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 June 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-1229
(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
(508-366-9011)
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:
6,449,896 shares at June 30, 1994.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
Operating revenue, principally from affiliates$356,488$361,131$756,062 $756,196
-------- -------- -------- --------
Operating expenses:
Fuel for generation 64,143 56,174 137,502 129,474
Purchased electric energy 118,919 133,352 239,757 259,276
Other operation 47,341 41,114 91,743 92,903
Maintenance 28,357 30,485 49,263 47,991
Depreciation and amortization 34,249 32,763 68,907 66,902
Taxes, other than income taxes 14,031 13,471 29,387 27,836
Income taxes 17,256 17,908 50,438 44,371
-------- -------- -------- --------
Total operating expenses 324,296 325,267 666,997 668,753
-------- -------- -------- --------
Operating income 32,192 35,864 89,065 87,443
Other income:
Allowance for equity funds used during
construction 2,286 811 4,062 1,502
Equity in income of nuclear power companies1,444 1,351 2,731 2,936
Other income (expense) - net (599) 255 (2,970) (1,088)
-------- -------- -------- --------
Operating and other income 35,323 38,281 92,888 90,793
-------- -------- -------- --------
Interest:
Interest on long-term debt 9,339 11,258 18,491 23,510
Other interest 995 416 1,034 937
Allowance for borrowed funds used during
construction - credit (1,193) (337) (2,008) (688)
-------- -------- -------- --------
Total interest 9,141 11,337 17,517 23,759
-------- -------- -------- --------
Net income $ 26,182 $ 26,944 $ 75,371 $ 67,034
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period$370,289 $342,655 $346,153 $321,699
Net income 26,182 26,944 75,371 67,034
Dividends declared on cumulative
preferred stock (858) (1,398) (1,724) (2,796)
Dividends declared on common stock (20,962) (61,275) (45,149) (79,011)
--------- -------- -------- --------
Retained earnings at end of period $374,651 $306,926 $374,651 $306,926
======== ======== ======== ========
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 New England Electric System.
NEW ENGLAND POWER COMPANY
Statements of Income
Twelve Months Ended June 30
(Unaudited)
1994 1993
---- ----
(In Thousands)
Operating revenue, principally from affiliates $1,548,881 $1,541,819
---------- ----------
Operating expenses:
Fuel for generation 281,375 280,959
Purchased electric energy 506,466 519,069
Other operation 184,927 178,413
Maintenance 104,533 103,922
Depreciation and amortization 133,937 129,192
Taxes, other than income taxes 53,482 52,560
Income taxes 100,065 88,487
---------- ----------
Total operating expenses 1,364,785 1,352,602
---------- ----------
Operating income 184,096 189,217
Other income:
Allowance for equity funds used during construction5,813 2,882
Equity in income of nuclear power companies 5,441 5,657
Other income (expense) - net (2,449) (1,357)
---------- ----------
Operating and other income 192,901 196,399
---------- ----------
Interest:
Interest on long-term debt 40,818 52,652
Other interest 5,524 2,585
Allowance for borrowed funds used during
construction - credit (3,246) (1,527)
---------- ----------
Total interest 43,096 53,710
---------- ----------
Net income $ 149,805 $ 142,689
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 306,926 $ 303,664
Net income 149,805 142,689
Dividends declared on cumulative preferred stock (3,811) (5,592)
Dividends declared on common stock (77,399) (133,835)
Premium on redemption of preferred stock (870)
---------- ----------
Retained earnings at end of period $ 374,651 $ 306,926
========== ==========
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 New England Electric System.
NEW ENGLAND POWER COMPANY
Balance Sheets
(Unaudited)
June 30, December 31,
ASSETS 1994 1993
------ ---- ----
(In Thousands)
Utility plant, at original cost $2,481,790 $2,445,702
Less accumulated provisions for depreciation
and amortization 975,099 943,750
---------- ----------
1,506,691 1,501,952
Net investment in Seabrook 1 under rate settlement 71,683 103,344
Construction work in progress 249,841 165,860
---------- ----------
Net utility plant 1,828,215 1,771,156
---------- ----------
Investments:
Nuclear power companies, at equity 46,727 46,342
Nonutility property and other investments, at cost 19,932 19,927
---------- ----------
Total investments 66,659 66,269
---------- ----------
Current assets:
Cash 1,710 610
Accounts receivable, principally from sales of
electric energy:
Affiliated companies 192,914 201,674
Others 62,446 58,581
Fuel, materials and supplies, at average cost 64,964 55,955
Prepaid and other current assets 27,692 26,454
---------- ----------
Total current assets 349,726 343,274
---------- ----------
Accrued Yankee Atomic costs 91,520 103,501
Deferred charges and other assets 162,679 157,087
---------- ----------
$2,498,799 $2,441,287
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
authorized and outstanding 6,449,896 shares $ 128,998 $ 128,998
Premiums on capital stocks 86,829 86,829
Other paid-in capital 288,000 288,000
Retained earnings 374,651 346,153
---------- ----------
Total common equity 878,478 849,980
Cumulative preferred stock, par value $100 per share 60,516 61,028
Long-term debt 667,535 667,448
---------- ----------
Total capitalization 1,606,529 1,578,456
---------- ----------
Current liabilities:
Short-term debt (including $12,475,000 and $8,325,000
to affiliates) 84,150 50,525
Accounts payable (including $58,581,000 and $58,056,000
to affiliates) 161,860 144,100
Accrued liabilities:
Taxes 15,102 9,337
Interest 10,039 10,086
Other accrued expenses 13,889 38,313
Dividends payable 21,820 14,512
---------- ----------
Total current liabilities 306,860 266,873
---------- ----------
Deferred federal and state income taxes 348,324 344,077
Unamortized investment tax credits 61,658 62,591
Accrued Yankee Atomic costs 91,520 103,501
Other reserves and deferred credits 83,908 85,789
---------- ----------
$2,498,799 $2,441,287
========== ==========
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
1994 1993
---- ----
(In Thousands)
Operating Activities:
Net income $ 75,371 $ 67,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 70,916 69,570
Deferred income taxes and
investment tax credits - net 7,373 1,768
Allowance for funds used during construction (6,070) (2,190)
Early retirement program 2,967
Decrease (increase) in accounts receivable 4,895 40,398
Decrease (increase) in fuel, materials, and supplies(9,009) (7,325)
Increase (decrease) in accounts payable 17,760 (3,260)
Increase (decrease) in other current liabilities (18,706) 11,897
Other, net (18,117) (12,781)
--------- ---------
Net cash provided by operating activities $ 124,413 $ 168,078
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(116,861) $ (65,572)
--------- ---------
Net cash used in investing activities $(116,861) $ (65,572)
--------- ---------
Financing Activities:
Dividends paid on common stock $ (38,699) $ (41,924)
Dividends paid on preferred stock (866) (2,796)
Long-term debt - issues 102,000
Long-term debt - retirements (101,000)
Preferred stock - retirement (512)
Premium on reacquisition of long-term debt (841)
Changes in short-term debt 33,625 (18,325)
--------- ---------
Net cash used in financing activities $ (6,452) $ (62,886)
--------- ---------
Net increase in cash and cash equivalents $ 1,100 $ 39,620
Cash and cash equivalents at beginning of period 610 652
--------- ---------
Cash and cash equivalents at end of period $ 1,710 $ 40,272
========= =========
Supplementary Information:
Interest paid less amounts capitalized $ 15,960 $ 20,840
--------- ---------
Federal and state income taxes paid $ 40,687 $ 41,283
--------- ---------
The accompanying notes are an integral part of these financial statements.
Note A - Investments in Nuclear Power Companies
- -----------------------------------------------
A summary of combined results of operations, assets and
liabilities of the four Yankee Nuclear Power Companies in which the
Company has investments is as follows:
Quarters Ended Six Months Ended
June 30,
----------------------------------------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
Operating revenue $158,091 $174,997 $308,740 $330,042
======== ======== ======== ========
Net income $ 7,522 $ 6,610 $ 15,444 $ 14,912
======== ======== ======== ========
Company's equity in
net income $ 1,444 $ 1,351 $ 2,731 $ 2,936
======== ======== ======== ========
June 30, December 31,
1994 1993
---- ----
(In Thousands)
Plant $ 535,993 $ 591,650
Other assets 1,297,576 1,286,923
Liabilities and debt (1,586,269)(1,633,139)
----------- -----------
Net assets $ 247,300 $ 245,434
=========== ===========
Company's equity in net assets $ 46,727 $ 46,342
=========== ===========
At June 30, 1994, $12,783,000 of undistributed earnings of the
nuclear power companies were included in the Company's retained
earnings. Yankee Atomic Electric Company plans to retain its
earnings until all of its current debt commitments are satisfied.
Note B - 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,
Note B - Continued
- ------
for remediation of property contaminated with hazardous substances.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. 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. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System subsidiaries currently have in place an
environmental audit program intended to enhance compliance with
existing federal, state, and local requirements regarding the
handling of potentially hazardous products and by-products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. The Company has been named as a
potentially responsible party (PRP) by either the U.S.
Environmental Protection Agency or the Massachusetts Department of
Environmental Protection at six sites at which hazardous waste is
alleged to have been disposed. The Company is also aware of other
sites for which it may be held responsible for remediating and it
is likely that, in the future, the Company will become involved in
additional proceedings demanding contribution for the cost of
remediating additional hazardous waste sites.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates 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. Although
rate recovery may be sought for cleanup costs incurred, it is
uncertain what portion, if any, would be allowed in rates.
Note B - Continued
- ------
The Company believes that hazardous waste liabilities for all
sites of which it is aware will not be material (10 percent of
common equity) to its financial position. Where appropriate, the
Company intends to seek recovery from its insurers and from other
PRPs, but it is uncertain whether, and to what extent, such efforts
will be successful.
Note C
- ------
In the opinion of the Company, these 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 1993 Annual
Report.
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Earnings
- --------
Net income for the first six months of 1994 increased $8
million from the corresponding period in 1993. Earnings in the
first six months of 1993 included a one-time after-tax charge of $6
million ($10 million before tax) associated with an early
retirement offer and special severance program for non-union
employees undertaken by the Company as part of an organizational
review. Excluding the effects of this 1993 charge, earnings for
the first six months of 1994 increased $2 million primarily due to
increased peak demands in the first quarter and decreased interest
costs. The increased earnings were partially offset by other
increased operation and maintenance costs and the reimbursement to
The Narragansett Electric Company (Narragansett) of certain power
plant dismantlement costs.
Regulatory Issues
- -----------------
The Federal Energy Regulatory Commission (FERC) has allowed the
Company to defer increased costs associated with a new accounting
standard for postretirement benefits other than pensions (PBOPs)
effective with its next rate filing. New accounting rules
established by the Financial Accounting Standards Board, which
became effective in 1993, require employers to establish a
liability during the working years of employees for the expected
cost of providing PBOPs instead of recording such costs when paid.
In a statement of policy applicable to all utilities subject to its
rate-making jurisdiction, the FERC stated that the increased costs
resulting from these new rules could be deferred pending the next
rate filing so long as such filing occurs before the end of 1995.
Accordingly, the Company has deferred a total of approximately $15
million of increased PBOP costs since January 1, 1993.
Operating Revenue
- -----------------
The following table summarizes the changes in operating revenue
during the second quarter and first six months of 1994 compared to
the corresponding periods in 1993:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- -----------
1994 vs 1993 1994 vs 1993
-------------- -----------
(In Millions)
Fuel recovery (2) $(6)
Accrued NEEI fuel revenues (2) (2)
Sales increase 3 12
Narragansett integrated
facilities credit (4) (4)
--- ---
$(5) $ -
=== ===
Accrued New England Energy Incorporated (NEEI) fuel revenues
reflect losses incurred by NEEI on its rate-regulated oil and gas
operations. These revenues are accrued by the Company in the year
of the loss, but are billed to its customers through its fuel
clause in the following year. The decrease in accrued NEEI fuel
revenues reflects decreased losses due to decreased oil and gas
production partially offset by decreased oil prices.
The increase in sales in the second quarter primarily reflects
increased sales for resale to other utilities. The increase in
sales for the first six months of 1994 also reflects the effects of
an increase in peak demands in January and June of 1994.
The entire output of Narragansett's portion of the Manchester
Street Generating Station is made available to the Company.
Narragansett receives a credit on its purchased power bill from the
Company for its fuel costs and other generation and transmission
costs associated with this plant. The increased credit reflects
increased dismantlement costs being incurred on Narragansett's
previously retired South Street generating facility.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Total Operating Expenses
Second Quarter Six Months
-------------- ------------
1994 vs 1993 1994 vs 1993
-------------- ------------
(In Millions)
Fuel costs $(3) $(7)
Accrued NEEI fuel costs (2) (2)
Purchased energy excluding fuel (2) (3)
Other operation and maintenance 4 -
Depreciation and amortization 2 2
Taxes - 8
--- ---
$(1) $(2)
=== ===
Total fuel costs represents fuel for generation and the
portion of purchased electric energy permitted to be recovered
through the Company's fuel adjustment clause. Purchased energy
excluding fuel represents the remainder of purchased electric
energy costs. The decrease in fuel costs reflects reduced
alternate energy purchases. The decrease in purchased energy
excluding fuel reflects a reduction in costs billed to the
Company during the second quarter of 1994 resulting from a
refueling outage by a nuclear power supplier in 1993.
The increase in other operation and maintenance expense
during the second quarter reflects increased demand-side
management program costs, increased computer system development
costs, increased nuclear refueling related expenses, and general
increases in other areas. These increases, which also occurred
in the six month period, were offset by a one-time charge of
$10 million associated with an early retirement offer and
special severance program recorded in the first quarter of 1993.
The increase in taxes for the first six months of 1994 is
primarily due to increased income and the effects of the
increase in the federal corporate income tax rate from 34
percent to 35 percent which went into effect in the third
quarter of 1993 retroactive to January 1, 1993 and increased
property tax accruals.
Allowance For Funds Used During Construction (AFDC)
- --------------------------------------------------
AFDC increased for the second quarter and first six months
of 1994 due to increased construction work in progress,
principally associated with the repowering of the Manchester
Street Station (see Utility Plant Expenditures and Financing
section).
Interest Expense
- ----------------
The decrease in interest expense for the second quarter and
first six months of 1994 is primarily due to significant
refinancings of corporate debt at lower interest rates during
1993.
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. Parties liable include past and
present site owners and operators, transporters that brought
wastes to the site, and entities that generated or arranged for
disposal or treatment of wastes ultimately disposed of at the
site. 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. These products or by-products may not
have previously been considered hazardous, and may not currently
be considered hazardous, but may be identified as such by
federal, state, or local authorities in the future. The New
England Electric System subsidiaries (NEES) currently have in
place an environmental audit program intended to enhance
compliance with existing federal, state, and local requirements
regarding the handling of potentially hazardous products and by-
products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against
the Company regarding liability for cleanup of sites alleged to
contain hazardous waste or substances. The Company has been
named as a potentially responsible party (PRP) by either the
U.S. Environmental Protection Agency (EPA) or the Massachusetts
Department of Environmental Protection at six sites at which
hazardous waste is alleged to have been disposed. The Company
is also aware of other sites for which it may be held
responsible for remediating and it is likely that, in the
future, the Company will become involved in additional
proceedings demanding contribution for the cost of remediating
additional hazardous waste sites.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such
as the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and
amount of waste disposed at the site, and the surrounding
geography and land use, make precise estimates 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. Although rate recovery may be sought for cleanup costs
incurred, it is uncertain what portion, if any, would be allowed
in rates.
The Company believes that hazardous waste liabilities for
all sites of which it is aware will not be material (10 percent
of common equity) to its financial position. Where appropriate,
the Company intends to seek recovery from its insurers and from
other PRPs, but it is uncertain whether, and to what extent,
such efforts will be successful.
Electric and Magnetic Fields (EMF)
- ---------------------------------
In recent years, concerns have been raised about whether
EMF, which occur near transmission and distribution lines as
well as near household wiring and appliances, cause or
contribute to adverse health effects. Numerous studies on the
effects of these fields, some of them sponsored by electric
utilities (including NEES companies), have been conducted and
are continuing. Some of the studies have suggested associations
between certain EMF and various types of cancer, while other
studies have not substantiated such associations. In February
1993, the EPA called for significant additional research on EMF.
In July 1994, a study by a University of Southern California
professor suggested an association between EMF and Alzheimer's
disease. It is impossible to predict the ultimate impact on the
Company and the electric utility industry if further
investigations were to demonstrate that the present electricity
delivery system is contributing to increased risk of cancer or
other health problems.
Several state courts have recognized a cause of action for
damage to property values in transmission line condemnation
cases based on the fear that power lines cause cancer. It is
difficult to predict what impact there would be on the Company
if this cause of action is recognized in the states in which the
Company operates and in contexts other than condemnation cases.
Clean Air Requirements
- ----------------------
The Company produces approximately 50 percent of its
electricity at eight older thermal generating units located in
Massachusetts. Six of the units are fueled by coal and the
other two are fueled by oil and natural gas. The 1990
amendments to the federal Clean Air Act require a significant
reduction in the nation's sulfur dioxide (SO2) and nitrogen
oxide (NOx) emissions by the year 2000.
Under the amendments pertaining to S02 emissions, the
Company expects to be included in Phase 1 of the acid rain
provisions that will become effective in 1995. The Company is
also subject to the Massachusetts S02 acid rain law that will
become effective in 1995, and Phase 2 of the federal acid rain
requirements, that will become effective in 2000.
In connection with requirements that relate to NOx
emissions, state environmental agencies in ozone non-attainment
areas were required to develop regulations (also known as
Reasonably Available Control Technology requirements, or RACT)
that will become effective in 1995 to address the first phase of
ozone air quality attainment. These regulations were adopted in
Massachusetts in September 1993. The RACT regulations require
control technologies (such as low NOx burners) to reduce NOx
emissions, an ozone precursor. Additional control measures may
be necessary to ensure attainment of the ozone standard. These
measures would have to be developed by the states in 1994 and
fully implemented by the Company no later than 1999. The extent
of these additional control measures is unknown at this time,
but could range from minor additions to the RACT requirements to
extensive emission reduction requirements, such as costly add-on
controls or fuel switching. Should the 1999 ozone attainment
requirements be extensive, or additional Clean Air Act or other
environmental requirements be imposed, continued operation of
certain existing generating units beyond 1999 could be
uneconomical. The Company believes that premature retirement of
substantially all of its older thermal generating units would
cause substantial rate increases.
It is estimated that the Company will incur one-time
operation and maintenance costs totaling approximately
$25 million and capital costs totaling approximately $120
million by 1995, of which approximately $10 million and $68
million, respectively, had been spent through June 1994, to
comply with SO2 and NOx requirements that will become effective
in 1995. In addition, the Company expects to incur increased
fuel costs ranging from approximately $10 million to $20
million, depending on fuel market conditions, by 1995, as a
result of federal and state clean air requirements.
The generation of electricity from fossil fuels may emit
trace amounts of hazardous air pollutants as defined in the
Clean Air Act Amendments of 1990. The Act mandates a study of
the potential dangers of hazardous air pollutant emissions from
electric utility plants. Such research is currently under way
and is expected to be complete in 1995. The study conclusions
could result in new emission standards and the need for
additional costly controls on the Company's plants. At this
time, the Company cannot estimate the impact that findings of
this research might have on operations.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to
increasing competitive pressures, stemming from a combination of
trends, including increasing electric rates, improved
technologies, and new regulations and legislation intended to
foster competition. Recently, this competition has been most
prominent in the bulk power market in which non-utility
generating sources have noticeably increased their market share.
For example, in 1984, less than 1 percent of the Company's
capacity was supplied by non-utility generation sources. By the
end of 1993, non-utility power purchases accounted for 380 MW,
or 7 percent, of the Company's total capacity. In addition to
competition from non-utility generators, the presence of excess
generating capacity in New England has resulted in the sale of
bulk power by utilities at prices less than the total costs of
owning and operating such generating capacity. However, in July
1994, a new all-time regional and system peak occurred which
will have the effect of reducing the near-term level of this
excess generating capacity in New England.
Since over 95 percent of the Company's sales are to its
retail affiliates, the Company is affected by increased
competition that these affiliates are facing in the retail
market. Currently, retail competition comes primarily from
alternative fuel suppliers (principally natural gas companies)
for heating and cooling, customer-owned generation to displace
purchases from electric utilities, and direct competition among
electric utilities to attract major new manufacturing facilities
to their service territories. In the future, the potential
exists for electric utilities and non-utility generators to sell
electricity to retail customers of other electric utilities
without regard to franchised service territories. For example,
the California Public Utilities Commission recently announced a
proposal that would give certain large retail customers, by the
year 1996, and all other retail customers, by the year 2002, the
option of selecting their electricity provider. Power purchased
from another provider would still be delivered over the local
utility's transmission network which, under the proposal, would
be subject to broader access. Other states, including several
New England states, have considered or are in the process of
considering options to foster increased competition.
The NEES companies are responding to current and anticipated
competitive pressures in a variety of ways, including cost
control and a corporate reorganization into separate retail and
wholesale business units. The wholesale business unit, which
includes the Company, is positioning itself for increased
competition through such means as terminating certain purchased
power contracts, shutdowns of uneconomic generating stations, as
well as rapid amortization of certain plant assets.
Specifically, the Company's rates currently include
approximately $100 million per year associated with the
recovery of certain Seabrook 1 costs under a 1988 rate
settlement and coal conversion expenditures at the Company's
Salem Harbor station. The recovery of these costs will be
completed prior to the end of 1995. The retail business unit's
response to competition includes the development of value-added
services for customers and the offering of economic development
rates to encourage businesses to locate in the retail
affiliates' service territories. In addition, two of the
Company's retail affiliates either offered or will begin
offering, a discount from base rates in return for a contract
requiring a customer to provide five years written notice before
purchasing electricity from others or generating any additional
electricity for the customer's own use.
The FERC ruled in 1992, in a proceeding not involving the
Company or its affiliates, that a utility may recover from a
wholesale requirements customer, any legitimate, prudent, and
verifiable costs that the utility had incurred based on a
reasonable expectation that it would continue to sell
requirements service to the customer. The FERC has referred to
such costs as "stranded costs". On appeal, the United States
Court of Appeals for the District of Columbia Circuit has
questioned whether allowing utilities to recover stranded costs
is anti-competitive and the Court remanded the case back to the
FERC for further proceedings and development of the competitive
issues. In a separate development, the FERC issued a notice of
proposed rule-making on the recovery of investment costs
stranded as a result of increased competition.
Electric utility rates are generally based on a utility's
costs. Therefore, electric utilities are subject to certain
accounting standards that are not applicable to other business
enterprises in general. These accounting rules require
regulated entities, in appropriate circumstances, to establish
regulatory assets and liabilities, which defer the income
statement impact of certain costs that are expected to be
recovered in future rates. The effects of competition could
ultimately cause the operations of the Company, or a portion
thereof, to cease meeting the criteria for application of these
accounting rules. While the Company does not expect to cease
meeting these criteria in the near future, if this were to
occur, accounting standards of enterprises in general would
apply and immediate recognition of any previously deferred costs
would be necessary in the year in which these criteria were no
longer applicable. In addition, if, because of competition,
utilities are unable to recover all of their costs in rates, it
may be necessary to write off those costs that are not
recoverable.
Utility Plant Expenditures and Financing
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Cash expenditures for utility plant totaled $117 million for
the first six months of 1994 including $78 million related to
the Manchester Street Station Repowering Project. The funds
necessary for utility plant expenditures during the period were
provided by net cash from operating activities, after the
payment of dividends and the proceeds of short-term debt issues.
The Company plans to issue $50 million of long-term debt in
1994.
The Company's major construction project is the repowering
of Manchester Street Station, a 140 MW electric generating
station in Providence, Rhode Island which is jointly owned by
the Company (90 percent interest) and Narragansett (10 percent
interest). Repowering will more than triple the power generation
capacity of Manchester Street Station and substantially increase
the plant's thermal efficiency. The total cost for the
generating station, scheduled for completion in late 1995, is
estimated to be approximately $525 million, including AFDC. In
addition, related transmission work, which is principally the
responsibility of Narragansett, is estimated to cost
approximately $75 million and is scheduled for completion in
late 1994. At June 30, 1994, $263 million, including AFDC, had
been spent on the project ($211 million by the Company).
Substantial commitments have been made relative to future
planned expenditures for this project.
At June 30, 1994, the Company had $84 million of short-term
debt outstanding including $72 million in the form of commercial
paper borrowings. The Company currently has lines of credit and
standby bond purchase facilities with banks totaling $490
million. These lines of credit are available to provide
liquidity support for commercial paper borrowings and for $342
million of the Company's outstanding variable rate mortgage
bonds in commercial paper mode and for other corporate purposes.
There were no borrowings under these lines of credit at June 30,
1994.
For the twelve-month period ending June 30, 1994, the ratio
of earnings to fixed charges was 6.39.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
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On May 12, 1994, a Special Meeting in lieu of Annual Meeting
of Shareholders was held.
By unanimous vote of the 6,449,896 shares having general
voting rights represented at this meeting:
The number of directors for the ensuing year was fixed at six.
The following were elected as directors:
Joan T. Bok
Frederic E. Greenman
Alfred D. Houston
John W. Newsham
John W. Rowe
Jeffrey D. Tranen
In addition, Michael E. Jesanis was elected Treasurer and
Robert King Wulff was elected Clerk. The terms of office are until
the next annual meeting of stockholders and until their successors
are duly chosen and qualified.
Coopers & Lybrand was also selected as Auditor for the year
1994.
Item 6. Exhibits and Reports on Form 8-K
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The Company is filing the following revised exhibit for
incorporation by reference into its registration statements on Form
S-3, Commission file Nos. 33-48257, 33-48897, and 33-49193:
12 Statement re computation of ratios
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 June 30, 1994 to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
s/ Michael E. Jesanis
Michael E. Jesanis, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: August 9, 1994