-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KGshnq+KSfgA7H+FttDS9zp09FKr+e3O/ysWbvJYczcFZ5dj9QAfPpehgQ3hKHou 9LhxE23ZOjCi3f3/3Gel2A== 0000071337-95-000022.txt : 19951221 0000071337-95-000022.hdr.sgml : 19951221 ACCESSION NUMBER: 0000071337-95-000022 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951220 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND POWER CO CENTRAL INDEX KEY: 0000071337 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663070 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06564 FILM NUMBER: 95602986 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 6173669011 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q AMENDMENT NO. 1 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6564 (LOGO) NEW ENGLAND POWER COMPANY (Exact name of registrant as specified in charter) MASSACHUSETTS 04-1663070 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 25 Research Drive, Westborough, Massachusetts 01582 (Address of principal executive offices) Registrant's telephone number, including area code (508-389-2000) 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 ( ) Common stock, par value $20 per share, authorized and outstanding: 6,449,896 shares at September 30, 1995. The undersigned registrant hereby amends its Quarterly Report on Form 10-Q for the quarterly period ending September 30, 1995 by correcting two sentences which were inadvertently mistyped in the "Competitive Conditions" section of its Management's Discussion and Analysis of Financial Condition and Results of Operations. The sentences should read as follows: "In June 1995, the NHPUC issued an order in the Freedom Energy docket in which it found that franchise territories in New Hampshire are not exclusive as a matter of law. The order also stated that federal law did not preclude the NHPUC from authorizing retail wheeling." Part I - Item 2 is restated in its entirety below. Item 2. Management's Discussion and Analysis of Financial --------------------------------------------------------- Condition and Results of Operations ----------------------------------- This section contains management's assessment of New England Power Company's financial condition and the principal factors having an impact on the results of operations. This discussion should be read in conjunction with the Company's financial statements and footnotes and the 1994 Annual Report on Form 10-K. Earnings - -------- Net income increased for the third quarter by approximately $12 million compared with the corresponding period in 1994. This increase reflects sales growth, reduced overhaul activity of wholly-owned generating units, and lower depreciation and amortization expense, partially offset by increased interest costs and increased reimbursements to affiliates for service extension discounts (SEDs) to customers and affiliate generation and transmission (G&T) costs incurred for the benefit of the Company. The decrease in depreciation and amortization is due to reduced amortization of the Seabrook 1 nuclear unit (Seabrook 1) in accordance with the Company's 1995 rate agreement, and the completion, in the second quarter of 1995, of the amortization of costs of certain coal conversion facilities. These decreases were partially offset by the effects of increased depreciation rates approved in the Company's 1995 rate agreement and depreciation of new plant expenditures. Earnings for the first nine months of 1995 decreased approximately $5 million due to increased purchased power costs resulting from scheduled plant overhauls and refueling shutdowns at partially-owned nuclear power suppliers and costs to repair the steam generator tubes at the nuclear power plant owned by Maine Yankee Atomic Power Company (Maine Yankee) in which the Company has a 20 percent interest. Also contributing to lower nine month earnings were increased interest expenses, increased operation and maintenance costs, and increased reimbursements to affiliates for SEDs and their G&T costs. Rate Activity - ------------- In February 1995, the Federal Energy Regulatory Commission (FERC) approved a rate agreement filed by the Company. Under the agreement, which became effective January 1995, the Company's base rates are frozen until 1997. Before this rate agreement, the Company's rate structure contained two surcharges that were recovering the costs of a coal conversion project and a portion of the Company's investment in Seabrook 1. These two surcharges fully recovered their related costs by mid-1995, however, under the rate agreement they have been continued as part of base rates. The agreement also allows for full recovery of costs associated with the Manchester Street Station repowering project, which is scheduled for completion during the fourth quarter of 1995. In addition, the agreement allows the Company to recover approximately $50 million of deferred costs associated with terminated purchased power contracts and postretirement benefits other than pensions (PBOPs) over seven years. Under the agreement, the Company is fully recovering currently incurred PBOP costs. The agreement further provides for the recovery over three years of $27 million of costs related to the dismantling of a retired generating station in Rhode Island and the replacement of a turbine rotor at one of the Company's generating units. The agreement also increases the Company's recovery of depreciation expense by approximately $8 million annually to recognize costs that will be incurred upon the eventual dismantling of its Brayton Point and Salem Harbor generating plants. Under the agreement, approximately $15 million of the $38 million in Seabrook 1 costs due to be recovered in 1995 pursuant to a 1988 settlement agreement are being deferred and will be recovered in 1996. Finally, the agreement provided that the Company would reimburse its wholesale customers for discounts provided by those wholesale customers to their retail customers under SED programs. Under these programs, retail customers are entitled to such discounts only if they have signed an agreement not to purchase power from another supplier or generate any additional power themselves for a three to five year period. Reimbursements in 1995 are expected to total $12 million. The FERC's approval of this rate agreement applies to all of NEP's customers except the Milford Power Limited Partnership (MPLP). MPLP, which owns a gas-fired power plant in Milford, Massachusetts, has protested this rate agreement based on issues related to the Manchester Street Station repowering project. Hearings on this protest concluded in October 1995 and an Administrative Law Judge initial decision is expected in early 1996 (for further discussion see Note C). Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Third Quarter Nine Months ------------- ------------ 1995 vs 1994 1995 vs 1994 ------------- ------------ (In Millions) Sales increase $ 7 $ 9 Fuel recovery (2) 17 SED reimbursements (3) (9) Narragansett integrated facilities credit (2) (6) Other 2 5 --- --- $ 2 $16 === === The increase in sales reflects the effects of an increase in peak demands in the second and third quarters of 1995. The Company experienced a decrease in peak demands in the first quarter of the year. For a discussion of fuel recovery see the fuel costs discussion in the Operating Expenses section. See the Rate Activity section for a discussion of SED reimbursements. The entire output of The Narragansett Electric Company's (Narragansett) generating capacity is made available to the Company. Narragansett receives a credit on its purchased power bill from the Company for its fuel costs and other generation and transmission related costs. The increased credits in 1995 reflect costs associated with a new transmission line that went into service in September 1994. In addition, the Company is reimbursing Narragansett for an increased level of costs being incurred in 1995 associated with the dismantlement of a previously retired South Street generating facility. As part of the Company's 1995 rate agreement, these credits in 1995 are being recovered over a three year period. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Third Quarter Nine Months ------------- ------------ 1995 vs 1994 1995 vs 1994 ------------- ------------ (In Millions) Fuel costs $ (1) $ 17 Purchased energy excluding fuel 2 23 Operation and maintenance (4) 12 Depreciation and amortization (13) (24) Taxes 4 (11) ---- ---- $(12) $ 17 ==== ==== Fuel costs represent fuel for generation and the portion of purchased electric energy permitted to be recovered through the Company's fuel adjustment clause. The increase in fuel costs in the first nine months of 1995 reflects increased short-term purchases due to decreased nuclear generation, decreased hydro production due to low water levels, and overhauls of fossil fuel generating facilities. Purchased energy excluding fuel represents the remainder of purchased electric energy costs. The increase in purchased energy excluding fuel for the first nine months of 1995 is the result of increased costs associated with scheduled plant overhauls and refueling shutdowns at partially-owned nuclear power facilities and costs to repair the steam generator tubes at Maine Yankee in which the Company has a 20 percent interest. The Maine Yankee nuclear unit has been shut down since January 1995, but is expected to return to service by year end. The Company recorded the full estimated incremental cost of the repairs in the first six months of 1995 as a charge to purchased power expense. The increase also includes amortization of previously deferred purchased power contract termination costs. Under the existing terms of certain purchased power contracts with other utilities, the Company will be reducing its power purchases which will result in a $19 million reduction in 1996 purchased power expenses. The increase in operation and maintenance costs for the nine months is primarily due to the recognition of currently incurred and previously deferred PBOP costs in accordance with the Company's 1995 rate agreement, increased transmission system related costs and increased general and administrative costs, partially offset by a decrease in generating plant overhaul costs. In the third quarter, the impact of reduced generating plant overhaul activity more than offset the increases in costs in other areas. The decrease in depreciation and amortization is due to decreased amortization of Seabrook 1 and the completion, in the second quarter of 1995, of the amortization of certain coal conversion facilities, partially offset by the effects of increased depreciation rates approved in the Company's 1995 rate agreement and depreciation of new plant expenditures. The change in taxes for the third quarter and first nine months of 1995 is primarily due to the change in income for those periods. Allowance For Funds Used During Construction (AFDC) - -------------------------------------------------- AFDC increased for the third quarter and first nine months of 1995 due to increased construction work in progress, principally associated with the Manchester Street Station repowering project. In September 1995, the first of three generating units began commercial operation at the power plant. The remaining units are scheduled to commence commercial operation during the fourth quarter of this year. AFDC ends for these projects when the units go into commercial operation. Interest Expense - ---------------- The increase in interest expense is primarily due to increased long-term and short-term debt balances and higher interest rates. Competitive Conditions - ---------------------- The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including surplus generating capacity, increasing electric rates, improved technologies, increasing demand for customer choice, and new regulations and legislation intended to foster competition. See the Company's Annual Report on Form 10-K for the year ended December 31, 1994. The Company derives over 95 percent of its operating revenue from sales of electricity to three retail affiliates of the Company. Massachusetts, Rhode Island, and New Hampshire, the three states served by these retail affiliates, have been considering various proposals for allowing electric customers greater choice over their electricity supplier. Massachusetts Electric Company (Massachusetts Electric) and Narragansett proposed to the Massachusetts Department of Public Utilities (MDPU) and the Rhode Island Public Utilities Commission (RIPUC), respectively, a set of interdependent principles for industry restructuring which was agreed to by groups representing environmental protection advocates, governmental agencies, non-utility generators, investor-owned utilities, and large and small customer interests. These principles included, among others, provisions for increased customer choice while allowing utilities the opportunity to recover the cost of their past commitments (stranded costs). In August 1995, the MDPU adopted principles similar to those filed by Massachusetts Electric, including a reasonable opportunity for recovery of stranded costs over a period not to exceed 10 years. The MDPU directed Massachusetts Electric and two other utilities to file by February 16, 1996, a detailed plan consistent with the MDPU decision. Also in August 1995, the RIPUC decision adopted the principles proposed by Narragansett, except for one regarding temporary support for renewable fuel technologies. The RIPUC ordered Narragansett to file a report no later than February 1, 1996 on its progress in negotiating a specific plan consistent with the principles. In October 1995, the New England Electric System (NEES) Companies began discussions with interested parties regarding the plan to be filed pursuant to the MDPU and RIPUC orders. That plan, to be called "Choice: New England", will propose that all customers of electric utilities in the three states served by NEES retail subsidiaries have the ability to choose their power supplier beginning in 1998. Under the plan, the Company's generation assets would become competitive, while its transmission assets would remain regulated. Among other provisions, the plan would also propose a uniform access charge so that all regional utilities will have an opportunity to recover the cost of commitments made under the current regulated system. NEES believes that its "Choice: New England" proposal meets the principles for industry restructuring adopted by the MDPU and RIPUC for increased customer choice while providing utilities with an opportunity to recover costs which may be stranded by such customer choice. However, there can be no assurance that a final plan will include an access charge which would recover all stranded costs. Furthermore, market pricing of generation will increase the volatility of NEES revenues and, because of competitive pressures, may not result in full cost recovery. In July 1995, the Governor of Rhode Island vetoed two bills that would have allowed certain industrial customers to buy power from alternative suppliers, rather than through the local electric utility. Narragansett urged the Governor to exercise his veto, because Narragansett believed the proposed legislation would result in piecemeal deregulation that would not be fair to customers or shareholders and would circumvent the comprehensive proceedings mentioned above. Narragansett committed among other things, that if the measures were not enacted, Narragansett would submit by July 1, 1996, a specific and detailed proposal to the RIPUC addressing the issues associated with providing open access to Narragansett's distribution system for its large commercial and industrial customers. Among other issues, that filing would address the proper means for recovering past costs incurred to serve exiting customers through a compensatory access charge. If the charges were approved by the RIPUC, the appropriate access tariffs would then be filed with the FERC. The Rhode Island Legislature may still override the vetoes. In August 1995, the MDPU issued an order in a stranded cost case involving another utility and one of its customers. This customer, which previously purchased all of its requirements from the utility, installed cogenerating equipment and requested that the utility provide only backup service. In its order, the MDPU required the customer to pay the utility 75 percent of the net stranded costs attributable to serving the customer's load. Because, in part, utilities have always been exposed to the risk of customer cogeneration, the MDPU indicated that its order, which is under appeal, did not set precedent for the issue of stranded cost recovery in the context of utility industry restructuring. In New Hampshire, the New Hampshire Public Utilities Commission (NHPUC) has been considering the proposal of a new company, Freedom Energy Company (Freedom Energy), to sell electricity at retail rates to large customers of another utility. In June 1995, the NHPUC issued an order in the Freedom Energy docket in which it found that franchise territories in New Hampshire are not exclusive as a matter of law. The order also stated that federal law did not preclude the NHPUC from authorizing retail wheeling. However, the order makes clear that Freedom Energy must obtain additional regulatory approvals at the state and federal level before it could operate as a public utility in the franchise territory of another utility. In addition, in June 1995, the Governor of New Hampshire signed into law a bill which instructs the NHPUC to establish a retail competition pilot program open to all classes of customers. NHPUC guidelines issued in October 1995 provide that each New Hampshire utility must allow customers representing 3 percent of its peak load (four megawatts (MW) for Granite State Electric Company (Granite State)) to have access to alternative suppliers of generation for three years, starting May 1, 1996. Customers participating in the pilot would be responsible for paying 50 percent of the utility's stranded costs, with the balance borne by utility shareholders. In comments filed on the preliminary guidelines, Granite State requested that the guidelines be revised to adopt "Choice: New England" as an alternative approach to the proposed pilot. Granite State offered to file the plan with the NHPUC in February, consistent with the filings contemplated in Massachusetts and Rhode Island, so that the plan could be implemented on a pilot basis by May 1, 1996. Granite State's comments also challenged the legal basis for the proposed assignment of stranded costs, arguing that the guidelines will result in an unconstitutional taking without compensation, are preempted by federal law, and are inequitable. The June 1995 legislation also established a legislative committee on retail wheeling and restructuring. The committee is expected to issue an interim report on its findings in November 1995 and a final report by March 1, 1996. In March 1995, the FERC issued a notice of proposed rule-making in which it stated that recovery in rates of legitimate and verifiable stranded costs from departing customers is the appropriate method for recovery of costs stranded as the result of wholesale competition. Under the FERC policy proposal, costs stranded as a result of retail competition would be subject to state commission review if the state commission has the necessary statutory authority, and subject to FERC review if the state commission does not have such authority. A final decision is expected in 1996. Electric utility rates have historically been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Financial Accounting Standard No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The Company believes that its operations currently meet the criteria established in FAS 71. However, the effects of regulatory and/or legislative initiatives, or the NEES companies' own initiatives, such as "Choice: New England", could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At September 30, 1995, the Company had pre-tax regulatory assets (net of regulatory liabilities) of approximately $300 million. In addition, the Company's affiliate, New England Energy Incorporated has a regulatory asset of approximately $200 million which is recoverable in its entirety from the Company. This amount would also be included in any write-down of the Company's regulatory assets. If competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a substantial write-down of plant assets could be required pursuant to Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). This standard, effective for fiscal year 1996, clarifies when and how to recognize an impairment of long-lived assets. For further discussion of FAS 121 see Note D. Utility Plant Expenditures and Financings - ----------------------------------------- Cash expenditures for utility plant totaled $125 million for the first nine months of 1995, including $82 million related to the Company's 90 percent share of the Manchester Street Station repowering project in Providence, Rhode Island. In September 1995, the first of three generating units began commercial operation at the power plant. The remaining units are scheduled to commence commercial operation during the fourth quarter of this year. The approximately 500 MW repowering project is estimated to cost approximately $455 million, excluding transmission facilities. The funds necessary for utility plant expenditures during the period were provided by net cash from operating activities, after the payment of dividends, and from proceeds of short-term and long-term debt issues. In the first nine months of 1995, the Company issued $50 million of long-term debt at interest rates ranging from 6.69 percent to 7.94 percent. In addition, the Company refinanced $10 million of variable rate mortgage bonds. The Company does not plan to issue any additional long-term debt in 1995. At September 30, 1995, the Company had $167 million of short-term debt outstanding, including $137 million of commercial paper borrowings. At September 30, 1995, the Company had lines of credit and bond purchase facilities with banks totaling $510 million which are available to provide liquidity support for commercial paper borrowings and for $342 million of the Company's outstanding variable rate mortgage bonds in tax-exempt commercial paper mode and for other corporate purposes. There were no borrowings under these lines of credit at September 30, 1995. For the twelve-month period ending September 30, 1995, the ratio of earnings to fixed charges was 5.14. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Form 10-Q for the quarter ended September 30, 1995 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND POWER COMPANY s/ Michael E. Jesanis Michael E. Jesanis, Treasurer, Authorized Officer, and Principal Financial Officer Date: December 20, 1995 -----END PRIVACY-ENHANCED MESSAGE-----