FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-5324
NORTHEAST UTILITIES
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2147929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
(Address of principal executive offices) (Zip Code)
(413) 785-5871
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
Common Shares, $5.00 par value 136,765,644 shares
NORTHEAST UTILITIES AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 2
Consolidated Statements of Income - Three
Months and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 14
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Part II. Other Information
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of
Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 31
PART I. FINANCIAL INFORMATION
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
------------- -------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at cost:
Electric................................................ $ 9,767,414 $ 9,685,155
Other................................................... 190,945 192,303
------------- -------------
9,958,359 9,877,458
Less: Accumulated provision for depreciation......... 4,146,199 3,979,864
------------- -------------
5,812,160 5,897,594
Unamortized PSNH acquisition costs...................... 446,997 491,709
Construction work in progress........................... 151,724 146,438
Nuclear fuel, net....................................... 199,343 196,424
------------- -------------
Total net utility plant............................. 6,610,224 6,732,165
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 440,140 403,544
Investments in regional nuclear generating
companies, at equity................................... 89,105 85,340
Investments in transmission companies, at equity........ 21,114 21,186
Investments in Charter Oak Energy, Inc. projects........ 87,431 57,188
Other, at cost.......................................... 68,621 43,372
------------- -------------
706,411 610,630
------------- -------------
Current Assets:
Cash and cash equivalents............................... 137,569 194,197
Special deposits........................................ 1,016 7,039
Receivables, net (Note 4)............................... 361,728 477,021
Accrued utility revenues (Note 4)....................... 117,587 127,162
Fuel, materials, and supplies, at average cost.......... 223,396 211,414
Recoverable energy costs, net--current portion.......... 50,306 1,804
Prepayments and other................................... 66,334 48,279
------------- -------------
957,936 1,066,916
------------- -------------
Deferred Charges:
Regulatory assets:
Income taxes,net...................................... 969,040 1,012,343
Deferred costs--nuclear plants........................ 195,266 185,078
Unrecovered contractual obligations................... 383,414 435,495
Recoverable energy costs, net......................... 312,754 328,863
Deferred demand side management costs................. 52,800 90,129
Cogeneration costs.................................... 49,817 66,205
Other................................................. 100,421 103,726
Unamortized debt expense................................ 39,931 38,146
Other .................................................. 76,307 72,052
------------ ------------
2,179,750 2,332,037
------------ ------------
Total Assets.............................................. $ 10,454,321 $ 10,741,748
============ ============
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
------------- -------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common shareholders' equity:
Common shares, $5 par value--authorized
225,000,000 shares; 136,742,106 shares issued and
129,709,676 shares outstanding in 1997 and
136,051,938 shares issued and 128,444,373 shares
outstanding in 1996.................................. $ 683,711 $ 680,260
Capital surplus, paid in.............................. 935,294 940,446
Deferred benefit plan--employee stock
ownership plan...................................... (162,776) (176,091)
Retained earnings..................................... 753,452 832,520
------------- -------------
Total common shareholders' equity.............. 2,209,681 2,277,135
Preferred stock not subject to mandatory redemption..... 136,200 136,200
Preferred stock subject to mandatory redemption......... 249,500 276,000
Long-term debt.......................................... 3,591,516 3,613,681
------------- -------------
Total capitalization........................... 6,186,897 6,303,016
------------- -------------
Minority Interest in Consolidated Subsidiaries............ 99,917 99,972
------------- -------------
Obligations Under Capital Leases.......................... 188,666 186,860
------------- -------------
Current Liabilities:
Notes payable to banks.................................. 145,000 38,750
Long-term debt and preferred stock--current
portion................................................ 301,583 319,503
Obligations under capital leases--current
portion................................................ 19,893 19,305
Accounts payable........................................ 359,423 507,139
Accrued taxes........................................... 31,899 7,050
Accrued interest........................................ 49,229 51,386
Accrued pension benefits................................ 91,253 99,699
Nuclear compliance...................................... 64,560 63,200
Other................................................... 92,328 98,570
------------- ------------
1,155,168 1,204,602
------------- ------------
Deferred Credits:
Accumulated deferred income taxes....................... 1,997,304 2,044,123
Accumulated deferred investment tax credits............. 163,640 168,444
Deferred contractual obligations........................ 390,912 440,495
Other................................................... 271,817 294,236
------------- ------------
2,823,673 2,947,298
------------- ------------
Commitments and Contingencies (Note 6)
Total Capitalization and Liabilities........... $ 10,454,321 $ 10,741,748
============= =============
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(Thousands of Dollars, except share information)
Operating Revenues............................. $ 903,323 $ 871,904 $ 1,878,691 $ 1,900,106
------------- ------------- ------------- -------------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power.... 276,949 199,720 617,432 511,459
Other........................................ 317,834 280,829 552,000 559,204
Maintenance................................... 143,525 109,557 242,722 178,020
Depreciation.................................. 87,415 89,460 176,594 180,404
Amortization of regulatory assets, net........ 31,015 24,916 62,412 39,257
Federal and state income taxes................ (19,248) 24,199 7,600 83,955
Taxes other than income taxes................. 59,669 61,404 127,638 132,727
------------- ------------- ------------- -------------
Total operating expenses............... 897,159 790,085 1,786,398 1,685,026
------------- ------------- ------------- -------------
Operating Income............................... 6,164 81,819 92,293 215,080
------------- ------------- ------------- -------------
Other Income:
Deferred nuclear plants return--other
funds...................................... 1,828 2,387 3,602 5,413
Equity in earnings of regional nuclear
generating and transmission companies...... 2,736 3,654 6,177 7,311
Other, net................................... 1,697 11,046 6,315 15,298
Minority interest in income of subsidiary.... (2,325) (2,325) (4,650) (4,650)
Income taxes................................. 1,676 (2,306) 1,207 (1,792)
------------- ------------- ------------- -------------
Other income, net...................... 5,612 12,456 12,651 21,580
------------- ------------- ------------- -------------
Income before interest charges......... 11,776 94,275 104,944 236,660
------------- ------------- ------------- -------------
Interest Charges:
Interest on long-term debt................... 68,219 70,649 138,425 143,073
Other interest............................... 3,509 7,452 4,375 8,594
Deferred nuclear plants return--borrowed
funds..................................... (3,416) (3,782) (6,728) (8,835)
------------- ------------- ------------- -------------
Interest charges, net.................. 68,312 74,319 136,072 142,832
------------- ------------- ------------- -------------
(Loss)/Income after interest charges.... (56,536) 19,956 (31,128) 93,828
Preferred Dividends of Subsidiaries............ 7,903 8,290 15,806 16,660
------------- ------------- ------------- -------------
Net (Loss)/Income.............................. $ (64,439) $ 11,666 $ (46,934) $ 77,168
============= ============= ============= =============
(Loss)/Earnings Per Common Share............... $ (0.50) $ 0.09 $ (0.36) $ 0.60
============= ============= ============= =============
Common Shares Outstanding (average)............ 129,603,995 127,808,845 129,115,844 127,705,612
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------------
1997 1996
----------- -----------
(Thousands of Dollars)
Operating Activities:
(Loss) Income before preferred dividends of subsidiaries.. $ (31,128) $ 93,828
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 176,594 180,404
Deferred income taxes and investment tax credits, net... 15,616 8,443
Deferred nuclear plants return, net of amortization..... (10,330) (6,982)
Recoverable energy costs, net of amortization........... (32,393) 2,979
Amortization of PSNH acquisition costs.................. 28,282 28,602
Deferred cogeneration costs, net of amortization........ 16,388 6,193
Deferred demand-side-management
costs, net of amortization............................ 37,329 23,306
Deferred nuclear refueling outage, net of amortization.. (18,255) 28,348
Nuclear compliance, net................................. 1,360 47,839
Other sources of cash................................... 35,541 127,431
Other uses of cash...................................... (27,672) (25,553)
Changes in working capital:
Receivables and accrued utility revenues................ 124,868 52,341
Fuel, materials, and supplies........................... (11,982) (10,065)
Accounts payable........................................ (147,716) 2,080
Accrued taxes........................................... 24,849 (8,705)
Other working capital (excludes cash)................... (28,877) (46,534)
----------- -----------
Net cash flows from operating activities.................... 152,474 503,955
----------- -----------
Financing Activities:
Issuance of common shares................................. 3,451 10,621
Issuance of long-term debt................................ 200,000 222,000
Net increase (decrease) in short-term debt................ 106,250 (9,000)
Reacquisitions and retirements of long-term debt.......... (241,450) (209,424)
Reacquisitions and retirements of preferred stock......... (25,000) (1,500)
Cash dividends on preferred stock......................... (15,806) (16,660)
Cash dividends on common shares........................... (32,134) (112,215)
----------- -----------
Net cash flows used for financing activities................ (4,689) (116,178)
----------- -----------
Investment Activities:
Investment in plant:
Electric and other utility plant........................ (112,473) (108,556)
Nuclear fuel............................................ (6,074) 1,518
----------- -----------
Net cash flows used for investments in plant.............. (118,547) (107,038)
Investments in nuclear decommissioning trusts............. (26,681) (29,842)
Capital contributions to Charter Oak Energy projects...... (28,750) (6,300)
Other investment activities, net.......................... (30,435) 2,173
----------- -----------
Net cash flows used for investments......................... (204,413) (141,007)
----------- -----------
Net (Decrease) Increase In Cash For The Period.............. (56,628) 246,770
Cash and cash equivalents - beginning of period............. 194,197 29,038
----------- -----------
Cash and cash equivalents - end of period................... $ 137,569 $ 275,808
=========== ===========
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Presentation
The accompanying unaudited consolidated financial statements should
be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) in this Form
10-Q, the Annual Report of Northeast Utilities (the company or NU)
on Form 10-K for the year ended December 31, 1996 (1996 Form 10-K),
the company's Form 10-Q for the quarter ended March 31, 1997, and
the company's Form 8-Ks dated June 26, 1997 and July 22, 1997. In
the opinion of the company, the accompanying financial statements
contain all adjustments necessary to present fairly the financial
position as of June 30, 1997, the results of operations for the
three-month and six-month periods ended June 30, 1997 and 1996, and
the statements of cash flows for the six-month periods ended June 30,
1997 and 1996. All adjustments are of a normal, recurring, nature
except those described below in Note 6B. The results of operations
for the three-month and six-month periods ended June 30, 1997 and
1996 are not necessarily indicative of the results expected for a
full year.
NU is the parent company of the Northeast Utilities system (the
system). The system furnishes franchised retail electric service in
Connecticut, New Hampshire, and western Massachusetts through four
wholly owned subsidiaries: The Connecticut Light and Power Company
(CL&P), Public Service Company of New Hampshire (PSNH), Western
Massachusetts Electric Company (WMECO), and Holyoke Water Power
Company. A fifth wholly owned subsidiary, North Atlantic Energy
Corporation (NAEC), sells all of its entitlement to the capacity and
output of the Seabrook nuclear power plant to PSNH. In addition to
its franchised retail electric service, the system furnishes firm and
other wholesale electric services to various municipalities and other
utilities and, on a pilot basis pursuant to state regulatory
experiments, provides off-system retail electric service. 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.
Select Energy, Inc., another NU subsidiary, which was formed in 1996
to develop and invest in energy related activities, formerly did
business as NUSCO Energy Partners, Inc.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
B. New Accounting Standards
The Financial Accounting Standards Board (FASB) issued two new
accounting standards during June 1997, Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS 130 establishes standards for the
reporting and disclosure of comprehensive income. SFAS 131 determines
the standards for reporting and disclosing qualitative and quantita-
tive information about a company's operating segments. Both SFAS 130
and SFAS 131 will be effective in 1998. Management believes that the
implementation of SFAS 130 and SFAS 131 will not have a material
impact on NU's financial position or its results of operations.
For additional information regarding the adoption of new accounting
standards, see Note 4, "Sale of Customer Receivables and Accrued
Utility Revenues" in this Form 10-Q, NU's Form 10-Q for the quarter
ended March 31, 1997 and NU's 1996 Form 10-K.
C. Regulatory Accounting and Assets
For information regarding regulatory accounting and assets, see the
MD&A and Part II in this Form 10-Q, NU's Form 10-Q for the quarter
ended March 31, 1997 and NU's 1996 Form 10-K.
2. SHORT-TERM DEBT
In November 1996, NU, CL&P and WMECO entered into a three-year revolving
credit agreement (New Credit Agreement) with a group of 12 banks. Access
to the New Credit Agreement is contingent upon certain financial tests
being met. On May 30, 1997, NU entered into a First Amendment and Waiver,
amending the New Credit Agreement. Interest coverage and common equity
ratios were revised to enable the companies to meet certain financial
tests. CL&P and WMECO are able to borrow up to $225 million and $90
million, respectively, which amounts are secured by a like principal
amount of their respective first mortgage bonds. The NU parent company,
which as a holding company cannot issue first mortgage bonds, will be able
to borrow up to $50 million if CL&P, WMECO, and NU consolidated financial
statements meet certain interest coverage tests for two consecutive
quarters. No more than $313.75 million may be borrowed by all companies
collectively at any one time.
For additional information regarding short-term debt, see the MD&A in this
Form 10-Q, NU's Form 10-Q for the quarter ended March 31, 1997, and NU's
1996 Form 10-K.
3. CAPITALIZATION
CL&P: On June 26, 1997, CL&P issued $200 million of First and Refunding
Mortgage Bonds, 1997 Series B (CL&P 1997 Series B Bonds). The CL&P 1997
Series B Bonds bear interest at an annual rate of 7.75% and will mature on
June 1, 2002.
WMECO: On July 31, 1997, WMECO issued $60 million of First Mortgage Bonds,
1997 Series B (WMECO 1997 Series B Bonds). The WMECO 1997 Series B Bonds
bear interest at an annual rate of 7.375% and will mature on July 1, 2001.
Rocky River Realty Company (RRR): In April 1997, the holders of
approximately $38 million of RRR notes elected to have RRR repurchase the
notes at par. On July 1, 1997, RRR received commitments from alternative
purchasers to purchase approximately $12 million of the notes that RRR had
been required to repurchase. On July 30, 1997, approximately $6 million of
the $12 million was purchased by an alternative purchaser. The remaining $6
million of the notes are expected to be purchased by another purchaser by
September 2, 1997.
RRR repurchased the remaining $26 million of the notes on July 14, 1997.
For additional information on these and other matters related to NU's
capitalization, see the MD&A in this Form 10-Q, NU's Form 10-Q for the
quarter ended March 31, 1997, NU's Form 8-K dated June 26, 1997 and NU's
1996 Form 10-K.
4. SALE OF CUSTOMER RECEIVABLES AND ACCRUED UTILITY REVENUES
During 1996, CL&P and WMECO entered into agreements to sell up to $200
million and $40 million, respectively, of eligible customer receivables
and accrued utility revenues. As of June 30, 1997, CL&P and WMECO have
sold approximately $100 million and $28 million, respectively, of their
accounts receivable under their respective sales agreements.
The FASB issued SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996.
SFAS 125 became effective on January 1, 1997, and establishes, in part,
criteria for concluding whether a transfer of financial assets in exchange
for consideration should be accounted for as a sale or as a secured
borrowing.
During May 1997, WMECO completed the process of restructuring its sales
agreement to comply with the requirements of SFAS 125 so that the
transactions occurring under the agreement are accounted for as sales and
not secured borrowings. As part of meeting the requirements, WMECO
established a single-purpose, wholly owned subsidiary, WMECO Receivables
Corporation (WRC). WRC's sole purpose is to purchase receivables from
WMECO and periodically resell undivided ownership interests in those
receivables to a third party purchaser. As collections reduce previously
sold undivided interests, new receivables may be sold. All receivables
transferred to WRC become assets owned by WRC.
At June 30, 1997, $28 million of receivables had been sold by WRC to a
third party purchaser. The agreement provides for a formula based loss
reserve in which additional customer receivables may be assigned to the
third party purchaser for bad debt. The third party purchaser absorbs the
excess amount in the event that actual loss experience exceeds the loss
reserve. At June 30, 1997, approximately $6.9 million of assets had been
designated as collateral to the third party purchaser.
CL&P is currently in the process of restructuring its accounts receivable
sales agreement to permit it to treat transactions occurring under the
agreement as a sale. At present, CL&P is required to record its sales of
customer accounts receivables and accrued utility revenues as secured
short-term borrowings.
For additional information regarding CL&P's and WMECO's sale of customer
receivables and accrued utility revenues, see the MD&A in this Form 10-Q,
NU's Form 10-Q for the quarter ended March 31, 1997 and NU's 1996 Form
10-K.
5. INTEREST RATE AND FUEL PRICE MANAGEMENT
Fuel Price Management: As of June 30, 1997, CL&P had outstanding fuel-
price management agreements with a total notional value of approximately
$318.4 million, and a negative mark-to-market position of approximately
$7.6 million.
Under the terms of CL&P's fuel price management agreements, CL&P can be
required to post cash collateral with its counterparties approximately
equivalent to the amount of a negative mark-to-market position. In
general, the amount of collateral is to be returned to CL&P when the mark-
to-market position becomes positive, when CL&P meets specified credit
ratings, or when an agreement ends and all open positions are properly
settled.
Interest Rate Management: As of June 30, 1997, NAEC had outstanding
interest-rate management agreements with a total notional value of
approximately $200 million and a positive mark-to-market position of
approximately $2.4 million.
Credit Risk: These agreements have been made with various financial
institutions, each of which is rated "BBB+" or better by Standard & Poor's
rating group. CL&P and NAEC are exposed to credit risk on fuel price
management instruments and interest-rate management instruments if the
counterparties fail to perform their obligations. However, management
anticipates that the counterparties will be able to fully satisfy their
obligations under the agreements.
For further information on interest rate and fuel price management
instruments, see the MD&A in this Form 10-Q, NU's Form 10-Q for the
quarter ended March 31, 1997 and NU's 1996 Form 10-K.
6. COMMITMENTS AND CONTINGENCIES
A. Restructuring
New Hampshire: On May 13, 1997, the United States District Court
for Rhode Island appointed a mediator to the pending case involving
PSNH's and affiliates' challenge to the New Hampshire Public
Utilities Commission decision on February 28, 1997. All court
proceedings on the case have been suspended during the mediation
process. On June 30, 1997, the mediator requested and received
an extension of the period of mediation to August 4, 1997. On
August 4, 1997, the mediator submitted to the court a second
recommendation for the continuation of mediation. Pursuant to the
court's order initiating the mediation process, this second extension
will continue through September 2, 1997.
For further information on restructuring of the electric utility
industry within the NU system companies' jurisdictions, see the
MD&A in this Form 10-Q, NU's Form 8-K dated June 26, 1997, NU's Form
10-Q for the quarter ended March 31, 1997 and NU's 1996 Form 10-K.
B. Nuclear Performance
Millstone: The three Millstone units are managed by Northeast
Nuclear Energy Company (NNECO). Millstone 1, 2, and 3 have been out
of service since November 4, 1995, February 21, 1996 and March 30,
1996, respectively, and are on the Nuclear Regulatory Commission's
(NRC) watch list. The company has restructured its nuclear
organization and is currently implementing comprehensive plans to
restart the units.
Management believes that Millstone 3 will be ready for restart by the
end of the third quarter of 1997, Millstone 2 in the fourth quarter
of 1997 and Millstone 1 in the first quarter of 1998. Because of the
need for completion of independent inspections and reviews and for
the NRC to complete its processes before the NRC Commissioners can
vote on permitting a unit to restart, the actual beginning of opera-
tions is expected to take several months beyond the time when a unit
is declared ready for restart. The NRC's internal schedules at
present indicate that a meeting of the Commissioners to act upon a
Millstone 3 restart request could occur by mid-December if NU, the
independent review teams and NRC staff concur that the unit can
return to operation by that time. A similar schedule indicates a mid-
March meeting of the Commissioners to act upon a Millstone 2 restart
request. Management hopes that Millstone 3 can begin operating by the
end of 1997.
Based on a recent review of work efforts and budgets, management
believes that the overall 1997 nuclear spending levels, which include
both nuclear O&M expenditures and associated support services and
capital expenditures, will be slightly higher than previously
estimated. The 1997 nuclear O&M expenditures are expected to
increase, while 1997 projected capital expenditures are expected to
decrease. NU's share of nonfuel O&M costs for Millstone to be
expensed in 1997 is now projected to be approximately $442 million
compared to $386 million previously estimated. The 1997 projection
includes $15 million of restart costs identified to date which are
expected to be incurred in 1998 and is net of $63 million of
Millstone costs reserved in 1996. NU's share of 1997 projected
capital expenditures for Millstone is expected to decrease from the
$60 million previously estimated to $43 million.
For the six months ended June 30, 1997, NU's share of nonfuel O&M
costs expensed for Millstone totaled $262 million. The actual
expenditures include $50 million reserved for future 1997 restart
costs and $15 million reserved for 1998 restart costs, and is net of
$63 million of spending against the reserve established in 1996. The
reserve balance at June 30, 1997, was approximately $65 million.
Nonfuel O&M costs have been and will continue to be absorbed by NU
without adjustment to its subsidiaries' current rates. Management
will continue to evaluate the costs to be incurred for the remainder
of 1997 and in 1998 to determine whether adjustments to the existing
reserves are required.
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. Replacement power costs incurred by NU attributable
to the Millstone outages averaged approximately $28 million per month
during the first six months of 1997, and are projected to average
approximately $26 million per month for the remainder of 1997. Based
on the current estimates of expenditures and restart dates,
management believes the system has sufficient resources to fund
the restoration of the Millstone units and related replacement power
costs.
CL&P Prudence Investigation: In response to motions filed by various
parties and intervenors, the Connecticut Department of Public Utility
Control (DPUC) on June 27, 1997 orally granted summary judgment in
CL&P's nuclear outage investigation docket, disallowing recovery of
costs associated with the ongoing outages at Millstone. On July 30,
1997, the DPUC issued a purported written decision in the same case,
which disallowed recovery of an estimated $600 million of replacement
power costs related to the Millstone outages, and found that CL&P had
agreed not to recover an additional $360 million of incremental O&M.
The written decision, like the oral decision, recognized CL&P's right
to seek recovery, in a future rate proceeding, of $40 million related
to reliability enhancements. CL&P has appealed the DPUC's decision.
CL&P has not requested cost recovery at this time and has said that
it will not seek recovery for a substantial portion of these costs
and will not request any cost recovery until the units are returned
to operation. Any requests for recovery would include only costs for
projects CL&P would have undertaken under normal operating conditions
or that provide long-term value for CL&P customers. CL&P does not
expect the DPUC's decision to have a material financial impact on
projected 1997 results. For additional information on this matter,
see the MD&A in this Form 10-Q.
Litigation: For information regarding litigation initiated by the
non-NU owners of Millstone 3, see Part II - Item 1 in this Form 10-Q
and NU's 1996 Form 10-K.
Maine Yankee Atomic Power Company (MYAPC): The NU system companies
have a twenty percent ownership interest in the Maine Yankee
nuclear generating facility (MY). At June 30, 1997, NU's equity
investment in MYAPC was approximately $14.9 million. The NU system
companies had relied on MY for approximately two percent of their
capacity.
On August 6, 1997, the board of directors of MYAPC voted unanimously
to cease permanently the production of power at MY. MYAPC has begun
to prepare the regulatory filings intended to implement the
decommissioning and the recovery of remaining assets of MYAPC. During
the latter part of 1997, MYAPC plans to file an amendment to its
power contracts to clarify the obligations of its purchasing
utilities following the decision to cease power production. MYAPC is
currently updating its decommissioning cost estimates. These
estimates are expected to be completed during the third quarter of
1997. At this time, the system is unable to estimate its obligation
to MYAPC. Under the terms of the contracts with MYAPC, the
shareholders-sponsor companies, including CL&P, PSNH, and WMECO, are
responsible for their proportionate share of the costs of the unit,
including decommissioning. Management expects that CL&P, PSNH, and
WMECO will be allowed to recover these costs from their customers.
For further information regarding nuclear performance, see the MD&A
and Part II in this Form 10-Q, NU's Form 10-Q for the quarter ended
March 31, 1997, NU's Form 8-K dated June 26, 1997, and NU's 1996 Form
10-K.
C. Environmental Matters: For information regarding environmental
matters, see the MD&A in this Form 10-Q, NU's Form 10-Q for the
quarter ended March 31, 1997 and NU's 1996 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see NU's Form 10-Q for the quarter ended
March 31, 1997 and NU's 1996 Form 10-K.
E. Construction Program: For information regarding NU's construction
program, see NU's Form 10-Q for the quarter ended March 31, 1997 and
NU's 1996 Form 10-K.
F. Long-Term Contractual Arrangements: For information regarding
long-term contractual arrangements, see NU's 1996 Form 10-K.
7. LEASES
On June 21, 1996, CL&P entered into an operating lease with a third party
to acquire the use of four turbine generators having an installed cost of
approximately $70 million. During the first quarter of 1997, it was
determined that CL&P would not be in compliance with a financial coverage
test required under the lease agreement. CL&P has reached an agreement
with the lessors for a resolution of this matter. Management believes
that the terms and conditions of this agreement will not have a material
adverse impact on the company's financial position or results of opera-
tions. For additional information on this matter, see NU's Form 10-Q for
the quarter ended March 31, 1997 and NU's 1996 Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Northeast Utilities:
We have reviewed the accompanying consolidated balance sheet of Northeast
Utilities (a Massachusetts trust) and subsidiaries as of June 30, 1997, and the
related consolidated statements of income for the three-month and six-month
periods ended June 30, 1997 and 1996, and the consolidated statements of cash
flows for the six-month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Hartford, Connecticut
August 12, 1997
NORTHEAST UTILITIES AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section contains management's assessment of Northeast Utilities and
subsidiaries' (NU or the system) financial condition and the principal factors
having an impact on the results of operations. This discussion should be read in
conjunction with NU's consolidated financial statements and footnotes in this
Form 10-Q, the First Quarter Form 10-Q, the 1996 Form 10-K, and the Form 8-Ks
dated June 26, 1997, and July 22, 1997.
FINANCIAL CONDITION
Overview
The outages at the three Millstone units (Millstone) continue to have a
substantial negative impact on NU's earnings. NU had a net loss for the second
quarter of 1997 of $0.50 per common share compared to earnings of $0.09 per
common share for the second quarter of 1996, and a net loss of approximately
$0.36 per common share for the six months ended June 30, 1997, compared to
earnings of approximately $0.60 per common share for the same period in 1996.
The losses for the three- and six-month periods were primarily attributable to
replacement-power and nuclear operation and maintenance (O&M) expenses for the
Millstone units in 1997, including amounts reserved for future spending. The
loss for the first six months of 1997 was also attributable to lower retail
sales. Retail kilowatt-hour sales for the first half of 1997 were 2.3 percent
below the same period in 1996 primarily due to mild weather in the first
quarter of 1997.
In 1997, while all three units are out of service, NU expects results of
operations to be about break-even based upon current assumptions that reflect
normal weather for the year. Replacement-power costs attributable to the
Millstone outages averaged approximately $28 million a month during the first
six months of 1997, and are projected to average approximately $26 million a
month for the remainder of 1997. NU will continue to expense its replacement
power costs in 1997.
Millstone Outages
NU has a 100 percent ownership interest in Millstone 1 and 2 and a 68 percent
joint ownership interest in Millstone 3. Millstone units 1, 2 and 3 (Millstone)
have been out of service since November 4, 1995, February 21, 1996, and
March 30, 1996, respectively.
Millstone 3 continues to be designated by management as the lead unit for
restart. Millstone 2 remains on a schedule to be ready for restart shortly after
Millstone 3. To provide the resources and focus for Millstone 3, the pace of
work on the restart of Millstone 1 was reduced until late in 1997 at which time
the full work effort is expected to be resumed.
Management believes that Millstone 3 will be ready for restart by the end of the
third quarter of 1997, Millstone 2 in the fourth quarter of 1997 and Millstone 1
in the first quarter of 1998. Because of the need for completion of independent
inspections and reviews and for the Nuclear Regulatory Commission (NRC) to
complete its processes before the NRC Commissioners can vote on permitting a
unit to restart, the actual beginning of operations is expected to take several
months beyond the time when a unit is declared ready for restart. The NRC's
internal schedules at present indicate that a meeting of the Commissioners to
act upon a Millstone 3 restart request could occur by mid-December if NU, the
independent review teams and NRC staff concur that the unit can return to
operation by that time. A similar schedule indicates a mid-March meeting of
the Commissioners to act upon a Millstone 2 restart request. Management hopes
that Millstone 3 can begin operating by the end of 1997.
As management continues to proceed with its current work towards restart, the
Independent Corrective Action Verification Program began on May 27, 1997 for
Millstone 3 and June 30, 1997 for Millstone 2. The program is expected to end in
mid-November 1997 for Millstone 3 and late November 1997 for Millstone 2. The
NRC Operational Safety Team Inspection for Millstone 3 is expected to begin in
October 1997.
Based on a recent review of work efforts and budgets, management believes that
the overall 1997 nuclear spending levels, which include both nuclear O&M
expenditures and associated support services and capital expenditures, will be
slightly higher than previously estimated. The 1997 projected nuclear O&M
expenditures are expected to increase, while 1997 projected capital
expenditures are expected to decrease. NU's share of nonfuel O&M costs for
Millstone to be expensed in 1997 is now projected to be approximately $442
million compared to $386 million previously estimated. The 1997 projection
includes $15 million of restart costs identified to date which are expected
to be incurred in 1998 and is net of $63 million of Millstone costs reserved
in 1996. NU's share of 1997 projected capital expenditures for Millstone are
expected to decrease from the $60 million previously estimated to $43 million.
For the six months ended June 30, 1997, NU's share of nonfuel O&M costs expensed
for Millstone totaled $262 million. The actual expenditures include $50 million
reserved for future 1997 restart costs and $15 million reserved for 1998 restart
costs, and is net of $63 million of spending against the reserve established in
1996. The reserve balance at June 30, 1997, was approximately $65 million.
Nonfuel O&M costs have been and will continue to be absorbed by NU without
adjustment to its subsidiaries' current rates.
Although 1998 nuclear operating budgets have not been established at this time,
management believes that the nuclear spending levels at Millstone will be
reduced considerably from 1997 levels, although they will be higher than before
the station was placed on the NRC's watch list. The actual level of 1998
spending will depend on when the units return to operation and the cost of
restoring them to service. The total cost to restart the units cannot be
estimated at this time. Management will continue to evaluate the costs to be
incurred for the remainder of 1997 and in 1998 to determine whether adjustments
to the existing reserves are required.
On July 1, 1997, Connecticut Light and Power Company (CL&P) submitted continued
unit operation studies to the Connecticut Department of Public Utility Control
(DPUC) showing that, under base case assumptions, Millstone 1 will have a value
to System customers (as compared to the cost of shutting down the unit and
incurring replacement power costs) of approximately $70 million during the
remaining thirteen years of its operating license and Millstone 2 will have a
value to System customers (on the same assumptions as used with Millstone 1) of
approximately $500 million during the remaining eighteen years of its operating
license. Two other cases submitted to the DPUC based on higher assumed O&M
costs, which CL&P considers less likely, indicated that Millstone 1 would be
uneconomic in varying degrees. Based on these economic analyses, NU expects to
continue operating both Millstone 1 and Millstone 2 for the remaining terms of
their respective operating licenses. The DPUC has stated it will consider these
analyses in the context of CL&P's next integrated resource planning proceeding
which begins in April 1998.
As a result of the nuclear situation, a number of civil lawsuits, criminal
investigations and regulatory proceedings have been initiated, including
litigation by NU's shareholders. On August 7, 1997, the non-NU owners of
Millstone 3 filed demands for arbitration with CL&P and Western Massachusetts
Electric Company (WMECO) as well as lawsuits in Massachusetts Superior Court
against Northeast Utilities and its current and former trustees. The NU
companies believe there is no legal basis for the claims and intend to defend
against them vigorously. To date, no reserves have been established for existing
or potential litigation. See Part II - Item 1 in this Form 10-Q and NU's 1996
Form 10-K for further information on litigation.
On July 23, 1997, NU announced that an agreement in principle has been reached
to settle seven derivative lawsuits and one demand letter filed by shareholders.
Under the agreement, insurers for certain of NU's present and former officers
and trustees will pay NU $25 million, less attorneys' fees, and NU has agreed to
certain corporate governance enhancements.
For further information on the current Millstone outages, see NU's First Quarter
Form 10-Q, 1996 Form 10-K and Form 8-K dated June 26, 1997.
Capacity
During 1996 and continuing into 1997, the NU system companies have taken
measures to improve their capacity position due to the current Millstone
outages. NU anticipates spending approximately $71 million for additional
capacity-related costs in 1997, of which $47 million is expected to be expensed.
The projected 1997 capacity-related expenditures have increased from previous
estimates due to additional improvements to existing fossil units and the NU
system's estimated share of costs to reactivate generating units in New England.
In the first six months of 1997, NU spent approximately $34 million to ensure
adequate generating capacity, of which $17 million was expensed.
Despite record-breaking demand in mid-July, the NU system has been able to meet
capacity requirements without any supply interruptions. Assuming normal weather
conditions and generating unit availability, management expects that the Company
will have sufficient capacity to meet peak load demands for the remainder of
1997. If there are high levels of unplanned outages at other units in New
England, or if any transmission lines used to import power from other states
are unavailable, at times of peak load demand, the Company and the other
New England utilities may have to resort to operating procedures designed to
reduce customer demand.
On June 28, 1997, the Seabrook nuclear unit in New Hampshire returned to service
following a 50-day planned refueling and maintenance outage.
In December 1996, all of the seven power cables installed in the Long Island
Sound between CL&P's Norwalk Harbor and the Long Island Lighting Company's
Northport generating plants were damaged. Repair work has been completed and all
cables were back in service by June 26, 1997.
NU has a 20 percent ownership interest in the Maine Yankee nuclear generating
facility (MY). On August 6, 1997, the board of directors of Maine Yankee Atomic
Power Company (MYAPC) voted to permanently close the plant after efforts to sell
the nuclear power plant were unsuccessful. MYAPC had previously announced that
it was considering permanent closure of the plant based on economic concerns and
uncertainty about the operation of the plant.
For further information on capacity-related issues and MYAPC, see the "Notes to
Consolidated Financial Statements," Note 6B and NU's 1996 Form 10-K.
Liquidity and Capital Resources
Cash provided from operations decreased approximately $351 million in the first
six months of 1997, from 1996, primarily due to higher 1997 cash expenditures
related to the Millstone outages, and the pay down of the 1996 year end accounts
payable balance. The year end accounts payable balance was relatively high due
to costs related to a severe December storm and costs associated with the
Millstone outages that had been incurred but not yet paid by the end of 1996.
Net cash used for financing activities decreased approximately $111 million,
primarily due to an increase in short-term borrowings through the use of $100
million of the CL&P accounts receivable facility established in 1996. Net
cash used for financing activities was also impacted by lower cash dividends on
NU common shares, partially offset by higher long-term debt and preferred stock
retirements. Cash used for investments increased approximately $63 million,
due in part to a $22 million increase in investments by NU's wholly owned
subsidiary, Charter Oak Energy.
CL&P and WMECO established facilities in 1996 under which they may sell up to
$200 and $40 million respectively, of their accounts receivable and accrued
utility revenues. As of June 30, 1997, CL&P and WMECO have sold approximately
$100 and $28 million, respectively.
Additionally, the Company, CL&P and WMECO entered into a new three-year
revolving credit agreement (the New Credit Agreement) in November 1996. On May
30, 1997, the First Amendment and Waiver to the New Credit Agreement became
effective. This amendment permits $313.75 million of credit in the aggregate to
remain available to CL&P and WMECO through the securing of such borrowings with
first mortgage bonds. Interest coverage and common equity ratios were revised to
enable the companies to meet certain financial tests. CL&P will be able to
borrow up to $225 million on the strength of bonds it has provided as collateral
for borrowings under the revolving credit agreement. WMECO will be able to
borrow up to $90 million on the basis of bonds it has provided as collateral.
The NU parent company, which as a holding company cannot issue first mortgage
bonds, will be able to borrow up to $50 million if CL&P, WMECO and NU
consolidated financial statements meet certain interest coverage tests for two
consecutive quarters. This is not expected to occur until mid-1998. At June 30,
1997, WMECO had $45 million outstanding under the New Credit Agreement.
On June 26, 1997, CL&P issued $200 million of First and Refunding Mortgage
Bonds, 1997 Series B due June 1, 2002. The net proceeds of the sale of the Bonds
were used for repayment of short-term debt incurred for general working capital
purposes, including costs associated with the current outages at the
Millstone units. CL&P is obligated to effect the exchange of these bonds for
publicly tradable Bonds within 180 days after issuing the Bonds or the interest
could increase in stages up to a maximum amount of 1.50 percent per annum.
On July 31, 1997, WMECO issued $60 million of First Mortgage Bonds, 1997 Series
B due July 1, 2001. The net proceeds of the sale of the Bonds will be used to
repay short-term debt that was incurred to refinance or refund debt and
preferred stock and for general working capital purposes, including costs
associated with the current outages at the Millstone units.
In April, 1997, Moody's Investors Services (Moody's) downgraded most of its
ratings of CL&P and WMECO securities because of the extended Millstone outages.
In May, 1997, Standard & Poor's (S&P) also downgraded its ratings of CL&P and
WMECO securities as a result of the Connecticut legislature failing to approve a
utility restructuring bill during the recently completed legislative session. As
a result, all NU system securities are currently rated below investment grade by
Moody's and S&P. These actions could adversely affect the availability and cost
of funds for the NU system companies.
On April 17, 1997, the holders of $38 million of notes issued by NU's real
estate company (Rocky River Realty Company or RRR) required RRR to repurchase
the notes at par. The notes are secured by real estate leases between RRR as
lessor and Northeast Utilities Service Company as lessee. On July 1, 1997, RRR
received commitments for the purchase of approximately $12 million of notes
and RRR repurchased the remaining $26 million of notes on July 14, 1997. On July
30, 1997, approximately $6 million of the $12 million was purchased by an
alternative purchaser. The remaining $6 million of the notes is expected to be
purchased by another purchaser by September 2, 1997.
Each major company in the NU system finances its own needs. Neither CL&P nor
WMECO has any agreements containing cross defaults based on events or
occurrences involving NU, Public Service Company of New Hampshire (PSNH) or
North Atlantic Energy Corporation (NAEC). Similarly, neither PSNH nor NAEC has
any agreements containing cross defaults based on events or occurrences
involving NU, CL&P or WMECO. Nevertheless, it is possible that investors will
take negative operating results or regulatory developments at one company in the
NU system into account when evaluating other companies in the NU system. That
could, as a practical matter and despite the contractual and legal separations
among the NU companies, negatively affect each company's access to the financial
markets.
If the return to service of one or more of the Millstone units is delayed
substantially, or if some borrowing facilities become unavailable because of
difficulties in meeting borrowing conditions, or if the system encounters
additional significant costs or any other significant deviations from
management's current assumptions, the currently available borrowing facilities
could be insufficient to meet all of the system's cash requirements. In those
circumstances, management would take actions to reduce costs and cash outflows
and would attempt to take other actions to obtain additional sources of funds.
The availability of these funds would be dependent upon the general market
conditions and the NU system's credit and financial condition at the time.
Restructuring
New Hampshire
On May 13, 1997, the United States District Court for Rhode Island appointed a
mediator to the pending case involving PSNH's and affiliates' challenge to the
New Hampshire Public Utilities Commission decision on February 28, 1997
regarding electric utility restructuring. All court proceedings on the case have
been suspended during the mediation process.
On August 4, 1997, the mediator submitted to the court a second recommendation
for the continuation of mediation. Pursuant to the court's order initiating the
mediation process, this second extension will continue through September 2,
1997.
Connecticut
On June 4, 1997, the Connecticut legislature completed its session without
passage of a proposed electric industry restructuring bill. The legislature may
consider restructuring legislation in the future.
Rate Matters
Connecticut
On January 15, 1997, the DPUC notified CL&P that it would be conducting its
prudence review of nuclear cost recovery issues in multiple phases. The first
phase, covering the period April 1 through June 30, 1996, was in progress when
various intervenors moved for summary judgment with respect to the costs for the
entire outage. On July 30, 1997, the DPUC issued a purported written decision
disallowing recovery of all of the replacement power costs associated with the
ongoing outages at Millstone. CL&P has not requested cost recovery at this time
and has said that it will not seek recovery for a substantial portion of these
costs and will not request any cost recovery until the units have returned to
operation. Any requests by CL&P for recovery would include only costs for
projects CL&P would have undertaken under normal operating conditions or that
provide long-term value for CL&P's customers. CL&P has appealed the DPUC's
decision to the Connecticut Superior Court. CL&P has expensed, and continues to
expense, the bulk of the Millstone outage costs as they are incurred.
Therefore, CL&P does not expect this decision to have a material financial
impact on projected 1997 results.
The DPUC is required to review a utility's rates every four years if there has
not been a rate proceeding during such period. On June 16, 1997, CL&P filed with
the DPUC certain financial information consistent with the DPUC's filing
requirements applicable to such four year review. CL&P expects hearings before
the DPUC to begin soon. The Company cannot predict the outcome of this
proceeding.
Risk Management Instruments
CL&P uses fuel price management instruments to reduce a portion of the fuel
price risk associated with certain of its long-term negotiated energy contracts
and replacement power expense during the Millstone outages. CL&P's fuel price
management instruments seek to minimize exposure associated with rising fuel
prices and effectively fix the cost of fuel and maintain the profitability of
certain of its long-term negotiated contract sales.
NAEC uses interest rate management instruments to reduce interest rate risk
associated with its $200 million variable rate bank notes. NAEC's interest rate
management instruments effectively fix its variable rate bank note at 7.82
percent.
Neither the CL&P nor the NAEC instruments are used for trading purposes. The
differential paid or received as fuel prices or interest rates change is
recognized in income when realized.
As of June 30, 1997, CL&P and NAEC had outstanding fuel price and interest rate
management instruments with a total notional value of approximately $318 million
and $200 million, respectively. The settlement amounts for the second quarter
associated with these instruments decreased fuel expense by approximately $0.8
million for CL&P and increased interest expense by approximately $0.3 million
for NAEC. For further information on risk management instruments, see the "Notes
to Consolidated Financial Statements," Note 5, in this Form 10-Q.
Environmental Matters
The Company is potentially liable for environmental cleanup costs at a number of
sites inside and outside its service territories. To date, the future estimated
environmental remediation liability has not been material with respect to the
earnings or financial position of the Company. For the period ended June 30,
1997, the Company increased the environmental reserve by approximately $2
million to a total of approximately $15 million, the most probable amount as
required by SFAS No.5, "Accounting for Contingencies."
RESULTS OF OPERATIONS
Income Statement Variances
Increase/(Decrease)
Millions of Dollars
Second Year-
Quarter Percent to-Date Percent
Operating revenues $31 4% $(21) (1)%
Fuel, purchased and net
interchange power 77 39 106 21
Other operation 37 13 (7) (1)
Maintenance 34 31 65 36
Amortization of
regulatory assets, net 6 24 23 59
Federal and state income taxes (47) (a) (79) (93)
Other income, net (9) (85) (9) (59)
Interest charges (6) (6) (9) (6)
Net loss (76) (a) (124) (a)
(a) Percentage greater than 100
Comparison of the Second Quarter of 1997 to the Second Quarter of 1996
Total operating revenues increased in 1997, primarily due to higher transmission
and other revenues ($11 million), higher fuel recoveries ($16 million) and
higher revenues from regulatory decisions ($11 million), partially offset by
lower wholesale revenues ($8 million). Revenues from regulatory decisions
increased primarily due to the mid-1996 retail rate increase for PSNH and higher
recoveries of demand-side-management costs. Wholesale revenues decreased
primarily due to lower 1997 capacity sales.
Fuel, purchased and net interchange power expense increased in 1997, primarily
due to higher replacement-power costs expensed in 1997 due to the nuclear
outages.
Other operation and maintenance expenses increased $71 million in 1997. The
major factors were the higher costs associated with the Millstone outages ($85
million) including a $30 million net increase over 1996 in the reserve for
future restart costs; higher costs associated with the Seabrook outage ($13
million); higher capacity charges from MY ($8 million); and higher transmission
expenses ($6 million). These increases were partially offset by the lower
recognition of nuclear refueling outage costs primarily as a result of the 1996
CL&P Rate Settlement ($23 million); lower administrative and general expenses
primarily due to lower pensions and benefit costs ($9 million) and lower 1997
costs associated with meeting capacity requirements ($8 million).
Amortization of regulatory assets, net increased in 1997, primarily due to
higher amortization in 1997 of CL&P cogeneration deferrals ($7 million)
and higher amortizations as a result of the 1996 CL&P Rate Settlement ($5
million). These were partially offset by the completion of the amortization of
phase-in costs for CL&P's share of Seabrook and Millstone 3 in 1996 ($6
million).
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
Other income, net decreased in 1997, primarily due to the deferral in 1996 of
interest expense associated with the FPPAC refund.
Interest charges decreased in 1997, primarily due to interest expense associated
with the FPPAC refund.
Comparison of the First Six Months of 1997 to the First Six Months of 1996
Total operating revenues decreased in 1997, primarily due to lower fuel
recoveries ($39 million), lower retail sales ($20 million) and lower wholesale
revenues ($8 million), partially offset by higher revenues as a result of
regulatory decisions ($28 million) and higher transmission and other revenues
($11 million). Fuel recoveries decreased primarily due to lower recoveries under
CL&P's and PSNH's fuel clauses. Retail sales decreased 2.3 percent primarily due
to mild weather in the first quarter of 1997. Wholesale revenues decreased
primarily due to lower 1997 capacity sales. Revenues from regulatory decisions
increased primarily due to the mid-1996 retail rate increase for PSNH and higher
recoveries of CL&P demand-side-management costs.
Fuel, purchased and net interchange power expense increased in 1997, primarily
due to higher replacement-power costs expensed in 1997 due to the nuclear
outages partially offset by the timing of the recognition of costs under PSNH's
fuel clause.
Other operation and maintenance expense increased $58 million in 1997. The major
factors were the higher costs associated with the Millstone outages ($75
million); higher costs associated with the Seabrook outage ($13 million); and
higher capacity charges from MY ($13 million). These increases were partially
offset by the lower recognition of nuclear refueling outage costs primarily as a
result of the 1996 CL&P Rate Settlement ($33 million) and lower administrative
and general expenses primarily due to lower pensions and benefit costs ($15
million).
Amortization of regulatory assets, net increased in 1997, primarily due to the
completion of CL&P cogeneration deferrals in 1996 and increased amortization in
1997 ($23 million) and higher amortizations as a result of the 1996 CL&P Rate
Settlement ($9 million). These were partially offset by the completion of the
amortization of phase-in costs for CL&P's share of Seabrook and Millstone 3 in
1996 ($11 million).
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
Other income, net decreased in 1997, primarily due to the deferral in 1996 of
interest expense associated with the FPPAC refund.
Interest charges decreased in 1997, primarily due to interest expense associated
with the FPPAC refund.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. An additional class action against NU and certain officers of NU is now
pending in the United States District Court for the District of Connecticut.
The complaint in this lawsuit, as with the seven other class actions, pending in
various state and federal courts, alleges that the defendants violated Sections
10(b) and 20(a) of the Securities and Exchange Act of 1934 and the common law by
disseminating false and misleading statements about NU's nuclear operations to
its shareholders, the Securities and Exchange Commission and the public. The
plaintiff sues individually and on behalf of a class of shareholders who
purchased or otherwise acquired NU common stock from March 25, 1994 through
April 5, 1996. NU believes that all of these class actions are without merit
and intends to vigorously defend in all such actions.
For additional information on shareholder litigation against NU, see "Item
3 - Legal Proceedings" in NU's 1996 Form 10-K and "Item 1 - Legal Proceedings"
in NU's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
For information regarding an agreement in principle to settle seven
derivative lawsuits against certain former and present NU officers and trustees
and one demand letter filed by NU shareholders, see NU's Current Report on Form
8-K dated July 22, 1997 and "Item 3 - Legal Proceedings" in NU's 1996 Form 10-K.
2. Under its Millstone Units 1 & 2 contract with CL&P, Connecticut Municipal
Electric Energy Cooperative (CMEEC) has a 3.49 percent life-of-unit interest in
each of the units. CMEEC and CL&P have been negotiating since May 1996 over
issues related to Millstone Units 1 & 2 and have taken preliminary steps to
prepare for arbitration of the matter. Since October 1996, CMEEC has failed to
make payment on its obligations of approximately $1.6 million per month,
claiming that CL&P materially breached its contractual obligations, and
requesting arbitration of the issues. CL&P has denied the allegations and filed
a petition on July 1, 1997 requesting the Connecticut Superior Court to order
CMEEC to pay its outstanding obligations (about $13.3 million) and make
continuing payments while the arbitration action is proceeding.
For additional information on this dispute, see "Item 3 - Legal
Proceedings" in NU's 1996 Form 10-K.
3. On July 17, 1997, CL&P filed an appeal of a June 6th order of the DPUC,
which had barred recovery of approximately $17 million of replacement power
costs incurred by CL&P as a result of the retirement of the Connecticut Yankee
nuclear power plant(CY) on December 4, 1996 through that part of CL&P's rate
structure known as the Energy Adjustment Clause. CL&P takes the position that
unless and until there is a determination that such post-retirement costs are
unreasonable, it is entitled to current recovery.
For additional information on the ongoing prudence proceeding at the
Federal Energy Regulatory Commission regarding the decision to retire CY prior
to the expiration of its operating license, see "Item 1. Business - Electric
Operations - Nuclear Generation" in NU's 1996 Form 10-K.
4. CL&P and WMECO, through NNECO, operate Millstone 3 at cost, and without
profit, under a Sharing Agreement that obligates them to utilize good utility
practice and requires the joint owners to share the risk of employee negligence
and other risks of operation and maintenance pro-rata in accordance with
their ownership shares. The Sharing Agreement also provides that CL&P and
WMECO would only be liable for damages to the non-NU owners for a deliberate
violation of the agreement pursuant to authorized corporate action.
On August 7, 1997, the non-NU owners of Millstone 3 filed demands for
arbitration with CL&P and WMECO as well as lawsuits in Massachusetts Superior
Court against Northeast Utilities and its current and former trustees. The non-
NU owners raise a number of contract, tort and statutory claims, arising out of
the operation of Millstone 3. The arbitrations and lawsuits seek to recover
compensatory damages, punitive damages, treble damages and attorneys' fees.
Owners representing approximately two-thirds of the non-NU interests in
Millstone 3 have claimed compensatory damages in excess of $200 million. In
addition, one of the lawsuits seeks to restrain NU from disposing of its shares
of the stock of WMECO and Holyoke Water Power Company, pending the outcome of
the lawsuit. The NU companies believe there is no legal basis for the claims and
intend to defend against them vigorously.
For further information on this matter, see "Item 3 - Legal Proceedings" in
NU's 1996 Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of NU held on June 17, 1997
shareholders voted to fix the number of Trustees for the ensuing year at eleven.
The vote fixing the number of Trustees was 110,326,624 votes in favor and
4,679,861 votes against, with 2,989,614 abstentions and broker nonvotes.
At the Annual Meeting, the following eleven nominees were elected to serve
on the Board of Trustees by the votes set forth below:
For Against Abstain
1. Cotton M. Cleveland 109,675,633 3,572,260 4,748,207
2. William F. Conway 110,649,383 2,598,511 4,748,207
3. John F. Curley 110,709,322 2,538,572 4,748,207
4. E. Gail DePlanque 110,711,563 2,536,330 4,748,207
5. Bernard M. Fox 105,880,311 7,367,582 4,748,207
6. Elizabeth T. Kennan 109,321,904 3,925,990 4,748,207
7. William J. Pape 109,483,548 3,764,345 4,748,207
8. Robert E. Patricelli 110,062,763 3,185,131 4,748,207
9. Norman C. Rasmussen 109,998,387 3,249,507 4,748,207
10. John F. Swope 109,978,033 3,270,461 4,747,607
11. John F. Turner 110,690,378 2,557,515 4,748,207
NU's shareholders also ratified the Board of Trustees' selection of Arthur
Andersen LLP to serve as independent auditors of NU and its subsidiaries for
1997. The vote ratifying such selection was 112,041,128 votes in favor and
3,637,282 votes against, with 2,317,690 abstentions and broker nonvotes.
ITEM 5. OTHER INFORMATION
1. On June 27, 1997, nuclear management of NU temporarily suspended all
nuclear training programs at Millstone to address programmatic deficiencies
identified by NNECO and NRC inspectors during reviews of the system's licensed
operator training programs at the system's four Connecticut nuclear units.
Since then, a Training Restart Plan has been established and various training
programs have been restarted, including the licensed operator training programs
for Millstone. Management continues to believe that the suspension will not
affect the schedule to restart the Millstone units
For additional information relating to this matter, see NU's Form 8-K dated
June 26, 1997 and "Item 1. Business - Nuclear Plant Performance and Regulatory
Oversight" and "Item 3. Legal Proceedings," in NU's 1996 Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
10 Description of Certain Management
Compensation Arrangements (Exhibit 4.2, Post
Effective Amendment No. 2, File No. 033-51185)
15 Letter regarding unaudited financial
information
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. NU filed a Form 8-K dated June 26, 1997 disclosing:
. Nuclear management of NU temporarily suspended all nuclear
training programs at Millstone to address programmatic
deficiencies identified by NNECO and the NRC;
. The DPUC orally granted summary judgment in CL&P's prudence
docket, disallowing recovery of substantially all costs
associated with the ongoing outages at Millstone;
. Under the CL&P First and Refunding Mortgage Bond Indenture, the
sinking fund had been eliminated;
. The court appointed mediator in the industry restructuring
dispute between the State of New Hampshire and PSNH and NU filed
a letter with the U.S. District Court in Rhode Island requesting
the extension of the mediation to August 4, 1997;
. On June 28, 1997, Seabrook nuclear generating unit returned to
service following a 50-day planned refueling and maintenance
outage;
. On July 1, 1997, CL&P submitted continued unit operation studies
to the DPUC;
. As a result of a trigger event set forth in the original note
agreement, RRR intends to repurchase approximately $26 million of
the total approximate $38 million of notes from the current
holders; the balance of the notes will be purchased by
alternative third party purchasers.
2. NU filed a Form 8-K dated July 22, 1997 disclosing:
. Information concerning second quarter 1997 losses for the NU
system;
. Information regarding an agreement to settle certain shareholder
derivative litigation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTHEAST UTILITIES
Registrant
Date August 12, 1997 By /s/ Bernard M. Fox
Bernard M. Fox
Chairman, President, and
Chief Executive Officer
Date August 12, 1997 By /s/ John J. Roman
John J. Roman
Vice President and
Controller