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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-7624
WESTERN MASSACHUSETTS ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1961130
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS
1
01090-0010 (Address of principal executive offices) (Zip Code)
(413) 785-5871
(Registrant's telephone number, including area code)
Not Applicable
(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
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, 1997
Common Shares, $25.00 par value 1,072,471 shares
WESTERN MASSACHUSETTS ELECTRIC COMPANY
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 1997 and
December 31, 1996 2
Statements of Income - Three Months
Ended March 31, 1997 and 1996 4
Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I. FINANCIAL INFORMATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- ------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at original cost:
Electric........................................ $ 1,261,681 $ 1,257,097
Less: Accumulated provision for depreciation...... 514,412 503,989
------------- ------------
747,269 753,108
Construction work in progress................... 16,640 15,968
Nuclear fuel, net............................... 30,470 30,296
------------- ------------
Total net utility plant..................... 794,379 799,372
------------- ------------
Other Property and Investments:
Nuclear decommissioning trusts, at market....... 86,720 83,611
Investments in regional nuclear generating
companies, at equity........................... 15,845 15,448
Other, at cost.................................. 4,369 4,367
------------- ------------
106,934 103,426
------------- ------------
Current Assets:
Cash............................................ 47 67
Receivables, net (Note 5)....................... 37,911 40,168
Accounts receivable from affiliated companies... 3,411 3,525
Accrued utility revenues (Note 5)............... 11,280 12,394
Fuel, materials, and supplies, at average cost.. 5,137 5,317
Recoverable energy costs, net--current portion.. 16,770 576
Prepayments and other........................... 13,590 11,686
------------- ------------
88,146 73,733
------------- ------------
Deferred Charges:
Regulatory assets:
Income taxes, net.............................. 67,542 71,519
Unrecovered contractual obligations (Note 2)... 79,651 84,598
Recoverable energy costs....................... - 17,510
Other.......................................... 34,814 37,225
Unamortized debt expense........................ 1,785 1,866
Other........................................... 510 888
------------- ------------
184,302 213,606
------------- ------------
Total Assets................................ $ 1,173,761 $ 1,190,137
============= ============
</TABLE>
See accompanying notes to financial statements.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- ------------
(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......................... 150,976 150,911
Retained earnings................................ 79,413 97,045
------------- ------------
Total common stockholder's equity....... 257,201 274,768
Preferred stock not subject to mandatory redemption. 20,000 20,000
Preferred stock subject to mandatory redemption. 19,500 21,000
Long-term debt.................................. 325,443 334,742
------------- ------------
Total capitalization................... 622,144 650,510
------------- ------------
Obligations Under Capital Leases.................. 29,460 29,269
------------- ------------
Current Liabilities:
Notes payable to banks.......................... 15,000 -
Notes payable to affiliated company............. 75,900 47,400
Long-term debt and preferred stock--current
portion........................................ 11,300 14,700
Obligations under capital leases--current
portion........................................ 2,965 2,965
Accounts payable................................ 15,959 26,698
Accounts payable to affiliated companies........ 15,550 20,256
Accrued taxes................................... 7,581 881
Accrued interest................................ 4,266 5,643
Nuclear compliance.............................. 6,550 11,800
Other........................................... 3,178 4,754
------------- ------------
158,249 135,097
------------- ------------
Deferred Credits:
Accumulated deferred income taxes............... 237,168 245,253
Accumulated deferred investment tax credits..... 25,200 24,833
Deferred contractual obligations................ 79,651 84,598
Other........................................... 21,889 20,577
------------- ------------
363,908 375,261
------------- ------------
Commitments and Contingencies (Note 6)
------------- ------------
Total Capitalization and Liabilities........... $ 1,173,761 $ 1,190,137
============= ============
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Revenues................................. $ 106,054 $ 114,797
----------- -----------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power..... 40,974 25,820
Other......................................... 26,683 41,226
Maintenance...................................... 16,485 9,616
Depreciation..................................... 10,182 9,785
Amortization of regulatory assets................ 1,615 3,018
Federal and state income taxes................... 793 6,085
Taxes other than income taxes.................... 5,457 5,555
----------- -----------
Total operating expenses................... 102,189 101,105
----------- -----------
Operating Income................................... 3,865 13,692
----------- -----------
Other Income:
Equity in earnings of regional nuclear generating
companies...................................... 493 500
Other, net....................................... 570 (87)
Income taxes..................................... 72 178
----------- -----------
Other income, net.......................... 1,135 591
----------- -----------
Income before interest charges............. 5,000 14,283
----------- -----------
Interest Charges:
Interest on long-term debt....................... 5,973 5,979
Other interest................................... 870 195
----------- -----------
Interest charges, net...................... 6,843 6,174
----------- -----------
Net (Loss) Income.................................. $ (1,843) $ 8,109
=========== ===========
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities:
Net (Loss)Income.................................... $ (1,843) $ 8,109
Adjustments to reconcile to net cash
from operating activities:
Depreciation...................................... 10,182 9,785
Deferred income taxes and investment tax credits, net 1,252 (3,234)
Recoverable energy costs, net of amortization........ 1,316 2,527
Deferred nuclear refueling outage, net of amortization 2,206 (3,000)
Nuclear compliance, net............................... (5,250) 7,105
Other sources of cash................................. 3,776 10,059
Other uses of cash.................................... (5,791) (2,790)
Changes in working capital:
Receivables and accrued utility revenues.............. 3,485 77
Fuel, materials, and supplies......................... 180 (120)
Accounts payable......................................(15,445) (7,487)
Accrued taxes......................................... 6,700 8,875
Other working capital (excludes cash)................. (4,857) (2)
----------- -----------
Net cash flows (used for) from operating activities.... (4,089) 29,904
----------- -----------
Financing Activities:
Net increase (decrease) in short-term debt.......... 43,500 (11,000)
Reacquisitions and retirements of long-term debt.... (14,700) -
Reacquisitions and retirements of preferred stock... 0 (1,500)
Cash dividends on preferred stock................... (785) (1,224)
Cash dividends on common stock...................... (15,004) (8,987)
----------- -----------
Net cash flows from (used for) financing activities... 13,011 (22,711)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant............................ (6,056) (4,731)
Nuclear fuel...................................... (30) (3)
----------- -----------
Net cash flows used for investments in plant........ (6,086) (4,734)
Investments in nuclear decommissioning trusts....... (2,455) (2,231)
Other investment activities, net.................... (401) (333)
----------- -----------
Net cash flows used for investments................... (8,942) (7,298)
----------- -----------
Net Decrease In Cash For The Period................... (20) (105)
Cash - beginning of period............................ 67 202
----------- -----------
Cash - end of period.................................. $ 47 $ 97
=========== ===========
</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 Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) in this Form 10-Q, the
Annual Report of Western Massachusetts Electric Company (the company
or WMECO) on Form 10-K for the year ended December 31, 1996 (1996 Form
10-K), and the company's Form 8-K dated April 11, 1997. In the opinion
of the company, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position as of
March 31, 1997, the results of operations for the three-month periods
ended March 31, 1997 and 1996, and the statements of cash flows for
the three-month periods ended March 31, 1997 and 1996. All adjustments
are of a normal, recurring, nature except those described below in
Note 6A. The results of operations for the three-month periods ended
March 31, 1997 and 1996 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 franchised 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 entitlement to the capacity and output of the
Seabrook nuclear power plant to PSNH. In addition to its franchised
retail service, the system furnishes firm and other wholesale electric
services to various municipalities and other utilities and on a pilot
basis pursuant to state regulatory experiments, provides off-system
retail electric service. 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. New Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure" in February 1997. SFAS 129 will
be effective for 1997 year-end reporting. Management believes that
the implementation of SFAS 129 will not have a material impact on
WMECO's financial position or its results of operations.
For information regarding the adoption of new accounting standards,
see Note 5, "Sale of Customer Receivables" and Note 6B, "Commitments
and Contingencies - Environmental Matters," in this Form 10-Q and
WMECO's 1996 Form 10-K.
C. Regulatory Accounting and Assets
The accounting policies of WMECO and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate regulated enterprises and reflect the effects of
SFAS 71 "Accounting for the Effects of Certain Types of Regulation."
Recently, the Securities and Exchange Commission (SEC) has questioned
the ability of certain utilities to remain on SFAS 71 in light of
state legislation regarding the transition to retail competition. The
industry expects guidance on this issue from FASB's Emerging Issues
Task Force in the near future.
While there are restructuring initiatives pending in the NU system
companies' respective jurisdictions, WMECO is not yet subject to a
transition plan. Management continues to believe that its use of SFAS
71 accounting is appropriate.
For additional information regarding regulatory accounting and assets,
see WMECO's 1996 Form 10-K.
2. CONNECTICUT YANKEE ATOMIC POWER COMPANY (CY)
CY, in which WMECO has a 9.5 percent ownership interest, owns a nuclear-
powered electric generating plant, which was taken out of service on July
22, 1996. On December 4, 1996, the board of directors of CY voted
unanimously to cease permanently the production of power at the plant. In
late December 1996, CY filed amendments to its power contracts with the
Federal Energy Regulatory Commission (FERC) to clarify any obligations of
its purchasing utilities, including WMECO. This filing estimated the
unrecovered obligations, including the funding of decommissioning, to be
approximately $762.8 million.
On February 27, 1997, FERC approved an order for hearing which, among other
things, accepted CY's contract amendments for filing and suspended the new
rates for a nominal period. The new rates became effective March 1, 1997,
subject to refund. At March 31, 1997, WMECO's share of the CY unrecovered
contractual obligation, which has also been recorded as a regulatory asset,
was $68.4 million.
For further information regarding CY, see WMECO's 1996 Form 10-K.
3. SHORT-TERM DEBT
On April 11, 1997, NU, CL&P and WMECO entered into an interim financing
arrangement which waives certain financial covenants under an earlier
revolving credit agreement with a group of banks and requires the companies
to effect certain amendments to the agreement. For further information
regarding this interim financing arrangement see WMECO's Form 8-K dated
April 11, 1997 and WMECO's 1996 Form 10-K.
4. CAPITALIZATION
Rocky River Realty Company (RRR): On April 17, 1997, the holders of $38.4
million of RRR's notes elected to have RRR repurchase the notes at par.
RRR is obligated to find an alternate purchaser for the notes by
approximately July 1, 1997 and has 60 more days to consummate the
repurchase should a purchaser be found. For additional information
regarding RRR's obligations, see WMECO's 1996 Form 10-K.
Downgrade Event: On April 28, 1997, Moody's Investors Services announced
that it was downgrading both CL&P's and WMECO's first mortgage bonds from
their "Baa3" rating to a "Ba1" rating. This rating change has placed
CL&P's and WMECO's first mortgage bonds in Moody's below investment grade
category.
5. SALE OF CUSTOMER RECEIVABLES
WMECO has entered into an agreement to sell up to $40 million of eligible
customer billed and unbilled accounts receivable. As of March 31, 1997,
WMECO had sold approximately $15 million of its accounts receivable under
its sales agreement.
The FASB issued SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996. SFAS
125 became effective on January 1, 1997, and establishes, in part, criteria
for concluding whether a transfer of financial assets in exchange for
consideration should be accounted for as a sale or as a secured borrowing.
At present, WMECO is required to record the sales of its customer accounts
receivable as secured short-term borrowings. WMECO is currently in the
process of restructuring its accounts receivable sales agreement so that
WMECO may treat this transaction as a sale as permitted under SFAS 125.
For additional information regarding WMECO's sales of customer receivables,
see WMECO's 1996 Form 10-K.
6. COMMITMENTS AND CONTINGENCIES
A. Nuclear Performance
Millstone: WMECO has a 19-percent ownership interest in Millstone 1
and 2 and a 12.24-percent ownership interest in Millstone 3.
Millstone units 1, 2, and 3 (Millstone) have been out of service since
November 4, 1995, February 21, 1996, and March 30, 1996, respectively.
Millstone 3 has been designated as the lead unit for restart.
Millstone 2 remains on a schedule to be ready for restart shortly
after Millstone 3. To provide the resources and focus for Millstone
3, the work on the restart of Millstone 1 will be reduced until late
in 1997 then the full work effort will be resumed.
Management believes that Millstone 3 will be ready for restart around
the end of the third quarter of 1997, Millstone 2 in the fourth
quarter of 1997 and Millstone 1 in the first quarter of 1998. Because
of the need for completion of independent inspections and reviews and
for the Nuclear Regulatory Commission (NRC) to complete its processes
before the NRC Commissioners can vote on permitting a unit to restart,
the actual beginning of operations is expected to take several months
beyond the time when a unit is declared ready for restart. The NRC's
internal schedules at present indicate that a meeting of the
Commissioners to act upon a Millstone 3 restart request could occur by
mid-December if NU, the independent review teams and NRC staff concur
that the unit is ready for restart by that time. Management hopes
that Millstone 3 can begin operating by the end of 1997.
Based on a recent review of the work efforts and budgets, management
believes that the overall 1997 nuclear spending levels - both nuclear
operations and maintenance (O&M) expenditures and associated support
services and capital expenditures - will be approximately the same as
previously estimated. However, 1997 nuclear O&M expenditures and
related support services are expected to increase slightly, while 1997
capital expenditures are expected to decrease. Management also
believes that it is possible that 1997 nuclear spending will increase
somewhat as the detailed work needed to restore the units to service
progresses.
The total cost to restart the units cannot be estimated at this time.
Management will continue to evaluate the costs to be incurred for the
remainder of 1997 and in 1998 to determine whether adjustments to the
existing reserves are required.
WMECO expensed approximately $17 million of non-fuel nuclear operation
and maintenance costs in the first quarter of 1997. An additional
$5.3 million was expended in the first quarter of 1997 and charged
against the reserve established in 1996. The balance of the reserve
at March 31, 1997 was $7 million.
Replacement power costs incurred by WMECO which are attributable to
the Millstone outages averaged approximately $6 million per month
during the first quarter of 1997, and are projected to average
approximately $5 million per month for the remainder of 1997.
Maine Yankee Atomic Power Company (MY): MY owns a nuclear-powered
electric generating unit which has been out of service since December
6, 1996 and is currently on the NRC's watch list. MY is projected to
incur substantially increased costs over the balance of 1997 while the
unit is not operating. The owners of MY are evaluating a range of
options with respect to MY's future operations. WMECO's monthly
replacement power costs attributable to MY being out of service are
projected to average approximately $200 thousand.
For further information regarding nuclear performance, see the MD&A in
this Form 10-Q and WMECO's 1996 Form 10-K.
B. Environmental Matters
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental
Remediation Liabilities" (SOP). The principal objective of the SOP is
to improve the manner in which existing authoritative accounting
literature is applied by entities to specific situations of
recognizing, measuring, and disclosing environmental remediation
liabilities. The SOP became effective January 1, 1997. The adoption
of the SOP resulted in a $450 thousand increase to WMECO's
environmental reserve.
At March 31, 1997, WMECO's net liability for its estimated remediation
costs, excluding recoveries from insurance companies and other third
parties was approximately $1.9 million, which management has
determined to be the most probable amount within a range of $1.9
million to $4.2 million.
For additional information regarding environmental matters, see
WMECO's 1996 Form 10-K.
C. Nuclear Insurance Contingencies
Insurance has been purchased to cover the primary cost of repair,
replacement or decontamination of utility property resulting from
insured occurrences. WMECO is subject to retroactive assessments if
losses exceed the accumulated funds available to the insurer. Based
on the most recent renewal, the maximum potential assessment against
the NU system with respect to losses arising during the current policy
year is approximately $2.7 million under the primary property
insurance program.
For additional information regarding nuclear insurance contingencies,
see WMECO's 1996 Form 10-K.
D. Construction Program
The construction program is subject to periodic review and revision by
management. As a result of the most recent capital program review,
management has decreased the construction program forecast for 1997
expenditures from $37 million to $31 million.
For information regarding WMECO's construction program, see WMECO's
1996 Form 10-K.
E. Long-Term Contractual Arrangements
For information regarding long-term contractual arrangements, see
WMECO's 1996 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 Western Massachusetts Electric
Company's (WMECO or the company) financial condition and the principal factors
having an impact on the results of operations. The company is a wholly-owned
subsidiary of Northeast Utilities (NU). This discussion should be read in
conjunction with WMECO's financial statements and footnotes in this Form 10-Q,
the 1996 Form 10-K and the Form 8-K dated April 11, 1997.
FINANCIAL CONDITION
Overview
The outages at the three Millstone units (Millstone) continue to have a
significant negative impact on WMECO's earnings. WMECO had a net loss of
approximately $1.8 million in the first quarter of 1997 compared to net income
of $8.1 million in the first quarter of 1996. The first quarter loss was
primarily attributable to replacement-power expenditures for the Millstone units
in the first quarter of 1997. In 1996, two of the Millstone units were operating
for some part of the first quarter. First quarter 1997 earnings were also
negatively affected by a much milder winter. Retail kilowatt-hour sales for the
quarter decreased 4.6 percent from 1996. Although nuclear operation and
maintenance spending was higher in 1997, this impact was offset by reserves for
nuclear expenditures recognized in 1996.
In 1997, while all three units are out of service, WMECO expects to operate on a
roughly break-even basis. Monthly replacement-power costs for WMECO attributable
to the Millstone outages averaged approximately $6 million during the first
quarter, and are projected to average approximately $5 million for the remainder
of 1997. The higher replacement-power costs in the first quarter were due
primarily to higher fuel prices.
Millstone Outages
WMECO has a 19-percent ownership interest in Millstone units 1 and 2, and a
12.24-percent ownership interest in Millstone 3. Millstone units 1, 2, and 3
(Millstone) have been out of service since November 4, 1995, February 21, 1996,
and March 30, 1996, respectively.
Millstone 3 has been designated as the lead unit for restart. Millstone 2
remains on a schedule to be ready for restart shortly after Millstone 3. To
provide the resources and focus for Millstone 3, the work on the restart of
Millstone 1 will be reduced until late in 1997 when the full work effort will be
resumed.
Management believes that Millstone 3 will be ready for restart around the end of
the third quarter of 1997, Millstone 2 in the fourth quarter of 1997 and
Millstone 1 in the first quarter of 1998. Because of the need for completion of
independent inspections and reviews and for the Nuclear Regulatory Commission
(NRC) to complete its processes before the NRC Commissioners can vote on
permitting a unit to restart, the actual beginning of operations is expected to
take several months beyond the time when a unit is declared ready for restart.
The NRC's internal schedules at present indicate that a meeting of the
Commissioners to act upon a Millstone 3 restart request could occur by mid-
December if NU, the independent review teams and NRC staff concur that the unit
is ready for restart by that time. Management hopes that Millstone 3 can begin
operating by the end of 1997.
Based on a recent review of the work efforts and budgets, management believes
that the overall 1997 nuclear spending levels - both nuclear operations and
maintenance (O&M) expenditures and associated support services and capital
expenditures - will be approximately the same as previously estimated. However,
1997 nuclear O&M expenditures and related support services are expected to
increase slightly, while 1997 capital expenditures are expected to decrease.
Management also believes that it is possible that 1997 nuclear spending will
increase somewhat as the detailed work needed to restore the units to service
progresses.
Although 1998 nuclear operating budgets have not been established at this time,
management believes that the nuclear spending levels at Millstone will be
reduced considerably from 1997 levels, although they will be higher than before
the station was placed on the NRC's Watch List. The actual level of 1998
spending will depend on when the units return to operation and the cost of
restoring them to service. The total cost to restart the units cannot be
estimated at this time. Management will continue to evaluate the costs to be
incurred for the remainder of 1997 and in 1998 to determine whether adjustments
to the existing reserves are required.
For further information on the current Millstone outages, see WMECO's 1996 Form
10-K.
Capacity
During 1996 and continuing into 1997, the NU system companies have taken
measures to improve their capacity position. WMECO anticipates spending
approximately $12 million for additional capacity-related costs in 1997, of
which $7 million is expected to be expensed. The projected 1997 capacity-related
expenditures have increased from previous estimates due to additional
improvements to existing fossil units and WMECO's estimated share of costs to
reactivate generating units in New England. As of March 31, 1997, WMECO spent
approximately $4 million to ensure adequate generating capacity, of which $1
million was expensed.
WMECO has a 3 percent ownership interest in the Maine Yankee nuclear generating
facility (MY). MY is projected to incur substantially increased costs over the
balance of 1997 while the unit is not operating. The owners of MY are evaluating
a range of options with respect to MY's future operations. WMECO's monthly
replacement-power costs while MY is out of service are not projected to be
significant.
For further information on capacity-related issues and MY, see WMECO's 1996 Form
10-K.
Liquidity And Capital Resources
Cash provided from operations decreased approximately $34 million in the first
quarter of 1997, from 1996, primarily due to higher 1997 cash operating costs
related to the Millstone outages and the pay down of the 1996 year end accounts
payable balance. The year end accounts payable balance was relatively high due
to costs related to a severe December storm and costs associated with the
Millstone outages that had been incurred but not yet paid by the end of 1996.
Net cash from financing activities increased approximately $36 million primarily
due to an increase in short-term debt. The increase in short-term debt includes
the use of $15 million of the accounts receivable facility established in 1996.
Net cash from financing activities was also impacted by higher reacquisitions
and retirements of long-term debt and higher payments of cash dividends on
common stock. Cash used for investments increased approximately $2 million
primarily due to higher 1997 construction expenditures.
WMECO expects to issue $60 million of first mortgage bonds in May 1997. The
proceeds will be used to repay a portion of outstanding short-term debt. The
short-term debt has been incurred for general working capital purposes,
including costs associated with the current outages at Millstone, bond
maturities and preferred stock redemptions.
On April 11, 1997, NU, The Connecticut Light and Power Company (CL&P) and WMECO
entered into an interim financing arrangement which waives certain financial
covenants under an earlier revolving credit agreement with a group of banks and
requires the companies to effect certain amendments to the agreement. For
further information on the interim arrangement, see WMECO's 1996 Form 10-K and
WMECO's Form 8-K dated April 11, 1997.
On April 17, 1997, the holders of $38 million of notes issued by NU's real
estate company (Rocky River Realty Company or RRR) required RRR to repurchase
the notes. RRR is currently investigating alternatives to refinance the notes.
For further information on the RRRs' notes, see WMECO's 1996 Form 10-K.
In April 1997, Moody's Investors Services (Moody's) downgraded most of the
securities ratings of CL&P and WMECO because of the extended Millstone outages.
As a result, all NU system securities are currently rated below investment grade
by Moody's. Moody's is no longer reviewing CL&P and WMECO for further
downgrades, however, NU, Public Service Company of New Hampshire (PSNH) and
North Atlantic Energy Corporation (NAEC) remain under review. This action will
adversely affect the availability and cost of funds for the NU system companies.
Each major company in the NU system finances its own needs. Neither CL&P nor
WMECO have any agreements containing cross defaults based on events or
occurrences involving NU, PSNH or NAEC. Similarly, neither PSNH nor NAEC have
any agreements containing cross defaults based on events or occurrences
involving NU, CL&P or WMECO. Nevertheless, it is possible that investors will
take negative operating results or regulatory developments at one company in the
NU system into account when evaluating other companies in the NU system. That
could, as a practical matter and despite the contractual and legal separations
among the NU companies, negatively affect each company's access to the financial
markets.
For information on WMECO's construction programs, see the Notes to Financial
Statements, Note 6D, in this Form 10-Q.
Restructuring - Potential Accounting Impacts
WMECO follows accounting principles in accordance with Statement of Financial
Accounting Standards (SFAS 71) "Accounting for the Effects of Certain Types of
Regulation," which allows the economic effects of rate regulation to be
reflected. Recently, the Securities and Exchange Commission has questioned the
ability of certain utilities to remain on SFAS 71 in light of state legislation
regarding the transition to retail competition. The industry expects guidance on
this issue from the Financial Accounting Standards Board's Emerging Issues Task
Force in the near future. While there are restructuring initiatives pending in
Massachusetts, WMECO is not yet subject to transition plans. Management
continues to believe that the application of SFAS 71 accounting is appropriate.
For further information on restructuring, see WMECO's 1996 Form 10-K.
RESULTS OF OPERATIONS
Income Statement Variances
Increase/(Decrease)
Millions of Dollars
First
Quarter Percent
Operating revenues $(9) (8)%
Fuel, purchased and net
interchange power 15 59
Other operation (15) (35)
Maintenance 7 71
Federal and state income taxes (5) (88)
Net income (10) (a)
(a) Percentage greater than 100
Comparison of the First Quarter of 1997 to the First Quarter of 1996
Total operating revenues decreased in 1997, primarily due to lower fuel
recoveries and lower retail sales. Fuel recoveries decreased $5 million
primarily due lower recoveries under the company's fuel clause. Retail sales
decreased 4.6 percent ($4 million) primarily due to milder weather in 1997.
Fuel, purchased, and net interchange power expense increased in 1997, primarily
due to higher replacement-power cost in 1997 due to the nuclear outages.
Other operation and maintenance expense decreased in 1997. The major factors
were the recognition nuclear reserves in the first quarter of 1996 ($7 million)
and spending against these reserves in 1997 ($5 million); and lower conservation
expenses in 1997 ($4 million), partially offset by higher costs in 1997
associated with the Millstone outages ($9 million).
Federal and state income taxes decreased in 1997, primarily due to lower book
taxable income.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. The Connecticut Department of Environmental Protection has referred to the
Connecticut Attorney General a series of alleged environmental violations at
Millstone for a possible civil penalty action. Management does not believe that
this action will have a material adverse impact on the NU company.
For additional information regarding a criminal investigation related to
this matter, see "Item 3 - Legal Proceedings" in WMECO's 1996 Form 10-K.
2. On May 9, 1997, the Town of Haddam (Town) and CY reached an agreement
regarding the repayment of property taxes due CY for the tax years beginning
October 1, 1991 through October 1, 1995. The Town will repay to CY an amount
totaling $13,990,000 which is inclusive of taxes and interest for those years.
As part of this negotiated settlement, the Town has paid CY $2,000,000 and may
bond all or part of the remaining $11,990,000. This settlement results from the
decision of a Connecticut court on September 5, 1996 in which the court found
that the Town had overassessed the property owned by CY.
For additional information regarding this matter, see "Item 3 - Legal
Proceedings" in WMECO's 1996 Form 10-K.
ITEM 5. OTHER INFORMATION
1. In March 1997, an additional Section 2.206 petition was filed with the NRC.
The petition seeks enforcement action and the placement of certain restrictions
on the decommissioning activities at the CY nuclear power plant. Specifically,
the petitioners requested that the NRC issue a civil monetary penalty to assure
compliance with radiation protection requirements, and that CY's license be
modified to prohibit any decommissioning activities for a six month period
following any radiological contamination event. In addition, petitioners
requested that CY be placed on the NRC's "watch list." Management is currently
evaluating whether and how to respond to this petition.
For additional information relating to other Section 2.206 petitions, see
"Item 3 - Legal Proceedings" in WMECO's 1996 Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
27 Financial Data Schedule
(b) Report on Form 8-K:
1. WMECO filed a Form 8-K dated April 11, 1997 disclosing that NU, CL&P,
and WMECO had entered into an interim arrangement that waives certain
financial covenants and requires the restructuring of the revolving
credit agreement that the three companies had entered into in November
1996.
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 9, 1997 By: /s/ John H. Forsgren
John H. Forsgren
Executive Vice President,
Chief Financial Officer and
Director
Date May 9, 1997 By: /s/ John J. Roman
John J. Roman
Vice President and Controller
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