ML20138G735

From kanterella
Jump to navigation Jump to search
PSC of New Hampshire 1996 Annual Rept
ML20138G735
Person / Time
Site: Millstone, Seabrook  Dominion icon.png
Issue date: 12/31/1996
From:
PUBLIC SERVICE CO. OF NEW HAMPSHIRE
To:
Shared Package
ML20138G692 List:
References
NUDOCS 9705060371
Download: ML20138G735 (54)


Text

_ - _ - . . - - - _ _ . __ - - _ - -

l O k\ 4/

t ,?

Q lA. El6y lE i

Qff j/kt>

l n,4/

l , , - , _ _ . _ , - _ , ,, ,

n 1x

^

a@ 'a c

k ,: - .'

1 m

l 4  !, .

,, %y :

l ,

.i l }

$ {J+ '

. lj m

g a mem .__m.ma acu

- mi l

1 l

8 '\ Public Service l k// of New Hampshire 97o506o371 97o43o EC M"* MO*8 S f8***

j PDR ADOCK 05000245 j I PDR l

k__,,___.._.._._.--_------_-_----------

1 DIRI( IORs 4

} John C. Colhns Bernard ht. Fox John J. Rornan i Executive Vke President Chairman and Chief Vice President and Controller l Eahey Highcock Chnic Executive Officer Frank P Sabatino l John H. Forsgren Wilham T. Fram,Jr. Vae Presideni-

Executn c Vue PreM ni and President and Wholesale Marketing i ChicI Fmancial Off.. .

Chief Operating Officer Northeast Utihties Lori A. hiabler Bernard ht. Fox Bruce D. Kenyon Assistant Controlicr-Chairman of the Board, President President-Nu(Icar Group Accounting Sermes

[

l and Chicf Executive Ofhter-Northeast Utihtics John H. Forsgren hiichael) hiahoney l

Executive Vwe President and Assistant Controllcr-William T. Frain Jr. Chicf fmancial Officer Rate Regulation President and l Chief Operating Offwcr Robert P Wax Theresa H. Allsop

"'"' ' '" '"' "#'I ^*"'"' '""'Y l Cher}l W Gnst and General Counsel f

Senior Vice Presdent and Chief j Robert A. Bersak Administrative Officer David H. Boguslawt.ki Assistant Seuctary Northeast Utihiics Serme Vac President-Energy Delivery i Company O. Kay Comendul Ronald G. Chevalier Asystant Scaetary Gerald Letendre we President-Fossil / Hydro l President-Diamond Casting &

' Engincenng and Operations htark A.Joyse Mac hine Company, Inc.

Assistant Secretary Hugh C. hiacKenzie Barry liberman President-Retail Business Group Vice President-Ccrporate and Robert C. Aronson Northeast Unhoes Environmental Allairs Assistant Treasurer Jane E. Newman David R. hicHale John B. Keane Executn e Vue Piesident Via Presidei .: and Treasurer Assuant Treasura l Exeter Trust Company j Robert P Wax Gary A. Long Senior Vke President, Secretary Yke President-Customer Servne l

! and General Counsel and Econonut Development Northeast Utihnes l

l 4

l I At t ( TIVI ( OMMIMI of the floant of Directors Bernard hl. Fox Chairman

} John il Forsgren Cheryl W Gnse j Hugh C hiacKen:le Wilham T. Frain,Jr.

? Ahcrnate i

i k IclMihn V 28. } 007 1

1 A

I

1996 Annual Report Public Service Company of New Hampshire Index Contents Egga Balance Sheets.............................................. 2-3 Statements of Income........................................ 4 Statements of Cash Flows.................................... 5 Statements of Common Stockholder's Equity................... 6 Notes to Financial Statements............................... 7 Rcport of Independent Public Accountants.................... 37 Mnnagement's Discussion and Analysis of Financial Condition and Results of Operations....................... 39 S21ected Financial Data..................................... 49 Statistics.................................................. 51 Statements of Quarterly Financial Data...................... 51 Preferred Stockholder and Bondholder Information............ Back Cover

=

l l

I I

l l

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE ,

BALANCE SHEETS l At December 31, 1996 1995 (Thousands of Dollars)

ASSETS Utility Plant, at cost:

Electric.. . .... . ... ... ...... . . ....... $ 1,877,955 $ 1,863,004 Less: Accumulated provision for depreciation (Note 1F). . . . ... . 552,780 513,244 1,325,175 1,349,760 Unamortized acquisition costs (Note IJ)... . . ..... 491,709 588,910 Construction work in progress.. .... ...... .. . 11,032 15,975 Nuclear fuel, net.. . .... . . .. ...... . .. . . 1,313 1,585 Total net utility plant.. ........ .... ..... .... 1,829,229 1,956,230 Other Property and Investments:  !

Nuclear decommissioning trusts, at market............ 3,229 2,436 Investments in regional nuclear generating companies and subsidiary company, at equity (Note IE) . ...................... ........ 19,578 19,300 Other, at cost.. ...... ............................ 1,835 1,103 24,642 22,839 Current Assets:

Cash... ... ..................... . ........ ...... 1,015 117 Notes receivable from affiliated companies........ .. 18,250 19,100 Receivables, less accumulated provision fer uncollectible accounts of $1,700,000 in 1996 and of $1,582,000 in 1995....... .................. 105,381 91,535 Accounts receivable from affiliated companies... .... 32,452 12,337 Taxes receivable from affiliated companies... ..... 613 -

)

i Accrued utility revenues................ ..... .... . 36,317 33,984  ;

Fuel, materials, and supplies, at average cost.. ... 44,852 41,717 l Prepayments and other. . .. ............... .. . 24,016 11,196  !

J l

262,896 209,986 Deferred Charges:

Regulatory assets (Note 1H).......................... 684,504 680,587 <

Deferred receivable from affiliated I company (Note 10G)............. ...................

33,284 33,284 Unamortized debt expense............................. 12,731 14,165 Other.. .......... . . .............................. 3,926 3,396 734,445 731,432 Total Assets................................ .... $ 2,851,212 $ 2,920,487 The accompanying notes are an integral part of these financial statements.

2 I

i l

l

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE BALANCE SHEETS

.............a........................._..............................

At Dscember 31, 1996 1995 (Thousands of Dollars) l CAPITALIZATION AND LIABILITIES C:pitalization:

Common stock--$1 par value.

Authorized and outstanding 1,000 shares.............. $ 1 $ 1 Ccpital surplus, paid 1n.............................. 423,058 422,385 Rotained earnings..................................... 174,691 143,039 Total common stockholder's equity............ 597,750 565,425 Preferred stock subject to mandatory redemption....... 100,000 125,000 Long-term debt........................................ 686,485 686,485 Total capitalization................... ..... 1,384,235 1,376,910 Obligations Under Seabrook Power Contracts and Other Capital Leases (Notes 2 and 3)............... 871,707 874,292 Current Liabilities: I Long-term debt and preferred stock--current 3

portion.............................................. 25,000 172,500 1 Obligations under Seabrook Power Contracts and other I capital leases--current portion '

(Notes 2 and 3)... ................................. 42,910 40,996 Accounts payable..... ................................ 37,675 49,863 l Accounts payable to affiliated companies.............. 31,130 26,656 i Accrued taxes.. ...................................... 81 798 Accrued interest...................................... 7,992 9,648 Accrued pension benefits.............................. 44,790 38,606 Other................................................. 37,516 19,077 227,094 358,144 Deferred Credits:

Accumulated deferred income taxes (Note II).... ...... 258,317 229,057 Accumulated deferred investment tax credits........... 4,511 5,060 D2ferred contractual obligations (Note 4)............. 50,271 18,814 Dmferred revenue from affiliated company (Note 10G)..... .................................. .. 33,284 33,284  ;

Other.... ....... ... .................. ............. 21,793 24,926 '

368,176 311,141 l

Commitments and Contingencies (Note 10) l Total Capitalization and Liabilities......... $ 2,351,212 $ 2,920,487 The accompanying notes are an integral part of these financial statements, i

3 1

F

r i

PUBLIC SERVICE COMPANY OF NEU HAMPSHIRE STATEMENTS OF INCOME I l

l t

l For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Operating Revenues..... .... ................. .... $1,110,169 $ 979,971 $ 922,039 Operating Expenses:

Operation --

Fuel, purchased and net interchange power..... 356,629 257,000 222,801 Other................. ....................... 327,287 313,604 303,271 Maintenance...................................... 45,728 42,244 43,725 Depreciation..................................... 42,983 44,337 38,703 Amortization of regulatory assets, net........... 56,884 55,547 55,319 Federal and state income taxes (Note 9).......... 80,340 69,817 68,088 Taxes other than income taxes.... ......... ..... 45,123 41,786 38,046 ,

)

Total operating expenses............ .. .. 954,974 824,343 769,953 l l

Operating Income.. . ....... ..... ..... . .. . 155,195 155,628 152,086 Other Income:

Equity in earnings of regional nuclear generating companies and subsidiary company.... 2,075 1,645 2,079 Other, net. ........ ....... ...... ............ 8,075 3,162 629 Income taxes. ...... .................... ....... (7,723) (770) (546)

Other income, net...... ........ .. ....... 2,427 4,037 2,162 l

........... .......... ......____ 1 Income before interest charges..... . ... 157,622 159,665 154,248 1

Interest Charges:

Interest on long-term debt..... ................ 57,557 76,320 76,410 Other interest.................. ............. .. 3,163 . 90 394  !

Interest charges, net...................... 60,720 76,410 76,804 l

Net Income.... .................................... $ 96,902 $ 83,255 $ 77,444 The accompanying notes are an integral part of these financial statements.

4

__ _ _ . . _ _ m . _ _ _ _ __ _ . _ _ . _ _ _ _ ___ .- m _ _ _ _ _ _ _ _ _ _ . _ _ _ _ ._ _

PUBLIC SERVICE CCMPANY OF NEW HAMPSHIkE STATEMENTS OF CASH FIDWS For the Years Ended December 31, 1996 1995 1994

.................................................................................................. i (Thousands of Dollars) I 1

Opercting Activities: I Ne t Inconc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,902 $ 83,255 $ 77,444 )

Adjustments to reconcile to net cash '

from operating activities:

Depreciation.............................................. 42,983 44,337 38,703  !

Deferred income taxes and investment tax credits, net..... 94,646 69,986 67,047 Recoverable energy costs, net of amortization. . . . . . . . . . . . . 31,663 (15,266) (81,206)

Amortization of acquisition costs......................... 56,884 55,547 55,319 1 Other sources of cash..................................... 65,922 15,973 3,213 Other uses of cash........................................ (51,188) - (4,456)

Changes in working capital:

Receivables and accrued utility revenues.................. (36,907) (10,506) (3,205)

Fuel, materials and supplies.............................. (3,135) (4,264) 3,734 j Accounts payable.......................................... (7,714) 2,375 18,598 Accrued taxes............................................. (717) (3,506) 4,182 Other working capital (excludes cash) . . . . . . . . . . . . . . . . . . . . . (12,659) 16 742 Net cash flows from operating activities...................... 276,680 237,947 180,115 Financing Activities:

Net decrease in short-term debt............................. - - (2,500)

Reicquisitions and retirements of long-term debt............ (172,500) (141,000) (94,000)

Ccsh dividends on preferred stock........................... (13,250) (13,250) (13,250)

Cash dividends on connon stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,000) (52,000) -

Net cash flows used for financing activities.................. (237,750) (206,250) (109,750)

Investment Activities:

Investment in plant: [

Electric utility plante................................... (37,480) (46,672) (39,721)

Nuclear fuel.............................................. 129 (184) (1,249) l Net cash flows used for investments in plant................ (37,351) (46,856) (40,970)  !

! NU Sys tem Money Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 15,900 (35,000)

  • Investment in nuclear deconunissioning trusts . . . . . . . . . . . . . . . . (521) (489) (368)

Other investment activities, net............................ (1,010) (431) 300 '

Net cash flows used for investments........................... (38,032) (31,876) (76,038)

Het Increase (Decrease) in Cash For 'Ihe Period. . . . . . . . . . . . . . . . 898 . (179) -(5,673)

Cash - beginning of period.................................... 117 296 5,969 Cash - end of period......... ................................ $ 1,015 $ 117 $ 296 Supplemental Cash Flow Information: '

Csah paid (received) during the year for:

Interest, net of amounts capitalized........................ $ 58,835 $ 74,543 $ 74,507 Income taxes............ ................................... $ (457) $ 1,369 $ 167

........... ........... == ........

Incrsase in obligations:

Seabrook Power Contracts and other capital leases........... $ 93 $ 28,028 $ 53,266 a

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

. 5

m__._ -m____.._.___. . ._ _ . . - . _ _ _ _ . _ _ _ . . _ . _ . _ _ . _ _ . . - _ . _ . _ _ . _ . . _ _ . _ . . _ . _ . . . _

k t

+

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE STATEMENTS OF COMMON STOCKHOLDER'S EQUITY i

t i

Capital l Common Surplus, Retained  !

Stock Paid In Earnings Total (Thousands of Dollars) i Balance at January 1, 1994............... $ 1 $421,245 $ 60,840 $482,006 '

Net income for 1994........... ...... 77,444 77,444  ;

Cash dividends on preferred. stock.... (13,250) (13,250)  !

Capital stock expenses, net.......... 539 539 j Balance at December 31, 1994............. 1 421,784 125,034 546,819  ;

Net income for 1995.................. 83,255 83,255 Cash dividends on preferred stock.... (13,250) (13,250) j Cash dividends on common stock....... (52,000) (52,000)

Capital stock expenses, net.......... -601 601 Balance at December 31, 1996..... ....... 1 422,335 143,039 565,425 Net income for 1996.................. 96,902 96,902  !

Cash dividends on preferred stock.... (13,250) (13,250)  !

Cash dividends on common stock....... (52,000) (52,000) lt Capital stock expenses, net.......... 673 673 i j

Balance at December 31, 1996............. $ 1 $423,058 $174,691 $597,750 i

l I

.i 1

l l

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

l i

i l

i 6

Public CCrvico Crap 2ny of CCw Hamp2hiro NOTES TO FINANCIAL STATEMENTS

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A. About Public Service :ompany of New Hampshire Public Service Compe f of New Hampshire (PSNH or the company),

The Connecticut Light and Power Company (CL&P), Western i Massachusetts Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), and Holyoke Water Power Company (HWP) are the operating subsidiaries comprising the Northeast Utilities system (the system) and are wholly owned by Northeast Utilities j (NU). i The system furnishes retail electric service in Connecticut, 1 New Hampshire, and western Massachusetts through CL&P, PSNH,  !

WMECO, and HWP. A fifth subsidiary, NAEC, sells all of its i capacity from Seabrook 1 (a 1,148-MW nuclear generatir.g unit)  :

to PSNH under two long-term contracts (the Seabrook Power '

Contracts). In addition to its retail service, the system furnishes firm and other wholesale electric services to various municipalities and other utilities. The system serves about 30 percent of New England's electric needs and is one of the 20 largest electric utility systems in the country as measured by revenues.

Other wholly owned subsidiaries of NU provide support services j for the system companies and, in some cases, for other New England utilities. Northeast Utilities Service Company (NUSCO) provides centralized accounting, administrative, information resources, engineering, financial, legal, operational, planning, purchasing and other services to the system companies. North Atlantic Energy Service Corporation acts as agent for CL&P and NAEC, and has operational responsibilities for the Seabrook 1 (Seabrook) nuclear generating facility.

Northeast Nuclear Energy Company (NNECO) acts as agent for the system companies in operating the Millstone nuclear generating '

facilities.

B. Presentation The preparation of financial statements in conformity, with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain reclassifications of prior years' data have been made to conform with the current year's presentation.

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

7

Publis CCrvico CompaSy cf Mr Hampshiro NOTES TO FINANCIAL. STATEMENTS C. Public Utility Regulation NU is registered with the Securities and Exchange Commission (SEC) as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act), and it and its subsidiaries, including the company, are subject to the provisions of the 1935 Act. Arrangements among the system companies, outside agencies and other utilities covering interconnections, interchange of electric power and sales of utility property are subject to regulation by the Federal Energy Regulatory Commission (FERC) and/or the SEC. The company is subject to further regulation for rates, accounting and other matters by the FERC and/or the New Hampshire Public Utilities Commission l (NHPUC).

D. New Accounting Standards The Financial Accounting Standards Board (FASB) has issued ,

Statement of Financial Accounting Standards (SFAS) 121,  !

" Accounting for the Impairment of Long-Lived Assets and for '

Long-Lived Assets to Be Disposed Of," which established y accounting standards for evaluating and recording asset i impairment. The company adopted SFAS 121 as of January 1, 1996. See Note 1H, " Summary of Significant Accounting Policies l

- Regulatory Accounting and Assets" tor iurther infornation on I the regulatory impacts of the company's adoption of SFAS 121.

See Note 100, " Commitments and Contingencies-Environmental Matters," for information on newly issued accounting and reporting standards related to this area.

E. Investments and Jointly Owned Electric Utility Plant Regional Nuclear Generating Companies: PSNH owns common stock of four regional nuclear generating companies (Yankee companies). The Yankee companies, with PSNH's ownership interests, are:

I Connecticut Yankee Atomic Power Company (a) (CN).... 5.0% l' Yankee Atomic Electric Company (a) (YAEC) . . . . . . . . . . . . 7.0 Maine Yankee Atomic Power Company (MY) .............. 5.0 ,

Vermont Yankee Nuclear Power Corporation (VY) ....... 4.0 (a) YAEC's and CY's nuclear power plants were shut down  !

permanently on February 26, 1992 and December 4, 1996, respectively.

PSNH's investments in the Yankee companies are accounted for on the equity basis due to the company's ability to exercise significant influence over their operating and financial policies.

8

Public Cervico company of New Hamp:hiro NOTES TO FINANCIAL STATENENTS The company's equity investments in the Yankee companies at December 31, 1996 are:

(Thousands of Dollars)

Connecticut Yankee Atomic Power Company.. $ 5,558 Yankee Atomic Electric Company........... 1,634 Maine Yankee Atomic Power Company........ 3,675 Vermont Yankee Nuclear Power Corporation. 2.100

$12.967 The electricity produced by MY and VY is committed substantially on the basis of ownership interests and is billed pursuant to contractual agreements. Under ownership agreements with the Yankee companies, PSNH may be asked to provide direct or indirect financial support for one or more of the companies.

For more information on these agreements, see Note 10F,

" Commitments and Contingencies -

Long-Term Contractual Arrangements." For more information on the Yankee companies, see Note 4, " Nuclear Decommissioning" and Note 10B,

" Commitments and Contingencies - Nuclear Performance."

Millstone 3: PSNH has a 2.85 percent joint ownership interest in Millstone 3, a 1,154-megawatt (MW) nuclear generating unit.

As of December 31, 1996 and 1995, plant-in-service included approximately $118.7 million and $118.6 million, respectively, and the accumulated provision for depreciation included approximately $29.4 million and $26.5 million, respectively, for PSNH's share of Millstone 3. PSNH's share of Millstone 3 expenses is included in the corresponding operating expenses on the accompanying Statements of Income. For more information on the Millstone 3 unit, see Note LOB, " Commitments and Contingencies - Nuclear Performance. "

Wyman Unit 4: PSNH has a 3.14 percent ownership interest in Wyman Unit 4 (Wyman), a 632-MW oil-fired generating unit. At December 31, 1996 and 1995, plant-in-service included approximately $6.0 million and the accumulated provision for depreciation included approximately $3.7 million and $3.5 million, respectively, for PSNH's share of Wyman. PSNH's share of Wyman expenses is included in the corresponding operating expenses on the accompanying Statements of Income.

F. Depreciation The provision for depreciation is calculated using the straight-line method based on estimated remaining lives of depreciable utility plant-in-service, adjusted for salvage value and removal costs, as approved by the NHPUC or other appropriate regulatory agencies. Except for major facilities, depreciation rates are applied to the average plant-in-service during the period. Major facilities are depreciated from the 9

Publio C rviCo Company cf New Hamp hiro NOTES TO FINANCIAL STATEMENTS time they are placed in service. When plant is retired from service, the original cost of plant, including costs of removal, less salvage, is charged to the accumulated provision for depreciation. The depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate of 3.7 percent in 1996, 3.8 percent in 1995 and 3.6 percent in 1994. See Note 4, " Nuclear Decommissioning," for information on nuclear plant decommissioning.

PSNH's nonnuclear generating facilities have limited service lives. Plant may be retired in place or dismantled based upon expected future needs, the economics of the closure and environmental concerns. The costs of closure and removal are incremental costs and, for financial reporting purposes, are accrued over the life of the asset as part of depreciation. At December 31, 1996, the accumulated provision for depreciation included approximately $31.1 million accrued for the cost of removal, net of salvage for nonnuclear generation property.

G. Revenues Other than revenues under fixed-rate agreements negotiated with certain wholesale, industrial and commercial customers and limited pilot retail access programs, utility revenues are based on authorized rates applied to each customer's use of electricity. In general, rates can be changed only through a formal proceeding before the appropriate regulatory commission.

At the end of each accounting period, PSNH accrues an estimate for the amount of energy delivered but unbilled.

H. Regulatory Accounting and Assets The accounting policies of PSNH and the accompanying financial statements conform to generally accepted accounting principles applicable to rate regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS 71,

" Accounting for the Effacts of Certain Types of Regulation."

Assuming a cost-of-service based regulatory structure, regulators may permit incurred costs, normally treated as expenses, to be deferred and recovered through future revenues.

Through their actions, regulators may also reduce or eliminate the value of an asset, or create a liability. If any portion of the company's operations were no longer subject to the provisions of SFAS 71, as a result of a change in the cost-of-service based regulatory structure or the effects of competition, the company would be required to write off related regulatory assets and liabilities. The company continues to believe that its use of regulatory accounting remains appropriato.

SFAS 121 requires the evaluation of long-lived assets, including regulatory assets, for impairment when certain events occur or when conditions exist that indicate the carrying amounts of assets may not be recoverable. SFAS 121 requires that any long-lived assets which are no longer probable of recovery through futura revenues be revalued based on estimated future cash flows.

10

Public COrviGo compa2y of New Hampshiro NOTES TO FINANCIAL STATEMENTS If the revaluation is less than the book value of the asset, an impairment loss would be charged to earnings. The implementation of SFAS 121 did not have a material impact on the company's financial position or results of operations as of December 31, 1996. Management continues to believe that it is probable that PSNH will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as competitive factors influence wholesale and retail pricing in the electric utility industry or if the cost-of-service based regulatory structure were to change.

The components of PSNH's regulatory assets are as follows:

At December 31, 1996 1995 (Thousands of Dollars)

Recoverable energy costs, net (Note 1K) .......................... $211,236 $220,093 Income taxes, net (Note II) .......... 151,431 192,690 Unrecovered contractual obligations (Note 4) ............... 50,271 18,814 Deferred costs, nuclear plants (Note 2) .................... 269,233 246,586 Other................................ 2,333 2,404

$684,504 $680,587 For more information on the company's regulatory environment and the potential impacts of restructuring, see Note 10A,

" Commitments and Contingencies -

Restructuring," Note 12,

" Subsequent Event," and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

I. Income Taxes The tax effect of temporary differences (differences between the periods in which transactions affect income in the financial statements and the periods in which they affect the determination of taxable income) is accounted for in accordance with the ratemaking treatment of the applicable regulatory commissions. The adoption of SFAS 109, " Accounting for Income Taxes," in 1993 increased the company's net deferred tax asset for net operating losses (NOLs) previously not recognized. As the potential benefit is being given to customers through rates, PSNH established an associated regulatory liability.

The adoption of SFAS 109 also increased deferred tax liabilities and as it is probable that the increase in deferred tax liabilities will be recovered from customers through rates, PSNH established a regulatory asset.

11

Public COrviGO Company of Eew Hamp2biro NOTES TO FINANCIAL ILTATEMENT8 The tax effect of temporary differences, including timing differences accrued under previously approved accounting standards, which give rise to the accumulated deferred tax obligation is as follows:

At December 31, 1996 1995 (Thousands of Dollars)

Accelerated depreciation and other plant-related difference.s..... $225,263 $ 231,126 NOL carryforwards..................... (94,149) (191,873)

Regulatory assets - income tax gross up............................ 68,652 85,192 Other................................. 58.551 104.612

$258.317 $ 229.057 At December 31, 1996, PSNH had a NOL carryforward of approximately $292 million, which can be used against PSNH's federal taxable income and which, if unused, expires between i the years 2000 and 2006. PSNH also had Investment Tax credit '

(ITC) carryforwards of $42 million, which if unused, expires between the years 1997 and 2004. For a portion of the carryforward amounts indicated above, the recrganization of PSNH under Chapter 11 of the United States Bankruptcy Code limits the annual amount of NOL and ITC carryforwards that may be used. Approximately $31 million of the NOL and $11 million of the ITC carryforwards are subject to this limitation. See Note 12, " Subsequent Event," for the possible impacts on the company from the NHPUC's decision related to industry restructuring.

J. Unamortised Acquisition Costa The unamortized acquisition costs represent the aggregate value placed by the 1989 rate agreement with the state of New Hampshire (Rate Agreement) on PSNH's assets in excess of the net book value of PSNH's non-Seabrook assets, plus the $"00-million value assigned to Seabrook by the Rate Agreement, as part of the bankruptcy resolution on June 5, 1992 (Acquisition Date). The Rate Agreement provides for the recovery, through rates, with a return, of the unamortized acquisition costs.

The Rate Agreement provides that $425 million of the unamortized acquisition costs be amortized over the first seven years after PSNH's May 16, 1991 reorganization from bankruptcy (Reorganization Date), with the remaining amount to be amortized over the 20-year period after the Reorganization Date. As of December 31, 1996, approximately $501.6 million of acquisition costs have been collected through rates.

K. Recoverable Energy Costs Under the Energy Policy Act of 1992 (Energy Act), PSNH is assessed for its proportionate share of the costs of decontaminating and decommissioning uranium enrichment plants owned by the United States Department of Energy (D&D l assessment). The Energy Act requires that regulators treat D&D 12 l

i Public CCrvico Company of New Eampnhiro m,i To yi-sunnr. .t ie-__s l assessments as a reasonable and necessary current cost of fuel, j to be fully recovered in rates, like any other fuel cost. PSNH is currently recovering these costs through rates. As of l December 31, 1996, PSNH's total D&D deferrals were ,

approximately $0.2 million. I 1

The Rate Agreement includes a comprehensive fuel and purchased '

power adjustment clause (FPPAC) permitting PSNH to pass through to retail customers, for a ten-year period that began in May, ,

1991, the retail portion of differences between the fuel and '

purchased power costs assumed in the Rate Agreement and PSNH's j actual cvsts, which include the costs related to the Seabrook Power Contracts and the Clean Air Act Amendment. The cost i components of the FPPAC are subject to a prudence review by the l NHPUC. '

The costs associated with purchases from nonutility generators (NUGs) over the level assumed in the Rate Agreement are  ;

deferred and recovered through the FPPAC. PSNH has been renegotiating the rate orders mandating the purchase of high- l cost NUG power. The NHPUC has approved an amendment to the ]

Rate Agreement allowing settlement agreements to be implemented }

with two wood-fired NUGs. Pursuant to the 1994 settlement i agreements, the two NUGs that were settled gave up their rights t to sell their output to PSNH in exchange for lump-sua cash J payments totaling approximately $40 million. The deferred ,

buyout payments are included as part of PSNH's recoverable j energy costs. During the Rate Agreement's fixed-rate period, l all of the savings from the buyout will be used to reduce  !

PSNH's recoverable energy costs. At the end of the fixed-rate  :

period, 50 percent of the savings will be used to reduce the  :

recoverable energy costs, with the remainder reducing current  !

rates. PSNH has also reached tentative agreements with the six remaining wood-fired NUGs. These agreements are subject to NHPUC approval. In January, 1997, the NHPUC issued an order i approving one of the six NUG settlements. However, the ;

conditions imposed within the order, along with the uncertainty  ;

caused.by industry restructuring proceedings, may impede PS,NH's  !

ability to' move forward with the settlements.

At December 31, 1996, PSNH's net recoverable energy costs were I approximately $211.2 million, including purchased power l deferrals of $183.4 million and the NUGs deferred buyout l payments of $27.6 million. t I

For further information on recoverable energy costs, see the  !

MD&A. See Note 12, " Subsequent Event" for the possible impacts I on the company of the NHPUC's decision related to industry {

restructuring. l I

I

~

13 )

i Public COrviCO Comp Cy Of New Namp hiro l

NOTES TO FINANCIAL STATEMENTS 1

2. SEABROOK POWER CONTRACTS 1 PSNH and NAEC have entered into two power contracts that obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook for the term of Seabrook's Nuclear Regulatory Commission (NRC) operating license. Under these power contracts, PSNH is obligated to pay NAEC's cost of service during this period, ,

regardless of whether Seabrook 1 is operating. NAEC's cost of service includes all of its Seabrook-related costs, including l operation and maintenance (O&M) expenses, fuel expense, income and i property tax expense, depreciation expense, certain overhead and other costs and a return on its allowed investment.

PSNH has included its right to buy power from NAEC on its Balance Sheets as part of utility plant and regulatory assets with a l corresponding obligation. At December 31, 1996, this right was '

valued at approximately $910.9 million. 1 The contracts established the value of the initial investment in i l

Seabrook (initial investment) at $700 million. As prescribed by the Rate Agreement, as of May 1, 1996, NAEC phased into rates 100 percent of the recoverable portion of its investment in Seabrook 1.

This plan is in compliance with SFAS 92," Regulated Enterprises-Accounting for Phase-in Plans." From the Acquisition Date through December 31, 1996, NAEC recorded $18S.1 million of deferred return on its investment in Seabrook 1. In addition, NAEC's utility plant includes $84.1 million of defer ed return that was transferred as I part of the Seabrook plant assets to NAEC on the Acquisition Date.

The deferred return, including the portion transferred to NAEC, will be recovered with carrying charges beginning December 1, 1997, and will be fully recovered by May 2001. NAEC depreciated its initial investment over the term of Seabrook l's operating license (39 years), and any subsequent plant additions are depreciated on a l straight-line basis over the remaining term of the power contracts j at the time the subsequent additions are placed in service.

If Seabrook 1 is shut down prior to the expiration of the NRC operating license, PSNH will be unconditionally required to pay NAEC termination costs for 39 years, less the period during which Seabrook 1 has operated. These termination costs will reimburse l NAEC for its share of Seabrook 1 shut-down and decommissioning l costs, and will pay NAEC a return of and on any undepreciated l balance of its initial investment over the remaining term of the l power contracts, and the return of and on any capital additions to j the plant made after the Acquisition Date over a period of five years after shut down (net of any tax benefits to NAEC attributable the cancellation).

l 14 j

Public C rvio3 Company of Cow Hampshiro NOTES TO VimmMCIAL STATEMWuTS Contract payments charged to operating expenses are approximately: i Year Contract Payments  :

(Thousands of Dollars) l 1996....................... $159,000 j 1995....................... 154,000 j 1994 ....................... 143,000 {

1 Interest included in the contract payment was $55 million in 1996,  !

$51 million in 1995, and $43 million in 1994.

Future minimum payments, excluding executory costs, such as property taxes, state use taxes, insurance and maintenance, under the terms of the contracts, as of December 31, 1996, are approximately:

l Year S.g.abrook Power Contracts '

(Thousands of Dollars) 1997........................ $ 91,000 1998........................ 148,000 1999........................ 146,000 2000........................ 144,000 2001........................ 95,000 After 2001.................. 1.149.200 l 1

Future minimum payments..... 1,773,200 Less amount representing interest 862.200 Present value of Seabrook Power Contracts payments ....... $ 911.000 See Note 12, " Subsequent Event" for the possible impacts the NHPUC's restructuring decision may have on the Seabrook Power Contracts.

3. LEASE 8 PSNH has entered into lease agreements, some of which are capital leases, for the use of data processing and office equipment, vehicles and office space. The provisions of these lease agreements generally provide for renewal options. The following rental payments have been charged to expense:

Year Caoital Leases Operatina Leases 1996............... $1,105,000 $4,884,000 1995............... 1,103,000 5,291,000 1994............... 1,061,000 4,255,000 Interest included in capital lease rental payments was $292,000 in 1996, $351,000 in 1995, and $394,000 in 1994.  !

15

I 1

Publio SOrvic3 Comp 2ny of N;w Hamp;hiro MQTES TO FINANCIAL STATEMENTS Future minimum rental payments, excluding executory costs, such as property taxes, state use taxes, insurance and maintenance, under ,

long-term noncancellable leases, as of December 31, 1996, are: j Year Caoital Leases Operatino Leases (Thousands of Dollars) 1997 .................. $1,500 $ 7,100 )

1998 .................. 1,500 5,600 1 1999 .................. 1,200 4,800 )

2000 .................. 1,000 4,200 '

2001 .................. 1,000 3,800 After 2001.............. 700 9.100 Future minimum lease payments.............. $6,900 $34.600 l

Less amount representing )

interest............... 3.200 <

l Present value of future  !

minimum lease payments $3.700 It is possible that certain operating lease payments related to ,

NUSCO leases will be accelerated from future years into 1997. See Note 10H, "The Rocky River Realty Company -

Obligations" for additional information.

1

4. NUCLEAR DECOMMISSIONING l Millstone and Seabrook: Millstone 3 and Seabrook 1 have service lives that are expected to end during the years 2025 and 2026, respectively. Upon retirement, these units must be decommissioned.

Decommissioning studies prepared in 1996 concluded that complete and immediate dismantlement at retirement continues to be the most j viable and economic method of decommissioning Millstone 3 and Seabrook 1. Decommissioning studies are reviewed and updated periodically to reflect changes in decommissioning requirements, costs, technology and inflation.

The estimated cost of decommissioning PSNH's 2.85 percent ownership share of Millstone 3 and NAEC's 35.98 percent share of Seabrook 1, in year-end 1996 dollars, is $13.2 million and $162.1 million, respectively. Millstone 3 and Seabrook i decommissioning costs will be increased annually by their respective escalation rates.

PSNH's Millstone 3 decommissioning costs are accrued over the expected service life of the unit and are included in depreciation expense on its Statements of Income. Nuclear decommissioning costs related to PSNH's share of Millstone 3 amounted to $0.4 in 1996 and

$0.3 million in 1995 and 1994. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on PSNH's Balance Sheets. At December 31, 1996, the balance in the accumulated reserve for decommissioning amounted to

$3.2 million.

16 l

J

1 I

Publio CCrvico COcp2ny ef N;w Hampshiro j l

EQIED_T_0_J_IJpcIAL STATEMENTS l PSNH makes payments to an independent decommissioning trust for its portion of the costs of decommissioning Millstone 3. Funding of the estimated decommissioning costs assumes levelized collections for Millstone 3 and escalated collections for Seabrook 1, and after-tax I earnings on the Millstone and Seabrook decommissioning funds of 5.8 percent and 6.5 percent, respectively. Under the terms of the Rate

~

Agreement, PSNH is obligated to pay NAEC's share of Seabrook's I decommissioning costs, even if the unit is shut down prior to the i expiration of its operating license. Accordingly, NAEC bills PSNH l I

directly for its share of the costs of decommissioning Seabrook 1.

PSNH records its Seabrook decommissioning costs as a component of purchased power expense on its Statements of Income. Under the Rate Agreement, PSNH's Seabrook decommissioning costs are recovered through base rates.

As of December 31, 1996, PSNH collected through rates approximately 1

$2.2 million toward the future decommissioning costs of its share of Millstone 3, which has been transferred to the external decommissioning trust. Earnings on the decommissioning trust increase the decommissioning trust balance and the accumulated I reserve for decommissioning. Unrealized gains and losses associated I with the decommissioning trust and financing fund also impact the balance of the trust and the accumulated reserve for i decommissioning.

As of December 31, 1996, NAEC has paid approximately $16.6 million (including payments made prior to the Acquisition Date by PSNH),

into Seabrook l's decommissioning financing fund.

Changes in requirements or technology, the timing of funding or dismantling, or adoption of a decommissioning method other than immediate dismantlement would change decommissioning cost estimates and the amounts required to be recovered. PSNH attempts to recover sufficient amounts through its allowed rates to cover its expected decommissioning costs. Only the portion of currently estimated total decommissioning costs that has been accepted by regulatory agencies is reflected in rates of PSNH. Based on present estimates and assuming its nuclear units operate to the end of their licensing period, PSNH expects that the decommissi'ningo trust and financing fund will be substantially funded when the units are retired from service.

MY and VY: Each Yankee company owns a single nuclear generating unit. MY and VY have service lives that are expected to end in 2008 and 2012, respectively. PSNH's ownership share of estimated costs, in year-end 1996 dollars, of decommissioning the units owned and operated by MY and VY is $18.5 million and $14.6 million, respectively. Under the terms of the contracts with the Yankee companies, the shareholders-sponsors are responsible for their proportionate share of the operating costs of each unit, including decommissioning. The nuclear decommissioning costs of the Yankee companies are included as part of the cost of power purchased by PSNH.

17

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

Publio GOrvico comp 2ny of N w Hamp0hiro NOTE 8 TO FINANCIAL STATM NTS 4

CY and YAEC: On December 4, 1996, the board of directors of CY I

voted unanimously to cease permanently the production of power at its nuclear plant. The system companies relied on CY for approximately three percent of their capacity.

1 CY has undertaken a number of regulatory filings intended to implement the decommissioning and the recovery of remaining assets of CY. During late December, 1996, CY filed an amendment to its power contracts to clarify the obligations of its purchasing utilities following the decision to cease power production. At December 31, 1996, the estimated obligation, including decommissioning amounted to $762.8 million of which PSNH's share was  !

approximately $38.1 million. l 1 YAEC is in the process of decommissioning its nuclear facility. At December 31, 1996, the estimated remaining costs, including

' decommissioning, amounted to $173.3 million of which PSNH's share was approximately $12.1 million.

Management expect 9 that PSNH will continue to be allowed to recover j these costs from its customers. Accordingly, PSNH has recognized '

these costs as regulatory assets, with corresponding obligations, on l its Balance Sheets.

Proposed Accounting: The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, i including the company, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units  !

in the financial statements. In response to these questions, FASB '

agreed to review the accounting for removal costs, including decommissioning, and issued a proposed statement entitled

" Accounting for Liabilities Related to Closure or Removal of Long-  ;

Lived Assets," in February, 1996. If current electric utility '

industry accounting practices for decommissioning are changed in accordance with the proposed statement: (1) annual provisions for decommissioning could increase, (2) the estimated cost for decommissioning could be recorded as a liability ,with an offset to plant rather than as part of accumulated depreciation, and (3) trust fund income from the external decommissioning trusts could be '

reported as investment income rather than as a reduction to decommissioning expense.

1

5. SHORT-TERN DEBT The amount of short-term borrowings that may be incurred by PSNH is subject to periodic approval by the SEC under the 1935 Act or by the NHPUC. PSNH was authorized, under a waiver from the NHPUC, as of January 1, 1997 to incur short-term borrowings up to a maximum of $225 million. The NHPUC borrowing limit will be reduced to $125 million effective May 1997.

On April 30, 1996, PSNH increased its $125 million revolving-credit agreement to $225 million with approval from the NHPUC. The 18

j Publio Ccryioo c::apar.y of New Hampshiro

  • l NOTES TO FINANCIAL STATEMENTS '

l agreement, which was scheduled to expire in May, 1996, has been f extended so that $100 million of the agreement will expire in April, 1997, and the remaining $125 million wi?.1 expire in April, i 1999. The revolving credit agreement is with a group of 16 banks.  ;

l PSNH is obligated to pay a facility fee of .25 percent per annum on  !

i the three-year commitment of $125 million and .20 percent per annum l

) on the one-year commitment of $100 million. At December 31, 1996 j and 1995, there were no borrowings under the facility.  !

l

! Money Pool: Certain subsidiaries of NU, including PSNH, are f l members of the Northeast Utilities System Money Pool (Pool). The t

Pool provides a more efficient use of the cash resources of the  ;

i system, and reduces outside short-term borrowings. NUSCO (

l administers the Pool as agent for the member companies. Short-term 4

borrowing needs of the member companies are first met with i available funds of other member companies, including funds borrowed i by NU parent. NU parent may lend to the Pool but may not borrow.

Funds may be withdrawn- from or repaid to the Pool at any -time  !

without prior notice. Investing and borrowing subsidiaries receive .

or pay interest based on the average daily Federal Funds rate.

However, borrowings based on loans from NU parent bear interest at NU parent's cost and must be repaid based upon the terms of NU parent's original borrowing. At December 31, 1996 and 1995, PSNH had no outstanding borrowings from the Pool.

Maturities of PSNH's short-term debt obligations were for periods I of three months or less.

l

6. EMPLOYEE BENEFITS '

A. Pension Benefits PSNH participates in a uniform noncontributory defined benefit retirement plan covering all regular system employees. Benefits are based on years of service and employees' highest eligible compensation during 60 consecutive months of employment. The company's direct portion of the system's pension cost, part of which was charged to utility plant, approximated $6.2 million in 1996, $2.3 million in 1995 and $4.4 million in 1994.

Pension costs for 1996 and 1994 included approximately $1.9 million related to workforce reduction programs.

Currently, PSNH funds annually an amount at least equal to that which will satisfy the requirements of the Employee Retirement Income Security Act and the Internal Revenue Code. Pension costs are determined using market-related values of pension assets. Pension assets are invested primarily in domestic and international equity securities and bonds.

19

Public CCryico Comp Cy cf New Hamp:hiro a

avrE8 TO FINANCIAL STATEMMMTS I

\

The components of net pension cost for PSNH are:

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Service cost..................... $ 6,161 $ 3,462 $ 5,531 Interest cost.................... 12,808 11,923 11,129 Return on plan assets............ (24,393) (33,156) 246 Net amortization................. 11.608 20.108 (12.526)

Net pension cost................. S 6.184 S 2.337 $ 4.380 For calculating pension cost, the following assumptions were used:

For the Years Ended December 31, 1996 1995 1994 Discount rate..................... 7.50% 8.25% 7.75%

Expected long-term rate of return. 8.75 8.50 8.50 i Compensation / progression rate..... 4.75 5.00 4.75

+

The following table represents the plan's funded status reconciled to the Balance Sheets:

At December 31. 1996 1995 (Thousands of Dollars)

Accumulated benefit obligation, including vested benefits at

. December 31, 1996 and 1995 of

$131,624,000 and $123,475,000, f respectively........................ $ 143.377 $133.840 Projected benefit obligation.......... 179,192 $169,040 Market value of plan assets........... 173.035 159,094 Market value in excess of l projected benefit obligation........ (6,157) (9,946)

Unrecognized transition amount........ 4,337 4,671 i Unrecognized prior service costs...... 8,135 5,428 Unrecognized net gain................. (51.105) (38,759) i Accrued pension liability............. $($44.790) $(38.606) ,

T l i

l l

l 20 l l

Public COrvico Crp ny of N ":7 Hamp hiro NOTES TO FINANCIAL STATEMENTS The following actuarial assumptions were used in calculating the plan's year-end funded status:

For the Years Ended December 31, 1996 1995 Discount rate......................... 7.75% 7.50% i Compensation / progression rate......... 4.75 4.75 {

l i

B. Postratirement Benefits Other Than Pensions PSNH provides certain health care benefits, primarily medical and dental, and life insurance benefits through a benefit plan to retired employees (referred to as SFAS 106 benefits). These benefits are available for employees retiring from the company who have met specified service requirements. For current employees and certain retirees, the total SFAS 106 benefit is limited to two times the 1993 per-retiree health care costs.

The SFAS 106 obligation has been calculated based on this assumption. PSNH's direct portion of SFAS 106 benefits, part of which was deferred or charged to utility plant, approximated

$6.2 million in 1996, $7.2 million in 1995 and $7.6 million in 1994.

PSNH is funding SFAS 106 postretirement costs through external trusts. The company is funding, on an annual basis, amounts that have been rate-recovered and which also are tax-deductible under the Internal Revenue Code. The trust assets are invested primarily in equity securities and bonds.

The components of health care and life insurance costs are: l For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Service cost.................. $ 914 $ 933 $ 971 Interest cost................. 3,559 4,063 3,844 Return on plan assets......... (1,720) (1,694) 37 Amortization of unrecognized transition obligation....... 2,941 2,941 2,941 Other amortization, net....... 547 998 (206)

Net health care and life insurance costs............. $6,241 $7,241 $7,587 21

Public BCrviGO Company Of New Namp hiro

\

l

! NOTES TO FINANCIAL STATEMENTS For calculating PSNH's SFAS 106 benefit costs, the following assumptions were used:

For the Years Ended December 31, 1996 1995 1994 Discount rate................. 7.50% 8.00% 7.75% l Long-term rate of return -

Health assets, net of tax.. 5.25 5.00 5.00 Life assets................ 8.75 8.50 8.5C The following table represents the plan's funded status reconciled to the Balance Sheets:

At December 31. 1996 1995 (Thousands of Dollars)

Accumulated postretirement benefit obligation of:

Retirees................... $38,245 $ 44,985 Fully eligible active employees................ 22 27 Active employees not eligible to retire....... 9.696 10.627 Total accumulated post-retirement benefit obligation.................. 47,963 55,639 Market value of plan assets... 17.882 11.743 Accumulated postretirement benefit obligation in excess of plan assets....... (30,081) (43,896)

Unrecognized transition amount...................... 47,049 49,989 Unrecognized net gain......... (17.139) (8.373)

Accrued postretirement benefit ,

liability................... $ (171) $ (2.280)

The following actuarial assumptions were used in calculating the plan's year-end funded status:

At December 31. 1996 1995 Discount rate......................... 7.75% 7.50%

Health care cost trend rate (a) ....... 7.23 8.40 (a) The annual growth in per capita cost of covered health care benefits was assumed to decrease to 4.91 percent by 2001.

22

Public CCrvico C2cp ny cf N;w Hamp::hiro NOTES TO FINANCIAL STATEMENTS The effect of increasing the assumed health care cost trend

, rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $3.1 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $0.3 million. The trust holding the health plan assets is subject

to federal income taxes at a 39.6 percent tax rate.

PSNH is currently recovering SFAS 106 costs, including amounts .

previously deferred. '

7. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Details of preferred stock subject to mandatory redemption are:

Shares Outstanding December 31.

Descriotion December 31, 1996 1996 1995 1994 (Thousands of Dollars) 10.60%

Series A of 1991..... 5,000,000 $125,000 $125,000 $125,000 Less preferred stock to be redeemed within one year.... 1,000,000 25.000 - -

Total preferred stock subject to mandatory redemption $100.000 $125.000 $125.000 In case of default on dividends or sinking-fund payments, no payments may be made on any junior stock by way of dividends or otherwise (other than in shares of junior stock) so long as the default continues. If PSNH is in arrears in the payment of dividends on any outstanding shares of preferred stock, PSNH would be prohibited from redemption or purchase of less than all of the preferred stock outstanding. The Series A Preferred Stock is not subject to optional redemption by PSNH. It is subject to an annual sinking fund requirement of $25 million, beginning on June 30, 1997, sufficient to retire annually 1,000,000 shares at

$25 per share.

23

Publio CCrvico Comp 2ny cf New Hamp3hiro NOTES TO FINANCIAL STATEMENTS

8. LONG-TERM DEBT Details of long-term debt outstanding are:

December 31, 1996 1995 (Thousands of Dollars)

First Mortgage Bonds:

8 7/8% Series A, due 1996............. $ -

$172,500 9.17% Series B, due 1998............. 170,00_q 170,000 Total First Mortgage Bonds..... 170,000 342,500 Pollution Control Revenue Bonds:

7.65% Tax-Exempt Series A, due 2021.... 66,000 66,000 7.50% Tax-Exempt Series B, due 2021.... 108,985 108,985 7.65% Tax-Exempt Series C, due 2021.... 112,500 112,500  :

Adjustable Rate, Taxable, Series D, due 2021............................. 39,500 39,500 Adjustable Rate, Taxable, Series E, due 2021............................. 69,700 69,700 1 Adjustable Rate, Tax-Exempt, Series D, l due 2021............................. 75,000 75,000 Adjustable Rate, Tax-Exempt, Series E due 2021............................. 44,800 44,800 Less: Amounts due within one year..... - 172,500 Long-term debt, net............. $686,485 $686,485 Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1996 aggregate approximately $170 million for 1998. There are neither sinking-fund requirements nor debt maturities existing for the years 1997, and 1999 through 2001.

Also, there are annual renewal and replacement fund requirements equal to 2.25 percent of the average of net depreciable property owned by PSNH at the reorganization date, plus cumulative gross property additions thereafter. PSNH expects to meet these future fund requirements by certifying property additions. Any deficiency would need to be satisfied by the deposit of cash or bonds.

Essentially, all utility plant of PSNH is subject to +he lien of its first mortgage bond indenture. PSNH's Revolving Credit Facility has a second lien, junior to the lien of its first mortgage bond indenture, on all PSNH property located in New Hampshire which will expire in April 1999. At December 31, 1996, there were no borrowings under the Revolving Credit Facility.

Concurrent with the issuance of PSNH's Series A and B First Mortgage Bonds, PSNH entered into financing arrangements with the Business Finance Authority of the state of New Hampshire (BFA).

Pursuant to these arrangements, the BFA issued seven series of Pollution Control Revenue Bonds (PCRBs) and loaned the proceeds to PSNH. At December 31, 1996, $516.5 million of PCRBs were outstanding. The average effective interest rates on the variable-rate pollution control notes ranged from 3.5 percent to 5.5 percent for 1996, and from 3.9 percent to 6.1 percent for 1995. PSNH's 24

1 Publio COrvico Cacprny of N;w Harapnhiro l

NOTES TO FINANCIAL STATEMENTS l obligation to repay each series of PCRBs is secured by a series of First Mortgage Bonds that were issued under its indenture. Each j such series of First Mortgage Bonds contains terms and provisions I with respect to maturity, principal payment, interest rate, and I redemption that correspond to those of the applicable series of l PCRBs. For financial reporting purposes, these bonds would not be  ;

considered outstanding unless PSNH fails to meet its obligations I under the PCRBs.

1 The Series B First Mortgage Bond is not redeemable prior to its maturity except in limited circumstances. The PCRBs, except for Series D and E, are redeemable on or after May 1, 2001, at the option of the company with accrued interest and at specified I premiums. Under current interest rate elections by PSNH, the I Series D and E PCRBs are redeemable, at par plus accrued interest at the end of each interest-rate period. Future interest-rate elections by PSNH could significantly defer or eliminate the availability of optional redemptions by PSNH, and could affect costs as well.

9. INCOME TAZ EXPENSE The components of the federal and state income tax provisions charged to operations are:

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Current income taxes:

Federal............................ $(4,978) $(1,166) $ 368 State.............................. (1,605) 1.767 1.219 Total current.................... (6.583) 601 1.587 Deferred income taxes, net:

Federal............................. 94,922 72,147 63,941 State.............................. 272 (1.606) 3.666 Total deferred ............ .. .. 95,194 70,541 6 7 ,_6 0 7 Investment tax credits, net.......... (548) (555) (560)

Total income tax expense............. S88,063 $70.587 $68.634 The components of total income tax expense are classified as follows:

Income taxes charged to operating expenses............................ $80,340 $69,817 $68,088 Other income taxes................... 7.723 770 546 Total income tax expense............. S88.063 S70.587 $68.634 25

Publio CCrviOO CsCpOny of New Hampchiro NOTES TO FINANCIAL STATEMENTS Deferred income taxes are comprised of the tax effects of temporary differences as follows:

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars) l Depreciation......................... $(1,055) $ 1,294 $ 2,701 Deferred tax asset associated with NOL........................... 96,756 57,543 23,611 Energy adjustment clauses............ (10,716) 5,098 30,954 l Amortization of regulatory settlement......................... 11,501 11,501 11,501 Other................................ (1,292) (4,895) (1,160)

Deferred income taxes, net........... $95,194 $70,541 $67,607 l A reconciliation between income tax expense and the expected tax l expense at the applicable statutory rate is as follows:

For the Years Ended December 31, 1996 1995 1994 (Thousands of Dollars)

Expected federal income tax at 35 percent of pretax income........ $64,616 $53,845 $51,127 Tax effect of differences:

Depreciation....................... 1,896 1,868 1,407 Amortization of acquisition costs.. 31,410 31,522 31,508 Seabrook intercompany loss......... (7,504) (13,048) (19,637)

Investment tax credit amortization. (548) (555) (560)

State income taxes, net of federal benefit.................. (867) 105 3,175 Other, net......................... (940) (3,150) 1,614 Total income tax expense............. $88,063 $70,587 $68,634

10. COMMITMENTS AND CONTINGENCIES A. Restructuring New Hampshire: The 1996 restructuring legislation that the NHPUC is charged with implementing provides that the NHPUC may not adopt a restructuring plan that imposes a severe financial hardship on a utility. NU management has testified that the implementation of certain methodologies would result in a significant loss to PSNH. If these losses were to result in the triggering of acceleration rights that PSNH's creditors have and, if any single significant creditor demanded payment because of the triggering of acceleration rights, all other l

major creditors would immediately follow and PSNH and NAEC bankruptcy filings would be unavoidable.

Management believes that PSNH is entitled to full recovery of

' its prudently incurred costs, including regulatory assets and stranded costs. It bases this belief both on the general nature of public utility industry cost-of-service based 26

Public Ccrvico Comp ny of N 0 Hamp hiro

NOTES TO FINANCIAL STATEMENTS regulation and the specific circumstances of the resolution of PSNH's previous bankruptcy proceedings and its acquisition by NU, including the recoveries provided by the Rate Agreement and related agreements.

See Note 12, " Subsequent Event" for the possible impacts on PSNH and NAEC of the NHPUC's decision related to industry restructuring.

B. Nuclear Performance Millstone: The three Millstone units are managed by NNECO.

Millstone 1, 2 and 3 have been out of service since November 4, 1995, February 21, 1996 and March 30, 1996, respectively, and are on the NRC's watch list. PSNH's ownership interest in the Millstone units is limited to a 2.85 percent joint ownership interest in Millstone 3. NU has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units.

According to the plans, each unit's recovery team will be working towards restart of its respective unit on a parallel basis with the other two units. Based upon management's current plans, it is estimated that one of the units will be ready for restart in the third quarter of 1997 with the other two units being ready for restart during the fourth quarter of 1997 and the first quarter of 1998, respectively.

The NRC has also issued two orders affecting the Millstone units on the subjects of independent corrective action verification and employee concerns. Independent third parties have been retained by NNECO and are awaiting NRC approval.

Prior to and following notification to the NRC that the units are ready to resume operations, the NRC staff will conduct extensive reviews and inspections and, prior to such notification, independent corrective action verification teams will also inspect each unit. The units will not be allowed to restart without an affirmative vote of the NRC commissioners following completion of these reviews and inspections. Management cannot estimate when the NRC will allow any of the units to restart, but hopes to have at least one unit operating in the second half of 1997.

NU is currently incurring substantial costs, including replacement power costs, while the three Millstone units are not operating. Management does not expect to recover a substantial portion of these costs. NU expensed approximately $179 million of incremental nonfuel nuclear O&M costs in 1996 including a reserve of $63 million against 1997 expenditures, of which PSNH's share of these costs is $3.0 million. Management estimates NU will expense approximately $386 million of nonfuel nuclear O&M costs in 1997 of which PSNH's share of these costs will be approximately $4.0 million.

27

Public D rvico C mp ny of N;w Hamp hira FOTES TO PINANCIAL STATEMENT 6 l

As discussed above, management cannot predict when the NRC will allow any of the Millstone units to return to service and thus cannot estimate the total replacement power costs the companies will ultimately incur. At December 31, 1996, NU had expensed incremental replacement power costs associated with the Millstone outages of approximately $260 million. To date, PSNH's share of replacement power costs has not been material. PSNH's share of ,

replacement power costs is not expected to be material for 1997, )

while Millstone 3 is out of service. Management believes the system has sufficient resources to fund the restoration of the  !

Millstone units to service under its present timetable.

MY: The NU system relies on MY for approximately two percent of l its capacity. The MY nuclear generating plant has been limited to l operating at 90 percent of capacity since early 1996, pending the ,

resolution of issues related to investigations initiated by the l NRC, and on December 6, 1996, was taken off line to resolve l cable-separation and associated issues. The NRC has notified MY I that the NRC staff has placed the MY plant on its watch list.

Returning the plant to service will require NRC approval.

Management cannot predict when MY's plant will be allowed to i return to service and expects there will be substantial costs I associated with the NRC's action that cannot be accurately estimated at this time.

C. Environmental Matters PSNH is subject to regulation by federal, state and local authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. PSNH has an active environmental auditing and training program and believes that it is in substantial compliance with current environmental laws and regulations.

Environmental requirements could hinder the construction of new generating units, transmission and distribution lines, substations and other facilities. Changing environmental requirements could also require extensive and costly modifications to PSNH's existing generating units, and transmission and distribution systems, and could raise operating costs significantly. As a result, PSNH may incur significant additional environmental costs, greater than amounts included in cost of removal and other reserves, in connection with the generation and transmission of electricity and the storage, transportation and disposal of by-products and wastes. PSNH may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot accurately be estimated.

PSNH has recorded a liability based upon currently available information for what it believes are its estimated environmental remediation costs that it expects to incur for 28

Publio CCrvico Crpnny of N;w Hampchiro NOTE 8 TO FINANCIAL STATEMENTS waste disposal sites. In most cases, additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At December 31, 1996, the net liability recorded by PSNH for its estimated environmental remediation costs, excluding any possible insurance recoveries or recoveries from third parties, amounted to approximately $4.6 million, which management has determined to be the most probable amount within the range of $4.6 million to $5.0 million.

PSNH cannot estimate the potential liability for future claims, including environmental remediation costs, that may be brought against it. However, considering known facts, existing laws, and regulatory practices, management does not believe the matters disclosed above will have a material effect on PSNH's financial position or future results of operations.

On October 10, 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, " Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The SOP became effective January 1, 1997. The company believes that the adoption of this SOP will not have a material impact on the company's financial position or results of operations.

D .. Nuclear Insurance Contingencies Under certain circumstances, in the event of a nuclear incident at one of the nuclear facilities covered by the federal government's third-party liability indemnification program, the company could be assessed in proportion to its ownership interest in each nuclear unit up to $75.5 million, not to exceed $10.0 million per nuclear unit in any one year. Under the terms of the power contracts with NAEC, PSNH could be obligated to pay for any assessment charged to NAEC as a " cost of service." Based on its ownership interest in Millstone 3 and NAEC's ownership interest in Seabrook 1, PSNH's maximum liability, including any additional potential assessments, would be $30.8 million per incident. In addition, through power purchase contracts with MY, VY and CY, PSNH would be responsible for up to an additional $11.1 million per incident.

Payments for PSNH's ownership interest in nuclear generating facilities would be limited to a maximum of $5.3 million per incident per year.

Insurance has been purchased to cover the primary cost of repair, replacement or decontamination of utility property resulting from insured occurrences at Millstone 3. PSNH is subject to retroactive assessments if losses exceed the 29 j

Public COrvico Cecpany of N;w Hampshire NOTES TO FINANCIAL STATEMENTS accumulated funds available to the insurer. The maximum potential assessment against PSNH with respect to losses arising during the current policy year is approximately $0.5 million under the primary property insurance program.

Insurance has been purchased to cover certain extra costs incurred in obtaining replacement power during prolonged accidental outages and the excess cost of repair, replacement, or decontamination or premature decommicsioning of utility property resulting from insured occurrences. PSNH is subject to retroactive assessments if losses exceed the accumulated funds available to the insurer. The maximum potential assessments against PSNH (including costs resulting from PSNH's contracts with NAEC), with respect to losses arising during current policy years are approximately $1.9 million under the replacement power policies and $7.3 million under the excess property damage, decontamination and decommissioning policies.

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

Innurance has been purchased aggregating $200 million on an industry basis for coverage of worker claims. All participating reactor operators insured under this coverage are subject to retrospective assessments of $3 million per reactor.

The maximum potential assessment against FSNH (including costs resulting from the Seabrook power contracts with NAEC), with respect to losses arising during the current policy period is approximately $1.8 million.

E. Construction Program The construction program is subject to periodic review and revision by management. PSNH currently forecasts construction expenditures of $206.0 million for the years 1997-2001, including $35.0 million for 1997. In addition, the company estimates that nuclear fuel requirements, for its share of Millstone 3, will be $4.2 million for the years 1997-2001, including $0.4 million for 1997.

F. Long-Term Contractual Arrangements Yankee Companies: PSNH, along with CL&P and WMECO, relies on MY and VY for approximately three percent of their capacity under long-term contracts. Under the terms of their agreements, the system companies pay their ownership (or entitlement) shares of costs, which include depreciation, O&M expenses, taxes, the estimated cost of decommissioning and a return on invested capital. These costs are recorded as purchased power expense and recovered through the company's rates. PSNH's total cost of purchases under contracts with the Yankee companies, excluding YAEC, amounted to $25.0 million in 1996, $26.4 million in 1995, and $23.4 million in 1994. See Note 1E, " Summary of Significant Accounting Policies-Investments and Joint 1y Owned Electric Utility Plant," and 30

Public Ccryico CCpany of N;w Hamp2hiro NOTES TO FINANCIAL STATENENTS Note 4, " Nuclear Decommissioning," for more information on the Yankee companies.

Nonutility Generators: PSNH has entered into various arrangements for the purchase of capacity and energy from NUGs.

These arrangements have terms from 20 to 30 years, currently expiring in the years 1998 through 2023, and require PSNH to purchase the energy at specified prices or formula rates. For the 12 months ended December 31, 1996, approximately 13 percent of the system electricity requirements were met by NUGs. PSNH's total cost of purchases under these arrangements amounted to

$139.1 million in 1996, $129.6 million in 1995, and $130.0 million in 1994. These costs are eventually recovered through the company's rates. For additional information, see Note 1K, i

" Summary of Significant Accounting Policies-Recoverable Energy Costs."

New Hampshire Electric Cooperative: PSNH entered into a buy-back agreement to purchase-the capacity and energy of the New  ;

Hampshire Electric Cooperative, Inc.'s (NHEC) share of Seabrook 1 and to pay all of NHEC's Seabrook 1 costs for a ten-year period, which began on July 1, 1990. The total cost of purchases under this agreement was $14.6 million in 1996, $15.8 million in 1995, and $14.6 million in 1994. A portion of these costs is collected currently through the FPPAC and the remaining costs are deferred for future collection in accordance with the Rate Agreement. In connection with the agreement, NHEC agreed to continue as a firm-requirements j customer of PSNH for 15 years.

Hydro-Quebec: Along with other New England utilities, PSNH, CL&P, WMECO, and HWP have entered into agreements to support transmission and terminal facilities to import electricity from the Hydro-Quebec system in Canada. PSNH is obligated to pay, over a 30-year period ending in 2020, its proportionate share of the annual O&M and capital costs of these facilities.

The estimated annual costs of PSNH's significant long-term contractual arrangements are as follows:

1997 1998 1999 2000 2001 (Millions of Dollars)

MY and VY.............. $17.5 $14.9 $17.1 $17.0 $ 13.9 Nonutility Generators., 134.0 137.0 141.0 145.0 149.0 NHEC................... 22.7 29.8 29.9 14.6 -

Hydro-Quebec........... 10.6 10.3 10.0 9.8 9.5 l

For additional information regarding the recovery of purchased power costs, see Note 1K, " Summary of Significant Accounting Policies - Recoverable Energy Costs.*

31 i

i l

Public BGrvico Corp 2ny of N;w Hampchirc NOTES TO FINANCIAL STATEMENTS G. Deferred Receivable from Affiliated Company  ;

At the time PSNH emerged from bankruptcy on May 16, 1991, in accordance with the phase-in under the Rate Agreement, it began accruing a deferred return on a portion of its Seabrook investment. From May 16, 1991 to the Acquisition Date, PSNH  ;

accrued a deferred return of $50.9 million. On the Acquisition  !

Date, PSNH sold the $50.9 million deferred return to NAEC as l part of the Seabrook-related assets. l 1

At the time PSNH transferred the deferred return to NAEC, it I realized, for income tax purposes, a gain that is deferred under the consolidated income tax rules. This gain will be restored for income tax purposes when the deferred return of

$50.9 million, and the associated income taxes of $32.9 million, are collected by NAEC through the Seabrook power contracts. When NAEC recovers the $32.9 million in years eight through ten of the Rate Agreement, it is obligated to make corresponding payments to PSNH.

1 On tha Acquisitian Date, PSNH recorded the $32.9 million of income taxes asscciated with the deferred return as a deferred receivable from liAEC, with a corresponding entry to deferred revenue, on its Balance Sheet. In 1993, due to changes in tax rates, this amount was adjusted to $33.2 million. See Note 12,

" Subsequent Event" for the possible impacts of the NHPUC's decision related to industry restructuring on this intercompany transaction between PSNH and NAEC.

H. The Rocky River Realty Company - Obligations i

The Rocky River Realty Company (RRR) provides real estate support j services which includes the leasing of property and facilities '

used by system companies. RRR is the obligor under financing arrangements for certain system facilities. Under those financing arrangements, the holders of notes for $38.4 million would be entitled to request that RRR repurchase the notes if any major subsidiary of NU (as defined by the notes) has debt ratings j below investment grade as of any year-end during the term of the i financing. The notes are secured by real estate leases between  !

RRR as lessor and NUSCO as lessee. The leases provide for the I acceleration of rent equal to RRR's note obligations if RRR is j unable to repay the obligation. The operating companies, primarily CL&P, WMECO and PSNH may be billed by NUSCO for their proportionate share of the accelerated lease obligations if the rateholders request repurchase of the notes. NU has guaranteed the notes.

Based on the terms of the notes, PSNH and NAEC will be defined as major subsidiaries of NU, effective as of the end of 1996, and both PSNH's and NAEC's debt ratings were below investment grade.

Accordingly, under the terms of the RRR tinancing arrangements, the holders may elect to require RRR to repurchase the notes at par. If the noteholders make such an election, RRR has the 32

Publio CCrvico comp 2ny of N;w Hamp hiro NOTES TO FINANCIAL STATENENTS option to refinance the notes with an institutional investor.

However, it is possible that RRR may be required to repurchase the notes. As of February 21, 1997, the holders had not made such an election. RRR plans to engage in discussions with the noteholders regarding this issue. Management does not expect the resolution to have a material impact on its financial condition.

11. FAIR VALUE OF FINANCIAL INSTRUNENTS The following methods and assumptions were used to estimate the fair value of each of the following financial instruments:

Cash and nuclear decommissioning trusts: The carrying amounts approximate fair value.

SFAS 115, " Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. Unrealized gains and losses resulting from the use of SFAS 115 accounting have not been material.

Preferred stock and long-term debt: The fair value of PSNH*s fixed-rate securities is based upon the quoted market price for those issues or similar issues. Adjustable rate securities are assumed to have a fair value equal to their carrying value. The carrying amounts of PSNH's financial instruments and the estimated  ;

fair values are as follows: l Carrying Fair At December 31. 1996 Amount Value (Thousands of Dollars)

Preferred stock subject to mandatory redemption................... $125,000 $125,000 Long-term debt - First Mortgage Bonds.... 170,000 175,729 Other long-term debt..................... 516,485 523,53.6 l

33

. .= -- - . - -. . __ , _-_---. _ _ - - . - .-.

)

Public COrvico company of New HampEhiro NOTES TO FINANCIAL STATEMENTS l

Carrying Fair At December 31. 1995 Amount Value l (Thousands of Dollars)  ;

Preferred stock subject to I mandatory redemption................... $125,000 $131,250 l Long-term debt - First Mortgage Bonds.... 342,500 352,517 other long-term debt..................... 516,485 532,190 The fair values shown above have been reported to meet the disclosure requirements and do not purport to represent the I amounts at which those obligations would be settled.

12. SUB8EQUENT EVENT l l

New Hampshire Restructuring: On February 28, 1997, the NHPUC 1 issued its decision related to restructuring the state's electric utility industry and setting interim stranded cost charges for PSNH pursuant to legislation enacted in New Hampshire in 1996. i In the decision, the NHPUC announced a departure from cost-based ratemaking and instead adopted a market-priced approach to 2 ratemaking and stranded cost recovery as advocated by the NHPUC's 1 consultants. Accordingly, unless the litigation described below results in a stay, or necessary modifications to the final plan 1 4

are made that leads management to conclude that the ratemaking  !

approach utilized in the NHPUC's restructuring decision will not go into effect, PSNH will be required to discontinue accounting under SFAS 71. That would result in PSNH writing off from its balance sheet, as early as the quarter ending March 31, 1997, i substantially all of its regulatory assets. The amount of the potential write-off which is triggered by the order is currently

, estimated at over $400 million, after taxes. PSNH does not believe that under the decision, it would be required to recognize any additional loss resulting from the impairment of the value of its other long-lived assets under the provisions of SFAS 121.

The decision also contains rulings on numerous other issues that may have a substantial effect on the operations of PSNH. Included l among these rulings are assertions that the Rate Agreement by and I between PSNH's parent company, NU and the state of New Hampshire, which was an integral part of NU's acquisition of PSNH in 1992, is not binding on the state; the requirement that PSNH divest within two years from the inception of competition all of its owned-generation and all of its wholesale power contracts (including its contracts with NAEC for Seabrook output); a prohibition on the remaining distribution company and its affiliates from engaging in ,

retail marketing or load aggregation services in New Hampshire; j l

34 j

Public COrvioO Carpnny of N w Hampshiro NOTES TO FINANCIAL STATEMENTS and a mandate for the filing of tariffs with the FERC for the provision of unbundled retail transmission service.

On March 3, 1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraining order, preliminary and permanent injunctive relief, and for declaratory judgment in the Federal District Court for New Hampshire. The case was subsequently transferred to Rhode Island.

On March 10, 1997, the Chief Judge of the Rhode Island federal court issued a temporary restraining order which stayed the NHPUC's February 28, 1997 decision to the extent it established a rate setting methodology that is not designed to recover PSNH's '

costs of providing service and would require PSNH to write off any regulatory assets. A hearing regarding the system plaintiffs' request for a preliminary injunction will be held in the same court on March 20, 1997.

PSNH also intends to pursue claims against the state of New L Hampshire for damages in state court in New Hampshire for abrogation of the 1989 Rate Agreement. The damage claims will be in the hundreds of millions of dollars.

PSNH and NAEC are parties to a variety of financing agreements providing that the credit thereunder can be terminated or accelerated if they do not maintain specified minimum ratios of common equity to capitalization (as defined in each agreement). In addition, PSNH and NAEC are parties to a variety of financing agreements providing in effect that the credit thereunder can be terminated or accelerated if there are actions taken, either by PSNH or NAEC or by the state of New Hampshire, that deprive PSNH and/or NAEC of the benefits of the Rate Agreement and/or the Seabrook Power Contracts.

If the NHPUC's February 28, 1997 decision becomes effective, it would, unless PSNH received waivers from its respective lenders, result in (i) write-offs that would cause PSNH's common equity to fall below the contractual minimums, (ii) reductions in income that would cause PSNH's income to fall below the contractual minimums, (iii) potential violation of the contractual provisions with respect to actions depriving PSNH and NAEC of the benefits of the Rate Agreement, and (iv) the potential for cross defaults to other PSNH and NAEC financing documents. Substantially all of PSNH's and i'AEC's debt obligations ($686 million of PSNH debt and

$515 million of NAEC debt) would be affected. For these actions to be avoided, management believes that it is essential that the  ;

March 10, 1997 temporary restraining order issued by a federal court judge be extended and made applicable to the foregoing l issues. I If these events transpired and the requested court relief is not forthcoming, and if the creditors holding PSNH and NAEC debt obligations decide to exercise their rights to demand payment and not to forebear while the litigation is pending, then either creditors or PSNH and NAEC could initiate proceedings under Chapter 11 of the bankruptcy laws.

35

l I

Public CCrvico Crp ny of N;w Hamp;hiro NOTES TO FINANCIAL STATEMENTS l

PSNH and NAEC Report Considerations: As a result of the NHPUC decision and the potential consequences discussed above, the l reports of our auditors on the individual financial statements of i PSNH and NAEC contain explanatory paragraphs. Those explanatory paragraphs indicate that a substantial doubt exists currently about the ability of PSNH and NAEC to continue as going concerns.

The accounts of PSNH and NAEC are included in the consolidated financial statements of NU on the basis of a going concern. While the effect of the implementation of that decision would have a material adverse impact on NU's financial position, results of operations and cash flows, it would not in and of itself result in defaults under borrowing or other financial agreements of NU or its other subsidiaries, i

1 i

36

~______- _ _ -_ _ _ _ _. _

Publio Cervico Cr pany of N w Hampshiro REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Public Service Company of New Hampshire:

We have audited the accompanying balance sheets of Public Service Company of New Hampshire (a New Hampshire corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1996 and 1995, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ,

financial statements. An audit also includes assessing the accounting l principles used and significant estimates made by management, as well .

as evaluating the overall financial statement presentation. We l believe that our audits provide a reasonable basis for our opinion. l In our opinion, the financial statements referred to above present i fairly, in all material respects, the financial position of Public I Service Company of New Hampshire as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12, on February 28, 1997 the State of New Hampshire Public Utilities Commission (the NHPUC) issued an order outlining its final plan to restructure the electric utility industry. The final plan announced a departure from cost-based ratemaking effective January 1., 1998, which, if implemented, would require the Company to discontinue the application of Financial Accounting Standard No. 71, " Accounting for the Effects of Certain Types of Regulation," (FAS 71). The implementation of the final plan, including the effect of the discontinuation of FAS 71, would result in after tax write-off of over

$400 million. Such a write-off would cause the Company to be in technical default under financial covenants imposed by lenders, which, would, if not waived or renegotiated, give rise to the rights of lenders to accelerate the repayment of approximately $686 million of the company's indebtedness and approximately $515 million of an 37

Public CCrvico Company cf NOU Hampnhiro 4

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS affiliated company's indebtedness. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements referred to above do not include any adjustments that might result from this uncertainty.

/s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Hartford, Connecticut February 21, 1997 (except with respect to the matter discussed in Note 12, as to which the date is March 10, 1997) l l

38 l

Public Service Company of New Hampshire MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1

This section contains management's aasessment of PSNH's (the company) financial condition and the principal factors having an impact on the results of operations. The company is a wholly-owned subsidiary of Northeast Utilities (NU). This discussion should be read in conjunction with the company's financial statements and footnotes.

FINANCIAL CONDITION E3rnings Overview PSNH had net income of approximately $97 million in 1996, compared to approximately $83 million in 1995. PSNH's 1996 net income increased primarily due to lower interest on long-term debt and. higher revenues, partially offset by increased operation and maintenance costs.

On February 28, 1997, the New Hampshire Public Utilities Commission (NHPUC) issued its orders for restructuring the state's electric utility industry, including setting interim stranded cost charges for PSNH. If the orders are implemented without modification, PSNH would be required to recognize write-offs of over $400 million, after taxes.

PSNH filed for and received a temporary restraining order from the United States District Court, which stayed certain portions of the NHPUC's orders. If PSNH is unable to keep this stay in effect, receive another appropriate court action, or otherwise modify the orders, the write-off triggered by the orders would result in defaults which, if not waived or renegotiated, would give creditors the right to accelerate the repayment of over $1.2 billion of PSNH and North Atlantic Energy Corporation (NAEC) indebtedness. If the NHPUC's orders are implemented and the financial covenant defaults are not waived, there would be substantial doubt about the company's ability to continue as a going concern. See " Restructuring" for further information on the impact of the NHPUC's orders.

Retail kilowatt-hour sales increased by only 0.4 percent in 1996.

Modest economic growth was partially offset by a pilot retail access program initiated in New Hampshire in June 1996; however, the pilot had little impact on 1996 financial results. Absent the negative effects of the pilot program, sales would have increased by 1.7 percent. In 1997, management expects that the New Hampshire economy will continue to experience modest economic growth.

ROstructuring General The movement toward electric industry restructuring continues to gain momentum nationally as well as within New Hampshire. Factors that are driving the move toward restructuring, in the Northeast in particular, include legislative and regulatory actions and relatively high electricity prices. These actions will impact the way that PSNH has historically conducted its business. Although PSNH continues to operate under cost-of-service based regulation, recent actions taken by the NHPUC, have created uncertainty with respect to future rates 39

and the recovery of strandable investments. Strandable investments are regulatory assets or other assets that would not be economical in a competitive environment. PSNH has exposure to strandable investments for its contractual obligation to NAEC for the Seabrook nuclear generating facility, state mandated purchased power arrangements that are priced above the market, significant regulatory assets that represent costs deferred by state regulators for future recovery and ,

costs incurred and assets created in connection with the bankruptcy I reorganization of PSNH and NU's acquisition of PSNH. PSNH's exposure to strandable investments and purchased power obligations exceeds its shareholder's equity. PSNH's ability to compete in a restructured environment would be negatively affected unless PSNH was able to recover substantially all of these past investments and commitments.

Management believes that it is entitled to full recovery of its  ;

prudently incurred costs, including regulatory assets and other strandable investments, based on the general nature of public utility industry cost-of-service based regulation and PSNH's rate agreement that was entered into by NU, PSNH and the state of New Hampshire in 1989 (the Rate Agreement).

February 28, 1997 NHPUC Orders On February 28, 1997, the NHPUC issued its orders for restructuring the state's electric utility industry and setting interim stranded cost charges for PSNH pursuant to legislation enacted in New Hampshire in 1996 (the Final Plan). The Final Plan would implement retail choice for all customers by January 1, 1998.

The Final Plan would replace the traditional cost-of-service based regulation with a regional average rate approach to rate setting and recovery of strandable investments. Accordingly, unless the litigation described below results in a stay that leads management to conclude that the ratemaking approach in the NHPUC's restructuring orders will not go into effect, PSNH will be required to discontinue accounting under Statement of Financial Accounting Standards (SFAS) 71,

" Accounting for the Effects of Certain Types of Regulation." This would result in PSNH writing off from its balance sheet, as early as the quarter ending March 31, 1997, substantially all of its regulatory assets. The amount of the potential write-off triggered by the Final Plan is currently estimated at over $400 million, after taxes.

Management believes that under the Final Plan, PSNH would not be required to recognize any additional loss resulting from impairment of the value of its other long-lived assets under the provisions of SFAS 121, " Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."

The Final Plan also contains rulings on numerous other issues that would, if put into effect, have a substantial effect on PSNH's operations. Included among these rulings are the requirement that PSNH divest within two years of the initiation of competition all of its owned generation and all of its wholesale power purchase contracts (including its contract with NAEC for Seabrook output) ; a prohibition on the remaining distribution company and its affiliates from engaging in retail marketing or load aggregation services; a mandate for the filing of tariffs with the Federal Energy Regulatory Commission (FERC) for the provision of unbundled retail transmission service; and assertions that the Rate Agreement, which was an integral part of NU's 40

. _ _ . ... . _ _ . = _ - . _ _ _ - . ~,. . - - - . - - --

acquisition of PSNH, is not binding on the state. The company will challenge these assertions.

PSNH must file revised interim stranded cost charges, in accordance with the terms of the Final Plan, by April 30, 1997. The Final Plan also requires each utility, including PSNH, to file comprehensive plans, by June 30, 1997, which comply with the Final Plan and supplemental orders. In addition, any jurisdictional utility that chooses to be a distribution company must submit a plan by December 31, 1997, to divest its generation and aggregation / marketing service functions by the end of the two-year period following the initiation of competition.

On March 3, 1997, PSNH, NU, NAEC and Northeast Utilities Service Company filed for a temporary restraining order, preliminary and permanent injunctive relief and for declaratory judgment in the United States District Court for New Hampshire. The case was subsequently transferred to Rhode Island. On March 10, 1997, the court issued a temporary restraining order, which stayed the NHPUC's February 28, 1997, orders to the extent they established a rate setting methodology that is not designed to recover PSNH's costs of providing service and would require PSNH to write off any regulatory assets under SFAS 71.

An evidentiary hearing regarding the system plaintiffs' request for a preliminary injunction will be held on March 20, 1997. PSNH also intends to pursue claims for damages against the state of New Hampshire in the New Hampshire state court for abrogation of the 1989 Rate Agreement. The damage claims will be in the hundreds of millions of dollars. Management cannot predict the ultimate outcome of these actions.

If PSNH is unable to keep this stay in effect, or receive another appropriate court action, or otherwise modify the Final Plan, the write-off triggered by the Final Plan would result in defaults which,  ;

if not vaived or renegotiated, would give creditors the right to '

accelerate the repayment of approximately $686 million of PSNH indebtedness and $515 million of NAEC indebtedness. These circumstances could force PSNH and NAEC to seek bankruptcy protection under Chapter 11 of the bankruptcy laws.

Potential Accounting Impacts j PSNH follows accounting principles in accordance with SFAS 71, which allows the economic effects of rate regulation to be reflected. Under these principles, regulators may permit incurred costs for certain I events or transactions, which would be treated as expenses by i nonregulated enterprises, to be deferred as regulatory assets and recovered through revenues at a later date.

If future competition or regulatory actions cause any portion of its operations to no longer be subject to SFAS 71, PSNH would no longer be able to recognize regulatory assets and liabilities for that portion of its business unless those costs would be recoverable by a portion of the business remaining on cost-of-service based regulation. Under its current regulatory environment, and subject to the successful resolution of the legal actions PSNH has taken with respect to the NHPUC's recent restructuring activities, management believes that PSNH's use of SFAS 71 remains appropriate.

41

l l

If events create uncertainty about the recoverability of any of PSNH's .

remaining long-lived assets, PSNH would be required to determine the l fair value of its long-lived assets, including regulatory assets, in accordance with SFAS 121. The implementation of SFAS 121 did not have a material impact on the company's financial position or results of operations as of December 31, 1996. Management believes it is probable that PSNH will recover its investments in long-lived assets through future revenues. This conclusion may change in the future as competitive factors influence wholesale and retail pricing in the electric utility industry or if the cost-of-service based regulatory structure were to change.

1 See the " Notes to Financial Statements" Note 1H, for further i information on regulatory accounting. I Rate Matters PSNH's Rate Agreement provides for seven base rate increases and a I comprehensive fuel and purchased power adjustment clause (FPPAC). In l June, 1996, the final base rate increase of 5.5 percent went into I offect . Although the FPPAC continues for an additional three years beyond the end of the fixed rate period, there is uncertainty regarding how it will function after that time. Given the completion ,

of the fixed rate period, and the uncertainty surrounding the FPPAC, i management expects to file a rate case with the NHPUC in May, 1997.

In June, 1996, the NHPUC ordered PSNH to refund, over 12 months, $41.5 million, (including $5 million of interest) related to small power producer costs which had been previously collected through the FPPAC.

See the " Notes to Financial Statements" Note 1K, for further information on the FPPAC.

Competition In addition to legislative and regulatory actions, competition in the electric utility industry continues to grow at a rapid pace as a result of technological advances; relatively high electricity prices in certain regions of the country, including New England; surplus generating capacity; and the increased availability of natural gas.

Competitive forces in the electric utility industry have already caused some customers to choose alternative energy suppliers or relocate outside of PSNH's service territory. In response, PSNH is preparing for a competitive environment by expanding previously ,

established programs and developing new ways to fortify its l relationships with existing customers and attract new customers, both ,

within and outside its service territory. j During 1996, PSNH continued to negotiate long-term power supply arrangements with certain large commercial and industrial retail l customers that require an incentive to locate or expand their i operat. ions within PSNH's service territory, are considering leaving or )

reducing. operations in the service territory, are facing short-term financial problems, or are considering generating their own electricity. Approximately 14 percent of PSNH's commercial and industrial retail revenues were under negotiated rate agreements at the end of 1996. In 1996, these negotiated rate reductions amounted to I approximately $12.5 million, up from $8 million in 1995. These '

activities are expected to continue in 1997. 1 42 ,

1 l

l 1

During 1996, the NU system devoted significantly more resources to its Retail Marketing Organization, whose primary mission is to provide value added energy solutions to customers. Training was emphasized for its 170 new employees, the majority of which are account executives charged with developing tailored solutions for the NU system's customers and positioning NU as a valuable partner for the future. The ability of these account executives to obtain an intimate understanding of customers' needs and concerns and provide value added energy solutions will play a key role in the NU system's ability to effectively compete in the future.

NU subsidiaries competed actively in two pilot retail access programs that were initiated in New Hampshire and Massachusetts in 1996. In New Hampshire, approximately 14,500 customers are participating in a two-year statewide pilot program. NU subsidiaries introduced three energy and service product offerings under different brand names and competed against 35 other energy suppliers. Given the political and regulatory environment in New Hampshire, it is notable that NU retained approximately 60 percent of PSNH's participating customers (50 percent of the total energy demand market share) and gained approximately 15 percent of the customers participating from outside NU's service territory. In addition to exposing NU to a competitive environment, these pilots have enabled NU to develop relationships with customers outside of its service territory and to secure energy contracts with major commercial customers.

Revenue erosion from traditional retail electric sales may be significant after restructuring. While margins on retail electric sales are likely to be thin, utilities can compete successfully if they are allowed to recover their strandable investments. During 1997 and beyond, the NU system will continue to participate in state sanctioned retail access programs; invest in new unregulated businesses; develop new energy-related products and services; and pursue strategic alliances with companies in various energy-related fields, including fuel supply and management, power quality, energy efficiency and load management services. Strategic alliances will allow NU to enter markets that provide access to new product lines and technologies that complement NU's current products and services.

Nuclear Performance PSNH has a 2.85 percent ownership interest in Millstone 3. In addition, under the Seabrook Power Contracts, PSNH is obligated to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook unit 1 (Seabrook) for a period equal to the length of the Nuclear Regulatory Commission (NRC) full-power operating license for Seabrook (through 2026) whether or not Seabrook is operating and without regard to the cost of alternative sources of power. North Atlantic Energy Service Corporation (NAESCO) is the managing agent and operates Seabrook.

Seabrook operated at a capacity factor of 96.8 percent through December 1996, compared to 83.2 percent for the same period in 1995.

The higher 1996 capacity factor was primarily the result of the planned refueling and maintenance outage in 1995 and the lack of an outage in 1996. The plant has a 49-day refueling outage scheduled to begin May 10, 1997.

43

Subsequent to its January 31, 1996, announcement that the three Millstone units (Millstone) had been placed on its watch list, the NRC has stated that the units cannot return to service until independent, third-party verification teams have reviewed the actions taken to improve the design, configuration and employee concerns issues that prompted the NRC to place the units on its watch list. Upon successful completion of these reviews, the NRC must approve the restart of each unit through a formal commission vote.

In October, 1996, the NRC issued a request for information concerning cll nuclear plants in the United States, except Millstone, which had previously received such a request. Such information will be used to verify that these facilities are being operated and maintained in cccordance with NRC regulations and their specific licenses. NAESCO has filed its response to the NRC's request, with respect to Seabrook.

Seabrook's operations were not restricted by the request. The NRC's April, 1996, inspection found Seabrook to be a well-operated facility I and found no major safety issues or weaknesses and noted that it would reduce its future inspections in a number of areas as a result of its findings.

Management took several key steps toward improving NU's nuclear '

program during 1996 and will continue to place a high priority on its recovery in 1997. The NU Board of Trustees formed a committee in April, 1996, to provide high-level oversight of the safety and offectiveness of NU's nuclear operations, progress toward resolving  ;

open NRC issues and progress in resolving employee, community and I customer concerns. In September, 1996, Bruce D. Kenyon was appointed l President and Chief Executive Officer of Northeast Nuclear Energy a wholly-owned subsidiary of NU that operates

]

Company (NNECO), i Millstone, and retired Admiral David M. Goebel was selected to serve l as Vice President for Nuclear Oversight. In early 1997, Neil S. Carns was selected to serve as Senior Vice President and Chief Nuclear Officer to oversee Millstone operations. Shortly after his arrival, Mr. Kenyon unveiled a reorganization of NU's nuclear organization that includes executives loaned from unaffiliated utility companies. The new organization is intended to establish direct accountability for performance at each of the nuclear units that the NU system operates and includes a recovery team for each Millstone unit.

Under the new nuclear organization, each unit's recovery team will be working toward restart of its respective unit simultaneously with the other two units. Management estimates that one of the units will be ready for NNECO to request the NRC's approval for restart in the third quarter of 1997, with the second and third units ready in the fourth quarter of 1997 and the first quarter of 1998, respectively.

Subsequent to NNECO's request to restart any of the units, the NRC will require a period of time to assess the results of the reviews performed by the NRC and the independent third-party teams. Management cannot estimate when the NRC will allow any of the units to restart, however, it hopes to have at least one unit operating in the second half of 1997. A period of time will be required subsequent to restart i for each unit to return to operating at full power.

To date, PSNH's costs related to the Millstone 3 outage have not had a material impact on the company's financial position or results of 44

operations. Management expects that, under its current planning ,

assumptions, Millstone 3's outage-related costs will continue to be l immaterial to the company's financial statements.

Liquidity and Capital Resources I Cash provided from operations increased by approximately $39 million in 1996, primarily due to lower interest on long-term debt and higher revenues, partially offset by higher purchased power costs, higher operation and maintenance expenses and lower funds from working capital. Cash used for financing activities increased by approximately

$32 million in 1996, primarily due to higher long-term debt repayments. Cash used for investments increased by approximately $6 million in 1996, primarily due to a decrease in loan repayments from other system companies under the NU system Money Pool, partially offset by lower construction expenditures in 1996.

The company has a more leveraged capital structure than most other investor-owned public utilities and is required to make substantial interest payments. The company's indebtedness under the Revolving Credit Facility, and some of the company's pollution control revenue bonds bear interest at floating rates to be set periodically, causing the company to be sensitive to fluctuating interest rates.

In March, 1997, Standard & Poor's Ratings Group (S&P) and Moody's Investors Service (Moody's) downgraded NU, PSNH and NAEC securities as a result of recent restructuring activities in New Hampshire. None of PSNH's and NAEC's securities are rated at investment grade. S&P and Moody's are reviewing all NU system securities for further downgrades.

These actions will adversely affect the availability and cost of funds for PSNH.

Nuclear Decommissioning PSNH has a 5 percent ownership interest in the Connecticut Yankee nuclear generating facility (CY or the plant). On December 4, 1996, the CY Board of Directors voted unanimously to cease permanently the production of power at the plant. The decision to retire CY from commercial operation was based on an economic analysis of the costs of operating it compared to the costs of closing it and incurring replacement power costs over the remaining period of the plant's operating license, which expires in 2007. The economic analysis showed that closing the plant and incurring replacement power costs produced substantial savings.

CY has undertaken a number of regulatory filings intended to implement the decommissioning. In late December, 1996, CY filed an amendment to its power contracts with the FERC to clarify the obligations of its purchasing utilities following the decision to cease power production.

At December 31, 1996, PSNH's share of these obligations was approximately $38 million, including the cost of decommissioning and the recovery of existing assets. Management expects that PSNH will cohtinue to be allowed to recover such FERC-approved costs from its customers. Accordingly, PSNH has recognized its share of the estimated costs as a regulatory asset, with a corresponding obligation, on its Balance Sheets.

PSNH's estimated cost to decommission its 2.85 percent share of Millstone 3 and NAEC's 35.98 percent share of Seabrook is 45

approximately $13 million and $162 million, respectively, in year end 1996 dollars. These costs are being recognized over the lives of the ,

respective units with a portion being currently recovered through  !

rates. Under the terms of the Rate Agreement, the company is obligated to pay NAEC's share of Seabrook's decommissioning costs, even if the unit is shut down prior to the expiration of its operating license. As of December 31, 1996, the market value of the contributions already made to the Seabrook and Millstone 3 decommissioning trusts, including their investment returns, was approximately $20 million and $3 million, respectively.

See the " Notes to Financial Statements" Note 4, for further ,

information on nuclear decommissioning, including PSNH's share of l costs to decommission the regional nuclear generating units. l Environmental PSNH is potentially liable for environmental cleanup costs at a number of sites inside and outside its service territory. To date, the future j estimated environmental remediation liability has not been material I with respect to the earnings or financial position of PSNH. At December 31, 1996, PSNH had recorded an environmental reserve of approximately $5 million, the most probable amount as required by i SFAS 5, " Accounting for Contingencies."

See the " Notes to Financial Statements" Note IOC, for further ,

information on environmental matters.

l RESULTS OF OPERATIONS  :

Income Statement Variances (Millions of Dollars) 1996 over/(under) 1995 1995 over/(under) 1994 Amount Percent Amount Percent Operating revenues $130 13% $58 6%

Fuel, purchased and net interchange power 100 39 34 15 Other operation 14 4 10 3 Maintenance 3 8 (1) (3)

Depreciation (1) (3) 6 15 Federal and state income taxes 17 25 2 3 Other, net 5 (a) 3 (a)

Interest on long-term debt (19) (25) - -

Other interest expense 3 (a) - -

Net income 14 16 6 8 (a) Percent greater than 100 46

operating Revenues Total operating revenues increased in 1996, primarily due to higher fuel revenues, regulatory decisions and other retail revenues. Fuel revenues increased $112 million, primarily due to the intercompany allocation of energy costs to NU affiliated companies ($125 million) and higher base fucl revenues as a result of the June 1996 and 1995 retail rate increases, partially offset by lower FPPAC revenues as a result of a customer refund ordered by the NHPUC. Revenues related to regulatory decisions increased $13 million, primarily due to the retail rate increases. Other retail revenues increased $5 million primarily due to sales growth and other revenue sources. Retail sales increased 0.4 percent ($2 million), primarily due to economic growth in 1996, partially offset by milder weather in 1996.

Total operating revenues increased in 1995, primarily due to regulatory decisions and higher fuel recoveries, partially offset by lower retail sales. Revenues related to regulatory decisions increased

$20 million, primarily due to the effects of the June 1995 and 1994 retail rate increases. Fuel, purchased power and FPPAC costs recoveries increased $49 million, primarily due to higher fuel and purchased power costs. Sales volume decreased $11 million, primarily due to price discounts, milder weather and lower wholesale sales.

Fuel, Purchased and Net Interchange Power Fuel, purchased and net interchange power expense increased in 1996, primarily due to higher purchased power costs and the timing of the recognition of fuel expenses under the FPPAC.

Fuel, purchased and net interchange power increased in 1995, primarily due to the timing of the recognition of fuel expenses under the FPPAC.

Other Operation and Maintenance Other operation and maintenance expenses increased in 1996, primarily due to higher storm expenditures, higher employee benefit costs, higher capacity charges under the Seabrook Power Contracts and higher marketing costs.

Other operation and maintenance expenses, net increased in 1995, primarily due to higher capacity charges under the Seabrook Power Contracts due to Seabrook's 1995 refueling and maintenance outage.

Depreciation Although the change in 1996 was not significant, depreciation increased in 1995, primarily due to the additional depreciation allowed from the savings from burning gas at Newington Station and an increase in plant additions.

i Federal and State Income Taxes Federal and state income taxes increased in 1996 and 1995, primarily due to higher book taxable income.

Other, Net Other, net increased in 1996, primarily due to the deferral of i interest expense associated with the FPPAC refund. The change in 1995 l was not significant.

l 47 i

j

Interest on Long-Tern Debt )

Interest on long-term debt decreased in 1996, primarily due to the '

repayment of the $172.5 million Series A first mortgage bond in May.

The change in 1995 was not significant.

Other Interest Expense other interest expense increased in 1996, primarily due to interest expense associated with the FPFAv refund. The change in 1995 was not cignificant.

i 48

I Public Service Company of New Hampshire f I

Sur.RCTED FINANCIAL DATA (a)

Jan. 1, 1996 Jan. 1, 1995 Jan. 1, 1994 to to to ,

For the Periods Dec. 31, 1996 Dec. 31, 1995 Dec. 31. 1994 r (Thousands of Dollars)  !

Operating Revenues... $1,110,169 $ 979,971 $ 922,039 ,

Operating Income..... 155,195 155,628 152,086 Net Income .......... 96,902 83,255 77,444 Cash Dividends on Common Stock....... 52,000 52,000 -

At Dec. 31. 1996 Dec. 31, 1995 Dec. 31. 1994 Total Assets......... $2,851,212 $2,920,487 $2,845,967 I Long-Term Debt (C) ... 686,485 858,985 999,985 i

i Preferred Stock Subject to Mandatory Redemption ( ) ...... 125,000 125,000 125,000 Obligations Under Seabrook Power Contracts and Other Capital Lease (c) ... 914,617 915,288 887,967 (a) Reclassifications of prior data have been made to conform with the current presentation.

(b) PSNH was acquired by NU on June 5, 1992.

(c) Includes portions due within one year.

l 49

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

t l

l i

l Public Service Company of New Hampshire )

SELECTED FINANCIAL DATA Jan. 1, 1993 June 5, 1992 (b) Jan. 1, 1992 to to to

, Dec. 31. 1993 Dec. 31. 1992 June 4. 1992 (Thousands of Dollars)

$864,415 $ 492,559 $ 381,769

124,710 61,206 34,250 1

, 52,237 29,398 12,778 l

! Dec. 31. 1993 Dec. 31. 1992 June 4, 1992

) (Thousands of Dollars) I

$2,774,511 $2,793,768 $2,693,414
1,093,895 1,187,985 1,488,985
125,000 125,000 125,000 i

4 i

! 856,559 787,826 -

i l

l e

I i

d 44 50

Public Service Company of New Hampshire STATISTICS Average Gross Electric Annual Utility Plant Use Per December 31, kWh Residential Electric (Thousands of Sales Customer Customers Employees Dollarsita) (Millions) (kWh) (Averaae) (December 31) '

l 1996 $2,382,009 13,601 6,567 407,082 1,279 1995 2,469,474 11,001 6,524(d) 406,077 1,325 1994 2,521,960 11,008 6,768 400,775 1,374 i 1993 2,590,644 11,146 6,817 397,277 1,426 i 1992(D) 2,656,493 12,294 6,874 394,046 1,680  !

STATEMENTS OF OUARTERLY FINANCIAL DATA (Unaudited)

Ouarter Ended (c) I 1996 March 31 June 30 Seot.30 Dec. 31 1 Operating Revenues..... $269,540 $261,897 $296,719 $282,013 operating Income....... $ 44,668 $ 42,156 $ 46,934 $ 21,437 Nat Income............. $ 28,545 $ 23,986 $ 30,646 $ 13,725 l 1995 __

Operating Revenues..... $252,337 $232,849 $249,626 $245,159 Operating Income....... $ 41,858 $ 31,480 $ 40,333 $ 41,957 Nst Income............. $ 21,823 $ 13,892 $ 23,195 $ 24,345

(*) Includes reclassification of the unamortized acquisition cost's to gross utility plant.

(b) PSNH was acquired by NU on June 5, 1992.

(*) Reclassifications of prior data have been made to conform with the current presentation.

(d) Effective January 1, 1996, the amounts shown reflect billed and unbilled sales. 1995 has been restated to reflect this change.

i l

51 l

i l

i Blank Page l l

l l

i 4

i 4

l

. _ _ ____ _. _ __= . . _ _ _ . _ _ _ _ _ _ . _ _ _ _ _ _ _ . . _ _ . _ _ _ _ _ _ . _ _ . _ _ _ _

PI *BIIt Al R\ IC I ( 0%f ?A%) Of hl % 11 A%fP%IllRI i

First Mortgage Bonds

,i Trustee and Interest Paying Agent 1

First Union Bank 765 Broad Street ,

i Newark, NewJersey 07102 l 1

Preferred Sloch j Transfer Agent, Dividend Disbursing Agent and Registrar i Northeast Utilities Service Company Shareholder Services PO. Box 5006

{ Hartford, Connecticut 06102-5006

, 1997 Dividend Payment Dates i 10.60% Series A j March 31, June 30, September 30, and December 31 i

Address General Cor respondence in Care of:

5 Northeast Utilities Service Company Investor Relations Department

) PO. Box 270 Hartford, Connecticut 06141-0270 Telephone: (860) 665-5000 I

I l

summmmmmmmmmme General Offices Data contained in this Annual Report are subnuited for the sole purpose of prondmg information to 1000 Elm Street present secunty holders about the Company Manchester, New Hampshire 03105