FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-43508
NORTH ATLANTIC ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 06-1339460
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 ELM STREET, MANCHESTER, NEW HAMPSHIRE 03105
(Address of principal executive offices) (Zip Code)
(603) 669-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1996
Common Shares, $1.00 par value 1,000 shares
NORTH ATLANTIC ENERGY CORPORATION
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 1996 and
December 31, 1995 2
Statements of Income - Three Months and Nine
Months Ended September 30, 1996 and 1995 4
Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II. Other Information
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I. FINANCIAL INFORMATION
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
------------- -------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 772,207 $ 771,794
Less: Accumulated provision for depreciation......... 116,052 99,772
------------- -------------
656,155 672,022
Construction work in progress........................... 9,000 7,616
Nuclear fuel, net....................................... 23,150 27,482
------------- -------------
Total net utility plant............................. 688,305 707,120
------------- -------------
Other Property and Investments:
Nuclear decommissioning trusts, at market............... 17,529 15,312
Other, at cost.......................................... 222 222
------------- -------------
17,751 15,534
------------- -------------
Current Assets:
Cash.................................................... 14,135 8,313
Special deposits........................................ 4,377 71
Notes receivable from affiliated companies.............. 28,750 2,500
Receivables from affiliated companies................... 13,860 18,692
Materials and supplies, at average cost................. 13,274 12,269
Prepayments and other................................... 2,739 4,157
------------- -------------
77,135 46,002
------------- -------------
Deferred Charges:
Regulatory assets:
Deferred costs--Seabrook............................... 180,374 162,430
Income taxes, net...................................... 46,683 43,231
Recoverable energy costs............................... 2,201 2,349
Unamortized loss on reacquired debt.................... 27,022 31,886
Unamortized debt expense................................ 4,932 5,619
Other................................................... 119 478
------------- -------------
261,331 245,993
------------- -------------
Total Assets........................................ $ 1,044,522 $ 1,014,649
============= =============
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
------------- -------------
(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....................................... 67,141 59,677
------------- -------------
Total common stockholder's equity.............. 228,141 220,677
Long-term debt.......................................... 520,000 540,000
------------- -------------
Total capitalization........................... 748,141 760,677
------------- -------------
Current Liabilities:
Notes payable to affiliated company..................... - 8,000
Long-term debt--current portion......................... 20,000 20,000
Accounts payable........................................ 7,520 6,135
Accounts payable to affiliated companies................ 5,410 143
Accrued interest........................................ 10,136 3,452
Accrued taxes........................................... 4,197 1,346
Other................................................... 201 270
------------- -------------
47,464 39,346
------------- -------------
Deferred Credits:
Accumulated deferred income taxes....................... 192,556 179,135
Deferred obligation to affiliated company............... 33,284 33,284
Other................................................... 23,077 2,207
------------- -------------
248,917 214,626
------------- -------------
Commitments and Contingencies (Note 5)<F5>
------------- -------------
Total Capitalization and Liabilities........... $ 1,044,522 $ 1,014,649
============= =============
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Thousands of Dollars)
Operating Revenues................................. $ 41,565 $ 39,696 $ 117,335 $ 110,042
---------- ---------- ---------- ----------
Operating Expenses:
Operation --
Fuel.......................................... 3,912 3,450 11,108 9,577
Other......................................... 8,516 8,529 23,993 24,467
Maintenance...................................... 2,172 2,276 5,649 5,601
Depreciation..................................... 6,020 5,865 17,933 17,454
Federal and state income taxes................... 3,292 2,743 9,073 7,423
Taxes other than income taxes.................... 3,014 3,038 9,079 7,999
---------- ---------- ---------- ----------
Total operating expenses................... 26,926 25,901 76,835 72,521
---------- ---------- ---------- ----------
Operating Income................................... 14,639 13,795 40,500 37,521
---------- ---------- ---------- ----------
Other Income:
Deferred Seabrook return--other funds............ 1,599 2,277 6,101 7,068
Other, net....................................... 407 411 747 1,276
Income taxes..................................... 2,921 407 4,480 2,755
---------- ---------- ---------- ----------
Other income, net.......................... 4,927 3,095 11,328 11,099
---------- ---------- ---------- ----------
Income before interest charges............. 19,566 16,890 51,828 48,620
---------- ---------- ---------- ----------
Interest Charges:
Interest on long-term debt....................... 12,954 15,553 39,617 47,413
Other interest................................... (201) (166) (410) (403)
Deferred Seabrook return--borrowed funds......... (3,105) (5,411) (11,843) (16,085)
---------- ---------- ---------- ----------
Interest charges, net...................... 9,648 9,976 27,364 30,925
---------- ---------- ---------- ----------
Net Income......................................... $ 9,918 $ 6,914 $ 24,464 $ 17,695
========== ========== ========== ==========
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1996 1995
----------- -----------
(Thousands of Dollars)
Operating Activities:
Net Income................................................ $ 24,464 $ 17,695
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 17,933 17,454
Deferred income taxes and investment tax credits, net... 9,969 23,980
Deferred return - Seabrook.............................. (17,944) (23,153)
Sale of Seabrook 2 steam generator...................... 20,870 -
Other sources of cash................................... 15,136 8,403
Other uses of cash...................................... (425) (1,023)
Changes in working capital:
Receivables............................................. 4,832 698
Materials and supplies.................................. (1,005) (1,421)
Accounts payable........................................ 6,652 (3,843)
Accrued taxes........................................... 2,851 2,215
Other working capital (excludes cash)................... 3,727 (9,664)
----------- -----------
Net cash flows from operating activities.................... 87,060 31,341
----------- -----------
Financing Activities:
Net decrease in short-term debt........................... (8,000) -
Reacquisitions and retirements of long-term debt.......... (20,000) (20,000)
Cash dividends on common stock............................ (17,000) (18,000)
----------- -----------
Net cash flows used for financing activities................ (45,000) (38,000)
----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................. (3,025) (3,830)
Nuclear fuel............................................ (4,153) (5,079)
----------- -----------
Net cash flows used for investments in plant.............. (7,178) (8,909)
NU System Money Pool...................................... (26,250) 26,500
Investments in nuclear decommissioning trusts............. (2,810) (2,826)
----------- -----------
Net cash flows (used for) from investments.................. (36,238) 14,765
----------- -----------
Net Increase In Cash For The Period......................... 5,822 8,106
Cash - beginning of period.................................. 8,313 2,508
----------- -----------
Cash - end of period........................................ $ 14,135 $ 10,614
=========== ===========
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Presentation
The accompanying unaudited financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) in this Form 10-Q, the
Annual Report of North Atlantic Energy Corporation (the company or
NAEC) on Form 10-K for the year ended December 31, 1995 (1995 Form
10-K), the company's Form 10-Qs for the quarters ended March 31, 1996
and June 30, 1996, and the company's Form 8-Ks dated January 31, 1996
and September 3, 1996. In the opinion of the company, the
accompanying financial statements contain all adjustments necessary to
present fairly the financial position as of September 30, 1996, the
results of operations for the three-month and nine-month periods ended
September 30, 1996 and 1995, and the statements of cash flows for the
nine-month periods ended September 30, 1996 and 1995. All adjustments
are of a normal, recurring, nature. The results of operations for the
three-month and nine-month periods ended September 30, 1996 and 1995
are not necessarily indicative of the results expected for a full
year.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
Northeast Utilities (NU) is the parent company of the Northeast
Utilities system (the system). The system furnishes retail electric
service in Connecticut, New Hampshire, and western Massachusetts
through four wholly owned subsidiaries, The Connecticut Light and
Power Company (CL&P), Public Service Company of New Hampshire (PSNH),
Western Massachusetts Electric Company (WMECO), and Holyoke Water
Power Company. NAEC, a wholly owned subsidiary, sells all of its
entitlement to the capacity and output of the Seabrook nuclear power
plant to PSNH. In addition to its retail electric service, the system
furnishes firm and other wholesale electric services to various
municipalities and other utilities. The system serves about 30
percent of New England's electric needs and is one of the 20 largest
electric utility systems in the country as measured by revenues.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
B. Special Deposits
Special deposits represent funds set aside to meet certain pre-funding
requirements established by the joint owners (including NAEC) of the
Seabrook project. The funds are used currently to meet the operation
and maintenance requirements of the Seabrook project.
2. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for evaluating and recording asset
impairment. The company adopted SFAS 121 as of January 1, 1996. SFAS 121
requires the evaluation of long-lived assets for impairment when certain
events occur or when conditions exist that indicate the carrying amounts of
assets may not be recoverable.
Based on the current regulatory environment in the system's service areas,
as of September 30, 1996, SFAS 121 did not have a material impact on the
company's financial position or results of operations. This conclusion may
change in the future as competitive factors influence wholesale and retail
pricing in the electric utility industry or if the cost-of-service based
regulatory structure were to change. For further information, see NAEC's
Form 8-K dated September 3, 1996, NAEC's Form 10-Qs for the quarters ended
March 31, 1996 and June 30, 1996, and NAEC's 1995 Form 10-K.
3. NUCLEAR DECOMMISSIONING
For information regarding nuclear decommissioning, see the company's Form
10-Q for the quarter ended March 31, 1996 and the company's 1995 Form 10-K.
4. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps: As of September 30, 1996, NAEC had outstanding
interest-rate swap agreements with a total notional value of approximately
$225 million and a positive mark-to-market position of approximately $3.9
million.
These swap agreements have been made with various financial institutions,
each of which is rated "BBB+" or better by Standard & Poor's rating group.
NAEC is exposed to credit risk on its interest-rate swaps if the
counterparties fail to perform their obligations. However, NAEC
anticipates that the counterparties will be able to fully satisfy their
obligations under the contracts. For further information on derivative
financial instruments see the MD&A in this Form 10-Q, NAEC's Form 10-Qs for
the quarters ended March 31, 1996 and June 30, 1996, and NAEC's 1995 Form
10-K.
5. COMMITMENTS AND CONTINGENCIES
A. Seabrook 1 Construction Program: For information regarding NAEC's
construction program, see NAEC's 1995 Form 10-K.
B. Nuclear Performance: For information regarding the company's nuclear
performance, see NAEC's 1995 Form 10-K and NAEC's Form 8-K dated
January 31, 1996. For information regarding NU's nuclear management
reorganization, see NAEC's Form 8-K dated September 3, 1996.
C. Environmental Matters: For information regarding environ-mental
matters, see NAEC's 1995 Form 10-K.
D. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see NAEC's 1995 Form 10-K.
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's (NAEC or 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 discussion should be read in
conjunction with NAEC's financial statements and footnotes in this Form 10-Q,
the 1995 Form 10-K, the First and Second Quarter 1996 Form 10-Qs, and the Form
8-Ks dated January 31, 1996 and September 3, 1996.
FINANCIAL CONDITION
Overview
Under the Seabrook Power Contract (the Contract), PSNH (Public Service Company
of New Hampshire) is unconditionally obligated to pay the company's cost of
service for a period equal to the length of the Nuclear Regulatory Commission
(NRC) full-power operating license for Seabrook (through 2026) whether or not
Seabrook 1 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.
Net income was approximately $10 million for the three months ended September
30, 1996, an increase of approximately $3 million from the same period in 1995.
Net income was approximately $24 million for the nine months ended September 30,
1996, an increase of approximately $7 million from the same period in 1995. The
increase in net income for the three-and-nine month periods was due to deferred
tax benefits associated with the proceeds from the sale of the Seabrook Unit 2
steam generators that are being applied to the dismantlement of Seabrook Unit 2.
In addition, net income for the nine-month period increased due to a 1995 one-
time adjustment to the deferred Seabrook 1 return balance.
Nuclear Performance
NAEC has a 35.98-percent ownership interest in the Seabrook nuclear power plant
(Seabrook) which is operated by North Atlantic Energy Service Corporation
(NAESCO), a wholly-owned subsidiary of NU.
Seabrook operated at a capacity factor of 95.7 percent through September 1996,
as compared to 92.8 percent for the same period in 1995.
On October 9, 1996, the NRC issued a request for information concerning all
nuclear plants in the United States, except the three Millstone units, which had
previously received such requests. Such information will be used to verify that
these facilities are being operated and maintained in accordance with NRC
regulations and their specific licenses. The NRC has indicated that the
information, which must be submitted within 120 days of the date of the request,
will be used to determine whether future inspection or enforcement activities
are warranted for any plant. NAESCO is currently preparing its response to the
NRC's request, with respect to Seabrook. Seabrook's operations were not
restricted by the request. The NRC's April 1996 inspection found Seabrook to be
a well-operated facility and found no major safety issues or weaknesses and
noted that it would reduce its future inspections in a number of areas as a
result of its findings.
Liquidity And Capital Resources
Cash provided from operations increased approximately $56 million in the first
nine months of 1996, from 1995, primarily due to the deferred tax benefits
associated with the sale of the Seabrook Unit 2 steam generators that are being
applied to the dismantlement of Seabrook Unit 2, increased cash return
associated with the phase-in of additional Seabrook plant, and higher funds
from working capital. Cash used for financing activities increased approximately
$7 million primarily due to higher repayment of short-term debt. Cash used for
investments, increased approximately $51 million in the first nine months of
1996, from 1995, primarily due to lower investment of cash in the NU system
Money Pool.
All NAEC securities remain on Standard & Poor's Rating Group CreditWatch.
NAEC has entered into interest-rate swap agreements to reduce interest-rate risk
associated with its $225 million variable-rate bank note. These swaps are not
used for trading purposes. The differential paid or received as interest rates
change is recognized in income when realized. As of September 30, 1996, NAEC
had outstanding swap agreements with a total notional value of approximately
$225 million. The settlement amount associated with the swap agreements
increased interest expense by approximately $0.8 million for NAEC during the
first nine months of 1996. NAEC's interest-rate swap agreements effectively fix
its variable-rate bank note at 7.05 percent.
RESULTS OF OPERATIONS
Income Statement Variances
Millions of Dollars Increase/(Decrease)
Third Year-
Quarter Percent to-Date Percent
Operating revenues $2 5% $ 7 7%
Federal and state income taxes (2) (84) 0 0
Deferred return-Seabrook (3) (39) (5) (22)
Interest on long-term debt (3) (17) (8) (16)
Net income 3 43 7 38
Comparison of the Third Quarter of 1996 with the Third Quarter of 1995
Operating revenues represent amounts billed to PSNH under the terms of the
Contract and billings to PSNH for decommissioning expense. Operating revenues
increased approximately $2 million primarily due to the increased return
associated with the phase-in of additional Seabrook 1 plant in May 1995 and
May 1996.
Deferred return-Seabrook decreased approximately $3 million primarily due to the
additional Seabrook investment phased into rates in May 1995 and May 1996.
Federal and state income taxes decreased approximately $2 million primarily due
to a 1996 deferred tax benefit associated with the proceeds from the sale of the
Seabrook Unit 2 steam generators.
Interest on long-term debt decreased approximately $3 million primarily due to
the 1995 refinancing of its $205 million 15.23-percent-rate note.
Comparison of the First Nine Months of 1996 with the First Nine
Months of 1995
Operating revenues increased approximately $7 million primarily due to the
increased return associated with the phase-in of additional Seabrook 1 plant in
May 1995 and May 1996 and higher operating expenses.
Deferred return-Seabrook decreased approximately $5 million primarily due to the
additional Seabrook investment phased into rates in May 1995 and May 1996,
partially offset by a one-time adjustment in June 1995 to the deferred Seabrook
return balance.
Interest on long-term debt decreased approximately $8 million primarily due to
the 1995 refinancing of its $205 million 15.23-percent-rate note.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
1. The NRC's Office of Investigations (OI) has been examining various matters
at Millstone and CY, including but not limited to procedural and technical
compliance matters and employee concerns. One of these matters has been
referred, and others may be referred, to the Office of the U. S. Attorney for
the District of Connecticut (U. S. Attorney) for possible criminal prosecution.
The referred matter concerns full core off-load procedures and related matters
at Millstone. The U. S. Attorney is also reviewing possible criminal violations
arising out of certain of NU's other activities at Millstone and CY, including
the 1996 nuclear workforce reduction.
The U. S. Attorney, together with the U. S. Environmental Protection Agency
and the Connecticut Attorney General, is also investigating possible criminal
violations of federal and state environmental laws at certain NU facilities,
including Millstone.
Management does not believe that any system company or officer has engaged
in conduct that would warrant a federal criminal prosecution. NU intends to
fully cooperate with the OI and the U.S. Attorney in their ongoing
investigations.
For more information regarding the full core off-load matter, see "Part II.
Other Information" in NAEC's Form 10-Q for the quarter ended March 31, 1996. For
more information regarding NU's 1996 nuclear workforce reduction and the NRC's
review thereof, see NAEC's 1995 Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. NAEC filed a Form 8-K dated September 3, 1996 disclosing that:
* NU appointed Bruce Kenyon as President and CEO of NU's nuclear
operations and Mr. Kenyon is in the process of implementing a nuclear
management reorganization.
* The NHPUC has issued a preliminary plan to restructure the state's
electric industry, including PSNH.
* PSNH has notified the State of New Hampshire that the state is in
breach of its obligations under the Rate Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTH ATLANTIC ENERGY CORPORATION
Registrant
Date November 12, 1996 By: /s/ Bernard M. Fox
Bernard M. Fox
Chairman and Director
Date November 12, 1996 By: /s/ John J. Roman
John J. Roman
Vice President and
Controller