FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-5324
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NORTHEAST UTILITIES
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2147929
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(413) 785-5871
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT APRIL 30, 1996
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COMMON SHARES, $5.00 PAR VALUE 127,677,695 SHARES
NORTHEAST UTILITIES AND SUBSIDIARIES
TABLE OF CONTENTS
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995 2
Consolidated Statements of Income - Three Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
PART I. FINANCIAL INFORMATION
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
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(Thousands of Dollars)
ASSETS
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Utility Plant, at cost:
Electric................................................ $ 9,553,303 $ 9,490,142
Other................................................... 157,294 187,389
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9,710,597 9,677,531
Less: Accumulated provision for depreciation......... 3,713,481 3,629,559
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5,997,116 6,047,972
Unamortized PSNH acquisition costs...................... 566,394 588,910
Construction work in progress........................... 165,965 165,111
Nuclear fuel, net....................................... 188,051 198,844
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Total net utility plant............................. 6,917,526 7,000,837
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Other Property and Investments:
Nuclear decommissioning trusts, at market............... 336,163 325,674
Investments in regional nuclear generating
companies, at equity................................... 82,355 81,996
Investments in transmission companies, at equity........ 23,262 23,558
Investments in Charter Oak Energy, Inc. projects........ 41,547 41,221
Other, at cost.......................................... 40,430 35,318
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523,757 507,767
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Current Assets:
Cash and cash equivalents (Note 1B)<F1B>................ 130,034 29,038
Receivables, net........................................ 451,365 435,931
Accrued utility revenues................................ 115,457 136,260
Fuel, materials, and supplies, at average cost.......... 201,649 200,580
Recoverable energy costs, net--current portion.......... 36,113 79,300
Prepayments and other................................... 38,754 34,430
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973,372 915,539
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Deferred Charges:
Regulatory assets:
Income taxes,net...................................... 1,184,304 1,176,356
Deferred costs--nuclear plants........................ 173,886 168,600
Unrecovered contractual obligation (Note 6)<F6>....... 81,996 103,475
Recoverable energy costs, net (Note 3)<F3>............ 245,427 260,678
Deferred demand-side management costs................. 100,200 117,070
Cogeneration costs-CL&P............................... 100,952 92,162
Other................................................. 96,531 116,010
Unamortized debt expense................................ 36,232 37,645
Other .................................................. 63,126 48,827
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2,082,654 2,120,823
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Total Assets.............................................. $ 10,497,309 $ 10,544,966
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See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
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(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
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Capitalization:
Common shareholders' equity:
Common shares, $5 par value--authorized
225,000,000 shares; 136,051,817 shares issued and
127,677,695 shares outstanding in 1996 and
135,611,166 shares issued and 127,050,647 shares
outstanding in 1995..................................... $ 680,259 $ 678,056
Capital surplus, paid in................................. 944,965 936,308
Deferred benefit plan--employee stock
ownership plan......................................... (193,837) (198,152)
Retained earnings........................................ 1,016,660 1,007,340
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Total common shareholders' equity................. 2,448,047 2,423,552
Preferred stock not subject to mandatory redemption........ 169,700 169,700
Preferred stock subject to mandatory redemption............ 301,000 302,500
Long-term debt............................................. 3,701,066 3,705,215
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Total capitalization.............................. 6,619,813 6,600,967
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Minority Interest in Consolidated Subsidiaries............... 99,931 99,935
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Obligations Under Capital Leases............................. 138,398 147,372
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Current Liabilities:
Notes payable to banks..................................... 40,000 99,000
Long-term debt and preferred stock--current
portion................................................... 219,725 219,657
Obligations under capital leases--current
portion................................................... 78,407 83,110
Accounts payable........................................... 249,369 319,038
Accrued taxes.............................................. 112,985 75,218
Accrued interest........................................... 76,038 53,699
Accrued pension benefits................................... 91,630 90,630
Other...................................................... 116,022 105,821
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984,176 1,046,173
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Deferred Credits:
Accumulated deferred income taxes.......................... 2,147,566 2,135,852
Accumulated deferred investment tax credits................ 175,654 178,060
Deferred contractual obligation (Note 6)<F6>............... 81,996 103,475
Other...................................................... 249,775 233,132
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2,654,991 2,650,519
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Commitments and Contingencies (Note 9)<F9>
Total Capitalization and Liabilities.............. $ 10,497,309 $ 10,544,966
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See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
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1996 1995
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(Thousands of Dollars,
except share information)
Operating Revenues.................................... $ 1,028,202 $ 944,705
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Operating Expenses:
Operation--
Fuel, purchased and net interchange power........ 311,739 237,644
Other............................................ 278,375 226,553
Maintenance......................................... 68,463 60,142
Depreciation........................................ 90,944 87,753
Amortization of regulatory assets, net.............. 14,341 29,901
Federal and state income taxes...................... 59,756 69,612
Taxes other than income taxes....................... 71,323 65,773
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Total operating expenses...................... 894,941 777,378
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Operating Income...................................... 133,261 167,327
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Other Income:
Deferred nuclear plants return--other funds......... 3,026 4,656
Equity in earnings of regional nuclear generating
and transmission companies....................... 3,657 2,337
Other, net.......................................... 1,927 (4,642)
Income taxes........................................ 514 4,131
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Other income, net............................. 9,124 6,482
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Income before interest charges................ 142,385 173,809
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Interest Charges:
Interest on long-term debt.......................... 72,424 80,204
Other interest...................................... 1,142 1,599
Deferred nuclear plants return--borrowed funds...... (5,053) (8,345)
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Interest charges, net......................... 68,513 73,458
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Income after interest charges.................. 73,872 100,351
Preferred Dividends of Subsidiaries................... 8,370 14,067
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Net Income............................................ $ 65,502 $ 86,284
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Earnings Per Common Share............................. $ 0.51 $ 0.69
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Common Shares Outstanding (average)................... 127,602,379 125,119,824
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See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
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1996 1995
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(Thousands of Dollars)
Operating Activities:
Income before preferred dividends of subsidiaries......... $ 73,872 $ 100,351
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 90,944 87,753
Deferred income taxes and investment tax credits, net... (8,230) 29,302
Deferred nuclear plants return, net of amortization..... (4,441) 17,835
Recoverable energy costs, net of amortization........... 58,438 (17,623)
Amortization of PSNH acquisition costs.................. 14,301 14,136
Deferred cogeneration costs--CL&P....................... (8,790) (19,040)
Nuclear O&M reserve (Note 9B)<F9B>...................... 37,778 -
Other sources of cash................................... 97,541 92,028
Other uses of cash...................................... (14,403) (5,754)
Changes in working capital:
Receivables and accrued utility revenues................ 5,369 8,467
Fuel, materials, and supplies........................... (1,069) (5,843)
Accounts payable........................................ (69,669) (62,102)
Accrued taxes........................................... 37,767 27,247
Other working capital (excludes cash)................... (8,562) (1,052)
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Net cash flows from operating activities.................... 300,846 265,705
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Financing Activities:
Issuance of common shares................................. 10,619 6
Issuance of Monthly Income
Preferred Securities..................................... - 100,000
Net decrease in short-term debt........................... (59,000) (67,000)
Reacquisitions and retirements of long-term debt.......... (6,758) (30,208)
Reacquisitions and retirements of preferred stock......... (1,500) (133,175)
Cash dividends on preferred stock......................... (8,370) (14,067)
Cash dividends on common shares........................... (56,082) (55,016)
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Net cash flows used for financing activities................ (121,091) (199,460)
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Investment Activities:
Investment in plant:
Electric and other utility plant........................ (57,910) (49,685)
Nuclear fuel............................................ (437) (6,277)
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Net cash flows used for investments in plant.............. (58,347) (55,962)
Investments in nuclear decommissioning trusts............. (14,911) (13,300)
Other investment activities, net.......................... (5,501) (5,185)
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Net cash flows used for investments......................... (78,759) (74,447)
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Net Increase (Decrease) In Cash For The Period.............. 100,996 (8,202)
Cash and cash equivalents - beginning of period............. 29,038 27,126
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Cash and cash equivalents - end of period................... $ 130,034 $ 18,924
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See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRESENTATION
The accompanying unaudited consolidated financial statements should be
read in conjunction with the Annual Report of Northeast Utilities (the
company or NU) on Form 10-K for the year ended December 31, 1995 (1995
Form 10-K). In the opinion of the company, the accompanying financial
statements contain all adjustments necessary to present fairly the
financial position as of March 31, 1996, the results of operations for
the three months ended March 31, 1996 and 1995, and the statements of
cash flows for the three months ended March 31, 1996 and 1995. All
adjustments are of a normal, recurring, nature except those described
below in Notes 3, 4, and 9B. The results of operations for the three
months ended March 31, 1996 and 1995 are not necessarily indicative of
the results expected for a full year.
NU is the parent company of the Northeast Utilities system (the
system). The system furnishes retail electric service in Connecticut,
New Hampshire, and western Massachusetts through four wholly owned
subsidiaries, The Connecticut Light and Power Company (CL&P), Public
Service Company of New Hampshire (PSNH), Western Massachusetts
Electric Company (WMECO), and Holyoke Water Power Company. A fifth
wholly owned subsidiary, North Atlantic Energy Corporation (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.
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 disclosures 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 period data have been made to
conform with the current period presentation.
B. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and short-term cash
investments which are highly liquid in nature and have original
maturities of three months or less.
2. NEW 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 establishes accounting standards for evaluating and
recording asset impairment. The company adopted SFAS 121 as of January 1,
1996. SFAS 121 requires the evaluation of long-lived assets for impairment
when certain events occur or when conditions exist that indicate the
carrying amounts of assets may not be recoverable.
SFAS 121 requires that any assets, including regulatory assets, that 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. Based
on the current regulatory environment in the system's service areas, as of
March 31, 1996, SFAS 121 did not have a material impact on the company's
financial position or results of operations. 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 Note 4, Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A), and Part
II, Item 5, "Other Information," in this Form 10-Q and the Notes to
Consolidated Financial Statements in NU's 1995 Form 10-K.
3. RECOVERABLE ENERGY COSTS
CL&P utilizes a generation utilization adjustment clause (GUAC), which
defers the effect on fuel costs caused by variations from a specified
composite nuclear generation capacity factor embedded in base rates. CL&P
is currently recovering $80 million of its 1994-1995 GUAC balance over 18
months. CL&P set aside $19 million of its 1994-1995 GUAC year request
pending the resolution of CL&P's appeals associated with two prior GUAC
periods.
In the first quarter of 1996, CL&P has reserved approximately $32 million
against the fuel overrecoveries related to the current GUAC period. The
reserve amount has been calculated in accordance with the Connecticut
Department of Public Utility Control's (DPUC) methodology utilized in prior
GUAC decisions. The reserve has been established pending resolution of
CL&P's appeals associated with the two prior GUAC periods, and the outcome
of the proposed CL&P settlement.
For further information on recoverable energy costs, the proposed CL&P
settlement, and the impacts of nuclear performance on the company's GUAC
deferral, refer to Notes 4 and 9B, the MD&A and Part II, Item 5, "Other
Information" in this Form 10-Q, and the Notes to Consolidated Financial
Statements in NU's 1995 Form 10-K.
4. CL&P PROPOSED SETTLEMENT
On April 15, 1996, CL&P submitted to the DPUC for approval a jointly
supported settlement agreement (the proposed settlement) intended to
resolve numerous pending contested issues among CL&P, the Prosecutorial
Division of the DPUC, and the Office of Consumer Counsel. For further
information on the proposed settlement, refer to the MD&A in this Form 10-
Q.
If approved, one term of the proposed settlement provides for an immediate
2.5 percent decrease in customer bills, to be accomplished by writing off
the expected May 1, 1996 balance of approximately $45 million in
uncollected deferred GUAC charges incurred for the 1994-1995 GUAC period.
The terms of this proposed settlement are subject to DPUC approval.
Management cannot predict at this time the potential outcome of the DPUC's
decision as related to the proposed settlement.
For further information on the GUAC deferral and the company's nuclear
performance issues as related to this settlement, refer to Notes 3 and 9B,
the MD&A in this Form 10-Q, and the Notes to Consolidated Financial
Statements in NU's 1995 Form 10-K.
5. NUCLEAR DECOMMISSIONING
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry,
including the company, regarding the recognition, measurement, and
classification of decommissioning costs for nuclear generating stations in
the financial statements of electric utilities. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning, and has issued a proposed statement "Accounting
for Liabilities Related to Closure or Removal of Long-Lived Assets" in
February 1996. If current electric utility industry accounting practices
for such decommissioning are changed: (1) annual provisions for
decommissioning could increase, (2) the estimated cost for decommissioning
could be recorded as a liability rather than as accumulated depreciation,
and (3) trust fund income from the external decommissioning trusts could be
reported as investment income rather than as a reduction to decommissioning
expense.
6. YANKEE ATOMIC ELECTRIC COMPANY (YAEC)
Collectively, CL&P, WMECO, and PSNH hold a 38.5 percent ownership interest
in YAEC. YAEC's nuclear power plant was shut down permanently on February
26, 1992. YAEC is in the process of dismantling its nuclear facility.
Effective January 1996, YAEC began billing its sponsors, including CL&P,
WMECO, and PSNH, amounts based on a revised estimate approved by the
Federal Energy Regulatory Commission that assumes decommissioning by the
year 2000. This revised estimate was based on continued access to the
Barnwell, South Carolina, low-level radioactive waste facility, changes in
assumptions about earnings on decommissioning trust investments, and
changes in other decommissioning cost assumptions. As of January 1996,
the estimated remaining costs, including decommissioning based on YAEC's
revised estimate amounted to $225.2 million, of which the NU system's share
was approximately $86.7 million.
For further information on YAEC, refer to the Notes to Consolidated
Financial Statements in NU's 1995 Form 10-K.
7. SHORT-TERM DEBT
On April 30, 1996, PSNH increased its $125 million revolving-credit
agreement to $225 million with approval from the New Hampshire Public
Utilities Commission (NHPUC). In addition, the agreement, which was
scheduled to expire in May 1996, has been extended, so that $100 million of
the agreement will expire April 1997 and the remaining $125 million will
expire April 1999. PSNH will use the facility in part to finance the
repayment at maturity of PSNH's $172.5 million of Series A first mortgage
bonds on May 16, 1996. For further information on Short-Term Debt, see the
Notes to the Consolidated Financial Statements in NU's 1995 Form 10-K.
8. DERIVATIVE FINANCIAL INSTRUMENTS
Fuel Swaps: CL&P uses fuel-swap agreements with financial institutions to
hedge against some of the fuel-price risk created by long-term negotiated
energy contracts. These fuel swaps minimize exposure associated with
rising fuel prices and effectively fix most of CL&P's cost of fuel and the
profitability for these negotiated energy contracts. Under the swap
agreements, CL&P exchanges monthly payments based on the differential
between a fixed and variable price for the associated fuel. As of March
31, 1996, CL&P had outstanding agreements with a total notional value of
approximately $242.5 million, and a negative mark-to-market position of
approximately $5.6 million.
Interest-Rate Swaps: NAEC uses interest-rate swap agreements with
financial institutions to hedge against interest-rate risk associated with
its $225 million variable-rate bank note. The interest-rate swaps minimize
exposure associated with rising interest rates, and effectively fix the
interest rate for this borrowing arrangement. Under the swap agreement,
NAEC exchanges quarterly payments based on a differential between a fixed
contractual interest rate and the three-month LIBOR rate at a given time.
As of March 31, 1996, NAEC had outstanding agreements with a total notional
value of approximately $225 million and a positive mark-to-market position
of approximately $2.4 million.
These swap agreements have been made with various financial institutions,
each of which are rated "BBB+" or better by Standard & Poor's rating group.
CL&P and NAEC are exposed to credit risk on fuel swaps and interest-rate
swaps if the counterparties fail to perform their obligations. However,
CL&P and NAEC anticipate that the counterparties will be able to fully
satisfy their obligations under the contracts. For further information on
Derivative Financial Instruments see the MD&A in this Form 10-Q and the
Notes to Consolidated Financial Statements in NU's 1995 Form 10-K.
9. COMMITMENTS AND CONTINGENCIES
A. Construction Program: For information regarding NU's construction
program, see the Notes to Consolidated Financial Statements in NU's
1995 Form 10-K.
B. Nuclear Performance: On January 31, 1996, the Nuclear Regulatory
Commission (NRC) announced that the three Millstone nuclear power
plants had been placed on its "watch list" because of long-standing
performance concerns. The NRC cited a number of operational problems,
that have arisen since 1990 at the Millstone plants.
Millstone 1, a 660-MW boiling-water reactor, owned 81 percent by CL&P
and 19 percent by WMECO, began a planned 49-day refueling and
maintenance outage on November 4, 1995. That outage was subsequently
extended to the second quarter of 1996 to complete weld overlays and
to respond to a December 13, 1995 letter from the NRC. This letter
requested that the company submit, no later than seven days prior to
restart of the unit, information describing the actions taken to
ensure the future operation of the unit will be conducted in
accordance with the terms and conditions of its operating license, NRC
regulations, and the plant's updated Final Safety Analysis Report
(collectively, "NRC requirements"). The letter also requires that
certain specific technical issues be resolved to the NRC's
satisfaction prior to restarting the unit.
On February 21, 1996, Millstone 2, a 870-MW pressurized-water reactor,
also owned 81 percent by CL&P and 19 percent by WMECO, was shut down
as a result of an engineering evaluation that determined that some
valves could be inoperable in some emergency situations. Management
decided at that time to combine this unscheduled outage with a mid-
cycle inspection outage previously scheduled for mid-April 1996. On
March 7, 1996, the NRC issued the company a letter requesting
information similar to that being sought for Millstone 1.
On March 30, 1996, Millstone 3, a 1154-MW pressurized-water reactor
that is jointly owned by CL&P (52.93 percent), WMECO (12.24 percent),
PSNH (2.85 percent), and other New England utilities, was shut down
following an engineering evaluation which determined that four safety-
related valves would not be able to perform their design function
during certain postulated events. On April 4, 1996, the NRC issued the
company a letter requesting information similar to that being sought
for Millstone 1 and 2.
On March 7, 1996, the NRC issued a letter to Northeast Utilities
Service Company (NUSCO), requesting operational assurances related to
the Connecticut Yankee nuclear unit (CY), a 575-MW pressurized water
reactor that is jointly owned by CL&P (34.5 percent), WMECO (9.5
percent), PSNH (5.0 percent), and other New England utilities, in
which NUSCO serves as agent for CY. The NRC's letter also requested
CY's plans and schedules for performing comprehensive compliance
checks. Operations at CY were not restricted by the NRC's request.
NUSCO filed a response to the NRC's request on April 8, 1996. A two-
week NRC review of the plant followed the submission of CY's response.
Based on that review, CY will update its April 8, 1996 letter to
address the NRC inspection findings by May 30, 1996. Management
believes that the outcome of the NRC's inspection at CY will not have
a material adverse impact on NU's financial position and results of
operations. NRC activities are continuing and management cannot
predict at this time what additional actions, if any, the NRC will
take with respect to CY.
As of May 6, 1996, all three Millstone units were out of service, as
the engineering analysis needed to respond to the NRC requirements is
still being performed. The company expects to incur approximately $6-
8 million (Millstone 1), $8-10 million (Millstone 2), and $7-9 million
(Millstone 3), respectively, in aggregate incremental replacement
power costs for each month the units are not operating. Management
estimates that the work required to comply with the NRC requirements
will be completed by early July 1996 for Millstone 3, the third
quarter of 1996 for Millstone 2 and the fourth quarter of 1996 for
Millstone 1. Management cannot predict at this time how long the
NRC's review will take or what additional actions, if any, will be
required before the units are allowed to restart. Recovery of
replacement power costs for these outages will be subject to prudence
reviews by the DPUC for CL&P, the Massachusetts Department of Public
Utilities for WMECO, and the NHPUC for PSNH. Refer to Note 3 in this
Form 10-Q for information on CL&P's recoverable energy costs.
In addition to the replacement power costs, the company expects to
incur operation and maintenance costs (O&M) related to the NRC's
actions at the Millstone units. Management has estimated these costs
to be at least $76 million, and has reserved approximately $38 million
in the first quarter of 1996 for the incremental O&M costs necessary
to respond to the NRC requirements. In addition, as of March 31,
1996, management has identified approximately $38 million of costs for
projects associated with the extended outages, the majority of which
have been accelerated from planned future outages. It is likely that
these costs will increase as additional projects are identified and
approved. Management cannot estimate at this time when each Millstone
unit will return to service, nor can management predict the possible
loss or range of loss the company may incur as a result of NRC actions
related to the operations of the Millstone units or CY. Management
believes that there is a significant exposure to nonrecovery of
material amounts of the total incremental costs.
Management also believes that there is a risk, particularly in
Connecticut, that it will be difficult to meet peak demand this summer
if all three Millstone units, and perhaps CY, are out of service
during the hottest summer weather. To reduce this risk, the company
is planning to acquire additional generating assets. Management
expects the incremental costs associated with meeting peak summer
demand to be approximately $20 million in 1996.
For further information on the company's nuclear performance, refer to
the company's Form 8-K dated March 30, 1996, the MD&A and Part II,
Items 1 and 5, "Legal Proceedings" and "Other Information" in this
Form 10-Q and NU's 1995 Form 10-K.
C. Environmental Matters: For information regarding environmental
matters, see Part II, Items 1 and 5, "Legal Proceedings" and "Other
Information" in this Form 10-Q and the Notes to Consolidated Financial
Statements in NU's 1995 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see the Notes to Consolidated Financial
Statements in NU's 1995 Form 10-K.
E. Long-Term Contractual Arrangements: For information regarding long-
term contractual arrangements, see Part II, Item 5 - "Other
Information" in this Form 10-Q and the Notes to Consolidated Financial
Statements in NU's 1995 Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To Northeast Utilities:
We have reviewed the accompanying consolidated balance sheet of Northeast
Utilities (a Massachusetts trust) and subsidiaries as of March 31, 1996, and the
related consolidated statements of income and cash flows for the three-month
period ended March 31, 1996 and 1995. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Hartford, Connecticut
May 3, 1996
NORTHEAST UTILITIES AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of Northeast Utilities' (NU or the
system) financial condition and the principal factors having an impact on the
results of operations. This discussion should be read in conjunction with NU's
consolidated financial statements and footnotes in this Form 10-Q, the 1995
Form 10-K, and the Form 8-K's dated January 31, 1996, March 30, 1996, and
April 15, 1996.
FINANCIAL CONDITION
OVERVIEW
Earnings per common share were $0.51 for the three months ended March 31, 1996,
a decrease of $0.18, from $0.69 for the same period in 1995. The 1996 earnings
were lower primarily due to reserves established for the outages at the
Millstone units, which resulted from the units being placed on the Nuclear
Regulatory Commission's (NRC) watch list and related licensing actions. In
addition, earnings decreased due to a one-time tax benefit, in 1995, from a
favorable tax ruling, which was partially offset by higher retail sales and
lower financing costs in 1996.
NU expects to incur substantial costs during the remainder of 1996, primarily in
the second and third quarters, as a result of the Millstone outages. When
combined with the impacts of a proposed rate settlement for The Connecticut
Light & Power Company (CL&P) and a typically low sales quarter, these costs
could result in a loss for the second quarter. At this time management expects
that earnings per share for 1996 will be well below the current annual dividend
rate of $1.76. The key factor affecting 1996 earnings will be the length of the
nuclear outages. This will determine the level of direct costs expended to
address NRC concerns and the replacement-power costs incurred to serve the
system's customers in the absence of energy from the Millstone units.
Management believes that a significant portion of the incremental costs,
including replacement power, associated with the nuclear outages, will not be
recoverable.
The NU Board of Trustees (the Board) evaluates the dividend quarterly. At its
April 23, 1996 meeting, the Board approved the current $0.44 per quarter common
dividend, payable on June 28, 1996, to holders of record on June 1, 1996.
Management and the Board do not believe that an earnings per share result below
the current dividend level for 1996 would of itself warrant a change in the
dividend. However, management believes the Board will re-examine the
appropriate dividend level each quarter to take into consideration expectations
of costs, the length of the nuclear outages, and other factors.
NU has put into place temporary cost-reduction measures covering most non-
nuclear areas of the NU system in an effort to help offset the substantial costs
it expects to incur for at least the next two quarters relating to the NRC
review and the Millstone outages. The cost-control measures will not affect
nuclear or customer reliability operations.
NUCLEAR PERFORMANCE
On January 31, 1996, the NRC placed Millstone units 1, 2, and 3 (Millstone) on
its watch list, which calls for increased NRC inspection attention. The NRC's
action referred to a number of performance concerns that have arisen since 1990,
including the inability to resolve employee safety concerns.
Millstone 1's planned refueling and maintenance outage, which began November 4,
1995, was extended to allow NU to complete reviews required by the NRC. In
response to a December 13, 1995 request by the NRC to provide information no
later than 7 days prior to restart of the unit, NU is conducting a detailed
review of Millstone 1's Updated Final Safety Analysis Report (FSAR) 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, FSAR, and the NRC's regulations.
On February 21, 1996, NU took Millstone 2 out of service as a result of an
engineering evaluation that determined that some valves could be inoperable
under certain emergency conditions. Management decided at that time to combine
this unscheduled outage with a mid-cycle outage previously scheduled to begin in
mid-April. On March 7, 1996, the NRC issued a letter requesting information
similar to that being sought for Millstone 1 prior to restart of the unit.
Also on March 7, 1996, the NRC requested operational assurances from Millstone 3
and Connecticut Yankee Atomic Power Company (CYAPC), with respect to its
Connecticut Yankee nuclear unit (CY), as well as plans and schedules for
performing comprehensive compliance checks. Operation of the units was not
restricted by the NRC's March 7th request.
On March 30, 1996, NU took Millstone 3 out of service as a result of an
engineering evaluation that determined certain system-isolation valves would not
perform properly under certain situations. On April 4, 1996, the NRC issued a
letter requesting information similar to that being sought for Millstone 1 prior
to restart of the unit.
On April 8, 1996, CYAPC submitted its response to the NRC's March 7th letter.
Subsequent to NU's submission, the NRC conducted a two-week inspection at CY,
focused on engineering and licensing documentation and practices. The NRC
provided its preliminary inspection findings at a meeting with plant management
on April 26, 1996. The NRC's conclusions, which will be more fully described in
a written inspection report to be issued within the next several weeks, included
findings that in certain instances CY's plant design is not conservative and
that the technical bases for design or operations decisions are not well
documented. Even with these findings, the NRC indicated that it did not believe
that CY was unsafe to operate. The NRC has requested that CYAPC supplement its
April 8th letter to address these inspection findings and explain why CY remains
safe to operate while the inspection findings are addressed. CYAPC's
supplemental letter is to be submitted by May 30, 1996. The NRC's activities
are continuing and management cannot predict at this time what additional
activities, if any, the NRC will take with respect to CY.
On April 22, 1996, the NRC announced the results of a recent inspection at the
Seabrook nuclear power plant in Seabrook, New Hampshire (Seabrook). The NRC
indicated that it found Seabrook to be a well-operated facility and found no
major safety issues or weaknesses. The NRC noted that it would reduce
inspections in a number of areas at Seabrook as a result of its findings.
The work necessary to respond to the NRC's letters regarding Millstone is
expected to be completed by July 2, 1996 for Millstone 3, during the third
quarter of 1996 for Millstone 2, and during the fourth quarter of 1996 for
Millstone 1. These estimates could be affected by the discovery of additional
issues and necessary corrective work. Management's reallocation of resources,
with the objective of filing Millstone 3's response by July 2, has resulted in
revised schedules for Millstone 1 and 2. The NRC has required that this
information be submitted no later than 7 days before each of these units returns
to operation. Since the NRC will carefully review these responses before
permitting each unit to returns to operation, management cannot predict at this
time how long the NRC's review will take or what additional actions, if any,
will be required before the units are allowed to restart.
Monthly replacement-power costs for NU system companies attributable to the
outages are expected to be approximately $6 to $8 million for Millstone 1, $8 to
$10 million for Millstone 2, and $7 to $9 million for Millstone 3. CL&P
recovers from, or refunds to, customers certain fuel costs if its nuclear units
do not operate at a predetermined capacity factor (currently 72 percent) through
the Generation Utilization Adjustment Clause (GUAC). In previous GUAC
proceedings, the Department of Public Utility Control (DPUC) has reduced CL&P's
GUAC recoveries by the amount of fuel over-recoveries during the GUAC period.
Because of the DPUC's previous decisions, and the likelihood that, as a result
of the Millstone outages, CL&P's GUAC capacity factor will be below 72 percent
for the GUAC period ending July 31, 1996, CL&P has established a $32 million
reserve against fuel over-recoveries as of March 31, 1996.
In addition to the costs of replacement power, there are, and will be,
incremental operation and maintenance (O&M) costs associated with the Millstone
outages and the NRC review. Because it cannot be known with any certainty how
long each unit will remain out of service, management can only provide general
estimates of the amount of direct costs that will be incurred. As of March 31,
1996, management has identified approximately $38 million of costs for projects
associated with the extended outages, the majority of which are for projects
which have been accelerated from planned future outages, and an additional $38
million of costs specifically associated with the NRC reviews. It is likely
that these costs will increase as additional projects are identified by NU or
the NRC. As of March 31, 1996, CL&P and Western Massachusetts Electric Company
(WMECO) have reserved approximately $31 and $7 million, respectively, for the
estimated costs associated directly with the NRC reviews.
The recovery of fuel and outage costs are subject to prudence reviews in
Connecticut, Massachusetts, and New Hampshire. While it is too early to
estimate the total amount of replacement-power and other costs that will result
from the NRC's review of Millstone, or what the results of any prudence reviews
will be, management believes that there is significant exposure for non-recovery
of a material amount of the total costs.
In April 1996, the Board announced the formation of a special committee of the
Board to provide high-level oversight of the safety and effectiveness of NU's
nuclear operations, progress toward resolving open NRC issues, and progress in
resolving employee, community, and customer concerns. The new committee will
consist exclusively of outside trustees and will be chaired by E. Gail de
Planque, a Board member who is a former NRC commissioner.
Given the current Millstone outages, management believes that there is a risk,
particularly in Connecticut, that it will be difficult to meet peak demand this
summer if all three Millstone units, and perhaps CY, are out of service during
the hottest summer weather. To reduce this risk, NU is planning to acquire
additional generating assets. Management expects the incremental costs
associated with meeting peak summer demand to be approximately $20 million in
1996.
RATE MATTERS
CONNECTICUT
In April 1996, CL&P submitted to the DPUC for approval a settlement agreement
(the Settlement) which is jointly supported by CL&P, the Prosecutorial Division
of the DPUC, and the Office of Consumer Counsel. The Settlement assumes a May 1,
1996 effective date. The two principal objectives of the Settlement are to
provide for a 20-month retail-rate agreement and to resolve pending reviews of
certain nuclear outages through March 31, 1996. Additionally, the Settlement
would terminate all pending litigation, as of March 31, 1996, among the parties
that could potentially affect CL&P's rates and earnings. The Settlement does not
impact costs incurred subsequent to March 31, 1996, which are associated with
the Millstone units' placement on the NRC's watch list. If approved, the
Settlement is expected to reduce estimated year-end 1996 earnings by
approximately $35 million, or $0.17 per share. The impact on NU's earnings will
be recognized primarily during the quarter in which the Settlement is approved
by the DPUC. A DPUC decision on the Settlement is expected by the end of May
1996. Management cannot predict at this time the potential outcome of the
DPUC's decision.
The proposed Settlement provides for an immediate 2.5-percent decrease in
customer bills to be accomplished by the elimination of the balance, as of the
effective date of the Settlement, of the uncollected deferred GUAC charges
incurred for the 1994-1995 GUAC period (approximately $45 million as of May 1,
1996). The Settlement also provides for the elimination of the deferred GUAC
charges, as of March 31, 1996, for the current GUAC period (approximately $6
million). Additionally, CL&P will freeze its base rates until at least
December 31, 1997, and accelerate the amortization of approximately $200 to $240
million ($97 to $122 million in 1996 and $103 to $118 million in 1997) of
potentially strandable assets. Should the base-rate freeze extend into 1998 and
beyond, the 1997 amortization level proposed in the Settlement would also be
extended.
The Settlement does not affect the DPUC's ongoing investigation of the adoption
of a fuel clause designed to track and recover all costs of energy incurred to
serve customers (fully-tracking fuel clause), which would supersede the current
GUAC and fossil-fuel-adjustment clause (FAC). However, it is expected that
during the transition period from the effective date of the Settlement to the
DPUC's decision on the fully-tracking fuel clause (expected in June 1996), the
net effect of the FAC, the GUAC, and a transitional deferred fuel accounting
mechanism provided for in the Settlement would operate as though CL&P has a
fully-tracking fuel clause.
Although it would decrease 1996 earnings, management believes the Settlement
would better position CL&P for the restructuring of the electric-power industry.
The 20-month rate freeze, and accelerated amortization described above, would
preserve current cash flow while reducing potentially strandable investments.
In addition, the termination of certain pending litigation and the elimination
of the need to file a rate case during 1996 will allow CL&P to focus its efforts
on preparing itself for a more competitive environment.
NEW HAMPSHIRE
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 two-year retail-wheeling pilot program. The
program, which is expected to begin by the end of May 1996, will initially
impact 3 percent of Public Service Company of New Hampshire's (PSNH) peak retail
electric load (approximately 12,000 customers). The NHPUC has approved PSNH's
plan for participation in the retail-wheeling pilot program. Under this plan,
PSNH would recover all of its costs above an assumed market price of power and
provide a 10-percent incentive credit off its traditional rates to customers who
participate in the program to encourage customer participation in the two year
experiment. If actual market prices differ from the assumed level, the NHPUC
has stated that utilities may seek recovery of the difference. The NHPUC has
required that PSNH participate in the competitive energy sales portion of the
pilot program through a separate affiliated company. An application seeking
authority for a PSNH affiliate to participate in the pilot program is currently
pending before the Securities and Exchange Commission.
The New Hampshire Legislature has passed legislation calling for the
restructuring of the electric-power industry to provide competition and customer
choice no later than July 1, 1998. The legislation, which is awaiting signature
by the Governor, seeks to maintain universal service, environmental protections,
and benefits for all consumers, while creating near-term rate relief. The
legislation specifically limits stranded cost recovery to that which is legally
required under applicable regulation or law. The NHPUC is required to issue an
Order establishing a statewide restructuring plan no later than February 28,
1997. Utilities must submit compliance filings no later than June 30, 1997.
In April 1996, PSNH publicly announced a proposal to begin negotiations with the
state on rates and other matters. PSNH indicated that, with state support, PSNH
may be able to lower its allowed rates by as much as 10 percent and cap them
through 2000. Such an agreement would be effective subsequent to the final 5.5-
percent rate increase effective June 1, 1996, which is allowed under the current
rate agreement. The outcome of the proposal, which would require the adoption
of a series of creative financial and regulatory measures, cannot be predicted
at this time.
MASSACHUSETTS
On April 30, 1996, the Massachusetts Department of Public Utilities (DPU)
approved a settlement which was proposed in February 1996 by WMECO and the
Massachusetts Attorney General (the Agreement). The Agreement will continue,
through February 1998, the 2.4-percent rate reduction instituted in June 1994.
Additionally, the Agreement will terminate pending reviews of WMECO's generating
plant performance, and any potential reviews associated with Millstone 2's 1994-
1995 extended outage, and accelerates its amortization of potentially strandable
generation assets by approximately $6 million in 1996 and $10 million in 1997.
The Agreement will not have a material impact on estimated earnings for 1996.
On May 1, 1996, the DPU issued draft comprehensive restructuring rules.
Management is currently performing an analysis of the DPU's rules, however, it
is clear that they are complex and far-reaching. WMECO will file its comments
on the DPU's rules on May 24, 1996. This filing will be followed by hearings,
and the proposed date for issuance of the final restructuring regulations is
September 20, 1996. The state's electric companies will then be required to
file revenue neutral rate unbundling plans in the fall of 1996. The DPU is
expected to rule on the companies' plans in early 1997. Subsequently, the DPU
has indicated it will rule on WMECO's and other electric companies' individual
restructuring plans in 1997. The DPU's target date for retail choice is January
1, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased approximately $35 million in the first
quarter of 1996, from 1995, primarily due to higher revenues from recoveries of
fuel costs paid in prior periods, partially offset by higher cash operating
expenses. Cash used for financing activities decreased approximately $78 million
in the first quarter of 1996, from 1995, primarily due to lower net
reacquisitions and retirements of long-term debt and preferred stock and the
issuance of additional common shares in 1996 for use in NU's Dividend
Reinvestment Plan (DRIP). Cash used for investments increased approximately $4
million in the first quarter of 1996, from 1995, primarily due to higher
construction expenditures, partially offset by lower nuclear fuel expenditures.
In April 1996, NU resumed its pre-1995 practice of purchasing NU common shares
on the open market, rather than issuing additional common shares, to meet its
obligation under the DRIP.
In April 1996, Standard & Poor's Ratings Group placed the ratings of the entire
NU system on CreditWatch with negative implications and Moody's placed the
credit ratings of NU, CL&P, WMECO, and the Niantic Bay Fuel Trust under review
for possible downgrade. These rating actions could adversely affect the future
availability and cost of funds.
The costs of replacement power and the direct costs associated with the current
nuclear outages will be substantial, even though the total cost is not
quantifiable at this time. Management is confident that the system will be
able to meet these additional funding requirements and the system's other 1996
requirements, including requirements for preferred and common dividends, through
a combination of internally generated funds, borrowings under existing credit
facilities, and planned new external financing arrangements. CL&P plans to
complete a $62 million tax-exempt debt issue in May 1996, and may also issue
approximately $60 million of first-mortgage bonds in the second quarter of 1996.
CL&P and WMECO are also evaluating the issuance of additional first-mortgage
bonds and asset-backed financings. NU, CL&P, and WMECO have also initiated
actions to obtain a significant increase in the agreements under which the
principal system companies (other than PSNH and North Atlantic Energy
Corporation (NAEC)) effect revolving credit borrowings. Management's intention
in implementing these additional financial arrangements is to ensure that the
system companies will have access to adequate cash resources, at reasonable
cost, even if the nuclear outages extend significantly longer, or the associated
costs are significantly greater, than management currently foresees.
In April 1996, PSNH increased, and extended the expiration date of, its
revolving-credit agreement limit. In addition to using a portion of the first
quarter increase in cash and cash equivalents, PSNH will draw funds under this
new facility to fund the maturity of its $172.5 million first-mortgage bond
issue in May 1996.
CL&P entered into fuel-swap agreements to reduce a portion of their fuel-price
risk for its long-term negotiated energy contracts. NAEC has entered into
interest-rate swap agreements to reduce interest-rate risk associated with its
$225 million variable-rate bank note. These swaps are not used for trading
purposes. The differential paid or received as fuel prices or interest rates
change is recognized in income when realized. As of March 31, 1996, CL&P and
NAEC had outstanding agreements with a total notional value of approximately
$242.5 and $225 million, respectively. The settlement amounts associated with
the swaps increased first quarter earnings by approximately $2.4 million for
CL&P and increased interest expense by approximately $0.1 million for NAEC.
CL&P's fuel swaps minimize exposure associated with rising fuel prices and
effectively fix the cost of fuel, and the profitability, for CL&P, of certain
negotiated contract sales, and the interest rate, at 7.05 percent, for NAEC's
variable-rate bank note.
RESULTS OF OPERATIONS
Comparison of the First Quarter of 1996 with the First Quarter of 1995
- ----------------------------------------------------------------------
Operating revenues increased approximately $83 million in the first quarter of
1996, from 1995. The components of the change in operating revenues are as
follows:
Changes in Operating Revenues Increase/(Decrease)
- ----------------------------- -------------------
(Millions of Dollars)
Regulatory decisions 4
Fuel, purchased-power, and FPPAC cost recoveries 54
Retail sales volume 30
Wholesale revenues (7)
Other revenues 2
---
Total revenue change $83
===
Revenues related to regulatory decisions increased primarily because of the mid-
1995 retail-rate increases for CL&P and PSNH, partially offset by a March 1996
reserve for CL&P over-recoveries of demand-side-management costs. Fuel,
purchased-power, and Fuel and Purchased Power Adjustment Clause (FPPAC) cost
recoveries increased primarily due to higher energy costs and higher revenues
from sales to other outside utilities. Retail sales volume increased as a
result of higher retail kilowatt-hour sales in 1996. Retail sales increased 4.3
percent for the first quarter of 1996, from 1995, primarily due to extremely
mild weather in the first three months of 1995. Wholesale revenues decreased
primarily due to higher recognition in 1995 of lump-sum payments for termination
of a long-term contract with CL&P.
Fuel, purchased, and net interchange power expense increased approximately $74
million in the first quarter of 1996, from 1995, primarily due to the timing of
the recognition of costs under CL&P's fuel clauses and the reserve associated
with CL&P's fuel over-recoveries under the DPUC's methodology.
Other operation and maintenance expense increased approximately $60 million in
the first quarter of 1996, from 1995, primarily due to the establishment of a
reserve resulting from the NRC review of Millstone, higher recognition of
pension and benefit costs, and higher costs associated with the nuclear outages,
partially offset by lower 1996 charges from the regional nuclear generating
units.
Depreciation expense increased approximately $3 million in the first quarter of
1996, from 1995, primarily due to higher plant balances and higher depreciation
rates in 1996.
Amortization of regulatory assets, net decreased approximately $16 million in
the first quarter of 1996, from 1995, primarily due to the completion of CL&P
and WMECO's amortization of Millstone 3 phase-in costs partially offset by lower
1996 CL&P cogeneration deferrals and higher 1996 amortization of cogeneration
deferrals.
Federal and state income taxes decreased approximately $6 million in the first
quarter of 1996, from 1995, primarily due to lower book taxable income,
partially offset by tax benefits from a favorable tax ruling during 1995.
Taxes other than income taxes increased approximately $6 million in the first
quarter of 1996, from 1995, primarily due to higher 1996 Connecticut gross
earnings tax expense and higher 1996 New Hampshire property tax expense.
Deferred nuclear plants return decreased approximately $5 million in the first
quarter of 1996, from 1995, primarily due to additional Seabrook 1 investments
being phased into rates.
Interest on long-term debt decreased approximately $8 million in the first
quarter of 1996, from 1995, primarily because of lower average interest rates as
a result of refinancing activities and lower 1996 debt levels.
Preferred dividends decreased approximately $6 million in the first quarter of
1996, from 1995, primarily due to a 1995 charge to earnings for premiums on
redeemed preferred stock and a reduction in preferred stock levels from the
first quarter of 1995.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDING
1. On April 10, 1996, NU received a letter from a representative of a
shareholder demanding that it commence legal action against Bernard M.
Fox and certain unnamed officers and directors with regard to operations
at Millstone Station. On April 23, 1996, NU's Board of Trustees created
a special committee that would, among other responsibilities, conduct an
independent review and investigation of the allegations contained in the
letter and make recommendations as to how the Board of Trustees should
respond to the letter.
In addition, on April 19, 1996, NU was served with a civil complaint
naming as defendants certain current and former trustees and officers.
-
The complaint was brought as a shareholder derivative action in the
Massachusetts Superior Court for the Hampden Division seeking to recover
unspecified damages for alleged losses purportedly arising out of NU's
operation of Millstone Station. NU is presently evaluating the matter.
The Company has also been was served in two similar proceedings in
Connecticut Superior Court.
2. On April 4, 1996, the Long Island Soundkeeper Fund, a public interest
group, filed a citizens suit against Long Island Lighting Company
("LILCO"),CL&P and Northeast Utilities Service Company ("NUSCO")
(collectively, the "Companies") in Federal District Court in
Connecticut. The suit alleges the Companies are violating the federal
Clean Water Act by maintaining an unpermitted discharge of pollutants
from the underwater cable extending from Northport on Long Island, New
York to Norwalk, Connecticut (the "Long Island Cable") owned by the
Companies and claims the pollutants are an imminent danger to the
environment and public health. The suit asks the court, among other
things, to enjoin further operation of the Long Island Cable without a
permit and require the Company to pay a civil penalty of $25,000 for
each violation. NUSCO and CL&P intend to defend the suit vigorously.
The potential outcome of this matter, the magnitude of any reliability
concerns resulting from a shutdown of the Long Island Cable and the cost
of alternatives cannot be determined at this time.
For additional information on the Long Island Cable and a related
ongoing United States Attorney's Office investigation, see "Item 1.
Business - Regulatory and Environmental Matters - Environmental
Regulation - Surface Water Quality Requirements" in NU's 1995 Form 10-K.
ITEM 5. OTHER INFORMATION
1. On April 9, 1996, Northeast Nuclear Energy Company ("NNECO") and the
Nuclear Regulatory Commission ("NRC") staff filed a joint motion to
terminate the NRC proceeding which began in 1995 when several New
England based public interest groups requested a hearing on the
Millstone 1 license amendment which explicitly authorized the practice
of offloading the full reactor core during refueling outages. The joint
motion was based on representations by counsel for the petitioners that
the matter would no longer be pursued. On April 15, 1995, the NRC's
Atomic Safety and Licensing Board granted the joint motion to terminate
the proceeding.
For additional information on this proceeding, see "Item 1. Business -
Electric Operations - Nuclear Generation - Millstone Units" in NU's 1995
Form 10-K.
2. On May 3, 1996, NU was advised by the Office of the U.S. Attorney for
the District of Connecticut (U.S. Attorney) that it had received a
report by the NRC Office of Investigations (OI) relating to full core
off-load procedures and certain related matters at Millstone Station.
The OI referred the report to the U.S. Attorney for review for possible
criminal prosecution and NU has been informed that the U.S. Attorney is
in the early stages of reviewing its conduct. NU does not have the OI's
report and therefore cannot evaluate either whether the report is
accurate or what any civil or criminal consequences may be. Despite the
possibility that some form of prosecutorial action might be initiated,
management does not believe that any System company or officer has
engaged in conduct that would warrant a federal criminal prosecution and
intends to fully cooperate with the U.S. Attorney in the investigation.
3. On April 18, 1996, the United States District Court for the Eastern
District of Kentucky approved the consent decree described in "Item 1.
Business - Regulatory and Environmental Matters - Environmental
Regulation - Toxic Substances and Hazardous Waste Regulations" in NU's
1995 Form 10-K.
4. In early 1996, the New Hampshire Public Utilities Commission ("NHPUC")
began a proceeding to decide whether to approve the settlement
agreements which Public Service Company of New Hampshire ("PSNH") had
reached with certain wood-fired nonutility generators ("NUGs"). On
March 11, 1996, the NHPUC decided, although the settlement agreements
contain a waiver of all claims by every party for past purchases of the
NUGs' output, to review whether PSNH had used its best efforts to
negotiate the settlements. On April 11, 1996, PSNH filed a Motion for
Rehearing with the NHPUC.
For additional information on this matter, see "Item 1. Business - Rates
- New Hampshire Retail Rates - NUGs" in NU's 1995 Form 10-K.
5. On March 27, 1996, the New Hampshire Electric Cooperative ("NHEC") filed
a Complaint, Request for Initiation of Proceedings and Motion for
Deferral requesting that FERC initiate proceedings to determine whether
PSNH is improperly billing NHEC costs associated with installation and
maintenance of selective non-catalytic reduction ("SNCR") technology at
PSNH's fossil-generating station Merrimack Unit 2. These costs result
from the installation of pollution control measures necessary to comply
with the Federal Clean Air Act Amendments of 1990. On March 25, 1996,
the NHPUC had indicated that PSNH would be allowed to recover only those
costs associated with the installation of SNCR technology through the
FPPAC. The NHPUC agreed that recovery of all amounts was appropriate
once the $20 million capital or the $2 million expense thresholds had
been reached and allowed PSNH to combine total costs for all units to
determine the threshold amount. The NHPUC has yet to issue a written
order in this proceeding.
For additional information on this proceeding, see "Item 1. Business -
Rates - New Hampshire Retail Rates - FPPAC" in NU's 1995 Form 10-K.
6. On April 24, 1996, FERC issued its final open access rule (the ``Rule'')
to promote competition in the electric industry. The Rule will require,
among other things, all public utilities that own, control or operate
facilities used for transmitting electric energy in interstate commerce
to file an open-access, non-discriminatory transmission tariff and to
take transmission service for their own new wholesale sales and
purchases under the open-access tariffs. The Rule also requires public
utilities to develop and maintain a same-time information system that
will give existing and potential transmission users the same access to
transmission information that the public utility enjoys, and requires
public utilities to separate transmission from generation marketing
functions and communications. The Rule also supports full recovery of
legitimate, prudent and verifiable stranded costs associated with
providing open access transmission services.
On March 29, 1996, FERC approved NU's transmission tariffs, where were
revised to meet the comparability standards articulated in the Notice of
Proposed Rulemaking that preceded the Rule and conditioned acceptance of
NU's market-based power sales tariff, where it permits NU to sell power
to wholesale customers outside of New England, on the removal of certain
language. NU submitted the required compliance filing to FERC on April
12, 1996. As a result of the Rule, NU will refile its transmission
tariffs to conform with the minimum terms and conditions set forth in
the Rule. Management is continuing to review what other steps, if any,
must be taken to comply with the Rule.
For additional information on this matter, see "Item 1. Business -
Competition and Marketing - Wholesale Marketing" in NU's 1995 Form 10-K.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
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15 Letter regarding unaudited financial information
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. NU filed a Form 8-K dated January 31, 1996 disclosing that the NRC had
placed Millstone station on its "watch list."
2. NU filed a Form 8-K dated March 30, 1996 updating the status of Millstone
station as related to the NRC's actions to date.
3. NU filed a Form 8-K dated April 15, 1996 related to the proposed CL&P rate
settlement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTHEAST UTILITIES
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Registrant
Date May 6, 1996 By /s/ Bernard M. Fox
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Bernard M. Fox
Chairman, President, and
Chief Executive Officer
Date May 6, 1996 By /s/ John J. Roman
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John J. Roman
Vice President and Controller