Exhibit 13.5
1994
ANNUAL REPORT
NORTH ATLANTIC ENERGY CORPORATION
---------------------------------
1994 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............... 18-20
Selected Financial Data............................ 21
Statistics......................................... 21
Statement of Quarterly Financial Data.............. 21
Bondholder Information............................. Back Cover
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
--------------------------------------------------------------------------------
At December 31, 1994 1993
--------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
------
Utility Plant, at original cost:
Electric................................................ $769,379 $758,170
Less: Accumulated provision for depreciation......... 75,176 56,649
--------- ---------
694,203 701,521
Construction work in progress........................... 3,704 7,618
Nuclear fuel, net....................................... 19,797 23,339
--------- ---------
Total net utility plant............................. 717,704 732,478
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market in 1994 and
at cost in 1993 (Note 8)<F8>........................... 10,342 7,881
Other, at cost.......................................... 222 -
--------- ---------
10,564 7,881
--------- ---------
Current Assets:
Cash and special deposits (Note 1K)<F1K>................ 8,166 8,404
Notes receivable from affiliated companies.............. 28,750 -
Receivables............................................. - 3,677
Receivables from affiliated companies................... 13,983 20,304
Materials and supplies, at average cost................. 10,036 7,353
Prepayments and other................................... 2,149 4,183
--------- ---------
63,084 43,921
--------- ---------
Deferred Charges:
Regulatory assets (Note 1G)<F1G>........................ 166,598 109,765
Unamortized debt expense................................ 4,834 5,507
Other................................................... 795 1,269
--------- ---------
172,227 116,541
--------- ---------
Total Assets........................................ $963,579 $900,821
========= =========
The accompanying notes are an integral part of these financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
---------------------------------------------------------------------------------
At December 31, 1994 1993
---------------------------------------------------------------------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock--$1 par value--authorized
and outstanding 1,000 shares in 1994 and 1993........... $ 1 $ 1
Capital surplus, paid in................................. 160,999 160,999
Retained earnings........................................ 59,236 38,701
--------- ---------
Total common stockholder's equity............... 220,236 199,701
Long-term debt (Note 4)<F4>.............................. 540,000 560,000
--------- ---------
Total capitalization............................ 760,236 759,701
--------- ---------
Current Liabilities:
Long-term debt--current portion.......................... 20,000 -
Accounts payable......................................... 4,073 3,999
Accounts payable to affiliated companies................. 38 2,389
Accrued interest......................................... 18,288 18,288
Accrued taxes............................................ 1,439 127
Deferred DOE obligation--current portion................. 845 845
Other.................................................... 329 -
--------- ---------
45,012 25,648
--------- ---------
Deferred Credits:
Accumulated deferred income taxes (Note 1I)<F1I>......... 120,250 74,772
Deferred obligation to affiliated company (Note 6)<F6>... 33,284 33,284
Deferred DOE obligation.................................. 3,553 3,941
Deferred Seabrook tax settlement obligation.............. 1,022 3,475
Other.................................................... 222 -
--------- ---------
158,331 115,472
--------- ---------
Commitments and Contingencies (Note 7)<F7>
Total Capitalization and Liabilities............ $963,579 $900,821
========= =========
The accompanying notes are an integral part of these financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
-----------------------------------------------------------------------------------------
January 1, January 1, June 5,
1994 1993 1992
to to to
December 31, December 31, December 31,
For the Periods 1994 1993 1992(a)
-----------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues............................. $ 145,751 $ 125,408 $ 78,444
------------- ------------- -------------
Operating Expenses:
Operation --
Fuel...................................... 7,144 7,067 1,688
Other..................................... 37,929 35,656 25,305
Maintenance.................................. 14,951 7,858 9,413
Depreciation................................. 22,959 22,642 12,905
Federal and state income taxes (Note 5)<F5>.. 8,027 5,673 2,583
Taxes other than income taxes................ 11,791 12,794 10,428
------------- ------------- -------------
Total operating expenses............... 102,801 91,690 62,322
------------- ------------- -------------
Operating Income............................... 42,950 33,718 16,122
------------- ------------- -------------
Other Income:
Deferred Seabrook return--other
funds (Note 1H)<F1H>....................... 12,951 13,397 7,784
Other, net................................... 1,272 1,891 200
Income taxes--credit......................... 3,970 1,653 10,428
------------- ------------- -------------
Other income, net...................... 18,193 16,941 18,412
------------- ------------- -------------
Income before interest charges......... 61,143 50,659 34,534
------------- ------------- -------------
Interest Charges:
Interest on long-term debt................... 64,022 64,022 36,647
Other interest............................... (280) 45 200
Deferred Seabrook return--borrowed
funds (Note 1H)<F1H>....................... (33,134) (39,406) (15,016)
------------- ------------- -------------
Interest charges, net.................. 30,608 24,661 21,831
------------- ------------- -------------
Net Income..................................... $ 30,535 $ 25,998 $ 12,703
============= ============= =============
(a) NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------
January 1, January 1, June 5,
1994 1993 1992
to to to
December 31, December 31, December 31,
For the Periods 1994 1993 1992
---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Cash Flows From Operating Activities:
Net Income................................................ $ 30,535 $ 25,998 $ 12,703
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 22,959 22,642 12,905
Deferred income taxes and investment tax credits, net... 34,449 37,121 8,505
Deferred return - Seabrook.............................. (46,085) (52,803) (22,800)
Other sources of cash................................... 5,096 9,050 5,491
Other uses of cash...................................... (2,842) (1,028) (8,104)
Changes in working capital:
Receivables............................................. 9,998 (790) (20,736)
Materials and supplies.................................. (2,683) (1,990) (2,288)
Accounts payable........................................ (2,277) 5,026 1,362
Accrued taxes........................................... 1,312 126 (4,970)
Other working capital (excludes cash)................... 2,363 822 2,330
----------- ------------ ------------
Net cash flows from (used for) operating activities......... 52,825 44,174 (15,602)
----------- ------------ ------------
Cash Flows From Financing Activities:
Issuance of common shares................................. - - 161,000
Issuance of long-term debt................................ - - 355,000
Net (decrease) increase in short-term debt................ - (18,500) 18,500
Cash dividends on common stock............................ (10,000) - -
----------- ------------ ------------
Net cash flows (used for) from financing activities......... (10,000) (18,500) 534,500
----------- ------------ ------------
Investment Activities:
Investment in plant:
Investment in Seabrook assets, net...................... - - (504,265)
Electric utility plant.................................. (11,256) (6,707) (6,307)
Nuclear fuel............................................ (1,227) (13,983) (511)
----------- ------------ ------------
Net cash flows used for investments in plant.............. (12,483) (20,690) (511,083)
NU System Money Pool...................................... (28,750) - -
Other investment activities, net.......................... (1,830) (2,844) (1,551)
----------- ------------ ------------
Net cash flows used for investments......................... (43,063) (23,534) (512,634)
Net (Decrease) Increase In Cash For The Period.............. (238) 2,140 6,264
Cash and special deposits - beginning of period............. 8,404 6,264 -
----------- ------------ ------------
Cash and special deposits - end of period................... $ 8,166 $ 8,404 $ 6,264
=========== ============ ============
Supplemental Cash Flow Information:
Cash paid (received) during the year for:
Interest, net of amounts capitalized during construction.. $ 64,056 $ 63,393 $ 18,166
=========== ============ ============
Income taxes.............................................. $ (34,988) $ (32,350) $ (16,000)
=========== ============ ============
NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
-----------------------------------------------------------------------------------
Capital Retained
Common Surplus, Earnings
Stock Paid In (a) Total
-----------------------------------------------------------------------------------
(Thousands of Dollars)
Balance at June 5, 1992 (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
Net income for 1994................. 30,535 30,535
Cash dividends on common stock...... (10,000) (10,000)
---------- ---------- --------- ----------
Balance at December 31, 1994............ $ 1 $ 160,999 $ 59,236 $ 220,236
========== ========== ========= ==========
(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.
(b) NAEC began operations on June 5, 1992.
The accompanying notes are an integral part of these financial statements.
NORTH ATLANTIC ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
<F1A>A. 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. 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 does 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'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.
<F1B>B. RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to
conform with the current year's presentation.
<F1C>C. JOINTLY OWNED UTILITY PLANT
As of December 31, 1994, NAEC has a 35.98 percent joint-ownership
interest in Seabrook 1, a 1,148-MW nuclear generating unit. NAEC sells
all of its share of the power generated by Seabrook 1 to PSNH. As of
December 31, 1994 and 1993, plant-in-service included approximately
$707.8 million and $758.1 million, respectively, and the accumulated
provision for depreciation included approximately $63.1 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 Statements of Income. In February 1994, NAEC
purchased an additional 0.4 percent share of Seabrook 1 from VEG&T.
<F1D>D. 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. Major facilities are depreciated from the time they are
placed in service. For other than major facilities, depreciation
factors are applied to the average plant-in-service during the period.
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 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 3.3 percent in 1994 and
3.2 percent in 1993 and 1992.
<F1E>E. 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 inter-
connections, 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, accounting, and other matters by the FERC and the
New Hampshire Public Utilities Commission (NHPUC).
<F1F>F. 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 original 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 percent 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 payments are designed to reimburse NAEC for its
share of Seabrook 1 cancellation and decommissioning costs and to
provide 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).
NAEC is selling the output from the additional 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.
<F1G>G. REGULATORY ACCOUNTING
NAEC follows accounting policies that reflect the impact of the rate
treatment of certain events or transactions that differ from generally
accepted accounting principles for those events or transactions
followed by nonregulated enterprises. Under regulatory accounting,
assuming that future revenues are expected to be sufficient to provide
recovery, regulators may permit incurred costs, normally treated as
expenses, to be deferred and recovered in revenues at a later date.
Regulatory accounting is unique in that the actions of a regulator can
provide reasonable assurance of the existence of an asset. Regulators,
through their actions, may also reduce or eliminate the value of an
asset, or create a liability. If the economic entity no longer comes
under the jurisdiction of a regulator or external forces, such as a
move to a competitive environment, effectively limiting the influence
of cost-of-service based rate regulation, the entity may be forced to
abandon regulatory accounting, requiring a reexamination and potential
write-off of net regulatory assets. NAEC continues to be subject to
cost-of-service based rate regulation. Based on current regulation,
NAEC believes that its use of regulatory accounting is still
appropriate.
The components of regulatory assets are as follows:
At December 31, 1994 1993
--------------------------------------------------------------
(Thousands of Dollars)
Deferred costs-Seabrook (Note 1H) .... $131,513 $ 85,428
Income taxes, net (Note 1I) .......... 30,461 19,432
Recoverable energy costs (Note 1J) ... 4,624 4,905
-------- ---------
..................................... $166,598 $ 109,765
======== =========
<F1H>H. DEFERRED COST - SEABROOK
NAEC is phasing into rates the recoverable portions of its investment
in Seabrook 1. NAEC is deferring costs as part of its phase-in plan.
Its plan is in compliance with SFAS No. 92, Regulated Enterprises -
Accounting for Phase-In Plans.
As prescribed by the Rate Agreement, NAEC is phasing in its investment
in Seabrook 1. As of December 31, 1994, the portion of the investment
on which NAEC is entitled to earn a cash return was 70 percent and will
increase by 15 percent in each of the next two years beginning May 1,
1995. From the Acquisition Date through December 31, 1994, NAEC
recorded $131.5 million of deferred return on the excluded portion of
its investment in Seabrook 1, which has been recorded in "Regulatory
Assets" on the Balance Sheets. The deferred return on the excluded
portion of NAEC's investment in Seabrook 1 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 2001.
<F1I>I. 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 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
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (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 it is probable that the increase in deferred tax
liabilities will be recovered from customers through rates, NAEC also
established a regulatory asset.
The tax effect of the temporary differences which give rise to the
accumulated deferred tax obligation are as follows:
At December 31, 1994 1993
-------------------------------------------------------------
(Thousands of Dollars)
Accelerated depreciation and other
plant-related differences ........ $ 93,486 $ 46,184
Regulatory assets-income tax gross up 7,223 6,801
Other .............................. 19,541 21,787
-------- --------
................................... $120,250 $ 74,772
======== ========
<F1J>J. RECOVERABLE ENERGY COSTS
Under the Energy Policy Act of 1992 (Energy Act), NAEC is assessed for
its proportionate shares of the costs of decontaminating and
decommissioning uranium enrichment plants owned by the United States
Department of Energy (D&D assessment). The Energy Act requires that
regulators treat D&D assessments as a reasonable and necessary current
cost of fuel, to be fully recovered in rates, like any other fuel cost.
NAEC has begun to recover these costs.
<F1K>K. CASH AND SPECIAL DEPOSITS
Cash and special deposits at December 31, 1994 and 1993 included $5.7
million and $7.3 million, respectively, in special deposits that will
be used to fund the company's share of future Seabrook operational
costs.
<F2>2. NUCLEAR DECOMMISSIONING
A 1994 Seabrook decommissioning study, which is currently under review by
the New Hampshire Decommissioning Financing Committee, 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.
NAEC's 36 percent ownership of the estimated cost of decommissioning
Seabrook 1 (utilizing the currently approved decommissioning study), in
year-end 1994 dollars, is $137.3 million. These estimated costs have been
levelized and assume after-tax earnings on the Seabrook decommissioning
funds of 6.1 percent. Future escalation rates in decommissioning costs for
Seabrook are assumed. 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
$2.7 million in 1994, $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. At
December 31, 1994, the balance in the accumulated reserve for
decommissioning amounted to $10.3 million. See "Nuclear Decommissioning"
in the Management's Discussion and Analysis for a discussion of changes
being considered by the FASB related to accounting for decommissioning
costs.
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 trust, held by a financing fund managed by the state of New
Hampshire.
As of December 31, 1994, NAEC (including pre-Acquisition Date payments made
by PSNH) has paid approximately $10.1 million into Seabrook 1's
decommissioning trust. Earnings on the decommissioning trust increase the
decommissioning trust balance and the accumulated reserve for
decommissioning. Due to NAEC's adoption, effective January 1, 1994, of
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities,
unrealized gains and losses associated with the decommissioning trust also
impact the balance of the trust and the accumulated reserve for
decommissioning.
Changes in requirements or technology, the timing of funding or
dismantling, or adoption of a decommissioning method other than immediate
dismantlement, would change decommissioning cost estimates. Because
allowances for decommissioning have increased significantly in recent
years, PSNH may need to increase its payments in future years to offset the
effects of any insufficient rate recoveries in previous years.
<F3>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. 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. At
December 31, 1994 and 1993, NAEC had no outstanding borrowings from the
Pool.
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, 1995, to
incur short-term borrowings up to a maximum of $50 million.
<F4>4. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31
-----------
1994 1993
----------------------------------------------------------------
(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
Less: Amounts due within one year 20,000 -
-------- --------
Long-term debt, net .... $540,000 $560,000
======== ========
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1994 for the years 1995 through 1999 are
$20,000,000 annually for 1995-1998 and $70,000,000 in 1999.
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.
<F5>5. INCOME TAX EXPENSE
The components of the federal and state income tax provisions are:
January 1, 1994 January 1 to June 5,
to December 31, 1993 to
For the Periods December 31, 1994 (Note 1I) December 31, 1992
---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Current income taxes:
Federal $(30,553) $(33,225) $(16,350)
State 161 124 -
-------- -------- --------
Total current (30,392) (33,101) (16,350)
-------- -------- --------
Deferred income taxes, net:
Federal 34,449 37,199 16,240
State 0 (78) 1,979
-------- -------- ---------
Total deferred 34,449 37,121 18,219
-------- -------- ---------
Total income tax expense $ 4,057 $ 4,020 $ 1,869
========= ========= =========
The components of total income tax expense are classified as follows:
Income taxes charged to operating
expenses $ 8,027 $ 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 (3,970) (1,653) (10,428)
--------- --------- ---------
Total income tax expense $ 4,057 $ 4,020 $ 1,869
========= ========= =========
Deferred income taxes are comprised of the tax effects of temporary differences as follows:
January 1, 1994 January 1 to June 5,
to December 31, 1993 to
For the Periods December 31, 1994 (Note 1I) December 31, 1992
---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Depreciation $22,783 $23,000 $16,146
Alternative minimum tax 73 1,250 (7,641)
AFUDC and deferred Seabrook
return, net 11,597 13,792 9,714
Property taxes - (1,003) -
Other (4) 82 -
------- ------- -------
Deferred income taxes, net $34,449 $37,121 $18,219
======== ======= =======
A reconciliation between income tax expense and the expected tax expense at the applicable
statutory rate is as follows:
January 1, 1994 January 1 to June 5,
to December 31, 1993 to
For the Periods December 31, 1994 (Note 1I) December 31, 1992
---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Expected federal income tax at
35 percent of pretax income for
1994 and 1993 and at
34 percent for 1992 $12,107 $10,506 $ 4,954
Tax effect of differences:
Depreciation differences (2,087) (1,481) (1,546)
Deferred Seabrook return -
other funds (4,533) (4,689) (2,647)
State income taxes, net of
federal benefit 104 30 1,306
Other, net (1,534) (346) (198)
-------- -------- --------
Total income tax expense $ 4,057 $ 4,020 $ 1,869
======== ======== ========
<F6>6. DEFERRED OBLIGATION TO 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.
7. COMMITMENTS AND CONTINGENCIES
<F7A>A. SEABROOK 1 CONSTRUCTION PROGRAM
The construction program for Seabrook 1 is subject to periodic review
and revision. Actual construction expenditures may vary from estimates
due to factors such as inflation, revised nuclear safety regulations,
delays, difficulties in the licensing process, the availability and
cost of capital, and other actions taken by regulatory bodies.
NAEC currently forecasts construction expenditures (including AFUDC)
for its share of Seabrook 1 to be $31.9 million for the years 1995-
1999, including $5.0 million for 1995. In addition, NAEC estimates
that its share of Seabrook 1 nuclear fuel requirements will be
$46.1 million for the years 1995-1999, including $9.6 million for 1995.
<F7B>B. ENVIRONMENTAL MATTERS
NAEC is subject to regulation by federal, state, and local authorities
with respect to air and water quality, handling the disposal of toxic
substances and hazardous and solid wastes, and the handling and use of
chemical products. NAEC has an active environmental auditing and
training program 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 accurately 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 activities.
In most cases, the extent of additional future environmental cleanup
costs is not reasonably estimable due to a number of factors including
the unknown magnitude of possible contamination, the appropriate
remediation methods, the possible effects of future legislation or
regulation, and the possible effects of technological changes.
NAEC cannot estimate the potential liability for future claims that may
be brought against it. However, considering known facts and existing
laws, and regulatory practices, management does not believe the matters
disclosed above will have a material effect on NAEC's financial
position or future results of operations.
<F7C>C. NUCLEAR INSURANCE CONTINGENCIES
The Price-Anderson Act currently limits public liability from a single
incident at a nuclear power plant to $8.9 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 $8.3 billion would be provided by an assessment of
$75.5 million per incident, levied on each of the 110 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 $415.3 million in total, for all 110 nuclear units.
The maximum assessment is to be adjusted at least every five years to
reflect inflationary changes. At December 31, 1994, based on NAEC's
ownership interest in Seabrook 1, the maximum liability would be $28.5
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.
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 $8.4 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 $3.1
million per reactor. The maximum potential assessments against NAEC
with respect to losses arising during the current policy period are
approximately $1.1 million.
Under the terms of the Contract, any nuclear insurance assessments
described above would be passed on to PSNH as a "cost of service."
<F8>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.
SFAS 115 requires investment in debt and equity securities to be presented
at fair value and was adopted by the company on a prospective basis as of
January 1, 1994. As a result of the adoption of SFAS 115, the investments
held by the decommissioning trust decreased by approximately $850 thousand
as of December 31, 1994, with a corresponding offset to the accumulated
provision for depreciation. There was no change in the funding
requirements of the trust nor any impact on earnings as a result of the
adoption of SFAS 115.
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:
At December 31, 1994 Carrying Amount Fair Value
----------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bond ............ $355,000 $351,450
Other long-term debt ........... 205,000 242,925
At December 31, 1993 Carrying Amount Fair Value
------------------------------------------------------------------
(Thousands of Dollars)
First Mortgage Bonds ........... $355,000 $373,496
Other long-term debt ........... 205,000 254,057
The fair values shown above have been reported to meet the disclosure
requirements and do not purport to represent the amounts at which those
obligations would be settled.
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, 1994 and 1993, and the related
statements of income, common stockholder's equity, and cash flows for the year
ended December 31, 1994 and 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, 1994 and 1993, and the results of its operations
and its cash flows for the years ended December 31, 1994 and 1993 and the
period from June 5, 1992 to December 31, 1992, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 17, 1995
NORTH ATLANTIC ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------------------------------
This section contains management's assessment of NAEC's (the company)
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 (Acquisition Date), NU acquired Public Service Company of New
Hampshire (PSNH), and PSNH's 35.6 percent share of the Seabrook 1 nuclear
power plant (Seabrook 1) and other Seabrook-related assets were transferred to
the company. At the Acquisition Date, PSNH and the company entered into the
Seabrook Power Contract (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 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 Contract. PSNH's obligations under the
Contract are solely its own and have not been guaranteed by NU. The Contract
contains no provisions entitling PSNH to terminate its obligations. If,
however, PSNH were to fail to perform its obligations under the Contract, the
company would be required to find other purchasers for Seabrook power.
RATE MATTERS
NAEC follows accounting principles that allow the rate treatment for certain
events or transactions to be reflected. These principles may differ from the
accounting principles followed by nonregulated enterprises. Regulators may
permit incurred costs, which would normally be treated as expenses by
nonregulated enterprises, to be deferred as regulatory assets and recovered in
revenues at a later date. Regulatory assets at December 31, 1994 were
approximately $167 million. Based on current regulation, the company believes
that its use of regulatory accounting is still appropriate.
As of December 31, 1994, NAEC has included in rates $490 million of its
Seabrook investment. The remaining investment ($210 million) will be phased
into rates over the next two years, beginning in May 1995. As of December 31,
1994, the deferred return associated with the amount of investment that has not
been included in rates was approximately $183 million, including approximately
$51 million which is recorded as utility plant. This amount and the additional
deferred amounts associated with the remaining phase-in will be recovered under
NAEC's Contract with PSNH over the period December 1997 through May 2001.
SEABROOK PERFORMANCE
The Seabrook plant operated at 61.6 percent of capacity for the year ended
December 31, 1994, compared with 89.8 percent in 1993 and a 1994 national
average of 73.2 percent. The lower 1994 capacity factor was primarily the
result of an unplanned outage earlier in the year and an extended refueling and
maintenance outage. The unit was taken out of service on January 25, 1994 when
an automatic trip from 100 percent power occurred when a main steam isolation
valve closed during quarterly surveillance testing. The unit returned to
service on February 18, 1994. The unit began its scheduled 57-day refueling
and maintenance outage on April 9, 1994. The unexpected discovery of reactor
coolant pump locking cups and a bolt in the reactor vessel contributed
substantially to the duration of the outage. The unit returned to service on
August 1, 1994 for an outage duration of 114 days. The next refueling outage
is scheduled for November 1995.
ENVIRONMENTAL MATTERS/NUCLEAR DECOMMISSIONING
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
activities.
The estimated cost of decommissioning NAEC's 36 percent ownership share of
Seabrook, in year-end 1994 dollars, is approximately $137 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 $2.7 million in 1994 and $2.6 million in
1993.
PSNH is obligated to pay the company's share of Seabrook's decommissioning
costs even if the unit is shut down prior to the expiration of its license.
Nuclear decommissioning, as a cost of removal, is included in the accumulated
provision for depreciation on the Balance Sheets.
The staff of the Securities and Exchange Commission has questioned certain of
the current accounting practices of the electric utility industry, including
this company, regarding the recognition, measurement, and classification of
decommissioning costs for nuclear generating stations in the financial
statements of electric utilities. The Financial Accounting Standards Board is
currently reviewing the accounting for removal costs, including decommissioning
and similar costs. If current electric utility industry accounting practices
for such decommissioning costs are changed: (1) annual provisions for
decommissioning could increase, (2) the estimated costs for decommissioning
could be recorded as a liability rather than as accumulated depreciation, and
(3) trust fund income from the external decommissioning trust could be reported
as investment income rather than as a reduction to decommissioning expense.
See "Notes to Financial Statements" for further information regarding nuclear
decommissioning and other environmental matters.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased approximately $9 million in 1994, as
compared with 1993, primarily due to the increased return associated with the
phase-in of additional Seabrook plant. Cash used for financing activities was
approximately $9 million lower in 1994, as compared with 1993, primarily due
to the repayment of short-term debt in 1993, partially offset by the payment
of cash dividends on common stock in 1994. Cash used for investments was
approximately $20 million higher in 1994, as compared with 1993, primarily due
to short-term loans to other NU system companies under the NU system Money Pool
and higher investment in plant, partially offset by lower nuclear fuel
expenditures in 1994.
The company's construction program expenditures amounted to approximately $11
million in 1994, as compared to approximately $7 million for 1993. The increase
is due to expenditures incurred as a result of NAEC's purchase of Vermont
Electric Generation and Transmission Company's 0.4 percent share of Seabrook in
1994, for approximately $6 million.
Nuclear fuel expenditures decreased approximately $13 million in 1994 from 1993
due to expenditures in 1993 for the Seabrook refueling outage.
The company has ongoing cash requirements for Seabrook-related capital
expenditures, nuclear fuel expenditures, interest and operating expenses.
Capital expenditures for the period 1995 through 1999 are expected to be
approximately $32 million (including allowance for funds used during
construction (AFUDC)), including $5 million for 1995. Nuclear fuel
expenditures for the same period are expected to be approximately $46 million
(excluding AFUDC), including $10 million for 1995. Such cash requirements are
expected to be met from payments under the 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. As of December 31, 1994, there were no borrowings
outstanding 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 $16 million from NU for the
period ended December 31, 1994 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
Operating revenues represent amounts billed to PSNH under the terms of the
Contract and billings to PSNH for decommissioning expense. Operating revenues
increased approximately $20 million in 1994, as compared to 1993, primarily due
to the higher operation and maintenance expenses and the increased return
associated with the phase-in of additional Seabrook plant in May 1994.
Operation and maintenance expenses increased approximately $9 million in 1994,
as compared to 1993, primarily due to the unplanned and extended Seabrook
outages in 1994.
Deferred Seabrook return - other and borrowed funds decreased approximately $6
million in 1994, as compared to 1993, primarily because additional Seabrook
investment was phased into rates in May 1994.
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.
SELECTED FINANCIAL DATA
1994 1993 1992*
----------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues.... $145,751 $125,408 $ 78,444
======== ======== =========
Operating Income...... $ 42,950 $ 33,718 $ 16,122
========= ========= =========
Net Income............ $ 30,535 $ 25,998 $ 12,703
========= ========= =========
Cash Dividends on Common Stock$ 10,000 $ - $ -
========= ========== =========
Total Assets.......... $963,579 $900,821 $818,123
======== ======== ========
Long-Term Debt(a)..... $560,000 $560,000 $560,000
======== ======== ========
(a)Includes portion due within one year
STATISTICS 1994 1993 1992*
---------------------------------------------------------------------------
Gross Electric Utility
Plant December 31,
(Thousand of Dollars). $792,880 $789,127 $774,920
======== ======== ========
kWh Sales (Millions).. 2,229 3,218 1,268
======== ======== ========
STATEMENTS OF QUARTERLY FINANCIAL DATA (UNAUDITED)
-------------------------------------------------------------------------
Quarter Ended
-----------------------------------------------
1994 March 31 June 30 September 30 December 31
-------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues.... $32,211 $40,011 $37,603 $35,926
======= ======= ======= =======
Operating Income...... $ 8,594 $10,718 $11,851 $11,787
======= ======= ======= =======
Net Income............ $ 6,643 $ 6,725 $ 8,161 $ 9,006
======= ======== ======== =======
1993
-------------------------------------------------------------------------
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
======= ======= ======= =======
* The company began commercial opertions on June 5, 1992.