SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 25, 1997
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Commission File Number 1-5324
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NORTHEAST UTILITIES
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2147929
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
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(Address of principal executive offices) (Zip Code)
(413) 785-5871
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
Item 3. Legal Proceedings
On December 18, 1997, a U. S. District Court judge orally approved the
$25 million settlement of seven derivative lawsuits and one demand letter
filed by shareholders of Northeast Utilities (NU) related to alleged
mismanagement at Millstone. The settlement had been announced by the company
in mid-1997. Under the agreement, insurers for certain of NU's present and
former officers and trustees will pay NU $25 million less attorneys' fees,
and NU has agreed to certain corporate governance enhancements. The judge,
however, has still not made a ruling regarding the amount of attorneys' fees
to be deducted from the settlement. The plaintiffs' counsel have requested
fees of approximately $7.5 million. NU cannot estimate when a final order
will be issued in this matter.
For more information regarding this matter, see NU's current report on
Form 8-K dated July 22, 1997, quarterly report on Form 10-Q for the quarter
ending September 30, 1997 and "Item 3. Legal Proceedings" in NU's 1996 Form
10-K.
Item 5. Other Events
1. Connecticut Rate Matters
Connecticut law requires the Connecticut Department of Public Utility
Control (DPUC) to review a utility's rates every four years if there has not
been a rate proceeding during such period. The DPUC has been conducting such
a review of the rates of The Connecticut Light and Power Company (CL&P), a
wholly owned subsidiary of NU, including an analysis of the possibility of
removing one or more of the Millstone nuclear units from CL&P's rate base.
On December 15, 1997, the DPUC issued its draft decision in this proceeding.
If adopted as final without modifications, the decision would allow Millstone
3 and 2 to remain in CL&P's rate base, but would require Millstone 1 to be
removed from rate base early in 1998, pending its return to service. Work on
Millstone 1 was reduced in 1997 to permit resources to be concentrated on the
restart of Millstone 3 and Millstone 2. Management currently hopes to return
Millstone 1 to service late in 1998.
If the draft decision becomes final, the DPUC would reopen CL&P's 1992
rate case in the first quarter of 1998 to remove Millstone 1 from CL&P's
rates. This action could result in a rate reduction, or the DPUC could
require CL&P to use the funds to reduce its regulatory assets that would
otherwise be recovered in the future. The DPUC estimated the amount of this
adjustment to be approximately $26 million of revenues on an annual basis.
The draft decision also indicated that the DPUC would open an interim rate
proceeding in the first quarter of 1998 to address approximately $64 million
of alleged CL&P overearnings. Under the draft decision such overearnings also
could be used to write-off regulatory assets. Both this and the Millstone 1
proceeding could be completed by March 1, 1998.
Finally, if the draft decision becomes final, the DPUC would open a full
rate case after the interim case is completed. The draft decision concludes
that rates currently in effect may produce overearnings allegedly amounting
to $150 million in 1998. The actual amount will have to be determined in a
full rate case, which normally takes about six months to complete after
filing.
In addition to the matters addressed above, the draft decision also
indicates, among other things, that the DPUC will schedule hearings for April
1, 1998 and June 1, 1998 to determine the status of Millstone 3 and 2,
respectively, and whether it should take some action to remove these units
from rate base if they are not then operating.
The primary financial impact of the draft decision, if it ultimately
results in a rate reduction, would be on projected CL&P 1998 earnings rather
than cash flow. The ability of CL&P to continue borrowing under its current
revolving credit agreement requires it to satisfy certain earnings coverage
and capitalization (common equity to total capitalization) ratios. These
ratios become more stringent beginning in the first quarter of 1998. If the
draft decision becomes final, the resulting earnings reductions could make it
difficult for CL&P to meet the required ratios in 1998. CL&P is conducting an
intensive budget review in an effort to identify appropriate expenditure
levels that will permit it to meet the required covenants. That review is
not complete.
If the return to service of one or more of the Millstone units is
delayed substantially beyond the present restart estimates, if some borrowing
facilities become unavailable because of difficulties in meeting borrowing
conditions, if CL&P encounters additional significant costs or if any other
significant deviations from management's assumptions occur, CL&P could be
unable to meet its cash requirements. In any such circumstance, management
would take even more stringent actions to reduce costs and cash outflows and
attempt to obtain additional sources of funds. The availability of these
funds would be dependent upon general market conditions and CL&P's credit and
financial condition at the time.
CL&P filed written exceptions to the removal of Millstone 1 from rate
base with the DPUC on December 19, 1997, including information on the
financial impacts of such a decision. The DPUC will consider oral arguments
on December 23, 1997 and written comments from all parties for the purpose of
developing its final decision, which is expected on December 31, 1997.
For more information regarding this matter and NU system liquidity, see
NU's current report on Form 8-K dated October 13, 1997, quarterly report on
Form 10-Q for the quarter ending September 30, 1997 and "Item 1.
Business-Rates-Connecticut Retail Rates" in NU's 1996 Form 10-K.
2. Massachusetts Restructuring Legislation
On November 25, 1997 Massachusetts enacted a comprehensive electric
utility industry restructuring bill. The bill provides that each
Massachusetts electric company, including Western Massachusetts Electric
Company (WMECO), a wholly-owned subsidiary of NU, will decrease its rates by
10 percent and allow all its customers choice of retail electric supplier on
March 1, 1998. The statute requires a further 5 percent rate reduction,
adjusted for inflation, by September 1, 1999.
In addition, the legislation provides, among other things, for: (1)
recovery of stranded costs through a "transition charge" to customers,
subject to review by the Department of Telecommunications and Energy (DTE),
formerly the Department of Public Utilities, (2) a possible limitation on
WMECO's return on equity should its stranded cost charge go above a certain
level, (3) securitization (i.e. refinancing of stranded costs through an
independent entity) of allowed stranded costs; and (4) divestiture of
fossil/hydro generation in order to recover transition charges in full and in
order to qualify for securitization. WMECO hopes that it will be able to
complete securitization in 1998.
The statute also provides that an electric company must transfer or
separate ownership of generation, transmission and distribution facilities
into independent affiliates or "functionally separate such facilities within
30 business days of federal approval" to do so. Transmission facilities
owned by an electric company are to be transferred to a transmission company
at net book value. The same is to be done for distribution facilities.
Additionally, marketing companies formed by an electric company are to be
separate from the electric company and separate from generation, transmission
or distribution affiliates.
WMECO is currently preparing its restructuring plan to comply with all
aspects of this legislation, and intends to file it with the DTE, as
required, by January 1, 1998. Under its present projections, which include
the return to service of the three Millstone nuclear units in line with
present assumptions, WMECO will be able to achieve the required 10 percent
rate reduction on March 1, 1998 without breaching any of the financial tests
in its credit arrangements.
WMECO's earnings prospects in 1998 and beyond will be affected by the
significant change in its business activities resulting from the legislation,
in ways that cannot now be definitely estimated.
For more information regarding restructuring initiatives in
Massachusetts and NU system liquidity, see quarterly report on Form 10-Q for
the quarter ending September 30, 1997 and "Item 1.
Business-Rates-Massachusetts Retail Rates" in NU's 1996 Form 10-K.
3. Ratings Downgrade
On December 17, 1997, Moody's Investors Service (Moody's) downgraded the
senior secured debt of CL&P, WMECO and NU, as well as the preferred stock of
CL&P and WMECO. All NU System securities remain under review for further
downgrade. This was the fourth time Moody's has downgraded CL&P and WMECO
securities since the Millstone units went on the NRC watch list early last
year. The Moody's senior debt ratings for CL&P and WMECO are now Ba2. The
Moody's senior debt rating for NU is B1. Although CL&P and WMECO do not have
any plans to issue debt in the near term, rating agency downgrades generally
increase the future cost of borrowing funds because lenders will want to be
compensated for increased risk.
Moody's indicated that the downgrade was precipitated primarily by "the
ongoing financial strain of trying to bring Millstone nuclear units back to
service in a timely and safe manner." Moody's also cited the draft decision
by the DPUC calling for the removal of Millstone 1 from CL&P's rate base
until the unit returns to service and the 10 percent rate cut for WMECO
expected to take place beginning in March 1998 as mandated by the recent
restructuring legislation in Massachusetts as additional factors affecting
the rating downgrade.
The downgrade of WMECO's first mortgage bonds brought those ratings to a
level at which the sponsor of WMECO's accounts receivable program (which
provides up to $40 million of financing potential) can take various actions,
in its discretion, which would have the practical effect of limiting WMECO's
ability to utilize the facility. To date, the sponsor has not notified WMECO
that it will elect to exercise those rights, and the program is functioning
in its normal mode.
For more information regarding this matter, see NU's quarterly reports
on Form 10-Q for the quarter ending March 31, 1997 and quarter ending June
30, 1997 and "Item 1. Business-Rates-Connecticut Retail Rates" in NU's 1996
Form 10-K.
4. Nuclear Regulatory Matters
On December 10, 1997, the Nuclear Regulatory Commission (NRC) issued
Millstone a notice of violation and proposed imposition of civil penalties in
the amount of $2.1 million for past violations of NRC requirements. These
violations have been the subject of previous enforcement conferences and date
back over several years, with the majority being more than a year old. NU's
wholly owned subsidiary, Northeast Nuclear Electric Company, as the NRC
licensed operator of Millstone, will not contest the violations or the fine.
For more information regarding this matter, see "Item 1.
Business-Electric Operations-Nuclear Generation" in NU's 1996 Form 10-K.
5. New Hampshire Rates
On December 1, 1997, the New Hampshire Public Utilities Commission
issued the Fuel and Purchased Power Adjustment Clause (FPPAC) rate to be
collected by Public Service Company of New Hampshire (PSNH), another wholly
owned subsidiary of NU, from December 1, 1997 through May 31, 1998. The
FPPAC rate will increase customer bills by approximately six percent;
however, a temporary base rate decrease, announced in October 1997 in PSNH's
ongoing base rate proceeding, reduced customer bills by approximately 6.9
percent effective as of December 1, 1997.
For more information regarding this matter, see NU's current report on
Form 8-K dated October 13, 1997, quarterly reports on Form 10-Q for the
quarters ending March 31, 1997, June 30, 1997, and September 30, 1997 and
"Item 1. Business-Rates-New Hampshire Retail Rates" in NU's 1996 Form 10-K.
SIGNATURE
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
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Registrant
Date December 23, 1997 By /s/John B. Keane
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John B. Keane
Vice President and Treasurer
