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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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, 1995
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, 1995 and
December 31, 1994 2
Statements of Income - Three and Nine
Months Ended September 30, 1995 and 1994 4
Statements of Cash Flows - Nine Months
Ended September 30, 1995 and 1994 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1995 1994
------------- -------------
(Thousands of Dollars)
ASSETS
- ------
Utility Plant, at original cost:
Electric................................................ $ 770,960 $ 769,379
Less: Accumulated provision for depreciation......... 93,525 75,176
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677,435 694,203
Construction work in progress........................... 5,456 3,704
Nuclear fuel, net....................................... 17,884 19,797
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Total net utility plant............................. 700,775 717,704
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Other Property and Investments:
Nuclear decommissioning trusts, at market............... 14,042 10,342
Other, at cost.......................................... 222 222
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14,264 10,564
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Current Assets:
Cash and special deposits............................... 24,864 8,166
Notes receivable from affiliated companies.............. 2,250 28,750
Receivables from affiliated companies................... 13,285 13,983
Materials and supplies, at average cost................. 11,457 10,036
Prepayments and other................................... 2,532 2,149
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54,388 63,084
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Deferred Charges:
Regulatory assets:
Deferred costs--Seabrook............................... 154,666 131,513
Income taxes, net...................................... 39,823 30,461
Recoverable energy costs............................... 4,414 4,624
Unamortized debt expense................................ 4,349 4,834
Other................................................... 598 795
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203,850 172,227
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Total Assets........................................ $ 973,277 $ 963,579
============= =============
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1995 1994
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(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
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Capitalization:
Common stock--$1 par value. Authorized
and outstanding 1,000 shares.......................... $ 1 $ 1
Capital surplus, paid in................................ 160,999 160,999
Retained earnings....................................... 58,931 59,236
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Total common stockholder's equity.............. 219,931 220,236
Long-term debt.......................................... 520,000 540,000
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Total capitalization........................... 739,931 760,236
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Current Liabilities:
Long-term debt--current portion......................... 20,000 20,000
Accounts payable........................................ 120 4,073
Accounts payable to affiliated companies................ 148 38
Accrued interest........................................ 17,911 18,288
Accrued taxes........................................... 3,654 1,439
Deferred DOE obligation--current portion................ 845 845
Other................................................... 17 329
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42,695 45,012
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Deferred Credits:
Accumulated deferred income taxes....................... 153,593 120,250
Deferred obligation to affiliated company............... 33,284 33,284
Deferred DOE obligation................................. 3,552 3,553
Deferred Seabrook tax settlement obligation............. - 1,022
Other................................................... 222 222
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190,651 158,331
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Commitments and Contingencies (Note 4)<F4>
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Total Capitalization and Liabilities........... $ 973,277 $ 963,579
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See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Thousands of Dollars)
Operating Revenues................................. $ 39,696 $ 37,603 $ 110,042 $ 109,825
---------- ---------- ---------- ----------
Operating Expenses:
Operation --
Fuel.......................................... 3,450 2,152 9,577 3,828
Other......................................... 8,529 8,643 24,467 28,702
Maintenance...................................... 2,276 4,019 5,601 14,188
Depreciation..................................... 5,865 5,743 17,454 17,049
Federal and state income taxes................... 2,743 2,201 7,423 5,829
Taxes other than income taxes.................... 3,038 2,994 7,999 9,066
---------- ---------- ---------- ----------
Total operating expenses................... 25,901 25,752 72,521 78,662
---------- ---------- ---------- ----------
Operating Income................................... 13,795 11,851 37,521 31,163
---------- ---------- ---------- ----------
Other Income:
Deferred Seabrook return--other funds............ 2,277 3,799 7,068 9,859
Other, net....................................... 411 104 1,276 491
Income taxes--credit............................. 407 903 2,755 2,619
---------- ---------- ---------- ----------
Other income, net.......................... 3,095 4,806 11,099 12,969
---------- ---------- ---------- ----------
Income before interest charges............. 16,890 16,657 48,620 44,132
---------- ---------- ---------- ----------
Interest Charges:
Interest on long-term debt....................... 15,553 16,006 47,413 48,017
Other interest................................... (166) (110) (403) (189)
Deferred Seabrook return--borrowed funds......... (5,411) (7,400) (16,085) (25,225)
---------- ---------- ---------- ----------
Interest charges, net...................... 9,976 8,496 30,925 22,603
---------- ---------- ---------- ----------
Net Income......................................... $ 6,914 $ 8,161 $ 17,695 $ 21,529
========== ========== ========== ==========
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1995 1994
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(Thousands of Dollars)
Operating Activities:
Net Income................................................ $ 17,695 $ 21,529
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 17,454 17,049
Deferred income taxes and investment tax credits, net... 23,980 26,301
Deferred return - Seabrook.............................. (23,153) (35,084)
Recoverable energy costs, net of amortization........... 211 -
Other sources of cash................................... 8,193 3,791
Other uses of cash...................................... (1,024) (1,811)
Changes in working capital:
Receivables............................................. 698 9,750
Materials and supplies.................................. (1,421) (2,346)
Accounts payable........................................ (3,843) 5,812
Accrued taxes........................................... 2,215 4,761
Other working capital (excludes cash)................... (1,072) 2,255
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Net cash flows from operating activities.................... 39,933 52,007
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Financing Activities:
Reacquisitions and retirements of long-term debt.......... (20,000) -
Cash dividends on common stock............................ (18,000) (5,000)
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Net cash flows used for financing activities................ (38,000) (5,000)
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Investment Activities:
Investment in plant:
Electric utility plant.................................. (3,830) (11,672)
Nuclear fuel............................................ (5,079) (742)
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Net cash flows used for investments in plant.............. (8,909) (12,414)
NU System Money Pool...................................... 26,500 (36,750)
Other investment activities, net.......................... (2,826) (2,697)
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Net cash flows from (used for) investments.................. 14,765 (51,861)
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Net Increase (Decrease) In Cash For The Period.............. 16,698 (4,854)
Cash and special deposits - beginning of period............. 8,166 8,404
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Cash and special deposits - end of period................... $ 24,864 $ 3,550
=========== ===========
See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. General
The accompanying unaudited financial statements should be read in conjunction
with the Annual Report of North Atlantic Energy Corporation (the company or
NAEC), a wholly owned subsidiary of Northeast Utilities (NU), on Form 10-K for
the year ended December 31, 1994 (1994 Form 10-K). In the opinion of the
company, the accompanying financial statements contain all adjustments necessary
to present fairly the financial position as of September 30, 1995, the results
of operations for the three and nine months ended September 30, 1995 and 1994,
and the statements of cash flows for the nine months ended September 30, 1995
and 1994. The results of operations for the three and nine months ended
September 30, 1995 and 1994 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.
2. Accounting for Long-Lived Assets
The company's accounting policies 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
Statement of Financial Accounting Standards No. 71, "Accounting for Certain
Types of Regulation" (SFAS 71). If any portion of the company's operations was
no longer subject to the provisions of SFAS 71, as a result of a change in the
cost-of-service based regulatory structure or the effects of competition, the
company would be required to write off related regulatory assets and
liabilities. The company would also be required to determine any impairment to
other assets and write down these assets to their fair value.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS
121), issued in March 1995 and effective January 1, 1996, establishes accounting
standards for the impairment of long-lived assets. SFAS 121 requires that
regulatory assets that are no longer probable of recovery through future
revenues be charged to earnings. Based upon the current regulatory environment
in the company's operating service area, it is not expected that the adoption of
SFAS 121 would 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.
3. Capitalization
In December 1995, NAEC plans to complete a $225 million variable rate note
facility with a group of banks. NAEC has called the entire $205 million
principal amount of its 15.23 percent notes, due 2000, in early November, with
funding in early December from the proceeds of the variable rate note facility.
An interest rate swap is also planned to reduce the variability in the interest
rate on the new notes. The refinancing is expected to save approximately
$3 million annually over the next five years.
4. Commitments and Contingencies
Construction Program: For information regarding NAEC's construction program,
see the Notes to Financial Statements in NAEC's 1994 Form 10-K.
Environmental Matters: For information regarding environmental matters, see the
Notes to Financial Statements in NAEC's 1994 Form 10-K.
Nuclear Insurance Contingencies: For information regarding nuclear insurance
contingencies, see the Notes to Financial Statements in NAEC's 1994 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 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, footnotes, and Part II, Other Information, of this report and
Management's Discussion and Analysis in the 1994 Form 10-K and the First Quarter
and Second Quarter 1995 Form 10-Qs.
FINANCIAL CONDITION
Overview
The Company and Public Service Company of New Hampshire (PSNH) 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 its 35.6 percent share of the Seabrook 1 nuclear power
plant (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.
For the three-month and nine-month periods ended September 30, 1995 net income
decreased by approximately $1 million and $4 million respectively. The decrease
in net income for the nine-month period
is due primarily to a one-time adjustment to correct the deferred
Seabrook return balance.
Workforce Reductions
In July 1995, NU announced a program aimed at reducing the nuclear
organization's total workforce by approximately 250 employees. The NU system-
wide estimated pre-tax cost of the early retirement that was charged to expense
in the third quarter was approximately $7 million. This estimate was based on
121 eligible employees accepting the early retirement. The balance of the
workforce reduction will be achieved through attrition and layoffs. The
estimated cost to the NU system of the early retirements and layoffs could be in
the range of $2 million to $3 million.
Rate Matters
As of September 30, 1995, NAEC has included in rates $595 million of its initial
Seabrook investment. The remaining investment ($105 million) will be phased
into rates in May 1996. As of September 30, 1995, the deferred return
associated with the amount of investment that has not been included in rates was
approximately $206 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 the Contract over
the period December 1997 through May 2001.
Seabrook Performance
Seabrook operated at a capacity factor of approximately 93 percent for the nine
months ended September 30, 1995, as compared to approximately 49 percent for the
same period in 1994. The lower 1994 capacity factor was primarily the result of
a 23-day shutdown for an unplanned outage that began in January and a 114-day
refueling and maintenance outage that began in April. In November 1995,
Seabrook began a 50 day refueling and maintenance outage.
Liquidity and Capital Resources
Cash provided from operations decreased approximately $12 million for the first
nine months in 1995, as compared with the same period in 1994, primarily due to
a decrease in working capital. Cash flows used for financing activities were
approximately $33 million higher in 1995 primarily due to the $20 million
sinking fund repayment of NAEC's Series A Bonds beginning in 1995 and the
payment of cash dividends on common stock in 1995. Cash used for investments
was approximately $7 million lower in 1995 primarily due lower short-term loans
to other NU system companies under the NU system Money Pool.
The company's construction program expenditures amounted to approximately $4
million for the first nine months of 1995, as compared to approximately $12
million for 1994. The decrease 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.
The company has ongoing cash requirements for Seabrook-related capital
expenditures, nuclear fuel expenditures, interest and operating expenses. 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 September 30, 1995, there
were no borrowings outstanding under the Money Pool.
A substantial portion of the company's cash flow consists 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 next few
years when the company is expected to incur losses for tax purposes due to
accelerated tax depreciation of Seabrook. 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.
On October 18, 1995, Moody's Investors Service lowered its ratings of PSNH and
NAEC securities, bringing the rating for PSNH's First Mortgage Bonds below
investment grade. Standard and Poor's had previously downgraded PSNH and NAEC
securities below investment grade. With both of the major nationally recognized
securities rating organizations that rate PSNH and NAEC securities rating them
below investment grade, PSNH's and NAEC's borrowing costs have been adversely
affected and the future availability and cost of funds for those companies could
be adversely affected.
RESULTS OF OPERATIONS
Comparison of Third Quarter of 1995 with the Third Quarter
- ----------------------------------------------------------
of 1994
- -------
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 in the third quarter of 1995 primarily due to
the increased return associated with the phase-in of additional Seabrook plant
in May 1995.
Deferred Seabrook return - other and borrowed funds decreased approximately $4
million in the third quarter of 1995, as compared with 1994, primarily because
additional Seabrook investment was phased into rates in May 1995.
Comparison of First Nine Months of 1995 with the First Nine Months
- ------------------------------------------------------------------
of 1994
- -------
Fuel expense increased approximately $6 million for the first nine months of
1995 as a result of better performance of Seabrook.
Operation and maintenance expenses decreased approximately $13 million in the
first nine months of 1995 primarily due costs associated with the Seabrook
outage in 1994.
Deferred Seabrook return - other and borrowed funds decreased approximately $12
million in the first nine months of 1995
primarily because additional Seabrook investment was phased into rates in May
1994 and 1995 and a one-time adjustment of approximately $5 million was made in
June 1995 to correct the deferred Seabrook return balance.
PART II. Other Information
Item 1. Legal Proceedings
1. On or about November 1, 1995, the New Hampshire Office of Consumer Advocate
(OCA) and the Campaign for Ratepayers Rights filed suit in Superior Court
against the NHPUC seeking a declaratory ruling that special contracts entered
into by and between PSNH and certain retail customers are prohibited by the 1989
rate agreement between PSNH and the State of New Hampshire (Rate Agreement). The
petition is based on an alleged inconsistency between the New Hampshire statute
that allows special contracts agreed to by a utility and a customer when deemed
appropriate by the NHPUC and the legislation accepting the Rate Agreement
wherein PSNH received protection against NHPUC actions fixing rates other than
in the manner agreed upon in the Rate Agreement. The court petition alleges
that the special contracts also constitute a breach of the Rate Agreement by
PSNH, thereby stopping PSNH from claiming benefits under the Rate Agreement.
The New Hampshire Attorney General will represent the NHPUC in this action.
While PSNH believes this proceeding should be dismissed on procedural grounds,
it cannot predict the outcome of this proceeding or its ultimate effect on PSNH
or NAEC at this time.
Item 5. Other Information
1. On October 9, 1995, the NHPUC issued preliminary guidelines for an Electric
Retail Competition Pilot Program (Program). The Program is proposed to be a
three-year retail wheeling experiment under which a randomly selected group of
retail users will be free to purchase up to 60 MW of power from other suppliers
besides their franchised local utility, of which 44 MW of the prospective loss
is allocated to PSNH. This amount of power equals three percent of PSNH's peak
load. If the program were implemented as proposed, participants would be
responsible for arranging their own electricity supply and would be free to
negotiate the terms for such supply with any potential supplier. Under the
proposed guidelines, utilities would not be allowed to charge exit or re-entry
fees to customers who go off and on their systems, but recovery of stranded
costs resulting from the Program would be split equally between utility
investors and participating customers. Finalization of the guidelines is
expected in December 1995, subject to further comments and hearings.
For additional information on this matter, see "Other Information" in NAEC's
1995 Form 10-Q for the quarter ended June 30, 1995.
2. On September 1, 1995, PSNH filed a petition with the New Hampshire Supreme
Court, which was accepted on November 2, 1995, appealing the NHPUC's decision in
the proceeding involving Freedom Electric Power Company, now known as Freedom
Energy Company, LLC (Freedom), that PSNH's franchise was not exclusive as a
matter of law.
For additional information on this matter, see "Other Information" in NAEC's
1995 Form 10-Q for the quarter ended June 30, 1995.
3. New Hampshire's Limited Electrical Energy Producers Act (LEEPA) purportedly
allows a qualifying generator of not greater than 5 MW capacity to sell its
output to up to three retail customers. LEEPA also provides that the local
franchised utility could be ordered to wheel the energy to these retail
customers. On October 3, 1995, the NHPUC issued an order stating that the LEEPA
retail wheeling provision was not pre-empted by federal law and that it had
authority to order such retail wheeling service if it was found to be in the
public good. PSNH and Connecticut Valley Electric Company filed motions for
rehearing of this order with the NHPUC on November 2, 1995.
4. On October 4, 1995, the U.S. Court of Appeals for the District of Columbia
Circuit granted a motion to intervene filed by Northeast Utilities Service
Company, Connecticut Yankee Atomic Power Company and North Atlantic Energy
Service Company as party petitioners in the lawsuit brought by other nuclear
utilities seeking a judicial declaration that the Nuclear Waste Policy Act of
1982, as amended, unconditionally binds the U.S. Department of Energy to begin
acceptance of spent nuclear fuel and high-level radioactive waste beginning on
January 31, 1998.
For additional information on this matter, see "Item 1. Business - Electric
Operations - Nuclear Generation - High-Level Radioactive Waste" in NAEC's 1994
Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
Exhibit
Number Description
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27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during this reporting period.
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 13, 1995 By /s/ Bernard M. Fox
-------------------- -----------------------------
Bernard M. Fox
Chairman, Chief Executive
Officer, and Director
Date November 13, 1995 By /s/ John W. Noyes
-------------------- -----------------------------
John W. Noyes
Vice President and Controller