ML20206E591
| ML20206E591 | |
| Person / Time | |
|---|---|
| Site: | Millstone  |
| Issue date: | 04/07/1987 |
| From: | Guglielmo F NORTHEAST UTILITIES |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| NUDOCS 8704130663 | |
| Download: ML20206E591 (79) | |
Text
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OE General Offices e Selden Street, Berlin, Connecticut 9
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P.O. BOX 270
- s avi" casa w" HARTFORD. CONNECTICUT 06141-0270 k
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(203) 665-5000 April 7, 1987 Director Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C.
20555
Dear Sir:
In accordance with paragraph 50.71(b) of 10CFR, Part 50, enclosed is one copy of each of the 1986 Annual Financial Report of The Connecticut Light and Power Company and Western Massachusetts Electric Company, license holders, all certified by Arthur Andersen & Company, certified public accountants.
The 1986 Annual Financial Report for Northeast Nuclear Energy Company will not become available until on or about April 24, 1987. One copy of Northeast Nuclear Energy Company's 1986 Annual Financial Report will be forwarded to you as soon as possible.
Please acknowledge receipt by returning the duplicate copy of this letter in the stamped, self-addressed envelope enclosed for your convenience.
Very truly yours, F. J. Guglielmo Supervisor, Statistics and Regulatory Reports FJG/j em/SRR122f Enclosure 8704130663 870407 I
PDR ADOCK 05000245 0
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PDR ty
ANNUAL REPORT 1986 4
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CL&P THE CONNECTICUT LIGHT & POWER COMPANY a subsidiary of Northeast Utilities
Directors PHILIP T. ASHTON LEON E. MAGLATHLIN, JR.
Senior Vice President Senior Vice President JOHN P. CAGNETTA EDWARD J. MROCZKA Senior Vice President Senior Vice President WILLIAM B. ELLIS JOHN F. OPEKA Chairman, President and Chief Executive Officer Executive Vice President BERNARD M. FOX LAWRENCE H. SHAY Executive Vice President and Chief Financial Senior Vice President and Administrative Officer WALTER F. TORRANCE, JR.
FRANK R. LOCKE Senior Vice President, Secretary and Vice President and Chief Administrative Officer General Counsel Western Massachusetts Eiectric Company Officers WILLIAM B. ELLIS TOD O. DIXON GEORGE D. UHL Chairman. President and Vice President Vice President and Controller Chief ExecutiveOfficer RAYMOND E. DONOVAN RICHARD P. WERNER BERNARD M. FOX Vice President Vice President ALBERT J. HAJEK LESLEY C. GEROULD Ch f na al d d ini ative Officer Vice President Regional Vice President-Southern JOHN F. OPEKA WARREN A. HUNT ROY C. NORMEN -
Executive Vice President Vice President Regional Vice President-Northern PHILIP T. ASHTON FRANCIS L KINNEY ALFRED R. ROGERS Senior Vice President Vice President F.egional Vice President-Central JOHN P. CAGNETTA HARRIE R. NIMS ROBERT W. ZONGHETTI Senior Vice President Vice President Regional Vice President-Westem LEON E. M AGLATHLIN, JR.
LEONARD A.O'CONNOR ELIZABETH W. BROOME Senior Vice President Vice President and Treasurer Assistant Secretary EDWARD J. MROCZKA RICHARD A. RECKERT CHERYL W. GRISE Vice President Assistant Secretary i
Senior Vice President LAWRENCE H. SHAY WAYNE D. ROMBERG DOUGLAS R. TEECE Senior Vice President Vice President Assistant Secretary WALTER F. TORRANCE JR.
WALTER T. SCHULTHEIS ROBERT C. ARONSON i
Vice President Assistant Treasurer Senior Vice President, Secretary and General Counsel C. FREDERICK SEARS DAVID H. BOGUSLAWSKI C. THAYER BROWNE Vice President Assistant Treasurer Vice President JOHN J. SMITH l
CARROLL A. CAFFREY Vice President Vice President FEBRUARY 27,1987 l
i THE CONNECTICUT LIGHT AND POWER COMPANY February 27, 1987 TO OUR PREFERRED STOCKHOLDERS:
The financial statements and statistical data contained in this report reflect the resultslof operations of The Connecticut Light and Power Company (CL&P) for 1986.
The 1986 annual report of Northeast Utilities, which provides information regarding the entire Northeast Utilities system, including CL&P, has also been mailed to all CL&P preferred stockholders.
This report is brief for that reason.
In 1986, several events occurred which furthered the company's progress toward achieving long-term financial strength.
The construction of Millstone 3 was completed and commercial operation began on April 23, 1986.
Since that date, the unit has been performing at a level that exceeds the average for new nuclear units.
CL&P's investments in Millstone 3 and the canceled Seabrook 2 project have been addressed in its completed retail rate case, which is described in detail within this report.
Also in 1986, CL&P bonds were upgraded by Moody's from Baa2 to Baal and its preferred stock was upgraded from baa2 to baal.
g Sincerely, o
/
l Bernard M.
Fox William B.
Ellis Executive Vice Presi ent, and Chairman, President, and Chief Financial and Administrative Chief Executive Officer officer
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1 The Connecticut Light and Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS i
This section contains management's assessment of The Connecticut Light and.
Power Company's (the Company) financial condition and the principal factors which have an impact on the results of operations. This discussion should be read in conjunction with the Company's financial statements and footnotes.
FINANCIAL CONDITION The Company's financial condition continued to improve during 1986 with progress being made toward its objective of achieving long-term financial strength. Several significant events occurred during the year. The financing and construction of Millstone 3 were completed, and the unit has been performing at a level which exceeds the average for new nuclear units. The Company owns 52.93 percent of Millstone 3.
In addition, as further discussed below, a rate settlement in Connecticut substantially resolved the uncertainty of major issues relating to the rate treatment for Millstone 3.
The Company continued to improve.its capital structure by increasing its f
equity ratio to 39.3 percent at December 31, 1986. The Company's not income increased to $291.5 million in 1986 compared to $277.1 million in 1985, primarily attributable to a 5.1 percent increase in electric sales. Noncash items, which include the allowance for funds used during construction (AFUDC) and the deferred return on the Millstone 3 investment not currently included in rate base, continued to provide almost 60 percent of the Company's earnings.
In December 1986, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 90, " Regulated Enterprises--Accounting for Abandonments and Disallowances of Plant Costs" (SFAS 90). 'Under SFAS 90, a utility must record a loss when it becomes probable i
that a cost disallowance of a newly completed plant will occur and the amount can be reasonably estimated.
It further requires that a utility record abandoned plant at the present value of the probable future revenues expected to-b provided to recover the cost of the asset when it appears probable that a regulatory commission will permit recovery of an abandoned plant without granting a return.
If the carrying amount of the abandoned asset exceeds the present value, a loss would be recognized.
SFAS 90 will be effective for fiscal years beginning after December 15, 1987. The FASB expects to release a separate exposure draft on the accounting for phase-in plans sometime in 1987.
The Company's investment in Millstone 3 has been addressed in its recently completed retail rate case. The Connecticut Department of Public Utility Control (DPUC) approved settlement agreements that denied recovery of approximately $184.4 million, representing the Company's pro rata share of Millstone 3 construction costs in excess of $3.4 billion. Under generally accepted accounting principles currently in effect, this regulatory action would not require immediate loss recognition. As a result of the DPUC decisions with
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respect to the partial disallowance of Millstone 3, the Company's net income will be reduced when the provisions of SFAS 90 are adopted. The impact of the Millstone 3 disallowance at the time SFAS 90 is adopted is expected to reduce net income by approximately $125 million.
The Tax Reform Act of 1986 modified many provisions of the federal tax laws. The modifications include the reduction in the corporate tax rate, the repeal of investment tax credit, the adoption of a new corporate afternative ninimum tax, and changes in the capitalization rules and depreciation system.
It is expected that'these modifications will have an adverse impact on cash flow.
The impact of the lower tax rates on deferred tax reserves will depend greatly on the treatment authorized in future decisions of regulatory commissions.
Construction Program The Company's 1986 construction expenditures of $339.3 million were the lowest since 1981, as Millstone 3 was completed and began commercial operation in April. Future construction projects are expected to require smaller outlays of funds and involve shorter construction periods. Projected construction expenditures, including AFUDC but excluding nuclear fuel, for the period 1987 through 1991 are presented in the following table.
Production Electric Facilities Distribution Other Total (Thousands of Dollars) 1987
$175,607
$ 77,090
$59,947
$312,644 1988 90,514 87,365 49,858 227,737 1989 94,312 97,609 55,620 247,541 1990 57,751 99,822 54,433 212,006 1991 60,273 101,455 53,643 215,371 The construction program includes the Company's 4.06 percent ownership interest in Seabrook 1.
For financial planning purposes, the Company is projecting that Seabrook I will be placed in service at the end of the second quarter of 1988, and the Company's share of the total cost of the unit will be tpproximately $230 million. As of December 31, 1986, the Company's investment in Seabrook I was was $193.3 million.
As discussed more fully in Note 11 of " Notes to Financial Statements," many uncertainties surround the Seabrook project. The Company believes that the commercial operation of Seabrook 1 is probable but not assured due to these uncertainties. Although the Company has only a 4.06 percent ownership interest, a substantial disallowance of Seabrook 1 costs could have an impact on the l
Company's ability to maintain progress toward its objective of achieving long-term financial strength.
Seabrook 2, in which the Company also has a 4.06 percent ownership interest, has been officially canceled. As of December 31, 1986, the Company's net investment in Seabrook 2 was $23.9 million....
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Financing l
It is essential that the Company maintains its progress toward financial health so as to assure continuing access to debt and equity, capital markets whenever needed to implement its ongoing construction program, to refund debt maturities, and to meet other cash requirements. Cash requirements in excess of internally generated funds are generally financed through short,. intermediate,
and long-term borrowings, nuclear fuel trust financing, leasing agreements, j
sales of preferred stock, and capital contributions from the parent company. In l
addition to construction and nuclear fuel requirements. the Company is obligated i
to meet maturities and cash sinking-fund requirements totaling $374.6 million i
for the years 1987 through 1991. External financing will continue to be necesuary to meet total cash requirements, although not at the levels in recent.
years because projected construction expenditures have been substantially j
reduced.
During 1986, the Company issued $345.4 million of first mortgage bonds, i
pollution control notes, and intermediate-term notes. A large portion of the proceeds of these issues was used to redeem, prior to maturity, high-interest rate first mortgage bonds, and eliminate variable-rata debt.
In 1985, the Company entered into a loan agreement with the Connecticut Resources Recovery Authority under which the Company may borrow up to 4
$60 million to finance the refurbishment of two turbine generators and i
associated facilities at the Company's South Meadow Station. As of December 31, 1986, borrowings of $21.7 million were outstanding under this agreement.
The Company and Western Massachusetts Electric Company (WMECO) continue to i
utilize a nuclear fuel trust to finance nuclear fuel requirements for Millstone 1 and 2 and their ownership share of Millstone 3.
As of December 31, 1986, the Company's portion of the trust's investment in nuclear fuel was 4
$291.5 million. The Company's nuclear fuel requirements of $280.0 million for the years 1987 to 1991 are expected to be financed primarily by the trust.
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In 1986, the system companies reduced available credit facilities and lines i
by $400 million, leaving $398 million available. This reduction included j
l termination of the Millstone 3 construction trust agreement. Available credit l.
facilities and lines include $350 million through revolving credit / tern loan agreements with two groups of banks. The maximum borrowing limit of the Company under these agreements is $350 million. However, since this money is 1
also available to WMECO, the amount of borrowing available to the Company could be lower depending on WMECO's utilization. At December 31, 1986, the Company I
and WMECO had outstanding borrowings of $50 million and $20 million, respectively, under these agreements. The remaining $48 million is available to the system companies through joint credit line agreements with various banks.
Amounts utilized by other system companies under these joint credit lines will I
reduce the amount available to the Company. At December 31, 1986, the amount of l
unused borrowing capacity under the joint credit lines available to the system j
companies was $35.5 million.
i If market conditions permit in 1987, the Company intends to refinance j
additional outstanding debt and preferred stock if that can be accomplished at a lower effective cost.
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j Rate Matters i
In November 1985, the Company filed an application with the DPUC requesting aggregate annual electric and gas revenue increases of $155.5 million. The increased revenue level was based primarily on a proposed three-year phase-in of Millstone 3 costs into rates when it began commercial operation. As discussed more fully in Note 8 of " Notes to Financial Statements," the DPUC issued a decision on this case on June 11, 1986 and subsequently approved
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i settlement agreements on July 1, 1986 which superceded a number of the l
provisions ordered in the June 11 decision. The rate decision and the settlement agreements addressed many of the major uncertainties that the Company was facing regarding the inclusion of Millstone 3 costs in rates. The rate decision established a five and one-half year phase-in of Millstone 3 costs into rates. The settlement agreements allowed the Company to recover its pro rata i
share of $3.4 billion of Millstone 3 construction costs, froze current electric l
rates until at least January 1, 1988, restored deferred fuel accounting with limitations, for the period from November 1,1986 through December 31, 1987, and established a Rate Moderation Fund to offset future rate increases. In addition, the parties agreed to withdraw certain appeals stemming from earlier l
DPUC and Superior Court decisions. Management believes that the settlement j
agreements, on balance, represent a realistic resolution of many complex issues j
that had been under_ review in the various rate proceedings and are in the best i
interests of both customers and shareholders.
f Based on current budget information, the Company's Rate Moderation Fund, which amounted to $52.4 million as of December 31, 1986, could grow substantially in 1987.
To help meet future capacity needs and to avoid building large, j
capital-intensive generating units the Company has solicited purchases of the output from cogeneration and small power production facilities. Such purchases i
could supply a significant portion of future generation needs. In July 1986, the DPUC issued a decision with respect to generic policies on cogeneration and small power production. This decision sets up a system under which future blocks of qualifying facility capacity would be approved by the DPUC on the basis of the projects' competitive rankings. The DPUC will approve only the "best" projects for which applications are currently pending before the DPUC.
In a prior generic decision and in decisions approving various cogeneration and small power production facility contracts, the DPUC has stated that the Company would be allowed to recover from its ratepayers all payments made to such facilities.
Gas Business i
l The Company has begun a study of its strategic options with respect to its gas business, including the possibility of divestiture.. The divestiture issue has existad since the formation of the the Northeast Utilities system in 1966.
At that time, the Securities and Exchange Commission authorized the affiliation, I
but reserved for later decision the question of whether the system's combination electric-gas business was in violation of the Public Utility Holding Company Act of 1935.
The study now under way will consider the implications that divestiture or retention of the gas business would have for the Company and the ways either - ~
option could be of facted. At present, there are no agreements with any other entity to acquire'the gas business in whole or in part, nor are any in
. negotiation. The : study is expected to be completed in the first half of 1987.
Depending on the study's conclusions, implementation of any substantial change in the gas businese could take one or more years because of regulatory, financial, and administrative complexities.
RESULTS OF OPERATIO(S Operating Revenues Operating revenues decreased $42.8 million from 1985 to 1986 and decreased
$22.8 million from 1384 to 1985. The components of the change in operating revenues for the pas : two years are provided in the table below.
Change in Operating Revenues Increase /(Decrease) 1986 vs. 1985 1985 vs. 1984 (Millions of Dollars)
Fuel cost recoveries
$(123.0)
$(23.3)
Regulatory rate decisions 34.5 (15.8)
Sales and other 45.7 16.3 Total re'renue change
$ (42.8)
$ (22.8)
Fuel cost recoveries decreased in 1986 primarily because of lower fossil-fuel prices and the effect of increased nuclear generation which replaced higher cost fossil generation. Revenues related to 1986 regulatory rate decisions increased primarily as a result of the recovery-of nonfuel costs associated with the operation of Millstone 3.
The sales increase in 1986 was primarily the result of a 5.1 percent increase in electric sales because of improved economic conditions and a 1.2 percent increase in gas sales as a result of greater heating requirements.
Fuel cost recoveries decreased in 1985 primarily because of lower 7
fossil-fuel prices. Regulatory rate decisions reduced revenues in 1985 primarily as a result of a DPUC interim order that diverted revenues related to construction work in progress (CWIP) to reduce the Company't., deferred fossil-fuel balance. The sales increase in 1985 is primarily the result of a 1.8 percent increase in electric sales, offset partially by a 6.0 percent decrease in gas sales because of lower heating requirements and some industrial-customers switching from gas to oil.
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Electric and Gas Energy Expenses Electric energy expenses, which include fuel and net purchased and interchange power, decreased $129.4 million in 1986 as compared to 1985. This decrease was primarily the result of lower fossil-fuel prices and lower cost energy provided by. Millstone 3, offset partially by higher kilowatt-hour (kWh) requirements.
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i Electric energy expenses increased $2.2 million in 1985 compared to 1984 because of the DPUC's interim order, which disallowed the deferral of i
unrecovered current fossil-fuel costs, and higher kWh requirements in 1985.
l These items were offset partially by lower fossil-fuel p, rices in 1985.
Cas energy expenses decreased $13.4 million in 1986 compared to 1985 as a result of lower prices in 1986, offset partially by the matching of revenues and expenses under the provisions of the Company's energy adjustment clause. Gas energy expenses decreased $4.0 million in 1985 compared to 1984 as a result of lower requirements in 1985 and the matching of revenues and expenses'undar the provisions of the Company's energy adjustment clause.
Other Operation and Maintenance Expenses Other operation and maintenance expenses increased $29.8 million in 1986 compared to 1985 primarily because of expenses associated with operating Millstone 3, higher capacity charges from Connecticut Yankee Atomic Power Company resulting from its refueling and maintenance outage in 1986, and the general impact of inflation on most expenses in 1986. Although inflation has subsided in recent years, operating expenses still have been impacted.
Other operation and maintenance expenses increased $65.0 million in 1985 compared to 1984 primarily because of the cost of repairing damage caused by Hurricane Gloria, an extended Millstone 2 refueling and maintenance outage, and the general impact of inflation on most expenses.
Depreciation Expense Depreciation expense increased $38.4 million in 1986 as compared to 1985 primarily because of the commercial operation of Millstone 3.
Taxes Federal and state income taxes increased $4.3 million in 1986 compared to 1985 because of an increase in taxable income. Federal and state income taxes decreased $34.3 million in 1985 compared to 1984 because of a decrease in taxable income. Taxes other than income taxes increased $13.8 million in 1986 compared to 1985 primarily because of property taxes associated with the commercial operation of Millstone 3 and higher sales taxes.
Allowance for Funds Used During Construction and Deferred Millstone 3 Return Total debt and equity AFUDC decreased $82.2 million in 1986 compared to 1985. This decrease was caused by a lower average CWIP balance, reflecting the commercial operation of Millstone 3.
This decrease was more than offset by the deferred return of $88.6 million on the Millstone 3 investment not currently included in rate base.
The increase in AFUDC of $41.5 million in 1985 compared to 1984 was primarily caused by a higher average CWIP balance attributable to the Millstone 3 construction project.,-
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9 The Connecticut Light and Power Company STATEMENTS OF INCOME For the Years Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Operating Revenues......................
$1,713,663
$1,756,436
$1,779,238 Operating Expenses:
Operation-Fue1.................................
362,677 358,450 475,861 Purchased and interchange power, net.
(33,197) 100,446 (23,193)
Gas purchased for resale.............
105,434 118,877 122,859 0ther................................
439,508 397,678 377,620 Maintenance...........................
138,118 150,195 105,292 Depreciation..........................
141,531 103,123 99,511 Federal and state income taxes (Note 4).............................
154,510 148,547 182,885 Taxes other than income taxes.........
154,779 140,982 142,825 Total operating expenses...........
1,463,360 1,518,298 1,487,660 Operating Income........................
250,303 238,138 291,578 Other Income:
Allowance for other funds uced during construction..................
56,119 119,561 87,383 l
Deferred Millstone 3 return-other l
funds................................
65,604 Equity in earnings of regional nuclear generating companies.........
10,163 9,589 8,689 O tWa r, n e t............................
(7,201)
(2,218)
(2,710)
Income taxes-credit...................
55,709 50,330 40,230 Other income, net..................
180,394 177,262 133,592 Income before interest charges.....
430,697 415,400 425,170 Interest Charges:
Interest on long-term debt............
178,836 179,371 172,185 Other' interest........................
9,386 3,734 4,176 A~1osance for borrowed funds used during construction, net of income taxes................................
(25,996)
(44,780)
(35,418)
Deferred Millstone 3 return-borrowed funds, net of income taxes (23,045)
Interent charges, net..............
139,181 138,325 140,943 Net Income..............................
$ 291,516
$ 277,075
$ 284,227 The accompanying notes are an integral part of these financial statements. __
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The Connecticut Light and Power Company STATEMENTS OF SOURCES OF FUNDS FOR GROSS PROPERTY ADDITIONS For the Years Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Funds Generated From Operations:
Net income.......................................
$291,516
$277,075
$284,227 l
Principal noncash items:
Depreciation..................................
148,331 103,123 99,511 Deferred income taxes, net....................
52,483 82,058 93,427 Rate moderation fund-deferred revenue (Note 8) 34,723 Amortization of deferred charges and other noncash items................................
1,765 13,440 20,467 Deferred return-Millstone 3 (Note 8)..........
(88,649)
Allowance for other funds used during construction.................................
(56,119)
(119,561)
(87,383)
Total funds from operations..............
384,050 356,135 410,249 Less-Cash dividends paid on:
Common stock..................................
141,664 139,708 118,440 Preferred stock...............................
33,206 34,789 35,592 Net funds generated from operations......
209,180 181,638 256,217 Funds Obtained From Financing:
Long-term debt...................................
360,850 210,230 230,800 Increase (decrease) in construction trust........
(72,058) 22,193 (72,830)
Increase (decrease) in short-term debt...........
25,000 29,000 (5,000)
Increase in obligations under capital leases.....
72,223 69,180 84,688 Capital contributions from Northeast Utilities (parent company)................................
30,000 30,000 Tota1....................................
386,015 360,603 267,658 Less-Reacquisitions and retirements of long-term debt and preferred stock......................
268,459 79,637 19,188 Net funds from financing.................
117,556 280,966 248,470 Other Sources (Uses) of Funds:
Changes in components of working ca' ital:
p Cash and special deposits.....................
13,624 (3,196)
(13,034)
Receivables and accrued utility revenues......
17,095 23,440 (40,138)
Fuel, materials and supplies..................
15,207 5,715 (2,792)
Accounts payable..............................
(56,346) 82,155 (15,161)
Accrued taxes.................................
31,671 (25,342) 42,523 Other, net....................................
(20,719) 4,221 14,840 Net change...............................
532 86,993 (13,762)
Rate moderation fund-GUAC credit (Note 8)........
17,667 Energy adjustment clauses, net...................
6,567 (18,672) 10,329 Other, net.......................................
(6,036)
(22,767) 4,275 Net other sources of funds...............
18,730 45,554 842 Total Funds For Construction From Above Sources...........................................
345,466 508,158 505,529 Allowance For Other Funds Used During Construction.
56,119 119,561 87,383 GROSS PROPERTY ADDITIONS...........................
$401,585
$627,719
$592,912 Composition of Gross Property Additions:
Electric utility plant...........................
$318,075
$532,441
$487,484 Gas utility plant................................
21,192 19,786 20,773 Nuclear fuel.....................................
62,318 75,492 84,655 Total....................................
$401,585
$627,719
$592,912 The accompanying notes are an integral part of these financial statements.
The Connecticut Light and Power Company BALANCE SHEETS At December 31, 1986 1985 (Thousands of Dollars)
Assets Utility Plant, at original cost:
Electric........................................
$4,657,419
$2,745,873 Gas.............................................
295,111 275,616 4,952,530 3,021,489 Less: Accumulated provision for depreciation.
1,154,115 1,045,067 3,798,415 1,976,422 Construction work in progress (Note 11).........
308,616 2,107,443 Nuclear fuel, net (Note 3)......................
286,446 306,478 Total net utility plant......................
4,393,477 4,390,343 Other Property and Investments:
Oth e r p rop e r ty (No t e 8).........................
193,704 12,946 Investments in regional nuclear generating companies and subsidiary companies, at equity..
49,920 49,939 Other, at cost..................................
85 200 243,709 63,085 Current Assets:
Cash and special deposits (Note 2)..............
5,991 19,615 Receivables, less accumulated provision for uncollectible accounts of $7,759,000 in 1986 and $7,605,000 in 1985.........................
158,938 169,426 Receivables from affiliated companies...........
18,383 27,964 Accrued utility revenues........................
87,987 85,013 Fuel, materials and supplies, at average cost...
73,702 88,909 Prepayments and other...........................
23,772 8,448 368,773 399,375 Deferred Charges:
Unamortized debt expense........................
7,481 8,522 Energy adjustment clauses, net..................
73,383 60,747 Unrecovered spent nuclear fuel disposal costs...
21,211 23,524 Canceled nuclear proj ects (Note 9)..............
23,950 24,932 Deferred costs-Millstone 3 (Note 8).............
90,446 0ther...........................................
21,579 17,381 238,050 135,106 Total Assets.................................
$5,244,009
$4,987,909 The accompanying notes are an integral part of these financial statements. I
The Connecticut Light and Power Company BALANCE SHEETS At December 31, 1986 1985 (Thousands of Dollars)
Capitalization and Liabilities Capitalization:
Common stock - $10 par value. Authorized 24,500,000 shares; outstanding 12,222,930 shares..........................................
122,229
$ 122,229 Cap ital surplus, paid in.........................
643,520 643,529 Retained earnings................................
808,018 691,372 Total common stockholder's equity.............
1,573,767 1,457,130 Cumulative preferred stock -
$50 par value. Authorized 9,000,000 shares; outstanding 7,760,504 shares in 1986 and 7,840,514 shares in 1985 Not subject to mandatory redemption (Note 5).
256,195 256,195 Subject to mandatory redemption (Note 6).....
129,392 133,393 Long-term debt (Note 7)..........................
2,027,858 2,002,787 To t al capitaliz a tion..........................
3,987,212 3,849,505 Obligations Under Capital Leases (Note 3)..........
237,782 274,462 Current Liabilities:
Notes payable to banks (Note 2)..................
72,000 32,000 Commercial paper (Note 2)........................
15,000 Long-term debt and preferred stock-current portion...................
19,156 13,964 Obligations under capital leases - current portion (Note 3)................................
93,037 57,856 Accounts payable.................................
60,990 117,306 Accounts payable to affiliated companies.........
80,334 80,364 Accrued taxes....................................
107,265 75,594 Ac c ru e d in t e re s t.................................
53,606 58,333 0ther............................................
33,906 17,935 520,294 468,352 Deferred Credits:
Accumulated deferred income taxes................
196,675 183,757 Accumulated deferred investment tax credits......
238,434 202,430 Ra te moderation fund (Note 8)....................
52,390 0ther............................................
11,222 9,403 498,721 395,590 Commitments and Contingencies (Note 11)
Total Capitalization and Liabilities....
$5,244,009
$4,987,909 The accompanying notes are an integral part of these financial statements.
Ths Crnn:cticut Light cnd Powsr Comp:ny STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Capital Common
- Surplus, Retained Stock Paid in Earninas (a)
Total (Thousands of Dollars)
Balance at January 1, 1984.........
$122,229
$583,361
$458,599
$1,164,189 Net income for 1984..............
284,227 284,227 Cash' dividends on preferred stock...........................
(35,592)
(35,592)
Cash dividends on common stock...
(118,440)
(118,440)
Capital contributions from Northeast Utilities (parent company)........................
30,000 30,000 Gain on reacquired preferred stock net of issuance and re tirement expenses.............
36 36 Bolance at December 31, 1984.......
122,229 613,397 588,794 1,324,420 Net to ome for 1985..............
277,075 277,075 Cash dividends on preferred stock...........................
(34,789)
(34,789)
Cash dividends on common stock...
(139,708)
(139,708)
Capital contributions from Northeast Utilities (parent company)........................
30,000 30,000 Gain on reacquired preferred stock net of issuance and retirement expenses.............
132 132 Bzlance at December 31, 1985.......
122,229 643,529 691,372 1,457,130 Net income for 1986..............
291,516 291,516 Cash dividends on preferred stock...........................
(33,206)
(32,206)
Cash dividends on common stock...
(141,664)
(141,664)
Preferred stock issuance expenses........................
(9)
(9)
Balance at December 31, 1986.......
$122,229
$643,520
$808,018
$1,573,767 (a) At December 31, 1986, there was approximately $254,096,000 of retained earnings available for payment of cash dividends on common stock under the provisions of the Company's First Mortgage Indenture and Deed of l
Trust.
The accompanying notes are an integral part of these financial statements.
l Th3 C nn:cticut Light end Powar Comp:ny NOTES TO FINANCIAL STATEMENTS l.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES General: The Connecticut Light and Power Company (the Company), Western Massachusetts Electric Company (WMECO) and Holyoke Water Power Company (HWP) are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by Northeast Utilities (NU).
Other wholly owned subsidiaries of NU provide substantial support services to the system. Northeast Utilities Service Company supplies-centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing, and other services to the system companies. Northeast Nuclear Energy Company (NNECO) acts as agent for system companies in constructing and operating nuclear generating facilities. NU also has two subsidiary realty companies, The Rocky River Realty Company and The Quinnehtuk Company.
All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity, and are subject to approval of various federal and state regulatory agencies.
Public Utility Regulation: NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (the 1935 Act), and it and its subsidiaries, including the Company, are subject to the provisions of the 1935 Act.
Arrangements among the system companies, outside agencies, and other utilities covering interconnections, interchange of electric power, and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. The Company is subject to further regulation for rates and other matters by the FERC and the Connecticut Department of Public Utility Control (DPUC), and follows the accounting policies prescribed by the respective commissions.
Investments and Jointly Owned Electric Utility Plant:
The Company owns common stock of four regional nuclear generating companies. These companies, with the Company's ownership interests, are:
Connecticut Yankee Atomic Power Company (CY) 34.5%
Yankee Atomic Electric Company 24.5%
Maine Yankee Atomic Power Company (MY) 12.0%
Vermont Yankee Nuclear Power Corporation (VY) 9.5%
The Company's investments in these companies are accounted for on the equity basis. The electricity produced from these facilities is committed to the participants based on their ownership interests and is billed pursuant to contractual agreements.
The Campany has a 52.93 percent interest in Millstone 3, a 1,150-megawatt (MW) nuclear generating unit. As of December 31, 1986, plant in service and accumulated depreciation included approximately
$1.8 billion and $36.5 million, respectively, for the Company's proportionate share of Millstone 3.
The Company's share of Millstone 3 expenses is included in the corresponding operating expenses on the accompanying Statements of Income.
The Connscticut Light and Power Company NOTES TO FINANCIAL STATEMENTS Revenues: Utility revenues are based on authorized ratas applied to each customer's use of electricity or gas. Rates can be increased only through a formal proceeding before the appropriate regulatory commission. At the end of each accounting period, the Company accrues an estimate for the amount of energy delivered but unbilled.
Spent Nuclear Fuel Disposal Costs: Under the Nuclear Waste Policy Act of 1982, the Company is paying the United States Department of Energy (DOE),
on a quarterly basis, a fee of 1.0 mill per kilowatt-hour (kWh) based on the Company's share of nuclear generation beginning on April 7,1983, for the disposal of spent nuclear fuel and high-level radioactive waste.
For nuclear fuel used to generate electricity prior to April 7, 1983 (prior period fuel), the fees are based on the Company's share of the amount of energy extracted from such fuel. As established by the Nuclear Late Policy Act of 1982, payment for prior period fuel may be made anytime prior to the first delivery of spent fuel to the DOE. At December 31, 1986, fees due to the DOE for the disposal of prior period fuel are approximately $90.2 million, including interest costs of $23.6 million.
The DPUC has allowed for the recovery of spent nuclear fuel disposal costs, including interest, in rate case or fuel adjustment decisions based on the provisions of the Nuclear Waste Policy Act of 1982. As of December 31, 1986, approximately $69.0 million had been collected through rates.
Depreciation: The provision for depreciation is calculated using the straight-line method based on estimated remaining useful lives of depreciable utility plant in service, adjusted for net salvage value and removal costs as approved by the DPUC. Except for major facilities, depreciation factors are applied to the average plant in service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation.
The depreciation rates for electric and gas plant in service are equivalent to the following composite rates:
Year Electric Cas 1986 3.4%
4.0%
1985 3.5 4.0 1984 3.5 4.1 Nuclear Decommissioning: A 1985 decommissioning study indicates that immediate dismantlement at retirement is the most viable and economic method of decommissioning the three Millstone Units. The Company's share of the total estimated cost of decommissioning these units is
$381.4 million in year-end 1986 dollars. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, technology, and inflation. - - _____
Th2'Ccanacticut Light and'Pcwer CompIny-NOTES TO FINANCIAL STATEMENTS In 1985, the Company filed plans with the DPUC to establish independent decommissioning trusts for its portion of the-costs of decommissioning Millstone 1, 2, and 3.
In 19861the DPUC approved the Company's plan to establish the independent trusts but required the Company
~
to' continue to use the depreciation reserve method for decommissioning funds collected through rates prior to July 1,.1986, and for those funds which do not qualify under rules established by the Internal Revenue Service.
As of December 31, 1986, the Company had collected through rates-
$39.8 million for future decommissioning costs, of which $1.4 million has been funded externally. Although a portion of the estimated total ~
decommissioning costs has been approved by the DPUC and is reflected in the depreciation expense of the Company, the Company believes revenues in amounts greater than those currently being collected will be required to pay the full projected costs of decommissioning.
Income Taxes: The tax effect of, timing differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of income subject to tax) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions.
In the 1986 retail rate order, the DPUC ordered the Company to return to flow-through accounting for income tax items not required to be normalized by Treasury regulations. See Note 4 for the components of income tax expense.
The Company has not provided deferred income taxes for certain timing differences during periods when the DPUC did not permit the recovery of such income taxes through rates charged to customers. The cumulative net amount of income tax timing differences for which deferred taxes have not been provided was approximately $910 million at December 31, 1986. As allowed under current regulatory practices, deferred taxes not previously provided are being collected in customers' rates as such taxes become payable.
Investment tax credits (ITC), which reduce federal income taxes currently payable, are deferred and amortized over the useful life of the related utility plant. The Tax Reform Act of 1986 repeals the ITC for property placed in service after December 31, 1985. However, ITC may be claimed on certain transition property. ITC carryovers that had not expired as of December 31, 1985 are preserved and may be used'in 1986 and thereafter.
Allowance for Funds Used During Construction (AFUDC): AFUDC, a noncash item, represents the estimated cost of capital funds used to finance the Company's construction program. These costs, which are one' component of the total capitalized cost of construction, are not recognized as part of the rate base for ratemaking purposes until facilities are placed in service. AFUDC is recovered over the service life of plant in the form of increased revenue collected as a result of higher depreciation expense.
0 Th3 CI:nn:cticut Light and Powar Compnny NOTES TO FINANCIAL STATEMENTS The effective AFUDC rates for 1986, 1985, and 1984 were 8.1 percent, 9.2 percent, and 9.3 percent, respectively. These rates are calculated using the net-of-income tax method and in accordance with FERC guidelines.
Retirement Plan: The Company participates in the Northeast Utilities Service Company Retirement Plan (the Plan). The Plan, which covers all regular system employees, is noncontributory. The system's policy is to fund annually the actuarially determined contribution, which includes that year's normal cost, the amortization of prior years' actuarial gains or losses over 15 years, and the amortization of prior service cost over a period of 40 years. The Company's allocated portion of the system's pension cost, part of which was charged to utility plant,. approximated
$15.7 million in 1986, $14.8 million in 1985, and $13.9 million in 1984.
The actuarial present value of accumulated plan benefits and plan net assets available for benefits for the Plan is:
January 1, 1986 1985 (Thousands of Dollars)
Benefits:
Vested..............
$377,090
$339,515 Nonvested...........
47,546 42,482
$424,636
$381,997 Net assets available for benefits........
$606,430
$479,525 The assumed rate of return used to determine the actuarial present value of accumulated plan benefits was 7.5 percent for both years.
In December 1985, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 87 (SEAS 87) entitled " Employers' Accounting for Pensions." SFAS 87 supercedes previous pension accounting standards and will be effective in 1987. This statement prescribes a standardized method for measuring pension costs and expanded footnote disclosures. The Company does not expect that the adoption of this standard will have a material effect on net income for 1987.
In addition to pension benefits, the Company provides certain health care and life insurance benefits to retired employees. The cost of providing those benefits was approximately $3,168,000 in 1986, $3,291,000 in 1985, and $2,949,000 in 1984. The Company recognizes health care benefits primarily as incurred and provides for life insurance benefits through premiums paid to an insurance company.
Energy Adjustaent Clauses: The Company's retail electric rates include an adjustment clause under which fossil-fuel prices above or below base rate levels are charged or credited to customers. Through February 28, 1985, most differences between fossil-fuel costs and f1ssil-fuel recoveries were deferred and recovered or refunded over a future period.
In April 1985, The Connecticut Light and Powar Company NOTES TO FINANCIAL STATEMENTS the DPUC issued an order which suspended deferred fossil-fuel accounting.
In July 1986, the DPUC reinstated deferred fossil-fuel accounting for the period November 1, 1986 through December 31, 1987, with a maximum of
$30 million that may be deferred during this period.
For additional information regarding the DPUC rate orders relating to deferred electric fossil-fuel, see Note 8, " Regulatory Matters."
The Company's retail base electric rates include nuclear generation at a 67 percent composite capacity factor. The DPUC has approved the use of a Generation Utilization Adjustment Clause (GUAC) which levels the effect on fuel costs caused by variations from the 67 percent composite nuclear generation capacity factor. At the end of a 12-month period ending July 31 of each year, these net variations from the amounts included in base rate cost levels are refunded to, or collected from, customers over the subsequent 11-month period. Should the annual nuclear capacity factor fall below 55 percent, the Company would have to apply to the DPUC for permission to recover the additional fuel expense.
For additional information regarding GUAC, see Note 8. " Regulatory Matters."
The Company's gas rates include an adjustment clause under which purchased gas costs above or below base rate levels are charged or credited to customers. As prescribed by the DPUC, most differences between the Company's actual purchased gas cost and the current cost recovery are deferred until future recovery is permitted.
2.
SHORT-TERM DEST The system companies have various credit lines totaling $398 million.
Of this amount, $350 million is available through revolving credit / term loan agreements with two groups of banks. The maximum borrowing limit of the Company under the agreements is $350 million less amounts borrowed by WMECO (not to exceed $105 million). The Company is obligated to pay commitment fees of three-eighths of 1 percent per annum under a
$200 million revolving credit agreement and one-quarter of 1 percent per annum under a $150 million revolving credit agreement on its proportionate share of the daily average of the unborrowed portion of the aggregate commitment. At December 31, 1986, the Company had outstanding borrowings of $50 million under these agreements.
The remaining $48 million is available to the system companies through bank credit lines. Amounts utilized by other system companies under these joint credit lines will reduce the amount available to the Company. Terms call for interest rates not to exceed the prime rate during the borrowing term. Although these lines generally are renewable, the continuing availability of the unused lines of credit is subject to review by the banks involved. Compensating balances for the system companies are maintained in connection with these bank credit lines which, at December 31, 1986, amounted to $2.4 million. At December 31, 1986, the amount of unused borrowing capacity under the credit lines available to the system companies was $35.5 million.
I
~Tha C nnecticut Light cnd Powar Company-NOTES TO FINANCIAL STATEMENTS Cash and special deposits at December 31, 1986 included $3.7 million of restricted funds, which must be used for future expenditures relating to the installation of pollution control equipment at Millstone 3 and Seabrook 1.
3.
LEASES The Company and WMECO have entered into a capital lease agreement to finance up to $530 million of nuclear fuel for Millstone 1 and 2 and their share for Millstone 3.
The Company and WMECO make quarterly lease payments for ths cost of nuclear fuel consumed in the reactors (based on a units-of-production method at rates which reflect estimated kWh of energy provided) plus financing costs associated with the fuel in the reactors.
Upon permanent discharge from the reactors, ownership of the nuclear fuel transfers to the Company and WMECO.
The Company has also entered into lease agreements, some of which are capital leases, for the use of substation equipment, data processing and office equipment, vehicles and office space. The provisions of these lease agreements generally provide for renewal options.
The following rental payments have been charged to operating expense:
Capital Operating Year Leases Leases 1986...............
$102,617,000
$28,956,000 1985...............
57,153,000 24,447,000 1984...............
76,777,000 22,073,000 Interest included in capital lease rental payments was $24,462,000 in 1986, $16,197,000 in 1985, and $18,554,000 in 1984.
Substantially all of the capital lease renta payments were made pursuant to the nuclear fuel lease agreement. Future minimum lease payments under the nuclear fuel capital lease cannot be reasonably estimated on an annual basis due to variations in the usage of nuclear fuel. l
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS Future minimum rental payments, excluding annual nuclear fuel lease payments, and executory costs such as property taxes, state use taxes, insurance, and maintenance, under long-term noncancelable leases as of December 31, 1986 are approximately:
Capital Operating Year Leases Leases (Thousands of Dollars) 1987...............................
$ 1,700
$ 24,600 1988...............................
1,700 19,100 1989...............................
1,600 14,400 1990...............................
1,400 11,000 1991...............................
1,300 9,400 After 1991.........................
19,000 70,400 Future minimum lease payments......
26.700
$148,900 Less amount representing interest..
13,700 Present value of future minimum lease payments for other than nuclear fue1............._.........
13,000 Present value of future nuclear fuel lease payments...............
317,800 Total.........................
$330,800 i
l.
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS 4.
INCOME TAX EXPENSE The components of the federal and state income tax provisions are:
For the Yeard Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Current incode taxes:
Federa1......................
$ 25,556
$ 4,342
$ 16,342 State........................
19,650 11,817 32,886 Total current..............
45,206 16,159 49,228 Deferred income taxes, net:
Investment tax credits.......
38,452 26,729 94,500 Federal......................
14,643 43,876 (1,437)
State........................
500 11,453 364 Total deferred............
53,595 82,058 93,427 Taxes on borrowed funds portion of AFUDC and deferred Millstone 3 return...........
51,657 47,943 37,825 Total income tax expense...................
150,458 146,160 180,480 Less:
Income taxes (credits) included in other income, net of the tax effects of the borrowed funds portion of AFUDC and deferred Millstone 3 return..................
(4,052)
(2,387)
(2,405)
Income taxes charged to operating expenses........
$154,510
$148,547
$182,885 Deferred income taxes are comprised of the tax effects of timing differences as follows:
For the Years Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Investment tax credits.........
$ 38,452
$ 26,729
$ 94,500 Liberalized depreciation, excluding leased nuclear fuel 56,520 16,075 14.287 Construction overheads.........
1,160 16,748 14,895 Liberalized depreciation and capitalized interest on leased nuclear fuel..........
(7,642) 16,044 326 Decommissioning costs..........
(3,911)
(3,138)
(4,647)
Settlement credits -
nuclear fue1.................
848 (3,388)
(859)
Energy adjustment clauses......
(12,988) 7,415 (14,658)
Spent nuclear fuel disposal costs........................
(789) 6,223 (4,248)
Canceled nuclear proj ect.......
8,250 Rate moderation fund...........
(18,097) 0ther..........................
(8,208)
(650)
(6,169)
Deferred income taxes, net.
$ 53,595
$ 82,058
$ 93,427,
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS The effective income tax rate is computed by dividing total income tax expense by the sum of such taxes and net income. The differences between the effective rate and the federal statutory income tax rate are:
For the Yeard Ended December 31, 1986 1985 1984 Federal statutory income tax rate....
46.0%
46.0%
46.0%
Tax effect of differences:
Depreciation differences............
2.4 0.9 0.2 Other funds portion of AFUDC not recognized as income for tax p u rp o s e s..........................
(5.9)
(13.0)
(8.6)
Deferred Millstone 3 return-other funds.............................
(6.8)
Construction overheads - portion not deferred.......................
(1.6)
Investment tax credit amortization..
(1.8)
(1. 7)
(1.6)
State income taxes, net of federal benefit............................
3.7 4.2 4.7 Other, net..........................
(2.0)
(1.9)
(1.9)
Effective income tax rate............
34.0%
34.5%
,38.8%..,.,
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS 5.
PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption outstanding at December 31, 1986, 1985, and 1984 are:
December 31, 1986 Redemption Shares Description Prices Outstanding (Thousands of Dollars)
$1.90 Series of 1947............
$52.50 163,912
$ 8,196
$2.00 Series of 1947............
54.00 336,088 16,804
$2.04 Series of 1949............
52.00 100,000 5,000
$2.06 Series E of 1954..........
51.00 200,000 10,000
$2.09 Series F of 1955..........
51.00 100,000 5,000
$ 2. 20 Series o f 1949............
52.50 200,000 10,000
$3.24 Series G of 1968..........
51.84 300,000 15,000
$3.80 Series J of 1971..........
52.10 400,000 20,000
$4.48 Series H of 1970..........
52.21 300,000 15,000
$4.48 Series I of 1970..........
52.32 400,000 20,000
$4.56 Series K of 1974..........
53.22*
1,000,000 50,000 3.90% Series of 1949............
50.50 160,000 8,000 4.5J% Series of 1956............
50.75 104,000 5,200 4.50% Series of 1963............
50.50 160,000 8,000 4.96% Series of 1958............
50.50 100,000 5,000 5.28% Series of 1967............
51.43 200,000 10,000 6.56% Series of 1968............
51.44 200,000 10,000 7.60% Series of 1971............
51.61 199,925 9,996 9.36% Series of 1970............
52.04 200,000 10,000 9.60% Series of 1974............
53.46*
299,970 14,999 Total preferred stock not subject to mandatory redemption 5,123,895
$256,195
- Redemption prices reduce in future years.
All or any part of each outstanding series of preferred stock may be redeemed by the Company at any time at established redemption prices plus accrued dividends to the date of redemption. '
The Connecticut Light and Power Company
~
NOTES TO FINANCIAL STATEMENTS 6.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption outstanding are:
December 31, Shares 1986 Outstanding December 31, Redemption December 31, Description Prices 1986 1986 1985 1984 (Thousands of Dollars)
$5.52 Series L of 1975
$52.76*
237,548
$ 11,879 $ 13,879 $ 14,657 10.48% Series of 1980 53.93*
480,000 24,000 25,000 25,000 11.52% Series of 1975 52.88*
119,061 5,953 6,954 7,321 15.04% Series M of 1982 57.52*
800,000 40,000 40,000 40,000 Adjustable Rate Series N of 1983 56.15*
1,000,000 50,000 50,000 50,000 2,636,609 Less preferred stock to be redeemed within one yer4r 2,440 2,440 1,086 Total preferred stock subject to mandatory redemption
$129,392 $133,393 $135,892 At December 31, 1986, there were 8,000,000 shares of $25 par value preferred stock authorized and unissued.
cRedemption prices reduce in future years.
The following table details sinking fund activity for preferred stock subject to mandatory redemption:
Minimum Maximum Annual Annual Sinking Fund Sinking Fund Shares Reacquired Series Requirement Requirement 1986 1985 1984 (Thousands of Dollars)
$5.52 Series L of 1975
$1,000
$2,000 40,010 14,541 22,966 11.52% Series of 1975 500 1,000 20,000 6,850 9,231 10.48% Series of 1980 1,000 2,000 20,000 15.04% Series M of 1982 (1) 2,000 4,000 Adjustable Rate Series N of 1983 (2) 2,500 5,000 (1) Sinking fund requirements commence June 1, 1988.
(2) Sinking fund requirements commence October 1, 1988.. _ -
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS The minimum sinking-fund provisions of the series subject to mandatory redemption, for the years 1987 through 1991, aggregate $2,500,000 in 1987 and
$7,000,000 in 1988 through 1991. All sinking-fund requirements for the preferred stock subject to mandatory redemption have been met.
In case of default on sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If the Company is in arrears in the payment of dividends on any outstanding shares of preferred stock, the Company would be prohibited from redemption or purchase of less than all of the preferred stock outstanding. All or part of each of the series named above may be redeemed by the Company at any time at established redemption prices plus accrued dividends to the date of redemption except that during the initial five-year redemption period the above series of preferred stock are subject to certain refunding limitations....
=Th2 C:nnecticut Light cnd Power Comp ny NOTES TO FINANCIAL STATEMENTS 7.
LONG-TERM DEBT Details of long-term debt outstanding are:
December 31, l
1986 1985 j
(Thousands of Dollars)
First Mortgage Bonds:
3 7/8% Series 0, due 1988.....................
30,000 30,000 4 7/8% Series P.
due 1990.....................
25,000 25,000
.9,600 4 1/2% Series Q.
due 1986.....................
4 3/8% Series R, due 1993.....................
25,000
. 25,000 6
% Series S, due 1997.....................
30,000 30,000-6 1/2%. Series T, due 1998.....................
20,000
- 20,000 6 7/8% Series U, dus 1998.....................
40,000 40,000 8 3/4%~ Series V, due 2000.....................
40,000 40,000 8 7/8% Series W, due 2000.....................
40,000 40,000 7 3/8%' Series X, due 2001.....................
30,000 30,000 7 5/8% Series Y, due 2002.....................
50,000 50,000 7 5/8% Series Z, due 2003.....................
50,000 50,000 8 3/4% Series AA, due 2004.....................
65,000 65,000 11
% Series CC, due 2000.....................
30,395 35,652
~
8 7/8% Series DD, due 2007.....................
45,000 45,000 9 1/4% Series EE, due 2008.....................
40,000 40,000 14 3/8% Series FF, due 2010.....................
7,100 14,200 17 3/4% Series GG, due 1991.....................
64,350 15
% Series HH, due 2012.....................
98,000 99,000 l
12 1/4% Series II, due 1993.....................
85,000 85,000 12 3/8% Series JJ, due 1994.....................
75,000 75,000 12
% Series KK, due 2015.....................
50,000 50,000 I
8 7/8% Series LL, due 1996.....................
100,000' 5
% Series, due 1987........................
15,000 15,000 4 3/8% Series E, due 1988.....................
18,000 18,000 l
4 1/4% Series, due 1993........................
15,000 15,000 i
4 1/2% Series, due 1994........................
12,000 12,000 5 5/8% Series, due 1997........................
20,000 20,000 6 1/2% Series, due 1998........................
10,000 10,000 l
7 1/8% Series, due 1998........................
25,000 25,000 9 1/4% Series, due 2000........................
20,000 20,000 7 5/8% Series, due 2001........................
30,000 30,000 7 1/2% Series, due 2002........................
35,000 35,000 7 1/2% Series, due 2003.~.......................
40,000 40,000 9 1/4% Series, due 2004........................
30,000 30,000 11 1/2% Series, due 1995........................
14,483 18,110 9 3/8% Series, due 2008........................
40,000 40,000 13.35 % Series, due 1990........................
6,620 10,000 17.60 % Series, due 1989........................
19,608 15 5/8% Series, due 1992........................
39,200 39,600 Total First Mortgage Bonds.................
$1,345,798
$1,360,120 4
i l l l
i
,-...---.---,n,-
.~,--,-----,,,,,--------n-
,c-,
n---,---,-r--n--or
--,-n,-~,
t
-Tha CInnecticut Light and Powar Colpiny NOTES TO FINANCIAL STATEMENTS t
I December 31,
~a 1986 1985 (Thousands of Dollars)
Tern Loan Agreements:
Secured note, variable rate due 1988-1991...........................
$ 150,000 Variable, due 1991..........*........
75,000 75,000 Intermediate notes, 8.675% to 9.23%
due 1988-1992.........................
200,000 Millstone 3 Construction. Trust, variable rate.........................
72,058 l
Pollution Control Notes:
5.90%,due 1998......................
9,337 9,437 l
6.50%, due 2007......................
16,000 16,000 Variable rate, due 2013-2016.........
290,100 244,700 Fees and interest due for spent fuel
]
disposal costs........................
90,189 84,164-l 0ther..................................
21,768 6,355 Less amounts due within one year.......
16,716 11,524 Unamortized premium and discount, net..
(3,618)
(3,523)
Long-term debt, net...............
42,027,858
$2,002,787 The Company and WMECO participated in a construction trust agreement to j
assist in the financing of the Millstone 3 construction. On June 4, 1986, the construction trust agreement was terminated.
Interest costs of
$3.5 million during 1986, $6.9 million during 1985, and $7.9 million during 1
1984 were incurred and capitalized, not of income taxes, by the Company. The weighted average interest rate charged to the system by the trust was 10.1 percent in 1986, 10.4 percent in 1985, and 11.5 percent in 1984.
j Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1986 for the years 1987 through 1991 are:
$19,381,000, $78,029,000, $80,029,000, $86,649,000, and $80,029,000, respectively.
In addition, there are annual 1 percent sinking-and improve-ment-fund requirements, currently amounting to $12,085,000, $12,041,000,
$11,997,000, $11,953,000, and $11,843,000 for the years 1987 throupa 1991, respectively. Such sinking-and improvement-fund requirements may be satisfied by the deposit of cash or bonds or by certification of property additions.
All or any part of each outstanding series of first mortgage bonds may be redeemed by the Company at any time at established redemption prices plus accrued interest to the date of redemption, except certain series which are subject to certain refunding limitations during their respective initial five-year redemption periods. The 11% Series CC bonds require a sinking-fund sufficient to retire a minimum of $2,500,000 in principal amount each year.
j The 11 1/2% Series bonds require a sinking-fund suf ficient to retire a minimum of $1,875,000 in principal amount each year.
i
. 1
~ -._---_ _ ____ _,, _ _ _ _,_ _._.___ _ _ _._.._._. _ _ __ _,_ _ _ _ __. _.,_ -,- _.._. - - _ _ _
Th3 Crnn:cticut Light tud Powsr Company a
NOTES TO FINANCIAL STATEMENTS
[
Essentially all of the Company's utility plant is subject to the lien of its first mortgage bond indentures. During 1986, the Company secured
$253.7 million of pollution control notes with second mortgage liens on Millstone 1, junior to the liens of its first mortgage bond indentures.
8.
REGULATORY MATTERS
-Retail Rate Case: In November 1985, the Company filed an application to amend its retail rates with the DPUC that would have increased annual electric and gas revenues by $155.5 million. On June 11, 1986, the DPUC issued a decision in the case that, among other things, would have reduced the Company's. electric revenues by $7.3 million and gas revenues by l
$1.8 million. On July 1, 1986, the DPUC approved settlement agreements (the settlement agreements) which superceded a number of the provisions ordered in the June 11 DPUC decision. The settlement agreements were reached by the Company with the Connecticut Attorney General, the Connecticut Consumer Counsel, and the Prosecutorial Division of the DPUC to resolve the rate case, i
the Millstone 3 prudence proceedings, excess capacity proceedings, and associated legal proceedings.
As a result of the June 11, 1986 DPUC decision and the settlement agreements, current electric rates will remain in effect until at least January 1, 1988. The DPUC has authorized a 14 percent return on equity (ROE) i for the Company. Should the Company's ROE fall to or below 0 percent for any i
12-month period prior to January 1, 1988, the Company may petition the DPUC for relief.
In addition, the settlement agreements require the Company to establish a rate moderation fund (the Rate Moderation Fund) to offset future 4
electric rate increases. Funding for the Rate Moderation Fund includes:
1 (i) the Company's revenues in excess of those producing a 16 percent ROE for any 12-month period ending before January 1, 1988, reduced, for any 12-month i
period in which the ROE does not equal or exceed 8 percent, by the amount of revenues that would be needed to attain an ROE of 8 percent, (ii)~the GUAC credit as of Ju1.y 31,1986. As of December 31, 1986, the Rate Moderation i
Fund's balance was $52.4 million ($34.7 million of deferred revenues and
$17.7 million for the July 31, 1986 GUAC credit). Commencing in January 1937, the Company will accrue interest on funds in the Rate Moderation Fund at 8 percent, compounded semiannually.
The settlement agreements confirmed the April 1, 1986 DPUC order that granted accounting treatment to permit the deferral of Millstone 3-related 1
return and operating costs of $13.1 million incurred from the unit's April 23, 1986 commercial operation date to May 23, 1986, the effective date
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of the retail rate orders. The Company will recover these costs, including a 1
return thereon, through rates over a period beginning January 1, 1988 and t
ending no later than December 31, 1995.
I Under the terms of the settlement agreements, the Company will be l
allowed to recover its pro rata share of $3.4 billion of Millstone 3 construction costs (including AFUDC) incurred as of April 23, 1986. Amounts i
which represent the Company's pro rata share of Millstone 3 construction costs in excess of $3.4 billion are not recoverable. Capital additions j
subsequent to April 23, 1986 are not subject to this limitation. As of 1
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Th3 C nnecticut Light cad Power Comp:ny 1
NOTES TO FINANCIAL STATEMENTS i
December 31, 1986, the company has approximately'$180.7 million of Millstone 3 costs in excess of $3.4 billion classified as Other Property on the accompanying Balance Sheets. The settlement agreements do not constitute a finding or admission of any imprudence or inefficiency in the construction of Millstone 3, and the concurrent prudence proceeding was terminated without-findings. The Company's pro rata share of the $3.4 billion permitted cost of Millstone 3 will be phased into rates over approximately five and one-half years. Although the settlement agreements provide for the phasing of the Company's Millstone 3 investment into rates on a specific schedule, it will be necessary for the Company to apply to the DPUC for revenue increases sufficient to recover the installments as they are phased in.
The DPUC has the authority to extend the phase-in period to January 1, 1993. The settlement agreements provide for full deferred earnings and carrying charges on the recoverable portion of the Company's investment in Millstone 3 being phased into rates. The amortization and recovery of deferrals through rates will be completed by December 31, 1995.
In addition, all issues in the concurrent DPUC proceeding concerning the Company's current generating capacity are deemed resolved until the Company's next general rate proceeding. See Note 10. " Accounting for Rate Base Disallowances, Phase-Ins, r
and Abandoned Plant " for a discussion of the effect on net income of the disallowance of a portion of the Company's investment in Millstone 3.
In an order dated April 4, 1985, the DPUC suspended the Company's deferred electric fossil-fuel accounting and also required the Company to divert construction work in progress (CWIP) revenues to reduce the deferred electric fossil-fuel balance on an ongoing basis. Additionally, in an order dated August 6, 1985, the DPUC required the Company to reduce the deferred electric fossil-fuel balance by the July 31, 1985 CUAC credit balance. As a result of the June 11 decision and the settlement agreements, the Company removed the CWIP revenues of $24.9 million and GUAC credit of $17.0 million, from the deferred electric fossil-fuel balance, and began amortizing these amounts over a 19-month period from June 1986 to December 1987. The deferred
[
electric fossil-fuel balance, as of February 28, 1985, of $83.8 million will be recovered over ten years with no rate base treatment. :The GUAC mechanism I
began operating again in the traditional manner beginning August 1,1986, after the July 31, 1986 credit of $17.7 million was applied to the Rate Moderation Fund.
1 On September 4,1985, the DPUC issued an order to the Company providing l
that in any month, beginning with August 1985, in which the Company's monthly annualised ROE, computed on a cost-of-capital basis, exceeded 15.9 percent, i
the Company would place the amount of revenues in excess of that required to earn a 15.9 percent return in a reserve account for use as an offset to its 4
l next general' rate request. Under this order, the Company had deferred
$33.1 million of revenues. The Company appealed this order to the Connecticut Superior Court.
On May 30, 1986, the Superior Court ruled in f avor of the Company and, in June 1986, the $33.1 million deferral was reversed.
Wholesale Rate Case On April 23, 1986, the Company began collecting rates subject to refund associated with a wholesale rate filing that was submitted in August 1985 to the FERC. The parties to the proceedings have reached settlements in principle on all but three issues in the case. Hearings on l
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Th3 C:nnecticut Light and Pow:r Company NOTES TO FINANCIAL STATEMENTS 4
the unresolved issues were completed on June 6, 1986. The FERC administrative law judge has not set a date for the decision. Management believes that the final resolution of these matters will not have a material' effect on not income.
9.
CANCELID NUCLEAR PROJECT i
Seabrook 2 has been canceled by the joint owners. The June 11 DPUC decision and the settlement agreements granted $3.3 million of annual revenues to recover a portion of the Company's retail investment in Seabrook 2.
The DPUC did not allow the Company to earn a return on this l
investment, which at December 31, 1986 was $23.9 million.
The total amount of investment to be recovered, whether there should be l
a return thereon in the future, and the recovery period will be determined in future proceedings. When making future rate determinations concerning the recovery of the Company's Seabrook 2 investment, the DPUC will^ consider the i
findings of the Seabrook prudence audit being conducted by Theodore Barry &
l Associates (TB&A).
For additional information regarding the Seabrook project I
prudence audit, see Note 11. "Comunitments and Contingencies." Although the Company has been allowed to recover part of the costs of a previously l
canceled nuclear unit (without a return), the Company cannot predict whether and to what extent it will recover its present Seabrook 2 investment.
I
- 10. ACCOUNTING FOR RATE BASE DISALLOWANCES, PHASE-INS, AND ABANDONED PLANT j
L As discussed above, the Company's investments in Millstone 3 and the I
abandoned Seabrook 2 project have been addressed in its recently completed rate case. Under generally accepted accounting principles currently in i
effect, those regulatory actions would not require ismediate lose recognition.
As reported in the Company's 1985 Annual Report, the FASB had been reconsidering its accounting standards for a number of regulatory-related issues including a regulator's partial disallowance of the cost of a newly completed plant, plant abandonments, and phase-in plans.
I In December 1986, FASB released Statement of Financial Accounting Standards No. 90, " Regulated Enterprises--Accounting for Abandonments and Disallowances of Plant Costs" (SFAS 90). SFAS 90 requires utilities ~to
(
recognize as a current charge to expense any costs of a recently completed plant which are disallowed (either directly or indirectly) in a rate proceeding. SFA$ 90'further requires that when it becomes probable that a plant under construction will be abandoned, 'and the utility determines that its regulatory commission will permit recovery of that abandoned plant, but without granting a return, the utility should discount the abandoned plant i
investment to the present value of the probable future revenues expected to be provided to recover the cost of the abandoned plant. If the carrying amount of the abandoned plant exceeds the present value, the loss would be recognised currently.
I LTh2 Connecticut Light cnd Pow:r Comp:ny NOTES TO FINANCIAL STATEMENTS i
4 SFAS 90 is effective for fiscal years beginning after December 15. 1987 i
and is to be applied retroactively. As a result of the DPUC decisions with respect to the partial disallowance of Millstone 3, described in Note 8,
" Regulatory Matters," the Company's not income will be reduced when the i
provisions of SFAS 90 are applied.
SFAS 90 must be applied no later than January 1989. The impact of the Millstone 3 disallowance at the time SFAS 90 is adopted is expected to reduce net income by approximately $125 'million.
The Company's discounting of its Seabrook 2. investment to its present value-I would not have a material effect on not income.
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During the course of its 1986 deliberations, FASB concluded that additional consideration is necessary to resolve accounting issues related to j
phase-in plans. As a result, accounting for phase-in plans was not included
]
in SFAS 90. The issue which FASB must address is to identify the criteria which would be used to defer and recover costs under a phase-in plan, j
including the appropriateness of accruing a deferred equity return. Any decision reached by FASB, which would differ from the criteria used in the Company's approved plans, could adversely affect the Company. The FASB i-expects to release an exposure draft on the accounting for phase-in plans i
sometime in 1987.
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- 11. COMMITMENTS AND CONTINGENCIES j
C_oustruction Progrant The construction program is subject to periodic review J
and revision. Actual construction expenditures may vary from such estimates due to factors such as revised load estimates, inflation, revised nuclear safety regulations, delays, difficulties in the licensing process, the availability and cost of capital, and the granting of timely and adequate rate relief by regulatory commissions, as well as actions by other regulatory bodies.
The Company currently forecasts construction expenditures (including AFUDC) of $1.2 billion for the years 1987-1991, including $312.6 million for
]
1987. In addition, the Company estimates that nuclear fuel requirements will j
be $280.0 million for the years 1987-1991, including $75.0 million for 1987.
l Seabrook: The Company has a 4.06 percent joint ownership interest in the Seabrook project. At December 31, 1986, the Company's CWIP balance included j
an investment of $193.3 million in Seabrook 1.
In January 1987, the Company
]
estimated that its total share of the costs, including AFUDC, for Seabrook 1 j
j would be approximately $230 million. The Company's estimates were based on l
l Its assumptions, for financial planning purposes, that Seabrook 1 would not enter service until Jane 30, 1988 and'that the total cost of constructing j
Seabrook 1 and placing it in service would be $5.7 billion, including AFUDC.
I In 1984, the DPUC established a $4.7 billion limit, with certain exceptions, on the construction costs of Seabrook 1 that may be made part of rate base or otherwise included in the rates of the Company. In 1985, a Connecticut law was enacted that placed the same $4.7 billion limit on Seabrook 1 construction costs. The Company's total expenditures for Seabrook 1 exceeded its pro rata share of the $4.7 billion " cap" in December 1986. Recovery of all subsequent investment in Seabrook 1 depends j
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Thi Ccnnfeticut Light cnd Powir Corp:ny j
NOTES TO FINANCIAL STATEMENTS on the Company's ability to, invalidate the $4.7 billion " cap" in the courts or to demonstrate to the DPUC that the additional. costs fall within the exceptions to the " cap" laws.
In March 1986, the DPUC reopened hearings regarding the viability of Seabrook 1.
The-June 11 DPUC decision concluded that "although the actual i
date.of operation is contingent upon final approval of an evacuation plan, j
Seabrook I will become used and useful for public service." In order to assist the DPUC in reaching decisions about the treatment of Seabrook project costs in electric rates, the DPUC has initiated a review, conducted by TB&A, of the prudence of the Company's and The United Illuminating Company's (an unaffiliated Connecticut utility) investments in the Seabrook project.
On September 20, 1986, the Governor of Massachusetts announced that Massachusetts will not submit evacuation plans for Seabrook I to federal authorities and that Massachusetts will challenge the. Nuclear Regulatory Commission's (NRC) actions if the NRC grants an operating license for Seabrook I without Massachusetts' approval of evacuation plans. In December 1986, the Seabrook joint owners asked the NRC for a reduction in the emergency evacuation zone radius. In January 1987, the NRC stated that it would not grant a low-power license to Seabrook 1 until it determines whether it will grant a reduction in the emergency evacuation zone. While the Company believes that Massachusetts' opposition increases the risk that the unit may not be permitted to operate, it continues to believe that the unit will be placed into commercial operation.
Due to the uncertainties surrounding Seabrook 1, including resolution of prudence and " cap" issues, management cannot predict the amount of the Company's investment that ultimately will be recoverable. Management does not believe that a material write-off of Seabrook 1 investment would be necessary under generally accepted accounting principles currently in effect.
However, under SFAS 90 (which was discussed in Note 10) a loss may have to be recognized for Seabrook 1.
Although the amount of any such loss cannot be determined until the above uncertainties are resolved, it could have a material effect on net income.
Hydro-Quebec Along with other New England utilities, the Company, WHECO and HWP have entered into agreements related to the financing and construction of direct current transmission and terminal facilities (Phase I) to import electricity from the Hydro-Quebec system in Canada. On October 1, 1986, Phase I entered commercial service. The final construction cost for Phase I is expected to be approximately $145-$150 million. The Phase I facilities are capable of transferring 690 MW.
The Company is entitled to receive 19.5 percent of New England's fuel savings related to the electricity transmitted by the facilities and is responsible for its share of the total annual costs of the facilities.
NU, along with various New England utilities, also entered into agreements to finance and construct additional transmission and terminal facilities (Phase II), currently estimated to cost approximately $547 million of which approximately $14.7 million had been expended as of December 31, 1986. These facilities, which will be completed in the early.
+
Th3 Conn:ctisut Light cad Power Comp ny NOTES TO FINANCIAL STATEMENTS I
1 1990's will increase the capability of the Phase I Hydro-Quebec interconnection to 2,000 MW. Upon completion of Phase II, NU.is expected to j
have a 22.36 percent equity ownership in the Phase II facilities. Under the i
terms of the Phase II equity agreement, NU will be required to guarantee the i
obligations of other participants that have lower credit ratings and will receive compensation for such guarantees.
f Nuclear Insurance Continsencies: The Price-Anderson Act currently limits public liability from a single incident at a nuclear power plant to
$695 million. The first $160 million of liability would be covered by the 4
i_
maximum provided by commercial insurance. Additional liability of up to
$535 million would be provided by an assessment of $5 million per incident levied on each of'the 107 nuclear units currently licensed to operate in the United States, subject to a maximum assessment of $10 million per nuclear unit in any year. Based on the Company's ownership interests in the nuclear units currently in service, the maximum liability per incident would be
$14.8 million, limited to a maximum of $29.6 million in any year.
Insurance has been purchased from Nuclear Electric Insurance Limited j
(NEIL) to covers (a) certain extra costs incurred in obtaining replacement i
power during a prolonged accidental outage with respect to the Company's j
ownership interests in Millstone 1, 2, and 3, and CY; and, (b) the cost of repair, replacement, or decontamination of utility property resulting from insured occurrences at Millstone 1, 2, and 3, CY, MY, and VY.
All companies insured with NEIL are subject to retroactive assessments if losses exceed the j
accumulated funds available to NEIL. The maximum potential assessments against the Company with respect to losses arising during current policy years are approximately $9.0 million under the replacement power policies and i
$12.5 million under the property damage and decontamination policies.
l Although the Company has purchased the limits of coverage currently available 1
from conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds.
)
Financing Guarantees: The owners of CY, including the Company, have j
guaranteed their pro rata shares of $36.7 million 17 percent Series A Debentures and a $25 million revolving credit agreement. The Company's guarantee is $21.9 million.
The owners of VY, including the Company, have guaranteed their pro rata i
shares of a $40 at111on nuclear fuel financing through the Vernon Energy j
Trust. The Company's guarantee is $3.8 million.
i The owners of MY, including the Company, have guaranteed their pro rata j
shares of MY's obligations under a $50 million nuclear fuel inan agreement.
l The Company's guarantee is $6.0 million.
The Company may be asked to provide additional capital and/or other j
types of direct or indirect financial support for one or more of'the regional nuclear generating companies.
I On December 22, 1986, NNECO sold $15 million of unsecured term notes.
4 The Company and WMECO have agreed to guarantee their pro rata shares of the notes. The Company's guarantee is $12.2 million.
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Thi C:nnscticut Light cnd Pow;r. Comp ny'-
NOTES TO FINANCIAL STATEMENTS
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12.
SEGMENTS OF BUSINESS i'
The following summarizes information relating to the Company's electric and gas operations:
I For the Years Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Operating information:
Operating revenues-Electric....................
$1,509,849
$1,536,426
$1,554,808
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Gas.........................
203,814 220,010 224,430 Tota 1...................
$1,713,663
$1,756,436
$1,779,238-e Pretax operating income-Electric....................
$ 370,934
$ 349,273
$ 435,113 i
Gas.........................
33,879 37,412 39,350 Tota 1..................
$ 404,813
$ 386,685
$ 474,463 Depreciation expense-Electric....................
130,273 92,513 89,455 j
Gas.........\\...............
11,258 10,610 10,056 Tota1..................
4 141,531 103,123 99,511 Gross Property Additions:
Electric.......................
$ 380,393
$ 607,933
$ 572.139 j
Gas............................
21,192 19,786 20,773 Tota1....................
$ 401,585
$ 627,719
$ 592,912 Investment information at December 31:
i Identifiable assets (a) -
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Electric.....................
$4,497,803
$4,207,525
$3,755,861 Gas..........................
229,768 217,656 207,872 Nona11ocable assets............
516,438 562,728 531,408 l
Total Assets.............
$5,244,009
$4,987,909
$4,495,141 (a) Includes construction work in progress, materials and supplies, and allocated common utility plant.
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Th3 C:nnecticut Light cud Pow r Company Auditors' Report s
To the Board of Directors of The Connecticut Light and Power Company:
We have examined the balance sheets of The Connecticut Light and Power Company (a Connecticut corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1986 and 1985, and the related statements of t
income, common stockholder's equity and sources of funds for gross property additions for each of the three years'in the period ended December 31, 1986.
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.
j In our opinion, the financial statements referred to above present fairly the financial position of The Connecticut Light and Power Company as of December 31,1986 and 1985, and the results of its operations and the sources of funds for gross property additions for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis.
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ARTHUR ANDERSEN & CO.
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Hartford, Connecticut, February 20, 1987 i
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l Tha Cannecticut Light cnd Pow r Comp ny-
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SELECTED FINANCIAL DATA Years Ended December 31, 1986 1985 1984 1983.
1982 (Thousands of Dollars)
Operating Revenues....
$1,713,663 $1,756,436 $1,779,238 $1,597,624 '41,502,645 Operating Income......
250,303 238,138 291,578 247,095 204,659 4
Net Income............
291,516 277,075 284,227 227,20'7' 152,960 i
Total Assets..........
5,244,009 4,987,909 4,495,141 4,028,993 3,478,644 Long-Tern Debt *.......
2,044,574 2,014,311 1,842,405 1,702,375 1,523,182 1
1 Preferred Stock j
Subject to Mandatory Redemption *..........
131,833 135,833 136,978 138,546 89,461 Obligations Under Capital Leases *......
330,819 332,318 313,433 272,090 232,428 4
- Includes portions due within one year.
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STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
N Quarter Ended 1986 March 31 June 30 September 30 December :iI (Thousands of Dollars)
Operating Revenues....
$465,627
$425,665
$398,982
$423,389 1
Operating Income......
$ 61,752
$ 76,615
$ 63,341
$ 48,595 i
Net Income............
$ 73,891
$ 94,999
$ 67,200
$ 55,426 1985 Operating Revenues....
$503,402
$404,265
$401,968
$446,801 Operating Income......
$ 81,787
$ 57,943
$ 51,638
$ 46,770 Net Income............
$ 89,649
$ 67,247
$ 62,799
$ 57,380 i
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Tha Cinnecticut Light cud Pcwer Comp;ny STATISTICS At December 31, 1986 1985 1984 1983 1982 Electric:-
Operating Revenues (thousands)....... $1,509,849 $1,536,426 $1,554,808 $1,358,625 $1,278,198 kWh Sales (millions)........
18,728 17,816 17,502 16,639 15,950 Average Annual Residential kWh Use...............
7,817 7,551 7,648 7,533 7,408 Customers (average).........
983,387 961,070 941,839 925,193 916,525
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Gas:
Operating Revenues (thousands)....... $ 203,814 $ 220,010 $ 224,430 $ 238,999 $ 224,447 Cubic Feet of Gas Sales (millions)..
28,249 27;915 29,682 27,661 28,917 Average Annual Residential Cubic Feet of Gas Used..
73,881 72,161 72,303 68,296 75,030 i
Customers (average) 162,765 159,119 156,452 154,808 152,329 Utility Plant (thousands)........ $5,547,592 $5,435,410 $4,899,399 $4,381,401 $3,858,064 Employees...........
4,066 4,061
'4,077 4,091 4,115
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Th2 Cennicticut Light and Powar Comp ny First and Refunding Mortgage-Bonds Trustee and Interest Paying Agent Bankers Trust Company, Corporate Trust and Agency Group P.O. Box 318, Church Street Station, New York, New York 10015 i
- The First National Bank of Boston, Corporate Trust Department P.O. Box 1897, Boston, Massachusetts 02105'
- The Connecticut National Bank, Corporate Trust Department 777 Main Street,. Hartford, Connecticut 06115 Preferred Stock Transfer Agent, Dividend Disbursing Agent and Registrar The Connecticut Bank and Trust Company, N.A. Stock Transfer Department One Constitution Plaza, Hartford, Connecticut 06115 Dividend Payment Dates 5.28%, 9.60%, 10.48%, 11.52%,
$3.24, $4.48 H, $4.48 I and Adjustable Rate N Series -
January 1, April 1, July 1 and October 1 4.50% (1956), 4.96%, 6.56%, 9.36%,
$1.90, $2.00, $2.04, $2.06, $2.09 and $2.20 Series -
l February 1, May 1, August 1 and November 1-l 3.90%, 4.50% (1963), 7.60%, 15.04%,
$3.80, $4.56 and $5.52 Series - March 1, June 1, September 1 and December 1 Address General Correspondence in Care of:
Northeast Utilities Service Company 4
Investor Relations Department P.O. Box 270 Hartford, Connecticut 06141-0270 l
Tel. (203) 665-5000 General Office Selden Street, Berlin, Connecticut 06037-1616
- Trustee and interest paying agent (except as noted below) for first mortgage bonds issued under the indenture of The Hartford Electric Light Company.
4 Effective at the close of business on June 30, 1982, The Hartford Electric Light Company was merged into The Connecticut Light and Power Company.
- Paying agent for the 4 1/4% 1963 Series, 4 1/2% 1964 Series, 4 3/8% 1958 Series, and 5% 1957 Series, i
The data contained in this Report is submitted for the sole purpose of
. providing information to present stockholders about the Company.
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NORTHEAST UT LIT ES THE CONNECTICUT LIGHT AND POWER COMPANY WESTERN MASSACHUSETTS ELECTRIC COMPANY HOLYOKE WATER POWER COMPANY NORTHEs5T UTIUTIES SERV!CE COMPANY NORTHEAST NUCLEAR ENERGY COMPANY i
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4 ANNUAL REPORT 1986 1
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WMECO WESTERN MASSACHUSETTS ELECTRIC COMPANY a subsidiary of Northeast Utilities
Directors PHILIP T. ASHTON LEON E. MAGLATHLIN,JR.
Senior <Vice President Senior Vice President The Connecticut Light and Power Company EDWARD J. MROCZKA JOHN P. CAGNETTA Senior Vice President Senior Vice President JOHN F. OPEKA WILLIAM B. ELLIS Executive Vice President Chairman, President and Chief Executive Officer LAWRENCE H. SHAY BERNARD M. FOX Senior Vice President Executive Vice President and Chief Financial WALTER F. TORRANCE, JR.
SeniorVicePresident Secretary, FRANK R. LOCKE General Counsel and Assistant Clerk Vice President and Chief Administrative Officer Officers WILLIAM B. ELL lS CARROLL A. CAFFREY C. FREDERICK SEARS Chairman, President and Vice President Vice President Chief Executive Officer TOD O. DIXON GEORGE D. UHL BERNARD M. FOX Vice President Vice President and Controller.
RAYMOND E. DONOVAN RICHARD P. WERNER h f rnan a O cer Vice President Vice President JOHN F. OPEKA ALBERT J. HAJEK ALBINA A.PLUTA Executive Vice President Vice President Clerk JOHN P. CAGNETTA WARREN A. HUNT ELIZABETH W. BROOME -
Senior Vice President Vice President Assistant Clerk LEON E MAGLATHLIN, JR.
FRANCIS L KINNEY CHERYL W. GRIS$ '
Senior Vice President Vice President Assistant Clerk EDWARD J. MROCZKA HARRIE R. NIMS JOHN T. HICKEY -
Senior Vice President Vice President Assistant Secretary LAWRENCE H. SHAY LEONARD A.O'CONNOR DOUGLAS R. TEECE Senior Vice President Vice President and Treasurer Assistant Secretary WALTER F. TORRANCE, JR.
RICHARD A.RECKERT ROBERT C. ARONSON i
Senior Vice President. Secretary, Vice President Assistant Treasurer General Counsel and Assistant Clerk WAYNE D. ROMBERG DAVID H. BOGUSLAWSKI FRANK R. LOCKE Vice President Assistant Treasurer Vice President and Chief Administrative Officer WALTER T. SCHULTHEIS Vice President C. THAYER BROWNE Vice President 1
i FEBRUARY 27,1987 i
WESTERN MASSACHUSETTS ELECTRIC COMPANY l
February 27, 1987 TO OUR PREFERRED STOCKHOLDERS:
The financial statements and statistical data contained in this report reflect the results of operations of Western Massachusetts Electric Company (WMECO) for 1986.
The 1986 annual report of Northeast Utilities, which provides information re-garding the entire Northeast Utilities system, including WMECO, has also been mailed to all WMECO preferred stockholders.
This report is brief for that reason.
Several significant events occurred during 1986 which furthered the company's progress toward achieving long-term financial strength.
Millstone 3 began commercial operation on April 23, 1986 and has been performing at a level that exceeds the average for new nuclear units.
On June 30, 1986 the Massachusetts Department of Public Utilities (DPU) issued a decision on WMECO's application.for an electric revenue increase, the details of which are described within this report.
In 1986, WMECO bonds were upgraded by Moody's from Baa2 to Baal and its preferred stock was upgraded from baa2 to baal.
Sincerely,
].
y Bernard M.
Fox William B.
Ellis Executive Vice President, and Chairman, President Chief Financial Officer and Chief Executive Officer
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Western Massachusetts Electric Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains management's assessment of Western Massachusetts i
Electric Company's (the Company) financial condition and the principal factors which have an impact on the results of operations. This discussion should be read in conjunction with the Company's financial statements and footnotes.
FINANCIAL CONDITION i
Several significant events occurred during 1986. The financing and construction of Millstone 3 were completed, and the unit has been performing at a level which exceeds the average for new nuclear units. The Company owns 12.24 percent of Millstone 3.
In addition, as further discussed below, a rate decision in Massachusetts substantially resolved the uncertainty of major issues -
relating to the rate treatment for Millstone 3.
The Company's net income decreased from $54.6 million for the year ended December 31, 1985 to $41.2 million for the year ended December 31, 1986. The decrease in net income is primarily attributable to higher operating costs associated with the commercial operation of Millstone 3.
4 The Company continued to improve its capital structure by increasing its equity ratio to 36.5 percent at December 31, 1986. Noncash items, which include the allowance for funds used during construction (AFUDC) and the deferred return on the Millstone 3 investment act currently included in rate base, continued to provide approximately 70 percent of the Company's earnings.
In December 1986, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 90, " Regulated-Enterprises--Accounting for Abandonments and Disallowances of Plant Costs" (SFAS 90). The Massachusetts Department of Public Utilities' (DPU) rate l
treatment of the Company's Millstone 3 investment does not fall within the provisions of SFAS 90.
The FASB expects to release a separate exposure draft on accounting for phase-in plans in 1987.
The Tax Reform Act of 1986 modified many provisions of the federal tax laws. The modifications include the reduction in the corporate tax rate, the l
repeal of investment tax credit, the adoption of a new corporate alternative.
l minimum tax, and changes in the capitalization rules and depreciation system.
It is expected that these modifications will have an adverse impact on cash flow.
The impact of the lower tax rates on deferred tax reserves will depend greatly on the treatment authorized in future decisions of regulatory commissions. -
5 Construction Program The Company's 1986 construction expenditures of.$60.4 million were the i
Iowest since 1981, as Millstone 3 was completed and began commercial operation in April. Future construction projects are expected to require smaller outlays-of funds and involve shorter construction periods. Projected construction expenditures, including AFUDC but excluding nuclear fuel, for the period 1987 through 1991 are presented in the following table.
Electric Electric Production Distribution Other Total (Thousands of Dollars) 1987
$23,202
$18,888
$5,213
$47,303 1988 15,009 25,343 9,935 50,287 1989 21,969 24,282 3,806 50,057 1990 14,959 26,075 3,704-44,738 1
1991 16,513 27,612 3,320 47,445 Financing It is essential that the Company maintains its progress toward financial health so as to assure continuing access to debt and equity capital markets whenever needed to implement its ongoing construction program, to refund debt maturities, and to meet other cash requirements. Cash requirements in excess of internally generated funds are generally financed through short, intermediate,
and long-term borrowings, nuclear fuel trust financing, leasing agreements, and J
i sales of preferred stock, and capital contributions from the parent company.- In addition to construction and nuclear fuel reqairements, the Company is obligated I
to meet maturities and' cash sinking-fund requirements totaling $79.6 million for the years 1987 through 1991. External financing will continue to be necessary i
to meet total cash requirements, although not at the-levels in recent years-because projected construction expenditures have been substantially reduced.
During 1986, tha Company issued $25 million of first mortgage bonds and
$60 million intermediate-term notes. A large portion of the proceeds of these issues was used to redeem, prior to maturity, high-interest rate first mortgage bonds, and reduce variable-rate debt.
In addition, the Company redeemed i
$15 million of preferred stock prior to maturity.
The Company and The Connecticut Light and Power Company (CL&P) continue to utilize a nuclear fuel trust to finance nuclear fuel requirements for Millstone 1 and 2 and their ownership share of Millstone 3.
As of December 31, 1986, the Company's portion of the trust's investment in nuclear fuel was
$68.2 million. The Company's nuclear fuel requirements of $64.1 million for the years 1987 to 1991 are expected to be financed by the trust.-
In 1986, the system companies reduced available credit facilitie's and lines by $400 million, leaving $398 million available. This reduction included the l
termination of the Millstone 3 construction trust agreement. Available credit facilities and lines include $350 million through revolving credit / term loan i
agreements with two groups of banks. The maximum borrowing limit of the Company under the agrecuents is $105 million. However, since this money is also.- -.. --
1 available to CL&P, the amount of borrowing available could be lower depending on CL&P's utilization. At December 31, 1986, the Company and CL&P had outstanding borrowings of $20 million and $50 million, respectively, under these agreements.
The remaining $48 million is available to the. system companies through joint credit line agreements with various banks. Amounts utilized by other system 4
companies under these joint credit lines will reduce the amount available to.the Compan,.
\\t December 31, 1986, the amount of unused borrowing capacity under the joint credit lines available to the system companies was $35.5 million.
1 i
Rate Matters In December 1985, the Company filed an application with the DPU requesting an annual electric revenue increase of $29.4 million.. The increased revenues-were required primarily for the proposed three-year phase-in of Millstone 3 costs into rates. On June 30, 1986, the DPU issued a decision that resulted in a net reduction in annual electric revenues of $5.9 million or 2.3 percent. The j
DPU determined that 76 percent of the Company's Millstone 3 construction costs met the "used and useful" standard established by the DPU and would be-phased into rates over a five-year period.
In addition, the DPU found that the Company-had prudently managed the project and, therefore, allowed recovery of most of the remaining 24 percent over ten years without a return. The DPU will1 permit the "unuseful" portion of Millstone 3 to be reevaluated in future proceedings.
On July 25, 1986, the Company filed a motion for recalculation and reconsideration of certain adjustments contained in the.DPU's June 30, 1986 I
order. On February 13, 1987, the DPU issued an order on the Company's motion i
for recalculation and reconsideration which further reduced annual electric l
revenues by $1.5 million.
In December 1986, the Company filed an application with the DPU requesting t
an increase in annual electric revenues of $23.5 million.
The increased-
{
revenues are required primarily to provide for the second year of the five-year phase-in of Millstone 3 costs into rates.
l To help meet future capacity needs and to avoid building large, capital-intensive generating units the Company has solicited purchases of the output from cogeneration and small power production facilities.. Such purchases could supply a significant portion of future generation needs. In August 1986, the DPU issued regulations governing the sale of electricity between cogenerators and small power producers and Massachusetts utilities. The regulations established a " bidding" process in which potential cogenerators 4
compete to supply utilities with capacity and energy.
In addition, the regulations assure utilities that payments to cogenerators and small power producers can be recovered through rates, if the DPU has approved the contracts.
1 I
i,
y en, - -,, - -.,n-,
7
,w-.
RESULTS OF OPERATIONS Operating Revenues Operating revenues decreased $14.1 million from 1985 to 1986 and increased
$3.5 million from 1984 to 1985. The components of the change in operating revenues for the past two years are provided in the table below.
Change in Operating Revenues Increase /(Decrease) 1986 vs. 1985 1985 vs. 1984 (Millions of Dollars)
Fuel cost recoveries
$(32.6)
$(1.3)
Regulatory rate decisions 12.6 8.9 Sales and other 5.9 (4.1)
Total revenue change
$(14.1)
$ 3.5 Fuel cost recoveries decreased in 1986 primarily because of lower fossil fuel prices and the effect of increased nuclear generation which replaced higher cost fossil generation. Revenues related to 1986 regulatory rate decisions increased primarily as a result of the recovery of nonfuel costs associated with the operation of Millstone 3.
The sales increase in 1986 was primarily the result of a 2.8 percent increase in electric sales because of improved economic conditions.
Fuel cost recoverias decreased in 1985 primarily because of lower fossil fuel prices and the recovery of energy costs on a lower level of sales.
Regulatory rate decisions increased revenues as a result of the July 1984 DPU rate case decision. The sales decrease in 1985 is primarily the result of a 0.9 percent decrease in electric sales resulting from lower heating requirements in 1985.
Electric Energy Expenses Electric energy expenses, which include fuel and net purchased and interchange power, decreased $32.7 million in 1986 as compared to 1985. This decrease was primarily the result of lower fossil fuel prices and lower cost energy provided by Millstone 3, partially offset by higher kilowatt-hour (kWh) requirements.
t Electric energy expenses decreased $1.2 million in 1985 compared to 1984 because of lower kWh requirements in 1985, lower fossil fuel prices and the matching of revenues and expenses under the provisions of the Company's energy adjustment clause.
Other Operation and Maintenance Expenses Other operation and maintenance expenses increased $15.8 million in 1986 compared to 1985 primarily because of expenses associated with operating Millstone 3, higher capacity charges from Connecticut Yankee Atomic Power Company resulting from its refueling and maintenance outage in 1986, and the general impact of inflation on most expenses in 1986. Although inflation has subsided in recent years, operating expenses still have been impacted.
Other operation and maintenance expenses increased $1.4 million in 1985 primarily because of an extended Millstone 2 refueling and maintenance outage and the general impact of inflation on most expenses. This increase was partially offset by lower capacity costs which resulted from a reduction in the allocation factor applicable to the Company in the operation of the Northeast Utilities Generation and Transmission Agreement.
Depreciation Expense Depreciation expense increased $6.5 million in 1986 as compared to 1985 primarily because of the commercial operation of Millstone 3.
Taxes Federal and state income taxes decreased $1.4 million in 1986 compared to 1985 because of an decrease in taxable income.
Federal and state income taxes increased $3.7 million in 1985 compared to 1984 because of a decrease in taxable income.
Allowance for Fund: Usei N? ring Construction and Deferred Millstone 3 Return Total debt and equity AFUDC decreased $20.5 million in 1986 compared to 1985. This decrease was caused by a lower average CWIP balance, reflecting the commercial operation of Millstone 3.
This decrease was offset partially by the deferred return of $18.4 million on the Millstone 3 investment not currently included in rate base.
The increase in AFUDC of $8.4 million in 1985 compared to 1984 was primarily caused by a higher average CW1P balance attributable to the Millstone 3 construction project. -_
Wastern Massachusetts Electric Company STATEMENTS OF INCOME For the Years Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Operating Revenues....................
$263,736
$277,820
$274,296 Operating Expenses:
Operation-Fuel...............................
45,249 41,477 61,902 Purchased and interchange power, net...............................
12,579 49,046 29,858 0ther..............................
77,383 59,265 62,298 Maintenance.........................
23,050 25,370 20,963 Depreciation........................
26,780 20,298 18,944 Federal and state income taxes (Note 4)...........................
27,586 29,131 25,275 Taxes other than income taxes.......
13,120 11,802 12,045 Total operating expenses.........
225.747 236,389 231,285 Operating Incame......................
37,989 41,431 43,011 Other Income:
Allowance for other funds used during construction................
10,820 26,040 19,441 Deferred Millstone 3 return-other funds..............................
13,132 Equity in earnings of regional nuclear generating companies.......
2,766 2,612 2,375
- Other, net..........................
(365)
(482)
(419)
Income taxes-credit.................
9,892 10,787 8,623 Other income, net................
36,245 38,957 30,020 Income before interest charges...
74,234 80,388 73,031 Interest Charges:
Interest on long-term debt..........
34,880 34,006 30,750 Other interest......................
1,621 1,215 1,612 Allowance for borrowed funds used during construction, net of income t ax e s..............................
(4,238)
(9,468)
(7,621)
Deferred Millstone 3 return-borrowed funds, net of income taxes.........
(5,233)
Interest charges, net............
27,030
__25,753 24,741 Net Income............................
$ 47,204
$ 54,635
$ 48,290 The accompanying notes are an integral part of these financial statements. - -___
Western Massachusetts Electric Company STATEMENTS OF SOURCES OF FUNDS FOR GROSS PROPERTY ADDITIONS For the Years Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Funds Generated From Operations:
Net income..................................
$ 47,204
$ 54,635
$ 48,290 Principal noncash items:
Depreciation.............................
28,180 20,298 18,944 Deferred income taxes, net...............
19,993 18,674 14,823 Amortization of deferred charges and other noncash items.....................
1,898 (1,031) 4,623 Deferred return-Millstone 3 (Note 8).....
(18,365)
Allowance for other funds used during construction............................
(10,820)
(26,040)
(19,441)
Total funds from operations........
68,090 66,536 67,239 Less-Cash dividends paid on:
Common stock.............................
25,268 24,988 20,205 Preferred stock..........................
8,486 9,470 9,869 Net funds generated from operations 34,336 32,078 37,165 Funds Obtained From Financing:
Long-term debt..............................
85,000 61,000 66,400 Increase (decrease) in construction trust...
(24,931) 19,756 (29,312)
Increase (decrease) in short-term debt......
35,500 9,000 (10,500)
Increase in obligations under capital leases.....................................
16,655 15,056 20,101 Capital contributions from Northeast Utilities (parent company).................
10,000 20,000 Tctal..............................
112,224 115,812 66,689 Less-Reacquisitions and retirements of long-term debt and preferred stock.........
64,481 24,500 8,350 Net funds from financing...........
47,743 91,312 58,339 Other Sources (Uses) of Funds:
Changes in components of working capital:
Cash and special deposits................
1,111 (1,276) 1,788 Receivables and accrued utility revenues.
1,948 2,657 (3,489)
Fuel, materials and supplies.............
(125) 816 (493)
Accounts payable.........................
577 (12,743) 8,825 Accrued taxes............................
(4,315)
(1,635) 1,584 Other, net...............................
(6,654) 2,407 (162)
Net change.........................
(7,458)
(9,774) 8,053 Energy adjustment clause....................
(2,696)
(120) 4,043 Other, net..................................
(8,041)
(6,723)
(254)
Net other sources (uses) of funds..
(18,195)
(16,617) 11,842 Total Funds For Construction From Above Sources......................................
63,884 106,773 107,346 Allowance For Other Funds Used During C o n s t ru c t io n.................................
10,820 26,040 19,441 GROSS PROPERTY ADDITIONS......................
$ 74,704
$132,813
$126,787 Composition of Gross Property Additions:
Electric utility plant...................
$ 60,363
$115,616
$107,422 Nuclear fuel.............................
14,341 17,197 19,365 Total..............................
$ 74,704
$132,813
$126,787 The accompanying notes are an integral part of these financial statements. _ _ _.
Wastern Massachusetts Electric Company BALANCE SHEETS At December 31, 1986 1985 (Thousands of Dollars)
Assets Utility Plant, at original cost:
Electric........................................
$ 963,548
$583,044 Less: Accumulated provision for depreciation.
211,452 194,356 752,096 388,688 Construction work in progress (Note 10).........
18,901 451,290 Nuclear fuel, net (Note 3)......................
64,383 69,163 Total net utility plant......................
835,380 909,141 Other Property and Investments:
Investments in regional nuclear generating c omp an ie s, a t e qu ity...........................
13,445 13,444 Other, at cost..................................
3,904 3,577 17,349 17,021 Current Assets:
Cash and special deposits.......................
3,123 4,234 Receivables, less accumulated provision for uncollectible accounts of $1,466,000 in 1986 and $1,454,000 in 1985.........................
25,454 25,557 Receivables from affiliated companies...........
3,681 7,267 Accrued utility revenues........................
13,297 11,556 Fuel, materials and supplies, at average cost...
8,357 8,232 Prepayments and other...........................
6,190 1,359 60,102 58,205 Deferred Charges:
Unamortized debt expense........................
2,092 1,759 Unrecovered spent nuclear fuel disposal costs...
5,193 5,433 Deferred costs-Millstone 3 (Note 8).............
20,401 Amortizable property investment-Millstone 3 (Note 8).......................................
103,095 0ther...........................................
9,369 4,223 140,150 11,415 Total Assets.................................
$1,052,981
$995,782 The accompanying notes are an integral part of these financial statements.
Western Massachusetts Electric Company BALANCE SHEETS At December 31, 1986 1985 (Thousands of Dollars)
Capitalization and Liabilities Capitalization:
Common stock - $25 par value. Authorized and outstanding 1,072,471 shares.....................
26,812
$ 26,812 Capital surplus, paid in..........................
149,777 151,404 Retained earnings.................................
98,105 84,655 Total common stockholder's equity..............
274,694 262,871 Cumulative preferred stock - $100 par value.
Authorized 1,000,000 shares; outstanding 700,000 shares in 1986 and 850,000 shares in 1985 Not subject to mandatory redemption (Note 5)..
35,000 35,000 Subject to mandatory redemption (Note 6)......
35,000 49,250 Long-term debt (Note 7)...........................
396,915 396,968 Total capitalization...........................
741,609 744,089 Obligations Under Capital Leases (Note 3)...........
53,149 62,167 Current Liabilities:
No te s payable to banks (Note 2)...................
47,500 11,000 Commercial paper (Note 2).........................
1,000 Long-term debt and preferred stock - current portion..........................................
12,000 750 Obligations under capital leases - current portion (Note 3).................................
21,766 13,534 Accounts payable..................................
9,341 8,204 Accounts payable to affiliated companies..........
14,058 14,618 Accrued texes.....................................
(586) 3,729 Accrued interest..................................
7,331 7,286 0ther.............................................
890 3,242 112,300 63,363 Deferred Credits:
Accumulated deferred income taxes.................
106,268 91,335 Accumulated deferred investment tax credits.......
38,429 33,850 0ther.............................................
1,226 978 145,923 126,163 Commitments and Contingencies (Note 10)
Total Capitalization and Liabilities.....
$1,052,981
$995,782 The accompanying notes are an integral part of these financial statements. _
Wastern Massachussets Electric Company STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Capital Common
- Surplus, Retained Stock
- Paid in Earninga (a) Total (Thousands of Dollars)
Balance at January 1, 1984..........
$26,812
$121,410
$46,262
$194,484 Net income for 1984...............
48,290 48,290 Cash dividends on preferred stock.
(9,869)
(9,869)
Cash dividends on common stock....
(20,205)
(20,205)
Capital contribution from Northeast Utilities (parent c omp any).........................
20,000 20,000 Balance at December 31, 1984........
26,812 141,410 64,478 232,700 Net income for 1985...............
54,635 54,635 Cash dividends on preferred stock.
(9,470)
(9.470)
Cash dividends on common stock....
(24,988)
(24,988)
Capital contributions from Northeast Utilities (parent company).........................
10,000 10,000 Preferred stock issuance expenses.
(6)
(6)
Balance at December 31, 1985........
26,812 151,404 84,655 262,871 Net income for 1986...............
47,204 47,204 Cash dividends on preferred stock.
(8,486)
(8,486)
Cash dividends on common stock....
(25,268)
(25,268)
Loss on reacquired preferred stock and preferred stock issuance and retirement expenses.
(1,627)
(1,627)
Balance at December 31, 1986........
$26,812
$149,777
$98,105
$274,694 (a) At December 31, 1986, there was approximately $54,291,000 of retained earnings available for payment of cash dividends on common stock under the provisions of the Company's First Mortgage Indenture and Deed of Trust.
The accompanying notes are an integral part of these financial statements.
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES General: Western Massachusetts Electric Company (the Company), The Connecticut Light and Power Company (CL&P) and Holyoke Water Power Company (HWP) are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by Northeast Utilities (NU).
Other wholly owned subsidiaries of NU provide substantial support services to the system. Northeast Utilities Service Company supplies centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing, and other services to the system companies. Northeast Nuclear Energy Company (NNECO) acts as agent for system companies in constructing and operating nuclear generating facilities. The Company purchases electricity from Holyoke Power and Electric Company, a wholly owned subsidiary of HWP. NU also has two subsidiary realty companies, The Rocky River Realty Company and The Quinnehtuk Company.
All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity, and are subject to approval of various federal and state regulatory agencies.
Public Utility Regulation: NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (the 1935 Act), and it and its subsidiaries, including the Company, are subject to the provisions of the 1935 Act.
Arrangements among the system companies, outside agencies, and other utilities covering interconnections, interchange of electric power, and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. The Company is subject to further regulation for rates and other matters by the FERC and the Massachusetts Department of Public Utilities (DPU), and follows the accounting policies prescribed by the respective commissions.
Investments and Jointly Owned Electric Utility Plant: The Company owns common stock of four regional nuclear generating companies. These companies, with the Company's ownership interests, are:
Connecticut Yankee Atomic Power Company (CY) 9.5%
Yankee Atomic Electric Company 7.0%
Maine Yankee Atomic Power Company (MY) 3.0%
Vermont Yankee Nuclear Power Corporation (VY) 2.5%
The Company's investment in these companies is accounted for on the equity basis. The electricity produced from these facilities is committed to the participants based on their ownership interests and is billed pursuant to contractual agreements.
The Company has a 12.24 percent interest in Millstone 3, a 1,150-megawatt (MW) nuclear generating unit. As of December 31, 1986, plant in service and accumulated depreciation included approximately -
Western M saschusetta Electric Company NOTES TO FINANCIAL STATEMENTS
$362.1 million and $7.2 million, respectively, for the Company's proportionate share of Millstone 3.
The Company's share of Millstone 3 expenses is included in the corresponding operating expenses on the accompanying Statements of Income.
Revenues: Utility revenues are based on authorized rates applied to each customer's use of electricity. Rates can be increased only through a formal proceeding before the appropriate regulatory commission. At the end of each accounting period, the Company accrues an estimate for the amount of energy delivered but unbilled.
Spent Nuclear Fuel Disposal Costs: Under the Nuclear Waste Policy Act of' 1982, the Company is paying the United States Department of Energy (DOE),
on a quarterly basis, a fee of 1.0 mill per kilowatt-hour (kWh) based on the Company's share of nuclear generation beginning on April 7, 1983, for the disposal of spent nuclear fuel and high-level radioactive waste.
For nuclear fuel used to generate electricity prior to April 7,1983 (prior period fuel), the fees are based on the Company's share of the amount of energy extracted from such fuel. As established by the Nuclear Waste Policy Act of 1982, payment for prior period fuel may be made anytime prior to the first delivery of spent fuel to the DOE. At December 31, 1986, fees due to the DOE for the disposal of prior period fuel are approximately $21.1 million, including interest costs of $5.5 million. The DPU has allowed for the recovery of spent nuclear fuel disposal costs, including interest, in rate case or fuel adjustment decisions based on the provisions of the Nuclear Waste Policy Act of 1982. As of December 31, 1986, approximately $15.9 million had been collected through rates.
Depreciation: The provision for depreciation is calculated using the straight-line method based on estimated remaining useful lives of depreciable utility plant in service, adjusted for net salvage value and removal costs as approved by the DPU. Except for major facilities, depreciation factors are applied to the average plant in service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation.
The depreciation rates for the several classes of electric plant in service are equivalent to a composite rate of 3.5 percent in 1986, 3.7 percent in 1985, and 3.6 percent in 1984.
Nuclear Decommissioning: A 1985 decommissioning study indicates that immediate dismantlement at retirement is the most viable and economic method of decommissioning the three Millstone units. The Company's share of the total estimated cost of decommissioning these units is
$89.1 million in year-end 1986 dollars. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, technology, and inflation.
In 1985, the Company filed plans with the DPU to establish independent decommissioning trusts for their portion of the costs of decommissioning -
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS Millstone 1, 2, and 3.
In 1986, the DPU ordered the Company to establish external decommissioning trusts for all three Millstone units and to transfer previously collected amounts for decommissioning Millstone 1 and 2 into these external decommissioning trusts.
As of December 31, 1986, the Company has collected through rates
$8.0 million for future decommissioning costs, of which, $6.0 million has been funded externally. Although a portion of the estimated total decommissioning costs has been approved by regulatory agencies and is reflected in the depreciation expense of the Company, the Company believes revenues in amounts greater than those currently being collected will be required to pay the full projected costs of decommissioning.
Income Taxes: The tax effect of timing differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of income subject to tax) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. See Note 4 for the components of income tax expense.
The Company has not provided deferred income taxes for certain timing differences during periods when applicable regulatory authorities did not permit the recovery of such income taxes through rates charged to customers. The cumulative net amount of income tax timing differences for which deferred taxes have not been provided was approximately
$67 million at December 31, 1986. As allowed under cu'rrent regulatory practices, deferred taxes not previously provided are being collected in customers' rates as such ta::es become payable.
Investment tax credits (ITC), which reduce federal income taxes currently payable, are deferred and amortized over the useful life of the related utility plant. The Tax Reform Act of 1986 repeals the ITC for property placed in service after December 31, 1985. However, ITC may be claimed on certain transition property. ITC carryovers that had not expired as of December 31, 1985 are preserved and may be used in 1986 and thereafter. At December 31, 1986, the Company had unused and unrecorded ITC of approximately $10.5 million, which are available to offset federal income tax provisions through the year 2001.
Allowance for Funds Used During Construction (AFUDC): AFUDC, a noncash item, represents the estimated cost of capital funds used to finance the Company's construction program. These costs, which are one component of the total capitalized cost of construction, are not recognized as part of the rate base for ratemaking purposes until facilities are placed in service. AFUDC is recovered over the service life of plant in the form of increased revenue collected as a result of higher depreciation expense.
The effective AFUDC rates for 1986, 1985, and 1984 were 8.7 percent, 9.4 percent, and 9.5 percent, respectively. These rates ars calculated using the net-of-income tax method and in accordance with FERC guidelines..
Wastern Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS Retirement Plan: The Company participates in the Northeast Utilities Service Company Retirement Plan (the Plan). The Plan, which covers all regular system employees, is noncontributory. The system's policy is to fund annually the actuarially determined contribution, which includes that year's normal cost, the amortization of prior years' actuarial gains or losses over 15 years, and the amortization of prior service cost over a period of 40 years. The Company's allocated portion of the system's pension cost, part of which was charged to utility plant, approximated
$2.6 million in 1986, $2.7 million in 1985, and $2.5 million in 1984.
The actuarial present value of accumulated plan benefits and plan net assets available for benefits for the Plan is:
January 1, 1986 1985 (Thousands of Dollars)
Benefits:
Vested..............
$377,090
$339,515 Nonvested...........
47,546 42,482
$424,636
$381,997 Net assets available for benefits........
$606,430
$479,525 The assumed rate of return used to determine the actuarial present value of accumulated plan benefits was 7.5 percent for both years.
In December 1985, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 47 (SFAS 87) entitled " Employers' Accounting for Pensions." SEAS 87 supercedes previous pension accounting standards and will be effective in 1987. This statement prescribes a standardized method for measuring pension costs and expanded footnote disclosures. The Company does not expect that the adoption of this standard will have a material effect on net income for 1987.
In addition to pension benefits, the Company provides certain health care and life insurance benefits to retired employees. The cost of providing those benefits was approximately $910,000 in 1986, $534,0D0 in 1985, and $837,000 in 1984. The Company recognizes health care benefits primarily as incurred and provides for life insurance benefits through premiums paid to an insurance company.
Energy Adjustment Clause: As permitted by the DPU, the Company defers the dif ference between forecasted and actual fuel costs until. it is recovered quarterly under a retail fuel adjustment clause. Massac?.usetts law requires the establishment of an annual performance program related to fuel procurement and use. The program establishes performanc t standards for plants owned and operated by the Company or plants in which the Company has a life-of-unit contract. Therefore, revenues collected under the Company's retail fuel adjustment clause are subject to refund pend.tng review by the DPU. To date there have been no significant adjustments as a result of this program.
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 2.
SHORT-TERM DEBT The system companies have various credit lines totaling $398 million.
Of this amount $350 million is available through revolving credit / term loan agreements with two groups of banks. The maximum borrowing limit of the Company under the agreements is $105 million. However, since this money is also available to CL&P, the amount of borrowing available could be lower depending on CL&P's utilization.
The Company is obligated to pay commitment fees of three-eighths of 1 percent per annum under a
$200 million revolving credit agreement and one-quarter of 1 percent per annum under a $150 million revolving credit agreement on its share of the daily average of the unborrowed portion of the aggregate commitment. At December 31, 1986, the Company had outstanding borrowings of $20 million under these agreements.
The remaining $48 million is available to the system companies through bank credit lines. Amounts utilized by other system companies under these joint credit lines will reduce the amount available to the Company. Terms call for interest rates not to exceed the prime rate during the borrowing term. Although these lines generally are renewable, the continuing availability of the unused lines of credit is subject to review by the banks involved. Compensating balances for the system companies are maintained in connection with these bank credit lines which, at December 31, 1986, amounted to $2.4 million. At December 31, 1986, the amount of unused borrowing capacity under the credit lines available to the system companies was $35.5 million.
3.
LEASES The Company and CL&P have entered into a capital lease agreement to finance up to $530 million of nuclear fuel for Millstone 1 and 2 and their share for Millstone 3.
The Company and CL&P make quarterly lease payments for the cost of nuclear fuel consumed in the reactors (based on a units-of-production method at rates which reflect estimated kWh of energy provided) plus financing costs associated with the fuel in the reactors.
Upon permanent discharge from the reactors, ownership of the nuclear fuel transfers to the Company and CL&P.
The Company has also entered into lease agreements, some of which are capital leases, for the use of substation equipment, data processing and office equipment, vehicles, and office space. The provisions of these lease agreements generally provide for renewal options.
The following rental payments have been charged to operating expense:
Capital Operating Year Leases Leases 1986
$24,439,000
$6,090,000 1985 13,179,000 4,488,000 1984 17,834,000 4,185,000,
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS Interest included in capital lease rental payments was $5,684,000 in 1986, $3,603,000 in 1985, and $4,171,000 in 1984.
Substantially all of the capital lease rental payments were made pursuant to the nuclear fuel lease agreement.
Future minimum lease payments under the nuclear fuel capital lease cannot be reasonably estimated on an annual basis due to variations in the usage of nuclear
, fuel.
Future minimum rental payments, excluding annual nuclear fuel lease payments, and executory costs such as property taxes, state use taxes, insurance, and maintenance, under long-term noncancelable leases as of December 31, 1986 are approximately:
Capital Operating Year Leases Leases (Thousands of Dollars) 1987..............................
200
$ 5,100 1988..............................
200 4,000 1989..............................
100 3,100 1990..............................
2,500 1991..............................
2,200 After 1991........................
500 16,700 Future minimum lease payments.....
1,000
$33,600 l
Less amount representing interest.
400 l
Present value of future minimum i
lease payments for other than nuclear fuel.....................
600 Present value of future nuclear fuel lease payments..............
74,300 Total........................
$74,900 _ - _ _
Wsotorn Macocchusetto Elsetric Comp:ny NOTES TO FINANCIAL STATEMENTS 4.
INCOME TAX EXPENSE The components of the federal and state income tax provisions are:
For the Years Ended December 31, 1986 1985 1984 (Thousands of Dollars)
Current income taxes:
Federal.....................
$(4,448)
$ (1,456)
(201)
State.......................
385 1,126 2,030 Total current............
(4,063)
(330) 1,829 Deferred income taxes, net:
Investment tax credits......
4,580 5,839 11,870 Federa1.....................
14,725 11,012 2,373 State.......................
2,451 1,823 580 Total deferred...........
21,756 18,674 14,823 Taxes on borrowed funds portion of AFUDC and deferred Millstone 3 return.
9,604 10,321 8,309 Total income tax expense.................
27,297 28,665 24,961 Less: Income taxes (credits) included in other income, net of the tax effects of the borrowed funds portion of AFUDC and deferred Millstone 3 return..................
(289)
(466)
(314)
Income taxes charged to operating expenses......
$27,586
$39,131
$25,275 Deferred income taxes are comprised of the tax effects of timing l
differences as follows:
Investment tax credits......
$ 4,580
$ 5,839
$11,870 Liberalized depreciation, excluding leased nuclear fuel.......................
11,913 4.533 3,251 Construction overheads......
1,012 3,090 3,069 Liberalized depreciation and capitalized interest on leased nuclear fuel........
(1,077) 3,586 (2)
Decommissioning costs.......
(1,061)
(839)
(622)
Settlement credits -
nuclear fuel..............
187 (744)
(192)
Energy adjustment clause....
1,658 1,092 (939)
Spent nuclear fuel disposal costs.....................
(115) 1,384 (973)
Refueling outage costs......
1,631 Millstone 3 pre-commercial Costs......................
1,763 Cost of removal.............
1,157 1,211 875 0ther.......................
108 (478)
(1,514)
Deferred income taxes, net
$21,756
$18,674
$14,823.___
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS The effective income tax rate is computed by dividing total income tax expense by the sum of such taxes and net income. The differences between the effective rate and the federal statutory income tax rate are:
For the Years Ended December 31, 1986 1985 1984 Federal statutory income tax rate.........................
46.0%
46.0%
46.0%
Tax effect of differences:
Depreciation differences....
3.9 2.6 1.0 Other funds portion of AFUDC not recognized as income for tax purposes...........
(6.7)
(14.4)
(12.2)
Deferred Millstone 3 return-1 other funds................
(8.1)
Investment tax credit amortization...............
(1.8)
(1.5)
(1.9)
State income taxes, net of federal benefit............
3.1 3.4 3.3 Other, net..................
0.2 (1.7)
(2.1) l Effective income tax rate.....
36.6%
34.4%
34.1%
5.
PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption out-standing at December 31, 1986, 1985, and 1984 are:
December 31, 1986 Redemption Shares Description Price Outstanding (Thousands of Dollars) 9.60% Series A of 1970
$103.99 150,000
$15,000 7.72% Series B of 1971 103.51 200,000 20,000 Total preferred stock not subject to mandatory redemption 350,000
$35,000 All or any part of each outstanding series of preferred stock may be redeemed by the Company at any time at established redemption prices plus accrued dividends to the date of redemption.
l Ucstern Massachusotts Electric Company NOTES TO FINANCIAL STATEMENTS 6.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption outstanding are:
December 31, Shares 1986 Outstanding Redemption December 31, December 31, Description Price 1986 1986 1985 1984 (Thousands of Dollars) 16.00% Series C of 1981
$15,000
$15,000 Adjustable Rate Series D of 1983 112.00*
350,000 35,000 35,000 35,000 350,000 35,000 50,000 50,000 Less preferred stock to be redeemed within one year 750 Total preferred stock subject to mandatory redemption
$35,000
$49,250
$50,000
- Redemption price reduces in future years.
The Adjustable Rate Series D of 1983 preferred stock (Series D) requires a sinking-fund sufficient to retire a minimum of 17,500 shares (or a maximum of 35,000 shares) at $100 per share each year commencing April 1, 1988.
Minimum sinking-fund preiisions of Series D which begin in 1988 are
$1,750,000 in 1988 through 1991.
In case of default on sinking-fund payments, no payments may be made on any junior stock by way of divider.ds or otherwise (other than in shares of junior stock) so long as the default continues. If the Company is in arrears in the payment of dividends on any outstanding shares of preferred stock, the Company would be prohibited from any redemption or purchase of less than all of the preferred stoch outstanding. All or part of Series D may be redeemed by the Company at any time at established redemption prices plus accrued dividends to the date of redemption except that during the initial five-year redemption period Series D is subject to certain refunding limitations.
/.. _ _ _ _....
T'
Wsetorn Maastchu:stts Elsctric Ceapany-NOTES.TO FINANCIAL STATEMENTS 7.
LONG-TERM DEBT Details of long-term debt outstanding are:
December 31, 1986 1985 (Thousands of Dollars).
First Mortgage Bonds:
..$'12,000 4 3/8% Series C, due 1987...............
$ 12,000' 4 3/8% Series-E, due 1992...............
8,000 18,000
-5 3/4% Series F, due 1997...............
15,000-
- 15,000-6 3/4% Series G, due 1998...............
=10,000 10,000 7 3/8% Series H, due 1998...............
15,000 15,000 9 3/8% Series I, due 2000...............
30,000-30,000 7 3/4% Series J, due 2002...............
30,000 30,000 9 1/4% Series K, due 2004...............
25,000 25,000-9 1/4% Series M, due 2006...............
-30,000 30,000 14 5/8% Series N, due 2010...............
1,190 16 3/8% Series 0, due 1991...............
_'17,455:
I 15
% Series P, due 1994...............
48,944 49,505 i
11 7/8% Series Q, due 2015...............
24,750 25,000 9 3/4% Series R, due 2016...............
25,000 Total First Mortgage Bonds.........
273,694 268,150:
1 Millstone 3 Construction Trust, variable rate....................................
24,931 Pollution Control Notes:
Variable rate, due 2014-2015............
52,400 52,400 5.9%, due 1998..........................
2,189 2,214 Intermediate notes, 7.96%-8.27% due 1989-1991...............................
60,000 Secured note, variable rate, due 1987-1988...............................
30,000 Fees and interest due for spent fuel disposal costs..........................
21,152 19,742 Less amounts due within one year.........
12,000 Unamortized premium and discount, net....
(520)
(469)
Long-term debt, net................
$396,915
$396,968 The Company and CL&P participated in a construction' trust agreement to assist in the financing of the Millstone 3 construction. On June 4, 1986, the construction trust agreement was terminated. Interest costs'of
$739 thousand during 1986, $1.2 million during 1985, and $1.9 million during 1984 were incurred and capitalized, net of income taxes, by the l:
Company. The weighted average interest rate charged to the system by the trust was 10.1 percent in 1986, 10.4 percent in 1985, and 11.5 percent in 1984.
Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1986 for the years 1987 through 1991 are: $12,000,000~1n 1987, $152,000 in 1988, and, $20,152,000 in each of the years-1989-1991.
In addition, there are annual 1 percent sinking-and improvement-fund requirements, currently amounting to $2,617,000 in each ofs -
=
cWxtern Macocchusctta Electric Compsny NOTES TO FINANCIAL STATEMENTS the years 1987-1991. Such sinking-and improvement-fund-requirements may-be satisfied by the deposit of cash or bonds or by certification'of l
property additions.
I All or any part of each outstanding series of first mortgage bonds may-be redeemed'by the Company at any time at established redemption prices plus accrued interest to the date of redemption, except certain series-which are subject to certain refunding limitatiods during their respective n,
initial five-year redemption periods.
5 Essentially all of the Company's utility plant is subject to the liens
- of its first mortgage bond indenture. During.1986, the Company secured
$52.4 million of pollution control notes with second mortgage liens on l
Millstone.1, junior to the liens of its first nortgage bond indenture.
3 8.
REGULATORY MATTERS Retail Rate Case:- On December 17, 1985, the Company filed an application with the DPU for.an overa11'$29.4 million net increase in retail electric-revenues. On June 30, 1986, the DPU issued a decision in the retail rate case that the DPU calculated would result in a net reduction in annual electric revenues of $5.9 million or 2.3 percent. The DPU has authorized a 13 percent ROE for the Company.
In its rate decision, the DPU applied a i
"used and useful" standard for euluating Millstone 3 s
"Used" as defined in the "used and useful" standard requires that a utility investment be in service and operating to provide a benefit to customers. The DPU found that Millstone 3 met this test. "Useful" in the i
"used and useful" standard requires a utility plant to be needed and economically desirable. The DPU evaluated the need for capacity as part of an overall economic analysis of Millstone 3, and determined that 76 percent of M111stora 3's costs would meet the "useful"' test. As a result, j
approximately $353 million of the Company's estimated $462 million l'
Millstone 3 retail investment was deemed "used and useful" in providing electricity to ratepayers. This "used and useful" portion of Millstone 3 I
will be phased into rates over a five-year period. Although the rate order j'
provides for a five-year phase-in, it will be necessary for the Company to j
apply to the DPU for revenue increases sufficient to recover the i
installments as.they are. phased in.
The Company will be allowed to earn a return on the "used and useful" portion of its investment in Millstone 3 i
being phased into rates.
The DPU further found that the Company had prudently maneged the construction of Millstone 3 and was, therefore, entitled to recover most of the remaining $109 million cost of Millstone 3 from ratepayers. Of this
$109 million, the Company will_be permitted to recover $95.5 million over a j
ten-year' period without earning a return. The remaining $13.5 million, which represents the equity portion of AFUDC for the "unuseful" segment, t
was' disallowed at this time. The DPU's decision regarding Millstone 3 i
provides that an additional amount of the Company's investment might subsequently be' deemed "used and useful." The DPU also approved accounting 4
treatment to permit'the deferral of Millstone 3-related return and a 1 1
WJatarn Massachusetts Electric Comprny NOTES TO FINANCIAL STATEMENTS operating costs from the commencement of that unit's commercial operation through June 29, 1986, the effective date of the retail rate orders. These deferred costs of $7.5 million, which will earn a return, are to be amortized over eight years beginning in July 1987.
On July 25, 1986, the Company filed a motion for-recalculation and reconsideration of certain adjustments contained in the DPU's June 30, 1986 order. On February f3, 1987, the DPU issued an order on the Company's motion for recalculation and reconsideration which further reduces the Company's annual revenues by $1.5 million.
On December 17, 1986, the Company filed an application with the DPU to increase its retail electric revenues by approximately $23.5 million annually or 8.7 percent. If approved, the new rates are expected to go into effect in July 1987. Most of the proposed increase is being sought as-the second part of the previously approved five-year phase-in of costs associated with Millstone 3.
The rate application incorporates a requested ROE of 14 percent, which is an increase from the 13 percent ROE currently authorized. Hearings began in February 1987.
Wholesale Rate Case: On April 23, 1986, the Company began collecting rates' subject to refund associated with a wholesale rate filing that was submitted in August 1985 to the FERC.
The parties to the proceedings have reached settlements in principle on all but three issues in the case.
Hearings on the unresolved issues were completed on June 6, 1986. The FERC administrative law judge has not set a date for the decision. Management believes that the final resolution of these matters will not have a material effect on net income.
9.
ACCOUNTING FOR RATE BASE DISALLOWANCES, PHASE-INS, AND ABANDONED PLANT As reported in the Company's 1985 Annual Report, the FASB had been reconsidering its accounting standards for a number of regulatory-related issues including a regulator's partial disallowance of the cost of a newly completed plant, plant abandonments, and phase-in plans.
In December 1986, FASB released Statement of Financial Accounting Standards No. 90, " Regulated Enterprises--Accounting for Abandonments and Disallowances of Plant Costs" (SFAS 90). The DPU's rate treatment of WMECO's Millstone 3 investment does not fall within the provisions of SFAS 90.
During the course of its 1986 deliberations, FASB concluded that additional consideration is necessary to resolve accounting issues related to phase-in plans. As a result, accounting for phase-in plans was not included in SFAS 90.
The issue which FASB must address is to identify the criteria which would be used to defer and recover costs under a phase-in plan, including the appropriateness of accruing a deferred equity return.
Any decision reached by FASB, which would differ from the criteria used in the Company's approved plan, could adversely affect the Company. The FASB expects to release an exposure draft on the accounting for phase-in plans sometime in 1987. - - -.
=
l W: stern Masscchussets Elactric Company NOTES TO lINANCIAL STATEMENTS
.10.
COMMITMENTS AND CONTINGENCIES Construction Program: The construction program is subject to periodic review and revision. Actual construction expenditures may vary from such estimates due to factors such as revised load estimates, inflation, revised nuclear safety regulations, delays, difficulties in the licensing process, the availability and cost of capital, and the granting of timely and adequate rate relief by regulatory commissions, as well as actions by other j
regulatory bodies.
The Company currently forecasts construction expenditures (including AFUDC) of $239.8 million for the years 1987-1991, including $47.3 million for 1987.
In addition, the Company estimates that nuclear fuel requirements will be $64.1 million for the years 1987-1991, including
$17.3 million for 1987.
Hydro-Quebec: Along with other New England utilities the Company, CL&P and HWP have entered into agreements related to the financing and construction of direct current transmission and terminal facilities (Phase I) to import electricity from the Hydro-Quebec system in Canada. On October 1, 1986, Phase I entered commercial service. The final construction cost for Phase I is expected to be approximately $145 to $150 million. The Phase I facilities are capable of transferring 690 MW.
The Company is entitled to receive 4 percent of New England's fuel savings related to the electricity transmitted by the facilities and is responsible for its share of the total annual costs of the facilities.
NU, along with various New England utilities, also entered into agreements to finance and construct additional transmission and terminal facilities (Phase II), currently estimated to cost approximately
$547 million of which approximately $14.7 million had been expended as o,f December 31, 1986. These facilities, which will be completed in the early 1990's, will increase the capability of the Phase I Hydro-Quebec interconnection to 2,000 MW.
Upon completion of Phase II, NU is expected to have a 22.36 percent equity ownership in the Phase II facilities. Under the terms of the Phase II equity agreement, NU wili 5e required to guarantee the obligations of other participants that have lower credit ratings and NU will receive compensation for such guarantees.
Nuclear Insurance Contingencies: The Price-Anderson Act currently limits public liability from a single incident at a nuclear power plant to
$695 million. The first $160 million of liability would be covered by the maximum provided by commercial insurance. Additional liability of up to
$535 million would be provided by an assessment of $5 million per incident levied on each of the 107 nuclear units currently licensed to operate in the United States, subject to a maximum assessment of $10 million per nuclear unit in any year. Based on the Company's ownership interests in the nuclear units currently in service, the maximum liability per incident 1
would be $3.6 million, limited to a maximum of $7.2 million in any year.
Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover:
(a) certain extra costs incurred in obtaining replacement J
l - --
l Wact rn MacccchuzGtts Elsetric Comprny l
NOTES TO FINANCIAL STATEMENTS 4
power during a prolonged accidental outage with respect to the Company's ownership interests in Millstone 1, 2, and 3, and CY; and, (b) the cost of repair, replacement, or decontamination of utility property resulting from insured occurrences at Millstone 1, 2, and 3, CY, MY, and VY.
All companies insured with NEIL are subject to retroactive assessments if losses exceed the accumulated funds available to NEIL. The maximum potential assessments against the Company with respect to losses arising during current policy years are approximately $2.1 million under the replacement power policies and $3.0 million under the property damage and decontamination policies. Although the Company has purchased the limits of coverage currently available from conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds.
Financial Guarantees: The owners of CY, including the Company, have guaranteed their pro rata shares of $36.7 million 17 percent Series A Debentures and a $25 million revolving credit agreement. The Company's' guarantee is $6.0 million.
The owners of VY, including the Company, have guaranteed their pro rata shares of a $40 million nuclear fuel financing through the Vernon Energy Trust. The Company's guarantee is $1.0 million.
The owners of MY, including the Company, have guaranteed their pro rata shares of MY's obligations under a $50 million nuclear fuel loan I
agreement. The Company's guarantee is $1.5 million.
The Company may be asked to provide additional capital and/or other types of direct or indirect financial support for one or more of the regional nuclear generating companies.
On December 22, 1986, NNECO sold $15 million of unsecured term notes.
The Company and CL&P have agreed to guarantee their pro rata shares of the notes. The Company's guarantee is $2.8 million.
i 1.
W20 torn M22ccchucotts Electric Comptny Auditors' Report 4
To the Board of Directors of Western Massachusetts Electric Company:
We have examined the balance sheets of Western Massachusetts Electric Company (a Massachusetts corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1986 and 1985, and the related statements of income, common stockholder's equity and sources of funds for gross property additions for each of the three years in the period ended December 31,
'l 1986. 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.
In our opinion the financial statements referred to above present.
fairly the financial position of Western Massachusetts Electric Company as of December 31, 1986'and 1985, and the results of its operations and the sources of funds for gross property additions for each of the three yeata in the period ended December 31, 1986, in conformity with generally accepted accounting i
principles applied on a consistent basis, j
ARTHUR ANDERSEN & CO.
I.
I Hartford, Connecticut Feb ruary 20, 1987 l
a
J i
s i
Western Massachusetts Electric Company SELECTED FINANCIAL DATA Years Ended December 31, 1986 1985 1984 1983 1982 4
(Thousands of Dcllars)
Operating Revenues.......... $ 263,736 $277,820 $274,296 $254.807 -$233,624~
l Operating Income............
37,989 41,431 43,011.
32,702.
33,380 Net: Income..................
47,204 54,635.
48,290 32,317 26,250 Total Assets................
1,052,981 995,782 891,360 797,414 692,154 Long-Term Debt *.............
408,915 396,968 336,386
.308,174 297,391 Preferred Stock Subject to Mandato ry Redemption *......
35,000 50,000 50,000 50,000 15,000 j
Obligations Under Capital j
Leases *....................
74,915 75,701 71,440 61,512 52,151 1
- Includes portions due within one year.
1 1
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended 1986 March 31 June 30 September 30 -December 31 (Thousands of Dollars)
Operating Revenues..........
$ 70,543
$ 52,573
$ 64,430
$ 76,190 Operating Income............
$ 12,733
$ 8,797
$ 8,329 8,130 Net Income..................
$ 16,665
$ 13,252
$ 8,322
$ 8,965 1985 Operating Revenues..........
$ 76,497
$ 64,161
$ 63,564
$ 73,598 Operating Income............
$ 13,505
$ 8,615
$ 11,497
$ '7,314 Net Income..................
$ 16,791
$ 11,673
$ 15,106
$ 11,065 _ _ _ _
Western Massachusetts Electric Company STATISTICS Utility Plant Average December 31, Annual Electric Employees (Thousands of kWh Sales Residential Customers (December Dollars)
(Millions) kWh Use
'(Average) 31) 1986
$1,046,832 3,549 7,378 179,700 859 1985 1,103,497 3,452 7,188 176,325 853 1984 984,543 3,483 7,330 173,690 854 1983 875,117 3,330 7,156 171.704 851 1982 769,460 3,277 7,117 170,234 838 i
4 i
Western Massachusetts Electric Company First Mortgage Bonds Trustee and Interest Paying Agent The First National Bank of Boston, Corporate Trust Department P.O. Box 1897, Boston, Massachusetts 02105 Preferred Stock Transfer Agent, Dividend Disburting Agent and Registrar The Connecticut Bank and Trust Company, N.A., Stock Transfer Department One Constitution Plaza, Hartford, Connecticut 06115 Dividend Payment Dates 9.60% Series A March 1. June 1, September 1 and December 1 7.72% Series B Adjustable Rate Series D January 1, April 1, July 1 and October 1 Address General Correspondence in Care of:
Northeast Utilities Service Company Investor Relations Department P.O. Box 270 Hartford, Connecticut 06141-0270 Tel. (203) 665-5000 General Office 174 Brush Hill Avenue, West Springfield, Massachusetts, 01090-0010 l
The data contained in this Report is submitted for the sole purpose of providing information to present stockholders about the Company..
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NORTHEAST UTILITIES j
THE CONNECTICUT LIGHT AND POWER COMPANY WESTERN MASSACHUSETTS ELECTRIC COMPANY HOLYOKE WATER POWER COMPANY l
I NORTHEAST UTIUTIES SERVICE COMPANY 1
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NORTHEAST NUCLEAR ENERGY COMPANY I
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