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 September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-7624
WESTERN MASSACHUSETTS ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1961130
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
(Address of principal executive offices) (Zip Code)
(413) 785-5871
(Registrant's telephone number, including area code)
Not Applicable
(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
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 October 31, 1996
Common Shares, $25.00 par value 1,072,471 shares
WESTERN MASSACHUSETTS ELECTRIC COMPANY
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 1996 and
December 31, 1995 2
Statements of Income - Three and Nine Months
Ended September 30, 1996 and 1995 4
Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
PART I. FINANCIAL INFORMATION
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 1,250,137 $ 1,234,738
Less: Accumulated provision for depreciation......... 489,134 462,872
------------- ------------
761,003 771,866
Construction work in progress........................... 16,721 18,957
Nuclear fuel, net....................................... 30,131 31,574
------------- ------------
Total net utility plant............................. 807,855 822,397
------------- ------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 74,962 69,903
Investments in regional nuclear generating
companies, at equity................................... 15,315 14,820
Other, at cost.......................................... 4,245 4,018
------------- ------------
94,522 88,741
------------- ------------
Current Assets:
Cash.................................................... 38 202
Receivables, net........................................ 39,553 42,164
Accounts receivable from affiliated companies........... 786 951
Accrued utility revenues................................ 10,023 11,119
Fuel, materials, and supplies, at average cost.......... 4,880 5,114
Recoverable energy costs, net--current portion.......... 8,274 2,595
Prepayments and other................................... 10,484 6,581
------------- ------------
74,038 68,726
------------- ------------
Deferred Charges:
Regulatory assets:
Income taxes, net...................................... 79,608 87,829
Unrecovered contractual obligation..................... 13,151 18,814
Recoverable energy costs, net.......................... 5,437 4,974
Other.................................................. 38,290 49,369
Unamortized debt expense................................ 1,379 1,496
Other................................................... 311 -
------------- ------------
138,176 162,482
------------- ------------
Total Assets........................................ $ 1,114,591 $ 1,142,346
============= ============
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$25 par value.
Authorized and outstanding 1,072,471 shares............ $ 26,812 $ 26,812
Capital surplus, paid in................................ 150,395 150,182
Retained earnings....................................... 110,329 115,296
------------- ------------
Total common stockholder's equity.............. 287,536 292,290
Preferred stock not subject to mandatory redemption..... 53,500 53,500
Preferred stock subject to mandatory redemption......... 21,000 22,500
Long-term debt.......................................... 334,238 347,470
------------- ------------
Total capitalization........................... 696,274 715,760
------------- ------------
Obligations Under Capital Leases.......................... 29,108 20,855
------------- ------------
Current Liabilities:
Notes payable to affiliated company..................... 8,000 24,050
Long-term debt and preferred stock--current
portion................................................ 16,200 1,500
Obligations under capital leases--current
portion................................................ 2,971 15,156
Accounts payable........................................ 14,762 14,475
Accounts payable to affiliated companies................ 9,294 11,604
Accrued taxes........................................... 10,119 1,686
Accrued interest........................................ 4,268 5,670
Other................................................... 16,363 7,768
------------- ------------
81,977 81,909
------------- ------------
Deferred Credits:
Accumulated deferred income taxes....................... 248,202 259,595
Accumulated deferred investment tax credits............. 25,200 26,302
Deferred contractual obligation......................... 13,151 18,814
Other................................................... 20,679 19,111
------------- ------------
307,232 323,822
------------- ------------
Commitments and Contingencies (Note 7)<F7>
------------- ------------
Total Capitalization and Liabilities........... $ 1,114,591 $ 1,142,346
============= ============
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(Thousands of Dollars)
Operating Revenues............................. $ 99,866 $107,960 $317,265 $315,237
--------- --------- --------- ---------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power. 33,157 21,017 79,754 65,291
Other..................................... 32,400 35,292 107,688 103,840
Maintenance.................................. 14,409 12,740 39,623 28,664
Depreciation................................. 10,024 9,521 29,661 28,365
Amortization of regulatory assets............ 1,020 2,973 8,155 17,084
Federal and state income taxes............... (411) 2,088 9,785 10,948
Taxes other than income taxes................ 4,940 4,530 15,203 14,184
--------- --------- --------- ---------
Total operating expenses............... 95,539 88,161 289,869 268,376
--------- --------- --------- ---------
Operating Income............................... 4,327 19,799 27,396 46,861
--------- --------- --------- ---------
Other Income:
Equity in earnings of regional nuclear
generating companies....................... 448 475 1,481 1,299
Other, net................................... 703 657 918 2,019
Income taxes................................. 293 38 351 249
--------- --------- --------- ---------
Other income, net...................... 1,444 1,170 2,750 3,567
--------- --------- --------- ---------
Income before interest charges......... 5,771 20,969 30,146 50,428
--------- --------- --------- ---------
Interest Charges:
Interest on long-term debt................... 6,026 6,699 18,022 20,708
Other interest............................... 141 129 395 214
--------- --------- --------- ---------
Interest charges, net.................. 6,167 6,828 18,417 20,922
--------- --------- --------- ---------
Net Income (Loss).............................. $ (396) $ 14,141 $ 11,729 $ 29,506
========= ========= ========= =========
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1996 1995
----------- -----------
(Thousands of Dollars)
Operating Activities:
Net Income................................................ $ 11,729 $ 29,506
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 29,661 28,365
Deferred income taxes and investment tax credits, net... (4,085) 3,600
Recoverable energy costs, net of amortization........... (6,142) 1,039
Deferred nuclear refueling outage, net of amortization.. 5,050 (6,232)
Nuclear compliance reserves, net........................ 7,531 -
Other sources of cash................................... 12,608 28,437
Other uses of cash...................................... (5,538) (256)
Changes in working capital:
Receivables and accrued utility revenues................ 3,872 426
Fuel, materials, and supplies........................... 234 (747)
Accounts payable........................................ (2,023) (16,719)
Accrued taxes........................................... 8,433 (808)
Other working capital (excludes cash)................... (4,241) (810)
----------- -----------
Net cash flows from operating activities.................... 57,089 65,801
----------- -----------
Financing Activities:
Net (decrease) increase in short-term debt................ (16,050) 28,250
Reacquisitions and retirements of long-term debt.......... - (34,300)
Reacquisitions and retirements of preferred stock......... (1,500) (15,675)
Cash dividends on preferred stock......................... (3,955) (3,688)
Cash dividends on common stock............................ (12,741) (22,737)
----------- -----------
Net cash flows used for financing activities................ (34,246) (48,150)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (15,456) (18,869)
Nuclear fuel............................................ 565 (1,112)
----------- -----------
Net cash flows used for investments in plant.............. (14,891) (19,981)
NU System Money Pool...................................... - 8,750
Investments in nuclear decommissioning trusts............. (7,394) (6,430)
Other investment activities, net.......................... (722) (2)
----------- -----------
Net cash flows used for investments......................... (23,007) (17,663)
----------- -----------
Net Decrease In Cash For The Period......................... (164) (12)
Cash - beginning of period.................................. 202 89
----------- -----------
Cash - end of period........................................ $ 38 $ 77
=========== ===========
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Presentation
The accompanying unaudited financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) in this Form 10-Q, the
Annual Report of Western Massachusetts Electric Company (the company
or WMECO) on Form 10-K for the year ended December 31, 1995 (1995 Form
10-K), the company's Form 10-Qs for the quarters ended March 31, 1996
and June 30, 1996, and the company's Form 8-Ks dated January 31, 1996,
March 30, 1996, June 6, 1996, June 28, 1996, July 22, 1996, and
September 3, 1996. In the opinion of the company, the accompanying
financial statements contain all adjustments necessary to present
fairly the financial position as of September 30, 1996, the results of
operations for the three-month and nine-month periods ended September
30, 1996 and 1995, and the statements of cash flows for the nine-month
periods ended September 30, 1996 and 1995. All adjustments are of a
normal, recurring, nature except those described below in Note 7B. The
results of operations for the three-month and nine-month periods ended
September 30, 1996 and 1995 are not necessarily indicative of the
results expected for a full year.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
Northeast Utilities (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),
WMECO, and Holyoke Water Power Company. A fifth wholly owned
subsidiary, North Atlantic Energy Corporation (NAEC), sells all of its
entitlement to the capacity and output of the Seabrook nuclear power
plant to PSNH. In addition to its retail electric 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.
2. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) has 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," which
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.
Based on the current regulatory environment in the system's service areas,
as of September 30, 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, see WMECO's
Form 10-Qs for the quarters ended March 31, 1996 and June 30, 1996, and
WMECO's 1995 Form 10-K.
3. REGULATORY ASSETS - RECOVERABLE ENERGY COSTS
For information on recoverable energy costs, see the MD&A and Note 7B in
this Form 10-Q and WMECO's 1995 Form 10-K.
4. SHORT-TERM DEBT
For information on short-term debt, see the MD&A in this Form 10-Q, WMECO's
Form 10-Q for the quarter ended March 31, 1996, and WMECO's 1995 Form 10-K.
5. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
On September 13, 1996, WMECO entered into an agreement to sell fractional
undivided percentage receivable interests in its eligible billed and
unbilled accounts receivable. The amount of receivables sold at any one
time will not exceed $40 million plus limited reserves for losses. To the
extent actual loss experience of the pool receivables exceeds the loss
reserves, the purchaser will absorb the excess. WMECO has retained
collection and servicing responsibilities as agent for the purchaser. As
of November 12, 1996, no receivables had been sold under this agreement.
The FASB has issued SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" which establishes,
in part, accounting standards for the accounting and recognition of
transfers of financial assets. SFAS 125 will be effective for transfers
and servicing of financial assets occurring after December 31, 1996
and will be applied prospectively. Under the terms of its receivables
financing agreement, WMECO is obligated to restructure its existing
arrangement to, in effect, satisfy the requirements of SFAS 125,
and obtain certain regulatory approvals, or waiver thereof, by February 1,
1997 or the arrangement will terminate.
6. NUCLEAR DECOMMISSIONING
For information regarding nuclear decommissioning, see the company's Form
10-Q for the quarter ended March 31, 1996 and the company's 1995 Form 10-K.
For information regarding the possible closure and decommissioning of
Connecticut Yankee (CY), see Note 7B in this Form 10-Q.
7. COMMITMENTS AND CONTINGENCIES
A. Construction Program: For information regarding WMECO's construction
program, see WMECO's 1995 Form 10-K.
B. Nuclear Performance:
Millstone: WMECO has previously disclosed in its 1995 Form 10-K, its
Form 10-Qs for the quarters ended March 31, 1996 and June 30, 1996,
and its Form 8-Ks dated January 31, 1996, March 30, 1996, June 6,
1996, June 28, 1996, July 22, 1996, and September 3, 1996, that among
other things: (i) the Millstone nuclear units have been placed on the
Nuclear Regulatory Commission's (NRC) watch list, (ii) the three
Millstone units are currently out of service, (iii) NU is currently
restructuring its nuclear organization and developing operational
readiness plans, and (iv) the company is currently incurring
substantial costs, including replacement power costs, while the three
Millstone units are down.
Management cannot predict when the NRC will allow any of the Millstone
units to return to service and thus cannot estimate the total
replacement power costs the company will ultimately incur.
Management now estimates WMECO will expense approximately $27 million
of incremental non-fuel nuclear operation and maintenance costs in
1996. Approximately $20 million of the $27 million was expensed in the
first three quarters of 1996. It is likely this estimate will rise as
NU and the NRC identify additional issues that need to be resolved.
The recovery of fuel, purchased power, and other outage-related costs
is subject to prudence reviews. While it is too early to estimate the
total amount of such costs or the results of any prudence reviews,
management believes that there is significant exposure to non-recovery
of a material amount of such costs.
For further information, see the Securities and Exchange Commission
filings referenced above, the MD&A, and Part II, Item 5 in this Form
10-Q.
Connecticut Yankee: On October 9, 1996, Connecticut Yankee Atomic
Power Company (CYAPC), which owns and operates CY nuclear generating
unit, announced that a permanent shutdown of the unit seems likely
based on an economic analysis of the costs of operating the unit
compared to the costs of closing the unit and incurring replacement
power costs over the remaining period of the unit's NRC operating
license. The final decision is pending a vote by CYAPC's board of
directors which is expected to occur in the fourth quarter of 1996.
WMECO has a 9.5 percent equity investment, approximating $10 million,
in CYAPC. The NU system relies on CYAPC for approximately 3.5 percent
of its system capacity.
The preliminary estimate of the sum of future payments for the
closing, decommissioning, and recovery of the remaining investment in
CY, assuming permanent shut down, is approximately $797 million.
WMECO's share of these remaining estimated costs is approximately $76
million.
The contract under which WMECO purchases its entitlement of CYAPC
power permits CYAPC to recover these costs from WMECO. Should CYAPC
board's decision result in permanent closure of CY, CYAPC expects to
file updated decommissioning costs and certain amendments to its power
contracts with the Federal Energy Regulatory Commission (FERC). Based
upon regulatory precedent, CYAPC believes it will continue to collect
from its power purchasers, including WMECO, its decommissioning costs,
the owners' unrecovered investments in CYAPC and other costs
associated with the permanent closure of the unit over the remaining
period of the unit's NRC operating license, which expires in 2007.
Management expects that WMECO will continue to be allowed to recover
such FERC-approved costs from its customers.
For further information regarding CY, see the MD&A in this Form 10-Q,
WMECO's Form 10-Qs for the quarters ended March 31, 1996 and June 30,
1996, and WMECO's Form 8-Ks dated June 3, 1996, July 22, 1996, and
September 3, 1996.
C. Environmental Matters: For information regarding environmental
matters, see WMECO's 1995 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see WMECO's 1995 Form 10-K.
E. Long-Term Contractual Arrangements: For information regarding long-
term contractual arrangements, see WMECO's 1995 Form 10-K.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section contains management's assessment of Western Massachusetts Electric
Company's (WMECO or 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 WMECO's financial statements and footnotes in this Form 10-Q,
the 1995 Form 10-K, the First and Second Quarter 1996 Form 10-Qs, and the Form
8-Ks dated January 31, 1996, March 30, 1996, June 6, 1996, June 28, 1996, July
22, 1996, and September 3, 1996.
FINANCIAL CONDITION
Overview
WMECO had a net loss of approximately $0.4 million for the three months ended
September 30, 1996, a decrease of approximately $14 million from the same period
in 1995. Earnings were lower primarily due to higher fuel costs related to the
outages at the Millstone units. This decrease was partially offset by lower
amortization due to the completion of the Millstone 3 unuseful investment and a
one-time tax benefit recognized in 1995.
Net income was approximately $12 million for the nine months ended September 30,
1996, a decrease of approximately $18 million from the same period in 1995.
Earnings were lower primarily due to higher operating costs and reserves related
to the outages at the Millstone units. This decrease was partially offset by
higher retail sales in 1996, lower amortization due to the completion of
the Millstone 3 phase-in and unuseful investment, and lower interest expense.
WMECO expects to continue incurring substantial costs during the remainder of
1996 as a result of the Millstone outages, which could result in a loss for the
fourth quarter. A key factor affecting 1996 earnings will be the level of costs
expended to address Nuclear Regulatory Commission (NRC) concerns and the
replacement-power costs incurred to serve WMECO's customers in the absence of
energy from the Millstone units. Management currently estimates that it will
expense about $27 million of incremental non-fuel operation and maintenance
costs in 1996, approximately $20 million of which were expensed during the first
nine months of 1996, including a reserve for future costs of $8 million. It is
likely that these costs will rise as NU and the NRC identify additional issues
that need to be resolved. WMECO's share of monthly replacement-power costs
attributable to the nuclear outages averages approximately $5 million.
Millstone Outages
WMECO has a 19-percent ownership interest in Millstone units 1 and 2, and a
12.24-percent ownership interest in Millstone 3.
Millstone units 1, 2, and 3 (Millstone) have been out-of-service since November
4, 1995, February 21, 1996, and March 30, 1996, respectively.
For further information on the current Millstone outages see WMECO's 1995 Form
10-K, Form 8-Ks dated January 31, 1996, March 30, 1996, June 6, 1996, June 28,
1996, July 22, 1996, and September 3, 1996, and the First and Second Quarter
1996 Form 10-Qs.
On October 18, 1996, the NRC announced that it will establish a Special Projects
Office to oversee inspection and licensing activities at Millstone. The
Special Projects Office will be responsible for (1) licensing and
inspection activities at NU's Connecticut plants; (2) oversight of the
Independent Corrective Action Verification Program; (3) oversight of NU's
corrective actions related to safety issues involving employee concerns; and (4)
inspections necessary to implement NRC oversight of the plants' restart
activities. Management believes that this development should provide dedicated
NRC resources and clearer lines of communication between NU and the NRC during
the recovery process.
On October 24, 1996, the NRC issued an order to Northeast Nuclear Energy Company
(NNECO), a wholly-owned subsidiary of NU that operates Millstone, that requires
NNECO to devise and implement a comprehensive plan within 60 days of this order
for handling safety concerns raised by Millstone employees and for assuring an
environment free from retaliation and discrimination. The NRC also ordered
NNECO to contract for an independent third party to oversee this corrective
action plan within 30 days of the date of this order. The members of the
independent third-party organization must not have had any direct previous
involvement with activities at Millstone and must be approved by the NRC.
Oversight by the third-party group will continue until NNECO demonstrates, by
performance, that the conditions leading to this order have been corrected.
Management cannot presently estimate the effect these efforts will have on the
timing of unit restarts or what additional costs, if any, these developments may
cause.
Connecticut Yankee
WMECO has a 9.5-percent ownership interest in the Connecticut Yankee Atomic
Power Company (CYAPC) which owns and operates the Connecticut Yankee nuclear
power plant (CY or the plant).
CY has been out-of-service since July 22, 1996. For further information on CY,
see WMECO's Form 8-Ks dated June 6, 1996, July 22, 1996, and September 3,1996,
the First and Second Quarter 1996 Form 10-Qs, and Note 6b - Commitments
and Contingencies - Nuclear Performance - Connecticut Yankee - of the Notes to
Financial Statements in this Form 10-Q.
On October 9, 1996, CYAPC announced that a permanent shutdown of the plant seems
likely based on an economic analysis of the costs of operating the plant
compared to the costs of closing the plant and incurring replacement power costs
over the remaining period of the plant's NRC operating license. The final
decision is pending a vote by CYAPC's Board of Directors (Board) which is
expected to occur in the fourth quarter of 1996. The NU system relies on its
entitlement in CY for approximately 3.5 percent of its system capacity.
The contract under which WMECO purchases its entitlement of CYAPC power permits
CYAPC to recover these costs from WMECO. Should the Board's decision result in
permanent closure of CY, CYAPC expects to file updated decommissioning costs and
certain amendments to its power contracts with the Federal Energy Regulatory
Commission (FERC). Based upon regulatory precedent, CYAPC believes it will
continue to collect from its power purchasers, including WMECO, its
decommissioning costs, the owners' unrecovered investments in CYAPC, and other
costs associated with the permanent closure of the plant over the remaining
period of the plant's NRC operating license, which expires in 2007. Management
expects that WMECO will continue to be allowed to recover such FERC-approved
costs from its customers.
Rate Matters
On August 30, 1996, the Massachusetts Department of Public Utilities (DPU)
approved a settlement agreement between WMECO and the Massachusetts Attorney
General to maintain WMECO's Fuel Adjustment Charge (FAC) at its August 1996
level through February 1997. The settlement also provides that WMECO will not
seek carrying charges on any deferred fuel costs incurred as a result of
maintaining the FAC at the agreed-upon level. In accepting the settlement, the
DPU deferred any inquiry into WMECO's fuel expenses, including replacement power
fuel expenses related to the Millstone outages.
Liquidity And Capital Resources
Cash provided from operations decreased approximately $9 million in the first
nine months of 1996, from 1995, primarily due to higher cash operating expenses
related to the nuclear outages, partially offset by higher retail sales and
lower income tax payments. Cash used for financing activities decreased
approximately $14 million primarily due to lower reacquisitions and retirements
of preferred stock and long-term debt and lower payment of cash dividends on
common stock in 1996, partially offset by a net decrease in short-term debt.
Cash used for investments increased approximately $5 million primarily due to
loan repayments from other companies under the NU system Money Pool during 1995,
partially offset by lower construction expenditures in 1996.
On October 8, 1996, Moody's Investors Service (Moody's) downgraded the senior
securities of WMECO, the Niantic Bay Fuel Trust (NBFT), and CYAPC for the second
time since May 1996. Standard & Poor's Rating Group (S&P) downgraded NBFT's
senior securities on October 11, 1996. S&P and Moody's also lowered NBFT's
commercial paper rating to A-3/P-3, increasing the difficulty for NBFT to market
commercial paper. All of WMECO's and NBFT's securities remain on S&P's
CreditWatch.
The system companies have taken various actions to ensure that they 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. These actions have contributed to a
net increase in cash for the NU system of approximately $205 million.
On September 13, 1996, WMECO established a facility under which it may sell from
time to time, up to $40 million of fractional interests in its billed and
unbilled accounts receivable, with limited recourse. This facility has not been
used to date.
Under the current revolving credit agreements (the Current Credit Agreements),
$342.5 million of short-term borrowing capacity is available to the
participating NU system companies. The Current Credit Agreements are scheduled
to be decreased to $257 million on November 27, 1996, when one-fourth of the
borrowing capacity expires.
NU, The Connecticut Light and Power Company (CL&P), and WMECO expect to enter
into a new three-year revolving credit agreement (the New Credit Agreement) in
mid-November 1996 with a group of banks. Under the New Credit Agreement, NU will
be able to borrow on a revolving basis up to $150 million, CL&P will be able to
borrow up to $315 million, and WMECO will be able to borrow up to $150 million,
subject to a total borrowing limit of $315 million for all three borrowers.
Once the New Credit Agreement becomes effective, the Current Credit Agreement
will be reduced to $57 million. More than $400 million of short-term borrowing
capacity will be available in the aggregate to NU, CL&P, and WMECO under: the
New Credit Agreement ($315 million); the Current Credit Agreements that will
remain in effect after the New Credit Agreement becomes effective ($57 million
in the aggregate); and informal uncommitted credit lines with individual banks
(approximately $40 million as of November 15, 1996).
In connection with the arrangement of the New Credit Agreement, NU, CL&P, and
WMECO received authority from the Securities and Exchange Commission to borrow
up to $200 million, $375 million, and $150 million, respectively, on a short-
term basis. Those limits are higher than the previous limits of $150 million,
$325 million, and $60 million, respectively.
For further information on short-term debt, see WMECO's First Quarter 1996 Form
10-Q and 1995 Form 10-K.
RESULTS OF OPERATIONS
Income Statement Variances
Millions of Dollars Increase/(Decrease)
Third Year-
Quarter Percent to-Date Percent
Operating revenues $(8) (8)% $ 2 1%
Fuel, purchased and
net interchange power 12 58 14 22
Other operation (3) (8) 4 4
Maintenance 2 13 15 38
Amortization of
regulatory assets, net (2) (66) (9) (52)
Federal and state income taxes (3) (a) (1) (12)
Interest on long-term debt (1) (10) (3) (12)
Net income (14) (a) (18) (60)
(a) Percentage greater than 100
Comparison of the Third Quarter of 1996 with the Third Quarter of 1995
Total operating revenues decreased due to lower fuel recoveries and regulatory
decisions. Fuel recoveries decreased approximately $6 million primarily due to
the timing of the recovery of lower costs under the company's fuel clause.
Revenues related to regulatory decisions decreased approximately $2 million
primarily due to lower demand-side-management revenues.
Fuel, purchased, and net interchange power expense increased primarily due to
higher 1996 energy costs due to the nuclear outages, partially offset by the
timing of the recognition of costs under the company's fuel clause.
Other operation and maintenance expense, net decreased primarily due to higher
1995 costs for demand-side-management programs and a 1995 work stoppage,
partially offset by higher costs associated with the nuclear outages ($2
million).
Amortization of regulatory assets, net decreased primarily due to the completion
of the amortization of the Millstone 3 unuseful investment as of June 30, 1996.
Federal and state income taxes decreased primarily due to lower book taxable
income, partially offset by a one-time tax benefit in 1995 as a result of the
expiration of the federal statute of limitations for 1991.
Interest on long-term debt decreased primarily due to lower average 1996
interest rates.
Comparison of the First Nine Months of 1996 with the First Nine Months of 1995
Total operating revenues increased due to higher retail sales, partially offset
by regulatory decisions. Retail kilowatt-hour sales increased 3.2 percent ($7
million) primarily due to modest economic growth in 1996. Revenues related to
regulatory decisions decreased approximately $4 million primarily due to lower
demand-side-management revenues.
Fuel, purchased, and net interchange power expense increased primarily due to
higher 1996 outside energy costs due to the nuclear outages, partially offset by
the timing of the recognition of costs under the company's fuel clause and lower
fossil and nuclear generation.
Other operation and maintenance expense increased primarily due to higher costs
associated with the nuclear outages ($20 million, including $8 million of
reserves for future costs) and higher office equipment expenses, partially
offset by higher 1995 costs for demand-side-management programs, a 1995 work
stoppage, and lower 1996 charges from the regional nuclear generating units.
Amortization of regulatory assets, net decreased primarily due to the completion
of the amortization of the Millstone 3 phase-in and unuseful investment as of
June 30, 1995 and 1996, respectively.
Federal and state income taxes decreased primarily due to lower 1996 book
taxable income, partially offset by tax benefits from a favorable tax ruling
recognized during the first quarter of 1995, and the expiration of the federal
statute of limitations for 1991, recognized during the third quarter of 1995.
Interest on long-term debt decreased primarily due to lower average 1996
interest rates.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
1. The NRC's Office of Investigations (OI) has been examining various matters
at Millstone and CY, including but not limited to procedural and technical
compliance matters and employee concerns. One of these matters has been
referred, and others may be referred, to the Office of the U. S. Attorney for
the District of Connecticut (U. S. Attorney) for possible criminal prosecution.
The referred matter concerns full core off-load procedures and related matters
at Millstone. The U.S. Attorney is also reviewing possible criminal violations
arising out of certain of NU's other activities at Millstone and CY, including
the 1996 nuclear workforce reduction.
The U. S. Attorney, together with the U. S. Environmental Protection Agency
and the Connecticut Attorney General, is also investigating possible criminal
violations of federal and state environmental laws at certain NU facilities,
including Millstone.
Management does not believe that any system company or officer has engaged
in conduct that would warrant a federal criminal prosecution. NU intends to
fully cooperate with the OI and the U.S. Attorney in their ongoing
investigations.
For more information regarding the full core off-load matter, see "Part II.
Other Information" in WMECO's Form 10-Q for the quarter ended March 31, 1996.
For more information regarding NU's 1996 nuclear workforce reduction and the
NRC's review thereof, see WMECO's 1995 Form 10-K. For more information
regarding the investigation of environmental matters at Millstone, see "Part II.
Other Information" in WMECO's Form 10-Q for the quarter ended June 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. WMECO filed a Form 8-K dated September 3, 1996 disclosing:
* A Connecticut court ruled that the Town of Haddam had over-assessed
the CY nuclear power plant.
* NU appointed Bruce Kenyon as President and CEO of NU's nuclear
operations and Mr. Kenyon is in the process of implementing a nuclear
management reorganization.
NU's three Millstone units continue to be out of service and
management is continuing its efforts to bring the units on-line.
* Moody's Investor Service has placed all of WMECO's securities under
review for possible downgrades.
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.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
Registrant
Date November 12, 1996 By: /s/ Bernard M. Fox
Bernard M. Fox
Chairman and Director
Date November 12, 1996 By: /s/ John J. Roman
John J. Roman
Vice President and Controller