1998 Annual Report
Public Service Company of New Hampshire
Index
Contents Page
Balance Sheets 2
Statements of Income 4
Statements of Comprehensive Income 4
Statements of Cash Flows 5
Statements of Common Stockholder's Equity 6
Notes to Financial Statements 7
Report of Independent Public Accountants 39
Management's Discussion and Analysis of Financial
Condition and Results of Operations 41
Selected Financial Data 50
Statistics (Unaudited) 52
Statements of Quarterly Financial Data (Unaudited) 52
Preferred Stockholder and Bondholder Information Back Cover
PART I. FINANCIAL INFORMATION
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
- -----------------------------------------------------------------------------------------
AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at cost:
Electric................................................ $ 1,927,341 $ 1,898,319
Less: Accumulated provision for depreciation......... 631,584 590,056
------------- -------------
1,295,757 1,308,263
Unamortized acquisition costs........................... 352,855 402,285
Construction work in progress........................... 20,735 10,716
Nuclear fuel, net....................................... 1,323 1,308
------------- -------------
Total net utility plant............................. 1,670,670 1,722,572
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 5,580 4,332
Investments in regional nuclear generating
companies and subsidiary company, at equity............ 19,836 19,169
Other, at cost.......................................... 4,319 3,773
------------- -------------
29,735 27,274
------------- -------------
Current Assets:
Cash and cash equivalents............................... 60,885 94,459
Receivables, less accumulated provision for
uncollectible accounts of $2,041,000 in 1998
and of $1,702,000 in 1997............................. 89,044 89,338
Accounts receivable from affiliated companies........... 12,018 38,520
Accrued utility revenues................................ 42,145 36,885
Fuel, materials and supplies, at average cost........... 36,642 40,161
Recoverable energy costs--current portion............... 65,257 31,886
Prepayments and other................................... 22,744 11,271
------------- -------------
328,735 342,520
------------- -------------
Deferred Charges:
Regulatory assets....................................... 610,222 695,418
Deferred receivable from affiliated company............. 22,728 32,472
Unamortized debt expense................................ 13,995 11,749
Other................................................... 5,510 5,154
------------- -------------
652,455 744,793
------------- -------------
Total Assets........................................ $ 2,681,595 $ 2,837,159
============= =============
See accompanying notes to financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
BALANCE SHEETS
- -----------------------------------------------------------------------------------------
AT DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$1 par value.
Authorized and outstanding 1,000 shares................ $ 1 $ 1
Capital surplus, paid in................................ 424,250 423,713
Retained earnings....................................... 252,912 170,501
Accumulated other comprehensive income.................. 1,004 -
------------- -------------
Total common stockholder's equity.............. 678,167 594,215
Preferred stock subject to mandatory redemption......... 50,000 75,000
Long-term debt.......................................... 516,485 516,485
------------- -------------
Total capitalization........................... 1,244,652 1,185,700
------------- -------------
Obligations Under Seabrook Power Contracts
and Other Capital Leases................................. 703,411 799,450
------------- -------------
Current Liabilities:
Long-term debt and preferred stock--current portion..... 25,000 195,000
Obligations under Seabrook Power Contracts and other
capital leases--current portion........................ 138,812 122,363
Accounts payable........................................ 26,227 21,231
Accounts payable to affiliated companies................ 28,410 32,677
Accrued taxes........................................... 82,743 69,445
Accrued interest........................................ 5,894 7,197
Accrued pension benefits................................ 46,004 46,061
Other................................................... 8,540 9,417
------------- -------------
361,630 503,391
------------- -------------
Deferred Credits:
Accumulated deferred income taxes....................... 225,091 204,406
Accumulated deferred investment tax credits............. 3,460 3,972
Deferred contractual obligations........................ 66,400 83,042
Deferred revenue from affiliated company................ 22,728 32,472
Other................................................... 54,223 24,726
------------- -------------
371,902 348,618
------------- -------------
Commitments and Contingencies (Note 6)
------------- -------------
Total Capitalization and Liabilities........... $ 2,681,595 $ 2,837,159
============= =============
See accompanying notes to financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF INCOME
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FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues................................. $ 1,087,247 $ 1,108,459 $ 1,110,169
------------ ------------ ------------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power..... 322,071 326,745 356,679
Other......................................... 402,012 368,363 326,337
Maintenance...................................... 51,734 38,320 45,728
Depreciation..................................... 45,342 44,377 42,983
Amortization of regulatory assets, net........... 26,758 56,557 56,884
Federal and state income taxes................... 65,079 86,450 80,677
Taxes other than income taxes.................... 43,052 43,623 45,123
------------ ------------ ------------
Total operating expenses................... 956,048 964,435 954,411
------------ ------------ ------------
Operating Income................................... 131,199 144,024 155,758
------------ ------------ ------------
Other Income:
Equity in earnings of regional nuclear
generating companies and subsidary company..... 2,649 1,373 2,075
Other, net....................................... 9,222 698 8,075
Income taxes..................................... (7,473) (2,391) (7,723)
------------ ------------ ------------
Other income, net.......................... 4,398 (320) 2,427
------------ ------------ ------------
Income before interest charges............. 135,597 143,704 158,185
------------ ------------ ------------
Interest Charges:
Interest on long-term debt....................... 43,317 51,259 57,557
Other interest................................... 594 273 3,163
------------ ------------ ------------
Interest charges, net...................... 43,911 51,532 60,720
------------ ------------ ------------
Net Income......................................... $ 91,686 $ 92,172 $ 97,465
============ ============ ============
STATEMENTS OF COMPREHENSIVE INCOME
Net Income......................................... $ 91,686 $ 92,172 $ 97,465
------------ ------------ ------------
Other comprehensive income, net of tax:
Unrealized gains on securities..................... 1,198 - -
Minimum pension liability adjustments.............. (194) - -
------------ ------------ ------------
Other comprehensive income, net of tax........... 1,004 - -
------------ ------------ ------------
Comprehensive Income............................... $ 92,690 $ 92,172 $ 97,465
============ ============ ============
See accompanying notes to financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF CASH FLOWS
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For the Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net Income.................................................. $ 91,686 $ 92,172 $ 97,465
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 45,342 44,377 42,983
Deferred income taxes and investment tax credits, net..... 78,366 21,645 94,983
Recoverable energy costs, net of amortization............. 2,065 (12,336) 31,663
Amortization of acquisition costs......................... 49,431 89,417 89,744
Amortization of regulatory liability...................... (32,860) (32,860) (32,860)
Amortization of other regulatory assets................... 10,187 - -
Deferred Seabrook capital costs .......................... (31,587) (8,376) -
Other sources of cash..................................... 32,255 51,054 65,922
Other uses of cash........................................ (53,615) (67,590) (51,188)
Changes in working capital:
Receivables and accrued utility revenues.................. 21,536 9,407 (36,907)
Fuel, materials and supplies.............................. 3,519 4,691 (3,135)
Accounts payable.......................................... 729 (14,897) (7,714)
Accrued taxes............................................. 13,298 69,364 (717)
Other working capital (excludes cash)..................... (13,710) (13,365) (13,559)
----------- ----------- -----------
Net cash flows from operating activities...................... 216,642 232,703 276,680
----------- ----------- -----------
Financing Activities:
Reacquisitions and retirements of long-term debt............ (170,000) - (172,500)
Reacquisitions and retirements of preferred stock........... (25,000) (25,000) -
Cash dividends on preferred stock........................... (9,275) (11,925) (13,250)
Cash dividends on common stock.............................. - (85,000) (52,000)
----------- ----------- -----------
Net cash flows used for financing activities.................. (204,275) (121,925) (237,750)
----------- ----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (43,780) (33,570) (37,480)
Nuclear fuel.............................................. (307) 5 129
----------- ----------- -----------
Net cash flows used for investments in plant............ (44,087) (33,565) (37,351)
Investment in NU system Money Pool.......................... - 18,250 850
Investment in nuclear decommissioning trusts................ (641) (490) (521)
Other investment activities, net............................ (1,213) (1,529) (1,010)
----------- ----------- -----------
Net cash flows used for investments........................... (45,941) (17,334) (38,032)
----------- ----------- -----------
Net (decrease)/increase in cash for the period................ (33,574) 93,444 898
Cash and cash equivalents- beginning of period................ 94,459 1,015 117
----------- ----------- -----------
Cash and cash equivalents- end of period...................... $ 60,885 $ 94,459 $ 1,015
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid/(refunded) during the year for:
Interest, net of amounts capitalized........................ $ 42,677 $ 51,775 $ 58,835
=========== =========== ===========
Income taxes................................................ $ 18,948 $ 10,612 $ (457)
=========== =========== ===========
(Decrease)/increase in obligations:
Seabrook Power Contracts and other capital leases........... $ (78,939) $ 6,197 $ 93
=========== =========== ===========
See accompanying notes to financial statements.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
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Accumulated
Capital Other
Common Surplus, Retained Comprehensive
Stock Paid In Earnings Income Total
- --------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at January 1, 1996............... $ 1 $422,385 $143,039 $ - $565,425
Net income........................... 97,465 97,465
Cash dividends on preferred stock.... (13,250) (13,250)
Cash dividends on common stock....... (52,000) (52,000)
Capital stock expenses, net.......... 673 673
-------- --------- --------- ------------- ---------
Balance at December 31, 1996............. 1 423,058 175,254 - 598,313
Net income........................... 92,172 92,172
Cash dividends on preferred stock.... (11,925) (11,925)
Cash dividends on common stock....... (85,000) (85,000)
Capital stock expenses, net.......... 655 655
-------- --------- --------- ------------- ---------
Balance at December 31, 1997............. 1 423,713 170,501 - 594,215
Net income........................... 91,686 91,686
Cash dividends on preferred stock.... (9,275) (9,275)
Capital stock expenses, net.......... 537 537
Other comprehensive income........... 1,004 1,004
-------- --------- --------- ------------- ---------
Balance at December 31, 1998............. $ 1 $424,250 $252,912 $ 1,004 $678,167
======== ========= ========= ============= =========
See accompanying notes to financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. About Public Service Company of New Hampshire
Public Service Company of New Hampshire (PSNH or the company), The
Connecticut Light and Power Company (CL&P), Western Massachusetts
Electric Company (WMECO),North Atlantic Energy Corporation (NAEC)
and Holyoke Water Power Company (HWP) 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, a 1,148
megawatt (MW) nuclear power generating unit) to PSNH under two life-
of-unit, full cost recovery contracts (the Seabrook Power Contracts).
HWP is also 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 PSNH, are
subject to the provisions of the 1935 Act. Arrangements among the
NU system companies, outside agencies and other utilities covering
interconnections, interchange of electric power and sales of utility
property are subject to regulation by the Federal Energy Regulatory
Commission (FERC) and/or the SEC. PSNH is subject to further
regulation for rates, accounting and other matters by the FERC
and/or the applicable state regulatory commissions.
Other wholly owned subsidiaries of NU provide support services for
the NU system companies and, in some cases, for other New England
utilities. Northeast Utilities Service Company (NUSCO) provides
centralized accounting, administrative, information resources,
engineering, financial, legal, operational, planning, purchasing and
other services to the NU system companies. North Atlantic Energy
Service Corporation (NAESCO) acts as agent for CL&P and NAEC, and
has operational responsibilities for Seabrook. 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.
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 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 a new
accounting standard during 1998: Statement of Financial Accounting
Standards (SFAS) 132, "Employers' Disclosures About Pensions and
Other Postretirement Benefits."
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 6, "Pension Benefits and
Postretirement Benefits Other Than Pensions," for further information
on PSNH'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. PSNH 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 which PSNH 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: PSNH owns common stock of
four regional nuclear generating companies (Yankee companies) which
are accounted for on the equity basis due to PSNH's ability to
exercise significant influence over their operating and financial
policies. PSNH's ownership interests in the Yankee companies at
December 31, 1998 are:
Connecticut Yankee Atomic Power Company (CYAPC) 5.0%
Yankee Atomic Electric Company (YAEC) 7.0
Maine Yankee Atomic Power Company (MYAPC) 5.0
Vermont Yankee Nuclear Power Corporation (VYNPC) 4.0
PSNH's equity investments in the Yankee companies at December 31,
1998 are:
(Thousands of Dollars)
CYAPC....................... $ 5,457
YAEC........................ 1,356
MYAPC....................... 4,312
VYNPC....................... 2,227
$13,352
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 further information on the Yankee companies, see
Note 4, "Nuclear Decommissioning and Plant Closure Costs."
Millstone 3: PSNH has a 2.85 percent joint ownership interest in
Millstone 3, a 1,154 MW nuclear generating unit. As of December 31,
1998 and 1997, plant-in-service included approximately $118.8
million and $118.7 million, respectively, and the accumulated
provision for depreciation included approximately $35.5 million and
$32.3 million, respectively, for PSNH's share of Millstone 3. PSNH's
share of Millstone 3 expenses is included in the corresponding
operating expenses on the accompanying Statements of Income.
For further information on the Millstone 3 unit, see Note 10C,
"Commitments and Contingencies - Nuclear Performance."
Wyman Unit 4: PSNH has a 3.14 percent ownership interest in Wyman
Unit 4 (Wyman), a 632 MW oil-fired generating unit. At December 31,
1998 and 1997, plant-in-service included approximately $6.1 million
and $6.0 million, respectively and the accumulated provision for
depreciation included approximately $4.0 million and $3.9 million,
respectively, for PSNH's share of Wyman. PSNH's share of Wyman
expenses is included in the corresponding operating expenses on the
accompanying Statements of Income.
E. Depreciation
The provision for depreciation is calculated using the straight-line
method based on estimated remaining lives of depreciable utility
plant-in-service, adjusted for salvage value and removal costs, as
approved by the appropriate regulatory agency. Except for major
facilities, depreciation rates are applied to the average plant-in-
service during the period. Major facilities are depreciated from the
time they are placed in service. When plant is retired from service,
the original cost of plant, including costs of removal, less salvage,
is charged to the accumulated provision for depreciation. The costs
of closure and removal of non-nuclear facilities are accrued over the
life of the plant as a component of depreciation. The depreciation
rates for the several classes of electric plant-in-service are
equivalent to a composite rate of 3.6 percent in 1998 and 3.7 percent
in 1997 and 1996. See Note 4, "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 $37.3 million and $34.2 million,
respectively, accrued for the cost of removal, net of salvage for
non-nuclear generation property.
F. Revenues
Other than revenues under fixed-rate agreements negotiated with
certain wholesale, commercial and industrial customers and limited
retail access programs, utility revenues are based on authorized
rates applied to each customer's use of electricity. In general,
rates can be changed only through a formal proceeding before the
appropriate regulatory commission. Regulatory commissions also have
authority over the terms and conditions of nontraditional rate
making arrangements. At the end of each accounting period, PSNH
accrues an estimate for the amount of energy delivered but unbilled.
For information on PSNH rate proceedings and the impact on PSNH, see
Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A), and Note 10B, "Commitments and
Contingencies - Rate Matters."
G. Acquisition Costs
The PSNH acquisition costs represent the aggregate value placed by
the 1989 rate agreement with the state of New Hampshire (Rate
Agreement) on PSNH's assets in excess of the net book value of
PSNH's non-Seabrook assets, plus the $700 million value assigned to
Seabrook by the Rate Agreement, as part of the bankruptcy resolution
on June 5, 1992 (Acquisition Date). The Rate Agreement provides for
the recovery through rates, with a return, of the PSNH acquisition
costs. The unrecovered balance at December 31, 1998, was approximately
$352.9 million and is being recovered ratably over a 20-year period
through May 1, 2011 in accordance with the Rate Agreement. Through
December 31, 1998, PSNH has collected approximately $640.0 million of
acquisition costs.
H. Regulatory Accounting and Assets
The accounting policies of PSNH and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of
the ratemaking process in accordance with SFAS 71, "Accounting for
the Effects of Certain Types of Regulation." Assuming a cost-of-
service based regulatory structure, regulators may permit incurred
costs, normally treated as expenses, to be deferred and recovered
through future revenues. Through their actions, regulators may also
reduce or eliminate the value of an asset, or create a liability. If
any portion of PSNH's operations were no longer subject to the
provisions of SFAS 71, PSNH 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, PSNH would be required to determine any
impairment to the carrying costs of deregulated plant and inventory
assets.
Management anticipates that a restructuring program will be
implemented in New Hampshire, and such a program is currently the
focus of negotiations and proceedings within the federal and state
legal systems. However, management continues to believe the
application of SFAS 71 remains appropriate at this time. Once PSNH's
restructuring plan has been formally approved by the appropriate
regulatory agency and management can determine the impacts of
restructuring, PSNH's generation businesses no longer will be rate
regulated on a cost-of-service basis. The majority of PSNH's
regulatory assets are related to its generation business. Management
expects that the transmission and distribution business within New
Hampshire will continue to be rate-regulated on a cost-of-service
basis and restructuring plans will allow for the recovery of
regulatory assets through this portion of the business.
For further information on PSNH's regulatory environment and the
potential impacts of restructuring, see Note 10A, "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 PSNH will recover its
investments in long-lived assets, including regulatory assets.
The components of PSNH's regulatory assets are as follows:
At December 31, 1998 1997
(Thousands of Dollars)
Recoverable energy costs, net
(Note 1J)......................... $156,250 $191,686
Income taxes, net (Note 1I)......... 139,739 128,244
Unrecovered contractual
obligations (Note 1K)............. 66,400 83,042
Deferred costs - nuclear
plants (Note 1L).................. 244,599 290,232
Other............................... 3,234 2,214
$610,222 $695,418
I. 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 9,
"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.... $100,786 $103,985
Net operating loss (NOL)
carryforwards...................... (25,610) (94,822)
Regulatory assets - income tax
gross up........................... 52,425 49,101
Other................................ 97,490 146,142
$225,091 $204,406
At December 31, 1998, PSNH had a federal NOL carryforward of
approximately $94 million that can be used against PSNH's federal
taxable income and which if unused, expires between the years 2005
and 2006. PSNH also had Investment Tax Credit (ITC) carryforwards of
$37 million which if unused, expire between the years 1999 and 2004.
The reorganization of PSNH under Chapter 11 of the United States
Bankruptcy Code limits the annual amount of ITC carryforward that
may be used. Approximately $6 million of the ITC carryforward is
subject to this limitation.
J. Recoverable Energy Costs
Under the Energy Policy Act of 1992 (Energy Act), PSNH 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. PSNH is currently recovering these costs through rates.
As of December 31, 1998, PSNH's total D&D deferrals were approximately
$237,000.
The Rate Agreement includes a comprehensive fuel and purchased power
adjustment clause (FPPAC) permitting PSNH to pass through to retail
customers, for a 10-year period that began in May 1991, the retail
portion of differences between the fuel and purchased power costs
assumed in the Rate Agreement and PSNH's actual costs, which include
the costs related to the Seabrook Power Contracts and the Clean Air
Act Amendment. The cost components of the FPPAC are subject to a
prudence review by the New Hampshire Public Utilities Commission
(NHPUC). At December 31, 1998, recoverable energy costs include
$156.3 million of noncurrent recoverable energy costs deferred under
the FPPAC.
Under the Rate Agreement, charges made by NAEC through the Seabrook
Power Contracts, including the deferred Seabrook capital expenses,
are to be deferred by PSNH and subsequently billed and collected by
PSNH through the FPPAC. PSNH began to defer the amount of these
costs on December 1, 1997 and continued to do so for the period
December 1, 1997 through May 31, 1998. Beginning on June 1, 1998,
these costs began to be recovered over a 36-month period. At
December 31, 1998, PSNH has deferred approximately $40.0 million
of these costs, which balance is recorded in PSNH's deferred costs,
nuclear plants.
See Note 10A, "Commitments and Contingencies - Restructuring" for the
possible impacts on PSNH of the NHPUC's decision related to industry
restructuring.
K. Unrecovered Contractual Obligations
Under the terms of contracts with MYAPC, CYAPC, and YAEC, the
shareholder-sponsor companies, including CL&P, PSNH and WMECO, are
responsible for their proportionate share of the remaining costs of
the units, including decommissioning. As management expects that the
NU system companies will be allowed to recover these costs from their
customers, the NU system companies have recorded regulatory assets,
with corresponding obligations on their respective balance sheets.
For further information, see Note 4, "Nuclear Decommissioning and
Plant Closure Costs."
L. Deferred Costs - Nuclear Plants
Under the Rate Agreement, the plant costs of Seabrook were phased
into rates over a seven-year period beginning May 15, 1991. These
deferred costs are being billed to PSNH by NAEC through the Seabrook
Power Contracts beginning December 1, 1997, and will be fully
recovered from PSNH's customers by May 2001.
M. Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and short-term cash
investments which are highly liquid in nature and have original
maturities of three months or less.
2. SEABROOK POWER CONTRACTS
PSNH and NAEC have entered into two power contracts that obligate PSNH
to purchase NAEC's 35.98 percent ownership of the capacity and output of
Seabrook for the term of Seabrook's Nuclear Regulatory Commission (NRC)
operating license. Under these power contracts, PSNH is obligated to
pay NAEC's cost of service during this period, regardless of whether
Seabrook 1 is operating. NAEC's cost of service includes all of its
Seabrook-related costs, including operation and maintenance (O&M)
expenses, fuel expense, income and property tax expense, depreciation
expense, certain overhead and other costs and a return on its allowed
investment.
PSNH has included its right to buy power from NAEC on its Balance Sheets
as part of utility plant and regulatory assets with a corresponding
obligation. At December 31, 1998, this right was valued at
approximately $838.1 million.
The contracts established the value of the initial investment in Seabrook
(initial investment) at $700 million. As prescribed by the Rate Agreement,
as of May 1, 1996, NAEC phased into rates 100 percent of its investment
in Seabrook 1. This plan is in compliance with SFAS 92,"Regulated
Enterprises-Accounting for Phase-in Plans." From the Acquisition Date
through November 1997, NAEC recorded $203.9 million of deferred return on
its investment in Seabrook 1. At November 30, 1997, NAEC's utility plant
included $84.1 million of deferred return that was transferred as part of
the Seabrook plant assets to NAEC on the Acquisition Date. Beginning on
December 1, 1997, the deferred return, including the portion transferred
to NAEC, is currently being billed through the Seabrook Power Contracts
to PSNH and will be fully recovered from customers by May 2001. NAEC
depreciated its initial investment over the term of Seabrook 1's
operating license (39 years), and any subsequent plant additions are
depreciated on a straight-line basis over the remaining term of the
power contracts at the time the subsequent additions are placed in
service.
If Seabrook 1 is shut down prior to the expiration of the NRC operating
license, PSNH will be unconditionally required to pay NAEC termination
costs for 39 years, less the period during which Seabrook 1 has operated.
These termination costs will reimburse NAEC for its share of Seabrook 1
shut-down and decommissioning costs, and will pay NAEC a return of and
on any undepreciated balance of its initial investment over the remaining
term of the power contracts, and the return of and on any capital
additions to the plant made after the Acquisition Date over a period of
five years after shut down (net of any tax benefits to NAEC attributable
to the cancellation).
Contract payments charged to operating expenses are approximately:
Year Contract Payments
(Thousands of Dollars)
1998............................ $272,000
1997............................ 188,000
1996............................ 159,000
Interest included in the contract payment was $54 million in 1998, $57
million in 1997, and $55 million in 1996.
Future minimum payments, excluding executory costs, such as property
taxes, state use taxes, insurance and maintenance, under the terms of
the contracts, as of December 31, 1998, are approximately:
Year Seabrook Power Contracts
(Thousands of Dollars)
1999........................... $ 195,000
2000........................... 193,000
2001........................... 117,000
2002........................... 78,100
2003........................... 76,000
After 2003..................... 1,095,000
Future minimum payments........ 1,754,000
Less amount representing
interest..................... 916,000
Present value of Seabrook Power
Contracts payments........... $ 838,100
See Note 10A, "Commitments and Contingencies - Restructuring" for the
possible impacts the NHPUC's restructuring decision may have on the
Seabrook Power Contracts.
3. LEASES
PSNH has entered into lease agreements, some of which are capital leases,
for the use of data processing and office equipment, vehicles and office
space. The provisions of these lease agreements generally provide for
renewal options. The following rental payments have been charged to
expense:
Year Capital Leases Operating Leases
1998................. $1,584,000 $5,392,000
1997................. 1,579,000 5,657,000
1996................. 1,105,000 4,884,000
Interest included in capital lease rental payments was $193,000 in 1998,
$272,000 in 1997 and $292,000 in 1996.
Future minimum rental payments, excluding executory costs, such as
property taxes, state use taxes, insurance and maintenance, under long-
term noncancellable leases, as of December 31, 1998, are:
Year Capital Leases Operating Leases
(Thousands of Dollars)
1999.................... $1,400 $ 5,800
2000.................... 1,200 5,100
2001.................... 1,200 4,600
2002.................... 400 2,500
2003.................... 400 1,300
After 2003.............. 1,500 3,000
Future minimum lease
payments............... 6,100 $22,300
Less amount representing
interest............... 2,000
Present value of future
minimum lease payments. $4,100
4. NUCLEAR DECOMMISSIONING AND PLANT CLOSURE COSTS
Millstone 3 and Seabrook 1: Millstone 3 and Seabrook 1 have service
lives that are expected to end during the years 2025 and 2026,
respectively. 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 Millstone 3 and Seabrook 1. Decommissioning
studies are reviewed and updated periodically to reflect changes in
decommissioning requirements, costs, technology and inflation.
The estimated cost of decommissioning PSNH's 2.85 percent ownership share
of Millstone 3 and NAEC's 35.98 percent share of Seabrook 1, in year-end
1998 dollars is $15.9 million and $175.9 million, respectively. Millstone 3
and Seabrook 1 decommissioning costs will be increased annually by their
respective escalation rates. PSNH's Millstone 3 decommissioning costs
are accrued over the expected service life of the unit and are included in
depreciation expense on its Statements of Income. Nuclear decommissioning
costs related to PSNH's share of Millstone 3 amounted to $0.4 million in
1998, 1997 and 1996. Nuclear decommissioning, as a cost of removal, is
included in the accumulated provision for depreciation on PSNH's Balance
Sheets. At December 31, 1998 and 1997, the balance in the accumulated
reserve for depreciation amounted to $3.0 million and $2.6 million,
respectively.
PSNH makes payments to an independent decommissioning trust for its
portion of the costs of decommissioning Millstone 3. NAEC's portion of
the cost of decommissioning Seabrook 1 is paid to an independent
decommissioning financing fund managed by the state of New Hampshire.
Funding of the estimated decommissioning costs assumes levelized
collections for Millstone 3 and escalated collections for Seabrook 1,
and after-tax earnings on the Millstone and Seabrook decommissioning
funds of approximately 5.5 percent and 6.5 percent, respectively. Under
the terms of the Rate Agreement, PSNH is obligated to pay NAEC's share
of Seabrook's decommissioning costs, even if the unit is shut down prior
to the expiration of its operating license. Accordingly, NAEC bills PSNH
directly for its share of the costs of decommissioning Seabrook 1. PSNH
records its Seabrook decommissioning costs as a component of purchased
power expense on its Statements of Income. Under the Rate Agreement,
PSNH's Seabrook decommissioning costs are recovered through base rates.
As of December 31, 1998, PSNH collected through rates approximately
$3.0 million toward the future decommissioning costs of its share of
Millstone 3, which has been transferred to the external decommissioning
trust. As of December 31, 1998, NAEC has paid approximately $25.6
million (including payments made prior to the Acquisition Date by PSNH),
into Seabrook 1's decommissioning financing fund. Earnings on the
decommissioning trust and financing fund increase the decommissioning
trust balance and the accumulated reserve for depreciation. Unrealized
gains and losses associated with the decommissioning trust and financing
fund also impact the balance of the trust, and the accumulated reserve
for depreciation. The fair value of the amounts in the external
decommissioning trust and financing fund was $5.6 million and $35.2
million, respectively, as of 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. PSNH 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 rates of PSNH.
Based on present estimates and assuming its nuclear units operate to
the end of their respective licensing periods, PSNH expects that the
decommissioning trust and financing fund will be substantially funded
when the units are retired from service.
Yankee Companies: VYNPC owns and operates a nuclear generating unit with
a service life that is expected to end in 2012. PSNH's ownership share of
estimated costs, in year-end 1998 dollars, of decommissioning the unit
owned and operated by VYNPC is approximately $21.2 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 PSNH's
(Thousands of Dollars) Obligation Share
Maine Yankee.................... $715,065 $ 35,753
Connecticut Yankee.............. 498,557 24,928
Yankee Atomic................... 81,699 5,719
For further information on the Yankee companies, see Note 10B,
"Commitments and Contingencies - Rate Matters."
For information on proposed changes to the accounting for decommissioning,
see the MD&A.
5. SHORT-TERM DEBT
The amount of short-term borrowings that may be incurred by PSNH is
subject to periodic approval by either the SEC under the 1935 Act or
by the NHPUC. Effective April 1998, PSNH was authorized under a waiver
from the NHPUC, to incur short-term borrowings up to a maximum of $75
million.
PSNH has access to a $75 million revolving credit agreement entered
into in April 1998 with a group of 16 banks. The borrowing level under
this agreement was reduced from the previous $125 million level. The
agreement will expire in April 1999. Under the terms of this agreement,
PSNH is obligated to pay a facility fee of .50 percent per annum on the
commitment. PSNH's borrowings under the $75 million agreement are
secured, per dollar of borrowing, by $75 million of first mortgage bonds
and substantially all of PSNH's accounts receivable. There were no
borrowings under this facility at December 31, 1998.
On March 20, 1998, in connection with the $75 million PSNH credit
agreement, the NHPUC issued an order requiring PSNH to obtain NHPUC
approval before paying any dividends on its common stock and before
investing any PSNH funds in the NU system Money Pool during the expected
364-day term of the facilities. PSNH has not sought such authorization.
Under the credit agreement discussed above, PSNH 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.
Money Pool: Certain subsidiaries of NU, including PSNH, 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.
However, borrowings based on loans from NU parent 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, PSNH had no
outstanding borrowings from the Pool. Due to the conditions placed
on PSNH by lenders and the NHPUC during April 1998 refinancings, PSNH
is presently restricted from lending money to the NU System Money Pool.
Maturities of PSNH's short-term debt obligations are for periods of
three months or less.
6. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The NU system's subsidiaries participate in a uniform noncontributory
defined benefit retirement plan covering all regular NU system
employees. Benefits are based on years of service and employees'
highest eligible compensation during 60 consecutive months of employment.
PSNH's direct portion of the NU system's pension (credit)/cost, part
of which was charged to utility plant, approximated $(0.06) million
in 1998, $1.3 million in 1997 and $6.2 million in 1996.
Currently, PSNH annually funds an amount at least equal to that which
will satisfy the requirements of the Employee Retirement Income Security
Act and the Internal Revenue Code. Pension costs are determined using
market-related values of pension assets.
PSNH also provides 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 PSNH
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. PSNH is funding postretirement
costs through external trusts. PSNH is funding, on an annual basis,
amounts that have been rate-recovered and which also are tax deductible
under the Internal Revenue Code.
Pension and trust assets are invested primarily in domestic and
international equity securities and bonds.
The following table represents the plans' beginning benefit obligation
balance reconciled to the ending benefit obligation balance, beginning
fair value of plan assets balance reconciled to the ending fair value of
plan assets balance and the respective funds' funded status reconciled to
the 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........... $(187,968) $(179,192) $(46,609) $(47,963)
Service cost.................. (4,275) (4,021) (858) (802)
Interest Cost................. (13,192) (13,398) (3,439) (3,352)
Transfers..................... (729) 1,049 - -
Actuarial (loss)/gain......... (5,128) (4,434) (2,807) 1,782
Benefits paid................. 10,249 10,995 3,644 3,726
Special termination benefits.. - 1,033 - -
Benefit obligation at
end of year................. $(201,043) $(187,968) $(50,069) $(46,609)
Change in plan assets
Fair value of plan assets at
beginning of year........... $ 195,612 $ 173,035 $ 22,908 $ 17,882
Actual return on plan assets. 27,088 34,621 3,211 3,697
Employer contribution......... - - 4,847 5,055
Benefits paid................. (10,249) (10,995) (3,644) (3,726)
Transfers..................... 729 (1,049) - -
Fair value of plan assets
at end of year.............. $ 213,180 $ 195,612 $ 27,322 $ 22,908
Funded status at
December 31................. $ 12,137 $ 7,644 $(22,747) $(23,701)
Unrecognized transition
amount...................... 3,670 4,003 41,167 44,108
Unrecognized prior service
cost........................ 7,058 7,597 - -
Unrecognized net gain......... (68,869) (65,305) (18,420) (20,407)
Accrued benefit cost.......... $ (46,004) $(46,061) $ - $ -
The following actuarial assumptions were used in calculating the plan's year-
end funded status:
At December 31,
Pension Postretirement
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.......... $ 4,275 $ 4,021 $ 4,245 $ 858 $ 802 $ 914
Interest cost......... 13,192 13,398 12,808 3,439 3,352 3,559
Expected return on
plan assets......... (15,626) (13,873) (12,344) (1,767) (1,385) (821)
Amortization of
unrecognized transition
obligation.......... 334 334 334 2,941 2,941 2,941
Amortization of prior
service cost........ 539 539 539 - - -
Amortization of
actuarial
gain................ (2,771) (2,115) (1,315) - - -
Other amortization,
net................. - - - (624) (827) (352)
Curtailment........... - (1,033) 1,917 - - -
Net periodic
(credit)/cost....... $ (57) $ 1,271 $ 6,184 $ 4,847 $ 4,883 $ 6,241
For calculating pension and postretirement benefit costs, the following
assumptions were used:
For the Years Ended December 31,
Postretirement
Pension Benefits Benefits
1998 1997 1996 1998 1997 1996
Discount rate........ 7.25% 7.75% 7.50% 7.25% 7.75% 7.50%
Expected long-term
rate of return...... 9.50% 9.25% 8.75% N/A N/A N/A
Compensation/
progression rate.... 4.25% 4.75% 4.75% 4.25% 4.75% 4.75%
Long-term rate
of return-
Health assets
net of tax......... N/A N/A N/A 7.75% 7.50% 5.25%
Life assets......... N/A N/A N/A 9.50% 9.25% 8.75%
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of changing the
assumed health care cost trend rate by one percentage point in each year
would have the following effects:
One Percentage One Percentage
(Thousands of Dollars) Point Increase Point Decrease
Effect on total service
and interest cost
components of net periodic
retirement health care
benefit costs................. $ 236 $ (224)
Effect on accumulated post-
retirement benefit
obligation.................... 3,178 (2,952)
The trust holding the health plan assets is subject to federal income
taxes at a 39.6 percent tax rate.
7. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Details of preferred stock subject to mandatory redemption are:
Shares
Outstanding December 31,
Description December 31, 1998 1998 1997 1996
(Thousands of Dollars)
10.60%
Series A of 1991...... 3,000,000 $ 75,000 $100,000 $125,000
Less preferred stock
to be redeemed
within one year..... 1,000,000 25,000 25,000 25,000
Total................. $ 50,000 $ 75,000 $100,000
In case of default on dividends or 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
PSNH is in arrears in the payment of dividends on any outstanding shares
of preferred stock, PSNH would be prohibited from redemption or purchase
of less than all of the preferred stock outstanding. The Series A
Preferred Stock is not subject to optional redemption by PSNH. It is
subject to an annual sinking fund requirement of $25 million, which
began on June 30, 1997, sufficient to retire annually 1,000,000 shares
at $25 per share.
8. LONG-TERM DEBT
Details of long-term debt outstanding are:
At December 31,
1998 1997
---- ----
(Thousands of Dollars)
First Mortgage Bonds:
9.17% Series B, due 1998 $ - $170,000
Pollution Control Revenue Bonds:
7.65% Tax-Exempt Series A, due 2021........ 66,000 66,000
7.50% Tax-Exempt Series B, due 2021........ 108,985 108,985
7.65% Tax-Exempt Series C, due 2021........ 112,500 112,500
Adjustable Rate, Taxable, Series D,due 2021.. 39,500 39,500
Adjustable Rate, Taxable, Series E, due 2021. 69,700 69,700
6% Tax-Exempt, Series D, due 2021............ 75,000 75,000
6% Tax-Exempt, Series E due 2021 (a)......... 44,800 44,800
Less: Amounts due within one year........... - 170,000
Long-term debt, net................. $516,485 $516,485
(a) On April 23, 1998, PSNH amended and extended letters of credit and
reimbursement agreements that provide credit support for $39.5 million
principal amount of taxable Pollution Control Refunding Revenue Bonds
(PCRB), 1991 Series D, due May 1, 2021, and $69.7 million principal
amount of taxable PCRB, 1991 Series E, due 2021.
The Series D and E taxable PCRB's are special limited obligations
of the Business Finance Authority of the State of New Hampshire (BFA)
and are payable solely by PSNH under the applicable loan and trust
agreements. PSNH's obligations to make payments under the loan and
trust agreements, letters of credit and reimbursement agreements are
secured by approximately $110 million of first mortgage bonds and
substantially all of PSNH's accounts receivable.
On May 1, 1998, the $75 million principal amount of tax-exempt PCRB,
1992 Series D, due May 1, 2021, and $44.8 million principal amount
of tax-exempt PCRB, 1993 Series E, due May 1, 2021, which were
previously issued by the BFA on PSNH's behalf as variable rate
bonds, were converted to fixed rate bonds bearing interest at 6
percent per annum. These bonds are special limited obligations of
the BFA and are payable solely by PSNH under the applicable loan and
trust agreement.
There are neither cash sinking-fund requirements nor debt maturities
existing for the years 1999 through 2003. There are annual renewal and
replacement fund requirements equal to 2.25 percent of the average of
net depreciable utility property owned by PSNH at the reorganization
date, plus cumulative gross property additions thereafter. PSNH expects
to meet these future fund requirements by certifying property additions.
Any deficiency would need to be satisfied by the deposit of cash or bonds.
PSNH's $75 million Revolving Credit Facility has a lien, on all PSNH
property located in New Hampshire which will expire in April 1999. At
December 31, 1998, there were no borrowings under the Revolving Credit
Facility.
Concurrent with the issuance of PSNH's Series A and B First Mortgage
Bonds, PSNH entered into financing arrangements with the BFA. Pursuant
to these arrangements, the BFA issued seven series of Pollution Control
Revenue Bonds (PCRBs) and loaned the proceeds to PSNH. The average
effective interest rates on the variable-rate pollution control notes
ranged from 3.1 percent to 5.6 percent in 1998 and from 3.8 percent to
5.6 percent in 1997. PSNH's obligation to repay each series of PCRBs is
secured by a series of first mortgage bonds that were issued under its
indenture. Each such series of first mortgage bonds contains terms and
provisions with respect to maturity, principal payment, interest rate,
and redemption that correspond to those of the applicable series of
PCRBs. For financial reporting purposes, these bonds would not be
considered outstanding unless PSNH fails to meet its obligations under
the PCRBs.
The PCRBs, except for taxable Series D and E and tax-exempt Series D
and E, are redeemable on or after May 1, 2001 and May 1, 2008,
respectively, at the option of the company with accrued interest and
at specified premiums. Under current interest rate elections by PSNH,
the Series D and E PCRBs are redeemable at par plus accrued interest at
the end of each interest-rate period. Future interest-rate elections by
PSNH could significantly defer or eliminate the availability of optional
redemptions by PSNH and could affect costs as well.
9. INCOME TAX EXPENSE
The components of the federal and state income tax provisions charged
to operations are:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Current income taxes:
Federal.............................. $(6,573) $67,148 $(4,978)
State................................ 759 48 (1,605)
Total current...................... (5,814) 67,196 (6,583)
Deferred income taxes, net:
Federal.............................. 78,022 20,983 95,225
State................................ 855 1,202 306
Total deferred..................... 78,877 22,185 95,531
Investment tax credits, net............ (511) (540) (548)
Total income tax expense............... $72,552 $88,841 $88,400
The components of total income tax expense are classified as follows:
Income taxes charged to operating
expenses............................. $65,079 $86,450 $80,677
Other income taxes..................... 7,473 2,391 7,723
Total income tax expense............... $72,552 $88,841 $88,400
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........................... $(4,317) $(1,937) $(1,055)
Deferred tax asset associated
with NOL.............................. 69,212 - 96,756
Energy adjustment clauses.............. (765) 16,839 (10,716)
Proceeds from the sale of NOX Credits.. (7,813) - -
Nuclear plant deferrals................ 11,836 - -
Amortization of regulatory
settlement........................... 11,501 11,501 11,501
Other.................................. (777) (4,218) (955)
Deferred income taxes, net............. $78,877 $22,185 $95,531
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.......... $57,484 $63,355 $64,931
Tax effect of differences:
Depreciation......................... (38) 1,890 1,841
Amortization of acquisition costs.... 17,301 31,298 31,410
Seabrook intercompany gains
and losses......................... 630 (3,898) (7,504)
Adjustment for prior years' taxes.... (1,974) (2,034) (2,182)
Investment tax credit amortization... (511) (540) (548)
State income taxes, net of
federal benefit.................... 306 1,085 (845)
Other, net........................... (646) (2,315) 1,297
Total income tax expense............... $72,552 $88,841 $88,400
10.COMMITMENTS AND CONTINGENCIES
A. Restructuring
New Hampshire: In 1996, New Hampshire enacted legislation requiring
a competitive electric industry beginning in 1998. In February 1997,
the NHPUC issued its restructuring order, which would have forced
PSNH and NAEC to write off all of their regulatory assets, and
possibly to seek protection under Chapter 11 of the bankruptcy laws.
The amount of potential write-off which would have been triggered by
the order is currently estimated to be in excess of approximately
$400 million, after taxes.
Following the issuance of these orders, PSNH immediately sought
declaratory and injunctive relief on various grounds in federal
district court and has received a preliminary injunction that freezes
implementation of the NHPUC's restructuring orders. Restructuring
in New Hampshire has resulted in numerous subsequent proceedings
within the federal and state legal systems.
As the court proceedings are ongoing, PSNH continues to be involved
in settlement discussions with representatives from the state of New
Hampshire. PSNH hopes to reach a settlement, which would include,
among other things, recovery of regulatory assets and stranded costs,
rate reductions, an auction of PSNH's generating units and
securitization of PSNH's stranded costs. If a settlement is not
reached, a trial is expected to begin mid to late 1999.
As a result of the February 1997 NHPUC decision and the potential
consequences discussed above, the reports of our auditors on the
individual financial statements of PSNH and NAEC contain explanatory
paragraphs. Those explanatory paragraphs indicate that a substantial
doubt exists currently about the ability of PSNH and NAEC to continue
as going concerns.
Management believes that PSNH is entitled to full recovery of its
prudently incurred costs, including regulatory assets and other
stranded costs. It bases this belief both on the general nature of
public utility industry cost-of-service based regulation and the
specific circumstances of the resolution of PSNH's previous
bankruptcy proceedings and its acquisition by NU, including the
recoveries provided by the Rate Agreement and related agreements.
B. Rate Matters
PSNH's Rate Agreement between NU, PSNH and the state of New Hampshire
provided for seven base-rate increases of 5.5 percent per year
beginning in 1990 and for the FPPAC. The final base-rate increase
went into effect on June 1, 1996. The Rate Agreement contemplates
that PSNH's rates are subject to traditional rate regulation after
the fixed-rate period, which expired on May 31, 1997. The FPPAC,
however, would continue through May 31, 2001, and other Rate
Agreement requirements would continue in accordance with the terms
of the agreement.
A PSNH base-rate case was filed in May 1997, but was delayed in
connection with the restructuring proceedings discussed above. In
November 1997, the NHPUC ordered a temporary base rate reduction for
PSNH of 6.87 percent effective December 1, 1997. The NHPUC also set
an interim return on equity of 11 percent. In December 1998, the
base-rate case was reopened and an updated rate case was filed.
A final decision, which will be reconciled to July 1, 1997, is
currently scheduled to be issued by June 1, 1999.
Concurrently with the 6.87 percent rate reduction beginning in
December 1997, the NHPUC allowed an FPPAC increase of approximately
6 percent. This rate increase was effective for the period from
December 1, 1997, through May 31, 1998. On May 29, 1998, the NHPUC
approved slightly more than a one percent increase in PSNH's FPPAC
rate for the period June through November 1998. On December 1, 1998,
the NHPUC allowed the current FPPAC rate to remain in place through
May 31, 1999. As a result of this decision, unrecovered energy
costs are projected to increase by approximately $17.4 million from
January 1, 1999 through May 31, 1999, to an estimated balance of
approximately $79.7 million. PSNH's ongoing restructuring settlement
negotiations with the state of New Hampshire could resolve both the
base-rate case and the FPPAC proceedings discussed above.
FERC: During November 1997, MYAPC filed an amendment to its power
contracts clarifying the obligations of its purchasing utilities
following the decision to cease power production. During January
1998, the FERC accepted the amendments and proposed rates, subject
to a refund. On January 18, 1999, MYAPC filed with the FERC
Administrative Law Judge (ALJ) an Offer of Settlement which,
if accepted by the FERC, will resolve all the issues in the FERC
decommissioning rate case proceeding. The settlement provides,
among other things, the following: (1) MYAPC will collect
$33.6 million annually to pay for decommissioning and spent fuel;
(2) its return on equity will be set at 6.5 percent; (3) MYAPC
is permitted full recovery of all unamortized investment in MY,
including fuel, and (4) an incentive budget for decommissioning
is set at $436.3 million.
During late December 1996, CYAPC filed an amendment to its power
contracts clarifying the obligations of its purchasing utilities
following the decision to cease power production. On February 27,
1997, the FERC accepted CYAPC's contract amendment. The new rates
became effective March 1, 1997, subject to a refund.
On August 31, 1998, the FERC ALJ released an initial decision
regarding the December 1996 filing. The decision contained
provisions which would allow for the recovery, through rates,
of the balance of PSNH's net unamortized investment in CYAPC,
which was approximately $5.5 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 PSNH's share would be approximately $1.9 million. NU
management cannot predict the ultimate outcome of the hearing at
this time, however, management believes that the associated regulatory
assets are probable of recovery.
C. Nuclear Performance
Millstone: The three Millstone units are managed by NNECO. All
three units were placed on the NRC watch list on January 29, 1996.
The units cannot be restarted without appropriate NRC approvals.
Millstone 3 has received these approvals and resumed operation in
July 1998.
Litigation: Certain of the non-NU joint owners of Millstone 3 have
filed demands for arbitration with CL&P and WMECO as well as lawsuits
in Massachusetts Superior Court against NU and its current and former
trustees related to the company's operation of Millstone 3. The
arbitrations and lawsuits seek to recover compensatory damages in
excess of $200 million, together with punitive damages, treble
damages and attorney's fees. Management cannot estimate the potential
outcome of these suits but believes there is no legal basis for the
claims and intends to defend against them vigorously.
D. Environmental Matters
PSNH is subject to regulation by federal, state and local authorities
with respect to air and water quality, the handling and disposal of
toxic substances and hazardous and solid wastes, and the handling and
use of chemical products. The NU system has an active environmental
auditing and training program and believes that it is in substantial
compliance with current environmental laws and regulations. However,
the NU system is subject to certain pending enforcement actions and
governmental investigations in the environmental area. Management
cannot predict the outcome of these enforcement actions and
investigations.
Environmental requirements could hinder the construction of new
generating units, transmission and distribution lines, substations
and other facilities. Changing environmental requirements could also
require extensive and costly modifications to PSNH's existing
generating units, and transmission and distribution systems, and
could raise operating costs significantly. As a result, PSNH 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.
PSNH may also 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.
PSNH has recorded a liability based upon currently available
information for what it believes are its estimated environmental
remediation costs that it expects to incur for waste disposal sites.
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 PSNH for its estimated
environmental remediation costs, not considering any possible
recoveries from third parties, amounted to approximately $7.9
million within a range of $7.9 million to $9.0 million.
PSNH 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,
PSNH will retain the risk loss, in part, for some environmental
remediation costs.
PSNH 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 PSNH's financial
position or future results of operations.
E. Spent Nuclear Fuel Disposal Costs
Under the Nuclear Waste Policy Act of 1982, PSNH 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 are
billed currently to customers and paid to the DOE on a quarterly
basis.
The DOE was originally scheduled to begin accepting delivery of spent
fuel in 1998. However, delays in identifying a permanent storage site
have continually postponed plans for the DOE's long-term storage and
disposal site. Extended delays or a default by the DOE could lead
to consideration of costly alternatives. The company has primary
responsibility for the interim storage of its spent nuclear fuel.
Current capability to store spent fuel at Seabrook are estimated to
be adequate until at least the year 2010. Meeting spent fuel storage
requirements beyond this period could require new and separate
storage facilities, the costs for which have not been determined.
In November 1997, the U.S. Court of Appeals for the D.C. Circuit
ruled that the lack of an interim storage facility does not excuse
the DOE from meeting its contractual obligation to begin accepting
spent nuclear fuel no later than January 31, 1998. The 1997 ruling
by the appeals court said, however, that the 1982 federal law could
not require the DOE to accept waste when it did not have a suitable
storage facility. The court directed the plaintiffs to pursue relief
under the terms of their contracts with the DOE. Based on this
ruling, since the DOE did not take the spent nuclear fuel as
scheduled, it may have to pay contract damages.
In May 1998, the same court denied petitions from 60 states and state
agencies, collectively, and 41 utilities, including the company, asking
the court to compel the DOE to submit a program, beginning immediately,
for disposing of spent nuclear fuel. The petitions were filed after
the DOE defaulted on its January 31, 1998 obligation to begin
accepting the fuel. The court directed the company and other
plaintiffs to pursue relief under the terms of their contracts with
the DOE.
In a petition filed in August 1998, the court's May 1998 decision was
appealed to the U.S. Supreme Court. In November 1998, the Supreme
Court declined to review the lower court ruling that said utilities
should go to court and seek monetary damages from the DOE. The ultimate
outcome of this legal proceeding is uncertain at this time.
F. Nuclear Insurance Contingencies
Under certain circumstances, in the event of a nuclear incident at
one of the nuclear facilities in the country covered by the federal
government's third-party liability indemnification program, an owner
of a nuclear unit could be assessed in proportion to its ownership
interest in each of its nuclear units up to $83.9 million. Payments
of this assessment would be limited to $10.0 million in any one year
per nuclear incident based upon the owner's pro rata ownership
interest in each of its nuclear units. In addition, the owner
would be subject to an additional 5 percent or $4.2 million, in
proportion to its ownership interests in each of its nuclear units,
if the sum of all claims and costs from any one nuclear incident
exceeds the maximum amount of financial protection. Under the terms
of the Seabrook Power Contracts with NAEC, PSNH could be obligated
to pay for any assessment charged to NAEC as a "cost of service."
Based on its ownership interest in Millstone 3 and NAEC's ownership
interest in Seabrook 1, PSNH's maximum liability, including any
additional assessments, would be $28.8 million per incident of
which payments would be limited to $3.8 million per year. In
addition, through power purchase contracts with VYNPC, PSNH would
be responsible for up to an additional $3.5 million per incident,
of which payments would be limited to a maximum of $0.4 million
per year.
Insurance has been purchased to cover the primary cost of repair,
replacement or decontamination of utility property resulting from
insured occurrences. PSNH is subject to retroactive assessments if
losses exceed the accumulated funds available to the insurer. The
maximum potential assessment against PSNH with respect to losses
arising during the current policy year is approximately $0.4 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. PSNH is subject to retroactive assessments if losses
exceed the accumulated funds available to the insurer. The maximum
potential assessments against PSNH (including costs resulting from
PSNH's contracts with NAEC), with respect to losses arising during
current policy years are approximately $1.3 million under the
replacement power policies and $4.1 million under the excess
property damage, decontamination and decommissioning policies.
Although PSNH has purchased the limits of coverage currently
available from the conventional nuclear insurance pools, the cost
of a nuclear incident could exceed available insurance proceeds.
The NRC approved CYAPC's and MYAPC's requests for withdrawal from
participation in the secondary financial protection program on
November 19, 1998 and January 17, 1999, respectively, due to their
permanently shutdown and defueled status. Therefore, neither
CYAPC nor their sponsor companies have any future obligations
for potential assessment.
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. PSNH currently forecasts construction expenditures
of approximately $331.4 million for the years 1999-2003, including
approximately $68.0 million for 1999. In addition, PSNH estimates
that nuclear fuel requirements, for its share of Millstone 3, will
be $4.5 million for the years 1999-2003, including $1.4 million for
1999.
H. Long-Term Contractual Arrangements
Yankee Companies: PSNH, CL&P and WMECO 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, O&M
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. PSNH's
total cost of purchases under contracts with VYNPC, amounted to
$7.0 million in 1998, $6.2 million in 1997 and $6.5 million in 1996.
PSNH may also be asked to provide direct or indirect financial
support for one or more of the Yankee companies, including VYNPC.
Nonutility Generators (NUGs): PSNH has requirements under various
arrangements for the purchase of capacity and energy from NUGs.
These arrangements have terms from 20 to 30 years, currently
expiring in the years 1998 through 2023, and require PSNH to
purchase energy at specified prices or formula rates. For the 12-
month period ending December 31, 1998, approximately 13 percent of
the NU system electricity requirements were met by NUGs. PSNH's
total cost of purchases under these arrangements amounted to $139.1
million in 1998, $133.1 million in 1997 and $132.6 million in 1996.
New Hampshire Electric Cooperative: PSNH entered into a buy-back
agreement to purchase the capacity and energy of the New Hampshire
Electric Cooperative, Inc.'s (NHEC) share of Seabrook 1 and to pay
all of NHEC's Seabrook 1 costs for a ten-year period, which began on
July 1, 1990. The total cost of purchases under this agreement was
$29.7 million in 1998, $23.4 million in 1997 and $14.6 million in
1996. The total cost of these purchases has been collected through
the FPPAC in accordance with the Rate Agreement.
Although under the agreement NHEC agreed to continue as a firm-
requirements customer of PSNH for 15 years, it has recently
received a FERC ruling allowing it to purchase power from qualifying
facilities. The ruling allows that the price for such purchases
may be determined through negotiation between NHEC and the qualifying
facility. The financial impact of this decision in the future will
vary depending upon the level of purchases made by NHEC from the
qualifying purchasers.
NHEC also is seeking to be able to purchase energy under the
agreement from competitive sources once competition has begun in
its service territory. A final FERC decision is expected by March
1999. The financial impact of this decision in the future will
depend upon the implementation of restructuring in NHEC's service
territory.
Hydro-Quebec: Along with other New England utilities, PSNH, CL&P,
WMECO, and HWP have entered into agreements to support transmission
and terminal facilities to import electricity from the Hydro-Quebec
system in Canada. PSNH 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 PSNH's
significant long-term contractual arrangements are as follows:
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(Millions of Dollars)
VYNPC......... $ 7.5 $ 6.9 $ 7.5 $ 7.7 $ 7.1
NUGs.......... 142.9 147.1 151.3 155.5 160.3
NHEC.......... 30.0 14.6 - - -
Hydro-Quebec.. 10.0 9.6 9.3 9.1 8.9
I. Deferred Receivable from Affiliated Company
At the time PSNH emerged from bankruptcy on May 16, 1991, in
accordance with the phase-in under the Rate Agreement, it began
accruing a deferred return on a portion of its Seabrook investment.
From May 16, 1991 to the Acquisition Date, PSNH accrued a deferred
return of $50.9 million. On the Acquisition Date, PSNH sold the
$50.9 million deferred return to NAEC as part of the Seabrook-
related assets.
At the time PSNH transferred the deferred return to NAEC, it
realized, for income tax purposes, a gain that is deferred under
the consolidated income tax rules. Beginning December 1, 1997,
this gain is being restored for income tax purposes, as the deferred
return of $50.9 million, and the associated income taxes of $32.9
million, are being collected by NAEC through the Seabrook Power
Contracts. As NAEC recovers the $32.9 million in years eight
through ten of the Rate Agreement, it will be obligated to make
these corresponding payments to PSNH.
On the Acquisition Date, PSNH recorded the $32.9 million of income
taxes associated with the deferred return as a deferred receivable
from NAEC, with a corresponding entry to deferred revenue, on its
Balance Sheet. In 1993, due to changes in tax rates, this amount
was adjusted to $33.2 million.
For further information related to the phase-in of the Seabrook
power plant, see Note 2, "Seabrook Power Contracts."
See Note 10A, "Commitments and Contingencies - Restructuring" for
the possible impacts of the NHPUC's decision related to industry
restructuring on this intercompany transaction between PSNH and
NAEC.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each of the following financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value
due to short-term nature of cash and cash equivalents.
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 $321,000 held for benefit of the Supplemental
Executive Retirement Plan were recorded on the balance sheet at their
fair market value at December 31, 1998, of $2.2 million.
Preferred stock and long-term debt: The fair value of PSNH's fixed-rate
securities is based upon the quoted market price for those issues or
similar issues. Adjustable rate securities are assumed to have a fair
value equal to their carrying value. The carrying amounts of PSNH's
financial instruments and the estimated fair values are as follows:
Carrying Fair
At December 31, 1998 Amount Value
(Thousands of Dollars)
Preferred stock subject to
mandatory redemption............... $ 75,000 $ 78,000
Other long-term debt................. $516,485 $535,401
Carrying Fair
At December 31, 1997 Amount Value
(Thousands of Dollars)
Preferred stock subject to
mandatory redemption............... $100,000 $ 99,000
Long-term debt - First mortgage bonds 170,000 170,424
Other long-term debt................. 516,485 537,599
The fair values shown above have been reported to meet the disclosure
requirements and do not purport to represent the amounts at which
those obligations would be settled.
12. OTHER COMPREHENSIVE INCOME
During 1998, the NU system 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, PSNH had no material other comprehensive income items.
The accumulated balance for each other comprehensive income item is as
follows:
Current
December 31 Period December 31,
1997 Change 1998
(Thousands of Dollars)
Unrealized gain on
securities.............. $ - $1,198 $1,198
Minimum pension
liability adjustment.... - (194) (194)
Accumulated other
comprehensive income.... $ - $1,004 $1,004
The changes in the components of other comprehensive income are reported
on the Statements of Comprehensive Income net of the following income tax
effects:
1998 1997 1996
(Thousands of Dollars)
Unrealized gain on
securities............. $(660) $ - $ -
Minimum pension
liability adjustment... 107 - -
Other comprehensive
income................. $ 553 $ - $ -
To the Board of Directors
of Public Service Company of New Hampshire:
We have audited the accompanying balance sheets of Public Service
Company of New Hampshire (a New Hampshire corporation and a wholly
owned subsidiary of Northeast Utilities) as of December 31, 1998 and
1997, and the related 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 Public
Service Company of New Hampshire as of December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. As discussed in Note 10A,
on February 28, 1997, the State of New Hampshire Public Utilities
Commission (the NHPUC) issued an order outlining its final plan to
restructure the electric utility industry. The final plan announced
a departure from cost-based rate making, which, if implemented, would
require the company to discontinue the application of Financial
Accounting Standard No. 71, "Accounting for the Effects of Certain
Types of Regulation," (FAS 71). The implementation of the final plan,
including the effect of the discontinuation of FAS 71, would result in
after tax write-off of over $400 million. Such a write-off would cause
the company to be in technical default under financial covenants imposed
by lenders, which, would, if not waived or renegotiated, give rise to
the rights of lenders to accelerate the repayment of approximately $516
million of the company's indebtedness and approximately $475 million of
an affiliated company's indebtedness.
These conditions raise substantial doubt about the company's ability to
continue as a going concern. The financial statements referred to above
do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 23, 1999
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section contains management's assessment of Public Service Company of
New Hampshire's (PSNH 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 financial statements and footnotes.
FINANCIAL CONDITION
Earnings Overview
PSNH had net income of approximately $92 million for 1998, essentially
unchanged from the same period in 1997.
Lower operating revenues as a result of rate decreases were offset by lower
operating expenses and lower interest costs. Operating revenues fell 2
percent despite a 2.3 percent increase in retail kilowatt-hour sales.
The resolution of New Hampshire restructuring and the final decision in
PSNH's rate case, that is currently scheduled to be issued in 1999, will
impact PSNH's ability to improve its results in 1999.
Restructuring
Although PSNH continues to operate under cost-of-service based regulation,
future rates and the recovery of stranded costs are issues that will be
addressed as restructuring legislation is implemented. Stranded costs are
expenditures or commitments that have been made to meet public service
obligations with the expectation that they would be recovered from customers.
However, under certain circumstances these costs might not be recoverable
from customers in a fully competitive electric utility industry (i.e., the
costs may result in above-market energy prices).
PSNH has exposure to stranded costs for its investments in high-cost nuclear
generating plants, state-mandated purchased-power obligations and significant
regulatory assets. As of December 31, 1998, PSNH's net investment in nuclear
generating plants, was approximately $83 million, and its regulatory assets
were approximately $610 million. PSNH's financial strength will be negatively
affected if it is unable to recover their past investments and commitments.
Restructuring efforts in New Hampshire have resulted in numerous proceedings
within the federal and state court systems. The New Hampshire Public
Utilities Commission's (NHPUC) 1997 restructuring orders have been prevented
from being implemented as a result of various court actions pending the
outcome of a full trial in the U.S. District Court. The 1997 orders would
have forced PSNH to write-off substantially all of its regulatory assets.
A trial is expected to begin in mid to late 1999.
In January 1999, the NHPUC issued an order stating that it intends to reopen
restructuring hearings. PSNH has requested the federal court to enforce its
preliminary injunction barring the NHPUC from proceeding with restructuring
efforts pending the court's decision on the merits after trial. The NHPUC
has agreed to delay this new proceeding until the federal court has had an
opportunity to rule on PSNH's enforcement motion.
The litigation has caused New Hampshire to fall behind several other
Northeast states in implementing industry restructuring. PSNH hopes to
reach a settlement that would include, among other things, substantial rate
reductions, customer choice, an auction of PSNH's generating units and
securitization of PSNH's stranded costs. PSNH believes that a negotiated
resolution of outstanding restructuring and rate issues would be in the best
interests of the state, the company and customers.
Rate Matters
In May 1998, the NHPUC approved slightly more than a 1 percent net increase
in PSNH's fuel and purchased-power adjustment clause (FPPAC) rate for the
period June through November 1998. As part of this proceeding, PSNH agreed
to offset in base rates the scheduled reduction in acquisition premium
amortization with the scheduled amortization of the Seabrook deferred return.
On December 1, 1998, the NHPUC approved a Stipulation and Settlement executed
by PSNH, the NHPUC staff, and the Governor's Office of Energy and Community
Services. They recommended that PSNH's currently effective FPPAC rate be
continued for another six-month period - December 1, 1998, through May 31,
1999. The FPPAC rate currently in effect will produce an estimated $80
million underrecovery as of May 31, 1999. All other FPPAC costs are being
recovered on a current basis.
A PSNH rate case has been pending at the NHPUC since May 1997 but was delayed
in connection with various restructuring proceedings. In November 1997, the
NHPUC ordered a temporary rate reduction of 6.87 percent effective December
1, 1997. A final rate case decision currently is scheduled to be issued by
June 1, 1999, the same date when PSNH's FPPAC rate is scheduled to be set for
the second half of 1999. The final decision will be reconciled to July 1,
1997. PSNH's ongoing settlement negotiations with the State of New Hampshire
could resolve both the rate case and FPPAC issues discussed above.
Millstone 3
PSNH has a 2.85 percent joint ownership interest in Millstone 3. 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. PSNH's share of the operation, maintenance and
replacement power costs associated with Millstone 3 totaled approximately
$5 million in 1998, down from $11 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.
Seabrook
PSNH is obligated to purchase North Atlantic Energy Corporation's (NAEC)
35.98 percent share of the capacity and output generated by Seabrook
1(Seabrook) under the Seabrook Power Contract for a period equal to the
length of the NRC full-power operating license for Seabrook (through 2026)
whether or not Seabrook is operating and without regard to the cost of
alternative sources of power. North Atlantic Energy Service Corporation is
the managing agent and operates Seabrook.
Seabrook operated at a capacity factor of 82.8 percent in 1998, compared to
78.3 percent for the same period in 1997. The unit operated well, except for
two unplanned outages, one in late 1997 through early 1998 and the other in
mid-1998, to repair the control building's air-conditioning system. Seabrook
is scheduled to begin a refueling outage in March 1999.
Liquidity And Capital Resources
Cash provided from operations totaled approximately $217 million in 1998
compared to $233 million in 1997, primarily due to the billing from NAEC of
the Seabrook phase-in costs beginning in December 1997 which were not being
recovered from customers for the first six months of 1998. Approximately
$195 million of net cash flows were used to repay long-term debt and
preferred stock in 1998, compared to only $25 million in 1997. Another $9
million was used to pay cash dividends on preferred stock in 1998 compared
to $97 million in 1997 for common and preferred dividends. Approximately
$46 million of net cash flows was used for investment in plant and other
investment activities compared to a net of $17 million in 1997.
During 1998 PSNH converted a total of $119.8 million variable-rate tax
exempt debt to fixed-rate tax exempt debt carrying an interest rate of 6.0
percent. PSNH met a $170 million bond maturity in May 1998 with cash on hand
and operating cash flows and successfully extended $190 million in credit
($75 million in bank credit lines and $115 million in letters of credit).
In September 1998, S&P upgraded PSNH's first mortgage bonds. The rating
agency actions were due in part to the NU system's success in 1998 in
maintaining access to its various credit lines. PSNH renegotiated a one-year
extension of the $75 million revolving credit agreement in April 1998.
PSNH's revolving credit agreement expires on April 22, 1999, and the company
currently does not intend to renew it. PSNH will fund its needs through
operating cash flows or other short-term credit arrangements which may be
negotiated later in the year. PSNH has had no borrowings under that line
since October 1998. PSNH expects to renew the bank letters of credit that
support nearly $110 million of taxable variable-rate pollution control bonds.
Those letters of credit also expire April 22, 1999.
Nuclear Decommissioning
The staff of the SEC has questioned certain current accounting practices of
the electric utility industry, regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating units in the
financial statements. In response to these questions, the Financial
Accounting Standards Board (FASB) had agreed to review the accounting for
closure and removal costs, including decommissioning. If current electric
utility industry accounting practices for nuclear power plant decommissioning
are changed, the annual provision for decommissioning could increase relative
to 1998, and the estimated cost for decommissioning could be recorded as a
liability (rather than as accumulated depreciation), with recognition of an
increase in the cost of the related nuclear power plant. As management
believes decommissioning costs will continue to be recovered through rates,
changes to the accounting will not affect net income.
Yankee Companies
PSNH has a 5 percent ownership interest in the Connecticut Yankee Atomic
Power Company (CYAPC), a 7 percent ownership interest in Yankee Atomic
Electric Company (YAEC), a 5 percent ownership interest in Maine Yankee
Atomic Power Company (MYAPC)and a 4 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, PSNH's share of its estimated remaining contract
obligations, including decommissioning, amounted to approximately $66.5
million: $5.7 million for YAEC, $24.9 million for CYAPC and $35.8 million for
MYAPC. Under the terms of the contracts with the Yankee companies, PSNH is
responsible for its proportionate share of the costs of the units including
decommissioning. Management expects to recover these costs from customers.
Accordingly, PSNH has recognized these costs as a regulatory asset, with a
corresponding obligation on its balance sheet.
PSNH 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
FERC, will resolve all the issues in the FERC decommissioning rate case
proceeding. NU management cannot predict the ultimate outcome of the FERC
proceedings at this time, but believes that the associated regulatory assets
are probable of recovery. For further information on these proceedings see
the "Notes to Consolidated Financial Statements," Note 10B.
PSNH's ownership share of estimated costs, in year-end 1998 dollars, of
decommissioning the nuclear plant owned by VYNPC is approximately $21.2
million.
Millstone 3 and Seabrook 1
PSNH's estimated cost to decommission its share of Millstone 3 is
approximately $15.9 million in year-end 1998 dollars. These costs are
being recognized over the life of the unit with a portion currently being
recovered through rates. As of December 31, 1998, the market value of the
contributions already made to the decommissioning trust, including its
investment return, was approximately $5.6 million.
PSNH is obligated to pay NAEC's share of Seabrook's decommissioning costs
even if the unit is shut down prior to the expiration of its license. NAEC's
estimated cost to decommission its share of Seabrook is approximately $175.9
million in year-end 1998 dollars. These costs are being recognized over the
life of the unit with a portion currently being recovered through PSNH's
rates. As of December 31, 1998, the market value of the contributions already
made to Seabrook's decommissioning financing fund, including its investment
returns, was approximately $35.2 million.
See the "Notes to Consolidated Financial Statements," Note 4, for further
information on nuclear decommissioning.
Year 2000 Issue
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
PSNH 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 PSNH. At December 31, 1998, PSNH had
recorded an environmental reserve of approximately $7.9 million. See the
"Notes to Consolidated Financial Statements," Note 10D, 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 $(21) (2)% $ (2) (-)%
Fuel, purchased and net
interchange power (5) (1) (30) (8)
Other operation 34 9 42 13
Maintenance 13 35 (7) (16)
Amortization of
regulatory assets, net (30) (53) - -
Federal and state income
taxes (16) (18) - -
Other, net 9 12 (7) (92)
Interest on long-term debt (8) (15) (6) (11)
Other interest expense - - (3) (91)
(a) Percent greater than 100.
Operating Revenues
Retail nonfuel revenues decreased $97 million due to the 1997 retail rate
decrease and the June 1998 base rate offset described under "Rate Matters."
This decrease was partially offset by higher fuel recoveries and higher
retail sales. Fuel recoveries increased $66 million due to the higher FPPAC
rate and the base rate offset. Retail kilowatt-hour sales were 2.3 percent
higher for 1998 and contributed approximately $9 million to nonfuel revenues.
Total operating revenues decreased in 1997 primarily due to lower fuel
recoveries, partially offset by higher retail revenues. Fuel recoveries
decreased approximately $12 million, primarily due to the customer refund
ordered by the NHPUC. Retail revenues increased approximately $9 million,
primarily due to the June 1996 rate increase, partially offset by the
December 1997 rate decrease and higher price discounts to retain customers.
Retail sales were essentially unchanged.
Fuel Expense
The change in fuel, purchased and net interchange power expense was not
significant in 1998.
Fuel, purchased and net interchange power expense decreased in 1997,
primarily due to the timing in the recognition of fuel expenses under the
FPPAC, partially offset by higher purchased power costs.
Other Operation and Maintenance Expense
Other operation maintenance increased in 1998 primarily due to higher costs
associated with the Seabrook Power Contract as a result of the amortization
of Seabrook phase-in costs that began in June 1998 ($57 million) and higher
costs related to the January ice storm, net of insurance proceeds, ($8
million); partially offset by the recognition of environmental insurance
proceeds ($12 million) and lower costs at Millstone 3 and the Maine Yankee
nuclear unit ($10 million).
Other operation and maintenance expense increased in 1997 primarily due to
higher capacity charges under the Seabrook Power Contract as a result of
the scheduled May 1997 refueling and maintenance outage and the unplanned
December 1997 outage ($23 million), higher capacity purchases from the New
Hampshire Electric Cooperative ($11 million), higher capacity charges from
MYAPC ($4 million) and higher costs for PSNH's share of Millstone 3
($2 million), partially offset by lower fossil costs ($4 million) and lower
administration and sales costs ($3 million).
Amortization of Regulatory Assets
Amortization of regulatory assets decreased in 1998, primarily due to the
completion of the amortization of a portion of the company's acquisition
premium ($40 million), partially offset by the additional amortization of
Seabrook phase-in costs($10 million).
The change in amortization of regulatory assets in 1997 was not significant.
Federal and State Income taxes
Federal and state income taxes decreased in 1998 compared to 1997 primarily
due to lower taxable income.
The change in federal and state income taxes was not significant in 1997.
Other, net income
Other, net income increased in 1998, primarily due to the amortization of the
taxes associated with the Seabrook-phase-in costs which began in December
1997.
Other, net income decreased in 1997, primarily due to the deferral in 1996 of
interest expense ($5 million) associated with the FPPAC refund.
Interest on Long-Term Debt
Interest on long-term debt decreased due to the maturity of bonds ($170
million) in May 1998.
Interest on long-term debt decreased in 1997, primarily due to the repayment
of the $172.5 million Series A first-mortgage bond in May 1996.
Other Interest Expense
The change in other interest in 1998 was not significant.
Other interest expense decreased in 1997, primarily due to 1996 interest
expense ($5 million) associated with the FPPAC refund.
Public Service Company of New Hampshire
SELECTED FINANCIAL DATA (a)
Jan. 1, 1998 Jan. 1, 1997 Jan. 1, 1996
to to to
For the Periods Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- --------------
(Thousands of Dollars)
Operating Revenues........... $1,087,247 $1,108,459 $1,110,169
Operating Income............. 131,199 144,024 155,758
Net Income................... 91,686 92,172 97,465
Cash Dividends on
Common Stock............... - 85,000 52,000
At Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- -------------
Total Assets................. $2,681,595 $2,837,159 $2,851,212
Long-Term Debt (b)........... 516,485 686,485 686,485
Preferred Stock
Subject to Mandatory
Redemption(b).............. 75,000 100,000 125,000
Obligations Under
Seabrook Power
Contracts and Other
Capital Leases(b).......... 838,100 921,813 914,617
(a) Reclassifications of prior data have been made to conform with
the current presentation.
(b) Includes portions due within one year.
Public Service Company of New Hampshire
SELECTED FINANCIAL DATA
Jan. 1, 1995 Jan. 1, 1994
to to
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
(Thousands of Dollars)
$979,971 $922,039
155,628 152,086
83,255 77,444
52,000 -
Dec. 31,1995 Dec. 31, 1994
------------ -------------
$2,920,487 $2,845,967
858,985 999,985
125,000 125,000
915,288 887,967
Public Service Company of New Hampshire
- -----------------------------------------------------------------------------
STATISTICS (Unaudited)
- -----------------------------------------------------------------------------
Average
Gross Electric Annual
Utility Plant Use Per
December 31, kWh Residential Electric
(Thousands of Sales Customer Customers Employees
Dollars)(a) (Millions) (kWh) (Average) (December 31)
1998 $2,302,254 12,579 6,347 421,602 1,265
1997 2,312,628 13,340 6,528 407,642 1,254
1996 2,382,009 13,601 6,567 407,082 1,279
1995 2,469,474 11,001 6,524(c) 406,077 1,325
1994 2,521,960 11,008 6,768 400,775 1,374
- -----------------------------------------------------------------------------
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
- -----------------------------------------------------------------------------
Quarter Ended (b)
-----------------
1999 March 31 June 30 Sept.30 Dec. 31
- ------------------------------------------------------------------------------
Operating Revenues... $261,745 $250,784 $286,614 $288,104
Operating Income..... $ 18,769 $ 42,406 $ 37,434 $ 32,590
Net Income........... $ 6,791 $ 31,601 $ 29,892 $ 23,402
1997 March 31 June 30 Sept.30 Dec. 31
- -------------------------------------------------------------------------------
Operating Revenues... $278,321 $257,098 $285,390 $287,650
Operating Income..... $ 44,776 $ 34,190 $ 32,166 $ 32,892
Net Income........... $ 32,295 $ 21,289 $ 18,900 $ 19,688
(a) Includes reclassification of the unamortized acquisition costs to
gross utility plant.
(b) Reclassifications of prior data have been made to conform with
the current presentation.
(c) Effective January 1, 1996, the amounts shown reflect billed and
unbilled sales. 1995 has been restated to reflect this change.