ML19327A999

United Illuminating Co 1988 Annual Rept.

ML19327A999
Person / Time
Site:	Seabrook
Issue date:	12/31/1988
From:	Geoffrey Edwards UNITED ILLUMINATING CO.
To:
Shared Package
ML19327A998	List: ML19327A997 ML19327A999 ML19327B001 ML19327B002 ML19327B004 ML19327B006 ML19327B008 ML19327B009 ML19327B010 ML19327B019
References
NUDOCS 8910240171
Download: ML19327A999 (58)

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O g. -;- Q> ' r FINANCIAL HIGNCNTS - .l t

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. Operatong Revenues (000) ; 5 518.938 'S 497.623

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, NetIncome (000) . . , S 78.639' ':5 ' 8.649 - - i Earnings per Share of Common Stock

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$ V outstanding)

Before etlect of SFAS No.'9C - 'S 7.22 S' ' $ 99 y After effect of SFAS No. 90 S' 4.85 S'- ' t.24) ' \

... Jb Dividends Declaredper Share of Common :

, &(. Stock .S 2.32 . 'S~ ' 2.32

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Utshty Plant (000)'. . S1,834.271. 5 1,718.300, l,

Saks of Energy-KWH(000) , 5.292,157. 5.125.019; 7

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TotalCustomers '

307.237 ~ 303,794 i Average ResidentialUse--KWH - 6.804 6.662 m

, , Peak Load- KW t,132.100 : 1,039.600. l

(. Numberof Employees ~ 1,620 1,604' 2' <

' Number of Common Shareowners 26.713 28.167 ll Note:Financialdata for 1987 have been restated to rettect the implementation of SFAS .

No. 90, a new accounting standard covering plant abandonments and desatow.

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ances and SFAS No. 96. the new standardpertaining to accountsng for encome ,

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The UnitedIlluminating Company Is an operating electric public utshty company, incorporatedin 1899. It is engaged pnncipallyin the production, s

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n purchase, transmission, distribution and sale of electricoty for residential, ;

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, commercialandindustrialpurposes in a service area of about 335 square

'w? miles in the southwestem'part of the State of Connecticut. The population of

.' this area is approximately 712,000, or 22 percent of the population of the :

L State.

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,, UIhas three wholly owned subsidiaries. Bndgeport Electric Company, .

a single purpose corporation, owns andleases to UIa coal fired generating .

unit at Bridgeport Harbor Station. Research Center, Inc., has been fortrid to I participate in the developme'11 of one or more power production vr.ntures. Y 1

United Resources, Inc., serves as the parent corporation for I'i's nonutihty businesses, each of which willcomplement and enhance. UI's electric utihty .  ;

business and serve theinterests of the Company antists shareowners and j ,_ customors. Three wholly owned subsidiaries of Urated Resources, Inc. have l

, been incorporated: Souwestcon Properties, Inc.; Thctmal Energies. Inc.;

and, Precision Power, Inc.

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As 1908 began,^ we understood that the measure of United Illuminating's success during the year would be determined by;

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l, ?c the degree to which we achieved notable progress in two a?eas of pnmaryimportance.

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. . One area envolved UI's desire to broaden the scope of its products and services beyor'd those tradstoonally.

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encompassed byits core electric business. Much of this offort would originate from a strategy of greater utthtation ot i demand.sioe and conservation programs, which would at once provide customers with increased service options and 4

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. also I;elp UI manage its growing electric demand without being forced to embark on any new capital intensive generating .

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station building progects; u

i- I y The second area involved the Seabrook nuclearpowerplant. From the outset.1988 was perceived to be a l l

, 7 determinative year for Seabrook. Ourprimary concem was that any significantnew roadblocks to commercialoperation

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could result in an erosion of.*bpport among some of the key entities involved with the project. It was clear that for Seabrook ,

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A f, to remain a viable project, the nnancial community needed to see some positive signals:

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Gased on a number of positive developments in both of these crucialareas, it gives us great pleasure to be sble t,) report that UI's 1988 can bejudged an outstanding success. In the finalanalysis. out 1968 success was significant >

not only forits financialrewards andpositive Seabrook developments but also forits importance in helping to shape some o<

, 01the pathways to ourpreferred future.

t l 'Of course, we must view the year's achievements through the perspective of our continuing success in

operating the Core electric business etlectively. Our sales were up again this year, 3.3 percent above 1987's recordlevels.

. Our region, again. enjoyed widespread economic prospenty with suffocient diversification to suggest contir ved growth for t! the foreseeable future.

I a For the seventh consecuti 'e year, UI ranked among the most elficient electric utihties in the nation, jumping l

b< ~ from eighth to fifth most elficient among the 100 largest investor. owned utikties.

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In addition, havong reduced our dependency on oil for electricity generation from 94 percent in 1984 to h+

' 37 percentin 1968. UI can now boast one of the most balanced and diversified fuelmixes of any utiktyin the Northeast.

n' f As notedin a report prepared by the Connecticut Department of Public Utahty Control. UI's levelof service

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. reliabihtyis exceptionalandis indicative of the premium the Company places on customer satisfaction.

7 V The strength of the bond between customers and Company was underkned by a recent customer opinion ll Fs j

j. survey which gave UI's quahty of service a truly remarkable 99 percent favorable rating. an outstanding achievement for )

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% any utthly, anywhere. i i

In essence, the combined strengths of a well run. offociently operated core electnc business, whsch has i b j eamed the conhdence and respect of our customers and a strong regionaleconomy provided us with opportunities in ..

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< 1988 to pursue some new initiatives to broaden our totaloperations. We have moved very cautiously. always mindful that

. any new venture must have a synergistic relationship with our core business. Each endeavor must both show promise of 1

ennancing eamings and contribute to greater customer satisfaction.

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,a l Some or our promising new mark ting ventures are Gscussedin the body of this report. Mostinvolve demand sode and conservation programs geared towardproviding customers with greater controlover how and to what extentthey use electncity and thereby esor sse greater controlover their costs. Greater control, maximum servoce and

. . increased options add up to greater VALUE- and that is what we are dedicated to providing our customers.

We beheve that all of our new ventures have helped position UI to respond effectively to future challenges.

There is no question that UI, along with all other utohties, is expenencing increasedlevels of competition from other energy supphers andindependent power producers. Givsn this altered environmentin the energy marketplace, a business as.

Usualmode of operations, essentiaRy falling back on old solutions to aadress new problems and opportunities, wtII not serve the best interests of UI's customers or shareowners. By aggressively adopting change and redirecting some of our resources. UIis shaping its own preferred future.

However, no single project or strategic direction me!ches the immediate importance of Seabrook to UI's destiny, By the very size of our investment in the plant, andits importance to the region's energy suppry, Seabrock stands at the heart of atourplans. Therefore, the senes of positive Seabrook developments that marked the end of 1988 were welcomed by all who have fought tirelessly for the plant's operation.

Two issues dominated the Seabrook scene during the year. One was the discontinuance by Massachusetts Municipal Wholesale Electric Company (MMWEC) of payment ofits share of Seabrook costs, and the other was the contirwed regulatory delay over of1 site emergency response planning issues.

By year end, the MMWEC problem was nearing resolution. Alter a penod of time in which numerous attema.

live options were explored for covering MMWEC's payments. a long term solution was designed. The project s fargest owner, Pubhc Service Company of New Hampshire (PSNH), has agreed to assume MMWEC's payments. This arrange-ment, when formally approve d, should cover MMWEC's financialobhgations to the project until the plant's commercial operation, thus assuring Seabrook continued stronc financialbacking.

The second issue. r& volving arou'od the refusal by the Commonwealth of Massachusetts to participate in \

emergency response planning. also moved much closer to successfulresolution by the close of the year.

A 1987 Nuclear Regulatory Commission (NRC) rule change cleared the way for approvalof plans which had J

already be..n prepared by the Seabrook owners for the six Massachusetts towns within a tO-mile radius of the plant and i submitted to the NRC for federalreviewin Iseu of state developedplans. A'though the NRC rule change was challengedin .

l Court by vanous nuclear energy opponents, that challenge was densed by a unanimous decision d the U.S Circurt Court of Appeals in Boston on September 6.1988.

Even with the NRC rule change, two major regulatory obstacles remained. While the rule change permitted New Hampshire Yankee to submit emergency response plans in lieu of state developed plans, state officials could stII '

s refJse lo participate In rehearsals of those plans. Thus, il Could be argued by Seabrook opponents that the NRC could not find "rensnnable ntsurance" that adeouato cratectrve measuren wnuld he tnken in the event nf nn nctant ornercencv The second potentialobstacle was that certain elements of any plan require exercise of the police power, which is vested only j rn nm ernrmay #

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-[ 1his situation cras cleam*tically altered c! hen In mid November. President Ronald Reagan signed an Esecu-

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t a q3[ twe Order allowing the federal govemment to participate detectly In the emergency response planning andimplementation n .i

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'yl  ; process ' By requinng the Federal Emergency Management Agency to develop and Implement emergeticy response gg, '

. , ,.g ,,,a;, = plans. Using the resources of the federal government and volunteer assistance from non governmentalpersonnet, when; g_n (W

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' ever state and local governments fail to prepare plans satisfactory to the NRC, this Order elfectively ehminated the s

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" reasonable assurance" stumbh' ng block. Moreover, the Executive Orderauthonzes the exercise of federalpohce power 5:n c

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- on the absence of state participation.. J n

Both of these developments should signihcantly espedite the full power hcensing process. In fact, a heanng:

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,. schedule on remaining emurgencyplanning issues has been announced commencing March 2I.1989 ' . c j

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f . x For many years, we have remained conhdent of Seabrook's eventualoperapon. Our conhdence has never -

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' 'been stronger. As stated earlier. we felt 1988 wou'd be the determina0ve par for Seabrook. We think It'wnr; allmapr ~ N

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decisions and events both directly andIndirectly affechng the project favored ourposikon. Now, after a long and arduous :i (pq vM road we can see a successful endin sight.

O , , Mamng an otherwise outstanding par was the necessity to write 00wn the value of our nuclear plantinvest.

- ments by a totalof $207 milhon afterincome taxes. These non cash wnte ofis stem mainly from delays in bcensing

' ' ' Seabrook. The wnte offs underscore the importance of the greatprogress made in 1988 toward operation of Seabrook. an V 'i . event which willmark the end of the trernendous Cost of ECensing delays,

Fsnally. a good dealof the credit for the success enjoyed by the Company this past year can be attributed to UIs top notch management team andIts I 600 talented employees, who understand and have responded to our corpo.

rate mission ofincreasing the value of our shareholders' investment. Our workforce is singlemindedly dedicated to officient  ?

' operabon and maximum customer service.

' In closing. we would also hke to thank you, our shareowners, for pur continued goodwill and trust. %ur loyalty

and support have been essential to our persevering through many Seabrook irustratons and our etfort to redirect tne Company's vision to account for new market reahties. Your conhdence inspires each and every one of us here to work to

'( make UnitedIlluminating the best run electnc utihtyon Amenca

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ooorge w. Edwards. .Ir. Richardt orossi CI'a rman of tne a0ard and President and Choef operavg ort.cer ,

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George W. Edwards. Jr. Rochard J. Grosst

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EXECUTitfE MANAGEMENT James F Crowe RobertL hscus Seno +ce pres cent Enocut we v ce P'es> cent anc Meser.ng Cnoe* Fona'sc e Or6cer Roland W Comstock Sensor Vee presroent Corporate AHairs N ,

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George W Edwards.Jr Rochard J. Grossi C%irme c' rne Boe': and President a~d Che'E re:orme Once' Cnie' Operat ~g Once-l l

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. j!NANCIAL REVIEW '

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,\ Most decisions related to corporate finance and accounting have far reaching n

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. umpacts on customers and shareowners. For that reason, both in the formulation N.'

of our hnancialpohcies and on our deahngs with regulators. UIis committed to

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<ost . On hnding and maintaining a fair balance between reasonable rates and appropn. 3 !*

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%. y ,j ate retums. On both scores.1988 was a very good year for UI. *  ;

aesie Eamings for the year, excluding accounting wnte otts 'were $7.22 X** *

• per share, an all time high. These earnings reflect higher kilowatt hour sales. -

1 3.3 percent above 1987, increased capacitygales, lower income taxes, and the ,;

absence in 1988 of additional depreciation and other non cash che rges recorded againstincomein 1987.

We also did very well with our equity retums, which compare favor. i if ably with those of the industry Excluding the ellects of accounting write ofis, ..,

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the return for 1988 was 15.5 percent. The retum including the write ofis was

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14.5 percent. However, due to the continuing delayin the operation of Sea. Y brook, non cash Allowance for Funds Used Dunng Construcbon (AFUDC) con. I

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tinues to represent a large portion of reported eamings and returns, about (,

76percentin 1988.

Cash flow for 1988 was S5.24 per share, which represents the net cash flow from operating act:vities less preferred stock dividends.

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Proceeds from out 1987 financing program, coupled with 1988 i' . . . . .

internal cash generation and $12 million of proceeds from a sale andleaseback arrangement, satisfied our financing needs for the first three quarters of the year. \

In mid October, we sold publicly $ 150 million of seven year debentures at an  !

I enterest rate offust over 105 percent The combination of our revolving credit l tacihbes andproceeds from this debenture issue willprovide us with opportuni-bes over the next year or so to continue ourprogram of reducing capitalcosts.

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'J A.VH sa'es In Marctt UIriducsd th2 value orits nuclear pla*1tinvestmsnt by g?-

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recording a non cash, after tax S172 million charge to ea'ntr1gs. which we ,

t elected to record by restating the financialresults for 1984 through 1987. the

, ytars when the write t,rtis would have teen recorded had the present account-3 l[.l[] ong rules been an cliect. Those wnte offs reflected the effects of the regulatory y treatment of our recovery of Millstone Unit 3 and the cancelled Seabrook Unit 2

' u es n si oo' investments, as we0 as the etfect of the ConnecticutIcg stative " cap' on the e %su

. e ciec e. cost of Seabrook Unit 1, assuming a January 1989 operation date.

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l' In addition, an September, the Company reco'ded a further non.

Cash wnte ofIagainst currentincome of approximately S35 million, net of relats d Cash Facs'per Scare income tax effects, to recognize a probable addstronal delayin the commercial operation date of Seabrook Unit 1 to atIcast July 1,1989. As a result of this >

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write off, earnings per share for 1988 were reduced to S4.85. ,

9 1988 marked the fourth consecutive year that UI dvd not seek a rate a 00 increase. In fact, our rates at the end oflast year were more than 10 percent N below the levelapproved at the end of 1984. Our exceptional success in con-

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.c,,m , oe,.,v., straining rate increases has been achieved through consistently excellent oper. ,

acwes ,eis cew~ :

L ****' ation of our generating units and other operating etfaciencies. as well as through increased sales and reduced capitalcosts.

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'_ t y; ^ A ' RECORD 4REAKING DEMANOS,  ;.  ; UIs heatratetstyear distribubon systems of the state s!

$ l ' ; RECORD SETTING PERFORMA CE l was 9.849.'the bestin the Company's ' major electric utshtaes. the DPUC - ~

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l There are se&eral tandards by. ' history The lower the heat rate, the ' found that "... itis evident thnt UI'has -

? 4, c which an electnc utikty company's more e!!acientis the overalgenerat. consistently andconscientiously n4 1 0 -

, performancein operatingits system ing and dehvery System., idenbloed service rehabthly as a prime can be measured. Mostcompanies Currently. UIranks h!!h corporate responsibikty "

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seek 'to achieve ratings in most cate. most elfacient among the 100 largest '

The DPUC also noted '

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l. ' gories that fallwithin acceptable investor owned utihties, up from that "sattsfactory rehabikty does not ;

<' industry standards.  ; eighth the year before. We has e been '

joSt happen, it required a continuing UIdoesn't. rankedin the top 10 tot seven con. andunflagging commitment on the

• UIsinves tb be atornear secubve years. Performance Sve this partof the utshtyprovider. Ihe Author-1 i ttie topin each and every category. does notjustoccu'byitself. Itis ity beheves UIis dedicated to main.

In fact. our Company wide employee predicated on totaldedicahon to eth. taining thatcommitment towardits

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program. Performance Plus, pro- ciency and a uninedteam approach, customers."

f videsincentives for aR UIpersonnel UIniso achieved Another key audience to perform at the highestlevels of elfi- extremely procuctive system genera- has noticed our commitment to serv-E ,

) ciency andproductivity bon with a net output of 6,486.324 ice reliabihty; our customers. A recent a

f a We strive to be the best kilowatt houts of electricity Our customer opinion survey gave UIs f ' forone reason-out customers. capacity factor of 62.6 percent also reliabihty of servsce a superb 99 pet.

b Operating oursystem ethciently and compared favorably toindustry cent favorable rating. That rating was produchvelyresultsin substantial standards weII eamed, as oursystem was savings to our customers and in addition, our service tested to the extremein 1988 by a s

assures V:em of top notch service reliabihty continues to be exceptional. senes of severe weatherpattems

're:liabahty Together, these add up to In 19BE, we attained a distnbution which led to new winter and summer better value for every energy dollar availaoihtyindex of 99.98 percent. demandpeaks I

7 spent. UI's 1 education to reliabihty of service On December 12, I988,

}i In 1987, UIcompiled the has been noted by a number of key UIset a new winter high for demand I 1

9 best generating efficiency and most at diences, including the Connecticut onoursystemof 930.9 megawatts productive generabon performance Department of Pubhc Ubbty Control. Unhke utthries in northem New inits history Its 1988 performance initsinvestigation of the England. UIis a summerpeaking was even moreimpressive a dequacy of the transmission and company On August IS. the finalday s i

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commotment to maontairung and oper. . New Engung desper. ' benetot. the OPUC has given the >' ,

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, e ating Its generatoon. transmission and ' ste!y needs the 1,150megewetts of Company the latitude to trade Phase 2 ' ,

a j ,/ E distributron systems to the highest ' power thet Seabrook represents. ~ power for othkr cap 0 City better '

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With everypassing day, the need for suitedtoits system as systemneeds ;

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j people who maintainit. If the commitL prows more acute. , UIconfonved to make - s "i

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. commitment and the performance ' ' to.energyplantin Bndgeport went Q. 4 -

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were there andour customers sntocommerCialoper0 tion, AN into the future, and at teesonable

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%* 'L' benefited. megawatts are dispatChedthrough prices. Our Commitment to this wi0 ,

A The seCondpoint UI's System and added to the Continue its 1989 and beyond. l l

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.h needs. However, the SI!vation was Company hat always maintained that s

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MULilPLYING CUS10MLR OPTIONS Natnor a' market resea'Ch data suggests that customer attitudes toward electroC servr;* go far beyond kilowatt hour p' Ce Consideratnons, inCressongly Consumers are equally or even more conc emed w,th ussues suCh as Quality of severCe.

ServtCe, Convenience, Courtesy. and advoCe and counsel.

Further surveys andrCate that for utshty Customers. " Cost Control" means more thanjust savong money It encompasses a desire to eserCise greater personalControl and Choice over how electnCityis used EarberIn this report, UIs obl eCrive to provideits Custome's value added energy servrces was noted Berng able to provide Customers greater Control and Cho Ce over how they use electhCity by offenng them expanded options ts precise!y how UI def i nes yhtue added energy related servrCes. ,

For starters. this means oevoting as mvCh Care and attentron to managrng relationships }

with our Customers as has traditional *y been spentmanagong our hardware. Before Customer programs

[ koChi ICt Can be suCCessfut, solid relatronships must be formed. r C ,s.

saep tm.e This means bstening to Customers, Carefu!Iy and regular *y. UI employs numerous techniques to coot w oge l vnderstand what is on its Customers' minds, anCluding Conducting regular Customer opinion surveys, participa ting in sery:Ce Clubs and other Civic and Community oriented orgardatoons, entenng ir n business and pohtsCalfrums, and 2

putting Corporate executives intJ dareCl ContaCl with 'sur Customer base k

i in the finalana'ys:s, we bsten so that we Can team:les'n whs' our Customers want and team what they need b This Information as then used to Create prog'ams that make sense to both them and the Company To that end, the UI Board of OtteClors appropriated $6 milhon in 1989 for the developmant and promotuon of demand svoe programs targeted at both business and residentia' Customers.

For our CommercialandIndustnalCustomers, we are marketing technologies such as Coolstorage, which is a practoCa! way for some businesses to Control air Condstroning Costs by 5 hefting ClectnCaluse to off peak hours A number of forms. including the Fusco Corporation, which is completing the seCond phase of the Mantime Center commerCra!Comptex on New Haven's waterfront. U.S SurgrCat and Buck's Ice Cream, as wen as the owners of the Enteronse II offoCe buildung on Shelton, are incorporating Coolstorage technologies to reduce energy Costs substantially UI benefits by be<ng able to maH be!!Or, more profitable use ofIts most efficient generating capaCaty

[ UIhas also Introduced a program to enhst the use of customer owned standby generators to suppiesnent the l

h Company's peak 60ad generating resources Owners of standby units are provrded economic Incentoves to use their emergency generating $ystems when requested by UI.

The standby generation program has worked very wvH nn ConjunCtoon with our Interruptible load program to save Customers money and reduce our peak loads. With the interruptible program, UI enters into arrangements with industnalCustomers by whtCh we Can reovest that they reduce their electroCatConsumption dunng penods ofIntense system demand In retum, Customers gain redvCtions on therr eleCtnCal demand Charges

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UIhas also set about espending D involvement on the commerCtalenergy market, Thermal Energoes. Inc..$ ,

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, subsiduary of the Compeny, wo soon be buddong and operat:ng a heating and Coohng center in dowr town New Ha vett m

. . 'wh*ch we ful'y satisfy the heating and Cookng needs of a large commercialoffrce complex and a ne w city hat.

, ,, y y 3 Our plans cat for buildung more heating and coobng centers, as they wt0 altw us to broaden the energy

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prodvCts we offet and provtoe annovativt Qays to reshape demand on out tieCtroC system.

[ Wre also Committed to helping our residenbal customers expand theor energy optoons through ConstrVatton

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.i~ ', and demand sode programs. Ognng 1988, we launched our Gt,od Cen!$ umbrella program, which promotes energy

,, t efftCiency on new residences and buildings. ,

A major component of this comprehensive unitiative is our Good Cents Home project. The objecove of the home project is to Induce budders in our temtory to sncorporate cost elfective, energy efficient technologies and buniding 3

. praCpces onto new home Construchon.

Constructoon of ourInitial Good Conts modelhome began last Fat. The home is being constructed under Uf's

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. direction by students from an area vocaponal technscalhigh schooland has received considerabit supportive medua and .

, state andlocalgovernment attenbort The New Haven Home Butiders Association has lentits support, and enterest on the

.} . programis growing rapidly.

' _ Another key feature of Good Cents as the promotion of high etfociency apphances, parbcularly heating and :

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Cochng appliances, in new Construction. Ihis sophiskcsted equipment can provide customers substantta!!y greater control

. over energy costs andcse.

The Companyis also demonstrating in real terms its concem for the safety and health ofits customers through i!S "Ught the Noght" resident'aland commercsaloutdoor security hghting program. "Ught the Night," whrch promotes the use of hrgh trlfociency bghts. exceeded Its target goals for the year by a consoderable amount.

Ul also bekeyes that atfording its Customers anCreased options sometimes means Involvement in bustness and economic programs outside those directly related to energy selvsCes andprodvCts. Therefore, wt are actsvely invo*ved on economic development offorts to help spur area busoness acpysty The Company's highly successful Business Retenkon ar d Erpanston Program. begun tn 1987, moved into two new municcahties. Ansonia and Hamden. last year.

This program strerugthens the bonds between local governments and business communtbes. leading to mutually benefscialeconomic initiatives. The Business Retention arud Expansion Program also provodes UI with another means of gethng close to sts customers and acquinng a better knowledge of the various markets for our products and 1-servates.

. By placing itself at the forefront of regonalofforts to promote conservatron and wise and effocrent energy use.

UIas also demonstrating its resolve to play a leading role on omplementing state energy pohcy That resolve oncludes a Commitment to the Continuance of sChve dialogues with state regulators and elected offoCla!s for the purpose of shaptng a balanced and Constructove state energy policy that serves the long term best enterests of consumers and nrovones

- expandedopportunstres toImprove companyprofitabihty.

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, hMCNNG OUf 10 %M energy. but alsoin nahonalindustry with the many(sues related to the CORCRCUNITats . competition against la$ other ens. care of aging relapves.

? 1he verynature of Uls business doc. ' bes. UIplans to extend the SCAT

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Our socialcommstment s:, tates thatit develop a unique relabon. approach to conservation throughout 0150 includes support of area educa.

shop with the communitres at serves. . ots entire service temtory pon. Our educatnonalprogram efforts

~ Company and customers are bound 1988 marked a record- on behalf of 21 schoolsystems were together bymutunt dependence and breaking par for contributnons to honored dunng the year when the a rehance on each others weH being. Operation Fuel, a matching contnbu. prestigious Laure' Award, presented

. At UI we neverforget toon fund whichpruvudes energy by the Connec0 cut Govemor's ourobhgation tolosterandpreserve assistance to housrholds not quab. CoJncRon Voluntary Actron. wa5 this relationship. For us,itmeans bed under other energyprograms. Ul bestowedon VI Besodes UI's contin.

much more thanjust s* Lng electncity andIts Cystomers Combined contnb. ving energy education programs for

~itineans being a goodand uted $ t 19,261, approximately 810 classes kondergarten through 12th responsible neighbor. Most of al.ot percentincrease over 1987's hgure. grade, participakon in specialproj.

means caring; Caring about the hyts in a coordinatedeffort eCts such bus Black History Month 9

andneeds of ourcustomers. wuth the Boy Scouts of Amenca, VI and Project Govemmenthighhphted i Some of thatcanngas assistedin the 1988 " Scouting ix Company efforts on behalf of quakty

. demonstratedbyowquahtyservice Food Drive," which collected a phe- educationin our service temtory.

andthe varnous programs and nomenel44 tons of cannedgoods for UIa!so recognizes the energyoptrons we develop to give food banks. The Company also dem, umportant contnbutions that the pet.

Our customers more controlover their onstratedits canng throughits con. 16tmong arts and culturalprograms

,. energy use. And some of the canng knued support of the United Way In make toward enhancing the oughty of .\

is shown tnrough our offorts to bs a 1968. corporate and emplope son, blein southwestem Connectcut.

good corporats cipten. tnbutons totalled 5227,030. So won - Prominent among UI's attivreesin Nowhere was UIs cor. Orchestratedas the UIvifortinIts th:s area on 1969 was the supportIt potate citetenship anymore in evo Westem D: vision, that United Way rendered for the expansion of the donce during 1988 than on tts has usedat as an example ofhow to Barnum Museum on Bndgeport. UIos conbnued administrapon of the organite a corporate driveproperly alsorepresentedon the goveming f

nabonallyrecognized Southem Another wayin which UI boardof the nabonallyrenowned Connecticut Acton Team Program carries outIts commitmentto social Shubert Theaterin New Haven.

(SCAT). SCATis a pubhc. private responsiDiblyis by employingits The management and partnersnip which provides state manyperson to person contacts e nployees of UItake pndein their funds for the weathentapon of qualt- throuphout the region to bring people participation in community programs.

tyang households. together forimportant causes. For This parbcipation stems from a Ul, as the onlyprivate example,in inBB UIorganized a deeplyheldconvoction that a busi.

organizationinvolvedin SCATS Community Outreach Seminarfor ness andits employees are responsi-ble for contnbuting to the socrat,

[ administration, developed the pro- over 100 socialwork professionals, gramin 1991. Since then over 500 covenng topics such as helping the culturaland economic welfare of the l.

dwelkngs have been weathented. poor, the elderly and the disabled communities they serve.

SCAThas won awards not only from obtain assistance. The Company also 1he state and federaldepartments of co-sponsored a program that dealt l

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NURIUNING OUR RELATIONSHIPS The responstbolity for nurturing and maintarnong relationships with a company $

constituents does not rest solely with any one department or area, butis shared in varyong cegrees by an departments and aH employees Nevertheless, for relatoonships to be developed to the fullest extent possible and to remain rele-vant to an organ:tation's strategic dwection, one group must be responsible for translating the company's operationalphilosophyinto a purposefulpublic affairs

' initiative.

At UI. this lesponsibittyis discharged by the Corporate Atfairs sec-toon. The two primary objectives of this function are:

1. To develop a responsible and responsive relationship with its vanous pubircs, including customers, regulators, business community, thoughtleaders andmedia. *[!

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g. To monitor and address govemmentinitiatives on the federal, Utvoc v?aors \ 'y protecwg erros*>er 8 4 C&$ M et state andlocallevels that couldpotentiallyimpact Company ;_ or,r,,,m .

interests. .

As judged against these objectives. UI enjoyed abundant success in 1998. Severalprojects stood out as models for others within the industry.'

1998 was the first fullyear of operation of the Company's ambitious servtce club program. UI currently has membership in nearly 80 of the civic and professionalorganizations in its service temtory. This participation a!!ows UI employees, and therefore the Company, to gain a clearer understanding of the issues most affecting our service area communities. andit also serves as an ellective vehicle for communicattng CompanypositOns to keymembers of the a'ea business andprofessionalcommunttres.

UI's Speakers Dureau completed another banner year. Oddressing t30 organizations and over $.000 persons on various Company and energy-related topics. Uke the service club program. the Speakers Bureau presenta-trons provide forums for frank and usefulInformatron interchange between UI employees and the p :bhc.

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• Company representatives also continunRy monitor ac'ivatos t s on the '

y u state level, particularly with regard to the state legislature and key regulatory

a. entrties. Most notable amcng its 1980 achievements was UI's role in helping to .

C, convince legislators that a proposed biR conceming Seabrook would have a n 4

. negative offect on the Company,its customers andits shareowners, and should '

t not be adopted, in addition, UI also maintained a signahcant presence in Wash.

, ington, 00, during 1988, pnncipaRy for the purpose of protecting its Seabrook

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Finally, there is an old truism often repeatedin govemment corcles !

that the world belongs to those who show up and are wiHing to work hard. UI

< beGe ves in that philosophy, not only in govemment, but in al of its operations and commitments. To manage one's own destiny, a company has to be involved on a personal, face to face levelin aR aspects ofits business, both intemaland extemal. UImanegement andits emploptes are personaMyinvcked with cus.

tomers. the financial community, shareowisers, elected officials. tegulators and OR other parties that comprise Its sphere of operations and influence. That In Ven)en proVI wl an eKCG.Nnt INO. De future prWises lo be eVen

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'O Aobert t Fascus  !

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l ' tin +Vi AM suMMAkV O! 5ELEC1LO DNANCIAL ANO $1AGTIC AL DATA

$H, 1998 1987 1986 newerr.noursome(00ol Residenhal 1,870,318 1,700,333 1,700,3L,.,

Commercial 2,174,200 2.046.289 1,914.889 Industnal 1,186,336 1,236,1$1 1,232.209 Other 61,303 $2,i46 $$,$33 Total $.292,157 $.125,019 4.912.933 nnoncialnoeulte(000)

Sales of electncoty-Residenbal 5 200,170 $ 188.740 $ 178,368 Commercoal 208.801 ' 195.972 180.888 Industral 96,665 100.354 99.939 Other 9,732 9,400 9,516 Otheroperabng revenues 3,$70 3,077 2.508 Totaloperating revenues $18,938 497,623 471,119 Operabng expenses, excluding income tax expense 360,998 361,586 333,651 Income tax expense (credit) 44,045 $0.633 $1,419 AMowance for funds used dunng construcbon 75.656 81,419 78.044 Net effecto!SFAS No. 90(a) (32,914) (86,528) (69.785)

Otherincome 24,093 - 26,282 28.290 Interestcharges 102.091 97,928 90,833 Netincome(a) 78,639 8,649 31,765 Preferred and preference stock dividends 11,348 11,953 18,969 Income appkcable to common stock (a) $ 67.291 $ (3.304) $ 12.796 Capitalisetion(000)

Long-term debt 5 865.954 5 796,226 5 680.215 Preferredandpreference stock Notsubjecttomandatoryredempton 70,000 70,000 70.000' Subjectto mandatoryredempbon 34,000 40.000 63,000 Common stock equity (a) 473,674 438,564 476,108 Total $1,443.628 $1.344,790 $1,289.32',

Common Stock Number of shares outstanding at year end 13,887,748 13,887,748 13,886,566 Average number of shares outstanding 13,887,748 13,887,654 13,827,431 Eamings pershare(b)

Before effectof SFAS No. 90 $7,22 $5.99 $5 97 After offectof SFAS No. 90 $4.85 $(.24) 5.93 Dividenos declaredpershare $2.32 52.32 S2.32 Book value per share (a) 534.11 531.58 $34.29 Sharnowners-Total 26,713 28,157 29.888 In Connecbcut 12,482 13,265 14,008 In Company territory 7.827 8,301 9.282 General Peakload-kRowatts 1,132,100 1.039.600 985,710 Generating capabihty at year end-kilowatts (c) 1,256.710 1,240,500 1,239,530 Numberofcustomers 307,237 303,794 298.484 Kolowatt hours perresidentialcustomer 6,804 6,562 6,356 Numberofemployees 1,620 1,604 1,S76 TotalpayroII(000) $ 62,387 $ 57,207 5 52,782 Totaltaxes (000)(a) $ 66,714 $ 33,224 5 38,724 Uchtyp,' ant at year end(000)(a) $1,834.271 $ 1,718.300 $1,681,986 Gross property add 100ns(000) 5 159,391 $ 154,672 5 194,168 Totalassets at year end(000)(a) 52,365.063 $2,178.002 $2,15S.251 ta) Data lor I986 and IQSr flave been restated to reRect the unplementanon of sFAs No 96, the new standardpertaitung to accounting for ecome taxes.

Data for 1984 through 198r have been restated to reflect the amplementatron of sFAs No 90, a new accountmg standard covenng p:ent abandonments and disasowances l tb) Earrungs per share based on the average number of shares outstandmg tcp Represents masunum cependable net k>ad.cairymg abdity dureg the wmterpenod for New England Power Poolpurposes mcludeg ul$ share of capacrty

? m Connecticut Yanare Atomoc Power company ($$.7r0 Kw).

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.y 1,654,591 1,642,564 1,637,581  ;

1,593,054 1,611.212 1,660,353 1,677,431 1,010,192 1,729.027 1,657,518 1.578 433 1,551,228 1,568,638 1,565.380 ,

1,286.402 1,314.328 1,255,824 1,2',c.942 ' 1,315,172 1,415.214 1,467,969 68,064 11,998 71,085 69,935 ' 70,299 70,813 69,971 4.819 249 4,757,917 4.622.008 1,475,164 4.647,911 4.115.078 4.780.751

$ 190.800 $ 185.209 5 166,350 $ 161,237 $ 164,595 5 133,763 $ 104,512 192,658 187,112 163,458 156,902 157,386 122,904 94,400 118,637 '124,118 107,724 106,788 117,624 98,303 15.316 10,367 10 664 9,771 9,652 9,613 7,697 6.330 2,394 2,367 2,283 2,151 1,804 1,455 1,320

$14,936 $09,470 449.586 436,730 451,022 364.122 281.878 368,260 400,773 356,300 353,070 386,279 328.253 238,60$

62,047 44,371 37,746 31,810 22,454 (387) 4.963 62.623 $7,242 52,407 40,349 28,113 21,555 15.$01 ,

3,400 (19,889) - <- - - -

29,75$ 19,083 13,981 8,595 9,040 710 1,102 77,402 52,351 41,345 35,039 29.904 30,055 25,245 103,00$ 68.411 80,503 65,755 49,538 34,466 29.668 20.339 16,883 14.084 14.084 12,351 9.296 5,744 S ,82.666 $ $1,528 5 66.419 5 51,671 $ 37,187 5 25,170 5 23.924 5 668,31$ $ 571,403 5 394.115 5 373,015 5 303,648 5 295,581 5 251,976 70,000 . 70,000 70,000 70,000 70,000 70,000 70,000 96.000 99.000 65.000 65.000 65.000 4$.000 15.000 493 261 434,030 408,331 319,720 262,190 222,861 186,326

$1,327,576 5 1,174,433 $ 937,446 5 827,735 5 700.846 $ 633,442 5 523 302 A

" 13,720.050 13.429,443 12,972.344 10,693,605 9, n 54,578 1,660,132 6,090,448 13,623,093 13,213,526 11,708,570 9.579,312 8,775,667 7,061,241 6,072,725

$5.82 $5.41 $5.67 $5.39 $4.24 $3.56 $3.94

$6.07 53.90 - - - - -

$2.08 ' $2.30 53.08 $2.92 52,76 52.68 $2.62

$35.95 532.32 $31.48 $29.90 $28.64 529.09 $30.59

'35,426 38,848 41,067 39,213 37,868 36,447 34.554 15,606 16,774 17,862 17,7S0 17,765 18.372 18,439 13.539 13.742 13,439 11.815 12,456 12.155 2 0.056 1,019,980 998,910 969.500 951,700 949,100 971,100 915.300 1,197,150 1,229,440 1,235,850 1,235,850 1,281,050 1,299,360 1,299,360 294.320 290,$91 287.370 284,586 282,890 280,800 278.523 6,265 6,293 6,336 6.213 6.312 6 54S 6.664 1,501 1,559 1,569 1.517 1,514 1,481 1,460

$ 49,150 $ 46,911 5 44,114 5 40,310 $ 35,581 5 31,653 $ 28,405 5 86,038 5 62,122 5 66,300 $ 64,319 $ 54,$10 5 34,777 $ 32,424

$1,555,883 $ 1,385,672 5 1,274,477 5 1,080,810 $ 922.734 5 830,034 5 764.651

$ 179,$28 $ 210,378 5 197,412 $ 167,924 5 115,540 $ 98,413 $ 86,643

$1,638,519 5 1,466,704 5 1,179,409 5 982.852 5 836,f08 $ 739,027 5 666,387 1

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, WMCEW$ oiscUS$10% AND ANausts or attemate fundmg arrangement of MMWEC's share of monthly FsNANCM COCTION AND 9t$UUS Of OPtRAflONS protectCosts. However, there Can be no assurance that any ..

l' svCh efforts would be sucCtss101. In any event, as a result c hkjor sntivenees en vinential Condition the delayin tesolving emergency tesponse plan ossues. the

, The Company's pnmary hnencialConcem ts the ynitis notHely to achieve Commercialoperatnon before ,luly 1, eChievemer]!Of commercialoperation status for Seabrook Unit 1999, ano the Company's share of the cost of this unitis 1 and more partsCulatty obtaining a Connecticut Oceartment enpected to increase by approximately $9 mint >n per month n

, of Pubhc Utohty Control (OPUC) rate decision that win permit a the intenm.

return on, and recovery of, UI $ investmentin this unit. The Company s hnencial condition is influenced by both {

Themajo!portton of the Company's Constru' ~*'npV the sGe and the cost of bnancing i*s sculmulatedInvestment gram consists of participatron in the construcborn .arook in the cortstructron of Seabrook Unit 1. To the extent that this +

Unit 1 in Seabrook, New Hampshire, a nuclear unitin which snvestmentis notinc!vded on rate bas 0. Cash recovery appbcs. ,

the Company has a 17,$% ownership share. At December 31, ble to the investment is kmited to the income tax benefits of i 1988, alter accounting for the wnte down of $265 minon due construc00n. However, from pn eamings standpoint, the cost r to the adoption of SFAS 90, the Company had unvested $78I of knancing construc* on balar ces as o!!s et by a non cash minon on the $tabrook unit (exClyding nucleat k%! andinclud* Credit to allowance for funds used dunny construcDon.

ing $329 minon in snowance for funds used durMQ construc Connecticutlaw prohibitt the onclusron of revenues i tron). While construction of the unitis complete and a 40 par associated with hnancing construction work on progress  !

condittonaloperating bcense has been received from the (CWIP)in rates, escept en the Case of Seabrook Unit t, whero l Nucleat Regulatory Commission (NRC), the snabihty to resolve inclusion is amited to companies that have expenenced, or issues related to the development of of1 site ernargency would experience, " negative cash flow" without such reve. ,

response plans ct'ntonves 80 olevent the unit from achieving nues. In addition, a condotion of the inclusion in rates of Sea.

commercialoperctron status. Pnmar0y as a result of the delay brook Unit 1 CWIP revenues is that an amount equal to the l in resolvong emergency responst plan issues, Pubbc Service CWIP revenues be escluded from rates after the Unitis in serv.

• Company of New Hampshire (PSNH), whoch holds the largest ice for a penod of time equalto the time the CWIP revenues ownersbrp interest in the Seabrook project, has had to seek had been in rates. Pursuant to this provision, as of December ,

protecpon under Chapter 11 of the Bankruptcy Code: and the 31,1988 the OPUC has snowed the Company to coIIect  ;

Campany cannotpredict at this time whatimpact these bank- approximately $ 133 milhon in CWIP revenues associated with ruptcyproceedings wiB have on the operating hcense pro- its investmentin Seabrook Unit 1. j credings for the Unit. Morecever on.fune 1,1989, The amount of the Company's investmentin Seabroo i Massachusetts Municipal Who'esale Electnc Company Unit 1 which can be includedin rates is currently hmited to its .?

(MMWEC). which holds an 11.59% ownership interest, share of the 54.7 bilhon cost " cap" estabbshed by Connecbcut i adopted a plan to withdraw from the project and ceased legislation andregulation. Although certain costincreases are  ;

monthly payments. After that date, the shortfatin monthly pay excepted from this cost hmit and the Company has hied a i ments was made up by a comb, nation of MMWEC's prepay- court appeal with respect to the hmit, any costs exceeding the i ments, payments by Northeast Utthties in retum for capacity estabbshed hmit may be unrecos etable. Furthermore, the I sales and withdrawals from project cash balances and Company's invcstmentin the Seabrook unitis the subject of a i advances by otherparticipsnts in antuc: patron of thei'nple- OPUC prxeeding relative to an audit of the construchon man-mentabon of the agreemer'I between PSNH and MMWEC agement of the Seabrook project and, under Connecticutlaw. i descnbed below. Under this agreement, such v.ithdrawalt a phase in to rates of the investmentin Seabrook Unit 1 over a and advances willbe reimbursed out of funds to be 01vanced period of tome wiR be required. Othor Connecticutlegislation  :

o for MMWEC by PSNH. On November 1,1956. PSNH and requires the OPUC to determine the appropriate levelof gen- l MMWEC disclosed that they had reached an agreementpur- erating reserve capacity for a utthtyprosecuting a rate pro-l svant to which MMWEC wiu continue to participate on the proi- ceeding and to exclude trom the utthty's rates the costs i ect. The agreementincludes a provtsson pursuant to whrch associated with any excess capacity

PSNH willadvance funds in an aggregate amount not exceed-  ;

ing $30 mahon to pay MMNEC's share of monthly project costs Liquidity and CapitalResources i from November 30,1968 until commercialoperation or cancel- At the beginning of 1998, the Company had $25 milhon  !

L latron of Seabrook Unit 1. This agreement, which is subject to of cash and temporary cash investments Ovnng 1968, operat.

obtaining regulatory and bankruptcy court approvals, was ing act,vities provided cash amounung to $41 milhon, alter divi. <

Q ided with the court on February 3,1969 Ifitis not approvs d, UI dendpayments; and extemal hnancing, alter ossuance  ;

and other Seabrook participants will endeavor to arrange an expenses, provided cash amounting to 5183 milhon. Of these j resources $84 mdiron was invested in plant and $10$ milhon was used to rebte long term debt and redeem preferred stock, leaving a cash and temporary cash investment balance amounting to $60 milhon at December 31,1988 i

i

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. The Company has a $13 mnon revolvong credit ogree. On October 13,1988, $1$0 m60n pnncipalamount of '

n.

ment wrth a group of banks that extends to December 31, 10s% Debentures,1995 Senes, due October 1,1995 were ,

1989. Trus agreement affords the barks an opportunity to issued and sokt to en underwnter at 99.87$% of principal '

dec6ne to lend fands of any one of aeseralcondrkons os not . value. The notproceeds of the saae of the Orbentures is being .

[i> , ~ ,) ' sabshed at the date of a requested borrowong. The condstens used n part for generalcorporate purposes.

i l

l include the absence of any occurrence wheCh has Cavsed the Dunng 1988, the Company formed several subsidiery  ;

[' Company's management to beheve that fuc-power operakon compennes for the purpose of enterung onto nonuchty. power-  ;

' of Seabrook Urut 1 wdnotbepermrtted of that commercial related business ventures whoch wd complement and i operaten wd not be actnesed dunng 1989. . enhance its electnc ut*ty business and sent the enterests of h y The Company also has an agreement, wtucit has not the Company and its shareholders and customers. The Deec

\ been UMae:f to date, to 508 to the banks involsedin the revolv. tors of the Company have authonted the investment of up to

\- ing credet agreement up to $40 moon ofits accounts receiva. l

$ 10 meon in one or more subsidiary or atMated corporatens j

, ble. 7tus agreement also entends to December 31,1989, and for ttus purpose.

Y sales of receivables are subject to $stostachon of the same j

cond tons as borrowongs under the revolving credit naeune of operetiens  ;

i. agreement. Eamings per share for 1988, before giving effect to 'l i, The Company has a sale and lesseback arrangement changes arising kom the adophon of a change on an account-  ;

with a knancialinstituten providong for nuclear fuelhnancing ing pnnciple related to accounting for abandonments and dos t up to 510 m&on Sor Seabrook Una 1 and up to $10 mnon for nnowances ofplant costs of regulated enterprises (SFAS No. t V Mastone Unit 3. Under this arrangement, the Companyis pay' 90), were $1.22 per share, an increase of $1.23 over 1987. j ing rent for the Mestone Unit 3 fuelbased on the direct costs to Ttus increase was due principaMy to higher kilowatt hout sales, i the lessor of the fuel, plus the lessor's hnencing Costs. In addi lugher Capacity sales, Jower income taxes and the absence of 'I f ton, a fuelreserve and supply agreement wQh the same finan* addikonaldepreciation and other non Cash Charges recorded I CialInstitut ott provides for hnancing fosse fuelpurchases up to in 1gg7, an aggregate of $ 13$ m6on. less the outstanding nuclear fact

.{

Eamings per share for 1988, aflet the adophon of SFAS lease obhgatons. At December 31,1988, approximately 575 l No. 90, increased $$ 09 hom 1987. This increase reflects, in  ;

mnon of nuclear fueland $15 mnon of fossH fuelpurchases. addobon to the above factors, non< ash, not.of tax wette offs of i including cost, were being hnanced under thes e arrange' $87 meon in 1987 and $33 m60n in 1988, representing i ments. The term of this agreement extends to May 31,1989. amounts by which the Company's investinentin Seabrook Unit i On Apr029,1987, the Company enteredinto a lease wrih the 1 was projected to exceed the ConnechCut statutory " Cap" on b same hnancialinstituten provoding *or the hnancing of the $2.9 recoverable costs of the Unit, t

&* m#on purchase price of realproperty on which the Company Eamongs per share for 1987 increased shghtly from plans to construct a service center fackty. On September 26, 1986, before adopton of SFAS No. 90, due primanly to l t

1988, the Company enteredinto a revolving Credit agreement improved operating ethClencies, higher kilowatt hour sales wah the same hnancialinstitution. This revolving credit agree- {

and a reduchon in preferred stock dividends as a result of the  ;

rnent enables the Company to borrow up to $4$ m600, unt0 Company's program to redeem and refinance high cost secu-June 30,1989, for generalcorporate purposes and within an l

ntres. These positive enmings factors were in large part offset k oggregate $ 13$ mbon bma for at outstanding financing obE' by additonaldepreciation and other non cash charges attnb. I gattons to the hnancialinstituton. The financialinstituhon may utable to stipulatod eamangs agreerr.ents which were deChne to lend funds under the revolving Credit agretment d {

designed to bring the Company's rate of return on cornmon any ont of stvetalCondipons is not satisfied at the time of a j stock equity to a levelcomparable to othii electnc uphbes

' requested borrowing. The Company and the financialinstitv- withoutimpachng the Company's cash flow.

tion have also agreed that the Company's borrowing Capacity Earrungs per share for 1987, after ths adopton of SFAS under the revolvang Credit agreement wdlincrease from $45 No, 90, gecypespg $ p.17 from 1986. This deCressa reflects, In in6on to $75 moon, and the aggregate outstanding hnancing addibon to the above factors, non Cash, net of tax Wnte= offs of obhgator ns hmt! wtHIncreast from $13$ inhon to $165 milhon, If $87 mnon in 1987 and $70 minon in 1986. The 1986 write off a stipulation for set!Iement satisfactory to the financialinstilu is althbutable to disallowed Costs of Millstone Unit 3 and the tion is schreved with respect to Seabrook related rate. making restatement of 1986 results to reflect the reduction of recovers-issues. ble Costs of Seabrook Unit 1 due to the Connecticut statutory On May 19,1988. the Company concluded a $13 6 mil- cap" kon sale andleaseback arrangement with a Credit Corporshon involving the sale andleasebaCk of six of the Company's fuel ct! storage tanks at New Haven Harbor Staten and Bndgeport Harbor Station (BHS). Under the arrangement $16 mnon as being used by UI to repair two of the tanks at BHS, and the remain <ng $ 12 mnon was used for construcpon program requirements and the funding of maturing debt payments and secursbes redempt ons.

Fae uwo m mar,as coms, ear st ]

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Mowatt hour sales br 1988 and 1987 were up 3 3% Otherincome and deductions. excluding the allowance and 4.3% respecovely,0verpnorpers, renechng omproved for envity funos usong dunng construction oncreased on 1988 Commercial activity and hogher resioenbal use.

Que to higher enterest encome an a result of higher average , "

Operahng revenues for 1985 and 1987 increased by balances in temporary Cash investments in 1987, there wa.

521.3 moon and 526 $ mAon, respecbvely, over the pnor decrease kom 1986. Que to reducedinterest income resulting Wars, due to higher sales volume and higher fossifueland kom lower everage balances n temporary cash onvtstments energy costs which were passed on to customers through the and the Copletron of special deposits for construction as pay.

t loss Ifueladjustment clause. ments were made for the Seabrook Unit 1 project. The 198i i Fueland enterchange energy espense in 1988 Decrease also rehected misceHaneous income deductions

[ encreased over 1987, due pnmanly to higher knowatt, hour associated with McreasedpubIrc educstron on enargy assues

! sales. Higher energy costs br 1988 also resulted from F ur. and governmentalrelations expenses and amortization of the V chases ofpower generatedby a regronalwaste ouming facH. premium paid to reacquire high cost secuntres I ity of the Connecucut Resources Recovery Authonty Fueland Other Interest charges oncreased on 1988 over the coon.

onterchange energy expense in 1987 increased over 1996, parable 1987penod, due pnmarily to the amortitation of

l. due pnmanly to higher kilowatt hour sales, which more than redempbon premiums. Other enterest charges for 198i

offset the benehts of conhnuung operating ethciencies and increased over 1986, due pnmar0y to the wnte off of expenses y oncreasednuclear generatton, associated with 1987 kng term debtissues b accordance

l. Other opersbon and maintenance expens es increased with the stpulated eamings agreements. The oncrease more j in 1988 over 1987, due pnncipa0y to hrgherpayrolcosts. than ofIset the offect on notinterest charges of an oncrease in l Other opera 00n and maintenance expense increased in 1987 the snowance for bortowed funds used dunng construction.

over 1986, due principaHy to higher insurance, pensoon and Ovioends on preferred andpreference stock payroR costs. decreasedin 1988 by $60$ thousand andin 1987 by 5i minton j Depreciation espense decreasedin 1988 from 1987, as a result of redemptions. These redemptions were moce as due pnmarily to the absence h 1988 of the addskonal depre. part of the Company's program of rehnancong high cost secu.

ciabon for Mollstone Unit 3 recordedin 1987 as a result of stpu. tities atlowerrates.

lated eamings agreements approved by the DPUC. Th's addiDonal depreciation accounted for the increase in 198i Outlook depreciabon expense over 1986. The Company's hnancialcondition is most heavo!yinfiv-

Mcomc tax expense decreasedin 1988 from 1987, due enced by the cost of carrying its investmentin the Seabrook pnmanly to a decrease on the federalincome tax rate and to tax Unit 1 nuclear unit, a burden that wia continue untd recovery "

i. benehis resulung from amortzat on of premiums paid on bond thisinvestmentthroughratescommences. Theoccurrence O purchases associated with long term rehnanc'ngs that more and hming of commercial operation, important elements in than of! set the increase b taxable income due to higher sales determining the rate treatment for the unit, continue to be volume. These same factors also resultedin the decrease in dependent on the accomphshment of necessary remaining 1987 income tax expense from 1996. Ircensing steps that are largely bepnd the Company's control.

Other taxes increased in 1988 over !987 as a result of especiaMy the tomely and successfulresolution of current dith.

higher property taxes, higher sales and use taxes, and an culties b secunng approvals of ofI site emergency response oncreats on Connect. cut gross eamings tax attnbutable to olans. While tnere have been severalrecent positrve develop-higherrevenues. ments, the Companyit unable to predictif and when the oh.

The allowance for equity funds used danng construction site emergency response plan issue will be resolved, since it as decreasedin 1998 from 1987, due pnmanly to tho reduced expected that this issue wiu continue to be contested vigor.

AFUOC rate and lower CWIP balances in 1988 resultag from ously by opponents of Seabrook Unit 1.1 Joe can the Company 5fAS No. 90 wnte downs. The anowance for equrty funds predoct what ompact the proceedings under the Bankruptcy used during construchon decreasedin 1987 from 1986, due to Code by PSNH, the lack of certainty regarding MMWEC's the incorpotabon in the allowance calculabon of a lower rate of conbnued participation in the Seabrook project, or the hnanc.

retum on common equityin accordance with the sbpulated ing problems of otherparbcipants willhave on the operahng eamings agreement. Scense proceedings for the Unit. A lengthy delayin achieving l

commercialoperation will add substantially to the tonal cost of the Unit and the delay could result in cancellation of the Unit. In the event canceMation of the unit were to occur, it would have serious effects on the Company, and the Company's hnancoal ,

viability would be dependent upon the rate treatment a!!Orded i its investmentin the unit by the OPUC. ,

\

l j

i 1

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y .-

a soos veo.>e per she e Ove to changes on accounting rules soopted by the Fonancoal Accotanting Standards Board iFASB), the Company recorded non cash wnte.otts of $206 mobon, net of apphcable

en' i g" '

oncome taxes, in 1969. These wnte ofis consisted of $ 165 mil.

) g. hon on account of the Seabrook Unit 1 statutory "cso"hmita.

l~

.... . tron, S9 minon on account of the canceGed Seabrook Unit 2.

" and $12 molhon for the partialdisallowance of Millstone Unit 3 10 cons. :hese v:nte otts, an and of thernselves, had no effect on se the Cornpany's current cash flow and we not effectIts pay, l

i

,o ment of current Common Stock dividends. II. due to prudence y audit and or excess capacity disaHowances, or due to any Other reason, the Companyis not anowed to recoverits share

.." " " ' ' ".... of the Seabrook Unit 1 cost " cap", or of the in servoce date of this unit is deland beyond.luly 1,1989, the Company wo be caooretut,on neton requoted to recognize a further wnte ott against income as soon as the amount of the desallowance becomes probable

g '

and can be reasonauy estimated. The Company estimates that a further postponement of the operatron date would

. . . . . require additionalnon-cash wnte offs of approximately $6 mil.

" kon, net of relatedincome tax effects, for each month of delay.

The Company we attempt to obtain a decision on the W' rate treatment of Seabrook Unit 1 byIts commercialoperation da!O. The Companypresently expects to propose a rate treet.

n ment that wminclude a phase in plan for Seabrook Unit 1 that is within the three to ten year phase in periodprescnbed by

.. .... Connecticut law and complies woth the changes in accounting rules. This proposal wd reflect the Companfs strategoc goal of

• e*2"" keeping rates relatively stable in realprice terms, e caen Depending on future regulatory treatment, changes in accounting rules regarding phase in plans 10,' large plant additions may also have an adverse effect on the Company's pere,n n te w gs cash flow and generalfinancialcondition.

Although developments with respect to Seabrook Unit 1 sT can be enpected to continue to dominate the Companfs financing outlook and plans, they are also sensitive to many other factors, including Conditsons in tte securities snarkets, Ho' "

io '

I economic Conditions, legislative developments, the levelof the Companfs sales and Its ability to obtain adequate end timely rate rebet.

100 Intletion As a result ofinRatron andincreased environmental and regulatory requirements, the estimated cost of replacing the i Company's productive capacity today would substantial'y eKCeed the histoncal Cost of such facilities reported on the financialstatements. Since the Companfs rates for servoce to Cash anavmnts its customers have been basedin the past on the cost of pro.

msone . , veding such service and have been revised from time to tome to l '*

reflectincreased costs of service, the Company beheves that is' any hogher replacement costs It may expenence in the future

g wo be recovered through the normairegulatoty process.

s' l

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'nawan a ce n s e Coamoa 1

l l

N uww swer,ag comna, 33 j

1 l

CONS OLt0Af t0 $ TATE MENT Of IhCOME for ese ves s Endes oecemberst.19tt. tssi and 1980

. i (Thousa30s eseeor cer sha e amountst 1988 1937 1986 Operatin9Revenues $518.938 $497,623 $471,119 Operating Expenses ,

Operabon Fuelandinterchar.ge energy-net 140,973 131,471 126.778 i Capacotypurchasedmet 6.491 1R449 13.484 ,

l Other 102,715 96.045 88.970 Maintenance 30.692 31,855 31,124 Depreciation 24.069 37,160 22.112

' Amorttation of deferredfossifuelcosts ~ ~ 94 Amortaabon of canceled nuclearprojects 10,415 10,415 11,260 Income taxes 44,045 50,633 51,419 t

Other taxes 45.643 40.191 39.829 Total 405.043 412.219 385.070 Operating income 113.895 85.404 86 049 Otherincome and Deductions Allowance 16e equity funds used dunng construcbon 48.605 54,933 57,393 Other net 5,011 3.092 5.728 Total 53.616 58.025 63.121 ,

Apphcation of SFAS No. 90 ,

Osanowedplantcosts net (50,595) (125.228) (107,058)

Accrebon of Seabrook Unit 2 Osancwed Rctum 4.419 4.922 5,388 Applicableincome taxes 13.262 33.778 31.885 Net EttectotSFAS No. 90 (32,914) (86.528) (69.785)

Income BeforeInterest Charpes 134.597 j6Q 79.385 Interest charges interestonlong term debt 90,022 88.700 88.610.'

Otherinterest 12,069 9.228 2.223 Anowance for borrowed funds used during construcbon (27.051) (26.486) (20.651)

Income tax benefits attnbutable to the anowance for borrowed funds (19.082) (23.190) (22.561)

NetInterest Chargos 55.958 48.252 47.621 78,639 8,649 31,764 Netincome DMdwds on Preferred and Preference Stock 11,348 11,953 18.969 income Applicable to Common Stock $ 67.291 $ (3.304) $ 12.795 Average Number of Common Shares Outstandong 13.888 13.888 13,827 Eemings per share otCommon stock $4.65 $(.24) $.9?

Cash OMdends Declared per Shere ot Common Stock $2.32 $2.32 $2.32 The snanc,a! Cats for 1987 and t 906 have been restated to reflect 00iustments for the scophon e Mamh 1988 of sFAs No 90. O new sccounteg standard covenng otent eben00nments and disanossoces of plant cos's: and sFAS No 96. the new standardpertaineg to accounting for uncome teses the accompaymg Statement of Accounnng Pokcoes and Notes to Consokosted fmancus Statements e o miegrar parts of the hnencia* statements

mw n r

CONSOLIDL1C 513 EVE %T Of CASM FL0s 5 for the we's Enovo Decemt.or 31. t900.1987 esa 1906

,., (ThousanOs of fk#a's) 1988 1987 1946

) Cesh flows from Operatin9 Activities Notincome $ 78,639 8 8,649 8 31,764 Adjustments to reconcile net income to net cash provided by operating activotoes:

Depreciation and amortization 43,781 52,581 34,477 Deterredancome tases 4,135 9,998 15.816 Deferred garn on sale olland - -

2.864 SFAS No. 90 wnteotts -net 32,914 86,528 69,785 Deterred investment tax credits - net (1,029) 3.383 (907)

Allowance for funds used dunng construction (75.656) (81,419) (78.044)

Changes on current assets andluabikties:

Accounts receivable (10.360) (5,794) 17,073 Accrued utshty revenutc ($88) (1,895) 913 fuel, matenals and supplies 12 (6,635) 1,892 Accounts payabie (10,487) 13,138 (29,429)

Tanes accrued (652) (2,175) 2.411 Interest accrued 11,464 4.609 89 Other-nef 6,054 1,116 (5.866)

Changes in noncurrent balance sheets items 6.084 917 6.171 ,

TotalAdjustments 5.672 74.252 37.245 Net cash provided by Operatmg Activities 84.311 82.901 69.009 Cash flows from financin9 Activities Commort stock -

36 5.087 Long term debt 170.000 328,500 61,500 Lease obhgations 16,722 13,856 20,643 Sect.nties retired and redeemed, including premiums Preferred andpreference stock (6,000) (25,200) (35.860) long term debt (98,667) (251,727) (66,342)

Notes payableincrease(decrease) - (25,675) 25,675 Expenses ofissues (4,096) (3,877) (420)

Dividends Preferred andpreference stock (11,485) (12,696) (20.229)

Common stock (32.219) (32.219) 131.984)

Not cash provided by (usedin) Financing Activities 34.255 (9.002) (41.930)

Net cash flows ficm Operating and Financing Activities 118,56') 73.899 27,079 Cssh Invested in Flent. Includin9 t'uclear fuel (83,735) (73.253) (116,124)

Nel change in Cash and Cash Equivalents 34,831 646 (89.045)

Cash and Cash Equivalents at beginning of period 25.087 24,441 113.486 Cash and Cash Equivalents at end of period 5 59,918 5 25.087 5 24.441 CCNECDC.LTED $1 ATE VENT OF RETAINED E ARNINC 5 for the %sts (nogG Qecemt er 31. t Gh8 196 t end 1986 (thousenos of Dora'sb 1988 1987 1986 Balence ,lanvary 1 $166,303 $204,947 $228,665 NetIncome 78,639 8.649 31,764 Premium applicable to redemption of preferred and preference stock - (2,200) (2,860)

Espenses associated with preferred and preference stock redeemed (4) (921) (1.572) 244,938 210.475 255.997 Deduct Cash Olvidends Declared Preferred and Preference Stock 11,348 11,953 18,969 Common Stock 32 219 32.219 32.081 Total 43.567 44.172 51.050 Balance December 31 520 t.371 $166.303 $204.947 l

h eCt saiustments for the scoptuon m March 1968 of siAs No 90. e new accounteg stancord The tenanc at ca's for 198i and 1G66 have tgen restate 0 to 19 m eerc vtyaa n we m - e n n , m eros a rterre ** w trn w v n.e m s,w ed; win .

, r, - ,, ; w, mc ene ,m s P

lhe e companymg $ts!qmen;of AClountonQ ohCots Ond Notts to ConsOI,0&tt0 funnnCo8I s18tements O't elegre'p0'ts of the imenCo8! statements L , , _

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co*sovecto euce str .

< ' December 3f. tses esrsad 7pe6 'g 1,  ?- >

Assete ithousan0s of Dollars 6 1900 1b0i t906 . . .

Uteltty 96ent et Or6pinalCent

. in servoce $ 858.702 $ 844.989 5 821,528 Less accumulated provision for deprecintoon 297.772 281,779 249.979

< 560,930 563.210 571,549 Constructoon work in prcgress 812.246 737,169 142.585 Nuclear fuel 14.984 67,539 62,376 Plant relatedregulatory assets 88 339 68.603 55 497 Net Utohty Plan! 1.536.499 1.436 521 1.432.007 Other Property andInvestmente 8.876 8.493 8.551' Current Aseets Cash and temporary cash investenents 59.918 25,087 24.441 Accounts receivable 1 L Customers. less ellowance for doubtful accounts of .

$1,580, $ 1,600 and 51,720 '50.665 43.827 40,140 Other 11,125 7,603 5.496 Accruedutlhty revenues 21,800 21,292' 19,397

- t uel, matensis and supphes, at average cost 20.246 20.258 13.623 Prepeyments 2.436 4.008' 4.302 Total 166.270 122.075 107.399 c

' Deterred Debits

- Unfunded deferredincome taxes 383.476 338,708 393.020 Unamorttred cancelled nuclear projects 59.970 65,710 71.097 Unamortized bond redemption costs 47,996 54,850 17,264

' Oeferredincome taxes 145.771 141,642 116.337 Other 16.205 10.003 9.576 Total 653.418 610.913 (47,294 '

$2.365.063 $2.178.002 $2.155.251 e

The 6nanc,a10ata for f 981 and 1986 have been restated to reflect ediustments for the adophon e March 7988 of SFAs No 90. a new accountmg stancard covereg plant abandonments and q sanonances of plant costs; and 5FAs No 96. the nea standardpertameg to accounhng for ecome tones r

the accompanymg Statement c! Accounbeg Pokeres and Notes to Consolocated Fmancos' Statements a*e etegra pa ts of the nnancualelatements 1'

s

%-_ i-~ 4....

CC N$OLsDATED B AL ANCE SH ET December st, t968.1907 en0 t906 Cepetekset on end UebNotees t% sends of tbre sl .

19a0 1907 speg Capitalisation

)

Comir.vt stock equity Common stock $ 277,968 $ 277.968 $ 277,932 Capitalstock expense (5,665) (5.707) (6.771) ,

Retained enmangs 201.371 166.303 204.947 >

473,674 438,$64 476,108 Preferred stock Not subject to mandatory redemption 70,000 70.O(,) 70.000 Subject tomandatory tedemption 34,000 40.000 63.000 Long term debt 862,287 767.559 661.548 Total 1,439.961 1.316.123 1.270.656 Noncurrent Uebilities  ?

Oblogations under capitalleases 111.171 94.870 81.063 Other 800 200 200 Total 111.971 95.070 81.263 Current Uebilities Currentportion oflor,g term debt 3.667 28,667 18,667 Notes payable ~ ~

25.67$

Accounts payable 42,953 $3.440 40,302 Dividends cayable 10,858 10.994 11.862 ,

Taxes accrued 21,929 22.581 24,756  ;

Pensions accrued 7.194 5,761 4,496

• Interest accrued 27,312 15,848 11,339 Obhgations under capitalleases 1,714 1,293 1,244 Other accruedhabilities 10.277 7.102 6.667 Total 125.904 145.676 145.008 Deferred Credits Customers' advances for construction 2,840 2.346 2,014 Accumulated deferred onvestment tax credits 52,125 54,954 $5,924 Unfunded defortedincome taxes 87,b54 86,779 81,074 Deterredincome taxes $26.329 466,133 S07,166 Deferred gsin on sale of utdatyplant 10.230 2,802 2.864 Deferredlossafuelcot:ts B,149 8.119 9.282 Tctal _ 687.227 621,133 658.324

~

Commitmenta and Contin 9encies - ~

$2.365.063 52.178.002 $2.155.251 The fmanc*et 00te for 1981 and 1906 have been restered to r'..".ect 00)ustments for the cooptron an Merch 1988 of srAs No. 90, e t'en occountung stance'0 covernng plant ebenco.vnents en00'senom ences of f or costs. end sfAs No 96. the new stender 0perterneg to accounteg for ancome tears the OCCQmpanynny $teogment Of Agggynteng P' cats eng Notes to Consolocateg franctar statements are mtegre'paets of the Inneec,0!sterements 4

tw etee w emGComoear. . 3I

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,(

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i t tail WL M OI. KGOJh teh& FOLICtlS uncome. Altnough the aNowance ooes not represent current Cash encome, it has histoncaMy been recoverable under the p eegeunting Records rate. making process over the servtCe hves of the related prop.

~

ne accounting records are maintained on accordance erties. The Company compounds semi annually the showance .

with the untform systems of accounts prescnbed by the Fed. apphcable to mayor construcbon projects.

eral Energy Regulatory Commission (FERC) and the Connecy. Pnot to 1987, the Company accounted for the portion of

. Cut Department of Pubhc Ubbty Control (DPUC). N anowance apphcable to borrowed funds on a net of tax y' basis for su construchon projects beca;; e interest charget Princip6ee of Ceneolidation assocuated with Construchon projects were expensed cur, The consohdated hnancial statements include the rently for tax purposes. However, ettechve .fanuary 1,1987, accounts of the Company andits who!!y owned subsidoarres, the Tax Reform Act of 1986 requires the capitahrskon for tu Bndgeport Electric Company (BEC), United Resources Inc. purposes ofinterest charges associated with construction (URI), and Research Center, Inc. (RCf). Intercompany projects, except forprotects such as Seabrook Unit 1 that accounts and transactions have been ehminatedin were begun pnot to March 1,1986. Therefore, in t 987 and consohdabon. 1988, AFUDC for Seabrook Unit 1, which accounted for over 90% of the Company's AFUOC in both years, was computed

>' Vtikty Plant on a net of tax basis, and AFUDC for altotherprojects was The cost of addibons to ublity plant and the cost of computed on a before4Ax basis.

renewals and betterments are capitahted. Cost consists of AFUDC rates in etlect dunng 1986 1968 are shown labor, materials, services and certain indirect construction betw l costs, including an allowance for funds used dunng construc. ***'*****'* **"*****'*

! tuon. The cost of current repairs and minor replacements is I000 ~

'^

'00I M%

~ charged to appropnate operating expense accounts. The orig.

inal cost of utchty plant retired or otherwise disposed of and the #0  ?

W* **

cost of removalless salvage are charged to the accumulated provision for depreciation. Deprecletion p Provisions for depreciabon on utiktyplant for book pur.

Anowance for Funds Used During Construction poses, excluding costs associated wrth the 1984 reconve,sion In accordance with the appbcable regulatory systems of of BEC's plant to a dual hred capabihty, are computed on a i accounts, the Company capitahtes an anowance for funds straight kne basis, using eshmated service hves determined by Used dunng construc60n (AFUOC), which represents the indopendent engineers. One half year's depreciattoriis taken j approximate cost of debt and equity capital devoted to plant in the year of addition and disposition of utihty >lant, exceptin i

under construction. In accordance with FERC prescribed the case of major operabng units on which depreciabon com.

accounbng, the portion of the anowance apphcable to bor. mences in the month they are placedin service and ceases in towed funds is presentedin the Consohdated Statement of the month they are removed from service. Depreciation asso.

Income as a reduction ofinterest ch9'ges, while the porbon of cisted with BEC's reconversion costs is computed on an the allowance apphcable to equity funds is presented as other annuity basis over the period that this plant is being lessed to the Company by BEC. The oggregate annualprovisions for depreciabon for the years 1986,1987 and 1988 were equiva.

lent to approximately 3.17%, 4 77%, and 2.99%. respectively, '

of the originalcost of depreciable property, as restated for the h

L_ ID remcmv~w I

i n,

• t.

k . E i

. elfect of SFAS No. 90. The 1987 aggregaD provision rehects a investmen3

. e one tome increase due to an additional $12.5 mnon of Mm. The Company's investmentin the Connecticut Yankee

- stone Unit No. 3 depreciation recordedin that year as a result Atomic Power Companyjoint venture, a nuclear generatung

, of stipulated eamings agreements. See Note (C), " Rate . companyin which the Company has a 9%v esinck interest. is

).

- Related Regulatory Proceedings", accountedforon an equity basis.

4 e .

locome Texes FoeellfuelCosto -t

, , In accordance with Statement of Financial Accounting The amount of fossilfuelcosts that, pursuant to the fuel Standards No. 96, " Accounting for Income Taxes" (SFAS No. adjustment clause in the Company's rates, cannot be reflected :

96), which was adoptedin the hrst quarter of 1988, the Com- cunentlyin customers' bis is deferred at the end of each pany has provided deferred taxes for el temporary book tax . accounting period. Since adoption of the deferred accounting

' dalferences using the liabihty method. The Gabokty method procedure in 1974, rate decisions by the DPUC andits prede. j requires that deferred tax balances be adjusted to reflect cessors have consistently made specific provision for amorti-enacted future tax rates that are antocipated to be in etfect . zation andrate making treatment of the Company's existing when the temporary diflerences reverse. In accordance with deferredfossilfuelcost balances.

generally accepted accounting principles forregulatedindus. .

tries the Company has estabushed assets and habilites that Reneerch and Development coste  !

reflect anticipated future ratemaking oflects of deferred tax Research and development costs, including environ.

provisions arising from the implementation of SFAS No. 96, mental studies, are capitaNzed of related to specific construc The Company has restated the deferred tax balances in its tron projects and depreciated over the Eves of the related financialstatements for prior periods to reflect the adoption of assets. Other research and development costs are charged to ,

SFAS No. 96.' expense asincurred.

Previously, incoma taxes were accounted for by the

< defenedmethod. Under that method, delenedtaxes were rec ognized at curror;t tax rates and regulPled enterprises old not '

record deferred taxes for realized tax benetiis when regulators '

used these benefits to reduce cunent rates.

The Companypractices fun normalization accounting for i allinvestment tax credits used to reduce current federal ,

income taxes. The majorportion of the credits generated results from the Company's election to take investment tax ,

credits applicable to long term projects on a progress of. con-struction basis.

Accrued Utility Revenvee The estimated amount of utility revenues (less related expenses and applicable taxes) for service rendered but not billedis accrued at the end of each accounting perioo. u

-f p

5 he twee nom, nam comeev _ _ __ ,

39 _

n~e- ([

.a  ;

, (j NofES TO CONSOUOaTE0 hNANCIAL 51a1EMENTS Long term Oebt(d)

\ ga;a es enjectper swe emounts. are nn tnwsanawess . tong.terin debentures:

( 4.65%,1990 Senes, due August 15,1990 $ 15.000 ~

W ta) Capoteltsation at December 31,1988 '

10%%,1995 Sene's,

1. 1. Y O' d "ue October 1,1995 IO'#

common Stock Equoty(a)

( Common stock, no par value $277,968 (issuedin OctoMr 1988) Im' Shares authonzed 17,500,000 gg y ,gggg,,,,,,gy,pyyy,,,$,,ggg. ,$,999 6%,1997 Senes, due June 15,1997 22,500 Shares outstanding at DecemMr31: ys,,999$,,,,,,gy,,,ny,,,,$ ,y99 ,$ 999 10 %,2000Senes,dueJune 15,2000 30,000 1986 13,886,566 7%% 2002Senes,dueOctobe:1,2002 25,000 4 1987- 13,887,748 8 %%, 2003 Series, due December 15, 2003 30,000'

^

Capitals k expense . . ' (5,665)

Sen be nture y R&taonedearnings (b) 201,371 84%, maturing serially as to $1,667 t Totalcommon stock equity 473.674 pnncipal amount on November 15 in each of V~ . Preferred and Preference Stock (c) the years 1989 to 1997, onclusive ($1,667

' Authonted; maturedon 1988) 15.000 Cumulative preferredstock: 11%, matunng serially as to $2,000

$100 par value 1,350,000 shanss pnncipal amount on November 15 in each of

$25 parva!ve 2,400,000 shares the Wars 1989 to 1999, inclusive ($2,000 Cumulative preference stock: maturedin 1988) 22.000

$25 par value,5,000,000 shares 449,500 Outstanding at December 31,1988: ' First Mortgage Bonds Bridgeport Electric Company:

r' Not subject to mar =intory redempt;on: 9.44%, Series B, matunng serially as to

. Cumulabve ' * *tock, $100 par value

$ 10.800 principal amount on February 15 4.35%, Se,s -,J00 shares 5,000 in each of the pars 1995 to 1999 54,000

4.72%, Series B,75,000 shares 7,500 10.32%, Series C, maturing serially as to

i. 4.64%, Series C,75.000 shares 7,500 $60,000 pnncipalamount on January 15 Y 5%% SeriesD,75,000 shares 7,500 in each of theyears 1993 to 1995 7.60%, Series E,125,000 shares 12.500 (issuedinJanuary1988) 180,000 7.60%, Senes F,150,000 shares 15,000 Other:

Cumulative preferred stock, $25 par value, Poltubon ControlRevenue Bonds:

8.80%,1976 Series,600.000 shares 15,000 14 %%,1984 Series, due October 1,2009 $ 40,000 Totalpreferred stock not 14 %%,1984 Series B, due December 1,2009 28.400 subjecttomandatoryredemption 70.000 9%% 1986 Series, due June 1,2016 7,500

. Subject to mandatoryredemption: 9%%,1987 Series, dueJuly 1,2012 25,000 Cumulative preferred stock, $ 100 par value: 1%% 1987 Series, due Novsmber 1,2012 43,500 19%,1984 Series,340,000 shares, Long term bankloans:

c subject to mandatoryredemption of 68,000 12.9% ($20,000), and 13,1 % ($20,000), maturing as to $15,000in 1992, $15,000in 1993 and shares each year beginning July 15,1990,

$10,000in 1994 40.000 at $100 per share, plus accrued dividends 34.000 Vl 867,900 Unamortsted debt discountle:S premium at December 31,1988 (1,946) ,

Totallong term debt 865.954 '

Less currentportion includedin Current liabilities 3,667 Totallong term debtincludedin CapitaI>zaton 862,287 TotalCapitalization 51,439.961 l

l 1

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- 4 L '*

O common stoca

j. Common stock, no par value, authorized at December 31,1988, included 400,000 shares reserved for the Company's i Employee Stock Ownership Plan (ESOP).

m Shares issued dunng 1988,1987 and 1986 andincreases to the common stock account from the proceeds of these issues were as follows:

1988 1987 1986 ,

Shares Shares Shares-

Amount 1000) Amount (000) Amount t000)

Balance..lanuary 1 $277,968 13,888 $277,932 13,887 $272,845 13,720 Additions resulting from:

DRP' - - - -

4.847 159

ESOP" - -

3Q 1 240 8 l Balance, December 31 $277,968 13,888 $277,968 13.888 $277.932 13.887 i

F

, 'The Companypurchased 158,474 shares in 1987 and Shares of preferred stock have preferent:al dividend 192,152 shares in 1988 on the open market to fulfulits obliga. and Equidation rights over shares of common stock. Preferred l tions under the Dividend Reinvestment Plan (DRP). shareholders are not entitled to general voting rights. However,

" Shares contnbuted to ESOPinclude additionalpur- if any preferred dividends are in arrears for six or more quar.

chases on the open market of 26,081 shares in 1986 and ters, or if some other event of default occurs, preferred share.

9,407 shares in 1987, There were no additions to ESOPin holders are entitled to elect a majonty of the Board of 1988 since income tax credits ahowable for ESOP ended at Directors. until alpreferred dividend arrears are paid and any December 31,1987, event of defaultis terminated.

Expenses related to the newissuances were chargod to ge; ung.7,,,o,s, capitalstock expense. On January 14,1988, the Company's wholly owned (b) RetegnedEarnines Restr6ction subsidiary, Bridgeport Electric Company (BEC), issued $ 180 The indenture under which aH of the Company's deben- m Hion principalamount ofits First Mortgage Bonds Series C, tures are issuedplaces kmitations on the payment of cash at an interest rate of 10.32% per annum, maturing over a three.

dividends on the common stock of the Company and on the year period ending January 15,1995. The proceeds were amounts that can be expended to purchase or redeem shares used in part to repay a $160 miHion short term borrowing from

' of common stock. However, an amount equalto the Compa, a financialins atution, which, together with a $33 minion loan ny's retained earnings at December 31,1988 can be used for from the Company, enstled BEC in December 1987 to repur.

the payment of cash dividends and the purchase or redemp. chase aH of the outstanding $154 miHion pnncipalamount ofits tion of shares of stock, without exceeding these limitations. h*% First Mortgage Bonds, Series A, paying a $39 minion premium to the bondholders. This $39 minion premium was  ;

(c) Preferred and Preterence stock taken as a loss forincome tcx purposes in 1987, but for book The par value of each of these issues was credited to purposes wsH be amortized over the hfe of the new issue. The the appropriate stock account and expenses related to these current tax benefit, approximately $18 minion, of the premium, issues were charged to capitalstxk expense, andpart of the proceeds of the $180 million bondissue were On April 15,1988, the date of a scheduled redemption used to repay the Company's $33 million loan to BEC. Since of 30,000 shares, the Companyredeemed aH of the 60 000 the $160 million in short term borrowings was a " bridge" loan outstanding shares ofits 9%% Preferred Stock, Senes G. The to be repaid from the proceeds of the $ 180 minion bond issue, mandatory 30,000 shares were redeemed at $100 per share the Companyreclassified $160 minion to long term debt at plus accrued dividends and the optional 30,000 shares were December 31,1987.

l redeemed at $101 per share plus accrued dividends. '

The aggregate redemption requirements for preferred stock are: none for the year 1939, and $6,800 per year dunng each of the four years 19901993.

,. Preference stock is a form of stock that is junior to pre.

I ferred stock but senior to common stock. Itis not subject to the eamings coverage requirements or minimum capitaland sur-plus requirements goveming the issuance of preferred stock.

There were no shares of preference stock outstanding at December 31, 988.

rn.uw a r mes s df 1

(fl i L

• V b On May 19,1988, the Company concluded a $13.6 mil- have provided for recovery of fuH rnvestment. The loss to be hon sale and leaseback arrangement with a Credit Corporatton recorded for the absence of an allowed retum ts measured by involving the sale and leaseback of six of the Company's fuel the difference between the recoverable investment and the -

Oilstorage tanks at New Haven Harbor Stabon and Bndgeport present value of suchinvestment Harbor Station (BHS). Under the arrangement. $ 12 moon was V used for construction program requirements and the funding M accounkne for munmnces o!!! ant cons k Prior to its amendment by SFAS No. 90 effoctive on of matunng debtpayments and securities redemptions. The .

' remaining $1.6 mhon is being used by VIto repair two of the MB, WM N MM WrWaWsanowances of mco+

tarAs at BHS_ ety & mwplantinvestments be wntten off against uncome.

On October 13,1988, $ 150 mhon pnncipal amount of uch 6saRowances could be amortsted over the hves of the 10%% Debentures,1995 Series, due October 1,1995, were innstrnents, pmnded futum revenues attnbutable to the facili-issued and sold to an underwnter at 99.875% of principal bes were expected to be sutticient to permit recovery of the e value. The netproceeds to the Company of approximately entste cost of the facihbes, inciv6ng the interest charge por.

I $148 m&on from the sale of me debentures is being usedin bons of the carrying costs of the undepreciated balances. The partbegeneralcorporatepurposes. Current accounbr'g rules require that, for completedplants, aH 5' On October 7,1988, the Company redeemed alofits osts 6sanowed for rate making purposes must be recog.

15 %% Debentures,1988 Series, at their principalamount of &d as bsses againsumom as som as me 6sanowance

$20 mhon plus accruedInterest to that date. The matunty date becomes probable and can be reasonably estimatd.

of these debentures was December 6,1988. On November in order to comply with the requirements of SFAS No.

l 15,1988, the Company made mandatory repayments of $1.7 90, me Cornpany mweded m me hrst quarter d 1988 a nw million on its 8 %% Senal Debentures,1983 1997 Series, and ca h wntnH againsumome dappmximately $172 rnoon,

$2 mnon ofits 11% Sest Debentures,19851999 Series. On ut dmlatedinume tax eMets, for 6sanowed wsts on as November 21,1988, the Company made a mandatory repay, investmentin Minstone Unit 3, me loss of a retum on the recov.

ment of $5 minion on its 16%% SerialDebentures,19871989 ery ofits onvestmentin the abandoned Seabrook Unit 2, and Series, and redeemed the remaining $20 mhon of these the amount by which its investmentin Seabrook Unit I was debentures at theirpnncipalamountplus accruedinterest to t en projected to exceed the Connecticut statutory " cap" on that date. On November 22,1988, the Companyprepaid an of recoverable costs of the unit, assuming a January 1989 com-q the $50 milhon ofits long term bank loans, due December 21, mercialoperation date. The Company elected to adopt these L

1989, at their principal amountplus accrued onterest to that changes by resta0ng the nnancialresults for the periods in date. These transacbons, together with the BEC t ansacDons, 1984 through 1987, when the write ofts would have been wtH substantraHy reduce currentinterest expense in accord recorded had the present accounting rules been in etlect dur-with the Company's progra'm to replace high cost securities ing mose pen'ods, remer man as a charge against 1988 issuedin recent years with lower cost financings. oncome. In addibon, in September 1988 the Company The aggregate matunbes of bag term debt during each recorded a furthernon cash write ofIagainst currentincome of the hve yeart; 1989 1993 are: 1989 $3,667; 1990-518,667; dappmximately $35 mhon, ut dmlated innen tax eMats, 1991513,667; 1992 $18,667; 1993 $78,667. to wwgnM a pmbade ad60mald&ayin me wmmmial operation date of Seabrook Unit 1 to atleastJuly 1,1999. If, (8) Accounting for Abandonments and Disallowances of Plant due to the DPUC's prudence au6t, an excess capacity 6 sal-Costs and Phrse In Plans lowance, or any Omer reason, the Companyis not aHowed to recoverits share of the Seabrook Unit 1 cost " cap", orif the ts) Accounung forabandonments commercialoperation date is further delayed, the Company Under SFAS No. 71, prior to 1988, a uttitty was not will be required to record a further non cash write ofIagainst required to record a loss against income ilrecovery ofits fun income as soon as the amount of the 6sanowance becomes investment in an abandonedplant had been allowed by its probable and can be reasonably estmated. The Company j rate regulators. However, SFAS No. 90 now requires that a estmates that a furtherpostponementin the commercialoper- '

loss be recorded for any disaHowance of the investmentin an ation date of Seabrook Unit 1 would require ad6tionalnon. l

l. abanoonedplant, oncluding the disaHowance of an aHowed cash wnte offs of approximately $6 mhon, net of related '

retum on investment, regardless of the fact that regulators income tax effects, for each month of delay. The following table illustrates the etfect on Net Income and Eamings per Share (EPS) of wnte offs recorded through December 31,1988 as a result of the adoption of SFAS No. 90:

l 4

I L

l L

l l

l 1

-3 j

• Wars Encea Decemterst, y ) IThousanos ot Dattam 1984 1985 1986 1981 1988 Total

j. h . Osa60wed Cor,s:

u Md! stone U% t 3 $ -

5 (17,472) $ ~ $ -

$ (17.472) i: '

') Seabrook Unit 1

- - (89,586) (125,228) (50,595) (265A09) ,

Lanowsd Retum on Seabrook Unit 2 (34,051) - - - -

(34 051)

~

Accretion of Seabrook Unit 2 Osanowed

. Return -

5.820 5.388 4.922 4.419 20.549 (34,051) 5.820 (101,670; (120,306) (46.176) (296.383)

RelatedIncome Taxes 14.162 (2.420) 31.885 33.778 13.262 90.667 Effect of apphcation of SFAS No. 90:

Netincome $ (19.889) $ 3.400 S (69.785)^ $ (86.528) $ (32.914) $1205.716)

EPS Sf f.51) $(5.05) $(6 23) Sf2 37) $l14 91)

$f5 The foderaltax rate used for calculating the elfects of time the CWIP revenues had been in rates. Dunng tr.e penod apphcation of SFAS No. 90 is the current rate of 34% since the that these revenues are excluded from rates, the Company wnH Company also elected to adopt SFAS No. 96 " Accounting record deferred carrying costs associated with the investment >

for Income Taxes" concurrentlyin the first quarter of 1988 by represented by this exclusion Although there is no assurance restating the financialresults of priorperiods. One of the that the Company will be aHowed to recover such costs requirements of SFAS No. 96 is that an deferred tax balances through rates, it is the Company's beNet that they wrH be must be computed based on the tax rate at which they are recovered over the remaining hie of the unit.

expected to reverse. See " Statement of Accounting Policies - In decisions in May and November 1986, the DPUC Income Taxes", above. approved the Company's proposal with respect to the rate.

making and accounting treatment of the Ccmpany's 3.685%

in er ca e the pact on rates thatmay result from

1. 1. " #'*"* #'9 " # 0 #' '#

toactive to the commercialoperation date of Apnl23,1986. As the addition to rate base of the cost of major new facihties, a result, $130 minion of the Company's $148 million onginal such additions may be added to rates gradually via a phase in plan. SFAS No. 92 estabkshes critena for the definition of a investment in the Unit and $$ minion of nuclear fuel were placedin rate base with an equal amount of Seabrook Unit 1 phase in plan and requires, among other things, that costs can CWIP being removed from rate base, thus leaving rate base be deferred under a phase in plan onlyif the rate regulators unchanged. The DPUC decision did not provide for recovery allow recovery of these deferred costs within a ten year penod through rates of the Company's operation, maintenance.

of time. While the Companyintends to submit a phase in plan decommissioning or other expenses related to Minstone Unit 3 for the recovery ofits investmentin Seabrook Unit 1 which for the period between its commercial operation date and the complies with SFAS No. 92, itis unable to predict the regula- y . ,

tory treatment which the plan will be affolded, if the Company However, in this intenm period, the Company espects that is not allowed to implement a phase in plan which comphes these expenses will be substantially oftset by fuel cost savings with SFAS No. 92, the inabihty to defer phase in costs of Sea-due to operation of the unit. The November 18,1986 decision 1 brook Unit I would adversely affect the Company's financial also terminated the pending prudence investigation of M H.

condition.

stone Unit 3 and was made oflective retroactive to the com.

1 mercialoperation date of the unit. Since the Company was not (C) Rate related Regulatory Proceedings allowed to recoverits fuHinvestmentin this unit it teducedits l In its rate decision on December 18,1984, the DPUC investment to $130mHion and recognized a loss against among otheritems, allowed the recovery of the Company's income of approximately $12 minion, net of relatedincome tax investmentin the canceIIed Seabrook Unit 2 over a ten year etfects, by restating its financialstatements for the year 1986.

penod, without return on the investment (see Note (I),

See Note (B). " Accounting for Abandonments and Disallow.

" Unamortized Cancened Nuclear Project") and an increase to ances of Plant Costs and Phase In Plans"

$44 million of annualrevenues on account of construction work On October 1,1986, the DPUCissued a notice thatit in progress (CWIP) associated with Seabrook Unit 1 reflecting would conduct a generalreview of financialand operational the inclusion in rate base of $183 minion of the investment in results of the State's major pubhc service companies, includ-this unit. As descnbedin the following paragraph, the amount ing Ui. UIprojected a retum on equity, as calculated for rate-of annual CWIP revenues in rates was reduced from $44 mil- making purposes. of over 18% for the year 1987 and offered Non to $12 million, effective Apnl23,1986, reflecting the inclu' severalalternative ways of reducing its eamings to or below sion in rate base of $48 milhon, on account of the commercial the allowedlevelof 16.4% without reducing rates and reve-operation of Millstone Unit 3. At December 31,1988, the Com- nues. The DPUC, recognizing UI's cash flow needs. accepted pany had coHected approximately $ 133 mrHion of CWIP reve' the concept of non rate actions to reduce the equity retum, nues in the aggregate. Under Connecticutlaw, a condition of andinitiated a proceeding to examine the appropn'ateness of the inclusion in rates of Seabrook Unit 1 CWIP revenues is that an amount equalto the CWIP revenues will be excluded from rates after the unit is in service for a penod of time equal to trae

% vn,reoum,wm cowy A

pw (

h ., .

Y t

L non cash adjustment actions such as accelerated oeprecia< (D) Income Tones *

[ tron of facihtues and shorter amortizatron penods for premium Income tax esperse consists of: ,

Y costs associated with redemption of high cost secunt:es as a ypeg ,ggy ,ggg means oflowenng Ul s projected equity retum.

9 ,pgp As a result of this procee$ng, on Apnl4,1987, the 5 22,313 $ 18,536 $ 13.950 Current DPUC approved a stipulated eamings agreement among the Deferred:

j' Company, the DPUC's Prosecutonal Division, the Division of Income tax attnbutable Consumer Counsel (DCC) and the Connecticut Attomey Gen. to the allowance for oral. Under the terms of this agreement, the Company was borrowed funds 19.082 23,190 22,561 required to continue its cash conservation practices while Attem30ve minimum tax 6.913 (10,670) -

, reducing its non cash eamings for 1987 by approximately $ 16 Accelerated depreciabon 5,308 8.171 7,654 i mdhon through various accounting procedures. Such proce.

' Construction owMads 1,609 1,378 2,304 dures included the recording of ad6tional depreciation on its ownership snterestin Aldlstone Unit 3, the use oflower AFUDC DI'"*# '** # ^ ***' I'0] 0A0 IE'0II)

~

rates and the wnto off againstincome ofissue expenses, ,",,f,",*n , ,,,gg, rncIv$ng debt 6scount, associated with certain 1987 long' (1,029) (1,091)

(netof amortizabon) (907) term debtissuances. The intent of the agreement was to lower Premium on BECbond the Company's rate of retum on common stock equity for 1987 redemption (3,306) 17,532 9,014 to a levelcomparable with the average of the electric uphry CanceIIednuclear industry, without affecting the levelof the Company's cash projects (6,359) (3,735) 1,275 flow. A condition of the agreement was thatif these measures Gain on sale of unhty proved to be insufficient to achieve the rate of retum pre. plant -

29 (1,146) scnbedin the stipu*ated agreement, further adjustments of this Other-net 199 (2,557) (614) n<itute would be required. Accordingly, on October 29,1987, Totaldeferred 21.732 32.097 37,469 the DPUCissued an order requiring the Company to show Totaloperating cause whyIt should not be ordered to decrease non caslo income tax expense 44,045 50,633 51,419 eamings by an ad6tional $5.6 million, by recording ad6&onal (1,999)

Otherincome and deductions: (1.286) (3.662) depreciatton of $4.7 mdlron and by writing off againstincome debtissue expenses of $900,000 associated with the $43.5 SFAS No. 90 write ofts:

mmion borrowing from the New Hampshire Industrial Develop. Plant abandonment 1,838 2,047 2,241 Construcbon overheads (647) (1,009) (1,249) ment Authonty (NHIDA)in November. The Company did not Investment tax credts (1,800) (4,353) (5,208) contest this show cause order and in the tcurth quarter of 1987 recorded these eamings reductious which were prescribedin g p y, gg, a second stipulated eamings agreement among the parties to nyf, (93,gggy (33,779; (3 g,gggy the eatheragreement.

Totalincome tax On October 11,1998, the DPUC commenced a pro * $ 29.497 $13,193 $17.535 evpense I ceeding to investigate the operatonal and financialstatus of I the Company, and ordered the Company to appear on ,

December 7,1988 to show cause why the Company's 1988 Accumulated deferredincome tax assets rate of retum on equity should not be reduced. Heanngs in this at comMr k 1988 198 1986 proceeding were heldin December 1988 and a decision is Plant 6sanowances $ %,565 $ 57,474 $ 27,%8 expectedin February 1989. On December 12,1988 the ,

DPUC, in a clantying order, stated that any reduction in the Plant abandonment 5,615 7.453 9,500 Company's retum on equity would be effective kom the date Deterredfossilfuelcosts 4,312 4,292 4,838  ;

ofits decision, On February 2,1989, the DPUC issued a draft Pension costs 3,619 2,954 2,318 <

l decision, which,if adopted, would require the Company to Gain on sale of utihtyplant 1,117 1,117 1,146

record approximately $ 16 mdlion of ad6tional depreciation Other 3,900 3.697 1,367 during the twelve months ended January 31,1990 to reduce $145.771 $141,642 5116,337 the Company's projected retum on equity to 16.4%. Itis the Company's belief that no such reducbons are appropnate at cc mul e ome tax i this bme and is defending its posicon before the DPUC, but the SFAS No. 96 adjustments $441,904 $385,187 $436,943 l

Companyis unable to prednct the outcome of this proceeding. Accelerated depreciation 26.981 21,886 14,600 l

CanceIIed Seabrook Unit 2 25,537 31,722 35,517 Unamortzed bond redemption costs 23,240 26,546 9.013 Construction overheads 12,424 11,462 11,093.

Altemative minimum tax ^ -

carryforward (3.757) (10.670) -

$526,329 S466,133 $507.166 Accumulated deferred investment tax cre6ts $ 52,125 $ 54.954 $ 55.924 4

[~ N

I lIL As a result of the adoption of SFAS No. 96 Cnd the

. restatement of the financialresults of poor penods to reflect The Tax Reform Act of 1986 provoded for a more com-prehensive corporate attemative minimum tax (AM T) for years

[

, such adoptions, the Company has adjustedits deferred tax begonning after 1986. To the extent that the AMT exceeds the asset and habihty balances as in@cated on the table immedi- federalincome tax computed at statutory rats 5, the excess

, ately above. In accordance with SFAS No. 96, the Company must be paidin addition to the regular tax liabahty. The excess

,' has also recorded Untunded DeterredIncome Tax assets and paid in any year can be camed forward indefinitely and offset i habolites as shownin the Consohdated Balance Sheet. against so much of any future year's regular tax kabihty as

? The amounts reported for federalincome tax expense exceeds that year's tentavve AMT The Company's AMThabil-for the 19srs 1988,1987 and 1986 were less than the amounts ityin excess of sts regular tax habokty for 1987 was $10.670,

( computed by applying the federalincome tax statutory rates to which was deferred on the Consondated Statement of Income.

book income before federalincome taxes. The reasons for During 1988, the Company's regular tax habokty

\ such 6fferences are as follows: exceededits tentative AMT Habihty by $6.913. As a result, 1 pas 1987 1pa6 $3,757 of AM Tis being camed forward al December 31,1988.

Nctincome $78.639 5 8.649 5 31,764 I tG Short Term Credit Arrangements i Totalincome tax expense 29,497 13,193 17,535 The Company has had a $160 molhon revolvung crest agreement with a group of banks since September 1986. This e p nse 9.325 3.803 4.058 agreement, which currently extends to December 31,1989, Federalincome tax expense 20,172 9.390 13.477

(_ affords the banks an opportunity to dechne to lend funds if any Bookincome before federal one of severalconditions is not sansfred at the date of a

[-

income taxes 98,811 18,039 45,241 requested borrowing, These con 6tions include, among oth-

? Fede alincome tax statutory ers, the absence of any occurrence which has caused the 3

Company's a:anagement to beheve that permission for Sea-Federalincome taxes at brook Unit 1 to commence fun-power operation wsII not be per-

• • * ** 00'0 0

• E 'O ' mitted or that commercialoperation of the unit wtR not be 9 , ny.

achieved, the continued expectation of the Company's man-Anowance for equity funds agement that commercialoperat,on of the unit wa0 be achieved used dunng construction capitalized for book during 1989, and the absence of a determination by the banks purposes, not taxable that the PSNH bankruptcy proceedings have increased the income 16,526 21,973 26,401 risk that the Company willnot be able to perform its obhgations Amortization of deferred under the agreement.

investment tax credits 1,029 1,09 t 907 The Company also has an agreement, which has not Equityin eaming'; of been utilized to date, to sen to the banks involved in the revolv-subsidiary companies ing credit agreement up to $40 million ofits accounts receiva-for book purposes, not ble. This agreement also extends to December 31,1989, and taxableincome 560 759 918 sales of:eceivables are subject to sat:staction of the same Tax d a n ss) conditions as borrowings under the revolving credit g,g g g depreciation applicable agreement.

topre 1981 property In 1988 the Company entered into a revolving cre6t additions (84) (505) (215) agreement with the same financialinstitution with which it has Amortizationof allowance a sale andleaseback arrangement for nuclear fueland a lossal for funds used dunng fuelreserve and supply agreement. See Note (J), " Fuel construction applicable Financing and Other Lease Obligations". This revolving credit to cancelled nuclear agreement enables the Company to borrow up to 545 minion, projects (1,070) (1,259) (1,538) untilJune 30,1989, for generalcorporate purposes and within Application of SFAS No. 90: an aggregate $135 minion kmit for alloutstanding financing bligations to the financialinstitution. The financialinstitution i en a (6,318) (23.552) (24.042) 1,800 4,353 5.208 may decline to lena funds under the revolving cre@t agree-Investment tax credits mentif any one of several conditions is not satisfied at the time Additionalbook depreciation apphcable of a requested borrowing. The Company and the financial to Minstone Unit 3 -

(4.995) - institution have also agreed that the Company's borrowing l Other stems -net 981 (39) (305) capacity under the revolving credit agreement wiuincrease Federetincome tax expense $20.172 5 9.390 $ 13.477 from 545 million to $75 million and the aggregate outstanding financing obligations hmit willincrease from $ 135 milhon to Elfective federalincome tax $ 165 minion. it a sDpulation for settlement satisfactory to the rates 20.4*,e 52.1,s. 29.8% , y, related rate making issues. See Note (K), " Commitments and Contingencies Seabrook Unit 1 - Prudence Reviews,'

N oww m.,m.m s cecer 45

~~~

'e  ;

't

)

Information with r:sperct to short term borrowings ss as SFAS No. 95 requires comp *ni:s using the Indirect  ;

follows' method ofpresentation of cash flows to fumish the following 1988 1987 1986 suppkmentary cas@ mms: .,

Maximum aggregate '*** '**I '***

pnncipalamount of short- Interestpaid(notof amounts term borrowings capitahzed) 549.673 546,028 $47,577 outstand ng at any month. Income taxes paid $14.881 $13.341 $11,585 end - $60.000 $25.675 Average aggregate short-b (G) Pension Plan and Retirement Benehts n u ng the The Company's pension plan, which is based on final year' ~ 27,848 1,49 y average pay, covers substantiaHy an ofits employees sndits Weighted averageinterest enbre costis borne by the Company. ,

rate' ~

7.5'e 7.5% In December 1985. FASB issued SFAS No. 87, a stan-Pnncipalamounts dard that revised the accounung for pension costs. The pnnci. .

outstanding at year end - 5 - $25,675 palobjecuve of SFAS No. 87 is to reaffirm accrual accounbng Annuahzedinterestrate on by providing a standardized method for measunng n]! peri.

principalamounts odic pension ;osts that is Intended to improve comparabihty outstanding at year end - -

8.0% and understandabihty by recognizing the compensation cost

' Average short term borrowings represent the sum of of employees' pensions over their approximate service daily borrowings outstanding, weighted for the number of penods. Although compMance was not required until 1987, the days outstanding and divided by the number of days in the Company adopted SFAS No. 87in December 1986, period. The weighted everage interest rate os determined by In 1986, pension cost was $157 reflecting the adoption dividinginteressexpense by the amount of average borrow' of SFAS No. 87, If the Companyhad delayed the adoption of ings. Commitment fees of $830, $800, and $607 paid during this new standard until 1987, its 1986 pension cost would have 1988,1987 and 1986, respectively are excluded from the been $2,023. The pnncipalreasons for the lower cost were calculation of the weighted averageinterestrate. There adopbon of the Projected Unit Credit Methodfor determining were no short term borrowings outstanding at December service cost, vse of shor*er term market rates forinterest 31,1988.

assumpbon purposes and use of shorter Hves for amorbzing prior service costs; all as prescribed by the standard. Pension (F) Supplementary Information costs for 1987 and 1988 were $1,255 and $ 1,443.

CONSOUDATED STATEMENTOFINCOME for 1986 funding purposes. the Company changedits The amount of maintenance, advertising costs, and the methodology to the Entry Ags Normal Cost and changedits provisions for depreciabon and amorbzadon, other than set method of plan asset valuabon. These changes resultedin the forth in the statement, are not significant, and there are no pension fund being overfundeo forincome tax purposes, myalbes-therebyreducing the Company's 1986 funding contribution

. Taxes, other than income taxes charged to costs and from approximately $3.000 to zero. Due to the changes expenses, are set forth below:

adoptedin 1986 and the experience of the plan and the fund since 1986, no funding contribution was required for 1987 or 1988 1987 1986 yggg, State gross camings $23,950 $22,999 $21,845 Pnot to 1986, pension costs and funding contributions Localrealestate and were determined by the Entry Age Normal Cost method with  !

personalproperty 20,226 16,199 17,866 Frozen InstalUability. l Other, principaHypayroII 6.123 4.024 4.038 The plan's irrevocable trust fund consists principany of j

$50.299 $43.222 $43.749 equity and Rxed income securities within the following tar- i Chargedto: getedportfolio mix:

Tax expense $45,643 $40,191 $39,829 percentage of 8 Other accounts 4.656 3.031 3.920 TotalFund

$50.299 $43.222 $43.749 Asset Category Minimum MixImum Equity Securities 45 65 CONSOUDATED STATEMENTOF CASHFLOWS Fixed income Securities 35 55 in December 1988, the Companyimplemented State' The components of netpension costs were as fo'iows:  !

ment of Financial Accounting Standar ds No. 95, " Statement of <

,,,, ,ggy Cash Flows" (SFAS No. 95) using the indirect method of pres-enfation for cash flows from operabng ac0vities. Accordingly, Service cost of benefits eamed during for 1987 and 1986 the information formerly presentedin the Conschdated Statements of Sources of Funds for Gross Prop-Int restcos onprojectedbenefit g,54y g,oyy erty Adainons has been restated to conform to the presenta- (5,229i Actuctretum on plan assets (l9.545) bon required by SFAS No. 95. 9.546 -(4,367)

Net amornzation and deferral For cash flow purposes, the Company considers an Netpension cost $ 1.443 $ 1.255 highly hquid debtinstruments with a matunty of three months orless atpurchase date to be cash equivalents.

_m mwrwem ~n __.

y: . -

\. Assumptions used to dourmane pension costs were: (I) Unamortised Cancelled Nuclear Project g,, in its December 1984 rate decision, the DPUC OHowed 7

recovery and amortizavon of, but no retum on, the Company's

Discount rate 8.25 % 7.50 % $104 mahon investmentin the canceIIed Seabrook Unit 2 over

\

Average wageincrease 6.00% 5.50 %

a ten parperiod. However, the DPUC has reserved the nght

& C dlong term rate ofplan g to adjust the amortization amountin the futuie to reflec~l several The fundedstatus and amounts variables, including cash flow needs, additional costs, salvage recognizedin the balance sheet at value and a prudence evaluation. As of December 31,1988.

December 31, were as tonows: the Company had accumulated an addstronal $ 11 mdlion of Actuarialpresent value of benefit Seabrook Unit 2 costs, representing principany costs that have ob6gations: been transferred from Seabrook Unit 1, but UI beheves that Vested beneht obbgation 5 70.272 $ 60.135 recovery of these additionalcosts would be consistent with the Accumulatedbenefit obhgation S 78.555 5 67,189 DPUC's reservation.

The results of an audit study released by the DPUC on Reconciliation ofAccruedPensio September 15,1987 concluded that $76 malion of Seabrook Proje te benehtobhgation $123,540 $107,458 nM 2 @stsincunedby npanybe Apnl 1984 were "unnecessarilyincurred.y AprH 198 The Company disa-Less: Plan assets (Iair value) 128.540 113.000 grees with this conclusion andis contesbng it vigorously. See I$s) a p YasYe (5.000) (5,542) "*',*p ( Commttm y, nts and Conungencies - Seabrook Una (po fg pg,q Since the Company has not been allowed a retum on expenence (6,357) (9.427) the Seabrook Unit 2 investment thatitis recovering through Unrecognizednet asset (obHgation) rates, it recorded, in the first quarter of 1988, a non-cash writo.

date ofinitialapplication 18.612 19,720 off of approximately $10 million, net of related income tax Accruedpension Habihty et oflects, by restating the financialresults for the years 1984 December 31 $ 7,194 5 5.75 y through 1987, If, as a result of the DPUC's prudence proceed-ing, tne Companyis not allowed to recoverits funinvestmentin this unit, it willbe required to record a further wnte ottagainst In addition to providing pension benehts, the Company income and may be obhged to refund to customers some por-provides certain health care and kte insurance benefits for Don of the amounts it willhave recovered through rates subse-retired employees. SubstantiaHy allof the Company's employ

• quentto December 1984 ees become eHgible for these benefits when theyreach retire-ment age while working for the Company. These and similar (J) FuelFinancing obligations and Other Lease Obligations benehts for active employees are provided through insurance In September 1988, the Company's fuelreserve and companies and Health Maintenance Organizations whose supply agreement was extended to May 31,1989. The agree.

premiums and membership fees are based on the benefds ment provides for the financing of up to $ 135 million in fossil provided and the claims experienced dunng the immediately fuelpurchases, less the amount of the Company's outstanding preceding rating year. The Companyrecognizes the cost of lease obHgations for nuclear fuel. At December 31,1988, providing those benefits to retired and active emplopes by approximately $ 15 million of fossil fuel, consisting of $10 million expensing the annualinsurance premiums, which were of oil and $5 mdlion of coal, was being Snanced under this

$4,609, $5,282 and $5,117 for the years 1986,1987 and 1988, agreement.

respec0vely. At December 31,1988, the Company was pro' l In September 1986, the Company amendedits sale and i viding these benefits for 1,617 ective employees and approxi*

leaseback agreement covering nuclear fuelfor Seabrook Unit i mately 524 retirees or their beneficiaries. The cost of providing 1, increasing the aggregate amount of nuclear fuelpurchases <

these benefits for retirees is not separable from the cost of which may be financed under the agreement from $60 mdlion providing benefits for active employees. to $70 million. At December 31,1988, $70 milhon of Seabrook \

Unit 1 nuclear fuel was being financed under this agreement.

(H) Jointly Owned Plant In August 1986, the Company also enteredinto a sale The Company's 93.7% ownership share of the New andleaseback agreement which provides for the financing of  :

Haven Harbor Station generating unit represented $129 million up to $10 million ofits ownership share in the nuclear fuelfor of utilityplantin service and $43 million of accumulatedprovi- Mdistone Unit 3. At December 31,1988, the amount of fuel I sion for depreciation at December 31,1988. The Company's being financed under this agreement was approximately $5 i ownership share of Mdistone Unit 3, which was placedin serv. milhon. The Companyis paying rent for the fuel based on the l ice in April 1986 is 3.685%, represented at December 31,1988 direct costs to the lessor of the fuel, plus the lessor's financing by $ 132 mdlion in plant In service and $22 milhon in accumu. costs, latedprovision for depreciation. The Company's share of the in addition to the nuclear fuelleases descnbec above, l Operating costs is includedin the appropnate expense cap- the Company has enteredinto other leases (some of which are l tions in the Consolidated Statement ofIncome. capitalleases), including arrangements for the use of data The Company also has a 17.b% ownership share in processing and office equipment vehicles, office space and Seabrook Unit 1, a nuclear generaung unit under construction. od tanks. The gross amount of assets recorded uncer capital

l. See Note (K), " Commitments and Conungencies" leases and the related obhgations of those leases as of December 31,1988 are recorded on the balance sheet l

l rhe wee mmewp Corneeny 47

V[ ,

J ( ,

Y future minimum lesse payments under capitalleasts searoos unit t are estimated to be as follows: The economic viabihty of Seabrook Unit I was seriously ,

jeopar6tedin the Spring of 1984 t'y substantalincreases in _

yggy ,

@stes BMsa a%ndant hnancialproblems of 1990 6.868 PSNH. Events since that time, inclu6ng the implementation of -

1991 6,42g 5,$33 hnancing plans by the joint owners and the attainment of con.

1992 5,439 strucbon milestcne eventi on or ahead of schedule and within 1993 After 1993 28,470 project management's cost estimates, have allowed construc.

tion of the unit to be completed; and recent favorable deci.

Totalminimum capitallesse payments $9.228 21.29 y sions regarding the hnancial quahhcation of the joint owners to Less:Amountrepresenhnginterest conductlow powertesting and the adequacyof the off site i Present value ofminimum capitallesse 37.937 emergency response plan for the State of New Hampshire payments 74.948 represent significant steps towards commercial operation ot Present valve of future nuclear fuellease payments the Unit. While the risk of cancellation of the unithas been '

Totallease obhgabons $112.885 reduced by this record of progress, both the occurrence and timing of commercialoperation of the Unit contmue to be dependent on accomphshment of severalremaining steps Capitahzakon of leases has no impact on income since which are largely bepnd the Company's control. See

n. ^

" Financing Concems"and" Licensing Proceedings". There- ,

the sum of the amortzabon of a leased asset and the interest fore. there is no assurance that Seabrook Unit 1 will be placed . f on the lease obbgation equals the rental expense allowed for in service; and if the unit were canceRed or abandoned, UTs rate makingpurposes.

Rentalpayments charged to operating expenses in hnancial viabihty and business operations would be jeopard.

1986,1987 and 1988 amounted to $10,730, $ 10,838 and ited. See " Financial Consequences il Seabrook Unit I were

$12,821 respectively CanceHed".

If and when commercialoperat'on of Seabrook Unit 1is Operaung leases, which account for the largest part of achieved, the Company's future financialcondition will be rentalandlease payments charged to operatng expense, consist of a large number of small, rela 0vely short term, renew. heavilyinfluenced by the rate making treatment accordedits investmentin the unit. Therefore, the Company willattempt to able agreements for a wide vanety of equipment.

obtain a decision on the rate making treatment by the unit's commercialoperabon date. However, Connecticutlegislation.

(K) Commitments and contingencies describedin greater detaRin " Connecticut Legislation and The Company has entered into substantal commitments in connec?on with its conunuing construction program, which Regulatory P'oceedngs", has estabhshed a " cap"on recoverable costs of Seabrook Unit 1 and requires the DPUC is presently eshmated at approximately $388 million, including to exclude from rate: the cost of any excess generating AFUDC and excluding nuclear fuel costs, for 1989 through capacity ownedby the Company. Moreover, the DPUCis 1s\93, The majoritem in the construccon program is the Com.

presentfy conducting proceedings to audit the construction pany's 17.5% ownership share in Seabrook Unit 1, which is management of the Seabrook project, examining all of Urs virtuaHy complete. The Company cannotpredict the commer,  ;

ac00ns and costs relating to the construction and financing of cialoperation date of the Unit, since the operating hcense for the project in order to determine the appropriate amount of l the unit will notpermit commercial operation until various con.

dations are met, the most ditficult of which is obtaining the costs to beincludedin Urs rates. See " Prudence Audi!". As a result of this legislation and the DPUC's auditproceedings, the [

approvalof off-site emergency response plans. Due to delays Company does not expect that it wiu be permitted to recover attnbutable to the regulatory process and the non cooperation its funinvestmentin Seabrook Unit 1 through rates. See " Write-of Massachusetts pubhc officials in satisfying the cond100ns of ofts of Unrecoverable Costs", below. See also Note (C) " Rate. l the operating Mcense, the cost of the unit has exceeded the Related Regulatory Proceedings", conceming the Seabrook i 54.7 billion legislative " cap" described below. Ucensing Unit 1 construc00n work in progress (CWIP) revenues which i requirements and delays, controversies over the use of have been includedin Urs rates by the DPUC in previous rate nuclear power andinterventions and appeals in regulatory cases and which will be excluded from rates for an equivalent and environmentalproceedings have delayed the commercial period of Ome after the unitis placedin service.

operation date andincreased the cost of Seabrook Unit 1, have causeo Public Service Company of New Hampshire (PSNH), which holds the largest ownership share (35.6%) in nnancine concerns PSNH, which holds a 35.6% ownership interestin Sea-the Seabrook project, to commence a proceeding under the brook Unit 1, experiencedincreasing financialstress begin-Bann uptcy Code, and have caused Massachusetts Munici.

ning in May 1987. On January 26, t988, the Supreme Court of pal Wholesale Electnc Company (MMWEC), which holds an New Hampshire upheld the constitutionality of a New Hamp-11.59% ownership share, to cease paying its share of projoct costs and seek to withdraw from the project. Each month of share statute which prohibits the inclusion of CWIPin a ubhty's rate base, thereby effectively precluding PSNH from obtaining delayin commercialoperation increases the cost of the Com-a 15% emergency rate increase which PSNH had stated was I.

pany's share of the unit by approximately 59 million, pnmanly -

AFUDC. The $388 million estimate of construction program integral to a financialrestructuring plan it had proposed in an I etfort to avoid proceedings under the Bankruptcy Code.

costs for 1989 through 1993 assumes that this monthly increase wiu continue to July 1,1989. On January 28,1988 PSNH commenced a procee@ng under Chapter 11 of the Bankruptcy Code Under this statute,

- 3

m _

0 f- '

. PSNHis continuing its oper

tions whlle seeking a fin:ncial announced an c greement with c~rtain other S:abrook p:rtici-reorganizabon by which ownership of PSNH's generation and pants, including the Company, under which NU funded the transmission assets andits distnbution assets would be sepa- shortfaRin payment of monthly protect costs due to MMWEC's ratedinto two subsidianes of a new holding company. Under action through August 1988. Anintegralpart of this agreement

g. this reorganized structure, the retait electricity rates of PSNH is that the other participants have contracted to purchase for would be predominantly controIIed by the Federal Energy one year, commencing November 1988, a combined totalof

, Regulatory Commission, through its regulation of the rates 250 megawatts of capacity from the NU system at NU's aver-aharged by the generation and tratamission subsidiary to the age cost. The Company's share of this commitmentis 50 distnbution subsidiary. On January 12,1989, Northeast Utilities megawatts. On August 30,1988, NU concluded addduonal (NU) proposed an attemative reorganization plan, by which power sales arrangements with utshties other than the Com.

PSNH's operating assets would be purchased by NU and pany under which NU funded the MMWEC shortfaa through -

PSNH's interestin Seabrook wuld be transl erred to a new November 30,1988. On November 4,1988, PSNH and i corporation owned by PSNH's unsecured creditors and stock. MMWEC reached a tentative agreement under which holders. NU wouldprovide sulficient funds to the new corpo. MMWEC will continue to participate in the project. The agree-ratron to meet its 35.6% ownership share of continuing mentincludes a provision pursuant to which PSNH wiR Seabrook monthly project costs through 1991, and NU would advance funds in a aggregate amount not exceeding $30 mil-purchase the new corporation's share of the electricaloutput hon to pay MMWEC's share of monthly project costs from of Seabrook Unit 1 for the hte of the unit,if and whenit com. November 30,1988 until commercialoperation or cancellation mences commercialoperation. New England Electric System of Seabrook Unit 1 This agreement, whichis subject to obtain.

(NEES) has also expressed air interestin acquiring the operat- ing regulatory and bankruptcy court approvals, was ided with ing assets of PSNH, but notits investment in Seabrook; and the court on February 3,1989. Implementation of the agree.

NEES may propose an alternative reorganization plan. Any ment also involves the present and former Seabrook partici.

rearganization plan wsR be subject to obtaining approvals from pants exchanging mutualteleases of claims arising out of the affected stockholders, creditors and regulators, as welas the construction of the project. There can be no assurance that bankruptcy court. regulatory and bankruptcy court approvals of this agreement The Companyis unable to predict whatimpact these wiR be obtained. Itit is not approved, UI and other Seabrook proceedings under the Bankruptcy Code may have on participants win endeavor to arrange an alternative funding PSNH's payment ofits share of the continuing monthly project arrangement of MMWEC's share of monthly project costs sub-costs of Seabrook Unit 1 or on the licensing proceedings - sequent to November 30,1988. However, there can be no Seabrook Unit 1. Although PSNHhas continuedpaying h assurance that any such etforts would be successful.

share of Seabrook Unit 1 costs, the bankruptcy cour' A Vermontparticipantin the Seabrook project, Vermont broad discretion as to which of PSNH's obhgations Electric Generation and Transmission Cooperative, Inc. (Vt continue to honor in connection with the Seabroos - Coop), which holds a 0.4% ownership share, has failed to ers' request for permission to conduct lower pows make construction funding payments due since January 1986.

the unit, the Nuclear Regulatory Commission (NR( However, the deficiencyin project construction funding on deniedintervenors' petikons, based on the commencement of account of Vt Coop's dennquencies has been andis being PSNH's bankruptcyproceedings, for a waiver of the NRC reg- made up by advance payments by the Company and some of Ulabon which prohibits anyinquiry, during an operating hcen- the other participants or their affiliates. The l'ompany's share sing proceeding,into the financialquahtication of an electric of advance payments on account of these delinquencies utdity's abihty to operate a nuclearplant safety. However, since amounted to approximately $720 thousand at December 31,  !

the outcome of bankruptcyproceedings is unpredictable, and 1988.

Since the NRC has not decided whether the proceedings are a The New Hampshire Electric Cooperative, Inc. (NH sulficient basis for waiving its financial quahfication regulation Coop), which holds a 2.2% ownership share in the project, in connection with a request forpermission to operate Sea- failed to make construction funding payments from January to brook Unit 1 at fullpower, the Company cannotpredict what April 1988. This deHquency was also made up by advance action it and the otherjoint owners of the unit wdl take in payments by the Company and some of the otherparticipants

, response to developments in these regards or whatimpact the of their affdiates. The delinquent amoc.,t was paidin full with l bankruptcy proceedings willhave on the Company's financial interest by NH Coop on May 20,1988.

l condition. On December 21,1988 the NRC decided aR of the On June 1, I988, MMWEC, which holds an 11.59% financial quahtication issues that had been admitted for con-ownership share of the Seabrook project, adopted a plan of sideration in connection with low power testing of Seabrook

, acdon to withdraw frorr the project, including cessation of pay Unit 1, including the bankruptcy of PSNH, the effect of New

l. ment of its share, approximately $2 mdhon, of totalmonthly Hampshire's anti CWIP statute, and the cessation of or arrears .

l' project costs. Since that date the shortfallin monthly payments in project payments by MMWEC, VT Coop and NH Coop. The l has been met by a combination of MMWEC's prepayments, NRC concluded that no significantlow power testing safety 1

payments by NUin return for capacity sales, and withdrawals problem was presented by these financialquahtication con-l from project cash balances and advances by other partici. cems and that low power testing may proceed when several pants in anticipation of the implementation of the agreement minor on stte emergency planning issues are resolved and the between PSNH and MMWEC descnbed below. Under this joint owners have provided for a sum of $72.1 mahon to be agreement lthdrawals and advances willbe reim- avadable for decommissioning Scabrook Unit 1 in the event bursed os, e to be advancedfor MMWFC by PSNH. On that low power testing is conducted and commercialopera-l July 13,1985 r ortheast Utihties (NU), which through a subsid. tion is never achieved. The joint owners expect to meet these My has 3 41% CwnurShip Shdru on the Soubicok prvject, Gonal: Gnu lui luw pvwut lustony dunny U,t> iaM quanut ut 1989; but there is no assurance that they wdl be able to 00 so.

l ine uwe numonnne comoany 49

!. +

y b Connecticut Legisiation end neeulatory Proceedings ' Legislaton enacted by Connecucutin 1985 requires the Commencing in April 1985, the Connec6 cut DPUC has DPUC to phase in the cost oflarge electnc generating facihties

': periodicaHy conducted reopened public hearings in the pro- into a utshty's rates in approximately equalinstallments over a

(

f ^ ceedings in which it found, in November and December 1984, penod of notless than 3 years nor more than 10 pars from the that Seabrook Unit I will become used and usefut for pubhc in service date of the facihtyif the inclusion of at costs would

(' service andis economicaHy viable. The CPUC has not reversedits 1984 findings as a result of any of hese haanngs, increase the v0hty's revenue requirements by more than 10%

This legislation will be applicable to the Company's Seabrook including the mostrecent of such heanngs which were con. Unit 1 costs of and when it is placedin service. In any event, as cludedin March 1986. In February 1988. the DPUC 1001d. .'n a descnbedin Note (C), " Rate.Related Regulatory Proceed-

rate proceeding of The Connecticut Light and Power Com. ings". UI's rates have included revenues associated with pany, that, while the economic consequences and appecpri- Seabrook Unit 1 CWIP, and a statutory condition of the onclu.

ateness of expenditures resol 0ng from delayin the opersuon of soon in rates of Seabrook Unit 1 CWIP revenues is that an Seabrook Unit 1 were subject to subsequentregulato:y amount equal to the CWIP revenues win be excluded from review, the unit was Hkely to become used and useful rates after the unitis in service for a period of time equal to Legislation enacteJ by Connecdcutin 1984 directed the the time the CWIP revenues had been in rates. Other 1985 l DPIIC to establish a hmit on the cost of Seabrook Unit 1 that Connecticutlegislation requires the DPUC to determine the

,

may be recovered through rates, which hmit wiH be subject to appropriate level of generating reserve capacity for a utility escala00n only forlabor and matenalcostincreases due to prosecuting a rate proceeding and to exclude from the utshty's infiabon exceeding 10% per year,* cost increases directly attrib- rates the costs associated with any excess capacity.

^ utable to new NRC regulations, and costs due to unforesee.

able and unavoidable labor stoppages. On September 27, ucensing proceedings 1984, the DPUCissued an order umitng the costs of Seabrook Nuclear generaung units are subject to the kcensing Unit 1 that may be recovered through rates by the Company to requirements of the NRC under the Atomic Energy Act of 1954, its share of costs notin excess of $4.7 billion (which figure as amended, and a variety of other state and federalrequire.

includes $200 million ofindirect construc00n costs previously ments. It has been the exponence of the electnc utihtyindustry allocated to Seabrook Unit 2), subject to increase only for the that the construcdon andinitialoperaton of these units are reasons notedin the preceding sentence. On December 11, subject to increasingly stringent kcensing requirements which, 1984, the Company filed an appeal with the Connecticut with other factors, have tended to increase the costs of and Superior Court challenging both the DPUC's order and the delay completion dates for the Units, in some instances precip-consttutionality of the 1984 legislacon. In 1985, the Connecti- itating cancella00ns ofprojects alter the expenditure oflarge cutlegislature amended the 1984 legisla00n to embody the amounts ofmoney, terms of the DPUC order, and the Companyhas challenged The Mcensing of Seabrook Unit I has been plagued by the consktutionahty of this amendment. Due to the delayin lengthy delays and has been repeatedly opposed by a num-achieving commercialoperation of the unit, the $4.7 bilhon cost ber ofintervening groups, which have participated ackvely in "ca?" has been exceeded. Each month of delayin the unit's administra0ve proceedings, filed numerous lawsuits and dem-in service date increases the total cost of the unit to the Com- onstrated at the construccon site. On October 17,1986, the pany by approximately $9 minion. NRC issued a fun 40 year operating license for Seabrook Unit in 1985, the Connecucutlegislature enacted a stature 1, permitting fuelloading. However, this hcense is subiect to which provides that,if the DPUC determines that a regulatory severalconditions which must be satsfred to permit an orderly or court decision in another state may substantiaHy affect the progression from fuelloading, which was completed on Octo-construction costs or the completion date of Seabrook Unit 1, ber 29,1986, to low power (5*4) testing and finalty to full-l the DPUC must require that any construcbon costs of the unit poweroperation.

incurred by the Company after the date of the DPUC's deter. As descnbed above at " Financing Concems," a mina00n not be recovered through rates, unless the unitis December 21,1988 decision of the NRC winpermitlow power subsequently completed and becomes us 3d and useful. tesung to proceed when severalminor on site emergency Following heanngs held on October 7,1985 and November planning issues are resolved and the joint owners have pro-6,1985, the DPUC determined that neither the construccon vided for a sum of $72.1 minion to be available for decommis-l costs not the completion date of Seabrook Unit I had been sub- sioning Seabrook Unit 1 in the event that low power tesung is l stantally affected by a 1985 Massachusetts Supreme Judicial conducted and commercial operation is never achieved.

1 Court decision which prevented MMWEC from issuing long. Although the joint owners expect to satts!y these condicons term debt to pay for Seabrook construction costs and resulted dunng the hrst quarter of 1989, there is no assurance that they in MMWEC's issuance of more expensive short term debt. The will be able to do so; and court challenges to the NRC's deci-Connecticut Office of Consumer Counsel (OCC) tiled an sion and to low power tesong can be expected.

appest with the Connecticut Superior Court chauenging this Following the satisfactory comple00n oflow power test-DPUC determina00n, which the Superior Court dismissed on ing, the remaining Itcensing issues which have been identihed November 1,1988. to date and which must be resolved prior to commercial oper-ation relate to the financial qualification of the joint owners to operate Seabrook Unit I safely and to the development of sat-isfactory off. site emergency response and evacuation plans

• increases in the Company's weighted average AFUDC rate after December 31,1983 above 10% % per year,

.. w -

for the ten mile emergencyresponse and evacu: tion planning On June 28 cnd 29.1988, a fun scad, graded cmer.

L zone surrounding the plant. Successfulresolubon ot the finan- gency preparedness exercise was conducted at Seabrook for cial quakfication issue wilbe dependent in large part on favor- both Massachusetts and New Hampshire emergency

? able developments in the PSNH bankruptcy proceedings response plans. Preliminary reviews by the Federal Emer-t_ descnbed above at " Financing Concems, about which no gency Planning Agency (FEMA) and NRC offacials indicated assurance can be given at this time. With regard to ofI site that aHparticipating organizations had demonstrated that they '

emergency response and evacuation planning, the State of could adequately protect the pubhc health and safety. On July New Hampshire prepared and filed a plan for tne seventeen 6,1988, the NRC issued an inspection report on the es ercise New Hampshire communities within the ten mile planning that contrmedits prehminary conclusions. A finalreport from zone in 1985, the Atomic Safety and Licensing Board (ASLB) FEMA on Septem >ct 6,1988 stated that it found no deficien-of the NRC heldpublic hearings on the plan from October ciesin the plans.

1987 to June 1988, and the ASLB approved the plan on On November 18,1988, the President of the United December 30,1988, as described below, although additional States issued an Enecutive Order covering FEMA's assistance appeals and addibonalproceedings before the NRC and the in emergency preparedness planning at commercial nuclear courts are anticipated. However, the state government of powerplants. This order enable the federaf 00vemment to _

Massachusetts. which is responsible for the development of participcte in such planning and to delegate federalauthonty such a plan in Massachusetts, has not ided a plan for the six to a unhty or other entity to carry out an emergency response Matsachusetts communik'es within tne ten-mile planning zone and evacuation plan. On December 14,1988 FEMA issued and, in a statement issued September 20,1986, Governor the results ofits integrated review and evaluation of all off site Michael Dukakis stated that he does not intend to do so emergency response and evacuation plans for Seabrook Sta-because he does not bekeve thatitis pocstb'e to develop a tron. FEMA determined that the plan for the State of Maine was c plan that would adequately protect f>vbMc health and safety If adequate to protect public health and safety, and that the New an accident were to occur. Hampshire plan would also meet FEMA approval after pro.

On October 29,1987, the NRC unanimously adopted a posed enhancements to the alert and notsfication systems are hcensing rule change which allows fur power operation of a complcte. FEMA further determined that tho plan for the Mas-nuclear plant to begin where there is a lack of paracipation in sachusetts communities win also provide for adequate protec-the devebpment andimplementation of emergency response tion of public health and safety when a vehicular alert and and evacuation planning by state or local govemments. This notificatiots system for that area is operational. On December ,

rule change requires the plant's owners to demonstrate to the 20,1988, the ASLB !ssued a PartialInitial Decision on the New NRC's sabstacbon that (1) the planning deficiencyis whony or Hampshire portion of the Seabrook Stat on Emergency substantiaHy the result of the non parbcipation ot state and or Response Plan. In this decision, the ASLB foundreasonable local govemments, (2) plans prepared by the owners provide assurance that adequate protective measures can and walbe reasonable assurance thatpublic health and safetyis not taken within the New Hampshire portion of the ten mile emer-endangered by operation of the plant, and (3) the owners have gency planning zone in the event of a radiological emergency made a sustained good faith elfort to secure and retain the at Seabrook, subject to the sehsfaction of severale oecified participation of the pertinent state andorlocal govemmental conditions. Providing satisfactory responses to these condi-authontres, including the lumishing to them ot copics of the tions is not expected to present a major challenge.

plans. The Commonwealth of Massachusetts, the State of Regulatory proceedings with respect to the transfer of New \brk and severalprivate parties have chauenged this rule responsibthty for management of construction and for opera.

change in court proceedings; and, although a federal appeals bon of Seabrook Unit 1 to New Hampshire Yankee Electnc courtin Boston has upheld the rule change and the Seabrook Corporation, an entity which has been created by the Sea-owners have attempted to demonstrate that the utility spon- brook joint owners for these express purposes, are pending sored emergency response plan which they have ided for before the Massachusetts Department of Pubhc Utihties.

Massachusetts satisfies the requirements of the revised rule, Approvalof this transfer by the NRC and the PSNH bank-there can be no assurance that the NRC's rule change will ruptcy court will also be required. On September 2,1988. the survive additionallegalchaHengss or that the owner's plan wsH bankruptcy court refused to approve the transfer, finding that satisfyits requirements. insufficient evidence had been submitted to justify approval at On Apal8,1987, the New Hampshire Yankee Division of that time. The joint owners wdl continue to seek the required PSNH (NHY) filed an emergency response and evacuation regulatory approvals, but the Company cannot predict when .

plan for the six Massachusetts communities within the ten mile orif the approvals willbe obtained. 1 planning zone. On June 11,1987, the NRC determined that l this plan was inadequate; and on September 21,1987, NHY nnancial consequences it seebrook unit 1 were cancetted ided a new utshty sponsoredplan for the Massachusetts com- In addition to resolution of the present financialproblems munities. On October 20,1987, the statiof the NRC concluded of PSNH, the outcome of cending andpossible future state that the new plan is a " bona fide utshty plan" which compen- and federal regulatory proceedings is of particular signih- l sales for the absence of participation by the govemmental cance in assessing the nsk that Seabrook Unit I willnot be 1 entities in Massachusetts. In a November 25,1987 decision, placedin commercialoperation, despite the several'avorable '

the NRC agreed wnth this analysis ofits staff. The ASLB wsH developments noted above. See " Financing Concems" and conductpublic heanngs on the utihty sponsored plan, and vig. "Ucensing Proceedings". The Companyis unable to predict orous opposition to the plan before the ASLB, the NRC and either the outcome of these proceedings or the nature or the courtsis expected. scope of any action which might be taken by the other Sea-brook participants 11 the outcome is unfavorable. l i

l raie un,seo msnmary comeay _ _

$f

m e ,, -

bi1 r

4 U*

i If Seabrook Unit 1 were to be canceHed, it would have a prudence Avoit materialadverse irapact on the Company's hnancialcondition On September 15,1987, the DPUC released the results 9

and its abihty to meet the long term needs ofits customers, of an audit study conducted by a consulting firm selected by i and the Company's financial viabikty and business operations the DPUC to perform a comprehensive management audit of l couid be jeopardized. At December 31,1988, the Company's the planning and constructon of Seabrook Units 1 and 2 )

investmer~ tin Seabrook Unit 1, after giving ettect to SFAS No. through October 31,1986. This report concluded that certarn i

( '

90 wnte offs, amounted to approximately $781 milhon, includ. project costs were " excessive and unnecessanlyincurred".

ing AFUDC but excluding approximately $70 miHion of nuclear The Company's proprobonate share of these costsis 5165 mil-

~ fuel. This investment exceeds the book value of the Compa. hon for Unit 1 and $76 milhon for Unit 2. The Company dis-ny's utihtyplantin service Although the Company would apply agrees with this conclusion, has fIcd extensive direct and

, to tu re DPUC to amortize its investment over an appropnate rebuttaltestimony, andis contesting the conclusion vigorously g penod of time and to recover the investment through rates, in the DPUCproceedings, which wHinvolve public heanngs incre would be no assurance as to whether or to what extent commencing in mid 1989 and may produce a DPUC decision the DPUC would grant such recovery As descnbedin "Wnte. during the FaH of 1989. ,

ofis of Unrecoverable Costs" below, aH of the investment that i is anticipated to exceed the Connecticut statutory cost " cap" write.otts orunrecomaku costs assuming a July 1,1989 commercialoperabon date, has been In accordance with changes in accounting rules l' recordedas a non cash wnte off againstincome. Anyprv. adopted by the FAS8, in the first quarter of 1988 the Company 7

dence disallowance of costs might also be required to be recorded a non-cash wnte off for Seabrook Unit 1 unrecovera-recorded as a loss againstincome, although itis the Compa. ble costs associated with Connecbcut's ' cap" legislation,

, ny's position that only that portion of any prudence disanow. assuming a January 1989 commercialoperation date, which ance that exceeds Costs over and above the statutory cost amounted to approximately $150 miHion, net of applicable

" cap" would be unrecoverable and required to be so income tax effects, by restating the fmancialresults for the recorded as a wnte ofIagainst currentincome. Further,if the pars 1986 and 1987, when the write ofis would have been Company were aHowed a recovery of costs without a retum on recorded had the present rules been in oflect dunng those ,

investment, it would be required to reduce the valuation ofits penods, rather than as a charge against 1988 income. In adds. l investment and record an additionalloss against current bon, in September 1988 the Company recorded a further non-  !

income. Moreover, the Company's annualized revenues pres. cash wnte off against currentincome of approximately $35 l endyinclude $12 million associated with the inclusion of $48 miHion, net of related income tax offects, to recognize a proba-  !

million of Seabrook Unit 1 CWIPin the Company's rate base, ble addibonal delay in the commercial operation date of Sea. , . ,

which would also be in jeopardyin the event of cancellation of brook Unit 1 to atleastJuly 1,1989. This additional write off

the unit. Consequendy, although the Companyis unable to reduced 1988 eamings by $2.56 per share. If, due to the predrct the outcome of the regulatory proceedings in which aH DPUC's prudence audit, an excess capacity disanowance, or  ;

any other reason, the Company is not allowed to recoverits i of these matters would be determinedif Seabrook Unit I were cancelled, adverse decisions in these proceedings could share of the Seabrook Unit I cost " cap", orif the commercial l

jeopardize the Company's financial viabihty and business operation date is delayed beyond July 1,1989, the Company operations. win be required to record a further non cash write ofIagainst ,

Cancellation of Seabrook Unit I would remove allof the income as soon as the amount of the disaHowance becomes Company's investmentin the unit from the calcula00n of the probat te and can be reasonably estimated. The Company kmit on the aggregate amount of the Company's unsubordi. estimates that a furtherpostponementin the commercialoper- y nated short term and long term borrowings prescnbed by the ation date of Seabrook Unit 1 Would require addConalnon-  ;

TrustIndenture under which an of the Company's Debentures cash wnte-ofis of approximately $6 miHion, net of related are issued. The Company's borrowing limit would be reduced income tax ellects, for each month of delay thereby to a levelsubstantially belowits outstanding borrow. l ings, precluding further unsubordinated borrowings by the otMr cornenstants ena cononeencks Company and obligating it to reduce its outstanding borrow- On November 22,1985, the DPUC approved the issu- .

\

ings to the new lower borrowing limit prior to May 1 of the ance and sale by Bridgeport Electric Company (BEC), a succeeding year. In such an event, in order to preserve its whouy owned subsidiary of the Company, of approximately financial viabihty and business operations, the Company 5100 milhon pnncipal amount of 18% First Mortgage Bonds.

would be compelled to attempt to seu secunbes that arejunior The sale of the bonds was consummated and the Company to the Company's Debentures and to seek a waiver of tne Trust received the proceeds on the same date. On November 25, Indenture borrowing kmit from the holdem of an outstanding 1985, the Connecucut OCC appealed to the Superior Court of senes ofits Debentures issuedprior to July 1,1987. Approval Connecticut from the DPUC's decision, aneging that the DPUC of the holders of two-thirds of theprincipalamountof allsuch did not comply with statutory procedures in reaching its deci-Debentures would be required to obtain such a waiver. The sion and that the decision violated the DPUC's regulattor's and Companyis unable to predict whetherit would be successful its previous decisions. AH of the bonds that are the subject of in either of these endeavors. this appeal have been purchased and retired by BEC in con-nection with the refinancing program being camed out by the '

Company and BEC. The OCC withdrewits claim that the court' -

l l should vood the issue and sale of the bonds; and the parties agreed that the DPUC should determine at what interest rate BEC could have issued and sold the $ 100 milhon of bonds in

- , a

( -, -

+

7 Ii ,

,J 1985 ifit had not been bound byits 1984 contracts, and (L) Overterly nnancial Date (Unaudited) whether the cost of refinancing these bonds would oncrease Selected quarterly 1,nancial data for 1988 and 1987 are .

the Company's electnc rates to a higherlevel than the rates set forth below:

. which would have been expenenced of such bonds had been issued and sold at such interest rate. On June 8,1988, a sup. E*ml"98

{' plemental decision was issued by the DPUCin which it found Operating Operating Not oko# m on

(. that BEC coulo have issued and sold tho $100 millior, of bonds Quarter Revenues Income Income stock ts; L. in 1985 at a 15% interest rate, but that the Company's cus. 1988 tomers have not been adversely affected by cather the in!erest first $126,712 $27,60$ $32,478 $2.13 rate ditforentialor the cost of refinancing said bonds. The Second 120,465 25,476 24,911 1.59 DPUC also found that the Company's customers may be Third 144,638 32,317 (2,342) (.37) adversely aflecteG in the future by the bond refinancing cost, Fourth 127,123 26,497 23,592 1.50 depending on the timing of the Company's next rate proceed. '90III)

First $121,859 $24,953 $29,252 $1.88 ing and on whetheritis found that the Company actedimpru-Second 120,028 19,147 (65,210) q4.91) der'tlyin obtaining the terms for the additional bonds issuedin

1. 0' 1985. Further proceedings in the Superior Court are pending.

Connecticut Yankee Atomic Power Company (Connecti-

1. 340f 4, '

cut Yankee), in which the Companyhas a 9.5% common stock (1) Based on weighted average number of shares outstand-ownership share, owns and operates a nuclear electric gener. ing each quarter, ating station in Haddam Neck, Connecticut. The Company is (2) The financialdata for 1987 have been restatsrd to reflect obbgated to fumish 9.5% of Connecticut Yankee's capital adjustments for the adoption in March 1988 of SFAS requirements, within specified hmits. Connecticut Yankee has No. 90, a new accounting standard cceering plant been engaged in a construction program which is essential to abandonments and Jisallowances of plant cost; and maintain its station as a dependable source oflow cost elec. SFAS No. 96, the new standard pertaining to accounting tric powerin New England. As a condition of the debt financ, forincome taxes. ,

I

. ing arrangements for this construction program, the lenders from time to time have required guarantees from the shat- Market for the Company % Common Equity and Related eowners of Connecticut Yankee. Currently, the Company's ka. Stockholder Metters -

bility forIts share of Cor:necticut Yankee's long term debt UI's Common Stock is traded on the New %rk Stock issues amounts to approximately $2.9 million. Exchange, where the high andlow sale pnces during 1988  !

The Company is a party to a ten 9 ear contract for the and 1987 were as fonows:

sale of seven bdlion kilowatt-hours per year of firm energy by Hydro-Quebec to the Hpiro-Quebec Phase ilparticipants, 1988 Sale Price 1987 Sale Price including the Company. The Company has a 5.45% share in HI9h Low High Low this phase of the project, which was authorind by the Con. First Quarter 27% 19 % 34 30 necticut DPUCin April 1987. The Phase 11 agreements provide Second Ovarter 23 19 % 32 % 24 >

for expansion of the capacity of the transmissionintertie Third Quarter 24 % 21 % 27% 21 %

l Fourth Quarter between New England and Ovebec from 690 megawatts to 27 % 23 27 % 21 %

2,000 megawatts in the early 1990's. In late 1987 the Com-pany was concemed about delays and uncertaintres in the UI has paid quarterly dividends on its Common Stock progress of this project, and on January 25,1988, UIsigned since 1900. The quarterly dividends declaredin 1987 and ,

an agreement to sen the Company's interestin the second 1988 were at a rate of $8 cents per share. j phase of the Hydro-Quebec interconnection to New England The Trust Indenture under which all of the Company's l Power Company, subject to DPUC approval. Subsequent Debentures are issued places limitations on the payment of f developments in 1988 successfuny address 9d the areas of cash dividends on the Common Stock of the Company and on ,

concem regarding the project that prompted the Company's the amounts that can be expended to purchase or redeem i decision to sell, and on August 31,1988, the DPUC ordered shares of Common Stock. However, an the Company's the Company to remainin the project. retained eamings at December 31,1988 were free of such h In complying with existing environmentalstatutes and limaations.

l regulations and further developments in these and cther areas As of January 31,1989, there were 26,567 Common }

of environmentalconcern, including legislation which is receiv. Stock shareowners of record. l ing senous consideration at federaland state levels in the l fields of water and air quality (particularly " acid rain" and t

" global warming"), hazardous waste handling and disposal and toxic substances, the Company may incur substantial capital expenditures for equipment modifications ar'd addi-tions, monitoring equipment and recording devices, and it may incur additionaloperating expenses. The totalamount of these expenditures is not now determinable.

I

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V* REPORT O!INCEPENDENT CER TIFIED PUBUC ACCOUNTANTS b, 1

[

16 the Shereowners and Owectors et. .-

l Tbe UnitedInuminating Company ,

fn

~

• We have audited the accompanying consoudated balance sheets of The UnitedIHuminating Company as of , ,

V December 31,1988,1987 and 1986, and the related conson. .

.

F. dated statements of encome, retained eamings and cash hows

] . for the years then ended. These financialstatements are the

( responsibility of the Company's management. Our responsibil-( ttyis to express an oponton on these financialstatements .i V basedon ouraudits.

We conducted our audits in accordance with generally  ;

fv accepted aud:Dng standards. Those standards require that we >

, plan and perform the audit to obtain reasonable assurance _

about whether the financial statements are free of materialmis.

statement. An auditincludes examining. On a test basis, evl. ,

dence supporkng the amounts and disclosures in the financial t

statements. An audit alsoincludes assessing the accounung i

(~ pnnciples used and signincant eshmates mads by manage-ment, as well as evaluakng the overaR financialstatement  ;

. presentation. We beheve that out audits provide a reasonable

!' ' basis forouropinion.

In out opinion, the consolidated financialstatements  !

i referred to above present fairly, in allmaterial respects,the con.

l ;sondatea financialposition of The Unitedilluminadng Com- ..

!: pany as of December 31,1988,1987 and 1986, and the r

. consoRdated results ofits opera 00ns andits cash flows for i the years then endedin conformity with generaHy accepted I accounungprinciples.

L The Companyis a 17.5% participantin the Seabrook

?' Unit 1 Nuclear Project (the Unit). As more fumy describedin Note (K)in the " Notes to Consolidated Financial Statements",

there are uncertainties reladng to those events necessary for '

the Unit to achieve commercialopera00n and to the extent of

. the recovery,in rates, of the Company'sinvestmentin the Unit.

The outcome of these uncertainties couldhave a material t oflect on the financialposition and results of operations of the Company, andit is unce. tain whether such material eflects would permit the reaNzation of assets and Hquidation of Rabin.

ties in the ordinary course of business operations.

As discussedin Notes (B) and (D) to the consoHdated Enancialstatements, the Company changedits methods of

( 'accounung for plant disallowances and abandonments and income taxesin 1988.

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