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 September 30, 1996
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 1-5324
NORTHEAST UTILITIES
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2147929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
(Address of principal executive offices) (Zip Code)
(413) 785-5871
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
Common Shares, $5.00 par value 136,051,937 shares
NORTHEAST UTILITIES AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 2
Consolidated Statements of Income - Three and Nine
Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Part II. Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
PART I. FINANCIAL INFORMATION
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at cost:
Electric................................................ $ 9,610,066 $ 9,490,142
Other................................................... 157,367 187,389
------------- -------------
9,767,433 9,677,531
Less: Accumulated provision for depreciation......... 3,874,639 3,629,559
------------- -------------
5,892,794 6,047,972
Unamortized PSNH acquisition costs...................... 514,065 588,910
Construction work in progress........................... 196,059 165,111
Nuclear fuel, net....................................... 185,960 198,844
------------- -------------
Total net utility plant............................. 6,788,878 7,000,837
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 358,980 325,674
Investments in regional nuclear generating
companies, at equity................................... 84,620 81,996
Investments in transmission companies, at equity........ 22,702 23,558
Investments in Charter Oak Energy, Inc. projects........ 44,703 41,221
Other, at cost.......................................... 46,283 35,318
------------- -------------
557,288 507,767
------------- -------------
Current Assets:
Cash and cash equivalents............................... 238,943 29,038
Receivables, net........................................ 419,501 435,931
Accrued utility revenues................................ 103,456 136,260
Fuel, materials, and supplies, at average cost.......... 203,041 200,580
Recoverable energy costs, net--current portion.......... - 79,300
Prepayments and other................................... 54,944 34,430
------------- -------------
1,019,885 915,539
------------- -------------
Deferred Charges:
Regulatory assets:
Income taxes,net...................................... 1,066,579 1,176,356
Deferred costs--nuclear plants........................ 180,374 168,600
Unrecovered contractual obligation.................... 69,832 103,475
Recoverable energy costs, net......................... 324,608 237,078
Deferred demand-side management costs................. 83,225 117,070
Cogeneration costs.................................... 76,679 92,162
Other................................................. 107,827 154,218
Unamortized debt expense................................ 37,197 37,645
Other .................................................. 82,107 48,827
------------ ------------
2,028,428 2,135,431
------------ ------------
Total Assets.............................................. $ 10,394,479 $ 10,559,574
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common shareholders' equity:
Common shares, $5 par value--authorized
225,000,000 shares; 136,051,923 shares issued and
128,201,100 shares outstanding in 1996 and
135,611,166 shares issued and 127,050,647 shares
outstanding in 1995.................................. $ 680,260 $ 678,056
Capital surplus, paid in.............................. 941,205 936,308
Deferred benefit plan--employee stock
ownership plan...................................... (181,722) (198,152)
Retained earnings..................................... 941,341 1,007,340
------------- -------------
Total common shareholders' equity.............. 2,381,084 2,423,552
Preferred stock not subject to mandatory redemption..... 169,700 169,700
Preferred stock subject to mandatory redemption......... 276,000 302,500
Long-term debt.......................................... 3,688,530 3,705,215
------------- -------------
Total capitalization........................... 6,515,314 6,600,967
------------- -------------
Minority Interest in Consolidated Subsidiaries............ 99,895 99,935
------------- -------------
Obligations Under Capital Leases.......................... 187,095 147,372
------------- -------------
Current Liabilities:
Notes payable to banks.................................. 15,000 99,000
Long-term debt and preferred stock--current
portion................................................ 281,013 219,657
Obligations under capital leases--current
portion................................................ 19,189 83,110
Accounts payable........................................ 289,656 319,038
Accrued taxes........................................... 66,750 75,218
Accrued interest........................................ 71,853 53,699
Accrued pension benefits................................ 91,603 90,630
Other................................................... 128,037 105,821
------------- ------------
963,101 1,046,173
------------- ------------
Deferred Credits:
Accumulated deferred income taxes....................... 2,083,974 2,135,852
Accumulated deferred investment tax credits............. 170,847 178,060
Deferred contractual obligation......................... 72,332 103,475
Other................................................... 301,921 247,740
------------- ------------
2,629,074 2,665,127
------------- ------------
Commitments and Contingencies (Note 8)<F8>
Total Capitalization and Liabilities........... $ 10,394,479 $ 10,559,574
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
(Thousands of Dollars, except share information)
<S> <C> <C> <C> <C>
Operating Revenues............................. $ 955,518 $ 985,092 $ 2,855,624 $ 2,770,130
------------- ------------- ------------- -------------
Operating Expenses:
Operation --
Fuel, purchased and net interchange power.... 308,111 242,923 819,570 680,860
Other........................................ 266,395 244,351 825,599 694,091
Maintenance................................... 104,998 70,048 283,018 197,926
Depreciation.................................. 88,300 89,514 268,704 263,016
Amortization of regulatory assets, net........ 42,212 36,727 81,469 96,897
Federal and state income taxes................ 12,696 75,816 96,651 201,085
Taxes other than income taxes................. 64,774 63,416 197,501 188,220
------------- ------------- ------------- -------------
Total operating expenses............... 887,486 822,795 2,572,512 2,322,095
------------- ------------- ------------- -------------
Operating Income............................... 68,032 162,297 283,112 448,035
------------- ------------- ------------- -------------
Other Income:
Deferred nuclear plants return--other
funds...................................... 1,919 3,431 7,332 10,727
Equity in earnings of regional nuclear
generating and transmission companies...... 3,326 3,637 10,637 9,854
Other, net................................... 6,126 3,270 16,774 633
Income taxes................................. (1,762) 306 (3,554) 6,511
------------- ------------- ------------- -------------
Other income, net...................... 9,609 10,644 31,189 27,725
------------- ------------- ------------- -------------
Income before interest charges......... 77,641 172,941 314,301 475,760
------------- ------------- ------------- -------------
Interest Charges:
Interest on long-term debt................... 71,156 78,692 214,229 239,271
Other interest............................... (55) 1,981 8,539 4,753
Deferred nuclear plants return--borrowed
funds..................................... (3,141) (5,827) (11,976) (17,476)
------------- ------------- ------------- -------------
Interest charges, net.................. 67,960 74,846 210,792 226,548
------------- ------------- ------------- -------------
Income after interest charges........... 9,681 98,095 103,509 249,212
Preferred Dividends of Subsidiaries............ 8,648 8,569 25,308 31,004
------------- ------------- ------------- -------------
Net Income..................................... $ 1,033 $ 89,526 $ 78,201 $ 218,208
============= ============= ============= =============
Earnings Per Common Share...................... $ 0.01 $ 0.71 $ 0.61 $ 1.74
============= ============= ============= =============
Common Shares Outstanding (average)............ 128,086,873 126,412,303 127,832,699 125,769,477
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities:
Income before preferred dividends of subsidiaries......... $ 103,509 $ 249,212
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 268,704 263,016
Deferred income taxes and investment tax credits, net... 27,443 103,961
Deferred nuclear plants return, net of amortization..... (10,148) 61,084
Recoverable energy costs, net of amortization........... (8,230) (46,592)
Amortization of PSNH acquisition costs.................. 42,743 41,323
Deferred cogeneration costs, net of amortization........ 15,483 (49,068)
Deferred demand-side-management
costs, net of amortization............................ 33,845 7,880
Deferred nuclear refueling outage, net of amortization.. 40,954 (19,973)
Nuclear compliance reserves, net........................ 40,006 -
Other sources of cash................................... 164,921 159,285
Other uses of cash...................................... (40,288) (37,800)
Changes in working capital:
Receivables and accrued utility revenues................ 49,234 13,926
Fuel, materials, and supplies........................... (2,461) (17,437)
Accounts payable........................................ (29,382) (53,799)
Accrued taxes........................................... (8,468) 66,389
Other working capital (excludes cash)................... (19,177) (13,390)
----------- -----------
Net cash flows from operating activities.................... 668,688 728,017
----------- -----------
Financing Activities:
Issuance of common shares................................. 10,622 21,462
Issuance of long-term debt................................ 222,100 -
Issuance of Monthly Income
Preferred Securities..................................... - 100,000
Net decrease in short-term debt........................... (84,000) (122,500)
Reacquisitions and retirements of long-term debt.......... (209,914) (139,227)
Reacquisitions and retirements of preferred stock......... (1,500) (133,175)
Cash dividends on preferred stock......................... (25,308) (31,004)
Cash dividends on common shares........................... (144,200) (165,876)
----------- -----------
Net cash flows used for financing activities................ (232,200) (470,320)
----------- -----------
Investment Activities:
Investment in plant:
Electric and other utility plant........................ (161,704) (168,772)
Nuclear fuel............................................ (1,453) (11,681)
----------- -----------
Net cash flows used for investments in plant.............. (163,157) (180,453)
Investments in nuclear decommissioning trusts............. (47,211) (46,832)
Other investment activities, net.......................... (16,215) (23,945)
----------- -----------
Net cash flows used for investments......................... (226,583) (251,230)
----------- -----------
Net Increase In Cash For The Period......................... 209,905 6,467
Cash and cash equivalents - beginning of period............. 29,038 27,126
----------- -----------
Cash and cash equivalents - end of period................... $ 238,943 $ 33,593
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES 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 Northeast Utilities (the company or NU) on
Form 10-K for the year ended December 31, 1995 (1995 Form 10-K), the
company's Form 10-Qs for the quarters ended March 31, 1996 and
June 30, 1996, and the company's Form 8-Ks dated January 31, 1996,
March 30, 1996, April 15, 1996, June 3, 1996, June 18, 1996, June 28,
1996, July 22, 1996, and August 19, 1996. In the opinion of the
company, the accompanying financial statements contain all adjustments
necessary to present fairly the financial position as of September 30,
1996, the results of operations for the three-month and nine-month
periods ended September 30, 1996 and 1995, and the statements of cash
flows for the nine-month periods ended September 30, 1996 and 1995.
All adjustments are of a normal, recurring, nature except those
described below in Note 8B. The results of operations for the three-
month and nine-month periods ended September 30, 1996 and 1995 are not
necessarily indicative of the results expected for a full year.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
NU is the parent company of the Northeast Utilities system (the
system). The system furnishes retail electric service in Connecticut,
New Hampshire, and western Massachusetts through four wholly owned
subsidiaries, The Connecticut Light and Power Company (CL&P), Public
Service Company of New Hampshire (PSNH), 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 retail
electric 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.
B. Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and short-term
cash investments which are highly liquid in nature and have original
maturities of three months or less.
2. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) has 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," which
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.
Based on the current regulatory environment in the system's service areas,
as of September 30, 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, see the MD&A
in this Form 10-Q, NU's Form 8-K dated August 19, 1996, NU's Form 10-Qs for
the quarters ended March 31, 1996 and June 30, 1996, and NU's 1995 Form 10-
K.
3. REGULATORY ASSETS - RECOVERABLE ENERGY COSTS
On October 8, 1996, the Connecticut Department of Public Utility Control
issued its final order establishing an Energy Adjustment Clause (EAC)
effective January 1, 1997. The EAC will replace CL&P's existing Fuel
Adjustment Clause and the Generation Utilization Adjustment Clause.
For further information regarding CL&P's recoverable energy costs see the
MD&A and Note 8B in this Form 10-Q, NU's Form 8-K dated August 19, 1996,
NU's Form 10-Qs for the quarters ended March 31, 1996 and June 30, 1996 and
NU's 1995 Form 10-K.
4. SHORT-TERM DEBT
For information on short-term debt, see the MD&A in this Form 10-Q, NU's
Form 10-Q for the quarter ended March 31, 1996, and NU's 1995 Form 10-K.
5. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
On September 13, 1996, WMECO entered into an agreement to sell fractional
undivided percentage receivable interests in WMECO's eligible billed and
unbilled accounts receivable. The amount of receivables sold at any one
time will not exceed $40 million plus limited reserves for losses. To the
extent actual loss experience of the pool receivables exceeds the loss
reserves, the purchaser will absorb the excess. WMECO has retained
collection and servicing responsibilities as agent for the purchaser. As
of November 12, 1996, no receivables had been sold under this agreement.
The FASB has issued SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which establishes, in
part, accounting standards for the accounting and recognition of transfers
of financial assets. SFAS 125 will be effective for transfers and
servicing of financial assets occurring after December 31, 1996 and will be
applied prospectively. Under the terms of its receivables financing
agreement, WMECO is obligated to restructure its existing arrangement to,
in effect, satisfy the requirements of SFAS 125 and obtain certain
regulatory approvals, or waiver thereof, by February 1, 1997 or the
arrangement will terminate.
For information on CL&P's accounts receivable securitization program
entered into on July 11, 1996, see NU's Form 10-Q for the quarter ended
June 30, 1996. This program is also being restructured to satisfy the
conditions of SFAS 125.
6. DERIVATIVE FINANCIAL INSTRUMENTS
Fuel Swaps: As of September 30, 1996, CL&P had outstanding fuel-swap
contracts with a total notional value of approximately $227.3 million, and
a negative mark-to-market position of approximately $12.7 million.
Interest-Rate Swaps: As of September 30, 1996, NAEC had outstanding
interest-rate swap agreements with a total notional value of approximately
$225 million and a positive mark-to-market position of approximately $3.9
million.
These swap agreements have been made with various financial institutions,
each of which is rated "BBB+" or better by Standard & Poor's rating group.
CL&P and NAEC are exposed to credit risk on fuel swaps and interest-rate
swaps if the counterparties fail to perform their obligations. However,
CL&P and NAEC anticipate 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, NU's Form
10-Qs for the quarters ended March 31, 1996 and June 30, 1996, and NU's
1995 Form 10-K.
7. NUCLEAR DECOMMISSIONING
For information regarding nuclear decommissioning, see NU's Form 10-Q for
the quarter ended March 31, 1996 and NU's 1995 Form 10-K. For
information regarding the possible closure and decommissioning of
Connecticut Yankee (CY), see Note 8B in this Form 10-Q.
8. COMMITMENTS AND CONTINGENCIES
A. Construction Program: For information regarding NU's construction
program, see NU's 1995 Form 10-K.
B. Nuclear Performance:
Millstone: NU has previously disclosed in its 1995 Form 10-K, its
Form 10-Qs for the quarters ended March 31, 1996 and June 30, 1996,
and its Form 8-Ks dated January 31, 1996, March 30, 1996, April 15,
1996, June 3, 1996, June 18, 1996, June 28, 1996, July 22, 1996, and
August 19, 1996 that, among other things: (i) the Millstone nuclear
units have been placed on the Nuclear Regulatory Commission's (NRC)
watch list, (ii) the three Millstone units are currently out of
service, (iii) the company is currently restructuring its nuclear
organization and developing operational readiness plans, and (iv) the
company is currently incurring substantial costs, including
replacement power costs, while the three Millstone units are not
operating.
Management cannot predict when the NRC will allow any of the Millstone
units to return to service and thus cannot estimate the total
replacement power costs the companies will ultimately incur.
Management now estimates NU will expense approximately $147 million of
incremental non-fuel nuclear operation and maintenance costs in 1996.
Approximately $108 million of the $147 million was expensed in the
first three quarters of 1996; $87 million for CL&P, $20 million for
WMECO, and $1 million for PSNH. It is likely this estimate will rise
as NU and the NRC identify additional issues that need to be resolved.
The recovery of fuel, purchased power, and other outage-related costs
is subject to prudence reviews in Connecticut, Massachusetts, and New
Hampshire. While it is too early to estimate the total amount of such
costs or the results of any prudence reviews, management believes that
there is significant exposure to non-recovery of a material amount of
such costs.
For further information, see the Securities and Exchange Commission's
filings referenced above, the MD&A, and Part II, Item 5 in this Form
10-Q.
Connecticut Yankee: On October 9, 1996, Connecticut Yankee Atomic
Power Company (CYAPC), which owns and operates the CY nuclear
generating unit, announced that a permanent shutdown of the unit
seems likely based on an economic analysis of the costs of
operating the unit compared to the costs of closing the unit and
incurring replacement power costs over the remaining period of the
unit's NRC operating license. The final decision is pending a vote
by CYAPC's board of directors which is expected to occur in the
fourth quarter of 1996.
The NU system has a 49 percent equity investment, approximating
$52 million, in CYAPC and relies on CYAPC for approximately 3.5
percent of its system capacity.
The preliminary estimate of the sum of future payments for the
closing, decommissioning, and recovery of the remaining investment in
CY, assuming permanent shut down, is approximately $797 million. The
NU system's share of these remaining estimated costs is approximately
$391 million.
The contracts under which CL&P, WMECO, and PSNH purchase their
entitlement of CYAPC power permit CYAPC to recover these costs from
CL&P, WMECO, and PSNH. Should CYAPC board's decision result in
permanent closure of CY, CYAPC expects to file updated decommissioning
costs and certain amendments to its power contracts with the Federal
Energy Regulatory Commission (FERC). Based upon regulatory precedent,
CYAPC believes it will continue to collect from its power purchasers,
including CL&P, WMECO, and PSNH, its decommissioning costs, the
owners' unrecovered investments in CYAPC and other costs associated
with the permanent closure of the unit over the remaining period of
the unit's NRC operating license, which expires in 2007. Management
expects that CL&P, WMECO, and PSNH will continue to be allowed to
recover such FERC-approved costs from their customers.
For further information regarding CY, see the MD&A in this Form 10-Q,
NU's Form 10-Qs for the quarters ended March 31, 1996 and June 30,
1996, and NU's Form 8-Ks dated June 3, 1996, July 22, 1996, and August
19, 1996.
C. Environmental Matters: For information regarding environmental
matters, see NU's 1995 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see NU's 1995 Form 10-K.
E. Long-Term Contractual Arrangements: For information regarding long-
term contractual arrangements, see NU's 1995 Form 10-K.
F. Class Action Suit: For information regarding the class action suit
that was filed against NU on July 3, 1996, see Part II, Item 1. Legal
Proceedings in NU's Form 10-Q for the quarter ended June 30, 1996.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Northeast Utilities:
We have reviewed the accompanying consolidated balance sheet of Northeast
Utilities (a Massachusetts trust) and subsidiaries as of September 30, 1996, and
the related consolidated statements of income for the three and nine-month
periods ended September 30, 1996 and 1995, and the consolidated statements of
cash flows for the nine-month periods ended September 30, 1996 and 1995. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
\s\ Arthur Andersen LLP
Arthur Andersen LLP
Hartford, Connecticut
November 12 , 1996
NORTHEAST UTILITIES AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section contains management's assessment of Northeast Utilities and
Subsidiaries' (NU or the system) financial condition and the principal factors
having an impact on the results of operations. This discussion should be read
in conjunction with NU's consolidated financial statements and footnotes in this
Form 10-Q, the 1995 Form 10-K, the First and Second Quarter 1996 Form 10-Qs, and
the Form 8-Ks dated January 31, 1996, March 30, 1996, April 15, 1996, June 3,
1996, June 18, 1996, June 28, 1996, July 22, 1996, and August 19, 1996.
FINANCIAL CONDITION
Overview
Earnings per common share were $0.01 for the three months ended September 30,
1996, a decrease of $0.70 from the same period in 1995, and $0.61 for the nine
months ended September 30, 1996, a decrease of $1.13 from the same period in
1995. The earnings for the three- and nine-month periods were lower primarily
due to higher operating costs and reserves related to the outages at the
Millstone units, the impact of The Connecticut Light and Power Company's (CL&P)
approved rate settlement agreement, costs associated with meeting summer 1996
capacity requirements, lower 1996 CL&P cogeneration deferrals, and one-time tax
benefits recognized in 1995. These decreases were partially offset by lower
amortization of Millstone 3 phase-in costs and lower 1996 interest expense. In
addition, the nine-month decrease in earnings was partially offset by higher
retail sales in 1996.
NU expects to continue incurring substantial costs during the remainder of 1996
as a result of the Millstone outages, which could result in a loss for the
fourth quarter. A key factor affecting 1996 earnings will be the level of costs
expended to address Nuclear Regulatory Commission (NRC) concerns and the
replacement-power costs incurred to serve the system's customers in the absence
of energy from the Millstone units. Management currently estimates that it will
expense about $147 million of incremental non-fuel operation and maintenance
costs in 1996, approximately $108 million of which were expensed during the
first nine months of 1996, including a reserve for future costs of $40 million.
It is likely that these costs will rise as NU and the NRC identify additional
issues that need to be resolved. Monthly replacement-power costs for NU system
companies attributable to the nuclear outages average approximately $30 million.
The NU Board of Trustees (the Board) evaluates the dividend on NU's common
shares quarterly. At its October 22, 1996 meeting, the Board declared a $0.25
per quarter common dividend, payable on December 31, 1996, to holders of record
on December 1, 1996.
For further information on NU's dividend, see NU's Form 8-K dated July 22, 1996.
Millstone Outages
NU has a 100-percent ownership interest in Millstone 1 and 2 and a 68-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.
For further information on the current Millstone outages see NU's 1995 Form 10-
K, Form 8-Ks dated January 31, 1996, March 30, 1996, June 3, 1996, June 18,
1996, June 28, 1996, July 22, 1996, and August 19, 1996, and the First and
Second Quarter 1996 Form 10-Qs.
On October 18, 1996, the NRC announced that it will establish a Special Projects
Office to oversee inspection and licensing activities at Millstone. The
Special Projects Office will be responsible for (1) licensing and inspection
activities at NU's Connecticut plants; (2) oversight of the Independent
Corrective Action Verification Program; (3) oversight of NU's corrective actions
related to safety issues involving employee concerns; and (4) inspections
necessary to implement NRC oversight of the plants' restart activities.
Management believes that this development should provide dedicated NRC resources
and clearer lines of communication between NU and the NRC during the recovery
process.
On October 24, 1996, the NRC issued an order to Northeast Nuclear Energy Company
(NNECO), a wholly-owned subsidiary of NU that operates Millstone, that requires
NNECO to devise and implement a comprehensive plan within 60 days of this order
for handling safety concerns raised by Millstone employees and for assuring an
environment free from retaliation and discrimination. The NRC also ordered NNECO
to contract for an independent third party to oversee this corrective action
plan within 30 days of the date of this order. The members of the independent
third-party organization must not have had any direct previous involvement with
activities at Millstone and must be approved by the NRC. Oversight by the
third-party group will continue until NNECO demonstrates, by performance, that
the conditions leading to this order have been corrected.
Management cannot presently estimate the effect these efforts will have on the
timing of unit restarts or what additional costs, if any, these developments may
cause.
Seabrook
NU has a 40-percent ownership interest in the Seabrook nuclear power plant
(Seabrook) which is operated by North Atlantic Energy Service Corporation
(NAESCO), a wholly-owned subsidiary of NU.
Seabrook 1 operated at a capacity factor of 95.7 percent through September 1996,
as compared to 92.8 percent for the same period in 1995.
On October 9, 1996, the NRC issued a request for information concerning all
nuclear plants in the United States, except the three Millstone units, which had
previously received such requests. Such information will be used to verify that
these facilities are being operated and maintained in accordance with NRC
regulations and the unit's specific licenses. The NRC has indicated that the
information, which must be submitted within 120 days of the date of the request,
will be used to determine whether future inspection or enforcement activities
are warranted for any plant. NAESCO is currently preparing its response to the
NRC's request, with respect to Seabrook. Seabrook's operations were not
restricted by the request. The NRC's April 1996 inspection found Seabrook to be
a well-operated facility without any major safety issues or weaknesses and noted
that it would reduce its future inspections in a number of areas as a result of
its findings.
Connecticut Yankee
NU has a 49-percent ownership interest in the Connecticut Yankee Atomic Power
Company (CYAPC) which owns and operates the Connecticut Yankee nuclear power
plant (CY or the plant).
CY has been out-of-service since July 22, 1996. For further information on CY,
see NU's Form 8-Ks dated June 3, 1996, July 22, 1996, and August 19, 1996, the
First and Second Quarter 1996 Form 10-Qs, and Note 8b - Commitments and
Contingencies - Nuclear Performance - Connecticut Yankee - of the Notes to
Consolidated Financial Statements in this Form 10-Q.
On October 9, 1996, CYAPC announced that a permanent shutdown of the plant seems
likely based on an economic analysis of the costs of operating the plant
compared to the costs of closing the plant and incurring replacement power costs
over the remaining period of the plant's NRC operating license. The final
decision is pending a vote by CYAPC's Board of Directors (CYAPC Board) which is
expected to occur in the fourth quarter of 1996. The NU system relies on its
entitlements in CY for approximately 3.5 percent of its system capacity.
The contracts under which CL&P, Western Massachusetts Electric Company (WMECO),
and Public Service Company of New Hampshire (PSNH) purchase their entitlements
of CYAPC power permit CYAPC to recover these costs from CL&P, WMECO, and PSNH.
Should the CYAPC Board's decision result in permanent closure of CY, CYAPC
expects to file updated decommissioning costs and certain amendments to its
power contracts with the Federal Energy Regulatory Commission (FERC). Based upon
regulatory precedent, CYAPC believes it will continue to collect from its power
purchasers, including CL&P, WMECO, and PSNH, its decommissioning costs, the
owners' unrecovered investments in CYAPC, and other costs associated with the
permanent closure of the plant over the remaining period of the plant's NRC
operating license, which expires in 2007. Management expects that CL&P, WMECO,
and PSNH will continue to be allowed to recover such FERC-approved costs from
their customers.
Capacity
Assuming normal weather conditions, management expects that the NU system will
have sufficient capacity to meet peak load demands even if CY and Millstone are
not operational at any time during the 1996-1997 winter season and the 1997
summer season, so long as the remaining generating units in Connecticut and the
New England region have normal operability. If high levels of unplanned outages
of the remaining units were to occur due to sustained operation during prolonged
periods of extreme weather, coincident with peak load demand, NU and the other
Connecticut utilities may have to resort to operating procedures designed to
reduce customer demand.
Rate Matters
Connecticut
On October 3, 1996, the Connecticut Department of Public Utility Control (DPUC)
issued a final procedural order confirming that prudence hearings on the current
nuclear outages would be delayed until the nuclear plants have returned to
service. CL&P will not be permitted to collect the associated replacement power
costs until prudence issues have been resolved. For further information on the
matter see NU's Form 8-K dated August 19, 1996.
On October 8, 1996, the DPUC issued its final order establishing an Energy
Adjustment Clause (EAC) in place of CL&P's existing Fuel Adjustment Clause and
Generation Utilization Adjustment Clause (GUAC). The EAC will take effect on
January 1, 1997. The EAC is designed to calculate the difference between actual
fuel costs and the fuel revenue collected through base rates. The order
establishes a six-month EAC billing period.
The EAC includes an incentive mechanism which disallows recovery of the first $9
million in fuel costs that exceeds base levels and permits CL&P to retain the
first $9 million in fuel cost savings. The EAC also designates a 60 percent
nuclear capacity factor floor. When the six-month nuclear capacity factor falls
below 60 percent, related energy costs are deferred to the subsequent EAC period
for consideration for recovery. Finally, the costs to serve nonfirm wholesale
transactions will continue to be neutralized through the EAC.
New Hampshire
The New Hampshire legislature has enacted legislation calling for restructuring
of the electric utility industry to provide customer choice of retail energy
supplier not later than July 1, 1998. On September 10, 1996, the New Hampshire
Public Utilities Commission (NHPUC) issued its Preliminary Plan (the Plan) to
implement this law. Under the Plan, utilities with rates above the regional
average would be allowed to recover a smaller amount of stranded costs than
other utilities. PSNH's rates are well above the regional average as a result of
mandated purchases from qualifying facilities under the Public Utilities
Regulatory Policies Act and state law, and also as a result of the resolution of
PSNH's bankruptcy and assets created by the Rate Agreement that was entered into
by NU and the State of New Hampshire (Rate Agreement).
On October 18, 1996, PSNH filed its initial comments on the Plan, stating, in
part, that the Plan failed to take into consideration the contractual
commitments of the State of New Hampshire under the Rate Agreement. If the Plan
is implemented in substantially its present form by the NHPUC on February 28,
1997 (the date established by the restructuring legislation), the State would be
in breach of its Rate Agreement obligations by failing to authorize a
compensatory interim stranded cost recovery charge for PSNH. In the event of
such final action on the Plan by the NHPUC and if the State is able to avoid its
obligations under the Rate Agreement, NU and PSNH would be exposed to the risk
that they would not recover a substantial amount of their potentially strandable
investments associated with the resolution of PSNH's bankruptcy, which could
have a material adverse impact on their financial position and results of
operations.
Management has evaluated the potential effects of the Plan in accordance with
Statement of Financial Accounting Standards 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Management
believes that the recovery of PSNH's potentially strandable assets through
future revenues remains probable based on the Rate Agreement.
For further information on New Hampshire rate and restructuring issues, see NU's
1995 Form 10-K, Second Quarter 1996 Form 10-Q and Form 8-Ks dated June 3, 1996
and August 19, 1996.
Massachusetts
On August 30, 1996, the Massachusetts Department of Public Utilities (DPU)
approved a settlement agreement between WMECO and the Massachusetts Attorney
General to maintain WMECO's Fuel Adjustment Charge (FAC) at its August 1996
level through February 1997. The settlement also provides that WMECO will not
seek carrying charges on any deferred fuel costs incurred as a result of
maintaining the FAC at the agreed-upon level. In accepting the settlement, the
DPU deferred any inquiry into WMECO's fuel expenses, including replacement power
fuel expenses related to the Millstone outages.
Liquidity And Capital Resources
Cash provided from operations decreased approximately $59 million in the first
nine months of 1996, from 1995, primarily due to higher cash operating costs
related to the nuclear outages and costs associated with meeting summer capacity
requirements, partially offset by higher retail sales. Net cash used for
financing activities decreased approximately $238 million primarily due to lower
reacquisitions and retirements of long-term debt and preferred stock, higher
issuances of long-term debt, lower cash dividends on common shares, and lower
repayment of short-term debt. Cash used for investments decreased approximately
$25 million primarily due to lower nuclear fuel expenditures and lower
investments in nonutility generation projects.
On October 8, 1996, Moody's Investors Service (Moody's) downgraded the senior
securities of NU, CL&P, WMECO, the Niantic Bay Fuel Trust (NBFT), and CYAPC for
the second time since May 1996. Standard & Poor's Ratings Group (S&P) downgraded
the senior securities of NU, CL&P, and NBFT on October 11, 1996. S&P and Moody's
also lowered the commercial paper ratings for CL&P and NBFT to A-3/P-3,
increasing the difficulty for the NU system to market commercial paper. All NU
system company securities remain on S&P's CreditWatch.
The system companies have taken various actions to ensure that they 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. These actions have contributed to a
net increase in cash of approximately $205 million.
CL&P completed a $62 million tax-exempt debt issue in May 1996 and issued $160
million of first-mortgage bonds in June 1996. The net proceeds from the issuance
of CL&P's first mortgage bonds, plus funds
from other sources, will be used to repay approximately $193 million of CL&P's
first-mortgage bonds that are due on April 1, 1997. Additionally, CL&P
established a facility under which it may sell, from time to time, up to $200
million of fractional interests in its billed and unbilled accounts receivable,
with limited recourse. This facility has not been used to date. On September 13,
1996, WMECO established a facility under which it may sell, from time to time,
up to $40 million of fractional interests in its billed and unbilled accounts
receivable, with limited recourse. This facility has not been used to date.
Under the current revolving credit agreements (the Current Credit Agreements),
$342.5 million of short-term borrowing capacity is available to the
participating NU system companies. The Current Credit Agreements are scheduled
to be decreased to $257 million on November 27, 1996, when one-fourth of the
borrowing capacity expires.
NU, CL&P, and WMECO expect to enter into a new three-year revolving credit
agreement (the New Credit Agreement) in mid-November 1996 with a group of banks.
Under the New Credit Agreement, NU will be able to borrow on a revolving basis
up to $150 million, CL&P will be able to borrow up to $315 million, and WMECO
will be able to borrow up to $150 million, subject to a total borrowing limit of
$315 million for all three borrowers. Once the New Credit Agreement becomes
effective, the Current Credit Agreement will be reduced to $57 million. More
than $400 million of short-term borrowing capacity will be available in the
aggregate to NU, CL&P, and WMECO under: the New Credit Agreement ($315 million);
the Current Credit Agreements that will remain in effect after the New Credit
Agreement becomes effective ($57 million in the aggregate); and informal
uncommitted credit lines with individual banks (approximately $40 million as of
November 15, 1996).
In connection with the arrangement of the New Credit Agreement, NU, CL&P, and
WMECO received authority from the Securities and Exchange Commission to borrow
up to $200 million, $375 million, and $150 million, respectively, on a short-
term basis. Those limits are higher than the previous limits of $150 million,
$325 million, and $60 million, respectively.
For further information on short-term debt, see NU's First Quarter 1996 Form 10-
Q and NU's 1995 Form 10-K.
The Board's July 22, 1996 decision to reduce NU's common dividend from $0.44 to
$0.25 per share quarterly will conserve cash at the rate of approximately $100
million annually, if continued at the new level. Management considers the new
dividend level to be sustainable in a range of scenarios.
CL&P has entered into fuel-swap agreements to reduce a portion of the fuel-price
risk associated with its long-term negotiated energy contracts. North Atlantic
Energy Corporation (NAEC) has entered into interest-rate swap agreements to
reduce interest-rate risk associated with its $225 million variable-rate bank
note. These swaps are not used for trading purposes. The differential paid or
received as fuel prices or interest rates change is recognized in income when
realized. As of September 30, 1996, CL&P and NAEC had outstanding swap
agreements with a total notional value of approximately $227.3 and $225 million,
respectively. The settlement amounts associated with the swaps increased
earnings by approximately $5.6 million for CL&P and increased interest expense
by approximately $0.8 million for NAEC during the first nine months of 1996.
CL&P's fuel swaps seek to minimize exposure associated with rising fuel prices
and effectively fix the cost of fuel and profitability of certain of its long-
term negotiated contract sales. NAEC's interest-rate swap agreements
effectively fix its variable-rate bank note at 7.05 percent.
RESULTS OF OPERATIONS
Income Statement Variances
Millions of Dollars Increase/(Decrease)
Third Year-
Quarter Percent to-Date Percent
Operating revenues $(30) (3)% $ 85 3%
Fuel, purchased and net
interchange power 65 27 139 20
Other operation 22 9 132 9
Maintenance 35 50 85 43
Amortization of
regulatory assets, net 5 15 (15) (16)
Federal and state income taxes (61) (81) (94) (49)
Other income, net 3 87 16 (a)
Deferred nuclear plants return (4) (45) (9) (32)
Interest on long-term debt (8) (10) (25) (10)
Preferred dividends of
subsidiaries 0 0 (6) (18)
Net income (88) (99) (140) (64)
(a) Percentage greater than 100
Comparison of the Third Quarter of 1996 with the Third Quarter of 1995
Total operating revenues decreased due to lower fuel recoveries and lower retail
sales, partially offset by higher recognition of reimbursable conservation
services ($11 million). Fuel recoveries decreased $32 million primarily due to
lower Fuel and Purchased Power Adjustment Clause (FPPAC) revenues for PSNH as a
result of a customer refund ordered by the NHPUC and lower average fossil fuel
prices. Retail sales decreased 0.9 percent ($7 million) primarily due to milder
weather in 1996, partially offset by modest economic growth in 1996.
Fuel, purchased, and net interchange power expense increased primarily due to
higher energy costs in 1996 due to the nuclear outages.
Other operation and maintenance expense increased primarily due to higher costs
associated with the nuclear outages ($23 million) and 1996 costs associated with
meeting summer capacity requirements ($10 million). In addition, these costs
reflect higher office equipment expenses, higher recognition of reimbursable
conservation expenses, and higher 1996 demand-side-management costs.
Amortization of regulatory assets, net increased primarily due to higher
amortizations as a result of the 1996 CL&P Settlement ($15 million), lower 1996
CL&P cogeneration deferrals, and higher 1996 amortization of previously deferred
CL&P cogeneration costs ($20 million), partially offset by the completion of
CL&P's and WMECO's amortizations of Millstone 3 phase-in costs in 1995 ($24
million).
Federal and state income taxes decreased primarily due to lower book taxable
income, partially offset by a one-time tax benefit in 1995 as a result of the
expiration of the federal statute of limitations for 1991.
Interest on long-term debt decreased primarily due to lower average interest
rates as a result of refinancing activities and lower average 1996 debt levels.
Comparison of the First Nine Months of 1996 with the First Nine Months of 1995
Total operating revenues increased due to higher retail sales, regulatory
decisions, higher fuel recoveries, and higher recognition in 1996 of
reimbursable conservation services ($22 million), partially offset by lower
wholesale revenues. Retail sales increased 2.5 percent ($45 million), primarily
due to modest economic growth in 1996. Regulatory decisions increased revenues
by $18 million primarily due to the mid-1995 retail-rate increase for CL&P and
the June 1, 1995 and 1996 retail-rate increases for PSNH, partially offset by
1996 reserves for CL&P over-recoveries of demand-side-management costs. Fuel
recoveries increased $10 million primarily due to higher base fuel revenues for
PSNH as result of higher sales, the recovery of GUAC costs for CL&P and higher
outside energy costs, partially offset by lower FPPAC revenues for PSNH as
result of a customer refund ordered by the NHPUC. Wholesale revenues decreased
$12 million primarily due to higher recognition in 1995 of lump-sum payments for
termination of a CL&P long-term contract and the expiration in 1995, of some
capacity sales contracts.
Fuel, purchased, and net interchange power expense increased primarily due to
higher energy costs in 1996 due to the nuclear outages and the write-off of GUAC
balances under the 1996 CL&P Settlement, partially offset by lower nuclear
generation.
Other operation and maintenance expense increased primarily due to higher costs
associated with the nuclear outages ($108 million, including $40 million of
reserves for future costs) and 1996 costs associated with meeting summer
capacity requirements ($31 million). In addition, these costs reflect higher
recognition of postretirement benefit costs, higher office equipment expenses,
higher recognition of reimbursable conservation expenses, and higher demand-
side-management costs, partially offset by lower 1996 charges from the regional
nuclear generating units.
Amortization of regulatory assets, net decreased primarily due to the completion
of CL&P's and WMECO's amortizations of Millstone 3 phase-in costs in 1995 ($79
million), partially offset by lower 1996 CL&P cogeneration deferrals and higher
1996 amortization of previously deferred cogeneration costs ($52 million), and
higher amortizations as a result of the 1996 CL&P Settlement ($15 million).
Federal and state income taxes decreased primarily due to lower book taxable
income, partially offset by tax benefits from a favorable tax ruling recognized
during the first quarter of 1995 and the expiration of the federal statute of
limitations for 1991, recognized during the third quarter of 1995.
Other income, net increased primarily due to the deferral of the PSNH interest
expense associated with an FPPAC refund, the 1995 write-down of CL&P's wholesale
investment in Millstone 3, a 1995 increase to the environmental reserve, and
higher interest income due to higher temporary cash investments in 1996.
Deferred nuclear plants return decreased primarily due to additional Seabrook
investment being phased into rates, partially offset by a one-time adjustment to
NAEC's Seabrook deferred return of $5 million in June 1995.
Interest on long-term debt decreased primarily due to lower average interest
rates as a result of refinancing activities and lower average 1996 debt levels.
Preferred dividends decreased primarily due to a 1995 charge to earnings for
premiums on redeemed preferred stock and a reduction in preferred stock levels.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. In January 1992, a lawsuit was filed against NU and CL&P alleging that the
cancer suffered by one of the plaintiffs was caused by electric and magnetic
fields (EMF) emanating from CL&P's Meadow Street substation and distribution
lines. The Connecticut Superior Court granted summary judgment to NU and CL&P
on two counts of the five count complaint. Following the summary judgment, the
plaintiffs withdrew the remaining three counts. On September 6, 1996, the
plaintiffs filed an appeal of the summary judgment on only one of the two counts
in the Connecticut Appellate Court for the District of New Haven.
For additional information on litigation relating to EMF, see "Item 3.
Legal Proceedings" in NU's 1995 Form 10-K.
ITEM 5. OTHER INFORMATION
1. The NRC's Office of Investigations (OI) has been examining various matters
at Millstone and CY, including but not limited to procedural and technical
compliance matters and employee concerns. One of these matters has been
referred, and others may be referred, to the Office of the U. S. Attorney for
the District of Connecticut (U. S. Attorney) for possible criminal prosecution.
The referred matter concerns full core off-load procedures and related matters
at Millstone. The U. S. Attorney is also reviewing possible criminal violations
arising out of certain of NU's other activities at Millstone and CY, including
the 1996 nuclear workforce reduction.
The U. S. Attorney, together with the U. S. Environmental Protection Agency
and the Connecticut Attorney General, is also investigating possible criminal
violations of federal and state environmental laws at certain NU facilities,
including Millstone.
Management does not believe that any system company or officer has engaged
in conduct that would warrant a federal criminal prosecution. NU intends to
fully cooperate with the OI and the U.S. Attorney in their ongoing
investigations.
For more information regarding the full core off-load matter, see "Part II.
Other Information" in NU's Form 10-Q for the quarter ended March 31, 1996. For
more information regarding NU's 1996 nuclear workforce reduction and the NRC's
review thereof, see NU's 1995 Form 10-K. For more information regarding the
investigation of environmental matters at Millstone, see "Part II. Other
Information" in NU's Form 10-Q for the quarter ended June 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
10 Material Contract
15 Letter regarding unaudited financial
information
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. NU filed a Form 8-K dated August 19, 1996 disclosing that:
* A Connecticut court ruled that the Town of Haddam had over-
assessed the CY nuclear power plant.
* NU appointed Bruce Kenyon as President and CEO of NU's nuclear
operations and Mr. Kenyon is in the process of implementing a
nuclear management reorganization.
NU's three Millstone units continue to be out of service and
management is continuing its efforts to bring the units on-line.
* Moody's Investor Service has placed all of the NU system
securities under review for possible downgrades.
* The DPUC issued a draft decision proposing to replace CL&P's two
existing energy recovery mechanisms with an EAC.
* The NHPUC has issued a preliminary plan to restructure the
state's electric industry, including PSNH.
* PSNH has notified the State of New Hampshire that the state is in
breach of its obligations under the Rate Agreement.
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.
NORTHEAST UTILITIES
Registrant
Date November 12, 1996 By: /s/ Bernard M. Fox
Bernard M. Fox
Chairman, President, and
Chief Executive Officer
Date November 12, 1996 By: /s/ John J. Roman
John J. Roman
Vice President and
Controller
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CONFIDENTIAL SEPARATION AGREEMENT
AND GENERAL RELEASE
THIS AGREEMENT, made and entered into as of the 16th day of August, 1996,
by and between Northeast Utilities Service Company, a Connecticut corporation
(the Company ), with its principal office in Berlin, Connecticut, and Robert E.
Busch ( Busch ).
W I T N E S S E T H:
WHEREAS, the Company had heretofore employed Busch as the President of its
Energy Resources Group; and
WHEREAS, Busch and the Company have agreed that Busch will leave employment
as of August 31, 1996; and
WHEREAS, the Company and Busch wish to enter into an agreement to provide
for a mutual release as to claims including, without limitation, claims that
might be asserted by Busch under the Age Discrimination in Employment Act, as
further described herein, reaffirm Busch's right to indemnification for actions
taken within the scope of his employment and provide the Company with Busch's
undertaking not to compete with the Company and to keep certain information
confidential;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto, intending to be legally bound, hereby agree as follows:
1. The Company and Busch hereby agree that Busch's separation shall be
effective on August 31, 1996 (the Separation Date ). As of August 15, 1996,
Busch also resigns all officer and director positions with the Company and its
subsidiaries and affiliates.
2. Notwithstanding Busch's separation, in consideration of the release
provided by Busch under paragraph 6 below, the Company shall pay or cause to be
paid or provided to Busch, subject to applicable employment and income tax
withholdings and deductions, the following:
a. Severance equal to 2 times the average of Busch's total compensation for
1995 and 1994, with 80% of such amount being paid on the 10th business day
following the Separation Date and 20% being paid on January 2, 1997;
b. A Target Benefit under the Company's Supplemental Executive Retirement Plan
for Officers (the Supplemental Plan ) commencing on the first day of the month
following Busch's attainment of age 55, calculated using Busch's actual
compensation and credited service (each as defined in the Supplemental Plan),
the provisional calculation formula specified in the Supplemental Plan and the
actuarial reduction factors specified in the Company's Retirement Plan or, in
the alternative, an amount equivalent to such Target Benefit;
c. For a period of two years following the Separation Date, Busch and his
spouse and eligible dependents shall be eligible for a continuation of medical
coverage, as in effect at such time and as the same may be changed from time to
time for employees generally, or until Busch has obtained new employment that
provides comparable medical coverage, if earlier (or to receive cash in lieu of
such coverage if it may not be continued or would adversely affect the tax
status of the medical plan under applicable law or regulations). Upon attaining
age 55, Busch and his spouse and eligible dependents shall be eligible for
retiree medical coverage, as in effect at such time and as the same may be
changed from time to time for retirees generally; and
d. Outplacement services from Lee Hecht for a period of one year from the
Separation Date; provided, however, that if Busch has not obtained new
employment by the end of such period, outplacement services shall continue for
an additional six months or until Busch has obtained new employment, if earlier.
3. Busch agrees and acknowledges that the Company, on a timely basis, has
paid, or agreed to pay, to Busch all other amounts due and owing based on his
prior services and that the Company has no obligation, contractual or otherwise
to Busch, except as provided herein, nor does it have any obligation to hire,
rehire or re-employ Busch in the future. Notwithstanding the foregoing, if the
Company requests, Busch will provide reasonable personal services to the Company
in connection with matters over which he was responsible during his employment
by the Company (including, but not limited to, litigation that results from any
such matter) and the Company will pay him for such personal services on a per
diem basis at a rate equal to the per diem equivalent of his base salary from
the Company immediately before the Separation Date as well as reimburse him for
documented expenses reasonably incurred in rendering such services.
4.a. Busch agrees and recognizes that by reason of his employment by and
service to the Company he has had access to certain confidential and proprietary
information relating to the Company's business, which may include, but is not
limited to, trade secrets, customer information, supplier information, cost and
pricing information, marketing and sales techniques, strategies and programs,
computer programs and software and financial information (collectively referred
to as Confidential Information ). Busch acknowledges that such Confidential
Information is a valuable and unique asset of the Company. Busch covenants that
he will not, unless expressly authorized in writing by the Company, at any time,
directly or indirectly, use any Confidential Information or divulge or disclose
any Confidential Information to any person, firm or corporation, unless such
information is in the public domain through no fault of Busch or except when
required to do so by a court of law, by any governmental agency having
supervisory authority over the business of the Company or by any administrative
or legislative body (including a committee thereof) with apparent jurisdiction
to order him to divulge, disclose or make accessible such information in which
case Busch will inform the Company in writing promptly of such required
disclosure, but in any event at least two business days prior to disclosure.
All written Confidential Information (including, without limitation, in any
computer or other electronic format) which came into Busch's possession during
the course of his employment shall remain the property of the Company. On the
Separation Date, Busch shall immediately return to the Company all written
Confidential Information in his possession.
b.(i) For a period of two years after the Separation Date, Busch will not,
except with the prior written consent of the Company, directly or indirectly,
own, manage, operate, join, control, finance or participate in the ownership,
management, operation, control or financing of, or be connected as an officer,
director, employee, partner, principal, agent, representative, consultant or
otherwise with, or use or permit his name to be used in connection with, any
business or enterprise (or division thereof, if applicable) which is engaged in
any business that is competitive with any business or enterprise in which the
Company or any of its subsidiaries or affiliates is engaged, anywhere within the
Company's service area, as defined below, whether or not such business or
enterprise is actually located within the service area. For the purposes of
this paragraph, service area shall mean the geographic area within the states
of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Washington D.C. and
West Virginia. Busch acknowledges that the listed service area is the area in
which the Company, or its subsidiaries or affiliates, presently does business or
is reasonably expected to do business in the near future.
(ii) The foregoing restrictions shall not be construed to prohibit the ownership
by Busch of less than five percent (5%) of any class of securities of any
corporation which is engaged in any of the foregoing businesses having a class
of securities registered pursuant to the Securities Exchange Act of 1934 (the
Exchange Act ), provided that such ownership represents a passive investment and
that neither Busch nor any group of persons including Busch in any way, either
directly or indirectly, manages or exercises control of any such corporation,
guarantees any of its financial obligations, otherwise takes any part in its
business, other than exercising his rights as a shareholder, or seeks to do any
of the foregoing.
c. Busch further covenants and agrees that, for two years following the Sep-
aration Date, he will not, directly or indirectly, (1) solicit, divert, take
away, or attempt to solicit, divert or take away, any of the Company's Prin-
cipal Customers, defined for the purposes hereof to include any customer of the
Company, or of any of its subsidiaries or affiliates, from which $100,000 or
more of annual gross revenues are derived at such time, or (2) encourage any
Principal Customer to reduce its patronage of the Company.
d. Busch further covenants and agrees that, for two years following the Sep-
aration Date, he will not, directly or indirectly, solicit or hire, or encourage
the solicitation or hiring of, any person who was a managerial or higher level
employee of the Company at any time during the term of Busch's employment by the
Company by any employer other than the Company for any position as an employee,
independent contractor, consultant or otherwise. The foregoing covenant of
Busch shall not apply to any person after 12 months have elapsed subsequent to
the date on which such person's employment by the Company has terminated.
5.(a) Busch acknowledges and agrees that the restrictions contained in
paragraph 4 are reasonable and necessary to protect and preserve the legitimate
interests, properties, goodwill and business of the Company, that the Company
would not have entered into this Agreement in the absence of such restrictions
and that irreparable injury will be suffered by the Company should Busch breach
any of the provisions of that paragraph. Busch further acknowledges and agrees
that a breach of any of the restrictions in paragraph 4 cannot be adequately
compensated by monetary damages. Busch agrees that he shall forfeit any payment
or benefits due hereunder and the Company shall be entitled to preliminary and
permanent injunctive relief, without the necessity of proving actual damages, as
well as an equitable accounting of all earnings, profits and other benefits
arising from any violation of paragraph 4, which rights shall be cumulative and
in addition to any other rights or remedies to which the Company may be
entitled. In the event that any of the provisions of paragraph 4 hereof should
ever be adjudicated to exceed the time, geographic, service, or other
limitations permitted by applicable law in any jurisdiction, it is the intention
of the parties that the provision shall be amended to the extent of the maximum
time, geographic, service, or other limitations permitted by applicable law,
that such amendment shall apply only within the jurisdiction of the court that
made such adjudication and that the provision otherwise be enforced to the
maximum extent permitted by law. Busch agrees that for a period of two years
following the Separation Date, he will provide, and that at all times after the
date hereof the Company may similarly provide, a copy of paragraph 4 hereof to
any business or enterprise (1) which he may directly or indirectly own, manage,
operate, finance, join, control or participate in the ownership, management,
operation, financing, or control of, or (2) with which he may be connected as an
officer, director, employee, partner, principal, agent, representative, con-
sultant or otherwise, or in connection with which he may use or permit his name
to be used; provided, however, that this provision shall not apply after
expiration of the time periods set forth therein.
b. Busch irrevocably and unconditionally (1) agrees that any suit, action or
other legal proceeding arising out of paragraph 4 hereof, including without
limitation, any action commenced by the Company for preliminary and permanent
injunctive relief and other equitable relief, may be brought in the United
States District Court for the District of Connecticut, or if such court does not
have jurisdiction or will not accept jurisdiction, in any court of general
jurisdiction in Hartford, Connecticut, (2) consents to the non-exclusive
jurisdiction of any such court in any such suit, action or proceeding, and (3)
waives any objection which Busch may have to the laying of venue of any such
suit, action or proceeding in any such court. Busch also irrevocably and
unconditionally consents to the service of any process, pleadings, notices or
other papers.
6. In full and complete settlement of any claims that Busch may have against
the Company, including any possible violations of the Age Discrimination in
Employment Act, 29 U.S.C. Section 621 et seq., ( ADEA ) in connection with his
separation from employment, and for and in consideration of the undertakings of
the Company described herein, Busch does hereby REMISE, RELEASE, AND FOREVER
DISCHARGE the Company, and each of its subsidiaries and affiliates, their
officers, directors, shareholders, partners, employees and agents, and their
respective successors and assigns, heirs, executors and administrators
(hereinafter all included within the term the Company ), of and from any and
all manner of actions and causes of actions, suits, debts, claims and demands
whatsoever in law or in equity, which he ever had, now has, or hereafter may
have, or which Busch's heirs, executors or administrators hereafter may have, by
reason of any matter, cause or thing arising from Busch's employment rela-
tionship or his separation from employment, including but not limited to, any
claims which have been asserted, could have been asserted, or could be asserted
now or in the future under any federal, state or local laws, including any
claims under ADEA, Title VII of the Civil Rights Act of 1964, as amended, 42
U.S.C. Section 2000e et seq. ( Title VII ), the Employee Retirement Income
Security Act of 1974, as amended ( ERISA ), the Rehabilitation Act of 1973, the
Americans with Disabilities Act, the Family and Medical Leave Act, the Energy
Reorganization Act of 1974, as amended, Section 11(c) of the Occupational Safety
and Health Act, and the Energy Policy Act, and any common law claims now or
hereafter recognized and all claims for counsel fees and costs; provided,
however, that nothing herein shall preclude Busch from joining the Company, and
the Company shall defend Busch, in any action brought against him which arises
out of actions taken within the scope of his employment by the Company and for
which he would have been indemnified pursuant to the Declaration of Trust of
Northeast Utilities as of the date hereof, unless later limited in accordance
with applicable law, or under applicable law, [in which case he shall notify the
Company within five business days after receiving service of process as to the
commencement of the action, give the Company the right to control the defense of
any such action except that Busch may retain separate counsel approved by the
Company, which approval shall not be unreasonably withheld, and whose reasonable
legal fees and expenses will be paid for and advanced by the Company, where (1)
the Company has taken or proposes to take a position adverse or detrimental to
Busch's position or interest in such action or (2) Busch's interests are, or
potentially could be, separate and distinct from the interests of the other
defendants who are being represented by the same counsel that the Company
proposes to represent Busch]. Notwithstanding the foregoing, nothing contained
herein shall prevent Busch from requiring the Company to fulfill its obligations
hereunder or under any employee benefit plan, as defined in Section 3(3) of
ERISA, maintained by the Company and in which Busch participated.
Nothing in this Agreement shall be construed to prohibit Busch from reporting
any suspected instance of illegal activity of any nature, any nuclear safety
concern, any workplace safety concern, or any public safety concern to the
Nuclear Regulatory Commission (NRC), the United States Department of Labor, or
any other federal or state governmental agency. This Agreement shall not be
construed to prohibit Mr. Busch from providing information to the NRC or to any
other federal or state governmental agency or governmental officials, or
testifying in any civil or criminal proceedings concerning any matter. This
Agreement shall not be construed as a waiver or withdrawal of safety concerns,
if any, which Mr. Busch may have reported to the NRC, or the withdrawal of
participation by Mr. Busch in any NRC proceedings.
7. Except to the extent permitted by paragraph 6, Busch further agrees and
covenants that neither he, nor any person, organization or other entity on his
behalf, will file, charge, claim, sue or cause or permit to be filed, charged,
or claimed, any action for damages, including injunctive, declaratory, monetary
or other relief against the Company, involving any matter arising from Busch's
employment relationship or his separation from employment, including, or
involving any continuing effects of any actions or practices which may have
arisen or occurred prior to the date of this Agreement in connection therewith,
including any charge of discrimination under ADEA, Title VII, the Workers'
Compensation Act or state or local laws. In addition, Busch further agrees and
covenants that should he, or any other person, organization or entity on his
behalf, file, charge, claim, sue or cause or permit to be filed, charged, or
claimed, any action for damages, including injunctive, declaratory, monetary or
other relief, despite his agreement not to do so hereunder, or should he
otherwise fail to abide by any of the terms of this Agreement, then the Company
will be relieved of all further obligations owed hereunder, he will forfeit all
monies paid to him hereunder and he will pay all of the costs and expenses of
the Company (including reasonable attorneys' fees) incurred in the defense of
any such action or undertaking.
8. In full and complete settlement of any claims that the Company may have
against Busch, other than the fulfillment of Busch's obligations hereunder and
any claim described in paragraph 10 below, and for and in consideration of the
undertakings of Busch described herein, the Company does hereby REMISE, RELEASE,
AND FOREVER DISCHARGE Busch and his heirs, executors and administrators
(hereinafter all included within the term Busch ), of and from any and all
manner of actions and causes of actions, suits, debts, claims and demands
whatsoever in law or in equity, which the Company ever had, now has, or
hereafter may have, by reason of any civil (but specifically not any criminal
act) matter, cause or thing whatsoever within the scope of Busch's employment by
the Company from the beginning of Busch's employment with the Company to the
date of this Agreement; and particularly, but without limitation of the
foregoing general terms, any claims arising from or relating in any way to
actions taken by Busch within the scope of his employment relationship and his
separation from employment with the Company.
9. Except for any claim described in paragraph 10 below, the Company further
agrees and covenants that neither it, nor any person, organization or other
entity on its behalf, will file, charge, claim, sue or cause or permit to be
filed, charged, or claimed, any action for damages, including injunctive,
declaratory, monetary or other relief against Busch, involving any matter
occurring at any time in the past up to the date of this Agreement, or involving
any continuing effects of any actions or practices which may have arisen or
occurred prior to the date of this Agreement, within the scope of his employment
by the Company, so long as Busch meets all of his obligations under this
Agreement. In addition, the Company further agrees and covenants that should
it, or any other person, organization or entity on its behalf, file, charge,
claim, sue or cause or permit to be filed, charged, or claimed, any action for
damages, including injunctive, declaratory, monetary or other relief, despite
its agreement not to do so hereunder, then it will pay all of the costs and
expenses of Busch (including reasonable attorneys' fees) incurred in the defense
of any such action or undertaking.
10. The Company expressly excepts from the provisions of paragraph 8 and 9,
above, any actions, claims, suits, or other assertions against Busch which are
instituted by the Company as the result of an investigation conducted upon the
demand of a shareholder including but not limited to the investigation conducted
upon the demand of Samuel Holtzman, or any actions instituted on behalf of the
Company by shareholders, including but not limited to all such actions now
pending in the courts of Connecticut and Massachusetts.
11. Busch hereby agrees and acknowledges that under this Agreement, the Company
has agreed to provide him with compensation and benefits that are in addition to
any amounts to which he otherwise would have been entitled in the absence of
this Agreement, and that such additional compensation is sufficient to support
the covenants and agreements by Busch herein.
12. Busch further agrees and acknowledges that the undertakings of the Company
as provided in this Agreement are made to provide an amicable conclusion of
Busch's employment by the Company and, further, that Busch will not require the
Company to publicize anything to the contrary. Busch and the Company, its
officers and directors, will not, disparage the name, business reputation or
business practices of the other. In addition, by signing this Agreement, Busch
agrees not to pursue any internal grievance with the Company.
13. Busch hereby certifies that he has read the terms of this Agreement, that
he has been advised by the Company to consult with an attorney and that he
understands its terms and effects. Busch acknowledges, further, that he is
executing this Agreement of his own volition, without any threat, duress or
coercion and with a full understanding of its terms and effects and with the
intention, as expressed in paragraph 6 hereof, of releasing all claims recited
herein in exchange for the consideration described herein, which he acknowledges
is adequate and satisfactory to him provided the Company meets all of its
obligations under this Agreement. The Company has made no representations to
Busch concerning the terms or effects of this Agreement other than those
contained in this Agreement.
14. Busch hereby acknowledges that he was presented with this Agreement
initially on August 15, 1996, and subsequently on October 18, 1996, and that he
was informed that he had the right to consider this Agreement and the release
contained herein for a period of 21 days prior to execution. Busch also
understands that he has the right to revoke this Agreement for a period of 7
days following execution, by giving written notice to the Company at 107 Selden
Street, Berlin, CT 06037, in which event the provisions of this Agreement shall
be null and void, and the parties shall have the rights, duties, obligations and
remedies afforded by applicable law.
15. Busch and the Company agree that if any part of this Agreement is
determined to be invalid, illegal or otherwise unenforceable, the remaining
provisions of this Agreement shall not be affected and will remain in full force
and effect.
16. This Agreement shall be interpreted and enforced under the laws of the
State of Connecticut and shall supersede any other versions of this Agreement.
17. The obligations under this Agreement, including but not limited to the
obligation under paragraph 2b hereof, shall, in the first instance, be paid and
satisfied by the Company; provided, however, that the Company will cause each
entity in which Northeast Utilities (or its successors or assigns) now or
hereafter holds, directly or indirectly, more than a 50 percent voting interest
and that has at least fifty (50) employees on its direct payroll (an Employer )
to approve and adopt this Agreement and, by such approval and adoption, to be
bound by the terms hereof as though a signatory hereto. If the Company shall be
dissolved or for any other reason shall fail to pay and satisfy the obligations,
each individual Employer shall thereafter shall be jointly and severally liable
to pay and satisfy the obligations to Busch.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement this 24th
day of October, 1996.
WITNESS NORTHEAST UTILITIES SERVICE COMPANY
By: /s/ Jeanne E. Taylor By: /s/Cheryl W. Grise
---------------------- --------------------------
WITNESS ROBERT E. BUSCH
By: /s/ Michelle DeSilva By: /s/Robert E. Busch
---------------------- ---------------------------
Exhibit 15
November 12, 1996
To Northeast Utilities:
We are aware that Northeast Utilities has incorporated by reference in its
Registration Statement No. 33-34622, No. 33-40156, No. 33-44814, and No. 33-
63023 its Form 10-Q for the quarter ended September 30, 1996, which includes our
report dated November 12, 1996 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act
of 1933, that report is not considered a part of the registration statement
prepared or certified by our firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
Arthur Andersen LLP
