<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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6564
(LOGO) NEW ENGLAND POWER COMPANY
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1663070
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-389-2000)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes (X) No ( )
Common stock, par value $20 per share, authorized and outstanding:
6,449,896 shares at September 30, 1997.
<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
-------- -----------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue, principally from affiliates $443,774 $431,420$1,277,871 $1,206,881
-------- -------- --------------------
Operating expenses:
Fuel for generation 90,580 95,751 284,368 250,741
Purchased electric energy 134,606 126,203 406,011 376,492
Other operation 57,570 49,947 184,798 153,234
Maintenance 20,458 19,724 66,964 62,696
Depreciation and amortization 26,929 26,510 70,334 79,540
Taxes, other than income taxes 16,690 16,300 51,713 50,249
Income taxes 32,406 33,203 68,468 75,242
-------- -------- --------------------
Total operating expenses 379,239 367,638 1,132,656 1,048,194
-------- -------- --------------------
Operating income 64,535 63,782 145,215 158,687
Other income:
Equity in income of nuclear power companies1,260 1,324 3,881 4,142
Other income (expense), net (1,366) 844 (3,780) (748)
-------- -------- --------------------
Operating and other income 64,429 65,950 145,316 162,081
-------- -------- --------------------
Interest:
Interest on long-term debt 10,427 11,046 31,599 33,855
Other interest 2,244 2,336 5,150 8,184
Allowance for borrowed funds used during
construction (261) 9 (912) (258)
-------- -------- --------------------
Total interest 12,410 13,391 35,837 41,781
-------- -------- --------------------
Net income $ 52,019 $ 52,559 $ 109,479$ 120,300
======== ======== ====================
Statements of Retained Earnings
Retained earnings at beginning of period $392,534 $386,242 $ 400,610$ 385,309
Net income 52,019 52,559 109,479 120,300
Dividends declared on cumulative
preferred stock (519) (519) (1,556) (2,055)
Dividends declared on common stock (35,475) (41,924) (99,974) (106,746)
Premium on redemption of preferred stock (450)
-------- -------- --------------------
Retained earnings at end of period $408,559 $396,358 $ 408,559$ 396,358
======== ======== ====================
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
</TABLE>
<PAGE>
<TABLE> NEW ENGLAND POWER COMPANY
Statements of Income
Twelve Months Ended September 30
(Unaudited)
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue, principally from affiliates $1,671,299 $1,586,190
---------- ----------
Operating expenses:
Fuel for generation 376,172 324,405
Purchased electric energy 538,429 505,209
Other operation 235,020 208,939
Maintenance 83,386 85,264
Depreciation and amortization 95,003 102,501
Taxes, other than income taxes 67,880 65,606
Income taxes 85,120 93,378
---------- ----------
Total operating expenses 1,481,010 1,385,302
---------- ----------
Operating income 190,289 200,888
Other income:
Allowance for equity funds used during construction 258
Equity in income of nuclear power companies 4,898 5,616
Other income (expense), net (4,883) (546)
---------- ----------
Operating and other income 190,304 206,216
---------- ----------
Interest:
Interest on long-term debt 42,855 45,791
Other interest 7,032 11,702
Allowance for borrowed funds used during construction (1,245) (2,649)
---------- ----------
Total interest 48,642 54,844
---------- ----------
Net income $ 141,662 $ 151,372
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 396,358 $ 387,345
Net income 141,662 151,372
Dividends declared on cumulative preferred stock (2,075) (2,913)
Dividends declared on common stock (127,386) (138,996)
Premium on redemption of preferred stock (450)
---------- ----------
Retained earnings at end of period $ 408,559 $ 396,358
========== ==========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $3,044,245 $2,991,797
Less accumulated provisions for depreciation
and amortization 1,176,595 1,118,340
---------- ----------
1,867,650 1,873,457
Construction work in progress 29,136 36,836
---------- ----------
Net utility plant 1,896,786 1,910,293
---------- ----------
Investments:
Nuclear power companies, at equity 50,370 47,902
Non-utility property and other investments 30,805 30,591
---------- ----------
Total investments 81,175 78,493
---------- ----------
Current assets:
Cash 1,273 3,046
Accounts receivable:
Affiliated companies 229,027 201,370
Accrued NEEI revenues 21,551 21,648
Others 24,630 23,219
Fuel, materials and supplies, at average cost 57,332 58,709
Prepaid and other current assets 21,557 25,050
---------- ----------
Total current assets 355,370 333,042
---------- ----------
Deferred charges and other assets 464,623 325,887
---------- ----------
$2,797,954 $2,647,715
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
authorized and outstanding 6,449,896 shares $ 128,998 $ 128,998
Premiums on capital stocks 86,779 86,779
Other paid-in capital 289,818 289,818
Retained earnings 408,559 400,610
Unrealized gain on securities, net 29
---------- ----------
Total common equity 914,183 906,205
Cumulative preferred stock, par value $100 per share 39,666 39,666
Long-term debt 647,666 733,006
---------- ----------
Total capitalization 1,601,515 1,678,877
---------- ----------
Current liabilities:
Long-term debt due in one year 53,000 3,000
Short-term debt (including $1,475,000 and $5,275,000
to affiliates) 97,950 93,600
Accounts payable (including $32,630,000 and $25,301,000
to affiliates) 127,963 127,226
Accrued liabilities:
Taxes 13,567 8,158
Interest 9,537 9,668
Other accrued expenses 15,392 16,577
Dividends payable 35,475 27,412
---------- ----------
Total current liabilities 352,884 285,641
---------- ----------
Deferred federal and state income taxes 375,134 382,164
Unamortized investment tax credits 53,969 55,486
Other reserves and deferred credits 414,452 245,547
---------- ----------
$2,797,954 $2,647,715
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Nine Months Ended September 30
(Unaudited)
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 109,479 $ 120,300
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 72,821 82,756
Deferred income taxes and investment tax credits, net (7,107) (4,002)
Allowance for funds used during construction (912) (258)
Decrease (increase) in accounts receivable (28,971) (33,061)
Decrease (increase) in fuel, materials, and supplies 1,377 (12,522)
Decrease (increase) in prepaid and other current assets 3,493 2,959
Increase (decrease) in accounts payable 737 (11,074)
Increase (decrease) in other current liabilities 4,093 12,874
Other, net 18,823 25,350
--------- ---------
Net cash provided by operating activities $ 173,833 $ 183,322
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $ (50,822) $ (54,992)
Other investing activities (167) (113)
--------- ---------
Net cash used in investing activities $ (50,989) $ (55,105)
--------- ---------
Financing Activities:
Dividends paid on common stock $ (91,911) $ (97,071)
Dividends paid on preferred stock (1,556) (2,055)
Redemption of preferred stock (20,900)
Long-term debt - issues 39,850
Long-term debt - retirements (35,500) (49,850)
Changes in short-term debt 4,350 (775)
Gain on redemption of preferred stock, net 1,369
--------- ---------
Net cash used in financing activities $(124,617) $(129,432)
--------- ---------
Net increase (decrease) in cash and cash equivalents $ (1,773) $ (1,215)
Cash and cash equivalents at beginning of period 3,046 2,607
--------- ---------
Cash and cash equivalents at end of period $ 1,273 $ 1,392
========= =========
The accompanying notes are an integral part of these financial statements.
</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 Nine Months Ended
September 30,
----------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $142,156 $134,570 $523,478 $453,091
======== ======== ======== ========
Net income $ 6,604 $ 4,286 $ 21,585 $ 19,558
======== ======== ======== ========
Company's equity in
net income $ 1,260 $ 1,324 $ 3,881 $ 4,142
======== ======== ======== ========
September 30, December 31,
1997 1996
---- ----
(In Thousands)
Net plant $ 420,918 $ 401,049
Other assets 2,225,215 2,031,336
Liabilities and debt (2,374,643) (2,177,068)
----------- -----------
Net assets $ 271,489 $ 255,317
=========== ===========
Company's equity in net assets $ 50,370 $ 47,902
=========== ===========
</TABLE>
At September 30, 1997, $16,427,000 of undistributed earnings of
the nuclear power companies were included in the Company's retained
earnings.
Millstone 3
The Company is a 12 percent joint owner of the 1,150 megawatt
(MW) Millstone 3 nuclear generating unit (Millstone 3). Millstone
3 is operated by Northeast Nuclear Energy Company, a subsidiary of
Northeast Utilities (NU). In April 1996, the Nuclear Regulatory
Commission (NRC) ordered Millstone 3, which has experienced
<PAGE>
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
numerous technical and nontechnical problems, to remain shut down
pending verification that the unit's operations are in accordance
with NRC regulations and the unit's operating license. The Company
is not an owner of Millstone 1 and 2 nuclear generating units,
which are also shut down under NRC orders. Millstone 3 has been
placed on the NRC "Watch List," signifying that its safety
performance exhibits sufficient weakness to warrant increased NRC
attention.
A number of significant prerequisites must be fulfilled prior
to restart of Millstone 3, including certification by NU that the
unit adequately conforms to its design and licensing bases, an
independent verification of corrective actions taken at the unit,
an NRC assessment concluding a culture change has occurred, public
hearings, and a vote of the NRC Commissioners. The Company cannot
predict when Millstone 3 will be allowed by the NRC to restart, but
believes that the restart of the unit is not likely until the
second quarter of 1998 at the earliest.
In 1996, the Company's Millstone 3 costs, excluding fuel,
increased by $9 million (all of which occurred in the first nine
months of 1996). During the first nine months of 1997 the
Company's Millstone 3 costs increased an additional $2 million over
prior year levels. The Company expects its level of Millstone 3
costs in the fourth quarter to be $7 million higher than during the
fourth quarter of 1996. Since April 1996, the Company has also
incurred an estimated $30 million in incremental replacement power
costs, which NEP has been recovering from customers through its
fuel clause. During the outage, the Company is incurring
incremental replacement power costs of approximately $1.8 million
per month.
Several criminal investigations related to Millstone 3 are
ongoing. The NRC and the Connecticut Department of Environmental
Protection have identified numerous apparent violations which may
result in the assessment of substantial civil penalties.
On August 7, 1997, the Company filed suit against NU in
Massachusetts Superior Court, Worcester County for damages
resulting from the tortious conduct of NU relating to Millstone 3.
The Company is seeking compensation for the losses it has suffered,
including the costs of the lost power and costs necessary to assure
that Millstone 3 can safely return to operation. The Company also
seeks punitive damages.
<PAGE>
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
The Company, on August 7, 1997, also sent a demand for
arbitration to Connecticut Light & Power Company and Western
Massachusetts Electric Company, both subsidiaries of NU, seeking
damages resulting from their breach of obligations under an
agreement with the Company and others regarding the operation and
ownership of Millstone 3.
Maine Yankee
The Company has a 20 percent equity ownership interest in Maine
Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW
nuclear generating station. After an extensive review of the
economic viability of the station, the Maine Yankee Board of
Directors voted to permanently shut down and decommission the
station. The Maine Public Utilities Commission (MPUC) has opened
a proceeding to review the prudence of the decision to close the
Maine Yankee plant, and whether the decision resulted from
imprudent operation of the plant. Maine Yankee intends to assert
that the MPUC jurisdiction is preempted by Federal Energy
Regulatory Commission (FERC) regulation.
In September 1997, the Department of Justice announced that no
criminal charges will be filed following a review of a NRC
investigatory report for possible criminal violations related to
the Maine Yankee station. Civil fines may be assessed by the NRC
based upon several investigations and inspections, including its
independent safety assessment.
At September 30, 1997, the Company's net investment in Maine
Yankee was $15 million. The Company estimates that Maine Yankee's
future billings to the Company to recover investments in the plant
and costs to shutdown and decommission the plant will be at least
$175 million. Such billings are subject to FERC approval. This
figure reflects an updated decommissioning study. These estimated
costs have been recorded as an accrued liability with an offsetting
regulatory asset in the expectation that the costs would be
recoverable from customers.
In the 1970s the Company and several other shareholders
(Sponsors) of Maine Yankee entered into 27 contracts (Secondary
Purchase Agreements) under which they sold portions of their
entitlement to Maine Yankee power output through 2002 to various
entities, primarily municipal and cooperative systems in New
<PAGE>
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
England (Secondary Purchasers). Virtually all of the Secondary
Purchasers have ceased making payments under the Secondary Purchase
Agreements, claiming that such agreements excuse further payments
upon station shutdown. The Company has notified the Secondary
Purchasers that the shutdown does not relieve them of their
obligation to make payments under the Secondary Purchase Agreements
and that they are in default of such agreements. As these
Secondary Purchase Agreements are between the Sponsors and the
Secondary Purchasers, Maine Yankee has billed the Sponsors for
payment as a result of nonpayment by the Secondary Purchasers.
This results in incremental monthly billings to the Company of
between $140,000 and $325,000 over the next several years. In the
event that no further payments are forthcoming from Secondary
Purchasers, the Company's share of these incremental costs would be
approximately $11 million, which the Company expects would be
recoverable from customers under stranded cost settlements. These
costs are not included in the $175 million estimate discussed
above.
Yankee Atomic
The Company has a 30 percent ownership interest in Yankee
Atomic Electric Company (Yankee Atomic). On October 15, 1997, the
Yankee Atomic Board of Directors announced it had accepted a
proposal by Duke Engineering & Services, a unit of Duke Energy
Corp., to acquire Yankee Atomic's Nuclear Services Division.
Closing is expected to take place later in 1997. Yankee Atomic
will continue to own the Yankee nuclear power plant in Rowe,
Massachusetts and be responsible for its decommissioning. This
transaction will not result in any signifcant financial impact to
the Company.
General
On October 24, 1997, the Citizen's Awareness Network and
Nuclear Information and Resource Service filed a petition with the
NRC which would require formal approval of a plant decommissioning
plan for the Connecticut Yankee and Maine Yankee plants. The
Company cannot predict what impact, if any, this action, or
resulting appeals, will have on the cost of decommissioning the
plants.
In October 1996, the NRC issued letters to operators of nuclear
power plants requiring them to document that the plants are
<PAGE>
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
operated and maintained within their design and licensing bases,
and that any deviations are reconciled in a timely manner. The
Seabrook 1 and Vermont Yankee nuclear power plants responded to the
NRC letters in February 1997. The NRC is still assessing the
responses.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Vermont Yankee, are
increasing rapidly and could adversely affect their service lives,
availability, and costs. These uncertainties stem from a
combination of factors, including the acceleration of competitive
pressures in the power generation industry and increased NRC
scrutiny.
Note B - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
A number of states, including Massachusetts, have enacted similar
laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The Company is a wholly-owned subsidiary
of New England Electric System (NEES). NEES subsidiaries have an
internal environmental audit program and an external waste disposal
vendor audit and qualification program intended to enhance
compliance with federal, state, and local requirements regarding
the handling of potentially hazardous products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for six
sites at which hazardous waste is alleged to have been disposed.
Private parties have also contacted or initiated legal proceedings
against the Company regarding hazardous waste cleanup. The Company
is currently aware of other sites, and may in the future become
aware of additional sites, that it may be held responsible for
remediating.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
<PAGE>
Note B - Hazardous Waste - Continued
- ------------------------
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. The NEES
companies have recovered amounts from certain insurers, and, where
appropriate, are seeking or intend to seek recovery from other
insurers and from other PRPs, but it is uncertain whether, and to
what extent, such efforts will be successful. The Company believes
that hazardous waste liabilities for all sites of which it is
aware, and which are not covered by a rate agreement, are not
material to its financial position.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which became effective in 1997. These new
rules do not have a material effect on the Company's financial
position or results of operations.
Note C - Town of Norwood Dispute
- --------------------------------
In April 1997, the Town of Norwood, Massachusetts filed a
lawsuit against the Company in the United States District Court for
the District of Massachusetts. The Company is the wholesale
electric supplier for Norwood pursuant to rates approved by the
FERC. Norwood alleges that the Company's proposal to divest its
power generation assets violates the terms of a 1983 agreement
settling an antitrust lawsuit brought by Norwood against the
Company. Norwood also alleges that the Company's proposed
divestiture plan and recovery of stranded investment costs
contravene federal antitrust laws. Norwood seeks that the Company
be permanently enjoined from refusing to comply with the terms of
the 1983 settlement agreement by divesting its generation assets or
from charging unjust and unreasonable rates to Norwood. Norwood
also seeks to recover treble damages of $450 million. The Company
believes that its divestiture plan will promote competition in the
wholesale power generation market and that it has met and will
continue to meet its contractual commitments to Norwood. Since the
original filing, the Company filed a motion to dismiss the lawsuit
based on its belief that Norwood's claims are within the FERC's
exclusive jurisdiction. Norwood filed a motion for summary
judgement and in the alternative for a preliminary injunction
restraining the divestiture of the Company's generating business.
In September 1997, the court denied Norwood's request for a
preliminary injunction, and took the other motions under
advisement.
<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, of which the
Company's share would have been approximately $6-$9 million. The
claims involved a dispute over the components of a pricing formula
and additional costs under the contract. With respect to on-going
claims, the Company had been paying Hydro-Quebec the higher amount
(additional costs of approximately $3 million per year) since July
1996 under protest and subject to refund. In October 1997, an
arbitrator ruled in favor of the New England utilities in all
respects. The Company has made a demand for refund. Hydro-Quebec
has not yet refunded any monies and plans to appeal the decision.
On November 9, 1997, the Company and the other utilities began a
second arbitration to enforce the first decision. Refunds received
from Hydro-Quebec will be passed on to customers through the
Company's fuel clause.
Note E
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the financial statements in the Company's 1996 Annual
Report.
<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 (the Company) financial condition and the principal
factors having an impact on the results of operations. This
discussion should be read in conjunction with the Company's
financial statements and footnotes and the 1996 Annual Report on
Form 10-K.
Earnings
- --------
Net income for the third quarter and first nine months of 1997
decreased $1 million and $11 million, respectively, compared with
the corresponding periods in 1996. These decreases were due to
increased operation and maintenance costs and increased year-to-
date purchased electric energy costs excluding fuel. These
decreases in income were partially offset by a transmission rate
increase.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island, and New Hampshire, see the "Industry
Restructuring" section in the Company's Form 10-K for 1996.
Industry Restructuring Update
As previously reported, the Massachusetts settlement and the
Rhode Island statute and related settlement covering customer
choice and electric utility restructuring provide for full recovery
of the costs of generating assets and oil and gas related assets
(including regulatory assets) not recoverable through the
divestiture of the Company's generating business. The Company is
a wholly-owned generation and transmission subsidiary of New
England Electric System (NEES). The Massachusetts settlement was
approved by the Massachusetts Department of Public Utilities (MDPU)
and a companion wholesale settlement is now pending final approval
before the Federal Energy Regulatory Commission (FERC). A Rhode
Island settlement reached in May 1997 among the Company, The
Narragansett Electric Company (Narragansett Electric) (a wholly-
owned distribution subsidiary of NEES), the Rhode Island Public
Utilities Commission (RIPUC) and the Rhode Island Division of
Public Utilities and Carriers to implement the stranded cost
recovery provisions of the Utility Restructuring Act of 1996 is
<PAGE>
also pending before the FERC. In July 1997, a FERC Administrative
Law Judge certified the proposed settlement to the full FERC
commission. Final FERC action is expected later in 1997.
On November 10, 1997, the Massachusetts House of
Representatives passed a bill which would provide Massachusetts
customers with the ability to choose their electric supplier on
March 1, 1998. The bill provides for the recovery of stranded
costs but contains provisions that could require Massachusetts
regulators to reexamine and recompute stranded costs. The bill
further requires electric companies to provide customers who do not
choose a supplier with a standard offer transition rate which is 10
percent below 1997 rates, with the discount growing to 15 percent
upon completion of divestiture of generating assets or so-called
"securitization" (or refinancing) of stranded costs. The
Massachusetts settlement, as approved by the MDPU earlier this
year, along with the anticipated sale of our generating business
described below, is expected to allow the rate reduction targets
contained in the House bill to be met. The Senate is expected to
act on the proposed legislation before the current session ends on
November 19, 1997.
Divestiture of Generation Business
Under the Massachusetts and Rhode Island settlements , the NEES
companies must complete the divestiture of their nonnuclear
generating business within six months of the later of the
commencement of retail choice in Massachusetts or the receipt of
all necessary regulatory approvals.
On August 5, 1997, the Company and Narragansett Electric
(collectively, the "Sellers") reached an agreement to sell their
nonnuclear generating business to USGen New England, Inc. (USGen),
an indirect wholly-owned subsidiary of PG&E Corporation. The
Sellers' nonnuclear generating business includes three fossil-fuel
generating stations and 15 hydroelectric generating stations,
totaling approximately 4,000 megawatt (MW) of capacity, with a book
value $1.1 billion.
USGen will pay the Sellers $1.59 billion in cash, of which $225
million will be contingent upon retail customers being able to
choose their electric supplier. Specifically, if customers
representing 89 percent of kilowatt-hour (kWh) sales of investor
owned utilities in Massachusetts, or 50 percent of kWh sales in New
England, have the ability to choose their electric supplier by
January 1, 1999, the Sellers will be entitled to the full
contingent amount. If such retail choice milestone is met after
January 1, 1999, the contingent portion of the purchase price
<PAGE>
declines ratably by $75 million over the year 1999, and $50 million
per year thereafter until the milestone is met. Payment of the
contingent portion can be deferred for up to two years if retail
choice is not the result of legislation.
USGen will also reimburse the NEES companies for $85 million of
costs associated with early retirement and special severance
programs for employees affected by industry restructuring. USGen
will purchase the Company's entitlement in approximately 1,100 MW
of power procured under long-term contracts. The Company will make
a monthly fixed contribution toward the above-market cost of the
purchased power of between $12.5 million and $14.2 million per
month from closing through January 2008. These amounts are
recoverable under the terms of the Massachusetts and Rhode Island
settlements. USGen will be responsible for the balance of the
costs under the purchased power contracts.
USGen will assume responsibility for environmental conditions
at the Sellers' generating stations. USGen will also assume the
Company's obligations under long-term fuel and fuel transportation
contracts and certain existing collective bargaining agreements.
The sale is subject to approval by various state and federal
regulatory agencies. The timing of such approval is uncertain;
however, approval is unlikely before the spring of 1998. Closing
is contingent upon all regulatory approvals being obtained by
February 1999.
As part of the divestiture plan, the Company will endeavor to
sell, or otherwise transfer, its minority interest in three nuclear
power plants to nonaffiliates. In addition, New England Energy
Incorporated (NEEI), an affiliate of the Company, is planning to
sell its oil and gas properties, the cost of which is supported by
the Company through fuel purchase contracts.
Under Rhode Island's Utility Restructuring Act of 1996 and the
Massachusetts settlement, the proceeds from the sale will be used
to offset the stranded costs which the NEES companies recover from
customers. The NEES companies estimate that, upon completion of
the sale, prices for their customers would decrease on average by
approximately 15 percent below today's prices.
Workforce Reduction
The NEES companies expect to implement substantial workforce
reductions during 1998 as a result of industry restructuring and
the sale of the generation business. The NEES companies have
reached an agreement with all three of their unions regarding
<PAGE>
benefits and other assistance, including early retirement and
severance programs, to union employees that are affected by these
events. The NEES companies have also announced similar early
retirement and severance programs for management employees. The
costs of such programs are expected to be substantially recovered
from the proceeds of the sale of the generating business.
Risk Factors
This Form 10-Q contains statements that may be considered
forward looking statements as defined under the securities laws.
Actual results may differ materially. As disclosed in the
Company's Form 10-K for the year ended 1996, there are several risk
factors which could affect actual results. While the NEES
companies believe that the sale agreement with USGen and other
developments constitute substantial progress in resolving the
uncertainty regarding the impact on shareholders from industry
restructuring, significant risks remain. These include, but are
not limited to: (i) the potential that ultimately the Massachusetts
and Rhode Island settlements and the Rhode Island statute will not
be implemented in the manner anticipated by NEES, (ii) the
possibility of state or federal legislation that would increase the
risks to shareholders above those contained in the settlements and
Rhode Island statute, (iii) the potential for adverse stranded cost
recovery decisions involving Granite State Electric Company
(Granite State) (a wholly-owned distribution subsidiary of NEES)
and the Company's unaffiliated customers, and (iv) the failure to
complete the sale of the generating business to USGen.
Even if these risks do not materialize, the implementation of
the sale agreement and the Massachusetts and Rhode Island
settlements regarding restructuring will negatively impact
financial results for the Company starting in 1998. The major risk
factors affecting the Company relate to the possibility of adverse
regulatory or judicial decisions or legislation which limit the
level of revenues the Company is allowed to charge for its services
or affects the costs the company incurs. The return on equity
permitted on the unrecovered commitments in the generating business
is generally 9.4 percent before mitigation incentives. In
addition, starting in 1998, earnings would be affected by the
return on the reinvestment of the proceeds from the sale of the
generation business. Such reinvestment return is expected, at
least in the near term, to be considerably less than has
historically been earned by the generation business. To the extent
that neither the divestiture of the Company's nonnuclear generation
nor retail choice occurs in 1998, under the Massachusetts
settlement pending before the FERC, approximately 73 percent of the
amount of the Company's 1998 earnings in excess of the 11.75
<PAGE>
percent return on equity must be refunded to Massachusetts Electric
Company (Massachusetts Electric) (a wholly-owned distribution
subsidiary of NEES) until its earnings cap is met, and then used to
reduce stranded costs. In addition, the NEES companies will also
incur costs associated with the transition after the sale is
completed.
Rhode Island
In July 1997, the Governor of Rhode Island signed into law
bills further implementing utility restructuring in Rhode Island.
The Securitization Act establishes a framework at the RIPUC for
utilities to seek approval for the issuance of bonds secured by
customers obligations to pay stranded cost charges. The 1997
Amendments to the Utility Restructuring Act modify the law so that
utilities will not have to transfer their transmission assets to
another company and make other technical amendments.
Accounting Implications
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of
Regulation (FAS 71), requires regulated entities, in appropriate
circumstances, to establish regulatory assets, and thereby defer
the income statement impact of certain costs expected to be
recovered in future rates. At December 31, 1996, the Company had
approximately $340 million in net regulatory assets in compliance
with FAS 71. In addition, the Company's affiliate, NEEI, had a
regulatory asset of approximately $150 million at December 31,
1996, which is recoverable in its entirety from the Company.
In response to concerns expressed by the staff of the
Securities and Exchange Commission, the Emerging Issues Task Force
(EITF) of the Financial Accounting Standards Board took under
consideration how FAS 71 should be applied in light of recent
changes within the regulated utility industry. In July 1997, the
EITF concluded that a utility whose ongoing generation operations
would not permit the application of FAS 71, but had otherwise
received approval to recover stranded costs through cost-based
regulated transmission and distribution rates, would be permitted
to continue to apply FAS 71 to the recovery of the stranded costs.
The Massachusetts and Rhode Island settlements each provide for
full recovery of the sunk costs of generating assets and oil and
gas related assets (including regulatory assets) not recoverable
<PAGE>
from the proceeds of the divestiture of the Company's generating
business. FERC approval is still required for the Massachusetts
and Rhode Island settlements. The cost of these assets would be
recovered as part of a transition access charge imposed on all
distribution customers. After the proposed divestiture,
substantially all of the Company's business, including the recovery
of its stranded costs, would remain under cost-based rate
regulation. The principal exception is the provision of the
settlements providing for a 80/20 sharing between customers and
shareholders of the going forward costs and revenues related to the
Company's operating nuclear interests. Specifically, FERC Order
No. 888 enables transmission companies to recover their specific
costs of providing transmission service. The Company believes
these factors and the EITF conclusion will allow it to continue to
apply FAS 71. Any gain or loss from the divestiture of generating
assets and oil and gas assets, as well as any loss resulting from
the impairment of the Company's plant assets under Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (FAS 121), will be recorded as a regulatory liability
or asset to be recovered through the ongoing transition access
charge. The Company will be required to cease to apply FAS 71 to
the 20 percent of its ongoing nuclear operations described above.
Despite the progress made to date in Massachusetts and Rhode
Island, it is possible that the final restructuring plans
ultimately ordered by regulatory bodies may not reflect full
recovery of stranded costs, including a fair return on those costs
as they are being recovered. In addition, it is possible that
future methods of setting performance-based distribution rates may
not be considered cost-based as required by FAS 71. In the event
that future circumstances should cause the application of FAS 71 to
be discontinued, a noncash write-off of previously established
regulatory assets related to the affected operations would be
required. In addition, write-downs of plant assets under FAS 121
could be required, including a write-off of any gain or loss from
the divestiture of the generating business.
Brayton Point
- -------------
In October 1996, the Environmental Protection Agency (EPA)
announced it was beginning a process to determine whether to modify
or revoke and reissue the Company's water discharge permit for its
Brayton Point 1,576 MW power plant. This action came two years
before the permit expiration date. The EPA stated it took this
step in response to a request from the Rhode Island Department of
Environmental Management (RIDEM). A RIDEM report asserted a
<PAGE>
statistical correlation between the decline in the fish population
in Mount Hope Bay and a change in operations at Brayton Point that
occurred in the mid-1980's.
In April 1997, the Company signed a memorandum of agreement
negotiated with the various federal and state environmental
agencies under which the Company will voluntarily operate under
more stringent conditions than under its existing permit. The
agreement is in lieu of any immediate action on the permit, and
will remain in effect until a renewal permit is issued. The
Company cannot predict at this time what permit changes will be
required or the impact on Brayton Point's operations and economics.
However, permit changes may substantially impact the plant's
capacity and ability to produce energy and/or require substantial
capital expenditures to construct equipment to address the concerns
raised by the environmental agencies.
Year 2000 Computer Issues
- -------------------------
In the next two years, most large companies will face a
potentially serious information systems (computer) problem because
most software application and operational programs written in the
past will not properly recognize calendar dates beginning in the
year 2000. This could force computers to either shut down or lead
to incorrect calculations. The NEES companies began the process of
identifying the changes required to their computer programs and
hardware during 1996. The necessary modifications to the NEES
companies' centralized financial, customer, and operational
information systems are expected to be completed by the end of
1998. The NEES companies believe they will incur approximately $20
million of costs associated with making the necessary modifications
identified to date to the centralized systems. Substantially all
of these costs are expected to be incurred prior to December 31,
1998. Noncentralized systems are currently being reviewed for Year
2000 problems. The NEES companies are unable to predict the costs
to be incurred for correction of such noncentralized systems, but
expect the scope and schedule for such work to be less complex than
for its centralized information systems.
<PAGE>
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1997 vs 1996 1997 vs 1996
------------- ------------
(In Millions)
Fuel recovery $ 6 $58
Narragansett Electric integrated
facilities credit 2 5
Sales (1) (8)
Stranded investment recovery 1 6
Other (including
transmission revenues) 4 10
--- ---
$12 $71
=== ===
For a discussion of fuel recovery, see the fuel costs
discussion in the "Operating Expenses" section.
The entire output of Narragansett Electric's generating
capacity is made available to the Company. Narragansett Electric
receives a credit on its purchased power bill from the Company for
its fuel costs and other generation and transmission related costs.
The reduction in these credits in 1997 reflects a reduction in
dismantlement costs being incurred by Narragansett Electric on a
previously retired generating facility.
Sales decreased in the first nine months due primarily to a
decrease in peak demand billing as a result of milder weather in
the first quarter of 1997.
The stranded investment recovery represents amounts being
recovered in connection with retail wheeling pilot programs
instituted by Massachusetts Electric and Granite State.
<PAGE>
The increase in other revenues is primarily due to a
transmission rate increase that went into effect in mid-1996.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses: Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1997 vs 1996 1997 vs 1996
------------- ------------
(In Millions)
Fuel costs $ 5 $ 58
Purchased energy, excluding fuel (2) 4
Operation and maintenance 8 36
Depreciation and amortization 1 (9)
Taxes - (5)
--- ----
$12 $ 84
=== ====
Fuel costs represent fuel for generation and the portion of
purchased electric energy permitted to be recovered through the
Company's fuel adjustment clause. The increase in fuel costs in
the third quarter and first nine months of 1997 primarily
reflects increased power supply to other utilities and increased
replacement power costs due to the reduced generation from
partially owned nuclear units. See "Investments in Nuclear
Units" section in the "Notes to the Unaudited Financial
Statements".
The portion of purchased electric energy costs not recovered
through the Company's fuel clause is shown as purchased energy,
excluding fuel. The decrease in purchased power costs,
excluding fuel, during the third quarter reflects reduced
charges from the closed Connecticut Yankee nuclear power plant
and reduced charges from the Vermont Yankee nuclear power plant
as a result of a 1996 third quarter refueling outage. On a
year-to-date basis, purchased power costs have increased,
reflecting overhaul and repair costs relating to the Maine
Yankee nuclear power plant and the Ocean State Power plant,
partially offset by reduced capacity purchases and reduced
purchased power costs from the Connecticut Yankee nuclear power
plant, which were primarily due to a one-time property tax
settlement.
<PAGE>
The decrease in depreciation and amortization expense
reflects the completion of the amortization of the Company's
pre-1988 investment in the Seabrook 1 nuclear unit and the
Company's investment in the canceled Seabrook 2 nuclear unit.
In accordance with a FERC 1995 settlement agreement, upon
completion of the amortization of Seabrook 1 and Seabrook 2, the
Company agreed to accelerate its amortization of previously
deferred costs associated with postretirement benefits other
than pensions (PBOPs). Upon completion of the PBOP
amortization, which occurred in July 1997, the Company was
required to accelerate its depreciation of Millstone 3.
The increase in operation and maintenance expense during the
third quarter reflects increased transmission wheeling costs and
start-up costs associated with the new regional transmission
control organization. For the nine month period, the increase
in operation and maintenance expense also reflects the increase
in PBOP expenses as mentioned above, as well as increased
maintenance costs of partially owned nuclear generating
facilities, Millstone 3 and Seabrook 1. Other increases in
operation and maintenance expenses resulted from the Company's
share of costs associated with the restoration to service of
previously idled generating facilities throughout New England,
in response to a tightening regional power supply, as well as an
overall increase in general and administrative costs.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $51 million for
the first nine months of 1997. The funds necessary for utility
plant expenditures during the period were provided by net cash
from operating activities, after the payment of dividends.
In the first nine months of 1997, the Company retired $35
million of mortgage bonds and increased its short-term debt
outstanding by $4 million.
The Company has approximately $700 million of mortgage bonds
outstanding. The bond indenture terms restrict the sale of the
trust property in its entirety or substantially in its entirety.
Therefore, the proposed sale of the Company's generating
business would likely require that the Company either amend the
bond indenture terms or defease the indenture and the bonds in
connection with the proposed sale. Any defeasance of bonds is
expected to be either to maturity or at general redemption
prices.
On November 7, 1997, NEES commenced cash tender offers for
any and all outstanding shares of the Company's preferred stock,
which totals approximately $40 million. Concurrently with the
<PAGE>
offer, the Company's Board of Directors is soliciting proxies
for use at a special meeting of preferred shareholders. The
special meeting is being held to consider amendments to the
Company's By-Laws and Articles of Incorporation which would
remove a limitation on the ability of the Company to issue
unsecured debt without approval of preferred shareholders. The
offer expires on December 12, 1997.
At September 30, 1997, the Company had $98 million of
short-term debt outstanding, including $96 million of commercial
paper borrowings. At September 30, 1997, the Company had lines
of credit and standby bond purchase facilities with banks
totaling $520 million which are available to provide liquidity
support for commercial paper borrowings and for $372 million of
the Company's outstanding variable rate mortgage bonds in
tax-exempt commercial paper mode and for other corporate
purposes. There were no borrowings under these lines of credit
at September 30, 1997.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning a lawsuit brought by the Company
against Northeast Utilities on August 7, 1997 in Massachusetts
Superior Court, Worcester County concerning the Millstone 3
nuclear unit, discussed in this report in Note A of Notes to
Unaudited Financial Statements, is incorporated herein and made
a part hereof.
Information concerning a demand for arbitration sent by the
Company to Connecticut Light & Power Company and Western
Massachusetts Electric Company concerning the Millstone 3
nuclear unit, discussed in this report in Note A of Notes to
Unaudited Financial Statements, is incorporated herein and made
a part hereof.
Information concerning a lawsuit brought against the Company
by the Town of Norwood, Massachusetts, discussed in this report
in Note C of Notes to Unaudited Financial Statements, is
incorporated herein and made a part hereof.
Information concerning a favorable arbitration decision for
the Company regarding its purchased power contract with Hydro-
Quebec, discussed in this report in Note D of Notes to Unaudited
Financial Statements, is incorporated herein and made a part
hereof.
Information concerning restructuring dockets before the
Federal Energy Regulatory Commission and other regulatory
approvals sought for the sale of the Company's generation
business, discussed in Part I of this report in Management's
Discussion and Analysis of Financial Conditions and Results of
Operations, is incorporated herein by reference and made a part
hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibit 2. The Company is filing as an exhibit a copy of the
Asset Purchase Agreement by and among the Company and The
Narragansett Electric Company and USGen New England, Inc.
(formerly USGen Acquisition Corporation) dated as of August 5,
1997. (Incorporated by reference to Exhibit 2 to New England
Electric System's Form 10-Q for the period ended September 30,
1997, File No. 1-3446).
<PAGE>
The Company is filing Financial Data Schedules.
The Company filed a report on Form 8-K dated August 6, 1997,
containing Item 5, Other Events.
<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, 1997 to be signed on its behalf by
the undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
s/Michael E. Jesanis
Michael E. Jesanis, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: November 13, 1997
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
2 Asset Purchase Agreement Incorporated
by and among NEP and The by Reference
Narragansett Electric
Company and USGen New
England, Inc.
27 Financial Data Schedule Filed Herewith
<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> SEP-30-1997
<PERIOD-TYPE> 9-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,896,786
<OTHER-PROPERTY-AND-INVEST> 81,175
<TOTAL-CURRENT-ASSETS> 355,370
<TOTAL-DEFERRED-CHARGES> 464,623 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,797,954
<COMMON> 128,998
<CAPITAL-SURPLUS-PAID-IN> 376,597
<RETAINED-EARNINGS> 408,559
<TOTAL-COMMON-STOCKHOLDERS-EQ> 914,183 <F3>
0
39,666
<LONG-TERM-DEBT-NET> 647,666
<SHORT-TERM-NOTES> 1,475
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 96,475
<LONG-TERM-DEBT-CURRENT-PORT> 53,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,045,489
<TOT-CAPITALIZATION-AND-LIAB> 2,797,954
<GROSS-OPERATING-REVENUE> 1,277,871
<INCOME-TAX-EXPENSE> 68,468
<OTHER-OPERATING-EXPENSES> 1,064,188
<TOTAL-OPERATING-EXPENSES> 1,132,656
<OPERATING-INCOME-LOSS> 145,215
<OTHER-INCOME-NET> 101
<INCOME-BEFORE-INTEREST-EXPEN> 145,316
<TOTAL-INTEREST-EXPENSE> 35,837
<NET-INCOME> 109,479
1,556
<EARNINGS-AVAILABLE-FOR-COMM> 107,923
<COMMON-STOCK-DIVIDENDS> 99,974
<TOTAL-INTEREST-ON-BONDS> 31,599
<CASH-FLOW-OPERATIONS> 173,833
<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.
<F3> Total common stockholders equity is reflected net of unrealized gain on
securities.
</FN>
