FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 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 - September 30, 1997 and
December 31, 1996 2
Consolidated Statements of Income - Three Months
and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 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 11
Part II. Other Information
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I. FINANCIAL INFORMATION
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
1997 December 31,
(Unaudited) 1996
------------- ------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 1,271,027 $ 1,257,097
Less: Accumulated provision for depreciation......... 537,535 503,989
------------- ------------
733,492 753,108
Construction work in progress........................... 19,808 15,968
Nuclear fuel, net....................................... 30,758 30,296
------------- ------------
Total net utility plant............................. 784,058 799,372
------------- ------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 96,668 83,611
Investments in regional nuclear generating
companies, at equity................................... 16,488 15,448
Other, at cost.......................................... 4,903 4,367
------------- ------------
118,059 103,426
------------- ------------
Current Assets:
Cash and cash equivalents............................... 15,048 67
Receivables, net (Note 3)............................... 2,136 40,168
Accounts receivable from affiliated companies........... 3,907 3,525
Taxes receivable........................................ 6,506 1,778
Accrued utility revenues (Note 3)....................... 28 12,394
Fuel, materials, and supplies, at average cost.......... 6,080 5,317
Recoverable energy costs, net--current portion.......... - 576
Prepayments and other................................... 16,267 11,686
------------- ------------
49,972 75,511
------------- ------------
Deferred Charges:
Regulatory assets:
Income taxes, net...................................... 63,015 71,519
Unrecovered contractual obligations (Note 4B).......... 100,644 84,598
Recoverable energy costs............................... 15,231 17,510
Other.................................................. 30,060 37,225
Unamortized debt expense................................ 2,831 1,866
Other................................................... 3,742 888
------------- ------------
215,523 213,606
------------- ------------
Total Assets........................................ $ 1,167,612 $ 1,191,915
============= ============
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
1997 December 31,
(Unaudited) 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................................ 151,106 150,911
Retained earnings....................................... 53,530 97,045
------------- ------------
Total common stockholder's equity.............. 231,448 274,768
Preferred stock not subject to mandatory redemption..... 20,000 20,000
Preferred stock subject to mandatory redemption......... 19,500 21,000
Long-term debt.......................................... 386,298 334,742
------------- ------------
Total capitalization........................... 657,246 650,510
------------- ------------
Obligations Under Capital Leases.......................... 26,757 29,269
------------- ------------
Current Liabilities:
Notes payable to banks.................................. 15,000 -
Notes payable to affiliated company..................... 2,350 47,400
Long-term debt and preferred stock--current
portion................................................ 11,300 14,700
Obligations under capital leases--current
portion................................................ 5,973 2,965
Accounts payable........................................ 20,114 26,698
Accounts payable to affiliated companies................ 20,555 20,256
Accrued taxes........................................... 1,043 2,659
Accrued interest........................................ 4,232 5,643
Nuclear compliance...................................... 18,920 11,800
Other................................................... 3,319 4,754
------------- ------------
102,806 136,875
------------- ------------
Deferred Credits:
Accumulated deferred income taxes....................... 234,137 245,253
Accumulated deferred investment tax credits............. 23,731 24,833
Deferred contractual obligations (Note 4B).............. 100,644 84,598
Other................................................... 22,291 20,577
------------- ------------
380,803 375,261
------------- ------------
Commitments and Contingencies (Note 4)
------------- ------------
Total Capitalization and Liabilities........... $ 1,167,612 $ 1,191,915
============= ============
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Thousands of Dollars)
Operating Revenues............................. $111,166 $ 99,866 $321,350 $317,265
--------- --------- --------- ---------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power. 34,533 33,168 110,868 79,765
Other..................................... 43,499 32,389 116,360 107,677
Maintenance.................................. 23,070 14,409 64,423 39,623
Depreciation................................. 10,179 10,024 30,008 29,661
Amortization of regulatory assets............ 1,605 1,020 4,830 8,155
Federal and state income taxes............... (4,020) (411) (13,378) 9,785
Taxes other than income taxes................ 4,577 4,940 14,811 15,203
--------- --------- --------- ---------
Total operating expenses............... 113,443 95,539 327,922 289,869
--------- --------- --------- ---------
Operating (Loss) Income........................ (2,277) 4,327 (6,572) 27,396
--------- --------- --------- ---------
Other Income:
Equity in earnings of regional nuclear
generating companies....................... 425 448 1,277 1,481
Other, net................................... (946) 703 (589) 918
Income taxes................................. 173 293 875 351
--------- --------- --------- ---------
Other (loss) income, net............... (348) 1,444 1,563 2,750
--------- --------- --------- ---------
(Loss) Income before interest charges.. (2,625) 5,771 (5,009) 30,146
--------- --------- --------- ---------
Interest Charges:
Interest on long-term debt................... 6,089 6,026 18,063 18,022
Other interest............................... 741 141 3,084 395
--------- --------- --------- ---------
Interest charges, net.................. 6,830 6,167 21,147 18,417
--------- --------- --------- ---------
Net (Loss) Income.............................. $ (9,455) $ (396) $(26,156) $ 11,729
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1997 1996
----------- -----------
(Thousands of Dollars)
Operating Activities:
Net(Loss)Income........................................... $ (26,156) $ 11,729
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 30,008 29,661
Deferred income taxes and investment tax credits, net... (8,029) (4,085)
Recoverable energy costs, net of amortization........... 2,855 (6,142)
Deferred nuclear refueling outage, net of amortization.. 4,411 5,050
Nuclear compliance, net................................. 7,120 7,531
Other sources of cash................................... 17,993 12,608
Other uses of cash...................................... (10,041) (5,538)
Changes in working capital:
Receivables and accrued utility revenues, net (Note 3).. 50,016 3,872
Fuel, materials, and supplies........................... (763) 234
Accounts payable........................................ (6,285) (2,023)
Accrued taxes........................................... (1,616) 8,433
Other working capital (excludes cash)................... (12,155) (4,241)
----------- -----------
Net cash flows from operating activities.................... 47,358 57,089
----------- -----------
Financing Activities:
Net decrease in short-term debt........................... (30,050) (16,050)
Issuance of long-term debt................................ 60,000 -
Reacquisitions and retirements of long-term debt.......... (14,700) -
Reacquisitions and retirements of preferred stock......... - (1,500)
Cash dividends on preferred stock......................... (2,355) (3,955)
Cash dividends on common stock............................ (15,004) (12,741)
----------- -----------
Net cash flows used for financing activities................ (2,109) (34,246)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (21,395) (15,456)
Nuclear fuel............................................ (15) 565
----------- -----------
Net cash flows used for investments in plant.............. (21,410) (14,891)
Investments in nuclear decommissioning trusts............. (7,282) (7,394)
Other investment activities, net.......................... (1,576) (722)
----------- -----------
Net cash flows used for investments......................... (30,268) (23,007)
----------- -----------
Net Increase (Decrease) In Cash For The Period.............. 14,981 (164)
Cash and cash equivalents- beginning of period.............. 67 202
----------- -----------
Cash and cash equivalents- end of period.................... $ 15,048 $ 38
=========== ===========
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 quarters ended March
31, 1997 and June 30, 1997, and the company's Form 8-Ks dated August
19, 1997 and October 13, 1997. In the opinion of the company, the
accompanying financial statements contain all adjustments necessary to
present fairly the financial position as of September 30, 1997, the
results of operations for the three-month and nine-month periods ended
September 30, 1997 and 1996, and the statements of cash flows for the
nine-month periods ended September 30, 1997 and 1996. All adjustments
are of a normal, recurring, nature except those described below in
Note 4B. The results of operations for the three-month and nine-month
periods ended September 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
For information regarding the adoption of new accounting standards,
see Note 3, "Sale of Customer Receivables and Accrued Utility
Revenues" in this Form 10-Q, WMECO's Form 10-Q for the quarters
ended June 30, 1997 and March 31, 1997 and WMECO's 1996 Form 10-K.
C. Regulatory Accounting and Assets
For information regarding regulatory accounting and assets, see the
MD&A in this Form 10-Q, WMECO's Form 10-Q for the quarters ended June
30, 1997 and March 31, 1997 and WMECO's 1996 Form 10-K.
D. Cash and Cash Equivalents
At September 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 3 of this Form 10-Q.
2. SHORT-TERM DEBT
For information regarding short-term debt, see the MD&A in this Form 10-Q,
WMECO's Form 10-Q for the quarters ended June 30, 1997 and March 31, 1997,
and WMECO's 1996 Form 10-K.
3. SALE OF CUSTOMER RECEIVABLES AND ACCRUED UTILITY REVENUES
During 1996, WMECO entered into an agreement to sell up to $40 million of
undivided ownership interests in its eligible customer receivables and
accrued utility revenues (receivables) to a third party purchaser. As of
September 30, 1997 WMECO had sold approximately $28 million of undivided
ownership interests in receivables under its sales agreements. As of
October 31, 1997, approximately $28 million of undivided ownership
interests in receivables had been sold to the third party purchaser by
WMECO through the use of its special purpose, wholly-owned subsidiary,
WMECO Receivables Corporation (WRC).
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 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 had restructured its sales
agreement to comply with the conditions of SFAS 125 and account for
transactions occurring under this program as sales of assets.
WRC's sales agreement provides for a formula based loss reserve in which
additional 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 September 30, 1997,
approximately $4.3 million of assets had been designated as collateral to
the third party purchaser by WRC.
For additional information regarding WMECO's sale of receivables, see the
MD&A in this Form 10-Q, WMECO's Form 10-Q for the quarters ended June 30,
1997 and March 31, 1997 and WMECO's 1996 Form 10-K.
4. 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.
NU hopes to return Millstone 3 to service late in the first quarter
of 1998; Millstone 2 two to three months after Millstone 3; and
Millstone 1 in the second half of 1998. The pace of the recovery
effort at Millstone 1 will continue to be reduced so that resources
can be focused on Millstone units 3 and 2 in the first half of 1998.
Full funding for the recovery of Millstone 1 can be restored after
Millstone 3 is back in service. The actual date of the return to
service is dependent upon the completion of independent inspections
and reviews, inspections and reviews by the NRC and a vote by the NRC
Commissioners, and, in the case of Millstone 1, the cost and schedule
of returning the first two units to service.
For the nine months ended September 30, 1997, WMECO's share of
nonfuel O&M costs expensed for Millstone totaled $83 million. These
expenses include $7 million reserved for future 1997 restart costs
and $12 million reserved for 1998 restart costs, and is net of $12
million of spending against the reserve established in 1996. The
reserve balance at September 30, 1997 was approximately $19 million.
WMECO's share of nonfuel O&M costs for Millstone to be expensed in
1997 is now projected to be approximately $101 million compared to
$84 million previously estimated. 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 from 1997 levels, although they will be
considerably 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 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 WMECO will ultimately
incur. Replacement power costs incurred by WMECO attributable to the
Millstone outages averaged approximately $6 million per month during
the first nine months of 1997, and are projected to average
approximately $5 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. WMECO will continue to expense its replacement power costs in
1997.
Litigation: For information regarding litigation initiated by the
non-NU owners of Millstone 3, see WMECO's Form 10-Q for the quarter
ended June 30, 1997, 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 September 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. During November
1997, MYAPC filed an amendment to its power contracts clarifying the
obligations of its purchasing utilities following the decision to
cease power production. At September 30, 1997, the estimated
obligation, including decommissioning, amounted to approximately $930
million, of which WMECO's share was $27.9 million. 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.
Accordingly, WMECO has recognized these costs as a regulatory asset,
with a corresponding obligation, on its consolidated balance sheets.
For additional information regarding this and other nuclear
performance matters, see Part II and the MD&A in this Form 10-Q,
WMECO's Form 8-K dated October 13, 1997, WMECO's Form 10-Q for the
quarters ended June 30, 1997 and March 31, 1997 and WMECO's 1996
Form 10-K.
C. Environmental Matters
For information regarding environmental matters, see WMECO's Form 10-Q
for the quarters ended June 30, 1997 and 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. For information related to the closure of MY,
see the MD&A and Note 4B in this Form 10-Q, and WMECO's Form 10-Q for
the quarter ended June 30, 1997.
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 and Second Quarter 1997 Form 10-Qs, the 1996 Form 10-K, and
the Form 8-Ks dated August 19, 1997 and October 13, 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 $9 million in the third quarter of 1997 compared to a net loss of
approximately $400,000 in the third quarter of 1996, and a net loss of
approximately $26 million for the nine months ended September 30, 1997, compared
to net income of approximately $12 million for the same period in 1996. The
losses for the three-and nine-month periods were attributable to replacement
power and nuclear operation and maintenance (O&M) expenses for the Millstone
units in 1997, including amounts reserved for future spending in 1997 and 1998.
The loss for the first nine months of 1997 was also attributable to lower retail
sales. Higher retail sales in the quarter reduced the third quarter loss.
Retail kilowatt-hour sales for the quarter were 3.7 percent higher than the
third quarter of 1996 primarily due to modest economic growth. Retail kilowatt-
hour sales for the nine months ended September 30, 1997 were 1.5 percent below
the same period in 1996 primarily due to mild weather in the first quarter of
1997.
Millstone-related costs have risen over the past several months as the company
completes the engineering, physical and programmatic efforts needed to return
the units to service. As a result, WMECO now expects a loss from results of
operations in 1997.
Millstone Outages
WMECO has a 19 percent joint 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.
The Company hopes to return Millstone 3 to service late in the first quarter of
1998; Millstone 2 two to three months after Millstone 3; and Millstone 1 in the
second half of 1998. The pace of the recovery effort at Millstone 1 will
continue to be reduced so that resources can be focused on Millstone units 3 and
2 in the first half of 1998. Full funding for the recovery of Millstone 1 can
be restored after Millstone 3 is back in service. The actual date of the return
to service for each of the units is dependent upon the completion of independent
inspections and reviews, inspections and reviews by the Nuclear Regulatory
Commission (NRC) and a vote by the NRC Commissioners and, in the case of
Millstone 1, the cost and schedule of returning the first two units to service.
For the nine months ended September 30, 1997, WMECO's share of nonfuel O&M costs
expensed for Millstone totaled $83 million. These expenses include $7 million
reserved for future 1997 restart costs and $12 million reserved for 1998 restart
costs, and is net of $12 million of spending against the reserve established in
1996. The reserve balance at September 30, 1997, was approximately $19 million.
WMECO's share of nonfuel O&M costs for Millstone to be expensed in 1997 is now
projected to be approximately $101 million compared to $84 million previously
estimated. 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 1998 nuclear spending levels at Millstone will be
reduced from 1997 levels, although they will be considerably higher than before
the station was placed on the NRC's watch list. The actual level of 1998
nuclear spending at Millstone 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 in 1998 to determine whether adjustments to the existing reserves
are required.
Replacement power costs attributable to the Millstone outages averaged
approximately $6 million a month during the first nine 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.
For further information on the current Millstone outages, see the "Notes to
Consolidated Financial Statements," Note 4B, in this Form 10-Q, WMECO's First
and Second Quarter 1997 Form 10-Qs and 1996 Form 10-K.
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 that its 1997 spending for additional capacity-
related costs will be approximately $12 million, of which $7 million is expected
to be expensed. WMECO spent approximately $9 million of the $12 million through
the first nine months of 1997, of which $4 million was expensed.
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 unanimously to cease permanently the production of
power at MY. During November 1997, MYAPC filed an amendment to its power
contracts clarifying the obligations of its purchasing utilities following the
decision to cease power production. As of September 30, 1997, the estimated
obligation, including decommissioning, amounted to approximately $930 million,
of which WMECO's share was approximately $28 million. Under the terms of the
contracts with MYAPC, WMECO is responsible for its proportionate share of the
costs of the unit, including decommissioning. Management expects that WMECO
will be allowed to recover these costs from its customers as they are included
in the Federal Energy Regulatory Commission approved wholesale contract.
Accordingly, WMECO has recognized these costs as a regulatory asset, with a
corresponding obligation on its balance sheets.
For further information on MYAPC, see the "Notes to Consolidated Financial
Statements," Note 4B and Part II - Item 2 in this Form 10-Q and WMECO's 1996
Form 10-K.
Liquidity and Capital Resources
Cash provided from operations decreased approximately $10 million in the first
nine months of 1997, compared to the same period in 1996, primarily due to
higher 1997 cash expenditures related to the Millstone outages, and the pay down
in 1997 of the 1996 year end accounts payable balance, partially offset by the
utilization of the accounts receivable facility. 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 $32 million, primarily due to the issuance of long-term debt in
1997. Net cash used for financing activities was also impacted by higher short-
term borrowings and retirements of long-term debt in 1997. Cash used for
investments increased approximately $7 million primarily due to higher 1997
construction expenditures.
WMECO established a facility in 1996 under which it may sell from time to time,
up to $40 million of undivided ownership interests in its accounts receivable
and accrued utility revenues. As of September 30, 1997, WMECO has sold
approximately $28 million.
NU, The Connecticut Light and Power Company (CL&P) and WMECO entered into a new
three-year revolving credit agreement (the New Credit Agreement) in November
1996, which was amended in May 1997. At September 30, 1997, WMECO had $15
million outstanding under the New Credit Agreement.
Each major company in the NU system finances its own needs. Neither CL&P nor
WMECO has any financing agreements containing cross defaults based on financial
defaults by NU, Public Service Company of New Hampshire (PSNH) or North Atlantic
Energy Corporation (NAEC). Similarly, neither PSNH nor NAEC has any financing
agreements containing cross defaults based on financial defaults by 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 financial markets.
The Company's ability to borrow under its financing arrangements is dependent on
its satisfaction of contractual borrowing conditions. The financial covenants
that must be satisfied to permit WMECO to borrow under the New Credit Agreement
are particularly restrictive. Also, WMECO'S accounts receivable facilities could
become unavailable if its respective senior securities were to be downgraded by
more than one step. Management has instructed all non-nuclear groups to
constrain their spending for the remainder of 1997 and the first half of 1998,
while the Millstone units are expected to be out of service, to levels intended
to assure that the financial covenants in WMECO's New Credit Agreement are
satisfied. In addition, management has announced that there will be a delay in
the resumption of full recovery funding for Millstone 1, as necessary, to ensure
that commitments to the Company's lenders are met. However, there is no
assurance that these financial covenants will be met as the Company may
encounter additional unexpected costs such as from storms; or reduced revenues
from the effect of weather on sales levels.
If the return to service of one or more of the Millstone units is delayed
substantially, beyond the present revised restart estimates 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
even more stringent 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
Third Year-
Quarter Percent to-Date Percent
Operating revenues $11 11% $4 1%
Fuel, purchased and net
interchange power 1 4 31 39
Other operation 11 34 9 8
Maintenance 9 60 25 63
Amortization of
regulatory assets, net 1 57 (3) (41)
Federal and state income taxes (3) (a) (24) (a)
Net income (9) (a) (38) (a)
(a) Percentage greater than 100
Comparison of the Third Quarter of 1997 to the Third Quarter of 1996
Total operating revenues increased in 1997, primarily due to higher retail sales
and higher fuel recoveries. Retail sales increased 3.7 percent as a result of
modest economic growth.
Other operation and maintenance expense increased $20 million in 1997. The major
factors were the higher costs associated with the Millstone outages ($20
million), including a $10 million net increase in the reserve for future restart
costs. This increase was partially offset by lower capacity charges from
Connecticut Yankee as a result of a property tax refund ($3 million).
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
Comparison of the First Nine Months of 1997 to the First Nine Months of 1996
Total operating revenues increased in 1997, primarily due to higher transmission
and other revenues partially offset by lower retail sales. Retail sales were
1.5 percent lower for the nine months as a result of 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 and maintenance expense increased $34 million in 1997. The major
factors were the higher costs associated with the Millstone outages ($34
million); higher capacity charges from MY ($2 million) and higher costs to
ensure adequate capacity ($4 million), partially offset by lower capacity
charges from Connecticut Yankee as a result of a property tax refund ($3
million) and lower administrative and general costs due primarily to lower
pensions and benefits ($2 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.
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
1. The Citizens Awareness Network (CAN) filed a petition with the NRC under
Section 2.206 of the NRC's regulations in November 1996 requesting that the NRC
suspend or revoke the operating licenses for Millstone 1, 2, and 3 and
Connecticut Yankee Atomic Power Company's nuclear generating facility (CY). The
petition also requested that the NRC take enforcement actions and make
investigations based on numerous allegations. On September 12, 1997, the
Director of Nuclear Reactor Regulation (Director) issued a partial decision
granting certain aspects of the petition, denying other aspects and deferring
other aspects of the petition pertaining to possible wrongdoing. The NRC
responded to these requests by relying upon actions that have already been taken
or actions that are currently under way. The NRC also denied petitioners'
request that the Millstone restart decision be postponed until completion of
pending investigations into alleged wrongdoings. However, the NRC decision
indicated that the results of these investigations will be considered by the NRC
Commissioners at the time of restart.
On September 3, 1997, the Director issued a partial decision deferring in
part and denying in part another Section 2.206 petition that had been filed by
CAN and the Nuclear Information Resource Service seeking NRC enforcement action
and placement of certain restrictions on decommissioning activities at CY. The
decision deferred that aspect of the petition requesting that the NRC take
enforcement action with respect to the radiological controls program at the
plant. The petitioners' requests that CY be placed on the NRC's watch list and
that a six-month moratorium be placed on decommissioning activities at CY were
denied.
For additional information relating to this matter, see "Item 3. Legal
Proceedings," in WMECO's 1996 Form 10-K and "Item 5 - Other Information" in
WMECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
2. A number of municipalities and cooperatives (Secondary Purchasers) have
notified the sponsors of MY, including CL&P, WMECO and PSNH, that they consider
their purchase and payment obligations under their purchase agreements to have
been terminated as a result of the decision by the MYAPC Board of Directors (MY
Board) to retire the facility. Accordingly, these Secondary Purchasers have
informed the sponsors that they will be making no further payments under the
contracts for the period following the MY Board's decision. Through such
contracts, the sponsors agreed to deliver a portion of the capacity and
electrical output from the facility until the year 2003 in exchange for payment
by the Secondary Purchasers of a pro rata share of the plant's costs and
expenses. NU's subsidiaries' estimated exposure under these contracts is
approximately $15 million to $20 million over the remaining term of these
agreements. The MY sponsors are reviewing their options on how to proceed
against the Secondary Purchasers in this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
10 Description of Certain Management
Compensation Arrangements (Exhibit 10.50,
File No. 333-30911)
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. WMECO filed a Form 8-K dated August 19, 1997 disclosing that Michael
G. Morris has been appointed Chairman, President and Chief Executive
Officer of NU.
2. WMECO filed a Form 8-K dated October 13, 1997 disclosing:
. NU's earnings for the quarter ending September 30, 1997 and
information on the Millstone nuclear units restart schedule.
. The Connecticut Department of Public Utility Control has been
conducting a review of the rates of CL&P, including an analysis of
the possibility of removing one or more of the Millstone nuclear
units from CL&P's rate base.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
Registrant
Date: November 12, 1997 By: /s/ John H. Forsgren
John H. Forsgren
Executive Vice President,
Chief Financial Officer and
Director
Date: November 12, 1997 By: /s/ John J. Roman
John J. Roman
Vice President and Controller