1996 Annual Report
Western Massachusetts Electric Company
Index
Contents Page
Balance Sheets.......................................................... 2-3
Statements of Income.................................................... 4
Statements of Cash Flows................................................ 5
Statements of Common Stockholder's Equity............................... 6
Notes to Financial Statements........................................... 7
Report of Independent Public Accountants................................ 33
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 34
Selected Financial Data................................................. 45
Statements of Quarterly Financial Data.................................. 45
Statistics.............................................................. 46
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
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At December 31, 1996 1995
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 1,257,097 $ 1,234,738
Less: Accumulated provision for
depreciation (Note 1F)........................ 503,989 462,872
------------- ------------
753,108 771,866
Construction work in progress........................... 15,968 18,957
Nuclear fuel, net......................................... 30,296 31,574
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Total net utility plant............................... 799,372 822,397
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Other Property and Investments:
Nuclear decommissioning trusts, at market............... 83,611 69,903
Investments in regional nuclear generating
companies, at equity (Note 1E)......................... 15,448 14,820
Other, at cost.......................................... 4,367 4,018
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103,426 88,741
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Current Assets:
Cash.................................................... 67 202
Receivables, less accumulated provision for
uncollectible accounts of $2,121,000 in 1996
and $2,230,000 in 1995................................ 40,168 42,164
Accounts receivable from affiliated companies........... 3,525 951
Accrued utility revenues................................ 12,394 11,119
Fuel, materials, and supplies, at average cost.......... 5,317 5,114
Prepayments and other................................... 12,262 9,176
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73,733 68,726
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Deferred Charges:
Regulatory assets (Note 1H)............................. 210,852 160,986
Unamortized debt expense................................ 1,866 1,496
Other................................................... 888 -
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213,606 162,482
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Total Assets........................................ $ 1,190,137 $ 1,142,346
============= ============
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
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At December 31, 1996 1995
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(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock,$25 par value--authorized and
outstanding 1,072,471 shares in 1996 and 1995........ $ 26,812 $ 26,812
Capital surplus, paid in................................ 150,911 150,182
Retained earnings....................................... 97,045 115,296
------------- ------------
Total common stockholder's equity.............. 274,768 292,290
Cumulative preferred stock--
$100 par value--authorized 1,000,000 shares;
outstanding 200,000 shares in 1996 and 1995;
$25 par value--authorized 3,600,000 shares;
outstanding 840,000 shares in 1996
2,300,000 shares in 1995
Preferred stock not subject to mandatory redemption..... 20,000 53,500
Preferred stock subject to mandatory redemption......... 21,000 22,500
Long-term debt.......................................... 334,742 347,470
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Total capitalization........................... 650,510 715,760
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Obligations Under Capital Leases (Note 8)................. 29,269 20,855
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Current Liabilities:
Notes payable to affiliated company..................... 47,400 24,050
Long-term debt and preferred stock--current
portion................................................ 14,700 1,500
Obligations under capital leases--current
portion................................................ 2,965 15,156
Accounts payable........................................ 26,698 14,475
Accounts payable to affiliated companies................ 20,256 11,604
Accrued taxes........................................... 881 1,686
Accrued interest........................................ 5,643 5,670
Nuclear compliance (Note 11B)........................... 11,800 -
Other................................................... 4,754 7,768
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135,097 81,909
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Deferred Credits:
Accumulated deferred income taxes (Note 1I)............. 245,253 259,595
Accumulated deferred investment tax credits
(Note 7)<F7>........................................... 24,833 26,302
Deferred contractual obligations (Note 11F)............. 84,598 18,814
Other................................................... 20,577 19,111
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375,261 323,822
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Commitments and Contingencies (Note 11)
------------- ------------
Total Capitalization and Liabilities........... $ 1,190,137 $ 1,142,346
============= ============
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF INCOME
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For the Years Ended December 31, 1996 1995 1994
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(Thousands of Dollars)
Operating Revenues............................. $421,337 $420,434 $421,477
--------- --------- ---------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power. 115,664 86,738 67,365
Other..................................... 148,724 143,000 130,683
Maintenance.................................. 56,201 37,447 35,430
Depreciation................................. 39,710 37,924 36,885
Amortization of regulatory assets............ 9,170 19,562 29,118
Federal and state income taxes (Note 7)...... 5,995 14,060 32,653
Taxes other than income taxes................ 19,850 18,639 18,403
--------- --------- ---------
Total operating expenses............... 395,314 357,370 350,537
--------- --------- ---------
Operating Income............................... 26,023 63,064 70,940
--------- --------- ---------
Other Income:
Equity in earnings of regional nuclear
generating companies....................... 1,800 1,771 2,031
Other, net................................... 1,153 1,232 3,687
Income taxes................................. 1,068 262 (71)
--------- --------- ---------
Other income, net...................... 4,021 3,265 5,647
--------- --------- ---------
Income before interest charges......... 30,044 66,329 76,587
--------- --------- ---------
Interest Charges:
Interest on long-term debt................... 24,094 26,840 27,678
Other interest............................... 2,028 356 (548)
--------- --------- ---------
Interest charges, net.................. 26,122 27,196 27,130
--------- --------- ---------
Net Income..................................... $ 3,922 $ 39,133 $ 49,457
========= ========= =========
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
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For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net Income.................................................. $ 3,922 $ 39,133 $ 49,457
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 39,710 37,924 36,885
Deferred income taxes and investment tax credits, net..... (3,439) 3,418 10,256
Deferred Millstone 3 return............................... - 7,146 13,427
Recoverable energy costs, net of amortization............. (10,517) 1,285 (8,622)
Nuclear compliance, net (Note 11B)........................ 11,800 - -
Deferred nuclear refueling outage, net of amortization.... 6,188 (8,857) (1,016)
Other sources of cash..................................... 21,248 32,266 28,569
Other uses of cash........................................ (10,270) (8,039) (23,701)
Changes in working capital:
Receivables and accrued utility revenues.................. (1,853) (1,933) 6,470
Fuel, materials and supplies.............................. (203) (285) 2,228
Accounts payable.......................................... 20,875 (11,669) 8,239
Accrued taxes............................................. (805) (3,474) (1,862)
Other working capital (excludes cash)..................... (8,144) 1,256 (2,991)
----------- ----------- -----------
Net cash flows from operating activities...................... 68,512 88,171 117,339
----------- ----------- -----------
Financing Activities:
Issuance of long-term debt.................................. - - 90,000
Net increase (decrease) in short-term debt.................. 23,350 24,050 (6,000)
Reacquisitions and retirements of long-term debt............ - (34,550) (104,169)
Reacquisitions and retirements of preferred stock........... (36,500) (15,675) (7,325)
Cash dividends on preferred stock........................... (5,305) (4,944) (5,897)
Cash dividends on common stock.............................. (16,494) (30,223) (29,514)
----------- ----------- -----------
Net cash flows used for financing activities.................. (34,949) (61,342) (62,905)
----------- ----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (23,468) (27,084) (32,680)
Nuclear fuel.............................................. 541 75 (4,928)
----------- ----------- -----------
Net cash flows used for investments in plant................ (22,927) (27,009) (37,608)
NU System Money Pool........................................ - 8,750 (8,750)
Investment in nuclear decommissioning trusts................ (9,794) (8,503) (7,761)
Other investment activities, net............................ (977) 46 (395)
----------- ----------- -----------
Net cash flows used for investments........................... (33,698) (26,716) (54,514)
----------- ----------- -----------
Net Increase (Decrease) In Cash For The Period................ (135) 113 (80)
Cash - beginning of period.................................... 202 89 169
----------- ----------- -----------
Cash - end of period.......................................... $ 67 $ 202 $ 89
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized........................ $ 21,725 $ 25,551 $ 25,174
=========== =========== ===========
Income taxes................................................ $ 7,816 $ 14,385 $ 30,040
=========== =========== ===========
Increase in obligations:
Niantic Bay Fuel Trust...................................... $ 669 $ 7,851 $ 12,237
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
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Capital Retained
Common Surplus, Earnings
Stock Paid In (a) Total
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1994............... $26,812 $149,319 $ 97,627 $273,758
Net income for 1994.................. 49,457 49,457
Cash dividends on preferred
stock.............................. (5,897) (5,897)
Cash dividends on common stock....... (29,514) (29,514)
Loss on the retirement of preferred
stock.............................. (87) (87)
Capital stock expenses, net.......... 364 364
-------- --------- --------- ---------
Balance at December 31, 1994............. 26,812 149,683 111,586 288,081
Net income for 1995.................. 39,133 39,133
Cash dividends on preferred
stock.............................. (4,944) (4,944)
Cash dividends on common stock....... (30,223) (30,223)
Loss on the retirement of preferred
stock.............................. (256) (256)
Capital stock expenses, net.......... 499 499
-------- --------- --------- ---------
Balance at December 31, 1995............. 26,812 150,182 115,296 292,290
Net income for 1996.................. 3,922 3,922
Cash dividends on preferred
stock.............................. (5,305) (5,305)
Cash dividends on common stock....... (16,494) (16,494)
Loss on retirement of preferred
stock.............................. (374) (374)
Capital stock expenses, net.......... 729 729
-------- --------- --------- ---------
Balance at December 31, 1996............. $26,812 $150,911 $ 97,045 $274,768
======== ========= ========= =========
(a) The company has dividend restrictions imposed by its long-term debt
agreements. At December 31, 1996, these restrictions totaled
approximately $21.5 million.
The accompanying notes are an integral part of these financial statements.
Western Massachusetts Electric Company
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ABOUT WESTERN MASSACHUSETTS ELECTRIC COMPANY
Western Massachusetts Electric Company (WMECO or the company), The
Connecticut Light and Power Company (CL&P), Holyoke Water Power Company
(HWP), Public Service Company of New Hampshire (PSNH), and North
Atlantic Energy Corporation (NAEC) are the operating subsidiaries
comprising the Northeast Utilities system (the system) and are wholly
owned by Northeast Utilities (NU).
The system furnishes retail electric service in Connecticut, New
Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and HWP.
The fifth subsidiary, NAEC, sells all of its capacity to PSNH. In
addition to its retail service, the system furnishes firm and other
wholesale electric services to various municipalities and other
utilities. The system serves about 30 percent of New England's
electric needs and is one of the 20 largest electric utility systems
in the country as measured by revenues.
Other wholly owned subsidiaries of NU provide support services for the
system companies and, in some cases, for other New England utilities.
Northeast Utilities Service Company (NUSCO) provides centralized
accounting, administrative, information resources, engineering,
financial, legal, operational, planning, purchasing, and other
services to the system companies. Northeast Nuclear Energy Company
(NNECO) acts as an agent for system companies in operating the
Millstone nuclear generating facilities.
B. PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of prior years' data have been made to conform
with the current year's presentation.
All transactions among affiliated companies are on a recovery of cost
basis which may include amounts representing a return on equity, and are
subject to approval by various federal and state regulatory agencies.
C.PUBLIC UTILITY REGULATION
NU is registered with the Securities and Exchange Commission (SEC) as a
holding company under the Public Utility Holding Company Act of 1935
(1935 Act), and it and its subsidiaries, including the company, are
subject to the provisions of the 1935 Act. Arrangements among the
system companies, outside agencies and other utilities covering inter-
connections, interchange of electric power and sales of utility property
are subject to regulation by the Federal Energy Regulatory Commission
(FERC) and/or the SEC. The company is subject to further regulation for
rates, accounting, and other matters by the FERC and/or the
Massachusetts Department of Public Utilities (DPU).
D.NEW ACCOUNTING STANDARDS
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 established accounting standards for evaluating and recording
asset impairment. The company adopted SFAS 121 as of January 1, 1996.
See Note 1H, "Summary of Significant Accounting Policies - Regulatory
Accounting and Assets" for further information on the regulatory impacts
of the company's adoption of SFAS 121. See Note 10, "Sale of Customer
Receivables," and Note 11C, "Commitments and Contingencies-Environmental
Matters," for information on newly issued accounting and reporting
standards related to those specific areas.
E.INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT
Regional Nuclear Generating Companies: WMECO owns common stock of four
regional nuclear generating companies (Yankee companies). The Yankee
companies, with the company's ownership interests, are:
Connecticut Yankee Atomic Power Company (a) (CY) ................ 9.5%
Yankee Atomic Electric Company (a) (YAEC) ....................... 7.0
Maine Yankee Atomic Power Company (MY) .......................... 3.0
Vermont Yankee Nuclear Power Corporation (VY) ................... 2.5
(a) YAEC's and CY's nuclear power plants were shutdown permanently on
February 26, 1992 and December 4, 1996, respectively.
WMECO's investments in the Yankee companies are accounted for on the
equity basis due to the company's ability to exercise significant
influence over their operating and financial policies.
WMECO's investments in the Yankee companies at December 31, 1996 are:
(Thousands of Dollars)
Connecticut Yankee Atomic Power Company .............. $10,165
Yankee Atomic Electric Company ........................ 1,673
Maine Yankee Atomic Power Company .................... 2,247
Vermont Yankee Nuclear Power Corporation .............. 1,363
$15,448
The electricity produced by MY and VY is committed substantially on the
basis of ownership interests and is billed pursuant to contractual
agreements. Under ownership agreements with the Yankee companies, WMECO
may be asked to provide direct or indirect financial support for one or
more of the companies. For more information on these agreements, see
Note 11F, "Commitments and Contingencies - Long-Term Contractual
Arrangements." For more information on the Yankee companies, see Note 2,
"Nuclear Decommissioning" and Note 11B, "Commitments and Contingencies -
Nuclear Performance."
Millstone 1: WMECO has a 19 percent joint-ownership interest in
Millstone 1, a 660-megawatt (MW) nuclear generating unit. As of
December 31, 1996 and 1995, plant-in-service included approximately
$90.2 million and $87.4 million, respectively, and the accumulated
provision for depreciation included approximately $37.2 million and
$34.5 million, respectively, for WMECO's share of Millstone 1. WMECO's
share of Millstone 1 expenses is included in the corresponding
operating expenses on the accompanying Statements of Income.
Millstone 2: WMECO has a 19 percent joint-ownership interest in
Millstone 2, an 870-MW nuclear generating unit. As of December 31, 1996
and 1995, plant-in-service included approximately $161.4 million and
$160.0 million, respectively, and the accumulated provision for
depreciation included approximately $51.7 million and $45.8 million,
respectively, for WMECO's share of Millstone 2. WMECO's share of
Millstone 2 expenses is included in the corresponding operating expenses
on the accompanying Statements of Income.
Millstone 3: WMECO has a 12.24 percent joint-ownership interest in
Millstone 3, a 1,154-MW nuclear generating unit. As of December 31,
1996 and 1995, plant-in-service included approximately $377.7 million
and the accumulated provision for depreciation included approximately
$99.8 million and $90.6 million, respectively, for WMECO's share of
Millstone 3. WMECO's share of Millstone 3 expenses is included in the
corresponding operating expenses on the accompanying Statements of
Income.
For more information regarding the Millstone units, see Note 11B,
"Commitments and Contingencies - Nuclear Performance."
F.DEPRECIATION
The provision for depreciation is calculated using the straight-line
method based on estimated remaining lives of depreciable utility
plant-in-service, adjusted for salvage value and removal costs, as
approved by the appropriate regulatory agency. Except for major
facilities, depreciation rates are applied to the average
plant-in-service during the period. Major facilities are depreciated
from the time they are placed in service. When plant is retired from
service, the original cost of plant, including costs of removal, less
salvage, is charged to the accumulated provision for depreciation. The
depreciation rates for the several classes of electric plant-in-service
are equivalent to a composite rate of 3.2 percent in 1996, 3.1 percent
in 1995 and 1994. See Note 2, "Nuclear Decommissioning," for information
on nuclear plant decommissioning.
WMECO's nonnuclear generating facilities have limited service lives.
Plant may be retired in place or dismantled based upon expected future
needs, the economics of the closure and environmental concerns. The
costs of closure and removal are incremental costs and, for financial
reporting purposes, are accrued over the life of the asset as part of
depreciation. At December 31, 1996, the accumulated provision for
depreciation included approximately $3.2 million accrued for the cost of
removal, net of salvage for nonnuclear generation property.
G.REVENUES
Other than revenues under fixed-rate agreements negotiated with certain
wholesale, industrial and commercial customers, utility revenues are
based on authorized rates applied to each customer's use of electricity.
In general, rates can be changed only through a formal proceeding before
the appropriate regulatory commission. At the end of each accounting
period, WMECO accrues an estimate for the amount of energy delivered but
unbilled.
H.REGULATORY ACCOUNTING AND ASSETS
The accounting policies of WMECO and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate regulated enterprises and reflect the effects of the
ratemaking process in accordance with SFAS 71, "Accounting for the
Effects of Certain Types of Regulation." Assuming a cost-of-service
based regulatory structure, regulators may permit incurred costs,
normally treated as expenses, to be deferred and recovered through
future revenues. Through their actions, regulators may also reduce or
eliminate the value of an asset, or create a liability. If any portion
of the company's operations were no longer subject to the provisions of
SFAS 71, as a result of a change in the cost-of-service based regulatory
structure or the effects of competition, the company would be required
to write off related regulatory assets and liabilities. The company
continues to believe that its use of regulatory accounting remains
appropriate.
SFAS 121 requires the evaluation of long-lived assets, including
regulatory 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 long-lived assets which are no
longer probable of recovery through future revenues be revalued based on
estimated future cash flows. If the revaluation is less than the book
value of the asset, an impairment loss would be charged to earnings.
The implementation of SFAS 121 did not have a material impact on the
company's financial position or results of operations as of December 31,
1996. Management continues to believe that it is probable that the
company will recover its investments in long-lived assets through future
revenues. This conclusion may change in the future as competitive
factors influence wholesale and retail pricing in electric utility
industry or if the cost-of-service based regulatory structure were to
change.
The components of WMECO's regulatory assets are as follows:
At December 31, 1996 1995
(Thousands of Dollars)
Income taxes, net (Note 1I) ................ $ 71,519 $ 87,829
Unrecovered contractual obligations
(Note 2) ................................. 84,598 18,814
Amortizable property investment -
Millstone 3 .............................. - 5,600
Recoverable energy costs (Note 1J) ......... 17,510 4,974
Other ...................................... 37,225 43,769
$210,852 $160,986
For more information on the company's regulatory environment and the
potential impacts of restructuring, see Note 11A, "Commitments and
Contingencies-Restructuring," and Management's Discussion and Analysis
of Financial Condition and Results of Operations (MD&A).
I.INCOME TAXES
The tax effect of temporary differences (differences between the periods
in which transactions affect income in the financial statements and the
periods in which they affect the determination of taxable income) is
accounted for in accordance with the ratemaking treatment of the
applicable regulatory commissions. The adoption of SFAS 109,
"Accounting for Income Taxes," in 1993 increased the company's net
deferred tax obligation. As it is probable that the increase in
deferred tax liabilities will be recovered from customers through rates,
WMECO established a regulatory asset. See Note 7, "Income Tax Expense"
for the components of income tax expense.
The tax effect of temporary differences, including timing differences
accrued under previously approved accounting standards, which give rise
to the accumulated deferred tax obligation is as follows:
At December 31, 1996 1995
(Thousands of Dollars)
Accelerated depreciation and
other plant-related differences ............ $218,389 $222,520
Regulatory assets - income tax gross up .... 29,457 34,540
Other ...................................... (2,593) 2,535
$245,253 $259,595
J.RECOVERABLE ENERGY COSTS
Under the Energy Policy Act of 1992 (Energy Act), WMECO is assessed for
its proportionate share of the costs of decontaminating and
decommissioning uranium enrichment plants owned by the United States
Department of Energy (D&D assessment). The Energy Act requires that
regulators treat D&D assessments as a reasonable and necessary current
cost of fuel, to be fully recovered in rates, like any other fuel cost.
WMECO is currently recovering these costs through rates. As of December
31, 1996, the company's total D&D deferrals were approximately $11
million.
For additional information regarding recoverable energy costs see the
MD&A.
K.SPENT NUCLEAR FUEL DISPOSAL COSTS
Under the Nuclear Waste Policy Act of 1982, WMECO must pay the United
States Department of Energy (DOE) for the disposal of spent nuclear fuel
and high-level radioactive waste. Fees for nuclear fuel burned on or
after April 7, 1983 are billed currently to customers and paid to the
DOE on a quarterly basis. For nuclear fuel used to generate electricity
prior to April 7, 1983 (prior-period fuel), payment must be made prior
to the first delivery of spent fuel to the DOE. The DOE was originally
scheduled to begin accepting delivery of spent fuel in 1998. However,
delays in identifying a permanent storage site have continually
postponed plans for the DOE's long-term storage and disposal site. The
DOE's current estimate for an available site is 2010.
Until such payment is made, the outstanding balance will continue to
accrue interest at the three-month Treasury Bill Yield Rate. At
December 31, 1996, fees due to the DOE for the disposal of prior-period
fuel were approximately $37.1 million, including interest costs of $21.5
million. As of December 31, 1996, all fees had been collected through
rates.
2. NUCLEAR DECOMMISSIONING
WMECO's nuclear power plants have service lives that are expected to end
during the years 2010 through 2025. Upon retirement, these units must be
decommissioned. The company's 1996 decommissioning study concluded that
complete and immediate dismantlement at retirement continues to be the most
viable and economic method of decommissioning the three Millstone units.
Decommissioning studies are reviewed and updated periodically to reflect
changes in decommissioning requirements, costs, technology and inflation.
The estimated cost of decommissioning WMECO's ownership share of
Millstone 1, 2, and 3, in year-end 1996 dollars, is $74.1 million, $65.5
million, and $56.6 million, respectively. The Millstone units
decommissioning costs will be increased annually by their respective
escalation rates. Nuclear decommissioning costs are accrued over the
expected service life of the units and are included in depreciation expense
on the Statements of Income. Nuclear decommissioning costs amounted to $6.2
million in 1996, $5.0 million in 1995, and $4.8 million in 1994. Nuclear
decommissioning, as a cost of removal, is included in the accumulated
provision for depreciation on the Balance Sheets. At December 31, 1996, the
balance in the accumulated reserve for decommissioning amounted to $83.6
million.
WMECO has established external decommissioning trusts through a trustee for
its portion of the costs of decommissioning Millstone 1, 2, and 3. Funding
of the estimated decommissioning costs assumes levelized collections for the
Millstone units and after-tax earnings on the Millstone decommissioning
funds of 5.8 percent. As of December 31, 1996, WMECO has collected, through
rates, $53.5 million toward the future decommissioning costs of its share of
the Millstone units, all of which has been transferred to external
decommissioning trusts. Earnings on the decommissioning trusts increase the
decommissioning trust balance and the accumulated reserve for
decommissioning. Unrealized gains and losses associated with the
decommissioning trusts and financing fund also impact the balance of the
trusts and the accumulated reserve for decommissioning.
Changes in requirements or technology, the timing of funding or dismantling,
or adoption of a decommissioning method other than immediate dismantlement
would change decommissioning cost estimates and the amounts required to be
recovered. WMECO attempts to recover sufficient amounts through its allowed
rates to cover its expected decommissioning costs. Only the portion of
currently estimated total decommissioning costs that has been accepted by
regulatory agencies is reflected in rates of the company. Based on present
estimates and assuming its nuclear units operate to the end of their
respective license periods, the company expects that the decommissioning
trusts will be substantially funded when the units are retired from service.
MY and VY: Each Yankee company owns a single nuclear generating unit. MY
and VY have service lives that are expected to end in 2008 and 2012,
respectively. The estimated cost, in year-end 1996 dollars, of
decommissioning WMECO's ownership share of units owned and operated by MY
and VY is $11.1 million and $9.1 million, respectively. Under the terms of
the contracts with the Yankee companies, the shareholder-sponsors are
responsible for their proportionate share of the operating costs of each
unit, including decommissioning. The nuclear decommissioning costs of the
Yankee companies are included as part of the cost of power purchased by
WMECO.
CY and YAEC: On December 4, 1996, the board of directors of CY voted
unanimously to cease permanently the production of power at its nuclear
plant. The system companies relied on CY for approximately 3 percent of
their capacity.
CY has undertaken a number of regulatory filings intended to implement the
decommissioning and the recovery of remaining assets of CY. During late
December, 1996, CY filed an amendment to its power contracts to clarify the
obligations of its purchasing utilities following the decision to cease
power production. At December 31, 1996, the estimated obligation, including
decommissioning amounted to $762.8 million of which the company's share was
approximately $72.5 million.
YAEC is in the process of decommissioning its nuclear facility. At December
31, 1996, the estimated remaining costs, including decommissioning, amounted
to $173.3 million of which the company's share was approximately $12.1
million.
Management expects that WMECO will continue to be allowed to recover these
costs from its customers. Accordingly, WMECO has recognized these costs as
regulatory assets, with corresponding obligations, on its Balance Sheets.
Proposed Accounting: The staff of the SEC 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 units in the financial
statements. In response to these questions, FASB agreed to review the
accounting for removal costs, including decommissioning, and issued a
proposed statement entitled "Accounting for Liabilities Related to Closure
or Removal of Long-Lived Assets," in February, 1996. If current electric
utility industry accounting practices for decommissioning are changed in
accordance with the proposed statement: (1) annual provisions for
decommissioning could increase; (2) the estimated cost for decommissioning
could be recorded as a liability with an offset to plant rather than as part
of 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.
3. SHORT-TERM DEBT
Limits: The amount of short-term debt borrowings that may be incurred by
WMECO is subject to periodic approval by either the SEC under the 1935 Act
or by its state regulator. In addition, the charter of WMECO contains
provisions restricting the amount of short-term debt borrowings. Under the
SEC and/or charter restrictions, WMECO was authorized, as of January 1,
1997, to incur short-term borrowings up to a maximum of $150 million.
Credit Agreements: In November, 1996, NU entered into a three-year
revolving credit agreement (New Credit Agreement) with a group of 12 banks.
Under the terms of the New Credit Agreement, NU, CL&P and WMECO will be able
to borrow up to $150 million, $313.75 million, and $150 million,
respectively. The overall limit for all of the borrowing system companies
under the entire New Credit Agreement is $313.75 million. WMECO is
obligated to pay a facility fee of .30 percent per annum of each bank's
total commitment under the new credit facility which will expire November
21, 1999. At December 31, 1996, there were $27.5 million in borrowings
under this agreement, all of which were borrowed by other system companies.
Access to the New Credit Agreement is contingent upon certain financial
tests being met. NU is currently renegotiating these restrictions so that
the financial impacts of the current nuclear outages do not impact the
ability to access these facilities. Through February 21, 1997, CL&P and
WMECO have satisfied all financial covenants required under their respective
borrowing facilities, but NU needed and obtained a limited waiver of an
interest coverage covenant that had to be satisfied for NU to borrow under
the New Credit Agreement. NU, CL&P and WMECO are currently maintaining
their access to the New Credit Agreement under an interim written
arrangement, under which NU agreed not to borrow more than $27.5 million
against the facility.
In addition to the New Credit Agreement, NU, CL&P, WMECO, HWP, NNECO and The
Rocky River Realty Company (RRR) have various revolving credit lines through
separate bilateral credit agreements. Under the remaining three-year
portion of the facility, four banks maintain commitments to the respective
system companies totaling $56.25 million. NU, CL&P and WMECO may borrow up
to the aggregate $56.25 million, whereas HWP, NNECO and RRR may borrow up to
their short-term debt limit of $5 million, $50 million, and $22 million,
respectively. Under the terms of the agreement, the system companies are
obligated to pay a facility fee of .15 percent per annum of each bank's
total commitment under the three-year portion of the facility. These
commitments will expire December 3, 1998. At December 31, 1996 and 1995,
there were $11.3 million and $42.5 million in borrowings, respectively,
under the facility all of which had been borrowed by other system companies.
Under both credit facilities above, the company may borrow funds on a short-
term revolving basis under the remaining portion of its agreement, using
either fixed-rate loans or standby loans. Fixed rates are set using
competitive bidding. Standby loans are based upon several alternative
variable rates.
Maturities of WMECO's short-term debt obligations are for periods of three
months or less.
Money Pool: Certain subsidiaries of NU, including WMECO, are members of the
Northeast Utilities System Money Pool (Pool). The Pool provides a more
efficient use of the cash resources of the system, and reduces outside
short-term borrowings. NUSCO administers the Pool as agent for the member
companies. Short-term borrowing needs of the member companies are first met
with available funds of other member companies, including funds borrowed by
NU parent. NU parent may lend to the Pool but may not borrow. Funds may be
withdrawn from or repaid to the Pool at any time without prior notice.
Investing and borrowing subsidiaries receive or pay interest based on the
average daily Federal Funds rate. However, borrowings based on loans from
NU parent bear interest at NU parent's cost and must be repaid based upon
the terms of NU parent's original borrowing. At December 31, 1996 and 1995,
WMECO had $47.4 million and $24.1 million, respectively, of borrowings
outstanding from the Pool. The interest rate on borrowings from the Pool at
December 31, 1996 and 1995 was 6.3 percent and 4.7 percent, respectively.
For further information on short-term debt see the MD&A.
4. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock not subject to mandatory redemptions are:
December 31, Shares
1996 Outstanding
Redemption December 31, December 31,
Description Price 1996 1996 1995 1994
(Thousands of Dollars)
7.72% Series B
of 1971 ........ $103.51 200,000 $20,000 $20,000 $20,000
1988 Adjustable
Rate DARTS ....... - - - 33,500 48,500
Total preferred
stock not subject
to mandatory
redemption ..... $20,000 $53,500 $68,500
All or any part of each outstanding series of preferred stock may be
redeemed by the company at any time at established redemption prices plus
accrued dividends to the date of redemption.
5. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
December 31 Shares
1996 Outstanding
Redemption December 31, December 31,
Description Price* 1996 1996 1995 1994
(Thousands of Dollars)
7.60% Series
of 1987 ........... $25.76 840,000 $21,000 $24,000 $24,675
Less preferred stock to be
redeemed within one
year, net of reacquired
stock .............. - 1,500 675
Total preferred stock
subject to mandatory
redemption ......... $21,000 $22,500 $24,000
*Redemption price reduces in future years.
The minimum sinking-fund provisions of the 1987 Series subject to mandatory
redemption at December 31, 1996, for the years 1997 through 2001, are $0 in
1997 and $1.5 million per year for 1998 through 2001. In case of default on
sinking-fund payments, no payments may be made on any junior stock by way of
dividends or otherwise (other than in shares of junior stock) so long as the
default continues. If the company is in arrears in the payment of dividends
on any outstanding shares of preferred stock, the company would be
prohibited from redemption or purchase of less than all of the preferred
stock outstanding. All or part of the 7.60% Series of 1987 may be redeemed
by the company at any time at an established redemption price plus accrued
dividends to the date of redemption subject to certain refunding
limitations.
6. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
1996 1995
(Thousands of Dollars)
First Mortgage Bonds:
5 3/4% Series F, due 1997......... $ 14,700 $ 14,700
6 3/4% Series G, due 1998......... 9,800 9,800
6 1/4% Series X, due 1999......... 40,000 40,000
6 7/8% Series W, due 2000......... 60,000 60,000
7 3/4% Series V, due 2002......... 85,000 85,000
7 3/4% Series Y, due 2024......... 50,000 50,000
Total First Mortgage Bonds................... 259,500 259,500
Pollution Control Notes:
Tax Exempt Series A, due 2028............... 53,800 53,800
Fees and interest due for spent
fuel disposal costs (Note 1K).............. 37,055 35,180
Less: Amounts due within one year........... 14,700 -
Unamortized premium and discount, net........ (913) (1,010)
Long-term debt, net.......................... $334,742 $347,470
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1996 for the years 1997 through 2001 are
approximately $14.7 million, $9.8 million, $40 million, $60 million, and
$0 million, respectively. In addition, there are annual one-percent
sinking-and improvement-fund requirements, currently amounting to $2.6
million for 1997, $2.4 million for 1998 and 1999, $2.0 million for 2000,
and $1.4 million for 2001. Such sinking- and improvement-fund requirements
may be satisfied by the deposit of cash or bonds by certification of
property additions.
All or any part of each outstanding series of first mortgage bonds may be
redeemed by the company at any time at established redemption prices plus
accrued interest to the date of redemption, except certain series which
are subject to certain refunding limitations during their respective
initial five-year redemption periods.
Essentially all of the company's utility plant is subject to the lien of
its first mortgage bond indenture. As of December 31, 1996 and 1995, the
company has secured $53.8 million of pollution control notes with second
mortgage liens on Millstone 1, junior to the liens of its first mortgage
bond indenture. The average effective interest rate on the variable-rate
pollution control notes was 3.3 percent for 1996 and 3.7 percent for 1995.
7. INCOME TAX EXPENSE
The components of the federal and state income tax provisions charged to
operations are:
For the Years Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Current income taxes:
Federal............................ $7,007 $ 7,419 $18,358
State.............................. 1,358 2,961 4,110
Total current.................... 8,365 10,380 22,468
Deferred income taxes, net:
Federal............................ (1,805) 4,130 9,697
State.............................. (165) 1,003 2,267
Total deferred...................(1,970) 5,133 11,964
Investment tax credits, net.......... (1,468) (1,715) (1,708)
Total income tax expense............. $4,927 $13,798 $32,724
The components of total income tax expense are classified as follows:
Income taxes charged to
operating expenses................. $5,995 $14,060 $32,653
Other income taxes .................. (1,068) (262) 71
Total income tax expense............. $4,927 $13,798 $32,724
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
For the Years Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Depreciation, leased nuclear
fuel, settlement credits,
and disposal costs.............. $ 32 $9,066 $ 7,016
Energy adjustment clause.......... 4,102 (1,549) 3,598
Expenses associated with
nuclear outages................. (4,633) - -
Demand side management............ 1,557 (1,184) 466
Nuclear plant deferrals........... (2,258) 2,468 (1,802)
Bond redemptions.................. (502) (572) 1,535
Other............................. (268) (3,096) 1,151
Deferred income taxes, net....... $(1,970) $5,133 $11,964
A reconciliation between income tax expense and the expected tax expense at the
applicable statutory rate is as follows:
For the Years Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Expected federal income tax at
35 percent of pretax income for.... $2,946 $18,526 $28,763
Tax effect of differences:
Depreciation....................... 2,280 2,173 1,740
Amortization of regulatory assets.. 1,029 1,665 3,347
Investment tax credit amortization. (1,468) (1,715) (1,708)
State income taxes, net of
federal benefit.................. 776 2,577 4,144
Adjustment for prior years' taxes.. - (7,702) (825)
Dividends received reduction....... (378) (481) (520)
Other, net......................... (258) (1,245) (2,217)
Total income tax expense............ $4,927 $13,798 $32,724
8. LEASES
WMECO and CL&P finance up to $450 million of nuclear fuel for Millstone 1
and 2 and their respective shares of the nuclear fuel for Millstone 3 under
the Niantic Bay Fuel Trust (NBFT) capital lease agreement. WMECO and CL&P
make quarterly lease payments for the cost of nuclear fuel consumed in the
reactors, based on a units-of-production method at rates which reflect
estimated kilowatt-hours of energy provided, plus financing costs associated
with the fuel in the reactors. Upon permanent discharge from the reactors,
ownership of the nuclear fuel transfers to WMECO and CL&P.
WMECO has also entered into lease agreements for the use of data processing
and office equipment, vehicles, nuclear control room simulators and office
space. The provisions of these lease agreements generally provide for
renewal options. The following rental payments have been charged to
expense:
Year Capital Leases Operating Leases
1996 .....................$ 3,598,000 $6,410,000
1995 ......................12,553,000 6,398,000
1994 ......................13,594,000 6,485,000
Interest included in capital lease rental payments was $1,858,000 in 1996,
$1,954,000 in 1995, and $1,845,000 in 1994.
Substantially all of the capital lease rental payments were made pursuant to
the nuclear fuel lease agreement. Future minimum lease payments under the
nuclear fuel capital lease cannot be reasonably estimated on an annual basis
due to variations in the usage of nuclear fuel.
Future minimum rental payments, excluding annual nuclear fuel lease payments
and executory costs such as property taxes, state use taxes, insurance, and
maintenance, under long-term noncancelable leases, as of December 31, 1996
are:
Year Operating Leases
(Thousands of Dollars)
1997 ................................$ 4,500
1998 ................................ 3,500
1999 ................................ 3,200
2000 ................................ 3,000
2001 ................................ 2,700
After 2001 ........................... 24,500
Future minimum lease payments ....... $41,400
It is possible that certain operating lease payments related to NUSCO
leases will be accelerated from future years into 1997. See Note 11G,
"The Rocky River Realty Company - Obligations" for additional
information.
9. EMPLOYEE BENEFITS
A. PENSION BENEFITS
The company participates in a uniform noncontributory defined benefit
retirement plan covering all regular system employees. Benefits are
based on years of service and the employees' highest eligible
compensation during 60 consecutive months of employment. The
company's direct portion of the system's pension income, part of
which was charged to utility plant, approximated $2.0 million in
1996, $2.7 million in 1995 and $1.0 million in 1994. The company's
pension costs for 1996, 1995 and 1994 included approximately $1.0
million, $0 million, and $0.8 million, respectively, related to
workforce reduction programs.
Currently, the company funds annually an amount at least equal to
that which will satisfy the requirements of the Employee Retirement
Income Security Act and the Internal Revenue Code. Pension costs are
determined using market-related values of pension assets. Pension
assets are invested primarily in domestic and international equity
securities and bonds.
The components of net pension cost for WMECO are:
For the Years Ended December 31, 1996 1995 1994
(Thousand of Dollars)
Service cost....................... $ 2,932 $ 1,645 $ 2,720
Interest cost...................... 7,786 7,757 7,655
Return on plan assets.............. (22,174) (29,798) 221
Net amortization................... 9,458 17,669 (11,635)
Net pension income................. $(1,998) $(2,727) $(1,039)
For calculating pension cost, the following assumptions were used:
For the Years Ended December 31, 1996 1995 1994
Discount rate.......................... 7.50% 8.25% 7.75%
Expected long-term rate
of return............................ 8.75 8.50 8.50
Compensation/progression rate.......... 4.75 5.00 4.75
The following table represents the plan's funded status reconciled to
the Balance Sheets:
At December 31, 1996 1995
(Thousands of Dollars)
Accumulated benefit obligation,
including vested benefits at
December 31, 1996 and 1995 of
$85,094,000 and $84,943,000,
respectively ....................... $ 91,170 $ 90,154
Projected benefit obligation.......... $107,816 $107,527
Market value of plan assets........... 157,863 143,632
Market value in excess of
projected benefit obligation........ 50,047 36,105
Unrecognized transition amount........ (1,963) (2,198)
Unrecognized prior service costs...... 1,213 (525)
Unrecognized net gain................. (46,486) (32,570)
Prepaid pension asset ................ $ 2,811 $ 812
The following actuarial assumptions were used in calculating
the plan's year-end funded status:
At December 31, 1996 1995
Discount rate............................ 7.75% 7.50%
Compensation/progression rate............ 4.75 4.75
B. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The company provides certain health care benefits, primarily medical
and dental, and life insurance benefits through a benefit plan to
retired employees (referred to as SFAS 106 benefits). These benefits
are available for employees retiring from the company who have met
specified service requirements. For current employees and certain
retirees, the total SFAS 106 benefit is limited to two times the 1993
per-retiree health care costs. The SFAS 106 obligation has been
calculated based on this assumption. WMECO's direct portion of SFAS
106 benefits, part of which were deferred or charged to utility
plant, approximated $3.8 million in 1996, $4.4 million in 1995, and
$5.0 million in 1994.
During 1994, the company began funding SFAS 106 postretirement costs
through external trusts. The company is funding, on an annual basis,
amounts that have been rate- recovered and which also are tax
deductible under the Internal Revenue Code. The trust assets are
invested primarily in equity securities and bonds.
The components of health care and life insurance costs are:
For the Years Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Service cost....................... $ 490 $ 490 $ 519
Interest cost...................... 2,236 2,544 2,703
Return on plan assets.............. (883) (718) 19
Amortization of unrecognized
transition obligation............ 1,641 1,641 1,641
Other amortization, net............ 353 473 76
Net health care and life
insurance costs.................. $3,837 $4,430 $4,958
For calculating WMECO's SFAS 106 benefit costs, the following
assumptions were used:
For the Years Ended December 31, 1996 1995 1994
Discount rate...................... 7.50% 8.00% 7.75%
Long-term rate of return -
Health assets, net of tax........ 5.25 5.00 5.00
Life assets...................... 8.75 8.50 8.50
The following table represents the plan's funded status
reconciled to the Balance Sheets:
At December 31, 1996 1995
(Thousands of Dollars)
Accumulated postretirement benefit obligation of:
Retirees...................................... $24,614 $28,787
Fully eligible active employees........... ... 28 28
Active employees not eligible to retire....... 5,449 5,847
Total accumulated postretirement
benefit obligation........................... 30,091 34,662
Market value of plan assets.................... 10,215 5,339
Accumulated postretirement benefit
obligation in excess of plan assets.......... (19,876) (29,323)
Unrecognized transition amount................. 26,259 27,901
Unrecognized net gain.......................... (6,765) (1,399)
Accrued postretirement benefit liability....... $ (382) $(2,821)
The following actuarial assumptions were used in calculating the
plan's year-end funded status:
At December 31, 1996 1995
Discount rate.................................. 7.75% 7.50%
Health care cost trend rate (a)................ 7.23 8.40
(a) The annual growth in per capita cost of covered health care
benefits was assumed to decrease to 4.91 percent by 2001.
The effect of increasing the assumed health care cost trend rate by
one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996, by $1.8
million and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for the year then ended
by $0.2 million. The trust holding the health plan assets is subject
to federal income taxes at a 39.6 percent tax rate.
WMECO is currently recovering SFAS 106 costs.
10. SALE OF CUSTOMER RECEIVABLES
WMECO has entered into an agreement to sell up to $40 million of eligible
customer billed and unbilled accounts receivable. The eligible receivables
are sold with limited recourse. The agreement was entered into during
September, 1996 and will expire in five years. The company has retained
collection responsibilities for receivables which have been sold under the
agreement. As collections reduce previously sold undivided interests, new
receivables would routinely be sold. The agreements provide for a loss
reserve determined by a formula which reflects credit exposure. As of
February 21, 1997, WMECO has sold approximately $15 million of their
accounts receivable under this agreement.
The FASB issued SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June, 1996. SFAS
125 became effective on January 1, 1997, and establishes, in part,
criteria for concluding whether a transfer of financial assets in exchange
for consideration should be accounted for as a sale or as a secured
borrowing.
WMECO is in the process of restructuring its receivable program to comply
with the requirements of SFAS 125. Management believes that the adoption
of SFAS 125 will not have a material impact on the company's financial
position or results of operations.
11. COMMITMENTS AND CONTINGENCIES
A. RESTRUCTURING
Although WMECO continues to operate under cost-of-service based
regulation, various restructuring initiatives in its jurisdiction
have created uncertainty with respect to future rates and the
recovery of strandable investments and certain future costs such
as purchase power obligations. Strandable investments are regulatory
assets or other assets that would not be economical in a competitive
environment. Management is unable to predict the ultimate outcome of
restructuring initiatives; however, it believes that it is entitled
to full recovery of its prudently incurred costs, including
regulatory assets and strandable investments based on the general
nature of public utility cost of service regulation. For further
information on restructuring, see the MD&A.
B. NUCLEAR PERFORMANCE
Millstone: The three Millstone units are managed by NNECO. Millstone
1, 2, and 3 have been out of service since November 4, 1995, February
21, 1996 and March 30, 1996, respectively, and are on the Nuclear
Regulatory Commission's (NRC) watch list. The company has
restructured its nuclear organization and is currently implementing
comprehensive plans to restart the units.
According to the plans, each unit's recovery team will be working
towards restart of its respective unit on a parallel basis with the
other two units. Based upon management's current plans, it is
estimated that one of the units will be ready for restart in the
third quarter of 1997 with the other two units being ready for
restart during the fourth quarter of 1997 and the first quarter of
1998, respectively.
The NRC has also issued two orders affecting the Millstone units on
the subjects of independent corrective action verification and
employee concerns. Independent third parties have been retained by
NNECO and are awaiting NRC approval.
Prior to and following notification to the NRC that the units are
ready to resume operations, the NRC staff will conduct extensive
reviews and inspections and, prior to such notification, independent
corrective action, verification teams will also inspect each unit.
The units will not be allowed to restart without an affirmative vote
of the NRC commissioners following completion of these reviews and
inspections. Management cannot estimate when the NRC will allow any
of the units to restart, but hopes to have at least one unit
operating in the second half of 1997.
The company is currently incurring substantial costs, including
replacement power costs, while the three Millstone units are not
operating. Management does not expect to recover a substantial
portion of these costs. WMECO expensed approximately $33 million of
incremental nonfuel nuclear operation and maintenance costs (O&M) in
1996, including a reserve of $12 million against 1997 expenditures.
Management estimates WMECO will expense approximately $73 million of
nonfuel nuclear O&M costs in 1997.
As discussed above, 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 WMECO will ultimately
incur. Replacement power costs for WMECO are expected to average
approximately $5 million per month during 1997 while all three
Millstone units remain out of service. Management believes the system
has sufficient resources to fund the restoration of the Millstone
units to service under its present timetable.
MY: The system companies rely on MY for approximately two percent of
their capacity. The MY nuclear generating plant has been limited to
operating at 90 percent of capacity since early 1996, pending the
resolution of issues related to investigations initiated by the NRC,
and on December 6, 1996, was taken off line to resolve cable-
separation and associated issues. The NRC has notified MY that the
NRC staff has placed the MY plant on its watch list. Returning the
plant to service will require NRC approval. Management cannot predict
when MY's plant will be allowed to return to service and expects
there will be substantial costs associated with the NRC's actions
that cannot be accurately estimated at this time.
Potential Litigation: The non-NU owners of Millstone 3 have been
paying their share of the monthly costs for Millstone 3 since the
unit went out of service in March, 1996, but have reserved their
rights to contest whether the NU system companies have any
responsibility for the additional costs the non-NU owners have borne
as a result of the current outage. No formal claims have been made,
but management believes that it is possible that some or all of the
non-NU owners will assert liability on the part of the NU system.
CL&P and WMECO, through NNECO as agent, operate Millstone 3 at cost,
and without profit, under a Sharing Agreement that obligates them to
utilize good utility operating practice and requires the joint owners
to share the risk of employee negligence and other risks pro rata in
accordance with their ownership shares. The Sharing Agreement
provides that CL&P and WMECO would only be liable for damages to the
non-NU owners for a deliberate breach of the Sharing Agreement. At
December 31, 1996, the costs related to this potential litigation were
estimated to be $2.5 million for incremental O&M costs and to be
between $8 and $10 million for replacement power costs. These costs
are likely to increase as long as Millstone 3 remains out of service.
NU will vigorously contest such suits if they are brought.
C. ENVIRONMENTAL MATTERS
WMECO is subject to regulation by federal, state and local
authorities with respect to air and water quality, the handling and
disposal of toxic substances and hazardous and solid wastes, and the
handling and use of chemical products. WMECO has an active
environmental auditing and training program and believes that it is
in substantial compliance with current environmental laws and
regulations.
Environmental requirements could hinder the construction of new
generating units, transmission and distribution lines, substations,
and other facilities. Changing environmental requirements could also
require extensive and costly modifications to WMECO's existing
generating units, and transmission and distribution systems, and
could raise operating costs significantly. As a result, WMECO may
incur significant additional environmental costs, greater than amounts
included in cost of removal and other reserves, in connection with the
generation and transmission of electricity and the storage,
transportation and disposal of by-products and wastes. WMECO may also
encounter significantly increased costs to remedy the environmental
effects of prior waste handling activities. The cumulative long-term
cost impact of increasingly stringent environmental requirements
cannot accurately be estimated.
WMECO has recorded a liability based upon currently available
information for what it believes are its estimated environmental
remediation costs for waste disposal sites. In most cases, additional
future environmental cleanup costs are not reasonably estimable due to
a number of factors, including the unknown magnitude of possible
contamination, the appropriate remediation methods, the possible
effects of future legislation or regulation and the possible effects
of technological changes. At December 31, 1996, the liability
recorded by WMECO for its estimated environmental remediation costs,
excluding any possible insurance recoveries or recoveries from third
parties, amounted to approximately $1.4 million, which management has
determined to be the most probable amount within the range of $1.4
million to $5.9 million.
WMECO cannot estimate the potential liability for future claims,
including environmental remediation costs, that may be brought against
it. However, considering known facts, existing laws and regulatory
practices, management does not believe the matters disclosed above
will have a material effect on WMECO's financial position or future
results of operations.
On October 10, 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental
Remediation Liabilities" (SOP). The principal objective of the SOP is
to improve the manner in which existing authoritative accounting
literature is applied by entities to specific situations of
recognizing, measuring and disclosing environmental remediation
liabilities. The SOP became effective January 1, 1997. The company
believes the adoption of this SOP will not have a material impact on
the company's financial position or results of operations.
D. NUCLEAR INSURANCE CONTINGENCIES
Under certain circumstances, in the event of a nuclear incident at one
of the nuclear facilities covered by the federal government's third-
party liability indemnification program, the company could be
assessed, in proportion to its ownership interest in each nuclear unit
up to $75.5 million not to exceed $10 million per nuclear unit in any
one year. Based on its ownership interest in Millstone 1, 2, and 3,
WMECO's maximum liability including any additional potential
assessments, would be $39.8 million per incident. In addition,
through power purchase contracts with MY, VY and CY, WMECO would be
responsible for up to an additional $11.9 million per incident.
Payments for WMECO's ownership interest in nuclear generating
facilities would be limited to a maximum of $6.5 million per incident
per year.
Insurance has been purchased to cover the primary cost of repair,
replacement or decontamination of utility property resulting from
insured occurrences. WMECO is subject to retroactive assessments if
losses exceed the accumulated funds available to the insurer. The
maximum potential assessment against WMECO with respect to losses
arising during the current policy year is approximately $2.5 million
under the primary property insurance program.
Insurance has been purchased to cover certain extra costs incurred in
obtaining replacement power during prolonged accidental outages and
the excess cost of repair, replacement, or decontamination or
premature decommissioning of utility property resulting from insured
occurrences. WMECO is subject to retroactive assessments if losses
exceed the accumulated funds available to the insurer. The maximum
potential assessments against the company with respect to losses
arising during current policy years are approximately $2.0 million
under the replacement power policies and $4.9 million under the excess
property damage, decontamination and decommissioning policies. The
cost of a nuclear incident could exceed available insurance proceeds.
Insurance has been purchased aggregating $200 million on a industry
basis for coverage of worker claims. All participating reactor
operators insured under this coverage are subject to retrospective
assessments of $3.0 million per reactor. The maximum potential
assessment against WMECO with respect to losses arising during the
current policy period is approximately $2.2 million.
E. CONSTRUCTION PROGRAM
The construction program is subject to periodic review and
revision by management. WMECO currently forecasts construction
expenditures of approximately $169 million for the years 1997-2001,
including $37 million for 1997. In addition, the company estimates
that nuclear fuel requirements, including nuclear fuel financed
through the NBFT, will be approximately $54.1 million for the years
1997-2001, including $2.4 million for 1997. See Note 8, "Leases" for
additional information about the financing of nuclear fuel.
F. LONG-TERM CONTRACTUAL ARRANGEMENTS
Yankee Companies: WMECO along with CL&P and PSNH, relies on MY and VY
for approximately three percent of their capacity under long-term
contracts. Under the terms of their agreements, the system companies
pay their ownership (or entitlement) shares of costs, which include
depreciation, O&M expenses, taxes, the estimated cost of
decommissioning and a return on invested capital. These costs are
recorded as purchased power expense and recovered through the
company's rates. WMECO's total cost of purchases under these
contracts with the Yankee companies excluding YAEC, amounted to $28.3
million in 1996, $28.9 million in 1995, and $28.8 million in 1994.
See Note 1E, "Summary of Significant Accounting Policies-Investments
and Jointly Owned Electric Utility Plant, " and Note 2, "Nuclear
Decommissioning" for more information on the Yankee companies.
Nonutility Generators (NUG): WMECO, along with CL&P and PSNH, has
entered into various arrangements for the purchase of capacity and
energy from NUGs. These arrangements have terms form 15 to 25 years,
currently expiring in the years 2008 through 2013, and requires WMECO
to purchase energy at specified prices or formula rates. For the 12
months ended December 31, 1996, approximately 13 percent of system
electricity requirements were met by NUGs. WMECO's total cost of
purchases under these arrangements amounted to $29.5 million in 1996,
$28.6 million in 1995, and $27.5 million in 1994. These costs are
eventually recovered through the company's rates.
Hydro-Quebec: Along with other New England utilities, WMECO, CL&P,
PSNH and HWP have entered into agreements to support transmission and
terminal facilities to import electricity from the Hydro-Quebec system
in Canada. WMECO is obligated to pay, over a 30-year period ending in
2020, its proportionate share of the annual O&M and capital costs of
these facilities.
The estimated annual costs of the WMECO's significant long-term
contractual arrangements are as follows:
1997 1998 1999 2000 2001
(Millions of Dollars)
MY and VY .................. $10.4 $ 8.9 $10.5 $10.4 $ 9.5
Nonutility generators ...... 33.0 35.0 37.0 39.0 42.0
Hydro-Quebec ............... 3.9 3.8 3.7 3.6 3.5
G. THE ROCKY RIVER REALTY COMPANY - OBLIGATIONS
RRR provides real estate support services which includes the leasing
of property and facilities used by system companies. RRR is the
obligor under financing arrangements for certain system facilities.
Under those financing arrangements, the holders of notes for $38.4
million would be entitled to request that RRR repurchase the notes if
any major subsidiary of NU (as defined by the notes) has debt ratings
below investment grade as of any year-end during the term of the
financing. The notes are secured by real estate leases between RRR as
lessor and NUSCO as lessee. The leases provide for the acceleration
of rent equal to RRR's note obligations if RRR is unable to repay the
obligation. The operating companies, primarily CL&P, WMECO and PSNH
may be billed by NUSCO for their proportionate share of the
accelerated lease obligations if the rateholders request repurchase of
the notes. NU has guaranteed the notes.
Based on the terms of the notes, PSNH and NAEC will be defined as
major subsidiaries of NU, effective as of the end of 1996, and both
PSNH's and NAEC's debt ratings were below investment grade.
Accordingly, under the terms of the RRR financing arrangements, the
holders may elect to require RRR to repurchase the notes at par. If
the noteholders make such an election, RRR has the option to refinance
the notes with an institutional investor. However, it is possible
that RRR may be required to repurchase the notes. As of February 21,
1997, the holders had not made such an election. RRR plans to engage
in discussions with the noteholders regarding this issue and
management does not expect the resolution to have a material impact on
its financial condition.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each of the following financial instruments:
Cash and nuclear decommissioning trusts: The carrying amounts approximate
fair value.
SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires investments in debt and equity securities to be
presented at fair value. As a result of this requirement, the investments
held in the company's nuclear decommissioning trust were adjusted to market
by approximately $8.4 million as of December 31, 1996 and by approximately
$4.5 million as of December 31, 1995, with a corresponding offset to the
accumulated provision for depreciation. The amounts adjusted in 1996 and
1995 represent cumulative gross unrealized holding gains. The cumulative
gross unrealized holding losses were immaterial for both 1996 and 1995.
Preferred stock and long-term debt: The fair value of WMECO's fixed-rate
securities is based upon the quoted market price for those issues or
similar issues. Adjustable rate securities are assumed to have a fair
value equal to their carrying value.
The carrying amount of WMECO's financial instruments and the estimated fair
values are as follows:
Carrying Fair
At December 31, 1996 Amount Value
(Thousands of Dollars)
Preferred stock not subject to
mandatory redemption......................... $ 20,000 $ 15,200
Preferred stock subject to
mandatory redemption.......................... 21,000 18,404
Long-term debt - First Mortgage Bonds.......... 259,500 260,440
Other long-term debt........................... 90,855 90,855
Carrying Fair
At December 31, 1995 Amount Value
(Thousands of Dollars)
Preferred stock not subject to
mandatory redemption..................... .... $ 53,500 $ 53,700
Preferred stock subject to
mandatory redemption.......................... 24,000 25,085
Long-term debt - First Mortgage Bonds.......... 259,500 265,280
Other long-term debt........................... 88,980 88,980
The fair values shown above have been reported to meet the disclosure
requirements and do not purport to represent the amounts at which those
obligations would be settled.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Western Massachusetts Electric Company:
We have audited the accompanying balance sheets of Western
Massachusetts Electric Company (a Massachusetts corporation and a
wholly owned subsidiary of Northeast Utilities) as of December 31,
1996 and 1995, and the related statements of income, common
stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Western
Massachusetts Electric Company as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 21, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of WMECO's (the company) financial
condition and the principal factors having an impact on the results of opera-
tions. The company is a wholly-owned subsidiary of Northeast Utilities (NU).
This discussion should be read in conjunction with the company's financial
statements and footnotes.
FINANCIAL CONDITION
EARNINGS OVERVIEW
WMECO faced an extremely difficult year in 1996 as a result of the prolonged
outages at the three Millstone units (Millstone). These outages resulted in
significantly increased expenditures for replacement power and work undertaken
at Millstone, which had a significant negative impact on WMECO's 1996 earnings.
In 1997, while all three units are out of service, WMECO expects to operate on a
roughly break-even basis. The combination of higher expenditures and the
uncertainty surrounding when the units will return to service made it necessary
to ensure that access to adequate cash levels would be available for the
duration of the outages. Management took various actions during 1996 to address
NU's nuclear program and liquidity issues, however, 1997 will continue to be a
serious challenge in these areas.
WMECO faces future uncertainty with the rapidly moving trend toward industry
restructuring. While restructuring had little direct impact on 1996 financial
results, it creates an environment of significant uncertainty and financial risk
for the coming years. As discussed in further detail in "Restructuring," the
financial treatment that strandable investments will be accorded will impact
WMECO's ability to compete in a restructured environment.
Net income was approximately $4 million in 1996, compared to $39 million in
1995. WMECO's 1996 net income was significantly lower primarily due to the
ongoing outages at Millstone which totaled approximately $74 million and reduced
WMECO's earnings by approximately $43 million. These costs included replacement
power, higher 1996 Millstone operation and maintenance costs and a reserve
recognized in 1996 for 1997 expenditures to return the Millstone units to
service. These decreases were partially offset by higher retail sales and lower
regulatory asset amortization.
Retail kilowatt-hour sales increased by 2.7 percent in 1996 as a result of
modest economic growth. In 1997, management expects that the Massachusetts
economy will continue to experience modest economic growth.
MILLSTONE
OUTAGES
WMECO has an 19 percent ownership interest in Millstone 1 and 2 and a 12.24
percent ownership interest in Millstone 3. Millstone 1, 2 and 3 have been out of
service since November 4, 1995, February 21, 1996, and March 30, 1996,
respectively.
Subsequent to its January 31, 1996, announcement that Millstone had been placed
on its watch list, the Nuclear Regulatory Commission (NRC) has stated that the
units cannot return to service until independent, third-party verification teams
have reviewed the actions taken to improve the design, configuration and
employee concerns issues that prompted the NRC to place the units on its watch
list. Upon successful completion of these reviews, the NRC must approve the
restart of each unit through a formal commission vote.
Management took several key steps toward improving NU's nuclear program during
1996 and will continue to place a high priority on its recovery in 1997. The NU
Board of Trustees formed a committee in April, 1996, 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. In September, 1996, Bruce D. Kenyon was appointed
President and Chief Executive Officer of Northeast Nuclear Energy Company
(NNECO), a wholly-owned subsidiary of NU that operates Millstone, and retired
Admiral David M. Goebel was selected to serve as Vice President for Nuclear
Oversight. In early 1997, Neil S. Carns was selected to serve as Senior Vice
President and Chief Nuclear Officer to oversee Millstone operations. Shortly
after his arrival, Mr. Kenyon unveiled a reorganization of NU's nuclear
organization that includes executives loaned from unaffiliated utility
companies. The new organization is intended to establish direct accountability
for performance at each of the nuclear units that the NU system operates and
includes a recovery team for each Millstone unit.
Under the new nuclear organization, each unit's recovery team will be working
toward restart of its respective unit simultaneously with the other two units.
Management estimates that one of the units will be ready for NNECO to request
the NRC's approval for restart in the third quarter of 1997, with the second and
third units ready in the fourth quarter of 1997 and the first quarter of 1998,
respectively. Subsequent to NNECO's request to restart any of the units, the NRC
will require a period of time to assess the results of the reviews performed by
the NRC and the independent third-party teams. Management cannot estimate when
the NRC will allow any of the units to restart, however, it hopes to have at
least one unit operating in the second half of 1997. A period of time will be
required subsequent to restart for each unit to return to operating at full
power.
Higher costs related to the Millstone outages will continue throughout 1997.
Monthly replacement power costs for WMECO are projected to average approximately
$5 million in 1997, while all three Millstone units remain out of service.
Replacement power costs for the Millstone units expensed in 1996 were $41
million, which was a substantial portion of the total 1996 replacement power
costs. WMECO will continue to expense its replacement power costs in 1997.
Nonfuel operation and maintenance costs for WMECO's share of Millstone to be
expensed in 1997 are estimated to be $73 million. A total of $76 million was
expensed in 1996 for nonfuel operation and maintenance costs for Millstone,
including $21 million for incremental costs related to the outages and $12
million reserved for future costs. Nonfuel operation and maintenance costs have
been, and will continue to be, absorbed through WMECO's current rates.
Although WMECO is not precluded from seeking rate recoveries in the future,
management has committed not to seek rate recovery for the portion of these
costs attributable to failure to meet industry standards in operating Millstone.
In light of that commitment, WMECO will not seek rate recovery for a substantial
portion of these costs. Management does not currently intend to request any such
recoveries until after the Millstone units begin returning to service;
therefore, it is unlikely that any additional revenues from any permitted
recovery of these costs will be available to contribute to funding the recovery
efforts while the units are out of service.
Under its present planning assumptions, management believes WMECO has sufficient
funds to restore the Millstone units to service and purchase replacement power.
See "Rate Matters" for further information on the recovery of outage-related
costs. See "Liquidity and Capital Resources" for further information regarding
WMECO's liquidity.
As a result of the nuclear situation, a number of civil lawsuits and criminal
investigations have been initiated, including shareholder litigation. In
addition, there is the potential for claims by the non-NU owners of Millstone 3
for the costs associated with the current outage. To date, no reserves have been
established for existing or potential litigation. See the "Notes to Financial
Statements" Note 11B, for further information on litigation.
CAPACITY
During 1996 and continuing into 1997, the NU system companies have taken
measures to improve their capacity position, including obtaining additional
generating capacity, improving the availability of NU's generating units and
improving the NU system's transmission capability.
Assuming normal weather conditions and generating unit availability, management
expects that the NU system will have sufficient capacity to meet peak load
demands even if Millstone is not operational at any time through the summer of
1997. If there are high levels of unplanned outages at other units in New
England, or if any of the system's transmission lines used to import power from
other states are unavailable, at times of peak load demand, WMECO and the other
New England utilities may have to resort to operating procedures designed to
reduce customer demand. Uncertainties associated with having sufficient capacity
through the summer of 1997 include: a Seabrook refueling outage scheduled for 49
days beginning on May 10, 1997; the availability of Maine Yankee, which was put
on the NRC's watch list in January, 1997, and is currently not expected to
return to service earlier than late summer 1997; and the timing of the repairs
to the Long Island Cable which is capable of providing as much as 300 megawatts
of transmission capability.
See the "Notes to Financial Statements" Note 11B, for further information on
Maine Yankee.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, WMECO took various actions to ensure that it will have access to
adequate cash resources, at reasonable cost. WMECO established a facility under
which it may sell up to $40 million of its billed and unbilled accounts
receivable. As of February 21, 1997, $15 million had been sold using this
facility. Additionally, NU, The Connecticut Light and Power Company (CL&P) and
WMECO entered into a new $313 million three-year revolving credit agreement (the
New Credit Agreement). Under the New Credit Agreement, NU has a contractual
short-term borrowing limit of $150 million, CL&P has a limit of $313 million and
WMECO has a limit of $150 million. The overall limit for all borrowers is $313
million.
Management believes that the borrowing facilities that are currently in place
provide the system companies with adequate access to the funds needed to bring
Millstone back to service if the units begin operating close to the currently
envisioned schedules, and if the other assumptions on which management has based
its planning do not change substantially.
Some of the borrowing facilities contain financial covenants that must be
satisfied before borrowings can be made and for outstanding borrowings to remain
outstanding. Through February 21, 1997, CL&P and WMECO have satisfied all
financial covenants required under their respective borrowing facilities, but NU
needed and obtained a limited waiver of an interest coverage covenant that had
to be satisfied for NU to borrow under the New Credit Agreement.
NU, CL&P and WMECO are currently maintaining their access to the New Credit
Agreement under a written arrangement, which expires March 28, 1997, unless
extended by mutual consent, under which NU agreed not to borrow more than $27
million against the facility for a period of time. In addition, NU agreed to
enter into an interim written arrangement whereby NU, CL&P and WMECO will seek
regulatory approval for certain amendments in order to maintain access to the
New Credit Agreement through its maturity date. It is anticipated that these
amendments will include (i) CL&P and WMECO providing lenders first mortgage
bonds as collateral for specified periods and subject to specified terms for
releasing the collateral, (ii) revised financial covenants that are consistent
with NU's, CL&P's and WMECO's current financial forecasts and (iii) an upfront
payment to the lenders in order to maintain commitments under the New Credit
Agreement.
The holders of $38 million of notes issued by NU's real estate company (Rocky
River Realty Company or RRR) are entitled to require that RRR purchase the notes
because, as of December 31, 1996, Public Service Company of New Hampshire and
North Atlantic Energy Corporation were rated below investment grade; these notes
are guaranteed by NU. NU is currently engaged in discussions with the
noteholders regarding this issue. See the "Notes to Financial Statements" Note
11G, for further information on these notes.
During 1996, Standard & Poor's Ratings Group (S&P) and Moody's Investors Service
(Moody's) downgraded all non-New Hampshire NU system securities at least once,
and in some cases twice, as a direct result of the Millstone outages. As of
December 31, 1996, the CL&P and WMECO first mortgage bonds were the only
securities on the NU system rated at investment grade. S&P and Moody's are
reviewing all NU system securities for further downgrades. These actions will
adversely affect the availability and cost of funds for the NU system companies.
Cash provided from operations decreased by approximately $20 million in 1996,
primarily due to higher cash operating costs related to the nuclear outages,
partially offset by higher retail sales and lower interest charges. Cash flows
from operations were also impacted by a sharp increase in the level of accounts
payable caused principally by costs related to a severe December storm and costs
associated with the Millstone outages that had not been paid by year end. Net
cash used for financing activities decreased by approximately $26 million in
1996, primarily due to lower reacquisitions and retirements of long-term debt
and lower cash dividend payments on common shares, partially offset by higher
reacquisitions and retirements of preferred stock. Cash used for investments
increased by approximately $7 million in 1996, primarily due to lower loan
repayments from other companies under the NU system Money Pool, partially offset
by lower construction expenditures in 1996.
If the return to service of one or more of the Millstone units is delayed
substantially, or if the needed waivers or modifications discussed above are not
forthcoming on reasonable terms, or if some borrowing facilities become
unavailable because of difficulties in meeting borrowing conditions, or if the
system encounters additional significant costs or other significant deviations
from management's current assumptions, the currently available borrowing
facilities could be insufficient to meet all of the system's cash requirements.
In those circumstances, management would take actions to reduce costs and cash
outflows and would attempt to take other actions to obtain additional sources of
funds. The availability of these funds would be dependent upon the general
market conditions and the NU system's credit and financial condition at the
time.
See the "Notes to Financial Statements" Notes 11E, 6 and 11F, for information on
construction, long-term debt funding and long-term contractual requirements.
RESTRUCTURING
The movement toward electric industry restructuring continues to gain momentum
nationally as well as within Massachusetts. Factors that are driving the move
toward restructuring, in the Northeast in particular, include legislative and
regulatory actions and relatively high electricity prices. These actions will
impact the way that WMECO has historically conducted its business. Although
WMECO continues to operate under cost-of-service based regulation, various
restructuring initiatives in Massachusetts have created uncertainty with respect
to future rates and the recovery of strandable investments. Strandable
investments are regulatory assets or other assets that would not be economical
in a competitive environment. WMECO has exposure to strandable investments based
on its investment in high-priced nuclear generating plants, state mandated
purchased power arrangements that are priced above the market and significant
regulatory assets that represent costs deferred by state regulators for future
recovery. WMECO's exposure to strandable investments and purchased power
obligations exceeds its shareholder's equity. WMECO's ability to compete in a
restructured environment would be negatively affected unless WMECO was able to
recover substantially all of these past investments and commitments.
In December, 1996, the Massachusetts Department of Public Utilities (DPU) issued
its Model Rules on Restructuring (Model Rules) that set forth the framework for
full customer choice of energy suppliers beginning January 1, 1998, and proposed
legislation to support the DPU's framework. After January 1, 1998, the DPU has
stated that it will no longer set rates for competitive suppliers of generation.
The DPU also reiterated its concern for the maintenance of the current level of
overall system reliability by stating that it will continue to regulate
distribution companies. In March, 1997, WMECO filed "unbundled" bills (separate
charges on bills for generation, transmission, distribution and access) with the
DPU, as required by the Model Rules.
The Model Rules require a number of statutory changes be enacted in order to
implement the rules. Additionally, the Massachusetts General Court has
established a legislative task force to review restructuring during the 1997
legislative session. The Massachusetts legislature has given no formal
indication as to whether it will enact the statutory changes requested by the
DPU. It is unclear at this time how the DPU will proceed if the requested
statutory changes are not enacted.
While the DPU's Model Rules indicate that utilities will have a reasonable
opportunity to recover strandable investments, the criteria to be used in this
process will likely be subject to review in a rate proceeding. Management
believes that it is entitled to full recovery of its prudently incurred costs,
including regulatory assets and other strandable investments, based on the
general nature of public utility industry cost-of-service based regulation.
POTENTIAL ACCOUNTING IMPACTS
WMECO follows accounting principles in accordance with Statement of Financial
Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of
Regulation," which allows the economic effects of rate regulation to be
reflected. Under these principles, regulators may permit incurred costs for
certain events or transactions, which would be treated as expenses by
nonregulated enterprises, to be deferred as regulatory assets and recovered
through revenues at a later date.
If future competition or regulatory actions cause any portion of its operations
to no longer be subject to SFAS 71, WMECO would no longer be able to recognize
regulatory assets and liabilities for that portion of its business unless those
costs would be recoverable by a portion of the business remaining on cost-of-
service based regulation. Under its current regulatory environment, management
believes that WMECO's use of SFAS 71 remains appropriate.
If events create uncertainty about the recoverability of any of WMECO's
remaining long-lived assets, WMECO would be required to determine the fair value
of its long-lived assets, including regulatory assets, in accordance with SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The implementation of SFAS 121 did not have a
material impact on the company's financial position or results of operations as
of December 31, 1996. Management believes that it is probable that WMECO will
recover its investments in long-lived assets through future revenues. 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.
See the "Notes to Financial Statements" Note 1H, for further information on
regulatory accounting.
COMPETITION
In addition to legislative and regulatory actions, competition in the electric
utility industry continues to grow at a rapid pace as a result of technological
advances; relatively high electricity prices in certain regions of the country,
including New England; surplus generating capacity; and the increased
availability of natural gas. Competitive forces in the electric utility industry
have already caused some customers to choose alternative energy suppliers or
relocate outside of WMECO's service territory. In response, WMECO is preparing
for a competitive environment by expanding previously established programs and
developing new ways to fortify its relationships with existing customers and
attract new customers, both within and outside its service territory.
During 1996, WMECO continued to negotiate long-term power supply arrangements
with certain large commercial and industrial retail customers who require an
incentive to locate or expand their operations within WMECO's service territory,
are considering leaving or reducing operations in the service territory, are
facing short-term financial problems, or are considering generating their own
electricity. Approximately 17 percent of WMECO's commercial and industrial
retail revenues were under negotiated rate agreements at the end of 1996. In
1996, these negotiated rate reductions amounted to approximately $6 million,
down slightly from $7 million in 1995. These activities are expected to continue
in 1997.
During 1996, the NU system devoted significantly more resources to its Retail
Marketing Organization, whose primary mission is to provide value added energy
solutions to customers. Training was emphasized for its 170 new employees, the
majority of whom are account executives charged with developing tailored
solutions for NU's customers and positioning NU as a valuable partner for the
future. The ability of these account executives to obtain an intimate
understanding of customers' needs and concerns and provide value added energy
solutions will play a key role in the NU system's ability to effectively compete
in the future.
NU subsidiaries competed actively in two pilot retail access programs that were
initiated in New England in 1996. In a pilot covering four Massachusetts
communities outside of WMECO's jurisdiction, NU attained approximately 60
percent of the total energy market share and 70 percent of the commercial energy
market share. In addition to exposing NU to a competitive environment, these
pilots have enabled NU to develop relationships with customers outside of its
service territory and to secure energy contracts with major commercial
customers.
Revenue erosion from traditional retail electric sales may be significant after
restructuring. While margins on retail electric sales are likely to be thin,
utilities can compete successfully if they are allowed to recover their
strandable investments. During 1997 and beyond, NU will continue to participate
in state sanctioned retail access programs; invest in new unregulated
businesses; develop new energy-related products and services; and pursue
strategic alliances with companies in various energy-related fields, including
fuel supply and management, power quality, energy efficiency and load management
services. Strategic alliances will allow NU to enter markets that provide access
to new product lines and technologies that complement NU's current products and
services.
RATE MATTERS
In April, 1996, the DPU approved a settlement (the Agreement) that included the
continuation through February, 1998, of the 2.4 percent rate reduction
instituted in June, 1994. Additionally, the Agreement terminated certain pending
and potential reviews of WMECO's generating plant performance and accelerated
its amortization of strandable generation assets by approximately $6 million in
1996 and $10 million in 1997. The Agreement did not have a material impact on
earnings for 1996.
In February, 1997, the DPU approved a joint settlement proposed by WMECO and the
Massachusetts Attorney General that provides for a continuation of WMECO's
August, 1996, fuel adjustment charge (FAC) through August, 1997, and stipulates
that WMECO will not seek carrying charges on any deferred fuel costs not
currently recovered as a result of maintaining the prior FAC rate. In accepting
this settlement, the DPU deferred any inquiry into WMECO's replacement power
costs related to the Millstone outages. Management does not expect to seek
recovery of a substantial portion of these costs.
NUCLEAR DECOMMISSIONING
WMECO has a 9.5 percent ownership interest in the Connecticut Yankee nuclear
generating facility (CY or the plant). On December 4, 1996, the CY Board of
Directors voted unanimously to cease permanently the production of power at the
plant. The decision to retire CY from commercial operation was based on an
economic analysis of the costs of operating it compared to the costs of closing
it and incurring replacement power costs over the remaining period of the
plant's operating license, which expires in 2007. The economic analysis showed
that closing the plant and incurring replacement power costs produced
substantial savings.
CY has undertaken a number of regulatory filings intended to implement the
decommissioning. In late December, 1996, CY filed an amendment to its power
contracts with the Federal Energy Regulatory Commission (FERC) to clarify the
obligations of its purchasing utilities following the decision to cease power
production. At December 31, 1996, WMECO's share of these obligations was
approximately $73 million, including the cost of decommissioning and the
recovery of existing assets. Management expects that WMECO will continue to be
allowed to recover such FERC-approved costs from its customers. Accordingly,
WMECO has recognized its share of the estimated costs as a regulatory asset,
with a corresponding obligation, on its Balance Sheets.
WMECO's estimated cost to decommission its shares of Millstone 1, 2 and 3 is
approximately $196 million in year end 1996 dollars. These costs are being
recognized over the lives of the respective units with a portion being currently
recovered through rates. As of December 31, 1996, the market value of the
contributions already made to the decommissioning trusts, including their
investment returns, was approximately $84 million.
See the "Notes to Financial Statements" Note 2, for further information on
nuclear decommissioning, including WMECO's share of costs to decommission the
regional nuclear generating units.
ENVIRONMENTAL MATTERS
WMECO is potentially liable for environmental cleanup costs at a number of sites
inside and outside its service territory. To date, the future estimated
environmental remediation liability has not been material with respect to the
earnings or financial position of WMECO. At December 31, 1996, WMECO had
recorded an environmental reserve of approximately $1 million, the most probable
amount as required by SFAS 5, "Accounting for Contingencies."
See the "Notes to Financial Statements" Note 11C, for further information on
environmental matters.
RESULTS OF OPERATIONS
Income Statement Variances
(Millions of Dollars)
1996 over/(under) 1995 1995 over/(under) 1994
Amount Percent Amount Percent
Operating revenues $ 1 -% $(1) -%
Fuel, purchased and net
interchange power 29 33 19 29
Other operation 6 4 12 9
Maintenance 19 50 2 6
Amortization of
regulatory assets,
net (10) (53) (10) (33)
Federal and state
income taxes (9) (64) (19) (58)
Other, net - - (2) (67)
Interest on long-
term debt (3) (10) (1) (3)
Net income (35) (90) (10) (21)
(a) Percentage greater than 100
OPERATING REVENUES
Total operating revenues increased in 1996, primarily due to higher retail
sales, partially offset by lower fuel and conservation recoveries. Retail
kilowatt-hour sales increased 2.7 percent ($9 million) primarily due to modest
economic growth in 1996. Fuel recoveries decreased $6 million, primarily due to
the timing of the recovery of costs under the company's fuel clause.
Conservation recoveries decreased approximately $6 million primarily due to
lower demand side management costs.
Total operating revenues decreased in 1995, primarily due to regulatory
decisions and lower other revenues, partially offset by higher fuel recoveries.
Revenues related to regulatory decisions decreased $2 million, primarily due to
the effects of the June 1994 retail rate reduction, partially offset by higher
demand side management costs. Other revenues include higher price discounts to
customers in 1995. Fuel recoveries increased $7 million, primarily due to higher
energy costs, partially offset by lower interchange revenues.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power expense increased in 1996, primarily
due to higher replacement power costs due to the nuclear outages, partially
offset by the timing of the recognition of costs under the company's fuel clause
and lower nuclear generation.
Fuel, purchased and net interchange power expense increased in 1995, primarily
due to a one-time benefit in May, 1994, from a rate case settlement agreement
and higher energy costs in 1995 as a result of the extended Millstone 2 outage.
OTHER OPERATION AND MAINTENANCE
Other operation and maintenance expenses increased in 1996, primarily due to
higher costs associated with the Millstone outages ($33 million, including $12
million reserved for future costs), partially offset by lower costs for demand
side management programs and a 1995 work stoppage.
Other operation and maintenance expenses increased in 1995, primarily due to
higher capacity charges from the regional nuclear units primarily due to Maine
Yankee, which was in an extended refueling outage throughout 1995; higher
benefit costs; higher demand side management programs; higher 1995 storm costs;
higher costs associated with a work stoppage; and higher outside services
employed, partially offset by lower reserves for excess/obsolete inventory and
lower maintenance costs at the company's fossil units.
AMORTIZATION OF REGULATORY ASSETS, NET
Amortization of regulatory assets, net decreased in 1996, primarily due to the
completion of the amortization of the Millstone 3 phase-in in 1995 and unuseful
investment in June, 1996, partially offset by higher amortization as a result of
the 1996 rate settlement.
Amortization of regulatory assets, net decreased in 1995, primarily due to the
completion of the company's amortization of Millstone 3 phase-in costs in June,
1995.
FEDERAL AND STATE INCOME TAXES
Federal and state income taxes decreased in 1996, primarily due to lower 1996
book taxable income, partially offset by 1995 tax benefits from a favorable tax
ruling and the expiration of the 1991 federal statute of limitations.
Federal and state income taxes decreased in 1995, primarily due to tax benefits
from a favorable tax ruling, the expiration of the 1991 federal statute of
limitations and lower book taxable income.
OTHER, NET
Although the change in 1996 was not significant, other, net decreased in 1995,
primarily because of lower deferred return due to the completion of the
Millstone 3 phase-in in 1995.
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased in 1996, primarily due to lower average
interest rates. The change in 1995 was not significant.
Western Massachusetts Electric Company
SELECTED FINANCIAL DATA (a)
1996 1995 1994 1993 1992
(Thousands of Dollars)
Operating Revenues.... $ 421,337 $ 420,434 $ 421,477 $ 415,055 $ 410,720
Operating Income....... 26,023 63,064 70,940 60,348 60,563
Net Income............. 3,922 39,133 49,457 40,594(b) 37,022
Cash Dividends on
Common Stock......... 16,494 30,223 29,514 28,785 29,536
Total Assets........... 1,190,137 1,142,346 1,183,618 1,204,642 1,130,684
Long-Term Debt (c)..... 349,442 347,470 379,969 393,232 392,976
Preferred Stock Not
Subject to Mandatory
Redemption........... 20,000 53,500 68,500 73,500 73,500
Preferred Stock Subject
to Mandatory
Redemption(c)......... 21,000 24,000 24,675 27,000 28,500
Obligations Under
Capital Leases(c)..... 32,234 36,011 36,797 36,902 41,509
(a) Reclassifications of prior data have been made to conform with the current
presentation.
(b)Includes the cumulative effect of change in accounting for municipal
property tax expense, which increased earnings for common shares by
$3.9 million.
(c) Includes portion due within one year.
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended (a)
1996 March 31 June 30 Sept. 30 Dec. 31
Operating Revenues....... $114,797 $102,602 $ 99,866 $104,072
Operating Income (Loss).. $ 13,692 $ 9,377 $ 4,327 $ (1,373)
Net Income (Loss)........ $ 8,109 $ 4,016 $ (396) $ (7,807)
1995
Operating Revenues....... $106,684 $100,593 $107,960 $105,197
Operating Income......... $ 18,085 $ 8,977 $ 19,799 $ 16,203
Net Income............... $ 12,076 $ 3,289 $ 14,141 $ 9,627
STATISTICS
Gross Electric Average
Utility Plant Annual
December 31, Use Per Electric
(Thousands kWh Sales Residential Customers Employees
of Dollars) (Millions) Customer(kWH) (Average) (December 31)
1996 $1,303,361 4,626 7,335 194,705 497
1995 1,285,269 4,846 7,105* 193,964 527
1994 1,271,513 4,978 7,433 193,187 617
1993 1,242,927 4,715 7,351 192,542 657
1992 1,214,386 4,155 7,433 191,920 739
*Effective January 1, 1996, the amounts shown reflect billed and unbilled
sales. 1995 has been restated to reflect this change.