-----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, N1sT5E7JMQau4tQlOB5QpcsxXriSFst1HXXgg6W9I7T56yEnm6hpQjZNA1Vqvyao /JV86XbYNT4TBSaeBIBRZQ== 0000071337-96-000007.txt : 19960816 0000071337-96-000007.hdr.sgml : 19960816 ACCESSION NUMBER: 0000071337-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND POWER CO CENTRAL INDEX KEY: 0000071337 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663070 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06564 FILM NUMBER: 96611724 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, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6564 (LOGO) NEW ENGLAND POWER COMPANY (Exact name of registrant as specified in charter) MASSACHUSETTS 04-1663070 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 25 Research Drive, Westborough, Massachusetts 01582 (Address of principal executive offices) Registrant's telephone number, including area code (508-389-2000) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Common stock, par value $20 per share, authorized and outstanding: 6,449,896 shares at June 30, 1996. PART I FINANCIAL STATEMENTS Item 1. Financial Statements - ---------------------------- NEW ENGLAND POWER COMPANY Statements of Income Periods Ended June 30 (Unaudited)
Quarter Six Months -------- ---------- 1996 1995 1996 1995 ---- ---- ---- ---- (In Thousands) Operating revenue, principally from affiliates $375,001 $378,177 $775,461 $769,295 -------- -------- -------- -------- Operating expenses: Fuel for generation 74,764 70,234 154,990 130,830 Purchased electric energy 124,755 140,208 250,289 285,549 Other operation 53,263 53,335 103,287 103,491 Maintenance 23,365 23,476 42,972 53,905 Depreciation and amortization 26,510 27,262 53,030 57,195 Taxes, other than income taxes 16,228 14,083 33,949 29,385 Income taxes 16,488 16,125 42,039 35,397 -------- -------- -------- -------- Total operating expenses 335,373 344,723 680,556 695,752 -------- -------- -------- -------- Operating income 39,628 33,454 94,905 73,543 Other income: Allowance for equity funds used during construction 2,552 4,953 Equity in income of nuclear power companies1,474 1,491 2,818 2,891 Other income (expense), net 404 1,263 (1,592) (1,099) -------- -------- -------- -------- Operating and other income 41,506 38,760 96,131 80,288 -------- -------- -------- -------- Interest: Interest on long-term debt 11,104 11,764 22,809 23,002 Other interest 3,680 2,255 5,848 4,370 Allowance for borrowed funds used during construction - credit (46) (2,948) (267) (5,755) -------- -------- -------- -------- Total interest 14,738 11,071 28,390 21,617 -------- -------- -------- -------- Net income $ 26,768 $ 27,689 $ 67,741 $ 58,671 ======== ======== ======== ======== Statements of Retained Earnings Retained earnings at beginning of period $396,399 $372,250 $385,309 $372,763 Net income 26,768 27,689 67,741 58,671 Dividends declared on cumulative preferred stock (678) (859) (1,536) (1,717) Dividends declared on common stock (35,797) (30,637) (64,822) (61,274) Premium on redemption of preferred stock (450) (450) -------- -------- -------- -------- Retained earnings at end of period $386,242 $368,443 $386,242 $368,443 ======== ======== ======== ======== 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)
1996 1995 ---- ---- (In Thousands) Operating revenue, principally from affiliates $1,576,705 $1,553,990 ---------- ---------- Operating expenses: Fuel for generation 304,009 253,868 Purchased electric energy 512,666 559,375 Other operation 211,668 208,358 Maintenance 82,021 115,170 Depreciation and amortization 98,593 126,267 Taxes, other than income taxes 63,280 54,398 Income taxes 97,693 81,555 ---------- ---------- Total operating expenses 1,369,930 1,398,991 ---------- ---------- Operating income 206,775 154,999 Other income: Allowance for equity funds used during construction 2,793 10,033 Equity in income of nuclear power companies 5,648 4,976 Other income (expense), net (2,103) 1,578 ---------- ---------- Operating and other income 213,113 171,586 ---------- ---------- Interest: Interest on long-term debt 46,604 43,222 Other interest 12,003 5,292 Allowance for borrowed funds used during construction - credit (5,991) (9,601) ---------- ---------- Total interest 52,616 38,913 ---------- ---------- Net income $ 160,497 $ 132,673 ========== ========== Statements of Retained Earnings Retained earnings at beginning of period $ 368,443 $ 374,651 Net income 160,497 132,673 Dividends declared on cumulative preferred stock (3,252) (3,433) Dividends declared on common stock (138,996) (135,448) Premium on redemption of preferred stock (450) ---------- ---------- Retained earnings at end of period $ 386,242 $ 368,443 ========== ========== 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 1996 1995 ------ ---- ---- (In Thousands) Utility plant, at original cost $2,956,660 $2,941,469 Less accumulated provisions for depreciation and amortization 1,080,834 1,047,982 ---------- ---------- 1,875,826 1,893,487 Net investment in Seabrook 1 under rate settlement 7,605 15,210 Construction work in progress 59,028 41,566 ---------- ---------- Net utility plant 1,942,459 1,950,263 ---------- ---------- Investments: Nuclear power companies, at equity 47,524 47,055 Non-utility property and other investments 26,746 26,627 ---------- ---------- Total investments 74,270 73,682 ---------- ---------- Current assets: Cash 251 2,607 Accounts receivable: Affiliated companies 206,656 204,314 Accrued NEEI revenues 32,434 43,731 Others 21,794 17,821 Fuel, materials, and supplies, at average cost 63,742 54,664 Prepaid and other current assets 28,566 27,986 ---------- ---------- Total current assets 353,443 351,123 ---------- ---------- Deferred charges and other assets 250,919 273,275 ---------- ---------- $2,621,091 $2,648,343 ========== ========== 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 86,820 86,829 Other paid-in capital 288,000 288,000 Retained earnings 386,242 385,309 ---------- ---------- Total common equity 890,060 889,136 Cumulative preferred stock, par value $100 per share 45,516 60,516 Long-term debt 735,900 735,440 ---------- ---------- Total capitalization 1,671,476 1,685,092 ---------- ---------- Current liabilities: Long-term debt due in one year 10,000 Short-term debt (including $6,950,000 and $1,025,000 to affiliates) 145,775 125,150 Accounts payable (including $34,672,000 and $50,760,000 to affiliates) 141,505 163,791 Accrued liabilities: Taxes 7,149 3,447 Interest 10,088 10,482 Other accrued expenses 11,339 10,834 Dividends payable 35,797 32,249 ---------- ---------- Total current liabilities 351,653 355,953 ---------- ---------- Deferred federal and state income taxes 387,917 390,197 Unamortized investment tax credits 56,497 57,509 Other reserves and deferred credits 153,548 159,592 ---------- ---------- $2,621,091 $2,648,343 ========== ========== 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)
1996 1995 ---- ---- (In Thousands) Operating Activities: Net income $ 67,741 $ 58,671 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 55,760 59,929 Deferred income taxes and investment tax credits, net (2,388) 11,990 Allowance for funds used during construction (267) (10,708) Decrease (increase) in accounts receivable 4,982 14,699 Decrease (increase) in fuel, materials, and supplies (9,078) (12,298) Decrease (increase) in prepaid and other current assets (580) 2,727 Increase (decrease) in accounts payable (22,286) (40,968) Increase (decrease) in other current liabilities 3,813 (2,539) Other, net 10,349 (23,487) -------- -------- Net cash provided by operating activities $108,046 $ 58,016 -------- -------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $(42,767) $(95,251) -------- -------- Net cash used in investing activities $(42,767) $(95,251) -------- -------- Financing Activities: Dividends paid on common stock $(61,274) $(30,637) Dividends paid on preferred stock (1,536) (1,717) Changes in short-term debt 20,625 20,305 Long-term debt - issues 39,850 60,000 Long-term debt - retirements (49,850) (10,000) Redemption of preferred stock (15,000) Premium on redemption of preferred stock (450) -------- -------- Net cash provided by (used in) financing activities$(67,635) $ 37,951 -------- -------- Net increase (decrease) in cash and cash equivalents $ (2,356) $ 716 Cash and cash equivalents at beginning of period 2,607 377 -------- -------- Cash and cash equivalents at end of period $ 251 $ 1,093 ======== ======== Supplementary Information: Interest paid less amounts capitalized $ 26,844 $ 19,974 -------- -------- Federal and state income taxes paid $ 48,448 $ 19,158 -------- --------- The accompanying notes are an integral part of these financial statements.
Note A - Investments in Nuclear Units - ------------------------------------- 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, ---------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (In Thousands) Operating revenue $163,406 $165,533 $318,521 $372,813 ======== ======== ======== ======== Net income $ 7,884 $ 7,966 $ 15,272 $ 16,284 ======== ======== ======== ======== Company's equity in net income $ 1,474 $ 1,491 $ 2,818 $ 2,891 ======== ======== ======== ======== June 30, December 31, 1996 1995 ---- ---- (In Thousands) Net plant $ 434,342 $ 443,967 Other assets 1,420,702 1,418,681 Liabilities and debt (1,603,449) (1,612,843) ----------- ----------- Net assets $ 251,595 $ 249,805 =========== =========== Company's equity in net assets $ 47,524 $ 47,055 =========== ===========
At June 30, 1996, $13,581,000 of undistributed earnings of the nuclear power companies were included in the Company's retained earnings. Millstone 3 and Connecticut Yankee The Company is a 12 percent joint owner of the Millstone 3 nuclear generating unit (Millstone 3), a 1,150 megawatt (MW) unit and has a 15 percent ownership interest in Connecticut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 MW nuclear generating plant. Both plants are operated by subsidiaries of Northeast Utilities (NU). In March 1996, the Millstone 3 unit was shut down as the result of an internal safety review. On April 4, 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone 3 to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's Note A - Investments in Nuclear Units - Continued - ------------------------------------- operating license. The Company is not a joint owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. On June 28, 1996, the NRC notified NU that the Millstone units had been reclassified from Category 2 facilities to Category 3 facilities on the NRC "watch list". The NRC deems Category 3 plants as having significant weaknesses that require them to remain shut down until it is demonstrated that adequate programs have been established and implemented to ensure substantial improvement. A Category 3 designation also requires a vote of the NRC Commissioners to restart the units. On August 6, 1996, the NRC Chairman described problems at the Millstone units as pervasive and indicated that a culture change is required. The NRC Chairman has also announced that independent verification of corrective actions taken at the units will be required prior to restart. It is uncertain when Millstone 3 will be allowed by the NRC to restart, although the Company believes that delays well beyond the end of 1996 are likely. Based on an estimate provided by NU, the Company accrued approximately $3 million in the second quarter of 1996 for its portion of the future incremental operation and maintenance costs related to corrective actions at the Millstone 3 unit. These costs were charged to other operation and maintenance expense. Additional costs may be incurred beyond those already recognized. The Company has been, and expects to continue until the unit is returned to service, incurring approximately $1.5 million per month in replacement power costs, which it has been recovering through its fuel clause. The Connecticut Yankee station was shut down on July 22, 1996 after a potential problem with the cooling systems was identified. On July 31, 1996, the NRC identified in an inspection report several additional issues which must be resolved prior to restart. The report addressed numerous programmatic weaknesses, significant deficiencies and errors, as well as issues similar to some identified at the Millstone 1 unit. As a result, Connecticut Yankee began a scheduled refueling outage early. On August 9, 1996, the NRC wrote to NU concerning recently identified safety concerns that raise questions regarding the continued operation of Connecticut Yankee. The NRC letter requires NU to resubmit under oath its basis for continued operation of the unit. The Company cannot predict when restart of Connecticut Yankee will occur. Note A - Investments in Nuclear Units - Continued - ------------------------------------- Maine Yankee The Company has a 20 percent ownership interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear generating station. The Maine Yankee station shut down on July 20, 1996 after identifying a potential problem with the cooling system. The station is in the process of returning to service. Maine Yankee is also subject to an NRC independent safety assessment (ISA) that began in June 1996. The ISA will be extensive and results are not expected until the Fall of 1996. Other nonaffiliated facilities which have been the subject of similar assessments have incurred substantial additional capital and operating expenditures. Prior to the shutdown, Maine Yankee had been operating at only 90 percent power. Upon its return to service, Maine Yankee will continue operating at 90 percent power until the NRC authorizes operation at a higher level. The New England Power Pool (NEPOOL) has indicated that with several nuclear units in New England not in service, there could be insufficient power supply available in New England to meet demand during the remainder of the summer peak-load period. NEPOOL members have taken steps to mitigate the load situation. In general, it is unknown what the total ultimate impact of the increased NRC scrutiny on the nuclear plants mentioned above will have on the Company's operations and costs. 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, 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 Electric System subsidiaries currently have 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. Note B - Hazardous Waste - Continued - ------------------------ 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 for six 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 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. 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. The Company believes that hazardous waste liabilities for all sites of which it is aware are not material to its financial position. Note C - Purchased Power Contract Disputes - ------------------------------------------ As previously reported, in October 1994 the Company was sued by, and later filed counterclaims against, Milford Power Limited Partnership (MPLP), a venture of Enron Corporation and Jones Capital that owned a 149 MW gas-fired power plant in Milford, Massachusetts. The Company purchased 56 percent of the power output of the facility under a long-term contract with MPLP. On April 24, 1996, the Company and MPLP executed a settlement agreement under which each party agreed to the dismissal of the lawsuit and the counterclaims, the restructuring of their power and fuel purchase arrangements, and the payment by MPLP to the Company in the third quarter of 1996 of an undisclosed amount of money. MPLP withdrew all allegations it made against the Company, including claims that the Company deceived its regulators and violated federal criminal statutes. The settlement has been approved by the Federal Energy Regulatory Commission. On August 1, 1996, MPLP sold its partnership interest in the plant to subsidiaries of American National Power, Inc. On July 11, 1996, various New England utilities that are members of NEPOOL, including the Company, submitted a dispute to arbitration regarding their Firm Energy Purchased Power Contract with Hydro-Quebec. The dispute concerns the components of a pricing formula. Note C - Purchased Power Contract Disputes - ------------------------------------------ Based on the Company's interpretation of Hydro-Quebec's claims, the Company's share of additional billings owed to Hydro-Quebec would be approximately $3.5 million on a retroactive basis and an estimated $3.8 million per year on a prospective basis through 2001. An arbitrator has not yet been appointed. Note D - ------ 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 1995 Annual Report. Item 2. Management's Discussion and Analysis of Financial --------------------------------------------------------- Condition and Results of Operations ----------------------------------- This section contains management's assessment of New England Power Company's financial condition and the principal factors having an impact on the results of operations. This discussion should be read in conjunction with the Company's financial statements and footnotes and the 1995 Annual Report on Form 10-K. Earnings - -------- Net income decreased for the second quarter of 1996 by approximately $1 million from the corresponding period in 1995, however, net income increased for the first six months of 1996 by approximately $9 million. The decrease in the second quarter was due to a number of factors, all relating to the completion in the second half of 1995 of the Manchester Street Station repowering project. These factors include decreased allowance for funds used during construction (AFDC), increased property taxes and increased depreciation. These declines in second quarter income were partially offset by decreased purchased power expense and the completion in mid-1995 of the amortization of a portion of Seabrook 1 costs and certain coal conversion costs. During the six-month period, the Company also experienced a decrease in maintenance expense as a result of overhauls at generating units in 1995. Competitive Conditions - ---------------------- The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including the presence of surplus generating capacity, a disparity in electric rates among regions of the country, improvements in generation efficiency, increasing demand for customer choice, and new regulations and legislation intended to foster competition. See the Company's Annual Report on Form 10-K for the year ended December 31, 1995. In states across the country, including Massachusetts and New Hampshire, there have been an increasing number of proposals to allow retail customers to choose their electricity supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems (also known as "retail wheeling"). In Rhode Island, such a proposal has been enacted into law. Rhode Island legislation On August 7, 1996, the Governor of Rhode Island signed into law legislation that will restructure the electric utility industry in Rhode Island. Rhode Island is the first state to pass comprehensive legislation providing retail customers with access to alternative suppliers and providing utilities with recovery of their stranded investments. The New England Electric System (NEES) companies supported this legislation which affects the Company and The Narragansett Electric Company (Narragansett) a retail affiliate. The legislation will allow all customers of electric utilities to choose their power supplier under a phased-in approach, while transmission and distribution rates will remain regulated. This phase-in will begin on July 1, 1997 for customers representing approximately 10 percent of Narragansett's load, followed by another 10 percent on January 1, 1998, and the balance of customers on July 1, 1998. Under the new law, the Company's wholesale contract with Narragansett will be terminated. In return, the cost of the Company's past generation commitments to serve Narragansett's customers will be recovered through a transition access charge on retail distribution rates. Those commitments, which are currently estimated at approximately $4 billion on a present value basis in total for the Company (of which Narragansett's share is approximately $1 billion), consist of (i) generating plant commitments, (ii) regulatory assets, (iii) the above market component of purchased power contracts, and (iv) the operating cost of nuclear plants which cannot be mitigated by shutting down the plants. The aggregate amount of the transition access charge will be reduced by the fair market value of the utilities' non-nuclear generating assets. The value of such generating assets will be determined by leasing, selling, spinning off, or otherwise disposing of at least a 15 percent interest in such generating facilities. Certain of these valuation methods would require transfer of such generating assets from the Company to an affiliated or unaffiliated entity. Sunk costs associated with generating plants and regulatory assets will be recovered over a period of 12 years, with an initial return on equity of one percentage point over the interest rate on long-term "BBB" rated utility bonds. Once the transition access charge is adjusted to reflect the market valuation of the non- nuclear generating plants, the return on equity will be retroactively increased to 11 percent. Purchased power contracts and nuclear decommissioning costs will be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. The initial transition access charge will be set at 2.8 cents per kilowatt-hour (kWh) through December 31, 2000, and is expected to decline thereafter. Implementation of various aspects of the Rhode Island legislation is subject to Rhode Island Public Utilities Commission and Federal Energy Regulatory Commission (FERC) approval. Massachusetts and New Hampshire proceedings In February 1996, Massachusetts Electric Company filed with the Massachusetts Department of Public Utilities a plan for retail choice similar to the Rhode Island legislation described above. Three other utilities and the Massachusetts Division of Energy Resources (DOER) also filed plans with the MDPU in February 1996. The DOER's plan calls for direct access for all customers beginning in 1998, with a pilot program beginning in 1997. The DOER's plan, however, proposes that, in exchange for stranded cost recovery, utilities divest their generating assets, either through sale or spinoff. On May 1, 1996, the MDPU issued a set of proposed rules and regulations governing the implementation of retail choice. The proposed rules would allow all customers of Massachusetts investor- owned utilities to choose their electricity supplier beginning in 1998. The MDPU-proposed rules affirm the principle of stranded cost recovery for utilities over ten years, but create uncertainties concerning the extent of actual stranded cost recovery. While the MDPU did not order mandatory divestiture of generating assets, it stated that it might provide utilities financial incentives to divest. Hearings on the proposed rules were completed in July 1996. The MDPU has stated that it will issue final regulations by year-end 1996 and issue orders on the individual utility plans in 1997. The New Hampshire Public Utilities Commission is expected to issue a preliminary restructuring plan for the electric utility industry in New Hampshire in August 1996. FERC order In April 1996, the FERC issued Order No. 888 addressing open access transmission and required those utilities that own transmission facilities to file open access tariffs to make available transmission service to affiliates and nonaffiliates at fair non-discriminatory rates. Order No. 888 also stated that public utilities will be allowed to seek recovery of legitimate and verifiable stranded costs from departing customers as a result of wholesale competition. The FERC indicated that it will provide for the recovery of retail stranded costs only if state regulators lack the legal authority to address those costs at the time retail wheeling is required. The FERC also stated that it would permit stranded cost recovery under wholesale requirements contracts, such as the contracts between the Company and its retail affiliates. In response to the FERC Notice of Proposed Rulemaking issued in advance of Order No. 888 discussed above, the Company and NEES Transmission Services, Inc. (NEES Trans), a proposed new subsidiary of NEES, filed transmission tariffs in March 1996 at the FERC. On July 9, 1996, the Company, on behalf of the NEES companies, filed a transmission tariff with the FERC that conforms with the requirements of Order No. 888. This tariff became effective immediately upon filing, subject to refund, and supersedes the NEES Trans tariff that was previously filed in March 1996. If approved as filed, the implementation of the tariff would not have a significant impact on the Company's revenues. Risk factors The major risk factors affecting recovery of at-risk assets are: (i) regulatory and legal decisions, (ii) the market price of power, and (iii) the amount of market share retained by the Company. First, there can be no assurance that a final restructuring plan ordered by regulatory bodies, or the courts, or through legislation will include an access charge that would fully recover stranded costs and include a fair return on those costs as they are being recovered. If laws are enacted or regulatory decisions are made that do not offer an opportunity to recover stranded costs, the Company believes it has strong legal arguments to challenge such laws or decisions. Such a challenge would be based, in part, on the assertion that subjecting utility generating assets to competition without compensation for stranded costs, while requiring utilities to open access to their wires at historic cost-based rates, would constitute an unconstitutional taking of property without just compensation. Second, the access charge included in the Rhode Island legislation, as well as the one proposed by the NEES companies in Massachusetts and New Hampshire, recovers only the above market components of sunk costs, such as plant expenditures and contractual commitments. Because of a regional surplus of electric generation capacity, current wholesale power prices in the short-term market are based on the short-run fuel costs of generating units. Such wholesale prices are not currently providing a significant contribution toward other marginal costs, such as operation and maintenance expenses. The Company expects this situation to continue in a retail market. Third, revenues will also be affected by the Company's ability to retain existing customers and attract new customers in a competitive environment. Pilot programs underway in New Hampshire and Massachusetts have been highly competitive, with many competitors and very low power prices being offered to participants. As a result of the pressure on market prices and market share, it is likely that, even with a fully compensatory transition access charge, the generating business will experience revenue losses and increased revenue volatility for an indeterminate period, which will limit its ability to contribute to consolidated earnings and dividend growth during that period. Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Financial Accounting Standard No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives, could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At December 31, 1995, the Company had pre-tax regulatory assets (net of regulatory liabilities) of approximately $300 million. In addition, the Company's affiliate, New England Energy Incorporated, has a regulatory asset of approximately $200 million, which is recoverable in its entirety from the Company. In addition to the potential write-down of regulatory assets, write-downs of plant assets could be required if competitive or regulatory change should cause a substantial revenue loss, or lead to the permanent shutdown or sale of any generating facilities. This "Competitive Conditions" section contains forward-looking statements as defined under the securities laws. Actual results could differ materially from those projected. This section, particularly under "Risk factors", lists some of the reasons why results could differ materially from those projected. Investments in Nuclear Units - ---------------------------- Millstone 3 and Connecticut Yankee The Company is a 12 percent joint owner of the Millstone 3 nuclear generating unit (Millstone 3), a 1,150 megawatt (MW) unit and has a 15 percent ownership interest in Connecticut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 MW nuclear generating plant. Both plants are operated by subsidiaries of Northeast Utilities (NU). In March 1996, the Millstone 3 unit was shut down as the result of an internal safety review. On April 4, 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone 3 to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. The Company is not a joint owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. On June 28, 1996, the NRC notified NU that the Millstone units had been reclassified from Category 2 facilities to Category 3 facilities on the NRC "watch list". The NRC deems Category 3 plants as having significant weaknesses that require them to remain shut down until it is demonstrated that adequate programs have been established and implemented to ensure substantial improvement. A Category 3 designation also requires a vote of the NRC Commissioners to restart the units. On August 6, 1996, the NRC Chairman described problems at the Millstone units as pervasive and indicated that a culture change is required. The NRC Chairman has also announced that independent verification of corrective actions taken at the units will be required prior to restart. It is uncertain when Millstone 3 will be allowed by the NRC to restart, although the Company believes that delays well beyond the end of 1996 are likely. Based on an estimate provided by NU, the Company accrued approximately $3 million in the second quarter of 1996 for its portion of the future incremental operation and maintenance costs related to corrective actions at the Millstone 3 unit. These costs were charged to other operation and maintenance expense. Additional costs may be incurred beyond those already recognized. The Company has been, and expects to continue until the unit is returned to service, incurring approximately $1.5 million per month in replacement power costs, which it has been recovering through its fuel clause. The Connecticut Yankee station was shut down on July 22, 1996 after a potential problem with the cooling systems was identified. On July 31, 1996, the NRC identified in an inspection report several additional issues which must be resolved prior to restart. The report addressed numerous programmatic weaknesses, significant deficiencies and errors, as well as issues similar to some identified at the Millstone 1 unit. As a result, Connecticut Yankee began a scheduled refueling outage early. On August 9, 1996, the NRC wrote to NU concerning recently identified safety concerns that raise questions regarding the continued operation of Connecticut Yankee. The NRC letter requires NU to resubmit under oath its basis for continued operation of the unit. The Company cannot predict when restart of Connecticut Yankee will occur. Maine Yankee The Company has a 20 percent ownership interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear generating station. The Maine Yankee station shut down on July 20, 1996 after identifying a potential problem with the cooling system. The station is in the process of returning to service. Maine Yankee is also subject to an NRC independent safety assessment (ISA) that began in June 1996. The ISA will be extensive and results are not expected until the Fall of 1996. Other nonaffiliated facilities which have been the subject of similar assessments have incurred substantial additional capital and operating expenditures. Prior to the shutdown, Maine Yankee had been operating at only 90 percent power. Upon its return to service, Maine Yankee will continue operating at 90 percent power until the NRC authorizes operation at a higher level. The New England Power Pool (NEPOOL) has indicated that with several nuclear units in New England not in service, there could be insufficient power supply available in New England to meet demand during the remainder of the summer peak-load period. NEPOOL members have taken steps to mitigate the load situation. In general, it is unknown what the total ultimate impact of the increased NRC scrutiny on the nuclear plants mentioned above will have on the Company's operations and costs. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Second Quarter Six Months -------------- ------------ 1996 vs 1995 1996 vs 1995 -------------- ------------ (In Millions) Sales increase $(1) $ - Fuel recovery - 11 Narragansett integrated facilities credit (2) (5) --- --- $(3) $ 6 === === For a discussion of fuel recovery see the fuel costs discussion in the "Operating Expenses" section. The entire output of Narragansett's generating capacity is made available to the Company. Narragansett receives a credit on its purchased power bill from the Company for its fuel costs and other generation and transmission related costs. The increased credits in 1996 relate to costs associated with the dismantlement of a previously retired South Street generating facility and with Narragansett's portion of the repowered Manchester Street generating station that entered commercial operation in the second half of 1995. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Second Quarter Six Months -------------- ------------ 1996 vs 1995 1996 vs 1995 -------------- ------------ (In Millions) Fuel costs $ 3 $ 14 Purchased energy, excluding fuel (14) (25) Operation and maintenance - (11) Depreciation and amortization: Seabrook 1 and Oil Conservation Adjustment (OCA) amortization (5) (12) Depreciation, including Manchester Street 4 8 Taxes, other than income taxes 3 4 Income taxes - 7 ---- ---- $ (9) $(15) ==== ==== Fuel costs represent fuel for generation and the portion of purchased electric energy permitted to be recovered through the Company's fuel adjustment clause. The increase in fuel costs in the second quarter and first six months of 1996 reflects increased kWh sales and additional fixed pipeline demand charges. These increases were partially offset by reduced purchases of power from nonaffiliates reflecting increased hydro generation and increased generation from affiliated nuclear power suppliers. In accordance with a 1992 rate agreement, approximately 50 percent of the Company's fixed pipeline demand charges in prior years were deferred pending completion of the Manchester Street Station repowering project. The remainder of the fixed pipeline demand charges were passed through the Company's fuel clause. The project was completed in the second half of 1995 and, accordingly, no further amounts have been deferred. The deferred amounts are currently being amortized over 25 years. Purchased energy, excluding fuel represents the remainder of purchased electric energy costs. The decrease in purchased energy, excluding fuel, is principally due to 1995 overhauls and refueling shutdowns at Maine Yankee and two other partially- owned nuclear power units, as well as reduced purchases of capacity from other suppliers. Purchased power costs in 1995 also included the Company's portion of incremental costs to repair steam generator tubes at Maine Yankee. Two of these nuclear units, Connecticut Yankee, which is currently shutdown, and Vermont Yankee, are scheduled for refueling shutdowns in the second half of 1996. See "Investments in Nuclear Units" section. The decrease in operation and maintenance costs for the first six months of 1996 reflects overhauls at wholly-owned generating units during the first six months of 1995. The decrease in Seabrook 1 and OCA amortization reflects the completion in mid-1995 of the amortization of a portion of Seabrook 1 costs and certain coal conversion costs. These decreases were partially offset by the depreciation of the Manchester Street Station. The change in taxes, other than income taxes is due to increased property taxes, including taxes on the Manchester Street Station. Allowance For Funds Used During Construction - -------------------------------------------- AFDC decreased for the second quarter and first six months of 1996 due to the completion of the Manchester Street Station repowering project in 1995. Utility Plant Expenditures and Financing - ---------------------------------------- Cash expenditures for utility plant totaled $43 million for the first six months of 1996. The funds necessary for utility plant expenditures during the period were provided by net cash from operating activities, after the payment of dividends. In the first six months of 1996, the Company refinanced $40 million of variable rate mortgage bonds. Citing the passage of the restructuring legislation in Rhode Island, Moody's Investor Services lowered the credit rating of the Company from A1 to A2 for senior secured debt. Standard & Poor's downgraded the Company's senior secured debt credit rating from A+ to A for similar reasons. Duff & Phelps Credit Rating Company had already downgraded the senior secured debt of the Company from AA- to A+ in March 1996 in anticipation of increasing competitive forces in the Northeast. In the second quarter of 1996, the Company redeemed all of its 7.24 percent series of cumulative preferred stock. A premium of $450,000 in connection with this redemption was charged to retained earnings in the second quarter. At June 30, 1996, the Company had $146 million of short-term debt outstanding, including $139 million of commercial paper borrowings and $7 million of borrowings from affiliates. At June 30, 1996, the Company had lines of credit and standby bond purchase facilities with banks totaling $540 million which are available to provide liquidity support for commercial paper borrowings and for $372 million of the Company's outstanding variable rate mortgage bonds in tax-exempt commercial paper mode and for other corporate purposes. There were no borrowings under these lines of credit at June 30, 1996. For the twelve- month period ending June 30, 1996, the ratio of earnings to fixed charges was 5.17. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning a settlement agreement regarding a lawsuit filed against the Company by Milford Power Limited Partnership on October 28, 1994, discussed in this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Information concerning arbitration of a dispute regarding the Company's purchased power contract with Hydro-Quebec discussed in this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Information concerning restructuring dockets before state and federal regulatory agencies, discussed in Part I of this report in Management's Discussion and Analysis of Financial Condition and Results of Operations, is incorporated herein by reference and made a part hereof. Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------ On April 17, 1996, the 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 five. The following were elected as directors: Joan T. Bok Alfred D. Houston Cheryl A. LaFleur John W. Rowe Jeffrey D. Tranen 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 1996. 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 The Company is filing Financial Data Schedules. The Company filed a report on Form 8-K dated May 30, 1996, containing Item 5, Other Events. 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, 1996 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 14, 1996 EX-99 2 EXHIBIT INDEX EXHIBIT INDEX ============= EXHIBIT DESCRIPTION PAGE - ------- ----------- ---- 12 Statement re Computation Filed Herewith of Ratios 27 Financial Data Schedule Filed Herewith EX-12 3 EXHIBIT 12 NEW ENGLAND POWER COMPANY Computation of Ratio of Earnings to Fixed Charges (SEC Coverage) (Unaudited)
12 Months Ended June 30, 1996 Years Ended December 31, Actual -------------------------------------------------------------- (Unaudited) 1995 1994 1993* 1992* 1991* -------------- ---- ---- ---- ---- ---- (In Thousands) Net Income $160,497 $151,427 $149,373 $141,468 $134,151 $134,747 - ---------- Less undistributed income of nuclear power companies 854 707 6 544 320 (240) -------- -------- -------- -------- -------- -------- 159,643 150,720 149,367 140,924 133,831 134,987 Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 72,851 55,094 61,350 62,454 64,417 62,182 Deferred federal income taxes 9,169 21,001 20,501 17,745 4,741 11,134 Investment tax credits - net (1,566) (1,505) (3,577) (2,606) (1,328) (7,732) State income taxes 17,520 16,814 17,328 17,242 14,596 15,526 Interest on long-term debt 46,605 46,797 38,711 45,837 59,382 67,426 Interest on short-term debt and other interest 12,003 10,525 1,956 5,427 2,071 2,490 Estimated interest component of rentals 3,223 3,349 3,635 3,851 4,121 4,115 -------- -------- -------- -------- -------- -------- Net earnings available for fixed charges $319,448 $302,795 $289,271 $290,874 $281,831 $290,128 ======== ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $ 46,605 $ 46,797 $ 38,711 $ 45,837 $ 59,382 $ 67,426 Interest on short-term debt and other interest 12,003 10,525 1,956 5,427 2,071 2,490 Estimated interest component of rentals 3,223 3,349 3,635 3,851 4,121 4,115 -------- -------- -------- -------- -------- -------- Total fixed charges $ 61,831 $ 60,671 $ 44,302 $ 55,115 $ 65,574 $ 74,031 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 5.17 4.99 6.53 5.28 4.30 3.92 - ---------------------------------- *The ratio earnings to fixed charges for 1993 to 1991 have been restated to reflect the estimated interest component of rentals.
EX-27 4 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF NEW ENGLAND POWER COMPANY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 JUN-30-1996 JUN-30-1995 JUN-30-1996 JUN-30-1995 6-MOS 6-MOS QTR-2 QTR-2 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 1,942,459 0 0 0 74,270 0 0 0 353,443 0 0 0 250,919 0 0 0 0 0 0 0 2,621,091 0 0 0 128,998 0 0 0 374,820 0 0 0 386,242 0 0 0 890,060 0 0 0 0 0 0 0 45,516 0 0 0 735,900 0 0 0 6,950 0 0 0 0 0 0 0 138,825 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 803,840 0 0 0 2,621,091 0 0 0 775,461 769,295 375,001 378,177 42,039 35,397 16,488 16,125 638,517 660,355 318,885 328,598 680,556 695,752 335,373 344,723 94,905 73,543 39,628 33,454 1,226 6,745 1,878 5,306 96,131 80,288 41,506 38,760 28,390 21,617 14,738 11,071 67,741 58,671 26,768 27,689 1,536 1,717 678 859 66,205 56,954 26,090 26,830 64,822 61,274 35,797 30,637 22,809 23,002 11,104 11,764 108,046 58,016 23,510 (12,931) 0 0 0 0 0 0 0 0 Total deferred charges includes other assets. Per share data is not relevant because the Company's common stock is wholly owned by New England Electric System. -----END PRIVACY-ENHANCED MESSAGE-----