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 1-5324
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 April 30, 1997
Common Shares, $5.00 par value 136,664,481 shares
NORTHEAST UTILITIES 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
Report of Independent Public Accountants 14
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Part II. Other Information
Item 1. Legal Proceedings 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 25
PART I. FINANCIAL INFORMATION
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at cost:
Electric....................................... $ 9,722,852 $ 9,688,005
Other.......................................... 188,199 189,453
------------- -------------
9,911,051 9,877,458
Less: Accumulated provision for depreciation 4,061,570 3,979,864
------------- -------------
5,849,481 5,897,594
Unamortized PSNH acquisition costs............. 469,353 491,709
Construction work in progress.................. 155,140 146,438
Nuclear fuel, net.............................. 198,885 196,424
------------- -------------
Total net utility plant.................... 6,672,859 6,732,165
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market...... 418,208 403,544
Investments in regional nuclear generating
companies, at equity.......................... 87,399 85,340
Investments in transmission companies, at equity 20,342 21,186
Investments in Charter Oak Energy, Inc.
projects (Note 1C)............................. 87,286 57,188
Other, at cost.................................. 45,819 43,372
------------- -------------
659,054 610,630
------------- -------------
Current Assets:
Cash and cash equivalents...................... 261,409 194,197
Special deposits............................... 4,686 7,039
Receivables, net (Note 5)...................... 411,384 477,021
Accrued utility revenues (Note 5).............. 121,197 127,162
Fuel, materials, and supplies, at average cost. 219,036 211,414
Recoverable energy costs, net--current portion. 31,960 1,804
Prepayments and other.......................... 57,559 48,279
------------- -------------
1,107,231 1,066,916
------------- -------------
Deferred Charges:
Regulatory assets:
Income taxes,net............................. 986,477 1,012,343
Deferred costs--nuclear plants............... 190,094 185,078
Unrecovered contractual obligations (Note 2). 408,439 435,495
Recoverable energy costs, net................ 298,069 328,863
Deferred demand side management costs........ 76,947 90,129
Cogeneration costs-CL&P...................... 58,029 66,205
Other........................................ 99,335 103,726
Unamortized debt expense....................... 37,425 38,146
Other ......................................... 75,547 72,052
------------ ------------
2,230,362 2,332,037
------------ ------------
Total Assets..................................... $ 10,669,506 $ 10,741,748
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES 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 shareholders' equity:
Common shares, $5 par value--authorized
225,000,000 shares; 136,052,053 shares issued
and 128,799,632 shares outstanding in 1997
and 136,051,938 shares issued and
128,444,373 shares outstanding in 1996.......$ 680,260 $ 680,260
Capital surplus, paid in...................... 935,784 940,446
Deferred benefit plan--employee stock
ownership plan........................... (167,869) (176,091)
Retained earnings............................. 817,890 832,520
------------- -------------
Total common shareholders' equity...... 2,266,065 2,277,135
Preferred stock not subject to mandatory
redemption................................. 136,200 136,200
Preferred stock subject to mandatory redemption. 274,500 276,000
Long-term debt.................................. 3,574,119 3,613,681
----------- -------------
Total capitalization................... 6,250,884 6,303,016
----------- -------------
Minority Interest in Consolidated Subsidiaries.... 99,944 99,972
------------- -------------
Obligations Under Capital Leases.................. 189,128 186,860
------------- -------------
Current Liabilities:
Notes payable to banks.......................... 226,250 38,750
Long-term debt and preferred stock--current
portion........................................ 341,838 319,503
Obligations under capital leases--current
portion........................................ 19,832 19,305
Accounts payable................................ 328,008 507,139
Accrued taxes................................... 34,430 7,050
Accrued interest................................ 71,187 51,386
Accrued pension benefits........................ 96,063 99,699
Nuclear compliance.............................. 34,930 63,200
Other........................................... 76,392 98,570
------------- ------------
1,228,930 1,204,602
------------- ------------
Deferred Credits:
Accumulated deferred income taxes............... 2,024,502 2,044,123
Accumulated deferred investment tax credits..... 166,776 168,444
Deferred contractual obligations................ 414,685 440,495
Other........................................... 294,657 294,236
------------- ------------
2,900,620 2,947,298
------------- ------------
Commitments and Contingencies (Note 7)
Total Capitalization and Liabilities...$ 10,669,506 $ 10,741,748
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
------------- -------------
(Thousands of Dollars,
except share information)
<S> <C> <C>
Operating Revenues................................ $ 975,368 $ 1,028,202
------------- -------------
Operating Expenses:
Operation--
Fuel, purchased and net interchange power.... 340,483 311,739
Other........................................ 234,166 278,375
Maintenance..................................... 99,197 68,463
Depreciation.................................... 89,179 90,944
Amortization of regulatory assets, net.......... 31,397 14,341
Federal and state income taxes.................. 26,848 59,756
Taxes other than income taxes................... 67,969 71,323
------------- -------------
Total operating expenses.................. 889,239 894,941
------------- -------------
Operating Income.................................. 86,129 133,261
------------- -------------
Other Income:
Deferred nuclear plants return--other funds..... 1,774 3,026
Equity in earnings of regional nuclear generating
and transmission companies................... 3,441 3,657
Other, net...................................... 4,618 4,252
Minority interest in income of subsidiary....... (2,325) (2,325)
Income taxes.................................... (469) 514
------------- -------------
Other income, net......................... 7,039 9,124
------------- -------------
Income before interest charges............ 93,168 142,385
------------- -------------
Interest Charges:
Interest on long-term debt...................... 70,206 72,424
Other interest.................................. 866 1,142
Deferred nuclear plants return--borrowed funds.. (3,312) (5,053)
------------- -------------
Interest charges, net..................... 67,760 68,513
------------- -------------
Income after interest charges.............. 25,408 73,872
Preferred Dividends of Subsidiaries........ 7,903 8,370
------------- -------------
Net Income........................................ $ 17,505 $ 65,502
============= =============
Earnings Per Common Share......................... $ 0.14 $ 0.51
============= =============
Common Shares Outstanding (average)............... 128,627,693 127,602,379
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
NORTHEAST UTILITIES 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:
Income before preferred dividends of subsidiaries.....$ 25,408 $ 73,872
Adjustments to reconcile to net cash
from operating activities:
Depreciation........................................ 89,179 90,944
Deferred income taxes and investment tax credits, net 27,884 (8,230)
Deferred nuclear plants return, net of amortization. (5,086) (4,441)
Recoverable energy costs, net of amortization....... 638 53,184
Amortization of PSNH acquisition costs............... 14,141 14,301
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 (9,128) 8,254
Nuclear compliance, net.............................. (28,270) 37,778
Other sources of cash................................ 31,294 77,671
Other uses of cash................................... (9,597) (14,403)
Changes in working capital:
Receivables and accrued utility revenues............. 71,602 5,369
Fuel, materials, and supplies........................ (7,622) (1,069)
Accounts payable..................................... (179,131) (69,669)
Accrued taxes........................................ 17,437 37,767
Other working capital (excludes cash)................ (12,939) (8,562)
---------- -----------
Net cash flows from operating activities................. 47,168 300,846
---------- -----------
Financing Activities:
Issuance of common shares.............................. 3 10,619
Net increase (decrease) in short-term debt............. 187,500 (59,000)
Reacquisitions and retirements of long-term debt....... (21,491) (6,758)
Reacquisitions and retirements of preferred stock...... - (1,500)
Cash dividends on preferred stock...................... (7,903) (8,370)
Cash dividends on common shares........................ (32,135) (56,082)
---------- -----------
Net cash flows from (used for) financing activities...... 125,974 (121,091)
---------- -----------
Investment Activities:
Investment in plant:
Electric and other utility plant..................... (53,514) (57,910)
Nuclear fuel......................................... (4,987) (437)
---------- -----------
Net cash flows used for investments in plant........... (58,501) (58,347)
Investments in nuclear decommissioning trusts.......... (13,669) (14,911)
Capital contributions to Charter Oak Energy projects... (28,060) (2,000)
Other investment activities, net....................... (5,700) (3,501)
---------- -----------
Net cash flows used for investments...................... (105,930) (78,759)
---------- -----------
Net Increase In Cash For The Period...................... 67,212 100,996
Cash and cash equivalents - beginning of period.......... 194,197 29,038
---------- -----------
Cash and cash equivalents - end of period................$ 261,409 $ 130,034
========== ===========
</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, 1996 (1996 Form 10-K) and
the company's Form 8-Ks dated March 19, 1997 and 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.
NU is the parent company of the Northeast Utilities system (the
system). The system furnishes franchised retail electric service in
Connecticut, New Hampshire, and western Massachusetts through four
wholly-owned subsidiaries: The Connecticut Light and Power Company
(CL&P), Public Service Company of New Hampshire (PSNH), 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 two new
accounting standards in February 1997: Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" and SFAS
129, "Disclosure of Information about Capital Structure." SFAS 128
and SFAS 129 will be effective for 1997 year-end reporting. Manage-
ment believes that the implementation of SFAS 128 and SFAS 129 will
not have a material impact on NU'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
NU's 1996 Form 10-K.
C. Charter Oak Energy, Inc. (COE)
NU's wholly-owned subsidiary, COE, develops and invests in
nonutility generation, exempt wholesale generators, and foreign
utility companies as permitted by current law. On March 25, 1997,
the NU Board of Trustees directed management to offer COE for sale.
COE's revenues and earnings historically have not been material to
NU.
Among other investments, COE has a majority ownership in a natural
gas-fired power plant located in Argentina (Ave Fenix Project). In
January 1997, COE made an additional investment of approximately $27
million in the Ave Fenix Project as part of the financial closing of
the project.
For further information regarding COE, see NU's 8-K dated March 19,
1997 and NU's 1996 Form 10-K.
D. Regulatory Accounting and Assets
The accounting policies of the operating companies 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, the companies are not yet subject
to transition plans. Management continues to believe that its use of
SFAS 71 accounting is appropriate.
For additional information regarding regulatory accounting and assets,
see Note 8, "New Hampshire Restructuring" and Note 9, "New Hampshire
Rates" in this Form 10-Q and NU's 1996 Form 10-K.
2. CONNECTICUT YANKEE ATOMIC POWER COMPANY (CY)
CY, in which the NU system companies have a 49 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, WMECO and PSNH.
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, the NU system's share of the CY
unrecovered contractual obligation, which has also been recorded as a
regulatory asset, was $352.7 million.
For further information regarding CY, see NU'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 NU's Form 8-K dated April
11, 1997 and NU'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 NU'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.
Northeast Nuclear Energy Company (NNECO): NNECO is a subsidiary of NU
which manages the three Millstone units. At March 31, 1997, NNECO had
$24.1 million of notes outstanding that are due in 2019. As a result of
the downgrading of CL&P's and WMECO's first mortgage bonds NNECO is
required, under the terms of the notes, to make a series of four equal
annual prepayments to the noteholder that effectively result in the notes
being fully repaid by May 2000. Therefore, approximately $6 million of
the notes has been reclassified as a current obligation. NNECO is
evaluating alternative financing.
5. SALE OF CUSTOMER RECEIVABLES
CL&P and WMECO have entered into agreements to sell up to $200 million and
$40 million, respectively, of eligible customer billed and unbilled
accounts receivable. As of March 31, 1997, CL&P and WMECO have sold
approximately $200 million and $15 million, respectively, of their accounts
receivable under their respective sales agreements.
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 and WMECO are required to record their respective sales of
customer accounts receivable as secured short-term borrowings. CL&P and
WMECO are currently in the process of restructuring their accounts
receivable sales agreements to permit the companies to treat these
transactions as sales as permitted under SFAS 125.
For additional information regarding CL&P's and WMECO's sales of customer
receivables, see NU's 1996 Form 10-K.
6. INTEREST RATE AND 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 returned to CL&P when the mark-
to-market position becomes positive, when CL&P meets specified credit
ratings, or when an agreement ends.
Interest Rate Management: As of March 31, 1997, NAEC had outstanding
interest rate management agreements with a total notional value of
approximately $200 million with a positive mark-to-market position of
approximately $4.6 million.
Credit Risk: These fuel price and interest rate management agreements
have been made with various financial institutions, each of which is rated
"BBB+" or better by Standard & Poor's ratings group. CL&P and NAEC are
exposed to credit risk on fuel price and interest rate management
instruments if the counterparties fail to perform their obligations.
However, management anticipates that the counterparties will be able to
satisfy their obligations under the agreements fully.
For further information on fuel price and interest rate management
instruments, see the MD&A in this Form 10-Q and NU's 1996 Form 10-K.
7. COMMITMENTS AND CONTINGENCIES
A. Nuclear Performance
Millstone: 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.
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.
NU expensed approximately $87 million of non-fuel nuclear operation
and maintenance costs in the first quarter of 1997. An additional
$28.3 million was expended in the first quarter of 1997 and charged
against the reserve established in 1996. The balance of the reserve
at March 31, 1997 was $38 million.
Replacement power costs attributable to the Millstone outages averaged
approximately $35 million per month during the first quarter of 1997
and are projected to average approximately $30 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. NU's monthly
replacement power costs attributable to MY being out of service are
projected to average approximately $2 million.
For further information regarding nuclear performance, see the MD&A in
this Form 10-Q and NU'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 $1 million increase to the environmental
reserve.
At March 31, 1997, the NU system's net liability for its estimated
remediation costs, excluding recoveries from insurance companies and
other third parties, was approximately $14 million, which management
has determined to be the most probable amount within a range of $14
million to $30 million.
For additional information regarding environmental matters, see NU'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. The NU system is subject to retroactive
assessments if losses exceed the accumulated funds available to the
insurer. Based on the most recent renewal, the maximum potential
assessment against the NU system with respect to losses arising during
the current policy year is approximately $14.3 million under the
primary property insurance program.
For additional information regarding nuclear insurance contingencies,
see NU'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 $280 million to $233 million.
For additional information regarding NU's construction program, see
NU's 1996 Form 10-K.
E. Long-Term Contractual Arrangements
For information regarding long-term contractual arrangements, see
NU's 1996 Form 10-K.
8. NEW HAMPSHIRE RESTRUCTURING
On March 19, 1997, the New Hampshire Public Utilities Commission (NHPUC)
issued a stay of its February 28, 1997 restructuring orders (Restructuring
Orders) pending conclusion of rehearings on portions of the Restructuring
Orders. On April 28, 1997, the United States District Court for Rhode
Island (the Court), sitting for the District Court for New Hampshire,
determined that it would not abstain from deciding PSNH's and affiliates'
challenge to the NHPUC decision. The Court is scheduled to begin hearings
on the merits of the case in June.
For further information regarding New Hampshire restructuring, see NU's
Form 8-K dated March 19, 1997 and NU's 1996 Form 10-K.
9. NEW HAMPSHIRE RATES
On May 2, 1997, PSNH filed a rate case with the NHPUC requesting base rates
to remain at their current level after PSNH's seven-year fixed-rate period
ends on May 31, 1997.
In a separate filing, PSNH requested an increase in the Fuel and Purchased
Power Adjustment Clause (FPPAC), based on the fact that as of June 1, 1997,
PSNH will no longer be able to defer for future collection any of the
payments it makes to independent power producers. If approved, the
proposed increase in the FPPAC charge would result in a six percent
increase in customers' bills as of June 1, 1997.
For further information on New Hampshire Rates, see the MD&A in this Form
10-Q and NU's 1996 Form 10-K.
10. 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 NU's 1996 Form 10-K.
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 March 31, 1997, and the
related consolidated statements of income and cash flows for the three-month
period ended March 31, 1997 and 1996. 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
May 9, 1997
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 1996 Form 10-K, and the Form 8-Ks dated March 19, 1997 and April
11, 1997.
FINANCIAL CONDITION
Overview
The outages at the three Millstone units (Millstone) continue to have a
significant negative impact on NU's earnings. Earnings for the first quarter of
1997 were $0.14 cents per common share compared to $0.51 cents per common share
for the first quarter of 1996. The lower earnings were 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 3.7
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, NU expects to operate on a
roughly break-even basis. A loss for the second quarter is likely given the
seasonality of NU's sales and the continued high level of replacement power
and nuclear operation and maintenance expenditures. Monthly replacement-
power costs attributable to the Millstone outages averaged approximately $35
million during the first quarter, and are projected to average approximately $30
million for the remainder of 1997. The higher replacement-power costs in the
first quarter were due primarily to higher fuel prices.
The NU Board of Trustees (the Board) evaluates the dividend on NU's common
shares quarterly. At its March 25, 1997 meeting, the Board adopted a resolution
suspending the quarterly dividend on NU's common shares indefinitely, beginning
with the dividend that would have otherwise been payable for the quarter ending
June 30, 1997. Suspension of the dividend will enable NU to conserve
approximately $130 million on an annual basis. For further information on the
dividend suspension, see NU's Form 8-K dated March 19, 1997.
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.
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 NU's 1996 Form
10-K.
Capacity
During 1996 and continuing into 1997, the NU system companies have taken
measures to improve their capacity position. NU anticipates spending
approximately $70 million for additional capacity-related costs in 1997, of
which $46 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 NU system's estimated share of
costs to reactivate generating units in New England. In the first quarter of
1997, NU spent approximately $18 million to ensure adequate generating capacity,
of which $5 million was expensed.
NU has a 20 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. NU's monthly
replacement-power costs while MY is out of service are projected to average
approximately $2 million.
For further information on capacity-related issues and MY, see NU's 1996 Form
10-K.
Liquidity and Capital Resources
Cash provided from operations decreased approximately $254 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 $247 million,
primarily due to the increase in short-term borrowings through the use of $215
million of two accounts receivable facilities established in 1996. Net cash
from financing activities was also impacted by lower cash dividends on NU
common shares, partially offset by higher long-term debt retirements and lower
NU common share issuances. Cash used for investments increased approximately $27
million, primarily due to higher investments by NU's wholly owned subsidiary,
Charter Oak Energy (COE). For further information on COE, see the Notes to
Consolidated Financial Statements, Note 1C, in this Form 10-Q.
On April 1, 1997, $193 million of The Connecticut Light and Power Company's
(CL&P) 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.
Western Massachusetts Electric Company (WMECO) and CL&P expect to issue $60
million, in May 1997, and $200 million, in June 1997, of first mortgage bonds,
respectively. The proceeds will be used to repay a portion of outstanding
short-term debt. The short-term debt has been incurred for general working
capital purposes, including costs associated with the current outages at
Millstone, bond maturities and preferred stock redemptions.
On April 11, 1997, NU, CL&P and WMECO entered into an interim financing
arrangement which waives certain financial covenants under an earlier revolving
credit agreement with a group of banks and requires the companies to effect
certain amendments to the agreement. For further information on the interim
arrangement, see NU's 1996 Form 10-K and NU'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 NU'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.
As a result of the downgrade, $24 million of Northeast Nuclear Energy Company
(NNECO) notes outstanding as of March 31, 1997, that were due in 2019, have been
accelerated, causing the notes to become due in four equal annual installments
from May 1997 through May 2000. NNECO is considering financing alternatives. For
further information on NNECO's note, see the Notes to Consolidated Financial
Statements, Note 4, in this Form 10-Q.
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 NU'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 NU's construction programs, see the Notes to Consolidated
Financial Statements, Note 7D, in this Form 10-Q.
Restructuring
New Hampshire
On March 19, 1997, the New Hampshire Public Utilities Commission (NHPUC) issued
a stay of its February 28, 1997 restructuring orders (Restructuring Orders)
pending conclusion of rehearings on portions of the Restructuring Orders. On
April 28, 1997, the United States District Court for Rhode Island (the Court),
sitting for the District Court of New Hampshire, determined that it would not
abstain from deciding PSNH's and affiliates' challenge to the NHPUC decision.
The Court is scheduled to begin hearings on the merits of the case in June.
On May 2, 1997, PSNH filed a retail rate case with the NHPUC. PSNH is not
requesting an increase in base rates but has asked the NHPUC to maintain its
current base rate level. The fixed rate period under the Rate Agreement ends on
May 31, 1997.
In a separate filing, PSNH requested a 6 percent increase in its Fuel and
Purchased Power Adjustment Clause (FPPAC) billings, effective June 1, 1997. This
increase is primarily the result of recognizing currently costs associated with
independent power producer payments, which had been previously deferred for
collection. The FPPAC will continue to operate until the year 2000.
For further information on New Hampshire restructuring issues and rate matters,
see NU's 1996 Form 10-K and Form 8-K dated March 19, 1997.
Potential Accounting Impacts
NU 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
the NU system companies' respective jurisdictions, NU's companies are 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 NU'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.
NAEC uses interest rate management instruments to reduce interest rate risk
associated with its $200 million variable rate bank notes. NAEC's interest rate
management instruments effectively fix its variable rate bank note at 7.82
percent.
Neither the CL&P nor the NAEC instruments are used for trading purposes. The
differential paid or received as fuel prices or interest rates change is
recognized in income when realized.
As of March 31, 1997, CL&P and NAEC had outstanding fuel price and interest rate
management instruments with a total notional value of approximately $215 million
and $200 million, respectively. The settlement amounts associated with the
instruments increased fuel expense by approximately $0.9 million for CL&P and
increased interest expense by approximately $0.2 million for NAEC 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
First
Quarter Percent
Operating revenues $(53) (5)%
Fuel, purchased and net
interchange power 29 9
Other operation (44) (16)
Maintenance 31 45
Amortization of
regulatory assets, net 17 (a)
Federal and state income taxes (32) (54)
Net Income (48) (73)
(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 higher regulatory
decisions. Fuel recoveries decreased $54 million primarily due to lower
recoveries under CL&P's and PSNH's fuel clauses. Retail sales decreased 3.7
percent ($26 million) primarily due to milder weather in 1997. Regulatory
decisions increased revenues by $17 million, primarily due to the mid-1996
retail rate increase for PSNH and lower reserves for CL&P over-recoveries of
demand-side-management costs.
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 PSNH's and
CL&P's fuel clauses.
Other operation and maintenance expense decreased in 1997. The major factors
were the recognition of nuclear reserves in the first quarter of 1996 ($38
million) and spending against these reserves in the first quarter of 1997 ($28
million); lower recognition of nuclear refueling outage costs primarily as a
result of the 1996 CL&P Rate Settlement ($10 million), partially offset by
higher costs associated with the Millstone outages ($50 million); higher 1997
costs associated with meeting capacity requirements ($5 million); higher
capacity charges from purchased power due to the Millstone outages ($5 million);
and higher capacity charges from MY ($5 million).
Amortization of regulatory assets, net increased in 1997, primarily due to the
completion of CL&P cogeneration deferrals in 1996 and increased amortization in
1997 ($14 million); and higher amortizations as a result of the 1996 CL&P Rate
Settlement ($8 million). These were partially offset by the completion of the
amortization of phase-in costs for Seabrook and Millstone 3 in 1996 ($6
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. Three additional class actions against NU and certain present and
former officers of NU are now pending in the United States District Court for
the District of Connecticut. The complaints in these lawsuits, as with the
other four class actions, allege that the defendants violated Section 10(b) of
the Securities Exchange Act of 1934 and the common law by disseminating false
and misleading statements about nuclear operations to NU's shareholders, the
SEC and the public. The plaintiffs sue individually and on behalf of a class of
shareholders who purchased or otherwise acquired NU common shares from March 18,
1994 through April 5, 1996. NU believes that all of these class actions are
without merit and intends to vigorously defend in all such actions.
For additional information on shareholder litigation against NU, see "Item 3 -
Legal Proceedings" in NU's 1996 Form 10-K.
2. 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 citizens 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 NU's 1996 Form 10-K.
3. The Connecticut Department of Environmental Protection has referred to the
Connecticut Attorney General a series of alleged environmental violations at
Millstone for a possible civil penalty action. Management does not believe that
this action will have a material adverse impact on the NU system.
For additional information regarding a criminal investigation related to
this matter, see "Item 3 - Legal Proceedings" in NU's 1996 Form 10-K.
4. 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 NU's 1996 Form 10-K.
5. In April 1996, NU received a letter from a representative of a shareholder
demanding that it commence legal action against NU's CEO, Bernard M. Fox, and
certain unnamed officers and directors with regard to operations at Millstone.
NU was subsequently served with seven civil complaints, brought as derivative
actions, naming as defendants certain current and former trustees and officers
seeking to recover unspecified damages for alleged losses purportedly arising
out of NU's operations at Millstone. The parties, including the representative
of the shareholder demand letter, are now involved in a mediation, which appears
to be making some progress towards a resolution of this matter.
For more information regarding these proceedings, see "Item 3 - Legal
Proceedings" in NU's 1996 Form 10-K.
ITEM 5. OTHER INFORMATION
1. In March 1997, an additional Section 2.206 petition was filed with the NRC.
The petition seeks enforcement action and the placement of certain restrictions
on the decommissioning activities at the CY nuclear power plant. Specifically,
the petitioners requested that the NRC issue a civil monetary penalty to assure
compliance with radiation protection requirements, and that CY's license be
modified to prohibit any decommissioning activities for a six month period
following any radiological contamination event. In addition, petitioners
requested that CY be placed on the NRC's "watch list." Management is currently
evaluating whether and how to respond to this petition.
For additional information relating to other Section 2.206 petitions, see
"Item 3 - Legal Proceedings" in NU's 1996 Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
15 Letter regarding unaudited financial information
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. NU filed a Form 8-K dated March 19, 1997 disclosing that:
* On March 25, 1997, the NU Board of Trustees adopted a resolution
suspending the quarterly dividends on NU's common shares.
* On March 25, 1997, the NU Board of Trustees also approved the
offering for sale of Charter Oak Energy, Inc.
* On March 19, 1997, the NHPUC issued a stay of its February 28,
1997 restructuring orders pending conclusions of a rehearing.
2. NU filed a Form 8-K dated April 11, 1997 disclosing that NU, CL&P and
WMECO had entered into an interim arrangement that waives certain
financial covenants and requires the restructuring of the revolving
credit agreement that the three companies had entered into in November
1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTHEAST UTILITIES
Registrant
Date May 9, 1997 By /s/ John H. Forsgren
John H. Forsgren
Executive Vice President
and Chief Financial Officer
Date May 9, 1997 By /s/ John J. Roman
John J. Roman
Vice President and Controller
Exhibit 15
May 9, 1997
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 March 31, 1997,
which includes our report dated May 9,1997 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
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