1999 Annual Report
The Connecticut Light and Power Company and Subsidiaries
Index
Contents Page
- -------- ----
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 1
Report of Independent Public Accountants............................ 12
Consolidated Statements of Income................................... 13
Consolidated Statements of Comprehensive Income..................... 13
Consolidated Balance Sheets......................................... 14-15
Consolidated Statements of Common Stockholder's Equity.............. 16
Consolidated Statements of Cash Flows............................... 17
Notes to Consolidated Financial Statements.......................... 18
Selected Consolidated Financial Data................................ 44
Consolidated Quarterly Financial Data (Unaudited)................... 44
Consolidated Statistics (Unaudited)................................. 45
Preferred Stockholder and Bondholder Information.................... Back Cover
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Overview
The financial improvement that began in 1998 continued throughout 1999 at The
Connecticut Light and Power Company (CL&P or the company), an operating
subsidiary of Northeast Utilities (NU) and part of the Northeast Utilities
system (NU system), despite a rate reduction in Connecticut. CL&P's results
benefited from the successful restart of the Millstone 2 nuclear unit, the
strong operating performance delivered by the Millstone 3 and Seabrook Station
(Seabrook) nuclear units, retail sales growth, and continued control over
operation and maintenance (O&M) expenses. A rate reduction reduced the
positive financial impacts of these items.
During 1999, CL&P resolved key industry restructuring issues by establishing
initial stranded cost recovery levels and standard offer service tariffs and
agreements. The auction of substantially all of the fossil and hydroelectric
generation assets owned by CL&P and the auction of its respective interest in
the output of the Millstone units, moved CL&P along in its transition into a
purely electric transmission and distribution company, as contemplated by
restructuring legislation in Connecticut.
CL&P lost $13.6 million in 1999, compared with a loss of $195.7 million in 1998
and a loss of $139.6 million in 1997. The 1999 results included after-tax
write-offs associated with the settlement of nuclear related issues and
industry restructuring totaling $28.8 million. During 1998, CL&P's results
included write-offs associated with a rate decision in Connecticut and the
retirement of Millstone 1 totaling $133.4 million.
In 1999, CL&P's revenues increased to $2.45 billion, up 2.5 percent from
revenues of $2.39 billion in 1998. The growth was primarily due to a 2.9
percent increase in retail sales. That growth was due to weather related
factors that included a hotter than normal summer. The balance of that
increase was due to economic expansion in CL&P's service territory. A retail
rate reduction offset some of the growth in revenues. CL&P's rates were
reduced 5 percent in early 1999. CL&P's rates were further reduced in January
2000 by 5 percent. The additional 5 percent rate reduction will offset some of
the growth in future revenues.
Aside from increased revenues, the primary reason for better operating
performance in 1999 was the return to service from extended outages of
Millstone 3 in July 1998 and Millstone 2 in May 1999.
CL&P's ability to continue improving financial performance in 2000 will depend
largely on continued sales growth and on successful control of O&M expenses.
CL&P also hopes to complete in 2000 the majority of restructuring work
remaining, primarily the issuance of rate reduction bonds (securitization) to
lower stranded costs, and the auction of CL&P's ownership interests in the
Millstone units.
Mergers
In 1998 and 1999, NU management concluded that the pace of deregulation was
accelerating throughout the northeastern United States and that shareholders
would benefit from NU not only remaining a major provider of electric
transmission and distribution service, but also an unregulated marketer of both
electricity and natural gas. NU management also concluded that as a result of
the changes occurring in the highly competitive electric utility industry,
increased size would be crucial to achieve its objective of being a leading
provider of energy products and services in the Northeast.
On October 13, 1999, NU announced an agreement to merge with Consolidated
Edison, Inc. (Con Edison), a financially stronger utility based in New York.
The merger will create the nation's largest electric distribution system with
more than 5 million customers and one of the 15 largest natural gas
distribution systems with 1.4 million customers.
NU and Con Edison filed with various state and federal regulatory bodies in
January 2000 to secure approval of the merger. The two companies expect these
regulatory proceedings can be completed by the end of July 2000.
Also in 1999, NU management concluded that the NU system would be stronger and
customers could be better served if NU reentered the natural gas distribution
business that it had exited in 1989 and examined several potential businesses
in New England. By adding gas to NU's energy mix, NU will be able to broaden
its services to its existing customers and will have additional opportunities
for long-term growth. In June 1999, NU announced an agreement to merge with
Yankee Energy System, Inc. (Yankee). The merger will return to NU
Connecticut's largest natural gas distribution system, as well as several
unregulated businesses involved in energy services, collections and other
areas. The Yankee merger received Yankee shareholder approval in October 1999,
final Connecticut Department of Public Utility Control (DPUC) approval in
December 1999 and Securities and Exchange Commission (SEC) approval in January
2000. The merger closed on March 1, 2000.
Liquidity
During 1999, strong sales growth, improved nuclear performance and continued
control of O&M expenses resulted in net cash flows provided by operations of
$299.4 million in 1999, compared to $364.1 million in 1998 and $37.2 million
in 1997. The decrease in cash flows from operations is primarily related to
increased tax payments in 1999.
On December 15, 1999, CL&P sold 2,235 megawatts (MW) of fossil generation
assets to an unaffiliated company. Proceeds from the sale totaled $516.9
million, including payments for fuel and inventory. CL&P used the proceeds
primarily to par call $406 million of first mortgage bonds in December 1999.
CL&P also used $57.5 million to buy out its lease of four 40 MW turbines.
Proceeds from the generation asset sale are included in net cash flows
provided by investing activities. Including construction expenditures and
investments in nuclear decommissioning trusts, net cash flows provided by
investing activities were $261.4 million in 1999, compared with net cash
flows used in investing activities of $183 million in 1998 and $108.1 million
in 1997.
Positive operating cash flows and the proceeds from the generation asset sale
enabled CL&P to substantially reduce its outstanding debt. As of December 31,
1999, CL&P's total debt level, including capital lease obligations, was $1.6
billion, compared with $2.2 billion as of December 31, 1998, and $2.3 billion
as of December 31, 1997.
The net cash flows used in financing activities were $560.9 million in 1999,
compared to $181.2 million in 1998 and net cash flows provided by financing
activities of $71 million in 1997. This included $639.8 million paid in 1999
to retire long-term debt and preferred stock, compared to $80.7 million in 1998
and $204.1 million in 1997. There were no cash dividends on common shares
paid in 1999 and 1998 and $6 million in 1997. Payments made for preferred
stock dividends were $12.8 million, $14.1 million and $15.2 million for 1999,
1998 and 1997, respectively.
CL&P's access to capital also benefited from the strong operating performance
at Millstone 2 and 3 and the announced merger with Con Edison. During 1999,
CL&P's securities received several upgrades from three credit rating agencies.
CL&P's senior secured bonds achieved investment grade ratings for the first
time since early 1997. At year end, all securities were under review for
possible upgrades, or on "credit watch" with positive implications by Standard
& Poor's, Moody's Investors Service and Fitch IBCA.
The rating agency upgrades benefited CL&P's efforts to broaden its credit
lines. On November 19, 1999, CL&P and Western Massachusetts Electric Company
(WMECO) entered into a new 364-day revolving credit facility for $500 million,
replacing the previous $313.75 million facility which was to expire on
November 21, 1999. The revolving credit facility, which is secured by second
mortgages on Millstone 2 and 3, will be used to bridge gaps in working capital
and provide short-term liquidity. CL&P may draw up to $300 million under the
facility. Once CL&P receives the proceeds from securitization, the $500 million
facility will be reduced to $300 million, with a $200 million limit for CL&P.
As of December 31, 1999, CL&P had $90 million outstanding under this facility.
For further information regarding the CL&P and WMECO revolving credit facility,
see Note 3, "Short-Term Debt," to the consolidated financial statements.
CL&P also has arranged financing through the sale of its accounts receivable.
CL&P can finance up to $200 million through this facility. As of December 31,
1999, CL&P had $170 million outstanding under this facility.
During 2000, CL&P hopes to receive regulatory approval to begin the process of
securitizing its approved stranded costs. Securitization involves issuing rate
reduction bonds with interest rates lower than the company's weighted average
cost of capital. Proceeds from securitization will be used to significantly
reduce the capitalization of CL&P and buyout or buydown certain purchased-power
contracts with a number of nonutility generators.
Restructuring
During 1999, Connecticut made significant progress in resolving industry
restructuring issues. Restructuring orders issued in Connecticut allowed CL&P
to determine the impacts of discontinuing Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," for the generation portion of CL&P's business. The transmission
and distribution portion of that business will continue to be cost-of-service
regulated. In addition, the restructuring orders provided for a transition
charge which allows for the recovery of CL&P's generation-related regulatory
assets and prudently incurred stranded costs.
During April 1999, CL&P filed its standard offer service plan with the DPUC and
received a decision on October 1, 1999, as amended on December 15, 1999. In
that decision, the DPUC approved the recovery of CL&P's regulatory assets and
certain stranded costs associated with CL&P's nuclear generation assets and
established the methodology for setting CL&P's standard offer rates, including
the transition charge and transmission and distribution rates. The DPUC ruled
on CL&P's stranded cost filing in July 1999 approving $3.5 billion of stranded
cost recovery, which is utilized, in part, in the determination of the
transition charge.
As provided for in the electric utility restructuring legislation enacted in
April 1998, 35 percent of CL&P's customers were able to choose their electric
generation supplier on January 1, 2000, with the remaining 65 percent having
choice on July 1, 2000. The major components of rates are a transmission and
distribution charge, a generation charge and a transition charge. For those
customers who do not or are unable to choose another competitive electric
generation supplier, CL&P will supply standard offer or generation service
at an average rate of $0.04813 per kilowatt-hour (kWh) through December 31,
2003. The revenues attributable to standard offer (generation) service are
expected to exceed the actual cost of providing generation and the difference
will be applied against stranded costs. In accordance with a plan approved by
the DPUC, one-half of the CL&P standard offer load was procured through a
competitive bidding process, with the remaining one-half of the power being
supplied by an affiliated company. The contracts are in place through the end
of 2003. For further information regarding commitments and contingencies
related to the Connecticut restructuring order, see Note 11A, "Commitments
and Contingencies - Restructuring," to the consolidated financial statements.
Generation Asset Divestitures
The Connecticut restructuring laws required CL&P to divest of its generation
assets and utilize substantially all of the net gains from any sales to offset
stranded costs. During 1999, CL&P sold its fossil generation assets resulting
in a net gain of $286.5 million. A corresponding amount of regulatory assets
was amortized. Also during 1999, CL&P signed agreements to transfer certain
hydroelectric generation assets to Northeast Generation Company, an unregulated
affiliate of NU. This transaction closed on March 14, 2000. In September
1999, NU announced that the Millstone nuclear generation assets of its
subsidiaries, CL&P and WMECO, will be put up for auction as soon as practical.
For further information regarding commitments and contingencies related to the
generation asset divestitures, see Note 11A, "Commitments and Contingencies -
Restructuring," to the consolidated financial statements.
Nuclear Generation
Millstone Nuclear Units
Millstone 3 received the appropriate Nuclear Regulatory Commission (NRC)
approvals and resumed operation in July 1998. Millstone 2 received similar NRC
approvals, resumed operation and was returned to CL&P's rate base in May 1999.
Millstone 3 and 2 achieved annual capacity factors of 81.7 percent and 57.9
percent in 1999, respectively. After a 60-day refueling and maintenance
outage, Millstone 3 returned to service on June 29, 1999, and has achieved a
98.1 percent capacity factor through December 31, 1999. Since returning to
service in May 1999, Millstone 2 has achieved a 90.3 percent capacity factor
through December 31, 1999. NU's total share of O&M expenses associated with
Millstone 3 and 2 totaled $261.8 million in 1999, as compared to $323.2 million
in 1998 and $406 million in 1997. Millstone 1 is currently in decommissioning
status.
An auction of CL&P's ownership interests in the Millstone units is expected in
2000 with a closing in 2001. Based on regulatory decisions received in 1999,
management expects to recover all of its remaining nuclear stranded costs from
retail customers.
Seabrook
Seabrook achieved an annual capacity factor of 86.4 percent in 1999. However,
since returning to service on May 13, 1999, after a 48-day refueling and
maintenance outage, Seabrook has achieved a 99 percent capacity factor through
December 31, 1999.
CL&P anticipates auctioning its 4.06 percent share of Seabrook, with the 35.98
percent share owned by its affiliate North Atlantic Energy Corporation.
Yankee Companies
On June 1, 1999, the Federal Energy Regulatory Commission accepted the offer of
settlement which was filed on January 15, 1999, by the Maine Yankee Atomic
Power Company (MYAPC). The significant aspects of the settlement allowed MYAPC
to collect $33.1 million annually to pay for decommissioning and spent fuel,
approved its return on equity of 6.5 percent, permitted full recovery of
MYAPC's unamortized investment, including fuel, and set an incentive budget for
decommissioning at $436.3 million.
On October 15, 1999, the Vermont Yankee Nuclear Power Corporation (VYNPC)
agreed to sell its unit for $22 million to an unaffiliated company. Among
other commitments, the acquiring company agreed to assume the decommissioning
cost of the unit after it is taken out of service, and the VYNPC owners have
agreed to fund the uncollected decommissioning cost to a negotiated amount at
the time of the closing of the sale. VYNPC's owners have also agreed either
to enter into a new purchased-power agreement with the acquiring company or to
buy out such future power payment obligations by making a fixed payment to
them. CL&P has elected the buyout option. The VYNPC owners' obligations to
close and pay such amounts are conditioned upon their receipt of satisfactory
regulatory approval of the transaction, including provision for adequate
recovery of these payments.
Nuclear Decommissioning
The staff of the SEC has questioned certain of the current accounting practices
of the electric utility industry regarding the recognition, measurement and
classification of decommissioning costs for nuclear units in their financial
statements.
Currently, the Financial Accounting Standards Board plans to review the
accounting for obligations associated with the retirement of long-lived assets,
including the decommissioning of nuclear units. If current accounting
practices for nuclear decommissioning change, the annual provision for
decommissioning could increase relative to 1999, and the estimated cost for
decommissioning could be recorded as a liability with recognition of an
increase in the cost of the related nuclear unit. However, management does
not believe that such a change will have a material impact on CL&P's financial
statements due to its current and future ability to recover decommissioning
costs through rates.
Spent Nuclear Fuel Disposal Costs
The United States Department of Energy (DOE) originally was scheduled to begin
accepting delivery of spent fuel in 1998. However, delays in confirming the
suitability of a permanent storage site continually have postponed plans for
the DOE's long-term storage and disposal site. Extended delays or a default
by the DOE could lead to consideration of costly alternatives. CL&P has the
primary responsibility for the interim storage of its share of spent nuclear
fuel. Adequate storage capacity exists to accommodate all spent nuclear fuel
at Millstone 1. The facilities for Millstone 2 are expected to provide
adequate storage to accommodate a full-core discharge from the reactor until
2005 with the implementation of currently planned modifications. Fuel
consolidation, which has been licensed for Millstone 2, could provide adequate
storage capacity for its projected life. The facilities for Millstone 3 are
expected to provide adequate storage for its projected life with the addition
of new storage racks. Seabrook is expected to have spent fuel storage capacity
until at least 2010. Meeting spent fuel storage requirements beyond these
periods could require new and separate storage facilities. For further
information regarding spent nuclear fuel disposal costs, see Note 11D,
"Commitments and Contingencies - Spent Nuclear Fuel Disposal Costs," to the
consolidated financial statements.
Market Risk and Risk Management Instruments
CL&P uses energy price risk management instruments to manage the market risk
exposures associated with changes in energy prices. CL&P uses these
instruments to reduce risk by essentially creating offsetting market exposures.
Based on the derivative instruments that were being utilized by CL&P to hedge
some of their energy price risks, there may be an impact on earnings upon
adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which management has not estimated at this time.
Energy Price Risk Management Instruments
In the generation of electricity, the most significant segment of the variable
cost component is the cost of fuel. Typically, most of CL&P's fuel purchases
were protected by a regulatory fuel price adjustment clause. However, for a
specific, well-defined volume of fuel that was excluded from the energy price
adjustment clause, CL&P employed energy price risk management instruments to
protect itself against the risk of rising fuel prices, thereby limiting fuel
costs and protecting its profit margins. These risks were created by the sale
of long-term fixed-price electricity sales contracts to wholesale customers.
In 1999, CL&P divested substantially all of its fossil and hydroelectric
generation assets and also transferred the rights and obligations of its long-
term fixed-price contracts to an unregulated affiliate. As a result, the fuel
swap positions were marked-to-market and CL&P recognized a loss of $5.2
million. In January 2000, the fuel swap positions were liquidated.
Other Matters
Environmental Matters
CL&P is subject to environmental laws and regulations structured to mitigate or
remove the effect of past operations and to improve or maintain the quality of
the environment. For further information regarding environmental matters, see
Note 11C, "Commitments and Contingencies - Environmental Matters," to the
consolidated financial statements.
Other Commitments and Contingencies
CL&P is subject to other commitments and contingencies primarily
relating to nuclear litigation, nuclear insurance contingencies, its
construction program, long-term contractual arrangements, and the New
England Power Pool generation pricing. For further information
regarding these commitments and contingencies, see Note 11,
"Commitments and Contingencies," to the consolidated financial
statements.
Year 2000 Issues
The transition into the year 2000 was a success for the NU system and
CL&P. Its mission to provide safe, reliable energy to its customers
and to ensure continued operability of critical business functions was
not affected by any year 2000 related issues.
The projected total cost of the year 2000 program is estimated at $21
million for the NU system. The total cost to date was funded through
operating cash flows. The NU system has incurred and expensed $20
million related to year 2000 readiness efforts.
Forward Looking Statements
This discussion and analysis includes forward looking statements, which are
statements of future expectations and not facts. Words such as estimates,
expects, anticipates, intends, plans, and similar expressions identify forward
looking statements. Actual results or outcomes could differ materially as a
result of further actions by state and federal regulatory bodies, competition
and industry restructuring, changes in economic conditions, changes in
historical weather patterns, changes in laws, developments in legal or public
policy doctrines, technological developments, and other presently unknown or
unforeseen factors.
RESULTS OF OPERATIONS
The components of significant income statement variances for the past two years
are provided in the table below.
Income Statement Variances
(Millions of Dollars)
1999 over/(under) 1998 1998 over/(under) 1997
--------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
Operating Revenues $ 66 3% $(79) (3)%
Operating Expenses:
Fuel, purchased and
net interchange power (143) (13) (60) (5)
Other operation and
maintenance (94) (12) (136) (15)
Depreciation (23) (10) (22) (9)
Amortization of regulatory
assets, net 327 (a) 59 96
Federal and state income taxes 164 - (12) (18)
Taxes other than income taxes 5 3 (2) (1)
Gain on sale of utility plant (286) - - -
Operating income 146 (a) 36 (a)
Equity in earnings of
regional nuclear
generating companies (5) (76) 1 10
Nuclear unrecoverable costs 90 63 (143) -
Other, net (20) (a) (4) (a)
Minority interest in
loss of subsidiary - - - -
Interest charges, net - - 5 3
Net Income/(Loss) 182 93 (56) (40)
(a) Percentage greater than 100.
Operating Revenues
Operating revenues increased by $66 million or 3 percent in 1999, due to higher
wholesale revenues ($72 million). The wholesale revenue increase is primarily
due to higher energy sales and related capacity and transmission revenues.
Retail revenues decreased primarily due to a retail rate reduction ($55
million) and lower fuel clause revenues ($33 million), partially offset by the
impact of Millstone 2 and 3 being returned to CL&P's rate base ($13 million)
and higher retail sales ($62 million). Retail kilowatt-hour sales increased by
2.9 percent.
The removal of Millstone 2 and 3 from CL&P's rate base reduced revenues by $68
million in 1998. Wholesale revenues decreased by $33 million, primarily as a
result of terminating the contract with the Connecticut Municipal Electric
Energy Cooperative (CMEEC). These decreases were partially offset by higher
retail sales volumes. Retail kilowatt-hour sales were 2.2 percent higher and
contributed $36 million to nonfuel revenues in 1998 primarily as a result of
economic growth.
Fuel, Purchased and Net Interchange Power
Fuel, purchased and net interchange power expense decreased in 1999, primarily
due to lower replacement power costs due to the return to service of Millstone
2 and 3, partially offset by higher purchased-power costs as a result of a
high sales demand.
The change in fuel, purchased and net interchange power expense in 1998, is
primarily due to lower replacement power costs due to the return to service of
Millstone 3 and lower costs at the Yankee nuclear units ($21 million). This
change was partially offset by higher capacity charges ($51 million).
Other Operation and Maintenance
Other O&M expenses decreased in 1999, primarily due to lower costs at the
Millstone units ($107 million), lower conservation and load management
amortization ($14 million), and lower fossil O&M expenses ($7 million),
partially offset by the recognition of environmental insurance proceeds in 1998
($9 million), higher transmission expenses ($12 million), and higher storm
costs ($12 million).
Other O&M expenses decreased in 1998, primarily due to lower costs at the
Millstone units ($125 million), lower administrative and general expenses
($12 million), the recognition of environmental insurance proceeds ($9
million), lower distribution costs ($8 million), a decrease in sales and
marketing expenses ($8 million), and lower costs from ISO-New England for
interchange services ($7 million). These decreases were partially offset
by higher recognition of nuclear refueling outage costs primarily as a
result of the 1996 rate settlement ($34 million).
Depreciation
Depreciation decreased in 1999 and 1998, primarily due to the retirement of
Millstone 1.
Amortization of Regulatory Assets, Net
Amortization of regulatory assets, net increased in 1999, primarily due to the
increased amortization associated with the gain on the sale of fossil
generation assets ($286 million), the amortization of CL&P's Millstone 1
remaining investment ($51 million) and the reclassification of the depreciation
on the nuclear plants transferred to regulatory assets ($19 million). These
increases were partially offset by the completion of the amortization of the
cogeneration deferral in the first quarter of 1999 ($23 million).
Amortization of regulatory assets, net increased in 1998, primarily due to
accelerated amortizations in accordance with regulatory decisions ($52 million)
and the beginning of the amortization of the Millstone 1 investment ($20
million).
Federal and State Income Taxes
Federal and state income taxes increased in 1999, primarily due to higher book
taxable income.
Federal and state income taxes decreased in 1998, primarily due to lower book
taxable income and the increase in income tax credits primarily due to the
Millstone 1 write-off of unrecoverable costs as a result of the February 1999
rate decision.
Gain on Sale of Utility Plant
CL&P recorded a gain on the sale of its fossil generation assets in 1999.
A corresponding amount of amortization expense was recorded.
Equity Earnings of Regional Nuclear Generating Companies
Equity earnings of regional nuclear generating companies decreased in 1999,
primarily due to lower earnings from the Connecticut Yankee Atomic Power
Company.
The change in equity earnings of regional nuclear generating companies in 1998
was not significant.
Nuclear Unrecoverable Costs
Nuclear unrecoverable costs in 1999 are comprised of one-time charges related
to the write-off of capital projects as a result of the Connecticut standard
offer decision ($11 million), the settlement of Millstone 3 joint owner
litigation, net of insurance proceeds ($22 million) and the write-off of CMEEC
nuclear costs ($20 million). In comparison, 1998 is comprised of the write-off
of the Millstone 1 entitlement formerly held by CMEEC ($27.8 million) and the
write-off of unrecoverable costs as a result of the February 1999 rate decision
($115.3 million).
Other, Net
Other, net, decreased in 1999, primarily due to the loss on the CL&P assignment
of market-based contracts to Select Energy, Inc.
The change in other, net in 1998 was not significant.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of The Connecticut Light and Power Company:
We have audited the accompanying consolidated balance sheets of The Connecticut
Light and Power Company (a Connecticut corporation and a wholly owned
subsidiary of Northeast Utilities) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, common stockholder's equity and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Connecticut Light and
Power Company and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 25, 2000
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues................................. $2,452,855 $2,386,864 $2,465,587
----------- ----------- -----------
Operating Expenses:
Operation -
Fuel, purchased and net interchange power..... 927,989 1,070,677 1,131,063
Other......................................... 480,138 520,518 572,900
Maintenance...................................... 217,961 271,317 355,772
Depreciation..................................... 193,776 216,509 238,667
Amortization of regulatory assets, net........... 447,776 120,884 61,648
Federal and state income taxes................... 122,059 (11,642) (59,436)
Taxes other than income taxes.................... 174,884 170,347 172,592
Gain on sale of utility plant.................... (286,477) - -
----------- ----------- -----------
Total operating expenses................... 2,278,106 2,358,610 2,473,206
----------- ----------- -----------
Operating Income/(Loss)............................ 174,749 28,254 (7,619)
----------- ----------- -----------
Other (Loss)/Income:
Equity in earnings of regional nuclear
generating companies........................... 1,506 6,241 5,672
Nuclear unrecoverable costs...................... (53,031) (143,239) -
Other, net....................................... (25,962) (6,075) (1,856)
Minority interest in loss of subsidiary.......... (9,300) (9,300) (9,300)
Income taxes..................................... 36,921 67,127 7,573
----------- ----------- -----------
Other (loss)/income, net................... (49,866) (85,246) 2,089
----------- ----------- -----------
Income/(Loss) before interest charges...... 124,883 (56,992) (5,530)
----------- ----------- -----------
Interest Charges:
Interest on long-term debt....................... 127,533 133,192 132,127
Other interest................................... 10,918 5,541 1,940
----------- ----------- -----------
Interest charges, net...................... 138,451 138,733 134,067
----------- ----------- -----------
Net Loss........................................... $ (13,568) $ (195,725) $ (139,597)
=========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Loss........................................... $ (13,568) $ (195,725) $ (139,597)
----------- ----------- -----------
Other comprehensive income, net of tax:
Unrealized gains on securities..................... 38 638 -
Minimum pension liability adjustments.............. - (260) -
----------- ----------- -----------
Other comprehensive income, net of tax........... 38 378 -
----------- ----------- -----------
Comprehensive Loss $ (13,530) $ (195,347) $ (139,597)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------
AT DECEMBER 31, 1999 1998
- ----------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 5,811,126 $ 6,173,871
Less: Accumulated provision for depreciation......... 4,234,771 2,758,012
------------- -------------
1,576,355 3,415,859
Construction work in progress........................... 115,529 83,477
Nuclear fuel, net....................................... 80,766 87,867
------------- -------------
Total net utility plant............................. 1,772,650 3,587,203
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 516,796 452,755
Investments in regional nuclear generating
companies, at equity................................... 54,472 56,999
Other, at cost.......................................... 36,696 93,864
------------- -------------
607,964 603,618
------------- -------------
Current Assets:
Cash.................................................... 364 434
Investments in securitizable assets..................... 107,620 160,253
Notes receivable from affiliated companies.............. - 6,600
Receivables, less accumulated provision for
uncollectible accounts of $300 in 1999 and 1998........ 19,680 22,186
Accounts receivable from affiliated companies........... 3,390 1,721
Taxes receivable........................................ - 26,478
Fuel, materials, and supplies, at average cost.......... 37,603 71,982
Prepayments and other................................... 148,628 121,514
------------- -------------
317,285 411,168
------------- -------------
Deferred Charges:
Regulatory assets....................................... 2,564,095 1,415,838
Unamortized debt expense................................ 16,323 19,603
Other................................................... 19,967 12,768
------------- -------------
2,600,385 1,448,209
------------- -------------
Total Assets........................................ $ 5,298,284 $ 6,050,198
============= =============
The accompanying notes are an integral part of these financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999 1998
- ------------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock, $10 par value - authorized
24,500,000 shares; 12,222,930 shares outstanding
in 1999 and 1998......................................... $ 122,229 $ 122,229
Capital surplus, paid in.................................. 665,598 664,156
Retained earnings......................................... 153,254 210,108
Accumulated other comprehensive income.................... 416 378
------------- -------------
Total common stockholder's equity................ 941,497 996,871
Preferred stock not subject to mandatory redemption....... 116,200 116,200
Preferred stock subject to mandatory redemption........... 79,789 99,539
Long-term debt............................................ 1,241,051 1,793,952
------------- -------------
Total capitalization............................. 2,378,537 3,006,562
------------- -------------
Minority Interest in Consolidated Subsidiary................ 100,000 100,000
------------- -------------
Obligations Under Capital Leases............................ 50,969 68,444
------------- -------------
Current Liabilities:
Notes payable to banks.................................... 90,000 10,000
Notes payable to affiliated company....................... 11,700 -
Long-term debt and preferred stock - current portion...... 178,755 233,755
Obligations under capital leases - current portion........ 93,431 94,440
Accounts payable.......................................... 101,106 121,040
Accounts payable to affiliated companies.................. 3,215 32,758
Accrued taxes............................................. 169,214 19,396
Accrued interest.......................................... 18,640 31,409
Other..................................................... 26,347 34,872
------------- -------------
692,408 577,670
------------- -------------
Deferred Credits and Other Long-term Liabilities:
Accumulated deferred income taxes......................... 999,473 1,194,722
Accumulated deferred investment tax credits............... 107,064 114,457
Decommissioning obligation - Millstone 1.................. 580,320 560,500
Deferred contractual obligations.......................... 238,142 277,826
Other..................................................... 151,371 150,017
------------- -------------
2,076,370 2,297,522
------------- -------------
Total Capitalization and Liabilities............. $ 5,298,284 $ 6,050,198
============= =============
The accompanying notes are an integral part of these financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------
Accumulated
Capital Retained Other
Common Surplus, Earnings Comprehensive
Stock Paid In (a) Income Total
- ------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1997............ $122,229 $639,657 $ 580,779 $ - $1,342,665
Net loss for 1997................. (139,597) (139,597)
Cash dividends on preferred
stock........................... (15,221) (15,221)
Cash dividends on common stock.... (5,989) (5,989)
Capital stock expenses, net....... 1,676 1,676
--------- --------- ---------- -------------- -----------
Balance at December 31, 1997.......... 122,229 641,333 419,972 - 1,183,534
Net loss for 1998................. (195,725) (195,725)
Cash dividends on preferred stock. (14,139) (14,139)
Capital stock expenses, net....... 2,764 2,764
Capital contribution from
Northeast Utilities............. 20,000 20,000
Gain on repurchase of preferred
stock........................... 59 59
Other comprehensive income........ 378 378
--------- --------- ---------- -------------- -----------
Balance at December 31, 1998.......... 122,229 664,156 210,108 378 996,871
Net loss for 1999................. (13,568) (13,568)
Cash dividends on preferred stock. (12,832) (12,832)
Capital stock expenses, net....... 1,442 1,442
Allocation of benefits - ESOP..... (30,454) (30,454)
Other comprehensive income........ 38 38
--------- --------- ---------- -------------- -----------
Balance at December 31, 1999.......... $122,229 $665,598 $ 153,254 $ 416 $ 941,497
========= ========= ========== ============== ===========
(a) The company has dividend restrictions imposed by its long-term debt
agreements. At December 31, 1999, these restrictions totaled
approximately $512 million.
The accompanying notes are an integral part of these financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------
For the Years Ended December 31,
- -----------------------------------------------------------------------------------------------
(Thousands of Dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Operating Activities:
Net loss.................................................... $ (13,568) $(195,725) $(139,597)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation.............................................. 193,776 216,509 238,667
Deferred income taxes and investment tax credits, net..... (140,459) (65,689) (10,401)
Amortization of regulatory assets, net ................... 447,776 120,884 61,648
Amortization of demand-side-management costs, net ........ 10,014 42,085 38,029
Amortization/(deferral) of recoverable energy costs....... 12,702 30,745 (9,533)
Deferred nuclear refueling outage, net of amortization ... - - (45,333)
Nuclear unrecoverable costs............................... 53,031 143,239 -
Allocation of ESOP benefits............................... (30,454) - -
Gain on sale of utility plant............................. (286,477) - -
Net other (uses)/sources of cash.......................... (113,174) 34,016 (50,953)
Changes in working capital:
Receivables............................................... 837 29,914 254,223
Fuel, materials and supplies.............................. 34,379 9,896 (1,941)
Accounts payable.......................................... (49,477) (63,592) (22,036)
Accrued taxes............................................. 149,818 (13,621) 4,310
Investments in securitizable assets....................... 52,633 45,372 (205,625)
Other working capital (excludes cash)..................... (21,930) 30,097 (74,266)
---------- ---------- ----------
Net cash flows provided by operating activities............... 299,427 364,130 37,192
---------- ---------- ----------
Financing Activities:
Issuance of long-term debt.................................. - - 200,000
Net increase/(decrease) in short-term debt.................. 91,700 (86,300) 96,300
Reacquisitions and retirements of long-term debt............ (620,010) (45,006) (204,116)
Reacquisitions and retirements of preferred stock........... (19,750) (35,711) -
Cash dividends on preferred stock........................... (12,832) (14,139) (15,221)
Cash dividends on common stock.............................. - - (5,989)
---------- ---------- ----------
Net cash flows (used in)/provided by financing activities..... (560,892) (181,156) 70,974
---------- ---------- ----------
Investing Activities:
Investment in plant:
Electric utility plant.................................... (180,982) (132,194) (155,550)
Nuclear fuel.............................................. (26,198) (8,444) (702)
---------- ---------- ----------
Net cash flows used for investments in plant.............. (207,180) (140,638) (156,252)
Investment in NU system Money Pool.......................... 6,600 (6,600) 109,050
Investment in nuclear decommissioning trusts................ (54,582) (54,106) (45,314)
Other investment activities, net............................ (355) (1,655) (15,595)
Net proceeds from the sale of utility plant................. 516,912 - -
Capital contributions from Northeast Utilities.............. - 20,000 -
---------- ---------- ----------
Net cash flows provided by/(used in) investing activities..... 261,395 (182,999) (108,111)
---------- ---------- ----------
Net (decrease)/increase in cash for the period................ (70) (25) 55
Cash - beginning of period.................................... 434 459 404
---------- ---------- ----------
Cash - end of period.......................................... $ 364 $ 434 $ 459
========== ========== ==========
Supplemental Cash Flow Information:
Cash paid/(refunded) during the year for:
Interest, net of amounts capitalized........................ $ 142,398 $ 110,119 $ 145,962
========== ========== ==========
Income taxes................................................ $ 19,754 $ (46,747) $ (22,338)
========== ========== ==========
Increase in obligations:
Niantic Bay Fuel Trust...................................... $ 4,752 $ 10,208 $ 2,815
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. About The Connecticut Light and Power Company
The Connecticut Light and Power Company (CL&P or the company) along
with the Public Service Company of New Hampshire (PSNH), Western
Massachusetts Electric Company (WMECO), North Atlantic Energy
Corporation (NAEC), and Holyoke Water Power Company (HWP) are the
operating companies comprising the Northeast Utilities system (NU
system) and are wholly owned by Northeast Utilities (NU). The NU system
serves in excess of 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. The NU system furnishes franchised retail
electric service in Connecticut, New Hampshire and western Massachusetts
through CL&P, PSNH and WMECO. NAEC sells all of its entitlement to the
capacity and output of the Seabrook Station (Seabrook) nuclear unit to
PSNH under the terms of two life-of-unit, full cost recovery contracts.
HWP, also is engaged in the production and distribution of electric
power.
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 the NU system, including CL&P, is subject to provisions
of the 1935 Act. Arrangements among the NU 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.
CL&P is subject to further regulation for rates, accounting and other
matters by the FERC and/or applicable state regulatory commissions.
Several wholly owned subsidiaries of NU provide support services for the
NU system companies, including CL&P, 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 NU system companies, including CL&P. Northeast
Nuclear Energy Company acts as agent for the NU system companies and
other New England utilities in operating the Millstone nuclear units.
North Atlantic Energy Service Corporation has operational responsibility
for Seabrook. In addition, CL&P has established a special purpose
subsidiary whose business consists of the purchase and resale of
receivables.
On October 13, 1999, NU and Consolidated Edison, Inc. (Con Edison)
announced that they have agreed to a merger to combine the two
companies. For further information, see Note 17, "Merger Agreement
with Con Edison."
B. Presentation
The consolidated financial statements of CL&P include the accounts of
all subsidiaries. Intercompany transactions have been eliminated in
consolidation.
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 representing a return on equity and are
subject to approval by various federal and state regulatory agencies.
C. New Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and hedging activities. This statement will require
derivative instruments utilized by CL&P to be recognized as assets or
liabilities at fair value.
In June 1999, the FASB delayed the adoption date of SFAS No. 133 to
January 1, 2001.
Based on the derivative instruments utilized by CL&P, there may be an
impact on earnings upon adoption of SFAS No. 133 which management has
not estimated at this time.
D. Investments and Jointly Owned Electric Utility Plant
Regional Nuclear Generating Companies: CL&P owns common stock in four
regional nuclear companies (Yankee Companies). CL&P's ownership
interests in the Yankee Companies at December 31, 1999 and 1998, which
are accounted for on the equity basis due to CL&P's ability to exercise
significant influence over their operating and financial policies are
34.5 percent of the Connecticut Yankee Atomic Power Company (CYAPC),
24.5 percent of the Yankee Atomic Electric Company (YAEC), 12 percent
of the Maine Yankee Atomic Power Company (MYAPC), and 9.5 percent of
the Vermont Yankee Nuclear Power Corporation (VYNPC). CL&P's total
equity investment in the Yankee Companies at December 31, 1999 and 1998,
is $54.5 million and $57.0 million, respectively. Each Yankee Company
owns a single nuclear generating unit. However, VYNPC is the only unit
still in operation at December 31, 1999.
Millstone: CL&P has an 81 percent joint ownership interest in both
Millstone 1, a 660 megawatt (MW) nuclear unit and Millstone 2, an 870 MW
nuclear generating unit. CL&P has a 52.93 percent joint ownership
interest in Millstone 3, a 1,154 MW nuclear generating unit. NU expects
to auction all three units as a single package in 2000, with a closing
in 2001. Appropriate regulatory approvals will be required to complete
the auction.
Seabrook: CL&P has a 4.06 percent joint ownership interest in Seabrook,
a 1,148 MW nuclear generating unit. CL&P expects to auction its
investment in Seabrook, jointly with NAEC, upon the resolution of the
restructuring issues in the state of New Hampshire.
Plant-in-service and the accumulated provision for depreciation for
CL&P's share of Millstone 2 and 3 and Seabrook are as follows:
------------------------------------------------------------------------
At December 31, 1999 1998
------------------------------------------------------------------------
(Millions of Dollars)
Plant-in-service
Millstone 2............................... $ 771.7 $ 759.3
Millstone 3............................... 1,915.1 1,909.4
Seabrook.................................. 173.9 174.3
Accumulated provision for depreciation
Millstone 2............................... $ 743.3 $ 309.2
Millstone 3............................... 1,822.8 609.3
Seabrook.................................. 165.7 39.3
------------------------------------------------------------------------
E. Depreciation
The provision for depreciation is calculated using the straight-line
method based on estimated remaining useful lives of depreciable utility
plant-in-service, adjusted for salvage value and removal costs, as
approved by the appropriate regulatory agency, where applicable. Except
for major facilities, depreciation rates are applied to the average
plant-in-service during the period. Major facilities are depreciated
from the time they are placed in service. When plant is retired from
service, the original cost of the plant, including costs of removal less
salvage, is charged to the accumulated provision for depreciation. The
costs of closure and removal of nonnuclear facilities are accrued over
the life of the plant as a component of depreciation. The depreciation
rates for the several classes of electric plant-in-service are
equivalent to a composite rate of 3.3 percent in 1999, 3.2 percent in
1998 and 3.8 percent in 1997.
At December 31, 1999 and 1998, the accumulated provision for
depreciation included $47.9 million accrued for the cost of removal, net
of salvage, for nonnuclear generation property.
As a result of discontinuing the application of SFAS No. 71 "Accounting
for the Effects of Certain Types of Regulation," for CL&P's generation
business, including CL&P's ownership interest in Seabrook, the company
recorded a charge to accumulated depreciation for the nuclear plant in
excess of fair market value in the amount of $1.7 billion, and a
corresponding regulatory asset was created.
F. Revenues
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. Regulatory
commissions also have authority over the terms and conditions of
nontraditional rate-making arrangements. At the end of each accounting
period, CL&P accrues a revenue estimate for the amount of energy
delivered but unbilled.
G. Regulatory Accounting and Assets
The accounting policies of CL&P and the accompanying consolidated
financial statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and historically reflect the
effects of the rate-making process in accordance with SFAS No. 71.
As a result of final restructuring orders issued in 1999, CL&P
discontinued the application of SFAS No. 71 for the generation portion
of its business.
Based on a current evaluation of the various factors and conditions that
are expected to impact future cost recovery, management continues to
believe it is probable that CL&P will recover its investments in long-
lived assets, including regulatory assets. In addition, all material
regulatory assets are earning a return. The components of CL&P's
regulatory assets are as follows:
------------------------------------------------------------------------
At December 31, 1999 1998
------------------------------------------------------------------------
(Millions of Dollars)
Recoverable nuclear costs................ $1,781.9 $ 442.7
Income taxes, net........................ 399.5 538.5
Unrecovered contractual obligations...... 228.9 267.0
Recoverable energy costs, net............ 89.4 102.1
Other.................................... 64.4 65.5
-------- --------
$2,564.1 $1,415.8
======== ========
------------------------------------------------------------------------
The restructuring orders in Connecticut provide for the transmission and
distribution business to continue to be cost-of-service based and also
provide for a transition charge which recovers stranded costs, including
the nuclear regulatory assets established below.
As a result of discontinuing the application of SFAS No. 71 for CL&P's
generation business, the company reclassified nuclear plant in excess
of its estimated fair market value from plant to regulatory assets.
As of December 31, 1999, the unamortized balance of $1.38 billion is
classified as recoverable nuclear costs. Also included in that
regulatory asset component for 1999 is $401.9 million, which includes
Millstone 1 recoverable nuclear costs relating to the recoverable
portion of the undepreciated plant and related assets ($101.9 million)
and the decommissioning and closure obligation ($300 million).
H. 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 rate-making treatment of the
applicable regulatory commissions.
The tax effect of temporary differences, including timing differences
accrued under previously approved accounting standards, that give rise
to the accumulated deferred tax obligation is as follows:
------------------------------------------------------------------------
At December 31, 1999 1998
------------------------------------------------------------------------
(Millions of Dollars)
Accelerated depreciation and
other plant-related differences......... $845.6 $1,002.7
Net operating loss carryforwards.......... - (7.8)
Regulatory assets - income tax gross up... 153.7 279.8
Other 0.2 (80.0)
------ --------
$999.5 $1,194.7
====== ========
------------------------------------------------------------------------
I. Recoverable Energy Costs
Under the Energy Policy Act of 1992 (Energy Act), CL&P is assessed for
its proportionate share of the costs of decontaminating and
decommissioning uranium enrichment plants owned by the United States
Department of Energy (DOE) (D&D Assessment). The Energy Act requires
that regulators treat D&D Assessments as a reasonable and necessary
current cost of fuel, to be fully recovered in rates like any other fuel
cost. CL&P is currently recovering these costs through rates. As of
December 31, 1999 and 1998, CL&P's total D&D Assessment deferrals were
$26.9 million and $44.9 million, respectively.
Through December 31, 1999, CL&P had an energy adjustment clause under
which fuel prices above or below base-rate levels were charged to or
credited to customers. At December 31, 1999 and 1998, recoverable
energy costs included $62.6 million and $78.1 million, respectively,
of costs previously deferred. Coincident with the start of
restructuring, the fuel clause was terminated. The balance at
December 31, 1999, has been recorded as a generation-related stranded
cost and will be recovered through a transition charge mechanism.
J. Unrecovered Contractual Obligations
Under the terms of contracts with the Yankee Companies, the shareholder-
sponsored companies, including CL&P, are responsible for their
proportionate share of the remaining costs of the units, including
decommissioning. As management expects that CL&P will be allowed to
recover these costs from its customers, CL&P has recorded a regulatory
asset, with a corresponding obligation, on its balance sheet.
2. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS
Millstone and Seabrook: CL&P's operating nuclear power plants, Millstone 2
and 3 and Seabrook, have service lives that are expected to end during the
years 2015 through 2026 and upon retirement, must be decommissioned.
Millstone 1's expected service life was to end in 2010, however, in July
1998, restart activities were discontinued and preparations for
decommissioning the unit began. Current decommissioning studies conclude
that complete and immediate dismantlement as soon as practical after
retirement continues to be the most viable and economic method of
decommissioning a unit. These studies are reviewed and updated
periodically to reflect changes in decommissioning requirements, costs,
technology, and inflation. 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. CL&P attempts to
recover sufficient amounts through its allowed rates to cover its expected
decommissioning costs.
CL&P's ownership share of the estimated cost of decommissioning Millstone 2
and 3 and Seabrook, in year end 1999 dollars, is $334.9 million, $327.9
million and $22.9 million, respectively. Nuclear decommissioning costs are
accrued over the expected service lives of the units and are included in
depreciation expense. Nuclear decommissioning expenses for these units
amounted to $19.6 million in 1999, $19.1 million in 1998 and $20 million
in 1997. Nuclear decommissioning, as a cost of removal, is included in
the accumulated provision for depreciation.
A Post-Shutdown Decommissioning Activities Report for Millstone 1 was filed
with the Nuclear Regulatory Commission in June 1999 which outlines
decommissioning activities, and costs, and supports the obligation recorded
by the company. Nuclear decommissioning expenses for Millstone 1 were
$22.8 million in 1999, $17.3 million in 1998 and $17.7 million in 1997.
External decommissioning trusts have been established for the costs of
decommissioning the Millstone units. Payments for CL&P's ownership share
of the cost of decommissioning Seabrook is paid to an independent
decommissioning financing fund managed by the state of New Hampshire.
Funding of the estimated decommissioning costs assumes levelized
collections for the Millstone units and escalated collections for Seabrook
and after-tax earnings on the Millstone and Seabrook decommissioning funds
of 5.5 percent and 6.5 percent, respectively.
As of December 31, 1999 and 1998, CL&P collected a total of $185.1 million
and $165.6 million, respectively, through rates toward the future
decommissioning costs of their shares of Millstone 2 and 3 and Seabrook,
of which $164.2 million in 1999 and $145.8 million in 1998 have been
transferred to external decommissioning trusts. Earnings on the
decommissioning trusts increase the decommissioning trust balances and the
accumulated reserves for depreciation. Unrealized gains and losses
associated with the decommissioning trusts and financing funds also impact
the balance of the trusts and the accumulated reserve for depreciation.
The fair values of the amounts in the external decommissioning trusts
were $282.2 million and $242.2 million at December 31, 1999 and 1998,
respectively.
Yankee Companies: VYNPC owns and operates a nuclear generating unit with
a service life that is expected to end in 2012. CL&P's ownership share of
estimated costs, in year end 1999 dollars, of decommissioning this unit is
$40.7 million. On October 15, 1999, VYNPC agreed to sell the unit for
$22 million to an unaffiliated company. Among other commitments, the
acquiring company agreed to assume the decommissioning cost of the unit
after it is taken out of service, and the VYNPC owners have agreed to fund
the uncollected decommissioning cost to a negotiated amount at the
time of the closing of the sale.
As of December 31, 1999 and 1998, CL&P's remaining estimated obligation,
including decommissioning for the units owned by CYAPC, YAEC and MYAPC,
which have been shut down was $238.1 million and $277.8 million,
respectively.
3. SHORT-TERM DEBT
Limits: The amount of short-term borrowings that may be incurred by CL&P
is subject to periodic approval by either the SEC under the 1935 Act or
by the respective state regulators. SEC authorization allowed CL&P, as
of January 1, 1999, to incur total short-term borrowings up to a maximum
of $375 million. In addition, the charter of CL&P contains preferred stock
provisions restricting the amount of unsecured debt the company may incur.
As of December 31, 1999, CL&P's charter permits CL&P to incur $322
million of unsecured debt.
Credit Agreement: On November 19, 1999, CL&P and WMECO entered into
a new 364-day revolving credit facility for $500 million, replacing the
previous $313.75 million facility which was to expire on November 21, 1999.
The revolving credit facility, will be used to bridge gaps in working
capital and provide short-term liquidity. CL&P may draw up to $300
million under the facility, which is secured by second mortgages on
Millstone 2 and 3. Unless extended, the new credit facility will expire
on November 17, 2000. At December 31, 1999 and 1998, there were $90
million and $10 million, respectively, in borrowings under these
facilities.
Under the credit agreement discussed above, CL&P may borrow at fixed or
variable rates plus an applicable margin based upon the company's most
senior secured debt as rated by the lower of Standard & Poor's or Moody's
Investors Service. The weighted average interest rate on CL&P's notes
payable to banks outstanding on December 31, 1999 and 1998, was 7.69
percent and 6.53 percent, respectively.
This credit agreement provides that CL&P must comply with certain financial
and nonfinancial covenants as are customarily included in such agreements,
including, but not limited to, common equity ratios and interest coverage
ratios.
Money Pool: Certain subsidiaries of NU, including CL&P, are members of the
Northeast Utilities System Money Pool (Pool). The Pool provides a more
efficient use of the cash resources of the NU system and reduces outside
short-term borrowings. NUSCO administers the Pool as agent for the member
companies. Short-term borrowing needs of the member companies are first
met with available funds of other member companies, including funds
borrowed 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. Borrowings based on loans from NU
parent, however, bear interest at NU parent's cost and must be repaid based
upon the terms of NU parent's original borrowing. At December 31, 1999 and
1998, CL&P had $11.7 million and no borrowings, respectively, from the
Pool. The interest rate on borrowings from the Pool at December 31, 1999
and 1998, was 4.9 percent and 5.8 percent, respectively. Maturities of
short-term debt obligations were for periods of three months or less.
4. LEASES
CL&P finances its respective shares of nuclear fuel for Millstone 2 and 3
under the Niantic Bay Fuel Trust (NBFT) capital lease agreement. This
capital lease agreement has an expiration date of June 1, 2040. At
December 31, 1999 and 1998, the present value of CL&P's capital lease
obligation to the NBFT was $127.2 million and $144.8 million, respectively.
In connection with the planned nuclear divestiture, CL&P anticipates that
its portion of the NBFT capital lease will be terminated and CL&P's portion
of the NBFT's obligation under the $180 million Series G Intermediate
Term Note agreement will be assigned to CL&P.
CL&P makes quarterly lease payments for the cost of nuclear fuel consumed
in the reactors based on a units-of-production method at rates which
reflect estimated kilowatt-hours of energy provided plus financing costs
associated with the fuel in the reactors. Upon permanent discharge from
the reactors, CL&P's interest in the nuclear fuel transfers to CL&P.
CL&P also has entered into lease agreements, some of which are capital
leases, for the use of data processing and office equipment, vehicles,
nuclear control room simulators, and office space. The provisions of
these lease agreements generally provide for renewal options.
Capital lease rental payments charged to operating expense were $10
million in 1999, $20.5 million in 1998 and $10.5 million in 1997.
Interest included in capital lease rental payments was $9.4 million
in 1999, $14.1 million in 1998 and $9.9 million in 1997. Operating lease
rental payments charged to expense were $14.3 million in 1999, $17.9
million in 1998 and $19.7 million in 1997.
Future minimum rental payments, excluding annual nuclear fuel lease
payments and executory costs such as property taxes, state use taxes,
insurance, and maintenance, under long-term noncancelable leases, as
of December 31, 1999, are:
---------------------------------------------------------------------------
Year Capital Leases Operating Leases
---------------------------------------------------------------------------
(Millions of Dollars)
2000............................... $ 2.4 $16.1
2001............................... 2.4 13.0
2002............................... 2.4 11.3
2003............................... 2.4 9.7
2004............................... 2.3 8.6
After 2004......................... 29.4 16.9
------ -----
Future minimum lease payments...... 41.3 $75.6
=====
Less amount representing interest.. 24.1
------
Present value of future minimum
lease payments for other than
nuclear fuel..................... 17.2
Present value of future nuclear
fuel lease payments.............. 127.2
------
Present value of future minimum
lease payments................... $144.4
======
---------------------------------------------------------------------------
5. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock not subject to mandatory redemption are:
---------------------------------------------------------------------------
December 31, Shares
1999 Outstanding December 31,
Redemption December 31, ------------------
Description Price 1999 1999 1998
---------------------------------------------------------------------------
(Millions of Dollars)
$1.90 Series of 1947 $52.50 163,912 $ 8.2 $ 8.2
$2.00 Series of 1947 54.00 336,088 16.8 16.8
$2.04 Series of 1949 52.00 100,000 5.0 5.0
$2.20 Series of 1949 52.50 200,000 10.0 10.0
3.90% Series of 1949 50.50 160,000 8.0 8.0
$2.06 Series E of 1954 51.00 200,000 10.0 10.0
$2.09 Series F of 1955 51.00 100,000 5.0 5.0
4.50% Series of 1956 50.75 104,000 5.2 5.2
4.96% Series of 1958 50.50 100,000 5.0 5.0
4.50% Series of 1963 50.50 160,000 8.0 8.0
5.28% Series of 1967 51.43 200,000 10.0 10.0
$3.24 Series G of 1968 51.84 300,000 15.0 15.0
6.56% Series of 1968 51.44 200,000 10.0 10.0
------ ------
$116.2 $116.2
====== ======
---------------------------------------------------------------------------
6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
---------------------------------------------------------------------------
December 31, Shares
1999 Outstanding December 31,
Redemption December 31, ------------------
Description Price 1999 1999 1998
---------------------------------------------------------------------------
(Millions of Dollars)
7.23% Series of 1992 $51.93 981,434 $49.1 $ 52.8
5.30% Series of 1993 50.67 1,009,340 50.5 66.5
----- ------
99.6 119.3
Less preferred stock to
be redeemed within one year 395,000 19.8 19.8
----- ------
$79.8 $ 99.5
===== ======
---------------------------------------------------------------------------
Each of these series is subject to certain refunding limitations for the
first five years after issuance. Redemption prices reduce in future years.
The following table details redemption and sinking fund activity for
preferred stock subject to mandatory redemption:
---------------------------------------------------------------------------
Minimum
Annual
Sinking Fund Shares Reacquired
Series Requirement 1999 1998
---------------------------------------------------------------------------
(Millions of Dollars)
7.23% Series of 1992 (1) $ 3.8 75,000 443,566
5.30% Series of 1993 (2) 16.0 320,000 270,660
(1) Sinking fund requirements commenced September 1, 1998.
(2) Sinking fund requirements commenced October 1, 1999.
The minimum sinking fund requirements of the series subject each year to
mandatory redemption aggregate $19.8 million each year for 2000 through
2002, $6.2 million in 2003, and $3.8 million in 2004. In case of default
on sinking fund payments, no payments may be made on any junior stock by
way of dividends or otherwise (other than in shares of junior stock) so
long as the default continues. If CL&P is in arrears in the payment of
dividends on any outstanding shares of preferred stock, CL&P would be
prohibited from redeeming or purchasing less than all of the outstanding
preferred stock.
7. LONG-TERM DEBT
Details of long-term debt outstanding are:
---------------------------------------------------------------------------
At December 31, 1999 1998
---------------------------------------------------------------------------
(Millions of Dollars)
First Mortgage Bonds:
7 1/4% Series VV due 1999................... $ - $ 74.0
5 1/2% Series A due 1999................... - 140.0
5 3/4% Series XX due 2000................... 159.0 200.0
7 7/8% Series A due 2001................... 160.0 160.0
7 3/4% Series C due 2002................... 200.0 200.0
6 1/8% Series B due 2004................... - 140.0
7 3/8% Series TT due 2019................... 20.0 20.0
7 1/2% Series YY due 2023................... - 100.0
8 1/2% Series C due 2024................... 115.0 115.0
7 7/8% Series D due 2024................... 140.0 140.0
7 3/8% Series ZZ due 2025................... - 125.0
------- --------
794.0 1,414.0
Pollution Control Notes:
Variable rate, due 2016-2022............... 46.4 46.4
Variable tax exempt, due 2028-2031......... 377.5 377.5
Fees and interest due for spent nuclear
fuel disposal costs........................ 183.4 175.0
Other........................................ 0.2 0.1
Less amounts due within one year............. 159.0 214.0
Unamortized premium and discount, net........ (1.4) (5.0)
-------- --------
Long-term debt, net.......................... $1,241.1 $1,794.0
======== ========
---------------------------------------------------------------------------
Long-term debt maturities and cash sinking fund requirements, excluding
fees and interest due for spent nuclear fuel disposal costs, on debt
outstanding at December 31, 1999, for the years 2000 through 2004 are
$159 million, $160 million, $200 million, and minimal requirements for
2003 and 2004, respectively.
Essentially all utility plant of CL&P is subject to the liens of the
company's first mortgage bond indenture.
CL&P has secured $315.5 million of pollution control notes with second
mortgage liens on Millstone 1, junior to the liens of its first mortgage
bond indenture.
CL&P has $62 million of tax-exempt Pollution Control Revenue Bonds with
bond insurance secured by first mortgage bonds and a liquidity facility.
The average effective interest rate on the variable-rate pollution control
notes ranged from 2.2 percent to 3.9 percent for 1999 and from 3.6 percent
to 3.7 percent for 1998.
8. INCOME TAX EXPENSE
The components of the federal and state income tax provisions were charged/
(credited) to operations as follows:
---------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------
(Millions of Dollars)
Current income taxes:
Federal............................... $197.7 $ (9.2) $(53.3)
State................................. 27.9 (3.9) (3.3)
------ ------ ------
Total current....................... 225.6 (13.1) (56.6)
------ ------ ------
Deferred income taxes, net:
Federal............................... (113.0) (34.9) 8.4
State................................. (20.1) (17.5) (11.4)
------ ------ ------
Total deferred...................... (133.1) (52.4) (3.0)
------ ------ ------
Investment tax credits, net............. (7.3) (13.3) (7.4)
------ ------ ------
Total income tax expense/(credit)....... $ 85.2 $(78.8) $(67.0)
====== ====== ======
---------------------------------------------------------------------------
The components of total income tax expense/(credit) are classified
as follows:
---------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------
(Millions of Dollars)
Income taxes charged to
operating expenses................... $122.1 $(11.7) $(59.4)
Other income taxes..................... (36.9) (67.1) (7.6)
------ ------ ------
Total income tax expense/(credit)...... $ 85.2 $(78.8) $(67.0)
====== ====== ======
---------------------------------------------------------------------------
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
---------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------
(Millions of Dollars)
Depreciation, leased nuclear fuel,
settlement credits and
disposal costs....................... $ (9.9) $ (5.6) $ 12.0
Regulatory deferral.................... 6.2 (36.7) (12.4)
State net operating loss carryforward.. 7.8 1.1 (7.7)
Regulatory disallowance................ (24.2) (18.1) -
Sale of fossil generation assets....... (126.1) - -
Pension accruals....................... 9.8 8.9 6.5
Contractual settlements................ 0.6 1.3 1.8
Other.................................. 2.7 (3.3) (3.2)
------- ------ ------
Deferred income taxes, net............. $(133.1) $(52.4) $ (3.0)
======= ====== ======
---------------------------------------------------------------------------
A reconciliation between income tax expense/(credit) and the expected tax
expense/(credit) at 35 percent of pretax income is as follows:
---------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
---------------------------------------------------------------------------
(Millions of Dollars)
Expected federal income tax............ $25.0 $(96.1) $(72.3)
Tax effect of differences:
Depreciation......................... 36.5 20.9 19.5
Amortization of regulatory assets.... 22.5 22.7 3.9
Investment tax credit amortization... (7.3) (13.3) (7.4)
State income taxes, net of federal
benefit............................ 5.1 (13.9) (9.6)
Other, net........................... 3.4 0.9 (1.1)
----- ------ ------
Total income tax expense/(credit)...... $85.2 $(78.8) $(67.0)
===== ====== ======
---------------------------------------------------------------------------
9. EMPLOYEE BENEFITS
A. Pension Benefits and Postretirement Benefits Other Than Pensions
The NU system companies, including CL&P, participate in a uniform
noncontributory defined benefit retirement plan covering substantially
all regular NU system employees. Benefits are based on years of
service and the employees' highest eligible compensation during 60
consecutive months of employment. CL&P's portion of the NU system's
total pension credit, part of which was credited to utility plant, was
$40.3 million in 1999, $32.6 million in 1998 and $22.5 million in 1997.
Currently, CL&P annually funds an amount at least equal to that which
will satisfy the requirements of the Employee Retirement Income Security
Act and Internal Revenue Code (the Code).
The NU system companies, including CL&P, also provide certain health
care benefits, primarily medical and dental, and life insurance benefits
through a benefit plan to retired employees. These benefits are
available for employees retiring from CL&P who have met specified
service requirements. For current employees and certain retirees, the
total benefit is limited to two times the 1993 per retiree health care
cost. These costs are charged to expense over the future estimated work
life of the employee. CL&P annually funds postretirement costs through
external trusts with amounts that have been rate-recovered and which
also are tax deductible under the Code.
Pension and trust assets are invested primarily in domestic and
international equity securities and bonds.
The following table represents information on the plans' benefit
obligation, fair value of plan assets, and the respective plans' funded
status:
- -------------------------------------------------------------------------------
At December 31,
- -------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
(Millions of Dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation
at beginning of year......... $ (562.7) $(531.6) $(133.8) $(126.6)
Service cost................... (11.0) (9.8) (2.3) (2.0)
Interest cost.................. (40.0) (37.5) (9.3) (9.2)
Plan amendment................. (32.5) - - -
Transfers...................... 1.8 (6.3) - -
Actuarial gain/(loss).......... 58.8 (12.4) (0.6) (7.7)
Benefits paid.................. 35.5 34.9 14.1 11.7
Settlements.................... (1.8) - - -
- -------------------------------------------------------------------------------
Benefit obligation
at end of year............... $ (551.9) $(562.7) $(131.9) $(133.8)
- -------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets
at beginning of year......... $ 935.7 $ 846.4 $ 53.8 $ 46.1
Actual return on plan assets... 135.8 117.9 6.6 6.1
Employer contribution.......... - - 13.4 13.3
Benefits paid.................. (35.5) (34.9) (14.1) (11.7)
Transfers...................... 1.8 6.3 - -
- -------------------------------------------------------------------------------
Fair value of plan assets
at end of year............... $1,037.8 $ 935.7 $ 59.7 $ 53.8
- -------------------------------------------------------------------------------
Funded status at December 31... $ 485.9 $ 373.0 $ (72.2) $ (80.0)
Unrecognized transition
(asset)/obligation........... (4.6) (5.5) 95.5 102.8
Unrecognized prior
service cost................. 33.1 3.2 - -
Unrecognized net gain.......... (400.9) (295.8) (23.3) (22.8)
- -------------------------------------------------------------------------------
Prepaid benefit cost........... $ 113.5 $ 74.9 $ - $ -
- -------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the plans'
year end funded status:
- -------------------------------------------------------------------------------
At December 31,
- -------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Discount rate................. 7.75% 7.00% 7.75% 7.00%
Compensation/progression rate. 4.75 4.25 4.75 4.25
Health care cost
trend rate(a)............... N/A N/A 5.57 5.22
- -------------------------------------------------------------------------------
(a) The annual per capita cost of covered health care benefits was
assumed to decrease to 4.90 percent by 2001.
The components of net periodic benefit (credit)/cost are:
- -------------------------------------------------------------------------------
For the Years Ended December 31,
- -------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
(Millions of Dollars) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------
Service cost............... $ 11.0 $ 9.8 $ 8.8 $ 2.3 $ 2.0 $ 1.7
Interest cost.............. 40.0 37.5 37.9 9.3 9.2 9.2
Expected return
on plan assets........... (78.1) (68.4) (59.6) (4.2) (3.6) (3.1)
Amortization of
unrecognized net
transition (asset)/
obligation............... (0.9) (0.9) (0.9) 7.3 7.4 7.3
Amortization of prior
service cost............. 2.7 0.3 0.3 - - -
Amortization of
actuarial gain........... (15.0) (10.9) (8.1) - - -
Other amortization, net.... - - - (1.3) (1.7) (2.3)
Settlements................ - - (0.9) - - -
- -------------------------------------------------------------------------------
Net periodic benefit
(credit)/cost............ $(40.3) $(32.6) $(22.5) $13.4 $13.3 $12.8
- -------------------------------------------------------------------------------
For calculating pension and postretirement benefit costs, the following
assumptions were used:
- -------------------------------------------------------------------------------
For the Years Ended December 31,
- -------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------
Discount rate.............. 7.00% 7.25% 7.75% 7.00% 7.25% 7.75%
Expected long-term
rate of return........... 9.50 9.50 9.25 N/A N/A N/A
Compensation/
progression rate......... 4.25 4.25 4.75 4.25 4.25 4.75
Long-term rate of return -
Health assets,
net of tax............... N/A N/A N/A 7.50 7.75 7.50
Life assets............... N/A N/A N/A 9.50 9.50 9.25
- -------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of changing the
assumed health care cost trend rate by one percentage point in each year
would have the following effects:
- -------------------------------------------------------------------------------
One Percentage One Percentage
(Millions of Dollars) Point Increase Point Decrease
- -------------------------------------------------------------------------------
Effect on total service and
interest cost components............ $0.6 $(0.6)
Effect on postretirement
benefit obligation.................. $7.3 $(7.2)
- -------------------------------------------------------------------------------
The trust holding the health plan assets is subject to federal
income taxes.
B. Employee Stock Ownership Plan
In June 1999, CL&P paid NU parent $30.5 million for NU shares issued
from 1992 through 1998 on behalf of its employees in accordance with
NU's 401(k) plan. CL&P charged retained earnings for this payment,
as compensation expense had already been recorded in the respective
years at the fair market value of the shares allocated.
10. SALE OF CUSTOMER RECEIVABLES
As of December 31, 1999 and 1998, CL&P had sold accounts receivable of
$170 million and $105 million, respectively, to a third-party purchaser
with limited recourse through the CL&P Receivables Corporation (CRC),
a wholly owned subsidiary of CL&P. In addition, at December 31, 1999
and 1998, $22.5 million and $11.6 million, respectively, of assets was
designated as collateral under the agreement with CRC.
Concentrations of credit risk to the purchaser under the company's
agreement with respect to the receivables are limited due to CL&P's
diverse customer base within its service territory.
11. COMMITMENTS AND CONTINGENCIES
A. Restructuring
During 1999, restructuring orders were issued by the Connecticut
Department of Public Utility Control (DPUC), which required CL&P to
discontinue the application of SFAS No. 71 to the generation portion
of its business and allowed for the recovery of the majority of its
stranded costs. Stranded costs including regulatory assets will be
collected through a transition charge through 2026. The restructuring
orders also allowed for securitization of CL&P's nonnuclear regulatory
assets and the costs to buyout or buydown the various purchased-power
contracts. Securitization is the process of monetizing stranded costs
through the sale of nonrecourse debt securities by a special purpose
entity, collateralized by CL&P's interests in its stranded cost
recoveries.
On December 15, 1999, the DPUC issued a supplemental decision approving
the components of CL&P's rates for standard offer service commencing on
January 1, 2000. The DPUC also approved an interim nuclear capital
recovery mechanism for the period from January 1, 2000, until the
nuclear units are sold at auction. In approving the rates, the DPUC
denied recovery of most of the capital additions made to Millstone 2
and 3 subsequent to June 30, 1997, which CL&P has or will expend to
maintain those plants in a safe and efficient condition or to maintain
their auction value. If implemented as approved, CL&P would not recover
a significant portion of the capital additions which have been or are
expected to be incurred subsequent to July 1, 1997, until the plants are
sold in 2001. On December 29, 1999, CL&P filed with the DPUC a petition
for reconsideration of this portion of the order. The DPUC has agreed
to reopen the docket to consider CL&P's petition. Management believes
the restructuring legislation provides for the recovery of these
prudently incurred expenditures. If CL&P is unsuccessful in favorably
resolving this contingency, an impairment loss of $50 million would be
recorded.
In September 1999, NU announced that the Millstone nuclear generation
assets of CL&P will be put up for auction as soon as practical. On
November 8, 1999, CL&P filed its divestiture plan for the Millstone
units with the DPUC. The auction is expected to begin in early 2000,
provided all regulatory approvals have been met, with a successful
bidder chosen by mid 2000 and a closing in 2001. No NU system company
will participate as a bidder in the auction process. Management expects
to recover all of CL&P's nuclear stranded costs through the net proceeds
of generation asset sales and billing through a transition charge to
retail customers.
B. Nuclear Litigation
The non-NU joint owners of Millstone 3 have filed demands for
arbitration with CL&P and WMECO as well as lawsuits in Massachusetts
Superior Court against NU and its current and former trustees related
to the companies' operation of Millstone 3. During 1999, NU and these
subsidiaries agreed in principle to settle with certain of the joint
owners, who own 58 percent of the non-NU ownership of Millstone 3. The
settlements provide for the payment to the claimants of $36.4 million
and certain contingent payments.
Arbitration and litigation claims remain outstanding for the remaining
joint owners who have not agreed to settle. Management cannot estimate
the potential outcome of the arbitration and litigation for the
nonsettled joint owners, therefore, no liability has been established
at December 31, 1999.
C. Environmental Matters
The NU system, including CL&P, is subject to environmental laws and
regulations intended to mitigate or remove the effect of past operations
and improve or maintain the quality of our environment. As such, the NU
system and CL&P have active environmental auditing and training programs
and believe they are in compliance with the current laws and
regulations.
However, the normal course of operations may necessarily involve
activities and substances that expose CL&P to potential liabilities of
which management cannot determine the outcome. Additionally, management
cannot determine the outcome for liabilities that may be imposed for
past acts, even though such past acts may have been lawful at the time
they occurred. Management does not believe, however, that this will
have a material impact on CL&P's financial statements.
Based upon currently available information for the estimated remediation
costs at December 31, 1999 and 1998, the liability recorded by CL&P for
its estimated environmental remediation costs amounted to $6.9 million
and $8 million, respectively.
D. Spent Nuclear Fuel Disposal Costs
Under the Nuclear Waste Policy Act of 1982, CL&P must pay the DOE for
the disposal of spent nuclear fuel and high-level radioactive waste.
The DOE is responsible for the selection and development of repositories
for, and the disposal of, spent nuclear fuel and high-level radioactive
waste. Fees for nuclear fuel burned on or after April 7, 1983, are
billed currently to customers and paid to the DOE on a quarterly basis.
For nuclear fuel used to generate electricity prior to April 7, 1983
(Prior Period Fuel), an accrual has been recorded for the full liability
and payment must be made prior to the first delivery of spent fuel to
the DOE. Until such payment is made, the outstanding balance will
continue to accrue interest at the 3-month treasury bill yield rate.
As of December 31, 1999 and 1998, fees due to the DOE for the disposal
of CL&P's Prior Period Fuel were $183.4 million and $175 million,
respectively, including interest costs of $116.9 million and $108.5
million, respectively.
E. Nuclear Insurance Contingencies
Insurance policies covering CL&P's ownership share of the NU system's
nuclear facilities have been purchased for the primary cost of repair,
replacement or decontamination of utility property, certain extra costs
incurred in obtaining replacement power during prolonged accidental
outages and the excess cost of repair, replacement or decontamination
or premature decommissioning of utility property.
CL&P is subject to retroactive assessments if losses under those
policies exceed the accumulated funds available to the insurer.
The maximum potential assessments with respect to losses arising during
the current policy year for the primary property insurance program, the
replacement power policies and the excess property damage policies are
$7.1 million, $4.1 million and $8.9 million, respectively. In addition,
insurance has been purchased by the NU system in the aggregate of $200
million on an industry basis for coverage of worker claims.
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 NU system, including CL&P,
could be assessed liabilities in proportion to its ownership interest in
each of its nuclear units up to $83.9 million. The NU system's payment
of this assessment would be limited to, in proportion to its ownership
interest in each of its nuclear units, $10 million in any one year per
nuclear unit. In addition, if the sum of all claims and costs from any
one nuclear incident exceeds the maximum amount of financial protection,
the NU system would be subject to an additional 5 percent or $4.2
million liability, in proportion to its ownership interests in each of
its nuclear units. Based upon its ownership interests in the Millstone
units and in Seabrook, CL&P's maximum liability, including any
additional assessments, would be $192.9 million per incident, of which
payments would be limited to $21.9 million per year. In addition,
through purchased-power contracts with VYNPC, CL&P would be responsible
for up to an additional assessment of $8.4 million per incident, of
which payments would be limited to $1 million per year.
F. Construction Program
CL&P currently forecasts construction expenditures of $1.3 billion for
the years 2000-2004, including $205.8 million for 2000. CL&P estimates
that nuclear fuel requirements, including nuclear fuel financed through
the NBFT, will be $137.5 million for the years 2000-2003, including
$47.5 million for 2000.
G. Long-Term Contractual Arrangements
Yankee Companies: The NU system companies relied on VYNPC for 1.5
percent of their capacity under long-term contracts. Under the terms
of its agreement, CL&P paid its ownership (or entitlement) shares of
costs, which included depreciation, operation and maintenance (O&M)
expenses, taxes, the estimated cost of decommissioning, and a return
on invested capital. These costs were recorded as purchased-power
expenses and recovered through CL&P's rates. CL&P's cost of purchases
under contracts with VYNPC amounted to $17 million in 1999, $15.9
million in 1998 and $14.1 million in 1997. VYNPC has agreed to sell
its nuclear unit. Upon completion of the sale, this long-term contract
will be terminated.
Nonutility Generators (NUGs): CL&P has entered into various arrangements
for the purchase of capacity and energy from NUGs. For the years ended
December 31, 1999 and 1998, 13 percent and for the year ended December
31, 1997, 14 percent, of NU's system electricity requirements were met
by NUGs. CL&P's total cost of purchases under these arrangements
amounted to $293.8 million in 1999, $290.7 million in 1998 and $283.2
million in 1997. The company is in the process of renegotiating the
terms of these contracts through either a contract buydown or buyout.
The company expects any payments to the NUGs as a result of these
renegotiations to be recovered from the company's customers.
Hydro-Quebec: Along with other New England utilities, CL&P has entered
into an agreement to support transmission and terminal facilities to
import electricity from the Hydro-Quebec system in Canada. CL&P is
obligated to pay, over a 30-year period ending in 2020, its
proportionate share of the annual O&M expenses and capital costs of
those facilities.
Estimated Annual Costs: The estimated annual costs of CL&P's
significant long-term contractual arrangements, absent the effects of
any contract terminations or buydowns, are as follows:
------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------------------------------------------------------------------
(Millions of Dollars)
VYNPC................. $ 15.9 $ 16.5 $ 16.6 $ 16.2 $ 15.9
NUGs.................. 291.0 292.5 296.2 301.7 283.3
Hydro-Quebec.......... 17.8 17.3 16.8 16.3 15.8
------------------------------------------------------------------------
H. New England Power Pool (NEPOOL) Generation Pricing
Disputes with respect to interpretation and implementation of the NEPOOL
market rules have arisen with respect to various competitive product
markets. In certain cases, CL&P stands to gain as a result of resolution
of such disputes. In other cases, CL&P could incur additional costs as
the result of resolution of the disputes. The various disputes are in
various stages of resolution through alternative dispute resolution and
regulatory review. It is too early to tell the level of potential gain
or loss that may result upon resolution of these issues.
12. MARKET RISK AND RISK MANAGEMENT INSTRUMENTS
Energy Price Risk Management: Beginning in 1997 through 1999, CL&P used
swap instruments with financial institutions to hedge the energy price risk
created by long-term negotiated energy contracts. These agreements were
intended to minimize exposure associated with rising fuel prices by
managing a portion of CL&P's cost of producing power for these negotiated
energy contracts.
In 1999, CL&P divested substantially all of its fossil and hydroelectric
generation assets and agreed to transfer the rights and obligations related
to the long-term negotiated energy contracts to an unregulated affiliate.
Accordingly, the fuel swap positions were marked-to-market and CL&P
recognized a loss of $5.2 million. In January 2000, the fuel swap
positions were liquidated.
13. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
CL&P Capital LP (CL&P LP), a subsidiary of CL&P, previously had issued
$100 million of cumulative 9.3 percent Monthly Income Preferred Securities
(MIPS), Series A. CL&P has the sole ownership interest in CL&P LP, as a
general partner, and is the guarantor of the MIPS securities. Subsequent
to the MIPS issuance, CL&P LP loaned the proceeds of the MIPS issuance,
along with CL&P's $3.1 million capital contribution, back to CL&P in the
form of an unsecured debenture. CL&P consolidates CL&P LP for financial
reporting purposes. Upon consolidation, the unsecured debenture is
eliminated, and the MIPS securities are accounted for as a minority
interest.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each of the following financial instruments:
Supplemental Executive Retirement Plan (SERP) Investments: CL&P's portion
of the investments held for the benefit of the SERP are recorded at fair
market value. These investments having a cost basis of $0.2 million held
for benefit of the SERP were recorded at their fair market values at
December 31, 1999 and 1998, of $1.3 million.
Nuclear decommissioning trusts: CL&P's portion of the investments held
in the NU system companies' nuclear decommissioning trusts were marked-
to-market by $88.2 million as of December 31, 1999, and $78.7 million as
of December 31, 1998, with corresponding offsets to the accumulated
provision for depreciation. The amounts adjusted in 1999 and 1998
represent cumulative net unrealized gains. The cumulative gross unrealized
holding losses were immaterial for both 1999 and 1998.
Preferred stock and long-term debt: The fair value of CL&P'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 CL&P's
financial instruments and the estimated fair values are as follows:
--------------------------------------------------------------------------
At December 31, 1999
--------------------------------------------------------------------------
Carrying Fair
(Millions of Dollars) Amount Value
--------------------------------------------------------------------------
Preferred stock not subject
to mandatory redemption................. $116.2 $144.9
Preferred stock subject to
mandatory redemption.................... 99.6 96.8
Long-term debt -
First mortgage bonds.................... 794.0 805.4
Other long-term debt.................... 607.3 564.5
MIPS...................................... 100.0 97.3
-------------------------------------------------------------------------
--------------------------------------------------------------------------
At December 31, 1998
--------------------------------------------------------------------------
Carrying Fair
(Millions of Dollars) Amount Value
--------------------------------------------------------------------------
Preferred stock not subject
to mandatory redemption................. $ 116.2 $ 77.2
Preferred stock subject to
mandatory redemption.................... 119.3 108.1
Long-term debt -
First mortgage bonds.................... 1,414.0 1,421.9
Other long-term debt.................... 598.9 601.2
MIPS...................................... 100.0 102.0
-------------------------------------------------------------------------
15. OTHER COMPREHENSIVE INCOME
The accumulated balance for each other comprehensive income item
is as follows:
---------------------------------------------------------------------------
Current
December 31, Period December 31,
1998 Change 1999
---------------------------------------------------------------------------
(Thousands of Dollars)
---------------------------------------------------------------------------
Unrealized gains on securities.... $ 638 $38 $ 676
Minimum pension liability
adjustments...................... (260) - (260)
---------------------------------------------------------------------------
Accumulated other
comprehensive income............ $ 378 $38 $ 416
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Current
December 31, Period December 31,
1997 Change 1998
---------------------------------------------------------------------------
(Thousands of Dollars)
---------------------------------------------------------------------------
Unrealized gains on securities.... $ - $ 638 $ 638
Minimum pension liability
adjustments...................... - (260) (260)
---------------------------------------------------------------------------
Accumulated other
comprehensive income............ $ - $ 378 $ 378
---------------------------------------------------------------------------
The changes in the components of other comprehensive income are reported
net of the following income tax effects:
---------------------------------------------------------------------------
(Thousands of Dollars) 1999 1998 1997
---------------------------------------------------------------------------
Unrealized gains on securities....... $(26) $(446) $ -
Minimum pension liability
adjustments........................ - 182 -
---------------------------------------------------------------------------
Other comprehensive income........... $(26) $(264) $ -
---------------------------------------------------------------------------
16. SEGMENT INFORMATION
Effective January 1, 1999, the NU system companies, including CL&P, adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The NU system is organized between regulated utilities
and unregulated energy services. CL&P is included in the regulated
utilities segment of the NU system and has no other reportable segments.
17. MERGER AGREEMENT WITH CON EDISON
On October 13, 1999, NU and Con Edison announced that they have agreed
to a merger to combine the two companies. The shareholders of NU will
receive $25 per share in a combination of cash and Con Edison common stock.
NU shareholders also have the right to receive an additional $1 per share
if a definitive agreement to sell its interests (other than that now held
by PSNH) in Millstone 2 and 3 is entered into and recommended by the
Utility Operations and Management Unit of the DPUC on or prior to the later
of December 31, 2000, or the closing of the merger. Further, the value of
the amount of cash or common stock to be received by NU shareholders is
subject to increase by an amount of $0.0034 per share per day for each day
that the transaction does not close after August 5, 2000.
Upon completion of the merger, NU will become a wholly owned subsidiary of
Con Edison. The purchase is subject to the approval of the shareholders
of both companies and several regulatory agencies. The companies
anticipate that these regulatory procedures can be completed by July 2000.
The Connecticut Light and Power Company and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues..................... $2,452,855 $2,386,864 $2,465,587 $2,397,460 $2,387,069
Operating Income/(Loss)................ 174,749 28,254 (7,619) 59,142 324,026
Net (Loss)/Income...................... (13,568) (195,725) (139,597) (50,868) 205,216
Cash Dividends on Common Stock......... - - 5,989 138,608 164,154
Total Assets........................... 5,298,284 6,050,198 6,081,223 6,244,036 6,045,631
Long-Term Debt(a)...................... 1,400,056 2,007,957 2,043,327 2,038,521 1,822,018
Preferred Stock Not Subject to
Mandatory Redemption................. 116,200 116,200 116,200 116,200 116,200
Preferred Stock Subject to
Mandatory Redemption (a)............. 99,539 119,289 155,000 155,000 155,000
Obligations Under Capital Leases (a)... 144,400 162,884 158,118 155,708 172,264
- -----------------------------------------------------------------------------------------------------------
CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
- -----------------------------------------------------------------------------------------------------------
Quarter Ended
- -----------------------------------------------------------------------------------------------------------
1999 March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues..................... $606,997 $565,069 $667,349 $613,440
======== ======== ======== ========
Operating Income....................... $ 20,412 $ 24,370 $ 51,969 $ 77,998
======== ======== ======== ========
Net (Loss)/Income...................... $(13,705) $(6,814) $ 9,873 $( 2,922)
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------
1998
- -----------------------------------------------------------------------------------------------------------
Operating Revenues..................... $608,961 $561,224 $628,148 $ 588,531
======== ======== ======== =========
Operating Income/(Loss)................ $ 6,261 $ 11,066 $ 29,945 $ (19,018)
======== ======== ======== =========
Net Loss............................... $(30,979) $(26,361) $(20,405) $(117,980)
======== ======== ======== =========
(a) Includes portion due within one year.
The Connecticut Light and Power Company and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED STATISTICS (Unaudited)
- -------------------------------------------------------------------------------
Average
Gross Electric Annual
Utility Plant Use Per
December 31, kWh Residential Electric
(Thousands of Sales Customer Customers Employees
Dollars) (Millions) (kWh) (Average) December 31,
- -------------------------------------------------------------------------------
1999 $6,007,421 29,317 8,969 1,120,846 2,377
1998 6,345,215 27,356 8,476 1,111,370 2,379
1997 6,639,786 25,766 8,526 1,103,309 2,163
1996 6,512,659 26,043 8,639 1,099,340 2,194
1995 6,389,190 26,366 8,506 (a) 1,094,527 2,285
(a) Effective January 1, 1996, the amounts shown reflect billed and unbilled
sales. The 1995 amounts have been restated to reflect this change.