ML20196B814

Northeast Util 1987 Annual Rept

ML20196B814
Person / Time
Site:	Seabrook
Issue date:	12/31/1987
From:	Ellis W NORTHEAST UTILITIES
To:
Shared Package
ML20196B791	List: ML20196B785 ML20196B814 ML20196B821 ML20196B834 ML20196B841 ML20196B851 ML20196B874 ML20196B902
References
NUDOCS 8806300380
Download: ML20196B814 (56)

Text

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.y' Tile ANNUAL REPORT Tile CON 1PANY '

l

. Competition: A matter of Northeast Utilities is the

• l choices not only serves as the parent company of the NU l

theme of our 1987 annual system (collectively referred  !

. report, but suggests the to as NU), one of the largest )

- " dramatic changes that will

• • utilities in the country and the 1 A 4 undoubtedly alter the way largest in New England, with g ? .*g ,. 3. e Northeast Utilities will do over 9,200 employees serving

.- g'OT g- business in the years to come.

Competition and choices are about 1.4 million customers in Connecticut and western M E 'g gym}

~

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words not usually associated with the traditional utility hiassachusetts.

The NU system includes industry However, new and three electric companies-The I

[( powerful forces of competition Connecticut Light and Iower l r6 .

. 't{ are beginning to erode the Company (CL&P), Western 1

- j ~- 3 y- once-secure osition of utilities hiassachusetts Electric I we , - as franchise monopolies. Company (WMECO), and As a result, we are faced Holyoke Water Power ON THE COVER with a number of alternatives Company (HWP). CL&P also The cover illustration and the as mstomers consider options supplies gas in portions of to m, stall self-generation units, Connecticut. Other major photography throughout tlu. s report depict the ongomg regulators ponder the complex subsidiary companies are alhance with the range of problems of rate design, and Northeast Nuclear Energy customers-from la;ge utility managements seek Company (NNECO), which industrial, commercial, and ways to reduce costs without operates the Millstone Nuclear compromising quality of Power Station, and Northeast municipal operations t service. Utilities Service Company mdividual residences-wh depend on us for reliable and in this annual report, we (NUSCO), which provides econonucal energy service. In explore the challenges of centralized support services competition, the choices it to the operating companies.

spite of the changes yvrought places before us, and the by the new competitive With a service area that environment, our nussion strategies we are adopting to stretches from the Connecticut remains a commitment to balance the diverse needs of shore to the Berkshires in our customers, to maintain our Massachusetts, from small excellence in service.

position as a viable and effective rural communities to bustling l

provider of energy services, cities, NU serves colleges and 1

and to offer appropriate major office complexes, rewarcis to our shareholders. dairy farms and computer i A special essay contributed equipment makers, and

! by Dr. Charles J. Cicchetti museums and airports in two of Harvard University's of the most prosperous, John E Kennedy School of changing states in the nation. To Government, examines the meet the region's energy needs current dilemma for the utility '

into the next decade, NU has industry posed by the developed, on the supply side, contradictory forces of a mix of generating capacity that CONTENTS competition and regulation. includes nuclear energy, coal, Highlights . 1 oil, natural gas, hydropower, Letter to Shareholders 2 and, increasingly, cogeneration Competition Essay . 7 and small power production; Operating Highlights 11 and, on the demand side, Financial and Statistical customer conservation Section . 21 programs that have brought the Shareholder Information 50 company national recognition Officers and Trustees 52 for its leadership.

l l

PIOitTHEAST UTILITIES 1987 Annurt R psrt HIGIILIGHTS' 1987 1966" '$$'r$,*.i., -['

Operating Revenues $2,080,898,000 $2,032,117,000 2.4 Net income $229,145,00G $181,939,000 25.9 Earnings Ibr Common Share $2.11 $1.68 25.6 Common Shares Outstanding (Average) 108,669,1 % 108,352,517 0.3 Dividends Paid Ibr Share $1.76 $1.68 4.8 Sales of Electricity (kWh - Thousands) 23,405,000 22,482,000 4.1 Sales of Gas (Mcf) 30,804,000 28,249,000 9.0 Electric Customers (Year-end) 1,209,686 1,177,510 2.7 Gas Customers (Year-end) 169,937 165,443 2.7 Construction Expenditures"* $329,497,000 $413,354,000 (20.3)

' includes gas operations to be divested see Note 2 of Notes to Consolidated Financial statements.

"Restated to reflect the write-off of CL&P's unrecoverable portion of Millstone 3. see Note 1 of Notes to Consolidated financial staternents.

'"Excludes nuclear fuel.

TO OUR SHAREHCLDERS ,

New forces of competition continuing progress in our previous year. In 1988, the have come to the electric utility efforts to control nonfuel operat- indicated annual dividend is industry They are bringing with ing and maintenance expenses. continuing at the 1987 rate of them a variety of new and, in la addition to these factors, $1.76 per share. The decision to many cases, difficult choices for sales growth helped lower the hold the dividend at the $1.76 utility managements, regulators, average cost per kilowatt-hour. per share level reflects current investors, customers, and In fact, the economy of our earnings prospects flowing employees. They may also service area has been strong, from our decision to expense represent a significant oppor- characterized by high employ- currently all costs associated tunity for your company After ment and nsmg m, comes, with the completion of describing 1987 performance to Seabrook 1, the likely effect of you, we will devote much of in 1987, preferred stock and the recently issued CL&P rate this letter to the subject of long-term financing amounted orc r, and the expected drop competition. to $408.5 million, including the in company earnings after the refinancing, at a lower cost, of planned spin-off ofits gas In 1987, Northeast Utilities $186 million of existing debt and business in 1989.

recorded creditable, though preferred stock. This was not outstanding, results. accomplished on favorable Shareholders' equity climbed Electric revenues continued to terms, despite the volatility and from $16.24 per share at the end increase, while, despite higher uncertainties that pn vailed in the of 1986 (restated) to $16.53 at sales, gas revenues declined financialmarkets during the year. year-end 1967. Our common slightly Earnings for the year of shares continued to trade

$2.11 a share declined against Dividends totaled $1.76 per during the year in a price range originally reported 1986 share in 1987, up (mm $1.68 the that remained above book earnings of $2.78 per share but value, despite the overall stock increased against restated 1986 market plunge in October.

earnings of $1.68 per share. Earnings / Dividends In December 1987, we wrote Several factors, all of them e ggs a psyjgs e off the disallowed portion resulting from legislative and sm ncswm of CL&P's investment in regulatory actions, were chiefly W NGS hiillstone 3, retroactive to 1986.

responsible for this decline in Originally reported 1986 earnings: a cap on the earnings Donms earnings were therefore 3 00 of The Connecticut Light and reduced by approximately Ibwer Company (CL&P); the $119 million or $1.10 per share.

inability of CL&P and Western Additionally, we wrote off the hiassachusetts Electric portion of CL&P's investment Company (Wh1ECO) to earn 2 50 in the Seabrook 1 nuclear unit a return on portions of that exceeded the statutory hiillstone 3 after April 23,1986; limit on our recoverable the write-off of CL&P's investment in the unit. This investment in the Seabrook 1 2 00 reduced our 1987 net income by nuclear unit that exceeded the approximately $16.9 million or' cap on costs adopted by the $0.16 per share. We are not, General Assembly; and a however, prevented from limitation on CL&P's ability to 1 50 ~, ultimately seeking full recovery recover certain fossil-fuel costs. of all our Seabrook 1 costs-Each of these developments  ; and we also remain firmly had a direct and damaging .

convinced that bringing this impact on our bottom-Ime LOO umt into service as soon as results. possible is essential to our region's future energy supply Positive factors included lower fuel costs, sharply reduced Complex regulatory issues g

construction expenditures, and 1983 1984 1985 1986 1987 again occupied much of our 2

" P tune muni a 'ention in IN ti, a 9{! v 1 l

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rate <ase l he det ision lett elti t rh Tales unt hanged but Jia nhit u all\ restrit ted the g dtilla rs that w ill be as ailable

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y r es enues fi)r expenditures drealer than thlise ( I &l' had t ontemplated m its rate applh atitin I he det isltin alsti i

called f or a gas rate dei rease g or bld l MHlhon on an annuJI o ~f basis Wh k k k k spnne et W the consnieration

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On h1 arch 4,1988, CL&P capacity to meet the peak shareholders would receibe initiated a court appeal seeking demands of our own service stock in the new gas company a to reverse the portion of the area, we also share-thmugh in proportion to NU shares DPUC decision representing a our participation in the held at that time. We have penalty for capacity sales. New England Pbwer Pbol great confidence in the future (NEPOOL)-the responsibility success of this new, in the Wh1ECO application, for maintaining an adequate independent gas company; filed on December 17,1987 with power supply for all of New which will be the largest in the hiassachusetts DPU, the England. Peak demand last Connecticut and one of the company seeks an increase in summer stretched NEPOOL's largest in New England. The revenues of $24.1 million, or 8.8 collective capacity to the limit, divestiture also would resolve percent. The request includes requiring the initiation of a long-standing issue by

$16.8 million for the third step contingency measures, bringing NU into compliance of the DPU-approved plan to including voltage reduction with the Public Utility Holding phase in allowed construction and the purchase of additional Company Act of 1935, which costs of hiillstone 3. A decision power from outside the region. stipulates that multistate by the DPU is expected by Both NEPOOL and the holding companies such as June 30,1988. company also experienced ours cannot serve both gas and record-high demands this electric customers.

Construction expenditures winter, substantially exceeding have been sharply reduced their 1987 summer peak loads, Planning for the future in following the April 1986 and, again, had to initiate the face of rapidly expanding completion of hiillstone 3-the emergency measures to avoid competition was a top priority largest, and certainly the most having to interrupt service to item on our management demanding, single construction customers. agenda during 1987. The program in NU's history. forces at work in this new Similar situations may well competitive environment are Although we have reduced occur at any time, and especially described in a special essay, our capital expenditures for when several plants are out which follows this letter to generating facilities, we of service for scheduled shareholders, contributed by continue to make substantial maintenance, refueling, or Dr. Charles J. Cicchetti, deputy investments to improve the unscheduled repairs. This director of the Energy and reliability of our transmission again emphasizes the need to EnvimnmentM Pblicy Center and distribution facilities. We bring Seabrook 1 in New at Harvard University's John F.

are committed to do better in Hampshire and the Pilgrim Kennedy School of Government.

this area, because we recognize unit in hiassachusetts on line.

that even a momentary outage As we have stated so often in As Dr. Cicchetti's essay on or voltage fluctuation can the past, the costs related to competition points out, our cause major inconvenience for maintaining a safe margin of most formidable task is likely to customers whose homes, capacity are far less than the be the effort to retain our major offices, and plants are often overall economic and social industrial and commercial

, filled with unforgiving impact of not having electric customers. These companies i electronic equipment. power available when it is are in a position to use modern needed. technologies to supply their We have dramatically own needs for electricity and expanded tree trimming as Our gas business grew thermal energy and to do so a major ongoing activity substantially in sales and cost-effectively, if our rates to that contributes to system profitability during 1987. In them are not competitive. They l reliability. Selective rebuilding October, we announced that also can produce additional l of transmission lines and the CL&P was developing a electric power, which we are l acquisition of special definitive plan to divest this now required, bylaw; to purchase l equipment, such as mobile business and establish it as at artificially high prices.

l transformers, represent further an independent, stand-alone enhancement of reliability company. Under this plan, in a survey of our major which we hope to implement customers, we found that Generating capacity issues by spring 1989 subject to DPUC literally every one of them was continue to be a concern. and Securities and Exchange at least reviewing the potential While NU has adequate reserve Commission approvals, NU for self-generation.

4 l

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58E""' dERE pa\ m ents i nn t i'dencration

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in terms of reliability, but also in customens. In teday's competitive achieve further growth an'd our responsiveness to special environment, rate design success as the region's preferred

• and changing customer needs. cannot favor any one class of supplier of energy services.

The entire NU organization user. In fact, as Dr. Cicchetti is dedicated to this goal. states, such subsidies can )

Particular attention is being only work to the ultimate -

given to identifying potential self-generators, and senior disadvantage of the particular consumer groups that iM l l

NU executives share in the regulators and politicalleaders ,

William B. Elbs l responsibility for carrying out have traditionally sought to Chairman and l

an active program of personal protect and support. - Chief Executive Officer i contact with these customers )

i throughout the year. hianagers and other personnel in the Proper rate design can give us a fairer opportunity to

/

/ , -r field are being given greater compete with self-generators. i l

responsibility and authority to We believe it is entirely l make decisions on behalf of our appropriate to charge adequate Bernard hl. Fox l

customers, while our Energy backup rates to self-generators President and Chief bianag,ement Services group who wish to remain connected Operating and Financial Officer l

helps customers reduce to the NU system as an alternate their costs through effective source. Similarly, when a self. Afarch 4,1988 conservation and load generator wants to return to management and the use of the NU system, the applicable such measures as interruptible rate should reflect the cost of rates. Through these programs, new generation required to we are able to demonstrate supply the additional load.

to major industrial and com-mercial customers that the value Rate design is a complex and added by NU services substan- aften controversial issue. But, tially offsets the perceived one thing is certain: It is an advantages of self-generation. issue that must be resolved in a realistic and responsible A second key step in meeting way, if we are to protect the the new competition is the integrity and stability of our continued effort to contain our region's energy supply and own costs and, therefore, the avoid burdening our smaller need for further rate increases. customers with ever increasing Determined cost management costs.

efforts have already eliminated more than $59 mill' ion from The new competitive forces 19S8 operating and maintenance present many alternatives.

budget projections made a There will be fundamental year ago. Our objectives are, changes in every aspect of the by 1990, to reduce operating way we do business. We also costs below 1987 levels and to believe that we are making the constrain the growth in capital right choices, that we are on the expenditures. right road, and that the years ahead offer a world of exciting The third essential com- opportunities. Given the ponent of our competitive enthusiasm, dedication, and strategy is to urp regulators to competence of our employees, adopi realistic, cost-based rate and with the continued design so that l arger customers support of our shareholders, no longer subndize smaller we are confident that NU will 6

4

. The New 0 0 De FHH D A VIEW FROM THE TRENCHES _

By Dr. Charles J. Cicchetti am still amazed by those who seem to think that Not many years ago, planning a lo was a simple matter of matching your travel plans with the airline schedules.

It was not necessary to master a utilities, with their major capital programs and heavy costs of purchased fuel, could somehow escape the twin economic forces of double-digit bewildering array of discount fares that do not inflation and expkxiing fuel prices that plagued always seem to be understood even by airline the world in the 1970s and early 1980s.

employees. Under regulation, everyone charged They could not, of course. But after decades the same price. At home, things were even of providing consumers with real-and often simpler. There was caly one telephone company, absolute-decreases in prices, the nation's utilities one gas company-and one electric utility. have found themselves besieged and bombarded Today, in those areas where many have long with criticism for failing to live up to their past felt that the franchised monopoly served us best, successes.

things are changing at a mind-boggling pace. We hiagnifying this alleged failure is the fact that are confronted with new options, alternatives, utilities publish monthly report cards called bills.

and choices. On close inspection (which they seldom receive), '

In broad terms, the forces at work include the backup for these bills indicates that utilities a variety of legal challenges to the historic have generally been successful in managing the relationships between regulated monopolies and controllable costs of their operations. hioney costs their markets, technological change, and the and fuel costs, however, are not controllable, and widely held public and political perception that utilities-the nation's largest private consumer of more competition willincrease economic efficiency both these commodities-are given little credit for and improve service, paying these costs and passing them on to  ;

l A number of additional and special factors consumers with no markup whatsoever.

have particularly affected the electric utility In other words, although often cast in the  ;

l industry role of villain, utilities are actually the victims of Ilaying been a direct participant in various energy cost inflation-right along with their aspects of regulation (state regulator, consumer customers.

advocate, environmentalist, utility consultant),1 Adding to the political pressure caused by Northeast Utilities 1937 Ammal Report

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p A Case of Competition ..py

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! Illustrative of the new competitive battlefield as

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descntwi bv Dr. Cicchetti is NL"s #

recent experience with major '.  ;

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9 1 con mercial and industnal j 7

~ f, n customers who have considered -

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One such customer, the !!arlea, '

} fotel in Enfield. Connecticut, 3

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g (managed by Ilarley Ilotek Inc. I

[ or Cleveland, Ohio) had decided to s i

install a IN-kib.vatt self- - - v R gee"ration unit in ordt r to re duce '

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its energy co3ts } snowing of the

} larlev's intention, NL"s Ent rgy _ , _

{ Management Sc.' vices p"rsonael j and Marketing Services engineers des eloped a plan that would allow the i f arlev -by changing its /p{ ~

y energy mix and implementing c

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B_ number of conservation .

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techniques---to recoup its initial 9- '

investmen! through ongoing -=

y energs savings in less than two and - a 4 one-halt vears. Members of NL%

f team then worked with liarley 9 management on the proposal _,

K_

which is ni)w being imp lemented.

l he idea or mstalling a self-f generation unit has been aba ndoned.

I a -

s- Ihis particular case has ended ~ ' #

E w ell trom the point of view of both "

$ the customer and NL'. liowever, it k aptly illustrates the nature of the k new competitive environment and ..

p the importance for NL' of retaining mapir commer 'ial and industnal g

1. Th B t ustomers whose revenues

[8' contribute substantially to gp ; f ci s ering the utility's fixed costs i -

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r increased utility bills is a fundamental (and guaranteeing a market for such new suppliers (the probably inevitable) misjudgment by all concerned local utility must buy this pmver) and providing an regarding projected growth in energy demand. opportunity-eagerly seized-for attractive Through the early 1970s, experience told us that subsidies in the form of inflated purchase prices for the demand for electric power doubled every the output of qualifying facilities (QFs).

~ decade. To meet this demand while reducing our it soon became clear that a utility's strongest dependence on imported oil and also improving competition in this new environment would come air and water quality, building more efficient coal from its own biggest commercial and industrial and nuclear generating capacity became firmly customers. Building what have become known as established as a nonpartisan national energy "PURPA machines" and taking advantage of low policy, oil and natural gas prices, they are using new self-Massive amounts of capital were therefore generation and cogeneratbn technology to fill committed to meet the expected growth in demand their own needs for electricity, as well as for and fuel-switching needs at a time when thermal energy (steam, hot water) also used in their construction costs, interest rates, and the expense plants and pmcesses. Finally, they are able to sell of meeting environmental regulations were all what electricity they do not use themselves to their rapidly escalating. Given the long lead times friendly neighborhood utility Utilities, already involved, utility managements were required to burdened with surplus capacity, are frequently make decisions on new capacity long before it finding themselves in the ludicrous >osition of became apparent that the new demand would be being required to buy this additiona supply at dramatically slowed by rising energy costs, prices even higher than their own prices and, in mnservation, new efficiencies in energy use, and any event, well above their own avoided or a ceneral slackening of ecor omic growth. marginal costs of generation.

The net result, today, is substantial generation Small wonder, in these circumstances, that suppy put in place at high cost to meet utilities across the nation are peering over the edges anticipa'ed growth that did not materialize and to of their foxholes and asking themselves what to do.

offset S5Mo-$100-per-barrel oil prices-that Some are fighting the competitive threat by didn't happn either. deeply discounting the prices charged to potential "Prudence reviews," along with accusations self-generators in order to keep their business of "cost overruos," "excess capacity," and along with some contribution to fixed costs, judgments as to Nseful costs" are some of the Others have decided they would rather switch sticks being used by regulators and politicians to than fight; they are joining the ranks of PURPA beat utility managements over the head for having suppliers by participating as equity investors in failed to predict-back in the late 1960s and into the this highly advantaged market. Still others have

. 1970s-what was going to happen in the 1930s. been aroposing independent power producer Since no one is more gifted with twenty twenty (IPP) aidding schemes and foolishly thinking that hindsight than utility critics, the resulting outcry future generation capacity will become someone directed at utilities in particular and at regulation else's responsibility. A number of companies have

in general soon created an environment where new proposed corporate restructuring programs that competitive alternatives came to have a particular will get new generating capacity out fmm under appeal. state regulation, placing it under federal regulation The economics were also attractive. The or in a free market context. Finally, there are utilities l imbalance in which supply exceeds demand and diversifying into businesses that are quite foreign regulated prices exceed the incremental cost of to their traditional energy operations, serving new load creates a circumstance in which In this difficult environment, the most l new entrants (call them competitors) are poised to compelling need is for utilities to be able to skim the cream from business in any given utility compete effectively in maintaining their present service area. market share with regard to larger industrial, commercial, and wholesale customers. This is also Adding fuel to this competitive fire is a little .

known law enacted between the two oil price the most politically awkward challenge for our shccks of the 1970s: The Public Utility Regulatory regulators.

Pblicies Act of 1978 (PUPPA). One purpose of this Competition from those who are able to act was to further reduce foreign oil dependence supply large customers at lower prices cannot be by encouraging small-scale nonutility electric met under present circumstances. This is because generation. This was accomplished by industrial and commercial rates-as a function of I

Northeast Utilities 1937 Armual Report

I social policy-have in many instances tended to exceed the cost of serving these larger customers.

In a world without competition, such a political tilt to rate design favoring the residential consumer could probably be maintained indefinitely But, in today's arena, it is simply not possible to mark up prices for one group of customers in order to subsidize others. For a utility, attempting to maintain such a policy will result in a significant loss of load from large customers. When that happens, substantial rate increases for residential consumers and small businesses become inevitable, since the utility's fixed costs must be supported by a declining sales volume spread ,

over a narrowing sales base. Dr. Charles J. Cicchetti An additional complication lies in the fact has nvently leen that, while large users of electricity can disconnect Y+ I appointed IIcputy dinrtor themselves without penalty from their local -

. of theinternationally edities and reap cost and efficiency benefits through self-generation and cogeneration, the (w

nrogni:cd Energy and Environmental Iblicy much larger number of residential and small Center at Harnmf Unitvrsity's John E Kennafy business customers simply cannot do this. They School of Goternment. Besides educating can use gas or oil for heating. They can install solar graduate students, this center sertvs as a high-panels and windmills. They can insulate and letvlinternationalforum, bringing together conserve in many other ways. But they cannot, representatites ofgotvrmnent, business, and realistically, unplug themselves from their utilities. academia, for rescarch and policy setting related By the same token, their utilities-unlike other to bnudly hised energy issues.

businesws which can, with equanimity, Dr. Cicchetti brings to his current position discontinue a particular product line or exit a tvide-ranging experience and impressite profitless market-will continue to have an credentials in ahnost all as vts of utility obligation to serve them. This is a key part of the management and regulation. Dr. Cicchetti original regulatory compact and that obligation rcccited a B. A. from Colorado College in 1965 will probably never be rescinded. It must, and a Ph.D. from Rutgers Unirvrsity in 1969; however, be adjusted and altered to meet the new luth degrecs avre in Emnomic. He then scrted realities of competition. for some time as a pm/cssor of Emnomics and If regulators and politicalleaders fail to grasp Environmental Studies at the Unitvrsity of and address these facts, the losers in the long run Wisconsin and, subsequently, as dinrtor of the will be the very consumers they have traditionally Wisconsin Energy Office 0975-1976), chairman sought to protect. of the Wisconsin Public Scrvice Conunission In the end, we must understand that 0977-1979), and senior vice president of competition is not a substitute for regulation-or National Economic Rcscarch Associates. A vice tersa. The two must be made to coexist with noted author and authority on matters including one another. It will not be easy As a distinguished electricity and natural-gas pricing, energy and former mentor of mine, Herman Roseman, has environmental polica he has published servral said: "Putting wings on a trolley car does not luoks and a nndtitude of articles and is guarantee that the thing will fly." The desired fmpically called upon to provide expert goal-an adequate and stable supply of fairly Icsthnony on energy issues and to lecture at priced electric power-can only be achieved home and abnud. He currently scrtes on a through a common exercise of reason, logic, and numler ofimportant national conunittees acceptance of reality concerned reith cncrgy policy Northeast Utilities 1987 Annual Report

GPER ATING HIGHLICHTS A planned refueling outage Academy for Nuclear Training.

+

of Connecticut Yankee (CY) hiillstone 3 is not a member SYSTEh! PERFORA1ANCE- has also been extended to because of its limited commercial SUPPLY correct damage to the plant's operation, but is expected to be thermal shield. CY is expected made a full member by mid-At ymr-end, the Northeast to return to 100 percent power 1988. In June 1987, NU formally Utilitics (NU) system cajucity, in mid-hfarch. Despite these dedicated the Nuclear Training net of sales and purchases, totaled difficulties with unscheduled Center at hiillstone to Lelan E 5564 mcganutts (AfiV) of tchich outages, the nuclear units in Sillin, Jr., in honor of the former 2420 A1W or 43 percent aus which the system companies NU chairman who did so much nuclear. Ruk summer demand have entitlements achieved an to put NU at the forefront of oaurred August 17,1987,and actual composite capacity factor nuclear operations in the uns 4591 AllV. Ruk reinter of 74.9 percent during 1987, United States.

demand ocurmi fanuary 26, well above the industry average 1987, and aus 4287 AliV. The of approximately 60 percent. e Fossil-In general, our fossil-summer puk aus constrained by fired units operated above emergency measures, teithout Nuclear generation provided their reliability targets, providing tchich the actual puk tvould hate 68 percent of our total electrical NU and other NEPOOL been aluut 100 A1W higher. energy requirements in 1987. companies with necessary capacity These highly reliable Thmugh its operating co n;unics, The National Nuclear units help to meet intermediate NU provides electricity to customers Accreditation Board has and peak-load conditions.

in its service territtry at prices that accredited all ten operator and com/urefaturably reith those of technical training programs at Oil-fired generation provided other utility systems in the region. hiillstone 1 and 2, and CY, 19 percent of total energy hb are closely interconnected reith making these plants full requirements for 1987; coal-ayucity throughout the Nete members of the National firec generation supplied 7 England region via purticif ution percent; and natural gas 3 in the Neto England Ibuvr nel percent.

(NEPOOL). Nuclear Capacity Factors sussom est sum u s .

A refurbished CL&P turbine o Nuclear-NU continues to urms generator at a refuse-to-energy be an industry leader in Percent project under construction by nuclear operations. On April 23, 90 CL&P and Connecticut 1987, hiillstone 3 completed Resources Recovery Authority its first year of commercial (CRRA) at CL&P's' South operation. During this period, hieadow Station in liartford, it operated at a 78.8 percent 80 ' Connecticut, began com-capacity factor figure, generating mercial operation ahead of 7.96 billion kilowatt-hours of E schedule in October 1987. A electricity and displacing about 14 million barrels of oil.

g second turbine generator 70 : began commercial operation early in 1988. The two In addition, hiillstone 3 generators will have a received high marks for its combined capacity of about management and performance 60 65 htW. Steam for' these two in an 18-month evaluation by units is being supplied from the Nuclear Regulatory three CRRA boilers fueled Commission. On October 31,  : with refuse supplemented hiillstone 3 was taken out of so with coal.

j service for its first refueling since entering commercial j In order to meet future service. Tlus outage was capacity needs, we are looking extended an additional month g into repowering opportunities to repair the plant's four 1983 1984 1985 1986 1987 for our fossil fuel plants. We reactor coolant pumps. The ., , ,, have implemented a Plant plant returned to service on n m , y m ,,- a w m Performance Impmvement february 9,1988. s w s m % m ,c m - Program to assess ways to 11

improve both reliability and have been submitted for these NU was awarded the "Ctility l efficiency. 3rojects, NUis mevaluating the of the Year Award" by the 1 3enefit of going forward on them. Ccgeneration Institute of the l

l o flydro-Hydropower Association of Energy Engineers j contributed 3 percent of total e Hydro-Quebec for its outstanding achievements  !

energy requirements in 1987. Interconnection-Phase I of a in promoting practices and 450-kilovolt direct-current principles of cogeneration.

New economic analyscs of transmission interconnection our proposals to expand between Hydm-Quebec and NU continues to work with hydmelectric facilities at Falls NEPOOL, including NU, regulatory agencies at the state Village, Bulls Bridge, began commercial operation and federallevels and others (Connecticut) and Cabot October 1,1986, resulting in to balance appropriately the Station (htassachusetts) have immediate economic benefits benefits and costs of shown that projected increases to customers served by cogeneration programs, l in construction costs, together NEPOOL members. Phase I principally through the with lower projected oil costs, provides for three to four institution of competitive substantially extend the million kilowatt-hours per year, ranking and selection or estimated payback period for or an aggregate of 33 million bidding processes.

these facilities. Although megawatt-hours, to be

applications for amended available to NEPOOL from 1986 e Regional Supply Issues-Federal Energy Regulatory to 1997. Phase 11 will increase Although NU has sufficient Commission (FERC) licenses the interconnection rating to capacity for itself, NEPOOL, as about 2000 h1W by late 1990 a whole, is operating near the Energy Contribution By Source and provide for the purchase minimum capacity level to by NEPOOL of seven million assure reliability of service. 1 mN M"m megawatt-hours annually of This is the result of a number um nucon a cas firm energy over a ten-year of factors, including the aeriod. Engineering, design, continuing delay of Seabrook 1, e ccA jcensing, and limited the extended outage of 1973 construction of the PhaseIIinter- Pilgrim, and the fact that a connection are already under number of fossil-fired plants way NU will have an equity located outside the NU interest of about $41 million in territory have failed to meet the Phase II project. reliability targets.

• Cogeneration and Small While New England has Power Production-During experienced some unexpected 1987, there were 68 customer- and temporary capacity owned cogeneration and small shortages in 1987 and early power production projects in 1988, NU, in general, is in a the NU service territory, totaling position to contract with about 92 h1W. Included in these neighboring utilities to sell figures are six facilities totaling power.

about 40 htW providing energy 1987 - to NU under long-term At year-end, we were selling electricity purchase agreements. 1600 htW to other NEPOOL member companies. We Additional contracts for anticipate that 1988 capacity purchase of electric energy by sales will remain at the 1600-system companies totaling 520 hiW level and, in the near htW have been approved by future, will be in the vicinity of the Connecticut Department of 1000 htW.

Public Utility Control (DPUC) and the Department of Public This creates some complicated Utilities (DPU)in hiassachusetts issues for us as we try to balance

-bringing the anticipated level our responsibilities to customers of cogeneration by 1992 to and shareholders while still about 560 h1W. providing for regional needs.

12

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supp'ies to meet current and customers in 1987 (over 10,000 efforts, NU has already

• expected demand through at least audits since the program's accomphhed a cumulative -

the iniddle of the 1990s. Through inception in 1982). We will peak-load reduction of about carefulorchestration of our load expand one of CL&P's most 250 hlW (5 percent of peak managernent and consertution popular programs, Wrap-Up/ load). This represents about programs, repourring projects, Scal-Up, which has benefited half of the combined and the addition ef supply through more than 195,000 Cannecticut conservation-derived the startup of Smbrook 1 and residential customers over the reductions to NEPOOL's peak Hydro-Quehr Phase I?, ne project past seven years, load made by NEPOOL leing able to nicet demand into the members as a group.

21st century without having to In October 1987, the United add major new generating capacity States Department of Energy e Conservation and awarded CL&P and the Weston Load hianagement o Demand Growth-As a hiiddle School a joint Award Plans-Consistent with the consequence of the vitality of for Energy innovation for the DPUC decisionin the CL&P rate the New England economy, coriprehensive energy- case, we will focus increasingly NU continues to experience reduction program undertaken on conservation and load unusual demand growth. in partnership by CL&P and management initiatives to Electric sales increased by 4.1 the school. encourage the most efficient percent in 1987 and are use of our energy resources for expected to increase by 3.6 Through its various conserva- new construction projects and percent in the year ahead, tion and load management those customers who are although the level of future considering generating their economic growth resulting own electricity: We will expand customer Class / Usage our Commercial and Industrial from the financial upheavals in late 1987 could significantly BEIR RLSiDENTIAL IEEE INDUSTRIAL L ght ng Refute (see photograph alter this projection. NU's on p.13), Energy Conscious

"'nc m caci 4t aus ornen Integrated Demand and Supply Construction, and Shared Energy Planning (IDSP) process CUSTOMERS BY CLASS Sei"SS Programs. In cases allows us to reevaluate our invoh'ing commercial and needs and constantly update industrial customers, we will our demand and supply ,

not only perform technical management responses against audits, but we will also the backdrop of rapidly provide partial payments changing circumstances. for the installation of equipment to implement the o Conservation and recommendations of the Load hianagement audits. In cases invoking new, Accomplishments-NU has electrically heated residences, long been a leader in initiating we will pay builders an and marketing creative incremental cost for the conservation campaigns. hiany measures to achieve maximum of our Energy Alhance pmgrams msulation goals. We expect i have received recognition from "" "

USAGE (kWh) BY CLASS state and national agencies. management programs to l reduce summer peak by some Through the NU-supported 450 hiW in 1996.

pmgrams of CONN SAVE and Mass-Sate, more than 25,000 In an effort to alleviate tight NU customers in 1987 (over capacity situations, NU and 200,000 since the programs . NEPOOL have offered began) received low-cost commercial and industrial advice on ways to conserve customers a financial incentive energy and reduce their bills to reduce demand in emergency (see photograph on p.19). situations. To supplement ,

Energy-CHECK provided current time-of-day rates,  ;

energy audits for over 1,400 interruptible rates are being 1 commercial and industrial offered as part of our load 1

14 I l

management and customer service programs.

Another means by which NU operating companies have sought to reduce peak demand is through a radio-controlled water heater pmgram. Cus-tomers who allow NU to turn off their water heaters by remote control, at peak-kiad periods, receive a credit on their bills.

J '

Conservation and load management help customers control their energy costs, reduce demand on the NU system, and serve as viable and cost-effective alternatives to competitive forces threatening to remove more of our load.

They are also integral to our efforts to avoid the construction of additional, costly generating capacity until the 21st century.

• Reliability-Despite our record of providing our customers with an average level of reliability of 99.9M percent, reliability issues continue to cause concern-both internally and externally.

1 During the first eight months of the year, the DPUC conducted an investigation into the adequacy of the transmission and distribution system of CL&P and The United Illuminating Company.

The final report from the investigation has not yet been issued. In its draft decision, the DPUC found that CL&P's current level of reliability is unsatisfactory and ordered CL&P to file' plans to improve reliability for review by the DPUC. Although CL5P agrees that some improvement in reliability is appropriate, it has filed comments with the Education helps fuel New England's econerny, and educational institutions represent a inaior DPUC taking issue with portions sultlass of custorners for NO. At Mi'slevari Liniversity irt Afiddletown. Connecticut Nlls of the draft decision.

M'illiarn A1.11ahy tietti, Energy Afanagernent Services' regional rnanager, has uvrked clowly with Arthur J. Pongraf:(rtghti Mi> levan's director of Tacilities Operaiwns and Afanagement, to suggest energy-Yring liQhting methods, uuys to save energy in a new athletic comp!cx the We made a substantial Com-college is I,uildung, and lectiniquc> to ol'tain vtale grants for conwrzulian tmprovernents mitment to improving reliability 15

daring 1987 and shall do the - -divest CL&P's gas business by more than 100 producers,' taking same again in 1988. Our 1987 establishing an independent advantage of the lower costs -

expenditures on tree trimming . gas company under the available there. The second alone exceeded $15.4 million- leadership of Philip T. Ashton, phase of the Boundary Gas an increase of 57 percent over senior vice president and project started bringing the previous year's upgraded general manager-Gas additional low-cost gas supplies

- program. Proper tree trimming Group. Depending on the to our customers in January 1988 is the single-most important time required to obtain state -to the benefit of ratepayers.

factor in providing reliable and federal regulatory electric service to customers in approvals, the s ain-off could Construction costs to extend

, this part of the country be accomplishec as early as and improve gas mains in the spring 1989. state exceeded $22 million in l

A surprise snowstorm on 1987.

October 4,1987, while leaves hieanwhile, the gas business were still on the trees, dumped is actively preparing itself to be We are very proud of the up to 12 inches of heavy, wet a self-sufficient, stand-alone operations at our Cooper snow'on many Connecticut organization. Ultimately, it will Street (hieren, Connccticut) and hiassachusetts com- employ about 650 people- Dispatch Center, which was munities. The snow- and nearly all of them drawn from dedicred on January 7,1988.

leaf-laden branches caused the ranks of current NU Its scphisticated, computer-unusual amounts of damage to employees. It is probable, at ized technology monitors electrical facilities in western least initially, that the new gas and controls gas flows at Connecticut and the Berkshires company will contract with NU remote locations. i in hiassachusetts and defied for some staff services and use i easy repair. Logistical problems of existing facilities, e Afarketing and in accommodating the 800- Competition-Given the need plus repair crews sent to the e Gas Supply-Gas supply for a diversity of energy affected communities also continues to be a critical issue sources, the continuing hampered and slowed the in Connecticut. The final volatility of oil price and supply, process of restoring power. biennial report of the Office and Connecticut's constantly Consequently, a peak number of Policy and hianagement of growing energy requirements, of 85,000 customers was left the state of Connecticut in we believe the gas business without electricity Interruptions 1987 included the following has considerable potential for ranged from two hours to statement: "The Connecticut growth-constrained only by three and one-half days. gas market is generally the pipeline capacities to our considered to be unsaturated, region.

or having unmet potential for GAS BUSINESS growth . . The present In 1987, a new gate station constraint on growth in the was built to supply gas to the As Connecticut's largest Connecticut market is supply IBh1 complex now under supplier of gas, CL&P deliteml . The two pipelines serving construction in Southbury, apprc.cima'cly 31 billion cubic the state are at capacity, Connecticut, which contains l feet of gas Jo about 170,000 and the market is not expected a 2,000-ton, gas-fired air-residential, commercial, and to grow substantially until conditioning system. We also industrial crstomers in 1987. And, additional sources of supply extended gas mains to Pierson's on January 14,19SS, a record one- are secured . . " This supply greenhouses in Cromwell, day gas sendout of 217,000 limitation is the primary reason Connecticut, to provide inter-A1A1Blu tms recorded. In the we have participated in the ruptible gas service to this large highly competitity business of relatively small expansion commercial customer (see marketing gas, CL&P's gas projects of our existing pipeline photograph on p.17). These business is groteing steadily and suppliers, the highly successful projects typify the kind of has contributed substantially to Boundary Gas project, and the opportunities available to us NU's mrnings and cash flom proposed Iroquois Gas in the current market.

o Gas Business Divestiture- e Iroquois Pipeline Project-As mentioned in the letter During 1987, NU purchased The plan to construct and to shareholders, NU has more than 27 percent of it3 operate a major new pipeline announced its intention to supply on the spot market hem from imquois, Ontario, to 16

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customers but proposed increasingly open market o Southeastern Connecticut increasing residential gas rates environment. Regional Resources Recovery -

by the same amount. Authority (SCRRRA)-CL&P On h1 arch 4,1988, CL&P has filed an appeal with the On February 4,1988, the initiated an appeal to the Superior Court to overturn DPUC issued a decision de- Hartford Superior Court state regulatory approval of creasing CL&P's gas rates by seeking to reverse the portion of terms to be included in a

$10.4 million on an annual the decision reducing revenue contract with the SCRRRA to basis. DPUC cLanges of requirements by $17.5 million as build a trash-to-energy plant proposed electric revenue a penalty associated with in Preston, Connecticut. The requirements resulted in a net capacity sales. contract would force CL&P decrease of $72.4 million from customers to subsidize the revenues under current electric e hiassachusetts Rate Case- plant at a cost of $105 million rates. However, the DPUC On June 30,1987, Western over 25 years-the difference substituted other revenue hiassachusetts Electric between the rate mandated requirements totaling the Company (Wh1ECO) was by the DPUC and what same amount and, therefore, granted a $12.5 million rate the electricity would cost ifit left electric rates essentially increase (subsequently reduced were generated by CL&P. To unchanged. to $11.0 million) and a return enable the plant's construction on equity of 12.5 percent by to go forward while the The decision's largest single the hiassachusetts DPU. court decides the appeal, disallowance, $38.6 million, The second of five annual CL&P has entered into an was a reduction in CL&P's installments of Wh1ECO's interim agreement to pay allowed return on equity to 12.6 share of the "used and the higher, DPUC-mandated percent from the previous year's useful" portion of the cost of rate should the plant begin 14 percent and the requested hiillstone 3 was also added to operating before a final 14.75 percent. Another the rate base. decision is rendered. If the reduction was $17.5 million, decision favors SCRRRA, representing a penalty for In December 1987, Wh1ECO CL&P will continue to pay the capacity sales that the DPUC filed an application with the higher rate. If the court believed had been made at less DPU to increase revenues by upholds CL&P's position, than an appmpriate price. $24.1 million or by approxi- SCRRRA has agreed to mately 8.8 percent. If reimburse the company for the Offsetting the reductions and approved, new rates would go electricity overcharges.

disallowances, the decision into effect in July 1988. Of the directed CL&P to spend an proposed increase, $16.8 million additional $7.9 million for is being requested as the third CUSTOMER AND electricity conservation step of the DPU-approved plan COhfMUNITY SERVICE programs, with an emphasis for phasing in costs associated on programs for low-income with building hiillstone 3. The In 1937, av dedicated ourseltvs customers. It also ordered a remaining $7.3 million of the as a com;uny to becoming eten one-time $10 million credit to request results from other more sensitity and responsity to electric customers. The increased costs of providing customer needs than ny hate lven balance, $54.5 million, was service. in the ;ust. As a kcystone of our applied to amortize deferred com;vtility strategy, focused charges in connection with

• FERC Wholesale Rate customer service takes on new the Millstone 3 phase-in Cases-A final decision on meaning and importance in our pmgram. three issues left unresolved in corporate culture.

the 1985 FERC wholesale rate The DPUC deferred cases filed by CL&P, WhiECO, Long recogni:cd for our consideration of CL&P's and Holyoke Water Power innotutity programs for low-income proposed changes in electric Company (HWP) has not been customers and our dedication to and gas rate designs until the made. It is not known our communifics, ne at NU are spring of 1988. The company when a decision on these conunitted to preserving and remains committed to the remaining reserved issues, enhancing the economic vitality need for rate redesign to which include the matter of and quality oflife of our region provide the means to compete Millstone 3 prudence, will through actite connnunity more effectively in an be issued. service.

18

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? o Environmental Activities communities it serves. Robert E. Busch, director-and Awards-NU has long Through contributions of Special Financial Projects, was

• taken pride in its contributions $2.2 million, we helped a elected senior vice president-to maintaining and improving broad range of organizations to Finance, effective June 1,1987.

the region's natural resources, benefit their communities in Keith R. h1arvin, previously On July 22,1987, NU was the areas of education, health system director of Purchasing presented (at the White House) and accial services, energy and hiaterials hianagement, a national "Take Pride in - conservation, economic was elected vice president-America" award for promoting development, etc. Over 19,000 Purchasing and Niaterials wise use of public resources people participated in our hianagement, effective Afay 1, thmugh its Northfield hiountain Annual Run for Education, 1987. John W. Noyes, (hfassachusetts) recreational and we again sponsored the previously director of Revenue facilities. The state of Connecticut Special Olympic- Requirements Preparation and Connecticut honored NU in the Winter Games. Analysis was elected vice statewide "Take Pride In president-Regulatory America" contest for its eagle- The dedication of NU Relations, effective July 1, viewing faci'ities at Shepaug employees to community 1987. C. Thayer Browne, Dam in Southbury, Connecticut, service organizations is previously vice president-Appmximately 15,000 people especially impressive. For Budget hianagement and viewed the nesting eagles from instance, NU employees Financial Planning, was this facility in 1987. supported the United Way/ elected vice president and Combined Health Appeal by treasurer, effective February 1, On hlay 16,1987, NU officially giving more than $970,000- 1988; and Eugene G.

dedicated a new Fishway an all-time high. Additionally, - Vertefeuille, formerly manager Viewing Facility at Holyoke, more than 1,600 NU employees cf short-term financing, was hiassachusetts, to Robert E. volunteered their time and elected assistant treasucer, Barrett, Jr., a former president energies to a host of community effective hiay 1,1987.

of Wh1ECO and HWP, who service organizations.

provided the driving force for Leonard A. O'Connor, design and development of Our involvement as a previously vice president and what is considered to be the company has been recognized treasurer, was elected vice most successful fishway on the at the local, state, and national president-Finance and Atlantic Coast. During spring levels. The Greater Hartford Accounting (Cas), effective of 1987,276,837 rhad and 207 Urban League honored NU for February 1,1988; and John J.

salmon were lifted over the its Bilingual Plant Operator's Smith, previously vice dam. Before it was closed for Training Program. Governor president-Gas Supply the season in late June, some O'Neill of Connecticut gave Planning and Business 13,000 people had visited the NU the Laurel Award for Services, was elected vice facility outstanding cocporate social president-Operations (Cas),

responsibility, and President effective January 1,1988.

Together with the National Reagan's Council on Private Parks Service and The Sector Initiatives presented NU e Retirement-Retiring after Appalachian Trail Conference, with its Special Recognition 37 years of service was

'NU hosted a formal dedication Award for our expansion of Warren A. Hunt, vice of the permanent Appalachian school-business collaboratives. president-Regulatory Relations.

Trail in October 1987. The trail, which extends more than 2,000 miles from hiaine to Georgia, ORGANIZATION AND passes through NU's Falls h1ANAGEh1ENT Village (Connecticut) hydro development. NU concurrently e Executive Changes-opened an interpretive nature Bernard hl. Fox was elected trail on the grounds of the Falls president and chief operating Village project. and financial officer of NU, effective June 1,1987. He pre-o Community involvement- viously served as executive vice As in years past, NU contributed president and chief financial sigr.ificantly in 1987 to the and administrative officer.

20

FINANDIAL AND STATISTICAL SE3Tl2N l

l l

CONTENTS PAGE Management's Discussion and Analysis of Financial Condition and Results of Operations ............. . .. ..... . ... ......... .... 22-27 Company Report .. . . .. . .... . .... . .... . . .. ..... ... . . .. .... 28 Auditors' Report . . . . . . . ... . .... .. .. ...... . .... .. ........ . . 28 Consolidated Statements of Income . . . . . . . . . ......... .. . ........... .... 29 Consolidated Statements of Cash Flows ..... . ....... ... ....... ....... ..... .. . 30 Consolidated Statements of Income Taxes . . . . .. ....... ... .. ....... .... ... 31 Consolidated Balance Sheets . . . . . . . .... ... . .. . .... . ...... ... .. 32-33 Consolidated Statements of Capitalization ................. .. .. .  % 35 Consolidated Statements of Common Shareholders' Equity .. ... ..... . ........... 36 Notes to Consolidated Financial Statements . . . . . . . . . . .. ..... .... . . 37-45 Selected Consolidated Financial Data . .. . . ... .. . ... . . 46 Consolidated Statements of Quarterly Financial Data .. .. ....... .. .. ... . 47 Consolidated Operating Statistics:

General . ...... .. .. . . ........ ... .... ... ...... . . .. 47 Electric ... . . . ..... ... .. . ... . .. .. .. ..... ......... .... 48 Gas... . .... . .. . . ..... .... . . ..... . . .. .. . . 49 Shareholder Information . . . . .. ... .. . . ........... . ... .. .. 50 NORTHEAST UTILITIES ANNUAL REPORT 1987 21

MANA2EMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS a

Lis section contains Disa!Ionunces of Plant Costs remained consistently above management's assessment (SFAS 90) to The Connecticut book value, although the market-of Northeast Utilities' (the Light and Power Company's to-book ratio decreased fmm comoany or NU) financial (CL&P) disallowed portion of 1.49, as restated, at December 31, conc ition and the principal hiillstone 3. As discussed more 1986 to 1.23 at December 31,1987, factors which had an impact fully in "Notes to Consolidated generally reflecting the overall on the results of operations. Financial Statements," in movemerit in the market for Eis discussion should be read December 1987, CL&P retro- utility stocks. At December 31, in conjunction with the com- actively applied to 1986 a 1987, the closing price of the pany's consolidated financial charge to net income of company's common shares statements and footnotes. approximately $119 million to was $20.25 per share compared write off the portion of its to a book value of $16.53.

investment in hiillstone 3 that Common share dividends paid FINANCIAL CONDITION was denied recovery under a in 1987 were $1.76 per share.

July 1986 Settlement Agreement. The indicated annual dividend The company's financial rate for 1988 remains at $1.76 condition is still in a period Prior to the restatement,1986 per share. The decision to hold of recovery fmm significant earnings per share were $2.78. the dividend at this level construction and financing Thus,1987 earnings decreased reflects the company's current requirements to complete $0.67 compared to originally earnings prospects associated hiillstone 3. Cash flow remains reported 1986 earnings. Bis with a number of factors, weak. The company's debt decrease resulted primarily from including a decision to levels are high and equity levels regulatory actions that included expense all costs associated are low by industry standards, a cap placed on CL&P's with the completion of reflecting the financing of past earnings after July 1,1986, Seabmok 1 effective January 1, construction pmgrams, as well the inability of CL&P and 1988, the effect of the recently as an extended phase-in plan Western hiassachusetts Electric issued Connecticut for hiillstone 3, and the write-off Company (Wh1ECO) to earn a Department of Public Utility of plant costs to equity in 1986 return on portions of hiillstone 3 Control's (DPUC) rate decision and 1987. Improvement in the after April 23,1986, and for CL&P, and the expected company's capital structure is a limitation on CL&P's ability drop in NU's earnings after the necessary for the company to to recover certain fossil-fuel planned spin-off of the gas regain financial health. Noncash costs. In accordance with the business in 1939.

earnings, representing allow- provisions of SFAS 90, the ance for funds used during company's 1987 earnings were Seabrook construction (AFUDC) and the also reduced by $16.9 million as CL&P has a 4.06 percent deferred return on Millstone 3, a result of the write-off of CL&P's ownership interest in the decreased in 1987 with the pro rata share of Seabrook 1 Seabrook project. For financial completion of hiillstone 3 construction costs in excess of planning purposes, although construction and as an a $4.7 billion statutory limit in not at all assured, the company additional portion of the Connecticut. Although these is currently projecting that hiillstone 3 investment was costs were written off for financial Seabmok 1 will be placed in phased into rates. reporting purposes, the company service in April 1989 and that retains the opportunity to pursue CL&P's share of the total cost The company's earnings per full recovery of its Seabrook of the unit, including AFUDC, common share increased to $2.11 investment. The charges to net will be approximately $250 million.

in 1987 as compared to restated income for applying SFAS 90 to Although Seabrook 1 will 1986 earnings of $1.68. The the hiillstone 3 and Seabrook 1 have a high cost per kilowatt-restatement resulted from retro- investments had no current hour generated, based on actively applying Statement of cash impact. its total cost included in Financial Accounting Standards rates, the overall impact on No. 90, Regulated Enterpriscs- In 1987, the market price of CL&P customer rates will be Anwntingfor Ahmdonments and the company's common shares relatively small since it only 22

represehts a small portion of PSNH and other joint owners,- preparing applications for SEC the NU system's total gen- management cannot predict and DPUC approval, are

- erating capacity In addition, whether or when the unit will expected to occur in the spring bringing this unit into service as o serate. If Seabrook 1 of 1988. The spin-off is expected soon as possible is essential to u,timately does not operate, to be accomplished by.the our region's futurc energy supply CL&P would seek full recovery spring of 1989, although the ofits investment. While the timing is dependent upon in 1986, the DPUC initiated a DPUC has permitted CL&P to the progress of regulatory review, conducted by Theodore recover substantial portions of hearings.

Barry and Associates (TB&A), its investments in similar of the prudence of CL&P's and circumstances, management Competition / Cost Containment The United Illuminating cannot predict the extent to Self-generation, cogeneration, Company's (an unaffiliated which CL&P will be permitted and competition for wholesale Connecticut utility) investments to recover its Seabrook 1 customers fmm other electric in the Seabmok project. On investment. utilities are factors now facing September 15,1987, TB&A many utilities nationwide.

issued their report, identifying Gas Business Although the company's

. $1.38 billion of alleged imprudent In late 1986, the company electric rates are generally Seabrook expenditures through began a study of its strategic competitive at present, October 1,1986. Of that amount, options with respect to the gas management believes that its

. $942 million is attributed to business which is owned and ability to compete in certain e alleged mismanagement of operated by CL&P, including energy markets could be construction of Seabrook 1 by the possibility of divestiture. hampered by declining self-Public Service Company of The gas business currently generation costs, CL&P's -

New Hampshire (PSNH), the repn sents less than 5 percent current inappmpriate rate lead participant in the project. of the company's net assets. designs among customer The remaining $4M million classes, and pmjected increases represents expenditures on In July 1987, CL&P no'ified in operating costs. It is Seabmok 2 made after April 1, the Securities and Exchange anticipated that, if no action 1981, the date which TB&A - Commission (SEC) of its were taken, the company could contends Seabrook 2 should intention to pursue a face a substantial loss of large have been canceled. divestiture of its gas business commercial and industrial and, in October 197/, CL&P customers who may conclude Although CL&P is a minority announced it was developing that they can save money by owner, TB&A's report criticized alans to divest its gas business generating their own electricity.

CL&P for paying inadequate ay transferring its gas assets to in addition, the company's attention to PSNH's manage- a new gas company and then subsidiaries have lost a ment of the project. CL&P distributing the stock of that aortion of their wholesale disagrees with the report's company to NU shareholders. ausiness due either to these conclusions in many respects The new company would not customers acquiring capacity and has submitted comments, be an affiliate or subsidiary entitlements in new generation as requested by the DPUC, on of NU and, following or to price competition. The issues related to the TB&A divestiture, its stock would be company's subsidiaries have report. Hearings are expected to independently owned and identified that there is a take place in 1988. Management traded. Management believes potential to lose as much as 20 cannot predict the outcome of this particular divestiture percent (approximately 740 this process, approach best meets the megawatts) of their electric load interests of electric and gas by the early 1990s, if nothing is ,

. As discussed here and more customers, employees, and done to respond to these fully in "Notes to Consolidated shareholders. competitive forces. This potential Financial Statements," many loss of electricload could result uncertainties continue to The spin-off must be in even a greater percentage surround the Seabmok project. reviewed and approved by reduction of net income.

In light of these substantial the DPUC and the SEC. 'Ihe

. uncertainties affecting Seabrook 1, initial steps in forming the new in response to these new chief of which are difficulties in company, such as defining competitive forces, the obtaining an operating license the operational needs of an company has instituted a three-and the financial problems of independent gas business and part strategy to change the 23 v- - - - - - v - ew . -.m-ee- -m .r e.e - sn ~- m-~-~ mcv . ~-.-ne -----e - --- -~ - - - -- w _ --

way it does business. First, a Ebetric the system's 1987 electric' marketing plan has been Construction Expenditures construction expenditures of -

developed to retain existing am mooucnon a mmswssa $305 millica were the lowest load, assist customers in the since 1980. For more than a efficient use of energy, and m asma decade, expenditures for new enhance already high levels of Actun base-load electric generating customer service. Second, an $ Maiions facilities had been the 800 aggressive cost management dominant component of the program, designed to reduce con;truction program. By and maintain pmjected 700 _ contrast, future projects nonfuel operation and included in the current maintenance costs through construction program are 1990 at levels below those of 600 - mainly for improvements to 1987, has been implemented, existing transmission, and third, CL&P has proposed distribution, and generating the adoption of cost-based rates 500 -

facilities and are expected to whereby customers are require less funding and charged rates that are equal to 400 _ involve shorter construction the actual cost of providing W periods. The charts on this them service. 3 page show both the reduction 300 -

in the overall level of electric Management believes that ,

construction expenditures for the potential impact of the period 1988 through 1992 competition has been 200 -

compared with the period 1983 identified far enough in through 1987 and the change in advance to minimize the 300 _ the nature of the expenditures.

potential adverse effects on financial results through the The DPUC recently reviewed implementation of these strategies. The management 1983 1984 1985 1986 1987 .Y transnussion and distribution actions already taken and systems. In a draft dedsion, being planned shou'd enable the DPUC found that CL&P's the company to enhance its current level of reliability is ability to compete in the unsatisfactory and ordered marketplace and maintain its PMCM

$ Manons ({gp to file plans to improVC high standards of performance 800 reliability for review by tne and reliability in the future. DPUC. Management has filed its response taking issue New Accounting Standard 700 - with portions of the DPUC's In December 1987, the draft decision. Although a Financial Accounting gg_ final order has not been issued, Standards Board issued this decision could result in Statement of Financial future increases in CL&P's Accounting Standards No. 96, 500 - construction program and/or  ;

Acmunting for Income Taxes operating expenses.

(SFAS %). SFAS % supersedes previously issued income tax 4N - Financing accounting standards and it is essential that the system will be effective in 1989. The 3gg _ companies maintain their company expects that when progress toward financial health i SFAS % is adopted it will ,

so as to assure continuing l significantly increase assets 200 - g i access to debt and equity capital and liabilities but will not have  ! i markets whenever needed to 1

+

a material effect on net income.

100 -

>[ f. l.

L" implement their ongoing l construction programs, to ENE l

Construction Program refund debt maturities, and to Because of the com aletion g MMM meet other cash requirements.

of Millstone 3 in Apri 1986, 1938 19S9 1990 1991 1992 Cash requirements in excess of 24

Soutces cf Funds (including a return) are Financial Statements," in June

. (perc:ntage cf deferred and recovered over a 1987, the DPUC approved a t:tal requirements) period of two to nine years. The new agreement which IIM INTERNAL IE2i (ONG TERM chart on this page illustrates the amendea CL&P's July 1986 ocar relative percentages of all major Settlement Agreement.

m ccwoN sisis orsEs. sources of funds for the five- The Amended Settlement

,QRES tnRED A )M E

• 8 EM, M Stoc< LEASES effective January 1,1987, The system companies among other things, allowed Percent issued approximately an additional phase-in of 20 100 $408.5 million of first mortgage percent of CL&P's recoverable gg - bonds, preferred stock, pollution hiillstone 3 investment into control bonds, and intermedia:e- rate base, reduced the upper go _ term notes in 1987. As in limit on CL&P's return on recent years, a large portion of equity from 16 percent to 14.5 70 - ~ , the proceeds from these issues percent, and prohibited CI &P was used to redeem, prior to from recovering certain f. ;il-60 maturity, high-interest-rate debt fuel costs. The impact of 50 - [

j; g . and high-dividend preferred limitations placed on CL&P's 3 stock to lower the company's return on equity and allowed cost of capital. level of fossil-fuel costs reduced 1987 earnings by 30 - CL&P and WN1ECO approximately $15 million.

continue to utilize a nuclear fuel 40 _ I 20 - trust to finance nuclear fuel As discussed earlier, the

,g_ requirements for hiilistone 1 adoption of equitable, cost-and 2 and their ownership based rates is an objective o share of hiillstone 3. As of CL&P is pursuing in an effort 1983 1984 1985 1986 1987 December 31,1987, the trust's to reflect more fairly the cost of investment in nuclear fuel was providing service to each class internally generated funds are $356.2 million. Nuclear fuel of customers and to meet the generally financed through requirements of $318.1 million challenge fmm new competitive short , intermediate , and long- for the years 1988 to 1992 are forces. As a result, on August 7, term borrowings, nuclear fuel expected to be financed by the 1987, CL&P filed an application trust financing, leasing trust, with the DPUC to amend retail agreements, and the sale of electric and gas rates whereby preferred stock. In addition to In 1987, the system each class of customers would construction and nuclear fuel companies reduced available be charged rates equal to the requirements, the system credit facilities and lines by actual cost of providing service.

companies are obligated to $10 million, leaving $388 million The application requested meet maturities and cash available. At December 31, appmval of rates that would sinking-fund requirements 1987, $25 million was outstand- have produced an annual totaling $525.8 million for the ing under these credit lines. electric revenue decrease of years 1988 through 1992. approximately $15 million.

In 1988, if favorable market External financing will conditions permit, the syttem On February 4,1988, the continue to be necessary to companies intend to continue DPUC issued a rate decision, meet total cash requirements, their program of refinancing effective January 1,1988, which although not at the levels of high-interest-rate debt and left electric rates essentially years past, since projected high-dividend preferred unchanged and lowered construction expenditures stock at lower costs. The gas gas rates by approximately have been substantially divestiture is not expected to $10.4 million annually. The reduced. A portion of external affect financing requirements order provided for the phase-financing requirements is for 1988. in of an additional 8 percent of needed to cover the cash hiillstone 3 costs, bringing the shortfall resulting from the Rate hiatters total to 48 percent, and it hiillstone 3 phase-in plans, As discussed more fully increased the amortization of since such phase-in costs in "Notes to Consolidated the deferred hiillstone 3 return 25

1987 Rsysnus Dollar and other expenses pmposed decision granting WA1ECO an (cants par dollar of revsnue) by CL&P. The DPUC ordered, $11.0 million increase in annual among other things, a revenues of its requested WHERE IT CAME FROM reduction in CL&P's return on increase of $23.5 million. In its uccTRic is7 0e>- tyuity to 12.6 percent from the decision, the DPU granted ]

o r THER (3 0c) 14 percent previously allowed Wh1ECO the entire second and the 14.75 percent requested step of the five year phase-in and pmvided for amortization of its ownesip share of the in 1988 of the Rate hioderation hiillstone 3 unit that was found Fund balance of $77.7 million at to be "useful" by the DPU in its December 31,1987. The order 1986 rate decision. Also in its also redumd revenue decision, the DPU allowed requirements by $17.5 million Wh1ECO to begin recovering as a penalty associated with tne ileferred return on the l capacity sales, prohibited recoverable but not yet phased-recovery of certain fossil-fuel in portion of its hiillstone 3 costs, and pmvided for a investment and autborized

$10 million one-time credit to the second year of a ten-yer electric customers in 1988. amortization of the nonequity Issues regarding rate design portion of Wh1ECO's WHERE IT WEN 1 innstment.

beginning m the spn.ng of 1988.

a hianagement is extremely In December 1987, Wh1LCO disappointed by this decision filed an application with the and concerned that the DPU requesting an increase in long-term interests of both annual electric revenues of customers and shareholders $24.1 million. The increased will not be served by such an revenues are required

, order. The combined effect of primarily to provide for the this decision will very likely third step of the five-year prevent CL&P from earning it3 phase-in of allowed hiillstone 3 allowed return on equity On construction costs.

h1 arch 4,1988, CL&P initiated t

2,',"o ,",,M,Cn an appeal to the Hartford twoccs m en Superior Court seeking to RESULTS OF OPER ATIONS i "gsN9 m l reverse the pation of the

.w6ES ANO deOslon reduang revenue ,The respective sizes of the en,r ras 06 3n requirements by $17.5 million system's continuing operations

- TA> ts o a en as a penalty associated with and the relative magnitude E[$5Ss#S $ @c7 ' capacity sales. of the various expenses wcuc t.ct onn incurred are illustrated gg^gEFERAED In June 1987, the in the charts on this page.

e m .a c s sera n o hiassachusetts Department of rcn scn.tswc a o m Public Utilities (DPU) issued a Operating Revenues Operating revenues increased

$49.8 million from 1986 to 1987 and decreased $32.7 million Change in Operating Revenues from 1985 to 1986. The comportents of the change in Increase /(Decrease) 1987 vs.1986 19 6 vs.1985 ""E ""# #

past tsvo years are provided in e.e.,n. d <mm the table on this page.

Fuel cost recoveries $(41.3) $(149.0)

Regulatory decisions 64.7 50.2 Fuel cos. recoveries Sales and other 26.4 66.1 decreased in 1987 prima;ily Total revenue change $ 49.8 because of lower cost energv

$ (32.7) provided by hiillstone 3, 26

which Treplaced higher cost Electric energy expenses compared to 1986. This decrease fossil-fuel generation, decreased $168.9 million in was caused by a lower average

- Millstone 3 was operational for 1986 as compared to 1985. This construction work in progress a full year in 1987 and decrease was primarily the (CWIP) balance, reflecting the i epproximately eight months in result of lower fossil-fuel prices commercial operation of 1986.- Revenues related to and lower cost energy pmvided hiillstone 3 in April 1986. The regulatory decisions increased by the operation of hiillstone 3, deferred return on hiillstone 3 in 1%7 primarily as a result of partially offset by higher kWh increased $22.5 million. This

- the recovery of nonfuel costs requirements in 1986. increase reflected a full year of associated with the commercial returns on phase-in plans in operatien of hiillstone 3. Other Operation and 1987 compared to a partial year These increases were partially hiaintenance Expenses in 1986, partially offset by offset by greater revenues Other operation and CL&P and WhiECO reflecting reserved under CL&P's Rate maintenance expenses an additional 20 percent of hioderation Fund in 1987. increased $105.2 million in 1987 their recoverable portions of Electric sales incr( wd compared to 1986 primarily hiillstone 3 into rate base primarily because of the because of the first full year of effective January 1,1987 and continued gmwth in the expenses associated with the June 30,1987, respectively regional economy operation of hiillstone 3, the Total debt and equity AFUDC hiillstone 1 refueling and decreased $102A million in 1986 Fuel cost recoveries maintenance outage, and the compared to 1985. This decreased in 1986 primarily general impact of inflation on decrease, which was caused because of lower fossil-fuel most expenses in 1987. by a lower average CWIP prices and the effect of balance reflecting the increased nuclear generation Other operation and commercial operation of which replaced higher cost maintenance expenses hiillstone 3, was more than fossil-fuel generation. increased $55.8 million in 1986 offset by the deferred return Revenues related to 1986 compared to 1985 prinwily of $107.0 million on the regulatory decisions increased because of expenses associated hiillstone 3 investment not primarily as a result of the with operating hiillstone 3, included in rate base.

recovery of nonfuel costs higher capacity charges from associated with the operation Connecticut Yankee Atomic of hiillstone 3. The sales Pbwer Company resulting from GAS OPERATIONS increase in 1986 was primarily its refueling and maintenaace the result of improved outage in 1986, and the general Income from gas operations economic conditions impact of inflation on most to be divested increased in 1986. expenses in 1986. $3.9 million in 1987 compared to 1986 primarily because of a Electric Energy Expenses Depreciation Expense 9.0 percent increase in gas s .les Electric energy expenses, Depreciation expense increased as a result of the availability and which include fuel and net $32.2 million in loS7 as compared lower cost of gas compared to purchased and interchange to 1986 and $14.0 million in 1986 other fuels. Fuel cost recoveries power, decreased $27.5 million as compared to 1985 primai y decreased $7.5 million in in 1987 as compared to 1986. because of the commercial opera- 1987 compared to 1986 and This decrease was primarily tion of hiillstone 3 in April 1986. $13.8 million in 1986 compared beause of lower cost energy to 1985 reflecting lower gas provided by the operation of Taxes costs incurred by the company hiillstone 3 and the matching of Federal and state income taxes and charged to customers, revenues and expenses under decn ased $56.7 million in 1986 the provisions of the company's companzd to 1985 because of the energy adjustment clauses. write-off of CL&P's disallowed These decreases were partially hiillstone 3 investment.

offset by greater kilowatt-hour (kWh) requirements in 1987 Allowance for Funds Used and the effect of the DPUC During Construction and prohibiting CL&P from Deferred hiillstone 3 Return recovering certain fossil-fuel Total debt and equity AFUDC costs. dccreased $68.6 million in 1987 27

Northeast Utilities and Subsidiaries COMPANY REPORT

• The consolidated financial statements of Northeast Utilities and subsidiaries and other smtions of this Annual Report were prepared by the company These financial statements, which were examined by Arthur Andersen & Co., were prepared in accordance with generally accepted accounting principles using estimates and judgment, where required, and giving consideration to materiality.

The company has endeavored to establish a control environment that encourages the maintenance of high standards of conduct in all of its business activities. The company maintains a system of internal accounting controls that is supported by an organization of trained management personnel, policies and procedures, and a comprehensive program of internal audits. Through established programs, the company regularly communicates to its management employees their internal control responsibilities and policies prohibiting conflicts of interest.

The Audit Committee of the Board of Trustees is composed entirely of outside trustees. This committee meets periodically with management, the internal auditors, and the independent auditors to review the activities of each and to discuss audit matters, financial reporting, and the adequacy of internal accounting contmis.

Because of inherent limitations in any system of internal accounting controls, errors or irregularities may occur and not be detected. The company believes, however, that its system of internal accounting controls and control environment provide reasonable assurance that its assets are safeguarded from loss or unauthorized use and that its financial records, which are the basis for the preparation of all financial statements, are reliable.

AUDITORS' REPORT To the Board of Trustees and Shareholders of Northeast Utilities:

We have examined the consolidated balance sheets and consolidated statements of capitalization of Northeast Utilities (a Massachusetts trust) and subsidiaries as of December 31,1987 and 1986, and the related consolidated statements of income, common shareholders' equity, cash flows and income taxes for each of the three years in the period ended December 31.1987. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed more fully in Note 8, a number of licensing, regulatory and other uncertainties currently exist relating to the Seabrook nuclear project. Because management is unable to predict how these uncertainties will be resolved, they cannot now predict what portion of the investment in the Scabrook project (approximately $212 million at December 31,1987) will ultimately be recoverable.

In our opinion, subject to the effect on the 1987 consolidated financial statements of such adjustments,

) if any that might have been required had the outcome of the uncertainties referred to above beca known,

! the financial statements referred to abose present fairly the financial position of Northeast Utilities and subsidiaries as of December 31,1987 and 1986, and the results of their operations and cash flows for each of l

the three years in the period ended December 31,1987, in conformity with generally accepted accounting principles. Also, in our opinion, except for the change (with which we concur) in accounting for pension

costs as discussed in Note 7, the accounting principles were applied on a consistent basis after giving retroactive effect to the change (with which we concur)in the method of accounting for disallowances of plant I costs as described in Note 1.

Hartford, Connecticut ARTilUR ANDERSEN & CO.

February 26,1988 28 l

1 1

Northeast Utilities and Subsidiaries GCNSOLIDATED STATEMENT 0 CF INCCME For tI1e Years Ended December 31, 1987 1986 1985 (Thousands of Dwars, ewept share informanon)

Operations Excluding Gas Operations To Be Divested:

Opera ting Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,878,082

$ 1,828,303 $ 1,861,011 Operating Expenses:

Operation -

Fu el . . . . . . . . . . . . ........ .... ............. ... 385,725 428,895 421,712 Purchased and interchange power, net . . ....... . ... . (20,542) (36,192) 139,929 Otiier . . ............... .... ... ........ .... 564,150 508,709 436,270 Maintenance . . .. ... .... .................. .... 208,023 158,223 174,820 Dep recia tio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,431 160,217 116,260 Federal and state income taxes (See Consolidated Statements of Income Taxes) . . . . . . . . . . . . ......... . 123,160 172,932 166,146 Taxes other than income taxes . . . . . . . . . . . . . . . ..... 147,879 155,143 139,4M Total operating expenses . . . . . . . . . ................ 1,600,826 1,547,927 1,594,621 Operating Income . . . . . . . . . .. .. .. ........... .. .. 277,256 280,376 266,390 Other Income:

Allowance for other funds used during construction ........ 13,467 67,M3 145,557 Deferred Millstone 3 return - other funds ....... ........ 94,217 78,736 -

Equity in earnings of regional nuclear generating companies . . . ............. .......... . . . . 11,368 12,928 12,201 Write-off of plant costs (Notes 1 and 8) . . . . . . . . . . . . . . . (24,122) (184,432) -

Other, net . . . . ...... ....... ... ........ ...... (2,468) (2,3M) (2,035)

Income taxes - credit . . . . . . . .. . ........... .. . 52,216 126,%1 60,557 Other income, net . ................. ... ... . . 144,678 _ 99,182 216,280 Income before interest charges . . . . . . . . . . . . . . . ... . . 421,934 379,558 482,670 Interest Cnarges:

Interest on long-term debt ...... . ...... . .... .. . 203,065 208,918 210,733 Other interest ... . . ........ . .... ... 17,713 19,273 7,489 Allowance for borrowed funds used during construction .. ..... ... ..... .. . . . . (16,632) (31,354) (55,526)

Deferred Millstone 3 return - borrowed funds, net of income taxes . . . . . . . . . . . . ... .. .. (35,324) (28,278) -

Interest charges, net . . ... . .. ... 168,822 168,559 162,6 %

Income after interest charges .. . . .. . . .... 253,112 210,999 319,974

• Preferred Dividends of Subsidiaries . . . ... . 38,583 35.765 42,206 Income from Continuing Operations . .... . . .. 214,529 171,234 277,768 Income from Gas Operations To Be Divested (Note 2) . .. . 14,616 10,705 10,773 Nct Income . .. ... . . . ...... ... .. . . $ 229,145 $ 181,939 $ 288,M1 Earnings Per Common Share:

Continuing operations . . .. . .... . ... . ... $ 1.97 5 1.58 $ 2.62 Cas operations to be divested .. . ...... . . .14 .10 _

.10 Net income .. . ... ... .. . . .. .. ......... $ 2.11 $ 1.68 $ 2.72 Common Shares Outstanding (average) .. . . 108,669,106 108,352,517 106,221,131 The awompanpng notes are an integral part of the e financial statemento 29

-Northeast Utilities and Subsidiaries -

' ENSOLIDATE3 STATEMENTS CF CACH FLGWS .

For the Years Ended December 31, 1987 1986 1985 (Thousana of Dollars)

Cash Flows From Operations:

Income before preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . $253,112 $210,999 $319,974 Adjusted for the following:

Deprecia tio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,970 1M.681 116,260 Amortization of leased property . . . . .. .............. ... 120,987 112,371 52,499 Defernxi income taxes, net .... ...... .. ... . ... .. .. 51,473 7,994 90,798 Deferred return-Millstone 3 . . . ......... ............ . (129,M1) (107,014) -

Allowance for other funds used during construction ....... .. (13,467) (67,M3) (145,557)

Rate moderation fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,3M 52,390 -

Write-off of plant costs (Notes 1 and 8) .................... 24,122 1M,432 -

Amortization of deferred charges and other noncash items . . (26,433) (1,808) (24,584)

Changes to working capital:

Receivables and accrued utility revenues . . .......... . (10,831) 17,986 1,970 Fuel, materials and supplies . . . . . . . . . . . . . . . . . . . ... . (16,268) (4,7M) 5,753 Accounts payable . . . . . . . . . . . . . . . . ... ...... . . .. (11,027) (27,150) 53,329 Accrued taxes . . . . ................. ........ . . .. (57,430) 17,7M (22,137)

Other working capital (excludes cash) . . ............. . 11,2N (1,419) 15,576 Net cash flows from continuing operations . . . . . . . . . . . . . . . . . 4M,175 559,119 463,881 Net cash flows (mm gas operations to be divested (Note 2) . . . . . 30,348 30,681 32,851 Net cash flows from operations . . . . . . .......... ... .. 434,523 589,800 4 % ,732 Cash Flows From Financing Activities:

Common shares . . . . . . . . . . . . . . . . . . . ... ........ ... . - 27,977 42,415 Preferred stock . . . . . . . . . . . . . . . . .... .. ......... . 80,000 - -

Long-term debt ................... . .. .... ........ 328,549 461,006 276,897 Increase in obligations under capital leases ....... . ...... . 114,128 95,M3 112,190 Millstone 3 construction tmst . . . ... ... ... .......... . -

(%,989) 41,950 Net increase in short-term debt . ................ . . . . 83,000 10,750 85,750 Reacquisitions and retirements of long-term debt and preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (232,835) (335 605) (141,721)

Premium on reacquisitions and financing expenses .......... (23,802) (10,173) (11,583)

Repayment of capital lease obligations . .. . .. .... .. (121,627) (96,786) (63,753)

Cash dividends on preferred stock . . . . . . . . . . . . . . ........ (40,451) (41,691) (44,259)

Cash dividends on ccmmon shares ....... .. . ..... . . . (191,258) (182,0M) (167,829)

Net cash flows from financMg activities . . . ... .. ..... (4,2%) (168,202) 130,057 Investment In Plant (including capital leases):

Electric and other utility p' ant .. . ..... .. . .. .... .. (3M,939) (392,162) (652,570)

Gas utility plant . . . . . ..... ... . .. . . (24,558) (21,192) (19,786)

Nuclear fuel ...... . .. ... .. .. . . (122,163) (76,117) (92,689)

(451,660) (489,471) (765,N5)

Less: Allowance for other funds used during construction .. (13,467) (67,343) (145,557)

Net investment in plant . . .. . .. .. . . . (438,193) (422,128) (619,488) nit Increase (Decrease) In Cash For The Period .. . ... . $ (7,966) $ (530) $ 7,301 30 The acompanying notes are an integral part of these financial statements.

Northeast Utilities and Subsidiaries

? CNSOLl2ATED STATEMENTS GF INCCME TAXES For the Years Ended December 31, 1987 1986 1985 (Uwusands of Dollars)

The components of the federal and state income tax provisions charged to continuing operations are:

Current income taxes:

Fed e ral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... $ 15,706 $ 17,182 $ 3,992 State........................................... 3,765 17,920 10,799 Total cu rren t . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... 19,471 35,102 14,791 Deferred income taxes, net:

Investment tax credits ................................ (2,582) 25, % 2 24,679 Federal . ...... . ... .... ....... ............. 49,932 (5,889) 53,230 State ............. . .. ........ ... .............. 4,123 (9,2N) 12,889 I o ta l d e fe rred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,47_3 10,869 90,798 Taxes on borrowed funds portion of allowance for funds used during construction (AFUDC) and deferred hiillstone 3 return ......... ....... ...... 39,420 61,170 58,207 Total income tax expense . .. ........... .. .. 110,3M 107,141 163,796 Less: Income taxes (credits) included in other income, net of the tax effects of the borrowed funds portion of AFUDC and deferred hiillstone 3 return ... ... . .. (12,796) (65,791) (2,350)

Income taxes charged to operating expenses . . . .. .... .... $123,160 $172,932 $166,146 Deferred income taxes are comprised of the tax effects of timing differences as follows:

Investment tax credits . . . . . . . . . . . . . . . . . . ............ $ (2,582) $ 25,962 $ 24,679 Liberalized depreciation, excluding leased nuclear fuel . . . . . . . 81,316 69,316 19,938 Construction overheads . . . . . . . . . . . ..... ... ........ 8,062 405 21,586 Liberalized deprwiation and capitalized interest on leased nuclear fuel ... .... . ........... (18,983) (8,719) 19,630 Decommissioning costs . . . . . . .......... ........... (461) (4,972) (3,977)

Settlement credits-nuclear fuel . . . . . . . . . .. ...... 9,948 1,035 (4,132)

Energy adjustment clauses . ...... . .. . .. .... 6,649 (9,956) 6,486 Spent nuclear fuel disposal costs . . . . ............... (M1) (904) 7,607 Rate moderation fund . . .. . .. ....... .. ..... ... (12,509) (18,097) -

Canceled nuclear project . . . . . . . . . .... . ........ (914) 8,250 -

Write-off of plant costs ...... ... . ........... (5,854) (48,115) -

Altemative hiinimum Tax . . ... ... . .... .... . (15,895) - -

Other . .. . ... ... .. . .. . ........ .. . .. 3,137 (3,336) (1,019)

Deferred income taxes, net . . . .. ... .. .. ...... . S 51,473 $ 10,869 $ 90,798 The effective income tax rate is computed by dividing total income tax expense by the sum of such taxes and income after interest charges. The differences between the effective rate and the federal statutory income tax rate are:

Federal statutory income tax rate . .. . . . .... . . 39.95 % 46.007c 46.007c Tax effect of differences:

Depreciation differences . . .. . ..... . .. .... . 3.56 4.19 1.N Other funds portion of AFUDC not recognized as income for tax purposes ..... . . . . . ..... ... . (1.48) (9.65) (13.M)

Deferred hiillstone 3 return-other funds .. . .. ... .. (10.36) (11.47) -

Construction overheads-portion not deferred . . . . . . (.29) (2.18) -

Investment tax credit amortization . .. ... . ... . (2.43) (2.86) (1.72)

State income taxes, net of federal benefit .. . .... ... 2.63 3.41 3.99 Write-off of plant costs . . . . .. .. .. . ... .68 8.17 -

Other, net . ...... . . ...... . .. .... . (1.90) (1.94) (1.61)

Effective income tax rate . . . .. . . . . .. .. 30.36 % 33.67'7c 33.86r.7e lhe awompanying notes are an integral part of these fmancial statements. 31

Northeast Utilities and Subsidiaries

• CCNSOLIDATED DALANCE CHEETS .

At December 31, 1987 1986 ghousanas of oars)

Utility Plant, at original cost:

Elec tric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,974,207 $5,725,573 Other......................................................... 62,758 58,M3 6,036,965 5,783,916 Less: Accumulated provision for depreciation . . ...... . .......... 1,467,003 1,M5,567 4,569, % 2 4,438,M9 Construction work in progress . . . . . ................... .......... 329,327 339,488 Nuclear fuel, net .... ............... .......................... 366,139 350,288 Net utility plant, continuing operations ........... ..... ...... 5,265,428 5,128,125 Gas plant, to be divested (includes construction work in progress of

$5,712,000 in 1987 and $3,994,000 in 1986) . . . . . . . . . . . . . . . . . . . . . . . 321,140 299,1N Less: Accumulated pmvision for depreciation ....... ............ 83,237 74,523 Net gas plant, to be divested (Note 2) . ........ .. ..... . .. . 237,903 224,581 Total net utility plant . . . . . . . . . . . . . . . . . . . . . . ................ 5,503,331 5,352,706 Oth:r Property and Investments:

Investments in regional nuclear generating companies, at equity . . . . . . . . 62,745 63,019 Other, at cost ................ ... ............. ... .... ...... 35,198 24,066 97,943 87,085 current Assets:

Cash and special deposits . . . . . . . . . . . . . . . . . . . . . . . . ............. 19,772 27,738 Receivables, less accumulated provision for uncollectible accounts of $11,057,000 in 1987 and $10,397,000 in 1986 . . . . . . . . . . . . . . . . . . .. 218,383 196,611 Accrued utility revenues . . . . . . . . . . . . . . . . . ..... ............ 90,343 101,2M Fuel, materials and supplies, at average cost . . . . . ... ......... ..... 141,5M 125,296 Accumulated deferred income taxes - current portion .... .. . ...... 41,758 -

Prepayments and other . . . . ... .... .... . ................ .. .. 14,7M 22,655 526,584 473,584 Deferred Charges:

Unamortized debt expense . . . . . . ..... . .. . ...... . . 11,311 9,815 Energy adjustment clauses, net . ....... .... .. .. .... .. .... 86,229 73,383 Unrecovered spent nuclear fuel disposal costs . . . . . . . . . . . . . . . . . . . . . 24,180 26,4N Canceled nuclear projects . . . ... . ... .... .. . .. . 21,659 24,0%

Deferred costs- hiillstone 3 . ... .. . . ...... ... .. . . .. 237,513 110,M7 Amortizable pn.perty investment - hiillstone 3 .. .. . ... . 92,868 103,095 Other . . . . . . . . . . . . . .. ..... ... . .... . 62,176 38,740 535,936 386,380 Total Assets ..... ... . . . .. ... . . . .. 56,663,794 $6,299,755 32 The accompnying notes are an integral prt of these hnancial staternents.

Northeast Utilities and Subsidiaries CONSOLIDATE 3 CALANCE SHEETS At December 31, 1987 1986

• ~"" "'

Ctpitalization and Liabilities Capitalization:(See Consolidated Statements of Capitalization)

Common shareholders' equity:

Common shares, $5 par value - authorized 225,000,000 shares at December 31,1987 and 130,000,000 shares at December 31,1986; outstanding 108,669,106 shares in 1987 and 1986 . . . . . . . . . . .. . $ 543,346 $ M3,M6 Capital surplus, paid in ............ .. .. ... ............. . 458,550 465,253 Retained earnings ...................... .. .... .. . ... .. 794,397 756,486 Total common shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 1,796,293 1,765,090 Preferred stock not subject to mandatory redemption . . . . . . . . . . . . . . . 291,193 291,195 Preferred stock subject to mandatory redemption . . . . . . . . . .. . ... 197,142 1M,392 Long-term debt .... ..... ........... .. .. ..... .. .... ...... 2,576,647 2,489,331 Total capitalization . . . . . . . . . . . . .. ...... .. .............. 4,861,277 4,710,008 Obligations Undet Capital Leases . .. ... .. . . . ............. 321,502 323,6 &l Current Liabilities:

Notes payable to banks ... . .............. ......... .. .... .. 90,500 119,500 Commercial paper . . . . . . . . . . . . .. .. ...... . ..... .. . 112,000 -

Long-term debt and preferred stock - current portion . ...... ...... 94,803 33,906 Obligations under capital leases - current portion . ..... .. .. 108,212 117,579 Accounts payable . . . . . . . . . . . . . . . . . . .......... ......... 142,917 152,975 Rate moderation fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .... 77,694 -

Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . ........ .. . ........ 54,401 111,831 Accrued interest . ... . . ........ . . . . ... ... ......... 59,612 69,157 Other . . ....., ............. .. ... ... .. ........... ...... 65,088 57,0M 805,227 662,002 Deferred Credits:

Accumulated deferred income taxes . . . . . . . . ........ . .... . 373,713 263,321 Accumulated deferred investment tax credits . . .... ........ .. . 267,6 % 272,224 Rate moderation fund .. . .... .. .. ........ . . ...

- 52,390 Other . . . . . . . . . . . . . . . . ....... ... .. . ...... . . . 31,379 16,206 672,788 604,141 Commitments and Contingencies (Note 8) l Total Capitalization and Liabilities .. . ..... $6,663,794 $6,299,755 The accompanying notes are an mtepal part of these fmancial statements. 33

Northeast Utilities and Subsidiaries GZNSOLCATE3 STATEMENTS CF CAPITALIZATISN At December 31, 1987 1986 mosanau.t tuiam Common Shareholders' Equity (See Balance Sheets) ... .. ............. $1,796,293 $1,765,090 Cumulative Preferred Stock of Subsidiaries:

$25 par value-authorized 10,000,000 shares; outstanding 3,200,000 shares in 1987 and no shares in 1986

$50 par value-authorized 9,000,000 shares; outstanding 6,940,5(M shares in 1987 and 7,760,5(M shares in 1986

$100 par value-authorized 1,000,000 shares; outstanding 700,000 shares in 1987 and 1986 Current Redemption Current Shares Dividend Rates Pricas (a) Outstanding Not Subject to hiandatory Redemption:

$50 par value - $1.90 to 9.80 $ 50.50 to $ M.00 5,123,895 256,195 256,195

$100 par value - $7.72 to $9.60 $103.51 to $103.99 350,000 .. 35,000 35,000 Total Preferred Stock Not Subject to hiandatory Redemption .. 291,195 291,195 Subject to hiandatory Redemption: (b)

$25 par value - $1.90 to $2.275 $ 26.90 to $ 27.28 3,200,000 .. 80,000 -

$50 par value - $5.24 to $7.52 $ 52.76 to $ 55.M 816,609 40,832 81,832

$50 par value- Adjustable Rate $ 56.15 1,000,000 . 50,000 50,000

$100 par value- Adjustable Rate $112.00 350,000 . 35,000 35,000 Total Preferred Stock Subject to hiandatory Redemption ........ ... 205,832 166,832 Less: Preferred Stock to be redeemed within one year . ... ....... ... 8,690 2,4 10 Preferred Stock Subject to hiandatory Redemption, Net . .... .... . . 197,142 1M,392 Long-Term Debt:  !

First hiortgage Bonds -

hiaturity Interest Rates 1987 'i 3/8% to 5% ... . . .. ... ... .. - 27,000 1988 3-7/8'7e to 4-3 '8% . . . . . . . . . . . . . . . . . . . . . .. . 48,000 48,000 1990 4-7/8% to 13.35% . . . . . . . . . . . . . . . . . . . . . . . 34,260 35,140 1992 4-3/8% to 15-5/8% . . . . .. ... ... . . .. . 8,000 47,200 1993-1997 4-1/4% to 15% . . . . . . .. .. . . .. .... 674,022 440,427 1998-2002 6-1/2% to 11% . . . . . .. ......... .... . 4M,407 455,395 2003-2007 7-1/2% to 9-1/4% .. . .. . .. 285,000 285,000 2008-2012 9-1/4% to 15% . .. . . . ... . .. . . 102,274 185,100 2013-2016 9-3'4% to 12% . ...... . .... .. 99,000 99,750 Total First hiortgage Bonds . .. .. .. . .... .. .. 1,684,963 1,623,012 Other Long-Term Debt -

Ibliotion Control Notes -

1987-2007 5.90% to 10% .. . . .. . ... ... ... . 34,190 36,525 2003-2017 Adjustable Rate . . . . .. .. . 397,500 357,500 Notes - 1988-1992 7.96% to 9.23% .. . 275,000 275,000 Fees and interest due for spent fuel disposal costs . .. .. 116,935 11!,M1 Other ... .... . . .. .. . . . .. . 158,655 121,557 Total Other Long-Term Debt ... ..... ... . . .. . . . . 982,280 901,'.823 Unamortized premium and discount, net . ... . . .. (4,483) (4,138) j Total Long-Term Debt (c) . . . .. . 2,662,760 2,520,797 Less: Amounts due within one year .. . . . 86,113 31,466 Long-Term Debt, Net . . . . 2,576,M7 2,489,331 Total Capitalization . . . M,861,277 M,710,008 M The aaompanying notes are an integral part of these finanaal statements.

Northeast Utilities and Subsidiaries C2NSOLIDATEJ GTATEMENTO CF CAPITAL 1Z ATICN (NOTES)

(a) During their respective initial five- (c) Long term debt maturities and year redemption periods, each of cash sinking-fund requirements these series is subject to certain on debt outstanding at December 31, refunding limitations. Redemption 1987 for the years 1988 through prices reduce in future years. 1992 are: $87,591,000,

$103,565,000, $110,823,000, (b) 'Ihe minimum sinking-fund $104,056,000, and $80,486,000, provisions of the series subject to respectively. In addition, there are mandatory redemption aggregt te annual 1 percent sinking and

$8,750,000 in 1988 and 1989,- improvement-fund requirements,

$6,750,000 in 1990 and 1991, and currently amounting to

$8,250,000 in 1992. In case of default $15,580,000, $15,555,000, on sinking-fund payments, no $15,530,000, $15,439,000, and payments may be made on any $15,334,000 for the years 1988 junior stock by way of dividends . . through 1992, respectively Such or otherwise (other than in shares sinking- and improvement fund of junior stock) so long as the requirements may be satisfied by default continues. If a subsidiary the deposit of cash or bonds or by is in arrears in the payment of certification of property additions. ,

dividends on any outstanding Essentially all utility plant of The

- shares of preferred stock, the Connecticut Light and Ibwer subsidiary would be prohibited Company (CL&P) and the Westem from redemption or purchase of hiassachusetts Electric Company .

less than all of the preferrN (WhfECO), wholly owned ,

stock outstanding. subsidianes of Northeast Utilities, is subject to the liens of their Changes in Preferred Stock Subject to respective first mortgage bond -

hiandatory Redemption: mdentures. In addition, CL&P Balance, January 1,1985 $186,978 and Wh1ECO have secured Reacquisitions and $M6.1 milhon of pollution control retirements . . . . . . . . (1,145) n tes with second mortgage liens on hiillstone 1, junior to the Balance, December 31,1985 185,833 liens of their respective first Reacquisitions and mortgage bond indentures.

retirements . . . . . . . (19,001)

Balance, December 31,1986 166,832 issu es . . . . . . . . . . . . . . 80,000 Reacquisitions and retirements . . . . . . . . (41,000)

Balance, December 31,1987 $205,832 I

I

[

35

Northeast Utilities and Subsidiaries CONSOLIDA.TE] STATEMENTS CF GCMMEN SHAREH2LDERS' EZ.UITY Capital Common Surplus, Retained Sharcs Paid in Earningsw Total (Thouunds of Dollars)

B: lance at January 1,1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $522,633 M17,198 $635,869 $1,575,705 Net income for 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,M1 288,M1 Cash dividends on common shares - $1.58 pr share . . . . . (167,829) (167,829)

Issuance of 2,753,300 common shares, $5 pai value . . . . . . 13,766 28,M9 42,415 Gain on reacquired preferred stock net of common share and preferred stock issuance and retirement ex pe nses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 39 Btnce at December 31,1985 ........ ... ........ ... 536,4M 445,886 756,581 1,738,871 Net income for 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,939 181,939

Cash dividends on common shares - $1.68 per share . . . . . (182,0M) (182,0M)

Issuance of 1,388,268 common shares, $5 par value . . . . . . . 6,942 21,035 27,977 Common share and preferred stock issuance and retirement expenses and premium on reacquired preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,663) (1,663)

B:.1:nce at December 31,1986 ......... ................. 543,M6 465,258 756,486 1,765,090 Net in come for 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,145 229,145 Cash dividends on common shares - $1.76 per share . . . . . (191,258) (191,258)

I Preferred stock issuance and retirement expenses ar.d premium on reacquired preferred stock . . . . . . . . . . . (6,6M) (6,684)

Sale of minor subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24) 24 Balance at December 31,1987 ........... ............. $M3,M6 M58,550 $794,397 $1,796,293 (a) Certain consolidated subsidiaries have dividend restrictions imposed by their long-term debt agreements. At December 31,1987, under the respective agreements, there was approximately $235 million of consolidated retained earnings available for dividends.

l l

36 The accompanying notes are an mtegral part of these fmancial statements.

North' east Utilities and Subsidiaries

• NZ,TES TO CGNSOLCATED FINANCIAL STATEMENTS 1 hiillstone 3 Write-Off it is anticipated that the new gas to electric and gas service company's capital structure customers. Common operation In April 1986, hiillstone 3 will be similar to that of other and maintenance expenses are entered commercial operation. comparable gas distribution allocated primarily using As a result of 1986 rate actions companies, a formula consisting of three (discussed in Note 3), The components: gross alant, Connecticut Light and Dower The spin-off must be reviewed gross revenues, anc gmss Company (CL&P), a wholly and appmved by the Connecticut payroll. Interest charges and owned subsidiary of Northeast Department of Public Utility preferred stock dividends are Utilities (NU or the company), Contml (DPUC) and the Securities allocated primarily based on was denied recovery of and Exchange Commission the proportionate relationship

$1M.4 million of its investment (SEC). CL&P expects to file for of beginning-of-year net utility in hiillstone 3. SEC and DPUC approval of the plant balances.

gas spin-off during the spring In December 1986, the of 1988. The spin-off is expected Financial Accounting Standards to be accomplished by the 3. Summary of Significant Board (FASB) released Statement spring of 1989, depending on Accounting Policies of Financial Accounting the progress of regulatory Standards No. 90, Regulatof hearings. Principles of Consolidatiom Enterprises - Accounting for NU is the parent company of Alundonments and Disallotmnces In segregating the results of the Northeast Utilities system of Plant Costs (SFAS 90). SFAS 90 gas operations, the company (the system). The consolidated requires utilities to write off any alk) cates certain expenses financial statements of the costs of a recently completed common to both electric and company include the accounts plant which are disallowed in gas operations. The alk) cation of all wholly owned subsidiaries.

a rate proceeding. While methods have been prescribed Significant intercompany SFAS 90 must be applied no by the DPUC for use in estab- transactions have been later than January 1988, NU lishing rates to be charged eliminated in consolidation.

and CL&P elected to adopt SFAS 90 during 1987.

Summarized results of operations of the gas business are as follows:

In conformity with the recommendation of SFAS 90, Ibr the Years Ended December 31, 1987 1986 1985 NU and CL&P restated their m - na,a r a m 1986 financial statements to Operating Revenues $202,816 $203,814 $220,010 reflect the application of this Operating Expenses:

new standard. The write-off Operation -

of the unrecoverable portion Gas purchased for resale 97,638 105,434 118,877 of hiillstone 3 reduced 1986 Other 31,468 30,008 30,870 net income by approximately Maintenance 6,716 6,770 6,151

$119.0 million ($1.10 per share)- Depreciation 11,704 11,258 10,610 Federal and state income taxes 15,756 12,799 15,550

2. Gas Divestiture Taxes other than income taxes 13,717 15,318 15,589 Total operating expenses 176,999 181,587 197,M7 CL&P plans to divest its gas Operating Income 25,817 22,227 22,363 business py transferring its gas assets to a new gas company Other Income (Expense), Net (50) 124 183 and then distributing the stock income tvfore interest charges 25,767 22,351 22,M6 of that company to NU share- Interest Charges 9,283 9,720 9,720 holders. The new company Income after interest charges 16,484 12,631 12,826 would not be an affiliate or Preferred Dividends 1,868 1,926 2,053 subsidiary of NU and, following .

Inc me from Gas Operations To Be divestiture, its stock would be $ 10,705 $ 10,773 Divested $ 14,616 independently owned and traded.

37

y Northe .st Utilities and Subsidiaries

~

' NOTES TO CCNSOLIDATED FINANCIAL STATEMENTS Public Utility Regulation: NU CL&P and Wh1ECO have a spent fuel to the DOE. At is registered with the SEC 65.17 percent joint interest in December 31,1987, fees due as a holding company under hiillstone 3, a 1,150-megawatt to the DOE for the disposal the Public Utility liolding (h1W) nuclear generating unit. of prior period fuel are Company Act of 1935 (the 1935 As of December 31,1987, plant- approximately $116.9 million, Act), and it and its subsidiaries in-service and accumulated including interest costs of are subject to the provisions of depreciation included $34.8 million. The DPUC and the 1935 Act. Arrangements approximately $2.2 billion and the hiassachusetts Depart-among the system companies, $1N.7 million, respectively, for ment of Public Utilities (DPU) outside agencies, and other CMP's and Wh1ECO's joint have allowed for the recovery utilities covering interconnections, share of hiillstone 3. CMP's of spent nuclear fuel disposal interchange of electric power, and Wh1ECO's joint share of costs, including interest, in and sales of utility property are hiillstone 3 expenses is rate case or fuel adjustment subject to regulation by the included in the corresponding decisions based on the Federal Energy Regulatory operating expenses on the provisions of the Nuclear Waste Commission (FERC) and/or the accompanying Consolidated Iblicy Act of 1982. As of SEC. The operating subsidiaries Statements of Income. December 31,1987, approxi-are subject to further regulation mately $92.8 million had been for rates and other matters by Revenues: Utility revenues collected through rates.

the FERC and/or their applicable are based on authorized rates state regulatory commissions applied to each customer's Depreciation: The provW and follow the accounting use of electricity or gas. Rates for depreciation is calculated policies prescribed by the can be increased only through using the straight-line method respective commissions. a formal proceeding before based on estimated remaining the appropriate regulatory usefullives of depreciable Investments and Jointly commission. At the end of utility plant in service, adjusted Owned Electric Utility Plant: eacF accounting period, CL&P for net salvage value and CMP and the Western and Wh1ECO accrue an removal costs as approved by Massachusetts Electric Company estimate for the amount of the appropriate regulatory (WMECO), a wholly owned energy delivered but unbilled. agency. Except for major facilities, subsidiary of NU, own common depreciation factors are applied stock of four regional nuclear Spent Nuclear Fuel Disposal to the average plant in service generating companies. These Costs: Under the Nuclear Waste during the period. hiajor facilities companies, with the system's Iblicy Act of 1982, CMP and are depreciated fmm the time ownership interests, are: Wh1ECO are paying the United they are placed in service. When States Department of Energy plant is retired from service, the Connecticut Yankee Atomic (DOE), on a quarterly basis, original cost of plant, including Ibwer Company (CY) 41.0% a fee of 1.0 mill per kilowatt- costs of removal, less salvage, is Yankee Atomic Electric hour (kWh) based on nuclear charged to the accumulated Company 31.5 generation beginning April 7, provision for depreciation.

Maine Yankee Atomic Ibwer 1983, for the disposal of spent Company (MY) 15.0 nuclear fuel and high-level The depreciation rates for Wrmont Yankee Nuclear Ibwer radioactive waste. the several classes of electric Corporation (VY) 12.0 and gas plant in service are For nuclear fuel used to equivalent to the following The system's investments in generate electricity prior to composite rates:

these companies are accounted April 7,1983 (prior period for on the equity basis. The fuel), the fees are based on the Year Electric Gas electricity produced from these amount of energy extracted from 1987 3.3% 3.9%

facilities is committed to the such fuel. As established by the 1986 3.4 4.0 participants based on their Nuclear Waste Iblicy Act o'f 1985 3.5 4.0 ownership interests and is 1982, payment for prior period billed pursuant to contractual fuel may be made anytime income Tases: The tax efftet of agreements, prior to the first delivery of timing differences (differences 38

Northeast Utilities and Subsidiaries

' ETES TG CCNSOLCATED FINANCIAL STATEMENTS between the periods in which construction program. These The DPUC has approved the

- transactions affect income in costs, which are one component use of a Generation Utilization the financial statements and the of the total capitalized cost of Adjustment Clause, which levels periods in which they affect the construction, are not recognized the effect on fuel costs caused determination of income subject as part of the rate base for rate- by variations from a 67 percent to tax)is accounted for in making purposes until facilities composite nuclear generation accordance with the ratemaking are placed in service. capacity factor. At the end of treatment of the applicable a 12-month period ending regulatory commissions. See As a result of the passage July 31 of each year, these net Consolidated Statements of of the Tax Reform Act of 1986, variations from the amounts income Taxes on page 31 for effective January 1,1987, included in base rate cost levels the components of income tax the NU operating companies are refunded to, or collected expense. discontinued capitalizing from, customers over the ,

AFUDC on a net-of-income subsequent 11-month period.

The company has not tax basis on all construction Should the annual nuclear provided deferred income taxes projects except for Seabrook I capacity factor fall below 55 for certain timing differences and a trash to-energy pmject percent, CLAP would have to during periods when a aplicable in Hartford, Connecticut, apply to the DPUC for permis-1 regulatory authorities c id not sion to recover the additional permit the recovery of such in 1987, AFUDC was fuel expense. During the income taxes thmugh rates capitalized at 9.4 percent, period from August 1,1986 to charged to customers. The except for the trash-to-energy July 31,1987, the composite cumulative net amount of income project and Seabrook 1, which nuclear generation factor was tax timing differences for which were capitalized on a net-of- 74.5 percent, resulting in a fuel deferred taxes have not tven income tax basis at 6.2 percent cost savings of appmximately provided was approximately and 6.7 percent, respectively $26.1 million, which is being

$1 billion at December 31,1987. The effective AFUDC rates refunded to customers during As allowed under current regula- were 8.2 percent and 9.2 percent, the period from September 1, tory practices, deferred taxes not on a net-of income tax basis in 1987 to July 31,1988.

previously provided are being 1986 and 1985, respectively.

collected in customers' rates as CL&P's gas rates include an such taxes become payable. Energy Adjustment Clauses: adjustment clause under which CIAP's retail electric rates aurchased gas costs above or In December 1987, FASB include an adjustment clause vlow base rate levels are charged issued Statement of Financial under which fossil-fuel prices or credited to customers. As Accounting Standards No. 96, above or below base rate levels prescribed by the DPUC, most Accormting for Income Taxes are charged or credited to differences between CL&P's (SFAS %). SFAS % supersedes customers. As a result of the actual purchased gas cost and previously issued income tax 1986 retail rate orders, the the current cost recovery are i

accounting standards and DPUC allowed deferred fossil- deferred until future recovery will be effective in 1989. The fuel accounting for the period or refund is permitted, company expects that when Novemtvr 1,1986 through SFAS % is adopted it will December 31,1987, with a As permitted by the DPU, significantly increase assets maximum of $30 million that was Wh1ECO defers the difference and liabilities but will not have deferrable during this period. between forecasted and actual a material effect on net income. This $34million ceiling was fuel costs until it is recovered 1 reached in hiay 1987. As a result, c,r refunded under a quarterly

! Allowance for Funds Used CIAP did not defer for future retail fuel adjustment clause.

During Construction (AFUDCh recovery $32.1 million of fuel hiassachusetts law requires the AFUDC, a noncash item costs for the period hiay 1987 establishment of an annual calculated in accordance with through December 1987. In Feb- performance program related FERC guidelines, represents the ruary 1988, CLAP was ordered to fuel procurement and use.

estimated cost of capital funds to amortize the $30 million over The program establishes

used to tinance the system's a three-year period. performance standards for j 39

Northeast Utilities and Subsidiaries NOTES TO CSNSOLIZATED FINANCIAL STATEMENTS j plants owned and operated by rates on a specific schedule, return, including carrying WhtECO or plants in which CL&P must apply to the DPUC chaq;es, on the recoverable but Wh1ECO has a life-of-unit for revenue increases sufficient not yet phased-in oortion of contract. Therefore, revenues to recover the installments WhtECO's investment in collected under the WhfECO as they are phased in. The hiillstone 3. This recovery will retail fuel adjustment clause Settlement Agreements provided take place over the nine-year are subject to refund pending for full deferred earnings and period which began June 30, review by the DPU To date, carrying charges on the recover- 1987. As of December 31,1987, there have been no significant able podion of CIAP's investment $2.2 million of the deferred adjustments as a result of this in hiillstone 3 being phased into return, including carrying program. rates. The amortization and charges, has been recovered, recovery of deferrals through Phase In Plans: As discussed rates began January 1,1988 The additional 20 percent below, both CL&P and Wh1ECO and will end no later than of Wh1ECO's hiillstone 3 are phasing into rates their December 31,1995. investment phased into rates respective hiillstone 3 invest- during 1987 amounted to ments. These plans, as currently On June 2,1987, amendments $70.6 million, leaving 60 percent designed, are in compliance to the 1986 Settlement Agree- or $211.8 million of Wh1ECO's with Statement of Financial ments (Amended Settlement recoverable hiillstone 3 invest-Accounting Standards No. 92, Agreements) were appmved ment for future phase-in.

Regulned Enterprises - Acmunt- by the DPUC and retroactivcly ingfor Phase-in Phms. applied to January 1,1987. On December 17,1987, The Amended Settlement WhtECO filed an application CL&P: Under the terms of Agreements allowed an additional with the DPU requesting the the settlement agreements 20 percent ($351.3 million) of third increment of the phase-(Settlement Agreements) CL&P's recoverable hiillstone 3 in p:an for 1988.

reached among the Connecticut investment to be included in rate Attorney General, the Division base, as of January 1,1987, Rate hioderation Fund: As of Consumer Counsel, the with the remaining 60 percent a result of past rate actions, Prosecutorial Division of the ($1.1 billion) to be included in CL&P was required to establish DPUC, and CL&P, which the increments of at least 8 percent a rate moderation fund (Rh1F),

DPUC approved on July 1,1986, annually commencing January 1, which would be used to offset CL&P would be allowed to 1988. In February 1988, CL&P future electric rate increases.

recover its pro rata share of received approval from the Funding for the RhiF included

$3.4 billion of hiillstone 3 DPUC to include an additional revenues in excess of those construction costs (including 8 percent of its hiillstone 3 required to produce a specified AFUDC) incurred as of investment in rate base, effective return on equity During 1987, April 23,1986. Amounts January 1,1988. CL&P refunded $30 million w aich represent CL&P's from the Rh1F to retail rate-pro rata share of hiillstone 3 WMECO: On June 30,1987, the payers. In February 1988, construction costs in excess DPU allowed the second of the DPUC ordered that the of $3.4 billion ($1M.4 million) five equal annual installments December 31,1987 Rh1F are not recoverable. Capital of the "used and useful" balance be ammtized to additions subsequent to portion of Wh1ECO's investment revenues and fuel expense April 23,1986 are not subject in hiillstone 3 to be added to during 1988 and eliminated the to this limitation. CL&P's pro WhtECO's rate base. Although Rh1F effective January 1,1988.

rata share of the $3.4 billion the rate order provides for a five-permitted cost of hiillstone 3 year phase 4n, it is necessary would be phased into rates for Wh1ECO to apply to the DPU 4. Nuclear Decommissioning over apprmimately five and for revenue increases sufficient one-half years. Although the to recover the installments as A 1987 decommissioning Settlement Agreements they are phased in. The DPU study indicates that immediate pmvide for phasing CL&P's also allowed the beginning dismantlement at retirement is hiillstone 3 mvestment into of the recovery of the deferred the most viable and economic 40

Northeast Utilities and Subsidiaries NOTES TO CENSOLIDATED FINANCIAL STATEMENTS method of decommissioning of energy pmvided) plus capital operating the tnree hiillstone units. The financing costs associated with lear Leases Leases estimated cost of decommis- the fuelin the reactors. Upon m-ww sioning CL&P's and Wh1ECO's aggregate ownership share of permanent discharge from the reactors, ownership of the 79 1990

?$ 5 5,7m 14,500 these units is $605.6 million in nuclear fuel transfers to CL&P 1991 5.600 9,500 year-end 1987 dollars. Decommis- and Wh1ECO. 1992 5.600 6.700

.After 1992 M,mo M,6m sioning studies are reviewed and '

updated periodically to reflect The system companies I"$"inimum lease changes in decommissioning have also entered into lease payments 85.000 592,700 requirements, technology, and agreements, some of which Less amount inflation. are capita! leases, for the use representing interest 39,300 of substation equipment, data CL&P and WhlECO have processing and office equip. Present value established independent ment, vehicles, nuclear control '

minNn lease decommissioning trusts for room simulators, and office payments for their portion of the costs of space. The provisions of these other than nudear fua 45,7m decommissioning hiillstone 1, lease agreements generally 2, and 3. provide for renewal options. " ' '

Pffut rj" The following rental payments nudear As of December 31,1987, have been charged to operating fuel lease CL&P and Wh1ECO have expense: payments 3s7.000 collected through rates Total W2,7m Capital Operating

$59.0 million for future .

decommissioning costs, of M I " I~

• which $36.2 million has been funded externally. Although a y{ 85 @ 0 f000 7,' 6. Short Term Debt 1985 73,505,000 20 2 000 portion of the estimated total The system companies have decommissioning costs has Interest included in vario as credit lines totaling been approved by regulatory capital lease rental payments $388 million. Of this amount, agencies and is reflected in the was $31,392,000 in 1987, $350 million is available depreciation expense of CL&P $33,298,000 in 1986, and through a revolving credit and Wh1ECO, the companies $20,910,000 in 1985. agreement with a group of believe revenues in amounts eleven banks. The maximum greater than those currently Substantially all of the capital individual borrowing limits of being collected will be required lease rental payments were CL&P and Wh1ECO under the to pay the full projected costs of made pursuant to the nuclear agreement are $350 million decommissioning. fuel lease agreement. Future and $105 million, respectively minimum lease payments The companies are obligated under the nuclear fuel capital to pay a facility fee of .1875 ,

5. Leases lease cannot be reasonably percent per annum on their estimated on an annual basis proportionate shares of the CL&P and Wh1ECO have due to variations in the usage commitment. At December 31, entered into a capital lease of nuclear fuel. 1987, Cl. &P and Wh1ECO had agreement to finance up to no borrowings under this

$530 million of nuclear fuel for Future minimum rental agreement.

hiillstone 1 and 2 and their payments, excluding annual share for hiillstone 3. CL&P nuclear fuel lease payments, The remaining $38 million is and Wh1ECO make quarterly and executory costs such as available to system companies lease payments for the cost of property taxes, state use taxes, through bank credit lines. Terms nuclear fuel consumed in the msurance, and maintenance, call for interest rates not to reactors (based on a units-of- under long-term noncancelable exceed the prime rate during the pmduction method at rates leases as of December 31,1987 borrowing term. Although these which reflect estimated kWh are approximately: lines generally are renewable, 41

. Northeast Utilities and Subsidiaries +

NOTES TG OSNSOLl2ATED FINAN31AL STATEMENTS .

the continuing availability of Act (ERISA). Pension costs are The following actuarial the lines of credit is subject to determined using market- assumptions were used in review by the banks involved. related value of pension assets. calculating the plan's year-end Compensating balances are Ibnsion assets are invested funded status:

maintained in connection primarily in equity securities, sonds, and insurance contracts. Discount rate 9.5%

with these bank credit lines C nsation/ progress,on i

which, at December 31,1987, amounted to $1.9 million. The components of net At December 31,1987, the pension cost for 1987 are: In addition to pension amount of unused borrowing benefits, the company's capacity under the credit lines Service cost $32,812,000 subsidiaries provide certain available to the system Interest cost 51,318,000 health care and life insurance companies was $13 million. Return on plan benefits to retired employees.

assets (36,811,000) The cost of providing those Net amortization (31,161,000) benefits was approximately

7. Retirement Plan Net pension cost 519,158,000 $6,567,000 in 1987, $5,082,000 in 1986, and $4,M3,000 in The company's subsidiaries For calculating 19S7 pension 19S5. The company recognizes participate in a uniform non- cost the following assumptions health care benefits primarily contributory defined benefit were used: as incurred and provides retirement plan covering all for life insurance benefits regular system employees. Discount rate 8.5% through premiums paid to Benefits are based on years Expected long-term an msurance company of service and employees' rate of retum 9.7%

compensation during the last Compensation'pmgression five years of employment, rate 7.5% 8. Commitments and Total pension cost, part Contingencies of which was charged to The following table utility plant, approximated represents the plan's funded Construction Program: The

$19,158,000 in 1987, status reconciled to the construction pmgram is

$31,731,000 in 1986, and consolidated balance sheet rubject to periodic review and

$30,803,000 in 1985. at December 31,1987: revision. Actual construction expenditures may vary from The company has adopted Actumulated such estimates due to factors the provisions of Statement benefit such as revised load estimates, of Financial Accounting obngation, inflation, revised nuclear Standards No. 87, Emphwers' including safety regulations, delays, Amnmting for Ibrsions, (SFAS $358,957,000 of difficulties in the licensing

87) effective January 1,1987. vested benefits $397,519,000 process, the availability and As required by SFAS 87, the Projected benefit cost of capital, and the granting actuarial cost method was obligation $661,338,000 of timely and adequate rate changed from the entry age Less: Market relief by regulatory commis-normal method to the pro- value of sions, as well as actions by other jected unit credit method. The plan assets 701,462.000 regulatory bodies.

decrease in pension expense Projected is due primarily to favorable benefit The system companies investment performance. obligation currentl'y forecast construction surplus, 37,124,000 expenditures (including U,"'""8*d it is the policy of the " '" AFUDC) of $1.46 billion for subsidiaries to fund annually I' ' I the years 1988-1992, including U fi[ed t an amount at least equal to gain (16,387.000) $327.3 milhon for 1988. These that which will satisty the forecasted expenditures requirements of the Employee Retirement income Sectmty

^{t , $(15,522,000) include gas expenditures of

$113.4 milhon for the years 1

42

Northeast Utilities and Subsidiaries

. NOTES TG CCNSOLCATE3 FINAN31AL STATEMENTS 1988-1992 and $23.1 million for have, through regulations in many respects and has 1988. In addition, the system and legislation, established a submitted comments, as companies estimate that M.7 billion "cap," with requested by the DPUC, on nuclear fuel requirements certain exceptions, on the issues related to the TB&A will be $318.1 million for the construction costs of Seabrook 1 report. Hearings are expected years 1988-1992, including that may be made part of rate to begin in 1988.

$M.5 million for 1988. base or otherwise included in the rates of CL&P. CL&P's total As discussed in Note 1, in Seabrook: CL&P has a 4.06 expenditures for Seabrook 1 are December 1986, FASB issued percent joint ownership in excess of its pro rata share of SFAS 90. Under SFAS 90, a interest in the Seabrook project. the H.7 billion "cap." Conse- utility must record a loss when At December 31,1987, CL&P's quently, recovery of CL&P's it becomes probable that a construction work in prog- portion of its investment in cost disallowance of a newly ress balance included an Seabmok 1 in excess of the completed plant will occur and investment of $190.5 million "cap"depends on CL&P's ability the amount can be reasonably in Seabrook 1 after writing off to invalidate the M.7 billion estimated.

a portion of its investment, "cap" in the courts or to as discussed below. Because demon 3trate to the DPUC that Management believes that of the unit's continued delays the additional costs fall within some portion of CL&P's in obtaining an operating the exceptions to the "cap" investment in Seabrook 1 may license, Seabrook 1 does not laws. be disallowed as a nsult of have an official in-service date, the "cap" legislation, or the For financial planning pur- In 1986, the DPUC initiated a prudence review, or on other poses, CL&P is using April 1989 review, conducted by Theodore grounds. Consequently, CL&P as the unit's projected in- Barry and Associates (TB&A), elected to adopt SFAS 90 in service date. On January 28, of the prudence of CL&P's and 1987 and has written off that 1988, Public Service of New The United Illuminating portion ofits Seabrook I cost Hampshire (PSNH), the lead Company's (UI), an unaffiliated in excess of the "cap" for participant in the Seabrook Connecticut utility, investments which recovery is no longer project, filed for protection in the Seabnmk project. On considered probable. This under Chapter 11 of the federal September 15,1987, TB&A write-off has reduced 1987 Bankruptcy Code. issued their report, identifying net income by approximately

$1.38 billion of alleged $16.9 million ($0.16 per share).

Project management faces imprudent Seabrook project This write-off reflects judg.

serious opposition in its efforts expenditures incurred through ments that CL&P must make to obtain an operating license October 1,1986. Of that in applying the accounting for Seabrook 1. The major area amount, $942 million is standards of SFAS 90. It does of controversy involves the attributed to alleged not indicate that CL&P believes development of acceptable mismanagement of the that any disallowances are emergency evacuation plans. construction of Seabrook I legally justified or appropriate by PSNH. The remaining and will not preclude CL&P On February 3,1988, the 934 million represents from pursuing recovery of its Atomic Safety and Licensing expenditures on Seabrook 2 total investment. In addition, Appeal Board of the Nuclear made after April 1,1981, the effective January 1,1988, CL&P Regulatory Commission ruled date on which TB&A contends stopped accruing AFUDC on that Seabrook 1 cannot receive Seabrook 2 should have been its Seabrook 1 investment and a low-power operating license canceled. will expense all future cash  ;

until a dispute over the lack costs during the construction -

of emergency sirens in TB&A's report criticind period, neighboring Massachusetts CL&P and UI for paying communities is resolved. inadequate attention to in light of the substantial PSNH's management of the uncertainties affecting The DPUC and the project. CL&P disagrees Seabrook 1, chief of which Connecticut State Legislature with the report's conclusions are difficulties in obtaining 43

- _ _ _ . _ . _ y

Northeast Utilities and Subsidiaries ,

NOTES TO OSNSOLIDATED FINANCIAL STATEMENTS -

an operating license and the completion of Phase II, NU is in hiillstone 1,2, and 3, and financial problems of PSNH expected to have an equity CY; and, (b) the cost of repair, and other joint owners, ownership approximating replacement, or decontamina-management cannot predict $41 million in the Phase 11 tion of utility property resulting whether or when the unit will facilities. Under the terms of the from insured occurrences at operate. If Seabrook 1 ultimately Phase 11 equity agreement, NU hiillstone 1,2, and 3, CY, hiY, does not operate, CL&P would will be required to guarantee and VY. All companies insured seek full recovery of its investment, the obligations of other with NEIL are subject to retro-l While the DPUC has permitted participants that have lower active assessments if losses l CL&P to recover substantial credit ratings and NU will exceed the accumulated funds l

portions of its investments receive compensation for such available to NEIL. The maxi-in similar circumstances, guarantees, mum potential assessments l management cannot predict against CL&P and Wh1ECO

! the extent to which CL&P Nuclear Insurance with respect to losses arising will be permitted to recover its Contingencies: The Price- during current policy years are Seabrook 1 investment. Anderson Act currently limits approximately $11.3 million public liability from a single under the replacement power Seabrook 2 has been incident at a nuclear power policies and $19.0 million canceled by the joint owners. plant to $720 million. The first under the property damage Through December 1987, CL&P $160 million of liability would and decontamination policies.

had recovered approximately be covered by the maximum Although CL&P and Wh1ECO

- $3.8 million of its retail invest- provided by commercial have purchased the limits of ment in Seabrook 2. In February insurance. Additionalliability coverage currently available 1988, CL&P was granted of up to $560 million would be from conventional nuclear

$2.5 million of annual revenues provided by an assessment of insurance pools, the cost of a to recover a portion of its $5 million per incident levied nuclear incident could exceed remaining retail investment on each of the 112 nuclear units available insurance proceeds.

in Seabrook 2, which at currently licensed to operate December 31,1987 amounted in the United States, subject to in addition, effective to $21.6 million. The DPUC a maximum assessment of January 1,1988, insurance did not allow CL&P to earn a $10 million per nuclear unit has been purchased from return on this investment. in any year. Based on CL&P's American Nuclear Insurers /

and Wh1ECO's ownership hiutual Atomic Energy Liability Hydro-Quebec: NU, along interests in the nuclear units Underwriters, aggregating with various New England currently in service, the $160 million on an industry utilities, has entered into maximum liability per incident basis for coverage of worker agreements to finance and would be $18.4 million, limited claims. All companies insured construct additional trans- to a maximum of $36.8 million under this coverage are subject mission and terminal facilities in any year. Legislation is to retroactive assessments.

(Phase 11) to import electricity currently pending which could The maximum potential from the Hydro-Quebec significantly increase the assessments against CL&P and system in Canada. The maximum potential assess- Wh1ECO with respect to losses Phase 11 project is currently ment per incident for public arising during the current estimated to cost approximately liability. policy period are approxi-

$%5.0 million of which mately $9.9 million.

appmximately $74.4 million Insurance has been had been expended or purcFased from Nuclear Financing Arrangements committed as of December 31, Electric Insurance Limited for the Regional Nuclear 1987. These facilities, which (NEIL) to cover: (a) certain extra Generating Companies:

are scheduled to be completed costs incurred in obtaining The owners of CY, including in the early 1990s, would replacement power during a CL&P and Wh1ECO, have increase the capability of prolonged accidental outage guaranteed their pro rata the Hydro-Quebec inter- with respect to CL&I's and shares of $33.0 million 17 l connection to 2,000 htW. Upon Wh1ECO's ownership interests percent Series A Debentures 44 1

. Northhast Utilities and Subsidiaries

' NOTES T@ OGNSOLIDATED FINAN31AL STATEMENTS and a $25 million mvohing crtdit agreement. The gturantees of CMP and Wh1ECO aggregate

$26.2 million.

The owners of VY, including CMP and Wh1ECO, have guaranteed their pro rata shares of a $40 million nuclear fuel financing through the Vernon Energy Trust. The

, guarantees of CMP and Wh1ECO aggregate $4.8 million. ,

The owners of hiY, including CMP and Wh1ECO, have guaranteed their pro rata shares of hiY's obligations under a $50 million nuclear fuelloan agreement. The guarantees of CMP and Wh1ECO aggregate

$7.5 million.

CMP and Wh1ECO 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.

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Northeast Utilities and Subsidiaries i SELE 3TED CCNSOL12ATED FINAN35AL DATA 1987 1986 1985 19M 1983 (Thousands (4 (Adlars, ewept percentages and share data)

Balance Sheet Data:

Net Utility Plant from Continuing Operations . . . . . . $5,265,428 $5,128,125 $5,2N,687 $4,650,428 $4,122,692 Net Gas Plant to be Divested . . . . . . . . . . ...... 237,903 224,581 214,115 2N,187 192,861 Total Assets . . . . . . . . . . . . . . . . . . 6,663,794 6,299,755 6,147,720 5,507,NO 4,957,927 Total Capitalization . . . . . . . . . 4,956,080 4,743,914 4,681,995 4,319,4N 3,9M,569 Obligations Under Capital Leases . . . . . . . . ... 432,714 441,183 440,587 392,593 337,636 Income and Share Data:

Continuing Operations:

Operating Revenues . . . . . . $1,878,082 $1,828,303 $1,861,011 $1,870,822 $1,650,082 Net income . . . . . . . . . . . . .. 214,529 171,2M 277,768 276,615 209,905 Eamings per Share . . ...... $ 1.97 $ 1.58 $ 2.62 5 2.73 $ 2.24 Gas Operations to be Divested:

Operating Revenues . . . . . . . . $202,816 $203,814 $220,010 $224,430 $238,999 Net income . . . . . . . . . . .. . 14,616 10,705 10,773 12,323 11,M3 Earnings per Share . . . . . . . . . $ 0.14 5 0.10 $ 0.10 $ 0.12 $ 0.13 Dividends per Share . . . . . . . . . . $ 1,76 $ 1.68 $ 1.58 $ 1.48 $ 1.38 Payout Ratio (7c) . . . . . . . . . . . . . 83.4 100.0 58.1 51.9 58.2 Number of Shares Outstanding- Average . . . . 108,669,106 108,352,517 106,221,131 101,398,235 93,497,945 Rate of Return Eamed on Avg. Common Equity (7c) . . . . 12.8 10.4 17.4 19.8 17.8 Book Value per Share . . . . . . . .. $16.53 $16.24 $16.21 $15.07 $13.M hlarket Price - High . . . . . . . . $28 $28% $18% $14% $13%

- Low . . . . . . . . . $18 $17% $13% $10% $11%

Cepitalizatiom (includes portions due within one year)

Common Shareholders' Eq u i ty . . . . . . . . . . . . . . . . . $1,796,293 $1,765,090 $1,738,871 $1,575,705 $1,361,724 Preferred Stock Not Subject to hiandatory Redemption . 291,195 291,195 291,195 291,195 291,195 Preferred Stock Subject to hiandatory Redemption . . . 205,832 166,832 185,833 186,978 188,M7 Long-Term Debt .......... . 2,662,760 2,520,797 2.466,096 2,265,526 2,113,103 Total Capitalization .. .. ... . $4,956,080 9 ,743,914 M,681,995 M,319,4N $3,9M,569 Common Shareholders' Eq u i ty . . . . . . . . . . . . . . ... 36.2 % 37.27c 37.17c 36.5% M.47c Preferred Stock Not Subject to hiandatory Redemption . . 5.9 6.2 6.2 6.7 7.4 Preferred Stock Subject to hiandatory Redemption . 4.2 3.5 4.0 4.3 4.8 Long-Term Debt . . . ..... ... 53.7 53.1 52.7 52.5 53.4 Total Capitalization ... .. 100.0 % 100.07c 100.0 % 100.0 % 100.0 %

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Nortbest Utilities and Subsidiaries CONSOLIDATE 3 STATEMENTS CF QUARTERLY FINANDIAL DATA (unaudit:d)

Quarter Ended 1987 h1 arch 31 June 30 September 30 December 31 (Theands of Dollars, eurpt per Share data)

Continuing Operations:

Operating Revenues . ........... H60,539 H57,109 M73,649 $4%,785 1

Operating income . . . . .......... $ 77,205 $ 77,378 $ 66,%7 $ 55,806 l

Ne t income . . . . . . . . . . . . . . . . . . . . S 75,639 $ 54,474 $ 57,M9 $ 26,567 Earnings Ihr Common Share . . . . . . $0.70 $0.50 $0.53 $0.24 Gas Operations to be Divested:

Operating Revcnues . ............ $ 79,797 $ 34,620 $ 25,447 $ 62,952 Operating Income . . . . . . ....... . $ 13,191 $ 2,435 $ 1,303 ,$ 8,888 Net income . . . . . . . .. . .... U0,391 $ (400) $ (1,458) $ 6,083 Earnings Ibr Common Share . . . . . $0.09 $0.00 $(0.01) $0.06 1986 Continuing Operations:

Operating Revenues . . . . .... ... M65,362 9 57,457 M51,800 M53,6M Operating income . . . ... ..... . S 66,501 5 M,752 $ 71,977 $ 57,146 Net income . . . . ... . ....... $ 72,951 $(22,298) $ 69,642 $ 50,939 Earnings Ibr Common Share . . . . . . . $0.68 $(0.21) $0.M $0.47 Gas Operations to be Divested:

Operating Revenues ............. $ M,568 $ 36,212 $ 23,195 $ 59,839 Operating Income . . . . . . . . . . . . $ 10,802 $ 2,022 $ 504 $ 8,899 Net income . . . . . . . . . . . .... $ 7,914 $ (S99) $ (2,365) $ 6,055 Earnings Ibr Common Share . . . . . . . $0.07 $(0.01) $(0.02) $0.06 f

OGNSOLIDATED GENER AL OPER ATING STATISTICS 1987 1986 1985 19M 1983 System Capability - h1W (a) . 5,5M.5 5,972.8 5,462.9 5,869.0 5,966.9 System Ibak Demand - hlW . . . 4,590.5 4,241.5 4,MO.2 4,2M.4 4,068.8 Nudear Capacity - htW (a) . . . . . . . . 2,420.2 2,681.4 1,932.2 1,937.8 1,937.8 Nuclear Capacity Factor (%) (a) . .. .. 74.9 75.7 66.0 78.5 62.7 Nudear Contribution To Total Energy Requirements (%)(a) . .. . 68.5 67.1 47.6 57.2 47.9 (a) Indudes ampany entitk ments in reponal nudcar generating nepanas, net of capaaty wk s and purchaws.

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a Northeast Utilities and Subsidiaries ,

CCNSOLl? ATE 3 ELECTRIC OPER ATIN3 STATISTICS -

1987 1986 1985 19M 1983 Source of Electric Energy: (kWh - millions) (a)

Nuclear - Steam . . . . . . . . . . . . . 18,019 16,624 11,453 13,711 10,898 Fossil - Stea m . . . . . . . . . . . . . . 7,912 9,N8 8,325 9,065 7,963 Hydto- Conventienal . . . . . . 866 895 726 840 833 Hydto - Pumped Storage . . . . . 973 950 925 875 897 Internal Combustion . . . . . . . . . . 39 33 16 M 13 Energy Used For Pumping . .. (1,322) (1,293) (1,287) (1,199) (1,244)

Net Generation . .... . 26,487 26,257 20,158 23,326 19,360 Purchased And Net Interchange . . . . . .. . ... (1,000) (1,725) 3,320 (115) 2,798 Company Use And Unaccounted For . . . . . . . . (2,082) (2,050) (1,859) (1,793) (1,801)

Net Energy Sold . . . . . . . . 23,405 22,482 21,619 21,418 20,357 Revenues: (thousands)

Residential . . . . . . . . . . . . .. $ 780,866 $ 741,838 S 750,076 5 754,075 $ 668,794 Commercial . . . . . . . . . . . . . . 630.678 602,924 606,414 589,898 515,750 Industrial . . . . . . . . . ... .. 353,394 350,310 371,079 381,289 332,460 Other Utilities . . ........... 43,170 55,683 56,857 56,492 55,457 Streetlighting and Railroads . . . 32,318 M,741 M,899 32,252 26,456 Miscellaneous . . . . . . . . . . . .. (18,146) (2,4M) 9,698 29,M0 28,413 Total Electric . . . . . . . . . 1,822,280 1,783,032 1,829,023 1,M3,M6 1,627,330 Other....................... 55,802 45,271 31,988 27,476 22,752 Total . . . , . . . . . . . . . . . . . . $1,878,082 $1,828,303 $1,861,011 $1,870,822 $1,650,082 Sales: (kWh - millions)

Residential . . . . ........... 8,825 8,274 7,837 7,8N 7,5M Commercial . . . . . . . . . . . . . . . . 8,151 7,676 7,185 6,9N 6,493 Ind ustrial . . . . . . . . . . . . . . . . . . 5,449 5,394 5,286 5,374 5,M6 Other Utilities . . . . . . .. . 699 830 1,016 1,082 1,060 Streetlighting and Railroads . . . . 281 308 295 2M 204 To ta l . . . . . . . . . . . . . . . . . 23,405 22,482 21,619 21,418 20,357 Customers: (average)

Residential .. ....... .. 1,091,539 1,063,998 1,N1,254 1,021,871 1,005,003 l

i Commercial . . .. ...... 94,1M 90,924 88,031 85,658 83,955 Ind ustrial . . . . . . . . . . . . . . . . . . 5,0M 5,102 5,0S7 5,022 4,979 l

Other.......... . . .... 3,090 3,061 3,035 2,992 2,976 I

Total ... .... .. .. . 1,193,877 1,163,085 1,137,407 1,115,M3 1,096,915 Average Annual Use Per Residential Customer (kWh) .. . 8,061 7.746 7,492 7,5% 7.472 Average Annual Bill Der Residential Customer . . . .. $713.24 $694.51 $717.06 $7M.00 $661.57 Av2 rage Revenue Per kWh:

i Residen tial . . . . . . . . . . . . . . 8.85c 8.97c 9.57e 9.66e 8.85e Commercial ... ... .. 7.74 7.85 8.44 8.54 7.94 Industrial . . . . . . . 6.49 6.49 7.02 7.10 6.59 (a) Generated in sy> tem and regional nuclear generating plants.

48

Northeast Utilities and Subsidinies CONSOLIDATED GAS OPER ATIN3 STATISTICS 1987 19

_[985 ~ 1984 1983 Source of Gas:

(Mcf- thousands)

Pu rchased . . . . . . . . . . . . . . . . . . . 35,587 29,237 30,534 32,099 28,438 Pnxt uced . . . . . . . . . . . . . . . . . . . . 178 223 236 318 352 Company Use And Unaccounted For . . . . . . . . . . (4,961) (1,211) (2,855) (2,735) (1,129)

Net Sold . . . . . .... . .. 30,804 28,249 _ 27,915 29,682 27,661 httximum Day Sendout (ht -Therms) . ... ....... 1,898 1,847 1,970 1,722 1,855 Revenues: (thousands)

Residential . . . . . . ....... $ 97,276 $ 99,6M $ 98,812 $ 98,799 $103,1M Commercial . . . . . . . ..... 57,667 58,006 58,9M 59,576 61,186 Industrial . . . . . . . . . . . . . . . . . . . 46,058 43,952 57,367 67,M5 68,783 hiiscellaneous . . . . . . . . . . . . . . . 1,815 2,202 4,897 (1,590) 5,866 Total ........... .... .. $202,816 $203,814 $220,010 $224,430 $238,999 Sales: (hief- thousands)

Residential . . . . . . . . . . . . . . . . . . 11,167 10,730 10,125 10,159 9,515 Commercial . . . . . . . . .. 8,763 S,134 7,7N 7,822 7,207 Ind ustrial . . . . . . . . . . . . . . . . . . 10,850 9,381 10,082 11,697 10,9M Other ..... . .. ... ....... 24 4 4 4 5 Total .. .... .. .. .. . 30,804 28,249 27,915 29,682 27,661 Customers: (average)

Residentiai . . . . . . . . . . . . . . . 148,523 145,2M 142,280 140,508 139,325 Commercial . . . . . . ......... 17,057 16,185 15,506 14,637 14,190 Ind ustrial . . . . . . . . . . . . . . . . . . 1,371 1,M6 1,333 1,307 1,293 To tal . . . . . . . . . . . . . . . . . . 166,951 162,765 159,119 156,452 1M,808 Average Annual Use Per Residential Customer (htcf) . ... .... . 75.2 73.9 71.2 72.3 68.3 Average Annual Bill I er Residential Customer . ..... . .... . $654.96 $686.13 $694.49 $703.15 $740.46 Aver:ge Revenue Ihr htcf:

Residential ...... . .. .... $8.71 $9.29 $9.76 $9.73 $10.M Commercial . . . . . .... ... 6.58 7.13 7.65 7.62 8.49 Industrial . . . . . . . . . . . . . . .. 4.25 4.69 5.69 5.18 6.29 49

SHAREH2LDER INFORMATICN .

Shareholders As of January 31,1988, there were 163,659 common shareholders of record of Northeast Utilities.

Common Share Information The co'mmon shares of Northeast Utilities are listed on the New York Stock behange. The ticker symbol is "NU," although it is frequently presented as "Noest Ut" in various financial publications.

The high and low sales prices and dividends paid for the past two years by quarters are shown below:

Quarterly Dividend Year Quarter liigh Low lbr Share 1987 First $28 $24% $0.44 Second 25 % 21 % 0.44 Third 24 % 21 % 0.44 Fourth 23 % 18 0.44 1986 First 22 % 17% 0.42 Second 22 % 17% 0.42 Third 28 % 21 % 0.42 Fourth 26 % 24 0.42 Dividend Reinvestment and Common Share Purchase Plan The company has a Dividend Reinvestment and Common Share Purchase Plan under which all common shareholders may use their dividends to purchase additional common shares. The company absorbs eli brokerage fees'for purchases under the plan.

The Connecticut Bank and Trust Company, N.A., One Constitution Plaza, liartford, Connecticut 06115, is the company's dividend paying agent and administers the company's Dividend Reinvestment and Common Share Purchase Plan.

Annual Meeting The annual meeting of shareholders of Northeast Utilities will be held at The Conference Center at Howard Johnson's, Windsor Locks, Connecticut, (on Interstate 91. . . take Center Street Exit 41) on Tuesday, May 24,1988, beginning at 10 a.m.

Transfer Agents and Registrars The Connecticut Bank and Trust Company, N.A. State Street Banx and Trust Company Stock Transfer Department Corporate Stock Transfer Department One Constitution Plaza 225 Franklin Street Hartford, Connecticut 06115 Boston, Massachusetts 02107 Form 10-K Available Northeast Utilities will provide shareholders a copy of its 1987 Annual Report to the Securities and Exchange Commission on Form 10-K, including the financial statements and schedules thereto, without charge, upon receipt of a written request sent to:

Cheryl W. Grisd Assistant Secretary Northecst Utilities 110. Box 270 Ilattford, Connecticut 06141-0270 50

NdRTHEAST UTILITIES SERVICE COMPANY OFFICERS Chairman and Vice Presidents John. J. Smith Chief Executive Officer Opratioris (Grs)

C. Thayer Umwne William B. Ellis Tnusuni C*' rge D. Uhl 09tlinNItr Carmll A. Caffrey Richard P. Werner Hurnan &souras G,uratint Engiturring aruf O. Non Gnraruc6nt President and Chief Operating and I"5"""u'" N*'"**

Financial Officer Raymond E. Donovan ALirActing arul Gnisunur Serticts Regional Vice Presidents Bernard hi. Fox Albert J. Hajek Richard R. Carella Gnvrate nrfornutnce Srtias arui y,c,,,

Organi:atinuti Contn4 Lesley C, Gerould Francis L Kinney S'udk7" Executive Vice President pufgjc Affaj,3 John E Opeka Keith R. h1arvin f(# y ,,,,,

Engirutrirts arul Opratants Purduising arul ALzteritis ALiruigerncnt y C. J. Nonnen Ilarrie R. Nims Transtnissins arui Distnlmti>rs Engirurring arul opratiins Alfred R. Rogers 0"'"'I Senior Vice Presidents John W. Noyes Ryulatory Rcartinis Robert W. Zonghetti Philip T. Ashton Wstern Grrural AtNgcr-Gis Gniup Ir nard A. O'Connor Tirurur arul Aavuriting' (Gas)

Robert E. Busch Tiratur EkdAE*" Assistant Secretaries ll>ssilaruf ilytro Pmiuctu.nt John !! Cagnetta Wayne D. Romberg Elizabeth W. Bnome Gyurate Planning aiul Ryulatory Rclations Nudtur Opratinis Cheryl W. Grise

. Douglas R. Teece Iron E. hiaglathlin, Jc Walter T. Schulthets Custonur strt ir Rwr Sundy Planning arul &sunh C. Frederick Sears Edward J. hinnka Assistant Treasurers Nudeur Engirutrirrg arul Oprations Nuclair arul Errt ininiricrital Enginaring lawrence 11. Shay Robert C. Aronson Ainnnianitite Syt ias Eugene G. Vertefeuille Walter E Torrance, Jr.

Savetary arul Gerural Counil As of February 1,1988 51

r-NORTHEAST UTILITIES

• OFFICERS TRUSTEES t Bizabeth T. Kennan Prcsidait William B. Blis *+' William O. Bailey Afount ikVyte G4hy' e Quirnuin of tir Baird Vir Guirnun arui Oti<f Exxtttite Offurr N* &d k% "YW "*I a yf f,h.Gg'k,'y Bernad M. Fox *t Edward B Bates Chkf Exa,4tity Offiar Fonrur Outinturt litrit Sihersnuths Prnu. tent and Chkf 0;vratin$ Gnnurtic,tt Atutu.d life Insurtnur aruf financialOfurr Ovnfuny '

A#' Burke Marshall Niclulas deb. Kit::enhids Robert E. Busch + # John McIl Collins PniferofLne Senior Vkr Praident Retimiauirnun ard we Lne sdat Otkf Em,ttite Offirr Walter E Torrance, Jt Springtidd Institution for S: tings *t* William J. Ihre 11 Senior Vice Praident, Stretary .

Pultisler and Genemi Gntnsel + # Richard L Creviston tweri ury Riyddiain Otairnun arui ard Anuru2in C. Thayer Browne Orif Era,4 tite Offiar (reasiup rs)

Vix Prnident and Trmsurer N*' England Snmgs Sank

1. • Norman C. Rasmussen George D. Uhl *t Donald W Davis Pnfessor of Nudair Enginaring Vice Praident and Controller $,"Sl,,,j, n,y, (tais, lurhure, and f,f$;& ##

Bizabeth W. Dmome #* William K. Reilly industrid ;mfucts)

Assistant Stretary Presdent Cheryl W. Gn.se. *+# Donald J. Donahuc nru tyiulife Furut aiut Guirnan tie Consertution Fourdation Assistant Stretary Atagna Gypr Gnnlurty (interrutiorud arrisrtutk>n Robert C. Aronson Assistant Tmusurer

• + William D. Blis Guinnan if tie aurd

'%,'h,f"u 7 >, "N'"l[ -

aid Orkf EraTetite Qfirr J r.

Eugene G. Wtefeuille *+# A bert E.ardStei

• + Bernard M. Fox Presdait inf 'er,fm,4 tite Opiar Assistant Tmisurer . tulert Steiger, Inc.

Pnsidertt ard Oikf OpratS (de;urtmait store duin) aid Fnuncul Offurr

• t* George B. liarvey Guirnun of tie Surd arut l'rssiderst Pitruv Stas tric.

(nuiling and offkr pmlucts, hisiruss supg4ks, ardfirurtcLa art'ias) t Eugene D. Jones Senu>r Vir Pnsilent Greirur Inc.

(antsulting cigirurrs>

Euuttive Committee

+ Finance Committee

1. Audit Committee t Committee on Organization Compensation and Board Affairs Corporate Responsibility Committee 52 As of February 1,1988

I Nd dERVICE AREA As of December 31,1987 l

~kH._ . VT NH _ _ . .

HUSETTS NY soston

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l l  % E Electric itetail Service Area C Electrie Whokwle Service Area O Gas Service Area NJ New York

1. City

__ ( l l The Northeast Utilities service area covers appmximately 5,970 square miles (4,480 in Connecticut and 1,490 in hiassachusetts) in 212 communities (153 in Connecticut and 59 in hiassachusetts).

, Northeast Utilities serves 1,209,686 electric and 169,937 gas customers. (CL&P serves 1,024,M3 electrie l

and 169,937 gas customers in Connecticut. In hiassachusetts, Wh1ECO serves 185,147 electric customers, and ilWP serves wholesale 44 large industries, an investor-owned utility, and a municipal electric l de} irtment.)

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N0n*H( Ast 4JCLE AA ENf *3v Coup Aw RQ Box 270 Hartford, Connecticut 061410270 (203) 665-5000 1

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