ML20205Q837

Annual Rept for 1986

ML20205Q837
Person / Time
Site:	Yankee Rowe
Issue date:	12/31/1986
From:	Papanic G, Tribble J YANKEE ATOMIC ELECTRIC CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
FYR-87-032, FYR-87-32, NUDOCS 8704060077
Download: ML20205Q837 (19)

Text

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'A Ypxas Yankee Atomic Electric Company Annual Report 1986 f

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Contents Page Description of Business.. 1 Common Stock Ownership.. I President's Letter.. 2 Selected Financial Data =- . 3 Report of Independent Certified Public Accountants 3 Financial Review.- 4 Statements of Income and Retained Earnings-- .. 5 Balance Sheets.. 6 Statements of Changes in Financial Position.. . 7 Notes to Financial Statements . 8 Officers of the Company. 16 Board of Directors.. .. 16

YANKEE ATOMIC ELECTRIC COMPANY 1671 WORCESTER ROAD FRAMINGHAM, MASSACHUSETTS 01701 Yankee Atomic Electric Company, an electric utility company, was incorporated in hiassachusetts in 1954 under the provisions of the hlassachusetts utility law which permits two or more electric companies to join in the construction and operation of a generating plant to serve their common needs.

The Company was formed by New England utilities for the purpose of constructing and operating New England's first nuclear power plant. In addition to its license to generate, buy, transmit and sell electricity, the Company is authorized to conduct research and engineering and assist others engaged in a similar business. The ten sponsoring utilities own the entire common capital stock of the C;mpany and are entitled to and obligated to purchase the output of the plant at a cost equal to total operating expenses plus a return on investment.

The Yankee plant is located on the Deerfield River in the Berkshire Hills in the Town of Rowe, hf assachusetts. The plant was placed in commercial operation in 1961 and has been in full operation since that time except for maintenance and refueling shutdowns. The unit is rated at 185 megawatts (gross) and has generated over 28 billion kwh of electricity since inception.

In 1968, the Securities and Exchange Commission authorized the Company to organize a Nuclear Services Division under the Company's corporate structure. This Division has a staff of approximately 400 engineers who provide services in all aspects of nuclear power plant design and operation including Nuclear Engineering, Environmental Engineering, Operations, Quality Assurance, Plant Engineering and Fuel hianagement.

Services are performed on a cost basis for the Yankee plant and other power plants of the sponsoring companies.

A limited amount of work is performed at a profit for other companies in the United States and abroad.

Comrrnn Stock Ownership Ownership Shares percentage Owned New England Power Company. 30.0% 46,020 The Connecticut Light and Power Company. 24.5 37,583 Boston Edison Company. 9.5 14,573 Central hiaine Power Company . 9.5 14,573 Public Service Company of New Hampshire.. 7.0 10,738 Western Alassachusetts Electric Company.. .. 7.0 10,738 hiontaup Electric Company . 4.5 6,903 Central Vermont Public Service Corporation.. 3.5 5,369 Commonwealth Electric Company.. 2.5 3,835 Cambridge Electric Light Company. 2.0 3,068 100.0 % 153,400 1

President's Letter 1986 was another good year for Yankee. The Rowe plant operated at 95% capacity factor, and generated 1.39 billion kilowatt hou s. This was the second best year in the 26 year history of the i plant. Only 1971 was better, when the plant produced 1.43 billion kilowatt hours.

Generation was not the only achievement in 1986, however. In its Systematic Assessment of Licensee Performance, the NRC gave Yankee its best rating ever. As a result of "this continuing record of superior operating performance", the NRC announced a reduced inspection frequency at Rowe. Only five other plants across the country have been so designated, and Yankee is the only one in the northeast region.

Company earnings were down somewhat in 1986 due to a change in the tax laws which reduced the benefit of deferred investment tax credits, as well as expenditures for political purposes, which are not billed to customers. Ilowever, return on equity was 13.5%, and the cost of power was 4c per kilowatt-hour, the lowest since 1983, when it was also 4c. This is a very respectable performance, considering the small size of the plant, and the capital expenditures that have been necessary to meet escalating NRC safety requirements.

The Company continues to provide substantial engineering services to other nuclear plants, principally in New England. Our major customers in Alaine and Vermont had very good years in 1986, as well. . hf aine Yankee set an all-time record for generation at 6.24 billion kilowatt hours.

And Vermont Yankee has run nearly continuously at full power ever since coming back on line in July, after replacement of its recirculation system piping. This is quite an achievement, because recovery from such an extensive maintenance operation is almost as difficult as starting up a new plant.

Yankee also provides technical services to the Seabrook plant, construction of which is now complete. Only political problems have prevented startup. We are confident Seabrook will overcome these problems, as it has so many in the past, and take its place as an important part of New England's generating mix.

/M1 leedd s &

February 27,1987 James E. Tribble 2

. -, ~ . . - - -. . . .. . .. - - .--

l Selected Financial Data (in thousands, except where noted)

Year Ended December 31, f 1986 1985 1984 1983 1982 -

Operating revenues:

Electric sales $55,031 $62,398 $60,522 $53,672 $52,097 l~ ~ Engineering services .._ 30,977 29,977 28,081 27,339 - 24,283 Total. . . $86,008 $92.375 $88,603 - . $81,011 $76,380 Operating income-- ... $ 6,082 $ 6,390 $ 7,429 $ 7,267 $ 5,811 Net income .. . $ 2.951 $ 3,612 $ 3,750 $ 3,928 $ 3,649 Common dividends.. $ 3,068 $ 3,605 $ 3,758 $ 3,835 $ 3,298 Total assets.. , .. $91,302 $94,838 $90,922 $86,359 $77,730 Long. term debt $31,813 $29,213 $16,325 . $15,750 $15,300 Short-term debt $ 3,400 $ 7,700 $ 9,300 $13,000 $15,300 Earnings per share ($ per share) . $ 19.24 $ 23.55 $ 24.45 $ 25.61 $ 23.79 Return on equity (percent).. 13.5 % 16.3 % 16.9 % 17.7 % 16.9 %

-Net generation (millions of kwh).. 1,393 1,182 1,026 1,343 882 Power cost (c/kwh). 4.0c 5.3c 5.9c 4.0c 5.9c COOPERS 3C LYBRAND Report ofIndependent Certiped Public Accountants YANKEE ATostic El.ECTRIC CONtPANY Framingham, Alassachusetts We have examined the balance sheets of Yankee Atomic Electric Company as of December 31,1986 and 1985, and the related statements of income and retained earnings and changes in financial position for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with.

l 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. .

In our opinion, the financial statements referred to above present fairly the financial position of Yankee -

Atomic Electric Company as of December 31,1986 and 1985, and the results of its operations and the changes in its financial position for each of the three years in the period ended December 31,1986, in conformity with generally accepted accounting principles applied on a consistent basis after restatement for the change, with l

which we concur, in the method of presenting the Yankee Decommissioning Trust as described in Note A of

" Notes to Financial Statements."

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Boston, Alassachusetts February 26,1987 i

3

Financial Review The Company has power contracts with its stockholder utilities through June 1991 which require these utilities to purchase all of the electrical output of the plant at a cost equal to total' operating expenses plus a return on investment, whether or not the plant operates. The Company also operates a Nuclear Services Division which furnishes engineering services to the Yankee plant and to other New England power projects on a cost basis. Limited engineering work is also performed for others at a profit.

! During 1986, the Yankee plant operated with an availability of 95.2% and provided electricity to stockholder utilities at a cost of 4.0e per kilowatt hour. There was no refueling in 1986, and the next refueling is scheduled for May 1987.

During 1986, the Company prevailed in a federal income tax court case agair.st the United States government regarding the exclusion of its decommissioning revenues from taxable income for fiscal years 1981 through 1983, and a portion of 1984. As a result, approximately $9,500,000 in federal and state income taxes will be refunded to the Company. During 1986, the Company recovered $2,506,597 in federal cod state income taxes. This amount, together with $605,253 of interest on the tax benefits, was refunded to customers. The balance will be refunded to customers as it is received by the Company, in accordance with regulatory requirements. (See Note F of " Notes to Financial Statements" for additional information regarding federal income taxes.)

Fuel expense increased $1,259,000 from 1985 to 1986 primarily due to increased generation.

Operations and maintenance expense decreased by $8,597,000 in 1986 primarily because the plant operated without a refueling and without any significant unplanned shutdowns in 1986. Also, approximately $3,500,000 of prior core waste disposal costs were included in operating expenses in 1985, with no corresponding amount charged in 1986.

Approval of a revised decommissioning rate schedule, in April 1985, resulted in the $709,000 increase in decommissioning expense in 1986 because the revised rates were in efTect for a full year. (See Note G of " Notes to Financial Statements" for additional information regarding decommissioning.)

The $246,000 increase in other income from 1985 to 1986 was the net result of interest received on decommissioning tax refunds from the Internal Revenue Service (IRS) and payments made to the Franklin County referendum effort.

The $343,000 increase in interest on long-term debt from 1985 to 1986 was the net result of an increase in average long-term debt outstanding and a decrease in interest rates.

Other interest, net, increased $382,000 in 1986 primarily because of interest adjustments recorded in 1986 resulting from a Federal Energy Regulatory Commission (FERC) audit covering the years 1981 through 1984, and because of a reduction to interest expense in 1985 for interest returned to customers on the prior core waste disposal fee.

The decline in net income in 1986 was primarily caused by an increase in costs not recoverable from customers and a reduction in benefits obtained from deferred investment tax credits. The FERC has advised the Company that it is considering actions to reduce the Company's current allowed 14%% rate of return on equity on a prospective basis.

The Tax Reform Act of 1986 resulted in the loss in 1986 of approximately $1,000,000 of investment tax credits which would have been available under the old law. The loss of these credits in 1986 and the future will result in lower net income for the Company, and a decrease in funds provided from operations. Ilowever, management believes that its credit facilities are adequate for its needs. (See Note E of " Notes to Financial Statements" for additional information.)

Construction expenditures for 1987 are estimated to be $2,500,000.

In December 1986, the Company paid its 39th consecutive dividend.

4

Statements of Income and Retained Earnings Year Ended December 31.

1986 1985 1984 Operating revenues (Note A):

Electric sales.. $55,030,825 $62,397,278 $60,521,821

' Engineering services to others . 30,977,235 29,977,261 28,081,445 Total operating revenues.. .. .. 86,008,060 92,374,539 88,603,266 Operating expenses (Note A):

Fuel (Note B).. . . . . . 12.243,314 10,984,812 9,468,952 Operations .. 14,022,557 21,638,469 17,131,173 Engineering.. 38,463,323 39,594,648 36,817,912 Maintenance .. , 1,725,694 2,706,299 3,493,218 Decommissioning (Note G) . 5,741,004 5,031,558 2,903,220 Depreciation . . . 6,372,412 5,216,940 4,896,688 Taxes, other than federal income.. . 2,935,310 1,778,046 2,936,014 Federal income taxes (Note F) . (1,577,873) (965,848) 3,527,486 Total operating expenses . 79.925,741 85,984,924 81,174,663 ,

1 Operating income .. 6,082,319 6,389,615 7,428,603 Other income:

Allowance for equity funds used during construction (Note A) . 96,917 228,308 -

Other, net.. 212,107 (34,101) 188,435 Total other income.. 309,024 194,207 188,435 Operating and other income .. 6,391,343 6,583.822 7,617,038 Interest:

Interest on long. term debt.. 3,204,927 2,861,747 2,719,253 Interest on short. term debt.. 266,592 483,919 986,366 Other interest, net . 162,366 (220,100) 222,244 Allowance for borrowed funds used during construction-credit (Note A) . (193,650) (154,050) (61,114)

Total interest .. . 3,440,235 2,971,516 3,866,749 Net income.. $ 2,951,108 $ 3,612,306 $ 3,750,289 Retained earnings:

l Retained earnings at beginning of year.. $ 6,008,517 $ 6,001.111 $ 6,009,122 Net income.. 2.951,108 3,612,306 3,750,289 8,959,625 9,613,417 9,759,411 Dividends paid . 3,068,000 3,604,900 3,758,300 Retained earnings at end of year (Note C) . $ 5,891,625 $ 6,008,517 $ 6,001,111 Per share data:

Earnings per share.. $19.24 $23.55 $24.45 Dividends per share.. $20.00 $23.50 $24.50 The accompanying notes are an integral part of these financial statements.

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r

. Balance Sheets

- ASSETS Dnember 31, 1986 1985

- ( Restated) .

Utilky plant, at oiiginal cost (Note A) , $82,793,749 $82,059,358 .

Less accumulated provisions for depreciation .. .. 64,712,359 58,941,984 I8,081,390 23,I17,374 -

Construction work in progress . 140,769 200,711.

l .

Nuclear fuel, at amortized cost (Notes B and I) _ 31,879,767 21,848,637 Net utility plant.- 50,101,926 55,166,722 Decommissioning trust (Note G); 21,647,820 17,919,152'.

Non-utility property,less accumulated provisions for depreciation of $453,538 .

and $404,594 525,339 .

.574,283-Other investments - - .. . 911,209 4 607,931

! Current assets: '

Cash and temporary cash investments - 6,870 110,409 Accounts receivable:

1 Electric sales.; . 5,015,094 12,212,978 -

I Engineering services to others (Note A).. 4,610,766 5,975,149 -

l Other. . . .. 3,7 % ,599 79,955 Materials and supplies, at average cost;- 820,692 844,936

)

Prepayments and other.. . . . . . . . '500,054 764,708 i i- Total current assets . .. -,.. 14,660,075 19,988,135 I Deferred federal and state income taxes (Note F) . 3,455,411 581,924 j $91,301,780 $94,838,147 a

! CAPITALIZATION AND LIABILITIES '

! Capitalization:

1 Capital stock, par value $100 per share: 153,400 shares authorized and -

j outstanding .. . . $15,340,000 ~ - $15,340,000 Retained earnings (Note C). . . . . . 5,891,625 6,008,517 Long-term debt (Note D).. .. 31,812,500 29,212,500

}

Total capitalization . . 53,044,125 50,561,017 Current liabilities:

Long-term debt due within one year (Note D) -- 3,400,000 -1,800,000 l Short-term debt (Note E) . .

- 5,900,000

Accounts payable.. ...... .. 4,126,612 11,339,320 373,232 448,165 Accrued interest - . . . . . . . . . . .

Total current liabilities . . . . . . 7,899,844 19,487,485 Decommissioning reserve (Note G) . . ...... 26,729,328 19,731,148 '

i Unamortized investment tax credits (Note F) . 3,628,483 5,058,497 1 I

Commitments and contingencies (Notes B, F, G and I). .. ..-.. . . . .

I $91,301,780 $94,838,147 i  !

, i j The accompanying notes are an integral part of these financial statements. l 6

l

t l Statements of Changes in Financial Position i

Year Ended Dnember 31.

1986 1985 1984 (Restated) ( Restated)

Financial resources were provided by:

Net income.. .. $ 2,951,108 $ 3,612,306 $ 3,750,289 l'rincipal non-cash items:

Depreciation, including non-utility property - 6,421,356 5,265,884 4,945,632 Amortization of nuclear fuel.. I1,067,150 9,720,926 8,373,024 Allowance for funds used during construction

( AFUDC).. (290,567) (382,358) (61,114)

Deferred federal and state income taxes (2,873,487) (4,323,711) 3,587,770 Investment tax credits-net (1,430,014) 432,260 248,224 l'rovision for prior core spent fuel disposal liability.. - 6,091,888 2,221,797 Working capital provided from operations ... 15,845,546 20,417,195 23,065,622 Issuance of long-term debt .. 6,000,000 14,000,000 5,000,000 Increase in decommissioning reserve.. .. 6,998,180 7,255,139 3,429,174 Other .. . 59,618 218,669 4,538 28,903,344 41,891,003 31,499,334 Financial resources were used for:

Construction expenditures, net of AFUDC.. 1,258,729 4,502,374 3,082,416 Nuclear fuel purchases, net of AFUDC- 10,885,088 12,846,092 9,630,156 Repayment of long-term debt.. 1,800,000 3,362,500 2,925,000 Increase in decommissioning trust.. 3,728,668 5,220,143 3,325,468 Spent fuel payment . - 13,206,630 -

Other investments . 303,278 383,309 224,622 Dividends on common stock.. 3,068,000 3,604,900 3,758,300 21,043,763 43,125,948 22,945,962 Increase (Decrease) in working capital . . $ 7,859.581 $( 1,234,945) $ 8,553,372 Changes in components of working capital:

Cash and temporary cash investments.. $ (103,539) $ (I,466) $( 1,546,823)

Accounts receivable.. (4,935,623) 3,494,814 4,048,481 Alaterials and supplies.. (24,244) (4,421) (106,410)

I' repayments and other.. (264,654) 132,021 (29,222)

Short-term debt . 5,900,000 (650,000) 5,200,000 Accounts payable. 7,212,708 (4,623,467) (518,265)

Accrued federal income tax.. - 520,364 1,441,882 Acerued interest.. 74,933 (102,790) 63,729 Increase (Decrease) in working capital . $ 7,859,581 $( l.234,945) $ 8,553,372 The accompanying notes are an integral part of these financial statements.

7

Notes to Financial Statements Note A-Summary of Significant Accounting Policies:

1. System of Accounts:

The accounts of the Company are maintained in accordance with the Uniform System of Accounts prescribed by regulatory bodies having jurisdiction. The accounts of the Yankee Decommissioning Trust (the Trust) are presented on a consolidated basis. (See Notes A.8 and G.)

2. Nuclear Services Division:

The Company operates a Nuclear Services Division under the applicable rules and regulations of the Public Utility IIolding Company Act of 1935 for the purpose of furnishing engineering services to the Company and its sponsoring utilities. Such services are provided on a full cost basis, including a return on working capital. The cost of services provided to the Yankee plant amounted to $9,627,064 in 1986, $11,550,311 in 1985 and $10,687,980 in 1984, and are included as engineering costs in the Statements of Income and Retained Earnings.

3. Utility Plant:

Utility plant is stated at the original cost of construction, which includes an allowance for the cost of funds used during construction. Costs of current repairs and minor replacements of plant and properties, which do not extend the current life of the plant, are charged to maintenance expense accounts as incurred. Plant retired or otherwise disposed of, together with costs of removal less salvage, is charged to accumulated provisions for depreciation.

4. Depreciation:

For financial statement purposes, depreciation is provided over the estimated service lives of the various classes of property on a straight-line basis. The estimated average remaining service life at December 31,1986 is approximately four years.

5. Allotcance for Funds Used During Construction (AFUDC):

The Company capitalizes as a part of construction and fuel costs an item called allowance for borrowed funds used during construction, which represents the approximate pre-tax cost of short-term debt and an item called allowance for equity funds used during construction, which represents the cost of other funds. AFUDC is recognized as a cost of " Utility plant" and " Nuclear fuel." Accordingly, AFUDC is capitalized in the same manner as construction labor and material costs with an offsetting credit to " Interest." This is in accordance with an established regulatory approved rate-making practice under which a utility is permitted a return on, and the recovery of, these capital costs through their ultimate inclusion in the rate base and in the provisions for depreciation and amortization.

The combined rate used in calculating AFUDC was 10.4% in 1986,11.0% in 1985 and 11.7% in 1984. In accordance with regulatory directives, thew rates included the before-income-tax effect of horrowed funds.

6. Nuclear Decommissioning:

In a 1984 decommissioning study, the Company estimated the cost of decommissioning the Yankee plant, utilizing the immediate dismantlement and removal method, at approximately $68 million in 1984 dollars. The Company records and bills decommissioning on a remaining life basis in accordance with regulatory approval.

(See Note G.)

8

Notes to Financial Statements (continued)

Note A-Sumtnary of Significant Accounting Policies (continued):

7. Income Taxes:

The tax efIect of timing differences (differences between the periods in which transactions adect income in the financial statements and the periods in which they affect the determination of income subject to tax) is accounted for in accordance with regulatory approval.

Investment tax credits are deferred and amortized over the estimated service lives of the property giving rise to the credits. ,

8. Restatement:

The 1985 Balance Sheet and the 1985 and 1984 Statements of Changes in Financial Pm; tion have been restated to include amounts relative to the Yankee Decommissioning Trust to conform with the 1986 presentation of the Trust. (See Note G.)

Note B-Nuclear Fuel:

The cost of nuclear fuel in the reactor is amortized to fuel expense on a unit of production method at rates based on estimated kilowatt hours to be produced from each core. Fuel expense also includes a charge for the permanent disposal of spent fuel.

The following table lists nuclear fuel components.

Dece.nher 31.

1986 1985 In stock.. $ 4,323,621 $ 6,667,102 In process . .. 13,517,249 -

Assemblies in reactor.. 32,291,127 32,291,997 Gross nuclear furl .- . 50,131,997 38,959,099 Less accumulated amortization.. 18,252,230 7,110,462 Net nuclear fuel.. $31,879,767 $31,848,637 Components of fuel expense are set forth in the following table.

Year Ended December 31.

1986 1985 1984 Amortization of nuclear fuel:

Enriched uranium.. . $ 9,089,487 $ 8,277,089 $7,101,537 Fabrication.. 1,810,537 1,435,826 1,271,487 AFUDC.. 167,126 8,011 -

11,067,150 9,720,926 8,373,024 Provision for current core spent fuel disposal.. 1,176,164 1,263,886 1,095,928 Fuel expense.. . . . $12.243,314 $10,984,812 $9,468,952 Under the Nuclear Waste Policy Act of 1982, the Company entered into a contract with the United States Department of Energy (DOE), under which it is required to pay the DOE a fee of 1.0 mil per kilowatt hour for net electricity generated after April 6,1983 in exchange for DOE services in disposing of the spent nuclear fuel used to generate that electricity.

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~ .. -. . - -

e Notes to Financial Statements (continued)

Note B-Nuclear Fuel (continued):

On June 30,'1985, the Company paid a lump-sum amount of $13,2%,630 to the DOE to satisfy its contractual liability for disposal of nuclear fuel used prior to April 7,1983. As a result of this election, the Company reversed and refunded an interest accrual of $2,323,429 previously billed to its customers. In addition, the Company ~ amortized to operations expense its remaining balance of unbilled spent fuel disposal costs, amounting to $8,415,317 at December 31,1984, and recognized certain tax benefits not previously recognized.

(See Note F.)

Note C-Restrictions on Retained Earnings Available for Dividends on Common Stock:

Pursuant to restrictions contained in the Loan Agreements, $4,660,000 of the Company's retained caraings at December 31,1986 were restricted as to dividends on common stock.

Note D-Long-Term Debt:

On December 31,1986, the Company converted a $20,000,000 revolving credit agreement with banks into a term loan. The term loan is repayable in quarterly varying installments through Afarch 31,1991. Interest

rates on advances are set, at the Company's election, at either the banks' prime rate or the London Interbank

! Offered Rate plus a fraction thereof. During the revolving credit period, the Company was obligated to pay a i monthly commitment fee in lieu of compensating balance requirements. At December 31,1986, the balance i outstanding was $20,000,000.

In 1984, the Company converted a $15,000,000 revolving credit agreement with other banks into'a term

loan. Commencing on September 30,1984, the loan was to be repaid in principal amounts of 15% for each of the first four years and 20% for each of the following two years with final payment required on June 30,1990. After -

l the Alarch 30, 1985 installment payment, an agreement was reached with the banks to delay principal installments until 1988, with final payment required in June 1991. Interest rates under this credit agreement .;

j are variable and are set, at the Company's election, at either the banks' prime rate or the London Interbank

, Offered Rate plus a fraction thereof. There are no compensating balance or monthly commitment fee requirements. At December 31,1986, the balance outstanding was $13,312,500.

! The term loan agreements are secured by the collateral assignment of all the Company's rights under the customer power contracts.

The Company has an unsecured long-term note for $1,900,000 with an 8%% interest rate maturing on j' January 2,1988. lleginning July 1,1982, the Company paid the first of ten semiannual principal installments

• l amounting to $900,000 per installment on the original $10,000,000 loan. The last two principal installments of

! the note will be $500,000 each.

Information regarding long term borrowings is summarized in the following table, f December .II.

4 1986 1985 1984 Term loans.. . . . $33,312,500 $27,312,500 $14,875,000 Installment note--8%%.. 1,900,000 3,700,000 5,500,000 i TotaI.. 35,212,500 31,012,500 20,375,000

! Less long-term debt due within one year . .. 3,400,000 1,800.000 4,050,000 i Long term debt, net . $31,812,500 $29,212,500 $16,325,000 i

The weighted average interest rates on year-end, long-term borrowings were 9.3%,10.4% and 10.8%,

~

! respectively, for 1986,1985 and 1984. The weighted average interest rates during 1986,1985 and 1984, based l

on average month-end balances, were 10.1%,10.9% and 11.8%, respectively.

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4

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Notes to Financial Statements (continued) 3 Note E-Short. Term Debt:

The Company has lines of credit with banks aggregating $25,000,000. Interest on borrowings is set at the -

1: banks' prime rate or the London Interbank Offered Rate plus a fraction thereof at the time of the advance. In 4

. lieu of compensating balance requirements, the Company is obligated to pay a commitment fee.

i

! The Company has been authorized by the Securities and Exchange Commission to issue and sell up to

, $25,000,000 of short-term notes and/or commercial paper through December 31,1988. The Company generally

, utilizes commercial paper, supported by its lines of credit, to finance construction projects or meet general working capital requirements.

Information regarding short. term borrowings is summarized in the following table..

1986 1985 1984 i

j Commercial paper outstanding at year-end . ..-. $ -. $ 5,900,000 $ 5,250,000 Maximum amount of borrowings at any month-end- $12,850,000 . $12,200,000 $12,000,000 Weighted monthly average borrowings out. I i standing during the ycar. $ 3,458,000 $ 6,435,000 $ 9,077,000 l The weighted average interest rates on year-end, short. term borrowings were 8.9% and 9.3%, respectively, for 1985 and 1984. The weighted average interest rates during 1986,1985 and 1984, based on average month-end balances, were 7.8%,7.5% and 10.9%, respectively.

Note F-Federal Income Taxes:

i j Federal income taxes consist of the following components.

l 1986 1985 1984 I- Current income taxes.. $ 3,137,156 $ 2,997,870 $ (280,821)

Deferred income taxes.. (3,119,257) (4,323,711) 3.587,770 i

Investment tax credittr--net (1,430,014)~ 432,260 248,224 f $( 1,412,115) $ (893,581) $3,555,173 j

s

investment tax credits-net reflect increases or decreases in federal income taxes attributable to such

! investment tax credits which have been deferred and amortized.

The Company has adopted comprehensive interperiod tax allocation (normalization) consistent with regulatory approval. The following table details the components of deferred federal income taxes, j 1986 1985 1984 Provision for plant decommissioning = $(3,814,787) $( I,266,721) -

3 Provision for decommissioning refunds.. . . . . 2,555,680 667,620 -

4 Allowance for funds used during construction . (53,456) 261,815 $ (57,818)

Excess book depreciation and fuel amortization . (1,806 694) (1,014) (1,012,550)

Provision for spent fuel disposal . -

(3,985,411). ~ 4,658,138

$(3,119,257) $(4,323,711) $ 3,587,770 4

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Notes to Financial Statements (continued) 1 Note F-Federal Income Taxes (continued): l The tax effect of the cumulative amount of timing differences at December 31,1986 for which deferred income taxes have not been provided is not material. Total federal income taxes differ from the amounts computed by applying the statutory tax rate to income before taxes. The reasons for the differences are as follows:

1986 1985 1984 Computed tax at statutory rate.-- .- $ 707,937 $ 1,250,614 $ 3,360,513 Increase (reduction) in tax resulting from:

Amortization of investment tax credits.. (1,627,407) (1,306,240) (1,173,756)

Decommissioning refunds . (1,268,706) - -

Provision for spent fuel disposal .... .. (394,878) (1,578,024) -

! Provision for decommissioning. 237,935 363,432 1,335,481 All ether differences.. 933,004 376,637 32,935 Federal income tax provisions (including

$165,758, $72,267 and $27,687 charged to other income) . $( 1,412,115) $ (893,581) $ 3,555,173 Eficctive federal income tax rate.. (91.8%) (32.9%) 48.7%

-In January 1986, the United States Court of Appeals for the Federal Circuit reaffirmed a lower court decision that decommissioning revenues collected from January 1981 through June 1984 were not taxable to the Company, The IRS did not appeal this decision and, as a result, the Company expects to receive total federal tax benefits of approximately $8,250,000, plus interest. Of this amount, $2,350,000 has been received from the IRS and refunded to customers through reduced billings as directed by FERC. The $5,900,000 of tax benefits remaining to be received will be refunded to customers when received by the Company, in accordance with regulatory requirements.

In 1981, the Company established a decommissioning trust fund. (See Note G.) Consistent with 1984 federal tax legislation, the Company has amended the original Trust to comply with the new legislative requirements for a decommissioning tax deduction. The Company has filed for approval from the IRS and has reflected a federal tax benefit of $475,870 through 1986.

Beginning in April 1985, in accordance with regulatory approval, the Company began recording deferred federal income tax benefits on that portion of decommissioning expense which is not currer.tly deductible for federal tax purposes. This amounted to $5,081,508 at December 31,1986.

As discussed in Note B, in 1985, the Company made a lump-sum payment of $13,206 630 to the DOE for disposal of spent fuel produced prior to April 7,1983. Concurrently, the Company recognized $1,578,024 of federal tax benefits not previously recorded.

Federal income tax returns for the Company have been examined and reported on by the Internal Revenue Service through 1981.

Note G-Decommissioning:

In April 1985, the Federal Energy Regulatory Commission approved a revised decommissioning rate schedule filed by the Company. The revised schedule allows the Company to collect $5,741,000 annually during the period from April 1,1985 through its plant license expiration date of November 4,1997. This will allow the Company to collect $68,000,000 from customers (in 1984 dollars) to provide for decommissioning of the Yankee plant.

12

Notes to Financial Statements (continued)

Note G-Decommissioning (continued):

Funds collected are being deposited in an irrevocable trust, maintained by a commercial bank, with principal and interest to be used exclusively to discharge future decommissioning obligations as incurred.

Components of the Decommissioning Trust are set forth in the following table:

December 31.

1986 1985 Cash.. . $ 28,287 $ 29,843 Accounts receivable.. . 897,032 918,560 Investments.. ..

20,723,751 16,977,149 Bank fees payable . (1,250) (6,400)

Decommissioning Trust assets, net.. $21,647,820 $17,919,152 Decommissioning Trust investments are invested in federal and state guaranteed securities, valued at cost which approximates market. At December 31,1986, deferred federal income taxes included $5,081,508, which represented federal income taxes paid on decommissioning collections which will be recovered when the Yankee plant is decomtr.issioned and the decommissioning expenses become deductible. The Trust received $1,257,176 in interest income, net, during 1986, which has been included in the balance sheet as an increase to both the Decommissioning Trust assets and the Decommissioning Reserve.

Note H-Retirement Plans:

The Company has noncontributory pension plans covering all qualified union and nonunion employees.

The Company's policy n to fund annually the actuarially determined contribution, which includes that year's normal cost plus any interest thereon, the amortization of prior service costs over 20 years and the amortization of actuarial gains and losser over 10 years. Total pension expense, including amortization of prior service costs and of actuarial gains and lesses charged principally to operating expenses of both the Yankee plant and the Nuclear Services Division, was $772,000 in 1986, $740,000 in 1985 and $652,000 in 1984.

The increase in pension cos+s in 1986 was due to an improvement in plan provisions, while the increase in 1985 was attributable to actuarial adjustments and increases in covered payroll.

The Company participates in the plans with subsidiaries of New England Electric System (the System).

The comparison, as shown below, of the market value of pension fund assets with the actuarial present value of accumuisted plan benefits is provided as a measure of the financial condition of the plans if they had been terminated as of April 1,1986 and 1985. The comparison shows that the plans' net asse:s exceed the actuarial present value of all plan benefits carned to date.

At April 1, 1986 1985 (thousands of dollars)

Actuarial present value of accumulated plan benefits:

Veste t .. $287,940 $210,663 Nonvested . 5,696 3,086 Total . .. .. $293,636 $213,749 Net assets available for plan benefits . $377,097 $331,422 The above calculation of the actuarial present value of accumulated plan benefits used an investment return of 7.1% and 8.9% in 1986 and 1985, respectively, which represents a weighted average of the interest rates used by the Pension llenefit Guaranty Corporation (a federal insurer of pension benefits); the above calculation does not reflect any future salary increases.

13

Notes to Financial Statements (continued)

Note H-Retirement Plans (continued):

llowever, System plan benefits are based on average salary levels during the final years of employment.

Therefore, future salary increases will increase plan benefits. The actuarial liability, shown below, was calculated using the plans' actuarial funding method and assumptions, including an assumption for future salary incresses.

At April 1.

1986 1985 (thousands of dollars)

Net assets available for plan benefits.. $377,097 $331,422 Actuarial liability.. 361,352 319.086 Excess of net assets over actuarial liability. . . $ 15,745 $ 12,336 In addition to providing pension benefits, the Company provides certain health care and life insurance l

benefits for retired employees. Substantially all of the Company's employees may become eligible for those l benefits if they reach retirement age while working for the Company. The cost of retiree health care and life insurance benefits is recognized as expense as claims are paid. In 1986 and 1985, these costs totalled $57,000 and $33,000, respectively.

Note I-Commitments and Contingencies:

1. The Company has contracts for the conversion, enrichment and fabrication of nuclear fuel through the year 1996. Contractual obligations under such agreements amounted to approximately $10,064,000 at December 31.1986. Of these obligations $1,861,000 are scheduled to be paid in 1987.

The Company has contracted for uranium through the year 1999. The Company is committed under a long-term purchase contract to make minimum payments aggregating $4,948,593 which may be required under a long-term contract for uranium if certain levels of production are not achieved by the supplier. At December 31,1986, the total commitments under these contracts are estimated to be:

Estimated Cost of Minimum - production 1987. $1,484,578 $ 4,797,000 1988.. 1,484,578 5,116,000 1989.. 1,484,578 4,657,000 1990.. 494,859 2,494,000 1991... - 2,644,000 1992-1996.. . .

- 10,522,000 1,ater years.. - 6,388,000 Total . $4,948,593 $36,618,000

2. The Company maintains the maximum amount of public nuclear liability insurance, currently

$160,000,000, available from private insurers. A federal statute, the Price-Anderson Act (which is scheduled to expire in 1987), mandates an industry. wide program under which nuclear facilities could he assessed in the event that a nuclear incident resulted in damages exceeding the $160,000,000 of private coverage. Under this Act, each nuclear reactor may be assessed a retrospective insurance premium of up to $5,000,000 for each nuclear incident within the United States. In the event of more than one incident per year, the maximum 14

Notes to Financial Statements (continued)

Note I-Commitments and Contingencies (continued):

annual assessment per reactor is $10,000,000. Under the billing provisions of the power contracts, the retrospective insurance premium would be includable in the cost of power.

3. At December 31,1986 and 1985, the Company had leases covering its office facilities, certain equipment and vehicles. Such lease payments are included in and recovered through the billings of the Nuclear Services Division and, therefore, have no effect on net income. In the normal course of business, the Company expects that as leases expire they will be renewed or replaced by other leases.

Estimated future annual lease payments, exclusive of taxes and insurance are as follows:

1987.. $2,280,207 1988- ._ . . . . 2,040,034 1989.. 1,868.912 1990.. _ 1,431,347 199I. 304 Later years.. -

Total . $7.620,804 1, case payments charged to operating expense amounted to $1,991,000 in 1986, $1,859,000 in 1985 and

$1,723,000 in 1984.

4. The Nuclear Services Division of the Company has provided technical services to the joint-owners of the Seabrook nuclear power plant in support of design and construction of that facility. This facility has been subject to substantial delays in its scheduled completion, and to significant increases in its budgeted cost.

Recently, the joint-owners applied to the Nuclear Regulatory Commission to obtain licensing for operation of Seabrook Unit 1. Such licensing has been delayed due to the refusal of certain towns and the Commonwealth of hlassachusetts to participate in developing evacuation plans for the six hlassachusetts towns which are within a ten mile radius of the Seabrook facility.

Negotiations are currently underway between the principal joint owners of the facility and certain contractors, including the Company, who have provided services to the joint-owners, with respect to a Standstill Agreement. Under the Agreement, the signatories would refrain for a specified period of time from claims against other signatories as to potential damages relating to the design, engineering, construction or management of the facility, subject to certain terms, conditions and exceptions. The running of any statutes of limitation would be suspended during this specified period of time. I Whether or not this Agreement is signed, the Company believes that claims potentially could be asserted against the contractors, including the Company, by one or more of the joint-owners. hlanagement is unable to predict the outcome of such unarserted claims, and it is possible that resolution of such unasserted claims could have a significant effect on the financial position and operations of the Company. Ilowever, based in part on consultations with legal counsel, management is not aware of any legitimate basis for such unasserted claims against the Company. hianagement believes that the Company's position is strong and that any such claims will be vigorously contested by the Company.

5. The Company, in common with other utilities, is subject to current and future regulations relative to nuclear power plant licensing.

This report is not to be considered an ofIer to sell or buy

. or solicitation of an offer to sell or buy any security.

15

Officers of the Company EDWARD A. BROWN, J AstES E. TRIBBLE, Chairman President and ChiefExecutive ODicer Imuts II. IIEIDER, JOltN DEVINCENTIS, l' ice President l' ice President KtRK L. RAsisAUER, ANDREW C. KADAK, Clerk I' ice President ARst AND R. SOUCY, Treasurer and ChiefFinancial ODicer ,

Board of Directors EDwAnn A. bro,wN, Chairman ofthe Company; JonsN F. OPEKA, Executive l' ice President, Chairman and ChiefExecutive ODicer of Engineering and Operations, New flampshire Yankee Electric Corporation Northeast Utilities Service Company WILLIAst F. BcRT,4ssistant to the Chief Executive Oficer, JontN B. RANDAZZA, l' ice President, COAfIEnergy Services Company Nuclear Resources, Joirs F. G. E CitoRN,JR., Chairman and Chief Executice Oficer, Eastern Utilities Associates JEVFREY D. TRANEN, l' ice President.

New England Power Company BERNARD M. Fox, Executive l' ice President i and ChiefFinancial and 3,,,7s g, 3g,ggtg, p,,,;g,,, ,,g Administratice Of}icer, W ef autive Opar oftMompany Northeast Utilities FREDERic E. GREENS 1AN, Senior System JoSEPli P. TYRRELL, Executive l' ice President, l' ice-President and General Counsel, Boston Edison Company New England Power Company TsiostAs C. WEBB, President and RonERTJ. II ARRIsoN, President and Chief Executing Oficer, ChiefExecutice Oficer, Public Service Company ofNew Hampshire Central l'ermont Public Service Corporation 16

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1986 Certified Iinaacul Statements 5

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