EXHIBIT 13.4
1996 Annual Report
Public Service Company of New Hampshire
Index
Contents Page
Balance Sheets........................................................ 2-3
Statements of Income.................................................... 4
Statements of Cash Flows................................................ 5
Statements of Common Stockholder's Equity............................... 6
Notes to Financial Statements........................................... 7
Report of Independent Public Accountants................................ 37
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 39
Selected Financial Data................................................. 49
Statistics.............................................................. 51
Statements of Quarterly Financial Data.................................. 51
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
- --------------------------------------------------------------------------------------
At December 31, 1996 1995
- --------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at cost:
Electric............................................. $ 1,877,955 $ 1,863,004
Less: Accumulated provision for
depreciation (Note 1F) ..................... 552,780 513,244
------------- -------------
1,325,175 1,349,760
Unamortized acquisition costs (Note 1J).............. 491,709 588,910
Construction work in progress........................ 11,032 15,975
Nuclear fuel, net.................................... 1,313 1,585
------------- -------------
Total net utility plant............................ 1,829,229 1,956,230
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............ 3,229 2,436
Investments in regional nuclear generating
companies and subsidiary company,
at equity (Note 1E)................................. 19,578 19,300
Other, at cost....................................... 1,835 1,103
------------- -------------
24,642 22,839
------------- -------------
Current Assets:
Cash................................................. 1,015 117
Notes receivable from affiliated companies........... 18,250 19,100
Receivables, less accumulated provision for
uncollectible accounts of $1,700,000 in 1996
and of $1,582,000 in 1995.......................... 105,381 91,535
Accounts receivable from affiliated companies........ 32,452 12,337
Taxes receivable from affiliated companies........... 613 -
Accrued utility revenues............................. 36,317 33,984
Fuel, materials, and supplies, at average cost....... 44,852 41,717
Prepayments and other................................ 24,016 11,196
------------- -------------
262,896 209,986
------------- -------------
Deferred Charges:
Regulatory assets (Note 1H).......................... 684,504 680,587
Deferred receivable from affiliated
company (Note 10G)................................. 33,284 33,284
Unamortized debt expense............................. 12,731 14,165
Other................................................ 3,926 3,396
------------- -------------
734,445 731,432
------------- -------------
Total Assets..................................... $ 2,851,212 $ 2,920,487
============= =============
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
- ---------------------------------------------------------------------------------------
At December 31, 1996 1995
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$1 par value.
Authorized and outstanding 1,000 shares.............. $ 1 $ 1
Capital surplus, paid in.............................. 423,058 422,385
Retained earnings..................................... 174,691 143,039
------------- -------------
Total common stockholder's equity............ 597,750 565,425
Preferred stock subject to mandatory redemption....... 100,000 125,000
Long-term debt........................................ 686,485 686,485
------------- -------------
Total capitalization......................... 1,384,235 1,376,910
------------- -------------
Obligations Under Seabrook Power Contracts
and Other Capital Leases (Notes 2 and 3)............... 871,707 874,292
------------- -------------
Current Liabilities:
Long-term debt and preferred stock--current
portion.............................................. 25,000 172,500
Obligations under Seabrook Power Contracts and other
capital leases--current portion
(Notes 2 and 3)...................................... 42,910 40,996
Accounts payable...................................... 37,675 49,863
Accounts payable to affiliated companies.............. 31,130 26,656
Accrued taxes......................................... 81 798
Accrued interest...................................... 7,992 9,648
Accrued pension benefits.............................. 44,790 38,606
Other................................................. 37,516 19,077
------------- -------------
227,094 358,144
------------- -------------
Deferred Credits:
Accumulated deferred income taxes (Note 1I)........... 258,317 229,057
Accumulated deferred investment tax credits........... 4,511 5,060
Deferred contractual obligations (Note 4)............. 50,271 18,814
Deferred revenue from affiliated company
(Note 10G)........................................... 33,284 33,284
Other................................................. 21,793 24,926
------------- -------------
368,176 311,141
------------- -------------
Commitments and Contingencies (Note 10)
------------- -------------
Total Capitalization and Liabilities......... $ 2,851,212 $ 2,920,487
============= =============
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF INCOME
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For the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues................................. $1,110,169 $ 979,971 $ 922,039
----------- ---------- ----------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power..... 356,629 257,008 222,801
Other......................................... 327,287 313,604 303,271
Maintenance...................................... 45,728 42,244 43,725
Depreciation..................................... 42,983 44,337 38,703
Amortization of regulatory assets, net........... 56,884 55,547 55,319
Federal and state income taxes (Note 9).......... 80,340 69,817 68,088
Taxes other than income taxes.................... 45,123 41,786 38,046
----------- ---------- ----------
Total operating expenses................... 954,974 824,343 769,953
----------- ---------- ----------
Operating Income................................... 155,195 155,628 152,086
----------- ---------- ----------
Other Income:
Equity in earnings of regional nuclear
generating companies and subsidiary company.... 2,075 1,645 2,079
Other, net....................................... 8,075 3,162 629
Income taxes..................................... (7,723) (770) (546)
----------- ---------- ----------
Other income, net.......................... 2,427 4,037 2,162
----------- ---------- ----------
Income before interest charges............. 157,622 159,665 154,248
----------- ---------- ----------
Interest Charges:
Interest on long-term debt....................... 57,557 76,320 76,410
Other interest................................... 3,163 90 394
----------- ---------- ----------
Interest charges, net...................... 60,720 76,410 76,804
----------- ---------- ----------
Net Income......................................... $ 96,902 $ 83,255 $ 77,444
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net Income.................................................. $ 96,902 $ 83,255 $ 77,444
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 42,983 44,337 38,703
Deferred income taxes and investment tax credits, net..... 94,646 69,986 67,047
Recoverable energy costs, net of amortization............. 31,663 (15,266) (81,206)
Amortization of acquisition costs......................... 56,884 55,547 55,319
Other sources of cash..................................... 65,922 15,973 3,213
Other uses of cash........................................ (51,188) - (4,456)
Changes in working capital:
Receivables and accrued utility revenues.................. (36,907) (10,506) (3,205)
Fuel, materials and supplies.............................. (3,135) (4,264) 3,734
Accounts payable.......................................... (7,714) 2,375 18,598
Accrued taxes............................................. (717) (3,506) 4,182
Other working capital (excludes cash)..................... (12,659) 16 742
----------- ----------- -----------
Net cash flows from operating activities...................... 276,680 237,947 180,115
----------- ----------- -----------
Financing Activities:
Net decrease in short-term debt............................. - - (2,500)
Reacquisitions and retirements of long-term debt............ (172,500) (141,000) (94,000)
Cash dividends on preferred stock........................... (13,250) (13,250) (13,250)
Cash dividends on common stock.............................. (52,000) (52,000) -
----------- ----------- -----------
Net cash flows used for financing activities.................. (237,750) (206,250) (109,750)
----------- ----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (37,480) (46,672) (39,721)
Nuclear fuel.............................................. 129 (184) (1,249)
----------- ----------- -----------
Net cash flows used for investments in plant................ (37,351) (46,856) (40,970)
NU System Money Pool........................................ 850 15,900 (35,000)
Investment in nuclear decommissioning trusts................ (521) (489) (368)
Other investment activities, net............................ (1,010) (431) 300
----------- ----------- -----------
Net cash flows used for investments........................... (38,032) (31,876) (76,038)
----------- ----------- -----------
Net Increase (Decrease) in Cash For The Period................ 898 (179) (5,673)
Cash - beginning of period.................................... 117 296 5,969
----------- ----------- -----------
Cash - end of period.......................................... $ 1,015 $ 117 $ 296
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid (received) during the year for:
Interest, net of amounts capitalized........................ $ 58,835 $ 74,543 $ 74,507
=========== =========== ===========
Income taxes................................................ $ (457) $ 1,369 $ 167
=========== =========== ===========
Increase in obligations:
Seabrook Power Contracts and other capital leases........... $ 93 $ 28,028 $ 53,266
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ---------------------------------------------------------------------------------------
Capital
Common Surplus, Retained
Stock Paid In Earnings Total
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1994............... $ 1 $421,245 $ 60,840 $482,086
Net income for 1994.................. 77,444 77,444
Cash dividends on preferred stock.... (13,250) (13,250)
Capital stock expenses, net.......... 539 539
-------- --------- --------- ---------
Balance at December 31, 1994............. 1 421,784 125,034 546,819
Net income for 1995.................. 83,255 83,255
Cash dividends on preferred stock.... (13,250) (13,250)
Cash dividends on common stock....... (52,000) (52,000)
Capital stock expenses, net.......... 601 601
-------- --------- --------- ---------
Balance at December 31, 1996............. 1 422,385 143,039 565,425
Net income for 1996.................. 96,902 96,902
Cash dividends on preferred stock.... (13,250) (13,250)
Cash dividends on common stock....... (52,000) (52,000)
Capital stock expenses, net.......... 673 673
-------- --------- --------- ---------
Balance at December 31, 1996............. $ 1 $423,058 $174,691 $597,750
======== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ABOUT PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
Public Service Company of New Hampshire (PSNH or the company), The
Connecticut Light and Power Company (CL&P), Western Massachusetts
Electric Company (WMECO), North Atlantic Energy Corporation (NAEC), and
Holyoke Water Power Company (HWP) are the operating subsidiaries
comprising the Northeast Utilities system (the system) and are wholly
owned by Northeast Utilities (NU).
The system furnishes retail electric service in Connecticut, New
Hampshire, and western Massachusetts through CL&P, PSNH, WMECO, and
HWP. A fifth subsidiary, NAEC, sells all of its capacity from Seabrook
1 (a 1,148-MW nuclear generating unit) to PSNH under two long-term
contracts (the Seabrook Power Contracts). 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. North Atlantic Energy Service Corporation
acts as agent for CL&P and NAEC, and has operational responsibilities
for the Seabrook 1 (Seabrook) nuclear generating facility. Northeast
Nuclear Energy Company (NNECO) acts as agent for the 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 New Hampshire Public Utilities Commission (NHPUC).
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 10C, "Commitments and Contingencies-Environmental Matters,"
for information on newly issued accounting and reporting standards
related to this area.
E.INVESTMENTS AND JOINTLY OWNED ELECTRIC UTILITY PLANT
Regional Nuclear Generating Companies: PSNH owns common stock of four
regional nuclear generating companies (Yankee companies). The Yankee
companies, with PSNH's ownership interests, are:
Connecticut Yankee Atomic Power Company (a) (CY) ................ 5.0%
Yankee Atomic Electric Company (a)(YAEC) ........................ 7.0
Maine Yankee Atomic Power Company (MY) .......................... 5.0
Vermont Yankee Nuclear Power Corporation (VY) ................... 4.0
(a)YAEC's and CY's nuclear power plants were shut down permanently on
February 26, 1992 and December 4, 1996, respectively.
PSNH's investments in the Yankee companies are accounted for on the
equity basis due to the company's ability to exercise significant
influence over their operating and financial policies.
The company's equity investments in the Yankee companies at December
31, 1996 are:
(Thousands of Dollars)
Connecticut Yankee Atomic Power Company ............ $ 5,558
Yankee Atomic Electric Company ..................... 1,634
Maine Yankee Atomic Power Company .................. 3,675
Vermont Yankee Nuclear Power Corporation ........... 2,100
$12,967
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, PSNH
may be asked to provide direct or indirect financial support for one or
more of the companies. For more information on these agreements, see
Note 10F, "Commitments and Contingencies - Long-Term Contractual
Arrangements." For more information on the Yankee companies, see Note
4, "Nuclear Decommissioning" and Note 10B, "Commitments and
Contingencies - Nuclear Performance."
Millstone 3: PSNH has a 2.85 percent joint ownership interest in
Millstone 3, a 1,154-megawatt (MW) nuclear generating unit. As of
December 31, 1996 and 1995, plant-in-service included approximately
$118.7 million and $118.6 million, respectively, and the accumulated
provision for depreciation included approximately $29.4 million and
$26.5 million, respectively, for PSNH's share of Millstone 3. PSNH's
share of Millstone 3 expenses is included in the corresponding
operating expenses on the accompanying Statements of Income. For more
information on the Millstone 3 unit, see Note 10B, "Commitments and
Contingencies - Nuclear Performance."
Wyman Unit 4: PSNH has a 3.14 percent ownership interest in Wyman
Unit 4 (Wyman), a 632-MW oil-fired generating unit. At December 31,
1996 and 1995, plant-in-service included approximately $6.0 million and
the accumulated provision for depreciation included approximately $3.7
million and $3.5 million, respectively, for PSNH's share of Wyman.
PSNH's share of Wyman expenses is included in the corresponding
operating expenses on the accompanying Statements of Income.
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 NHPUC or other appropriate regulatory agencies. 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 3.7 percent in 1996, 3.8 percent
in 1995 and 3.6 percent in 1994. See Note 4, "Nuclear Decommissioning,"
for information on nuclear plant decommissioning.
PSNH'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 $31.1 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 and limited pilot retail
access programs, utility revenues are based on authorized rates applied
to each customer's use of electricity. In general, rates can be
changed only through a formal proceeding before the appropriate
regulatory commission. At the end of each accounting period, PSNH
accrues an estimate for the amount of energy delivered but unbilled.
H.REGULATORY ACCOUNTING AND ASSETS
The accounting policies of PSNH and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate regulated enterprises and reflect the effects of the
ratemaking process in accordance with SFAS 71, "Accounting for the
Effects of Certain Types of Regulation." Assuming a cost-of-service
based regulatory structure, regulators may permit incurred costs,
normally treated as expenses, to be deferred and recovered 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 PSNH
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.
The components of PSNH's regulatory assets are as follows:
At December 31, 1996 1995
(Thousands of Dollars)
Recoverable energy costs, net
(Note 1K)............................... $211,236 $220,093
Income taxes, net (note 1I).............. 151,431 192,690
Unrecovered contractual
obligations (Note 4)................... 50,271 18,814
Deferred costs, nuclear
plants (Note 2)........................ 269,233 246,586
Other.................................... 2,333 2,404
$684,504 $680,587
For more information on the Company's regulatory environment and the
potential impacts of restructuring, see Note 10A, "Commitments and
Contingencies - Restructuring," Note 12, "Subsequent Event," 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 asset for net operating losses (NOLs) previously not
recognized. As the potential benefit is being given to customers
through rates, PSNH established an associated regulatory liability.
The adoption of SFAS 109 also increased deferred tax liabilities and as
it is probable that the increase in deferred tax liabilities will be
recovered from customers through rates, PSNH established a regulatory
asset.
The tax effect of temporary differences, including timing differences
accrued under previously approved accounting standards, which give rise
to the accumulated deferred tax obligation is as follows:
At December 31, 1996 1995
(Thousands of Dollars)
Accelerated depreciation and
other plant-related differences .......... $225,263 $ 231,126
NOL carryforwards .......................... (94,149) (191,873)
Regulatory assets - income tax
gross up ................................. 68,652 85,192
Other ...................................... 58,551 104,612
$258,317 $ 229,057
At December 31, 1996, PSNH had a NOL carryforward of approximately $292
million, which can be used against PSNH's federal taxable income and
which, if unused, expires between the years 2000 and 2006. PSNH also
had Investment Tax Credit (ITC) carryforwards of $42 million, which if
unused, expires between the years 1997 and 2004. For a portion of the
carryforward amounts indicated above, the reorganization of PSNH under
Chapter 11 of the United States Bankruptcy Code limits the annual
amount of NOL and ITC carryforwards that may be used. Approximately
$31 million of the NOL and $11 million of the ITC carryforwards are
subject to this limitation. See Note 12, "Subsequent Event," for the
possible impacts on the company from the NHPUC's decision related to
industry restructuring.
J. UNAMORTIZED ACQUISITION COSTS
The unamortized acquisition costs represent the aggregate value placed by
the 1989 rate agreement with the state of New Hampshire (Rate
Agreement) on PSNH's assets in excess of the net book value of PSNH's
non-Seabrook assets, plus the $700-million value assigned to Seabrook
by the Rate Agreement, as part of the bankruptcy resolution on June 5,
1992 (Acquisition Date). The Rate Agreement provides for the recovery,
through rates, with a return, of the unamortized acquisition costs.
The Rate Agreement provides that $425 million of the unamortized
acquisition costs be amortized over the first seven years after PSNH's
May 16, 1991 reorganization from bankruptcy (Reorganization Date), with
the remaining amount to be amortized over the 20-year period after the
Reorganization Date. As of December 31, 1996, approximately $501.6
million of acquisition costs have been collected through rates.
K.RECOVERABLE ENERGY COSTS
Under the Energy Policy Act of 1992 (Energy Act), PSNH is assessed for
its proportionate share of the costs of decontaminating and
decommissioning uranium enrichment plants owned by the United States
Department of Energy (D&D assessment). The Energy Act requires that
regulators treat D&D assessments as a reasonable and necessary current
cost of fuel, to be fully recovered in rates, like any other fuel cost.
PSNH is currently recovering these costs through rates. As of December
31, 1996, PSNH's total D&D deferrals were approximately $0.2 million.
The Rate Agreement includes a comprehensive fuel and purchased power
adjustment clause (FPPAC) permitting PSNH to pass through to retail
customers, for a ten-year period that began in May, 1991, the retail
portion of differences between the fuel and purchased power costs
assumed in the Rate Agreement and PSNH's actual costs, which include
the costs related to the Seabrook Power Contracts and the Clean Air Act
Amendment. The cost components of the FPPAC are subject to a prudence
review by the NHPUC.
The costs associated with purchases from nonutility generators (NUGs)
over the level assumed in the Rate Agreement are deferred and recovered
through the FPPAC. PSNH has been renegotiating the rate orders
mandating the purchase of high-cost NUG power. The NHPUC has approved
an amendment to the Rate Agreement allowing settlement agreements to be
implemented with two wood-fired NUGs. Pursuant to the 1994 settlement
agreements, the two NUGs that were settled gave up their rights to sell
their output to PSNH in exchange for lump-sum cash payments totaling
approximately $40 million. The deferred buyout payments are included
as part of PSNH's recoverable energy costs. During the Rate
Agreement's fixed-rate period, all of the savings from the buyout will
be used to reduce PSNH's recoverable energy costs. At the end of the
fixed-rate period, 50 percent of the savings will be used to reduce the
recoverable energy costs, with the remainder reducing current rates.
PSNH has also reached tentative agreements with the six remaining wood-
fired NUGs. These agreements are subject to NHPUC approval. In
January, 1997, the NHPUC issued an order approving one of the six NUG
settlements. However, the conditions imposed within the order, along
with the uncertainty caused by industry restructuring proceedings, may
impede PSNH's ability to move forward with the settlements.
At December 31, 1996, PSNH's net recoverable energy costs were
approximately $211.2 million, including purchased power deferrals of
$183.4 million and the NUGs deferred buyout payments of $27.6 million.
For further information on recoverable energy costs, see the MD&A. See
Note 12, "Subsequent Event" for the possible impacts on the company of
the NHPUC's decision related to industry restructuring.
2. SEABROOK POWER CONTRACTS
PSNH and NAEC have entered into two power contracts that obligate PSNH to
purchase NAEC's 35.98 percent ownership of the capacity and output of
Seabrook for the term of Seabrook's Nuclear Regulatory Commission (NRC)
operating license. Under these power contracts, PSNH is obligated to pay
NAEC's cost of service during this period, regardless of whether Seabrook
1 is operating. NAEC's cost of service includes all of its Seabrook-
related costs, including operation and maintenance (O&M) expenses, fuel
expense, income and property tax expense, depreciation expense, certain
overhead and other costs and a return on its allowed investment.
PSNH has included its right to buy power from NAEC on its Balance Sheets
as part of utility plant and regulatory assets with a corresponding
obligation. At December 31, 1996, this right was valued at approximately
$910.9 million.
The contracts established the value of the initial investment in Seabrook
(initial investment) at $700 million. As prescribed by the Rate
Agreement, as of May 1, 1996, NAEC phased into rates 100 percent of the
recoverable portion of its investment in Seabrook 1. This plan is in
compliance with SFAS 92,"Regulated Enterprises-Accounting for Phase-in
Plans." From the Acquisition Date through December 31, 1996, NAEC
recorded $185.1 million of deferred return on its investment in Seabrook
1. In addition, NAEC's utility plant includes $84.1 million of deferred
return that was transferred as part of the Seabrook plant assets to NAEC
on the Acquisition Date. The deferred return, including the portion
transferred to NAEC, will be recovered with carrying charges beginning
December 1, 1997, and will be fully recovered by May 2001. NAEC
depreciated its initial investment over the term of Seabrook 1's
operating license (39 years), and any subsequent plant additions are
depreciated on a straight-line basis over the remaining term of the
power contracts at the time the subsequent additions are placed in
service.
If Seabrook 1 is shut down prior to the expiration of the NRC operating
license, PSNH will be unconditionally required to pay NAEC termination
costs for 39 years, less the period during which Seabrook 1 has operated.
These termination costs will reimburse NAEC for its share of Seabrook 1
shut-down and decommissioning costs, and will pay NAEC a return of and on
any undepreciated balance of its initial investment over the remaining
term of the power contracts, and the return of and on any capital
additions to the plant made after the Acquisition Date over a period of
five years after shut down (net of any tax benefits to NAEC attributable
the cancellation).
Contract payments charged to operating expenses are approximately:
Year Contract Payments
(Thousands of Dollars)
1996................................. $159,000
1995................................. 154,000
1994................................. 143,000
Interest included in the contract payment was $55 million in 1996, $51
million in 1995, and $43 million in 1994.
Future minimum payments, excluding executory costs, such as property taxes,
state use taxes, insurance and maintenance, under the terms of the
contracts, as of December 31, 1996, are approximately:
Year Seabrook Power Contracts
(Thousands of Dollars)
1997 ................................ $ 91,000
1998 ................................ 148,000
1999 ................................ 146,000
2000 ................................ 144,000
2001 ................................ 95,000
After 2001............................. 1,149,200
Future minimum payments................ 1,773,200
Less amount representing interest...... 862,200
Present value of Seabrook Power
Contracts payments .................. $ 911,000
See Note 12, "Subsequent Event" for the possible impacts the NHPUC's
restructuring decision may have on the Seabrook Power Contracts.
3. LEASES
PSNH has entered into lease agreements, some of which are capital leases,
for the use of data processing and office equipment, vehicles and office
space. The provisions of these lease agreements generally provide for
renewal options. The following rental payments have been charged to
expense:
Year Capital Leases Operating Leases
1996................... $1,105,000 $4,884,000
1995................... 1,103,000 5,291,000
1994................... 1,061,000 4,255,000
Interest included in capital lease rental payments was $292,000 in 1996,
$351,000 in 1995, and $394,000 in 1994.
Future minimum rental payments, excluding executory costs, such as property
taxes, state use taxes, insurance and maintenance, under long-term
noncancellable leases, as of December 31, 1996, are:
Year Capital Leases Operating Leases
(Thousands of Dollars)
1997....................... $1,500 $ 7,100
1998....................... 1,500 5,600
1999....................... 1,200 4,800
2000....................... 1,000 4,200
2001....................... 1,000 3,800
After 2001 ................ 700 9,100
Future minimum lease
payments ................ $6,900 $34,600
Less amount representing
interest ................. 3,200
Present value of future
minimum lease payments .. $3,700
It is possible that certain operating lease payments related to NUSCO
leases will be accelerated from future years into 1997. See Note 10H, "The
Rocky River Realty Company - Obligations" for additional information.
4. NUCLEAR DECOMMISSIONING
Millstone and Seabrook: Millstone 3 and Seabrook 1 have service lives that
are expected to end during the years 2025 and 2026, respectively. Upon
retirement, these units must be decommissioned. Decommissioning studies
prepared in 1996 concluded that complete and immediate dismantlement at
retirement continues to be the most viable and economic method of
decommissioning Millstone 3 and Seabrook 1. Decommissioning studies are
reviewed and updated periodically to reflect changes in decommissioning
requirements, costs, technology and inflation.
The estimated cost of decommissioning PSNH's 2.85 percent ownership share
of Millstone 3 and NAEC's 35.98 percent share of Seabrook 1, in year-end
1996 dollars, is $13.2 million and $162.1 million, respectively. Millstone
3 and Seabrook 1 decommissioning costs will be increased annually by their
respective escalation rates. PSNH's Millstone 3 decommissioning costs are
accrued over the expected service life of the unit and are included in
depreciation expense on its Statements of Income. Nuclear decommissioning
costs related to PSNH's share of Millstone 3 amounted to $0.4 in 1996 and
$0.3 million in 1995 and 1994. Nuclear decommissioning, as a cost of
removal, is included in the accumulated provision for depreciation on
PSNH's Balance Sheets. At December 31, 1996, the balance in the
accumulated reserve for decommissioning amounted to $3.2 million.
PSNH makes payments to an independent decommissioning trust for its portion
of the costs of decommissioning Millstone 3. Funding of the estimated
decommissioning costs assumes levelized collections for Millstone 3 and
escalated collections for Seabrook 1, and after-tax earnings on the
Millstone and Seabrook decommissioning funds of 5.8 percent and 6.5
percent, respectively. Under the terms of the Rate Agreement, PSNH is
obligated to pay NAEC's share of Seabrook's decommissioning costs, even if
the unit is shut down prior to the expiration of its operating license.
Accordingly, NAEC bills PSNH directly for its share of the costs of
decommissioning Seabrook 1. PSNH records its Seabrook decommissioning costs
as a component of purchased power expense on its Statements of Income.
Under the Rate Agreement, PSNH's Seabrook decommissioning costs are
recovered through base rates.
As of December 31, 1996, PSNH collected through rates approximately $2.2
million toward the future decommissioning costs of its share of
Millstone 3, which has been transferred to the external decommissioning
trust. Earnings on the decommissioning trust increase the decommissioning
trust balance and the accumulated reserve for decommissioning. Unrealized
gains and losses associated with the decommissioning trust and financing
fund also impact the balance of the trust and the accumulated reserve for
decommissioning.
As of December 31, 1996, NAEC has paid approximately $16.6 million
(including payments made prior to the Acquisition Date by PSNH), into
Seabrook 1's decommissioning financing fund.
Changes in requirements or technology, the timing of funding or
dismantling, or adoption of a decommissioning method other than immediate
dismantlement would change decommissioning cost estimates and the amounts
required to be recovered. PSNH attempts to recover sufficient amounts
through its allowed rates to cover its expected decommissioning costs.
Only the portion of currently estimated total decommissioning costs that
has been accepted by regulatory agencies is reflected in rates of PSNH.
Based on present estimates and assuming its nuclear units operate to the
end of their licensing period, PSNH expects that the decommissioning trust
and financing fund will be substantially funded when the units are retired
from service.
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. PSNH's ownership share of estimated costs, in year-end 1996
dollars, of decommissioning the units owned and operated by MY and VY is
$18.5 million and $14.6 million, respectively. Under the terms of the
contracts with the Yankee companies, the shareholders-sponsors are
responsible for their proportionate share of the operating costs of each
unit, including decommissioning. The nuclear decommissioning costs of the
Yankee companies are included as part of the cost of power purchased by
PSNH.
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 three 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 PSNH's share was
approximately $38.1 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 PSNH's share was approximately $12.1 million.
Management expects that PSNH will continue to be allowed to recover these
costs from its customers. Accordingly, PSNH 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.
5. SHORT-TERM DEBT
The amount of short-term borrowings that may be incurred by PSNH is subject
to periodic approval by the SEC under the 1935 Act or by the NHPUC. PSNH
was authorized, under a waiver from the NHPUC, as of January 1, 1997 to
incur short-term borrowings up to a maximum of $225 million. The NHPUC
borrowing limit will be reduced to $125 million effective May 1997.
On April 30, 1996, PSNH increased its $125 million revolving-credit
agreement to $225 million with approval from the NHPUC. The agreement,
which was scheduled to expire in May, 1996, has been extended so that $100
million of the agreement will expire in April, 1997, and the remaining $125
million will expire in April, 1999. The revolving credit agreement is with
a group of 16 banks. PSNH is obligated to pay a facility fee of .25 percent
per annum on the three-year commitment of $125 million and .20 percent per
annum on the one-year commitment of $100 million. At December 31, 1996 and
1995, there were no borrowings under the facility.
Money Pool: Certain subsidiaries of NU, including PSNH, are members of the
Northeast Utilities System Money Pool (Pool). The Pool provides a more
efficient use of the cash resources of the system, and reduces outside
short-term borrowings. NUSCO administers the Pool as agent for the member
companies. Short-term borrowing needs of the member companies are first
met with available funds of other member companies, including funds
borrowed by NU parent. NU parent may lend to the Pool but may not borrow.
Funds may be withdrawn from or repaid to the Pool at any time without prior
notice. Investing and borrowing subsidiaries receive or pay interest based
on the average daily Federal Funds rate. However, borrowings based on
loans from NU parent bear interest at NU parent's cost and must be repaid
based upon the terms of NU parent's original borrowing. At December 31,
1996 and 1995, PSNH had no outstanding borrowings from the Pool.
Maturities of PSNH's short-term debt obligations were for periods of three
months or less.
6. EMPLOYEE BENEFITS
A. PENSION BENEFITS
PSNH participates in a uniform noncontributory defined benefit
retirement plan covering all regular system employees. Benefits are
based on years of service and employees' highest eligible compensation
during 60 consecutive months of employment. The company's direct
portion of the system's pension cost, part of which was charged to
utility plant, approximated $6.2 million in 1996, $2.3 million in 1995
and $4.4 million in 1994. Pension costs for 1996 and 1994 included
approximately $1.9 million related to workforce reduction programs.
Currently, PSNH funds annually an amount at least equal to that which
will satisfy the requirements of the Employee Retirement Income
Security Act and the Internal Revenue Code. Pension costs are
determined using market-related values of pension assets. Pension
assets are invested primarily in domestic and international equity
securities and bonds.
The components of net pension cost for PSNH are:
For the Years Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Service cost............................ $ 6,161 $ 3,462 $ 5,531
Interest cost........................... 12,808 11,923 11,129
Return on plan assets................... (24,393) (33,156) 246
Net amortization........................ 11,608 20,108 (12,526)
Net pension cost........................ $ 6,184 $ 2,337 $ 4,380
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
$131,624,000 and $123,475,000,
respectively ........................ $ 143,377 $133,840
Projected benefit obligation .......... 179,192 $169,040
Market value of plan assets ........... 173,035 159,094
Market value in excess of
projected benefit obligation ........ (6,157) (9,946)
Unrecognized transition amount ........ 4,337 4,671
Unrecognized prior service costs ...... 8,135 5,428
Unrecognized net gain ................. (51,105) (38,759)
Accrued pension liability ............. ($44,790) $(38,606)
The following actuarial assumptions were used in calculating the plan's
year-end funded status:
For the Years Ended December 31, 1996 1995
Discount rate............................ 7.75% 7.50%
Compensation/progression rate............ 4.75 4.75
B. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
PSNH provides certain health care benefits, primarily medical and
dental, and life insurance benefits through a benefit plan to retired
employees (referred to as SFAS 106 benefits). These benefits are
available for employees retiring from the company who have met
specified service requirements. For current employees and certain
retirees, the total SFAS 106 benefit is limited to two times the 1993
per-retiree health care costs. The SFAS 106 obligation has been
calculated based on this assumption. PSNH's direct portion of SFAS 106
benefits, part of which was deferred or charged to utility plant,
approximated $6.2 million in 1996, $7.2 million in 1995 and $7.6
million in 1994.
PSNH is funding SFAS 106 postretirement costs through external trusts.
The company is funding, on an annual basis, amounts that have been
rate-recovered and which also are tax-deductible under the Internal
Revenue Code. The trust assets are invested primarily in equity
securities and bonds.
The components of health care and life insurance costs are:
For the Years Ended December 31, 1996 1995 1994
(Thousands of Dollars)
Service cost ....................... $ 914 $ 933 $ 971
Interest cost ...................... 3,559 4,063 3,844
Return on plan assets .............. (1,720) (1,694) 37
Amortization of unrecognized
transition obligation ............ 2,941 2,941 2,941
Other amortization, net ............ 547 998 (206)
Net health care and life
insurance costs .................. $6,241 $7,241 $7,587
For calculating PSNH'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 ........................ $38,245 $ 44,985
Fully eligible active
employees ..................... 22 27
Active employees not
eligible to retire ............ 9,696 10,627
Total accumulated post-
retirement benefit
obligation ....................... 47,963 55,639
Market value of plan assets ........ 17,882 11,743
Accumulated postretirement
benefit obligation in
excess of plan assets ............ (30,081) (43,896)
Unrecognized transition
amount ........................... 47,049 49,989
Unrecognized net gain .............. (17,139) (8,373)
Accrued postretirement benefit
liability ........................ $ (171) $ (2,280)
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 $3.1
million and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for the year then ended by
$0.3 million. The trust holding the health plan assets is subject to
federal income taxes at a 39.6 percent tax rate.
PSNH is currently recovering SFAS 106 costs, including amounts
previously deferred.
7. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
Shares
Outstanding December 31,
Description December 31, 1996 1996 1995 1994
(Thousands of Dollars)
10.60%
Series A of 1991 ......... 5,000,000 $125,000 $125,000 $125,000
Less preferred stock
to be redeemed
within one year ........ 1,000,000 25,000 - -
Total preferred stock
subject to
mandatory redemption ... $100,000 $125,000 $125,000
In case of default on dividends or sinking-fund payments, no payments may
be made on any junior stock by way of dividends or otherwise (other than in
shares of junior stock) so long as the default continues. If PSNH is in
arrears in the payment of dividends on any outstanding shares of preferred
stock, PSNH would be prohibited from redemption or purchase of less than
all of the preferred stock outstanding. The Series A Preferred Stock is
not subject to optional redemption by PSNH. It is subject to an annual
sinking fund requirement of $25 million, beginning on June 30, 1997,
sufficient to retire annually 1,000,000 shares at $25 per share.
8. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
1996 1995
(Thousands of Dollars)
First Mortgage Bonds:
8 7/8% Series A, due 1996....................... $ - $172,500
9.17% Series B, due 1998..................... 170,000 170,000
Total First Mortgage Bonds............... 170,000 342,500
Pollution Control Revenue Bonds:
7.65% Tax-Exempt Series A, due 2021............ 66,000 66,000
7.50% Tax-Exempt Series B, due 2021............ 108,985 108,985
7.65% Tax-Exempt Series C, due 2021............ 112,500 112,500
Adjustable Rate, Taxable, Series D,
due 2021 ....................................... 39,500 39,500
Adjustable Rate, Taxable, Series E,
due 2021 ....................................... 69,700 69,700
Adjustable Rate, Tax-Exempt, Series D,
due 2021 ....................................... 75,000 75,000
Adjustable Rate, Tax-Exempt, Series E
due 2021 ....................................... 44,800 44,800
Less: Amounts due within one year ............... - 172,500
Long-term debt, net ....................... $686,485 $686,485
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1996 aggregate approximately $170 million for
1998. There are neither sinking-fund requirements nor debt maturities
existing for the years 1997, and 1999 through 2001. Also, there are annual
renewal and replacement fund requirements equal to 2.25 percent of the
average of net depreciable property owned by PSNH at the reorganization
date, plus cumulative gross property additions thereafter. PSNH expects to
meet these future fund requirements by certifying property additions. Any
deficiency would need to be satisfied by the deposit of cash or bonds.
Essentially, all utility plant of PSNH is subject to the lien of its first
mortgage bond indenture. PSNH's Revolving Credit Facility has a second
lien, junior to the lien of its first mortgage bond indenture, on all PSNH
property located in New Hampshire which will expire in April 1999. At
December 31, 1996, there were no borrowings under the Revolving Credit
Facility.
Concurrent with the issuance of PSNH's Series A and B First Mortgage Bonds,
PSNH entered into financing arrangements with the Business Finance
Authority of the state of New Hampshire (BFA). Pursuant to these
arrangements, the BFA issued seven series of Pollution Control Revenue
Bonds (PCRBs) and loaned the proceeds to PSNH. At December 31, 1996, $516.5
million of PCRBs were outstanding. The average effective interest rates on
the variable-rate pollution control notes ranged from 3.5 percent to 5.5
percent for 1996, and from 3.9 percent to 6.1 percent for 1995. PSNH's
obligation to repay each series of PCRBs is secured by a series of First
Mortgage Bonds that were issued under its indenture. Each such series of
First Mortgage Bonds contains terms and provisions with respect to
maturity, principal payment, interest rate, and redemption that correspond
to those of the applicable series of PCRBs. For financial reporting
purposes, these bonds would not be considered outstanding unless PSNH fails
to meet its obligations under the PCRBs.
The Series B First Mortgage Bond is not redeemable prior to its maturity
except in limited circumstances. The PCRBs, except for Series D and E, are
redeemable on or after May 1, 2001, at the option of the company with
accrued interest and at specified premiums. Under current interest rate
elections by PSNH, the Series D and E PCRBs are redeemable, at par plus
accrued interest at the end of each interest-rate period. Future interest-
rate elections by PSNH could significantly defer or eliminate the
availability of optional redemptions by PSNH, and could affect costs as
well.
9. 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 ................................ $(4,978) $(1,166) $ 368
State .................................. (1,605) 1,767 1,219
Total current ........................ (6,583) 601 1,587
Deferred income taxes, net:
Federal ................................ 94,922 72,147 63,941
State .................................. 272 (1,606) 3,666
Total deferred ...................... 95,194 70,541 67,607
Investment tax credits, net .............. (548) (555) (560)
Total income tax expense ................. $88,063 $70,587 $68,634
The components of total income tax expense are classified as follows:
Income taxes charged to operating
expenses ................................ $80,340 $69,817 $68,088
Other income taxes ....................... 7,723 770 546
Total income tax expense ................. $88,063 $70,587 $68,634
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 ............................. $(1,055) $ 1,294 $ 2,701
Deferred tax asset associated
with NOL ............................... 96,756 57,543 23,611
Energy adjustment clauses ................ (10,716) 5,098 30,954
Amortization of regulatory
settlement ............................. 11,501 11,501 11,501
Other .................................... (1,292) (4,895) (1,160)
Deferred income taxes, net ............... $95,194 $70,541 $67,607
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 ............. $64,616 $53,845 $51,127
Tax effect of differences:
Depreciation ............................ 1,896 1,868 1,407
Amortization of acquisition costs ....... 31,410 31,522 31,508
Seabrook intercompany loss .............. (7,504) (13,048) (19,637)
Investment tax credit amortization ...... (548) (555) (560)
State income taxes, net of
federal benefit ....................... (867) 105 3,175
Other, net .............................. (940) (3,150) 1,614
Total income tax expense .................. $88,063 $70,587 $68,634
10. COMMITMENTS AND CONTINGENCIES
A.RESTRUCTURING
New Hampshire: The 1996 restructuring legislation that the NHPUC is
charged with implementing provides that the NHPUC may not adopt a
restructuring plan that imposes a severe financial hardship on a
utility. NU management has testified that the implementation of
certain methodologies would result in a significant loss to PSNH. If
these losses were to result in the triggering of acceleration rights
that PSNH's creditors have and, if any single significant creditor
demanded payment because of the triggering of acceleration rights, all
other major creditors would immediately follow and PSNH and NAEC
bankruptcy filings would be unavoidable.
Management believes that PSNH is entitled to full recovery of its
prudently incurred costs, including regulatory assets and stranded
costs. It bases this belief both on the general nature of public
utility industry cost-of-service based regulation and the specific
circumstances of the resolution of PSNH's previous bankruptcy
proceedings and its acquisition by NU, including the recoveries
provided by the Rate Agreement and related agreements.
See Note 12, "Subsequent Event" for the possible impacts on PSNH and
NAEC of the NHPUC's decision related to industry restructuring.
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 NRC's watch list.
PSNH's ownership interest in the Millstone units is limited to a 2.85
percent joint ownership interest in Millstone 3. NU 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.
NU 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. NU
expensed approximately $179 million of incremental nonfuel nuclear O&M
costs in 1996 including a reserve of $63 million against 1997
expenditures, of which PSNH's share of these costs is $3.0 million.
Management estimates NU will expense approximately $386 million of
nonfuel nuclear O&M costs in 1997 of which PSNH's share of these costs
will be approximately $4.0 million.
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 the companies will ultimately incur.
At December 31, 1996, NU had expensed incremental replacement power
costs associated with the Millstone outages of approximately $260
million. To date, PSNH's share of replacement power costs has not been
material. PSNH's share of replacement power costs is not expected to be
material for 1997, while Millstone 3 is 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 NU system relies on MY for approximately two percent of its
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 action that cannot be accurately estimated at this time.
C.ENVIRONMENTAL MATTERS
PSNH is subject to regulation by federal, state and local authorities
with respect to air and water quality, the handling and disposal of
toxic substances and hazardous and solid wastes, and the handling and
use of chemical products. PSNH has an active environmental auditing
and training program and believes that it is in substantial compliance
with current environmental laws and regulations.
Environmental requirements could hinder the construction of new
generating units, transmission and distribution lines, substations and
other facilities. Changing environmental requirements could also
require extensive and costly modifications to PSNH's existing
generating units, and transmission and distribution systems, and could
raise operating costs significantly. As a result, PSNH may incur
significant additional environmental costs, greater than amounts
included in cost of removal and other reserves, in connection with the
generation and transmission of electricity and the storage,
transportation and disposal of by-products and wastes. PSNH may also
encounter significantly increased costs to remedy the environmental
effects of prior waste handling activities. The cumulative long-term
cost impact of increasingly stringent environmental requirements cannot
accurately be estimated.
PSNH has recorded a liability based upon currently available
information for what it believes are its estimated environmental
remediation costs that it expects to incur 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 net liability recorded by PSNH for its estimated environmental
remediation costs, excluding any possible insurance recoveries or
recoveries from third parties, amounted to approximately $4.6 million,
which management has determined to be the most probable amount within
the range of $4.6 million to $5.0 million.
PSNH cannot estimate the potential liability for future claims,
including environmental remediation costs, that may be brought against
it. However, considering known facts, existing laws, and regulatory
practices, management does not believe the matters disclosed above will
have a material effect on PSNH's financial position or future results
of operations.
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 that 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 $10.0 million per nuclear unit in any one
year. Under the terms of the power contracts with NAEC, PSNH could be
obligated to pay for any assessment charged to NAEC as a "cost of
service." Based on its ownership interest in Millstone 3 and NAEC's
ownership interest in Seabrook 1, PSNH's maximum liability, including
any additional potential assessments, would be $30.8 million per
incident. In addition, through power purchase contracts with MY, VY
and CY, PSNH would be responsible for up to an additional $11.1 million
per incident. Payments for PSNH's ownership interest in nuclear
generating facilities would be limited to a maximum of $5.3 million per
incident per year.
Insurance has been purchased to cover the primary cost of repair,
replacement or decontamination of utility property resulting from
insured occurrences at Millstone 3. PSNH is subject to retroactive
assessments if losses exceed the accumulated funds available to the
insurer. The maximum potential assessment against PSNH with respect to
losses arising during the current policy year is approximately $0.5
million under the primary property insurance program.
Insurance has been purchased to cover certain extra costs incurred in
obtaining replacement power during prolonged accidental outages and the
excess cost of repair, replacement, or decontamination or premature
decommissioning of utility property resulting from insured occurrences.
PSNH is subject to retroactive assessments if losses exceed the
accumulated funds available to the insurer. The maximum potential
assessments against PSNH (including costs resulting from PSNH's
contracts with NAEC), with respect to losses arising during current
policy years are approximately $1.9 million under the replacement power
policies and $7.3 million under the excess property damage,
decontamination and decommissioning policies. Although PSNH has
purchased the limits of coverage currently available from the
conventional nuclear insurance pools, the cost of a nuclear incident
could exceed available insurance proceeds.
Insurance has been purchased aggregating $200 million on an industry
basis for coverage of worker claims. All participating reactor
operators insured under this coverage are subject to retrospective
assessments of $3 million per reactor. The maximum potential assessment
against PSNH (including costs resulting from the Seabrook power
contracts with NAEC), with respect to losses arising during the current
policy period is approximately $1.8 million.
E.CONSTRUCTION PROGRAM
The construction program is subject to periodic review and revision by
management. PSNH currently forecasts construction expenditures of
$206.0 million for the years 1997-2001, including $35.0 million for
1997. In addition, the company estimates that nuclear fuel
requirements, for its share of Millstone 3, will be $4.2 million for
the years 1997-2001, including $0.4 million for 1997.
F.LONG-TERM CONTRACTUAL ARRANGEMENTS
Yankee Companies: PSNH, along with CL&P and WMECO, 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. PSNH's total cost of purchases under contracts with the Yankee
companies, excluding YAEC, amounted to $25.0 million in 1996, $26.4
million in 1995, and $23.4 million in 1994. See Note 1E, "Summary of
Significant Accounting Policies-Investments and Jointly Owned Electric
Utility Plant," and Note 4, "Nuclear Decommissioning," for more
information on the Yankee companies.
Nonutility Generators: PSNH has entered into various arrangements for
the purchase of capacity and energy from NUGs. These arrangements have
terms from 20 to 30 years, currently expiring in the years 1998 through
2023, and require PSNH to purchase the energy at specified prices or
formula rates. For the 12 months ended December 31, 1996,
approximately 13 percent of the system electricity requirements were
met by NUGs. PSNH's total cost of purchases under these arrangements
amounted to $139.1 million in 1996, $129.6 million in 1995, and $130.0
million in 1994. These costs are eventually recovered through the
company's rates. For additional information, see Note 1K, "Summary of
Significant Accounting Policies-Recoverable Energy Costs."
New Hampshire Electric Cooperative: PSNH entered into a buy-back
agreement to purchase the capacity and energy of the New Hampshire
Electric Cooperative, Inc.'s (NHEC) share of Seabrook 1 and to pay all
of NHEC's Seabrook 1 costs for a ten-year period, which began on July
1, 1990. The total cost of purchases under this agreement was $14.6
million in 1996, $15.8 million in 1995, and $14.6 million in 1994. A
portion of these costs is collected currently through the FPPAC and the
remaining costs are deferred for future collection in accordance with
the Rate Agreement. In connection with the agreement, NHEC agreed to
continue as a firm-requirements customer of PSNH for 15 years.
Hydro-Quebec: Along with other New England utilities, PSNH, CL&P,
WMECO, and HWP have entered into agreements to support transmission and
terminal facilities to import electricity from the Hydro-Quebec system
in Canada. PSNH is obligated to pay, over a 30-year period ending in
2020, its proportionate share of the annual O&M and capital costs of
these facilities.
The estimated annual costs of PSNH's significant long-term contractual
arrangements are as follows:
1997 1998 1999 2000 2001
(Millions of Dollars)
MY and VY ..................... $17.5 $14.9 $17.1 $17.0 $ 13.9
Nonutility Generators ......... 134.0 137.0 141.0 145.0 149.0
NHEC .......................... 22.7 29.8 29.9 14.6 -
Hydro-Quebec .................. 10.6 10.3 10.0 9.8 9.5
For additional information regarding the recovery of purchased power
costs, see Note 1K, "Summary of Significant Accounting Policies -
Recoverable Energy Costs."
G.DEFERRED RECEIVABLE FROM AFFILIATED COMPANY
At the time PSNH emerged from bankruptcy on May 16, 1991, in accordance
with the phase-in under the Rate Agreement, it began accruing a
deferred return on a portion of its Seabrook investment. From May 16,
1991 to the Acquisition Date, PSNH accrued a deferred return of $50.9
million. On the Acquisition Date, PSNH sold the $50.9 million deferred
return to NAEC as part of the Seabrook-related assets.
At the time PSNH transferred the deferred return to NAEC, it realized,
for income tax purposes, a gain that is deferred under the consolidated
income tax rules. This gain will be restored for income tax purposes
when the deferred return of $50.9 million, and the associated income
taxes of $32.9 million, are collected by NAEC through the Seabrook
power contracts. When NAEC recovers the $32.9 million in years eight
through ten of the Rate Agreement, it is obligated to make
corresponding payments to PSNH.
On the Acquisition Date, PSNH recorded the $32.9 million of income
taxes associated with the deferred return as a deferred receivable from
NAEC, with a corresponding entry to deferred revenue, on its Balance
Sheet. In 1993, due to changes in tax rates, this amount was adjusted
to $33.2 million. See Note 12, "Subsequent Event" for the possible
impacts of the NHPUC's decision related to industry restructuring on
this intercompany transaction between PSNH and NAEC.
H.THE ROCKY RIVER REALTY COMPANY - OBLIGATIONS
The Rocky River Realty Company (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. Management does not expect the
resolution to have a material impact on its financial condition.
11.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. Unrealized gains and losses resulting from the
use of SFAS 115 accounting have not been material.
Preferred stock and long-term debt: The fair value of PSNH'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 amounts of PSNH's
financial instruments and the estimated fair values are as follows:
Carrying Fair
At December 31, 1996 Amount Value
(Thousands of Dollars)
Preferred stock subject to
mandatory redemption........................... $125,000 $125,000
Long-term debt - First Mortgage Bonds............ 170,000 175,729
Other long-term debt............................. 516,485 523,536
Carrying Fair
At December 31, 1995 Amount Value
(Thousands of Dollars)
Preferred stock subject to
mandatory redemption........................... $125,000 $131,250
Long-term debt - First Mortgage Bonds............ 342,500 352,517
Other long-term debt............................. 516,485 532,190
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.
12. SUBSEQUENT EVENT
New Hampshire Restructuring: On February 28, 1997, the NHPUC issued its
decision related to restructuring the state's electric utility industry
and setting interim stranded cost charges for PSNH pursuant to
legislation enacted in New Hampshire in 1996.
In the decision, the NHPUC announced a departure from cost-based
ratemaking and instead adopted a market-priced approach to ratemaking and
stranded cost recovery as advocated by the NHPUC's consultants.
Accordingly, unless the litigation described below results in a stay, or
necessary modifications to the final plan are made that leads management
to conclude that the ratemaking approach utilized in the NHPUC's
restructuring decision will not go into effect, PSNH will be required to
discontinue accounting under SFAS 71. That would result in PSNH writing
off from its balance sheet, as early as the quarter ending March 31,
1997, substantially all of its regulatory assets. The amount of the
potential write-off which is triggered by the order is currently
estimated at over $400 million, after taxes. PSNH does not believe that
under the decision, it would be required to recognize any additional loss
resulting from the impairment of the value of its other long-lived assets
under the provisions of SFAS 121.
The decision also contains rulings on numerous other issues that may have
a substantial effect on the operations of PSNH. Included among these
rulings are assertions that the Rate Agreement by and between PSNH's
parent company, NU and the state of New Hampshire, which was an integral
part of NU's acquisition of PSNH in 1992, is not binding on the state;
the requirement that PSNH divest within two years from the inception of
competition all of its owned-generation and all of its wholesale power
contracts (including its contracts with NAEC for Seabrook output); a
prohibition on the remaining distribution company and its affiliates from
engaging in retail marketing or load aggregation services in New
Hampshire; and a mandate for the filing of tariffs with the FERC for the
provision of unbundled retail transmission service.
On March 3, 1997, PSNH, NU, NAEC and NUSCO filed for a temporary
restraining order, preliminary and permanent injunctive relief, and for
declaratory judgment in the Federal District Court for New Hampshire.
The case was subsequently transferred to Rhode Island. On March 10, 1997,
the Chief Judge of the Rhode Island federal court issued a temporary
restraining order which stayed the NHPUC's February 28, 1997 decision to
the extent it established a rate setting methodology that is not designed
to recover PSNH's costs of providing service and would require PSNH to
write off any regulatory assets. A hearing regarding the system
plaintiffs' request for a preliminary injunction will be held in the same
court on March 20, 1997.
PSNH also intends to pursue claims against the state of New Hampshire for
damages in state court in New Hampshire for abrogation of the 1989 Rate
Agreement. The damage claims will be in the hundreds of millions of
dollars.
PSNH and NAEC are parties to a variety of financing agreements providing
that the credit thereunder can be terminated or accelerated if they do
not maintain specified minimum ratios of common equity to capitalization
(as defined in each agreement). In addition, PSNH and NAEC are parties to
a variety of financing agreements providing in effect that the credit
thereunder can be terminated or accelerated if there are actions taken,
either by PSNH or NAEC or by the state of New Hampshire, that deprive
PSNH and/or NAEC of the benefits of the Rate Agreement and/or the
Seabrook Power Contracts.
If the NHPUC's February 28, 1997 decision becomes effective, it would,
unless PSNH received waivers from its respective lenders, result in (i)
write-offs that would cause PSNH's common equity to fall below the
contractual minimums, (ii) reductions in income that would cause PSNH's
income to fall below the contractual minimums, (iii) potential violation
of the contractual provisions with respect to actions depriving PSNH and
NAEC of the benefits of the Rate Agreement, and (iv) the potential for
cross defaults to other PSNH and NAEC financing documents. Substantially
all of PSNH's and NAEC's debt obligations ($686 million of PSNH debt and
$515 million of NAEC debt) would be affected. For these actions to be
avoided, management believes that it is essential that the March 10, 1997
temporary restraining order issued by a federal court judge be extended
and made applicable to the foregoing issues.
If these events transpired and the requested court relief is not
forthcoming, and if the creditors holding PSNH and NAEC debt obligations
decide to exercise their rights to demand payment and not to forebear
while the litigation is pending, then either creditors or PSNH and NAEC
could initiate proceedings under Chapter 11 of the bankruptcy laws.
PSNH and NAEC Report Considerations: As a result of the NHPUC decision
and the potential consequences discussed above, the reports of our
auditors on the individual financial statements of PSNH and NAEC contain
explanatory paragraphs. Those explanatory paragraphs indicate that a
substantial doubt exists currently about the ability of PSNH and NAEC to
continue as going concerns. The accounts of PSNH and NAEC are included in
the consolidated financial statements of NU on the basis of a going
concern. While the effect of the implementation of that decision would
have a material adverse impact on NU's financial position, results of
operations and cash flows, it would not in and of itself result in
defaults under borrowing or other financial agreements of NU or its other
subsidiaries.
To the Board of Directors
of Public Service Company of New Hampshire:
We have audited the accompanying balance sheets of Public Service Company
of New Hampshire (a New Hampshire corporation and a wholly owned subsidiary
of Northeast Utilities) as of December 31, 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 Public Service Company
of New Hampshire 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12, on
February 28, 1997 the State of New Hampshire Public Utilities Commission
(the NHPUC) issued an order outlining its final plan to restructure the
electric utility industry. The final plan announced a departure from cost-
based ratemaking effective January 1, 1998, which, if implemented, would
require the Company to discontinue the application of Financial Accounting
Standard No. 71, "Accounting for the Effects of Certain Types of
Regulation," (FAS 71). The implementation of the final plan, including the
effect of the discontinuation of FAS 71, would result in after tax write-
off of over $400 million. Such a write-off would cause the Company to be
in technical default under financial covenants imposed by lenders, which,
would, if not waived or renegotiated, give rise to the rights of lenders to
accelerate the repayment of approximately $686 million of the Company's
indebtedness and approximately $515 million of an affiliated company's
indebtedness. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements referred
to above do not include any adjustments that might result from this
uncertainty.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 21, 1997 (except with respect to the matter discussed in Note 12,
as to which the date is March 10, 1997)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of PSNH's (the company) financial
condition and the principal factors having an impact on the results of
operations. The company is a wholly-owned subsidiary of Northeast Utilities
(NU). This discussion should be read in conjunction with the company's financial
statements and footnotes.
FINANCIAL CONDITION
EARNINGS OVERVIEW
PSNH had net income of approximately $97 million in 1996, compared to
approximately $83 million in 1995. PSNH's 1996 net income increased primarily
due to lower interest on long-term debt and higher revenues, partially offset by
increased operation and maintenance costs.
On February 28, 1997, the New Hampshire Public Utilities Commission (NHPUC)
issued its orders for restructuring the state's electric utility industry,
including setting interim stranded cost charges for PSNH. If the orders are
implemented without modification, PSNH would be required to recognize write-offs
of over $400 million, after taxes. PSNH filed for and received a temporary
restraining order from the United States District Court, which stayed certain
portions of the NHPUC's orders. If PSNH is unable to keep this stay in effect,
receive another appropriate court action, or otherwise modify the orders, the
write-off triggered by the orders would result in defaults which, if not waived
or renegotiated, would give creditors the right to accelerate the repayment of
over $1.2 billion of PSNH and North Atlantic Energy Corporation (NAEC)
63
indebtedness. If the NHPUC's orders are implemented and the financial covenant
defaults are not waived, there would be substantial doubt about the company's
ability to continue as a going concern. See "Restructuring" for further
information on the impact of the NHPUC's orders.
Retail kilowatt-hour sales increased by only 0.4 percent in 1996. Modest
economic growth was partially offset by a pilot retail access program initiated
in New Hampshire in June 1996; however, the pilot had little impact on 1996
financial results. Absent the negative effects of the pilot program, sales would
have increased by 1.7 percent. In 1997, management expects that the New
Hampshire economy will continue to experience modest economic growth.
RESTRUCTURING
GENERAL
The movement toward electric industry restructuring continues to gain momentum
nationally as well as within New Hampshire. 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 PSNH has historically conducted its business. Although PSNH
continues to operate under cost-of-service based regulation, recent actions
taken by the NHPUC, 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. PSNH has exposure to strandable investments for its contractual
obligation to NAEC for the Seabrook nuclear generating facility, state mandated
purchased power arrangements that are priced above the market, significant
regulatory assets that represent costs deferred by state regulators for future
recovery and costs incurred and assets created in connection with the
bankruptcy reorganization of PSNH and NU's acquisition of PSNH. PSNH's
exposure to strandable investments and purchased power obligations exceeds its
shareholder's equity. PSNH's ability to compete in a restructured
environment would be negatively affected unless PSNH was able to recover
substantially all of these past investments and commitments. 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
and PSNH's rate agreement that was entered into by NU, PSNH and the state of
New Hampshire in 1989 (the Rate Agreement).
FEBRUARY 28, 1997 NHPUC ORDERS
On February 28, 1997, the NHPUC issued its orders for restructuring the state's
electric utility industry and setting interim stranded cost charges for PSNH
pursuant to legislation enacted in New Hampshire in 1996 (the Final Plan). The
Final Plan would implement retail choice for all customers by January 1, 1998.
The Final Plan would replace the traditional cost-of-service based regulation
with a regional average rate approach to rate setting and recovery of
strandable investments. Accordingly, unless the litigation described below
results in a stay that leads management to conclude that the ratemaking
approach in the NHPUC's restructuring orders will not go into effect, PSNH
will be required to discontinue accounting under Statement of Financial
Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types
of Regulation." This would result in PSNH writing off from its balance sheet,
as early as the quarter ending March 31, 1997, substantially all of its
regulatory assets. The amount of the potential write-off triggered by the
Final Plan is currently estimated at over $400 million, after taxes. Management
believes that under the Final Plan, PSNH would not be required to recognize
any additional loss resulting from impairment of the value of its other
long-lived assets under the provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
The Final Plan also contains rulings on numerous other issues that would, if
put into effect, have a substantial effect on PSNH's operations. Included
among these rulings are the requirement that PSNH divest within two years of
the initiation of competition all of its owned generation and all of its
wholesale power purchase contracts (including its contract with NAEC for
Seabrook output); a prohibition on the remaining distribution company and its
affiliates from engaging in retail marketing or load aggregation services; a
mandate for the filing of tariffs with the Federal Energy Regulatory Commission
(FERC) for the provision of unbundled retail transmission service; and
assertions that the Rate Agreement, which was an integral part of NU's
acquisition of PSNH, is not binding on the state. The company will challenge
these assertions.
PSNH must file revised interim stranded cost charges, in accordance with the
terms of the Final Plan, by April 30, 1997. The Final Plan also requires each
utility, including PSNH, to file comprehensive plans, by June 30, 1997, which
comply with the Final Plan and supplemental orders. In addition, any
jurisdictional utility that chooses to be a distribution company must submit a
plan by December 31, 1997, to divest its generation and aggregation/marketing
service functions by the end of the two-year period following the initiation of
competition.
On March 3, 1997, PSNH, NU, NAEC and Northeast Utilities Service Company filed
for a temporary restraining order, preliminary and permanent injunctive relief
and for declaratory judgment in the United States District Court for New
Hampshire. The case was subsequently transferred to Rhode Island. On March 10,
1997, the court issued a temporary restraining order, which stayed the NHPUC's
February 28, 1997, orders to the extent they established a rate setting
methodology that is not designed to recover PSNH's costs of providing service
and would require PSNH to write off any regulatory assets under SFAS 71. An
evidentiary hearing regarding the system plaintiffs' request for a preliminary
injunction will be held on March 20, 1997. PSNH also intends to pursue claims
for damages against the state of New Hampshire in the New Hampshire state court
for abrogation of the 1989 Rate Agreement. The damage claims will be in the
hundreds of millions of dollars. Management cannot predict the ultimate outcome
of these actions.
If PSNH is unable to keep this stay in effect, or receive another appropriate
court action, or otherwise modify the Final Plan, the write-off triggered by
the Final Plan would result in defaults which, if not waived or renegotiated,
would give creditors the right to accelerate the repayment of approximately
$686 million of PSNH indebtedness and $515 million of NAEC indebtedness. These
circumstances could force PSNH and NAEC to seek bankruptcy protection under
Chapter 11 of the bankruptcy laws.
POTENTIAL ACCOUNTING IMPACTS
PSNH follows accounting principles in accordance with SFAS 71, 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, PSNH 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, and subject
to the successful resolution of the legal actions PSNH has taken with respect
to the NHPUC's recent restructuring activities, management believes that PSNH's
use of SFAS 71 remains appropriate.
If events create uncertainty about the recoverability of any of PSNH's
remaining long-lived assets, PSNH would be required to determine the fair
value of its long-lived assets, including regulatory assets, in accordance
with SFAS 121. 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 it is probable that PSNH 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.
RATE MATTERS
PSNH's Rate Agreement provides for seven base rate increases and a
comprehensive fuel and purchased power adjustment clause (FPPAC). In June,1996,
the final base rate increase of 5.5 percent went into effect . Although the
FPPAC continues for an additional three years beyond the end of the fixed rate
period, there is uncertainty regarding how it will function after that time.
Given the completion of the fixed rate period, and the uncertainty surrounding
the FPPAC, management expects to file a rate case with the NHPUC in May, 1997.
In June, 1996, the NHPUC ordered PSNH to refund, over 12 months, $41.5 million,
(including $5 million of interest) related to small power producer costs which
had been previously collected through the FPPAC.
See the "Notes to Financial Statements" Note 1K, for further information on the
FPPAC.
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 PSNH's service territory. In response, PSNH
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, PSNH continued to negotiate long-term power supply arrangements
with certain large commercial and industrial retail customers that require an
incentive to locate or expand their operations within PSNH'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 14 percent of PSNH'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 $12.5 million,
up from $8 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 which are account executives charged with developing tailored
solutions for the NU system'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 Hampshire and Massachusetts in 1996. In New Hampshire,
approximately 14,500 customers are participating in a two-year statewide pilot
program. NU subsidiaries introduced three energy and service product offerings
under different brand names and competed against 35 other energy suppliers.
Given the political and regulatory environment in New Hampshire, it is notable
that NU retained approximately 60 percent of PSNH's participating customers
(50 percent of the total energy demand market share) and gained approximately
15 percent of the customers participating from outside NU's service territory.
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, the NU system 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.
NUCLEAR PERFORMANCE
PSNH has a 2.85 percent ownership interest in Millstone 3. In addition, under
the Seabrook Power Contracts, PSNH is obligated to purchase NAEC's 35.98
percent ownership of the capacity and output of Seabrook unit 1 (Seabrook) for
a period equal to the length of the Nuclear Regulatory Commission (NRC)
full-power operating license for Seabrook (through 2026) whether or not
Seabrook is operating and without regard to the cost of alternative sources
of power. North Atlantic Energy Service Corporation (NAESCO) is the managing
agent and operates Seabrook.
Seabrook operated at a capacity factor of 96.8 percent through December 1996,
compared to 83.2 percent for the same period in 1995. The higher 1996 capacity
factor was primarily the result of the planned refueling and maintenance outage
in 1995 and the lack of an outage in 1996. The plant has a 49-day refueling
outage scheduled to begin May 10, 1997.
Subsequent to its January 31, 1996, announcement that the three Millstone units
(Millstone) had been placed on its watch list, the 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.
In October, 1996, the NRC issued a request for information concerning all
nuclear plants in the United States, except Millstone, which had previously
received such a request. Such information will be used to verify that these
facilities are being operated and maintained in accordance with NRC regulations
and their specific licenses. NAESCO has filed its response to the NRC's request,
with respect to Seabrook. Seabrook's operations were not restricted by the
request. The NRC's April, 1996, inspection found Seabrook to be a well-operated
facility and found no major safety issues or weaknesses and noted that it would
reduce its future inspections in a number of areas as a result of its findings.
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.
To date, PSNH's costs related to the Millstone 3 outage have not had a material
impact on the company's financial position or results of operations. Management
expects that, under its current planning assumptions, Millstone 3's outage-
related costs will continue to be immaterial to the company's financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased by approximately $39 million in 1996,
primarily due to lower interest on long-term debt and higher revenues,
partially offset by higher purchased power costs, higher operation and
maintenance expenses and lower funds from working capital. Cash used for
financing activities increased by approximately $32 million in 1996, primarily
due to higher long-term debt repayments. Cash used for investments increased by
approximately $6 million in 1996, primarily due to a decrease in loan repayments
from other system companies under the NU system Money Pool, partially offset by
lower construction expenditures in 1996.
The company has a more leveraged capital structure than most other investor-
owned public utilities and is required to make substantial interest payments.
The company's indebtedness under the Revolving Credit Facility, and some of the
company's pollution control revenue bonds bear interest at floating rates to be
set periodically, causing the company to be sensitive to fluctuating interest
rates.
In March, 1997, Standard & Poor's Ratings Group (S&P) and Moody's Investors
Service (Moody's) downgraded NU, PSNH and NAEC securities as a result of recent
restructuring activities in New Hampshire. None of PSNH's and NAEC's securities
are 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 PSNH.
NUCLEAR DECOMMISSIONING
PSNH has a 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 FERC to clarify the obligations of its purchasing utilities
73
following the decision to cease power production. At December 31, 1996, PSNH's
share of these obligations was approximately $38 million, including the cost of
decommissioning and the recovery of existing assets. Management expects that
PSNH will continue to be allowed to recover such FERC-approved costs from its
customers. Accordingly, PSNH has recognized its share of the estimated costs as
a regulatory asset, with a corresponding obligation, on its Balance Sheets.
PSNH's estimated cost to decommission its 2.85 percent share of Millstone 3 and
NAEC's 35.98 percent share of Seabrook is approximately $13 million and $162
million, respectively, 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. Under the terms of the Rate Agreement, the company is
obligated to pay NAEC's share of Seabrook's decommissioning costs, even if the
unit is shut down prior to the expiration of its operating license. As of
December 31, 1996, the market value of the contributions already made to the
Seabrook and Millstone 3 decommissioning trusts, including their investment
returns, was approximately $20 million and $3 million, respectively.
See the "Notes to Financial Statements" Note 4, for further information on
nuclear decommissioning, including PSNH's share of costs to decommission the
regional nuclear generating units.
ENVIRONMENTAL
PSNH 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 PSNH. At December 31, 1996, PSNH had recorded
an environmental reserve of approximately $5 million, the most probable amount
as required by SFAS 5, "Accounting for Contingencies."
See the "Notes to Financial Statements" Note 10C, 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 $130 13% $58 6%
Fuel, purchased and
net interchange
power 100 39 34 15
Other operation 14 4 10 3
Maintenance 3 8 (1) (3)
Depreciation (1) (3) 6 15
Federal and state
income taxes 17 25 2 3
Other, net 5 (a) 3 (a)
Interest on
long-term debt (19) (25) - -
Other interest expense 3 (a) - -
Net income 14 16 6 8
(a) Percent greater than 100
OPERATING REVENUES
Total operating revenues increased in 1996, primarily due to higher fuel
revenues, regulatory decisions and other retail revenues. Fuel revenues
increased $112 million, primarily due to the intercompany allocation of energy
costs to NU affiliated companies ($125 million) and higher base fuel revenues as
a result of the June 1996 and 1995 retail rate increases, partially offset by
lower FPPAC revenues as a result of a customer refund ordered by the NHPUC.
Revenues related to regulatory decisions increased $13 million, primarily due to
the retail rate increases. Other retail revenues increased $5 million primarily
due to sales growth and other revenue sources. Retail sales increased 0.4
percent ($2 million), primarily due to economic growth in 1996, partially offset
by milder weather in 1996.
Total operating revenues increased in 1995, primarily due to regulatory
decisions and higher fuel recoveries, partially offset by lower retail sales.
Revenues related to regulatory decisions increased $20 million, primarily due to
the effects of the June 1995 and 1994 retail rate increases. Fuel, purchased
power and FPPAC costs recoveries increased $49 million, primarily due to higher
fuel and purchased power costs. Sales volume decreased $11 million, primarily
due to price discounts, milder weather and lower wholesale sales.
FUEL, PURCHASED AND NET INTERCHANGE POWER
Fuel, purchased and net interchange power expense increased in 1996, primarily
due to higher purchased power costs and the timing of the recognition of fuel
expenses under the FPPAC.
Fuel, purchased and net interchange power increased in 1995, primarily due to
the timing of the recognition of fuel expenses under the FPPAC.
OTHER OPERATION AND MAINTENANCE
Other operation and maintenance expenses increased in 1996, primarily due to
higher storm expenditures, higher employee benefit costs, higher capacity
charges under the Seabrook Power Contracts and higher marketing costs.
Other operation and maintenance expenses, net increased in 1995, primarily due
to higher capacity charges under the Seabrook Power Contracts due to Seabrook's
1995 refueling and maintenance outage.
DEPRECIATION
Although the change in 1996 was not significant, depreciation increased in 1995,
primarily due to the additional depreciation allowed from the savings from
burning gas at Newington Station and an increase in plant additions.
FEDERAL AND STATE INCOME TAXES
Federal and state income taxes increased in 1996 and 1995, primarily due to
higher book taxable income.
OTHER, NET
Other, net increased in 1996, primarily due to the deferral of interest expense
associated with the FPPAC refund. The change in 1995 was not significant.
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased in 1996, primarily due to the repayment of
the $172.5 million Series A first mortgage bond in May. The change in 1995 was
not significant.
OTHER INTEREST EXPENSE
Other interest expense increased in 1996, primarily due to interest expense
associated with the FPPAC refund. The change in 1995 was not significant.
Public Service Company of New Hampshire
SELECTED FINANCIAL DATA (a)
Jan. 1, 1996 Jan. 1, 1995 Jan. 1, 1994
to to to
For the Periods Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
(Thousands of Dollars)
Operating Revenues...... $1,110,169 $ 979,971 $ 922,039
Operating Income.......... 155,195 155,628 152,086
Net Income ............... 96,902 83,255 77,444
Cash Dividends on
Common Stock............ 52,000 52,000 -
At Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
Total Assets........... $2,851,212 $2,920,487 $2,845,967
Long-Term Debt (c)...... 686,485 858,985 999,985
Preferred Stock
Subject to Mandatory
Redemption(c)........... 125,000 125,000 125,000
Obligations Under
Seabrook Power
Contracts and Other
Capital Lease(c)........ 914,617 915,288 887,967
(a) Reclassifications of prior data have been made to conform with
the current presentation.
(b) PSNH was acquired by NU on June 5, 1992.
(c) Includes portions due within one year.
SELECTED FINANCIAL DATA
Jan. 1, 1993 June 5, 1992 (b) Jan. 1, 1992
to to to
Dec. 31, 1993 Dec. 31, 1992 June 4, 1992
(Thousands of Dollars)
$864,415 $ 492,559 $ 381,769
124,710 61,206 34,250
52,237 29,398 12,778
- - -
Dec. 31, 1993 Dec. 31, 1992 June 4, 1992
(Thousands of Dollars)
$2,774,511 $2,793,768 $2,693,414
1,093,895 1,187,985 1,488,985
125,000 125,000 125,000
856,559 787,826 -
STATISTICS
Average
Gross Electric Annual
Utility Plant Use Per
December 31, kWh Residential Electric
(Thousands of Sales Customer Customers Employees
Dollars)(a) (Millions) (kWh) (Average) (December 31)
1996 $2,382,009 13,601 6,567 407,082 1,279
1995 2,469,474 11,001 6,524(d) 406,077 1,325
1994 2,521,960 11,008 6,768 400,775 1,374
1993 2,590,644 11,146 6,817 397,277 1,426
1992(b) 2,656,493 12,294 6,874 394,046 1,680
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended (c)
1996 March 31 June 30 Sept.30 Dec. 31
Operating Revenues........ $269,540 $261,897 $296,719 $282,013
Operating Income........... $ 44,668 $ 42,156 $ 46,934 $ 21,437
Net Income.............. $ 28,545 $ 23,986 $ 30,646 $ 13,725
1995
Operating Revenues..........$252,337 $232,849 $249,626 $245,159
Operating Income.......... $ 41,858 $ 31,480 $ 40,333 $ 41,957
Net Income................ $ 21,823 $ 13,892 $ 23,195 $ 24,345
(a) Includes reclassification of the unamortized acquisition costs to gross
utility plant.
(b) PSNH was acquired by NU on June 5, 1992.
(c) Reclassifications of prior data have been made to conform with
the current presentation.
(d) Effective January 1, 1996, the amounts shown reflect billed and
unbilled sales. 1995 has been restated to reflect this change.