EXHIBIT 13.3
1995 Annual Report
Western Massachusetts Electric Company
Index
Contents Page
- -------- ----
Balance Sheets....................................................... 2-3
Statements of Income................................................. 4
Statements of Cash Flows............................................. 5
Statements of Common Stockholder's Equity............................ 6
Notes to Financial Statements........................................ 7
Report of Independent Public Accountants............................. 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 27
Selected Financial Data.............................................. 33
Statements of Quarterly Financial Data............................... 33
Statistics........................................................... 34
Preferred Stockholder and Bondholder Information..................... Back Cover
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
- ------------------------------------------------------------------------------------
At December 31, 1995 1994
- ------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $1,234,738 $1,214,326
Less: Accumulated provision for depreciation......... 462,872 425,019
----------- -----------
771,866 789,307
Construction work in progress........................... 18,957 19,187
Nuclear fuel, net....................................... 31,574 38,000
----------- -----------
Total net utility plant............................. 822,397 846,494
----------- -----------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 69,903 56,123
Investments in regional nuclear generating
companies, at equity................................... 14,820 14,927
Other, at cost.......................................... 3,979 3,941
----------- -----------
88,702 74,991
----------- -----------
Current Assets:
Cash.................................................... 241 105
Notes receivable from affiliated companies.............. - 8,750
Receivables, less accumulated provision for
uncollectible accounts of $2,230,000 in 1995
and $2,032,000 in 1994................................ 42,164 35,427
Accounts receivable from affiliated companies........... 951 1,108
Accrued utility revenues................................ 11,119 15,766
Fuel, materials, and supplies, at average cost.......... 5,114 4,829
Prepayments and other................................... 9,176 9,215
----------- -----------
68,765 75,200
----------- -----------
Deferred Charges:
Regulatory assets (Note 1G)<F1G>........................ 160,986 184,226
Unamortized debt expense................................ 1,496 1,733
Other................................................... - 974
----------- -----------
162,482 186,933
----------- -----------
Total Assets........................................ $1,142,346 $1,183,618
=========== ===========
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
- ------------------------------------------------------------------------------------
At December 31, 1995 1994
- ------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock,$25 par value--authorized and
outstanding 1,072,471 shares in 1995 and 1994........ $ 26,812 $ 26,812
Capital surplus, paid in................................ 150,182 149,683
Retained earnings....................................... 115,296 111,586
----------- -----------
Total common stockholder's equity.............. 292,290 288,081
Cumulative preferred stock--
$100 par value--authorized 1,000,000 shares;
outstanding 200,000 shares in 1995 and 1994;
$25 par value--authorized 3,600,000 shares;
outstanding 2,300,000 shares in 1995
2,927,000 shares in 1994
Preferred stock not subject to mandatory redemption..... 53,500 68,500
Preferred stock subject to mandatory redemption......... 22,500 24,000
Long-term debt.......................................... 347,470 345,669
----------- -----------
Total capitalization........................... 715,760 726,250
----------- -----------
Obligations Under Capital Leases.......................... 20,855 23,852
----------- -----------
Current Liabilities:
Notes payable to affiliated company..................... 24,050 -
Long-term debt and preferred stock--current
portion................................................ 1,500 34,975
Obligations under capital leases--current
portion................................................ 15,156 12,945
Accounts payable........................................ 14,475 20,396
Accounts payable to affiliated companies................ 11,604 17,352
Accrued taxes........................................... 1,686 5,160
Accrued interest........................................ 5,670 6,702
Other................................................... 7,768 7,584
----------- -----------
81,909 105,114
<
1995 Annual Report
Western Massachusetts Electric Company
Index
Contents Page
- -------- ----
Balance Sheets....................................................... 2-3
Statements of Income................................................. 4
Statements of Cash Flows............................................. 5
Statements of Common Stockholder's Equity............................ 6
Notes to Financial Statements........................................ 7
Report of Independent Public Accountants............................. 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 27
Selected Financial Data.............................................. 33
Statements of Quarterly Financial Data............................... 33
Statistics........................................................... 34
Preferred Stockholder and Bondholder Information..................... Back Cover
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
- ------------------------------------------------------------------------------------
At December 31, 1995 1994
- ------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $1,234,738 $1,214,326
Less: Accumulated provision for depreciation......... 462,872 425,019
----------- -----------
771,866 789,307
Construction work in progress........................... 18,957 19,187
Nuclear fuel, net....................................... 31,574 38,000
----------- -----------
Total net utility plant............................. 822,397 846,494
----------- -----------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 69,903 56,123
Investments in regional nuclear generating
companies, at equity................................... 14,820 14,927
Other, at cost.......................................... 3,979 3,941
----------- -----------
88,702 74,991
----------- -----------
Current Assets:
Cash.................................................... 241 105
Notes receivable from affiliated companies.............. - 8,750
Receivables, less accumulated provision for
uncollectible accounts of $2,230,000 in 1995
and $2,032,000 in 1994................................ 42,164 35,427
Accounts receivable from affiliated companies........... 951 1,108
Accrued utility revenues................................ 11,119 15,766
Fuel, materials, and supplies, at average cost.......... 5,114 4,829
Prepayments and other................................... 9,176 9,215
----------- -----------
68,765 75,200
----------- -----------
Deferred Charges:
Regulatory assets (Note 1G)<F1G>........................ 160,986 184,226
Unamortized debt expense................................ 1,496 1,733
Other................................................... - 974
----------- -----------
162,482 186,933
----------- -----------
Total Assets........................................ $1,142,346 $1,183,618
=========== ===========
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
- ------------------------------------------------------------------------------------
At December 31, 1995 1994
- ------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock,$25 par value--authorized and
outstanding 1,072,471 shares in 1995 and 1994........ $ 26,812 $ 26,812
Capital surplus, paid in................................ 150,182 149,683
Retained earnings....................................... 115,296 111,586
----------- -----------
Total common stockholder's equity.............. 292,290 288,081
Cumulative preferred stock--
$100 par value--authorized 1,000,000 shares;
outstanding 200,000 shares in 1995 and 1994;
$25 par value--authorized 3,600,000 shares;
outstanding 2,300,000 shares in 1995
2,927,000 shares in 1994
Preferred stock not subject to mandatory redemption..... 53,500 68,500
Preferred stock subject to mandatory redemption......... 22,500 24,000
Long-term debt.......................................... 347,470 345,669
----------- -----------
Total capitalization........................... 715,760 726,250
----------- -----------
Obligations Under Capital Leases.......................... 20,855 23,852
----------- -----------
Current Liabilities:
Notes payable to affiliated company..................... 24,050 -
Long-term debt and preferred stock--current
portion................................................ 1,500 34,975
Obligations under capital leases--current
portion................................................ 15,156 12,945
Accounts payable........................................ 14,475 20,396
Accounts payable to affiliated companies................ 11,604 17,352
Accrued taxes........................................... 1,686 5,160
Accrued interest........................................ 5,670 6,702
Other................................................... 7,768 7,584
----------- -----------
81,909 105,114
----------- -----------
Deferred Credits:
Accumulated deferred income taxes (Note 1H)<F1H>........ 259,595 253,821
Accumulated deferred investment tax credits............. 26,302 27,822
Deferred contractual obligation......................... 18,814 28,572
Other................................................... 19,111 18,187
----------- -----------
323,822 328,402
----------- -----------
Commitments and Contingencies (Note 10)<F10>
Total Capitalization and Liabilities........... $1,142,346 $1,183,618
=========== ===========
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF INCOME
- ------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues.............................. $420,208 $421,477 $415,055
--------- --------- ---------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power.. 86,738 67,365 67,781
Other...................................... 142,774 130,683 142,273
Maintenance................................... 37,447 35,430 34,259
Depreciation.................................. 37,924 36,885 35,751
Amortization of regulatory assets............. 19,562 29,118 29,700
Federal and state income taxes (Note 8)<F8>... 14,060 32,653 27,892
Taxes other than income taxes................. 18,639 18,403 17,051
--------- --------- ---------
Total operating expenses................ 357,144 350,537 354,707
--------- --------- ---------
Operating Income................................ 63,064 70,940 60,348
--------- --------- ---------
Other Income:
Equity in earnings of regional nuclear
generating companies........................ 1,771 2,031 1,680
Other, net.................................... 1,232 3,687 4,405
Income taxes.................................. 262 (71) 23
--------- --------- ---------
Other income, net....................... 3,265 5,647 6,108
--------- --------- ---------
Income before interest charges.......... 66,329 76,587 66,456
--------- --------- ---------
Interest Charges:
Interest on long-term debt.................... 26,840 27,678 29,979
Other interest................................ 356 (548) (195)
--------- --------- ---------
Interest charges, net................... 27,196 27,130 29,784
--------- --------- ---------
Income before cumulative effect of
accounting change............................. 39,133 49,457 36,672
Cumulative effect of accounting change
(Note 1A)<F1A>................................ - - 3,922
--------- --------- ---------
Net Income...................................... $ 39,133 $ 49,457 $ 40,594
========= ========= =========
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net Income.................................................. $ 39,133 $ 49,457 $ 40,594
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 37,924 36,885 35,751
Deferred income taxes and investment tax credits, net..... 3,418 10,256 918
Deferred Millstone 3 return............................... (190) (1,331) (2,516)
Amortization of deferred Millstone 3 return............... 7,336 14,758 14,768
Recoverable energy costs, net of amortization............. (4,715) (8,622) 7,316
Other sources of cash..................................... 29,409 27,553 26,765
Other uses of cash........................................ (8,039) (23,701) (2,698)
Changes in working capital:
Receivables and accrued utility revenues.................. (1,933) 6,470 (3,728)
Fuel, materials, and supplies............................. (285) 2,228 1,944
Accounts payable.......................................... (11,669) 8,239 (2,078)
Accrued taxes............................................. (3,474) (1,862) (3,248)
Other working capital (excludes cash)..................... 1,256 (2,991) 2,433
----------- ----------- -----------
Net cash flows from operating activities...................... 88,171 117,339 116,221
----------- ----------- -----------
Financing Activities:
Issuance of long-term debt.................................. - 90,000 113,800
Net increase (decrease) in short-term debt.................. 24,050 (6,000) (35,500)
Reacquisitions and retirements of long-term debt............ (34,550) (104,169) (114,270)
Reacquisitions and retirements of preferred stock........... (15,675) (7,325) (1,500)
Cash dividends on preferred stock........................... (4,944) (5,897) (5,259)
Cash dividends on common stock.............................. (30,223) (29,514) (28,785)
----------- ----------- -----------
Net cash flows used for financing activities.................. (61,342) (62,905) (71,514)
----------- ----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (27,084) (32,680) (34,592)
Nuclear fuel.............................................. 75 (4,928) (2,926)
----------- ----------- -----------
Net cash flows used for investments in plant................ (27,009) (37,608) (37,518)
NU System Money Pool........................................ 8,750 (8,750) -
Other investment activities, net............................ (8,434) (8,156) (7,169)
----------- ----------- -----------
Net cash flows used for investments........................... (26,693) (54,514) (44,687)
----------- ----------- -----------
Net Increase (Decrease) In Cash For The Period................ 136 (80) 20
Cash - beginning of period.................................... 105 185 165
----------- ----------- -----------
Cash - end of period.......................................... $ 241 $ 105 $ 185
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 25,551 $ 25,174 $ 27,277
=========== =========== ===========
Income taxes................................................ $ 14,385 $ 30,040 $ 21,200
=========== =========== ===========
Increase in obligations:
Niantic Bay Fuel Trust...................................... $ 7,851 $ 12,237 $ 9,369
=========== =========== ===========
/Table>
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ---------------------------------------------------------------------------------------
Capital Retained
Common Surplus, Earnings
Stock Paid In (a) Total
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1993............... $26,812 $149,026 $ 91,077 $266,915
Net income for 1993.................. 40,594 40,594
Cash dividends on preferred
stock.............................. (5,259) (5,259)
Cash dividends on common stock....... (28,785) (28,785)
Capital stock expenses, net.......... 293 293
-------- --------- --------- ---------
Balance at December 31, 1993............. 26,812 149,319 97,627 273,758
Net income for 1994.................. 49,457 49,457
Cash dividends on preferred
stock.............................. (5,897) (5,897)
Cash dividends on common stock....... (29,514) (29,514)
Loss on the retirement of preferred
stock.............................. (87) (87)
Capital stock expenses, net.......... 364 364
-------- --------- --------- ---------
Balance at December 31, 1994............. 26,812 149,683 111,586 288,081
Net income for 1995.................. 39,133 39,133
Cash dividends on preferred
stock.............................. (4,944) (4,944)
Cash dividends on common stock....... (30,223) (30,223)
Loss on retirement of preferred
stock.............................. (256) (256)
Capital stock expenses, net.......... 499 499
-------- --------- --------- ---------
Balance at December 31, 1995............. $26,812 $150,182 $115,296 $292,290
======== ========= ========= =========
(a) The company has dividend restrictions imposed by its long-term debt
agreements. At December 31, 1995, these restrictions totaled
approximately $21.5 million.
The accompanying notes are an integral part of these financial statements.
Western Massachusetts Electric Company
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRESENTATION
Western Massachusetts Electric Company (WMECO or the company), The
Connecticut Light and Power Company (CL&P), Holyoke Water Power Company
(HWP), Public Service Company of New Hampshire (PSNH), and North
Atlantic Energy Corporation (NAEC) are the operating subsidiaries
comprising the Northeast Utilities system (the system) and are wholly
owned by Northeast Utilities (NU).
The system furnishes retail electric service in Connecticut, New
Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and HWP.
A fifth subsidiary, NAEC, sells all of its capacity to PSNH. In
addition to its retail service, the system furnishes firm and other
wholesale electric services to various municipalities and other
utilities. The system serves about 30 percent of New England's electric
needs and is one of the 20 largest electric utility systems in the
country as measured by revenues.
Other wholly owned subsidiaries of NU provide 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 (NNECO) acts as agent for system companies in 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of prior years' data have been made to conform
with the current year's presentation.
Property Taxes: WMECO changed its method of accounting for municipal
property tax expense for its respective Connecticut properties during
1993. This one-time change increased 1993 net income by approximately
$3.9 million.
B. FUTURE ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in
March 1995. SFAS 121 became effective January 1, 1996, and establishes
accounting standards for evaluating and recording asset impairment.
SFAS 121 requires the evaluation of long-lived assets for impairment
when certain events occur or conditions exist that indicate the carrying
amounts of assets may not be recoverable. Refer to Note 1G, "Regulatory
Accounting," for further information on the regulatory impacts of the
company's adoption of SFAS 121.
C. INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT
Regional Nuclear Generating Companies: WMECO owns common stock of four
regional nuclear generating companies (Yankee companies). The Yankee
companies, with the company's ownership interests, are:
Connecticut Yankee Atomic Power Company (CY) ........ 9.5%
Yankee Atomic Electric Company (YAEC) ............... 7.0
Maine Yankee Atomic Power Company (MY) .............. 3.0
Vermont Yankee Nuclear Power Corporation (VY) ....... 2.5
WMECO's investments in the Yankee companies are accounted for on the
equity basis due to the company's ability to exercise significant
influence over their operating and financial policies. The electricity
produced by the facilities that are operating is committed substantially
on the basis of ownership interests and is billed pursuant to
contractual agreements. Under ownership agreements with the Yankee
companies, WMECO may be asked to provide direct or indirect financial
support for one or more of the companies. For more information on these
agreements, see Note 10E, "Commitments and Contingencies - Long-Term
Contractual Arrangements."
YAEC's nuclear power plant was shut down permanently on February 26,
1992. For more information on the Yankee companies, see Note 3,
"Nuclear Decommissioning."
Millstone 1: WMECO has a 19 percent joint-ownership interest in
Millstone 1, a 660-megawatt (MW) nuclear generating unit. As of
December 31, 1995 and 1994, plant-in-service included approximately
$87.4 million and $87.0 million, respectively, and the accumulated
provision for depreciation included approximately $34.5 million and
$31.4 million, respectively, for WMECO's share of Millstone 1. WMECO's
share of Millstone 1 expenses is included in the corresponding operating
expenses on the accompanying Statements of Income.
Millstone 2: WMECO has a 19 percent joint-ownership interest in
Millstone 2, an 870-MW nuclear generating unit. As of December 31, 1995
and 1994, plant-in-service included approximately $160.0 million and
$159.2 million, respectively, and the accumulated provision for
depreciation included approximately $45.8 million and $40.4 million,
respectively, for WMECO's share of Millstone 2. WMECO's share of
Millstone 2 expenses is included in the corresponding operating expenses
on the accompanying Statements of Income.
Millstone 3: WMECO has a 12.24 percent joint-ownership interest in
Millstone 3, a 1,154-MW nuclear generating unit. As of December 31,
1995 and 1994, plant-in-service included approximately $377.7 million
and $376.1 million, respectively, and the accumulated provision for
depreciation included approximately $90.6 million and $83.2 million,
respectively, for WMECO's share of Millstone 3. WMECO's share of
Millstone 3 expenses is included in the corresponding operating expenses
on the accompanying Statements of Income.
D. 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 appropriate regulatory agency. Except for major
facilities, depreciation factors are applied to the average
plant-in-service during the period. Major facilities are depreciated
from the time they are placed in service. When plant is retired from
service, the original cost of plant, including costs of removal, less
salvage, is charged to the accumulated provision for depreciation. The
depreciation rates for the several classes of electric plant-in-service
are equivalent to a composite rate of 3.1 percent in 1995, 1994, and
1993. See Note 3, "Nuclear Decommissioning," for information on nuclear
plant decommissioning.
E. PUBLIC UTILITY REGULATION
NU is registered with the Securities and Exchange Commission (SEC) as a
holding company under the Public Utility Holding Company Act of 1935
(1935 Act), and it and its subsidiaries, including the company, are
subject to the provisions of the 1935 Act. Arrangements among the
system companies, outside agencies, and other utilities covering 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/or
the Massachusetts Department of Public Utilities (DPU).
F. REVENUES
Other than revenues under 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.
In general, rates can be changed only through a formal proceeding
before the appropriate regulatory commission. At the end of each
accounting period, WMECO accrues an estimate for the amount of energy
delivered but unbilled.
G. REGULATORY ACCOUNTING
The accounting policies of WMECO and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process in accordance with SFAS 71, Accounting for the
Effects of Certain Types of Regulation. Assuming a cost-of-service
based regulatory structure, regulators may permit incurred costs,
normally treated as expenses, to be deferred and recovered in future
revenues. Through their actions, regulators may also reduce or
eliminate the value of an asset, or create a liability. If any portion
of the company's operations were no longer subject to the provisions of
SFAS 71, as a result of a change in the cost-of-service based regulatory
structure or the effects of competition, the company would be required
to write off related regulatory assets and liabilities. The company
would also be required to determine any impairment to other assets and
write down these assets to fair value. Based on current regulation and
recent regulatory decisions, and initiatives relating to competition in
the system's market, the company believes that its use of regulatory
accounting remains appropriate.
SFAS 121 requires that any assets, including regulatory assets, which
are no longer probable of recovery through future revenues, be revalued
based on estimated future cash flows. If the revaluation is less than
the book value of the asset, an impairment loss would be charged to
earnings. As noted above, based on the current regulatory environment
in the company's service area, it is not expected that SFAS 121 will
have a material impact on the company's financial position or results of
operations upon adoption. This conclusion may change in the future as
competitive factors influence wholesale and retail pricing in the
electric utility industry, or if the cost-of-service based regulatory
structure were to change. For further information on the company's
regulatory environment, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A).
The components of regulatory assets are as follows:
At December 31, 1995 1994
-----------------------------------------------------------------------
(Thousands of Dollars)
Income taxes, net (Note 1H) ..................... $ 87,829 $ 86,357
Unrecovered contractual obligation (Note 3) ... 18,814 28,572
Amortizable property investment - Millstone 3 ... 5,600 16,800
Recoverable energy costs (Note 1I) .............. 10,974 8,324
Deferred costs - Millstone 3 .................... - 7,836
Other ........................................... 37,769 36,337
--------- ---------
$ 160,986 $ 184,226
========= =========
H. INCOME TAXES
The tax effect of temporary differences (differences between the periods
in which transactions affect income in the financial statements and the
periods in which they affect the determination of income subject to tax)
is accounted for in accordance with the ratemaking treatment of the
applicable regulatory commissions. The adoption of SFAS 109, Accounting
for Income Taxes, in 1993 increased the company's net deferred tax
obligation. As it is probable that the increase in deferred tax
liabilities will be recovered from customers through rates, WMECO
established a regulatory asset. See Note 8, "Income Tax Expense" for
the components of income tax expense.
The tax effect of temporary differences, including timing differences
accrued under previously approved accounting standards, which give rise
to the accumulated deferred tax obligation are as follows:
At December 31, 1995 1994
--------------------------------------------------------------------
(Thousands of Dollars)
Accelerated depreciation and other
plant-related differences ........... $222,520 $214,485
Regulatory assets - income tax gross up 34,540 34,084
Other ................................. 2,535 5,252
---------- ----------
$259,595 $253,821
======== ========
I. RECOVERABLE ENERGY COSTS
Under the Energy Policy Act of 1992 (Energy Act), WMECO 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.
WMECO is currently recovering these costs through rates. As of
December 31, 1995, the company's total D&D deferrals were approximately
$11.0 million.
J. SPENT NUCLEAR FUEL DISPOSAL COSTS
Under the Nuclear Waste Policy Act of 1982, WMECO must pay the United
States Department of Energy (DOE) for the disposal of spent nuclear fuel
and high-level radioactive waste. Fees for nuclear fuel burned on or
after April 7, 1983 are billed currently to customers and paid to the
DOE on a quarterly basis. For nuclear fuel used to generate electricity
prior to April 7, 1983 (prior-period fuel), payment may be made anytime
prior to the first delivery of spent fuel to the DOE, which may be as
early as 1998. Until such payment is made, the outstanding balance will
continue to accrue interest at the three-month Treasury Bill Yield Rate.
At December 31, 1995, fees due to the DOE for the disposal of prior-
period fuel were approximately $35.2 million, including interest costs
of $19.6 million. As of December 31, 1995, all fees have been collected
through rates.
K. DERIVATIVE FINANCIAL INSTRUMENTS
The company utilizes an interest-rate cap to manage well-defined
interest-rate risk. Premiums paid for purchased interest-rate cap
agreements are amortized to interest expense over the terms of the cap.
Unamortized premiums are included in deferred charges. Amounts
receivable under cap agreements are accrued and offset against interest
expense. Any material unrealized gains or losses on interest-rate caps
will be deferred until realized. For further information on
derivatives, see Note 11, "Derivative Financial Instruments."
2. LEASES
WMECO and CL&P finance up to $475 million of nuclear fuel for Millstone 1
and 2 and their respective shares of the nuclear fuel for Millstone 3 under
the Niantic Bay Fuel Trust (NBFT) capital lease agreement. WMECO and CL&P
make quarterly lease payments for the cost of nuclear fuel consumed in the
reactors (based on a units-of-production method at rates which reflect
estimated kilowatt-hours of energy provided) plus financing costs associated
with the fuel in the reactors. Upon permanent discharge from the reactors,
ownership of the nuclear fuel transfers to WMECO and CL&P.
WMECO has also entered into lease agreements for the use of data processing
and office equipment, vehicles, nuclear control room simulators, and office
space. The provisions of these lease agreements generally provide for
renewal options. The following rental payments have been charged to
operating expense:
Year Capital Leases Operating Leases
---- -------------- ----------------
1995...................... $12,553,000 $6,398,000
1994...................... 13,594,000 6,485,000
1993...................... 17,280,000 6,367,000
Interest included in capital lease rental payments was $1,954,000 in 1995,
$1,845,000 in 1994, and $2,090,000 in 1993.
Substantially all of the capital lease rental payments were made pursuant to
the nuclear fuel lease agreement. Future minimum lease payments under the
nuclear fuel capital lease cannot be reasonably estimated on an annual basis
due to variations in the usage of nuclear fuel.
Future minimum rental payments, excluding annual nuclear fuel lease payments
and executory costs, such as property taxes, state use taxes, insurance, and
maintenance, under long-term noncancelable leases, as of December 31, 1995
are:
Year Operating Leases
---- ----------------
(Thousands of Dollars)
1996 ............................ $ 4,600
1997 ............................ 4,300
1998 ............................ 3,300
1999 ............................ 3,100
2000 ............................ 2,900
After 2000 ...................... 12,200
-------
Future minimum lease payments ... $30,400
=======
3. NUCLEAR DECOMMISSIONING
WMECO's nuclear power plants have service lives that are expected to end
during the years 2010 through 2025. Upon retirement, these units must be
decommissioned. 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 the three Millstone units.
Decommissioning studies are reviewed and updated periodically to reflect
changes in decommissioning requirements, costs, technology, and inflation.
The estimated cost of decommissioning WMECO's ownership share of
Millstone 1, 2, and 3, in year-end 1995 dollars, is $70.4 million, $62.3
million, and $53.7 million, respectively. These estimated costs assumed
levelized collections and after-tax earnings on the Millstone
decommissioning funds of 6.5 percent. The Millstone units decommissioning
costs will be increased annually by escalation rates. Nuclear
decommissioning costs are accrued over the expected service life of the
units and are included in depreciation expense on the Statements of Income.
Nuclear decommissioning costs amounted to $5.0 million in 1995, $4.8
million in 1994, and $4.6 million in 1993. Nuclear decommissioning, as a
cost of removal, is included in the accumulated provision for depreciation
on the Balance Sheets. At December 31, 1995, the balance in the accumulated
reserve for decommissioning amounted to $69.9 million. See "Nuclear
Decommissioning" in the MD&A for a discussion of changes being considered by
the FASB relating to accounting for closure and removal of long-lived assets
(including nuclear decommissioning).
WMECO has established external decommissioning trusts through a trustee for
its portion of the costs of decommissioning Millstone 1, 2, and 3. As of
December 31, 1995, WMECO has collected, through rates, $47.4 million toward
the future decommissioning costs of its share of the Millstone units, all of
which has been transferred to external decommissioning trusts. Earnings on
the decommissioning trusts increase the decommissioning trust balance and
the accumulated reserve for decommissioning. Unrealized gains and losses
associated with the decommissioning trusts also impact the balance of the
trusts and the accumulated reserve for decommissioning.
Changes in requirements or technology, the timing of funding or dismantling,
or adoption of a decommissioning method other than immediate dismantlement
would change decommissioning cost estimates and the amounts required to be
recovered. WMECO 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 the company. Based on present
estimates and assuming its nuclear units operate to the end of their
respective license periods, the company expects that the decommissioning
trusts will be substantially funded when the units are retired from service.
WMECO, along with other New England utilities, has equity investments in the
four Yankee companies. Each Yankee company owns a single nuclear generating
unit with service lives that are expected to end during the years 2007
through 2012. The estimated cost, in year-end 1995 dollars, of
decommissioning WMECO's ownership share of units owned and operated by CY,
MY, and VY is $36.6 million, $10.6 million, and $8.7 million, respectively.
Under the terms of the contracts with the Yankee companies, the
shareholders-sponsors are responsible for their proportionate share of the
operating costs of each unit, including decommissioning. The nuclear
decommissioning costs of the Yankee companies are included as part of the
cost of power purchased by WMECO.
YAEC is in the process of dismantling its nuclear facility. Accelerated
decommissioning of that unit has been delayed because of litigation over the
Nuclear Regulatory Commission's (NRC) approval of YAEC's decommissioning
plan. Effective November 1995, YAEC began billing its sponsors, including
WMECO, amounts based on a revised estimate approved by the FERC that assumes
decommissioning of the plant by the year 2000. This revised decommissioning
estimate was based on access to the Barnwell, South Carolina low-level
radioactive waste facility, changes in assumptions about earnings in
decommissioning trust investments, and changes in other decommissioning cost
assumptions. At December 31, 1995, the estimated remaining costs, including
decommissioning, amounted to $268.8 million of which WMECO's share was
approximately $18.8 million. Management expects that WMECO will continue to
be allowed to recover such FERC-approved costs from its customers.
Accordingly, WMECO has recognized these costs as regulatory assets, with
corresponding obligations, on its Balance Sheets.
4. SHORT-TERM DEBT
NU, CL&P, WMECO, HWP, NNECO, and The Rocky River Realty Company (RRR) have
established a revolving-credit facility with a group of 15 banks. Under
this facility, the participating companies may borrow up to an aggregate of
$343 million. Individual borrowing limits as of January 1, 1996 were
$150 million for NU parent, $325 million for CL&P, $60 million for WMECO,
$5 million for HWP, $50 million for NNECO, and $22 million for RRR. The
system companies may borrow funds on a short-term revolving basis using
either fixed-rate loans or standby loans. Fixed rates are set using
competitive bidding. Standby-loan rates are based upon several alternative
variable rates. The system companies are obligated to pay a facility fee of
0.15 percent per annum of each bank's total commitment under the three-year
portion of the facility, representing 75 percent of the total facility, plus
0.10 percent per annum of each bank's total commitment under the 364-day
portion of the facility, representing 25 percent of the total facility. At
December 31, 1995 and 1994, there were $42.5 million and $30 million of
borrowings, respectively, under the facility, all of which had been borrowed
by other system companies.
Certain subsidiaries of NU, including WMECO, 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.
Investing and borrowing subsidiaries receive or pay interest based on the
average daily Federal Funds rate. However, borrowings based on loans from
NU parent bear interest at NU parent's cost and must be repaid based upon
the terms of NU parent's original borrowing. At December 31, 1995, WMECO
had $24.1 million of borrowings outstanding from the Pool. At December 31,
1994, WMECO had no borrowings from the Pool. The interest rate on
borrowings from the Pool at December 31, 1995 was 4.7 percent.
Maturities of WMECO's short-term debt obligations are for periods of three
months or less.
The amount of short-term borrowings that may be incurred by WMECO is subject
to periodic approval by the SEC under the 1935 Act. In addition, the
charter of WMECO contains provisions restricting the amount of short-term
borrowings. Under the SEC and/or charter restrictions, the company was
authorized, as of January 1, 1995, to incur short-term borrowings up to a
maximum of $60 million.
5. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock not subject to mandatory redemptions are:
December 31, Shares
1995 Outstanding
Redemption December 31, December 31,
-------------------------
Description Price 1995 1995 1994 1993
------------------------------------------------------------------------
(Thousands of Dollars)
7.72% Series B of 1971 $103.51 200,000 $20,000 $20,000 $20,000
1988 Adjustable
Rate DARTS .... 25.00 1,340,000 33,500 48,500 53,500
------- ------- -------
Total preferred stock not
subject to mandatory
redemption .... $53,500 $68,500 $73,500
======= ======= =======
All or any part of each outstanding series of preferred stock may be
redeemed by the company at any time at established redemption prices plus
accrued dividends to the date of redemption.
6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
December 31 Shares
1995 Outstanding
Redemption December 31, December 31,
-------------------------
Description Price* 1995 1995 1994 1993
------------------------------------------------------------------------
(Thousands of Dollars)
7.60% Series of 1987 $25.89 960,000 $24,000 $24,675 $27,000
Less preferred stock to be
redeemed within one
year, net of reacquired
stock .......... 60,000 1,500 675 1,500
------- ------- ------
Total preferred stock
subject to mandatory
redemption ..... $22,500 $24,000 $25,500
======= ======= =======
*Redemption price reduces in future years.
The minimum sinking-fund provisions of the 1987 Series subject to mandatory
redemption at December 31, 1995, for the years 1996 through 2000, are $1.5
million per year. In case of default on sinking-fund payments, no payments
may be made on any junior stock by way of dividends or otherwise (other than
in shares of junior stock) so long as the default continues. If the company
is in arrears in the payment of dividends on any outstanding shares of
preferred stock, the company would be prohibited from redemption or purchase
of less than all of the preferred stock outstanding. All or part of the
7.60% Series of 1987 may be redeemed by the company at any time at an
established redemption price plus accrued dividends to the date of
redemption subject to certain refunding limitations.
7. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
--------------------
1995 1994
-----------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds:
9 1/4% Series U, due 1995 $ - $ 34,300
5 3/4% Series F, due 1997 14,700 14,850
6 3/4% Series G, due 1998 9,800 9,900
6 1/4% Series X, due 1999 40,000 40,000
6 7/8% Series W, due 2000 60,000 60,000
7 3/4% Series V, due 2002 85,000 85,000
7 3/4% Series Y, due 2024 50,000 50,000
------ ------
Total First Mortgage Bonds 259,500 294,050
Pollution Control Notes:
Tax Exempt Series A, due 2028 53,800 53,800
Fees and interest due for spent
fuel disposal costs (Note 1J) 35,180 33,239
Less: Amounts due within one year - 34,300
Unamortized premium and discount, net (1,010) (1,120)
-------- ----------
Long-term debt, net $347,470 $345,669
======== ========
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1995 for the years 1996 through 2000 are
approximately $0.0, $14.7 million, $9.8 million, $40.0 million and $60.0
million, respectively. In addition, there are annual one-percent sinking-
and improvement-fund requirements, currently amounting to $2.6 million for
1996 and 1997, $2.4 million for 1998 and 1999, and $2.0 million for 2000.
Such sinking- and improvement-fund requirements may be satisfied by the
deposit of cash or bonds by certification of property additions.
All or any part of each outstanding series of first mortgage bonds may be
redeemed by the company at any time at established redemption prices plus
accrued interest to the date of redemption, except certain series which are
subject to certain refunding limitations during their respective initial
five-year redemption periods.
Essentially all of the company's utility plant is subject to the lien of
its first mortgage bond indenture. As of December 31, 1995 and 1994, the
company has secured $53.8 million of pollution control notes with second
mortgage liens on Millstone 1, junior to the liens of its first mortgage
bond indenture. The average effective interest rate on the variable-rate
pollution control notes was 3.7 percent for 1995 and 2.7 percent for 1994.
8. INCOME TAX EXPENSE
The components of the federal and state income tax provisions are:
For the Years Ended December 31, 1995 1994 1993
---------------------------------------------------------------
(Thousands of Dollars)
Current income taxes:
Federal..................... $ 7,419 $18,358 $22,239
State....................... 2,961 4,110 4,712
-------- ------- --------
Total current............. 10,380 22,468 26,951
------- ------- -------
Deferred income taxes, net:
Federal..................... 4,130 9,697 1,683
State...................... 1,003 2,267 664
-------- --------- ---------
Total deferred............ 5,133 11,964 2,347
-------- ------- --------
Investment tax credits, net... (1,715) (1,708) (1,429)
-------- -------- --------
Total income tax expense...... $13,798 $32,724 $27,869
======= ======= =======
The components of total income tax expense are classified as follows:
Income taxes charged to
operating expenses......... $14,060 $32,653 $27,892
Other income taxes ........... (262) 71 (23)
------- ------- -------
Total income tax expense...... $13,798 $32,724 $27,869
======= ======= =======
Deferred income taxes are comprised of the tax effects of temporary differences
as follows:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------
(Thousands of Dollars)
Depreciation, leased nuclear fuel,
settlement credits and disposal costs $9,066 $7,016 $6,852
Energy adjustment clause............. (1,549) 3,598 (2,627)
Nuclear plant deferrals.............. 2,468 (1,802) (1,778)
Bond redemptions..................... (572) 1,535 1,200
Other................................ (4,280) 1,617 (1,300)
------ ------ --------
Deferred income taxes, net........... $5,133 $11,964 $ 2,347
====== ======= =======
A reconciliation between income tax expense and the expected tax expense at the
applicable statutory rate is as follows:
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------
(Thousands of Dollars)
Expected federal income tax at 35 percent
of pretaxincome for................. $18,526 $28,763 $23,962
Tax effect of differences:
Depreciation....................... 2,173 1,740 1,784
Amortization of deferred
Millstone 3 return............... 1,665 3,347 3,341
Investment tax credit amortization. (1,715) (1,708) (1,429)
State income taxes, net of
federal benefit.................. 2,577 4,144 3,494
Adjustment for prior years' taxes.. (7,702) (825) -
Other, net......................... (1,726) (2,737) (3,283)
-------- -------- -------
Total income tax expense............. $13,798 $32,724 $27,869
======= ======= =======
9. EMPLOYEE BENEFITS
A. PENSION BENEFITS
The company participates in a uniform noncontributory-defined benefit
retirement plan covering all regular system employees. Benefits are
based on years of service and employees' highest eligible compensation
during five consecutive years of employment. The company's direct
portion of the system's pension (income)/cost, part of which was
charged to utility plant, approximated $(2.7) million in 1995, $(1.0)
million in 1994, and $1.2 million in 1993. The company's pension
costs for 1994 and 1993 included approximately $0.8 million and $2.7
million, respectively, related to workforce-reduction programs.
Currently, the company 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 WMECO are:
For the Years Ended December 31, 1995 1994 1993
-----------------------------------------------------------
(Thousand of Dollars)
Service cost................... $ 1,645 $ 2,720 $ 4,702
Interest cost.................. 7,757 7,655 7,527
Return on plan assets.......... (29,798) 221 (17,272)
Net amortization............... 17,669 (11,635) 6,246
------ -------- ---------
Net pension (income)/cost...... $(2,727)$ (1,039) $ 1,203
======= ======== ========
-----------------------------------------------------------
For calculating pension cost, the following assumptions were used:
For the Years Ended December 31, 1995 1994 1993
------------------------------------------------------------------
Discount rate.................. 8.25% 7.75% 8.00%
Expected long-term rate of return 8.50 8.50 8.50
Compensation/progression rate.. 5.00 4.75 5.00
The following table represents the plan's funded status reconciled to
the Balance Sheets:
At December 31, 1995 1994
-----------------------------------------------------------------
(Thousands of Dollars)
Accumulated benefit obligation,
including vested benefits at
December 31, 1995 and 1994 of
$84,943,000 and $80,159,000,
respectively................... $ 90,154 $ 85,193
======== ========
Projected benefit obligation..... $107,527 $ 99,667
Market value of plan assets...... 143,632 122,813
-------- --------
Market value in excess of projected
benefit obligation............. 36,105 23,146
Unrecognized transition amount... (2,198) (2,433)
Unrecognized prior service costs. (525) (560)
Unrecognized net gain............ (32,570) (22,068)
-------- ---------
Prepaid/(Accrued) pension liability $ 812 $ (1,915)
========== ======
The following actuarial assumptions were used in calculating the
plan's year-end funded status:
At December 31, 1995 1994
-----------------------------------------------------------------
Discount rate............................ 7.50% 8.25%
Compensation/progression rate............ 4.75 5.00
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 (referred to as SFAS 106 benefits). These benefits
are available for employees retiring from the company who have met
specified service requirements. For current employees and certain
retirees, the total SFAS 106 benefit is limited to two times the 1993
per-retiree health care costs. The SFAS 106 obligation has been
calculated based on this assumption. WMECO's direct portion of health
care and life insurance costs, part of which were deferred or charged
to utility plant, approximated $4.4 million in 1995 and $5.0 million
in both 1994 and 1993.
During 1994, the company began funding SFAS 106 postretirement costs
through external trusts. The company, is funding on an annual basis,
amounts that have been rate recovered and which also are tax-
deductible under the Internal Revenue Code. The trust assets are
invested primarily in equity securities and bonds.
The components of health care and life insurance costs are:
For the Years Ended December 31, 1995 1994 1993
--------------------------------------------------------------
(Thousands of Dollars)
Service cost................... $ 490 $ 519 $ 659
Interest cost.................. 2,544 2,703 2,676
Return on plan assets.......... (718) 19 -
Amortization of unrecognized
transition obligation........ 1,641 1,641 1,703
Other amortization, net........ 473 76 -
------ ------- -------
Net health care and life
insurance costs.............. $4,430 $4,958 $5,038
====== ====== ======
------------------------------------------------------------
For calculating WMECO's SFAS 106 benefits cost, the following
assumptions were used:
For the Years Ended December 31, 1995 1994 1993
------------------------------------------------------------
Discount rate.................. 8.00% 7.75% 7.75%
Long-term rate of return -
Health assets, net of tax.... 5.00 5.00 5.00
Life assets.................. 8.50 8.50 8.50
The following table represents the plan's funded status reconciled to
the Balance Sheets:
At December 31, 1995 1994
------------------------------------------------------------
(Thousands of Dollars)
Accumulated postretirement benefit obligation of:
Retirees................................$28,787 $29,619
Fully eligible active employees......... 28 28
Active employees not eligible to retire. 5,847 4,823
------- -------
Total accumulated postretirement
benefit obligation..................... 34,662 34,470
======= =======
Market value of plan assets.............. 5,339 2,026
-------- -------
Accumulated postretirement benefit
obligation in excess of plan assets... (29,323) (32,444)
Unrecognized transition amount........... 27,901 29,542
Unrecognized net gain.................... (1,399) (477)
------- -------
Accrued postretirement benefit liability.$(2,821) $(3,379)
======= =======
The following actuarial assumptions were used in calculating the
plan's year-end funded status:
At December 31, 1995 1994
-----------------------------------------------------------------
Discount rate............................ 7.50% 8.00%
Health care cost trend rate (a).......... 8.40 10.20
(a)The annual growth in per capita cost of covered health care
benefits was assumed to decrease to 5.4 percent by 2001.
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, 1995 by $2.0
million and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for the year then ended by
$0.2 million. The trust holding the plan assets is subject to federal
income taxes at a 35 percent tax rate.
WMECO is currently recovering SFAS 106 costs, including amounts
previously deferred.
10. COMMITMENTS AND CONTINGENCIES
A. CONSTRUCTION PROGRAM
The construction program is subject to periodic review and revision.
WMECO currently forecasts construction expenditures of approximately
$184.7 million for the years 1996-2000, including $30.4 million for
1996. In addition, the company estimates that nuclear fuel
requirements, including nuclear fuel financed through the NBFT, will
be approximately $54.9 million for the years 1996-2000, including $8.1
million for 1996. See Note 2, "Leases" for additional information
about the financing of nuclear fuel.
B. NUCLEAR PERFORMANCE
In October 1994, Millstone 2 began a planned refueling and maintenance
outage that was originally scheduled for 63 days. The outage
encountered several unexpected difficulties which extended the
duration of the outage until August 4, 1995. Total replacement power
costs attributable to the extension of the outage for WMECO were
approximately $16 million. Operation and maintenance (O&M) costs
incurred during the outage were approximately $13 million, an increase
of $5 million as a result of the outage extension. O&M costs
associated with the refueling outage are deferred and amortized
through rates for WMECO. The recovery of replacement power and O&M
costs is subject to refund pending a prudence review in Massachusetts.
Management does not believe the outcome of the prudence review will
have a material adverse impact on the company's financial position and
results of operations.
In November 1995, Millstone 1 began a planned refueling and
maintenance outage that was originally scheduled for 49 days. The
outage has encountered several unexpected difficulties which has
lengthened the duration of the outage. The impact of the outage
extension is currently under review, but the unit is not expected to
return to service until the mid to late part of the second quarter of
1996. The estimated costs attributable to this outage extension are
replacement-power costs of $1.3 million per month and O&M costs of
approximately $3.8 million. Recovery of the costs related to this
outage is subject to prudence reviews by the DPU.
On January 31, 1996, the NRC announced that the three Millstone
nuclear power plants operated by NNECO had been placed on its "watch
list" because of long-standing performance concerns. The NRC cited a
number of operational problems which have arisen since 1990 at the
Millstone plants.
The NRC recognized that there are significant current variations in
the performance of the three units. The performance concerns cited by
the NRC, combined with NU's failure to maintain previous performance
improvements, have resulted in the NRC requiring close monitoring of
Millstone unit operations and the implementation of a corrective
action program. While the NRC has not specifically restricted
operations at the Millstone site, the company expects that there will
be costs associated with the NRC's actions that cannot accurately be
estimated at this time.
C. ENVIRONMENTAL MATTERS
WMECO 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. WMECO has an active
environmental auditing and training program and believes that it is in
substantial compliance with current environmental laws and
regulations.
Environmental requirements could hinder the construction of new
generating units, transmission and distribution lines, substations,
and other facilities. The cumulative long-term cost impact of
increasingly stringent environmental requirements cannot accurately be
estimated. Changing environmental requirements could also require
extensive and costly modifications to WMECO's existing generating
units, and transmission and distribution systems, and could raise
operating costs significantly. As a result, WMECO 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. WMECO may
also encounter significantly increased costs to remedy the
environmental effects of prior waste handling activities.
WMECO has recorded a liability for what it believes, based upon
information currently available, are its estimated environmental
remediation costs for waste disposal sites. In most cases, additional
future environmental cleanup costs are not reasonably estimable due to
a number of factors, including the unknown magnitude of possible
contamination, the appropriate remediation methods, the possible
effects of future legislation or regulation, and the possible effects
of technological changes. At December 31, 1995, the liability
recorded by WMECO for its estimated environmental remediation costs,
excluding any possible insurance recoveries or recoveries from third
parties, amounted to approximately $1.1 million, which management has
determined to be the most probable amount within the range of $1.1
million to $2.9 million.
WMECO cannot estimate the potential liability for future claims,
including environmental remediation costs, that may be brought against
it. However, considering known facts, existing laws, and regulatory
practices, management does not believe the matters disclosed above
will have a material effect on WMECO's financial position or future
results of operations.
D. NUCLEAR INSURANCE CONTINGENCIES
Under certain circumstances, in the event of a nuclear incident at one
of the nuclear facilities covered by the federal government's third-
party liability indemnification program, the company could be assessed
in proportion to its ownership interest in each nuclear unit up to
$75.5 million not to exceed $10 million per nuclear unit in any one
year. The maximum assessment is to be adjusted at least every five
years for inflationary changes. Based on the ownership interest in
Millstone 1, 2, and 3, WMECO's maximum liability, including any
additional potential assessments, would be $39.8 million per incident.
In addition, through power purchase contracts with the three
operating Yankee regional nuclear generating companies, WMECO would be
responsible for up to an additional $11.9 million per incident.
Payments for WMECO's ownership interest in nuclear generating
facilities would be limited to a maximum of $6.5 million per incident
per year.
Insurance has been purchased to cover the primary cost of repair,
replacement, or decontamination of utility property resulting from
insured occurrences. WMECO is subject to retroactive assessments if
losses exceed the accumulated funds available to the insurer. The
maximum potential assessment against WMECO with respect to losses
arising during the current policy year is approximately $2.9 million
under the primary property insurance program.
Insurance has been purchased to cover certain extra costs incurred in
obtaining replacement power during prolonged accidental outages and
the excess cost of repair, replacement, or decontamination or
premature decommissioning of utility property resulting from insured
occurrences. WMECO is subject to retroactive assessments if losses
exceed the accumulated funds available to the insurer. The maximum
potential assessments against the system with respect to losses
arising during current policy years are approximately $2.0 million
under the replacement power policies and $7.6 million under the excess
property damage, decontamination, and decommissioning policies. The
cost of a nuclear incident could exceed available insurance proceeds.
Insurance has been purchased aggregating $200 million on a industry
basis for coverage of worker claims. All participating reactor
operators insured under this coverage are subject to retrospective
assessments of $3.0 million per reactor. The maximum potential
assessment against WMECO with respect to losses arising during the
current policy period is approximately $2.2 million.
E. LONG-TERM CONTRACTUAL ARRANGEMENTS
Yankee Companies: WMECO, along with CL&P and PSNH, purchased
approximately 6.7 percent of their electricity requirements pursuant
to long-term contracts with the Yankee companies. Under the terms of
their agreements, the companies pay their ownership (or entitlement)
shares of generating costs, which include depreciation, O&M expenses,
taxes, the estimated cost of decommissioning, and a return on invested
capital. These costs are recorded as purchased-power expense and
recovered through the companies' rates. WMECO's total cost of
purchases under these contracts for the units that are operating
amounted to $28.9 million in 1995, $28.8 million in 1994, and $30.2
million in 1993. See Note 1C, "Summary of Significant Accounting
Policies-Investments and Jointly Owned Electric Utility Plant," and
Note 3, "Nuclear Decommissioning," for more information on the
Yankee companies.
Nonutility Generators: WMECO has entered into two arrangements for
the purchase of capacity and energy from nonutility generators. These
arrangements have terms of 15 and 25 years, currently expiring in the
years 2008 and 2013, and require WMECO to purchase the energy at
specified prices or formula rates. For the twelve months ended
December 31, 1995, approximately 13 percent of system electricity
requirements was met by nonutility generators. WMECO's total cost of
purchases under these arrangements amounted to $28.6 million in 1995,
$27.5 million in 1994, and $13.6 million in 1993. These costs are
eventually recovered through the company's rates. For additional
information, see Note 1I, "Summary of Significant Accounting
Policies-Recoverable Energy Costs."
Hydro-Quebec: Along with other New England utilities, WMECO, CL&P,
PSNH, and HWP entered into agreements to support transmission and
terminal facilities to import electricity from the Hydro-Quebec system
in Canada. WMECO is obligated to pay, over a 30-year period ending in
2020, its proportionate share of the annual O&M and capital costs of
these facilities.
The estimated annual costs of the WMECO's significant long-term
contractual arrangements are as follows:
1996 1997 1998 1999 2000
------------------------------------------------------------
(Millions of Dollars)
Yankee companies..... $28.8 $27.9 $30.2 $30.7 $32.8
Nonutility generators 30.9 32.5 34.1 35.8 38.5
Hydro-Quebec......... 4.1 3.9 3.8 3.7 3.7
11. DERIVATIVE FINANCIAL INSTRUMENTS
The company utilizes derivative financial instruments to manage well-
defined interest-rate risk. The company does not use them for trading
purposes.
WMECO 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 its variable-rate tax-exempt pollution control revenue
bond. During 1995, there was one outstanding contract held by WMECO,
covering $52 million of its pollution control bond, which expired in
January 1996. The contract entitled WMECO to receive from its counterparty
the amount, if any by which the interest payments on a portion of its
variable-rate tax-exempt pollution control revenue bond exceeds the J. J.
Kenny High Grade Index. Due to its upcoming expiration, as of December 31,
1995, the total fair market value of this cap was zero.
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, Accounting for Certain Investments in Debt and Equity Securities,
requires investments in debt and equity securities to be presented at fair
value and was adopted by the company on a prospective basis as of January
1, 1994. During 1995, the investments held in the company's nuclear
decommissioning trusts increased by $4.5 million as of December 31, 1995
and decreased by approximately $0.8 million as of December 31, 1994, with a
corresponding offset to the accumulated provision for depreciation. The
$4.5 million increase in 1995 represents cumulative gross unrealized
holding gains. The cumulative gross unrealized holding losses were
immaterial for 1995. The $0.8 million decrease for 1994 represents
cumulative gross unrealized holding gains of $0.3 million, offset by
cumulative gross unrealized holding losses of $1.1 million. 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 WMECO's fixed-rate
securities is based upon the quoted market price for those issues or
similar issues. WMECO's adjustable rate preferred stock is assumed to have
a fair value equal to its carrying value.
The carrying amount of WMECO's financial instruments and the estimated fair
values are as follows:
Carrying Fair
At December 31, 1995 Amount Value
--------------------------------------------------------------
(Thousands of Dollars)
Preferred stock not subject to
mandatory redemption.................. $ 53,500 $ 53,700
Preferred stock subject to mandatory
redemption............................ 24,000 25,085
Long-term debt - First Mortgage Bonds... 259,500 265,280
Other long-term debt.................... 88,980 88,980
- -------------------------------------------------------------------
Carrying Fair
At December 31, 1994 Amount Value
--------------------------------------------------------------
(Thousands of Dollars)
Preferred stock not subject to
mandatory redemption.................. $ 68,500 $ 66,050
Preferred stock subject to mandatory
redemption............................ 24,675 24,675
Long-term debt - First Mortgage Bonds... 294,050 274,469
Other long-term debt.................... 87,039 87,039
The fair values shown above have been reported to meet the disclosure
requirements and do not purport to represent the amounts at which those
obligations would be settled.
To the Board of Directors
of Western Massachusetts Electric Company
We have audited the accompanying balance sheets of Western Massachusetts
Electric Company (a Massachusetts corporation and a wholly owned subsidiary of
Northeast Utilities) as of December 31, 1995 and 1994, and the related
statements of income, common stockholder's equity, and cash flows for each of
the three years in the period ended December 31, 1995. 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 Western Massachusetts
Electric Company as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1A to the Financial Statements, effective January 1,
1993, Western Massachusetts Electric Company changed its method of accounting
for property taxes.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 16, 1996
WESTERN MASSACHUSETTS ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------
This section contains management's assessment of WMECO's (the company) financial
condition and the principal factors having an impact on the results of opera-
tions. 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 was approximately $39 million in 1995, a decrease of approximately
$10 million, from approximately $49 million in 1994. The 1995 net income was
lower as a result of higher fuel and purchased power costs and higher operation
expenses, partially offset by lower income tax expense and lower amortization of
regulatory assets due to the completion of the Millstone 3 phase-in costs.
Retail kilowatt-hour sales fell by 0.1 percent in 1995 as a result of a flat
economy in New England and mild weather in the first quarter of 1995. With the
New England economy not forecasted to grow substantially during 1996, sales
levels are expected to remain flat.
WMECO acts as both a buyer and a seller of electricity in the highly competitive
wholesale electricity market in the Northeast. Increased competition has made
the renegotiation of expiring wholesale contracts, as well as the signing of new
contracts, financially challenging. In the last few years WMECO has entered
into several smaller long-term sales contracts which will continue through
approximately the year 2005.
During 1995, the Federal Energy Regulatory Commission issued a proposal for
restructuring the electric-power industry, which calls for open access to
transmission facilities, a standard formula for calculating rates, and full
recovery of stranded investments. The impact on WMECO of this proposal, which
is expected to be finalized in 1996, is not known at this time.
During 1995, a Massachusetts Senate Committee and the Coalition of Northeastern
Governors released their reports addressing the restructuring of the electric-
power industry and its resulting impact on customers and states. Both of these
reports presented the future as one in which there would be some form of
continued regulation for transmission and distribution with fully competitive
generation.
Also in 1995, the Massachusetts Department of Public Utilities (DPU) concluded
that while increased competition is in the public interest, electric utilities
should have the opportunity to recover "net, nonmitigatable stranded costs"
during a transition period to full competition. While such a conclusion is
encouraging, there is uncertainty with regard to the final regulatory and
legislative definitions of terms such as "net, nonmitigatable" and "stranded
costs."
WMECO is taking a proactive role in the electric-power industry's movement
toward competition. In its "Customers First" plan (the plan), which was filed
with the DPU in February 1996, WMECO outlined a comprehensive approach to
enhancing customer satisfaction and market efficiency while moving toward full
competition in the electricity marketplace. The plan calls for several
significant changes in electricity pricing, the ability to introduce new
products and services, the method of rate-setting, and the operation of
the New England Power Pool. The plan also calls for the phase-in of supplier
choices through the use of pilot programs. Management believes that a fully
competitive market for electricity should begin once all issues relating to
the transition from traditional utility regulation have been thoroughly
addressed.
In addition to the formulation of this plan and ongoing meetings with
legislators, regulators and others in the industry, WMECO is moving ahead in
other areas, including revenue enhancement initiatives and cost reductions,
to better position itself for an increasingly competitive environment.
A comprehensive companywide effort, which started in 1994, to reengineer WMECO's
business and operating processes continued throughout 1995. WMECO expects that
this effort will have significant positive effects on operating costs and
customer service. Many of the organizational changes in the operating and
service functions announced in 1995 and early 1996 are consistent with the
initial recommendations of the reengineering teams. While WMECO's reengineering
efforts will be reduced in 1996, implementation costs relating to the previous
reengineering efforts are expected to increase.
With retail electric revenues accounting for approximately 90 percent of its
1995 revenues, WMECO has continued to develop a number of initiatives to retain
and serve its existing customers and to expand its retail customer base. The
most visible result of these efforts is the expansion of the Retail Marketing
organization. Retail Marketing's mission is to better understand the needs and
concerns of WMECO's retail customer and to develop innovative approaches to
addressing these issues. These initiatives include providing discounts to
certain customers for signing economic development and competitive generation-
based contracts, offering demand-side-management services, and providing
additional products and services.
WORKFORCE REDUCTIONS
In January 1996, NU completed its nuclear workforce reduction plan.
Approximately 220 positions were eliminated through a combination of early
retirements, attrition, and layoffs. The total pretax cost of the workforce
reduction to the NU system, which was recognized in 1995, was approximately $9
million.
RATE MATTERS
WMECO follows accounting principles in accordance with Statement of Financial
Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types
of Regulation" that allows the economic effects of rate regulation to be
reflected. Under these principles, regulators may permit incurred costs for
certain events or transactions, which would be treated as expenses by
nonregulated enterprises, to be deferred as regulatory assets and recovered in
revenues at a later date.
The creation of these regulatory assets has kept down electric rates in past
years, at the expense of having higher rates in the future. At December 31,
1995, WMECO's regulatory assets totaled approximately $161 million. The largest
regulatory assets are related to the future recovery of income taxes, nearly $88
million, and payments to the United States Department of Energy for fuel
disposal, approximately $35 million. The substantial costs of amortizing these
regulatory assets would hinder WMECO from competing effectively in an openly
competitive electric market if customers are not required to pay such costs.
Given the increasingly competitive nature of the industry and increased activity
in the regulatory environment, WMECO has made the recovery of regulatory assets
one of its central financial strategies, while balancing the customer's pricing
needs with NU's shareholder's earnings requirements. Under its proposed
settlement with the DPU (see discussion below), WMECO will be allowed to recover
a significant portion of its regulatory assets during the next five years.
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." SFAS 121, which was effective January 1, 1996, requires
assets, including regulatory assets, that are no longer probable of
recovery through future revenues be charged to earnings.
If future competition or regulatory actions cause any portion of its operations
to no longer be subject to SFAS 71, WMECO would be required to determine the
fair value of the related regulatory assets and liabilities and record any
necessary write-downs. Additionally, if events create uncertainty about the
recoverability of any of WMECO's remaining long-lived assets, a similar analysis
would be required for those assets in accordance with SFAS 121. Under its
current regulatory environment, WMECO believes that its use of SFAS 71 remains
appropriate and that the adoption of SFAS 121 will not have a material impact on
its financial position or results of operations.
See the "Notes to Financial Statements," Note 1G, for further details on
regulatory accounting.
In February 1996, WMECO and the Massachusetts Attorney General proposed a
settlement with the DPU, which, if approved, would continue the 2.4-percent rate
reduction instituted in June 1994. The reduction would remain in effect through
February 1998. Additionally, the settlement would terminate WMECO's pending
reviews of its generating plant performance, any potential reviews associated
with Millstone 2's 1994-1995 extended outage, and accelerate its recovery of
generation assets by approximately $6 million and $10 million in 1996 and 1997,
respectively. The settlement does not address the issues discussed above
related to the restructuring of the electric-power industry.
NUCLEAR PERFORMANCE
On January 31, 1996, the Nuclear Regulatory Commission (NRC) placed Millstone 1,
2, and 3 (Millstone) on its "watch list." The NRC's action was in response to
a number of performance concerns which have arisen since 1990 and a failure to
resolve employee safety concerns. The NRC's action will result in close
monitoring of programs and performance at Millstone to assure the development
and implementation of effective corrective actions.
NU's management plans to continue its extensive efforts already under way to
address these concerns. Concurrent with the NRC's action, NU provided the NRC
with the results of a comprehensive self-assessment review of the employee
concern program at Millstone. Additionally, in January 1996, NU announced a
reorganization of its nuclear operations which included the creation of a new
office of Nuclear Safety and Oversight.
Although the start-up of Millstone 1, which is currently in outage, will be
affected by its placement on the NRC's "watch list," operations at Millstone 2
and 3 have not been restricted. NU's management expects that the increased NRC
attention will inevitably have effects and costs that are not known at this
time.
In November 1995, Millstone 1 began a planned refueling and maintenance outage.
The outage has been extended to allow NU to complete reviews required by the
NRC. In response to a request by the NRC, NU is conducting a detailed review of
Millstone 1's Final Safety Analysis Report and an assessment of the plant's
readiness to ensure that the future operation of the plant will be conducted in
accordance with the terms and conditions of its operating license and the NRC's
regulations. The outage schedule is currently under review, but the unit is not
expected to return to service before the mid-to-late part of the second quarter
of 1996. Total replacement-power costs attributable to the Millstone 1 outage
extension for WMECO are expected to be approximately $1 million per month. In
addition, operation and maintenance (O&M) costs to be incurred as a result of
the extension are estimated to be approximately $4 million. Replacement-power
costs are recovered currently through rates. Nuclear outage O&M costs are
deferred and amortized through rates. The recovery, or refund, of outage costs
is subject to prudence reviews.
The composite capacity factor of the five nuclear generating units that NU
operates-including the Connecticut Yankee nuclear unit-was 69.9 percent in 1995,
compared with 67.5 percent for 1994, and a 1995 national average of 77.6
percent. The 1995 capacity factor was impacted by an extended refueling and
maintenance outage for Millstone 2.
See the "Notes to Financial Statements," Note 10B, for further information on
outage deferrals and recoveries.
ENVIRONMENTAL MATTERS
NU devotes substantial resources to identify and comply with the multitude of
environmental requirements it faces. NU has active auditing programs addressing
a variety of regulatory requirements, including an environmental auditing
program to detect and remedy noncompliance with environmental laws or
regulations.
WMECO 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 WMECO. At December 31, 1995, WMECO had
recorded an environmental reserve amounting to approximately $1 million, the
minimum amount required under SFAS 5, "Accounting for Contingencies." These
costs could be significantly higher if alternative remedies become necessary.
NUCLEAR DECOMMISSIONING
WMECO's estimated cost to decommission its shares of Millstone 1, 2, and 3 is
approximately $186 million in year-end 1995 dollars. These costs are being
recognized over the lives of the respective units and a portion is being
recovered through rates.
The FASB is currently reviewing the accounting for closure and removal costs,
including decommissioning and similar costs, for long-lived assets. If current
electric-power industry accounting practices for such decommissioning costs were
changed, annual provisions for decommissioning would increase and the estimated
costs for decommissioning would be recorded as a liability rather than as a
component of accumulated depreciation.
See the "Notes to Financial Statements," Note 3, for further information on
nuclear decommissioning, including WMECO's share of costs to decommission the
regional nuclear generating units.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations decreased approximately $29 million in 1995, from
1994, primarily due to higher cash payments for energy, operation, and
maintenance costs, and lower working capital. Cash used for financing
activities was relatively flat in 1995, from 1994. Cash used for investments
decreased approximately $28 million in 1995, from 1994, primarily due to a
decrease in loans to other system companies under the NU system Money Pool,
lower construction expenditures, and lower nuclear fuel expenditures.
WMECO has entered into interest-rate-cap contracts to reduce a portion of its
interest-rate risk
See the "Notes to Financial Statements," Note 11, for further information on
derivative financial instruments and the "Notes to Financial Statements,"
Notes 6, 7 and 10A, for further information on construction and long-term debt
funding requirements.
RESULTS OF OPERATIONS
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)
1995 vs. 1994 1994 vs. 1993
- --------------------------------------------------------------------
(Millions of Dollars)
Regulatory decisions $(2) $(4)
Fuel and purchased power
cost recoveries 7 13
Sales volume (1) (2)
Other revenues (5) (1)
--- ---
Total revenue change $(1) $6
==== ==
Revenues related to regulatory decisions decreased, primarily due to the effects
of the June 1994 retail-rate reduction, partially offset by higher recoveries
for demand-side-management costs. Fuel and purchased-power cost recoveries
increased primarily due to higher energy costs, partially offset by lower
interchange revenues. Other includes higher price discounts to customers in
1995.
Operating revenues increased approximately $6 million in 1994, from 1993.
Revenues related to regulatory decisions decreased, primarily due to the effects
of the June 1994 retail-rate reduction, and lower recoveries for demand-side
management-costs, partially offset by the July 1993 retail-rate increase. Fuel
and purchased-power cost recoveries increased primarily due to higher energy
interchange revenues in 1994.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power expense increased approximately $19
million in 1995, from 1994, primarily due to a one-time benefit in May 1994 from
a rate case settlement agreement and higher energy costs in 1995 as a result of
the extended Millstone 2 outage.
The change in 1994, from 1993, was not significant.
OTHER OPERATION AND MAINTENANCE EXPENSES
Other operation and maintenance expense increased approximately $14 million in
1995, from 1994, primarily due to higher capacity charges from the regional
nuclear units primarily due to Maine Yankee which was in an extended refueling
outage throughout 1995, higher benefit costs, higher demand-side-management
costs, higher 1995 storm costs, higher costs associated with a work stoppage,
and higher outside services employed, partially offset by lower reserves for
excess/obsolete inventory in 1995, and lower maintenance costs at the company's
fossil units.
Other operation and maintenance expenses decreased approximately $10 million in
1994, from 1993, primarily due to higher costs in 1993 associated with early-
retirement programs, lower 1994 payroll and benefit costs, lower fossil-unit
costs, and lower capacity charges from the regional nuclear generating units,
partially offset by higher 1994 costs associated with the operation and
maintenance activities of the nuclear units, higher reserves for excess/obsolete
inventory at the nuclear and fossil units in 1994, and higher outside services
primarily related to companywide process reengineering.
AMORTIZATION OF REGULATORY ASSETS, NET
Amortization of regulatory assets, net decreased approximately $10 million in
1995, from 1994, primarily due to the completion of the company's amortization
of Millstone 3 phase-in costs in 1995.
The change in 1994, from 1993, was not significant.
FEDERAL AND STATE INCOME TAXES
Federal and state income taxes decreased approximately $19 million in 1995, from
1994, primarily due to tax benefits from a favorable tax ruling, the expiration
of the federal statute of limitations for 1991, and lower taxable income.
Federal and state income taxes increased approximately $5 million in 1994, from
1993, primarily due to higher taxable income.
OTHER INCOME, NET
Other income, net decreased by approximately $2 million in 1995, from 1994,
primarily because additional Millstone 3 investments were phased into rates.
The change in 1994, from 1993, was not significant.
INTEREST CHARGES
Although the change in 1995, from 1994, was not significant, interest on long-
term debt decreased approximately $2 million in 1994, from 1993, primarily due
to lower average interest rates as a result of refinancing activities and lower
1994 debt levels.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
The cumulative effect of the accounting change of approximately $4 million in
1993 represents the one-time change in the method of accounting for Connecticut
municipal property tax expense recognized in the first quarter of 1993.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
SELECTED FINANCIAL DATA (a) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues........ $ 420,208 $ 421,477 $ 415,055 $ 410,720 $ 409,840
Operating Income.......... 63,064 70,940 60,348 60,563 59,833
Net Income................ 39,133 49,457 40,594(b) 37,022 34,637
Cash Dividends on
Common Stock............ 30,223 29,514 28,785 29,536 31,499
Total Assets.............. 1,142,346 1,183,618 1,204,642 1,130,684 1,119,593
Long-Term Debt*........... 347,470 379,969 393,232 392,976 401,095
Preferred Stock Not Subject
to Mandatory Redemption.... 53,500 68,500 73,500 73,500 88,500
Preferred Stock Subject to
Mandatory Redemption(c). 24,000 24,675 27,000 28,500 28,502
Obligations Under Capital
Leases(c)............... 36,011 36,797 36,902 41,509 44,134
(a) Reclassifications of prior years' data have been made to conform with the
current year's presentation.
(b) Includes the cumulative effect of change in accounting for municipal
property tax expense, which increased earnings for common shares by $3.9
million.
(c)Includes portion due within one year.
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
- --------------------------------------------------
Quarter Ended (a)
--------------------------------------------
1995 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------
Operating Revenues........ $106,684 $100,593 $107,960 $104,971
======== ======== ======== ========
Operating Income.......... $ 18,085 $ 8,977 $ 19,799 $ 16,203
======== ======== ======== ========
Net Income................ $ 12,076 $ 3,289 $ 14,141 $ 9,627
======== ======== ======== ========
1994
- ---------------------------------------------------------------------------
Operating Revenues........ $112,984 $101,188 $102,597 $104,708
======== ======== ======== ========
Operating Income.......... $ 19,732 $ 21,466 $ 11,596 $ 18,146
======== ======== ======== ========
Net Income................ $ 13,961 $ 16,035 $ 6,395 $ 13,066
======== ======== ======== ========
(a)Reclassifications of prior period data have been made to conform with
the current presentation.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATISTICS
- -------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------
1995 $1,285,269 4,846 7,243 193,964 527
1994 1,271,513 4,978 7,433 193,187 617
1993 1,242,927 4,715 7,351 192,542 657
1992 1,214,386 4,155 7,433 191,920 739
1991 1,199,362 3,780 7,494 191,692 797
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.4
<SEQUENCE>19
<DESCRIPTION>ANNUAL REPORT OF PSNH
<TEXT>
EXHIBIT 13.4
1995 Annual Report
Public Service Company of New Hampshire
Index
Contents Page
- -------- ----
Balance Sheets.............................................. 2-3
Statements of Income........................................ 4
Statements of Cash Flows.................................... 5
Statements of Common Stockholder's Equity................... 6
Notes to Financial Statements............................... 7
Report of Independent Public Accountants.................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 26
Selected Financial Data..................................... 32
Statistics.................................................. 34
Statements of Quarterly Financial Data...................... 34
Preferred Stockholder and Bondholder Information............ Back Cover
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
- -------------------------------------------------------------------------------------
At December 31, 1995 1994
- -------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at cost:
Electric................................................ $2,109,590 $2,038,625
Less: Accumulated provision for depreciation......... 513,244 474,129
----------- -----------
1,596,346 1,564,496
Unamortized acquisition costs (Note 1H)<F1H>............ 588,910 678,974
Construction work in progress........................... 15,975 17,781
Nuclear fuel, net....................................... 1,585 2,248
----------- -----------
Total net utility plant............................. 2,202,816 2,263,499
----------- -----------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 2,436 1,815
Investments in regional nuclear generating
companies and subsidiary company, at equity............ 19,300 19,551
Other, at cost.......................................... 764 394
----------- -----------
22,500 21,760
----------- -----------
Current Assets:
Cash.................................................... 456 322
Notes receivable from affiliated companies.............. 19,100 35,000
Receivables, less accumulated provision for
uncollectible accounts of $1,582,000 in 1995
and of $2,015,000 in 1994............................. 91,535 76,173
Accounts receivable from affiliated companies........... 1,486 3,779
Accrued utility revenues................................ 33,984 36,547
Fuel, materials, and supplies, at average cost.......... 41,717 37,453
Prepayments and other................................... 11,196 20,829
----------- -----------
199,474 210,103
----------- -----------
Deferred Charges:
Regulatory assets (Note 1G)<F1G>........................ 434,001 292,531
Deferred receivable from affiliated company............. 33,284 33,284
Unamortized debt expense................................ 14,165 17,064
Other................................................... 3,396 7,726
----------- -----------
484,846 350,605
----------- -----------
Total Assets........................................ $2,909,636 $2,845,967
=========== ===========
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
- --------------------------------------------------------------------------------------
At December 31, 1995 1994
- --------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock, $1 par value--authorized
and outstanding 1,000 shares in 1995 and 1994........... $ 1 $ 1
Capital surplus, paid in................................. 422,385 421,784
Retained earnings........................................ 143,039 125,034
----------- -----------
Total common stockholder's equity............... 565,425 546,819
Cumulative preferred stock subject to mandatory
redemption--
$25 par value--authorized 25,000,000 shares;
outstanding 5,000,000 shares in 1995 and 1994...... 125,000 125,000
Long-term debt........................................... 686,485 905,985
----------- -----------
Total capitalization............................ 1,376,910 1,577,804
----------- -----------
Obligations Under Seabrook Power Contracts
and Other Capital Leases.................................. 874,292 849,776
----------- -----------
Current Liabilities:
Long-term debt--current portion.......................... 172,500 94,000
Obligations under Seabrook Power Contracts and other
capital leases--current portion......................... 40,996 38,191
Accounts payable......................................... 39,012 45,984
Accounts payable to affiliated companies................. 26,656 17,309
Accrued taxes............................................ 798 4,304
Accrued interest......................................... 9,648 10,496
Accrued pension benefits................................. 38,606 36,269
Other.................................................... 19,077 20,350
----------- -----------
347,293 266,903
----------- -----------
Deferred Credits:
Accumulated deferred income taxes (Note 1J)<F1J>......... 229,057 62,080
Accumulated deferred investment tax credits.............. 5,060 5,614
Deferred contractual obligation.......................... 18,814 28,572
Deferred revenue from affiliated company................. 33,284 33,284
Other.................................................... 24,926 21,934
----------- -----------
311,141 151,484
----------- -----------
Commitments and Contingencies (Note 10)<F10>
Total Capitalization and Liabilities............ $2,909,636 $2,845,967
=========== ===========
The accompanying notes are an integral part of these financial statements
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues.............................. $ 979,590 $ 922,039 $ 864,415
---------- ---------- ----------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power.. 257,008 222,801 208,023
Other...................................... 313,390 303,271 301,534
Maintenance................................... 42,244 43,725 35,427
Depreciation.................................. 44,337 38,703 38,580
Amortization of regulatory assets, net........ 55,547 55,319 67,379
Federal and state income taxes (Note 8)<F8>... 69,758 68,088 54,087
Taxes other than income taxes................. 41,786 38,046 34,675
---------- ---------- ----------
Total operating expenses................ 824,070 769,953 739,705
---------- ---------- ----------
Operating Income................................ 155,520 152,086 124,710
---------- ---------- ----------
Other Income:
Equity in earnings of regional nuclear
generating companies and subsidiary company.. 1,645 2,079 1,777
Other, net.................................... 3,329 629 635
Income taxes.................................. (829) (546) 3,868
---------- ---------- ----------
Other income, net....................... 4,145 2,162 6,280
---------- ---------- ----------
Income before interest charges.......... 159,665 154,248 130,990
---------- ---------- ----------
Interest Charges:
Interest on long-term debt.................... 76,320 76,410 77,842
Other interest................................ 90 394 911
---------- ---------- ----------
Interest charges, net................... 76,410 76,804 78,753
---------- ---------- ----------
Net Income...................................... $ 83,255 $ 77,444 $ 52,237
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net Income.................................................. $ 83,255 $ 77,444 $ 52,237
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 44,337 38,703 38,580
Deferred income taxes and investment tax credits, net..... 69,986 67,047 50,027
Recoverable energy costs, net of amortization............. (15,266) (81,206) (39,654)
Amortization of acquisition costs......................... 55,547 55,319 67,379
Other sources of cash..................................... 15,973 3,213 30,001
Other uses of cash........................................ - (4,456) (4,394)
Changes in working capital:
Receivables and accrued utility revenues.................. (10,506) (3,205) (3,161)
Fuel, materials, and supplies............................. (4,264) 3,734 3,936
Accounts payable.......................................... 2,375 18,598 (2,894)
Accrued taxes............................................. (3,506) 4,182 (1,602)
Other working capital (excludes cash)..................... 16 742 (2,224)
----------- ----------- -----------
Net cash flows from operating activities...................... 237,947 180,115 188,231
----------- ----------- -----------
Financing Activities:
Issuance of long-term debt.................................. - - 44,800
Net decrease in short-term debt............................. - (2,500) (41,000)
Reacquisitions and retirements of long-term debt............ (141,000) (94,000) (138,800)
Cash dividends on preferred stock........................... (13,250) (13,250) (13,250)
Cash dividends on common stock.............................. (52,000) - -
----------- ----------- -----------
Net cash flows used for financing activities.................. (206,250) (109,750) (148,250)
----------- ----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (46,672) (39,721) (35,360)
Nuclear fuel.............................................. (184) (1,249) (614)
----------- ----------- -----------
Net cash flows used for investments in plant................ (46,856) (40,970) (35,974)
NU System Money Pool........................................ 15,900 (35,000) -
Other investment activities, net............................ (607) (68) (340)
----------- ----------- -----------
Net cash flows used for investments........................... (31,563) (76,038) (36,314)
----------- ----------- -----------
Net Increase (Decrease) in Cash For The Period................ 134 (5,673) 3,667
Cash - beginning of period.................................... 322 5,995 2,328
----------- ----------- -----------
Cash - end of period.......................................... $ 456 $ 322 $ 5,995
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 74,543 $ 74,507 $ 75,609
=========== =========== ===========
Income taxes................................................ $ 1,369 $ 167 $ 2,390
=========== =========== ===========
Increase in obligations:
Seabrook Power Contracts and other capital leases........... $ 28,028 $ 53,266 $ 89,492
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ---------------------------------------------------------------------------------------
Capital
Common Surplus, Retained
Stock Paid In Earnings Total
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1993............... $ 1 $420,762 $ 21,853 $442,616
Net income for 1993.................. 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 for 1994.................. 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
Net income for 1995.................. 83,255 83,255
Cash dividends on preferred stock.... (13,250) (13,250)
Cash dividends on common stock....... (52,000) (52,000)
Capital stock expenses, net.......... 601 601
-------- --------- --------- ---------
Balance at December 31, 1995............. $ 1 $422,385 $143,039 $565,425
======== ========= ========= =========
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
A. PRESENTATION
Public Service Company of New Hampshire (PSNH or the company), The
Connecticut Light and Power Company (CL&P), Western Massachusetts
Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), and
Holyoke Water Power Company (HWP) are the operating subsidiaries
comprising the Northeast Utilities (NU) system (the system) and are
wholly owned by NU.
The system furnishes retail electric service in Connecticut, New
Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and HWP.
A fifth subsidiary, NAEC, sells all of its capacity to PSNH. In
addition to its retail service, the system furnishes firm and other
wholesale electric services to various municipalities and other
utilities. The system serves about 30 percent of New England's electric
needs and is one of the 20 largest electric utility systems in the
country as measured by revenues.
Other wholly owned subsidiaries of NU provide 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. North Atlantic Energy Service
Corporation acts as agent for CL&P and NAEC in operating the Seabrook 1
nuclear facility. Northeast Nuclear Energy Company (NNECO) acts as
agent for the system companies in 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of prior years' data have been made to conform
with the current year's presentation.
B. FUTURE ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in
March 1995. SFAS 121 became effective January 1, 1996, and establishes
accounting standards for evaluating and recording asset impairment.
SFAS 121 requires the evaluation of long-lived assets for impairment
when certain events occur or conditions exist that indicate the carrying
amounts of assets may not be recoverable. Refer to Note 1G, "Regulatory
Accounting," for further information on the regulatory impacts of the
company's adoption of SFAS 121.
C. 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 due to the company's ability to exercise significant
influence over their operating and financial policies. The electricity
produced by the facilities that are operating is committed substantially
on the basis of ownership interests and is billed pursuant to
contractual agreements. Under ownership agreements with the Yankee
companies, PSNH may be asked to provide direct or indirect financial
support for one or more of the companies. For more information on these
agreements, see Note 10E, "Commitments and Contingencies - Long-term
Contractual Arrangements."
YAEC's 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: PSNH has a 2.85 percent joint-ownership interest in
Millstone 3, a 1,154-megawatt (MW) nuclear generating unit. As of
December 31, 1995 and 1994, plant-in-service included approximately
$118.6 million and $118.3 million, respectively, and the accumulated
provision for depreciation included approximately $26.5 million and
$24.2 million, respectively, for PSNH's share of Millstone 3. PSNH's
share of Millstone 3 expenses is included in the corresponding operating
expenses on the accompanying Statements of Income.
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,
1995 and 1994, plant-in-service included approximately $6.0 million and
the accumulated provision for depreciation included approximately $3.5
million and $3.3 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.
D. 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. The depreciation rates for the several classes of
electric plant-in-service are equivalent to a composite rate of 3.8
percent for the year ended December 31, 1995 and 3.6 percent for the
years ended December 31, 1994 and 1993. See Note 4, "Nuclear
Decommissioning," for information on nuclear plant decommissioning.
E. PUBLIC UTILITY REGULATION
NU is registered with the Securities and Exchange Commission (SEC) as a
holding company under the Public Utility Holding Company Act of 1935
(1935 Act), and it and its subsidiaries, including the company, are
subject to the provisions of the 1935 Act. Arrangements among the
system companies, outside agencies, and other utilities covering 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/or
the NHPUC.
F. REVENUES
Other than recovery under 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.
In general, rates can be changed only through a formal proceeding
before the appropriate regulatory commission. At the end of each
accounting period, PSNH accrues an estimate for the amount of energy
delivered but unbilled.
G. REGULATORY ACCOUNTING
The accounting policies of PSNH and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process in accordance with SFAS 71, Accounting for the
Effects of Certain Types of Regulation. Assuming a cost-of-service based
regulatory structure, regulators may permit incurred costs, normally
treated as expenses, to be deferred and recovered in future revenues.
Through their actions, regulators may also reduce or eliminate the value
of an asset, or create a liability. If any portion of the company's
operations were no longer subject to the provisions of SFAS 71, as a
result of a change in the cost-of-service based regulatory structure or
the effects of competition, the company would be required to write off
related regulatory assets and liabilities. The company would also be
required to determine any impairment to other assets and write down
these assets to fair value. Based on current regulation and recent
regulatory decisions and initiatives relating to competition in the
system's markets, the company believes that its use of regulatory
accounting remains appropriate.
SFAS 121 requires that any assets, including regulatory assets, which
are no longer probable of recovery through future revenues, be revalued
based on estimated future cash flows. If the revaluation is less than
the book value of the asset, an impairment loss would be charged to
earnings. As noted above, based on the current regulatory environment
in the company's service area, it is not expected that SFAS 121 will
have material impact on the company's financial position or results of
operations upon adoption. This conclusion may change in the future as
competitive factors influence wholesale and retail pricing in the
electric utility industry or if the cost-of-service based regulatory
structure were to change. For further information on the company's
regulatory environment, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A).
The components of regulatory assets are as follows:
At December 31, 1995 1994
---------------------------------------------------------------
(Thousands of Dollars)
Recoverable energy costs (Note 1I) ... $220,093 $194,994
Income taxes, net (Note 1J) .......... 192,690 66,466
Unrecovered contractual obligation (Note 4) 18,814 28,572
Other ................................ 2,404 2,499
---------- ----------
$434,001 $292,531
======== ========
H. UNAMORTIZED ACQUISITION COSTS
The unamortized acquisition costs represent the aggregate value placed
by the 1989 rate agreement with the state of New Hampshire (Rate
Agreement) on PSNH's assets in excess of the net book value of PSNH's
non-Seabrook assets plus the $700-million value assigned to Seabrook by
the Rate Agreement, as part of the bankruptcy resolution, on June 5,
1992 (Acquisition Date). The Rate Agreement provides for the recovery,
through rates, with a return, of the amortization of the unamortized
acquisition costs. The Rate Agreement provides that $425 million of the
unamortized acquisition costs be amortized over the first seven years
after PSNH's May 16, 1991 reorganization from bankruptcy (Reorganization
Date), with the remaining amount to be amortized over the 20-year period
after the Reorganization Date. As of December 31, 1995, approximately
$411.8 million of acquisition costs have been collected through rates.
I. 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 is currently recovering these costs through rates.
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 purchased power costs assumed in the Rate Agreement
and PSNH's actual costs, which include the costs related to the Seabrook
Power Contracts and the Clean Air Act Amendment. 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 renegotiating the rate
orders mandating the purchase of high-cost NUG power. The NHPUC has
approved an amendment to the Rate Agreement allowing settlement
agreements to be implemented with two wood-fired NUGs. In 1994, the two
NUGs that were settled gave up their rights to sell their output to PSNH
in exchange for lump-sum cash payments totaling 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 of the savings from the buyout will be used to reduce PSNH's
recoverable energy costs. At the end of the fixed-rate period, 50
percent of the savings will be used to reduce the recoverable energy
costs, with the remainder reducing current rates. PSNH has also reached
tentative agreements with the six remaining wood-fired NUGs. These
agreements are subject to NHPUC approval.
At December 31, 1995, PSNH's net recoverable energy costs were
approximately $220 million, including purchased power deferrals of
$185.6 million and the NUGs deferred buyout payments of $34.2 million.
J. 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. The adoption of SFAS 109, Accounting
for Income Taxes, in 1993 increased the company's deferred tax asset for
net operating losses (NOLs) previously not recognized. As the potential
benefit is being given to customers through rates, PSNH established an
associated regulatory liability. The adoption of SFAS 109 also
increased deferred tax liabilities and as it is probable that the
increase in deferred tax liabilities will be recovered from customers
through rates, PSNH established a regulatory asset.
The tax effect of temporary differences, including timing differences
accrued under previously approved accounting standards, which give rise
to the accumulated deferred tax obligation is as follows:
At December 31, 1995 1994
--------------------------------------------------------------------------------------
(Thousands of Dollars)
Accelerated depreciation and other plant-related differences... $ 231,126 $ 81,732
NOL carryforwards ............................................ (191,873) (247,440)
Regulatory assets - income tax gross up ...................... 85,192 33,837
Other ........................................................ 104,612 193,951
---------- ----------
$ 229,057 $ 62,080
========= ==========
At December 31, 1995, PSNH had a NOL carryforward of approximately $572
million, to be used against PSNH's federal taxable income, and to expire
between the years 2000 and 2006. PSNH also had Investment Tax Credit
(ITC) carryforwards of $52 million, which expire between the years 1996
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 $95 million of the NOL and $21 million
of the ITC carryforwards are subject to this limitation.
K. DERIVATIVE FINANCIAL INSTRUMENTS
PSNH utilizes an interest-rate cap to manage well-defined interest-rate
risk. The premium paid for the purchased interest-rate-cap agreement is
amortized to interest expense over the term of the cap. Unamortized
premiums are included in deferred charges. Amounts receivable under the
cap agreement are accrued and offset against interest expense. Any
material unrealized gains or losses on the interest-rate cap will be
deferred until realized. For further information on derivatives, see
Note 11, "Derivative Financial Instruments."
2. SEABROOK POWER CONTRACTS
PSNH and NAEC have entered into two power contracts that obligate PSNH to
purchase NAEC's 35.98 percent ownership of the capacity and output of
Seabrook for the term of Seabrook's Nuclear Regulatory Commission (NRC)
operating license. Under these power contracts, PSNH is obligated to pay
NAEC's cost of service during this period, regardless of whether Seabrook 1
is operating. NAEC's cost of service includes all of its Seabrook-related
costs, including operation and maintenance (O&M) expenses, fuel expense,
income and property tax expense, depreciation expense, and certain overhead
and other costs, and a return on its allowed investment.
PSNH has included its right to buy power from NAEC on its Balance Sheets as
part of utility plant with a corresponding obligation. At December 31,
1995, this right was valued at approximately $910.8 million.
The contracts established the value of the initial investment in Seabrook
(initial investment) at $700 million. As of December 31, 1995, the portion
of the initial investment on which NAEC is entitled to earn a cash return
was 85 percent. The initial investment will be fully phased into NAEC's
rate base as of May 1, 1996. From the Acquisition Date through December 31,
1995, NAEC recorded $162.4 million of deferred return on the excluded
portion of its investment in Seabrook 1. The deferred return on the
excluded portion of NAEC's investment in Seabrook 1 will be recovered from
PSNH with carrying charges beginning December 1, 1997, and will be fully
recovered by May 2001. NAEC is depreciating its initial investment over the
term of Seabrook 1's operating license (39 years), and any subsequent plant
additions are depreciated on a straight-line basis over the remaining term
of the power contracts at the time the subsequent additions are placed in
service.
If Seabrook 1 is shut down prior to the expiration of the NRC operating
license, PSNH will be unconditionally required to pay NAEC termination costs
for 39 years, less the period during which Seabrook 1 has operated. These
termination costs will reimburse NAEC for its share of Seabrook 1 shut-down
and decommissioning costs, and will pay NAEC a return of and on any
undepreciated balance of its initial investment over the remaining term of
the power contracts, 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 the cancellation).
Contract payments charged to operating expenses are approximately:
Year Contract Payments
---- -----------------
(Thousands of Dollars)
1995 ....................... $154,000
1994 ....................... 143,000
1993 ....................... 123,000
Interest included in the contract payments was $51 million in 1995, $43
million in 1994, and $33 million in 1993.
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, 1995, are approximately:
Year Seabrook Power Contracts
---- ------------------------
(Thousands of Dollars)
1996 ........................ $ 79,900
1997 ........................ 86,000
1998 ........................ 143,800
1999 ........................ 142,100
2000 ........................ 140,300
After 2000 .................. 1,195,800
----------
Future minimum payments ..... 1,787,900
Less amount representing interest 877,100
-----------
Present value of Seabrook Power
Contracts ................. $ 910,800
===========
3. LEASES
PSNH has entered into lease agreements, some of which are capital leases,
for the use of data processing and office equipment, vehicles, and office
space. The provisions of these lease agreements generally provide for
renewal options. The following rental payments have been charged to
operating expense:
Year Capital Leases Operating Leases
---- -------------- ----------------
1995 ........................ $1,103,000 $5,291,000
1994 ........................ 1,061,000 4,255,000
1993 ........................ 701,000 6,197,000
Interest included in capital leases was $351,000 in 1995, $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
noncancellable leases, as of December 31, 1995, are:
Year Capital Leases Operating Leases
---- -------------- ----------------
(Thousands of Dollars)
1996 ........................ $1,100 $7,200
1997 ........................ 1,100 6,100
1998 ........................ 1,000 4,800
1999 ........................ 700 4,100
2000 ........................ 500 3,600
After 2000 .................. 1,200 11,500
------- --------
Future minimum lease payments $5,600 $37,300
=======
Less amount representing interest 1,100
-----
Present value of future minimum lease
payments .................. $4,500
======
4. NUCLEAR DECOMMISSIONING
Millstone 3 and Seabrook 1 have service lives that are expected to end
during the years 2025 and 2026, respectively. Upon retirement, these units
must be decommissioned. A 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 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, costs, technology, and
inflation.
The estimated cost of decommissioning PSNH's 2.85 percent ownership share of
Millstone 3 and NAEC's 35.98 percent share of Seabrook 1, in year-end 1995
dollars, is $12.5 million and $152.5 million, respectively. These estimated
costs assume levelized collections for Millstone 3 and escalated collections
for Seabrook 1, and after-tax earnings on the Millstone and Seabrook
decommissioning funds of 6.5 percent and 6.1 percent, respectively.
Millstone 3 and Seabrook 1 decommissioning costs will be increased annually
by their respective escalation rates. PSNH's Millstone 3 decommissioning
costs are accrued over the expected service life of the unit and are
included in depreciation expense on its Statements of Income. Nuclear
decommissioning related to PSNH's share of Millstone 3 amounted to $0.3
million in 1995, 1994, and 1993. Nuclear decommissioning, as a cost of
removal, is included in the accumulated provision for depreciation on PSNH's
Balance Sheets. At December 31, 1995, the balance in the accumulated
reserve for decommissioning amounted to $2.4 million. See "Nuclear
Decommissioning" in the MD&A for a discussion of changes being considered by
the FASB related to accounting for closure and removal of long-lived assets
(including nuclear decommissioning).
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 1'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 1. PSNH records its Seabrook
decommissioning costs as a component of purchased power expense on its
Statements of Income. Under the Rate Agreement, PSNH's Seabrook
decommissioning costs are recovered through base rates.
As of December 31, 1995, PSNH collected through rates approximately $1.8
million toward the future decommissioning costs of its share of Millstone 3,
which has been transferred to the external decommissioning trust. Earnings
on the decommissioning trust increase the decommissioning trust balance and
the accumulated reserve for decommissioning. Unrealized gains and losses
associated with the decommissioning trust also impact the balance of the
trust and the accumulated reserve for decommissioning.
As of December 31, 1995, NAEC (including payments made prior to the
Acquisition Date by PSNH) has paid approximately $13.1 million, into
Seabrook 1's decommissioning financing fund.
Changes in requirements or technology, the timing of funding or dismantling,
or adoption of a decommissioning method other than immediate dismantlement
would change decommissioning cost estimates and the amounts required to be
recovered. PSNH attempts to recover sufficient amounts through its allowed
rates to cover its expected decommissioning costs. Only the portion of
currently estimated total decommissioning costs that has been accepted by
regulatory agencies is reflected in rates of PSNH. Based on present
estimates and assuming its nuclear units operate to the end of their
licensing period, PSNH expects that the decommissioning trust and financing
fund will be substantially funded when the units are retired from service.
PSNH, along with other New England utilities, has equity investments in the
four Yankee companies. Each Yankee company owns a single nuclear generating
unit with service lives that are expected to end during the years 2007
through 2012. PSNH's ownership share of estimated costs, in year-end 1995
dollars, of decommissioning the units owned and operated by CY, MY, and VY
is $19.3 million, $17.7 million, and $13.9 million, respectively. Under the
terms of the contracts with the Yankee companies, the shareholders-sponsors
are responsible for their proportionate share of the operating costs of each
unit, including decommissioning. The nuclear decommissioning costs of the
Yankee companies are included as part of the cost of power purchased by
PSNH.
YAEC is in the process of dismantling its nuclear facility. Accelerated
decommissioning of that unit has been delayed because of litigation over the
NRC's approval of YAEC's decommissioning plan. Effective November 1995,
YAEC began billing its sponsors, including PSNH, amounts based on a revised
estimate approved by the FERC that assumes decommissioning of the plant by
the year 2000. This revised decommissioning estimate was based on access to
the Barnwell, South Carolina low-level radioactive waste facility, changes
in assumptions about earnings in decommissioning trust investments, and
changes in other decommissioning cost assumptions. At December 31, 1995,
the estimated remaining costs, including decommissioning, amounted to $268.8
million, of which PSNH's share was approximately $18.8 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 corresponding obligations, on its Balance Sheets.
5. SHORT-TERM DEBT
PSNH has credit lines totaling $125 million available through a revolving-
credit agreement 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, 1995 and
1994, there were no borrowings under the agreement. These credit lines will
expire in May 1996. PSNH is in the process of negotiating an increase and
extension to the revolving credit agreement.
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.
Investing and borrowing subsidiaries receive or pay interest based on the
average daily Federal Funds rate. However, borrowings based on loans from
NU parent bear interest at NU parent's cost and must be repaid based upon
the terms of NU parent's original borrowing. At December 31, 1995 and 1994,
PSNH had no outstanding borrowings from the Pool.
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. PSNH is seeking approval from
the NHPUC to increase its short-term debt limit to $225 million.
6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
Shares Outstanding December 31,
----------------------------
Description December 31, 1995 1995 1994 1993
------------------------------------------------------------------------
(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 an annual sinking
fund requirement of $25 million, beginning on June 30, 1997, sufficient to
retire annually 1,000,000 shares at $25 per share.
7. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
------------
1995 1994
-----------------------------------------------------------------------
(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
Pollution Control Revenue Bonds:
7.65% Tax-Exempt Series A, due 2021. 66,000 66,000
7.50% Tax-Exempt Series B, due 2021. 108,985 108,985
7.65% Tax-Exempt Series C, due 2021. 112,500 112,500
Adjustable Rate, Taxable, Series D, due 2021 39,500 39,500
Adjustable Rate, Taxable, Series E, due 2021 69,700 69,700
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 .. 172,500 94,000
---------- ---------
Long-term debt, net ....... $686,485 $905,985
======== ========
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1995 for the years 1996 through 2000 are
approximately $172.5 million for 1996, $0 for 1997, $170 million for 1998,
and $0 for 1999 and 2000. Also, there are annual renewal and replacement
fund requirements equal to 2.25 percent of the average of net depreciable
property owned by PSNH at the reorganization date, plus cumulative gross
property additions thereafter. PSNH expects to meet these future fund
requirements by certifying property additions. Any deficiency would need to
be satisfied by the deposit of cash or bonds.
Essentially, all utility plant of PSNH is subject to the lien of its first
mortgage bond indenture. PSNH's Revolving Credit Facility is 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, 1995 and 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 originally issued seven series of Pollution Control
Revenue Bonds (PCRBs), and loaned the proceeds to PSNH. In 1992 and 1993,
the Business Finance Authority, formerly the IDA, issued $75 million and
$44.8 million, respectively, of tax-exempt PCRBs to replace outstanding
taxable PCRBs of the same amount. At December 31, 1995 and 1994, $516.5
million of PCRBs were outstanding. The average effective interest rates on
the variable-rate pollution control notes ranged from 3.9 percent to 6.1
percent for 1995, and 2.9 percent to 4.3 percent for 1994. 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
obligations 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.
8. INCOME TAX EXPENSE
The components of federal and state income tax provisions are:
For the Years Ended December 31, 1995 1994 1993
-------------------------------------------------------------------------
(Thousands of Dollars)
Current income taxes:
Federal ............................ $(1,166) $ 368 $ (937)
State .............................. 1,767 1,219 1,183
------- -------- --------
Total current .................... 601 1,587 246
------- -------- --------
Deferred income taxes, net:
Federal ............................ 72,147 63,941 47,407
State .............................. (1,606) 3,666 3,131
------- -------- --------
Total deferred .................. 70,541 67,607 50,538
Investment tax credits, net .......... (555) (560) (565)
--------- --------- ---------
Total income tax expense ............. $70,587 $68,634 $50,219
======= ======= =======
The components of total income tax expense are classified as follows:
Income taxes charged to operating expenses $69,758 $68,088 $54,087
Other income taxes ................... 829 546 (3,868)
-------- -------- --------
Total income tax expense ............. $70,587 $68,634 $50,219
======= ======= =======
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
For the Years Ended December 31, 1995 1994 1993
--------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation ......................... $ 1,294 $ 2,701 $ 4,549
Deferred tax asset associated with NOL 57,543 23,611 25,438
Energy adjustment clauses ............ 5,098 30,954 15,155
Amortization of regulatory settlement 11,501 11,501 7,667
Other ................................ (4,895) (1,160) (2,271)
-------- -------- --------
Deferred income taxes, net ........... $70,541 $67,607 $50,538
======= ======= =======
A reconciliation between income tax expense and the expected tax expense at
the applicable statutory rate is as follows:
For the Years Ended December 31, 1995 1994 1993
--------------------------------------------------------------------------
(Thousands of Dollars)
Expected federal income tax at 35 percent
of pretax income ................... $53,845 $51,127 $35,860
Tax effect of differences:
Depreciation ....................... 1,868 1,407 1,593
Amortization of acquisition costs .. 31,522 31,508 31,432
Seabrook intercompany loss ......... (13,048) (19,637) (19,176)
Investment tax credit amortization . (555) (560) (565)
State income taxes, net of federal benefit 105 3,175 2,804
Other, net ......................... (3,150) 1,614 (1,729)
-------- -------- --------
Total income tax expense ............. $70,587 $68,634 $50,219
======= ======= =======
9. EMPLOYEE BENEFITS
A. PENSION BENEFITS
PSNH participates in a uniform noncontributory-defined benefit
retirement plan covering all regular system employees. Benefits are
based on years of service and employees' highest eligible compensation
during five consecutive years of employment. The company's direct
portion of the system's pension cost, part of which was charged to
utility plant, approximated $2.3 million in 1995, $4.4 million in 1994,
and $6.6 million in 1993. Pension costs for 1994 and 1993 included
approximately $1.9 million and $3.4 million, respectively, related to
workforce-reduction programs.
Currently, PSNH funds annually an amount at least equal to that which
will satisfy the requirements of the Employee Retirement Income Security
Act and the Internal Revenue Code. Pension costs are determined using
market-related values of pension assets. Pension assets are invested
primarily in domestic and international equity securities and bonds.
The components of net pension cost for PSNH are:
For the Years Ended December 31, 1995 1994 1993
---------------------------------------------------------------------------
(Thousands of Dollars)
Service cost ...................... $ 3,462 $ 5,531 $ 7,539
Interest cost ..................... 11,923 11,129 11,180
Return on plan assets ............. (33,156) 246 (19,308)
Net amortization .................. 20,108 (12,526) 7,215
-------- -------- ---------
Net pension cost .................. $ 2,337 $ 4,380 $ 6,626
======== ======== ========
---------------------------------------------------------------
For calculating pension cost, the following assumptions were used:
For the Years Ended December 31, 1995 1994 1993
-------------------------------------------------------------------
Discount rate ..................... 8.25% 7.75% 8.00%
Expected long-term rate of return . 8.50 8.50 8.50
Compensation/progression rate ..... 5.00 4.75 5.00
The following table represents the plan's funded status reconciled to the
Balance Sheets:
At December 31, 1995 1994
-----------------------------------------------------------------------
(Thousands of Dollars)
Accumulated benefit obligation, including vested
benefits at December 31, 1995 and 1994 of
$123,475,000 and $111,198,000, respectively $133,840 $121,202
======== ========
Projected benefit obligation (PBO) .... $169,040 $146,972
Market value of plan assets ........... 159,094 136,104
-------- --------
PBO in excess of plan assets .......... (9,946) (10,868)
Unrecognized transition amount ........ 4,671 5,004
Unrecognized prior service costs ...... 5,428 5,775
Unrecognized net gain ................. (38,759) (36,180)
--------- ---------
Accrued pension liability ............. $(38,606) $(36,269)
======== ========
-------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the plan's
year-end funded status:
For the Years Ended December 31, 1995 1994
---------------------------------------------------------------
Discount rate ......................... 7.50% 8.25%
Compensation/progression rate ......... 4.75 5.00
B. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
PSNH provides certain health care benefits, primarily medical and
dental, and life insurance benefits through a benefit plan to retired
employees (referred to as SFAS 106 benefits). These benefits are
available for employees retiring from the company who have met specified
service requirements. For current employees and certain retirees, the
total SFAS 106 benefit is limited to two times the 1993 per-retiree
health care costs. The SFAS 106 obligation has been calculated based on
this assumption. PSNH's direct portion of SFAS 106 benefits, part of
which were deferred or charged to utility plant, approximated $7.2
million in 1995, $7.6 million in 1994, and $9.1 million in 1993.
PSNH is funding SFAS 106 postretirement costs through external trusts.
The company is funding, on an annual basis, amounts that have been rate-
recovered and which also are tax-deductible under the Internal Revenue
Code. The trust assets are invested primarily in equity securities and
bonds.
The components of health care and life insurance costs are:
For the Years Ended December 31, 1995 1994 1993
---------------------------------------------------------------------------
(Thousands of Dollars)
Service cost .................. $ 933 $ 971 $1,260
Interest cost ................. 4,063 3,844 4,800
Return on plan assets ......... (1,694) 37 -
Amortization of unrecognized transition
obligation .................. 2,941 2,941 3,046
Other amortization, net ....... 998 (206) -
------- -------- ---------
Net health care and life insurance costs $7,241 $7,587 $9,106
====== ====== ======
---------------------------------------------------------------
For calculating PSNH's SFAS 106 benefits cost, the following assumptions
were used:
For the Years Ended December 31, 1995 1994 1993
------------------------------------------------------------------
Discount rate ................. 8.00% 7.75% 7.75%
Long-term rate of return:
Health assets, net of tax .. 5.00 5.00 5.00
Life assets ................ 8.50 8.50 8.50
The following table represents the plan's funded status reconciled to the
Balance Sheet:
At December 31, 1995 1994
-------------------------------------------------------------------------
(Thousands of Dollars)
Accumulated postretirement benefit obligation of:
Retirees ................... $ 44,985 $ 39,881
Fully eligible active employees 27 52
Active employees not eligible to retire 10,627 9,065
-------- ----------
Total accumulated postretirement benefit obligation 55,639 48,998
Market value of plan assets ... 11,743 6,606
--------- ----------
Accumulated postretirement benefit obligation
in excess of plan assets .............. (43,896) (42,392)
Unrecognized transition amount 49,989 52,930
Unrecognized net gain ........ (8,373) (13,204)
-------- --------
Accrued postretirement benefit liability $ (2,280) $ (2,666)
========= ========
------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the plan's
year-end funded status:
At December 31, 1995 1994
--------------------------------------------------------------------
Discount rate ......................... 7.50% 8.00%
Health care cost trend rate (a) ....... 8.40 10.20
(a) The annual growth in per capita cost of covered health care
benefits was assumed to decrease to 5.4 percent by 2001.
The effect of increasing the assumed health-care-cost trend rate by one
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $3.7
million and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year then ended by $0.3
million. The trust holding the plan assets is subject to federal income
taxes at a 35 percent tax rate.
PSNH is currently recovering SFAS 106 costs, including amounts
previously deferred.
10. COMMITMENTS AND CONTINGENCIES
A. CONSTRUCTION PROGRAM
The construction program is subject to periodic review and revision.
PSNH currently forecasts construction expenditures of $200.9 million for
the years 1996-2000, including $51.5 million for 1996. In addition, the
company estimates that nuclear fuel requirements, for its share of
Millstone 3, will be $4.8 million for the years 1996-2000, including
$1.8 million for 1996.
B. NUCLEAR PERFORMANCE
On January 31, 1996, the NRC announced that the three Millstone nuclear
power plants operated by NNECO had been placed on its "watch list"
because of long-standing performance concerns. The NRC cited a number
of operational problems which have arisen since 1990 at the Millstone
plants.
The NRC recognized that there are significant current variations in the
performance of the three units. The performance concerns cited by the
NRC, combined with NU's failure to maintain previous performance
improvements, have resulted in the NRC requiring close monitoring of
Millstone unit operations and the implementation of a corrective action
program. While the NRC has not specifically restricted operations at
the Millstone site, the company expects that there will be costs
associated with the NRC's actions that cannot accurately be estimated at
this time.
C. ENVIRONMENTAL MATTERS
PSNH is subject to regulation by federal, state, and local authorities
with respect to air and water quality, 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.
Environmental requirements could hinder the construction of new
generating units, transmission and distribution lines, substations, and
other facilities. The cumulative long-term, 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, based upon
information currently available, are its estimated environmental
remediation costs for waste disposal sites. In most cases, additional
future environmental cleanup costs are not reasonably estimable due to a
number of factors, including the unknown magnitude of possible
contamination, the appropriate remediation methods, the possible effects
of future legislation or regulation, and the possible effects of
technological changes. At December 31, 1995, the liability recorded by
PSNH for its estimated environmental remediation costs, excluding any
possible insurance recoveries or recoveries from third parties, amounted
to approximately $5.0 million.
PSNH cannot estimate the potential liability for future claims,
including environmental remediation costs, that may be brought against
it. However, considering known facts, existing laws, and regulatory
practices, management does not believe the matters disclosed above will
have a material effect on PSNH's financial position or future results of
operations.
D. NUCLEAR INSURANCE CONTINGENCIES
Under certain circumstances, in the event of a nuclear incident at one
of the nuclear facilities covered by the federal government's third-
party liability indemnification program, the company could be assessed
in proportion to its ownership interest in each nuclear unit up to $75.5
million, not to exceed $10 million per nuclear unit in any one year.
The maximum assessment is to be adjusted at least every five years for
inflationary changes. Under the terms of the power contracts with NAEC,
PSNH could be obligated to pay for any assessment charged to NAEC as a
"cost of service." Based on the ownership interest in Millstone 3 and
NAEC's ownership interest in Seabrook 1, PSNH's maximum liability,
including any additional potential assessments, would be $30.8 million
per incident. In addition, through power purchase contracts with the
three operating Yankee regional nuclear generating companies, PSNH would
be responsible for up to an additional $11.1 million per incident.
Payments for PSNH's ownership interest in nuclear generating facilities
would be limited to a maximum of $5.3 million per incident per year.
Insurance has been purchased to cover the primary cost of repair,
replacement, or decontamination of utility property resulting from
insured occurrences at Millstone 3. PSNH is subject to retroactive
assessments if losses exceed the accumulated funds available to the
insurer. The maximum potential assessment against PSNH with respect to
losses arising during the current policy year is approximately $0.5
million under the primary property insurance program.
Insurance has been purchased to cover certain extra costs incurred in
obtaining replacement power during prolonged accidental outages and the
excess cost of repair, replacement, or decontamination or premature
decommissioning of utility property resulting from insured occurrences.
PSNH is subject to retroactive assessments if losses exceed the
accumulated funds available to the insurer. The maximum potential
assessments against PSNH (including costs resulting from PSNH's
contracts with NAEC), with respect to losses arising during current
policy years are approximately $1.6 million under the replacement power
policies and $11.1 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 aggregating $200 million on an industry
basis for coverage of worker claims. All participating reactor
operators insured under this coverage are subject to retrospective
assessments of $3.0 million per reactor. The maximum potential
assessment against PSNH (including costs resulting from the Seabrook
power contracts with NAEC), with respect to losses arising during the
current policy period is approximately $1.8 million.
E. LONG-TERM CONTRACTUAL ARRANGEMENTS
Yankee Companies: PSNH, along with CL&P and WMECO, purchased
approximately 6.7 percent of their electricity requirements pursuant to
long-term contracts with the Yankee companies. Under the terms of their
agreements, the companies pay their ownership (or entitlement) shares of
generating costs, which include depreciation, O&M expenses, taxes, the
estimated cost of decommissioning, and a return on invested capital.
These costs are recorded as purchased-power expense and recovered
through the companies' rates. PSNH's total cost of purchases under
these contracts for the units that are operating amounted to $26.4
million in 1995, $23.4 million in 1994, and $26.5 million in 1993. See
Note 1C, "Summary of Significant Accounting Policies-Investments and
Jointly Owned Electric Utility Plant," and Note 4, "Nuclear
Decommissioning," for more information on the Yankee companies.
Nonutility Generators: PSNH has entered into various arrangements for
the purchase of capacity and energy from NUGs. These arrangements have
terms from 20 to 30 years, currently expiring in the years 1998 through
2023, and require PSNH to purchase the energy at specified prices or
formula rates. For the 12 months ended December 31, 1995, approximately
13 percent of system electricity requirements was met by NUGs. PSNH's
total cost of purchases under these arrangements amounted to $129.6
million in 1995, $130.0 million in 1994, and $133.4 million in 1993.
These costs are eventually recovered through the company's rates. For
additional information, see Note 1I, "Summary of Significant Accounting
Policies-Recoverable Energy Costs."
New Hampshire Electric Cooperative: PSNH entered into a buy-back
agreement to purchase the capacity and energy of the New Hampshire
Electric Cooperative, Inc.'s (NHEC) share of Seabrook 1 and to pay all
of NHEC's Seabrook 1 costs for a ten-year period, which began July 1,
1990. The total cost of purchases under this agreement was $15.8
million in 1995, $14.6 million in 1994, and $14.4 million in 1993. A
portion of these costs is collected currently through the FPPAC and the
remaining costs are deferred for future collection in accordance with
the Rate Agreement. In connection with the agreement, NHEC agreed to
continue as a firm-requirements customer of PSNH for 15 years.
Hydro-Quebec: Along with other New England utilities, PSNH, CL&P,
WMECO, and HWP entered into agreements to support transmission and
terminal facilities to import electricity from the Hydro-Quebec system
in Canada. PSNH is obligated to pay, over a 30-year period ending in
2020, its proportionate share of the annual O&M and capital costs of
these facilities.
The estimated annual costs of PSNH's significant long-term contractual
arrangements are as follows:
1996 1997 1998 1999 2000
--------------------------------------------------------------------
(Millions of Dollars)
Yankee Companies $25.4 $25.8 $27.7 $27.6 $29.6
Nonutility Generators 130.3 134.5 137.9 141.4 145.4
NHEC .......... 14.6 22.5 29.5 29.7 14.6
Hydro-Quebec .. 11.2 10.6 10.3 10.0 9.9
F. 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 Seabrook power
contracts. When NAEC recovers the $32.9 million in years eight through
ten of the Rate Agreement, it is obligated to make corresponding
payments to PSNH.
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.
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
1995, there was one outstanding contract held by PSNH, covering $75 million
of its variable rate debt, which expired in January 1996. The contract
entitled 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. Due to its
upcoming expiration, as of December 31, 1995, the total fair market value of
this cap was $0.
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, Accounting for Certain Investments in Debt and Equity Securities,
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.
Unrealized gains and losses resulting from the adoption of SFAS 115 have
not been material. 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:
Carrying Fair
At December 31, 1995 Amount Value
------------------------------------------------------------------------
(Thousands of Dollars)
Preferred stock subject to mandatory redemption $125,000 $131,250
Long-term debt - First Mortgage Bonds .... 342,500 352,517
Other long-term debt ..................... 516,485 532,190
------------------------------------------------------------------------
Carrying Fair
At December 31, 1994 Amount 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
The fair values shown above have been reported to meet the 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, 1995 and 1994, and the related
statements of income, common stockholder's equity, and cash flows for each of
the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 16, 1996
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 was approximately $83 million in 1995, an increase of approximately
$6 million, from approximately $77 million in 1994. The 1995 net income was
higher primarily due to higher revenues from the sixth step of PSNH's Rate
Agreement and higher base fuel recoveries, partially offset by higher capacity
charges under the Seabrook Power Contract, higher purchased power, and higher
income taxes.
Retail kilowatt-hour sales rose by only 0.4 percent in 1995 as a result of a
flat economy in New England. With the New England economy not forecasted to
grow substantially during 1996, sales levels are expected to remain flat.
PSNH acts as both a buyer and a seller of electricity in the highly competitive
wholesale electricity market in the Northeast. Increased competition has made
the renegotiation of expiring wholesale contracts, as well as the signing of new
contracts, financially challenging.
During 1995, the Federal Energy Regulatory Commission issued a proposal for
restructuring the electric-power industry which calls for open access to
transmission facilities, a standard formula for calculating rates, and full
recovery of stranded investments. The impact on PSNH of this proposal, which is
expected to be finalized in 1996, is not known at this time.
During 1995, the Coalition of Northeastern Governors released its report
addressing the restructuring of the electric-power industry and its resulting
impact on customers and states. The report presented the future as one in which
there would be some form of continued regulation for transmission and
distribution with fully competitive generation.
In 1995, the New Hampshire Legislature created a committee to review the
industry's structure and called for the New Hampshire Public Utilities
Commission (NHPUC) to initiate a retail wheeling pilot program. Under the
current NHPUC proposal, the program, which is expected to begin in 1996, will
initially impact 3 percent of PSNH's peak retail electric load, but only allows
for a 50-percent recovery of PSNH's potentially strandable costs. PSNH and the
NHPUC Staff have entered into a joint recommendation that, if approved by the
NHPUC, would govern PSNH's participation in the retail wheeling pilot program.
Under this settlement, PSNH would provide competing electric suppliers access to
3 percent of its retail customers. PSNH would recover 100 percent of its
potentially strandable costs via a delivery charge, but would provide a 10-
percent incentive credit off its traditional rates to encourage customer
participation in the two-year program.
PSNH is taking a proactive role in the electric-power industry's movement toward
competition. PSNH has outlined a comprehensive approach to enhancing customer
satisfaction and market efficiency while moving toward full competition in the
electricity marketplace. The approach calls for several significant changes in
electricity pricing, the ability to introduce new products and services, the
method of rate-setting, and the operation of the New England Power Pool. The
plan also calls for the phase-in of supplier choices through the use of pilot
programs. Management believes that a fully competitive market for electricity
should begin once all issues relating to the transition from traditional utility
regulation have been thoroughly addressed.
In addition to the formulation of this approach and ongoing meetings with
legislators, regulators, and others in the industry, PSNH is moving ahead in
other areas, including revenue enhancement initiatives, and cost reductions, to
better position itself for an increasingly competitive environment.
A comprehensive companywide effort, which started in 1994, to reengineer PSNH's
business and operating processes continued throughout 1995. PSNH expects that
this effort will have significant positive effects on operating costs and
customer service. Many of the organizational changes in the operating and
service functions announced in 1995 and early 1996 are consistent with the
initial recommendations of the reengineering teams. While PSNH's reengineering
efforts will be reduced in 1996, implementation costs relating to the previous
reengineering efforts are expected to increase.
With retail electric revenues accounting for approximately 80 percent of its
1995 revenues, PSNH has continued to develop a number of initiatives to retain
and serve its existing customers and to expand its retail customer base. The
most visible result of these efforts is the expansion of the Retail Marketing
organization. Retail Marketing's mission is to better understand the needs and
concerns of PSNH's retail customer and to develop innovative approaches to
addressing these issues. These initiatives include providing discounts to
certain customers for signing economic development and competitive generation-
based contracts, offering demand-side-management services, and providing
additional products and services.
WORKFORCE REDUCTIONS
In January 1996, NU completed its nuclear workforce reduction plan.
Approximately 220 positions were eliminated through a combination of early
retirements, attrition and layoffs. The total pretax cost of the workforce
reduction, to the NU system, which was recognized in 1995, was approximately $9
million.
RATE MATTERS
PSNH follows accounting principles in accordance with Statement of Financial
Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types
of Regulation" that allows the economic effects of rate regulation to be
reflected. Under these principles, regulators may permit incurred costs for
certain events or transactions, which would be treated as expenses by
nonregulated enterprises, to be deferred as regulatory assets and recovered in
revenues at a later date.
The creation of these regulatory assets has kept down electric rates in past
years, at the expense of having higher rates in the future. At December 31,
1995, PSNH's regulatory assets totaled approximately $430 million. The largest
regulatory assets are related to the future recovery of energy cots,
approximately $220 million, and income taxes, approximately $193 million. The
substantial costs of amortizing these regulatory assets would hinder PSNH from
competing effectively in an openly competitive electric market if customers are
not required to pay such costs. Given the increasingly competitive nature of
the industry and increased activity in the regulatory environment, PSNH has made
the recovery of regulatory assets one of its central financial strategies, while
balancing the customer's pricing needs with NU's shareholder's earnings
requirements. Under its existing rate agreement, PSNH is allowed to recover a
significant portion of its regulatory assets during the next five years.
However, maintaining the present recovery level is dependent upon the outcome of
negotiations between PSNH and the NHPUC when its current rate agreement expires.
As the expiration of PSNH's current rate agreement approaches, negotiations will
be held between PSNH and the NHPUC to determine whether, or to what extent,
rates should be adjusted going forward. PSNH's strategy during these
negotiations will be to maintain stable rates, applying any available earnings
that may result to reduce the balance of its regulatory assets. Management is
unable to predict the ultimate outcome of these negotiations, which will be
subject to NHPUC approval.
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS 121, which was effective January 1, 1996, requires
assets, including regulatory assets, that are no longer probable of recovery
through future revenues be charged to earnings.
If future competition or regulatory actions cause any portion of its operations
to no longer be subject to SFAS 71, PSNH would be required to determine the fair
value of the related regulatory assets and liabilities and record any necessary
write-downs. Additionally, if events create uncertainty about the
recoverability of any of PSNH'S remaining long-lived assets, a similar analysis
would be required for those assets in accordance with SFAS 121. Under its
current regulatory environment, PSNH believes that its use of SFAS 71 remains
appropriate and that the adoption of SFAS 121 will not have a material impact on
its financial position or results of operations.
See the "Notes to Financial Statements," Note 1G, for further details on
regulatory accounting.
In June 1995, PSNH's base rates increased by 5.5 percent under the sixth step of
a seven-year 1989 rate agreement approved by the NHPUC.
In November 1995, the NHPUC authorized a PSNH request to reduce its Fuel and
Purchased Power Adjustment Clause (FPPAC) rate, which took effect on December 1,
1995, and will continue through May 31, 1996. The decision reduced PSNH's
overall rates by approximately 2.6 percent.
In 1995, PSNH completed installation of equipment to comply with the Clean Air
Act Amendments of 1990. The capitalized cost of the installation was
approximately $25 million, and will cause PSNH to spend approximately $4 million
annually for additional operation and maintenance costs. In April 1995, the
NHPUC began proceedings to determine whether these costs are recoverable from
customers. The NHPUC is allowing PSNH to recover these costs through the FPPAC,
subject to refund, pending a final decision.
The costs associated with purchases by PSNH from certain nonutility generators
(NUGs) over the level assumed in rates are deferred for recovery over ten-year
periods through the FPPAC. PSNH is attempting to renegotiate these arrangements
with the NUGs. At December 31, 1995, the unrecovered deferral was approximately
$192 million, including buyout payments of approximately $34 million for two of
PSNH's eight wood-fired NUGs. By December 31, 1995, PSNH had reached
agreements with the owners of the remaining six wood-fired NUGs. If
consummated, these agreements could result in net savings of approximately $430
million to PSNH's customers over a period of 20 years following guaranteed
payments of approximately $250 million. Management will reevaluate whether to
proceed with these agreements if the NHPUC fails to provide for full recovery of
stranded costs.
NUCLEAR PERFORMANCE
On January 31, 1996, the Nuclear Regulatory Commission (NRC) placed Millstone 1,
2, and 3 (Millstone) on its "watch list." The NRC's action was in response to
a number of performance concerns which have arisen since 1990 and a failure to
resolve employee safety concerns. The NRC's action will result in close
monitoring of programs and performance at Millstone to assure the development
and implementation of effective corrective actions.
NU's management plans to continue its extensive efforts already underway to
address these concerns. Concurrent with the NRC's action, NU provided the NRC
with the results of a comprehensive self-assessment review of the employee
concern program at Millstone. Additionally, in January 1996, NU announced a
reorganization of its nuclear operations which included the creation of a new
office of Nuclear Safety and Oversight.
Operations at Millstone 3 have not been restricted by its placement on the
"watch list". NU's management expects that the increased NRC attention will
inevitably have effects and costs that are not known at this time.
The Seabrook plant operated at 83.2 percent of capacity for the year ended
December 31, 1995, compared with 61.6 percent in 1994 and a 1995 national
average of 77.6 percent. The higher 1995 capacity factor was primarily the
result of unplanned and extended outages in 1994 compared to only a 37.5-day
planned refueling and maintenance outage in 1995, the unit's shortest to date.
ENVIRONMENTAL MATTERS
NU devotes substantial resources to identify and comply with the multitude of
environmental requirements it faces. NU has active auditing programs addressing
a variety of regulatory requirements, including an environmental auditing
program to detect and remedy noncompliance with environmental laws or
regulations.
PSNH 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 PSNH. At December 31, 1995, the company had
recorded an environmental reserve amounting to approximately $5 million, as
required under SFAS 5, ``ccounting for Contingencies.'' These costs could be
significantly higher if alternative remedies become necessary.
NUCLEAR DECOMMISSIONING
PSNH's estimated cost to decommission its 2.85 percent share of Millstone 3 and
NAEC's 35.98 percent share of Seabrook 1 is approximately $13 million and $153
million, respectively, in year-end 1995 dollars. These costs are being
recognized over the lives of the respective units and a portion is being
recovered through rates. Under the terms of the Rate Agreement, the company is
obligated to pay NAEC's share of Seabrook's decommissioning costs, even if the
unit is shut down prior to the expiration of its operating license.
The FASB is currently reviewing the accounting for closure and removal costs,
including decommissioning and similar costs, for long-lived assets. If current
electric-power industry accounting practices for such decommissioning costs were
changed, annual provisions for decommissioning would increase and the estimated
costs for decommissioning would be recorded as a liability rather than as a
component of accumulated depreciation.
See the "Notes to Financial Statements," Note 4, for further information on
nuclear decommissioning, including PSNH's share of costs to decommission the
regional nuclear generating units .
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased approximately $58 million in 1995, from
1994, primarily due to the 1994 payments to the NUGs. Cash used for financing
activities increased approximately $97 million in 1995, from 1994, primarily due
to the repayment of the Term Loan and the payment of its first common stock
dividends in 1995. Cash used for investments decreased approximately $44 million
in 1995, from 1994, 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 Revolving Credit Facility, and some of the
company's pollution control revenue bonds bear interest at floating rates to be
set periodically, causing the company to be sensitive to fluctuating interest
rates.
PSNH has entered into an interest-rate-cap contract to reduce a portion of its
interest-rate risk.
In October 1995, Moody's Investors Service lowered its rating for PSNH and NAEC
securities, bringing the rating for PSNH's First Mortgage Bonds below investment
grade. Standard & Poor's had previously downgraded PSNH to below investment
grade. NAEC securities had not been previously rated at investment grade. These
downgrades could adversely affect the future availability and cost of funds for
these companies.
PSNH may be required to issue a significant amount of new debt in 1996, since it
must fund the maturity of its $172.5 million first mortgage bond issue at the
same time that it may need to finance more than $100 million for payments to its
wood-fired NUG's.
See the "Notes to Financial Statements," Note 7, for further information on
derivative financial instruments and Notes 6, 7, and 10A, for information on
construction and long-term debt funding requirements.
RESULTS OF OPERATIONS
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)
1995 vs. 1994 1994 vs. 1993
- ----------------------------------------------------------------------
(Millions of Dollars)
Regulatory decisions $20 $20
Fuel, purchased power
and FPPAC cost recoveries 49 32
Sales volume (11) 6
--- ---
Total revenue change $58 $58
=== ===
Revenues related to regulatory decisions increased, primarily due to the effects
of the June 1995 and 1994 retail-rate increases. Fuel, purchased-power and FPPAC
cost recoveries increased primarily due to higher fuel and purchased-power
costs. Sales volume decreased as a result of price discounts, milder weather,
and lower wholesale sales.
Operating revenues increased approximately $58 million in 1994, from 1993.
Revenues related to regulatory decisions increased primarily, due to the effects
of the June 1994 and 1993 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
improved economy and colder winter weather. Retail sales increased 2.0 percent
in 1994 from 1993 sales levels.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power expense increased approximately $34
million in 1995, from 1994, primarily due to the timing in the recognition of
fuel expenses under the FPPAC.
Fuel, purchased and net interchange power increased approximately $15 million in
1994, from 1993, primarily due to an increase in purchased power.
OTHER OPERATION AND MAINTENANCE EXPENSES
Other operation and maintenance expenses increased by approximately $9 million
in 1995, from 1994, primarily due to higher capacity charges under the Seabrook
Power Contracts due to the 1995 refueling and maintenance outage at the Seabrook
nuclear plant in 1995.
Other operation and maintenance expenses increased by approximately $10 million
in 1994, from 1993, primarily due to 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.
See the "Notes to Financial Statements," Note 2, for further information on the
Seabrook Power Contracts.
DEPRECIATION EXPENSES
Depreciation expenses increased by $6 million in 1995, from 1994, primarily due
to the additional depreciation allowed from the savings from burning gas at
Newington Station and an increase in plant additions.
The change in depreciation expense in 1994, from 1993, was not significant.
AMORTIZATION OF REGULATORY ASSETS, NET
Although the change in 1995, from 1994, was not significant, amortization of
regulatory assets net, decreased approximately $12 million in 1994, from 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.
FEDERAL AND STATE INCOME TAXES
Federal and state income taxes increased approximately $2 million in 1995, from
1994, primarily due to higher taxable income.
Federal and state income taxes increased approximately $18 million in 1994, from
1993, primarily due to higher taxable income.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
SELECTED FINANCIAL DATA
======================================================================================
Jan. 1, 1995 Jan. 1, 1994 Jan. 1, 1993 June 5, 1992(a)
to to to to
For the Periods Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues... $ 979,590 $ 922,039 $ 864,415 $ 492,559
Operating Income..... 155,520 152,086 124,710 61,206
Net Income (Loss).... 83,255 77,444 52,237 29,398
At Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992
- --------------------------------------------------------------------------------------
Total Assets......... $2,909,636 $2,845,967 $2,774,511 $2,793,768
Long-Term Debt (c)... 858,985 999,985 1,093,985 1,187,985
Liabilities Subject to
Settlement(c)...... - - - -
Preferred Stock Subject to
Mandatory Redemption(c) 125,000 125,000 125,000 125,000
Preferred Stock Not Subject to
Mandatory Redemption - - - -
Obligations Under Seabrook
Power Contract and Other
Capital Lease(c)... 915,288 887,967 856,559 787,826
(a) PSNH was acquired by NU on June 5, 1992.
(b) PSNH was reorganized on May 16, 1991.
(c) Includes portions due within one year.
SELECTED FINANCIAL DATA
- -------------------------------------------------------
Jan. 1, 1992 May 16, 1991(b) January 1, 1991
to to to
June 4, 1992 Dec. 31, 1991 May 15, 1991
- -------------------------------------------------------
(Thousands of Dollars)
$ 381,769 $ 539,827 $ 246,281
34,250 82,755 21,616
12,778 52,694 (100,791)
June 4, 1992 Dec. 31, 1991 May 15, 1991**
- -------------------------------------------------------
(Thousands of Dollars)
$2,693,414 $2,636,525 $2,502,237
1,488,985 1,515,985 -
- - 1,901,803
125,000 125,000 -
- - -
- - -
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATISTICS
- ------------------------------------------------------------------------------
Gross Electric Average
Utility Plant Annual
December 31, Use Per Electric
(Thousands of kWh Sales Residential Customers Employees
Dollars)(a) (Millions) Customer (kWh) (Average) (December 31)
- ------------------------------------------------------------------------------
1995 $2,716,060 11,001 6,576 406,077 1,325
1994 2,737,628 11,008 6,768 400,775 1,374
1993 2,760,228 11,146 6,817 397,277 1,426
1992(b) 2,763,075 12,294 6,874 394,046 1,680
1991 2,647,866 11,377 7,184 390,793 2,639
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
- -----------------------------------------------------------------------------
Quarter Ended (c)
-------------------------------------------------
1995 March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------
Operating Revenues.......... $252,337 $232,849 $249,626 $244,778
======== ======== ======== ========
Operating Income............ $ 41,858 $ 31,480 $ 40,333 $ 41,849
========= ========= ========= =========
Net Income (Loss)........... $ 21,823 $ 13,892 $ 23,195 $ 24,345
========= ========= ========= =========
1994
- ---------------------------------------------------------------------------
Operating Revenues.......... $249,279 $210,875 $227,976 $233,909
======== ======== ======== ========
Operating Income............ $ 43,441 $ 32,388 $ 38,713 $ 37,544
========= ========= ========= =========
Net Income.................. $ 24,278 $ 14,001 $ 19,262 $ 19,903
========= ========= ========= =========
- ---------------------------------------------------------------------------
(a) Includes reclassification of the unamortized acquisition costs to gross
utility plant.
(b) PSNH was acquired by NU on June 5, 1992.
(c) Reclassifications of quarterly data have been made to conform with the
current presentation.