1998 Annual Report
North Atlantic Energy Corporation
Index
Contents Page
Balance Sheets........................................ 2
Statements of Income.................................. 4
Statements of Cash Flows.............................. 5
Statements of Common Stockholder's Equity............. 6
Notes to Financial Statements......................... 7
Report of Independent Public Accountants.............. 22
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 24
Selected Financial Data............................... 30
Statistics (Unaudited)................................ 30
Statements of Quarterly Financial Data (Unaudited).... 30
Bondholder Information................................ Back Cover
PART I. FINANCIAL INFORMATION
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
- -----------------------------------------------------------------------------------------
At December 31, 1998 1997
- -----------------------------------------------------------------------------------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 753,379 $ 779,111
Less: Accumulated provision for depreciation......... 165,114 143,778
------------- -------------
588,265 635,333
Construction work in progress........................... 7,090 4,616
Nuclear fuel, net....................................... 23,644 27,413
------------- -------------
Total net utility plant............................. 618,999 667,362
------------- -------------
Other Property and Investments:
Nuclear decommissioning trust, at market................ 35,210 26,547
------------- -------------
35,210 26,547
------------- -------------
Current Assets:
Cash.................................................... 71 13
Special deposits........................................ 11,198 -
Notes receivable from affiliated companies.............. 30,350 -
Receivables from affiliated companies................... 23,804 25,695
Taxes receivable........................................ 7,887 4,613
Materials and supplies, at average cost................. 12,812 13,003
Prepayments and other................................... 2,198 4,220
------------- -------------
88,320 47,544
------------- -------------
Deferred Charges:
Regulatory assets....................................... 199,882 269,484
Unamortized debt expense................................ 2,742 3,702
------------- -------------
202,624 273,186
------------- -------------
Total Assets........................................ $ 945,153 $ 1,014,639
============= =============
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
- -----------------------------------------------------------------------------------------
At December 31, 1998 1997
- -----------------------------------------------------------------------------------------
(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....................................... 43,196 58,702
------------- -------------
Total common stockholder's equity.............. 204,196 219,702
Long-term debt.......................................... 405,000 475,000
------------- -------------
Total capitalization........................... 609,196 694,702
------------- -------------
Current Liabilities:
Notes payable to affiliated companies................... - 9,950
Long-term debt--current portion......................... 70,000 20,000
Accounts payable........................................ 5,924 7,912
Accounts payable to affiliated companies................ 867 6,040
Accrued interest........................................ 2,987 3,025
Accrued taxes........................................... 710 -
Other................................................... 285 1,055
------------- -------------
80,773 47,982
------------- -------------
Deferred Credits:
Accumulated deferred income taxes....................... 209,634 216,701
Deferred obligation to affiliated company............... 22,728 32,472
Other................................................... 22,822 22,782
------------- -------------
255,184 271,955
------------- -------------
Commitments and Contingencies (Note 7)
------------- -------------
Total Capitalization and Liabilities........... $ 945,153 $ 1,014,639
============= =============
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues................................. $ 276,685 $ 192,381 $ 162,152
---------- ---------- ----------
Operating Expenses:
Operation --
Fuel.......................................... 13,305 13,405 15,013
Other......................................... 36,763 39,091 35,268
Maintenance...................................... 14,120 24,146 9,154
Depreciation..................................... 25,381 25,170 24,056
Amortization of regulatory assets, net........... 85,464 6,270 (912)
Federal and state income taxes................... 36,194 14,845 12,341
Taxes other than income taxes.................... 11,401 12,393 12,343
---------- ---------- ----------
Total operating expenses................... 222,628 135,320 107,263
---------- ---------- ----------
Operating Income................................... 54,057 57,061 54,889
---------- ---------- ----------
Other Income:
Deferred Seabrook return--other funds............ 6,731 7,205 7,700
Other, net....................................... (8,435) (747) 1,200
Income taxes..................................... 14,378 4,394 5,052
---------- ---------- ----------
Other income, net.......................... 12,674 10,852 13,952
---------- ---------- ----------
Income before interest charges............. 66,731 67,913 68,841
---------- ---------- ----------
Interest Charges:
Interest on long-term debt....................... 50,082 50,722 52,414
Other interest................................... (676) 649 (697)
Deferred Seabrook return--borrowed funds......... (12,169) (13,411) (14,948)
---------- ---------- ----------
Interest charges, net...................... 37,237 37,960 36,769
---------- ---------- ----------
Net Income......................................... $ 29,494 $ 29,953 $ 32,072
========== ========== ==========
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities:
Net Income.................................................. $ 29,494 $ 29,953 $ 32,072
Adjustments to reconcile to net cash
from operating activities:
Depreciation.............................................. 25,381 25,170 24,056
Amortization of nuclear fuel.............................. 10,453 10,705 11,668
Deferred income taxes and investment tax credits, net..... 6,010 22,649 15,749
Deferred return - Seabrook................................ (18,900) (20,616) (22,648)
Amortization of nuclear plants return..................... 86,376 7,182 -
Amortization of other regulatory assets................... (912) (912) (912)
Amortization of deferred obligation to affiliated company. (9,744) (812) -
Sale of Seabrook 2 steam generator........................ - - 20,931
Other sources of cash..................................... 24,643 12,776 10,087
Other uses of cash........................................ (6,429) (9,406) (2,582)
Changes in working capital:
Receivables............................................... 1,891 (9,273) 2,270
Materials and supplies.................................... 191 90 (824)
Accounts payable.......................................... (7,161) (11,835) 19,509
Accrued taxes............................................. 710 (3,486) 2,140
Other working capital (excludes cash)..................... (13,258) 3,429 (7,675)
----------- ----------- -----------
Net cash flows from operating activities...................... 128,745 55,614 103,841
----------- ----------- -----------
Financing Activities:
Net (decrease)/increase in short-term debt.................. (9,950) 7,450 (5,500)
Reacquisitions and retirements of long-term debt............ (20,000) (20,000) (45,000)
Cash dividends on common stock.............................. (45,000) (25,000) (38,000)
----------- ----------- -----------
Net cash flows used for financing activities.................. (74,950) (37,550) (88,500)
----------- ----------- -----------
Investment Activities:
Investment in plant:
Electric utility plant.................................... (9,028) (6,606) (5,921)
Nuclear fuel.............................................. (6,474) (6,147) (15,752)
----------- ----------- -----------
Net cash flows used for investments in plant............ (15,502) (12,753) (21,673)
Investment in NU system Money Pool.......................... (30,350) - 2,500
Investment in nuclear decommissioning trusts................ (7,885) (5,597) (4,404)
Other investment activities, net............................ - - 222
----------- ----------- -----------
Net cash flows used for investments........................... (53,737) (18,350) (23,355)
----------- ----------- -----------
Net increase/(decrease) in cash for the period................ 58 (286) (8,014)
Cash - beginning of period.................................... 13 299 8,313
----------- ----------- -----------
Cash - end of period.......................................... $ 71 $ 13 $ 299
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid/(refunded) during the year for:
Interest, net of amounts capitalized........................ $ 42,498 $ 45,297 $ 46,322
=========== =========== ===========
Income taxes................................................ $ 22,136 $ - $ (13,160)
=========== =========== ===========
See accompanying notes to 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 January 1, 1996 ............. $ 1 $ 160,999 $ 59,677 $ 220,677
Net income.......................... 32,072 32,072
Cash dividends...................... (38,000) (38,000)
---------- ---------- --------- ----------
Balance at December 31, 1996............ 1 160,999 53,749 214,749
Net income.......................... 29,953 29,953
Cash dividends...................... (25,000) (25,000)
---------- ---------- --------- ----------
Balance at December 31, 1997............ 1 160,999 58,702 219,702
Net income.......................... 29,494 29,494
Cash dividends...................... (45,000) (45,000)
---------- ---------- --------- ----------
Balance at December 31, 1998............ $ 1 $ 160,999 $ 43,196 $ 204,196
========== ========== ========= ==========
(a) All retained earnings are available for distribution, plus an allowance of
$10 million. However, there is a 25% common equity ratio test that must be
met in order to comply with the 1995 Term Credit Agreement maturing November
2000. Therefore, the company can pay out all of its retained earnings plus a
portion of the allowance. Currently there is $45.8 million available for
dividends.
See accompanying notes to financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. About North Atlantic Energy Corporation
North Atlantic Energy Corporation (NAEC or the company), 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 (HWP), are the operating subsidiaries
comprising the Northeast Utilities system (the NU system) and are
wholly owned by Northeast Utilities (NU).
The NU system furnishes franchised retail electric service in
Connecticut, New Hampshire, and western Massachusetts through CL&P,
PSNH and WMECO. NAEC sells all of its entitlement to the capacity
and output of the Seabrook nuclear power plant, (Seabrook or Seabrook
1, a 1,148 megawatt nuclear generating unit) to PSNH under two life-
of-unit full cost recovery contracts (the Seabrook Power Contracts).
HWP is also engaged in the production and distribution of electric
power. The NU system also furnishes firm and other wholesale
electric services to various municipalities and other utilities,
and participates in limited retail access programs, providing off-
system retail electric service. The NU system serves in excess of 30
percent of New England's electric needs and is one of the 24 largest
electric utility systems in the country as measured by revenues.
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). NU and its subsidiaries, including NAEC, are
subject to the provisions of the 1935 Act. Arrangements among the
NU 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. NAEC is subject to further
regulation for rates, accounting and other matters by the FERC
and/or applicable state regulatory commissions.
Other wholly owned subsidiaries of NU provide support services for
the NU system companies and, in some cases, for other New England
utilities. Northeast Utilities Service Company (NUSCO) provides
centralized accounting, administrative, information resources,
engineering, financial, legal, operational, planning, purchasing and
other services to the NU system companies. North Atlantic Energy
Service Corporation (NAESCO) acts as agent for NAEC and CL&P and has
operational responsibility for Seabrook. Northeast Nuclear Energy
Company (NNECO) acts as agent for the NU system companies and other
New England utilities in operating the Millstone nuclear generating
facilities.
During the first quarter of 1999, NU established three new
subsidiaries: NU Enterprises, Inc., Northeast Generation Company,
and Northeast Generation Services Company. Directly or through
multiple subsidiaries, these entities will engage in a variety of
energy-related activities, including the acquisition and management
of non-nuclear generating plants.
B. Presentation
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 disclosure 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.
Certain reclassifications of prior years' data have been made to
conform with the current year's presentation.
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.
C. New Accounting Standards
The Financial Accounting Standards Board (FASB) issued a new
accounting standard during 1998: Statement of Financial Accounting
Standards (SFAS) 133, "Accounting for Derivative Instruments and
Hedging Activities."
SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. This statement
becomes effective for NAEC on January 1, 2000 and will require
derivative instruments used by NAEC to be recognized on the balance
sheets as assets or liabilities at fair value. NAEC uses derivative
instruments for hedging purposes. The accounting for these hedging
instruments will depend on which hedging classification each
derivative instrument falls under, as defined by SFAS 133, offset
by any changes in the market value of the hedged item.
Based on the derivative instruments which are currently being
utilized by NAEC to hedge some of its interest-rate risks, there will
be an impact on earnings upon adoption of SFAS 133 which management
cannot estimate at this time. For further information regarding
derivative instruments, see Note 8, "Market Risk-Management."
D. Jointly Owned Electric Utility Plant
NAEC has a 35.98 percent joint-ownership interest in Seabrook which
includes the 0.4 percent ownership interest in Seabrook 1 which
NAEC acquired from Vermont Electric Generation and Transmission
Cooperative in February 1994. NAEC sells all of its entitlement
to the capacity and output of the Seabrook nuclear generating unit
to PSNH under the Seabrook Power Contracts.
As of December 31, 1998 and 1997, plant-in-service included
approximately $721.2 million and $723.2 million, respectively,
and the accumulated provision for depreciation included approximately
$130.7 million and $116.1 million, respectively, for NAEC's share of
Seabrook 1. NAEC's share of Seabrook 1 expenses is included in the
corresponding operating expenses on the accompanying Statements of
Income.
E. 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 appropriate regulatory agency. Except for major
facilities, depreciation rates 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. The costs
of closure and removal of non-nuclear facilities are accrued over the
life of the plant as a component of depreciation. The depreciation
rates for the several classes of electric plant-in-service are
equivalent to a composite rate of 3.5 percent in 1998 and 1997, and
3.4 percent in 1996. See Note 2, "Nuclear Decommissioning" for
additional information on nuclear plant decommissioning.
F. Seabrook Power Contracts
PSNH and NAEC have entered into the Seabrook Power Contracts which
obligate PSNH to purchase NAEC's 35.98 percent ownership of the
capacity and output of Seabrook 1 for the term of Seabrook 1's
Nuclear Regulatory Commission (NRC) operating license. Under these
contracts, PSNH is obligated to pay NAEC's cost of service during
this period, regardless if Seabrook 1 is operating. NAEC's cost of
service includes all of its Seabrook-related costs, including
operation and maintenance (O&M) expenses, fuel expense, income and
property tax expense, depreciation expense, certain overhead and
other costs and a return on its allowed investment.
The Seabrook Power Contracts established the value of the initial
investment in Seabrook (initial investment) at $700-million. As
prescribed by the 1989 rate agreement between NU, PSNH, the State of
New Hampshire (Rate Agreement), as of May 1, 1996, NAEC phased into
rates 100 percent of the recoverable portion of its investment in
Seabrook 1. From June 5, 1992 (the date NU acquired PSNH and NAEC
acquired Seabrook 1 from PSNH - the Acquisition Date) through
November 1997, NAEC recorded $203.9 million of deferred return on its
investment in Seabrook 1. At November 30, 1997, NAEC's utility plant
included $84.1 million of deferred return that was transferred as
part of the Seabrook plant assets to NAEC on the Acquisition Date.
Beginning on December 1, 1997, the deferred return, including the
portion transferred to NAEC began to be billed through the Seabrook
Power Contracts to PSNH, and will be fully recovered from customers
by May 2001. NAEC is depreciating its initial investment over the
term of Seabrook 1's operating license (39 years), and any subsequent
plant additions are depreciated on a straight-line basis over the
remaining term of the Seabrook Power Contracts at the time the
subsequent additions are placed in service.
If Seabrook 1 is shut down prior to the expiration of the NRC
operating license, PSNH will be unconditionally required to pay NAEC
termination costs for 39 years, less the period during which Seabrook
1 has operated. These termination costs will reimburse NAEC for its
share of Seabrook 1 shut-down and decommissioning costs, and will
pay NAEC a return of and on any undepreciated balance of its initial
investment over the remaining term of the Seabrook Power Contracts,
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 the
cancellation).
G. Regulatory Accounting and Assets
The accounting policies of the company and the accompanying financial
statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of
the ratemaking process in accordance with SFAS 71, "Accounting for
the Effects of Certain Types of Regulation." Assuming a cost-of-
service based regulatory structure, regulators may permit incurred
costs, normally treated as expenses, to be deferred and recovered
through future revenues. Through their actions, regulators also may
reduce or eliminate the value of an asset, or create a liability. If
any portion of the company's operations were no longer subject to the
provisions of SFAS 71, the company would be required to write off all
of its related regulatory assets and liabilities unless there is a
formal transition plan which provides for the recovery, through
established rates, for the collection of these costs through a
portion of the business which would remain regulated on a cost-of-
service basis. At the time of transition, NAEC would be required to
determine any impairment to the carrying costs of deregulated plant
and inventory assets.
The issue of restructuring the electric utility industry in New
Hampshire is currently the focus of negotiations and proceedings
within the federal and state legal systems. The outcome of these
court proceedings will impact NAEC due to NAEC's contractual
relationship with PSNH through the Seabrook Power Contracts.
Management continues to believe that NAEC's use of regulatory
accounting emains appropriate while this issue remains in
litigation.
For further information on NAEC's regulatory environment and the
potential impacts of restructuring, see Note 7A, "Commitments and
Contingencies - Restructuring," and Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A).
Based on a current evaluation of the various factors and conditions
that are expected to impact future cost recovery, management
continues to believe it is probable that the operating companies,
including NAEC, will recover their investments in long-lived assets,
including regulatory assets. The components of NAEC's regulatory
assets are as follows:
At December 31, 1998 1997
(Thousands of Dollars)
Deferred costs-Seabrook 1
(Note 1J)........................... $147,169 $199,753
Income taxes, net (Note 1H)........... 39,472 48,736
Recoverable energy costs (Note 1I).... 1,878 2,057
Unamortized loss on reacquired
debt................................ 11,363 18,938
$199,882 $269,484
H. 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
taxable income) is accounted for in accordance with the ratemaking
treatment of the applicable regulatory commissions. See Note 5,
"Income Tax Expense" for the components of income tax expense.
The tax effect of temporary differences, including timing differences
accrued under previously approved accounting standards, which give
rise to the accumulated deferred tax obligation is as follows:
At December 31, 1998 1997
(Thousands of Dollars)
Accelerated depreciation and
other plant-related differences..... $182,170 $159,251
Regulatory assets - income tax
gross up............................ 13,640 17,094
Other................................. 13,824 40,356
$209,634 $216,701
I. Recoverable Energy Costs
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 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 is currently recovering these costs through the
Seabrook Power Contracts. As of December 31, 1998, NAEC's total D&D
deferral was approximately $1.9 million.
J. Deferred Cost - Seabrook 1
Under the Rate Agreement, the plant costs of Seabrook were phased
into rates over a seven-year period beginning May 15, 1991. Total
costs deferred under the phase-in plan were approximately $288
million. This plan is in compliance with SFAS 92, "Regulated
Enterprises - Accounting for Phase-In Plans." These deferred costs
are being billed to PSNH by NAEC through the Seabrook Power Contracts
beginning December 1, 1997, and will be fully recovered from PSNH by
NAEC through the Seabrook Power Contracts beginning December 1, 1997,
and will be fully recovered from PSNH's customers by May 2001. See
Note 1F, "Summary of Significant Accounting Policies - Seabrook
Power Contracts," for terms of Seabrook 1's phase-in. See Note 7A,
"Commitments and Contingencies - Restructuring" for the possible
impacts of the NHPUC's decision related to industry restructuring.
K. Market Risk-Management Policies
NAEC utilizes market risk-management instruments to hedge well-
defined risks associated with variable interest rates. To qualify
for hedge treatment, the underlying hedged item must expose the
company to risks associated with market fluctuations and the market
risk-management instrument used must be designated as a hedge and
must reduce the company's exposure to market fluctuations throughout
the period.
Amounts receivable or payable under interest-rate management
instruments are accrued and offset against interest expense. For
further information, see Note 8, "Market Risk-Management."
2. NUCLEAR DECOMMISSIONING
The Seabrook 1 nuclear power plant has a service life that is expected to
end in the year 2026. Upon retirement, this unit must be decommissioned.
A current decommissioning study concluded that complete and immediate
dismantlement at retirement continues to be the most viable and economic
method of decommissioning Seabrook 1. Decommissioning studies are
reviewed and updated periodically to reflect changes in decommissioning
requirements, costs, technology and inflation.
NAEC's 35.98 percent ownership of the estimated costs of decommissioning
Seabrook 1, in year-end 1998 dollars, is $175.9 million. Seabrook 1
decommissioning costs will be increased annually by an escalation rate.
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 $4.7 million in 1998,
$4.5 million in 1997 and $3.5 million in 1996. Nuclear decommissioning,
as a cost of removal, is included in the accumulated provision for
depreciation on the Balance Sheets. At December 31, 1998 and 1997, the
balance in the accumulated reserve for depreciation amounted to $25.6
million and $21.1 million, respectively.
Under the terms of the Rate Agreement, PSNH is obligated to pay NAEC's
share of Seabrook 1'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.
Funding of the estimated decommissioning costs assumes escalated
collections for Seabrook 1 and after-tax earnings on the Seabrook
decommissioning fund of 6.5 percent.
As of December 31, 1998, NAEC (including payments made prior to the
Acquisition Date by PSNH) had paid approximately $25.6 million into
Seabrook 1's decommissioning financing fund. Earnings on the
decommissioning financing fund increase the decommissioning trust
balance and the accumulated reserve for depreciation. Unrealize
gains and losses associated with the decommissioning financing fund
also impact the balance of the trust and the accumulated reserve
for depreciation. The fair value of the amounts in the external
decommissioning trusts was $35.2 million as of December 31, 1998.
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 and the amounts
required to be recovered. PSNH attempts to recover sufficient amounts
through its allowed rates to cover NAEC's expected decommissioning costs.
Only the portion of currently estimated total decommissioning cost that
has been accepted by regulatory agencies is reflected in PSNH's rates.
Based on present estimates and assuming Seabrook 1 operates to the end of
its licensing period, NAEC expects that the decommissioning financing
fund will be substantially funded when Seabrook 1 is retired from
service.
3. SHORT-TERM DEBT
The amount of short-term borrowings that may be incurred by NAEC is
subject to periodic approval by either the SEC under the 1935 Act or by
its state regulator. Under the SEC restrictions, NAEC was authorized, as
of January 1, 1999, to incur short-term borrowings up to a maximum of $60
million.
Money Pool: Certain subsidiaries of NU, including NAEC, are members of
the Northeast Utilities System Money Pool (Pool). 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. 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. 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. At December 31, 1998 and 1997, NAEC had no borrowings and
$9.95 million, respectively, of borrowings outstanding from the Pool.
The interest rate on borrowings from the Pool at December 31, 1998 and
1997 was 5.8 percent, respectively.
Maturities of NAEC's short-term debt obligations were for periods of
three months or less.
4. LONG-TERM DEBT
Details of long-term debt outstanding are:
December 31,
1998 1997
(Thousands of Dollars)
First Mortgage Bonds:
9.05% Series A, due 2002............. $275,000 $295,000
Notes:
Variable - Rate Facility, due 2000... 200,000 200,000
Less: Amounts due within one year..... 70,000 20,000
Long-term debt, net............. $405,000 $475,000
Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at December 31, 1998 is $70 million for 1999, $270 million
for 2000, $70 million for 2001, $65 million for 2002 and no requirements
for the year 2003.
Market risk-management instruments with financial institutions
effectively fix the interest rate on NAEC's $200 million variable-rate
bank note at 7.823 percent. For more information on the interest-rate
management instruments, see Note 8, "Market Risk- Management."
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. Essentially all
of NAEC's utility plant is subject to the lien of its Indenture.
5. INCOME TAX EXPENSE
The components of the federal and state income tax provisions were
charged as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Current income taxes:
Federal................................ $15,206 $(11,889) $(8,570)
State.................................. 600 (309) 110
Total current........................ 15,806 (12,198) (8,460)
Deferred income taxes, net:
Federal................................ 4,032 21,528 14,884
State.................................. 1,978 1,121 865
Total deferred....................... 6,010 22,649 15,749
Total income tax expense............. $21,816 $10,451 $ 7,289
The components of total income tax expense are classified as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Income taxes charged to
operating expenses..................... $36,194 $14,845 $12,341
Other income taxes....................... (14,378) (4,394) (5,052)
Total income tax expense............... $21,816 $10,451 $ 7,289
Deferred income taxes are comprised of the tax effects of temporary
differences as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Depreciation............................. $ 21,828 $20,823 $12,730
Bond redemptions......................... (2,824) (2,351) (2,359)
Seabrook 1 deferred return............... (14,233) 3,338 5,438
Other.................................... 1,239 839 (60)
Deferred income taxes, net............. $ 6,010 $22,649 $15,749
A reconciliation between income tax expense and the expected tax expense
at the applicable statutory rate is as follows:
For the Years Ended December 31, 1998 1997 1996
(Thousands of Dollars)
Expected federal income tax
at 35 percent of
pretax income.......................... $17,959 $14,141 $13,776
Tax effect of differences:
Amortization of regulatory
assets............................... 7,077 (319) -
Depreciation........................... 949 (1,049) (1,343)
Deferred Seabrook 1 return............. (2,356) (2,522) (2,695)
State income taxes,
net of federal benefit............... 1,657 718 634
Allocation of Parent
Company's loss....................... (3,874) (615) (578)
Sale of Seabrook 2 steam
generator.............................. - - (2,516)
Other, net............................... 404 97 11
Total income tax expense................. $21,816 $10,451 $ 7,289
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 Rate Agreement, it began accruing a deferred
return on the unphased-in portion of its Seabrook 1 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 transferred the deferred return to NAEC, it realized,
for income tax purposes, a gain that is deferred under the consolidated
income tax rules. Beginning December 1, 1997, this gain is being
restored for income tax purposes as the deferred return of $50.9 million,
and the associated income taxes of $33.2 million, are collected by NAEC
through the Seabrook Power Contracts. As NAEC recovers the $33.2 million
in years eight through ten of the Rate Agreement, it will be obligated to
make corresponding payments to PSNH.
See Note 1F, "Seabrook Power Contracts" for further information on the
phase-in of the Seabrook power plant and see Note 7A, "Commitments and
Contingencies - Restructuring" for the possible impacts on NAEC from the
NHPUC's decision related to industry restructuring.
7. COMMITMENTS AND CONTINGENCIES
A. Restructuring
New Hampshire: In 1996, New Hampshire enacted legislation requiring a
competitive electric industry beginning in 1998. In February 1997,
the NHPUC issued its restructuring order, which would have forced
PSNH and NAEC to write off all of their regulatory assets, and
possibly to seek protection under Chapter 11 of the bankruptcy laws.
The amount of potential write-off which would have been triggered by
the order is currently estimated to be in excess of $400 million,
after taxes.
Following the issuance of these orders, PSNH immediately sought
declaratory and injunctive relief on various grounds in federal
district court and has received a preliminary injunction that freezes
implementation of the NHPUC's restructuring orders. Restructuring
in New Hampshire has resulted in numerous subsequent proceedings
within the federal and state legal systems.
As the court proceedings are ongoing, PSNH continues to be involved
in settlement discussions with representatives from the state of New
Hampshire. PSNH hopes to reach a settlement, which would include,
among other things, recovery of regulatory assets and stranded
costs, rate reductions, an auction of PSNH's generating units and
securitization of PSNH's stranded costs. If a settlement is not
reached a trial is expected to begin mid to late 1999.
As a result of the NHPUC decision and the potential consequences
discussed above, the reports of our auditors on the individual
financial statements of PSNH and NAEC contain explanatory paragraphs.
Those explanatory paragraphs indicate that a substantial doubt exists
currently about the ability of PSNH and NAEC to continue as going
concerns.
Management believes that PSNH is entitled to full recovery of its
prudently incurred costs, including regulatory assets and other
stranded costs (such as its obligations to NAEC under the Seabrook
Power Contracts). It bases this belief both on the general nature of
public utility industry cost-of-service based regulation and the
specific circumstances of the resolution of PSNH's previous
bankruptcy proceedings and its acquisition by NU, including the
recoveries provided by the Rate Agreement and related agreements.
B. Environmental Matters
NAEC is subject to regulation by federal, state and local authorities
with respect to air and water quality, the handling and disposal of
toxic substances and hazardous and solid wastes, and the handling and
use of chemical products. NAESCO, on behalf of NAEC and the other
Seabrook joint owners, has an active environmental auditing and
training program and believes that it is in substantial compliance
with current environmental laws and regulations. However, the NU
system is subject to certain pending enforcement actions and
governmental investigations in the environmental area. Management
cannot predict the outcome of these enforcement actions and
investigations.
Environmental requirements could hinder future construction. 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. The cumulative long-term cost
impact of increasingly stringent environmental requirements cannot
be estimated accurately.
NAEC cannot estimate the potential liability for future claims,
including environmental remediation costs, that may be brought
against it. However, considering known facts, 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.
C. Spent Nuclear Fuel Disposal Costs
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. The DOE is responsible for the
selection and development of repositories for, and the disposal of,
spent nuclear fuel and high-level radioactive waste. Fees for
nuclear fuel burned on or after April 7, 1983, are billed currently
to customers and paid to the DOE on a quarterly basis.
The DOE was originally scheduled to begin accepting delivery of spent
fuel in 1998. However, delays in identifying a permanent storage
site have continually postponed plans for the DOE's long-term storage
and disposal site. Extended delays or a default by the DOE could
lead to consideration of costly alternatives. The company has
primary responsibility for the interim storage of its spent nuclear
fuel. Current capability to store spent fuel at Seabrook 1 is
expected to have spent fuel storage capacity until at least 2010.
Meeting spent fuel storage requirements beyond this period could
require new and separate storage facilities, the costs for which have
not been determined.
In November 1997, the U.S. Court of Appeals for the D.C. Circuit
ruled that the lack of an interim storage facility does not excuse
the DOE from meeting its contractual obligation to begin accepting
spent nuclear fuel no later than January 31, 1998. The 1997 ruling
by the appeals court said, however, that the 1982 federal law could
not require the DOE to accept waste when it did not have a suitable
storage facility. The court directed the plaintiffs to pursue relief
under the terms of their contracts with the DOE. Based on this
ruling, since the DOE did not take the spent nuclear fuel as
scheduled, it may have to pay contract damages.
In May 1998, the same court denied petitions from 60 states and state
agencies, collectively, and 41 utilities, including the company,
asking the court to compel the DOE to submit a program, beginning
immediately, for disposing of spent nuclear fuel. The petitions were
filed after the DOE defaulted on its January 31, 1998 obligation to
begin accepting the fuel. The court directed the company and other
plaintiffs to pursue relief under the terms of their contracts with
the DOE.
In a petition filed in August 1998, the court's May 1998 decision was
appealed to the U.S. Supreme Court. In November 1998, the Supreme
Court declined to review the lower court ruling that said utilities
should go to court and seek monetary damages from the DOE. The
ultimate outcome of this legal proceeding is uncertain at this time.
D. Nuclear Insurance Contingencies
Under certain circumstances, in the event of a nuclear incident at
one of the nuclear facilities in the country covered by the federal
government's third-party liability indemnification program, an owner
of a nuclear unit could be assessed in proportion to its ownership
interest in each of its nuclear units up to $83.9 million. Payments
of this assessment would be limited to, in proportion to its
ownership interest in each of its nuclear units, $10.0 million in
any one year per nuclear incident. In addition, if the sum of all
claims and costs from any one nuclear incident exceeds the maximum
amount of financial protection, the owner would be subject to an
additional five percent or $4.2 million, in proportion to its
ownership interests in each of its nuclear units. Based upon its
ownership interest in Seabrook 1, NAEC's maximum liability, including
any additional assessments, would be $31.3 million per incident, of
which payments would be limited to $3.6 million per year.
Insurance has been purchased to cover the primary cost of repair,
replacement or decontamination of utility property resulting from
insured occurrences at Seabrook station. NAEC is subject to
retroactive assessments if losses exceed the accumulated funds
available to the insurer. The maximum potential assessment against
NAEC with respect to losses arising during the current policy year
is approximately $2.0 million.
Insurance has been purchased to cover certain extra costs of repair,
replacement or decontamination or premature decommissioning of
utility property resulting from insured occurrences. NAEC is subject
to retroactive assessments if losses exceed the accumulated funds
available to the insurer. The maximum potential assessment against
NAEC with respect to losses arising during current policy years is
approximately $3.2 million. The cost of a nuclear incident could
exceed available insurance proceeds.
Insurance has been purchased aggregating $200 million on an industry
basis for coverage of worker claims.
Under the terms of the Seabrook Power Contracts, any nuclear
insurance assessments described above would be passed on to PSNH as
a "cost of service."
E. Seabrook 1 Construction Program
The construction program for Seabrook 1 is subject to periodic review
and revision by management. NAEC currently forecasts construction
expenditures for its share of Seabrook 1 to be $27.3 million for the
years 1999-2003, including approximately $8.2 million for 1999. In
addition, NAEC estimates that its share of Seabrook 1 nuclear fuel
requirements will be approximately $53.7 million for the years 1999-
2003, including $1.6 million for 1999.
8. MARKET RISK-MANAGEMENT
NAEC uses swap instruments with financial institutions to hedge against
interest-rate risk associated with its $200 million variable rate bank
note. The interest-rate management instruments employed eliminate the
exposure associated with rising interest rates, and effectively fix the
interest rate for this borrowing arrangement. Under the agreements, NAEC
exchanges quarterly payments based on a differential between a fixed
contractual interest rate and the three-month LIBOR rate at a given time.
As of December 31, 1998, NAEC had outstanding agreements with a total
notional value of $200 million and a negative mark-to-market position of
approximately $2.3 million.
Credit Risk: These agreements have been made with various financial
institutions, each of which is rated "A3" or better by Moody's rating
group. NAEC will be exposed to credit risk on its respective market
risk-management instruments if the counterparties fail to perform their
obligations. However, management anticipates that the counterparties will
be able to fully satisfy their obligations under the agreements.
9. 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 and cash equivalents: The carrying amounts approximate fair value
due to the short-term nature of cash and cash equivalents.
Nuclear decommissioning trust: The investments held in NAEC's nuclear
decommissioning fund were adjusted to market by approximately $2.3
million as of December 31, 1998 and by approximately $1.5 million as
of December 31, 1997 with corresponding offsets to the accumulated
provision for depreciation. The amounts adjusted in 1998 and 1997
represent cumulative gross unrealized holding gains. The cumulative
gross unrealized holding losses were immaterial for 1998 and 1997.
Long-term debt: The fair value of NAEC's fixed-rate security is based
upon the quoted market price for that issue or similar issue. The
adjustable rate security is assumed to have a fair value equal to its
carrying value.
The carrying amounts of NAEC's financial instruments and the estimated
fair values are as follows:
Carrying Fair
At December 31, 1998 Amount Value
(Thousands of Dollars)
First mortgage bonds................. $275,000 $284,543
Other long-term debt................. $200,000 $200,000
Carrying Fair
At December 31, 1997 Amount Value
(Thousands of Dollars)
First mortgage bonds................. $295,000 $301,599
Other long-term debt................. $200,000 $200,000
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.
10. NUCLEAR PERFORMANCE
For information on nuclear performance related to the Seabrook nuclear
power plant, see the MD&A.
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, 1998 and 1997, and the related
statements of income, common stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 7A, on
February 28, 1997, the State of New Hampshire Public Utilities Commission
(the NHPUC) issued an order outlining its final plan to restructure the
electric utility industry. The final plan announced a departure from cost-
based ratemaking for Public Service Company of New Hampshire (PSNH). PSNH
is the sole customer of the company. The final plan, if implemented, would
require PSNH to discontinue the application of Financial Accounting Standard
No. 71, "Accounting for the Effects of Certain Types of Regulation," (FAS
71). The effects of such a discontinuation would cause PSNH and the company
to be in technical default under their current financial covenants, which
would, if not waived or renegotiated, give rise to the rights of lenders to
accelerate the repayment of approximately $516 million of PSNH's indebtedness
and approximately $475 million of the company's indebtedness. These conditions
raise substantial doubt about the company's ability to continue as a going
concern. The financial statements referred to above do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 23, 1999
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 the company's financial statements and notes to
financial statements.
FINANCIAL CONDITION
Earnings Overview
NAEC's net income for 1998 was essentially unchanged. NAEC had net income of
approximately $29 million in 1998 compared to approximately $30 million in
1997.
The company's only assets are Seabrook and other Seabrook-related assets and
its only source of revenues are the power contracts between PSNH and the
company. PSNH's obligations under the Power Contracts are solely its own and
have not been guaranteed by NU. The Power Contracts contain no provisions
entitling PSNH to terminate its obligations. If, however, PSNH were to fail
to perform its obligation under the Power Contracts, the company would be
required to find other purchasers for Seabrook power.
Liquidity and Capital Resources
Net cash flows from operations totaled approximately $129 million in 1998,
up sharply from $56 million in 1997. The increase resulted from the
recovery of the Seabrook deferred nuclear costs beginning in December 1997.
Approximately $54 million of net cash flow was used for investment activities,
including construction expenditures, investments in the NU system money pool
and investments in nuclear decommissioning trusts, compared with $18 million
in 1997. Another $45 million was used to pay common dividends, compared
with $25 million in 1997. The balance of cash used for financing activities,
approximately $30 million, was used to pay off long-term and short-term debt.
In 1997 net debt and preferred stock levels were reduced by only $13 million.
PSNH Restructuring
Restructuring efforts in New Hampshire have resulted in numerous proceedings
within the federal and state court systems. The New Hampshire Public
Utilities Commission's (NHPUC) 1997 restructuring orders have been prevented
from being implemented as a result of various court actions pending the
outcome of a full trial in the U.S. District Court. The 1997 orders would
have forced PSNH and NAEC to write off substantially all of their regulatory
assets. A trial is expected to begin in mid to late 1999.
In January 1999, the NHPUC issued an order stating that it intends to reopen
restructuring hearings. PSNH has requested the federal court to enforce its
preliminary injunction barring the NHPUC from proceeding with restructuring
efforts pending the court's decision on the merits after trial. The NHPUC
has agreed to delay this new proceeding until the federal court has had an
opportunity to rule on PSNH's enforcement motion.
The litigation has caused New Hampshire to fall behind several other
Northeast states in implementing industry restructuring. PSNH hopes to
reach a settlement that would include, among other things, substantial rate
reductions, customer choice, an auction of PSNH's generating units and
securitization of PSNH's stranded costs. PSNH believes that a negotiated
resolution of outstanding restructuring and rate issues would be in the best
interests of the state, PSNH and customers.
Seabrook Performance
Seabrook operated at a capacity factor of 82.8 percent through December 1998,
compared to 78.3 percent for the same period in 1997. The unit operated well,
except for two unplanned outages, one in late 1997 through early 1998 and the
other in mid-1998, to repair control building's air conditioning system.
Seabrook is scheduled to begin a refueling outage in March 1999.
Seabrook Decommissioning
NAEC's estimated cost to decommission its share of Seabrook is approximately
$175.9 million in year-end 1998 dollars. These costs are being recognized
over the life of the unit with a portion currently being recovered through
PSNH's rates. 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 license. As of December 31, 1998, the market value of the
contributions already made to the decommissioning trusts, including their
investment returns, was approximately $35.2 million.
See the "Notes to Consolidated Financial Statements," Note 2, for further
information on nuclear decommissioning.
Year 2000 Issue
The NU system has established an action plan by which identified processes
must be completed by certain dates in order to ensure its operating systems,
including nuclear systems, and reporting systems are able to properly
recognize the year 2000. This action plan has three phases: the inventory
phase, the detailed assessment phase and the remediation phase. The inventory
phase, which has been completed, identified operating and reporting systems
which may need to be fixed. The detailed assessment phase, which has been
completed, determined exactly what needed to be done in order to ensure that
the systems identified during the inventory phase are able to recognize
properly and process the year 2000. The final phase is the remediation phase.
By the end of this phase, mission critical systems (systems that are
related to safety, keeping the lights on, regulatory requirements, and other
systems that could have a significant financial impact) will be year 2000
ready; that is, these systems will perform their business functions properly
in the year 2000. This phase includes making modifications, testing and
validating changes and verifying that the year 2000 issues have been
resolved.
Although the identification and detailed assessment phases are complete,
newly identified items, such as new software purchases, are added to the
inventory as they are identified and are subject to detailed assessment
and, if needed, remediation. NU system purchasing policies require newly
purchased software and devices to be year 2000 compliant. None of these
newly identified items are expected to materially impact completion of
the remediation phase.
The NU system has identified and inventoried 2,497 computer systems
(software) and over 24,000 devices (hardware) broken down into 3,450 device
types containing date-sensitive computer chips. As of December 31, 1998, 77
percent of the software systems and 81 percent of the hardware at Seabrook
were year 2000 ready.
The remaining items are in various stages of modification or testing.
Management anticipates the remediation phase for mission critical systems
to be completed by mid-1999.
In addition, the NU system has been contacting its key suppliers and
business partners to determine their ability to manage the year 2000
problem successfully. The NU system is adjusting its inventories, working
with suppliers to provide backup inventories, and changing suppliers as
needed to provide for an adequate supply of materials needed to conduct
business into the year 2000.
The NU system has utilized both internal and external resources to identify,
assess, test and reprogram or replace the computer systems for year 2000
readiness. The current projected total cost of the Year 2000 Program to the
NU system is $30 million. The total estimated remaining cost is $18 million,
which is being funded through operating cash flows. The majority of these
costs will be expensed as incurred in 1999. Since 1996, the NU system has
incurred and expensed approximately $12 million related to Year 2000
readiness efforts. Total expenditures related to the year 2000 are not
expected to have a material effect on the operations or financial condition
of the NU system.
The costs of the project and the date on which the NU system plans to
complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third-
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those plans. If the NU system's remediation plans or
those of third parties are not successful, there could be a significant
disruption of the NU system's operations. The most likely worst case
scenario is a limited number of localized interruptions to electric service
which can be restored within a few hours. As a precautionary measure, NU is
formulating contingency plans that will evaluate alternatives that could be
implemented if our remediation efforts are not successful. The contingency
plans are being developed by enhancing existing emergency operating
procedures to include year 2000 issues. In addition, the NU system plans
to have staff available to respond to any year 2000 situations that might
arise. The contingency plan is expected to be available by July 30, 1999.
The NU system is committed to assuring that adequate resources are available
in order to implement any changes necessary for its nuclear and other
operations to be compatible with the new millennium.
Risk-Management Instruments
NAEC uses swaps to manage the market risk exposures associated with changes
in variable interest rates. NAEC uses these instruments to reduce risk by
essentially creating offsetting market exposures. Based on the derivative
instruments which currently are being utilized by NAEC to hedge some of its
interest rate risks, there will be an impact on earnings upon adoption of
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, which management cannot
estimate at this time. For more information on NU's use of risk-management
instruments, see the "Notes to Consolidated Financial Statements," Notes 1K
and 8.
NEAC holds a variable-rate long-term note, exposing the company to interest
rate risk. In order to hedge some of this risk, interest rate risk-
management instruments have been entered into on NAEC's $200 million
variable-rate note, effectively fixing the interest on this note at 7.823
percent. As of December 31, 1998, NAEC had outstanding agreements with a
total notional value of approximately $200 million and a negative mark-to-
market position of approximately $2.3 million.
Environmental Matters
NAEC is potentially liable for environmental cleanup costs at a number
of sites inside and outside of its service territory. To date, the future
estimated environmental remediation liability has not been material with
respect to the earnings or financial position of the company. See the "Notes
to Consolidated Financial Statements," Note 7B, for further information on
environmental matters.
RESULTS OF OPERATIONS
Income Statement Variances
Increase/(Decrease)
Millions of Dollars
1998 over/(under)1997 1997 over/(under)1996
Amount Percent Amount Percent
Operating revenues $84 44% $30 19%
Other operation and
maintenance expense $(12) (20%) $20 45%
Amortization of Regulatory
Assets, net $ 79 (a) $ 6 (a)
Federal and State Income Taxes $ 11 (a) $ 3 43%
Other, net $ (8) (a) $(2) (a)
(a) Percent greater than 100.
Operating Revenues
Operating revenues represent amounts billed to PSNH under the terms of the
Power Contracts and billings to PSNH for decommissioning expense.
Operating revenues increased in 1998 primarily due to amounts billed to PSNH
for the amortization of the Seabrook deferred return which began in December
1997.
Operating revenues increased in 1997 primarily due to higher operation and
maintenance expenses and the increased return associated with the phase-in of
the final 15 percent of the Seabrook plant investment in May, 1996.
Other Operation and Maintenance Expense
Other operation and maintenance expenses decreased in 1998 primarily due to
lower costs associated with Seabrook outages in 1998.
Other operation and maintenance expenses increased in 1997 primarily due to
higher costs associated with a planned refueling and unplanned Seabrook
outages in 1997.
Amortization of Regulatory Assets, net
Amortization of Regulatory Assets, net increased in 1998 and 1997 primarily
due to the amortization of the Seabrook deferred return which began in
December 1997.
Federal and State Income Taxes
Federal and State income taxes increased in 1998 primarily due to higher
taxable income.
Federal and State income taxes increased in 1997 primarily due to deferred
tax benefits in 1996 associated with proceeds from the sale of the Seabrook
Unit 2 steam generators.
Other, net
Other, net income decreased in 1998 primarily due to the amortization of the
taxes associated with the Seabrook-phase-in costs which began in December
1997.
Other, net income decreased in 1997 primarily due to lower income from
temporary cash investments and the amortization of the Seabrook deferred
charges associated with the taxes on the purchased return.
North Atlantic Energy Corporation
SELECTED FINANCIAL DATA (a) 1998 1997 1996 1995 1994
(Thousands of Dollars)
Operating Revenues......... $276,685 $ 192,381 $ 162,152 $ 157,183 $145,751
Operating Income........... $ 54,057 $ 57,061 $ 54,889 $ 51,394 $ 42,950
Net Income................. $ 29,494 $ 29,953 $ 32,072 $ 24,441 $ 30,535
Cash Dividends on
Common Stock............. $ 45,000 $ 25,000 $ 38,000 $ 24,000 $ 10,000
Total Assets............... $945,153 $1,014,639 $1,017,388 $1,014,649 $963,579
Long-Term Debt (b)......... $475,000 $ 495,000 $ 515,000 $ 560,000 $560,000
STATISTICS (Unaudited) 1998 1997 1996 1995 1994
Gross Electric Utility
Plant at December 31,
(Thousands of Dollars)..... $784,113 $ 811,140 $ 816,446 $ 806,892 $792,880
kWh Sales (Millions) for
the twelve month period
ending December 31,...... 3,018 2,859 3,542 3,016 2,229
STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) (Thousands of Dollars)
Quarter Ended (a)
1998 March 31 June 30 Sept. 30 Dec. 31
Operating Revenues......... $68,169 $69,627 $69,087 $69,802
Operating Income........... $13,648 $13,365 $13,159 $13,885
Net Income................. $ 6,909 $ 8,303 $ 7,170 $ 7,112
1997
Operating Revenues......... $41,976 $50,128 $45,943 $54,334
Operating Income........... $14,406 $14,183 $14,124 $14,348
Net Income................. $ 7,240 $ 6,958 $ 8,086 $ 7,669
(a) Reclassifications of prior data have been made to conform with the current
presentation.
(b) Includes portion due within one year.