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 September 30, 1995
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:
6,449,896 shares at September 30, 1995.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
Quarter Nine Months
-------- -----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
Operating revenue, principally from affiliates $421,935 $419,555$1,191,230 $1,175,617
-------- -------- --------------------
Operating expenses:
Fuel for generation 75,355 68,846 206,185 206,348
Purchased electric energy 133,660 139,173 419,209 378,930
Other operation 52,676 49,495 156,167 141,238
Maintenance 16,481 23,943 70,386 73,206
Depreciation and amortization 22,602 35,610 79,797 104,517
Taxes, other than income taxes 13,974 14,113 43,359 43,500
Income taxes 37,518 33,158 72,915 83,596
-------- -------- --------------------
Total operating expenses 352,266 364,338 1,048,018 1,031,335
-------- -------- --------------------
Operating income 69,669 55,217 143,212 144,282
Other income:
Allowance for equity funds used during
construction 2,535 2,199 7,488 6,261
Equity in income of nuclear power companies 1,356 1,478 4,247 4,209
Other income (expense) - net (713) 130 (1,812) (2,840)
-------- -------- --------------------
Operating and other income 72,847 59,024 153,135 151,912
-------- -------- --------------------
Interest:
Interest on long-term debt 11,859 9,620 34,861 28,111
Other interest 2,637 1,378 7,007 2,412
Allowance for borrowed funds used during
construction - credit (3,333) (1,792) (9,088) (3,800)
-------- -------- --------------------
Total interest 11,163 9,206 32,780 26,723
-------- -------- --------------------
Net income $ 61,684 $ 49,818 $ 120,355$ 125,189
======== ======== ====================
Statements of Retained Earnings
Retained earnings at beginning of period $368,443 $374,651 $ 372,763$ 346,153
Net income 61,684 49,818 120,355 125,189
Dividends declared on cumulative
preferred stock (858) (858) (2,575) (2,582)
Dividends declared on common stock (41,924) (40,312) (103,198) (85,461)
-------- -------- --------------------
Retained earnings at end of period $387,345 $383,299 $ 387,345$ 383,299
======== ======== ====================
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 September 30
(Unaudited)
1995 1994
---- ----
(In Thousands)
Operating revenue, principally from affiliates $1,556,370 $1,550,523
---------- ----------
Operating expenses:
Fuel for generation 260,377 277,986
Purchased electric energy 553,862 502,452
Other operation 211,539 191,765
Maintenance 107,708 106,386
Depreciation and amortization 113,259 135,733
Taxes, other than income taxes 54,259 54,553
Income taxes 85,915 98,961
---------- ----------
Total operating expenses 1,386,919 1,367,836
---------- ----------
Operating income 169,451 182,687
Other income:
Allowance for equity funds used during construction 10,369 7,387
Equity in income of nuclear power companies 4,854 5,899
Other income (expense) - net 735 (2,868)
---------- ----------
Operating and other income 185,409 193,105
---------- ----------
Interest:
Interest on long-term debt 45,461 38,937
Other interest 6,551 6,077
Allowance for borrowed funds used during
construction - credit (11,142) (4,459)
---------- ----------
Total interest 40,870 40,555
---------- ----------
Net income $ 144,539 $ 152,550
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 383,299 $ 334,170
Net income 144,539 152,550
Dividends declared on cumulative preferred stock (3,433) (3,448)
Dividends declared on common stock (137,060) (99,973)
---------- ----------
Retained earnings at end of period $ 387,345 $ 383,299
========== ==========
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)
September 30, December 31,
ASSETS 1995 1994
------ ---- ----
(In Thousands)
Utility plant, at original cost $2,745,552 $2,524,544
Less accumulated provisions for depreciation
and amortization 1,046,476 1,001,393
---------- ----------
1,699,076 1,523,151
Net investment in Seabrook 1 under rate settlement 19,012 38,283
Construction work in progress 221,936 314,777
---------- ----------
Net utility plant 1,940,024 1,876,211
---------- ----------
Investments:
Nuclear power companies, at equity 47,080 46,349
Nonutility property and other investments, at cost 23,758 22,980 ---------- ----------
Total investments 70,838 69,329
---------- ----------
Current assets:
Cash 2,476 377
Accounts receivable, principally from sales of
electric energy:
Affiliated companies 217,355 197,655
Others 49,277 69,532
Fuel, materials and supplies, at average cost 76,996 73,361
Prepaid and other current assets 32,405 33,729
---------- ----------
Total current assets 378,509 374,654
---------- ----------
Accrued Yankee Atomic costs 104,257 122,452
Deferred charges and other assets 198,315 170,192
---------- ----------
$2,691,943 $2,612,838
========== ==========
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 387,345 372,763
---------- ----------
Total common equity 891,172 876,590
Cumulative preferred stock, par value $100 per share 60,516 60,516
Long-term debt 735,386 695,466
---------- ----------
Total capitalization 1,687,074 1,632,572
---------- ----------
Current liabilities:
Long-term debt due in one year 10,000
Short-term debt (including $29,175,000 and $16,575,000
to affiliates) 166,575 145,575
Accounts payable (including $40,186,000 and $69,089,000
to affiliates) 156,200 179,761
Accrued liabilities:
Taxes 18,098 6,133
Interest 11,796 9,914
Other accrued expenses 10,406 10,866
---------- ----------
Total current liabilities 373,075 352,249
---------- ----------
Deferred federal and state income taxes 382,715 364,073
Unamortized investment tax credits 57,589 59,014
Accrued Yankee Atomic costs 104,257 122,452
Other reserves and deferred credits 87,233 82,478
---------- ----------
$2,691,943 $2,612,838
========== ==========
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Nine Months Ended September 30
(Unaudited)
1995 1994
---- ----
(In Thousands)
Operating Activities:
Net income $ 120,355 $ 125,189
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 84,241 107,674
Deferred income taxes and investment tax credits - net 16,927 10,204
Allowance for funds used during construction (16,576) (10,061)
Decrease (increase) in accounts receivable 555 (13,407)
Decrease (increase) in fuel, materials, and supplies (3,635) (7,100)
Eecrease (increase) in prepaid and other current assets 1,324 (946)
Increase (decrease) in accounts payable (23,561) 12,226
Increase (decrease) in other current liabilities 13,387 (11,891)
Other, net (30,905) (22,259)
--------- ---------
Net cash provided by operating activities $ 162,112 $ 189,629
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(125,240) $(172,837)
Other investing activities (300)
--------- ---------
Net cash used in investing activities $(125,240) $(173,137)
--------- ---------
Financing Activities:
Dividends paid on common stock $(103,198) $ (59,661)
Dividends paid on preferred stock (2,575) (2,582)
Redemption of preferred stock (512)
Long-term debt - issues 60,000 5,000
Long-term debt - retirements (10,000)
Changes in short-term debt 21,000 41,880
--------- ---------
Net cash used in financing activities $ (34,773) $ (15,875)
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 2,099 $ 617
Cash and cash equivalents at beginning of period 377 610
--------- ---------
Cash and cash equivalents at end of period $ 2,476 $ 1,227
========= =========
Supplementary Information:
Interest paid less amounts capitalized $ 29,347 $ 25,859
--------- ---------
Federal and state income taxes paid $ 37,670 $ 60,165
--------- ---------
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 Nine Months Ended
September 30,
----------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
Operating revenue $154,853 $119,729 $527,666 $428,469
======== ======== ======== ========
Net income $ 5,979 $ 7,945 $ 22,263 $ 23,389
======== ======== ======== ========
Company's equity in
net income $ 1,356 $ 1,478 $ 4,247 $ 4,209
======== ======== ======== ========
September 30, December 31,
1995 1994
---- ----
(In Thousands)
Plant $ 467,319 $ 537,103
Other assets 1,413,571 1,458,186
Liabilities and debt (1,630,999) (1,748,960)
----------- -----------
Net assets $ 249,891 $ 246,329
=========== ===========
Company's equity in net assets $ 47,080 $ 46,349
=========== ===========
At September 30, 1995, $13,137,000 of undistributed earnings
of the nuclear power companies were included in the Company's
retained earnings.
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,
for remediation of property contaminated with hazardous substances.
A number of states, including Massachusetts, have enacted similar
laws.
Note B - Hazardous Waste - Continued
- ------------------------
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. New England Electric System subsidiaries
currently have 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
by either the U.S. Environmental Protection Agency or the
Massachusetts Department of Environmental Protection for six 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 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. 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 would be successful. The Company believes that
hazardous waste liabilities for all sites of which it is aware will
not be material to its financial position.
Note C - Purchased Power Contract Dispute
- -----------------------------------------
In October 1994, the Company was sued by Milford Power Limited
Partnership (MPLP), a venture of Enron Corporation and Jones
Capital that owns a 149 megawatt gas-fired power plant in Milford,
Massachusetts. The Company purchases 56 percent of the power
output of the facility under a long-term contract with MPLP. The
suit alleges that the Company has engaged in a scheme to cause MPLP
and its power plant to fail and has prevented MPLP from finding a
long-term buyer for the remainder of the facility's output. The
complaint includes allegations that the Company has violated the
Federal Racketeer
Note C - Purchased Power Contract Dispute - Continued
- -----------------------------------------
Influenced and Corrupt Organizations Act, engaged in unfair or
deceptive acts in trade or commerce, and breached contracts. MPLP
also asserts that the Company deliberately misled regulatory bodies
concerning the Manchester Street Station repowering project. MPLP
seeks compensatory damages in an unspecified amount, as well as
treble damages. The Company believes that the allegations of
wrongdoing are without merit. The Company has filed counterclaims
and crossclaims against MPLP, Enron Corporation, and Jones Capital,
seeking monetary damages and termination of the purchased power
contract.
MPLP also intervened in the Company's recent rate filing
before the Federal Energy Regulatory Commission making similar
allegations to those asserted in MPLP's lawsuit. Hearings on this
claim concluded in October 1995. An Administrative Law Judge
initial decision is expected in early 1996.
Note D - New Accounting Standard
- --------------------------------
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (FAS 121), effective for fiscal year 1996. This
standard clarifies when and how to recognize an impairment of
long-lived assets. In addition, FAS 121 requires that all
regulatory assets, which must have a high probability of recovery
to be initially established, must continue to meet that high
probability standard to avoid being written off. However, if
written off, a regulatory asset can be restored if it again has a
high probability of recovery. The impact of this standard will be
driven by the facts and circumstances that exist when the standard
is adopted and thereafter.
Note E - Shipping Charter Contract Dispute
- ------------------------------------------
On August 17, 1995, the Massachusetts Superior Court dismissed
a lawsuit filed against NEP in May 1995 by Keystone Shipping
Company (Keystone). The Court held that Keystone's claims,
relating to a ship charter, were subject to mandatory arbitration
under the charter between NEP and Intercoastal Bulk Carriers, Inc.
(IBC), an affiliate of Keystone. On August 21, 1995, an
arbitration panel unanimously ruled in NEP's favor. In September
1995, the parties signed mutual releases. The ship is currently in
Note E - Shipping Charter Contract Dispute - Continued
- ------------------------------------------
dry dock for routine maintenance and inspection. During the
inspection, it was determined that repair work is needed. Under
the releases, IBC is responsible for the cost of such repairs and
the arbitration panel would hear any disputes which arise
concerning the cost of repair.
Note F
- ------
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 1994 Annual
Report.
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 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 1994 Annual Report on Form 10-K.
Earnings
- --------
Net income increased for the third quarter by approximately $12
million compared with the corresponding period in 1994. This
increase reflects sales growth, reduced overhaul activity of
wholly-owned generating units, and lower depreciation and
amortization expense, partially offset by increased interest costs
and increased reimbursements to affiliates for service extension
discounts (SEDs) to customers and affiliate generation and
transmission (G&T) costs incurred for the benefit of the Company.
The decrease in depreciation and amortization is due to reduced
amortization of the Seabrook 1 nuclear unit (Seabrook 1) in
accordance with the Company's 1995 rate agreement, and the
completion, in the second quarter of 1995, of the amortization of
costs of certain coal conversion facilities. These decreases were
partially offset by the effects of increased depreciation rates
approved in the Company's 1995 rate agreement and depreciation of
new plant expenditures.
Earnings for the first nine months of 1995 decreased
approximately $5 million due to increased purchased power costs
resulting from scheduled plant overhauls and refueling shutdowns at
partially-owned nuclear power suppliers and costs to repair the
steam generator tubes at the nuclear power plant owned by Maine
Yankee Atomic Power Company (Maine Yankee) in which the Company has
a 20 percent interest. Also contributing to lower nine month
earnings were increased interest expenses, increased operation and
maintenance costs, and increased reimbursements to affiliates for
SEDs and their G&T costs.
Rate Activity
- -------------
In February 1995, the Federal Energy Regulatory Commission
(FERC) approved a rate agreement filed by the Company. Under the
agreement, which became effective January 1995, the Company's base
rates are frozen until 1997. Before this rate agreement, the
Company's rate structure contained two surcharges that were
recovering the costs of a coal conversion project and a portion of
the Company's investment in Seabrook 1. These two surcharges fully
recovered their related costs by mid-1995, however, under the rate
agreement they have been continued as part of base rates.
The agreement also allows for full recovery of costs associated
with the Manchester Street Station repowering project, which is
scheduled for completion during the fourth quarter of 1995. In
addition, the agreement allows the Company to recover approximately
$50 million of deferred costs associated with terminated purchased
power contracts and postretirement benefits other than pensions
(PBOPs) over seven years. Under the agreement, the Company is
fully recovering currently incurred PBOP costs. The agreement
further provides for the recovery over three years of $27 million
of costs related to the dismantling of a retired generating station
in Rhode Island and the replacement of a turbine rotor at one of
the Company's generating units. The agreement also increases the
Company's recovery of depreciation expense by approximately $8
million annually to recognize costs that will be incurred upon the
eventual dismantling of its Brayton Point and Salem Harbor
generating plants. Under the agreement, approximately $15 million
of the $38 million in Seabrook 1 costs due to be recovered in 1995
pursuant to a 1988 settlement agreement are being deferred and will
be recovered in 1996.
Finally, the agreement provided that the Company would
reimburse its wholesale customers for discounts provided by those
wholesale customers to their retail customers under SED programs.
Under these programs, retail customers are entitled to such
discounts only if they have signed an agreement not to purchase
power from another supplier or generate any additional power
themselves for a three to five year period. Reimbursements in 1995
are expected to total $12 million.
The FERC's approval of this rate agreement applies to all of
NEP's customers except the Milford Power Limited Partnership
(MPLP). MPLP, which owns a gas-fired power plant in Milford,
Massachusetts, has protested this rate agreement based on issues
related to the Manchester Street Station repowering project.
Hearings on this protest concluded in October 1995 and an
Administrative Law Judge initial decision is expected in early 1996
(for further discussion see Note C).
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1995 vs 1994 1995 vs 1994
------------- ------------
(In Millions)
Sales increase $ 7 $ 9
Fuel recovery (2) 17
SED reimbursements (3) (9)
Narragansett integrated
facilities credit (2) (6)
Other 2 5
--- ---
$ 2 $16
=== ===
The increase in sales reflects the effects of an increase in
peak demands in the second and third quarters of 1995. The Company
experienced a decrease in peak demands in the first quarter of the
year.
For a discussion of fuel recovery see the fuel costs discussion
in the Operating Expenses section.
See the Rate Activity section for a discussion of SED
reimbursements.
The entire output of The Narragansett Electric Company's
(Narragansett) generating capacity 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 related costs. The increased credits in 1995 reflect
costs associated with a new transmission line that went into
service in September 1994. In addition, the Company is reimbursing
Narragansett for an increased level of costs being incurred in 1995
associated with the dismantlement of a previously retired South
Street generating facility. As part of the Company's 1995 rate
agreement, these credits in 1995 are being recovered over a three
year period.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1995 vs 1994 1995 vs 1994
------------- ------------
(In Millions)
Fuel costs $ (1) $ 17
Purchased energy excluding fuel 2 23
Operation and maintenance (4) 12
Depreciation and amortization (13) (24)
Taxes 4 (11)
---- ----
$(12) $ 17
==== ====
Fuel costs represent fuel for generation and the portion of
purchased electric energy permitted to be recovered through the
Company's fuel adjustment clause. The increase in fuel costs in
the first nine months of 1995 reflects increased short-term
purchases due to decreased nuclear generation, decreased hydro
production due to low water levels, and overhauls of fossil fuel
generating facilities.
Purchased energy excluding fuel represents the remainder of
purchased electric energy costs. The increase in purchased energy
excluding fuel for the first nine months of 1995 is the result of
increased costs associated with scheduled plant overhauls and
refueling shutdowns at partially-owned nuclear power facilities and
costs to repair the steam generator tubes at Maine Yankee in which
the Company has a 20 percent interest. The Maine Yankee nuclear
unit has been shut down since January 1995, but is expected to
return to service by year end. The Company recorded the full
estimated incremental cost of the repairs in the first six months
of 1995 as a charge to purchased power expense. The increase also
includes amortization of previously deferred purchased power
contract termination costs. Under the existing terms of certain
purchased power contracts with other utilities, the Company will be
reducing its power purchases which will result in a $19 million
reduction in 1996 purchased power expenses.
The increase in operation and maintenance costs for the nine
months is primarily due to the recognition of currently incurred
and previously deferred PBOP costs in accordance with the Company's
1995 rate agreement, increased transmission system related costs
and increased general and administrative costs, partially offset by
a decrease in generating plant overhaul costs. In the third
quarter, the impact of reduced generating plant overhaul activity
more than offset the increases in costs in other areas.
The decrease in depreciation and amortization is due to
decreased amortization of Seabrook 1 and the completion, in the
second quarter of 1995, of the amortization of certain coal
conversion facilities, partially offset by the effects of increased
depreciation rates approved in the Company's 1995 rate agreement
and depreciation of new plant expenditures.
The change in taxes for the third quarter and first nine months
of 1995 is primarily due to the change in income for those periods.
Allowance For Funds Used During Construction (AFDC)
- --------------------------------------------------
AFDC increased for the third quarter and first nine months of
1995 due to increased construction work in progress, principally
associated with the Manchester Street Station repowering project.
In September 1995, the first of three generating units began
commercial operation at the power plant. The remaining units are
scheduled to commence commercial operation during the fourth
quarter of this year. AFDC ends for these projects when the units
go into commercial operation.
Interest Expense
- ----------------
The increase in interest expense is primarily due to increased
long-term and short-term debt balances and higher interest rates.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to rapidly
increasing competitive pressures, stemming from a combination of
trends, including surplus generating capacity, increasing electric
rates, improved technologies, increasing demand for customer
choice, and new regulations and legislation intended to foster
competition. See the Company's Annual Report on Form 10-K for the
year ended December 31, 1994.
The Company derives over 95 percent of its operating revenue
from sales of electricity to three retail affiliates of the
Company. Massachusetts, Rhode Island, and New Hampshire, the three
states served by these retail affiliates, have been considering
various proposals for allowing electric customers greater choice
over their electricity supplier. Massachusetts Electric Company
(Massachusetts Electric) and Narragansett proposed to the
Massachusetts Department of Public Utilities (MDPU) and the Rhode
Island Public Utilities Commission (RIPUC), respectively, a set of
interdependent principles for industry restructuring which was
agreed to by groups representing environmental protection
advocates, governmental agencies, non-utility generators,
investor-owned utilities, and large and small customer interests.
These principles included, among others, provisions for increased
customer choice while allowing utilities the opportunity to recover
the cost of their past commitments (stranded costs). In August
1995, the MDPU adopted principles similar to those filed by
Massachusetts Electric, including a reasonable opportunity for
recovery of stranded costs over a period not to exceed 10 years.
The MDPU directed Massachusetts Electric and two other utilities to
file by February 16, 1996, a detailed plan consistent with the MDPU
decision. Also in August 1995, the RIPUC decision adopted the
principles proposed by Narragansett, except for one regarding
temporary support for renewable fuel technologies. The RIPUC
ordered Narragansett to file a report no later than February 1,
1996 on its progress in negotiating a specific plan consistent with
the principles.
In October 1995, the New England Electric System (NEES)
Companies began discussions with interested parties regarding the
plan to be filed pursuant to the MDPU and RIPUC orders. That plan,
to be called "Choice: New England", will propose that all customers
of electric utilities in the three states served by NEES retail
subsidiaries have the ability to choose their power supplier
beginning in 1998. Under the plan, the Company's generation assets
would become competitive, while its transmission assets would
remain regulated. Among other provisions, the plan would also
propose a uniform access charge so that all regional utilities will
have an opportunity to recover the cost of commitments made under
the current regulated system.
NEES believes that its "Choice: New England" proposal meets the
principles for industry restructuring adopted by the MDPU and RIPUC
for increased customer choice while providing utilities with an
opportunity to recover costs which may be stranded by such customer
choice. However, there can be no assurance that a final plan will
include an access charge which would recover all stranded costs.
Furthermore, market pricing of generation will increase the
volatility of NEES revenues and, because of competitive pressures,
may not result in full cost recovery.
In July 1995, the Governor of Rhode Island vetoed two bills
that would have allowed certain industrial customers to buy power
from alternative suppliers, rather than through the local electric
utility. Narragansett urged the Governor to exercise his veto,
because Narragansett believed the proposed legislation would result
in piecemeal deregulation that would not be fair to customers or
shareholders and would circumvent the comprehensive proceedings
mentioned above. Narragansett committed among other things, that
if the measures were not enacted, Narragansett would submit by July
1, 1996, a specific and detailed proposal to the RIPUC addressing
the issues associated with providing open access to Narragansett's
distribution system for its large commercial and industrial
customers. Among other issues, that filing would address the
proper means for recovering past costs incurred to serve exiting
customers through a compensatory access charge. If the charges
were approved by the RIPUC, the appropriate access tariffs would
then be filed with the FERC. The Rhode Island Legislature may
still override the vetoes.
In August 1995, the MDPU issued an order in a stranded cost
case involving another utility and one of its customers. This
customer, which previously purchased all of its requirements from
the utility, installed cogenerating equipment and requested that
the utility provide only backup service. In its order, the MDPU
required the customer to pay the utility 75 percent of the net
stranded costs attributable to serving the customer's load.
Because, in part, utilities have always been exposed to the risk of
customer cogeneration, the MDPU indicated that its order, which is
under appeal, did not set precedent for the issue of stranded cost
recovery in the context of utility industry restructuring.
In New Hampshire, the New Hampshire Public Utilities Commission
(NHPUC) has been considering the proposal of a new company, Freedom
Energy Company (Freedom Energy), to sell electricity at retail
rates to large customers of another utility. In June 1995, the
NHPUC issued an order in the Freedom Energy docket in which it
found that franchise territories in New Hampshire are exclusive as
a matter of law. The order also stated that federal law precluded
the NHPUC from authorizing retail wheeling. However, the order
makes clear that Freedom Energy must obtain additional regulatory
approvals at the state and federal level before it could operate as
a public utility in the franchise territory of another utility.
In addition, in June 1995, the Governor of New Hampshire signed
into law a bill which instructs the NHPUC to establish a retail
competition pilot program open to all classes of customers. NHPUC
guidelines issued in October 1995 provide that each New Hampshire
utility must allow customers representing 3 percent of its peak
load (four megawatts (MW) for Granite State Electric Company
(Granite State)) to have access to alternative suppliers of
generation for three years, starting May 1, 1996. Customers
participating in the pilot would be responsible for paying 50
percent of the utility's stranded costs, with the balance borne by
utility shareholders. In comments filed on the preliminary
guidelines, Granite State requested that the guidelines be revised
to adopt "Choice: New England" as an alternative approach to the
proposed pilot. Granite State offered to file the plan with the
NHPUC in February, consistent with the filings contemplated in
Massachusetts and Rhode Island, so that the plan could be
implemented on a pilot basis by May 1, 1996. Granite State's
comments also challenged the legal basis for the proposed
assignment of stranded costs, arguing that the guidelines will
result in an unconstitutional taking without compensation, are
preempted by federal law, and are inequitable. The June 1995
legislation also established a legislative committee on retail
wheeling and restructuring. The committee is expected to issue an
interim report on its findings in November 1995 and a final report
by March 1, 1996.
In March 1995, the FERC issued a notice of proposed rule-making
in which it stated that recovery in rates of legitimate and
verifiable stranded costs from departing customers is the
appropriate method for recovery of costs stranded as the result of
wholesale competition. Under the FERC policy proposal, costs
stranded as a result of retail competition would be subject to
state commission review if the state commission has the necessary
statutory authority, and subject to FERC review if the state
commission does not have such authority. A final decision is
expected in 1996.
Electric utility rates have historically been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Financial Accounting Standard No.
71, Accounting for the Effects of Certain Types of Regulation (FAS
71), requires regulated entities, in appropriate circumstances, to
establish regulatory assets and liabilities, and thereby defer the
income statement impact of certain costs that are expected to be
recovered in future rates. The Company believes that its
operations currently meet the criteria established in FAS 71.
However, the effects of regulatory and/or legislative initiatives,
or the NEES companies' own initiatives, such as "Choice: New
England", could, in the near future, cause all or a portion of the
Company's operations to cease meeting the criteria of FAS 71. In
that event, the application of FAS 71 to such operations would be
discontinued and a non-cash write-off of previously established
regulatory assets and liabilities related to such operations would
be required. At September 30, 1995, the Company had pre-tax
regulatory assets (net of regulatory liabilities) of approximately
$300 million. In addition, the Company's affiliate, New England
Energy Incorporated has a regulatory asset of approximately $200
million which is recoverable in its entirety from the Company.
This amount would also be included in any write-down of the
Company's regulatory assets. If competitive or regulatory change
should cause a substantial revenue loss or lead to the permanent
shutdown of any generating facilities, a substantial write-down of
plant assets could be required pursuant to Financial Accounting
Standard No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). This
standard, effective for fiscal year 1996, clarifies when and how to
recognize an impairment of long-lived assets. For further
discussion of FAS 121 see Note D.
Utility Plant Expenditures and Financings
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Cash expenditures for utility plant totaled $125 million for
the first nine months of 1995, including $82 million related to the
Company's 90 percent share of the Manchester Street Station
repowering project in Providence, Rhode Island. In September 1995,
the first of three generating units began commercial operation at
the power plant. The remaining units are scheduled to commence
commercial operation during the fourth quarter of this year. The
approximately 500 MW repowering project is estimated to cost
approximately $455 million, excluding transmission facilities. The
funds necessary for utility plant expenditures during the period
were provided by net cash from operating activities, after the
payment of dividends, and from proceeds of short-term and long-term
debt issues. In the first nine months of 1995, the Company issued
$50 million of long-term debt at interest rates ranging from 6.69
percent to 7.94 percent. In addition, the Company refinanced $10
million of variable rate mortgage bonds. The Company does not plan
to issue any additional long-term debt in 1995.
At September 30, 1995, the Company had $167 million of
short-term debt outstanding, including $137 million of commercial
paper borrowings. At September 30, 1995, the Company had lines of
credit and bond purchase facilities with banks totaling $510
million which are available to provide liquidity support for
commercial paper borrowings and for $342 million of the Company's
outstanding variable rate mortgage bonds in tax-exempt commercial
paper mode and for other corporate purposes. There were no
borrowings under these lines of credit at September 30, 1995.
For the twelve-month period ending September 30, 1995, the
ratio of earnings to fixed charges was 5.14.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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Information concerning a lawsuit filed against the Company by
Milford Power Limited Partnership on October 28, 1994, and
intervention into a Company rate filing, discussed in Part I of
this report in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Note C of Notes to
Unaudited Financial Statements, is incorporated herein by reference
and made a part hereof.
Information concerning dismissal of a lawsuit filed against
the Company in May 1995 by Keystone Shipping Company, discussed in
Note E of Notes to Unaudited Financial Statements, is incorporated
herein by reference and made a part hereof.
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
The Company is filing Financial Data Schedules.
The Company filed a report on Form 8-K dated August 16, 1995
containing Item 5, Other Events.
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 September 30, 1995 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: November 13, 1995