<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 September 30, 2000.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
<CAPTION>
Quarter Six Months
-------- ----------
2000 1999 2000 1999
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue, principally from affiliates $175,390 $142,066 $331,580 $281,686
-------- -------- -------- --------
Operating expenses:
Fuel for generation 4,296 3,857 7,882 6,071
Purchased electric energy:
Contract termination and nuclear
unit shutdown charges 61,377 47,769 120,981 95,925
Other 16,659 14,330 32,175 26,923
Other operation 17,856 17,665 32,506 33,725
Maintenance 5,862 5,569 10,686 16,971
Depreciation and amortization 22,480 21,210 43,247 42,203
Taxes, other than income taxes 5,894 5,316 11,697 11,075
Income taxes 15,734 7,568 26,929 16,215
-------- -------- -------- --------
Total operating expenses 150,158 123,284 286,103 249,108
-------- -------- -------- --------
Operating income 25,232 18,782 45,477 32,578
Other income and (expense):
Allowance for equity funds used
during construction - 447 (2) 988
Equity in income of nuclear power companies1,949 1,001 2,817 1,968
Amortization of goodwill (4,446) - (8,783) -
Other income (expense), net (124) 935 2,224 3,186
-------- -------- -------- --------
Operating and other income 22,611 21,165 41,733 38,720
-------- -------- -------- --------
Interest:
Interest on long-term debt 4,456 3,370 8,442 6,571
Other interest 1,899 246 3,140 452
Allowance for borrowed funds used during
construction (204) (120) (532) (226)
-------- -------- -------- --------
Total interest 6,151 3,496 11,050 6,797
-------- -------- -------- --------
Net income $ 16,460 $ 17,669 $ 30,683 $ 31,923
======== ======== ======== ========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 16,077 $232,070 $ 1,415 $217,839
Net income 16,460 17,669 30,683 31,923
Dividends declared on cumulative
preferred stock (24) (24) (47) (47)
Dividends declared on common stock - - - -
Gain on redemption of preferred stock 17 - 17 -
Repurchase of common stock - 264 - 264
Acquisition adjustment - - 462 -
-------- -------- -------- --------
Retained earnings at end of period $ 32,530 $249,979 $ 32,530 $249,979
======== ======== ======== ========
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 National Grid USA.
</TABLE>
<PAGE>
<TABLE> NEW ENGLAND POWER COMPANY
Statements of Income
Twelve Months Ended September 30
(Unaudited)
<CAPTION>
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue, principally from affiliates $ 613,622 $586,167
--------- --------
Operating expenses:
Fuel for generation 15,104 11,528
Purchased electric energy:
Contract termination and nuclear
unit shutdown charges 213,365 190,910
Other 65,554 46,813
Other operation 66,267 75,126
Maintenance 20,805 30,272
Depreciation and amortization 80,719 98,149
Taxes, other than income taxes 20,831 19,452
Income taxes 44,888 37,829
-------- --------
Total operating expenses 527,533 510,079
-------- --------
Operating income 86,089 76,088
Other income and (expense):
Allowance for equity funds used during construction (13) 2,095
Equity in income of nuclear power companies 4,135 3,609
Amortization of goodwill (9,149) -
Other income (expense), net 2,541 2,912
-------- --------
Operating and other income 83,603 84,704
-------- --------
Interest:
Interest on long-term debt 16,529 13,538
Other interest 4,304 831
Allowance for borrowed funds used during construction (1,121) (497)
-------- --------
Total interest 19,712 13,872
-------- --------
Net income $ 63,891 $ 70,832
========= ========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 249,979 $186,354
Net income 63,891 70,832
Dividends declared on cumulative preferred stock (94) (122)
Dividends declared on common stock (265,513) -
Gain on redemption of preferred stock 17 -
Repurchase of common stock - (7,085)
Purchase accounting adjustment (16,212) -
Acquisition adjustment 462 -
--------- --------
Retained earnings at end of period $ 32,530 $249,979
========= ========
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 National Grid USA.
</TABLE>
<PAGE>
<TABLE> NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
September 30, March 31,
ASSETS 2000 2000
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $1,566,774 $1,318,026
Less accumulated provisions for depreciation
and amortization 961,493 854,309
---------- ----------
605,281 463,717
Construction work in progress 36,647 35,730
---------- ----------
Net utility plant 641,928 499,447
---------- ----------
Goodwill, net of amortization 340,523 333,771
Investments:
Nuclear power companies, at equity 49,325 45,966
Decommissioning trust funds 46,888 36,279
Non-utility property and other investments 14,744 7,490
---------- ----------
Total investments 110,957 89,735
---------- ----------
Current assets:
Cash, and temporary cash investments (including
$-0- and $37,820,000 with affiliates) 47,897 226,921
Accounts receivable:
Affiliated companies 80,522 72,780
Others 80,973 48,139
Fuel, materials, and supplies, at average cost 9,847 10,345
Prepaid and other current assets 26,111 25,377
Regulatory asset purchased power obligations 103,789 74,988
---------- ----------
Total current assets 349,139 458,550
---------- ----------
Regulatory assets 1,587,179 1,210,800
Deferred charges and other assets 53,484 37,271
---------- ----------
$3,083,210 $2,629,574
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
Authorized - 6,449,896 shares
Outstanding - 3,619,896 shares $ 72,398 $ 72,398
Other paid-in capital 730,413 582,983
Retained earnings 32,530 1,415
Unrealized gain on securities, net 17 -
---------- ----------
Total common equity 835,358 656,796
Cumulative preferred stock, par value $100 per share 1,471 1,567
Long-term debt 371,776 371,773
---------- ----------
Total capitalization 1,208,605 1,030,136
---------- ----------
Current liabilities:
Short-term debt (including $100,000,000 and $-0- to parent) 163,500 38,500
Accounts payable (including $21,989,000 and $26,993,000
to affiliates) 76,149 51,584
Accrued liabilities:
Taxes 3,105 2,394
Interest 1,518 1,900
Purchased power contract obligations 103,789 74,988
Other accrued expenses 7,046 10,879
Dividends payable 23 256,487
---------- ----------
Total current liabilities 355,130 436,732
---------- ----------
Deferred federal and state income taxes 278,371 176,351
Unamortized investment tax credits 16,015 16,733
Accrued Yankee nuclear plant costs 300,700 268,855
Purchased power obligations 662,625 611,802
Other reserves and deferred credits 261,764 88,965
---------- ----------
$3,083,210 $2,629,574
========== ==========
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 September 30
(Unaudited)
<CAPTION>
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 30,683 $ 31,923
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 47,646 44,870
Amortization of goodwill 8,783 -
Deferred income taxes and investment tax credits, net (1,815) (8,375)
Allowance for funds used during construction (530) (1,215)
Changes in assets and liabilities, net of effects of merger:
Decrease (increase) in accounts receivable, net (18,735) (11,408)
Decrease (increase) in fuel, materials, and supplies 602 (1,206)
Decrease (increase) in regulatory assets 142,232 127,305
Decrease (increase) in prepaid and other current assets 2,441 (18,065)
Increase (decrease) in accounts payable 9,319 1,386
Increase (decrease) in purchased power
contract obligations (96,633) (55,719)
Increase (decrease) in other current liabilities (6,070) 6,787
Increase (decrease) in other non-current liabilities (16,328) (13,228)
Other, net (29,740) (37,549)
--------- --------
Net cash provided by (used in) operating activities $ 71,855 $ 65,506
--------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $ (22,121) $(27,586)
Other investing activities (6,594) (199)
--------- --------
Net cash provided by (used in) investing activities $ (28,715) $(27,785)
--------- --------
Financing Activities:
Dividends paid on common stock $(256,463) $ -
Dividends paid on preferred stock (47) (47)
Changes in short-term debt 125,000 38,500
Long-term debt - retirements (90,575) -
Redemption of preferred stock, net of discount (79) -
--------- --------
Net cash provided by (used in) financing activities $(222,164) $ 38,453
--------- --------
Net increase (decrease) in cash and cash equivalents $(179,024) $ 76,174
Cash and cash equivalents at beginning of period 226,921 165,981
--------- --------
Cash and cash equivalents at end of period $ 47,897 $242,155
========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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
it may be held responsible for remediating.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. The Company
has recovered amounts from certain insurers, and, where
appropriate, intends to seek recovery from other insurers and from
other PRPs, but it is uncertain whether, and to what extent, such
<PAGE>
efforts will be successful. The Company believes that hazardous
waste liabilities for all sites of which the Company is aware are
not material to its financial position.
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
September 30,
---------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(In Thousands)
<S> <C <C> <C> <C>
Operating revenue $82,653 $91,361 $170,204 $183,170
======= ======= ======== ========
Net income $18,845 $ 1,167 $ 22,969 $ 6,296
======= ======= ======== ========
Company's equity in
net income recorded $ 1,949 $ 1,001 $ 2,817 $ 1,968
======= ======= ======== ========
September 30, March 31,
2000 2000
---- ----
(In Thousands)
Net plant $ 156,017 $ 167,317
Other assets 2,140,575 2,520,887
Liabilities and debt (2,082,277) (2,437,609)
----------- -----------
Net assets $ 214,315 $ 250,595
=========== ===========
Company's equity in net assets $ 49,325 $ 45,966
=========== ===========
</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:
<TABLE>
<CAPTION>
<S> <C> <C>
Future
The Company's Estimated
Investment Billings to
as of 9/30/00 Date the Company
Unit % $(millions) Retired $(millions)
-----------------------------------------------------------------
Yankee Atomic 34.5 4 Feb 1992 0
Connecticut Yankee 19.5 15 Dec 1996 75
Maine Yankee 24.0 18 Aug 1997 143
</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,
including a return on that investment, as well as unfunded nuclear
decommissioning costs and other costs. Maine Yankee and Connecticut
Yankee recover their costs, including a return, in accordance with
settlement agreements approved by the FERC in May 1999 and July
2000, respectively. Prospectively, under the FERC settlement
agreement, Connecticut Yankee has agreed to reduce annual
collections for decommissioning through the use of its pre-1983
spent fuel trust funds and to limit its return on equity to 6
percent. In addition, Connecticut Yankee, Yankee Atomic, and Maine
Yankee continue to pursue litigation against the Department of
Energy (DOE) to assume financial responsibility for storage of
<PAGE>
spent nuclear fuel. Under rate provisions approved by the FERC for
Connecticut Yankee and Yankee Atomic, any recovery from the DOE
proceedings after litigation expenses and taxes would be returned
to customers.
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.
Maine Yankee had hired Stone & Webster, Inc. (S&W), an
engineering, construction, and consulting company, as the principal
contractor to decommission the unit. In May 2000, Maine Yankee
terminated its long-term contract with S&W and negotiated an
arrangement with S&W to continue work until June 2000. On June 2,
2000, S&W filed for Chapter 11 bankruptcy protection due to
financial difficulties. S&W was ultimately acquired by Shaw
Engineering Group. Bids were submitted to Maine Yankee on October
31, 2000, by candidates to succeed S&W as the principal contractor
to complete decommissioning. On June 30, 2000, Federal Insurance
Company (Federal) filed a complaint in S&W's bankruptcy proceeding
which alleges that Maine Yankee improperly terminated its contract
with S&W. If the court were to make such a finding, Federal would
be excused from a $37 million performance bond liability to Maine
Yankee. Federal's complaint has been removed to the US Federal
District Court in Maine for jury trial. On August 24, 2000, Maine
Yankee filed a $78.2 million damage claim against S&W in the
bankruptcy proceeding. At this time, the Company is unable to
determine the potential impact, if any, of these developments.
Under the provisions of the Company's industry restructuring
settlement agreements approved by state and federal regulators in
1998, the Company recovers all costs, including shutdown costs,
that the FERC allows these Yankee companies to bill to the Company.
<PAGE>
Operating Nuclear Units
The Company has minority interests in three operating nuclear
generating units which the Company is engaged in efforts to divest:
Vermont Yankee, Millstone 3, and Seabrook 1. Uncertainties
regarding the future of nuclear generating stations, particularly
older units, such as Vermont Yankee, have increased in recent years
and could adversely affect their service lives, availability, and
costs. These uncertainties stem from a combination of factors,
including the acceleration of competitive pressures in the power
generation industry and increased Nuclear Regulatory Commission
(NRC) scrutiny. The Company performs periodic economic viability
reviews of operating nuclear units in which it holds ownership
interests. Until such time as the Company divests its operating
nuclear interests, the Company will share with customers, through
contract termination charges (CTC), 80 percent of the revenues and
operating costs related to the Company's interest in these units,
with shareholders retaining the balance.
Vermont Yankee
The following table summarizes the Company's interest in the
Vermont Yankee Nuclear Power Corporation as of September 30, 2000:
<TABLE>
<CAPTION>
The Company's Interest
(millions of dollars)
<S> <C> <C> <C> <C> <C>
Equity Net Estimated Decommissioning
Ownership Equity Plant Decommissioning Fund License
Interest (%) Investment Assets Cost (in 1999$) Balance Expiration
------------ ---------- ------ --------------- ------- ----------
22.5 $12 $35 $97 $51 2012
</TABLE>
<PAGE>
In November 1999, the Vermont Yankee Nuclear Power Corporation
entered into an agreement with AmerGen Energy Company (AmerGen), a
joint venture between PECO Energy and British Energy, to sell the
assets of Vermont Yankee. Under the terms of the agreement, after
a Vermont Yankee contribution toward the plant's decommissioning
trust fund, AmerGen will take over the fund and assume
responsibility for the actual cost of decommissioning the plant.
The agreement would also require the existing power purchasers
(including the Company) to continue to purchase the output of the
plant or to buy out of the purchased power obligation. In November
1999, the Company signed an agreement to buy out of its obligation,
requiring future payments which will be recovered through the
Company's CTC. The Company has recorded an accrued liability and
offsetting regulatory asset of $80 million for its share of future
liabilities related to Vermont Yankee, including the purchased
power contract termination payment obligation, but excluding
interest and a return allowance. Although the NRC and the FERC have
technically approved the proposed sale, Vermont Yankee has notified
AmerGen that neither approval can be deemed final and therefore
both approvals remain subject to resolution of certain issues
before they would be considered satisfactory to Vermont Yankee in
accordance with the terms of its sale agreements with AmerGen. The
sale is also contingent upon additional regulatory approvals by the
Securities and Exchange Commission, under the Public Utility
Holding Company Act of 1935, and the Vermont Public Service Board
(VPSB). The Vermont Department of Public Service (VDPS) has filed
briefs with the VPSB opposing the transaction. On October 26, 2000,
however, the VPSB granted a motion filed by AmerGen, which was
supported by the VDPS and Vermont Yankee, requesting the VPSB to
delay any decision in the Vermont proceeding until November 15,
2000. AmerGen requested the delay to provide the parties with
sufficient time to consider a revised settlement proposal.
<PAGE>
Millstone 3
In November 1999, the Company entered into an agreement with
Northeast Utilities (NU) and certain of NU's subsidiaries to settle
claims made by the Company relative to the operation of Millstone
3. Among other things, the settlement provides for NU to include
the Company's share of Millstone 3 in an auction of NU's share of
the unit. Upon the closing of the sale, NU will pay the Company a
total of $25 million, regardless of the actual sale price, and
reimburse the Company for any capital expenditures in excess of
pre-budgeted levels incurred after October 1999. The Company will
also be reimbursed for fuel procurement expenditures which increase
net nuclear fuel account balances above balances at that time. The
settlement also requires NU to indemnify the Company and assume any
residual liabilities resulting from the sale, including any
requirements that the sellers continue to purchase output from the
unit. In addition, the settlement requires NU to pay the Company an
additional $1 million per month for every month beyond April 1,
2001 that the closing does not occur.
On August 7, 2000, Dominion Resources, Inc. (Dominion) agreed
to purchase the Millstone units, including the Company's 16.2
percent share of Millstone 3, for $1.3 billion in cash. The
purchase has received clearance from the Department of
Justice/Federal Trade Commission. The purchase must also be
approved by the NRC, the FERC, and public utility commissions in
various states affected by the purchase transaction. Filings for
approval have been made with each regulatory agency. Dominion
expects to finalize the transaction by April 2001.
Any amounts received pursuant to a sale will, after
reimbursement of the Company's transaction costs and net investment
in Millstone 3, be credited to customers.
<PAGE>
Seabrook 1
As part of its restructuring settlement with the State of New
Hampshire, Public Service Company of New Hampshire (PSNH), through
its affiliate, North Atlantic Energy Corporation (NAEC), has
committed to seek New Hampshire Public Utilities Commission
approval of a definitive plan to sell, via public auction, its
share of Seabrook 1, with such sale to occur no later than December
31, 2003. NAEC owns the largest percentage of the plant with a
35.98 percent interest, and its affiliate, North Atlantic Energy
Service Corporation, is the plant operator. As part of its
settlement, PSNH has also agreed to make all reasonable efforts to
bundle its interests with those of other owners (including the
Company) seeking to sell their interests.
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
a tariff amendment approved by the FERC in May 1998, the Company
has been assessing Norwood a CTC. Through September 2000, the
charges assessed Norwood amount to approximately $23 million, all
of which remain unpaid. The Company has filed a collection action
in Massachusetts Superior Court (Superior Court).
Separately, Norwood filed suit in Federal District Court
(District Court) in April 1997 alleging that the divestiture of the
Company's nonnuclear generating business (the divestiture) violated
the terms of the 1983 power contract and contravened antitrust
laws. The District Court dismissed the lawsuit. On appeal, the
First Circuit Court of Appeals (First Circuit) consolidated appeals
Norwood made from FERC's orders approving the Company's
divestiture, the wholesale rate settlement between the Company and
its distribution affiliates, and the CTC tariff amendment. In
February 2000, the First Circuit dismissed Norwood's appeal from
the FERC orders and dismissed its appeal from all but one of
<PAGE>
Norwood's District Court claims, which relates to alleged
generation market power. In February and March 2000, respectively,
the First Circuit denied Norwood's petition for further review of
its District Court claims decision and its decision on the FERC
orders. On May 30, 2000, Norwood petitioned the US Supreme Court
for review of the First Circuit decisions. On October 2, 2000, the
US Supreme Court refused Norwood's petitions to review the First
Circuit decisions affirming (a) the FERC's approval of the CTC, the
divestiture, and the settlement agreements regarding termination of
the Company's power sales agreements with its affiliates, and (b)
the US District Court's dismissal of Norwood's antitrust and breach
of contract claims.
In the District Court action, on April 10, 2000, the Company
renewed its motion to dismiss Norwood's remaining claim. Norwood
amended its complaint to reassert a request for rescission of the
divestiture, which it had earlier dropped. A hearing took place
before the District Court on July 18, 2000.
In the Superior Court collection action, Norwood moved to
dismiss the Company's complaint, which the Superior Court denied on
April 30, 1999. Norwood filed counterclaims against the Company,
which the Company moved to dismiss. The Superior Court deferred
decision on the Company's motion pending resolution of Norwood's
various appeals to the First Circuit, and on July 21, 2000, the
Company renewed its motion to dismiss in light of the First Circuit
decisions and filed a motion for summary judgement.
Norwood has also appealed a June 1999 FERC decision that
rejected Norwood's challenge to the calculation of the CTC based on
the terms of the 1983 power contract, which Norwood contended ended
in October 1998, not October 2008. On June 29, 2000, the First
Circuit rejected Norwood's appeal.
<PAGE>
Note D - Merger Agreement with Niagara Mohawk
---------------------------------------------
On September 5, 2000, National Grid USA's parent company,
National Grid Group plc (National Grid), and Niagara Mohawk
Holdings, Inc., announced a merger agreement under which National
Grid will acquire Niagara Mohawk (NiMo) through the formation of a
new National Grid holding company, New National Grid, and the
exchange of NiMo shares for a combination of American Depositary
Shares (ADSs) and cash. The terms of the agreement value the
transaction at approximately $3.0 billion.
The transaction is expected to be completed by late 2001, and
is subject to a number of conditions, including regulatory and
other governmental approvals, the sale of NiMo's nuclear facilities
or other satisfactory arrangements being reached, and approval by
NiMo and National Grid shareholders.
Note E - Acquisition of Eastern Utilities Associates
----------------------------------------------------
The acquisition of Eastern Utilities Associates (EUA) by
National Grid USA was completed on April 19, 2000 for $642 million,
or $31.459 per share. On May 1, 2000, Montaup Electric Company
(Montaup), formerly a subsidiary of EUA, was merged into the
Company.
The acquisition of EUA was accounted for by the purchase
method, the application of which, including the recognition of
goodwill, has been pushed down and reflected on the financial
statements of the National Grid USA subsidiaries, including the
Company. Total goodwill amounted to $394 million, of which the
Company was allocated $7.8 million relative to the merger of
Montaup into the Company. This amount was determined pursuant to an
independent study conducted by a third party and is being amortized
over 20 years.
<PAGE>
Combined with the amortization of goodwill allocated to the
Company from the acquisition of New England Electric System (NEES)
by National Grid, the total annual amortization of goodwill will
amount to approximately $17.5 million. Disclosure regarding the
acquisition of NEES by National Grid is contained in the Company's
Transitional Annual Report on Form 10-K for the period ended March
31, 2000.
As a result of the acquisition, Montaup's balance sheet
accounts were incorporated into the financial statements of the
Company as of May 1, 2000. Listed below are the significant account
balances incorporated.
<TABLE>
<CAPTION>
May 1, 2000 Balance
(In Thousands)
<S> <C>
Assets
Utility plant, at original cost $227,114
Accumulated provisions for depreciation $(92,093)
and amortization
Regulatory assets (current and long-term) $547,412
Liabilities
Other paid-in capital $135,444
Deferred federal and state income taxes $104,860
Accrued Yankee nuclear plant costs $ 46,030
Purchased power obligations
(current and long-term) $176,257
Other reserves and deferred credits $174,942
</TABLE>
The accompanying statements of operations do not include any
revenues or expenses related to Montaup prior to the subsidiary
companies' merger on May 1, 2000.
The following unaudited pro forma information presents the
results of operations of the Company assuming the merger of Montaup
into the Company occurred on October 1, 1998. This pro forma
information has been prepared for comparative purposes only and
includes an adjustment for additional amortization expense as a
result of goodwill. This information does not purport to be
indicative of the results of operations that actually would have
resulted had the merger occurred on October 1, 1998, or of future
results of the Company.
<TABLE>
<CAPTION>
Supplemental Unaudited Pro Forma Information
Periods Ended September 30
(In Thousands)
<S> <C> <C> <C>
Three Months Six Months Twelve Months
------------ ---------- -------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Combined Operating
Revenues $175,390 $195,650 $344,977 $408,759 $712,100 $882,791
Net Earnings $ 16,460 $ 17,385 $ 30,129 $ 30,344 $ 61,721 $ 68,504
</TABLE>
Note F
------
Income statements for the six and twelve month periods ended
September 30, 2000, reflect a reclassification of approximately
$4.3 million and approximately $4.7 million, respectively, of
goodwill amortization previously reflected on the "Depreciation and
amortization" line in "Operating expenses," but now reported in
"Other income and expense."
<PAGE>
Note G
------
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 Transitional Annual Report on Form 10-K for the period
ended March 31, 2000.
<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 Transitional Annual
Report on Form 10-K for the period ended March 31, 2000.
The Company is a subsidiary of National Grid USA, formerly New
England Electric System (NEES). NEES was acquired by National Grid
Group plc (National Grid) in March 2000.
Merger Agreement with Niagara Mohawk
-----------------------------------
On September 5, 2000, National Grid USA's parent company,
National Grid, and Niagara Mohawk Holdings, Inc., announced a
merger agreement under which National Grid will acquire Niagara
Mohawk (NiMo) through the formation of a new National Grid holding
company, New National Grid, and the exchange of NiMo shares for a
combination of American Depositary Shares (ADSs) and cash. The
terms of the agreement value the transaction at approximately $3.0
billion.
The transaction is expected to be completed by late 2001, and
is subject to a number of conditions, including regulatory and
other governmental approvals, the sale of NiMo's nuclear facilities
or other satisfactory arrangements being reached, and approval by
NiMo and National Grid shareholders.
Acquisition of Eastern Utilities Associates
-------------------------------------------
The acquisition of Eastern Utilities Associates (EUA) by
National Grid USA was completed on April 19, 2000 for $642 million,
or $31.459 per share. On May 1, 2000, Montaup Electric Company
(Montaup), formerly a subsidiary of EUA, was merged into the
Company.
<PAGE>
The acquisition of EUA was accounted for by the purchase
method, the application of which, including the recognition of
goodwill, has been pushed down and reflected on the financial
statements of the National Grid USA subsidiaries, including the
Company. Total goodwill amounted to $394 million, of which the
Company was allocated $7.8 million relative to the merger of
Montaup into the Company. This amount was determined pursuant to an
independent study conducted by a third party and is being amortized
over 20 years.
Combined with the amortization of goodwill allocated to the
Company from the acquisition of NEES by National Grid, the total
annual amortization of goodwill will amount to approximately $17.5
million. Disclosure regarding the acquisition of NEES by National
Grid is contained in the Company's Transitional Annual Report on
Form 10-K for the period ended March 31, 2000.
As a result of the acquisition, Montaup's balance sheet
accounts were incorporated into the financial statements of the
Company as of May 1, 2000. Listed below are the significant account
balances incorporated.
<PAGE>
<TABLE>
<CAPTION>
May 1, 2000 Balance
(In Thousands)
<S> <C>
Assets
Utility plant, at original cost $227,114
Accumulated provisions for depreciation $(92,093)
and amortization
Regulatory assets (current and long-term) $547,412
Liabilities
Other paid-in capital $135,444
Deferred federal and state income taxes $104,860
Accrued Yankee nuclear plant costs $ 46,030
Purchased power obligations
(current and long-term) $176,257
Other reserves and deferred credits $174,942
</TABLE>
The accompanying statements of operations do not include any
revenues or expenses related to Montaup prior to the subsidiary
companies' merger on May 1, 2000.
The following unaudited pro forma information presents the
results of operations of the Company assuming the merger of Montaup
into the Company occurred on October 1, 1998. This pro forma
information has been prepared for comparative purposes only and
includes an adjustment for additional amortization expense as a
result of goodwill. This information does not purport to be
indicative of the results of operations that actually would have
resulted had the merger occurred on October 1, 1998, or of future
results of the Company.
<PAGE>
<TABLE>
<CAPTION>
Supplemental Unaudited Pro Forma Information
Periods Ended September 30
(In Thousands)
<S> <C> <C> <C>
Three Months Six Months Twelve Months
------------ ---------- -------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Combined Operating
Revenues $175,390 $195,650 $344,977 $408,759 $712,100 $882,791
Net Earnings $ 16,460 $ 17,385 $ 30,129 $ 30,344 $ 61,721 $ 68,504
</TABLE>
Change of Fiscal Year
---------------------
National Grid USA and its subsidiaries, including the Company,
changed their fiscal year from a calendar year ending December 31,
to a fiscal year ending March 31. The Company made this change in
order to align its fiscal year with that of National Grid USA's
parent company, National Grid. The Company's first new full fiscal
year began on April 1, 2000 and will end on March 31, 2001. This
report reflects results of operations for the second quarter and
first six months of the Company's new fiscal year 2001.
Industry Restructuring
----------------------
For a full discussion of industry restructuring activities,
the Company's divestiture of its nonnuclear generating business
(the divestiture) and stranded cost recovery, see the "Industry
Restructuring" section in the Company's Transitional Annual Report
on Form 10-K for the period ended March 31, 2000.
<PAGE>
Regulatory Asset Recovery
-------------------------
Because electric utility rates have historically been based on
a utility's costs, electric utilities are subject to certain
accounting standards that are not applicable to other business
enterprises in general. The Company applies the provisions of
Statement of Financial Accounting Standards No. 71, Accounting for
the Effects of Certain Types of Regulation (FAS 71), which requires
regulated entities, in appropriate circumstances, to establish
regulatory assets or liabilities, and thereby defer the income
statement impact of certain charges or revenues because they are
expected to be collected or refunded through future customer
billings. In 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board concluded that a utility that had
received approval to recover stranded costs through regulated 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
divestiture. 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. 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. At September 30, 2000, this amounted to
approximately $1.7 billion, including $1.1 billion related to the
above-market costs of purchased power contracts, $0.3 billion
related to accrued Yankee nuclear plant costs, and $0.3 billion
related to other net CTC regulatory assets.
<PAGE>
Earnings
--------
Net income for both the quarter and six month period ended
September 30, 2000 decreased approximately $1 million compared with
the same periods in 1999. The decrease in earnings is a result of
goodwill amortization from the mergers with National Grid and EUA,
increased interest expense, and decreased mitigation incentives,
partially offset by increased income due to the May 1, 2000 merger
with Montaup, and increased earnings from nuclear operations.
Operating Revenue
-----------------
Operating revenue for the quarter and six month period
increased approximately $33 million and $50 million, respectively,
compared with the same periods in 1999. These increases are
primarily due to the merger with Montaup effective May 1, 2000, as
well as increased sales and rates related to obligations to new
customer load in Rhode Island, and a net increase in CTC revenues
due to fully reconciling true-up mechanisms which allow the Company
to adjust revenues proportionately with correlating expenses.
For the six month period, the increase also reflects increased
kilowatthour sales from partially owned nuclear generating
facilities, which experienced refueling outages during the quarter
ended June 30, 1999.
Operating Expenses
------------------
Operating expenses for the quarter and six month period
increased $23 million and $37 million, respectively, compared with
the same periods in 1999.
<PAGE>
Purchased power expense increased approximately $16 million
and $30 million for the quarter and six month period, respectively.
The increases are primarily attributed to the inclusion of
Montaup's purchased power costs effective May 1, 2000, increased
fuel prices, and an increase in standard offer purchases related to
obligations to supply new customer load in Rhode Island, partially
offset by a decrease in purchased power charges from the Yankee
Atomic nuclear power plant as a result of the completion of the
purchased power contract and final billing for June 2000.
Nuclear operation and maintenance expenses increased
approximately $1 million for the quarter, reflecting the merger of
Montaup's ownership percentage of Millstone 3 with the Company's
effective as of the merger date. These expenses decreased $6
million for the six month period as a result of reduced expenses at
the partially owned Millstone 3 and Seabrook 1 nuclear generating
facilities, which experienced refueling outages during the quarter
ended June 30, 1999.
For the six month period, other operating expenses decreased
approximately $1 million compared with the same period in 1999,
primarily due to reduced pension and postretirement healthcare
expenses, partially offset by the receipt of a transmission
wheeling refund that reduced expense in June 1999.
Interest Expense
----------------
The increase in interest expense for the quarter and six month
period is primarily due to increased interest rates on variable
rate long-term debt and increased short-term debt borrowings.
Utility Plant Expenditures and Financing
----------------------------------------
Cash expenditures for the Company for utility plant totaled
$22 million for the quarter ended September 30, 2000 and were
primarily transmission-related. The funds necessary for utility
plant expenditures during the period were primarily provided by
internally generated funds.
<PAGE>
Dividends payable at March 31, 2000, in the amount of $256
million, were paid on June 27, 2000.
On September 19, 2000, the Company repurchased 961 shares of
its 6 percent $100 par value preferred stock for $79,766.
Approximately $17,000 of this transaction was credited to retained
earnings.
At September 30, 2000, the Company had $100 million of short-
term debt outstanding to affiliates and an additional $64 million
in commercial paper mode. The Company has regulatory approval to
issue up to $375 million of short-term debt. On October 25, 2000,
the Company received the necessary regulatory approvals which will
allow $39 million of variable rate debt to remain outstanding
through 2015. This will result in classifying that portion of the
debt as long-term rather than short-term in subsequent reporting
periods. Proceeds from the increase in short-term debt were
utilized to pay Montaup's debt of approximately $91 million and
purchased power contract payable of approximately $60 million.
At September 30, 2000, the Company had lines of credit and
standby bond purchase facilities with banks totaling $460 million
which are available to provide liquidity support for $435 million
of the Company's short-term and long-term bonds in tax-exempt
commercial paper mode, and for other corporate purposes. There were
no borrowings under these lines of credit at September 30, 2000.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Information concerning settlement of 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 and 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 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, U. S. Supreme Court decision refusing to
review First Circuit decisions, 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.
On August 31, 1999, the parties to an agreement for joint
ownership, construction and operation of the Wyman 4 generation
unit, including the Company, made a demand for arbitration to
Central Maine Power Company (CMP) for payments alleged due under
the agreement upon CMP's sale of Wyman 4 to FPL Energy, Inc.
(FPL). Demand was also made to FPL as successor-in-interest to
CMP. The Company's portion of the claims under the agreement
could total approximately $7 million.
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 September 30, 2000 to be signed on its
behalf by the undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
s/John Cochrane
John G. Cochrane, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: November 10, 2000
