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 March 31, 1998
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 March 31, 1998.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended March 31
(Unaudited)
Three Months Twelve Months
------------ -----------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Operating revenue, principally from affiliates $401,147 $438,048$1,641,002 $1,637,897
-------- -------- --------------------
Operating expenses:
Fuel for generation 83,551 103,015 353,270 365,334
Purchased electric energy 122,485 144,345 505,787 527,721
Other operation 50,202 55,849 235,859 209,281
Maintenance 25,556 19,770 95,606 79,281
Depreciation and amortization 29,884 22,018 105,889 99,707
Taxes, other than income taxes 18,383 18,205 67,489 66,900
Income taxes 22,346 24,194 88,161 90,537
-------- -------- --------------------
Total operating expenses 352,407 387,396 1,452,061 1,438,761
-------- -------- --------------------
Operating income 48,740 50,652 188,941 199,136
Other income:
Allowance for equity funds used during
construction - - - 5
Equity in income of nuclear power companies1,115 1,496 4,808 5,311
Other income (expense) - net (2,552) (2,090) (3,866) (1,950)
-------- -------- --------------------
Operating and other income 47,303 50,058 189,883 202,502
-------- -------- --------------------
Interest:
Interest on long-term debt 9,723 10,832 41,168 44,238
Other interest 1,914 1,651 7,319 9,549
Allowance for borrowed funds used during
construction - credit (284) (370) (1,152) (740)
-------- -------- --------------------
Total interest 11,353 12,113 47,335 53,047
-------- -------- --------------------
Net income $ 35,950 $ 37,945 $ 142,548$ 149,455
======== ======== ====================
Statements of Retained Earnings
Retained earnings at beginning of period $407,630 $400,610 $ 409,011$ 396,399
Net income 35,950 37,945 142,548 149,455
Dividends declared on cumulative
preferred stock (519) (519) (2,075) (2,235)
Dividends declared on common stock - (29,025) (106,423) (134,158)
Premium on redemption of preferred stock - - - (450)
-------- -------- --------------------
Retained earnings at end of period $443,061 $409,011 $ 443,061$ 409,011
======== ======== ====================
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)
March 31, December 31,
ASSETS 1998 1997
------ ---- ----
(In Thousands)
Utility plant, at original cost $3,075,395 $3,057,749
Less accumulated provisions for depreciation
and amortization 1,216,355 1,196,972
---------- ----------
1,859,040 1,860,777
Construction work in progress 26,127 29,015
---------- ----------
Net utility plant 1,885,167 1,889,792
---------- ----------
Investments:
Nuclear power companies, at equity 50,638 49,825
Nonutility property and other investments 35,187 34,723
---------- ----------
Total investments 85,825 84,548
---------- ----------
Current assets:
Cash 1,139 1,643
Accounts receivable, principally from sales of
electric energy:
Affiliated companies 235,198 233,308
Accrued NEEI revenues - 11,419
Others 24,068 26,638
Fuel, materials, and supplies, at average cost 59,129 47,492
Prepaid and other current assets 21,653 17,837
---------- ----------
Total current assets 341,187 338,337
---------- ----------
Accrued Yankee nuclear plant costs 285,273 299,564
Deferred charges and other assets 277,388 150,851
---------- ----------
$2,874,840 $2,763,092
========== ==========
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 86,779
Other paid-in capital 289,818 289,818
Retained earnings 443,061 407,630
Unrealized gain on securities, net 50 34
---------- ----------
Total common equity 948,706 913,259
Cumulative preferred stock, par value $100 per share 39,666 39,666
Long-term debt 647,774 647,720
---------- ----------
Total capitalization 1,636,146 1,600,645
---------- ----------
Current liabilities:
Long-term debt due within one year - 50,000
Short-term debt (including $9,575,000 and $3,125,000
to affiliates) 182,275 111,250
Accounts payable (including $25,507,000 and $14,373,000
to affiliates) 133,130 109,121
Accrued liabilities:
Taxes 18,507 39
Interest 8,265 8,905
Other accrued expenses 23,771 23,554
Dividends payable - 35,474
---------- ----------
Total current liabilities 365,948 338,343
---------- ----------
Deferred federal and state income taxes 412,396 369,757
Unamortized investment tax credits 52,958 53,463
Accrued Yankee nuclear plant costs 285,273 299,564
Other reserves and deferred credits 122,119 101,320
---------- ----------
$2,874,840 $2,763,092
========== ==========
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND POWER COMPANY
Statements of Cash Flows
Quarters Ended March 31
(Unaudited)
1998 1997
---- ----
(In Thousands)
Operating activities:
Net income $ 35,950 $ 37,945
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,629 22,908
Deferred income taxes and investment tax credits, net 42,358 (1,751)
Allowance for funds used during construction (284) (370)
Reimbursement to New England Energy Incorporated
of loss on sale of oil and gas properties (120,900) -
Decrease (increase) in accounts receivable, net 12,099 (21,826)
Decrease (increase) in fuel, materials, and supplies (11,637) (3,408)
Decrease (increase) in prepaid and other current assets (3,816) (150)
Increase (decrease) in accounts payable 24,009 9,824
Increase (decrease) in other current liabilities 18,045 17,069
Other, net 4,873 15,129
-------- --------
Net cash provided by operating activities $ 31,326 $ 75,370
-------- --------
Investing activities:
Plant expenditures, excluding allowance
for funds used during construction $(16,451) $(15,947)
Other investing activities (411) (126)
-------- --------
Net cash used in investing activities $(16,862) $(16,073)
-------- --------
Financing activities:
Dividends paid on common stock $(35,474) $(27,412)
Dividends paid on preferred stock (519) (519)
Changes in short-term debt 71,025 4,625
Long-term debt - retirements (50,000) (35,500)
-------- --------
Net cash used in financing activities $(14,968) $(58,806)
-------- --------
Net increase (decrease) in cash and cash equivalents $ (504) $ 491
Cash and cash equivalents at beginning of period 1,643 3,046
-------- --------
Cash and cash equivalents at end of period $ 1,139 $ 3,537
======== ========
The accompanying notes are an integral part of these financial statements.
Note A - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
A number of states, including Massachusetts, have enacted similar
laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. New England Power Company (the Company)
currently has in place an internal environmental audit program and
an external waste disposal vendor audit and qualification program
intended to enhance compliance with existing federal, state, and
local requirements regarding the handling of potentially hazardous
products and by-products.
The Company has been named as potentially responsible party
(PRP) by either the United States 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 possible hazardous waste 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. The New
England Electric System (NEES) companies have recovered amounts
from certain insurers, and, where appropriate, the Company intends
to seek recovery from other insurers and from other PRPs, but it is
uncertain whether, and to what extent, such efforts will be
successful. The Company believes that hazardous waste liabilities
for all sites of which it is aware are not material to its
financial position.
Note B - Nuclear Units
- ----------------------
Yankee Nuclear Power Companies (Yankees)
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:
Quarter ended
March 31,
--------------
1998 1997
---- ----
(In thousands)
Operating revenue $122,615 $176,027
======== ========
Net income $ 7,351 $ 8,379
======== ========
Company's equity in net income $ 1,115 $ 1,496
======== ========
March 31, December 31,
1998 1997
---- ----
(In thousands)
Net plant $ 197,826 $ 204,689
Other assets 3,081,065 3,100,589
Liabilities and debt (3,004,773) (3,036,845)
----------- -----------
Net assets $ 274,118 $ 268,433
=========== ===========
Company's equity in net assets $ 50,638 $ 49,825
=========== ===========
At March 31, 1998, $16,695,000 of undistributed earnings of the
nuclear power companies were included in the Company's retained
earnings.
Nuclear Units Permanently Shut Down
Three regional nuclear generating companies in which the
Company has a minority interest own nuclear generating units which
have been permanently shut down. These three units are as follows:
NEP's Investment Future Estimated
Unit Percent Amount($) Date Retired Billings to NEP($)
- -----------------------------------------------------------------------------
Yankee Atomic 30 7 million Feb 1992 40 million
Connecticut Yankee 15 17 million Dec 1996 89 million
Maine Yankee 20 16 million Aug 1997 156 million
- -----------------------------------------------------------------------------
In the case of each of these units, the Company has recorded an
estimate of the total future payment obligation as a liability and
an offsetting regulatory asset, reflecting estimated future
billings from the companies. In a 1993 decision, the Federal
Energy Regulatory Commission (FERC) allowed Yankee Atomic to
recover its undepreciated investment in the plant as well as
unfunded nuclear decommissioning costs and other costs.
Connecticut Yankee and Maine Yankee have both filed similar
requests with the FERC. Several parties have intervened in
opposition to both filings. The Company's stranded cost settlements
allow it to recover all costs that the FERC allows the Yankee
companies to bill to the Company.
The Citizen's Awareness Network and Nuclear Information and
Resource Service have indicated their intention to file a request
with the Nuclear Regulatory Commission (NRC) designed to overturn
a current NRC rule on decommissioning. The Company cannot predict
what impact, if any, these activities, if successful, would have on
the cost of decommissioning the plants.
At Maine Yankee, the NRC has identified numerous apparent
violations of its regulations, which may result in the assessment
of significant civil penalties.
In the 1970s, the Company and several other shareholders
(Sponsors) of Maine Yankee entered into 27 contracts (Secondary
Purchase Agreements) under which they sold portions of their
entitlement to Maine Yankee power output through 2002 to various
entities, primarily municipal and cooperative systems in New
England (Secondary Purchasers). Virtually all of the Secondary
Purchasers have ceased making payments under the Secondary Purchase
Agreements and have demanded arbitration, claiming that such
agreements excuse further payments upon plant shutdown. The
Company has notified the Secondary Purchasers that the shutdown
does not relieve them of their obligation to make payments under
the Secondary Purchase Agreements and that they are in default of
such agreements. The Company has asked the FERC to enforce the
Company's rights under the agreements. In the event that no
further payments are forthcoming from Secondary Purchasers, the
Company, as a primary obligor to Maine Yankee, would be required to
pay an additional $9 million of future shutdown costs. These costs
are not included in the $156 million estimate disclosed in the
table above. Shutdown costs are recoverable from customers under
the stranded cost settlements.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for the
plant decommissioning, the owners of Maine Yankee are jointly and
severally liable for the shortfall.
Operating Nuclear Units
The Company has minority interests in three other nuclear
generating units, Vermont Yankee, Millstone 3, and Seabrook 1.
Millstone 3 is currently shut down and has been placed on the NRC
"Watch List," signifying that its safety performance exhibits
sufficient weakness to warrant increased NRC attention. Millstone
3 may not restart without NRC approval.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Vermont Yankee, are
increasing rapidly and could adversely affect their service lives,
availability, and costs. These uncertainties stem from a
combination of factors, including the acceleration of competitive
pressures in the power generation industry and increased NRC
scrutiny. The Company performs periodic economic viability reviews
of operating nuclear units in which it holds ownership interests.
Millstone 3
In April 1996, the NRC ordered Millstone 3, which has experienced
numerous technical and nontechnical problems, to remain shut down
pending verification that the unit's operations are in accordance
with NRC regulations and the unit's operating license. Millstone
3 is operated by a subsidiary of Northeast Utilities (NU). The
Company is not an owner of the Millstone 1 and 2 nuclear generating
units, which are also shut down under NRC orders.
A number of significant prerequisites must be fulfilled prior to
restart of Millstone 3, including an independent verification of
corrective actions taken at the unit, an NRC assessment concluding
a safety conscious work environment exists, one or more public
meetings, and a vote of the NRC Commissioners. Based on
information currently available, the Company believes that, barring
unforseen further difficulties, restart of the unit is likely
during the summer of 1998.
Since April 1996, the Company has incurred an estimated $40
million in incremental replacement power costs. During the outage,
the Company is incurring incremental replacement power costs of
approximately $2 million per month. Through February 1998, when
most of the Company's power sales were subject to a fuel clause,
the Company recovered its incremental power costs from customers
through its fuel clause. Starting in March 1998, most of the
Company's power sales are at a stated rate which is not subject to
a fuel clause. Certain true-up mechanisms exist in lieu of the
fuel clause which cover most of these costs.
Several criminal investigations related to Millstone 3 are
ongoing. In December 1997, the NRC assessed civil penalties
totaling $2.1 million for numerous violations at the three
Millstone units. The Company's share of this fine was less than
$100,000. The Connecticut Department of Environmental Protection
and Connecticut Attorney General have filed suit against NU for
alleged wastewater discharge violations at the Millstone units,
which may result in the assessment of substantial civil penalties.
In August 1997, the Company filed suit against NU in
Massachusetts Superior Court for damages resulting from the
tortious conduct of NU relating to Millstone 3. The Company is
seeking compensation for the losses it has suffered, including the
costs of lost power and costs necessary to assure that Millstone 3
can safely return to operation. The Company also seeks punitive
damages. NU has filed for dismissal of the suit and sought to
consolidate it with suits filed by other joint owners in
Massachusetts Superior Court.
The Company also sent a demand for arbitration to Connecticut
Light & Power Company and Western Massachusetts Electric Company,
both subsidiaries of NU, seeking damages resulting from their
breach of obligations under an agreement with the Company and
others regarding the operation and ownership of Millstone 3.
Note C - Town of Norwood
- ------------------------
In April 1997, the Town of Norwood, Massachusetts filed a lawsuit
against the Company in the United States District Court for the
District of Massachusetts. The Company has been a wholesale power
supplier for Norwood pursuant to rates approved by the FERC.
Norwood alleges that the Company's proposed divestiture of its
power generation assets would violate the terms of a 1983 power
contract which settled an antitrust lawsuit brought by Norwood
against the Company. Norwood also alleges that the Company's
proposed divestiture plan and recovery of stranded investment costs
contravene federal antitrust laws. Norwood seeks an injunction
enjoining the divestiture and an unspecified amount of treble
damages (a specific claim for $450 million was withdrawn). In
September 1997, Norwood's motion for a preliminary injunction of
the divestiture was denied. In November 1997, Norwood filed an
amended complaint making new allegations relating to the sale of
the Company's generating assets and naming as additional
defendants, NEES, USGen New England, Inc. (USGen) and USGen's
affiliate, PG&E Corporation. The Company continues to believe that
its divestiture plan will promote competition in the wholesale
power generation market and that it has met and will continue to
meet its contractual commitments to Norwood. On January 9, 1998,
the defendants, including NEES and the Company, filed a motion to
dismiss the lawsuit. On April 29, 1998, Norwood filed a second
amended complaint. This complaint essentially makes the same
allegations, but drops USGen as a party.
In March 1998, Norwood gave notice of its intent to terminate its
contract with the Company, without accepting responsibility for its
share of the Company's stranded costs, and to begin taking power
from another supplier. The Company has filed with the FERC for
permission to charge Norwood a contract termination charge for its
share of the Company's stranded costs. In April 1998, Norwood
moved to dismiss the Company's filing with the FERC. In the event
that a determination is made which denies the Company the ability
to charge Norwood a contract termination charge, the Company may be
required to take noncash write-offs for certain portions of the
Company's stranded costs that would otherwise have been charged to
Norwood.
Note D - Hydro-Quebec arbitration
- ---------------------------------
In 1996, various New England utilities which are members of the
New England Power Pool, including the Company, submitted a dispute
to arbitration regarding their Firm Energy Purchased Power Contract
with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage
claim of approximately $37 million for past damages, of which the
Company's share would have been approximately $6 million to $9
million. The claims involved a dispute over the components of a
pricing formula and additional costs under the contract. With
respect to ongoing claims, the Company has been paying Hydro-Quebec
the higher amount (additional costs of approximately $3 million per
year) since July 1996 under protest and subject to refund. In
October 1997, an arbitrator ruled in favor of the New England
utilities in all respects. The Company has made a demand for
refund. Hydro-Quebec has not yet refunded any monies and has
appealed the decision. In November 1997, the Company and the other
utilities began a second arbitration to enforce the first decision.
Refunds received from Hydro-Quebec will be passed on to customers.
Note E - Comprehensive Income
- -----------------------------
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income (FAS 130). The statement establishes standards for
reporting comprehensive income and its components. Comprehensive
income for the period is equal to net income plus "other
comprehensive income," which, for the Company, consists of the
change in unrealized holding gains on available-for-sale securities
during the period. Other comprehensive income was immaterial for
the Company for the quarters ended March 31, 1998 and 1997,
respectively.
Note F - New Accounting Standards
- ---------------------------------
In 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 131 (FAS 131),
"Disclosure about Segments of an Enterprise and Related
Information", which goes into effect in 1998. FAS 131 requires the
reporting in financial statements of certain new additional
information about operating segments of a business. Application of
FAS 131 is not required for interim reporting in the initial year
of application. The Company is currently evaluating the impact
that FAS 131 will have on its future reporting requirements.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132 (FAS 132), Employers' Disclosures
about Pensions and Other Postretirement Benefits, which revises
disclosure requirements for pension and other postretirement
benefits. The Company is currently evaluating the effects of FAS
132 on its reporting requirements and will adopt FAS 132 in its
financial statements for the year ending December 31, 1998. The
adoption of FAS 132 will have no impact on the Company's operating
results, financial position, or cash flows.
Note G
- ------
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 consolidated financial statements in the Company's
1997 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 (the Company) financial condition and the principal
factors having an impact on the results of operations. This
discussion should be read in conjunction with the Company's
financial statements and footnotes and the 1997 Annual Report on
Form 10-K.
Earnings
- --------
Net income decreased for the first quarter of 1998 by
approximately $2 million from the corresponding period in 1997.
This decrease is primarily due to the impact of industry
restructuring in Rhode Island and Massachusetts, which caused rates
to be reduced in connection with customers gaining the right to
choose their power supplier, effective January 1, 1998 and March 1,
1998, respectively. In addition, the Company experienced an
increase in operation and maintenance expense in the first quarter
of 1998. Partially offsetting this reduction in earnings was a
decrease in the non-fuel portion of purchased power expense.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island, and New Hampshire, stranded cost
recovery, the Company's proposed divestiture of its nonnuclear
generating business, accounting implications of industry
restructuring and divestiture, workforce reductions, and impact of
industry restructuring on the distribution business, see the
"Industry Restructuring" section in the Company's Form 10-K for
1997 and the Company's 1997 Annual Report.
Industry Restructuring Update
New Hampshire
On April 15, 1998, the Federal Energy Regulatory Commission
(FERC) approved the comprehensive settlement agreement reached
between Granite State Electric Company (Granite State Electric),
the Company, the Governor's office of the State of New Hampshire,
and a number of other parties. The settlement provides for choice
of power supplier to Granite State Electric's customers by no later
than July 1, 1998. The principle terms of the settlement are
substantially similar to the settlements reached in Massachusetts
and Rhode Island. The settlement agreement still requires New
Hampshire Public Utility Commission (NHPUC) approval. On May 1,
1998, Granite State Electric submitted a filing to the NHPUC in
compliance with the March 20, 1998 Order of Rehearing which would
provide for retail access to begin July 1, 1998 even if Granite
State Electric's previously filed settlement were not accepted.
Risk Factors
While the Company believes that the previously described
settlements and legislation and the sale agreement with USGen New
England, Inc. (USGen) and other developments constitute substantial
progress in reducing the impacts associated with industry
restructuring, significant risks remain. These include, but are
not limited to: (i) the potential that ultimately the settlements
will not be implemented in the manner anticipated by the Company,
(ii) the possibility that a voter referendum in November 1998 could
overturn the Massachusetts legislation, followed by materially
adverse legislative or regulatory actions, (iii) the possibility of
federal legislation that would increase the risk to shareholders
above those contained in the settlements and the Massachusetts and
Rhode Island statutes, (iv) the potential for adverse stranded cost
recovery decisions involving wholesale customers with whom
settlements have not yet been reached, and (v) the failure to
complete the sale of the nonnuclear generating business to USGen.
This report contains statements that may be considered forward
looking under the securities laws. Actual results may differ
materially for the reasons discussed in the "Industry
Restructuring" section of the Company's Form 10-K for 1997. Upon
the introduction of industry restructuring and consumer choice,
settlement agreements related to the recovery of stranded costs
will limit the Company's return on equity to approximately 9.4
percent, before mitigation incentives, which is significantly lower
than that earned by the Company in recent years. Following
completion of the sale of the nonnuclear generating business, the
Company's earnings will also be affected by the return on the
reinvestment of sale proceeds, which is expected, at least in the
near term, to be considerably less than the return historically
earned by the generating business.
Year 2000 Computer Issues
- -------------------------
For a full discussion of the Company's Year 2000 computer issues,
including a description of the modification process, timeline, and
estimated total costs, refer to the "Financial Review" section of
the Company's 1997 Annual Report, filed in conjunction with the
Company's Form 10-K for 1997.
Operating Revenue
- -----------------
The following table summarizes the changes in operating revenue:
Increase (Decrease) in Operating Revenue
First Quarter
-------------
1998 vs 1997
-------------
(In millions)
Industry-restructuring related rate changes $(11)
Fuel cost-related (32)
Other, including transmission revenues 6
----
$(37)
====
Generation-related rate reductions reflect rate reductions to
customers as part of industry restructuring and the implementation
of customer choice of power supplier in Rhode Island on January 1,
1998 and in Massachusetts on March 1, 1998. These rate reductions
include the effect of various true-up mechanisms. These true-up
mechanisms cover a number of items including, but not limited to,
fuel expense, nuclear operating and decommissioning costs and the
non-fuel component of purchased power expense.
For a discussion of fuel costs, see the "Operating Expenses"
section.
The increase in other operating revenue includes approximately
$3 million representing increased transmission billings to New
England Power Pool (NEPOOL). A similar increase in NEPOOL
transmission billing to the Company is included in operation and
maintenance expense.
Operating Expenses
- ------------------
The following table summarizes the changes in operating expenses:
Increase (Decrease) in Operating Expenses
First Quarter
-------------
1998 vs 1997
------------
(In millions)
Fuel costs $(31)
Purchased energy, excluding fuel (10)
Depreciation and amortization 8
Operation and maintenance:
PBOP amortization (6)
Other 6
Taxes (2)
----
$(35)
====
Fuel costs represent fuel for generation and the portion of
purchased electric energy permitted in the past to be recovered
through the Company's fuel adjustment clause. After the
divestiture of the nonnuclear generating business, the Company will
not require such a mechanism. The decrease in fuel costs in the
first quarter of 1998 primarily represents reduced wholesale sales
to other utilities, a decrease in the cost of short-term power
purchases and lower coal and oil prices.
The decrease in purchased power costs, excluding fuel, during the
first quarter primarily reflects reduced charges from the
Connecticut Yankee and Maine Yankee nuclear power plants, which
were closed in December 1996 and mid-1997, respectively, as well as
reduced charges from the Ocean State Power II plant, which
underwent a major overhaul during the first quarter of 1997.
The decrease in operation and maintenance associated with the
Company's post retirement benefits other than pensions (PBOP)
amortization reflects the completion of the accelerated PBOP
amortization in 1997 under the terms of a 1995 rate agreement.
This decrease in expense is offset by a corresponding increase in
the accelerated amortization of the Company's investment in the
Millstone 3 nuclear unit, which is described in depreciation and
amortization expense below.
The increase in other operation and maintenance expense reflects
the costs of a major scheduled overhaul at the Manchester Street
generating plant and the increased NEPOOL transmission billings to
the Company, as discussed above.
The overall increase in depreciation and amortization expense
during the first quarter primarily represents the accelerated
amortization of Millstone 3, a portion of which was attributable to
the completion of the PBOP amortization discussed above. This
accelerated amortization is recorded as a regulatory liability.
Also contributing to the increase is depreciation expense on new
utility plant expenditures.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $16 million for the
first three months of 1998. These expenditures were primarily
transmission-related. The funds necessary for utility plant
expenditures during the period were primarily provided by increased
short-term debt.
In the first three months of 1998, the Company retired $50
million of mortgage bonds and increased its short-term debt
outstanding by $71 million.
In order to meet the terms of the Company's mortgage indenture,
the Company will be required, prior to the consummation of the sale
of its nonnuclear generating facilities, to either defease or call
approximately $278 million of its mortgage bonds. Any defeasance
of bonds would be by deposit of cash representing principal and
interest to the maturity date, or interest, principal, and general
redemption premium to an earlier redemption date. In addition, the
Company will retire approximately $372 million of mortgage bonds
securing the issuance of a like amount of pollution control revenue
bonds (PCRBs) by various public agencies. However, the Company
expects that substantially all of the underlying PCRBs will remain
outstanding as unsecured obligations of the Company.
At March 31, 1998, the Company had $182 million of short-term
debt outstanding, including $173 million of commercial paper
borrowings. At March 31, 1998, the Company had lines of credit and
standby bond purchase facilities with banks totaling $580 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 March 31, 1998.
As part of New England Electric System's plan to divest its
generating business, New England Energy Incorporated (NEEI) sold
its oil and gas properties in February 1998 for approximately $50
million. NEEI's loss on the sale of approximately $120 million,
before tax, has been reimbursed by the Company. This loss has been
recorded as a regulatory asset, which is recoverable under the
terms of restructuring settlements reached in Massachusetts and
Rhode Island.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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Information concerning a lawsuit brought by the Company against
Northeast Utilities on August 7, 1997 in Massachusetts Superior
Court, Worcester County concerning the Millstone 3 nuclear unit,
discussed in this report in Note B of Notes to Unaudited Financial
Statements, is incorporated herein and made a part hereof.
Information concerning a demand for arbitration sent by the
Company to Connecticut Light & Power Company and Western
Massachusetts Electric Company concerning the Millstone 3 nuclear
unit, discussed in this report in Note B of Notes to Unaudited
Financial Statements, is incorporated herein and made a part
hereof.
Information concerning a lawsuit brought against the Company by
the Town of Norwood, Massachusetts and a related Federal Energy
Regulatory Commission proceeding, discussed in this report in Note
C of Notes to Unaudited Financial Statements, is incorporated
herein and made a part hereof.
Information concerning an appeal of a favorable arbitration
decision for the Company by Hydro-Quebec regarding its purchased
power contract with Hydro-Quebec, discussed in this report in Note
D of Notes to Unaudited Financial Statements, is incorporated
herein and made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
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The Company is filing Financial Data Schedules.
The Company filed a report on Form 8-K dated February 25, 1998,
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 March 31, 1998 to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ENGLAND POWER COMPANY
s/John G. Cochrane
John G. Cochrane, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: May 13, 1998