-----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, TU/kPYsBhGw3vyOXM0fN5JcqkBoslwvVbHf6A4vZvIfZU9xxB5Boz34u4QFFtdsc F/iC2SGyrXe/WrbbQDyzmg== 0000071337-96-000010.txt : 19961111 0000071337-96-000010.hdr.sgml : 19961111 ACCESSION NUMBER: 0000071337-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961108 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: 96657224 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 September 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 September 30, 1996. PART I FINANCIAL STATEMENTS Item 1. Financial Statements - ---------------------------- NEW ENGLAND POWER COMPANY Statements of Income Periods Ended September 30 (Unaudited)
Quarter Nine Months -------- ----------- 1996 1995 1996 1995 ---- ---- ---- ---- (In Thousands) Operating revenue, principally from affiliates $431,420 $421,935$1,206,881 $1,191,230 -------- -------- -------------------- Operating expenses: Fuel for generation 95,751 75,355 250,741 206,185 Purchased electric energy 126,203 133,660 376,492 419,209 Other operation 49,947 52,676 153,234 156,167 Maintenance 19,724 16,481 62,696 70,386 Depreciation and amortization 26,510 22,602 79,540 79,797 Taxes, other than income taxes 16,300 13,974 50,249 43,359 Income taxes 33,203 37,518 75,242 72,915 -------- -------- -------------------- Total operating expenses 367,638 352,266 1,048,194 1,048,018 -------- -------- -------------------- Operating income 63,782 69,669 158,687 143,212 Other income: Allowance for equity funds used during construction 2,535 7,488 Equity in income of nuclear power companies1,324 1,356 4,142 4,247 Other income (expense), net 844 (713) (748) (1,812) -------- -------- -------------------- Operating and other income 65,950 72,847 162,081 153,135 -------- -------- -------------------- Interest: Interest on long-term debt 11,046 11,859 33,855 34,861 Other interest 2,336 2,637 8,184 7,007 Allowance for borrowed funds used during construction 9 (3,333) (258) (9,088) -------- -------- -------------------- Total interest 13,391 11,163 41,781 32,780 -------- -------- -------------------- Net income $ 52,559 $ 61,684 $ 120,300$ 120,355 ======== ======== ==================== Statements of Retained Earnings Retained earnings at beginning of period $386,242 $368,443 $ 385,309$ 372,763 Net income 52,559 61,684 120,300 120,355 Dividends declared on cumulative preferred stock (519) (858) (2,055) (2,575) Dividends declared on common stock (41,924) (41,924) (106,746) (103,198) Premium on redemption of preferred stock (450) -------- -------- -------------------- Retained earnings at end of period $396,358 $387,345 $ 396,358$ 387,345 ======== ======== ==================== 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 September 30 (Unaudited)
1996 1995 ---- ---- (In Thousands) Operating revenue, principally from affiliates $1,586,190 $1,556,370 ---------- ---------- Operating expenses: Fuel for generation 324,405 260,377 Purchased electric energy 505,209 553,862 Other operation 208,939 211,539 Maintenance 85,264 107,708 Depreciation and amortization 102,501 113,259 Taxes, other than income taxes 65,606 54,259 Income taxes 93,378 85,915 ---------- ---------- Total operating expenses 1,385,302 1,386,919 ---------- ---------- Operating income 200,888 169,451 Other income: Allowance for equity funds used during construction 258 10,369 Equity in income of nuclear power companies 5,616 4,854 Other income (expense), net (546) 735 ---------- ---------- Operating and other income 206,216 185,409 ---------- ---------- Interest: Interest on long-term debt 45,791 45,461 Other interest 11,702 6,551 Allowance for borrowed funds used during construction (2,649) (11,142) ---------- ---------- Total interest 54,844 40,870 ---------- ---------- Net income $ 151,372 $ 144,539 ========== ========== Statements of Retained Earnings Retained earnings at beginning of period $ 387,345 $ 383,299 Net income 151,372 144,539 Dividends declared on cumulative preferred stock (2,913) (3,433) Dividends declared on common stock (138,996) (137,060) Premium on redemption of preferred stock (450) ---------- ---------- Retained earnings at end of period $ 396,358 $ 387,345 ========== ========== 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)
September 30, December 31, ASSETS 1996 1995 ------ ---- ---- (In Thousands) Utility plant, at original cost $2,973,759 $2,941,469 Less accumulated provisions for depreciation and amortization 1,098,734 1,047,982 ---------- ---------- 1,875,025 1,893,487 Net investment in Seabrook 1 under rate settlement 3,803 15,210 Construction work in progress 47,284 41,566 ---------- ---------- Net utility plant 1,926,112 1,950,263 ---------- ---------- Investments: Nuclear power companies, at equity 48,147 47,055 Non-utility property and other investments 26,773 26,627 ---------- ---------- Total investments 74,920 73,682 ---------- ---------- Current assets: Cash 1,392 2,607 Accounts receivable: Affiliated companies 252,345 204,314 Accrued NEEI revenues 25,875 43,731 Others 20,707 17,821 Fuel, materials and supplies, at average cost 67,186 54,664 Prepaid and other current assets 25,027 27,986 ---------- ---------- Total current assets 392,532 351,123 ---------- ---------- Deferred charges and other assets 234,417 273,275 ---------- ---------- $2,627,981 $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 86,779 86,829 Other paid-in capital 289,818 288,000 Retained earnings 396,358 385,309 ---------- ---------- Total common equity 901,953 889,136 Cumulative preferred stock, par value $100 per share 39,666 60,516 Long-term debt 735,953 735,440 ---------- ---------- Total capitalization 1,677,572 1,685,092 ---------- ---------- Current liabilities: Long-term debt due in one year 10,000 Short-term debt (including $7,275,000 and $1,025,000 to affiliates) 124,375 125,150 Accounts payable (including $40,170,000 and $50,760,000 to affiliates) 152,717 163,791 Accrued liabilities: Taxes 15,553 3,447 Interest 10,055 10,482 Other accrued expenses 12,029 10,834 Dividends payable 41,924 32,249 ---------- ---------- Total current liabilities 356,653 355,953 ---------- ---------- Deferred federal and state income taxes 386,380 390,197 Unamortized investment tax credits 55,992 57,509 Other reserves and deferred credits 151,384 159,592 ---------- ---------- $2,627,981 $2,648,343 ========== ========== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY Statements of Cash Flows Nine Months Ended September 30 (Unaudited)
1996 1995 ---- ---- (In Thousands) Operating Activities: Net income $ 120,300 $ 120,355 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 82,756 84,241 Deferred income taxes and investment tax credits, net (4,002) 16,927 Allowance for funds used during construction (258) (16,576) Decrease (increase) in accounts receivable (33,061) 555 Decrease (increase) in fuel, materials, and supplies (12,522) (3,635) Decrease (increase) in prepaid and other current assets 2,959 1,324 Increase (decrease) in accounts payable (11,074) (23,561) Increase (decrease) in other current liabilities 12,874 13,387 Other, net 25,350 (30,905) --------- --------- Net cash provided by operating activities $ 183,322 $ 162,112 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $ (54,992) $(125,240) Other investing activities (113) --------- --------- Net cash used in investing activities $ (55,105) $(125,240) --------- --------- Financing Activities: Dividends paid on common stock $ (97,071) $(103,198) Dividends paid on preferred stock (2,055) (2,575) Redemption of preferred stock (20,900) Long-term debt - issues 39,850 60,000 Long-term debt - retirements (49,850) (10,000) Changes in short-term debt (775) 21,000 Gain on redemption of preferred stock, net 1,369 --------- --------- Net cash used in financing activities $(129,432) $ (34,773) --------- --------- Net increase (decrease) in cash and cash equivalents (1,215) $ 2,099 Cash and cash equivalents at beginning of period 2,607 377 --------- --------- Cash and cash equivalents at end of period $ 1,392 $ 2,476 ========= ========= 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 Nine Months Ended September 30, ----------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (In Thousands) Operating revenue $134,570 $154,853 $453,091 $527,666 ======== ======== ======== ======== Net income $ 4,286 $ 5,979 $ 19,558 $ 22,263 ======== ======== ======== ======== Company's equity in net income $ 1,324 $ 1,356 $ 4,142 $ 4,247 ======== ======== ======== ========
September 30, December 31, 1996 1995 ---- ---- (In Thousands) Net plant $ 417,752 $ 443,967 Other assets 1,450,066 1,418,681 Liabilities and debt (1,615,194) (1,612,843) ----------- ----------- Net assets $ 252,624 $ 249,805 =========== =========== Company's equity in net assets $ 48,147 $ 47,055 =========== =========== At September 30, 1996, $14,203,000 of undistributed earnings of the nuclear power companies were included in the Company's retained earnings. Connecticut Yankee The Company has a 15 percent equity ownership interest in Connecticut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 megawatt (MW) nuclear generating plant. At September 30, 1996, the Company's net investment in Connecticut Yankee was $16 million. Subsidiaries of Northeast Utilities (NU) own 49 percent of Connecticut Yankee. The Connecticut Yankee station has been shut down since July 22, 1996, after a potential problem with Note A - Investments in Nuclear Units - Continued - ------------------------------------- its cooling system was identified. Since that time, the Nuclear Regulatory Commission (NRC) has identified additional weaknesses and deficiencies which have to be addressed before the plant can restart. On September 3, 1996, the NRC sent an inspection team to Connecticut Yankee to investigate two unrelated events occurring at the plant while it was shut down. On October 9, 1996, the owners of Connecticut Yankee announced that permanent shutdown of the plant was likely. The announcement was made based on an economic analysis comparing the incremental costs associated with operating and maintaining the plant with the expected value of the plant's output. A final decision by the Connecticut Yankee board of directors is expected in the near future. In the event the plant is permanently shut down, Connecticut Yankee's estimated billings to the Company, including decommissioning of the plant, is currently estimated to be approximately $120 million and is subject to Federal Energy Regulatory Commission approval. These costs would be recorded as an accrued liability with an offsetting regulatory asset in the expectation that the costs would be recoverable from customers. In the event of restart, costs in the range of at least $40 million would be required to address corrective actions at Connecticut Yankee. The Company's share of these costs would be at least $6 million. Millstone 3 The Company is a 12 percent joint owner of the Millstone 3 nuclear generating unit (Millstone 3), a 1,150 MW unit. Millstone 3 is operated by a subsidiary of NU. In March 1996, the Millstone 3 unit was shut down as a result of an internal safety review. In April 1996, the 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. The NRC has classified the Millstone units as 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. 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. On October 18, 1996, the NRC Note A - Investments in Nuclear Units - Continued - ------------------------------------- established a Special Projects Office to oversee inspection and licensing activities at Millstone. The NRC expects the office to be in operation for 18 to 24 months. A vote of the NRC Commissioners is required prior to restart of the units. The Company cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes that the unit will remain shut down for a very protracted period. The Company has an accrued liability of approximately $7 million at the end of the third quarter of 1996 for its share of the currently estimated future incremental operation and maintenance costs related to corrective actions at the Millstone 3 unit. Additional costs may be incurred beyond those already recognized. During the outage, the Company is incurring approximately $1.5 million per month in replacement power costs, which it has been recovering from customers through its fuel clause. Maine Yankee The Company has a 20 percent equity ownership interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear generating station. Maine Yankee is currently operating at 90 percent power until the NRC authorizes operation at a higher level. As previously reported, the NRC is investigating allegations that inadequate analyses of the plant's emergency core cooling system were performed. In September 1996, the NRC asked the Department of Justice to review an NRC investigatory report on the allegations. Maine Yankee was also subject to an NRC independent safety assessment. On October 7, 1996, the NRC staff issued its report, which concluded that overall performance at Maine Yankee was considered adequate for operation. However, the report identified a number of weaknesses and deficiencies. Maine Yankee must respond by December 10, 1996 to the report with its plans for resolving the deficiencies. It is not known when, or if, the Maine Yankee plant will be allowed to return to maximum capacity or how much of an investment might be required to correct the deficiencies. General On October 9, 1996, the NRC issued letters to all nuclear power plants requiring them to submit documentation showing that the plants are operated and maintained within their design basis, and Note A - Investments in Nuclear Units - Continued - ------------------------------------- any deviations are reconciled in a timely manner. The Seabrook 1, Maine Yankee, and Vermont Yankee nuclear power plants, in which the Company owns 10 percent, 20 percent, and 20 percent interests, respectively, will all be required to respond to the NRC letters by February 1997. 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 - Brayton Point - ---------------------- On October 22, 1996, the Environmental Protection Agency (EPA) announced it was beginning a process to revoke the Company's water discharge permit for its Brayton Point 1,538 MW power plant (Brayton Point). This action comes two years before the permit expiration date. The EPA expects to work with the Company and other interested parties, including the states of Rhode Island and Massachusetts, to recommend new permit requirements within 60 days. Brayton Point will continue to operate under the terms of its existing permit until permit modifications are made or a revised permit is issued. The EPA stated it took the action in response to environmental concerns regarding the plant's thermal discharges. The Company cannot predict at this time what permit changes will be required or the impact on plant operations and economics. Note C - 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 C - 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 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. This section contains forward-looking statements as defined under the securities laws. Actual results could differ materially from those projected. This section, particularly under "Competitive Conditions - Risk Factors", lists some of the reasons why results could differ materially from those projected. Earnings - -------- Net income decreased for the third quarter of 1996 by approximately $9 million from the corresponding period in 1995, however, net income for the first nine months of 1996 was unchanged. The decrease in the third quarter was due to a number of factors, most of which relate 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 depreciation and increased property taxes. The Company also experienced a decrease in revenues excluding fuel. During the nine-month period, these declines were offset by decreased purchased power expense and decreased fossil and hydroelectric generating plant maintenance expense. 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 the New England states, 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 these competitive circumstances, utilities across the country that operate generation plants, such as the Company, face the risk that market prices may not be sufficient to recover the costs of the commitments incurred to supply customers under a regulated industry structure. The amount by which costs exceed market prices is commonly referred to as "stranded costs". Massachusetts Settlement Agreement In May 1996, the Massachusetts Department of Public Utilities (MDPU) issued a set of proposed rules and regulations governing the implementation of retail choice in Massachusetts. 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. The MDPU has stated that it will issue final regulations by year-end 1996 and issue orders on individual utility plans in 1997. On October 1, 1996, the Company and Massachusetts Electric Company (Massachusetts Electric), a retail affiliate, together with the Massachusetts Attorney General, the Massachusetts Division of Energy Resources and other parties, filed a comprehensive settlement agreement with the MDPU. The settlement agreement provides for the commencement of retail choice on January 1, 1998 (contingent on choice being available to the customers of all Massachusetts investor-owned utilities), full compensation for potential stranded costs, and the full divestiture of the NEES companies' fossil and hydroelectric generating business. Under the settlement agreement, customers who do not choose an alternative supplier would receive "Standard Offer" service, which would be priced to guarantee customers at least a 10 percent savings in 1998 from current electricity prices, therefore resulting in revenue losses for Massachusetts Electric. Under the settlement agreement, the Company's wholesale contract with Massachusetts Electric would be terminated. In return, the cost of the Company's past generation commitments to serve Massachusetts Electric's customers (estimated at approximately $3 billion) would be recovered through a transition access charge on retail distribution rates. Those commitments 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, including nuclear decommissioning. Sunk costs associated with generating plants and regulatory assets would be recovered over a period of 12 years, based on an initial return on equity of 9.4 percent. As the transition access charge declines, the Company would earn mitigation incentives which would supplement its return on equity on sunk costs above the initial 9.4 percent during the 12 year transition period. The incentives are designed such that the Company believes that it could earn a return on equity on sunk costs of 11 percent. The above-market component of purchased power contracts and nuclear decommissioning costs would be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. The transition access charge would be reduced to reflect the net proceeds from the sale of the NEES companies' generating assets. The initial transition access charge, before the application of those proceeds, would be set at 2.8 cents per kilowatt-hour (kWh) through December 31, 2000, and is expected to decline thereafter. The settlement agreement requires the NEES companies to file a divestiture plan for the generating business with the MDPU by July 1, 1997. The NEES companies must complete the divestiture of its generating business within six months of the later of the commencement of retail access in Massachusetts or the receipt of all necessary regulatory approvals. As part of the divestiture plan, the Company would endeavor to sell or otherwise transfer its minority interest in four nuclear power plants to nonaffiliates. The Company may retain responsibility for decommissioning and related expenses if necessary. To the extent that the Company is unable to divest its nuclear generating interests, the settlement agreement provides for an 80 percent/20 percent sharing between customers and shareholders of the revenues associated with the nuclear interests and the costs not otherwise reflected in the transition access charge. The MDPU, with the agreement of the parties, has set a procedural schedule under which it will issue a decision on the settlement agreement by January 10, 1997. The settlement agreement is also subject to approval by the Federal Energy Regulatory Commission (FERC). Additional governmental approvals would be required for the divestiture of the generating business. In addition, the implementation of retail choice in Massachusetts may be the subject of legislation from the Massachusetts legislature. 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 NEES companies supported this legislation which affects the Company and The Narragansett Electric Company (Narragansett), a retail affiliate. The legislation allows 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. All Rhode Island customers would have choice of supplier beginning January 1, 1998 if retail access is available to 40 percent or more of the kWh sales in New England by that date. Rhode Island customers will likely receive substantial savings in a competitive market, which will therefore result in revenue losses for Narragansett. 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 (estimated at approximately $1 billion) will be recovered through a transition access charge on retail distribution rates similar to that contained in the Massachusetts settlement agreement. Under the Rhode Island legislation, the return on equity is initially set at 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. Implementation of various aspects of the Rhode Island legislation is subject to Rhode Island Public Utilities Commission and FERC approval. New Hampshire Proceedings In September 1996, the New Hampshire Public Utilities Commission issued a preliminary restructuring plan for the electric utility industry in New Hampshire. The stated goals of the preliminary plan include encouraging the divestiture of generation assets and the recovery of some stranded costs through an interim non-bypassable transition charge. Recoverable stranded costs would be determined on a utility-specific basis. The amount of recovery could be tied to the amount by which a utility's rates exceed the regional average electricity rate. Utilities with rates at or below the regional average could be entitled to greater recovery of stranded costs. Utility-specific interim stranded cost recovery hearings are scheduled for December 1996. A final plan is expected to be issued in February 1997. 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. On July 9, 1996, the Company 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. The implementation of the tariff is not expected to have a significant impact on the Company's revenues. Accounting Implications 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 Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The Company believes that, if approved by regulators, the Massachusetts settlement agreement and the Rhode Island legislation would meet the criteria for continued application of FAS 71 to the Company's remaining regulated utility operations, including the recovery of stranded costs. As a result, no write-off of existing regulatory assets is expected and any loss from the divestiture of NEES's generating business would be recorded as a regulatory asset. Risk Factors For a discussion of risk factors in the event that the Massachusetts settlement agreement is not approved and FERC approval of implementation of the Rhode Island legislation does not occur, see "Risk Factors" in the Company's Form 10-Q for the quarter ended June 30, 1996. Investments in Nuclear Units - ---------------------------- Connecticut Yankee The Company has a 15 percent equity ownership interest in Connecticut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 megawatt (MW) nuclear generating plant. At September 30, 1996, the Company's net investment in Connecticut Yankee was $16 million. Subsidiaries of Northeast Utilities (NU) own 49 percent of Connecticut Yankee. The Connecticut Yankee station has been shut down since July 22, 1996, after a potential problem with its cooling system was identified. Since that time, the Nuclear Regulatory Commission (NRC) has identified additional weaknesses and deficiencies which have to be addressed before the plant can restart. On September 3, 1996, the NRC sent an inspection team to Connecticut Yankee to investigate two unrelated events occurring at the plant while it was shut down. On October 9, 1996, the owners of Connecticut Yankee announced that permanent shutdown of the plant was likely. The announcement was made based on an economic analysis comparing the incremental costs associated with operating and maintaining the plant with the expected value of the plant's output. A final decision by the Connecticut Yankee board of directors is expected in the near future. In the event the plant is permanently shut down, Connecticut Yankee's estimated billings to the Company, including decommissioning of the plant, is currently estimated to be approximately $120 million and is subject to FERC approval. These costs would be recorded as an accrued liability with an offsetting regulatory asset in the expectation that the costs would be recoverable from customers. (See "Competitive Conditions" section.) In the event of restart, costs in the range of at least $40 million would be required to address corrective actions at Connecticut Yankee. The Company's share of these costs would be at least $6 million. Millstone 3 The Company is a 12 percent joint owner of the Millstone 3 nuclear generating unit (Millstone 3), a 1,150 MW unit. Millstone 3 is operated by a subsidiary of NU. In March 1996, the Millstone 3 unit was shut down as a result of an internal safety review. In April 1996, the 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. The NRC has classified the Millstone units as 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. 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. On October 18, 1996, the NRC established a Special Projects Office to oversee inspection and licensing activities at Millstone. The NRC expects the office to be in operation for 18 to 24 months. A vote of the NRC Commissioners is required prior to restart of the units. The Company cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes that the unit will remain shut down for a very protracted period. The Company has an accrued liability of approximately $7 million at the end of the third quarter of 1996 for its share of the currently estimated future incremental operation and maintenance costs related to corrective actions at the Millstone 3 unit. Additional costs may be incurred beyond those already recognized. During the outage, the Company is incurring approximately $1.5 million per month in replacement power costs, which it has been recovering from customers through its fuel clause. Maine Yankee The Company has a 20 percent equity ownership interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear generating station. Maine Yankee is currently operating at 90 percent power until the NRC authorizes operation at a higher level. As previously reported, the NRC is investigating allegations that inadequate analyses of the plant's emergency core cooling system were performed. In September 1996, the NRC asked the Department of Justice to review an NRC investigatory report on the allegations. Maine Yankee was also subject to an NRC independent safety assessment. On October 7, 1996, the NRC staff issued its report, which concluded that overall performance at Maine Yankee was considered adequate for operation. However, the report identified a number of weaknesses and deficiencies. Maine Yankee must respond by December 10, 1996 to the report with its plans for resolving the deficiencies. It is not known when, or if, the Maine Yankee plant will be allowed to return to maximum capacity or how much of an investment might be required to correct the deficiencies. General On October 9, 1996, the NRC issued letters to all nuclear power plants requiring them to submit documentation showing that the plants are operated and maintained within their design basis, and any deviations are reconciled in a timely manner. The Seabrook 1, Maine Yankee, and Vermont Yankee nuclear power plants, in which the Company owns 10 percent, 20 percent, and 20 percent interests, respectively, will all be required to respond to the NRC letters by February 1997. 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. Brayton Point - ------------- On October 22, 1996, the Environmental Protection Agency (EPA) announced it was beginning a process to revoke the Company's water discharge permit for its Brayton Point 1,538 MW power plant (Brayton Point). This action comes two years before the permit expiration date. The EPA expects to work with the Company and other interested parties, including the states of Rhode Island and Massachusetts, to recommend new permit requirements within 60 days. Brayton Point will continue to operate under the terms of its existing permit until permit modifications are made or a revised permit is issued. The EPA stated it took the action in response to environmental concerns regarding the plant's thermal discharges. The Company cannot predict at this time what permit changes will be required or the impact on plant operations and economics. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Third Quarter Nine Months ------------- ------------ 1996 vs 1995 1996 vs 1995 ------------- ------------ (In Millions) Fuel recovery $15 $26 Narragansett integrated facilities credit (3) (7) Sales decrease and other (3) (3) --- --- $ 9 $16 === === 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 the 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 Third Quarter Nine Months ------------- ------------ 1996 vs 1995 1996 vs 1995 ------------- ------------ (In Millions) Fuel costs $16 $ 30 Purchased energy, excluding fuel (3) (28) Operation and maintenance - (11) Depreciation and amortization: Seabrook 1 and Oil Conservation Adjustment (OCA) amortization - (12) Depreciation, including Manchester Street 4 12 Taxes, other than income taxes 2 7 Income taxes (4) 2 --- ---- $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 increases in fuel costs in the third quarter and first nine months of 1996 primarily reflect additional fixed pipeline demand charges due to the completion of the Manchester Street repowering project in the second half of 1995, the amortization of pipeline demand charges deferred during the project's construction period, and increased kWh sales. The portion of purchased electric energy costs not recovered through the Company's fuel clause is shown as purchased energy, excluding fuel. The decrease in purchased power costs, excluding fuel, for the third quarter and nine-month period reflects reductions in purchases under certain long-term power contracts. Purchased power costs in the first six months of 1995 also included the Company's portion of the incremental costs to repair steam generator tubes at Maine Yankee. Purchased power costs from other power suppliers also decreased in the first six months but increased in the third quarter primarily due to the timing of overhauls and refueling shutdowns. The decrease in operation and maintenance costs for the nine- month period reflects overhauls at the Company's fossil and hydroelectric generating units during the first nine months of 1995, partially offset by the Company's portion of currently estimated incremental costs to correct deficiencies at the Millstone 3 nuclear generating unit. The Company is a joint owner of Millstone 3. (See "Investments in Nuclear Units" section.) 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 offset by the depreciation of the Manchester Street Station. The increase in taxes, other than income taxes in 1996 is due to increased property taxes, including taxes on the Manchester Street Station. Allowance For Funds Used During Construction - -------------------------------------------- AFDC decreased for the third quarter and first nine months of 1996 due to the completion of the Manchester Street Station repowering project in 1995. Utility Plant Expenditures and Financings - ----------------------------------------- Cash expenditures for utility plant totaled $55 million for the first nine 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 nine months of 1996, the Company refinanced $40 million of variable rate mortgage bonds. The Company plans to refinance $8 million of variable rate debt in the fourth quarter of 1996. In August 1996, the Company repurchased $6 million of its 4.64 percent series of cumulative preferred stock. In May 1996, the Company redeemed all ($15 million) of its 7.24 percent series of cumulative preferred stock. The Company has approximately $740 million of mortgage bonds outstanding. The bond indenture terms restrict the sale of the trust property in its entirety or substantially in its entirety. Therefore, the proposed sale of the Company's generating business would likely require that the Company either amend the bond indenture terms or defease the indenture and the bonds in connection with the proposed sale. Any defeasance of bonds is expected to be either to maturity or at general redemption prices. See "Competitive Conditions" section. At September 30, 1996, the Company had $124 million of short-term debt outstanding, including $117 million of commercial paper borrowings. At September 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 September 30, 1996. For the twelve-month period ending September 30, 1996, the ratio of earnings to fixed charges was 5.02. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- 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. 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. 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. On October 18, 1996, the Company and other New England utilities who are parties to the Firm Energy Contract filed a motion to dismiss Hydro-Quebec's claims. A decision on the motion is expected by December of this year. 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 reports on Form 8-K dated September 12, 1996 and October 1, 1996, each 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 Septmber 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: November 8, 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 September 30, 1996 Years Ended December 31, Actual --- ----------------------------------------------------------- (Unaudited) 1995 1994 1993* 1992* 1991* -------------- ---- ---- ---- ---- ---- (In Thousands) Net Income $151,372 $151,427 $149,373 $141,468 $134,151 $134,747 - ---------- Less undistributed income of nuclear power companies 1,067 707 6 544 320 (240) -------- -------- -------- -------- -------- -------- 150,305 150,720 149,367 140,924 133,831 134,987 Add income taxes and fixed charges - ---------------------------------- Current federal income taxes 75,081 55,094 61,350 62,454 64,417 62,182 Deferred federal income taxes 3,633 21,001 20,501 17,745 4,741 11,134 Investment tax credits - net (1,597) (1,505) (3,577) (2,606) (1,328) (7,732) State income taxes 16,505 16,814 17,328 17,242 14,596 15,526 Interest on long-term debt 45,791 46,797 38,711 45,837 59,382 67,426 Interest on short-term debt and other interest 11,702 10,525 1,956 5,427 2,071 2,490 Estimated interest component of rentals 3,156 3,349 3,635 3,851 4,121 4,115 -------- -------- -------- -------- -------- -------- Net earnings available for fixed charges $304,576 $302,795 $289,271 $290,874 $281,831 $290,128 ======== ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $ 45,791 $ 46,797 $ 38,711 $ 45,837 $ 59,382 $ 67,426 Interest on short-term debt and other interest 11,702 10,525 1,956 5,427 2,071 2,490 Estimated interest component of rentals 3,156 3,349 3,635 3,851 4,121 4,115 -------- -------- -------- -------- -------- -------- Total fixed charges $ 60,649 $ 60,671 $ 44,302 $ 55,115 $ 65,574 $ 74,031 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 5.02 4.99 6.53 5.28 4.30 3.92 - ---------------------------------- * The ratio of earnings to fixed charges for 1993 to 1991 have been restated to reflect the estimated interest component of rentals.
EX-27 4
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 SEP-30-1996 9-MOS PER-BOOK 1,926,112 74,920 392,532 234,417 0 2,627,981 128,998 376,597 396,358 901,953 0 39,666 735,953 124,375 0 0 0 0 0 0 826,034 2,627,981 1,206,881 75,242 972,952 1,048,194 158,687 3,394 162,081 41,781 120,300 2,055 118,245 106,746 33,855 183,322 0 0 Total deferred charges includes other assets and accrued Yankee Atomic costs. Short-term notes includes commercial paper obligations and short-term debt to affiliates. Per share data is not relevant because the Company's common stock is wholly-owned by New England Electric System. -----END PRIVACY-ENHANCED MESSAGE-----