<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 2000.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
<CAPTION>
Three Months Twelve Months
------------ -------------
2000 1999 2000 1999
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue, principally from affiliates $156,190 $139,620 $ 580,298 $ 765,670
-------- -------- --------- ---------
Operating expenses:
Fuel for generation 3,586 2,214 14,665 70,113
Purchased electric energy:
Contract termination and nuclear
unit shutdown charges 59,604 48,156 199,757 167,244
Other 15,516 12,593 63,225 106,651
Other operation 14,650 16,060 66,076 97,925
Maintenance 4,824 11,402 20,512 25,487
Depreciation and amortization 25,104 20,993 84,152 102,138
Taxes, other than income taxes 5,803 5,759 20,253 24,394
Income taxes 11,195 8,647 36,722 59,765
-------- -------- --------- ---------
Total operating expenses 140,282 125,824 505,362 653,717
-------- -------- --------- ---------
Operating income 15,908 13,796 74,936 111,953
Other income:
Allowance for equity funds used during
construction (2) 541 434 1,762
Equity in income of nuclear power companies 868 967 3,187 4,152
Other income (expense), net 2,348 2,251 3,600 5,295
-------- -------- --------- ---------
Operating and other income 19,122 17,555 82,157 123,162
-------- -------- --------- ---------
Interest:
Interest on long-term debt 3,986 3,201 15,443 17,803
Other interest 1,241 206 2,651 4,884
Allowance for borrowed funds used during
construction (328) (106) (1,037) (644)
-------- -------- --------- ---------
Total interest 4,899 3,301 17,057 22,043
-------- -------- --------- ---------
Net income $ 14,223 $ 14,254 $ 65,100 $ 101,119
======== ======== ========= =========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 1,415 $217,839 $ 232,070 $ 462,968
Net income 14,223 14,254 65,100 101,119
Dividends declared on cumulative
preferred stock (23) (23) (94) (240)
Dividends declared on common stock - - (265,513) (130,610)
Premium on redemption of preferred stock - - 264 (264)
Repurchase of common stock - - - (200,903)
Purchase accounting adjustment - - (16,212) -
Acquisition adjustment 462 - 462 -
-------- -------- --------- ---------
Retained earnings at end of period $ 16,077 $232,070 $ 16,077 $ 232,070
======== ======== ========= =========
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>
<TABLE> NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
June 30, March 31,
ASSETS 2000 2000
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $1,564,640 $1,318,026
Less accumulated provisions for depreciation
and amortization 952,688 854,309
---------- ----------
611,952 463,717
Construction work in progress 30,370 35,730
---------- ----------
Net utility plant 642,322 499,447
---------- ----------
Total goodwill, net of amortization 337,148 333,771
Investments:
Nuclear power companies, at equity 56,304 45,966
Decommissioning trust funds 43,744 36,279
Nonutility property and other investments 14,954 7,490
---------- ----------
Total investments 115,002 89,735
---------- ----------
Current assets:
Cash and temporary cash investments (including $-0-
and $37,820,000 with affiliates) 6,593 226,921
Accounts receivable:
Affiliated companies 80,352 72,780
Others 64,786 48,139
Fuel, materials, and supplies, at average cost 10,475 10,345
Prepaid and other current assets 54,295 25,377
Regulatory asset purchased power obligations 103,789 74,988
---------- ----------
Total current assets 320,290 458,550
---------- ----------
Regulatory assets 1,665,700 1,210,800
Deferred charges and other assets 51,100 37,271
---------- ----------
$3,131,562 $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 722,592 582,983
Retained earnings 16,077 1,415
Unrealized gain on securities, net 18 -
---------- ----------
Total common equity 811,085 656,796
Cumulative preferred stock, par value $100 per share 1,567 1,567
Long-term debt 371,774 371,773
---------- ----------
Total capitalization 1,184,426 1,030,136
---------- ----------
Current liabilities:
Short-term debt (including $100,000,000 and $-0- to parent) 196,550 38,500
Accounts payable (including $22,071,000 and $26,993,000
to affiliates) 67,691 51,584
Accrued liabilities:
Taxes 3,801 2,394
Interest 2,255 1,900
Purchased power contract obligations 103,789 74,988
Other accrued expenses 7,283 10,879
Dividends payable 23 256,487
---------- ----------
Total current liabilities 381,392 436,732
---------- ----------
Deferred federal and state income taxes 291,902 176,351
Unamortized investment tax credits 18,438 16,733
Accrued Yankee nuclear plant costs 307,729 268,855
Purchased power obligations 690,464 611,802
Other reserves and deferred credits 257,211 88,965
---------- ----------
$3,131,562 $2,629,574
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Quarters Ended June 30
(Unaudited)
<CAPTION>
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Operating activities:
Net income $ 14,223 $ 14,254
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 22,933 21,745
Amortization of goodwill 4,337 -
Deferred income taxes and investment tax credits, net 11,224 (409)
Allowance for funds used during construction (326) (648)
Changes in assets and liabilities, net of
effects of merger:
Decrease (increase) in accounts receivable, net (2,378) 1,512
Decrease (increase) in fuel, materials, and supplies (26) (639)
Decrease (increase) in regulatory assets 63,711 61,096
Decrease (increase) in prepaid and other current assets (25,743) (34,656)
Increase (decrease) in accounts payable 864 2,325
Increase (decrease) in purchased power
contract obligations (68,794) (34,600)
Increase (decrease) in other current liabilities (4,400) (3,799)
Increase (decrease) in other non-current liabilities(13,852) (8,840)
Other, net (17,642) (19,314)
--------- --------
Net cash provided by (used in) operating activities $ (15,869) $ (1,973)
--------- --------
Investing activities:
Plant expenditures, excluding allowance
for funds used during construction $ (11,951) $(12,947)
Other investing activities (3,497) (16)
--------- --------
Net cash provided by (used in) investing activities $ (15,448) $(12,963)
--------- --------
Financing activities:
Dividends paid on common stock $(256,463) $ -
Dividends paid on preferred stock (23) (23)
Changes in short-term debt 158,050 -
Long-term debt - retirements (90,575) -
--------- --------
Net cash provided by (used in) financing activities $(189,011) $ (23)
--------- --------
Net increase (decrease) in cash and cash equivalents $(220,328) $(14,959)
Cash and cash equivalents at beginning of period 226,921 165,981
--------- --------
Cash and cash equivalents at end of period $ 6,593 $151,022
========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE> NEW ENGLAND POWER COMPANY
Statements of Income
Twelve Months Ended September 30
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue, principally from affiliates $ 586,167 $1,481,068
--------- ----------
Operating expenses:
Fuel for generation 11,528 309,795
Purchased electric energy 237,723 464,581
Other operation 75,126 189,582
Maintenance 30,272 75,560
Depreciation and amortization 98,149 112,035
Taxes, other than income taxes 19,452 61,347
Income taxes 37,829 86,621
--------- ----------
Total operating expenses 510,079 1,299,521
--------- ----------
Operating income 76,088 181,547
Other income:
Allowance for equity funds used during construction 2,095 114
Equity in income of nuclear power companies 3,609 5,466
Other income (expense), net 2,912 1,202
--------- ----------
Operating and other income 84,704 188,329
--------- ----------
Interest:
Interest on long-term debt 13,538 37,629
Other interest 831 12,454
Allowance for borrowed funds used during construction (497) (1,149)
--------- ----------
Total interest 13,872 48,934
--------- ----------
Net income $ 70,832 $ 139,395
========= ==========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $186,354 $ 408,559
Net income 70,832 139,395
Dividends declared on cumulative preferred stock (122) (1,698)
Dividends declared on common stock - (166,084)
Repurchase of common stock (7,085) (193,818)
-------- ---------
Retained earnings at end of period $249,979 $ 186,354
======== =========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
</TABLE>
<PAGE>
<TABLE> NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $1,313,115 $1,262,461
Less accumulated provisions for depreciation
and amortization 844,257 837,637
---------- ----------
468,858 424,824
Construction work in progress 16,982 33,289
---------- ----------
Net utility plant 485,840 458,113
---------- ----------
Investments:
Nuclear power companies, at equity 46,631 48,538
Non-utility property and other investments 39,836 39,583
---------- ----------
Total investments 86,467 88,121
---------- ----------
Current assets:
Cash, and temporary cash investments (including
$95,614,000 and $109,911,000 with affiliates) 242,155 179,413
Accounts receivable:
Affiliated companies 68,964 107,878
Others 45,005 32,573
Fuel, materials, and supplies, at average cost 9,778 9,220
Prepaid and other current assets 33,480 21,569
---------- ----------
Total current assets 399,382 350,653
---------- ----------
Regulatory assets 1,302,456 1,512,562
Deferred charges and other assets 4,973 5,339
---------- ----------
$2,279,118 $2,414,788
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
Authorized - 6,449,896 shares
Outstanding - 3,619,896 shares and 3,749,896 shares $ 72,398 $ 74,998
Premium on capital stock 48,624 50,371
Other paid-in capital 183,937 190,852
Retained earnings 249,979 204,603
Unrealized gain on securities, net 68 72
---------- ----------
Total common equity 555,006 520,896
Cumulative preferred stock, par value $100 per share 1,567 1,567
Long-term debt 371,770 371,765
---------- ----------
Total capitalization 928,343 894,228
---------- ----------
Current liabilities:
Short-term debt 38,500 -
Accounts payable (including $44,737,000 and $119,657,000
to affiliates) 81,796 162,360
Accrued liabilities:
Taxes 5,485 15,009
Interest 1,556 2,440
Other accrued expenses 26,134 20,086
Dividends payable 24 24
---------- ----------
Total current liabilities 153,495 199,919
---------- ----------
Deferred federal and state income taxes 162,818 165,115
Unamortized investment tax credits 21,317 30,870
Accrued Yankee nuclear plant costs 211,843 242,138
Purchased power obligations 740,046 832,668
Other reserves and deferred credits 61,256 49,850
---------- ----------
$2,279,118 $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
Nine Months Ended September 30
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 52,268 $ 104,331
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 87,040 87,375
Deferred income taxes and investment tax credits, net (2,649) (221,184)
Allowance for funds used during construction (1,935) (937)
Reimbursement to New England Energy Incorporated of loss - (120,900)
on sale of oil and gas properties
Buyout of purchased power contracts - (333,520)
Decrease (increase) in accounts receivable, net 26,482 84,894
Decrease (increase) in fuel, materials, and supplies (558) (10,789)
Decrease (increase) in prepaid and other current assets(11,911) 7,312
Increase (decrease) in accounts payable (80,564) (29,142)
Increase (decrease) in other current liabilities (4,360) 41,628
Other, net 20,100 (88,141)
-------- -----------
Net cash provided by (used in) operating activities$ 83,913 $ (479,073)
-------- -----------
Investing Activities:
Proceeds from sale of generating assets $ - $ 1,688,863
Plant expenditures, excluding allowance for
funds used during construction (41,325) (44,933)
Other investing activities (219) (445)
-------- -----------
Net cash provided by (used in) investing activities$(41,544)$ 1,643,485
-------- -----------
Financing Activities:
Capital contribution from parent $ - $ 34,881
Dividends paid on common stock - (166,084)
Dividends paid on preferred stock (71) (1,038)
Changes in short-term debt 38,500 (111,250)
Long-term debt - retirements - (328,000)
Repurchase of common shares (18,056) (417,960)
Redemption of preferred stock - (29,283)
-------- -----------
Net cash provided by (used in) financing activities$ 20,373 $(1,018,734)
-------- -----------
Net increase (decrease) in cash and cash equivalents $ 62,742 $ 145,678
Cash and cash equivalents at beginning of period 179,413 1,643
-------- -----------
Cash and cash equivalents at end of period $242,155 $ 147,321
======== ===========
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:
<TABLE>
<CAPTION>
Quarter Ended
June 30,
---------------
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $87,551 $91,809
======= =======
Net income $ 4,124 $ 5,129
======= =======
Company's equity in
net income $ 868 $ 967
======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
---- ----
(In Thousands)
<S> <C> <C>
Net plant $ 161,142 $ 167,317
Other assets 2,501,028 2,520,887
Liabilities and debt (2,411,650) (2,437,609)
----------- -----------
Net assets $ 250,520 $ 250,595
=========== ===========
Company's equity in net assets $ 56,304 $ 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>
Future
The Company's Estimated
Investment Billings to
as of 6/30/00 Date the Company
Unit % $(millions) Retired $(millions)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Atomic 34.5 5 Feb 1992 0
Connecticut Yankee 19.5 21 Dec 1996 77
Maine Yankee 24.0 18 Aug 1997 148
</TABLE>
<PAGE>
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 recovers its
costs, including a return, in accordance with settlement agreements
approved by the FERC in May 1999. In December 1996, Connecticut
Yankee filed a similar request with the FERC, to which several
parties intervened in opposition. 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 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 $16 million
to $20 million before taxes for the entire recovery period. On July
26, 2000, the FERC approved a settlement among Connecticut Yankee,
the Connecticut Department of Public Utility Control (CDPUC), the
Office of Consumer Counsel (OCC), and the Connecticut Municipal
Electric Cooperative. The settlement resolves all issues in the
case, except the OCC has reserved its right to appeal recovery of
any costs other than decommissioning. Reduced rates will become
effective for September 2000 power billings. There will be no
refunds of any amounts collected up to the effective date of the
settlement. Connecticut Yankee had reserved for potential refunds
and will be reversing that reserve. Prospectively, 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
continues to pursue litigation against the Department of Energy to
assume financial responsibility for storage of spent nuclear fuel
and has agreed to pass to ratepayers any recovery after litigation
expenses and taxes.
<PAGE>
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., 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 Stone & Webster and negotiated an
arrangement with Stone & Webster to continue work until June 2000.
On June 2, 2000, Stone & Webster filed for Chapter 11 bankruptcy
protection due to financial difficulties. Stone & Webster also
announced that it has negotiated the sale of substantially all of
its assets. On June 27, 2000, Maine Yankee entered into a second
interim agreement with Stone & Webster for an additional 90 days
effective July 1, 2000. On June 30, 2000, Federal Insurance Company
(Federal) filed a complaint in Stone & Webster's bankruptcy
proceeding which alleges that Maine Yankee improperly terminated
its contract with Stone & Webster. If the court were to make such
a finding, Federal would be excused from a $37 million performance
bond liability to Maine Yankee. At this time, the Company is unable
to determine the potential impact, if any, of these developments.
Yankee Atomic has repurchased the Company's common stock. On
August 10, 2000, the Company received proceeds of $1,257,000 from
the common stock repurchase. Yankee Atomic's final monthly power
bill to the Company was for the month of June 2000. However, Yankee
Atomic may issue further bills to the Company if necessary to meet
decommissioning costs. Such further bills are not anticipated at
this time.
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 June 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 $36 $97 $50 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 would 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 would be recovered through the
Company's CTC. The Company has recorded an accrued liability and an
offsetting regulatory asset of $83 million for its share of future
liabilities related to Vermont Yankee, including the purchased
power contract termination payment obligation and other plant
assets, 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 certain
qualification 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
(SEC), under the Public Utility Holding Company Act of 1935, and
the Vermont Public Service Board (VPSB). The Vermont Public Service
Department has filed briefs with the VPSB opposing the transaction.
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
<PAGE>
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 must be approved by the NRC, the FERC, the Department of
Justice/Federal Trade Commission, the SEC, and public utility
commissions in various states affected by the purchase transaction.
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.
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 (NHPUC)
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 is the majority owner 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)
<PAGE>
seeking to sell their interests. This approach would allow for an
auction of a majority interest. The NHPUC granted conditional
approval of the settlement on April 19, 2000. The New Hampshire
legislature approved the necessary legislation on May 31, 2000. On
June 23, 2000, PSNH made a compliance filing before the NHPUC.
Final resolution by the NHPUC approving the settlement compliance
filing is expected late this summer.
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 June 2000, the charges
assessed Norwood amount to approximately $20 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 the 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
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.
<PAGE>
Norwood had 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.
In the District Court action, on April 10, 2000, the Company
renewed its motion to dismiss Norwood's remaining claim on the
ground that the Company is not a proper party to a claim under
Section 7 of the Clayton Act. The Company also joined in a motion
by its co-defendants to dismiss the claim on collateral estoppel
and lack of standing grounds. 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 and the District Court took the motions under
advisement.
In the Superior Court collection action, Norwood moved to
dismiss the Company's complaint, which the Superior Court denied on
April 30, 1999. Norwood then 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. At the same time, the Company filed a
motion for summary judgement on its claim. The Superior Court has
scheduled a hearing for September 13, 2000.
Note D - Acquisition of EUA
---------------------------
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 $388 million, of which the
Company was allocated $7.7 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 New England Electric System (NEES)
by The National Grid Group plc (National Grid), the total annual
amortization of goodwill expense will amount to approximately $17.1
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>
May 1, 2000 Balance
(In Thousands)
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
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 July 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 July 1, 1998, or of future
results of the Company.
<PAGE>
<TABLE>
<CAPTION>
Supplemental Unaudited Pro Forma Information
Periods Ended June 30
(In Thousands)
Three Months Twelve Months
------------ -------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Combined Operating
Revenues $169,587 $213,109 $732,361 $1,088,371
Net Earnings $ 10,853 $ 13,057 $ 60,123 $ 88,515
</TABLE>
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 Transitional Annual Report 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 The National
Grid Group plc (National Grid) in March 2000.
Acquisition of EUA
------------------
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 $388 million, of which the
Company was allocated $7.7 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 NEES by National Grid, the total
annual amortization of goodwill expense will amount to
approximately $17.1 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.
<PAGE>
The following unaudited pro forma information presents the
results of operations of the Company assuming the merger of Montaup
into the Company occurred on July 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 July 1, 1998, or of future
results of the Company.
<TABLE>
<CAPTION>
Supplemental Unaudited Pro Forma Information
Periods Ended June 30
(In Thousands)
Three Months Twelve Months
------------ -------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Combined Operating
Revenues $169,587 $213,109 $732,361 $1,088,371
Net Earnings $ 10,853 $ 13,057 $ 60,123 $ 88,515
</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 first quarter of the
Company's new fiscal year 2001.
<PAGE>
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 of the Company's Form 10-K for the period
ended March 31, 2000 and the Company's 2000 Transitional Annual
Report.
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
<PAGE>
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 June 30, 2000, this amounted to approximately
$1.8 billion, including $1.2 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.
Earnings
--------
Net income for the quarter ended June 30, 2000 remained flat
compared with the same period in 1999. Although earnings did not
change, they were affected by increased income due to the May 1,
2000 merger with Montaup, and increased earnings from nuclear
operations, substantially offset by goodwill amortization resulting
from the mergers with National Grid and EUA.
Operating Revenue
-----------------
Operating revenue for the quarter ended June 30, 2000
increased approximately $17 million compared with the same period
in 1999. The increase in revenue is primarily attributable to
increased kilowatthour (kWh) sales from the partially owned
Millstone 3 and Seabrook 1 nuclear generating facilities, which
experienced refueling outages during the quarter ended June 30,
1999, and additional kWh sales resulting from the merger with
Montaup effective May 1, 2000. The increase is also due to
increased standard offer rates effective January 1, 2000, increased
kWh sales related to obligations to new customer load in Rhode
Island, and the inclusion of CTC and other Montaup revenues since
the merger date.
<PAGE>
Partially offsetting these increases is a net decrease in CTC
revenue due to fully reconciling true-up mechanisms which allow
utilities to adjust revenues proportionately with correlating
expenses.
Operating Expenses
------------------
Operating expenses for the quarter ended June 30, 2000
increased $14 million compared with the same period in 1999.
Purchased power expense increased approximately $14 million,
primarily reflecting increased costs due to the merger with
Montaup, as well as an increase in standard offer purchases related
to obligations to supply new customer load in Rhode Island.
Nuclear operation and maintenance expenses decreased
approximately $7 million 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. Other operating expenses decreased 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.
Depreciation and amortization expenses in the quarter ended
June 30, 2000 increased $4 million compared with the same period in
1999. This increase is due primarily to amortization of goodwill
associated with National Grid USA's merger with National Grid, and
the merger of Montaup into the Company.
Interest Expense
----------------
The increase in interest expense for the quarter ended June
30, 2000 is primarily due to increased interest rates on variable
rate long-term debt and increased short-term debt borrowings.
<PAGE>
Utility Plant Expenditures and Financing
----------------------------------------
Cash expenditures for the Company for utility plant totaled
$12 million for the quarter ended June 30, 2000 and were primarily
transmission-related. The funds necessary for utility plant
expenditures during the period were primarily provided by
internally generated funds.
Dividends payable at March 31, 2000, in the amount of $256
million, were paid on June 27, 2000.
At June 30, 2000, the Company had $100 million of short-term
debt outstanding to affiliates and an additional $97 million in
commercial paper mode. The Company has regulatory approval to issue
up to $375 million of short-term debt. The Company plans to seek
the necessary regulatory approvals in 2000 which would allow $39
million of variable rate debt to remain outstanding through 2015.
This would result in classifying that portion of the debt as
long-term rather than short-term. 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 June 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 $468 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 June 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, 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 nearly $7 million.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On April 19, 2000 the Annual Meeting of Shareholders was
held.
By unanimous vote of the 3,619,896 shares present of
3,635,568 total shares having general voting rights:
<PAGE>
The number of directors for the ensuing year was fixed at
seven.
The following were elected as directors *:
Cynthia A. Arcate
L. Joseph Callan
Peter G. Flynn
Michael E. Jesanis
Cheryl A. LaFleur
Richard P. Sergel
Philip R. Sharp
John G. Cochrane was elected as Treasurer and Gregory A.
Hale was elected as Clerk.
PricewaterhouseCoopers was selected as Auditor for the year
2000.
The By-laws of the Company were amended to allow the board
of directors to fix the numbers of directors between shareholder
meetings.
* Subsequent to the Annual Shareholder Meeting, Ms. Arcate
resigned as a director. The Board fixed the number of directors
at eight until the next shareholder meeting and elected Robert G.
Powderly and Terry L. Schwennesen directors of the Company
effective June 1, 2000.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
The Company is filing Financial Data Schedules.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report on Form 10-Q
for the quarter ended June 30, 2000 to be signed on its behalf by
the undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
S/John G. Cochrane
John G. Cochrane, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: August 11, 2000
