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 March 31, 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 April 30, 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 - March 31, 1997 and
December 31, 1996 2
Statements of Income - Three Months
Ended March 31, 1997 and 1996 4
Statements of Cash Flows - Three Months
Ended March 31, 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 12
Signatures 13
PART I. FINANCIAL INFORMATION
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 775,280 $ 775,794
Less: Accumulated provision for depreciation......... 129,297 124,530
------------- -------------
645,983 651,264
Construction work in progress........................... 9,965 8,887
Nuclear fuel, net....................................... 33,205 31,765
------------- -------------
Total net utility plant............................. 689,153 691,916
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 20,826 19,744
------------- -------------
Current Assets:
Cash.................................................... 148 299
Special deposits........................................ 4,686 7,039
Receivables from affiliated companies................... 14,370 16,422
Materials and supplies, at average cost................. 13,679 13,093
Prepayments and other................................... 2,086 4,302
------------- -------------
34,969 41,155
------------- -------------
Deferred Charges:
Regulatory assets:
Deferred costs--Seabrook............................... 190,094 185,078
Income taxes, net...................................... 47,185 47,185
Recoverable energy costs............................... 2,166 2,217
Other regulatory assets................................ 23,808 25,401
Unamortized debt expense................................ 4,421 4,692
------------- -------------
267,674 264,573
------------- -------------
Total Assets........................................ $ 1,012,622 $ 1,017,388
============= =============
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 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....................................... 35,989 53,749
------------- -------------
Total common stockholder's equity.............. 196,989 214,749
Long-term debt.......................................... 495,000 495,000
------------- -------------
Total capitalization........................... 691,989 709,749
------------- -------------
Current Liabilities:
Notes payable to affiliated company..................... 20,750 2,500
Long-term debt--current portion......................... 20,000 20,000
Accounts payable........................................ 4,496 20,714
Accounts payable to affiliated companies................ 5,052 5,073
Accrued interest........................................ 10,015 2,888
Accrued taxes........................................... 1,365 3,486
Other................................................... 344 271
------------- -------------
62,022 54,932
------------- -------------
Deferred Credits:
Accumulated deferred income taxes....................... 202,538 196,650
Deferred obligation to affiliated company............... 33,284 33,284
Other................................................... 22,789 22,773
------------- -------------
258,611 252,707
------------- -------------
Commitments and Contingencies (Note 3)
------------- -------------
Total Capitalization and Liabilities........... $ 1,012,622 $ 1,017,388
============= =============
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Revenues.................................... $ 41,976 $ 36,663
----------- -----------
Operating Expenses:
Operation --
Fuel............................................. 3,828 3,326
Other............................................ 7,890 7,849
Maintenance......................................... 2,933 1,649
Depreciation........................................ 6,357 6,071
Federal and state income taxes...................... 3,245 2,663
Taxes other than income taxes....................... 3,317 3,030
----------- -----------
Total operating expenses...................... 27,570 24,588
----------- -----------
Operating Income...................................... 14,406 12,075
----------- -----------
Other Income:
Deferred Seabrook return--other funds............... 1,741 2,577
Other, net.......................................... 116 102
Income taxes........................................ 154 755
----------- -----------
Other income, net............................. 2,011 3,434
----------- -----------
Income before interest charges................ 16,417 15,509
----------- -----------
Interest Charges:
Interest on long-term debt.......................... 12,527 13,407
Other interest...................................... (75) (87)
Deferred Seabrook return--borrowed funds............ (3,275) (5,001)
----------- -----------
Interest charges, net......................... 9,177 8,319
----------- -----------
Net Income............................................ $ 7,240 $ 7,190
=========== ===========
</TABLE>
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities:
Net Income................................................ $ 7,240 $ 7,190
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 6,357 6,071
Deferred income taxes and investment tax credits, net... 5,888 6,701
Deferred return - Seabrook.............................. (5,016) (7,578)
Other sources of cash................................... 4,985 4,762
Other uses of cash...................................... (454) -
Changes in working capital:
Receivables............................................. 2,052 (9,225)
Materials and supplies.................................. (586) (341)
Accounts payable........................................ (16,239) (1,470)
Accrued taxes........................................... (2,121) (511)
Other working capital (excludes cash)................... 11,769 5,707
----------- -----------
Net cash flows from operating activities.................... 13,875 11,306
----------- -----------
Financing Activities:
Net increase (decrease) in short-term debt................ 18,250 (8,000)
Cash dividends on common stock............................ (25,000) (5,500)
----------- -----------
Net cash flows used for financing activities................ (6,750) (13,500)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (1,700) (738)
Nuclear fuel............................................ (4,364) (390)
----------- -----------
Net cash flows used for investments in plant.............. (6,064) (1,128)
NU System Money Pool...................................... - (4,000)
Investments in nuclear decommissioning trusts............. (1,212) (991)
----------- -----------
Net cash flows used for investments......................... (7,276) (6,119)
----------- -----------
Net Decrease In Cash For The Period......................... (151) (8,313)
Cash - beginning of period.................................. 299 8,313
----------- -----------
Cash - end of period........................................ $ 148 $ -
=========== ===========
</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), and the company's Form 8-K dated March 19, 1997. In the opinion
of the company, the accompanying financial statements contain all
adjustments necessary to present fairly the financial position as of
March 31, 1997, the results of operations for the three-month periods
ended March 31, 1997 and 1996, and the statements of cash flows for
the three-month periods ended March 31, 1997 and 1996. All
adjustments are of a normal, recurring, nature. The results of
operations for the three-month periods ended March 31, 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
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
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure" in February 1997. SFAS 129 will
be effective for 1997 year-end reporting. Management believes that
the implementation of SFAS 129 will not have a material impact on
NAEC's financial position or its results of operations.
For information regarding the adoption of a new accounting standard,
See Note 3A, "Commitments and Contingencies - Environmental Matters"
in this Form 10-Q and NAEC's 1996 Form 10-K.
C. Regulatory Accounting and Assets
The accounting policies of NAEC and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate regulated enterprises and reflect the effects of
SFAS 71, "Accounting for the Effects of Certain Types of Regulation."
Recently, the Securities and Exchange Commission (SEC) has questioned
the ability of certain utilities to remain on SFAS 71 in light of
state legislation regarding the transition to retail competition. The
industry expects guidance on this issue from FASB's Emerging Issues
Task Force in the near future.
While there are restructuring initiatives pending in the NU system
companies' jurisdictions, NAEC and PSNH are not yet subject to
transition plans. Management continues to believe that its use of SFAS
71 accounting is appropriate.
For additional information regarding regulatory accounting and assets,
see Note 5, "New Hampshire Restructuring" in this Form 10-Q and NAEC's
1996 Form 10-K.
2. INTEREST RATE MANAGEMENT
As of March 31, 1997, NAEC had outstanding interest rate management
agreements with a total notional value of approximately $200 million with a
positive mark-to-market position of approximately $4.6 million.
The interest rate management agreements have been made with various
financial institutions, each of which is rated "BBB+" or better by Standard
& Poor's ratings 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 satisfy their obligations under the agreements fully.
For further information on interest rate management instruments, see the
MD&A in this Form 10-Q and NAEC's 1996 Form 10-K.
3. COMMITMENTS AND CONTINGENCIES
A. Environmental Matters
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental
Remediation Liabilities" (SOP). The principal objective of the SOP is
to improve the manner in which existing authoritative accounting
literature is applied by entities to specific situations of
recognizing, measuring, and disclosing environmental remediation
liabilities. The SOP became effective January 1, 1997. The adoption
of the SOP did not have a material impact on NAEC's financial position
or its results of operations.
For further information regarding environmental matters, see 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 March 19, 1997, the New Hampshire Public Utilities Commission (NHPUC)
issued a stay of its February 28, 1997 restructuring orders (Restructuring
Orders) pending conclusion of rehearings on portions of the Restructuring
Orders. On April 28, 1997, the United States District Court for Rhode
Island (the Court), sitting for the District Court for New Hampshire,
determined that it would not abstain from deciding PSNH's and affiliates'
challenge to the NHPUC decision. The Court is scheduled to begin hearings
on the merits of the case in June.
For further information regarding New Hampshire restructuring, see NAEC's
Form 8-K dated March 19, 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 NAEC's (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 1996 Form 10-K and the Form 8-K
dated March 19, 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
(NRC) full-power operating license for Seabrook (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 $7 million in the first quarter of 1997,
unchanged from the same period in 1996.
Nuclear Performance
Seabrook operated at a capacity factor of 100.3 percent through for the first
quarter of 1997, compared to 86.7 percent for the same period in 1996. As of May
9, 1997, Seabrook had operated for 463 consecutive days. On May 10, 1997, the
plant began a scheduled 49-day refueling outage.
For information on the Millstone outages, see NAEC's 1996 Form 10-K.
Liquidity and Capital Resources
Cash provided from operations increased by approximately $3 million in 1997,
primarily due to increased cash return associated with the phase-in of
additional Seabrook 1 plant. Cash used for financing activities decreased by
approximately $7 million in 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 increased by approximately $1 million in 1997,
primarily due to higher 1997 nuclear fuel expenditures.
All NU system securities are currently rated below investment grade by Moody's.
Moody's is no longer reviewing The Connecticut Light and Power Company and
Western Massachusetts Electric Company for further downgrades, however, NU, PSNH
and NAEC remain under review. This action will adversely affect the availability
and cost of funds for the NU system companies.
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 agreements containing cross defaults based on events or
occurrences involving NU, PSNH or NAEC. Similarly, neither PSNH nor NAEC have
any agreements containing cross defaults based on events or occurrences
involving 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 the financial
markets.
Restructuring
On March 19, 1997, the New Hampshire Public Utilities Commission (NHPUC) issued
a stay of its February 28, 1997 restructuring orders (Restructuring Orders)
pending conclusion of rehearings on portions of the Restructuring Orders. On
April 28, 1997, the United States District Court for Rhode Island (the Court),
sitting for the District Court of New Hampshire, determined that it would not
abstain from deciding PSNH's and affiliates' challenge of the NHPUC's
Restructuring Orders. The Court is scheduled to begin hearings on the merits of
the case in June.
For further information on New Hampshire restructuring issues, see NAEC's 1996
Form 10-K and Form 8-K dated March 19, 1997.
Potential Accounting Impacts
NAEC follows accounting principles in accordance with the Statement of Financial
Accounting Standards (SFAS) 71 "Accounting for the Effects of Certain Types of
Regulation," which allows the economic effects of rate regulation to be
reflected. Recently, the Securities and Exchange Commission has questioned the
ability of certain utilities to remain on SFAS 71 in light of state legislation
regarding the transition to retail competition. The industry expects guidance on
this issue from the Financial Accounting Standards Board's Emerging Issues Task
Force in the near future. NAEC is not yet subject to transition plans.
Management continues to believe that the application of SFAS 71 accounting is
appropriate.
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 March 31, 1997, NAEC had outstanding interest rate management instruments
with a total notional value of approximately $200 million. The settlement
amounts associated with the instruments increased interest expense by
approximately $0.2 million for the first quarter of 1997. For further
information on risk management instruments, see the Notes to Financial
Statements, Note 2, in this Form 10-Q.
RESULTS OF OPERATIONS
Comparison of the First Quarter of 1997 to the First Quarter of 1996
Income Statement Variances
Increase/(Decrease)
Millions of Dollars
Amount Percent
Operating revenues $5 14%
Fuel expenses 1 15
Maintenance 1 78
Federal and state income taxes 1 62
Deferred Seabrook return (other
and borrowed funds) (3) (34)
Interest on long-term debt (1) (7)
Net income - -
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 first quarter of 1997, primarily due to the
increased return associated with the phase-in of the final 15 percent of
Seabrook plant's Initial Investment in May, 1996 and higher operating expenses.
Fuel expenses increased in 1997, primarily due to higher Seabrook capacity
factors.
Maintenance expenses increased in 1997, primarily due to higher costs in
preparation for the scheduled refueling and maintenance outage in May 1997.
Federal and state income taxes increased in 1997, primarily due higher book
taxable income.
Deferred Seabrook return decreased in 1997, primarily due to the final phase-in
of Seabrook investment into rates in May, 1996.
Interest on long-term debt decreased in 1997 primarily due to the redemption of
first mortgage bonds and variable rate notes in 1996.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
27 Financial Data Schedule
(b) Report on Form 8-K:
1. NAEC filed a Form 8-K dated March 19, 1997 disclosing that:
* On March 19, 1997, the NHPUC issued a stay on its February 28, 1997
restructuring orders pending conclusions of a rehearing.
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 May 9,1997 By: /s/ John H. Forsgren
John H. Forsgren
Executive Vice President and
Chief Financial Officer
Date May 9, 1997 By: /s/ John J. Roman
John J. Roman
Vice President and Controller
<TABLE> <S> <C>
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<NAME>NORTH ATLANTIC ENERGY CORPORATION
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