-----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, AjGFDClGXzz8nb/HgVSRyiwzYPeEJGbtrNxx0TtPbYv23HvMLDB5ql+oZIq2YCHo CvYVaDBo4W/w6gCRkGygPw== 0000071337-98-000008.txt : 19981113 0000071337-98-000008.hdr.sgml : 19981113 ACCESSION NUMBER: 0000071337-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98745578 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, 1998 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: 3,749,896 shares at September 30, 1998. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- NEW ENGLAND POWER COMPANY Statements of Income Periods Ended September 30 (Unaudited)
Quarter Nine Months ------- ----------- 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) Operating revenue, principally from affiliates $321,569 $443,774$1,081,036 $1,277,871 -------- -------- -------------------- Operating expenses: Fuel for generation 62,442 90,580 221,429 284,368 Purchased electric energy 98,271 134,606 342,945 406,011 Other operation 40,464 57,570 132,874 184,798 Maintenance 784 20,458 52,704 66,964 Depreciation and amortization 25,199 26,929 84,345 70,334 Taxes, other than income taxes 10,258 16,690 45,749 51,713 Income taxes 29,504 32,406 65,080 68,468 -------- -------- -------------------- Total operating expenses 266,922 379,239 945,126 1,132,656 -------- -------- -------------------- Operating income 54,647 64,535 135,910 145,215 Other income: Equity in income of nuclear power companies1,544 1,260 4,158 3,881 Other income (expense), net 3,432 (1,366) 940 (3,780) -------- -------- -------------------- Operating and other income 59,623 64,429 141,008 145,316 -------- -------- -------------------- Interest: Interest on long-term debt 7,635 10,427 26,951 31,599 Other interest 4,299 2,244 10,549 5,150 Allowance for borrowed funds used during construction (267) (261) (823) (912) -------- -------- -------------------- Total interest 11,667 12,410 36,677 35,837 -------- -------- -------------------- Net income $ 47,956 $ 52,019 $ 104,331$ 109,479 ======== ======== ==================== Statements of Retained Earnings Retained earnings at beginning of period $462,967 $392,534 $ 407,630$ 400,610 Net income 47,956 52,019 104,331 109,479 Dividends declared on cumulative preferred stock (141) (519) (1,179) (1,556) Dividends declared on common stock (130,610) (35,475) (130,610) (99,974) Premium on repurchase of common stock (193,818) - (193,818) - -------- -------- -------------------- Retained earnings at end of period $186,354 $408,559 $ 186,354$ 408,559 ======== ======== ==================== 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)
1998 1997 ---- ---- (In Thousands) Operating revenue, principally from affiliates $1,481,068 $1,671,299 ---------- ---------- Operating expenses: Fuel for generation 309,795 376,172 Purchased electric energy 464,581 538,429 Other operation 189,582 235,020 Maintenance 75,560 83,386 Depreciation and amortization 112,035 95,003 Taxes, other than income taxes 61,347 67,880 Income taxes 86,621 85,120 ---------- ---------- Total operating expenses 1,299,521 1,481,010 ---------- ---------- Operating income 181,547 190,289 Other income: Equity in income of nuclear power companies 5,466 4,898 Other income (expense), net 1,316 (4,883) ---------- ---------- Operating and other income 188,329 190,304 ---------- ---------- Interest: Interest on long-term debt 37,629 42,855 Other interest 12,454 7,032 Allowance for borrowed funds used during construction (1,149) (1,245) ---------- ---------- Total interest 48,934 48,642 ---------- ---------- Net income $ 139,395 $ 141,662 ========== ========== Statements of Retained Earnings Retained earnings at beginning of period $ 408,559 $ 396,358 Net income 139,395 141,662 Dividends declared on cumulative preferred stock (1,698) (2,075) Dividends declared on common stock (166,084) (127,386) Premium on repurchase of common stock (193,818) - ---------- ---------- Retained earnings at end of period $ 186,354 $ 408,559 ========== ========== 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 1998 1997 ------ ---- ---- (In Thousands) Utility plant, at original cost $1,246,228 $3,057,749 Less accumulated provisions for depreciation and amortization 823,181 1,196,972 ---------- ---------- 423,047 1,860,777 Construction work in progress 28,313 29,015 ---------- ---------- Net utility plant 451,360 1,889,792 ---------- ---------- Investments: Nuclear power companies, at equity 48,203 49,825 Non-utility property and other investments 34,380 34,723 ---------- ---------- Total investments 82,583 84,548 ---------- ---------- Current assets: Cash, and temporary cash investments (including $93,260,000 and $-0- with affiliated companies) 147,321 1,643 Accounts receivable: Affiliated companies 150,301 233,308 Accrued NEEI revenues - 11,419 Others 36,170 26,638 Fuel, materials and supplies, at average cost 9,689 47,492 Prepaid and other current assets 5,479 17,837 ---------- ---------- Total current assets 348,960 338,337 ---------- ---------- Regulatory assets 1,567,664 413,938 Deferred charges and other assets 11,004 36,477 ---------- ---------- $2,461,571 $2,763,092 ========== ========== CAPITALIZATION AND LIABILITIES ------------------------------ Capitalization: Common stock, par value $20 per share, authorized and outstanding 3,749,896 and 6,449,896 shares $ 74,998 $ 128,998 Premiums on capital stocks 50,395 86,779 Other paid-in capital 190,722 289,818 Retained earnings 186,354 407,630 Unrealized gain on securities, net 43 34 ---------- ---------- Total common equity 502,512 913,259 Cumulative preferred stock, par value $100 per share 10,575 39,666 Long-term debt 371,763 647,720 ---------- ---------- Total capitalization 884,850 1,600,645 ---------- ---------- Current liabilities: Long-term debt due in one year - 50,000 Short-term debt (including $-0- and $3,125,000 to affiliates) - 111,250 Accounts payable (including $11,543,000 and $14,373,000 to affiliates) 79,979 109,121 Accrued liabilities: Taxes 24,675 39 Interest 267 8,905 Other accrued expenses 134,185 23,554 Dividends payable 141 35,474 ---------- ---------- Total current liabilities 239,247 338,343 ---------- ---------- Deferred federal and state income taxes 170,234 369,757 Unamortized investment tax credits 30,649 53,463 Accrued Yankee nuclear plant costs 261,278 299,564 Purchased power obligations 863,367 - Other reserves and deferred credits 11,946 101,320 ---------- ---------- $2,461,571 $2,763,092 ========== ========== 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)
1998 1997 ---- ---- (In Thousands) Operating Activities: Net income $ 104,331 $ 109,479 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 87,375 72,821 Deferred income taxes and investment tax credits, net (221,184) (7,107) Allowance for funds used during construction (823) (912) Reimbursement to New England Energy Incorporated of loss (120,900) - on sale of oil and gas properties Buyout of purchased power contracts (333,520) - Decrease (increase) in accounts receivable 84,894 (28,971) Decrease (increase) in fuel, materials, and supplies (10,789) 1,377 Decrease (increase) in prepaid and other current assets 7,312 3,493 Increase (decrease) in accounts payable (29,142) 737 Increase (decrease) in other current liabilities 41,628 4,093 Other, net (88,255) 18,823 ----------- --------- Net cash provided by (used in) operating activities $ (479,073) $ 173,833 ----------- --------- Investing Activities: Proceeds from sale of generating assets $ 1,688,863 $ - Plant expenditures, excluding allowance for funds used during construction (44,933) (50,822) Other investing activities (445) (167) ----------- --------- Net cash provided by (used in) investing activities $ 1,643,485 $ (50,989) ----------- --------- Financing Activities: Capital contribution from parent $ 34,881 $ - Dividends paid on common stock (166,084) (91,911) Dividends paid on preferred stock (1,038) (1,556) Changes in short-term debt (111,250) 4,350 Long-term debt - retirements (328,000) (35,500) Repurchase of common shares (417,960) - Redemption of preferred stock (29,283) - ----------- --------- Net cash used in financing activities $(1,018,734) $(124,617) ----------- --------- Net increase (decrease) in cash and cash equivalents $ 145,678 $ (1,773) Cash and cash equivalents at beginning of period 1,643 3,046 ----------- --------- Cash and cash equivalents at end of period $ 147,321 $ 1,273 =========== ========= The accompanying notes are an integral part of these financial statements.
Note A - 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 Power Company (the Company) currently has 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. 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 possible hazardous waste 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. The New England Electric System (NEES) companies have recovered amounts from certain insurers and other third parties, and, where appropriate, the Company intends 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 are not material to its financial position. Note B - Divestiture of Generating Business - ------------------------------------------- On September 1, 1998, the Company and The Narragansett Electric Company (Narragansett Electric) completed the sale of substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The Company received $1.55 billion for the sale. In addition, the Company was reimbursed approximately $140 million for costs associated with early retirements and special severance programs for employees affected by industry restructuring, and the value of inventories. For more information on the terms and events leading to the sale, the accounting implications of the sale, and the assets sold, see the Company's Annual Report on Form 10-K for the year ended December 31, 1997. As part of the sale, USGen purchased the Company's entitlement to approximately 1,100 megawatts of power procured under long-term contracts. Pursuant to the transfer agreement, under certain conditions involving formal assignment of the contracts to USGen and a release of the Company from further obligations to the power supplier, the Company is required to make a lump sum payment of the present value of its monthly fixed contribution obligations. On or prior to the closing date, the Company paid approximately $340 million towards the above-market costs of two of the power contracts. The Company is required to make fixed contributions averaging $9.5 million per month through January 2008 towards the above-market cost of the other contracts. USGen is responsible for the balance of the costs under the purchased power contracts. All of the payments are recoverable from customers as part of industry restructuring settlements reached by the Company with various parties and approved by state and Federal regulators. The present value of the future monthly fixed contributions, amounting to $863 million, are recorded as a liability on the balance sheet. This liability, as well as the lump sum payments previously made, net of amortization, are also recorded as a regulatory asset on the balance sheet. In order to satisfy certain terms of its mortgage indenture, the Company was required to defease or retire all of its $641 million of mortgage bonds outstanding at the time of the sale of its nonnuclear generating business. With respect to $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs) issued by public agencies, the Company retired the mortgage bonds, leaving the underlying PCRBs outstanding as unsecured obligations of the Company. Pursuant to a tender offer, the Company purchased $183 million of bonds. Provisions for the payment of the remaining mortgage bonds were made by depositing with trustees U.S. treasury obligations sufficient to pay principal and interest to the maturity date, or, in the alternative, principal, interest and premium to the first date on which the bonds could be redeemed. Both the U.S. treasury obligations and defeased bonds were removed from the September 30, 1998 balance sheet. Note C - Regulatory Asset Recovery - ---------------------------------- 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 these charges because they are expected to be included in future customer charges. In 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board concluded that a utility who had received approval to recover so-called "stranded costs" through regulated transmission and distribution rates would be permitted to continue to apply FAS 71 to the recovery of stranded costs. In accordance with industry restructuring settlement agreements reached in Massachusetts, Rhode Island and New Hampshire, the Company has been permitted to recover its investments as of December 31, 1995 in the Millstone 3 and Seabrook 1 nuclear facilities, assuming these facilities had zero market value. Recent sales of nuclear units, (which have required the prefunding of decommissioning liabilities by the seller,) have tended to confirm lower market values for nuclear facilities. Consistent with these provisions of the settlement agreements, and now that the divestiture of the nonnuclear generating business has occurred, the Company recorded an impairment writedown in its reserve for depreciation and established an offsetting regulatory asset on the September 30, 1998 balance sheet for $348 million and $41 million, which represent the net book value at December 31, 1995, less applicable depreciation subsequent to that date, of Millstone 3 and Seabrook 1, respectively. Nevertheless, the Company will endeavor to sell, or otherwise transfer, its interest in these nuclear plants. Should these efforts yield a positive market value, the Company will credit any such value to customers. The Company has received authorization from the Federal Energy Regulatory Commission (FERC) to recover through contract termination charges substantially all of the costs associated with its former generating business not recovered through the sale of that business. As a result, the Company has recorded a regulatory asset for the costs which are recoverable from customers through contract termination charges. The regulatory asset includes the following major components: the Company's reimbursement of the loss on the sale of NEES' oil and gas business and the unrecovered plant costs in operating nuclear plants, reduced by the gain from the sale of the Company's nonnuclear generating business, all of which will be recovered by the end of 2000; and costs associated with permanently closed nuclear power plants and the above-market costs associated with purchased power contracts, which are being recovered over a much longer period of time as such costs are actually incurred. At September 30, 1998, regulatory assets totaled approximately $1.6 billion, of which approximately $863 million related to the above-market portion of purchased power contracts. Substantially all of the Company's regulatory assets are recoverable through the Company's contract termination charge. It is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets, including those being recovered through the Company's contract termination charge. Note D - Preferred Stock and Common Stock Repurchases - ----------------------------------------------------- In September 1998, the Company retired preferred stock with an aggregate par value of $29 million. On September 30, 1998, the Company also repurchased 2.7 million shares of its common stock from NEES for $418 million. Total premiums of $194 million in connection with the repurchase were charged to retained earnings. Note E - Nuclear Units - ---------------------- Yankee Nuclear Power Companies (Yankees) 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, ---------------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) Operating revenue $104,210 $142,156 $343,041 $523,478 ======== ======== ======== ======== Net income $ 6,314 $ 6,604 $ 20,820 $ 21,585 ======== ======== ======== ======== Company's equity in net income $ 1,545 $ 1,260 $ 4,159 $ 3,881 ======== ======== ======== ======== September 30, December 31, 1998 1997 ---- ---- (In Thousands) Net plant $ 177,372 $ 204,689 Other assets 2,958,662 3,100,589 Liabilities and debt (2,875,214) (3,036,845) ----------- ----------- Net assets $ 260,820 $ 268,433 =========== =========== Company's equity in net assets $ 48,203 $ 49,825 =========== ===========
At September 30, 1998, $14,259,000 of undistributed earnings of the nuclear power companies were included in the Company's retained earnings. Nuclear Units Permanently Shut Down Three regional nuclear generating companies in which the Company has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows: NEP's Investment Future Estimated Unit Percent Amount($) Date Retired Billings to NEP($) - ----------------------------------------------------------------------------- Yankee Atomic 30 6 million Feb 1992 33 million Connecticut Yankee 15 15 million Dec 1996 83 million Maine Yankee 20 16 million Aug 1997 145 million - ----------------------------------------------------------------------------- In the case of each of these units, the Company has recorded an estimate of the total future payment obligation as a liability and an offsetting regulatory asset, reflecting estimated future billings from the companies. In a 1993 decision, the FERC allowed Yankee Atomic to recover its undepreciated investment in the plant as well as unfunded nuclear decommissioning costs and other costs. The Company's industry restructuring settlements allow it to recover all costs that the FERC allows these Yankee companies to bill to the Company. Connecticut Yankee and Maine Yankee have both filed similar requests with the FERC. Several parties have intervened in opposition to both filings. On August 31, 1998, a FERC Administrative Law Judge (ALJ) issued an initial decision which would allow for full recovery of Connecticut Yankee's unrecovered investment, but precluded a return on that investment. The ALJ's initial decision is subject to review and approval by the FERC. Connecticut Yankee, the Company, and other parties have filed exceptions to the ALJ's decision with the FERC. Should the FERC uphold the ALJ's initial decision in its current form, the Company's share of the loss of the return component would total approximately $12 million to $15 million before taxes. The Citizen's Awareness Network and Nuclear Information and Resource Service have indicated their intention to file a request with the Nuclear Regulatory Commission (NRC) designed to overturn a current NRC rule on decommissioning. The Company cannot predict what impact, if any, these activities, if successful, would have on the cost of decommissioning the plants. At Maine Yankee, the NRC issued a notice of violation on October 8, 1998 for issues identified prior to the shut down of the plant in August 1997. The NRC did not assess any civil penalties related to the notice of violation. 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 entitlements to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements and have demanded arbitration, claiming that such agreements excuse further payments upon plant shutdown. The motion of the Secondary Purchasers to compel arbitration was denied by the Maine Superior Court on the grounds that the FERC has jurisdiction. The Secondary Purchasers are appealing this decision to the Maine Supreme Judicial Court. The Company has asked the FERC to enforce the Company's rights under the agreements. In the event that no further payments are forthcoming from Secondary Purchasers, the Company, as a primary obligor to Maine Yankee, would be required to pay an additional $7 million of future shutdown costs. These costs are not included in the $145 million estimate disclosed in the table above. Shutdown costs are recoverable from customers under the industry restructuring settlements. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. Operating Nuclear Units The Company has minority interests in three other nuclear generating units, Vermont Yankee, Millstone 3, and Seabrook 1. 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. The Company performs periodic economic viability reviews of operating nuclear units in which it holds ownership interests. Millstone 3 In April 1996, the NRC ordered Millstone 3, which had experienced numerous technical and nontechnical problems, to shut down pending verification that the unit's operations were in accordance with NRC regulations and the unit's operating license. In July 1998, Millstone 3 returned to full operation. Millstone 3 remains on the NRC "Watch List," signifying that it continues to warrant increased NRC attention. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). The Company is not an owner of the Millstone 2 nuclear generating unit, which is temporarily shut down under NRC orders, or the Millstone 1 nuclear generating unit, which has been permanently shut down. During the Millstone 3 outage, the Company incurred an estimated $45 million in incremental replacement power costs. Through February 1998, when most of the Company's power sales were subject to a fuel clause, the Company recovered its incremental replacement power costs from customers through its fuel clause. Starting in March 1998, most of the Company's power sales are at a stated rate which is not subject to a fuel clause. However, certain true-up mechanisms exist in lieu of the fuel clause, which cover most of these costs. Several criminal investigations related to Millstone 3 are ongoing. In December 1997, the NRC assessed civil penalties totaling $2.1 million for numerous violations at the three Millstone units. The Company's share of this fine was less than $100,000. On September 24, 1998, NU, the Connecticut Department of Environmental Protection and the Connecticut Attorney General reached a stipulated agreement for alleged wastewater discharge violations at the Millstone units. As part of the agreement, NU will pay a civil penalty of $700,000, and an additional $500,000 to fund three environmental projects. The Company's share of this fine will be immaterial. In August 1997, the Company sued NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU that caused the shutdown of Millstone 3. The Company's damages include the costs of replacement power during the outage and costs necessary to return Millstone 3 to safe operation. The Company also seeks punitive damages. The Company also sent a demand for arbitration to Connecticut Light & Power Company (CL&P) and Western Massachusetts Electric Company (WMEC), 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. The arbitration is scheduled for October 1999. NU moved to dismiss the Company's suit, or, in the alternative, stay the suit pending arbitration of the Company's claims against CL&P and WMEC. NU also moved to consolidate the Company's suit with suits filed by other joint owners in Massachusetts Superior Court. On July 3, 1998, the court denied NU's motion to dismiss and its motion to stay pending arbitration. On July 21, 1998, the Company amended its complaint by, among other things, adding NU's Trustees as defendants. The Worcester Superior Court granted the Company's motion for a trial in June 1999, subject to revision if the cases are consolidated. No ruling has been made on NU's motion to consolidate. Nuclear Decommissioning In New Hampshire, legislation was recently enacted which makes owners of Seabrook 1, of which the Company owns a 10 percent interest, proportional guarantors for decommissioning costs in the event that an owner without a franchise service territory fails to fund its share of decommissioning costs. Currently, a single owner of an approximate 12 percent share of Seabrook 1 has no franchise service territory. For more information on nuclear decommissioning, refer to the Company's Annual Report on Form 10-K for 1997. The New Hampshire Nuclear Decommissioning Finance Committee is reviewing Seabrook Station's decommissioning estimate and associated annual funding levels. Among the items being considered is the imposition of joint and several liability among the Seabrook joint owners for decommissioning funding. The Company cannot predict what additional liability, if any, may be imposed on it. The Nuclear Waste Policy Act of 1982 establishes that the federal government (through the Department of Energy (DOE)) is responsible for the disposal of spent nuclear fuel. The federal government requires the Company to pay a fee based on its share of the net generation from the Millstone 3 and Seabrook 1 nuclear units. Through February 1998, the Company recovered this fee through its fuel clause. Subsequently, most of these costs are recovered through the Company's restructuring settlement in lieu of the fuel clause. Similar costs are incurred by the Vermont Yankee nuclear generating unit. These costs are billed to the Company and also recovered from customers through the same mechanism. In November 1997, ruling on a lawsuit brought against the DOE by numerous utilities and state regulatory commissions, the Court of Appeals for the District of Columbia (the Appeals Court) held that the DOE was obligated to begin disposing of utilities' spent nuclear fuel by January 31, 1998. The DOE failed to meet this deadline, and is not scheduled to have a temporary or permanent repository for spent nuclear fuel for several years. In February 1998, Maine Yankee petitioned the Appeals Court to compel the DOE to remove Maine Yankee's spent fuel from the site. In May 1998, the Appeals Court rejected the petitions of Maine Yankee and the other utilities and state regulatory commissions, stating that the issue of damages was a contractual matter. The operators of the units in which the Company has an obligation, including Maine Yankee, Connecticut Yankee, and Yankee Atomic, continue to pursue damage claims against the DOE in the Federal Court of Claims (Claims Court). On October 30, 1998, the Claims Court ruled that the DOE violated a commitment to remove spent fuel from Yankee Atomic. The Claims Court issued similar rulings in November 1998 related to cases brought by Connecticut Yankee and Maine Yankee. Further proceedings will be scheduled by the Claims Court to decide the amount of damages. Note F - Town of Norwood - ------------------------ On September 29, 1998, the United States District Court for the District of Massachusetts dismissed the lawsuit filed by the Town of Norwood, Massachusetts against NEES and the Company in April 1997. The Company had been a wholesale power supplier for Norwood pursuant to rates approved by the FERC. In the lawsuit, Norwood had alleged that the Company's divestiture of its power generating assets would violate the terms of a 1983 power contract. Norwood also alleged that the divestiture and recovery of stranded investment costs contravened federal antitrust laws. The District Court judge granted NEES' and the Company's motion for dismissal on the grounds that the contract did not require the Company to retain its generating units, that the FERC-approved filed rates govern these matters and that Norwood had adequate opportunity at the FERC to litigate these matters. Norwood has filed a motion to alter or amend the order of dismissal. In March 1998, Norwood gave notice of its intent to terminate its contract with the Company, without accepting responsibility for its share of the Company's stranded costs, and began taking power from another supplier commencing in April 1998. In May 1998, the FERC ruled that the Company could assess a contract termination charge to any of the Company's unaffiliated customers that choose to terminate their wholesale power contracts early. Norwood claimed that the contract termination charge approved by the FERC did not apply to Norwood; however, in denying Norwood's motion for rehearing, the FERC ruled that the charge did apply to Norwood. On October 2, 1998, Norwood appealed this decision to the First Circuit Court of Appeals (First Circuit). The Company's billings to Norwood for this charge through September 1998 have been approximately $4 million. Norwood has not paid any of these billings. The Company intends to pursue collection action to recover these amounts. Norwood appealed the FERC's orders approving the divestiture and the Massachusetts and Rhode Island industry restructuring settlement agreements (including modification of the Company's contracts with Massachusetts Electric and Narragansett Electric) to the First Circuit on July 31, 1998 and August 7, 1998, respectively. The FERC had found that the challenged orders do not apply to Norwood. On October 20, 1998, the First Circuit consolidated all three of Norwood's appeals from the FERC's orders. These consolidated appeals will likely be consolidated with two other appeals that were filed on August 6, 1998 with the Second Circuit Court of Appeals and transferred to the First Circuit on October 13, 1998. Both appeals, filed by the Northeast Center for Social Issue Studies, challenge the FERC's approval of the Company's sale of its hydroelectric facilities. Note G - 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 million to $9 million. The claims involved a dispute over the components of a pricing formula and additional costs under the contract. With respect to ongoing claims, the Company paid Hydro-Quebec the higher amount (additional costs of approximately $3 million per year) from July 1996 until September 1, 1998 under protest and subject to refund. The contract was transferred to USGen on September 1, 1998 in conjunction with the sale of the nonnuclear generating business. In October 1997, an arbitrator ruled in favor of the New England utilities in all respects. Hydro-Quebec has not yet refunded any monies and has appealed the decision. In June 1998, the United States District Court (District Court) issued an order affirming the 1997 arbitration decision in favor of the Company and the other utilities. Hydro-Quebec is appealing this order to the Court of Appeals for the First Circuit. On July 31, 1998, in a separate proceeding, an arbitrator denied the request of the Company and other utilities that they be allowed to withhold payment of disputed amounts from Hydro-Quebec during the pendency of Hydro-Quebec's appeal. The Company and the other utilities have filed a petition with the District Court to vacate this decision, and Hydro-Quebec has petitioned the District Court to confirm it. Note H - Comprehensive Income - ----------------------------- In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS 130). FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which, for the Company, consists of the change in unrealized holding gains on available-for-sale securities during the period. Other comprehensive income was immaterial for the Company for the quarters ended and the nine month periods ended September 30, 1998 and 1997, respectively. Note I - New Accounting Standards - --------------------------------- In 1997, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which goes into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. Application of FAS 131 is not required for interim reporting in the initial year of application. The Company is currently evaluating the impact that FAS 131 will have on its future reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. The Company will adopt FAS 132 in its financial statements for the year ending December 31, 1998. The adoption of FAS 131 and FAS 132 will have no impact on the Company's operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. FAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, the Company has no such derivative holdings. Note J - ------ 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 1997 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 1997 Annual Report on Form 10-K. Earnings - -------- Net income decreased for the third quarter and first nine months of 1998 by $4.1 million and $5.1 million, respectively, as compared to the corresponding periods in 1997. The Company's revenues during both the third quarter and first nine months of 1998 were reduced as a result of termination of its all- requirements contracts with its primary customers effective January 1, 1998 in Rhode Island, March 1, 1998 in Massachusetts, and July 1, 1998 in New Hampshire. The decreases in revenues in the third quarter and the nine month period were partially offset by decreases in operating expenses, principally operation and maintenance expenses, primarily due to the sale of the Company's nonnuclear generating business on September 1, 1998, and reduced purchased electric energy expense, primarily reduced charges from Maine Yankee. With the introduction of industry restructuring and customer choice of power supplier, a fundamental change has occurred in the electric utility business. The Company believes that through its restructuring settlements at the Federal and state level, the state laws passed in the jurisdictions in which it does business, and the sale of its nonnuclear generation business that the major impacts of restructuring (particularly, the recovery of stranded costs) have been favorably resolved. Possible remaining risks include the potential that the settlements will not be implemented in the manner anticipated by the Company or that Federal legislation could be enacted that would increase the risk to shareholders above those contained in the settlements and state legislation. With respect to future earnings, now that the divestiture of the nonnuclear generating business has occurred, the settlement agreements limit the return on equity earned on the Company's remaining generating assets to 9.7 percent, before mitigation incentives, which is significantly lower than earned by the generating business in recent years. Beginning on September 1, 1998, the sale date of the nonnuclear generating business, the Company's earnings became further dependent on the return on the reinvestment of the sale proceeds. This reinvestment return is expected, at least in the near term, to be considerably less than the return historically earned by the generating business. This report contains statements that may be considered forward looking under the securities laws. Actual results may differ materially. See the above discussion for factors which could cause the results to differ. Industry Restructuring - ---------------------- For a full discussion of industry restructuring activities in Massachusetts, Rhode Island, and New Hampshire, stranded cost recovery, accounting implications of industry restructuring and divestiture, and workforce reductions, see the "Industry Restructuring" section in the Company's Form 10-K for 1997 and the Company's 1997 Annual Report. Industry Restructuring Update New Hampshire On July 13, 1998, the New Hampshire Public Utility Commission (NHPUC), approved the comprehensive settlement agreement reached between Granite State Electric Company (Granite State Electric), the Company, the Governor's office of the State of New Hampshire, and a number of other parties. The Federal Energy Regulatory Commission (FERC) had previously approved a wholesale settlement in April, 1998. On July 27, 1998, the Company filed with the FERC to amend the wholesale settlement to conform to the settlement approved by the NHPUC. The settlement provided choice of power supplier to Granite State Electric's customers as of July 1, 1998. The principal terms of the settlement are substantially similar to the settlements reached in Massachusetts and Rhode Island. Divestiture of Generating Business On September 1, 1998, the Company and The Narragansett Electric Company completed the sale of substantially all of their nonnuclear generating business to USGen New England, Inc. (USGen), an indirect wholly owned subsidiary of PG&E Corporation. The Company received $1.55 billion for the sale. In addition, the Company was reimbursed approximately $140 million for costs associated with early retirements and special severance programs for employees affected by industry restructuring, and the value of inventories. For more information on the terms and events leading to the sale, the accounting implications of the sale, and the assets sold, see the Company's Annual Report on Form 10-K for the year ended December 31, 1997. As part of the sale, USGen purchased the Company's entitlement to approximately 1,100 megawatts of power procured under long-term contracts. Pursuant to the transfer agreement, under certain conditions involving formal assignment of the contracts to USGen and a release of the Company from further obligations to the power supplier, the Company is required to make a lump sum payment of the present value of its monthly fixed contribution obligations. On or prior to the closing date, the Company paid approximately $340 million towards the above-market costs of two of the power contracts. The Company is required to make fixed contributions averaging $9.5 million per month through January 2008 towards the above-market cost of the other contracts. USGen is responsible for the balance of the costs under the purchased power contracts. All of the payments are recoverable from customers as part of industry restructuring settlements reached by the Company with various parties and approved by state and Federal regulators. The present value of the future monthly fixed contributions, amounting to $863 million, are recorded as a liability on the balance sheet. This liability, as well as the lump sum payments previously made, net of amortization, are also recorded as a regulatory asset on the balance sheet. In order to satisfy certain terms of its mortgage indenture, the Company was required to defease or retire all of its $641 million of mortgage bonds outstanding at the time of the sale of its nonnuclear generating business. With respect to $372 million of mortgage bonds securing the issuance of a like amount of pollution control revenue bonds (PCRBs) issued by public agencies, the Company retired the mortgage bonds, leaving the underlying PCRBs outstanding as unsecured obligations of the Company. Pursuant to a tender offer, the Company purchased $183 million of bonds. Provisions for the payment of the remaining mortgage bonds were made by depositing with trustees U.S. treasury obligations sufficient to pay principal and interest to the maturity date, or, in the alternative, principal, interest and premium to the first date on which the bonds could be redeemed. Both the U.S. treasury obligations and defeased bonds were removed from the September 30, 1998 balance sheet. Regulatory Asset Recovery 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 these charges because they are expected to be included in future customer charges. In 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board concluded that a utility who had received approval to recover so-called "stranded costs" through regulated transmission and distribution rates would be permitted to continue to apply FAS 71 to the recovery of stranded costs. In accordance with industry restructuring settlement agreements reached in Massachusetts, Rhode Island and New Hampshire, the Company has been permitted to recover its investments as of December 31, 1995 in the Millstone 3 and Seabrook 1 nuclear facilities, assuming these facilities had zero market value. Recent sales of nuclear units, (which have required the prefunding of decommissioning liabilities by the seller,) have tended to confirm lower market values for nuclear facilities. Consistent with these provisions of the settlement agreements, and now that the divestiture of the nonnuclear generating business has occurred, the Company recorded an impairment writedown in its reserve for depreciation and established an offsetting regulatory asset on the September 30, 1998 balance sheet for $348 million and $41 million, which represent the net book value at December 31, 1995, less applicable depreciation subsequent to that date, of Millstone 3 and Seabrook 1, respectively. Nevertheless, the Company will endeavor to sell, or otherwise transfer, its interest in these nuclear plants. Should these efforts yield a positive market value, the Company will credit any such value to customers. The Company has received authorization from the FERC to recover through contract termination charges substantially all of the costs associated with its former generating business not recovered through the sale of that business. As a result, the Company has recorded a regulatory asset for the costs which are recoverable from customers through contract termination charges. The regulatory asset includes the following major components: the Company's reimbursement of the loss on the sale of NEES' oil and gas business and the unrecovered plant costs in operating nuclear plants, reduced by the gain from the sale of the Company's nonnuclear generating business, all of which will be recovered by the end of 2000; and costs associated with permanently closed nuclear power plants and the above-market costs associated with purchased power contracts, which are being recovered over a much longer period of time as such costs are actually incurred. At September 30, 1998, regulatory assets totaled approximately $1.6 billion, of which $863 million related to the above-market costs of purchased power contracts. Substantially all of the Company's regulatory assets are recoverable through the Company's contract termination charge. It is possible that future regulatory rules or other circumstances could cause the application of FAS 71 to be discontinued, which would result in a noncash write-off of previously established regulatory assets, including those being recovered through the Company's contract termination charge. Year 2000 Computer Issues - ------------------------- Over the next year, most companies will face a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates associated with the year 2000 (Y2K). This could cause computers to either shut down or lead to incorrect calculations. During 1996, the NEES companies began the process of identifying the changes required to their computer software and hardware to mitigate Y2K issues. The NEES companies established a Y2K Project team to manage these issues. This team reports project progress to a recently formed Y2K Executive Oversight Committee each month. The team also makes regular reports to NEES' Board of Directors and its Audit Committee. The NEES companies have separated their Y2K Project into four parts as shown below, along with the estimated completion dates for each part.
Substantial Contingency Testing, Completion Documentation, of Critical and Clean Category Specific Example Systems Management - ------- ------------- ---------- ---------------- Mainframe/Midrange Accounting/Customer Fourth quarter Throughout 1999 Systems service integrated 1998 systems Desktop Systems Personal computers/ Mid-1999 Throughout 1999 Department software/ Networks Operational/ Dispatching systems/ Mid-1999 Throughout 1999 Embedded Transmission and Systems Distribution systems/ Telephone systems External Issues Electronic Data Mid-1999 Throughout 1999 Interchange/Vendor communications
The NEES companies are using a three-phase approach in coordinating their Y2K Project for system-related issues: (I) Assessment and Inventory, (II) Pilot Testing, and (III) Renovation, Conversion, or Replacement of Application and Operating Software Packages and Testing. Phase I, which was an initial assessment of all systems and devices for potential Y2K defects, was completed in mid-1997. Phase II, which consisted of renovation pilots for a cross-section of systems in order to facilitate the establishment of templates for Phase III work, was completed in late 1997. Phase III, which is currently ongoing, requires the renovation, conversion, or replacement of the remaining applications and operating software packages. The NEES companies have also implemented a formalized communication process with third parties to receive information related to their progress in remediating their own Y2K issues, and to communicate the NEES companies' progress in addressing the Y2K issue. These third parties include major customers, suppliers, and significant businesses with which the NEES companies have data links (such as banks). The NEES companies cannot predict the outcome of other companies' remediation efforts. The NEES companies believe total costs associated with making the necessary modifications to all centralized and noncentralized systems will be approximately $25 million. In addition, the NEES companies are spending $4 million related to the implementation of a new human resources and payroll system, the replacement of which is in part due to the Y2K issue. To date, total Y2K-related costs of $19 million have been incurred, of which $1 million has been capitalized. The NEES companies are in the process of developing Y2K contingency plans to allow for critical information and operating systems to function from January 1, 2000 forward. If required, these plans are intended to address both internal risks as well as potential external risks related to both suppliers and customers. Part of the contingency planning for accounting and desktop systems will include taking extensive data back-ups prior to year-end closing. For operational systems, the NEES companies have in place an overall disaster recovery program, which already includes periodic disaster simulation training (for outages due to severe weather, for instance). As part of Y2K contingency planning, the NEES companies will review their disaster recovery plans, modifying them for Y2K-specific issues. The NEES companies expect that these contingency plans will be in place by mid-1999. Interregional and regional contingency plans are being formulated that address emergency scenarios due to the interconnection of utility systems throughout the United States. At a regional level, the NEES companies are participating and cooperating with the New England Power Pool (NEPOOL) and the Independent System Operator of the NEPOOL area (ISO New England). Overall regional activities, including those of NEPOOL and ISO New England, will be coordinated by the Northeast Power Coordinating Council, whose activities will be incorporated into the interregional coordinating effort by the North American Electric Reliability Council. The target for the completion of this planning process is mid-1999. The NEES companies have noted that the Y2K coordination efforts by ISO New England began only in May 1998, resulting in a demanding and difficult schedule to attain regional and interregional target dates. The NEES companies believe the worst case scenario with a reasonable chance of occurring is temporary disruptions of electric service. This scenario could result from a failure to adequately remediate Y2K problems at NEES company facilities or could be caused by the inability of entities, such as ISO New England, to maintain the short-term reliability of various generators and/or transmission lines on a regional or superregional basis. The NEES companies believe that the contingency plans being developed both internally and on a regional level, as described above, should substantially mitigate the risks of this potential scenario. In the event that a short-term disruption in service occurs, the Company does not expect that it would have a material impact on its financial position and results of operations. While the NEES companies believe that their overall Y2K program will satisfactorily address all critical operational and system-related issues, significant risks remain. These risks include, but are not limited to, the Y2K readiness of third parties, including other utilities and power suppliers, cost and timeline estimates of remaining Y2K mitigation efforts, and the overall accuracy of assumptions made related to future events in the development of the Y2K mitigation effort. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Third Quarter Nine Months ------------- ------------ 1998 vs 1997 1998 vs 1997 ------------- ------------ (In Millions) Industry-restructuring related rate reductions $ (62) $(101) Fuel cost-related (54) (85) Accrued NEEI fuel revenues (7) (21) Other 1 10 ----- ----- $(122) $(197) ===== ===== The industry-restructuring related rate changes reflect the impact of the implementation of customer choice of power supplier in Rhode Island on January 1, 1998, in Massachusetts on March 1, 1998 and in New Hampshire on July 1, 1998. On these dates, the Company terminated its all-requirements contracts with its distribution subsidiaries and temporarily replaced them with lower priced wholesale standard offer contracts, until the sale of its nonnuclear generating business to USGen on September 1, 1998. These rate reductions include the effect of various true-up mechanisms. These true-up mechanisms cover a number of items including stranded cost recovery billings, fuel expense, nuclear operating and decommissioning costs, and the non-fuel component of purchased power expense. For a discussion of fuel costs, see the "Operating Expenses" section. Accrued New England Energy Incorporated (NEEI) fuel revenues reflect losses incurred by NEEI on its rate-regulated oil and gas operations. NEEI sold its oil and gas properties effective January 1, 1998. Historically, these revenues were accrued by the Company in the year of the loss, but were billed to its customers through its fuel clause in the following year. The increase in other operating revenue is primarily due to increased transmission billings to NEPOOL during the first quarter of 1998. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Third Quarter Nine Months ------------- ------------ 1998 vs 1997 1998 vs 1997 ------------- ------------ (In Millions) Fuel costs $ (54) $ (85) Accrued NEEI fuel costs (7) (21) Purchased energy, excluding fuel (3) (21) Depreciation and amortization (2) 14 Operation and maintenance: PBOP amortization (1) (14) Other (36) (52) Taxes (9) (9) ----- ----- $(112) $(188) ===== ===== Fuel costs represent fuel for generation and the portion of purchased electric energy permitted in the past to be recovered through the Company's fuel adjustment clause. Since the divestiture of the nonnuclear generating business on September 1, 1998, the Company no longer requires such a mechanism. The decrease in fuel costs primarily represents the effect of the sale of the generating plants on September 1, 1998 and reduced wholesale sales to other utilities and lower coal and oil prices. For a discussion of accrued NEEI fuel costs, see the "Operating Revenue" section. The decrease in purchased power costs, excluding fuel, during the third quarter and year-to-date period reflects reduced charges from the Maine Yankee nuclear power plant, which was closed in mid- 1997, and the transfer of the Company's purchased power contracts to USGen in conjunction with the sale of the nonnuclear generating business on September 1, 1998. These decreases were partially offset during the third quarter by monthly contractual payments to USGen for the above-market portion of transferred purchased power contracts. The decrease in operation and maintenance expense associated with the Company's post retirement benefits other than pensions (PBOP) amortization reflects the completion of the accelerated PBOP amortization in 1997 under the terms of a 1995 rate agreement. This decrease in expense is offset by a corresponding increase in the accelerated amortization of the Company's investment in the Millstone 3 nuclear unit, which is described in depreciation and amortization expense below. The decrease in other operation and maintenance expense reflects reduced costs as a result of the sale of the nonnuclear generating business on September 1, 1998, reduced maintenance costs from the partially owned Millstone 3 and Seabrook 1 nuclear generating facilities, reduced general and administrative costs, and reduced NEPOOL transmission billings, as these costs are billed directly to the Company's distribution subsidiaries, effective the second quarter of 1998. The year-to-date decrease also reflects 1997 charges for the Company's share of the costs of the restoration to service of previously idled generating facilities in response to a tightened regional power supply. The decrease in depreciation and amortization expense in the third quarter is primarily due to reduced generation-related depreciation as a result of the sale of the Company's nonnuclear generating business on September 1, 1998. During the year-to-date period, the decrease was more than offset by the accelerated amortization of Millstone 3, a portion of which was attributable to the completion of the PBOP amortization discussed above. This accelerated amortization was recorded as a regulatory liability. The decrease in taxes during the third quarter reflects an overall lower property tax basis for the Company as a result of the sale of the nonnuclear generating business on September 1, 1998. Other Income - ------------ The increase in other income during the third quarter is primarily due to increased interest income. Utility Plant Expenditures and Financing - ---------------------------------------- Cash expenditures for utility plant totaled $45 million for the first nine months of 1998. These expenditures were primarily transmission-related. The funds necessary for utility plant expenditures during the period were primarily provided by proceeds from the sale of the nonnuclear generating business. In the first nine months of 1998, the Company defeased or retired all of its mortgage bonds. See the "Divestiture of Generating Business" section for more information. The Company also paid down all of its short-term debt outstanding. At September 30, 1998, the Company had lines of credit and standby bond purchase facilities with banks totaling $580 million which are available to provide liquidity support for commercial paper borrowings, the remaining PCRBs, when in a commercial paper mode, and for other corporate purposes. There were no borrowings under these lines of credit at September 30, 1998. The Company prepaid approximately $190 million and $150 million in May 1998 and August 1998, respectively, in conjunction with the amendment of two long-term purchased power contracts. These balances, net of amortization, are recorded as regulatory assets on the balance sheet. In September 1998, the Company retired preferred stock with an aggregate par value of $29 million. In October 1998, the Company redeemed all of its outstanding Dividend Series Preferred Stock, with a par value of $8.7 million. On September 30, 1998, the Company repurchased 2.7 million shares of its common stock from NEES for $418 million. Total premiums of $194 million in connection with the repurchase were charged to retained earnings. As part of NEES' plan to divest its generating business, NEEI sold its oil and gas properties effective January 1, 1998 for approximately $50 million. NEEI's loss on the sale of approximately $120 million, before tax, has been reimbursed by the Company. This loss has been recorded as a regulatory asset, which is recoverable under the terms of restructuring settlements reached in Massachusetts, Rhode Island, and New Hampshire. 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 B of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning an arbitration between the Company and Connecticut Light & Power Company and Western Massachusetts Electric Company concerning the Millstone 3 nuclear unit, discussed in this report in Note B of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning a dispute between the Company and secondary purchasers of Maine Yankee power output, discussed in this report in Note B of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning dismissal of a lawsuit brought against the Company by the Town of Norwood, Massachusetts and appeals of related Federal Energy Regulatory Commission orders, discussed in this report in Note C of Notes to the Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning two arbitration decisions and related appeals regarding the Company's 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. Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------- On August 10, 1998, a Special Meeting of the Dividend Series Preferred Stockholders was held. By unanimous vote of the shares present and represented at the meeting (as listed below), the sale of substantially all of the Company's nonnuclear generating business to USGen New England, Inc. was approved. Dividend Series Preferred Stock Outstanding Present 4.56% Series 100,000 90,667 4.60% Series 80,140 70,872 4.64% Series 41,500 40,350 6.08% Series 100,000 92,286 Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The Company is filing Financial Data Schedules. The Company filed a report on Form 8-K dated September 1, 1998, containing Items 2, 5, and 7, including pro forma financial statements. 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, 1998 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND POWER COMPANY s/John G. Cochrane John G. Cochrane, Treasurer, Authorized Officer, and Principal Financial Officer Date: November 12, 1998 EX-99 2 EXHIBIT INDEX EXHIBIT INDEX ------------- EXHIBIT DESCRIPTION PAGE - ------- ----------- ---- 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-31-1998 SEP-30-1998 9-MOS PER-BOOK 451,360 82,583 348,960 1,578,668 0 2,461,571 74,998 241,117 186,354 502,512 0 10,575 371,763 0 0 0 0 0 0 0 1,576,721 2,461,571 1,081,036 65,080 880,046 945,126 135,910 5,098 141,008 36,677 104,331 1,179 103,152 130,610 26,951 (479,073) 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 includes the unrealized gain on securities. -----END PRIVACY-ENHANCED MESSAGE-----