The weighted average interest rate on PSNH's notes payable to banks outstanding on December 31, 2001 was 2.9 percent.
This credit agreement provides that PSNH must comply with certain financial and nonfinancial covenants as are customarily included in such agreements, including, but not limited to, consolidated debt ratios and interest coverage ratios.
PSNH currently is and expects to remain in compliance with these covenants.
Money Pool:
Certain subsidiaries of NU, including PSNH, are members of the Northeast Utilities System Money Pool (Pool).
The Pool provides a more efficient use of the cash resources of the NU system and reduces outside short-term borrowings.
NUSCO administers the Pool as agent for the member companies.
Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent.
NU parent may lend to the Pool but may not borrow.
Funds may be withdrawn from or repaid to the Pool at any time without prior notice.
Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate.
Borrowings based on loans from NU parent,
- however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing.
At December 31, 2001 and
- 2000, PSNH had
$23 million in borrowings from and no borrowings from/lendings to the Pool, respectively. The interest rate on borrowings from the Pool at December 31, 2001 was 1.5 percent.
24
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 4.
LEASES PSNH has entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles and office space.
The provisions of these lease agreements generally provide for renewal options.
Capital lease rental payments charged to operating expense were $0.7 million in
- 2001,
$1 million in
- 2000, and $1.5 million in 1999.
Interest included in capital lease rental payments was $0.3 million in 2001 and 2000, and $0.4 million in 1999.
Operating lease rental payments charged to expense were $3.9 million in
- 2001,
$3.5 million in 2000, and $3.1 million in 1999.
Future minimum rental payments, excluding executory costs, such as property taxes, state use taxes, insurance, and maintenance, under long-term noncancelable
- leases, as of December 31,
- 2001, are as follows:
Year Capital Leases Operating Leases (Millions of Dollars) 2002..........................
$0.4
$ 5.9 2003...........................
0.4 4.3 2004...........................
0.4 3.8 2005...........................
0.4 3.2 2006...........................
0.3 2.8 After 2006.................
0.4 4.6 Future minimum lease payments...........
2.3
$24.6 Less amount representing interest....................
0.9 Present value of future minimum lease payments...........
$1.4 25
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 5.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are as follows:
Shares Outstanding December 31, Description December 31, 2001 2001 2000 (Millions of Dollars) 10.60% Series A of 1991
$24.3 Less preferred stock to be redeemed within one year 24.3 Totals.......................
LONG-TERM DEBT Details of long-term debt outstanding are as follows:
At December 31, 2001 2000 (Millions of Dollars)
Pollution Control Revenue Bonds:
7.65% Tax-Exempt Series A, due 2021.....
$ 66.0 7.50% Tax-Exempt Series B, due 2021.....
109.0 7.65% Tax-Exempt Series C, due 2021.....
112.5 6.00% Tax-Exempt Series D, due 2021.....
75.0 75.0 6.00% Tax-Exempt Series E, due 2021.....
44.8 44.8 Adjustable Rate, Series A, due 2021.....
89.3 Adjustable Rate, Series B, due 2021.....
89.3 5.45% Tax-Exempt Series C, due 2021.....
108.9 Long-term debt..........................
$407.3
$407.3 There are no cash sinking fund requirements or debt maturities for the years 2002 through 2006. There are annual renewal and replacement fund requirements equal to 2.25 percent of the average of net depreciable utility property owned by PSNH at the reorganization
- date, plus cumulative gross property additions thereafter.
PSNH expects to meet these future fund requirements by certifying property additions.
Any deficiency would need to be satisfied by the deposit of cash or bonds.
Essentially, all utility plant of PSNH is subject to the liens of the company's first mortgage bond indenture.
PSNH entered into financing arrangements with the Business Finance Authority (BFA) of the state of New Hampshire.
Pursuant to which the BFA issued five series of Pollution Control Revenue Bonds (PCRBs) and loaned the proceeds to PSNH.
PSNH's obligation to repay each series of PCRBs is secured by bond insurance and the first mortgage bonds.
26 6.
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Each such series of first mortgage bonds contains similar terms and provisions as the applicable series of PCRBs.
For financial reporting
- purposes, these first mortgage bonds would not be considered outstanding unless PSNH failed to meet its obligations under the PCRBs.
The average effective interest rates on the variable-rate pollution control notes was 1.6 percent in 2001 and ranged from 5.9 percent to 6.8 percent in 2000.
- 7.
INCOME TAX EXPENSE The components of the federal and state income tax provisions were charged/(credited) to operations as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Current income taxes:
Federal..............................
$(143.5)
$41.8
$41.4 State.................................
(13.4) 4.0 5.0 Total current.....................
(156.9) 45.8 46.4 Deferred income taxes, net:
Federal...............................
197.3 6.7 4.6 State..................................
13.5 0.8 (2.2)
Total deferred...................
210.8 7.5 2.4 Investment tax credits, net...........
(15.3)
(8.0)
(7.7)
Total income tax expense..............
38.6
$45.3
$41.1 Deferred income taxes are comprised of the tax effects of temporary differences as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Depreciation...........................
$ 1.9
$(1.0)
$ (6.5)
Regulatory deferral...................
13.3 6.9 (12.6)
State net operating loss carryforward........................
29.5 Regulatory disallowance...............
2.3 (2.3)
Contractual settlements...............
6.7 (6.7)
Securitized contract costs and other.....................
177.9 Other.....................................
8.7 1.6 1.0 Deferred income taxes, net............
$210.8
$ 7.5 2.4 27
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation between income tax expense expense at the statutory rate is as follows:
and the expected tax For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Expected federal income tax...........
$42.1
$39.4
$43.7 Tax effect of differences:
Depreciation........................
0.7 0.3 0.9 Amortization of regulatory assets.................
6.3 9.9 9.9 Investment tax credit amortization......................
(15.3)
(8.0)
(7.7)
State income taxes, net of federal benefit...................
0.1 2.9 1.6 Adjustment to tax asset valuation allowance...............
(7.4)
Seabrook intercompany gains and losses.........................
5.0 0.8 Allocation of parent company loss...
(4.2)
Other, net..........................
4.7 (0.7)
Total income tax expense..............
$38.6
$45.3
$41.1
- 8.
PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system companies, including
- PSNH, participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment.
PSNH's portion of the NU system's pension credit, part of which was credited to utility plant, was $4.7 million in
- 2001,
$4.3 million in 2000 and $0.5 million in 1999.
Currently, PSNH's policy equal to that which will Retirement Income Security is to annually fund an amount at least satisfy the requirements of the Employee Act and Internal Revenue Code.
The NU system companies, including PSNH, also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a
benefit plan to retired employees.
These benefits are available for employees retiring from PSNH who have met specified service requirements.
For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost.
These costs are charged to expense over the estimated work life of the employee.
PSNH annually funds postretirement costs through external trusts with amounts that have been rate-recovered and which also are tax deductible.
28
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pension and trust assets are invested primarily in domestic and international equity securities and bonds.
The following table represents information on the plans' benefit obligation, fair value of plan assets, and the respective plans' funded status:
At December 31, Postretirement Pension Benefits Benefits (Millions of Dollars) 2001 2000 2001 2000 Change in benefit obligation Benefit obligation at beginning of year......
$(211.1)
$(201.5)
$(52.9) $(51.2)
Service cost.....................
(5.0)
(4.8)
(1.1)
(0.9)
Interest Cost....................
(15.8)
(15.0)
(4.3)
(3.9)
Transfers..........................
0.1 0.1 Actuarial loss..............
(9.5)
(1.0)
(12.4)
(1.1)
Benefits paid...............
15.1 11.1 5.3 4.2 Settlements and other.......
(1.7)
(0.1)
Benefit obligation at end of year............
$(227.9)
$(211.1)
$(65.5)
$(52.9)
Change in plan assets Fair value of plan assets at beginning of year......
$ 221.8
$ 233.8
$ 32.4
$ 30.6 Actual return on plan assets...............
(10.0)
(0.8)
(2.9) 1.5 Employer contribution.......-
4.3 4.5 Benefits paid...............
(15.1)
(11.1)
(5.3)
(4.2)
Transfers........................
(0.1)
(0.1)
Fair value of &lan assets at end of year............
$ 196.6
$ 221.8
$ 28.5
$ 32.4 Funded status at December 31............
$ (31.3) 10.7
$(37.0)
$(20.5)
Unrecognized transition obligation................
2.7 3.0 32.2 35.3 Unrecognized prior service cost.............
14.1 15.5 Unrecognized net (gain)/loss...............
(22.8)
(70.4) 4.6 (14.8)
Accrued benefit cost........
$ (37.3)
$ (41.2)
$ (0.2) 29
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following actuarial assumptions were used in calculating the plans' year end funded status:
At December 31, Postretirement Pension Benefits Benefits 2001 2000 2001 2000 Discount rate............
7.25%
7.50%
7.25%
7.50%
Compensation/
progression rate.......
4.25 4.50 4.25 4.50 Health care cost trend rate (a).........
N/A N/A 11.00 5.26 (a)
The annual per capita cost of covered health care benefits was assumed to decrease to 5.00 percent by 2007.
The components of net periodic benefit (credit)/cost are:
For the Years Ended December 31, Postretirement Pension Benefits Benefits (Millions of Dollars) 2001 2000 1999 2001 2000 1999 Service cost......
$ 5.0
$ 4.8 4.9
$ 1.1
$ 0.9 1.0 Interest cost.....
15.8 15.0 14.3 4.3 3.9 3.6 Expected return on plan assets..
(20.9)
(19.7)
(17.7)
(2.9)
(2.6)
(2.1)
Amortization of unrecognized net transition obligation......
0.3 0.3 0.3 2.9 2.9 2.9 Amortization of prior service cost............
1.3 1.3 1.3 Amortization of actuarial gain (5.4)
(6.0)
(3.6)
Other amortization, net.............
(1.1)
(0.6)
(0.5)
Settlements and other...........
(0.8)
Net periodic benefit (credit)/cost...
$(4.7)
$ (4.3) $ (0.5)
$ 4.3
$ 4.5 4.9 30
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For calculating pension and postretirement benefit
- costs, following assumptions were used:
the For the Years Ended December 31, Postretirement Pension Benefits Benefits 2001 2000 1999 2001 2000 1999 Discount rate.............
7.50% 7.75% 7.00%
7.50%
7.75%
7.00%
Expected long-term rate of return...........
9.50 9.50 9.50 N/A N/A N/A Compensation/
progression rate.........
4.50 4.75 4.25 4.50 4.75 4.25 Long-term rate of return Health assets, net of tax...........
N/A N/A N/A 7.50 7.50 7.50 Life assets............
N/A N/A N/A 9.50 9.50 9.50 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects:
One Percentage One Percentage (Millions of Dollars)
Point Increase Point Decrease Effect on total service and interest cost components.......
$0.2
$(0.2)
Effect on postretirement benefit obligation............
$3.0
$(2.7)
The trust holding the health plan assets is subject to federal income taxes.
- 9.
NUCLEAR GENERATION ASSETS DIVESTITURE On March 31,
- 2001, PSNH, CL&P and WMECO sold their ownership interests in Millstone 3 to a subsidiary of Dominion Resources, Inc.,
Dominion Nuclear Connecticut, Inc.
(DNCI).
This sale included all of the respective joint ownership interests of PSNH, CL&P and WMECO in Millstone 3.
PSNH received approximately $25 million of cash proceeds from the sale and applied the proceeds to taxes and reductions of debt and equity.
As part of the sale, DNCI assumed responsibility for decommissioning the three Millstone units.
31
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 10. COMMITMENTS AND CONTINGENCIES A.
Restructuring In July 2001, the NHPUC opened a docket to review the FPPAC cost accruals between August 2, 1999, and April 30, 2001.
Hearings at the NHPUC are expected to be held during the spring of 2002.
Under the Settlement Agreement, the FPPAC deferrals are recovered as a Part 3 regulatory asset through a stranded cost recovery charge.
At December 31, 2001 and 2000, PSNH had $183.3 million and $145.9 million, respectively, of recoverable deferred energy costs deferred under the FPPAC, excluding previous deferrals of purchases from independent power producers.
Management does not expect the outcome of these hearings to have a material impact on its earnings.
B.
Environmental Matters The NU system, including PSNH, is subject to environmental laws and regulations intended to mitigate or remove the effect of past operations and improve or maintain the quality of the environment.
As such, the NU system, including PSNH, has active environmental auditing and training programs and believes it is substantially in compliance with the current laws and regulations.
- However, the normal course of operations may necessarily involve activities and substances that expose PSNH to potential liabilities of which management cannot determine the outcome.
Additionally, management cannot determine the outcome for liabilities that may be imposed for past acts, even though such past acts may have been lawful at the time they occurred.
Management does not believe,
- however, that this will have a
material impact on PSNH's consolidated financial statements.
Based upon currently available information for the estimated remediation costs as of December 31, 2001 and 2000, the liability recorded by PSNH for its estimated environmental remediation costs amounted to $11.4 million and $9.7 million, respectively.
C.
Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, PSNH must pay the DOE for the disposal of spent nuclear fuel and high-level radioactive waste.
The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste.
Fees for nuclear fuel burned on or after April 7,
- 1983, are billed currently to customers and paid to the DOE on a quarterly basis.
PSNH remains responsible for fees to be paid for fuel burned until the divestiture of the Millstone and Seabrook nuclear units.
32
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS D.
Nuclear Insurance Contingencies Insurance policies covering PSNH's ownership share of the NU system's nuclear facilities have been purchased for the primary cost of
- repair, replacement or decontamination of utility property, certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of
- repair, replacement or decontamination or premature decommissioning of utility property.
PSNH is subject to retroactive assessments if losses under those policies exceed the accumulated funds available to the insurer.
The maximum potential assessments with respect to losses arising during the current policy year for the primary property insurance program, the replacement power policies and the excess property damage policies are $0.2 million, $1.3 million and $0.5 million, respectively.
In addition, insurance has been purchased in the aggregate amount of $200 million on an industry basis by the NU system for coverage of worker claims.
Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the NU
- system, including
- PSNH, could be assessed liabilities in proportion to its ownership interest in each of its nuclear units up to $83.9 million. The NU system's payment of this assessment would be limited to, in proportion to its ownership interest in each of its nuclear units,
$10 million in any one year per nuclear unit.
In addition, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection, the NU
- system, including PSNH would be subject to an additional 5 percent or $4.2 million liability, in proportion to its ownership interests in each of its nuclear units.
Under the terms of the Seabrook Power Contracts, PSNH could be obligated to pay for any assessment charged to NAEC as a cost of service.
Based upon NAEC's ownership interest in
- Seabrook, PSNH's maximum liability, including any additional assessments, would be
$31.3 million per
- incident, of which payments would be limited to $3.6 million per year.
In addition, through purchased-power contracts with
- VYNPC, PSNH would be responsible for up to an additional assessment of $3.5 million per incident, of which payments would be limited to $0.3 million per year.
PSNH expects to terminate its nuclear insurance upon the divestiture of its remaining nuclear units.
33
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS E.
Long-Term Contractual Arrangements Yankee Companies:
Under the terms of its agreement, PSNH paid its ownership (or entitlement) shares of costs, which included depreciation, O&M
- expenses, taxes, the estimated cost of decommissioning, and a return on invested capital.
These costs were recorded as purchased-power expenses.
PSNH's cost of purchases under contracts with VYNPC amounted to $6.5 million in 2001, $6.4 million in 2000 and $7.5 million in 1999.
VYNPC is in the process of selling its nuclear unit.
Upon completion of the
- sale, it is expected that these long-term contracts will be replaced with different contracts with the new buyer.
Energy Procurement Contracts: PSNH has entered into various arrangements for the purchase of capacity and energy.
PSNH's total cost of purchases under these arrangements amounted to
$144.4 million in 2001,
$144.9 million in 2000 and $139.8 million in 1999.
Hydro-Quebec: Along with other New England utilities, PSNH has entered into an agreement to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada.
PSNH is obligated to pay, over a 30-year period ending in
- 2020, its proportionate share of the annual O&M expenses and capital costs of those facilities.
Estimated Annual Costs:
The estimated annual costs of PSNH's significant long-term contractual arrangements, absent the effects of any contract terminations, buydowns or buyouts, or sales of generation assets are as follows:
2002 2003 2004 2005 2006 Totals (Millions of Dollars)
VYNPC............
7.7 7.3 8.4 8.5 7.7
$ 39.6 Energy Procurement Contracts......
135.5 139.3 142.8 144.3 140.4 702.3 Hydro-Quebec.....
8.4 8.1 7.8 7.5 6.7 38.5 Totals...........
$151.6 $154.7
$159.0
$160.3
$154.8
$780.4
- 11. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS Seabrook:
PSNH is obligated to pay NAEC's share of Seabrook's decommissioning costs, even if the unit is shut down prior to the expiration of its operating license.
Accordingly, NAEC bills PSNH directly for its share of the costs of decommissioning Seabrook.
PSNH records its Seabrook decommissioning costs as a component of purchased-power expense.
These costs are recovered through a
stranded cost recovery charge.
The Seabrook decommissioning costs will continue to be increased annually by its respective escalation 34
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rates until the unit is sold.
Under New Hampshire law, Seabrook's decommissioning funding requirements are set by the New Hampshire Nuclear Decommissioning Financing Committee (NDFC).
During November
- 2001, the NDFC issued an order that decreased the decommissioning funding requirements from previously approved levels as a result of revisions in the decommissioning standard required by state statutes and an increase in the NDFC's estimate of the energy producing life of Seabrook to 2026.
As a result, nuclear decommissioning costs are being accrued over the expected service life of the unit.
PSNH's estimated cost of decommissioning NAEC's ownership share of
- Seabrook, in year end 2001 dollars, is
$199.9 million. PSNH payments for NAEC's ownership share of the cost of decommissioning Seabrook are paid by NAEC to an independent decommissioning financing fund managed by the state of New Hampshire.
As of December 31, 2001 and 2000, NAEC has paid approximately $46.6 million and $39.6 million, respectively, (including payments made prior to the acquisition date by PSNH) into Seabrook's decommissioning fund.
Earnings on the decommissioning trust increase the decommissioning trust balance and the accumulated provision for depreciation.
Unrealized gains and losses associated with the decommissioning trust also impact the balance of the trust and the accumulated provision for depreciation.
The fair values of the amounts in the Seabrook external decommissioning trust were
$55.5 million and
$50.8 million at December 31, 2001 and
- 2000, respectively.
Upon divestiture, the balance in the Seabrook decommissioning trust will be transferred to the buyer.
Yankee Companies:
VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012.
PSNH's ownership share of estimated costs, in year end 2001 dollars, of decommissioning this unit is
$18.9 million.
In August 2001, VYNPC agreed to sell its nuclear generating unit for
$180
- million, including $35 million for nuclear fuel, to an unaffiliated company.
Among other commitments, the acquiring company agreed to assume the obligation to decommission the unit after it is taken out of service and provide the current level of output from the unit through 2012.
The sale is subject to the approval of the Vermont Public Service
- Board, the Nuclear Regulatory Commission, the
- FERC, and other regulatory authorities.
The closing on the sale is expected to be in the first half of 2002.
As of December 31, 2001 and
- 2000, PSNH's remaining estimated obligation, including decommissioning for the units owned by CYAPC, YAEC and MYAPC, which have been shut down was $37.7 million and
$41.5 million, respectively.
35
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments:
Nuclear Decommissioning Trusts: PSNH's portion of the investments held in the NU system companies' nuclear decommissioning trusts were transferred to DNCI in 2001 in conjunction with the sale of the Millstone units.
These investments were marked-to-market by a
positive $2.3 million as of December 31,
- 2000, with corresponding offsets to the accumulated provision for depreciation.
Preferred Stock and Long-Term Debt:
The fair value of PSNH's fixed rate securities is based upon the quoted market price for those issues or similar issues.
Adjustable rate securities are assumed to have a
fair value equal to their carrying value.
The carrying amounts of PSNH's financial instruments and the estimated fair values are as follows:
At December 31, 2001 Carrying Fair (Millions of Dollars)
Amount Value Long-term debt Other long-term debt.....................
$407.3
$410.0 Rate reduction bonds.....................
507.4 519.4 At December 31, 2000 Carrying Fair (Millions of Dollars)
Amount Value Preferred stock subject to mandatory redemption...................
$ 24.3
$ 25.5 Long-term debt Other long-term debt......................
407.3 401.9 36
Public Service Company of New Hampshire and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 13. OTHER COMPREHENSIVE INCOME The accumulated balance for as follows:
each other comprehensive income item is Current December 31, Period December 31, (Millions of Dollars) 2000 Change 2001 Unrealized gains on securities...............
$1.4
$(0.8)
$0.6 Minimum pension liability adjustments....
(0.2)
(0.2)
Accumulated other comprehensive income/(loss)...............
$1.2
$(0.8)
$0.4 Current December 31, Period December 31, (Millions of Dollars) 1999 Change 2000 Unrealized gains on securities...............
$1.3
$0.1
$1.4 Minimum pension liability adjustments....
(0.2)
(0.2)
Accumulated other comprehensive income.....
$1.1
$0.1
$1.2 The changes in the components of other comprehensive income are reported net of the following income tax effects:
(Millions of Dollars) 2001 2000 1999 Unrealized gains on securities...............
$0.4 Minimum pension liability adjustments....
Other comprehensive income........................
$0.4
- 14.
SEGMENT INFORMATION The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries.
PSNH is included in the regulated utilities segment of the NU system and has no other reportable segments.
37
I I I Public Service Company of New Hampshire and Subsidiaries SELECTED CONSOLIDATED FINANCIAL DATA 4UUU Operating Revenues..........
$1,171,686 Net Income/(Loss)...........
81,776 Cash Dividends on Common Stock..............
27,000 Total Assets................
2,094,514 Rate Reduction Bonds........
507,381 Long-Term Debt(a)...........
Preferred Stock Subject to Mandatory Redemption (a)..
Obligations Under Seabrook Power Contracts and Other Capital Leases (a)........
407,285 110,275
$1,291,332 (146,666) 50,000 2,082,296 1999 (Thousands
$1,160,589 84,209 2,622,433 407,285 24,268 629,230 516,485 50,000 726,153 1998 of Dollars)
$1,087,247 91, 686 2,681,595 516,485 75,000 842,223 1997
$1,108,459 92,172 85,000 2,837,159 686,485 100,000 921,813 QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended 2001 March 31 June 30 September 30 December 31 (Thousands of Dollars)
Operating Revenues 5340z835
$286.799
$299,711
$ 244.341 Operating Income L-232-2
$ 31.008
$ 45564
$__34.854 Net Income 1-283-62
$ 15,517
$ 21.630 16,267 2000 Operating Revenues 1328L7Q7 Operating Income
$ 38,577 Net Income/(Loss)
$ 17_431 (a)
Includes portions due within one year.
$326.471
$ 37.407
$ 14,252 S337-878a L33.7-24 L2.8.7-33
$ 298,276
$ 26 296
$ (207.082) 38 SELECTED CONSOLIDATED FINANCIAL DATA
Public Service Company of New Hampshire and Subsidiaries CONSOLIDATED STATISTICS (Unaudited)
Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollars)
(Millions)
(kWh)
(Average)
December 31, 2001 2000 1999 1998 1997
$1,492,916 1,535,343 2,283,187 2,302,254 2,312,628 14,953 17,143 12,832 12,579 13,340 6,868 6,644 6,665 6,347 6,528 439,750 433,937 427,694 421,602 407,642 1,241 1,227 1,258 1,265 1,254 39
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Public Service of New Hampshire General Offices 780 North Commercial Street P.O. Box 330 Manchester, New Hampshire 03101 AM-Public Service of New Hampshire The Northeast Utilities System
Public Service Company of New Hampshire Pollution Control Revenue Bonds Trustee and Interest Paying Agent First Union National Bank 21 South Street Morristown, NJ 07960 Data contained in this Annual Report are submitted for the sole purpose ofproviding information to present security holders about the company.
Address General Correspondence in Care of:
Northeast Utilities Service Company Investor Relations Department P.O. Box 270 Hartford, Connecticut 06141-0270 Telephone: (860) 665-5000
Western Massachusetts Electric Company Fc u ts 2001 Annual Report
Directors Officers David H. Boguslawski Vice President-Transmission Business Northeast Utilities Service Company James E. Byrne Partner Finneran, Byrne & Drechsler, LLP John H. Forsgren Vice Chairman, Executive Vice President and Chief Financial Officer Northeast Utilities Cheryl W. Gris6 President-Utility Group Northeast Utilities Kerry J. Kuhlman President and Chief Operating Officer Western Massachusetts Electric Company Paul J. McDonald Advisor to the Board of Directors of Friendly Ice Cream Corporation Michael G. Morris Chairman of the Board, President and Chief Executive Officer Northeast Utilities Melinda M. Phelps Partner Bulklejf Richardson & Gelinas, LLP Executive Committee of the Board of Directors Michael G. Morris, Chairman David H. Boguslawski John H Forsgren Cheryl W Grisi KerryJ Kuhlman Michael G. Morris Chairman and Chief Executive Officer Kerry J. Kuhlman President and Chief Operating Officer David H. Boguslawski Vice President-Transmission Business David R. McHale Vice President and Treasurer John P Stack Vice President-Accounting and Controller Roger C. Zaklukiewicz Vice President-Transmission Engineering and Operations Patricia A. Wood Clerk
- 0. Kay Comendul Assistant Clerk William J. Quinlan Assistant Clerk Deborah L. Canyock Assistant Controller-Management Information and Budgeting Services Lori A. Mahler Assistant Controller-Accounting Services William J. Starr Assistant Controller-Taxes Randy A. Shoop Assistant Treasurer-Finance
2001 Annual Report Western Massachusetts Electric Company and Subsidiary Index Contents Management's Discussion and Analysis of Financial Condition and Results of Operations.......................
Report of Independent Public Accountants....................
Consolidated Statements of Income...........................
Consolidated Statements of Comprehensive Income.............
Consolidated Balance Sheets.................................
Consolidated Statements of Common Stockholder's Equity......
Consolidated Statements of Cash Flows.......................
Notes to Consolidated Financial Statements..................
Selected Consolidated Financial Data........................
Consolidated Quarterly Financial Data (Unaudited)...........
Consolidated Statistics (Unaudited).........................
Preferred Stockholder and Bondholder Information............
Page 1
11 13 13 14-15 16 17 18 38 38 39 Back Cover
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Western Massachusetts Electric Company and Subsidiary MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Overview Western Massachusetts Electric Company's (WMECO or the company) earnings before preferred dividends totaled
$15 million in
- 2001, compared with $35.3 million in 2000 and $2.9 million in 1999.
WMECO is an operating company in the Northeast Utilities system (NU system) and is wholly owned by Northeast Utilities (NU).
Earnings at WMECO decreased primarily because the sale of Millstone three months into 2001 removed a significant source of earnings as compared with 2000.
Future Outlook In 2001, as a result of completing industry restructuring, WMECO has evolved into an energy delivery company, delivering electricity to customers that is produced by other companies and sometimes bought by customers through intermediaries.
Customers in Massachusetts currently have the option of choosing alternative power suppliers or relying on WMECO to acquire the power for them through standard offer service.
WMECO renegotiated its standard offer supply contracts on an annual basis.
As a
- result, in January
- 2001, WMECO instituted approximately a 17 percent overall rate increase for its customers taking standard offer service reflecting a sharp increase in prices paid to third-party suppliers during 2001.
In December 2001,
- however, these rates were reduced by 14
- percent, primarily reflecting a
reduction in WMECO's standard offer service supply costs in 2002.
The significant reduction in supply costs in 2002 will result in a
material reduction in WMECO's operating revenues and purchased power costs in
- 2002, but should not have a significant impact on financial performance since electric supply costs are passed through to customers.
As a result, WMECO expects that its financial performance will be relatively stable and predictable in 2002, absent significant adverse events, such as a catastrophic storm.
Liquidity The year 2001 was marked by tremendous inflows of cash into the NU system and WMECO as a result of the securitization of stranded costs and the sale of the Millstone units.
WMECO's liquidity benefited from the issuance of $155 million in rate reduction certificates and the receipt of approximately $175 million from the sale of the Millstone units.
The largest share of the proceeds from the Millstone sale was used for the repayment of debt and preferred securities.
As a result, WMECO's combined short-term and long-term debt other than rate reduction bonds decreased to $160.4 million at the end of 2001 from 1
$310 million at the end of 2000.
WMECO repaid all of its preferred stock in 2001.
Of the $155 million of rate reduction certificates issued by WMECO,
$99.7 million was related to the buyout of high-cost, long-term purchased-power contracts.
The remaining proceeds from the Millstone sale were used primarily to pay state and federal income taxes on the Millstone sale and return equity capital to NU parent.
Including both return of capital and common dividends, WMECO paid $37 million to NU parent in 2001.
Primarily as a result of the Millstone sale and the issuance of rate reduction certificates, WMECO's consolidated capitalization ratio was significantly stronger at the end of 2001 than it was a year earlier.
Including capital lease obligations, but excluding rate reduction bonds, as these bonds are nonrecourse to WMECO, WMECO's capitalization ratio was 51.6 percent debt and 48.4 percent common equity at the end of
- 2001, compared with 61.8 percent
- debt, 6.7 percent preferred securities and 31.5 percent common equity at the end of 2000.
The improved capitalization ratio and lowered overall risk profile resulted in a series of upgrades of the NU system securities through 2001.
At the end of 2001, senior debt ratings on WMECO's securities were A3 and BBB+.
- Overall, these ratings were the highest for WMECO securities in decades and are expected to continue to enhance WMECO's access to low-cost capital.
WMECO's net cash flows provided by operating activities decreased to
$64.9 million in
- 2001, compared with $71.5 million in 2000 and $21.8 million in 1999.
In
- 2001, cash flows provided by operating activities, decreased primarily due to industry restructuring and the Millstone sale in March 2001.
The level of common dividends totaled
$22 million in
- 2001, as compared to $12 million in 2000 and no common dividends in 1999.
The level of preferred dividends decreased to $0.4 million in
- 2001, compared with $2.8 million in 2000 and $3.3 million in 1999, reflecting WMECO's reduced preferred stock outstanding.
WMECO currently forecasts construction expenditures of up to $25 million for the year 2002.
Over the coming
- years, management expects WMECO to pay out substantially all of its earnings as dividends to the parent company.
In
- 2002, WMECO may make additional dividend payments to NU to help achieve its target leverage ratio of approximately 55
- percent, excluding rate reduction bonds.
As of December 31,
- 2001, WMECO's capitalization included total debt of approximately 52
- percent, excluding rate reduction bonds.
Current debt levels at WMECO are expected to remain stable in future years.
2
Capital investments in electric utility plant at WMECO totaled $30.9 million in
- 2001, as compared to $27.3 million in 2000.
The company anticipates no material increase in capital expenditures in the next several years.
Restructuring and Rate Matters Massachusetts has experienced a continued expansion in the number of customers securing their electric supply through competitive suppliers.
In January
- 2001, WMECO instituted approximately a
17 percent overall rate increase for its customers taking standard offer service.
The increase reflected a sharp increase, from approximately
$0.045 per kilowatt-hour (kWh) to approximately $0.073 per
- kWh, in prices paid to third-party suppliers during 2001.
In December 2001, however, the Massachusetts Department of Telecommunications and Energy approved approximately a 14 percent reduction in WMECO's overall rates for standard offer service customers, primarily reflecting a reduction in WMECO's standard offer service supply costs in 2002 to approximately
$0.048 per kWh.
The significant reduction in supply costs in 2002 will result in a material reduction in WMECO's operating revenues and purchased power costs in
- 2002, but should not have a significant impact on financial performance since electric supply costs are passed through to customers.
For further information regarding commitments and contingencies related to restructuring, see Note 10A, "Commitments and Contingencies
- Restructuring," to the consolidated financial statements.
Regional Transmission Organization The Federal Energy Regulatory Commission (FERC) has required all transmission owning utilities, including WMECO, to voluntarily start forming regional transmission organizations (RTO) or to state why this process has not begun.
In July 2001, the FERC stated that the three existing Northeastern Independent System Operators (ISO)
(PJM, New York and New England) should work together to form one RTO.
The FERC initiated a mediation effort between all interested parties to begin the process of forming such an entity.
NU has been discussing with the other transmission owners in the three pool area the potential to form an Independent Transmission Company (ITC).
The ITC would be a for-profit entity and would perform certain transmission functions required by the FERC including tariff
- control, system planning and system operations.
The remaining functions required by the FERC would be performed by the ISO and deal with the energy market and short-term reliability.
Together, the ITC and ISO form the FERC desired RTO.
In January 2002, the New York and New England ISOs announced their intention to form an RTO.
NU is working with the other transmission owners in these two power pools to create an ITC.
The agreements 3
needed to create the ITC and to define the working relationships among the ISO, the ITC and the transmission owners should be created in 2002 and will allow the ITC to begin operation shortly thereafter.
The ITC and/or ISO will have the responsibility to collect the revenue requirements of each transmission owning entity from the market place through FERC approved tariffs.
The creation of the ITC and/or RTO will require a FERC rate case and the impact on NU's return on equity as a result of this rate case cannot be estimated at this time.
Nuclear Plant Performance and Other Matters Vermont Yankee: In August 2001, the owners of Vermont Yankee announced they would sell the unit to an unaffiliated company for $180 million, including $145 million for the plant and materials and supplies and
$35 million for the nuclear fuel.
WMECO owns 2.5 percent of the unit, and under the terms of the sale, will continue to buy 2.5 percent of the plant's output through March 2012 at a range of fixed prices.
The sale requires several regulatory approvals and is scheduled to close during the first half of 2002.
Millstone: On March 31,
- 2001, WMECO and The Connecticut Light and Power Company (CL&P) consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion Resources, Inc.,
Dominion Nuclear Connecticut, Inc.
(DNCI).
Additionally,
- WMECO, CL&P and Public Service Company of New Hampshire sold their ownership interests in Millstone 3 to DNCI.
On October 5,
- 2001, NU issued a report, following an extensive search, concerning two missing fuel pins at the retired Millstone 1 nuclear unit, which was sold to DNCI on March 31, 2001.
As of December 31, 2001, costs related to this search for WMECO totaled $1.3 million. The report concluded that the pins are currently located in one of four facilities licensed to store low or high-level nuclear waste and that they are not a threat to public health and safety.
A follow-up review by the Nuclear Regulatory Commission (NRC) commenced shortly after the report was filed and resulted in a NRC sponsored public meeting on January 15, 2002.
In February
- 2002, the NRC issued a written inspection report which concluded that NU's investigation was thorough and
- complete, and that its conclusions were reasonable and supportable.
Nuclear Decommissioning In connection with the aforementioned sale of the Millstone units, DNCI has agreed to assume responsibility for decommissioning those units.
For further information regarding nuclear decommissioning, see Note 11, "Nuclear Decommissioning and Plant Closure Costs,"
to the consolidated financial statements.
4
Spent Nuclear Fuel Disposal Costs The United States Department of Energy (DOE) originally was scheduled to begin accepting delivery of spent nuclear fuel on January 31, 1998.
- However, delays in confirming the suitability of a permanent storage site continually have postponed plans for the DOE's long-term storage and disposal site.
Extended delays or a default by the DOE could lead to consideration of costly alternatives.
WMECO has the primary responsibility for the interim storage of its spent nuclear fuel prior to divestiture of its remaining operating nuclear
- unit, Vermont
- Yankee, as well as the three nuclear units currently undergoing decommissioning, Connecticut Yankee, Maine Yankee and Yankee Rowe.
For further information regarding spent nuclear fuel disposal costs, see Note
- 10C, "Commitments and Contingencies Spent Nuclear Fuel Disposal Costs," to the consolidated financial statements.
Other Matters Critical Accounting Policies: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and at times difficult, subjective or complex judgments.
Accounting policies related to the recoverability of certain regulatory assets and the assumptions used in developing the pension and postretirement benefit obligations are the accounting principles that management believes are critical and could have a significant impact on WMECO's consolidated financial statements.
Regulatory Assets: The accounting policies of the NU system's regulated operating companies historically reflect the effects of the rate-making process in accordance with Statement of Accounting Standards (SFAS)
No.
71, "Accounting for the Effects of Certain Types of Regulation." Through its cost-of-service rate regulated transmission and distribution
- business, WMECO is currently recovering its investments in long-lived
- assets, including regulatory assets, and management believes that the application of SFAS No.
71 to that portion of their business continues to be appropriate.
Management must reaffirm this conclusion at each balance sheet date.
If, as a result of a change in circumstances, it is determined that any portion of these investments is no longer recoverable under SFAS No.
71, that portion would be written off. Such a write-off could have a material impact on WMECO's consolidated financial statements.
Management currently believes that all long-lived
- assets, including regulatory assets, are recoverable.
Pension and Postretirement Benefit Obligations:
WMECO participates in a
uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees and also provides certain health care
- benefits, 5
primarily medical and dental, and life insurance benefits through a benefit plan to retired employees.
For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status, and net periodic benefit credit or cost is based on several significant assumptions.
These assumptions primarily relate to the application of a discount rate, expected long-term rate of return and other trend rates.
If these assumptions were
- changed, the resultant change in benefit obligations, fair values of plan assets, funded status, and net periodic benefit credits or costs could have a material impact on WMECO's consolidated financial statements.
For further information regarding these types of activities, see Note IG, "Regulatory Accounting and Assets," and Note 8, "Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial statements.
Environmental Matters:
The NU system, including WMECO, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment.
For further information regarding environmental matters, see Note 10B, "Commitments and Contingencies -
Environmental Matters," to the consolidated financial statements.
Other Commitments and Contingencies:
For further information regarding other commitments and contingencies, see Note 10, "Commitments and Contingencies,"
to the consolidated financial statements.
Contractual Obligations and Commercial Commitments:
Aggregated information regarding WMECO's contractual obligations and commercial commitments as of December 31, 2001, is summarized as follows:
(Millions of Dollars) 2002 2003 2004 2005 2006 Totals Notes payable to banks
$50.0
$ 50.0 Operating leases 3.5 3.2 3.0 2.9 2.6 15.2 Long-term contractual obligations 10.7 10.4 10.9 10.9 10.1 53.0 Totals
$64.2
$13.6
$13.9
$13.8
$12.7
$118.2 For further information regarding WMECO's contractual obligations and commercial commitments, see Note 2,
"Short-Term Debt,"
Note 3,
"Leases,"
and Note 10E, "Long-Term Contractual Arrangements,"
to the consolidated financial statements.
6 I
Forward Looking Statements:
This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, the use of proceeds from restructuring, and the recovery of operating costs.
Words such as estimates,
- expects, anticipates,
- intends, plans, and similar expressions identify forward looking statements.
Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory
- bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in
- laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors.
RESULTS OF OPERATIONS The components of significant income statement variances for the past two years are provided in the table below.
Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 2000 over/(under) 1999 Amount Percent Amount Percent Operating Revenues
$(35)
(7)%
$99 24%
Operating Expenses:
Fuel, purchased and net interchange power 70 28 95 62 Other operation (9)
(12)
(26)
(25)
Maintenance (13)
(41)
(14)
(30)
Depreciation (4)
(22)
(10)
(36)
Amortization of regulatory assets, net 84 (a) 21 80 Taxes other than income taxes (6)
(26)
(3)
(14)
Gain on sale of utility plant (120)
(a) 22 100 Total operating expenses 2
1 85 24 Operating income (37)
(50) 14 24 Other income/(loss), net (2)
(a) 22 (a)
Interest expense, net (10)
(40)
(2)
(7)
Income before income tax expense (29)
(57) 38 (a)
Income tax expense (9)
(57) 6 69 Net Income/(loss)...
$(20)
(58)%
$32
_a)
(a) Percent greater than 100.
7
Operating Revenues Operating revenues decreased by $35 million or 7 percent in
- 2001, primarily due to lower wholesale revenues
($85 million),
partially offset by higher regulated retail revenues
($52 million).
Wholesale revenues were lower primarily as a result of the sale of the Millstone units at the end of the first quarter of 2001 and lower sales of energy and capacity.
Retail revenues increased primarily due to an increase in the standard offer service rate partially offset by lower retail sales.
Retail sales decreased by 0.9 percent compared to 2000.
Operating revenues increased by $99 million or 24 percent in
- 2000, primarily due to higher wholesale and retail revenues.
Wholesale revenues increased
($82 million) as a result of the sale of output from Millstone 2 and 3.
Retail revenues increased by $11 million due to retail rate increases in late 1999 and early 2000.
Retail sales compared to 1999 were flat.
Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in
- 2001, primarily due to higher purchased energy costs associated with the standard offer supply.
Fuel, purchased and net interchange power expense increased in
- 2000, primarily due to the transition, under industry restructuring, of purchasing full requirements for customers from standard offer suppliers, in addition to the remaining fuel costs of the nuclear units and cogenerators.
Other Operation and Maintenance Other operation and maintenance (O&M) expenses decreased in
- 2001, primarily due to lower nuclear expenses ($29 million) as a result of the sale of the Millstone units at the end of the first quarter in 2001 and lower transmission and distribution expenses
($2 million),
partially offset by higher administrative and general expenses
($10 million).
Other O&M expenses decreased in 2000, primarily due to lower spending at the nuclear units
($17 million),
the decommissioning status of Millstone 1
($7 million),
lower administrative and general expenses
($14 million),
lower fossil and hydroelectric expenses due to the sale of certain fossil generation assets, and the transfer of certain hydroelectric generation assets
($6 million),
partially offset by higher transmission expenses ($4 million).
Depreciation Depreciation expense decreased in
- 2001, primarily due to the elimination of decommissioning expenses as a result of the sale of the Millstone units at the end of the first quarter of 2001.
Depreciation decreased in
- 2000, primarily due to the effect of discontinuing SFAS No.
71 for the generation portion of the business 8
and the resulting reclassification of depreciable nuclear plant balances to regulatory assets
($14 million),
the sale of certain fossil generation assets and the transfer of certain hydroelectric generation assets.
Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in
- 2001, primarily due to the amortization in 2001 related to the gain from the sale of Millstone
($120 million),
partially offset by lower amortization of nuclear-related transition costs
($22 million) and the current deferral of transition costs ($23 million).
Amortization of regulatory assets, net increased in
- 2000, primarily due to changes in amortization levels as a
result of industry restructuring
($24 million) and higher amortization associated with the reclassified nuclear plant balances
($14 million),
partially offset by the amortization in 1999 of the gain on the sale of the fossil plants ($12 million).
Taxes Other Than Income Taxes Taxes other than income taxes decreased in 2001 and 2000, primarily due to decreases in local property taxes.
Gain on Sale of Utility Plant WMECO recorded a gain in 2001 on the sale of its ownership interest in Millstone.
A corresponding amount of amortization expense was recorded.
Other Income/(Loss),
Net Other income/(loss),
net decreased in
- 2001, primarily due to higher environmental reserves in 2001, partially offset by the settlement, in
- 2000, of Millstone-related litigation, net of insurance proceeds
($2 million).
Other income/(loss),
net increased in
- 2000, primarily due to the nuclear-related costs.
Nuclear-related costs in 2000 are comprised of a settlement of Millstone 3 joint owner litigation, net of insurance proceeds
($2 million),
and a regulatory settlement
($1 million).
In comparison, costs in 1999 are comprised of one-time charges related to the return disallowed on Millstone 1 unrecovered plant from March 1998 forward ($11 million),
the settlement of Millstone 3 owner litigation, net of insurance proceeds ($5 million),
and the disallowed Millstone 1 plant per the Massachusetts restructuring order ($2 million).
Additionally, other income/(loss),
net increased in
- 2000, primarily due to an environmental reserve recorded in 1999
($3 million) and higher equity in earnings of regional nuclear generating and transmission companies from the Connecticut Yankee Atomic Power Company as a result of a rate settlement ($2 million).
9
Interest Expense, Net Interest expense, net decreased in 2001, primarily due to retirement of long-term debt.
Interest
- expense, net decreased in
- 2000, primarily due to reacquisitions and retirements of long-term debt, partially offset by an increase in interest charges related to short-term borrowings.
Income Tax Expense Income tax expense decreased in 2001, primarily due to lower revenues resulting from the sale of Millstone.
Income tax expense increased in
- 2000, primarily due to higher book taxable income.
10
Western Massachusetts Electric Company and Subsidiary REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Western Massachusetts Electric Company:
We have audited the accompanying consolidated balance sheets of Western Massachusetts Electric Company (a Massachusetts corporation and a wholly owned subsidiary of Northeast Utilities) and subsidiary as of December 31, 2001 and
- 2000, and the related consolidated statements of
- income, comprehensive
- income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Massachusetts Electric Company and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31,
- 2001, in conformity with accounting principles generally accepted in the United States.
Is! ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut January 22, 2002 11
This Page Left Intentionally Blank 12 I-
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 (Thousands of Dollars)
Operating Revenues....................................
Operating Expenses:
Operation Fuel, purchased and net interchange power........
Other............................................
Maintenance.........................................
Depreciation........................................
Amortization of regulatory assets, net..............
Taxes other than income taxes.......................
Gain on sale of utility plant.......................
Total operating expenses......................
Operating Income......................................
Other (Loss)/Income, Net..............................
Income Before Interest and Income Tax Expense.........
Interest Expense:
Interest on long-term debt..........................
Interest on rate reduction bonds....................
Other interest......................................
Interest expense, net............................
Income Before Income Tax Expense......................
Income Tax Expense....................................
Net Income............................................
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net Income.............................................
Other comprehensive (loss)/income, net of tax:
Unrealized (losses)/gains on securities.............
Comprehensive Income..................................
478,869 315,903 66,458 19,635 13,818 131,876 13,065 (119,775) 440,980 37,889 (1,050) 36,839 5,325 6,251 3,735 15,311 21,528 6,560 14,968 14,968 (123) 14,845 513,678 246,130 75,940 33,111 17,693 47,775 17,759 438,408 75,270 685 75,955 14,051 11,491 25,542 50,413 15,145 35,268 35,268 22 35,290 414,231 151,714 101,842 47,586 27,771 26,488 20,677 (22,437) 353,641 60,590 (21,246) 39,344 24,255 3,259 27,514 11,830 8,943 2,887 2,887 10 2,897 The accompanying notes are an integral part of these financial statements.
13
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS At December 31, 2001 2000 (Thousands of Dollars)
ASSETS Current Assets:
Cash..................................................
Receivables, less accumulated provision for uncollectible accounts of $2,028 in 2001 and
$1,886 in 2000........................................
Accounts receivable from affiliated companies..........
Unbilled revenues......................................
Fuel, materials and supplies, at average cost..........
Prepayments and other..................................
Property, Plant and Equipment:
Electric utility Less: Accumulated provision for depreciation........
Construction work in progress..........................
Nuclear fuel, net......................................
Deferred Debits and Other Assets:
Regulatory assets......................................
Prepaid pension........................................
Nuclear decommissioning trusts, at market..............
Other..................................................
599 43,761 2,208 12,746 1,457 1,544 62,315 564,857 186,784 378,073 18,326 396,399 320,222 54,226 19,500 393,948 985 36,364 16,146 21,222 1,606 4,817 81,140 1,112,405 792,923 319,482 22,813 18,296 360,591 392,247 45,473 144,921 23,446 606,087 Total Assets.............................................
852,662 The accompanying notes are an integral part of these financial statements.
1,047,818 14
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS At December 31, 2001 2000 (Thousands of Dollars)
LIABILITIES AND CAPITALIZATION Current Liabilities:
Notes payable to banks.................................
Notes payable to affiliated company....................
Long-term debt and preferred stock - current portion...
Accounts payable.......................................
Accounts payable to affiliated companies...............
Accrued taxes..........................................
Accrued interest.......................................
Other..................................................
Rate Reduction Bonds.....................................
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes......................
Accumulated deferred investment tax credits............
Decommissioning obligation - Millstone 1...............
Deferred contractual obligations.......................
Other..................................................
Capitalization:
Long-Term Debt.........................................
Preferred Stock........................................
Common Stockholder's Equity:
Common stock, $25 par value - authorized 1,072,471 shares; 509,696 shares outstanding in 2001 and 590,093 shares outstanding in 2000......
Capital surplus, paid in.............................
Retained earnings....................................
Accumulated other comprehensive income...............
Common Stockholder's Equity............................
Total Capitalization.....................................
50,000 9,200 34,970 2,982 3,691 2,201 10,214 113,258 110,000 600 61,500 25,298 8,611 8,471 4,703 34,592 253,775 152,317 229,893 3,998 37,357 64,222 335,470 224,711 17,580 136,130 42,519 26,782 447,722 139,425 35,000 101,170 12,742 82,224 55,422 59 150,447 251,617 14,752 94,010 62,952 182 171,896 346,321 Commitments and Contingencies (Note 10)
Total Liabilities and Capitalization.....................
852,662 1,047,818 The accompanying notes are an integral part of these financial statements.
15
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Accumulated Capital Other Common Stock
- Surplus, Retained Comprehensive Paid In Earnings Income/(Loss)
(Thousands of Dollars)
Total (a)
Balance at January 1, 1999...............
Net income for 1999..................
Cash dividends on preferred stock....
Capital stock expenses, net..........
Allocation of benefits -
ESOP (b)....
Capital contribution from Northeast Utilities................
Other comprehensive income...........
Balance at December 31, 1999.............
Net income for 2000..................
Cash dividends on preferred stock....
Cash dividends on common stock.......
Repurchase of common stock...........
Capital stock expenses, net..........
Allocation of benefits -
ESOP (b)....
Other comprehensive income...........
Balance at December 31, 2000.............
Net income for 2001..................
Cash dividends on preferred stock....
Cash dividends on common stock.......
Repurchase of common stock...........
Capital stock expenses, net..........
Allocation of benefits -
ESOP (b)....
Other comprehensive loss.............
Balance at December 31, 2001.............
$ 26,812
$ 151,431 46,003 26,812 260 20,000 171,691 (12,060)
(77,940) 259 14,752 94,010 150
$ 224,396 2,887 (3,298)
(6,880) 10 38,712 160 35,268 (2,798)
(12,002) 3,772 62,952 22 182 14,968 (404)
(22,000)
(2,010)
(12,990) 1,204 (94)
(123)
$ 12,742 82,224 55,422 59 2,887 (3,298) 260 (6,880) 20,000 I0 237,375 35,268 (2,798)
(12,002)
(90,000) 259 3,772 22 171,896 14,968 (404)
(22,000)
(15,000) 1,204 (94)
(123)
$ 150,447 (a) The company has no dividend restrictions.
However, the company has two tests it must meet before it can pay out any dividends. The most restrictive of which limits the company to paying out no greater than $55.4 million of equity at December 31, 2001.
(b)
In June 1999, WMECO paid NU parent $6.9 million for NU shares issued from 1992 through 1998 on behalf of its employees in accordance with NU's 401(k) plan. This transaction resulted in a reduction of the NU parent loss and a tax benefit to WMECO.
The amount in 2000 represents the remaining previously unallocated 1993 through 1999 NU parent losses.
The accompanying notes are an integral part of these financial statements.
16
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 (Thousands of Dollars)
Operating Activities:
Net income....................................................
Adjustments to reconcile to net cash flows provided by operating activities:
Depreciation................................................
Deferred income taxes and investment tax credits, net.......
Net amortization of recoverable energy costs................
Amortization of regulatory assets, net......................
Gain on sale of utility plant...............................
Net other (uses)/sources of cash............................
Changes in working capital:
Receivables and unbilled revenues, net......................
Fuel, materials and supplies................................
Accounts payable............................................
Accrued taxes...............................................
Other working capital (excludes cash).......................
Net cash flows provided by operating activities.................
Investing Activities:
Investments in regulated plant:
Electric utility plant......................................
Nuclear fuel................................................
Net cash flows used for investments in regulated plant........
Investments in nuclear decommissioning trusts.................
Other investment activities, net..............................
Net proceeds from the sale of utility plant...................
Capital contributions from Northeast Utilities................
Buyout of IPP contracts.......................................
Net cash flows provided by investing activities.................
Financing Activities:
Repurchase of common stock....................................
Issuance of rate reduction bonds..............................
Retirement of rate reduction bonds............................
Net (decrease)/increase in short-term debt....................
Reacquisitions and retirements of long-tem debt..............
Reacquisitions and retirements of preferred stock.............
Retirement of capital lease obligation........................
Cash dividends on preferred stock.............................
Cash dividends on common stock................................
Net cash flows used in financing activities.....................
Net (decrease)/increase in cash Cash - beginning of year........................................
Cash - end of year..............................................
Supplemental Cash Flow Information:
Cash paid/(refunded) during the year for:
Interest, net of amounts capitalized.........................
Income taxes.................................................
Increase in obligations:
Niantic Bay Fuel Trust........................................
14,968 35,268 2,887 13,818 5,281 3,179 131,876 (119,775)
(2,052) 15,017 149 4,043 (4,780) 3,204 64,928 (30,921)
(140)
(31,061)
(23,037) 817 175,154 (80,000) 41,873 (15,000) 155,000 (2,683)
(51,400)
(100,000)
(36,500)
(34,200)
(404)
(22,000)
(107,187)
(386) 985 599 17,939 6,314 411 17,693 (11,549) 9,386 47,775 (22,254)
(24,637) 1,491 17,727 7,882 (7,321) 71,461 (27,267)
(7,848)
(35,115)
(3,437) 3,589 185,787 150,824 (90,000)
(21,800)
(94,150)
(1,500)
(2,798)
(12,002)
(222,250) 35 950 985 26,055 18,554 1,532 27,771 (6,544) 26,488 (22,437) 6,759 (22,180) 1,956 (14,636)
(675) 22,368 21,757 (30,192)
(5,817)
(36,009)
(11,387) 1,807 48,524 20,000 (19,700) 3,235 81,500 (100,850)
(1,500)
(3,298)
(24,148) 844 106 950 30,958 (6,296) 1,112 The accompanying notes are an integral part of these financial statements.
17
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES A.
About Western Massachusetts Electric Company Western Massachusetts Electric Company (WMECO or the company) along with The Connecticut Light and Power Company (CL&P),
Public Service Company of New Hampshire (PSNH),
North Atlantic Energy Corporation (NAEC),
Holyoke Water Power Company (HWP),
and Yankee Energy
- System, Inc.
(Yankee) are the operating companies comprising the Northeast Utilities system (NU system) and are wholly owned by Northeast Utilities (NU).
The NU system furnishes franchised retail electric service in western Massachusetts, Connecticut and New Hampshire through
- WMECO, CL&P and PSNH.
NAEC sells all of its entitlement to the capacity and output of the Seabrook Station nuclear unit (Seabrook) to PSNH under the terms of two life-of-unit, full cost recovery contracts (Seabrook Power Contracts).
HWP also is engaged in the production of electric power.
- Yankee, the parent company of Yankee Gas Services Company (Yankee Gas),
is Connecticut's largest natural gas distribution system.
NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act) and the NU system, including
- WMECO, is subject to the provisions of the 1935 Act.
Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC.
WMECO is subject to further regulation for
- rates, accounting and other matters by the FERC and the Massachusetts Department of Telecommunications and Energy (DTE).
Several wholly owned subsidiaries of NU provide support services for the NU system companies, including WMECO,
- and, in some
- cases, for other New England utilities.
Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, engineering, financial, information resources, legal, operational, planning, purchasing, and other services to the NU system companies, including WMECO.
North Atlantic Energy Service Corporation has operational responsibility for Seabrook.
In
- addition, WMECO has established a special purpose subsidiary whose operations are solely related to the issuance of rate reduction certificates.
B.
Presentation The consolidated financial statements of WMECO include the accounts of its subsidiary. Intercompany transactions have been eliminated in consolidation.
18
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain reclassifications of prior years' data have been made to conform with the current year's presentation.
All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies and the DTE.
C.
New Accounting Standards Asset Retirement Obligations: In June
- 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No.
- 143, "Accounting for Asset Retirement Obligations."
This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees.
SFAS No.
143 is effective for WMECO's 2003 calendar year.
Upon adoption of SFAS No.
- 143, there may be an impact on WMECO's consolidated financial statements which management has not estimated at this time.
Long-Lived Assets:
In August 2001, the FASB issued SFAS No.
- 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No.
144 is effective for WMECO's 2002 calendar year.
Currently, management does not expect the adoption of SFAS No.
144 to have a material impact on WMECO's consolidated financial statements.
D.
Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: WMECO owns common stock in four regional nuclear companies (Yankee Companies).
WMECO's ownership interests in the Yankee Companies at December 31, 2001 and 2000, which are accounted for on the equity method due to WMECO's ability to exercise significant influence over their operating and financial policies are 9.5 percent of the 19
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Connecticut Yankee Atomic Power Company (CYAPC),
7 percent of the Yankee Atomic Electric Company (YAEC),
3 percent of the Maine Yankee Atomic Power Company (MYAPC),
and 2.5 percent of the Vermont Yankee Nuclear Power Corporation (VYNPC).
WMECO's total equity investment in the Yankee Companies at December 31, 2001 and 2000, is
$9.3 million and $11.1 million, respectively.
Each Yankee Company owns a single nuclear generating unit.
- However, VYNPC is the only unit still in operation at December 31, 2001.
Plant-in-service and the accumulated provision for depreciation for WMECO's share of Millstone 2 and 3 are as follows:
At December 31, 2001 2000 (Millions of Dollars)
Plant-in-service:
Millstone 2.............................
182.3 Millstone 3..........................-
382.7 Accumulated provision for depreciation:
Millstone 2.....
174.5 Millstone 3.........................-
357.3 E.- Depreciation The provision for depreciation is calculated using the straight-line method based on estimated remaining useful lives of depreciable utility plant-in-service, adjusted for salvage value and removal
- costs, as approved by the appropriate regulatory agency where applicable.
Depreciation rates are applied to the average plant-in-service from the time they are placed in service.
When plant is retired from service, the original cost of the plant, including costs of removal less
- salvage, is charged to the accumulated provision for depreciation.
The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 2.3 percent in 2001, 2.2 percent in 2000 and 2.3 percent in 1999.
As a result of discontinuing the application of SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation,"
for WMECO's generation business in 1999, the company recorded a charge to accumulated depreciation for the nuclear plant in excess of the estimated fair market value at the time in the amount of $330 million and a corresponding regulatory asset was created.
F.
Revenues Revenues are based on authorized rates applied to each customer's use of energy.
In general, rates can be changed only through a formal proceeding before the DTE.
Regulatory 20
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS commissions also have authority over the terms and conditions of nontraditional rate-making arrangements.
At the end of each accounting period, WMECO accrues a revenue estimate for the amount of energy delivered but unbilled.
G.
Regulatory Accounting and Assets The accounting policies of WMECO conform to accounting principles generally accepted in the United States applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No.
- 71.
WMECO's transmission and distribution business continues to be cost-of-service rate regulated, and management believes the application of SFAS No.
71 continues to be appropriate.
Management also believes it is probable that WMECO will recover its investments in long-lived assets, including regulatory assets. Stranded costs for WMECO will be recovered through a transition charge over a 12-year period.
In addition, the regulatory assets in the following table are earning a return. The components of WMECO's regulatory assets are as follows:
At December 31, 2001 2000 (Millions of Dollars)
Recoverable nuclear costs.............
38.5
$257.7 Securitized regulatory assets.......
149.6 Income taxes, net.......................
57.3 50.3 Unrecovered contractual obligations.
37.4 42.5 Recoverable energy costs, net.......
3.8 6.9 Other...............................
33.6 34.8 Totals
$320.2
$392.2 As a result of discontinuing the application of SFAS No.
71 for WMECO's generation
- business, the company had an unamortized balance
($250.5 million and
$286.9 million),
included in recoverable nuclear costs at December 31, 2001 and 2000, respectively.
These amounts were the result of reclassified nuclear plant in excess of its estimated fair market value from plant to regulatory assets, which took place in 1999.
This balance is offset by the unamortized balance of the deferred credit on the transfer of assets, in March
- 2000, to Northeast Generation Company (NGC) of approximately $127.5 million.
Since the transfer occurred between WMECO and NGC, two affiliates, the deferred credit is eliminated in consolidation.
In March 2001, WMECO sold its ownership interest in the Millstone units.
The gain on this 21
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS sale in the amount of approximately $119.8 million was used to offset recoverable nuclear
- costs, resulting in an unamortized balance of $3.3 million, after the current year's amortization expense.
Also included in that regulatory asset component for 2001 and 2000 are
$35.2 million and
$104.9 million, respectively, which includes Millstone 1 recoverable nuclear costs relating to the recoverable portion of the undepreciated plant and related assets
($35.2 million and
$39.6 million, respectively) and the decommissioning and closure obligation ($65.3 million in 2000).
WMECO issued rate reduction certificates in the amount of
$155 million in May of 2001 and
$99.7 million of those proceeds were related to the buyout of contracts with independent power producers.
The payments to buyout or buydown these contracts were recorded as securitized regulatory assets.
- WMECO, under the terms of contracts with the Yankee Companies, is responsible for its proportionate share of the remaining costs of the units, including decommissioning.
These amounts are recorded as unrecovered contractual obligations.
A portion of these obligations was securitized in 2001 and is included in securitized regulatory assets.
- WMECO, under the Energy Policy Act of 1992 (Energy Act),
is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (DOE)
(D&D Assessment).
The Energy Act requires that regulators treat D&D Assessments as a reasonable and necessary current cost of
- fuel, to be fully recovered in rates like any other fuel cost.
WMECO is currently recovering these costs through rates.
As of December 31, 2001 and 2000, WMECO's total D&D Assessment deferrals were
$5.5 million and
$8.6 million, respectively, and have been recorded as recoverable energy costs, net.
H.
Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate-making treatment of the applicable regulatory commissions.
The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax 22 I I
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS obligation including the impact of the sale of the Millstone units, is as follows:
At December 31, 2001 2000 (Millions of Dollars)
Accelerated depreciation and other plant-related differences....
$107.5
$113.5 Regulatory assets:
Nuclear stranded investment........
52.3 80.2 Securitized contract termination costs and other..................
38.4 Income tax gross-up................
19.0 19.5 Other......
12.7 11.5 Totals...............................
$229.9
$224.7 I.
Other (Loss)/Income, Net The components of WMECO's other (loss)/income, net items are as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Other nuclear-related costs......................
$(2.8)
$(18.0)
Other, net..............
(1.0) 3.5 (3.2)
Totals.......................
$(1.0)
$ 0.7
$(21.2)
- 2.
SHORT-TERM DEBT Limits: The amount of short-term borrowings that may be incurred by WMECO is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators.
Currently, SEC authorization allows WMECO to incur total short-term borrowings up to a maximum of $250 million.
Credit Agreement:
On November 16,
- 2001, WMECO, CL&P,
- PSNH, and Yankee Gas entered into a
364-day unsecured revolving credit facility for $350 million.
This facility replaced a $250 million facility for CL&P and WMECO which expired on November 16, 2001.
WMECO may draw up to $100 million, subject to the maximum facility limit of $350 million.
Unless extended, the credit facility will expire on November 15, 2002.
At December 31, 2001 and 2000, there were
$50 million and
$110 million, respectively, in borrowings under these facilities.
Under the aforementioned credit agreement, WMECO may borrow at fixed or variable rates plus an applicable margin based upon certain debt ratings, as rated by the lower of Standard and Poor's or Moody's Investors Service.
The weighted average interest rates on WMECO's notes payable to banks outstanding on December 31, 2001 and 2000, was 2.98 percent and 8.05 percent, respectively.
23
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This credit agreement provides that WMECO must comply with certain financial and nonfinancial covenants as are customarily included in such agreements, including, but not limited to, consolidated debt ratios and interest coverage ratios.
WMECO currently is and expects to remain in compliance with these covenants.
Money Pool:
Certain subsidiaries of NU, including
- WMECO, are members of the Northeast Utilities System Money Pool (Pool).
The Pool provides a more efficient use of the cash resources of the NU system and reduces outside short-term borrowings.
NUSCO administers the Pool as agent for the member companies.
Short-term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent.
NU parent may lend to the Pool but may not borrow.
Funds may be withdrawn from or repaid to the Pool at any time without prior notice.
Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate. Borrowings based on loans from NU
- parent, however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing.
At December 31, 2001 and 2000, WMECO had
$9.2 million and $0.6 million, respectively, of borrowings outstanding from the Pool. The interest rate on borrowings from the Pool at December 31, 2001 and
- 2000, was 1.5 percent and 5.4 percent, respectively.
- 3.
LEASES WMECO has entered into lease agreements for the use of data processing and office equipment,
- vehicles, nuclear control room simulators, and office space.
The provisions of these lease agreements generally provide for renewal options.
Capital lease rental payments charged to operating expense were
$1.9 million in
- 2001,
$9.6 million in
- 2000, and $2.6 million in 1999.
Interest included in capital lease rental payments was $0.7 million in
- 2001,
$2.8 million in
- 2000, and $3.1 million in 1999.
Operating lease rental payments charged to expense were
$2.5 million in 2001, $3.2 million in 2000, and $4.8 million in 1999.
24
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum rental payments, excluding executory costs such as property taxes, state use taxes, insurance, and maintenance, under long-term operating noncancelable leases, as of December 31,
- 2001, are as follows:
Year Operating Leases (Millions of Dollars) 2002......................................
$ 3.5 2003........................................
3.2 2004........................................
3.0 2005........................................
2.9 2006........................................
2.6 After 2006.................................
11.4 Future minimum lease payments.....
$26.6
- 4.
PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption are as follows:
December 31, Shares 2001 Outstanding Redemption December 31, December 31, Description Price 2001 2001 2000 (Millions of Dollars) 7.72% Series B of 1971
$20.0
- 5.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are as follows:
December 31, Shares 2001 Outstanding Redemption December 31, December 31, Description Price 2001 2001 2000 (Millions of Dollars) 7.60% Series of 1987
$16.5 Less preferred stock to be redeemed within one year 1.5 Totals......................................
$15.0 25
Western Massachusetts Electric Company and Subsidiary 1 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 6.
LONG-TERM DEBT Details of long-term debt outstanding are as follows:
At December 31, 2001 2000 (Millions of Dollars)
First Mortgage Bonds:
7 3/8% Series B, due 2001......................
$ 60.0 7 3/4% Series V, due 2002.........................
40.0 100.0 Pollution Control Notes:
Tax Exempt 1993 Series A, 5.85% due 2028 53.8 53.8 Fees and interest due for spent nuclear fuel disposal costs.......
47.4 45.6 Less amounts due within one year...........
60.0 Long-term debt, net........................
$101.2
$139.4 Essentially all utility plant of WMECO is subject to the liens of the company's first mortgage bond indenture.
WMECO has secured $53.8 million of pollution control notes with second mortgage liens on transmission assets, junior to the liens of its first mortgage bond indentures.
- 7.
INCOME TAX EXPENSE The components of the federal and state income tax provisions were charged/(credited) to operations as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Current income taxes:
Federal...........................
$ 0.3
$15.8
$13.5 State...............................
1.0 10.9 2.0 Total current...................
1.3 26.7 15.5 Deferred income taxes, net:
Federal.............................
5.3 (0.8)
(3.5)
State.............................
..0.6 (8.6)
(0.9)
Total deferred.............
.... 5.9 (9.4)
(4.4)
Investment tax credits, net....
(0.6)
(2.1)
(2.2)
Total income tax expense.......
$ 6.6
$15.2
$ 8.9 26
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes are comprised of the tax effects of temporary differences as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Depreciation, leased nuclear fuel, settlement credits, and disposal costs....................
$(0.6)
$ 0.9
$(2.3)
Regulatory deferral.................
(3.7)
(16.4)
(1.4)
Regulatory disallowance..........
(4.2)
Pension accruals......................
1.0 5.9 4.2 Sale of generation assets........
(30.5)
Securitized contract termination costs and other....
38.4 Other 1.3 0.2 (0.7)
Deferred income taxes, net.......
$ 5.9
$(9.4)
$(4.4)
A reconciliation between income tax expense and the expected tax expense at the statutory rate is as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Expected federal income tax......
$ 7.5
$17.6
$4.1 Tax effect of differences:
Depreciation...................
(1.2) 0.2 Amortization of regulatory assets............
1.2 1.3 6.2 Investment tax credit amortization..................
(0.6)
(2.1)
(2.2)
State income taxes, net of federal benefit.................
1.1 1.5 0.7 Dividends received deduction...
(0.6)
(1.7)
(0.4)
Other, net........................
(2.0)
(0.2) 0.3 Total income tax expense.........
$ 6.6
$15.2
$8.9
- 8.
PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system companies, including WMECO, participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees.
Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment.
WMECO's portion of the NU system's total pension credit, part of which was credited to utility plant, was $13.9 million in
- 2001,
$19 million in 2000 and $10.8 million in 1999.
Currently, WMECO's policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code.
27
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The NU system companies, including
- WMECO, also provide certain health care
- benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees.
These benefits are available for employees retiring from WMECO who have met specified service requirements.
For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost.
These costs are charged to expense over the estimated work life of the employee.
WMECO annually funds postretirement costs through external trusts with amounts that have been rate-recovered and which also are tax deductible.
Pension and trust assets are invested primarily in domestic and international equity securities and bonds.
28 1 11
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents obligation, fair value of plan funded status:
information on the plans' benefit
- assets, and the respective plans' At December 31, Pension Benefits Postretirement Benefits (Millions of Dollars) 2001 2000 2001 2000 Change in benefit obligation Benefit obligation at beginning of year.........
$(121.1)
$(118.1) $(29.3)
$(29.5)
Service cost.....................
(1.9)
(2.2)
(0.4)
(0.4)
Interest cost.....................
(8.5)
(8.9)
(2.4)
(2.2)
Transfers........................
4.9 0.5 Actuarial loss...................
(3.0)
(3.0)
(7.0)
(0.5)
Benefits paid.....................
8.7 8.2 3.6 2.6 Settlements and other.........
(0.4) 2.4 0.7 Benefit obligation at end of year...............
$(121.3)
$(121.1) $(35.5)
$(29.3)
Change in plan assets Fair value of plan assets at beginning of year........
$ 214.3
$ 223.9
$ 17.3
$ 16.6 Actual return on plan assets....................
(9.5)
(0.9)
(1.6) 0.8 Employer contribution.........-
2.6 2.5 Benefits paid.....................
(8.7)
(8.2)
(3.6)
(2.6)
Transfers.......................
(4.9)
(0.5)
Fair value of plan assets at end of year...............
$ 191.2
$ 214.3 $ 14.7
$ 17.3 Funded status at December 31.............
69.9 93.2 $(20.8)
$(12.0)
Unrecognized transition (asset)/obligation.........
(0.7)
(0.9) 17.4 19.1 Unrecognized prior service cost...................
6.0 6.6 Unrecognized net (gain)/loss...................
(21.0)
(53.4) 3.8 (6.6)
Prepaid benefit cost 54.2 45.5 0.4 0.5 29
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 The following actuarial assumptions were used in calculating the plans' year end funded status:
At December 31, Postretirement Pension Benefits Benefits 2001 2000 2001 2000 Discount rate.................
7.25%
7.50%
7.25%
7.50%
Compensation/progression rate.
4.25 4.50 4.25 4.50 Health care cost trend rate(a)...............
N/A N/A 11.00 5.26 (a)
The annual per capita cost of covered health care benefits was assumed to decrease to 5.00 percent by 2007.
The components of net periodic benefit (credit)/cost are:
For the Years Ended December 31, Postretirement Pension Benefits Benefits (Millions of Dollars) 2001 2000 1999 2001 2000 1999 Service cost........
$ 1.9 2.2 2.4
$ 0.4
$ 0.4
$ 0.5 Interest cost.....
8.5 8.9 8.5 2.4 2.2 2.1 Expected return on plan assets.
(20.0)
(19.0)
(16.9)
(1.4)
(1.3)
(1.0)
Amortization of unrecognized net transition (asset)/
obligation......
(0.2)
(0.2)
(0.2) 1.6 1.6 1.6 Amortization of prior service cost............
0.6 0.6 0.6 Amortization of actuarial gain...
(4.4)
(4.9)
(3.4)
Other amortization, net................
(0.4)
(0.4)
(0.3)
Settlements and other...........
(0.3)
(6.6)
(1.8)
Net periodic benefit (credit)/cost
$(13.9)
$(19.0)
$(10.8)
$ 2.6
$ 2.5
$ 2.9
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For calculating pension and postretirement benefit
- costs, the following assumptions were used:
For the Years Ended December 31, Pension Benefits 2001 2000 1999 Postretirement Benefits 2001 2000 1999 Discount rate..........
7.50%
7.75%
7.00%
7.50% 7.75% 7.00 Expected long-term rate of return..........
9.50 9.50 9.50 N/A N/A N/A Compensation/
progression rate......
4.50 4.75 4.25 4.50 4.75 4.25 Long-term rate of return Health assets, net of tax........
N/A N/A N/A 7.50 7.50 7.50 Life assets.........
N/A N/A N/A 9.50 9.50 9.50 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects:
One Percentage One Percentage (Millions of Dollars)
Point Increase Point Decrease Effect on total service and interest cost components......
$0.1
$(0.l)
Effect on postretirement benefit obligation............
... $1.5
$(1.3)
The trust holding the health plan assets is subject to federal income taxes.
- 9.
NUCLEAR GENERATION ASSETS DIVESTITURE On March 31,
- 2001, WMECO and CL&P consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion Resources, Inc.,
Dominion Nuclear Connecticut, Inc.
(DNCI).
- WMECO, CL&P and PSNH sold their ownership interests in Millstone 3 to DNCI.
This sale included all of the respective joint ownership interests of CL&P, PSNH and WMECO in Millstone 3.
WMECO received approximately $175 million of cash proceeds from the sale and applied the proceeds to taxes and reductions of debt and equity. As part of the sale, DNCI assumed responsibility for decommissioning the three Millstone units.
In connection with the sale, WMECO recorded a gain in the amount of approximately $119.8 million which was used to offset stranded costs.
31
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 10. COMMITMENTS AND CONTINGENCIES A.
Restructuring During the first quarter of 2000, WMECO filed its first annual stranded cost reconciliation filing covering the period March 1, 1998 through December 31, 1999.
The hearing and briefing processes related to this filing were completed during the second quarter of 2001.
A DTE decision is expected in the first half of 2002.
On March 30,
- 2001, WMECO also filed its second annual stranded cost reconciliation with the DTE for calendar year 2000 with the related review and hearing processes anticipated to be scheduled for the first half of 2002.
The cumulative deferral of unrecovered stranded costs, as filed through calendar year
- 2000, is approximately
$4 million.
Management believes these costs are fully recoverable.
WMECO is in the process of finalizing its 2001 annual transition cost reconciliation which is expected to be filed with the DTE on March 29, 2002.
This filing reconciles the recovery of stranded generation costs for calendar year 2001.
Also included in this filing are 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 data discovery by the DTE and other intervenors.
B.
Environmental Matters The NU system, including
- WMECO, is subject to environmental laws and regulations intended to mitigate or remove the effect of past operations and improve or maintain the quality of the environment.
As
- such, the NU system, including
- WMECO, has active environmental auditing and training programs and believes it is substantially in compliance with the current laws and regulations.
However, the normal course of operations may involve activities and substances that expose WMECO to potential liabilities of which management cannot determine the outcome.
Additionally, management cannot determine the outcome for liabilities that may be imposed for past acts, even though such past acts may have been lawful at the time they occurred.
Management does not believe, however, that this will have a material impact on WMECO's consolidated financial statements.
32 L 11
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Based upon currently available information for the estimated remediation costs as of December 31, 2001 and
- 2000, the liability recorded by WMECO for its estimated environmental remediation costs amounted to $5.3 million and $4.6 million, respectively.
C.
Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, WMECO must pay the DOE for the disposal of spent nuclear fuel and high-level radioactive waste.
The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste.
For nuclear fuel used to generate electricity prior to April 7, 1983 (Prior Period Fuel),
an accrual has been recorded for the full liability and payment must be made prior to the first delivery of spent fuel to the DOE.
Until such payment is
- made, the outstanding balance will continue to accrue interest at the 3 month treasury bill yield rate.
As of December 31, 2001 and 2000, fees due to the DOE for the disposal of Prior Period Fuel were $47.4 million and $45.6 million, respectively, including interest costs of $31.8 million and $30 million, respectively.
Fees for nuclear fuel burned on or after April 7,
- 1983, are billed currently to customers and paid to the DOE on a
quarterly basis.
WMECO remains responsible for fees to be paid for fuel burned until the divestiture of the Millstone nuclear units.
D.
Nuclear Insurance Contingencies Insurance policies covering WMECO's ownership share of the NU system's nuclear facilities have been purchased for the primary cost of repair, replacement or decontamination of utility property, certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of
- repair, replacement or decontamination or premature decommissioning of utility property.
WMECO is subject to retroactive assessments if losses under those policies exceed the accumulated funds available to the insurer.
The maximum potential assessments with respect to losses arising during the current policy year for the primary property insurance program and. the excess property damage policies are $0.2 million and $0.3 million, respectively.
In addition, insurance has been purchased by the NU system in the aggregate amount of
$200 million on an industry basis for coverage of worker claims.
Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the 33
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NU system, including WMECO, could be assessed liabilities in proportion to its ownership interest in each of its nuclear units up to $83.9 million.
The NU system's payment of this assessment would be limited to, in proportion to its ownership interest in each of its nuclear units, $10 million in any one year per nuclear unit.
In addition, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection, the NU system, including WMECO, would be subject to an additional 5 percent, or $4.2 million, liability, in proportion to its ownership interests in each of its nuclear units.
Through purchased-power contracts with
- VYNPC, WMECO would be responsible for an assessment of
$2.2 million per incident, of which payments would be limited to
$0.3 million per year.
WMECO expects to terminate its nuclear insurance upon the divestiture of its remaining nuclear units.
E.
Long-Term Contractual Arrangements Yankee Companies: Under the terms of its agreement, WMECO paid its ownership (or entitlement) shares of costs, which included depreciation, operation and maintenance (O&M)
- expenses, taxes, the estimated cost of decommissioning, and a return on invested capital.
These costs were recorded as purchased-power expenses.
WMECO's cost of purchases under its contract with VYNPC amounted to $4.1 million in 2001,
$4 million in 2000 and
$4.7 million in 1999.
VYNPC is in the process of selling its nuclear unit.
Upon completion of the sale, it is expected that these long-term contracts will be replaced with different contracts with the new buyer.
Energy Procurement Contracts: WMECO has entered into various arrangements for the purchase of capacity and energy.
WMECO's total cost of purchases under these arrangements amounted to
$14.5 million in 2001,
$28.5 million in 2000 and $28.2 million in 1999.
Hydro-Quebec: Along with other New England utilities, WMECO has entered into an agreement to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada.
WMECO is obligated to pay, over a 30-year period ending in
- 2020, its proportionate share of the annual O&M expenses and capital costs of those facilities.
34 1 11
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Estimated Annual Costs:
The estimated annual costs of WMECO's significant long-term contractual arrangements, absent the effects of any contract terminations, buydowns or buyouts, or sales of generation assets are as follows:
2002 2003 2004 2005 2006 Totals (Millions of Dollars)
VYNPC...........
$ 4.8
$ 4.6
$ 5.2
$ 5.3
$ 4.8
$24.7 Energy Procurement Contracts.....
2.8 2.8 2.8 2.8 2.8 14.0 Hydro-Quebec....
3.1 3.0 2.9 2.8 2.5 14.3 Totals..........
$10.7
$10.4
$10.9
$10.9
$10.1
$53.0
- 11.
NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012.
WMECO's ownership share of estimated costs, in year end 2001 dollars, of decommissioning this unit was
$11.8 million.
In August
- 2001, VYNPC agreed to sell its nuclear generating unit for
$180
- million, including
$35 million for nuclear
- fuel, to an unaffiliated company.
Among other commitments, the acquiring company agreed to assume the obligation to decommission the unit after it is taken out of service and agreed to provide the current level of output from the unit through 2012.
The sale is subject to the approval of the Vermont Public Service Board, the Nuclear Regulatory Commission, the FERC and other regulatory authorities.
The closing on the sale is expected to be in the first half of 2002.
As of December 31, 2001 and 2000, WMECO's remaining estimated obligations, including decommissioning for the units owned by
- CYAPC, YAEC and
- MYAPC, which have been shut down was
$37.4 million and $42.5 million, respectively.
- 12.
FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments:
Nuclear Decommissioning Trusts:
WMECO's portion of the investments held in the NU system companies' nuclear decommissioning trusts were transferred to DNCI in conjunction with the sale of the Millstone units to DNCI in March 2001.
These investments were marked-to-market by a positive $32.3 million as of December 31,
- 2000, with corresponding offsets to the accumulated provision for depreciation.
35
1 11 Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Preferred Stock and Long-Term Debt: The fair value of WMECO's fixed-rate securities is based upon the quoted market price for those issues or similar issues.
Adjustable rate securities are assumed to have a fair value equal to their carrying value.
The carrying amounts of WMECO's financial instruments and the estimated fair values are as follows:
At Dece~mber '
)(
(Millions of Dollars)
Amount Value Long-term debt Other long-term debt....................
$101.2
$101.0 Rate reduction bonds...................
152.3 154.1 At December 31, 2000 Carrying Fair (Millions of Dollars)
Amount Value Preferred stock not subject to mandatory redemption..............
$ 20.0 20.2 Preferred stock subject to mandatory redemption......................
16.5 16.5 Long-term debt First mortgage bonds..................
i...100.0 100.3 Other long-term debt......................
99.4 93.7 36 At Dec*mh*<
"41
?AN1 Carrvina
Western Massachusetts Electric Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 13.
OTHER COMPREHENSIVE INCOME The accumulated balance for each other is as follows:
comprehensive income item Current December 31, Period December 31, (Millions of Dollars) 2000 Change 2001 Unrealized gains on securities..........
$0.2
$(0.I)
$0.1 Accumulated other comprehensive income/(loss).............
$0.2
$(0.i)
$0.1 Current December 31, Period December 31, (Millions of Dollars) 1999 Change 2000 Unrealized gains on securities..........
$0.2
$0.2 Accumulated other comprehensive income...
$0.2
$0.2 The changes in the components of other comprehensive income are reported net of the following income tax effects:
(Millions of Dollars) 2001 2000 1999 Unrealized gains on securities............
$0.1 Other comprehensive income....................
$0.1
- 14.
SEGMENT INFORMATION The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries.
WMECO is included in the regulated utilities segment of the NU system and has no other reportable segments.
37
Western Massachusetts Electric Company and Subsidiary SELECTED CONSOLIDATED FINANCIAL DATA 2001 2000 1999 1998 1997 (Thousands of Dollars)
Operating Revenues...............
$478,869
$513,678
$414,231
$393,322
$426,447 Net Income/(Loss)................
... 14,968 35,268 2,887 (9,579)
(27,460)
Cash Dividends on Common Stock...................
...... 22,000 12,002
-15,D04 Total Assets..............................
852,662 1,047,818 1,253,604 1,287,682 1,179,128 Rate Reduction Bonds.............
152,317 Long-Term Debt (a)...............
... 101,170 199,425 290,279 389,314 396,649 Preferred Stock Not Subject to Mandatory Redemption.....................
20,000 20,000 20,000 20,000 Preferred Stock Subject to Mandatory Redemption (a).................
16,500 18,000 19,500 21,000 Obligations Under Capital Leases (a).............
110 26,921 29,972 34,093 32,887 CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended 2001 March 31 June 30 September 30 December 31 (Thousands of Dollars)
Operating Revenues.......................
143
$106,866
$120,679
$108,024 Operating Income........................
1 7 6 6,406
$ 14,821 4,786 Net Income...................................
331 9 1,518
$ 3.880
$ 6.251 2000 Operating Revenues......................
$129410
$120,90
$104 0 0
$133,778 Operating Income........................
$ 20,244 12707 2
$ 21651 Net Income...............................
$ 11,053
,95 9638
$ 1,621*
(a) Includes portion due within one year.
38
Western Massachusetts Electric Company and Subsidiary CONSOLIDATED STATISTICS (Unaudited)
Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollars)
(Millions)
(kWh)
(Average)
December 31, 2001 2000 1999 1998 1997 583,183 1,153,514 1,216,015 1,256,046 1,334,233 4,712 7,278 4,654 4,091 4,300 7,476 7,371 7,423 6,979 7,121 200,166 198,372 198,012 196,339 195,324 405 406 482 533 507 39
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Western Massachusetts Electric Company Senior Notes Trustee and Interest Paying Agent State Street Bank and Trust Company Goodwin Square 225 Asylum Street 23rd Floor Hartford, CT 06103 Address General Correspondence in Care of:
Northeast Utilities Service Company Investor Relations Department P.O. Box 270 Hartford, CT 06141-0270 Telephone: (860) 665-5000 Data contained in this Annual Report are submitted for the sole purpose ofproviding information to present security holders about the company.
Western Massachusetts Electric Company General Offices 174 Brush Hill Avenue West Springfield, Massachusetts 01090-0010 Western Massachusetts VIRRAMP Electric The Northeast Utilities System
The Connecticut Light and Power Company Fc ults 2001 Annual Report
Directors Officers David H. Boguslawski Vice President-Transmission Business Northeast Utilities Service Company Cheryl HW.
Gris6 President-Utility Group Northeast Utilities Leon J. Olivier President and Chief Operating Officer The Connecticut Light and Power Company Leon J. Olivier President and Chief Operating Officer David H. Boguslawski Vice President-Transmission Business Dana L. Louth Vice President-Energy Delivery Services James A. MuntS Vice President-Customer Services Rodney 0. Powell Vice President-Customer Relations John P. Stack Vice President-Accounting and Controller Roger C. Zaklukiewicz Vice President-Transmission Engineering and Operations
- 0. Kay Comendul Secretary Randy A. Shoop Treasurer Deborah L Canyock Assistant Controller -Management Information and Budgeting Services Lori A. Mahler Assistant Controller-Accounting Services William J. Starr Assistant Controller-Taxes William J. Whinma Assistant Secretary
2001 Annual Report The Connecticut Light and Power Company and Subsidiaries Index Contents Management's Discussion and Analysis of Financial Condition and Results of Operations.......................
Report of Independent Public Accountants....................
Consolidated Statements of Income...........................
Consolidated Statements of Comprehensive Income.............
Consolidated Balance Sheets.................................
Consolidated Statements of Common Stockholder's Equity......
Consolidated Statements of Cash Flows.......................
Notes to Consolidated Financial Statements..................
Selected Consolidated Financial Data........................
Consolidated Quarterly Financial Data (Unaudited)...........
Consolidated Statistics (Unaudited).........................
Preferred Stockholder and Bondholder Information............
Page 1
13 15 15 16-17 18 19 20 43 43 44 Back Cover
The Connecticut Light and Power Company and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Overview The Connecticut Light and Power Company's (CL&P or the company),
the Northeast Utilities system's (NU system) largest operating subsidiary, earnings before preferred dividends totaled $109.8 million in
- 2001, compared with $148.1 million in 2000 and a loss of $13.6 million in 1999.
Earnings at CL&P decreased primarily because the sale of Millstone three months into 2001 removed a significant source of earnings as compared with 2000.
In addition to the sale of Millstone, CL&P's lower earnings also reflect a
$21 million reduction in distribution and transmission rates the Connecticut Department of Public Utility Control (DPUC) imposed, which was effective on June 20, 2001.
Future Outlook In 2001, as a result of completing industry restructuring, CL&P has evolved into an energy delivery company, delivering electricity to customers that is produced by other companies and sometimes bought by customers through intermediaries.
As of January 1, 2000, CL&P secured four-year fixed-price contracts with three suppliers to provide power to customers who choose standard offer service.
Select Energy, Inc.
(Select Energy),
an affiliated company, became responsible for 50 percent of CL&P's standard offer load for the entire standard offer period, or approximately 2,000 megawatts annually at peak.
Two other unaffiliated suppliers became responsible for the balance of CL&P's standard offer load also for the entire standard offer period.
CL&P is fully recovering from retail customers, through reconciling
- charges, the cost of buying power from these three standard offer suppliers and expects to continue this recovery through the expiration of the contracts on December 31, 2003.
As a result, CL&P expects that its financial performance will be relatively stable and predictable in 2002, absent significant adverse events, such as a catastrophic storm.
Liquidity The year 2001 was marked by tremendous inflows of cash into the NU system and CL&P as a result of the securitization of stranded costs and the sale of the Millstone units.
CL&P's liquidity benefited from the issuance of $1.4 billion in rate reduction certificates and the receipt of approximately $800 million from the sale of the Millstone units.
The largest share of the proceeds from the Millstone sale was used for the repayment of debt.
As a result, CL&P's combined short term and long-term debt other than rate reduction bonds decreased to 1
$824.3 million at the end of 2001 from approximately $1.3 billion at the end of 2000.
Capital lease obligations declined to $16 million at the end of 2001 from $129.9 million at the end of 2000.
In 2001, CL&P also repaid $100 million of Monthly Income Preferred Securities and reduced the amount outstanding under its accounts receivable facility by $170 million.
Of the $1.4 billion of rate reduction certificates issued by CL&P,
$1.1 billion was used to buyout or buydown high-cost, long-term purchased-power contracts.
The remaining proceeds from the Millstone sale were used primarily to pay state and federal income taxes on the Millstone sale and return equity capital to NU parent.
Including both return of capital and common dividends, CL&P paid $60.1 million to NU parent in 2001.
Primarily as a result of the Millstone sale and the issuance of rate reduction certificates, CL&P's consolidated capitalization ratio was significantly stronger at the end of 2001 than it was a year earlier.
Including capital lease obligations, but excluding rate reduction bonds as these bonds are nonrecourse to CL&P, CL&P's capitalization ratio was 48.5 percent debt, 6.7 percent preferred securities and 44.8 percent common equity at the end of 2001, compared with 63.5 percent debt, 5.0 percent preferred securities and 31.5 percent common equity at the end of 2000.
The improved capitalization ratio and lowered overall risk profile resulted in *a series of upgrades of the NU system securities through 2001.
At the end of 2001, senior debt ratings on CL&P's securities were A2 and A-.
- Overall, those ratings were the highest for CL&P securities in decades and are expected to continue to enhance CL&P's access to low-cost capital.
CL&P's net cash flows provided by operating activities declined to
$44.2 million in 2001, compared with $259.9 million in 2000 and $299.4 million in 1999.
In
- 2001, cash flows provided by operating activities, decreased primarily due to the tax impact of the Millstone sale in March 2001 and a reduction in the accounts receivable sold under CL&P's receivables program.
The level of common dividends totaled $60.1 million in 2001, as compared to $72 million in 2000 and no common dividends in 1999.
The level of preferred dividends decreased to $5.6 million in 2001, compared with $7.4 million in 2000 and $12.8 million in 1999, reflecting CL&P's ongoing effort to reduce preferred stock outstanding.
CL&P currently forecasts construction expenditures of up to $244 million for the year 2002.
CL&P's dividend policy will depend largely on its earnings and the timing and scope of its expected increasing investment in its distribution and transmission system.
In
- 2002, CL&P may make additional dividend payments to NU to help achieve its target leverage ratio of approximately 55 percent, excluding rate reduction bonds.
As of December 31,
- 2001, CL&P's capitalization included total debt of approximately 48 percent, excluding rate reduction bonds.
2
Beyond 2001, CL&P may need to issue long-term debt if its currently planned transmission construction program is approved by regulators.
Business Development and Capital Expenditures In
- 2001, NU system companies announced a number of initiatives to significantly increase their investment in regulated electric transmission facilities, particularly in Connecticut.
CL&P announced that it planned to construct two new 345,000 volt transmission line facilities totaling approximately 85 miles into Norwalk, Connecticut at a combined cost of approximately $520 million.
An application to construct one of the facilities, an approximately 20-mile facility from Bethel, Connecticut to Norwalk, Connecticut, was filed in October 2001 with the Connecticut Siting Council.
A decision is expected by the fall of 2002.
The application related to a second facility from Middletown, Connecticut to Norwalk, Connecticut will be filed with the Connecticut Siting Council later in 2002.
CL&P also has proposed replacing the existing 138,000 volt transmission line beneath Long Island Sound between Norwalk, Connecticut and Northport -
Long Island, New York.
CL&P, which owns an equal share of the existing line with the Long Island Power Authority, would bear approximately half of the cost of the
$80 million project.
That project would require Connecticut, New York and federal regulatory approvals.
This application was filed with the Connecticut Siting Council in February 2002.
If approved, these three projects would increase CL&P's capital expenditures.
CL&P's capital investments in electric utility plant totaled $237.4 million in 2001 and $208.2 million in 2000, well above the $132.2 million level of 1998, primarily as a result of increased spending on CL&P's distribution system.
CL&P's capital expenditures are expected to total $244 million in 2002 and higher in 2003 through
- 2005, if the transmission projects are approved.
Restructuring and Rate Matters Industry restructuring for CL&P was essentially completed in 2000.
In June
- 2001, the DPUC concluded an investigation of 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 return on equity 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 January 1, 2002.
- Also, on July 26, 2001, the DPUC authorized CL&P to assess a charge of approximately $0.002 per kilowatt-hour (kWh) from August 2001 through December 2003 to collect approximately $98.5 million of deferred fuel costs.
The net result of these decisions was a reduction in CL&P's pretax earnings of
$21.1 million beginning June 20,
- 2001, an 3
J-I
acceleration of CL&P's recovery of stranded costs in 2002 and 2003, and further enhancement of CL&P's cash flows.
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 a subsidiary of Dominion Resources, Inc.,
Dominion Nuclear Connecticut, Inc.
(DNCI).
This application described and requested DPUC approval for CL&P's treatment of its share of the proceeds from the sale.
A decision from the DPUC is expected in the first half of 2002.
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, virtually all of CL&P's customers were procuring their electricity through CL&P's standard offer service.
Through December 2003, 50 percent of CL&P's standard offer service requirements will be purchased from Select Energy with the remaining 50 percent being purchased from two unaffiliated companies.
On November 18,
- 2001, at the request of one of the unaffiliated companies, CL&P filed a request with the DPUC to raise the standard offer service rate from an average of $0.0495 per kWh to $0.0595 per kWh to help promote competition in advance of the January 1, 2004, termination of the standard offer service period and to provide financial relief to the standard offer suppliers.
In December 2001, the DPUC rejected CL&P's
- request, but opened two new dockets to examine the absence of effective retail electric competition in Connecticut and the financial condition of the suppliers.
The dockets will include the gathering of information regarding the viability of the standard offer service contracts, their reliability and whether the standard offer service contracts should be linked to market conditions.
The DPUC held hearings in February 2002.
A decision in this docket which could lead to the re-opening of CL&P's standard offer docket to consider these issues is expected to be issued in the first half of 2002.
For further information regarding commitments and contingencies related to restructuring, see Note 10A, "Commitments and Contingencies
- Restructuring," to the consolidated financial statements.
Regional Transmission Organization The Federal Energy Regulatory Commission (FERC) has required all transmission owning utilities, including CL&P, to voluntarily start forming regional transmission organizations (RTO) or to state why this process has not begun.
In July 2001, the FERC stated that the three existing Northeastern Independent System Operators (ISO)
(PJM, New York and New England) should work together to form one RTO.
The FERC initiated a mediation effort between all interested parties to begin the process of forming such an entity.
NU has been discussing with the other transmission owners in the three pool area the potential to form an Independent Transmission Company 4
(ITC).
The ITC would be a for-profit entity and would perform certain transmission functions required by the FERC including tariff
- control, system planning and system operations.
The remaining functions required by the FERC would be performed by the ISO and deal with the energy market and short-term reliability.
In January 2002, the New York and New England ISOs announced their intention to form an RTO.
NU is working with the other transmission owners in these two power pools to create an ITC.
The agreements needed to create the ITC and to define the working relationships among the ISO, the ITC and the transmission owners should be created in 2002 and will allow the ITC to begin operation shortly thereafter.
The ITC and/or ISO will have the responsibility to collect the revenue requirements of each transmission owning entity from the market place through FERC approved tariffs.
The creation of the ITC and/or RTO will require a FERC rate case and the impact on NU's return on equity as a result of this rate case cannot be estimated at this time.
Nuclear Plant Performance and Other Matters Seabrook: Seabrook operated at a capacity factor of 85.9 percent in 2001.
After returning from a scheduled refueling outage in January
- 2001, Seabrook operated at a capacity factor of 93.4 percent. Seabrook is scheduled to undergo a refueling outage in the spring of 2002.
CL&P owns 4.06 percent of Seabrook.
Vermont Yankee: In August 2001, the owners of Vermont Yankee announced they would sell the unit to an unaffiliated company for $180 million, including $145 million for the plant and materials and supplies and
$35 million for the nuclear fuel.
CL&P owns 9.5 percent of the unit, and under the terms of the sale, will continue to buy 9.5 percent of the plant's output through March 2012 at a range of fixed prices.
The sale requires several regulatory approvals and is scheduled to close during the first half of 2002.
Millstone: On March 31, 2001, CL&P and Western Massachusetts Electric Company (WMECO) consummated the sale of Millstone 1 and 2 to DNCI.
Additionally, CL&P, Public Service Company of New Hampshire, and WMECO sold their ownership interests in Millstone 3 to DNCI.
On October 5,
- 2001, NU issued a report, following an extensive search, concerning two missing fuel pins at the retired Millstone 1 nuclear unit, which was sold to DNCI on March 31, 2001.
As of December 31,
- 2001, costs related to this search for CL&P totaled $5.8 million.
The report concluded that the pins are currently located in one of four facilities licensed to store low or high-level nuclear waste and that they are not a threat to public health and safety.
A follow-up review by the Nuclear Regulatory Commission (NRC) commenced shortly after the report was filed and resulted in a NRC sponsored public meeting on January 15, 2002.
In February
- 2002, the NRC issued a
written inspection report which concluded that NU's investigation was thorough 5
and
- complete, and that its conclusions were reasonable and supportable.
Nuclear Decommissioning In connection with the aforementioned sale of the Millstone units, DNCI has agreed to assume responsibility for decommissioning those units.
For further information regarding nuclear decommissioning, see Note 11, "Nuclear Decommissioning and Plant Closure Costs,"
to the consolidated financial statements.
Spent Nuclear Fuel Disposal Costs The United States Department of Energy (DOE) originally was scheduled to begin accepting delivery of spent nuclear fuel on January 31, 1998.
- However, delays in confirming the suitability of a permanent storage site continually have postponed plans for the DOE's long-term storage and disposal site.
Extended delays or a default by the DOE could lead to consideration of costly alternatives.
CL&P has the primary responsibility for the interim storage of its spent nuclear fuel prior to divestiture of its remaining operating nuclear units, Seabrook and Vermont
- Yankee, as well as the three nuclear units currently undergoing decommissioning, Connecticut
- Yankee, Maine Yankee and Yankee Rowe.
For further information regarding spent nuclear fuel disposal costs, see Note
- 10C, "Commitments and Contingencies Spent Nuclear Fuel Disposal Costs," to the consolidated financial statements.
Other Matters Critical Accounting Policies: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and at times difficult, subjective or complex judgments.
Accounting policies related to the recoverability of certain regulatory assets and the assumptions used in developing the pension and postretirement benefit obligations are the accounting principles that management believes are critical and could have a significant impact on CL&P's consolidated financial statements.
Regulatory Assets: The accounting policies of the NU system's regulated operating companies historically reflect the effects of the rate-making process in accordance with Statement of Financial Accounting Standards (SFAS)
No.
71, "Accounting for the Effects of Certain Types of Regulation." Through its cost-of-service rate regulated transmission and distribution
- business, CL&P is currently recovering its investments in long-lived
- assets, including regulatory assets, and management believes that the 6
l
application of SFAS No.
71 to that portion of their business continues to be appropriate.
Management must reaffirm this conclusion at each balance sheet date.
If, as a result of a change in circumstances, it is determined that any portion of these investments is no longer recoverable under SFAS No.
71, that portion would be written off. Such a write-off could have a material impact on CL&P's consolidated financial statements.
Management currently believes that all long-lived
- assets, including regulatory assets, are recoverable.
Pension and Postretirement Benefit Obligations: CL&P participates in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees and also provides certain health care benefits, primarily medical and
- dental, and life insurance benefits through a benefit plan to retired employees.
For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status, and net periodic benefit credit or cost is based on several significant assumptions.
These assumptions primarily relate to the application of a discount rate, expected long-term rate of return and other trend rates.
If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status, and net periodic benefit credits or costs could have a material impact on CL&P's consolidated financial statements.
For further information regarding these types of activities, see Note 1G, "Regulatory Accounting and Assets," and Note 7, "Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial statements.
Environmental Matters:
The NU system, including CL&P, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment.
For further information regarding environmental matters, see Note 10B, "Commitments and Contingencies -
Environmental Matters," to the consolidated financial statements.
Other Commitments and Contingencies:
For further information regarding other commitments and contingencies, see Note 10, "Commitments and Contingencies,"
to the consolidated financial statements.
7
I1I Contractual Obligations and Commercial Commitments:
Aggregated information regarding CL&P's contractual obligations and commercial commitments as of December 31,
- 2001, is summarized as follows:
(Millions of Dollars) 2002 2003 2004 2005 2006 Totals Capital leases 2.4 2.4 2.4 2.4 2.4 12.0 Operating leases 10.9 9.3 8.2 7.5 6.4 42.3 Long-term contractual obligations 227.0 231.3 234.1 237.3 237.6 1,167.3 Totals
$240.3
$243.0
$244.7
$247.2
$246.4
$1,221.6 For further information regarding CL&P's contractual obligations and commercial commitments, see Note 3, "Leases,"
and Note 10E, "Long Term Contractual Arrangements,"
to the consolidated financial statements.
Forward Looking Statements:
This discussion and analysis includes forward looking statements, which are statements of future expectations and not facts including, but not limited to, statements regarding future earnings, refinancings, the use of proceeds from restructuring, and the recovery of operating costs.
Words such as estimates,
- expects, anticipates,
- intends, plans, and similar expressions identify forward looking statements.
Actual results or outcomes could differ materially as a result of further actions by state and federal regulatory
- bodies, competition and industry restructuring, changes in economic conditions, changes in historical weather patterns, changes in
- laws, developments in legal or public policy doctrines, technological developments, and other presently unknown or unforeseen factors.
8
RESULTS OF OPERATIONS The components of significant income statement variances for the past two years are provided in the table below.
Income Statement Variances (Millions of Dollars) 2001 over/(under) 2000 2000 over/(under) 1999 Amount Percent Amount Percent Operating Revenues
$(290)
(10)%
$483 20%
Operating Expenses:
Fuel, purchased and net interchange power (151)
(9) 738 80 Other operation (102)
(25)
(68)
(14)
Maintenance (30)
(22)
(82)
(38)
Depreciation (21)
(18)
(76)
(39)
Amortization of regulatory assets, net 649 (a)
(350)
(78)
Taxes other than income taxes (7)
(5)
(37)
(21)
Gain on sale of utility plant (522) 286 100 Total operating expenses (184)
(7) 411 19 Operating income (106)
(29) 72 24 Other income/(loss),
net 75 (a) 65 74 Interest expense, net 22 23 (40)
(29)
Income before income tax expense (53)
(22) 177 (a)
Income tax expense (15)
(15) 15 18 Net income/(loss)
$ (38)
(26)%
$162 (a)
(a) Percent greater than 100.
9
Operating Revenues Total revenues decreased by
$290 million or 10 percent in
- 2001, primarily due to lower wholesale revenues
($325 million) and lower transmission revenues ($19 million), partially offset by higher retail revenues
($57 million).
Wholesale revenues were lower primarily as a result of the sale of the Millstone units at the end of the first quarter of 2001 and lower sales of capacity and energy.
The lower transmission revenues were partially offset by lower transmission expenses.
Retail revenues increased primarily due to higher retail sales ($43 million) and the recovery of previously deferred fuel costs
($19 million),
partially offset by a rate decrease
($5 million).
Retail sales increased 2.4 percent compared to 2000.
Operating revenues increased by $483 million or 20 percent in
- 2000, primarily due to higher wholesale revenues
($510 million),
primarily as a result of the sale of the output from Millstone 2 and 3, and the amortization of the amount related to the transfer of certain hydroelectric generation assets
($25 million) partially offset by lower retail revenues
($51 million).
Retail revenues decreased primarily as a result of a 5 percent retail rate decrease
($108 million), partially offset by higher retail sales ($27 million) and by the impact of Millstone 2 being returned to rate base ($30 million).
Retail sales increased by 0.4 percent in 2000.
Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense decreased in
- 2001, primarily due to lower purchased power costs resulting from the buydown and buyout of various cogeneration contracts and lower nuclear fuel expense.
Fuel, purchased and net interchange power expense increased in
- 2000, primarily due to the transition, under industry restructuring, to purchasing full requirements for customers from standard offer suppliers, in addition to the remaining fuel costs of the nuclear units and cogenerators.
Other Operation and Maintenance Other operation and maintenance (O&M) expenses decreased by
$132 million in 2001, primarily due to lower nuclear expenses ($95 million) as a result of the sale of the Millstone units at the end of the first quarter of
- 2001, lower administrative and general expenses
($22 million),
lower transmission expenses
($16 million),
and lower fossil/hydro expenses
($3 million),
partially offset by higher distribution expenses
($4 million).
Other O&M expenses decreased in 2000, primarily due to lower spending at the nuclear units
($56 million),
the decommissioning status of Millstone 1 ($14 million),
lower expenses due to the sale of certain fossil generation assets
($65 million),
and lower administrative and general expenses
($26 million),
partially offset by higher customer service expenses ($39 million).
10
Depreciation Depreciation expense decreased in
- 2001, primarily due to the elimination of decommissioning expenses as a result of the sale of the Millstone units at the end of the first quarter of 2001.
Depreciation expense decreased in 2000, primarily due to the effect of discontinuing SFAS No.
71 for the generation portion of the business and the resulting reclassification of depreciable nuclear plant balances to regulatory assets
($70 million),
the sale of certain fossil generation assets and the transfer of certain hydroelectric generation assets.
Amortization of Regulatory Assets, Net Amortization of regulatory assets, net increased in
- 2001, primarily due to the amortization related to the gain on the sale of the Millstone units
($524 million) and higher amortization related to securitized assets
($68 million),
stranded costs
($30 million),
and other amortizations related to restructuring ($27 million).
Amortization of regulatory assets, net decreased in
- 2000, primarily due to changes in amortization levels as a
result of industry restructuring ($128 million),
the amortization in 1999 of the gain on the sale of fossil plants ($286 million),
and the completion of the amortization of CL&P's cogeneration deferral in the first quarter of 1999
($6 million).
These decreases were partially offset by higher amortization associated with the reclassified nuclear plant balances
($70 million).
Taxes Other Than Income Taxes Taxes other than income taxes decreased in
- 2001, primarily due to settlement of a property tax appeal with the City of Meriden in 2001
($5 million) and the reduction in property tax due to the sale of the Millstone units
($12 million),
partially offset by higher gross earnings tax paid on higher revenues ($8 million).
Taxes other than income taxes decreased in
- 2000, primarily due to lower Connecticut gross earnings tax
($18 million) and lower local property taxes ($7 million).
Gain on Sale of Utility Plant CL&P recorded a gain on the sale of its ownership share in the Millstone units.
A corresponding amount of amortization expense was recorded in 2001.
CL&P recorded a gain on the sale of its fossil generation assets in 1999.
11
Other Income/(Loss),
Net Other income/(loss),
net increased in 2001, primarily due to the gain on the sale of CL&P's ownership share in the Millstone units
($29 million),
the settlement, in
- 2000, of Millstone-related litigation, net of insurance proceeds
($9 million),
a write-off associated with the former CMEEC nuclear entitlement
($6 million) in 2000 and higher interest income in 2001, including the allowed return on deferred fuel balances
($10 million),
interest on an IRS tax settlement
($10 million),
and interest income related to the City of Meriden property tax refund ($2 million).
Other income/(loss),
net increased in 2000, primarily due to the 1999 write-off of stranded costs in relation to the treatment of market based contracts ($15 million).
Interest Expense, Net Interest expense, net increased in
- 2001, primarily due to interest associated with the issuance of rate reduction certificates in
- 2001, partially offset by lower interest on other long-term debt resulting from reacquisitions and retirements of long-term debt in 2001.
Interest
- expense, net decreased in
- 2000, primarily due to reacquisitions and retirements of long-term debt in 2000.
12 I I
The Connecticut Light and Power Company and Subsidiaries REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of The Connecticut Light and Power Company:
We have audited the accompanying consolidated balance sheets of The Connecticut Light and Power Company (a Connecticut corporation and a wholly owned subsidiary of Northeast Utilities) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive
- income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
- fairly, in all material respects, the financial position of The Connecticut Light and Power Company and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31,
- 2001, in conformity with accounting principles generally accepted in the United States.
/s/
ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut January 22, 2002 13
SII This Page Left Intentionally Blank 14
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME S.....................................................................................................
FortheYearsEndedDecember31,-----
2001 2000 1999 (Thousands of Dollars)
Operating Revenues....................................
Operating Expenses:
Operation Fuel, purchased and net interchange power........
O ther............................................
Maintenance.........................................
Depreciation........................................
Amortization of regulatory assets, net..............
Taxes other than income taxes.......................
Gain on sale of utility plant.......................
Total operating expenses..........................
Operating Income......................................
Other Income/(Loss),
Net..............................
Income Before Interest and Income Tax Expense.........
Interest Expense:
Interest on long-term debt..........................
Interest on rate reduction bonds....................
Other interest......................................
Interest expense, net.............................
income Before Income Tax Expense......................
Income Tax Expense....................................
Net Income/(Loss).....................................
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net Income/(Loss).....................................
Other comprehensive (loss)/income, net of tax:
Unrealized (losses)/gains on securities.............
Other comprehensive (loss)/income, net of tax....
Comprehensive Income/(Loss)...........................
$ 2,646,123 1,514,418 310,477 106,228 96,212 746,693 130,656 (521,590) 2,383,094 263,029 52,804 315,833 59,724 60,644 761 121,129 194,704 84,901 109,803 109,803 (439)
(439) 109,364
$ 2,935,922 1,665,806 412,230 136,141 117,305 97,315 137,846 2,566,643 369,279 (22,224) 347,055 89,841 9,025 98,866 248,189 100,054 148,135
$ 2,452,855 927, 989 480,138 217,961 193,776 447,776 174,884 (286,477) 2,156,047 296,808 (86,787) 210,021 127,533 10,918 138,451 71,570 85,138 (13,568) 148,135 (13,568) 90 90 148,225 38 38 (13,530)
The accompanying notes are an integral part of these financial statements.
15
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At December 31, 2001 2000 (Thousands of Dollars)
ASSETS Current Assets:
Cash and cash equivalents..............................
Investments in securitizable assets....................
Notes receivable from affiliated companies.............
Receivables, less accumulated provision for uncollectible accounts of $525 in 2001 and $300 in 2000......................................
Accounts receivable from affiliated companies..........
Unbilled revenues......................................
Fuel, materials and supplies, at average cost..........
Prepayments and other..................................
Property, Plant and Equipment:
Electric utility Less: Accumulated provision for depreciation........
Construction work in progress..........................
Nuclear fuel, net......................................
Deferred Debits and Other Assets:
Regulatory assets......................................
Prepaid pension........................................
Nuclear decommissioning trusts, at market..............
Oth er.................................................
773 36,367 77,200 247,801 22,134 7,492 33,085 17,703 442, 555 3,127,548 1,236, 638 1,890,910 134,964 3,299 2,029, 173 1,877,191 233, 692 6,231 138, 715 2,255,829 5,461 98,146 38,000 29,245 103,763 36,332 32,291 343,238 5,756,098 4,210,429 1,545,669 128,835 79,672 1,754,176 1,835,967 170,672 536,912 123,233 2,666,784 Total Assets.............................................
4,727,557 The accompanying notes are an integral part of these financial statements.
4,764,198 16
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At December 31, 2001 2000 (Thousands of Dollars)
LIABILITIES AND CAPITALIZATION Current Liabilities:
Notes payable to banks.................................
Long-term debt and preferred stock - current portion...
Accounts payable.......................................
Accounts payable to affiliated companies...............
Accrued taxes..........................................
Accrued interest.......................................
Other..................................................
Rate Reduction Bonds.....................................
Minority Interest in Consolidated Subsidiary.............
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes......................
Accumulated deferred investment tax credits............
Decommissioning obligation - Millstone 1...............
Deferred contractual obligations.......................
Other..................................................
Capitalization:
Long-Term Debt.........................................
Preferred Stock........................................
Common Stockholder's Equity:
Common stock, $10 par value - authorized 24,500,000 shares; 7,584,884 shares outstanding in 2001 and 2000........................
Capital surplus, paid in.............................
Retained earnings....................................
Accumulated other comprehensive income...............
Common Stockholder's Equity............................
Total Capitalization.....................................
132,593 85,057 34,823 10,369 62,841 325,683 1,358,653 820,444 95,996 141,497 267,900 1,325,837 824,349 116,200 75,849 414,018 286,901 67 776,835 1,717,384 115,000 160,000 153,944 122,106 32,901 13,995 161,193 759,139 100,000 977,439 99,771 580,320 160,590 165,307 1,983,427 1,072,688 116,200 75,849 413,192 243,197 506 732,744 1,921,632 Commitments and Contingencies (Note 10)
Total Liabilities and Capitalization.....................
4,727,557 4,764,198 The accompanying notes are an integral part of these financial statements.
17
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Common Stock Capital
- Surplus, Paid In (Thousands Retained Earnings of Dollars)
Accumulated Other Comprehensive Income/(Loss)
Balance at January 1, 1999............
Net loss for 1999.................
Cash dividends on preferred stock.
Capital stock expenses, net.......
Allocation of benefits -
ESOP (b).
Other comprehensive income........
Balance at December 31, 1999..........
Net income for 2000...............
Cash dividends on preferred stock.
Cash dividends on common stock....
Redemption of preferred stock.....
Repurchase of common stock........
Capital stock expenses, net.......
Allocation of benefits -
ESOP (b).
Other comprehensive income........
Balance at December 31, 2000..........
Net income for 2001...............
Cash dividends on preferred stock.
Cash dividends on common stock....
Capital stock expenses, net.......
Allocation of benefits -
ESOP (b)
Other comprehensive loss..........
Balance at December 31, 2001..........
122,229 664,156
$ 210,108 122,229 1,442 665,598 (749)
(46,380)
(253,620) 1,963 75,849 413,192 826 (13,568)
(12,832)
(30,454) 153,254 148,135 (7,402)
(72,014) 21,224 243,197 109,803 (5,559)
(60,072)
(468) 378 996,871 38 416 90 506 (439) 75,849 414,018
$ 286,901 67 (13,568)
(12,832) 1,442 (30,454) 38 941,497 148,135 (7,402)
(72,014)
(749)
(300,000) 1,963 21,224 90 732,744 109,803 (5,559)
(60,072) 826 (468)
(439) 776,835 (a) The company has a dividend restriction as well as two tests it must meet before it can pay out any dividends. The most restrictive of which limits the company's ability to pay out approximately $253.8 of equity at December 31, 2001.
(b)
In June 1999, CL&P paid NU parent $30.5 million for NU shares issued from 1992 through 1998 on behalf of its employees in accordance with NU's 401(k) plan. This transaction resulted in a reduction of the NU parent loss and a tax benefit to CL&P. The amount in 2000 represents the remaining previously unallocated 1993 through 1999 NU parent losses.
The accompanying notes are an integral part of these financial statements.
18 Total (a)
THN CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 (Thousands of Dollars)
Operating Activities:
Net income/(loss)............................................
Adjustments to reconcile to net cash flows provided by operating activities:
Depreciation...............................................
Deferred income taxes and investment tax credits, net......
Amortization of regulatory assets, net.....................
Tax benefit for 1993-1999 from reduction in NU parent losses............................
Gain on sale of utility plant..............................
Net other uses of cash.....................................
Changes in working capital:
Receivables and uibilled revenues, net.....................
Fuel, materials and supplies...............................
Accounts payable...........................................
Accrued taxes..............................................
Investments in securitizable assets........................
Other working capital (excludes cash)......................
Net cash flows provided by operating activities................
Investing Activities:
Investments in regulated plant:
Electric utility plant.....................................
Nuclear fuel...............................................
Net cash flows used for investments in regulated plant.......
Investment in NU system Money Pool...........................
Investments in nuclear decommissioning trusts................
Other investment activities, net.............................
Net proceeds from the sale of utility plant..................
Buyout/buydown of IPP contracts..............................
Net cash flows (used in)/provided by investing activities......
Financing Activities:
Repurchase of common stock...................................
Issuance of rate reduction bonds.............................
Retirement of rate reduction bonds...........................
Net (decrease)/increase in short-term debt...................
Reacouisitions and retirements of long-term debt.............
Reacguisitions and retirements of preferred stock............
Retirement of monthly income preferred securities............
Retirement of capital lease obligation.......................
Cash dividends on preferred stock............................
Cash dividends on common stock...............................
Net cash flows provided by/(used in) financing activities......
Net(decrease)/increase in cash and cash equivalents...........
Cash and cash epuivalents beginning of year..................
Cash and cash equivalents
- end of year........................
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized.........................
Income taxes.................................................
Increase in obligations:
Niantic Bay Fuel Trust.......................................
109,803 96,212 (144,559) 746,693 (521,590)
(132,911)
(144,419) 3,247 (58,400) 1,922 61,779 26,440 44,217 (237,423)
(1,992)
(239,415)
(39,200)
(74,866)
(10,164) 827,681 (1,029,008)
(564,972) 1,438,400 (79,747)
(115,000)
(416,155)
(100,000)
(145,800)
(5,559)
(60,072) 516,067 (4,688) 5,461 773 120,645 230,144 1,754 148,135 (13,568) 117,305 5,672 97,315 21,461 (69,454)
(109,938) 1,271 171,729 (136,313) 9,474 3,204 259,861 (208,249)
(35,709)
(243,958)
(38,000)
(25,133) 10,246 686,807 389,962 (300,000) 13,300 (179,071)
(99,539)
(7,402)
(72,014)
(644,726) 5,097 364 5,461 96,735 226,380 6,535 193,776 (140,459) 447,776 (286,477)
(106,396) 837 34,379 (49,477) 149,818 52,633 16,585 299,427 (180,982)
(26,198)
(207,180) 6,600 (54,582)
(355) 516,912 261,395 91, 700 (620,010)
(19,750)
(12,832)
(560,892)
(70) 434 364 142,398 19,754 4,752 The accompanying notes are an integral part of these financial statements.
19
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES A.
About The Connecticut Light and Power Company The Connecticut Light and Power Company (CL&P or the company) along with the Public Service Company of New Hampshire (PSNH),
Western Massachusetts Electric Company (WMECO),
North Atlantic Energy Corporation (NAEC),
Holyoke Water Power Company (HWP),
and Yankee Energy System, Inc.
(Yankee) are the operating companies comprising the Northeast Utilities system (NU system) and are wholly owned by Northeast Utilities (NU).
The NU system furnishes franchised retail electric service in Connecticut, New Hampshire and western Massachusetts through CL&P, PSNH and WMECO.
NAEC sells all of its entitlement to the capacity and output of the Seabrook Station nuclear unit (Seabrook) to PSNH under the terms of two life-of-unit, full cost recovery contracts (Seabrook Power Contracts).
HWP also is engaged in the production of electric power.
- Yankee, the parent company of Yankee Gas Services Company (Yankee Gas),
is Connecticut's largest natural gas distribution system.
NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act) and the NU system, including CL&P, is subject to the provisions of the 1935 Act.
Arrangements among the NU system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC.
CL&P is subject to further regulation for
- rates, accounting and other matters by the FERC and the Connecticut Department of Public Utility Control (DPUC).
Several wholly owned subsidiaries of NU provide support services for the NU system companies, including CL&P, and, in some
- cases, for other New England utilities.
Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, engineering, financial, information resources,
- legal, operational,
- planning, purchasing, and other services to the NU system companies, including CL&P.
North Atlantic Energy Service Corporation has operational responsibility for Seabrook.
In
- addition, CL&P has established two special purpose subsidiaries, one whose operations are solely related to the issuance of rate reduction certificates and one whose business consists solely of the purchase and resale of receivables.
20
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS B.
Presentation The consolidated financial statements of CL&P include the accounts of all subsidiaries.
Intercompany transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain reclassifications of prior years' data have been made to conform with the current year's presentation.
All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity and are subject to approval by various federal and state regulatory agencies and the DPUC.
C.
New Accounting Standards Asset Retirement Obligations: In June
- 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No.
- 143, "Accounting for Asset Retirement Obligations."
This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a
long-lived
- asset, except for certain obligations of lessees.
SFAS No.
143 is effective for CL&P's 2003 calendar year.
Upon adoption of SFAS No.
143, there may be an impact on CL&P's consolidated financial statements which management has not estimated at this time.
Long-Lived Assets:
In August 2001, the FASB issued SFAS No.
- 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement modifies financial accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No.
144 is effective for CL&P's 2002 calendar year.
Currently, management does not expect the adoption of SFAS No.
144 to have a material impact on CL&P's consolidated financial statements.
21
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS D.
Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: CL&P owns common stock in four regional nuclear companies (Yankee Companies).
CL&P's ownership interests in the Yankee Companies at December 31, 2001 and 2000, which are accounted for on the equity method due to CL&P's ability to exercise significant influence over their operating and financial policies are 34.5 percent of the Connecticut Yankee Atomic Power Company (CYAPC),
24.5 percent of the Yankee Atomic Electric Company (YAEC),
12 percent of the Maine Yankee Atomic Power Company (MYAPC),
and 9.5 percent of the Vermont Yankee Nuclear Power Corporation (VYNPC).
CL&P's total equity investment in the Yankee Companies at December 31, 2001 and 2000, is
$34.7 million and
$41.4
- million, respectively.
Each Yankee Company owns a
single nuclear generating unit. However, VYNPC is the only unit still in operation at December 31, 2001.
Seabrook: CL&P has a 4.06 percent joint ownership interest in
- Seabrook, a
1,148 megawatt nuclear generating unit.
CL&P expects to sell its joint ownership interest in
- Seabrook, jointly with NAEC, around the end of 2002 through a public auction.
Plant-in-service and the accumulated provision for depreciation for CL&P's share of Millstone 2
and 3
and Seabrook are as follows:
At December 31, 2001 2000 (Millions of Dollars)
Plant-in-service:
Millstone 2..............................
779.7 Millstone 3..................................-
1,924.7 Seabrook...................................
174.7 174.7 Accumulated provision for depreciation:
Millstone 2.............................
779.1 Millstone 3..................................
1,815.0 Seabrook.............................
164.8 164.0 E.
Depreciation The provision for depreciation is calculated using the straight-line method based on the estimated remaining useful lives of depreciable utility plant-in-service, adjusted for salvage value and removal
- costs, as approved by the appropriate regulatory agency where applicable.
Depreciation rates are applied to plant-in-service from the time they are placed in service.
When plant is retired from service, the original cost of the plant, including costs of removal less
- salvage, is charged to the accumulated provision for depreciation.
The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite 22
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rate of 3.1 percent in
- 2001, 3 percent in 2000 and 3.3 percent in 1999.
As a result of discontinuing the application of SFAS No.
71 "Accounting for the Effects of Certain Types of Regulation,"
for CL&P's generation business in
- 1999, including CL&P's ownership interest in Seabrook, the company recorded a charge to accumulated depreciation for the nuclear plant in excess of the estimated fair market value at the time in the amount of $1.7 billion and a corresponding regulatory asset was created.
F.
Revenues Revenues are based on authorized rates applied to each customer's use of energy.
In general, rates can be changed only through a formal proceeding before the DPUC.
Regulatory commissions also have authority over the terms and conditions of nontraditional rate-making arrangements.
At the end of each accounting period, CL&P accrues a revenue estimate for the amount of energy delivered but unbilled.
G.
Regulatory Accounting and Assets The accounting policies of CL&P conform to accounting principles generally accepted in the United States applicable to rate-regulated enterprises and historically reflect the effects of the rate-making process in accordance with SFAS No.
- 71.
CL&P's transmission and distribution business continues to be cost-of-service rate regulated, and management believes the application of SFAS No.
71 continues to be appropriate.
Management also believes it is probable that CL&P will recover its investments in long-lived
- assets, including regulatory assets. Stranded costs for CL&P will be recovered through a transition charge over a 12-year period.
23
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition, the regulatory assets in the following table are earning a return. The components of CL&P's regulatory assets are as follows:
At December 31, 2001 2000 (Millions of Dollars)
Recoverable nuclear costs............
158.1
$1,122.4 Securitized regulatory assets........
1,356.3 Income taxes, net....................
154.2 371.9 Unrecovered contractual obligations..
2.1 171.8 Recoverable energy costs, net........
80.1 85.2 Other.......................................
126.4 84.7 Totals...............................
$1,877.2
$1,836.0 As a result of discontinuing the application of SFAS No.
71 for CL&P's generation
- business, the company had an unamortized balance
($1.21 billion and
$1.35 billion),
included in recoverable nuclear costs at December 31, 2001 and 2000, respectively.
These amounts were the result of reclassified nuclear plant in excess of its estimated fair market value from plant to regulatory assets, which took place in 1999.
This balance is offset by the unamortized balance of the deferred credit on the transfer of assets, in March
- 2000, to Northeast Generation Company (NGC) of approximately $541.5 million.
Since the transfer occurred between CL&P and NGC, two affiliates, the deferred credit is eliminated in consolidation.
In March 2001, CL&P sold its ownership interest in the Millstone units.
The gain on this sale in the amount of approximately $521.6 million was used to offset recoverable nuclear costs, resulting in an unamortized balance of $148.9 million, after the current year's amortization expense.
Also included in that regulatory asset component for 2001 and 2000 are
$9.2 million and $344.3 million, respectively, which includes Millstone 1
recoverable nuclear costs relating to the recoverable portion of the undepreciated plant and related assets
($9.2 million and $51.2 million, respectively) and the decommissioning and closure obligations ($293.1 million in 2000).
CL&P issued $1.4 billion in rate reduction certificates and used $1.1 billion of those proceeds to buyout or buydown certain contracts with independent power producers.
The majority of the payments to buyout or buydown these contracts were recorded as securitized regulatory assets.
CL&P also securitized a
portion of its SFAS No.
109 regulatory asset.
24 i-LU
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CL&P, under the terms of contracts with the Yankee Companies, is responsible for its proportionate share of the remaining costs of the
- units, including decommissioning.
These amounts are recorded as unrecovered contractual obligations.
A portion of these obligations was securitized in 2001 and is included in securitized regulatory assets.
CL&P, under the Energy Policy Act of 1992 (Energy Act),
is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (DOE)
(D&D Assessment).
The Energy Act requires that regulators treat D&D Assessments as a
reasonable and necessary current cost of fuel, to be fully recovered in rates like any other fuel cost.
CL&P is currently recovering these costs through rates.
As of December 31, 2001 and 2000, the CL&P's total D&D Assessment deferrals were
$21.1 million and
$24.1 million, respectively, and have been recorded as recoverable energy costs, net.
In addition, through December 31,
- 1999, CL&P had an energy adjustment clause under which fuel prices above or below base-rate levels were charged to or credited to customers.
Coincident with the start of restructuring, the energy adjustment clause was terminated.
Energy costs deferred and not yet collected under the energy adjustment clause amounted to $59 million and $61.1 million at December 31, 2001 and 2000, respectively, which have been recorded as recoverable energy costs, net.
H.
Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the rate-making treatment of the applicable regulatory commissions.
25
_1_U1 The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, that give rise to the accumulated deferred tax obligation, including the impact of the sale of the Millstone units, is as follows:
At December 31, 2001 2000 (Millions of Dollars)
Accelerated depreciation and other plant-related differences....
$279.1
$271.2 Regulatory assets:
Nuclear stranded investment........
276.1 528.8 Securitized contract termination costs and other..................
63.4 Income tax gross-up................
134.4 142.6 Other....................................
67.4 34.8 Totals...............................
$820.4
$977.4 I.
Cash and Cash Equivalents Cash and cash equivalents includes cash on hand term cash investments which are highly liquid in have original maturities of three months or less.
and short nature and J.
Other Income/(Loss),
Net The components of CL&P's other income/(loss),
net items are as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Gain related to Millstone sale.......
$29.5 Other nuclear-related costs.....................
(14.1)
(53.0)
Other, net.............
23.3 (8.1)
(33.8)
Totals..................
... $52.8
$(22.2)
$(86.8)
- 2.
SHORT-TERM DEBT Limits: The amount of short-term borrowings that may be incurred by CL&P is subject to periodic approval by either the SEC under the 1935 Act or by the respective state regulators.
Currently, SEC authorization allows CL&P to incur total short-term borrowings up to a maximum of $375 million.
In addition, the charter of CL&P contains preferred stock provisions restricting the amount of unsecured debt the company may incur.
As of December 31,
- 2001, CL&P's charter permits CL&P to incur $535 million of additional unsecured debt.
26
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Credit Agreement:
On November 16,
- 2001, CL&P,
- PSNH, WMECO, and Yankee Gas entered into a
364-day unsecured revolving credit facility for $350 million.
This facility replaced a $250 million facility for CL&P and WMECO which expired on November 16, 2001.
CL&P may draw up to $150 million under the facility, subject to the maximum facility limit of $350 million.
Unless extended, the credit facility will expire on November 15, 2002.
At December 31, 2001 and
- 2000, there were no borrowings and
$115
- million, respectively, in borrowings under these facilities for CL&P.
Under the aforementioned credit agreement, CL&P may borrow at fixed or variable rates plus an applicable margin based upon certain debt ratings, as rated by the lower of Standard and Poor's or Moody's Investors Service.
The weighted average interest rate on CL&P's notes payable to banks outstanding on December 31,
- 2000, was 8.41 percent.
This credit agreement provides that CL&P must comply with certain financial and nonfinancial covenants as are customarily included in such agreements, including, but not limited to, consolidated debt ratios and interest coverage ratios.
CL&P currently is and expects to remain in compliance with these covenants.
Money Pool: Certain subsidiaries of NU, including CL&P, are members of the Northeast Utilities System Money Pool (Pool).
The Pool provides a more efficient use of the cash resources of the NU system and reduces outside short-term borrowings.
NUSCO administers the Pool as agent for the member companies.
Short term borrowing needs of the member companies are first met with available funds of other member companies, including funds borrowed by NU parent.
NU parent may lend to the Pool but may not borrow.
Funds may be withdrawn from or repaid to the Pool at any time without prior notice.
Investing and borrowing subsidiaries receive or pay interest based on the average daily federal funds rate.
Borrowings based on loans from NU parent,
- however, bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing.
At December 31, 2001 and
- 2000, CL&P had $77.2 million and $38 million of lendings to the Pool, respectively.
The interest rate on lendings to the Pool at December 31, 2001 and
- 2000, was 1.5 percent and 5.4 percent, respectively.
- 3.
LEASES CL&P has entered into lease agreements, some of which are capital
- leases, for the use of data processing and office equipment, vehicles, nuclear control room simulators, and office space.
The provisions of these lease agreements generally provide for renewal options.
27
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital lease rental payments charged to operating expense were
$9.2 million in
- 2001,
$36.3 million in
- 2000, and $10 million in 1999.
Interest included in capital lease rental payments was $3.4 million in
- 2001,
$7.9 million in 2000, and $9.4 million in 1999.
Operating lease rental payments charged to expense were
$7.1 million in 2001, $9.8 million in 2000, and $14.3 million in 1999.
Future minimum rental payments, property taxes, state use taxes, long-term noncancelable leases, follows:
excluding executory costs such as insurance, and maintenance, under as of December 31,
- 2001, are as Year Capital Leases Operating Leases (Millions of Dollars) 2002.......................
2.4
$10.9 2003...........................
2.4 9.3 2004...........................
2.4 8.2 2005...........................
2.4 7.5 2006..........................
2.4 6.4 After 2006...............
24.7 11.9 Future minimum lease payments.........
36.7
$54.2 Less amount representing interest...............
20.7 Present value of future minimum lease payments.........
$16.0 28 11
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 4.
PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption are as follows:
December 31, Shares 2001 Outstanding Redemption December 31, December 31, Description Price 2001 2001 2000 (Millions of Dollars)
$1.90 Series of 1947
$52.50 163,912 8.2 8.2
$2.00 Series of 1947 54.00 336,088 16.8 16.8
$2.04 Series of 1949 52.00 100,000 5.0 5.0
$2.20 Series of 1949 52.50 200,000 10.0 10.0 3.90% Series of 1949 50.50 160,000 8.0 8.0
$2.06 Series E of 1954 51.00 200,000 10.0 10.0
$2.09 Series F of 1955 51.00 100,000 5.0 5.0 4.50% Series of 1956 50.75 104,000 5.2 5.2 4.96% Series of 1958 50.50 100,000 5.0 5.0 4.50% Series of 1963 50.50 160,000 8.0 8.0 5.28% Series of 1967 51.43 200,000 10.0 10.0
$3.24 Series G of 1968 51.84 300,000 15.0 15.0 6.56% Series of 1968 51.44 200,000 10.0 10.0 Totals.....................................
$116.2
$116.2
- 5.
LONG-TERM DEBT Details of long-term debt outstanding are as follows:
At December 31, 2001 2000 (Millions of Dollars)
First Mortgage Bonds:
7 7/8% Series A due 2001.............
$160.0 7 3/4% Series C due 2002.............
200.0 8 1/2% Series C due 2024.............
59.0 115.0 7 7/8% Series D due 2024.............
139.8 140.0 198.8 615.0 Pollution Control Notes:
Variable rate, due 2016-2022..........
46.4 46.4 Variable rate, tax exempt, due 2028-2031............................
377.5 377.5 Fees and interest due for spent nuclear fuel disposal costs...................
201.9 194.7 Less amounts due within one year........
160.0 Unamortized premium and discount, net..--.
(0.3)
(0.9)
Long-term debt, net......................
$824.3
$1,072.7 the liens of 29 Essentially all utility plant of CL&P is subject to the company's first mortgage bond indenture.
I If The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CL&P has secured $315.5 million of pollution control notes secured by second mortgage liens on transmission assets, junior to the liens of their first mortgage bond indentures.
CL&P has $62 million of tax-exempt Pollution Control Revenue Bonds (PCRBs) with bond insurance secured by the first mortgage bonds and a liquidity facility.
For financial reporting purposes, these first mortgage bonds would not be considered outstanding unless CL&P failed to meet its obligations under the PCRBs.
The average effective interest rates on the variable-rate pollution control notes ranged from 1.3 percent to 3.6 percent for 2001 and from 3.2 percent to 4.9 percent for 2000.
- 6.
INCOME TAX EXPENSE The components of the federal and state income tax provisions were charged/(credited) to operations as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Current income taxes:
Federal.....................
$190.7
$ 77.2
$197.7 State..........................
38.8 17.2 27.9 Total current.............
229.5 94.4 225.6 Deferred income taxes, net:
Federal.....................
(117.0) 10.6 (113.0)
State..........................
(23.8) 2.4 (20.1)
Total deferred............
(140.8) 13.0 (133.1)
Investment tax credits, net...
(3.8)
(7.3)
(7.4)
Total income tax expense......
$ 84.9
$100.1
$ 85.1 30
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes are comprised of the tax effects of temporary differences as follows:
For the Years Ended December 31, 2001 2000 1999 (Millions of Dollars)
Depreciation, leased nuclear fuel, settlement credits and disposal costs................
(9.2)
$13.8 (9.9)
Regulatory deferral.............
(33.1)
(14.1) 6.2 State net operating loss carryforward..................-
7.8 Regulatory disallowance.........-
(24.2)
Sale of generation assets.......
(197.6)
(126.1)
Pension accruals................
19.9 13.6 9.8 Securitized contract termination costs and other...
63.4 Other..............................
15.8 (0.3) 3.3 Deferred income taxes, net......
$(140.8)
$13.0
$(133.1)
A reconciliation between income expense at the statutory rate is tax expense and the as follows:
expected tax For the Years Ended December 31, Expected federal income tax.....
Tax effect of differences:
Depreciation..................
Amortization of regulatory assets..........
Investment tax credit amortization................
State income taxes, net of federal benefit.............
Other, net....................
Total income tax expense........
2001 2000 1999 (Millions of Dollars)
$68.1 4.0 (0.6)
(3.8) 9.8 7.4
$84.9
$ 86.9 5.8 3.6 (7.3) 12.7 (1.6)
$100.1
$25.0 27.1 31.9 (7.4) 5.1 3.4
$85.1
- 7.
PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The NU system companies, including CL&P, participate in a uniform noncontributory defined benefit retirement plan covering substantially all regular NU system employees. Benefits are based on years of service and the employees' highest eligible compensation during 60 consecutive months of employment.
CL&P's portion of the NU system's total pension credit, part of which was credited to utility
- plant, was
$63.7 million in
- 2001,
$57.2 million in 2000 and $40.3 million in 1999.
Currently, CL&P's policy is to annually fund an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and Internal Revenue Code.
31
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The NU system companies, including CL&P, also provide certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees.
These benefits are available for employees retiring from CL&P who have met specified service requirements.
For current employees and certain retirees, the total benefit is limited to two times the 1993 per retiree health care cost.
These costs are charged to expense over the estimated work life of the employee.
CL&P annually funds postretirement costs through external trusts with amounts that have been rate-recovered and which also are tax deductible.
Pension and trust assets are invested primarily in domestic and international equity securities and bonds.
32
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents information on the plans' benefit obligation, fair value of plan assets, and the respective plans' funded status:
At December 31, Postretirement Pension Benefits Benefits (Millions of Dollars) 2001 2000 2001 2000 Change in benefit obligation Benefit obligation at beginning of year.....
$(587.3)
$ (551.9)
$(136.3) $(131.9)
Service cost...............
(10.0)
(9.7)
(1.9)
(1.9)
Interest cost..............
(43.7)
(42.3)
(11.1)
(10.1)
Transfers..................
(2.4)
(4.9)
Actuarial loss.............
(25.1)
(18.9)
(32.2)
(5.2)
Benefits paid..............
45.1 40.4 16.0 12.8 Settlements and other......
(2.6)
(0.2)
Benefit obligation at end of year...........
$(626.0)
$ (587.3)
$(165.7) $(136.3)
Change in plan assets Fair value of plan assets at beginning of year.....
$ 998.8
$1,037.8 62.4
$ 59.7 Actual return on plan assets..............
(45.7)
(3.5)
(5.8) 3.0 Employer contribution......-
14.5 12.5 Benefits paid..............
(45.1)
(40.4)
(16.0)
(12.8)
Transfers.....................
2.4 4.9 0.6 Fair value of plan assets at end of year...........
$ 910.4 998.8 55.7 62.4 Funded status at December 31...........
$ 284.4 411.5
$(110.0) $ (73.9)
Unrecognized transition (asset)/obligation.......
(2.7)
(3.7) 80.3 88.2 Unrecognized prior service cost.............
27.6 30.4 Unrecognized net (gain)/loss..............
(75.6)
(267.5) 29.1 (14.3)
Prepaid/(accrued) benefit cost.......................
$ 233.7 170.7 (0.6) $
33
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following actuarial assumptions were used in calculating the plans' year end funded status:
At December 31, Pension 2001 Benefits 2000 Postretirement Benefits Discount rate..................
7.25%
7.50%
7.25%
7.50%
Compensation/progression rate..
4.25 4.50 4.25 4.50 Health care cost trend rate (a).................
N/A N/A 11.00 5.26 (a)
The annual per capita cost of covered health care benefits was assumed to decrease to 5.00 percent by 2007.
The components of net periodic benefit (credit)/cost are:
For the Years Ended December 31, Postretirement Pension Benefits Benefits (Millions of Dollars) 2001 2000 1999 2001 2000 1999 Service cost.....
$10.0 9.7
$ 11.0
$ 1.9
$ 1.9
$ 2.3 Interest cost....
43.7 42.3 40.0 11.1 10.1 9.3 Expected return on plan assets.
(95.3)
(88.4)
(78.1)
(5.5)
(4.9)
(4.2)
Amortization of unrecognized net transition (asset)/
obligation......
(0.9)
(0.9)
(0.9) 7.3 7.3 7.3 Amortization of prior service cost............
2.6 2.7 2.7 Amortization of actuarial gain..
(21.4)
(22.6)
(15.0)
Other amortization, net.............
(0.5)
(1.9)
(1.3)
Settlements and other..........
. (2.4)
Net periodic benefit (credit)/cost..
$(63.7)
$(57.2)
$(40.3)
$14.3
$12.5
$13.4 34 1 11
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For calculating pension and postretirement benefit
- costs, the following assumptions were used:
For the Years Ended December 31, Pension Benefits 2001 2000 1999 Postretirement Benefits 2001 2000 1999 Discount rate..........
7.50% 7.75% 7.00%
7.50% 7.75% 7.00%
Expected long-term rate of return.......
9.50 9.50 9.50 N/A N/A N/A Compensation/
progression rate.....
4.50 4.75 4.25 4.50 4.75 4.25 Long-term rate of return Health assets, net of tax.......
N/A N/A N/A 7.50 7.50 7.50 Life assets........
N/A N/A N/A 9.50 9.50 9.50 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
The effect of changing the assumed health care cost trend rate by one percentage point in each year would have the following effects:
One Percentage One Percentage (Millions of Dollars)
Point Increase Point Decrease Effect on total service and interest cost components......
$0.5
$ (0.5)
Effect on postretirement benefit obligation...........
$6.1
$ (5.6)
The trust holding the health plan assets is subject to federal income taxes.
- 8.
SALE OF CUSTOMER RECEIVABLES On July 11,
- 2001, CL&P renewed its accounts receivable securitization credit line for one year.
At that time, the credit line capacity was reduced from $200 million to $100 million.
As of December 31,
- 2001, CL&P had no amounts outstanding through the CL&P Receivables Corporation (CRC),
a wholly owned subsidiary of CL&P.
As of December 31,
- 2000, CL&P had sold accounts receivable of $170 million to a third-party purchaser with limited recourse through the CRC.
In
- addition, at December 31,
- 2000,
$18.9 million of accounts receivable were designated as collateral under the agreement with the CRC.
Concentrations of credit risk to the purchaser under the company's agreement with respect to the receivables are limited due to CL&P's diverse customer base within its service territory.
35
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 9.
NUCLEAR GENERATION ASSETS DIVESTITURE On March 31,
- 2001, CL&P and WMECO consummated the sale of Millstone 1 and 2 to a subsidiary of Dominion Resources, Inc.,
Dominion Nuclear Connecticut, Inc.
(DNCI).
CL&P, PSNH and WMECO sold their ownership interests in Millstone 3 to DNCI.
This sale included all of the respective joint ownership interests of CL&P, PSNH and WMECO in Millstone 3.
CL&P received approximately $800 million of cash proceeds from the sale and applied the proceeds to taxes and reductions of debt and equity.
As part of the sale, DNCI assumed responsibility for decommissioning the three Millstone units.
In connection with the sale, CL&P recorded a gain in the amount of approximately
$521.6 million which was used to offset stranded costs.
- 10.
COMMITMENTS AND CONTINGENCIES A.
Restructuring 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.
In accordance with Connecticut's electric utility industry restructuring legislation, CL&P was required to utilize any gains from the Millstone sale to offset stranded costs.
There are certain contingencies related to this filing regarding the potential disallowance of what management believes were prudently incurred costs.
Management believes the recoverability of these costs is probable.
A decision from the DPUC is expected in the first half of 2002.
B.
Environmental Matters The NU system, including CL&P, is subject to environmental laws and regulations structured to mitigate or remove the effect of past operations and to improve or maintain the quality of the environment.
As
- such, the NU
- system, including CL&P, has active environmental auditing and training programs and believes it is substantially in compliance with the current laws and regulations.
- However, the normal course of operations may involve activities and substances that expose CL&P to potential liabilities of which management cannot determine the outcome.
Additionally, management cannot determine the outcome for liabilities that may be imposed for past acts, even though such past acts may have been lawful at the time they occurred.
Management does not believe,
- however, that this 36 1.
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS will have a material impact on CL&P's consolidated financial statements.
Based upon currently available information for the estimated remediation costs as of December 31, 2001 and 2000, the liability recorded by CL&P for its estimated environmental remediation costs amounted to $2.5 million and $5.2 million, respectively.
C.
Spent Nuclear Fuel Disposal Costs Under the Nuclear Waste Policy Act of 1982, CL&P must pay the DOE for the disposal of spent nuclear fuel and high-level radioactive waste.
The DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste.
For nuclear fuel used to generate electricity prior to April 7, 1983 (Prior Period Fuel),
an accrual has been recorded for the full liability and payment must be made prior to the first delivery of spent fuel to the DOE.
Until such payment is
- made, the outstanding balance will continue to accrue interest at the 3-month treasury bill yield rate.
As of December 31, 2001 and 2000, fees due to the DOE for the disposal of Prior Period Fuel were $201.9 million and $194.7
- million, respectively, including interest costs of
$135.4 million and $128.1 million, respectively.
Fees for nuclear fuel burned on or after April 7,
- 1983, are billed currently to customers and paid to the DOE on a
quarterly basis.
CL&P remains responsible for fees to be paid for fuel burned until the divestiture of the Millstone and Seabrook nuclear units.
D.
Nuclear Insurance Contingencies Insurance policies covering CL&P's ownership share of the NU system's nuclear facilities have been purchased for the primary cost of repair, replacement or decontamination of utility property, certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement or decontamination or premature decommissioning of utility property.
CL&P is subject to retroactive assessments if losses under those policies exceed the accumulated funds available to the insurer.
The maximum potential assessments with respect to losses arising during the current policy year for the primary property insurance program, the replacement power policies and the excess property damage policies are
$1.1 million,
$0.1 million and $1.6 million, respectively.
In
- addition, insurance has been purchased by the NU system in the 37
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS aggregate amount of $200 million on an industry basis for coverage of worker claims.
Under certain circumstances, in the event of a
nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification
- program, the NU system, including CL&P, could be assessed liabilities in proportion to its ownership interest in each of its nuclear units up to $83.9 million.
The NU system's payment of this assessment would be limited to, in proportion to its ownership interest in each of its nuclear units,
$10 million in any one year per nuclear unit.
In addition, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection, the NU system, including CL&P, would be subject to an additional 5
- percent, or $4.2 million, liability, in proportion to its ownership interests in each of its nuclear units.
Based upon its ownership interest in Seabrook, CL&P's maximum liability, including any additional assessments, would be $3.6 million per incident, of which payments would be limited to
$0.4 million per year.
In
- addition, through purchased-power contracts with VYNPC, CL&P would be responsible for up to an additional assessment of $8.4 million per incident, of which payments would be limited to $1 million per year.
CL&P expects to terminate its nuclear insurance upon the divestiture of its remaining nuclear units.
E.
Long-Term Contractual Arrangements Yankee Companies:
Under the terms of its agreement, CL&P paid its ownership (or entitlement) shares of costs, which included depreciation, operation and maintenance (O&M) expenses, taxes, the estimated cost of decommissioning, and a return on invested capital.
These costs were recorded as purchased-power expenses.
CL&P's cost of purchases under its contract with VYNPC amounted to $14.7 million in 2001,
$14.5 million in
- 2000, and $17 million in 1999.
VYNPC is in the process of selling its nuclear unit.
Upon completion of the
- sale, it is expected that these long-term contracts will be replaced with different contracts with the new buyer.
Energy Procurement Contracts: CL&P has entered into various arrangements for the purchase of capacity and energy.
CL&P's total cost of purchases under these arrangements amounted to
$205 million in
- 2001,
$308.6 million in 2000 and
$293.8 million in 1999.
Hydro-Quebec: Along with other New England utilities, CL&P has entered into an agreement to support transmission and terminal facilities to import electricity from the Hydro 38
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quebec system in Canada.
CL&P is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M expenses and capital costs of those facilities.
Estimated Annual Costs:
The estimated annual costs of CL&P's significant long-term contractual arrangements, absent the effects of any contract terminations, buydowns or buyouts, or sales of generation assets are as follows:
2002 2003 2004 2005 2006 Totals (Millions of Dollars)
VYNPC........
$ 18.4
$ 17.5
$ 19.9
$ 20.2
$ 18.3 94.3 Energy Procurement Contracts..
193.2 199.0 200.0 203.4 206.9 1,002.5 Hydro-Quebec.
15.4 14.8 14.2 13.7 12.4 70.5 Totals......
$227.0.$231.3
$234.1
$237.3 $237.6
$1,167.3
- 11.
NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS Seabrook: CL&P's operating nuclear power plant,
- Seabrook, has a service life that is expected to end in 2026, and upon retirement, must be decommissioned.
CL&P's ownership share of the estimated cost of decommissioning
- Seabrook, in year end 2001 dollars, is
$22.6 million.
Nuclear decommissioning costs are accrued over the expected service life of the unit and are included in depreciation expense and the accumulated provision for depreciation.
Nuclear decommissioning expenses for Seabrook amounted to $0.8 million in
- 2001, 2000 and 1999.
Through December 31, 2001 and 2000, total decommissioning expenses of
$5.9 million and
$5.1
- million, respectively, have been collected from customers related to Seabrook and are reflected in the accumulated provision for depreciation.
Payments for CL&P's ownership share of the cost of decommissioning Seabrook are paid to an independent decommissioning financing fund managed by the state of New Hampshire.
As of December 31, 2001 and 2000,
$5.4 million and $4.6 million, respectively, have been transferred to external decommissioning trusts.
Earnings on the decommissioning trust increase the decommissioning trust balance and the accumulated provision for depreciation.
Unrealized gains and losses associated with the decommissioning trust also impact the balance of the trust and the accumulated provision for depreciation.
The fair values of the amounts in the Seabrook external decommissioning trust were $6.2 million and
$5.8 million at December 31, 2001 and
- 2000, respectively.
Upon divestiture, the balance in the Seabrook decommissioning trust will be transferred to the buyer.
39
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Yankee Companies: VYNPC owns and operates a nuclear generating unit with a service life that is expected to end in 2012.
CL&P's ownership share of estimated costs, in year end 2001 dollars, of decommissioning this unit is
$44.7 million.
In August 2001, VYNPC agreed to sell its nuclear generating unit for
$180
- million, including
$35 million for nuclear fuel!,
to an unaffiliated company.
Among other commitments, the acquiring company agreed to assume the obligation to decommission the unit after it is taken out of service and agreed to provide the current level of output from the unit through 2012.
The sale is subject to the approval of the Vermont Public Service
- Board, the Nuclear Regulatory Commission, the FERC and other regulatory authorities. The closing on the sale is expected to be in the first half of 2002.
As of December 31, 2001 and 2000, CL&P's remaining estimated obligations, including decommissioning for the units owned by
- CYAPC, YAEC and
- MYAPC, which have been shut down was
$141.5 million and $160.6 million, respectively.
- 12.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY CL&P Capital LP (CL&P LP),
a subsidiary of CL&P, previously had issued
$100 million of cumulative 9.3 percent Monthly Income Preferred Securities (MIPS),
Series A.
CL&P has the sole ownership interest in CL&P LP, as a general partner, and was the guarantor of the MIPS securities.
Subsequent to the MIPS
- issuance, CL&P LP loaned the proceeds of the MIPS issuance, along with CL&P's $3.1 million capital contribution, back to CL&P in the form of an unsecured debenture.
CL&P consolidates CL&P LP for financial reporting purposes.
Upon consolidation, the unsecured debenture was eliminated, and the MIPS securities were accounted for as a minority interest.
In the second quarter of 2001, CL&P repaid the $100 million in notes associated with the MIPS.
- 13.
FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments:
Cash and Cash Equivalents:
The carrying amounts approximate fair value due to the short-term nature of cash and cash equivalents.
Nuclear Decommissioning Trusts: CL&P's portion of the investments held in the NU system companies' nuclear decommissioning trusts were marked-to-market by a
negative
$0.1 million as of December 31, 2001, and a positive $83.2 million as of December 31,
- 2000, with corresponding offsets to the accumulated provision for depreciation.
In conjunction with the sale of the Millstone units to DNCI in March 2001, CL&P's Millstone decommissioning trusts were transferred to DNCI.
40
The Conneqticut Light and Power Company and Subsidiaries NOTES TO CqNSOLIDATED FINANCIAL STATEMENTS Preferred Stock and Long-Term Debt: The fair value of CL&P's fixed-rate securities is based upon the quoted market price for those issues or similar issues.
Adjustable rate securities are assumed to have a fair value equal to their carrying value.
The carrying amounts of CL&P's financial instruments and the estimated fair values are as follows:
At December 31, 2001 Carrying Fair (Millions of Dollars)
Amount Value Preferred stock not subject to mandatory redemption...............
116.2 62.4 Long-term debt First mortgage bonds..................
198.8 212.8 Other long-term debt..................
625.8 615.1 Rate reduction bonds....................
1,358.7 1,388.3 At December 31, 2000 Carrying Fair (Millions of Dollars)
Amount Value Preferred stock not subject to mandatory redemption...............
$116.2
$139.7 Long-term debt First mortgage bonds..................
615.0 621.6 Other long-term debt..................
618.6 576.4 MIPS......
i...
100.0 100.5
- 14.
OTHER COMPREHENSIVE INCOME The accumulated balance for each other comprehensive income item is as follows:
Current December 31, Period December 31, (Millions of Dollars) 2000 Change 2001 Unrealized gains on securities...........
$0.8
$(0.4)
$0.4 Minimum pension liability adjustments...
(0.3)
(0.3)
Accumulated other comprehensive income/(loss)...............
$0.5
$(0.4)
$0.1 41
The Connecticut Light and Power Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Current December 31, Period December 31, (Millions of Dollars) 1999 Change 2000 Unrealized gains on securities...........
$0.7
$0.1
$0.8 Minimum pension liability adjustments...
(0.3)
(0.3)
Accumulated other comprehensive income....
$0.4
$0.1
$0.5 The changes in the components of other comprehensive income are reported net of the following income tax effects:
(Millions of Dollars) 2001 2000 1999 Unrealized gains on securities...........
$0.3
$(0.1)
Minimum pension liability adjustments...
Other comprehensive income/(loss)..............
$0.3
$(0.1)
- 15.
SEGMENT INFORMATION The NU system is organized between regulated utilities (electric and gas since March 1, 2000) and competitive energy subsidiaries.
CL&P is included in the regulated utilities segment of the NU system and has no other reportable segments.
42
The Connecticut Light and Power Company and Subsidiaries SELECTED CONSOLIDATED FINANCIAL DATA 2001 2000 1999 1998 1997 (Thousands of Dollars)
Operating Revenues..........
$2,646,123
$2,935,922
$2,452,855
$2,386,864
$2,465,587 Net Income/(Loss)...........
109,803 148,135 (13,568)
(195,725)
(139,597)
Cash Dividends on Common Stock..............
60,072 72,014 5,989 Total Assets................
4,727,557 4,764,198 5,298,284 6,050,198 6,081,223 Rate Reduction Bonds........
1,358,653 Long-Term Debt(a)...........
824,349 1,232,688 1,400,056 2,007,957 2,043,327 Preferred Stock Not Subject to Mandatory Redemption................
116,200 116,200 116,200 116,200 116,200 Preferred Stock Subject to Mandatory Redemption (a)............
99,539 119,289 155,000 CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended 2001 March 31 June 30 September 30 December 31 (Thousands of Dollars)
Operating Revenues 73905 6$
7 675 8626,365 Operating Income
$ 65.096
$ 68,114 31
$ 66716 Net Income
$ 38,300
$18,12
$ 18,824 38_67 2000 Operating Revenues Operating Income Net Income (a) Includes portion due within
$747,976
$114,612
$ 49y643 one year.
$683,585
$ 70,082
$ 19.186
$748.143 930157
$756, 218
$ 91,428
$ 51.398 43
1 11 The Connecticut Light and Power Company and Subsidiaries CONSOLIDATED STATISTICS (Unaudited)
Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollars)
(Millions)
(kWh)
(Average)
December 31, 2001 3,265,811
$32,645 8,884 1,153,234 2,160 2000 5,964,605 42,179 8,976 1,121,551 2,057 1999 6,007,421 29,317 8,969 1,120,846 2,377 1998 6,345,215 27,356 8,476 1,111,370 2,379 1997 6,639,786 25,766 8,526 1,103,309 2,163 44
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The Connecticut Light and Power Company First and Refunding Mortgage Bonds Trustee and Interest Paying Agent Bankers Trust Company, Corporate Trust and Agency Group 100 Plaza One Jersey City, NJ 07310 Data contained in this Annual Report are submitted for the sole purpose ofproviding information to present security holders about the company.
Preferred Stock Transfer Agent, Dividend Disbursing Agent and Registrar The Bank of New York 5 Penn Plaza-13th Floor New York, NY 10001-1810 2002 Dividend Payment Dates 5.28%, $3.24 Series January 1, April 1, July 1, and October 1 4.50% (1956), 4.96%, 6.56%
$1.90, $2.00, $2.04, $2.06, $2.09, and $2.20 Series February 1, May 1, August 1, and November 1 3.90%, 4.50% (1963), Series March 1, June 1, September 1, and December 1 Address General Correspondence in Care of:
Northeast Utilities Service Company Investor Relations Department PO. Box 270 Hartford, CT 06141-0270 Telephone: (860) 665-5000
I I The Connecticut Light and Power Company General Offices 107 Selden Street Berlin, Connecticut 06037-1616 Connecticut Light & Power The Northeast Utilities System