<PAGE>
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, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-1229
(LOGO) NEW ENGLAND POWER COMPANY
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1663070
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-366-9011)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Common stock, par value $20 per share, authorized and outstanding:
6,449,896 shares at September 30, 1994.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
<CAPTION>
Quarter Nine Months
-------- -----------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue, principally from affiliates$419,555$417,912$1,175,617$1,174,108
-------- -------- --------------------
Operating expenses:
Fuel for generation 68,846 72,235 206,348 201,709
Purchased electric energy 139,173 143,187 378,930 402,463
Other operation 49,495 42,657 141,238 135,560
Maintenance 23,943 22,090 73,206 70,081
Depreciation and amortization 35,610 33,814 104,517 100,716
Taxes, other than income taxes 14,113 13,042 43,500 40,878
Income taxes 33,158 34,262 83,596 78,633
-------- -------- --------------------
Total operating expenses 364,338 361,287 1,031,335 1,030,040
-------- -------- --------------------
Operating income 55,217 56,625 144,282 144,068
Other income:
Allowance for equity funds used during
construction 2,199 624 6,261 2,126
Equity in income of nuclear power companies1,478 1,021 4,209 3,957
Other income (expense) - net 130 549 (2,840) (539)
-------- -------- --------------------
Operating and other income 59,024 58,819 151,912 149,612
-------- -------- --------------------
Interest:
Interest on long-term debt 9,620 11,500 28,111 35,010
Other interest 1,378 825 2,412 1,762
Allowance for borrowed funds used during
construction - credit (1,792) (578) (3,800) (1,266)
-------- -------- --------------------
Total interest 9,206 11,747 26,723 35,506
-------- -------- --------------------
Net income $ 49,818 $ 47,072 $ 125,189$ 114,106
======== ======== ====================
Statements of Retained Earnings
Retained earnings at beginning of period$374,651 $306,926 $ 346,153$ 321,699
Net income 49,818 47,072 125,189 114,106
Dividends declared on cumulative
preferred stock (858) (1,221) (2,582) (4,017)
Dividends declared on common stock (40,312) (17,737) (85,461) (96,748)
Premium on redemption of preferred
stock (870) (870)
-------- -------- --------------------
Retained earnings at end of period $383,299 $334,170 $ 383,299$ 334,170
======== ======== ====================
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.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Income
Twelve Months Ended September 30
(Unaudited)
<CAPTION>
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue, principally from affiliates$1,550,523 $1,561,234
---------- ----------
Operating expenses:
Fuel for generation 277,986 282,580
Purchased electric energy 502,452 532,700
Other operation 191,765 179,165
Maintenance 106,386 100,624
Depreciation and amortization 135,733 129,414
Taxes, other than income taxes 54,553 53,001
Income taxes 98,961 95,218
---------- ----------
Total operating expenses 1,367,836 1,372,702
---------- ----------
Operating income 182,687 188,532
Other income:
Allowance for equity funds used during construction7,387 2,866
Equity in income of nuclear power companies 5,899 4,849
Other income (expense) - net (2,868) (1,609)
---------- ----------
Operating and other income 193,105 194,638
---------- ----------
Interest:
Interest on long-term debt 38,937 48,795
Other interest 6,077 1,630
Allowance for borrowed funds used during
construction - credit (4,459) (1,660)
---------- ----------
Total interest 40,555 48,765
---------- ----------
Net income $ 152,550 $ 145,873
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 334,170 $ 315,517
Net income 152,550 145,873
Dividends declared on cumulative preferred stock (3,448) (5,414)
Dividends declared on common stock (99,973) (120,936)
Premium on redemption of preferred stock (870)
---------- ----------
Retained earnings at end of period $ 383,299 $ 334,170
========== ==========
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.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
September 30,December 31,
ASSETS 1994 1993
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $2,503,384 $2,445,702
Less accumulated provisions for depreciation
and amortization 992,656 943,750
---------- ----------
1,510,728 1,501,952
Net investment in Seabrook 1 under rate settlement 55,206 103,344
Construction work in progress 285,727 165,860
---------- ----------
Net utility plant 1,851,661 1,771,156
---------- ----------
Investments:
Nuclear power companies, at equity 47,041 46,342
Nonutility property and other investments, at cost 20,245 19,927
---------- ----------
Total investments 67,286 66,269
---------- ----------
Current assets:
Cash 1,227 610
Accounts receivable, principally from sales of
electric energy:
Affiliated companies 206,052 201,674
Others 67,610 58,581
Fuel, materials and supplies, at average cost 63,055 55,955
Prepaid and other current assets 27,400 26,454
---------- ----------
Total current assets 365,344 343,274
---------- ----------
Accrued Yankee Atomic costs 132,920 103,501
Deferred charges and other assets 165,966 157,087
---------- ----------
$2,583,177 $2,441,287
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
authorized and outstanding 6,449,896 shares $ 128,998 $ 128,998
Premiums on capital stocks 86,829 86,829
Other paid-in capital 288,000 288,000
Retained earnings 383,299 346,153
---------- ----------
Total common equity 887,126 849,980
Cumulative preferred stock, par value $100 per share 60,516 61,028
Long-term debt 672,541 667,448
---------- ----------
Total capitalization 1,620,183 1,578,456
---------- ----------
Current liabilities:
Short-term debt (including $2,500,000 and $8,325,000
to affiliates) 92,405 50,525
Accounts payable (including $66,613,000 and $58,056,000
to affiliates) 156,326 144,100
Accrued liabilities:
Taxes 25,283 9,337
Interest 8,541 10,086
Other accrued expenses 12,021 38,313
Dividends payable 40,312 14,512
---------- ----------
Total current liabilities 334,888 266,873
---------- ----------
Deferred federal and state income taxes 349,452 344,077
Unamortized investment tax credits 61,192 62,591
Accrued Yankee Atomic costs 132,920 103,501
Other reserves and deferred credits 84,542 85,789
---------- ----------
$2,583,177 $2,441,287
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Nine Months Ended September 30
(Unaudited)
<CAPTION>
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 125,189 $ 114,106
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 107,674 103,896
Deferred income taxes and investment tax credits - net10,204 6,409
Allowance for funds used during construction (10,061) (3,392)
Early retirement program 2,967
Decrease (increase) in accounts receivable (13,407) 3,175
Decrease (increase) in fuel, materials, and supplies(7,100) 6,440
Increase (decrease) in accounts payable 12,226 (24,230)
Increase (decrease) in other current liabilities (11,891) 18,778
Other, net (23,205) (17,595)
--------- ---------
Net cash provided by operating activities $ 189,629 $ 210,554
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(172,837) $(112,161)
Other investing activities (300)
--------- ---------
Net cash used in investing activities $(173,137) $(112,161)
--------- ---------
Financing Activities:
Dividends paid on common stock $ (59,661) $(103,198)
Dividends paid on preferred stock (2,582) (4,017)
Redemption of preferred stock (512) (25,000)
Premium on redemption of preferred stock (870)
Long-term debt - issues 5,000 197,400
Long-term debt - retirements (197,400)
Premium on reacquisition of long-term debt (2,923)
Changes in short-term debt 41,880 37,600
--------- ---------
Net cash used in financing activities $ (15,875) $ (98,408)
--------- ---------
Net increase (decrease) in cash and cash equivalents$ 617 $ (15)
Cash and cash equivalents at beginning of period 610 652
--------- ---------
Cash and cash equivalents at end of period $ 1,227 $ 637
========= =========
Supplementary Information:
Interest paid less amounts capitalized $ 25,859 $ 32,447
--------- ---------
Federal and state income taxes paid $ 60,165 $ 60,703
--------- ---------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Note A - Investments in Nuclear Power Companies
- -----------------------------------------------
A summary of combined results of operations, assets and
liabilities of the four Yankee Nuclear Power Companies in which the
Company has investments is as follows:
Quarters Ended Nine Months Ended
September 30,
----------------------------------------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
Operating revenue $119,729 $201,827 $428,469 $531,869
======== ======== ======== ========
Net income $ 7,945 $ 7,967 $ 23,389 $ 22,879
======== ======== ======== ========
Company's equity in
net income $ 1,478 $ 1,021 $ 4,209 $ 3,957
======== ======== ======== ========
September 30, December 31,
1994 1993
---- ----
(In Thousands)
Plant $ 535,924 $ 591,650
Other assets 1,316,363 1,286,923
Liabilities and debt (1,603,762) (1,633,139)
----------- -----------
Net assets $ 248,525 $ 245,434
=========== ===========
Company's equity in net assets $ 47,041 $ 46,342
=========== ===========
At September 30, 1994, $ 13,098,000 of undistributed earnings
of the nuclear power companies were included in the Company's
retained earnings. Yankee Atomic Electric Company plans to retain
its earnings until all of its current debt commitments are
satisfied.
Note B - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
<PAGE>
Note B - Hazardous Waste - Continued
- ------------------------
for remediation of property contaminated with hazardous substances.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. A number of states, including
Massachusetts, have enacted similar laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System subsidiaries currently have in place an
environmental audit program intended to enhance compliance with
existing federal, state, and local requirements regarding the
handling of potentially hazardous products and by-products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. The Company has been named as a
potentially responsible party (PRP) by either the U.S.
Environmental Protection Agency or the Massachusetts Department of
Environmental Protection at six sites at which hazardous waste is
alleged to have been disposed. The Company is also aware of other
sites for which it may be held responsible for remediating and it
is likely that, in the future, the Company will become involved in
additional proceedings demanding contribution for the cost of
remediating additional hazardous waste sites.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. Although
rate recovery may be sought for cleanup costs incurred, it is
uncertain what portion, if any, would be allowed in rates.
<PAGE>
Note B - Hazardous Waste - Continued
- ------------------------
The Company believes that hazardous waste liabilities for all
sites of which it is aware will not be material (10 percent of
common equity) to its financial position. Where appropriate, the
Company intends to seek recovery from its insurers and from other
PRPs, but it is uncertain whether, and to what extent, such efforts
will be successful.
Note C - Purchased Power Contract Dispute
- -----------------------------------------
On October 26, 1994, the Company was sued by Milford Power
Limited Partnership (MPLP) in the Superior Court for Worcester
County, Massachusetts. MPLP, a venture of Enron Corporation and
Jones Capital, owns a 149 MW gas-fired power plant in Milford,
Massachusetts. The Company purchases 56 percent of the power
output of the facility under a long-term contract with MPLP. MPLP
alleges that the Company has engaged in a scheme to cause MPLP and
its power plant to fail and has prevented MPLP from finding a long-
term buyer for the remaining 44 percent of the facility's output.
The complaint includes allegations that the Company has violated
the Federal Racketeer Influenced and Corrupt Organizations Act,
engaged in unfair or deceptive acts in trade or commerce, and
breached contracts. MPLP seeks compensatory damages in an
unspecified amount, as well as treble damages. The Company
believes that the allegations of wrongdoing are without merit.
Note D
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the financial statements in the Company's 1993 Annual
Report.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Earnings
- --------
Net income for the third quarter and first nine months of 1994
increased $3 million and $11 million, respectively, from the
corresponding periods in 1993. The increase in the third quarter
earnings is primarily due to decreased interest costs and decreased
purchased power charges excluding fuel. In the third quarter of
1993, purchased power expense was higher due to overhauls and
refueling shutdowns by partially owned nuclear power suppliers.
Partially offsetting these increases in earnings were increased
other operation and maintenance expenses and the reimbursement
through revenue credits to The Narragansett Electric Company
(Narragansett) of certain power plant dismantlement costs.
Earnings in the first nine months of 1993 included a one-time
after-tax charge of $6 million ($10 million before tax) associated
with an early retirement offer and special severance program for
non-union employees undertaken by the Company as part of an
organizational review. Excluding the effects of this 1993 charge,
earnings for the first nine months of 1994 increased $5 million.
In addition to the reasons for the change in earnings for the third
quarter, earnings for the first nine months of 1994 reflected
increased peak demand revenues primarily in the first quarter of
1994. The Company estimates that it will incur increased costs of
<PAGE>
approximately $10 million in the fourth quarter of 1994 in
connection with overhauls of its wholly owned generating units, in
part to achieve compliance with the Clean Air Act (see Clean Air
Requirements section).
Regulatory Issues
- -----------------
The Federal Energy Regulatory Commission (FERC) has allowed the
Company to defer increased costs associated with a new accounting
standard for postretirement benefits other than pensions (PBOPs)
effective with its next rate filing. New accounting rules
established by the Financial Accounting Standards Board, which
became effective in 1993, require employers to establish a
liability during the working years of employees for the expected
cost of providing PBOPs instead of recording such costs when paid.
In a statement of policy applicable to all utilities subject to its
rate-making jurisdiction, the FERC stated that the increased costs
resulting from these new rules could be deferred pending the next
rate filing so long as such filing occurs before the end of 1995.
Accordingly, the Company has deferred a total of approximately $17
million of increased PBOP costs since January 1, 1993.
The Company has in the past, and is continuing to recover in
rates amounts billed to it by Yankee Atomic Electric Company
(Yankee Atomic) for decommissioning costs associated with Yankee
Atomic's retired nuclear power plant. The Company is a 30 percent
<PAGE>
owner of Yankee Atomic and was a purchaser of 30 percent of the
output of the unit prior to its retirement. Yankee Atomic's
recovery of such costs is in accordance with a 1992 settlement
agreement it reached in a FERC rate proceeding. Yankee Atomic
recently announced a new decommissioning cost estimate that,
subject to certain approvals by the Nuclear Regulatory Commission
and in turn by the FERC, would increase billings to the Company by
approximately $11 million per year. This increase in the cost
primarily reflects the unavailability of permanent repositories for
both low-level and high-level nuclear waste.
The Company has recorded an estimate of its entire future
payment obligations to Yankee Atomic as a liability on its balance
sheet as well as an offsetting regulatory asset reflecting its
expected future rate recovery of such costs. These higher
estimated decommissioning costs for Yankee Atomic have been
reflected in the amounts recorded on the Company's books at
September 30, 1994.
Although the Company does not currently have a rate case
pending, it has initiated discussions of future rate levels with
the parties that usually participate in its rate proceedings.
Hydroelectric Generating Station Relicensing
- --------------------------------------------
The term of the FERC license for the Company's Deerfield River
Hydroelectric Project expired at the end of 1993. The Company
<PAGE>
filed an application for a new license in 1991, which is still
under review. An annual license is granted to the Company until a
final determination is made on the application. Several advocacy
groups intervened proposing operational modifications. On October
5, 1994, the Company and 12 advocacy groups and government agencies
signed a settlement agreement, providing minimum flows, fish
passage facilities, wildlife enhancements, and conservation
easements on over 17,000 acres of Company land. The cost of these
measures is currently estimated at $25 million to $30 million over
the proposed 40 year term of the new license, principally for
replacement power costs associated with providing minimum water
flows. The agreement is subject to the granting of a FERC license
and the states of Vermont and Massachusetts issuing Water Quality
Certifications with conditions consistent with the settlement
agreement.
<PAGE>
Operating Revenue
- -----------------
The following table summarizes the changes in operating revenue
during the third quarter and first nine months of 1994 compared to
the corresponding periods in 1993:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1994 vs 1993 1994 vs 1993
------------- ------------
(In Millions)
Sales increase $12
Fuel recovery $ 3 (5)
Narragansett integrated
facilities credit (2) (6)
Other 1 1
--- ---
$ 2 $ 2
=== ===
The increase in sales in the first nine months of 1994 reflects
increased sales for resale to other utilities and the effects of an
increase in peak demands primarily in the first quarter of 1994.
The entire generating output of Narragansett's generating
capacity has in the past, and continues to be made available to the
Company. Narragansett receives a credit on its purchased power
bill from the Company for its fuel costs and other generation and
transmission related costs. The increased credit reflects
increased dismantlement costs being incurred on Narragansett's
previously retired South Street generating facility.
<PAGE>
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Total Operating Expenses
Third Quarter Nine Months
------------- ------------
1994 vs 1993 1994 vs 1993
------------- ------------
(In Millions)
Fuel costs $ 2 $ (7)
Purchased energy excluding fuel (9) (12)
Other operation and maintenance 8 9
Depreciation and amortization 2 4
Taxes - 7
--- ----
$ 3 $ 1
=== ====
Total fuel costs represents fuel for generation and the
portion of purchased electric energy permitted to be recovered
through the Company's fuel adjustment clause. Purchased energy
excluding fuel represents the remainder of purchased electric
energy costs. The decrease in fuel costs for the first nine
months of 1994 reflects reduced alternate energy purchases. The
decrease in purchased energy excluding fuel reflects overhauls
and refueling shutdowns by partially owned nuclear power
suppliers in the third quarter of 1993.
The increase in other operation and maintenance expense
during the third quarter reflects increased demand-side
<PAGE>
management program costs, increased pension and other retiree
benefit costs, increased computer system development costs,
increased production maintenance costs, gas pipeline contract
termination costs, and general increases in other areas. These
increases, which also occurred in the nine month period, were
offset by a one-time charge of $10 million associated with an
early retirement offer and special severance program recorded in
the first quarter of 1993.
The increase in depreciation and amortization expense
reflects increased amortization of the net investment in the
Seabrook 1 Nuclear Unit (Seabrook 1).
The increase in taxes for the first nine months of 1994 is
primarily due to increased income and increased property tax
accruals.
Allowance For Funds Used During Construction (AFDC)
- --------------------------------------------------
AFDC increased for the third quarter and first nine months
of 1994 due to increased construction work in progress,
principally associated with the repowering of the Manchester
Street Station (see Utility Plant Expenditures and Financing
section).
<PAGE>
Interest Expense
- ----------------
The decrease in interest expense for the third quarter and
first nine months of 1994 is primarily due to significant
refinancings of corporate debt at lower interest rates during
1993.
Hazardous Waste
- ---------------
The Federal Comprehensive Environmental Response,
Compensation and Liability Act, more commonly known as the
"Superfund" law, imposes strict, joint and several liability,
regardless of fault, for remediation of property contaminated
with hazardous substances. Parties liable include past and
present site owners and operators, transporters that brought
wastes to the site, and entities that generated or arranged for
disposal or treatment of wastes ultimately disposed of at the
site. A number of states, including Massachusetts, have enacted
similar laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. These products or by-products may not
have previously been considered hazardous, and may not currently
be considered hazardous, but may be identified as such by
federal, state, or local authorities in the future. The New
<PAGE>
England Electric System subsidiaries (NEES) currently have in
place an environmental audit program intended to enhance
compliance with existing federal, state, and local requirements
regarding the handling of potentially hazardous products and by-
products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against
the Company regarding liability for cleanup of sites alleged to
contain hazardous waste or substances. The Company has been
named as a potentially responsible party (PRP) by either the
U.S. Environmental Protection Agency (EPA) or the Massachusetts
Department of Environmental Protection at six sites at which
hazardous waste is alleged to have been disposed. The Company
is also aware of other sites for which it may be held
responsible for remediating and it is likely that, in the
future, the Company will become involved in additional
proceedings demanding contribution for the cost of remediating
additional hazardous waste sites.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such
as the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and
amount of waste disposed at the site, and the surrounding
<PAGE>
geography and land use, make precise estimates difficult. There
are also significant uncertainties as to the portion, if any, of
the investigation and remediation costs of any particular
hazardous waste site that may ultimately be borne by the
Company. Although rate recovery may be sought for cleanup costs
incurred, it is uncertain what portion, if any, would be allowed
in rates.
The Company believes that hazardous waste liabilities for
all sites of which it is aware will not be material (10 percent
of common equity) to its financial position. Where appropriate,
the Company intends to seek recovery from its insurers and from
other PRPs, but it is uncertain whether, and to what extent,
such efforts will be successful.
Electric and Magnetic Fields (EMF)
- ---------------------------------
In recent years, concerns have been raised about whether
EMF, which occur near transmission and distribution lines as
well as near household wiring and appliances, cause or
contribute to adverse health effects. Numerous studies on the
effects of these fields, some of them sponsored by electric
utilities (including NEES companies), have been conducted and
are continuing. Some of the studies have suggested associations
between certain EMF and various types of cancer, while other
studies have not substantiated such associations. In February
<PAGE>
1993, the EPA called for significant additional research on EMF.
In July 1994, a study by a University of Southern California
professor suggested an association between EMF and Alzheimer's
disease. It is impossible to predict the ultimate impact on the
Company and the electric utility industry if further
investigations were to demonstrate that the present electricity
delivery system is contributing to increased risk of cancer or
other health problems.
Many utilities, including the NEES companies, have been
contacted by customers regarding a potential relationship
between EMF and adverse health effects. To date, no court in
the United States has ruled that EMF from electrical facilities
cause adverse health effects and no utility has been found
liable for personal injuries alleged to have been caused by EMF.
In any event, the NEES companies believe that they have adequate
insurance coverage.
Several state courts have recognized a cause of action for
damage to property values in transmission line condemnation
cases based on the fear that power lines cause cancer. It is
difficult to predict what impact there would be on the Company
if this cause of action is recognized in the states in which the
Company operates and in contexts other than condemnation cases.
Legislation has been introduced in Massachusetts that if
passed, would require state agencies to study existing EMF-
<PAGE>
related research and make recommendations for further
legislation.
Clean Air Requirements
- ----------------------
The Company produces approximately 50 percent of its
electricity at eight older thermal generating units located in
Massachusetts. Six of the units are fueled by coal and the
other two are fueled by oil and natural gas. The 1990
amendments to the federal Clean Air Act require a significant
reduction in the nation's sulfur dioxide (SO2) and nitrogen
oxide (NOx) emissions by the year 2000.
Under the amendments pertaining to S02 emissions, the
Company expects to be included in Phase 1 of the acid rain
provisions that will become effective in 1995. The Company is
also subject to the Massachusetts S02 acid rain law that will
become effective in 1995, and Phase 2 of the federal acid rain
requirements, that will become effective in 2000.
In connection with requirements that relate to NOx
emissions, state environmental agencies in ozone non-attainment
areas were required to develop regulations (also known as
Reasonably Available Control Technology requirements, or RACT)
that will become effective in 1995 to address the first phase of
ozone air quality attainment. These regulations were adopted in
<PAGE>
Massachusetts in September 1993. The RACT regulations require
control technologies (such as low NOx burners) to reduce NOx
emissions, an ozone precursor. Additional control measures may
be necessary to ensure attainment of the ozone standard. These
measures would have to be developed by the states in 1994 and
fully implemented by the Company no later than 1999. The extent
of these additional control measures is unknown at this time,
but could range from minor additions to the RACT requirements to
extensive emission reduction requirements, such as costly add-on
controls or fuel switching. Should the 1999 ozone attainment
requirements be extensive, or additional Clean Air Act or other
environmental requirements be imposed, continued operation of
certain existing generating units beyond 1999 could be
uneconomical. The Company believes that premature retirement of
substantially all of its older thermal generating units would
cause substantial rate increases.
The Company estimates that it will incur one-time operation
and maintenance costs totaling approximately $25 million and
capital costs totaling approximately $120 million through 1995,
of which approximately $12 million and $78 million,
respectively, had been spent through September 1994, to comply
with SO2 and NOx requirements that will become effective in
1995. In addition, the Company expects to incur increased fuel
costs of approximately $10 million to $20 million annually,
<PAGE>
depending on fuel market conditions, by 1995, as a result of
federal and state clean air requirements.
The generation of electricity from fossil fuels may emit
trace amounts of hazardous air pollutants as defined in the
Clean Air Act Amendments of 1990. The Act mandates a study of
the potential dangers of hazardous air pollutant emissions from
electric utility plants. Such research is currently under way
and is expected to be complete in 1995. The study conclusions
could result in new emission standards and the need for
additional costly controls on the Company's plants. At this
time, the Company cannot estimate the impact that findings of
this research might have on operations.
Purchased Power Contract Dispute
- --------------------------------
On October 26, 1994, the Company was sued by Milford Power
Limited Partnership (MPLP) in the Superior Court for Worcester
County, Massachusetts. MPLP, a venture of Enron Corporation and
Jones Capital, owns a 149 MW gas-fired power plant in Milford,
Massachusetts. The Company purchases 56 percent of the power
output of the facility under a long-term contract with MPLP.
MPLP alleges that the Company has engaged in a scheme to cause
MPLP and its power plant to fail and has prevented MPLP from
finding a long-term buyer for the remaining 44 percent of the
facility's output. The complaint includes allegations that the
<PAGE>
Company has violated the Federal Racketeer Influenced and
Corrupt Organizations Act, engaged in unfair or deceptive acts
in trade or commerce, and breached contracts. MPLP seeks
compensatory damages in an unspecified amount, as well as treble
damages. The Company believes that the allegations of
wrongdoing are without merit.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to
increasing competitive pressures, stemming from a combination of
trends, including increasing electric rates, improved
technologies, and new regulations and legislation intended to
foster competition. To date, this competition has been most
prominent in the bulk power market in which non-utility
generating sources have noticeably increased their market share.
For example, in 1984, less than 1 percent of the Company's
capacity was supplied by non-utility generation sources. By the
end of 1993, non-utility power purchases accounted for 380 MW,
or 7 percent, of the Company's total capacity. In addition to
competition from non-utility generators, the presence of excess
generating capacity in New England has resulted in the sale of
bulk power by utilities at prices below the total costs of
owning and operating such generating capacity. However, in July
1994, a new all-time regional and System peak occurred which
<PAGE>
will have the effect of reducing the near-term level of this
excess generating capacity in New England.
Since over 95 percent of the Company's sales are to its
retail affiliates, the Company is affected by increased
competition that these affiliates are facing in the retail
market. Currently, retail competition comes primarily from
alternative fuel suppliers (including natural gas companies) for
heating and cooling, customer-owned generation to displace
purchases from electric utilities, and direct competition among
electric utilities to attract major new manufacturing facilities
to their service territories. Some state regulatory agencies,
other entities, and individuals have developed proposals under
which electric utilities and non-utility generators may sell
electricity to retail customers of other electric utilities
without regard to franchised service territories. For example,
the California Public Utilities Commission recently announced a
proposal that would give certain large retail customers, by the
year 1996, and all other retail customers, by the year 2002, the
option of selecting their electricity provider. Power purchased
from another provider would still be delivered over the local
utility's transmission network which, under the proposal, would
be subject to broader access. Other states (including several
New England states), federal agencies regulating the NEES
companies, and state and federal legislative bodies have
<PAGE>
considered or are in the process of considering options to
foster increased competition.
The NEES companies are responding to current and anticipated
competitive pressures in a variety of other ways, including cost
control and a corporate reorganization into separate retail and
wholesale business units. The wholesale business unit, which
includes the Company, is positioning itself for increased
competition through such means as terminating certain purchased
power and gas pipeline contracts, shutdowns of uneconomic
generating stations, as well as rapid amortization of certain
plant assets. Specifically, the Company's rates currently
include approximately $100 million per year associated with the
recovery of certain Seabrook 1 costs under a 1988 rate
settlement and coal conversion expenditures at the Company's
Salem Harbor station. The recovery of these costs will be
completed prior to the end of 1995. The retail business unit's
response to competition includes the development of
comprehensive value-added services customized to customers'
needs and the offering of economic development rates to
encourage businesses to locate in the retail affiliates' service
territories. In addition, two of the Company's retail
affiliates are offering a discount from base rates in return for
a contract requiring a customer to provide five years written
notice before purchasing electricity from others or generating
<PAGE>
any additional electricity for the customer's own use (the
notice provision may be reduced from five to three years under
certain conditions).
Observers of the electric utility business have recommended
various (and sometimes conflicting) strategies for electric
utilities to deal with these competitive pressures. These
suggestions include business combinations with other companies,
restructurings involving separation or sales of portions of the
retail and/or wholesale businesses, and diversification into
unrelated businesses. For example, the NEES companies have
proposed one possible framework for increasing customer choice
of suppliers and achieving environmental goals, while preserving
shareholder value. This increase in customer choice could
decrease the value of generation related assets and purchased
power contracts. However, the replacement value of transmission
assets likely far exceeds their historic cost. The NEES
companies have suggested that utilities should have the ability
to offset this decrease in the value of generation related
assets by realizing the higher value of transmission assets. As
one part of this possible framework, the NEES companies have
stated that, in order to accomplish this realization, they would
be willing to consider selling their transmission system at
replacement cost to entities not in the generation business.
This sale would facilitate the transition to a fully competitive
<PAGE>
generating market. As part of their routine long-term planning
process, the NEES companies may, from time to time, be engaged
in analysis, either internally or with third parties, of these
and other strategies.
The FERC ruled in 1992, in a proceeding not involving the
Company or its affiliates, that a utility may recover from a
wholesale requirements customer, any legitimate, prudent, and
verifiable costs that the utility had incurred based on a
reasonable expectation that it would continue to sell
requirements service to the customer. The FERC has referred to
such costs as "stranded costs". On appeal, the United States
Court of Appeals for the District of Columbia Circuit has
questioned whether allowing utilities to recover stranded costs
is anti-competitive and the Court remanded the case back to the
FERC for further proceedings and development of the competitive
issues. In a separate development, the FERC issued a notice of
proposed rule-making on the recovery of investment costs
stranded as a result of increased competition.
Electric utility rates are generally based on a utility's
costs. Therefore, electric utilities are subject to certain
accounting standards that are not applicable to other business
enterprises in general. These accounting rules require
regulated entities, in appropriate circumstances, to establish
regulatory assets and liabilities, which defer the income
<PAGE>
statement impact of certain costs that are expected to be
recovered in future rates. The effects of competition could
ultimately cause the operations of the Company, or a portion
thereof, to cease meeting the criteria for application of these
accounting rules. While the Company does not expect to cease
meeting these criteria in the near future, if this were to
occur, accounting standards of enterprises in general would
apply and immediate recognition of any previously deferred costs
would be necessary in the year in which these criteria were no
longer applicable. In addition, if, because of competition,
utilities are unable to recover all of their costs in rates, it
may be necessary to write off those costs that are not
recoverable.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $173 million for
the first nine months of 1994 including $110 million related to
the Manchester Street Station Repowering Project. The funds
necessary for utility plant expenditures during the period were
provided by net cash from operating activities, after the
payment of dividends and the proceeds of long and short-term
debt issues. The Company issued $5 million of long-term
mortgage bonds in the third quarter at an interest rate of 8.53
<PAGE>
percent. In addition, the Company issued $10 million of long-
term debt in November 1994 at an interest rate of 8.33 percent
and plans to issue an additional $35 million of long-term debt
by the end of 1994 or early 1995.
The Company's major construction project is the repowering
of Manchester Street Station, a 140 MW electric generating
station in Providence, Rhode Island which is jointly owned by
the Company (90 percent interest) and Narragansett (10 percent
interest). Repowering will more than triple the power
generation capacity of Manchester Street Station and
substantially increase the plant's thermal efficiency. The
total cost for the generating station, scheduled for completion
in late 1995, is estimated to be approximately $525 million,
including AFDC. In addition, related transmission work was
estimated to cost $75 million. At September 30, 1994, a total
of $310 million, including AFDC, had been spent on the project
including the related transmission work ($247 million by the
Company). The transmission facilities were in service at
September 30, 1994, although all costs related to such work had
not yet been incurred. Substantial commitments have been made
relative to future planned expenditures for this project.
At September 30, 1994, the Company had $92 million of
short-term debt outstanding including $90 million in the form of
commercial paper borrowings. The Company currently has lines of
<PAGE>
credit and standby bond purchase facilities with banks totaling
$490 million. These lines of credit are available to provide
liquidity support for commercial paper borrowings and for $342
million of the Company's outstanding variable rate mortgage
bonds in commercial paper mode and for other corporate purposes.
There were no borrowings under these lines of credit at
September 30, 1994.
For the twelve-month period ending September 30, 1994, the
ratio of earnings to fixed charges was 6.57.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning a suit by Milford Power Limited
Partnership against the Company filed on October 25, 1994,
discussed in Part I of this report in Management's Discussion
and Analysis of Financial Condition and Results of Operations is
incorporated herein by reference and made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed a report on Form 8-K dated October 27,
1994, containing Item 5, Other Events.
The Company is filing the following revised exhibit for
incorporation by reference into its registration statements on
Form S-3, Commission file Nos. 33-48257, 33-48897, and 33-49193:
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
<PAGE>
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, 1994 to be signed on its
behalf by the undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
s/ Michael E. Jesanis
Michael E. Jesanis, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: November 10, 1994
EXHIBIT INDEX
<PAGE>
EXHIBIT INDEX
=============
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
12 Statement re Computation Filed Herewith
of Ratios
27 Financial Data Schedule Filed Herewith
EXHIBIT 12
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Computation of Ratio of Earnings to Fixed Charges
(SEC Coverage)
(Unaudited)
<CAPTION>
12 Months
Ended
September 30, 1994 Years Ended December 31,
Actual --------------------------------------------------------------
(Unaudited) 1993 1992 1991 1990 1989
-------------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income $152,550 $141,468 $134,151 $134,747 $222,219 $124,617
- ----------
Less undistributed income of
nuclear power companies 1,674 544 320 (240) (133) 715
-------- -------- -------- -------- -------- --------
150,876 140,924 133,831 134,987 222,352 123,902
Add income taxes and fixed charges
- ----------------------------------
Current federal income taxes 64,038 62,454 64,417 62,182 50,543 42,885
Deferred federal income taxes 20,234 17,745 4,741 11,134 38,367 7,841
Investment tax credits - net (2,026) (2,606) (1,328) (7,732) (26,026) 950
State income taxes 17,459 17,242 14,596 15,526 21,867 14,002
Interest on long-term debt 38,937 45,837 59,382 67,426 67,385 66,654
Interest on short-term debt and other6,077 5,427 2,071 2,490 6,900 7,730
-------- -------- -------- -------- -------- --------
Net earnings available
for fixed charges $295,595 $287,023 $277,710 $286,013 $381,388 $263,964
======== ======== ======== ======== ======== ========
Fixed charges:
Interest on long-term debt $ 38,937 $ 45,837 $ 59,382 $ 67,426 $ 67,385 $ 66,654
Interest on short-term debt and other6,077 5,427 2,071 2,490 6,900 7,730
-------- -------- -------- -------- -------- --------
Total fixed charges $ 45,014 $ 51,264 $ 61,453 $ 69,916 $ 74,285 $ 74,384
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges 6.57 5.60 4.52 4.09 5.13 3.55
- ----------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER>1,000
<S> <C> <C> <C> <C>
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1993 DEC-31-1994 DEC-31-1993
<PERIOD-END> SEP-30-1994 SEP-30-1993 SEP-30-1994 SEP-30-1993
<PERIOD-TYPE> 9-MOS 9-MOS QTR-3 QTR-3
<BOOK-VALUE> PER-BOOK PER-BOOK PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,851,661 0 0 0
<OTHER-PROPERTY-AND-INVEST> 67,286 0 0 0
<TOTAL-CURRENT-ASSETS> 365,344 0 0 0
<TOTAL-DEFERRED-CHARGES> 298,886 <F1>0 0 0
<OTHER-ASSETS> 0 0 0 0
<TOTAL-ASSETS> 2,583,177 0 0 0
<COMMON> 128,998 0 0 0
<CAPITAL-SURPLUS-PAID-IN> 374,829 0 0 0
<RETAINED-EARNINGS> 383,299 0 0 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 887,126 0 0 0
0 0 0 0
60,516 0 0 0
<LONG-TERM-DEBT-NET> 672,541 0 0 0
<SHORT-TERM-NOTES> 92,405 <F2>0 0 0
<LONG-TERM-NOTES-PAYABLE> 0 0 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 0 0 0 0
0 0 0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0 0 0
<LEASES-CURRENT> 0 0 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 870,589 0 0 0
<TOT-CAPITALIZATION-AND-LIAB> 2,583,177 0 0 0
<GROSS-OPERATING-REVENUE> 1,175,617 1,174,108 419,555 417,912
<INCOME-TAX-EXPENSE> 83,596 78,633 33,158 34,262
<OTHER-OPERATING-EXPENSES> 947,739 951,407 331,180 327,025
<TOTAL-OPERATING-EXPENSES> 1,031,335 1,030,040 364,338 361,287
<OPERATING-INCOME-LOSS> 144,282 144,068 55,217 56,625
<OTHER-INCOME-NET> 7,630 5,544 3,807 2,194
<INCOME-BEFORE-INTEREST-EXPEN> 151,912 149,612 59,024 58,819
<TOTAL-INTEREST-EXPENSE> 26,723 35,506 9,206 11,747
<NET-INCOME> 125,189 114,106 49,818 47,072
2,582 4,017 858 1,221
<EARNINGS-AVAILABLE-FOR-COMM> 122,607 110,089 48,960 45,851
<COMMON-STOCK-DIVIDENDS> 85,461 96,748 40,312 17,737
<TOTAL-INTEREST-ON-BONDS> 28,111 35,010 9,620 11,500
<CASH-FLOW-OPERATIONS> 189,629 210,554 65,216 42,476
<EPS-PRIMARY> 0 <F3> 0 <F3> 0 <F3> 0 <F3>
<EPS-DILUTED> 0 <F3> 0 <F3> 0 <F3> 0 <F3>
<FN>
<F1> Total deferred charges includes other assets and accrued Yankee Atomic costs.
<F2> Short-term notes includes commercial paper obligations and short-term debt to affiliates.
<F3> Per share data is not relevant because the Company's common stock is wholly owned by New England Electric System.
</FN>
