FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 (I.R.S. Employer
of 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, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at
----- April 30, 1996
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Common Shares, $25.00 par value 1,072,471 shares
WESTERN MASSACHUSETTS ELECTRIC COMPANY
TABLE OF CONTENTS
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 1996 and December 31, 1995 2
Statements of Income - Three Months Ended
March 31, 1996 and 1995 4
Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 1,242,737 $ 1,234,738
Less: Accumulated provision for depreciation......... 472,017 462,872
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770,720 771,866
Construction work in progress........................... 14,961 18,957
Nuclear fuel, net....................................... 30,040 31,574
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Total net utility plant............................. 815,721 822,397
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Other Property and Investments:
Nuclear decommissioning trusts, at market............... 71,662 69,903
Investments in regional nuclear generating
companies, at equity................................... 14,881 14,820
Other, at cost.......................................... 4,290 4,018
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90,833 88,741
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Current Assets:
Cash.................................................... 97 202
Receivables, net........................................ 41,295 42,164
Accounts receivable from affiliated companies........... 1,018 951
Accrued utility revenues................................ 11,844 11,119
Fuel, materials, and supplies, at average cost.......... 5,234 5,114
Recoverable energy costs, net........................... 3,123 2,595
Prepayments and other................................... 7,852 6,581
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70,463 68,726
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Deferred Charges:
Regulatory assets:
Income taxes, net...................................... 87,829 87,829
Unrecovered contractual obligation (Note 4)<F4>........ 14,908 18,814
Recoverable energy costs............................... 10,919 10,974
Other.................................................. 36,671 43,369
Unamortized debt expense................................ 1,449 1,496
Other................................................... 237 -
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152,013 162,482
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Total Assets........................................ $ 1,129,030 $ 1,142,346
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</TABLE>
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
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(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$25 par value.
Authorized and outstanding 1,072,471 shares............ $ 26,812 $ 26,812
Capital surplus, paid in................................ 150,255 150,182
Retained earnings....................................... 113,194 115,296
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Total common stockholder's equity.............. 290,261 292,290
Preferred stock not subject to mandatory redemption..... 53,500 53,500
Preferred stock subject to mandatory redemption......... 21,000 22,500
Long-term debt.......................................... 347,956 347,470
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Total capitalization........................... 712,717 715,760
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Obligations Under Capital Leases.......................... 19,328 20,855
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Current Liabilities:
Notes payable to affiliated company..................... 13,050 24,050
Long-term debt and preferred stock--current
portion................................................ 1,500 1,500
Obligations under capital leases--current
portion................................................ 14,250 15,156
Accounts payable........................................ 10,667 14,475
Accounts payable to affiliated companies................ 7,925 11,604
Accrued taxes........................................... 10,561 1,686
Accrued interest........................................ 4,239 5,670
Other................................................... 17,571 7,768
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79,763 81,909
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Deferred Credits:
Accumulated deferred income taxes....................... 256,522 259,595
Accumulated deferred investment tax credits............. 25,935 26,302
Deferred contractual obligation (Note 4)<F4>............ 14,908 18,814
Other................................................... 19,857 19,111
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317,222 323,822
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Commitments and Contingencies (Note 5)<F5>
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Total Capitalization and Liabilities........... $ 1,129,030 $ 1,142,346
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</TABLE>
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1996 1995
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(Thousands of Dollars)
<S> <C> <C>
Operating Revenues.................................... $ 114,797 $ 106,684
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Operating Expenses:
Operation --
Fuel, purchased and net interchange power........ 25,820 17,669
Other............................................ 41,226 35,851
Maintenance......................................... 9,616 7,770
Depreciation........................................ 9,785 9,580
Amortization of regulatory assets................... 3,018 6,888
Federal and state income taxes...................... 6,085 5,791
Taxes other than income taxes....................... 5,555 5,050
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Total operating expenses...................... 101,105 88,599
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Operating Income...................................... 13,692 18,085
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Other Income:
Equity in earnings of regional nuclear generating
companies......................................... 500 283
Other, net.......................................... (87) 560
Income taxes........................................ 178 156
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Other income, net............................. 591 999
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Income before interest charges................ 14,283 19,084
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Interest Charges:
Interest on long-term debt.......................... 5,979 6,960
Other interest...................................... 195 48
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Interest charges, net......................... 6,174 7,008
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Net Income............................................ $ 8,109 $ 12,076
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</TABLE>
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
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(Thousands of Dollars)
<S> <C> <C>
Operating Activities:
Net Income................................................ $ 8,109 $ 12,076
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 9,785 9,580
Deferred income taxes and investment tax credits, net... (3,234) 2,648
Recoverable energy costs, net of amortization........... (473) (4,495)
Nuclear O&M reserve (Note 5B)<F5B>...................... 7,105 -
Other sources of cash................................... 10,059 9,857
Other uses of cash...................................... (2,790) (2,029)
Changes in working capital:
Receivables and accrued utility revenues................ 77 (1,004)
Fuel, materials, and supplies........................... (120) (61)
Accounts payable........................................ (7,487) (19,743)
Accrued taxes........................................... 8,875 4,541
Other working capital (excludes cash)................... (2) 1,210
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Net cash flows from operating activities.................... 29,904 12,580
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Financing Activities:
Net (decrease) increase in short-term debt................ (11,000) 11,750
Reacquisitions and retirements of preferred stock......... (1,500) (15,675)
Cash dividends on preferred stock......................... (1,224) (1,323)
Cash dividends on common stock............................ (8,987) (7,529)
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Net cash flows used for financing activities................ (22,711) (12,777)
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Investment Activities:
Investment in plant:
Electric utility plant.................................. (4,731) (5,758)
Nuclear fuel............................................ (3) (842)
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Net cash flows used for investments in plant.............. (4,734) (6,600)
NU System Money Pool...................................... - 8,750
Investments in nuclear decommissioning trusts............. (2,231) (2,132)
Other investment activities, net.......................... (333) 142
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Net cash flows (used for) from investments.................. (7,298) 160
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Net Decrease In Cash For The Period......................... (105) (37)
Cash - beginning of period.................................. 202 89
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Cash - end of period........................................ $ 97 $ 52
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</TABLE>
See accompanying notes to financial statements.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRESENTATION
The accompanying unaudited financial statements should be read in
conjunction with the Annual Report of Western Massachusetts Electric
Company (WMECO) on Form 10-K for the year ended December 31, 1995
(1995 Form 10-K). In the opinion of the company, the accompanying
financial statements contain all adjustments necessary to present
fairly the financial position as of March 31, 1996, the results of
operations for the three months ended March 31, 1996 and 1995, and the
statements of cash flows for the three months ended March 31, 1996 and
1995. All adjustments are of a normal, recurring, nature except those
described below in Note 5B. The results of operations for the three
months ended March 31, 1996 and 1995 are not necessarily indicative of
the results expected for a full year.
Northeast Utilities (NU) is the parent company of the Northeast
Utilities system (the system). The system furnishes retail electric
service in Connecticut, New Hampshire, and western Massachusetts
through four wholly owned subsidiaries, The Connecticut Light and
Power Company (CL&P), Public Service Company of New Hampshire (PSNH),
WMECO, and Holyoke Water Power Company. A fifth wholly owned
subsidiary, North Atlantic Energy Corporation (NAEC), sells all of its
capacity to PSNH. In addition to its retail service, the system
furnishes firm and other wholesale electric services to various
municipalities and other utilities. The system serves about 30
percent of New England's electric needs and is one of the 20 largest
electric utility systems in the country as measured by revenues.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
B. REGULATORY ACCOUNTING - WMECO SETTLEMENT
Refer to Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) in this Form 10-Q for information
related to WMECO's approved rate settlement, which was approved on
April 30, 1996.
2. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March
1995. SFAS 121 establishes accounting standards for evaluating and
recording asset impairment. The company adopted SFAS 121 as of January 1,
1996. SFAS 121 requires the evaluation of long-lived assets for impairment
when certain events occur or when conditions exist that indicate the
carrying amounts of assets may not be recoverable.
SFAS 121 requires that any assets, including regulatory assets, that are no
longer probable of recovery through future revenues be revalued based on
estimated future cash flows. If the revaluation is less than the book
value of the asset, an impairment loss would be charged to earnings. Based
on the current regulatory environment in the system's service areas, as of
March 31, 1996, SFAS 121 did not have a material impact on the company's
financial position or results of operations. This conclusion may change in
the future as competitive factors influence wholesale and retail pricing in
the electric utility industry or if the cost-of-service based regulatory
structure were to change. For further information on the company's
regulatory environment, refer to the MD&A and Part II, Item 5, "Other
Information," in this Form 10-Q and the Notes to Financial Statements in
WMECO's 1995 Form 10-K.
3. NUCLEAR DECOMMISSIONING
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry,
including the company, regarding the recognition, measurement, and
classification of decommissioning costs for nuclear generating stations in
the financial statements of electric utilities. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning, and has issued a proposed statement "Accounting
for Liabilities Related to Closure or Removal of Long-Lived Assets" in
February 1996. If current electric utility industry accounting practices
for such decommissioning are changed: (1) annual provisions for
decommissioning could increase, (2) the estimated cost for decommissioning
could be recorded as a liability rather than as accumulated depreciation,
and (3) trust fund income from the external decommissioning trusts could be
reported as investment income rather than as a reduction to decommissioning
expense.
4. YANKEE ATOMIC ELECTRIC COMPANY (YAEC)
WMECO holds a 7.0 percent ownership interest in YAEC. YAEC's nuclear power
plant was shut down permanently on February 26, 1992. YAEC is in the
process of dismantling its nuclear facility. Effective January 1996, YAEC
began billing its sponsors, including CL&P, WMECO, and PSNH, amounts based
on a revised estimate approved by the Federal Energy Regulatory Commission
that assumes decommissioning by the year 2000. This revised estimate was
based on continued access to the Barnwell, South Carolina, low-level
radioactive waste facility, changes in assumptions about earnings on
decommissioning trust investments, and changes in other decommissioning
cost assumptions. As of January 1996, the estimated remaining costs,
including decommissioning based on YAEC's revised estimate amounted to
$225.2 million, of which WMECO's share was approximately $15.8 million.
For further information on YAEC, refer to the Notes to Financial Statements
in WMECO's 1995 Form 10-K.
5. COMMITMENTS AND CONTINGENCIES
A. Construction Program: For information regarding WMECO's construction
program, see the Notes to Financial Statements in WMECO's 1995
Form 10-K.
B. Nuclear Performance: On January 31, 1996, the Nuclear Regulatory
Commission (NRC) announced that the three Millstone nuclear power
plants had been placed on its "watch list" because of long-standing
performance concerns. The NRC cited a number of operational problems,
that have arisen since 1990 at the Millstone plants.
Millstone 1, a 660-MW boiling-water reactor, owned 81 percent by CL&P
and 19 percent by WMECO, began a planned 49-day refueling and
maintenance outage on November 4, 1995. That outage was subsequently
extended to the second quarter of 1996 to complete weld overlays and
to respond to a December 13, 1995 letter from the NRC issued to NU.
This letter requested that NU submit, no later than seven days prior
to restart of the unit, information describing the actions taken to
ensure the future operation of the unit will be conducted in
accordance with the terms and conditions of its operating license, NRC
regulations, and the plant's updated Final Safety Analysis Report
(collectively, "NRC requirements"). The letter also requires that
certain specific technical issues be resolved to the NRC's
satisfaction prior to restarting the unit.
On February 21, 1996, Millstone 2, a 870-MW pressurized-water reactor,
also owned 81 percent by CL&P and 19 percent by WMECO, was shut down
as a result of an engineering evaluation that determined that some
valves could be inoperable in some emergency situations. Management
decided at that time to combine this unscheduled outage with a mid-
cycle inspection outage previously scheduled for mid-April 1996. On
March 7, 1996, the NRC issued NU a letter requesting information
similar to that being sought for Millstone 1.
On March 30, 1996, Millstone 3, a 1154-MW pressurized-water reactor
that is jointly owned by CL&P (52.93 percent), WMECO (12.24 percent),
PSNH (2.85 percent), and other New England utilities, was shut down
following an engineering evaluation which determined that four safety-
related valves would not be able to perform their design function
during certain postulated events. On April 4, 1996, the NRC issued NU
a letter requesting information similar to that being sought for
Millstone 1 and 2.
On March 7, 1996, the NRC issued a letter to Northeast Utilities
Service Company (NUSCO), requesting operational assurances related to
the Connecticut Yankee nuclear unit (CY), a 575-MW pressurized water
reactor that is jointly owned by CL&P (34.5 percent), WMECO (9.5
percent), PSNH (5.0 percent), and other New England utilities, in
which NUSCO serves as agent for CY. The NRC letter also requested
CY's plans and schedules for performing comprehensive compliance
checks. Operations at CY were not restricted by the NRC's request.
NUSCO filed a response to the NRC's request on April 8, 1996. A two-
week NRC review of the plant followed the submission of CY's response.
Based on that review, CY will update its April 8, 1996 letter to
address the NRC inspection findings by May 30, 1996. Management
believes that the outcome of the NRC's inspection at CY will not have
a material adverse impact on WMECO's financial position and results of
operations. NRC activities are continuing and management cannot
predict at this time what additional actions, if any, the NRC will
take with respect to CY.
As of May 6, 1996, all three Millstone units were out of service, as
the engineering analysis needed to respond to the NRC requirements is
still being performed. The company expects to incur approximately $1
million (Millstone 1), $1-2 million (Millstone 2), and $1-2 million
(Millstone 3), respectively, in aggregate incremental replacement
power costs for each month the units are not operating. Management
estimates that the work required to comply with the NRC requirements
will be completed by early July 1996 for Millstone 3, the third
quarter of 1996 for Millstone 2 and the fourth quarter of 1996 for
Millstone 1. Management cannot predict at this time how long the
NRC's review will take or what additional actions, if any, will be
required before the units are allowed to restart. Recovery of
replacement power costs for these outages will be subject to prudence
reviews by the Massachusetts Department of Public Utilities.
Management does not believe the outcome of a prudence review will have
a material adverse impact on WMECO's financial position or results of
operations, as reported as of March 31, 1996.
In addition to the replacement power costs, the company expects to
incur operation and maintenance costs (O&M) related to the NRC's
actions at the Millstone units. Management has estimated these costs
to be at least $14 million, and has reserved approximately $7 million
in the first quarter of 1996 for the incremental O&M costs necessary
to respond to the NRC requirements. In addition, as of March 31,
1996, management has identified approximately $7 million of costs for
projects associated with the extended outages, the majority of which
have been accelerated from planned future outages. It is likely that
these costs will increase as additional projects are identified and
approved. Management cannot estimate at this time when each Millstone
unit will return to service, nor can management predict the possible
loss or range of loss the company may incur as a result of NRC actions
related to the operations of the Millstone units or CY. Management
believes that there is a significant exposure to nonrecovery of
material amounts of the total incremental costs.
Management also believes that there is a risk, particularly in
Connecticut, that it will be difficult to meet peak demand this summer
if all three Millstone units, and perhaps CY, are out of service
during the hottest summer weather. To reduce this risk, the NU system
is planning to acquire additional generating assets. Management
expects the NU system's incremental costs associated with meeting peak
summer demand to be approximately $20 million in 1996.
For further information on the company's nuclear performance, refer to
the company's Form 8-K dated March 30, 1996, the MD&A and Part II,
Items 1 and 5, "Legal Proceedings" and "Other Information" in this
Form 10-Q and WMECO's 1995 Form 10-K.
C. Environmental Matters: For information regarding environmental
matters, see Part II, Item 5, "Other Information" in this Form 10-Q
and the Notes to Financial Statements in WMECO's 1995 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see the Notes to Financial Statements in
WMECO's 1995 Form 10-K.
E. Long-Term Contractual Arrangements: For information regarding long-
term contractual arrangements, see the Notes to Financial Statements
in WMECO's 1995 Form 10-K.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of WMECO's (the company) financial
condition and the principal factors having an impact on the results of
operations. The company is a wholly-owned subsidiary of Northeast Utilities
(NU). This discussion should be read in conjunction with WMECO's financial
statements and footnotes in this Form 10-Q, the 1995 Form 10-K, and the Form 8-
K's dated January 31, 1996 and March 30, 1996.
FINANCIAL CONDITION
OVERVIEW
Net income was approximately $8 million for the three months ended March 31,
1996, a decrease of approximately $4 million, from approximately $12 million for
the same period in 1995. The 1996 net income was lower primarily due to the
reserve established for the outages at the Millstone units, which resulted from
the units being placed on the Nuclear Regulatory Commission's (NRC) watch list
and related licensing actions. This decrease was partially offset by lower
amortization in 1996 due to the completion of the Millstone 3 phase-in during
1995.
The company expects to incur substantial costs during the remainder of 1996,
primarily in the second and third quarters, as a result of the Millstone
outages. When combined with a typically low sales quarter, these costs will
further depress the second quarter earnings. The key factor affecting 1996
earnings will be the length of the nuclear outages. This will determine the
level of direct costs expended to address NRC concerns and the replacement-power
costs incurred to serve the company's customers in the absence of energy from
the Millstone units. Management believes that a significant portion of the
incremental costs, including replacement-power, associated with the nuclear
outages will not be recoverable.
NU has put into place temporary cost-reduction measures covering most non-
nuclear areas of the NU system in an effort to help offset the substantial costs
it expects to incur for at least the next two quarters relating to the NRC
review and the Millstone outages. The cost-control measures will not affect
nuclear or customer reliability operations.
NUCLEAR PERFORMANCE
WMECO has a 19-percent ownership interest in Millstone units 1 and 2, a 12.24-
percent ownership interest in Millstone 3, and a 9.5-percent ownership interest
in the Connecticut Yankee Atomic Power Company (CYAPC).
On January 31, 1996, the NRC placed Millstone units 1, 2, and 3 (Millstone) on
its watch list, which calls for increased NRC inspection attention. The NRC's
action referred to a number of performance concerns that have arisen since 1990,
including the inability to resolve employee safety concerns.
Millstone 1's planned refueling and maintenance outage, which began November 4,
1995, was extended to allow NU to complete reviews required by the NRC. In
response to a December 13, 1995 request by the NRC to provide information no
later than 7 days prior to restart of the unit, NU is conducting a detailed
review of Millstone 1's Updated Final Safety Analysis Report (FSAR) and an
assessment of the plant's readiness to ensure that the future operation of the
plant will be conducted in accordance with the terms and conditions of its
operating license, FSAR, and the NRC's regulations.
On February 21, 1996, NU took Millstone 2 out of service as a result of an
engineering evaluation that determined that some valves could be inoperable
under certain emergency conditions. Management decided at that time to combine
this unscheduled outage with a mid-cycle outage previously scheduled to begin in
mid-April. On March 7, 1996, the NRC issued a letter requesting information
similar to that being sought for Millstone 1 prior to restart of the unit.
Also on March 7, 1996, the NRC requested operational assurances from Millstone 3
and CYAPC, with respect to its Connecticut Yankee nuclear unit (CY), as well as
plans and schedules for performing comprehensive compliance checks. Operation
of the units was not restricted by the NRC's March 7th request.
On March 30, 1996, NU took Millstone 3 out of service as a result of an
engineering evaluation that determined certain system-isolation valves would not
perform properly under certain situations. On April 4, 1996, the NRC issued a
letter requesting information similar to that being sought for Millstone 1 prior
to restart of the unit.
On April 8, 1996, CYAPC submitted its response to the NRC's March 7th letter.
Subsequent to NU's submission, the NRC conducted a two-week inspection at CY,
focused on engineering and licensing documentation and practices. The NRC
provided its preliminary inspection findings at a meeting with plant management
on April 26, 1996. The NRC's conclusions, which will be more fully described in
a written inspection report to be issued within the next several weeks, included
findings that in certain instances CY's plant design is not conservative and
that the technical bases for design or operations decisions are not well
documented. Even with these findings, the NRC indicated that it did not believe
that CY was unsafe to operate. The NRC has requested that CYAPC supplement its
April 8th letter to address these inspection findings and explain why CY remains
safe to operate while the inspection findings are addressed. CYAPC's
supplemental letter is to be submitted by May 30, 1996. The NRC's activities
are continuing and management cannot predict at this time what additional
activities, if any, the NRC will take with respect to CY.
The work necessary to respond to the NRC's letters regarding Millstone is
expected to be completed by July 2, 1996 for Millstone 3, during the third
quarter of 1996 for Millstone 2, and during the fourth quarter of 1996 for
Millstone 1. These estimates could be affected by the discovery of additional
issues and necessary corrective work. Management's reallocation of resources,
with the objective of filing Millstone 3's response by July 2, has resulted in
revised schedules for Millstone 1 and 2. The NRC has required that this
information be submitted no later than seven days before each of these units
returns to operation. Since the NRC will carefully review these responses
before permitting each unit to return to operation, management cannot predict at
this time how long the NRC's review will take or what additional actions, if
any, will be required before the units are allowed to restart.
Monthly replacement-power costs attributable to the outages for WMECO are
expected to be approximately $1 million for Millstone 1 and $1 to $2 million
each for Millstone 2 and 3. These costs are recovered currently through
WMECO's fuel clause.
In addition to the costs of replacement power, there are, and will be,
incremental operation and maintenance (O&M) costs associated with the Millstone
outages and the NRC review. Because it cannot be known with any certainty how
long each unit will remain out of service, management can only provide general
estimates of the amount of direct costs that will be incurred. As of March 31,
1996, management has estimated WMECO's share of the identified costs associated
with the extended outages to be approximately $7 million, the majority of which
are for projects which have been accelerated from planned future outages, and an
additional $7 million of costs specifically associated with the NRC review. It
is likely that these costs will increase as additional projects are identified
by NU or the NRC. As of March 31, 1996, WMECO has reserved approximately $7
million for the estimated costs associated directly with the NRC review.
The recovery of fuel and outage costs are subject to prudence reviews. While it
is too early to estimate the total amount of replacement-power and other costs
that will result from the NRC's review of Millstone, or what the results of any
prudence reviews will be, management believes that there is significant exposure
for non-recovery of a material amount of the total costs.
In April 1996, NU's Board of Trustees (the Board) announced the formation of a
special committee of the Board to provide high-level oversight of the safety and
effectiveness of NU's nuclear operations, progress toward resolving open NRC
issues, and progress in resolving employee, community, and customer concerns.
The new committee will consist exclusively of outside trustees and will be
chaired by E. Gail de Planque, a Board member who is a former NRC commissioner.
Given the current Millstone outages, NU management believes that there is a
risk, particularly in Connecticut, that it will be difficult to meet peak demand
this summer if all three Millstone units, and perhaps CY, are out of service
during the hottest summer weather. To reduce this risk, NU is planning to
acquire additional generating assets. NU management expects the incremental
costs, to the NU system, associated with meeting peak summer demand to be
approximately $20 million in 1996.
RATE MATTERS
On April 30, 1996, the Massachusetts Department of Public Utilities (DPU)
approved a settlement which was proposed in February 1996 by WMECO and the
Massachusetts Attorney General (the Agreement). The Agreement will continue,
through February 1998, the 2.4-percent rate reduction instituted in June 1994.
Additionally, the Agreement will terminate pending reviews of WMECO's generating
plant performance and any potential reviews associated with Millstone 2's 1994-
1995 extended outage, and accelerates its amortization of potentially strandable
generation assets by approximately $6 million in 1996 and $10 million in 1997.
The Agreement will not have a material impact on estimated earnings for 1996.
On May 1, 1996, the DPU issued draft comprehensive restructuring rules.
Management is currently performing an analysis of the DPU's rules, however, it
is clear that they are complex and far-reaching. WMECO will file its comments
on the DPU's rules on May 26, 1996. The filing will be followed by hearings,
and the proposed date for issuance of the final restructuring regulations is
September 20, 1996. The state's electric companies will then be required to
file revenue neutral rate unbundling plans in the fall of 1996. The DPU is
expected to rule on the companies' plans in early 1997. Subsequently, the DPU
has indicated that it will rule on WMECO's and other electric companies'
individual restructuring plans in 1997. The DPU's target date for retail choice
is January 1, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased approximately $17 million in 1996, from
1995, primarily due to higher funds from working capital. Cash used for
financing activities increased approximately $10 million in 1996, from 1995,
primarily due to a net decrease in short-term debt, partially offset by lower
reacquisitions and retirements of preferred stock. Cash from investments
decreased approximately $7 million in 1996, from 1995, primarily due to loan
repayments from other companies under the NU system Money Pool during 1995.
In April 1996, Standard & Poor's Ratings Group placed WMECO's ratings on
CreditWatch with negative implications and Moody's placed WMECO's credit ratings
under review for possible downgrade. These rating actions could adversely
affect the future availability and cost of funds.
The costs of replacement power and the direct costs associated with the current
nuclear outages will be substantial, even though the total cost is not
quantifiable at this time. Management is confident that the company will be
able to meet these additional funding requirements and the company's other 1996
requirements, including requirements for preferred dividends, through a
combination of internally generated funds, and borrowings under existing credit
facilities. Management is also evaluating the issuance of additional first-
mortgage bonds and asset-backed financings. WMECO has also initiated actions to
obtain a significant increase in the agreements under which it can borrow funds
under revolving credit arrangements. Management's intention in implementing
these additional financial arrangements is to ensure that WMECO will have access
to adequate cash resources, at reasonable cost, even if the nuclear outages
extend significantly longer, or the associated costs are significantly greater
than management currently foresees.
RESULTS OF OPERATIONS
Comparison of the First Quarter of 1996 with the First Quarter of 1995
- ----------------------------------------------------------------------
Operating revenues increased approximately $8 million in the first quarter of
1996, from 1995. The components of the change in operating revenues are as
follows:
Changes in Operating Revenues Increase/(Decrease)
- ----------------------------- -------------------
(Millions of Dollars)
Fuel and purchased-power cost recoveries $4
Retail sales volume 3
Other revenues 1
---
Total revenue change $8
==
Fuel and purchased-power cost recoveries increased primarily due to higher
energy costs and higher revenues from sales to other outside utilities. Retail
kilowatt-hour sales increased 3.5 percent for the first quarter of 1996, from
1995, primarily due to extremely mild weather in the first three months of 1995.
Fuel, purchased, and net interchange power expense increased approximately $8
million in the first quarter of 1996, from 1995, primarily due to the timing of
the recognition of costs under the company's fuel clauses and higher energy
costs in 1996 as a result of the Millstone outages.
Other operation and maintenance expense increased approximately $7 million in
the first quarter of 1996, from 1995, primarily due to the establishment of a
reserve resulting from the NRC review of Millstone.
Amortization of regulatory assets, net decreased approximately $4 million in the
first quarter of 1996, from 1995, primarily due to the completion of the
amortization of Millstone 3 phase-in costs in June 1995.
Interest on long-term debt decreased approximately $1 million in the first
quarter of 1996, from 1995, primarily due to lower outstanding debt in 1996.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDING
1. On April 10, 1996, NU received a letter from a representative of a
shareholder demanding that it commence legal action against Bernard M.
Fox and certain unnamed officers and directors with regard to operations
at Millstone Station. On April 23, 1996, NU's Board of Trustees created
a special committee that would, among other responsibilities, conduct an
independent review and investigation of the allegations contained in the
letter and make recommendations as to how the Board of Trustees should
respond to the letter.
In addition, on April 19, 1996, NU was served with a civil complaint
naming as defendants certain current and former trustees and officers.
-
The complaint was brought as a shareholder derivative action in the
Massachusetts Superior Court for the Hampden Division seeking to recover
unspecified damages for alleged losses purportedly arising out of NU's
operation of Millstone Station. NU is presently evaluating the matter.
NU has also been was served in two similar proceedings in Connecticut
Superior Court.
ITEM 5. OTHER INFORMATION
1. On April 9, 1996, Northeast Nuclear Energy Company ("NNECO") and the
Nuclear Regulatory Commission ("NRC") staff filed a joint motion to
terminate the NRC proceeding which began in 1995 when several New
England based public interest groups requested a hearing on the
Millstone 1 license amendment which explicitly authorized the practice
of offloading the full reactor core during refueling outages. The joint
motion was based on representations by counsel for the petitioners that
the matter would no longer be pursued. On April 15, 1995, the NRC's
Atomic Safety and Licensing Board granted the joint motion to terminate
the proceeding.
For additional information on this proceeding, see "Item 1. Business -
Electric Operations - Nuclear Generation - Millstone Units" in WMECO's
1995 Form 10-K.
2. On May 3, 1996, NU was advised by the Office of the U.S. Attorney for
the District of Connecticut (U.S. Attorney) that it had received a
report by the NRC Office of Investigations (OI) relating to full core
off-load procedures and certain related matters at Millstone Station.
The OI referred the report to the U.S. Attorney for review of possible
criminal prosecution and NU has been informed that the U.S. Attorney is
in the early stages of reviewing its conduct. NU does not have the OI's
report and therefore cannot evaluate either whether the report is
accurate or what any civil or criminal consequences may be. Despite the
possibility that some form of prosecutorial action might be initiated,
management does not believe that any System company or officer has
engaged in conduct that would warrant a federal criminal prosecution and
intends to fully cooperate with the U.S. Attorney in the investigation.
3. On April 18, 1996, the United States District Court for the Eastern
District of Kentucky approved the consent decree described in "Item 1.
Business - Regulatory and Environmental Matters - Environmental
Regulation - Toxic Substances and Hazardous Waste Regulations" in
WMECO's 1995 Form 10-K.
4. On April 24, 1996, FERC issued its final open access rule (the ``Rule'')
to promote competition in the electric industry. The Rule will require,
among other things, all public utilities that own, control or operate
facilities used for transmitting electric energy in interstate commerce
to file an open-access, non-discriminatory transmission tariff and to
take transmission service for their own new wholesale sales and
purchases under the open-access tariffs. The Rule also requires public
utilities to develop and maintain a same-time information system that
will give existing and potential transmission users the same access to
transmission information that the public utility enjoys, and requires
public utilities to separate transmission from generation marketing
functions and communications. The Rule also supports full recovery of
legitimate, prudent and verifiable stranded costs associated with
providing open access transmission services.
On March 29, 1996, FERC approved NU's transmission tariffs, where were
revised to meet the comparability standards articulated in the Notice of
Proposed Rulemaking that preceded the Rule and conditioned acceptance of
NU's market-based power sales tariff, where it permits NU to sell power
to wholesale customers outside of New England, on the removal of certain
language. NU submitted the required compliance filing to FERC on April
12, 1996. As a result of the Rule, NU will refile its transmission
tariffs to conform with the minimum terms and conditions set forth in
the Rule. Management is continuing to review what other steps, if any,
must be taken to comply with the Rule.
For additional information on this matter, see "Item 1. Business -
Competition and Marketing - Wholesale Marketing" in WMECO's 1995 Form
10-K.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. WMECO filed a Form 8-K dated January 31, 1996 disclosing that the NRC had
placed Millstone station on its "watch list."
2. WMECO filed a Form 8-K dated March 30, 1996 updating the status of
Millstone station as related to the NRC's actions to date.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WESTERN MASSACHUSETTS ELECTRIC COMPANY
--------------------------------------
Registrant
Date May 8, 1996 By /s/ Bernard M. Fox
------------------ --------------------------
Bernard M. Fox
Vice Chairman and Director
Date May 8, 1996 By: /s/ John J. Roman
------------------- ------------------------------
John J. Roman
Vice President and Controller
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