<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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6564
(LOGO) NEW ENGLAND POWER COMPANY
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1663070
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-389-2000)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes (X) No ( )
Common stock, par value $20 per share, authorized and outstanding:
3,619,896 shares at March 31, 1999.
<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
-------- ----------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue, principally from affiliates $139,620 $358,320 $306,797 $759,467
-------- -------- -------- --------
Operating expenses:
Fuel for generation 2,214 75,436 5,272 158,987
Purchased electric energy 60,749 122,189 118,733 244,674
Other operation 16,060 42,208 35,270 92,410
Maintenance 11,402 26,364 17,168 51,920
Depreciation and amortization 20,993 29,262 61,360 59,146
Taxes, other than income taxes 5,759 17,108 11,393 35,491
Income taxes 8,647 13,230 21,747 35,576
-------- -------- -------- --------
Total operating expenses 125,824 325,797 270,943 678,204
-------- -------- -------- --------
Operating income 13,796 32,523 35,854 81,263
Other income:
Allowance for equity funds used
during construction 541 - 1,129 -
Equity in income of nuclear power companies 967 1,499 1,482 2,614
Other income (expense), net 2,251 60 2,685 (2,492)
-------- -------- -------- --------
Operating and other income 17,555 34,082 41,150 81,385
-------- -------- -------- --------
Interest:
Interest on long-term debt 3,201 9,593 6,344 19,316
Other interest 206 4,336 446 6,250
Allowance for borrowed funds used during
construction - credit (106) (272) (239) (556)
-------- -------- -------- --------
Total interest 3,301 13,657 6,551 25,010
-------- -------- -------- --------
Net income $ 14,254 $ 20,425 $ 34,599 $ 56,375
======== ======== ======== ========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $217,839 $443,061 $204,603 $407,630
Net income 14,254 20,425 34,599 56,375
Dividends declared on cumulative
preferred stock (23) (518) (47) (1,037)
Repurchase of common stock - - (7,085) -
-------- -------- -------- --------
Retained earnings at end of period $232,070 $462,968 $232,070 $462,968
======== ======== ======== ========
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>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue, principally from affiliates $ 765,670 $1,603,273
--------- ----------
Operating expenses:
Fuel for generation 70,113 337,933
Purchased electric energy 273,895 500,916
Other operation 97,925 206,688
Maintenance 25,487 95,234
Depreciation and amortization 102,138 113,765
Taxes, other than income taxes 24,394 67,779
Income taxes 59,765 89,523
--------- ----------
Total operating expenses 653,717 1,411,838
--------- ----------
Operating income 111,953 191,435
Other income:
Allowance for equity funds used during construction 1,762 -
Equity in income of nuclear power companies 4,152 5,182
Other income (expense), net 5,295 (3,482)
--------- ----------
Operating and other income 123,162 193,135
--------- ----------
Interest:
Interest on long-term debt 17,803 40,421
Other interest 4,884 10,399
Allowance for borrowed funds used during
construction - credit (644) (1,143)
--------- ----------
Total interest 22,043 49,677
--------- ----------
Net income $ 101,119 $ 143,458
========= ==========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 462,968 $ 392,534
Net income 101,119 143,458
Dividends declared on cumulative preferred stock (240) (2,075)
Dividends declared on common stock (130,610) (70,949)
Premium on redemption of preferred stock (264) -
Repurchase of common stock (200,903) -
--------- ----------
Retained earnings at end of period $ 232,070 $ 462,968
========= ==========
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>
<TABLE> NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $1,277,503 $1,262,461
Less accumulated provisions for depreciation
and amortization 841,392 837,637
---------- ----------
436,111 424,824
Construction work in progress 40,215 33,289
---------- ----------
Net utility plant 476,326 458,113
---------- ----------
Investments:
Nuclear power companies, at equity 47,496 48,538
Non-utility property and other investments 39,672 39,583
---------- ----------
Total investments 87,168 88,121
---------- ----------
Current assets:
Cash and temporary cash investments (including $75,662,000
and $109,911,000 with affiliates 151,022 179,413
Accounts receivable:
Affiliated companies 70,078 107,878
Others 30,971 32,573
Fuel, materials, and supplies, at average cost 9,211 9,220
Prepaid and other current assets 50,071 21,569
---------- ----------
Total current assets 311,353 350,653
---------- ----------
Regulatory assets 1,368,665 1,512,562
Deferred charges and other assets 5,455 5,339
---------- ----------
$2,248,967 $2,414,788
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
Authorized - 6,449,896 shares
Outstanding - 3,619,896 and 3,749,896 shares $ 72,398 $ 74,998
Premiums on capital stocks 48,624 50,371
Other paid-in capital 184,229 190,852
Retained earnings 232,070 204,603
Unrealized gains on securities, net 79 72
---------- ----------
Total common equity 537,400 520,896
Cumulative preferred stock, par value $100 per share 1,567 1,567
Long-term debt 371,768 371,765
---------- ----------
Total capitalization 910,735 894,228
---------- ----------
Current liabilities:
Accounts payable (including $46,255,000 and $119,657,000
to affiliates) 82,735 162,360
Accrued liabilities:
Taxes 2,827 15,009
Interest 2,047 2,440
Other accrued expenses 17,715 20,086
Dividends payable 23 24
---------- ----------
Total current liabilities 105,347 199,919
---------- ----------
Deferred federal and state income taxes 170,643 165,115
Unamortized investment tax credits 23,590 30,870
Accrued Yankee nuclear plant costs 222,393 242,138
Purchased power obligations 761,165 832,668
Other reserves and deferred credits 55,094 49,850
---------- ----------
$2,248,967 $2,414,788
========== ==========
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>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 34,599 $ 56,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 63,915 60,618
Deferred income taxes and investment tax credits, net 5,317 44,214
Allowance for funds used during construction (1,368) (556)
Reimbursement to New England Energy Incorporated of loss
on sale of oil and gas properties - (120,900)
Prepayment for amended purchase power agreement - (191,676)
Decrease (increase) in accounts receivable, net 39,402 12,334
Decrease (increase) in fuel, materials, and supplies 9 (12,188)
Decrease (increase) in prepaid and other current assets(28,502) (32,631)
Increase (decrease) in accounts payable (79,625) 4,602
Increase (decrease) in other current liabilities (14,946) 17,184
Other, net (2,367) (4,278)
-------- ---------
Net cash provided by (used in) operating activities $ 16,434 $(166,902)
-------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(26,686) $ (32,496)
Other investing activities (36) (433)
-------- ---------
Net cash used in investing activities $(26,722) $ (32,929)
-------- ---------
Financing Activities:
Capital contribution from parent $ - $ 30,000
Dividends paid on common stock - (35,474)
Dividends paid on preferred stock (47) (1,037)
Changes in short-term debt - 255,700
Long-term debt - retirements - (50,000)
Repurchase of common shares (18,056) -
-------- ---------
Net cash provided by (used in) financing activities $(18,103) $ 199,189
-------- ---------
Net increase (decrease) in cash and cash equivalents $(28,391) $ (642)
Cash and cash equivalents at beginning of period 179,413 1,643
-------- ---------
Cash and cash equivalents at end of period $151,022 $ 1,001
======== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NEW ENGLAND POWER COMPANY
Notes to Unaudited Financial Statements
Note A - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
A number of states, including Massachusetts, have enacted similar
laws.
The electric utility industry typically utilizes and/or generates
in its operations a range of potentially hazardous products and
by-products. New England Power Company (the Company) currently has
in place an internal environmental audit program and an external
waste disposal vendor audit and qualification program intended to
enhance compliance with existing federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the United States Environmental Protection Agency
or the Massachusetts Department of Environmental Protection for
several sites at which hazardous waste is alleged to have been
disposed. Private parties have also contacted or initiated legal
proceedings against the Company regarding hazardous waste cleanup.
The Company is currently aware of other possible hazardous waste
sites, and may in the future become aware of additional sites, that
they may be held responsible for remediating.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. The New
England Electric System (NEES) companies have recovered amounts
from certain insurers, and, 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.
<PAGE>
Note B - Nuclear Units
- ----------------------
Yankee Nuclear Power Companies (Yankees)
The Company has minority interests in four Yankee Nuclear Power
Companies. These ownership interests are accounted for on the
equity method. The Company's share of the expenses of the Yankees
is accounted for in "Purchased electric energy" on the income
statement.
A summary of combined results of operations, assets, and
liabilities of the four Yankees is as follows:
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30,
---------------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
Operating revenue $91,809 $116,216 $181,053 $238,831
======= ======== ======== ========
Net income $ 5,129 $ 7,155 $ 10,267 $ 14,506
======= ======== ======== ========
Company's equity in
net income $ 967 $ 1,499 $ 1,482 $ 2,614
======= ======== ======== ========
June 30, December 31,
1999 1998
---- ----
(In Thousands)
Net plant $ 177,736 $ 171,582
Other assets 2,740,788 2,810,613
Liabilities and debt (2,659,895) (2,723,454)
----------- -----------
Net assets $ 258,629 $ 258,741
=========== ===========
Company's equity in net assets $ 47,496 $ 48,538
=========== ===========
At June 30, 1999, $13,553,000 of undistributed earnings of the
nuclear power companies were included in the Company's retained
earnings.
</TABLE>
Nuclear Units Permanently Shut Down
Three regional nuclear generating companies in which the Company
has a minority interest own nuclear generating units that have been
permanently shut down. These three units are as follows:
<PAGE>
<TABLE>
<CAPTION>
Future
Estimated
NEP's Billings
Investment Date to NEP
Unit % $ (millions) Retired $(millions)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Atomic 30 5 Feb 1992 17
Connecticut Yankee 15 16 Dec 1996 70
Maine Yankee 20 16 Aug 1997 135
</TABLE>
In the case of each of these units, the Company has recorded a
liability and an offsetting regulatory asset reflecting the
estimated future billings from the companies. In a 1993 decision,
the Federal Energy Regulatory Commission (FERC) allowed Yankee
Atomic to recover its undepreciated investment in the plant as well
as unfunded nuclear decommissioning costs and other costs.
Connecticut Yankee has filed a similar request with the FERC.
Several parties have intervened in opposition to the filing. In
August 1998, a FERC Administrative Law Judge (ALJ) issued an
initial decision which would allow for full recovery of Connecticut
Yankee's unrecovered investment, but precluded a return on that
investment. Connecticut Yankee, the Company, and other parties have
filed with the FERC exceptions to the ALJ's decision. Should the
FERC uphold the ALJ's initial decision in its current form, the
Company's share of the loss of the return component would total
approximately $12 million to $15 million before taxes. The recovery
by Maine Yankee of its costs is in accordance with settlement
agreements approved by the FERC in May 1999.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for the
plant decommissioning, the owners of Maine Yankee are jointly and
severally liable for the shortfall.
<PAGE>
The Company's industry restructuring settlement agreements
approved by state and federal regulators in 1998 (Settlement
Agreements) allow it to recover all costs, including shutdown
costs, that the FERC allows these Yankee companies to bill to the
Company.
Operating Nuclear Units
The Company has minority interests in three other nuclear
generating units: Vermont Yankee, Millstone 3, and Seabrook 1.
Uncertainties regarding the future of nuclear generating stations,
particularly older units, such as Vermont Yankee, have increased in
recent years 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 Nuclear
Regulatory Commission (NRC) scrutiny. The Company performs periodic
economic viability reviews of operating nuclear units in which it
holds ownership interests.
Nuclear Divestiture
The Company is engaged in efforts to divest its interests in the
three operating nuclear units mentioned above. In February 1999,
the Vermont Yankee Nuclear Power Corporation Board of Directors
(Board) granted an exclusive right to AmerGen Energy Company
(AmerGen), a joint venture by PECO Energy and British Energy, to
conduct a due diligence review and negotiate a possible agreement
to purchase the assets of Vermont Yankee. The period of
exclusivity expired in June 1999. On August 2, 1999, Vermont
Yankee announced that it had received an unsolicited expression of
interest from Entergy Nuclear, Inc. (Entergy) to buy the Vermont
Yankee plant. The Board authorized negotiations with Entergy and
continued negotiations with AmerGen. Provided the negotiations for
a sale are successful, consummation of such a sale would be
contingent on regulatory approvals by the NRC, the Securities and
Exchange Commission, under the Public Utility Holding Company Act
of 1935, and the Vermont Public Service Board, among others. The
regulatory process could take eight to twelve months or longer.
The Company has a 20 percent ownership interest in Vermont Yankee
and an equity investment of approximately $11 million at June 30,
1999.
<PAGE>
Millstone 3
In July 1998, Millstone 3, which is operated by a subsidiary of
Northeast Utilities (NU), returned to full operation after being on
the NRC's "Watch List" since January 1996 and shut down since April
1996. In April 1999, the NRC eliminated its "Watch List"
designation process and implemented a process that categorizes
plants as requiring one of three levels of attention: "agency
focus", calling for the attention of the Executive Director for
Operations and/or the Commission; "regional focus", calling for
special attention from the appropriate Regional Administrator; and
"routine focus", calling for normal everyday oversight. Millstone
3 has been categorized as the subject of regional focus. A
criminal investigation of NU's operating subsidiary related to
Millstone 3 is ongoing.
In August 1997, the Company sued NU in Massachusetts Superior
Court (Superior Court) for damages resulting from the tortious
conduct of NU that caused the shutdown of Millstone 3. The
Company's damages include the costs of replacement power during the
outage, costs necessary to return Millstone 3 to safe operation,
and other additional costs. Most of the Company's incremental
replacement power costs have been recovered from customers, either
through fuel adjustment clauses or through provisions in the
Settlement Agreements. The Company also seeks punitive damages.
In July 1998, the Superior Court denied NU's motion to dismiss and
its motion to stay pending arbitration. The Company subsequently
amended its complaint by, among other things, adding NU's Trustees
as defendants. In June 1999, the Superior Court denied NU's motion
for summary judgement. The Company's suit has been consolidated
with suits filed by other joint owners. The trial is scheduled for
March 2000. Some or all of the damages awarded from the lawsuit
would be refunded to customers.
In August 1997, the Company 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. On July 21, 1999, the arbitrator dismissed NU's
motion for summary judgement. The arbitration hearing is scheduled
for October 1999.
<PAGE>
Note C - Town of Norwood Dispute
- --------------------------------
From 1983 until 1998, the Company was the wholesale power
supplier for the Town of Norwood, Massachusetts (Norwood). In
April 1998, Norwood began taking power from another supplier.
Pursuant to tariffs approved by the FERC in May 1998, the Company
has been assessing Norwood a contract termination charge (CTC).
Through June 1999, the charges assessed Norwood amount to
approximately $10 million, all of which remain unpaid. Norwood has
appealed the FERC's authorization of CTCs as well as the FERC's
approval of the Settlement Agreements and the Company's divestiture
of its nonnuclear generating assets to the First Circuit Court of
Appeals (First Circuit). The Company is pursuing a collection
action in Massachusetts Superior Court.
Separately, Norwood filed suit in Federal District Court
(District Court) in April 1997 alleging that the Company's
divestiture violated the terms of the 1983 power contract. Norwood
has appealed to the First Circuit the District Court's dismissal of
Norwood's lawsuit.
Note D
- ------
In the opinion of the Company, these financial 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 1998 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 1998 Annual Report on
Form 10-K.
Merger Agreements
- -----------------
For a full discussion of New England Electric Systems' (NEES)
merger agreements with The National Grid Group plc (National Grid)
and Eastern Utilities Associates (EUA), see the Merger Agreements
sections of the Company's Form 10-K for 1998 and the Company's 1998
Annual Report.
Update of Merger Agreements with National Grid and EUA
On April 22, 1999, shareholders of National Grid approved the
proposed merger with 99 percent of those voting approving the
merger. On May 3, 1999, NEES received the approval of more than
the required majority of outstanding shares for the merger with 75
percent of outstanding shares voting in favor of the merger. Of
those shares voted, in excess of 94 percent voted in favor of the
merger.
The NEES/National Grid merger has received approval or clearance
from the Federal Trade Commission (FTC), the Committee on Foreign
Investment in the United States, the Federal Energy Regulatory
Commission (FERC), the Vermont Public Service Board (VPSB), and the
Connecticut Department of Public Utility Control (CDPUC). In
addition, the New Hampshire Public Utilities Commission approved
the proposed merger in an oral order on August 9, 1999, with a
written order expected in several weeks.
NEES and National Grid have also filed for merger approval with
the Securities and Exchange Commission (SEC), under the Public
Utility Holding Company Act of 1935 (1935 Act). In connection with
the SEC application, the Massachusetts Department of
<PAGE>
Telecommunications and Energy (MDTE) certified to the SEC that the
merger would not interfere with the MDTE's authority or ability to
protect customers of NEES' Massachusetts distribution subsidiaries.
NEES and National Grid have requested a similar certification from
state regulators in Rhode Island. In addition, NEES and National
Grid have also filed for merger approval with the Nuclear
Regulatory Commission (NRC) to transfer ownership licenses for its
minority ownership interests in regional nuclear plants. On July
20, 1999, three subsidiaries of Northeast Utilities filed a request
for hearing with the NRC with respect to financial qualifications
and raising issues of foreign ownership. NEES and National Grid
responded, in a July 27, 1999 filing, opposing the request and
asserting that the application should be granted as a matter of law
and there is no need for a hearing. It is not known when the NRC
will respond to the request or how it will rule.
The NEES/National Grid merger is expected to be completed by
early 2000.
The NEES acquisition of EUA has also received clearance from the
FTC. NEES and EUA have made appropriate filings with the FERC,
SEC, under the 1935 Act, NRC, MDTE, VPSB, and the Rhode Island
Public Utilities Commission. In addition, the acquisition of EUA
requires approval by the CDPUC. On May 17, 1999, EUA shareholders
approved the acquisition of EUA by NEES. The acquisition of EUA is
expected to be completed by early 2000.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities, the
Company's divestiture of its nonnuclear generating business and
stranded cost recovery, see the "Industry Restructuring" section of
the Company's Form 10-K for 1998 and the Company's 1998 Annual
Report.
Regulatory Asset Recovery
- -------------------------
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Statement of Financial Accounting
<PAGE>
Standards No. 71, Accounting for the Effects of Certain Types of
Regulation (FAS 71), requires regulated entities, in appropriate
circumstances, to establish regulatory assets, and thereby defer
the income statement impact of these charges because they are
expected to be included in future customer charges. In 1997, the
Emerging Issues Task Force (EITF) of the Federal Accounting
Standards Board concluded that a utility that had 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 stranded costs.
The Company has received authorization from the FERC to recover
through contract termination charges (CTC) substantially all of the
costs associated with its former generating business not recovered
through the sale of that business. Additionally, FERC Order No. 888
enables transmission companies to recover their specific costs of
providing transmission service. Therefore, substantially all of the
Company's business, including the recovery of its stranded costs,
remains under cost-based rate regulation. The Company believes
these factors and the EITF conclusion allow it to continue to apply
FAS 71. Because of the nuclear cost-sharing provisions related to
the Company's CTC, the Company ceased applying FAS 71 in 1997 to 20
percent of its ongoing nuclear operations, the impact of which is
immaterial.
As a result of applying FAS 71, the Company has recorded a
regulatory asset for the costs that are recoverable from customers
through the CTC. The regulatory asset reflects the loss on the sale
of NEES' oil and gas business and the unrecovered plant costs in
operating nuclear plants (assuming no market value), the costs
associated with permanently closed nuclear power plants, and the
present value of the payments associated with the above-market cost
of purchased power contracts, reduced by the gain from the sale of
the nonnuclear generating business. At June 30, 1999, the
regulatory asset related to the CTC was approximately $1.4 billion,
of which $1.1 billion related to the above-market costs of
purchased power contracts.
Currently, there is much regulatory and other movement toward
establishing performance-based rates. It is possible that the
adoption of performance-based rates for the Company or its
affiliates, future regulatory rules, or other circumstances could
cause the application of FAS 71 to be discontinued. Absent the
<PAGE>
circumstances described in the next paragraph, this discontinuation
would result in a noncash write-off of previously established
regulatory assets, including those being recovered through the
Company's CTC.
Massachusetts Electric Company (Massachusetts Electric) and The
Narragansett Electric Company (Narragansett Electric),
distribution affiliates of the Company, filed rate plans in April
and May 1999, respectively, which, if approved, may cause the
application of FAS 71 to be discontinued upon consummation of the
NEES/National Grid merger. The Company is recovering its stranded
costs as a component of Massachusetts Electric's and Narragansett
Electric's distribution rates. As a result, the Company may not be
able to continue to apply FAS 71 to its recovery of stranded costs
after the merger is completed. Because the discontinuation of FAS
71 would be coincident with the completion of the NEES/National
Grid merger, the NEES companies believe the appropriate accounting
treatment would be that the regulatory assets would not be written
off but instead reclassified to either an intangible asset account
or a goodwill account.
Year 2000 Readiness Disclosure
- ------------------------------
Over the course of this year, most companies will face a
potentially serious information systems (computer) problem because
many software applications and operational programs written in the
past may not properly recognize calendar dates associated with the
year 2000 (Y2K). This could cause computers to either shut down or
lead to incorrect calculations.
During 1996, the NEES companies began the process of identifying
the changes required to their computer software and hardware to
mitigate Y2K issues. The NEES companies established a Y2K Project
team to manage these issues, which has consisted of as many as 70
full-time equivalent staff at some points in time, primarily
external consultants being overseen by an internal Y2K management
team. To facilitate the Y2K Project, NEES entered into contracts
with Keane, Inc. and IBM to provide personnel support to the Y2K
Project. Through June 30, 1999, the NEES companies have spent
approximately $18 million with these vendors, which is included in
the cost figures disclosed below. The Y2K Project team reports
project progress to a Y2K Executive Oversight Committee each month.
<PAGE>
The team also makes regular reports to NEES' Board of Directors and
its Audit Committee. The NEES companies separated their Y2K Project
into four parts as shown on the following page.
<TABLE>
<CAPTION>
Substantial Contingency Testing,
Completion Documentation,
of Critical and Clean
Category Specific Example Systems Management
- -------- ---------------- ----------- -------------------
<S> <C> <C> <C>
Mainframe/Midrange Accounting/Customer Completed Throughout 1999
systems service integrated
systems
Desktop systems Personal computers/ Completed Throughout 1999
Department software/
Networks
Operational/ Dispatching systems/ Completed Throughout 1999
Embedded Transmission and
systems Distribution systems/
Telephone systems
External issues Electronic Data Completed Throughout 1999
Interchange/Vendor
communications
</TABLE>
The NEES companies used a three-phase approach in coordinating
their Y2K Project for system-related issues: (I) Assessment and
Inventory, (II) Pilot Testing, and (III) Renovation, Conversion, or
Replacement of Application and Operating Software Packages and
Testing. Phase I, which was an initial assessment of all systems
and devices for potential Y2K defects, was completed in mid-1997.
These assessments included, but were not limited to, the review of
program code for mainframe and midrange systems, analysis of
personal computer hardware and network equipment for desktop
systems, reaching consensus with key "data exchange" partners
regarding the approach and execution of plans to address Y2K-
related issues, and coordination with other New England Power Pool
(NEPOOL) member utilities related to operational systems, such as
transmission systems. Phase II, which consisted of renovation
<PAGE>
pilots for a cross-section of systems in order to facilitate the
establishment of templates for Phase III work, was completed in
late 1997. Phase III, which was completed on June 30, 1999,
required the renovation, conversion, or replacement of the
remaining applications and operating software packages.
Critical systems include major operational and informational
systems such as the NEES companies' financial-related and customer
information systems. These mission critical systems were first
addressed at an individual component level, and then, upon
satisfactory completion of that testing, reviewed at an integrated
level, during which the Y2K Project team tested for Y2K problems
which could be caused by various system interfaces. Additionally,
contingency plans are being implemented for mission critical
systems, as described below.
The overall Y2K Project was designed such that Y2K-related work
performed by external consultants was reviewed by NEES employees,
and vice-versa. The Y2K Project team management periodically
benchmarked its progress against the recommended progress schedule
documented by the North American Electric Reliability Council
(NERC), and has met all recommended schedules, including the
issuance of its Year 2000 Readiness Letter to NERC on June 30,
1999.
The NEES companies also implemented a formalized communication
process with third parties to give and receive information related
to their progress in remediating their own Y2K issues, and to
communicate the NEES companies' progress in addressing the Y2K
issue. These third parties include major customers, suppliers, and
significant businesses with which the NEES companies have data
links (such as banks). The NEES companies have identified standard
offer generation service providers, telecommunications companies,
and the Independent System Operator-New England (ISO New England)
as critical to business operations. The NEES companies have been
in contact with all of these parties regarding the progress of
their Y2K remediation efforts, and will continue to monitor their
ongoing remediation efforts through continued communications. The
NEES companies cannot predict the outcome of other companies'
remediation efforts. Therefore, contingency plans are being
implemented, as described below.
<PAGE>
The NEES companies believe total costs associated with making the
necessary modifications to all centralized and noncentralized
systems will be approximately $28 million. These costs include the
replacement of approximately one thousand desktop computers. In
addition, the NEES companies are spending $7 million related to the
replacement of the human resources and payroll system, in part due
to the Y2K issue. As of June 30, 1999, total Y2K-related costs of
approximately $33 million have been incurred, of which
approximately $6 million have been capitalized. The NEES companies
continually review their cost estimates based upon the overall Y2K
Project status, and update these estimates as warranted.
The NEES companies have developed and are implementing Y2K
contingency plans to allow for critical information and operating
systems to function from January 1, 2000, forward. These plans are
intended to address both internal risks as well as potential
external risks related to suppliers and customers. Part of the
contingency plan implementation for accounting and desktop systems
will include taking extensive data back-ups prior to year-end
closing. For operational systems, the NEES companies have in place
an overall disaster recovery program, which already includes
periodic disaster simulation training (for outages due to severe
weather, for instance). As part of the Y2K contingency plan
implementation, the NEES companies are reviewing their disaster
recovery plans and modifying them for Y2K-specific issues, such as
a potential loss of telecommunication services. The NEES companies
expect to hold contingency plan drills during the third quarter of
1999.
Interregional and regional contingency plans are being finalized
to address emergency scenarios due to the interconnection of
utility systems throughout the United States. At a regional level,
the NEES companies are participating and cooperating with NEPOOL
and ISO New England. Overall regional activities, including those
of NEPOOL and ISO New England, are being coordinated by the
Northeast Power Coordinating Council, whose activities are being
incorporated into the interregional coordinating effort by NERC.
Drills of these interregional and regional contingency plans are
expected to be held in September 1999.
The NEES companies believe that their mission critical systems
used to deliver electricity are ready for date changes associated
with Y2K, in accordance with the criteria specified by NERC.
<PAGE>
Recognizing that neither the NEES companies nor any other
organization can make guarantees about something as complex as Y2K,
the NEES companies also have developed and are implementing the
contingency plans described above (including contingency plans in
the event of temporary disruptions of electric service) to address
potential problems caused by Y2K. In the event that a short-term
disruption in service occurs, NEES does not expect that such a
disruption would have a material impact on its financial position
or results of operation.
Earnings
- --------
Net income for the second quarter and first six months of 1999
decreased $6 million and $22 million, respectively, compared with
the corresponding periods in 1998. The decrease in earnings for
the second quarter of 1999 reflects the continuing impact of the
sale of the Company's nonnuclear generating business on September
1, 1998, as well as reduced CTC rates effective January 1, 1999.
Year-to-date earnings reflect these factors as well as significant
revenue reductions due to the impact of the restructuring of the
utility business. Partially offsetting the decrease in revenues is
an increase in transmission revenues associated with the
elimination of certain liabilities related to open access
transmission tariffs as well as the recovery of the Company's
stranded investment costs including mitigation incentives. The
mitigation incentives recorded in the second quarter and first six
months of 1999 amounted to approximately $6 million and $12
million, respectively.
Operating Revenue
- -----------------
Operating revenue decreased $219 million and $453 million in the
second quarter and first six months of 1999, respectively,
compared with the corresponding periods in 1998. These decreases
in revenues are due in part to the divestiture of the Company's
nonnuclear generating business on September 1, 1998, including
reduced CTC rates as well as significant rate reductions
implemented in connection with industry restructuring. These rate
changes include the effect of various true-up mechanisms, including
stranded cost recovery billings, fuel expense, nuclear operating
costs and decommissioning costs, and the non-fuel component of
<PAGE>
purchased power expense. Partially offsetting the decrease in
revenues is the elimination of certain liabilities related to open
access transmission tariffs, and the ability of the Company to
recover stranded investments including mitigation incentives.
Operating Expenses
- ------------------
Operating expenses for the second quarter and first six months
of 1999 decreased $200 million and $407 million, respectively,
compared with the corresponding periods in 1998. The September 1,
1998 sale of the Company's nonnuclear generating business had the
impact of decreasing all categories of operating expenses for the
second quarter. On a year-to-date basis, all categories of
operating expenses other than depreciation and amortization were
reduced as a result of the sale.
The decrease in fuel expense and purchased power costs reflects
the assumption of the Company's obligations under most of its
previously existing purchased power contracts by the buyer of the
Company's nonnuclear generating business. Purchased power expense
includes the Company's obligation to pay predetermined amounts to
the buyer for the above market cost of those contracts. The
Company also remains obligated under the purchased power contracts
with the four Yankee nuclear power companies, three of which have
been permanently shut down (See Note B). As a result, the
Company's costs decreased by $4 million and $9 million,
respectively, in connection with the permanent shutdown of the
Maine Yankee nuclear power plant as well as the absence of a
refueling outage at the Vermont Yankee nuclear power plant.
In addition to the impact of the sale, the decrease in other
operation and maintenance expenses reflects reduced general and
administrative costs due to the allocation to the Company of less
New England Power Service Company costs after the divestiture of
its nonnuclear generating business. In addition, transmission
wheeling costs decreased by $3 million and $11 million in the
quarter and year-to-date period, respectively, due to such costs
being billed directly to the Company's distribution affiliates as
well as the receipt of a transmission wheeling refund. These
decreases were partially offset by increased costs of $6 million
and $4 million in the quarter and year-to-date period,
respectively, associated with the partially owned Millstone 3 and
<PAGE>
Seabrook 1 nuclear generating facilities which experienced
refueling outages in the second quarter.
Depreciation and amortization expenses decreased in the second
quarter but increased for the year-to-date period. The second
quarter decrease is due to the depreciation and amortization of
generation-related plant in 1998 being greater than the recovery
and amortization of generation-related stranded costs in 1999.
This relationship was just the opposite in the first quarter of
1999 compared to 1998 due to a one-time accelerated recovery of
stranded costs from customers in Rhode Island in the first quarter
of 1999.
Interest Expense and Other Income
- ---------------------------------
The decrease in interest expense is due principally to reduced
interest on long-term and short-term debt as a result of the
defeasance or repayment of debt in conjunction with the sale of the
Company's nonnuclear generating business.
The increase in other income during the second quarter and first
six months of 1999 is primarily due to increased interest income as
a result of the reinvestment of the proceeds from the September 1,
1998 sale.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $27 million for the
first six months of 1999. These expenditures were primarily
transmission-related. The funds necessary for utility plant
expenditures during the period were primarily provided by internal
funds.
On February 8, 1999, the Company repurchased 130,000 shares of
its common stock from NEES for $18 million. Approximately $7
million of the repurchase price was charged to retained earnings.
<PAGE>
At June 30, 1999, the Company had lines of credit and standby
bond purchase facilities with banks totaling $455 million which are
available to provide liquidity support for $372 million of the
Company's bonds in tax-exempt commercial paper mode and for other
corporate purposes. There were no borrowings under these lines of
credit at June 30, 1999.
<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 B 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 B of Notes to Unaudited
Financial Statements, is incorporated herein and made a part
hereof.
The Company and several other shareholders (Sponsors) of Maine
Yankee are parties to 27 contracts (Secondary Purchase Agreements)
under which they sold portions of their entitlements to Maine
Yankee power output through 2002 to various entities, primarily
municipal and cooperative systems in New England (Secondary
Purchasers). Virtually all of the Secondary Purchasers had ceased
making payments under the Secondary Purchase Agreements, claiming
that such agreements excuse further payments upon plant shutdown.
In February 1999, settlement agreements between the Sponsors and
Secondary Purchasers were filed with the FERC, under which the
Secondary Purchasers would be required to make certain payments to
Maine Yankee, and, in turn, to the Company, related to both past
and future obligations under the Secondary Purchase Agreements. In
May 1999, the FERC approved the settlement agreements which fully
resolve the dispute between the Sponsors and the Secondary
Purchasers.
Information concerning dismissal of a lawsuit brought against the
Company by the Town of Norwood, Massachusetts and appeals of that
lawsuit and related Federal Energy Regulatory Commission orders,
and the Company's collection action, discussed in this report in
Note C of Notes to Unaudited Financial Statements, is incorporated
herein and made a part hereof.
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders
- ----------------------------------------------------------------
On April 21, 1999, the Annual Meeting of Shareholders was held.
By unanimous vote of the 3,749,896 shares present out of
3,765,568 total shares having general voting rights:
The number of directors for the ensuing year was fixed at four.
The following were elected as directors:
Peter G. Flynn
Alfred D. Houston
Cheryl A. LaFleur
Richard P. Sergel
John G. Cochrane was elected Treasurer and Gregory A. Hale was
elected Clerk. The terms of office are until the next annual
meeting of stockholders and until their successors are duly chosen
and qualified.
PricewaterhouseCoopers was selected as Auditor for the year 1999.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing Financial Data Schedules.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-Q for
the quarter ended June 30, 1999 to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
s/John G. Cochrane
John G. Cochrane, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: August 13, 1999
<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-31-1999
<PERIOD-END> JUN-30-1999
<PERIOD-TYPE> 6-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 476,326
<OTHER-PROPERTY-AND-INVEST> 87,168
<TOTAL-CURRENT-ASSETS> 311,353
<TOTAL-DEFERRED-CHARGES> 1,374,120 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,248,967
<COMMON> 72,398
<CAPITAL-SURPLUS-PAID-IN> 232,853
<RETAINED-EARNINGS> 232,070
<TOTAL-COMMON-STOCKHOLDERS-EQ> 537,400 <F3>
0
1,567
<LONG-TERM-DEBT-NET> 371,768
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,338,232
<TOT-CAPITALIZATION-AND-LIAB> 2,248,967
<GROSS-OPERATING-REVENUE> 306,797
<INCOME-TAX-EXPENSE> 21,747
<OTHER-OPERATING-EXPENSES> 249,196
<TOTAL-OPERATING-EXPENSES> 270,943
<OPERATING-INCOME-LOSS> 35,854
<OTHER-INCOME-NET> 5,296
<INCOME-BEFORE-INTEREST-EXPEN> 41,150
<TOTAL-INTEREST-EXPENSE> 6,551
<NET-INCOME> 34,599
47
<EARNINGS-AVAILABLE-FOR-COMM> 34,552
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 6,344
<CASH-FLOW-OPERATIONS> 16,434
<EPS-BASIC> 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 includes the unrealized gain on
securities.
</FN>
