1998 Annual Report
The Connecticut Light and Power Company and Subsidiaries
Index
Contents Page
Consolidated Balance Sheets............................... 2-3
Consolidated Statements of Income......................... 4
Consolidated Statements of Comprehensive Income........... 4
Consolidated Statements of Cash Flows..................... 5
Consolidated Statements of Common Stockholder's Equity.... 6
Notes to Consolidated Financial Statements................ 7
Report of Independent Public Accountants.................. 40
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 41
Selected Financial Data................................... 53
Statements of Quarterly Financial Data (Unaudited)........ 53
Statistics (Unaudited).................................... 54
Preferred Stockholder and Bondholder Information.......... Back Cover
PART I. FINANCIAL INFORMATION
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------
At December 31, 1998 1997
- ----------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 6,173,871 $ 6,411,018
Less: Accumulated provision for depreciation......... 2,758,012 2,902,673
------------- -------------
3,415,859 3,508,345
Construction work in progress........................... 83,477 93,692
Nuclear fuel, net....................................... 87,867 135,076
------------- -------------
Total net utility plant............................. 3,587,203 3,737,113
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 452,755 369,162
Investments in regional nuclear generating
companies, at equity................................... 56,999 58,061
Other, at cost.......................................... 93,864 66,615
------------- -------------
603,618 493,838
------------- -------------
Current Assets:
Cash.................................................... 434 459
Investment in securitizable assets...................... 160,253 205,625
Notes receivable from affiliated companies.............. 6,600 -
Receivables, less accumulated provision for
uncollectible accounts of $300,000 in 1998 and 1997.... 22,186 50,671
Accounts receivable from affiliated companies........... 1,721 3,150
Taxes receivable........................................ 26,478 70,311
Fuel, materials and supplies, at average cost........... 71,982 81,878
Recoverable energy costs, net--current portion.......... - 28,073
Prepayments and other................................... 121,514 79,642
------------- -------------
411,168 519,809
------------- -------------
Deferred Charges:
Regulatory assets (Note 1G)............................. 1,415,838 1,292,818
Unamortized debt expense................................ 19,603 19,286
Other................................................... 12,768 18,359
------------- -------------
1,448,209 1,330,463
------------- -------------
Total Assets........................................ $ 6,050,198 $ 6,081,223
============= =============
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
At December 31, 1998 1997
- ------------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$10 par value. Authorized
24,500,000 shares; outstanding 12,222,930
shares................................................... $ 122,229 $ 122,229
Capital surplus, paid in.................................. 664,156 641,333
Retained earnings......................................... 210,108 419,972
Accumulated other comprehensive income.................... 378 -
------------- -------------
Total common stockholder's equity................ 996,871 1,183,534
Preferred stock not subject to mandatory
redemption............................................... 116,200 116,200
Preferred stock subject to mandatory redemption........... 99,539 151,250
Long-term debt............................................ 1,793,952 2,023,316
------------- -------------
Total capitalization............................. 3,006,562 3,474,300
------------- -------------
Minority Interest in Consolidated Subsidiary................ 100,000 100,000
------------- -------------
Obligations Under Capital Leases............................ 68,444 18,042
------------- -------------
Current Liabilities:
Notes payable to banks.................................... 10,000 35,000
Notes payable to affiliated companies..................... - 61,300
Long-term debt and preferred stock--current
portion.................................................. 233,755 23,761
Obligations under capital leases--current
portion.................................................. 94,440 140,076
Accounts payable.......................................... 121,040 124,427
Accounts payable to affiliated companies.................. 32,758 92,963
Accrued taxes............................................. 19,396 33,017
Accrued interest.......................................... 31,409 14,650
Other..................................................... 34,872 23,495
------------- -------------
577,670 548,689
------------- -------------
Deferred Credits:
Accumulated deferred income taxes......................... 1,194,722 1,348,617
Accumulated deferred investment tax credits............... 114,457 127,713
Decommissioning obligation--Millstone 1 (Note 3).......... 560,500 -
Deferred contractual obligations.......................... 277,826 348,406
Other..................................................... 150,017 115,456
------------- -------------
2,297,522 1,940,192
------------- -------------
Commitments and Contingencies (Note 11)
Total Capitalization and Liabilities............. $ 6,050,198 $ 6,081,223
============= =============
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues................................. $2,386,864 $2,465,587 $2,397,460
----------- ----------- -----------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power..... 887,224 977,543 831,079
Other......................................... 703,971 726,420 727,674
Maintenance...................................... 271,317 355,772 300,005
Depreciation..................................... 216,509 238,667 247,109
Amortization of regulatory assets, net........... 120,884 61,648 57,432
Federal and state income taxes................... (11,642) (59,436) 957
Taxes other than income taxes.................... 170,347 172,592 174,062
----------- ----------- -----------
Total operating expenses................... 2,358,610 2,473,206 2,338,318
----------- ----------- -----------
Operating Income/(Loss)............................ 28,254 (7,619) 59,142
----------- ----------- -----------
Other Income:
Equity in earnings of regional nuclear
generating companies........................... 6,241 5,672 6,619
Millstone 1--unrecoverable costs (Note 1K)....... (143,239) - -
Other, net....................................... (6,075) (1,856) 20,710
Minority interest in income of subsidiary........ (9,300) (9,300) (9,300)
Income taxes..................................... 67,127 7,573 160
----------- ----------- -----------
Other (loss)/income, net................... (85,246) 2,089 18,189
----------- ----------- -----------
(Loss)/income before interest charges...... (56,992) (5,530) 77,331
----------- ----------- -----------
Interest Charges:
Interest on long-term debt....................... 133,192 132,127 127,198
Other interest................................... 5,541 1,940 1,001
----------- ----------- -----------
Interest charges, net...................... 138,733 134,067 128,199
----------- ----------- -----------
Net Loss........................................... $ (195,725) $ (139,597) $ (50,868)
=========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Loss........................................... $ (195,725) $ (139,597) $ (50,868)
----------- ----------- -----------
Other comprehensive income, net of tax (Note 15):
Unrealized gains on securities..................... 638 - -
Minimum pension liability adjustments.............. (260) - -
----------- ----------- -----------
Other comprehensive income, net of tax........... 378 - -
----------- ----------- -----------
Comprehensive Loss $ (195,347) $ (139,597) $ (50,868)
========== =========== ===========
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net loss.................................................... $(195,725) $(139,597) $ (50,868)
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 216,509 238,667 247,109
Deferred income taxes and investment tax credits, net..... (65,689) (10,401) (39,642)
Amortization of deferred demand-side-management costs, net 42,085 38,029 26,941
Amortization/(deferral) of recoverable energy costs....... 30,745 (9,533) (35,567)
Amortization of cogeneration deferral..................... 29,559 37,338 19,221
Amortization of regulatory asset - income taxes........... 66,027 13,927 19,349
Amortization of other regulatory asset ................... 25,298 10,383 18,862
Deferred nuclear refueling outage, net of amortization ... - (45,333) 45,643
Millstone 1--unrecoverable costs.......................... 143,239 - -
Other sources of cash..................................... 82,109 35,065 51,823
Other uses of cash........................................ (23,561) (50,417) (23,862)
Changes in working capital:
Receivables and accrued utility revenues.................. (5,086) 184,223 (22,378)
Fuel, materials and supplies.............................. 9,896 (1,941) (11,455)
Accounts payable.......................................... (63,592) (22,036) 83,951
Accrued taxes............................................. (13,621) 4,310 (23,561)
Sale of receivables and accrued utility revenues.......... 35,000 70,000 -
Investment in securitizable assets........................ 45,372 (205,625) -
Other working capital (excludes cash)..................... 30,097 (74,266) (5,385)
---------- ---------- ----------
Net cash flows from operating activities...................... 388,662 72,793 300,181
---------- ---------- ----------
Financing Activities:
Issuance of long-term debt.................................. - 200,000 222,000
Net (decrease)/increase in short-term debt.................. (86,300) 96,300 (51,750)
Reacquisitions and retirements of long-term debt............ (45,006) (204,116) (14,329)
Reacquisitions and retirements of preferred stock........... (35,711) - -
Cash dividends on preferred stock........................... (14,139) (15,221) (15,221)
Cash dividends on common stock.............................. - (5,989) (138,608)
---------- ---------- ----------
Net cash flows (used for)/from financing activities........... (181,156) 70,974 2,092
---------- ---------- ----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (132,194) (155,550) (140,086)
Nuclear fuel.............................................. (8,444) (702) 553
---------- ---------- ----------
Net cash flows used for investments in plant............ (140,638) (156,252) (139,533)
Investment in NU system Money Pool.......................... (6,600) 109,050 (109,050)
Investment in nuclear decommissioning trusts................ (54,106) (45,314) (50,998)
Other investment activities, net............................ (26,187) (51,196) (2,625)
Capital contributions from Northeast Utilities.............. 20,000 - -
---------- ---------- ----------
Net cash flows used for investments........................... (207,531) (143,712) (302,206)
---------- ---------- ----------
Net (Decrease)/Increase In Cash For The Period................ (25) 55 67
Cash - beginning of period.................................... 459 404 337
---------- ---------- ----------
Cash - end of period.......................................... $ 434 $ 459 $ 404
========== ========== ==========
Supplemental Cash Flow Information:
Cash paid/(refunded) during the year for:
Interest, net of amounts capitalized........................ $ 110,119 $ 145,962 $ 114,458
========== ========== ==========
Income taxes................................................ $ (46,747) $ (22,338) $ 77,790
========== ========== ==========
Increase in obligations:
Niantic Bay Fuel Trust and other capital leases............. $ 4,102 $ 2,815 $ 2,855
========== ========== ==========
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- ----------------------------------------------------------------------------------------------------
Accumulated
Capital Retained Other
Common Surplus, Earnings Comprehensive
Stock Paid In (a) Income Total
- ----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1996.......... $122,229 $637,981 $ 785,476 $ - $1,545,686
Net loss........................ (50,868) (50,868)
Cash dividends on preferred
stock......................... (15,221) (15,221)
Cash dividends.................. (138,608) (138,608)
Capital stock expenses, net..... 1,676 1,676
--------- --------- ---------- -------------- -----------
Balance at December 31, 1996........ 122,229 639,657 580,779 - 1,342,665
Net loss........................ (139,597) (139,597)
Cash dividends on preferred
stock......................... (15,221) (15,221)
Cash dividends.................. (5,989) (5,989)
Capital stock expenses, net..... 1,676 1,676
--------- --------- ---------- -------------- -----------
Balance at December 31, 1997........ 122,229 641,333 419,972 - 1,183,534
Net loss........................ (195,725) (195,725)
Cash dividends.................. (14,139) (14,139)
Capital stock expenses, net..... 2,764 2,764
Capital contribution from
Northeast Utilities........... 20,000 20,000
Gain on repurchase of preferred
stock......................... 59 59
Other comprehensive income...... 378 378
--------- --------- ---------- -------------- -----------
Balance at December 31, 1998........ $122,229 $664,156 $ 210,108 $ 378 $ 996,871
========= ========= ========== ============== ===========
(a) The company has dividend restrictions imposed by its long-term debt
agreements. At December 31, 1998, these restrictions totaled approximately
$540 million.
See accompanying notes to consolidated financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. About The Connecticut Light and Power Company
The Connecticut Light and Power Company (the company or CL&P) and
subsidiaries, Western Massachusetts Electric Company (WMECO), Holyoke
Water Power Company (HWP), Public Service Company of New Hampshire
(PSNH) and North Atlantic Energy Corporation (NAEC) are the operating
subsidiaries comprising the Northeast Utilities system (the NU system)
and are wholly owned by Northeast Utilities (NU).
The NU system furnishes franchised retail electric service in
Connecticut, New Hampshire and western Massachusetts through CL&P,
PSNH and WMECO. NAEC sells all of its entitlement to the capacity
and output of the Seabrook nuclear power plant (Seabrook 1 or
Seabrook) to PSNH under two life-of-unit, full cost recovery
contracts. HWP also is engaged in the production and distribution of
electric power. The NU system also furnishes firm and other
wholesale electric services to various municipalities and other
utilities, and participates in limited retail access programs,
providing off-system retail electric service. The NU system serves
in excess of 30 percent of New England's electric needs and is one of
the 24 largest electric utility systems in the country as measured by
revenues.
NU is registered with the Securities and Exchange Commission (SEC) as
a holding company under the Public Utility Holding Company Act of
1935 (1935 Act). NU and its subsidiaries, including CL&P, are
subject to the provisions of the 1935 Act. Arrangements among the NU
system companies, outside agencies and other utilities covering
interconnections, interchange of electric power and sales of utility
property are subject to regulation by the Federal Energy Regulatory
Commission (FERC) and/or the SEC. CL&P is subject to further
regulation for rates, accounting and other matters by the FERC and/or
applicable state regulatory commissions.
Other wholly owned subsidiaries of NU provide support services for
the NU system companies and, in some cases, for other New England
utilities. Northeast Utilities Service Company (NUSCO) provides
centralized accounting, administrative, information resources,
engineering, financial, legal, operational, planning, purchasing and
other services to the NU system companies. Northeast Nuclear Energy
Company (NNECO) acts as agent for the NU system companies and other
New England utilities in operating the Millstone nuclear generating
facilities. North Atlantic Energy Service Corporation (NAESCO) has
operational responsibilities for Seabrook. In addition, CL&P and
WMECO each have established a special purpose subsidiary whose
business consists of the purchase and resale of receivables.
During the first quarter of 1999, NU established three new
subsidiaries: NU Enterprises, Inc., Northeast Generation Company and
Northeast Generation Services Company. Directly or through multiple
subsidiaries, these entities will engage in a variety of energy-
related activities, including the acquisition and management of non-
nuclear generating plants.
B. Presentation
The consolidated financial statements of CL&P include the accounts of
all wholly owned subsidiaries. Significant intercompany transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Certain reclassifications of prior years' data have been made to
conform with the current year's presentation.
All transactions among affiliated companies are on a recovery of cost
basis which may include amounts representing a return on equity and
are subject to approval by various federal and state regulatory
agencies.
C. New Accounting Standards
The Financial Accounting Standards Board (FASB) issued two new
accounting standards during 1998: Statement of Financial Accounting
Standards (SFAS) 132, "Employers' Disclosures About Pensions and
Other Postretirement Benefits," and SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities."
SFAS 132 revises employers' disclosures about pension and other
postretirement benefit plans, but it does not change the measurement
or recognition of those plans. See Note 9, "Pension Benefits
and Postretirement Benefits Other Than Pensions," for further
information on CL&P's pension and postretirement benefits
disclosures.
SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. This statement
becomes effective for CL&P on January 1, 2000, and will require
derivative instruments used by CL&P to be recognized on the balance
sheets as assets or liabilities at fair value. CL&P uses derivative
instruments for hedging purposes. The accounting for these hedging
instruments will depend on which hedging classification each
derivative instrument falls under, as defined by SFAS 133, offset
by any changes in the market value of the hedged item. Based on the
derivative instruments which currently are being utilized by CL&P to
hedge some of its fuel price risks, there will be an impact on
earnings upon adoption of SFAS 133 which management cannot estimate
at this time. For further information see Note 12, "Fuel-Price Risk-
Management."
During June 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131
determines the standards for reporting and disclosing qualitative and
quantitative information about a company's operating segments. More
specifically, it requires financial information to be disclosed for
segments whose operating results are received by the chief operating
officer for decisions on resource allocation. It also requires
related disclosures about products and services, geographic areas and
major customers. CL&P currently evaluates management performance
using a cost-based budget and the information required by SFAS 131 is
not available.
As a result of the changes the NU system and the industry are
undergoing, the company will implement business segment reporting in
1999. This reporting will provide management with revenue and
expense information at the business segment level. Management has
identified significant segments to include transmission,
distribution, generation-related and energy marketing.
D. Investments and Jointly Owned Electric Utility Plant
Regional Nuclear Generating Companies: CL&P owns common stock of
four regional nuclear generating companies (Yankee companies) which
are accounted for on the equity basis due to CL&P's ability to
exercise significant influence over their operating and financial
policies. CL&P's equity investments and ownership interests in the
Yankee companies at December 31, 1998 are:
(Thousands of Dollars, Except for Percentages)
Connecticut Yankee Atomic
Power Company (CYAPC)............. $36,254 34.5%
Yankee Atomic Electric
Company (YAEC).................... 4,882 24.5
Maine Yankee Atomic Power
Company (MYAPC)................... 10,400 12.0
Vermont Yankee Nuclear
Power Corporation (VYNPC)......... 5,463 9.5
Total Equity Investment............. $56,999
Each Yankee company owns a single nuclear generating unit. YAEC's,
CYAPC's and MYAPC's nuclear power plants were shut down permanently
on February 26, 1992, December 4, 1996, and August 6, 1997,
respectively. For additional information on the Yankee companies,
see Note 3, "Nuclear Decommissioning and Plant Closure Costs."
Millstone: CL&P has an 81 percent joint ownership in both
Millstone 1, a 660-megawatt (MW) nuclear generating unit and
Millstone 2, a 870-MW nuclear generating unit. CL&P has a 52.93
percent joint-ownership interest in Millstone 3, a 1,154-MW nuclear
generating unit. During the third quarter of 1998, management
decided to retire Millstone 1 and prepare for final decommissioning.
For further information on the Millstone 1 closure, see Note 3,
"Nuclear Decommissioning and Plant Closure Costs," and Management's
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A). For further information on Millstone 2 and 3, see
Note 3, "Nuclear Decommissioning and Plant Closure Costs," Note 11C,
"Commitments and Contingencies - Nuclear Performance," and the MD&A.
Seabrook 1: CL&P has a 4.06 percent joint ownership interest in
Seabrook 1, a 1,148-MW nuclear generating unit.
Plant-in-service and the accumulated provision for depreciation for
CL&P's share of the three Millstone units and Seabrook are as
follows:
At December 31,
(Millions of Dollars) 1998 1997
Plant-in-service
Millstone 1.................................. $ - $ 387.7
Millstone 2.................................. 759.3 694.7
Millstone 3.................................. 1,909.4 1,906.9
Seabrook 1................................... 174.3 174.3
Accumulated provision for depreciation
Millstone 1.................................. $ - $ 172.0
Millstone 2.................................. 309.2 249.1
Millstone 3.................................. 609.3 552.7
Seabrook 1................................... 39.3 33.9
CL&P's share of Millstone and Seabrook 1 expenses are included in
operating expenses on the accompanying Consolidated Statements of
Income.
E. Depreciation
The provision for depreciation is calculated using the straight-line
method based on estimated remaining lives of depreciable utility
plant-in-service, adjusted for salvage value and removal costs, as
approved by the appropriate regulatory agency.
Except for major facilities, depreciation rates are applied to the
average plant-in-service during the period. Major facilities are
depreciated from the time they are placed in service. When plant is
retired from service, the original cost of plant, including costs of
removal, less salvage, is charged to the accumulated provision for
depreciation. The costs of closure and removal of non-nuclear
facilities are accrued over the life of the plant as a component of
depreciation. The depreciation rates for the several classes of
electric plant-in-service are equivalent to a composite rate of 3.2
percent in 1998 and 3.8 percent in 1997 and 4.0 percent in 1996. See
Note 3, "Nuclear Decommissioning and Plant Closure Costs," for
information on nuclear decommissioning.
At December 31, 1998 and 1997, the accumulated provision for
depreciation included approximately $47.9 million and $45.8 million,
respectively, accrued for the cost of removal, net of salvage value
for non-nuclear generation property.
F. Revenues
Other than revenues under fixed-rate agreements negotiated with
certain wholesale, commercial and industrial customers and limited
retail access programs, utility revenues are based on authorized
rates applied to each customer's use of electricity. In general,
rates can be changed only through a formal proceeding before the
appropriate regulatory commission. Regulatory commissions also have
authority over the terms and conditions of nontraditional rate making
arrangements. At the end of each accounting period, CL&P accrues an
estimate for the amount of energy delivered but unbilled.
G. Regulatory Accounting and Assets
The accounting policies of CL&P and the accompanying consolidated
financial statements conform to generally accepted accounting
principles applicable to rate-regulated enterprises and reflect the
effects of the ratemaking process in accordance with SFAS 71,
"Accounting for the Effects of Certain Types of Regulation." Assuming
a cost-of-service based regulatory structure, regulators may permit
incurred costs, normally treated as expenses, to be deferred and
recovered through future revenues. Through their actions, regulators
may also reduce or eliminate the value of an asset, or create a
liability. If CL&P was no longer subject to the provisions of SFAS
71, CL&P would be required to write off all of its related regulatory
assets and liabilities unless there is a formal transition plan which
provides for the recovery, through established rates, for the
collection of these costs through a portion of the business which
would remain regulated on a cost-of-service basis. At the time of
transition, CL&P also would be required to determine any impairment
of the carrying costs of deregulated plant and inventory assets.
A restructuring program is being implemented within CL&P's
jurisdiction, however, management continues to believe the
application of SFAS 71 remains appropriate at this time. Once CL&P's
restructuring plan has been formally approved by the appropriate
regulatory agency and management can determine the impacts of
restructuring, CL&P's generation business will no longer be rate
regulated on a cost-of-service basis. The majority of CL&P's
regulatory assets are related to its respective generation business.
Management expects that CL&P's transmission and distribution business
will continue to be rate-regulated on a cost-of-service basis and
restructuring plans will allow for the recovery of regulatory assets
through this portion of the business.
For further information on CL&P's regulatory environment and the
potential impacts of restructuring, see Note 11A, "Commitments and
Contingencies - Restructuring," and the MD&A.
Based on a current evaluation of the various factors and conditions
that are expected to impact future cost recovery, management
continues to believe it is probable that CL&P will recover its
investments in long-lived assets, including regulatory assets.
The components of CL&P's regulatory assets are as follows:
At December 31, 1998 1997
(Thousands of Dollars)
Income taxes, net (Note 1H)................ $ 538,521 $ 709,896
Recoverable energy costs,
net (Note 1I)............................ 102,124 104,796
Deferred demand-side management
costs.................................... 10,014 52,100
Cogeneration costs......................... 5,779 33,505
Unrecovered contractual
obligations (Note 1J).................... 266,992 338,406
Millstone 1 (Note 1K)...................... 442,669 -
Other...................................... 49,739 54,115
$1,415,838 $1,292,818
H. Income Taxes
The tax effect of temporary differences (differences between the
periods in which transactions affect income in the financial
statements and the periods in which they affect the determination of
taxable income) is accounted for in accordance with the ratemaking
treatment of the applicable regulatory commissions. See Note 8,
"Income Tax Expense" for the components of income tax expense.
The tax effect of temporary differences, including timing differences
accrued under previously approved accounting standards, which give
rise to the accumulated deferred tax obligation is as follows:
At December 31, 1998 1997
(Thousands of Dollars)
Accelerated depreciation and other
plant-related differences................ $1,002,725 $1,056,690
Regulatory assets - income tax
gross up................................. 279,823 304,276
Net operating loss carryforwards........... (7,777) (7,670)
Other...................................... (80,049) (4,679)
$1,194,722 $1,348,617
At December 31, 1998, CL&P had a state of Connecticut net operating
loss carryforward of approximately $149 million which can be used
against CL&P and its affiliates' combined Connecticut taxable income
and which if unused, expires in the year 2002.
I. Recoverable Energy Costs
Under the Energy Policy Act of 1992 (Energy Act), CL&P is assessed
for its proportionate share of the costs of decontaminating and
decommissioning uranium enrichment plants owned by the United States
Department of Energy (D&D assessment). The Energy Act requires that
regulators treat D&D assessments as a reasonable and necessary
current cost of fuel, to be fully recovered in rates like any other
fuel cost. CL&P is currently recovering these costs through rates.
As of December 31, 1998, CL&P's total D&D deferrals were approximately
$44.9 million.
CL&P has in place an energy adjustment clause under which fuel prices
above or below base-rate levels are charged or credited to customers.
At December 31, 1998, recoverable energy costs included $78.1 million
of costs previously deferred.
J. Unrecovered Contractual Obligations
Under the terms of contracts with MYAPC, CYAPC and YAEC, the
shareholder-sponsor companies, including CL&P, PSNH and WMECO, are
responsible for their proportionate share of the remaining costs of
the units, including decommissioning. As management expects that the
NU system companies will be allowed to recover these costs from their
customers, the NU system companies have recorded regulatory assets,
with corresponding obligations, on their respective balance sheets.
For further information, see Note 3, "Nuclear Decommissioning and
Plant Closure Costs."
K. Millstone 1
The Millstone 1 regulatory asset includes the recoverable portion of
the undepreciated plant and related balances of approximately $129.5
million, and the regulatory asset associated with the decommissioning
and closure obligation of $313.5 million. See Note 3, "Nuclear
Decommissioning and Plant Closure Costs," for further information.
L. Market Risk-Management Policies
CL&P utilizes swap instruments to hedge well-defined risks associated
with changes in fuel prices. To qualify for hedge treatment, the
underlying hedged item must expose CL&P to risks associated with
market fluctuations and the market-risk management instrument used
must be designated as a hedge and must reduce the company's exposure
to market fluctuations throughout the period.
Amounts receivable or payable under fuel-price management instruments
are recognized in operating expenses when realized. For further
information, see Note 12, "Fuel-Price Risk- Management."
2. LEASES
CL&P finances its nuclear fuel for Millstone 2 and its respective share
of the nuclear fuel for Millstone 3 under the Niantic Bay Fuel Trust
(NBFT) capital lease agreement. This lease agreement has an expiration
date of June 1, 2040. On June 5, 1998, the NBFT issued $180 million
Series G intermediate term notes (ITNs) through a private placement
offering. The five-year notes mature June 5, 2003 and will bear
interest at a rate of 8.59 percent per annum, payable semiannually.
At December 31, 1998, CL&P's capital lease obligation to the NBFT was
approximately $144.8 million.
The permanent shutdown of Millstone 1 in July 1998 afforded the NBFT ITN
holders the right to seek repurchase of a pro rata share of their notes
based upon the stipulated loss value of Millstone 1 fuel compared to the
stipulated loss value of all fuel then under the NBFT, approximately
$80 million. The shutdown also obligates CL&P to pay such amount to
the NBFT under the NBFT lease whether or not any ITN holders request
repurchase. CL&P is seeking consents from the ITN holders to amend this
lease provision so that they will not be obligated to make this payment,
but instead will issue an additional $80 million of collateral first
mortgage bonds in mid-1999.
CL&P makes quarterly lease payments for the cost of nuclear fuel
consumed in the reactors based on a units-of-production method at rates
which reflect estimated kilowatt-hours of energy provided plus financing
costs associated with the fuel in the reactors. Upon permanent
discharge from the reactors, ownership of the nuclear fuel transfers to
CL&P. CL&P also has entered into lease agreements, some of which are
capital leases, for the use of data processing and office equipment,
vehicles, gas turbines, nuclear control room simulators and office
space. The provisions of these lease agreements generally provide for
renewal options.
The following rental payments have been charged to expense:
Year Capital Leases Operating Leases
1998................ $20,494,000 $17,914,000
1997................ 10,457,000 19,749,000
1996................ 17,993,000 22,032,000
Interest included in capital lease rental payments was $14,083,000 in
1998, $9,948,000 in 1997 and $10,144,000 in 1996.
Future minimum rental payments, excluding executory costs such as
property taxes, state use taxes, insurance and maintenance, under long-
term noncancelable leases as of December 31, 1998, are:
Year Capital Leases Operating Leases
(Thousands of Dollars)
1999................ $ 2,900 $22,700
2000................ 2,900 21,200
2001................ 2,900 15,600
2002................ 3,000 6,700
2003................ 3,000 4,200
After 2003.......... 46,200 11,500
Future minimum lease
payments.......... 60,900 $80,900
Less amount
representing
interest.......... 42,859
Present value of
future minimum
lease payments.... 18,041
Present value of
future nuclear
fuel lease
payments.......... 144,843
Present value of
future minimum
lease payments.... $162,884
3. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS
Millstone 2 and 3 and Seabrook 1: CL&P's operating nuclear power
plants have service lives that are expected to end during the years
2015 through 2026. Upon retirement, these units must be decommissioned.
Current decommissioning studies concluded that complete and immediate
dismantlement at retirement continues to be the most viable and economic
method of decommissioning the units. Decommissioning studies are
reviewed and updated periodically to reflect changes in decommissioning
requirements, costs, technology and inflation.
The estimated cost of decommissioning CL&P's ownership share of
Millstone 2, in year-end 1998 dollars, is $322.0 million. CL&P's
ownership share of the estimated cost of decommissioning Millstone 3
and Seabrook 1 in year-end 1998 dollars, is $296.2 million and $19.9
million, respectively. Millstone 2 and 3 and Seabrook 1 decommissioning
costs will be increased annually by their respective escalation rates.
Nuclear decommissioning costs are accrued over the expected service
lives of the units and are included in depreciation expense on the
Consolidated Statements of Income. Nuclear decommissioning costs for
these units amounted to $19.1 million in 1998 and $20.0 million each
year in 1997 and 1996. Nuclear decommissioning, as a cost of removal,
is included in the accumulated provision for depreciation on the
Consolidated Balance Sheets. At December 31, 1998 and 1997, the
decommissioning balance in the accumulated reserve for depreciation
amounted to $165.6 million and $146.5 million, respectively.
CL&P has established external decommissioning trusts for its portion of
the costs of decommissioning Millstone 2 and 3. Payments for CL&P's
portion of the cost of decommissioning Seabrook 1 are paid to an
independent decommissioning financing fund managed by the state of New
Hampshire. Funding of the estimated decommissioning costs assumes
levelized collections for the Millstone units and escalated collections
for Seabrook 1 and after-tax earnings on the Millstone and Seabrook
decommissioning funds of approximately 5.5 percent and 6.5 percent,
respectively.
As of December 31, 1998, CL&P collected a total of $162.2 million
through rates toward the future decommissioning costs of its share of
Millstone 2 and 3, of which $142.8 million has been transferred to
external decommissioning trusts. As of December 31, 1998, CL&P paid
approximately $3.0 million into Seabrook 1's external decommissioning
financing fund. Earnings on the decommissioning trusts and financing
fund increase the decommissioning trust balance and the accumulated
reserve for depreciation. Unrealized gains and losses associated with
the decommissioning trusts and financing fund also impact the balance of
the trusts and the accumulated reserve for depreciation. The fair value
of the units in the external decommissioning trusts was $242.2 million
at December 31, 1998.
Changes in requirements or technology, the timing of funding or
dismantling or adoption of a decommissioning method other than immediate
dismantlement would change decommissioning cost estimates and the
amounts required to be recovered. CL&P attempts to recover sufficient
amounts through its allowed rates to cover its expected decommissioning
costs. Only the portion of currently estimated total decommissioning
costs that have been accepted by regulatory agencies is reflected in
CL&P's rates. Based on present estimates and assuming its nuclear units
operate to the end of their respective license periods, CL&P expects
that the decommissioning trusts and financing fund will be substantially
funded when the units are retired from service.
Millstone 1: CL&P's share of the total estimated decommissioning costs
for Millstone 1, which have been updated to reflect the early shutdown
of the unit, are approximately $560.5 million as of December 31, 1998.
The company has recorded the decommissioning and closure obligation as
a liability. Nuclear decommissioning costs for Millstone 1 were $17.3
million in 1998, $17.7 million in 1997 and $17.8 million in 1996.
In February 1999, the DPUC issued a decision on CL&P's rate case filing.
The decision allowed for recovery over a three-year period, without a
return, of $126.0 million of CL&P's remaining investment in Millstone 1.
As a result, CL&P recorded an after-tax loss of approximately $80
million, related to the write down of its investment in Millstone 1.
The decision allowed for the recovery of CL&P's decommissioning and
closure obligations. Accordingly, CL&P recorded a regulatory asset for
its portion of the decommissioning and closure obligation. For further
information on the DPUC decision, see Note 1B, "Commitments and
Contingencies - Rate Matters" and the MD&A.
During 1998, CL&P recorded a loss of approximately $27.9 million related
to the termination of approximately a 4.3 percent entitlement contract
of CL&P's share of Millstone 1, formerly held by the Connecticut
Municipal Electric Energy Cooperative.
CL&P uses external trusts to fund the estimated decommissioning costs of
Millstone 1. As of December 31, 1998, CL&P had collected a total of
$151.7 million through rates toward the future decommissioning costs of
its share of Millstone 1, of which $129.8 million has been transferred
to external decommissioning trusts. At December 31, 1998, the fair
market value of the balance in the external trusts was approximately
$210.5 million.
Yankee Companies: VYNPC owns and operates a nuclear generating unit with
a service life that is expected to end in 2012. CL&P's ownership share
of estimated costs, in year-end 1998 dollars, of decommissioning this
unit is $50.4 million.
At December 31, 1998, the remaining estimated obligation, including
decommissioning, for the Yankee companies' nuclear generating facilities
which have been shut down were:
Total CL&P's
(Thousands of Dollars) Obligation Share
Maine Yankee..................... $715,065 $ 85,808
Connecticut Yankee............... $498,557 $172,002
Yankee Atomic.................... $ 81,699 $ 20,016
For further information on the Yankee companies, see Note 11B,
"Commitments and Contingencies - Rate Matters."
For information on proposed changes to the accounting for
decommissioning, see the MD&A.
4. SHORT-TERM DEBT
Limits: The amount of short-term borrowings that may be incurred by CL&P
is subject to periodic approval by either the SEC under the 1935 Act or
by the DPUC. SEC authorization allowed CL&P, as of January 1, 1999, to
incur total short-term borrowings up to a maximum of $375 million. In
addition, the charter of CL&P contains preferred stock provisions
restricting the amount of unsecured debt the company may incur. As of
December 31, 1998, CL&P's charter permits CL&P to incur an additional
$466 million of unsecured debt.
Credit Agreements: NU, CL&P and WMECO are parties to a $313.75 million
revolving credit agreement (Credit Agreement). Under the Credit
Agreement amended on September 11, 1998, CL&P and WMECO are able to
borrow, subject to the availability of first mortgage bond collateral,
up to $313.75 million and $150 million, respectively. At December 31,
1998, CL&P and WMECO have issued first mortgage bonds to enable
borrowings under this facility up to a maximum of $225 million and $80
million, respectively. NU, which cannot issue first mortgage bonds,
would be able to borrow up to $50 million if NU consolidated, CL&P and
WMECO each meet certain interest coverage tests for two consecutive
quarters. This requirement for NU has not been met. In addition, CL&P
and WMECO each must meet certain minimum quarterly financial ratios to
access the Credit Agreement. CL&P is currently in the process of
obtaining a waiver of the equity financial ratio requirement for the
quarter ended December 31, 1998. WMECO satisfied these ratios for the
quarter ending December 31, 1998. In connection with obtaining the
waiver for the equity test, NU's participation in the Credit Agreement
will be terminated. The overall limit for all of the borrowing system
companies under the entire Credit Agreement is $313.75 million. The
companies are obligated to pay a facility fee of .50 percent per annum
of each bank's total commitment under the Credit Agreement, which will
expire in November 1999. At December 31, 1998 and 1997, there were $30
million and $50 million, respectively, in borrowings under this Credit
Agreement. Of these amounts, CL&P had $10 million borrowed in 1998 and
$35 million borrowed in 1997.
Under the credit facility discussed above, CL&P may borrow funds on a
short-term revolving basis under its agreement, using either fixed-rate
loans or standby loans. Fixed rates are set using competitive bidding.
Standby loans are based upon several alternative variable rates. The
weighted average annual interest rate on CL&P's notes payable to banks
outstanding on December 31, 1998 and 1997, was 6.53 percent and 6.95
percent, respectively.
Money Pool: Certain subsidiaries of NU, including CL&P, are members of
the Northeast Utilities System Money Pool (Pool). The Pool provides a
more efficient use of the cash resources of the NU system, and reduces
outside short-term borrowings. NUSCO administers the Pool as agent for
the member companies. Short-term borrowing needs of the member
companies are first met with available funds of other member companies,
including funds borrowed by NU parent. NU parent may lend to the Pool
but may not borrow. Funds may be withdrawn from or repaid to the Pool
at any time without prior notice. Investing and borrowing subsidiaries
receive or pay interest based on the average daily Federal Funds rate.
Borrowings based on loans from NU parent, however, bear interest at NU
parent's cost and must be repaid based upon the terms of NU parent's
original borrowing. At December 31, 1998 and 1997, CL&P had no
borrowings and $61.3 million, respectively, of borrowings outstanding
from the Pool. The interest rate on borrowings from the Pool on
December 31, 1998 and 1997 was 5.8 percent, respectively. Maturities of
short-term debt obligations were for periods of three months or less.
For further information on short-term debt, including the ability to
access these agreements, see the MD&A.
5. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock not subject to mandatory redemption are:
December 31, Shares
1998 Outstanding
Redemption December 31, December 31,
Description Price 1998 1998 1997 1996
(Thousands of Dollars)
$1.90 Series of 1947 $52.50 163,912 $ 8,196 $ 8,196 $ 8,196
$2.00 Series of 1947 54.00 336,088 16,804 16,804 16,804
$2.04 Series of 1949 52.00 100,000 5,000 5,000 5,000
$2.06 Series E of 1954 51.00 200,000 10,000 10,000 10,000
$2.09 Series F of 1955 51.00 100,000 5,000 5,000 5,000
$2.20 Series of 1949 52.50 200,000 10,000 10,000 10,000
$3.24 Series G of 1968 51.84 300,000 15,000 15,000 15,000
3.90% Series of 1949 50.50 160,000 8,000 8,000 8,000
4.50% Series of 1956 50.75 104,000 5,200 5,200 5,200
4.50% Series of 1963 50.50 160,000 8,000 8,000 8,000
4.96% Series of 1958 50.50 100,000 5,000 5,000 5,000
5.28% Series of 1967 51.43 200,000 10,000 10,000 10,000
6.56% Series of 1968 51.44 200,000 10,000 10,000 10,000
Total $116,200 $116,200 $116,200
All or any part of each outstanding series of such preferred stock may
be redeemed by CL&P at any time at established redemption prices plus
accrued dividends to the date of redemption.
6. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
December 31, Shares
1998 Outstanding
Redemption December 31, December 31,
Description Price* 1998 1998 1997 1996
(Thousands of Dollars)
7.23% Series of 1992 $52.17 1,056,434 $ 52,822 $ 75,000 $ 75,000
5.30% Series of 1993 51.00 1,329,340 66,467 80,000 80,000
119,289 155,000 155,000
Less preferred stock
to be redeemed
within one year...... 395,000 19,750 3,750 -
Total.................. $ 99,539 $151,250 $155,000
*Each of these series is subject to certain refunding limitations
for the first five years after they were issued. Redemption prices
reduce in future years.
The following table details redemption and sinking fund activity for
preferred stock subject to mandatory redemption:
Minimum
Annual
Sinking-Fund Shares Reacquired
Series Requirement 1998 1997 1996
(Thousand of Dollars)
7.23% Series of 1992 (1) $ 3,750 443,566 - -
5.30% Series of 1993 (2) 16,000 270,660 - -
(1) Sinking fund requirements commence September 1, 1998.
(2) Sinking fund requirements commence October 1, 1999.
The minimum sinking-fund provisions of the series subject to mandatory
redemption, for the years 1999 through 2003, aggregate approximately
$19.8 million each year for 1999 through 2002 and $6.2 million for
2003. In case of default on sinking-fund payments, no payments may
be made on any junior stock by way of dividends or otherwise (other
than in shares of junior stock) so long as the default continues.
If CL&P is in arrears in the payment of dividends on any outstanding
shares of preferred stock, CL&P would be prohibited from redeeming
or purchasing less than all of the preferred stock outstanding. All
or part of each of the series named above may be redeemed by CL&P at
any time at established redemption prices plus accrued dividends to
the date of redemption, subject to certain refunding limitations.
7. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
1998 1997
(Thousands of Dollars)
First mortgage bonds:
6 1/2% Series T due 1998.......... $ - $ 20,000
7 1/4% Series VV due 1999.......... 74,000 99,000
5 1/2% Series A due 1999.......... 140,000 140,000
5 3/4% Series XX due 2000.......... 200,000 200,000
7 7/8% Series A due 2001.......... 160,000 160,000
7 3/4% Series C due 2002.......... 200,000 200,000
6 1/8% Series B due 2004.......... 140,000 140,000
7 3/8% Series TT due 2019.......... 20,000 20,000
7 1/2% Series YY due 2023.......... 100,000 100,000
8 1/2% Series C due 2024.......... 115,000 115,000
7 7/8% Series D due 2024.......... 140,000 140,000
7 3/8% Series ZZ due 2025.......... 125,000 125,000
Total 1,414,000 1,459,000
Pollution Control Notes:
Variable rate, due 2016-2022......... 46,400 46,400
Variable tax exempt, due 2028-2031... 377,500 377,500
Fees and interest due for spent
fuel disposal costs (Note 11E)....... 175,022 166,458
Other.................................. 81 86
Less amounts due within one year....... 214,005 20,011
Unamortized premium and discount, net.. (5,045) (6,117)
Long-term debt, net.................. $1,793,953 $2,023,316
Long-term debt and cash sinking-fund requirements on debt outstanding
at December 31, 1998, for the years 1999 through 2002 are approximately
$214.0 million, $200.0 million, $160.0 million, $200.0 million,
respectively, and no requirements for 2003.
All or any part of each outstanding series of first mortgage bonds may
be redeemed by CL&P at any time at established redemption prices plus
accrued interest to the date of redemption, except certain series which
are subject to certain refunding limitations during their respective
initial five-year redemption periods.
Essentially all of CL&P's utility plant is subject to the lien of its
first mortgage bond indenture. As of December 31, 1998 and 1997, CL&P
has secured $369.3 million and $315.5 million, respectively, of
pollution control notes with second mortgage liens on Millstone 1,
junior to the lien of its first mortgage bond indenture. The average
effective interest rate on the variable-rate pollution control notes
ranged from 3.6 percent to 3.7 percent for 1998 and from 3.6 percent to
3.7 percent for 1997.
CL&P has $62 million of tax-exempt Pollution Control Revenue Bonds with
a bond insurance secured by first mortgage bonds and a liquid facility.
8. INCOME TAX EXPENSE
The components of the federal and state income tax provisions
were(credited)/ charged as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Current income taxes:
Federal....................... $ (9,217) $(53,339) $ 30,650
State......................... (3,863) (3,270) 9,789
Total current............... $(13,080) $(56,609) $ 40,439
Deferred income taxes, net:
Federal....................... (34,880) 8,436 (22,866)
State......................... (17,553) (11,470) (9,409)
Total deferred.............. (52,433) (3,034) (32,275)
Investment tax credits, net..... (13,256) (7,366) (7,367)
Total income tax
(credit)/expense............ $(78,769) $(67,009) $ 797
The components of total income tax expense are classified as
follows:
Income taxes charged to
operating expenses............ $(11,642) $(59,436) $ 957
Other income taxes.............. (67,127) (7,573) (160)
Total income tax
(credit)/expense............ $(78,769) $(67,009) $ 797
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Depreciation, leased nuclear fuel,
settlement credits and
disposal costs................ $ (5,572) $ 11,991 $ 3,981
Energy adjustment clauses....... (24,932) (14,039) (1,654)
Demand-side management.......... (12,474) (12,408) (17,099)
Nuclear plant deferrals......... 674 14,007 (18,861)
Bond redemptions................ 152 (1,339) (1,789)
Contractual settlements......... 1,252 1,754 2,513
Pension accruals................ 8,872 6,524 2,944
State net operating loss
carryforwards................. 1,150 (7,670) -
Millstone revenue out of
rate base..................... (18,080) - -
Other........................... (3,475) (1,854) (2,310)
Deferred income taxes, net...... $(52,433) $ (3,034) $(32,275)
A reconciliation between income tax expense and the expected tax expense
at the applicable statutory rate is as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Expected federal income tax at
35 percent of pretax income... $(96,073) $(72,312) $(18,257)
Tax effect of differences:
State income taxes, net of
federal benefit............. (7,358) (8,966) 248
Depreciation.................. 25,368 18,944 20,470
Amortization of
regulatory assets........... 22,725 3,901 8,601
Investment tax credit
amortization and write off.. (13,256) (7,366) (7,367)
Adjustment for prior years'
taxes....................... (10,991) (10) -
Nondeductible penalties....... 2,551 (82) 717
Other, net.................... (1,735) (1,118) (3,615)
Total income tax
(credits)/expense......... $(78,769) $(67,009) $ 797
9. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The NU system subsidiaries participate in a uniform noncontributory
defined benefit retirement plan covering all regular NU system
employees. Benefits are based on years of service and the employees'
highest eligible compensation during 60 consecutive months of
employment. CL&P's direct portion of the NU system's pension
cost/(credit), part of which was credited to utility plant, approximated
$32.6 million in 1998, ($22.5) million in 1997 and ($8.8) million in
1996.
Currently, CL&P annually funds an amount at least equal to that which
will satisfy the requirements of the Employee Retirement Income Security
Act and the Internal Revenue Code. Pension costs are determined using
market-related values of pension assets.
The NU system's subsidiaries also provide certain health care benefits,
primarily medical and dental, and life insurance benefits through a
benefit plan to retired employees. These benefits are available for
employees retiring from the company who have met specified service
requirements. For current employees and certain retirees, the total
benefit is limited to two times the 1993 per-retiree health care cost.
These costs are charged to expense over the future estimated work life
of the employee. CL&P is funding postretirement costs through external
trusts. CL&P is funding, on an annual basis, amounts that have been
rate-recovered and which also are tax deductible under the Internal
Revenue Code.
Pension and trust assets are invested primarily in domestic and
international equity securities and bonds.
The following table represents the plans' beginning benefit obligation
balance reconciled to the ending benefit obligation balance, beginning
fair value of plan assets balance reconciled to the ending fair value of
plan assets balance and the respective funds' funded status reconciled
to the Consolidated Balance Sheets:
The components of net cost are:
At December 31,
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
(Thousands of Dollars)
Change in benefit
obligation
Benefit obligation at
beginning of year...........$(531,564) $(514,989) $(126,576) $(137,377)
Service cost................. (9,782) (8,836) (2,006) (1,692)
Interest Cost................ (37,452) (37,938) (9,221) (9,152)
Transfers.................... (6,324) 2,625 - -
Actuarial (loss)/gain........ (12,451) (9,666) (7,703) 8,475
Benefits paid................ 34,900 36,291 11,705 13,170
Curtailments and Settlements. - 949 - -
Benefit obligation at
end of year................$(562,673) $(531,564) $(133,801) $(126,576)
Change in plan assets
Fair value of plan assets at
beginning of year..........$ 846,366 $ 736,448 $ 46,055 $ 38,783
Actual return on plan assets 117,889 148,834 6,143 7,639
Employer contribution........ - - 13,299 12,803
Benefits paid................ (34,900) (36,291) (11,705) (13,170)
Transfers.................... 6,324 (2,625) - -
Fair value of plan assets
at end of year.............$ 935,679 $ 846,366 $ 53,792 $ 46,055
Funded status at
December 31................ 373,006 314,802 (80,009) $ (80,521)
Unrecognized transition
amount..................... (5,525) (6,445) 102,818 110,162
Unrecognized prior service
cost....................... 3,231 3,524 - -
Unrecognized net gain........ (295,763) (269,560) (22,809) (29,641)
Prepaid benefit cost.........$ 74,949 $ 42,321 $ - $ -
The following actuarial assumptions were used in calculating the plans'
year-end funded status:
At December 31,
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
Discount rate.............. 7.00% 7.25% 7.00% 7.25%
Compensation/
progression rate......... 4.25% 4.25% 4.25% 4.25%
Health care cost
trend rate (a)........... N/A N/A 5.22% 5.76%
(a) The annual growth in per capita cost of covered health care
benefits was assumed to decrease to 4.40 percent by 2001.
The components of net periodic benefit cost are:
For the Years Ended December 31,
Pension Benefits Postretirement Benefits
1998 1997 1996 1998 1997 1996
(Thousands of Dollars)
Service cost.............. $ 9,782 $ 8,836 $ 9,058 $ 2,006 $ 1,692 $ 2,270
Interest cost............. 37,452 37,938 37,227 9,221 9,152 10,211
Expected return
on plan assets.......... (68,364) (59,608) (52,258) (3,555) (3,132) (981)
Amortization of
unrecognized
transition
obligation/(asset)...... (921) (921) (921) 7,344 7,344 7,344
Amortization of prior
service costs........... 292 292 292 - - -
Amortization of
actuarial (gain)/loss... (10,873) (8,085) (5,062) - - -
Other amortization,
net..................... - - - (1,717) (2,253) (967)
Curtailments and
settlements............. - (949) 2,838 - - -
Net periodic benefit
cost/(credit)........... $32,632 $(22,497) $(8,826) $13,299 $12,803 $17,877
For calculating pension and postretirement benefit costs, the following
assumptions were used:
For the Years Ended December 31,
Postretirement
Pension Benefits Benefits
1998 1997 1996 1998 1997 1996
Discount rate............. 7.25% 7.75% 7.50% 7.25% 7.75% 7.50%
Expected long-term
rate of return.......... 9.50% 9.25% 8.75% N/A N/A N/A
Compensation/
progression rate........ 4.25% 4.75% 4.75% 4.25% 4.75% 4.75%
Long-term rate
of return-
Health assets,
net of tax............ N/A N/A N/A 7.75% 7.50% 5.25%
Life assets............. N/A N/A N/A 9.50% 9.25% 8.75%
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of changing the
assumed health care cost trend rate by one percentage point in each year
would have the following effects:
One Percentage One Percentage
(Thousands of Dollars) Point Increase Point Decrease
Effect on total service
and interest cost
components............... $ 553 $ (560)
Effect on post-
retirement benefit
obligation............... 7,358 (7,275)
The trust holding the health plan assets is subject to federal income
taxes at a 39.6 percent tax rate.
10. SALE OF CUSTOMER RECEIVABLES AND ACCRUED UTILITY REVENUES
CL&P has entered into an agreement to sell up to $200 million of
undivided ownership interests in eligible customer receivables and
accrued utility revenues (receivables).
CL&P has established a special purpose, wholly owned subsidiary whose
business consists of the purchase and resale of receivables, CL&P
Receivables Corporation (CRC). For receivables sold, CL&P has retained
collection responsibilities as agent for the purchaser under the
company's agreement. As collections reduce previously sold receivables,
new receivables may be sold. At December 31, 1998, approximately $105
million of receivables had been sold to third-party purchasers by CL&P.
All receivables sold to CRC are not available to pay CL&P's creditors.
The receivables are sold to a third-party purchaser with limited
recourse. The sales agreements provide for a formula-based loss reserve
in which additional receivables may be assigned to the third-party
purchaser for costs such as bad debt. The third-party purchaser absorbs
the excess amount in the event that actual loss experience exceeds the
loss reserve. At December 31, 1998, approximately $11.6 million was the
formula-based amount of credit exposure and has been reserved as
collateral by CRC. Historical losses for bad debt for CL&P has been
substantially less.
Concentrations of credit risk to the purchaser under CL&P's agreement
with respect to the receivables are limited due to CL&P's diverse
customer base within its service territory.
11. COMMITMENTS AND CONTINGENCIES
A. Restructuring
During April 1998, the utility restructuring bill was signed into
law by the governor of the state of Connecticut. The legislation
provides for electric utilities, including CL&P, to recover
stranded costs. The legislation also allows for securitization of
generation-related regulatory assets and the costs associated with
renegotiated above-market purchased-power contracts and requires
divestiture of generation-related assets through public auction.
As a result of the restructuring legislation, CL&P will sell non-
nuclear generating assets and purchased-power contracts with
nonutility generators through public auction. CL&P also will
transfer its ownership interests in Millstone 2 and 3 and Seabrook
to a corporate affiliate or division, subject to prior federal
regulatory approvals, which would assume CL&P's responsibilities
related to the plants for the period prior to offering them for the
sale. In February 1999, the DPUC announced the offering for sale
of CL&P's fossil fueled and hydroelectric generating facilities.
Interested parties will be required to submit nonbinding bids by
April 8, 1999. A smaller field of qualified bidders will be
selected to participate in the second round of the auction and will
be invited to submit binding bids. A winning bidder will be chosen
by mid-1999 and the sale will be completed by the end of 1999. At
December 31, 1998, the book value of assets to be auctioned during
1999 was approximately $170 million.
After restructuring is complete, CL&P will be an electric
transmission and distribution company which will continue to
provide transmission and distribution services on a cost-of-service
basis.
Management continues to believe that it is probable that CL&P will
fully recover its prudently incurred costs, including regulatory
assets and stranded investments.
B. Rate Matters
On February 25, 1998, the DPUC issued its decision in CL&P's
Interim Rate case. During the period from March 1, 1998 through
September 28, 1998, rates were charged under an interim rate which
required a $30.5 million annual credit to customer bills to reflect
the removal of Millstone 1 from rates.
During April 1998, the DPUC issued a decision finding Millstone 2
unlikely to restart in 1998 and ordered its removal from rate base
effective May 1, 1998. The DPUC allowed the revenue requirement
reductions related to this decision to be potentially applied
against regulatory asset balances. As a result, there was no
change in rates or CL&P's cash flow from rates. CL&P has accounted
for these reductions as a reserve against revenues until such time
when the regulatory asset balances are reduced. At December 31,
1998, the amount of revenue reductions related to this decision
totaled approximately $36.4 million. The unit will remain out of
rate base until the plant is restarted.
On June 1, 1998, CL&P filed its rate application for a
comprehensive rate proceeding. On February 5, 1999, the DPUC
issued its final decision in CL&P's rate case. The DPUC concluded
that CL&P's annual revenue requirements should be reduced by
approximately $232 million, or 9.68 percent, through a combination
of a 4 percent reduction to CL&P's rates and accelerated
amortization of approximately $136 million of its deferred tax
regulatory asset. The decision is retroactive to September 28,
1998. The retroactive portion of the decision did not require a
base-rate decrease. It resulted in accelerated amortization of the
deferred tax regulatory asset in the amount of $27.6 million. The
decision also resulted in an after-tax write-off of approximately
$80 million related to CL&P's investment in Millstone 1. For
further information, see Note 3, "Nuclear Decommissioning and
Plant Closure Costs," and the MD&A.
FERC: 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. During January
1998, the FERC accepted the amendments and proposed rates, subject
to a refund. On January 18, 1999, MYAPC filed with the FERC
Administrative Law Judge (ALJ) an Offer of Settlement which if
accepted by the FERC, will resolve all the issues in the FERC
decommissioning rate case proceeding. The settlement provides,
among other things, the following: (1) MYAPC will collect $33.6
million annually to pay for decommissioning and spent fuel; (2) its
return on equity will be set at 6.5 percent; (3) MYAPC is permitted
full recovery of all unamortized investment in MY, including fuel,
and (4) an incentive budget for decommissioning is set at $436.3
million.
During late December 1996, CYAPC filed an amendment to its power
contracts clarifying the obligations of its purchasing utilities
following the decision to cease power production. On February 27,
1997, the FERC accepted CYAPC's contract amendment. The new rates
became effective March 1, 1997, subject to a refund.
On August 31, 1998, the FERC ALJ released an initial decision
regarding the December 1996 filing. The decision contained
provisions which would allow for the recovery, through rates, of
the balance of the NU system companies' net unamortized investment
in CYAPC, which was approximately $51.7 million as of December 31,
1998. The decision also called for the disallowance of the recovery
of a portion of the return on the CY investment. The ALJ's
decision also stated that decommissioning collections should
continue to be based on the previously approved estimate of $309.1
million (in 1992 dollars), with an inflation adjustment of 3.8
percent per year, until a new, more reliable estimate has been
prepared and tested.
During October 1998, CYAPC, CL&P, PSNH and WMECO filed briefs on
exceptions to the ALJ decision. If the initial ALJ decision is
upheld, CYAPC could be required to write off a portion of the
regulatory asset associated with the plant closing.
If upheld, CYAPC's management has estimated the effect of the ALJ
decision on CYAPC's earnings would be approximately $37.5 million,
of which CL&P's share would be approximately $6.4 million. NU
management cannot predict the ultimate outcome of the hearing at
this time, however, management believes that the associated
regulatory assets are probable of recovery.
C. Nuclear Performance
Millstone: The three Millstone units are managed by NNECO. All
three units were placed on the NRC watch list on January 29, 1996.
The units cannot be restarted without appropriate NRC approvals.
Millstone 3 has received these approvals and resumed operation in
July 1998. Restart efforts continue for Millstone 2 and it is
expected to be ready to restart in the spring of 1999. The
estimated replacement power costs are approximately $7 million per
month while Millstone 2 remains out of service. In July 1998,
CL&P and WMECO decided to retire Millstone 1 and prepare for final
decommissioning.
Litigation: Certain of the non-NU joint owners of Millstone 3
have filed demands for arbitration with CL&P and WMECO as well
as lawsuits in Massachusetts Superior Court against NU and its
current and former trustees related to the company's operation of
Millstone 3. The arbitrations and lawsuits seek to recover
compensatory damages in excess of $200 million, together with
punitive damages, treble damages and attorney's fees. Management
cannot estimate the potential outcome of these suits but believes
there is no legal basis for the claims and intends to defend
against them vigorously.
D. Environmental Matters
The NU system is subject to regulation by federal, state and local
authorities with respect to air and water quality, the handling and
disposal of toxic substances and hazardous and solid wastes, and
the handling and use of chemical products. The NU system has an
active environmental auditing and training program and believes
that it is in substantial compliance with current environmental
laws and regulations. However, the NU system is subject to certain
pending enforcement actions and governmental investigations in the
environmental area. Management cannot predict the outcome of these
enforcement actions and investigations.
Environmental requirements could hinder the construction of new
generating units, transmission and distribution lines, substations
and other facilities. Changing environmental requirements could
also require extensive and costly modifications to CL&P's existing
generating units and transmission and distribution systems, and
could raise operating costs significantly. As a result, CL&P may
incur significant additional environmental costs, greater than
amounts included in cost of removal and other reserves, in
connection with the generation and transmission of electricity and
the storage, transportation and disposal of byproducts and wastes.
CL&P also may encounter significantly increased costs to remedy
the environmental effects of prior waste handling activities. The
cumulative long-term cost impact of increasingly stringent
environmental requirements cannot be estimated accurately.
CL&P has recorded a liability based upon currently available
information for the estimated environmental remediation costs
that it expects to incur. In most cases, additional future
environmental cleanup costs are not reasonably estimable due to
a number of factors, including the unknown magnitude of possible
contamination, the appropriate remediation methods, the possible
effects of future legislation or regulation and the possible
effects of technological changes. At December 31, 1998, the
liability recorded by CL&P for its estimated environmental
remediation costs, not considering any possible recoveries from
third parties, amounted to approximately $8.0 million, within a
range of $8.0 million to $19.3 million.
CL&P has received proceeds from several insurance carriers for
the settlement with certain insurance companies of all past,
present and future environmental matters. As a result of these
settlements, CL&P will retain the risk loss, in part, for some
environmental remediation costs.
CL&P cannot estimate the potential liability for future claims,
including environmental remediation costs, that may be brought
against it. However, considering known facts, existing laws and
regulatory practices, management does not believe the matters
disclosed above will have a material effect on the NU system's
financial position or future results of operations.
E. Spent Nuclear Fuel Disposal Costs
Under the Nuclear Waste Policy Act of 1982, CL&P must pay the
United States Department of Energy (DOE) for the disposal of
spent nuclear fuel and high-level radioactive waste. The DOE is
responsible for the selection and development of repositories for,
and the disposal of, spent nuclear fuel and high-level radioactive
waste. Fees for nuclear fuel burned on or after April 7, 1983, are
billed currently to customers and paid to the DOE on a quarterly
basis. For nuclear fuel used to generate electricity prior to
April 7, 1983 (prior period fuel), payment must be made prior to
the first delivery of spent fuel to the DOE. Until such payment is
made, the outstanding balance will continue to accrue interest at
the three-month Treasury Bill Yield Rate. At December 31, 1998,
fees due to the DOE for the disposal of prior period fuel were
approximately $175.0 million, including interest costs of $108.5
million.
The DOE was originally scheduled to begin accepting delivery of
spent fuel in 1998. However, delays in identifying a permanent
storage site have continually postponed plans for the DOE's long-
term storage and disposal site. Extended delays or a default by
the DOE could lead to consideration of costly alternatives. The
company has primary responsibility for the interim storage of
its spent nuclear fuel. Adequate storage capacity exists to
accommodate all spent nuclear fuel at Millstone 1. With the
addition of new storage racks, storage facilities for Millstone 3
are expected to be adequate for the projected life of the unit.
With the implementation of currently planned modifications, the
storage facilities for Millstone 2 are expected to be adequate to
accommodate a full-core discharge from the reactor until 2005.
Fuel consolidation, which has been licensed for Millstone 2, could
provide adequate storage capability for its projected life.
Seabrook is expected to have spent fuel storage capacity until at
least 2010. Meeting spent fuel storage requirements beyond these
periods could require new and separate storage facilities, the
costs for which have not been determined.
In November 1997, the U.S. Court of Appeals for the D.C. Circuit
ruled that the lack of an interim storage facility does not excuse
the DOE from meeting its contractual obligation to begin accepting
spent nuclear fuel no later than January 31, 1998. The 1997
ruling by the appeals court said, however, that the 1982 federal
law could not require the DOE to accept waste when it did not have
a suitable storage facility. The court directed the plaintiffs to
pursue relief under the terms of their contracts with the DOE.
Based on this ruling, since the DOE did not take the spent nuclear
fuel as scheduled, it may have to pay contract damages.
In May 1998, the same court denied petitions from 60 states and
state agencies, collectively, and 41 utilities, including the
company, asking the court to compel the DOE to submit a program,
beginning immediately, for disposing of spent nuclear fuel. The
petitions were filed after the DOE defaulted on its January 31,
1998 obligation to begin accepting the fuel. The court directed
the company and other plaintiffs to pursue relief under the terms
of their contracts with the DOE.
In a petition filed in August 1998, the court's May 1998 decision
was appealed to the U.S. Supreme Court. In November 1998, the
Supreme Court declined to review the lower court ruling that said
utilities should go to court and seek monetary damages from the
DOE. The ultimate outcome of this legal proceeding is uncertain at
this time.
F. Nuclear Insurance Contingencies
Under certain circumstances, in the event of a nuclear incident at
one of the nuclear facilities in the country covered by the federal
government's third-party liability indemnification program, an
owner of a nuclear unit could be assessed in proportion to its
ownership interest in each of its nuclear units up to $83.9
million. Payments of this assessment would be limited to $10.0
million in any one year per nuclear incident based upon the owner's
pro rata ownership interest in each of its nuclear units. In
addition, the owner would be subject to an additional 5 percent or
$4.2 million, in proportion to its ownership interests in each of
its nuclear units, if the sum of all claims and costs from any
one nuclear incident exceeds the maximum amount of financial
protection. Based upon its ownership interests in Millstone 1, 2
and 3 and in Seabrook 1, CL&P's maximum liability, including any
additional assessments, would be $192.9 million per incident, of
which payments would be limited to $21.9 million per year. In
addition, through power purchase contracts with VYNPC and CYAPC,
CL&P would be responsible for up to an additional $8.4 million per
incident, of which payments would be limited to $1.0 million per
year.
Insurance has been purchased to cover the primary cost of repair,
replacement or decontamination of utility property resulting from
insured occurrences. CL&P is subject to retroactive assessments if
losses exceed the accumulated funds available to the insurer. The
maximum potential assessment against CL&P with respect to losses
arising during the current policy year is approximately $9.5
million under the primary property insurance program.
Insurance has been purchased to cover certain extra costs incurred
in obtaining replacement power during prolonged accidental outages
and the excess cost of repair, replacement or decontamination or
premature decommissioning of utility property resulting from
insured occurrences. CL&P is subject to retroactive assessments if
losses exceed the accumulated funds available to the insurer. The
maximum potential assessments against CL&P with respect to losses
arising during current policy years are approximately $4.6 million
under the replacement power policies and $10.0 million under the
excess property damage, decontamination and decommissioning
policies. The cost of a nuclear incident could exceed available
insurance proceeds.
Insurance has been purchased aggregating $200 million on an
industry basis for coverage of worker claims.
G. Construction Program
The construction program is subject to periodic review and revision
by management. CL&P currently forecasts construction expenditures
of approximately $1.5 billion for the years 1999-2003, including
$231 million for 1999. In addition, CL&P estimates that nuclear
fuel requirements, including nuclear fuel financed through the
NBFT, will be approximately $158.5 million for the years 1999-2003,
including $25.2 million for 1999. See Note 2, "Leases," for
additional information about the financing of nuclear fuel.
H. Long-Term Contractual Arrangements
Yankee Companies: CL&P, WMECO and PSNH rely on VY for
approximately 1.4 percent of their capacity under long-term
contracts. Under the terms of their agreements, the NU system
companies pay their ownership (or entitlement) shares of costs
which include depreciation, operation and maintenance expenses,
taxes, the estimated cost of decommissioning and a return on
invested capital. These costs are recorded as purchased-power
expense and are recovered through the companies' rates. CL&P's
total cost of purchases under contracts with VYNPC amounted to
$15.9 million in 1998, $14.1 million in 1997 and $14.8 million
in 1996.
Nonutility Generators: CL&P has entered into various arrangements
for the purchase of capacity and energy from nonutility generators
(NUGs). These arrangements have terms from 10 to 30 years,
currently expiring in the years 1999 through 2029, and require
CL&P to purchase energy at specified prices or formula rates. For
the 12-month period ending December 31, 1998, approximately 13 percent
of NU system electricity requirements were met by NUGs. CL&P's
total cost of purchases under these arrangements amounted to $290.7
million in 1998, $283.2 million in 1997 and $279.5 million in 1996.
Hydro-Quebec: Along with other New England utilities, CL&P, PSNH,
WMECO and HWP have entered into agreements to support transmission
and terminal facilities to import electricity from the Hydro-Quebec
system in Canada. CL&P is obligated to pay, over a 30-year period
ending in 2020, its proportionate share of the annual O&M and
capital costs of these facilities.
Estimated Annual Costs: The estimated annual costs of CL&P's
significant long-term contractual arrangements are as follows:
1999 2000 2001 2002 2003
(Millions of Dollars)
VYNPC $ 17.0 $ 15.8 $ 17.2 $ 17.5 $ 16.3
NUGs 290.3 298.7 292.3 296.1 301.6
Hydro-Quebec 18.3 17.6 17.1 16.7 16.2
12. FUEL-PRICE RISK-MANAGEMENT
CL&P uses swap instruments with financial institutions to hedge against
some of the fuel price risk created by long-term negotiated energy
contracts. These agreements minimize exposure associated with rising
fuel prices by managing a portion of CL&P's cost of producing power for
these negotiated energy contracts. As of December 31, 1998, CL&P had
outstanding agreements with a total notional value of approximately
$422.2 million and a negative mark-to-market position of approximately
$44.9 million.
The terms of the agreements require CL&P to post cash collateral with
its counterparties in the event of negative mark-to-market positions and
lowered credit ratings. The amount of the 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. At December 31, 1998, cash collateral
in the amount of $45.7 million was posted under these terms. This
amount has been recorded in Other Investments on the accompanying
Consolidated Balance Sheets.
These agreements have been made with various financial institutions,
each of which is rated "A3" or better by Moody's rating group. CL&P
will be exposed to credit risk on its respective market risk 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.
13. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
CL&P Capital LP (CL&P LP, a subsidiary of CL&P) had previously issued
$100 million of cumulative 9.3 percent Monthly Income Preferred
Securities (MIPS), Series A. CL&P has the sole ownership interest
in CL&P LP, as a general partner, and is the guarantor of the MIPS
securities. Subsequent to the MIPS issuance, CL&P LP loaned the
proceeds of the MIPS issuance, along with CL&P's $3.1 million capital
contribution, back to CL&P in the form of an unsecured debenture.
CL&P consolidates CL&P LP for financial reporting purposes. Upon
consolidation, the unsecured debenture is eliminated and the MIPS
securities are accounted for as minority interests.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each of the following financial instruments:
Supplemental Executive Retirement Plan investments: SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
requires investments in debt and equity securities to be presented at
fair value. As a result of this requirement, the investments having
a cost basis of $5.4 million held for benefit of the Supplemental
Executive Retirement Plan were recorded on the Consolidated Balance
Sheets at their fair market value at December 31, 1998 of $8.7 million.
Nuclear decommissioning trusts: The investments held in the NU system
companies' nuclear decommissioning trusts were adjusted to market by
approximately $110.4 million as of December 31, 1998 and $69.6 million
as of December 31, 1997, with corresponding offsets to the accumulated
provision for depreciation. The amounts adjusted in 1998 and in 1997
represent cumulative net unrealized gains. The cumulative gross
unrealized holding losses were immaterial for both 1998 and 1997.
Preferred stock and long-term debt: The fair value of the NU system's
fixed-rate securities is based upon the quoted market price for those
issues or similar issues. Adjustable rate securities are assumed to have
a fair value equal to their carrying value. The carrying amounts of
CL&P's financial instruments and the estimated fair values are as
follows:
Carrying Fair
At December 31, 1998 Amount Value
(Thousands of Dollars)
Preferred stock not subject
to mandatory redemption.......... $ 116,200 $ 77,217
Preferred stock subject to
mandatory redemption............. 119,289 108,108
Long-term debt -
First mortgage bonds............. 1,414,000 1,421,926
Other long-term debt............. 599,003 601,158
MIPS............................... 100,000 102,000
Carrying Fair
At December 31, 1997 Amount Value
(Thousands of Dollars)
Preferred stock not subject
to mandatory redemption.......... $ 116,200 $ 62,889
Preferred stock subject to
mandatory redemption............. 155,000 135,600
Long-term debt -
First mortgage bonds............. 1,459,000 1,435,772
Other long-term debt............. 590,443 590,443
MIPS............................... 100,000 100,760
The fair values shown above have been reported to meet disclosure
requirements and do not purport to represent the amounts at which those
obligations would be settled.
15. OTHER COMPREHENSIVE INCOME
During 1998, CL&P adopted SFAS 130, "Reporting Comprehensive Income,"
which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed
with the same prominence as other financial statements. During 1997 and
1996, CL&P had no material other comprehensive income items.
The accumulated balance for each other comprehensive income item is as
follows:
Current
December 31, Period December 31,
1997 Change 1998
(Thousands of Dollars)
Unrealized gain on
securities.................. $ - $ 638 $ 638
Minimum pension
liability adjustment........ - (260) (260)
Accumulated other
comprehensive income........ $ - $ 378 $ 378
The changes in the components of other comprehensive income are reported
on the Consolidated Statements of Comprehensive Income net of the
following income tax effects.
1998 1997 1996
(Thousands of Dollars)
Unrealized gain on
securities.................. $(446) $ - $ -
Minimum pension
liability adjustment........ 182 - -
Other comprehensive
income...................... $(264) $ - $ -
To the Board of Directors
of The Connecticut Light and Power Company:
We have audited the accompanying consolidated balance sheets of The
Connecticut Light and Power Company (a Connecticut corporation and a
wholly owned subsidiary of Northeast Utilities) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
income, comprehensive income, common stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The
Connecticut Light and Power Company and subsidiaries as of December 31,
1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 23, 1999
The Connecticut Light and Power Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of Connecticut Light and
Power's (CL&P 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 the company's consolidated financial statements and
footnotes.
FINANCIAL CONDITION
CL&P's financial outlook improved in 1998 despite reductions in retail rates.
The improved outlook is a result of the successful restart of the Millstone 3
nuclear power plant, significant progress toward the restart of Millstone 2
and significant reductions in operating expenses.
CL&P had a net loss of approximately $196 million in 1998, compared to a net
loss of approximately $140 million in 1997. The greater loss in 1998 was the
result of significant write-offs of the company's investment in the retired
Millstone 1 nuclear power plant and the accelerated amortization of
regulatory assets as ordered by Connecticut regulators in a February 1999
retail rate decision.
Operation and maintenance (O&M) costs at Millstone Station declined to $315
million in 1998 from $440 million in 1997. These decreases were driven
primarily by the decision to retire Millstone 1 and the return to service of
Millstone 3. In addition, total fuel and purchased power costs decreased to
$887 million in 1998 as compared to $977 million in 1997, primarily due to
the restart of Millstone 3.
Total revenues fell 3 percent to $2.39 billion in 1998 from $2.47 billion in
1997. The fall in revenues occurred despite a 2.2 percent increase in retail
kilowatt-hour sales for the year. The lower revenues resulted primarily from
the removal of the Millstone units from the company's retail rate base.
Also offsetting the lower O&M were significant increases in certain noncash
expenses. Primarily as a result of Connecticut regulatory decisions,
amortization of regulatory assets totaled $121 million in 1998, up from $62
million in 1997.
CL&P's ability to improve its financial performance in 1999 will depend
primarily on its success in bringing Millstone 2 back on line, and further
reducing its operating costs to help offset continued downward pressure on
retail revenues. CL&P will continue to be negatively impacted by the $232
million reduction in revenue requirements ordered by Connecticut state
regulators in February 1999.
Restructuring
Although CL&P continues to operate under cost-of-service based regulation,
future rates and the recovery of stranded costs are issues that will be
addressed as restructuring legislation is implemented. Stranded costs are
expenditures or commitments that have been made to meet public service
obligations with the expectation that they would be recovered from customers.
However, under certain circumstances these costs might not be recoverable
from customers in a fully competitive electric utility industry (i.e., the
costs may result in above-market energy prices).
CL&P has exposure to stranded costs for its investments in high-cost nuclear
generating plants, state-mandated purchased-power obligations and significant
regulatory assets. As of December 31, 1998, CL&P's net investment in nuclear
generating plants was approximately $1.9 billion and its regulatory assets
were approximately $1.4 billion. CL&P's financial strength will be
negatively affected if it is unable to recover past investments and
commitments.
In April 1998, Connecticut enacted comprehensive electric utility
restructuring legislation. The act provides for rates to be capped at
December 31, 1996, levels until December 31, 1999. Retail choice will be
phased in over six months beginning January 1, 2000, and will extend to all
retail customers by July 2000. Customers not choosing an alternate supplier
can continue to receive service until January 2004 at a rate that is at least
10 percent less than 1996 rates. The law allows for recovery of all
prudently incurred stranded costs and mandates the functional separation of
competitive and regulated businesses. To qualify for stranded cost recovery,
CL&P must auction off its fossil and hydroelectric generating facilities
prior to January 2000, and its nuclear generating assets prior to January
2004. CL&P also received regulatory approval to auction any of its purchased-
power contracts which cannot be renegotiated by March 1999.
The Connecticut legislation allows the use of securitization after January 1,
2000, to further reduce the costs of the transition to a competitive
marketplace. The use of securitization is limited, however, to non-nuclear
generation-related regulatory assets and costs associated with the
renegotiation of purchased-power contracts. CL&P may not securitize nuclear
stranded costs. The Connecticut Department of Public Utility Control (DPUC)
will initiate an investigation into CL&P's stranded costs in the spring of
1999 with a final decision expected before the end of the year.
As a result of the corporate unbundling and divestiture proposals, CL&P
would redefine itself as a distribution company under the restructuring
legislation, and would provide generation services only to the extent
necessary to provide standard offer, backup and default services as required
by customers who have not chosen an alternate energy supplier.
Rate Matters
In February 1999, the DPUC issued a final order in CL&P's retail rate
proceeding reducing CL&P's revenue requirements by $232 million retroactive
to September 28, 1998. To implement that reduction, the DPUC ordered CL&P to
reduce its retail base rates by approximately $96 million annually and to
increase its amortization of regulatory assets by $136 million annually. The
rate order allowed CL&P to earn a return on equity of 10.3 percent. The DPUC
also said it would allow CL&P to recover only $126 million of its investment
in Millstone 1 undepreciated plant and related assets. As a result of this
decision, CL&P reflected in 1998 a one-time pre-tax charge of $116.5 million
and began amortizing its remaining Millstone 1 investment over three years.
In a February 1998 decision, the DPUC removed Millstone 2 from CL&P's rate
base effective May 1, 1998, and Millstone 3 effective July 1, 1998. On July
18, 1998, Millstone 3 returned to rate base. Millstone 1 previously had been
removed from CL&P's rate base effective March 1, 1998, with customers
receiving a temporary credit of approximately 1.4 percent, or $30 million
annually, on their bills.
The removal of Millstone 2 reduced CL&P's noncash revenues by approximately
$3 million a month. This reduction was increased in the 1999 rate order to
nearly $6.6 million per month to reflect lower fuel costs. Actual fuel costs
are subject to true-up in the Energy Adjustment Clause.
Millstone Nuclear Units
CL&P owns 81.0 percent of Millstone 2 and approximately 52.9 percent of
Millstone 3. CL&P's poor financial performance from 1996 through 1998 was
primarily due to the lengthy outages at Millstone. Costs peaked in 1997 when
replacement power costs and operation and maintenance costs totaled nearly
$730 million. In 1998, Millstone-related costs fell significantly as
Millstone 3 returned to service and Millstone 1 began to prepare for
decommissioning.
After a 27-month outage, Millstone 3 received Nuclear Regulatory Commission
(NRC) permission to restart in June 1998 and reached full power in July. The
unit achieved a capacity factor of approximately 70 percent in 1998 following
its return to service. CL&P's share of the operation, maintenance and
replacement power costs associated with Millstone 3 totaled approximately
$131 million in 1998, down from $241 million in 1997. The unit remains on
the NRC's watch list with a Category 2 designation, which means that it
will continue to be subject to heightened NRC oversight. A refueling and
maintenance outage is scheduled to begin in May 1999.
Millstone 2 remains on the NRC watch list with a Category 3 designation,
meaning that NRC commissioners must formally vote to allow restart.
Key steps before restart include final verification that the unit is in
conformance with its design and licensing basis; that management processes
support safe and conservative operations; and that the employees are
effective at identifying and correcting deficiencies at the unit. Millstone
2 is on schedule for a spring 1999 restart following final NRC review and
approval. Millstone 2's return is expected to restore $6.6 million a month
in noncash revenues to CL&P, reduce fuel and purchased-power expense by
approximately $7 million a month, and significantly reduce the unit's
operation and maintenance expenses, which totaled $178 million in 1998.
In a July 1998 filing with the DPUC, management concluded that Millstone 2
had over $400 million of economic value over the 17 years remaining on its
license life. In its February rate decision, the DPUC concurred that the
unit was economic for customers and ordered it to be restored to CL&P rate
base once it operates at 75 percent or more power for 100 consecutive hours.
Liquidity
CL&P successfully refinanced more than $600 million in expiring debt
obligations and bank commitments in 1998 despite a significant reported
loss. CL&P converted a total of $362 million variable-rate tax exempt debt
to fixed-rate tax exempt debt carrying interest rates of 5.85 to 5.95 percent.
Niantic Bay Fuel Trust (NBFT), which finances CL&P's and WMECO's nuclear fuel
at Millstone, refinanced maturing notes and bank lines through the issuance
of $180 million of five-year 8.59 percent notes. The success in refinancing
CL&P's obligations was due primarily to the progress shown in 1998 by
returning Millstone 3 to service and improved cash flows.
Net cash flows from operations totaled approximately $389 million in 1998, up
sharply from $73 million in 1997. Approximately $208 million of net cash
flow was used for investment activities, including construction expenditures
and investments in nuclear decommissioning trusts, compared with $144 million
in 1997. Another $14 million was used to pay preferred dividends, compared
with $21 million in common and preferred dividends in 1997. The balance of
cash used for financing activities, approximately $167 million, was used to
pay off long-term, short-term debt and preferred stock, a significant shift
from 1997 when net debt and preferred stock levels increased by $92 million.
The return to service of Millstone 3 and resulting reduction in costs
stabilized the NU system's credit ratings in mid-1998 after repeated
downgrades in 1996 and 1997. Moody's Investors Service, which had downgraded
CL&P, WMECO, and NU debt in April 1998, upgraded those same ratings in July
1998 and established a "positive" outlook. Also in July, Standard & Poor's
(S&P) removed the NU system from "CreditWatch--negative" for the first time
in more than two years. In September 1998, S&P upgraded CL&P, WMECO and PSNH
first mortgage bonds.
The rating agency actions also were due in part to the NU system's success in
1998 in maintaining access to its various credit lines. Key covenants on a
$313.75 million revolving credit line primarily serving CL&P and WMECO were
adjusted in the fall. The CL&P rate decision resulted in the need for a
waiver of the revolver's equity test in the fourth quarter, which was
negotiated with banks in March 1999.
The $313.75 million revolving credit line will expire on November 21, 1999.
As of February 23, 1999, CL&P had $165 million outstanding under that line.
CL&P met a $140 million bond maturity on February 1, 1999. Management expects
those borrowings to increase further in the first half of 1999 as CL&P pays
off a $74 million bond issue that matures July 1, 1999.
CL&P has also arranged financing agreements through the sale of its accounts
receivables. CL&P can finance up to $200 million through these facilities.
As of December 31, 1998, CL&P had financed $105 million through its accounts
receivable line.
For additional information on the sales of accounts receivable, see "Notes
to Consolidated Financial Statements," Note 10.
CL&P is party to an operating lease with General Electric Capital Corporation
related to the use of four turbine generators having an installed cost of
approximately $70 million and a stipulated loss value of $59 million. CL&P
must meet certain financial covenants that are substantially similar to the
revolving credit line. CL&P has received a waiver of these tests for the
fourth quarter of 1998 as a result of the CL&P rate decision.
The permanent shutdown of Millstone 1 in July 1998 could require CL&P and
WMECO to immediately repay the NBFT approximately $80 million of capital
lease obligations. CL&P is seeking consents from the note holders to amend
the lease so that they will not be obligated to make this payment. As
consideration for the note holders' consents, the companies intend to issue
an additional $80 million of first mortgage bonds in mid-1999.
Nuclear Decommissioning
The staff of the SEC has questioned certain current accounting practices of
the electric utility industry, regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating units in the
financial statements. In response to these questions, the Financial
Accounting Standards Board (FASB) had agreed to review the accounting for
closure and removal costs, including decommissioning. If current electric
utility industry accounting practices for nuclear power plant decommissioning
are changed, the annual provision for decommissioning could increase relative
to 1998, and the estimated cost for decommissioning could be recorded as a
liability (rather than as accumulated depreciation), with recognition of an
increase in the cost of the related nuclear power plant. As management
believes decommissioning costs will continue to be recovered through rates,
changes to the accounting will not affect net income.
Millstone 1
CL&P has an ownership interest of 81 percent in Millstone 1. Based on a
continued unit operation study filed with the DPUC in July 1998, CL&P and
WMECO decided to retire Millstone 1 and begin decommissioning activities.
Subsequently, Millstone 1 was removed from the NRC's watch list.
CL&P's share of the total estimated decommissioning costs for Millstone 1,
which have been updated to reflect the early shutdown of the unit, is
approximately $560.5 million in December 1998 dollars. CL&P uses external
trusts to fund the decommissioning costs. In 1998, CL&P recorded a charge of
approximately $143.2 million for the write-off of its investment in Millstone
1 as a result of the February 1999 rate decision and an earlier settlement
with the Connecticut Municipal Electric Energy Cooperative (CMEEC). At
December 31, 1998, CL&P had unrecovered plant and related assets for
Millstone 1 of $129.5 million and an unrecovered decommissioning obligation
of $313.5 million. These amounts have been recorded as a regulatory asset,
while decommissioning and closure obligations have been recorded as a
liability. CL&P has been allowed to recover its remaining investment in
Millstone 1 over three years beginning October 1998. The rate decision also
stated that CL&P would be allowed to recover its decommissioning costs and
could defer pre-decommissioning costs commencing July 1, 1999 for future
recovery.
Yankee Companies
CL&P has a 34.5 percent ownership interest in the Connecticut Yankee Atomic
Power Company (CYAPC), a 24.5 percent ownership interest in Yankee Atomic
Electric Company (YAEC), a 12 percent ownership interest in Maine Yankee
Atomic Power Company (MYAPC) and a 9.5 percent ownership interest in Vermont
Yankee Nuclear Power Corporation (VYNPC). The nuclear plants owned by YAEC,
CYAPC and MYAPC were shut down permanently on February 26, 1992, December 4,
1996, and August 6, 1997, respectively.
At December 31, 1998, CL&P's share of its estimated remaining contract
obligations, including decommissioning, amounted to approximately $277.8
million; $20.0 million for YAEC, $172.0 million for CYAPC and $85.8 million
for MYAPC. Under the terms of the contracts with the Yankee companies, CL&P
is responsible for its proportionate share of the costs of the units
including decommissioning. Management expects to recover these costs from
customers. Accordingly, CL&P has recognized these costs as a regulatory
asset, with a corresponding obligation on its balance sheet.
CL&P has exposure for its investment in CYAPC as a result of an initial
decision at the Federal Energy Regulatory Commission (FERC). Additionally,
in January 1999, MYAPC filed an offer of settlement which, if accepted by the
FERC, will resolve all the issues in the FERC decommissioning rate case
proceeding. CL&P management cannot predict the ultimate outcome of the FERC
proceedings at this time, but believes that the associated regulatory assets
are probable of recovery. For further information on these proceedings see
"Notes to Consolidated Financial Statements," Note 11B.
CL&P's ownership share of the estimated costs of decommissioning the nuclear
plant owned by VYNPC is approximately $50.4 million in year-end 1998 dollars.
Millstone 2, 3 and Seabrook 1
CL&P's estimated cost to decommission its shares of Millstone 2, Millstone 3
and Seabrook 1 is approximately $638 million in year-end 1998 dollars. These
costs are being recognized over the lives of the respective units with a
portion currently being recovered through rates. As of December 31, 1998,
the market value of the contributions already made to the decommissioning
trusts, including their investment returns, was approximately $242 million.
See the "Notes to Consolidated Financial Statements," Note 3, for further
information on nuclear decommissioning.
Year 2000 Issues
The NU system has established an action plan by which identified processes
must be completed by certain dates in order to ensure its operating systems,
including nuclear systems, and reporting systems are able to properly
recognize the year 2000. This action plan has three phases: the inventory
phase, the detailed assessment phase and the remediation phase. The inventory
phase, which has been completed, identified operating and reporting systems
which may need to be fixed. The detailed assessment phase, which has been
completed, determined exactly what needed to be done in order to ensure that
the systems identified during the inventory phase are able to recognize
properly and process the year 2000. The final phase is the remediation phase.
By the end of this phase, mission critical systems (systems that are
related to safety, keeping the lights on, regulatory requirements, and other
systems that could have a significant financial impact) will be year 2000
ready; that is, these systems will perform their business functions properly
in the year 2000. This phase includes making modifications, testing and
validating changes and verifying that the year 2000 issues have been
resolved.
Although the identification and detailed assessment phases are complete,
newly identified items, such as new software purchases, are added to the
inventory as they are identified and are subject to detailed assessment and,
if needed, remediation. The NU system purchasing policies require newly
purchased software and devices to be year 2000 compliant. None of these
newly identified items are expected to materially impact completion of the
remediation phase.
The NU system has identified and inventoried 2,497 computer systems
(software) and over 24,000 devices (hardware) broken down into 3,450
device types containing date-sensitive computer chips. As of December 31,
1998, 73 percent of the software systems and 81 percent of the hardware
were year 2000 ready.
The remaining items are in various stages of modification or testing.
Management anticipates the remediation phase for mission critical systems
to be completed by mid-1999.
In addition, the NU system has been contacting its key suppliers and
business partners to determine their ability to manage the year 2000
problem successfully. The NU system is adjusting its inventories, working
with suppliers to provide backup inventories, and changing suppliers as
needed to provide for an adequate supply of materials needed to conduct
business into the year 2000.
The NU system also has worked actively with the Independent System Operator
(ISO) New England, the operator of the New England power grid and with the
North American Electric Reliability Council to provide for the year 2000
readiness of the New England power grid.
The NU system has utilized both internal and external resources to identify,
assess, test and reprogram or replace the computer systems for year 2000
readiness. The current projected total cost of the Year 2000 Program to the
NU system is $30 million. The total estimated remaining cost is $18 million,
which is being funded through operating cash flows. The majority of these
costs will be expensed as incurred in 1999. Since 1996, the NU system has
incurred and expensed approximately $12 million related to year 2000
readiness efforts. Total expenditures related to the year 2000 are not
expected to have a material effect on the operations or financial condition
of the NU system.
The costs of the project and the date on which the NU system plans to
complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third-
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those plans. If the NU system's remediation plans or
those of third parties are not successful, there could be a significant
disruption of the NU system's operations. The most likely worst case
scenario is a limited number of localized interruptions to electric service
which can be restored within a few hours. As a precautionary measure, the
NU system is formulating contingency plans that will evaluate alternatives
that could be implemented if our remediation efforts are not successful.
The contingency plans are being developed by enhancing existing emergency
operating procedures to include year 2000 issues. In addition, the NU system
plans to have staff available to respond to any year 2000 situations that
might arise. The contingency plan is expected to be available by July 30,
1999.
The NU system is committed to assuring that adequate resources are available
in order to implement any changes necessary for its nuclear and other
operations to be compatible with the new millennium.
Risk-Management Instruments
The following discussion about CL&P's risk-management activities includes
forward looking statements that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward looking
statements.
This analysis presents the hypothetical loss in earnings related to the fuel
price and interest rate market risks at December 31, 1998. CL&P uses swaps
to manage the market risk exposures associated with changes in fuel prices
and variable interest rates. CL&P uses these instruments to reduce risk by
essentially creating offsetting market exposures. Based on the derivative
instruments which are currently being utilized by CL&P to hedge some of
their fuel price and interest rate risks, there will be an impact on
earnings upon adoption of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which management cannot estimate at this time. For more information on
CL&P's use of risk-management instruments, see the "Notes to Consolidated
Financial Statements," Notes 1L and 12.
Fuel-Price Risk-Management Instruments
In the generation of electricity, the most significant segment of the
variable cost component is the cost of fuel. Typically, most of CL&P's
fuel purchases are protected by a regulatory fuel price adjustment clause.
However, for a specific, well-defined volume of fuel that is excluded from
the fuel price adjustment clause, CL&P employs fuel-price risk-management
instruments to protect itself against the risk of rising fuel prices, thereby
limiting fuel costs and protecting its profit margins. These risks are
primarily created by the sale of long-term, fixed-price electricity
contracts to wholesale customers.
At December 31, 1998, CL&P had outstanding fuel-price management instrument
agreements with a total notional value of approximately $422 million and
a negative mark-to-market position of approximately $45 million. A
hypothetical 10 percent decrease in average 1998 fuel prices during 1999
may result in a $10 million decrease in the fair value of the fuel-price
risk-management instruments. Because these instruments are used to hedge
the fuel price risk created by the sale of long-term, fixed-price electricity
contracts, it is expected that the hypothetical decrease in fuel prices
during 1999 would result in a corresponding increase in the fair value of
these contracts.
This analysis is based on the assumption that the amount of fuel-price risk-
management instruments and the amount of long-term fixed-price electricity
sales contracts to wholesale customers will not fluctuate during 1999. This
analysis is subject to change as these assumptions change.
Environmental Matters
CL&P is potentially liable for environmental cleanup costs at a number of
sites inside and outside its service territory. To date, the future estimated
environmental remediation liability has not been material with respect to the
earnings or financial position of CL&P. CL&P had recorded an environmental
reserve of approximately $8.0 and $6.4 million, at December 31, 1998 and
1997, respectively. See the "Notes to Consolidated Financial Statements,"
Note 11D, for further information on environmental matters.
RESULTS OF OPERATIONS
Income Statement Variances
(Millions of Dollars)
1998 over/(under) 1997 1997 over/(under) 1996
Amount Percent Amount Percent
Operating revenues $(79) (3)% $ 68 3%
Fuel, purchased and net
interchange power (90) (9) 146 18
Other operation (22) (3) (1) -
Maintenance (84) (24) 56 19
Depreciation (22) (9) (8) (3)
Amortization of regulatory
assets, net 59 96 4 7
Federal and state income
taxes (12) (18) (68) (a)
Millstone 1 unrecoverable
costs (143) (100) - -
Other income, net (4) (a) (16) (89)
Net loss (56) (40) (89) (a)
(a) Percentage greater than 100.
Operating Revenues
The removal of the Millstone units from CL&P's rate base reduced revenues by
$68 million in 1998. Wholesale revenues decreased by $33 million primarily
as a result of the terminated contract with CMEEC. These decreases were
partially offset by higher retail sales volumes. Retail kilowatt-hour sales
were 2.2 percent higher and contributed $36 million to nonfuel revenues in
1998 primarily as a result of economic growth.
Total operating revenues increased in 1997, primarily due to higher fuel
recoveries and higher conservation recoveries. Fuel recoveries increased $33
million, primarily due to higher fuel revenues as a result of a lower fuel
rate in 1996. Conservation recoveries increased by $17 million, primarily due
to a 1996 reserve for overrecoveries of demand-side management costs.
Fuel, Purchased and Net Interchange Power
The change in fuel, purchased and net interchange power expense in 1998 is
primarily due to lower replacement power costs due to the return to service
of Millstone 3.
Fuel, purchased and net interchange power expense increased in 1997,
primarily due to replacement power costs associated with the Millstone
outages.
Other Operation and Maintenance
Other operation and maintenance expenses decreased in 1998, primarily due
to lower costs at the Millstone nuclear units ($125 million), lower costs
at the Yankee nuclear units ($21 million), lower administrative and general
expenses ($12 million), the recognition of environmental insurance proceeds
($9 million), lower distribution costs ($8 million), a decrease in sales and
marketing expenses ($8 million), and lower costs from ISO New England for
interchange services ($7 million). These decreases were partially offset
by higher capacity charges ($51 million) and the recognition of nuclear
refueling outage costs primarily as a result of the 1996 Rate Settlement
($34 million).
Other operation and maintenance expenses increased in 1997, primarily due to
higher costs associated with the Millstone restart effort ($173 million) and
higher charges from MYAPC ($9 million), partially offset by lower recognition
of nuclear refueling outage costs primarily as a result of the 1996 Rate
Settlement ($72 million), lower capacity charges from CYAPC as a result of a
property tax refund ($27 million), lower administrative and general expenses
($23 million) primarily due to lower pensions and benefit costs, and lower
storm expenses.
Depreciation
Depreciation decreased in 1998, primarily due to the retirement of Millstone 1.
Depreciation decreased in 1997, primarily due to lower depreciation rates
partially offset by higher plant balances.
Amortization of Regulatory Assets, Net
Amortization of regulatory assets, net increased in 1998, primarily due to
accelerated amortizations in accordance with retail regulatory decisions and
the beginning of the amortization of the Millstone 1 remaining investment.
Amortization of regulatory assets, net increased in 1997, primarily due to
the completion of cogeneration deferrals in 1996 and increased amortization
in 1997, partially offset by the completion of CL&P's Seabrook amortization
in 1996.
Federal and State Income Taxes
Federal and state income taxes decreased in 1998 primarily due to lower book
taxable income and the increase in income tax credits due to the Millstone 1
write off.
Federal and state income taxes decreased in 1997 primarily due to lower book
taxable income.
Millstone 1 Unrecoverable Costs
Millstone 1 unrecoverable costs represents the write-off of the Millstone 1
entitlement formerly held by CMEEC and the write-off of unrecoverable costs
as a result of the February 1999 rate decision.
Other Income, Net
The change in other income, net in 1998 was not significant. Other income,
net decreased in 1997, primarily due to costs associated with the sale of
accounts receivable facility and lower miscellaneous income.
The Connecticut Light and Power Company and Subsidiaries
SELECTED FINANCIAL DATA(a)
1998 1997 1996 1995 1994
(Thousands of Dollars)
Operating Revenues....$2,386,864 $2,465,587 $2,397,460 $2,387,069 $2,328,052
Operating Income/
(Loss).............. 28,254 (12,399) 29,773 324,026 286,948
Net (Loss)/Income..... (195,725) (144,377) (80,237) 205,216 198,288
Cash Dividends on
Common Stock........ - 5,989 138,608 164,154 159,388
Total Assets.......... 6,050,198 6,081,223 6,244,036 6,045,631 6,217,457
Long-Term Debt (c).... - 2,043,327 2,038,521 1,822,018 1,823,690
Preferred Stock Not
Subject to Mandatory
Redemption.......... 116,200 116,200 116,200 116,200 166,200
Preferred Stock
Subject to Mandatory
Redemption(c)....... 119,289 155,000 155,000 155,000 230,000
Obligations Under
Capital Leases(c)... 162,884 158,118 155,708 172,264 175,969
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended(a)
1998 March 31 June 30 September 30 December 31
(Thousands of Dollars)
Operating Revenues $608,961 $561,224 $628,148 $ 588,531
Operating Income/(Loss) $ 6,261 $ 11,066 $ 29,945 $ (19,018)
Net Loss $(30,979) $(26,361) $(20,405) $(117,980)
1997
Operating Revenues $624,908 $574,841 $627,712 $638,126
Operating Income/(Loss) $ 23,148 $(33,587) $(15,552) $ 13,592
Net Loss $ (6,431) $(64,089) $(50,077) $(23,780)
(a) Reclassifications of prior data have been made to conform with the current
presentation.
(b) Includes the cumulative effect of change in accounting for municipal
property tax expense, which increased earnings for common shares by
$47.7 million.
(c) Includes portion due within one year.
The Connecticut Light and Power Company and Subsidiaries
STATISTICS (Unaudited)
Gross Electric Average
Utility Plant Annual
December 31, Use Per Electric
(Thousands of kWh Sales Residential Customers Employees
Dollars) (Millions) Customer (kWh) (Average) (December 31)
1998 $6,345,215 27,356 8,476 1,113,370 2,336
1997 6,639,786 26,766 8,526 1,103,309 2,163
1996 6,512,659 26,043 8,639 1,099,340 2,194
1995 6,389,190 26,366 8,506(a) 1,094,527 2,270
1994 6,327,967 26,975 8,775 1,086,400 2,587
(a) Effective January 1, 1996, the amounts shown reflect billed and
unbilled sales. 1995 has been restated to reflect this change.