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, 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 September 30, 1996.
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
Quarter Nine Months
-------- -----------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Operating revenue, principally from affiliates $431,420 $421,935$1,206,881 $1,191,230
-------- -------- --------------------
Operating expenses:
Fuel for generation 95,751 75,355 250,741 206,185
Purchased electric energy 126,203 133,660 376,492 419,209
Other operation 49,947 52,676 153,234 156,167
Maintenance 19,724 16,481 62,696 70,386
Depreciation and amortization 26,510 22,602 79,540 79,797
Taxes, other than income taxes 16,300 13,974 50,249 43,359
Income taxes 33,203 37,518 75,242 72,915
-------- -------- --------------------
Total operating expenses 367,638 352,266 1,048,194 1,048,018
-------- -------- --------------------
Operating income 63,782 69,669 158,687 143,212
Other income:
Allowance for equity funds used during
construction 2,535 7,488
Equity in income of nuclear power companies1,324 1,356 4,142 4,247
Other income (expense), net 844 (713) (748) (1,812)
-------- -------- --------------------
Operating and other income 65,950 72,847 162,081 153,135
-------- -------- --------------------
Interest:
Interest on long-term debt 11,046 11,859 33,855 34,861
Other interest 2,336 2,637 8,184 7,007
Allowance for borrowed funds used during
construction 9 (3,333) (258) (9,088)
-------- -------- --------------------
Total interest 13,391 11,163 41,781 32,780
-------- -------- --------------------
Net income $ 52,559 $ 61,684 $ 120,300$ 120,355
======== ======== ====================
Statements of Retained Earnings
Retained earnings at beginning of period $386,242 $368,443 $ 385,309$ 372,763
Net income 52,559 61,684 120,300 120,355
Dividends declared on cumulative
preferred stock (519) (858) (2,055) (2,575)
Dividends declared on common stock (41,924) (41,924) (106,746) (103,198)
Premium on redemption of preferred stock (450)
-------- -------- --------------------
Retained earnings at end of period $396,358 $387,345 $ 396,358$ 387,345
======== ======== ====================
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)
1996 1995
---- ----
(In Thousands)
Operating revenue, principally from affiliates $1,586,190 $1,556,370
---------- ----------
Operating expenses:
Fuel for generation 324,405 260,377
Purchased electric energy 505,209 553,862
Other operation 208,939 211,539
Maintenance 85,264 107,708
Depreciation and amortization 102,501 113,259
Taxes, other than income taxes 65,606 54,259
Income taxes 93,378 85,915
---------- ----------
Total operating expenses 1,385,302 1,386,919
---------- ----------
Operating income 200,888 169,451
Other income:
Allowance for equity funds used during construction 258 10,369
Equity in income of nuclear power companies 5,616 4,854
Other income (expense), net (546) 735
---------- ----------
Operating and other income 206,216 185,409
---------- ----------
Interest:
Interest on long-term debt 45,791 45,461
Other interest 11,702 6,551
Allowance for borrowed funds used during
construction (2,649) (11,142)
---------- ----------
Total interest 54,844 40,870
---------- ----------
Net income $ 151,372 $ 144,539
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 387,345 $ 383,299
Net income 151,372 144,539
Dividends declared on cumulative preferred stock (2,913) (3,433)
Dividends declared on common stock (138,996) (137,060)
Premium on redemption of preferred stock (450)
---------- ----------
Retained earnings at end of period $ 396,358 $ 387,345
========== ==========
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 1996 1995
------ ---- ----
(In Thousands)
Utility plant, at original cost $2,973,759 $2,941,469
Less accumulated provisions for depreciation
and amortization 1,098,734 1,047,982
---------- ----------
1,875,025 1,893,487
Net investment in Seabrook 1 under rate settlement 3,803 15,210
Construction work in progress 47,284 41,566
---------- ----------
Net utility plant 1,926,112 1,950,263
---------- ----------
Investments:
Nuclear power companies, at equity 48,147 47,055
Non-utility property and other investments 26,773 26,627
---------- ----------
Total investments 74,920 73,682
---------- ----------
Current assets:
Cash 1,392 2,607
Accounts receivable:
Affiliated companies 252,345 204,314
Accrued NEEI revenues 25,875 43,731
Others 20,707 17,821
Fuel, materials and supplies, at average cost 67,186 54,664
Prepaid and other current assets 25,027 27,986
---------- ----------
Total current assets 392,532 351,123
---------- ----------
Deferred charges and other assets 234,417 273,275
---------- ----------
$2,627,981 $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 86,779 86,829
Other paid-in capital 289,818 288,000
Retained earnings 396,358 385,309
---------- ----------
Total common equity 901,953 889,136
Cumulative preferred stock, par value $100 per share 39,666 60,516
Long-term debt 735,953 735,440
---------- ----------
Total capitalization 1,677,572 1,685,092
---------- ----------
Current liabilities:
Long-term debt due in one year 10,000
Short-term debt (including $7,275,000 and $1,025,000
to affiliates) 124,375 125,150
Accounts payable (including $40,170,000 and $50,760,000
to affiliates) 152,717 163,791
Accrued liabilities:
Taxes 15,553 3,447
Interest 10,055 10,482
Other accrued expenses 12,029 10,834
Dividends payable 41,924 32,249
---------- ----------
Total current liabilities 356,653 355,953
---------- ----------
Deferred federal and state income taxes 386,380 390,197
Unamortized investment tax credits 55,992 57,509
Other reserves and deferred credits 151,384 159,592
---------- ----------
$2,627,981 $2,648,343
========== ==========
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)
1996 1995
---- ----
(In Thousands)
Operating Activities:
Net income $ 120,300 $ 120,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 82,756 84,241
Deferred income taxes and investment tax credits, net (4,002) 16,927
Allowance for funds used during construction (258) (16,576)
Decrease (increase) in accounts receivable (33,061) 555
Decrease (increase) in fuel, materials, and supplies (12,522) (3,635)
Decrease (increase) in prepaid and other current assets 2,959 1,324
Increase (decrease) in accounts payable (11,074) (23,561)
Increase (decrease) in other current liabilities 12,874 13,387
Other, net 25,350 (30,905)
--------- ---------
Net cash provided by operating activities $ 183,322 $ 162,112
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $ (54,992) $(125,240)
Other investing activities (113)
--------- ---------
Net cash used in investing activities $ (55,105) $(125,240)
--------- ---------
Financing Activities:
Dividends paid on common stock $ (97,071) $(103,198)
Dividends paid on preferred stock (2,055) (2,575)
Redemption of preferred stock (20,900)
Long-term debt - issues 39,850 60,000
Long-term debt - retirements (49,850) (10,000)
Changes in short-term debt (775) 21,000
Gain on redemption of preferred stock, net 1,369
--------- ---------
Net cash used in financing activities $(129,432) $ (34,773)
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,215) $ 2,099
Cash and cash equivalents at beginning of period 2,607 377
--------- ---------
Cash and cash equivalents at end of period $ 1,392 $ 2,476
========= =========
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 Nine Months Ended
September 30,
-----------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Operating revenue $134,570 $154,853 $453,091 $527,666
======== ======== ======== ========
Net income $ 4,286 $ 5,979 $ 19,558 $ 22,263
======== ======== ======== ========
Company's equity
in net income $ 1,324 $ 1,356 $ 4,142 $ 4,247
======== ======== ======== ========
September 30, December 31,
1996 1995
---- ----
(In Thousands)
Net plant $ 417,752 $ 443,967
Other assets 1,450,066 1,418,681
Liabilities and debt (1,615,194) (1,612,843)
----------- -----------
Net assets $ 252,624 $ 249,805
=========== ===========
Company's equity in net assets $ 48,147 $ 47,055
=========== ===========
At September 30, 1996, $14,203,000 of undistributed earnings of
the nuclear power companies were included in the Company's retained
earnings.
Connecticut Yankee
The Company has a 15 percent equity ownership interest in
Connecticut Yankee Atomic Power Company (Connecticut Yankee) which
owns a 580 megawatt (MW) nuclear generating plant. At September
30, 1996, the Company's net investment in Connecticut Yankee was
$16 million. Subsidiaries of Northeast Utilities (NU) own 49
percent of Connecticut Yankee. The Connecticut Yankee station has
been shut down since July 22, 1996, after a potential problem with
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
its cooling system was identified. Since that time, the Nuclear
Regulatory Commission (NRC) has identified additional weaknesses
and deficiencies which have to be addressed before the plant can
restart. On September 3, 1996, the NRC sent an inspection team to
Connecticut Yankee to investigate two unrelated events occurring at
the plant while it was shut down. On October 9, 1996, the owners
of Connecticut Yankee announced that permanent shutdown of the
plant was likely. The announcement was made based on an economic
analysis comparing the incremental costs associated with operating
and maintaining the plant with the expected value of the plant's
output. A final decision by the Connecticut Yankee board of
directors is expected in the near future. In the event the plant
is permanently shut down, Connecticut Yankee's estimated billings
to the Company, including decommissioning of the plant, is
currently estimated to be approximately $120 million and is subject
to Federal Energy Regulatory Commission approval. These costs
would be recorded as an accrued liability with an offsetting
regulatory asset in the expectation that the costs would be
recoverable from customers. In the event of restart, costs in the
range of at least $40 million would be required to address
corrective actions at Connecticut Yankee. The Company's share of
these costs would be at least $6 million.
Millstone 3
The Company is a 12 percent joint owner of the Millstone 3
nuclear generating unit (Millstone 3), a 1,150 MW unit. Millstone
3 is operated by a subsidiary of NU. In March 1996, the Millstone
3 unit was shut down as a result of an internal safety review. In
April 1996, the 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.
The NRC has classified the Millstone units as 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. 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. On October 18, 1996, the NRC
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
established a Special Projects Office to oversee inspection and
licensing activities at Millstone. The NRC expects the office to
be in operation for 18 to 24 months. A vote of the NRC
Commissioners is required prior to restart of the units. The
Company cannot predict when Millstone 3 will be allowed by the NRC
to restart, but believes that the unit will remain shut down for a
very protracted period.
The Company has an accrued liability of approximately $7
million at the end of the third quarter of 1996 for its share of
the currently estimated future incremental operation and
maintenance costs related to corrective actions at the Millstone 3
unit. Additional costs may be incurred beyond those already
recognized. During the outage, the Company is incurring
approximately $1.5 million per month in replacement power costs,
which it has been recovering from customers through its fuel
clause.
Maine Yankee
The Company has a 20 percent equity ownership interest in Maine
Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW
nuclear generating station. Maine Yankee is currently operating at
90 percent power until the NRC authorizes operation at a higher
level. As previously reported, the NRC is investigating
allegations that inadequate analyses of the plant's emergency core
cooling system were performed. In September 1996, the NRC asked
the Department of Justice to review an NRC investigatory report on
the allegations.
Maine Yankee was also subject to an NRC independent safety
assessment. On October 7, 1996, the NRC staff issued its report,
which concluded that overall performance at Maine Yankee was
considered adequate for operation. However, the report identified
a number of weaknesses and deficiencies. Maine Yankee must respond
by December 10, 1996 to the report with its plans for resolving the
deficiencies. It is not known when, or if, the Maine Yankee plant
will be allowed to return to maximum capacity or how much of an
investment might be required to correct the deficiencies.
General
On October 9, 1996, the NRC issued letters to all nuclear power
plants requiring them to submit documentation showing that the
plants are operated and maintained within their design basis, and
Note A - Investments in Nuclear Units - Continued
- -------------------------------------
any deviations are reconciled in a timely manner. The Seabrook 1,
Maine Yankee, and Vermont Yankee nuclear power plants, in which the
Company owns 10 percent, 20 percent, and 20 percent interests,
respectively, will all be required to respond to the NRC letters by
February 1997.
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 - Brayton Point
- ----------------------
On October 22, 1996, the Environmental Protection Agency (EPA)
announced it was beginning a process to revoke the Company's water
discharge permit for its Brayton Point 1,538 MW power plant
(Brayton Point). This action comes two years before the permit
expiration date. The EPA expects to work with the Company and
other interested parties, including the states of Rhode Island and
Massachusetts, to recommend new permit requirements within 60 days.
Brayton Point will continue to operate under the terms of its
existing permit until permit modifications are made or a revised
permit is issued. The EPA stated it took the action in response to
environmental concerns regarding the plant's thermal discharges.
The Company cannot predict at this time what permit changes will be
required or the impact on plant operations and economics.
Note C - 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 C - 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 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.
This section contains forward-looking statements as defined under
the securities laws. Actual results could differ materially from
those projected. This section, particularly under "Competitive
Conditions - Risk Factors", lists some of the reasons why results
could differ materially from those projected.
Earnings
- --------
Net income decreased for the third quarter of 1996 by
approximately $9 million from the corresponding period in 1995,
however, net income for the first nine months of 1996 was
unchanged. The decrease in the third quarter was due to a number
of factors, most of which relate 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 depreciation and increased property
taxes. The Company also experienced a decrease in revenues
excluding fuel. During the nine-month period, these declines were
offset by decreased purchased power expense and decreased fossil
and hydroelectric generating plant maintenance expense.
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 the New England states,
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 these competitive circumstances, utilities across
the country that operate generation plants, such as the Company,
face the risk that market prices may not be sufficient to recover
the costs of the commitments incurred to supply customers under a
regulated industry structure. The amount by which costs exceed
market prices is commonly referred to as "stranded costs".
Massachusetts Settlement Agreement
In May 1996, the Massachusetts Department of Public Utilities
(MDPU) issued a set of proposed rules and regulations governing the
implementation of retail choice in Massachusetts. 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. The MDPU has stated that it will issue final regulations
by year-end 1996 and issue orders on individual utility plans in
1997.
On October 1, 1996, the Company and Massachusetts Electric
Company (Massachusetts Electric), a retail affiliate, together with
the Massachusetts Attorney General, the Massachusetts Division of
Energy Resources and other parties, filed a comprehensive
settlement agreement with the MDPU. The settlement agreement
provides for the commencement of retail choice on January 1, 1998
(contingent on choice being available to the customers of all
Massachusetts investor-owned utilities), full compensation for
potential stranded costs, and the full divestiture of the NEES
companies' fossil and hydroelectric generating business. Under the
settlement agreement, customers who do not choose an alternative
supplier would receive "Standard Offer" service, which would be
priced to guarantee customers at least a 10 percent savings in 1998
from current electricity prices, therefore resulting in revenue
losses for Massachusetts Electric.
Under the settlement agreement, the Company's wholesale
contract with Massachusetts Electric would be terminated. In
return, the cost of the Company's past generation commitments to
serve Massachusetts Electric's customers (estimated at
approximately $3 billion) would be recovered through a transition
access charge on retail distribution rates. Those commitments
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, including nuclear
decommissioning.
Sunk costs associated with generating plants and regulatory
assets would be recovered over a period of 12 years, based on an
initial return on equity of 9.4 percent. As the transition access
charge declines, the Company would earn mitigation incentives which
would supplement its return on equity on sunk costs above the
initial 9.4 percent during the 12 year transition period. The
incentives are designed such that the Company believes that it
could earn a return on equity on sunk costs of 11 percent. The
above-market component of purchased power contracts and nuclear
decommissioning costs would be recovered as incurred over the life
of those obligations, a period expected to extend beyond 12 years.
The transition access charge would be reduced to reflect the net
proceeds from the sale of the NEES companies' generating assets.
The initial transition access charge, before the application of
those proceeds, would be set at 2.8 cents per kilowatt-hour (kWh)
through December 31, 2000, and is expected to decline thereafter.
The settlement agreement requires the NEES companies to file a
divestiture plan for the generating business with the MDPU by July
1, 1997. The NEES companies must complete the divestiture of its
generating business within six months of the later of the
commencement of retail access in Massachusetts or the receipt of
all necessary regulatory approvals.
As part of the divestiture plan, the Company would endeavor to
sell or otherwise transfer its minority interest in four nuclear
power plants to nonaffiliates. The Company may retain
responsibility for decommissioning and related expenses if
necessary. To the extent that the Company is unable to divest its
nuclear generating interests, the settlement agreement provides for
an 80 percent/20 percent sharing between customers and shareholders
of the revenues associated with the nuclear interests and the costs
not otherwise reflected in the transition access charge.
The MDPU, with the agreement of the parties, has set a
procedural schedule under which it will issue a decision on the
settlement agreement by January 10, 1997. The settlement agreement
is also subject to approval by the Federal Energy Regulatory
Commission (FERC). Additional governmental approvals would be
required for the divestiture of the generating business. In
addition, the implementation of retail choice in Massachusetts may
be the subject of legislation from the Massachusetts legislature.
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 NEES companies supported this
legislation which affects the Company and The Narragansett Electric
Company (Narragansett), a retail affiliate.
The legislation allows 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. All Rhode Island customers would have choice of
supplier beginning January 1, 1998 if retail access is available to
40 percent or more of the kWh sales in New England by that date.
Rhode Island customers will likely receive substantial savings in
a competitive market, which will therefore result in revenue losses
for Narragansett.
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 (estimated at approximately $1 billion) will be recovered
through a transition access charge on retail distribution rates
similar to that contained in the Massachusetts settlement
agreement. Under the Rhode Island legislation, the return on
equity is initially set at 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.
Implementation of various aspects of the Rhode Island
legislation is subject to Rhode Island Public Utilities Commission
and FERC approval.
New Hampshire Proceedings
In September 1996, the New Hampshire Public Utilities
Commission issued a preliminary restructuring plan for the electric
utility industry in New Hampshire. The stated goals of the
preliminary plan include encouraging the divestiture of generation
assets and the recovery of some stranded costs through an interim
non-bypassable transition charge. Recoverable stranded costs would
be determined on a utility-specific basis. The amount of recovery
could be tied to the amount by which a utility's rates exceed the
regional average electricity rate. Utilities with rates at or
below the regional average could be entitled to greater recovery of
stranded costs. Utility-specific interim stranded cost recovery
hearings are scheduled for December 1996. A final plan is expected
to be issued in February 1997.
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.
On July 9, 1996, the Company 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. The implementation of the tariff is not expected to have
a significant impact on the Company's revenues.
Accounting Implications
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 Standards
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, if approved by regulators, the Massachusetts settlement
agreement and the Rhode Island legislation would meet the criteria
for continued application of FAS 71 to the Company's remaining
regulated utility operations, including the recovery of stranded
costs. As a result, no write-off of existing regulatory assets is
expected and any loss from the divestiture of NEES's generating
business would be recorded as a regulatory asset.
Risk Factors
For a discussion of risk factors in the event that the
Massachusetts settlement agreement is not approved and FERC
approval of implementation of the Rhode Island legislation does not
occur, see "Risk Factors" in the Company's Form 10-Q for the quarter
ended June 30, 1996.
Investments in Nuclear Units
- ----------------------------
Connecticut Yankee
The Company has a 15 percent equity ownership interest in
Connecticut Yankee Atomic Power Company (Connecticut Yankee) which
owns a 580 megawatt (MW) nuclear generating plant. At September
30, 1996, the Company's net investment in Connecticut Yankee was
$16 million. Subsidiaries of Northeast Utilities (NU) own 49
percent of Connecticut Yankee. The Connecticut Yankee station has
been shut down since July 22, 1996, after a potential problem with
its cooling system was identified. Since that time, the Nuclear
Regulatory Commission (NRC) has identified additional weaknesses
and deficiencies which have to be addressed before the plant can
restart. On September 3, 1996, the NRC sent an inspection team to
Connecticut Yankee to investigate two unrelated events occurring at
the plant while it was shut down. On October 9, 1996, the owners
of Connecticut Yankee announced that permanent shutdown of the
plant was likely. The announcement was made based on an economic
analysis comparing the incremental costs associated with operating
and maintaining the plant with the expected value of the plant's
output. A final decision by the Connecticut Yankee board of
directors is expected in the near future. In the event the plant
is permanently shut down, Connecticut Yankee's estimated billings
to the Company, including decommissioning of the plant, is
currently estimated to be approximately $120 million and is subject
to FERC approval. These costs would be recorded as an accrued
liability with an offsetting regulatory asset in the expectation
that the costs would be recoverable from customers. (See
"Competitive Conditions" section.) In the event of restart, costs
in the range of at least $40 million would be required to address
corrective actions at Connecticut Yankee. The Company's share of
these costs would be at least $6 million.
Millstone 3
The Company is a 12 percent joint owner of the Millstone 3
nuclear generating unit (Millstone 3), a 1,150 MW unit. Millstone
3 is operated by a subsidiary of NU. In March 1996, the Millstone
3 unit was shut down as a result of an internal safety review. In
April 1996, the 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.
The NRC has classified the Millstone units as 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. 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. On October 18, 1996, the NRC
established a Special Projects Office to oversee inspection and
licensing activities at Millstone. The NRC expects the office to
be in operation for 18 to 24 months. A vote of the NRC
Commissioners is required prior to restart of the units. The
Company cannot predict when Millstone 3 will be allowed by the NRC
to restart, but believes that the unit will remain shut down for a
very protracted period.
The Company has an accrued liability of approximately $7
million at the end of the third quarter of 1996 for its share of
the currently estimated future incremental operation and
maintenance costs related to corrective actions at the Millstone 3
unit. Additional costs may be incurred beyond those already
recognized. During the outage, the Company is incurring
approximately $1.5 million per month in replacement power costs,
which it has been recovering from customers through its fuel
clause.
Maine Yankee
The Company has a 20 percent equity ownership interest in Maine
Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW
nuclear generating station. Maine Yankee is currently operating at
90 percent power until the NRC authorizes operation at a higher
level. As previously reported, the NRC is investigating
allegations that inadequate analyses of the plant's emergency core
cooling system were performed. In September 1996, the NRC asked
the Department of Justice to review an NRC investigatory report on
the allegations.
Maine Yankee was also subject to an NRC independent safety
assessment. On October 7, 1996, the NRC staff issued its report,
which concluded that overall performance at Maine Yankee was
considered adequate for operation. However, the report identified
a number of weaknesses and deficiencies. Maine Yankee must respond
by December 10, 1996 to the report with its plans for resolving the
deficiencies. It is not known when, or if, the Maine Yankee plant
will be allowed to return to maximum capacity or how much of an
investment might be required to correct the deficiencies.
General
On October 9, 1996, the NRC issued letters to all nuclear power
plants requiring them to submit documentation showing that the
plants are operated and maintained within their design basis, and
any deviations are reconciled in a timely manner. The Seabrook 1,
Maine Yankee, and Vermont Yankee nuclear power plants, in which the
Company owns 10 percent, 20 percent, and 20 percent interests,
respectively, will all be required to respond to the NRC letters by
February 1997.
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.
Brayton Point
- -------------
On October 22, 1996, the Environmental Protection Agency (EPA)
announced it was beginning a process to revoke the Company's water
discharge permit for its Brayton Point 1,538 MW power plant
(Brayton Point). This action comes two years before the permit
expiration date. The EPA expects to work with the Company and
other interested parties, including the states of Rhode Island and
Massachusetts, to recommend new permit requirements within 60 days.
Brayton Point will continue to operate under the terms of its
existing permit until permit modifications are made or a revised
permit is issued. The EPA stated it took the action in response to
environmental concerns regarding the plant's thermal discharges.
The Company cannot predict at this time what permit changes will be
required or the impact on plant operations and economics.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1996 vs 1995 1996 vs 1995
------------- ------------
(In Millions)
Fuel recovery $15 $26
Narragansett integrated
facilities credit (3) (7)
Sales decrease and other (3) (3)
--- ---
$ 9 $16
=== ===
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 the
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
Third Quarter Nine Months
------------- ------------
1996 vs 1995 1996 vs 1995
------------- ------------
(In Millions)
Fuel costs $16 $ 30
Purchased energy, excluding fuel (3) (28)
Operation and maintenance - (11)
Depreciation and amortization:
Seabrook 1 and Oil Conservation
Adjustment (OCA) amortization - (12)
Depreciation, including Manchester
Street 4 12
Taxes, other than income taxes 2 7
Income taxes (4) 2
--- ----
$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 increases in fuel costs in
the third quarter and first nine months of 1996 primarily reflect
additional fixed pipeline demand charges due to the completion of
the Manchester Street repowering project in the second half of
1995, the amortization of pipeline demand charges deferred during
the project's construction period, and increased kWh sales.
The portion of purchased electric energy costs not recovered
through the Company's fuel clause is shown as purchased energy,
excluding fuel. The decrease in purchased power costs, excluding
fuel, for the third quarter and nine-month period reflects
reductions in purchases under certain long-term power contracts.
Purchased power costs in the first six months of 1995 also included
the Company's portion of the incremental costs to repair steam
generator tubes at Maine Yankee. Purchased power costs from other
power suppliers also decreased in the first six months but
increased in the third quarter primarily due to the timing of
overhauls and refueling shutdowns.
The decrease in operation and maintenance costs for the nine-
month period reflects overhauls at the Company's fossil and
hydroelectric generating units during the first nine months of
1995, partially offset by the Company's portion of currently
estimated incremental costs to correct deficiencies at the
Millstone 3 nuclear generating unit. The Company is a joint owner
of Millstone 3. (See "Investments in Nuclear Units" section.)
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
offset by the depreciation of the Manchester Street Station.
The increase in taxes, other than income taxes in 1996 is due
to increased property taxes, including taxes on the Manchester
Street Station.
Allowance For Funds Used During Construction
- --------------------------------------------
AFDC decreased for the third quarter and first nine months of
1996 due to the completion of the Manchester Street Station
repowering project in 1995.
Utility Plant Expenditures and Financings
- -----------------------------------------
Cash expenditures for utility plant totaled $55 million for the
first nine 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
nine months of 1996, the Company refinanced $40 million of variable
rate mortgage bonds. The Company plans to refinance $8 million of
variable rate debt in the fourth quarter of 1996.
In August 1996, the Company repurchased $6 million of its 4.64
percent series of cumulative preferred stock. In May 1996, the
Company redeemed all ($15 million) of its 7.24 percent series of
cumulative preferred stock.
The Company has approximately $740 million of mortgage bonds
outstanding. The bond indenture terms restrict the sale of the
trust property in its entirety or substantially in its entirety.
Therefore, the proposed sale of the Company's generating business
would likely require that the Company either amend the bond
indenture terms or defease the indenture and the bonds in
connection with the proposed sale. Any defeasance of bonds is
expected to be either to maturity or at general redemption prices.
See "Competitive Conditions" section.
At September 30, 1996, the Company had $124 million of
short-term debt outstanding, including $117 million of commercial
paper borrowings. At September 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 September 30, 1996. For
the twelve-month period ending September 30, 1996, the ratio of
earnings to fixed charges was 5.02.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
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.
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. 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. On October 18, 1996, the Company
and other New England utilities who are parties to the Firm
Energy Contract filed a motion to dismiss Hydro-Quebec's claims.
A decision on the motion is expected by December of this year.
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 reports on Form 8-K dated September 12,
1996 and October 1, 1996, each 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 Septmber 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: November 8, 1996