<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of the
Securities Exchange Act of 1934
Date of Earliest Event Reported: September 1, 1998
NEW ENGLAND POWER COMPANY
(exact name of registrant as specified in charter)
Massachusetts 1-6564 04-1663070
(state or other (Commission (I.R.S. Employer
jurisdiction of File No.) Identification No.)
incorporation)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
(508) 389-2000
(Registrant's telephone number, including area code)
<PAGE>
Item 2. Acquisition or Disposition of Assets
- --------------------------------------------
On September 1, 1998, New England Power Company (NEP) and The
Narragansett Electric Company, both subsidiaries of New England
Electric System (NEES), completed the sale of substantially all of
their non-nuclear generating business to USGen New England, Inc.
(USGen), an indirect who1ly owned subsidiary of PG&E Corporation
(PG&E). NEP's share of the proceeds amounted to approximately
$1.55 billion. In addition, NEP was reimbursed approximately $140
million for costs associated with early retirements and special
severance programs for employees affected by industry
restructuring and the value of inventories. For more information
on the terms and events leading to the sale, the accounting
implications of the sale, and the assets sold, see NEP's Annual
Report on Form 10-K for the year ended December 31, 1997.
As part of the sale, USGen purchased NEP's entitlement to
approximately 1,100 MW of power procured under long-term
contracts. NEP is required to make a monthly fixed contribution
towards the above-market cost of the purchased power from closing
through January 2008. USGen is responsible for the balance of the
costs under the purchased power contracts. Pursuant to the
transfer agreement, under certain conditions involving formal
assignment of the contracts to USGen and a release of NEP from
further obligations to the power supplier, NEP is required to make
a lump sum payment of the present value of its monthly fixed
contribution obligations. To date during 1998, NEP has made lump
sum payments of approximately $340 million which reduced the
monthly fixed contributions to an average of $9.5 million. The
lump sum payments and remaining monthly fixed contributions are
recoverable from customers as part of industry restructuring
settlements reached by NEP with various parties and approved by
state and Federal regulators.
Item 5. Other Events
- --------------------
NEP used approximately $270 million of the proceeds of the
sale of assets described in Item 2 for the defeasance of long-term
mortgage debt, including (i) $38 million of tax-exempt pollution
control revenue bonds issued by the Connecticut Development
Authority and (ii) $230 million of publicly-held mortgage bonds.
A portion of the publicly-held mortgage bonds were acquired
<PAGE>
through a tender offer. Approximately $372 million of mortgage
bonds securing a like amount of tax-exempt pollution control
revenue bonds (PCRB's) issued by various public agencies were
retired. The $372 million of PCRB's were then reoffered on an
unsecured basis. Approximately $410 million was used to retire
short-term debt and preferred stock held by NEES. (Note that the
above figures are as of September 1, 1998 and that the attached
proforma financial statements are as of June 30, 1998.) NEP
expects that its state and Federal tax liability related to the
sale (net of deductions related to power contract lump sum
payments) will equal approximately $200 million.
The NEP Board of Directors has authorized the repurchase of
up to five million shares (out of 6.5 million shares) of its common
stock held by NEES at the then book value per share. This
transaction has not been consummated pending approval of the
Securities and Exchange Commission under the Public Utility
Holding Company Act of 1935 and is not reflected in the attached
pro forma financial statements.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
- -------------------------------------------------------------
Pro Forma Financial Information
The following unaudited pro forma consolidated financial
statements are filed with this report:
Pro Forma Balance Sheet of New England Power Company at June 30,
1998
Pro Forma Statements of Income of New England Power Company:
Year Ended December 31, 1997
Six Months Ended June 30, 1998
The Pro Forma Balance Sheet of New England Power Company (the
Company) at June 30, 1998 reflects the financial position of the
Company after giving effect to the disposition of the assets
discussed in Item 2 and assumes the disposition took place on June
30, 1998. The Pro Forma Statements of Income for the fiscal year
<PAGE>
ended December 31, 1997 and the six months ended June 30, 1998
assume that the disposition occurred on January 1, 1997, and are
based on the operations of the Company for the year ended December
31, 1997 and the six months ended June 30, 1998.
The unaudited pro forma financial statements have been prepared
by the Company based upon assumptions deemed reasonable by it.
The unaudited pro forma financial statements presented herein are
shown for illustrative purposes only and are not indicative of the
future financial position or future results of operations of the
Company, or the financial position or results of operations of the
Company that would have actually occurred had the transaction been
in effect as of the date or for the periods presented. In
particular, while the disposition of the assets portrayed herein
will have a significant impact on the results of operations, such
disposition is only one component of the restructuring that the
Company is undergoing at this time. A more complete description
of all such restructuring changes is included in the Company's
1997 Annual Report on Form 10-K.
The unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and related
notes of the Company.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Current Report on Form
8-K to be signed on its behalf by the undersigned thereunto duly
authorized.
NEW ENGLAND POWER COMPANY
s/John G. Cochrane
By
John G. Cochrane
Treasurer
Date: September 16, 1998
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
1 Pro Forma Balance Filed
Sheet of New England herewith
Power Company at
June 30, 1998
2 Pro Forma Statements of Filed
Income of New England herewith
Power Company for the
year ended December
31, 1997 and six months
ended June 30, 1998
3 Notes to Unaudited Pro Forma Filed
Financial Statements herewith
<PAGE>
<TABLE> NEW ENGLAND POWER COMPANY
Balance Sheet
At June 30, 1998
(Actual and Pro Forma)
(Unaudited)
<CAPTION>
ASSETS
------
Actual Adjustments Pro Forma
------ ----------- ---------
(In Thousands)
<S> <C> <C> <C>
Utility plant, at original cost $3,084,842 $(1,848,677) $1,236,165
Less accumulated provisions for
depreciation and amortization 1,234,869 (807,674) 427,195
-------------------------------
1,849,973(1,041,003) 808,970
Construction work in progress 30,217 (5,087) 25,130
-------------------------------
Net utility plant 1,880,190(1,046,090) 834,100
-------------------------------
Investments:
Nuclear power companies, at equity 47,443 - 47,443
Non-utility property and other investments 35,191 (769) 34,422
-------------------------------
Total investments 82,634 (769) 81,865
-------------------------------
Current assets:
Cash 1,001 659,481 660,482
Accounts receivable:
Affiliated companies 232,000 - 232,000
Others 27,031 - 27,031
Fuel, materials, and supplies, at average cost 59,680 (50,724) 8,956
Prepaid and other current assets 55,514 (17,876) 37,638
-------------------------------
Total current assets 375,226 590,881 966,107
-------------------------------
Accrued Yankee nuclear plant costs 272,939 - 272,939
Deferred charges and other assets 462,542 1,016,642 1,479,184
-------------------------------
$3,073,531$ 560,664$3,634,195
===============================
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 319,818 34,484 354,302
Retained earnings 462,968 1,503 464,471
Unrealized gains on securities, net 55 - 55
-------------------------------
Total common equity 998,618 35,987 1,034,605
Cumulative preferred stock, par value $100
per share 39,666 - 39,666
Long-term debt 647,829 (278,010) 369,819
-------------------------------
Total capitalization 1,686,113 (242,023) 1,444,090
-------------------------------
Current liabilities:
Short-term debt (including $159,175,000
to affiliates) 366,950 (366,950) -
Accounts payable (including $6,118,000
to affiliates) 113,723 - 113,723
Accrued liabilities:
Taxes 10,552 - 10,552
Interest 8,217 - 8,217
Other accrued expenses 30,913 80,525 111,438
-------------------------------
Total current liabilities 530,355 (286,425) 243,930
-------------------------------
Deferred federal and state income taxes 414,527 (211,625) 202,902
Unamortized investment tax credits 52,452 (22,333) 30,119
Accrued Yankee nuclear plant costs 272,939 - 272,939
Other reserves and deferred credits 117,145 1,323,070 1,440,215
-------------------------------
$3,073,531$ 560,664$3,634,195
===============================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Statement of Income
Six Months Ended June 30, 1998
(Actual and Pro Forma)
(Unaudited)
<CAPTION>
Actual AdjustmentsPro Forma
------ --------------------
(In Thousands)
<S> <C> <C> <C>
Operating revenue, principally from affiliates $759,467$(456,823)$302,644
-------- --------- --------
Operating expenses:
Fuel for generation 158,987 (154,447) 4,540
Purchased electric energy 244,674 (88,200) 156,474
Other operation 92,410 (58,059) 34,351
Maintenance 51,920 (39,501) 12,419
Depreciation and amortization 59,146 (26,746) 32,400
Taxes, other than income taxes 35,491 (25,731) 9,760
Income taxes 35,576 (19,525) 16,051
-------- --------- --------
Total operating expenses 678,204 (412,209) 265,995
-------- --------- --------
Operating income 81,263 (44,614) 36,649
Other income:
Equity in income of nuclear power companies 2,614 - 2,614
Other income (expense), net (2,492) (97) (2,589)
-------- --------- --------
Operating and other income 81,385 (44,711) 36,674
-------- --------- --------
Interest:
Interest on long-term debt 19,316 (11,162) 8,154
Other interest 6,250 (3,378) 2,872
Allowance for borrowed funds used during
construction - credit (556) 301 (255)
-------- --------- --------
Total interest 25,010 (14,239) 10,771
-------- --------- --------
Net income $ 56,375$ (30,472) $ 25,903
======== ========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND POWER COMPANY
Statement of Income
Twelve Months Ended December 31, 1997
(Actual and Pro Forma)
(Unaudited)
<CAPTION> Actual Adjustments Pro Forma
------ --------------------
(In Thousands)
<S> <C> <C> <C>
Operating revenue, principally from affiliates $1,677,903$(990,307) $ 687,596
---------- -------------------
Operating expenses:
Fuel for generation 372,734 (351,897) 20,837
Purchased electric energy 527,647 (189,591) 338,056
Other operation 241,506 (141,367) 100,139
Maintenance 89,820 (48,720) 41,100
Depreciation and amortization 98,024 (52,800) 45,224
Taxes, other than income taxes 67,311 (48,835) 18,476
Income taxes 90,009 (48,840) 41,169
---------- -------------------
Total operating expenses 1,487,051 (882,050) 605,001
---------- -------------------
Operating income 190,852 (108,257) 82,595
Other income:
Equity in income of nuclear power companies 5,189 - 5,189
Other income (expense), net (3,404) 2,781 (623)
---------- -------------------
Operating and other income 192,637 (105,476) 87,161
---------- -------------------
Interest:
Interest on long-term debt 42,277 (24,203) 18,074
Other interest 7,055 (3,813) 3,242
Allowance for borrowed funds used
during construction - credit (1,238) 669 (569)
---------- -------------------
Total interest 48,094 (27,347) 20,747
---------- -------------------
Net income $ 144,543$ (78,129)$ 66,414
========== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Notes to Unaudited Pro Forma Financial Statements
- ------------------------------------------------
Balance Sheet
- -------------
1. The historical financial statements of the New England Power
Company (the Company) as of June 30, 1998 have been adjusted to
give effect to the transaction between USGen New England, Inc.
(USGen), an indirect wholly owned subsidiary of PG&E Corporation,
and the Company and its affiliate, The Narragansett Electric
Company (Narragansett Electric), that occurred effective September
1, 1998. New England Electric System (NEES) first contributed its
investment in Narragansett Energy Resources Company (NERC), which
was a 20 percent owner of the Ocean State Power generating units,
to the Company. The Company and Narragansett Electric then sold
their nonnuclear generating assets, excluding the Company's
ownership interest in the Wyman 4 generating unit, as well as the
Company's newly acquired equity investment in NERC, to USGen. The
pro forma financial statement adjustments are based on the
Company's and Narragansett Electric's book value of the assets
being sold at June 30, 1998.
The substance of the transactions are detailed
in the entries shown below, but can be summarized as follows:
- - The Company, Narragansett Electric and NEES sold assets (plant
assets, materials and supplies inventory and NEES' investment
in NERC) with a book value of $1.1 billion for proceeds of
approximately $1.6 billion. The resulting gain was credited to
a regulatory liability account reflecting the obligation to
pass this gain on to ratepayers in connection with
restructuring rate settlement agreements.
- - The Company absorbed $20 million, before tax, of transaction
costs in income.
- - The Company received additional proceeds of $85 million from
USGen, which were used to offset the recognition of a liability
for employee severance and early retirement costs.
- - Approximately $22 million, before tax, of unamortized
investment tax credits associated with assets sold was credited
to income.
<PAGE>
- - Certain capital lease assets and obligations were eliminated as
a result of these capital lease obligations being transferred
to USGen.
- - The Company retired $278 million of long-term debt and $367
million of short-term debt.
- - The Company recorded a liability and offsetting regulatory
asset reflecting the present value of the Company's monthly
fixed contribution to USGen in connection with purchased power
contracts transferred to USGen. In addition, in connection
with the direct assignment of one of these purchased power
contracts, the Company made a lump sum payment to USGen in lieu
of ongoing monthly payments. This lump sum payment was also
reflected as a regulatory asset.
2. The cash proceeds and disposition of those proceeds reflected
in these financial statements is as follows:
Cash proceeds:
Per Asset Purchase Agreement (APA) $1,590,000,000
Reimbursement of early retirement
and severance costs 85,000,000
Materials & Supplies at book value 10,858,481
Reimbursement of purchased power
contract prepayment 5,046,250
Fuel inventory at book value 37,529,435
--------------
Total proceeds $1,728,434,166
Use of proceeds:
Pay transaction costs 20,000,000
--------------
Total net proceeds $1,708,434,166
Less: Narragansett Electric proceeds 41,909,077
--------------
NEP net proceeds $1,666,525,089
USGen has also assumed certain on-site hazardous waste
obligations for which the Company had recorded on its books an
accrued liability of $141,787 at June 30, 1998. In addition, in
1992, the Company and Narragansett Electric entered into a 10 year
tax treaty with the City of Providence, Rhode Island which
required the companies to prepay certain property taxes prior to
<PAGE>
completion of the Manchester Street repowering project. Upon
completion of the repowering project, the Company and Narragansett
Electric were amortizing such payments over the remainder of the
term of the treaty. These prepaid property taxes offset the gain
on sale of these assets being credited to a regulatory liability
account.
3. Entries to record the effect of the sale:
Debit Credit
Entry 1: ----- ------
Cash - Increase $1,666,525,089
Utility Plant - Decrease $1,783,801,668
Accumulated Provision
for Depreciation - Decrease 807,674,400
Construction Work
in Progress - Decrease 5,087,229
Non-Utility property - Decrease 769,000
Investment in NERC - Decrease 34,483,668
Material and Supplies,
at average cost - Decrease 10,858,481
Fuel inventory - Decrease 37,529,435
Prepaid and Other
Current Assets - Decrease 17,876,650
Other Current Liabilities - Early
Retirement and Severance
Costs - Increase 85,000,000
Miscellaneous deductions -
Transaction costs - Increase 20,000,000
Other Reserves and
Deferred Credits - Increase 518,793,358
<To record the sale transaction and expense of transaction costs.>
Entry 2:
Unamortized Investment
Tax Credits (ITC) - Decrease $22,332,745
ITC amortization - Decrease $22,332,745
Deferred income
tax expense - Increase 8,760,019
Reserve for deferred
income taxes - Increase 8,760,019
<To record ITC amortization and related taxes associated with
property sold.>
<PAGE>
Debit Credit
Entry 3: ----- ------
Current income tax - Increase $220,440,519
Current income tax - Decrease $ 7,845,000
Accrued income
taxes payable - Increase 212,595,519
Deferred income
tax expense - Decrease 220,440,519
Reserve for deferred
income taxes - Decrease 220,440,519
<To record income taxes on the sale.>
Entry 4:
Other Reserves and
Deferred Credits - Decrease $2,335,449
Fuel, Materials, and Supplies,
at average cost - Decrease $2,335,449
<To transfer the Company's accumulated losses from its affiliate,
New England Energy Incorporated, from its fuel inventory account
to its regulatory liability account.>
Entry 5:
Other Accrued Expenses - Decrease $ 4,333,131
Other Reserves and
Deferred Credits - Decrease 60,542,199
Utility Plant - Decrease $64,875,330
<To eliminate the Company's capital lease obligation, under the
Hydro-Quebec transmission line support agreements, which was
assumed by USGen.>
Entry 6:
Long-term debt - Decrease $278,010,000
Short-term debt - Decrease 366,950,000
Accrued income
taxes payable - Decrease 212,595,519
Cash - Decrease $857,555,519
<To record the retirement of long-term and short-term debt and the
payment of taxes due on the sale.>
<PAGE>
Debit Credit
Entry 7: ----- ------
Deferred Charges
and Other Assets - Increase $1,016,641,825
Other Reserves
and Deferred Credits - Increase $867,153,867
Cash - Decrease 149,487,958
<To record the liability and offsetting regulatory asset
reflecting the present value of the Company's monthly fixed
contribution to USGen for purchased power under the Purchased
Power Agreements Transfer Agreement (PPA Transfer Agreement)
discussed below.>
Entry 8:
Investment in NERC - Increase $34,483,668
Other paid-in-capital - Increase $34,483,668
<To record the transfer of NEES' investment in NERC to the
Company.>
Entry 9:
Accrued liabilities - Decrease $141,787
Deferred federal and state
income tax - Increase $55,616
Retained earnings - Increase 86,171
<To record elimination of hazardous waste liability.>
4. In addition to the APA, the Company and USGen entered into
several ancillary agreements. One such agreement is the PPA
Transfer Agreement. Under the PPA Transfer Agreement, USGen will
purchase the Company's entitlements of approximately 1,100 MW of
power procured by the Company under long-term contracts with
utility and non-utility generators, which have terms expiring as
late as 2019. Under the PPA Transfer Agreement, the Company will
make a monthly fixed contribution with USGen reimbursing the
Company for the balance of the costs. The Company's contributions
will end in January 2008. The present value of these
contributions has been recorded as a regulatory asset, as
described in Entry 7 above.
5. In addition to the transactions portrayed herein, certain other
indirectly related transactions have taken place in September 1998
which are not reflected in these pro forma financial statements.
The Company paid a special common dividend of approximately $130
million, and also repurchased approximately $30 million of its
preferred stock held by NEES. Additionally, the NEES Board of
Directors authorized the purchase from time to time of up to an
additional 5 million shares over the 5 million share buyback
authorization announced in August 1997. To date, NEES has
purchased approximately 4.8 million shares.
<PAGE>
Income Statement
- ----------------
The rates the Company charged its customers were not separately
set for its individual assets and, as a result, it was not possible
to determine from billing records the amount of revenues that
would be attributable to the assets sold. The Company's rates
have historically been set by regulators on a bundled basis in a
manner which attempts to reimburse the Company for the cost of
operating and maintaining its facilities plus providing it a
reimbursement for interest expense, preferred dividends and a
return on its equity investment and related income taxes. In the
rate making process, the calculation of the reimbursement for
these capital related costs is through the determination of rate
base, which is composed of the net investment in assets devoted to
providing service to customers. The principal component of rate
base is the Company's net investment in utility property, plant
and equipment.
The Company's Pro Forma Statements of Income have been prepared
by first allocating net income based on the percentage breakdown
of net plant investment sold, exclusive of capital leases, versus
assets retained. This results in 54.05 percent of historical net
income removed as a pro forma adjustment.
This net plant investment calculation was similarly used, with
some modification which will be described later, for interest
expense and income taxes. For most other income statement
accounts, management utilized a more specific identification
approach. Once having allocated net income in the manner
described above and once having allocated the other income
statement accounts, it was possible to derive a revenue figure for
the assets sold versus retained following essentially a similar
process that the regulatory rate making process would use to
derive a revenue requirement.
While the above discussion is applicable to 1997, the impacts
of industry restructuring during 1998 resulted in the unbundling
of certain revenue streams for the Company for portions of 1998. A
full discussion of these changes is available in the Company's
1997 Annual Report on Form 10-K. Due to the fact that the Company
had both bundled and unbundled revenue streams during 1998, and
the associated complexities in attempting to meld multiple
methodologies, management elected to utilize the approach
described below for the pro forma income statement for both the
year ended December 31, 1997 and the six months ended June 30,
1998.
<PAGE>
Interest Expense
The plant-based methodology utilized for net income was
similarly utilized for the calculation of pro forma adjustments
for interest expense on long-term debt, other interest and
allowance for borrowed funds used during construction. However,
once having allocated total long-term debt outstanding between
assets sold versus retained using the net plant investment
approach, it was possible to perform a more specific allocation of
lower cost pollution control debt outstanding versus higher cost
other long-term debt outstanding. This resulted in more of the
lower cost pollution control debt being associated with assets
retained and assigned more interest expense to the assets sold.
Purchased Power
Pro forma adjustments for purchased power were derived via
specific identification of purchased power contracts subject to
the PPA Transfer Agreement between the Company and USGen, net of
the monthly fixed contributions towards purchased power, as
discussed in Item 2 above.
Fuel expense, other operation expense, maintenance expense,
depreciation and amortization expense, and taxes, other than
income taxes
Pro forma adjustments for these income statement captions were
calculated primarily by specific identification of costs. The
only significant exception in this area is for the transmission
portion of the Company's business, for which allocation factors
for the various categories, contemplated in the Company's current
transmission cost-of-service, were utilized.
Income Taxes
Income taxes were allocated primarily based on the derivation
of net income using the net plant investment allocation approach
described above. However, certain items which have the effect of
changing the Company's effective tax rate were able to be
allocated on a specific identification basis between assets sold
versus retained.
Other Income (Expense)
Since the Company's ownership interest in nuclear power
companies was not sold, the equity in income in these companies
will be retained. With respect to other costs included in other
income, these represent primarily incentive compensation costs,
other executive benefit costs and donations and lobbying costs.
These costs were allocated primarily based on either the
historical allocation of internal salaries and wages or the
allocation of net investment between assets sold versus retained.
