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 0-7624
WESTERN MASSACHUSETTS ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1961130
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
(Address of principal executive offices) (Zip Code)
(413) 785-5871
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
Common Shares, $25.00 par value 1,072,471 shares
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
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
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
PART I. FINANCIAL INFORMATION
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
------------- ------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 1,266,012 $ 1,257,097
Less: Accumulated provision for depreciation......... 524,693 503,989
------------- ------------
741,319 753,108
Construction work in progress........................... 17,331 15,968
Nuclear fuel, net....................................... 30,613 30,296
------------- ------------
Total net utility plant............................. 789,263 799,372
------------- ------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 91,077 83,611
Investments in regional nuclear generating
companies, at equity................................... 16,160 15,448
Other, at cost.......................................... 4,870 4,367
------------- ------------
112,107 103,426
------------- ------------
Current Assets:
Cash and cash equivalents (Note 1D)..................... 17,462 67
Receivables, net (Note 4)............................... 2,263 40,168
Accounts receivable from affiliated companies........... 3,360 3,525
Taxes receivable........................................ 6,688 1,778
Accrued utility revenues (Note 4)....................... 27 12,394
Fuel, materials, and supplies, at average cost.......... 6,163 5,317
Recoverable energy costs, net--current portion.......... - 576
Prepayments and other................................... 16,363 11,686
------------- ------------
52,326 75,511
------------- ------------
Deferred Charges:
Regulatory assets:
Income taxes, net...................................... 67,382 71,519
Unrecovered contractual obligations.................... 75,101 84,598
Recoverable energy costs............................... 12,678 17,510
Other.................................................. 32,834 37,225
Unamortized debt expense................................ 2,161 1,866
Other................................................... 453 888
------------- ------------
190,609 213,606
------------- ------------
Total Assets........................................ $ 1,144,305 $ 1,191,915
============= ============
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
------------- ------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$25 par value.
Authorized and outstanding 1,072,471 shares............ $ 26,812 $ 26,812
Capital surplus, paid in................................ 151,041 150,911
Retained earnings....................................... 63,770 97,045
------------- ------------
Total common stockholder's equity.............. 241,623 274,768
Preferred stock not subject to mandatory redemption..... 20,000 20,000
Preferred stock subject to mandatory redemption......... 19,500 21,000
Long-term debt.......................................... 325,964 334,742
------------- ------------
Total capitalization........................... 607,087 650,510
------------- ------------
Obligations Under Capital Leases.......................... 29,606 29,269
------------- ------------
Current Liabilities:
Notes payable to banks.................................. 45,000 -
Notes payable to affiliated company..................... 33,100 47,400
Long-term debt and preferred stock--current
portion................................................ 11,300 14,700
Obligations under capital leases--current
portion................................................ 2,972 2,965
Accounts payable........................................ 16,113 26,698
Accounts payable to affiliated companies................ 15,722 20,256
Accrued taxes........................................... 398 2,659
Accrued interest........................................ 5,579 5,643
Nuclear compliance...................................... 12,090 11,800
Other................................................... 3,396 4,754
------------- ------------
145,670 136,875
------------- ------------
Deferred Credits:
Accumulated deferred income taxes....................... 241,240 245,253
Accumulated deferred investment tax credits............. 24,099 24,833
Deferred contractual obligations........................ 75,101 84,598
Other................................................... 21,502 20,577
------------- ------------
361,942 375,261
------------- ------------
Commitments and Contingencies (Note 5)
------------- ------------
Total Capitalization and Liabilities........... $ 1,144,305 $ 1,191,915
============= ============
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Thousands of Dollars)
Operating Revenues............................. $104,130 $102,602 $210,184 $217,399
--------- --------- --------- ---------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power. 34,759 20,777 75,733 46,597
Other..................................... 46,780 34,062 73,463 75,288
Maintenance.................................. 24,868 15,598 41,353 25,214
Depreciation................................. 9,647 9,852 19,829 19,637
Amortization of regulatory assets............ 1,610 4,117 3,225 7,135
Federal and state income taxes............... (10,151) 4,111 (9,358) 10,196
Taxes other than income taxes................ 4,777 4,708 10,234 10,263
--------- --------- --------- ---------
Total operating expenses............... 112,290 93,225 214,479 194,330
--------- --------- --------- ---------
Operating (Loss) Income........................ (8,160) 9,377 (4,295) 23,069
--------- --------- --------- ---------
Other Income:
Equity in earnings of regional nuclear
generating companies....................... 359 533 852 1,033
Other, net................................... (213) 302 357 215
Income taxes................................. 630 (120) 702 58
--------- --------- --------- ---------
Other income, net...................... 776 715 1,911 1,306
--------- --------- --------- ---------
(Loss) Income before interest charges.. (7,384) 10,092 (2,384) 24,375
--------- --------- --------- ---------
Interest Charges:
Interest on long-term debt................... 6,001 6,017 11,974 11,996
Other interest............................... 1,473 59 2,343 254
--------- --------- --------- ---------
Interest charges, net.................. 7,474 6,076 14,317 12,250
--------- --------- --------- ---------
Net (Loss) Income.............................. $(14,858) $ 4,016 $(16,701) $ 12,125
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------------
1997 1996
----------- -----------
(Thousands of Dollars)
Operating Activities:
Net(Loss)Income........................................... $ (16,701) $ 12,125
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 19,829 19,637
Deferred income taxes and investment tax credits, net... (3,562) (6,082)
Recoverable energy costs, net of amortization........... 5,408 (1,724)
Deferred nuclear refueling outage, net of amortization.. 4,411 3,551
Nuclear compliance, net................................. 290 8,991
Other sources of cash................................... 9,222 11,348
Other uses of cash...................................... (3,332) (5,766)
Changes in working capital:
Receivables and accrued utility revenues................ 50,437 937
Fuel, materials, and supplies........................... (846) (214)
Accounts payable........................................ (15,119) (2,572)
Accrued taxes........................................... (2,261) 10,118
Other working capital (excludes cash)................... (11,010) (1,340)
----------- -----------
Net cash flows from operating activities.................... 36,766 49,009
----------- -----------
Financing Activities:
Net increase (decrease) in short-term debt................ 30,700 (21,050)
Reacquisitions and retirements of long-term debt.......... (14,700) -
Reacquisitions and retirements of preferred stock......... - (1,500)
Cash dividends on preferred stock......................... (1,570) (2,424)
Cash dividends on common stock............................ (15,004) (8,987)
----------- -----------
Net cash flows used for financing activities................ (574) (33,961)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (12,816) (10,358)
Nuclear fuel............................................ (23) 554
----------- -----------
Net cash flows used for investments in plant.............. (12,839) (9,804)
Investments in nuclear decommissioning trusts............. (4,743) (4,915)
Other investment activities, net.......................... (1,215) (408)
----------- -----------
Net cash flows used for investments......................... (18,797) (15,127)
----------- -----------
Net Increase (Decrease) In Cash For The Period.............. 17,395 (79)
Cash and cash equivalents- beginning of period.............. 67 202
----------- -----------
Cash and cash equivalents- end of period.................... $ 17,462 $ 123
=========== ===========
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
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 Western Massachusetts Electric Company (the
company or WMECO) 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 27, 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 5B. 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.
Northeast Utilities (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), 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.
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 quantitative 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 WMECO'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, WMECO's Form 10-Q for the quarter
ended March 31, 1997 and WMECO's 1996 Form 10-K.
C. Regulatory Accounting and Assets
For information regarding regulatory accounting and assets, see
WMECO's Form 10-Q for the quarter ended March 31, 1997 and WMECO's
1996 Form 10-K.
D. Cash and Cash Equivalents
At June 30, 1997, cash and cash equivalents included
approximately $15 million of investment in securities resulting from
WMECO's sale of accounts receivable and accrued utility revenues. For
further information on the sale of accounts receivable and accrued
utility revenues, see Note 4 of this Form 10-Q.
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, WMECO's Form 10-Q for the quarter ended March 31, 1997, and
WMECO's 1996 Form 10-K.
3. CAPITALIZATION
Bonds: 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 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 WMECO's
capitalization, see the MD&A in this Form 10-Q, WMECO's Form 10-Q for the
quarter ended March 31, 1997, WMECO's Form 8-K dated June 27, 1997 and
WMECO's 1996 Form 10-K.
4. SALE OF CUSTOMER RECEIVABLES AND ACCRUED UTILITY REVENUES
During 1996, WMECO entered into an agreement to sell up to $40 million of
its eligible customer receivables and accrued utility revenues. As of June
30, 1997, WMECO had sold approximately $28 million of its accounts
receivable under its 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.
For additional information regarding WMECO's sale of customer receivables
and accrued utility revenues, see the MD&A in this Form 10-Q, WMECO's Form
10-Q for the quarter ended March 31, 1997 and WMECO's 1996 Form 10-K.
5. COMMITMENTS AND CONTINGENCIES
A. Restructuring
For information on restructuring of the electric utility industry
within WMECO's jurisdiction, see WMECO's 1996 Form 10-K.
B. Nuclear Performance
Millstone: WMECO has a 19 percent joint-ownership interest in
Millstone 1 and 2, and a 12.24 percent joint-ownership interest in
Millstone 3. 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. Management 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 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.
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.
WMECO's share of nonfuel O&M costs for Millstone to be expensed in
1997 is now projected to be approximately $84 million compared to $73
million previously estimated. The 1997 projection includes $3 million
of restart costs identified to date which are expected to be incurred
in 1998 and is net of $12 million of Millstone costs reserved in 1996.
WMECO's share of 1997 projected capital expenditures for Millstone is
expected to decrease from the $11 million previously estimated to $8
million.
For the six months ended June 30, 1997, WMECO's share of nonfuel O&M
costs expensed for Millstone totaled $50 million. The actual
expenditures include $9 million reserved for future 1997 restart costs
and $3 million reserved for 1998 restart costs, and is net of $12
million of spending against the reserve established in 1996. The
reserve balance at June 30, 1997, was approximately $12 million.
Nonfuel O&M costs have been and will continue to be absorbed by WMECO
without adjustment to its 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 company will
ultimately incur. Replacement power costs incurred by WMECO
attributable to the Millstone outages averaged approximately $5
million per month during the first six months of 1997, and are
projected to average approximately $5 million per month for the
remainder of 1997. Based on 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.
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 WMECO's 1996 Form 10-K.
Maine Yankee Atomic Power Company (MYAPC): WMECO has a three percent
ownership interest in the Maine Yankee nuclear generating facility
(MY). At June 30, 1997, WMECO's equity investment in MYAPC was
approximately $2.3 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 company is unable to estimate its obligation
to MYAPC. Under the terms of the contracts with MYAPC, the
shareholders-sponsor companies, including WMECO, are responsible for
their proportionate share of the costs of the unit, including
decommissioning. Management expects that WMECO will be allowed to
recover these costs from its customers.
For further information regarding nuclear performance, see the MD&A
and Part II in this Form 10-Q, WMECO's Form 10-Q for the quarter ended
March 31, 1997, WMECO's Form 8-K dated June 27, 1997, and WMECO's 1996
Form 10-K.
C. Environmental Matters
For information regarding environmental matters, see WMECO's Form 10-Q
for the quarter ended March 31, 1997 and WMECO's 1996 Form 10-K.
D. Nuclear Insurance Contingencies
For information regarding nuclear insurance contingencies, see WMECO's
Form 10-Q for the quarter ended March 31, 1997 and WMECO's 1996 Form
10-K.
E. Construction Program
For information regarding WMECO's construction program, see WMECO's
Form 10-Q for the quarter ended March 31, 1997 and WMECO's 1996 Form
10-K.
F. Long-Term Contractual Arrangements
For information regarding long-term contractual arrangements, see
WMECO's 1996 Form 10-K.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section contains management's assessment of Western Massachusetts Electric
Company's (WMECO or the company) financial condition and the principal factors
having an impact on the results of operations. The company is a wholly-owned
subsidiary of Northeast Utilities (NU). This discussion should be read in
conjunction with WMECO's 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 27, 1997, and July 22, 1997.
FINANCIAL CONDITION
Overview
The outages at the three Millstone units (Millstone) continue to have a
substantial negative impact on WMECO's earnings. WMECO had a net loss of
approximately $15 million in the second quarter of 1997 compared to net income
of approximately $4 million in the second quarter of 1996, and a net loss of
approximately $17 million for the six months ended June 30, 1997, compared to
net income of approximately $12 million 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. The loss for the first six months of 1997 was also attributable
to lower retail sales. Retail kilowatt-hour sales for the six months ended June
30, 1997 were 4 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, WMECO 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 $4 million a month during the first six
months of 1997, and are projected to average approximately $5 million for the
remainder of 1997. The company will continue to expense its replacement power
costs in 1997.
Millstone Outages
WMECO has a 19 percent ownership interest in Millstone 1 and 2 and a 12.24
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. WMECO's share of nonfuel O&M costs
for Millstone to be expensed in 1997 is now projected to be approximately $84
million compared to $73 million previously estimated. The 1997 projection
includes $3 million of restart costs identified to date which are expected to
be incurred in 1998 and is net of $12 million of Millstone costs reserved in
1996. WMECO's share of 1997 projected capital expenditures for Millstone are
expected to decrease from the $11 million previously estimated to $8 million.
For the six months ended June 30, 1997, WMECO's share of nonfuel O&M costs
expensed for Millstone totaled $50 million. The actual expenditures include $9
million reserved for future 1997 restart costs and $3 million reserved for 1998
restart costs, and is net of $12 million of spending against the reserve
established in 1996. The reserve balance at June 30, 1997, was approximately $12
million. Nonfuel O&M costs have been and will continue to be absorbed by WMECO
without adjustment to its 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.
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 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 WMECO's 1996 Form 10-K for further information on
litigation. For further information on the current Millstone outages, see
WMECO's First Quarter Form 10-Q, 1996 Form 10-K and Form 8-K dated June 27,
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. WMECO anticipates spending approximately $12 million for additional
capacity-related costs in 1997, of which $7 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, WMECO spent approximately $5 million to ensure
adequate generating capacity, of which $3 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, NU and the other New England
utilities may have to resort to operating procedures designed to reduce customer
demand.
WMECO has a 3 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
Financial Statements," Note 5B and WMECO's 1996 Form 10-K.
Liquidity and Capital Resources
Cash provided from operations decreased approximately $12 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 $33 million,
primarily due to an increase in short-term borrowings. Net cash used for
financing activities was also impacted by higher reacquisitions and retirements
long-term debt in 1997 and higher payments of cash dividends on common stock.
Cash used for investments increased approximately $4 million primarily due to
higher 1997 construction expenditures.
WMECO established a facility in 1996 under which it may sell up to $40 million
of its accounts receivable and accrued utility revenues. As of June 30, 1997,
WMECO has sold approximately $28 million.
Additionally, the Company and NU, and CL&P 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 WMECO and CL&P 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 WMECO, CL&P 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 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 WMECO and CL&P securities because of the extended Millstone outages.
In May, 1997, Standard & Poor's (S&P) also downgraded its ratings of WMECO and
CL&P 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.
RESULTS OF OPERATIONS
Income Statement Variances
Increase/(Decrease)
Millions of Dollars
Second Year-
Quarter Percent to-Date Percent
Operating revenues $2 2% $(7) (3)%
Fuel, purchased and net
interchange power 14 67 29 63
Other operation 13 37 (2) (2)
Maintenance 9 59 16 64
Amortization of
regulatory assets, net (3) (61) (4) (55)
Federal and state income taxes (15) (a) (20) (a)
Net loss (19) (a) (29) (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
revenues.
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 expense increased $22 million in 1997. The major
factors were the higher costs associated with the Millstone outages ($15
million) including a $6 million net increase in the reserve for future restart
costs, and higher 1997 costs associated with meeting capacity requirements ($3
million), and higher capacity charges from MY ($1 million).
Amortization of regulatory assets, net increased in 1997, primarily due to the
completion of the amortization of phase-in costs for Millstone 3 in 1996 ($3
million).
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
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 ($5 million) and lower retail sales ($7 million), partially offset
by higher transmission and other revenues ($3 million). Retail sales decreased
4.0 percent primarily due to mild weather in the first quarter of 1997.
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 expense decreased $2 million and maintenance expense increased
$16 million in 1997. The major factors were the higher costs associated with the
Millstone outages ($14 million); higher 1997 costs associated with meeting
capacity requirements ($3 million); higher capacity charges from MY ($2 million)
and lower conservation and load management costs ($4 million).
Amortization of regulatory assets, net decreased in 1997, primarily due the
completion of the amortization of phase-in costs for Millstone 3 in 1996 ($6
million).
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
WMECO's 1996 Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In a written Consent in Lieu of an Annual Meeting of Stockholders of WMECO
("Consent") dated March 6, 1997, stockholders voted to fix the number of
directors for the ensuing year at eight. The vote fixing the number of
directors at seven was 1,072,471 shares in favor, representing 100 percent of
the issued and outstanding shares of common stock of WMECO.
Through the Consent the following eight directors were elected, each by a
vote of 1,072,471 shares in favor, to serve on the Board of Directors for the
ensuing year: Robert G. Abair, John H. Forsgren, Bernard M. Fox, William T.
Frain, Jr., Cheryl W. Grise, John B. Keane, Bruce D. Kenyon, and Hugh C.
MacKenzie.
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 WMECO's Current
Report on Form 8-K dated June 27, 1997 and "Item 1. Business - Nuclear Plant
Performance and Regulatory Oversight" and "Item 3. Legal Proceedings," in
WMECO's 1996 Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. WMECO filed a Form 8-K dated June 27, 1997 disclosing:
. Nuclear management of NU temporarily suspended all nuclear
training programs at Millstone to address programmatic
deficiencies identified by NNECO and the NRC;
. 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. WMECO filed a Form 8-K dated July 22, 1997 disclosing information
concerning its second quarter 1997 loss.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
Registrant
Date: August 12, 1997 By: /s/ John H. Forsgren
John H. Forsgren
Executive Vice President,
Chief Financial Officer and
Director
Date: August 12, 1997 By: /s/ John J. Roman
John J. Roman
Vice President and Controller