Exhibit 13.5
1993
ANNUAL REPORT
NORTH ATLANTIC ENERGY CORPORATION
1993 Annual Report
North Atlantic Energy Corporation
Index
Contents Page
- -------- ----
Balance Sheets . . . . . . . . . . . . . . . . . 1-2
Statements of Income . . . . . . . . . . . . . . 3
Statements of Cash Flows . . . . . . . . . . . . 4
Statements of Common Stockholder's Equity. . . . 5
Notes to Financial Statements. . . . . . . . . . 6-16
Report of Independent Public Accountants . . . . 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 18-22
Selected Financial Data. . . . . . . . . . . . . 23
Statistics . . . . . . . . . . . . . . . . . . . 23
Statement of Quarterly Financial Data. . . . . . 23
Bondholder Information . . . . . . . . . . . . . Back Cover
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
At December 31, 1993 1992<F1>(a)
- --------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric............................................ $ 758,170 $ 756,806
Less: Accumulated provision for depreciation..... 56,649 36,327
------------ ------------
701,521 720,479
Construction work in progress....................... 7,618 4,775
Nuclear fuel, net................................... 23,339 13,339
------------ ------------
Total net utility plant......................... 732,478 738,593
------------ ------------
Other Property and Investments:
Nuclear decommissioning trust, at cost.............. 7,881 5,037
------------ ------------
Current Assets:
Cash and special deposits........................... 8,404 6,264
Receivables......................................... 3,677 349
Receivables from affiliated companies............... 20,304 22,842
Materials and supplies, at average cost............. 7,353 5,362
Prepayments and other............................... 4,183 4,157
------------ ------------
43,921 38,974
------------ ------------
Deferred Charges:
Deferred costs--Seabrook <F4>(Note 1)............... 85,428 22,801
Regulatory asset--income taxes <F4>(Note 1)......... 19,432 -
Unamortized debt expense............................ 5,507 6,179
Deferred DOE assessment <F4>(Note 1)................ 4,905 4,965
Other............................................... 1,269 1,574
------------ ------------
116,541 35,519
------------ ------------
Total Assets.................................... $ 900,821 $ 818,123
============ ============
<F1>(a) NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
1
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
At December 31, 1993 1992<F1>(a)
- --------------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock, $1 par value--authorized
and outstanding 1,000 shares....................... $ 1 $ 1
Capital surplus, paid in............................ 160,999 160,999
Retained earnings................................... 38,701 12,703
------------ -----------
Total common stockholder's equity.......... 199,701 173,703
Long-term debt <F7>(Note 4)......................... 560,000 560,000
------------ -----------
Total capitalization....................... 759,701 733,703
------------ -----------
Current Liabilities:
Notes payable to affiliated company................. - 18,500
Accounts payable.................................... 3,999 760
Accounts payable to affiliated companies............ 2,389 602
Accrued interest.................................... 18,288 18,288
Accrued taxes....................................... 127 1
Deferred DOE obligation--current portion <F4>(Note 1) 845 -
------------ ------------
25,648 38,151
------------ ------------
Deferred Credits:
Accumulated deferred income taxes <F4>(Note 1)...... 74,772 8,395
Deferred obligation to affiliated company <F9>(Note 6) 33,284 32,909
Deferred DOE obligation <F4>(Note 1)................ 3,941 4,965
Deferred Seabrook tax settlement obligation......... 3,475 -
------------ ------------
115,472 46,269
------------ ------------
Commitments and Contingencies <F10>(Note 7)
Total Capitalization and Liabilities............ $ 900,821 $ 818,123
============ ============
<F1>(a) NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
2
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
January 1, 1993 June 5, 1992
to to
December 31, December 31,
For the Periods 1993 1992<F1>(a)
- ---------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues........................... $ 125,408 $ 78,444
---------------- -------------
Operating Expenses:
Operation--
Fuel..................................... 7,067 1,688
Other.................................... 35,656 25,305
Maintenance................................ 7,858 9,413
Depreciation............................... 22,642 12,905
Federal and state income taxes <F8>(Note 5) 5,673 2,583
Taxes other than income taxes.............. 12,794 10,428
---------------- -------------
Total operating expenses............. 91,690 62,322
---------------- -------------
Operating Income............................. 33,718 16,122
---------------- -------------
Other Income:
Deferred Seabrook return--other funds...... 13,397 7,784
Other, net................................. 1,891 200
Income taxes-credit........................ 1,653 10,428
---------------- -------------
Other income, net.................... 16,941 18,412
---------------- -------------
Income before interest charges....... 50,659 34,534
---------------- -------------
Interest Charges:
Interest on long-term debt................. 64,022 36,647
Other interest............................. 45 200
Deferred Seabrook return--borrowed funds,
<F4>(Note 1)............................ (39,406) (15,016)
---------------- -------------
Interest charges, net................ 24,661 21,831
---------------- -------------
Net Income .................................. $ 25,998 $ 12,703
================ =============
<F1>(a) NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
3
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
For the Periods January 1, 1993 June 5, 1992
to to
December 31, December 31,
1993 1992 <F1>(a)
- -------------------------------------------------------------------------------------------
(Thousands of Dollars)
Cash Flows From Operations:
Net Income .............................................. $ 25,998 $ 12,703
Adjusted for the following:
Depreciation........................................... 22,861 13,009
Deferred income taxes and investment tax credits, net.. 37,121 8,505
Deferred return - Seabrook............................. (52,803) (22,802)
Other sources of cash.................................. 8,767 5,387
Other uses of cash..................................... (964) (8,102)
Changes in working capital:
Receivables and accrued utility revenues.............. (790) (20,736)
Materials and supplies................................ (1,990) (2,288)
Accounts payable...................................... 5,026 1,362
Accrued taxes......................................... 126 (4,970)
Other working capital (excludes cash)................. 822 2,330
------------- -------------
Net cash flows from (used for) operations.................. 44,174 (15,602)
------------- -------------
Cash Flows From Financing Activities:
Common shares............................................ - 161,000
Long-term debt........................................... - 355,000
Net increase (decrease) in short-term debt............... (18,500) 18,500
------------- -------------
Net cash flows from (used for) financing activities........ (18,500) 534,500
------------- -------------
Investment Activities:
Investment in plant:
Investment in Seabrook assets, net..................... - (504,265)
Electric utility plant................................. (6,707) (6,307)
Nuclear fuel........................................... (13,983) (511)
------------- -------------
Net cash flows used for investments in plant............. (20,690) (511,083)
Other investment activities, net......................... (2,844) (1,551)
------------- -------------
Net cash flows used for investments........................ (23,534) (512,634)
------------- -------------
Net Increase In Cash for the Period........................ 2,140 6,264
Cash and special deposits - beginning of period............ 6,264 -
------------- -------------
Cash and special deposits - end of period.................. $ 8,404 $ 6,264
============= =============
Supplemental Cash Flow Information:
Cash paid (received) during the period for:
Interest, net of amounts capitalized during
construction................................ $ 63,393 $ 18,166
============= =============
Income taxes.............................................. $ (32,350) $ (16,000)
============= =============
<F1>(a)NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
4
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------------
Capital Retained
Common Surplus, Earnings
Stock Paid In <F2>(a) Total
- -------------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at June 5, 1992 <F3>(b)......... $ - $ - $ - $ -
Net income for 1992................. 12,703 12,703
Issuance of 1,000 shares of common
stock, $1 par value............... 1 1
Premium on common stock............. 160,999 160,999
----------- ---------- --------------------
Balance at December 31, 1992............ 1 160,999 12,703 173,703
Net income for 1993................. 25,998 25,998
----------- ---------- --------------------
Balance at December 31, 1993............ $ 1 $ 160,999 $ 38,701 $199,701
=========== ========== ====================
<F2>(a) The company had dividend restrictions imposed by its long-term debt agreement
and was effectively prohibited by the agreement from the distribution of any
dividends through May 1993. After that time, all retained earnings are
available plus an allowance of $10 million.
<F3>(b) NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
5
NORTH ATLANTIC ENERGY CORPORATION
- ----------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
<F4>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
North Atlantic Energy Corporation (NAEC or the Company) is a wholly owned
subsidiary of Northeast Utilities (NU). NAEC was incorporated on September
20, 1991 for the purpose of acquiring Public Service Company of New
Hampshire's (PSNH) ownership interest in the Seabrook nuclear project
(Seabrook). The company has no employees. Upon NU's acquisition of PSNH on
June 5, 1992 (Acquisition Date), PSNH's 35.6 percent share of the Seabrook
nuclear power plant (Seabrook 1) and other Seabrook-related assets were
transferred to NAEC for approximately $504 million in cash and the
assumption of PSNH's obligations under the $205 million, 15.23 percent Notes
originally issued by PSNH. The sources of cash were a $161 million equity
investment by NU into NAEC, and NAEC's issuance and sale of $355 million of
9.05 percent First Mortgage Bonds, both of which took place on June 5, 1992.
NAEC also acquired PSNH's 35.6 percent interest in the nuclear fuel for
Seabrook 1 and the cancelled Seabrook 2. In addition, it acquired from PSNH
ownership of the approximately 719 acres of exclusion area land which
surrounds the location of the two Seabrook units. NAEC will not operate
Seabrook 1, which at the Acquisition Date, was being operated by the New
Hampshire Yankee Division (NHY) of PSNH. Effective June 29, 1992, North
Atlantic Energy Service Corporation (NAESCO, another newly formed, wholly
owned, subsidiary of NU), replaced NHY as the managing agent and represents
the Seabrook joint owners, including NAEC, in the operation of Seabrook 1.
On June 29, 1992, all NHY employees became employees of NAESCO.
On February 15, 1994, NAEC acquired Vermont Electric Generation and
Transmission Cooperative, Inc.'s (VEG&T) 0.4 percent ownership interest of
Seabrook for approximately $6.4 million.
The company, The Connecticut Light and Power Company, PSNH, Western
Massachusetts Electric Company, and Holyoke Water Power Company are the
operating subsidiaries comprising the Northeast Utilities system (the system)
and are wholly owned by NU. Other wholly owned subsidiaries of NU provide
substantial support services to the system. Northeast Utilities Service
Company (NUSCO) supplies centralized accounting, administrative, data
processing, engineering, financial, legal, operational, planning, purchasing,
and other services to the system companies. Northeast Nuclear Energy Company
acts as agent for system companies in constructing and operating the
Millstone nuclear generating facilities.
All transactions among affiliated companies are on a recovery of cost basis
which may include amounts representing a return on equity, and are subject to
approval by various federal and state regulatory agencies.
ACCOUNTING CHANGES
Income Taxes: The company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes (SFAS 109),"
effective January 1, 1993. For information on this change, see <F4> Note 1,
"Summary of Significant Accounting Policies - Income Taxes."
ACCOUNTING RECLASSIFICATIONS
Certain amounts in the accompanying financial statements of the company for
the period June 5, 1992 through December 31, 1992 have been classified to
conform with December 31, 1993 presentation.
6
PUBLIC UTILITY REGULATION
NU is registered with the Securities and Exchange Commission (SEC) as a
holding company under the Public Utility Holding Company Act of 1935 (1935
Act), and it and its subsidiaries, including NAEC, are subject to the
provisions of the 1935 Act. Arrangements among the system companies, outside
agencies, and other utilities covering interconnections, interchange of
electric power, and sales of utility property are subject to regulation by
the Federal Energy Regulatory Commission (FERC) and/or the SEC. The company
is subject to further regulation for rates and other matters by the FERC and
the New Hampshire Public Utilities Commission (NHPUC), and follows the
accounting policies prescribed by the commissions.
SEABROOK POWER CONTRACT
On June 5, 1992, NAEC and PSNH entered into the Seabrook Power Contract
(Contract), under which PSNH is obligated to buy from NAEC, and NAEC is
obligated to sell to PSNH, all of NAEC's 35.6 percent ownership share of the
capacity and output of Seabrook 1 for a period equal to the length of the
Nuclear Regulatory Commission's (NRC) full power operating license for
Seabrook 1. The Contract is included as part of the rate agreement between
PSNH and the state of New Hampshire (the Rate Agreement). Under the
Contract, PSNH is unconditionally obligated to pay NAEC's cost of service
during this period whether or not Seabrook 1 is operating. NAEC's cost of
service includes all of its Seabrook-related costs, including operation and
maintenance expense, fuel expense, property tax expense, depreciation
expense, and certain overhead and other costs.
The Contract established the value of the initial investment in Seabrook at
$700-million (Initial Investment) and the initial investment in nuclear fuel
at $0. NAEC is depreciating its Initial Investment on a straight-line basis
over the remaining term of Seabrook 1's full power operating license. Any
subsequent additions to Seabrook 1 will be depreciated on a straight-line
basis over the remaining term of the Contract at the time the additions are
brought into service. The Contract provides that NAEC's return on its
allowed investment in Seabrook 1 (its investment in working capital, fuel,
capital additions after the date of commercial operation of Seabrook 1 and a
portion of the Initial Investment) is calculated based on NAEC's actual
capitalization from time to time over the term of the Contract, which
includes its actual debt and preferred equity costs, and a common equity cost
of 12.53% for the first ten years of the Contract, and thereafter at an
equity rate of return to be fixed in a filing with FERC.
If Seabrook 1 is shut down prior to the expiration of the NRC operating
license term, PSNH will be unconditionally required to pay NAEC termination
costs for 39 years, less the period during which Seabrook 1 has operated.
These costs are designed to reimburse NAEC for its share of Seabrook 1
cancellation and decommissioning costs and to pay NAEC a return of and on any
undepreciated balance of its Initial Investment in the plant over the
then-remaining term of the Contract, and the return of and on any capital
additions to the plant made after the Acquisition Date over a period of five
years after shut down (net of any tax benefits to NAEC attributable to such
shut down).
The portion of NAEC's Initial Investment included in rates is prescribed by
the Contract. The deferred return on the excluded portion of the Initial
Investment will become a component of NAEC's cost of service beginning in the
first year after the end of PSNH's fixed rate period (the Fixed Rate Period),
which continues through May 1997. See <F4> Note 1, "Summary of Significant
Accounting Policies - Phase-In Plan," below, for additional information
regarding NAEC's phase-in plan.
7
NAEC will sell the output from the 0.4 percent Seabrook interest purchased
from VEG&T on February 15, 1994 to PSNH under an agreement that has been
approved by the FERC and is substantially similar to the Seabrook Power
Contract between PSNH and NAEC that was effective on the Acquisition Date.
NUCLEAR FUEL AND SPENT NUCLEAR FUEL DISPOSAL COSTS
The cost of nuclear fuel is amortized to operation expense using a
units-of-production method at rates based on estimated kilowatt-hours of
energy provided.
Under the Nuclear Waste Policy Act of 1982, NAEC must pay the United States
Department of Energy (DOE) for the disposal of spent nuclear fuel and
high-level radioactive waste. Fees are billed currently to customers and
paid to the DOE on a quarterly basis.
Under the Energy Policy Act of 1992 (Energy Act), NAEC is assessed for its
proportionate share of the costs of decontaminating and decommissioning
uranium enrichment plants operated by the DOE (D&D assessment). The Energy
Act imposes an overall cap of $2.25 billion on the obligation of the
commercial power industry and limits the annual special assessment to $150
million each year over a 15-year period beginning in 1993. The Energy Act
also requires that regulators treat D&D assessments as a reasonable
and necessary cost of fuel, to be fully recovered in rates, like any other
fuel cost. The cap and annual recovery amounts will be adjusted annually for
inflation. The D&D assessment is allocated among utilities based upon
services purchased in prior years. As of December 31, 1993, NAEC's remaining
share of these costs is estimated to be approximately $4.9 million. NAEC has
begun to recover these costs. Accordingly, NAEC recognized these costs as a
regulatory asset with a corresponding obligation on its Balance Sheet.
JOINTLY OWNED UTILITY PLANT
As of December 31, 1993, NAEC has a 35.6 percent joint-ownership interest in
Seabrook 1, a 1,150-MW nuclear generating unit. NAEC sells all of its share
of the power generated by Seabrook 1 to PSNH. As of December 31, 1993,
plant-in-service and the accumulated provision for depreciation included
approximately $758.1 million and $56.6 million, respectively, for NAEC's
share of Seabrook 1. NAEC's share of Seabrook 1 expenses is included in the
operating expenses on the accompanying Statement of Income. In February
1994, NAEC purchased an additional 0.4 share of Seabrook 1 from VEG&T.
DEPRECIATION
The provision for depreciation is calculated using the straight-line method
based on estimated remaining lives of depreciable utility plant-in-service,
adjusted for salvage value and removal costs, as approved by the FERC.
Except for major facilities, depreciation factors are applied to the average
plant-in-service during the period. Major facilities are depreciated from
the time they are placed in service. When plant is retired from service, the
original cost of plant, including costs of removal, less salvage, is charged
to the accumulated provision for depreciation. For Seabrook 1, the costs of
removal, less salvage, that have been funded through external decommissioning
trusts will be paid with funds from the trusts and charged to the accumulated
reserve for decommissioning included in the accumulated provision for
depreciation over the expected service life of the plant. See <F5> Note 2,
"Nuclear Decommissioning," for additional information.
The depreciation rates for the several classes of electric plant-in-service
are equivalent to a composite rate of 3.2 percent in 1993 and 1992.
8
INCOME TAXES
The tax effect of temporary differences (differences between the periods in
which transactions affect income in the financial statements and the periods
in which they affect the determination of income subject to tax) is accounted
for in accordance with the ratemaking treatment of the FERC. See <F8>
Note 5, "Income Tax Expense," for the components of income tax expense.
When NU acquired PSNH on June 5, 1992, PSNH and NAEC became parties to the
Tax Allocation Agreement among the members of the NU system. The Tax
Allocation Agreement requires each member of the NU system to pay to NU the
amount, if any, that would have been its federal income tax liability if it
had filed a separate return, with certain adjustments, and requires NU to
distribute the excess of the sum of such payments over the NU system's
consolidated federal income tax liability among those members of the NU
system that had tax items that reduced the NU system's current consolidated
tax liability. A substantial portion of NAEC's cash flow for the first few
years of operations is expected to consist of payments made by NU to NAEC
under the Tax Allocation Agreement. The amount of such payments will
decrease over time but is expected to remain substantial during the first few
years of operations when NAEC is expected to incur losses for tax purposes
due to the accelerated tax depreciation of Seabrook 1. Under the Tax
Allocation Agreement, NAEC's tax losses may be utilized to offset taxable
income of the NU system and NU is required, under the Tax Allocation
Agreement, to pay NAEC for the use of such tax benefits. Such tax losses, if
not fully utilized in the taxable year in which they were incurred, may be
carried back to each of the three taxable years of the NU system preceding
the taxable year in which they are incurred. If the NU system does not have
enough taxable income in the taxable year in which such losses are incurred
or in the preceding taxable years to permit it to take full advantage of such
tax losses, or if the NU system is in an alternative minimum tax position in
any such year, then the amount of payments under the Tax Allocation Agreement
to NAEC will be decreased and NAEC's cash flow will be adversely affected.
No assurance can be given that NAEC's cash flow will not be adversely
affected in subsequent years by the inability of the other members of the NU
system to utilize fully the tax losses expected to be incurred by NAEC.
In 1992, the Financial Accounting Standards Board (FASB) issued SFAS 109.
SFAS 109 supersedes previously issued income tax accounting standards. NAEC
adopted SFAS 109, on a prospective basis, during the first quarter of 1993.
The adoption of SFAS 109 has not had a material effect on the net income or
on the balance sheet of the company. As of December 31, 1993, the deferred
tax obligation related to the adoption of SFAS 109 was approximately $19
million. As it is probable that the increase in deferred tax liabilities
will be recovered from customers through rates, NAEC also established a
regulatory asset. SFAS 109 does not permit net-of-tax accounting.
Accordingly, the company no longer utilizes net-of-tax accounting for the
deferred nuclear plants return-borrowed funds and allowance for funds used
during construction (AFUDC)-borrowed funds associated with Seabrook 1.
The temporary differences which give rise to the accumulated deferred tax
obligation at December 31, 1993 are as follows:
(Thousands of Dollars)
Accelerated depreciation and other
plant-related differences. . . . . . . . . . . $46,184
The tax effect of net regulatory assets . . . . 6,801
Other. . . . . . . . . . . . . . . . . . . . . . 21,787
-------
$74,772
=======
9
PHASE-IN PLAN
As described below, NAEC is phasing into rates its Initial Investment in
Seabrook 1. The plan is in compliance with Statement of Financial Accounting
Standards No. 92, "Regulated Enterprises - Accounting for Phase-In Plans."
As prescribed by the Rate Agreement, NAEC is phasing in its Initial
Investment. As of December 31, 1993, the portion of the Initial Investment
on which NAEC is entitled to earn a cash return was 55 percent and will
increase by 15 percent in each of the next three years beginning May 15,
1994. Between the May 16, 1991 reorganization date of PSNH (Reorganization
Date) and the Acquisition Date, PSNH recorded $50.9 million of deferred
return on its investment in Seabrook 1. In accordance with the Rate
Agreement, PSNH transferred the $50.9 million deferred return balance to NAEC
along with the other Seabrook assets. On the Acquisition Date, NAEC recorded
the $50.9 million deferred return and $32.9 million of income taxes
associated with the deferred return as part of utility plant. From the
Acquisition Date through December 31, 1993, NAEC recorded an additional $85.4
million of deferred return, which is recorded in deferred costs - Seabrook on
the Balance Sheet. The deferred return on the excluded portion of the
Initial Investment, including the $50.9 million, will be recovered with
carrying charges beginning six months after the end of PSNH's Fixed-Rate
Period (which continues through May 1997) and will be fully recovered by May
15, 2001.
CASH AND SPECIAL DEPOSITS
Cash and special deposits at December 31, 1993 and 1992 included $7.3 million
and $6.0 million, respectively, in special deposits that will be used to fund
the company's share of future Seabrook operational costs.
<F5>
2. NUCLEAR DECOMMISSIONING
A 1991 Seabrook decommissioning study confirmed that complete and immediate
dismantlement at retirement is the most viable and economic method of
decommissioning Seabrook 1. Decommissioning studies are reviewed and updated
periodically to reflect changes in decommissioning requirements, technology,
and inflation.
The estimated cost of decommissioning NAEC's 36.0 ownership share of Seabrook
1, in year-end 1993 dollars, is $131.7 million. Nuclear decommissioning
costs are accrued over the expected service life of the unit and are included
in depreciation expense on the Statements of Income. Nuclear decommissioning
costs amounted to $2.6 million in 1993 and $1.4 million in 1992. Nuclear
decommissioning, as a cost of removal, is included in the accumulated
provision for depreciation on the Balance Sheets.
Under the terms of the Rate Agreement, PSNH is obligated to pay NAEC's share
of Seabrook's decommissioning costs, even if the unit is shut down prior to
the expiration of its operating license. NAEC's portion of the cost of
decommissioning Seabrook 1 is paid to an independent decommissioning
financing fund managed by the state of New Hampshire.
As of December 31, 1993, NAEC (including pre-Acquisition Date payments made
by PSNH) has paid approximately $7.3 million into Seabrook 1's
decommissioning financing fund. Earnings on the decommissioning trusts and
financing fund increase the decommissioning trust balance and the accumulated
reserve for decommissioning. At December 31, 1993, the balance in the
accumulated reserve for decommissioning amounted to $7.9 million.
10
Changes in requirements or technology, or adoption of a decommissioning
method other than immediate dismantlement, could change decommissioning cost
estimates. Although allowances for decommissioning have increased
significantly in recent years, ratepayers in future years will need to
increase their payments to offset the effects of any insufficient rate
recoveries in previous years.
<F6> 3. SHORT-TERM DEBT
NAEC is a limited participant in the Northeast Utilities System Money Pool
(Pool). As a limited participant, NAEC is limited to borrowing funds
provided by NU parent. The Pool provides a more efficient use of the cash
resources of the system, and reduces outside short-term borrowings. NUSCO
administers the Pool as agent for the member companies. Short-term borrowing
needs of the member companies are first met with available funds of other
member companies, including funds borrowed by NU parent. NU parent may lend
to the Pool but may not borrow. However, borrowings based on loans
from NU parent bear interest at NU parent's cost and must be repaid based
upon the terms of NU parent's original borrowing. Funds may be withdrawn
from or repaid to the Pool at any time without prior notice. Investing and
borrowing subsidiaries receive or pay interest based on the average daily
Federal Funds rate.
Maturities of NAEC's short-term debt obligations were for periods of three
months or less.
The amount of short-term borrowings that may be incurred by the system
companies is subject to periodic approval by the SEC under the 1935 Act.
Under the SEC restrictions, NAEC was authorized, as of January 1, 1993, to
incur short-term borrowings up to a maximum of $50 million.
<F7>
4. LONG-TERM DEBT
Details of long-term debt outstanding are:
- -------------------------------------------------------------------------
December 31,
---------------
1993 1992
- -------------------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds:
9.05% Series A, due 2002. . . . . . . . $355,000 $355,000
Notes:
15.23% due 2000. . . . . . . . . . . . . 205,000 205,000
-------- --------
Long-term debt, net $560,000 $560,000
======== ========
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1993 for the years 1994 through 1998 are
approximately $0 in 1994 and $20,000,000 for 1995-1998.
The Series A Bonds are not redeemable prior to maturity except out of
proceeds of sales of property subject to the lien of the Series A First
Mortgage Bond Indenture (Indenture), at general redemption prices established
by the Indenture, and out of condemnation or insurance proceeds and through
the operation of the sinking fund discussed above.
Essentially all of NAEC's utility plant is subject to the lien of its
Indenture.
11
<F8>
5. INCOME TAX EXPENSE
The components of the federal and state income tax provisions are:
- -----------------------------------------------------------------------------
January 1, June 5,
to to
For the Periods December 31, 1993 December 31, 1992
<F4>(Note 1)
- -----------------------------------------------------------------------------
(Thousands of Dollars)
Current income taxes:
Federal. . . . . . . . . . . . $(33,225) $(16,350)
State. . . . . . . . . . . . . 124 -
--------- ---------
Total current . . . . . . . . (33,101) (16,350)
--------- ---------
Deferred income taxes, net:
Federal . . . . . . . . . . . . 37,199 16,240
State . . . . . . . . . . . . . (78) 1,979
--------- ---------
Total deferred . . . . . . . . 37,121 18,219
--------- ---------
Total income tax expense . . . $ 4,020 $ 1,869
========= =========
The components of total income tax expense are classified as follows:
Income taxes charged to
operating expenses. . . . . . . $ 5,673 $ 2,583
Income taxes associated with
allowance for funds used
during construction (AFUDC)
and deferred Seabrook 1
return - borrowed funds. . . . . - 9,714
Other income taxes - credit . . . (1,653) (10,428)
--------- ---------
Total income tax expense. . . . . $ 4,020 $ 1,869
========= =========
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
- -----------------------------------------------------------------------------
January 1, to June 5,
to to
For the Periods December 31, 1993 December 31, 1992
<F4>(Note 1)
- -----------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation. . . . . . . . . . . $23,000 $16,146
Alternative minimum tax . . . . . 1,250 (7,641)
AFUDC and deferred Seabrook
return, net. . . . . . . . . . . 13,792 9,714
Property taxes. . . . . . . . . . (1,003) -
Other . . . . . . . . . . . . . . 82 -
------- -------
Deferred income taxes, net. . . . $37,121 $18,219
======= =======
12
A reconciliation between income tax expense and the expected tax expense at
the applicable statutory rate is as follows:
- -----------------------------------------------------------------------------
January 1, June 5,
to to
For the Periods December 31, 1993 December 31, 1992
<F4>(Note 1)
- -----------------------------------------------------------------------------
(Thousands of Dollars)
Expected federal income tax at
35 percent of pretax income for
1993 and at 34 percent for
1992 . . . . . . . . . . . . . . $10,506 $ 4,954
Tax effect of differences:
Depreciation differences. . . . . (1,481) (1,546)
Deferred Seabrook return -
other funds. . . . . . . . . . . (4,689) (2,647)
State income taxes, net of federal
benefit. . . . . . . . . . . . . 30 1,306
Other, net. . . . . . . . . . . . (346) (198)
------- -------
Total income tax expense . . $ 4,020 $ 1,869
======= =======
<F9> 6. DEFERRED OBLIGATION - AFFILIATED COMPANY
At the time PSNH emerged from bankruptcy on May 16, 1991, in accordance with
the phase-in under the Contract, it began accruing a deferred return on a
portion of its Seabrook investment. From May 16, 1991 to the Acquisition
Date, PSNH accrued a deferred return of $50.9 million. On the Acquisition
Date, PSNH transferred the $50.9 million deferred return to NAEC as part of
the Seabrook-related assets.
At the time PSNH sold the deferred return to NAEC, it realized, for income
tax purposes, a gain that is deferred under the consolidated income tax
rules. This gain will be restored for income tax purposes when the deferred
return of $50.9 million, and the associated income taxes of $32.9 million,
are collected by NAEC through the Contract. When NAEC recovers the $32.9
million in years eight through ten of the Rate Agreement, it is obligated to
make corresponding payments to PSNH.
On the Acquisition Date, NAEC recorded the $32.9 million of income taxes
associated with the deferred return as an adjustment to the purchase price of
the Seabrook-related assets, with a corresponding obligation to PSNH, on its
Balance Sheet. In 1993, due to changes in tax rates, this amount was
adjusted to $33.3 million.
<F10>
7. COMMITMENTS AND CONTINGENCIES
SEABROOK 1 CONSTRUCTION PROGRAM
The construction program for Seabrook 1 is subject to periodic review and
revision. Actual construction expenditures may vary from such estimates due
to factors such as revised load estimates, inflation, revised nuclear safety
regulations, delays, difficulties in the licensing process, the availability
and cost of capital, and other actions taken by regulatory bodies.
13
NAEC currently forecasts construction expenditures (including AFUDC) for its
share of Seabrook 1 to be $37.8 million for the years 1994-1998, including
$8.2 million for 1994. In addition, NAEC estimates that its share of
Seabrook 1 nuclear fuel requirements will be $53.5 million for the years
1994-1998, including $4.9 million for 1994.
ENVIRONMENTAL MATTERS
NAEC is subject to regulation by federal, state, and local authorities with
respect to air and water quality, handling and the disposal of toxic
substances and hazardous and solid wastes, and the handling and
use of chemical products. NAEC has an active environmental auditing program
to prevent, detect, and remedy noncompliance with environmental laws or
regulations and believes that it is in substantial compliance with current
environmental laws and regulations. Changing environmental requirements
could hinder future construction. The cumulative long-term, economic cost
impact of increasingly stringent environmental requirements cannot be
estimated. Changing environmental requirements could also require extensive
and costly modifications to NAEC's existing investment in Seabrook 1 and
could raise operating costs significantly. As a result, NAEC may incur
significant additional environmental costs, greater than amounts included in
cost of removal and other reserves, in connection with the generation of
electricity and the storage, transportation, and disposal of by-products and
wastes. NAEC may also encounter significantly increased costs to remedy the
environmental effects of prior waste handling and disposal activities.
In most cases, the extent of additional future environmental cleanup costs is
not reasonably estimable due to factors such as the unknown magnitude of
possible contamination, the appropriate remediation method, the possible
effects of future legislation and regulation, the possible effects of
technological changes related to future cleanup, and the difficulty of
determining future liability, if any, for the cleanup of sites at which NAEC
may be determined to be legally liable by the federal or state environmental
agencies. In addition, NAEC cannot estimate the potential liability for
future claims that may be brought against it by private parties. However,
considering known facts and existing laws and regulatory practices,
management does not believe that such matters will have a material adverse
effect on NAEC's financial position or future results of operations.
NUCLEAR INSURANCE CONTINGENCIES
The Price-Anderson Act currently limits public liability from a single
incident at a nuclear power plant to $9.4 billion. The first $200 million of
liability would be provided by purchasing the maximum amount of commercially
available insurance. Additional coverage of up to a total of $8.8 billion
would be provided by an assessment of $75.5 million per incident, levied on
each of the 116 nuclear units that are currently subject to the Secondary
Financial Protection Program in the United States, subject to a maximum
assessment of $10 million per incident per nuclear unit in any year. In
addition, if the sum of all public liability claims and legal costs arising
from any nuclear incident exceeds the maximum amount of financial protection,
each reactor operator can be assessed an additional 5 percent, up to $3.8
million, or $437.9 million in total, for all 116 nuclear units. The maximum
assessment is to be adjusted at least every five years to reflect
inflationary changes. At December 31, 1993, based on NAEC's ownership
interest in Seabrook 1, the maximum liability would be $28.2 million per
incident. Payments for NAEC's ownership interest in Seabrook 1 would be
limited to a maximum of $3.6 million per incident per year.
14
Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL)
to cover the cost of repair, replacement, or decontamination or premature
decommissioning of utility property resulting from insured occurrences with
respect to NAEC's ownership interest in Seabrook 1. All companies insured
with NEIL are subject to retroactive assessments if losses exceed the
accumulated funds available to NEIL. The maximum potential assessments
against NAEC with respect to losses arising during current policy years
are approximately $4.6 million under the property damage, decontamination,
and decommissioning policies. Although NAEC has purchased the limits of
coverage currently available from the conventional nuclear insurance pools,
the cost of a nuclear incident could exceed available insurance proceeds.
Insurance has been purchased from American Nuclear Insurers/Mutual Atomic
Energy Liability Underwriters, aggregating $200 million on an industry basis
for coverage of worker claims. All companies insured under this coverage are
subject to retrospective assessments of $3.2 million per reactor. The
maximum potential assessments against NAEC with respect to losses arising
during the current policy period are approximately $1.2 million.
Under the terms of the Contract, any nuclear insurance assessments described
above would be passed on to PSNH as a "cost of service."
<F11>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments:
Cash, special deposits and nuclear decommissioning trust: The carrying
amounts approximate fair value.
Long-term debt: The fair value of NAEC's long-term debt is based upon the
quoted market price for those issues or similar issues.
The carrying amounts of NAEC's financial instruments and the estimated fair
values are as follows:
- ----------------------------------------------------------------------------
Carrying Fair
At December 31, 1993 Amount Value
- ----------------------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds. . . . . . . . . . $355,000 $373,496
Other long-term debt. . . . . . . . . . 205,000 254,057
- ----------------------------------------------------------------------------
Carrying Fair
At December 31, 1992 Amount Value
- ----------------------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds. . . . . . . . . . . $355,000 $369,200
Other long-term debt. . . . . . . . . . . 205,000 262,400
15
The fair values shown above have been reported to meet the disclosure
requirements and do not purport to represent the amounts that those
obligations would be settled at.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities (SFAS
115)." SFAS 115 requires companies to disclose the classification of
investments in debt or equity securities based on management's intent and
ability to hold the security. SFAS 115 also requires disclosure of the
aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses and amortized cost basis by major security type. Effective
January 1, 1994, NAEC will adopt SFAS 115 on a prospective basis. NAEC
anticipates that the adoption of SFAS 115 will not have a material impact on
future results of operations or financial position.
16
NORTH ATLANTIC ENERGY CORPORATION
- -----------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -----------------------------------------------------------------------------
To the Board of Directors
of North Atlantic Energy Corporation:
We have audited the accompanying balance sheets of North Atlantic Energy
Corporation (a New Hampshire corporation and a wholly owned subsidiary of
Northeast Utilities) as of December 31, 1993 and 1992, and the related
statements of income, common stockholder's equity, and cash flows for the
year ended December 31, 1993 and the period from June 5, 1992 to December 31,
1992. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North Atlantic Energy
Corporation as of December 31, 1993 and 1992, and the results of its
operations and cash flows for the year ended December 31, 1993 and the period
from June 5, 1992 to December 31, 1992, in conformity with generally accepted
accounting principles.
As discussed in <F4> Note 1 to the Financial Statements, "Summary of
Significant Accounting Policies - Accounting Changes," effective January 1,
1993, North Atlantic Energy Corporation changed its method of accounting for
income taxes.
/s/Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
Hartford, Connecticut
February 18, 1994
17
NORTH ATLANTIC ENERGY CORPORATION
- ----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------
This section contains management's assessment of North Atlantic Energy
Corporation (the company or NAEC) financial condition and the principal
factors having an impact on the results of operations. The company is a
wholly-owned subsidiary of Northeast Utilities (NU). This section should be
read in conjunction with the company's financial statements and footnotes.
FINANCIAL CONDITION
Overview
On June 5, 1992 (the Acquisition Date), NU and Public Service Company of New
Hampshire (PSNH) completed an affiliation, which represented the second step
of a two-step bankruptcy court approved plan (the Plan) that was devised in
1989 to return then-bankrupt PSNH to financial health. The first step took
place on May 16, 1991 (the Reorganization Date) when PSNH emerged from
bankruptcy as a stand-alone company, subject to a Merger Agreement (the
Merger Agreement) with NU's subsidiaries Northeast Utilities Service Company
and NU Acquisition Corporation (NUAC). The final step in the affiliation
plan occurred on June 5, 1992, when NUAC merged into PSNH pursuant to the
Merger Agreement and PSNH became a wholly owned operating subsidiary of NU.
In a related transaction, PSNH's 35.6 percent share of the Seabrook 1 nuclear
power plant (Seabrook) and other Seabrook-related assets were transferred to
the company. On June 29, 1992, North Atlantic Energy Service Corporation,
another wholly owned subsidiary of NU, received approval to manage Seabrook
as agent for the Seabrook joint owners.
At the Acquisition Date, PSNH and the company entered into the Seabrook Power
Contract, under which PSNH is obligated to buy from the company, and the
company is obligated to sell to PSNH, all of the company's capacity and
output of Seabrook for a period equal to the length of the Nuclear Regulatory
Commission full-power operating license for Seabrook (through 2026). Under
the contract, PSNH is unconditionally obligated to pay the company's "cost of
service" during the period whether or not Seabrook is operating and without
regard to the cost of alternative sources of power. In addition, PSNH will
be obligated to pay decommissioning and project cancellation costs after the
termination of the operating license.
The company's "cost of service" includes all of its prudently incurred
Seabrook-related costs, including operation and maintenance expense, fuel
expense, property tax expense, depreciation expense, certain overhead and
other costs, and a phased-in return on its Seabrook investment. The Seabrook
Power Contract established the initial recoverable investment in Seabrook at
$700 million (Initial Investment), plus any capital additions, net of
depreciation.
The company's only assets are Seabrook and other Seabrook-related assets and
its only source of revenue is the Seabrook Power Contract. PSNH's
obligations under the Seabrook Power Contract are solely its own and
have not been guaranteed by NU. The Seabrook Power Contract contains no
provisions entitling PSNH to terminate its obligations. If, however, PSNH
were to fail to perform its obligations under the Seabrook Power Contract,
the company would be required to find other purchasers for Seabrook power.
Under the Seabrook Power Contract, the company is not entitled to earn an
immediate cash return on the full amount of its Initial Investment in
Seabrook, but instead is required to phase-in its return on the Initial
Investment. The portion of the Initial Investment on which the company is
entitled to earn a return is 20 percent in the first year after the
Reorganization Date, increasing by 20 percent in the second year and by 15
percent in each of the next
18
four years, resulting in 100 percent recovery in the sixth and each succeeding
year. The company is entitled to earn a noncash deferred return on the portion
of the Initial Investment not yet phased into rates. The company is currently
earning a return on 55 percent of its Seabrook investment.
When PSNH emerged from bankruptcy on May 16, 1991, in accordance with the
phase-in under the Seabrook Power Contract, it began accruing a deferred
return on a portion of its Seabrook investment. From May 16, 1991
to the Acquisition Date, PSNH accrued a deferred return of $50.9 million. On
the Acquisition Date, PSNH transferred the $50.9 million deferred return to
the company as part of the Seabrook-related assets. NAEC recorded the $50.9
million as an adjustment to utility plant. From the Acquisition Date through
December 31, 1993, NAEC recorded an additional $85.4 million of deferred
return, which is recorded in deferred costs--Seabrook on the Balance Sheets.
The deferred return on the excluded portion of the Initial Investment,
including the $50.9 million, will be recovered with carrying charges
beginning six months after the end of PSNH's fixed-rate period (which
continues through May 1997) and will be fully recovered by May 15, 2001.
At the time PSNH transferred the deferred return to NAEC, it realized, for
income tax purposes, a gain that is deferred under the consolidated income
tax rules. This gain will be restored for income tax purposes when the
deferred return of $50.9 million, and the associated income taxes of
$32.9 million, are collected by NAEC from PSNH through the Seabrook Power
Contract over the period beginning six months after the end of PSNH's fixed
rate period through May 15, 2001. When NAEC recovers the $32.9 million, it
is obligated to make corresponding payments to PSNH. On the Acquisition
Date, NAEC recorded on its balance sheet the $32.9 million as an adjustment
to the purchase price of the Seabrook-related assets, with a corresponding
obligation to PSNH.
In 1992, the company recorded a deferred assessment and obligation for the
estimated costs for the company's Seabrook share of an assessment for costs
for the decontamination and decommissioning of uranium enrichment plants
operated by the United States Department of Energy (DOE). The company
expects to recover these amounts from PSNH as part of the cost of Seabrook
fuel.
In 1993, the company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109, the
company reflected a regulatory asset and a deferred tax liability for the
cumulative amount of income taxes associated with timing differences for
which deferred taxes had not been provided but are expected to be recovered
from customers in the future. The adoption of SFAS No. 109 has not had a
material effect on results of operations.
See the "Notes to Financial Statements" for further details on deferred
charges and recently adopted accounting standard.
RATE MATTERS
PSNH's rate agreement with the State of New Hampshire (the Rate Agreement)
provides the financial basis for the affiliation plan. It sets out a
comprehensive plan of rates for PSNH, providing for seven base rate increases
of 5.5 percent per year (the Fixed Rate Period) and a comprehensive Fuel and
Purchased Power Adjustment Clause (FPPAC). The first of these base rate
increases was put in effect on January 1, 1990. The remaining three
increases are effective annually on each June 1 beginning in 1994.
The FPPAC allows PSNH to recover from its customers the difference between
actual prudent energy and purchased power costs, including the costs incurred
under the Seabrook Power Contract, and the costs included in base rates.
In January 1994, the NHPUC approved a Memorandum of Understanding between
PSNH, NAEC, Northeast Utilities Service Company (NUSCO), and the Attorney
General of the State of New Hampshire relating to certain issues which had
arisen under the Rate Agreement (the Global Settlement). The Global
Settlement addressed changes in tax legislation in New Hampshire, accounting
treatments for PSNH resulting from adoption of SFAS
19
No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions"
and SFAS No. 109 and recovery for certain aspects of PSNH's settlement with the
Vermont Electric Generation and Transmission Cooperative, Inc. (VEG&T),
including the purchase by NAEC of VEG&T's 0.4 percent share of Seabrook.
NAEC became the purchaser of the VEG&T's 0.4 percent share of Seabrook and
entered into a separate power contract with PSNH, under which PSNH is
obligated to buy from NAEC all of the capacity and output of Seabrook
attributable to such interest for a period equal to the length of the NRC
full power operating license for Seabrook. On January 7, 1994, the NRC
approved the transfer of VEG&T's ownership share of Seabrook to NAEC. All
regulatory approvals for NAEC's purchase have been received and the closing
was effective in February 1994.
On April 16, 1993, the Governor of New Hampshire signed into law legislation
that implemented the settlement of a suit concerning a property tax on
Seabrook station (the Seabrook Tax) that was filed with the United States
Supreme Court by Attorneys General of Connecticut, Massachusetts, and Rhode
Island. The legislation made various changes to New Hampshire tax laws. The
change in the tax law required the State of New Hampshire to refund to the
joint owners of Seabrook a total of $8.8 million in each of 1993 and 1994.
NAEC has recognized a receivable and an obligation to PSNH for PSNH and
NAEC's share of the refund. The tax refund is being refunded to PSNH through
the FPPAC.
SEABROOK PERFORMANCE
In 1993 Seabrook operated at a capacity factor of 89.8 percent as compared to
77.9 percent for the same period in 1992 and a national average of 70.6
percent for 1993. The unit was shutdown on September 7, 1992 for refueling
and maintenance and returned to service on November 13, 1992. The unit is
scheduled to begin a 56-day refueling and maintenance outage on March 26,
1994.
NAEC could be affected by the ability of other Seabrook joint owners to fund
their shares of Seabrook costs. Great Bay Power Corporation, an owner of a
12.13 percent entitlement in Seabrook is operating under bankruptcy
protection of Chapter 11 of the Federal Bankruptcy Code. It is expected that
Great Bay or certain companies that Great Bay has agreements with will have
funds sufficient to fund the upcoming Seabrook outage.
ENVIRONMENTAL MATTERS
NAEC is subject to regulation by federal, state, and local authorities with
respect to air and water quality, handling and the disposal of toxic
substances and hazardous and solid wastes, and the handling and use of
chemical products. The cumulative long-term economic cost impact of
increasingly stringent environmental requirements cannot be estimated.
However, NAEC has an active environmental auditing program to detect and
remedy noncompliance with environmental laws or regulations. NAEC may incur
significant additional costs, greater than amounts included in cost of
removal and other reserves, in connection with the generation of electricity
and the storage, transportation, and disposal of by-products and wastes.
NAEC may also encounter significantly increased costs to remedy the
environmental effects of prior waste handling and disposal practices.
The estimated cost of decommissioning NAEC's 36.0 ownership share of
Seabrook, in year-end 1993 dollars, is $131.7 million. Nuclear
decommissioning costs are accrued over the expected service life of the unit
and are included in depreciation expense on the Statements of Income.
Nuclear decommissioning costs amounted to $2.6 million in 1993 and $1.4
million in 1992. Nuclear decommissioning, as a cost of removal, is included
in the accumulated provision for depreciation on the Balance Sheets.
See "Notes to Financial Statements" for further information regarding nuclear
decommissioning and other environmental matters.
20
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations provided the primary source of funds for the
period ended December 31, 1993, while repayment of short-term debt and
investment in nuclear fuel and plant were the primary uses of funds. Nuclear
fuel expenditures for the period are high due to higher purchases in 1993 in
preparation for a March 1994 refueling and maintenance outage.
The company had negative cash flow from operations for the period June 5,
1992 through December 31, 1992 due to a substantial portion of its earnings
being noncash.
At the Acquisition Date, NAEC assumed PSNH's obligations under the $205
million of 15.23 percent notes (the Notes) and paid $504 million to PSNH for
the purchase of PSNH's interest in Seabrook. The company financed these
requirements out of the proceeds from the sale of $355 million Series A First
Mortgage Bonds and the sale of its common stock to NU for $161 million. As a
result of these transactions and the assumption of the Notes, the company's
initial capitalization is approximately 78 percent debt and 22 percent common
equity. In addition, the company borrowed amounts under the NU system Money
Pool for ongoing cash requirements. As of December 31, 1993, there are no
borrowings under the Money Pool. (See "Notes to Financial Statements" for
information regarding the Money Pool.)
The company will have ongoing cash requirements for Seabrook-related capital
expenditures, nuclear fuel expenditures, interest and operating expenses.
Capital expenditures for the period 1994 through 1998 are expected to be
approximately $37.8 million (including AFUDC), including $8.2 million for
1994. Nuclear fuel expenditures for the same period are expected to be
approximately $53.5 million (excluding AFUDC), including $4.9 million for
1994. Such cash requirements are expected to be met from payments under the
Seabrook Power Contract and the Tax Allocation Agreement, except that to the
extent some or all of the capital expenditures and nuclear fuel expenditures
may have to be financed, the company expects to borrow under the Money Pool.
A substantial portion of the company's cash flow for the first few years is
expected to consist of payments made by NU to the company under a Tax
Allocation Agreement that the company entered into with NU at the time of
the acquisition. The amount of such payments will decrease over time but is
expected to remain substantial during the first few years when the company is
expected to incur losses for tax purposes due to accelerated tax depreciation
of Seabrook. The company received approximately $33 million from NU for the
period ended December 31, 1993 under this agreement. No assurance can be
given, however, as to the extent of the future benefits, if any, that will
actually accrue to the company under the Tax Allocation Agreement. (See
"Notes to Financial Statements" for further information regarding the Tax
Allocation Agreement.)
RESULTS OF OPERATIONS
The company has no historical results prior to June 5, 1992. Therefore, the
Statements of Income for the periods June 5, 1992 to December 31, 1992 and
January 1, 1993 to December 31, 1993 are not comparable.
Operating revenues represent amounts from PSNH under the terms of the
Seabrook Power Contract and billings to PSNH for decommissioning expense.
Operating expenses represent the costs incurred for the operation of Seabrook
including fuel expense.
The deferred Seabrook return represents the investment return not recovered
currently on the portion of the Seabrook investment not reflected in rate
base.
Income taxes included in other income represent the tax benefits related to
the portion of the Seabrook investment not reflected in rate base.
21
Interest on long-term debt and other interest reflects the interest expenses
on the debt incurred and assumed at the acquisition.
22
NORTH ATLANTIC ENERGY CORPORATION
- -----------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
1993 1992<F12>*
- -----------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues . . . . . . . . $125,408 $ 78,444
======== ========
Operating Income . . . . . . . . . $ 33,718 $ 16,122
======== ========
Net Income . . . . . . . . . . . . $ 25,998 $ 12,703
======== ========
Total Assets . . . . . . . . . . . $900,821 $818,123
======== ========
Long-Term Debt . . . . . . . . . . $560,000 $560,000
======== ========
- -----------------------------------------------------------------------------
STATISTICS 1993 1992<F12>*
- -----------------------------------------------------------------------------
Gross Electric Utility Plant
December 31,
(Thousand of Dollars). . . . . . . $789,127 $774,920
======== ========
kWh Sales (Millions) . . . . . . . 3,218 1,268
======== ========
- -----------------------------------------------------------------------------
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited)
- -----------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------
1993 March 31 June 30<F13>** September 30 December 31
- -----------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues . . $29,153 $29,952 $31,845 $34,458
======= ======= ======= =======
Operating Income . . . $ 6,541 $ 7,964 $ 9,657 $ 9,556
======= ======= ======= =======
Net Income . . . . . . $ 5,185 $ 5,985 $ 7,491 $ 7,337
======= ======= ======= =======
1992
- -----------------------------------------------------------------------------
Operating Revenues . . $ - $ 8,785 $32,439 $37,220
======== ======= ======= =======
Operating Income . . . $ - $ 2,010 $ 6,988 $ 7,124
======== ======= ======= =======
Net Income . . . . . . $ - $ 1,119 $ 6,822 $ 4,762
======== ======= ======= =======
<F12> *The company began commercial operations on June 5, 1992. Information
presented for 1992 covers the period June 5, 1992 through December 31,
1992.
<F13>**In 1992, represents the period June 5, 1992 through June 30,
1992.
23
North Atlantic Energy Corporation
First Mortgage Bonds
--------------------
Trustee and Interest Paying Agent
United States Trust Company of New York
114 West 47th Street
New York, New York 10036
15.23% Notes
------------
Trustee and Interest Paying Agent
United States Trust Company of New York
114 West 47th Street
New York, New York 10036
Address General Correspondence in Care of:
Northeast Utilities Service Company
Investor Relations Department
P.O. Box 270
Hartford, Connecticut 06141-0270
Tel. (203) 665-5000
General Office
1000 Elm Street
P.O. Box 330
Manchester, New Hampshire 03105
_______________________________