-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, c7xVVvGLMqMP9kmavdq5RQkQ5Y0WzKnbsqerurZ6n2wizLj9HnKAa8zfow741ZeC gYjdDTc277SvWno/EoThvw== 0000071337-94-000005.txt : 19940811 0000071337-94-000005.hdr.sgml : 19940811 ACCESSION NUMBER: 0000071337-94-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND POWER CO CENTRAL INDEX KEY: 0000071337 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 041663070 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06564 FILM NUMBER: 94542520 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 6173669011 10-Q 1 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 June 30, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-1229 (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 (508-366-9011) 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 June 30, 1994. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- NEW ENGLAND POWER COMPANY Statements of Income Periods Ended June 30 (Unaudited)
Quarter Six Months -------- ---------- 1994 1993 1994 1993 ---- ---- ---- ---- (In Thousands) Operating revenue, principally from affiliates$356,488$361,131$756,062 $756,196 -------- -------- -------- -------- Operating expenses: Fuel for generation 64,143 56,174 137,502 129,474 Purchased electric energy 118,919 133,352 239,757 259,276 Other operation 47,341 41,114 91,743 92,903 Maintenance 28,357 30,485 49,263 47,991 Depreciation and amortization 34,249 32,763 68,907 66,902 Taxes, other than income taxes 14,031 13,471 29,387 27,836 Income taxes 17,256 17,908 50,438 44,371 -------- -------- -------- -------- Total operating expenses 324,296 325,267 666,997 668,753 -------- -------- -------- -------- Operating income 32,192 35,864 89,065 87,443 Other income: Allowance for equity funds used during construction 2,286 811 4,062 1,502 Equity in income of nuclear power companies1,444 1,351 2,731 2,936 Other income (expense) - net (599) 255 (2,970) (1,088) -------- -------- -------- -------- Operating and other income 35,323 38,281 92,888 90,793 -------- -------- -------- -------- Interest: Interest on long-term debt 9,339 11,258 18,491 23,510 Other interest 995 416 1,034 937 Allowance for borrowed funds used during construction - credit (1,193) (337) (2,008) (688) -------- -------- -------- -------- Total interest 9,141 11,337 17,517 23,759 -------- -------- -------- -------- Net income $ 26,182 $ 26,944 $ 75,371 $ 67,034 ======== ======== ======== ======== Statements of Retained Earnings Retained earnings at beginning of period$370,289 $342,655 $346,153 $321,699 Net income 26,182 26,944 75,371 67,034 Dividends declared on cumulative preferred stock (858) (1,398) (1,724) (2,796) Dividends declared on common stock (20,962) (61,275) (45,149) (79,011) --------- -------- -------- -------- Retained earnings at end of period $374,651 $306,926 $374,651 $306,926 ======== ======== ======== ======== 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 New England Electric System.
NEW ENGLAND POWER COMPANY Statements of Income Twelve Months Ended June 30 (Unaudited)
1994 1993 ---- ---- (In Thousands) Operating revenue, principally from affiliates $1,548,881 $1,541,819 ---------- ---------- Operating expenses: Fuel for generation 281,375 280,959 Purchased electric energy 506,466 519,069 Other operation 184,927 178,413 Maintenance 104,533 103,922 Depreciation and amortization 133,937 129,192 Taxes, other than income taxes 53,482 52,560 Income taxes 100,065 88,487 ---------- ---------- Total operating expenses 1,364,785 1,352,602 ---------- ---------- Operating income 184,096 189,217 Other income: Allowance for equity funds used during construction5,813 2,882 Equity in income of nuclear power companies 5,441 5,657 Other income (expense) - net (2,449) (1,357) ---------- ---------- Operating and other income 192,901 196,399 ---------- ---------- Interest: Interest on long-term debt 40,818 52,652 Other interest 5,524 2,585 Allowance for borrowed funds used during construction - credit (3,246) (1,527) ---------- ---------- Total interest 43,096 53,710 ---------- ---------- Net income $ 149,805 $ 142,689 ========== ========== Statements of Retained Earnings Retained earnings at beginning of period $ 306,926 $ 303,664 Net income 149,805 142,689 Dividends declared on cumulative preferred stock (3,811) (5,592) Dividends declared on common stock (77,399) (133,835) Premium on redemption of preferred stock (870) ---------- ---------- Retained earnings at end of period $ 374,651 $ 306,926 ========== ========== 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 New England Electric System.
NEW ENGLAND POWER COMPANY Balance Sheets (Unaudited)
June 30, December 31, ASSETS 1994 1993 ------ ---- ---- (In Thousands) Utility plant, at original cost $2,481,790 $2,445,702 Less accumulated provisions for depreciation and amortization 975,099 943,750 ---------- ---------- 1,506,691 1,501,952 Net investment in Seabrook 1 under rate settlement 71,683 103,344 Construction work in progress 249,841 165,860 ---------- ---------- Net utility plant 1,828,215 1,771,156 ---------- ---------- Investments: Nuclear power companies, at equity 46,727 46,342 Nonutility property and other investments, at cost 19,932 19,927 ---------- ---------- Total investments 66,659 66,269 ---------- ---------- Current assets: Cash 1,710 610 Accounts receivable, principally from sales of electric energy: Affiliated companies 192,914 201,674 Others 62,446 58,581 Fuel, materials and supplies, at average cost 64,964 55,955 Prepaid and other current assets 27,692 26,454 ---------- ---------- Total current assets 349,726 343,274 ---------- ---------- Accrued Yankee Atomic costs 91,520 103,501 Deferred charges and other assets 162,679 157,087 ---------- ---------- $2,498,799 $2,441,287 ========== ========== CAPITALIZATION AND LIABILITIES ------------------------------ Capitalization: Common stock, par value $20 per share, authorized and outstanding 6,449,896 shares $ 128,998 $ 128,998 Premiums on capital stocks 86,829 86,829 Other paid-in capital 288,000 288,000 Retained earnings 374,651 346,153 ---------- ---------- Total common equity 878,478 849,980 Cumulative preferred stock, par value $100 per share 60,516 61,028 Long-term debt 667,535 667,448 ---------- ---------- Total capitalization 1,606,529 1,578,456 ---------- ---------- Current liabilities: Short-term debt (including $12,475,000 and $8,325,000 to affiliates) 84,150 50,525 Accounts payable (including $58,581,000 and $58,056,000 to affiliates) 161,860 144,100 Accrued liabilities: Taxes 15,102 9,337 Interest 10,039 10,086 Other accrued expenses 13,889 38,313 Dividends payable 21,820 14,512 ---------- ---------- Total current liabilities 306,860 266,873 ---------- ---------- Deferred federal and state income taxes 348,324 344,077 Unamortized investment tax credits 61,658 62,591 Accrued Yankee Atomic costs 91,520 103,501 Other reserves and deferred credits 83,908 85,789 ---------- ---------- $2,498,799 $2,441,287 ========== ========== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY Statements of Cash Flows Six Months Ended June 30 (Unaudited)
1994 1993 ---- ---- (In Thousands) Operating Activities: Net income $ 75,371 $ 67,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 70,916 69,570 Deferred income taxes and investment tax credits - net 7,373 1,768 Allowance for funds used during construction (6,070) (2,190) Early retirement program 2,967 Decrease (increase) in accounts receivable 4,895 40,398 Decrease (increase) in fuel, materials, and supplies(9,009) (7,325) Increase (decrease) in accounts payable 17,760 (3,260) Increase (decrease) in other current liabilities (18,706) 11,897 Other, net (18,117) (12,781) --------- --------- Net cash provided by operating activities $ 124,413 $ 168,078 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $(116,861) $ (65,572) --------- --------- Net cash used in investing activities $(116,861) $ (65,572) --------- --------- Financing Activities: Dividends paid on common stock $ (38,699) $ (41,924) Dividends paid on preferred stock (866) (2,796) Long-term debt - issues 102,000 Long-term debt - retirements (101,000) Preferred stock - retirement (512) Premium on reacquisition of long-term debt (841) Changes in short-term debt 33,625 (18,325) --------- --------- Net cash used in financing activities $ (6,452) $ (62,886) --------- --------- Net increase in cash and cash equivalents $ 1,100 $ 39,620 Cash and cash equivalents at beginning of period 610 652 --------- --------- Cash and cash equivalents at end of period $ 1,710 $ 40,272 ========= ========= Supplementary Information: Interest paid less amounts capitalized $ 15,960 $ 20,840 --------- --------- Federal and state income taxes paid $ 40,687 $ 41,283 --------- --------- The accompanying notes are an integral part of these financial statements.
Note A - Investments in Nuclear Power Companies - ----------------------------------------------- A summary of combined results of operations, assets and liabilities of the four Yankee Nuclear Power Companies in which the Company has investments is as follows: Quarters Ended Six Months Ended June 30, ---------------------------------------- 1994 1993 1994 1993 ---- ---- ---- ---- (In Thousands) Operating revenue $158,091 $174,997 $308,740 $330,042 ======== ======== ======== ======== Net income $ 7,522 $ 6,610 $ 15,444 $ 14,912 ======== ======== ======== ======== Company's equity in net income $ 1,444 $ 1,351 $ 2,731 $ 2,936 ======== ======== ======== ======== June 30, December 31, 1994 1993 ---- ---- (In Thousands) Plant $ 535,993 $ 591,650 Other assets 1,297,576 1,286,923 Liabilities and debt (1,586,269)(1,633,139) ----------- ----------- Net assets $ 247,300 $ 245,434 =========== =========== Company's equity in net assets $ 46,727 $ 46,342 =========== =========== At June 30, 1994, $12,783,000 of undistributed earnings of the nuclear power companies were included in the Company's retained earnings. Yankee Atomic Electric Company plans to retain its earnings until all of its current debt commitments are satisfied. Note B - 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, Note B - Continued - ------ for remediation of property contaminated with hazardous substances. Parties liable include past and present site owners and operators, transporters that brought wastes to the site, and entities that generated or arranged for disposal or treatment of wastes ultimately disposed of at the site. 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. These products or by-products may not have previously been considered hazardous, and may not currently be considered hazardous, but may be identified as such by federal, state, or local authorities in the future. The New England Electric System subsidiaries currently have in place an environmental audit program intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. Federal and state environmental agencies, as well as private parties, have contacted or initiated legal proceedings against the Company regarding liability for cleanup of sites alleged to contain hazardous waste or substances. The Company has been named as a potentially responsible party (PRP) by either the U.S. Environmental Protection Agency or the Massachusetts Department of Environmental Protection at six sites at which hazardous waste is alleged to have been disposed. The Company is also aware of other sites for which it may be held responsible for remediating and it is likely that, in the future, the Company will become involved in additional proceedings demanding contribution for the cost of remediating additional hazardous waste sites. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. Factors such as the evolving nature of remediation technology and regulatory requirements and the particular characteristics of each site, including, for example the size of the site, the nature and amount of waste disposed at the site, and the surrounding geography and land use, make precise estimates 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. Although rate recovery may be sought for cleanup costs incurred, it is uncertain what portion, if any, would be allowed in rates. Note B - Continued - ------ The Company believes that hazardous waste liabilities for all sites of which it is aware will not be material (10 percent of common equity) to its financial position. Where appropriate, the Company intends to seek recovery from its insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. Note C - ------ In the opinion of the Company, these 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 1993 Annual Report. Item 2. Management's Discussion and Analysis of Financial --------------------------------------------------------- Condition and Results of Operations ----------------------------------- Earnings - -------- Net income for the first six months of 1994 increased $8 million from the corresponding period in 1993. Earnings in the first six months of 1993 included a one-time after-tax charge of $6 million ($10 million before tax) associated with an early retirement offer and special severance program for non-union employees undertaken by the Company as part of an organizational review. Excluding the effects of this 1993 charge, earnings for the first six months of 1994 increased $2 million primarily due to increased peak demands in the first quarter and decreased interest costs. The increased earnings were partially offset by other increased operation and maintenance costs and the reimbursement to The Narragansett Electric Company (Narragansett) of certain power plant dismantlement costs. Regulatory Issues - ----------------- The Federal Energy Regulatory Commission (FERC) has allowed the Company to defer increased costs associated with a new accounting standard for postretirement benefits other than pensions (PBOPs) effective with its next rate filing. New accounting rules established by the Financial Accounting Standards Board, which became effective in 1993, require employers to establish a liability during the working years of employees for the expected cost of providing PBOPs instead of recording such costs when paid. In a statement of policy applicable to all utilities subject to its rate-making jurisdiction, the FERC stated that the increased costs resulting from these new rules could be deferred pending the next rate filing so long as such filing occurs before the end of 1995. Accordingly, the Company has deferred a total of approximately $15 million of increased PBOP costs since January 1, 1993. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue during the second quarter and first six months of 1994 compared to the corresponding periods in 1993: Increase (Decrease) in Operating Revenue Second Quarter Six Months -------------- ----------- 1994 vs 1993 1994 vs 1993 -------------- ----------- (In Millions) Fuel recovery (2) $(6) Accrued NEEI fuel revenues (2) (2) Sales increase 3 12 Narragansett integrated facilities credit (4) (4) --- --- $(5) $ - === === Accrued New England Energy Incorporated (NEEI) fuel revenues reflect losses incurred by NEEI on its rate-regulated oil and gas operations. These revenues are accrued by the Company in the year of the loss, but are billed to its customers through its fuel clause in the following year. The decrease in accrued NEEI fuel revenues reflects decreased losses due to decreased oil and gas production partially offset by decreased oil prices. The increase in sales in the second quarter primarily reflects increased sales for resale to other utilities. The increase in sales for the first six months of 1994 also reflects the effects of an increase in peak demands in January and June of 1994. The entire output of Narragansett's portion of the Manchester Street Generating Station 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 costs associated with this plant. The increased credit reflects increased dismantlement costs being incurred on Narragansett's previously retired South Street generating facility. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Total Operating Expenses Second Quarter Six Months -------------- ------------ 1994 vs 1993 1994 vs 1993 -------------- ------------ (In Millions) Fuel costs $(3) $(7) Accrued NEEI fuel costs (2) (2) Purchased energy excluding fuel (2) (3) Other operation and maintenance 4 - Depreciation and amortization 2 2 Taxes - 8 --- --- $(1) $(2) === === Total fuel costs represents fuel for generation and the portion of purchased electric energy permitted to be recovered through the Company's fuel adjustment clause. Purchased energy excluding fuel represents the remainder of purchased electric energy costs. The decrease in fuel costs reflects reduced alternate energy purchases. The decrease in purchased energy excluding fuel reflects a reduction in costs billed to the Company during the second quarter of 1994 resulting from a refueling outage by a nuclear power supplier in 1993. The increase in other operation and maintenance expense during the second quarter reflects increased demand-side management program costs, increased computer system development costs, increased nuclear refueling related expenses, and general increases in other areas. These increases, which also occurred in the six month period, were offset by a one-time charge of $10 million associated with an early retirement offer and special severance program recorded in the first quarter of 1993. The increase in taxes for the first six months of 1994 is primarily due to increased income and the effects of the increase in the federal corporate income tax rate from 34 percent to 35 percent which went into effect in the third quarter of 1993 retroactive to January 1, 1993 and increased property tax accruals. Allowance For Funds Used During Construction (AFDC) - -------------------------------------------------- AFDC increased for the second quarter and first six months of 1994 due to increased construction work in progress, principally associated with the repowering of the Manchester Street Station (see Utility Plant Expenditures and Financing section). Interest Expense - ---------------- The decrease in interest expense for the second quarter and first six months of 1994 is primarily due to significant refinancings of corporate debt at lower interest rates during 1993. 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. Parties liable include past and present site owners and operators, transporters that brought wastes to the site, and entities that generated or arranged for disposal or treatment of wastes ultimately disposed of at the site. 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. These products or by-products may not have previously been considered hazardous, and may not currently be considered hazardous, but may be identified as such by federal, state, or local authorities in the future. The New England Electric System subsidiaries (NEES) currently have in place an environmental audit program intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by- products. Federal and state environmental agencies, as well as private parties, have contacted or initiated legal proceedings against the Company regarding liability for cleanup of sites alleged to contain hazardous waste or substances. The Company has been named as a potentially responsible party (PRP) by either the U.S. Environmental Protection Agency (EPA) or the Massachusetts Department of Environmental Protection at six sites at which hazardous waste is alleged to have been disposed. The Company is also aware of other sites for which it may be held responsible for remediating and it is likely that, in the future, the Company will become involved in additional proceedings demanding contribution for the cost of remediating additional hazardous waste sites. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. Factors such as the evolving nature of remediation technology and regulatory requirements and the particular characteristics of each site, including, for example the size of the site, the nature and amount of waste disposed at the site, and the surrounding geography and land use, make precise estimates 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. Although rate recovery may be sought for cleanup costs incurred, it is uncertain what portion, if any, would be allowed in rates. The Company believes that hazardous waste liabilities for all sites of which it is aware will not be material (10 percent of common equity) to its financial position. Where appropriate, the Company intends to seek recovery from its insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. Electric and Magnetic Fields (EMF) - --------------------------------- In recent years, concerns have been raised about whether EMF, which occur near transmission and distribution lines as well as near household wiring and appliances, cause or contribute to adverse health effects. Numerous studies on the effects of these fields, some of them sponsored by electric utilities (including NEES companies), have been conducted and are continuing. Some of the studies have suggested associations between certain EMF and various types of cancer, while other studies have not substantiated such associations. In February 1993, the EPA called for significant additional research on EMF. In July 1994, a study by a University of Southern California professor suggested an association between EMF and Alzheimer's disease. It is impossible to predict the ultimate impact on the Company and the electric utility industry if further investigations were to demonstrate that the present electricity delivery system is contributing to increased risk of cancer or other health problems. Several state courts have recognized a cause of action for damage to property values in transmission line condemnation cases based on the fear that power lines cause cancer. It is difficult to predict what impact there would be on the Company if this cause of action is recognized in the states in which the Company operates and in contexts other than condemnation cases. Clean Air Requirements - ---------------------- The Company produces approximately 50 percent of its electricity at eight older thermal generating units located in Massachusetts. Six of the units are fueled by coal and the other two are fueled by oil and natural gas. The 1990 amendments to the federal Clean Air Act require a significant reduction in the nation's sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions by the year 2000. Under the amendments pertaining to S02 emissions, the Company expects to be included in Phase 1 of the acid rain provisions that will become effective in 1995. The Company is also subject to the Massachusetts S02 acid rain law that will become effective in 1995, and Phase 2 of the federal acid rain requirements, that will become effective in 2000. In connection with requirements that relate to NOx emissions, state environmental agencies in ozone non-attainment areas were required to develop regulations (also known as Reasonably Available Control Technology requirements, or RACT) that will become effective in 1995 to address the first phase of ozone air quality attainment. These regulations were adopted in Massachusetts in September 1993. The RACT regulations require control technologies (such as low NOx burners) to reduce NOx emissions, an ozone precursor. Additional control measures may be necessary to ensure attainment of the ozone standard. These measures would have to be developed by the states in 1994 and fully implemented by the Company no later than 1999. The extent of these additional control measures is unknown at this time, but could range from minor additions to the RACT requirements to extensive emission reduction requirements, such as costly add-on controls or fuel switching. Should the 1999 ozone attainment requirements be extensive, or additional Clean Air Act or other environmental requirements be imposed, continued operation of certain existing generating units beyond 1999 could be uneconomical. The Company believes that premature retirement of substantially all of its older thermal generating units would cause substantial rate increases. It is estimated that the Company will incur one-time operation and maintenance costs totaling approximately $25 million and capital costs totaling approximately $120 million by 1995, of which approximately $10 million and $68 million, respectively, had been spent through June 1994, to comply with SO2 and NOx requirements that will become effective in 1995. In addition, the Company expects to incur increased fuel costs ranging from approximately $10 million to $20 million, depending on fuel market conditions, by 1995, as a result of federal and state clean air requirements. The generation of electricity from fossil fuels may emit trace amounts of hazardous air pollutants as defined in the Clean Air Act Amendments of 1990. The Act mandates a study of the potential dangers of hazardous air pollutant emissions from electric utility plants. Such research is currently under way and is expected to be complete in 1995. The study conclusions could result in new emission standards and the need for additional costly controls on the Company's plants. At this time, the Company cannot estimate the impact that findings of this research might have on operations. Competitive Conditions - ---------------------- The electric utility business is being subjected to increasing competitive pressures, stemming from a combination of trends, including increasing electric rates, improved technologies, and new regulations and legislation intended to foster competition. Recently, this competition has been most prominent in the bulk power market in which non-utility generating sources have noticeably increased their market share. For example, in 1984, less than 1 percent of the Company's capacity was supplied by non-utility generation sources. By the end of 1993, non-utility power purchases accounted for 380 MW, or 7 percent, of the Company's total capacity. In addition to competition from non-utility generators, the presence of excess generating capacity in New England has resulted in the sale of bulk power by utilities at prices less than the total costs of owning and operating such generating capacity. However, in July 1994, a new all-time regional and system peak occurred which will have the effect of reducing the near-term level of this excess generating capacity in New England. Since over 95 percent of the Company's sales are to its retail affiliates, the Company is affected by increased competition that these affiliates are facing in the retail market. Currently, retail competition comes primarily from alternative fuel suppliers (principally natural gas companies) for heating and cooling, customer-owned generation to displace purchases from electric utilities, and direct competition among electric utilities to attract major new manufacturing facilities to their service territories. In the future, the potential exists for electric utilities and non-utility generators to sell electricity to retail customers of other electric utilities without regard to franchised service territories. For example, the California Public Utilities Commission recently announced a proposal that would give certain large retail customers, by the year 1996, and all other retail customers, by the year 2002, the option of selecting their electricity provider. Power purchased from another provider would still be delivered over the local utility's transmission network which, under the proposal, would be subject to broader access. Other states, including several New England states, have considered or are in the process of considering options to foster increased competition. The NEES companies are responding to current and anticipated competitive pressures in a variety of ways, including cost control and a corporate reorganization into separate retail and wholesale business units. The wholesale business unit, which includes the Company, is positioning itself for increased competition through such means as terminating certain purchased power contracts, shutdowns of uneconomic generating stations, as well as rapid amortization of certain plant assets. Specifically, the Company's rates currently include approximately $100 million per year associated with the recovery of certain Seabrook 1 costs under a 1988 rate settlement and coal conversion expenditures at the Company's Salem Harbor station. The recovery of these costs will be completed prior to the end of 1995. The retail business unit's response to competition includes the development of value-added services for customers and the offering of economic development rates to encourage businesses to locate in the retail affiliates' service territories. In addition, two of the Company's retail affiliates either offered or will begin offering, a discount from base rates in return for a contract requiring a customer to provide five years written notice before purchasing electricity from others or generating any additional electricity for the customer's own use. The FERC ruled in 1992, in a proceeding not involving the Company or its affiliates, that a utility may recover from a wholesale requirements customer, any legitimate, prudent, and verifiable costs that the utility had incurred based on a reasonable expectation that it would continue to sell requirements service to the customer. The FERC has referred to such costs as "stranded costs". On appeal, the United States Court of Appeals for the District of Columbia Circuit has questioned whether allowing utilities to recover stranded costs is anti-competitive and the Court remanded the case back to the FERC for further proceedings and development of the competitive issues. In a separate development, the FERC issued a notice of proposed rule-making on the recovery of investment costs stranded as a result of increased competition. Electric utility rates are generally based on a utility's costs. Therefore, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. These accounting rules require regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, which defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of competition could ultimately cause the operations of the Company, or a portion thereof, to cease meeting the criteria for application of these accounting rules. While the Company does not expect to cease meeting these criteria in the near future, if this were to occur, accounting standards of enterprises in general would apply and immediate recognition of any previously deferred costs would be necessary in the year in which these criteria were no longer applicable. In addition, if, because of competition, utilities are unable to recover all of their costs in rates, it may be necessary to write off those costs that are not recoverable. Utility Plant Expenditures and Financing - ---------------------------------------- Cash expenditures for utility plant totaled $117 million for the first six months of 1994 including $78 million related to the Manchester Street Station Repowering Project. The funds necessary for utility plant expenditures during the period were provided by net cash from operating activities, after the payment of dividends and the proceeds of short-term debt issues. The Company plans to issue $50 million of long-term debt in 1994. The Company's major construction project is the repowering of Manchester Street Station, a 140 MW electric generating station in Providence, Rhode Island which is jointly owned by the Company (90 percent interest) and Narragansett (10 percent interest). Repowering will more than triple the power generation capacity of Manchester Street Station and substantially increase the plant's thermal efficiency. The total cost for the generating station, scheduled for completion in late 1995, is estimated to be approximately $525 million, including AFDC. In addition, related transmission work, which is principally the responsibility of Narragansett, is estimated to cost approximately $75 million and is scheduled for completion in late 1994. At June 30, 1994, $263 million, including AFDC, had been spent on the project ($211 million by the Company). Substantial commitments have been made relative to future planned expenditures for this project. At June 30, 1994, the Company had $84 million of short-term debt outstanding including $72 million in the form of commercial paper borrowings. The Company currently has lines of credit and standby bond purchase facilities with banks totaling $490 million. These lines of credit are available to provide liquidity support for commercial paper borrowings and for $342 million of the Company's outstanding variable rate mortgage bonds in commercial paper mode and for other corporate purposes. There were no borrowings under these lines of credit at June 30, 1994. For the twelve-month period ending June 30, 1994, the ratio of earnings to fixed charges was 6.39. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------- On May 12, 1994, a Special Meeting in lieu of Annual Meeting of Shareholders was held. By unanimous vote of the 6,449,896 shares having general voting rights represented at this meeting: The number of directors for the ensuing year was fixed at six. The following were elected as directors: Joan T. Bok Frederic E. Greenman Alfred D. Houston John W. Newsham John W. Rowe Jeffrey D. Tranen In addition, Michael E. Jesanis was elected Treasurer and Robert King Wulff was elected Clerk. The terms of office are until the next annual meeting of stockholders and until their successors are duly chosen and qualified. Coopers & Lybrand was also selected as Auditor for the year 1994. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The Company is filing the following revised exhibit for incorporation by reference into its registration statements on Form S-3, Commission file Nos. 33-48257, 33-48897, and 33-49193: 12 Statement re computation of ratios 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 June 30, 1994 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: August 9, 1994 EX-99 2 EXHIBIT INDEX EXHIBIT INDEX ============= EXHIBIT DESCRIPTION PAGE - ------- ----------- ---- 12 Statement re Computation Filed Herewith of Ratios EX-99 3 EXHIBIT 12 NEW ENGLAND POWER COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage)
12 Months Ended June 30, 1994 Years Ended December 31, Actual -------------------------------------------------------------- (Unaudited) 1993 1992 1991 1990 1989 -------------- ---- ---- ---- ---- ---- (In Thousands) Net Income $149,805 $141,468 $134,151 $134,747 $222,219 $124,617 - ---------- Less undistributed income of nuclear power companies 836 544 320 (240) (133) 715 -------- -------- -------- -------- -------- -------- 148,969 140,924 133,831 134,987 222,352 123,902 Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 62,925 62,454 64,417 62,182 50,543 42,885 Deferred federal income taxes 22,671 17,745 4,741 11,134 38,367 7,841 Investment tax credits - net (2,284) (2,606) (1,328) (7,732) (26,026) 950 State income taxes 17,528 17,242 14,596 15,526 21,867 14,002 Interest on long-term debt 40,818 45,837 59,382 67,426 67,385 66,654 Interest on short-term debt and other5,524 5,427 2,071 2,490 6,900 7,730 -------- -------- -------- -------- -------- -------- Net earnings available for fixed charges $296,151 $287,023 $277,710 $286,013 $381,388 $263,964 ======== ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $ 40,818 $ 45,837 $ 59,382 $ 67,426 $ 67,385 $ 66,654 Interest on short-term debt and other5,524 5,427 2,071 2,490 6,900 7,730 -------- -------- -------- -------- -------- -------- Total fixed charges $ 46,342 $ 51,264 $ 61,453 $ 69,916 $ 74,285 $ 74,384 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 6.39 5.60 4.52 4.09 5.13 3.55 - ----------------------------------
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