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, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6564
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, 2001.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended December 31
(In thousands)
(Unaudited)
Quarter Nine Months
---------- ----------
2001 2000 2001 2000
------- ------- ------- -------
Operating revenue, principally from affiliates $136,065 $156,396 $428,233 $487,976
------------ ------------ ------------ ------------
Operating expenses:
Fuel for generation 1,421 2,680 4,176 10,562
Purchased electric energy:
Contract termination and nuclear
unit shutdown charges 57,295 47,191 172,334 158,711
Other 15,228 21,846 55,998
63,482
Other operation 13,096 16,236 39,696 48,742
Maintenance 3,841 9,192 13,449 19,878
Depreciation and amortization 7,832 22,033 23,195 65,280
Taxes, other than income taxes 4,633 6,225 14,010 17,922
Income taxes 12,498 8,953 37,258 35,882
------------ ------------ ------------ ------------
Total operating expenses 115,844 134,356 360,116 420,459
------------ ------------ ------------ ------------
Operating income 20,221 22,040 68,117 67,517
Other income and (expense):
Allowance for equity funds used
during construction 142 - 897 (2)
Equity in income of nuclear power companies 815 3,074 2,580 5,891
Amortization of goodwill (Note F) - (4,455) - (13,238)
Other income (expense), net 274 (664) 992 1,560
------------ ------------ ------------ ------------
Operating and other income 21,452 19,995 72,586 61,728
------------ ------------ ------------ ------------
Interest:
Interest on long-term debt 2,807 4,942 9,806 13,777
Other interest 811 331 2,132 3,078
Allowance for borrowed funds used during construction (18) (58) (148) (590)
------------ ------------ ------------ ------------
Total interest 3,600 5,215 11,790 16,265
------------ ------------ ------------ ------------
Net income $ 17,852 $ 14,780 $ 60,796 $ 45,463
======= ======= ======= =======
Statements of Retained Earnings
(In thousands)
Retained earnings at beginning of period $103,011 $ 32,530 $ 60,110 $ 1,415
Net income 17,852 14,780 60,796 45,463
Dividends declared on cumulative preferred stock (22) (22) (65) (69)
Gain on redemption of preferred stock - 4 - 21
Acquisition adjustment - - - 462
------------ ------------ ------------ ------------
Retained earnings at end of period $120,841 $ 47,292 $120,841 $ 47,292
======= ======= ======= =======
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
(In thousands)
(Unaudited)
December 31, March 31,
ASSETS 2001 2001
------------ ------ ------
Utility plant, at original cost $ 897,981 $ 846,935
Less accumulated provisions for depreciation and amortization 325,658 320,238
--------------- ---------------
572,323 526,697
Construction work in progress 10,066 34,946
--------------- ---------------
Net utility plant 582,389 561,643
--------------- ---------------
Goodwill, net of amortization (Note F) 338,188 338,188
Investments:
Nuclear power companies, at equity 40,740 46,474
Decommissioning trust fund 17,671 16,331
Nonutility property and other investments 11,489 14,374
--------------- ---------------
Total investments 69,900 77,179
--------------- ---------------
Current assets:
Cash and temporary cash investments (including $113,125
and $22,075 with affiliates) 115,713 22,360
Accounts receivable:
Affiliated companies 57,730 61,191
Others 69,014 89,483
Fuel, materials, and supplies, at average cost 6,134 6,289
Prepaid and other current assets 1,654 2,051
Regulatory assets-purchased power obligations and accrued Yankee
nuclear plant costs 158,592 158,578
--------------- ---------------
Total current assets 408,837 339,952
--------------- ---------------
Regulatory assets 1,359,537 1,522,089
Deferred charges and other assets 52,565 50,170
--------------- ---------------
$ 2,811,416 $2,889,221
========= =========
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 731,974 731,974
Retained earnings 120,841 60,110
Unrealized loss on securities, net (117) (145)
--------------- ---------------
Total common equity 925,096 864,337
Cumulative preferred stock, par value $100 per share 1,436 1,436
Long-term debt 410,283 410,279
--------------- ---------------
Total capitalization 1,336,815 1,276,052
--------------- ---------------
Current liabilities:
Accounts payable (including $4,899 and $25,287 to affiliates) 41,331 66,017
Accrued liabilities:
Taxes 63,482 39,451
Interest 1,475 1,489
Purchased power obligations and accrued Yankee nuclear plant costs 158,592 158,578
Other accrued expenses 7,349 7,621
Dividends payable 22 22
--------------- ---------------
Total current liabilities 272,251 273,178
--------------- ---------------
Deferred federal and state income taxes 256,525 272,304
Unamortized investment tax credits 8,924 9,312
Accrued Yankee nuclear plant costs 154,749 172,340
Purchased power obligations 555,380 636,848
Other reserves and deferred credits 226,772 249,187
--------------- ---------------
$2,811,416 $2,889,221
========= =========
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Nine Months Ended December 31
(In thousands)
(Unaudited)
2001 2000
------- -------
Operating Activities:
Net income $ 60,796 $ 45,463
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (including amortization
of above market purchased power contracts) 65,502 70,601
Amortization of goodwill (Note F) - 13,238
Deferred income taxes and investment tax credits, net (17,131) (6,310)
Allowance for funds used during construction (1,045) (588)
Changes in assets and liabilities, net of effects of merger:
Decrease (increase) in accounts receivable, net (1,070) 4,728
Decrease in fuel, materials, and supplies 155 1
Decrease in regulatory assets 113,453 152,039
Decrease in prepaid and other current assets 397 17,110
Decrease in accounts payable (24,686) (9,497)
Decrease in purchased power contract obligations (81,511) (98,760)
Increase in other current liabilities 23,745 26,483
Decrease in other non-current liabilities (39,949) (18,898)
Other, net 875 (53,597)
------------ -------------
Net cash provided by operating activities $ 99,531 $ 142,013
------------ -------------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(36,342) $ (38,566)
Proceeds from divestiture of generating assets 25,000 -
Proceeds from sale of non-utility property 940 -
Other investing activities 4,289 (8,605)
------------ -------------
Net cash used in investing activities $ (6,113) $ (47,171)
------------ -------------
Financing Activities:
Dividends paid on common stock $ - $(256,463)
Dividends paid on preferred stock (65) (69)
Changes in short-term debt - 61,500
Long-term debt - issues - 38,500
Long-term debt - retirements - (90,575)
Redemption of preferred stock, net - (110)
------------ -------------
Net cash used in financing activities $ (65) $(247,217)
------------ -------------
Net increase (decrease) in cash and cash equivalents $ 93,353 $(152,375)
Cash and cash equivalents at beginning of period 22,360 226,921
------------ -------------
Cash and cash equivalents at end of period $115,713 $ 74,546
======= =======
Supplementary Information:
Interest paid $ 8,897 $ 15,823
Federal and state income taxes paid (refunded) $ 31,783 $ (5,424)
Dividends received from investments at equity $ 2,659 $ 12,826
The accompanying notes are an integral part of these financial statements.
</TABLE
Note A - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation and
Liability Act, more commonly known as the "Superfund" law, imposes strict,
joint and several liability, regardless of fault, for remediation of
property contaminated with hazardous substances. A number of states,
including Massachusetts, have enacted similar laws.
The electric utility industry typically utilizes and/or generates in
its operations a range of potentially hazardous products and by-products.
New England Power Company (the Company) currently has in place an internal
environmental audit program and an external waste disposal vendor audit
and qualification program intended to enhance compliance with existing
federal, state, and local requirements regarding the handling of
potentially hazardous products and by-products.
The Company has been named as a potentially responsible party (PRP)
by either the United States Environmental Protection Agency or the
Massachusetts Department of Environmental Protection for several sites at
which hazardous waste is alleged to have been disposed. Private parties
have also contacted or initiated legal proceedings against the Company
regarding hazardous waste cleanup. The Company is currently aware of other
possible hazardous waste sites, and may in the future become aware of
additional sites, that it may be held responsible for remediating. Some of
these sites relate to the disposal of ash from fossil fuel generating
plants formerly owned by the Company.
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 is currently
recovering certain environmental cleanup costs in rates. The Company
believes that hazardous waste liabilities for all sites of which it is
aware are not material to its financial position.
Note B - Nuclear Units
- ----------------------
The Company has minority interests in four Yankee Nuclear Power
Companies (Yankees). These ownership interests are accounted for on the
equity method. Three of the Yankees have been permanently shut down, and
one is operating. The Company has power contracts with each of the Yankees
that require the Company to pay an amount equal to its share of total
fixed and operating costs (including decommissioning costs) of the plant
plus a return on equity. The Company's share of the expenses of the
Yankees is accounted for in "Purchased electric energy" on the income
statement. In addition, the Company has a minority non-operating ownership
interest in the Seabrook 1 Nuclear generating unit. The Company's share of
expenses for Seabrook 1 is accounted for in "Other operation" and
"Maintenance" expenses on the income statement.
In view of potential terrorist activity following the events of
September 11, 2001, security at nuclear plants has been enhanced in
concert with Nuclear Regulatory Commission (NRC) advisory notices. The
Company is unable to determine at this time whether additional security at
the plants will result in material cost increases.
Nuclear Units Permanently Shut Down
Yankee Atomic, Connecticut Yankee, and Maine Yankee have permanently
ceased operations. Yankee Atomic has discontinued further billings to the
Company, subject to a final reconciliation of costs once decommissioning
at the plant has been completed. The Company's remaining investment in
Yankee Atomic will be repurchased no later than June 2002. In the case of
Maine Yankee and Connecticut Yankee, the Company has recorded a liability
and a regulatory asset reflecting the estimated future billings from the
companies.
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 Federal
Energy Regulatory Commission (FERC) allows these Yankee companies to bill
to the Company.
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 previously 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. In June 2000, S&W filed for Chapter 11
bankruptcy protection. Subsequently, Maine Yankee decided to self-manage
the unit's decommissioning process. In June 2000, Federal Insurance
Company (Federal) filed a complaint in S&W's bankruptcy proceedings,
subsequently removed to US District Court in Maine, which alleged that
Maine Yankee improperly terminated its contract with S&W and that Federal
should be excused from $38 million performance bond and $12 million
payment bond to Maine Yankee.
In December 2001, Maine Yankee and Federal reached a settlement.
Pursuant to the settlement agreement, Federal paid Maine Yankee $44
million in January 2002. Maine Yankee deposited the payment in its
decommissioning trust fund. Maine Yankee's August 2000 damage claim
against S&W in the bankruptcy proceeding for $78.2 million (later
decreased to $21 million to reflect, among other things, the recovery of
$44 million from Federal) is still pending.
At Maine Yankee and Yankee Atomic, the contractor responsible for
construction of the dry cask spent fuel storage facility has incurred
delays. Connecticut Yankee has experienced delays in its decommissioning
process due to zoning and other issues.
Due to rate recovery mechanisms, the S&W claims and decommissioning
delays are not expected to affect the Company's earnings.
Operating Nuclear Units
The Company has minority interests in two operating nuclear
generating units that the Company is engaged in efforts to divest: Vermont
Yankee and Seabrook 1. In addition, the Company sold its 16.2 percent
interest in Millstone 3 to Dominion Resources, Inc. (Dominion) on March
31, 2001. Until such time as the Company divests its operating nuclear
interests, 80 percent of the revenues and reasonable operating costs
related to the units will be allocated to customers through the contract
termination charges (CTC), with shareholders being allocated the balance.
Net proceeds attributed to the divestiture of the units will be allocated
to customers through the CTC.
Vermont Yankee
On August 15, 2001, Vermont Yankee announced that it had reached an
agreement to sell the Vermont Yankee nuclear power plant to Entergy
Corporation (Entergy) for $180 million. As of December 31, 2001, the
Company had a 22.5 percent ownership interest in Vermont Yankee. The
Company's portion of the sale price would be $40.5 million ($32.6 million
for the plant and related assets and $7.9 million for nuclear fuel). The
plant's decommissioning trust fund would be transferred to Entergy, and
Entergy would assume decommissioning liability for the plant. As part of
the transaction, Vermont Yankee owners, including the Company, would
purchase power from the plant through 2012. Net proceeds from the sale
would be credited to the Company's customers through the CTC. The 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 Vermont Public Service Board
(VPSB), and other state regulatory commissions with jurisdiction over
other equity owners of Vermont Yankee. To date, the FERC has issued an
order approving the sale. The Vermont Department of Public Service, an
intervener in the VPSB proceeding, has taken the position that certain
concerns must be addressed to its satisfaction before it could support the
sale.
The Company resells 11.8 MW of its Vermont Yankee entitlement to a
number of municipal and cooperative utilities (Secondary Purchasers)
located in Massachusetts under a "Vermont Yankee Secondary Purchaser
Agreement" which has a 30-year term and expires on November 30, 2002. In
November 2001, the Company and the Secondary Purchasers agreed to early
termination of
their contract as of February 28, 2002.In exchange for that agreement, the
Secondary Purchasers have agreed that they will not oppose the plant sale
in any regulatory proceeding. The final agreement is subject to regulatory
approval by the FERC.
In December 2001, Vermont Yankee reached a settlement with four
equity owners, other than the Company, agreeing to repurchase the Vermont
Yankee shares held by these minority shareholders for $230 per share. The
repurchase was consummated in January 2002 for approximately $5.3 million.
The effect of the repurchase is that the Company's ownership interest in
Vermont Yankee increased from 22.5 percent to 23.9 percent.
The Citizens of Brattleboro, and eight other towns in Vermont will
cast a non-binding vote at town meetings in March 2002, on whether they
want Vermont Yankee to be shut down. It is unclear at this time whether
the outcome of such votes will affect the sale of the Company's interest
in Vermont Yankee.
Seabrook 1
In December 2000 and April 2001, respectively, Northeast Utilities
(NU) and the Company filed Seabrook divestiture plans before the New
Hampshire Public Utilities Commission (NHPUC). Under the terms of the
Public Service Company of New Hampshire Restructuring Settlement and
enabling legislation, the NHPUC, in conjunction with the Connecticut
Department of Public Utility Control (CDPUC), will administer an auction
of an 88 percent interest in the plant. On September 28, 2001, the NHPUC
and the CDPUC jointly announced that JP Morgan had been retained as the
exclusive financial advisor to manage the sale. In November 2001, the
Company committed to participate in this auction sale process. The Company
expects the sale process to be completed by December 2002.
On July 6, 2001, legislation was enacted to modify New Hampshire's
current decommissioning law. This new legislation, initiated and supported
by Seabrook's joint owners, including the Company, is designed to protect
customers from future decommissioning risks. The legislation also enhances
the potential sale price of Seabrook by reducing the standard for non-
radiological decommissioning at the site, and by allowing the buyer of the
plant to retain any decommissioning funds in excess of those contributed
by customers of the present owners.
The New Hampshire Nuclear Decommissioning Finance Committee (NHNDFC)
has authority to implement the new decommissioning law. Under the new law,
the NHNDFC is charged with assuring that the buyer of Seabrook will have
adequate funding to complete decommissioning in the event the plant is
prematurely shutdown.
On November 5, 2001, the NHNDFC issued an order substantially
approving a settlement establishing proposed terms for funding assurance.
The terms of the settlement include a cash "top-off" payment to the
decommissioning fund of approximately $57 million at the time of the sale.
In addition, the buyer of the plant would be required to accelerate its
annual decommissioning fund contributions through 2006 and provide a
funding assurance package of approximately $125 million that would decline
over time as additional annual contributions are made to the fund.
Millstone 3
In November 1999, the Company entered into an agreement with NU to
settle claims made by the Company regarding the operation of Millstone 3.
Among other things, the settlement provided for NU to include the
Company's 16.2 percent interest in Millstone 3 in an auction of NU's share
of the unit. Upon the closing of the sale, the Company was to receive a
fixed amount, regardless of the actual sale price.
In August 2000, Dominion agreed to purchase the Millstone units,
including the Company's interest in Millstone 3, for $1.3 billion. In
March 2001, the sale was completed. In accordance with the prior
settlement agreement, the Company was paid approximately $27.9 million,
including $25 million for the plant, and the Company paid approximately
$5.8 million to increase the decommissioning trust fund.
The Rhode Island Attorney General and the Rhode Island Division of
Public Utilities and Carriers have previously contended that the payment
the Company received from the sale of Millstone 3, as established by its
agreement with NU, was insufficient in light of the Dominion purchase
price. The Rhode Island regulators may reassert their claims in connection
with the recovery of the stranded costs. The Company is unable to
determine whether such assertions would have a material impact on its
financial position.
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 2001, the charges assessed Norwood amount to
approximately $39 million, all of which remain unpaid. The Company filed a
collection action in Massachusetts Superior Court (Superior Court). The
Superior Court deferred action until various other appeals were decided.
(For a full discussion of the events leading up to the Superior Court's
decision, see Note D-6, "Town of Norwood Dispute" in the Notes to
Financial Statements in the Company's 2001 Annual Report.) On March 14,
2001, the Superior Court ordered Norwood to pay the Company $27 million
including interest. Norwood was ordered to pay the judgment in monthly
installments of $600,000. Norwood appealed the order on April 11, 2001.
Pending the appeal, Norwood entered into a consent order to establish a
segregated account for the benefit of the Company in the amount of $14
million and to make regular additions to the account.
Note D - Standard Offer Service and ICAP Deficiency Charge
- ----------------------------------------------------------
Prior to divesting substantially all of its nonnuclear generation
business in 1998, the Company was the wholesale supplier of the electric
energy requirements to its retail distribution affiliates as well as
unaffiliated customers. The Company's all-requirements contracts with its
affiliated distribution companies, as well as with some unaffiliated
customers, were generally terminated pursuant to settlement agreements and
tariff provisions in 1998. However, the Company remained obligated to
provide transition power supply service to new customer load in Rhode
Island at the standard offer price, but did not have a regulatory
agreement that necessarily allowed full recovery of the costs of such
standard offer power. Consequently, the Company was at risk for the
difference between the actual cost of serving this load and the revenue
received from this obligation. For the nine months ended December 31,
2001, the impact on the Company's financial position was immaterial.
Effective December 1, 2001, a third party assumed the responsibility for
providing transitional standard offer power service in Rhode Island, and
the Company's obligation terminated.
As reported in the Company's 2001 Annual Report, there has been
litigation regarding a FERC order to increase the Installed Capacity
(ICAP) deficiency charge to $8.75 per kilowatt-month (kW-month) instead of
the rate proposed by the Independent System Operator-New England (ISO New
England) of $0.17 per kW-month. In June 2001, after significant litigation
and a remand from the US Court of Appeals for the First Circuit, ISO New
England made a Compliance Filing with the FERC proposing a compromise ICAP
regime, including an ICAP deficiency charge of $4.87 per kW-month.
On September 28, 2001, the FERC issued an order refusing to apply
retroactively the $8.75 deficiency charge for the period January to June
2000. On November 20, 2001, the FERC issued an order on rehearing of the
August order requiring ISO New England to establish a prospective ICAP
regime (i.e., one under which utility ICAP purchase requirements are known
in advance) in lieu of a retrospective requirement with a cure period. It
is unclear what system will replace the ICAP regime in the future.
ISO New England has proposed a system that would be largely contract
based with respect to forward reserve market and quick-start services.
That proposal, which is contingent upon further development of Standard
Market Design, has generated a number of comments by parties that threaten
to reopen a number of issues that have already been settled in this area.
The Company is unable at this time to determine whether these
proceedings will have a material impact on earnings.
Note E - 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 (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS 71), which requires regulated entities, in
appropriate circumstances, to establish regulatory assets or liabilities,
and thereby defer the income statement impact of certain charges or
revenues because they are expected to be collected or refunded through
future customer billings. In 1997, the Emerging Issues Task Force of the
Financial Accounting Standards Board (FASB) 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 CTCs 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, 2001, this amounted to approximately $1.5 billion,
including $1.0 billion related to the above-market costs of purchased
power contracts, $0.2 billion related to accrued Yankee nuclear plant
costs, and $0.3 billion related to other net CTC regulatory assets.
Note F - New Accounting Standards
- ---------------------------------
The Company adopted SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets" (FAS 142), effective April 1, 2001. FAS 142 requires
that goodwill no longer be amortized. The following table presents pro
forma information for the quarter and nine months ended December 31, 2000,
to reflect the reversal of goodwill amortization in accordance with FAS
142:
December 31, 2000
(In thousands)
Quarter Nine Months
Ended Ended
------- -----------
Net income, as reported $14,780 $45,463
Reversal of goodwill
amortization 4,455 13,238
------- -------
Restated pro forma
net income $19,235 $58,701
======= =======
In accordance with FAS 142, goodwill must be reviewed for impairment
within six months of adoption ("transitional goodwill impairment test"),
and annually thereafter. The Company utilized a discounted cash flow
approach incorporating its most recent business plan forecasts in the
performance of the transitional test for goodwill impairment. The result
of this analysis determined that no adjustment to the goodwill carrying
value was required.
FAS 142 also requires that recognizable intangible assets be
amortized over their useful lives and tested for impairment. Intangible
assets with indefinite useful lives should be reviewed for impairment. The
Company has concluded a review of its intangible assets at March 31, 2001,
and no adjustment was deemed necessary effective with the adoption of FAS
142.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." These accounting pronouncements require that
an entity recognize derivative instruments as either assets or liabilities
in the statement of financial position and the measure of those
instruments at fair value. The Company adopted the pronouncements
effective at the beginning of fiscal 2002. The standards have not
materially affected the Company's financial position or results of
operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (FAS 143). FAS 143 provides the accounting
requirements for retirement obligations associated with tangible long-
lived assets. FAS 143 is effective for fiscal years beginning after June
15, 2002, and early adoption is permitted. The Company does not expect
that this pronouncement will have a material impact in its earnings,
considering that historically the obligations related to asset retirements
have been recovered through rates.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (FAS 121) and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," related to the disposal of a segment of a
business. FAS 144 establishes a single accounting model for long-lived
assets to be disposed of by sale and resolves significant implementation
issues related to FAS 121. FAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company is currently unable to determine the
impact of this statement on its financial position or results of
operations.
Note G - Voluntary Early Retirement
- ------------------------------------
On January 14, 2002, a limited Voluntary Early Retirement Offer
(VERO) was extended to non-union employees who meet certain eligibility
requirements. Eligible employees are in targeted functions and will be age
55 with at least ten years of pension service by March 31, 2004. This
program is intended to reduce the National Grid USA workforce through
attrition. At this time, the Company cannot reasonably estimate the
participation in the VERO. Therefore, expenses related to this offer have
not yet been recorded.
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 Annual Report for the period ended March 31,
2001. Certain prior period amounts on the financial statements have been
reclassified to conform with the current presentation
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 Annual Report on Form 10-K for the period
ended March 31, 2001.
The Company is a wholly owned subsidiary of National
Grid USA.
FERC Proceedings
- ----------------
In general, the regulatory structure and regulations
which relate to the Company's business are in a period of
major change and uncertainty. Decisions being made by the
Federal Energy Regulatory Commission (FERC) and the
Independent System Operator-New England (ISO New England)
will affect how the Company does business and whether it
can enter new endeavors. The Company is currently unable to
determine whether these proceedings will have a material
impact on its financial position or results of operations.
The FERC has been reviewing the development of
regional transmission organizations (RTOs). The FERC has
indicated that it wants RTOs to have large geographic
scope. In July and August, 2001, the FERC ordered National
Grid USA and other New England parties and participants of
the New York Independent System Operator (ISO), and the
Pennsylvania-New Jersey-Maryland (PJM) ISO to participate
in a mediation process to develop a proposal for a larger
RTO. The FERC has not yet ruled on the mediation report
issued in September 2001.
Pending the ruling on the mediation report, the
transmission owners have been working toward a hybrid RTO
structure in which an independent transmission company
would manage the transmission grid for the RTO and an
independent market administrator would manage power sales
for the RTO. However, it is not clear what sort of RTO
structure will ultimately result from these negotiations.
In fact, based on a January 29, 2002 filing by the New York
and New England ISOs to form their own RTO, even the
geographic scope of the RTO in which the Company will
participate is still an open question.
The FERC has begun another advanced rulemaking to
address Standard Market Design regarding the buying and
selling of power. As a first step in this direction, the
FERC has requested in a December 19, 2001 order that all
industry segments try to agree on a single standards
organization that would establish national standard
business practices for the wholesale electric industry. The
FERC indicated that if the industry cannot reach agreement
by March 15, 2002, the FERC will either choose such an
organization itself or develop such standard business
practices on its own.
To the extent the Company wishes to pursue
opportunities to manage an RTO or to be a member of an
independent transmission company, with the opportunity to
propose financial incentives to deliver greater value for
customers and shareholders, the FERC rulings in this and
other proceedings may have an impact on the ability to do
so.
On June 13, 2001, the FERC issued an order relating to
New England Power Pool's (NEPOOL) proposed congestion
management and multi-settlement systems. In the June 13
Order, the FERC found that "energy uplift" costs (which had
been about $9 million per month for NEPOOL in 2000) should
be allocated on the basis of reliance on the energy markets
administered by the ISO New England. This would have the
effect of relieving parties that procure power under
bilateral contracts (such as the Company) from paying
energy uplift charges. However, the NEPOOL Participants
Committee and ISO New England submitted a filing on July
13, 2001 that the Company believes does not comport with
the FERC's order. The Company has filed a protest to the
NEPOOL and ISO New England filing.
Earnings
- --------
Net income for the quarter and nine months ended
December 31, 2001, increased approximately $3 million and
$15 million, respectively, compared with the same periods
in 2000. The increase is primarily due to the adoption of
Statement of Financial Accounting Standards No. 142
"Accounting for Goodwill and Other Intangible Assets" (FAS
142), effective April 1, 2001, which requires the cessation
of goodwill amortization, (See Note F.) Also contributing
to the increase in earnings is a decrease in interest
expense due to decreased interest rates on variable-rate
long-term debt and the refinancing of short-term debt.
Operating Revenue
- -----------------
Operating revenue for the quarter and nine months
ended December 31, 2001, decreased approximately $20
million and $60 million, respectively, compared with the
same periods in 2000. The decrease in revenue for the
quarter is primarily due to reduced kilowatthour (kWh)
sales as a result of the sale of the Millstone 3 nuclear
generating facility (Millstone 3) in March of 2001, and the
termination of the standard offer service to Rhode Island,
effective December 1, 2001. The decrease is also related to
reduced contract termination charges (CTC) revenue due to
fully reconciling true-up mechanisms that allow the Company
to adjust revenues proportionately with correlating
expenses.
For the nine month period the decrease is primarily
attributable to reduced kWh sales due to the sale of
Millstone 3, the effect of a refueling outage at the
Vermont Yankee nuclear power plant during the quarter ended
June 30, 2001, and decreased CTC revenue as described in
the previous paragraph. Partially offsetting these
decreases were increases in kWh sales related to standard
offer service to Rhode Island through December 1, 2001, and
increased transmission revenues. The transmission charge is
a formula rate that recovers the Company's actual costs
plus a return on actual investment.
Operating Expenses
- ------------------
Operating expenses for the quarter and nine months
ended December 31, 2001, decreased approximately $19
million and $60 million, respectively, compared with the
same periods in 2000.
Fuel for generation expense for the quarter and nine
months ended December 31, 2001, decreased approximately $1
million and $6 million, respectively, primarily due to the
sale of Millstone 3.
Purchased power expense increased approximately $3
million for the quarter ended December 31, 2001, compared
with the same period in 2000. The increase was primarily
due to a refund of excess nuclear insurance coverage and
tax credits to Maine Yankee and Connecticut Yankee during
the quarter ended December 31, 2000.
For the nine month period ended December 31, 2001,
purchased power expense increased approximately $6 million
compared with the same period in 2000. The increased cost
is attributed to a refueling outage at Vermont Yankee
during the quarter ended June 30, 2001, the effect of the
insurance refund and tax credits discussed above, and the
inclusion of Montaup Electric Company's (Montaup) purchased
power costs effective May 1, 2000. These increases are
partially offset by decreased costs due to lower fuel
prices of power purchased to supply the standard offer
customers in Rhode Island. Effective December 1, 2001, a
third party assumed the responsibility for providing
transitional standard offer power service in Rhode Island,
and the Company's obligation terminated.
Nuclear operation and maintenance expenses for the
quarter and nine months ended December 31, 2001, decreased
approximately $7 million and $16 million, respectively, as
a result of the sale of Millstone 3. Other operating
expenses for the quarter ended December 31, 2001, decreased
approximately $1 million compared with the same period in
2000, primarily due to a decrease in administrative expense
caused by the sale of Millstone 3.
Depreciation and amortization expenses for the quarter and
nine months ended December 31, 2001, decreased
approximately $14 million and $42 million, respectively,
compared with the same periods in 2000. This decrease is
due to reduced nuclear depreciation and decommissioning
expense as a result of the sale of Millstone 3 in March
2001, and the full recovery of the Company's CTC-related
fixed costs associated with its generating plants and
regulatory assets (excluding Montaup's fixed costs) at the
end of 2000.
Other Income and Expense-net
- ----------------------------
Other income and expense-net for the quarter and nine
months ended December 31, 2001, increased approximately $3
million and $10 million, respectively, compared with the
same periods in 2000. The increase is due primarily to the
cessation of goodwill amortization as a result of the
adoption of FAS 142 and an increase in allowance for equity
funds used during construction, partially offset by reduced
earnings from the Yankee Nuclear Power Companies.
Interest Expense
- ----------------
Interest expense for the quarter and nine months ended
December 31, 2001 decreased approximately $2 million and $4
million, respectively, compared with the same periods in
2000 primarily due to decreased interest rates on the
Company's variable-rate long-term debt and the refinancing
of short-term debt.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled approximately
$16 million and $36 million for the quarter and nine months
ended December 31, 2001, respectively, and were primarily
transmission-related. The funds necessary for utility plant
expenditures during the period were primarily provided by
internally generated funds.
At December 31, 2001, the Company had no short-term
debt outstanding. The Company has regulatory approval to
issue up to $375 million of short-term debt. National Grid
USA and certain subsidiaries, including the Company,
operate a money pool to more effectively utilize cash
resources and to reduce outside short-term borrowings.
Short-term borrowing needs are met first by available funds
of the money pool participants. Borrowing companies pay
interest at a rate designed to approximate the cost of
outside short-term borrowings. Companies that invest in the
pool share the interest earned on a basis proportionate to
their average monthly investment in the money pool. Funds
may be withdrawn from or repaid to the pool at any time
without prior notice.
At December 31, 2001, 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, 2001. Fees are paid on the
lines and facilities in lieu of compensating balances.
At December 31, 2001, the Company had no off-balance
sheet transactions, arrangements, or other relationships
with unconsolidated entities or persons that would
materially affect liquidity, availability of capital
resources, financial position, or results of operations.
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, 2001, 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, 2001, was approximately
2.745 percent.
For a full discussion of the Company's risk associated
with the Installed Capacity deficiency charge, refer to
Note D in the Notes to Unaudited Financial Statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning an appeal by the Town of
Norwood, Massachusetts of a judgment in favor of the
Company, discussed in this report in Note C of Notes to
Unaudited Financial Statements, is incorporated herein and
made a part hereof.
Information concerning several Federal Energy
Regulatory Commission proceedings, discussed in this report
in the FERC Proceedings section of Management's Discussion
and Analysis of Financial Condition and Results of
Operations (Part I, Item II) and in Note D of Notes to
Unaudited Financial Statements, is incorporated herein and
made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
None.
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, 2001
to be signed on its behalf by the undersigned thereunto
duly authorized.
NEW ENGLAND POWER COMPANY
s/John G. Cochrane
John G. Cochrane,
Authorized Officer, and
Principal Financial Officer
Date: February 13, 2002
New England Power New England Power Company
25 Research Drive
Westborough, Massachusetts 01582
Tel. (508) 389-2000
February 13, 2002
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
New England Power Company is a participant in the
Electronic Data Gathering and Retrieval Program.
Submitted herewith in electronic format for filing with
the Commission is a Quarterly Report on Form 10-Q for the
period ended December 31, 2001, for the below named
company, which is currently required to file reports
pursuant to Section 13 of the Securities Exchange Act of
1934.
NEW ENGLAND POWER COMPANY
This report is filed with you pursuant to Rule 13(a)-13 of
the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
Very truly yours,
s/ John G. Cochrane
John G. Cochrane
Treasurer
18
1
NEW ENGLAND POWER COMPANY
Notes To Unaudited Financial Statements
NEW ENGLAND POWER COMPANY
NEW ENGLAND POWER COMPANY