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, 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:
3,749,896 shares at September 30, 1998.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND POWER COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
Quarter Nine Months
------- -----------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Operating revenue, principally from affiliates $321,569 $443,774$1,081,036 $1,277,871
-------- -------- --------------------
Operating expenses:
Fuel for generation 62,442 90,580 221,429 284,368
Purchased electric energy 98,271 134,606 342,945 406,011
Other operation 40,464 57,570 132,874 184,798
Maintenance 784 20,458 52,704 66,964
Depreciation and amortization 25,199 26,929 84,345 70,334
Taxes, other than income taxes 10,258 16,690 45,749 51,713
Income taxes 29,504 32,406 65,080 68,468
-------- -------- --------------------
Total operating expenses 266,922 379,239 945,126 1,132,656
-------- -------- --------------------
Operating income 54,647 64,535 135,910 145,215
Other income:
Equity in income of nuclear power companies1,544 1,260 4,158 3,881
Other income (expense), net 3,432 (1,366) 940 (3,780)
-------- -------- --------------------
Operating and other income 59,623 64,429 141,008 145,316
-------- -------- --------------------
Interest:
Interest on long-term debt 7,635 10,427 26,951 31,599
Other interest 4,299 2,244 10,549 5,150
Allowance for borrowed funds used during
construction (267) (261) (823) (912)
-------- -------- --------------------
Total interest 11,667 12,410 36,677 35,837
-------- -------- --------------------
Net income $ 47,956 $ 52,019 $ 104,331$ 109,479
======== ======== ====================
Statements of Retained Earnings
Retained earnings at beginning of period $462,967 $392,534 $ 407,630$ 400,610
Net income 47,956 52,019 104,331 109,479
Dividends declared on cumulative
preferred stock (141) (519) (1,179) (1,556)
Dividends declared on common stock (130,610) (35,475) (130,610) (99,974)
Premium on repurchase of common stock (193,818) - (193,818) -
-------- -------- --------------------
Retained earnings at end of period $186,354 $408,559 $ 186,354$ 408,559
======== ======== ====================
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)
1998 1997
---- ----
(In Thousands)
Operating revenue, principally from affiliates $1,481,068 $1,671,299
---------- ----------
Operating expenses:
Fuel for generation 309,795 376,172
Purchased electric energy 464,581 538,429
Other operation 189,582 235,020
Maintenance 75,560 83,386
Depreciation and amortization 112,035 95,003
Taxes, other than income taxes 61,347 67,880
Income taxes 86,621 85,120
---------- ----------
Total operating expenses 1,299,521 1,481,010
---------- ----------
Operating income 181,547 190,289
Other income:
Equity in income of nuclear power companies 5,466 4,898
Other income (expense), net 1,316 (4,883)
---------- ----------
Operating and other income 188,329 190,304
---------- ----------
Interest:
Interest on long-term debt 37,629 42,855
Other interest 12,454 7,032
Allowance for borrowed funds used during construction (1,149) (1,245)
---------- ----------
Total interest 48,934 48,642
---------- ----------
Net income $ 139,395 $ 141,662
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 408,559 $ 396,358
Net income 139,395 141,662
Dividends declared on cumulative preferred stock (1,698) (2,075)
Dividends declared on common stock (166,084) (127,386)
Premium on repurchase of common stock (193,818) -
---------- ----------
Retained earnings at end of period $ 186,354 $ 408,559
========== ==========
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 1998 1997
------ ---- ----
(In Thousands)
Utility plant, at original cost $1,246,228 $3,057,749
Less accumulated provisions for depreciation
and amortization 823,181 1,196,972
---------- ----------
423,047 1,860,777
Construction work in progress 28,313 29,015
---------- ----------
Net utility plant 451,360 1,889,792
---------- ----------
Investments:
Nuclear power companies, at equity 48,203 49,825
Non-utility property and other investments 34,380 34,723
---------- ----------
Total investments 82,583 84,548
---------- ----------
Current assets:
Cash, and temporary cash investments (including
$93,260,000 and $-0- with affiliated companies) 147,321 1,643
Accounts receivable:
Affiliated companies 150,301 233,308
Accrued NEEI revenues - 11,419
Others 36,170 26,638
Fuel, materials and supplies, at average cost 9,689 47,492
Prepaid and other current assets 5,479 17,837
---------- ----------
Total current assets 348,960 338,337
---------- ----------
Regulatory assets 1,567,664 413,938
Deferred charges and other assets 11,004 36,477
---------- ----------
$2,461,571 $2,763,092
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $20 per share,
authorized and outstanding
3,749,896 and 6,449,896 shares $ 74,998 $ 128,998
Premiums on capital stocks 50,395 86,779
Other paid-in capital 190,722 289,818
Retained earnings 186,354 407,630
Unrealized gain on securities, net 43 34
---------- ----------
Total common equity 502,512 913,259
Cumulative preferred stock, par value $100 per share 10,575 39,666
Long-term debt 371,763 647,720
---------- ----------
Total capitalization 884,850 1,600,645
---------- ----------
Current liabilities:
Long-term debt due in one year - 50,000
Short-term debt (including $-0- and $3,125,000
to affiliates) - 111,250
Accounts payable (including $11,543,000 and $14,373,000
to affiliates) 79,979 109,121
Accrued liabilities:
Taxes 24,675 39
Interest 267 8,905
Other accrued expenses 134,185 23,554
Dividends payable 141 35,474
---------- ----------
Total current liabilities 239,247 338,343
---------- ----------
Deferred federal and state income taxes 170,234 369,757
Unamortized investment tax credits 30,649 53,463
Accrued Yankee nuclear plant costs 261,278 299,564
Purchased power obligations 863,367 -
Other reserves and deferred credits 11,946 101,320
---------- ----------
$2,461,571 $2,763,092
========== ==========
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)
1998 1997
---- ----
(In Thousands)
Operating Activities:
Net income $ 104,331 $ 109,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 87,375 72,821
Deferred income taxes and investment tax credits, net (221,184) (7,107)
Allowance for funds used during construction (823) (912)
Reimbursement to New England Energy Incorporated of loss (120,900) -
on sale of oil and gas properties
Buyout of purchased power contracts (333,520) -
Decrease (increase) in accounts receivable 84,894 (28,971)
Decrease (increase) in fuel, materials, and supplies (10,789) 1,377
Decrease (increase) in prepaid and other current assets 7,312 3,493
Increase (decrease) in accounts payable (29,142) 737
Increase (decrease) in other current liabilities 41,628 4,093
Other, net (88,255) 18,823
----------- ---------
Net cash provided by (used in)
operating activities $ (479,073) $ 173,833
----------- ---------
Investing Activities:
Proceeds from sale of generating assets $ 1,688,863 $ -
Plant expenditures, excluding allowance for
funds used during construction (44,933) (50,822)
Other investing activities (445) (167)
----------- ---------
Net cash provided by (used in)
investing activities $ 1,643,485 $ (50,989)
----------- ---------
Financing Activities:
Capital contribution from parent $ 34,881 $ -
Dividends paid on common stock (166,084) (91,911)
Dividends paid on preferred stock (1,038) (1,556)
Changes in short-term debt (111,250) 4,350
Long-term debt - retirements (328,000) (35,500)
Repurchase of common shares (417,960) -
Redemption of preferred stock (29,283) -
----------- ---------
Net cash used in financing activities $(1,018,734) $(124,617)
----------- ---------
Net increase (decrease) in cash and cash equivalents $ 145,678 $ (1,773)
Cash and cash equivalents at beginning of period 1,643 3,046
----------- ---------
Cash and cash equivalents at end of period $ 147,321 $ 1,273
=========== =========
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 a 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 other third parties, 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 - Divestiture of Generating Business
- -------------------------------------------
On September 1, 1998, the Company and The Narragansett Electric
Company (Narragansett Electric) completed the sale of substantially
all of their nonnuclear generating business to USGen New England,
Inc. (USGen), an indirect wholly owned subsidiary of PG&E
Corporation. The Company received $1.55 billion for the sale. In
addition, the Company was reimbursed approximately $140 million for
costs associated with early retirements and special severance
programs for employees affected by industry restructuring, and the
value of inventories. For more information on the terms and events
leading to the sale, the accounting implications of the sale, and
the assets sold, see the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
As part of the sale, USGen purchased the Company's entitlement
to approximately 1,100 megawatts of power procured under long-term
contracts. Pursuant to the transfer agreement, under certain
conditions involving formal assignment of the contracts to USGen
and a release of the Company from further obligations to the power
supplier, the Company is required to make a lump sum payment of the
present value of its monthly fixed contribution obligations. On or
prior to the closing date, the Company paid approximately $340
million towards the above-market costs of two of the power
contracts. The Company is required to make fixed contributions
averaging $9.5 million per month through January 2008 towards the
above-market cost of the other contracts. USGen is responsible for
the balance of the costs under the purchased power contracts. All
of the payments are recoverable from customers as part of industry
restructuring settlements reached by the Company with various
parties and approved by state and Federal regulators. The present
value of the future monthly fixed contributions, amounting to $863
million, are recorded as a liability on the balance sheet. This
liability, as well as the lump sum payments previously made, net of
amortization, are also recorded as a regulatory asset on the
balance sheet.
In order to satisfy certain terms of its mortgage indenture,
the Company was required to defease or retire all of its $641
million of mortgage bonds outstanding at the time of the sale of
its nonnuclear generating business. With respect to $372 million
of mortgage bonds securing the issuance of a like amount of
pollution control revenue bonds (PCRBs) issued by public agencies,
the Company retired the mortgage bonds, leaving the underlying
PCRBs outstanding as unsecured obligations of the Company.
Pursuant to a tender offer, the Company purchased $183 million of
bonds. Provisions for the payment of the remaining mortgage bonds
were made by depositing with trustees U.S. treasury obligations
sufficient to pay principal and interest to the maturity date, or,
in the alternative, principal, interest and premium to the first
date on which the bonds could be redeemed. Both the U.S. treasury
obligations and defeased bonds were removed from the September 30,
1998 balance sheet.
Note C - Regulatory Asset Recovery
- ----------------------------------
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. Statement of 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 thereby defer
the income statement impact of these charges because they are
expected to be included in future customer charges. In 1997, the
Emerging Issues Task Force of the Financial Accounting Standards
Board concluded that a utility who had received approval to recover
so-called "stranded costs" through regulated transmission and
distribution rates would be permitted to continue to apply FAS 71
to the recovery of stranded costs.
In accordance with industry restructuring settlement agreements
reached in Massachusetts, Rhode Island and New Hampshire, the
Company has been permitted to recover its investments as of
December 31, 1995 in the Millstone 3 and Seabrook 1 nuclear
facilities, assuming these facilities had zero market value.
Recent sales of nuclear units, (which have required the prefunding
of decommissioning liabilities by the seller,) have tended to
confirm lower market values for nuclear facilities. Consistent
with these provisions of the settlement agreements, and now that
the divestiture of the nonnuclear generating business has occurred,
the Company recorded an impairment writedown in its reserve for
depreciation and established an offsetting regulatory asset on the
September 30, 1998 balance sheet for $348 million and $41 million,
which represent the net book value at December 31, 1995, less
applicable depreciation subsequent to that date, of Millstone 3 and
Seabrook 1, respectively. Nevertheless, the Company will endeavor
to sell, or otherwise transfer, its interest in these nuclear
plants. Should these efforts yield a positive market value, the
Company will credit any such value to customers.
The Company has received authorization from the Federal Energy
Regulatory Commission (FERC) to recover through contract
termination charges substantially all of the costs associated with
its former generating business not recovered through the sale of
that business. As a result, the Company has recorded a regulatory
asset for the costs which are recoverable from customers through
contract termination charges. The regulatory asset includes the
following major components: the Company's reimbursement of the
loss on the sale of NEES' oil and gas business and the unrecovered
plant costs in operating nuclear plants, reduced by the gain from
the sale of the Company's nonnuclear generating business, all of
which will be recovered by the end of 2000; and costs associated
with permanently closed nuclear power plants and the above-market
costs associated with purchased power contracts, which are being
recovered over a much longer period of time as such costs are
actually incurred. At September 30, 1998, regulatory assets
totaled approximately $1.6 billion, of which approximately $863
million related to the above-market portion of purchased power
contracts. Substantially all of the Company's regulatory assets
are recoverable through the Company's contract termination charge.
It is possible that future regulatory rules or other
circumstances could cause the application of FAS 71 to be
discontinued, which would result in a noncash write-off of
previously established regulatory assets, including those being
recovered through the Company's contract termination charge.
Note D - Preferred Stock and Common Stock Repurchases
- -----------------------------------------------------
In September 1998, the Company retired preferred stock with an
aggregate par value of $29 million. On September 30, 1998, the
Company also repurchased 2.7 million shares of its common stock
from NEES for $418 million. Total premiums of $194 million in
connection with the repurchase were charged to retained earnings.
Note E - 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:
Quarters Ended Nine Months Ended
September 30,
----------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Operating revenue $104,210 $142,156 $343,041 $523,478
======== ======== ======== ========
Net income $ 6,314 $ 6,604 $ 20,820 $ 21,585
======== ======== ======== ========
Company's equity in
net income $ 1,545 $ 1,260 $ 4,159 $ 3,881
======== ======== ======== ========
September 30, December 31,
1998 1997
---- ----
(In Thousands)
Net plant $ 177,372 $ 204,689
Other assets 2,958,662 3,100,589
Liabilities and debt (2,875,214) (3,036,845)
----------- -----------
Net assets $ 260,820 $ 268,433
=========== ===========
Company's equity in net assets $ 48,203 $ 49,825
=========== ===========
At September 30, 1998, $14,259,000 of undistributed earnings of
the nuclear power companies were included in the Company's retained
earnings.
Nuclear Units Permanently Shut Down
Three regional nuclear generating companies in which the
Company has a minority interest own nuclear generating units which
have been permanently shut down. These three units are as follows:
NEP's Investment Future Estimated
Unit Percent Amount($) Date Retired Billings to NEP($)
- -----------------------------------------------------------------------------
Yankee Atomic 30 6 million Feb 1992 33 million
Connecticut Yankee 15 15 million Dec 1996 83 million
Maine Yankee 20 16 million Aug 1997 145 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 FERC allowed
Yankee Atomic to recover its undepreciated investment in the plant
as well as unfunded nuclear decommissioning costs and other costs.
The Company's industry restructuring settlements allow it to
recover all costs that the FERC allows these Yankee companies to
bill to the Company. Connecticut Yankee and Maine Yankee have both
filed similar requests with the FERC. Several parties have
intervened in opposition to both filings. On August 31, 1998, a
FERC Administrative Law Judge (ALJ) issued an initial decision
which would allow for full recovery of Connecticut Yankee's
unrecovered investment, but precluded a return on that investment.
The ALJ's initial decision is subject to review and approval by the
FERC. Connecticut Yankee, the Company, and other parties have
filed exceptions to the ALJ's decision with the FERC. Should the
FERC uphold the ALJ's initial decision in its current form, the
Company's share of the loss of the return component would total
approximately $12 million to $15 million before taxes.
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 issued a notice of violation on
October 8, 1998 for issues identified prior to the shut down of the
plant in August 1997. The NRC did not assess any civil penalties
related to the notice of violation.
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
entitlements 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 motion
of the Secondary Purchasers to compel arbitration was denied by the
Maine Superior Court on the grounds that the FERC has jurisdiction.
The Secondary Purchasers are appealing this decision to the Maine
Supreme Judicial Court. 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 $7 million of future shutdown costs. These costs
are not included in the $145 million estimate disclosed in the
table above. Shutdown costs are recoverable from customers under
the industry restructuring 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.
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 had
experienced numerous technical and nontechnical problems, to shut
down pending verification that the unit's operations were in
accordance with NRC regulations and the unit's operating license.
In July 1998, Millstone 3 returned to full operation. Millstone 3
remains on the NRC "Watch List," signifying that it continues to
warrant increased NRC attention. Millstone 3 is operated by a
subsidiary of Northeast Utilities (NU). The Company is not an
owner of the Millstone 2 nuclear generating unit, which is
temporarily shut down under NRC orders, or the Millstone 1 nuclear
generating unit, which has been permanently shut down.
During the Millstone 3 outage, the Company incurred an
estimated $45 million in incremental replacement power costs.
Through February 1998, when most of the Company's power sales were
subject to a fuel clause, the Company recovered its incremental
replacement 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. However,
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. On September 24, 1998, NU, the Connecticut Department of
Environmental Protection and the Connecticut Attorney General
reached a stipulated agreement for alleged wastewater discharge
violations at the Millstone units. As part of the agreement, NU
will pay a civil penalty of $700,000, and an additional $500,000 to
fund three environmental projects. The Company's share of this
fine will be immaterial.
In August 1997, the Company sued NU in Massachusetts Superior
Court for damages resulting from the tortious conduct of NU that
caused the shutdown of Millstone 3. The Company's damages include
the costs of replacement power during the outage and costs
necessary to return Millstone 3 to safe operation. The Company
also seeks punitive damages. The Company also sent a demand for
arbitration to Connecticut Light & Power Company (CL&P) and Western
Massachusetts Electric Company (WMEC), 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. The arbitration is scheduled for October
1999. NU moved to dismiss the Company's suit, or, in the
alternative, stay the suit pending arbitration of the Company's
claims against CL&P and WMEC. NU also moved to consolidate the
Company's suit with suits filed by other joint owners in
Massachusetts Superior Court. On July 3, 1998, the court denied
NU's motion to dismiss and its motion to stay pending arbitration.
On July 21, 1998, the Company amended its complaint by, among other
things, adding NU's Trustees as defendants. The Worcester Superior
Court granted the Company's motion for a trial in June 1999,
subject to revision if the cases are consolidated. No ruling has
been made on NU's motion to consolidate.
Nuclear Decommissioning
In New Hampshire, legislation was recently enacted which makes
owners of Seabrook 1, of which the Company owns a 10 percent
interest, proportional guarantors for decommissioning costs in the
event that an owner without a franchise service territory fails to
fund its share of decommissioning costs. Currently, a single owner
of an approximate 12 percent share of Seabrook 1 has no franchise
service territory. For more information on nuclear decommissioning,
refer to the Company's Annual Report on Form 10-K for 1997.
The New Hampshire Nuclear Decommissioning Finance Committee is
reviewing Seabrook Station's decommissioning estimate and
associated annual funding levels. Among the items being considered
is the imposition of joint and several liability among the Seabrook
joint owners for decommissioning funding. The Company cannot
predict what additional liability, if any, may be imposed on it.
The Nuclear Waste Policy Act of 1982 establishes that the
federal government (through the Department of Energy (DOE)) is
responsible for the disposal of spent nuclear fuel. The federal
government requires the Company to pay a fee based on its share of
the net generation from the Millstone 3 and Seabrook 1 nuclear
units. Through February 1998, the Company recovered this fee
through its fuel clause. Subsequently, most of these costs are
recovered through the Company's restructuring settlement in lieu of
the fuel clause. Similar costs are incurred by the Vermont Yankee
nuclear generating unit. These costs are billed to the Company and
also recovered from customers through the same mechanism. In
November 1997, ruling on a lawsuit brought against the DOE by
numerous utilities and state regulatory commissions, the Court of
Appeals for the District of Columbia (the Appeals Court) held that
the DOE was obligated to begin disposing of utilities' spent
nuclear fuel by January 31, 1998. The DOE failed to meet this
deadline, and is not scheduled to have a temporary or permanent
repository for spent nuclear fuel for several years. In February
1998, Maine Yankee petitioned the Appeals Court to compel the DOE
to remove Maine Yankee's spent fuel from the site. In May 1998,
the Appeals Court rejected the petitions of Maine Yankee and the
other utilities and state regulatory commissions, stating that the
issue of damages was a contractual matter. The operators of the
units in which the Company has an obligation, including Maine
Yankee, Connecticut Yankee, and Yankee Atomic, continue to pursue
damage claims against the DOE in the Federal Court of Claims
(Claims Court). On October 30, 1998, the Claims Court ruled that
the DOE violated a commitment to remove spent fuel from Yankee
Atomic. The Claims Court issued similar rulings in November 1998
related to cases brought by Connecticut Yankee and Maine Yankee.
Further proceedings will be scheduled by the Claims Court to decide
the amount of damages.
Note F - Town of Norwood
- ------------------------
On September 29, 1998, the United States District Court for the
District of Massachusetts dismissed the lawsuit filed by the Town
of Norwood, Massachusetts against NEES and the Company in April
1997. The Company had been a wholesale power supplier for Norwood
pursuant to rates approved by the FERC. In the lawsuit, Norwood
had alleged that the Company's divestiture of its power generating
assets would violate the terms of a 1983 power contract. Norwood
also alleged that the divestiture and recovery of stranded
investment costs contravened federal antitrust laws. The District
Court judge granted NEES' and the Company's motion for dismissal on
the grounds that the contract did not require the Company to retain
its generating units, that the FERC-approved filed rates govern
these matters and that Norwood had adequate opportunity at the FERC
to litigate these matters. Norwood has filed a motion to alter or
amend the order of dismissal.
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 began taking power
from another supplier commencing in April 1998. In May 1998, the
FERC ruled that the Company could assess a contract termination
charge to any of the Company's unaffiliated customers that choose
to terminate their wholesale power contracts early. Norwood
claimed that the contract termination charge approved by the FERC
did not apply to Norwood; however, in denying Norwood's motion for
rehearing, the FERC ruled that the charge did apply to Norwood. On
October 2, 1998, Norwood appealed this decision to the First
Circuit Court of Appeals (First Circuit). The Company's billings
to Norwood for this charge through September 1998 have been
approximately $4 million. Norwood has not paid any of these
billings. The Company intends to pursue collection action to
recover these amounts.
Norwood appealed the FERC's orders approving the divestiture
and the Massachusetts and Rhode Island industry restructuring
settlement agreements (including modification of the Company's
contracts with Massachusetts Electric and Narragansett Electric) to
the First Circuit on July 31, 1998 and August 7, 1998,
respectively. The FERC had found that the challenged orders do not
apply to Norwood.
On October 20, 1998, the First Circuit consolidated all three
of Norwood's appeals from the FERC's orders. These consolidated
appeals will likely be consolidated with two other appeals that
were filed on August 6, 1998 with the Second Circuit Court of
Appeals and transferred to the First Circuit on October 13, 1998.
Both appeals, filed by the Northeast Center for Social Issue
Studies, challenge the FERC's approval of the Company's sale of its
hydroelectric facilities.
Note G - 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 paid Hydro-Quebec the higher
amount (additional costs of approximately $3 million per year) from
July 1996 until September 1, 1998 under protest and subject to
refund. The contract was transferred to USGen on September 1, 1998
in conjunction with the sale of the nonnuclear generating business.
In October 1997, an arbitrator ruled in favor of the New England
utilities in all respects. Hydro-Quebec has not yet refunded any
monies and has appealed the decision. In June 1998, the United
States District Court (District Court) issued an order affirming
the 1997 arbitration decision in favor of the Company and the other
utilities. Hydro-Quebec is appealing this order to the Court of
Appeals for the First Circuit.
On July 31, 1998, in a separate proceeding, an arbitrator
denied the request of the Company and other utilities that they be
allowed to withhold payment of disputed amounts from Hydro-Quebec
during the pendency of Hydro-Quebec's appeal. The Company and the
other utilities have filed a petition with the District Court to
vacate this decision, and Hydro-Quebec has petitioned the District
Court to confirm it.
Note H - Comprehensive Income
- -----------------------------
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income (FAS 130). FAS 130 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 and the nine month periods ended
September 30, 1998 and 1997, respectively.
Note I - New Accounting Standards
- ---------------------------------
In 1997, the Financial Accounting Standards Board (FASB)
released Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information
(FAS 131), 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, Employers' Disclosures about Pensions
and Other Postretirement Benefits (FAS 132), which revises
disclosure requirements for pension and other postretirement
benefits. The Company will adopt FAS 132 in its financial
statements for the year ending December 31, 1998.
The adoption of FAS 131 and FAS 132 will have no impact on the
Company's operating results, financial position, or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133), which establishes accounting and
reporting standards for such instruments. FAS 133 is effective for
fiscal years beginning after June 15, 1999. Currently, the Company
has no such derivative holdings.
Note J
- ------
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 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 third quarter and first nine
months of 1998 by $4.1 million and $5.1 million, respectively, as
compared to the corresponding periods in 1997. The Company's
revenues during both the third quarter and first nine months of
1998 were reduced as a result of termination of its all-
requirements contracts with its primary customers effective January
1, 1998 in Rhode Island, March 1, 1998 in Massachusetts, and July
1, 1998 in New Hampshire. The decreases in revenues in the third
quarter and the nine month period were partially offset by
decreases in operating expenses, principally operation and
maintenance expenses, primarily due to the sale of the Company's
nonnuclear generating business on September 1, 1998, and reduced
purchased electric energy expense, primarily reduced charges from
Maine Yankee.
With the introduction of industry restructuring and customer
choice of power supplier, a fundamental change has occurred in the
electric utility business. The Company believes that through its
restructuring settlements at the Federal and state level, the state
laws passed in the jurisdictions in which it does business, and the
sale of its nonnuclear generation business that the major impacts
of restructuring (particularly, the recovery of stranded costs)
have been favorably resolved. Possible remaining risks include the
potential that the settlements will not be implemented in the
manner anticipated by the Company or that Federal legislation could
be enacted that would increase the risk to shareholders above those
contained in the settlements and state legislation. With respect
to future earnings, now that the divestiture of the nonnuclear
generating business has occurred, the settlement agreements limit
the return on equity earned on the Company's remaining generating
assets to 9.7 percent, before mitigation incentives, which is
significantly lower than earned by the generating business in
recent years. Beginning on September 1, 1998, the sale date of the
nonnuclear generating business, the Company's earnings became
further dependent on the return on the reinvestment of the sale
proceeds. This reinvestment return is expected, at least in the
near term, to be considerably less than the return historically
earned by the generating business.
This report contains statements that may be considered forward
looking under the securities laws. Actual results may differ
materially. See the above discussion for factors which could cause
the results to differ.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island, and New Hampshire, stranded cost
recovery, accounting implications of industry restructuring and
divestiture, and workforce reductions, 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 July 13, 1998, the New Hampshire Public Utility Commission
(NHPUC), 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 Federal Energy Regulatory
Commission (FERC) had previously approved a wholesale settlement in
April, 1998. On July 27, 1998, the Company filed with the FERC to
amend the wholesale settlement to conform to the settlement
approved by the NHPUC. The settlement provided choice of power
supplier to Granite State Electric's customers as of July 1, 1998.
The principal terms of the settlement are substantially similar to
the settlements reached in Massachusetts and Rhode Island.
Divestiture of Generating Business
On September 1, 1998, the Company and The Narragansett Electric
Company completed the sale of substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an indirect
wholly owned subsidiary of PG&E Corporation. The Company received
$1.55 billion for the sale. In addition, the Company was
reimbursed approximately $140 million for costs associated with
early retirements and special severance programs for employees
affected by industry restructuring, and the value of inventories.
For more information on the terms and events leading to the sale,
the accounting implications of the sale, and the assets sold, see
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
As part of the sale, USGen purchased the Company's entitlement
to approximately 1,100 megawatts of power procured under long-term
contracts. Pursuant to the transfer agreement, under certain
conditions involving formal assignment of the contracts to USGen
and a release of the Company from further obligations to the power
supplier, the Company is required to make a lump sum payment of the
present value of its monthly fixed contribution obligations. On or
prior to the closing date, the Company paid approximately $340
million towards the above-market costs of two of the power
contracts. The Company is required to make fixed contributions
averaging $9.5 million per month through January 2008 towards the
above-market cost of the other contracts. USGen is responsible for
the balance of the costs under the purchased power contracts.
All of the payments are recoverable from customers as part of
industry restructuring settlements reached by the Company with
various parties and approved by state and Federal regulators. The
present value of the future monthly fixed contributions, amounting
to $863 million, are recorded as a liability on the balance sheet.
This liability, as well as the lump sum payments previously made,
net of amortization, are also recorded as a regulatory asset on the
balance sheet.
In order to satisfy certain terms of its mortgage indenture,
the Company was required to defease or retire all of its $641
million of mortgage bonds outstanding at the time of the sale of
its nonnuclear generating business. With respect to $372 million
of mortgage bonds securing the issuance of a like amount of
pollution control revenue bonds (PCRBs) issued by public agencies,
the Company retired the mortgage bonds, leaving the underlying
PCRBs outstanding as unsecured obligations of the Company.
Pursuant to a tender offer, the Company purchased $183 million of
bonds. Provisions for the payment of the remaining mortgage bonds
were made by depositing with trustees U.S. treasury obligations
sufficient to pay principal and interest to the maturity date, or,
in the alternative, principal, interest and premium to the first
date on which the bonds could be redeemed. Both the U.S. treasury
obligations and defeased bonds were removed from the September 30,
1998 balance sheet.
Regulatory Asset Recovery
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. Statement of 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 thereby defer
the income statement impact of these charges because they are
expected to be included in future customer charges. In 1997, the
Emerging Issues Task Force of the Financial Accounting Standards
Board concluded that a utility who had received approval to recover
so-called "stranded costs" through regulated transmission and
distribution rates would be permitted to continue to apply FAS 71
to the recovery of stranded costs.
In accordance with industry restructuring settlement agreements
reached in Massachusetts, Rhode Island and New Hampshire, the
Company has been permitted to recover its investments as of
December 31, 1995 in the Millstone 3 and Seabrook 1 nuclear
facilities, assuming these facilities had zero market value.
Recent sales of nuclear units, (which have required the prefunding
of decommissioning liabilities by the seller,) have tended to
confirm lower market values for nuclear facilities. Consistent
with these provisions of the settlement agreements, and now that
the divestiture of the nonnuclear generating business has occurred,
the Company recorded an impairment writedown in its reserve for
depreciation and established an offsetting regulatory asset on the
September 30, 1998 balance sheet for $348 million and $41 million,
which represent the net book value at December 31, 1995, less
applicable depreciation subsequent to that date, of Millstone 3 and
Seabrook 1, respectively. Nevertheless, the Company will endeavor
to sell, or otherwise transfer, its interest in these nuclear
plants. Should these efforts yield a positive market value, the
Company will credit any such value to customers.
The Company has received authorization from the FERC to recover
through contract termination charges substantially all of the costs
associated with its former generating business not recovered
through the sale of that business. As a result, the Company has
recorded a regulatory asset for the costs which are recoverable
from customers through contract termination charges. The
regulatory asset includes the following major components: the
Company's reimbursement of the loss on the sale of NEES' oil and
gas business and the unrecovered plant costs in operating nuclear
plants, reduced by the gain from the sale of the Company's
nonnuclear generating business, all of which will be recovered by
the end of 2000; and costs associated with permanently closed
nuclear power plants and the above-market costs associated with
purchased power contracts, which are being recovered over a much
longer period of time as such costs are actually incurred. At
September 30, 1998, regulatory assets totaled approximately $1.6
billion, of which $863 million related to the above-market costs of
purchased power contracts. Substantially all of the Company's
regulatory assets are recoverable through the Company's contract
termination charge.
It is possible that future regulatory rules or other
circumstances could cause the application of FAS 71 to be
discontinued, which would result in a noncash write-off of
previously established regulatory assets, including those being
recovered through the Company's contract termination charge.
Year 2000 Computer Issues
- -------------------------
Over the next year, most companies will face a potentially
serious information systems (computer) problem because many
software applications and operational programs written in the past
may not properly recognize calendar dates associated with the year
2000 (Y2K). This could cause computers to either shut down or lead
to incorrect calculations.
During 1996, the NEES companies began the process of
identifying the changes required to their computer software and
hardware to mitigate Y2K issues. The NEES companies established a
Y2K Project team to manage these issues. This team reports project
progress to a recently formed Y2K Executive Oversight Committee
each month. The team also makes regular reports to NEES' Board of
Directors and its Audit Committee. The NEES companies have
separated their Y2K Project into four parts as shown below, along
with the estimated completion dates for each part.
Substantial Contingency Testing,
Completion Documentation,
of Critical and Clean
Category Specific Example Systems Management
- ------- ------------- ---------- ----------------
Mainframe/Midrange Accounting/Customer Fourth quarter Throughout 1999
Systems service integrated 1998
systems
Desktop Systems Personal computers/ Mid-1999 Throughout 1999
Department software/
Networks
Operational/ Dispatching systems/ Mid-1999 Throughout 1999
Embedded Transmission and
Systems Distribution systems/
Telephone systems
External Issues Electronic Data Mid-1999 Throughout 1999
Interchange/Vendor
communications
The NEES companies are using a three-phase approach in
coordinating their Y2K Project for system-related issues: (I)
Assessment and Inventory, (II) Pilot Testing, and (III) Renovation,
Conversion, or Replacement of Application and Operating Software
Packages and Testing. Phase I, which was an initial assessment of
all systems and devices for potential Y2K defects, was completed in
mid-1997. Phase II, which consisted of renovation pilots for a
cross-section of systems in order to facilitate the establishment
of templates for Phase III work, was completed in late 1997. Phase
III, which is currently ongoing, requires the renovation,
conversion, or replacement of the remaining applications and
operating software packages.
The NEES companies have also implemented a formalized
communication process with third parties to receive information
related to their progress in remediating their own Y2K issues, and
to communicate the NEES companies' progress in addressing the Y2K
issue. These third parties include major customers, suppliers, and
significant businesses with which the NEES companies have data
links (such as banks). The NEES companies cannot predict the
outcome of other companies' remediation efforts.
The NEES companies believe total costs associated with making
the necessary modifications to all centralized and noncentralized
systems will be approximately $25 million. In addition, the NEES
companies are spending $4 million related to the implementation of
a new human resources and payroll system, the replacement of which
is in part due to the Y2K issue. To date, total Y2K-related costs
of $19 million have been incurred, of which $1 million has been
capitalized.
The NEES companies are in the process of developing Y2K
contingency plans to allow for critical information and operating
systems to function from January 1, 2000 forward. If required,
these plans are intended to address both internal risks as well as
potential external risks related to both suppliers and customers.
Part of the contingency planning for accounting and desktop systems
will include taking extensive data back-ups prior to year-end
closing. For operational systems, the NEES companies have in place
an overall disaster recovery program, which already includes
periodic disaster simulation training (for outages due to severe
weather, for instance). As part of Y2K contingency planning, the
NEES companies will review their disaster recovery plans, modifying
them for Y2K-specific issues. The NEES companies expect that these
contingency plans will be in place by mid-1999.
Interregional and regional contingency plans are being
formulated that address emergency scenarios due to the
interconnection of utility systems throughout the United States.
At a regional level, the NEES companies are participating and
cooperating with the New England Power Pool (NEPOOL) and the
Independent System Operator of the NEPOOL area (ISO New England).
Overall regional activities, including those of NEPOOL and ISO New
England, will be coordinated by the Northeast Power Coordinating
Council, whose activities will be incorporated into the
interregional coordinating effort by the North American Electric
Reliability Council. The target for the completion of this
planning process is mid-1999. The NEES companies have noted that
the Y2K coordination efforts by ISO New England began only in May
1998, resulting in a demanding and difficult schedule to attain
regional and interregional target dates.
The NEES companies believe the worst case scenario with a
reasonable chance of occurring is temporary disruptions of electric
service. This scenario could result from a failure to adequately
remediate Y2K problems at NEES company facilities or could be
caused by the inability of entities, such as ISO New England, to
maintain the short-term reliability of various generators and/or
transmission lines on a regional or superregional basis. The NEES
companies believe that the contingency plans being developed both
internally and on a regional level, as described above, should
substantially mitigate the risks of this potential scenario. In
the event that a short-term disruption in service occurs, the
Company does not expect that it would have a material impact on its
financial position and results of operations.
While the NEES companies believe that their overall Y2K
program will satisfactorily address all critical operational and
system-related issues, significant risks remain. These risks
include, but are not limited to, the Y2K readiness of third
parties, including other utilities and power suppliers, cost and
timeline estimates of remaining Y2K mitigation efforts, and the
overall accuracy of assumptions made related to future events in
the development of the Y2K mitigation effort.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1998 vs 1997 1998 vs 1997
------------- ------------
(In Millions)
Industry-restructuring
related rate reductions $ (62) $(101)
Fuel cost-related (54) (85)
Accrued NEEI fuel revenues (7) (21)
Other 1 10
----- -----
$(122) $(197)
===== =====
The industry-restructuring related rate changes reflect the
impact of the implementation of customer choice of power supplier
in Rhode Island on January 1, 1998, in Massachusetts on March 1,
1998 and in New Hampshire on July 1, 1998. On these dates, the
Company terminated its all-requirements contracts with its
distribution subsidiaries and temporarily replaced them with lower
priced wholesale standard offer contracts, until the sale of its
nonnuclear generating business to USGen on September 1, 1998.
These rate reductions include the effect of various true-up
mechanisms. These true-up mechanisms cover a number of items
including stranded cost recovery billings, 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.
Accrued New England Energy Incorporated (NEEI) fuel revenues
reflect losses incurred by NEEI on its rate-regulated oil and gas
operations. NEEI sold its oil and gas properties effective January
1, 1998. Historically, these revenues were accrued by the Company
in the year of the loss, but were billed to its customers through
its fuel clause in the following year.
The increase in other operating revenue is primarily due to
increased transmission billings to NEPOOL during the first quarter
of 1998.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1998 vs 1997 1998 vs 1997
------------- ------------
(In Millions)
Fuel costs $ (54) $ (85)
Accrued NEEI fuel costs (7) (21)
Purchased energy, excluding fuel (3) (21)
Depreciation and amortization (2) 14
Operation and maintenance:
PBOP amortization (1) (14)
Other (36) (52)
Taxes (9) (9)
----- -----
$(112) $(188)
===== =====
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. Since the
divestiture of the nonnuclear generating business on September 1,
1998, the Company no longer requires such a mechanism. The
decrease in fuel costs primarily represents the effect of the sale
of the generating plants on September 1, 1998 and reduced wholesale
sales to other utilities and lower coal and oil prices.
For a discussion of accrued NEEI fuel costs, see the "Operating
Revenue" section.
The decrease in purchased power costs, excluding fuel, during
the third quarter and year-to-date period reflects reduced charges
from the Maine Yankee nuclear power plant, which was closed in mid-
1997, and the transfer of the Company's purchased power contracts
to USGen in conjunction with the sale of the nonnuclear generating
business on September 1, 1998. These decreases were partially
offset during the third quarter by monthly contractual payments to
USGen for the above-market portion of transferred purchased power
contracts.
The decrease in operation and maintenance expense 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 decrease in other operation and maintenance expense
reflects reduced costs as a result of the sale of the nonnuclear
generating business on September 1, 1998, reduced maintenance costs
from the partially owned Millstone 3 and Seabrook 1 nuclear
generating facilities, reduced general and administrative costs,
and reduced NEPOOL transmission billings, as these costs are billed
directly to the Company's distribution subsidiaries, effective the
second quarter of 1998. The year-to-date decrease also reflects
1997 charges for the Company's share of the costs of the
restoration to service of previously idled generating facilities in
response to a tightened regional power supply.
The decrease in depreciation and amortization expense in the
third quarter is primarily due to reduced generation-related
depreciation as a result of the sale of the Company's nonnuclear
generating business on September 1, 1998. During the year-to-date
period, the decrease was more than offset by the accelerated
amortization of Millstone 3, a portion of which was attributable to
the completion of the PBOP amortization discussed above. This
accelerated amortization was recorded as a regulatory liability.
The decrease in taxes during the third quarter reflects an
overall lower property tax basis for the Company as a result of the
sale of the nonnuclear generating business on September 1, 1998.
Other Income
- ------------
The increase in other income during the third quarter is
primarily due to increased interest income.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $45 million for the
first nine months of 1998. These expenditures were primarily
transmission-related. The funds necessary for utility plant
expenditures during the period were primarily provided by proceeds
from the sale of the nonnuclear generating business.
In the first nine months of 1998, the Company defeased or
retired all of its mortgage bonds. See the "Divestiture of
Generating Business" section for more information. The Company
also paid down all of its short-term debt outstanding.
At September 30, 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, the remaining PCRBs, when in a commercial paper
mode, and for other corporate purposes. There were no borrowings
under these lines of credit at September 30, 1998.
The Company prepaid approximately $190 million and $150 million
in May 1998 and August 1998, respectively, in conjunction with the
amendment of two long-term purchased power contracts. These
balances, net of amortization, are recorded as regulatory assets on
the balance sheet.
In September 1998, the Company retired preferred stock with an
aggregate par value of $29 million. In October 1998, the Company
redeemed all of its outstanding Dividend Series Preferred Stock,
with a par value of $8.7 million.
On September 30, 1998, the Company repurchased 2.7 million
shares of its common stock from NEES for $418 million. Total
premiums of $194 million in connection with the repurchase were
charged to retained earnings.
As part of NEES' plan to divest its generating business, NEEI
sold its oil and gas properties effective January 1, 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, Rhode Island, and New Hampshire.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
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 an arbitration between the Company and
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 dispute between the Company and
secondary purchasers of Maine Yankee power output, discussed in
this report in Note B of Notes to Unaudited Financial Statements,
is incorporated herein and made a part hereof.
Information concerning dismissal of a lawsuit brought against
the Company by the Town of Norwood, Massachusetts and appeals of
related Federal Energy Regulatory Commission orders, discussed in
this report in Note C of Notes to the Unaudited Financial
Statements, is incorporated herein and made a part hereof.
Information concerning two arbitration decisions and related
appeals regarding the Company's 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 4. Submission of Matters to a Vote of Security-Holders
- -------------------------------------------------------------
On August 10, 1998, a Special Meeting of the Dividend Series
Preferred Stockholders was held. By unanimous vote of the shares
present and represented at the meeting (as listed below), the sale
of substantially all of the Company's nonnuclear generating
business to USGen New England, Inc. was approved.
Dividend Series
Preferred Stock Outstanding Present
4.56% Series 100,000 90,667
4.60% Series 80,140 70,872
4.64% Series 41,500 40,350
6.08% Series 100,000 92,286
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing Financial Data Schedules.
The Company filed a report on Form 8-K dated September 1,
1998, containing Items 2, 5, and 7, including pro forma financial
statements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-Q for
the quarter ended September 30, 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: November 12, 1998