-----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, GWpmsv3GqpcnBsnDSM1CD3BStc2C00OxDzVhoBfnbokmzUS2u3R5jqQYkYQnFud7 RvVnxYeVA3XHkVfQlGKLlQ== 0000071337-97-000015.txt : 19971113 0000071337-97-000015.hdr.sgml : 19971113 ACCESSION NUMBER: 0000071337-97-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-06564 FILM NUMBER: 97715174 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, 1997 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, 1997. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- NEW ENGLAND POWER COMPANY Statements of Income Periods Ended September 30 (Unaudited)
Quarter Nine Months -------- ----------- 1997 1996 1997 1996 ---- ---- ---- ---- (In Thousands) Operating revenue, principally from affiliates $443,774 $431,420$1,277,871 $1,206,881 -------- -------- -------------------- Operating expenses: Fuel for generation 90,580 95,751 284,368 250,741 Purchased electric energy 134,606 126,203 406,011 376,492 Other operation 57,570 49,947 184,798 153,234 Maintenance 20,458 19,724 66,964 62,696 Depreciation and amortization 26,929 26,510 70,334 79,540 Taxes, other than income taxes 16,690 16,300 51,713 50,249 Income taxes 32,406 33,203 68,468 75,242 -------- -------- -------------------- Total operating expenses 379,239 367,638 1,132,656 1,048,194 -------- -------- -------------------- Operating income 64,535 63,782 145,215 158,687 Other income: Equity in income of nuclear power companies1,260 1,324 3,881 4,142 Other income (expense), net (1,366) 844 (3,780) (748) -------- -------- -------------------- Operating and other income 64,429 65,950 145,316 162,081 -------- -------- -------------------- Interest: Interest on long-term debt 10,427 11,046 31,599 33,855 Other interest 2,244 2,336 5,150 8,184 Allowance for borrowed funds used during construction (261) 9 (912) (258) -------- -------- -------------------- Total interest 12,410 13,391 35,837 41,781 -------- -------- -------------------- Net income $ 52,019 $ 52,559 $ 109,479$ 120,300 ======== ======== ==================== Statements of Retained Earnings Retained earnings at beginning of period $392,534 $386,242 $ 400,610$ 385,309 Net income 52,019 52,559 109,479 120,300 Dividends declared on cumulative preferred stock (519) (519) (1,556) (2,055) Dividends declared on common stock (35,475) (41,924) (99,974) (106,746) Premium on redemption of preferred stock (450) -------- -------- -------------------- Retained earnings at end of period $408,559 $396,358 $ 408,559$ 396,358 ======== ======== ==================== 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)
1997 1996 ---- ---- (In Thousands) Operating revenue, principally from affiliates $1,671,299 $1,586,190 ---------- ---------- Operating expenses: Fuel for generation 376,172 324,405 Purchased electric energy 538,429 505,209 Other operation 235,020 208,939 Maintenance 83,386 85,264 Depreciation and amortization 95,003 102,501 Taxes, other than income taxes 67,880 65,606 Income taxes 85,120 93,378 ---------- ---------- Total operating expenses 1,481,010 1,385,302 ---------- ---------- Operating income 190,289 200,888 Other income: Allowance for equity funds used during construction 258 Equity in income of nuclear power companies 4,898 5,616 Other income (expense), net (4,883) (546) ---------- ---------- Operating and other income 190,304 206,216 ---------- ---------- Interest: Interest on long-term debt 42,855 45,791 Other interest 7,032 11,702 Allowance for borrowed funds used during construction (1,245) (2,649) ---------- ---------- Total interest 48,642 54,844 ---------- ---------- Net income $ 141,662 $ 151,372 ========== ========== Statements of Retained Earnings Retained earnings at beginning of period $ 396,358 $ 387,345 Net income 141,662 151,372 Dividends declared on cumulative preferred stock (2,075) (2,913) Dividends declared on common stock (127,386) (138,996) Premium on redemption of preferred stock (450) ---------- ---------- Retained earnings at end of period $ 408,559 $ 396,358 ========== ========== 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 1997 1996 ------ ---- ---- (In Thousands) Utility plant, at original cost $3,044,245 $2,991,797 Less accumulated provisions for depreciation and amortization 1,176,595 1,118,340 ---------- ---------- 1,867,650 1,873,457 Construction work in progress 29,136 36,836 ---------- ---------- Net utility plant 1,896,786 1,910,293 ---------- ---------- Investments: Nuclear power companies, at equity 50,370 47,902 Non-utility property and other investments 30,805 30,591 ---------- ---------- Total investments 81,175 78,493 ---------- ---------- Current assets: Cash 1,273 3,046 Accounts receivable: Affiliated companies 229,027 201,370 Accrued NEEI revenues 21,551 21,648 Others 24,630 23,219 Fuel, materials and supplies, at average cost 57,332 58,709 Prepaid and other current assets 21,557 25,050 ---------- ---------- Total current assets 355,370 333,042 ---------- ---------- Deferred charges and other assets 464,623 325,887 ---------- ---------- $2,797,954 $2,647,715 ========== ========== 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 86,779 Other paid-in capital 289,818 289,818 Retained earnings 408,559 400,610 Unrealized gain on securities, net 29 ---------- ---------- Total common equity 914,183 906,205 Cumulative preferred stock, par value $100 per share 39,666 39,666 Long-term debt 647,666 733,006 ---------- ---------- Total capitalization 1,601,515 1,678,877 ---------- ---------- Current liabilities: Long-term debt due in one year 53,000 3,000 Short-term debt (including $1,475,000 and $5,275,000 to affiliates) 97,950 93,600 Accounts payable (including $32,630,000 and $25,301,000 to affiliates) 127,963 127,226 Accrued liabilities: Taxes 13,567 8,158 Interest 9,537 9,668 Other accrued expenses 15,392 16,577 Dividends payable 35,475 27,412 ---------- ---------- Total current liabilities 352,884 285,641 ---------- ---------- Deferred federal and state income taxes 375,134 382,164 Unamortized investment tax credits 53,969 55,486 Other reserves and deferred credits 414,452 245,547 ---------- ---------- $2,797,954 $2,647,715 ========== ========== 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)
1997 1996 ---- ---- (In Thousands) Operating Activities: Net income $ 109,479 $ 120,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 72,821 82,756 Deferred income taxes and investment tax credits, net (7,107) (4,002) Allowance for funds used during construction (912) (258) Decrease (increase) in accounts receivable (28,971) (33,061) Decrease (increase) in fuel, materials, and supplies 1,377 (12,522) Decrease (increase) in prepaid and other current assets 3,493 2,959 Increase (decrease) in accounts payable 737 (11,074) Increase (decrease) in other current liabilities 4,093 12,874 Other, net 18,823 25,350 --------- --------- Net cash provided by operating activities $ 173,833 $ 183,322 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $ (50,822) $ (54,992) Other investing activities (167) (113) --------- --------- Net cash used in investing activities $ (50,989) $ (55,105) --------- --------- Financing Activities: Dividends paid on common stock $ (91,911) $ (97,071) Dividends paid on preferred stock (1,556) (2,055) Redemption of preferred stock (20,900) Long-term debt - issues 39,850 Long-term debt - retirements (35,500) (49,850) Changes in short-term debt 4,350 (775) Gain on redemption of preferred stock, net 1,369 --------- --------- Net cash used in financing activities $(124,617) $(129,432) --------- --------- Net increase (decrease) in cash and cash equivalents $ (1,773) $ (1,215) Cash and cash equivalents at beginning of period 3,046 2,607 --------- --------- Cash and cash equivalents at end of period $ 1,273 $ 1,392 ========= ========= 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 New England Power Company (the Company) has investments is as follows:
Quarters Ended Nine Months Ended September 30, ---------------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (In Thousands) Operating revenue $142,156 $134,570 $523,478 $453,091 ======== ======== ======== ======== Net income $ 6,604 $ 4,286 $ 21,585 $ 19,558 ======== ======== ======== ======== Company's equity in net income $ 1,260 $ 1,324 $ 3,881 $ 4,142 ======== ======== ======== ======== September 30, December 31, 1997 1996 ---- ---- (In Thousands) Net plant $ 420,918 $ 401,049 Other assets 2,225,215 2,031,336 Liabilities and debt (2,374,643) (2,177,068) ----------- ----------- Net assets $ 271,489 $ 255,317 =========== =========== Company's equity in net assets $ 50,370 $ 47,902 =========== ===========
At September 30, 1997, $16,427,000 of undistributed earnings of the nuclear power companies were included in the Company's retained earnings. Millstone 3 The Company is a 12 percent joint owner of the 1,150 megawatt (MW) Millstone 3 nuclear generating unit (Millstone 3). Millstone 3 is operated by Northeast Nuclear Energy Company, a subsidiary of Northeast Utilities (NU). In April 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone 3, which has experienced Note A - Investments in Nuclear Units - Continued - ------------------------------------- numerous technical and nontechnical problems, 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 an owner of Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. Millstone 3 has been placed on the NRC "Watch List," signifying that its safety performance exhibits sufficient weakness to warrant increased NRC attention. A number of significant prerequisites must be fulfilled prior to restart of Millstone 3, including certification by NU that the unit adequately conforms to its design and licensing bases, an independent verification of corrective actions taken at the unit, an NRC assessment concluding a culture change has occurred, public hearings, and a vote of the NRC Commissioners. The Company cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes that the restart of the unit is not likely until the second quarter of 1998 at the earliest. In 1996, the Company's Millstone 3 costs, excluding fuel, increased by $9 million (all of which occurred in the first nine months of 1996). During the first nine months of 1997 the Company's Millstone 3 costs increased an additional $2 million over prior year levels. The Company expects its level of Millstone 3 costs in the fourth quarter to be $7 million higher than during the fourth quarter of 1996. Since April 1996, the Company has also incurred an estimated $30 million in incremental replacement power costs, which NEP has been recovering from customers through its fuel clause. During the outage, the Company is incurring incremental replacement power costs of approximately $1.8 million per month. Several criminal investigations related to Millstone 3 are ongoing. The NRC and the Connecticut Department of Environmental Protection have identified numerous apparent violations which may result in the assessment of substantial civil penalties. On August 7, 1997, the Company filed suit against NU in Massachusetts Superior Court, Worcester County for damages resulting from the tortious conduct of NU relating to Millstone 3. The Company is seeking compensation for the losses it has suffered, including the costs of the lost power and costs necessary to assure that Millstone 3 can safely return to operation. The Company also seeks punitive damages. Note A - Investments in Nuclear Units - Continued - ------------------------------------- The Company, on August 7, 1997, also sent a demand for arbitration to Connecticut Light & Power Company and Western Massachusetts Electric Company, both subsidiaries of NU, seeking damages resulting from their breach of obligations under an agreement with the Company and others regarding the operation and ownership of Millstone 3. 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. After an extensive review of the economic viability of the station, the Maine Yankee Board of Directors voted to permanently shut down and decommission the station. The Maine Public Utilities Commission (MPUC) has opened a proceeding to review the prudence of the decision to close the Maine Yankee plant, and whether the decision resulted from imprudent operation of the plant. Maine Yankee intends to assert that the MPUC jurisdiction is preempted by Federal Energy Regulatory Commission (FERC) regulation. In September 1997, the Department of Justice announced that no criminal charges will be filed following a review of a NRC investigatory report for possible criminal violations related to the Maine Yankee station. Civil fines may be assessed by the NRC based upon several investigations and inspections, including its independent safety assessment. At September 30, 1997, the Company's net investment in Maine Yankee was $15 million. The Company estimates that Maine Yankee's future billings to the Company to recover investments in the plant and costs to shutdown and decommission the plant will be at least $175 million. Such billings are subject to FERC approval. This figure reflects an updated decommissioning study. These estimated costs have been recorded as an accrued liability with an offsetting regulatory asset in the expectation that the costs would be recoverable from customers. In the 1970s the Company and several other shareholders (Sponsors) of Maine Yankee entered into 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlement to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New Note A - Investments in Nuclear Units - Continued - ------------------------------------- England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements, claiming that such agreements excuse further payments upon station shutdown. The Company has notified the Secondary Purchasers that the shutdown does not relieve them of their obligation to make payments under the Secondary Purchase Agreements and that they are in default of such agreements. As these Secondary Purchase Agreements are between the Sponsors and the Secondary Purchasers, Maine Yankee has billed the Sponsors for payment as a result of nonpayment by the Secondary Purchasers. This results in incremental monthly billings to the Company of between $140,000 and $325,000 over the next several years. In the event that no further payments are forthcoming from Secondary Purchasers, the Company's share of these incremental costs would be approximately $11 million, which the Company expects would be recoverable from customers under stranded cost settlements. These costs are not included in the $175 million estimate discussed above. Yankee Atomic The Company has a 30 percent ownership interest in Yankee Atomic Electric Company (Yankee Atomic). On October 15, 1997, the Yankee Atomic Board of Directors announced it had accepted a proposal by Duke Engineering & Services, a unit of Duke Energy Corp., to acquire Yankee Atomic's Nuclear Services Division. Closing is expected to take place later in 1997. Yankee Atomic will continue to own the Yankee nuclear power plant in Rowe, Massachusetts and be responsible for its decommissioning. This transaction will not result in any signifcant financial impact to the Company. General On October 24, 1997, the Citizen's Awareness Network and Nuclear Information and Resource Service filed a petition with the NRC which would require formal approval of a plant decommissioning plan for the Connecticut Yankee and Maine Yankee plants. The Company cannot predict what impact, if any, this action, or resulting appeals, will have on the cost of decommissioning the plants. In October 1996, the NRC issued letters to operators of nuclear power plants requiring them to document that the plants are Note A - Investments in Nuclear Units - Continued - ------------------------------------- operated and maintained within their design and licensing bases, and that any deviations are reconciled in a timely manner. The Seabrook 1 and Vermont Yankee nuclear power plants responded to the NRC letters in February 1997. The NRC is still assessing the responses. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as Vermont Yankee, are increasing rapidly and could adversely affect their service lives, availability, and costs. These uncertainties stem from a combination of factors, including the acceleration of competitive pressures in the power generation industry and increased NRC scrutiny. 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. The Company is a wholly-owned subsidiary of New England Electric System (NEES). NEES subsidiaries have an internal environmental audit program and an external waste disposal vendor audit and qualification program intended to enhance compliance with federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. The Company has been named as a potentially responsible party (PRP) by either the United States Environmental Protection Agency or the Massachusetts Department of Environmental Protection for 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 Note B - Hazardous Waste - Continued - ------------------------ investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by the Company. The NEES companies have recovered amounts from certain insurers, and, where appropriate, are seeking or intend to seek recovery from other insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. The Company believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. In October 1996, the American Institute of Certified Public Accountants issued new accounting rules for Environmental Remediation Liabilities which became effective in 1997. These new rules do not have a material effect on the Company's financial position or results of operations. Note C - Town of Norwood Dispute - -------------------------------- In April 1997, the Town of Norwood, Massachusetts filed a lawsuit against the Company in the United States District Court for the District of Massachusetts. The Company is the wholesale electric supplier for Norwood pursuant to rates approved by the FERC. Norwood alleges that the Company's proposal to divest its power generation assets violates the terms of a 1983 agreement settling an antitrust lawsuit brought by Norwood against the Company. Norwood also alleges that the Company's proposed divestiture plan and recovery of stranded investment costs contravene federal antitrust laws. Norwood seeks that the Company be permanently enjoined from refusing to comply with the terms of the 1983 settlement agreement by divesting its generation assets or from charging unjust and unreasonable rates to Norwood. Norwood also seeks to recover treble damages of $450 million. The Company believes that its divestiture plan will promote competition in the wholesale power generation market and that it has met and will continue to meet its contractual commitments to Norwood. Since the original filing, the Company filed a motion to dismiss the lawsuit based on its belief that Norwood's claims are within the FERC's exclusive jurisdiction. Norwood filed a motion for summary judgement and in the alternative for a preliminary injunction restraining the divestiture of the Company's generating business. In September 1997, the court denied Norwood's request for a preliminary injunction, and took the other motions under advisement. Note C - Town of Norwood Dispute - Continued - -------------------------------- Norwood also opposed the Company's proposed restructuring settlements for Massachusetts and Rhode Island. In July 1997, a FERC Administrative Law Judge (ALJ) certified the Company's proposed settlements to the full FERC Commission. The FERC ALJ concluded that Norwood failed to present any genuine issues of material fact, the effects of the settlement on Norwood are indirect, and adequate remedies exist to protect Norwood against adverse consequences should they occur in the future. This certification now clears the way for the FERC Commissioners to rule on the restructuring settlements. A decision from the FERC is expected later in 1997. Note D - Hydro-Quebec Arbitration - --------------------------------- In 1996, various New England utilities which are members of the New England Power Pool, including the Company, submitted a dispute to arbitration regarding their Firm Energy Purchased Power Contract with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage claim of approximately $37 million for past damages, of which the Company's share would have been approximately $6-$9 million. The claims involved a dispute over the components of a pricing formula and additional costs under the contract. With respect to on-going claims, the Company had been paying Hydro-Quebec the higher amount (additional costs of approximately $3 million per year) since July 1996 under protest and subject to refund. In October 1997, an arbitrator ruled in favor of the New England utilities in all respects. The Company has made a demand for refund. Hydro-Quebec has not yet refunded any monies and plans to appeal the decision. On November 9, 1997, the Company and the other utilities began a second arbitration to enforce the first decision. Refunds received from Hydro-Quebec will be passed on to customers through the Company's fuel clause. Note E - ------ 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 1996 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 (the Company) financial condition and the principal factors having an impact on the results of operations. This discussion should be read in conjunction with the Company's financial statements and footnotes and the 1996 Annual Report on Form 10-K. Earnings - -------- Net income for the third quarter and first nine months of 1997 decreased $1 million and $11 million, respectively, compared with the corresponding periods in 1996. These decreases were due to increased operation and maintenance costs and increased year-to- date purchased electric energy costs excluding fuel. These decreases in income were partially offset by a transmission rate increase. Industry Restructuring - ---------------------- For a full discussion of industry restructuring activities in Massachusetts, Rhode Island, and New Hampshire, see the "Industry Restructuring" section in the Company's Form 10-K for 1996. Industry Restructuring Update As previously reported, the Massachusetts settlement and the Rhode Island statute and related settlement covering customer choice and electric utility restructuring provide for full recovery of the costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable through the divestiture of the Company's generating business. The Company is a wholly-owned generation and transmission subsidiary of New England Electric System (NEES). The Massachusetts settlement was approved by the Massachusetts Department of Public Utilities (MDPU) and a companion wholesale settlement is now pending final approval before the Federal Energy Regulatory Commission (FERC). A Rhode Island settlement reached in May 1997 among the Company, The Narragansett Electric Company (Narragansett Electric) (a wholly- owned distribution subsidiary of NEES), the Rhode Island Public Utilities Commission (RIPUC) and the Rhode Island Division of Public Utilities and Carriers to implement the stranded cost recovery provisions of the Utility Restructuring Act of 1996 is also pending before the FERC. In July 1997, a FERC Administrative Law Judge certified the proposed settlement to the full FERC commission. Final FERC action is expected later in 1997. On November 10, 1997, the Massachusetts House of Representatives passed a bill which would provide Massachusetts customers with the ability to choose their electric supplier on March 1, 1998. The bill provides for the recovery of stranded costs but contains provisions that could require Massachusetts regulators to reexamine and recompute stranded costs. The bill further requires electric companies to provide customers who do not choose a supplier with a standard offer transition rate which is 10 percent below 1997 rates, with the discount growing to 15 percent upon completion of divestiture of generating assets or so-called "securitization" (or refinancing) of stranded costs. The Massachusetts settlement, as approved by the MDPU earlier this year, along with the anticipated sale of our generating business described below, is expected to allow the rate reduction targets contained in the House bill to be met. The Senate is expected to act on the proposed legislation before the current session ends on November 19, 1997. Divestiture of Generation Business Under the Massachusetts and Rhode Island settlements , the NEES companies must complete the divestiture of their nonnuclear generating business within six months of the later of the commencement of retail choice in Massachusetts or the receipt of all necessary regulatory approvals. On August 5, 1997, the Company and Narragansett Electric (collectively, the "Sellers") reached an agreement to sell their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly-owned subsidiary of PG&E Corporation. The Sellers' nonnuclear generating business includes three fossil-fuel generating stations and 15 hydroelectric generating stations, totaling approximately 4,000 megawatt (MW) of capacity, with a book value $1.1 billion. USGen will pay the Sellers $1.59 billion in cash, of which $225 million will be contingent upon retail customers being able to choose their electric supplier. Specifically, if customers representing 89 percent of kilowatt-hour (kWh) sales of investor owned utilities in Massachusetts, or 50 percent of kWh sales in New England, have the ability to choose their electric supplier by January 1, 1999, the Sellers will be entitled to the full contingent amount. If such retail choice milestone is met after January 1, 1999, the contingent portion of the purchase price declines ratably by $75 million over the year 1999, and $50 million per year thereafter until the milestone is met. Payment of the contingent portion can be deferred for up to two years if retail choice is not the result of legislation. USGen will also reimburse the NEES companies for $85 million of costs associated with early retirement and special severance programs for employees affected by industry restructuring. USGen will purchase the Company's entitlement in approximately 1,100 MW of power procured under long-term contracts. The Company will make a monthly fixed contribution toward the above-market cost of the purchased power of between $12.5 million and $14.2 million per month from closing through January 2008. These amounts are recoverable under the terms of the Massachusetts and Rhode Island settlements. USGen will be responsible for the balance of the costs under the purchased power contracts. USGen will assume responsibility for environmental conditions at the Sellers' generating stations. USGen will also assume the Company's obligations under long-term fuel and fuel transportation contracts and certain existing collective bargaining agreements. The sale is subject to approval by various state and federal regulatory agencies. The timing of such approval is uncertain; however, approval is unlikely before the spring of 1998. Closing is contingent upon all regulatory approvals being obtained by February 1999. As part of the divestiture plan, the Company will endeavor to sell, or otherwise transfer, its minority interest in three nuclear power plants to nonaffiliates. In addition, New England Energy Incorporated (NEEI), an affiliate of the Company, is planning to sell its oil and gas properties, the cost of which is supported by the Company through fuel purchase contracts. Under Rhode Island's Utility Restructuring Act of 1996 and the Massachusetts settlement, the proceeds from the sale will be used to offset the stranded costs which the NEES companies recover from customers. The NEES companies estimate that, upon completion of the sale, prices for their customers would decrease on average by approximately 15 percent below today's prices. Workforce Reduction The NEES companies expect to implement substantial workforce reductions during 1998 as a result of industry restructuring and the sale of the generation business. The NEES companies have reached an agreement with all three of their unions regarding benefits and other assistance, including early retirement and severance programs, to union employees that are affected by these events. The NEES companies have also announced similar early retirement and severance programs for management employees. The costs of such programs are expected to be substantially recovered from the proceeds of the sale of the generating business. Risk Factors This Form 10-Q contains statements that may be considered forward looking statements as defined under the securities laws. Actual results may differ materially. As disclosed in the Company's Form 10-K for the year ended 1996, there are several risk factors which could affect actual results. While the NEES companies believe that the sale agreement with USGen and other developments constitute substantial progress in resolving the uncertainty regarding the impact on shareholders from industry restructuring, significant risks remain. These include, but are not limited to: (i) the potential that ultimately the Massachusetts and Rhode Island settlements and the Rhode Island statute will not be implemented in the manner anticipated by NEES, (ii) the possibility of state or federal legislation that would increase the risks to shareholders above those contained in the settlements and Rhode Island statute, (iii) the potential for adverse stranded cost recovery decisions involving Granite State Electric Company (Granite State) (a wholly-owned distribution subsidiary of NEES) and the Company's unaffiliated customers, and (iv) the failure to complete the sale of the generating business to USGen. Even if these risks do not materialize, the implementation of the sale agreement and the Massachusetts and Rhode Island settlements regarding restructuring will negatively impact financial results for the Company starting in 1998. The major risk factors affecting the Company relate to the possibility of adverse regulatory or judicial decisions or legislation which limit the level of revenues the Company is allowed to charge for its services or affects the costs the company incurs. The return on equity permitted on the unrecovered commitments in the generating business is generally 9.4 percent before mitigation incentives. In addition, starting in 1998, earnings would be affected by the return on the reinvestment of the proceeds from the sale of the generation business. Such reinvestment return is expected, at least in the near term, to be considerably less than has historically been earned by the generation business. To the extent that neither the divestiture of the Company's nonnuclear generation nor retail choice occurs in 1998, under the Massachusetts settlement pending before the FERC, approximately 73 percent of the amount of the Company's 1998 earnings in excess of the 11.75 percent return on equity must be refunded to Massachusetts Electric Company (Massachusetts Electric) (a wholly-owned distribution subsidiary of NEES) until its earnings cap is met, and then used to reduce stranded costs. In addition, the NEES companies will also incur costs associated with the transition after the sale is completed. Rhode Island In July 1997, the Governor of Rhode Island signed into law bills further implementing utility restructuring in Rhode Island. The Securitization Act establishes a framework at the RIPUC for utilities to seek approval for the issuance of bonds secured by customers obligations to pay stranded cost charges. The 1997 Amendments to the Utility Restructuring Act modify the law so that utilities will not have to transfer their transmission assets to another company and make other technical amendments. 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. Statement of 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 thereby defer the income statement impact of certain costs expected to be recovered in future rates. At December 31, 1996, the Company had approximately $340 million in net regulatory assets in compliance with FAS 71. In addition, the Company's affiliate, NEEI, had a regulatory asset of approximately $150 million at December 31, 1996, which is recoverable in its entirety from the Company. In response to concerns expressed by the staff of the Securities and Exchange Commission, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board took under consideration how FAS 71 should be applied in light of recent changes within the regulated utility industry. In July 1997, the EITF concluded that a utility whose ongoing generation operations would not permit the application of FAS 71, but had otherwise received approval to recover stranded costs through cost-based regulated transmission and distribution rates, would be permitted to continue to apply FAS 71 to the recovery of the stranded costs. The Massachusetts and Rhode Island settlements each provide for full recovery of the sunk costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable from the proceeds of the divestiture of the Company's generating business. FERC approval is still required for the Massachusetts and Rhode Island settlements. The cost of these assets would be recovered as part of a transition access charge imposed on all distribution customers. After the proposed divestiture, substantially all of the Company's business, including the recovery of its stranded costs, would remain under cost-based rate regulation. The principal exception is the provision of the settlements providing for a 80/20 sharing between customers and shareholders of the going forward costs and revenues related to the Company's operating nuclear interests. Specifically, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. The Company believes these factors and the EITF conclusion will allow it to continue to apply FAS 71. Any gain or loss from the divestiture of generating assets and oil and gas assets, as well as any loss resulting from the impairment of the Company's plant assets under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121), will be recorded as a regulatory liability or asset to be recovered through the ongoing transition access charge. The Company will be required to cease to apply FAS 71 to the 20 percent of its ongoing nuclear operations described above. Despite the progress made to date in Massachusetts and Rhode Island, it is possible that the final restructuring plans ultimately ordered by regulatory bodies may not reflect full recovery of stranded costs, including a fair return on those costs as they are being recovered. In addition, it is possible that future methods of setting performance-based distribution rates may not be considered cost-based as required by FAS 71. In the event that future circumstances should cause the application of FAS 71 to be discontinued, a noncash write-off of previously established regulatory assets related to the affected operations would be required. In addition, write-downs of plant assets under FAS 121 could be required, including a write-off of any gain or loss from the divestiture of the generating business. Brayton Point - ------------- In October 1996, the Environmental Protection Agency (EPA) announced it was beginning a process to determine whether to modify or revoke and reissue the Company's water discharge permit for its Brayton Point 1,576 MW power plant. This action came two years before the permit expiration date. The EPA stated it took this step in response to a request from the Rhode Island Department of Environmental Management (RIDEM). A RIDEM report asserted a statistical correlation between the decline in the fish population in Mount Hope Bay and a change in operations at Brayton Point that occurred in the mid-1980's. In April 1997, the Company signed a memorandum of agreement negotiated with the various federal and state environmental agencies under which the Company will voluntarily operate under more stringent conditions than under its existing permit. The agreement is in lieu of any immediate action on the permit, and will remain in effect until a renewal permit is issued. The Company cannot predict at this time what permit changes will be required or the impact on Brayton Point's operations and economics. However, permit changes may substantially impact the plant's capacity and ability to produce energy and/or require substantial capital expenditures to construct equipment to address the concerns raised by the environmental agencies. Year 2000 Computer Issues - ------------------------- In the next two years, most large companies will face a potentially serious information systems (computer) problem because most software application and operational programs written in the past will not properly recognize calendar dates beginning in the year 2000. This could force computers to either shut down or lead to incorrect calculations. The NEES companies began the process of identifying the changes required to their computer programs and hardware during 1996. The necessary modifications to the NEES companies' centralized financial, customer, and operational information systems are expected to be completed by the end of 1998. The NEES companies believe they will incur approximately $20 million of costs associated with making the necessary modifications identified to date to the centralized systems. Substantially all of these costs are expected to be incurred prior to December 31, 1998. Noncentralized systems are currently being reviewed for Year 2000 problems. The NEES companies are unable to predict the costs to be incurred for correction of such noncentralized systems, but expect the scope and schedule for such work to be less complex than for its centralized information systems. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Third Quarter Nine Months ------------- ------------ 1997 vs 1996 1997 vs 1996 ------------- ------------ (In Millions) Fuel recovery $ 6 $58 Narragansett Electric integrated facilities credit 2 5 Sales (1) (8) Stranded investment recovery 1 6 Other (including transmission revenues) 4 10 --- --- $12 $71 === === For a discussion of fuel recovery, see the fuel costs discussion in the "Operating Expenses" section. The entire output of Narragansett Electric's generating capacity is made available to the Company. Narragansett Electric receives a credit on its purchased power bill from the Company for its fuel costs and other generation and transmission related costs. The reduction in these credits in 1997 reflects a reduction in dismantlement costs being incurred by Narragansett Electric on a previously retired generating facility. Sales decreased in the first nine months due primarily to a decrease in peak demand billing as a result of milder weather in the first quarter of 1997. The stranded investment recovery represents amounts being recovered in connection with retail wheeling pilot programs instituted by Massachusetts Electric and Granite State. The increase in other revenues is primarily due to a transmission rate increase that went into effect in mid-1996. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Third Quarter Nine Months ------------- ------------ 1997 vs 1996 1997 vs 1996 ------------- ------------ (In Millions) Fuel costs $ 5 $ 58 Purchased energy, excluding fuel (2) 4 Operation and maintenance 8 36 Depreciation and amortization 1 (9) Taxes - (5) --- ---- $12 $ 84 === ==== 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 third quarter and first nine months of 1997 primarily reflects increased power supply to other utilities and increased replacement power costs due to the reduced generation from partially owned nuclear units. See "Investments in Nuclear Units" section in the "Notes to the Unaudited Financial Statements". 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, during the third quarter reflects reduced charges from the closed Connecticut Yankee nuclear power plant and reduced charges from the Vermont Yankee nuclear power plant as a result of a 1996 third quarter refueling outage. On a year-to-date basis, purchased power costs have increased, reflecting overhaul and repair costs relating to the Maine Yankee nuclear power plant and the Ocean State Power plant, partially offset by reduced capacity purchases and reduced purchased power costs from the Connecticut Yankee nuclear power plant, which were primarily due to a one-time property tax settlement. The decrease in depreciation and amortization expense reflects the completion of the amortization of the Company's pre-1988 investment in the Seabrook 1 nuclear unit and the Company's investment in the canceled Seabrook 2 nuclear unit. In accordance with a FERC 1995 settlement agreement, upon completion of the amortization of Seabrook 1 and Seabrook 2, the Company agreed to accelerate its amortization of previously deferred costs associated with postretirement benefits other than pensions (PBOPs). Upon completion of the PBOP amortization, which occurred in July 1997, the Company was required to accelerate its depreciation of Millstone 3. The increase in operation and maintenance expense during the third quarter reflects increased transmission wheeling costs and start-up costs associated with the new regional transmission control organization. For the nine month period, the increase in operation and maintenance expense also reflects the increase in PBOP expenses as mentioned above, as well as increased maintenance costs of partially owned nuclear generating facilities, Millstone 3 and Seabrook 1. Other increases in operation and maintenance expenses resulted from the Company's share of costs associated with the restoration to service of previously idled generating facilities throughout New England, in response to a tightening regional power supply, as well as an overall increase in general and administrative costs. Utility Plant Expenditures and Financing - ---------------------------------------- Cash expenditures for utility plant totaled $51 million for the first nine months of 1997. 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 1997, the Company retired $35 million of mortgage bonds and increased its short-term debt outstanding by $4 million. The Company has approximately $700 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. On November 7, 1997, NEES commenced cash tender offers for any and all outstanding shares of the Company's preferred stock, which totals approximately $40 million. Concurrently with the offer, the Company's Board of Directors is soliciting proxies for use at a special meeting of preferred shareholders. The special meeting is being held to consider amendments to the Company's By-Laws and Articles of Incorporation which would remove a limitation on the ability of the Company to issue unsecured debt without approval of preferred shareholders. The offer expires on December 12, 1997. At September 30, 1997, the Company had $98 million of short-term debt outstanding, including $96 million of commercial paper borrowings. At September 30, 1997, the Company had lines of credit and standby bond purchase facilities with banks totaling $520 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, 1997. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning a lawsuit brought by the Company against Northeast Utilities on August 7, 1997 in Massachusetts Superior Court, Worcester County concerning the Millstone 3 nuclear unit, discussed in this report in Note A of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning a demand for arbitration sent by the Company to Connecticut Light & Power Company and Western Massachusetts Electric Company concerning the Millstone 3 nuclear unit, discussed in this report in Note A of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning a lawsuit brought against the Company by the Town of Norwood, Massachusetts, discussed in this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning a favorable arbitration decision for the Company regarding its purchased power contract with Hydro- Quebec, discussed in this report in Note D of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning restructuring dockets before the Federal Energy Regulatory Commission and other regulatory approvals sought for the sale of the Company's generation business, discussed in Part I of this report in Management's Discussion and Analysis of Financial Conditions and Results of Operations, is incorporated herein by reference and made a part hereof. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- Exhibit 2. The Company is filing as an exhibit a copy of the Asset Purchase Agreement by and among the Company and The Narragansett Electric Company and USGen New England, Inc. (formerly USGen Acquisition Corporation) dated as of August 5, 1997. (Incorporated by reference to Exhibit 2 to New England Electric System's Form 10-Q for the period ended September 30, 1997, File No. 1-3446). The Company is filing Financial Data Schedules. The Company filed a report on Form 8-K dated August 6, 1997, 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 September 30, 1997 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 13, 1997 EX-99 2 EXHIBIT INDEX EXHIBIT INDEX ------------- EXHIBIT DESCRIPTION PAGE - ------- ----------- ---- 2 Asset Purchase Agreement Incorporated by and among NEP and The by Reference Narragansett Electric Company and USGen New England, Inc. 27 Financial Data Schedule Filed Herewith EX-27 3 FINANCIAL DATA 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-31-1997 SEP-30-1997 9-MOS PER-BOOK 1,896,786 81,175 355,370 464,623 0 2,797,954 128,998 376,597 408,559 914,183 0 39,666 647,666 1,475 0 96,475 53,000 0 0 0 1,045,489 2,797,954 1,277,871 68,468 1,064,188 1,132,656 145,215 101 145,316 35,837 109,479 1,556 107,923 99,974 31,599 173,833 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. Total common stockholders equity is reflected net of unrealized gain on securities. -----END PRIVACY-ENHANCED MESSAGE-----