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 1-11419
THE CONNECTICUT LIGHT AND POWER COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0303850
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
SELDEN STREET, BERLIN, CONNECTICUT 06037-1616
(Address of principal executive offices) (Zip Code)
(860) 665-5000
(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, $10.00 par value 12,222,930 shares
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997
and December 31, 1996 2
Consolidated Statements of Income - Three
Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Part II. Other Information
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
PART I. FINANCIAL INFORMATION
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 6,312,883 $ 6,283,736
Less: Accumulated provision for depreciation......... 2,722,637 2,665,519
------------- -------------
3,590,246 3,618,217
Construction work in progress........................... 96,735 95,873
Nuclear fuel, net....................................... 133,892 133,050
------------- -------------
Total net utility plant............................. 3,820,873 3,847,140
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 307,230 296,960
Investments in regional nuclear generating
companies, at equity................................... 58,369 56,925
Other, at cost.......................................... 18,736 16,565
------------- -------------
384,335 370,450
------------- -------------
Current Assets:
Cash.................................................... 197 404
Notes receivable from affiliated companies.............. 225,300 109,050
Receivables, net (Note 5)............................... 224,041 226,112
Accounts receivable from affiliated companies........... 564 3,481
Taxes receivable........................................ 32,414 40,134
Accrued utility revenues (Note 5)....................... 77,461 78,451
Fuel, materials, and supplies, at average cost.......... 85,110 79,937
Recoverable energy costs, net--current portion.......... 18,724 25,436
Prepayments and other................................... 79,562 63,344
------------- -------------
743,373 626,349
------------- -------------
Deferred Charges:
Regulatory assets:
Income taxes,net...................................... 735,844 753,390
Unrecovered contractual obligations (Note 2).......... 281,527 300,627
Deferred demand side management costs................. 76,947 90,129
Recoverable energy costs, net......................... 84,541 97,900
Cogeneration costs.................................... 58,029 66,205
Other................................................. 60,173 62,530
Unamortized debt expense................................ 17,084 17,033
Other................................................... 13,170 12,283
------------- -------------
1,327,315 1,400,097
------------- -------------
Total Assets........................................ $ 6,275,896 $ 6,244,036
============= =============
</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,
1997 1996
------------- -------------
(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................................ 640,077 639,657
Retained earnings....................................... 535,184 551,410
------------- -------------
Total common stockholder's equity.............. 1,297,490 1,313,296
Preferred stock not subject to mandatory
redemption............................................. 116,200 116,200
Preferred stock subject to mandatory redemption......... 155,000 155,000
Long-term debt.......................................... 1,816,657 1,834,405
------------- -------------
Total capitalization........................... 3,385,347 3,418,901
------------- -------------
Minority Interest in Consolidated Subsidiary.............. 100,000 100,000
------------- -------------
Obligations Under Capital Leases.......................... 144,062 143,347
------------- -------------
Current Liabilities:
Notes payable to banks.................................. 200,000 -
Long-term debt and preferred stock--current
portion................................................ 224,116 204,116
Obligations under capital leases--current
portion................................................ 12,370 12,361
Accounts payable........................................ 96,027 160,945
Accounts payable to affiliated companies................ 58,008 78,481
Accrued taxes........................................... 28,223 28,707
Accrued interest........................................ 34,982 31,513
Nuclear compliance...................................... 27,855 50,500
Other................................................... 23,516 34,433
------------- -------------
705,097 601,056
------------- -------------
Deferred Credits:
Accumulated deferred income taxes....................... 1,349,880 1,365,641
Accumulated deferred investment tax credits............. 133,239 135,080
Deferred contractual obligations........................ 287,773 305,627
Other................................................... 170,498 174,384
------------- -------------
1,941,390 1,980,732
------------- -------------
Commitments and Contingencies (Note 7)
Total Capitalization and Liabilities........... $ 6,275,896 $ 6,244,036
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Revenues.................................... $ 624,908 $ 659,355
----------- -----------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power........ 265,500 223,375
Other............................................ 142,145 189,844
Maintenance......................................... 70,621 49,048
Depreciation........................................ 59,919 62,716
Amortization of regulatory assets, net.............. 15,869 (2,750)
Federal and state income taxes...................... 836 28,527
Taxes other than income taxes....................... 46,870 48,618
----------- -----------
Total operating expenses...................... 601,760 599,378
----------- -----------
Operating Income...................................... 23,148 59,977
----------- -----------
Other Income:
Equity in earnings of regional nuclear generating
companies......................................... 1,817 1,836
Other, net.......................................... 4,610 4,088
Minority interest in income of subsidiary........... (2,325) (2,325)
Income taxes........................................ (95) (487)
----------- -----------
Other income, net............................. 4,007 3,112
----------- -----------
Income before interest charges................ 27,155 63,089
----------- -----------
Interest Charges:
Interest on long-term debt.......................... 33,277 29,792
Other interest...................................... 309 446
----------- -----------
Interest charges, net......................... 33,586 30,238
----------- -----------
Net (Loss) Income..................................... $ (6,431) $ 32,851
=========== ===========
</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,
-----------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities:
Net (Loss) Income ........................................ $ (6,431) $ 32,851
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 59,919 62,716
Deferred income taxes and investment tax credits, net... (6,376) (36,122)
Deferred nuclear plants return, net of amortization..... - 3,143
Recoverable energy costs, net of amortization........... 20,071 50,361
Deferred cogeneration costs, net of amortization........ 8,176 (8,790)
Deferred demand-side-management
costs, net of amortization............................ 13,182 16,870
Deferred nuclear refueling outage, net of amortization.. (11,333) 7,503
Nuclear compliance, net................................. (22,645) 30,369
Other sources of cash................................... 20,521 47,493
Other uses of cash...................................... (1,638) (16,170)
Changes in working capital:
Receivables and accrued utility revenues................ 13,698 (2,576)
Fuel, materials, and supplies........................... (5,173) 332
Accounts payable........................................ (85,391) (42,801)
Accrued taxes........................................... (484) 33,318
Other working capital (excludes cash)................... (23,666) (12,104)
----------- -----------
Net cash flows (used for) from operating activities......... (27,570) 166,393
----------- -----------
Financing Activities:
Net increase (decrease) in short-term debt................ 200,000 (51,750)
Reacquisitions and retirements of long-term debt.......... (11) (5)
Cash dividends on preferred stock......................... (3,805) (3,805)
Cash dividends on common stock............................ (5,989) (60,259)
----------- -----------
Net cash flows from (used for) financing activities......... 190,195 (115,819)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (32,493) (25,945)
Nuclear fuel............................................ (589) (45)
----------- -----------
Net cash flows used for investments in plant.............. (33,082) (25,990)
NU System Money Pool...................................... (116,250) (12,250)
Investments in nuclear decommissioning trusts............. (9,885) (11,549)
Other investment activities, net.......................... (3,615) (953)
----------- -----------
Net cash flows used for investments......................... (162,832) (50,742)
----------- -----------
Net Decrease In Cash For The Period......................... (207) (168)
Cash - beginning of period.................................. 404 337
----------- -----------
Cash - end of period........................................ $ 197 $ 169
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
THE CONNECTICUT LIGHT AND POWER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Presentation
The accompanying unaudited consolidated 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 the Connecticut Light and Power Company (the
company or CL&P) 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 7A. 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: 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 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
CL&P'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 7B, "Commitments
and Contingencies - Environmental Matters," in this Form 10-Q and
CL&P's 1996 Form 10-K.
C. Regulatory Accounting and Assets
The accounting policies of CL&P and the accompanying consolidated
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, CL&P 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 CL&P's 1996 Form 10-K.
2 CONNECTICUT YANKEE ATOMIC POWER COMPANY (CY)
CY, in which CL&P has a 34.5 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 CL&P. 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, CL&P's share of the CY unrecovered
contractual obligation, which also has been recorded as a regulatory asset,
was $248.3 million.
For further information regarding CY, see CL&P'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 CL&P's Form 8-K dated
April 11, 1997 and CL&P'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 CL&P'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
CL&P has entered into an agreement to sell up to $200 million of eligible
customer billed and unbilled accounts receivable. As of March 31, 1997,
CL&P had sold approximately $200 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, CL&P is required to record the sales of its customer accounts
receivable as secured short-term borrowings. CL&P is currently in the
process of restructuring its accounts receivable sales agreement so that
CL&P may treat this transaction as a sale as permitted under SFAS 125.
For additional information regarding CL&P's sale of customer receivables,
see CL&P's 1996 Form 10-K.
6. FUEL PRICE MANAGEMENT
Fuel Price Management: As of March 31, 1997, CL&P had outstanding fuel
price management agreements with a total notional value of approximately
$215.5 million with a negative mark-to-market position of approximately
$2.5 million. Since March 31, 1997, CL&P has entered into additional fuel
price management agreements with a total notional value of approximately
$44.8 million.
Under the terms of CL&P's fuel price management agreements, CL&P can be
required to post cash collateral with its counterparties approximately
equivalent to the amount of a negative mark-to-market position. In
general, the amount of collateral is to be required to CL&P when the mark-
to-market position becomes positive, when CL&P meets specified credit
ratings, or when an agreement ends.
Credit Risk: These fuel price management agreements have been made with
various financial institutions, each of which is rated "A" or better by
Standard & Poor's ratings group. CL&P is exposed to credit risk on its
fuel price management instruments if the counterparties fail to perform
their obligations. However, CL&P anticipates that the counterparties will
be able to satisfy their obligations under the agreements fully.
For further information on fuel price management instruments, see the MD&A
in this Form 10-Q and CL&P's 1996 Form 10-K.
7. COMMITMENTS AND CONTINGENCIES
A. Nuclear Performance
Millstone: CL&P has a 81-percent ownership interest in Millstone 1
and 2 and a 52.93-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.
CL&P expensed approximately $69 million of non-fuel nuclear operation
and maintenance costs in the first quarter of 1997. An additional
$22.6 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 $31 million.
Replacement power costs incurred by CL&P attributable to the Millstone
outages averaged approximately $28 million per month during the first
quarter of 1997, and are projected to average approximately $24
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. CL&P's monthly
replacement power costs attributable to MY being out of service are
projected to average approximately $1.5 million.
For further information regarding nuclear performance, see the MD&A in
this Form 10-Q and CL&P'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 $400 thousand increase to CL&P's
environmental reserve.
At March 31, 1997, CL&P's net liability for its estimated remediation
costs, excluding recoveries from insurance companies and other third
parties was approximately $7.6 million, which management has
determined to be the most probable amount within a range of $7.6
million to $13.4 million.
For additional information regarding environmental matters, see CL&P'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. CL&P 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
CL&P with respect to losses arising during the current policy year is
approximately $11.2 million under the primary property insurance
program.
For additional information regarding nuclear insurance contingencies,
see CL&P'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 $165 million to $148 million.
For additional information regarding CL&P'S construction program,
see CL&P's 1996 Form 10-K.
E. Long-Term Contractual Arrangements
For information regarding long-term contractual arrangements, see the
company's 1996 Form 10-K.
8. LEASES
On June 21, 1996, CL&P entered into an operating lease with a third party
to acquire the use of four turbine generators having an installed cost of
approximately $70 million. Based on projections of its first quarter 1997
financial results, it was determined that CL&P would not be in compliance
with a financial coverage test required under the lease agreement. CL&P
has requested, and obtained, a temporary waiver from the lessors for the
financial coverage test that would have been breached, and is currently
negotiating with the lessor for a long-term solution.
For additional information regarding this lease, and related issues
regarding external financings, see Note 3, "Short-Term Debt," and Note 4,
"Capitalization," in this Form 10-Q and CL&P's 1996 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 The Connecticut Light and Power
Company's and subsidiaries (CL&P 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 CL&P's consolidated 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 CL&P's earnings. CL&P had a net loss of
approximately $6 million in the first quarter of 1997 compared to net income of
approximately $33 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 3.2 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, CL&P expects to continue
operating at a loss. Monthly replacement-power costs for CL&P attributable to
the Millstone outages averaged approximately $28 million during the first
quarter, and are projected to average approximately $24 million for the
remainder of 1997. The higher replacement-power costs in the first quarter were
due primarily to higher fuel prices.
Millstone Outages
CL&P has an 81 percent ownership interest in Millstone 1 and 2 and a 52.93
percent ownership interest in Millstone 3. Millstone 1, 2 and 3 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 CL&P's 1996 Form
10-K.
Capacity
During 1996 and continuing into 1997, the NU system companies have taken
measures to improve their capacity position. CL&P anticipates spending
approximately $55 million for additional capacity-related costs in 1997, of
which $37 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 the CL&P's estimated share of costs to
reactivate generating units in New England. In the first quarter of 1997, CL&P
spent approximately $14 million to ensure adequate generating capacity, of which
$5 million was expensed.
CL&P has a 12 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. Monthly replacement-
power costs for CL&P's share while MY is out of service are projected to average
approximately $1.2 million.
For further information on capacity-related issues and MY, see CL&P's 1996 Form
10-K.
Liquidity and Capital Resources
Cash provided from operations decreased approximately $194 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 $306 million,
primarily due to an increase in short-term borrowings through the use of the
$200 million of the accounts receivable facility established in 1996. Net cash
from financing activities was also impacted by lower cash dividends on common
shares. Cash used for investments increased approximately $112 million primarily
due to higher investments in the NU system Money Pool.
On April 1, 1997, $193 million of CL&P's first mortgage bonds matured. CL&P
funded the maturity with cash available from long-term debt issuances that took
place in 1996 in anticipation of this maturity.
CL&P expects to issue $200 million of first mortgage bonds in June 1997. The
proceeds will be used to repay a portion of outstanding short-term debt that has
been incurred for general working capital purposes, including costs associated
with the current outages at Millstone.
On April 11, 1997, NU, CL&P and Western Massachusetts Electric Company (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 CL&P's 1996 Form 10-K
and CL&P'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 CL&P'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.
On June 21, 1996, CL&P entered into an operating lease with a third party to
acquire the use of four turbine generators having an installed cost of
approximately $70 million. Based on projections of its first quarter 1997
financial results, it was determined that CL&P would not be in compliance with a
financial coverage test required under the lease agreement. CL&P has requested,
and obtained, a temporary waiver from the lessors for the financial coverage
test that would have been breached, and is currently negotiating with the lessor
for a long-term solution. For further information on CL&P's lease, see CL&P's
1996 Form 10-K.
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 CL&P's construction program, see the Notes to Consolidated
Financial Statements, Note 7D, in this Form 10-Q.
Restructuring - Potential Accounting Impacts
CL&P follows accounting principles in accordance with the 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
Connecticut, CL&P 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 CL&P's 1996 Form 10-K.
Risk Management Instruments
CL&P uses fuel price management instruments to reduce a portion of the fuel
price risk associated with certain of its long-term negotiated energy contracts.
CL&P's fuel price management instruments seek to minimize exposure associated
with rising fuel prices and effectively fix the cost of fuel and maintain the
profitability of certain of its long-term negotiated contract sales.
These instruments 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, 1997, CL&P had outstanding fuel price management instruments
with a total notional value of approximately $215 million. The settlement
amounts associated with the instruments increased fuel expense by approximately
$0.9 million for the first quarter of 1997. Since March 31, 1997, CL&P has
entered into additional fuel price management agreements with a total notional
value of approximately $45 million. For further information on risk management
instruments, see the Notes to Consolidated Financial Statements, Note 6, in this
Form 10-Q.
RESULTS OF OPERATIONS
Income Statement Variances
Increase/(Decrease)
Millions of Dollars
Amount Percent
Operating revenues $(34) (5)%
Fuel, purchased and net
interchange power 42 19
Other operation (48) (25)
Maintenance 22 44
Amortization of regulatory
assets, net 19 (a)
Federal and state income
taxes (28) (97)
Net income (39) (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, partially offset by lower conservation
reserves. Fuel recoveries decreased $32 million primarily due to lower
recoveries under the company's fuel clause. Retail sales decreased 3.2 percent
($15 million) primarily due to milder weather in 1997. Lower reserves for over-
recoveries of demand-side-management costs increased revenues by $10 million.
Fuel, purchased and net interchange power expense increased in 1997, primarily
due to higher replacement-power costs in 1997 due to the nuclear outages,
partially offset by the timing of the recognition of costs under the company's
fuel clause.
Other operation and maintenance expenses decreased in 1997. The major factors
were the recognition of nuclear reserves in the first quarter of 1996 ($31
million) and spending against these reserves in the first quarter of 1997 ($23
million); lower recognition of nuclear refueling outage costs primarily as a
result of the 1996 Rate Settlement ($10 million) and lower pension, benefit and
storm costs ($7 million), partially offset by higher costs associated with the
Millstone outages ($41 million); and higher 1997 costs associated with meeting
capacity requirements ($5 million).
Amortization of regulatory assets, net increased in 1997, primarily due to the
completion of cogeneration deferrals in 1996 and increased amortization in 1997
($14 million); and higher amortizations as a result of the 1996 Rate Settlement
($8 million), partially offset by the completion of the amortization of phase-in
costs for Seabrook in 1996 ($3 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. On April 23, 1997, CL&P, Northeast Utilities Service Company, the Long
Island Lighting Company, and the Long Island Soundkeeper Fund, Inc. jointly
filed a Stipulation of Dismissal in Federal District Court, which settled the
Soundkeeper's citizen suit under the Federal Clean Water Act regarding leaks
from the Long Island cable into the Long Island Sound. The settlement will not
impose material costs on CL&P or any other NU system companies.
For additional information on this litigation and the consent order, see
"Item 1. Business - Other Regulatory and Environmental Matters - Environmental
Regulation" and "Item 3 - Legal Proceedings" in CL&P's 1996 Form 10-K.
2. The Connecticut Department of Environmental Protection (DEP) 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 system.
For additional information regarding a criminal investigation related to
this matter, see "Item 3 - Legal Proceedings" in CL&P's 1996 Form 10-K.
3. 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 CL&P's 1996 Form 10-K.
ITEM 5. OTHER INFORMATION
1. In March 1997, an additional Section 2.206 petition was filed with the
Nuclear Regulatory Commission (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 CL&P'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. CL&P filed a Form 8-K dated April 11, 1997 disclosing that NU, CL&P, and
WMECO had entered into a 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.
THE CONNECTICUT LIGHT AND POWER 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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