1998 Annual Report
Western Massachusetts Electric Company and Subsidiary
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........................ 36
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 37
Selected Financial Data......................................... 45
Statements of Quarterly Financial Data (Unaudited).............. 45
Statistics (Unaudited).......................................... 46
Preferred Stockholder and Bondholder Information................ Back Cover
PART I. FINANCIAL INFORMATION
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------
AT DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 1,221,257 $ 1,284,288
Less: Accumulated provision for depreciation......... 517,401 559,119
------------- ------------
703,856 725,169
Construction work in progress........................... 14,858 19,038
Nuclear fuel, net....................................... 19,931 30,907
------------- ------------
Total net utility plant............................. 738,645 775,114
------------- ------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 125,598 102,708
Investments in regional nuclear generating
companies, at equity................................... 15,440 15,741
Other, at cost.......................................... 7,322 4,900
------------- ------------
148,360 123,349
------------- ------------
Current Assets:
Cash.................................................... 106 105
Investments in securitizable assets..................... 21,865 25,280
Receivables, less accumulated provision for
uncollectible accounts of $50,000 in 1998 and 1997.... 862 2,739
Accounts receivable from affiliated companies........... 4,188 3,933
Taxes receivable........................................ 14,255 10,768
Fuel, materials and supplies, at average cost........... 5,053 5,860
Recoverable energy costs, net--current portion.......... 1,924 -
Prepayments and other................................... 23,996 14,945
------------- ------------
72,249 63,630
------------- ------------
Deferred Charges:
Regulatory assets (Note 1G)............................. 322,435 211,377
Unamortized debt expense................................ 2,298 2,695
Other................................................... 3,695 2,963
------------- ------------
328,428 217,035
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Total Assets........................................ $ 1,287,682 $ 1,179,128
============= ============
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------
AT DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$25 par value.
Authorized and outstanding 1,072,471 shares............ $ 26,812 $ 26,812
Capital surplus, paid in................................ 151,431 151,171
Retained earnings....................................... 46,003 58,608
Accumulated other comprehensive income.................. 150 -
------------- ------------
Total common stockholder's equity.............. 224,396 236,591
Preferred stock not subject to mandatory redemption..... 20,000 20,000
Preferred stock subject to mandatory redemption......... 18,000 19,500
Long-term debt.......................................... 349,314 386,849
------------- ------------
Total capitalization........................... 611,710 662,940
------------- ------------
Obligations Under Capital Leases.......................... 12,129 217
------------- ------------
Current Liabilities:
Notes payable to banks.................................. 20,000 15,000
Notes payable to affiliated companies................... 30,900 14,350
Long-term debt and preferred stock--current
portion................................................ 41,500 11,300
Obligations under capital leases--current
portion................................................ 21,964 32,670
Accounts payable........................................ 17,952 30,571
Accounts payable to affiliated companies................ 12,866 21,209
Accrued taxes........................................... 1,264 522
Accrued interest........................................ 8,030 3,318
Other................................................... 6,831 2,446
------------- ------------
161,307 131,386
------------- ------------
Deferred Credits:
Accumulated deferred income taxes....................... 248,985 246,453
Accumulated deferred investment tax credits............. 21,895 23,364
Decommissioning obligation--Millstone 1 (Note 2)........ 131,500 -
Deferred contractual obligations........................ 74,534 93,628
Other................................................... 25,622 21,140
------------- ------------
502,536 384,585
------------- ------------
Commitments and Contingencies (Note 11)
Total Capitalization and Liabilities........... $ 1,287,682 $ 1,179,128
============= ============
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues............................. $ 393,322 $426,447 $421,337
---------- --------- ---------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power. 113,148 140,976 115,691
Other..................................... 134,916 153,399 136,897
Maintenance.................................. 56,622 81,466 56,201
Depreciation................................. 40,901 39,753 39,710
Amortization of regulatory assets............ 6,016 6,428 9,170
Federal and state income taxes............... 2,109 (15,142) 10,628
Taxes other than income taxes................ 19,756 19,316 19,850
---------- --------- ---------
Total operating expenses............... 373,468 426,196 388,147
---------- --------- ---------
Operating Income............................... 19,854 251 33,190
---------- --------- ---------
Other Income:
Equity in earnings of regional nuclear
generating companies....................... 1,699 1,524 1,800
Other, net................................... (1,905) (1,106) 1,153
Income taxes................................. 2,198 1,026 1,068
---------- --------- ---------
Other income, net...................... 1,992 1,444 4,021
---------- --------- ---------
Income before interest charges......... 21,846 1,695 37,211
---------- --------- ---------
Interest Charges:
Interest on long-term debt................... 28,027 26,046 24,094
Other interest............................... 3,398 3,109 2,028
---------- --------- ---------
Interest charges, net.................. 31,425 29,155 26,122
---------- --------- ---------
Net (Loss)/Income.............................. $ (9,579) $(27,460) $ 11,089
========== ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net (Loss)/Income.............................. $ (9,579) $(27,460) $ 11,089
---------- --------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities................. 183 - -
Minimum pension liability adjustments.......... (33) - -
---------- --------- ---------
Other comprehensive income, net of tax...... 150 - -
---------- --------- ---------
Comprehensive (Loss)/Income.................... $ (9,429) $(27,460) $ 11,089
========== ========= =========
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net (Loss)/Income........................................... $ (9,579) $ (27,460) $ 11,089
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 40,901 39,753 39,710
Deferred income taxes and investment tax credits, net..... 7,405 (1,256) 1,194
Amortization of regulatory assets - income taxes.......... 2,657 5,452 2,917
Amortization of other regulatory assets................... 3,359 976 6,253
Other sources of cash..................................... 14,395 22,011 7,749
Other uses of cash........................................ (11,809) (21,215) (10,270)
Changes in working capital:
Receivables and accrued utility revenues.................. 1,622 29,415 (1,853)
Fuel, materials and supplies.............................. 807 (543) (203)
Accounts payable.......................................... (20,962) 4,826 20,875
Sale of receivables and accrued utility revenues, net..... - 20,000 -
Investment in securitizable assets........................ 3,415 (25,280) -
Accrued taxes............................................. 742 (2,137) (805)
Other working capital (excludes cash)..................... (3,441) (16,882) (8,144)
----------- ----------- -----------
Net cash flows from operating activities...................... 29,512 27,660 68,512
----------- ----------- -----------
Financing Activities:
Issuance of long-term debt.................................. - 60,000 -
Net increase/(decrease) in short-term debt.................. 21,550 (18,050) 23,350
Reacquisitions and retirements of long-term debt............ (9,800) (14,700) -
Reacquisitions and retirements of preferred stock........... (1,500) - (36,500)
Cash dividends on preferred stock........................... (3,026) (3,140) (5,305)
Cash dividends on common stock.............................. - (15,004) (16,494)
----------- ----------- -----------
Net cash flows from/(used for) financing activities........... 7,224 9,106 (34,949)
----------- ----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (19,895) (26,249) (23,468)
Nuclear fuel.............................................. (1,801) (8) 541
----------- ----------- -----------
Net cash flows used for investments in plant............ (21,696) (26,257) (22,927)
Investment in nuclear decommissioning trusts................ (12,918) (9,645) (9,794)
Other investment activities, net............................ (2,121) (826) (977)
----------- ----------- -----------
Net cash flows used for investments........................... (36,735) (36,728) (33,698)
----------- ----------- -----------
Net Increase/(Decrease) In Cash For The Period................ 1 38 (135)
Cash - beginning of period.................................... 105 67 202
----------- ----------- -----------
Cash - end of period.......................................... $ 106 $ 105 $ 67
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid/(refunded) during the year for:
Interest, net of amounts capitalized........................ $ 22,902 $ 28,711 $ 21,725
=========== =========== ===========
Income taxes................................................ $ (2,624) $ (1,121) $ 7,816
=========== =========== ===========
Increase in obligations:
Niantic Bay Fuel Trust...................................... $ 962 $ 660 $ 669
=========== =========== ===========
See accompanying notes to consolidated financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY AND SUBSIDIARY
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............... $26,812 $150,182 $115,296 $ - $292,290
Net income for 1996.................. 11,089 11,089
Cash dividends on preferred
stock.............................. (5,305) (5,305)
Cash dividends on common stock....... (16,494) (16,494)
Loss on the retirement of preferred
stock.............................. (374) (374)
Capital stock expenses, net.......... 729 729
-------- --------- --------- ------------- ---------
Balance at December 31, 1996............. 26,812 150,911 104,212 - 281,935
Net income for 1997.................. (27,460) (27,460)
Cash dividends on preferred
stock.............................. (3,140) (3,140)
Cash dividends on common stock....... (15,004) (15,004)
Capital stock expenses, net.......... 260 260
-------- --------- --------- ------------- ---------
Balance at December 31, 1997............. 26,812 151,171 58,608 - 236,591
Net loss for 1998.................... (9,579) (9,579)
Cash dividends on preferred
stock.............................. (3,026) (3,026)
Capital stock expenses, net.......... 260 260
Other comprehensive income........... 150 150
-------- --------- --------- ------------- ---------
Balance at December 31, 1998............. $26,812 $151,431 $ 46,003 $ 150 $224,396
======== ========= ========= ============= =========
(a) The company has dividend restrictions imposed by its long-term debt
agreements. At December 31, 1998, these restrictions totaled approximately
$33.8 million.
See accompanying notes to consolidated financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. About Western Massachusetts Electric Company
Western Massachusetts Electric Company and Subsidiary (WMECO or the
company), The Connecticut Light and Power Company (CL&P), 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) to PSNH
under two life-of-unit, full cost recovery contracts. HWP 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 WMECO, are subject to
the provisions of the 1935 Act. Arrangements among the NU system
companies, outside agencies and other utilities covering inter-
connections, interchange of electric power and sales of utility
property are subject to regulation by the Federal Energy Regulatory
Commission (FERC) and/or the SEC. WMECO is subject to further
regulation for rates, accounting, and other matters by the FERC
and/or the applicable state regulatory commissions.
Several 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. 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 WMECO include the accounts
of its wholly owned subsidiary. 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 Statement of
Financial Accounting Standards (SFAS) 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," in 1998. 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 WMECO's
pension and postretirement benefits disclosures.
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. WMECO 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 WMECO 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: WMECO owns common stock of
four regional nuclear generating companies (Yankee companies) which
are accounted for on the equity basis due to WMECO's ability to
exercise significant influence over their operating and financial
policies. WMECO'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).................. $ 9,974 9.5%
Yankee Atomic Electric
Company (YAEC)......................... 1,395 7.0
Maine Yankee Atomic Power
Company (MYAPC)........................ 2,629 3.0
Vermont Yankee Nuclear
Power Corporation (VYNPC).............. 1,442 2.5
$15,440
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 2, "Nuclear Decommissioning and Plant Closure Costs."
Millstone: WMECO has 19 percent joint-ownership interest in
Millstone 1, a 660-megawatt (MW) nuclear generating unit and
Millstone 2, a 870-MW nuclear generating unit. WMECO has a 12.24
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 2,
"Nuclear Decommissioning and Plant Closure Costs," and Management's
Discussion and Analysis (MD&A). For further information on Millstone
2 and 3, see Note 2, "Nuclear Decommissioning and Plant Closure
Costs," Note 11C, "Commitments and Contingencies - Nuclear
Performance," and the MD&A.
Plant-in-service and the accumulated provision for depreciation for
WMECO's share of the three Millstone units are as follows:
At December 31,
(Millions of Dollars) 1998 1997
Plant-in-service
Millstone 1...................................... $ - $ 91.0
Millstone 2...................................... 177.5 162.4
Millstone 3...................................... 379.2 378.7
Accumulated provision for depreciation
Millstone 1...................................... $ - $ 40.1
Millstone 2...................................... 70.4 57.6
Millstone 3...................................... 121.1 110.1
WMECO's share of Millstone 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 2.9 percent
in 998 and 3.2 percent in 1997 and 1996. See Note 2, "Nuclear
Decommissioning and Plant Closure Costs," for information on nuclear
plant decommissioning.
At December 31, 1998 and 1997, the accumulated provision for
depreciation included approximately $3.2 million accrued for the cost
of removal, net of salvage, for non-nuclear generation property.
WMECO is currently in the process of selling its non-nuclear
generation. See 11A, "Commitment and Contingencies - Restructuring"
for further information.
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, WMECO accrues an
estimate for the amount of energy delivered but unbilled.
G. Regulatory Accounting and Assets
The accounting policies of WMECO 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
also may reduce or eliminate the value of an asset, or create a
liability. If WMECO was no longer subject to the provisions of SFAS
71, the company 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, WMECO would also be required to determine any impairment
to the carrying costs of deregulated plant and inventory assets.
Electric utility industry restructuring in Massachusetts was
effective March 1, 1998, however, management continues to believe the
application of SFAS 71 remains appropriate at this time. Once
WMECO's restructuring plan has been formally approved by the
Massachusetts Department of Telecommunications and Energy (DTE) and
management can determine the impacts of restructuring, WMECO's
generation business will no longer be rate regulated on a cost-of-
service basis. The majority of WMECO's regulatory assets are
generation-related. Management expects that WMECO's transmission and
distribution business will continue to be rate-regulated on a cost-
of-service basis and the restructuring plan will allow for the
recovery of regulatory assets through this portion of the business.
For further information on WMECO'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 WMECO will recover its
investments in long-lived assets, including regulatory assets. The
components of WMECO's regulatory assets are as follows:
At December 31, 1998 1997
(Thousands of Dollars)
Income taxes, net (Note 1H)............ $57,079 $ 63,716
Unrecovered contractual obligations
(Note 1J)............................ 74,534 93,628
Recoverable energy costs (Note 1I)..... 18,980 26,270
Millstone 1 (Note 1K).................. 133,653 -
Standard service offer deferral
(Note 1L)............................ 13,271 -
Other.................................. 24,918 27,763
$322,435 $211,377
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 7,
"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, that 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........ $228,059 $223,038
Regulatory assets - income tax gross up 29,286 30,175
Other.................................. (8,360) (6,760)
$248,985 $246,453
I. Recoverable Energy Costs
Under the Energy Policy Act of 1992 (Energy Act), WMECO 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. WMECO is currently recovering these costs through rates.
As of December 31, 1998, WMECO's total D&D deferrals were approximately
$10.5 million.
Prior to March 1, 1998, WMECO had in place a comprehensive fuel
adjustment clause which allowed for the collection or refund of fuel
price differences between the cost of fuel and the amounts collected.
Management expects the deferred fuel balance will be collected as
part of the restructuring proceeding.
J. Unrecovered Contractual Obligations
Under the terms of contracts with MYAPC, CYAPC and YAEC, the
shareholder-sponsor companies, including WMECO, are responsible for
their proportionate share of the remaining costs of the units,
including decommissioning. As management expects that WMECO will be
allowed to recover these costs from its customers, WMECO has recorded
regulatory assets, with corresponding obligations, on its balance
sheets. For further information, see Note 2, "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 $60.8
million, and the regulatory asset associated with the decommissioning
and closure obligation of $72.8 million. See Note 2, "Nuclear
Decommissioning and Plant Closure Costs," for further information.
L. Standard Service Offer Deferral
For the period March 1, 1998 through December 31, 1998, WMECO has
recorded a standard service offer deferral regulatory asset
representing a portion of the costs of providing energy in excess of
the standard offer rate as allowed by the restructuring legislation.
Management expects WMECO will be allowed to recover these costs
under the restructuring plan.
2. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS
Millstone 2 and 3: WMECO's operating nuclear power plants have service
lives that are expected to end during the years 2015 through 2025. Upon
retirement, these units must be decommissioned. Current decommissioning
studies conclude 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 WMECO's ownership share of
Millstone 2 and 3, in year-end 1998 dollars, is $75.5 million and $68.5
million, respectively. Millstone 2 and 3 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 $3.7 million in 1998, 1997 and 1996, respectively. 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 provision for depreciation amounted to $35.5 million and
$31.9 million, respectively.
WMECO has established external decommissioning trusts for its portion of
the costs of decommissioning Millstone 2 and 3. Funding of the estimated
decommissioning costs for these units assumes levelized collections and
after-tax earnings on the decommissioning funds of approximately 5.5
percent.
As of December 31, 1998, WMECO has collected a total of $35.5 million
through rates toward the future decommissioning costs of its share of
Millstone 2 and 3, all of which has been transferred to the external
decommissioning trusts. Earnings on the decommissioning trusts increase
the decommissioning trust balance and the accumulated reserve for
depreciation. Unrealized gains and losses associated with the
decommissioning trusts also impact the balance of the trust and the
accumulated reserve for depreciation. The fair value of the amounts in
the external decommissioning trusts was $66.9 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. WMECO attempts to recover sufficient amounts
through its allowed rates to cover its expected decommissioning costs.
Only the portion of currently estimated total decommissioning costs that
has been accepted by regulatory agencies is reflected in the rates of
WMECO. Based on present estimates and assuming its nuclear units operate
to the end of their respective license periods, WMECO expects that the
decommissioning trusts will be substantially funded when the units are
retired from service.
Millstone 1: WMECO'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 $131.5 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 $2.5 million
in 1998, 1997 and 1996, respectively.
WMECO will seek recovery of unrecovered Millstone 1 balances of
approximately $60.8 million and decommissioning related costs of
approximately $63.3 million as part of its restructuring regulatory
proceedings. Based upon the restructuring law in Massachusetts,
management believes it is probable that WMECO will be allowed the
recovery of these costs and has recorded a regulatory asset.
WMECO uses external trusts to fund its estimated Millstone 1
decommissioning costs. As of December 31, 1998, WMECO had collected a
total of $30.3 million through rates toward the future decommissioning
costs of its share of Millstone 1, all of which has been transferred to
external decommissioning trusts. At December 31, 1998, the fair market
value of the balance in the external trusts was approximately $58.7 million.
Yankee Companies: VYNPC owns and operates a nuclear generating unit with
a service life that is expected to end in 2012. WMECO's ownership share
of estimated costs, in year-end 1998 dollars, of decommissioning this
unit is $13.2 million.
At December 31, 1998, the remaining estimated obligation, including
decommissioning, for the Yankee company nuclear generating facilities
which have been shut down were:
Total WMECO's
(Thousands of Dollars) Obligation Share
Maine Yankee............................. $715,065 $21,452
Connecticut Yankee....................... $498,557 $47,363
Yankee Atomic............................ $ 81,699 $ 5,719
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.
3. SHORT-TERM DEBT
Limits: The amount of short-term borrowings that may be incurred by WMECO
is subject to periodic approval by either the SEC under the 1935 Act or
by the DTE. SEC authorization allowed WMECO, as of January 1, 1999, to
incur short-term borrowings up to a maximum of $150 million. In addition,
the charter of WMECO contains a preferred stock provision restricting the
amount of unsecured debt that the company may incur. As of December 31,
1998, this charter permits WMECO to incur an additional $96 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 requirements 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 NU system companies under the entire Credit
Agreement is $313.75 million. The NU system 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
borrowings, $20 million was borrowed by WMECO in 1998 and $15 million was
borrowed by WMECO in 1997.
Under the credit facility discussed above, WMECO 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 WMECO'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 WMECO, 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, WMECO had $30.9 million and
$14.4 million, respectively, of borrowings outstanding from the Pool. The
interest rate on borrowings from the Pool at December 31, 1998 and 1997,
was 5.8 percent each year.
Maturities of short-term debt obligations were for periods of three
months or less.
For further information on WMECO's short-term debt, see the MD&A.
4. PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock not subject to mandatory redemptions are:
December 31, Shares
1998 Outstanding
Redemption December 31, December 31,
Description Price 1998 1998 1997 1996
(Thousands of Dollars)
7.72% Series B
of 1971....... $103.51 200,000 $20,000 $20,000 $20,000
All or any part of the outstanding preferred stock may be redeemed by the
company at any time at established redemption prices plus accrued dividends
to the date of redemption.
5. 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)
7.60% Series
of 1987....... $25.51 780,000 $19,500 $21,000 $21,000
Less preferred stock to be
redeemed within one
year, net of reacquired
stock......... 60,000 1,500 1,500 -
Total........... $18,000 $19,500 $21,000
*Redemption price reduces in future years.
The minimum sinking-fund provisions of the 1987 Series subject to
mandatory redemption at December 31, 1998, for the years 1999 through
2003 is $1.5 million per year. 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 the company is in arrears in the payment of
dividends on any outstanding shares of preferred stock, the company would
be prohibited from redemption or purchase of less than all of the
preferred stock outstanding. All or part of the 7.60% Series of 1987 may
be redeemed by the company at any time at an established redemption price
plus accrued dividends to the date of redemption subject to certain
refunding limitations.
6. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
1998 1997
(Thousands of Dollars)
First mortgage bonds:
6 3/4% Series G, due 1998.................. $ - $ 9,800
6 1/4% Series X, due 1999.................. 40,000 40,000
6 7/8% Series W, due 2000.................. 60,000 60,000
7 3/8% Series B, due 2001.................. 60,000 60,000
7 3/4% Series V, due 2002.................. 85,000 85,000
7 3/4% Series Y, due 2024.................. 50,000 50,000
Total 295,000 304,800
Pollution control notes:
Tax Exempt 1993 A Series, 5.85% due 2028... 53,800 53,800
Fees and interest due for spent
fuel disposal costs (Note 11E)............. 41,355 39,045
Less: Amounts due within one year.......... 40,000 9,800
Unamortized premium and discount, net....... (841) (996)
Long-term debt, net......................... $349,314 $386,849
On October 1, 1998, the variable interest rate on WMECO's $53.8 million
principal amount PCRB, 1993 A Series, due September 1, 2028, was fixed at
a rate of 5.85 percent per annum.
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1998 for the years 1999 through 2002 are
approximately $40 million, $60 million, $60 million, and $85 million,
respectively. There are no long-term debt maturities or cash sinking-
fund requirements for 2003. In addition, there are annual one-percent
sinking- and improvement-fund requirements, currently amounting to $1.5
million for 1999 and 2000, $900 thousand for 2001 and 2002 and no
requirement for 2003. Such sinking- and improvement-fund requirements
may be satisfied by the deposit of cash or bonds by certification of
property additions.
All or any part of each outstanding series of first mortgage bonds may be
redeemed by WMECO 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 WMECO's utility plant is subject to the lien of its
first mortgage bond indenture. As of December 31, 1998 and 1997, WMECO
has secured $53.8 million of pollution control notes with second mortgage
liens on Millstone 1, junior to the liens of its first mortgage bond
indenture. The average effective interest rate on the variable-rate
pollution control notes was 3.2 percent for 1998 and 3.5 percent for 1997.
7. INCOME TAX EXPENSE
The components of the federal and state income tax provisions were
charged as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Current income taxes:
Federal............................ $(7,412) $(14,277) $7,007
State.............................. (82) (635) 1,358
Total current.................... (7,494) (14,912) 8,365
Deferred income taxes, net:
Federal............................ 6,535 3 2,054
State.............................. 2,339 210 609
Total deferred................... 8,874 213 2,663
Investment tax credits, net.......... (1,469) (1,469) (1,468)
Total income tax (credit)/
expense............................ $ (89) $(16,168) $9,560
The components of total income tax expense are classified as follows:
Income taxes charged to
operating expenses................. $ 2,109 $(15,142) $10,628
Other income taxes................... (2,198) (1,026) (1,068)
Total income tax (credit)/
expense............................ $ (89) $(16,168) $ 9,560
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................. $ 5,808 $ 1,407 $ 32
Energy adjustment clause............. 3,389 3,115 4,102
Demand side management............... (1,192) 321 1,557
Nuclear plant deferrals.............. (897) (3,431) (2,258)
Pension.............................. 950 999 (57)
Bond redemptions..................... (500) (535) (502)
Other................................ 1,316 (1,663) (211)
Deferred income taxes, net........... $ 8,874 $ 213 $ 2,663
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 for..... $(3,384) $(15,270) $7,076
Tax effect of differences:
Depreciation........................ 1,765 630 1,499
Amortization of regulatory assets... 938 1,916 1,029
Investment tax credit amortization.. (1,469) (1,469) (1,468)
Nondeductible penalties............. 599 (19) 89
State income taxes, net of
federal benefit................... 1,052 (225) 1,279
Adjustment for prior years' taxes... 692 (967) -
Dividends received reduction........ (666) (408) (378)
Other, net.......................... 384 (356) 434
Total income tax (credit)/expense..... $ (89) $(16,168) $9,560
8. LEASES
WMECO finances its share of the nuclear fuel for Millstone 2 and 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 on June 5, 2003
and will bear interest at a rate of 8.59 percent per annum, payable
semiannually. At December 31, 1998, WMECO's capital lease obligation to
the NBFT was approximately $33.9 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. This amount was
approximately $80 million. The shutdown also obligates WMECO to pay such
amount to the NBFT under the NBFT lease whether or not any ITN holders
request repurchase. WMECO 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.
WMECO 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 WMECO. WMECO's current portion
of the NBFT lease obligation at December 31, 1998 was approximately $21.9
million, including approximately $15.2 million reclassified to current as
a result of the shutdown of Millstone 1. Future minimum lease payments
under the nuclear fuel capital lease for the remaining portion of the
obligation cannot be reasonably estimated on an annual basis due to
variations in the usage of nuclear fuel.
WMECO also has entered into nonfuel lease agreements, some of which may
be capital leases, for the use of data processing and office equipment,
vehicles, nuclear control room simulators and office space. The
provisions of these lease agreements generally provide for renewal
options. Future minimum lease payments for nonfuel capital leases as of
December 31, 1998, were approximately $36 thousand each year for 1999
through 2003. Future minimum rental payments, excluding executory costs
such as property taxes, state use taxes, insurance and maintenance under
long-term noncancelable operating leases, as of December 31, 1998, are:
Year (Thousands of Dollars)
1999......................... $ 3,902
2000......................... 3,594
2001......................... 3,217
2002......................... 2,785
2003......................... 2,233
After 2003................... 15,460
$31,191
The following rental payments have been charged to expense:
Year Capital Leases Operating Leases
1998......................... $4,137,000 $5,790,000
1997......................... 1,820,000 5,968,000
1996......................... 3,598,000 6,410,000
Interest included in capital lease rental payments was $2,796,000 in
1998, $1,820,000 in 1997, and $1,858,000 in 1996.
9. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The NU system subsidiaries participate in a uniform non-contributory
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.
WMECO's direct portion of the NU system's pension credit, part of which
was credited to utility plant, approximated $7.4 million in 1998, $5.7
million in 1997, and $2.0 million in 1996.
Currently, WMECO funds annually an amount at least equal to that which
will satisfy the requirements of the Employee Retirement Income Security
Act and the Internal Revenue Code. Pension costs are determined using
market-related values of pension assets.
The NU system 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. WMECO is funding postretirement costs through external
trusts. WMECO is funding, on an annual basis, amounts that have been
rate-recovered and which are also 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............ $(109,536) $(107,816) $(27,826) $(30,091)
Service cost.................. (2,192) (1,876) (460) (355)
Interest Cost................. (7,914) (7,858) (2,074) (2,011)
Transfers..................... (3,044) 820 - -
Actuarial (loss)/gain......... (3,751) (1,224) (2,415) 2,028
Benefits paid................. 7,700 7,889 2,661 2,603
Curtailments and settlements.. - 529 - -
Benefit obligation at
end of year................. $(118,737) $(109,536) $(30,114) $(27,826)
Change in plan assets
Fair value of plan assets at
beginning of year........... $181,028 $157,863 $ 12,838 $ 10,215
Actual return on plan assets. 25,229 31,874 1,588 2,058
Employer contribution......... - - 2,870 3,168
Benefits paid................. (7,700) (7,889) (2,661) (2,603)
Transfers..................... 3,044 (820) - -
Fair value of plan assets
at end of year.............. $201,601 $181,028 $ 14,635 $ 12,838
Funded status at
December 31................. $ 82,864 $ 71,492 $(15,479) $(14,988)
Unrecognized transition
amount...................... (1,492) (1,727) 22,977 24,618
Unrecognized prior service
cost........................ 1,070 1,142 - -
Unrecognized net gain......... (66,542) (62,370) (7,498) (9,630)
Prepaid benefit cost.......... $15,900 $ 8,537 $ - $ -
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............$ 2,192 $ 1,876 $ 1,979 $ 460 $ 355 $ 490
Interest cost........... 7,914 7,858 7,786 2,074 2,011 2,236
Expected return on plan
assets................ (14,754) (12,746) (11,216) (935) (736) (330)
Amortization of
unrecognized transition
(asset)/obligation.... (235) (235) (235) 1,641 1,641 1,641
Amortization of prior
service cost.......... 72 72 72 - - -
Amortization of actuarial
gain.................. (2,551) (2,022) (1,337) - - -
Other amortization, net. - - - (370) (484) (200)
Curtailments and
settlements........... - (529) 953 - - -
Net periodic benefit
(credit)/cost.........$ (7,362) $ (5,726) $(1,998) $2,870 $2,787 $3,837
For calculating pension and postretirement benefit costs, the following
assumptions were used:
For the Years Ended December 31,
Pension Benefits Postretirement 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.................. $ 130 $ (131)
Effect on post-
retirement benefit
obligation.................. 1,740 (1,698)
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
WMECO has entered into an agreement to sell up to $40 million of
undivided ownership interests in eligible customer receivables and
accrued utility revenues (receivables).
WMECO has established a special purpose, wholly owned subsidiary, WMECO
Receivables Corporation (WRC), whose business consists of the purchase
and resale of receivables. For receivables sold, WMECO has retained
collection responsibilities as agent for the purchaser under its
agreement. As collections reduce previously sold receivables, new
receivables may be sold. At December 31, 1998, approximately $20 million
of receivables had been sold to a third-party purchaser by WMECO. All
receivables sold to WRC are not available to pay WMECO's creditors.
The receivables are sold to a third-party purchaser with limited
recourse. The sales agreement provides 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 $2.9 million was the
formula-based amount of credit exposure and has been reserved as
collateral by WRC. Historical losses for bad debt for WMECO have been
substantially less.
As a result of prior period downgrades on WMECO's first mortgage bonds,
the current bond rating is at a level where the sponsor of WMECO's
accounts receivable program could take various actions at its
discretion, which would have the practical effect of limiting WMECO's
ability to utilize the facility. To date, the sponsor has not notified
WMECO that it will elect to exercise those rights and the program is
functioning in its normal mode.
Concentrations of credit risk to the purchaser under WMECO's agreement
with respect to the receivables are limited due to WMECO's diverse
customer base within its service territory.
11. COMMITMENTS AND CONTINGENCIES
A. Restructuring
Electric utility industry restructuring in Massachusetts became
effective March 1, 1998. As required by the legislation enacted in
November 1997, WMECO will continue to operate and maintain its
transmission and local distribution network and deliver electricity
to all customers. The restructuring legislation specifically
provides for the cost recovery of generation-related assets. The
legislation gives the DTE the authority to determine the amount of
stranded costs that will be eligible for recovery by utilities.
Costs which will qualify as stranded costs and be eligible for
recovery include, but are not limited to, certain above-market
costs associated with generating facilities, costs associated with
long-term commitments to purchase power at above-market prices from
small-power producers and nonutility generators (NUGs), and
regulatory assets and associated liabilities related to the
generation portion of WMECO's business.
Effective March 1, 1998, WMECO's restructuring plan has been filed
with the DTE and includes a 10 percent rate reduction, divestiture
of generation assets, securitization of approximately $500 million
of stranded costs and customer choice of supplier. The DTE has
not approved WMECO's plan yet and rates are being charged under an
interim order. A final decision is expected in mid-1999.
On January 22, 1999, WMECO signed an agreement to sell 290-MW of
fossil and hydroelectric generation assets to Consolidated Edison
Energy, Inc. of New York for $47 million. The sale price is
approximately 3.8 times greater than the assets' 1997 book value of
$12.5 million. WMECO did not offer its 19 percent share of the
Northfield Mountain pumped storage generating facility and
associated hydroelectric facilities. WMECO's book value in
Northfield Mountain was $13.0 million at December 31, 1998. This
asset will be auctioned in conjunction with CL&P's fossil/hydro
auction to take place before 2000. The net proceeds in excess of
book value received from the actual divestiture of these units will
be used to mitigate stranded costs.
Based upon the legislation and regulatory proceedings to date,
management continues to believe that the company will recover its
prudently incurred costs, including regulatory assets and
generation-related investments. However, a change in one or more of
these factors could affect the recovery of stranded costs and may
result in a loss to the company.
B. Rate Matters
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 WMECO's net unamortized investment in CYAPC, which
was approximately $10 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 WMECO's share would be approximately $3.6 million.
WMECO's 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. WMECO's
estimated replacement power costs are approximately $1 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 attorneys' 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
enforcement actions and governmental investigations in the
environmental area. Management cannot predict the outcome of these
enforcement acts 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 WMECO's existing
generating units, and transmission and distribution systems, and
could raise operating costs significantly. As a result, WMECO may
incur significant additional environmental costs, greater than
amounts included in cost of removal and other reserves, in
connection with the generation and transmission of electricity and
the storage, transportation and disposal of by-products and wastes.
WMECO 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.
WMECO 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 WMECO for its estimated environmental
remediation costs, not considering any possible recoveries from
third parties, amounted to approximately $1.9 million, within a
range of $1.9 million to $3.1 million.
WMECO 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, WMECO will retain the risk loss, in part, for some
environmental remediation costs.
WMECO 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 WMECO's financial
position or future results of operations.
E. Spent Nuclear Fuel Disposal Costs
Under the Nuclear Waste Policy Act of 1982, WMECO 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 $41.1 million, including interest costs of $25.5
million.
The DOE originally was 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.
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, WMECO could be assessed in proportion to its ownership
interest in each of its nuclear units up to $83.9 million.
WMECO's payments of this assessment would be limited to, in
proportion to its ownership interest in each of its nuclear
units, $10.0 million in any one year per nuclear incident. In
addition, if the sum of all claims and costs from any one nuclear
incident exceeds the maximum amount of financial protection,
WMECO would be subject to an additional 5 percent, or $4.2
million, in proportion to its ownership interests in each of its
nuclear units. Based upon its ownership interests in Millstone
1, 2 and 3, WMECO's maximum liability, including any additional
assessments, would be $44.3 million per incident, of which
payments would be limited to $5.0 million per year. In addition,
through power purchase contracts with VYNPC, WMECO would be
responsible for up to an additional $2.2 million per incident, of
which payments would be limited to $0.3 million per year.
The NRC approved CYAPC's and MYAPC's requests for withdrawal from
participation in the secondary financial protection program,
effective November 19, 1998, and January 17, 1999, respectively,
due to their permanently shutdown and defueled status. Therefore,
neither CYAPC, MYAPC, nor their sponsor companies have any future
obligations for potential assessments.
Insurance has been purchased to cover the primary cost of repair,
replacement or decontamination of utility property resulting from
insured occurrences. WMECO is subject to retroactive assessments
if losses exceed the accumulated funds available to the insurer.
The maximum potential assessment against WMECO with respect to
losses arising during the current policy year is approximately $2.2
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. WMECO is subject to retroactive assessments if
losses exceed the accumulated funds available to the insurer. The
maximum potential assessments against WMECO with respect to losses
arising during current policy years are approximately $1.0 million
under the replacement power policies and $2.3 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. WMECO currently forecasts construction expenditures
of approximately $167.8 million for the years 1999-2003, including
$33.5 million for 1999. In addition, WMECO estimates that nuclear
fuel requirements, including nuclear fuel financed through the
NBFT, will be approximately $35.5 million for the years 1999-2003,
including $5.8 million for 1999. See Note 8, "Leases" for additional
information about the financing of nuclear fuel.
H. Long-Term Contractual Arrangements
Yankee Companies: The NU system companies 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. WMECO's
total cost of purchases under contracts with VYNPC amounted to $4.4
million in 1998, $3.9 million in 1997 and $4.1 million in 1996. WMECO
may also be asked to provide direct or indirect financial support from
one or more of the Yankee companies, including VYNPC.
NUGs: WMECO has entered into arrangements for the purchase of
capacity and energy from two NUGs. These arrangements have terms
from 15 to 25 years, currently expiring in the years 2008 through
2013, and require WMECO 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. WMECO's total cost of purchases under these arrangements
amounted to $29.9 million in 1998, $31.2 million in 1997 and $29.5
million in 1996.
Hydro-Quebec: Along with other New England utilities, WMECO, CL&P,
PSNH and HWP have entered into agreements to support transmission
and terminal facilities to import electricity from the Hydro-Quebec
system in Canada. WMECO 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 WMECO's
significant long-term contractual arrangements are as follows:
1999 2000 2001 2002 2003
(Millions of Dollars)
VYNPC......................... $ 4.7 $ 4.3 $ 4.7 $ 4.8 $ 4.5
NUGs.......................... 31.1 32.2 33.1 33.9 34.9
Hydro-Quebec.................. 3.7 3.6 3.5 3.4 3.3
12. 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 $52,000 held for the benefit of the Supplemental Executive
Retirement Plan were recorded on the Consolidated Balance Sheets at their
fair market value at December 31, 1998 of $352,000.
Nuclear decommissioning trusts: The investments held in WMECO's nuclear
decommissioning trusts were adjusted to market by approximately $27.8
million as of December 31, 1998 and $17.9 million as of December 31,
1997, with corresponding offsets to the accumulated provision for
depreciation. The amounts adjusted in 1998 and 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 WMECO'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 amount of WMECO'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................... $ 20,000 $ 19,800
Preferred stock subject to
mandatory redemption................... 19,500 19,796
Long-term debt - first mortgage bonds.... 295,000 297,162
Other long-term debt..................... 95,155 95,419
Carrying Fair
At December 31, 1997 Amount Value
(Thousands of Dollars)
Preferred stock not subject to
mandatory redemption................... $ 20,000 $ 16,252
Preferred stock subject to
mandatory redemption................... 21,000 20,580
Long-term debt - first mortgage bonds.... 304,800 302,627
Other long-term debt..................... 92,845 92,845
13. OTHER COMPREHENSIVE INCOME
During 1998, WMECO 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, WMECO 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 gains on
securities.................... $ - $183 $183
Minimum pension
liability adjustment.......... - (33) (33)
Accumulated other
comprehensive income.......... $ - $150 $150
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 gains
on securities................. $(117) $ - $ -
Minimum pension
liability adjustment.......... 21 - -
Other comprehensive
income........................ $ (96) $ - $ -
To the Board of Directors
of Western Massachusetts Electric Company:
We have audited the accompanying consolidated balance sheets of Western
Massachusetts Electric Company (a Massachusetts corporation and a wholly
owned subsidiary of Northeast Utilities) and subsidiary 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 Western Massachusetts
Electric Company and subsidiary 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
Western Massachusetts Electric Company and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of Western Massachusetts
Electric Company's (WMECO or the company) financial condition and the
principal factors having an impact on the results of operations. The company
is a wholly-owned subsidiary of Northeast Utilities (NU). This discussion
should be read in conjunction with the company's consolidated financial
statements and footnotes.
FINANCIAL CONDITION
Overview
WMECO's financial results improved in 1998 despite a reduction in retail
rates. The improved results are 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.
WMECO had a net loss of approximately $10 million in 1998, compared to a net
loss of approximately $28 million in 1997. Improved results in 1998 were
primarily due to a $43 million reduction in nonfuel operation and maintenance
costs and a $28 million reduction in fuel and purchased power expense,
partially offset by a reduction in operating revenues.
Total revenues fell 8 percent to $393 million in 1998 from $426 million in
1997. The fall in revenues occurred despite a 1.3 percent increase in retail
kilowatt-hour sales for the year. The revenue reduction primarily resulted
from a 10 percent retail rate decrease required by Massachusetts
restructuring legislation.
WMECO'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. WMECO's financial performance will be affected by the
carryover of 1998 rate reductions, plus another 5 percent rate reduction,
adjusted for inflation, that is scheduled to take effect September 1, 1999.
WMECO is in the process of auctioning approximately 560 megawatts (MW) of
fossil and hydroelectric generating capacity. Management also hopes in 1999
to begin the process of securitizing stranded costs, a means of monetizing
the company's regulatory assets and certain other stranded costs. WMECO
intends to use most of the proceeds from asset sales and securitization to
repay outstanding debt and preferred securities.
Restructuring
In November 1997, Massachusetts enacted comprehensive electric utility
industry restructuring legislation. As required by that legislation, WMECO
instituted a 10 percent rate reduction in 1998 and continues to work with
the Massachusetts Department of Telecommunications and Energy (DTE) on
implementing WMECO's restructuring plan. In September 1999, WMECO must
institute another 5 percent rate reduction, adjusted for inflation.
In January 1999, WMECO announced the sale of approximately 290 MW of
fossil/hydro generating capacity to Consolidated Edison Energy, Inc. for $47
million. The sale price is approximately 3.8 times greater than the assets'
1997 book value of $12.5 million. WMECO hopes to close on that transaction
in midsummer and expects to use the majority of the proceeds to repay
outstanding debt. The sale of these assets and future asset sales will be
used to reduce WMECO's stranded costs. WMECO will auction another 270 MW of
pumped storage and conventional hydroelectric plant later in 1999. WMECO has
notified the DTE that it will also seek to auction its ownership in the
Millstone units. WMECO expects to seek approval to securitize up to $500
million in stranded costs.
Following the sale of its generating assets, WMECO will continue to operate
and maintain the transmission and local distribution network and deliver
electricity to its customers.
Millstone Nuclear Units
WMECO has a 19 percent ownership interest in Millstone 2 and a 12.24 percent
ownership interest in Millstone 3. 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. WMECO's share of the operation, maintenance and
replacement power costs associated with Millstone 3 totaled approximately $28
million in 1998, down from $52 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 to service will reduce WMECO's fuel and
purchased-power expense by approximately $1 million a month and significantly
reduce O&M which totaled $42 million in 1998.
Liquidity
WMECO converted a total of $53.8 million variable-rate tax exempt debt to
fixed-rate tax exempt debt carrying an interest rate of 5.85 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.
Net cash flows from operations totaled approximately $30 million in 1998, up
from $28 million in 1997. Approximately $37 million of net cash flow was
used for investment activities, including construction expenditures and
investments in nuclear decommissioning trusts, essentially unchanged from
1997. Approximately $7 million of net cash flows was from financing
activities, compared with $9 million in 1997. Short-term debt increased by
$22 million while long-term debt and preferred stock levels were reduced by
$11 million in 1998. In 1997, debt levels increased a net of $27 million.
Approximately $3 million was used to pay preferred dividends in 1998,
compared with $18 million in preferred and common dividends in 1997.
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.
Key covenants on a $313.75 million revolving credit line primarily serving
CL&P and WMECO were adjusted in the fall. The $313.75 million revolving
credit line will expire on November 21, 1999. As of February 23, 1999,
WMECO had $60 million outstanding under that line. WMECO paid off a $40
million bond issue that matured on March 1, 1999.
WMECO has arranged financing agreements through the sale of its accounts
receivables. WMECO can finance up to $40 million through this facility. As of
December 31, 1998, WMECO had financed $20 million through its accounts
receivable line.
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. The companies are 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' consent, the companies intend to issue
an additional $80 million of first mortgage bonds in mid-1999.
Nuclear Decommissioning
Millstone 1
WMECO has a 19 percent ownership interest in Millstone 1. Based on a
continued unit operation study filed with the Connecticut Department of
Public Utility Control (DPUC) in July 1998, management decided to retire
Millstone 1 and begin decommissioning activities. Subsequently, Millstone 1
was removed from the NRC's watch list.
WMECO'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 $131.5 million in December 1998 dollars. WMECO uses external
trusts to fund the decommissioning costs. At December 31, 1998, WMECO had
unrecovered plant and related assets for Millstone 1 of $60.8 million and
unrecovered decommissioning obligation of $72.8 million. These amounts have
been recorded as a regulatory asset, while decommissioning and closure
obligations have been recorded as a liability. Management expects the DTE to
decide on the recovery of WMECO's share of Millstone 1 investment and
decommissioning liability as part of the ongoing restructuring docket.
Yankee Companies
WMECO has a 9.5 percent ownership interest in the Connecticut Yankee Atomic
Power Company (CYAPC), a 7.0 percent ownership interest in Yankee Atomic
Electric Company (YAEC), a 3.0 percent ownership interest in Maine Yankee
Atomic Power Company (MYAPC) and a 2.5 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, WMECO's share of its estimated remaining contract
obligations, including decommissioning, amounted to approximately $74.6
million: $47.4 million for CYAPC, $21.5 million for MYAPC and $5.7 million
for YAEC. Under the terms of the contracts with the Yankee companies, WMECO
is responsible for its proportionate share of the costs of the units
including decommissioning. Management expects to recover these costs from
customers. Accordingly, WMECO has recognized these costs as regulatory
assets, with corresponding obligations on its balance sheet.
WMECO 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. 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 Yankee companies see
"Notes to Consolidated Financial Statements," Note 11B.
WMECO's share of estimated costs of decommissioning the nuclear plant owned
by VYNPC is approximately $13.2 million in year-end 1998 dollars.
Millstone 2 and 3
WMECO's estimated cost to decommission its shares of Millstone 2 and
Millstone 3 is approximately $144.0 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 $66.9 million.
See the "Notes to Consolidated Financial Statements," Note 2, 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. 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.
Environmental Matters
WMECO 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 WMECO. At December 31, 1998, WMECO had
recorded an environmental reserve of approximately $1.9 million. 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 $ (33) (8)% $ 5 1 %
Fuel, purchased and net
interchange power (28) (20) 25 22
Other operation (18) (12) 17 12
Maintenance (25) (30) 25 45
Amortization of regulatory
assets, net - - (3) (30)
Federal and state
income taxes 16 (99) (26) (a)
Net income 18 (65) (39) (a)
(a) Percentage greater than 100.
Operating Revenues
Total operating revenues decreased in 1998, primarily due to a 10 percent
retail rate decrease in 1998, partially offset by higher retail sales. Retail
kilowatt-hour sales were 1.3 percent higher than 1997.
Total operating revenues increased in 1997, primarily due to higher
transmission and capacity revenues, partially offset by lower retail sales.
Retail kilowatt-hour sales were 1.0 percent lower in 1997 as a result of mild
winter weather.
Fuel, Purchased and Net Interchange Power
Fuel, purchased and net interchange power expense decreased in 1998,
primarily due to lower replacement power costs as a result of 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 expense decreased in 1998, primarily due to
lower costs at the Millstone units ($30 million), lower capacity charges from
CYAPC and MYAPC ($10 million) and the recognition of environmental insurance
proceeds ($2 million).
Other operation and maintenance expense increased in 1997, primarily due to
higher costs associated with the Millstone restart effort ($40 million),
higher capacity charges from MYAPC ($2 million) and higher costs to ensure
adequate capacity ($6 million), partially offset by lower capacity charges
from CYAPC as a result of a property tax refund ($4 million) and lower
administrative and general expenses primarily due to lower pensions and
benefit costs ($5 million).
Amortization of Regulatory Assets, Net
The change in amortization of regulatory assets, net in 1998 was not
significant.
Amortization of regulatory assets, net decreased in 1997, primarily due to
the completion of the amortization of Millstone 3 investment in 1996.
Federal and State Income Taxes
Federal and state income taxes increased in 1998, primarily due to higher
book taxable income.
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
Western Massachusetts Electric Company And Subsidiary
SELECTED FINANCIAL DATA (a)
1998 1997 1996 1995 1994
(Thousands of Dollars)
Operating Revenues....$ 393,322 $ 426,447 $ 421,337 $ 420,434 $ 421,477
Operating Income/
(Loss).............. 19,854 251 33,190 63,064 70,940
Net (Loss)/Income..... (9,579) (27,460) 11,089 39,133 49,457
Cash Dividends on
Common Stock........ - 15,004 16,494 30,223 29,514
Total Assets.......... 1,287,682 1,179,128 1,191,915 1,142,346 1,183,618
Long-Term Debt (b).... 389,314 396,649 349,442 347,470 379,969
Preferred Stock Not
Subject to Mandatory
Redemption.......... 20,000 20,000 20,000 53,500 68,500
Preferred Stock Subject
to Mandatory
Redemption(b)....... 19,500 21,000 21,000 24,000 24,675
Obligations Under
Capital Leases(b)... 34,093 32,887 32,234 36,011 36,797
(a) Reclassifications of prior data have been made to conform with the
current presentation.
(b) Includes portion due within one year.
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended (a)
1998 March 31 June 30 Sept. 30 Dec. 31
Operating Revenues......... $107,189 $ 90,649 $93,839 $101,645
Operating Income........... $ 7,838 $ 6,614 $ 4,301 $ 1,101
Net Income/(Loss).......... $ 1,367 $ (738) $(3,546) $ (6,662)
1997
Operating Revenues......... $106,054 $104,130 $111,166 $105,097
Operating Income/(Loss).... $ 675 $ (4,794) $ 1,875 $ 2,495
Net Loss................... $ (5,033) $(11,492) $ (5,303) $ (5,632)
Western Massachusetts Electric Company and Subsidiary
STATISTICS (Unaudited)
Gross Electric Average
Utility Plant Annual
December 31, Use Per Electric
(Thousands kWh Sales Residential Customers Employees
of Dollars) (Millions) Customer (kWh) (Average) (December 31)
1998 $1,256,046 4,091 6,979 196,339 533
1997 1,334,233 4,300 7,121 195,324 507
1996 1,303,361 4,626 7,335 194,705 497
1995 1,285,269 4,846 7,105* 193,964 527
1994 1,271,513 4,978 7,433 193,187 617
*Effective January 1, 1996, the amounts shown reflect billed
and unbilled sales. 1995 has been restated to reflect this change.