ML20245G188
| ML20245G188 | |
| Person / Time | |
|---|---|
| Site: | Millstone  |
| Issue date: | 04/24/1989 |
| From: | Pedone L NORTHEAST UTILITIES |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| NUDOCS 8905030089 | |
| Download: ML20245G188 (78) | |
Text
, _ _ _ - - _
NORTHEAST UTILETIES a.nor i Omc... somon sir..i. Bornn, Conn.ciicui l
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P.O. BOX 270 o.Y.s$"((uYOb.,.,
HARTFORD. CONNECTICUT 06141-0270 k
J (203) 665-5000 o.n.,im me.a mecc.
April 24, 1989 RE:
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 1988 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 1988 Annual Financial Report for Northeast Nuclear Energy Company will not become available until on or about April 28, 1989. One copy of Northeast Nuclear Energy Company's 1988 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, 9
Leonard Pedone Supnrvisor, Accounting Research and Financial Reporting LP/jem/SRR122f Enclosure h
8905030089 090424 PDR ADDCK 05000245 f)l y
PDR f
I
N 4
i ANNUAL REPORT 1988 CL&P The Connecticut Light & Power Company a subsidiary of Northeast Utilities
Directors ROBERT G. ABAIR FRANN R. LOCKE Vice President and Chief Administrative Officer Senior Vice President Western Massachusetts Electric Company EDWARD J. MROCZKA PHILIP T. ASHTON Senior Vice President Senior Vice President OPN ROBERT E. BUSCH Executive Vice President Senior Vice President LAWRENCE H. SHAY JOHN P. CAGNETTA Senior Vice President Senior Vice President WILLIAM B. ELLIS Senior Vice President. Secretary and Chairman and Chief Executive Officer General Counsel BERNARD M. FOX President and Chief Operating and Financial Officer Officers WILLIAM B. ELLIS TOD O. DIXON GEORGE D. UHL Chairman and Chief Vice President Vice President and Controller Executive Officer RAYMOND E. DONOVAN RICHARD P. WERNER BERNARD M. FOX Vice President Vice President ALBERT J. HAJEK RICHARD R. CARELLA d nan ia Of c r Vice President Regional Vice President-Eastern JOHN F. OPEKA BARRY ILBERMAN LESLEY C. GEROULD Executive Vice President Vice President Regional Vice President-Southern PHILIP T. ASHTON FRANCIS L. KINNEY ROY C.J. NORMEN Senior Vice President and Vice President Regional Vice President-Northern General Manager-Gas Group HUGH C. MACKENZIE ALFRED R. ROGERS ROBERT E. BUSCH Vice President Regional Vice President-Central Senior Vice President KEITH R. MARVIN ROBERT W. ZONGHETTI JOHN P. CAG'NETTA Vice President Regional Vice President-Western Senior Vice President JOHN W. NOYES THERESA H. ALLSOP FRANK R. LOCKE Vice President Assistant Secretary Senior Vice President LEONARD A.O'CONNOR CHERYL W. GRISE EDWARD J. MROCZKA Vice President (Gas)
Assistant Secretary Senior Vice President RICHARD A. RECKERT DOUGLAS R. TEECE LAWRENCE H. SHAY Vice Presicent Assistant Secretary Senior Vice Pre sident WAYNE D. ROMBERG KAREN G. VALENTI WALTER F. TORRANCE, JR.
Vice President Assistant Secretary Serur Vice President, Secretary and General Counsel WALTER T. SCHULTHEIS ROBERT C. ARONSON Vice President Assistant Treasurer C. THAYER BROWNE Vice President and Treasurer C. FREDERICK SEARS ARTHUR H. HIERL Vice President Assistant Treasurer CARROLL A. CAFFREY Vice President JOHN J. SMITH EUGENE G VERTEFEUILLE Vice President (Gas)
Assistant Treasurer l
FEBRUARY 28,1989
THE CONNECTICUT LIGHT AND POWER COMPANY l
l March, 1989 TO OUR PREFERRED STOCKHOLDERS:
The financial statements and statistical data contained in this report reflect the results of operations of The Connecticut Light and Power Company (CL&P) for 1988.
The 1988 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.
During 1988, CL&P entered into agreements to sell over 3,000 megawatt-years of capacity to other New England utilities over the next six years.
These agreements should produce net revenues of over $400 million for that period.
However, under current Connecticut rate-setting principles, these revenues will be applied to reduce customer revenue requirements and not towards earnings for investors.
In December, the divestiture of the Company's gas business received preliminary approval from the Department of Public Utility Control (DPUC).
Approval from the Securities and Exchange Commission (SEC) is still pending along with final DPUC approval.
The divestiture is currently scheduled for this summer.
In 1988, operating revenues (including gas operations) increased to $1.9 billion from $1.7 billion in 1987.
Corresponding net income increased slightly to $232.5 million from $229.8 million in 1987.
A more comprehensive discussion for each of these items is contained within this report.
Sincerely, f
p,s Bernard M.
Fox Willia B.
Ellis President and Chief Operating Chairman and Chief and Financial Officer Executive Officer
The Connecticut Light and Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains management's assessment of The Connecticut Light and Pawer Company's (the Company) financial condition and the principal factors with an impact on the results of operations. The Company is a wholly owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the Company's financial statements and footnotes.
FINANCIAL CONDITION Overview The Company's net income increased to $232.5 million in 1988 from $229.8 million in 1987. The Company's earnings improved in 1988 as a result of increased electric and gas sales, a decline in operation and maintenance expenses, due in part to management's cost-containment efforts, and the $16.9 million after-tax write-off, reflected in 1987 earnings, of Seabrook 1 costs in excess of a Connecticut $4.7 billion statutory " cap."
The increase in 1988 earnings was partially offset by the effects of a February 1988 Connecticut Department of Public Utility Control (DPUC) retail rate decision (February Decision),
effective January 1, 1988, which lowered the Company's allowed return on equity (ROE) from 14.0 percent to 12.6 percent, lowered annual gas revenues by approximately $10.4 million, provided for a $10 million one-time refund to electric customers, prohibited the Company from recovering certain fossil-fuel costs, and imposed a $17.5 million penalty for capacity sales at what the DPUC called below-market value. The penalty has been appealed to the Hartford Superior Court. The 1988 earnings were also adversely affected by management's decision to stop accruing allowance for funds used during construction (AFUDC) on Seabrook 1, effective January 1, 1988, and the expansing of 1988 Seabrook 1 costs in excess of the $4.7 billion " cap."
The Company is planning to spin off itt gas business, which is currently expected to be completed this summer. The Company would use a major part of the proceeds to redeem, at par, certain high-interest-rate first mortgage bonds.
The amount of cash available for redemptions will depend, among other things, on the book value of the Company's gas assets on the divestiture date and the capital market conditions at that time.
If capital market conditions are unfavorable, the Company may accept a secured note in lieu of cash and would be able to redeem some or all of the debt as planned only when and as it receives payments on the note. For additional information regarding gas divestiture, see the " Notes to Financial Statements."
Management expects the Company's earnings to remain relatively flat in the near future even though Company operational performance has been superior. The
$119 million after-tax Millstone 3 write-off in 1986 and the write-off of Seabrook 1 investment in excess of the $4.7 billion " cap" will continue to affect the Company's financial condition adversely because they reduced the equity base on which the Company is allowed to earn its ROE.
In addition, the expected divestiture of the Company's gas business will reduce income-generating assets by approximately 5 percent. The gas business contributed 4.7 percent of the Company's total earnings in 1988.
Notwithstanding management's concern with. inadequate earnings, several events could lead to a gradual improvement in the Company's financial condition.
During 1988, the Company entered into arrangements to sell over 3,000 megawatt-years of capacity over the next six years at the NU system's average cost.
The Company expects to realize not revenues of over $400 million during the six-year period from these sales.
Under current Connecticut rate-setting principles, these net revenues are applied to reduce revenues required from customers and are not available, even in part, as earnings for investors. The Company has appealed this principle to the Hartford Superior Court. Nevertheless, management believes that investors benefit indirectly from the capacity sales because these transactions will assist in allowing the Company's electric rates to remain competitive at a time when customers may otherwise seek alternative lower-cost sources of energy.
The revenues from the capacity sales will also limit the Company's need to apply for future rate increases.
Another positive factor that will strengthen the Company's financial condition by increasing internal cash generation is the accelerated phase-in of the Millstone 3 investment into rate base.
A December 1988 DpVC retail rate decision (December Decision) allows the company to include an additional 32 percent of its allowed Millstone 3 investment in rate base, effective January 1, 1989. This would bring the portion of recoverable Millstone 3 earning a cash return to 80 percent. The Company is allowed to earn a noncash return on the portion of Millstone 3 not currently included in rate base. As noncash earnings on Millstone 3 are replaced with cash earnings, management believes that the Company's key financial ratios should improve and that there is a reasonable possibility that bond and preferred stock ratings will also improve.
Seabrook project The Company has a 4.06 percent joint ownership interest in the Seabrook project.
At December 31, 1988, the Company's construction work in progress (CWIp) balance included an investment of $190.5 million in Seabrook 1, after writing off
$33.8 million of Seabrook 1 investment to date, including $9.7 million of cash costs in 1988.
Effective January 1, 1988, the Company stopped accruing AFUDC on its Seabrook 1 investment.
The write-offs reflected judgments that Company management made in applying the provisions of Statement of Financial Accounting Standards No. 90, Regulated Enterprises--Accounting for Abandonments and Disallowances of plant Costs (SFAS 90) to the likelihood of recovering its Seabrook investment. The write-offs do not indicate that the Company believes that the potential disallowances are legally justified or appropriate, or that the Company will not challenge those potential disallowances. The Company's investment in Seabrook is still subject to a variety of regulatory reviews and approvals, and further write-offs under SFAS 90 may be required. Future earnings would also be reduced because of a lowered equity base.
A number of issues continue to affect the planned commercial operation of Seabrook 1, including the financial qualifications of the joint owners of the project to meet their responsibilities as licensees.
Until these issues are resolved, management cannot predict whether or when the unit will operate.
_3
Solely for financial planning purposes, the Company now assumes that Seabrook 1 will commence operation on January 1, 1991.
If Seabrook 1 ultimately does not operate, the Company would seek full recovery of its investment. While the DPUC has permitted the company to recover substantial portions of its investments in similar circumstances, management cannot predict the extent to which the Company will be permitted to recover its Seabrook 1 investment. For additional information regarding the Seabrook project, see the " Notes to Financial Statements."
Competition / Cost Containment In 1987, an extensive study by NU identified self-genaration by large industrial and commercial customers, cogeneration facilities, and competition from other utilities for wholesale customers as significant factors posing a threat to NU's existing energy market. At that time, NU identified a potential loss or as much as 20 percent, approximately 750 megawatts (MW), of its operating subsidiaries' electric load by the early 1990s if it did not immediately address these issues.
In response to these competitive forces, management implemented a strategy to mitigate this threat. The strategy includes a marketing plan to enhance customer service and improve energy efficiency, an aggressive cost-management program to hold down electric prices, and working with regulators to reduce the nonresidential-customer subsidies to residential customers provided by current rate design. In late 1988, the Company agreed, subject to DPUC approval, to reduce this subsidy in its largest industrial customer's electric rate in exchange for this customer's commitment not to self-generate for three years.
Management estimates that the annual net revenue loss would be $3 million if this customer self-generates, while the proposed rate reduction would be less than $1 millicn.
Management believes that the cost-containment effort, modest rate design changes allowed by regulators, improvements made in the customer service area, and the 1988 sales of additional capacity have substantially reduced the Company's exposure to load loss. While the NU system has experienced wholesale customer losses of 20 MW in the last two years, the actual installation of self-generation facilities has been minimal. Management estimates that the potential loss of additional NU system baseload sales to competition, if NU achieves its competitive goals, now ranges between 100 and 180 MW in the early 1990s.
Under consideration in Connecticut is a proposal to extend the state's 7 1/2 percent sales tax to utility bills.' If enacted, the sales tax could have a significant adverse effect on the efforts to minimize large load losses.
Geographical Expension On January 28, 1988, Public Service of New Hampshire (PSNH) filed a voluntary Chapter 11 petition in the United States Bankruptcy Court in Manchester, New Hampshire. NU management believes that PSNH is a fundamentally sound electric utility that went bankrupt because it was unable to finance its 35.6 percent ownership share of the Seabrook project through the extended delays that the project encountered.
Following PSNH's bankruptcy filing, NU announced that it has an interest in acquiring PSNH's operating assets, exclusive of its interest in Seabrook.
NU management believes the acquisition of PSNH would be a 4
logical expansion of the NU system's geographical boundaries, would add a healthy new service territory, and would create long-term strategic advantages for NU's utility business.
NU's existing generating capacity can be made available to supplement the needs of the rapidly expanding New Hampshire economy whether or not Seabrook 1 operates. While other utilities have expressed interest in acquiring PSNH, and PSNH has proposed a plan of reorganization that would result in an internal corporate restructuring without an acquisition by a third party, NU management believes the proposed NU-PSNH combination would be l
the most advantageous outcome for New Hampshire customers.
On January 12, 1989, NU delivered a comprehensive $2 billion proposal to representatives of PSNH.
NU's proposal is designed to remove PSNH from bankruptcy and assure New Hampshire residents a reliable energy supply.
PSNH's ownership in Seabrook would be transferred to a separate New Hampshire company to be owned by existing PSNH unsecured creditors. Through a power purchase contract with the reorganized PSNH, the separate company owning Seabrook would be provided with revenue to support its obligations to the Seabrook project.
Before it can become effective, the proposal must be accepted by PSNH creditors and security holders and approved by the Bankruptcy Court and federal and state regulators. Because of the likelihood of competing offers for PSNH and the uncertainties of the bankruptcy and regulatory processes, NU's acquisition of PSNH is not assured.
Construction Program The Company's 1988 electric construction expenditures of $209.7 million were the lowest since 1979. Following the completion of Millstone 3 in 1986, the construction program's focus changed to expenditures for improvements to existing transmission, distribution, and generating facilities.
The Company has budgeted more than $65 million over the next six years to improve the reliability of its transmission and distribution system. The Company does not foresee the need to construct, on behalf of its customers, a major new generating facility until well into the future.
In the 1990's, Millstone 2's steam generators may require replacement and could involve a five-to six-month outage at a cost to the Company of approximately
$120 million, not including the cost of replacement power. Management is attempting to minimize the length of this possible outage by arranging procurement of items with long lead times.
Projected electric construction expenditures for the period 1989 through 1993 are presented in the following table. The projections include $28.4 million of costs associated with Millstone 2's steam generators.
Production Distribution Transmission Facilities Facilities Facilities other Total (Thousands of Dollars) 1989
$88,270
$106,857
$19,151
$13,972
$228,250 1990 60,609 115,778 16,498 13,023 205,908 1991 55,949 119,887 15,509 9,196 200,541 1992 47,303 120,848 16,709 5,332 190,192 1993 48,736 130,097 15,611 6,699 201,143.-
Financing The Company's bonds are currently rated Baal by Moody's and BBB+ by Standard and poor's, but management has a goal of seeing that the senior securities progress, over t'ime, to at least a strong "A" rating. Management believes that this is an achievable goal because of higher cash earnings due to the accelerated Millstone 3 phase-in allowed in rate decisions. For example, the percentage of cash earnings (earnings excluding AFUDC and the deferred Millstone 3 return) averaged 42 percent in the period 1984 through 1988, and for 1989 that percentage is projected to increase to approximately 72 percent.
Cash regyirements in excess of internally generated funds are generally financed through short, intermediate, and long-term borrowings, nuclear fuel trust financing, leas'ing agreements, and the sale of preferred stock.
In addition to construction an'd nuclear fuel requirements, the Company is obligated to meet maturities and cash sinking-fund requirements totaling $573.6 million for the years 1989 through 1993.
External financing will continue to be necessary to meet total cash requirements, although not at the levels of past years, since projected construction expenditures have been substantially reduced.
The Company issued $210 million of first mortgage bonds, and pollution control bonds in 1988.
As in recent years, a significant portion of the proceeds from these issues was used to redeem, prior to maturity, high-interest-rate debt and high-dividend preferred stock to lower the Company's cost of capital.
The Company and Western Massachusetts Electric Company (WMECO) continue to utilize a nuclear fuel trust to finance their nuclear fuel requirements for Millstone 1, 2, and 3.
As of December 31, 1988, the Company's portion of the trust's investment in nuclear fuel was $269.9 riillion.
The Company's nuclear fuel requirements of $257.7 million for the years 1989 to 1993 are expected to be financed by the trust.
In 1988, the system companies increased available credit facilities and lines by
$12 million, making $400 million available. Available credit facilities and lines include $350 million through a revolving credit agrecaent with a group of eleven banks. The maximum borrowing limit of the Company under this agreement is $350 million. However, since this money is also available to WMECO, the amount of borrowing available could be lower depending on WMECO's utilization.
At Dv ember 31, 1988, the system companies had $146 million of external short-tern borrowings.
In 1989, the company intends to continue redeeming high-interest-rate debt as f
opportunities arise. Elimination of high-cost debt, or replacement with l
lower-cost capital, provides opportunities for reducing revenue requirements and improving Company earnings and coverage of fixed charges. As discussed in
" Overview," the anticipated gas divestiture may provide a portion of the cash j
necessary to accomplish these redemptions.
Rate Matters In the December Decision, the DPUC approved the Company's first retail rate increase since late 1983. The December Decision provides for an annual increase in electric and gas revenues of approximately $27.3 million (1.54 percent) and i
t
$1.4 million (0.66 percent), respectively.
The Company had requested an annual increase in electric and gas revenues of approximately $94.4 million and
$4.9 million, respectively. The DPUC increased the Company's allowed ROE from 12.6 percent to 12.9 percent, allowed an additional 32 percent of Millstone 3 to be phased into rate base, concluded that the Company does not have excess generating capacity, and approved a new fossil-fuel adjustment clause (FAC) on a trial basis. Management believes that the revised FAC will improve the responsiveness of the FAC to changes in the cost of generating fossil kilowatt-hours (kWh), improve the timeliness of the collection of fossil-fuel costs, and reduce administrative burdens associated with current fuel clause calculations. However, management was disappointed with the DPUC's decision not to reinstate deferred-electric-fuel accounting.
Management is concerned that the DPUC does not provide any financial reward to shareholders for management's actions that have produced significant savings for Connecticut's ratepayers. These concerns result from the DPUC's denial to shareholders of any of the direct benefit the capacity sales arrangements entered into in 1980 and its failure to recognize management's cost-containment efforts. Management is also disappointed that the revenue allowance for gas does not adequately reflect the impact of the capital structure ordered by the DPUC in its decision approving, in principle, the gas divestiture plan.
In January 1989, the Company filed an appeal in the Hartford Superior Court to reverse two aspects of the December Decision, one dealing with power sales to other utilities and the other dealing with the DPUC refusal to allow the Company a return on monies expended on fuel but not yet collected in rates.
If the Company prevails on both issues, annual electric revenues would increase by about 0.5 percent, or $9.4 million.
New Accounting Standard The Financial Accounting Standards Board has issued a new income tax accounting standard which will become effective in 1990. The new accounting standard requires, among other things, that regulated utilities reflect, on their balance sheets, the taxes related to the cumulative amount of income tax timing differences for which deferred taxes have not been provided. The Company expects that, when the new standard is adopted in 1990, it will increase assets and liabilities by approximately $1.0 billion, but will not have a material effect on net income.
~7-
4 RESULTS OF OPERATIONS Operating Revenues Operating revenues increased $193.9 million from 1987 to 1988 and increased
$28.6 million from 1986 to 1987. 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) 1988 vs. 1987 1987 vs. 1986 (Millions of Dollars)
Rate moderation fund
$106.6
$(13.3)
Fuel cost recoveries 53.9 (42.3)
Regulatory decisions (40.0) 59.9 Sales and other 73.4 24.3 Total revenue change
},193.9
$ 28.6 Operating revenues related to the rate moderation fund increased because, effective January 1, 1988, the February Decision discontinued the Company's requirement to reserve a level of revenues in excess of that required to earn a specified ROE.
In addition, the February Decision ordered the Company to recognize in revenues, over the 12-month period beginning January 1, 1988, a portion of those revenues reserved prior to January 1, 1988.
Fuel cost recoveries increased primarily because of higher energy sales.
Revenues related to regulatory decisions decreased primarily because of the February Decision which, among other things, provided for a $10 million refund to electric customers in January 1988, lowered the Company's allowed ROE, and imposed a
$17.5 million penalty associated with capacity sales.
Electric sales increased primarily because of the continued economic growth in the region and higher cooling and heating requirements in 1988.
Fuel cost recoveries decreased in 1987 primarily because of lower cost energy provided by Millstone 3, which replaced higher cost fossil-fuel generation.
Millstone 3 was operational for a full year in 1987 and approximately eight months in 1986. Fevenuec related to regulatory decisions increased in 1987 primarily as a result of the recovery of nonfuel costs associated with the commercial operation of Millstone 3.
Electric sales increased primarily because of the continued growth in the regional economy.
1 Electric Energy Expenses Electric energy expenses, which include fuel and net purchased and interchange power, increased $60.0 million in 1988 as compared to 1987.
This increase was primarily because or higher kWh requirements and higher cost energy purchases from other utilities throughout the region.
Electric energy expenses decreased $28.1 million in 1987 as compared to 1986.
This decrease was primarily because of lower cost energy provided by the operation of Millstone 3 and the matching of revenues and expenses under the 1
- _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ -... I
provisions of the Company's energy adjustment clauses. These decreases were partially offset by greater kWh requirements in 1987 and the effect of the DPUC l
prohibiting the company from recovering certain fossil-fuel costs.
Other Operation and Maintenance Expenses Other operation and maintenance expenses decreased $52.4 million in 1988 as compared to 1987 primarily because of higher sales of capacity in 1988, lower i
nuclear refueling and maintenance outage expenses in 1988, and the effect of cost-containment measures implemented by management.
Other operation and maintenance expenses increased $72.2 million in 1987 as compared to 1986 primarily because of the first full year of expenses associated with operation of Millstone 3, higher nuclear refueling and maintenance outage expenses, and the general impact of inflation on most expenses in 1987.
Depreciation Expenses Depreciation expenses increased $13.2 million in 1988 as compared to 1987 primarily because of greater plant investment and higher decommissioning levels.
Depreciation expenses increased $25.4 million in 1987 as compared to 1986 primarily because of the commercial operation of Millstone 3 in April 1986.
Amortization of Deferred Millstone 3 Return The amortization of deferred Millstone 3 return increased $62.8 million in 1988 as compared to 1987 primarily because the February Decision allowed the Company to begin amortizing deferred phase-in costs, effective January 1, 1988.
Taxes Federal and state income taxes increased $29.3 million in 1988 as compared to 1987 primarily because of higher taxable income, partially offset by a lower statutory tax rate. Taxes other than income taxes increased $18.2 million in 1988 as compared to 1987 primarily because of higher expenses associated with Connecticut gross earnings taxes and Connecticut sales taxes.
I Federal and state income taxes increased $19.6 million in 1987 as compared to 1986 because of an increase in taxable income, partially offset by a lower effective tax rate in 1987.
1 Allowance for Funds Used During Construction and Deferred Millstone 3 Return Total debt and equity AFUDC decreased $22.3 million in 1988 as compared to 1987.
This decrease was caused primarily by the Company's decision not to accrue AFUDC on Seabrook 1, effective January 1, 1988, since recovery of such AFUDC is no longer considered probable. The deferred return on Millstone 3 decreased
$13.2 million primarily because the Company had an additional portion of its recoverable Millstone 3 investment phased into rate base in 1988 as compared to the same period 4.n 1987.
Total debt and equity AFUDC decreased $52.8 million in 1987 as compared to 1986.
This decrease was caused by a lower average CWIP balance, reflecting the
_9 l
e commercial operation of Millstone 3 in April 1986. The deferred return on Millstone 3 increased $17.3 million. This increase reflected a full year of returns on the phase-in plan in 1987 compared to a partial year in 1986, partially offset by the Company reflecting an additional portion of its recoverable Millstone 3 investment phased into rate base, effective January 1, 1987.
Gas Operations Income from gas operations to be divested decreased $5.5 million in 1988 compared to 1987 primarily because of the February Decision requiring a
$10.4 million reduction in gas revenues, effective January 1, 1988, partially offset by a 3.0 percent increase in sales.
Income from gas operations to be divested increased $5.0 million in 1987 compared to 1986 primarily because of 9.0 percent increase in gas sales as a result of the availability and lower cost of gas compared to other fuels.
l l
1 __
_ ___ _ _________o
l Tha Connecticut Light and Power Company l
l STATF.MENTS OF INCOME 1
For the Years Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Operations Excluding Gas Operations To Be Divested:
Operating Revenues......................
$1,732,298
$1,538,410
$1,509,849 Operating Expenses:
Operation-Fuel................
349,221 309,760 362,677 Purchased and interchange power, net.
12,125 (8,375)
(33,197)
Other................................
404,720 440,374 408,353 Maintenance...........................
154,763 171,523 131,347 Depreciation..........................
168,821 155,662 130,273 Amortization of deferred Millstone 3 return...............................
62,835 Federal and state income taxes (Note 9).............................
153,359 108,527 141,711 Taxes other than income taxes.........
147,791 129,602 139,462 Total operating expenses...........
1,453,635 1,307,073 1,280,626 Operating Income........................
278,663 231,337 229,223 Other Income:
Allowance for other funds used during construction..................
2,262 13,409 55,955 Deferred Millstone 3 return - other funds...............................
61,824 77,854 65,604 Equity in earnings of regional nuclear generating companies.........
7,939 8,927 10,163 Write-off of plant costs..............
(9,717)
(24,122)
(184,432)
- Other, net............................
4,733 (2,095)
(3,023)
Income taxes - credit.................
33,024 46,202 117,040 Other income, net..................
100,065 120,175 61,307 Income before interest charges.....
378,728 351,512 290,530 Interest Charges:
Interest on long-term debt............
181,375 164,668 169,577 Other interest........................
11,289 17,272 8,827 Allowance for borrowed funds used during construction..................
(4,490)
(15,659)
(25,902)
Deferred Millstone 3 return - borrowed funds, net of income taxes...........
(30,990)
(28,112)
(23,045)
Interest charges, net..............
157,184 138,169 129,457 Income from Continuing Operations.......
221,544 213,343 161,073 Income from Gas Operations To Be Divested (Note 1)....................
10,979 16,450 11,488 Net Income.................
$ 232,523
$ 229,793
$ 172,561 The accompanying notes are an integral part of these financial statements.
The Connecticut Light and Power Company BAIANCE SHEETS At December 31, 1988 1987 I
(Thousands of Dollars)
Assets Utility Plant, at original cost:
Electric........................................
$5,048,592
$4,862,185 Less: Accumulated provision for depreciation.
,,1,298,138 1,169,944 3,750,454 3,692,241 Construction work in progress...................
288,669 288,049 Nuclear fuel, net..................
287,203 299,105 Net utility plant, continuing operations........
4,326,326 4,279,395 Gas plant, to be divested (includes construction work in progress of $6,641,000 in 1988 and
$5,712,000 in 1987)............................
347,244 321,140 Less': Accumulated provision for depreciation..
92,657 83,237 Net gas plant, to be divested (Note 1).......
254,587 237,903 Total net utility plant......................
4,580,913 4,517,298 Other Property and Investments:
Investments in regional nuclear generating companies and subsidiary companies, at equity..
50,918 49,402 Other, at cost..................................
14,327 12,888 65,245 62,290 Current Assets:
Cash and special deposits.......................
1,952 1,499 Receivables, less accumulated provision for uncollectible accounts of $7,048,000 in 1988 and $8,384,000 in 1987.........................
192,611 165,228 Receivables from affiliated companies...........
29,245 13,423 Accrued utility revenues........................
87,292 78,637 Fuel, materials and supplies, at average cost...
76,470 74,113 Accumulated deferred income taxes - current portion........................................
41,566 l
Prepayments and other...........................
19,690 20,469 407,260 394,935 Deferred Charges:
Unamortized debt expense........................
9,911 9,082 Energy adjustment clauses, net..................
26,232 86,229 Unrecovered spent nuclear fuel disposal costs...
20,397 19,433 Canceled nuclear project........................
19,205 21,605 Deferred costs - Millstone 3..............
223,285 196,412 Other...........................................
71,414 37,606 370,444 370,367 Total Assets....
$5,423,862
$5,344,890 The accompanying notes are an integral part of these financial statements.
- )
- The Connecticut Light and Power Company BALANCE SIIEETS At December 31, 1988 1987 (Thousands of Dollars)
)
Capitalization and Liabilities l
1 J
Capitalization-Common stock - $10 par value - authorized
]
24,500,000 shares; outstanding 12,222,930 j
shares in 1988 and 1987.........................
$ 122,229
$ 122,229 Capital surplus, paid in.........................
636,844 637,214 Retained earnings................................
768,802 726,763 Total common stockholder's equity.............
1,527,875 1,486,206 Cumulative preferred stock -
$50 par value - authorized 9,000,000 shares; outstanding 5,760,504 shares in 1988 and 6,940,504 shares in 1987
$25 par value - authorized 8,000,000 shares; I
outstanding 2,000,000 shares in 1988 and 2,000,000 shares in 1987 Not subject to mandatory redemption (Note 6).
256,195 256,195 Subject to mandatory redemption (Note 7).....
79,392 133,892 Long-term debt (Note 8)..........................
2,229,836 2,126,203
]
Total capitalization..........................
4,093,298 4,002,496 i
1 l
. Obligations Under Capital leases...................
227,399 240,573 1
Current Liabilities:
Notes payable to banks...........................
64,000 47,500 commercial paper.................................
43,000 62,000 Long-term debt and preferred stock - current portion.........................................
95,878 83,292 obligations under capital leases - current portion.........................................
82,738 85,616 Accounts payable.................................
71,612 66,234 Accounts payable to affiliated companies.........
41,995 57,987 Rate moderation fund.............................
77,694 Ac c ru e d t ax e s....................................
133,545 58,234 Accrued interest.................................
54,911 52,061 Other-18,538 30,321 606,217 620,939 Deferred Credits:
Accumulated deferred income taxes................
252,842 248,051 Accumulated deferred investment tax credits......
202,479 213,553 Other........................
41,627 19,278 496,948 480,882 Conunitments and Contingencies (Note 11)
I Total Capitalization and Liabilities..........
$5,423,862
$5,344,890 The accompanying notes are an integral part of these financial statements.
The Connecticut Light and Power Company STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Capital Common
- Surplus, Retained i
Stock Paid Yn Earnings (a)
Total (Thousands of Dollars)
Balance at January 1, 1986.........
$ 122,229
$643,529
$691,372
$1,457,130 Net income for 1986..............
172,561 172,561 Cash dividends on preferred stock...........................
(33,206)
(33,206)
Cash dividends on common stock...
(141,664)
(141,664)
Preferred stock issuance
)
expenses........................
(9)
(9)
Balance at December 31, 1986.......
122,229 643,520 689,063 1,454,812 1
Net income for 1987..............
229,793 229,793 j
I Cash dividends on preferred stock...........................
(32,217)
(32,217)
Cash dividends on coamon stock...
(159,876)
(159,876) 3 Preferred stock issuance and i
retirement expenses and premium I
on reacquired preferred stock...
(6,306)
(6,306) l Balance at December 31, 1987.......
122,229 637,214 726,763 1,486,206 Net income for 1988..............
232,523 232,523 Cash dividends on preferred
{
stock...........................
(30,120)
(30,120)
{
Cash dividends on common stock...
(160,364)
(160,364)
)
I Preferred stock retirement expenses net of amortization....
(370)
(370)
Balance at December 31, 1988.......
$122,229
$636,844
$768,802
$1,527,875 l
(a) At December 31, 1988, there was approximately $195,476,000 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.
l l
The accompanying notes are an integral part of these financial statements.
l l
l l 1 1
i The Connecticut Light and Power Company STATEMENTS OF CASil FIDWS For the Years Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Cash Flows from Operations:
i Income from continuing operations..................
$ 221,544
$ 213,343
$ 161,073
{
Adjusted for the following:
Depreciation..............
160,536 149,098 133,337 Amortization of leased property..................
89,753 95,606 88,022 Deferred income taxes, net.......................
37,976 37,340 (15,610)
Deferred return - Millstone 3....................
(92,814)
(105,966)
(88,649)
Allowance for other funds used during construction....................................
(2,262)
(13,409)
(55,955) i Rate moderation fund.............................
(77,694) 25,304 52,390 j
Write-off of plant costs.........................
24,122 184,432 Amortization of deferred Millstone 3 return......
62,835 Amortization of deferred charges and other noncash items...................................
28,370 (36,368)
(5,709) l Changes in working capital:
1 Receivables and accrued utility revenues.......
(51,860) 8,020 17,095 Fuel, materials and supplies...................
(2,357)
(411) 15,207 Accounts payable...............................
(11,304)
(17,889)
(54,690)
Accrued taxes..................................
75,317 (49,031) 31,671 Other working capital (excludes cash)..........
3,569 4,655 (20,719)
Net cash flows from continuing operations..........
441,609 334,414 441,895 Net cash flows from gas operations to be divested (Note 1).
23,767 30,314 29,538 i
Net cash flows from operations.....................
465,376 364,728 471,433 Cash Flows from Financing Activities:
Preferred stock........................
50,000 Long-term debt...................................
210,000 328,300 360,850 Increase in obligations under capital leases.....
70,472 92,294 72,223 l
Net increase (decrease) in short-term debt......
(2,500) 37,500 25,000 Reacquisitions and retirements of long-term debt and preferred stock.............................
(154,255)
(215,444)
(268,459)
Premium on reacquisitions and financing expenses.
(5,419)
(23,222)
(6,731)
Repayment of capital lease obligations...........
(85,834)
(96,137)
(75,382)
Cash dividends on preferred stock................
(30,120)
(32,217)
(33,206)
Cash dividends on common stock...................
(160,364)
(159,876)
(141,664)
Millstone 3 construction trust...................
(72,058)
Net cash flows from financing activities...........
(158,020)
(18,802)
(139,427)
Investment in Plant (including capital leases):
Electric utility plant...........................
(209,729)
(240,470)
(318,075)
Gas utility plant................................
(26,379)
(24,558)
(21,192)
Nuclear fuel.....................................
(73,057)
(98,799)
(62,318)
(309,165)
(363,827)
(401,585)
Less: Allowance for other funds used during construction.............................
(2,262)
(13,409)
(55,955)
Het investment in plant............................
(306,903)
(350,418)
(345,630)
Not Increase (Decrease) in Cash for the Period.....
453 (4,492)
$ (13,624)
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized during l
construction................................
$ 186,148
$ 166,231
$ 164,517 Income taxes....................................
31,217 65,151 14,283 The accompanying notes are an integral part of these financial statements. 1
The connecticut Light and Power Company NOTES To FINANCIAL STATEMENTS 1.
GAS DIVESTITURE In 1987, Northeast Utilities (NU) determined to dispose of the gas utility business of The Connecticut Light and Power Company (CL&P or the Company), its wholly owned subsidiary. The gas business divestiture is being effected to comply with the requirements of the Public Utility Holding Company T.ct of 1935 (1935 Act).
In May 1988, applications were filed with the Connecticut Department of Public Utility Control (DPUC) and the Securities and Exchange Commission (SEC), which outlined the plan of divestiture.
The divestiture is scheduled to occur during mid-1989. However, the exact date of divestiture is contingent on when regulatory approval is achieved.
The plan of divestiture calls for the creat!_,n of a new gas holding company system (Yankee System) with Yankee Energy System, Inc. (YES), a newly formed Connecticut corporation, as parent.
The spin-off of the Yankee System will be effected by means of a special stock dividend to NU shareholders.
YES will then be completely separate from NU and CL&P. The plan calls for NU shareholders as of a given record date to receive one share of YES for each 20 shares of NU.
Shareholders who would receive ten or fewer YES shares will receive cash in lieu of such shares.
Gas assets transferred to the Yankee System will be paid for in cash if satisfactory terms can be arranged from third parties in the capital markets.
If financing is not available on satisfactory terms in the capital markets, payment will be made for the gas assets partly in cash and partly by issuing purchase money notes. These notes will be secured by a first mortgage on such assets.
On December 21, 1988, a decision was issued by the DPUC in which the DPUC approved the divestiture by NU and CL&P of its gas business. The gas divestiture is still subject to review and approval by the SEC under the 1935 Act, and specific details of the divestiture still need to be approved by the DPUC.
In segregating the results of gas operations, the Company allocates certain expenses common to both electric and gas operations. The allocation methods have been prescribed by the DPUC for use in establishing
(
rates to be charged to electric and gas service customers. Common operation and maintenance expenses are allocated primarily using a formula consisting of three components: gross plant, gross revenues, and gross payroll.
Interest charges and preferred stock dividends are allocated primarily based on tha proportionate relationship of beginning-of-year net utility plant bal; 2::.
l. _ - _ _ _ _ _ - _ _ - _ _ - _ _ _ _ - _ _ _ _ - _ _ - _ -
The. Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS Summarized results of operations of the gas business are as follows:
For the Years Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Operating Revenues
$200,243
$202,816
$203,814 Operating Expenses:
Operation -
1 Gas purchased for resale 103,068 97,638 105,434 Other 31,753 31,489 31,155
)
Maintenance 6,643 6,716 6,770 Depreciation 13,033 11,704 11,258 Federal and state income taxes 9,512 15,756 12,799 Taxes other than income taxes 14,444 13,717 15,318 Total operating expenses 178,453 177,020 182,734 Operating Income 21,790 25,796 21,080 Other Income (Expense), Net 68 (46) 133 Income before interest j
charges 21,858 25,750 21,213
)
Interest Charges 10,879 9,300 9,725 Income from Gas Operations to be Divested
$ 10,979
$ 16,450
$ 11,488 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES General: The company, Western Massachusetts Electric Company (WMECO), and Holyoke Water Power Company are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by NU.
l other wholly owned subsidiaries of NU provide substantial support services to the system. Northeast Utilities Service Company supplies centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing, and other services to the system companies. Northeast Nuclear Energy Company acts as agent for system companies in constructing and operating nuclear generating facilities.
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 SEC as a holding company under 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 inter-connections, interchange of electric power, and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC.
The Company is subject to further regulation for _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ - -
4
'The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS rates and other matters by the FERC and the 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%
3 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 Company has a 52.93 percent interest in Millstone 3, a 1,156-megawatt (MW) nuclear generating unit. As of December 31, 1988, plant-in-service and accumulated depreciation included approximately
$1.9 billion and $135.9 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 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 must pay the United States Department of Energy (DOE) 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), payment may be made anytime prior to the first delivery of spent fuel to the DOE.
At December 31, 1988, fees due to the DOE for the disposal of prior period fuel were approximately $102.3 million, including interest costs of $35.8 million. As of December 31, 1988, approximately
$81.9 million had been collected through rates.
f Fees for fuel burned after April 7, 1983 are paid to the DOE on a quarterly basis l
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. l i
l The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS The depreciation rates for the several classes of electric and gas plant in service are equivalent to the following composite rates:
Year Electric Gas 1988 3.4%
4.0%
1987 3.3 3.9 1986 3.4 4.0 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 9 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 $775 million at December 31, 1988. As allowed under current regulatory practices, deferred taxes not previously provided are being collected in customers' rates as such taxes become q
payable.
j In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96, " Accounting for Income Taxes" (SFAS 96). SFAS 96 supersedes previously issued income tax accounting standards and will ba effective in 1990. The Company expects that when SFAS 96 is adopted, it will significantly increase assets and liabilities by approximately $1 billion, but will not have a material effect on net income.
Allowance for Funds Used During Construction (AFUDC):
AFUDC, a noncash item calculated in accordance with FERC guidelines, 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 j
cost of construction, are not recognized as part of the rate base for ratemaking purposes until facilities are placed in service.
The effective AFUDC rate under the gross-of-income tax method for 1988 was 9.1 percent.
In 1987, AFUDC was capitalized at 9.7 percent, except for a trash-to-energy project and Seabrook 1, which were capitalized on a net-of-income tax basis at 6.2 percent and 6.7 percent, respectively. The effective AFUDC rate under the net-of-income tax method for 1986 was 8.1 percent.
In conjunction with the establishment of a $4.7 billion statutory
" cap" on the construction costs of Seabrook 1, effective January 1, 1988, the Company stopped accruing AFUDC on its Seabrook 1 investment. For additional information regarding the Seabrook project, see Note 11,
" Commitments and Contingencies.". _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ - _ - _ _ _ _ - _ _ _ _ _ _ _ _ _ -
The Connecticut Light and power Company NOTES TO FINANCIAL STATEMENTS Energy Adjustment Clauses:
Retail electric rates include a fuel adjustment clause (FAC) under which fossil-fuel prices above or below base rate levels are charged or credited to customers. Administrative proceedings are required each month to approve the charges or credits proposed for the following month for the FAC.
Monthly FAC rates are also subject to retroactive review and appropriate adjustment by the DPUC each quarter after public hearings. The DPUC did not allow deferred fossil-fuel accounting for the period January 1, 1988 through December 31, 1988 and in its December 1988 rate order, the DPUC has continued to disallow deferred fossil-fuel accounting. The DPUC is permitting the Company to recover deferred fossil-fuel balances which at December 31, 1988 amounted to
$62.8 million and $20.0 million over a remaining period of seven years and two years, respectively, without earning a return.
The DPUC has approved the use of a Generation Utilization Adjustment Clause (GUAC) which levels the effect on fuel costs caused by variations from a 67 percent composite nuclear generation capacity factor through February 29, 1988 and a 69 percent composite nuclear generation capacity i
factor effective March 1, 1988.
In the December 1988 rate decision, the l
DPUC approved a GUAC capacity factor of 70 percent effective January 1, l
1989. 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.
During the period from August 1, 1987 to July 31, 1988, the composite nuclear generation factor was 72.1 percent, resulting in a fuel cost savings of approximately $23.2 million, which is being refunded to customers during the period from September 1, 1988 to July 31, i
1989.
The Company's gas rates include a purchased gas adjustment clause under which 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 or refund is permitted.
Phase-in Plan: The Company is phasing into rates its Millstone 3 investment.
The plan, as currently designed, is in compliance with Statement of Financial Accounting Standards No. 92, " Regulated Enterprises--Accounting for Phase-in Plans."
As allowed by the DPUC, the Company is phasing into rate base its allowed investment in Millstone 3.
The company must apply to the DPUC for l
l revenue increases sufficient to recover the installments as they are phased in.
The DPUC has provided for full deferred earnings and carrying charges on the Company's allowed investment in Millstone 3.
Through December 31, 1988 the Company had placed into rate base $843.2 million or 48 percent of its allowed investment in Millstone 3.
The amortization and recovery of deferrals through rates began January 1, 1988 and will end no later than December 31, 1995. As of December 31, 1988, $62.E million of l
the deferred return, including carrying charges, has been recovered.
j _ _ _ _ _ - _ _ _ _ _ _ _. _ _ _ _ _ _ _ _ -. _ _
The Connecticut Light and power Company NOTES TO FINANCIAL STATEMENTS In December 1988, the DPUC permitted the Company to place an additional 32 percent of its allowed Millstone 3 investment into rate base, effective January 1, 1989. With this approval, $1.4 billion (or 80 percent) of the Company's allowed investment in Millstone 3 has been placed into rate base as of January 1, 1989. The remaining $351 million (or 20 percent) of the Company's allowed investment in Millstone 3 is to be phased into rate base in four 5 percent steps beginning in 1992.
3.
NUCLEAR DECOMMISSIONING A 1987 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 $522.8 million in year-end 1988 dollars.
Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, technology, and inflation.
The Company has established independent decommissioning trusts for its portion of the costs of decommissioning Millstone 1, 2,.and 3.
As of December 31, 1988, the Company had collected through rates $61.5 million for future decommissioning costs, of which $36.7 million has been funded e.:ternally. 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.
4.
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 of the nuclear fuel for Millstone 3.
The Company and WMECO 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 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, nuclear control room simulators, 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 Leaces 1988...............
$107,021,000
$27,372,000 1987.
109,357,000 31,919,000 l
1986...............
102,617,000 28,956,000 i 1
I t-
_______D
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS Interest included in capital. lease rental payments was $21,469,000 in 1988, $22,733,000 in 1987, and $24,462,000 in 1986.
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 noncancellable leases as of December 31, 1988 are approximately:
Capital Operating Year Leases Leases (Thousands of Dollars) 1989...............................
$ 1,600
$ 25,822 1990...............
1,336 22,829 1991..............................,
1,302 17,835 1992...............................
1,302 14,082 1993...............................
1,302 10,183 After 1993.........................
16,413 52,732 Future minimum lease payments......
23,255
$143,483 Less amount representing interest..
11,269 Present value of future minimum lease payments for other than nuclear fuel......................
11,986 Present value of future nuclear fuel lease payments...............
298,151 Total.........................
$310,137 5.
SHORT-TERM DEBT The system companies have var'ious credit lines totaling $400 million.
Of this amount, $350 million is available to the Company and WMECO through a revolving credit agreement with a group of eleven banks. The maximum borrowing limit of the Company under the agreement is $350 million less amounts borrowed (not to exceed $105 million) by WMECO.
The Company may borrow funds on a short-term revolving basis using either fixed rate loans or standby loans. Fixed rates are set using competitive bidding.
Standby loan rates are based upon several alternative variable rates. The Company is obligated to pay a facility fee of.1875 percent per annum on its proportionate share of the commitment, At December
'1, 1988, the Company had $64 million outstanding under this agreement.
The remaining $50 million is available to the NU system companies through a revolving credit agreement with seven banks. Under this agreement, the NU system companies can borrow in the aggregate an amount not to exceed $50 million. Loans under this agreement are on a short-term _________-__ - -________ _ _ - _____ a
L The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS revolving basis in the form of either Eurodollar Loans based on the LIBOR, plus 3/8 of 1. percent, or as Alternative Base Rate Loans at the greater of the prime rate or 1/2 of 1 percent over the Federal Funds Effective Rate.
This agreement will expire on August 25, 1991 unless extended, on an annual basis, for a maximum of four years beyond the expiration of the initial three-year term. At December 31, 1988, the amount of unused borrowing capacity under this agreement was $50 million.
6.
PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION l
Details of preferred stock not subject to mandatory redemption outstanding at December 31, 1988, 1987, and 1986 are:
December 31, 1988 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 of 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 4.50% 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
$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.
.____-____________O
.The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS 7.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption outstanding are:
December 31, Shares 1988 Outstanding December 31, L
Redemption December 31, l
Description Prices
- 1988 1988 1987 1986 (Thousands of Dollars)
$5.52 Series L of 1975
$52.76 157,548
$ 7,879 $ 9,879 $ 11,879 10.48% Series of 1980 53.93 400,000 20,000 22,000 24,000 11.52% Series of 1975 52.88 79,061 3,953 4,953 5,953 15.04% Series M of 1982 4,000 40,000 Adjustable Rate Series N of 1983 50,000 50,000 9.10% Series of 1987 27.12 2,000,000 50,000 50,000 81,832 140,832 131,832 Less preferred stock to be redeemed within one year 2,440 6,940 2,440 Total preferred stock subject to mandatory redemption
$ 79,392 $133,892 $129,392 CRodemption 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 1988 1987 1986 (Thousands of Dollars)
$5.52 Series L of 1975
$1,000
$2,000 40,000 40,000 40,010 10.48% Series of 1980 1,000 2,000 40,000 40,000 20,000 11.52% Series of 1975 500 1,000 20,000 20,000 20,000 15.04% Series M of 1982 80,000 720,000 Adjustable Rate Series N of 1983 1,000,000 9.10% Series of 1987 (1) 2,500 5,000 (1) Sinking fund requirements commence June 1, 1993.
The minimum sinking-fund provisions of the series subject to mandatory redemption, for the years 1989 through ]993, aggregate $2,500,000 in each of the years 1989-1992 and $5,000,000 in 1993. 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 _ _ _ _ _ _ _.
.The connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS 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 seccrued dividends to the date of redemption except that during the initial five-year redemption period the 9.10% Series of preferred stock is subject to certain refunding limitations.
1 i
The Connecticut Light and Power Company 1
NOTES TO FINANCIAL STATEMENTS I
8.
LONG-TERM DEBT Details of long-term debt outstanding are:
December 31, 1988 1987 l
(Thousands of Dollars)
First Mortgage Bonds:
4 3/8% Series E, due 1988.....................
18,000 3 7/8% Series 0, due 1988.....................
30,000 4 7/8% Series P, due 1990.....................
25,000 25,000 13.35% Series, due 1990.....................
1,620 6,620 i
4 1/4% Series, due 1993.....................
15,000 15,000 12 1/4% Series II, due 1993.....................
85,000 85,000 4 3/8% Series R, due 1993.....................
25,000 25,000 8 1/2% Series PP, due 1993.....................
125,000 9 3/4% Series 00, due 1994.....................
95,000 95,000 4 1/2% Series, due 1994.....................
12,000 12,000 12 3/8% Series JJ, due 1994.....................
74,624 74,624 10
% Series NN, due 1995.....................
80,000 80,000 8 7/8% Series'LL, due 1996.....................
100,000 100,000 5 5/8% Series, due 1997.....................
20,000 20,000.
9 1/8% Series MM, due 1997.....................
75,000 75,000 6
% Series S, due 1997.....................
30,000 30,000 6 7/8% Series U, due 1998.....................
40,000 40,000 7 1/8% Series, due 1998.....................
25,000 25,000 6 1/2% Series T, due 1998.....................
20,000 20,000 6 1/2% Series, due 1998.....................
10,000 10,000 8 3/4% Series V, due 2000...................
40,000 40,000 8 7/8% Series W, due 2000.....................
40,000 40,000 9 1/4% Series, due 2000.....................
20,000 20,000 11
% Series CC, due 2000.....................
4,754 9,407 7 3/8% Series X, due 2001.....................
30,000 30,000 7 5/8% Series, due 2001.................
30,000 30,000 7 1/2% Series, due 2002.....................
35,000 35.000 7 5/8% Series Y, due 2002.....................
50,000 50,000 7 5/8% Series Z, due 2003.....................
50,000 50,000 7 1/2% Series, due 2003.....................
40,000 40,000 8 3/4% Series AA, due 2004.....................
65,000 65,000 9 1/4% Series, due 2004.....................
30,000 30,000 8 7/8% Series DD, due 2007.....................
45,000 45,000 9 1/4% Series EE, due 2008.....................
40,000 40,000 9 3/8% Series, due 2008.....................
40,000 40,000 15
% Series HH, due 2012.....................
11,217 22,274 12
% Series KK, due 2015.....................
49,500 49,500 f
9 3/4% Series QQ, due 2018.....................
75,000 f
Total First Mortgage Bonds.................
$1,553,715
$1,422,425 The1 Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1988 1987 (Thousands of Dollars)
Term Loan Agreements:
Variable rate, due 1991..............
75,000 75,000 Intermediate Term Notes:
8.925% to 9.23%, due 1989-1992.......
175,000 200,000 Pollution Control Notes:
5.90%, due 1998......................
8,256 8,272 6.50%, due 2007......................
16,000 16,000 Variable rate, due 2013-2018.........
340,100 330,100 Fees and interest due for spent fuel disposal costs........................
102,302 94,717 other..................................
58,532 60,063 Less amounts due within one year.......
93,438 76,352 Unamortized premium and discount, net..
(5,631)
(4,022)
Long-term debt, net...............
$2,229,036
$2,126,203 Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1988 for the years 1989 through 1993 are:
$81,555,000, $83,704,000, $80,321,000, $55,903,000, and $257,099,000, respectively.
In addition, there are annual 1 percent sinking-and improve-ment-fund requirements, currently amounting to $14,771,000, $14,746,000, l
$14,705,000, $14,703,000, and $14,703,000 for the years 1989 through 1993, I
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 i
be redeemed by the Company at any time at established redemption prices plus I
accrued interest to the date of redemption, except certain series which are i
subject to certain refunding limitations during their respective initial five-year redemption periods.
Essentially all of the Company's utility plant is subject to the lien of its first mortgage bond indentures. As of December 31, 1988, the Company has secured $293.7 million of pollution control notes with second mortgage liens on Millstone 1, junior to the liens of its first mortgage bond indentures.
1 i
1 l,
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS 9.
INCOME TAX EXPENSE The components of the federal and state income tax provisions charged to continuing operations are:
For the Years Ended December 31, 1988 1987 1986 (Thousands of Dollars)
. Current income taxes:
Federal................................
$ 59,737
$ 22,462
$ 22,199 State..................................
22,622 2,523 16,971 Total current........................
82,359 24,985 39,170 Deferred income taxes, net:
Investment tax credits.................
(6,425)
(12,348) 21,562 Federal................................
45,626 73,350 17,892 State..................................
3,565 9,884 (2,397)
Total deferred......................
42,766 70,886 37,057 Total income tax expense.............
$125,125
$ 95,871
$ 76,227 The components of total income tax expense are classified as follows:
Income taxes charged to operating expenses............................
$153,359
$108,527
$141,711 Income taxes associated with the amortization of deferred Millstone 3 return - borrowed funds.............
(17,209)
Income taxes associated with the allowance for funds used during construction ( AFUDC) and deferred Millstone 3 return - borrowed funds.
21,999 33,546 51,556 Other income taxes - credit..........
(33,024)
(46,202)
(117,040)
Total income tax expense.............
$125,125
$ 95,871
$ 76,227 _ - _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -
The connecticut Light and Power Company
-)
NOTES TO FINANCIAL STATEMENTS 1
Deferred income taxes are comprised of the tax effects of timing differences as follows:
For the Years Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Investment tax credits...................
$ (6,425)
$(12,348)
$ 21,562 Liberalized depreciation, excluding leased nuclear fuel.....................
58,933 73,110 54,436 Construction overheads...................
77 5,683 (1,967)
Liberalized depreciation on leased nuclear fuel, settlement credits, and disposal costs..........................
(6,779)
(7,758)
(7,583)
Decommissioning costs....................
(2,468)
(441)
(3,911)
Energy adjustment clauses................
(22,947) 9,778 (11,614)
AFUDC and deferred Millstone 3 return, net.....................................
4,790 33,546 51,556 Rate moderation fund.....................
28,826 (12,509)
(18,097)
Canceled nuclear project.................
(716)
(808) 8,250 Write-off of plant costs.................
(4,029)
(5,854)
(48,115)
Alternative Minimum Tax..................
(10,830)
Contributions in aid of construction.....
(4,724)
(5,243)
Loss on bond redemption..................
4,998 Pension accrual..........................
(88)
(2,697)
Other....................................
(1,684) 2,259 (7,460)
Deferred income taxes, net...........
$ 42,766
$ 70,886
$ 37,057 The effective income tax rate i's computed by dividing total income tax expense by the sum of such taxes and income after interest charges. The differences between the effective rate and the federal statutory income tax rate are:
For the Years Ended December 31, 1988 1987 1986 Federal statutory income tax rate........
34.00%
39.95%
46.00%
Tax effect of differences:
Depreciation differences................
4.22 4.84 4.54 Other funds portion of AFUDC not recognized as income for tax purposes..
(.22)
(1.73)
(10.85)
Deferred Millstone 3 return - other funds..................................
(6.06)
(10.06)
(12.72)
Amortization of deferred Millstone 3 return - other funds...................
4.56 Construction' overheads - portion not deferred...............................
(.70)
(.33)
(2.92)
Investment tax credit amortization......
(1.85)
(2.30)
(3.21)
State income taxes, net of federal benefit................................
5.10 2.40 3.31 Write-of f of plant costs................
.80 10.96
- Other, net..............................
(2.96)
(2.57)
(3.00)
' Effective income tax rate................
36.09%
31.00%
32.11% _ -
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS 10.
RETIREMENT PLAN The Company participates in a uniform noncontributory defined benefit retirement plan covering all regular NU system employees.
Benefits are based on years of service and employees' compensation during the last five years of employment.
The Company has adopted the provisions of Statement of Financial Accounting Standards No. 87, " Employers' Accounting for Pensions,"
(SFAS 87) effective January 1, 1987. As required by SFAS 87, the actuarial cost method was changed from the entry age normal method to the projected unit credit method.
It is the policy of the Company to fund annually an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.
Pension costs are determined using market-related values of pension assets.
Pension assets are invested primarily in equity securities, bonds, and insurance contracts.
The components of net pension cost for the NU system are:
For the Years Ended December 31, 1988 1987 (Thousands of Dollars)
Service cost
$ 31,893
$ 32,812 Interest cost 59,715 54,318 Return on plan assets (84,825)
(36,811)
Net amortization 10,431 (31,161)
Net pension cost
$ 17,214
$ 19,158 The Company's allocated portion of the system's pension cost, part of which was charged to Utility Plant, approximated $5 million in 1988,
$6.4 million in 1987, and $15.7 million in 1986.
For calculating pension cost the following assumptions were used:
For the Years Ended December 31, 1988 1987 Discount rate 9.5%
8.5%
Expected long-term rate of return 9.7 9.7 Compensation / progression rate 8.5 7.5 The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS The following table represents the plan's funded status reconciled to the NU consolidated balance sheet:
F'or the Years Ended December 31, 1988 1987 (Thousands of Dollars)
Accumulated benefit obligation, including
$386,618,000 of vested benefits at December 31, 1988 and $358,957,000 at December 31, 1987
$419,781
$397,549 projected benefit obligation 694,315
$664,338 Less:
Market value of plan assets 768,001 701,462 projected benefit obligation surplus 73,686 37,124 Unrecognized transition amount (34,233)
(36,259)
Unrecognized net gain (67,259)
(16,387)
Accrued pension (liability)
$(27,806)
$(15,522)
The following actuarial assumptions were used in calculating the plan's year-end funded status:
For the Years Ended December 31, 1988 1987 (Thousands of Dollars)
Discount rate 9.5%
9.5%
Compensation / progression rate 8.5 8.5 In addition to pension benefits, the Company provides certain health care and life insurance benefits to retired employees. The cost of providing those benefits was approximately $4,673,000 in 1988, $4,412,000 in 1987, and $3,168,000 in 1986. The Company recognizes health care benefits primarily as incurred and provides for life insurance benefits through premiums paid to an insurance company.
11.
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, l
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 $1.15 billion for the years 1989-1993, including $257.6 million for 1989. These forecasted expenditures include gas expenditures of
$122.5 million for the years 1989-1993 including $29.4 million for 1989.
In addition, the Company estimates that nuclear fuel requirements will be
$259.9 million for the years 1989-1993, including $21.6 million for 1989..
The Connecticut Light and power Company NOTES TO FINANCIAL STATEMENTS Corrosion, pitting, and denting of tubes within steam generator assemblies have been problems found at numerous nuclear units. These problems were first identified at Millstone 2 in a 1977 outage, and since then the unit's steam generator system has been the subject of regular inspections and repairs.
In light of the repairs that have been required, it may become necessary to replace Millstone 2's steam generators during the mid-1990's.
Commitments are being made to procure spare steam generator subassemblies.
If a steam generator replacement becomes necessary, an outage of five to six months could be involved. The cost of the replacement (excluding replacement power costs), to CL&p, could be approximately $121.5 million.
Seabrook: The Company has a 4.06 percent joint ownership interest in the Seabrook project. At December 31, 1988, the Company's construction work in progress balance included an investment of $190.5 million in seabrook 1.
Seabrook 1 has faced serious opposition to its efforts to obtain an operating license. Receipt of an operating license requires the resolution of several issues, including the project's emergency response and evacuation procedures, the disposition of legal challenges from government officials and citizen groups in Massachusetts and the financial difficulties of several joint owners of the project.
progress has been made in addressing the emergency response and evacuation issues that must be resolved before the Nuclear Regulatory Commission (NRC) can issue a low-power license for the project.
In September 1988, the NRC adopted a rule clarification that allows licensing for fuel loading and low-power operation before implementation of off-site prompt notification systems (sirens), thereby deferring resolution of the siren issue until the full power operating license is to be issued. On August 8, 1988, the NRC's Licensing Board issued an order renewing the authorization to operate Seabrook I at up to 5 percent of the unit's rated power. The Federal Emergency Management Agency and the NRC also issued favorable reporte with respect to an emergency preparedness exercise held at Seabrook in June 1988.
Financial qualification issues remain as substantial obstacles to the issunnce of a low-power license. Principal items that have given the NRC renewed concern about financial qualifications are the January 18, 1988 filing by public Service Company of New Hampshire (pSNH, a 35.6 percent owner of the project) for protection from its creditors under Chapter 11 of the Federal Bankruptcy Code, the June 1988 announcement by the Massachusetts Municipal Wholesale Electric Company (MMWEC) that it would no longer fund its Seabrook obligations, and the ability of various Seabrook participants to fund decommissioning costs in the event that the unit operates for low-power testing, but an operating license is ultimately denied.
On December 21, 1988, the NRC authorized its st6ff to issue a low-power license for Seabrook 1 once certain financial conditions are met.
These conditions require that the joint owners provide reasonable assurances that funding will be available for decommissioning in the event Seabrook 1 is canceled after low-power testing. The NRC estimates that _ -_---
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS l
i
$72.1 million would be required for decommissioning. The company's proportionate share of decommissioning cost approximates $2.9 million. To accommodate any intervenor challenge, the NRC provided that a low-power license may not be issued until ten days after notice to the NRC by the staff that the decommissioning funding terms of the order have been met.
On December 27, 1988, PSNH filed, with the United States Bankruptcy l
Court (Court), a reorganization plan that prov3 des for a holding company structure and a partial shift of rate regulation from the state to the federal level.
The filing allows PSNH to retain the exclusive right to file a plan with the Court until February 27, 1989 or such time as the Court sets.
For information concerning NU's offer to purchase PSNH's non-Seabrook assets, see Note 12, "Public Service Company of New Hampshire."
As short-term funding to compensate for MMWEC's ceasing to fund its portion of the Seabrook project, the Company provided approximately
$7.2 million of financing for Seabrook.
In return for the Company's funding, other Seabrook owners have agreed to purchase capacity from the NU system. The NU system is not, through these funding arrangements, acquiring any additional ownership in the Seabrook project beyond the 4.06 percent share currently held by the Company.
In light of the substantial uncertainties affecting Seabrook 1, management cannot predict whether or when the unit will operate.
Solely for financial planning purposes, the Company now assumes that Seabrook 1 will commence operation on January 1,.1991.
If Seabrook 1 ultimately does not operate, the Company would seek full recovery of its investment.
While the DPUC has permitted the Conpsnv to recover substantial portions of its investments in similar circumstances, management cannot predict the extent to which the Company will be permitted to recover its Seabrook 1 investment.
Seabrook 2 has been canceled by the joint owners. Through December 31, 1988, the Company had recovered approximately $6.3 million of its retail investment in Seabrook 2.
The Company has been granted
$2.5 million of annual revenues to recover a portion of its remaining retail investment in Seabrook 2, which at December 31, 1988 amounted to
$19.2 million.
The DPUC has not permitted the Company to earn a return on this investment.
In 1986, the DPUC initiated a review, conducted by Theodore Barry and Associates (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 15, 1987, TB&A issued their report, identifying $1.38 billion of alleged imprudent Seabrook project expenditures incurred through October 1, 1986. The Company disagrees with the TB&A report conclusions. Hearings are expected to begin in mid-1989.
Hydro-Quebec: Along with various New England utilities, NU has entered into agreements to finance and construct additional transmission and terminal facilities (Phase II) to import electricity from the Hydro-Quebec system in Canada. The Phase II project is currently estimated to cost - - - _ - _ - _ _ _ _ _ -
The Connecticut Light and Power Company NOTES TO FINANCIAL STATEME5dS approximately $565 million of which approximately $270 million had been expended or committed as of December 31, 1988. These facilities, which are scheduled to be completed in the fall of 1990, would increase the capability of the Hydro-Quebec interconnection to 2,000 MW.
Upon completion of Phase II, NU is expected to have un equity ownership approximating $41 million in the Phase II facilities.
Under the terms of the Phase II equity agreement, NU will be required to guarantee the obligations of other participants that have lower credit ratings and NU will receive compensation for such guarantees. Under the terms of the Phase II contract CL&P is entitled to receive 18.82% of the energy transmitted by the Phase II facilities.
Nuclear Insurance Contingencies: On August 22, 1988, an extension of The Price-Anderson Act (Act) through August 1, 2002 was signed, revising nuclear liability indemnification. The revised Act lbmits public liability from a single incident at a nuclear power plant to $7.6 billion. The first
$160 million of liability would be provided by purchasing the maximum amount of commercially available insurance. Additional coverage of up to
$7.1 billion would be provided by an assessment of $63 million per incident, levied on each of the 113 nuclear units currently licensed to operate in the United States, subject to a maximum assessment of
$10 million per incident per nuclear unit in any year.
In addition, if the sum of all public liability claims and legal costs arising from any nuclear incident exceeds the maximum amount of financial protection, each reactor operator can be assessed an additional 5 percent, up to $3.2 million. The maximum assessment is to be adjusted at least every five years to reflect inflationary changes. Based on CL&P's ownership interest in the three Millstone units, its maximum liaoility would be $142.2 million per incident.
In addition, through CL&P's power purchase contracts with the four Yankee regional nuclear electric generating companies, and the Company's ownership in Seabrook, CL&P would be responsible for up to an additional $55.9 million per incident.
Payments for CL&P's ownership interest in nuclear generating facilities would be limited to a maximum of
$30 million per incident per year.
Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover:
(a) certain extra costs incurred in obtaining replacement power during a prolonged accidental outage utth respect to CL&P's ownership interest 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 excerd the accumulated funds available to NEIL. The maximum potential assessments against the Company with respect to losses arising during current policy years are approximately $9.4 million under the replacement power policies and $10.7 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.
In addition, insurance has been purchased from American Nuclear Insurers / Mutual Atomic Energy Liability Underwriters, aggregating
$160 million on an industry basis for coverage of worker claims. All companies insured under this coverage are subject to retrospective _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ - _ _ - _ _ _
The Connecticut Light and Power Company t
NOTES TO FINANCIAL STATEMENTS assessments of $2.7 million per reactor. The maximum potential assessments against the Company with respect to losses arising during the current policy period are approximately $8.1 million.
Financing Arrangements for the Regional Nuclear Generating Companies: The owners of CY, including the Company, have guaranteed their pro rata shares of $29.4 million 17 percent Series A Debentures.
The guarantee'of the Company is $10,6 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 guarantee of the Company is $3.8 million.
The owners of MY, including the Company, have guaranteed their pro rata shares of MY's ob31gations under a $50 million nuclear fuel loan agreement. The guarantee of the Company is $6 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.
12.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE On January 12, 1989, NU made an offer to purchase the non-Seabrook assets of PSNH. Under the terms of the offer, PSNH would become a New Hampshire-regulated operating subsidiary of NU.
PSNH's 35.6-percent share of the Seabrook nuclear power plant would be spun off into a separate company owned by PSNH's existing unsecured creditors and security holders.
NU's New Hampshire subsidiary would contract to buy the power for as long as the plant operates.
The offer values PFNH's non-Seabrook assets at $1.2 billion. New financing will be provided to pay off PSNH's first, third-and general and refunding mortgage bonds, except $100 million of pollution control revenue bonds which will be assumed. The interest in the new Seabrook company would be worth approximately $750 million, based on the power purchase contract NU has proposed for its new New Hampshire subsidiary.
The offer is subject to approval by the Court, PSNH's creditors and security holders, and federal and state regulatory authorities.
Approval of this offer is not assured.
The Connecticut Light and Power Company Report of Independent Public Accountants To the Board of Directors of The Connecticut Light and Power Company:
We have audited 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, 1988 and 1987, and the related statements of income, common stockhsider's equity and cash flows for each of the three years in the period ended December 31, 1988. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Connecticut Light and Power Company as of December 31, 1988 and 1987, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles.
As discussed more fully in Note 11, a number of licensing, regulatory and other uncertainties currently exist relating to the Seabrook nuclear project.
Because management is unable to predict how these uncertainties will be resolved, they cannot now predict what portion of the investment in the Seabrook project (approximately $210 million at December 31, 1989) will ultimately be recoverable.
ARTHUR ANDERSEN & CO.
Hartford, Connecticut February 24, 1989 -
The Connecticut Light and Power Company SELECTED FINANCIAL DATA Years Ended December 31, 1988 1987 1986 1985 1984 (Thousands of Dollars)
Continuing Operations:
Operating Revenues...
$1,732,298 $1,538,410 $1,509,849 $1,536,426 $1,554,808 Operating Income.....
278,663 231,337 229,223 216,276 267,835 Not Income...........
221,544 213,343 161,073 264,744 270,373 Gas Operations to be Divested:
Operating Revenues...
200,243 202,816 203,814 220,010 224,430 Operating Income.....
21,790 25,796 21,080 21,862 23,743 Net Income...........
10,979 16,450 11,488 12,331 13,854 Total Assets...........
5,423,862 5,344,890 5,063,313 4,987,909 4,495,141 Long-Term Debt *........
2,323,274 2,202,555 2,044,574 2,014,311 1,842,405 Preferred Stock Subject to Mandatory Redemption *..........
81,832 140,832 131,833 135,833 336,978 Obligations Under Capital Leases *......
310,137 326,189 330,819 322,318 313,433
- Includes portions due within one year.
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended 1988 March 31 June 30 September 30 December 31 (Thousands of Dollars)
Continuing Operations:
Operating Revenues...
$447,771
$390,068
$453,985
$440,474 Operating Income.....
$ 65,295
$ 60,981
$ 81,220
$ 71,167 Net Income...........
$ 50,481
$ 45,410
$ 64,509
$ 61,144 Gas Operations to be Divested:
Operating Revenues...
$ 78,199
$ 34,999
$ 23,612
$ 63,433 Operating Income.....
$ 12,953 j 2,032 (261)
$ 7,066 Net Income...........
$ 10,280 (732)
$ (2,974)
$ 4,405 1987 Continuing Operations:
Operating Revenues...
$370,928
$380,734
$390,920
$395,828 Operating Income.....
$ 63,218
$ 68,185
$ 59,576
$ 40,358 Net Income....
$ 72,492
$ 56,157
$ 60,211
$ 24,483 Gas Operations to be Divested:
Operating Revenues...
$ 79,797
$ 34,620
$ 25,447
$ 62,952 Operating Income.....
$ 13,110
$ 2,363
$ 1,515
$ 8,808 l
Net Income...........
$ 10,769 (783)
$ 6,464 l
l 6
The Connecticut Light and Power Company STATISTICS At December 31, 1988 1987 1986 1985 1984 Electric:
kWh Sales (millions)........
20,611 19,639 18,728 17,816 17,502 Average Annual Residential kWh Use...............
8,525 8,152 7,817 7,551 7,648 Customers (average) 1,036,565 1,010,343 983,387 961,070 941,839 Gross Electric Utility Plant (Thousands of Dollars)......... $5,624,464 $5,449,339 $5,248,487 $5,155,473 $4,637,929 Gas:
Cubic Feet of Gas Sales (millions)..
31,707 30,804 28,249 27,915 29,682 Average Annual Residential Cubic Feet of Gas Used..
77,924 75,188 73,881
'71,161 72,303 Customers (average) 171,400 166,951 162,765 159,119 156,452 Gross Gas Plant (Thousands of Dollars)......... $ 347,244 $ 321,140 $ 299,105 $ 279,937 $ 261,470 Employees...........
4,022 4,115 4,066 4,061 4,077 t
l The Connecticut Light and Power Company l
l F3rst 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
- 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 1989 Dividend Payment Dates 5.28%, 9.60%, 10.48%, 11.52%,
$3.24, $4.48 H and $4.48 I 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 -
February 1, May 1, August 1 and November 1 l
3.90%, 4.50% (1963), 7.60%, 9.10%,
$3.80, $4.56 and $5.52 Series -
i March 1, June 1, September 1 and December 1 DARTS ***
March 15, May 3, June 21, August 9, September 27 and November 15 Address General Correspondence in Care of:
l Northeast Utilities Service Company Investor Relations Department
]
P.O. Box 270 Hartford, Connecticut 06141-0270 l
Tel. (203) 665-5000 j
General Office Selden Street, Berlin, Connecticut 06037-1616 1
1
- Trustee and interest paying agent (except as noted below) for first mortgage bonds issued under the indenture of The Hartford Electric Light Company.
Effective at the close of business on June 30, 1982, The Hartford Electric l
Light Company was merged into The Connecticut Light and Power Company.
- Paying agent for the 4 1/4% 1963 Series and 4 1/2% 1964 Series.
l l
- Transfer and Paying Agent:
Bankers Trust Company, Corporate Trust and Agency Group P.O. Box 318, Church Street Station, New York, New York 10015 The data contained in this Report is submitted for the sole purpose of providing information to present stockholders about the Company..
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NORTHEAST UTILITIES THE CONNECTICUT UGHT AND POWER COMPANY WESTERN MASSACHUSETTS ELECTRIC COMPANY HOLYOKE WATER POWER COMPANY NORTHEAST UTluTIES SERVICE COMPANY NORTHEAST NUCLEAR ENERGY COMPANY I
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ANNUAL REPORT 1988 l
l WMECO Western Massachusetts Electric Company a subsidiary of Northeast Utilities i
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Directors ROBERT G. ABAIR FRANK R. LOCKE Vice President and Chief Administrative Officer Senior Vice President
. PHILIP T. ASHTON EDWARD J. MROCZKA Senior Vice President Senior Vice President The Connecticut Light and Power Company JOHN F. OPEKA ROBERT E. BUSCH Executive Vice President Senior Vice P.esident LAWRENCE H. SHAY JOHN P. CAGNETTA Senior Vice President Senior Vice President WALTER F. TORRANCE, JR.
WILLIAM B. ELLIS Senior Vice President. Secretary, Chairman and Chief Executive Officer General Counse' and Assistant Clerk BERNARD M. FOX President and Chief Operating and Financial Officer Officers WILLIAM B. ELLIS CARROLL A. CAFFREY C. FREDERICK SEARS Chairman and Chief Vice President Vice President TOD O. DlXON GEORGE D. UHL l
BERNARD M. FOX Vice Nasident Vice President and Controller RAYMOND E. DONOVAN RICHARD P. WERNER d an la Oficer Vice President Vice President ALBERT J. HAJEK CORLEEN T. MASON I
E ecuiv Vce President f
Vice President Clerk BARRY ILBERMAN THERESA H. ALLSOP S n or Vic P es d nt Vice President Assistant Clerk JOHN P. CAGNETTA FRANCIS L. KINNEY CHERYL W. GRISE Senior Vice President Vice President Assistant Clerk FRANK R. LOCKE HUGH C. MACKENZlE KAREN G. VALENTI Senior Vice President Vice President Assistant Clerk EDWARD J. MROCZKA KEITH R. MARVIN JOHN T. HICKEY I
Senior Vice President Vice President Assistant Secretary l
LAWRENCE H. SHAY JOHN W. NOYES DOUGLAS R. TEECE Senior Vice President Vice President Assistant Secretary WALTER F. TORRANCE, JR.
RICHARD A. RECKERT RUBERT C. ARONSON Senior Vice President. Secretary.
Vice President Assistant Treasurer I
General Counsel and Assistant Clerk WAYNE D. ROMBERG ARTHUR H. HIERL ROBERT G. ABAIR Vice President Assistant Treasurer l
Vice President and Chief Administrative Officar WALTER T. SCHULTHEIS EUGENE G. VERTEFEUILLE Vice President Assistant Treasurer f
C. THAYER BROWNE
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Vice President and Treasurer l
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l FEBRUARY 28,1989 )
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l WESTERN MASSACHUSETTS ELECTRIC COMPANY March, 1989 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 1988.
The 1988 annual report of Northeast Utilities, which provides information regarding the entire Northeast Utilities system, including WMECO, has also been mailed to all WMECO preferred stockholders.
This report is brief for that reason.
In June, 1988, the Massachusetts Department of Public Utilities granted WMECO on $8.6 million increase in annual revenues which was less than half of the increase the Company had requested.
In December of 1988, the Company filed a new rate case seeking $28.3 million or a 9.76% increase.
In 1988, operating revenues increased to $303.9 million from
$284.9 million in 1987.
Corresponding net income increased to
$43.5 million from $39.6 million in 1987.
A more comprehensive discussion of these items is contained within this report.
Sincerely,
/
Bernard M.
Fox William B.
Ellis President and Chief Operating Chairman and Chief and Financial Officer Executive Officer I
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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 Electric Company's (the Company) financial condition and the principal factors with an impact on the results of operations.
The Company is a wholly owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the Company's financial statements and footnotes.
FINANCIAL CONDITION Overview The Company's net income increased to $43.5 million in 1988 from $39.6 million in 1987.
The Company's earnings improved in 1988 primarily as a result of I
increased electric sales and the effect of management's cost-containment measures.
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Management expects the Company's earnings to remain relatively flat in the near future even though Company operational performance has been superior. In June 1Q86, the Massachusetts Department of public Utilities (DPU) determined that $95.5 million of the Company's Millstone 3 investment, which was regarded as not being "used and useful," would be allowed recovery over a ten-year period without earning a return on those portions of the investment. In addition,
$13.5 million of equity allowance for funds used during construction (AFUDC) was permanently disallowed recovery from ratepayers.
The inability to earn a return on those portions of the investment will continue to affect the Company's financial condition adversely while a portion of the Millstone 3 investment is classified as "unuseful."
The Company recently filed an application with the DPU which, if approved by the DpU, would permit the Ccmpany to phase in the fourth of five equal annual l
Installments of the "used and useful" portion of the Company's Millstone 3 l
investment. This would bring the portion of recoverable Millstone 3 earning a cash return to 80 percent.
The Company's rate application also proposes a method to accelerate the fifth and final installment of the Millstone 3 phase-in by using a portion of the revenues expected from The Connecticut Light and Power Company's (CL&p) capacity sales at the NU system's average cost. The Company is able to realize the benefit of a portion of CL&P's capacity sales because of an agreement between the NU system operating subsidiaries that substantially l
oqualizes energy and' capacity costs among the companies. The company is allowed l
to earn a noncash return on the "used and useful" portion of Millstone 3 not j
currently included in rate base. As noncash earnings on Millstone 3 are i
replaced with cash earnings, management believes that the Company's key l
financial ratios should improve and that there is a reasonable possibility that bond and preferred stock ratings will also improve.
Competition / Cost Containment In 1987, an extensive study by NU identified self-generation by large industrial and commercial customers, cogeneration facilities, and competition from other 2-
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utilities for wholesale customers as significant factors posing a threat to NU's existing energy market. At that time, NU identified a potential loss of as much as 20 percent, approximately 750 megawatts (MW), of the NU system's electric load by the early 1990s if it did not immediately address these issues. In response to these competitive forces, management implemented a strategy to mitigate this threat. The strategy includes a marketing plan to enhance customer service and improve energy efficiency, an aggressive cost-management program to hold down electric prices, and working with regulators to reduce the nonresidential-customer subsidies to residential customers provided by current rate design.
Management believes that the cost-containment effort, modest rate design changes allowed by regulators, improvements made in the customer service area, and the 1988 sales of additional capacity have substantially reduced the Company's exposure to load loss. Management estimates that the potential loss of additional NU system baseload sales to competition, if NU achieves its competitive goals, now ranges between 100 and 180 MW in the early 1990s.
Geographical Expansion On January 28, 1988, Public Service of New Hampshire (PSNH) filed a voluntary Chapter 11 petition in the United States Bankruptcy Court in Manchester, New Hampshire. NU management believes that PSNH is a fundamentally sound electric utility that went bankrupt because it was unable to finance its 35.6 percent ownership share of the Seabrook project through the extended delays that the project encountered. Following PSNH's bankruptcy filing, NU announced that it has an interest in acquiring PSNH's operating assets, cxclusive of its interest in Seabrook. NU management believes the acquisition of PSNH would be a logical expansion of the NU system's geographical boundaries, would add a healthy new service territory, and would create long-term strategic advantages for NU's utility business.
NU's existing generating capacity can be made available to supplement the needs of the rapidly expanding bew Hampshire economy whether or not Seabrook 1 operates. While other utilities hase expressed interest in acquiring PSNH, and PSNH has proposed a plan of reorganization that would result in an internal corporate restructuring without an acquisition by a third party, NU management believes the proposed NU-PSNH combination would be the most advantageous outcome for New Hampshire customers.
On January 12, 1989, NU delivered a comprehensive $2 billion proposal to representatives of PSNH.
NU's proposal is designed to remove PSNH from bankruptcy and assure New Hampshire residents a reliable energy supply.
PSNH's ownership in Seabrook would be transferred to a separate New Hampshire company to be owned by existing PSNH unsecured creditors. Through a power purchase contract with the reorganized PSNH, the separate company owning Seabrook would be provided with revenue to support its obligations to the Seabrook project.
Before it can become effective, the proposal must be accepted by PSNH creditors and security holders and approved by the Bankruptcy Court and federal and state regulators. Because of the likelihood of competing offers for PSNH and the uncertainties of the bankruptcy and regulatory processes, NU's acquisition of l
PSNH is not assured.
Construction Program The Company's 1988 construction expenditures of $44.2 million were the lowest since 1980. Following the completion of Millstone 3 in 1986, the construction - _ - _ _ _ _ _ __
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program's focus changed to expenditures for improvements to existing transmission, distribution, and generating facilities. The Company has budgeted more than $15 million over the next six years to improve the reliability of its 1
transmission and distribution system. The Company does not foresee the need to construct, on behalf of its customers, a major new generating f acility until well into the future.
In the 1990's, Millstone 2's steam generators may require replacement and could involve a five-to six-month outage at a cost to the Company of approximately
$30 million, not including the cost of replacement power. Management is attempting to minimize the length of this possible outage by arranging procurement of items with long lead times.
I Projected construction expenditures for the period 1989 through 1993 are l
presented in the following table. The projections include $6.6 million of costs associated with Millstone 2's steam generators.
production Distribution Transmission Facilities Facilities Facilities Other Total (Thousands of Dollars) 1989
$21,683
$26,496
$1,642
$4,047
$53,868 1990 14,663 26,178 2,607 1,426 44,874 1991 9,522 27,576 2,285 1,003 40,386 1992 13,954 31,969 1,977 1,057 48,957 1993 15,346 30,975 495 1,070 47,886 Financing The Company's bonds are rated Baal by Moody's and BBB+ by Standard and Poor's, but management has a goal of seeing that the senior securities progress, over time, to at least a strong "A" rating. Management believes that this is an achievable goal because of higher cash earnings due to the Millstone 3 phase-in allowed in the DPU rate decision. For example, the percentage of cash earnings (earnings excluding AFUDC and the deferred Millstone 3 return) averaged 39.6 percent in the period 1984 through 1988, and this percentage should increase as additional installments of the recoverable investment in Millstone 3 are phased into base rates.
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 the sale of preferred stock.
In addition to construction and nuclear fuel requirements, the Company is obligated to meet maturities and cash sinking-fund requirements totaling $71.8 million for the years 1983 through 1993.
External financing will continue to be necessary to meet total cash requirements, although not at the levels of past years, since projected construction expenditures have been substantially reduced.
The Company issued $148.5 million of first mortgage bonds and preferred stock in 1988. As in recent years, a significant portion of the proceeds from these issues was used to redeem, prior to maturity, high-interest-rate debt to lower the Company's cost of capital. _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ _
6 The Company and CL&P continue to utilize a nuclear fuel trust to finance their '
nuclear fuel requirements for Millstone 1, 2, and 3.
As of December 31, 1988, the Company's portion of the trust's investment in nuclear fuel was
$63.2 million.
The Company's nuclear fuel requirements of $60.1 million for the years 1989 to 1993 are expected to be financed by the trust.
In 1988, the system companies increased available credit facilities and lines by
$12 million, making $400 million available. Available credit facilities and lines include $350 million through a revolving credit agreement with a group of eleven banks. The maximum borrowing limit of the Company under this agreement 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.
At December 31, 1988, the system companies had $146 million of external short-term borrowings.
In 1989, the Company intends to continue redeeming high-interest-rate debt as opportunities arise. Elimination of high-cost debt, or replacement with leser-cost capital, provides opportunities for reducing revenue requirements and improving Company earnings and coverage of fixed charges.
Rate Matters In June 1988, the DPU issued a decision granting the Company an $8.6 million (3.2 percent) annual increase in base revenues of.its requested increase of
$22.5 million.
In its decision, the DPU granted the Company the entire third step of the five-year phase-in of its "used and useful" investment in Millstone 3, bringing the phased-in total to 60 percent, and increased the Company's allowed ROE from 12.5 percent to 12.75 percent.
In December 1988, the Company filed an application with the D?U requesting an increase in annual revenues of $28.3 million, or 9.76 percent.
The need for er increase is driven by a combination of higher costs and the continued phase-in of the Company's investment in Millstone 3.
New Accounting Standard The Financial Accounting Standards Board has issued a new income tax accounting standard which will become effective in 1990. The new accounting standard requires, among other things, that regulated utilities reflect, on their balance sheets, the taxes related to the amount of allowance for funds used during construction (AFUDC), for both the uguity and debt components, not previously depreciated and for which deferred taxes are not provided.
The Company expects that, when the new standard is adopted in 1990, it will increase assets and liabilities by approximately $81 million, but will not have a material effect on net income. ___ ___
RESULTS OF OPERATIONS Operating Revenues Operating revenues increased $19.0 million from 1987 to 1988 and increased
$21.2 million from 1986 to 1987. The components of the change in operating revenues for the past two years are provided in the table on this page.
Increase in Operating Revenues 1988 vs. 1987 1987 vs. 1986 (Millions of Dollars)
Fuel cost recoveries
$ 0.4
$ 2.7 Regulatory decisions 9.7 17.3 Sales and other 8.9 1.2 Total revenue increase
$19.0
$21.2 Revenues related to regulatory decisions increased in 1988 primarily as a result of the continued phase-in of Millstone 3 into rate base and the increased recovery of phase-in deferred Millstone 3 return. The sales increase in 1988 was primarily the result of the continued economic growth in the region and higher cooling and heating requirements in 1988.
Fuel cost recoveries increased in 1987 primarily because of higher kWh sales.
Revenues related to regulatory decisions increased in 1987 primarily as a result of the recovery of nonfuel costs associated with the commercial operation of Millstone 3.
Electric Energy Expenses Electric energy expenses increased $2.5 million in 1987 as compared to 1986.
This increase was primarily the result of greater kWh requirements in 1987 and the matching of revenues and expenses under the provisions of the Company's energy adjustment clause, partially offset by lower cost energy provided by the 1
operation of Millstone 3.
Other Operation and Maintenance Expenses Other operation and maintenance expenses decreased $2.1 million in 1988 as compared to 1987 primarily because of higher sales of capacity in 1988, lower nuclear refueling and maintenance outage expenses in 1988, and the effect of cost-containment measures implemented by management.
Other operation and maintenance expenses increased $19.6 million in 1987 as compared to 1986 primarily because of the first full year of expenses associated I
with the operation of Millstone 3, the amortization of the "unuseful" portion of f
Millstone 3 and the general impact of inflation on most expenses in 1987.
t Depreciation Expenses Depreciation expenses increased $1.8 million in 1988 as compared to 1987 primarily because of greater plant investment and higher decommissioning levels. i
4-Depreciation expenses increased $6.1 million in 1987 as compared to 1986 primarily because of the commercial operation of Millstone 3 in April 1986.
Amortization of Deferred Millstone 3 Return The amortization of deferred Millstone 3 return increased $3.9 million in 1988 as compared to 1987 primarily because of a full year's amortization of Millstone 3 deferred costs in 1988 compared with six months in 1987.
In addition, the DPU allowed the Company to increase the amortization level of deferred Millstone 3 return from 20 percent to 40 percent, effective June 30, 1988.
The amortization of deferred Millstone 3 return increased $2.2 million in 1987 as compared to 1986 because the DPU allowed the Company to begin amortizing 20 percent of the deferred Millstone 3 return, effective June 30, 1987.
Taxes Federal and state income taxes increased $2.3 million in 1988 as compared to l'87 primarily because of higher taxable income, partially offset by a lower statutory tax rate.
Federal and state income taxes decreased $13.7 million in
- 1987 as compared to 1986 because of a decrease in taxable income and a lower effective tax rate in 1987.
Taxes other than income taxes increased $1.9 million in 1988 as compared to 1987 primarily because of higher Connecticut sales taxes in 1988 and higher property taxes associated with the Millstone complex in 1988.
Allowance for Funds Used During Construction and Deferred Millstone 3 Return The deferred return on Millstone 3 decreased $4.5 million in 1988 as compared to 1987 primarily because the Company had an additional portion of its recoverable Millstone 3 investment phased into rate base effective June 30, 1988.
Total debt and equity AFUDC decreased $14.1 million in 1987 as compared to 1986.
This decrease was caused by a lower average construction work in progress Dalance, reflecting the commercial operation of Millstone 3 ir April 1986. Tho deferred return on Millstone 3 increased $5.2 million.
This increase reflected a full year of returns on the phase-in plan in 1987 compared to a partial year in 1986, partially offset by the Company reflecting an additional 20 percent of the recoverable portion of its Millstone 3 investment into rate base effective June 30, 1987.
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Western Massachusetts Electric Company STNTEMENTS OF INCOME For,the Years Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Ope rn t i ng Revenues......................
$303,904
$284,;12
$263,736 Operating Expenses:
Operation-Fuel.................................
46,472 55,207 45,249 Purchased and interchange power, net.
14,234 5,083 12,579 C.her................................
83,521 87,334 77,383 Maintenance...........................
32,222 30,541 23,050 Depreciation..........................
34,669 32,890 26,780 Amortization of deferred Millstone 3 return...............................
6,059 2,171 Federal and ctate income taxes (Note 8).............................
19,774 13,957 27,586 Taxes other than income taxes.........
15,508 13,621 13,120 Total operating expenses...........
252,459 240,804 225,747 Operating Income........................
51,445
_ 44,138 37,989 Other Incomo:
Allowance for other funds used during construction..................
208 20 10,820 Deferred Millstone 3 return - other funds................................
13,180 1G,364 13,132 Equity in earnings of regional nuclear generating companies.........
2,149 2,441 2,766
- other, net............................
553 (620)
(365)
Income taxes - credit.................
6,021 6,222 9,892 Other income, net..........
22,111 24,427 36,245 Income before interest charges.....
73,556 68,565 74,234 Interest Charges; Interest on long-term debt............
34,269 34,070 34,8E0 other interest........................
2,749 3,037 1,621 Allowance for borrowed funds used during construction...............
(994)
(949)
(4,238)
Deferred Millstone 3 return - borrowed funds, net of income taxes...........
(5,933)
(7,212)
(5,233)
Interest charges, net..............
30,091 20,946 27,030 Net Income..............................
$ 43,465
$ 39,619
$ 47,204 The accompanying notes are an integral part of these financial statements.
Western Massachusetts Electric Company.
STATEMENTS OF CASil FLOWS i
For the Years Ended December 31, 1988 1987 1986 l
(Thousands of Dollars) l Cash Flows From Operations:
Net income.........................................
$ 43,465
$ 39,619
$ 47,204 Adjusted for the following:
Depreciation.....................................
30,674 29,993 28,180 Amortization of leased property..................
21,004 22,375 20,763 Deferred income taxes, net.......................
5,460 14,392 19,993 Deferred return - Millstone 3....................
(19,113)
(23,576)
(18,365)
Allowance for other funds used during construction....................................
(208)
(20)
(10,820)
Amortization of deferred Millstone 3 return......
6,059 2,171 Amortization of deferred charges and other noncash items....
3,145 9,112 (8,366)
Changes in working capital:
Receivables and accrued utility revenues.......
(9,310)
(20,309) 1,948 Fu21, materials and supplies...................
(1,807) 80 (125)
Accounts payable......
125 1,608 960 A c c ru e d t ax e s..................................
5,763 586 (4,315)
Other working capital (excludes cash)..........
(1,230) 3,790 (6,654)
Net cash flows from operations.....................
84,027 79,821 70,403 Cash Flows From Financing Activities:
Preferred stock.....
53,500 30,000 Long-term debt...................................
95,000 85,000 Increase in obligations under capital leases.....
16,535 21,586 16,655 Net increase (decrease) in short-term debt.......
(30,000) 6,500 35,500 Reacquisitions and retirements of long-term debt and preferred stock.............................
(82,699)
(14,066)
(64,481)
Premium on reacquisitions and financing expenses.
(7,254)
(562)
(3,801)
Repayment of capital lease obligations...........
(20,092)
(22,484)
(17,818)
Cash dividends on preferred stock................
(10,390)
(8,234)
(8,486)
Cash dividends on common stock...................
(29,880)
(27,552)
(25,268)
Millstone 3 construction trust...................
(24,931)
Net cash flows from financing activities...........
(15,280)
(14,812)
(7,630)
Investment in plant (including capital 1 cases):
Electric utility plant...........................
(44,210)
(45,178)
(60,363)
Nuclear fuel.....................................
(16,872)
(22,822)
(14,341)
(61,082)
(68,000)
(74,704)
Less: Allowance for other funds used during construction.............................
(208)
(20)
(10,820)
Net investment in plant............................
(60,874)
(67,980)
(63,884) ;
i Net Increase (Decrease) In Cash for the Period.....
$ 7,873
$ (2,971)
$ (1,111) '
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized during construction......................
$ 33,189
$ 36,471
$ 31,782 Income taxes (refund)............................
(1,443) 7,510 542 1
The accompanying notes are an integral part of these financial statements.
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Western Massachusetts Electric Company BAIANCE CHEETS At December 31, 1988 1987 (Thousands of Dollars)
Assets Utility Plant, at original cost:
Electric........................................
$1,043,169
$1,003,695 Less: Accumulated provision for depreciation.
260,565 234,595 782,604 769,100 Construction work in progress...................
19,630 18,076 Nuclear fuel, net...............................
64,067 67,038 Total net utility plant......................
866,301 854,214 Other Property and Investments:
Investments in regional nuclear generating companies, at equity...........................
13,802 13,385 Other, at cost..................................
3,865 3,871 17,667 17,256 Current Assets:
Cash and special deposits (Note 4)..............
8,025 152 Receivables, less accumulated provision for
? collectible accounts of $1,327,000 in 1988 ano $1,500,000 in 1987.........................
29,374 27,950 Receivables from affiliated companies...........
30,522 23,085 Accrued utility revenues........................
12,155 11,706
' Fuel, materials and supplies, at average cost...
10,084 8,277 Prepayments and other...........................
6,378 5,346 96,538 76,516 Deferred Charges:
Unamortized debt expense..........
2,169 1,985 Unrecovered spent nuclear fuel disposal costs...
5,036 4,747 Deferred costs - Millstone 3....................
52,730 41,101 l
Amortizable property investment - Millstone 3...
82,369 2,868 Other...........................................
28,996 17,114 171,300 157,815 Total Assets.................................
$1,151,806
$1,105,801 The accompanying notes are an integral part of these financial statements.
ys:
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' Western M' massachusetts Electric Company l
.E BALANCE SHEETS l
At December 31, 1988 1987 (Thousands of Dollars)
Capitalization and Liabilities Capitalization:
Common stock'- $25 par value -: authorized and outstanding 1,072,471 shares in 1988 and 1987....
26,812 26,812 Capital surplus, paid 1n..........................
147,845 149,398
. Retained earnings.................................
105,133 101,938 Total common stockholder's equity..............
279,790 278,148 Cumulative preferred stock -
$100 par.value - authorized 1,000,000 shares; outstanding 350,000 shares in 1988 and 700,000 shares in 1987; $25 par value - authorized 3,600,000 shares at December 31, 1988 and 2,000,000 shares at December 31, 1987; outstanding 3,340,000 shares in 1988 and 1,200,000' shares in 1987.
Not' subject to mandatory redemption (Note 5)..
88,500 35,000 Subject to mandatory redemption (Note 6)......
30,000 63,250 Long-te rm debt, ( Note 7 )...........................
416,925 395,971 Total capitalization...........................
815,215 772,369 Obligations Under Capital Leases....................
50,858 53,830 Current Liabilities:
Notes payable to banks............................
16,000 4,000 Commercial paper..................................
8,000 50,000 Long-term debt and preferred stock - current
-portion..........................................
28,018 1,750 Obligations'under capital leases - current portion..........................................
19,258 20,005 Accounts payable..................................
8,994 14,686 Accounts payable to affiliated companies..........
16,483 10,504 Accrued taxes.....................................
5,763 Accrued interest..................................
7,675 6,555 Other.............................................
3,925 6,080 114,116 113,580 Deferred Credits:
Accumulated deferred income taxes.................
124,514 117,666 Accumulated deferred investment tax credits.......
43,380 45,244 Other.............................................
3,723 3,112 171,617 166,022 Commitments and Contingencies (Note 10)
Total Capitalization and Liabilities...........
$1,151,806
$1,105,801 The accompanying notes are an integral part of these financial statements. _.
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' Western I: massachusetts Electric Company STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
. Capital Common. Surplus, Retained Stock Paid In Earnings (a) Total (Thousands of Dollars) l Balance at January 1, 1986..........
$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)
Preferred stock issuance and^
retirement expenses and premium on reacquired preferred-l stock............................
(1,627)
(1,627)
Balance at December 31, 1986........
26,812 149,777
.98,105 274,694 Net income for 1987...............
39,619 39,619
. Cash dividends on preferred stock.
(8,234)
(8,234)
Cash dividendslon common stock....
(27,552)
(27,552)
Preferred stock issuance expenses, net of: amortization..............
(379)
(379)
Balance at. December 31,.1987........
26,812 149,398 101,938
'278,148 Net income for 1988...............
43,465 43,465 Cash dividends on preferred' stock.
(10,390)
(10,390)
' Cash dividends on common stock....
(29,880)
(29,880)
Preferred' stock issuance and
' retirement expenses, net of L
amortization.....................
(1,553)
(1,553) l Balance at December 31, 1988........
$26,812
$147,845 $105,133
$279,790
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(a)- At December 31, 1988, there was approximately $33,978,000 of retained earnings available for payment of cash dividends on common stock under l'
'the provisions of the Company's First Mortgage Indenture and Deed of Trust.
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-The. accompanying notes are an integral part of these financial statements. _ _
Western Massachusetts Electric Company I
NOTES TO FINANCIAL STATEMENTS 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES General: Western Massachusetts Electric Company (WMECO or the Company),
The Connecticut Light and Power Company (CL&P), and Holyoke Water Power Company (HWP) are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by Northeast Utilities (NU).
Other wholly owned subsidiaries of NU provide substantial support services to the system. Northeast Utilities Service Company supplies centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing, and other services to the system companies. Northeast Nuclear Energy Company acts as agent for system companies in constructing and operating nuclear generating facilities. The Company purchases electricity from Holyoke Power and Electric Company, a wholly owned subsidiary of HWP.
NU also has two subsidiary realty companies, The Rocky River Realty Company and The Quinnehtuk Company.
All transactions among 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 (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 i
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 1,156-megawatt (MW) nuclear generating unit. As of December 31, 1988,.
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS plant-in-service and accumulated depreciation included approximately
$369.7 million and $26.9 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 must pay the United States Department of Energy (DOE) 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), payment may be made anytime prior to the first delivery of spent fuel to the DOE.
At December 31, 1988, fees due to the DOE for the disposal of prior period fuel were approximately $24 million, including interest costs of $8.4 million. As of December 31, 1988, approximately
$19 million had been collected through rates.
Fees for fuel burned after April 7, 1983 are paid to the DOE on a quarterly basis.
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 3.6 percent in 1988, 3.4 percent in 1987, and 3.5 percent in 1986.
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 l-tax) is accounted for in accordance with the racemaking treatment of the l
applicable regulatory commissions.
See Note 8 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 $60 million j
l at December 31, 1988. As allowed under current regulatory practices, i L_
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 1
deferred taxes not previously provided are being collected in customers' rates as such taxes become payable.
In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting. Standards No. 96, " Accounting for Income Taxes" (SFAS 96).
SFAS 96 supersedes previously issued income tax accounting standards and will be effective in 1990. The Company expects that when SFAS 96 is adopted it will increase assets and liabilities by approximately $81 million, but will not have a material effect on net income.
Allowance for Funds Used During Construction ( AFUDC): AFUDC, a noncash item calculated in accordance with FERC guidelines, 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.
The effective AFUDC rates under the gross-of-income tax method for 1988 and 1987 were 8.8 percent and 7.8 percent, respectively. The effective AFUDC rate under the net-of-income tax method for 1986 war 8.7 percent.
Energy Adjustment Clause: As permitted by the DPU, the Company defers the difference between forecasted and actual fuel costs until it is recovered or refunded quarterly under a retail fuel adjustment clause. Massachusetts law requires the establishment of an annual' performance program related to fuel procurement and use.
The program establishes performance standards for plants owned and operated by the Company or plants in which the Company has a life-of-unit contract. Therefore, revenues collected under the Company's retail fuel adjustment clause are subject to refund pending review by the DPU.
To date, there have been no significant adjustments as a result of this program.
Phase-in Plan:
The Company is phasing into rates the recoverable part of its Millstone 3 investment. The plan, as currently designed, is in compliance with Statement of Financial Accounting Standards No. 92,
" Regulated' Enterprises--Accounting for Phase-in Plans." Under the terms of the original rate order, the Company must apply to the DPU for revenue increases sufficient to recover the Millstone 3 installments as they are to be phased in.
On June 30, 1988, the DPU allowed the third of five equal annual installments of the "used and useful" portion of the Company's investment in Millstone 3 to be added to the Company's rate base.
Beginning in 1986, the DPU has permited the Company to recover the portion representing the amount currently determined to be "unuseful" by the DPU
($69.3 million at December 31, 1988), excluding the applicable equity AFUDC, over a ten-year period, without earning a return, on June 30, 1987, q
the Company also began to recover the deferred return, including carrying i
charges, on the recoverable but not yet Fhased-in portion of its investment in Millstone 3.
This recovery will take place over a nine-year period. As of December 31, 1988, $8.2 million of the deferred return, including carrying charges, has been recovered.
l L I
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS At December 31,.1988 $211.9 million (or 60 percent) of the "used and useful" portion of the Company's investment in Millstone 3 was in rate base. This includes the additional 20 percent of the Company's Millstone 3 investment phased into rates during 1988, leaving 40 percent or l
$141.3 million of the company's recoverable Millstone 3 investment for future phase-in.
On December 16, 1988, the Company filed an application with the DPU requesting the fourth annual installment of the phase-in plan to become effective on July 1, 1989.
In addition, the Company has proposed a plan to the DPU which, if adopted, would accelerate the phase-in of the fifth and final-installment to become effective in November 1989.
The plan as proposed would avoid any additional increases in base rates since the Company has recommended that the costs associated with the fifth and final installment of the Millstone 3 phase-in be offset with revenues expected from certain NU system capacity sales arrangements with other New England utilities.
~ 2.
NUCLEAR DECOMMISSIONING A 1987 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 $122.2 million in year-end 1988 dollars.
Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, technology, and inflation.
The Company has established independent decommissioning trusts for its portion of'c' costs of decommissioning Millstone 1, 2, and 3.
As of December 31, 1988, the Company has collected through rates $14.9 million for future decommissioning costs, of which $14.6 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 l
pay the full projected costs of decommissioning.
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 of the nuclear fuel for Millstone 1 and 2 and their share of the nuclear fuel 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, nuclear control room simulators, and office rn t
4 '
Western Massachusetts Electric Company
(
NOTES TO FINANCIAL STATEMENTS 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 1988...............
$24,775,000
$8,259,000 1987...............
25,372,000 8,618,000 l
1986...............
24,439,000 6,090,000 Interest included in capital lease rental payments was $4,795,000 in 1988, $5,091,000 in 1987, and $5,684,000 in 1986.
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 2 sage 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 noncancellable leases as of December 31, 1988 are approximately:
Capital Operating Year Leases Leases (Thousands of Dollars) 1989..............................
70
$ 5,959 1990..............................
36 5,377 1991..............................
36 4,353 1992..............................
36 3,717 1993..............................
36 3,017 After 1993.......................
396 32,571 Future minimum lease payments.....
610
$54,994 Less amount representing interest.
247 Present value of future minimum lease payments for other than nuclear fuel.....................
363 Present value of future nuclear fuel lease payments..............
69,753 Total........................
170,116 4.
SHORT-TERM DEBT The system companies have various credit lines totaling $400 million.
of this amount, $350 million is available to the Company and CL&P through a revolving credit agreement with a group of eleven banks.
The maximum borrowing limit of the Company under the agreement is $105 million. - _ - - _ _ _ _ _ _ _ _ _ _ - _ _ _ _ - _ _ _ _
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS However, since this money is also available to CL&p the amount of borrowing could be lower depending on CL&P's utilization.
The Company may borrow funds on a short-term revolving basis using either fixed rate loans or standby loans. Fixed rates are set using competitive bidding.
Standby loan rates are based upon several alternative variable rates. The company is obligated to pay a facility fee of.1875 percent per annum on its proportionate share of the commitment. At December 31, 1988, the Company had $16 million outstanding under this agreement.
The remaining $50 million is available to the NU system companies through a revolving credit agreement with seven banks.
Under this agreement, the NU system companies can borrow in the aggregate an amount not to exceed $50 million. Loans under this agreement are on a short-term revolving basis in the form of either Eurodollar Loans based on the LIBOR, plus 3/8 of 1 percent, or as Alternative Base Rate Loans at the greater of the prime rate of 1/2 of 1 percent over the Federal Punds Effective Rate.
This agreement will expire on August 25, 1991 unless extended, on an annual basis, for a maximum of four years beyond the expiration of the initial three-year term. At December 31, 1988, the amount of unused borrowing capacity under this agreement was $50 million.
Cash and special deposits at December 31, 1988 included $7,866,000 of restricted funds which were used to redeem a portion of the Company's Series Q bonds in March 1989.
5.
PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption out-j standing are:
December 31, Shares 1988 Outstanding Redemption December 31, December 31, Description Price 1988 1988 1987 1986 (Thousands of Dollars) 9.60% Series A of 1970
$103.99 150,000
$15,000
$15,000
$15,000 7.72% Series B of 1971 103.51 200,000 20,000 20,000 20,000 1988 Adjustable Rate DARTS 25.00 2,140,000 53,500 Total preferred stock not subject to mandatory I
redemption
$88,500
$35,000
$35,000 l
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.
1 j
1 l
1 1
- Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 6.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION l
~
Details of preferred stock subject to mandatory redemption outstanding are:
~
December 31, Shares 1988 Outstanding Redemption December 31, December 31, Description Price 1988 1988 1987 1986 (Thousands of Dollars)
Adjustable Rate Series D of 1983
$35,000
$35,000 7.60% Series of 1987 26.90*
1,200,000 30,000 30,000 30,000 65,000 35,000 Less preferred stock to be redeemed within one your 1,750 Total preferred stock subject to mandatory redemption
$ 30,000
$63,250
$35,000
- Redemption price reduces in future years.
The 7.6% 1987 Series Preferred Stock requires a sinking-fund sufficient to retire a minimum of 60,000 shares (or a maximum of 120,000) at $25 per share each year commencing February 1, 1992.
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 the 7.60%
Series of 1987 may be redeemed by the Company at any time at an established 1
l redemption price plus accrued dividends to the date of redemption except that during the initial five-year redemption period it is subject to certain refunding limitations..
y
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS 7.
LONG-TERM DEBT Details of long-term debt outstanding are:
December 31, 1988 1987 (Thousands of Dollars)
First Mortgage Bonds:
4 3/8% Series E, due 1992...............
$ 8,000
$ 8,000 15
% Series P, due 1994...............
47,398 9 1/4% Series S, due 1995........
60,000 5 3/4% Series F, due 1997...............
15,000 15,000 7 3/8% Series H, due 1998...............
15,000 15,000 6 3/4% Series G, due 1998...............
10,000 10,000 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 11 7/8% Series Q, due 2015...............
24,234 24,500 9 3/4% Series R, due 2016..........
25,000 25,000 10 1/8% Series T, due 2018...............
35,000 Total First Mortgage Bonds.........
307,234 259,898 Intermediate Term Notes:
7.96%-8.27% due 1989-1991...............
60,000 60,000 Pollution Control Notes:
Variable rate, due 2014-2015............
52,400 52,400 5.9%, due 1998..........................
1,883 1,919 Fees and interest due for spent fuel disposal costs..........................
23,997 22,218 Less amounts due within one year.........
28,018 Unamortized premium and discount, net....
(571)
(464)
Long-term debt, net................
$416,925_
$395,971 Long-term debt maturitier and cash sinking-fund requirements on debt outstanding at December 31, 1988 for the years 1989 through 1993 are:
$20,152,000 in each of the years 1989-1991, $8,152,000 in 1992 and
$152,000 in 1993.
In addition, there are annual 1 percent sinking-and improvement-fund requirements, currently amounting to $3,072,000 in each of the years 1989-1992 and $2,992,000 in 1993.
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.
Essentially all of the Company's utility plant is subject to the liens of its first mortgage bond indenture. As of December 31, 1988, the Company Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS I
has secured $52.4 million of pollution control notes with second mortgage liens on Millstone 1, junior to the liens of its first mortgage bond indenture.
i 8.
INCOME TAX EXPENSE i
The components of the federal and state income tax provisions are:
For the Years Ended Decenber 31, 1988 1987 1986 (Thousands.of Dollars)
Current income taxes:
Federal...............................
$ 6,693
$(6,404)
$(4,448)
. State..................................
1,600 (253) 385 Total current.......................
8,293 (6,657)
(4,063)
Deferred income taxes, net:
Investment tax credits.................
(1,952) 6,814 4,580 Federal................................
7,347 10,323 22,793 State..................................
2,196 3,130 3,987 Total deferred......................
7,591 20,267 31,360 Total income tax expense............
$15,884
$13,610
$27,297 The components of total income tax expense are classified as follows:
Income taxes charged to operating
$19,774
$13,957
$27,586 expenses..............................
Income taxes associated with the amortization of deferred Millstone 3 return. borrowed funds...............
(1,597)
Income taxes associated with the allowance for funds.used during construction (AFUDC) and deferred Millstone 3 return - borrowed funds...
3,728 5,875 9,603 Other income taxes -
credit............
(6,021)
(6,222)
(9,892)
Total income tax expense...............
$15,884
$13,610
$27,297
{ - _ _ _ _ _ _ _ _ _ _ _ -
e Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS Deferred income taxes are comprised of the tax effects of timing differences as follows:
For the Years Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Investment tax credits.................
$(1,952)
$ 6,814
$ 4,580 Liberalized depreciation, excluding leased nuclear fuel...................
10,480 11,250 11,913 Construction overheads.................
474 2,388 1,012 Liberalized depreciation on leased nuclear fuel, settlement credits, and disposal costs........................
(1,526)
(1,919)
(1,005)
Decommissioning costs..................
(439)
(20)
(1,061)
Energy adjustment clause...............
1,639 (2,928) 1,658 AFUDC and deferred Millstone 3 return, net...................................
2,131 5,875 9,603 Alternative minimum tax................
(5,065)
Deferred refueling cost..
477 3,289 1,631 Loss on bond redemption................
1,848 Reversal of excess FIT associated with unprotected deferred items............
(2,541)
(833)
Other..................................
(1,152)
(432) 3,02_9 Deferred income taxes, net...........
$ 7,591
$20,267
$31,360 _ _ - -. - - - _ _ _ _ - _ _ - - _ _ - _ _ - _ _ _ _
~
Western Massachusetts Electric Company i
NOTES T0' FINANCIAL STATEMENTS The effective income tax rate is computed by dividing total income tax l
expense by the sum of such taxes and net income. The differences between i
the effective rate and the federal statutory income tax rate are:
For the Years Ended December 31, 1988 1987 1986 Federal statutory income tax rate.......
.34.00%
39.95%
46.00%
Tax effect of differences:
Depreciation differences..............
3.69 1.61 3.86 Other funds portion of AFUDC not recognized as income for tax purposes.............................
(.12)
(.01)
(6.68) l Deferred Millstone 3 return -
other funds.........................
(7.55)
(12.28)
(8.11)
Amortization of deferred Millstone 3 return - other funds.................
2.57 1.21 Construction overheads - portion not deferred.............................
(.04)
Investment tax credit amortization....
(3.29)
(3.00)
(1.82)
State income taxes, net of federal benefit..............................
4.27 3.15 3.17 Reversal of' excess FIT associated with unprotected deferred items...........
(4.29)
(1.56)
- Other, net.~...........................
(2.52)
(3.46)
.22 Effective income tax rate...............
26.76%
25.57 %
36.64%
9.
RETIREMENT PLAN The Company participates in a uniform noncontributory defined benefit retirement plan covering all regular NU system employees. Benefits are based on years of service and employees' compensation during the last five years of employment.
The company has adopted the provisions of Statement of Financial Accounting Standards No. 87, " Employers' Accounting for Pensions,"
(SFAS 87) effective January 1, 1987. As required by SFAS 87, the actuarial cost method was changed from the entry age normal method to the projected unit credit method.
It is the policy of the Company to fund annually an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.
Pension costs are determined using market-related values of pension assets.
I pension assets are invested primarily in equity securities, bonds, and insurance contracts.
l Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS The components of net pension cost for the NU system are:
For the Years Ended December 31, 1988 1987 (Thousands of Dollars)
Service cost
$31,893
$ 32,812 i
Interest cost 59,715 54,318 Return on plan assets (84,825)
(36,811)
Net amortization 10,431 (31,161) j Net pension cost
$17,214
$ 19,158 The Company's allocated portion of the system's pension cost, part of which was charged to utility plant, approximated $20,000 in 1988, $400,000 in 1987, and $2,600,000 in 1986.
For calculating pension cost the following assumptions were used:
For the Years Ended December 31, 1988 1987 Discount rate 9.5%
8.5%
Expected long-term rate of return 9.7 9.7 Compensation / progression rate 8.5 7.5 l
The following table represents the plan's funded status reconciled to the NU consolidated balance sheet:
j For the Years Ended December 31, 1988 1987 (Thousands of Dollars)
Accumulated benefit obligation, including $386,618,000 of vested benefits at December 31, 1988 and $358,957,000 at December 31, 1987
$419,781
$397,549 Projected benefit obligation 694,315 664,338 Less: Market value of plan assets 768,001 701,462 l
Projected benefit obligation surplus 73,686 37,124 Unrecognized transition amount (34,233)
(36,259)
Unrecognized net gain (67,259)
(16,387)
Accrued pension (11 ability)
$(27,806)
$(15,522) l l-l l
The following actuarial assumptions were used in calculating the plan's year-end funded status:
For the Years Ended December 31, 1988 1987 Discount rate 9.5%
9.5%
Compensation / progression rate 8.5 8.5% l
(
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS In addition to pension benefits, the company provides certain health care and life insurance benefits to retired employees. The cost of providing those benefits was approximately $1,360,000 in 1988, $929,000 in 1987, and $910,000 in 1986. The Company recognizes health care benefits primarily as incurred and provides for life insurance benefits through premiums paid to an insurance company.
10.
COMMITMENTS AND CONTINGENCIES Construction Program: The construction program is subject to periodic review 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 $236 nillion for the years 1989-1993, including $53.9 million for 1989.
In addition, the system companies estimate that nuclear fuel requirements will be $60.1 million for the years 1989-1993, including
$5.1 million for 1989.
Corrosion, pitting, and denting of tubes within steam generator assemblies have been problems found at numerous nuclear units.
These problems were first identified at Millstone 2 in a 1977 outage, and since then the unit's steam generator system has been the subject of regular inspections and repairs.
In light of the repairs that have been required, it may become necessary to replace Millstone 2's steam generators during the mid-1990's.
Commitments are being made to procure spare steam generator subassemblies.
If a steam generator replacement becomes necessary, an outage of five to six months could be involved.
The cost of the replacement (excluding replacement power costs), to WMECO, could be approximately $28.5 million.
Hydro-Quebec: Along with various New England utilities, NU has entered into agreements to finance and construct additional transmission and terminal facilities (Phase II) to import electricity from the Hydro-Quebec system in Canada. The Phase II project is currently estimated to cost approximately $565 million of which approximately $270 million had been expended or committed as of December 31, 1988.
These facilities, which are scheduled to be completed in the fall of 1990, would increase the capability of the Hydro-Quebec interconnection to 2,000 MW.
Upon completion of Phase II, NU is expected to have an equity ownership approximating $41 million in the Phase II facilities.
Under the terms of the Phase II equity agreement, NU will be required to guarantee the obligations of other participants that have lower credit ratings and NU will receive compensation for such guarantees. Under the terms of the Phase II contract WMECO is entitled to receive 3.83 percent of the energy transmitted by the Phase II facilities.
Nuclear Insurance Contingencies:
On August 22, 1988, an extension of the Price-Anderson Act (Act) through August 1, 2002 was signed, revising nuclear liability indemnification.
The revised Act limits public liability. _. _ _ _ - -
L Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS from a single incident at a nuclear power plant to $7.6 billion. The first
$160 million of liability would be provided by purchasing the maximum amount of commercially available insurance. Additional coverage of up to
$7.1 billion would be provided by an assessment of $63 million per incident, levied on each of the 113 nuclear units currently licensed to operate in the United States, subject to a maximum assessment of
$10 million per incident per nuclear unit in any year.
In addition, if the sum of all public liability claims and legal costs arising from any nuclear incident exceeds the maximum amount of financial protection, each reactor operator can be assessed an additional 5 percent, up to $3.2 million. The maximum assessment is to be adjusted at least every five years to reflect inflationary changes. Based on WMECO's ownership interest in the three Millstone units, its maximum liability would be $33.2 million per incident.
In addition, through WMECO's power purchase contracts with the four Yankee regional nuclear electric generating companies, it would be responsible for up to an additional $14.6 million per incident.
payments for WMECO's ownership interest in nuclear generating facilities would be limited to a maximum of $7.2 million per incident per year.
Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover:
(a) certain extra costs incurred in obtaining replacement power during a prolonged accidental outage with respect to WMECO'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 lossca arising during current policy years are approximately $2.2 million under the replacement power policies and $2.6 million under the property damage and decontamination policies. Although the Company has purchased the limits of coverage currently available from the conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds.
In addition, insurance has been purchased from American Nuclear Insurers / Mutual Atomic Energy Liability Underwriters, aggregating
$160 million on an industry basis for coverage of worker claims.
All companies insured under this coverage are subject to retrospective assessments of $2.7 million per reactor. The maximum potential assessments against the Company with respect to losses arising during the current policy period are approximately $1.9 million.
Financing Arrangements for the Regional Nuclear Generating Companies: The owners of CY, including the Company, have guaranteed their pro rata shares of $29.4 million 17 percent Series A Debentures. The guarantee of the Company is $2.9 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 guarantee of the Company is $1 million.
i -___-________ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _
Western Massachusetts Electric Company NOTES TO FINANCIAL STATEMENTS The owners of MY, including the Company, have guaranteed their pro rata shares of MY's obligations under a $50 million nuclear fuel loan agreement. The guarantee of the Company 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.
11.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE On January 12, 1989, NU made an offer to purchase the non-Seabrook assets of Public Service Company of New Hampshire (PSNH).
Under the terms of the offer, PSNH would become a New Hampshire-regulated operating subsidiary of NU.
PSNH's 35.6-percent share of the Seabrook nuclear power plant would be spun off into a separate company owned by PSNH's existing unsecured creditors and security holders.
NU's New Hampshire subsidiary would contract to buy the power for as long as the plant operates.
The offer values PSNH's non-Seabrook assets at $1.2 billion. New financing will be provided to pay off PSNH's first, third-and general and refunding mortgage bonds, except $100 million of pollution control revenue bonds which will be assumed. The interest in the new Seabrook company would be worth approximately $750 million, based on the power purchase contract NU has proposed for its new New Hampshire subsidiary.
i The offer is subject to approval by the United States Bankruptcy Court, PSNH'c creditors and security holders, and federal and state regulatory authorities.
Approval of this offer is not assured.
b Western Massachusetts Electric Company Report of Independent Public Accountants To the Board of Directors of Western Massachusetts Electric Company:
We have audited the balance sheets of Western Massachusetts Electric Company (a Massachusetts corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1988 and 1987, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1988. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Massachusetts Electric Company as of December 31, 1988 and 1987, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Hartford, Connecticut February 24, 1989 l
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Western Massachusetts Electric Company SELECTED FINANCIAL DATA Years Ended December 31, 1988 1987 1986 1985 1984 (Thousands of Dollars)
Operating Revenues..........
$303,904 $ 284,942 $263,736 $277,820 $274,296 Operating Income............
51,445 44,138 37,989 41,431 43,011 Net Income..................
43,465 39,619 47,204 54,635 48,290 Total Assets................
1,151,806 1,105,801 1,052,981 995,782 891,360 Long-Term Debt *.............
444,943 395,971 408,915 396,968 336,386 Preferred Stock Subject to Mandatory Redemption *......
30,000 65,000 35,000 50,000 50,000 Obligations Under Capital Leases *....................
70,116 73,835 74,915 75,701 71,440
- Includes portions due within one year.
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended 1988 March 31 June 30 September 30 December 31 (Thousands of Dollars)
Operating Revenues..........
$ 81,987
$ 68,114 L '7 5,768
$ 78,035 Operating Income............
$ 17,005
$ 9,754
$ 14,366
$ 10,320 Net Income..................
$ 14,911
$ 8,722
$ 11,168
$ 8,664 1987 Operating Revenues..........
$ 76,838
$ 62,533
$ 70,279
$ 75,292 Operating Income............
$ 12,775
$ 8,574
$ 8,819
$ 13,970 Net Income..................
$ 12,645
} 8,461
$ 6,815
$ 11,698 _
O Western Massachusetts Electric Company STATISTICS Gross Utility Plant Average December 31, Annual Electric (Thousands of kWh Sales Residential Customers Employees Dollars)
(Millions) kWh Use (Average)
(December 31,)
1988
$1,126,866 3,753 7,853 187,145 840 1987 1,088,809 3,625 7,584 183,538 871 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 a
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A 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 Disbursing Agent and Registrar The Connecticut Bank and Trust Company, N. A., Stock Transfer Department One Constitution Plaza, Hartford, Connecticut 06115 1989 Dividend Payment Dates 9.60% Series A March 1, June 1, September 1 and December 1 l
7.72% Series B January 1, April 1, July 1 and October 1 7.60% Series l
February 1, May 1, August 1 and November 1 I
DARTS
- January 4, February 22, April 11, May 31, July 18, September 6, October 24 and December 12 l
l Address General Correspondence in Care of:
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Northeast Utilities Service Company Investor Relations Department P.O. Box 270 Hartford, Connecticut 06141-0270 Tel. (203) 665-5000 l
l General Office l
174 Brush h.ll Avenue, West Springfield, Massachusetts, 01090-0010 l
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- Transfer and Paying Agent:
Bankers Trust Company, Corporate Trust and Agency Group P.O. Box 318, Church Street Station, New York, New York 10015 The data contained in this Report is submitted for the sole purpose of providing information to present stockholders about the Company.. _..
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NORTHEAST UTILITIES THE CONNECTICUT LIGHT AND POWER COMPANY WESTER:4 MASSACHUSETTS ELECTRIC COMPANY HOLYOKE WATER POWER COMPANY NORTHEAST UTILITIES SERVICE COMPANY NORTHEAST NUCLEAR ENERGY COMPANY