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 0-404
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THE CONNECTICUT LIGHT AND POWER COMPANY
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0303850
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SELDEN STREET, BERLIN, CONNECTICUT 06037-1616
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(860) 665-5000
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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, $10.00 PAR VALUE 12,222,930 SHARES
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995 2
Consolidated Statements of Income - Three Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
PART I. FINANCIAL INFORMATION
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 6,191,374 $ 6,147,961
Less: Accumulated provision for depreciation......... 2,472,181 2,418,557
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3,719,193 3,729,404
Construction work in progress........................... 78,620 103,026
Nuclear fuel, net....................................... 131,323 138,203
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Total net utility plant............................. 3,929,136 3,970,633
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Other Property and Investments:
Nuclear decommissioning trusts, at market............... 245,796 238,023
Investments in regional nuclear generating
companies, at equity................................... 54,843 54,624
Other, at cost.......................................... 16,975 16,241
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317,614 308,888
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Current Assets:
Cash.................................................... 169 337
Notes receivable from affiliated companies.............. 12,250 -
Receivables, net........................................ 251,082 231,574
Accounts receivable from affiliated companies........... 3,124 3,069
Accrued utility revenues................................ 74,170 91,157
Fuel, materials, and supplies, at average cost.......... 68,150 68,482
Recoverable energy costs, net--current portion.......... 41,431 78,108
Prepayments and other................................... 54,377 42,894
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504,753 515,621
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Deferred Charges:
Regulatory assets:
Income taxes,net...................................... 863,521 863,521
Deferred costs--nuclear plants........................ 3,878 6,170
Unrecovered contractual obligation (Note 6)<F6>....... 52,180 65,847
Deferred demand-side management costs................. 100,200 117,070
Recoverable energy costs, net......................... 6,075 27,262
Cogeneration costs.................................... 100,952 92,162
Other................................................. 27,215 38,352
Unamortized debt expense................................ 14,737 14,977
Other................................................... 13,731 10,232
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1,182,489 1,235,593
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Total Assets........................................ $ 5,933,992 $ 6,030,735
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED 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--$10 par value. Authorized
24,500,000 shares; outstanding 12,222,930
shares................................................. $ 122,229 $ 122,229
Capital surplus, paid in................................ 638,401 637,981
Retained earnings....................................... 754,263 785,476
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Total common stockholder's equity.............. 1,514,893 1,545,686
Preferred stock not subject to mandatory
redemption............................................. 116,200 116,200
Preferred stock subject to mandatory redemption......... 155,000 155,000
Long-term debt.......................................... 1,814,832 1,812,646
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Total capitalization........................... 3,600,925 3,629,532
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Minority Interest in Consolidated Subsidiary.............. 100,000 100,000
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Obligations Under Capital Leases.......................... 101,736 108,408
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Current Liabilities:
Notes payable to banks.................................. - 41,500
Notes payable to affiliated company..................... - 10,250
Long-term debt and preferred stock--current
portion................................................ 9,372 9,372
Obligations under capital leases--current
portion................................................ 60,011 63,856
Accounts payable........................................ 84,298 110,798
Accounts payable to affiliated companies................ 28,376 44,677
Accrued taxes........................................... 85,586 52,268
Accrued interest........................................ 31,058 30,854
Other................................................... 49,571 20,027
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348,272 383,602
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Deferred Credits:
Accumulated deferred income taxes....................... 1,468,183 1,486,873
Accumulated deferred investment tax credits............. 140,605 142,447
Deferred contractual obligation (Note 6)<F6>............ 52,180 65,847
Other................................................... 122,091 114,026
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1,783,059 1,809,193
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Commitments and Contingencies (Note 8)<F8>
Total Capitalization and Liabilities........... $ 5,933,992 $ 6,030,735
============= =============
</TABLE>
See accompanying notes to consolidated financial statement
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED 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.................................... $ 659,355 $ 601,194
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Operating Expenses:
Operation --
Fuel, purchased and net interchange power........ 223,375 159,915
Other............................................ 189,844 145,244
Maintenance......................................... 49,048 41,763
Depreciation........................................ 62,716 60,737
Amortization of regulatory assets, net.............. (2,750) 9,106
Federal and state income taxes...................... 28,527 42,323
Taxes other than income taxes....................... 48,618 45,915
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Total operating expenses...................... 599,378 505,003
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Operating Income...................................... 59,977 96,191
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Other Income:
Deferred nuclear plants return--other funds......... 449 1,222
Equity in earnings of regional nuclear generating
companies......................................... 1,836 1,072
Other, net.......................................... 1,314 (3,116)
Income taxes........................................ (487) 2,083
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Other income, net............................. 3,112 1,261
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Income before interest charges................ 63,089 97,452
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Interest Charges:
Interest on long-term debt.......................... 29,792 30,955
Other interest...................................... 492 1,083
Deferred nuclear plants return--borrowed funds...... (46) (463)
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Interest charges, net......................... 30,238 31,575
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Net Income............................................ $ 32,851 $ 65,877
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</TABLE>
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED 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................................................ $ 32,851 $ 65,877
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 62,716 60,737
Deferred income taxes and investment tax credits, net... (36,122) 489
Deferred nuclear plants return, net of amortization..... 3,143 25,483
Recoverable energy costs, net of amortization........... 57,864 (14,475)
Deferred cogeneration costs............................. (8,790) (19,040)
Nuclear O&M reserve (Note 8B)<F8B>...................... 30,369 -
Other sources of cash................................... 64,363 72,265
Other uses of cash...................................... (16,170) (9,996)
Changes in working capital:
Receivables and accrued utility revenues................ (2,576) 7,314
Fuel, materials, and supplies........................... 332 (197)
Accounts payable........................................ (42,801) (37,794)
Accrued taxes........................................... 33,318 26,431
Other working capital (excludes cash)................... (12,104) (14,857)
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Net cash flows from operating activities.................... 166,393 162,237
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Financing Activities:
Issuance of Monthly Income
Preferred Securities..................................... - 100,000
Net decrease in short-term debt........................... (51,750) (56,750)
Reacquisitions and retirements of long-term debt.......... (5) (11)
Reacquisitions and retirements of preferred stock......... - (117,500)
Cash dividends on preferred stock......................... (3,805) (9,431)
Cash dividends on common stock............................ (60,259) (39,847)
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Net cash flows used for financing activities................ (115,819) (123,539)
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Investment Activities:
Investment in plant:
Electric utility plant.................................. (25,945) (25,277)
Nuclear fuel............................................ (45) (3,801)
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Net cash flows used for investments in plant.............. (25,990) (29,078)
NU System Money Pool...................................... (12,250) -
Investments in nuclear decommissioning trusts............. (11,549) (10,189)
Other investment activities, net.......................... (953) 600
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Net cash flows used for investments......................... (50,742) (38,667)
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Net (Decrease) Increase In Cash For The Period.............. (168) 31
Cash - beginning of period.................................. 337 264
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Cash - end of period........................................ $ 169 $ 295
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRESENTATION
The accompanying unaudited consolidated financial statements should be read
in conjunction with the Annual Report of The Connecticut Light and Power
Company (the company or CL&P) 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 Notes 3,
4, and 8B. 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, CL&P, Public Service Company of New Hampshire (PSNH),
Western Massachusetts Electric Company (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.
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 Note 4, Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A), and Part
II, Item 5, "Other Information," in this Form 10-Q and the Notes to
Consolidated Financial Statements in CL&P's 1995 Form 10-K.
3. RECOVERABLE ENERGY COSTS
CL&P utilizes a generation utilization adjustment clause (GUAC), which
defers the effect on fuel costs caused by variations from a specified
composite nuclear generation capacity factor embedded in base rates. CL&P
is currently recovering $80 million of its 1994-1995 GUAC balance over 18
months. CL&P set aside $19 million of its 1994-1995 GUAC year request
pending the resolution of CL&P's appeals associated with two prior GUAC
periods.
In the first quarter of 1996, the company has reserved approximately $32
million against the fuel overrecoveries related to the current GUAC period.
The reserve amount has been calculated in accordance with the Connecticut
Department of Public Utility Control's (DPUC) methodology utilized in prior
GUAC decisions. The reserve has been established pending resolution of
CL&P's appeals associated with the two prior GUAC periods, and the outcome
of the proposed CL&P settlement.
For further information on recoverable energy costs, the proposed CL&P
settlement, and the impacts of nuclear performance on the company's GUAC
deferral, refer to Notes 4 and 8B, the MD&A and Part II, Item 5, "Other
Information" in this Form 10-Q, and the Notes to Consolidated Financial
Statements in CL&P's 1995 Form 10-K.
4. CL&P PROPOSED SETTLEMENT
On April 15, 1996, CL&P submitted to the DPUC for approval a jointly
supported settlement agreement (the proposed settlement) intended to
resolve numerous pending contested issues among CL&P, the Prosecutorial
Division of the DPUC, and the Office of Consumer Counsel. For further
information on the proposed settlement, refer to the MD&A in this Form 10-
Q.
If approved, one term of the proposed settlement provides for an immediate
2.5 percent decrease in customer bills, to be accomplished by writing off
the expected May 1, 1996 balance of approximately $45 million in
uncollected deferred GUAC charges incurred for the 1994-1995 GUAC period.
The terms of this proposed settlement are subject to DPUC approval.
Management cannot predict at this time the potential outcome of the DPUC's
decision as related to the proposed settlement.
For further information on the GUAC deferral and the company's nuclear
performance issues as related to this settlement, refer to Notes 3 and 8B,
the MD&A in this Form 10-Q, and the Notes to Consolidated Financial
Statements in CL&P's 1995 Form 10-K.
5. 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.
6. YANKEE ATOMIC ELECTRIC COMPANY (YAEC)
CL&P holds a 24.5 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, 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 CL&P's share was approximately $55.2 million.
For further information on YAEC, refer to the Notes to Consolidated
Financial Statements in CL&P's 1995 Form 10-K.
7. DERIVATIVE FINANCIAL INSTRUMENTS
CL&P uses fuel-swap agreements with financial institutions to hedge against
some of the fuel-price risk created by long-term negotiated energy
contracts. These fuel swaps minimize exposure associated with rising fuel
prices and effectively fix most of CL&P's cost of fuel and the
profitability for these negotiated energy contracts. Under the swap
agreements, CL&P exchanges monthly payments based on the differential
between a fixed and variable price for the associated fuel. As of March
31, 1996, CL&P had outstanding agreements with a total notional value of
approximately $242.5 million, and a negative mark-to-market position of
approximately $5.6 million.
These swap agreements have been made with various financial institutions,
each of which are rated "BBB+" or better by Standard & Poor's rating group.
CL&P is exposed to credit risk on its fuel swaps if the counterparties
fail to perform their obligations. However, CL&P anticipates that the
counterparties will be able to fully satisfy their obligations under the
contracts. For further information on Derivative Financial Instruments see
the MD&A in this Form 10-Q and the Notes to Consolidated Financial
Statements in CL&P's 1995 Form 10-K.
8. COMMITMENTS AND CONTINGENCIES
A. Construction Program: For information regarding CL&P's construction
program, see the Notes to Consolidated Financial Statements in CL&P'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 to NU. This
letter requested that the company 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's 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 CL&P'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 $5-
$7 million (Millstone 1), $7-$8 million (Millstone 2), and $6-$7
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 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 prudency reviews by
the DPUC. Refer to Note 3 in this Form 10-Q for information on CL&P's
recoverable energy costs.
In addition to the replacement power costs, CL&P 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 $61 million, and CL&P has reserved approximately $30 million in
the first quarter of 1996 for its share of incremental O&M costs
necessary to respond to the NRC requirements. In addition, as of
March 30, 1996, management has identified, approximately $31 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 believe 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 CL&P's 1995 Form 10-K.
C. Environmental Matters: For information regarding environmental
matters, see Part II, Items 1 and 5, "Legal Proceedings" and "Other
Information" in this Form 10-Q and the Notes to Consolidated Financial
Statements in CL&P's 1995 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see the Notes to Consolidated Financial
Statements in CL&P's 1995 Form 10-K.
E. Long-Term Contractual Arrangements: For information regarding long-
term contractual arrangements and the Notes to Consolidated Financial
Statements in CL&P's 1995 Form 10-K.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of CL&P'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 CL&P's consolidated
financial statements in this Form 10-Q, the 1995 Form 10-K, and the Form 8-Ks
dated January 31, 1996, March 30, 1996, and April 15, 1996.
FINANCIAL CONDITION
OVERVIEW
Net income was approximately $33 million for the three months ended March 31,
1996, a decrease of $33 million, from $66 million in 1995. The 1996 net income
was lower primarily due to reserves 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. In addition,
earnings decreased due to a one-time tax benefit, in 1995, from a favorable tax
ruling, which was partially offset by higher retail sales in 1996.
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 the impacts of a proposed rate settlement and a
typically low sales quarter, it is likely that these costs will result in a loss
for the second quarter. In addition, net income for 1996 will be significantly
lower than 1995 net income. The key factor affecting 1996 net income 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.
Management and the CL&P Board of Directors (Board) do not believe that a loss
i the second quarter of 1996 would of itself warrant a change in the dividend
level. However, management believes the Board will reexamine the appropriate
dividend level each quarter to take into consideration expectation of costs, the
length of the nuclear outages and other factors.
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
CL&P has a 81-percent ownership interest in Millstone units 1 and 2, a 52.9-
percent ownership interest in Millstone 3, and a 34.5-percent ownership interest
in Connecticut Yankee nuclear unit (CY).
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 Connecticut Yankee Atomic Power Company (CYAPC), with respect to 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.
On April 22, 1996, the NRC announced the results of a recent inspection at the
Seabrook nuclear power plant in Seabrook, New Hampshire (Seabrook). The NRC
indicated that it found Seabrook to be a well-operated facility and found no
major safety issues or weaknesses. The NRC noted that it would reduce
inspections in a number of areas at Seabrook as a result of its findings.
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, 1996, has
resulted in revised schedules for Millstone 1 and 2. The NRC has required
that this information be submitted no later than 7 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 CL&P are
expected to be approximately $5 to $7 million for Millstone 1, $7 to $8 million
for Millstone 2 , and $6 to $7 million for Millstone 3. CL&P recovers from, or
refunds to, customers certain fuel costs if its nuclear units do not operate at
a predetermined capacity factor (currently 72 percent) through the Generation
Utilization Adjustment Clause (GUAC). In previous GUAC proceedings, the DPUC
has reduced CL&P's GUAC recoveries by the amount of fuel over-recoveries during
the GUAC period. Because of the DPUC's previous decisions, and the likelihood
that, as a result of the Millstone outages, CL&P's GUAC capacity factor will be
below 72 percent for the GUAC period ending July 31, 1996, CL&P has established
a $32 million reserve against fuel over-recoveries as of March 31, 1996.
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 reviews. 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 identified approximately $31 million of costs associated
with the extended outages, the majority of which are for projects which have
been accelerated from planned future outages, and an additional $31 million of
costs specifically associated with the NRC reviews. It is likely that these
costs will increase as additional projects are identified by NU and the NRC. As
of March 31, 1996, CL&P has reserved approximately $31 million for the estimated
costs associated directly with the NRC reviews.
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 NU Board) announced the formation of
a special committee of the NU 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, an NU 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. Management expects the incremental costs
associated with meeting peak summer demand to be approximately $20 million in
1996.
RATE MATTERS
In April 1996, CL&P submitted to the DPUC for approval a settlement agreement
(the Settlement) which is jointly supported by CL&P, the Prosecutorial Division
of the DPUC, and the Office of Consumer Counsel. The Settlement assumes a May 1,
1996 effective date. The two principal objectives of the Settlement are to
provide for a 20-month retail-rate agreement and to resolve pending reviews of
certain nuclear outages through March 31, 1996. Additionally, the Settlement
would terminate all pending litigation, as of March 31, 1996, among the parties
that could potentially affect CL&P's rates and earnings. The Settlement does not
impact the costs incurred subsequent to March 31, 1996, which are associated
with the Millstone units placement on the NRC's watch list. If approved, the
Settlement is expected to reduce estimated year-end 1996 earnings by
approximately $35 million. The impact on CL&P's earnings will be recognized
primarily during the quarter in which the Settlement is approved by the DPUC. A
DPUC decision on the Settlement is expected by the end of May 1996. Management
cannot predict at this time the potential outcome of the DPUC's decision.
The proposed settlement provides for an immediate 2.5-percent decrease in
customer bills to be accomplished by the elimination of the balance, as of the
effective date of the Settlement, of the uncollected deferred GUAC charges
incurred for the 1994-1995 GUAC period (approximately $45 million as of May 1,
1996). The Settlement also provides for the elimination of the deferred GUAC
charges, as of March 31, 1996, for the current GUAC period (approximately $6
million). Additionally, CL&P will freeze its base rates until at least December
31, 1997, and accelerate the amortization of approximately $200 to $240 million
($97 to $122 million in 1996 and $103 to $118 million in 1997) of potentially
strandable assets. Should the base-rate freeze extend into 1998 and beyond, the
1997 amortization level proposed in the Settlement would also be extended.
The Settlement does not affect the DPUC's ongoing investigation of the adoption
of a fuel clause designed to track and recover all costs of energy incurred to
serve customers (fully-tracking fuel clause), which would supersede the current
GUAC and fossil-fuel-adjustment clause (FAC). However, it is expected that
during the transition period from the effective date of the Settlement to the
DPUC's decision on the fully-tracking fuel clause (expected in June 1996), the
net effect of the FAC, the GUAC, and a transitional deferred fuel accounting
mechanism provided for in the Settlement would operate as though CL&P has a
fully-tracking fuel clause.
Although it would decrease 1996 earnings, management believes the Settlement
would better position CL&P for the restructuring of the electric-power industry.
The 20-month rate freeze and accelerated amortization described above, would
preserve current cash flow while reducing potentially strandable investments.
In addition, the termination of certain pending litigation and the elimination
of the need to file a rate case during 1996 will allow CL&P to focus its efforts
on preparing itself for a more competitive environment.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased approximately $4 million in 1996, from
1995, primarily due to higher revenues from recoveries of fuel costs paid in
prior periods, partially offset by higher cash operating expenses. Cash used for
financing activities decreased approximately $8 million in 1996, from 1995,
primarily due to lower net reacquisitions and retirements of preferred stock and
a decrease in preferred stock dividends, partially offset by an increase in
payment of common stock dividends. Cash used for investments increased
approximately $12 million in 1996, from 1995, primarily due to an increase in
loans to other companies under the NU system Money Pool.
In April 1996, Standard & Poor's Ratings Group placed CL&P's ratings on
CreditWatch with negative implications and Moody's placed the credit ratings of
CL&P and the Niantic Bay Fuel Trust 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 and common dividends, through
a combination of internally generated funds, borrowings under existing credit
facilities, and planned new external financing arrangements. CL&P plans to
complete a $62 million tax-exempt debt issue in May 1996, and may also issue
approximately $60 million of first-mortgage bonds in the second quarter of 1996.
CL&P is also evaluating the issuance of additional first-mortgage bonds and
asset-backed financings. CL&P has also initiated actions to obtain a significant
increase in the agreements under which the company can borrow under revolving
credit borrowings. Management's intention in implementing these additional
financial arrangements is to ensure that the company 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.
CL&P has entered into fuel-swap agreements to reduce a portion of its fuel-price
risks. These swaps are not used for trading purposes. The differential paid or
received as fuel prices change is recognized in income when realized. As of
March 31, 1996, CL&P had outstanding agreements with a total notional value of
approximately $243 million. The settlement amounts associated with the swaps
increased first quarter earnings by approximately $2 million. These swaps
minimize exposure associated with rising fuel prices and effectively fix the
cost of fuel, and the profitability, of certain negotiated contract sales.
RESULTS OF OPERATIONS
Comparison of the First Quarter of 1996 with the First Quarter of 1995
- ----------------------------------------------------------------------
Operating revenues increased approximately $58 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)
Regulatory decisions $ 3
Fuel and purchased power cost recoveries 44
Retail sales volume 22
Wholesale revenues (6)
Other revenues (5)
-----
Total revenue change $ 58
====
Revenues related to regulatory decisions increased primarily because of the mid-
1995 retail-rate increase, partially offset by a March 1996 reserve for over-
recoveries of demand-side-management costs. Fuel and purchased power cost
recoveries increased primarily due to higher energy costs and higher revenues
from sales to other outside utilities. Retail sales volume increased as a
result of higher retail kilowatt-hour sales in 1996. Retail sales increased 4.9
percent for the first quarter of 1996, from 1995, primarily due to extremely
mild weather in the first three months of 1995. Wholesale revenues decreased
primarily due to higher recognition in 1995 of lump-sum payments for termination
of a long-term contract.
Fuel, purchased, and net interchange power expense increased approximately $63
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 the reserve
associated with fuel over-recoveries.
Other operation and maintenance expense increased approximately $52 million in
the first quarter of 1996, from 1995, primarily due to the establishment of a
reserve resulting from the NCR review of Millstone, higher recognition of
pension and benefit costs in 1996, and higher costs associated with the nuclear
outages, partially offset by lower 1996 charges from the regional nuclear
generating units.
Amortization of regulatory assets, net decreased approximately $11 million in
the first quarter of 1996, from 1995, primarily due to the completion of
amortization of Millstone 3 phase-in costs partially offset by lower 1996
cogeneration deferrals and the 1996 amortization of cogeneration deferrals.
Federal and state income taxes decreased approximately $11 million in the first
quarter of 1996, from 1995, primarily due to lower book taxable income,
partially offset by tax benefits from a favorable tax ruling during 1995.
Taxes other than income taxes increased approximately $3 million in the first
quarter of 1996, from 1995, primarily due to higher 1996 Connecticut gross
earnings tax expense.
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 directors 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 been in two similar proceedings in Connecticut Superior Court.
2. On April 4, 1996, the Long Island Soundkeeper Fund, a public interest
group, filed a citizens suit against Long Island Lighting Company
("LILCO"),CL&P and Northeast Utilities Service Company ("NUSCO")
(collectively, the "Companies") in Federal District Court in
Connecticut. The suit alleges the Companies are violating the federal
Clean Water Act by maintaining an unpermitted discharge of pollutants
from the underwater cable extending from Northport on Long Island, New
York to Norwalk, Connecticut (the "Long Island Cable") owned by the
Companies and claims the pollutants are an imminent danger to the
environment and public health. The suit asks the court, among other
things, to enjoin further operation of the Long Island Cable without a
permit and require the Company to pay a civil penalty of $25,000 for
each violation. NUSCO and CL&P intend to defend the suit vigorously.
The potential outcome of this matter, the magnitude of any reliability
concerns resulting from a shutdown of the Long Island Cable and the cost
of alternatives cannot be determined at this time.
For additional information on the Long Island Cable and a related
ongoing United States Attorney's Office investigation, see "Item 1.
Business - Regulatory and Environmental Matters - Environmental
Regulation - Surface Water Quality Requirements" in CL&P's 1995 Form 10-
K.
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 CL&P'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 for 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 CL&P'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 which 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 CL&P'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. CL&P filed a Form 8-K dated January 31, 1996 disclosing that the NRC had
placed Millstone station on its "watch list."
2. CL&P filed a Form 8-K dated March 30, 1996 updating the status of Millstone
station as related to the NRC's actions to date.
3. CL&P filed a Form 8-K dated April 15, 1996 related to the proposed CL&P
rate settlement.
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.
THE CONNECTICUT LIGHT AND POWER
-------------------------------
COMPANY
- -------
Registrant
Date May 6, 1996 By /s/ Bernard M. Fox
----------- -------------------------------
Bernard M. Fox
Chairman and Director
Date May 6, 1996 By /s/ John J. Roman
----------- -------------------------------
John J. Roman
Vice President and Controller
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