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 September 30, 1997
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 October 31, 1997
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 - September 30, 1997 and
December 31, 1996 2
Statements of Income - Three Months and
Nine Months Ended September 30, 1997 and 1996 4
Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 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 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 781,432 $ 775,794
Less: Accumulated provision for depreciation......... 142,148 124,530
------------- -------------
639,284 651,264
Construction work in progress........................... 8,725 8,887
Nuclear fuel, net....................................... 29,097 31,765
------------- -------------
Total net utility plant............................. 677,106 691,916
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 24,329 19,744
------------- -------------
24,329 19,744
------------- -------------
Current Assets:
Cash.................................................... - 299
Special deposits........................................ 669 7,039
Receivables from affiliated companies................... 15,562 16,422
Taxes receivable........................................ 6,762 -
Materials and supplies, at average cost................. 13,861 13,093
Prepayments and other................................... 2,908 4,302
------------- -------------
39,762 41,155
------------- -------------
Deferred Charges:
Regulatory assets:
Deferred costs--Seabrook............................... 200,438 185,078
Income taxes, net...................................... 50,212 47,185
Recoverable energy costs............................... 2,063 2,217
Other regulatory assets................................ 20,562 25,401
Unamortized debt expense................................ 3,941 4,692
------------- -------------
277,216 264,573
------------- -------------
Total Assets........................................ $ 1,018,413 $ 1,017,388
============= =============
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
------------- -------------
(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....................................... 51,033 53,749
------------- -------------
Total common stockholder's equity.............. 212,033 214,749
Long-term debt.......................................... 475,000 495,000
------------- -------------
Total capitalization........................... 687,033 709,749
------------- -------------
Current Liabilities:
Notes payable to affiliated company..................... 17,500 2,500
Long-term debt--current portion......................... 20,000 20,000
Accounts payable........................................ 5,566 20,714
Accounts payable to affiliated companies................ 5,496 5,073
Accrued interest........................................ 9,330 2,888
Accrued taxes........................................... 315 3,486
Other................................................... 220 271
------------- -------------
58,427 54,932
------------- -------------
Deferred Credits:
Accumulated deferred income taxes....................... 216,844 196,650
Deferred obligation to affiliated company............... 33,284 33,284
Other................................................... 22,825 22,773
------------- -------------
272,953 252,707
------------- -------------
Commitments and Contingencies (Note 3)
------------- -------------
Total Capitalization and Liabilities........... $ 1,018,413 $ 1,017,388
============= =============
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues................................. $ 45,943 $ 41,565 $ 138,047 $ 117,335
---------- ---------- ---------- ----------
Operating Expenses:
Operation --
Fuel.......................................... 4,984 3,912 10,509 11,108
Other......................................... 9,145 8,516 27,879 23,993
Maintenance...................................... 5,029 2,172 18,685 5,649
Depreciation..................................... 6,309 6,020 18,822 17,933
Federal and state income taxes................... 3,276 3,292 9,793 9,073
Taxes other than income taxes.................... 3,076 3,014 9,646 9,079
---------- ---------- ---------- ----------
Total operating expenses................... 31,819 26,926 95,334 76,835
---------- ---------- ---------- ----------
Operating Income................................... 14,124 14,639 42,713 40,500
---------- ---------- ---------- ----------
Other Income:
Deferred Seabrook return--other funds............ 1,812 1,599 5,365 6,101
Other, net....................................... (65) 407 71 747
Income taxes..................................... 1,684 2,921 2,554 4,480
---------- ---------- ---------- ----------
Other income, net.......................... 3,431 4,927 7,990 11,328
---------- ---------- ---------- ----------
Income before interest charges............. 17,555 19,566 50,703 51,828
---------- ---------- ---------- ----------
Interest Charges:
Interest on long-term debt....................... 12,449 12,954 37,852 39,617
Other interest................................... 380 (201) 562 (410)
Deferred Seabrook return--borrowed funds......... (3,360) (3,105) (9,995) (11,843)
---------- ---------- ---------- ----------
Interest charges, net...................... 9,469 9,648 28,419 27,364
---------- ---------- ---------- ----------
Net Income......................................... $ 8,086 $ 9,918 $ 22,284 $ 24,464
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities:
Net Income................................................ $ 22,284 $ 24,464
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 18,823 17,933
Deferred income taxes and investment tax credits, net... 17,209 9,969
Deferred return - Seabrook.............................. (15,360) (17,944)
Sale of Seabrook 2 steam generator...................... - 20,870
Recoverable energy costs, net of amortization........... 154 99
Other sources of cash................................... 14,645 15,037
Other uses of cash...................................... (638) (425)
Changes in working capital:
Receivables............................................. 860 4,832
Materials and supplies.................................. (768) (1,005)
Accounts payable........................................ (14,725) 6,652
Accrued taxes........................................... (3,171) 2,851
Other working capital (excludes cash)................... 7,393 3,727
----------- -----------
Net cash flows from operating activities.................... 46,706 87,060
----------- -----------
Financing Activities:
Net increase (decrease) in short-term debt................ 15,000 (8,000)
Reacquisitions and retirements of long-term debt.......... (20,000) (20,000)
Cash dividends on common stock............................ (25,000) (17,000)
----------- -----------
Net cash flows used for financing activities................ (30,000) (45,000)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (7,409) (3,025)
Nuclear fuel............................................ (5,607) (4,153)
----------- -----------
Net cash flows used for investments in plant.............. (13,016) (7,178)
NU System Money Pool...................................... - (26,250)
Investments in nuclear decommissioning trusts............. (3,989) (2,810)
----------- -----------
Net cash flows used for investments......................... (17,005) (36,238)
----------- -----------
Net (Decrease) Increase In Cash For The Period.............. (299) 5,822
Cash - beginning of period.................................. 299 8,313
----------- -----------
Cash - end of period........................................ $ - $ 14,135
=========== ===========
</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, 1996 (1996 Form
10-K), the company's Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997, and the company's Form 8-Ks dated August 19, 1997,
September 2, 1997, and October 13, 1997. In the opinion of the
company, the accompanying financial statements contain all adjustments
necessary to present fairly the financial position as of September 30,
1997, the results of operations for the three-month and nine-month
periods ended September 30, 1997 and 1996, and the statements of cash
flows for the nine-month periods ended September 30, 1997 and 1996.
All adjustments are of a normal, recurring, nature. The results of
operations for the three-month and nine-month periods ended September
30, 1997 and 1996 are not necessarily indicative of the results
expected for a full year.
Northeast Utilities (NU) is the parent company of the Northeast
Utilities system (the system). The system furnishes franchised 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. NAEC, a wholly owned subsidiary, sells
all of its entitlement to the capacity and output of the Seabrook
nuclear power plant to PSNH. In addition to its franchised retail
electric service, the system furnishes firm and other wholesale
electric services to various municipalities and other utilities and,
on a pilot basis pursuant to state regulatory experiments, provides
off-system retail electric service. 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.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
B. New Accounting Standards
For information regarding the adoption of new accounting
standards, see NAEC's Form 10-Q for the quarters ended June 30, 1997
and March 31, 1997, and NAEC's 1996 Form 10-K.
C. Regulatory Accounting and Assets
For information regarding regulatory accounting and assets, see the
MD&A in this Form 10-Q, NAEC's Form 10-Q for the quarters ended June
30, 1997 and March 31, 1997, and NAEC's 1996 Form 10-K.
2. INTEREST RATE MANAGEMENT
As of September 30, 1997, NAEC had outstanding interest-rate management
agreements with a total notional value of approximately $200 million and a
positive mark-to-market position of approximately $800 thousand.
The interest-rate management 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 interest-rate
management instruments if the counterparties fail to perform their
obligations. However, management anticipates that the counterparties will
be able to fully satisfy their obligations under the agreements.
For further information on interest-rate management instruments, see the
MD&A in this Form 10-Q, NAEC's Form 10-Q for the quarters ended June 30,
1997 and March 31, 1997 and NAEC's 1996 Form 10-K.
3. COMMITMENTS AND CONTINGENCIES
A. Environmental Matters
For information regarding environmental matters, see NAEC's Form 10-Q
for the quarter ended March 31, 1997 and NAEC's 1996 Form 10-K.
B. Nuclear Insurance Contingencies
For information regarding nuclear insurance contingencies, see NAEC's
1996 Form 10-K.
C. Seabrook 1 Construction Program
For information regarding NAEC's construction program, see NAEC's 1996
Form 10-K.
4. NUCLEAR PERFORMANCE
For information regarding nuclear performance, see NAEC's 1996 Form 10-K.
5. NEW HAMPSHIRE RESTRUCTURING
On May 13, 1997, the United States District Court for New Hampshire (Court)
appointed a mediator to the pending case involving PSNH's and affiliates'
challenge to the New Hampshire Public Utilities Commission (NHPUC) Final
Plan on restructuring the electric industry issued on February 28, 1997.
All court proceedings in the case were suspended during the mediation
process. On September 2, 1997, PSNH announced that the mediation involving
its court challenge to the February 28, 1997 restructuring orders of the
NHPUC had ended without a resolution. The Court has suspended the
procedural schedule associated with this court proceeding pending the
resolution of appeals of certain preliminary rulings by the United States
Circuit Court of Appeals for the First Circuit. The temporary restraining
order issued by the Court in March 1997 will remain in effect until further
order of either court. The NHPUC also reopened its proceeding to
reconsider certain matters in its restructuring orders.
For further information on the restructuring of the electric utility
industry in the State of New Hampshire and on the PSNH rate case
proceeding, see the MD&A in this Form 10-Q, NAEC's Form 8-Ks dated October
13, 1997 and September 2, 1997, NAEC's Form 10-Q for the quarters ended
June 30, 1997 and March 31, 1997 and NAEC's 1996 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 the Company's financial statements and footnotes in this Form
10-Q, the First and Second Quarter 1997 Form 10-Qs, the 1996 Form 10-K and the
Form 8-K dated September 2, 1997.
FINANCIAL CONDITION
Earnings Overview
Under the Seabrook Power Contract (the Contract), Public Service Company of New
Hampshire (PSNH) is unconditionally obligated to pay the Company's cost of
service for a period equal to the length of the Nuclear Regulatory Commission's
(NRC) full-power operating license for Seabrook 1 (through 2026) 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.
NAEC had net income of approximately $8 million for the three months ended
September 30, 1997 compared to approximately $10 million for the same period in
1996. Net income for the nine months ended June 30, 1997 was approximately $22
million, compared to approximately $24 million for the same period in 1996. The
decreases in net income for the three and nine month periods were primarily due
to deferred tax benefits in 1996 associated with the proceeds from the sale of
Seabrook Unit 2 steam generators.
Nuclear Performance
Seabrook operated at a capacity factor of 82.7 percent through September 30,
1997, compared to 95.7 percent for the same period in 1996. The lower 1997
capacity factor is due primarily to the 50-day scheduled refueling and
maintenance outage, which began on May 10, 1997. The plant returned to service
on June 28, 1997.
For information on the Millstone outages, see NAEC's 1996 Form 10-K.
Liquidity and Capital Resources
Cash provided from operations decreased by approximately $40 million in the
first nine months of 1997, from 1996, as a result of the pay down of the 1996
year end accounts payable balance and from proceeds in 1996 from the sale of the
Seabrook Unit 2 steam generators. The year end accounts payable balance was
relatively high due to purchases in preparation for the Seabrook outage that had
been incurred but not yet paid by the end of 1996. Cash used for financing
activities decreased by approximately $15 million in the first nine months of
1997, primarily due to the utilization of the NU system money pool in 1997,
partially offset by higher cash dividends on common stock. Cash used for
investments decreased by approximately $19 million in the first nine months of
1997, primarily due to a decrease in investments in the Money Pool partially
offset by higher 1997 Seabrook plant expenditures.
Each major company in the NU system finances its own needs. Neither The
Connecticut Light and Power Company (CL&P) nor Western Massachusetts Electric
Company (WMECO) have any financing agreements containing cross defaults based on
financial defaults by NU, PSNH or NAEC. Similarly, neither PSNH nor NAEC have
any financing agreements containing cross defaults based on financial defaults
by NU, CL&P or WMECO. Nevertheless, it is possible that investors will take
negative operating results or regulatory developments at one company in the NU
system into account when evaluating other companies in the NU system. That
could, as a practical matter and despite the contractual and legal separations
among the NU companies, negatively affect each company's access to financial
markets.
PSNH Restructuring
On May 13, 1997, the United States District Court (Court) of New Hampshire
appointed a mediator to the pending case involving PSNH's and affiliates'
challenge to the New Hampshire Public Utilities Commission (NHPUC) decision on
February 28, 1997 regarding electric utility restructuring. All court
proceedings on the case were suspended during the mediation process.
On September 2, 1997, PSNH announced that the mediation had ended without a
resolution. The Court has suspended the procedural schedule associated with
this court proceeding pending the resolution of appeals of certain preliminary
rulings by the U.S. Circuit Court of Appeals for the First Circuit. The
temporary restraining order issued by the Court in March 1997 will remain in
effect until further orders by either court.
The NHPUC also reopened its proceeding to reconsider certain limited matters in
its restructuring orders. The NHPUC established a schedule to conduct rehearings
on two PSNH-specific issues - whether the Final Plan would require write-offs
under Statement of Financial Accounting Standards (SFAS) 71 and whether the
Final Plan repudiates the Rate Agreement; and one generic issue - whether energy
efficiency mandates for regulated distribution companies should be continued. On
October 22, 1997, the NHPUC changed the scope of the PSNH-specific re-hearing
proceedings to encompass the alternative rate-setting methodologies proposed
by the intervenors; to decide the appropriate methodology to be used to
determine PSNH's interim stranded costs; and to set PSNH's interim stranded cost
charges utilizing the determined methodology. In testimony filed with the NHPUC
on November 7, 1997, PSNH proposed a new methodology to quantify its stranded
costs. Under this proposal, PSNH would divest all owned generation and
purchased-power obligations via auction. To the extent that the auction
fails to produce sufficient revenues to cover the net book value of owned
generation and contractual payment obligations of purchased-power, the
difference would be recovered from customers through a non-bypassable
distribution charge. The new proposal also relies upon securitization of certain
assets to further reduce rates. Hearings are scheduled to begin on November 20,
1997.
PSNH Rate Matters
On September 16, 1997, PSNH filed testimony and exhibits supporting an increase
of just under 10 percent on an annual basis in the Fuel and Purchased Power
Adjustment Clause (FPPAC) rate effective on December 1, 1997. In order to
request as moderate an FPPAC rate as possible, PSNH's filing defers certain
costs for future recovery. A decision is pending.
By Order dated November 6, 1997, the NHPUC ordered a temporary rate reduction
for PSNH at a revenue level 6.87 percent lower than current rates. The
temporary rates will be effective December 1, 1997. The NHPUC also set an
interim return on equity of 11 percent. A final decision in PSNH's permanent
rate proceeding, which will be reconciled to July 1, 1997, is not expected to be
issued until mid-1998.
All or a portion of this reduction may be offset or eliminated by an increase to
rates through the FPPAC, referred to above.
For further information on New Hampshire restructuring issues, see NAEC's 1996
Form 10-K, First and Second Quarter 1997 10-Qs and Form 8-K dated September 2,
1997.
Risk Management Instruments
NAEC uses interest-rate management instruments to reduce interest rate risk
associated with its $200 million variable rate bank note. NAEC's interest rate
management instruments effectively fix its variable rate bank note at 7.82
percent.
These instruments are not used for trading purposes. The differential paid or
received as interest rates change is recognized in income when realized.
As of September 30, 1997, NAEC had outstanding interest rate management
instruments with a total notional value of approximately $200 million. The
settlement amounts for the third quarter associated with the instruments
increased interest expense by approximately $140,000.
For further information on risk management instruments, see the "Notes to
Financial Statements", Note 2, in this Form 10-Q.
RESULTS OF OPERATIONS
Income Statement Variances
Increase/(Decrease)
Millions of Dollars
Third Year
Quarter Percent to-Date Percent
Operating revenues $4 11% $21 18%
Fuel Expense 1 27 (1) (5)
Other operation and
maintenance expense 3 33 17 57
Deferred Seabrook return (other
and borrowed funds) - - (3) (14)
Income taxes 1 20 3 20
Net income (2) (18) (2) (9)
Comparison of the Third Quarter of 1997 to the Third Quarter of 1996
Operating revenues represent amounts billed to PSNH under the terms of the Power
Contracts and billings to PSNH for decommissioning expense.
Operating revenues increased in the third quarter primarily due to higher
operation and maintenance expenses associated with the Seabrook outage.
Income taxes increased in the third quarter primarily due to deferred tax
benefits in 1996 associated with proceeds from the sale of the Seabrook Unit 2
steam generators.
Comparison of the First Nine Months of 1997 to the First Nine Months of 1996
Operating revenues increased in the first nine months primarily due to higher
operation and maintenance expenses and the increased return associated with the
phase-in of the final 15 percent of Seabrook plant's Initial Investment in May,
1996.
Other operation and maintenance expenses increased in the first nine months
primarily due to higher costs associated with the scheduled Seabrook
refueling and maintenance outage in May 1997.
Deferred Seabrook return decreased in the first nine months primarily due to the
final phase-in of Seabrook investment into rates in May, 1996.
Income taxes increased in the first nine months primarily due to deferred tax
benefits in 1996 associated with proceeds from the sale of the Seabrook Unit 2
steam generators.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
10 Description of Certain Management
Compensation Arrangements (Exhibit 10.50, File No. 333-
30911)
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. NAEC filed a Form 8-K dated August 19, 1997 disclosing that Michael G.
Morris has been appointed Chairman, President and Chief Executive
Officer of NU.
2. NAEC filed a Form 8-K dated September 2, 1997 disclosing:
. The NHPUC/PSNH mediation proceedings had ended without resolution.
. In connection with PSNH's temporary rate proceeding, testimony was
filed with the NHPUC disclosing the significant negative
consequences to PSNH if the NHPUC implements a one-year rate
reduction of 11.41 percent.
3. NAEC filed a Form 8-K dated October 13, 1997 disclosing:
. On October 13, 1997, the NHPUC orally ordered a temporary rate
reduction for PSNH at a revenue level 6.43 percent lower than
current rates, to be effective December 1, 1997.
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: November 12, 1997 By: /s/ John H. Forsgren
John H. Forsgren
Executive Vice President and
Chief Financial Officer
Date: November 12, 1997 By: /s/ John J. Roman
John J. Roman
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> UT
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<NAME>NORTH ATLANTIC ENERGY CORPORATION
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