-----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, KPghpQaiXKUOThyxvHMsD0HzEy5noDfAafeK6xf0VyEV4H7FeYuIRzBcTg1vyH2T VQ5KdBaJOq6OdiPY+BoClg== 0000071337-02-000002.txt : 20020414 0000071337-02-000002.hdr.sgml : 20020414 ACCESSION NUMBER: 0000071337-02-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020213 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: 1934 Act SEC FILE NUMBER: 002-26651 FILM NUMBER: 02541193 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 nep10q.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, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6564 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, 2001. PART I FINANCIAL INFORMATION Item 1. Financial Statements - -------------------------------------- NEW ENGLAND POWER COMPANY Statements of Income Periods Ended December 31 (In thousands) (Unaudited)

NEW ENGLAND POWER COMPANY Balance Sheets (In thousands) (Unaudited)

NEW ENGLAND POWER COMPANY Statements of Cash Flows Nine Months Ended December 31 (In thousands) (Unaudited)

December 31, 2000 (In thousands) Quarter Nine Months Ended Ended ------- ----------- Net income, as reported $14,780 $45,463 Reversal of goodwill amortization 4,455 13,238 ------- ------- Restated pro forma net income $19,235 $58,701 ======= ======= In accordance with FAS 142, goodwill must be reviewed for impairment within six months of adoption ("transitional goodwill impairment test"), and annually thereafter. The Company utilized a discounted cash flow approach incorporating its most recent business plan forecasts in the performance of the transitional test for goodwill impairment. The result of this analysis determined that no adjustment to the goodwill carrying value was required. FAS 142 also requires that recognizable intangible assets be amortized over their useful lives and tested for impairment. Intangible assets with indefinite useful lives should be reviewed for impairment. The Company has concluded a review of its intangible assets at March 31, 2001, and no adjustment was deemed necessary effective with the adoption of FAS 142. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These accounting pronouncements require that an entity recognize derivative instruments as either assets or liabilities in the statement of financial position and the measure of those instruments at fair value. The Company adopted the pronouncements effective at the beginning of fiscal 2002. The standards have not materially affected the Company's financial position or results of operations. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143 provides the accounting requirements for retirement obligations associated with tangible long- lived assets. FAS 143 is effective for fiscal years beginning after June 15, 2002, and early adoption is permitted. The Company does not expect that this pronouncement will have a material impact in its earnings, considering that historically the obligations related to asset retirements have been recovered through rates. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121) and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," related to the disposal of a segment of a business. FAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves significant implementation issues related to FAS 121. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently unable to determine the impact of this statement on its financial position or results of operations. Note G - Voluntary Early Retirement - ------------------------------------ On January 14, 2002, a limited Voluntary Early Retirement Offer (VERO) was extended to non-union employees who meet certain eligibility requirements. Eligible employees are in targeted functions and will be age 55 with at least ten years of pension service by March 31, 2004. This program is intended to reduce the National Grid USA workforce through attrition. At this time, the Company cannot reasonably estimate the participation in the VERO. Therefore, expenses related to this offer have not yet been recorded. 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 Annual Report for the period ended March 31, 2001. Certain prior period amounts on the financial statements have been reclassified to conform with the current presentation 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 Annual Report on Form 10-K for the period ended March 31, 2001. The Company is a wholly owned subsidiary of National Grid USA. FERC Proceedings - ---------------- In general, the regulatory structure and regulations which relate to the Company's business are in a period of major change and uncertainty. Decisions being made by the Federal Energy Regulatory Commission (FERC) and the Independent System Operator-New England (ISO New England) will affect how the Company does business and whether it can enter new endeavors. The Company is currently unable to determine whether these proceedings will have a material impact on its financial position or results of operations. The FERC has been reviewing the development of regional transmission organizations (RTOs). The FERC has indicated that it wants RTOs to have large geographic scope. In July and August, 2001, the FERC ordered National Grid USA and other New England parties and participants of the New York Independent System Operator (ISO), and the Pennsylvania-New Jersey-Maryland (PJM) ISO to participate in a mediation process to develop a proposal for a larger RTO. The FERC has not yet ruled on the mediation report issued in September 2001. Pending the ruling on the mediation report, the transmission owners have been working toward a hybrid RTO structure in which an independent transmission company would manage the transmission grid for the RTO and an independent market administrator would manage power sales for the RTO. However, it is not clear what sort of RTO structure will ultimately result from these negotiations. In fact, based on a January 29, 2002 filing by the New York and New England ISOs to form their own RTO, even the geographic scope of the RTO in which the Company will participate is still an open question. The FERC has begun another advanced rulemaking to address Standard Market Design regarding the buying and selling of power. As a first step in this direction, the FERC has requested in a December 19, 2001 order that all industry segments try to agree on a single standards organization that would establish national standard business practices for the wholesale electric industry. The FERC indicated that if the industry cannot reach agreement by March 15, 2002, the FERC will either choose such an organization itself or develop such standard business practices on its own. To the extent the Company wishes to pursue opportunities to manage an RTO or to be a member of an independent transmission company, with the opportunity to propose financial incentives to deliver greater value for customers and shareholders, the FERC rulings in this and other proceedings may have an impact on the ability to do so. On June 13, 2001, the FERC issued an order relating to New England Power Pool's (NEPOOL) proposed congestion management and multi-settlement systems. In the June 13 Order, the FERC found that "energy uplift" costs (which had been about $9 million per month for NEPOOL in 2000) should be allocated on the basis of reliance on the energy markets administered by the ISO New England. This would have the effect of relieving parties that procure power under bilateral contracts (such as the Company) from paying energy uplift charges. However, the NEPOOL Participants Committee and ISO New England submitted a filing on July 13, 2001 that the Company believes does not comport with the FERC's order. The Company has filed a protest to the NEPOOL and ISO New England filing. Earnings - -------- Net income for the quarter and nine months ended December 31, 2001, increased approximately $3 million and $15 million, respectively, compared with the same periods in 2000. The increase is primarily due to the adoption of Statement of Financial Accounting Standards No. 142 "Accounting for Goodwill and Other Intangible Assets" (FAS 142), effective April 1, 2001, which requires the cessation of goodwill amortization, (See Note F.) Also contributing to the increase in earnings is a decrease in interest expense due to decreased interest rates on variable-rate long-term debt and the refinancing of short-term debt. Operating Revenue - ----------------- Operating revenue for the quarter and nine months ended December 31, 2001, decreased approximately $20 million and $60 million, respectively, compared with the same periods in 2000. The decrease in revenue for the quarter is primarily due to reduced kilowatthour (kWh) sales as a result of the sale of the Millstone 3 nuclear generating facility (Millstone 3) in March of 2001, and the termination of the standard offer service to Rhode Island, effective December 1, 2001. The decrease is also related to reduced contract termination charges (CTC) revenue due to fully reconciling true-up mechanisms that allow the Company to adjust revenues proportionately with correlating expenses. For the nine month period the decrease is primarily attributable to reduced kWh sales due to the sale of Millstone 3, the effect of a refueling outage at the Vermont Yankee nuclear power plant during the quarter ended June 30, 2001, and decreased CTC revenue as described in the previous paragraph. Partially offsetting these decreases were increases in kWh sales related to standard offer service to Rhode Island through December 1, 2001, and increased transmission revenues. The transmission charge is a formula rate that recovers the Company's actual costs plus a return on actual investment. Operating Expenses - ------------------ Operating expenses for the quarter and nine months ended December 31, 2001, decreased approximately $19 million and $60 million, respectively, compared with the same periods in 2000. Fuel for generation expense for the quarter and nine months ended December 31, 2001, decreased approximately $1 million and $6 million, respectively, primarily due to the sale of Millstone 3. Purchased power expense increased approximately $3 million for the quarter ended December 31, 2001, compared with the same period in 2000. The increase was primarily due to a refund of excess nuclear insurance coverage and tax credits to Maine Yankee and Connecticut Yankee during the quarter ended December 31, 2000. For the nine month period ended December 31, 2001, purchased power expense increased approximately $6 million compared with the same period in 2000. The increased cost is attributed to a refueling outage at Vermont Yankee during the quarter ended June 30, 2001, the effect of the insurance refund and tax credits discussed above, and the inclusion of Montaup Electric Company's (Montaup) purchased power costs effective May 1, 2000. These increases are partially offset by decreased costs due to lower fuel prices of power purchased to supply the standard offer customers in Rhode Island. Effective December 1, 2001, a third party assumed the responsibility for providing transitional standard offer power service in Rhode Island, and the Company's obligation terminated. Nuclear operation and maintenance expenses for the quarter and nine months ended December 31, 2001, decreased approximately $7 million and $16 million, respectively, as a result of the sale of Millstone 3. Other operating expenses for the quarter ended December 31, 2001, decreased approximately $1 million compared with the same period in 2000, primarily due to a decrease in administrative expense caused by the sale of Millstone 3. Depreciation and amortization expenses for the quarter and nine months ended December 31, 2001, decreased approximately $14 million and $42 million, respectively, compared with the same periods in 2000. This decrease is due to reduced nuclear depreciation and decommissioning expense as a result of the sale of Millstone 3 in March 2001, and the full recovery of the Company's CTC-related fixed costs associated with its generating plants and regulatory assets (excluding Montaup's fixed costs) at the end of 2000. Other Income and Expense-net - ---------------------------- Other income and expense-net for the quarter and nine months ended December 31, 2001, increased approximately $3 million and $10 million, respectively, compared with the same periods in 2000. The increase is due primarily to the cessation of goodwill amortization as a result of the adoption of FAS 142 and an increase in allowance for equity funds used during construction, partially offset by reduced earnings from the Yankee Nuclear Power Companies. Interest Expense - ---------------- Interest expense for the quarter and nine months ended December 31, 2001 decreased approximately $2 million and $4 million, respectively, compared with the same periods in 2000 primarily due to decreased interest rates on the Company's variable-rate long-term debt and the refinancing of short-term debt. Utility Plant Expenditures and Financing - ---------------------------------------- Cash expenditures for utility plant totaled approximately $16 million and $36 million for the quarter and nine months ended December 31, 2001, respectively, and were primarily transmission-related. The funds necessary for utility plant expenditures during the period were primarily provided by internally generated funds. At December 31, 2001, the Company had no short-term debt outstanding. The Company has regulatory approval to issue up to $375 million of short-term debt. National Grid USA and certain subsidiaries, including the Company, operate a money pool to more effectively utilize cash resources and to reduce outside short-term borrowings. Short-term borrowing needs are met first by available funds of the money pool participants. Borrowing companies pay interest at a rate designed to approximate the cost of outside short-term borrowings. Companies that invest in the pool share the interest earned on a basis proportionate to their average monthly investment in the money pool. Funds may be withdrawn from or repaid to the pool at any time without prior notice. At December 31, 2001, 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, 2001. Fees are paid on the lines and facilities in lieu of compensating balances. At December 31, 2001, the Company had no off-balance sheet transactions, arrangements, or other relationships with unconsolidated entities or persons that would materially affect liquidity, availability of capital resources, financial position, or results of operations. 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, 2001, 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, 2001, was approximately 2.745 percent. For a full discussion of the Company's risk associated with the Installed Capacity deficiency charge, refer to Note D in the Notes to Unaudited Financial Statements. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning an appeal by the Town of Norwood, Massachusetts of a judgment in favor of the Company, discussed in this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning several Federal Energy Regulatory Commission proceedings, discussed in this report in the FERC Proceedings section of Management's Discussion and Analysis of Financial Condition and Results of Operations (Part I, Item II) and in Note D of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- None. 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, 2001 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND POWER COMPANY s/John G. Cochrane John G. Cochrane, Authorized Officer, and Principal Financial Officer Date: February 13, 2002 New England Power New England Power Company 25 Research Drive Westborough, Massachusetts 01582 Tel. (508) 389-2000 February 13, 2002 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: New England Power Company is a participant in the Electronic Data Gathering and Retrieval Program. Submitted herewith in electronic format for filing with the Commission is a Quarterly Report on Form 10-Q for the period ended December 31, 2001, for the below named company, which is currently required to file reports pursuant to Section 13 of the Securities Exchange Act of 1934. NEW ENGLAND POWER COMPANY This report is filed with you pursuant to Rule 13(a)-13 of the Securities and Exchange Commission under the Securities Exchange Act of 1934. Very truly yours, s/ John G. Cochrane John G. Cochrane Treasurer 18 1 NEW ENGLAND POWER COMPANY Notes To Unaudited Financial Statements NEW ENGLAND POWER COMPANY NEW ENGLAND POWER COMPANY ~~-----END PRIVACY-ENHANCED MESSAGE-----~~