SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 20, 1998
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Commission File Number 0-7624
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WESTERN MASSACHUSETTS ELECTRIC COMPANY
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1961130
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
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(Address of principal executive offices) (Zip Code)
(413) 785-5871
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
Item 5. Other Events
1. Connecticut Rate Matters and Ratings Downgrades
On April 20, 1998, the The Connecticut Department of Public Utilities
Commission (DPUC) issued a draft decision that would, if adopted unchanged,
remove Millstone 2 from The Connecticut Light and Power Company's (CL&P) rate
base effective May 1, 1998. In making this decision, the DPUC concluded that
Millstone 2 is unlikely to return to service in 1998. CL&P currently
estimates that Millstone 2 will restart approximately three to four months
after the restart of Millstone 3. CL&P hopes Millstone 3 will return to
service following an NRC commissioners vote in May 1998. The draft decision
further concluded that the DPUC would automatically remove Millstone 3 from
CL&P's rate base effective July 1, 1998 if the unit has not been operating
for 100 continuous hours at 95 percent capacity by that date. Based on its
current restart assumptions, CL&P believes that it is likely to meet this
goal. If they are removed from rates, the draft decision also provides for
Millstone 3 and Millstone 2 to be reinstated into rate base upon achieving
that goal.
The DPUC said that removing Millstone 2 from rate base will result in an
annual reduction of CL&P's current revenue requirements of $37.7 million, or
about $3.1 million a month. This was computed by disallowing CL&P recovery
of Millstone 2's operation and maintenance costs, depreciation and a return
on capital, but allowing CL&P to recover in the future the replacement power
costs it has been expensing for Millstone 2 for the past two years. The net
reduction of revenue requirements associated with removing Millstone 3 from
rate base would be about $13.2 million a month.
The DPUC decided in its draft decision to make the revenue requirement
reduction "non-cash" by allowing CL&P to accrue the reductions associated
with the removal of Millstone 2 and Millstone 3, if applicable, from rate
base and apply them against the replacement power costs associated with the
early retirement of the Connecticut Yankee nuclear power plant (CY) that have
been deferred by order of the DPUC, pending a final decision by the Federal
Energy Regulatory Commission on the prudence of the early retirement and the
costs associated therewith. CL&P has been deferring these CY replacement
power costs since June 1997 and the projected deferral through June 1998 is
approximately $65 million.
The draft decision, if it becomes final, would create additional
pressures on CL&P's ability to meet certain financial covenants in its
existing credit agreements. If the final decision is not changed, it would
reduce CL&P's earnings and would therefore make both of CL&P's key revolving
credit line covenants more difficult to meet. Northeast Utilities (NU) and
its wholly owned subsidiary, Western Massachusetts Electric Company (WMECO),
are also parties to this credit agreement. Similar covenant requirements are
included in an operating lease, which CL&P entered into in June of 1996,
related to the use of four turbine generators having an installed cost of
approximately $70 million. CL&P will closely review its 1998 projections in
light of the draft decision to determine whether there are additional
measures that can be implemented to assure that these covenants are met,
including an evaluation of the restart schedule for Millstone 2.
As a result of this draft decision, CL&P plans to begin contacting the
banks involved in the impacted agreements to review the status of the
companies' performance against the covenants. CL&P also will urge the DPUC
to modify its decision both in written exceptions that are due April 24, 1998
and in oral arguments that are scheduled for the afternoon of April 27, 1998.
A final decision is expected on April 29, 1998.
If CL&P breached these covenants, the bank creditors would have a number
of options, including causing the acceleration of the affected indebtedness,
reducing CL&P's access to further credit, seeking higher interest rates and
fees, asking for additional collateral and additional measures which CL&P
cannot predict.
On April 22, 1998, Moody's Investors Services (Moody's) downgraded the
senior secured debt of CL&P and WMECO to Ba3 from Ba2. Moody's also
downgraded CL&P and WMECO's preferred stock and NU's unsecured amortizing
notes. The ratings remain under review. Moody's indicated that the downgrade
was primarily due to the DPUC's decision discussed above. In particular,
Moody's stated that the decision "adds to pressure for restart at a time when
existing financial strains are already significant."
The downgrade of WMECO's senior secured debt brought those ratings to a
level at which the sponsor of WMECO's $40 million accounts receivable program
could elect to terminate the program. WMECO immediately notified the sponsor
of the downgrade and is waiting for a response. In the event that the program
is terminated by the sponsor, WMECO could elect to immediately pay off the
outstanding obligations or wind down the program pursuant to its terms. As
of April 22, 1998, WMECO had sold approximately $20 million of receivables
under the program.
CL&P's $200 million accounts receivables program could be terminated if
its senior secured debt is downgraded one more step.
For more information regarding these matters, see NU's Current Report on
Form 8-K dated March 9, 1998 and "Item 1. Business-Rates-Connecticut Retail
Rates" and "-Financing Program" in NU's 1997 Form 10-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
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Registrant
Date April 22, 1998 By /s/John B. Keane
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John B. Keane
Vice President and Treasurer