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) April 15, 1998
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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 5. Other Events
1. Electric Utility Restructuring - Connecticut
On April 15, 1998, the Connecticut legislature approved a comprehensive
electric utility restructuring bill. A key element of the bill is that it
introduces a clear path to competition in the state, while permitting,
subject to mitigation requirements discussed below, utilities to fully
recover their strandable costs. Strandable costs are expenditures incurred,
or commitments for future expenditures made, on behalf of customers with the
expectation such expenditures would continue to be recoverable in the future
through rates.
In particular, the bill provides, among other things, that:
(i) Retail choice will be phased in over six months beginning January
2000, with up to 35 percent of customers located in distressed cities
initially being eligible to choose their electric supplier, and 100 percent
of customers thereafter having choice by July 2000; rates will be capped at
December 31, 1996 levels from July 1, 1998 until December 31, 1999;
(ii) Customers who do not choose an alternate supplier could take
standard offer service from the existing utility until January 2004, which
service must be at a rate that is at least 10 percent less than rates in
effect on December 31, 1996;
(iii) Rates will be unbundled into several components, including charges
for transmission, distribution, generation, the recovery of strandable costs,
public policy costs and new conservation and renewable programs; Strandable
costs will be recovered through a competitive transition assessment (CTA).
(iv) Electric utilities will be required to auction their non-nuclear
generating assets by January 2000 and their nuclear generating assets by
January 2004 in order to recover strandable costs; affiliates of the electric
utilities will be allowed to bid at both auctions; if nuclear plants cannot
be sold above the minimum price set by the Connecticut Department of Public
Utility Control (DPUC), then they must be transferred to an affiliate at a
value determined by the DPUC; and nuclear strandable costs can be recovered
for the amount by which their book value exceeds the minimum price set by the
DPUC; and
(v) Securitization is allowed for generation-related regulatory assets
and the costs associated with renegotiated above-market purchased power
contracts, including FERC-regulated contracts approved for inclusion in rates
that were entered into before July 1, 2000. The above-market portion of
purchased power contracts that have not been renegotiated can be collected
through the CTA.
The Connecticut Light and Power Company (CL&P), a wholly owned
subsidiary of Northeast Utilities (NU), is subject to this legislation. As of
December 31, 1997, CL&P's net investment in non-nuclear generating assets was
approximately $200 million, and its net investment in nuclear generating
assets, excluding its investment in certain regional nuclear companies, was
approximately $2.3 billion. CL&P currently estimates that at least $600
million of CL&P's regulatory assets could be securitized and above-market
purchased power costs would be collected through the CTA. Based on current
market prices, CL&P has above-market purchase power obligations, the combined
net present value of which is in excess of one billion dollars.
Although CL&P is permitted under this legislation to fully recover its
strandable costs as discussed above, CL&P's earnings prospects in a
restructured environment will be affected in ways that cannot now be
estimated.
The bill must be signed by Governor Rowland before it becomes law.
For more information regarding this matter, see "Item 1.
Business-Electric Utility Restructuring and "-Rates-Connecticut Retail Rates"
in NU's 1997 Form 10-K.
2. Connecticut Rate Matters and Ratings Downgrades
On April 20, 1998, the DPUC issued a draft decision that would, if
adopted unchanged, remove Millstone 2 from CL&P's rate base effective May 1,
1998. In making this decision, the DPUC concluded that Millstone 2 is
unlikely to return to service in 1998. CL&P currently estimates that
Millstone 2 will restart approximately three to four months after the restart
of Millstone 3. CL&P hopes Millstone 3 will return to service following an
NRC commissioners vote in May 1998. The draft decision further concluded that
the DPUC would automatically remove Millstone 3 from CL&P's rate base
effective July 1, 1998 if the unit has not been operating for 100 continuous
hours at 95 percent capacity by that date. Based on its current restart
assumptions, CL&P believes that it is likely to meet this goal. If they are
removed from rates, the draft decision also provides for Millstone 3 and
Millstone 2 to be reinstated into rate base upon achieving that goal.
The DPUC said that removing Millstone 2 from rate base will result in an
annual reduction of CL&P's current revenue requirements of $37.7 million, or
about $3.1 million a month. This was computed by disallowing CL&P recovery
of Millstone 2's operation and maintenance costs, depreciation and a return
on capital, but allowing CL&P to recover in the future the replacement power
costs it has been expensing for Millstone 2 for the past two years. The net
reduction of revenue requirements associated with removing Millstone 3 from
rate base would be about $13.2 million a month.
The DPUC decided in its draft decision to make the revenue requirement
reduction "non-cash" by allowing CL&P to accrue the reductions associated
with the removal of Millstone 2 and Millstone 3, if applicable, from rate
base and apply them against the replacement power costs associated with the
early retirement of the Connecticut Yankee nuclear power plant (CY) that have
been deferred by order of the DPUC, pending a final decision by the Federal
Energy Regulatory Commission on the prudence of the early retirement and the
costs associated therewith. CL&P has been deferring these CY replacement
power costs since June 1997 and the projected deferral through June 1998 is
approximately $65 million.
The draft decision, if it becomes final, would create additional
pressures on CL&P's ability to meet certain financial covenants in its
existing credit agreements. If the final decision is not changed, it would
reduce CL&P's earnings and would therefore make both of CL&P's key revolving
credit line covenants more difficult to meet. NU and its wholly owned
subsidiary, Western Massachusetts Electric Company (WMECO), are also parties
to this credit agreement. Similar covenant requirements are included in an
operating lease, which CL&P entered into in June of 1996, related to the use
of four turbine generators having an installed cost of approximately $70
million. CL&P will closely review its 1998 projections in light of the draft
decision to determine whether there are additional measures that can be
implemented to assure that these covenants are met, including an evaluation
of the restart schedule for Millstone 2.
As a result of this draft decision, CL&P plans to begin contacting the
banks involved in the impacted agreements to review the status of the
companies' performance against the covenants. CL&P also will urge the DPUC
to modify its decision both in written exceptions that are due April 24, 1998
and in oral arguments that are scheduled for the afternoon of April 27, 1998.
A final decision is expected on April 29, 1998.
If CL&P breached these covenants, the bank creditors would have a number
of options, including causing the acceleration of the affected indebtedness,
reducing CL&P's access to further credit, seeking higher interest rates and
fees, asking for additional collateral and additional measures which CL&P
cannot predict.
On April 22, 1998, Moody's Investors Services (Moody's) downgraded the
senior secured debt of CL&P and WMECO to Ba3 from Ba2. Moody's also
downgraded CL&P and WMECO's preferred stock and NU's unsecured amortizing
notes. The ratings remain under review. Moody's indicated that the downgrade
was primarily due to the DPUC's decision discussed above. In particular,
Moody's stated that the decision "adds to pressure for restart at a time when
existing financial strains are already significant."
The downgrade of WMECO's senior secured debt brought those ratings to a
level at which the sponsor of WMECO's $40 million accounts receivable program
could elect to terminate the program. WMECO immediately notified the sponsor
of the downgrade and is waiting for a response. In the event that the program
is terminated by the sponsor, WMECO could elect to immediately pay off the
outstanding obligations or wind down the program pursuant to its terms. As
of April 22, 1998, WMECO had sold approximately $20 million of receivables
under the program.
CL&P's $200 million accounts receivables program could be terminated if
its senior secured debt is downgraded one more step.
For more information regarding these matters, see NU's Current Report on
Form 8-K dated March 9, 1998 and "Item 1. Business-Rates-Connecticut Retail
Rates" and "-Financing Program" in NU's 1997 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 April 22, 1998 By /s/John B. Keane
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John B. Keane
Vice President and Treasurer
