ML20155D090
| ML20155D090 | |
| Person / Time | |
|---|---|
| Site: | Millstone  |
| Issue date: | 12/31/1985 |
| From: | Ellis W WESTERN MASSACHUSETTS ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML20155D016 | List: |
| References | |
| NUDOCS 8604170234 | |
| Download: ML20155D090 (34) | |
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ANNUAL REPORT 1
1985 l
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l WMECO
! WESTERN MASSACHUSETTS ELECTRIC COMPANY a subsidiary of Northeast Utilities DR DOKhhhohh45 PDR
DIRECTORS PHILIP T. ASHTON FRANK R. LOCKE Senior Vice President Vice President and Chief Administrative Officer The Connecticut Light and Power Company JOHN P. CAGNETTA Senior Vice President Vice President JOHN F. OPEKA WILLtAM B. ELLIS Senior Vice President Chairman and Chief Executive Off:cer WRENCE H. SHAY WALTER F. FEE Senior Vice President Executive Vice President WALTER F. TORRANCE JR.
E. JAMES FERLAND Senior Vice President. General Counsel and President and Chief Operating Officer Assistant Clerk BERNARD M. FOX Senior Vice President and Chief Financial Officer OFFICERS WILLIAM B. ELLIS CARROLL A. CAFFREY WALTER T. SCHULTHEIS Chairman and Ch:ef Executive Offreer Vice President Vice President E. JAMES FERLAND JOHN P. CAGNETTA C FREDERICK SEARS Pres dert and Chief Operating Off:cer Vice President Vice President WALTER F. FEE TOD O. DIXON RICHARD P. WERNER Executie Vice President Vice President Vice President BERNARD M. FOX RAYMOND E. DONOVAN GEORGE D. UHL Senict Vice President and Vice President Controller Chtef Financial Officer ALBERT J. HAJEK ALBINA A. PLUTA LEON E. MAGLATHLIN. JR Vice President Clerk Sen!cr Vice President WARREN A. HUNT ROBERT W. BISHOP JOHN F. OPEKA Vice President Secretary and Assistant Clerk Senior Vice President FRANCIS L. KINNEY CHERYL W. GRIS LAWRENCE H SHAY Vice Pres: dent Assistant Clerk Senior Vice President EDWARD J. MROCZKA JOHN T. HICKEY WALTER F. TORRANCE. JR. Vice President Assistant Secretary unseland A S ta t er HARRIE R. NIMS DOUGLAS R TEECE Vice President Assistant Secretary FRANK R. LOCKE Vice Pres: dent and Chief Administrative Officer Vice President and Treasurer Assistant Treasurer C THAYER BROWNE RICHARD A. RECKERT DAVID H. BOCUSLAWSKl Vice President Vice President Assistant Treasurer FEBRUARY 28,1986
Western Massachusetts Electric Company February 28, 1986 To Our Preferred Stockholders:
i he financial statements and statistical data contained in this report reflect the results of operations of the Western Massachusetts Electric Company (WMECO) for 1985. The 1985 annual
, report of Northeast Utilities, which provides information regarding the entire Northeast Utilities' system, including WMECO, has also been mailed to all WMECO preferred stockholders.
his report is brief for that reason.
In December 1985 WMECO filed an application with the
- Department of Public Utilities requesting an aggregate annual revenue increase of $29.4 million or 11.5 percent. The application contemplates three annual revenue increases of approximately 9 percent each to phase-in costs attributable to Millstone 3. A decision is expected by July 1986.
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! Millstone 3 is on schedule for a May 1, 1986 in-service date. Se total estimated cost of NMECO's 12.24 percent j ownership in the unit is estimated to be $470.1 million, based on i the unit's estimated cost of $3.825 billion. %e unit received l an operating license from the Nuclear Regulatory Commission (NRC)
I in November 1985 permitting operation at power levels of up to 5 t
percent. In January 1986, the NRC granted the unit a full power operating license.
In 1985, WMECO bonds were upgraded by Standard & Poor's from BBB- to BBB and its preferred stock was upgraded from BB to BBB .
In 1985, NMECO used the proceeds of a $25 million bond issue <
j~ to redeem a portion of an outstanding bond series that carried a higher coupon rate. It also issued $36 million of tax exempt 4 bonds for pollution control facilities at the Millstone site.
During 1986, WMECO plans to issue additional long-term debt to refund higher coupon debt.
Sincerely, 1
President Chairman 1
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i Western Massachusetts Electric Company i
j MANAGEMENT'S DISCUSSION AND ANALYS'S OF
- FINANCIAL CONDITION AND RES"LTS OF OPERATIONS j This section contains management's assessment of Western Massachusetts l
Electric Company's (the Company) financial condition and the principal factors 4
which have an impact on the results of operations. This discussion should be l read in conjunction with the Company's financial statements and footnotes.
I FINANCIAL CONDITION The Company's net income increased to $54.6 million in 1985 from
$48.3 million in 1984. The increase in net income is attributable to a !
mid-1984 retail rate decision granted by the Massachusetts Department of Public l Utilities (DPU) and an increase in the allowance for funds used during i construction (AFUDC), a noncash item, which provided a significant portion of the Company's earnings.
The outlook for the Company's financial condition is now heavily dependent upon the decisions expected primarily in 1986 from various regulatory I commissions regarding the rate treatment to be accorded the Company's inves cent l in Millstone 3. That unit remains on schedule to begin commercial operat.on by j May 1986 and represents approximately one-half of the Company's net plant in j service.
Millstone 3 Rate Issues
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j A number of significant issues relating to the rate treatment for Millstone 3, as described here, must be resolved in 1186. The Company has
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- proposed a three-year phase-in of the costs of Millstone 3 into rates in its recent retail rate filing. The Company owns 12.24 percent of Millstone 3.
) Management believes that its phase-in plan equitably balances the objectives of j
1 providing customers with the lowest practicable rates, while also protecting the l interests of investors. Necessary improvements in the Company's financial j condition vill be impeded if the phase-in period is extended beyond three years j or if portions of the Company's investment in Millstone 3 are dis' allowed for any l reason.
i In new standards, first described in its July 1984 decision, the DPU cautioned the Company that it would permit rate recognition of Millstone 3
- only to the extent that the Company demonstrates that the unit is "used and i
useful." Under these standards, a unit would be used and useful only if and to the extent that it is needed and economically desirable in providing benefits to
- ratepayers. The DPU stated that if the standards are not satisfied, the portion j of the unit that is not needed or economically desirable may be treated as plant j held for future use and not currently entitled to rate recognition, or the i disallowed portion of the plant may be amortized over an appropriate period in i the manner allowed for abandoned plants. In its retail rate case filed in ;
) December 1985 with the DPU, the Company has attempted to demonstrate that these i j new standards are satisfied in the case of Millstone 3. If any of the Company's
- prudently incurred investment in Millstone 3 is not permitted full rate t
recognition because of the DPU's interpretation of its new standards, and if those standards are upheld, the consequences for the Company could be adverse.
In many jurisdictions, regulatory decisions have failed to permit full and timely rate recognition of investments in new generating facilities. Under>
generally accepted accounting principles currently in effect, amounts excluded from rate base by a regulatory commission would not necessarily be written off as a charge against income at the time of disallowance. Ilowever, as further explained in Note 8 of " Notes to Financial Statements," tiel Financial Accounting Standards Board (FASB) is currently reconsidering its accoun,.ng standards for regulated companies and has issued an exposure draft on the accounting for phase-in plans, abandonments and disallowances. Under the FASB's proposed standards, direct and indirect disallowances would be immediately written off as charges against income. Although there is potential exposure to partial disallowances of the Company's investment in Millstone 3, the Company cannot predict the amounts that may ultimately be disallowed. The FASB expects its reconsideration of regulatory accounting issues to be completed during 1986.
Construction Program The Company's 1985 construction expenditures of $115.6 million were the highest in its history. Projected construction expenditures, including AFUDC but excluding nuclear fuel, for 1986 throbgh 1990 are presented in the following table. Annual construction expenditures are projected to be at a lower level after Millstone 3 begins commercial operation in 1986.
Electric I Generating Facilities Other Total (Thousands of Dollars) i 1986 $50,559 $20,076 $70,635 1987 25,307 21,341 46,648 1988 14,255 22,806 37,061 1989 13,832 24,435 38,267 1990 12,295 25,659 37,954 The construction of Millstone 3 is the most significant item in the ,
construction program, representing about 75 percent of the program in 1985 and 43 percent of the 1986 program. The total estimated cost of the Company's 12.24 p~ercent ownership interest in the unit (representing 140.7 megawatts) is
$470.1 million of the unit's estimated cost of $3.825 billion.
In addition to construction expenditures, the Company estimates that nuclear fuel requirements will be $59.1 million for the years 1986 through 1990.
Financing 1 It is essential that the Company regain and maintain its financial health to assure access at reasonable cost to financial markets so as to acquire the funds needed for its ongoing construction programs, to refund debt maturities 1
and to meet other cash requirements. Cash requirements in excess of internally generated funds are financed through short , intermediate- and long-term borrowings, the issuance of tax-exempt pollution control notes, construction and nuclear fuel trust financings, leasing agreements, sales of preferred stock, and capital contributions from the parent company. In addition to construction and nuclear fuel requirements, the Company is obligated to meet debt maturities and cash sinking-fund requirements totaling $51.5 million for the years 1986 through 1990. External financing continues to supply a substantial portion of total cash requirements and is expected to continue to do so until Millstone 3 is placed in service and reflected in rates.
During 1985, the Company issued $61 million of first mortgage bonds and pollution control notes. A portion of these proceeds were used to redeem, prior to maturity, $22 million of high interest rate first mortgage bonds. The Company also received capital contributions of $10 million from the parent company. In addition, the Company and The Connecticut Light and Power Company (CL&P) used the construction trust arrangement to finance Millstone 3 construction expenditures and the Company had $24,9 million outstanding under this arrangement as of December 31, 1985. The Company and CL&P continue tc utilize a nuclear fuel trust to finance nuclear fuel requirements for Millstone 1 and 2 and their ownership share of Millstone 3. As of December 31, 1985, the Company's portion of the trust's investment in nuclear fuel was
$72 million.
In 1986, the Company intends to maximize the use of tax-exempt financings and to attempt to refinance, with fixed interest rate debt having a lower cost, outstanding floating-rate debt and high interest rate first mortgage bonds. In addition, as Millstone 3 progresses to commercial operation the Company and CL&P expect to reduce the level of available credit facilities which had been expanded in 1984. This level of credit included $350 million available to the Company and CL&P under joint credit lines with a maximum borrowing limit of
$105 million for the Company. In addition, $400 million of credit was available under the construction trust for the Company and CL&P. The system companies also have $48 million joint credit line agreements with various banks. In late 1985 and early 1986 the Company and CL&P reduced the available credit under the construction trust from $400 million to $200 million and additional reductions in credit facilities are projected to take place during 1986.
Rate Matters In December 1985, the Company filed an application with the DPU requesting an annual electric revenue increase of $29.4 million. The increased revenues are required primarily to provide for the proposed three-year phase-in of Millstone 3 costs into rates.
During August 1985, the Company filed an application for an annual wholesale electric revenue increase with the Federal Energy Regulatory Commission of approximately $1.9 million. The increase is intended to reflect the higher costs associated with the commercial operation of Millstone 3.
In February 1986, the DPU issued proposed regulations governing the sale of electricity between cogenerators and small power producers and Massachusetts utilities. The proposed regulations will put in place a " bidding" process where potential cogenerators compete to supply utilities with capacity and energy.
Hearings will be held in March 1986 on the proposed regulations.
RESULTS OF OPERATIONS Operating Revenues Operating revenues increased $3.5 million from 1984 to 1985 and
$19.5 million from 1983 to 1984. The compoaents of the change in operating revenues for the past two years are provided in the table below.
Change in Operating Revenues Increase /(Decrease) 1985 vs. 1984 vs.
1984 1983 (Millions of Dollars)
Rate increases $ 8.9 $11.4 Fuel cost recoveries (1.3) 5.5 Sales and other (4.1) 2.6 Total revenue change $ 3.5 519.5 Fuel cost recoveries decreased primarily because of lower fossil fuel prices and the recovery of energy costs on a lower level of sales. The sales decrease of 0.9 percent is primarily the result of lower heating requirements in 1985.
The increase in fuel cost recoveries during 1984 was primarily attributable to the recovery of electric energy costs on a higher level of sales and the recovery of deferred energy costs from prior periods. In 1984, electric sales increased 4.6 percent which primarily resulted from improved economic conditions in the Company's service area.
Electric Energy Expenses Electric energy expenses, which include fuel and net purchased and interchange power, decreased $1.2 million in 1985 compared to 1984. This decrease was primarily the result of lower kilowatt-hour (kWh) requirements, lower fossil fuel prices in 1985 and the matching of revenues and expenses under the provisions of the Company's energy adjustment clause. Electric energy expenses increased $5.7 million in 1984 compared to 1983 primarily because of higher energy prices and kWh requirements in 1984.
Other Operation and Maintenance Expenses Other operation and maintenance expenses increased $1.4 million in 1985 primarily because of an extended Millstone 2 refueling and maintenance outage and the general impact of inflation on most expenses. This increase was partially offset by lower capacity costs which resulted from a reduction in the allocation factor applicable to the Company in the operation of the Northeast Utilities Generation and Transmission Agreement.
Other operation and maintenance expenses decreased $2.8 million in 1984 compared to 1983 and is primarily attributable to lower 1984 nuclear refueling and maintenance costs, partially offset by the general impact of inflation on most expenses.
Taxes Federal and state income taxes increased $3.7 million in 1985 compared to 1984 and $5.9 million in 1984 compared to 1983. These increases are attributable to an increase in taxable income in both years.
Interest Charges Interest charges increased $2.9 million in 1985 compared to 1984 and
$3.1 million in 1984 compared to 1983 primarily because of higher borrowing levels reflecting the need for additional capital to finance the Company's share of Millstone 3 construction costs.
Allowance for Funds Used During Construction The increases in AFUDC of $8.4 million in 1985 and $7.3 million in 1984 were primarily caused by higher average construction work in progress balances attributable to the Millstone 3 construction project.
Impact of Inflation See Note 9 of " Notes to Financial Statements" for a discussion on the impact of inflation on the Company.
Waotern Massachusstts Electric Company STATEMENTS OF INCOME l
! For the Years Ended December 31, 1985 1984 1983 (Thousands of Dollars)
Operating Revenues.................... $277,820 $274,296 $254,807 Operating Expenses:
Operation-Fue1............................... 41,477 61,902 36,588 Purchased and interchange power, net............................... 49,046 29,858 49,483 0ther.............................. Si',265 62,298 63,214 Maintenance......................... 2.',370 20,963 22,863 Depreciation........................ 20,298 18,944 18,090 Federal and state income taxes (Note 4)........................... 29,131 25,275 19,625 Taxes other than income taxes....... 11,802 12,045 12,242 Total operating expenses......... 236,389 231,285 222,105 Operating Income...................... 41,431 43,011 32,702 Other Income:
Allowance for equity funds used during construction................ 26,040 19,441 13,376 Equity in earnings of regional nuclear generating companies....... 2,612 2,375 2,216 Other, net.......................... (482) (419) (641)
Income taxes applicable to other income-credit...................... 10,787 8,623 7,474 Other income, net................ 38,957 30,020 22,425 Income before interest charges... 80,388 73,031 55,127 Interest Charges:
Interest on long-term debt.......... 34,006 30,750 27,612 Other interest...................... 1,215 1,612 1,603 Allowance for borrowed funds used during construction, net of income taxes.............................. (9,468) (7,621) (6,405)
Interest charges, net............ 25,753 24,741 22,810 Net Income............................ $ 54,635 $ 48,290 $ 32,317 The accompanying notes.are an integral part of these financial statements.
Western Massachusstts Electric Company STATEMENTS OF SOURCES OF FUNDS FOR GROSS PROPERTY ADDITIONS For the Years Ended December 31, 1985 1984 1983 (Thousands of Dollars)
Funds Generated From Operations:
Net income.................................. $ 54,635 $ 48,290 $ 32,317 Principal noncash items:
Depreciation............................. 20,298 18,944 18,090 Prior period spent fuel disposal costs... 1,522 1,560 2,371 Deferred income taxes, net............... 18,674 14,823 13,634 Other amortization and noncash items..... 812 3,657 1,542 Amortization of energy adjustment clause. (3,365) (594) (4,110)
Allowance for equity funds used during construction............................ (26,040) (19,441) (13,376)
Total funds from operations........ 66,536 67,239 50,468 Less-Cash dividends paid on:
Common stock............................. 24,988 20,205 18,940 Preferred stock.......................... 9,470 9,869 8,313 Net funds generated from operations 32,078 37,165 23,215 Funds Obtained From Financing:
Long-term debt.............................. 61,000 66,400 -
Preferred stock............................. - -
35,000 Increase (decrease) in construction trust... 19,756 (29,312) (4,841)
Increase (decrease) in short-term debt...... 9,000 (10,500) 550 l Increase in obligations under capital 1 eases.................................... 16,056 20,101 14,695 Capital contributions from Northeast Utilities (parent company)................. 10,000 20,000 20,000 Total.............................. 115,812 66,689 65,404 Less-Reacquisitions and retirement of long-term debt............................. 24,500 8,350 -
Net funds from financing........... 91,312 58,339 65,404 Other Sources (Uses) of Funds:
Changes in compenents of working capital:
Cash and special deposits................ (1,276) 1,788 (2,492)
Receivables and accrued utility revenues. 2,657 (3,489) (815)
Fuel, materials and supplies............. 816 (493) 991 Accounts payable......................... (12,743) 8,825 7,111 Accrued taxes............................ (1,635) 1,584 Other, net...............................
(71) 2,407 (162) 2,144 Net change......................... (9,774) 8,053 6,868 Energy adjustment clause.................... (120) 4,043 Other, net..................................
(751) !
(6,723) (254) 333 Net other sources (uses) of funds.. (16,617) 11,842 6,450 Total Funds For Construction From Above Sources...................................... 106,773 107,346 95,069 Allowance For Equity Funds Used During Construction................................. 26,040 19,441 13,376 GROSS PROPERTY ADDITIONS...................... $132,813 $126,787 $108,445 Composition of Gross Property Additions:
Electric utility plant................... $115,616 $107,422 $ 94,539 Nuclear fuel............................. 17,197 19,365 13,906 Total.............................. $132,813 $126,787 $108,445 The accompanying notes are an integral part of these financial statements.
Wastern Messachusstts Electric Company BALANCE SHEETS At December 31, 1985 1984 (Thousands of Dollars)
Assets Utility Plant, at original cost:
Electric........................................ $583,044 $559,930 Less: Accumulated provision for depreciation. 194,356 177,753 388,688 382,177 Construction work in progress (Note 8) . . . . . . . . . . 451,290 363,181 Nuclear fuel, net (Note 3)...................... 69,163 61,432 Total net utility plant...................... 909,141 806,790 1
1 Other Property and Investments:
Investments in regional nuclear generating companies, at equity........................... 13,444 13,452 Other, at cost.................................. 3,577 3,206 17,021 16,658 Current Assets:
Cash and special deposits (Note 2) . . . . . . . . . . . . . . 4,234 2,958 Receivables, less accumulated provision for uncollectible accounts of $1,454,000 in 1985
- and $1,350,000 in 1984......................... 25,557 25,591 Receivables from affiliated companies........... 7,267 9,690 Accrued utility revenues........................ 11,556 11,756 Fuel, materials and supplies, at average cost... 8,232 9,048 Prepayments and other........................... 1,359 3.120 l 58,205 62,163 Deferred Charges
Unamortized debt expense........................ 1,759 1,347 Unrecovered spent nuclear fuel disposal costs... 5,433 2,825
- 0ther........................................... 4,223 1,577 i 11,415 5,749 Total Assets................................. $995,782 $891,360 The accompanying notes are an integral part of these financial statements.
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Western Massachusetts Electric Company BALANCE SHEETS At December 31, 1985 1984 i (Thousands of Dollars) j Capitalization and Liabilities Capitalization:
Common stock - $25 par value. Authorized and j outstanding 1,072,471 shares..................... $ 26,812 $ 26,812 Capital surplus, paid 1n.......................... 151,404 141,410 Retained earnings................................. 84,655 64,478
- Total common stockholder's equity.............. 262,871 232,700 Cumulative preferred stock - $100 par value.
Authorized 1,000,000 shares; outstanding 850,000 shares in 1985 and 850,000 shares in 1984 Not subject to mandatory redemption (Note 5).. 35,000 35,000 Subject to mandatory redemption (Note 6)...... 49,250 50,000 Long-term debt (Note 7)........................... 396,968 336,386 Total capitalization........................... 744,089 654,086 Obligations Under Capital Leases (Note 3)........... 62,167 58,040 Current Liabilities:
I Notes payable to banks (Note 2)................... 11,000 3,000 Commercial paper (Note 2)......................... 1,000 -
! Preferred stock subject to mandatory redemption -
current portion.................................. 750 -
Obligations under capital leases - current
! p o r t ion (No t e 3 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,534 13,400 i Accounts payable.................................. 8,204 17,041 l Accounts payable to affiliated companies.......... 14,618 18,524 Ac c ru e d t ax e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,729 5,364 j Accrued interest.................................. 7,286 7,570
! 0ther............................................. 3,242 4,063
! 63,363 68,962 Deferred Credits:
Accumulated deferred income taxes................. 91,335 80,234 Accumulated deferred investment tax credits....... 33,850 28,720 0ther............................................. 978 1,318 126,163 110,272
- Commitments and Contingencies (Note 8) i I Total Capitalization and Liabilities..... $995,782 $891,360 l
l The accompanying notes are an integral part of these financial statements.
i
r W3 stern Massachusetts Electric Company STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Capital Common Surplus, Retained Stock Paid in Earnings Total (Thousands of Dollars)
Balance at January 1, 1983.......... $26,812 $102,562 $41,198 $170,572 Net income for 1983............... 32,317 32,317 Cash dividends on preferred stock. (8,313) (8,313)
Cash dividends on common stock. . . . (18,940) (18,940)
Capital contribution from Northeast Utilities (parent company)......................... 20,000 20,000 Preferred stock issuance expenses. (1,152) (1,152)
Balance at December 31, 1983........ 26,812 121,410 46,262 194,484 Net income for 1984............... 48,290 48,290 Cash dividends on preferred stock. (9,869) (9,869)
Cash dividends on common stock.... (20,205) (20,205)
Capital contribution from Northeast Utilities (parent company)......................... 20,000 20,000 Balance at December 31, 1984........ 26,812 141,410 64,478 232,700 Net income for 1985............... 54,635 54,635 Cash dividends on preferred stock. (9,470) (9,470)
Cash dividends on common stock.... (24,988) (24,988)
Capital contributions from Northeast Utilities (parent company)......................... 10,000 10,000 Preferred stock issuance expenses. (6) (6)
Balance at December 31, 1985 (a).... $26,812 $151,404 $84,655 $262,871 (a) At December 31, 1985, there was approximately $40,841,000 of retained earnings available for payment of cash dividends on common stock under the provisions of the Company's First Mortgage Indenture and Deed of Trust.
The accompanying notes are an integral part of these financial statements.
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I W2 stern Maseschusetts Electric Cospiny 4
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' NOTES TO FINANCIAL STATEMENTS 1 1
I j 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES i
I General: Western Massachusetts Electric Company (the Company), The i 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) .
j Other wholly owned subsidiaries of NU provide substantial support
. services to the system. Northeast Utilities Service Company supplies centralized accounting, administrative, data processing, engineering, f 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 i
subsidiary realty companies, The Rocky River Realty Company and The
! Quinnehtuk Company.
! All transactions among affiliated companies are on a recovery of cost j
basis which may include amounts representing a return on equity, and are subject to approval of various federal and state regulatory agencies.
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Public Utility Regulation: NU is registered with the Securities and l
l Exchange Commission (SEC) as a holding company under the Public Utility
- Holding Company Act of 1935, and it and its subsidiaries, including the l Company, are subject to the provisions of the act. Arrangements among.the i 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 Commission
! (FERC) and/or the SEC. The Company is subject to further regula: ion for rates and other matters by the FERC and the Massachusetts Deparcment of l Public Utilities (DPU), and follows the accounting policies prescribed by
! the respective commissions.
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- Investments: The Company owns common stock of four regional nuclear generating companies. These companies, with the Company's ownership interests, are:
l i Connecticut Yankee Atomic Power Company (CY) 9.5% j i Yankee Atomic Electric Company 7.0% l i Maine Yankee Atomic Power Company (MY) 3.0% l 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.
Revenues: Utility revenues are based on authorized rates applied to each j customer's use of electricity. Rates can be increased only through a i formal proceeding before the appropriate regulatory commission. At the end
- of each accounting period, the Company accrues an estimate for the amount of energy delivered but unbilled.
Wagtern Massechu:stts Electric Company NOTES TO FINANCIAL STATEMENTS Spent Nuclear Fuel Disposal Costs: Under the Nuclear Waste Policy Act of 1982 (the Act), the Company is paying the United States Department of Energy (DOE), on a quarterly basis, a fee of 1.0 mill per kilowatt-hour (kWh') based on the Company's share of nuclear generation beginning Ap;il 7, 1983, for 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), the fees are based on the Company's share of the amount of energy extracted from such fuel. In June 1985, the Company selected the deferred lump sum payment option as the payment arrangement for prior period fuel. Under this option, payment for prior period fuel may be made anytime prior to the first delivery of spent fuel to the DOE which will occur by January 31, 1998, as established by the Act. Interest is accrued from April 7, 1983 until payment is made, based on 13-week United States Treasury Bill rates compounded quarterly. Through December 31, 1985, these interest charges, as well as principal costs, have been capitalized. The DPU has allowed for the recovery of spent nuclear fuel disposal costs in fuel adjustment decisions based on the provisions of the Act.
Fees due to the DOE for the disposal of prior period fuel are approximately $19.7 million, including interest costs of $4.1 million accrued from April 7, 1983 through December 31, 1985. As of December 31, 1985, approximately $14.3 million had been collected through rates.
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 net salvage value and removal costs as approved by the DPU. Except for major f acilities, depreciation factors are applied to the average plant in service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired f rom service, the original cost of 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 3.7 percent in 1985, 3.6 percent in 1984 and 3.5 percent in 1983.
Nuclear Decommissioning: A 1985 decommissioning study indicates that immediate dismantlement at retirement is the most viable and economic method of decommissioning the Millstone 1 and 2 nuclear units in which the Company has a 19 percent ownership interest. The Company's share of the total estimated cost of decommiseioning these units is $59 million in year-end 1985 dollars. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, technology and inflation. As of December 31, 1985, the Company has collected through rates $5.8 million fee future decommissioning costs. Although a substantial portion c? the estimated total decommissioning costs has been approved by regulator / agencies and is reflected in the depreciation expense of the Compaiiy, it believes revenues in amounts higher than those currently being collected will be required to pay the full projected costs of decommissioning.
W2 stern Ma:sachusstts Elsctric Company NOTES TO FINANCIAL STATEMENTS As part of its current rate application, the Company has filed plans for the establishment of an external decommissioning trust.
l Income Taxes: The tax effect of timing differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. 1 i
The company did not provide deferred income taxes for certain 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 ir.come tax timing dif ferences for which deferred taxes have not been provided was approximately $73 million at December 31, 1985. As allowed under current regulatory practices, deferred taxes not previously provided are being collected in customers' rates as such taxes become payable.
Investment tax credits, which reduce federal income taxes currently payable, are deferred and amortized over the useful life of the related utility plant. At December 31, 1985, the Company had unused and unrecorded investment tax credits of approximately $17.7 million, which are available to offset federal income tax provisions through 2000. See Note 4 for the components of income tax expense.
Allowance for Funds Used During Construction (AFUDC): AFUDC, a noncash item, represents the estimated cost of capital funds used to finance the Company's construction program. These costs, which are one component of the total capitalized cost of construction, are not recognized as part of the rate base for ratemaking purposes until facilities are placed in service. AFUDC is recovered over the service life of plant in the form of increased revenue collected as a result of higher depreciation expense.
The effective AFUDC rates for 1985, 1984 and 1983 were 9.4 percent, 9.5 percent and 8.9 percent, respectively. These rates are calculated using the net-of-income tax method and in accordance with FERC guidelines.
Retirement Plan: The Company participates in the Northeast Utilities Service Company Retirement Plan (the Plan). The Plan, which covers all regular system employees, is noncontributory. The~ system's policy is to fund annually the actuarially determined contribution, which includes that year's normal cost, the amortization'of prior years' actuarial gains or losses over 15 years, and the amortization of prior service cost over a period of 40 years. The Company's allocated portion of the system's pension cost, part of which was charged to utility plant, approximated
$2.7 million in 1985, $2.5 million in 1984 and $3.3 million in 1983.
L
r W2etern M:ssachusstes Electric Company NOTES TO FINANCIAL STATEMENTS The actuarial present value of accumulated plan benefits and plan net assets available for benefits for the Plan is:
January 1, 1985 1984 (Thousands of Dollars)
Benefits:
Vested.............. $339,515 $ 310,498 Nonvested........... 42,482 41,244
$381,997 $351,742 Net assets available for benefits........ $479,525 $446,949 The assumed rate of return used to determine the actuarial present value of accumulated plan benefits was 7.5 percent for 1985 and 1984.
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 $534,000 in 1985, $837,000 in 1984 and $536,000 in 1983. The Company recognizes health care benefits primarily as incurred and provides for life insurance benefits through premiums paid to an insurance company. ,
In December 1985, the Financial Accounting Standards Board (FASB) issued a new statement entitled " Employers' Accounting for Pensions," which supersedes previous pension accounting standards and will be eftective for fiscal years beginning after December 15, 1986. This statement prescribes a standardized method for measuring net periodic pension costs, expanded footnote disclosures, and, in some cases, recognition of a pension liability. The Company cannot predict at this time what impact, if any, this new statement will have on its results of operations or how this impact might be considered by the DPU when establishing customer rates.
Energy Adjustment Clause: As permitted by the DPU, the Company' defers the difference between forecasted and actual fuel costs until it is recovered quarterly under a retail fuel adjustment clause. Massachusetts law requires the establishment of an annual performance program related to fuel 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 retail fuel adjustment clause are subject to refund pending review by the DPU.
The DPU issued an order for the June 1984 through May 1985 performan:e period in which it denied the Company collection of replacement power costs for a 25-day CY outage extension. While the ef fect of the order was not material, the Company has appealed the order. Current performance program goals for the Company cover the period June 1985 through May 1986. While a final determination cannot be made at this time, management believes that
- . - - _ - - . - - . - - _ . - . - - . __ _ _ . -~. - - . - _
i 1
i Wastern Massachusetts Electric Company 1
i
, NOTES TO FINANCIAL STATEMENTS i
the Company is essentially operating within these program goals and that a J
significant program refund is unlikely.
i
- 2. SHORT-TERM DEBT The Company and CL&P have joint credit lines of $350 million, pursuant
- to revolving credit / term loan agreements, with two groups of banks. The maximum borrowing limit of the Company under the agreements is $105 million. However, since this money is also available to CL&P, the amount of borrowing available could be lower depending on CL&P's utilization. The
- Company is obligated to pay commitment fees of three-eighths of 1 percent i per annum under a $200 million revolving credit agreement and one-quarter of 1 percent per annum under a $150 million revolving credit agreement on its share of the daily average of the unborrowed portion of the aggregate commitment. At December 31, 1985, the Company had no borrowings under ;
i these agreements.
I l The Company uses bank loans and commercial paper to assist in i financing its continuing construction program on a short-term basis and to i meet general working capital needs. The system companies have joint bank l credit lines totaling $48 million. Amounts utilized by other system l l companies under these joint credit lines will reduce the amount available l to the Company. Terms call for interest rates not to exceed the prime rate
- 1 during the borrowing term. Although these lines generally are renewable, j the continuing evailability of the unused lines of credit is subject to j review by the banks involved. Compensating balances for the system ,
l companies are maintained in connection with these bank credit lines which, f
]
at December 31, 1985, amounted to $2.4 million. At December 31, 1985, the
- amount of anused borrowing capacity under the credit lines available to the system companies was $9.3 million.
! Cash and special deposits at December 31, 1985, included $3.2 million l of restricted funds which must be used for future expenditures relating to the installation of pollution control equipment at Millstone 3.
- 3. LEASES
) The Company and CL&P have entered into a capital lease agreement to finance up to $530 million of nuclear fuel for Millstone 1 and 2 and their 1
share for Hillstone 3. The Company and CL&P make quarterly lease payments for the cost of nuclear fuel consumed in the reactors plus financing costs associated with the fuel in the reactors (based on a units-of-production method at rates which reflect estimated kWh of energy provided). Upon permanent discharge from the reactors, ownership of the nuclear fuel transfers to the Company and CL&P.
i
! The Company has also entered into lease agreements, some of which are 1 capital leases, for the use of substation equipment, data processing and office equipment, vehicles and office space. The provisions of these lease I
agreements generally provide for renewal options.
I
_17_
1
Wactorn M a ccchuratta Elsctric Cospany NOTES TO FINANCIAL STATEMENTS The following rental payments have been charged to operating expense:
Capital Operating Year Leases Leases 1985 $13,179,000 $4,488,000 1984 17,834,000 4,185,000 1983 8,356,000 3,537,000 Interest included in capital lease rental payments was $3,603,000 in 1985, $4,171,000 in 1984 and $2,545,000 in 1983.
Substantially all of the capital lease rental payments were made pursuant to the nuclear fuel lease agreement. Future minimum lease payments under the nuclear fuel capital lease cannot be reasonsbly estimated on an annual basis due to variations in the usage of nuclear fuel.
Future minimum rental payments, excluding annual nuclear fuel lease payments, and executory costs such as real estate taxes, state use taxes, insurance and maintenance, under long-term noncancelable leases as of December 31, 1985 are approximately:
Capital Operating Year Leases Leases (Thousands of Dollars) 1986.............................. $ 200 $ 5,200 1987.............................. 200 4,200 1988.............................. 200 3,200 1989.............................. 100 2,400 1990.............................. 100 2,100 After 1990........................ 500 15,700 Future minimum lease payments..... 1,300 $32,800 Less amount representing interest. 500 Present value of future minimum lease payments for other than nuclear rue 1..................... 800 Present value of future nuclear fuel lease payments.............. 74,900 Tota 1........................ $75,700
l l Wastern Massachusstts Electric Company 1
, NOTES TO FINANCIAL STATEMENTS l
i 4. INCOME TAX EXPENSE The components of the federal and state income tax provisions are:
For the Years Ended December 31, 1985 1984 1983 (Thousands of Dollars)
Current income taxes:
l Federa1..................... $(1,456) $ (201)' $(1,351)
'4 State....................... 1,126 2,030 (132) j Total current............ (330) 1,829 (1,483) i Deferred income taxes, net:
f Investment tax credits...... 5,8'9 11,870 (5,710) l Federa1..................... 11,012 2,373 17,460
{ State....................... 1,823 580 1,884 l Total deferred........... 18,674 14,823 13,634 Taxes on borrowed funds portion of AFUDC............ 10,321 8,309 6,894
- Total income tax expense................. 28,665 24,961 19,045 Less
- Income taxes (credits) included in other income, net of the tax
. effects of the borrowed j funds portion of AFUDC. (466) (314) (580) 1 i
Income taxes charged to i operating expenses...... $29,131 $25,275 $19,625 i Deferred income taxes are comprised of the tax effects of timing i
differences as follows:
l j Investment tax credits...... $ 5,839 $11,870 $(5,710) j Liberalized depreciation,
! excluding leased nuclear 4
fue1....................... 4.533 3,251 3,829 Construction overheads...... 4,301 3,944 3,389
! Liberalized depreciation and capitalized interest on i leased nuclear fuel........ 3,586 (2) 4,719 Decommissioning costs....... (839) (622) (123)
! Settlement credits -
- nuclear fue1.............. (744) (192) (374)
Energy adjustment clause.... 1,092 (939) 2,111
, Spent nuclear fuel disposal costs..................... 1,384 (973) 6,398 j 0ther....................... (478) (1,514) (605) 4 Deferred income taxes, net $18,674 $14,823 $13,634 l . - -. . _- - . - - - - . - - - - . - . _ . - - - . - _ - - - -
W2 stern M:cacchunatts Electric Company NOTES TO FINANCIAL STATEMENTS The effective income tax 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, 1985 1984 1983 Federal statutory income tax rate......................... 46.0% 46.0% 46.0%
Tax effect of differences:
Additional depreciation for tax purposes............... 2.6 1.0 1.5 Allowance for equity funds used during construction -
not recognized as income for tax purposes........... (14.4) (12.2) (12.0)
Investment tax credit amortization............... (1.5) (1.9) (2.1)
State income taxes, net of federal benefit............ 3.4 3.3 3.3 Other, net.................. (1.7) (2.1) 0.4 Effective income tax rate..... 34.4% 34.1% 37.1%
- 5. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption out-standing at December 31, 1985, 1984 and 1983 are:
December 31, 1985 Redemption Shares Description Price Outstanding (Thousands of Dollars) 9.60% Series A of 1970 $103.99 150,000 $15,000 7.72% Series B of 1971 105.44* 200,000 20,000 Total preferred stock not subject to mandatory redemption 350,000 $35,000
- Redemption prices reduce in future years.
All or any part of each outstanding series of preferred stock may be redeemed by the Corpany at any time at established redemption prices plus accrued dividends to the date of redemption.
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W2 stern Massachusatts Electric Company NOTES TO FI'4ANCIAL STATEMENTS
- 6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption outstanding are:
December 31, Shares 1985 Outstanding Redemption December 31, December 31, Description Price 1985 1985 1984 1983 (Thousands of Dollars) 16.00% Series C of 1981 $116.00* 150,000 $15,000 $15,000 $15,000 Adjustable Rate Series D of 1983 112.00* 350,000 35,000 35,000 35,000 500,000 50,000 50,000 50,000 Less preferred stock to be redeemed within one year 750 - -
Total preferred stock subject to mandatory redemption $49,250 $50,000 $50,000
- Redemption prices reduce in future years.
The 16.00% Series C of 1981 preferred stock (16.00% Series) requires a sinking-fund sufficient to retire a minimum of 7,500 shares (or a maximum of 15,000 shares) at $100 per share each year commencing December 1,1986.
The Adjustable Rate Series D of 1983 preferred stock (Adjustable Rate Series) requires a sinking-fund sufficient to retire a minimum of 17,500 shares (or a maximum of 35,000 shares) at $100 per share each year commencing April 1, 1988.
The minimum sinking-fund provisions of the series subject to mandatory redemption, for the years 1986 through 1990, aggregate $750,000 in 1986 and l 1987, and $2,500,000 in 1988, 1989 and 1990. In case of default on j sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If the Company is in arrears in the payment of dividends on outstanding shares of preferred stock then it would be ;
prohibited from redeeming or purchasing less than all of the preferred 1 stock outstanding. All or part of the above series may be redeemed by the Company at any time at established redemption prices plus accrued dividends to the date of redemption except that during the initial five-year redemption period the above series of preferred stock are subject to certain refunding limitations.
m Wastern Massachusstts Electric Company NOTES TO FINANCIAL STATEMENTS
- 7. LONG-TERM DEBT Details of long-term debt outstanding are:
December 31, 1985 1984 (Thousands of Dollars)
First Mortgage Bonds:
4 3/8% Series C due 1987............... $ 12,000 $ 12,000 4 3/8% Series E, due 1992............... 8,000 8,000 5 3/4% Series F due 1997............... 15,000 15,000 6 3/4% Series G, due 1998............... 10,000 10,000 7 3/8% Se ries H , due 1998. . . . . . . . . . . . . . . 15,000 15,000 9 3/8% Series 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............... 25,000 25,000 9 1/4% Series M, due 2006............... 30,000 30,000 14 5/8% Series N, due 2010............... 1,190 25,000 16 3/8% Series 0, due 1991............... 17,455 17,650 15 % Series P, duc 1994............... 49,505 50,000 11 7/8% Series Q, due 2015............... 25,000 -
Total First Mortgage Honds......... 268,150 267,650 Millstone 3 Construction Trust, variable rate.................................... 24,931 5,174 Pollution Control Notes:
Variable rate, due 2014-2015............ 52,400 16,400 5.9%, due 1998.......................... 2,214 2,214 Secured Note, variable rate, due 1987-1988............................... 30,000 30,000 Fees and interest due for spent fuel disposal costs.......................... 19,742 15,611 Unamortized premium and discount , net.... (469) (663)
Lo ng- t e rm d e b t , n e t . . . . . . . . . . . . . . . . $396,968 $336,386 The Company and CL&P participate in a construction trust agreement to assist in the financing of the Millstone 3 construction. In March 1986, commitments under this arrangement will be reduced to $200 million. The trust was given a lien, junior to the lien of the Company's indenture, on the Company's interest in Millstone 3. Once Millstone 3 is in service, but beginning no later than 1988, the trust obligations are to be repaid over a four-year period. llowever, the Company intends to pay down the outstanding balance of the construction trust in 1986 with the proceeds from the sale of fixed rate notes.
Interest costs of $1.2 million during 1985, $1.9 million during 1984 and $3.0 million during 1983 were incurred and capitalized, net of income taxes, by the Company. The weighted average interest rate charged to the system by the trust was 10.4 percent in 1985, 11.5 percent in 1984 and 10.8 percent in 1983.
Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1985, for the years 1986 through 1990 are none in 1986, $27,000,000 in 1987, $15,152,000 in 1988 and $152,000 i
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS i l
in 1989 and 1990. In addition, there are annual 1 percent sinking- and l improvement-fund requirements, for the years 1986 through 1990, currently !
amounting to $2,682,000 in 1986 and 1987 and $2,562,000 in each of the !
years 1988-1990. Such sinking- and improvement-fund recuirements 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 redesmed by the Company at any time at established redemption prices plus accrued interest to the date of redemption, except certain settes 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 indenture.
- 8. COMMITMENTS AND CONTINGENCIES Construction Program: The construction program is subject to periodic review and revision. Actual construction expenditures may vary from such estimates due to f actors such as revised load estimates, inflation, revised nuclear safety regulations, delays, difficulties in the licensing process, the availability and cost of capital, and the granting of timely and adequate rate relief by regulatory commissions, as well as actions by other regulatory bodies.
The Company currently forecasts construction expenditures (including AFUDC) of $230.6 million for the years 1986-1990, including $70.6 million for 1986. In addition, the Company estimates that nuclear fuel requirements will be $59.1 million for the years 1986-1990, including
$5.0 million for 1986.
Millstone 3: Millstone 3 is the most significant item in the Company's !
construction program. At December 31, 1985, construction work in progress (CWIP) included an investment of $441.0 million in Millstone 3.
In 1982, the Company projected that the construction cost of Millstone 3 would be $3.54 billion. During 1984, the Company estimated that the cost for this unit would be $3.825 billion. Assuming the estimated cost of $3.825 billion, the Company's share would represent an investment of $470.1 million, based on its ownership of 12.24 percent.
Hydro-Quebec: The Company, CL&P and HWP, along with other New England utilities, have entered into agreements related to the financing and construction of transmission and terminal facilities (phase one) to import electricity from the Hydro-Quebec system in Canada. Upon completion, the ,
phase one facilities will be capable of transferring 690 megawatts (MW). i The Company will receive 4 percent of the electricity transmitted by such l facilities and will be responsible for its share of the total annual costs l of the facilities. The current construction forecast is $167 million, of which approximately $111 million has been expended as of December 31, 1985.
A mid-1986 in-service date is planned for phase one.
i
o I Western Massachusetts Electric Company
] NOTES TO FINANCIAL STATEMENTS
?
j New England utilities also entered into agreements with Hydro-Quebec j to finance and construct additional transmission and terminal facilities
! (phase two), currently estimated to cost approximately $585 million. These l facilities will increase the capability of the phase one Hydro-Quebec interconnection to 2,000 MW, and have an anticipated in-service date of l 1990. Upon completion of phase two, NU is expected to have a 20.58 percent equity ownership in the phase two facilities. Under the terms of the phase two equity agreement, NU is required to guarantee the obligations of
- other participants that have lower credit ratings.
)
j Regulatory Matters: The Company filed an application to amend its retail j rate schedules with the DPU on December 17, 1985. The Company's requested j rates would increase annual revenues by $29.4 million or approximately
- 11.5 percent. Most of the proposed increase, $23 million or 9 percent, is
- associated with the commercial operation of Millstone 3. The balance of j the proposed increase, $6.4 million or 2.5 percent, is requested to cover i changes in the cost of business.
}
j In its rate application, the Company is proposing a three-year phase-in
! of its investment in Millstone 3. Once completed, the Company will have an j investment of $470.1 million in Millstone 3, representing an ownership j interest of 12.24 percent. If approved, the new rates would go into effect i in July 1986. Hearings on the rate application began in mid-February 1986, i
j In new standards, firse described in its July 1984 decision, the DPU 1 cautioned the Company that it would permit rate recognition of Millstone 3
( only to the extent that the Company demonstrates that the unit is "used and l useful." Under these standards, a unit would be used and useful only if j and to the extent that it is needed and economically desirable in providing
! benefits to ratepayers. The D1'U stated that if the standards are not
- satisfied, the portion of the unit that is not needed or economically j desirable may be treated as plant held for future use and not currently l entitled to rate recognition, or the disallowed portion of the plant may be amortized over an appropriate period in the manner allowed for abandoned plants. In its retail rate case the Company has attempted to demonstrate j that these new standards are satisfied in the case of Millstone 3. If any i of the Company's prudently incurred investment in Millstone 3 is not i permitted full rate recognition because of the DPU's interpretation of its i new standards, and if those standards are upheld, the consequences for the
} Company could be adverse.
r 1
The Company has filed an application for a wholesale electric revenue i increase with the FERC. The increase is intended to reflect higher costs
. that will result when Millstone 3 commences commercial operation. Taking j into account estimated fuel costs savings that will result from replacing j fossil-fired generation with nuclear-powered generation, the requested 1 annual revenue increase is approximately $1.9 million. The Company has agreed that the effective date of the new rates may be suspended until Millstone 3 consnences commercial operation.
Accounting for Rate Base Disallowances, Phase-Inn and Abandoned plant: The FASB is currently reconsidering its accounting standards for a number of regulatory-related issues, including partial disallowances of plant l
Wactern Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS construction costs, phase-in plans, and abandonments of partially completed generating units.
In December 1985, the FASB released an Exposure Draft (ED) entitled
" Regulated Enterprises--Accounting for Phase-In Plans, Abandonments, and Disallowances of Plant Costs." Under the proposals, a partial disallowance of the costs of a newly constructed plant would be recognized as an immediate loss. Operating costs of a new plant would be deferred for future recovery only if the costs were deferred under a specific plan agreed to by regulators, the plan specified the timing of recovery of all costs, and all deferred costs were recovered within ten years from the plan's inception. When abandonment of a plant under construction becomes probable, the costs of the plant would be removed from CWIP or the plant-in-service account and recorded in a separate account at the present value of the probable future revenues expected to be provided to recover the cost of the asset.
If enacted, the proposal would require retroactive application. The FASB expects its reconsideration of regulatory accounting issues to be completed during 1986.
As explained in greater detail above, the recovery of the Company's investment in Millstone 3 is being addressed, and will be addressed, by various regulatory authorities in current rate proceedings. There is the potential that the various regulatory authorities may impose disallowances that could preclude the Company from recovering a portion of its investment (direct disallowances), and related carrying charges (indirect disallowances),
in Millstone 3. Under generally accepted accounting principles currently in effect, amounts excluded from rate base by a regulatory commission would not necessarily be written off as a charge against income at the time of disallowance unless allowed rates, including a return on investment, would be inadequate to recover the total cost of the facility, plus related i interest. Management does not believe that a material write-of f under current generally accepted accounting principles would be necessary.
However, management is concerned that FASB's proposed ED, discussed above, would, if adopted, require the Company to write off potentially significant amounts of disallowances, either direct or indirect, as a result of actions imposed by regulatory authorities.
Nuclear Insurance Contingencient The Price-Anderson Act currently limits public liability f rom a single incident at a nuclear power plant to
$650 million. The first $160 million of liability would be covered by the maximum provided by commercial insurance. Additional liability of up to l
$490 million would be provided by an assessment of $5 million per incident levied on each of the 98 nuclear unito currently licensed to operate in the United States, subject to a maximum assessment of $10 million per nuclear unit in any year. Based on the Company's ownership interests in the nuclear units currently in service, the maximum liability per incident would be $3.6 million, limited to a maximum of $7.2 million in any year.
Wactern Macerchucatts Electric Company NOTES TO FINANCIAL STATEMENTS Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover: (a) certain extra costs incurred in obtaining replacement power during a prolonged accidental outage with respect to the Company's ownership interests in Millstone 1 and 2 and CY; and, (b) the cost of repair, replacement or decontamination of utility property resulting f rom 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 against the Company with respect to losses arising during current policy years are approximately $3.3 million under the replacement power policies and $3.5 million under the property damage and decontamination policies.
Although the Company has purchased the limits of coverage currently available f rom conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds.
Financial Arrangements for the Regional Nucicar Generating Companies: The owners of CY, including the Company, have guaranteed their pro rata shares of $40.4 million 17 percent Series A Debentures. The Company's guarantee is $4.0 million.
On August 5, 1985, CY executed a $25 million revolving credit agreement. The owners of CY, including the Company, have agreed to guarantee their pro rata shares of this agreement. The Company's guarantee is $2.4 million.
The owners of VY, including the Company, have guaranteed their pro rata shares of a $40 million nuclear fuel financing through the Vernon Energy Trust. The Company's guarantee is $1.0 million. I The owners of MY, including the Company, have agreed to guarantee their pro rata shares of MY's obligations under a $50 million nuclear fuel loan agreement which was executed on September 23, 1985. The Company's guarantee is $1.5 million.
The Company may be asked to provide additional capital and/or other types of direct or indirect financial support for one or more of the regional nuclear generating companies.
- 9. IMPACT OF CHANGING PRICES (UNAUDITED)
The following supplementary data was prepared in accordance with the requirements of Statement of Financial Accounting Standards No. 33 (SFAS No. 33), "Financini Reporting and Changing Prices" as amended.
As required by SFAS No. 33, the historical cost of plant, as stated in the system's financial records, is adjusted for changing prices. This price adjustment does not necessarily represent the replacement cost of existing plant because such plant is not expected to be replaced precisely in kind. The Company's price adjustment was determined by indexing historical plant using the Handy-Whitman Index of Public Utility Construction Costs. Nuclear fuel accounts reflect the current replacement cost of such fuel based on current market prices. Land was estimated by using the Consumer Price Index for all Urban Consumers.
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l l
W3 stern Massachusetts Electric Company l
NOTES TO FINANCIAL STATEMENTS i
{ Depreciation expense was determined by applying the Company's I depreciation rates to the adjusted plant. Other expense items were not j adjusted because they were considered to be at average price levels for the j year or were specifically excluded from adjustment by SFAS No. 33. As a i result of the adjustment to depreciation, net income was reduced by
$23 million. At December 31, 1985, the current cost of fixed assets, net of accumulated depreciation, was $1.3 billion, while historical cost, or net cost recoverable through depreciation, was $0.9 billion. For 1985, the increase in general inflation ($46 million) exceeded the increase in specific prices ($66 million) af ter adjustment to net recoverable cost by
$4 million.
During periods of inflation, holders of net monetary assets suffer a loss of purchasing power, while holders of net monetary liabilities experience a gain because debt will be repaid in dollars having less i purchasing power. As a result of the substantial amount of debt which was !
used to finance utility plant, the Company's gain from the decline in purchasing power of net amounts owed was $21 million in 1985. This " gain" ;
is not realizable by the Company and, therefore, cannot be considered i additional funds for reinvestment or dividend distribution.
Comparison of Selected Financial Data Adjusted for Changing Prices (In Aversee 1985 Dollars) i Years Ended December 31, 1985 1984 1983 1982 1981 j (Millions of Dollars, '
+
except index data)
Operating Revenues................. $278 $284 $274 $261 $309 Net income (1oss).................. $ 31 $ 26 $ 6 $ (1) $ (4)
Net assets at year-end............. $259 $237 $206 $188 $176 Amount by which the increase in general price level is greater than (or less than) the increase in specific prices after adjustment to net recoverable cost........... $ 4 $ 6 $ (2) $ (6) $ 18 Gain from decline in purchasing power of net amounts owed......... $ 23 $ 59 $ 20 $ 18 $ 36 Average consumer price index....... 322.2 311.1 298.4 289.1 272.4 W ctorn M200cchucotto Elsetric Company Auditors' Report To the Board of Directors of Western Massachusetts Electric Company:
We have examined the balance sheets of Western Massachusetts Electric Company (a Massachusetts corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1985 and 1984, and the related statements of income, common stockholder's equity and sources of funds for gross property additions for each of the three years in the period ended December 31, 1985. Our examinations were made in accordance with generally accepted auditing standarcis and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fa'irly the financial position of Western Massachusetts Electric Company as of Cecember 31, 1985 and 1984, and the results of its operations and the sources of funds for gross property additions for each of the three years in the period ended December 31, 1985, in contormity with generally accepted accounting principles applied on a consistent basis.
I ARTHUR ANDERSEN & CO.
f Hartford, Connecticut February 17, 1986
s I
Western Massachusetts Electric Company SELECTED FINANCIAL DATA Sears Ended December 31, 1985 1984 1983 1982 1981 (Thousands of Dollars)
Operating Revenues............ $277,820 $274,296 $254,807 $233,624 $260,634 Operating Income.............. 41,431 43,011 32,702 33,380 34,238 Net Income.................... 54,635 48,290 32,317 26,250 20,503 Total Assets.................. 995,782 891,360 797,414 692,154 602,880 Long-Term Debt *............... 396,968 336,386 308,174 297,391 268,051 Preferred Stock Subject to Mandatory Redemption *........ 50,000 50,000 50,000 15,000 15,000 Obligations Under Capital Leases *...................... 75,701 71,440 61,512 52,151 350
- Includes portions due within one year.
STATEMENTS OF OUARTERLY FINANCIAL DATA (Unaudited)
Quarter Fnded 1985 March 31 June 30 September 30 December 31 (Thousands of Dollars)
Operating Revenues............ $ 76,497 $ 64,161 $ 63,564 $ 73,598 Operating Income.............. $ 13,505 $ 8,615 $ 11,497 $ 7.814 Net Income.................... $ 16,791 $ 11,673 $ 15,106 $ 11,065 1984 Operating Revenues............ $ 74,855 $ 65.711 $ 63,809 $ 69,921 Operating Income.............. $ 11,438 $ 8,298 $ 12,264 $ 11,011 Net Income.................... $ 12,397 $ 9,329 $ 13,918 $ 12,646 f
Western Massachusetts Electric Company STATISTICS Utility Plant Average December 31 Annual Electric Employees (Thousands of kWh Sales Residential Customers (December Dollars) (Millions) kWh Use (Average) 31) 1985 $ 1,103,49 7 3,452 7,188 176,325 853 1984 984,543 3,483 7.330 173,690 854 1983 875,117 3,330 7.156 171,704 851 1982 769,460 3,277 7.117 170,234 838 1981 660,450 3,393 7.352 167,883 818 b
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l Western Nassachusetts Electric Company First Mortgage Bonds Trustee and Interest Paying Agent The First National Bank of Boston, Corporate Trust Department P.O. Box 1897, Boston, Massachusetts 02105 Preferred Stock Transfer Agent Dividend Disbursing Agent and Registrar The Connecticut Bank and Trust Company, N. A., Stock Transfer Department One Constitution Plaza, Hartford, Connecticut 06115 Dividend Payment Dates 9.60% Series A and 16.00% Series C March 1. June 1. September 1 and December 1 7.72% Series B Adjustable Rate Series D January 1. April 1, July 1 and October 1 Address General Correspondence in Care oft Northeast Utilities Service Company Investor Relations Department P.O. Box 270 Hartford, Connecticut 06141-0270 Tel. (203) 665-5000 l General Office 174 Brush Hill Avenue, West Springfield, Massachusetts, 01090-0010 The data contained in this Report is submitted for the sole purpose of providing information to present stockholders about the Company.
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NORTHEAST UTILITIES THE CONNECTICUT LIGHT AND POWER COMPANY WESTERN MASSACHUSETTS ELECTRIC COMPANY HOLYOME WATER POWER COMPANY NORTHEAST UTILITIES SERVICE COMPANY NORTHEAST NUCLEAR ENERGY COMPANY t
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