EXHIBIT 13.4
2003 Annual Report
Western Massachusetts Electric Company and Subsidiary
Index
Contents Page
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Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 1
Independent Auditors' Report and Report of Independent
Public Accountants............................................. 12
Consolidated Balance Sheets...................................... 14-15
Consolidated Statements of Income................................ 16
Consolidated Statements of Comprehensive Income.................. 16
Consolidated Statements of Common Stockholder's Equity........... 17
Consolidated Statements of Cash Flows............................ 18
Notes to Consolidated Financial Statements....................... 19
Consolidated Quarterly Financial Data (Unaudited)................ 32
Selected Consolidated Financial Data (Unaudited)................. 32
Consolidated Statistics (Unaudited).............................. 32
Bondholder Information........................................... Back Cover
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND BUSINESS ANALYSIS
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OVERVIEW
Western Massachusetts Electric Company (WMECO or the company), a wholly owned
subsidiary of Northeast Utilities (NU), earned $16.2 million in 2003 compared
to $37.7 million in 2002 and $15 million in 2001. The 2003 decline in
earnings related primarily to the recognition of $13 million of investment
tax credits in the second quarter of 2002 and to the positive financial
impact of an approval of a regulatory settlement in the fourth quarter of
2002.
NU's other subsidiaries include The Connecticut Light and Power Company
(CL&P), Public Service Company of New Hampshire (PSNH), Yankee Energy System,
Inc., North Atlantic Energy Corporation, Select Energy, Inc., Northeast
Generation Company, Northeast Generation Services Company, and Select Energy
Services, Inc.
During 2003, pre-tax pension income for WMECO declined $4.2 million, from a
credit of $12.1 million in 2002 to a credit of $7.9 million in 2003. Of the
$7.9 million and $12.1 million of pension credits recorded during 2003 and
2002, $4.8 million and $7.9 million, respectively, were recognized in the
consolidated statements of income as reductions to operating expenses. The
remaining $3.1 million in 2003 and $4.2 million in 2002 relate to employees
working on capital projects and were reflected as reductions to capital
expenditures. The pre-tax $3.1 million decrease in pension income that
reduces operating expenses was reflected evenly throughout 2003, resulting in
a decline of $0.5 million in net income per quarter during 2003.
WMECO's revenues for 2003 increased to $391.2 million from $369.5 million in
2002 due to increases in electric sales volumes and rates in 2003 as compared
to 2002.
Partially as a result of an adjustment to estimated unbilled revenues
resulting from a process to validate and update the assumptions used to
estimate unbilled revenues, 2003 WMECO retail sales increased 2.6 percent
compared to 2002. Absent that adjustment, WMECO retail sales increased 2
percent. The adjustment to WMECO's estimated unbilled revenues increased
WMECO's net income by $0.3 million for 2003. For further information
regarding the estimate of unbilled revenues, see "Critical Accounting
Policies and Estimates - Unbilled Revenues," included in this Management's
Discussion and Analysis.
FUTURE OUTLOOK
In 2004, WMECO is projecting to record pre-tax pension income of $4.2 million
as compared to pension income of $7.9 million in 2003. Pension income is
annually adjusted during the second quarter based on updated actuarial
valuations, and the 2004 estimate may change.
WMECO's 2004 earnings will also be impacted by the transmission rate case
before the Federal Energy Regulatory Commission (FERC). Management expects
this case to be decided in the second half of 2004.
LIQUIDITY
After four years of reducing its indebtedness, WMECO's total debt, excluding
rate reduction bonds, rose to $198.6 million at the end of 2003, compared
with $194.9 million at the end of 2002. At December 31, 2003, WMECO had $10
million in notes payable to banks, compared with $7 million of notes payable
to banks at December 31, 2002.
WMECO's net cash flows provided by operating activities totaled $57.2 million
in 2003 as compared to $27.6 million in 2002 and $57.2 million in 2001. Cash
flows provided by operating activities in 2003 increased due to an increase
in prepaid pension, increase in amortization of regulatory assets and changes
in working capital items, primarily receivables and unbilled revenues and
accounts payable. Receivables and unbilled revenues and accounts payable
changed due to the timing of receipts received on amounts due and payments on
amounts outstanding. Amortization of regulatory assets increased due to the
higher recovery of stranded costs. These increases were offset by a $21.5
million decrease in net income.
Cash flows provided by operating activities in 2002 decreased due to changes
in working capital items, primarily receivables and unbilled revenues and
accounts payable, partially offset by the increase in net income in 2002.
There was a comparable level of investing and financing activity in 2003 as
compared to 2002, which included the sale of $55 million of 10-year senior
unsecured notes by WMECO on September 30, 2003, at a coupon rate of 5.0
percent. WMECO used the proceeds from this debt issue to reduce its level of
short-term borrowings from the NU Money Pool. Cash flows used for
investments in plant totaled $30.4 million in 2003, $23.1 million in 2002 and
$30.7 million in 2001. WMECO expects capital expenditures to reach $38
million in 2004. The level of common dividends was consistent and totaled
$22 million in 2003, $16 million in 2002 and $22 million in 2001.
There was a lower level of investing and financing activities in 2002 as
compared to 2001, primarily due to the retirement of long-term debt, issuance
of rate reduction bonds and buyout of independent power producer contracts in
2001.
Aside from the rate reduction bonds outstanding, no WMECO debt issues mature
during the eight-year period of 2004 through 2011.
In November 2003, WMECO renewed a $300 million credit line under terms
similar to the previous arrangement that expired in November 2003. WMECO can
borrow up to $100 million and had $10 million in borrowings outstanding on
this credit line at December 31, 2003.
Rate reduction bonds are included on the consolidated balance sheets of
WMECO, even though the debt is non-recourse to WMECO. At December 31, 2003,
WMECO had a total of $133 million in rate reduction bonds outstanding,
compared with $142.7 million outstanding at December 31, 2002. All
outstanding rate reduction bonds of WMECO are scheduled to fully amortize by
June 1, 2013. Interest on the bonds totaled $9 million in 2003, compared
with $9.6 million in 2002 and $6.3 million in 2001, the year of issuance.
Cash flows from the amortization of rate reduction bonds totaled $9.8 million
in 2003, compared with $9.4 million in 2002 and $3.6 million in 2001. Over
the next several years, retirement of rate reduction bonds will increase, and
interest payments will steadily decrease, resulting in no material changes to
debt service costs on the existing issues. WMECO fully recovers the
amortization and interest payments from customers through stranded cost
revenues each year, and the bonds have no impact on net income. Moreover, as
the rate reduction bonds are non-recourse, the three rating agencies that
rate the debt of WMECO do not reflect the revenues, expenses, or outstanding
securities related to the rate reduction bonds in establishing the credit
ratings of WMECO.
The retirement of rate reduction bonds does not equal the amortization of
rate reduction bonds because the retirement represents principal payments,
while the amortization represents amounts recovered from customers for future
principal payments. The timing of recovery does not exactly match the
expected principal payments.
BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES
WMECO's capital expenditures totaled $30.4 million in 2003, compared with
$23.1 million in 2002 and $30.7 million in 2001. WMECO's capital
expenditures are expected to total $38 million in 2004.
REGIONAL TRANSMISSION ORGANIZATION
The FERC has required all transmission owning utilities, including WMECO, to
voluntarily form regional transmission organizations (RTOs) or to state why
this process has not begun.
On October 31, 2003, New England Independent System Operator (ISO-NE), along
with NU (including WMECO), and six other New England transmission companies
filed a proposal with the FERC to create a RTO for New England. The RTO is
intended to strengthen the independent and efficient management of the
region's power system while ensuring that customers in New England continue
to have the most reliable system possible to realize the benefits of a
competitive wholesale energy market.
ISO-NE, as a RTO, will have a new independent governance structure and will
also become the transmission provider for New England by exercising
operational control over New England's transmission facilities pursuant to a
detailed contractual arrangement with the New England transmission owners.
Under this contractual arrangement, the RTO will have clear authority to
direct the transmission owners to operate their facilities in a manner that
preserves system reliability, including requiring transmission owners to
expand existing transmission lines or build new ones when needed for
reliability. Transmission owners will retain their rights over revenue
requirements, rates and rate designs. The filing requests that the FERC
approve the RTO arrangements for an effective date of March 1, 2004.
In a separate filing made on November 4, 2003, NU including WMECO, along with
six other New England transmission owners requested, consistent with the
FERC's pricing policy for RTOs and Order-2000-compliant independent system
operators, that the FERC approve a single return on equity (ROE) for regional
and local rates that would consist of a base ROE as well as incentive adders
of 50 basis points for joining a RTO and 100 basis points for constructing
new transmission facilities approved by the RTO. If the FERC approves the
request, then the transmission owners would receive a 13.3 percent ROE for
existing transmission facilities and a 14.3 percent ROE for new transmission
facilities. The outcome of this request and its impact on WMECO cannot be
determined at this time.
RESTRUCTURING AND RATE MATTERS
On August 26, 2003, NU's electric operating companies, including WMECO, filed
their first transmission rate case at the FERC since 1995. In the filing, NU
requested implementation of a formula rate that would allow recovery of
increasing transmission expenditures on a timelier basis and that the
changes, including a $23.7 million annual rate increase through 2004, take
effect on October 27, 2003. NU requested that the FERC maintain NU's
existing 11.75 percent ROE until a ROE for the New England RTO is
established by the FERC. On October 22, 2003, the FERC accepted this filing
implementing the proposed rates subject to refund effective on October 28,
2003. A final decision in the rate case is expected in 2004.
Increasing transmission rates are generally recovered from distribution
companies through FERC-approved transmission rates. Electric distribution
companies pass through higher transmission rates to retail customers as
approved by the Massachusetts Department of Telecommunications and Energy
(DTE). Currently, WMECO has a tracking mechanism to reset rates annually for
transmission costs with overcollections refunded to customers and
undercollections deferred and then collected from customers in later years.
Transition Cost Reconciliations: On March 31, 2003, WMECO filed its 2002
transition cost reconciliation with the DTE. This filing reconciled the
recovery of generation-related stranded costs for calendar year 2002 and
included the renegotiated purchased power contract related to the Vermont
Yankee nuclear unit.
On July 15, 2003, the DTE issued a final order on WMECO's 2001 transition
cost reconciliation, which addressed WMECO's cost tracking mechanisms. As
part of that order, the DTE directed WMECO to revise its 2002 annual
transition cost reconciliation filing. The revised filing was submitted to
the DTE on September 22, 2003. Hearings have been held, and the timing of a
final decision from the DTE is uncertain. Management does not expect the
outcome of this docket to have a material adverse impact on WMECO's net
income or financial position.
Standard Offer and Default Service: In December 2003, the DTE approved
WMECO's standard offer service rate of $0.05607 per kWh for the period of
January 1, 2004 through February 28, 2005. The DTE also approved a default
service rate of $0.05829 for the period of January 1, 2004 through June 30,
2004 for residential customers and a rate of $0.0616 for the period
January 1, 2004 through March 31, 2004 for commercial and industrial
customers.
For information regarding commitments and contingencies related to
restructuring and rate matters, see Note 6A, "Commitments and Contingencies -
Restructuring and Rate Matters," to the consolidated financial statements.
NUCLEAR GENERATION ASSET DIVESTITURES
Millstone: On March 31, 2001, WMECO sold its ownership interest in the
Millstone nuclear units (Millstone).
Vermont Yankee: On July 31, 2002, Vermont Yankee Nuclear Power Corporation
(VYNPC) consummated the sale of its nuclear generating unit. In November
2003, WMECO sold back to VYNPC its shares of stock for approximately $0.2
million. WMECO continues to purchase approximately 2.5 percent of the
plant's output under a new contract.
Nuclear Decommissioning and Plant Closure Costs: Although the purchasers of
WMECO's ownership shares of the Millstone and Vermont Yankee plants assumed
the obligation of decommissioning those plants, WMECO still has significant
decommissioning and plant closure cost obligations to the companies that own
the Yankee Atomic, Connecticut Yankee (CY) and Maine Yankee plants
(collectively Yankee Companies). Each plant has been shut down and is
undergoing decommissioning. The Yankee Companies collect decommissioning and
closure costs through wholesale FERC-approved rates charged under a power
purchase agreement with WMECO. WMECO in turn passes these costs on to its
customers through state regulatory commission-approved retail rates. A
portion of the decommissioning and closure costs have already been collected,
but a substantial portion related to the decommissioning of CY has not yet
been filed at and approved for collection by the FERC. The cost estimate for
CY that has not yet been approved for recovery by FERC at December 31, 2003
is $50.1 million.
WMECO cannot at this time predict the timing or outcome of the FERC
proceeding required for the collection of these remaining decommissioning and
closure costs or the Bechtel Power Corporation litigation referred to in Note
6F, "Commitments and Contingencies - Nuclear Decommissioning and Plant
Closure Costs," to the consolidated financial statements. Although
management believes that these costs will ultimately be recovered from
WMECO's customers, there is a risk that the FERC may not allow these costs,
the estimates of which have increased significantly in 2003 and 2002, to be
recovered in wholesale rates. If FERC does not allow these costs to be
recovered in wholesale rates, WMECO would expect the state regulatory
commissions to disallow these costs in retail rates as well.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and at times difficult, subjective
or complex judgments. Changes in these estimates, assumptions and judgments,
in and of themselves, could materially impact the financial statements of
WMECO. Management communicates to and discusses with NU's Audit Committee
of the Board of Trustees all critical accounting policies and estimates. The
following are the accounting policies and estimates that management believes
are the most critical in nature.
Presentation: In accordance with current accounting pronouncements, WMECO's
consolidated financial statements include all subsidiaries upon which control
is maintained and all variable interest entities for which WMECO is the
primary beneficiary, as defined. All intercompany transactions between these
subsidiaries are eliminated as part of the consolidation process.
WMECO has less than 50 percent ownership interests in the Connecticut Yankee
Atomic Power Company, Yankee Atomic Electric Company and Maine Yankee Atomic
Power Company. WMECO does not control these companies and does not
consolidate them in its financial statements. WMECO accounts for the
investments in these companies using the equity method. Under the equity
method, WMECO records its ownership share of the earnings or losses at these
companies. Determining whether or not WMECO should apply the equity method
of accounting for an investee company requires management judgment.
The required adoption date of Financial Accounting Standards Board (FASB)
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities"
was delayed from July 1, 2003 to December 31, 2003 for WMECO. However, WMECO
elected to adopt FIN 46 at the original adoption date. The adoption of FIN
46 had no impact on WMECO. In December 2003, the FASB issued a revised
version of FIN 46 (FIN 46R). FIN 46R is effective for WMECO for the first
quarter of 2004, but is not expected to have an impact on WMECO's
consolidated financial statements.
Revenue Recognition: WMECO retail revenues are based on rates approved by the
DTE. These regulated rates are applied to customers' use of energy to
calculate a bill. In general, rates can only be changed through formal
proceedings with the DTE. WMECO utilizes regulatory commission-approved
tracking mechanisms to track the recovery of certain incurred costs. The
tracking mechanisms allow for rates to be changed periodically, with
overcollections refunded to customers or underrecollections collected from
customers in future periods.
The determination of the energy sales to individual customers is based on the
reading of meters, which occurs on a systematic basis throughout the month.
Billed revenues are based on these meter readings. At the end of each month,
amounts of energy delivered to customers since the date of the last meter
reading are estimated, and an estimated amount of unbilled revenues is
recorded.
Wholesale transmission revenues are based on rates and formulas that are
approved by the FERC. Most of WMECO's wholesale transmission revenues are
collected through a combination of the New England Regional Network Service
(RNS) tariff and WMECO's Local Network Service (LNS) tariff. The RNS tariff,
which is administered by ISO-NE, recovers the revenue requirements associated
with transmission facilities that are deemed by the FERC to be Pool
Transmission Facilities. The LNS tariff which was accepted by the FERC on
October 22, 2003, provides for the recovery of WMECO's total transmission
revenue requirements, net of revenue credits received from various rate
components, including revenues received under the RNS rates.
Unbilled Revenues: Unbilled revenues represent an estimate of electricity
delivered to customers that has not been billed. Unbilled revenues represent
assets on the balance sheet that become accounts receivable in the following
month as customers are billed.
The estimate of unbilled revenues is sensitive to numerous factors that can
significantly impact the amount of revenues recorded. Estimating the impact
of these factors is complex and requires management's judgment. The estimate
of unbilled revenues is important to WMECO's consolidated financial
statements as adjustments to that estimate could significantly impact
operating revenues and earnings. Two potential methods for estimating
unbilled revenues are the requirements and the cycle method.
WMECO estimates unbilled revenues monthly using the requirements method. The
requirements method utilizes the total monthly volume of electricity
delivered to the system and applies a delivery efficiency (DE) factor to
reduce the total monthly volume by an estimate of delivery losses in order to
calculate total estimated monthly sales to customers. The total estimated
monthly sales amount less total monthly billed sales amount results in a
monthly estimate of unbilled sales. Unbilled revenues are estimated by
applying an average rate to the estimate of unbilled sales.
Differences between the actual DE factor and the estimated DE factor can have
a significant impact on estimated unbilled revenue amounts.
In 2003, the unbilled sales estimates for WMECO were tested using the cycle
method. The cycle method uses the billed sales from each meter reading cycle
and an estimate of unbilled days in each month based on the meter reading
schedule. The cycle method is historically more accurate than the
requirements method when used in a mostly weather-neutral month. The cycle
method resulted in adjustments to the estimate of unbilled revenues that had
a positive after-tax earnings impact on WMECO of $0.3 million in 2003.
The testing of the requirements method with the cycle method will be done on
at least an annual basis using a weather-neutral month.
Derivative Accounting: Effective January 1, 2001, WMECO adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended.
Many WMECO contracts for the purchase or sale of energy or energy-related
products are derivatives. The application of derivative accounting under
SFAS No. 133, as amended, is complex and requires management judgment in the
following respects: identification of derivatives and embedded derivatives,
election, and designation of the normal purchases and sales exception, and
determining the fair value of derivatives. All of these judgments, depending
upon their timing and effect, could have a significant impact on WMECO's
consolidated balance sheets.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amended existing
derivative accounting guidance. This new statement incorporates
interpretations that were included in previous Derivative Implementation
Group guidance, clarifies certain conditions, and amends other existing
pronouncements. It was effective for contracts entered into or modified
after June 30, 2003. Management has determined that the adoption of SFAS No.
149 had no impact on the accounting for WMECO contracts.
Regulatory Accounting: The accounting policies of WMECO historically reflect
the effects of the rate-making process in accordance with SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." The
transmission and distribution businesses of WMECO continue to be cost-of-
service rate regulated, and management believes the application of SFAS No.
71 to that portion of those businesses continues to be appropriate.
Management must reaffirm this conclusion at each balance sheet date. If, as
a result of a change in circumstances, it is determined that any portion of
WMECO no longer meets the criteria of regulatory accounting under SFAS No.
71, that portion of the company will have to discontinue regulatory
accounting and write-off their regulatory assets and liabilities. Such a
write-off could have a material impact on WMECO's consolidated financial
statements.
The application of SFAS No. 71 results in recording regulatory assets and
liabilities. Regulatory assets represent the deferral of incurred costs that
are probable of future recovery in customer rates. In some cases, WMECO
records regulatory assets before approval for recovery has been received from
the DTE. Management must use judgment to conclude that costs deferred as
regulatory assets are probable of future recovery. Management bases its
conclusion on certain factors, including changes in the regulatory
environment, recent rate orders issued by the DTE and the status of any
potential new legislation. Regulatory liabilities represent revenues
received from customers to fund expected costs that have not yet been
incurred or probable future refunds to customers. Management uses its best
judgment when recording regulatory assets and liabilities; however, the DTE can
reach different conclusions about the recovery of costs, and those conclusions
could have a material impact on WMECO's consolidated financial statements.
Management believes it is probable that WMECO will recover the regulatory
assets that have been recorded.
Pension and Postretirement Benefits Other Than Pensions (PBOP): WMECO
participates in a uniform noncontributory defined benefit retirement plan
(Pension Plan) covering substantially all regular WMECO employees. WMECO
also participates in a postretirement benefit plan (PBOP Plan) to provide
certain health care benefits, primarily medical and dental, and life
insurance benefits through a benefit plan to retired employees. For each of
these plans, the development of the benefit obligation, fair value of plan
assets, funded status and net periodic benefit credit or cost is based on
several significant assumptions. If these assumptions were changed, the
resulting change in benefit obligations, fair values of plan assets, funded
status and net periodic benefit credits or costs could have a material impact
on WMECO's consolidated financial statements.
Results: Pre-tax periodic pension income for the Pension Plan, excluding
settlements, curtailments and special termination benefits, totaled $7.9
million, $12.1 million and $13.7 million for the years ended December 31,
2003, 2002 and 2001, respectively. The pension income amounts exclude one-
time items recorded under SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," associated with early termination programs and the sale of
Millstone. Net SFAS No. 88 items totaled $1.2 million in income for the year
ended December 31, 2002. This amount was recorded as a liability for refund
to customers.
The pre-tax net PBOP Plan cost, excluding settlements, curtailments and
special termination benefits, totaled $3.5 million, $3.4 million and $2.5
million for the years ended December 31, 2003, 2002 and 2001, respectively.
Long-Term Rate of Return Assumptions: In developing the expected long-term
rate of return assumptions, WMECO evaluated input from actuaries, consultants
and economists, as well as long-term inflation assumptions and WMECO's
historical 20-year compounded return of approximately 11 percent. WMECO's
expected long-term rate of return on assets is based on certain target asset
allocation assumptions and expected long-term rates of return. The Pension
Plan's and PBOP Plan's target asset allocation assumptions and expected long-
term rates of return assumptions by asset category are as follows:
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At December 31,
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Pension Benefits Postretirement Benefits
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2003 2002 2003 2002
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Target Assumed Target Assumed Target Assumed Target Assumed
Asset Rate of Asset Rate of Asset Rate of Asset Rate of
Asset Category Allocation Return Allocation Return Allocation Return Allocation Return
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Equity securities:
United States 45.00% 9.25% 45.00% 9.75% 55.00% 9.25% 55.00% 9.75%
Non-United States 14.00% 9.25% 14.00% 9.75% 11.00% 9.25% - -
Emerging markets 3.00% 10.25% 3.00% 10.75% 2.00% 10.25% - -
Private 8.00% 14.25% 8.00% 14.75% - - - -
Debt Securities:
Fixed income 20.00% 5.50% 20.00% 6.25% 27.00% 5.50% 45.00% 6.25%
High yield fixed
income 5.00% 7.50% 5.00% 7.50% 5.00% 7.50% - -
Real estate 5.00% 7.50% 5.00% 7.50% - - - -
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The actual asset allocations at December 31, 2003 and 2002 approximated these
target asset allocations. WMECO regularly reviews the actual asset
allocations and periodically rebalances the investments to the targeted asset
allocations when appropriate. For information regarding actual asset
allocations, see Note 4, "Pension Benefits and Postretirement Benefits Other
Than Pensions," to the consolidated financial statements.
WMECO reduced the long-term rate of return assumption 50 basis points from
9.25 percent to 8.75 percent in 2003 for the Pension Plan and PBOP Plan due
to lower expected market returns. WMECO believes that 8.75 percent is a
reasonable long-term rate of return on Pension Plan and PBOP Plan assets for
2003, and WMECO expects to use 8.75 percent in 2004. WMECO will continue to
evaluate the actuarial assumptions, including the expected rate of return, at
least annually, and will adjust the appropriate assumptions as necessary.
Actuarial Determination of Income and Expense: WMECO bases the actuarial
determination of Pension Plan and PBOP Plan income/expense on a market-
related valuation of assets, which reduces year-to-year volatility. This
market-related valuation calculation recognizes investment gains or losses
over a four-year period from the year in which they occur. Investment gains
or losses for this purpose are the difference between the expected return
calculated using the market-related value of assets and the actual return
based on the fair value of assets. Since the market-related valuation
calculation recognizes gains or losses over a four-year period, the future
value of the market-related assets will be impacted as previously deferred
gains or losses are recognized. There will be no impact on the fair value of
Pension Plan and PBOP Plan assets.
At December 31, 2003, the Pension Plan had cumulative unrecognized investment
losses of $10.6 million, which will increase pension expense over the next
four years by reducing the expected return on Pension Plan assets. At
December 31, 2003, the Pension Plan also had cumulative unrecognized
actuarial losses of $7.8 million, which will increase pension expense over
the expected future working lifetime of active Pension Plan participants, or
approximately 13 years. The combined total of unrecognized investment and
actuarial losses at December 31, 2003 is $18.4 million. These losses impact
the determination of pension expense and the actuarially determined prepaid
pension amount recorded on the consolidated balance sheets but have no impact
on expected Pension Plan funding.
At December 31, 2003, the PBOP Plan had cumulative unrecognized investment
losses of $1 million, which will increase PBOP Plan cost over the next four
years by reducing the expected return on plan assets. At December 31, 2003,
the PBOP Plan also had cumulative unrecognized actuarial losses of $5.1
million, which will increase PBOP Plan expense over the expected future
working lifetime of active PBOP Plan participants, or approximately 13 years.
The combined total of unrecognized investment and actuarial losses at
December 31, 2003 is $6.1 million. These losses impact the determination of
PBOP Plan cost and the actuarially determined accrued PBOP Plan cost recorded
on the consolidated balance sheets.
Discount Rate: The discount rate that is utilized in determining future
pension and PBOP obligations is based on a basket of long-term bonds that
receive one of the two highest ratings given by a recognized rating agency.
To compensate for the Pension Plan's longer duration 25 basis points were
added to the benchmark. The discount rate determined on this basis has
decreased from 6.75 percent at December 31, 2002 to 6.25 percent at
December 31, 2003.
Expected Pension Income: Due to the effect of the unrecognized actuarial
losses and based on an expected rate of return on Pension Plan assets of 8.75
percent, a discount rate of 6.25 percent and various other assumptions, WMECO
estimates that expected contributions to and pension income for the Pension
Plan will be as follows (in millions):
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Expected
Year Contributions Pension Income
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2004 $ - $4.2
2005 $ - $1.9
2006 $ - $1.0
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Future actual pension income/expense will depend on future investment
performance, changes in future discount rates and various other factors
related to the populations participating in the Pension Plan.
Sensitivity Analysis: The following represents the increase/(decrease) to
the Pension Plan's reported cost and to the PBOP Plan's reported cost as a
result of the change in the following assumptions by 50 basis points (in
millions):
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At December 31,
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Pension Plan Postretirement Plan
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Assumption Change 2003 2002 2003 2002
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Lower long-term
rate of return $ 1.1 $ 1.1 $ 0.1 $ 0.1
Lower discount
rate $ 0.9 $ 0.8 $ 0.1 $ 0.1
Lower compensation
increase $(0.4) $(0.3) N/A N/A
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Plan Assets: The value of the Pension Plan assets has increased from $162.4
million at December 31, 2002 to $195.3 million at December 31, 2003. The
investment performance returns, despite declining discount rates, have
increased the overfunded status of the Pension Plan on a projected benefit
obligation (PBO) basis from $28.8 million at December 31, 2002 to $51.5
million at December 31, 2003. The PBO includes expectations of future
employee compensation increases. The accumulated benefit obligation (ABO) of
the Pension Plan was approximately $68.1 million less than Pension Plan
assets at December 31, 2003 and approximately $46.1 million less than Pension
Plan assets at December 31, 2002. The ABO is the obligation for employee
service and compensation provided through December 31, 2003. If the ABO for
the entire Pension Plan exceeds all Pension Plan assets at a future plan
measurement date, NU will record an additional minimum liability of which
WMECO will be allocated its proportionate share. WMECO has not made employer
contributions since 1991.
The value of PBOP Plan assets has increased from $13.3 million at December 31,
2002 to $17.5 million at December 31, 2003. The investment performance
returns, despite declining discount rates, have decreased the underfunded
status of the PBOP Plan on an accumulated projected benefit obligation basis
from $23.3 million at December 31, 2002 to $18.5 million at December 31,
2003. WMECO has made a contribution each year equal to the PBOP Plan's
postretirement benefit cost, excluding curtailments, settlements and special
termination benefits.
Health Care Cost: The health care cost trend assumption used to project
increases in medical costs is 9 percent for 2003, decreasing one percentage
point per year to an ultimate rate of 5 percent in 2007. The effect of
increasing the health care cost trend by one percentage point would have
increased 2003 service and interest cost components of the PBOP Plan cost by
$0.1 million in 2003 and $0.1 million in 2002.
Accounting for the Effect of Medicare Changes on PBOP: On December 8, 2003,
the President signed into law a bill that expands Medicare, primarily by
adding a prescription drug benefit and by adding a federal subsidy to
qualifying plan sponsors of retiree health care benefit plans. Management
believes that WMECO currently qualifies.
Specific authoritative accounting guidance on how to account for the effect
the Medicare federal subsidy has on WMECO's PBOP Plan has not been issued by
the FASB. FASB Staff Position (FSP) No. FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," required WMECO to make an
election for 2003 financial reporting. The election was to either defer the
impact of the subsidy until the FASB issues guidance or to reflect the impact
of the subsidy on December 31, 2003 reported amounts. WMECO chose to reflect
the impact on December 31, 2003 reported amounts.
Reflecting the impact of the Medicare change decreased the PBOP benefit
obligation by $2.3 million and increased actuarial gains by approximately
$2.3 million with no impact on 2003 expenses, assets, or liabilities. The
$2.3 million actuarial gain will be amortized as a reduction to PBOP expense
over 13 years beginning in 2004. PBOP expense in 2004 will also reflect a
lower interest cost due to the reduction in the December 31, 2003 benefit
obligation. Management estimates that the reduction in PBOP expense in 2004
will be approximately $0.2 million.
When accounting guidance is issued by the FASB, it may require WMECO to
change the accounting described above and change the information included in
this annual report.
Income Taxes: Income tax expense is calculated each year in each of the
jurisdictions in which WMECO operates. This process involves estimating
WMECO's actual current tax exposures as well as assessing temporary
differences resulting from differing treatment of items, such as timing of
the deduction and expenses for tax and book accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
in WMECO's consolidated balance sheets. Adjustments made to income taxes
could significantly affect WMECO's consolidated financial statements.
Management must also assess the likelihood that deferred tax assets will be
recovered from future taxable income, and to the extent that recovery is not
likely, a valuation allowance must be established. Significant management
judgment is required in determining income tax expense and deferred tax
assets and liabilities.
WMECO accounts for deferred taxes under SFAS No. 109, "Accounting for Income
Taxes." For temporary differences recorded as deferred tax liabilities that
will be recovered in rates in the future, WMECO has established a regulatory
asset. The regulatory asset amounted to $60.1 million and $54.2 million at
December 31, 2003 and 2002, respectively. Regulatory agencies in certain
jurisdictions in which WMECO operates require the tax effect of specific
temporary differences to be "flowed through" to utility customers. Flow
through treatment means that deferred tax expense is not recorded on the
consolidated statements of income. Instead, the tax effect of the temporary
difference impacts both amounts for income tax expense currently included in
customers' rates and the company's net income. Flow through treatment can
result in effective income tax rates that are significantly different than
expected income tax rates. Recording deferred taxes on flow through items is
required by SFAS No. 109, and the offset to the deferred tax amounts is the
regulatory asset referred to above. A reconciliation from expected tax
expense at the statutory federal income tax rate to actual tax expense
recorded is included in Note 11, "Income Tax Expense," to the consolidated
financial statements.
The estimates that are made by management in order to record income tax
expense, accrued taxes and deferred taxes are compared each year to the
actual tax amounts filed on WMECO's income tax returns. The income tax
returns were filed in the fall of 2003 for the 2002 tax year. In the fourth
quarter, WMECO recorded differences between income tax expense, accrued taxes
and deferred taxes on its consolidated financial statements and the amounts
that were on its income tax returns. Recording these differences in income
tax expense resulted in a negative impact of approximately $0.1 million on
WMECO's 2003 earnings.
Depreciation: Depreciation expense is calculated based on an asset's useful
life, and judgment is involved when estimating the useful lives of certain
assets. A change in the estimated useful lives of these assets could have a
material impact on WMECO's consolidated financial statements absent timely
rate relief for WMECO's assets.
Accounting for Environmental Reserves: Environmental reserves are accrued
using a probabilistic model approach when assessments indicate that it is
probable that a liability has been incurred and an amount can be reasonably
estimated. Adjustments made to environmental liabilities could have a
significant effect on earnings. The probabilistic model approach estimates
the liability based on the most likely action plan from a variety of
available remediation options, ranging from no action to remedies ranging
from establishing institutional controls to full site remediation and long-
term monitoring. The probabilistic model approach estimates the liabilities
associated with each possible action plan based on findings through various
phases of site assessments. These estimates are based on currently available
information from presently enacted state and federal environmental laws and
regulations and several cost estimates from outside engineering and
remediation contractors. These amounts also take into consideration prior
experience in remediating contaminated sites and data released by the United
States Environmental Protection Agency and other organizations.
These estimates are subjective in nature partly because there are usually
several different remediation options from which to choose when working on a
specific site. These estimates are subject to revisions in future periods
based on actual costs or new information concerning either the level of
contamination at the site or newly enacted laws and regulations. The amounts
recorded as environmental liabilities on the consolidated balance sheets
represent management's best estimate of the liability for environmental costs
based on current site information from site assessments and remediation
estimates. These liabilities are estimated on an undiscounted basis.
WMECO does not have a recovery mechanism for environmental costs, and changes
in WMECO's environmental reserves impact WMECO's earnings.
Asset Retirement Obligations: WMECO adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" on January 1, 2003. SFAS No. 143 requires that
legal obligations associated with the retirement of property, plant and
equipment be recorded as a liability on the balance sheet at fair value when
incurred and when a reasonable estimate of the fair value can be made. SFAS
No. 143 defines an asset retirement obligation (ARO) as a legal obligation
that is required to be settled due to an existing or enacted law, statute,
ordinance or a written or oral promise to remove an asset. AROs may stem
from environmental laws, state laws and regulations, easement agreements,
building codes, contracts, franchise grants and agreements, oral promises
made upon which third parties have relied, or the dismantlement, restoration,
or reclamation of properties.
Upon adoption of SFAS No. 143, certain removal obligations were identified
that management believes are AROs but either have not been incurred or are
not material. These removal obligations arise in the ordinary course of
business or have a low probability of occurring. The types of obligations
primarily relate to transmission and distribution lines and poles,
telecommunication towers, transmission cables and certain FERC or state
regulatory agency re-licensing issues. There was no impact to WMECO's
earnings upon adoption of SFAS No. 143; however, if there are changes in
certain laws and regulations, orders, interpretations or contracts entered
into by WMECO there may be future AROs that need to be recorded.
Under SFAS No. 71, regulated utilities, including WMECO, currently recover
amounts in rates for future costs of removal of plant assets. Future
removals of assets do not represent legal obligations and are not AROs.
Historically, these amounts were included as a component of accumulated
depreciation until spent. At December 31, 2003 and 2002, these amounts
totaling $25 million and $17 million, respectively, were reclassified to
regulatory liabilities on the accompanying consolidated balance sheets.
In June 2003, the FASB issued a proposed FSP, "Applicability of SFAS No. 143,
'Accounting for Asset Retirement Obligations', to Legislative Requirements on
Property Owners to Remove and Dispose of Asbestos or Asbestos-Containing
Materials." In the FSP, the FASB staff concludes that current legislation
creates a legal obligation for the owner of a building to remove and dispose
of asbestos-containing materials. In the FSP, the FASB staff also concludes
that this legal obligation constitutes an ARO that should be recognized as a
liability under SFAS No. 143. This FSP changes a FASB staff interpretation
of SFAS No. 143 that an obligating event did not occur until a building
containing asbestos was demolished. In November 2003, the FASB indicated
that, based on the diverse views it received in comment letters on the
proposed FSP, it was considering a proposal for a FASB agenda project to
address this issue. If this FSP is adopted in its current form, then WMECO
would be required to record an ARO. Management has not estimated this
potential ARO at December 31, 2003.
Special Purpose Entity: During 2001, to facilitate the issuance of rate
reduction certificates intended to finance certain stranded costs, WMECO
established WMECO Funding LLC. WMECO Funding LLC was created as part of a
state-sponsored securitization program. WMECO Funding LLC is restricted from
engaging in non-related activities and is required to operate in a manner
intended to reduce the likelihood that it would be included in WMECO's
bankruptcy estate if it ever became involved in a bankruptcy proceeding.
WMECO Funding LLC and the securitization amounts are consolidated in the
accompanying consolidated financial statements.
For further information regarding the matters in this "Critical Accounting
Policies and Estimates" section see Note 1, "Summary of Significant
Accounting Policies," Note 3, "Derivative Instruments and Risk Management
Activities," Note 4, "Pension Benefits and Postretirement Benefits Other Than
Pensions," Note 11, "Income Tax Expense," and Note 6B, "Commitments and
Contingencies - Environmental Matters," to the consolidated financial
statements.
OTHER MATTERS
Commitments and Contingencies: For further information regarding other
commitments and contingencies, see Note 6, "Commitments and Contingencies,"
to the consolidated financial statements.
Contractual Obligations and Commercial Commitments: Information regarding
WMECO's contractual obligations and commercial commitments at December 31,
2003 is summarized through 2008 and thereafter as follows:
- ----------------------------------------------------------------------------------------------------
(Millions of
Dollars) 2004 2005 2006 2007 2008 Thereafter
- ----------------------------------------------------------------------------------------------------
Notes payable
to banks (a) $10.0 $ - $ - $ - $ - $ -
Long-term
debt (a) - - - - - 108.8
Operating
leases (b)(c) 3.3 3.2 2.9 2.7 2.5 9.0
Long-term
contractual
arrangements (b)(c) 9.9 9.5 9.5 9.1 9.1 47.6
- ----------------------------------------------------------------------------------------------------
Totals $23.2 $12.7 $12.4 $11.8 $11.6 $165.4
- ----------------------------------------------------------------------------------------------------
(a) Included in WMECO's debt agreements are usual and customary positive,
negative and financial covenants. Non-compliance with certain covenants,
for example the timely payment of principal and interest, may constitute an
event of default, which could cause an acceleration of principal in the
absence of receipt by the company of a waiver or amendment. Such
acceleration would change the obligations outlined in the table of
contractual obligations and commercial commitments. Long-term debt excludes
fees and interest due for spent nuclear fuel disposal costs and unamortized
premium and discount, net.
(b) WMECO has no provisions in its operating lease agreements related to its
long-term contractual arrangements that could trigger a change in terms and
conditions, such as acceleration of payment obligations.
(c) Amounts are not included on WMECO's consolidated balance sheets.
Rate reduction bond amounts are non-recourse to WMECO, have no required
payments over the next five years and are not included in this table.
Additionally, this table does not include notes payable to affiliated
companies totaling $31.4 million at December 31, 2003 and WMECO's expected
contribution to the PBOP Plan in 2004 of $4 million. WMECO's standard offer
service contracts and default service contracts are also not included in this
table. For further information regarding WMECO's contractual obligations and
commercial commitments, see Note 2, "Short-Term Debt," Note 8, "Leases," Note
6E, "Commitments and Contingencies - Long-Term Contractual Arrangements," and
Note 10, "Long-Term Debt," to the consolidated financial statements.
Forward Looking Statements: This discussion and analysis includes forward
looking statements, which are statements of future expectations and not facts
including, but not limited to, statements regarding future earnings,
refinancings, regulatory proceedings, the use of proceeds from restructuring,
and the recovery of operating costs. 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 weather
patterns, changes in laws, developments in legal or public policy doctrines,
technological developments, volatility in electric commodity markets, and
other presently unknown or unforeseen factors.
Website: Additional financial information is available through NU's website
at www.nu.com.
RESULTS OF OPERATIONS
The following table provides the variances in income statement line items for
the consolidated statements of income included in this annual report for the
past two years.
- ---------------------------------------------------------------------------------------------------
2003 over/(under) 2002 2002 over/(under) 2001
Income Statement Variances ---------------------- ------------------------
(Millions of Dollars) Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
Operating Revenues $ 22 6% $(109) (23)%
Operating Expenses:
Fuel, purchased and net interchange power 18 10 (135) (43)
Other operation 10 20 (18) (26)
Maintenance 1 5 (5) (26)
Depreciation - - 1 4
Amortization of regulatory assets, net 11 37 (98) (76)
Amortization of rate reduction bonds - - 6 (a)
Taxes other than income taxes 1 11 (2) (18)
Gain on sale of utility plant - - 120 100
- ---------------------------------------------------------------------------------------------------
Total operating expenses 41 13 (131) (30)
- ---------------------------------------------------------------------------------------------------
Operating income (19) (32) 22 58
Interest expense, net (1) (4) (1) (6)
Other income/(loss), net 4 (a) - -
- ---------------------------------------------------------------------------------------------------
Income before income tax expense (14) (33) 23 (a)
Income tax expense 7 100 - -
- ---------------------------------------------------------------------------------------------------
Net income $(21) (57)% $ 23 (a)%
===================================================================================================
(a) Percent greater than 100.
OPERATING REVENUES
Operating revenues increased $22 million in 2003, primarily due to higher
retail revenues ($17 million) and higher wholesale revenues ($5 million).
Retail revenues were higher primarily due to higher retail sales volumes ($9
million) and an increase in the standard offer service rate resulting from a
competitive bid process required by the DTE ($10 million). Retail sales
increased by 2.6 percent. Wholesale revenues were higher primarily due to
higher wholesale sales.
Operating revenues decreased $109 million in 2002, primarily due to lower
retail revenues ($71 million) and lower wholesale and other revenues ($38
million). Retail revenues were lower primarily due to a decrease in the
standard offer service rate resulting from a competitive bid process required
by the DTE ($109 million) partially offset by an increase in the transition
charge rate ($32 million) and higher distribution revenues from higher retail
sales ($11 million). Retail sales increased by 1.9 percent. The decrease in
revenues related to the standard offer service rate is offset by a
corresponding decrease in fuel, purchased and net interchange power expense.
Wholesale revenues were lower primarily due to the inclusion in 2001 of
revenue from the output of Millstone ($14 million) and the lower sales of
energy and capacity due to the buydown and buyout of various cogenerator
contracts ($12 million). The buydown and buyout of cogeneration contracts
has a corresponding decrease in fuel, purchased and net interchange power
expense.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power expense increased $18 million in
2003, primarily due to higher standard offer purchases ($10 million) as a
result of the retail sales increase and higher standard offer supply costs
due to the rebidding of the supply in 2003 and higher wholesale purchases of
energy and capacity.
Fuel, purchased and net interchange power expense decreased $135 million in
2002, primarily due to the lower supply price for standard offer service
($109 million), the buydown and buyout of various cogeneration contracts ($12
million) and lower nuclear fuel expense ($9 million).
OTHER OPERATION AND MAINTENANCE
Other operation and maintenance (O&M) expenses increased $11 million in 2003
due to lower pension income ($7 million) and higher transmission expense ($4
million).
Other O&M expenses decreased $23 million in 2002, primarily due to the lack
of nuclear expenses in 2002 as a result of the sale of Millstone at the end
of the first quarter in 2001 ($12 million) and lower administrative and
general expenses ($9 million).
DEPRECIATION
Depreciation increased $1 million in 2002, primarily due to an increase in
utility plant balances.
AMORTIZATION OF REGULATORY ASSETS, NET
Amortization of regulatory assets, net increased $11 million in 2003
primarily due to the higher recovery of stranded costs.
Amortization of regulatory assets, net decreased $98 million in 2002
primarily due to the amortization in 2001 related to the sale of Millstone
($120 million) and lower amortization related to the recovery of the
Millstone investment ($15 million), partially offset by higher amortization
in 2002 related to the recovery of stranded costs ($37 million).
AMORTIZATION OF RATE REDUCTION BONDS
Amortization of rate reduction bonds increased $6 million in 2002 due to the
repayment of principal.
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $1 million in 2003 primarily due to
the absence of the benefit of a Connecticut sales tax settlement recognized
in 2002.
Taxes other than income taxes decreased $2 million in 2002, primarily due to
a decrease in local property taxes and the benefit of a Connecticut sales tax
settlement.
GAIN ON SALE OF UTILITY PLANT
WMECO recorded a $120 million gain in 2001 on the sale of its ownership
interest in Millstone. A corresponding amount of amortization expense was
recorded.
INTEREST EXPENSE, NET
Interest expense, net decreased $1 million in 2003, primarily due to lower
interest on short-term debt from lower interest rates.
Interest expense, net decreased $1 million in 2002, primarily due to
retirement of long-term debt in 2001.
OTHER INCOME/(LOSS), NET
Other income/(loss), net increased $4 million primarily due to the absence of
the 2002 stranded cost reconciliation adjustment ($3 million) and a gain on
disposition of property in 2003 ($2 million).
Other income/(loss), net was unchanged due to lower environmental costs
recorded in 2002 ($3 million) offset by the DTE's order in 2002 in a stranded
cost reconciliation adjustment resulting in a reduction to the gain from the
sale of the fossil units ($3 million).
INCOME TAX EXPENSE
Income tax expense increased $7 million, primarily due to the recognition in
2002 of investment tax credits as a result of the 2002 DTE decision ($13
million), partially offset by lower taxable income. For further information
regarding income tax expense, see Note 11, "Income Tax Expense," to the
consolidated financial statements.
Income tax expense remained unchanged in 2002 as a result of higher book
income offset by the recognition in 2002 of investment tax credits as a
result of a regulatory decision ($13 million).
COMPANY REPORT
- -------------------------------------------------------------------------------
Management is responsible for the preparation, integrity, and fair
presentation of the accompanying consolidated financial statements of Western
Massachusetts Electric Company and subsidiary and other sections of this
annual report. These financial statements, which were audited by Deloitte &
Touche LLP in 2003 and 2002 and Arthur Andersen LLP in 2001, have been
prepared in conformity with accounting principles generally accepted in the
United States of America using estimates and judgments, where required, and
giving consideration to materiality.
The company has endeavored to establish a control environment that encourages
the maintenance of high standards of conduct in all of its business
activities. Management is responsible for maintaining a system of internal
control over financial reporting that is designed to provide reasonable
assurance, at an appropriate cost-benefit relationship, to the company's
management and Board of Trustees of Northeast Utilities regarding the
preparation of reliable, published financial statements. The system is
supported by an organization of trained management personnel, policies and
procedures, and a comprehensive program of internal audits. Through
established programs, the company regularly communicates to its management
employees their internal control responsibilities and obtains information
regarding compliance with policies prohibiting conflicts of interest and
policies segregating information between regulated and unregulated subsidiary
companies. The company has standards of business conduct for all employees,
as well as a code of ethics for senior financial officers.
The Audit Committee of the Board of Trustees of Northeast Utilities is
composed entirely of independent trustees and includes two members that the
Board of Trustees considers "audit committee financial experts." The Audit
Committee meets regularly with management, the internal auditors and the
independent auditors to review the activities of each and to discuss audit
matters, financial reporting matters, and the system of internal controls
over financial reporting. The Audit Committee also meets periodically with
the internal auditors and the independent auditors without management
present.
Because of inherent limitations in any system of internal controls, errors or
irregularities may occur and not be detected. The company believes, however,
that its system of internal controls over financial reporting and control
environment provide reasonable assurance that its assets are safeguarded from
loss or unauthorized use and that its financial records, which are the basis
for the preparation of all financial statements, are reliable. Additionally,
management believes that its disclosure controls and procedures are in place
and operating effectively. Disclosure controls and procedures are designed
to ensure that information included in reports such as this annual report is
recorded, processed, summarized, and reported within the time periods
required and that the information disclosed is accumulated and reviewed by
management for discussion and approval.
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Directors
of Western Massachusetts Electric Company:
We have audited the accompanying consolidated balance sheets of Western
Massachusetts Electric Company and subsidiary (a Massachusetts corporation
and a wholly owned subsidiary of Northeast Utilities) (the "Company") as of
December 31, 2003 and 2002, and the related consolidated statements of
income, comprehensive income, common stockholder's equity, and cash flows for
the years then ended. 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. The consolidated financial
statements of the Company as of December 31, 2001, and for the year then
ended, were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in
their report dated January 22, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 2003 and 2002 consolidated financial statements present
fairly, in all material respects, the financial position of Western
Massachusetts Electric Company and subsidiary as of December 31, 2003 and
2002, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 23, 2004
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Directors
of Western Massachusetts Electric Company:
We have audited the accompanying consolidated balance sheets of Western
Massachusetts Electric Company (a Massachusetts corporation and a wholly
owned subsidiary of Northeast Utilities) and subsidiary as of December 31,
2001 and 2000, 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, 2001. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Western Massachusetts
Electric Company and subsidiary as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 22, 2002
Readers of these consolidated financial statements should be aware that
this report is a copy of a previously issued Arthur Andersen LLP report
and that this report has not been reissued by Arthur Andersen LLP.
Furthermore, this report has not been updated since January 22, 2002,
and Arthur Andersen LLP completed its last post-audit review of December 31,
2001, consolidated financial information on May 13, 2002.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
At December 31, 2003 2002
- -----------------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Current Assets:
Cash $ 1 $ 123
Receivables, less provision for uncollectible
accounts of $2,551 in 2003 and $1,958 in 2002 40,103 42,203
Accounts receivable from affiliated companies 20 6,354
Unbilled revenues 10,299 8,944
Materials and supplies, at average cost 1,584 1,821
Prepayments and other 1,139 1,470
---------------- ----------------
53,146 60,915
---------------- ----------------
Property, Plant and Equipment:
Electric utility 612,450 590,153
Less: Accumulated depreciation 177,803 178,804
---------------- ----------------
434,647 411,349
Construction work in progress 13,124 11,860
---------------- ----------------
447,771 423,209
---------------- ----------------
Deferred Debits and Other Assets:
Regulatory assets 268,180 283,702
Prepaid pension 75,386 67,516
Other 19,081 18,304
---------------- ----------------
362,647 369,522
---------------- ----------------
Total Assets $ 863,564 $ 853,646
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------
At December 31, 2003 2002
- --------------------------------------------------------------------------------------------
(Thousands of Dollars)
LIABILITIES AND CAPITALIZATION
- ------------------------------
Current Liabilities:
Notes payable to banks $ 10,000 $ 7,000
Notes payable to affiliated companies 31,400 85,900
Accounts payable 10,173 17,730
Accounts payable to affiliated companies 13,789 6,218
Accrued taxes 765 4,334
Accrued interest 2,544 2,059
Other 9,785 8,005
---------------- ----------------
78,456 131,246
---------------- ----------------
Rate Reduction Bonds 132,960 142,742
---------------- ----------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 216,547 222,065
Accumulated deferred investment tax credits 3,326 3,662
Deferred contractual obligations 86,937 63,767
Regulatory liabilities 27,776 17,443
Other 8,357 12,770
---------------- ----------------
342,943 319,707
---------------- ----------------
Capitalization:
Long-Term Debt 157,202 101,991
---------------- ----------------
Common Stockholder's Equity:
Common stock, $25 par value - authorized
1,072,471 shares; 434,653 shares outstanding
in 2003 and 2002 10,866 10,866
Capital surplus, paid in 69,544 69,712
Retained earnings 71,677 77,476
Accumulated other comprehensive loss (84) (94)
---------------- ----------------
Common Stockholder's Equity 152,003 157,960
---------------- ----------------
Total Capitalization 309,205 259,951
---------------- ----------------
Commitments and Contingencies (Note 6)
Total Liabilities and Capitalization $ 863,564 $ 853,646
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues $ 391,178 $ 369,487 $ 478,869
-------------- -------------- --------------
Operating Expenses:
Operation -
Fuel, purchased and net interchange power 198,985 181,485 315,903
Other 59,020 49,039 66,458
Maintenance 15,289 14,499 19,635
Depreciation 14,104 14,381 13,818
Amortization of regulatory assets, net 41,695 30,327 128,321
Amortization of rate reduction bonds 9,847 9,385 3,555
Taxes other than income taxes 11,844 10,688 13,065
Gain on sale of utility plant - - (119,775)
-------------- -------------- --------------
Total operating expenses 350,784 309,804 440,980
-------------- -------------- --------------
Operating Income 40,394 59,683 37,889
Interest Expense:
Interest on long-term debt 3,860 2,942 4,940
Interest on rate reduction bonds 8,994 9,587 6,251
Other interest 965 1,857 4,120
-------------- -------------- --------------
Interest expense, net 13,819 14,386 15,311
-------------- -------------- --------------
Other Income/(Loss), Net 3,167 (850) (1,050)
-------------- -------------- --------------
Income Before Income Tax Expense 29,742 44,447 21,528
Income Tax Expense 13,530 6,765 6,560
-------------- -------------- --------------
Net Income $ 16,212 $ 37,682 $ 14,968
============== ============== ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income $ 16,212 $ 37,682 $ 14,968
-------------- -------------- --------------
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on securities 37 (110) (123)
Minimum supplemental executive retirement
pension liability adjustments (27) (43) -
-------------- -------------- --------------
Other comprehensive income/(loss), net of tax 10 (153) (123)
-------------- -------------- --------------
Comprehensive Income $ 16,222 $ 37,529 $ 14,845
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Capital Other
---------------------- Surplus, Retained Comprehensive Total
Shares Amount Paid In Earnings Income/(Loss) (a)
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars, except share information)
Balance at January 1, 2001 590,093 $ 14,752 $ 94,010 $ 62,952 $ 182 $ 171,896
Net income for 2001 14,968 14,968
Cash dividends on preferred stock (404) (404)
Cash dividends on common stock (22,000) (22,000)
Repurchase of common stock (80,397) (2,010) (12,990) (15,000)
Capital stock expenses, net 1,204 1,204
Allocation of benefits - ESOP (94) (94)
Other comprehensive loss (123) (123)
--------- ---------- ---------- ---------- --------- -----------
Balance at December 31, 2001 509,696 12,742 82,224 55,422 59 150,447
Net income for 2002 37,682 37,682
Cash dividends on common stock (16,009) (16,009)
Repurchase of common stock (75,043) (1,876) (12,123) (13,999)
Capital stock expenses, net 131 131
Allocation of benefits - ESOP (520) 381 (139)
Other comprehensive loss (153) (153)
--------- ---------- ---------- ---------- --------- -----------
Balance at December 31, 2002 434,653 10,866 69,712 77,476 (94) 157,960
Net income for 2003 16,212 16,212
Cash dividends on common stock (22,011) (22,011)
Allocation of benefits - ESOP (168) (168)
Other comprehensive income 10 10
--------- ---------- ---------- ---------- --------- -----------
Balance at December 31, 2003 434,653 $ 10,866 $ 69,544 $ 71,677 $ (84) $ 152,003
========= ========== ========== ========== ========= ===========
(a) The Federal Power Act, and the Public Utility Holding Act of 1935 (the
1935 Act) limit the payment of dividends by the company to its retained
earnings balance.
The Utility Group credit agreement also limits dividend payments subject
to the requirements that the company's total debt to total capitalization
ratio does not exceed 65 percent.
At December 31, 2003, retained earnings available for payment of dividends
is restricted to $46.3 million.
The accompanying notes are an integral part of these consolidated financial
statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net income $ 16,212 $ 37,682 $ 14,968
Adjustments to reconcile to net cash flows
provided by operating activities:
Depreciation 14,104 14,381 13,818
Deferred income taxes and investment tax credits, net (14,315) (26,952) 5,281
Amortization of regulatory assets, net 41,695 30,327 128,321
Amortization of rate reduction bonds 9,847 9,385 3,555
Amortization of recoverable energy costs 598 (529) 3,179
Gain on sale of utility plant - - (119,775)
Increase in prepaid pension (7,870) (13,290) (8,453)
Regulatory overrecoveries 6,265 24,984 112,025
Other sources of cash 8,672 19,870 64,065
Other uses of cash (24,355) (53,355) (177,340)
Changes in current assets and liabilities:
Receivables and unbilled revenues, net 7,079 1,199 15,017
Materials and supplies 237 (365) 149
Other current assets (excludes cash) 330 74 3,273
Accounts payable 14 (13,989) 4,043
Accrued taxes (3,569) 643 (4,780)
Other current liabilities 2,266 (2,425) (192)
---------- --------- ----------
Net cash flows provided by operating activities 57,210 27,640 57,154
---------- --------- ----------
Investing Activities:
Investments in plant (30,386) (23,148) (30,676)
NU system Money Pool (lending)/borrowing (54,500) 76,700 8,600
Investments in nuclear decommissioning trusts - - (23,037)
Net proceeds from the sale of utility plant - - 175,154
Buyout of IPP contract - - (80,000)
Other investment activities 1,377 937 817
---------- --------- ----------
Net cash flows (used in)/provided by investing activities (83,509) 54,489 50,858
---------- --------- ----------
Financing Activities:
Issuance of long-term debt 55,000 - -
Repurchase of common shares - (13,999) (15,000)
Issuance of rate reduction bonds - - 155,000
Retirement of rate reduction bonds (9,782) (9,575) (2,683)
Increase/(decrease) in short-term debt 3,000 (43,000) (60,000)
Reacquisitions and retirements of long-term debt - - (100,000)
Reacquisitions and retirements of preferred stock - - (36,500)
Retirement of capital lease obligation - - (34,200)
Cash dividends on preferred stock - - (404)
Cash dividends on common stock (22,011) (16,009) (22,000)
Other financing activities (30) (22) 7,389
---------- --------- ----------
Net cash flows provided by/(used in) financing activities 26,177 (82,605) (108,398)
---------- --------- ----------
Net decrease in cash (122) (476) (386)
Cash - beginning of year 123 599 985
---------- --------- ----------
Cash - end of year $ 1 $ 123 $ 599
========== ========= ==========
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 13,560 $ 14,934 $ 17,939
========== ========= ==========
Income taxes $ 31,807 $ 32,522 $ 6,314
========== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
A. ABOUT WESTERN MASSACHUSETTS ELECTRIC COMPANY
Western Massachusetts Electric Company (WMECO or the company) is a wholly
owned subsidiary of Northeast Utilities (NU). WMECO is registered with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of
1934. NU is registered with the SEC as a holding company under the Public
Utility Holding Company Act of 1935 (1935 Act), and NU, including WMECO, is
subject to the provisions of the 1935 Act. Arrangements among WMECO, other
NU 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. WMECO is subject to further regulation for
rates, accounting and other matters by the FERC and the Massachusetts
Department of Telecommunications and Energy (DTE). WMECO, The Connecticut
Light and Power Company (CL&P) and Public Service Company of New Hampshire
(PSNH), furnish franchised retail electric service in Massachusetts,
Connecticut and New Hampshire, respectively.
Several wholly owned subsidiaries of NU provide support services for NU's
companies, including WMECO. Northeast Utilities Service Company (NUSCO)
provides centralized accounting, administrative, engineering, financial,
information technology, legal, operational, planning, purchasing, and other
services to NU's companies.
WMECO's purchases from Select Energy, Inc. (Select Energy), another NU
subsidiary, for standard offer and default service and for other transactions
with Select Energy represented approximately $143 million, $14 million and $4
million for the years ended December 31, 2003, 2002 and 2001, respectively.
B. PRESENTATION
The consolidated financial statements of WMECO include the accounts of its
subsidiary WMECO Funding LLC. Intercompany transactions have been eliminated
in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingencies 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. Reclassifications were made to cost of
removal and regulatory asset and liability amounts on the accompanying
consolidated balance sheets. Reclassifications have also been made to the
accompanying consolidated statements of cash flows.
C. NEW ACCOUNTING STANDARDS
Derivative Accounting: Effective January 1, 2001, WMECO adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In April 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends SFAS No. 133.
This new statement incorporates interpretations that were included in
previous Derivative Implementation Group guidance, clarifies certain
conditions, and amends other existing pronouncements. It is effective for
contracts entered into or modified after June 30, 2003. Management has
determined that the adoption of SFAS No. 149 did not change WMECO's
accounting for contracts, or the ability of WMECO to elect the normal
purchases and sales exception.
Employers' Disclosures about Pensions and Other Postretirement Benefits: In
December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," (SFAS No.
132R). This statement revises employers' disclosures about pension plans and
other postretirement benefit plans, requires additional disclosures about the
assets, obligations, cash flows, and the net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans and
requires companies to disclose various elements of pension and postretirement
benefit costs in interim period financial statements. The revisions in SFAS
No. 132R are effective for 2003, and WMECO included the disclosures required
by SFAS No. 132R in this annual report. For the required disclosures, see
Note 4, "Pension Benefits and Postretirement Benefits Other Than Pensions,"
to the consolidated financial statements.
Liabilities and Equity: In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 establishes standards on how to
classify and measure certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and was otherwise
effective for WMECO for the third quarter of 2003. As WMECO no longer has
any preferred stock subject to mandatory redemption, the adoption of SFAS No.
150 did not have an impact on WMECO's consolidated financial statements.
Consolidation of Variable Interest Entities: In December 2003, the FASB
issued a revised version of FASB Interpretation No. (FIN) 46 "Consolidation
of Variable Interest Entities," (FIN 46R). FIN 46R is effective for WMECO
for the first quarter of 2004 but is not expected to have an impact on
WMECO's consolidated financial statements.
D. GUARANTEES
At December 31, 2003, NU had outstanding guarantees to WMECO of $2.5 million.
WMECO had no guarantees outstanding at December 31, 2003.
E. REVENUES
WMECO retail revenues are based on rates approved by the DTE. These
regulated rates are applied to customers' use of energy to calculate a bill.
In general, rates can only be changed through formal proceedings with the
DTE.
WMECO utilizes regulatory commission-approved tracking mechanisms to track
the recovery of certain incurred costs. The tracking mechanisms allow for
rates to be changed periodically, with overcollections refunded to customers
or undercollections collected from customers in future periods.
Unbilled revenues represent an estimate of electricity delivered to customers
that has not been billed. Unbilled revenues represent assets on the balance
sheet that become accounts receivable in the following month as customers are
billed. Billed revenues are based on meter readings.
Unbilled revenues are estimated monthly using the requirements method. The
requirements method utilizes the total monthly volume of electricity
delivered to the system and applies a delivery efficiency factor to reduce
the total monthly volume by an estimate of delivery losses in order to
calculate total estimated monthly sales to customers. The total estimated
monthly sales amount less total monthly billed sales amount results in a
monthly estimate of unbilled sales. Unbilled revenues are estimated by
applying an average rate to the estimate of unbilled sales.
In 2003, the unbilled sales estimates for WMECO were tested using the cycle
method. The cycle method uses the billed sales from each meter reading cycle
and an estimate of unbilled days in each month based on the meter reading
schedule. The cycle method is historically more accurate than the
requirements method when used in a mostly weather-neutral month. The cycle
method resulted in adjustments to the estimate of unbilled revenues that had
a positive after-tax earnings impact on WMECO of $0.3 million in 2003.
Wholesale transmission revenues are based on rates and formulas that are
approved by the FERC. Most of WMECO's wholesale transmission revenues are
collected through a combination of the New England Regional Network Service
(RNS) tariff and WMECO's Local Network Service (LNS) tariff. The RNS tariff,
which is administered by the New England Independent System Operator,
recovers the revenue requirements associated with transmission facilities
that are deemed by the FERC to be Pool Transmission Facilities. The LNS
tariff which was accepted by the FERC on October 22, 2003, provides for the
recovery of WMECO's total transmission revenue requirements, net of revenue
credits received from various rate components, including revenues received
under the RNS rates.
F. ACCOUNTING FOR ENERGY CONTRACTS
The accounting treatment for energy contracts entered into varies between
contracts and depends on the intended use of the particular contract and on
whether or not the contracts are derivatives.
Non-derivative contracts that are entered into for the normal purchase or
sale of energy to customers that will result in physical delivery are
recorded at the point of delivery under accrual accounting.
Derivative contracts that are entered into for the normal purchase and sale
of energy and meet the normal purchase and sale exception to derivative
accounting, as defined in SFAS No. 133 and amended by SFAS No. 149 (normal),
are also recorded at the point of delivery under accrual accounting.
Both non-derivative contracts and derivative contracts that are normal are
recorded in revenues when these contracts represent sales, and recorded in
fuel, purchased and net interchange power when these contracts represent
purchases, except for sales contracts that relate to procurement activities.
These contracts are recorded in fuel, purchased and net interchange power
when settled.
For further information regarding these contracts and their accounting, see
Note 3, "Derivative Instruments and Risk Management Activities," to the
consolidated financial statements.
G. REGULATORY ACCOUNTING
The accounting policies of WMECO conform to accounting principles generally
accepted in the United States of America applicable to rate-regulated
enterprises and historically reflect the effects of the rate-making process
in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types
of Regulation."
The transmission and distribution of WMECO continue to be cost-of-service
rate regulated. Management believes the application of SFAS No. 71 to that
portion of those businesses continues to be appropriate. Management also
believes it is probable that WMECO will recover its investments in long-lived
assets, including regulatory assets. In addition, all material net
regulatory assets are earning an equity return, except for securitized
regulatory assets, which are not supported by equity.
The components of regulatory assets are as follows:
- ---------------------------------------------------------------------
At December 31,
- ---------------------------------------------------------------------
(Millions of Dollars) 2003 2002
- ---------------------------------------------------------------------
Recoverable nuclear costs $ 32.7 $ 38.0
Securitized assets 132.1 141.9
Income taxes, net 60.1 54.2
Unrecovered contractual obligations 86.9 63.8
Recoverable energy costs 3.7 4.3
Rate cap deferral (57.1) (28.1)
Other 9.8 9.6
- ---------------------------------------------------------------------
Totals $268.2 $283.7
- ---------------------------------------------------------------------
Recoverable Nuclear Costs: In March 2001, WMECO sold its ownership interest
in the Millstone nuclear units (Millstone). The gain on this sale of
$119.8 million was used to offset recoverable nuclear costs, resulting in a
total unamortized balance of $6.1 million and $7.1 million at December 31, 2003
and 2002, respectively. Also included in recoverable nuclear costs for 2003
and 2002 are $26.6 million and $30.9 million, respectively, primarily related
to Millstone 1 recoverable nuclear costs associated with the recoverable
portion of the undepreciated plant and related assets at the time Millstone 1
was shut down.
Securitized Assets: In May 2001, WMECO issued $155 million in rate reduction
certificates and used $80 million of those proceeds to buy out an independent
power producer contract. The remaining balance is $132.1 million and $141.9
million at December 31, 2003 and 2002, respectively.
Securitized assets are being recovered over the amortization period of their
associated rate reduction bonds. All outstanding rate reduction bonds of
WMECO are scheduled to fully amortize by June 1, 2013.
Income Taxes, Net: 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
DTE and SFAS No. 109. Differences in income taxes between SFAS No. 109 and
the rate-making treatment of the DTE are recorded as regulatory assets.
For further information regarding income taxes, see Note 1H, "Summary of
Significant Accounting Policies - Income Taxes," and Note 11, "Income Tax
Expense," to the consolidated financial statements.
Unrecovered Contractual Obligations: WMECO, under the terms of contracts with
three regional nuclear companies (Yankee Companies), is responsible for its
proportionate share of the remaining costs of the units, including
decommissioning. These amounts are recorded as unrecovered contractual
obligations. A portion of these obligations were securitized in 2001 and are
included in securitized regulatory assets. During 2002, WMECO was notified
by the Yankee Companies that the estimated cost of decommissioning their
units had increased over prior estimates due to higher anticipated costs for
spent fuel storage, security and liability and property insurance. In
December 2002, WMECO recorded an additional $32.4 million in deferred
contractual obligations and a corresponding increase in the unrecovered
contractual obligations regulatory asset as a result of these increased
costs.
In November 2003, the Connecticut Yankee Atomic Power Company (CYAPC)
prepared an updated estimate of the cost of decommissioning its nuclear unit.
WMECO's aggregate share of the estimated increased cost is $32.5 million.
WMECO recorded an additional $32.5 million in deferred contractual
obligations and a corresponding increase in the unrecovered contractual
obligations regulatory asset as a result of these increased costs.
Recoverable Energy Costs: Under the Energy Policy Act of 1992 (Energy Act),
WMECO was 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. WMECO no longer owns nuclear generation but continues to recover these
costs through rates. At December 31, 2003 and 2002, WMECO's total D&D
Assessment deferrals were $3.7 million and $4.3 million, respectively, and
have been recorded as recoverable energy costs.
The majority of the recoverable energy costs are recovered in rates currently
from WMECO's customers.
Rate Cap Deferral: The rate cap deferral allows WMECO to recover stranded
costs. These amounts represent the cumulative excess of transition cost
revenues over transition cost expenses.
Regulatory Liabilities: WMECO maintained $27.8 million and $17.4 million of
regulatory liabilities at December 31, 2003 and 2002, respectively. These
amounts are comprised of the following:
- ----------------------------------------------------------------
At December 31,
- ----------------------------------------------------------------
(Millions of Dollars) 2003 2002
- ----------------------------------------------------------------
Cost of removal $25.0 $17.0
Other regulatory liabilities 2.8 0.4
- ----------------------------------------------------------------
Totals $27.8 $17.4
- ----------------------------------------------------------------
Under SFAS No. 71, WMECO currently recovers amounts in rates for future costs
of removal of plant assets. Historically, these amounts were included as a
component of accumulated depreciation until spent. These amounts were
reclassified to regulatory liabilities on the accompanying consolidated
balance sheets.
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 and SFAS No. 109.
The tax effects of temporary differences that give rise to the net
accumulated deferred tax obligation are as follows:
- --------------------------------------------------------------------------
At December 31,
- --------------------------------------------------------------------------
(Millions of Dollars) 2003 2002
- --------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation and
other plant-related differences $ 87.6 $ 76.2
Regulatory amounts:
Securitized contract termination
costs and other 22.7 27.0
Income tax gross-up 24.3 24.3
Employee benefits 30.3 27.3
Other 78.9 95.2
- --------------------------------------------------------------------------
Total deferred tax liabilities 243.8 250.0
- --------------------------------------------------------------------------
Deferred tax assets:
Regulatory deferrals 17.3 13.3
Employee benefits 1.5 1.4
Income tax gross-up 0.2 3.2
Other 8.3 10.0
- --------------------------------------------------------------------------
Total deferred tax assets 27.3 27.9
- --------------------------------------------------------------------------
Totals $216.5 $222.1
- --------------------------------------------------------------------------
NU and its subsidiaries, including WMECO, file a consolidated federal income
tax return. Likewise NU and its subsidiaries, including WMECO, file state
income tax returns, with some filing in more than one state. NU and its
subsidiaries, including WMECO, are parties to a tax allocation agreement
under which each taxable subsidiary pays a quarterly estimate (or settlement)
of no more than it would have otherwise paid had it filed a stand-alone tax
return. Generally these quarterly estimated payments are settled to actual
payments within three months after filing the associated return. Subsidiaries
generating tax losses are similarly paid for their losses when utilized.
In 2000, NU requested from the Internal Revenue Service (IRS) a Private
Letter Ruling (PLR) regarding the treatment of unamortized investment tax
credits (ITC) and excess deferred income taxes (EDIT) related to generation
assets that have been sold. EDIT are temporary differences between book and
taxable income that were recorded when the federal statutory tax rate was
higher than it is now or when those differences were expected to be resolved.
The PLR addresses whether or not EDIT and ITC can be returned to customers,
which without a PLR management believes would represent a violation of
current tax law. The IRS declared a moratorium on issuing PLRs until final
regulations on the return of EDIT and ITC to regulated customers are issued
by the Treasury Department. Proposed regulations were issued in March 2003,
and a hearing took place in June 2003. The proposed new regulations would
allow the return of EDIT and ITC to regulated customers without violating the
tax law. Also, under the proposed regulations, a company could elect to
apply the regulation retroactively. The Treasury Department is currently
deliberating the comments received at the hearing. If final regulations
consistent with the proposed regulations are issued, then there could be an
impact on WMECO's financial statements.
I. DEPRECIATION
The provision for depreciation is calculated using the straight-line method
based on estimated remaining useful lives of depreciable utility plant-in-
service, which range primarily from 15 years to 60 years, adjusted for
salvage value and removal costs, as approved by the appropriate regulatory
agency where applicable. Depreciation rates are applied to the average plant-
in-service 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. Cost of
removal is now classified as a regulatory liability. The depreciation rates
for the several classes of electric plant-in-service are equivalent to a
composite rate of 2.4 percent in 2003 and 2.3 percent in 2002 and 2001.
J. EQUITY INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT
Regional Nuclear Companies: At December 31, 2003, WMECO owns common stock in
three regional nuclear companies (Yankee Companies). WMECO's ownership
interests in the Yankee Companies at December 31, 2003 and 2002, which are
accounted for on the equity method are 9.5 percent of CYAPC, 7 percent of the
Yankee Atomic Electric Company (YAEC) and 3 percent of the Maine Yankee
Atomic Power Company (MYAPC). Effective November 7, 2003, WMECO sold its 2.6
percent ownership interest in Vermont Yankee Nuclear Power Corporation
(VYNPC). WMECO's total equity investment in the Yankee Companies at
December 31, 2003 and 2002, is $5.9 million and $8.6 million, respectively.
Each of the remaining Yankee Companies owns a single nuclear generating plant
which is being decommissioned.
K. Allowance for Funds Used During Construction
The allowance for funds used during construction (AFUDC) is a non-cash item
that is included in the cost of WMECO plant and represents the cost of
borrowed and equity funds used to finance construction. The portion of AFUDC
attributable to borrowed funds is recorded as a reduction of other interest
expense, and the cost of equity funds is recorded as other income on the
consolidated statements of income:
- -----------------------------------------------------------
For the Years Ended December 31,
- -----------------------------------------------------------
(Millions of Dollars,
except percentages) 2003 2002 2001
- -----------------------------------------------------------
Borrowed funds $0.1 $0.3 $0.4
Equity funds - - -
- -----------------------------------------------------------
Totals $0.1 $0.3 $0.4
- -----------------------------------------------------------
Average AFUDC rates 1.7% 3.0% 6.0%
- -----------------------------------------------------------
L. ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement requires that legal obligations associated with
the retirement of property, plant and equipment be recognized as a liability
at fair value when incurred and when a reasonable estimate of the fair value
of the liability can be made. SFAS No. 143 was effective on January 1, 2003,
for WMECO. Management has completed its review process for potential asset
retirement obligations (ARO) and not identified any material AROs that have
been incurred. However, management identified certain removal obligations
that arise in the ordinary course of business or have a low probability of
occurring. These types of obligations primarily relate to transmission and
distribution lines and poles, telecommunication towers, transmission cables and
certain FERC or state regulatory agency re-licensing issues. These obligations
are AROs that have not been incurred or are not material in nature.
A portion of WMECO's rates is intended to recover the cost of removal of
certain utility assets. The amounts recovered do not represent AROs. At
December 31, 2003 and 2002, cost of removal was approximately $25 million and
$17 million, respectively.
M. MATERIALS AND SUPPLIES
Materials and supplies include materials purchased primarily for
construction, operation and maintenance (O&M) purposes. Materials and
supplies are valued at the lower of average cost or market.
N. OTHER INCOME/(LOSS)
The pre-tax components of WMECO's other income/(loss) items are as follows:
- ----------------------------------------------------------------
For the Years Ended December 31,
- ----------------------------------------------------------------
(Millions of Dollars) 2003 2002 2001
- ----------------------------------------------------------------
Investment income $ 1.8 $ 1.6 $ 0.9
Charitable donations (0.3) (0.3) (0.4)
Other, net 1.7 (2.2) (1.6)
- ----------------------------------------------------------------
Totals $ 3.2 $(0.9) $(1.1)
- ----------------------------------------------------------------
2. SHORT-TERM DEBT
- -------------------------------------------------------------------------------
Limits: The amount of short-term borrowings that may be incurred by WMECO is
subject to periodic approval by the SEC under the 1935 Act or the DTE. On
June 30, 2003, the SEC granted authorization allowing WMECO to incur total
short-term borrowings up to a maximum of $200 million through June 30, 2006,
with authorization for borrowings from the NU Money Pool (Pool) granted
through June 30, 2004.
Credit Agreement: On November 10, 2003, WMECO, CL&P, PSNH, and Yankee Gas
entered into a 364-day unsecured revolving credit facility for $300 million.
This facility replaces a similar credit facility that expired on November 11,
2003 and WMECO may draw up to $100 million under this facility. Unless
extended, the credit facility will expire on November 8, 2004. At December 31,
2003 and 2002, there were $10 million and $7 million, respectively, in
borrowings under these credit facilities.
Under the aforementioned credit agreement, WMECO may borrow at fixed or
variable rates plus an applicable margin based upon certain debt ratings, as
rated by the lower of Standard and Poor's or Moody's Investors Service. The
weighted average interest rates on WMECO's notes payable to banks outstanding
on December 31, 2003 and 2002 were 1.9 percent and 4.3 percent, respectively.
Under the credit agreement, WMECO must comply with certain financial and non-
financial covenants as are customarily included in such agreements, including
but not limited to, consolidated debt ratios and interest coverage ratios.
The most restrictive financial covenant is the interest coverage ratio.
WMECO currently is and expects to remain in compliance with these covenants.
Pool: WMECO is a member of the Pool. The Pool provides a more efficient use
of the cash resources of NU 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, 2003 and 2002, WMECO had borrowings of $31.4
million and $85.9 million from the Pool, respectively. The interest rate on
borrowings from the Pool at December 31, 2003 and 2002 was 1 percent and 1.2
percent, respectively.
3. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
- -------------------------------------------------------------------------------
A. DERIVATIVE INSTRUMENTS
Effective January 1, 2001, WMECO adopted SFAS No. 133, as amended.
Derivatives that do not meet the definition of a cash flow hedge and cannot
be designated as being used for normal purchases or normal sales are also
recorded at fair value with changes in fair value included in earnings unless
recorded as a regulatory asset or liability. Derivative contracts that are
entered into as a normal purchase or sale and will result in physical
delivery, and are documented as such, are recorded under accrual accounting.
For information regarding accounting changes related to derivative
instruments, see Note 1C, "Summary of Significant Accounting Policies - New
Accounting Standards," to the consolidated financial statements. WMECO had
no derivative contracts at December 31, 2003 or 2002 that required fair value
accounting.
B. RISK MANAGEMENT ACTIVITIES
WMECO is subject to credit risk from certain long-term or high-volume supply
contracts with energy marketing companies. Credit risks and market risks at
WMECO are monitored regularly by a Risk Oversight Council operating outside
of the business units that create or actively manage these risk exposures to
ensure compliance with NU's stated risk management policies.
4. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- -------------------------------------------------------------------------------
Pension Benefits: WMECO participates in a uniform noncontributory defined
benefit retirement plan (Pension Plan) covering substantially all regular NU
employees. Benefits are based on years of service and the employees' highest
eligible compensation during 60 consecutive months of employment. Pre-tax
pension income was $7.9 million in 2003, $12.1 million in 2002, and $13.7
million in 2001. These amounts exclude pension settlements, curtailments and
net special termination expenses of $1.2 million in income in 2002 and $0.3
million in expense in 2001. WMECO uses a December 31 measurement date for
the Pension Plan. Pension income attributable to earnings is as follows:
- -------------------------------------------------------------------------------
For the Years Ended December 31,
- -------------------------------------------------------------------------------
(Millions of Dollars) 2003 2002 2001
- -------------------------------------------------------------------------------
Pension income before
settlements, curtailments
and special termination benefits $(7.9) $(12.1) $(13.7)
Net pension income
capitalized as utility plant 3.1 4.2 4.6
- -------------------------------------------------------------------------------
Net pension income before
settlements, curtailments
and special termination
benefits (4.8) (7.9) (9.1)
Settlements, curtailments and
special termination benefits
reflected in earnings - - 0.7
- -------------------------------------------------------------------------------
Total pension income
included in earnings $(4.8) $ (7.9) $ (8.4)
- -------------------------------------------------------------------------------
Pension Settlements, Curtailments and Special Termination Benefits: There
were no settlements, curtailments or special termination benefits in 2003.
In conjunction with the divestiture of its generation assets, WMECO recorded
$1.2 million in curtailment income in 2002, all of which was recorded as a
regulatory liability and did not impact earnings.
In conjunction with the Voluntary Separation Program (VSP) that was announced
in December 2000, WMECO recorded $0.2 million in settlement income in 2001.
The VSP was intended to reduce the generation-related support staff between
March 1, 2001 and February 28, 2002, and was available to non-bargaining unit
employees who, by February 1, 2002, were at least age 50, with a minimum of
five years of credited service, and at December 15, 2000, were assigned to
certain groups and in eligible job classifications.
One component of the VSP included special pension termination benefits equal
to the greater of 5 years added to both age and credited service of eligible
participants or two weeks of pay for each year of service subject to a
minimum level of 12 weeks and a maximum of 52 weeks for eligible
participants. The special pension termination benefits expense associated
with the VSP totaled $0.5 million in 2001. The net total of the settlement
and curtailment income and the special termination benefits expense was $0.3
million, of which $0.7 million of costs were included in operating expenses,
$0.4 million was deferred as a regulatory liability and is expected to be
returned to customers.
Postretirement Benefits Other Than Pensions (PBOP): WMECO also provides
certain health care benefits, primarily medical and dental, and life
insurance benefits through a benefit plan to retired employees (PBOP Plan).
These benefits are available for employees retiring from WMECO 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 estimated work life of the
employee. WMECO uses a December 31 measurement date for the PBOP Plan.
WMECO annually funds postretirement costs through external trusts with
amounts that have been rate-recovered and which also are tax deductible.
In 2002, the PBOP Plan was amended to change the claims experience basis, to
increase minimum retiree contributions and to reduce the cap on the company's
subsidy to the dental plan. These amendments resulted in a $2.1 million
decrease in WMECO's benefit obligation under the PBOP Plan at December 31,
2002.
Impact of New Medicare Changes on PBOP: On December 8, 2003, the President
signed into law a bill that expands Medicare, primarily by adding a
prescription drug benefit starting in 2006 for Medicare-eligible retirees as
well as a federal subsidy to plan sponsors of retiree health care benefit
plans who provide a prescription drug benefit at least actuarially equivalent
to the new Medicare benefit.
Based on the current PBOP Plan provisions, WMECO's actuaries believe that
WMECO will qualify for this federal subsidy because the actuarial value of
WMECO's PBOP Plan is estimated to be 60 percent greater than that of the
standard Medicare benefit. WMECO will directly benefit from the federal
subsidy for retirees who retired before 1991. For other retirees, management
does not believe that WMECO will benefit from the subsidy because WMECO's
cost support for these retirees is capped at a fixed dollar commitment.
The aggregate effect of recognizing the Medicare change is a decrease to the
PBOP benefit obligation of $2.3 million. This amount includes the present
value of the future government subsidy, which was estimated by discounting
the expected payments using the actuarial assumptions used to determine the
PBOP liability at December 31, 2003. Also included in the $2.3 million
estimate is a decrease in the assumed participation in NU's retiree health
plan from 95 percent to 85 percent for future retirees, which reflects the
expectation that the Medicare prescription benefit will produce insurer-
sponsored health plans that are more financially attractive to future
retirees. The per capita claims cost estimate was not changed. Management
reduced the PBOP benefit obligation as of December 31, 2003 by $2.3 million
and recorded this amount as an actuarial gain within unrecognized net
loss/(gain) in the tables that follow. The $2.3 million actuarial gain will
be amortized beginning in 2004 as a reduction to PBOP expense over the future
working lifetime of employees covered under the plan (approximately 13
years). PBOP expense in 2004 will also reflect a lower interest cost due to
the reduction in the December 31, 2003 benefit obligation.
Specific authoritative guidance on accounting for the effect of the Medicare
federal subsidy on PBOP plans and amounts is pending from the FASB. When
issued, that guidance could require WMECO to change the accounting described
above and change the information reported herein.
PBOP Settlements, Curtailments and Special Termination Benefits: There were
no settlements, curtailments or special termination benefits in 2003. In
2001, WMECO recorded PBOP special termination benefits expense of $0.1
million in connection with the VSP. This amount was recorded as a regulatory
asset and collected through rates in 2002.
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) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $(133.6) $(121.3) $(36.6) $(35.5)
Service cost (2.5) (2.2) (0.4) (0.4)
Interest cost (8.7) (8.7) (2.4) (2.6)
Medicare impact - - 2.3 -
Plan amendment - (1.1) - 2.1
Transfers 0.5 (0.2) - -
Actuarial loss (7.6) (8.2) (1.5) (3.8)
Benefits paid - excluding lump sum payments 8.1 8.1 2.7 3.6
- ----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $(143.8) $(133.6) $(35.9) $(36.6)
- ----------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 162.4 $ 191.2 $ 13.3 $ 14.7
Actual return on plan assets 41.5 (20.9) 3.4 (1.2)
Employer contribution - - 3.4 3.4
Transfers (0.5) 0.2 - -
Benefits paid - excluding lump sum payments (8.1) (8.1) (2.7) (3.6)
- ----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 195.3 $ 162.4 $ 17.4 $ 13.3
- ----------------------------------------------------------------------------------------------------------
Funded status at December 31 $ 51.5 $ 28.8 $(18.5) $(23.3)
Unrecognized transition (asset)/obligation (0.2) (0.5) 12.4 13.8
Unrecognized prior service cost 5.7 6.4 - -
Unrecognized net loss 18.4 32.8 6.1 10.0
- ----------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 75.4 $ 67.5 $ - $ 0.5
- ----------------------------------------------------------------------------------------------------------
The accumulated benefit obligation for the Pension Plan was $127.2 million
and $116.3 million at December 31, 2003 and 2002, respectively.
The following actuarial assumptions were used in calculating the plans' year
end funded status:
- -------------------------------------------------------------------------------
At December 31,
- -------------------------------------------------------------------------------
Balance Sheets Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 6.25% 6.75%
Compensation/progression rate 3.75% 4.00% N/A N/A
Health care cost trend rate N/A N/A 9.00% 10.00%
- -------------------------------------------------------------------------------
The components of net periodic (income)/expense are as follows:
- -----------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------
(Millions of Dollars) 2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Service cost $ 2.5 $ 2.2 $ 1.9 $ 0.4 $ 0.4 $ 0.4
Interest cost 8.7 8.7 8.5 2.4 2.6 2.3
Expected return on plan assets (18.2) (19.9) (20.0) (1.3) (1.3) (1.4)
Amortization of unrecognized net
transition (asset)/obligation (0.2) (0.2) (0.2) 1.4 1.5 1.6
Amortization of prior service cost 0.7 0.7 0.6 - - -
Amortization of actuarial gain (1.4) (3.6) (4.5) - - -
Other amortization, net - - - 0.6 0.2 (0.4)
- -----------------------------------------------------------------------------------------------------------------
Net periodic (income)/expense - before
settlements, curtailments and special
termination benefits (7.9) (12.1) (13.7) 3.5 3.4 2.5
- -----------------------------------------------------------------------------------------------------------------
Settlement income - - (0.2) - - -
Curtailment income - (1.2) - - - -
Special termination benefits expense - - 0.5 - - 0.1
- -----------------------------------------------------------------------------------------------------------------
Total - settlements, curtailments and special
termination benefits - (1.2) 0.3 - - 0.1
- -----------------------------------------------------------------------------------------------------------------
Total - net periodic (income)/expense $ (7.9) $(13.3) $(13.4) $ 3.5 $ 3.4 $ 2.6
- -----------------------------------------------------------------------------------------------------------------
For calculating pension and postretirement benefit income and expense
amounts, the following assumptions were used:
- -----------------------------------------------------------------------------------------
For the Years Ended December 31,
- -----------------------------------------------------------------------------------------
Statements of Income Pension Benefits Postretirement Benefits
- -----------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected long-term rate of return 8.75% 9.25% 9.50% 8.75% 9.25% 9.50%
Compensation/progression rate 4.00% 4.25% 4.50% N/A N/A N/A
- -----------------------------------------------------------------------------------------
The following table represents the PBOP assumed health care cost trend rate
for the next year and the assumed ultimate trend rate:
- ---------------------------------------------------------------
Year Following December 31,
- ---------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------
Health care cost trend rate
assumed for next year 8.00% 9.00%
Rate to which health care cost
trend rate is assumed to
decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the
ultimate trend rate 2007 2007
- ---------------------------------------------------------------
The annual per capita cost of covered health care benefits was assumed to
decrease by one percentage point each year through 2007.
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 $0.1 $(0.7)
Effect on postretirement
benefit obligation $1.1 $(1.0)
- --------------------------------------------------------------------
WMECO's investment strategy for its Pension Plan and PBOP Plan is to maximize
the long-term rate of return on those plans' assets within an acceptable
level of risk. The investment strategy establishes target allocations, which
are regularly reviewed and periodically rebalanced. WMECO's expected long-
term rates of return on Pension Plan assets and PBOP Plan assets are based on
these target asset allocation assumptions and related expected long-term
rates of return.
In developing its expected long-term rate of return assumptions for the
Pension Plan and the PBOP Plan, WMECO also evaluated input from actuaries,
consultants and economists as well as long-term inflation assumptions and
WMECO's historical 20-year compounded return of approximately 11 percent.
The Pension Plan's and PBOP Plan's target asset allocation assumptions and
expected long-term rate of return assumptions by asset category are as
follows:
- -----------------------------------------------------------------------------------------------------------------
At December 31,
- -----------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Target Assumed Target Assumed Target Assumed Target Assumed
Asset Rate of Asset Rate of Asset Rate of Asset Rate of
Asset Category Allocation Return Allocation Return Allocation Return Allocation Return
- -----------------------------------------------------------------------------------------------------------------
Equity securities:
United States 45.00% 9.25% 45.00% 9.75% 55.00% 9.25% 55.00% 9.75%
Non-United States 14.00% 9.25% 14.00% 9.75% 11.00% 9.25% - -
Emerging markets 3.00% 10.25% 3.00% 10.75% 2.00% 10.25% - -
Private 8.00% 14.25% 8.00% 14.75% - - - -
Debt Securities:
Fixed income 20.00% 5.50% 20.00% 6.25% 27.00% 5.50% 45.00% 6.25%
High yield fixed
income 5.00% 7.50% 5.00% 7.50% 5.00% 7.50% - -
Real estate 5.00% 7.50% 5.00% 7.50% - - - -
- -----------------------------------------------------------------------------------------------------------------
The actual asset allocations at December 31, 2003 and 2002, approximated
these target asset allocations. The plans' actual weighted-average asset
allocations by asset category are as follows:
- --------------------------------------------------------------------------
At December 31,
- --------------------------------------------------------------------------
Postretirement
Pension Benefits Benefits
- --------------------------------------------------------------------------
Asset Category 2003 2002 2003 2002
- --------------------------------------------------------------------------
Equity securities:
United States 47.00% 46.00% 59.00% 55.00%
Non-United States 18.00% 17.00% 12.00% -
Emerging markets 3.00% 3.00% 1.00% -
Private 3.00% 3.00% - -
Debt Securities:
Fixed income 19.00% 21.00% 25.00% 45.00%
High yield fixed
income 5.00% 5.00% 3.00% -
Real estate 5.00% 5.00% - -
- -------------------------------------------------------------------------
Total 100.00% 100.00% 100.00% 100.00%
- --------------------------------------------------------------------------
Currently, WMECO's policy is to annually fund an amount at least equal to
that which will satisfy the requirements of the Employee Retirement Income
Security Act and Internal Revenue Code.
WMECO does not expect to make any contributions to the Pension Plan in 2004
and expects to make $4 million in contributions to the PBOP Plan in 2004.
Postretirement plan assets for non-union employees are subject to federal
income taxes.
5. NUCLEAR GENERATION ASSET DIVESTITURES
- -------------------------------------------------------------------------------
VYNPC: On July 31, 2002, VYNPC consummated the sale of its nuclear
generating plant to a subsidiary of Entergy Corporation (Entergy) for
approximately $180 million. As part of the sale, Entergy assumed
responsibility for decommissioning VYNPC's nuclear generating unit. On
November 7, 2003, WMECO sold its 2.6 percent ownership interest in VYNPC.
WMECO will continue to buy approximately 2.5 percent of the plant's output
through March 2012 at a range of fixed prices.
6. COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------------------------------
A. RESTRUCTURING AND RATE MATTERS
Transition Cost Reconciliations: On March 31, 2003, WMECO filed its 2002
transition cost reconciliation with the DTE. This filing reconciled the
recovery of generation-related stranded costs for calendar year 2002 and
included the renegotiated purchased power contract related to the Vermont
Yankee nuclear unit.
On July 15, 2003, the DTE issued a final order on WMECO's 2001 transition
cost reconciliation, which addressed WMECO's cost tracking mechanisms. As
part of that order, the DTE directed WMECO to revise its 2002 annual
transition cost reconciliation filing. The revised filing was submitted to
the DTE on September 22, 2003. Hearings have been held, and the timing of a
final decision from the DTE is uncertain. Management does not expect the
outcome of this docket to have a material adverse impact on WMECO's net
income or financial position.
B. ENVIRONMENTAL MATTERS
General: WMECO is subject to environmental laws and regulations intended to
mitigate or remove the effect of past operations and improve or maintain the
quality of the environment. These laws and regulations require the removal
or the remedy of the effect on the environment of the disposal or release of
certain specified hazardous substances at current and former operating sites.
As such, WMECO has an active environmental auditing and training program and
believes that it is substantially in compliance with all enacted laws and
regulations.
Environmental reserves are accrued using a probabilistic model approach when
assessments indicate that it is probable that a liability has been incurred
and an amount can be reasonably estimated. The probabilistic model approach
estimates the liability based on the most likely action plan from a variety
of available remediation options, ranging from no action to several different
remedies ranging from establishing institutional controls to full site
remediation and monitoring.
These estimates are subjective in nature as they take into consideration
several different remediation options at each specific site. The reliability
and precision of these estimates can be affected by several factors including
new information concerning either the level of contamination at the site,
recently enacted laws and regulations or a change in cost estimates due to
certain economic factors.
The amounts recorded as environmental liabilities on the consolidated balance
sheets represent management's best estimate of the liability for
environmental costs and takes into consideration site assessment and
remediation costs. Based on currently available information for estimated
site assessment and remediation costs at December 31, 2003 and 2002, WMECO
had $0.7 million and $0.8 million, respectively, recorded as environmental
reserves. A reconciliation of the total amount reserved at December 31, 2003
and 2002 is as follows:
- --------------------------------------------------------------------
(Millions of Dollars) For the Years Ended December 31,
- --------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------
Balance at beginning of year $ 0.8 $ 5.2
Additions and adjustments 0.3 0.2
Payments (0.4) (4.6)
- --------------------------------------------------------------------
Balance at end of year $ 0.7 $ 0.8
- --------------------------------------------------------------------
These liabilities are estimated on an undiscounted basis and do not assume
that any amounts are recoverable from insurance companies or other third
parties. The environmental reserve includes sites at different stages of
discovery and remediation and does not include any unasserted claims. At
December 31, 2003, there is one site for which there are unasserted claims;
however, any related remediation costs are not probable or estimable at this
time. WMECO's environmental liability also takes into account recurring
costs of managing hazardous substances and pollutants, mandated expenditures
to remediate previously contaminated sites and any other infrequent and non-
recurring clean up costs.
WMECO currently has nine sites included in the environmental reserve. Of
those nine sites, five sites are in the remediation or long-term monitoring
phase and four sites have had site assessments completed.
In addition, capital expenditures related to environmental matters are
expected to total approximately $1 million in aggregate for the years 2004
through 2008. These expenditures relate to environmental remediation
programs.
MGP Sites: Manufactured gas plant (MGP) sites are sites that manufactured gas
from coal and produced certain byproducts that may pose risk to human health
and the environment. At December 31, 2003 and 2002, $0.1 million and $0.4
million, respectively, represent amounts for the site assessment and
remediation of MGPs. WMECO currently has three MGP sites included in its
environmental liability. Of the three MGP sites, one is currently undergoing
remediation efforts with the other two MGP sites in the site assessment stage.
CERCLA Matters: The Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA) and its' amendments or state equivalents
impose joint and several strict liabilities, regardless of fault, upon
generators of hazardous substances resulting in removal and remediation costs
and environmental damages. Liabilities under these laws can be material and
in some instances may be imposed without regard to fault or for past acts
that may have been lawful at the time they occurred. WMECO has one superfund
site under CERCLA for which it has been notified that it is a potentially
responsible party (PRP). For sites where there are other PRPs and WMECO is
not managing the site assessment and remediation, the liability accrued
represents WMECO's estimate of what it will need to pay to settle its
obligations with respect to the site.
It is possible that new information or future developments could require a
reassessment of the potential exposure to related environmental matters. As
this information becomes available management will continue to assess the
potential exposure and adjust the reserves as necessary.
WMECO does not have a regulatory recovery mechanism to recover environmental
costs from its customers, and changes in WMECO's environmental reserves
impact WMECO's earnings.
C. SPENT NUCLEAR FUEL DISPOSAL COSTS
Under the Nuclear Waste Policy Act of 1982, WMECO 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. 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. At December 31, 2003 and
2002, fees due to the DOE for the disposal of Prior Period Fuel were $48.7
million and $48.2 million, respectively, including interest costs of $33.1
million and $32.6 million, respectively.
Fees for nuclear fuel burned on or after April 7, 1983, were billed currently
to customers and were paid to the DOE on a quarterly basis. At December 31,
2003, WMECO's ownership share of Millstone has been sold, and WMECO is no
longer responsible for fees relating to fuel burned at this facility since
their sale.
D. NUCLEAR INSURANCE CONTINGENCIES
In conjunction with the divestiture of Millstone in 2001, NU and WMECO
terminated their nuclear insurance related to Millstone, and WMECO has no
further exposure for potential assessments related to Millstone. However,
through its continuing association with Nuclear Electric Insurance Limited
(NEIL) and CYAPC, NU is subject to potential retrospective assessments
totaling $0.8 million under its respective NEIL insurance policies.
E. LONG-TERM CONTRACTUAL ARRANGEMENTS
VYNPC: Previously, under the terms of its agreement, WMECO paid its
ownership (or entitlement) shares of costs, which included depreciation, O&M
expenses, taxes, the estimated cost of decommissioning, and a return on
invested capital to VYNPC and recorded these costs as purchased-power
expenses. On July 31, 2002, VYNPC consummated the sale of its nuclear
generating unit to a subsidiary of Entergy for approximately $180 million.
Under the terms of the sale, WMECO will continue to buy approximately 2.5
percent of the plant's output through March 2012 at a range of fixed prices.
The total cost of purchases under contracts with VYNPC amounted to $4.6
million in 2003, $4.3 million in 2002 and $4.1 million in 2001.
Electricity Procurement Contracts: WMECO has entered into an arrangement for
the purchase of electricity. The total cost of purchases under this
arrangement amounted to $2.8 million in 2003, $2.5 million in 2002 and $14.5
million in 2001. These amounts relate to IPP contracts and do not include
contractual commitments related to WMECO's standard offer and default
service.
Hydro-Quebec: Along with other New England utilities, WMECO has entered into
an agreement to support transmission and terminal facilities to import
electricity from the Hydro-Quebec system in Canada. WMECO 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 Future Annual Costs: The estimated future annual costs of WMECO's
significant long-term contractual arrangements are as follows:
- -------------------------------------------------------------------------------
(Millions of
Dollars) 2004 2005 2006 2007 2008 Thereafter
- -------------------------------------------------------------------------------
VYNPC $4.6 $4.3 $4.5 $4.3 $4.4 $15.2
Electricity
Procurement
Contracts 2.4 2.4 2.4 2.4 2.4 4.8
Hydro-Quebec 2.9 2.8 2.6 2.4 2.3 27.6
- -------------------------------------------------------------------------------
Totals $9.9 $9.5 $9.5 $9.1 $9.1 $47.6
- -------------------------------------------------------------------------------
F. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS
In conjunction with the Millstone and VYNPC nuclear generation asset
divestitures, the applicable liabilities and nuclear decommissioning trusts
were transferred to the purchasers, and the purchasers agreed to assume
responsibility for decommissioning their respective units.
WMECO still has significant decommissioning and plant closure cost
obligations to the Yankee Companies that own the Yankee Atomic, Connecticut
Yankee (CY) and Maine Yankee nuclear power plants. Each plant has been shut
down and is undergoing decommissioning. The Yankee Companies collect
decommissioning and closure costs through wholesale FERC-approved rates
charged under power purchase agreements to WMECO. WMECO in turn passes these
costs on to its customers through state regulatory commission-approved retail
rates. A portion of the decommissioning and closure costs have already been
collected, but a substantial portion related to the decommissioning of CY has
not yet been filed at and approved for collection by the FERC.
During 2002, WMECO was notified by CYAPC and YAEC that the estimated cost of
decommissioning these units and other closure costs increased over prior
estimates due to higher anticipated costs for spent fuel storage, security
and liability and property insurance. WMECO's share of this increase is
$33.3 million. Following FERC rate cases by the Yankee Companies, WMECO
expects to recover the higher decommissioning costs from its retail
customers.
In June 2003, CYAPC notified NU that it had terminated its contract with
Bechtel Power Corporation (Bechtel) for the decommissioning of the CY nuclear
power plant. CYAPC terminated the contract based on its determination that
Bechtel's decommissioning work has been incomplete and untimely and that
Bechtel refused to perform the remaining decommissioning work. Bechtel has
filed a counterclaim against CYAPC asserting a number of claims and seeking a
variety of remedies, including monetary and punitive damages and the
rescission of the contract. Bechtel has amended its complaint to add claims
for wrongful termination.
In November 2003, CYAPC prepared an updated estimate of the cost of
decommissioning its nuclear unit. WMECO's aggregate share of the estimated
increased cost primarily related to the termination of Bechtel, is $32.5
million.
CYAPC is seeking recovery of additional decommissioning costs and other
damages from Bechtel and, if necessary, its surety. In pursuing this
recovery through pending litigation, CYAPC is also exploring options to
structure an appropriate rate application to be filed with the FERC, with any
resulting adjustments being charged to the owners of the nuclear unit,
including WMECO. The timing, amount and outcome of these filings cannot be
predicted at this time.
WMECO cannot at this time predict the timing or outcome of the FERC
proceeding required for the collection of these remaining decommissioning and
closure costs. Although management believes that these costs will ultimately
be recovered from WMECO's customers, there is a risk that the FERC may not
allow these costs, the estimates of which have increased significantly in
2003 and 2002, to be recovered in wholesale rates. If FERC does not allow
these costs to be recovered in wholesale rates, WMECO would expect the state
regulatory commissions to disallow these costs in retail rates as well.
At December 31, 2003 and 2002, WMECO's remaining estimated obligations for
decommissioning and closure costs for the shut down units owned by CYAPC,
YAEC and MYAPC were $86.9 million and $63.8 million, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments:
Long-Term Debt and Rate Reduction Bonds: The fair value of WMECO'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 WMECO's financial
instruments and the estimated fair values are as follows:
- ---------------------------------------------------------------------
At December 31, 2003
- ---------------------------------------------------------------------
(Millions of Dollars) Carrying Amount Fair Value
- ---------------------------------------------------------------------
Long-term debt -
Other long-term debt $157.5 $159.9
Rate reduction bonds 133.0 145.9
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
At December 31, 2002
- ---------------------------------------------------------------------
(Millions of Dollars) Carrying Amount Fair Value
- ---------------------------------------------------------------------
Long-term debt -
Other long-term debt $102.0 $104.3
Rate reduction bonds 142.7 159.2
- ---------------------------------------------------------------------
Other long-term debt includes $48.7 million and $48.2 million of fees and
interest due for spent nuclear fuel disposal costs at December 31, 2003 and
2002, respectively.
Other Financial Instruments: The carrying value of financial instruments
included in current assets and current liabilities, approximates their fair
value.
8. LEASES
- -------------------------------------------------------------------------------
WMECO has entered into lease agreements for the use of data processing and
office equipment, vehicles, and office space. The provisions of these lease
agreements generally provide for renewal options.
Capital lease rental payments charged to operating expense were zero in 2003
and 2002, and $1.9 million in 2001. Interest included in capital lease
rental payments was zero in 2003 and 2002, and $0.7 million in 2001.
Operating lease rental payments charged to expense were $2.5 million in 2003,
$2.3 million in 2002, and $2.5 million in 2001.
Future minimum rental payments excluding executory costs, such as property
taxes, state use taxes, insurance, and maintenance, under long-term
noncancelable operating leases, at December 31, 2003 are as follows:
- -----------------------------------------------------------
(Millions of Dollars) Operating
Year Leases
- -----------------------------------------------------------
2004 $ 3.3
2005 3.2
2006 2.9
2007 2.7
2008 2.5
Thereafter 9.0
- -----------------------------------------------------------
Future minimum lease payments $23.6
- -----------------------------------------------------------
9. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
- -------------------------------------------------------------------------------
The accumulated balance for each other comprehensive income/(loss) item is as
follows:
- ---------------------------------------------------------------------------
Current
December 31, Period December 31,
(Millions of Dollars) 2002 Change 2003
- ---------------------------------------------------------------------------
Unrealized
gains/(losses)
on securities $ - $ - $ -
Minimum supplemental
executive retirement
pension liability
adjustments (0.1) - (0.1)
- ---------------------------------------------------------------------------
Accumulated other
comprehensive
loss $(0.1) $ - $(0.1)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Current
December 31, Period December 31,
(Millions of Dollars) 2001 Change 2002
- ---------------------------------------------------------------------------
Unrealized
gains/(losses)
on securities $0.1 $(0.1) $ -
Minimum supplemental
executive retirement
pension liability
adjustments - (0.1) (0.1)
- ---------------------------------------------------------------------------
Accumulated other
comprehensive
income/(loss) $0.1 $(0.2) $(0.1)
- ---------------------------------------------------------------------------
The changes in the components of other comprehensive income/(loss) are
reported net of the following income tax effects:
- ---------------------------------------------------------------------------
(Millions of Dollars) 2003 2002 2001
- ---------------------------------------------------------------------------
Unrealized
gains
on securities $ - $0.1 $0.1
Minimum supplemental
executive retirement
pension liability
adjustments - - -
- ---------------------------------------------------------------------------
Accumulated other
comprehensive
income $ - $0.1 $0.1
- ---------------------------------------------------------------------------
10. LONG-TERM DEBT
- -------------------------------------------------------------------------------
Details of long-term debt outstanding are as follows:
- ---------------------------------------------------------------------------
At December 31, 2003 2002
- ---------------------------------------------------------------------------
(Millions of Dollars)
Pollution Control Notes:
Tax Exempt 1993 Series A,
5.85% due 2028 $ 53.8 $ 53.8
Other:
Taxable Senior Series A,
5.00% due 2013 55.0 -
- ---------------------------------------------------------------------------
Total Pollution Control Notes
and Other 108.8 53.8
- ---------------------------------------------------------------------------
Fees and interest due for spent
nuclear fuel disposal costs 48.7 48.2
- ---------------------------------------------------------------------------
Total pollution control notes and fees
and interest for spent nuclear fuel
disposal costs 157.5 102.0
- ---------------------------------------------------------------------------
Less amounts due within one year - -
Unamortized premium and
discount, net (0.3) -
- ---------------------------------------------------------------------------
Long-term debt $157.2 $102.0
- ---------------------------------------------------------------------------
11. 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, 2003 2002 2001
- ----------------------------------------------------------------
(Millions of Dollars)
Current income taxes:
Federal $23.4 $27.9 $ 0.3
State 4.4 5.8 1.0
---------------------------------------------------------------
Total current 27.8 33.7 1.3
- ----------------------------------------------------------------
Deferred income taxes, net:
Federal (12.0) (13.5) 5.3
State (2.0) 0.1 0.6
- ----------------------------------------------------------------
Total deferred (14.0) (13.4) 5.9
- ----------------------------------------------------------------
Investment tax credits, net (0.3) (13.5) (0.6)
- ----------------------------------------------------------------
Total income tax expense $13.5 $ 6.8 $ 6.6
- ----------------------------------------------------------------
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
- ----------------------------------------------------------------
For the Years Ended
December 31, 2003 2002 2001
- ----------------------------------------------------------------
(Millions of Dollars)
Depreciation $ 1.7 $ 1.5 $ (0.6)
Net regulatory deferral (13.7) (6.0) 4.1
Sale of generation assets - (2.0) (30.5)
Pension accruals 1.5 2.6 1.0
Contract termination costs,
net of amortization (4.4) (3.6) 30.6
Other 0.9 (5.9) 1.3
- ----------------------------------------------------------------
Deferred income taxes, net $(14.0) $(13.4) $ 5.9
- ----------------------------------------------------------------
A reconciliation between income tax expense and the expected tax expense at
the statutory rate is as follows:
- ----------------------------------------------------------------
For the Years Ended
December 31, 2003 2002 2001
- ----------------------------------------------------------------
(Millions of Dollars)
Expected federal income tax $10.4 $ 15.5 $ 7.5
Tax effect of differences:
Depreciation 0.6 0.5 1.9
Amortization of
regulatory assets 1.0 - -
Investment tax credit
amortization (0.3) (13.5) (0.6)
State income taxes,
net of federal benefit 1.6 3.8 1.0
Other, net 0.2 0.5 (3.2)
- -----------------------------------------------------------------
Total income tax expense $13.5 $ 6.8 $ 6.6
- -----------------------------------------------------------------
12. SEGMENT INFORMATION
- -------------------------------------------------------------------------------
NU is organized between the Utility Group and NU Enterprises based on each
segments' regulatory environment or lack thereof. WMECO is included in the
Utility Group segment of NU and has no other reportable segments.
- -------------------------------------------------------------------------------
Consolidated Quarterly Financial Data (Unaudited)
- -------------------------------------------------------------------------------
(Thousands of Dollars) Quarter Ended (a)
- -------------------------------------------------------------------------------
2003 March 31, June 30, September 30, December 31,
- -------------------------------------------------------------------------------
Operating Revenues $104,786 $89,665 $103,365 $93,362
Operating Income $ 14,694 $ 7,561 $ 11,592 $ 6,547
Net Income $ 6,068 $ 2,586 $ 5,195 $ 2,363
- -------------------------------------------------------------------------------
2002
- -------------------------------------------------------------------------------
Operating Revenues $ 96,005 $87,191 $ 95,684 $90,607
Operating Income $ 15,695 $10,678 $ 12,524 $20,786
Net Income $ 6,890 $15,322 $ 4,730 $10,740
- -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Selected Consolidated Financial Data (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Operating Revenues $391,178 $369,487 $478,869 $ 513,678 $ 414,231
Net Income 16,212 37,682 14,968 35,268 2,887
Cash Dividends on Common Stock 22,011 16,009 22,000 12,002 -
Gross Property, Plant and Equipment (b) 625,574 602,013 583,183 1,153,514 1,216,015
Total Assets (c) 863,564 853,646 852,662 1,047,818 1,253,604
Rate Reduction Bonds 132,960 142,742 152,317 - -
Long-Term Debt (d) 157,202 101,991 101,170 199,425 290,279
Preferred Stock Not Subject to Mandatory Redemption - - - 20,000 20,000
Preferred Stock Subject to Mandatory Redemption (d) - - - 16,500 18,000
Obligations Under Capital Leases (d) 57 87 110 26,921 29,972
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Consolidated Statistics (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Revenues: (Thousands)
Residential $165,871 $158,060 $174,899 $148,735 $146,728
Commercial 133,122 127,030 157,722 135,703 131,655
Industrial 63,990 60,782 83,752 79,886 75,220
Other Utilities 14,347 9,354 38,893 123,874 34,626
Streetlighting and Railroads 4,817 5,071 5,306 5,106 4,831
Miscellaneous 9,031 9,190 18,297 20,374 21,171
- -----------------------------------------------------------------------------------------------------------------------------
Total $391,178 $369,487 $478,869 $513,678 $414,231
- -----------------------------------------------------------------------------------------------------------------------------
Sales: (kWh - Millions)
Residential 1,521 1,459 1,389 1,382 1,394
Commercial 1,567 1,523 1,495 1,465 1,468
Industrial 909 912 940 1,010 999
Other Utilities 255 180 864 3,396 769
Streetlighting and Railroads 26 28 24 25 24
- -----------------------------------------------------------------------------------------------------------------------------
Total 4,278 4,102 4,712 7,278 4,654
- -----------------------------------------------------------------------------------------------------------------------------
Customers: (Average)
Residential 185,202 183,662 182,688 181,316 180,807
Commercial 18,838 18,516 15,996 15,593 15,745
Industrial 897 910 808 801 807
Other 693 672 674 662 653
- -----------------------------------------------------------------------------------------------------------------------------
Total 205,630 203,760 200,166 198,372 198,012
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Use Per
Residential Customer (kWh) 8,214 7,921 7,476 7,371 7,423
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Bill Per
Residential Customer $895.33 $857.84 $941.23 $793.12 $780.90
- -----------------------------------------------------------------------------------------------------------------------------
Average Revenue Per kWh:
Residential 10.90 cents 10.83 cents 12.59 cents 10.76 cents 10.52 cents
Commercial 8.50 8.34 10.55 9.26 8.97
Industrial 7.04 6.66 8.91 7.91 7.53
- -----------------------------------------------------------------------------------------------------------------------------
Employees 408 400 405 406 482
=============================================================================================================================
(a) Certain reclassifications of prior years' data have been made to conform
with the current year's presentation.
(b) Amount includes construction work in progress.
(c) Total assets were not adjusted for cost of removal prior to 2002.
(d) Includes portions due within one year.