ML20043A492

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Annual Rept 1989,Western Massachusetts Electric Co
ML20043A492
Person / Time
Site: Haddam Neck, Millstone  File:Connecticut Yankee Atomic Power Co icon.png
Issue date: 12/31/1989
From: Ellis W, Fox B
WESTERN MASSACHUSETTS ELECTRIC CO.
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ML20042E591 List:
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NUDOCS 9005220138
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~~ ' + n. -b t' Directors ROBERT G. ABAIR FRANK R, LOCKE - Vice President and Chief Administrative Officer . Senior Vice. President - ROBERT E. BUSCH " n EDWARD J. MROCZKA ' Senior Vice Preskient and Chiof Senior Vice President Financial Officer ' JOHN El a Y JOHN P. CAGNETTA - Executivt <. President : 4 x' Senior Vice President LAWRENCE H. SHAY. WILLIAM B. ELLIS - Senior Vice President j - Chairman and Chief Executive Officer - WALTER E TORRANCE, JR. BERNARD.M. FOX ; Senior Vice President, Secretary, President and Chief Operating Officer General Counsel and Assistant Clerk I - Officers WILLIAM B. ELUS TOD O. DIXON - GEORGE D. UHL Chairmen and Chief - Vice President

Vice President and Controller RAYMOND E. DONOVAN RICHARD R WERNER BERNARD M. FOX Vice President Vic6 President.

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' ALBERT J. HAJEK .JANICE P. JACQUE L ' Vice President - . Clerk. JOHN F. OPEKA l Executive Vice President BARRY ILBERMAN -

THERESA H.' ALLSOP.

= Vice President Assistant Clerk _ ROBERT E. BUSCH i Senior Vice President and FRANCIS L KINNEY. KAREN G. VALENTI ~! Chief Financial Officer Vice President . Assistant Clerk ~ JOHN P. CAGNETTA HUGH C, MACKENZIE' - JOHN T. HICKEY. Senior Vice President Vice President Assistant Secretary. FRANK R. LOCKE _ KEITH R. MARVIN DOUGLAS R.TEECE ] Senior Vice President Vice President' Assistant Secretary EDWARD J. MROCZKA JOHN W. NOYES ROBERT C. ARONSON 3 Senior Vice President Vice President . Assistant Treasurer - LAWRENCE H. SHAY RICHARD A. RECKERT'. ARTHUR H. HIERL Senior Vice President 'Vice President Assistant Treasurer WALTER F. TORRANCE, JR. WAYNE D. ROMBERG EUGENE G.-VERTEFEUILLE Senior Vice President, Secretary, Vice President Assistant Treasurer GeneralCounseland Assistant Clerk . WALTER T. SCHULTHEIS ROBERT G. ABAIR Vice President Vice President and Chief C. FREDERICK SEARS ' Administrative Officer I Vice President C. THAYER BROWNE 1 Vice President and Treasurer FEBRUARY 28,1990 -

s ii< ' f' 4' ' c y ( t" ' .'4 .Q-I r a 1989. Annual' Report: l-Western Mascachusetts Electric Company; .Indext AM Page-LContents Letter'to Preferred Stockholders................................... < it Management's Discussion and Analysis'of:Financiala --Cond1 tion.and Results of' Operations............................... 2-9 Balance Sheets...................................................... 110-11 l i Statements of' Income................................................. .12, i) Statements-of= Cash Flows..............'..............................- 131 l. Statements of Common Stockholder's. Equity......................~..... [14. Notes to Financial Statements...~..................................... .-15-29 Report of~' Independent Public Accountants..............'..'....-...... 30;

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d i Selected Financial' Data'......................-........................ 31: d ~ Statements of Quarterly Financial Data........ 31-- ] ^ Statistics......................................................... 32 Preferred Stockholder'and Bondholder Information................... 33 i x ') f

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l + 'i s WESTERN MASSACHUSETTS = ELECTRIC COMPANY = r y Y 1 Ma'rch, 1990; TO OUR-PREFERREDoSTOCKHOLDERS: The financial' statements and; statistical 1 data contained in: ( thisireport reflect the results"ofdoperations'of Western; The 1989 annuali Massachusetts; Electric Company (WMECO)-for'1989.' : report of Northeast" Utilities, which provides information l regarding the entire-Northeast Utilities: system, includingiWMECOp has also beenimaileduto all-WMECO preferred! stockholders'. :This reporta is brief f or' that ' reason.:- In 1989, operating. revenues increased'to)$335i3 millionifrom t $303.9 million ina1988.. Corresponding netLincomerdecreasedLfrom. $43.5 million'in~1988 to $38.6 millioniin 1989. .o In June, 1989, the Massachusetts Department of Public, Utilities granted WMECO a $17.9 million, or:approximately sixi. percent,. increase in annual' revenues based on a. requested $28.3: million. In December ofil969,.the Companyjfiledlainew: rate case' ^ t seeking $32.5 million or a 10.2 percent increase,'which would1 phase the final 120 percent of WMECO's share,of MillstoneL3 into rate base and would provide-some:neededjimprovementsin:the o Company's financial position. A more' comprehensive discussion of'these11tems-is containe'd 1 within this report. 1 Sincerely, s g ~ Bernard M WilliamSB.'El'lis President and C ief Chairman and Chief . Operating Officer Executive Officer i I L i. 4 l5

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L F Western Massachusetts Electric Company; i MANAGEMENT'S DISCUSSION AND. ANALYSIS OF. . FINANCIAL CONDITION AND RESULTS'OF OPERATIONS-f ' This section contains. management's'_ assessment of Western Massachusetts Electric .I' Company's (the-Company) financial _ condition"and the. principal;factorsEwithfan impact,on the'results of operations._.The: Company is'a wholly; owned l subsidiary' of Northeast Utilities (NU). This. discussion should be read:in conjunction with the Company's financial statements and footnotes.-

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.0"5 FINANCIALCONDITIOU. f Overview 'I The Company's net income decreased-to $38'.6'millioniin'1989 from $43.5Lmillion-. I inL1988.. The decrease' in ' net income ' is < the t result of. higher : refueling L and'~ maintenance outage costs at electric production facilities, unusually moderate weather throughout most' of' 1989i a'nd 1the general impact of t inflationion most' expenses J in L 1989 L This decrease yas partially offset; by cost-containment measures instituted by. management' and higher. sales,' Unusually moderate weather L a throughout-most of 1989-limited thei sales Lincrease.to 2 percent; over 1988. r The Company's - return on. common. equity ' (ROE)J was '12.2 percentLfor the.. twelve months ended December' 31,1989 compared to the 13.0 ' percent ROE (cost of capital. method) allowed by the Massachusetts Department of Public Utilities -(DPU) fin;its June 30, 1989 retail rate decision.. The Company expectsEthat its ROE will improve because of improved: sales and the. effectsiof the June. 30, 1989 rate: N decision. The Company also filed a rate application with the'DPU in December.to 4 IV recover costs associated with - the fif th : and J finali phase-in installment. of l Millstone 3 and' increased operating costo, i t Despite the decline in net income, the Companyx continues to improve the quality. of earnings now that 80 percent of the allowed cost of-Millstone. 3 ; has.been. phased into retail rate base. The Company.'istallowed to earn aLnoncash return ~ on the 20 percent portion of Millstone 3 - not yet. included in rate base. .As noncash earnings on Millstone 3 'are replaced with cash : earnings,. management believes that the Company's key financial ratios will improve..The' percent.of noncash earnings has dropped from 46.7 percent of net earnings (before preferred dividends) for the year ending December 31,'1988 to 39.1 percent of not earnings for the year ending December 31, 1989. For information regarding nuclear _ decommissioning, environmental' matters,'and other contingencies, see " Notes to Financial Statements." Public Service Company of New Hampshire-(PSNH) In December 1989, Northeast Utilities Service Company (NUSCO) filed with the 1 United States Bankruptcy Court for the District of New Hampshire (the Bankruptcy Court) an amended Joint Plan of Reorganization (the Plan), under which NUSCO's '

y; ~ M p i purent=,. NU, would acquire PSNH. The Plan was negotiated; with, and proposed - jointly = by, f the of ficialj committees 1 of PSNH's1 equity security holders $and' unsecured creditors and the. holders of a majority of PSNH's third-Lmortgage bonds. The present PSNH management. agreed to cosponsor'the Plan shortly before:it was ]' 4 ' fil'edi The Plan is. the only plan of reorganization that has gained'the consensus: ?of the many negotiating parties in;the PSNH bankruptcy, which has.been going'ont for almost two years. Solicitation'of votes for the, Plan from PSNH's creditors ~ and shareholders.beganfin January 1990; ~ Hearings 'ini the Bankruptcy LCourtLto j confirm the Plan are scheduled foriApril 1990h Thel Plan -calls for' distribution 1 of ' approximately $2.3 billion -.of cash. and ,1 securities to PSNH' creditors and securitycholders, with an optional!"two-step" / could be reorganized by mid-1990,Vif, approach'under whichfa stand-alone.'PSNHc i regulatory approvals for a. complete acquisition of PSNH;by NU;are~not-in place ,~j by then. If that occurs,Ethe Bankruptcy: Court's confirmation order;would:have the stand-alonelPSNH' enter =into an agreement;to merge;with a. newly' formed NUf 3 subsidiary when all. merger conditions are satisfied..When the' acquisition ~is+ completed, : reorganized PSNH'sc 35.6 percent : interest in' Seabrook M would 1 be l transferred to a separate NU subsidiary,' North Atlantic Energy Corporation (Northi '~ Atlantic), which:would sell Seabrook's.. output to the reorganized PSNHi The Plan requires approvals from the Bankruptcyf Court, the New Hampshire Public. Utilities Commission,;the Securities and Exchange Commissionf the Federal Energys Regulatory Commission (FERC), the Nuclear' Regulatory Commission 1(NRC) and other government' agencies. - Although NU has sought' accelerated regulatory re' view of the i proposed acquisition,.and has presented extensive'information about' the' benefits of. the acquisition,. regulatory; approvals are notiassured. Other utilities havel indicated 'that they'= intend to oppose NU's : proposal -'by; challcnging E NU.' s i antitrust ~ objections to the proposed acquisition. ' proceedings: and. raising transmission access policies :in theseiregulatory If the proposed PSNH acquisition occurs, NU:would : initially f 5 nance the purchase ' with a combination-ofLcommon stock and term loans totaling-about:$^60:million. It is contemplated.that the,NUtterm loans.l($230-$310 million):wonidJbe repaid-from the proceeds of issuing NU common shares'over no more than three years'. The remaining financings will be doneby the two~new NU-subsidiaries:t' Reorganized PSNH and North Atlantic. Reorganized PSNH(will issue and sell up to $612 Lmillion of its first mortgage bonds, borrow approximately $320 million.through'at term loan facility, assume or-refund at' a more favorable rate about, $212 'million of. i pollution control revenue bonds. issued by PSNH,'.and issue.and sell $125'million of preferred stock. NorthiAtlantic will. issue $355 million of first mortgage y . bonds and'up tv $205 million of. contingent notes, under which it will haveino, ]J, obligations until Seabrook, North Atlantic's principal' asset, has : reached-specific milestones in its licensing by the.'NRC and its operation. W V As a result of acquiring PSNH, NU's consolidated' capitalization would. initially. t 3 - have a higher percentage of debt than if the acquisition did not occur: The: i additional debt would be at. the NU level and at the acquired PSMH level and would not affect the capital structure of NU's existing operating companies. The ~ consolidated debt as a percentage of total consolidated capitalization would, on q a pro forma basis, increase from approximately 56 percent prior to acquisition j to approximately 65 percent following the acquisition. The percentage of NU's

i m',, 7 .f common _ equity: in its: total ' capitalization cisiprojected 'to be approximately. 27 percent af ter thes acquisition! is icompleted,i but..it iC anticipated to risen .above 30 percent within about two-years.. The J temporary. increase -in leverage on a consolidated' basis ' is ' attributable t primarily to debt incurred by the reorganized PSNH,- which would have the benefit-of;a favorable rate agreement to support'the' debt' service,(and to debt' incurred' by North Atlantic, which would have the benefitiof a _. firm power contract with the reorganized PSNH.E. In light of the temporary nature of: the increase in ' leverage,- 4 the. contractual'arrangemen_ts that will-be:in place.to support the debt, and the. 4 0

increased. diversity 'ofl regulatory risk that consolidated NU. will experienceW NU 0

management'is confident!that'the initial leverage is'an acceptable.and prudente trade-off for.the' acquisition _ benefits, q e NU management.~ believes the acquisition of PSNH provides an opportunity to achieve an everall' reduction ingcosts for the current.and; future ratepayers1ofethe NU. system, while providing-real benefits'for its. shareholders. -Specific areas for? _[ expected - cost savings ' include a / reduction ;in ' costs : fory theE operationi and ~ m' intenance of Seabrook, savings from improving the availability of PSNH'lsl fossil-a steam generating facilities,lenergy savings: achieved:by:the joint' operation'of' L the combined: NU ? and1PSNH _ systems, - savings from ' a. reduction L in ' the combined - 1 - system's New-England Power Pool.(NEPOOL) capability responsibility resulting from- ' the diversity of peak loads bitween PSNH and ;the restLof the NU system,' and;a reduction:in PSNH's purchasing,zadministrative,:and generalLeosts,n By reducing 4 1 Jcosts, NU can'better maintain:af fordable electric service and can also reduce' the ~ threat that theLlargest electric customers willi leave : the rsystem..and; turn to self-generation.. The consolldation'of the two-serviceLterritories'also offers an opportunity for ; diversification that reduces-risksJ for, both ' areas. - For' additional information regarding PSNH, see the " Notes'to Financial. Statements."' ~ Capacity Sales o on October 13', 1989, the FERC accepted'for'filingJa: series of contracts under 1 l which The Connecticut Light and Power Company f(CL&P) has ' agreed to_ sell over 3,800 megawatt-years of capacity over a ten-year period.' These contracts, which were signed.in;1988 and 1989, cover the sale of entitlements-to the capacity and - energy from specified base load, intermediate,. peaking and pumpedistorage units of-the NU. system. The capacity and transmission revenues from-these' sales are [ estimated to be over $600 million. The Company is able!to realize the_ benefit. of a portion of L CL&P's capacity : sales because of an agreement 1between the NU i - system operating subsidiaries that substantially' equalizes energy and capacity costs among the system companies.' -Competition / Cost Containment Management continues ; to focus on the Company's core business t activities, j particularly in'the area of'its cost-management program.and improved customer' service activities. Significant progress has'been.made in a number of key areas in the past two. years which has helped the Company to become more efficient and more competitive. First, the Company continu' s to look aggressively for ways to e manage its costs. Second,. management continues to develop and t enhance 'its marketing plan to improve customer service. This includes contacts 'with1 key I i w

^ 8 + "e. e 'customors to better understand.what their specific energy needs are and to ensure - l that;the Company.respondsiguickly andfeffectively:to.thosegneeds'.' Third,' the: Company has.. increasedD espitallexpenditures and - operation and i maintenance' s spending,' including tree trimming, to enhance reliability. 'Last, CL&P.and thel i Company committed"approximately $33 million;in 1989 on energy conservation'and' -load-management / programs principally-to help larger commercial 1and industrial'

customers pay lower electric bills'by cutting their energy-waste,Eand1to help them explore other alternatives to. generating their own electricity.~;

Cost manageme'nt andlimproved customer f service ~ continue to strengthen ithe Company's core business and will help achieve the goal of remaining the qquality provider of energy. services in'Gestern-Massachusetts. Construction Program- =! The Company's _1989 construction expenditures of ' $48.4 million.were. among ;the [ lowest in the 19 sos..' Following.' the; completion Lof Millstone 3 ein ? 1986, Lthe construction program's focus changed to. expenditures.for; improvements to' existing + - transmission, distribution,-and, generating facilities. 'In a continuing effort. l to compliment an already strong base of generation reliability,: the NU system has-l budgeted more than $100 million. over ( the E next six ? years ; tx> : improve y the ' - t reliability of itsftransmission and' distribution system.._The. Company.does not: foresee'thenneed to construct a majorinew~ generating: facility'until hfte';the. r year 2000. .i

The company anticipates that: it 1 will.be necessary to replace the : Millstone '2' l

steam generators early in.the 1990s'..This couldLinvolveta'five-to six-month outage at a total NU system. cost,. including the cost of equipment being procured,- of approximately $200 millioni which includes allowance for funds used,during construction but does not include :the cost of replacement power.. Management is' attempting to minimize:the length of this possible outage by currently arranging. for the procurement of~ items with!1ongflead times, i Projected construction expenditures for the periodl1990 ' through' '1994 are - ~ (j ~ presented in the following-table, 'j 7 . Production Distribution =, Transmission; Facilities ' Facilities 1 Facilities-Other Total i ~ (Thousands of Dollars) 1990 $18,759 $29,474- $3,765- $1,143 -$53,141' 1991 13,983 25,154. 4,925 1547 .44,609 j 1992 34,396 30,915 5,179 611 ~71,101; e a 1993 16,170-35,512: 3,605 621 55,908' 1994-9,234 28,257 1,252 611 39,354 + Financing The Company's bonds are currently rated Baal ~ by Moody's, BBB+ by Standard' and Poor's and BBB+ by Duff and Phelps..However, management has a goal of seeing that its senior securities progress, over time,- to a strong "A" rating. >

i Management continues to believo that.. this is an -achievable goal: because; of' i expected improvements in financial conditions due in part to higher cash earnings .availabic to cover' interest charges and preferred dividends as Millstone 3,is' phased into rates. For example, the percentage of cash in.the Company'sTearnings averaged 42 percent in the period 1985-through 1989, -and for~ 1990:that percentage-Lis projected-to be approximately~77 percent. '~ Cash requirements in excess of internally generated funds are generally financed; through t short,. intermediate, and Elong-term borrowings, nucleari fuel ; trust financing'3,1 easing agreemen.ts, and the sale of preferred stock. In a'ddition to -construction and nuclear fuel requirements, the Company is : obligated to meet maturities;and cash. sinking-fund requirements for long-term debt and preferred i . stock totaling.$53.3 million'for the years 1990 through 1994.- c External; financing iwill' continue:to be necessary to meet. total cash requirements,falthough-not at substantially reduced. I the levels of past years,.since; projected construction expenditureschave.been The Company and CL&P continue:to utilize a nuclear fuel trust to1 finance:their. 4 = nuclear fuel' requirements for Millstone 1, 2i-and 3. As'of December 31,;1989, 'l the.' Company's portion : of the trust's investment in nuclear fuel, net ' of J the -fourth quarter.1989 lease payment made on January 31,-199.0, was $50.2 million. The Company's nuclear fuel requirements (for. MillstoneL1, 2, _and 3).'of' 1 $63.3 million for ' the - years 1990 to '1994 are expected to bei financed / by the trust. In 1989, the system companies had' credit' facilities of $400.million avail'able. Available credit facilities and. lines include $350'million:through'a. revolving credit agreement with a number of. banks. The maximum: borrowing limit ofathe I . Company under this agreement.is $105 million. However, isince ' this i borrowing. facility.is also available to CL&p, the amount ofLborrowing-available;could be lower depending =on CL&p's utilization. -At December 31, 1989, the Company had. -$32 million of external short-term borrowings. l+ Rate Matters f In ?une 1989, the DPU, issued a decision granting-the' Company a $17.9 million,'or approximately 6 percent, increase-in ; annual revenues-of: its; requested $28.3 million. In its decision,.the DPU granted the Company.the entire fourth I step of the five-year' phase-in of its ' "used-and? useful"' investment in Millstone 3, bringing.' the phased-in. total to - 80 percent, ' and ' increased the Company's allowed ROE from 12.75: percent to 13.00 percent. 3 On December 15, 1989, the Company filed an application with the-DPU> requesting ) an increase in annual revenues of $32.5 million, or 10.2 percent. A significant portion of the requested rate increase will' allow the Company _to phase in the fif th and final installment of. Millstone 3 construction costs - into. customers' rates. The balance of the proposed rate increase is needed to recover additional costs resulting from inflation and new, expanded services including conservation and load management program activities that the utility,will provide. t i 1 t if a

f !r .c' t f Accounting Standard: + LThe Financial Accounting StandardsI oard h'as; amended a'previously issued income B tax accounting standard. The accou'nting standard requirest among'other things,. a

that regulated l utilities reflect,-on-their balance-sheets the taxes related to the cumulative amount of income' tax. timing differences-for which deferred.
taxes have not ' been provided.

The : Company' expects that wheni the new standard W l adopted. In ' 1992, it will increase assets and liabilities by - approximatelf. .i .$81 million butlwill not'have a. material effect on net income.; .l "RESULTS OF. OPERATIONS l Operating Revenues Operating' revenues increased $31.4 million - from.1988 to ~ 1989 and. increased.. ~ revenues for the'past two years are provided'in the table. W. low.: ,i $19.0 millions from :1987 to 1988. - The components. of the change 'in operating s J Change'in Operating Revenues- -Increase /(Decrease) 1989 vs. 1988 1988 vs. 1987' (Millions of Dollars) i Fuel cost recoveries ' $ 17 ~. 8,

$.0.4 Regulatory decisions ^

12.2 19.7 1.4 8.9- .t Sales and other g g Total. revenue change Fuel cost recoveries increased in 1989h primarily because of. higher sales? and higher energy costs. Revenues related 'to regulatory : decisions increased. primarily because of the effect of June 1988 ' and. June J1989' DPU retail. rate.' I decisions that authorized the continued phase-infof Millstone'3 into rate base i and the increased recovery of phase-in deferred Millstone 3; return'. i Revenues related to regulatory d' cisions increased in 1988, primarily as a result e of the June 1988 DPU. rate decision = that' authorized the; continued-phase-in of-Millstone 3 into. rate base <and the increased = recovery - of i phase-in" deferred 3 Millstone 3 return.' The sales increase in 1988 compared-to.1987 was primarily J the result of the continued' economic growth in the. region.and higher heating and 4 cooling. requirements in 1988. Electric Energy-Expenses Electric energy expenses, which. include fuel'and' net. purchased and. interchange .l power, increased $17.7 million in 1989 as compared to 1988,: primarily because of higher cost purchases from cogenerators and other utilities throughout-the region. i

, 9_ ;g v Q ,.C w + t-1.;; otherLoperation"and Maintenance! Expenses 4 . Othori operation and(maintenance ' expenses ? increased. $4.3' million oin '1989 as; .{ L compared.to 1988, primarily because of higher costs associated with refueling and . maintenance activities at fossil and nuclear electric production facilities and the: general. impact of inflation:on:most expenses,; partially offset bp'. higher d sales.of capacity and management.'s cost-containment efforts;in 1989 : 0 g. l 0ther operation andDyaintenance expenses decreased ; $2.1 million-in11988 4. as compared =.to 1987, primarily because of higher. sales of. capacity ini1988,'jlower-

nuclear refueling and maintenance, outage expenses in -1988 and; the <effect of h
cost-containment measures' implemented by management.

7 i h P Depreciation-Expenses, ip' . Depreciation expensesEincreased $1'.6 million finI 1989 as compared.to 1988 :and..

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! $1.8 million in 19685 as - compared tot 1987,: primarily;because of greater plant investment;and higher: decommissioning levels. j )) : Amortization of. Deferred ~ Millstone 3 Return! n The1 amortization-of' deferred. Mill' stone 3 return incre'ased $3,2 million inf1989. l. -aofcompared to. 1988, primarily because:1the ? Company' was allowed. a' higherL 7 amortization.. level by the DPtj in June: 1989 ~and June 1988 retail. rate' decisions. 'g f 'The' amortization of.. deferred MillstoneL3 return increased'$3.9:million01n11988-fg as ' compared to ' 1987,. primarily because..of ' affull-year'sf amortization. ;of i ~ Millstone.3 " deferred ) costs in' 1988 compared D with : six " months in x 1987. - In

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addition, effective; June'30,;1988,1 the DpU-allowed the Company to. increase the V -amortization ~1evel of deferred Millstone ~3 return; 4 1 :; Taxes Federal and state -income taxes-increased' $2.3 million in :1988 as -compared / to' 1987, primarily because of higher taxable income, partially' offset.by a lower: statutory tax rate. y cf i' Deferred Millstone 3 Return 1 The deferred return on Millstone : 3 decreased $5.4 million:in:1989-as compared' to : 1988, primarily because the Company. had an additional portion of its recoverable Millstone 3 investment phased into rate base-effective? June 30, 1989. [ The deferred. return on Millstone 3 decreased $4.5 :million in'1988 as: compared to '[ 1987, primarily because the Company had an additional portion' cf its recoverable 1 Millstone 3 investment phased into rate' base effective June 30,.1988; r ,I \\ k

b F' = Interest Charges . Interest chstges increased $3.2 million.1n 1989 as compared to 1988, primarily ~ because of higher average interest rates throughout 1989 and-interest accrued-on. spent nuclear fuel disposal costs. i .i \\# i 1 h ..y 'l { l i .i .. I e

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r -lb b 't o Western Massachusetts Electric Company: '[ BALANCE SHERTS 'j s At December 31, 1989 1988 (Thousands of Dollars) .f Assets Utility Plant, at original cost: Electric.........'..........................-...... '$1,079,687 $1,043,169= Lessi Accumulated provfision for depreciatior.. ' 279,695-260,565- ) .799,992. 782,604. Construction work in progress................... 18,'241 19,630 ' Nuclear fuel, net.......'........................ 49,852-64,067 Total.netLutility plant......................; .__,868,085 866,301 Other. Property and Investments: .-r Investments in regional nuclear generating. q companies, at~ equity...............~............ -14,136 13,802-Other, at cost.........................J........ 4,230 3,865 '18'366. 17,667:. < Current Assets: Cash and special deposits....................... .116 -8,025 Receivables, less-accumulated provision (forf uncollectible accounts of $1,637,000 in11989 and~$1,327,00011n 1988........................'. 32,999 29,374 Receivables from affiliated companies........... 12,495 30,522 Accrued utility revenues........................ L16,165 12,155 Fuel, materials and supplies, at average cost... 12,081 10,08'4 3 y Prepayments and other........................... 9,466-6,378: L '83,322 96,538 l l L Deferred Charges: l Unamortized debt expense........................ 2,066 .2,169 Unrecovered spent nuclear fuel disposal costs... 5,102 '5,036 Deferred costs - Millstone 3.................... 55',752 52,730 Amortizable property investment - Millstone 3... 71,942 82,369 Other........................................... 30,461 28,996 { i 165,323 171,300' l' l l Total Assets................................. $1;135,096' $1,151,806 The accompanying notes are an integral part of these financial statements. -

' \\! ~! Festern Massachusetts Electric Company: ' BklPW E S"EETS At December 314 1989 1988

(Thousands =of Dollars) i 4

Cepitalitet. ion ruul Liahi]ities Capitelizetion:. /- 4 -Common stock - $25 par value - authorized and. .26,812 outstanding 1,072,471" shares in.1989 and 1988.... 26,812 Capitel surplus, paid in.......................... 148,107' 147,845-Retained earnings........'.....~.................-..- 105;493. -105,~133, Totel common stockholder's equity.............. 280,412' 279,790 Cumuletive oreferred stock = $100 per value -' authorized 1,000,000 shares; outstanding 350.000 shares jn 1989'and'1988; 6l $25= par velue - authorized 3,600~000 shares at December 31,-1989:-outstanding' 3,340,000- shares in 1989 and 1988 Not subject to mandatory redemption (Note'5)....: 88,500: 88;500 1 Subject to mendatory redemption (Note 6).'........ -30,000L 130,000-Long-term debt (Note 7).......................'.... 397,941 -416,925' Totel'caoithl12etion........................... -796,853: 815,215 Obligatione Under Capitel' Lenses................... ! 35,2645 50,858' Current Liabilities: Notes paveble=to banks............................ 15,000~ 16,000 Notes paveble to affiliate company.............-... 4'000' ,1 Commercial paper.................................. 17;000 8,000 Long-term debt - current portion.................. 20,1521 128,018 Obligations under capital leases current portion..................................... 21;466 19,258 Accounts payeble............ 18,106 8,994 Accounts payeble to effilie.ted comoanies.......... .10,427 16,483' l -Accrued taxes..................................... ,6,365 5,763 Acc ru ed in t e re s t.................................. '7,2441 7,675: Other............................................. 2,843 -3,9251-122,6031 114,116' Deferred Credits: ' Accumulated deferred income taxes................. 135,118-124,514 j Accumulated deferred investment tax credits....... 42,212 43,380 i Other............................................. 3,046 3,723- )]. 180,376 171,617 Cormitnents end Continaencies (Note 10) i Total Capitalization and Liabilities........... 11,135,096 $1,151,806 -The accompenying notes are en integral part of these financial statements. ' j.- g . ll.'

a 1 i., i s N . WestrnMas::chuw3ttsEldctric. company: 9: r STATDEENTS OF-' INCOME l 4 - For the Yoars Ended December 31,- 1989 1988 1987 L -(Thousands of Dollars) Operating' Revenues.....".................. .$335,281 $303,904! $284,942. p ~ l. . operating Expenses: 7 Operation- =Puel....... ............t...'.........~. 42,940 46,4727 55,2071 purchased and interchange power, net.- '35,486' 14,234L .5,083-Other...................... 182,356 83,521-87,334 1 Maintenance...........................

37,710-

'32,222 30,541f f l Depreciation......-...................... 36,240 34,669l 32,890 j l Amortization of deferred Millstone'3 '~ l r e tu r n............ '.................. '.. 9,2931 6,059, 2,1711 F Federal and state income taxes .g h t (Note 8).............................

21,145 L19,774'

'13,957 Taxes other than income 1 taxes......... 14,628 15,508 13,621- .i Total operating expenses........... 279,798: 252s459 '240',804 , 0perating Income.........~............;.. 55,483 '51,445 44',138 i Other, Income:- Allowance for other funds used' u during s construction'.................... 62- .208 20 ,s Deferred Millstone'3' return'-Lother-funds................................ '9,607 '13,180 L16,364-U Equity in' earnings of regional { nuclear generating companies......... _'2,037 : 2,149 2,4411 l g s 1-

Other, net............................

528 .553 (620)' 4 Income taxes -: credit.'................ 5,656 6,021 6,222 / l Other income, net.................. 17,890 ,22,111 ..24,427 + E Income before interest charges..... 73,373' '73,556-68'565 Interest Charges: i Interest on long-term debt............

36,957 134,269-34,070

't Other interest........................ 3,253 2,749 -3,037 Allowance for borrowed funds used [ during construction.................. ( 1,299) ~ (994)' (949) z l Deferred Millstone 3-return - borrowed' l. ' funds, net of income taxes........... (4,116) (5,933) (7,212) L l Interest charges, net.............. 34,795 30,091 28,946 l Net Income.............................. $ 38',578 $ 43,465 $ 39,619 1g The accompanying notes are an integral part of these financial statements. L k sl, 1 r [ t

g t-b W stern M:ssachusstts Elsctric Company STATIDENTS OF CASH Flats - 'For the Years Ended December 31,- 1989 1988 1987 (Thousands of Dollars) . Cash Flows From Operations: Net income......................................... $ 38,578 $ 43,465 $ 39,619 Adjusted for the following; j , Depreciation and amortizatio.3 of leased property. 50,109 51,678 52,368- ~ Deferred income taxes and ini estment tax credits, net..............................'............... 9,902 5,460-14,392' Deferred return.- Millstone S.................... (13,723) (19,113). (23,576)- Amortization of deferred Millstone 3 re'curn...... 9,293 6,059 2,171 Amortization of deferred charges and other-2,937 -9,092 noncash items................................... 10,291 Changes in working capital: ..(20,309) Receivables and accrued utility revenues....... 10,392 .(9,310) Fuel, materials, and supplies.................. (1,997), (1,807) 80 Accounts payable................................ '3,370-125 1,608: Accrued taxes.................................. (236) 5,763.

586.

Other working capital (excludes cash).......... (3,040) (1,230) 3,790. Net cash flows from operations..................... 112,939 84,027 79',821 Cash Flows From Financing Activities: Preferred stock.................................. .53,500 30,000~ Long-term debt................................... 95,000 Increase in obligations under= capital leases..... 5,360L 16,535-21,586' Net increase (decrease) in short-term debt....... .12,000-(30,000) .6,500 Reacquisitions and retirements of.long-term debt and preferred stock............................. (28,998) (82,699) (14,066) Premium on reacquisitions and financing expenses. (83): .(7,254) (562) Repayment of capital lease obligations...'........ (19,061)- (20,092) (22,484) '1 Cash dividends on preferred stock................ (9,244) (10,390) (8,234) J Cash dividends on common stock................... (28,974); (29,880). (27,552) '( i Net cash flows from financing activities........... (69,000). (15,280) (14,812) l l Investment in Plant (including capital leases): (44,210) -(45,178) = Electric utility plant........................... (48,441) Nuclear fuel..................................... (3,469) (16,872) (22,822) Less: Allowance for other funds used during ) construction............................. (62) (208) (20). Net cash flows used for investments in plant....... (51,848) (60,874) (67,980) Net Increase (Decrease) In Cash for the Period..... (7,909) 7,873 (2,971) Cash beginning of period........................... 8,025 152 3,123 ] Cash end of period................................. 116 $ 8,025 152 t i Supplemental Cash Flow Information: Cash paid (received) during the year for: Interest, not of amounts capitalized during construction.................................... H 36,496 S 33,189 'S 36,471 { Income taxes..................................... S (2,304) S (1,443) S 7,510 The accomnanying notes are an integral part of these financial statements. .i l '

A s ?' ^ I J 2 -. Western Massachusetts Electric Company L STATDEENTS OF Colet0N STOCKHOLDER'S ' EQUITY ' o i - Capital Consnon. Surplus,c Retained-

Stock Paid In-Earnings'(a) Total-(Thousands - of : Dollars )-

[, Balance at January 1, 1987.-......... >$26,812c $149,777 $ 98,105L $. 274',694 .) l: Net-income for 1987' .39,619 39,619-Cash dividends on preferred stock. .(8,234). (8,234)- Cash. dividends on common stock.... .(27,552)

(27,552)-

~ Preferred stockLissuance expenses, [" '(379); net of amortization............... (379)?

Balance;at December 31,s1987.'.......:

l26,812 149,398l'101,938', /278,148-. - I. l .,g Net income for 1988.'.............. 43,465'. 43k465- ' Cash dividends on preferred stock.--

(10,390)1

/(10,390)l: Cash dividends - on coninon ' stock.... (29,880). .~ ( 39,880).' Preferred stock issuance'andi retirement; expenses,fnet of '(1,553); y q amortization- '(1,553) q . Balance at December 31,,1988........ 26,812 147,845 li.f.:105,133 - 279,790 l .g 1 } p. Net Income for'1989............... s38,578 '38,578 l: Cash dividends on preferred' stock. . (9,244). (9,244) ,' 1 l' Cash dividends on common stock.... (28,974); '(28,974) !.) Preferred' stock issuance expenses, I! j. net of amortization.............. 262 ~ 262 j i y ' Balance at December 31, 1989........ $26,812 '$148,107' $105l493

$280,412-

-1 i 1 q 1 q - j 0 -(a) The Company has dividend restrictions imposed by-its long-term-debt ] agreements. At December 31,-1989 these restrictions totaled $71,million. i l l, 1 1 The accompanying notes are an integral part of these financial statements. .q ! l 1

i Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES General: Western Massachusetts Electric Company (WMECO or the Company), The Connecticut Light and Power Company (CL&P), and Holyoke Water Power Company (HWP) are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by Northeast Utilities (NU). Other wholly owned subsidiaries of NU provide substantial support services to the system. Northeast Utilities Service Company supplies centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing, and other services to the system companies. Northeast Nuclear Energy Company acts as agent for system companies in constructing and operating nuclear generating facilities. The Company purchases electricity from Holyoke Power and Electric Company, a wholly owned subsidiary of HWP. NU also has two subsidiary realty companies, The Rocky River Realty Company and The Quinnehtuk Company. All transactions among af filiated 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. Public Utility Regulation: 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 it and its subsidiaries, including the Company, are subject to the provisions of the 1935 Act. Arrangements among the system companies, outside agencies, and other utilities covering inter-connections, interchange of electric power, and sales of utility property are subject to regulation by the Federal Energy Regulatory CommisLion (FERC) and/or the SEC. The Company is subject to further regulation for rates and other matters by the FERC and the Massachusetts Department of public Utilities (DPU), and follows the accounting policies prescribed by the commissions. Investments and Jointly Owned Electric Utility Plant: The Company owns common stock of four regional nuclear generating companies. These companies, with the Company's ownership interests, are: Connecticut Yankee Atomic Power Company (CY) 9.5% Yankee Atomic Electric Company 7.0% Maine Yankee Atomic Power Company (MY) 3.0% Vermont Yankee Nuclear Power Corporation (VY) 2.5% The Company's investment in these companies is accounted for on the equity basis. The electricity produced from these facilities is committed to the participants based on their ownership interests and is billed pursuant to contractual agreements. -

.n iQ:v Iiv q wd c. 'l ~ Western Massachusetts Electric Company,- J 'f ' i i NOTES TO FINANCIAL STATEMENTS s The-Company has a 12.24 percent joint ownership interest inLMillstone 3i- ~ 7 a 1,156-megawatt L- (MW) nuclear: generating ; unit. ' As t of December 31,;'1989, plant-in-service and accumulated provision ;for deprociationL fincluded - approximately ' $372.5 million, and. $36.4 million,. respectively, for. the Company'sL proportionate share.of' Millstone'3. Thei Company's share of' a Millstone 3 expenses?is included in. the corresponding operating - expenses - on. l the accompanying Statements of. Income. I' Revenues: Utility) revenues are based 1on' authorizedL rates applied; to each l j customer's use'of electricity,fRates'can be.. increased only through;aLformal proceeding before the appropriate regulatory commission, fat'the end'of:each? accounting period; :the. Company accrue's an' estimate Lfor the iamountLof energy - delivered'but unbilled. ' ~ j - Spent Nuclear - Fuel Disposal Costs: Under the 5 Nuclear, Waste 1 policy ; Act.of-a - 1982, the = Company must pay the-. United States ' Department of1EnergyL(DOE)1for Y the. disposal' of. spent nuclear fuel; and high-level ~ radioactive waste. 1For. nuclear s fuel used to, generate' electricity priorEtoi April.7,.1983: J(prior. L - period fuel), paymentE may ' be ' made E anytime. prior to theJ first deliveryr of i spent fuel. to the DOE. LAt' December 31,l1989,. feesi due to theiDOEt formthe disposal of; prior - period fuel' were approximatelyd$26.1 million, L ncluding-i ' interest '. costs of $10.4'million. As a.of S December: 31, 11989, Lapproximately [ l., I l ~-' $21.0 million had been collected throughLrates. g r L Fees'for! nuclear'. fuel burned after April;7, 1983 are paid; to. the DOE 'on ' t E a quarterly. basis.- j Depreciation: .The provision for depreciation 18--calculated using thei straight-line method based on estimated, remaining useful' lives-of depreciablei I utility - plant-in-service, adjusted' for - salvage "value and remov'al) costs' as. approved by the DpU. Except for major facilities, depreciationifactors are applied to the average plant-in-service during the period. Major facilities } are ' depreciated from the time they ' are placed inf service. When plantOis [ e retired from service, the ' original cost of' plant,c. including. costs of removal,= i less salvage,-is. charged to the. accumulated provision for; depreciation. :For nuclear production plants', the costs ' f removal, less salvagef 'that have 'been o funded through external decommissioning trusts will he charged m.to ? those I trusts. See Note 2, " Nuclear Decommissioning," for additional.-information. L' The, depreciation ~ rates for the several' classesJ -of electric plant-in-service are equivalent to a composite -rate < of 3.6 percent in 1989 g and.1988, and.3.4 percent in 1987. j Incomo Taxes: The tax effect of' timing differences (differences between the 4 ~ periods' in which transactions - affect income in the / financial statements and the periods in which they affect the determination of income subject to. tax) is accounted for-in accordance with the ratemaking treatment of the l applicable regulatory commissions. See Note 8 ' for the components ofiincome - tax expense, j '[ 1 4

4

s, y

4 Mestern Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS The L Company has not provided deferred income taxes for certal'n -- timing - differences during periods when the: DPU did not permit the - recovery of, such income taxes through rates charged to customers. The cumulative net amount'

of income - tax -- timing differences for ' which > deferred taxes have - not been provided was approximately $50 million at ; December 31,- 1989.. - As. allowed under current regulatory practices, _ deferred taxes not? previouslyf provided-are being collected in customers! rates as such taxes becomefpayable.

In: December'1987, the Financial Accounting ' Stan'dards Board: issued Statementc of Financial Accounting Standards No. 96, " Accounting for o Income.. Taxes"-(SFAS 96). SFAS 96, as amended, supersedes-previously issued income ' tax accounting standards:and will be' effective inil992 - The Company expects that when SFAS 96 is adopted 'it will increase : assets and liabilities; by approximately-$81 million, but will not have a material'effect on net-income. Allowance for Funds Used-During Construction (AFUDC): AFUDC,-a noncash cost-calculated in accordance with FERC guidelines, represents theLestimated cost { of capital funds' used to finance. the Company's 1 construction-program. 1 These i costs, whichLare one component.of the total capitalized' cost of construction 4 --are not ~ recognized as _ part of' the rate base-for aratemaking; purposes ; until . 1 facilities are placed in service. ~ l L The effective AFUDC-rates under'the gross-of-income tax method.for'1989,. 1988 and.1987 were 10.0 percent,'8.8 percent and 7.8Lpercent,;respectively. Energy Adjustment Clause: As permitted ' by the DPU, the - Company e defers. the difference between forecasted and actual fuel costs untilzit'is recovered or. . 1 refunded quarterly under a retail fuel' adjustment clause.; Massachusetts law; j requires the. establishment of an -annual 4 perfo:mance: program related to fuel - 4 procurement and use. The program establishes performance standards for plants owned and operated by.the Company or plants in which-the Company has a.. { life-of-unit contract. Therefore, revenues collected under: the Company's - I retail. fuel adjustment clause are subject to. refund pending review 'by the DPU. To date, there have been no significant adjustments as'a result of this program. Phase-in plan: The Compan_y.is phasing into rates the recoverable part of.its Millstone 3 investment. The plan, as currently designed,.is in-compliance i j with Statement of Financial Accounting Stan6ards' No.-92, '" Regulated i Enterprises--Accounting for Phase-in' plans." Under the terms of the.' original { Millstone 3 phase-in rate order, the ' Company must apply to theDPU for ' l revenue increases sufficient to recover the Millstone 3'-installments l as they j are to be-phased in. On June 30,.1989,.the DPU allowed-the fourth of five-equal annual installments of the "used and useful" portion of the Company's investment -in Millstone 3 to be added to the Company's ' rate -base.. LAt i December 31, 1989, $282.6 million, or 80 percent, of the "used and useful" portion of the Company's investment in Millstone 3 was in rate base, leaving 1 $70.6 million, or 20 percent, of the Company's-recoverable Millstone 3 investment for future phase-in. i ^ a

4 m s LM 'l i a w 's b 3 Western Massachusetts Electric Company. l n.-- NOTES TO FINANCIAL STATEMENTS , Beginning - in 1986, the ' DPU 1has permitted the _ Company ' to i recover the - portion of its Millstone 3L investment representing ' the c amount currently -i determined to be "unuseful" by' the DpU ($60.5 million :at December 31, 1989), (excludingi the applicable equity AFUDC, - overf a c ten-year L period' without-l . earning a return. -On June 30, 1987,. the: Company'also began to recover the.: i . deferred return;.includingt carrying charges, on the: recoverable but not yet phased-in portion ofsits-investmentLin. Millstone 3. .This recovery will take- .j place over c a - nine-year. period. As offDecember-31, 1989, $17.5: cmillion_of L the deferred return,-including carrying charges, has<been: recovered. On ? December 15r ~ '1989, the I CompanyJ filed an lapplication[with Lthe ?DPU-requesting the' fifth and. final annual installment' of.the phase-in plan.: to become effective on July l',-1990.-- s 2. -NUCLEAR DECOMMISSIONING-AE 1989 : decommissioning study -reaffirms that complete. and immediate-- idismantlement -at-retirement' is the : most viable ' 'and c economic. method. ' of ' a decommissioning 1 the three' Millstone units..The Company's sharesofith'e? total t estimated cost -of decommissioning ' these-units is $128.6'million in: year-end i 1989 dollars. = Decommissioning studies-arez reviewed and updated < periodically _ to reflect changes in decommissioning requirements,: technology,.and 0 -inflation. ~ a The Company > has. established independent l decommissioning _ trusts: for its portion of the costs of decommissioning Millstone _1,'2, and-3. ,4 As of December 31, s1989, 'the!LCompany ;has; collected through>. rates i $19.3 million for future decommissioning; costs,1'which has been transferred to (! external l decommissioning trusts c : Although - a portion 3 of' thei estimated total - 7 decommissioning ; costs _ has been : approved i by regulatory < agencies and is' reflected' in the: depreciation expense of f the : Company, the Company' believas . required to pay the full projected costs of decommissioning. _ will1 he '. revenues in amounts greater than those currently lbeing collected 3. LEASES l The Company and CL&P 'have entered 'into a capital lease agreementt to finance up to $530 million of nuclear fuel for Millstone.-1 and 2 and their. share of the nuclear. fuel for Millstone 3. The - Company andi CL&p!!make quarterly lease payments for. the cost of -nuclear : fuel consumed --inL the 'l reactors (based on a units-of-production method at-rates which reflect estimated kilowatt-hours of energy provided) plus 1 financing costs associatad with the fuel in the reactors. Upon permanent discharge-from the. reactors, ownership of the nuclear fuel transfers to the Company and CL&P. The Company has also entered into lease agreements, some of-which aro- . capital leases, for the use of substation equipment,, data processing and-office equipment, vehicles, nuclear control room simulators, and :off3ce 4 1 i s '] I

+ s

o,,

I, iWestern Massachusetts Electric Company' NOTES TO FINANCIAL STATEMENTS -space. The L provisions Lof these. lease agreements generally provide forc

renewal options.

.The' following" rental payments..have: been charged -to-operating expense: 1. -e Capital;

Operating

' Year- ' Leases Leases 1989............... $22,781;000 $7,080,000' R 19 8 8.. -........... '.... -24,775,000 8,259,000 1987............... 25,372,000-c8,618,000? Interest included in capital Llease: rentali payments was $5,108,000 inc 1989,-$4,795,000 in 1988, and.$5,091,000:in 1987.' "substantially all of the-capital lease rental payments were. made

pursuant to the nuclear tuel lease agreement.

Future minimum lease payments ~ under the nuclear fuel' capital. lease cannot - bei reasonably- ~ estimated on> an : ~q annual basisidue to variations in the-usage of nuclear fuel; Future minimum-rentalu payments, ' excluding annualE nuclear, fuel -- lease payments and executory costs, such w as': property taxes, state tuse taxes,. -- in su ranc e, - and ' maintenance,. under long-term noncancelable. leases, as. of , December 31, 1989, are approximately: Capitali . Operating Year Leases' Leases -(Thousands of Dollars)- Jb 1990......-........................ $1 36. $ 6,152 j 1991.............................. 36. -5;385 l 1 1992.. 36 4,694 1993.............................. 36 3,857 1994.......................'....... 36 -~ 3,12 3 - j After 1994........................ 360' ~40,431 Future minimum' lease payments..... 540 $63,642 -.s Less amount representing interest. 218 Present value of future minimum lease payments for other than nuclear fuel..................... 322 present value of future' nuclear fuel lease payments.............. 56 408-Total........................ $56,730- ..k i f ( s

1 o-r Western Massachusetts Electric Company _ NOTES TO FINANCIAL STATEMENTS y - 4.- SHORT-TERM DEBT [ The'~ system ' companies 'have. various credit l'ines. totaling $400 million.1 ' Of ' thislamount, $350 %illion-is available to the Company, NU and CL&P, through - a revolving-credit' agreement with a-group of 11, banks. The maximum borrowing: c limit of the Company under the agreement is $105 million'. However, sinceithe' $350 million agreement /is also available. to-CL&P (up to $350 million)= and NU : (not to' exceed- $100 million), the < amount' of funds available - to the-Company. could ~ be - less than' $105' million.: The Gnpany = may borrow; funds on.a short-term revolving basis. using 'either-fixed-rate loans "or standby - loans.. Fixed rates are set using competitive bidding._ Standby loan ratas are' based' upon several alternative variable rates. The Ccmpany. is obligated.. to" pay 'a f acility fee of.1875 percent per annum on its proportionate share of the commitment. At. December 31, 1989, the company.%d $10 million outstanding under this agreement. . The _ remaining $50 million in available: to the NU. system ' companies through a revolving-credit: agreement with a group of = seven banks.- - Under this- - agreement, the NU system companies' can borrow. in the. aggregate: an amount not to : exceed $50 million. Loans under ~ this agreement -are. on a short-term

revolving basis in: the. form of _elther Eurodollar Loans based on the-London

-Interbank offered Rate, ' plus L 3/8 of 1-percent, or as Alternative Base Rate Loans at the greater of the prime rat'e or 1/2 of 1' percent.over the Federal" Funds Effective Rate. This agreement 'will.. expire on' August 25, 1991-unless-extended, on' an annuali basis, for as maximum of - four ' ' years. beyond. the. expiration of the initial' three-year term.' At December. 31,:1989, there ware no borrowings under this agreement. 4 m ? h a k i I ' ~ 20-t i ) 4 4

r e Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 5. PREFERRED STOCK NOT SUBJECT TO KANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption are: December 31, Shares 1989 Outstanding Redemption December 31, Decenber 31, Description Price 1989 1989 1988 1987 (Thousands-of Dollars) 9.60% Series A of 1970 $103.99 150,000 $15,000 $15,000 $15,000-7.72% Series D of 1971 103.51 200,000 20,000 20,000 20,000 1988 Adjustable Rate DARTS 25.00 2,140,000 53,500 53,500 Total preferred stock not subject to mandatory redemption $88,500 $88,500 $35,000 All or any part of each outstanding series of preferred stock may be redeemed by the Company at any time at established cdemption prices plus accrued dividends to the date of redemption. 6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are: December 31, Shares 1989 Outstanding Redemption December 31, December 31, Description Price 1989 1989- -1988 1987 (Thousands of Dollars) Adjustable Rate Series D of 1983 $35,000 7.60% Series of 1987 26.90* 1,200,000 30,000 30,000 30,000 30,000 30,000 65,000 Less preferred stock to be redeemed within one year Total preferred stock subject 1,750-to mandatory redemption $ 30,000 $30,000 $63,250

  • Redemption price reduces in future years.

The.7.60% 1987 Series Preferred Stock requires a sinking-fund sufficient to retire a minimum of 60,000 shares (or a maximum of 120,000) at $25 per share each year commencing February 1,1992. { 1

b 1 4 I z U c a + Western Massachusetts Electric Company; i 4 NOTES TO FINANCIAL STATEMENTS E in. case of def ault ont ainking-fund pay' rents, ' no ' payments may.be mede ' ont any ' junior' stock by way of; dividends or otherwise - (other; than in sheres < of .'i junior.. stock) so long as the,defeult continees.- If the Comoany.is.in errears .in the payment.of dividends on any;outstending shares of preferred stock, the. Company would be: prohibited from redemption or purcheme of less Lthan ell of.

the. preferred; stock: outstanding.; All or part of - the 7.600 Saries ofl 1987 raay.

be _ redeemed by! thel Company; at - any time t at Lan establimbed redemotion; price 1 i f.redemotion; eycept that, durinq ; the plus. accrued dividends toxthe date o tinitial five-year: redemption ' oeriod ;1t ' _is sebiect ' to cetain a rafonding - limitations. .7-- LONG-TERM DEBT-t Details of long-term debt outstanding are: . December 31', 1989 1988; (Thoe.nends of-Dollars) --First Mortgage Bonds: $ 8,000 ~4:3/8V Series E, due 1992............... $':8,000 19 1/4% Series S; due'1995............... 60,000

60,000-5 3/4% Series F, due 1997...............

115,000 15.000' 1.3/8% Series H, due~1998...............1 15,000' .15,000 6 3/4% Series G, due 1998....'.............. 10,000 10,000 9 3/8% Serie? I, due-2000...............- 30,000: 30,000: 7 3/4% Series J, due 2002............... 30,000 30,000 9 1/4% Series K, due 2004............... 25,000L '25,000 9 1/40 Series M, due 2006............... 30,000, -30.000 11 7/8% Series Q, due 2015......... 15,586- '24.234 9 3/4% Series R, due 2016............... 25,000 l25,000' 10 1/8% Series T, due 2018.........-...... 34,650-35,000 Total First Mortgage Bonds........... -298.236 .307:234 Intermediate Term Notes: 7.96%-8.27% due 1989-1991............... 40,'000-60,000- ' Pollution Control Notes:. Variable rate, due 2014-2015............ 52,400 52,400L 5.9%, due 1998........................... 1,883 1,883 Fees and interest due for spent feel disposal costs.......................... 26,059 23,997 Less amounts.due within one year......... 20,152 28,018 Unamorticed premium and discount,. net..... (485) =(571)" {3,,9,J7 9,,4,,j, g6g Long-term > debt,. net................ j l: / . Long-term debt maturities and cesh sinking-fund reonirements on debt = l outstanding at December 31, 1989-for' the years' 1940- throvah 1994' are: $20,152,000-for 1990'and 19914 $8,152,000 in 1992 and $152.000-in 1993 and 1994. In addition, there are annual 1 percent sinking-and-improvernent-

fund requirements, currently amounting to $3,080,000 in eech of; the yeers 1990 through 1992 and-53,000.000 jn 1993 and 1994.

Sech sinking- '. end ,. i r

l i l [ l Western Massachusetts Electric Company NOTES TO FINANCIAL STATENENTS improvement-fund requirements may be satisfied by the deposit of cash or ~ bonds or by certification of property additions. All or any part of each outstanding series of first mortgage bonds may. be redeemed by the company at any time at established redemption prices plus accrued interest to the date of redemption, except certain series which are subject to certain refunding limitations ~during their respective initial five-year redemption periods. Essentially all of the Company's utility plant is subject to the liens of its first mortgage bond indentures. As of December 31, 1989, the Company has secured $52.4 million of pollution control notes with second mortgage liens on Millstone 1, junior to the liens. of' its first mortgage. bond indentures. 8. INCOME TAX EXPENSE The components of the federal.and state income tax provisions are: For the Years Ended December 31, 1989 1988 1987 (Thousands of Dollars) Current income taxes: Federal................................ $ 4,426 $ 6,693 $(6,404) State.................................. 1,161 1,600 (253)' Total current....................... 5,587 8,293 (6,657) Deferred income taxes, net: Federal................................ 7,825 7,347 10,323 State.................................. 2,940 2,196 3,130 Total deferred...................... 10-765 9,543 13,453 Investment tax credits, not............ (1,168) (1,952) 6,814 Total income tax expense............ $15,184 $15,884 $13,610 .j The components of total income tax expense are classified as follows: Income taxes charged to operating i expenses.............................. $21,145 $19,774- $13,957 Income taxes associated with the amortization of deferred Millstone 3 return - borrowed funds............... (2,923) (1,597) Income taxes associated with AFUDC and deferred Millstone 3 return - borrowed funds........................ 2,616 3,728 5,875 Other income taxes - credit............ (5,656) (6,021) (6,222) Total income tax expense............... $15,184 $15,884 $13,610 i i a r

h i Western Massachusetts Electric Company, r NOTES TO FINANCIAL STATEMENTS Deferred income taxes are comprised of the tax effects of timing differences as'follows: ~For the Years Eaded December 31, 1989 1988 1987 .(Thousands of Dollars) Liberalized depreciation, excluding leased nuclear fuel.....'.............. $ 6,598 $ 9,658 $11,301 Construction overheads................. (1,808) (1,442): 1,407 Liberalized depreciation on leased-nuclear fuel, settlement credits; and (1,'33) 8 disposal costs........................ 1,233 (1,377)' Decommissioning. costs.................. - 57 ~ (211) 74 Energy adjustment clause............... 1,113 ~1,552 (3,005) 'AFUDC and deferred Millstone 3 return, i net................................... (305) 2,131-5,875'. Alternative minimum tax................ (5,065) l ? Deferred refueling cost................ 2,245-414-3,289 Loss on bond redemption................ 1,835 (42) 1,848 0ther.................................. (203) (1,140): (438) Deferred income taxes, net'............ $10,765 $ 9,543 $13,453 } The effective inceme tem rate is computed by dividing total income tax expense by the sum of such taxes and net income. The differences between the effective rate and the federal statutory income tax rate'are: For the Years Ended December 31. 1989 1988 1987 Federal statutory income tax rate....... 34'.00% 34.00% 39.95% l Tax effect of differences: 1 Depreciation differences............... (.69) 1.88 (.18) Other funds portion of AFUDC not e recognized as income for tax purposes............................. (.04) (.12) (.01) Deferred Millstone 3 return - i t-other funds.......................... (6.08) (7.55) (12.28) ~ Amortization of deferred Millstone 3 return - other funds................. 4.06 2.57 1.21 Construction overheads - portion not deferred............................. (3.56) (3.23) (1.57)- Investment tax credit amortization.... (2.17) (3.29) (3.00) 37 State income taxes, net of federal benefit.............................. 5.14 4.27 3.15

Other, net............................

(2.42) (1.77) (1.70) Effective income tax rate............... 28.24%- 26.76% 25.57% F -

Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 9. RETIREMENT PLAN The Company participates 'in. a;-uniform noncontributory defined' benefit retirement plan covering all regular NU system employees. Benefits are based on-years of service and employees' compensation during the last five years of employment.. The Company's allocated portion of the system's pension cost, part of which was charged to utility. plant, ' approximated $118,000 in!1989, $20,000 in 1988, and $400,000 in 1987.. It is the ' policy of the Company to fundi. annually an amount at - least - equal to that which will satisfy.the requirements of the Employee Retirement Income Security _ Act and the Internal Revenue Code. -Pension costs are determined using market-related values of pension assets.. Pension assets are invested primarily in equity securities, bonds, and insurance contracts. The' components of net pension cost for the NU system are For the Years Ended December 31, 1989 1988- -1987 (Thousands of Dollars) Service cost................... $ 31,020 $31,893 $32,812 Interest cost'.................. 61,415 59,715 54,318 Return on plan assets.......... (160,750) (84'825).(36,811) Net amortization............... 82,852 10,431 .-$19,158 (31,161) Net pension cost............... $ 14,537- $17,214-i For calculating pension cost, the following assumptions were used: For the Years Ended December 31.- 1989 1988 1987 Discount rate.................. 9.5% 9.5% 8.5% Expected long-term rate of return..................... 9.7 9.7 9.7 Compensation / progression rate.. 8.5 8.5 L7.5 l .g

i o l Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS The following table ' represents the plan's funded status reconciled to the NU consolidated balance' sheet: At December 31, 1989 1988 (Thousands of Dollars) Accumulated benefit obligation, including $439,804',000 of vested benefits at December 31, 1989 and t $386,618,000 of vested benefits at December 31, 1988.................. $471,387 1419,781 projected benefit obligation........ 720,994 694,315 -Less: Market value of plan assets.. 874,792' 768,001 i Market value in excess of projected benefit obligation.................. 153,798 73,686 Unrecognized transition amount...... (30,837) (34,233)' Unrecognized net gain............... (140,607) (67,259) Accrued pension (liability)......... $(17,646)' $(27,806) l The following actuarial assumptions were used in calculating'the plan's j year-end funded status: At December 31, 1989 1988-Discount rate....................... 9.0% 9.5% t Compensation / progression rate....... 7.5

8. 5, In addition to pension benefits, the Company provides certain health care and life insurance benefits to retired employees. The cost of providing-those benefits was approximately $1,768,000 in 1989, $1,360,000 in 1988, and L

$929,000 in 1987. The company recognizes health care benefits primarily as incurred and provides for life insurance benefits through premiums paid to an' insurance company. 10. COMMITMENTS AND CONTINGENCIES Construction Program: The construction program is subject to periodic review .d and revision. Actual construction expenditures may vary'from such estimates due to factors such as revised lead estimates, inflation, revised nuclear r safety regulations, delays, difficulties in the. licensing process', the: j availability and cost of capital, and' the granting of timely and adequate a rate relief by regulatory commissions, as well as actions by other regulatory. bodies. l l= The Company currently forecasts construction expenditures (including AFUDC) of $264.1 million for the years 1990-1994, including $53.1 million for 1990. In addition, the Company estimates that' nuclear fuol requirements will '[ be $63.3 million for the years 1990-1994, including $18.2 million for 1990. ? i o i P

Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS Hydro-Quebec: Along with various New England utilities, NU has entered into agreements to finance and construct additional transmission tand terminal facilities (phase II) to import electricity from the Hydro-Quebec system in Canada.- The ' phase II project is currently estimated to _ cost approximately $490 million of which approximately $410 million has been expended or committed as'of December 31, 1989. These facilities, which are. scheduled to be placed in service in late - 1990, would increase the capability of the Hydro-Quebec interconnection to 2,000 MW. Upon completion of phase II, NU is expected to have a 22.66 percent equity ownership approximating $35 million in the phase II facilities.. Under the terms of.,the Phase.II' equity agreement, NU guarantees the. obligations of. ' other participants that have lower credit ratings. NU receives compensation for such guarantees. - Under the terms of the phase II_ contract: WMECO is entitled to receive 3.83 percent of the energy transmitted by the Phase 11 facilities. Millstone 2: Corrosion, pitting, and denting of tubes within steam generator. assemblies have been problems found at - numerous nuclear units. These problems were first-identified at Millstone 2 in a 1977 outage. Since then, the unit's steam generator system has been the subject of regular inspections and repairs. In light of the extensive repairs that have been required, it will probably become necessary to replace Millstone' 2's steam-generators. In the early 1990s. Commitments have been made to procure spare steam generator subassemblies, and plans are being developed to prepare the site for replacement. 'If a. steam generator replacement becomes necessary, an outage of five to six months could be involved.- The total cost, to the NU system, of the replacement (including the cost ' of equipment being procured but excluding replacement power costs) is estimated to b,e $200 million including AFUDC. Environmental Matters: The NU system is subject to regulation by federal, state, and local authorities with respect to air and water quality and the. disposal of toxic substances and hazardous and solid wastes. The cumulative long-term economic cost impact of increasingly stringent environmental requirements cannot be estimated. However, to comply with such requirements, the system may incur significant additional costs in. connection with the generation and transmission of electricity and the storage,_ transportation, and disposal of by-products and wastes. The system may also encounter significantly increased costs to remedy the environmental effects of prior disposal practices. These changing environmental requiremento could hinder the construction of new fossil-fuel generating units and ' could require extensive and costl.y modifications to the system's existing hydro and, fossil-fuel generating units. The system may also face 'significantly increased costs for work centers and other facilities as a result of environmental regulations. The extent of additienal future environmental cleanup costs is not estimable due to factors such as the unknown magnitude ~ of possible contamination, the possible effects of future legislation and regulation, the possible effects of technological changes-related to future cleanup, and the difficulty of determining future liability, if any, for the cleanup of sites at which the Company has or may be designated as a potential responsible. .1 1

1 r

.w r Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS party by the United States Env'ironmental.' Protection Agencyi the Massachusetts-Department of Environmental; - Protection, 'and J the,.. Connecticut! Department of Environmtsntal Protection. Inc addition,. _the Company cannot - estimate the, 1 potential' liability _for' future claims that"may be brought against the Company' by private parties.. However; _considering known - facts; existingclawal and possible Jinsurance; and/or rate treatment,/ management does not believe>such~ matters willu have Ta s materialf adverse; effectF on3 the1 Company's. financial-

position, k lear Insurance Contingencies:

The. price-Anderson Acts currently ; limits h.iblic liability from _a single incident? at aL nuclearf power. plant to $7.8. billion. The-first $200 million of liability would be provided by purchasing the maximum amount of commercially. available: insurance. _ Additional' coverage of up to a total of $7.2' billion would' be provided ' by an assessment of" $63 million - per incident,. levied on' each of f the 115 ' nuclear. units-currently' licensed to operate'in the United' states, subject to'a maximum assessment of s $10 million per incident: per nuclear lunitL in any year; e In ' addition,' if the sum of all public liability claims and legal costs arising fromf any nuclear incident exceeds ~ the ' maximum ! amount of ; financiali protection, eachi reactor operator can be assessed an _ additional 15 percent, up.;to $3.2L million or. $362.3 million in total, for' all" 115' nuclear units. 4The maximum ' assessment is to be_ adjusted at least every five years to reflect' inflationary changes. Based on the Company's ownership l interest ' in-the three' Millstone. units,.the Company's maximum _ liability would be $33.2_ millions per ' incident.. In addition, through the Company's power purchase contracts with the four Yankee. regional. nuclear generating companies, it would be responsible?for up to an additional $14.6 million per incident.. Payments. for-the Company's ownership interest in nuclear generating facilities would be limited to a maximum of $7.2 million per incident per year. a-Insurance has been purchased f rom. Nuclear Electric ~ Insurance 1 Limited (NEIL) to cover: (1) certain extra costs in' curred 'in7 obtaining replacement power during a prolonged accidental outage ' with ' respect' to _ the Company's ownership interest in Millstone 1, 2, and'3, and CY; and (ii) the cost of repair, replacement, or decontamination. of utility property resulting from insured occurrences at Millstone 1, 2, and 3,,CY,:MY,.and VY. All companies insured with NEIL are subject to retroactive assessments;if: losses exceed the accumulated funds available to NEIL.. The maximum - potential assessments o against 'the Company with respect to losses - arising during current. policy years is approximately $3.3 million under the replacement powerc policies and $2.5 million-under the. property ; damage and decontamination policies. ~ Although.the Company has purchased the limits of coverage currently available. from the conventional nuclear. insurance pools,. the cost of-a nuclearrincident a-could exceed available insurance proceeds. In-addition, insurance has been _ purchased from -American. Nuclear [' Insurers / Mutual Atomic Energy Liability Underwriters, aggregating $200-o E million on an industry basis, for coverage.of worker claims. All companies L insured' under,this coverage are subject to retrospective assessments of R .$3.25 million per reactor. The maximum potential assessment againsti the j '

i. 1 o. Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS Company with respect to losses arising during the current policy period is approximately $2.3 million. Financing Arrangements for the Regional Nuclear Generating Companies ' The owners of CY, including the Company,..have guaranteed their pro rata shares of $22.0 million 17 percent Series' A Debentures. The guarantee of the Company. is $2.2 million. The Company' believes that the regional nuclear generating companies will require additional' external fineneing in the.next several years for construction expenditures, nuclear fuel, and other purposes' Although the i ways in which each regional nuclear generating company will attempt to finance these expenditures have not been determined, the Company expects that it may be asked to provide direct or indirect financial support. for one or more of these companies. 4 e 4 4 t,

y (, i M y. V i,.,. X':stcrn Mr2cchuZtts Elcctric CompanyJ L o p Report of Independent Public Accountants t To the. Board of Directors' .ofl Western Massachusetts Electric. Company: . We have audited the balance sheets ofiWestern Massachusetts Electric Company : (a Massachusetts corporation and a1 wholly owned subsidiary of? Northeast? Utilities) 1 las, of December 31', : 1989 and 1988, and-the related ;. statements' of Lincome, fjcommon - 7 . stockholder's equity;; and cash flows for each s of the 1threeTyears.in the ' period ended December 31,'1989.'lTheseEfinancial statements-are.the' responsibility:of.the: Company's.' management. Our ? responsibility J is. - to.( express an opinion. on! these: x financial statements based on'our audits. We conducted. our auditsJin ' accordance withHgenerally: accepted L auditing l standards. Those standards require that' we planiand. perform' the-audit:. to obtain reasonable assurance about fwhether the1 financial 1 statements are - free'of material .-misstatement.- T An: audit: includes: examining, on altest s basis, evidence supporting - the; amounts' and disclosures in - the financialL statements.. An auditiaiso includes' assessing the accounting principles 1 used.and. significant' estimates 1madel'by. management, as well as evaluating the overall' financial; statement - presentation.

We believe that our audits provide 1a reasonable basisifor our opinion','

In our opinion, the financial" statements referred to above presentLfairly, in ) all material respects, - the financial position of: Western Massachusetts-Electric ll . Company as of December 31, 1969 and 1988' ' and - the ~ results of its. operations. and L cash flows.for each of the three years. in the period ended December 31,-'1989, in-h conformity with generally-accepted accounting principles.. l ARTHUR ANDERSEN & CO. i Hartford, Connecticut 3;. February 16, 1990 he ?- a j! ~ .) i l $. .q. 30 h-n. W4 s s.

W:stcrn M22s chus0tts Electric Company SELECTED FINANCIAL DATA Years Ended December 31, 1989 1988 1987 1986 1985 (Thousands of Dollars) Operating' Revenues.......... $335,281 $303,904.$ 284,942 $263,736 $277'820 Operating Income............ 55,483 51,445 44,138 37,989 ~ 41,431 Net income.................. 38,578 43,465 39,619 47,204 54',635 Total Assets................ 1,135,096 1,151,806 1,105,801 1,052,981 995,782 Long-Term Debt *............. 418,093 444,943 395,971 408,915 396,968 Preferred Stock Subject to Mandatory Redemption...... 30,000 30,000 65,000 '35,000 50,000 a Obligations Under Capital Leases *.................... 56,730 70,116' 73,835 74,915 75,701

  • Includes portions due within one year.

STATEMENTS OF OUARTERLY FINANCIAL DATA (Unaudited) Quarter Ended 1989 March 31 June 30 September 30 December 31 (Thousands of Dollars) Operating Revenues.......... $ 85,844 $ 76,796 $ 83,173 $ 89,468 Operating Income............ $ 17,941 $ 9,654 $ 12,552 $ 15,336 Net Income.................. $ 14,645 $ 5,267 $ 7.813 $ 10,853 't 1988 Operating Revenues.......... $ 81,987 $ 68,114 $ 75,768 $ 78,035 Operating Income............ $ 17,005 9,754- $ '14,366 $ 10,320 Net income.................. $ 14,911 $ 8,722 $ 11,168 $ B,664 i ~< i y i. 7. 1 e 4D-42-

WestirnMas;rchu;;tts.Elcctric' Company}c

,e r 4 n' ' STATISTICS- 'I

  • J

' Gross Utility Plant- ! Average . Annual'. Electric? -December 31,. P,- (Thousends of. kWh Salt.3- , Residential . Customers 1 - Employees:- Dolitirs ) -(Millions)' kWh Use '(Averace)- (December 31;) -1989' '$1,147,780: ~3,830_ 7,878-l-190,204 849c. (1988 -1,126,8661 3,753 7,853D,' 187,145 L B40.. 1987-1,088,809 3,625-7,584' '183,538-871 1986 1,046,832 3,549-7,378-179,700: '859. 't '1985 1,103,497' 3,452 -7,188 176,325/ ~B53' A D t. [. f p 5 6 5 b i 4 t \\ L 4 t vs '.' f i.,.s {ll): 1 r,n e, i - .i .vt r Ys v f 4 4 + Y 9 y i i f '4i a 32., c

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Western MassachusettsLElectric Company'

^ First Mortgage Bonds i Trustee and Interest Paying Agent' The First National Bank of Boston,' Corporate: Trust Department .P.O. Box 1897,1 Boston, Massachusetts 02105: Preferred Stock; Transfer Agent, Dividend Disbursing Agent'and Registrar' The-Connecticut Bank and Trust. Company; N'A.; Stock Transfer Departmenti One Constitution Plaza,-Hartford,-Connecticut 06115-1990 Dividend; Payment' Dates '7.72% Series B January 1, April 1,~ July 11'and October 1 '7.60% Series-February 1, May 1, August :1 and November 1- .9.60% Series A March-1, June.1, September.1 and December l' , DARTS

  • January 30, March 20, May B, June'26, August 14, October 2 and November 20 Address General correspondence in Care of:

Northeast Utilities Service' Company-Investor Relations Department P.O.' Box 270 Hartford, Connecticut 06141-0270 Tel. (203) 665-5000 General Office 174 Brush Hill Avenue, West Springfield, Massachusetts,- 01090-0010 4

  • Transfer and Paying Agent:

' Bankers Trust Company,. Corporate Trust and Agency. Group' s P.O. Box 318; Church Street Station,.New York, New York-10015 - I The. data contained in this Report is submitted for the sole purpose of. .providing information to present stockholders about'the-Company . -{. l r q

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=

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0 4 s 1*M 1 BAST UTILMES THE CONNECTICUT UGHT AND POWER COMPANY q WESTERN MASSACHUSETTS ELECTRIC COMPANY - t HOLYOKE WATER POWER COMPANY NORTHEAST UTluTIES SERVICE COMPANY NORTE&AST NUCLEAR ENERGY COMPANY l 1 1 e e i 4 9 i ___m____.____.m___.___.-_m. ___ _. _.}}

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