<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 June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6564
(LOGO) NEW ENGLAND POWER COMPANY
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1663070
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-389-2000)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes (X) No ( )
Common stock, par value $20 per share, authorized and outstanding:
6,449,896 shares at June 30, 1997.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
<CAPTION>
Quarter Six Months
-------- ----------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue, principally from affiliates $396,049 $375,001 $834,097 $775,461
-------- -------- -------- --------
Operating expenses:
Fuel for generation 90,773 74,764 193,788 154,990
Purchased electric energy 127,060 124,755 271,405 250,289
Other operation 71,379 53,263 127,228 103,287
Maintenance 26,736 23,365 46,506 42,972
Depreciation and amortization 21,387 26,510 43,405 53,030
Taxes, other than income taxes 16,818 16,228 35,023 33,949
Income taxes 11,868 16,488 36,062 42,039
-------- -------- -------- --------
Total operating expenses 366,021 335,373 753,417 680,556
-------- -------- -------- --------
Operating income 30,028 39,628 80,680 94,905
Other income:
Equity in income of nuclear power companies1,125 1,474 2,621 2,818
Other income (expense), net (324) 404 (2,414) (1,592)
-------- -------- -------- --------
Operating and other income 30,829 41,506 80,887 96,131
-------- -------- -------- --------
Interest:
Interest on long-term debt 10,340 11,104 21,172 22,809
Other interest 1,255 3,680 2,906 5,848
Allowance for borrowed funds used during
construction - credit (281) (46) (651) (267)
-------- -------- -------- --------
Total interest 11,314 14,738 23,427 28,390
-------- -------- -------- --------
Net income $ 19,515 $ 26,768 $ 57,460 $ 67,741
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $409,011 $396,399 $400,610 $385,309
Net income 19,515 26,768 57,460 67,741
Dividends declared on cumulative
preferred stock (518) (678) (1,037) (1,536)
Dividends declared on common stock (35,474) (35,797) (64,499) (64,822)
Premium on redemption of preferred stock (450) (450)
-------- -------- -------- --------
Retained earnings at end of period $392,534 $386,242 $392,534 $386,242
======== ======== ======== ========
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 June 30
(Unaudited)
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue, principally from affiliates $1,658,945 $1,576,705
---------- ----------
Operating expenses:
Fuel for generation 381,343 304,009
Purchased electric energy 530,026 512,666
Other operation 227,397 211,668
Maintenance 82,652 82,021
Depreciation and amortization 94,584 98,593
Taxes, other than income taxes 67,490 63,280
Income taxes 85,917 97,693
---------- ----------
Total operating expenses 1,469,409 1,369,930
---------- ----------
Operating income 189,536 206,775
Other income:
Allowance for equity funds used during
construction 2,793
Equity in income of nuclear power companies 4,962 5,648
Other income (expense), net (2,673) (2,103)
---------- ----------
Operating and other income 191,825 213,113
---------- ----------
Interest:
Interest on long-term debt 43,474 46,604
Other interest 7,124 12,003
Allowance for borrowed funds used during
construction - credit (975) (5,991)
---------- ----------
Total interest 49,623 52,616
---------- ----------
Net income $ 142,202 $ 160,497
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 386,242 $ 368,443
Net income 142,202 160,497
Dividends declared on cumulative preferred stock (2,075) (3,252)
Dividends declared on common stock (133,835) (138,996)
Premium on redemption of preferred stock (450)
---------- ----------
Retained earnings at end of period $ 392,534 $ 386,242
========== ==========
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>
June 30, December 31,
ASSETS 1997 1996
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $3,033,643 $2,991,797
Less accumulated provisions for depreciation
and amortization 1,157,488 1,118,340
---------- ----------
1,876,155 1,873,457
Construction work in progress 25,142 36,836
---------- ----------
Net utility plant 1,901,297 1,910,293
---------- ----------
Investments:
Nuclear power companies, at equity 49,464 47,902
Non-utility property and other investments 30,783 30,591
---------- ----------
Total investments 80,247 78,493
---------- ----------
Current assets:
Cash 738 3,046
Accounts receivable:
Affiliated companies 219,936 201,370
Accrued NEEI revenues 16,888 21,648
Others 26,984 23,219
Fuel, materials, and supplies, at average cost 64,817 58,709
Prepaid and other current assets 23,059 25,050
---------- ----------
Total current assets 352,422 333,042
---------- ----------
Deferred charges and other assets 294,456 325,887
---------- ----------
$2,628,422 $2,647,715
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
authorized and outstanding 6,449,896 shares $ 128,998 $ 128,998
Premiums on capital stocks 86,779 86,779
Other paid-in capital 289,818 289,818
Retained earnings 392,534 400,610
---------- ----------
Total common equity 898,129 906,205
Cumulative preferred stock, par value $100 per share 39,666 39,666
Long-term debt 647,613 733,006
---------- ----------
Total capitalization 1,585,408 1,678,877
---------- ----------
Current liabilities:
Long-term debt due in one year 53,000 3,000
Short-term debt (including $5,700,000 and $5,275,000
to affiliates) 132,925 93,600
Accounts payable (including $22,331,000 and $25,301,000
to affiliates) 124,953 127,226
Accrued liabilities:
Taxes 1,719 8,158
Interest 8,760 9,668
Other accrued expenses 12,991 16,577
Dividends payable 35,474 27,412
---------- ----------
Total current liabilities 369,822 285,641
---------- ----------
Deferred federal and state income taxes 378,083 382,164
Unamortized investment tax credits 54,475 55,486
Other reserves and deferred credits 240,634 245,547
---------- ----------
$2,628,422 $2,647,715
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 57,460 $ 67,741
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 44,713 55,760
Deferred income taxes and
investment tax credits, net (3,807) (2,388)
Allowance for funds used during construction (651) (267)
Decrease (increase) in accounts receivable (17,571) 4,982
Decrease (increase) in fuel, materials, and supplies (6,108) (9,078)
Decrease (increase) in prepaid and other current assets 1,991 (580)
Increase (decrease) in accounts payable (2,273) (22,286)
Increase (decrease) in other current liabilities (10,933) 3,813
Other, net 22,760 10,349
-------- --------
Net cash provided by operating activities $ 85,581 $108,046
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(34,082) $(42,767)
Other investing activities (158)
-------- --------
Net cash used in investing activities $(34,240) $(42,767)
-------- --------
Financing Activities:
Dividends paid on common stock $(56,437) $(61,274)
Dividends paid on preferred stock (1,037) (1,536)
Changes in short-term debt 39,325 20,625
Long-term debt - issues 39,850
Long-term debt - retirements (35,500) (49,850)
Redemption of preferred stock (15,000)
Premium on redemption of preferred stock (450)
-------- --------
Net cash provided by (used in) financing activities$(53,649) $(67,635)
-------- --------
Net increase (decrease) in cash and cash equivalents $ (2,308) $ (2,356)
Cash and cash equivalents at beginning of period 3,046 2,607
-------- --------
Cash and cash equivalents at end of period $ 738 $ 251
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Note A - Investments in Nuclear Units
- -------------------------------------
A summary of combined results of operations, assets and
liabilities of the four Yankee Nuclear Power Companies in which New
England Power Company (the Company) has investments is as follows:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30,
----------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $205,295 $163,406 $381,322 $318,521
======== ======== ======== ========
Net income $ 6,602 $ 7,884 $ 14,981 $ 15,272
======== ======== ======== ========
Company's equity in
net income $ 1,125 $ 1,474 $ 2,621 $ 2,818
======== ======== ======== ========
June 30, December 31,
1997 1996
---- ----
(In Thousands)
Net plant $ 423,040 $ 401,049
Other assets 2,173,646 2,031,336
Liabilities and debt (2,330,022) (2,177,068)
----------- -----------
Net assets $ 266,664 $ 255,317
=========== ===========
Company's equity in net assets $ 49,464 $ 47,902
=========== ===========
</TABLE>
At June 30, 1997, $15,520,000 of undistributed earnings of the
nuclear power companies were included in the Company's retained
earnings.
Millstone 3
The Company is a 12 percent joint owner of the 1,150 megawatt
(MW) Millstone 3 nuclear generating unit (Millstone 3). In April
1996, the Nuclear Regulatory Commission (NRC) ordered Millstone 3,
which has experienced numerous technical and nontechnical problems,
to remain shut down pending verification that the unit's operations
<PAGE>
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
are in accordance with NRC regulations and the unit's operating
license. Millstone 3 is operated by a subsidiary of Northeast
Utilities (NU). The Company is not an owner of Millstone 1 and 2
nuclear generating units, which are also shut down under NRC
orders.
A number of significant prerequisites must be fulfilled prior
to restart of Millstone 3, including certification by NU that the
unit adequately conforms to its design and licensing bases, an
independent verification of corrective actions taken at the unit,
an NRC assessment concluding a culture change has occurred, public
hearings, and a vote of the NRC Commissioners. NU has announced
that it expects Millstone 3 to be ready for restart around the end
of 1997, subject to review by the NRC Commissioners. The Company
cannot predict when Millstone 3 will be allowed by the NRC to
restart, but believes that the unit will remain shut down for a
very protracted period.
In 1996, the Company incurred $10 million of actual costs
related to corrective actions associated with the outage and also
accrued a liability at December 31, 1996 of approximately $3
million for its share of future corrective action costs. In May
1997, the Company was informed by NU that additional costs are
likely to be incurred in 1997, of which the Company's share is
approximately $10 million. Approximately $3 million of this
increase is in connection with corrective actions and was,
therefore, recorded in the second quarter of 1997. There is no
assurance that the Company's share of the actual additional costs
will be limited to $10 million. During the outage, the Company is
also incurring approximately $1.6 million per month in incremental
replacement power costs, which it has been recovering from
customers through its fuel clause.
Several criminal investigations related to Millstone 3 are
ongoing. The NRC has identified numerous apparent violations of
its regulations which may result in the assessment of civil
penalties. The Company and other minority owners of Millstone 3 are
assessing their legal rights with respect to NU's operation of
Millstone 3.
Maine Yankee
The Company has a 20 percent equity ownership interest in Maine
Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW
nuclear generating station. On May 27, 1997, the Maine Yankee
Board of Directors announced that the economic viability of the
station was under review and the station would likely be
permanently shut down unless a buyer can be found. PECO Energy Co.
has expressed interest in purchasing the Maine Yankee plant, and
discussions are currently ongoing. The Company cannot predict
<PAGE>
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
whether these discussions will result in the sale of the Maine
Yankee plant.
In late 1995, allegations were made to the NRC that inadequate
analyses of the plant's emergency core cooling system had been
performed. As a result of the allegations, the NRC limited the
plant's operation to 90 percent of full capacity. In September
1996, the NRC asked the Department of Justice (DOJ) to review, for
potential criminal violations, an NRC investigatory report on the
allegations. The DOJ is not limited in its investigation to the
matters covered in that report.
Over the past few years, the Maine Yankee nuclear generating
plant has experienced numerous technical and nontechnical problems.
Prior to the May 27, 1997 announcement, and in response to an
independent safety assessment conducted by the NRC, Maine Yankee
had planned to spend more than $50 million in 1997 on operational
improvements. In addition, management had identified approximately
$34 million in additional expenditures it proposed to make in 1997.
Following the announcement, expenditures were cut back
substantially pending a decision on the future of the unit.
Under a confirmatory action letter issued by the NRC on
December 18, 1996, and supplemented on January 30, 1997, Maine
Yankee must fulfill certain commitments before its plant will be
allowed by the NRC staff to return to service. Because of
regulatory and other uncertainties faced by Maine Yankee, as well
as the unit's questionable economics, the Company cannot predict
whether or when Maine Yankee will return to service, but it is not
likely to return to service unless a buyer can be found. During
the outage, the Company is incurring approximately $1.8 million per
month in incremental replacement power costs, which it has been
recovering from customers through its fuel clause.
General
The Millstone 3 and Maine Yankee nuclear generating units are
currently shut down and have been placed on the NRC "Watch List",
signifying that their safety performance exhibits sufficient
weakness to warrant increased NRC attention. Neither may restart
without NRC approval.
In October 1996, the NRC issued letters to operators of nuclear
power plants requiring them to document that the plants are
operated and maintained within their design and licensing bases,
and that any deviations are reconciled in a timely manner. The
Seabrook 1, Maine Yankee, and Vermont Yankee nuclear power plants
responded to the NRC letters in February 1997. The NRC is still
assessing the responses.
<PAGE>
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Maine Yankee and
Vermont Yankee, are increasing rapidly and could adversely affect
their service lives, availability, and costs. These uncertainties
stem from a combination of factors, including the acceleration of
competitive pressures in the power generation industry and
increased NRC scrutiny.
Note B - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
A number of states, including Massachusetts, have enacted similar
laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The Company is a wholly-owned subsidiary
of New England Electric System (NEES). NEES subsidiaries have an
internal environmental audit program and an external waste disposal
vendor audit and qualification program intended to enhance
compliance with federal, state, and local requirements regarding
the handling of potentially hazardous products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for six
sites at which hazardous waste is alleged to have been disposed.
Private parties have also contacted or initiated legal proceedings
against the Company regarding hazardous waste cleanup. The Company
is currently aware of other sites, and may in the future become
aware of additional sites, that it may be held responsible for
remediating.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
<PAGE>
Note B - Hazardous Waste - Continued
- ------------------------
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 NEES
companies have received recovery amounts from certain insurers,
and, where appropriate, intend to seek recovery from other insurers
and from other PRPs, but it is uncertain whether, and to what
extent, such efforts will be successful. The Company believes that
hazardous waste liabilities for all sites of which it is aware are
not material to its financial position.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which become effective in 1997. These new
rules do not have a material effect on the Company's financial
position or results of operations.
Note C - Town of Norwood Dispute
- --------------------------------
In April 1997, the Town of Norwood, Massachusetts filed a
lawsuit against the Company in the United States District Court for
the District of Massachusetts. The Company is the wholesale
electric supplier for Norwood pursuant to rates approved by the
Federal Energy Regulatory Commission (FERC). Norwood alleges that
the Company's proposal to divest its power generation assets
violates the terms of a 1983 agreement settling an antitrust
lawsuit brought by Norwood against the Company. Norwood also
alleges that the Company's proposed divestiture plan and recovery
of stranded investment costs contravene Federal antitrust laws.
Norwood seeks that the Company be permanently enjoined from
refusing to comply with the terms of the 1983 settlement agreement
by divesting its generation assets or from charging unjust and
unreasonable rates to Norwood. Norwood also seeks to recover
treble damages of $450,000,000. The Company believes that its
divestiture plan will promote competition in the wholesale power
generation market and that it has met and will continue to meet its
contractual commitments to Norwood. Since the original filing, the
Company has filed a motion to dismiss the lawsuit based on its
belief that Norwood's claims are within the FERC's exclusive
jurisdiction. Norwood has filed a motion for summary judgement and
in the alternative for a preliminary injunction restraining the
divestiture of the Company's generating business. The court has
scheduled a hearing on the Company's and Norwood's motions in
September.
<PAGE>
Note C - Town of Norwood Dispute - Continued
- --------------------------------
Norwood also opposed the Company's proposed restructuring
settlements for Massachusetts and Rhode Island. In July 1997, a
FERC Administrative Law Judge (ALJ) certified the Company's
proposed settlements to the full FERC Commission. The FERC ALJ
concluded that Norwood failed to present any genuine issues of
material fact, the effects of the settlement on Norwood are
indirect, and adequate remedies exist to protect Norwood against
adverse consequences should they occur in the future. This
certification now clears the way for the FERC Commissioners to rule
on the restructuring settlements. A decision from the FERC is
expected later in 1997.
Note D - Hydro-Quebec Arbitration
- ---------------------------------
In 1996, various New England Utilities which are members of the
New England Power Pool, including the Company, submitted a dispute
to arbitration regarding their Firm Energy Purchased Power Contract
with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage
claim of approximately $37 million for past damages. If Hydro-
Quebec were to prevail, the Company's share of such damages would
be approximately $6-$9 million. The claims involve a dispute over
the components of a pricing formula and additional costs under the
contract. With respect to on-going claims, the Company has been
paying Hydro-Quebec the higher amount (additional costs of
approximately $3 million per year) since July 1996 under protest
and subject to refund. A decision by the arbitrator is expected in
September 1997.
Note E
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the financial statements in the Company's 1996 Annual
Report.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
This section contains management's assessment of New England
Power Company's financial condition and the principal factors
having an impact on the results of operations. This discussion
should be read in conjunction with the Company's financial
statements and footnotes and the 1996 Annual Report on Form 10-K.
Earnings
- --------
Net income for the second quarter and first six months of 1997
decreased $7 million and $10 million, respectively, compared with
the corresponding periods in 1996. These decreases were due to
increased operation and maintenance costs and increased purchased
electric energy costs excluding fuel. In addition, although sales
in the second quarter were relatively flat, sales in the first
quarter decreased due to milder weather. These decreases in income
were partially offset by a transmission rate increase and a
decrease in depreciation and amortization expense.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island, and New Hampshire, see the "Industry
Restructuring" section in the Company's Form 10-K for 1996.
Industry Restructuring Update
As previously reported, the Massachusetts settlement and the
Rhode Island statute and related settlement covering customer
choice and electric utility restructuring provide for full recovery
of the costs of generating assets and oil and gas related assets
(including regulatory assets) not recoverable through the
divestiture of the Company's generating business. The Company is
a wholly-owned subsidiary of New England Electric System (NEES).
The Massachusetts settlement was approved by the Massachusetts
Department of Public Utilities (MDPU) and a companion wholesale
settlement is now pending final approval before the Federal Energy
Regulatory Commission (FERC). A Rhode Island settlement reached in
May 1997 among the Company, The Narragansett Electric Company (a
retail subsidiary of NEES), the Rhode Island Public Utilities
Commission (RIPUC) and the Rhode Island Division of Public
Utilities and Carriers to implement the stranded cost recovery
provisions of the Utility Restructuring Act of 1996 is also pending
before the FERC. FERC action is expected later in 1997.
<PAGE>
Divestiture of Generation Business
Under the Massachusetts and Rhode Island settlements and the
Rhode Island statute, the NEES companies must complete the
divestiture of their nonnuclear generating business within six
months of the later of the commencement of retail choice in
Massachusetts or the receipt of all necessary regulatory approvals.
In July 1997, the NEES companies received binding proposals for
the purchase of their nonnuclear generating business. These
proposals are currently being evaluated. The NEES companies hope
to announce a purchase and sale agreement in the near future.
Closing would be conditioned upon the receipt of regulatory
approvals, which are expected to take at least six to 12 months
following the execution of purchase and sale agreements. At
December 31, 1996, the undepreciated book value of nonnuclear net
generating plant was approximately $1.1 billion.
As part of the divestiture plan, the Company will endeavor to
sell, or otherwise transfer, its minority interest in four nuclear
power plants to nonaffiliates. In addition, New England Energy
Incorporated (NEEI) is planning to sell its oil and gas properties,
the cost of which is supported by the Company through fuel purchase
contracts.
The NEES companies have reached an agreement with all three of
its unions regarding benefits and other assistance, including early
retirement and severance programs, to union employees that are
affected by the restructuring of the electric utility industry and
the NEES companies divestiture of its generation business. The
NEES companies have also announced similar early retirement and
severance programs for management employees. The NEES companies
anticipate that industry restructuring and divestiture will lead to
workforce reductions. The expected cost of such programs will be
substantially recovered from the proceeds of the sale of the
generating business.
Massachusetts
On May 20, 1997, the Utility Workers Union of America and the
Massachusetts Alliance of Utility Unions withdrew their appeal to
the Massachusetts Supreme Judicial Court of the MDPU approval of
the Massachusetts settlement.
Several bills are pending before the Massachusetts legislature
on electric utility industry restructuring, including comprehensive
legislation introduced by former Governor Willam F. Weld and by the
legislature's Joint Committee on Electric Restructuring. These
bills cover many of the topics addressed in the settlement,
including the extent to which stranded costs may be recovered, and
could impact the implementation of the settlement.
<PAGE>
Rhode Island
In July 1997, the Governor of Rhode Island signed into law
bills further implementing utility restructuring in Rhode Island.
The Securitization Act establishes a framework at the RIPUC for
utilities to seek approval for the issuance of bonds secured by
customers obligations to pay stranded cost charges. The 1997
Amendments to the Utility Restructuring Act modify the law so that
utilities will not have to transfer their transmission assets to
another company and make other technical amendments.
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of
Regulation (FAS 71), requires regulated entities, in appropriate
circumstances, to establish regulatory assets, and thereby defer
the income statement impact of certain costs expected to be
recovered in future rates. At December 31, 1996, the Company had
approximately $340 million in net regulatory assets in compliance
with FAS 71. In addition, the Company's affiliate, NEEI, had a
regulatory asset of approximately $150 million at December 31,
1996, which is recoverable in its entirety from the Company.
In response to concerns expressed by the staff of the
Securities and Exchange Commission, the Emerging Issues Task Force
(EITF) of the Financial Accounting Standards Board took under
consideration how FAS 71 should be applied in light of recent
changes within the regulated utility industry. In July 1997, the
EITF concluded that a utility whose ongoing generation operations
would not permit the application of FAS 71, but had otherwise
received approval to recover stranded costs through regulated
transmission and distribution rates, would be permitted to continue
to apply FAS 71 to the recovery of the stranded costs.
The Massachusetts and Rhode Island settlements and the Rhode
Island statute each provide for full recovery of the sunk costs of
generating assets and oil and gas related assets (including
regulatory assets) not recoverable from the proceeds of the
divestiture of the Company's generating business. FERC approval is
still required for the Massachusetts and Rhode Island settlements.
The cost of these assets would be recovered as part of a transition
access charge imposed on all distribution customers. After the
proposed divestiture, substantially all of the Company's business,
including the recovery of its stranded costs, would remain under
cost-based rate regulation. Specifically, FERC Order No. 888
enables transmission companies to recover their specific costs of
<PAGE>
providing transmission service. The principal exception is the
provision of the settlements providing for a 80/20 sharing between
customers and shareholders of the going forward costs and revenues
related to the Company's operating nuclear interests. The Company
believes these factors and the EITF conclusion will allow it to
continue to apply FAS 71 and that no impairment of plant assets
will exist under Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (FAS 121). Any gain or loss
from the divestiture of generating assets and oil and gas assets
will be recorded as a regulatory liability or asset to be reflected
through the ongoing transition access charge. The Company will be
required to cease to apply FAS 71 to the 20 percent of its ongoing
nuclear operations described above.
Despite the progress made to date in Massachusetts and Rhode
Island, it is possible that the final restructuring plans
ultimately ordered by regulatory bodies may not reflect full
recovery of stranded costs, including a fair return on those costs
as they are being recovered. In the event that future
circumstances should cause the application of FAS 71 to be
discontinued, a noncash write-off of previously established
regulatory assets related to the affected operations would be
required. In addition, write-downs of plant assets under FAS 121
could be required, including a write-off of any gain or loss from
the divestiture of the generating business.
Brayton Point
- -------------
In October 1996, the Environmental Protection Agency (EPA)
announced it was beginning a process to determine whether to modify
or revoke and reissue the Company's water discharge permit for its
Brayton Point 1,576 megawatt power plant. This action came two
years before the permit expiration date. The EPA stated it took
this step in response to a request from the Rhode Island Department
of Environmental Management (RIDEM). A RIDEM report asserted a
statistical correlation between the decline in the fish population
in Mount Hope Bay and a change in operations at Brayton Point that
occurred in the mid-1980's.
In April 1997, the Company signed a memorandum of agreement
negotiated with the various federal and state environmental
agencies under which the Company will voluntarily operate under
more stringent conditions than under its existing permit. The
agreement is in lieu of any immediate action on the permit, and
will remain in effect until a renewal permit is issued. The
Company cannot predict at this time what permit changes will be
required or the impact on Brayton Point's operations and economics.
<PAGE>
However, permit changes may substantially impact the plant's
capacity and ability to produce energy and/or require substantial
capital expenditures to construct equipment to address the concerns
raised by the environmental agencies.
Year 2000 Computer Issues
- -------------------------
In the next two-and-one-half years, most large companies will
face a potentially serious information systems (computer) problem
because most software application and operational programs written
in the past will not properly recognize calendar dates beginning in
the year 2000. This could force computers to either shut down or
lead to incorrect calculations. The NEES companies began the
process of identifying the changes required to their computer
programs and hardware during 1996. The necessary modifications to
the NEES companies' centralized financial, customer, and
operational information systems are expected to be completed by the
end of 1998. The NEES companies believe they will incur
approximately $20 million of costs between now and January 1, 2000,
associated with making the necessary modifications identified to
date to the centralized systems. Noncentralized systems are
currently being reviewed for Year 2000 problems. The NEES
companies are unable to predict the costs to be incurred for
correction of such noncentralized systems, but expect the scope and
schedule for such work to be less complex than for its centralized
information systems.
<PAGE>
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1997 vs 1996 1997 vs 1996
-------------- ------------
(In Millions)
Fuel recovery $13 $53
Narragansett Electric integrated
facilities credit 2 3
Sales - (7)
Stranded investment recovery 2 4
Other (including
transmission revenues) 4 6
--- ---
$21 $59
=== ===
For a discussion of fuel recovery, see the fuel costs
discussion in the "Operating Expenses" section.
The entire output of The Narragansett Electric Company's
(Narragansett Electric) (a wholly-owned retail subsidiary of NEES)
generating capacity is made available to the Company. Narragansett
Electric receives a credit on its purchased power bill from the
Company for its fuel costs and other generation and transmission
related costs.
Sales decreased in the first six months due to a decrease in
peak demand billing as a result of milder weather in the first
quarter of 1997.
The stranded investment recovery represents amounts being
recovered in connection with retail wheeling pilot programs
instituted by Massachusetts Electric Company and Granite State
Electric Company (wholly-owned retail subsidiaries of NEES).
The increase in other revenues is primarily due to a
transmission rate increase that went into effect in mid-1996.
<PAGE>
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1997 vs 1996 1997 vs 1996
-------------- ------------
(In Millions)
Fuel costs $14 $ 54
Purchased energy, excluding fuel 4 6
Operation and maintenance 22 28
Depreciation and amortization (5) (10)
Taxes (4) (5)
--- ----
$31 $ 73
=== ====
Fuel costs represent fuel for generation and the portion of
purchased electric energy permitted to be recovered through the
Company's fuel adjustment clause. The increase in fuel costs in
the second quarter and first six months of 1997 primarily
reflects increased power supply to other utilities and increased
replacement power costs due to the reduced generation from
partially owned nuclear units. See "Investments in Nuclear
Units" section in the "Notes to the Unaudited Financial
Statements".
The portion of purchased electric energy costs not recovered
through the Company's fuel clause is shown as purchased energy,
excluding fuel. The increase in purchased power costs during
the first two quarters of 1997 reflects overhaul and repair
costs relating to the Maine Yankee nuclear power plant and an
overhaul at the Ocean State Power plant, partially offset by
reduced capacity purchases and reduced purchased power costs
from the Connecticut Yankee nuclear power plant, primarily due
to a one-time property tax settlement.
The decrease in depreciation and amortization expense
reflects the completion of the amortization of the Company's
<PAGE>
pre-1988 investment in the Seabrook 1 nuclear unit and the
Company's investment in the canceled Seabrook 2 nuclear unit.
In accordance with a 1995 settlement agreement, upon completion
of the amortization of Seabrook 1 and Seabrook 2, the Company
agreed to accelerate its amortization of previously deferred
costs associated with postretirement benefits other than
pensions (PBOPs).
The increase in operation and maintenance expense for the six
month period is due in part to the increase in PBOP expenses as
well as increased maintenance costs of partially owned nuclear
generating facilities, Millstone 3 and Seabrook 1. Other
increases in operation and maintenance expenses resulted from
the Company's share of costs associated with the restoration to
service of previously idled generating facilities throughout New
England, in response to a tightening regional power supply, as
well as an overall increase in general and administrative costs.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $34 million for
the first six months of 1997. The funds necessary for utility
plant expenditures during the period were primarily provided by
net cash from operating activities, after the payment of
dividends.
In the first six months of 1997, the Company retired $35
million of mortgage bonds and increased its short-term debt
outstanding by $39 million.
The Company has approximately $700 million of mortgage bonds
outstanding. The bond indenture terms restrict the sale of the
trust property in its entirety or substantially in its entirety.
Therefore, the proposed sale of the Company's generating
business would likely require that the Company either amend the
bond indenture terms or defease the indenture and the bonds in
connection with the proposed sale. Any defeasance of bonds is
expected to be either to maturity or at general redemption
prices.
At June 30, 1997, the Company had $133 million of short-term
debt outstanding, including $127 million of commercial paper
borrowings. At June 30, 1997, the Company had lines of credit
and standby bond purchase facilities with banks totaling $520
million which are available to provide liquidity support for
commercial paper borrowings and for $372 million of the
Company's outstanding variable rate mortgage bonds in tax-exempt
commercial paper mode and for other corporate purposes. There
were no borrowings under these lines of credit at June 30, 1997.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning restructuring dockets before the
Federal Energy Regulatory Commission, 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.
Information concerning a lawsuit filed against the Company by
the Town of Norwood, Massachusetts, discussed in this report in
Note C of Notes to Unaudited Financial Statements, is incorporated
herein by reference and made a part hereof.
Information concerning arbitration of a dispute regarding the
Company's purchased power contract with Hydro-Quebec discussed in
this report in Note D of Notes to Unaudited Financial Statements,
is incorporated herein by reference and made a part hereof.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
On April 16, 1997, the Annual Meeting of Shareholders was
held.
By unanimous vote of the 6,449,896 shares having general
voting rights represented at this meeting:
The number of directors for the ensuing year was fixed at
five.
The following were elected as directors:
Joan T. Bok
Alfred D. Houston
Cheryl A. LaFleur
John W. Rowe
Jeffrey D. Tranen
Michael E. Jesanis was elected Treasurer and Robert King Wulff
was elected Clerk. The terms of office are until the next annual
meeting of stockholders and until their successors are duly chosen
and qualified.
Coopers & Lybrand was also selected as Auditor for the year
1997.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing Financial Data Schedules.
The Company filed reports on Form 8-K dated April 16, 1997 and
July 14, 1997, each containing Item 5, Other Events.
<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 June 30, 1997 to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
s/Michael E. Jesanis
Michael E. Jesanis, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: July 31, 1997
EXHIBIT INDEX
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
27 Financial Data Schedule Filed Herewith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> 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.
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> 6-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,901,297
<OTHER-PROPERTY-AND-INVEST> 80,247
<TOTAL-CURRENT-ASSETS> 352,422
<TOTAL-DEFERRED-CHARGES> 294,456 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,628,422
<COMMON> 128,998
<CAPITAL-SURPLUS-PAID-IN> 376,597
<RETAINED-EARNINGS> 392,534
<TOTAL-COMMON-STOCKHOLDERS-EQ> 898,129
0
39,666
<LONG-TERM-DEBT-NET> 647,613
<SHORT-TERM-NOTES> 5,700
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 127,225
<LONG-TERM-DEBT-CURRENT-PORT> 53,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 857,089
<TOT-CAPITALIZATION-AND-LIAB> 2,628,422
<GROSS-OPERATING-REVENUE> 834,097
<INCOME-TAX-EXPENSE> 36,062
<OTHER-OPERATING-EXPENSES> 717,355
<TOTAL-OPERATING-EXPENSES> 753,417
<OPERATING-INCOME-LOSS> 80,680
<OTHER-INCOME-NET> 207
<INCOME-BEFORE-INTEREST-EXPEN> 80,887
<TOTAL-INTEREST-EXPENSE> 23,427
<NET-INCOME> 57,460
1,037
<EARNINGS-AVAILABLE-FOR-COMM> 56,423
<COMMON-STOCK-DIVIDENDS> 64,499
<TOTAL-INTEREST-ON-BONDS> 21,172
<CASH-FLOW-OPERATIONS> 85,581
<EPS-PRIMARY> 0 <F2>
<EPS-DILUTED> 0 <F2>
<FN>
<F1> Total deferred charges includes other assets.
<F2> Per share data is not relevant because the Company's common stock is
wholly-owned by New England Electric System.
</FN>
