FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-43508
NORTH ATLANTIC ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 06-1339460
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 ELM STREET, MANCHESTER, NEW HAMPSHIRE 03105
(Address of principal executive offices) (Zip Code)
(603) 669-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1996
Common Shares, $1.00 par value 1,000 shares
NORTH ATLANTIC ENERGY CORPORATION
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 1996 and
December 31, 1995 2
Statements of Income - Three Months and Six
Months Ended June 30, 1996 and 1995 4
Statements of Cash Flows - Six Months
Ended June 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 774,785 $ 771,794
Less: Accumulated provision for depreciation......... 109,981 99,772
------------- -------------
664,804 672,022
Construction work in progress........................... 5,146 7,616
Nuclear fuel, net....................................... 23,411 27,482
------------- -------------
Total net utility plant............................. 693,361 707,120
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 16,601 15,312
Other, at cost.......................................... 222 222
------------- -------------
16,823 15,534
------------- -------------
Current Assets:
Cash.................................................... 13,424 8,313
Special deposits........................................ 2,617 71
Notes receivable from affiliated companies.............. - 2,500
Receivables from affiliated companies................... 13,265 18,692
Materials and supplies, at average cost................. 12,934 12,269
Prepayments and other................................... 5,258 4,157
------------- -------------
47,498 46,002
------------- -------------
Deferred Charges:
Regulatory assets:
Deferred costs--Seabrook............................... 175,670 162,430
Income taxes, net...................................... 46,683 43,231
Recoverable energy costs............................... 2,250 2,349
Other regulatory assets................................ 28,643 31,886
Unamortized debt expense................................ 5,141 5,619
Other................................................... 239 478
------------- -------------
258,626 245,993
------------- -------------
Total Assets........................................ $ 1,016,308 $ 1,014,649
============= =============
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock--$1 par value. Authorized
and outstanding 1,000 shares.......................... $ 1 $ 1
Capital surplus, paid in................................ 160,999 160,999
Retained earnings....................................... 63,223 59,677
------------- -------------
Total common stockholder's equity.............. 224,223 220,677
Long-term debt.......................................... 520,000 540,000
------------- -------------
Total capitalization........................... 744,223 760,677
------------- -------------
Current Liabilities:
Notes payable to affiliated company..................... 6,500 8,000
Long-term debt--current portion......................... 20,000 20,000
Accounts payable........................................ 5,178 6,135
Accounts payable to affiliated companies................ 128 143
Accrued interest........................................ 3,169 3,452
Accrued taxes........................................... 5,883 1,346
Other................................................... 303 270
------------- -------------
41,161 39,346
------------- -------------
Deferred Credits:
Accumulated deferred income taxes....................... 195,433 179,135
Deferred obligation to affiliated company............... 33,284 33,284
Other................................................... 2,207 2,207
------------- -------------
230,924 214,626
------------- -------------
Commitments and Contingencies (Note 5)<F5>
------------- -------------
Total Capitalization and Liabilities........... $ 1,016,308 $ 1,014,649
============= =============
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues................................. $ 39,107 $ 36,362 $ 75,770 $ 70,346
---------- ---------- ---------- ----------
Operating Expenses:
Operation --
Fuel.......................................... 3,870 2,858 7,196 6,127
Other......................................... 7,628 8,232 15,477 15,938
Maintenance...................................... 1,828 1,687 3,477 3,325
Depreciation..................................... 5,842 5,684 11,913 11,589
Federal and state income taxes................... 3,118 2,536 5,781 4,680
Taxes other than income taxes.................... 3,035 2,613 6,065 4,961
---------- ---------- ---------- ----------
Total operating expenses................... 25,321 23,610 49,909 46,620
---------- ---------- ---------- ----------
Operating Income................................... 13,786 12,752 25,861 23,726
---------- ---------- ---------- ----------
Other Income:
Deferred Seabrook return--other funds............ 1,925 1,411 4,502 4,791
Other, net....................................... 238 535 340 865
Income taxes..................................... 804 1,467 1,559 2,348
---------- ---------- ---------- ----------
Other income, net.......................... 2,967 3,413 6,401 8,004
---------- ---------- ---------- ----------
Income before interest charges............. 16,753 16,165 32,262 31,730
---------- ---------- ---------- ----------
Interest Charges:
Interest on long-term debt....................... 13,256 15,855 26,663 31,860
Other interest................................... (122) (138) (209) (237)
Deferred Seabrook return--borrowed funds......... (3,737) (2,832) (8,738) (10,674)
---------- ---------- ---------- ----------
Interest charges, net...................... 9,397 12,885 17,716 20,949
---------- ---------- ---------- ----------
Net Income......................................... $ 7,356 $ 3,280 $ 14,546 $ 10,781
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities:
Net Income................................................ $ 14,546 $ 10,781
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 11,913 11,589
Deferred income taxes and investment tax credits, net... 12,846 16,087
Deferred return - Seabrook.............................. (13,240) (15,465)
Other sources of cash................................... 10,067 5,307
Other uses of cash...................................... (412) (1,022)
Changes in working capital:
Receivables............................................. 5,427 1,345
Materials and supplies.................................. (665) (823)
Accounts payable........................................ (972) (3,733)
Accrued taxes........................................... 4,537 1,771
Other working capital (excludes cash)................... (3,897) (4,636)
----------- -----------
Net cash flows from operating activities.................... 40,150 21,201
----------- -----------
Financing Activities:
Net decrease in short-term debt........................... (1,500) -
Reacquisitions and retirements of long-term debt.......... (20,000) (20,000)
Cash dividends on common stock............................ (11,000) (12,000)
----------- -----------
Net cash flows used for financing activities................ (32,500) (32,000)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (1,813) (1,909)
Nuclear fuel............................................ (1,423) (2,966)
----------- -----------
Net cash flows used for investments in plant.............. (3,236) (4,875)
NU System Money Pool...................................... 2,500 15,000
Investments in nuclear decommissioning trusts............. (1,803) (1,834)
----------- -----------
Net cash flows (used for) from investments.................. (2,539) 8,291
----------- -----------
Net Increase (Decrease) In Cash For The Period.............. 5,111 (2,508)
Cash - beginning of period.................................. 8,313 2,508
----------- -----------
Cash - end of period........................................ $ 13,424 $ -
=========== ===========
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Presentation
The accompanying unaudited financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) in this Form 10-Q, the
Annual Report of North Atlantic Energy Corporation (the company or
NAEC) on Form 10-K for the year ended December 31, 1995 (1995 Form
10-K), the company's First Quarter 1996 Form 10-Q and the company's
Form 8-K dated January 31, 1996. In the opinion of the company, the
accompanying financial statements contain all adjustments necessary to
present fairly the financial position as of June 30, 1996, the results
of operations for the three-month and six-month periods ended June 30,
1996 and 1995, and the statements of cash flows for the six-month
periods ended June 30, 1996 and 1995. All adjustments are of a
normal, recurring, nature. The results of operations for the three-
month and six-month periods ended June 30, 1996 and 1995 are not
necessarily indicative of the results expected for a full year.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
Northeast Utilities (NU) is the parent company of the Northeast
Utilities system (the system). The system furnishes retail electric
service in Connecticut, New Hampshire, and western Massachusetts
through four wholly owned subsidiaries, The Connecticut Light and
Power Company (CL&P), Public Service Company of New Hampshire (PSNH),
Western Massachusetts Electric Company (WMECO), and Holyoke Water
Power Company (HWP). NAEC, a wholly owned subsidiary, sells all of
its capacity and output of the Seabrook nuclear power plant to PSNH.
In addition to its retail electric service, the system furnishes firm
and other wholesale electric services to various municipalities and
other utilities. The system serves about 30 percent of New England's
electric needs and is one of the 20 largest electric utility systems
in the country as measured by revenues.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
B. Special Deposits
Special deposits represent funds set aside to meet certain pre-funding
requirements established by the joint owners (including NAEC) of the
Seabrook project. The funds are used currently to meet the operation
and maintenance requirements of the Seabrook project.
2. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which established accounting standards for
evaluating and recording asset impairment. The company adopted SFAS 121 as
of January 1, 1996. SFAS 121 requires the evaluation of long-lived assets
for impairment when certain events occur or when conditions exist that
indicate the carrying amounts of assets may not be recoverable.
Based on the current regulatory environment in the system's service areas,
as of June 30, 1996, SFAS 121 did not have a material impact on the
company's financial position or results of operations. This conclusion may
change in the future as competitive factors influence wholesale and retail
pricing in the electric utility industry or if the cost-of-service based
regulatory structure were to change. For further information, see NAEC's
1995 Form 10-K and NAEC's First Quarter 1996 Form 10-Q.
3. NUCLEAR DECOMMISSIONING
For information on nuclear decommissioning, see the company's First Quarter
1996 Form 10-Q and the company's 1995 Form 10-K.
4. DERIVATIVE FINANCIAL INSTRUMENTS
NAEC uses interest-rate swap agreements with financial institutions to
hedge against interest-rate risk associated with its $225 million variable-
rate bank note. The interest-rate swaps reduce exposure associated with
rising interest rates, and effectively fix the interest rate for this
borrowing arrangement. Under the swap agreement, NAEC exchanges quarterly
payments based on a differential between a fixed contractual interest rate
and the three-month LIBOR rate at a given time. As of June 30, 1996, NAEC
had outstanding agreements with a total notional value of approximately
$225 million and a positive mark-to-market position of approximately $4.2
million.
These swap agreements have been made with various financial institutions,
each of which is rated "BBB+" or better by Standard & Poor's rating group.
NAEC is exposed to credit risk on its interest-rate swaps if the
counterparties fail to perform their obligations. However, NAEC
anticipates that the counterparties will be able to fully satisfy their
obligations under the contracts. For further information on derivative
financial instruments see the MD&A in this Form 10-Q, NAEC's First Quarter
1996 Form 10-Q, and NAEC's 1995 Form 10-K.
5. COMMITMENTS AND CONTINGENCIES
A. Seabrook 1 Construction Program: For information regarding NAEC's
construction program, see NAEC's 1995 Form 10-K.
B. Nuclear Performance: For information regarding the company's nuclear
performance, see NAEC's 1995 Form 10-K and NAEC's Form 8-K dated
January 31, 1996.
C. Environmental Matters: For information regarding environmental
matters, see NAEC's 1995 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see NAEC's 1995 Form 10-K.
NORTH ATLANTIC ENERGY CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section contains management's assessment of North Atlantic Energy
Corporation's (NAEC or the company) financial condition and the principal
factors having an impact on the results of operations. The company is a wholly-
owned subsidiary of Northeast Utilities (NU). This discussion should be read in
conjunction with NAEC's financial statements and footnotes in this Form 10-Q,
the 1995 Form 10-K, the First Quarter 1996 Form 10-Q, and the Form
8-K dated January 31, 1996.
FINANCIAL CONDITION
Overview
The company's cost of service includes all of its prudently incurred Seabrook 1-
related costs, including operation and maintenance expense, fuel expense,
property tax expense, depreciation expense, certain overhead and other costs,
and a phased-in return on its Seabrook 1 investment. The Contract established
the initial recoverable investment in Seabrook 1 at $700 million (Initial
Investment), plus any capital additions, net of depreciation. PSNH is
unconditionally obligated to pay the company's cost of service during the period
whether or not Seabrook 1 is operating and without regard to the cost of
alternative sources of power. In addition, PSNH will be obligated to pay
decommissioning and project cancellation costs after the termination of the
operating license.
Net income was approximately $7 million for the three months ended June 30,
1996, an increase of approximately $4 million from the same period in 1995. Net
Income was approximately $15 million for the six months ended June 30, 1995, an
increase of approximately $4 million from the same period in 1995. The increases
in net income for the three-and six-month periods were primarily due to the 1995
one-time adjustment to the deferred Seabrook 1 return balance and lower interest
on long-term debt.
Nuclear Performance
Seabrook 1 operated at a capacity factor of 93% through June 1996, as compared
to 94% for the same period in 1995.
Rate Matters
As of June 30, 1996, NAEC has included in rates 100% of its Seabrook 1 Initial
Investment of $700 million. An additional amount of deferred Seabrook 1 return
of approximately $51 million is recorded as utility plant. The deferred amounts
associated with the Seabrook 1 phase-in will be recovered under the Contract
with PSNH over the period December 1997 through May 2001.
Liquidity And Capital Resources
Cash provided from operations increased approximately $19 million in the first
six months of 1996, from 1995, primarily due to increased cash return associated
with the phase-in of additional Seabrook plant and higher funds from working
capital. Cash used for investments, increased approximately $11 million in the
first six months of 1996, from 1995, primarily due to lower borrowings under the
NU system money pool.
All NAEC securities remain on S&P's CreditWatch. These rating actions could
adversely affect the future availability and cost of funds.
NAEC has entered into interest-rate swap agreements to reduce interest-rate risk
associated with its $225 million variable-rate bank note. These swap agreements
are not used for trading purposes. The differential paid or received as interest
rates change is recognized in income when realized. As of June 30, 1996, NAEC
had outstanding swap agreements with a total notional value of approximately
$225 million. The settlement amount associated with the swap agreements
increased interest expense by approximately $.6 million for NAEC during the
first six months of 1996. NAEC's interest-rate swap agreements effectively fix
its variable-rate bank note at 7.05 percent.
RESULTS OF OPERATIONS
Comparison of the Second Quarter of 1996 with the Second Quarter of 1995
Operating revenues represent amounts billed to PSNH under the terms of the
Contract and billings to PSNH for decommissioning expense. Operating revenues
increased approximately $3 million primarily due to the increased return
associated with the phase-in of additional Seabrook 1 plant in May 1996.
Deferred Seabrook return-other and borrowed funds increased approximately $1
million primarily due to a one-time adjustment in June 1995 to correct the
deferred Seabrook return balance partially offset by the additional Seabrook
investment phased into rates in May 1996.
Federal and state income taxes increased approximately $1 million primarily due
to higher book taxable income.
Interest expense decreased approximately $3 million primarily due to the 1995
refinancing of its $205 million 15.23%-rate note.
Comparison of the First Six Months of 1996 with the First Six Months of 1995
Operating revenues increased approximately $5 million primarily due to the
increased return associated with the phase-in of additional Seabrook 1 plant in
May 1995 and May 1996.
Deferred Seabrook 1 return-other and borrowed funds decreased approximately $2
million primarily due to the additional Seabrook investment phased into rates in
May 1995 and May 1996, partially offset by a one-time adjustment in June 1995 to
correct the deferred Seabrook return balance.
Federal and state income taxes increased approximately $2 million primarily due
to higher book taxable income.
Interest expense decreased approximately $5 million primarily due to the 1995
refinancing of its $205 million 15.23%-rate note.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. On May 13, 1996, the New Hampshire Supreme Court (Court) ruled in PSNH's
appeal of the NHPUC's June 1995 decision that state law does not require
electric utility franchises in New Hampshire to be exclusive. The Court ruled
that the NHPUC can alter existing exclusive franchise orders if it is determined
to be in the public good to do so. The Court expressly indicated, however, that
its decision does not discuss whether such an alteration of the franchise would
require compensation to the utility. The decision arose from a NHPUC proceeding
initiated to address Freedom Energy Company, LLC's (Freedom) petition seeking
permission from the NHPUC to operate as an electric utility in New Hampshire.
The remaining issues related to Freedom's petition are still pending at the
NHPUC.
For additional information on this proceeding, see "Item 1. Business -
Rates - New Hampshire Retail Rates - Electric Industry Restructuring in New
Hampshire" in NAEC's 1995 Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of NAEC held on June 10, 1996,
stockholders voted to fix the number of directors for the ensuing year at seven.
The vote fixing the number of directors at seven was 1,000 shares in favor,
representing 100 percent of the issued and outstanding shares of common stock of
NAEC.
At the Annual Meeting, the following seven directors were elected, each by a
vote of 1,000 shares in favor, to serve on the Board of Directors for the
ensuing year: Robert E. Busch, Ted C. Feigenbaum, Bernard M. Fox, William T.
Frain, Jr., Cheryl W. Grise, John B. Keane and Hugh C. MacKenzie.
ITEM 5. OTHER INFORMATION
1. On July 23, 1996, the United States Court of Appeals for the District of
Columbia held that the United States Department of Energy (DOE) is obligated
under the Nuclear Waste Policy Act (NWPA) of 1982 to start disposing spent
nuclear fuel (SNF) no later than January 31, 1998. This decision followed a
request by numerous utilities, including certain NU subsidiaries, and state
utility commissions to review the DOE's final interpretation declaring that it
had no obligation under the NWPA or its contracts with utilities to accept SNF
absent an operational repository. The decision of the DOE was vacated, and the
case was remanded for further proceedings consistent with the appellate court's
opinion.
For additional information on this proceeding, see "Item 1. Business -
Electric Operations - Nuclear Generation - High-Level Radioactive Waste" in
NAEC's 1995 Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. NAEC did not file any Form 8-Ks during this reporting period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTH ATLANTIC ENERGY CORPORATION
Registrant
Date August 13, 1996 By: /s/ Bernard M. Fox
Bernard M. Fox
Chairman, Chief Executive
Officer and Director
Date August 13, 1996 By: /s/ John J. Roman
John J. Roman
Vice President and
Controller
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000880416
<NAME>NORTH ATLANTIC ENERGY CORPORATION
<MULTIPLIER>1,000
<S> <C>
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<PERIOD-END> JUN-30-1996
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