Exhibit 13.4
1994
ANNUAL REPORT
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
---------------------------------------
1994 Annual Report
Public Service Company of New Hampshire
Index
Contents Page
-------- ----
Balance Sheets..................................... 1-2
Statements of Income............................... 3
Statements of Cash Flows........................... 4
Statements of Common Equity........................ 5
Notes to Financial Statements...................... 6-27
Report of Independent Public Accountants........... 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 29-35
Selected Financial Data............................ 37-38
Statistics......................................... 39
Statements of Quarterly Financial Data............. 39
Preferred Stockholder and Bondholder Information... Back Cover
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
-------------------------------------------------------------------------------------
At December 31, 1994 1993
-------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
------
Utility Plant, at original cost:
Electric................................................ $2,038,625 $1,980,050
Less: Accumulated provision for depreciation......... 474,129 441,076
----------- -----------
1,564,496 1,538,974
Construction work in progress........................... 17,781 8,573
Nuclear fuel, net....................................... 2,248 2,107
----------- -----------
Total net utility plant............................. 1,584,525 1,549,654
----------- -----------
Other Property and Investments:
Nuclear decommissioning trusts, at market in 1994 and
at cost in 1993 (Note 12)<F12>......................... 1,815 1,486
Investments in regional nuclear generating
companies and subsidiary company, at equity............ 19,551 19,816
Other, at cost.......................................... 394 429
----------- -----------
21,760 21,731
----------- -----------
Current Assets:
Cash.................................................... 322 5,995
Notes receivable from affiliated companies.............. 35,000 -
Receivables, less accumulated provision for
uncollectible accounts of $2,015,000 in 1994
and of $1,816,000 in 1993............................. 76,173 76,665
Accounts receivable from affiliated companies........... 3,779 859
Accrued utility revenues................................ 36,547 35,770
Fuel, materials, and supplies, at average cost.......... 37,453 41,187
Prepayments and other................................... 20,829 10,429
----------- -----------
210,103 170,905
----------- -----------
Deferred Charges:
Regulatory assets (Note 1H)<F1H>........................ 971,505 973,353
Deferred receivable from affiliated company............. 33,284 33,284
Unamortized debt expense................................ 17,064 19,643
Other................................................... 7,726 5,941
----------- -----------
1,029,579 1,032,221
----------- -----------
Total Assets........................................ $2,845,967 $2,774,511
=========== ===========
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
--------------------------------------------------------------------------------------
At December 31, 1994 1993
--------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, $1 par value--authorized
and outstanding 1,000 shares in 1994 and 1993........... $ 1 $ 1
Capital surplus, paid in................................. 421,784 421,245
Retained earnings........................................ 125,034 60,840
----------- -----------
Total common stockholder's equity............... 546,819 482,086
Cumulative preferred stock subject to mandatory
redemption--
$25 par value--authorized 25,000,000 shares;
outstanding 5,000,000 shares in 1994 and 1993
(Note 6)<F6>......................................... 125,000 125,000
Long-term debt (Note 7)<F7>.............................. 905,985 999,985
----------- -----------
Total capitalization............................ 1,577,804 1,607,071
----------- -----------
Obligations Under Seabrook Power Contract
and Other Capital Leases (Notes 2 and 3)<F2><F3>.......... 849,776 815,553
----------- -----------
Current Liabilities:
Notes payable to affiliated company...................... - 2,500
Long-term debt--current portion.......................... 94,000 94,000
Obligations under Seabrook Power Contract and other
capital leases--current portion (Notes 2 and 3)<F2><F3>. 38,191 41,006
Accounts payable......................................... 45,984 27,119
Accounts payable to affiliated companies................. 17,309 17,576
Accrued taxes............................................ 4,304 122
Accrued interest......................................... 10,496 11,142
Accrued pension benefits................................. 36,269 31,890
Other.................................................... 20,350 22,014
----------- -----------
266,903 247,369
----------- -----------
Deferred Credits:
Accumulated deferred income taxes (Note 1K)<F1K>......... 62,080 18,076
Accumulated deferred investment tax credits.............. 5,614 6,174
Deferred contract obligation--YAEC (Note 4)<F4>.......... 28,572 24,150
Deferred revenue from affiliated company
(Note 10G)<F10G>........................................ 33,284 33,284
Other.................................................... 21,934 22,834
----------- -----------
151,484 104,518
----------- -----------
Commitments and Contingencies (Note 10)<F10>
Total Capitalization and Liabilities............ $2,845,967 $2,774,511
=========== ===========
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF INCOME
-------------------------------------------------------------------------------------------------------
January 1, January 1, June 5, January 1,
1994 1993 1992 1992
to to to to
December 31, December 31, December 31, June 4,
For the Periods 1994 1993 1992 1992
-------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues.............................. $ 922,039 $ 864,415 $ 492,559 |$ 381,769
------------- ------------- -------------|------------
Operating Expenses: |
Operation -- |
Fuel, purchased and net interchange power.. 222,801 208,023 105,346 | 123,784
Other...................................... 303,271 301,534 176,679 | 103,250
Maintenance................................... 43,725 35,427 20,535 | 22,520
Depreciation.................................. 38,703 38,580 21,526 | 25,183
Amortization of regulatory assets, net........ 55,319 67,379 51,143 | 36,528
Federal and state income taxes (Note 8)<F8>... 68,088 54,087 39,197 | 16,449
Taxes other than income taxes................. 38,046 34,675 16,927 | 19,805
------------- ------------- -------------|------------
Total operating expenses................ 769,953 739,705 431,353 | 347,519
------------- ------------- -------------|------------
Operating Income................................ 152,086 124,710 61,206 | 34,250
------------- ------------- -------------|------------
Other Income: |
|
Deferred Seabrook return--other funds......... - - - | 12,101
Equity in earnings of regional nuclear |
generating companies and subsidary company.. 2,079 1,777 1,031 | 869
Bankruptcy related expenses................... - - - | (5,084)
Gain on generating projects................... - - - | 6,498
Other, net.................................... 629 635 2,519 | 63
Income taxes--(expense) credit................ (546) 3,868 14,254 | 12,814
------------- ------------- -------------|------------
Other income, net....................... 2,162 6,280 17,804 | 27,261
------------- ------------- -------------|------------
Income before interest charges.......... 154,248 130,990 79,010 | 61,511
------------- ------------- -------------|------------
Interest Charges: |
Interest on long-term debt.................... 76,410 77,842 47,625 | 54,125
Other interest................................ 394 911 1,987 | 3,913
Deferred Seabrook return--borrowed funds, |
net of income taxes.......................... - - - | (9,305)
------------- ------------- -------------|------------
Interest charges, net................... 76,804 78,753 49,612 | 48,733
------------- ------------- -------------|------------
|
Net Income...................................... $ 77,444 $ 52,237 $ 29,398 |$ 12,778
============= ============= =============|============
|
PSNH became a wholly owned subsidiary of Northeast Utilities on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------
Jan. 1, Jan. 1, Jun. 5, Jan. 1,
1994 1993 1992 1992
to to to to
Dec. 31, Dec. 31, Dec. 31, Jun. 4,
For the Periods 1994 1993 1992 1992
------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Cash Flows From Operating Activities: |
Net Income...............................................$ 77,444 $ 52,237 $ 29,398 |$ 12,778
Adjustments to reconcile to net cash |
from operating activities: |
Depreciation........................................... 38,703 38,580 21,526 | 25,183
Deferred income taxes and investment tax credits, net.. 67,047 50,027 22,543 | 3,141
Deferred return - Seabrook............................. - - - | (21,406)
Recoverable energy costs, net of amortization.......... (81,206) (39,654) (42,910)| 1,469
Amortization of regulatory asset, net.................. 55,319 67,379 51,143 | 36,528
Other sources of cash.................................. 3,213 30,001 12,816 | 15,967
Other uses of cash..................................... (4,535) (4,394) (4,435)| (4,400)
Changes in working capital: |
Receivables and accrued utility revenues............... (3,205) (3,161) (18,314)| 34,432
Fuel, materials, and supplies.......................... 3,734 3,936 459 | (4,945)
Accounts payable....................................... 18,598 (2,894) 5,083 | (8,189)
Accrued taxes.......................................... 4,182 (1,602) (17,323)| 20,409
Other working capital (excludes cash).................. 742 (2,224) 12,610 | (26,056)
|
---------- ---------- ----------|----------
Net cash flows from operating activities................... 180,036 188,231 72,596 | 84,911
---------- ---------- ----------|----------
Cash Flows Used For Financing Activities: |
Issuance of common shares................................ - - 425,000 | -
Issuance of long-term debt............................... - 44,800 75,000 | -
Net decrease in short-term debt.......................... (2,500) (41,000) (64,500)| -
Reacquisitions and retirements of long-term debt......... (94,000) (138,800) (171,000)| (27,000)
Cash dividends on preferred stock........................ (13,250) (13,250) (9,938)| (3,312)
Acquisition settlement................................... - - (841,466)| -
---------- ---------- ----------|----------
Net cash flows used for financing activities............... (109,750) (148,250) (586,904)| (30,312)
---------- ---------- ----------|----------
Investment Activities: |
Investment in plant: |
Electric utility plant................................. (39,721) (35,360) (15,352)| (25,266)
Nuclear fuel........................................... (1,249) (614) (552)| (9,990)
---------- ---------- ----------|----------
Net cash flows used for investments in plant............. (40,970) (35,974) (15,904)| (35,256)
Sale of Seabrook assets to NAEC (Note 1A)<F1A>........... - - 504,265 | -
NU System Money Pool..................................... (35,000) - - | -
Other investment activities, net......................... 11 (340) (180)| -
---------- ---------- ----------|----------
Net cash flows (used for) from investments................. (75,959) (36,314) 488,181 | (35,256)
---------- ---------- ----------|----------
Net (Decrease) Increase in Cash for the Period............. (5,673) 3,667 (26,127)| 19,343
Cash - beginning of period................................. 5,995 2,328 28,455 | 9,112
---------- ---------- ----------|----------
|
Cash - end of period.......................................$ 322 $ 5,995 $ 2,328 |$ 28,455
========== ========== ==========|==========
Supplemental Cash Flow Information: |
Cash paid during the year for: |
Interest, net of amounts capitalized during construction.$ 74,507 $ 75,609 $ 35,405 |$ 53,427
========== ========== ==========|==========
|
Income taxes.............................................$ 167 $ 2,390 $ 410 |$ 909
========== ========== ==========|==========
Increase in obligations: |
Seabrook Power Contract..................................$ 51,924 $ 84,796 $ 37,490 |$ -
========== ========== ==========|==========
Capital leases...........................................$ 1,342 $ 4,696 $ - |$ -
========== ========== ==========|==========
PSNH became a wholly owned subsidiary of Northeast Utilities on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF COMMON EQUITY
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Capital
Common Surplus, Retained
Stock Paid In Earnings Total
---------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1992............... $37,494 $646,298 $ 632 $684,424
Net income........................... 12,778 12,778
Cash dividends on preferred stock.... (5,704) (5,704)
Stock dividends on common stock...... 1,962 16,456 (18,418) -
Capital stock expenses, net.......... (2) (2)
-------- --------- --------- ---------
Balance at June 4, 1992.................. $39,456 $662,752 $(10,712) $691,496
======== ========= ========= =========
Balance at June 5, 1992.................. $ - $ - $ - $ -
Net income........................... 29,398 29,398
Cash dividends on preferred stock.... (7,545) (7,545)
Issuance of 1,000 shares of common
stock, $1 par value................ 1 1
Premium on common stock.............. 424,999 424,999
Capital stock expenses, net.......... (4,237) (4,237)
-------- --------- --------- ---------
Balance at December 31, 1992............. 1 420,762 21,853 442,616
Net income........................... 52,237 52,237
Cash dividends on preferred stock.... (13,250) (13,250)
Capital stock expenses, net.......... 483 483
-------- --------- --------- ---------
Balance at December 31, 1993............. 1 421,245 60,840 482,086
Net income........................... 77,444 77,444
Cash dividends on preferred stock.... (13,250) (13,250)
Capital stock expenses, net.......... 539 539
-------- --------- --------- ---------
Balance at December 31, 1994............. $ 1 $421,784 $125,034 $546,819
======== ========= ========= =========
PSNH became a wholly owned subsidiary of Northeast Utilities on June 5, 1992.
The accompanying notes are an integral part of these financial statements
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
<F1A> A. MERGER WITH NORTHEAST UTILITIES
On June 5, 1992 (Acquisition Date), Northeast Utilities (NU) acquired
Public Service Company of New Hampshire (PSNH) pursuant to a merger
agreement and the company became a wholly owned operating subsidiary of
NU. In a related transaction, PSNH's 35.6 percent share of the
Seabrook 1 nuclear power plant (Seabrook 1) and other Seabrook-related
assets were transferred to North Atlantic Energy Corporation (NAEC),
another new NU subsidiary.
In accordance with generally accepted accounting principles, the
acquisition of PSNH has been accounted for as a purchase.
On June 29, 1992, PSNH's New Hampshire Yankee Division (NHY) was
dissolved and North Atlantic Energy Service Corporation (NAESCO), a
wholly owned subsidiary of NU, with the approval of the Securities and
Exchange Commission (SEC) and the Nuclear Regulatory Commission (NRC),
began management of the Seabrook 1 power plant as agent for the
Seabrook joint owners. On June 29, 1992, all NHY employees became
employees of NAESCO.
<F1B> B. GENERAL
PSNH, The Connecticut Light and Power Company, Western Massachusetts
Electric Company, NAEC, and Holyoke Water Power Company are the
operating subsidiaries comprising the Northeast Utilities system (the
system) and are wholly owned by NU.
Other wholly owned subsidiaries of NU provide substantial support
services to the system. Northeast Utilities Service Company (NUSCO)
supplies centralized accounting, administrative, data processing,
engineering, financial, legal, operational, planning, purchasing, and
other services to the system companies. Northeast Nuclear Energy
Company acts as agent for system companies in constructing and
operating the Millstone nuclear generating facilities.
All transactions among affiliated companies are on a recovery of cost
basis which may include amounts representing a return on equity, and
are subject to approval by various federal and state regulatory
agencies.
<F1C> C. RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to
conform with the current year's presentation.
<F1D> D. INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT
Regional Nuclear Generating Companies: PSNH owns common stock of four
regional nuclear generating companies (Yankee companies). The Yankee
companies, with PSNH's ownership interests, are:
Connecticut Yankee Atomic Power Company (CY) .... 5.0%
Yankee Atomic Electric Company (YAEC) ........... 7.0
Maine Yankee Atomic Power Company (MY) .......... 5.0
Vermont Yankee Nuclear Power Corporation (VY) ... 4.0
PSNH's investments in the Yankee companies are accounted for on the
equity basis, based on PSNH's ability to exercise significant influence
over their operating and financial policies. The electricity produced
by the facilities that are operating is committed to the participants
substantially on the basis of their ownership interests and is billed
pursuant to contractual agreements. Under ownership agreements with the
Yankee companies, PSNH may be asked to provide direct or indirect
financial support for one more or of the companies. For more
information on these agreements, see Note 10E, "Commitments and
Contingencies - Purchased Power Arrangements."
The YAEC nuclear power plant was shut down permanently on February 26,
1992. For more information on the Yankee companies, see Note 4,
"Nuclear Decommissioning."
Millstone 3: The company has a 2.85 percent joint ownership interest
in Millstone 3, a 1,154-megawatt (MW) nuclear generating unit. As of
December 31, 1994 and 1993, plant-in-service included approximately
$118.3 million and $118.1 million, respectively, and the accumulated
provision for depreciation included approximately $24.2 million and
$21.1 million, respectively, for PSNH's proportionate share of
Millstone 3. PSNH's share of Millstone 3 expenses is included in the
corresponding operating expenses on the accompanying Statements of
Income.
Wyman Unit 4: PSNH has a 3.14 percent ownership interest in Wyman
Unit 4 (Wyman), a 632 -MW oil-fired generating unit. At December 31,
1994 and 1993, plant-in-service included approximately $6.0 million and
the accumulated provision for depreciation included approximately $3.3
million and $3.1 million, respectively, for PSNH's share of Wyman.
PSNH's share of Wyman expenses is included in the corresponding
operating expenses on the accompanying Statements of Income.
<F1E> E. DEPRECIATION
The provision for depreciation is calculated using the straight-line
method based on estimated remaining lives of depreciable utility
plant-in-service, adjusted for salvage value and removal costs, as
approved by the New Hampshire Public Utilities Commission (NHPUC).
Except for major facilities, depreciation factors are applied to the
average plant-in-service during the period. Major facilities are
depreciated from the time they are placed in service. When plant is
retired from service, the original cost of plant, including costs of
removal, less salvage, is charged to the accumulated provision for
depreciation. For Millstone 3, the costs of removal, less salvage,
that have been funded through an external decommissioning trust will be
paid with funds from the trust and charged to the accumulated reserve
for decommissioning included in the accumulated provision for
depreciation over the expected service life of the plant. See Note 4,
"Nuclear Decommissioning," for additional information.
The depreciation rates for the several classes of electric
plant-in-service are equivalent to a composite rate of 3.6 percent for
the years ended December 31, 1994, and December 31, 1993, 3.5 percent
for the six-month and twenty-six day period ending December 31, 1992,
and 3.4 percent for the five-month and four-day period ending June 4,
1992.
<F1F> F. PUBLIC UTILITY REGULATION
NU is registered with the Securities and Exchange Commission (SEC) as a
holding company under the Public Utility Holding Company Act of 1935
(1935 Act), and it and its subsidiaries, including PSNH, are subject to
the provisions of the 1935 Act. Arrangements among the system
companies, outside agencies, and other utilities covering inter-
connections, interchange of electric power, and sales of utility
property are subject to regulation by the Federal Energy Regulatory
Commission (FERC) and/or the SEC. The company is subject to further
regulation for rates, accounting, and other matters by the FERC and the
NHPUC.
<F1G> G. REVENUES
Other than fixed-rate agreements negotiated with certain wholesale,
industrial, and commercial customers, utility revenues are based on
authorized rates applied to each customer's use of electricity. Rates
can be changed only through a formal proceeding before the appropriate
regulatory commission. At the end of each accounting period, PSNH
accrues an estimate for the amount of energy delivered but unbilled.
For additional information see Note 10B, "Commitments and Contingencies
- PSNH Rate Agreement."
<F1H> H. REGULATORY ACCOUNTING
PSNH follows accounting policies that reflect the impact of the rate
treatment of certain events or transactions that differ from generally
accepted accounting principles for those events or transactions
followed by nonregulated enterprises. Under regulatory accounting,
assuming that future revenues are expected to be sufficient to provide
recovery, regulators may permit incurred costs, normally treated as
expenses, to be deferred and recovered in revenues at a later date.
Regulatory accounting is unique in that the actions of a regulator can
provide reasonable assurance of the existence of an asset. Regulators,
through their actions, may also reduce or eliminate the value of an
asset, or create a liability. If the economic entity no longer comes
under the jurisdiction of a regulator or external forces, such as a
move to a competitive environment, effectively limiting the influence
of cost-of-service based rate regulation, the entity may be forced to
abandon regulatory accounting, requiring a reexamination and potential
write-off of net regulatory assets. PSNH continues to be subject to
cost-of-service based rate regulation. Based on current regulation,
PSNH believes that its use of regulatory accounting is still
appropriate.
The components of regulatory assets are as follows:
At December 31, 1994 1993
--------------------------------------------------------------
(Thousands of Dollars)
Regulatory asset (Note 1I) ...........$678,974 $769,498
Recoverable energy costs (Note 1J) ...194,994 122,861
Income taxes, net (Note 1K) .......... 66,466 54,250
Unrecovered contract obligation-
YAEC (Note 4) ........................ 28,572 24,150
Other ................................ 2,499 2,594
------- --------
$971,505 $973,353
======== ========
<F1I> I. REGULATORY ASSET
The regulatory asset represents the aggregate value, as of the
Acquisition Date, placed by the rate agreement with the state of New
Hampshire (Rate Agreement) on PSNH's assets in excess of the net book
value of PSNH's non-Seabrook assets and the $700 million value assigned
to Seabrook by the Rate Agreement. The regulatory asset was valued at
approximately $920.6 million on the Acquisition Date. The Rate
Agreement provides for the recovery, through rates, of the amortization
of the regulatory asset with a return each year on the unamortized
portion of the asset. The Rate Agreement provides that $425 million of
the regulatory asset be amortized over the first seven years after May
16, 1991 (Reorganization Date), with the remaining amount to be
amortized over the 20-year period after the Reorganization Date.
<F1J> J. RECOVERABLE ENERGY COSTS
Under the Energy Policy Act of 1992 (Energy Act), PSNH is assessed for
its proportionate share of the costs of decontaminating and
decommissioning uranium enrichment plants owned by the United States
Department of Energy (D&D 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.
PSNH has begun to recover these costs.
The Rate Agreement includes a comprehensive fuel and purchased power
adjustment clause (FPPAC) permitting PSNH to pass through to retail
customers, for a ten-year period, the retail portion of differences
between the fuel and purchase power costs assumed in the Rate Agreement
and PSNH's actual costs, which include the costs under the Seabrook
Power Contract. The cost components of the FPPAC are subject to a
prudence review by the NHPUC.
The costs associated with purchases from certain nonutility generators
(NUGs), over the level assumed in the Rate Agreement, are deferred and
recovered through the FPPAC. PSNH has been attempting to negotiate the
rate orders mandating the purchase of high-cost NUG power. In
September 1994, the NHPUC approved an amendment to the Rate Agreement
allowing settlement agreements to be implemented with two NUGs. The
two NUGs have given up their right to sell their output to PSNH in
exchange for lump sum cash payments of approximately $40 million. The
deferred buyout payments are included as part of PSNH's recoverable
energy costs. During the Rate Agreement's Fixed-Rate period, all the
savings from the buyout will be used to reduce PSNH's recoverable
energy costs. At the end of the Fixed-Rate period, 50 percent of the
savings will be used to reduce the recoverable energy costs with the
remainder reducing current rates. At December 31, 1994, PSNH's
recoverable energy costs included fuel and purchase power deferrals
($154.9 million), the deferred buyout ($39.8 million), and the D&D
assessment ($0.3 million). See Note 10B, "Commitments and
Contingencies - PSNH Rate Agreement," for further information.
<F1K> K. 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 income
subject to tax) is accounted for in accordance with the ratemaking
treatment of the applicable regulatory commissions. See Note 8,
"Income Tax Expense," for the components of income tax expense.
In 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109). SFAS 109 supersedes previously issued income
tax accounting standards. PSNH adopted SFAS 109, on a prospective
basis, during the first quarter of 1993. The adoption of SFAS 109 has
not had a material effect on the net income or on the balance sheet of
the company. As a result of the adoption of SFAS 109, the company has
increased the deferred tax asset for net-operating-losses (NOLs)
previously not recognized. A valuation reserve was not established.
As it is probable that the increase in deferred tax liabilities will be
recovered from customers through rates, PSNH also established a
regulatory asset.
The tax effect of temporary differences which give rise to the
accumulated deferred tax obligation are as follows:
At December 31, 1994 1993
------------------------------------------------------------
(Thousands of Dollars)
Accelerated depreciation and other
plant-related differences .......... $ 106,683 $ 150,238
Net operating loss carryforwards ..... (247,440) (270,612)
Regulatory liabilities -
income tax gross up (46,445) (49,423)
Other ................................ 249,282 187,873
-------- --------
$ 62,080 $ 18,076
========= =========
At December 31, 1994, PSNH had a regular tax NOL carryforward of
approximately $726 million, and an Alternative Minimum Tax (AMT) NOL
carryforward of $529 million, both to be used against PSNH's federal
taxable income and expiring between the years 2000 and 2006. PSNH also
had Investment Tax Credit (ITC) carryforwards of $54 million, which
expire between the years 1995 and 2004. For a portion of the
carryforward amounts indicated above, the reorganization of PSNH under
Chapter 11 of the United States Bankruptcy Code limits the annual
amount of NOL and ITC carryforwards that may be used. Approximately
$249 million of the NOL, $189 million of the AMT NOL, and $23 million
of the ITC carryforwards are subject to this limitation.
<F1L>L. DERIVATIVE FINANCIAL INSTRUMENTS
PSNH utilizes interest-rate caps to manage well defined interest rate
risks. Premiums paid for purchased interest-rate-cap agreements are
amortized to interest expense over the terms of the caps. Unamortized
premiums are included in Deferred Charges - Other. Amounts receivable
under cap agreements are accrued as a reduction of interest expense.
Any material unrealized gains or losses on interest rate caps will be
deferred until realized. For further information, see Note 11,
"Derivative Financial Instruments."
<F2>2. SEABROOK POWER CONTRACT
On June 5, 1992, NAEC and PSNH entered into the Seabrook Power Contract
(Contract), under which PSNH is obligated to buy from NAEC, and NAEC is
obligated to sell to PSNH, all of NAEC's 35.6 percent ownership share of
the capacity and output of Seabrook 1 for a period equal to the length of
the NRC's full power operating license for Seabrook 1. Accordingly, PSNH
has included its right to buy power from NAEC on its Balance Sheets as part
of utility plant with a corresponding obligation. At December 31, 1994,
this right was valued at approximately $882.8 million. Under the Contract,
PSNH is unconditionally obligated to pay NAEC's cost of service during this
period whether or not Seabrook 1 is operating. NAEC's cost of service
includes all of its Seabrook-related costs, including operation and
maintenance expense, fuel expense, property tax expense, depreciation
expense, and certain overhead and other costs.
The Contract establishes the value of the initial investment in Seabrook
(Initial Investment) at $700 million and the initial investment in nuclear
fuel at $0. NAEC is depreciating its Initial Investment on a straight line
basis over the remaining term of Seabrook's full power operating license.
Any subsequent additions to Seabrook 1 will be depreciated on a straight-
line basis over the remaining term of the Contract at the time the
additions are brought into service. The Contract provides that NAEC's
return on its allowed investment in Seabrook 1 (its investment in working
capital, fuel, capital additions after the date of commercial operation of
Seabrook 1 and a portion of the Initial Investment) is calculated based on
NAEC's actual capitalization from time to time over the term of the
Contract, which includes its actual debt and preferred equity costs, and a
common equity cost of 12.53 percent for the first ten years of the
Contract, and thereafter at an equity rate of return to be fixed in a
filing with FERC. The portion of the Initial Investment which is included
in the allowed investment was 40 percent at the Acquisition Date, and will
increase by 15 percent in each of the following four years beginning
May 15, 1993. As of December 31, 1994, the portion of the initial
investment included in the allowed investment was 70 percent. From the
Acquisition Date through December 31, 1994, NAEC recorded an additional
$131.5 million of deferred return. The deferred return on the excluded
portion of the Initial Investment, including the $50.9 million, will be
recovered with carrying charges by NAEC through the Contract beginning six
months after the end of PSNH's Fixed Rate Period and will be fully
recovered by May 15, 2001.
If Seabrook 1 is shut down prior to the expiration of the NRC operating
license term, PSNH will be unconditionally required to pay NAEC termination
costs for 39 years, less the period during which Seabrook 1 has operated.
These costs are designed to reimburse NAEC for its share of Seabrook 1
shut-down and decommissioning costs and to pay NAEC a return of and on any
undepreciated balance of its Initial Investment in the plant over the then-
remaining term of the Contract, and the return of and on any capital
additions to the plant made after the Acquisition Date over a period of
five years after shut down (net of any tax benefits to NAEC attributable to
such cancellation).
Contract payments charged to operating expense were $143 million, including
an interest component of $43 million for the year ended December 31, 1994;
$123 million, including an interest component of $33 million for the year
ended December 31, 1993; and $26.5 million, including $16.3 million for the
period June 5, 1992 through December 31, 1992.
On February 15, 1994, NAEC acquired Vermont Electric Generation and
Transmission Cooperative, Inc.'s (VEG&T) 0.4 percent ownership interest in
Seabrook for approximately $6.4 million. NAEC sells the output from the
Seabrook interest purchased from VEG&T on February 15, 1994 to PSNH under
an agreement that has been approved by the FERC and is substantially
similar to the Seabrook Power Contract between PSNH and NAEC that was
effective on the Acquisition Date.
Future minimum payments, excluding executory costs, such as property taxes,
state use taxes, insurance, and maintenance, under the terms of the
contracts, as of December 31, 1994, are approximately:
Seabrook Power Contracts
------------------------
(Thousands of Dollars)
1995 ................................ $ 72,300
1996 ................................ 81,200
1997 ................................ 91,100
1998 ................................ 169,700
1999 ................................ 167,900
After 1999 .......................... 1,341,900
----------
Future minimum payments ............. 1,924,100
Less amount representing interest .. 1,041,300
----------
Present value of Seabrook Power
Contracts payments ............... $ 882,800
==========
<F3>3. LEASES
PSNH 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. The following
rental payments have been charged to operating expense:
Year Capital Leases Operating Leases
---- -------------- ----------------
1994 ................ $1,061,000 $4,255,000
1993 ................ 701,000 6,197,000
1992 ................ - 8,511,000
Interest included in capital leases was $394,000 in 1994 and $403,000 in
1993.
Future minimum rental payments, excluding executory costs, such as property
taxes, state use taxes, insurance, and maintenance, under long-term
noncancelable leases, as of December 31, 1994, are approximately:
Operating Leases
----------------
(Thousands of Dollars)
1995 ............................... $ 7,900
1996 ............................... 6,900
1997 ............................... 5,800
1998 ............................... 4,500
1999 ............................... 4,000
After 1999 ......................... 14,100
--------
Future minimum lease payments $43,200
=======
<F4>4. NUCLEAR DECOMMISSIONING
The company's 1992 decommissioning study concluded that complete and
immediate dismantlement at retirement continues to be the most viable and
economic method of decommissioning Millstone 3. A 1994 Seabrook
decommissioning study, which is currently under review by the New Hampshire
Decommissioning Financing Committee, also confirmed that complete and
immediate dismantlement at retirement is the most viable and economic
method of decommissioning Seabrook 1. Decommissioning studies are reviewed
and updated periodically to reflect changes in decommissioning
requirements, technology, and inflation.
The estimated cost of decommissioning PSNH's 2.85 percent ownership share
of Millstone 3 and NAEC's 36.0 percent share of Seabrook 1 (utilizing the
currently approved decommissioning study), in year-end 1994 dollars, is
$12.8 million and $137.3 million, respectively. These estimated costs have
been levelized and assume after-tax earnings on the Millstone and Seabrook
decommissioning funds of 6.5 percent and 6.1 percent, respectively. Future
escalation rates in decommissioning costs for Millstone 3 and Seabrook 1
are assumed. PSNH's Millstone 3 decommissioning costs are accrued over the
expected service life of the unit and are included in depreciation expense
on its Statements of Income. Nuclear decommissioning related to PSNH's
share of Millstone 3 amounted to $0.3 million in 1994 and 1993, and $0.2
million in 1992. Nuclear decommissioning costs, as a cost of removal, are
included in the accumulated provision for depreciation on PSNH's Balance
Sheets. At December 31, 1994, the balance in the accumulated reserve for
decommissioning amounted to $1.8 million. See "Nuclear Decommissioning" in
Management's Discussion and Analysis for a discussion of changes being
considered by the FASB related to accounting for decommissioning costs.
PSNH makes payments to an independent decommissioning trust for its portion
of the costs of decommissioning Millstone 3. Under the terms of the Rate
Agreement, PSNH is obligated to pay NAEC's share of Seabrook's
decommissioning costs, even if the unit is shut down prior to the
expiration of its operating license. Accordingly, NAEC bills PSNH directly
for its share of the costs of decommissioning Seabrook. PSNH records its
Seabrook decommissioning costs as a component of purchased power expense on
its Statement of Income. Under the Rate Agreement, PSNH's Seabrook
decommissioning costs are recovered through base rates.
As of December 31, 1994, PSNH has collected, through rates, approximately
$1.5 million toward the future decommissioning costs of its share of
Millstone 3, which has been transferred to the external decommissioning
trust. Earnings on the decommissioning trusts increase the decommissioning
trusts balance and the accumulated reserve for decommissioning. Due to
PSNH's adoption, effective January 1, 1994, of SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities, unrealized gains and
losses associated with the decommissioning trusts also impact the balance
of the trusts and the accumulated reserve for decommissioning.
As of December 31, 1994, NAEC (including pre-Acquisition Date payments made
by PSNH) has paid approximately $10.1 million, into Seabrook 1's
decommissioning trust.
Changes in requirements or technology, the timing of funding or
dismantling, or adoption of a decommissioning method other than immediate
dismantlement, would change decommissioning cost estimates. PSNH attempts
to recover sufficient amounts through its allowed rates to cover its
expected decommissioning costs. Only the portion of currently estimated
total decommissioning costs that has been accepted by regulatory agencies
is reflected in rates of PSNH. Because allowances for decommissioning have
increased significantly in recent years, ratepayers in future years may
need to increase their payments to offset the effects of any insufficient
rate recoveries in previous years.
PSNH, along with other New England utilities, has equity investments in the
four Yankee companies. Each Yankee company owns a single nuclear
generating unit. PSNH's ownership share of the estimated costs, in year-
end 1994 dollars, of decommissioning of CY, MY, and VY are $18.1 million,
$16.9 million, and $13.2 million, respectively. Under the terms of the
contracts with the Yankee companies, the shareholders-sponsors are
responsible for their proportionate share of the operating costs of each
unit, including decommissioning. The nuclear decommissioning costs of the
Yankee companies are included as part of the cost of power by PSNH.
YAEC has begun component removal activities related to decommissioning of
its nuclear facility. In June 1992, YAEC filed a rate filing to obtain
FERC authorization to collect the closing and decommissioning costs and to
recover the remaining investment in the YAEC nuclear power plant over the
remaining period of the plant's Nuclear Regulatory Commission (NRC)
operating license. The bulk of these costs has been agreed to by the YAEC
joint owners and approved, as a settlement, by FERC. In October 1994, YAEC
submitted a revised decommissioning cost estimate as part of its
decommissioning plan with the NRC. Following the receipt of NRC approval,
this estimate will be filed with the FERC. This revised estimate increased
PSNH's ownership share of decommissioning YAEC's nuclear facility by
approximately $6.6 million in January 1, 1994 dollars. At December 31,
1994, the estimated remaining costs, including decommissioning, amounted to
$408.2 million, of which PSNH's share was approximately $28.6 million.
Management expects that PSNH will continue to be allowed to recover such
FERC-approved costs from its customers. Accordingly, PSNH has recognized
these costs as a regulatory asset, with a corresponding obligation, on its
Balance Sheets.
<F5>5. SHORT-TERM DEBT
PSNH has credit lines totaling $125 million available through a Revolving-
Credit Facility with a group of 19 banks. PSNH may borrow funds on a
short-term revolving basis using either fixed-rate or standby loans. Fixed
rates are set using competitive bidding. Standby-loan rates are based upon
several alternative variable rates. PSNH is obligated to pay a facility
fee of 0.25 percent per annum on the total commitment. At December 31,
1994 and 1993, there were no borrowings under the Facility.
Certain subsidiaries of NU, including PSNH, are members of the Northeast
Utilities System Money Pool (Pool). The Pool provides a more efficient use
of the cash resources of the system, and reduces outside short-term
borrowings. NUSCO administers the Pool as agent for the member companies.
Short-term borrowing needs of the member companies are first met with
available funds of other member companies, including funds borrowed by NU
parent. NU parent may lend to the Pool but may not borrow. Funds may be
withdrawn from or repaid to the Pool at any time without prior notice.
However, borrowings based on loans from NU parent bear interest at NU
parent's cost and must be repaid based upon the terms of NU parent's
original borrowing. Investing and borrowing subsidiaries receive or pay
interest based on the average daily Federal Funds rate. At December 31,
1994, there were no outstanding borrowings from the Pool. At December 31,
1993, PSNH had $2.5 million in outstanding borrowings the Pool, for which
the average interest rate was 2.9 percent.
Maturities of PSNH's short-term debt obligations were for periods of three
months or less.
The amount of short-term borrowings that may be incurred by PSNH is subject
to periodic approval by the SEC under the 1935 Act. Under the SEC
restrictions, PSNH was authorized, as of January 1, 1995 to incur short-
term borrowings up to a maximum of $175 million.
<F6>6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
Shares Outstanding December 31,
--------------------------
Description December 31, 1994 1994 1993 1992
-----------------------------------------------------------------
(Thousands of Dollars)
10.60% Series A of 1991 5,000,000 $125,000 $125,000 $125,000
======== ======== ========
In case of default on dividends or sinking-fund payments, no payments may
be made on any junior stock by way of dividends or otherwise (other than in
shares of junior stock) so long as the default continues. If PSNH is in
arrears in the payment of dividends on any outstanding shares of preferred
stock, PSNH would be prohibited from redemption or purchase of less than
all of the preferred stock outstanding. The Series A Preferred Stock is
not subject to optional redemption by PSNH. It is subject to a sinking
fund beginning on June 30, 1997, sufficient to retire annually 1,000,000
shares at $25 per share.
<F7>7. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
-------------------
1994 1993
----------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds:
8 7/8% Series A ........due 1996 $172,500 $172,500
9.17% Series B ........due 1998 170,000 170,000
--------- --------
Total First Mortgage Bonds ..... 342,500 342,500
Term Loan/Notes:
Variable Rate ................due 1996 141,000 235,000
Pollution Control Revenue Bonds:
7.65% Series A ........due 2021 66,000 66,000
7.50% Series B ........due 2021 108,985 108,985
7.65% Series C ........due 2021 112,500 112,500
Adjustable Rate Series D due 2021 39,500 39,500
Adjustable Rate Series E due 2021 69,700 69,700
Adjustable Rate, Tax-Exempt,
Series D due 2021 75,000 75,000
Adjustable Rate, Tax-Exempt,
Series E due 2021 44,800 44,800
Less: Amounts due within one year ... 94,000 94,000
-------- --------
Long-term debt, net ............ $905,985 $999,985
======== ========
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1994 for the years 1995 through 1999
are approximately $94,000,000 in 1995, $219,500,000 in 1996, $0 in 1997,
$170,000,000 in 1998, and $0 in 1999. Also, there are annual renewal and
replacement fund requirements equal to 2.25 percent of the average of net
depreciable property owned by PSNH at the Reorganization Date, plus
cumulative gross property additions thereafter. PSNH expects to meet its
future fund requirements by certifying property additions. Any deficiency
would need to be satisfied by the deposit of cash or bonds.
Essentially, all utility plant of PSNH is subject to the lien of its first
mortgage bond indenture. PSNH's two bank facilities, the Term Loan and
Revolving Credit Facility are secured by a second lien, junior to the lien
of its first mortgage bond indenture, on all PSNH property located in New
Hampshire. At December 31, 1994, and the principal amount outstanding
under the Term Loan was $141 million and $235 million, respectively. The
average effective interest rates for the Term Loan for 1994 and 1993 were
approximately 5.2 percent and 4.3, respectively. At December 31, 1994,
there were no borrowings under the Revolving Credit Facility.
Concurrent with the issuance of PSNH's Series A and B First Mortgage Bonds,
PSNH entered into financing arrangements with the Industrial Development
Authority of the state of New Hampshire (IDA). Pursuant to these
arrangements, the IDA issued five series of Pollution Control Revenue Bonds
(PCRBs) and loaned the proceeds to PSNH. At December 31, 1994 and 1993,
$516.5 million of the PCRBs were outstanding. The average effective
interest rates on the variable-rate pollution percent control notes ranged
from 2.90 to 4.3 percent for 1994 and from 2.5 percent to 3.4 percent for
1993. PSNH's obligation to repay each series of PCRBs is secured by a
series of First Mortgage Bonds that were issued under its indenture. Each
such series of First Mortgage Bonds contains terms and provisions with
respect to maturity, principal payment, interest rate and redemption that
correspond to those of the applicable series of PCRBs; for financial
reporting purposes, these bonds would not be considered outstanding unless
PSNH fails to meet its obligation under the PCRBs.
The Series A and B First Mortgage Bonds are not redeemable prior to their
maturity except in limited circumstances. The PCRBs, except for Series D
and E, are redeemable on or after May 1, 2001, at the option of the company
with accrued interest and at specified premiums. Under current interest
rate elections by PSNH, the Series D and E PCRBs are redeemable, at par
plus accrued interest at the end of each interest rate period. Future
interest rate elections by PSNH could significantly defer or eliminate the
availability of optional redemptions by PSNH and could affect costs as
well.
<F8>8. INCOME TAX EXPENSE
The components of federal and state income tax provisions are:
Jan. 1, 1993
Jan. 1, 1994 to June 5, 1992 Jan. 1, 1992
to Dec. 31, 1993 to to
For the Periods Dec.31, 1994 (Note 1K) Dec. 31. 1992 June 4, 1992
-----------------------------------------------------------------------------
(Thousands of Dollars)
Current income taxes:
Federal .............. $ 368 $ (937) $ 2,400 | $ 415
State ................ 1,219 1,183 - | 79
--------- -------- -------- | ---------
Total current 1,587 246 2,400 | 494
--------- -------- -------- | ---------
|
Deferred income taxes, net: |
Federal 63,941 47,407 23,086 | 8,703
State 3,666 3,131 - | -
--------- -------- -------- | ---------
|
Total deferred 67,607 50,538 23,086 | 8,703
--------- -------- -------- | ---------
|
|
Investment tax credits, net (560) (565) (326) | (341)
-------- --------- -------- | ---------
|
Total income tax expense $ 68,634 $ 50,219 $ 25,160 | $ 8,856
======== ======== ======== ========
The components of total income tax expense are classified as follows:
Income taxes charged to
operating expenses... $68,088 $54,087 $39,197 | $16,449
Income taxes associated |
with the deferred |
return on Seabrook.. - - - | 4,793
Income taxes associated |
with allowance for funds |
used during construction |
and the deferred return |
on NHEC deferred costs - - 217 | 428
Other income taxes - credit 546 (3,868) (14,254) | (12,814)
-------- -------- ------- | -------
|
Total income tax expense. $ 68,634 $ 50,219 $25,160 | $ 8,856
======== ======== ======= =======
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
Jan. 1, 1993
Jan. 1, 1994 to June 5, 1992 Jan. 1, 1992
to Dec. 31, 1993 to to
For the Periods Dec. 31, 1994 (Note 1K) Dec. 31, 1992 June 4, 1992
-------------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation $ 2,701 $ 4,549 $ 1,629 | $12,333
Energy adjustment clauses 30,954 15,155 14,520 | (1,359)
Deferred tax asset |
associated with NOL 23,611 25,438 9,335 | (2,317)
Alternative minimum tax (301) 1,056 (2,441) | (394)
Amortization of prepaid |
deferred taxes 11,501 7,667 - | -
Deferred return on Seabrook - - - | 4,793
Severance benefits - - 254 | (1,020)
Other (859) (3,327) (211) | (3,333)
--------- -------- ------- | --------
|
|
Deferred income taxes, net $67,607 $50,538 $23,086 | $ 8,703
======= ======= ======= ========
A reconciliation between income tax expense and the expected tax expense at
the applicable statutory rates is as follows:
Jan. 1, 1993
Jan. 1, 1994 to June 5, 1992 Jan. 1, 1992
to Dec.31, 1993 to to
For the Periods Dec. 31,1994 (Note 1K) Dec. 31, 1992 June 4, 1992
----------------------------------------------------------------------------
(Thousands of Dollars)
Expected federal income tax at
35 percent of pretax income
for 1994 and 1993 and at
34 percent for 1992 $51,127 $35,860 $18,550 |$ 7,356
Tax effect of differences: |
Depreciation differences 1,407 1,593 1,032 | (8,314)
Amortization of regulatory |
asset - Rate Agreement 20,007 23,765 17,624 | 12,477
Seabrook intercompany loss (19,637) (19,176) (11,903) | -
Reorganization expenses - - 22 | 1,728
Deferred investment return - - - | (3,832)
State income taxes, net of |
federal benefit 3,175 2,804 - | -
Amortization of prepaid deferred |
taxes 11,501 7,667 - | -
Other, net 1,054 (2,294) (165) | (559)
-------- ------ --------- | -------
|
Total income tax expense $68,634 $50,219 $25,160 |$ 8,856
======= ======= ======= =======
9. EMPLOYMENT BENEFITS
<9A>A. PENSION BENEFITS
The company participates in a uniform noncontributory defined benefit
retirement plan covering all regular system employees (the Plan).
Benefits are based on years of service and employees' highest eligible
compensation during five consecutive years of employment. Effective
January 1993, PSNH's plan was merged into the NU system's uniform
noncontributory defined benefit plan. The company's direct portion of
the system's pension cost, part of which was charged to utility plant,
approximated $4.4 million in 1994, $6.6 million 1993, and $4.4 million
for the period January 1, 1992 to June 4, 1992 and $3.5 million for the
period June 5, 1992 to December 31, 1992. The pension cost for January
1, 1992 to June 4, 1992 includes employees of NHY, who are now employees
of NAESCO. Pension costs for 1994 and 1993 included approximately $1.9
million and $3.4 million, respectively, related to work force reduction
programs.
Currently, PSNH funds annually an amount at least equal to that which
will satisfy the requirements of the Employee Retirement Income
Security Act and the Internal Revenue Code. Pension costs are
determined using market-related values of pension assets. Pension
assets are invested primarily in domestic and international equity
securities and bonds.
The components of net pension cost for PSNH are:
Jan. 1, 1994 Jan. 1, 1993 June 5, 1992 Jan. 1, 1992
to to to to
For the Periods Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 June 4, 1992
----------------------------------------------------------------------
(Thousands of Dollars)
Service cost $ 5,531 $ 7,539 $ 2,889 | $ 3,850
Interest cost 11,129 11,180 6,810 | 6,200
Return on plan assets 246 (19,308) (5,026) | (4,561)
Net amortization (12,526) 7,215 (1,206) | (1,067)
------- -------- ------ | --------
|
Net pension cost $ 4,380 $ 6,626 $ 3,467 | $ 4,422
======== ======== ======= ========
--------------------------------------------------------------------
For calculating pension cost, the following assumptions were used:
Jan. 1, 1994 Jan. 1, 1993 June 5, 1992 Jan. 1, 1992
to to to to
For the Periods Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 June 4, 1992
-------------------------------------------------------------------------------
Discount rate ............ 7.75% 8.00% 8.00% | 8.00%
Expected long-term rate . |
of return ............... 8.50 8.50 9.00 | 9.00
Compensation/progression . |
rate .................. 4.75 5.00 6.00 | 6.00
The following table represents the Plan's funded status reconciled to
the Balance Sheets:
At December 31, 1994 1993
-------------------------------------------------------------------
(Thousands of Dollars)
Accumulated benefit obligation,
including $111,198,000 of vested
benefits at December 31, 1994
$111,691,000 of vested
benefits at December 31, 1993 $121,202 $122,429
======== ========
Projected benefit obligation (PBO) $146,972 $156,475
Market value of plan assets 136,104 145,536
-------- --------
PBO in excess of plan assets (10,868) (10,939)
Unrecognized transition amount 5,004 5,338
Unrecognized prior service costs 5,775 4,890
Unrecognized net gain ...... (36,180) (31,179)
-------- --------
Accrued pension liability .. $(36,269) $ (31,890)
========= ==========
The following actuarial assumptions were used in calculating the Plan's
year-end funded status:
For the Years Ended December 31, 1994 1993
------------------------------------------------------------
Discount rate...................... 8.25% 7.75%
Compensation/progression rate 5.00 4.75
<F9B>B. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The company provides certain health care benefits, primarily medical
and dental, and life insurance benefits through a benefit plan to
retired employees. These benefits are available for employees leaving
the company who are otherwise eligible to retire and have met specified
service requirements. Effective January 1, 1993, the company adopted
SFAS 106, Employer's Accounting for Postretirement Benefits Other Than
Pensions, on a prospective basis. PSNH's direct portion of health care
and life insurance costs, part of which were deferred or charged to
utility plant, approximated $7.6 million in 1994, $9.1 million in 1993,
and $3.3 million in 1992.
On January 1, 1993, the accumulated postretirement benefit obligation
represented the company's transition obligation upon the adoption of
SFAS 106. As allowed by SFAS 106, the company is amortizing its
transition obligation of approximately $59 million over a 20-year
period. For current employees and certain retirees, the total SFAS 106
benefit is limited to two times the 1993 per retiree health care costs.
The SFAS 106 obligation has been calculated based on this assumption.
During 1993, the company began funding SFAS 106 postretirement costs
through external trusts. The company is funding annually amounts that
have been rate recovered and which also are tax-deductible under the
Internal Revenue Code. The trust assets are invested primarily in
equity securities and bonds.
The following table represents the plan's funded status reconciled to
the Balance Sheet.
At December 31, 1994 1993
------------------------------------------------------------------
(Thousands of Dollars)
Accumulated postretirement benefit obligation of:
Retirees ...................... $39,881 $51,832
Fully eligible active employees 52 99
Active employees not eligible to retire 9,065 7,888
--------- -------
Total accumulated postretirement benefit
obligation .................... 48,998 59,819
Market value of plan assets ...... 6,606 2,387
--------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (42,392) (57,432)
Unrecognized transition amount ... 52,930 55,870
Unrecognized net gain ............ (13,204) (1,065)
-------- --------
Accrued postretirement benefit liability $ (2,666) $ (2,627)
======== ========
-------------------------------------------------------------
The components of health care and life insurance costs are:
For the Years Ended December 31, 1994 1993
------------------------------------------------------------
(Thousands of Dollars)
Service cost ..................... $ 971 $1,260
Interest cost .................... 3,844 4,800
Return on plan assets ............ 37 -
Net amortization ................. 2,735 3,046
------ ------
Net health care and life insurance costs $7,587 $9,106
====== ======
-------------------------------------------------------------
The following actuarial assumptions were used in calculating the Plan's
year-end funded status:
At December 31, 1994 1993
------------------------------------------------------------
(Thousands of Dollars)
Discount rate .................... 8.00% 7.75%
Long-term rate of return -
health assets,net of tax ........ 5.00 5.00
Long-term rate of return - life assets 8.50 8.50
Health care cost trend rate (a) .. 10.20 11.10
(a) Annual growth in per capita cost of covered health care benefits
was assumed to decrease to 5.4 percent for 2002.
The effect of increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1994 by $2.4
million and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for the year then ended by
$233,000. The trust holding the plan assets is subject to federal
income taxes at a 35-percent tax rate.
PSNH is currently recovering SFAS 106 costs, including previously
deferred costs. Deferral of such costs are permitted since it is
expected that the period of recovery of deferred costs will be within
the time frame established by the applicable accounting requirements.
10. COMMITMENTS AND CONTINGENCIES
<F10A>A.CONSTRUCTION PROGRAM
The construction program is subject to periodic review and revision.
Actual construction expenditures may vary from estimates due to factors
such as revised load estimates, inflation, revised nuclear safety
regulations, delays, difficulties in the licensing process, the
availability and cost of capital, and the granting of timely and
adequate rate relief by regulatory commissions, as well as actions by
other regulatory bodies.
PSNH currently forecasts construction expenditures (including AFUDC) of
$195.5 million for the years 1995-1999, including $50.7 million for
1995. In addition, PSNH estimates that nuclear fuel requirements, for
its share of Millstone 3, will be $4.2 million for the years 1995-1999,
including $790,000 for 1995.
<F10B>B.PSNH RATE AGREEMENT
The Rate Agreement provided the financial basis for PSNH's Plan of
Reorganization (the Plan). The Rate Agreement calls for seven
successive 5.5 percent annual increases in PSNH's base rates for its
charges to retail customers (the Fixed-Rate Period). The first
increase was put into effect on January 1, 1990 and the remaining two
increases are scheduled to be put into effect annually beginning on
June 1, 1995. As discussed in Note 1J, "Recoverable Energy Costs," the
FPPAC protects PSNH from changes in fuel and purchased power costs.
Although the Rate Agreement provides an unusually high degree of
certainty as to PSNH's future retail rates, it also entails a risk when
sales are lower than anticipated or if PSNH should experience
unexpected increases in its costs other than those for fuel and
purchased power, since PSNH has agreed that it will not seek additional
rate relief during the Fixed-Rate Period, except in limited
circumstances. However, in order to provide protection from
significant variations from the costs assumed in base rates over the
Fixed-Rate Period, the Rate Agreement establishes a return on equity
(ROE) collar to prevent PSNH from earning a ROE in excess of an upper
limit or below a lower limit. To date, PSNH's ROE has been within the
limits of the ROE collar.
<F10C>C.ENVIRONMENTAL MATTERS
PSNH is subject to regulation by federal, state, and local authorities
with respect to air and water quality, handling the disposal of toxic
substances and hazardous and solid wastes, and the handling and use of
chemical products. PSNH has an active environmental auditing and
training program and believes that it is in substantial compliance with
current environmental laws and regulations.
Changing environmental requirements could hinder the construction of
new generating units, transmission and distribution lines, substations,
and other facilities. The cumulative long-term, economic cost impact
of increasingly stringent environmental requirements cannot accurately
be estimated. Changing environmental requirements could also require
extensive and costly modifications to PSNH's existing generating units,
and transmission and distribution systems, and could raise operating
costs significantly. As a result, PSNH may incur significant
additional environmental costs, greater than amounts included in cost
of removal and other reserves, in connection with the generation and
transmission of electricity and the storage, transportation, and
disposal of by-products and wastes. PSNH may also encounter
significantly increased costs to remedy the environmental effects of
prior waste handling activities.
PSNH has recorded a liability for what it believes is, based upon
information currently available, its estimated environmental
remediation costs for waste disposal sites for which it expects to bear
legal liability. In most cases, the extent of additional future
environmental cleanup costs is not reasonably estimable due to a number
of factors including the unknown magnitude of possible contamination,
the appropriate remediation methods, the possible effects of future
legislation or regulation methods, and the possible effects of
technological changes. At December 31, 1994, the liability recorded by
PSNH for its estimated environmental remediation costs, excluding any
possible insurance recoveries or recoveries from third parties,
amounted to approximately $2 million.
PSNH cannot estimate the potential liability for future claims that may
be brought against it. However, considering known facts, existing
laws, and regulatory practices, management does not believe the matters
disclosed above will have a material effect on PSNH's financial
position or future results of operations.
<F10D>D.NUCLEAR INSURANCE CONTINGENCIES
The Price-Anderson Act currently limits public liability from a single
incident at a nuclear power plant to $8.9 billion. The first
$200 million of liability would be provided by purchasing the maximum
amount of commercially available insurance. Additional coverage of up
to a total of $8.3 billion would be provided by an assessment of $75.5
million per incident, levied on each of the 110 nuclear units that are
currently subject to the Secondary Financial Protection Program in the
United States, subject to a maximum assessment of $10 million per
incident per nuclear unit in any year. In addition, if the sum of all
public liability claims and legal costs arising from any nuclear
incident exceeds the maximum amount of financial protection, each
reactor operator can be assessed an additional 5 percent, up to
$3.8 million, or $415.3 million in total, for all 110 nuclear units.
The maximum assessment is to be adjusted at least every five years to
reflect inflationary changes. Under the terms of the Contract with
NAEC, PSNH would be obligated to pay for any assessment charged to NAEC
as a "cost of service." At December 31, 1994, based on PSNH's
ownership interests in Millstone 3, and NAEC's ownership interests in
Seabrook 1, PSNH's maximum liability would be $30.7 million per
incident. In addition, through PSNH's purchased power contracts with
the three operating Yankee regional nuclear generating companies, PSNH
would be responsible for up to an additional $11.1 million per
incident. The payments for PSNH's ownership interest in nuclear
generating facilities and costs resulting from the Contract with NAEC
would be limited to a maximum of $5.3 million per incident per year.
Effective January 1, 1995, insurance was purchased from Nuclear Mutual
Limited (NML) to cover the primary cost of repair, replacement, or
decontamination of utility property resulting from insured occurrences
with respect to PSNH's ownership interest in Millstone 3 and CY. All
companies insured with NML are subject to retroactive assessments if
losses exceed the accumulated funds available to NML. The maximum
potential assessment against PSNH with respect to losses arising during
the current policy year is approximately $0.5 million under the NML
primary property insurance program.
Insurance has been purchased from Nuclear Electric Insurance Limited
(NEIL) to cover (1) certain extra costs incurred in obtaining
replacement power during prolonged accidental outages with respect to
PSNH's Contract with NAEC; and (2) the excess cost of repair,
replacement, or decontamination or premature decommissioning of utility
property resulting from insured occurrences with respect to PSNH's
ownership interests in Millstone 3, CY, MY, and VY; and NAEC's
ownership interest in Seabrook. All companies insured with NEIL are
subject to retroactive assessments if losses exceed the accumulated
funds available to NEIL. The maximum potential assessments against
PSNH (including costs resulting from PSNH's Contract with NAEC) with
respect to losses arising during current policy years are approximately
$1.5 million under the replacement power policies and $11.3 million
under the excess property damage, decontamination, and decommissioning
policies. Although PSNH has purchased the limits of coverage currently
available from the conventional nuclear insurance pools, the cost of a
nuclear incident could exceed available insurance proceeds.
Insurance has been purchased from American Nuclear Insurers/Mutual
Atomic Energy Liability Underwriters, aggregating $200 million on an
industry basis for coverage of worker claims. All reactor operators
insured under this coverage are subject to retrospective assessments of
$3.1 million per reactor. The maximum potential assessments against
PSNH (including costs resulting from PSNH's Contract with NAEC) with
respect to losses arising during the current policy period are
approximately $1.9 million.
<F10E>E.PURCHASED POWER ARRANGEMENTS
PSNH, along with CL&P and WMECO, purchase approximately 10 percent of
their electricity requirements pursuant to long-term contracts with the
Yankee companies. Under the terms of its agreements, the company pays
its ownership share (or entitlement share) of generating costs, which
includes depreciation, taxes, operation and maintenance expenses, the
estimated cost of decommissioning, and a return on invested capital.
These costs are recorded as purchased power expense and recovered
through the company's rates. PSNH's total cost of purchases under
these contracts for the units that are operating amounted to $23.4
million in 1994, $26.5 million in 1993 and $24.8 million in 1992. See
Note 1D, "Summary Of Significant Accounting Policies-Investments and
Jointly Owned Electric Utility Plant" and Note 4, "Nuclear
Decommissioning" for more information on the Yankee companies.
PSNH has entered into multiple purchases of capacity and energy from
nonutility generators pursuant to rate orders. These arrangements have
terms from 20 to 30 years, and require the company to purchase the
energy at specified prices or formula rates. For the 12 months ended
December 31, 1994, approximately 14 percent of NU system electricity
requirements was met by nonutility generators. The total cost to the
company of purchases under these arrangements amounted to $130 million
in 1994, $133.4 million in 1993, and $92.1 million in 1992. These
costs are eventually recovered through the company's rates. See Note
1J, "Summary of Significant Accounting Policies - Recoverable Energy
Costs" for further information.
In an effort to control costs from nonutility generators and as
required by the rate agreement, PSNH has been negotiating with 13
nonutility generators. As of February 1995, eight of those
negotiations were complete. This includes five hydroelectric
facilities that were renegotiated to convert their rate orders to long-
term contracts and three wood-burning facilities had either their rate
orders bought out or entered into a new contract. Mediation efforts
continue with the five wood burners that have not been settled.
PSNH entered into a buy-back agreement to purchase the capacity and
energy of the New Hampshire Electric Cooperative, Inc.'s (NHEC)
Seabrook entitlement and to pay all of NHEC's Seabrook costs for a ten-
year period which began July 1, 1990. The total cost of purchases
under this agreement was $15.7 million in 1994, $14.4 million in 1993,
and $13.8 million in 1992. Part of these costs is collected currently
through the FPPAC and part is deferred for future collection in
accordance with the Rate Agreement. In connection with the agreement,
NHEC agreed to continue as a firm-requirements customer of PSNH for 15
years.
The estimated annual cost of PSNH's significant purchased power
arrangements are as follows:
1995 1996 1997 1998 1999
-------------------------------------------------------------
(Millions of Dollars)
Yankee companies ......$ 27.3 $ 28.5$ 25.5 $ 30.5 $ 30.1
Nonutility generators . 116.3 121.6 123.9 126.0 128.1
NHEC .................. 16.5 16.5 25.1 33.2 32.8
<F10F>F.HYDRO-QUEBEC
Along with other New England utilities, PSNH entered into agreements to
support transmission and terminal facilities to import electricity from
the Hydro-Quebec system in Canada. PSNH is obligated to pay, over a
30-year period, its proportionate share of the annual operation,
maintenance, and capital costs of these facilities, which are currently
forecast to be $53.7 million for the years 1995-1999, including $12.0
million for 1995.
<F10G>G.DEFERRED RECEIVABLE FROM AFFILIATED COMPANY
At the time PSNH emerged from bankruptcy on May 16, 1991, in accordance
with the phase-in under the Rate Agreement, it began accruing a
deferred return on a portion of its Seabrook investment. From May 16,
1991 to the Acquisition Date, PSNH accrued a deferred return of
$50.9 million. On the Acquisition Date, PSNH sold the $50.9 million
deferred return to NAEC as part of the Seabrook-related assets.
At the time PSNH transferred the deferred return to NAEC, it realized,
for income tax purposes, a gain that is deferred under the consolidated
income tax rules. This gain will be restored for income tax purposes
when the deferred return of $50.9 million, and the associated income
taxes of $32.9 million, are collected by NAEC through the Contract.
When NAEC recovers the $32.9 million in years eight through ten of the
Rate Agreement, it is obligated to make corresponding payments to PSNH.
On the Acquisition Date, PSNH recorded the $32.9 million of income
taxes associated with the deferred return as a deferred receivable from
NAEC, with a corresponding entry to deferred revenue, on its Balance
Sheet. In 1993, due to changes in tax rates, this amount was adjusted
to $33.3 million.
<F11> 11. DERIVATIVE FINANCIAL INSTRUMENTS
The company utilizes derivative financial instruments to manage well-
defined interest-rate risks. The company does not use them for trading
purposes.
PSNH has entered into an interest-rate cap contract with a financial
institution in order to reduce a portion of the interest-rate risk
associated with certain variable-rate tax-exempt pollution control revenue
bonds, as well as a portion of the PSNH Variable-Rate Term Loan. During
1994, there were three outstanding contracts held by PSNH, covering $225
million of its variable rate debt, with terms ranging from one to three
years. The contact entitles PSNH to receive from its counterparties the
amount, if any by which the interest payments on its variable-rate tax-
exempt pollution control revenue bond exceeds the J. J. Kenny High Grade
Index and the PSNH Variable-Rate Term Loan exceeds the three-month LIBOR
rate. These contracts are settled on a quarterly basis. As of December
31, 1994, PSNH had a total of $75 million in caps outstanding, with a
positive mark-to-market position of approximately $0.8 million.
PSNH is exposed to credit risk on the interest-rate caps if the
counterparties fail to perform their obligations. However, PSNH
anticipates that the counterparties will be able to fully satisfy their
obligations under the contracts.
<F12>12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each of the following financial instruments:
Cash and nuclear decommissioning trusts: The carrying amounts approximate
fair value.
SFAS 115 requires investments in debt and equity securities to be presented
at fair value and was adopted by PSNH on a prospective basis as of January
1, 1994. There was no change in funding requirements of the trusts nor any
impact on earnings as a result of the adoption of SFAS 115.
Preferred stock and long-term debt: The fair value of PSNH's securities is
based upon the quoted market price for those issues or similar issues.
Adjustable rate securities are assumed to have a fair value equal to their
carrying value.
The carrying amounts of PSNH's financial instruments and the estimated fair
values are as follows:
At December 31, 1994 Carrying Amount Fair Value
-----------------------------------------------------------------
(Thousands of Dollars)
Preferred stock subject to mandatory
redemption ........................$125,000 $127,500
Long-term debt -
First Mortgage Bonds .............. 342,500 342,931
Other long-term debt .............. 657,485 641,673
-----------------------------------------------------------------
At December 31, 1993 Carrying Amount Fair Value
-----------------------------------------------------------------
(Thousands of Dollars)
Preferred stock subject to mandatory
redemption ........................$125,000 $139,375
Long-term debt -
First Mortgage Bonds .............. 342,500 359,878
Other long-term debt .............. 751,485 783,389
The fair values shown above have been reported to meet disclosure
requirements and do not purport to represent the amounts at which those
obligations would be settled.
To the Board of Directors
of Public Service Company of New Hampshire:
We have audited the accompanying balance sheets of Public Service Company
of New Hampshire (a New Hampshire corporation and a wholly owned subsidiary of
Northeast Utilities) as of December 31, 1994 and 1993, and the related
statements of income, common equity and cash flows for the years ended
December 31, 1994 and 1993 and the periods from January 1, 1992 to June 4, 1992
and June 5, 1992 to December 31, 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Public Service Company of
New Hampshire as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years ended December 31, 1994 and 1993 and
the periods from January 1, 1992 to June 4, 1992 and June 5, 1992 to
December 31, 1992, in conformity with generally accepted accounting principles.
As explained in Note 9B to the financial statements, effective January 1,
1993, Public Service Company of New Hampshire changed its methods of accounting
for postretirement benefits other than pensions.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 17, 1995
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------------------------------
This section contains management's assessment of PSNH's (the company)
financial condition and the principal factors having an impact on the
results of operations. The company is a wholly owned subsidiary of
Northeast Utilities (NU). This discussion should be read in conjunction
with the company's financial statements and footnotes.
FINANCIAL CONDITION
OVERVIEW
Net income increased to approximately $77 million in 1994 from approximately $52
million in 1993. The increase from 1993 is a result of increased revenues from
retail rate increases, higher retail kilowatt-hour sales, and higher income from
the amortization of the company's regulatory liability.
In 1994, PSNH's retail kilowatt-hour sales rose by 2.0 percent over 1993, due in
large part to the beginning of an economic recovery in New England. Employment
levels have risen, unemployment rates have fallen, and personal income has
increased in New Hampshire. Retail sales were also affected by colder winter
weather in early 1994.
In 1995, PSNH expects little retail sales growth over 1994, primarily because of
the effects of higher interest rates on the economy and a return to normal
weather. Over the longer term, retail kilowatt-hour sales growth is expected to
be strong in New Hampshire, which by some measures has the fastest growing
economy in New England. In 1994, many businesses announced plans to expand in
New Hampshire. The company estimates that it will have compounded annual sales
growth of 1.9 percent from 1994 through 1999.
Competitive forces within the electric utility industry are continuing to
increase due to a variety of influences, including legislative and regulatory
actions, technological advances, and changes in consumer demand. PSNH has
developed, and is continuing to develop, a number of initiatives to retain and
continue to serve its existing customers and to expand its retail customer base.
The company believes the steps it is taking, including a companywide process
reengineering effort, will have significant, positive effects, including reduced
operating costs and improved customer service, in the next few years. The
company also benefits from a diverse retail base with no significant dependence
on any one retail customer or industry.
PSNH continues to operate predominantly in a state-approved franchise territory
under traditional cost-of-service regulation. Retail wheeling, under which a
retail customer would be permitted to select an electricity supplier and require
the local electric utility to transmit the power to the customer's site, is not
required in PSNH's service territory. Several bills related to retail wheeling
have been introduced in the New Hampshire legislature. To date, none of these
bills have been enacted. The chairman of the New Hampshire Public Utilities
Commission (NHPUC) has set up a roundtable discussion with legislators,
utilities, customers and other interested parties regarding competition in the
electric utility industry. In addition, a new entity, Freedom Electric Power
Company (FEPCO), has filed with the NHPUC for permission to do business as an
electric utility to serve selected large PSNH customers. PSNH and other New
Hampshire utilities are opposing FEPCO's petition before the NHPUC. Management
cannot assess the impact of any potential legislative or regulatory outcomes on
PSNH.
While retail competition is not required in the company's retail service
territory, competitive forces are nonetheless influencing retail pricing.
These forces include competition from alternate fuels such as natural gas,
competition from customer-owned generation, and regional competition for
business retention and expansion. PSNH's retail business group continues to
work with customers to address their concerns. PSNH has reached long-term rate
agreements with new and existing customers to gain or retain their business. In
general, these rate agreements have terms of about five years. Negotiated
retail rate reductions for PSNH customers under rate agreements in effect for
1994 amounted to approximately $3 million. Management believes that the
aggregate amount of negotiated retail rate reductions will increase in 1995, but
that the related agreements will continue to provide significant benefits to
PSNH, including the preservation of approximately 4 percent of retail revenues.
The company is also working with its regulators to address the needs of
customers more widely. PSNH has a seven-year rate agreement in effect through
May 1997. Management will continue to evaluate the use of agreements of this
type to keep retail rates competitive.
RATE MATTERS
PSNH follows accounting principles that allow the rate treatment for certain
events or transactions to be reflected. These principles may differ from the
accounting principles followed by nonregulated enterprises. Regulators may
permit incurred costs, which would normally be treated as expenses by non-
regulated enterprises, to be deferred as regulatory assets and recovered in
revenues at a later date. Regulatory assets at December 31, 1994 were
approximately $972 million. Based on current regulation, the company believes
that its use of regulatory accounting is still appropriate.
See the "Notes To Financial Statements," Note 1H, for further details on
regulatory accounting.
In June 1994, PSNH's base rates increased by 5.5 percent under a seven-year 1989
rate agreement approved by the NHPUC.
The costs associated with purchases by PSNH from certain nonutility generators
(NUGs) over the level assumed in rates are deferred and recovered over ten-year
periods through the Fuel and Purchased Power Adjustment Clause (FPPAC). At
December 31, 1994, the unrecovered deferrals were approximately $174 million.
PSNH is attempting to renegotiate these arrangements with the NUGs.
On September 23, 1994, the NHPUC approved settlement agreements with two wood-
fired NUGs covering approximately 20 megawatts (MW) of capacity. These two NUGs
gave up their rights to sell their output to PSNH in exchange for lump sum cash
payments by PSNH totaling approximately $40 million. The buyout payment was
added to the deferred balance of NUG costs. The savings resulting from the
agreements will be used to reduce the NUG deferred balance over the remaining
period of the cancelled arrangements. PSNH is involved in mediations with the
owners of the six remaining wood-fired facilities, which account for
approximately 87 MW of capacity. PSNH has reached an agreement with one of
these six NUGs, which calls for a payment by PSNH of $52 million in return for a
substantial reduction in the rates charged to PSNH. The agreement was filed
with the NHPUC in February 1995.
SEABROOK PERFORMANCE
The Seabrook plant operated at 61.6 percent of capacity for the year ended
December 31, 1994, compared with 89.8 percent in 1993 and a 1994 national
average of 73.2 percent. The lower 1994 capacity factor was primarily the
result of an unplanned outage early in the year and an extended refueling and
maintenance outage. The unit was taken out of service on January 25, 1994 when
an automatic trip from 100 percent power occurred when a main steam isolation
valve closed during quarterly surveillance testing. The unit returned to
service on February 18, 1994. The unit began its scheduled 57-day refueling and
maintenance outage on April 9, 1994. The unexpected discovery of reactor
coolant pump locking cups and a bolt in the reactor vessel contributed
substantially to the extension of the outage. The unit returned to service on
August 1, 1994 for an outage duration of 114 days. The next refueling outage is
scheduled for November 1995.
ENVIRONMENTAL MATTERS
NU devotes substantial resources to identify and then to meet the multitude of
environmental requirements it faces. PSNH has active auditing programs
addressing a variety of different regulatory requirements, including an
environmental auditing program to detect and remedy noncompliance with
environmental laws or regulations.
The company is potentially liable for environmental cleanup costs at a number of
sites both inside and outside its service territory. To date, the future
estimated environmental remediation liability has not been material with respect
to the earnings or financial position of the company. At December 31, 1994, the
liability recorded by the company, amounted to approximately $2 million, which
represents the highest cost probable at this time.
The company expects that the implementation of the 1990 Clean Air Act Amendments
(CAAA) as they relate to sulfur dioxide emissions will require only modest
emissions reductions for PSNH. The company is subject to more stringent
emission limits for nitrogen oxides (NOX) within the next five years under the
CAAA requirements. PSNH will install at Merrimack Station a selective catalytic
reduction (SCR) pollution control system by May 1995 to comply with CAAA
requirements. The cost of the SCR installation is approximately $22 million,
with approximately $10 million of costs incurred as of December 31,1994.
Additional capital costs of approximately $5-$7 million are expected to be
incurred to comply with NOX emission limits for 1999.
NUCLEAR DECOMMISSIONING
The company's estimated cost to decommission its share of Millstone 3 and North
Atlantic Energy Corporation's (NAEC) share of Seabrook is approximately $13
million and $137 million, respectively, in year-end 1994 dollars. Under the
terms of the Rate Agreement, the company is obligated to pay NAEC's share of
Seabrook's decommissioning costs, even if the unit is shut down prior to the
expiration of its operating license. In addition, the company's estimated cost
to decommission its shares of the regional nuclear generating units is estimated
to be approximately $48 million. These costs are being recognized over the lives
of the respective units and a portion of the costs is being recovered through
rates. Yankee Atomic Electric Company (YAEC) has begun component removal
activities related to the decommissioning of its nuclear facility. PSNH's
estimated obligation to YAEC has been recorded on its Balance Sheets.
Management expects that the company will continue to be allowed to recover these
costs.
The staff of the Securities and Exchange Commission has questioned certain of
the current accounting practices of the electric utility industry, including
this company, regarding the recognition, measurement, and classification of
decommissioning costs for nuclear generating stations in the financial
statements of electric utilities. The Financial Accounting Standards Board is
currently reviewing the accounting for removal costs, including decommissioning
and similar costs. If current electric utility industry accounting practices
for such decommissioning costs are changed: (1) annual provisions for
decommissioning could increase, (2) the estimated costs for decommissioning
could be recorded as a liability rather than as accumulated depreciation, and
(3) trust fund income from the external decommissioning trust could be reported
as investment income rather than as a reduction to decommissioning expense.
See the "Notes to Financial Statements," Note 4, for further information on
nuclear decommissioning.
PROPERTY TAXES
PSNH has had a significant court appeal for municipal property tax assessments
in the town of Bow, New Hampshire. The central issue in the case is the fair
market value of utility property. The company believes that the assessments
should be based on a fair market value that approximates net book cost. This is
the assessment level that taxing authorities are predominantly using throughout
Connecticut, Massachusetts, and some of New Hampshire. However, towns such as
Bow advocate a method that approximates reproduction costs.
PSNH's appeal of the property tax as assessed against them by Bow has been
dismissed by the Supreme Court of New Hampshire. The company estimates that,
for assessments in towns such as Bow, the change to the reproduction cost
methodology could result in property valuations approximately three times
greater than values approximating net book cost. If other towns adopt this
methodology, there could be a significant adverse impact on the company's future
results of operations and financial condition. However, the extent to which
other towns successfully adopt this methodology and any subsequent increase in
the company's property tax liability cannot be determined at this time.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations decreased approximately $8 million in 1994, as
compared with 1993, primarily due to higher payments to nonutility generators.
Cash used for financing activities was approximately $38 million lower in 1994,
as compared with 1993, primarily due to a lower repayment of short-term debt.
Cash used for investments was approximately $40 million higher in 1994, as
compared with 1993, primarily due to an increase in short-term loans to other NU
system companies under the NU system Money Pool.
The company has a more leveraged capital structure than most other investor-
owned public utilities and is required to make substantial interest payments.
The company's indebtedness under the Term Loan, Revolving Credit Facility, and
some of the company's pollution control revenue bonds bear interest at floating
rates to be set periodically, causing the company to be sensitive to prevailing
interest rates. The company has entered into interest rate cap contracts to
reduce a portion of the interest rate risk on certain variable-rate tax-exempt
pollution control revenue bonds and the variable-rate term loan. Any premiums
paid on these contracts are deferred and amortized over the life of the
contracts. The differential paid or received as interest rates change is
recognized in income when realized.
For further information on Derivatives, see the "Notes to Financial Statements,"
Note 11, "Derivative Financial Instruments," and Note 12, "Fair Value of
Financial Instruments."
PSNH is obligated to meet approximately $559 million of long-term debt and
preferred stock maturities and cash sinking-fund requirements during the 1995
through 1999 period, including approximately $94 million for 1995. The
company's Term Loan must be repaid in 16 quarterly installments of approximately
$24 million that commenced in August 1992. PSNH's Series A preferred stock has
an annual sinking fund of approximately $25 million beginning in 1997. The
company may need to supplement its internal cash generation with outside
financing, including additional borrowings if additional agreements are reached
with the wood-fired NUGs.
PSNH's construction program expenditures, including allowance for funds used
during construction (AFUDC), for the period 1995 through 1999 are estimated to
be approximately $196 million, including approximately $51 million for 1995.
The construction program's main focus is maintaining and upgrading the existing
transmission and distribution system, as well as nuclear and fossil-generating
facilities. NU does not foresee the need for new major generating facilities,
at least until the year 2009.
RESULTS OF OPERATIONS
PSNH's results of operations for the twelve months ended December 31, 1994 and
1993 and the period June 5, 1992 through December 31, 1992 reflect the results
after the acquisition of PSNH by NU on June 5, 1992. The results for the 1993
period compared to the 1992 period are not comparable because of the significant
impacts of the acquisition on the company's results.
OPERATING REVENUES
The components of the change in operating revenues for the past two years are
provided in the table below.
Change in Operating Revenues
Increase/(Decrease)
1994 vs. 1993 1993 vs. 1992
--------------------------------------------------------------------
(Millions of Dollars)
Regulatory decisions $20 $24
Fuel, purchased power
and FPPAC cost recoveries 32 23
Sales volume 6 7
Other revenues - 1
Sales to other utilities - (49)
1992 Escrowed revenues - (16)
----- ----
Total revenue change $58 ($10)
=== ====
Operating revenues increased approximately $58 million in 1994 from 1993.
Revenues related to regulatory decisions increased primarily because of the
effects of the June 1993 and 1994 retail rate increases. Fuel, purchased power,
and FPPAC cost recoveries increased primarily due to higher fuel and purchased
power costs. Sales volume increased as a result of higher retail sales from an
improving economy and colder winter weather. Retail sales increased 2.0 percent
in 1994 from 1993 sales levels.
Operating revenues decreased approximately $10 million in 1993 from 1992
primarily due to lower short-term power sales to other utilities as a result of
the elimination, effective with the acquisition, of sales to NU, and the one-
time impact in 1992 of $16 million of revenues released from escrow at the
acquisition date. These decreases were partially offset by retail rate
increases in June 1992 and 1993 and higher fuel, purchased power, and FPPAC cost
recoveries. Retail sales increased 1.4 percent in 1993 from 1992 sales levels.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power increased approximately $15 million in
1994, as compared to 1993, primarily due to an increase in purchased power.
Fuel, purchased and net interchange power decreased approximately $21 million
in 1993, as compared to 1992, primarily due to the timing in the recognition of
fuel expenses under the FPPAC.
OTHER OPERATION AND MAINTENANCE EXPENSES
Other operation and maintenance expenses increased by approximately $10 million
in 1994, as compared to 1993, primarily as a result of maintenance work during
the two outages at the Seabrook nuclear plant in 1994 and higher storm-related
expenses in 1994, partially offset by lower 1994 payroll and benefit costs and
the cost of an employee reduction program in 1993.
Other operation and maintenance expenses increased by approximately $14 million
in 1993, as compared to 1992, primarily as a result of the payments made by PSNH
to NAEC for costs associated with the Seabrook plant under the Seabrook Power
Contract, beginning June 5, 1992.
See "Notes to Financial Statements," Note 2, for further information on the
Seabrook Power Contract.
DEPRECIATION
Depreciation expense decreased $8 million in 1993 as compared to 1992, as a
result of the transfer of the company's investment in Seabrook to NAEC and the
inclusion of such costs in the Seabrook Power Contract.
AMORTIZATION OF REGULATORY ASSETS, NET
Amortization of regulatory assets, net decreased $12 million in 1994, as
compared to 1993, primarily due to the higher amortization in 1994 of the
regulatory liability recognized under a global settlement approved at the end of
1993. Approximately $128 million of pre-acquisition losses are being amortized
over six years as a credit to amortization expense. 1994 included a full year
of amortization as compared to only eight months of amortization in 1993.
Amortization of regulatory assets, net decreased $20 million in 1993, as
compared to 1992, primarily due to the amortization of the regulatory
liability recognized under the global settlement.
FEDERAL AND STATE INCOME TAXES
Federal and state income taxes increased approximately $18 million in 1994, as
compared to 1993, primarily because of higher taxable income.
Federal and state income taxes increased approximately $22 million in 1993, as
compared to 1992, primarily because of higher taxable income.
DEFERRED NUCLEAR PLANTS RETURN
The company has not recorded a deferred Seabrook return after June 4, 1992
because the company's investment in Seabrook was transferred to NAEC at the
acquisition date. Prior to the transfer of Seabrook to NAEC, a deferred return
was calculated on the portion of the Seabrook investment not reflected in rate
base.
OTHER INCOME, NET
Bankruptcy related expenses for the period prior to June 5, 1992, represent
costs associated with PSNH's bankruptcy. In 1988, PSNH filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code.
The gain on generating projects of $6 million for the period prior to June 5,
1992, represents a first quarter 1992 adjustment related to the settlement of a
Seabrook contractor dispute and a Seabrook property tax abatement.
INTEREST CHARGES
Interest on long-term debt and other interest charges are lower for 1993, as
compared to 1992, due to the assumption by NAEC, at the acquisition date, of
the company's obligations under the 15.23 percent Notes, paydown of the Term
Loan and a reduction in borrowings under the revolving credit facility.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
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SELECTED FINANCIAL DATA
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Jan. 1, 1994 Jan. 1, 1993 June 5, 1992* Jan. 1, 1992 May 16, 1991**
to to to to to
For the Periods Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 June 4, 1992 Dec. 31, 1991
------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues $922,039 $864,415 $492,559 | $381,769 $539,827 |
| |
Operating Income... 152,086 124,710 61,206 | 34,250 82,755 |
| |
Net Income (Loss)... 77,444 52,237 29,398 | 12,778 52,694 |
| |
At Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 June 4, 1992* Dec. 31, 1991
------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Total Assets $2,845,967 $2,774,511 $2,793,768 | $2,693,414 $2,636,525 |
| |
Long-Term Debt (a).. 999,985 1,093,985 1,187,985 | 1,488,985 1,515,985 |
| |
Liabilities Subject to | |
Settlement (a).. - - - | - - |
| |
Preferred Stock Subject | |
to Mandatory Redemption (a) 125,000 125,000 125,000 | 125,000 125,000 |
| |
Prefered Stock Not Subject | |
to Mandatory Redemption - - - | - - |
| |
Obligations Under Seabrook | |
Power Contract and Other | |
Capital Leases (a) 887,967 856,559 787,826 | - - |
(a)Includes portions due within one year.
* PSNH was acquired by NU on June 5, 1992 - See Note 1 of Notes to Financial Statements.
**PSNH was reorganized on May 16, 1991.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
SELECTED FINANCIAL DATA
Jan. 1, 1991 Jan. 1, 1990
to to
For the Periods May 15, 1991 Dec. 31, 1990
-----------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues $246,281 $660,122
Operating Income... 21,616 63,059
Net Income (Loss)... (100,791) (210,012)
At May 15, 1991** Dec. 31, 1990
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(Thousands of Dollars)
Total Assets $2,502,237 $2,490,534
Long-Term Debt (a).... - -
Liabilities Subject to
Settlement (a)...... 1,901,803 1,864,681
Preferred Stock Subject
to Mandatory Redemption (a) - 420,613
Prefered Stock Not Subject
to Mandatory Redemption - 48,587
Obligations Under Seabrook
Power Contract and Other
Capital Leases (a) - -
(a)Includes portions due within one year.
* PSNH was acquired by NU on June 5, 1992 - See Note 1 of Notes to
Financial Statements.
**PSNH was reorganized on May 16, 1991.
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STATISTICS
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Gross Electric Average
Utility Plant Annual
December 31, Use Per Electric
(Thousands of kWh Sales Residential Customers Employees
Dollars) (Millions) Customer(kWh)(Average)(December 31,)
--------------------------------------------------------------------
1994 $2,058,654 11,008 6,768 400,775 1,374
1993 1,990,730 11,146 6,817 397,277 1,426
1992* 1,894,359 12,294 6,874 394,046 1,680
1991 1,782,894 11,377 7,184 390,793 2,639
1990 2,585,890 8,324 7,015 388,192 2,766
1989 2,555,404 7,656 7,311 383,497 2,786
STATEMENTS OF QUARTERLY FINANCIAL DATA (UNAUDITED)
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1994 March 31 June 30 September 30 December 31
----------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues $ 249,279 $ 210,875 $ 227,976 $ 233,909
========= ========= ========= =========
Operating Income $ 43,441 $ 32,388 $ 38,713 $ 37,544
========= ========= ========= =========
Net Income (Loss) $ 24,278 $ 14,001 $ 19,262 $ 19,903
========= ========= ========= =========
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1993 March 31 June 30 September 30 December 31
----------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues $ 224,705 $ 192,360 $ 222,717 $ 224,633
========= ========= ========= =========
Operating Income $ 35,077 $ 21,682 $ 24,725 $ 43,226
========= ========= ========= =========
Net Income (Loss) $ 15,558 $ 2,995 $ 8,583 $ 25,101
========= ========= ========= =========
* PSNH was acquired by NU on June 5, 1992 - See Note 1A of Notes to
Financial Statements.