-----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, KOIy6Q6JJd7eYX02EDqVH14ZPzvCPB2eakiod24EOlmAKp+eDVbJ6PgkS54Y0A+2 kiJDxI8tGPZqycZyMu2wnw== 0000071337-01-000002.txt : 20010214 0000071337-01-000002.hdr.sgml : 20010214 ACCESSION NUMBER: 0000071337-01-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 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: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-26651 FILM NUMBER: 1537280 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 5083892000 MAIL ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 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: 3,619,896 shares at December 31, 2000. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- NEW ENGLAND POWER COMPANY Statements of Income Periods Ended December 31 (Unaudited)
Quarter Nine Months -------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- (In Thousands) Operating revenue, principally from affiliates $156,396 $ 147,478 $487,976 $ 429,164 -------- --------- -------- --------- Operating expenses: Fuel for generation 2,680 3,674 10,562 9,745 Purchased electric energy: Contract termination and nuclear unit shutdown charges 47,191 44,979 158,711 140,904 Other 21,846 18,697 63,482 45,620 Other operation 16,236 18,001 48,742 51,726 Maintenance 9,192 5,799 19,878 22,770 Depreciation and amortization 22,033 20,510 65,280 62,713 Taxes, other than income taxes 6,225 3,573 17,922 14,648 Income taxes 8,953 8,318 35,882 24,533 -------- --------- -------- --------- Total operating expenses 134,356 123,551 420,459 372,659 -------- --------- -------- --------- Operating income 22,040 23,927 67,517 56,505 Other income and (expense): Allowance for equity funds used during construction - 382 (2) 1,370 Equity in income of nuclear power companies 3,074 456 5,891 2,424 Amortization of goodwill (4,455) - (13,238) - Other income (expense), net (664) (1,533) 1,560 1,653 -------- --------- -------- --------- Operating and other income 19,995 23,232 61,728 61,952 -------- --------- -------- --------- Interest: Interest on long-term debt 4,942 4,338 13,777 10,909 Other interest 331 311 3,078 763 Allowance for borrowed funds used during construction (58) (163) (590) (389) -------- --------- -------- --------- Total interest 5,215 4,486 16,265 11,283 -------- --------- -------- --------- Net income $ 14,780 $ 18,746 $ 45,463 $ 50,669 ======== ========= ======== ========= Statements of Retained Earnings (In Thousands) Retained earnings at beginning of period $ 32,530 $ 249,979 $ 1,415 $ 217,839 Net income 14,780 18,746 45,463 50,669 Dividends declared on cumulative preferred stock (22) (23) (69) (70) Dividends declared on common stock - (241,415) - (241,415) Gain on redemption of preferred stock 4 - 21 264 Acquisition adjustment - - 462 - -------- --------- -------- --------- Retained earnings at end of period $ 47,292 $ 27,287 $ 47,292 $ 27,287 ======== ========= ======== ========= The accompanying notes are an integral part of these financial statements. Per share data is not relevant because the Company's common stock is wholly owned by National Grid USA.
NEW ENGLAND POWER COMPANY Statements of Income Twelve Months Ended December 31 (Unaudited)
2000 1999 ---- ---- (In Thousands) Operating revenue, principally from affiliates $622,540 $ 596,341 -------- --------- Operating expenses: Fuel for generation 14,110 12,803 Purchased electric energy: Contract termination and nuclear unit shutdown charges 206,116 187,777 Other 78,164 56,731 Other operation 64,502 70,936 Maintenance 24,198 28,536 Depreciation and amortization 82,242 103,080 Taxes, other than income taxes 23,483 20,282 Income taxes 45,523 37,633 -------- --------- Total operating expenses 538,338 517,778 -------- --------- Operating income 84,202 78,563 Other income and (expense): Allowance for equity funds used during construction (395) 1,958 Equity in income of nuclear power companies 6,753 2,939 Amortization of goodwill (13,604) - Other income (expense), net 3,410 2,087 -------- --------- Operating and other income 80,366 85,547 -------- --------- Interest: Interest on long-term debt 17,526 14,052 Other interest 3,931 1,003 Allowance for borrowed funds used during construction (1,016) (522) -------- --------- Total interest 20,441 14,533 -------- --------- Net income $ 59,925 $ 71,014 ======== ========= Statements of Retained Earnings (In Thousands) Retained earnings at beginning of period $ 27,287 $ 204,603 Net income 59,925 71,014 Dividends declared on cumulative preferred stock (93) (94) Dividends declared on common stock (24,098) (241,415) Gain on redemption of preferred stock 21 264 Repurchase of common stock - (7,085) Purchase accounting adjustment (16,212) - Acquisition adjustment 462 - -------- --------- Retained earnings at end of period $ 47,292 $ 27,287 ======== ========= The accompanying notes are an integral part of these financial statements. Per share data is not relevant because the Company's common stock is wholly owned by National Grid USA.
NEW ENGLAND POWER COMPANY Balance Sheets (Unaudited)
December 31, March 31, ASSETS 2000 2000 - ------ ---- ---- (In Thousands) Utility plant, at original cost $1,582,082 $1,318,026 Less accumulated provisions for depreciation and amortization 967,723 854,309 ---------- ---------- 614,359 463,717 Construction work in progress 36,296 35,730 ---------- ---------- Net utility plant 650,655 499,447 ---------- ---------- Goodwill, net of amortization 337,403 333,771 Investments: Nuclear power companies, at equity 46,457 45,966 Decommissioning trust funds 48,898 36,279 Non-utility property and other investments 14,671 7,490 ---------- ---------- Total investments 110,026 89,735 ---------- ---------- Current assets: Cash, and temporary cash investments (including $65,486,000 and $37,820,000 with affiliates) 74,546 226,921 Accounts receivable: Affiliated companies 79,120 72,780 Others 58,912 48,139 Fuel, materials, and supplies, at average cost 10,448 10,345 Prepaid and other current assets 11,442 25,377 Regulatory asset purchased power obligations 104,583 74,988 ---------- ---------- Total current assets 339,051 458,550 ---------- ---------- Regulatory assets 1,576,578 1,210,800 Deferred charges and other assets 56,791 37,271 ---------- ---------- $3,070,504 $2,629,574 ========== ========== CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization: Common stock, par value $20 per share, Authorized - 6,449,896 shares Outstanding - 3,619,896 shares $ 72,398 $ 72,398 Other paid-in capital 727,004 582,983 Retained earnings 47,292 1,415 Unrealized gain (loss) on securities, net (21) - ---------- ---------- Total common equity 846,673 656,796 Cumulative preferred stock, par value $100 per share 1,436 1,567 Long-term debt 410,277 371,773 ---------- ---------- Total capitalization 1,258,386 1,030,136 ---------- ---------- Current liabilities: Short-term debt (including $100,000,000 and $-0- to parent) 100,000 38,500 Accounts payable (including $23,723,000 and $26,993,000 to affiliates) 57,333 51,584 Accrued liabilities: Taxes 34,137 2,394 Interest 3,355 1,900 Purchased power contract obligations 104,583 74,988 Other accrued expenses 6,730 10,879 Dividends payable 22 256,487 ---------- ---------- Total current liabilities 306,160 436,732 ---------- ---------- Deferred federal and state income taxes 272,767 176,351 Unamortized investment tax credits 13,593 16,733 Accrued Yankee nuclear plant costs 294,560 268,855 Purchased power obligations 659,704 611,802 Other reserves and deferred credits 265,334 88,965 ---------- ---------- $3,070,504 $2,629,574 ========== ========== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY Statements of Cash Flows Nine Months Ended December 31 (Unaudited)
2000 1999 ---- ---- (In Thousands) Operating Activities: Net income $ 45,463 $ 50,669 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 70,601 66,619 Amortization of goodwill 13,238 - Deferred income taxes and investment tax credits, net (6,310) 8,385 Allowance for funds used during construction (588) (1,759) Buyout of purchased power contracts - (3,472) Changes in assets and liabilities, net of effects of merger: Decrease (increase) in accounts receivable, net 4,728 (15,184) Decrease (increase) in fuel, materials, and supplies 1 (899) Decrease (increase) in regulatory assets 152,039 83,929 Decrease (increase) in prepaid and other current assets 17,110 (23,900) Increase (decrease) in accounts payable (9,497) (17,198) Increase (decrease) in purchased power contract obligations (98,760) (92,028) Increase (decrease) in other current liabilities 26,483 (3,428) Increase (decrease) in other non-current liabilities (18,898) 51,144 Other, net (53,597) (46,332) --------- -------- Net cash provided by (used in) operating activities $ 142,013 $ 56,546 --------- -------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $ (38,566) $(43,148) Other investing activities (8,605) (4,391) --------- -------- Net cash provided by (used in) investing activities $ (47,171) $(47,539) --------- -------- Financing Activities: Dividends paid on common stock $(256,463) $ (9,050) Dividends paid on preferred stock (69) (94) Changes in short-term debt 61,500 38,500 Long-term debt - issues 38,500 - Long-term debt - retirements (90,575) - Redemption of preferred stock, net (110) - --------- -------- Net cash provided by (used in) financing activities $(247,217) $ 29,356 --------- -------- Net increase (decrease) in cash and cash equivalents $(152,375) $ 38,363 Cash and cash equivalents at beginning of period 226,921 165,981 --------- -------- Cash and cash equivalents at end of period $ 74,546 $204,344 ========= ======== The accompanying notes are an integral part of these financial statements.
/* WordPerfect WARNING - No Equivalent EDGAR Representation */ /* WordPerfect Structure - Header A Beginning */ NEW ENGLAND POWER COMPANY Notes to Unaudited Financial Statements /* WordPerfect Structure - Header A Ending */ Note A - Hazardous Waste - ------------------------ The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. A number of states, including Massachusetts, have enacted similar laws. The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. New England Power Company (the Company) currently has in place an internal environmental audit program and an external waste disposal vendor audit and qualification program intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. The Company has been named as a potentially responsible party (PRP) by either the United States Environmental Protection Agency or the Massachusetts Department of Environmental Protection for several sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against the Company regarding hazardous waste cleanup. The Company is currently aware of other possible hazardous waste sites, and may in the future become aware of additional sites that it may be held responsible for remediating. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by the Company. The Company has recovered amounts from certain insurers, and, where appropriate, intends to seek recovery from other insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. The Company believes that hazardous waste liabilities for all sites of which the Company is aware are not material to its financial position. Note B - Nuclear Units - ---------------------- Yankee Nuclear Power Companies (Yankees) The Company has minority interests in four Yankee Nuclear Power Companies. These ownership interests are accounted for on the equity method. The Company's share of the expenses of the Yankees is accounted for in "Purchased electric energy" on the income statement. A summary of combined results of operations, assets, and liabilities of the four Yankees is as follows:
Quarters Ended Nine Months Ended December 31, ------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (In Thousands) Operating revenue $53,661 $104,625 $223,865 $287,795 ======= ======== ======== ======== Net income $ 2,957 $ 2,456 $ 25,926 $ 8,752 ======= ======== ======== ======== Company's equity in net income $ 3,074 $ 456 $ 5,891 $ 2,424 ======= ======== ======== ======== December 31, March 31, 2000 2000 ---- ---- (In Thousands) Net plant $ 162,595 $ 167,317 Other assets 2,048,735 2,520,887 Liabilities and debt (1,997,252) (2,437,609) ----------- ----------- Net assets $ 214,078 $ 250,595 =========== =========== Company's equity in net assets $ 46,457 $ 45,966 =========== ===========
Nuclear Units Permanently Shut Down Three of the Yankee Nuclear Power Companies in which the Company has a minority interest own nuclear generating units that have been permanently shut down. These three units are as follows:
Future The Company's Estimated Investment Billings to as of 12/31/00 Date the Company Unit % $(millions) Retired $(millions) - ----------------------------------------------------------------- Yankee Atomic 34.5 2 Feb 1992 0 Connecticut Yankee 19.5 15 Dec 1996 73 Maine Yankee 24.0 17 Aug 1997 139
In the case of each of these units, the Company has recorded a liability and an offsetting regulatory asset reflecting the estimated future billings from the companies. In a 1993 decision, the Federal Energy Regulatory Commission (FERC) allowed Yankee Atomic to recover its undepreciated investment in the plant, including a return on that investment, as well as unfunded nuclear decommissioning costs and other costs. Maine Yankee and Connecticut Yankee recover their costs, including a return, in accordance with settlement agreements approved by the FERC in May 1999 and July 2000, respectively. Prospectively, under the FERC settlement agreement, Connecticut Yankee has agreed to reduce annual collections for decommissioning through the use of its pre-1983 spent fuel trust funds and to limit its return on equity to 6 percent. In addition, Connecticut Yankee, Yankee Atomic, and Maine Yankee continue to pursue litigation against the Department of Energy (DOE) to assume financial responsibility for storage of spent nuclear fuel. Under rate provisions approved by the FERC for Connecticut Yankee and Yankee Atomic, any recovery from the DOE proceedings after litigation expenses and taxes will be returned to customers. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. Maine Yankee had hired Stone & Webster, Inc. (S&W), an engineering, construction, and consulting company, as the principal contractor to decommission the unit. In May 2000, Maine Yankee terminated its long-term contract with S&W and negotiated an arrangement with S&W to continue work through June 2000. On June 2, 2000, S&W filed for Chapter 11 bankruptcy protection. Confidential bids were submitted to Maine Yankee on October 31, 2000, by candidates to succeed S&W as the principal contractor to complete decommissioning. On January 26, 2001, the Maine Yankee Board of Directors announced that it had rejected the bids and approved a plan to self-manage Maine Yankee's decommissioning process. On June 30, 2000, Federal Insurance Company (Federal) filed a complaint in S&W's bankruptcy proceeding which alleges that Maine Yankee improperly terminated its contract with S&W. If the court were to make such a finding, Federal would be excused from a $37 million performance bond liability to Maine Yankee. Federal's complaint has been removed to the US Federal District Court in Maine for jury trial. On August 24, 2000, Maine Yankee filed a $78.2 million damage claim against S&W in the bankruptcy proceeding. At this time, the Company is unable to determine the potential impact, if any, of these developments. Under the provisions of the Company's industry restructuring settlement agreements approved by state and federal regulators in 1998, the Company recovers all costs, including shutdown costs, that the FERC allows these Yankee companies to bill to the Company. Operating Nuclear Units The Company has minority interests in three operating nuclear generating units which the Company is engaged in efforts to divest: Vermont Yankee, Millstone 3, and Seabrook 1. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as Vermont Yankee, have increased in recent years and could adversely affect their service lives, availa bility, and costs. These uncertainties stem from a combination of factors, including the acceleration of competitive pressures in the power generation industry and increased Nuclear Regulatory Commission (NRC) scrutiny. The Company performs periodic economic viability reviews of operating nuclear units in which it holds ownership interests. Until such time as the Company divests its operating nuclear interests, the Company will share with customers, through contract termination charges (CTC), 80 percent of the revenues and operating costs related to the Company's interest in these units, with shareholders retaining the balance. Vermont Yankee The following table summarizes the Company's interest in the Vermont Yankee Nuclear Power Corporation as of December 31, 2000:
The Company's Interest (millions of dollars) ---------------------------------------------- Equity Net Estimated Decommissioning Ownership Equity Plant Decommissioning Fund License Interest (%) Investment Assets Cost (in 2000$) Balance Expiration ------------ ---------- ------ - --------------- ------- ---------- 22.5 $12 $36 $102 $53 2012
In November 1999, the Vermont Yankee Nuclear Power Corporation entered into an agreement with AmerGen Energy Company (AmerGen), a joint venture between PECO Energy and British Energy, to sell the assets of Vermont Yankee. Approval of the sale is pending before the Vermont Public Service Board (VPSB), among other regulatory agencies. Since that time, the agreement has been revised and several other parties have indicated to the VPSB that they were prepared to make an offer for Vermont Yankee. At a hearing on January 29, 2001, the Chairman of the VPSB indicated that the VPSB would decide in mid-February 2001 whether it would reject the AmerGen agreement, thereby enabling Vermont Yankee to go forward with an auction of the unit, or take other action. Any sale of the plant is contingent upon the receipt of regulatory approvals by the Securities and Exchange Commission, under the Public Utility Holding Company Act of 1935, the FERC, the NRC, the VPSB, and other state regulatory commissions with jurisdiction over other equity owners of Vermont Yankee. Under the terms of the original AmerGen agreement, after a Vermont Yankee contribution toward the plant's decommissioning trust fund, AmerGen would take over the fund and assume responsibility for the actual cost of decommissioning the plant. The agreement would also require the existing power purchasers (including the Company) to continue to purchase the output of the plant or to buy out of the purchased power obligation. In November 1999, the Company signed an agreement to buy out of its obligation, requiring future payments which would be recovered through the Company's CTC. The Company recorded an accrued liability and offsetting regulatory asset of $80 million for its share of future liabilities related to Vermont Yankee, including the purchased power contract termination payment obligation, but excluding interest and a return allowance. On November 15, 2000, Vermont Yankee entered into a revised sale agreement with AmerGen which expires at the end of June 2001. The Vermont Department of Public Service was also a signatory. The revised agreement would represent an approximate $10 million net present value improvement from the original agreement for the Company's 22.5 percent share of the plant. On November 28, 2000, Entergy Corporation (Entergy) petitioned to intervene in the VPSB proceeding and informed the VPSB that it was prepared to make an offer to buy the plant. On December 8, 2000, the VPSB granted Entergy's request to submit a bid for Vermont Yankee, which was submitted on January 12, 2001 and was followed shortly thereafter by a revised offer from AmerGen. On December 5, 2000, Dominion Resources, Inc. (Dominion) indicated by letter to the VPSB that it was also interested in bidding on Vermont Yankee. In addition, on January 10, 2001, Constellation Energy Group, Inc. (Constellation) also indicated a willingness to bid and urged the VPSB to move forward with an auction of the plant. Millstone 3 In November 1999, the Company entered into an agreement with Northeast Utilities (NU) and certain of NU's subsidiaries to settle claims made by the Company relative to the operation of Millstone 3. Among other things, the settlement provides for NU to include the Company's share of Millstone 3 in an auction of NU's share of the unit. Upon the closing of the sale, NU will pay the Company a total of $25 million, regardless of the actual sale price, and reimburse the Company for any capital expenditures in excess of pre-budgeted levels incurred after October 1999. The Company will also be reimbursed for fuel procurement expenditures which increase net nuclear fuel account balances above balances at that time. The settlement also requires NU to indemnify the Company and assume any residual liabilities resulting from the sale, including any requirements that the sellers continue to purchase output from the unit. In addition, the settlement requires NU to pay the Company an additional $1 million per month for every month beyond April 1, 2001 that the closing does not occur. On August 7, 2000, Dominion agreed to purchase the Millstone units, including the Company's 16.2 percent share of Millstone 3, for $1.3 billion in cash. The purchase is contingent upon approval by the Department of Justice/Federal Trade Commission (DOJ/FTC), the NRC, the FERC, the Massachusetts Department of Telecommunications and Energy (MDTE), and public utility commissions in various states affected by the purchase transaction. Filings for approval have been made with each regulatory agency. To date, approvals have been received from the DOJ/FTC, the MDTE, the FERC, and various states affected by the transaction, including the Connecticut Department of Public Utility Control, the New Hampshire Public Utilities Commission (NHPUC), and the VPSB. Dominion expects to finalize the transaction by April 2001. In November 2000, the Rhode Island Attorney General and the Rhode Island Division of Public Utilities and Carriers filed a protest at the FERC contending that the payment the Company will receive from the sale of Millstone 3, as established by its agreement with NU, is insufficient. On December 13, 2000, the Company and other parties to the Millstone sale submitted answers opposing Rhode Island's position and arguing, among other things, that Rhode Island's contention is well beyond the scope of the FERC proceeding which was initiated for the sole purpose of receiving approval to transfer Millstone to Dominion. The Company further stated that concerns over the customer rate impact of the Company's agreement with NU are more appropriately addressed under the terms of its restructuring settlements and need not delay the FERC's approval of the sale. On January 25, 2001, the FERC found that Rhode Island's objection was beyond the scope of the proceeding and approved the sale. Any amounts received pursuant to a sale will, after reimbursement of the Company's transaction costs and net investment in Millstone 3, be credited to customers. Seabrook 1 As part of its restructuring settlement with the State of New Hampshire, Public Service Company of New Hampshire (PSNH), through its affiliate, North Atlantic Energy Corporation (NAEC), has committed to seek NHPUC approval of a definitive plan to sell, via public auction, its share of Seabrook 1, with such sale to occur no later than December 31, 2003. NAEC owns the largest percentage of the plant with a 35.98 percent interest, and its affiliate, North Atlantic Energy Service Corporation, is the plant operator. As part of its settlement, PSNH has also agreed to make all reasonable efforts to bundle its interests with those of other owners (including the Company) seeking to sell their interests. On December 15, 2000, NU filed its divestiture plan before the NHPUC, requesting an expeditious process in order to permit a prompt sale of the plant. Under the terms of the PSNH Settlement and enabling legislation, the NHPUC will administer the sale of the plant with the assistance of a sale specialist. The Company generally supports the NU divestiture plan and will shortly file its own divestiture plan before the NHPUC indicating its willingness to move forward with the sale. On October 21, 2000, Seabrook Station began a planned 31-day refueling outage. On Wednesday, November 1, 2000, with the reactor core fully off-loaded, the station experienced the first of two equipment problems on one of the two emergency diesel generators (EDG), which required extensive repairs before the station could be returned to service. The plant returned to full operation on February 1, 2001. The EDG problems extended the outage by approximately 71 days. Note C - Town of Norwood Dispute - -------------------------------- From 1983 until 1998, the Company was the wholesale power supplier for the Town of Norwood, Massachusetts (Norwood). In April 1998, Norwood began taking power from another supplier. Pursuant to a tariff amendment approved by the FERC in May 1998, the Company has been assessing Norwood a CTC. Through December 2000, the charges assessed Norwood amount to approximately $26 million, all of which remain unpaid. The Company has filed a collection action in Massachusetts Superior Court (Superior Court). Separately, Norwood filed suit in Federal District Court (District Court) in April 1997 alleging that the divestiture of the Company's nonnuclear generating business (the divestiture) violated the terms of the 1983 power contract and contravened antitrust laws. The District Court dismissed the lawsuit. On appeal, the First Circuit Court of Appeals (First Circuit) consolidated appeals Norwood made from FERC's orders approving the Company's divestiture, the wholesale rate settlement between the Company and its distribution affiliates, and the CTC tariff amendment. In February 2000, the First Circuit dismissed Norwood's appeal from the FERC orders and dismissed its appeal from all but one of Norwood's District Court claims, which relates to alleged generation market power. In February and March 2000, respectively, the First Circuit denied Norwood's petition for further review of its District Court claims decision and its decision on the FERC orders. On May 30, 2000, Norwood petitioned the US Supreme Court for review of the First Circuit decisions. On October 2, 2000, the US Supreme Court refused Norwood's petitions to review the First Circuit decisions affirming (a) the FERC's approval of the CTC, the divestiture, and the settlement agreements regarding termination of the Company's power sales agreements with its affiliates, and (b) the US District Court's dismissal of Norwood's antitrust and breach of contract claims. In the District Court action, on April 10, 2000, the Company renewed its motion to dismiss Norwood's remaining claim. Norwood amended its complaint to reassert a request for rescission of the divestiture, which it had earlier dropped. A hearing took place before the District Court on July 18, 2000. In the Superior Court collection action, Norwood moved to dismiss the Company's complaint, which the Superior Court denied on April 30, 1999. Norwood filed counterclaims against the Company, which the Company moved to dismiss. The Superior Court deferred decision on the Company's motion pending resolution of Norwood's various appeals to the First Circuit, and on July 21, 2000, the Company renewed its motion to dismiss in light of the First Circuit decisions and filed a motion for summary judgement. The Superior Court heard oral arguments on both motions on October 25, 2000. Norwood has also appealed a June 1999 FERC decision that rejected Norwood's challenge to the calculation of the CTC based on the terms of the 1983 power contract, which Norwood contended ended in October 1998, not October 2008. On June 29, 2000, the First Circuit rejected Norwood's appeal. On December 22, 2000, Norwood filed a petition for certiorari to the US Supreme Court for review of the First Circuit's decision. Note D - Standard Offer Service and ICAP Deficiency Charge - ---------------------------------------------------------- Prior to divesting its nonnuclear generation business in 1998, the Company was the wholesale supplier of the electric energy requirements to the New England Electric System (NEES) retail companies. The Company's all-requirements contracts with its affiliated distribution companies, as well as with unaffiliated customers, were generally terminated pursuant to settlement agreements and tariff provisions in 1998. However, the Company remains obligated to provide transition power supply service to new customer load in Rhode Island at the standard offer price, but does not have a fixed price wholesale contract in place. Consequently, the Company is at risk for the difference between the actual cost of serving this load and the revenue received from this obligation. The standard offer rate that the Company charges for continuing to meet this obligation increased from 3.5 cents per kilowatthour (kWh) in 1999 to 3.8 cents per kWh effective January 1, 2000. The standard offer rate is also subject to a rolling twelve-month fuel index adjustment factor, which increased the rate by an additional 0.12 cents per kWh beginning in April 2000 up to 1.592 cents per kWh in December 2000. The Company meets this obligation by periodically procuring the necessary power supply at market prices. Over time, the Company cannot predict whether the resulting revenues will be sufficient to cover the costs of procuring such power. In a December 15, 2000 Order, the FERC rejected the Independent System Operator-New England's (ISO New England) proposed $0.17 per kW-month Installed Capacity (ICAP) deficiency charge and reinstated an administratively-determined deficiency charge of $8.75 per kW-month, retroactive to August 1, 2000. Several parties, including the Company, filed motions requesting rehearing of the ICAP Order and/or emergency motions for stay of the FERC's order. On January 10, 2001, the FERC granted these motions and will conduct a new hearing. If the $8.75 per kW-month ICAP deficiency charge were to be made effective as of August 1, 2000, it would impact the Company's cost of power to supply its all-requirements load obligations from August forward. In that event, increased ICAP revenues that the Company will receive from the sale of its generation unit entitlements would partially offset any additional cost. Prospectively, the Company has entered into an agreement to purchase capacity for partial protection against the possible increase in ICAP deficiency charges for the quarter ending March 31, 2001. Note E - Merger Agreement with Niagara Mohawk - --------------------------------------------- The Company is a wholly owned subsidiary of National Grid USA. On September 5, 2000, National Grid USA's parent company, National Grid Group plc (National Grid), and Niagara Mohawk Holdings, Inc., announced a merger agreement under which National Grid will acquire Niagara Mohawk (NiMo) through the formation of a new National Grid holding company and the exchange of NiMo shares for a combination of American Depositary Shares (ADSs) and cash. The terms of the agreement value the transaction at approximately $3.0 billion. The transaction is expected to be completed by late 2001, and is subject to a number of conditions, including regulatory and other governmental approvals and the sale of NiMo's nuclear facilities or other satisfactory arrangements being reached. The transaction has received approval by NiMo and National Grid shareholders. On December 12, 2000, Niagara Mohawk Power Corporation announced that it reached an agreement to sell its nuclear facilities to Constellation. Note F - Acquisition of Eastern Utilities Associates - ---------------------------------------------------- The acquisition of Eastern Utilities Associates (EUA) by National Grid USA was completed on April 19, 2000. On May 1, 2000, Montaup Electric Company (Montaup), formerly a subsidiary of EUA, was merged into the Company. The acquisition of EUA was accounted for by the purchase method, the application of which, including the recognition of goodwill, has been pushed down and reflected on the financial statements of the National Grid USA subsidiaries, including the Company. Total goodwill amounted to $402 million, of which the Company was allocated $8 million relative to the merger of Montaup into the Company. This amount was determined pursuant to an independent study conducted by a third party and is being amortized over 20 years. Combined with the amortization of goodwill allocated to the Company from the acquisition of NEES by National Grid, the total annual amortization of goodwill will amount to approximately $17.6 million. Disclosure regarding the acquisition of NEES by National Grid is contained in the Company's Transitional Annual Report on Form 10-K for the period ended March 31, 2000. As a result of the acquisition, Montaup's balance sheet accounts were incorporated into the financial statements of the Company as of May 1, 2000. Listed below are the significant account balances incorporated.
May 1, 2000 Balance (In Thousands) Assets Utility plant, at original cost $227,114 Accumulated provisions for depreciation $(92,093) and amortization Regulatory assets (current and long-term) $547,412 Liabilities Other paid-in capital $135,444 Deferred federal and state income taxes $104,860 Accrued Yankee nuclear plant costs $ 46,030 Purchased power obligations (current and long-term) $176,257 Other reserves and deferred credits $174,942
The accompanying statements of operations do not include any revenues or expenses related to Montaup prior to the subsidiary companies' merger on May 1, 2000. The following unaudited pro forma information presents the results of operations of the Company assuming the merger of Montaup into the Company occurred on January 1, 1999. This pro forma information has been prepared for comparative purposes only and includes an adjustment for additional amortization expense as a result of goodwill. This information does not purport to be indicative of the results of operations that actually would have resulted had the merger occurred on January 1, 1999, or of future results of the Company. /* WordPerfect WARNING - No Equivalent EDGAR Representation */ /* WordPerfect Structure - Header A Beginning */ NEW ENGLAND POWER COMPANY Notes to Unaudited Financial Statements /* WordPerfect Structure - Header A Ending */
Supplemental Unaudited Pro Forma Information Periods Ended December 31 (In Thousands) Three Months Nine Months Twelve Months ------------ ----------- ------------- 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- Combined Operating Revenues $156,396 $193,904 $501,373 $602,662 $674,593 $859,598 Net Earnings $ 14,780 $ 17,865 $ 44,904 $ 48,176 $ 58,598 $ 67,299
Note G - ------ Income statements for the nine and twelve month periods ended December 31, 2000, reflect a reclassification of approximately $4.3 million and approximately $4.7 million, respectively, of goodwill amortization previously reflected on the "Depreciation and amortization" line in "Operating expenses," but now reported in "Other income and expense." Note H - ------ In the opinion of the Company, these financial statements reflect all adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of its operations for the periods presented and should be considered in conjunction with the notes to the financial statements in the Company's Transitional Annual Report on Form 10-K for the period ended March 31, 2000. /* WordPerfect WARNING - No Equivalent EDGAR Representation */ /* WordPerfect Structure - Header B Beginning */ NEW ENGLAND POWER COMPANY /* WordPerfect Structure - Header B Ending */ 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 (the Company) 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 Transitional Annual Report on Form 10-K for the period ended March 31, 2000. The Company is a wholly owned subsidiary of National Grid USA, formerly New England Electric System (NEES). NEES was acquired by National Grid Group plc (National Grid) in March 2000. Merger Agreement with Niagara Mohawk - ------------------------------------ On September 5, 2000, National Grid USA's parent company, National Grid, and Niagara Mohawk Holdings, Inc., announced a merger agreement under which National Grid will acquire Niagara Mohawk (NiMo) through the formation of a new National Grid holding company and the exchange of NiMo shares for a combination of American Depositary Shares (ADSs) and cash. The terms of the agreement value the transaction at approximately $3.0 billion. The transaction is expected to be completed by late 2001, and is subject to a number of conditions, including regulatory and other governmental approvals and the sale of NiMo's nuclear facilities or other satisfactory arrangements being reached. The transaction has received approval by NiMo and National Grid shareholders. On December 12, 2000, Niagara Mohawk Power Corporation announced that it reached an agreement to sell its nuclear facilities to Constellation Energy Group, Inc. Acquisition of Eastern Utilities Associates - ------------------------------------------- The acquisition of Eastern Utilities Associates (EUA) by National Grid USA was completed on April 19, 2000. On May 1, 2000, Montaup Electric Company (Montaup), formerly a subsidiary of EUA, was merged into the Company. Change of Fiscal Year - --------------------- National Grid USA and its subsidiaries, including the Company, changed their fiscal year from a calendar year ending December 31, to a fiscal year ending March 31. The Company made this change in order to align its fiscal year with that of National Grid USA's parent company, National Grid. The Company's first new full fiscal year began on April 1, 2000 and will end on March 31, 2001. This report reflects results of operations for the third quarter and nine months of the Company's new fiscal year 2001. Standard Offer Service and ICAP Deficiency Charge - ------------------------------------------------- Prior to divesting its nonnuclear generation business in 1998, the Company was the wholesale supplier of the electric energy requirements to the NEES retail companies. The Company's all- requirements contracts with its affiliated distribution companies, as well as with unaffiliated customers, were generally terminated pursuant to settlement agreements and tariff provisions in 1998. However, the Company remains obligated to provide transition power supply service to new customer load in Rhode Island at the standard offer price, but does not have a fixed price wholesale contract in place. Consequently, the Company is at risk for the difference between the actual cost of serving this load and the revenue received from this obligation. The standard offer rate that the Company charges for continuing to meet this obligation increased from 3.5 cents per kilowatthour (kWh) in 1999 to 3.8 cents per kWh effective January 1, 2000. The standard offer rate is also subject to a rolling twelve-month fuel index adjustment factor, which increased the rate by an additional 0.12 cents per kWh beginning in April 2000 up to 1.592 cents per kWh in December 2000. The Company meets this obligation by periodically procuring the necessary power supply at market prices. Over time, the Company cannot predict whether the resulting revenues will be sufficient to cover the costs of procuring such power. In a December 15, 2000 Order, the Federal Energy Regulatory Commission (FERC) rejected the Independent System Operator-New England's (ISO New England) proposed $0.17 per kW-month Installed Capacity (ICAP) deficiency charge and reinstated an administratively-determined deficiency charge of $8.75 per kW- month, retroactive to August 1, 2000. Several parties, including the Company, filed motions requesting rehearing of the ICAP Order and/or emergency motions for stay of the FERC's order. On January 10, 2001, the FERC granted these motions and will conduct a new hearing. If the $8.75 per kW-month ICAP deficiency charge were to be made effective as of August 1, 2000, it would impact the Company's cost of power to supply its all-requirements load obligations from August forward. In that event, increased ICAP revenues that the Company will receive from the sale of its generation unit entitlements would partially offset any additional cost. Prospectively, the Company has entered into an agreement to purchase capacity for partial protection against the possible increase in ICAP deficiency charges for the quarter ending March 31, 2001. Industry Restructuring - ---------------------- For a full discussion of industry restructuring activities, the Company's divestiture of its nonnuclear generating business (the divestiture) and stranded cost recovery, see the "Industry Restructuring" section in the Company's Transitional Annual Report on Form 10-K for the period ended March 31, 2000. Regulatory Asset Recovery - ------------------------- Because electric utility rates have historically been based on a utility's costs, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. The Company applies the provisions of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FA S 71), which requires regulated entities, in appropriate circumstances, to establish regulatory assets or liabilities, and thereby defer the income statement impact of certain charges or revenues because they are expected to be collected or refunded through future customer billings. In 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board concluded that a utility that had received approval to recover stranded costs through regulated rates would be permitted to continue to apply FAS 71 to the recovery of stranded costs. The Company has received authorization from the FERC to recover through contract termination charges (CTC) substantially all of the costs associated with its former generating business not recovered through the divestiture. Additionally, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. Therefore, substantially all of the Company's business, including the recovery of its stranded costs, remains under cost-based rate regulation. Because of the nuclear cost-sharing provisions related to the Company's CTC, the Company ceased applying FAS 71 in 1997 to 20 percent of its ongoing nuclear operations, the impact of which is immaterial. As a result of applying FAS 71, the Company has recorded a regulatory asset for the costs that are recoverable from customers through the CTC. At December 31, 2000, this amounted to approximately $1.7 billion, including $1.1 billion related to the above-market costs of purchased power contracts, $0.3 billion related to accrued Yankee nuclear plant costs, and $0.3 billion related to other net CTC regulatory assets. Earnings - -------- Net income for the quarter and nine month period ended December 31, 2000 decreased approximately $4 million and $5 million, respectively, compared with the same periods in 1999. The decrease in earnings is a result of goodwill amortization from the mergers with National Grid and EUA, increased purchased power costs, increased interest expense, and decreased mitigation incentives, partially offset by increased income due to the May 1, 2000 merger with Montaup, and increased earnings from nuclear operations. Operating Revenue - ----------------- Operating revenue for the quarter and nine month period increased approximately $9 million and $59 million, respectively, compared with the same periods in 1999. Sales for resale for the quarter and nine month period increased approximately $12 million and $51 million, respectively, compared with the same periods in 1999. These increases are primarily due to increased sales and rates related to obligations to new customer load in Rhode Island, and increased unit contract sales from partially owned nuclear units which experienced refueling outages during the same periods in 1999. CTC revenues for the quarter and nine month period increased approximately $1 million and $5 million, respectively, due to fully reconciling true-up mechanisms which allow the Company to adjust revenues proportionately with correlating expenses. These increases were also affected by the merger with Montaup effective May 1, 2000. Transmission revenues decreased approximately $4 million for the third quarter and increased approximately $2 million for the nine month period compared with the same periods in 1999. The transmission charge is a formula rate which recovers the Company's actual costs plus a return on actual investment. Operating Expenses - ------------------ Operating expenses for the quarter and nine month period increased $11 million and $48 million, respectively, compared with the same periods in 1999. Fuel for generation decreased approximately $1 million for the quarter, but increased approximately $1 million for the nine month period compared with the same periods in 1999. The decrease for the quarter is primarily attributed to a refueling outage at the partially owned Seabrook 1 nuclear generating facility. For the nine month period, the increase is due to refueling outages experienced at the partially owned Millstone 3 and Seabrook 1 nuclear generating facilities during the quarter ended June 30, 1999. Operating expenses for both the quarter and the nine month period were affected by the inclusion of Montaup's ownership percentage of Millstone 3 with the Company's effective as of the merger date. Purchased power expense increased approximately $5 million and $36 million for the quarter and nine month period, respectively. The increases are primarily attributed to the inclusion of Montaup's purchased power costs effective May 1, 2000, increased fuel prices, and an increase in standard offer purchases related to obligations to supply new customer load in Rhode Island. These increases are partially offset by decreased purchased power charges from the Yankee Nuclear Power Companies (Yankees). Charges from Maine Yankee decreased due to a refund for the termination of excess nuclear insurance coverage. Vermont Yankee purchased power charges decreased due to the effect of a refueling outage during the quarter ended December 31, 1999. In addition, purchased power charges from the Yankee Atomic nuclear power plant decreased as a result of the completion of the purchased power contract and final billing in June 2000. Nuclear operation and maintenance expenses increased approximately $4 million for the quarter, reflecting the merger of Montaup's ownership percentage of Millstone 3 with the Company's effective as of the merger date, and the effects of increased operation and maintenance expenses during a refueling outage at Seabrook 1. For the nine month period, these expenses decreased approximately $2 million as a result of improved operations at Millstone 3 and reduced expenses primarily related to refueling outages at Millstone 3 and Seabrook 1 during the quarter ended June 30, 1999. For the quarter and nine month period, other nonnuclear operation and maintenance expenses decreased approximately $2 million and $4 million, respectively, compared with the same periods in 1999, primarily due to reduced pension and postretirement healthcare expenses and reduced transmission costs. For the nine month period, these decreases are partially offset by the receipt of a transmission wheeling refund that reduced expense in June 1999. Depreciation and amortization expenses increased approximately $2 million for the quarter and approximately $3 million for the nine month period due to increased nuclear depreciation as a result of the addition of Montaup's ownership percentage effective as of the merger date. Interest Expense - ---------------- The increase in interest expense for the quarter and nine month period is primarily due to higher interest rates on variable rate long-term debt and increased short-term debt borrowings, as well as interest related to Montaup's CTC settlement. Other Income and Expense - ------------------------ Other income for the quarter and nine month period increased approximately $3 million and $2 million, respectively, compared with the same periods in 1999. This increase was primarily related to increased earnings from the Yankees, partially offset by a decrease in allowance for equity funds used during construction. The amortization of goodwill of approximately $4 million for the quarter and $13 million for the nine month period resulted from the mergers with National Grid and EUA. Utility Plant Expenditures and Financing - ---------------------------------------- Cash expenditures for the Company for utility plant totaled $39 million for the nine months ended December 31, 2000 and were primarily transmission-related. The funds necessary for utility plant expenditures during the period were primarily provided by internally generated funds. Dividends payable at March 31, 2000, in the amount of $256 million, were paid on June 27, 2000. On September 19, 2000, the Company repurchased 961 shares of its 6 percent $100 par value preferred stock for $79,766. Approximately $17,000 of this transaction was credited to retained earnings. On October 17, 2000, the Company repurchased 350 shares of its 6 percent $100 par value preferred stock for $30,455. Approximately $4,000 of this transaction was credited to retained earnings. At December 31, 2000, the Company had $100 million of short- term debt outstanding to affiliates. The Company has regulatory approval to issue up to $375 million of short-term debt. On October 25, 2000, the Company received the necessary regulatory approvals to allow approximately $39 million of variable rate debt to remain outstanding through 2015. This results in classifying that debt as long-term rather than short-term for this period and subsequent reporting periods. Proceeds from the increase in short-term debt were utilized to pay Montaup's debt of approximately $91 million and purchased power contract obligations of approximately $60 million. At December 31, 2000, the Company had lines of credit and standby bond purchase facilities with banks totaling $456 million which are available to provide liquidity support for $410 million of the Company's long-term bonds in tax-exempt commercial paper mode, and for other corporate purposes. There were no borrowings under these lines of credit at December 31, 2000. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------ New England Power Company's (the Company) major financial market risk exposure is changing interest rates. Changing interest rates will affect interest paid on variable rate debt. At December 31, 2000, the Company's tax exempt variable rate long-term debt had a carrying value and fair value of approximately $410 million. While the ultimate maturity dates of the underlying loan agreements range from 2015 through 2022, this debt is issued in tax exempt commercial paper mode. The various components that comprise this debt are issued for periods ranging from one day to 270 days, and are remarketed through remarketing agents at the conclusion of each period. The weighted average variable interest rate for the nine months ended December 31, 2000, was approximately 4.22 percent. For a full discussion of the Company's risk associated with Industry Restructuring and Standard Offer Service, refer to Note D in the Notes to Unaudited Financial Statements. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning settlement of a lawsuit brought by the Company against Northeast Utilities on August 7, 1997 in Massachusetts Superior Court, Worcester County concerning the Millstone 3 nuclear unit and a demand for arbitration sent by the Company to Connecticut Light & Power Company and Western Massachusetts Electric Company concerning the Millstone 3 nuclear unit and a related Federal Energy Regulatory Commission (FERC) decision, discussed in this report in Note B of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning dismissal of a lawsuit brought against the Company by the Town of Norwood, Massachusetts and appeals of that lawsuit and related Federal Energy Regulatory Commission orders, U. S. Supreme Court decision refusing to review First Circuit decisions, the Company's collection action, and pending appeals, discussed in this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. On August 31, 1999, the minority owners under an agreement for joint ownership, construction and operation of the Wyman 4 generation unit, including the Company, made a demand for arbitration to Central Maine Power Company (CMP) for payments alleged due under the agreement upon CMP's sale of Wyman 4 to FPL Energy, Inc. (FPL). Demand was also made to FPL as successor-in- interest to CMP. The Company's portion of the claims under the agreement could total approximately $7 million. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The Company filed reports on Form 8-K dated November 21, 2000 and December 6, 2000, each containing Item 5 Other Information. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q for the quarter ended December 31, 2000 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND POWER COMPANY s/John G. Cochrane John G. Cochrane, Treasurer, Authorized Officer, and Principal Financial Officer Date: February 13, 2001 -----END PRIVACY-ENHANCED MESSAGE-----