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, 1996
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 June 30, 1996.
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Operating revenue, principally from affiliates $375,001 $378,177 $775,461 $769,295
-------- -------- -------- --------
Operating expenses:
Fuel for generation 74,764 70,234 154,990 130,830
Purchased electric energy 124,755 140,208 250,289 285,549
Other operation 53,263 53,335 103,287 103,491
Maintenance 23,365 23,476 42,972 53,905
Depreciation and amortization 26,510 27,262 53,030 57,195
Taxes, other than income taxes 16,228 14,083 33,949 29,385
Income taxes 16,488 16,125 42,039 35,397
-------- -------- -------- --------
Total operating expenses 335,373 344,723 680,556 695,752
-------- -------- -------- --------
Operating income 39,628 33,454 94,905 73,543
Other income:
Allowance for equity funds used during
construction 2,552 4,953
Equity in income of nuclear power companies1,474 1,491 2,818 2,891
Other income (expense), net 404 1,263 (1,592) (1,099)
-------- -------- -------- --------
Operating and other income 41,506 38,760 96,131 80,288
-------- -------- -------- --------
Interest:
Interest on long-term debt 11,104 11,764 22,809 23,002
Other interest 3,680 2,255 5,848 4,370
Allowance for borrowed funds used during
construction - credit (46) (2,948) (267) (5,755)
-------- -------- -------- --------
Total interest 14,738 11,071 28,390 21,617
-------- -------- -------- --------
Net income $ 26,768 $ 27,689 $ 67,741 $ 58,671
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $396,399 $372,250 $385,309 $372,763
Net income 26,768 27,689 67,741 58,671
Dividends declared on cumulative
preferred stock (678) (859) (1,536) (1,717)
Dividends declared on common stock (35,797) (30,637) (64,822) (61,274)
Premium on redemption of preferred stock (450) (450)
-------- -------- -------- --------
Retained earnings at end of period $386,242 $368,443 $386,242 $368,443
======== ======== ======== ========
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)
1996 1995
---- ----
(In Thousands)
Operating revenue, principally from affiliates $1,576,705 $1,553,990
---------- ----------
Operating expenses:
Fuel for generation 304,009 253,868
Purchased electric energy 512,666 559,375
Other operation 211,668 208,358
Maintenance 82,021 115,170
Depreciation and amortization 98,593 126,267
Taxes, other than income taxes 63,280 54,398
Income taxes 97,693 81,555
---------- ----------
Total operating expenses 1,369,930 1,398,991
---------- ----------
Operating income 206,775 154,999
Other income:
Allowance for equity funds used during
construction 2,793 10,033
Equity in income of nuclear power companies 5,648 4,976
Other income (expense), net (2,103) 1,578
---------- ----------
Operating and other income 213,113 171,586
---------- ----------
Interest:
Interest on long-term debt 46,604 43,222
Other interest 12,003 5,292
Allowance for borrowed funds used during
construction - credit (5,991) (9,601)
---------- ----------
Total interest 52,616 38,913
---------- ----------
Net income $ 160,497 $ 132,673
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 368,443 $ 374,651
Net income 160,497 132,673
Dividends declared on cumulative preferred stock (3,252) (3,433)
Dividends declared on common stock (138,996) (135,448)
Premium on redemption of preferred stock (450)
---------- ----------
Retained earnings at end of period $ 386,242 $ 368,443
========== ==========
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 1996 1995
------ ---- ----
(In Thousands)
Utility plant, at original cost $2,956,660 $2,941,469
Less accumulated provisions for depreciation
and amortization 1,080,834 1,047,982
---------- ----------
1,875,826 1,893,487
Net investment in Seabrook 1 under rate settlement 7,605 15,210
Construction work in progress 59,028 41,566
---------- ----------
Net utility plant 1,942,459 1,950,263
---------- ----------
Investments:
Nuclear power companies, at equity 47,524 47,055
Non-utility property and other investments 26,746 26,627
---------- ----------
Total investments 74,270 73,682
---------- ----------
Current assets:
Cash 251 2,607
Accounts receivable:
Affiliated companies 206,656 204,314
Accrued NEEI revenues 32,434 43,731
Others 21,794 17,821
Fuel, materials, and supplies, at average cost 63,742 54,664
Prepaid and other current assets 28,566 27,986
---------- ----------
Total current assets 353,443 351,123
---------- ----------
Deferred charges and other assets 250,919 273,275
---------- ----------
$2,621,091 $2,648,343
========== ==========
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 86,820 86,829
Other paid-in capital 288,000 288,000
Retained earnings 386,242 385,309
---------- ----------
Total common equity 890,060 889,136
Cumulative preferred stock, par value $100 per share 45,516 60,516
Long-term debt 735,900 735,440
---------- ----------
Total capitalization 1,671,476 1,685,092
---------- ----------
Current liabilities:
Long-term debt due in one year 10,000
Short-term debt (including $6,950,000 and $1,025,000
to affiliates) 145,775 125,150
Accounts payable (including $34,672,000 and $50,760,000
to affiliates) 141,505 163,791
Accrued liabilities:
Taxes 7,149 3,447
Interest 10,088 10,482
Other accrued expenses 11,339 10,834
Dividends payable 35,797 32,249
---------- ----------
Total current liabilities 351,653 355,953
---------- ----------
Deferred federal and state income taxes 387,917 390,197
Unamortized investment tax credits 56,497 57,509
Other reserves and deferred credits 153,548 159,592
---------- ----------
$2,621,091 $2,648,343
========== ==========
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)
1996 1995
---- ----
(In Thousands)
Operating Activities:
Net income $ 67,741 $ 58,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 55,760 59,929
Deferred income taxes and
investment tax credits, net (2,388) 11,990
Allowance for funds used during construction (267) (10,708)
Decrease (increase) in accounts receivable 4,982 14,699
Decrease (increase) in fuel, materials, and supplies (9,078) (12,298)
Decrease (increase) in prepaid and other current assets (580) 2,727
Increase (decrease) in accounts payable (22,286) (40,968)
Increase (decrease) in other current liabilities 3,813 (2,539)
Other, net 10,349 (23,487)
-------- --------
Net cash provided by operating activities $108,046 $ 58,016
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(42,767) $(95,251)
-------- --------
Net cash used in investing activities $(42,767) $(95,251)
-------- --------
Financing Activities:
Dividends paid on common stock $(61,274) $(30,637)
Dividends paid on preferred stock (1,536) (1,717)
Changes in short-term debt 20,625 20,305
Long-term debt - issues 39,850 60,000
Long-term debt - retirements (49,850) (10,000)
Redemption of preferred stock (15,000)
Premium on redemption of preferred stock (450)
-------- --------
Net cash provided by (used in) financing activities$(67,635) $ 37,951
-------- --------
Net increase (decrease) in cash and cash equivalents $ (2,356) $ 716
Cash and cash equivalents at beginning of period 2,607 377
-------- --------
Cash and cash equivalents at end of period $ 251 $ 1,093
======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 26,844 $ 19,974
-------- --------
Federal and state income taxes paid $ 48,448 $ 19,158
-------- ---------
The accompanying notes are an integral part of these financial statements.
Note A - Investments in Nuclear Units
- -------------------------------------
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,
----------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Operating revenue $163,406 $165,533 $318,521 $372,813
======== ======== ======== ========
Net income $ 7,884 $ 7,966 $ 15,272 $ 16,284
======== ======== ======== ========
Company's equity in
net income $ 1,474 $ 1,491 $ 2,818 $ 2,891
======== ======== ======== ========
June 30, December 31,
1996 1995
---- ----
(In Thousands)
Net plant $ 434,342 $ 443,967
Other assets 1,420,702 1,418,681
Liabilities and debt (1,603,449) (1,612,843)
----------- -----------
Net assets $ 251,595 $ 249,805
=========== ===========
Company's equity in net assets $ 47,524 $ 47,055
=========== ===========
At June 30, 1996, $13,581,000 of undistributed earnings of the
nuclear power companies were included in the Company's retained
earnings.
Millstone 3 and Connecticut Yankee
The Company is a 12 percent joint owner of the Millstone 3
nuclear generating unit (Millstone 3), a 1,150 megawatt (MW) unit
and has a 15 percent ownership interest in Connecticut Yankee
Atomic Power Company (Connecticut Yankee) which owns a 580 MW
nuclear generating plant. Both plants are operated by subsidiaries
of Northeast Utilities (NU). In March 1996, the Millstone 3 unit
was shut down as the result of an internal safety review. On April
4, 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone
3 to remain shut down pending verification that the unit's
operations are in accordance with NRC regulations and the unit's
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
operating license. The Company is not a joint owner of the
Millstone 1 and 2 nuclear generating units, which are also shut
down under NRC orders.
On June 28, 1996, the NRC notified NU that the Millstone units
had been reclassified from Category 2 facilities to Category 3
facilities on the NRC "watch list". The NRC deems Category 3 plants
as having significant weaknesses that require them to remain shut
down until it is demonstrated that adequate programs have been
established and implemented to ensure substantial improvement. A
Category 3 designation also requires a vote of the NRC
Commissioners to restart the units. On August 6, 1996, the NRC
Chairman described problems at the Millstone units as pervasive and
indicated that a culture change is required. The NRC Chairman has
also announced that independent verification of corrective actions
taken at the units will be required prior to restart. It is
uncertain when Millstone 3 will be allowed by the NRC to restart,
although the Company believes that delays well beyond the end of
1996 are likely.
Based on an estimate provided by NU, the Company accrued
approximately $3 million in the second quarter of 1996 for its
portion of the future incremental operation and maintenance costs
related to corrective actions at the Millstone 3 unit. These costs
were charged to other operation and maintenance expense.
Additional costs may be incurred beyond those already recognized.
The Company has been, and expects to continue until the unit is
returned to service, incurring approximately $1.5 million per month
in replacement power costs, which it has been recovering through
its fuel clause.
The Connecticut Yankee station was shut down on July 22, 1996
after a potential problem with the cooling systems was identified.
On July 31, 1996, the NRC identified in an inspection report
several additional issues which must be resolved prior to restart.
The report addressed numerous programmatic weaknesses, significant
deficiencies and errors, as well as issues similar to some
identified at the Millstone 1 unit. As a result, Connecticut
Yankee began a scheduled refueling outage early. On August 9,
1996, the NRC wrote to NU concerning recently identified safety
concerns that raise questions regarding the continued operation of
Connecticut Yankee. The NRC letter requires NU to resubmit under
oath its basis for continued operation of the unit. The Company
cannot predict when restart of Connecticut Yankee will occur.
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
Maine Yankee
The Company has a 20 percent ownership interest in Maine Yankee
Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear
generating station. The Maine Yankee station shut down on July 20,
1996 after identifying a potential problem with the cooling system.
The station is in the process of returning to service. Maine
Yankee is also subject to an NRC independent safety assessment
(ISA) that began in June 1996. The ISA will be extensive and
results are not expected until the Fall of 1996. Other
nonaffiliated facilities which have been the subject of similar
assessments have incurred substantial additional capital and
operating expenditures. Prior to the shutdown, Maine Yankee had
been operating at only 90 percent power. Upon its return to
service, Maine Yankee will continue operating at 90 percent power
until the NRC authorizes operation at a higher level.
The New England Power Pool (NEPOOL) has indicated that with
several nuclear units in New England not in service, there could be
insufficient power supply available in New England to meet demand
during the remainder of the summer peak-load period. NEPOOL
members have taken steps to mitigate the load situation.
In general, it is unknown what the total ultimate impact of the
increased NRC scrutiny on the nuclear plants mentioned above will
have on the Company's operations and costs.
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.
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.
Note B - Hazardous Waste - Continued
- ------------------------
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 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 will be successful. The Company believes that
hazardous waste liabilities for all sites of which it is aware are
not material to its financial position.
Note C - Purchased Power Contract Disputes
- ------------------------------------------
As previously reported, in October 1994 the Company was sued
by, and later filed counterclaims against, Milford Power Limited
Partnership (MPLP), a venture of Enron Corporation and Jones
Capital that owned a 149 MW gas-fired power plant in Milford,
Massachusetts. The Company purchased 56 percent of the power
output of the facility under a long-term contract with MPLP. On
April 24, 1996, the Company and MPLP executed a settlement
agreement under which each party agreed to the dismissal of the
lawsuit and the counterclaims, the restructuring of their power and
fuel purchase arrangements, and the payment by MPLP to the Company
in the third quarter of 1996 of an undisclosed amount of money.
MPLP withdrew all allegations it made against the Company,
including claims that the Company deceived its regulators and
violated federal criminal statutes. The settlement has been
approved by the Federal Energy Regulatory Commission. On August 1,
1996, MPLP sold its partnership interest in the plant to
subsidiaries of American National Power, Inc.
On July 11, 1996, various New England utilities that are
members of NEPOOL, including the Company, submitted a dispute to
arbitration regarding their Firm Energy Purchased Power Contract
with Hydro-Quebec. The dispute concerns the components of a
pricing formula.
Note C - Purchased Power Contract Disputes
- ------------------------------------------
Based on the Company's interpretation of Hydro-Quebec's claims,
the Company's share of additional billings owed to Hydro-Quebec
would be approximately $3.5 million on a retroactive basis and an
estimated $3.8 million per year on a prospective basis through
2001. An arbitrator has not yet been appointed.
Note D
- ------
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 1995 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 1995 Annual Report on Form 10-K.
Earnings
- --------
Net income decreased for the second quarter of 1996 by
approximately $1 million from the corresponding period in 1995,
however, net income increased for the first six months of 1996 by
approximately $9 million. The decrease in the second quarter was
due to a number of factors, all relating to the completion in the
second half of 1995 of the Manchester Street Station repowering
project. These factors include decreased allowance for funds used
during construction (AFDC), increased property taxes and increased
depreciation. These declines in second quarter income were
partially offset by decreased purchased power expense and the
completion in mid-1995 of the amortization of a portion of Seabrook
1 costs and certain coal conversion costs. During the six-month
period, the Company also experienced a decrease in maintenance
expense as a result of overhauls at generating units in 1995.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to rapidly
increasing competitive pressures, stemming from a combination of
trends, including the presence of surplus generating capacity, a
disparity in electric rates among regions of the country,
improvements in generation efficiency, 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, 1995.
In states across the country, including Massachusetts and New
Hampshire, there have been an increasing number of proposals to
allow retail customers to choose their electricity supplier, with
incumbent utilities required to deliver that electricity over their
transmission and distribution systems (also known as "retail
wheeling"). In Rhode Island, such a proposal has been enacted into
law.
Rhode Island legislation
On August 7, 1996, the Governor of Rhode Island signed into law
legislation that will restructure the electric utility industry in
Rhode Island. Rhode Island is the first state to pass
comprehensive legislation providing retail customers with access to
alternative suppliers and providing utilities with recovery of
their stranded investments. The New England Electric System (NEES)
companies supported this legislation which affects the Company and
The Narragansett Electric Company (Narragansett) a retail
affiliate.
The legislation will allow all customers of electric utilities
to choose their power supplier under a phased-in approach, while
transmission and distribution rates will remain regulated. This
phase-in will begin on July 1, 1997 for customers representing
approximately 10 percent of Narragansett's load, followed by
another 10 percent on January 1, 1998, and the balance of customers
on July 1, 1998.
Under the new law, the Company's wholesale contract with
Narragansett will be terminated. In return, the cost of the
Company's past generation commitments to serve Narragansett's
customers will be recovered through a transition access charge on
retail distribution rates. Those commitments, which are currently
estimated at approximately $4 billion on a present value basis in
total for the Company (of which Narragansett's share is
approximately $1 billion), consist of (i) generating plant
commitments, (ii) regulatory assets, (iii) the above market
component of purchased power contracts, and (iv) the operating cost
of nuclear plants which cannot be mitigated by shutting down the
plants. The aggregate amount of the transition access charge will
be reduced by the fair market value of the utilities' non-nuclear
generating assets. The value of such generating assets will be
determined by leasing, selling, spinning off, or otherwise
disposing of at least a 15 percent interest in such generating
facilities. Certain of these valuation methods would require
transfer of such generating assets from the Company to an
affiliated or unaffiliated entity.
Sunk costs associated with generating plants and regulatory
assets will be recovered over a period of 12 years, with an initial
return on equity of one percentage point over the interest rate on
long-term "BBB" rated utility bonds. Once the transition access
charge is adjusted to reflect the market valuation of the non-
nuclear generating plants, the return on equity will be
retroactively increased to 11 percent. Purchased power contracts
and nuclear decommissioning costs will be recovered as incurred
over the life of those obligations, a period expected to extend
beyond 12 years. The initial transition access charge will be set
at 2.8 cents per kilowatt-hour (kWh) through December 31, 2000, and
is expected to decline thereafter. Implementation of various
aspects of the Rhode Island legislation is subject to Rhode Island
Public Utilities Commission and Federal Energy Regulatory
Commission (FERC) approval.
Massachusetts and New Hampshire proceedings
In February 1996, Massachusetts Electric Company filed with the
Massachusetts Department of Public Utilities a plan for retail
choice similar to the Rhode Island legislation described above.
Three other utilities and the Massachusetts Division of Energy
Resources (DOER) also filed plans with the MDPU in February 1996.
The DOER's plan calls for direct access for all customers beginning
in 1998, with a pilot program beginning in 1997. The DOER's plan,
however, proposes that, in exchange for stranded cost recovery,
utilities divest their generating assets, either through sale or
spinoff.
On May 1, 1996, the MDPU issued a set of proposed rules and
regulations governing the implementation of retail choice. The
proposed rules would allow all customers of Massachusetts investor-
owned utilities to choose their electricity supplier beginning in
1998. The MDPU-proposed rules affirm the principle of stranded
cost recovery for utilities over ten years, but create
uncertainties concerning the extent of actual stranded cost
recovery. While the MDPU did not order mandatory divestiture of
generating assets, it stated that it might provide utilities
financial incentives to divest. Hearings on the proposed rules
were completed in July 1996. The MDPU has stated that it will
issue final regulations by year-end 1996 and issue orders on the
individual utility plans in 1997.
The New Hampshire Public Utilities Commission is expected to
issue a preliminary restructuring plan for the electric utility
industry in New Hampshire in August 1996.
FERC order
In April 1996, the FERC issued Order No. 888 addressing open
access transmission and required those utilities that own
transmission facilities to file open access tariffs to make
available transmission service to affiliates and nonaffiliates at
fair non-discriminatory rates. Order No. 888 also stated that
public utilities will be allowed to seek recovery of legitimate and
verifiable stranded costs from departing customers as a result of
wholesale competition. The FERC indicated that it will provide for
the recovery of retail stranded costs only if state regulators lack
the legal authority to address those costs at the time retail
wheeling is required. The FERC also stated that it would permit
stranded cost recovery under wholesale requirements contracts, such
as the contracts between the Company and its retail affiliates.
In response to the FERC Notice of Proposed Rulemaking issued in
advance of Order No. 888 discussed above, the Company and NEES
Transmission Services, Inc. (NEES Trans), a proposed new subsidiary
of NEES, filed transmission tariffs in March 1996 at the FERC. On
July 9, 1996, the Company, on behalf of the NEES companies, filed
a transmission tariff with the FERC that conforms with the
requirements of Order No. 888. This tariff became effective
immediately upon filing, subject to refund, and supersedes the NEES
Trans tariff that was previously filed in March 1996. If approved
as filed, the implementation of the tariff would not have a
significant impact on the Company's revenues.
Risk factors
The major risk factors affecting recovery of at-risk assets
are: (i) regulatory and legal decisions, (ii) the market price of
power, and (iii) the amount of market share retained by the
Company. First, there can be no assurance that a final
restructuring plan ordered by regulatory bodies, or the courts, or
through legislation will include an access charge that would fully
recover stranded costs and include a fair return on those costs as
they are being recovered. If laws are enacted or regulatory
decisions are made that do not offer an opportunity to recover
stranded costs, the Company believes it has strong legal arguments
to challenge such laws or decisions. Such a challenge would be
based, in part, on the assertion that subjecting utility generating
assets to competition without compensation for stranded costs,
while requiring utilities to open access to their wires at historic
cost-based rates, would constitute an unconstitutional taking of
property without just compensation. Second, the access charge
included in the Rhode Island legislation, as well as the one
proposed by the NEES companies in Massachusetts and New Hampshire,
recovers only the above market components of sunk costs, such as
plant expenditures and contractual commitments. Because of a
regional surplus of electric generation capacity, current wholesale
power prices in the short-term market are based on the short-run
fuel costs of generating units. Such wholesale prices are not
currently providing a significant contribution toward other
marginal costs, such as operation and maintenance expenses. The
Company expects this situation to continue in a retail market.
Third, revenues will also be affected by the Company's ability to
retain existing customers and attract new customers in a
competitive environment. Pilot programs underway in New Hampshire
and Massachusetts have been highly competitive, with many
competitors and very low power prices being offered to
participants. As a result of the pressure on market prices and
market share, it is likely that, even with a fully compensatory
transition access charge, the generating business will experience
revenue losses and increased revenue volatility for an
indeterminate period, which will limit its ability to contribute to
consolidated earnings and dividend growth during that period.
Historically, electric utility rates have 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 effects of regulatory, legislative,
or utility initiatives, 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 December 31, 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. In addition to the
potential write-down of regulatory assets, write-downs of plant
assets could be required if competitive or regulatory change should
cause a substantial revenue loss, or lead to the permanent shutdown
or sale of any generating facilities.
This "Competitive Conditions" section contains forward-looking
statements as defined under the securities laws. Actual results
could differ materially from those projected. This section,
particularly under "Risk factors", lists some of the reasons why
results could differ materially from those projected.
Investments in Nuclear Units
- ----------------------------
Millstone 3 and Connecticut Yankee
The Company is a 12 percent joint owner of the Millstone 3
nuclear generating unit (Millstone 3), a 1,150 megawatt (MW) unit
and has a 15 percent ownership interest in Connecticut Yankee
Atomic Power Company (Connecticut Yankee) which owns a 580 MW
nuclear generating plant. Both plants are operated by subsidiaries
of Northeast Utilities (NU). In March 1996, the Millstone 3 unit
was shut down as the result of an internal safety review. On April
4, 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone
3 to remain shut down pending verification that the unit's
operations are in accordance with NRC regulations and the unit's
operating license. The Company is not a joint owner of the
Millstone 1 and 2 nuclear generating units, which are also shut
down under NRC orders.
On June 28, 1996, the NRC notified NU that the Millstone units
had been reclassified from Category 2 facilities to Category 3
facilities on the NRC "watch list". The NRC deems Category 3 plants
as having significant weaknesses that require them to remain shut
down until it is demonstrated that adequate programs have been
established and implemented to ensure substantial improvement. A
Category 3 designation also requires a vote of the NRC
Commissioners to restart the units. On August 6, 1996, the NRC
Chairman described problems at the Millstone units as pervasive and
indicated that a culture change is required. The NRC Chairman has
also announced that independent verification of corrective actions
taken at the units will be required prior to restart. It is
uncertain when Millstone 3 will be allowed by the NRC to restart,
although the Company believes that delays well beyond the end of
1996 are likely.
Based on an estimate provided by NU, the Company accrued
approximately $3 million in the second quarter of 1996 for its
portion of the future incremental operation and maintenance costs
related to corrective actions at the Millstone 3 unit. These costs
were charged to other operation and maintenance expense.
Additional costs may be incurred beyond those already recognized.
The Company has been, and expects to continue until the unit is
returned to service, incurring approximately $1.5 million per month
in replacement power costs, which it has been recovering through
its fuel clause.
The Connecticut Yankee station was shut down on July 22, 1996
after a potential problem with the cooling systems was identified.
On July 31, 1996, the NRC identified in an inspection report
several additional issues which must be resolved prior to restart.
The report addressed numerous programmatic weaknesses, significant
deficiencies and errors, as well as issues similar to some
identified at the Millstone 1 unit. As a result, Connecticut
Yankee began a scheduled refueling outage early. On August 9,
1996, the NRC wrote to NU concerning recently identified safety
concerns that raise questions regarding the continued operation of
Connecticut Yankee. The NRC letter requires NU to resubmit under
oath its basis for continued operation of the unit. The Company
cannot predict when restart of Connecticut Yankee will occur.
Maine Yankee
The Company has a 20 percent ownership interest in Maine Yankee
Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear
generating station. The Maine Yankee station shut down on July 20,
1996 after identifying a potential problem with the cooling system.
The station is in the process of returning to service. Maine
Yankee is also subject to an NRC independent safety assessment
(ISA) that began in June 1996. The ISA will be extensive and
results are not expected until the Fall of 1996. Other
nonaffiliated facilities which have been the subject of similar
assessments have incurred substantial additional capital and
operating expenditures. Prior to the shutdown, Maine Yankee had
been operating at only 90 percent power. Upon its return to
service, Maine Yankee will continue operating at 90 percent power
until the NRC authorizes operation at a higher level.
The New England Power Pool (NEPOOL) has indicated that with
several nuclear units in New England not in service, there could be
insufficient power supply available in New England to meet demand
during the remainder of the summer peak-load period. NEPOOL
members have taken steps to mitigate the load situation.
In general, it is unknown what the total ultimate impact of the
increased NRC scrutiny on the nuclear plants mentioned above will
have on the Company's operations and costs.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1996 vs 1995 1996 vs 1995
-------------- ------------
(In Millions)
Sales increase $(1) $ -
Fuel recovery - 11
Narragansett integrated
facilities credit (2) (5)
--- ---
$(3) $ 6
=== ===
For a discussion of fuel recovery see the fuel costs discussion
in the "Operating Expenses" section.
The entire output of Narragansett's 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 1996 relate to costs associated with the dismantlement of a
previously retired South Street generating facility and with
Narragansett's portion of the repowered Manchester Street
generating station that entered commercial operation in the second
half of 1995.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1996 vs 1995 1996 vs 1995
-------------- ------------
(In Millions)
Fuel costs $ 3 $ 14
Purchased energy, excluding fuel (14) (25)
Operation and maintenance - (11)
Depreciation and amortization:
Seabrook 1 and Oil Conservation
Adjustment (OCA) amortization (5) (12)
Depreciation, including Manchester
Street 4 8
Taxes, other than income taxes 3 4
Income taxes - 7
---- ----
$ (9) $(15)
==== ====
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 second quarter and first six months of 1996 reflects
increased kWh sales and additional fixed pipeline demand
charges. These increases were partially offset by reduced
purchases of power from nonaffiliates reflecting increased hydro
generation and increased generation from affiliated nuclear
power suppliers. In accordance with a 1992 rate agreement,
approximately 50 percent of the Company's fixed pipeline demand
charges in prior years were deferred pending completion of the
Manchester Street Station repowering project. The remainder of
the fixed pipeline demand charges were passed through the
Company's fuel clause. The project was completed in the second
half of 1995 and, accordingly, no further amounts have been
deferred. The deferred amounts are currently being amortized
over 25 years.
Purchased energy, excluding fuel represents the remainder of
purchased electric energy costs. The decrease in purchased
energy, excluding fuel, is principally due to 1995 overhauls and
refueling shutdowns at Maine Yankee and two other partially-
owned nuclear power units, as well as reduced purchases of
capacity from other suppliers. Purchased power costs in 1995
also included the Company's portion of incremental costs to
repair steam generator tubes at Maine Yankee. Two of these
nuclear units, Connecticut Yankee, which is currently shutdown,
and Vermont Yankee, are scheduled for refueling shutdowns in
the second half of 1996. See "Investments in Nuclear Units"
section.
The decrease in operation and maintenance costs for the
first six months of 1996 reflects overhauls at wholly-owned
generating units during the first six months of 1995.
The decrease in Seabrook 1 and OCA amortization reflects the
completion in mid-1995 of the amortization of a portion of
Seabrook 1 costs and certain coal conversion costs. These
decreases were partially offset by the depreciation of the
Manchester Street Station.
The change in taxes, other than income taxes is due to
increased property taxes, including taxes on the Manchester
Street Station.
Allowance For Funds Used During Construction
- --------------------------------------------
AFDC decreased for the second quarter and first six months
of 1996 due to the completion of the Manchester Street Station
repowering project in 1995.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $43 million for
the first six months of 1996. The funds necessary for utility
plant expenditures during the period were provided by net cash
from operating activities, after the payment of dividends. In
the first six months of 1996, the Company refinanced $40 million
of variable rate mortgage bonds.
Citing the passage of the restructuring legislation in
Rhode Island, Moody's Investor Services lowered the credit
rating of the Company from A1 to A2 for senior secured debt.
Standard & Poor's downgraded the Company's senior secured debt
credit rating from A+ to A for similar reasons. Duff & Phelps
Credit Rating Company had already downgraded the senior secured
debt of the Company from AA- to A+ in March 1996 in anticipation
of increasing competitive forces in the Northeast.
In the second quarter of 1996, the Company redeemed all of
its 7.24 percent series of cumulative preferred stock. A
premium of $450,000 in connection with this redemption was
charged to retained earnings in the second quarter.
At June 30, 1996, the Company had $146 million of short-term
debt outstanding, including $139 million of commercial paper
borrowings and $7 million of borrowings from affiliates. At
June 30, 1996, the Company had lines of credit and standby bond
purchase facilities with banks totaling $540 million which are
available to provide liquidity support for commercial paper
borrowings and for $372 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 June 30, 1996. For the twelve-
month period ending June 30, 1996, the ratio of earnings to
fixed charges was 5.17.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning a settlement agreement regarding a
lawsuit filed against the Company by Milford Power Limited
Partnership on October 28, 1994, discussed in this report in Note
C of Notes to Unaudited Financial Statements, is incorporated
herein by reference and made a part hereof.
Information concerning arbitration of a dispute regarding the
Company's purchased power contract with Hydro-Quebec discussed in
this report in Note C of Notes to Unaudited Financial Statements,
is incorporated herein by reference and made a part hereof.
Information concerning restructuring dockets before state and
federal regulatory agencies, discussed in Part I of this report in
Management's Discussion and Analysis of Financial Condition and
Results of Operations, is incorporated herein by reference and made
a part hereof.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
On April 17, 1996, the 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
five.
The following were elected as directors:
Joan T. Bok
Alfred D. Houston
Cheryl A. LaFleur
John W. Rowe
Jeffrey D. Tranen
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
1996.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
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 May 30, 1996,
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 June 30, 1996 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 14, 1996