<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 March 31, 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 March 31
(Unaudited)
<CAPTION>
Three Months Twelve Months
------------ -------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue, principally from affiliates $167,177 $401,147$ 984,370 $1,641,002
-------- -------- --------------------
Operating expenses:
Fuel for generation 3,058 83,551 143,335 353,270
Purchased electric energy 57,984 122,485 335,335 505,787
Other operation 19,210 50,202 124,073 235,859
Maintenance 5,766 25,556 40,449 95,606
Depreciation and amortization 40,367 29,884 110,407 105,889
Taxes, other than income taxes 5,634 18,383 35,743 67,489
Income taxes 13,100 22,346 64,348 88,161
-------- -------- --------------------
Total operating expenses 145,119 352,407 853,690 1,452,061
-------- -------- --------------------
Operating income 22,058 48,740 130,680 188,941
Other income:
Allowance for equity funds used during
construction 588 - 1,221 -
Equity in income of nuclear power companies 515 1,115 4,684 4,808
Other income (expense), net 434 (2,552) 3,104 (3,866)
-------- -------- --------------------
Operating and other income 23,595 47,303 139,689 189,883
-------- -------- --------------------
Interest:
Interest on long-term debt 3,143 9,723 24,195 41,168
Other interest 240 1,914 9,014 7,319
Allowance for borrowed funds used during
construction - credit (133) (284) (810) (1,152)
-------- -------- --------------------
Total interest 3,250 11,353 32,399 47,335
-------- -------- --------------------
Net income $ 20,345 $ 35,950 $ 107,290$ 142,548
======== ======== ====================
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $204,603 $407,630 $ 443,061 $ 409,011
Net income 20,345 35,950 107,290 142,548
Dividends declared on cumulative
preferred stock (24) (519) (735) (2,075)
Dividends declared on common stock - - (130,610) (106,423)
Premium on redemption of preferred stock - - (264) -
Repurchase of common stock (7,085) - (200,903) -
-------- -------- --------- ---------
Retained earnings at end of period $217,839 $443,061 $ 217,839 $ 443,061
======== ======== ========= =========
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>
March 31, December 31,
ASSETS 1999 1998
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $1,259,435 $1,262,461
Less accumulated provisions for depreciation
and amortization 838,380 837,637
---------- ----------
421,055 424,824
Construction work in progress 46,189 33,289
---------- ----------
Net utility plant 467,244 458,113
---------- ----------
Investments:
Nuclear power companies, at equity 47,323 48,538
Nonutility property and other investments 39,640 39,583
---------- ----------
Total investments 86,963 88,121
---------- ----------
Current assets:
Cash and temporary cash investments (including $82,583,000
and $109,911,000 with affiliates) 165,981 179,413
Accounts receivable:
Affiliated companies 77,874 107,878
Others 24,687 32,573
Fuel, materials, and supplies, at average cost 8,572 9,220
Prepaid and other current assets 15,415 21,569
---------- ----------
Total current assets 292,529 350,653
---------- ----------
Regulatory assets 1,429,761 1,512,562
Deferred charges and other assets 5,593 5,339
---------- ----------
$2,282,090 $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 217,839 204,603
Unrealized gain on securities, net 73 72
---------- ----------
Total common equity 523,163 520,896
Cumulative preferred stock, par value $100 per share 1,567 1,567
Long-term debt 371,767 371,765
---------- ----------
Total capitalization 896,497 894,228
---------- ----------
Current liabilities:
Accounts payable (including $47,741,000 and $119,657,000
to affiliates) 80,410 162,360
Accrued liabilities:
Taxes 5,619 15,009
Interest 3,272 2,440
Other accrued expenses 17,497 20,086
Dividends payable 24 24
---------- ----------
Total current liabilities 106,822 199,919
---------- ----------
Deferred federal and state income taxes 170,815 165,115
Unamortized investment tax credits 25,864 30,870
Accrued Yankee nuclear plant costs 232,770 242,138
Purchased power obligations 795,765 832,668
Other reserves and deferred credits 53,557 49,850
---------- ----------
$2,282,090 $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
Quarters Ended March 31
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating activities:
Net income $ 20,345 $ 35,950
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 42,170 30,629
Deferred income taxes and investment tax credits, net 5,726 42,358
Allowance for funds used during construction (720) (284)
Reimbursement to New England Energy Incorporated
of loss on sale of oil and gas properties - (120,900)
Decrease (increase) in accounts receivable, net 37,890 12,099
Decrease (increase) in fuel, materials, and supplies 648 (11,637)
Decrease (increase) in prepaid and other current assets 6,154 (3,816)
Increase (decrease) in accounts payable (81,950) 24,009
Increase (decrease) in other current liabilities (11,147) 18,045
Other, net (709) 4,873
-------- --------
Net cash provided by (used in) operating activities$ 18,407 $ 31,326
-------- --------
Investing activities:
Plant expenditures, excluding allowance
for funds used during construction $(13,739) $(16,451)
Other investing activities (20) (411)
-------- --------
Net cash provided by (used in) investing activities$(13,759) $(16,862)
-------- --------
Financing activities:
Dividends paid on common stock $ - $(35,474)
Dividends paid on preferred stock (24) (519)
Changes in short-term debt - 71,025
Long-term debt - retirements - (50,000)
Repurchase of common shares (18,056) -
-------- --------
Net cash provided by (used in) financing activities$(18,080) $(14,968)
-------- --------
Net increase (decrease) in cash and cash equivalents $(13,432) $ (504)
Cash and cash equivalents at beginning of period 179,413 1,643
-------- --------
Cash and cash equivalents at end of period $165,981 $ 1,139
======== ========
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
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 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 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:
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Operating revenue $89,244 $122,615
======= ========
Net income $ 5,138 $ 7,351
======= ========
Company's equity in
net income $ 515 $ 1,115
======= ========
March 31, December 31,
1999 1998
---- ----
(In thousands)
Net plant $ 166,062 $ 171,582
Other assets 2,798,948 2,810,613
Liabilities and debt (2,707,749) (2,723,454)
----------- -----------
Net assets $ 257,261 $ 258,741
=========== ===========
Company's equity in net assets $ 47,323 $ 48,538
=========== ===========
</TABLE>
At March 31, 1999, $13,380,000 of undistributed earnings of the
nuclear power companies were included in the Company's retained
earnings.
<PAGE>
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:
<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 21
Connecticut Yankee 15 16 Dec 1996 72
Maine Yankee 20 16 Aug 1997 139
</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 and Maine Yankee have both filed similar
requests with the FERC. Several parties have intervened in
opposition to both filings. 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. In January 1999, parties in the Maine Yankee
proceeding filed a comprehensive settlement agreement with the
FERC, under which Maine Yankee would recover all unamortized
investment in the plant, including a return on its equity
investment of 6.5 percent, as well as decommissioning costs and
other costs. This settlement agreement requires FERC approval. The
Company's industry restructuring settlements allow it to recover
all costs that the FERC allows these Yankee companies to bill to
the Company.
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
<PAGE>
making payments under the Secondary Purchase Agreements, claiming
that such agreements excuse further payments upon plant shutdown.
In February 1999, a settlement agreement which fully resolves the
dispute between the Sponsors and Secondary Purchasers was 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. This settlement agreement requires
FERC approval. Shutdown costs are recoverable from customers under
the Settlement Agreements.
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.
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, 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 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. On February 25,
1999, the Board of Directors of Vermont Yankee Nuclear Power
Corporation granted an exclusive right to AmerGen Energy Company
(AmerGen), a joint venture by PECO Energy and British Energy to
conduct a due diligence review over the next 120 days and negotiate
a possible agreement to purchase the assets of Vermont Yankee.
Provided the due diligence review leads to successful completion of
negotiations for a sale, 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. In
past negotiations for the sale of nuclear plants, due diligence
review has not guaranteed that a sale will occur. The Company has
a 20 percent ownership interest in Vermont Yankee and an investment
of approximately $11 million at March 31, 1999.
<PAGE>
Millstone 3
In July 1998, Millstone 3 returned to full operation after being
shut down since April 1996. In April 1999, the NRC eliminated its
"Watch List" designation process and has 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. Millstone
3 is operated by a subsidiary of Northeast Utilities (NU). A
criminal investigation related to Millstone 3 is ongoing.
In August 1997, the Company sued NU in Massachusetts 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 settlement agreements approved by
state and federal regulators in 1998 (Settlement Agreements). The
Company also seeks punitive damages. 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. The arbitration is scheduled for October
1999. In July 1998, the 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 December 1998, NU moved for summary judgement.
The Company's suit has been consolidated with suits filed by other
joint owners. The court is in the process of scheduling a trial
date. Some or all of the damages awarded from the lawsuit would be
refunded to customers.
Nuclear Decommissioning
The Company is liable for its share of decommissioning costs for
Millstone 3, Seabrook 1, and all of the Yankees. Decommissioning
costs include not only estimated costs to decontaminate the units
as required by the NRC, but also costs to dismantle the
uncontaminated portion of the units. The Company records
decommissioning costs on its books consistent with its rate
recovery. The Company is recovering its share of projected
decommissioning costs for Millstone 3 and Seabrook 1 through
depreciation expense. In addition, the Company is paying its
portion of projected decommissioning costs for all of the Yankees
<PAGE>
through purchased power expense. Such costs reflect estimates of
total decommissioning costs approved by the FERC.
In New Hampshire, legislation was recently enacted which makes
owners of Seabrook 1, in which the Company owns a 10 percent
interest, proportional guarantors for decommissioning costs in the
event that an owner without a franchise service territory fails to
fund its share of decommissioning costs. Currently, a single owner
of an approximate 12 percent share of Seabrook 1 has no franchise
service territory.
The New Hampshire Nuclear Decommissioning Finance Committee is
reviewing Seabrook Station's decommissioning estimate and
associated annual funding levels. Among the items being considered
is the imposition of joint and several liability among the Seabrook
joint owners for decommissioning funding. The Company cannot
predict what additional liability, if any, may be imposed on it.
The Nuclear Waste Policy Act of 1982 establishes that the federal
government (through the Department of Energy (DOE)) is responsible
for the disposal of spent nuclear fuel. The federal government
requires the Company to pay a fee based on its share of the net
generation from the Millstone 3 and Seabrook 1 nuclear generating
units. Prior to 1998, the Company recovered this fee through its
fuel clause. Under the Settlement Agreements, substantially all of
these costs are recovered through contract termination charges
(CTC). Similar costs are billed to the Company by Vermont Yankee
and also recovered from customers through the same mechanism. In
November 1997, ruling on a lawsuit brought against the DOE by
numerous utilities and state regulatory commissions, the U.S. Court
of Appeals for the District of Columbia (the Appeals Court) held
that the DOE was obligated to begin disposing of utilities' spent
nuclear fuel by January 31, 1998. The DOE failed to meet this
deadline, and is not expected to have a temporary or permanent
repository for spent nuclear fuel for many years. In February 1998,
Maine Yankee petitioned the Appeals Court to compel the DOE to
remove Maine Yankee's spent fuel from the site. In May 1998, the
Appeals Court rejected the petitions of Maine Yankee and the other
utilities and state regulatory commissions, stating that the issue
of damages was a contractual matter. The operators of the units in
which the Company has an obligation, including Maine Yankee,
Connecticut Yankee, and Yankee Atomic, continue to pursue damage
claims against the DOE in the Federal Court of Claims (Claims
Court). In October 1998, the Claims Court ruled that the DOE
violated a commitment to remove spent fuel from Yankee Atomic. The
Claims Court issued similar rulings in November 1998 related to
cases brought by Connecticut Yankee and Maine Yankee. Further
proceedings will be scheduled by the Claims Court to decide the
amount of damages. On April 6, 1999, a federal judge with the
Claims Court dismissed a lawsuit brought by Northern States Power
Company seeking damage payments resulting from the DOE's failure to
<PAGE>
remove spent fuel from nuclear power plants. It is unclear at this
time what effect, if any, this ruling will have on the independent
separate lawsuits brought by Yankee Atomic, Maine Yankee, and
Connecticut Yankee.
Note C - Town of Norwood Dispute
- --------------------------------
In September 1998, the United States District Court (District
Court) for the District of Massachusetts dismissed the lawsuit
filed in April 1997 by the Town of Norwood, Massachusetts against
NEES and the Company. The Company had been a wholesale power
supplier for Norwood pursuant to rates approved by the FERC. In the
lawsuit, Norwood had alleged that the Company's divestiture of its
power generating assets would violate the terms of a 1983 power
contract. Norwood also alleged that the divestiture and recovery
of stranded investment costs contravened federal antitrust laws.
The District Court judge granted NEES' and the Company's motion for
dismissal on the grounds that the contract did not require the
Company to retain its generating units, that the FERC-approved
filed rates govern these matters, and that Norwood had adequate
opportunity at the FERC to litigate these matters. Norwood filed a
motion to alter or amend the order of dismissal, which was denied.
In December 1998, Norwood filed a second motion to amend judgement
and also filed an appeal with the First Circuit Court of Appeals
(First Circuit). In March 1999, the District Court denied Norwood's
second motion to amend judgement.
In March 1998, Norwood gave notice of its intent to terminate its
contract with the Company, without accepting responsibility for its
share of the Company's stranded costs, and began taking power from
another supplier commencing in April 1998. In May 1998, the FERC
ruled that the Company could assess a CTC to any of the Company's
unaffiliated customers that choose to terminate their wholesale
power contracts early. Norwood claimed that the CTC approved by the
FERC did not apply to Norwood; however, in denying Norwood's motion
for rehearing, the FERC ruled that the charge did apply to Norwood.
Norwood has appealed this decision to the First Circuit. The
Company's billings to Norwood for this charge through March 1999
have been approximately $7 million, which remain unpaid. The
Company filed a collection action with the Massachusetts Superior
Court in December 1998 to recover these amounts. Norwood filed a
motion to dismiss or stay in January 1999, which has been denied.
Norwood also appealed the FERC's orders approving the divestiture
and the Massachusetts and Rhode Island industry restructuring
settlement agreements (including modification of the Company's
contracts with Massachusetts Electric Company and The Narragansett
Electric Company) to the First Circuit, despite the FERC's finding
that those settlement agreements do not apply to Norwood.
<PAGE>
The First Circuit has consolidated all three of Norwood's appeals
from the FERC's orders with two other appeals filed by the
Northeast Center for Social Issue Studies, which challenge the
FERC's approval of the Company's sale of its hydroelectric
facilities. The case is expected to be fully briefed by July 1999.
Note D - New Accounting Standards
- ---------------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (FAS 133), which
establishes accounting and reporting standards for such
instruments. FAS 133 is effective for fiscal years beginning after
June 15, 1999. Currently, the Company has no such holdings.
Note E
- ------
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>
NEW ENGLAND POWER COMPANY
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 9, 1999, NEES and National Grid received clearance under
the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976, as
amended. In addition, shareholders of National Grid approved the
proposed merger on April 22, 1999 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. NEES and National Grid have also filed for
merger approval with the Securities and Exchange Commission (SEC),
Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory
Commission (NRC). NEES and National Grid have also made filings in
the states in which NEES subsidiaries operate where support or
approval for the merger is required. On April 21, 1999, the New
Hampshire Public Utilities Commission (NHPUC) issued an order
finding that the NEES/National Grid merger filing did not satisfy
the requirements for exemption from the NHPUC's formal review
process. Hearings on the merger are scheduled for June 1999. On
April 29, 1999, the Committee on Foreign Investment in the United
States under the Exon-Florio Provisions of the Omnibus Trade and
Competitiveness Act of 1988 concluded there were no issues of
national security to warrant any investigation. The NEES/National
Grid merger is expected to be completed by early 2000.
On April 29, 1999, NEES and EUA also received clearance under
HSR for the NEES acquisition of EUA. NEES and EUA have filed for
merger approval with the FERC and the Commonwealth of
Massachusetts. The acquisition of EUA also requires approval by
<PAGE>
the SEC and NRC, and approval by certain states in which EUA
subsidiaries operate. 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
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 Federal Energy
Regulatory Commission (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
<PAGE>
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 March 31, 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
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.
In April 1999, Massachusetts Electric Company, (Massachusetts
Electric), a distribution affiliate, filed a rate plan 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 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 regulatory assets would not be written off but
instead would be 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 March 31, 1999, the NEES companies have spent
approximately $17 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 have separated their Y2K
Project into four parts as shown below, along with the estimated
completion dates for each part.
<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/ June 30, 1999 Throughout 1999
Department software/
Networks
Operational/ Dispatching systems/ June 30, 1999 Throughout 1999
Embedded Transmission and
systems Distribution systems/
Telephone systems
External issues Electronic Data June 30, 1999 Throughout 1999
Interchange/Vendor
communications
</TABLE>
The NEES companies are using 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
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 is currently ongoing, requires the
renovation, conversion, or replacement of the remaining
applications and operating software packages.
<PAGE>
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 formulated for mission critical
systems, as described below.
The overall Y2K Project has also been designed such that Y2K-
related work performed by external consultants is reviewed by NEES
employees, and vice-versa. The Y2K Project team management
periodically benchmarks its progress against the recommended
progress schedule documented by the North American Electric
Reliability Council (NERC), and is currently ahead of the
recommended schedule.
The NEES companies have 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 developed, as described below.
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 March 31, 1999, total Y2K-related costs of
approximately $30 million have been incurred, of which
approximately $4 million has 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 are in the process of developing Y2K
contingency plans to allow for critical information and operating
systems to function from January 1, 2000 forward. If required,
these plans are intended to address both internal risks as well as
potential external risks related to suppliers and customers. Part
<PAGE>
of the contingency planning 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 Y2K contingency planning, the NEES
companies will review their disaster recovery plans, modifying them
for Y2K-specific issues, such as a potential loss of
telecommunication services. The NEES companies expect that these
contingency plans will be in place by the third quarter of 1999.
Interregional and regional contingency plans are being formulated
that 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, will be coordinated by the Northeast
Power Coordinating Council, whose activities will be incorporated
into the interregional coordinating effort by NERC. The target for
the completion of this planning process is mid-1999. The NEES
companies have noted that the Y2K coordination efforts by ISO New
England began in May 1998, resulting in a demanding and difficult
schedule to attain regional and interregional target dates.
The NEES companies believe that the contingency plans being
developed both internally and on a regional level should
substantially mitigate the risks of Y2K-related failures at NEES
company facilities or those caused by the inability of entities,
such as ISO New England, to maintain the short-term reliability of
various generator and/or transmission lines on a regional or
interregional basis. Such risks include temporary disruptions of
electric service, which the NEES companies believe is the worst
case Y2K scenario with a reasonable chance of occurring. In the
event that a short-term disruption in service occurs, NEES does not
expect that it would have a material impact on its financial
position or results of operation.
While the NEES companies believe that their overall Y2K program
will satisfactorily address all critical operational and
system-related issues, significant risks remain. These risks
include, but are not limited to, the Y2K readiness of third
parties, including other utilities, power suppliers, and ISO New
England, cost and timeline estimates of remaining Y2K mitigation
efforts, and the overall accuracy of assumptions made related to
future events in the development of the Y2K mitigation effort.
<PAGE>
Earnings
- --------
Net income for the first quarter of 1999 decreased $16 million
compared with the corresponding period in 1998. The decrease in
earnings reflects the continuing impact of the restructuring of the
utility business and the effect of the divestiture of the Company's
nonnuclear generating business on September 1, 1998.
Partially offsetting this revenue decrease is an increase in
transmission billings, including the elimination of $5 million of
certain liabilities related to open access transmission tariffs and
the recovery of the Company's stranded investment costs including
mitigation incentives. The mitigation incentives recorded in the
first quarter amounted to approximately $6 million.
Operating Revenue
- -----------------
Operating revenue decreased $234 million in the first quarter of
1999 compared with the corresponding period in 1998. Industry
restructuring continues to have a negative impact on revenues.
Rate reductions were implemented upon the commencement of providing
customer choice of electric supplier. These initial rate
reductions commenced for all customers in Rhode Island,
Massachusetts, and New Hampshire on January 1, March 1, and July 1,
1998, respectively. Further rate reductions were provided to
customers following the sale of the Company's nonnuclear generating
business on September 1, 1998. These rate reductions also 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 purchased
power expense.
Partially offsetting this revenue decrease is an increase in
transmission billings, the elimination of certain liabilities
related to open access transmission tariffs, and the ability of the
Company to recover its stranded investments from the affiliated
wholesale customers through CTCs. The CTC rate was originally set
at 2.8 cents per kilowatthour (kWh), and subsequently reduced to
approximately 1.5 cents or less per kWh upon the sale of the
Company's nonnuclear generating business.
Operating Expenses
- ------------------
Operating expenses for the first quarter of 1999 decreased $207
million compared with the corresponding period in 1998. The
September 1, 1998 sale of the Company's nonnuclear generating
business had the impact of decreasing all categories of operating
expenses other than depreciation and amortization. The decrease in
<PAGE>
operating expenses also reflects reduced charges from both the
Maine Yankee nuclear power plant and the Vermont Yankee nuclear
power plant, which experienced a refueling shutdown beginning in
March 1998.
In addition to the impact of the sale, the decrease in other
operation and maintenance expenses reflects reduced general and
administrative costs primarily due to workforce reductions and
reduced transmission billings to the Company. In conjunction with
industry restructuring, NEPOOL transmission costs are billed
directly to the Company's distribution affiliates. Reduced charges
of approximately $2 million from the partially owned Millstone 3
nuclear generating facility also contributed to the decrease in
operation and maintenance expenses.
Depreciation and amortization expenses increased during the first
quarter primarily due to the recovery and amortization of
generation-related stranded costs in 1999 being greater than
depreciation and amortization of generation-related plant in 1998.
Interest Expense and Other Income
- ---------------------------------
The decrease in interest expense is due principally to reduced
interest on long-term debt as a result of the defeasement of debt
in conjunction with the sale of the Company's nonnuclear generating
business.
The increase in other income during the first quarter 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 $14 million for the
first three months of 1999. These expenditures were primarily
transmission-related. The funds necessary for utility plant
expenditures during the period were primarily provided by
internally generated funds.
On February 8, 1999, the Company repurchased 130,000 shares of
its common stock from NEES for $18 million. Approximately $7
million in connection with the repurchase was charged to retained
earnings.
At March 31, 1999, the Company had lines of credit and standby
bond purchase facilities with banks totaling $445 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 March 31, 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.
Information concerning a settlement agreement between the
Company and secondary purchasers of Maine Yankee power output,
discussed in this report in Note B of Notes to Unaudited Financial
Statements, is incorporated herein and made a part hereof.
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.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing Financial Data Schedules.
The Company filed a report on Form 8-K dated February 1, 1999
containing Items 5 and 7.
<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 March 31, 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: May 17, 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> MAR-31-1999
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 467,244
<OTHER-PROPERTY-AND-INVEST> 86,963
<TOTAL-CURRENT-ASSETS> 292,529
<TOTAL-DEFERRED-CHARGES> 1,435,354 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,282,090
<COMMON> 72,398
<CAPITAL-SURPLUS-PAID-IN> 232,853
<RETAINED-EARNINGS> 217,839
<TOTAL-COMMON-STOCKHOLDERS-EQ> 523,163 <F3>
0
1,567
<LONG-TERM-DEBT-NET> 371,767
<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> 1,385,593
<TOT-CAPITALIZATION-AND-LIAB> 2,282,090
<GROSS-OPERATING-REVENUE> 167,177
<INCOME-TAX-EXPENSE> 13,100
<OTHER-OPERATING-EXPENSES> 132,019
<TOTAL-OPERATING-EXPENSES> 145,119
<OPERATING-INCOME-LOSS> 22,058
<OTHER-INCOME-NET> 1,537
<INCOME-BEFORE-INTEREST-EXPEN> 23,595
<TOTAL-INTEREST-EXPENSE> 3,250
<NET-INCOME> 20,345
24
<EARNINGS-AVAILABLE-FOR-COMM> 20,321
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 3,143
<CASH-FLOW-OPERATIONS> 18,407
<EPS-PRIMARY> 0 <F2>
<EPS-DILUTED> 0 <F2>
<FN>
<F1> Total deferred charges includes other assets and accrued Yankee Atomic
costs.
<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>
