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 December 31, 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 December 31, 2000.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended December 31
(Unaudited)
Quarter Nine Months
-------- -----------
2000 1999 2000 1999
---- ---- ---- ----
(In Thousands)
Operating revenue, principally from affiliates $156,396 $ 147,478
$487,976 $ 429,164
-------- --------- -------- ---------
Operating expenses:
Fuel for generation 2,680 3,674 10,562 9,745
Purchased electric energy:
Contract termination and nuclear
unit shutdown charges 47,191 44,979 158,711
140,904
Other 21,846 18,697 63,482 45,620
Other operation 16,236 18,001 48,742 51,726
Maintenance 9,192 5,799 19,878 22,770
Depreciation and amortization 22,033 20,510 65,280 62,713
Taxes, other than income taxes 6,225 3,573 17,922 14,648
Income taxes 8,953 8,318 35,882 24,533
-------- --------- -------- ---------
Total operating expenses 134,356 123,551
420,459 372,659
-------- --------- -------- ---------
Operating income 22,040 23,927 67,517 56,505
Other income and (expense):
Allowance for equity funds used
during construction - 382 (2) 1,370
Equity in income of nuclear power companies 3,074 456
5,891 2,424
Amortization of goodwill (4,455) - (13,238) -
Other income (expense), net (664) (1,533) 1,560 1,653
-------- --------- -------- ---------
Operating and other income 19,995 23,232 61,728
61,952
-------- --------- -------- ---------
Interest:
Interest on long-term debt 4,942 4,338 13,777 10,909
Other interest 331 311 3,078 763
Allowance for borrowed funds used during
construction (58) (163) (590) (389)
-------- --------- -------- ---------
Total interest 5,215 4,486 16,265 11,283
-------- --------- -------- ---------
Net income $ 14,780 $ 18,746 $ 45,463 $ 50,669
======== ========= ======== =========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 32,530 $ 249,979 $
1,415 $ 217,839
Net income 14,780 18,746 45,463 50,669
Dividends declared on cumulative
preferred stock (22) (23) (69) (70)
Dividends declared on common stock - (241,415) - (241,415)
Gain on redemption of preferred stock 4 - 21 264
Acquisition adjustment - - 462 -
-------- --------- -------- ---------
Retained earnings at end of period $ 47,292 $ 27,287 $ 47,292
$ 27,287
======== ========= ======== =========
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.
NEW ENGLAND POWER COMPANY
Statements of Income
Twelve Months Ended December 31
(Unaudited)
2000 1999
---- ----
(In Thousands)
Operating revenue, principally from affiliates $622,540 $ 596,341
-------- ---------
Operating expenses:
Fuel for generation 14,110 12,803
Purchased electric energy:
Contract termination and nuclear
unit shutdown charges 206,116 187,777
Other 78,164 56,731
Other operation 64,502 70,936
Maintenance 24,198 28,536
Depreciation and amortization 82,242 103,080
Taxes, other than income taxes 23,483 20,282
Income taxes 45,523 37,633
-------- ---------
Total operating expenses 538,338 517,778
-------- ---------
Operating income 84,202 78,563
Other income and (expense):
Allowance for equity funds used during construction (395) 1,958
Equity in income of nuclear power companies 6,753 2,939
Amortization of goodwill (13,604) -
Other income (expense), net 3,410 2,087
-------- ---------
Operating and other income 80,366 85,547
-------- ---------
Interest:
Interest on long-term debt 17,526 14,052
Other interest 3,931 1,003
Allowance for borrowed funds used during construction (1,016)
(522)
-------- ---------
Total interest 20,441 14,533
-------- ---------
Net income $ 59,925 $ 71,014
======== =========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 27,287 $ 204,603
Net income 59,925 71,014
Dividends declared on cumulative preferred stock (93) (94)
Dividends declared on common stock (24,098) (241,415)
Gain on redemption of preferred stock 21 264
Repurchase of common stock - (7,085)
Purchase accounting adjustment (16,212) -
Acquisition adjustment 462 -
-------- ---------
Retained earnings at end of period $ 47,292 $ 27,287
======== =========
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.
NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
December 31, March 31,
ASSETS 2000 2000
- ------ ---- ----
(In Thousands)
Utility plant, at original cost $1,582,082 $1,318,026
Less accumulated provisions for depreciation
and amortization 967,723 854,309
---------- ----------
614,359 463,717
Construction work in progress 36,296 35,730
---------- ----------
Net utility plant 650,655 499,447
---------- ----------
Goodwill, net of amortization 337,403 333,771
Investments:
Nuclear power companies, at equity 46,457 45,966
Decommissioning trust funds 48,898 36,279
Non-utility property and other investments 14,671 7,490
---------- ----------
Total investments 110,026 89,735
---------- ----------
Current assets:
Cash, and temporary cash investments (including
$65,486,000 and $37,820,000 with affiliates) 74,546 226,921
Accounts receivable:
Affiliated companies 79,120 72,780
Others 58,912 48,139
Fuel, materials, and supplies, at average cost 10,448 10,345
Prepaid and other current assets 11,442 25,377
Regulatory asset purchased power obligations 104,583 74,988
---------- ----------
Total current assets 339,051 458,550
---------- ----------
Regulatory assets 1,576,578 1,210,800
Deferred charges and other assets 56,791 37,271
---------- ----------
$3,070,504 $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 727,004 582,983
Retained earnings 47,292 1,415
Unrealized gain (loss) on securities, net (21) -
---------- ----------
Total common equity 846,673 656,796
Cumulative preferred stock, par value $100 per share 1,436 1,567
Long-term debt 410,277 371,773
---------- ----------
Total capitalization 1,258,386 1,030,136
---------- ----------
Current liabilities:
Short-term debt (including $100,000,000 and $-0- to parent)
100,000 38,500
Accounts payable (including $23,723,000 and $26,993,000
to affiliates) 57,333 51,584
Accrued liabilities:
Taxes 34,137 2,394
Interest 3,355 1,900
Purchased power contract obligations 104,583 74,988
Other accrued expenses 6,730 10,879
Dividends payable 22 256,487
---------- ----------
Total current liabilities 306,160 436,732
---------- ----------
Deferred federal and state income taxes 272,767 176,351
Unamortized investment tax credits 13,593 16,733
Accrued Yankee nuclear plant costs 294,560 268,855
Purchased power obligations 659,704 611,802
Other reserves and deferred credits 265,334 88,965
---------- ----------
$3,070,504 $2,629,574
========== ==========
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Nine Months Ended December 31
(Unaudited)
2000 1999
---- ----
(In Thousands)
Operating Activities:
Net income $ 45,463 $ 50,669
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 70,601 66,619
Amortization of goodwill 13,238 -
Deferred income taxes and investment tax credits, net
(6,310) 8,385
Allowance for funds used during construction (588) (1,759)
Buyout of purchased power contracts - (3,472)
Changes in assets and liabilities, net of effects of
merger:
Decrease (increase) in accounts receivable, net 4,728
(15,184)
Decrease (increase) in fuel, materials, and supplies 1
(899)
Decrease (increase) in regulatory assets 152,039 83,929
Decrease (increase) in prepaid and other current assets
17,110 (23,900)
Increase (decrease) in accounts payable (9,497)
(17,198)
Increase (decrease) in purchased power
contract obligations (98,760) (92,028)
Increase (decrease) in other current liabilities 26,483
(3,428)
Increase (decrease) in other non-current liabilities
(18,898) 51,144
Other, net (53,597) (46,332)
--------- --------
Net cash provided by (used in) operating activities $
142,013 $ 56,546
--------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $ (38,566) $(43,148)
Other investing activities (8,605) (4,391)
--------- --------
Net cash provided by (used in) investing activities $
(47,171) $(47,539)
--------- --------
Financing Activities:
Dividends paid on common stock $(256,463) $ (9,050)
Dividends paid on preferred stock (69) (94)
Changes in short-term debt 61,500 38,500
Long-term debt - issues 38,500 -
Long-term debt - retirements (90,575) -
Redemption of preferred stock, net (110) -
--------- --------
Net cash provided by (used in) financing activities
$(247,217) $ 29,356
--------- --------
Net increase (decrease) in cash and cash equivalents $(152,375) $
38,363
Cash and cash equivalents at beginning of period 226,921 165,981
--------- --------
Cash and cash equivalents at end of period $ 74,546 $204,344
========= ========
The accompanying notes are an integral part of these financial statements.
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NEW ENGLAND POWER COMPANY
Notes to Unaudited Financial Statements
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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
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:
Quarters Ended Nine Months Ended
December 31,
-------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(In Thousands)
Operating revenue $53,661 $104,625 $223,865 $287,795
======= ======== ======== ========
Net income $ 2,957 $ 2,456 $ 25,926 $ 8,752
======= ======== ======== ========
Company's equity in
net income $ 3,074 $ 456 $ 5,891 $ 2,424
======= ======== ======== ========
December 31, March 31,
2000 2000
---- ----
(In Thousands)
Net plant $ 162,595 $ 167,317
Other assets 2,048,735 2,520,887
Liabilities and debt (1,997,252) (2,437,609)
----------- -----------
Net assets $ 214,078 $ 250,595
=========== ===========
Company's equity in net assets $ 46,457 $ 45,966
=========== ===========
Nuclear Units Permanently Shut Down
Three of the Yankee Nuclear Power 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:
Future
The Company's Estimated
Investment Billings to
as of 12/31/00 Date the Company
Unit % $(millions) Retired $(millions)
- -----------------------------------------------------------------
Yankee Atomic 34.5 2 Feb 1992 0
Connecticut Yankee 19.5 15 Dec 1996 73
Maine Yankee 24.0 17 Aug 1997 139
In the case of each of these units, the Company has recorded a liability
and an offsetting regulatory asset reflecting the estimated future billings
from the companies. In a 1993 decision, the Federal Energy Regulatory
Commission (FERC) allowed Yankee Atomic to recover its undepreciated
investment in the plant, including a return on that investment, as well as
unfunded nuclear decommissioning costs and other costs. Maine Yankee and
Connecticut Yankee recover their costs, including a return, in accordance with
settlement agreements approved by the FERC in May 1999 and July 2000,
respectively. Prospectively, under the FERC settlement agreement, Connecticut
Yankee has agreed to reduce annual collections for decommissioning through the
use of its pre-1983 spent fuel trust funds and to limit its return on equity
to 6 percent. In addition, Connecticut Yankee, Yankee Atomic, and Maine Yankee
continue to pursue litigation against the Department of Energy (DOE) to assume
financial responsibility for storage of spent nuclear fuel. Under rate
provisions approved by the FERC for Connecticut Yankee and Yankee Atomic, any
recovery from the DOE proceedings after litigation expenses and taxes will be
returned to customers.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for the plant
decommissioning, the owners of Maine Yankee are jointly and severally liable
for the shortfall.
Maine Yankee had hired Stone & Webster, Inc. (S&W), an engineering,
construction, and consulting company, as the principal contractor to
decommission the unit. In May 2000, Maine Yankee terminated its long-term
contract with S&W and negotiated an arrangement with S&W to continue work
through June 2000. On June 2, 2000, S&W filed for Chapter 11 bankruptcy
protection. Confidential bids were submitted to Maine Yankee on October 31,
2000, by candidates to succeed S&W as the principal contractor to complete
decommissioning. On January 26, 2001, the Maine Yankee Board of Directors
announced that it had rejected the bids and approved a plan to self-manage
Maine Yankee's decommissioning process. On June 30, 2000, Federal Insurance
Company (Federal) filed a complaint in S&W's bankruptcy proceeding which
alleges that Maine Yankee improperly terminated its contract with S&W. If the
court were to make such a finding, Federal would be excused from a $37 million
performance bond liability to Maine Yankee. Federal's complaint has been
removed to the US Federal District Court in Maine for jury trial. On August
24, 2000, Maine Yankee filed a $78.2 million damage claim against S&W in the
bankruptcy proceeding. At this time, the Company is unable to determine the
potential impact, if any, of these developments.
Under the provisions of the Company's industry restructuring settlement
agreements approved by state and federal regulators in 1998, the Company
recovers all costs, including shutdown costs, that the FERC allows these
Yankee companies to bill to the Company.
Operating Nuclear Units
The Company has minority interests in three operating nuclear generating
units which the Company is engaged in efforts to divest: Vermont Yankee,
Millstone 3, and Seabrook 1. Uncertainties regarding the future of nuclear
generating stations, particularly older units, such as Vermont Yankee, have
increased in recent years and could adversely affect their service lives, availa
bility, and costs. These uncertainties stem from a combination of factors,
including the acceleration of competitive pressures in the power generation
industry and increased Nuclear Regulatory Commission (NRC) scrutiny. The
Company performs periodic economic viability reviews of operating nuclear
units in which it holds ownership interests. Until such time as the Company
divests its operating nuclear interests, the Company will share with
customers, through contract termination charges (CTC), 80 percent of the
revenues and operating costs related to the Company's interest in these units,
with shareholders retaining the balance.
Vermont Yankee
The following table summarizes the Company's interest in the Vermont
Yankee Nuclear Power Corporation as of December 31, 2000:
The Company's Interest
(millions of dollars)
----------------------------------------------
Equity Net Estimated
Decommissioning
Ownership Equity Plant Decommissioning
Fund License
Interest (%) Investment Assets Cost (in
2000$) Balance Expiration
------------ ---------- ------
- --------------- ------- ----------
22.5 $12 $36 $102
$53 2012
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.
Approval of the sale is pending before the Vermont Public Service Board
(VPSB), among other regulatory agencies. Since that time, the agreement has been
revised and several other parties have indicated to the VPSB that they were
prepared to make an offer for Vermont Yankee. At a hearing on January 29,
2001, the Chairman of the VPSB indicated that the VPSB would decide in
mid-February 2001 whether it would reject the AmerGen agreement, thereby
enabling Vermont Yankee to go forward with an auction of the unit, or take
other action. Any sale of the plant is contingent upon the receipt of
regulatory approvals by the Securities and Exchange Commission, under the
Public Utility Holding Company Act of 1935, the FERC, the NRC, the VPSB, and
other state regulatory commissions with jurisdiction over other equity owners
of Vermont Yankee.
Under the terms of the original AmerGen 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 recorded an
accrued liability and offsetting regulatory asset of $80 million for its share
of future liabilities related to Vermont Yankee, including the purchased power
contract termination payment obligation, but excluding interest and a return
allowance.
On November 15, 2000, Vermont Yankee entered into a revised sale
agreement with AmerGen which expires at the end of June 2001. The Vermont
Department of Public Service was also a signatory. The revised agreement would
represent an approximate $10 million net present value improvement from the
original agreement for the Company's 22.5 percent share of the plant.
On November 28, 2000, Entergy Corporation (Entergy) petitioned to
intervene in the VPSB proceeding and informed the VPSB that it was prepared to
make an offer to buy the plant. On December 8, 2000, the VPSB granted
Entergy's request to submit a bid for Vermont Yankee, which was submitted on
January 12, 2001 and was followed shortly thereafter by a revised offer from
AmerGen. On December 5, 2000, Dominion Resources, Inc. (Dominion) indicated by
letter to the VPSB that it was also interested in bidding on Vermont Yankee.
In addition, on January 10, 2001, Constellation Energy Group, Inc.
(Constellation) also indicated a willingness to bid and urged the VPSB to move
forward with an auction of the plant.
Millstone 3
In November 1999, the Company entered into an agreement with Northeast
Utilities (NU) and certain of NU's subsidiaries to settle claims made by the
Company relative to the operation of Millstone 3. Among other things, the
settlement provides for NU to include the Company's share of Millstone 3 in an
auction of NU's share of the unit. Upon the closing of the sale, NU will pay
the Company a total of $25 million, regardless of the actual sale price, and
reimburse the Company for any capital expenditures in excess of pre-budgeted
levels incurred after October 1999. The Company will also be reimbursed for
fuel procurement expenditures which increase net nuclear fuel account balances
above balances at that time. The settlement also requires NU to indemnify the
Company and assume any residual liabilities resulting from the sale, including
any requirements that the sellers continue to purchase output from the unit.
In addition, the settlement requires NU to pay the Company an additional $1
million per month for every month beyond April 1, 2001 that the closing does
not occur.
On August 7, 2000, Dominion 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 is contingent upon approval by the Department of
Justice/Federal Trade Commission (DOJ/FTC), the NRC, the FERC, the
Massachusetts Department of Telecommunications and Energy (MDTE), and public
utility commissions in various states affected by the purchase transaction.
Filings for approval have been made with each regulatory agency. To date,
approvals have been received from the DOJ/FTC, the MDTE, the FERC, and various
states affected by the transaction, including the Connecticut Department of
Public Utility Control, the New Hampshire Public Utilities Commission (NHPUC),
and the VPSB. Dominion expects to finalize the transaction by April 2001.
In November 2000, the Rhode Island Attorney General and the Rhode Island
Division of Public Utilities and Carriers filed a protest at the FERC
contending that the payment the Company will receive from the sale of
Millstone 3, as established by its agreement with NU, is insufficient. On
December 13, 2000, the Company and other parties to the Millstone sale
submitted answers opposing Rhode Island's position and arguing, among other
things, that Rhode Island's contention is well beyond the scope of the FERC
proceeding which was initiated for the sole purpose of receiving approval to
transfer Millstone to Dominion. The Company further stated that concerns over
the customer rate impact of the Company's agreement with NU are more
appropriately addressed under the terms of its restructuring settlements and
need not delay the FERC's approval of the sale. On January 25, 2001, the FERC
found that Rhode Island's objection was beyond the scope of the proceeding and
approved the sale.
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 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 owns the largest
percentage of the plant with a 35.98 percent interest, and its affiliate,
North Atlantic Energy Service Corporation, is the plant operator. As part of
its settlement, PSNH has also agreed to make all reasonable efforts to bundle
its interests with those of other owners (including the Company) seeking to
sell their interests.
On December 15, 2000, NU filed its divestiture plan before the NHPUC,
requesting an expeditious process in order to permit a prompt sale of the
plant. Under the terms of the PSNH Settlement and enabling legislation, the
NHPUC will administer the sale of the plant with the assistance of a sale
specialist. The Company generally supports the NU divestiture plan and will
shortly file its own divestiture plan before the NHPUC indicating its
willingness to move forward with the sale.
On October 21, 2000, Seabrook Station began a planned 31-day refueling
outage. On Wednesday, November 1, 2000, with the reactor core fully
off-loaded, the station experienced the first of two equipment problems on one
of the two emergency diesel generators (EDG), which required extensive repairs
before the station could be returned to service. The plant returned to full
operation on February 1, 2001. The EDG problems extended the outage by
approximately 71 days.
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
December 2000, the charges assessed Norwood amount to approximately $26
million, all of which remain unpaid. The Company has filed a collection action
in Massachusetts Superior Court (Superior Court).
Separately, Norwood filed suit in Federal District Court (District Court)
in April 1997 alleging that the divestiture of the Company's nonnuclear
generating business (the divestiture) violated the terms of the 1983 power
contract and contravened antitrust laws. The District Court dismissed the
lawsuit. On appeal, the First Circuit Court of Appeals (First Circuit)
consolidated appeals Norwood made from FERC's orders approving the Company's
divestiture, the wholesale rate settlement between the Company and its
distribution affiliates, and the CTC tariff amendment. In February 2000, the
First Circuit dismissed Norwood's appeal from the FERC orders and dismissed
its appeal from all but
one of Norwood's District Court claims, which relates to alleged generation
market power. In February and March 2000, respectively, the First Circuit
denied Norwood's petition for further review of its District Court claims
decision and its decision on the FERC orders. On May 30, 2000, Norwood
petitioned the US Supreme Court for review of the First Circuit decisions. On
October 2, 2000, the US Supreme Court refused Norwood's petitions to review
the First Circuit decisions affirming (a) the FERC's approval of the CTC, the
divestiture, and the settlement agreements regarding termination of the
Company's power sales agreements with its affiliates, and (b) the US District
Court's dismissal of Norwood's antitrust and breach of contract claims.
In the District Court action, on April 10, 2000, the Company renewed its
motion to dismiss Norwood's remaining claim. Norwood amended its complaint to
reassert a request for rescission of the divestiture, which it had earlier
dropped. A hearing took place before the District Court on July 18, 2000.
In the Superior Court collection action, Norwood moved to dismiss the
Company's complaint, which the Superior Court denied on April 30, 1999.
Norwood filed counterclaims against the Company, which the Company moved to
dismiss. The Superior Court deferred decision on the Company's motion pending
resolution of Norwood's various appeals to the First Circuit, and on July 21,
2000, the Company renewed its motion to dismiss in light of the First Circuit
decisions and filed a motion for summary judgement. The Superior Court heard
oral arguments on both motions on October 25, 2000.
Norwood has also appealed a June 1999 FERC decision that rejected
Norwood's challenge to the calculation of the CTC based on the terms of the
1983 power contract, which Norwood contended ended in October 1998, not
October 2008. On June 29, 2000, the First Circuit rejected Norwood's appeal.
On December 22, 2000, Norwood filed a petition for certiorari to the US
Supreme Court for review of the First Circuit's decision.
Note D - Standard Offer Service and ICAP Deficiency Charge
- ----------------------------------------------------------
Prior to divesting its nonnuclear generation business in 1998, the
Company was the wholesale supplier of the electric energy requirements to the
New England Electric System (NEES) retail companies. The Company's
all-requirements contracts with its affiliated distribution companies, as well
as with unaffiliated customers, were generally terminated pursuant to
settlement agreements and tariff provisions in 1998. However, the Company
remains obligated to provide transition power supply service to new customer
load in Rhode Island at the standard offer price, but does not have a fixed
price wholesale contract in place. Consequently, the Company is at risk for
the difference between the actual cost
of serving this load and the revenue received from this obligation. The
standard offer rate that the Company charges for continuing to meet this
obligation increased from 3.5 cents per kilowatthour (kWh) in 1999 to 3.8
cents per kWh effective January 1, 2000. The standard offer rate is also
subject to a rolling twelve-month fuel index adjustment factor, which
increased the rate by an additional 0.12 cents per kWh beginning in April 2000
up to 1.592 cents per kWh in December 2000. The Company meets this obligation
by periodically procuring the necessary power supply at market prices. Over
time, the Company cannot predict whether the resulting revenues will be
sufficient to cover the costs of procuring such power.
In a December 15, 2000 Order, the FERC rejected the Independent System
Operator-New England's (ISO New England) proposed $0.17 per kW-month Installed
Capacity (ICAP) deficiency charge and reinstated an
administratively-determined deficiency charge of $8.75 per kW-month,
retroactive to August 1, 2000. Several parties, including the Company, filed
motions requesting rehearing of the ICAP Order and/or emergency motions for
stay of the FERC's order. On January 10, 2001, the FERC granted these motions
and will conduct a new hearing. If the $8.75 per kW-month ICAP deficiency
charge were to be made effective as of August 1, 2000, it would impact the
Company's cost of power to supply its all-requirements load obligations from
August forward. In that event, increased ICAP revenues that the Company will
receive from the sale of its generation unit entitlements would partially
offset any additional cost. Prospectively, the Company has entered into an
agreement to purchase capacity for partial protection against the possible
increase in ICAP deficiency charges for the quarter ending March 31, 2001.
Note E - Merger Agreement with Niagara Mohawk
- ---------------------------------------------
The Company is a wholly owned subsidiary of National Grid USA. On
September 5, 2000, National Grid USA's parent company, National Grid Group plc
(National Grid), and Niagara Mohawk Holdings, Inc., announced a merger
agreement under which National Grid will acquire Niagara Mohawk (NiMo) through
the formation of a new National Grid holding company and the exchange of NiMo
shares for a combination of American Depositary Shares (ADSs) and cash. The
terms of the agreement value the transaction at approximately $3.0 billion.
The transaction is expected to be completed by late 2001, and is subject
to a number of conditions, including regulatory and other governmental
approvals and the sale of NiMo's nuclear facilities or other satisfactory
arrangements being reached. The transaction has received approval by NiMo and
National Grid shareholders. On December 12, 2000, Niagara Mohawk Power
Corporation announced that it reached an agreement to sell its nuclear
facilities to Constellation.
Note F - Acquisition of Eastern Utilities Associates
- ----------------------------------------------------
The acquisition of Eastern Utilities Associates (EUA) by National Grid
USA was completed on April 19, 2000. 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 $402 million,
of which the Company was allocated $8 million relative to the merger of
Montaup into the Company. This amount was determined pursuant to an
independent study conducted by a third party and is being amortized over 20
years.
Combined with the amortization of goodwill allocated to the Company from
the acquisition of NEES by National Grid, the total annual amortization of
goodwill will amount to approximately $17.6 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.
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 January 1, 1999. 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 January 1, 1999, or of future results of
the Company.
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NEW ENGLAND POWER COMPANY
Notes to Unaudited Financial Statements
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Supplemental Unaudited Pro Forma Information
Periods Ended December 31
(In Thousands)
Three Months Nine Months Twelve Months
------------ ----------- -------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Combined Operating
Revenues $156,396 $193,904 $501,373 $602,662 $674,593
$859,598
Net Earnings $ 14,780 $ 17,865 $ 44,904 $ 48,176 $
58,598 $ 67,299
Note G
- ------
Income statements for the nine and twelve month periods ended December
31, 2000, reflect a reclassification of approximately $4.3 million and
approximately $4.7 million, respectively, of goodwill amortization previously
reflected on the "Depreciation and amortization" line in "Operating expenses,"
but now reported in "Other income and expense."
Note H
- ------
In the opinion of the Company, these financial statements reflect all
adjustments (which include normal recurring adjustments) necessary for a fair
statement of the results of its operations for the periods presented and
should be considered in conjunction with the notes to the financial statements
in the Company's Transitional Annual Report on Form 10-K for the period ended
March 31, 2000.
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NEW ENGLAND POWER COMPANY
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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 wholly owned subsidiary of National Grid USA, formerly
New England Electric System (NEES). NEES was acquired by National Grid Group
plc (National Grid) in March 2000.
Merger Agreement with Niagara Mohawk
- ------------------------------------
On September 5, 2000, National Grid USA's parent company, National Grid,
and Niagara Mohawk Holdings, Inc., announced a merger agreement under which
National Grid will acquire Niagara Mohawk (NiMo) through the formation of a
new National Grid holding company and the exchange of NiMo shares for a
combination of American Depositary Shares (ADSs) and cash. The terms of the
agreement value the transaction at approximately $3.0 billion.
The transaction is expected to be completed by late 2001, and is subject
to a number of conditions, including regulatory and other governmental
approvals and the sale of NiMo's nuclear facilities or other satisfactory
arrangements being reached. The transaction has received approval by NiMo and
National Grid shareholders. On December 12, 2000, Niagara Mohawk Power
Corporation announced that it reached an agreement to sell its nuclear
facilities to Constellation Energy Group, Inc.
Acquisition of Eastern Utilities Associates
- -------------------------------------------
The acquisition of Eastern Utilities Associates (EUA) by National Grid
USA was completed on April 19, 2000. On May 1, 2000, Montaup Electric Company
(Montaup), formerly a subsidiary of EUA, was merged into the Company.
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 third
quarter and nine months of the Company's new fiscal year 2001.
Standard Offer Service and ICAP Deficiency Charge
- -------------------------------------------------
Prior to divesting its nonnuclear generation business in 1998, the
Company was the wholesale supplier of the electric energy requirements to the
NEES retail companies. The Company's all- requirements contracts with its
affiliated distribution companies, as well as with unaffiliated customers,
were generally terminated pursuant to settlement agreements and tariff
provisions in 1998. However, the Company remains obligated to provide
transition power supply service to new customer load in Rhode Island at the
standard offer price, but does not have a fixed price wholesale contract in
place. Consequently, the Company is at risk for the difference between the
actual cost of serving this load and the revenue received from this
obligation. The standard offer rate that the Company charges for continuing to
meet this obligation increased from 3.5 cents per kilowatthour (kWh) in 1999
to 3.8 cents per kWh effective January 1, 2000. The standard offer rate is
also subject to a rolling twelve-month fuel index adjustment factor, which
increased the rate by an additional 0.12 cents per kWh beginning in April 2000
up to 1.592 cents per kWh in December 2000. The Company meets this obligation
by periodically procuring the necessary power supply at market prices. Over
time, the Company cannot predict whether the resulting revenues will be
sufficient to cover the costs of procuring such power.
In a December 15, 2000 Order, the Federal Energy Regulatory Commission
(FERC) rejected the Independent System Operator-New England's (ISO New
England) proposed $0.17 per kW-month Installed Capacity (ICAP) deficiency
charge and reinstated an administratively-determined deficiency charge of
$8.75 per kW- month, retroactive to August 1, 2000. Several parties, including
the Company, filed motions requesting rehearing of the ICAP Order and/or
emergency motions for stay of the FERC's order. On January 10, 2001, the FERC
granted these motions and will conduct a new hearing. If the $8.75 per
kW-month ICAP deficiency charge were to be made effective as of August 1,
2000, it would impact the Company's cost of power to supply its
all-requirements load obligations from August forward. In that event,
increased ICAP revenues that the Company will receive from the sale of its
generation unit entitlements would partially offset any additional cost.
Prospectively, the Company has entered into an agreement to purchase capacity
for partial protection against the possible increase in ICAP deficiency
charges for the quarter ending March 31, 2001.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities, the Company's
divestiture of its nonnuclear generating business (the divestiture) and
stranded cost recovery, see the "Industry Restructuring" section in the
Company's Transitional Annual Report on Form 10-K for the period ended March
31, 2000.
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 (FA
S 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 FERC to recover through
contract termination charges (CTC) substantially all of the costs associated
with its former generating business not recovered through the divestiture.
Additionally, FERC Order No. 888 enables transmission companies to recover
their specific costs of providing transmission service. Therefore,
substantially all of the Company's business, including the recovery of its
stranded costs, remains under cost-based rate regulation. Because of the
nuclear cost-sharing provisions related to the Company's CTC, the Company
ceased applying FAS 71 in 1997 to 20 percent of its ongoing nuclear
operations, the impact of which is immaterial.
As a result of applying FAS 71, the Company has recorded a regulatory
asset for the costs that are recoverable from customers through the CTC. At
December 31, 2000, this amounted to approximately $1.7 billion, including $1.1
billion related to the above-market costs of purchased power contracts, $0.3
billion related to accrued Yankee nuclear plant costs, and $0.3 billion
related to other net CTC regulatory assets.
Earnings
- --------
Net income for the quarter and nine month period ended December 31, 2000
decreased approximately $4 million and $5 million, respectively, compared with
the same periods in 1999. The decrease in earnings is a result of goodwill
amortization from the mergers with National Grid and EUA, increased purchased
power costs, increased interest expense, and decreased mitigation incentives,
partially offset by increased income due to the May 1, 2000 merger with
Montaup, and increased earnings from nuclear operations.
Operating Revenue
- -----------------
Operating revenue for the quarter and nine month period increased
approximately $9 million and $59 million, respectively, compared with the same
periods in 1999.
Sales for resale for the quarter and nine month period increased
approximately $12 million and $51 million, respectively, compared with the
same periods in 1999. These increases are primarily due to increased sales and
rates related to obligations to new customer load in Rhode Island, and
increased unit contract sales from partially owned nuclear units which
experienced refueling outages during the same periods in 1999. CTC revenues
for the quarter and nine month period increased approximately $1 million and
$5 million, respectively, due to fully reconciling true-up mechanisms which
allow the Company to adjust revenues proportionately with correlating
expenses. These increases were also affected by the merger with Montaup
effective May 1, 2000.
Transmission revenues decreased approximately $4 million for the third
quarter and increased approximately $2 million for the nine month period
compared with the same periods in 1999. The transmission charge is a formula
rate which recovers the Company's actual costs plus a return on actual
investment.
Operating Expenses
- ------------------
Operating expenses for the quarter and nine month period increased $11
million and $48 million, respectively, compared with the same periods in
1999.
Fuel for generation decreased approximately $1 million for the quarter,
but increased approximately $1 million for the nine month period compared with
the same periods in 1999. The decrease for the quarter is primarily attributed
to a refueling outage at the partially owned Seabrook 1 nuclear generating
facility. For the nine month period, the increase is due to refueling outages
experienced at the partially owned Millstone 3 and Seabrook 1 nuclear
generating facilities during the quarter ended June 30, 1999. Operating
expenses for both the quarter and the nine month period were affected by the
inclusion of Montaup's ownership percentage of Millstone 3 with the Company's
effective as of the merger date.
Purchased power expense increased approximately $5 million and $36
million for the quarter and nine month period, respectively. The increases are
primarily attributed to the inclusion of Montaup's purchased power costs
effective May 1, 2000, increased fuel prices, and an increase in standard
offer purchases related to obligations to supply new customer load in Rhode
Island. These increases are partially offset by decreased purchased power
charges from the Yankee Nuclear Power Companies (Yankees). Charges from Maine
Yankee decreased due to a refund for the termination of excess nuclear
insurance coverage. Vermont Yankee purchased power charges decreased due to
the effect of a refueling outage during the quarter ended December 31, 1999.
In addition, purchased power charges from the Yankee Atomic nuclear power
plant decreased as a result of the completion of the purchased power contract
and final billing in June 2000.
Nuclear operation and maintenance expenses increased approximately $4
million for the quarter, reflecting the merger of Montaup's ownership
percentage of Millstone 3 with the Company's effective as of the merger date,
and the effects of increased operation and maintenance expenses during a
refueling outage at Seabrook 1. For the nine month period, these expenses
decreased approximately $2 million as a result of improved operations at
Millstone 3 and reduced expenses primarily related to refueling outages at
Millstone 3 and Seabrook 1 during the quarter ended June 30, 1999.
For the quarter and nine month period, other nonnuclear operation and
maintenance expenses decreased approximately $2 million and $4 million,
respectively, compared with the same periods in 1999, primarily due to reduced
pension and postretirement healthcare expenses and reduced transmission costs.
For the nine month period, these decreases are partially offset by the receipt
of a transmission wheeling refund that reduced expense in June 1999.
Depreciation and amortization expenses increased approximately $2 million
for the quarter and approximately $3 million for the nine month period due to
increased nuclear depreciation as a result of the addition of Montaup's
ownership percentage effective as of the merger date.
Interest Expense
- ----------------
The increase in interest expense for the quarter and nine month period is
primarily due to higher interest rates on variable rate long-term debt and
increased short-term debt borrowings, as well as interest related to Montaup's
CTC settlement.
Other Income and Expense
- ------------------------
Other income for the quarter and nine month period increased
approximately $3 million and $2 million, respectively, compared with the same
periods in 1999. This increase was primarily related to increased earnings
from the Yankees, partially offset by a decrease in allowance for equity funds
used during construction.
The amortization of goodwill of approximately $4 million for the quarter
and $13 million for the nine month period resulted from the mergers with
National Grid and EUA.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for the Company for utility plant totaled $39 million
for the nine months ended December 31, 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.
On September 19, 2000, the Company repurchased 961 shares of its 6
percent $100 par value preferred stock for $79,766. Approximately $17,000 of
this transaction was credited to retained earnings. On October 17, 2000, the
Company repurchased 350 shares of its 6 percent $100 par value preferred stock
for $30,455. Approximately $4,000 of this transaction was credited to retained
earnings.
At December 31, 2000, the Company had $100 million of short- term debt
outstanding to affiliates. The Company has regulatory approval to issue up to
$375 million of short-term debt. On October 25, 2000, the Company received the
necessary regulatory approvals to allow approximately $39 million of variable
rate debt to remain outstanding through 2015. This results in classifying that
debt as long-term rather than short-term for this period and subsequent
reporting periods. Proceeds from the increase in short-term debt were utilized
to pay Montaup's debt of approximately $91 million and purchased power
contract obligations of approximately $60 million.
At December 31, 2000, the Company had lines of credit and standby bond
purchase facilities with banks totaling $456 million which are available to
provide liquidity support for $410 million of the Company's long-term bonds in
tax-exempt commercial paper mode, and for other corporate purposes. There were
no borrowings under these lines of credit at December 31, 2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
New England Power Company's (the Company) major financial market risk
exposure is changing interest rates. Changing interest rates will affect
interest paid on variable rate debt. At December 31, 2000, the Company's tax
exempt variable rate long-term debt had a carrying value and fair value of
approximately $410 million. While the ultimate maturity dates of the
underlying loan agreements range from 2015 through 2022, this debt is issued
in tax exempt commercial paper mode. The various components that comprise this
debt are issued for periods ranging from one day to 270 days, and are
remarketed through remarketing agents at the conclusion of each period. The
weighted average variable interest rate for the nine months ended December 31,
2000, was approximately 4.22 percent.
For a full discussion of the Company's risk associated with Industry
Restructuring and Standard Offer Service, refer to Note D in the Notes to
Unaudited Financial Statements.
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
and a related Federal Energy Regulatory Commission (FERC) decision, discussed
in this report in Note B of Notes to Unaudited Financial Statements, is
incorporated herein and made a part hereof.
Information concerning dismissal of a lawsuit brought against the Company
by the Town of Norwood, Massachusetts and appeals of that lawsuit and related
Federal Energy Regulatory Commission orders, U. S. Supreme Court decision
refusing to review First Circuit decisions, the Company's collection action,
and pending appeals, 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 minority owners under an agreement for joint
ownership, construction and operation of the Wyman 4 generation unit,
including the Company, made a demand for arbitration to Central Maine Power
Company (CMP) for payments alleged due under the agreement upon CMP's sale of
Wyman 4 to FPL Energy, Inc. (FPL). Demand was also made to FPL as
successor-in- interest to CMP. The Company's portion of the claims under the
agreement could total approximately $7 million.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed reports on Form 8-K dated November 21, 2000 and
December 6, 2000, each containing Item 5 Other Information.
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
December 31, 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: February 13, 2001