ML20155D035

Annual Rept 1985,Connecticut Light & Power Co

ML20155D035
Person / Time
Site:	Millstone
Issue date:	12/31/1985
From:	Ellis W CONNECTICUT LIGHT & POWER CO. (SUBS. OF NORTHEAST
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ML20155D016	List: ML20155D013 ML20155D035 ML20155D090
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NUDOCS 8604170226
Download: ML20155D035 (42)

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ANNUAL REPORT 1985

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! CL&P THE CONNECTICUT LIGHT AND POWER COMPANY a subsidiary of Northeast Utilities

!$0"$0$$k$I000$4s I PDR

l DIRECTORS l PHILIP T. ASHTON FRANK R. LOCKE Senior Vice President Vice President and Chief Administrative Officer.

Western Massachusetts Electnc Company JOHN P. CAGNETTA Vice President LEON E. MAGLATHLIN, JR.

Senior Vice President WILLIAM B ELLIS Chairman and Chief Executive Officer JOHN F. OPEKA Seni r Vice President WALTER F. FEE Execuwe Vice President LAWRENCE H. SHAY Senior Vice President E. JAMES FERLAND President and Chief Operating Officer WALTER F. TORRANCE. JR.

Senior Vice President, Gc neral Counsel and BERNARD M FOX Assistant Secretary Senior Vice President and Chief Financial Officer OFFICERS -

WILLIAM B ELLIS JOHN P. CAGNETTA RICHARD P. WERNER Chairman and Chief Executive Off.cer Vice President Vice President E JAMES FERLAND TOD O. DIXON W. LINDSEY BOOTH Pres +deat and Chief Operating Officer Vice Presidert Regional Vice President-Eastern WALTER F. FEE RAYMOND E. DONOVAN THOMAS F. BRENNAN Executwe Vice President Vice President Regional Vice President-Central PHILIP T ASHTON ALBERT J. HAJEK LESLEY C GEROULD Senior V;ce President Vice President Regional Vice President-Southern BERNARD M FOX WARREN A. HUNT ROY C. NORMEN Senior Vice President and Vice President Regional Vice President-Northern Ch<e' Financial Officer FRANCIS L. KINNEY ROBERT W. ZONGHETTI LECN E. MAGLATHLIN. JR Vice President Regional Vice President-Western Sen:or V,ce President EDWARD J. MROCZKA GEORGE D UHL JOHN F OPEKA Vice President Controller Senior Vice President HARRIE R. NIMS ROBERT W. BISHOP LAWRENCE H SHAY Vice President Secretary Senior Vice President LEONARD A. O'CONNOR CHERYL W. GRIS WALTER F. TOPRANCE. JR. Vice President and Treasurer Assistant Secretary Senior Vtte President. Generat Counsel and Assistant Secretary RICHARD A. RECKERT DOUGLAS R. TEECE Vice President Assistant Secretary C. THAYER BROWNE Vice Pres-dent WALTER T SCHULTHEIS ROBERT C. ARONSON Vice President Assistant Treasurer CARROLL A CAFFREY Vice President C. FREDERICK SEARS DAVID H. DOGUSLAWSKI Vice President Assistant Treasurer JOHN J. SMITH Vice President FEBRUARY 28,1986

The Connecticut Light and Power Company February 28, 1986 To Our Preferred Stockholders:

a, he financial statements and statistical data contained in this repori reflect the results of operations of The Connecticut Light and Power Company (CL&P) for 1985. The 1985 annual report of Northeast Utilities, which provides information regarding the entire Northeast Utilities' system, including CL&P, has also been mailed to all CL&P prefer:;ed stockholders. This report is brief for that reason.

During 1985 numerous issues regarding CL&P's rates and earnings were addressed by the Department of Public Utility Control (DPUC). DPUC orders changing the way CL&P accounts for its deferred fossil fuel charges and accounting for earnings in excess of previously approved levels were issued. In November 1985, CL&P filed an application for an aggregate j annual revenue increase of approximately $155.5 million or 9 percent. We application contemplates three annual revenue increases of approximately 9 percent each to phase-in costs associated with Millstone 3. A decision is expected by June 1986.

The first phase of a management audit engaged by the DPUC to review the prudence of the management and construction of Millstone 3 resulted in CL&P being alleged to have been " inefficient" in certain construction areas. These alleged inefficiencies resulted in approximately $121.1 million of additional costs. These inefficiencies apply to the entire cost of Millstone 3, not just CL&P's share. CL&P is challenging the findings of this audit before the DPUC.

Millstone 3 is on schedule for a May 1, 1986 in-service date. The i

estimated cost of CL&P's expected ownership of 52.93 percent in the unit is estimated to be $2.02 billion, based on the unit's estimated cost of $3.825 billion. The unit received an operating license from the Nuclear Regulatory Con 1 mission (NRC) in November permitting operation at power i levels of up to 5 percent. In January 1986, the NRC granted the unit a I full power operating license.

In 1985, CL&P used the proceeds of a $50 million bond issue to redeem a portion of an outstanding bond series that carried a higher coupon rate. I It also issued $153.9 million of tax exempt bonos and entered into a financing agreement with the Connecticut Resource Recovery Authority to borrow up to $60 million to refurbish the South Meadow Plant's turbine generators and other facilities. In 1986, CL&P plans to issue additional long term debt in part to refund higher coupon debt.

l Sincerely, 1

1 President Chairman j

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The Connecticut Light and Power Company l

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains management's assessment of The Connecticut Light and Power Company's (the Company) financial condition at.d the principal f actors which have an impact on the results of operations. This discussion should be read in conjunction with the Company's financial statements and footnotes.

FINANCIAL CONDITION The Company's net income decreased to $277.1 million in 1985 from

$284.2 million in 1984. Factors affecting earnings include the cost of repairing the damage to transmission and distribution facilities caused by Hurricane Gloria, the effect of an interim order issued by the Connecticut Department of Public Utility Control (DPUC) in 1985 and the general impact of inflation on most expenses. The earnings decrease was partially offset by an increase in the allowance for funds used during construction (AFUDC), a noncash item, which provided a significant portion of the Company's earnings.

The outlook for the Company's financial condition is now heavily dependent upon the decisions expected primarily in 1986 from various regulatory l commissions regarding the rate treatment to be accorded the Company's investment '

in Millstone 3. That unit remains on schedule to begin commercial operation by May 1986 and represents approximately one-half of the Company's net plant in se rvice .

Millstone 3 Rate Issues A number of significant issues relating to the rate treatment for Millstone 3, as described here, must be resolved in 1986. The Company has proposed a three-year phase-in of the costs of Millstone 3 into rates in its i recent retail rate filing. The Company owns 52.61 percent of Millstone 3 and l has reached an agreement to purchase, in 1986, an additional 0.32 percent i ownership interest in the unit. Management believes that its phase-in plan equitably balances the objectives of providing customers with the lowest practicable rates, while also protecting the interests of investors. Necessary improvements in the Company's financial condition will be impeded if the phase-in period is extended beyond three years or if portions of the Company's investment in Millstone 3 are disallowed for any reason.

The DPUC engaged The Nielsen-Wurster Group, Inc. (Nielsen-Wurster) in 1984 to conduct a comprehensive rettonpective audit of the prudence of the management and construction of Millstone 3. In October 1985, Nielsen-Wurster filed its final report on phase one of its two-phase audit, covering the period from i

inception through September 30, 1984, and found no areas of imprudent decision making in the management of Millstone 3. However, there were areas in which Nielt a-Wurs' r found the Company to have been " inefficient," representing approximately $121.1 million of total additional project costs, including AFUDC.

These costs relate to the entire cost of Millstone 3, not only the Company's share. Nielsen-Wurster's findings are being considered by the DPUC, along with other evidence being received by the DPUC, in deciding the amount of the Company's investment in Millstone 3 that is to be included in the Company's rate basc. The Company strongly challenges the allegation of inefficiencies and has presented its own rebuttal evidence to support its position in proceedings

' before the DPUC. Phase two of the audit will cover the period from October 1, 1984 to project completion.

Legislation enacted in Connecticut during 1983 could limit the recoverability, with certain exceptions, of Millstone 3 construction costs above the unit's 1982 estimated cost of $3.54 billion. The current estimated cost for the unit is $3.825 billion. The Company is not able at this time to l

determine how much, if any, of the total cost of Millstone 3, above

$3.54 billion, would not be recoverable because of this legislation. The Company believes that it is entitled to full rate recognition of all prudently incurred investments in facilities.

Legislation enacted in Connecticut during 1985 requires the DPUC to i

determine, in all rate applications, the level of generation reserve capacity necessary to provide a net economic benefit to customers. In making its determination, the DPUC is to consider New England Power Pool standards, state l energy policy, and any other factors the DPUC determines appropriate. The law requires the DPUC to exclude from rates any costs associated with generating facilities which would provide reserve capacity in excess of the level determined by the DPUC in a maaner that provides the optimal short-term and long-term benefits to ratepayers. Hearings on this issue began in January 1986, and the DPUC's findirgs will be incorporated into the Company's current retail rate case. The Ccapany believes that its current capacity level and the level of capacity that is planned after Millstone 3 begins commercial operation are appropriate and not excess within the meaning of the law. The Company cannot, however, predict the outcome of the DPUC proceeding on this subject.

If any of the rate-related proceedings described here result in the Company failing to receive full rate recognition of its prudently incurred investments in Millstone 3 and the Seabrook project, the consequences for the Company could be adverne.

In many jurisdictions, regulatory decisions have f ailed to permit full and timely rate recognition of investments in new generating facilities.

Under generally accepted accounting principles currently in effect, amounts excluded f rom rate base by a regulatory commission would not necessarily be written off as a charge against income at the time of disallowance unless

allowed rates, including a return on investment, would be inadequate to recover the totd1 cost of the facility, plun related interest. However, as further explained in Note 8 of " Notes to Financial Statements," the Financial Accounting Standards Board (FASB) is currently reconsidering its accounting otandards for regulated companies and has issued an exposure draft on the accounting for phase-in plans, abandonments and disallowances. Under the FASB's proposed standards, direct and indirect disallowances would be immediately written off as charges against income. Although there is potential exposure to partial disallowances of the Company's investments in Millstone 3 and the Seabrook l project, the Company cannot predict the amounts that may ultimately be disallowed. The FASB expects its reconsideration of regulatory accounting issues to be completed during 1986.

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Construction Program i

The Company's 1985 construction expenditures of $552.2 million were the highest in its history. Projected construction expenditures, including AFUDC l

but excluding nuclear fuel, for the period 1986 through 1990 are illustrated in the following table. Annual construction expenditures are projected to be at a lower level after Millstone 3 begins commercial operation in 1986.

Electric Generating Facilities Other Total (Thousands of Dollars) 1986 $282,609 $105,922 $388,531 1987 144,311 113,748 258,059 1988 67,973 117,180 185,153 1989 51,010 127,038 178,048 1990 44,720 132,139 176,859 The construction of Millstone 3 is the most significant item in the construction program, representing about 67 percent of the program in 1985 and 36 percent of the 1986 program. The total estimated cost of the C ma-v's 52.93 percent ownership interest in the unit (representing 608.7 megaw ets), which includes the expected purchase of the additional 0.32 percent ownership interest, is

$2.02 billion of the unit's estimated cost of $3.825 billion.

The construction program also includes the Company's 4.06 percent ownership interest in Seabrook 1. For financial planning purposes, the Company is l projecting that Seabrook 1 will be placed in service in the third quarter of 1987 and the Company's share of the cost will be approximately $208.9 million.

The Company's share of the construction expenditures for Seabrook 1 is estimated to be $44.7 million for 1986 and 1987. The Company considers Seabrook 2, in which the Company also has a 4.06 percent ownership interest, to be effectively canceled and has requested that it be allowed to recover its investment in its retail rate request. The Company's investment in Seabrook 2 was $24.4 million as of December 31, 1985.

In addition to construction expenditures, the Company estimates that nuclear fuel requirements will be $252.2 million for the years 1986 through 1990.

Financing i

( It is essential that the Company regain and maintain its financial health to assure access at reasonable cost to financial markets so as to acquire the funds needed for its ongoing construction program, to refund debt maturities and to meet other cash requirements. Cash requirements in excess of internally l generated funds are financed through short , intermediate- and long-term borrowings, the issuance of tax-exempt pollution control notes, construction and nuclear fuel trust financings, leasing agreements, sales of preferred stock, and I

capital contributions f rom the parent company. In addition to construction and nuclear fuel requirements, the company is obligated to meet debt maturities and i

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cash sinking-fund requirements totaling $289.6 million for the years 1986 through 1990. External financing continues to supply a substantial portion of total cash requirements and is expected to continue to do so until Millstone 3 is placed in service and reflected in rates.

. During 1985, the Company issued approximately $210.2 million of first

) mortgage bonds, pollution control notes and long-term notes. A portion of these

] proceeds were used to redeem, prior to maturity, approximately $43.7 million of high interest rate first mortgage bonds. The Company also received capital contributions of $30 million from the parent company. The Company entered into

! a loan agreement with the Connecticut Resource Recovery Authority under which j the Company may borrow up to $60 million to finance the refurbishment of two j turbine generators and associated facilities at the Company's South Meadow l l Station. In addition, a construction trust arrangement was used by the Company j and Western Massachusetts Electric Company (WMECO) to finance Millstone 3

construction expenditures under which the Company had $72.1 million outstanding l as of December 31, 1985. The Company and WMECO continued to utilize a nuclear fuel trust to finance nuclear fuel requirements for Millstone 1 and 2 and their I ownership share of Millstone 3. As of December 31, 1985, the Company's portion of the trust's investment in nuclear fuel was $308.0 million.

In 1986, the Company intends to maximize the use of tax-exempt financings

and to attempt to refinance, with fixed interest rate debt having a lower cost, J outstanding floating-rate debt and high interest rate first mortgage bonds. In addition, as Millstone 3 progresses to commercial operation, the Company and WMECO expect to reduce the level of available credit facilities, which had been expanded in 1984 and early 1985. This level of credit, a portlon of which was i available to WMECO and other system companies, included $448 million available i to the Company under credit lines, as well as $400 million available to the Company under the construction trust. In late 1985 and early 1986 the Company and WMEC0 reduced the available credit under the construction trust from

$400 million to $200 uillion and additional reductions in credit facilities are i projected to take place during 1986.

I I Rate Matters

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l In November 1985, the Company filed an application with the DPUC requesting

! aggregate annual electric and gas revenue increases of $155.5 million. The j increased revenues are required primarily for the proposed three-year phase-in i

I of Millstone 3 costs into rates when it begins commercial operation. I r

l As a result of the Company's return on common equity (ROE) being above that j allowed,by the DPUC in its December 1983 retail rate decision, the DPUC issued r j interim orders in April 1985 and September 1985 which are intended to reduce the

Company's earnings. The April 1985 order required that all electric fossil fuel i

costs incurred after February 28, 1985 and neither reflected in base rates ner l otherwise recovered through the existing fuel adjustment clause be charged or

credited to expense. Prior to the order, such costs would have been deferred

! and recovered or refunded over a future period. The order also required that, i after February 28, 1985, revenues related to construction work in progress

} (CWIP) which had been included in rate base be applied to reduce the existing deferred fuel balance. AFUDC is being recorded on the amount of CWIP which has been removed from rate base. The order will remain in effect until rescinded or modified by the DPUC. Earnings were reduced $11.7 million in 1985 as a result l of the DPUC's arder.

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I f In September 1985, the DPUC adopted another order which, beginning with the month of August 1985, provided that in any month where the Company's monthly annualized ROE, computed on a cost of capital basis, exceeds 15.9 percent, the i Company shall place the amount of revenues in excess of that required to earn a 15.9 percent, return in a reserve account for use as an offset to its next general rate request. During 1985 the monthly annualized ROE has not exceeded 15.9 percent, and therefore, no revenues have been reserved.

In February 1986, the DPUC denied the Company's request to rescind the DPUC's April and September orders. The Company has filed an appeal with the Connecticut Superior Court with respect to these orders. These orders are projected to significantly reduce earnings in early 1986.

During August 1985, the Company filed an application for an annual wholesale electric revenue increase with the Federal Energy Regulatory I Commission of approximately $11.1 million. The increase is intended to reflect the higher costs associated with the commercial operatior of Millstone 3.

j In 1984, legislation was enacted in Connecticut requiring the DPUC to establish a limit on the amount of construction costs of Seabrook 1 that may be made part of the rate base or otherwise included in the rates of the Company.

The DPUC established such a limit, with certain exceptions, at $4.7 billion, of which approximat ely $191 million would be applicable in the determination of l

the Company's rates. This legislation also required the DPUC to determine the l

economic viabilit of Seabrook 1, the ability of the owners to finance the

! project to comple* lon, and the probability that the project would be completed i and placed in sert ce. In its decision, the DPUC concluded that Seabrook 1 is both economically .4nd financially viable and that its completion is in the public interest. The Company believes that the completion of the unit is l j

probable but not assured due to uncertainties such as the outcome of pending regulatory proceedings in states other than Connecticut, intervenor challenges, and risks attendant to the licensing process. The DpUC continues to hold the docket open to allow for consideration of future events that may effect the unit.

3 In December 1985, the DPUC issued a decision designed to further encourage i the development of cogeneration and small power production in Connecticut. The decision established rates for utility purchase of such generation and provided cogenerators and small power producers with options under which rates paid could l j significantly exceed avoided costs in the early years of a contract, but are anticipated to fall below avoided costs in the later years, so that the aggregate payments over the expected length of the contracts are expected to t equal avoided costs over the same period. Before the decision, the Company had been able to reach pricing agreements with cogenerators and small power i producers at rates which would result in total payments below avoided costs.

The Company's petition for reconsideration of the requirement for full avoided cost payments was denied by the DPUC.

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RESULTS OF OPERATIONS Operating Revenues Operating revenues decreased $22.8 million from 1984 to 1985 and increased

$181.6 million from 1983 to 1984 The components of the change in operating revenues for the past two years are provided in the table below.

Change in Operating Revenues Increase /(Decrease) 1985 vs. 1984 1984 vs. 1983 (Millions of Dollars)

Fuel cost recoveries $(23.3) $ 50.9 DPUC interim order (15.8) -

Rate increases -

73.8 Sales and Other 16.3 56.9 Total revenue change $(22.8) $181.6 Fuel cost recoveries decreased in 1985 primarily because of lower fossil fuel prices. The decrease in revenues resulting from the DPUC interim order represents the diversion of revenues related to CWIP, which previously had been included in rate base, to reduce the existing deferred fossil fuel balance. The sales increase is primarily the result of a 1.8 percent increase in electric sales because of improved economic conditions in the Company's service area, partially offset by a 6.0 percent decrease in gas sales because of lower heating requirements in 1985 and some industrial customers switching from gas to oil.

The increase in fuel cost recoveries during 1984 was primarily attributable to the combination of the recovery of electric energy costs on a higher level of sales and the recovery of deferred energy costs from prior years. Electric sales increased 5.2 percent and gas sales increased 7.3 percent in 1984. These increases resulted primarily from improved economic conditions in the Company's service area.

Electric and Gas Energy Expenses Electric energy expenses, which include fuel and net purchased and interchange power, increased $2.2 million in 1985 compared to 1984 because of the DPUC's interim order, which disallowed the deferral of current unrecovered fossil fuel costs, and higher kilowatt-hour (kWh) requirements in 1985. These items were partially offset by lower fossil fuel prices in 1985. Electric energy expenses increased $70.8 million in 1984 compared to 1983 primarily because of higher kWh requirements and energy prices in 1984.

Gas energy expenses decreased $4.0 million in 1985 compared to 1984 as a result of lower requirements in 1985 and the matching of revenues and expenses under the provisions of the Company's energy adjustment clause. Cas energy expenses decreased $18.0 million in 1984 compared to 1983 as a result of lower prices in 1984, offset partially by the effect of higher requirements in 1984.

l Other Operation and Maintenance Expenses l

Other operation and maintenance expenses increased $65.0 million in 1985 because of the cost of repairing damage caused by Hurricane Gloria, an extended Millstone 2 refueling and maintenance outage and the general impact of inflation on most expenses. Other operation and maintenance expenses increased

$24.0 million in 1984 compared to 1983 because of the general impact of inflation on most expenses. This increase was offset partially in 1984 by the effect of lower nuclear refueling and maintenance costs.

Taxes Federal and state income taxes decreased $34.3 million in 19ES compated to 1984 because of a decrease in taxable income. Federal and state income taxes increased $47.6 million in 1984 compared to 1983 because of an increase in taxable income.

Interest Charges Interest charges increased $6.7 million in 1985 compared to 1984 and

$20.1 million in 1984 compared to 1983 primarily because of higher borrowing levels reflecting the need for additional capital to finance the Company's share of Millstone 3 construction costs.

Allowance for Funds Used During Construction The increases in AFUDC of $41.5 million in 1985 and $25.2 millio, in 1984 were primarily caused by higher average CWIP balances attributable to the Millstone 3 construction project.

Impact of Inflation l

See Note 11 of " Notes to Financial Statements" for a discussion on the ,

impact of inflation on the Company. I i

Ths Connscticut Light and Powar Comptny 4 STATEMENTS OF INCOME l

) For the Years Ended December 31, 1985 1984 1983

) (Thousands of Dollars)

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Operating Revenues...................... $1.756.436 $1.779.238 $1,597,624 i j

j Operating Expenses:

j Operation-Fue1................................. 358,450 479,861 296,909 Purchased and interchange power, net. 100,446 (23,193) 88,962  ;

i Gao purchased for resale............. 118,877 122,859 140,882 j 0ther................................ 397,678 377,620 346,567 J Maintenance........................... 150,195 105,292 112,377 j Depreciation.......................... 103,123 99,511 95.579 i Federal and state income taxes j (Note 4)............................. 148,547 182,885 135,648 i Taxes other than income taxes......... 140,982 142,825 133,605 Total operating expenses........... 1,518,298 1,487,660 1,350,529 Operating Income........................ 238,138 291,578 247,095 4

I Other Income

, Allowance for equity funds used

! during construction.................. 119,561 87,383 67,958 i Equity in earnings of regional l nuclear generating companies......... 9,589 8.689 8,108 :

J Other, net............................ (2,218) (2,710) (3,229) i Income taxes applicable to other 50,330 40,230 33,938

f income-credit........................

Other income, net.................. 177,262 133,592 106,775 i i

! Income before interest charges..... 415,400 425,170 353,870  ;

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Interest Charges

) Interest on long-tena debt. . . . . . . . . . . . 179,371 172,185 151,893 i Other interest........................ 3,734 4,176 4,365 ,

l Allowance for borrowed funds used '

! during construction, net of income i j taxes................................ (44,780) (35,418) (29,595) t

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! Ihterest charges, net.............. 138,325 140,943 126,663 Net Income.............................. 4 277,075 $ 284,227 $ 227,207 l

i i 1he accompanying notes are an integral part of these financial statements.

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Tha Connscticut Light and Powar Cor.psny STATEMENTS OF SOURCES OF FUNDS FOR GROSS PROPERTY ADDITIONS For the Years Ended December 31 1985 . 1984 1983 (Thousands of Dollars)

Funds Generated From Operations:

Net income.................................. $277,075 $284,227 $227,207 Principal noncaah items:

Depreciation............................. 103,123 99,511 95,579 Prior period spent fuel disposal costs... 6,381 6,438 10,063 Deferred income taxes, net............... 82,058 93,427 103,384 l Other amortization and noncash items..... 760 10,707 5,659 Amortization of energy adjustment clauses 6,299 3,322 (7,779) l l

Allowance for equity funds used during construction............................ (119.561) (87,383) (67,958)

Total funds from operations......... 356,135 410,249 366.155 Less-Cash dividends paid on:

Common stock............................. 139,708 118,440 111,351' Preferred stock.......................... 34,789 35,592 30.578' Net funds generated from operations. 181,638 256,217 224,226 Funds Obtained From Financing:

Long-term debt.............................. 210,230 230,800 95,000 Preferred stock............................. - - 50,000 increase (decrease) in construction trust... 22,193 (72,830) 26,689 Increase (decrease) in short-term debt...... 29,000 (5,000) (11,575)

Increase in obligations under capital leases 69,180 84,688 62,646 Capital contributions from Northeast Utilities (parent company)................. 30,000 30,000 80,000 Tota 1............................... 360,603 267,658 302,760 Less-Reacquisitions and retirements of long-term debt and preferred stock....... 79,637 19,188 __ 9,906 Net funds from financing............ 280,966 248,470 292,854 Other Sources (Uses) of Funds:

Changes in components of working capital:

Cash and special deposits................ (3,196) (13,034) (2,226)

Receivables and accrued utility revenues. 23,440 (40,138) (9.573)

Fuel, materials and supplies............. 5,715 (2,792) 10,896 Accounts payable......................... 82.155 (15,161) 13,659 Accrued taxes............................ (25,342) 42,523 (18,223)

Other, net............................... 4,221 14,840 8,371 Net change.......................... 86,993 (13,762) 2,904 Energy adjustment clauses, net.............. (18,672) 10,329 (53,824)

Other, net.................................. (22,767) 4,275 (8,940)

Net other sources (uses) of funds... 45,554 842 (59,860)

Total Funds For Construction From Above Sources...................................... 508,158 505,529 457,220 Allowance For Equity Funds Used During Construction................................. 119,561 87,383 67,958 GROSS PROPERTY ADDIT 10NS...................... $627,719 $592.912 $525,178 Composition of Gross Property Additions:

Electric utility plant...................... $532,441 $487,484 $446,644 Cas utility p1 ant........................... 19,786 20,773 18,553 Nucient fue1................................ 75,492 84,655 59,981 Tota 1............................... $627,719 $592,912 $525,17H l

The accompanying notes are an integral part of these financial statements.

Tha Connscticut Light and Pow 2r Company BALANCE SHEETS At December 31, 1985 1984 (Thousands of Dollars)

Assets s -

Utility Plant, at original cost:

Electric........................................ $2,745,873 $2,632,726 Gas............................................. 275,616 256,968 3,021,489 2,889,694 Less: Accumulated provision for depreciation. 1,045,067 965,357 1,976,422 1,924,337 t Construction work in progress (Note 8).......... 2,107,443 1,737,878 Nuclear fuel, net (Note 3)...................... 306,478 271,827 Total net utility plant...................... 4,390,343 3,934,042 t

i Other Property and Investments:

.. vestments in regional nuclear generating companies and subsidiary companies, at equity.. 49,939 49,701 Other, at cost.................................. 13,146 13,105 63,085 62,806 Current Assets:

Cash and special deposits (Note 2) . . . . . . . . . . . . . . 19,615 16,419 Receivables, less accumulated provision for uncollectible accounts of $7,605,000 in 1985 and $7,674,000 in 1984......................... 169,426 166,782 l Receivables from affiliated companies........... 27,964 57,300 Accrued utility revenues........................ 85,013 81,761 Fuel, materials and supplies, at average cost... 88,909 94,624 Prepayments and other........................... 8,448 16,029 399,375 432,915 Deferred Charges:

Unamortized debt expense........................ 8,522 6,632 Energy adjustment clauses, net.................. 60,747 36,033 Unrecovered spent nuclear fuel disposal costs... 23,524 12,301 Canceled nuclear projects (Note 9).............. 24,932 1,140 0ther........................................... 17,381 9,272 135,106 65,37H Total Assets................................. $4,987,909 $4,495,141 The accompanying notes are an integral part of these financial statements.

Tha Connscticut Light and Powar Corp:ny l

BALANCE SHEETS l

At December 31 1985 1984 (Thousands of Dollars)

Capitalization and Liabilities Capitalization:

Common stock - $10 par value. Authorized l

24,500,000 shares; outstanding 12,222,930 shares.......................................... $ 122,229 $ 122,229 Capital surplus, paid in......................... 643,529 613.397 Retained earnings................................ 691,372 588,794 l

Total common stockholder's equity............. 1,457,130 1,324,420 Cumulative preferred stock -

$50 par value. Authorized 9,000,000 shares; outstanding 7,840.514 shares in 1985 and 7,861.905 shares in 1984 Not subject to mandatory redemption (Note 5). 256,195 256,195 Subj ect to mandatory redemption (Note 6) . . . . . 133,393 135,892 l Long-term debt (Note 7).......................... 2,002.787 1,819,516 Total capitalization.......................... 3,849,505 3,536,023 Obligations Under Capital Leases (Note 3).......... 274,462 256,262 Current Liabilities:

Notes payable to banks (Note 2).................. 32,000 18,000 Commercial paper (Note 2)........................ 15,000 -

Long-term debt and preferred stock-current portion......................................... 13,964 23,975 Obligations under capital leases - current ,

portion (Note 3)................................ 57,856 57,171 Accounts payable................................. 117,306 66,512 Accounts payable to affiliated companies......... 80,364 49,003 Accrued taxes.................................... 75,594 100,936 l Accrued interest................................. 58,333 56,669 0ther............................................ 17,935 16,975 468,352 389,241 Deferred Credits:

Accumulated deferred income taxes................ 183,757 121,910 Accumulated deferred investment tax credits...... 202,430 181,284 0ther............................................ 9,403 10,421 395,590 313,615 Commitments and Contingencies (Note 8) l l

l Total Capitalization and Liabilities.... $4,987,909 $4,495,141 The accompanying notes are an integral part of these financial statements.

Th2 Connscticut Light and Powar Company e

STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Capital Common Surplus, Retained Stock Paid in Earnings Total (Thousands of Dollars)

Balance at January 1, 1983......... $122,229 $504,464 $373,321 $1,000,014 Net income for 1983.............. 227,207 227,207 Cash dividends on preferred stock........................... (30,578) (30,578)

Cash dividends on common stock... (111,351) (111,351)

Capital contributions from Northeast Utilities (parent company)........................ 80,000 80,000 Preferred stock issuance and retirement expenses............. (1,103) (1,103)

Balance at December 31, 1983....... 122,229 583,361 458,599 1,164,189 Net income for 1984.............. 284,227 284,227 Cash dividends on preferred stock........................... (35,592) (35,592)

Cash dividends on common stock... (118,440) (118,440)

Capital contributions from Northeast Utilities (parent company)........................ 30,000 30,000 Cain on reacquired preferred stock net of issuance and retirement expenses............. 36 36 Balance at December 31, 1984....... 122,229 613,397 588,794 1,324,420 Net income for 1985.............. 277,075 277,075 Cash dividends on preferred stock........................... (34,789) (34,789) l Cash dividends on common stock... (139,708) (139,708)

Capital contributions from Northeast Utilities (parent company)........................ 30,000 30,000 Cain on reacquired preferred stock net of issuance and retirement expenses............. 132 132 Balance at December 31, 1985 (a)... $122,229 $643,529 $691,372 $1,457,130 (a) At December 31, 1985, there was approximately $213.266,000 of retained earnings available for payment of cash dividends on common stock under the provisions of the Company's First Mortgage Indenture and Deed of Trust.

The accompanying notes are an integral part of these financial statements.

Tha C:nnscticut Light and Pow 2r Comp:ny NOTES TO FINANCIAL STATEMENTS

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES General: The Connecticut Light and Power Company (the Company), Western Massachusetts Electric Company (WMECO) and Holyoke Water Power Company (HWP) are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by Northeast Utilities (NU).

Other wholly owned subsidiaries of NU provide substantial support services to the system. Northeast Utilities Service Company supplies centralized accounting, administrative, data processing, engineering, financial, legal, operational, planning, purchasing and other services to the system companies. Northeast Nuclear Energy Company acts as agent for system companies in constructing and operating nuclear generating facilities. NU also has two subsidiary realty companies, The Rocky River Realty Company and The Quinnehtuk Company.

All transactions among affiliated companies are on a recovery of cost basis which may include amounts representing a return on equity, and are subject to approval of various federal and state regulatory agencies.

Public Utility Regulation: NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935, and it and its subsidiaries, including the Company, are subject to the provisions of the act. Arrangements among the system companies, outside agencies and other utilities covering inter-connections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. The Company is subject to further regulation for rates and other matters by the FERC and the Connecticut Department of Public Utility Control (DPUC), and follows the accounting policies pre-scribed by the respective commissions.

Investments: The Company owns common stock of four regional nuclear generating companies. These companies, with the Company's ownership interests, are:

Conneccicut Yankee Atomic Power Company (CY) 34.5%

Yankee Atomic Electric Company 24.5%

Maine Yankee Atomic Power Company (HY) 12.0%

Vermont Yankee Nuclear Pcwer Corporation (VY) 9.5%

The Company's investments in these companies are accounted for on the equity basis. The electricity produced f rom these f ai llities is committed to the participants based on their ownership interests and is billed pursuant to contractual agreements.

Revenues Utility revenues are based on authorized rates applied to each customer'n use of electricity or gas. Rates can be increased only through a formal proceeding before the appropriate regulatory commission. At the end of each accounting period, the Company accrues an estimate for the amount of energy delivered but unbilled.

l Tho Connscticut Light and Powsr Company l i

NOTES TO FINANCIAL STATEMENTS Spent Nuclear Fuel Disposal Costs: Under the Nuclear Waste Policy Act of 1982 (the Act), the Company is paying the United States Department of Energy (DOE), on a quarterly basis, a fee of 1.0 mill per kilowatt-hour (kWh) based on the Company's share of nuclear generation beginning April 7, 1983, for the disposal of spent nuclear fuel and high-level radioactive waste.

For nuclear fuel used to generate electricity prior to April 7, 1983 (prior period fuel), the fees are based on the Company's share of the amount of energy extracted from such fuel. In June 1985, the Company selected the deferred lump sum payment option as the payment arrangement for prior period fuel. Under this option, payment for prior period fuel may be made anytime prior to the first delivery of spent fuel to the DOE which will occur by January 31, 1998, as established by the Act. Interest is accrued from April 7, 1983 until payment 19 made, based on 13-week United States Treasury Bill rates compounded quarterly. Through December 31, 1985, these interest charges, as well as principal costs, have been capitalized. The DPUC has allowed for the recovery of spent nuclear fuel disposal costs in rate case decisions based on the provisions of the Act.

rees due to the DOE for the disposal of prior period fuel are approximately $84.2 million, including interest costs of $17.6 rillion accrued from April 7, 1983 through December 31, 1985. As of December 31, 1985, approximately $60.6 million had been collected through rates.

Depreciation: The provision for depreciation is calculated using the straight-line method based on estimated remaining useful lives of depreciable utility plant in service, adjusted for net salvage value and removal costs as approved by the DPUC. Except for major facilities, depreciation factors are applied to the average plant in service during the period. Major facilities are depreciated from the time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation.

The depreciation rates for the several classes of electric and gas plant in service are equivalent to the following composite rates:

Year Electric Cas 1985 3.5% 4.0%

1984 3.5 4.1 1983 3.5 4.2 Nuclear Decommissioning: A 1985 decommissioning study indicates that immediate dismantlement at retirement is the most viable and economic method of decommissioning the Hillstone 1 and 2 nuclear units in which the Company has an 81 percent ownership interest. The Company's share of the total estimated cost of decommissioning these tinits is $253 million in year-end 1985 dollars. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, technology and inflation. As of December 31, 1985, the Company has collected through

Th3 Conn:cticut Light and Pow 2r Comp ny NOTES TO FINANCIAL STATEMENTS rates $32.4 million for future decommissioning costs. Although a substantial portion of the estimated total decommissioning costs has been approved by regulatory agencies and is reflected in depreciation expense, the Company believes revenues in amounts higher than those currently beine collected will be required to pay the full projected costs of decommissioning.

As part of its current rate applicatica, the Company has filed plans for the establishment of an external decommissioning trust. In January 1986, the DPUC issued a draft order which p"evidoo sur the establishment of an independent decommissionir.s re at. The draf t order, if adopted, would require the Company to continue to use the depreciation reserve method for previously collected decommissioning costs and for those funds which do not qualify under rules established by the Internal Revenue Service.

Income Taxes: The tax effect of timing differences (differences between I

the periods in which transactions affect income in the financial statements and the periods in which they affect taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions.

The Company did n'ot provide deferred income taxes for certain timing j dif ferences during periods when the DPUC did not permit the recovery of I such income taxes through rates charged to customers. The cumulative net amount of income tax timing differences for which deferred taxes have not been provided was approximately $919 million at December 31, 1985. As allowed under current regulatory practices, deferred taxes not previously provided are being collected in customers' rates as such taxes become payable.

Investment tax credits, which reduce federni income taxes currently payabic, are deferred and amortized over the useful life of the related utility plant. At December 31, 1985, the company had unused and unrecorded investment tax credits of approximately $10.7 million, which are available to offset federal income tax provisions through 2000. See Note 4 for the components of income tjy? expense.

Allowance for Funds Used During Construction (AFUDC): AFUDC, a noncash item, represents the estimated cost of capital funds used to finance the Company's construction program. These costs, which are one component of the total capitalizad cont of construction, are not recognized as part of the tate baue for ratemaking purposes until facilities are placed in e-rvice. AFUDC is recovered over the service life of plant in the form of increased revenue collected as a result of higher depreciation expense.

The effective AFUDC rates for 1985, 1984 and 1983 were 9.2 percent, 9.3 percent and 9.2 percent, respectively. These rates are calculated using the net-of-income tax method and in accordance with FERC guidelinen.

Retirement plant The Company participates in the Northeast Utilities Service Company Retirement plan (the Plan). The Plan, which covers all regular system employees, is noncontributory. The system's policy is to l

Th3 Connscticut I.ight and Power Company NOTES TO FINANCIAL. STATEMENTS r

fund annually the actuarially determined contribution, which incimfen that '

year's normal cost, the amortization of prior years' actuarini gains or ionses over 15 years, and the amortiention of prior nervice cost over n period of 40 years. The Company's allocated portion of the system's pension cost, part of which was charged to utility plant, approximated i $14.8 million in 1985, $13.9 million in 1984 and $15.2 million in 1983.

The actuarial present value of accumulated plan benefits and plan net assets available for benefits for the plan in:

January I, 1985 1984

) (Thounands of Dollars) t Benefits:

j Vented.............. $339,515 $ 310,498 Nonvented........... 42,482 41,244

$381,997 $ 351. 742 Net nsnets available for benefits........ $479,525 $446,949 4 The nanumed rate of return used to determine the actuarini present value of accumulated plan benefits van 7.5 percent for 1985 and 1984.

In addition to pension benefits, the Company provides certain henith care and life innurance benefita to retired employeen. The cost of providing those benefits van approximately $3,291,000 in 1985, $2,949,000 j in 1984 and $2,695,000 in 1983. The Corpany recognizen henith care benefits primarily an incurred and providen for life innurance benefits through premiumn paid to an innurance company.

4 In December 1985, the financial Accounting Standards Board (FASH) .

! innued a new statement entitled "rmployern' Accounting for Pensionn," which I nuperseden previoun pension accounting utandards and will be ef fective for fineni yearn beginning after December 15, 1986. This statcment prencriben a standardized method for mensuring net periodic petinion costs, expanded footnote discionuren, and, in nome canen, recognition of a pennion i l liability. The Company cannot predict at thin time what impact, if any, thin new ntatement will have on its renults of operationn or how thin i impact might be considered by the DPUC when establishing customer rates.

EnerEy Adjustment Claunent The Company'n retail electric roten include an

< ndjuntment cinune under which f onsil fuel pricon above or below base rate leveln are charged or credited to customern. Through February 28, 1985,

, mont dif ferencen between fonnit fuel conta and fonnil fuel recoverien were deferred and recovered or refunded over a future period. On April 4, 1985,

' the DPUC innued an interim order to the Company which required that conta incurred after February 28, 19H5, and neither reflected in bane rnten nor

otherwine recovered through existing fuel adjuntment claunen be charged or I

credited to expenne. In addition, the interim order required that, after i February 28, 1985, revennen relating to conntruction work in progrenn i

l The Connecticut Light and Powsr Company NOTES TO FINANCIAL STATEMENTS i

(CWIF) which had been included in rate base be applied to reduce the existing deferred fuel balance. AFUDC is recorded on the amount of CWIP which has been removed from rate base.

The interim order resulted in a $11.7 million reduction of net income i

for the year ended December 31, 1985. The interim order will remain in effect until rescinded or modified by the DPUC. In December 1985, the Company filed with the DPUC for rescission of that portion of the order i that required the Company to expense unrecovered fuel costs. In February 1986, the DPUC denied the Company's petition to rescind the interim order.

i The Company has filed an appeal with the Connecticut Superior Court with j respect to this order. For information concerning other interim orders, i see Note 8 "Comnitments and Contingencies."

The Company's retail base elect ric rates include nuclear generation at a 70 percent composite capacity faccot. The upUC has approved the use of a

! generation utilization adjustment clause (GUAC) which levels the effect on fuel costs caused by variations from a 70 percent composite nuclear #

generation capacity f actor. When actual nucle r performance is above

70 percent, fuel costa are lower than amounts included in base rates, and when nuclear performance is below 70 percent, fuel costs are higher than

, amounts included in base rates. At the end of a 12-month period ending l July 31 of each year, these net variations from the amounts included in base rate cost levels are refunded to, or collected from, customers over

,' the subsequent 11-month period. Should the annual nuclear capacity factor t

fall below 55 percent, the Company would have to apply to the DPUC for l permission to recover the additional fuel expense. On August 6, 1985, the DPUC issued an interim order which required the Company to apply the net credit balance of $17.0 million in the GUAC account as of July 31, 1985, to i

reduce the deferred fossil fuel balance.

The Company's gas rates include an adjustment clause under which purchased gas costs above or below base rate levels are charged or credited to customers. As prescribed by the DPUC, most dif ferences between the j Company's actual purchased gas costs and the current cost recovery are deferred until future recovery is permitted.

l

2. SHORT-TERM DEBT The Company and WHEC0 have joint credit lines of $350 million, pursuant to revolving credit / term loan agreements, with two groups of banks. The maximum borrowing ifnit of the Company under the agreements is

$350 million less amounts (not to exceed $105 million) borrowed by WMECO.

The Company is obligated to pay commitment fees of three-eighths of 1 i

percent per annum under a $200 million revolving credit agreement and

, one-quarter of 1 percent per annum under a $150 million revolving credit ,

agreement on its proportionate share of the daily average of the unborrowed l

portion of the aggregate commitment. In addition, the Company has a

$50 million Eurodollar revolving credit agreement for which it pays a fee J of one-eighth of I percent per annum. At December 31, 1985, the Company had no borrowings under these agreements.

l A

Th2 Conn 2cticut Light and Powar Company NOTES TO FINANCIAL STATEMENTC _

The Company uses bank loans and coumer.ial paper to assist in financing its continuing construction r.ogram or r short-term basis and to meet general working capital needs, the system e panies have joint bank credit lines totaling $48 millic.. Amounts utili 2d by other system companies under these joint c edit lines will red ce the amount available to the Company. Terms ca'i fe; interest rates no to exceed the prime rate during the borrowing tata. sithough these lines tenera11y are renewable, the continuing avaf *abilir, of the unused lines ci credit is subject to review by the br.ss invc'.ved. Compensating ba1*" ;. , the system companies are aaintain d in connectie wisu thesc .nk credit lines which, at Decembe- 31, 1985, omn" *,. Lo $2.4 million. At December 31, 1985, the amount s ununo- .srowing capacity under the credit lines available to the systs/. e panter was $9.3 million.

Cash are special deposita at December 31, 19d5, included

$16.1 mili.on of restricted funds which must be used for future expendit.res relating to the installation of pollution control equipment at M111st ene 1 and Seabrook 1.

3. LF WES Tse Company and WMECO have entered into a capital lease agreement to finatae up to $530 million of nuclear fuel for Millstone I and 2 and their shase for Millstone 3. The Company and WMECO make quarterly lease payments foc the cost of nuclear fuel consumed in the reactors plus financing costs

~ssociated with the fuel in the reactors (based on a units-of-production method at rates which reflect estimated kWh of energy provided). Upon permanent discharge from the reactors, ownership of the nuclear fuel i transfers to the Company and WMECO.

The Company has also entered into lease agreements, some of which are capital leases, for the use of e.ubstation equipment, data processing and of fice equipment, vehicles and of fice space. The provisions of these lease agreements generally provide Ior renewal options.

The following rental reyments have been charged to oparating expease Capital Operating Year Leapes Leases 1985............... $57,153,000 $24,447,000 1984............... 76,777,000 22.073,000 1983............... 36,858,000 18,331,000 Interest included in capital lease rental payments was $16,197,000 in 1985, $18,554,000 in 1984 and $11,843,000 in 1983.

Substantially all of the capital lease rental payments were made pursuant to the nuclear fuel lens. agreement. Future minimum lease payments under the nuclear furi capital lease cannot be reasonably estimated on an annual basie due to variations in the usage of nuclear fuel.

Tha Conn:cticut Light and Powar Company NOTES TO FINANCIAL STATEMENTS Future minimum rental payments, excluding annual nuclear fuel lease payments, and executory costs such as real estate taxes, state use taxes, insurance and maintenance, under long-term noncancelable leases as of December 31, 1985 are approximately:

Capital Operating Year Leases Leases (Thousands of Dollars) 1986...................;........... $ 1,900 $ 27,600 1987............................... 1,900 21,700 1988............................... 1,900 15,500 1989............................... 1,800 10,700 1990............................... 1,300 8,700 After 1990......................... 20,400 70.200 Future minimum lease payments...... 29,200 $154,400 Less amount representing interest.. 16,700 Present value of future minimum lease payments for other than nuclear fue1...................... 12,500 Present value of future nuclear fuel lease payments............... 319,800 Tota 1......................... $332,300

4. INCOME TAX EXPENSE The components of the federal and state income tax provisions are:

For the Years Ended December 31, 1985 1984 1983 (Thousands of Dollars)

Current income taxes:

Federa1...................... $ 4,342 $ 16,342 $ (1,245)

State........................ 11,817 32,886 (429)

Total current.............. 16.159 49,228 (1,674)

Deferred income taxes, nett Investment tax credits....... 26,729 94.500 (8,525)

Federa1...................... 43,876 (1,437) 88,227 State........................ 11,453 364 23,682 Total deferred............ 82,058 93,427 103,384 Taxes on borrowed funds portion of AFUDC..................... 47,943 37,825 31,170 Total income tax expense................... 146,160 180,480 132,880 Less: Income taxes (credits) included in other income, net of the tax effects of the borrowed funds portion of AFUDC.. (2,387) (2,405) (2,768) income taxes charged to operating expenses........ $148,547 $182,885 $135,648 k

The Connecticut Light and Power Company NOTES TO FINANCI AL STATEMENTS Deferred income taxes are comprised of the tax effects of timing differences as follows:

For the Years Ended December 31, 1985 1984 1983 (Thousands of Dollars)

Investment tax credits......... $ 26,729 $ 94,500 $ (8,525)

Liberalized depreciation, excluding leased nuclear fuel 16,075 14,287 14,616 Const action overheads......... 16,748 14,895 14,709 Liberalized depreciation and capitalized 1.cerest on leased nuclear fuel.......... 16,044 326 21,5C3 Decommissioning costs.......... (3,138) (4,647) (923)

Settlement credits -

nuclear fuel................. (3,388) (859) (1,786)

Energy adjustment clauses...... 7,415 (14,658) 36,159 spent nu:Icer foal disposal costs........................ 6,223 (4,248) 29,232 0ther.........,................. (650) (6,169) (1,681) referred income t9xes, net. $ 82,058 $ 93,427 $103,384 The effective income tax rate is computed by dividing total income tax expense by the sun of such taxes and net income. The differences between the effective rate and the federal statutory income tax rate are:

For the Years Ended December 31, 1985 1984 1983 Federal statutory income tax rate.... 46.0% 46.0% 46.0%

Tax ef f ect of dif ferences:

Additional depreciation for tax purposes.......................... 0.9 0.2 (0.5)

Allowance for equity funds used during construction - not recognized as income for tax 4 purposes.......................... (13.0) (8.6) (8.7)

Investment tax credit amortization.. (1.7) (1.6) (1.3)

State income taxes, net of federal benefit............................ 4.2 4.7 4*

Other, net.......................... (1.9) (1.9) (3.0)

Effective income tax rate............ 34.5% 38.8% 36.9%

The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS

5. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Details of preferred stock not subject to mandatory redemption outstanding are:

December 31, Shares 1985 Outstanding Redemption December 31 December 31.

Description Price 198r 1985 1984 1983 (Tbousands of Dollars)

$1.90 Series of 1947............ $52.50 163,912 $ 8,196 $ 8,196 $ 8,196

$2.00 Series of 1947............ 54.00 336,088 16,804 16,804 16,804

$2.04 Series of 1949............ 52.00 100,000 5,000 5,000 5,000

$2.06 Series E of 1954.......... 51.00 200,000 10,000 10,000 10,000

$2.09 Series F of 1955. . . . . . . . . . 51.00 100,000 5,000 5,000 5,000

$2.20 Series of 1949............ 52.50 200,000 10,000 10,000 10,000

$3.24 Series G of 1968.......... 51.84 300,000 15,000 15,000 15,000

$3.80 Series J of 1971.......... 53.05* 400,000 20,000 20,000 20,000

$4.48 Serits H of 1970.......... 52.21 300,000 15,000 15,000 15,000

$4.48 Series I of 1970.......... 52.32 400,000 20,000 20,000 20,000

$4.56 Series K of 1974........., 53.22* 1,060,000 50,000 50,000 50,000 3.90% Series of 19,9............ 50.50 160,000 8,000 8,000 8,000 4.50% Series of 1956............ 50.75 104,000 5,200 5.200 5,200 4.50% Series of 1963............ 50.50 160,000 8,000 8,000 8,000 4.96%-Series of 1958............ 50.50 100,000 5,000 5,000 5,000 5.28% Series of 1967............ 51.43 200,000 10,000 10,000 10,000 6.56% Series of 1968............ 51.44 200,000 10,000 10,000 10,000 7.60% Series of 1971............ 52.56* 199,925 9,996 9,996 9,996 9.36% Series of 1970............ 52.34 200,000 10,000 10,000 10,000 9.60% Series of 1974............ 53.46* 299,970 14,999 14,999 14,999 Total preferred stock not subject to mandatory redemption 5,123,895 $256,195 $256,195 $256,195

• Redemption prices reduce in future years.

All or any part of each outstanding series of preferred stock may be redeemed by the Company at any time at established redemption prices plus accrued dividends to the date of redemption.

l The Connscticut Light and Power Company NOTES TO FINANCIAL STATEMENTS

6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redempsion outstanding are:

December 31, Shares 1985 Outstanding December 31 Redemption December 31, Description Price 1985 1985 1984 1983 (Thousands of Dollars)

$5.52 Series L of 1975 $52.76* 277,558 $ 13,879 $ 14,657 $ 15,770 10.48% Series of 1980 53.93* 500,000 25,000 25,000 25,000 11.52% Series of 1975 52.88* 139,061 6,9.54 7,321 7,776 15.04% Series M of 1982 57.52* 800,000 40,000 40.000 40,000 Adjustable Rate Series N of 1983 56.15* 1,000,000 50,000 50,000 50,000 2,716,619 Less preferred stock to be redeemed within one year 2,440 1,086 1,153 Total preferred stock subject to mandatory redemption $133,393 $135,892 $137,393 At December 31, 1985, there were 8,000,000 shares of $25 par value preferred stock authorized and unissued.

• Redemption prices reduce in future years.

The following table details sinking fund activity for preferred stock subject to mandatory redemption:

Minimum Maximum Annual Annual Sinking Fund Sinking Fund Shares Reacquired Series Requirement Requirement 1985 1984 1983 (Thousands of Dollars)

$5.52 Series L of 1975 $1,000 $2,000 14,541 22,966 5,290 11.52% Series of 1975 500 1,000 6,850 9,211 11,103 10.48% Series of 1980 (1) 1,000 2,000 - - -

15.04% Series M of 1982 (2) 2,000 4,000 - - -

Adjustable Rate Series N of 1983 (3) 2,500 5,000 - - -

(1) Sinking fund requirements commence July 1, 1986.

(2) Sinking fund requirements commence June 1, 1988.

(3) Sinking fund requirements commence October 1,1988.

l Th2 Connscticut Light and Power Company NOTES TO FINANCIAL STATEMENTS l

The minimum sinking-fund provisions of the series subject to mandatory redemption, for the years 1986 through 1990, aggregate $2,500,000 in 1986 and 1987, and $7,000,000 in 1988,1989 and 19'>0. All sinking-fund requirements for the preferred stock subject to mandatory redemption have been met. In case of default on sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. Any dividend payment in arrears on outstanding shares of prefer-ed stock would prohibit the redemption or purchase of less than all of the preferred stock outstanding. All or part of each of the series named above may be redeemed by the Company at any time at established redemption prices plus accrued dividends to the date of redemption except that during the initial five-year redemption period the above series of preferred stock are subject to certain refunding limitations.

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9

Th2 Cor.necticut Light end Powar CompIny NOTES TO FINANCIAL STATEMENTS 4 7. LONG-TERM DEBT Details of long-term debt outstanding are:

December 31, 1985 1984 (Thousands of Dollars)

First Mortgage Bonds:

3 1/4% Series N, due 1985.............. $ -

$ 20,000 3 7/8% Series 0, due 1988.............. 30,000 30,000 4 7/8% Series P, due 1990.............. 25,000 25,000 4 1/2% Series Q, due 1986.............. 9,600 9,600 4 3/8% Series R, due 1993............... 25,000 25,000 6  % Series S, due 1997.............. 30,000 30,000 6 1/2% Se-les T, due 1998.............. 20,000 20,000

< 6 7/8% Series U, due 1998.............. 40,000 40,000 8 3/4% Series V, due 2000.............. 40,000 40,000 8 7/8% Series W, due 2000.............. 40,000 40,000 7 3/8% Series X, due 2001.............. 30,000 30,000 7 5/8% Series Y, due 2002.............. 50,000 50,000 7 5/8% Series Z, due 2003.............. 50,000 50,000 8 3/4% Series AA, due 2004.............. 65,000 65,000 11  % Series CC, due 2000.............. 35,652 39,304 8 7/8% Series DD, due 2007.............. 45,000 45,000 9 1/4% Series EE, due 2008.............. 40,000 40,000

14 3/8% Series FF, due 2010.............. 14,200 65,000 17 3/4% Series GG, due 1991.............. 64,350 65,000 15  % Series HH, due 2012.............. 99,000 100,000 12 1/4% Series II, due 1993.............. 85,000 85,000 12 3/8% Series JJ, due 1994.............. 75,000 75,000 12  % Series KK, due 2015.............. 50,000 -

5  % Series, due 1987................. 15,000 15,000 4 3/8% Series E, due 1988.............. 18,000 18,000 4 1/4% Series, due 1993................. 15,000 15,000 4 1/2% Series, due 1994................. 12,000 12,000 5 5/8% Series, due 1997................. 20,000 20,000 6 1/2% Series, due 1998................. 10,000 10,000 7 1/8% Series, due 1998................. 25,000 25,000 9 1/42 Series, due 2000................. 20,000 20,000 7 5/8% Series, due 2001................. 30,000 30,000 7 1/2% Series, due 2002................. 35,000 35,000 7 1/2% Series, due 2003................. 40,000 40,000 9 1/4% Series, due 2004................. 30,000 30,000 11 1/2% Series, due 1995................. 18,110 19,804 9 3/8% Series, due 2008................. 40,000 40,000 13.35 % Series, due 1990................. 10,000 10,000 17.60 % Series, due 1989................. 19,608 20,000

> 15 5/8% Series, due 1992................. ,

39,600 40,000 Total First Mortgage Bonds.......... $1,360,120 $1,388,708 j

The Connecticut Light and Powar Company NOTES TO FINANCIAL STATEMENTS December 31, 1985 1984 (Thousands of Dollars)

Term Loan Agreements:

Secured note, variable rate due 1988-1991........................... $ 150,000 $ 150,000 14.80%, due 1991..................... 75,000 75,000 Millstone 3 Construction Trust, variable rate......................... 72,058 49,865 Pollution Control Notes:

5.90%, due 1998...................... 9,437 9,437 6.50%, due 2007...................... 16,000 16,000 Variable rate, due 2013-2015......... 244,700 90,800 Fees and interest due for spent fuel disposal costs........................ 84,164 66,553 0ther.................................. 6,355 62 Less amounts due within one year....... 11,524 22,889 Unamortized premium and discount, net.. (3,523) (4,020)

Long-term debt , net............... $2,002,787 $1,819,516 The Company and WMECO participate in a construction trust agreement to ,

assist in the financing of the Millstone 3 construction. In March 1986, l commitments under this arrangement will be reduced to $200 million. The trust was given a lien, junior to the lien of the Company's indenture, on the l Company's interest in Millstone 3. Once Millstone 3 is in service, but i beginning no later than 1988, the trust obligations are to be repaid over a four-year period. However, the Company intends to pay down the outstanding .

balance of the construction trust in 1986 with the proceeds from the sale of I fixed rate notes.

Interest costs of $6.9 million during 1985, $7.9 million during 1984 and

$9.9 million during 1983 were incurred and capitalized, net of income taxes, I by the Company. The weighted average interest rate charged to the system by the trust was 10.4 percent in 1985, 11.5 percent in 1984 and 10.8 percent in 1983.

Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1985, for the years 1986 through 1990 are:

$14,006,000, $19,375,000, $90,523,000, $62,131,000 and $77,523,000, respectively. In addition, there are annual 1 percent sinking- and improve-ment-fund requirements, currently amounting to $12,130,000, $12,086,000,

$12,043,000, $11,999,000 and $11,759,000, for the years 1986 through 1990, respectively. Such sinking- and improvement-fund requirements may be satisfied by the deposit of cash or bonds or by certification of property additions.

All or any part of each outstanding series of first mortgage bonds may be redeemed by the Company at any time at established redemption prices plus accrued interest to the date of redemption, except certain series which are subject to certain refunding limitations during their respective initial five-year redemption periods. The 11% Series CC bonds require a sinking-fund sufficient to retire a minimum of $2,500,000 in principal amount each year.

The 11 1/2% Series bonds require a sinking-fund sufficient to retire a minimum of $1,875,000 in principal amount each year.

Tha Connscticut Light and Powar Company NOTES TO FINANCIAL STATEMENTS l

Essentially all of the Company's utility plant is subject to the lien of its first mortgage bond indentures.

8. COMMITMENTS AND CONTINGENCIES Construction Program: The construction program is subject to periodic review and revision. Actual construction expenditures may vary from such estimates due to factors such as revised load estimates, inflation, revised nuclear safety regulations, delays, difficulties in the licensing process, the availability and cost of capital, and the granting of timely and adequate rate relief by regulatory commissions, as well as actions by other regulatory bodies.

The Company currently forecasts construction expenditures (including AFUDC) of $1.2 billion for the years 1986-1990, including $388.5 million for 1986. In addition, the Company estimates that nuclear fuel requirements will be $252.2 million for the years 1986-1990, including $21.4 million for 1986.

Millstone 3: Millstone 3 is the most significant item in the Company's construction program. At December 31, 1985, CWIP included an investment of

$1.88 billion in Millstone 3. In February 1986, the Company reached agreement with the Burlington Electric Department (Burlington) to purchase a portion of Burlington's ownership interest in Millstone 3. As a result of this agreement, the Company's ownership interest will increase by an additional 0.32 percent (3.7 megawatts (MW)) to 52.93 percent.

In 1982, the Company projected that the construction cost of Millstone 3 would be $3.54 billion. During 1984, the Company estimated that the cost for this unit would be $3.825 billion. Assuming the estimated cost of

$3.825 billion and completion of the purchase of a portion of Burlington's ownership interest in the unit, the Company's share would represent an investment of $2.02 billion, based on its ownership of 52.93 percent.

Seabrook: The Company has a 4.06 percent joint ownership interest in the two nuclear units in Seabrook, New Hampshire. At December 31,1985, the Company's CWIP balance included an investment of approximately $164.2 million in the Seabrook 1 project. In July 1985, the Seabrook Project Management issued a revised cost estimate of $4.56 billion for Seabrook 1. This estimate consisted of $2.89 billion cash and $1.67 billion AFUDC. A contingency allowance of $150 million was included in the estimate. Seabrook Projecq Management has scheduled a commercial operation date in October 1986.

As of Pscember 31, 1985, construction on the unit was estimated to be 95 percent complete and the cash-to-go cost was $373 million.

For financial planning purposes, the Company is assuming a more conservative estimate of both the commercial operation date and total project cost of September 1, 1987, and $5.1 billion, respectively.

In 1984, the DPUC established a $4.7 billion limit, with certain exceptions, on the construction costs of Seabrook 1 that may be made part of rate base or otherwise included in the rates of the Company. The The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS Company believes that a limit on prudently incurred costs would not meet legal standards and has appealed the DPUC's decision to the Superior Court.

During 1984, the DPUC conducted hearings on the economic viability of Seabrook 1, and determined that the completion of Seabrook 1 is economically and financially viable, is more desirable than cancellation, and its I completion is in the public interest. However, uncertainties such as the outcome of pending regulatory proceedings in states other than Connecticut, intervenor challenges and risks attendant to the licensing process could cause further delays. Management believes the completion of the unit is probable but not assured because of the uncertainties previously discussed.

The DPUC has scheduled further hearings on the viability of Seabrook 1 for March 1986.

If Seabrook I were to be canceled, the Company would seek recovery of its prudently incurred costs. The Company believes that its Seabrook investment is recoverable based on past DPUC practices. However, the Company cannot predict whether and to what extent full recovery of its Seabrook 1 investment would be permitted. (For information regarding Seabrook 2, see Note 9, " Canceled Nuclear Project.")

i Hydro-Quebec: The 'ompany, WMECO and HWP, along with other New England I utilities, have en ered into agreements related to the financing and construction of transmission and terminal facilities (phase one) to import electricity from the Hydro-Quebec system in Canada. Upon completion, the phase one facilities will be capable of transferring 690 MW. The Company will receive 19.5 percent of the electricity transmitted by such facilities and will be responsible for its share of the total annual costs of the facilities. The current construction forecast is $167 million, of which approximately $111 million has been expended as of December 31, 1985. A mid-1986 in-service date is planned for phase one. l New England utilities also entered into agreements with Hydro-Quebec to finance and construct additional transmission and terminal f acilities (phase two), currently estimated to cost approximately $585 million. These facilities will increase the capability of the phase one Hydro-Quebec interconnection to 2,000 MW, and have an anticipated in-service date of 1990.

Upon completion of phase two, NU is expected to have a 20.58 percent equity ownership in the phase two facilities. Under the terms of the phase two equity agreement, NU is required to guarantee the obligations of other participants that have lower credit ratings.

Regulatory Matters: On September 4, 1985, the DPUC issued a supplemental interim order providing that in any month, beginning with August 1985, in which the Company's monthly annualized return on equity, computed on a cost-of-capital basis, exceeded 15.9 percent, the Company would place the amount of revenues in excess of that required to earn a 15.9 percent return in a reserve account for use as an offset to its next general rate request.

This order had no effect on 1985 earnings, however, for the month of January 1986, net income was reduced by $4.1 million. In February 1986, the DPUC denied the Company's petition to rescind the interim order. The 1

The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS Company has filed an appeal with the Connecticut Superior Court with respect to this order. (For additional information regarding the April and August 1985 interim orders, see " Energy Adjustment Clauses" section of Note 1.)

On November 25, 1985 the Company filed an application to amend its retail rates with the DPUC that would increase total annual revenues by

$155.5 million, or approximately 9 percent. The requested rates would increase annual revenues from its electric customers by $147 million, an average of 9.8 percent. The annual increase for the Company's gas customers would be $8.5 million or approximately 3.7 percent. The increased revenues for electric customers are required primarily to provide for the phase-in of Millstone 3 into rates when it enters commercial service in May 1986. If 1 approved, new rates would go into effect in May 1986.

In its rate application, the Company is proposing a three-year phase-in of its investment in Millstone 3. This phase-in plan is in compliance with Connecticut legislation enacted in July 1985, which requires the DPUC to l

develop a plan to phase the cost of the Millstone 3 and Seabrook 1 plants l into retail electric rates over a period of not less than three years nor more than ten years. If approved by the DPUC, the phase-in plan would result in three annual rate increases of about 9 percent associated with Millstone 3. As discussed below, any decision regarding this rate application would be impacted by the results of both the prudence and capacity hearings currently under way.

In October 1985, the DPUC released the resulta of phase one of a prudence audit of the management and construction of Millstone 3 that was y

conducted by The Nielsen-Wurster Group, Inc. (Nielson-Wurster) . Phase one, which analyzed the project from its inception to September 30, 1984, found no areas of imprudence in the management and construction of Millstone 3.

(Phase two of the audit will review the project from October 1, 1984 to completion.) It did find four areas in which, in the opinion of

Nielson-Wurster, the implementation of prudent decisions was accomplished with " inefficiencies" that they valutd at approximately $121.1 million.

< These inef ficiencies apply to the entire cost of Millstone 3, not just the Company's share. The Company is contesting Nielsen-Wurster's allegations of inefficiencies and is of the opinion that all prudently incurred costs of Millstone 3 should be included in rate base. The DPUC began hearings on this

matter in January 1986.

! As part of its review of this and all future rate applications the DPUC is conducting hearings required by a law, effective July 1985, to determine the level of generation reserve capacity necessary to provide a net economic benefit to customers. In addition, the law requires the DPUC to exclude from f rates any costs associated with generating facilities which would provide reserve capacity in excess of the level determined appropriate by the DPUC.

The DPUC began hearings on this matter in January 1986.

i Connecticut law limits, with certain exceptions, the construction costs of Millstone 3 that may be included in a Connecticut electric company's rate base to $3.54 billion. The Company is not able at this time to determine how much, if any, of the total cost of Millstone 3 would be precluded from

The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS recovery because of this law. Should it be determined that the law prevents

the Company from recovering its prudent investment in Millstone 3, management intends to pursue appropriate measures, which could include administrative and court appea1s, to obtain full rate recognition of its prudent investment.

The Company has filed an application for a wholesale electric revenue increase with the FERC. The increase is intended to reflect higher costs that will result when Millstone 3 commences commercial operation. Taking into account estimated fuel cost savings that will result from replacing fossil-fired generation with nuclear-powered generation, the requested annual revenue increase is approximately $11.1 million. Except for a minor portion of the proposed Company rate request, the Company has agreed that the effective date of the new rates may be suspended until Millstone 3 commences commercial operation.

i Accounting for Rate Base Disallowances, Phase-Ins and Abandoned Plant: The FASB is currently reconsidering its accounting standards for a number of regulatory-related issues, including partial disallowances of plant construction costs, phase-in plans, and abandonments of partially completed generating units.

In December 1985, the FASB released an Exposure Draft (ED) entitled

" Regulated Enterprises--Accounting for Phase-In Plans, Abandonments, and Disallowances of Plant Costs." Under the proposals, a partial disallowance of the costs of a newly constructed plant would be recognized as an immediate loss. Operating costs of a new plant would be deferred for future recovery only if the costs were deferred under a specific plan agreed to by regulators, the plan specified the timing of recovery of all costs, and all deferred costs were recovered within ten years from the plan's inception.

When abandonment of a plant under construction becomes probable, the costs of the plant would be removed from CWIP or the plant-in-service account and i recorded in a separate account at the present value of the probable future revenues expected to be provided to recover the cost of the asset.

If enacted, the proposal would require retroactive application. The FASB expects its reconsideration of regulatory accounting issues to be completed during 1986.

As explained in greater detail above and in Note 9, " Canceled Nuclear Project," the recovery of the Company's investments in Millstone 3 and the Seabrook project is being addressed, and will be addressed, by various regulatory authorities in current and future rate proceedings. There is the potential that the various regulatory authorities may impose disallowances that could preclude the Company from recovering a portion of its investments (direct disallowances), and related carrying charges (indirect disallowances),

in Millstone 3 and Seabrook. Under generally accepted accounting principles currently in effect, amounts excluded from rate base by a regulatory commission would not necessarily be written off as a charge against income at the time of disallowance unless allowed rates, including a return on

investment, would be inadequate to recover the total cost of the facility, plus related interest. Management does not believe that a material write-off under current generally accepted accounting principles would be necessary.

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The Connecticut Light and Power Company NOTES TO FINANCIAL STATEMENTS However, management is concerned that FASB's proposed ED, discussed above, would, if adopted, require the Company to write off potentially significant amounts of disallowances, either direct or indirect, as a result of actions imposed by regulatory authorities.

Nuclear Insurance Contingencies: The Price-Anderson Act currently limits public liability from a single incident at a nuclear power plant to $650 million. The first $160 million of liability would be covered by the maximum provided by commercial insurance. Additional liability of up to $490 million would be provided by an assessment of $5 million per incident levied on each of the 98 nuclear units currently licensed to operate in the United States, subject to a maximum assessment of $10 million per r.uclear unit in any year.

Based on the Company's ownership interests in the nuclear units currently in service, the maximum liability per incident would be $14.8 million, limited to a maximum of $29.6 million in any year.

Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover: (a) certain extra costs incurred in obtaining replacement power during a prolonged accidental outage with respect to the Company's ownership interests in Millstone 1 and 2 and CY; and, (b) the cost of repair, replacement or decontamination of utility property resulting from insured occurrences at Millstone 1, 2 and 3, CY, MY and VY. All companies insured with NEIL are subject to retroactive assessments if losses exceed the accumulated funds available to NEIL. The maximum potential casessments against the Company with respect to losses arising during current policy years are approximately $13.6 million under the replacement power policies and $14.6 million under the property damage and decontamination policies.

Although the Company has purchased the limits of coverage currently available from conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds.

Financial Arrangements for the Regional Nuclear Generating Companies: The owners of CY, including the Company, have guaranteed their pro rata shares of

$40.4 million 47 percent Series A Debentures. The Company's guarantee is

$14.6 million.

On August 5, 1985, CY executed a $25 million revolving credit agreement.

The owners of CY, including the Company, have agreed to guarantee their pro rata shares of th'.s agreement. The Company's guarantee is $8.6 million.

The owners of VY, including the Company, have guaranteed their pro rata shares of a $40 million nuclear fuel financing through the Vernon Energy Trust. The Company's guarantee is $3.8 million.

The owners of MY, including the Company, have agreed to guarantee their pro rata shares of MY's obligations under a $50 million nuclear fuel loan agreement which was executed on September 23, 1985. The Company's guarantee is $6.0 million.

The Company may be asked to provide additional capital and/or other types of direct or indirect financial support for one or more of the regional nuclear generating companies.

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The Connecticut Light and Powar Company NOTES TO FINANCIAL STATEMENTS

9. CANCELED NUCLEAR PROJECT The Company considers Seabrook 2 to be effectively canceled. During 1985, the Company transferred its investment in Seabrook 2 from Construction Work in Progress to Canceled Nuclear Projects where it will remain until recovery is permitted. The Company's investment in Seabrook 2 was

$24.4 million as of December 31, 1985.

In its retail rate case, the Company is requesting recovery of its Seabrook 2 costs over a three-year period. The Company cannot predict whether and to what extent full recovery of its Seabrook 2 investment will be

permitted. However, the Company believes that its Seabrook investment is recoverable based on past DPUC practices and previous DPUC orders with respect to Seabrook. (For additional information regarding the Seabrook l project, see the "Seabrook" section and " Accounting for Rate Base Disallowances, Phase-Ins and Abandoned Plant" section of Note 8.)

10. SEGMENTS OF BUSINESS The following summarizes information relating to the Company's electric and gas operations:

For the Years Ended December 31, 1985 1984 1983 (Thousands of Dollars)

Operating information:

Cperating revenues-Electric..................... $1,536,426 $1,554,808 $1,358,625 Cas.......................... 220,010 224,430 238,999 Total...................... $1,756,436 $1,779,238 $1,597,624 Pretax operating income-Electric..................... $ 349,273 $ 435,113 $ 344,661 i Gas.......................... 37,412 39,350 38,082 Total..................... $ 386,685 $ 474,463 $ 382,743 Depreciation expense-Electric..................... $ 92,513 $ 89,455 $ 85,860 Gas....,..................... 10,610 10,056 9,719 Total..................... $ 103,123 $ 99,511 $ 95,579 Gross Property Additions:

Electric........................ $ 607,933 $ 572,139 $ 506,625 Cas............................. 19,786 20,773 18,553 Total....................... $ 627,719 $ 592,912 $ 525,178 Investment information at December 31:

Identifiable assets (a) -

Electric...................... $4,207,525 $3,755,861 $3,326,103 Gas........................... 217,656 207,872 195,854 Nona11ocable assets............. 562,728 531,408 507,036 Total Assets................ $4,987,909 $4,495,141 $4,028,993 (a) Includes construction work in progress, materials and supplies, and

! allocated common utility plant.

Tho Connscticut Light and Powar Company NOTES TO FINANCIAL STATEMENTS

11. IMPACT OF CHANGING PRICES (UNAUDITED)

The following supplementary data was prepared in accordance with the requirements of Statement of Financial Accounting Standards No. 33 (SFAS No. 33), " Financial Reporting and Changing Prices," as amended. ]

As required by SFAS No. 33, the historical cost of plant, as stated in the Company's financial records, is adjusted for changing prices. This price adjustment does not necessarily represent the replacement cost of existing plant because such plant is not expected to be replaced precisely in kind.

The Company's price adjustment was determined by indexing historical plant using the Handy-Whitman Index of Public Utility Construction Costs. Nuclear fuel accounts reflect the current replacement cost of such fuel based on current market prices. Land was estimated by using the Consumer Price Index for all Urban Consumers.

Depreciation expense was determined by applying the Company's depreciation rates to the adjusted plant. Other expense items were not adjusted because they were considered to be at average price levels for the year or were spacifically excluded from adjustment by SFAS No. 33. As a result of the adjustment to depreciation, net income was reduced by

$120 million. At December 31, 1985, the current cost of fixed assets, net of accumulated depreciation, was $6.5 billion, while historical cost, or net cost recoverable through depreciation, was $4.4 billion. For 1985, the increase in general inflation ($229 million) exceeded the increase in specific prices ($312 million) after adjustment to net recoverable cost by

$15 million.

During periods of inflation, holders of net monetary assets suf fer a loss of purchasing power, while holders of net monetary liabilities experience a gain because debt will be repaid in dollars having less purchasing power. As a result of the substantial amount of debt which was used to finance utility plant, the Company's gain from the decline in purchasing power of net amounts owed was $104 million in 1985. This " gain" is not realizable by the Company and, therefore, cannot be considered additional funds for reinvestment or dividend distribution.

The Connacticut Light and Powar Comptny NOTES TO FINANCIAL STATEMENTS l

Comparison of Selected Financial Data Adjusted for Changing Ptices (In Average 1985 Dollars)

Years Ended December 31, 1985 1984 1983 1982 1981 (Millions of Dollars, except index data)

Operating revenues...................... $1,756 $1,842 $1,722 $1,675 $1,616 i

Net income (loss)....................... $ 157 $ 173 $ 101 $ 21 $ (29)

Net assets at year-end.................. $1,434 $1,353 $1,233 $1,102 $ 967

Amount by which the increase in gereral

) price level is greater than (or less than) the increase in specific prices after adjustment to net recoverable cost $ 15 $ 26 $ (14) $ (36) $ 74 Gain from decline in purchasing power of net amounts owed.............. $ 104 $ 100 $ 86 $ 78 $ 172 Average consumer price index............ 322.2 311.1 298.4 289.1 272.4 2

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Ths Connscticut Light and Powar Company Auditors' Report i

To the Board of Directors I of The Connecticut Light and Power Company:

We have examined the balance sheets of The Connecticut Light and Power 1 Company (a Connecticut corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1985 and 1984, and the related statements of income, common stockholder's equity and sources of funds for gross property additions for each of the three years in the period ended December 31, 1985.

Our examinations were made in accordance with generally accepted auditing

} standards and, accordingly, included such tests of the accounting records and l

such other auditing procedures as we considered necessary in the circumstances.

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In our opinion, the financial statements referred to above present fairly the financial position of The Connecticut Light and Power Company as of December 31, 1985 and 1984, and the results of its operations and the sources of funds for gross property additions for each of the three years in the period

! ended December 31, 1985, in conformity with generally accepted accounting j principles applied on a consistent basis.

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ARTHUR ANDERSEN & CO.

Hartford, Connecticut i February 17, 1986

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The Connecticut Light and Powsr Company SELECTED FINANCIAL DATA Years Ended December 31, 1985 1984 1983 1982 1981 (Thousands of Dollars)

Operating Revenues.... $1,756,436 $1,779,238 $1,597,624 $1,502,645 $1,365,653 i Operating Income...... 238,138 291,578 247,095 204,659 174,890 Net Income............ 277,075 284,227 227,207 152,960 104,568 Total Assets.......... 4,987,909 4,495,141 4,028,993 3,478,644 3,116,424 Long-Term Debt *....... 2,014,311 1,842,405 1,702,375 1,523,182 1,416,710 Preferred Stock f Subject to Mandatory Redemption *.......... 135,833 136,978 138,546 89,461 51,601 1 Obligations Under Capital Leases *...... 332,318 313,433 272,090 232,428 11,810 )

• Includes portions due within one year.

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STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) l Quarter Ended 1985 March 31 June 30 September 30 December 31 (Thousands of Dollars)

Operating Revenues.... $503,402 $404,265 $401,968 $446,801 Operating Income...... $ 81,787 $ 57,943 $ 51,638 $ 46,770 Net Income............ $ 89,649 $ 67,247 $ 62,799 $ 57,380 1984 l Operating Revenues.... $498,938 $405,855 $426,902 $447,543 Operating Income...... $ 91,360 $ 59,040 $ 73,880 $ 67,298 Net Income............ $ 87,310 $ 56,245 $ 73,415 $ 67,257 l

The Connscticut Light and Powar Comp:ny j STATISTICS i

At December 31, 1985 1984 1983 1982 1981 i Electric:

l Operating Revenues (thousands)....... $1,536,426 $1,554,808 $1,358,625 $1,278,198 $1,184,385 kWh Sales j (millions)........ 17,816 17,502 16,639 15,950 16,779 Average Annual Residential kWh

! Use............... 7,551 7,648 7,533 7,408 7,588 l Customers i (average)......... 961,070 941,839 925,193 916,525 906,688 Gas: ,

Operating Revenues (thousands) . . . . . . . $ 220,010 $ 224,430 $ 238,999 $ 224,447 $ 181,268 i Cubic Feet of Gas i Sales (millions).. 27,915 29,682 27,661 28,917 29,029 Average Annual i Residential Cubic Feet of Gas Used.. 71,161 72,303 68,296 75,030 77,449 Customers (average) 159,119 156,452 154,808 152,329 150,901 1

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4 j Utility Plant i (thousands)........ $5,435,410 $4,899,399 $4,381,401 $3,858,064 $3,336,776 I Employees........... 4,061 4,077 4,091 4,115 4,063 j 1

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Th3 Ccnn3cticut Light and Powar Corprny l

i First and Refunding Mortgage Bonds Trustee and Interest Paying Agent i Bankers Trust Company, Corporate Trust and Agency Group P.O. Box 318, Church Street Station New York, New York 10015

• The First National Bank of Boston, Corporate Trust Department P.O. Box 1897, Boston, Massachusetts 02105

• • The Conv.ecticut National Bank, Corporate Trust Department j 777 Main Street, Hartford, Connecticut 06115 i

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i Preferred Stock i Transfer Agent, Dividend Disbursing Agent and Registrar .

j The Connecticut Bank and Trust Company, N. A. Stock Transfer Department

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One Constitution Plaza, Hartford, Connecticut 06115 i

i Dividend Payment Dates I 5.28%, 9.6ci, 10.48%, 11.52%,

! $3.24, $4.48 H, $4.48 I and Adjustable Rate N Series -

l January 1 April 1. July 1 and October 1

! 4.50%, 4.96%, 6.56%, 9.36%,

$1.90, $2.00, $2.04, $2.06, $2.09 and $2.20 Series -

i February 1, May 1 August I and November 1 l 3.90%, 4.50% (1963), 7.60%, 15.04%, <

$3.80, $4.56 and $5.52 Series - March 1, June 1 September 1 and December 1

)

l Address General Correspondence in Care of:

j

) Northeast Utilities Service Company Investor Relations Department P.O. Box 270

Hartford, Connecticut 06141-0270 Tel. (203) 665-5000 General Office '

Selden Street, Berlin, Connecticut 06037-1616 i

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• Trustee and interest paying agent (except as noted below) for first mortgage j bonds issued under the indenture of The Hartford Electric Light Company.

Ef fective at the close of business on June 30, 1982, The Hartford Electric

) Light Company was merged into The Connecticut Light and Power Company.

** Paying agent for the 4 1/4% 1963 Series, 4 1/2% 1964 Series, 4 3/8% 1958 Series, and 5% 1957 Series.

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! The data contained in this Report is submitted for the sole purpose of providing information to present stockholders about the Company. l l

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i l NORTHEAST UTILIT ES THE CONNECTICUT LIGHT AND POWER COMPANY WESTERN MASSACHUSETTS ELECTRIC COMPANY

' HOLYOKE WATER POWER COMPANY NORTHE AST UTILITIES SERVICE COMPANY NORTHEAST NUCLEAA ENERGYCOMPANY I

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