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 March 31, 1996
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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
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NORTH ATLANTIC ENERGY CORPORATION
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(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 06-1339460
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 ELM STREET, MANCHESTER, NEW HAMPSHIRE 03105
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Address of principal executive offices) (Zip Code)
(603) 669-4000
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(Registrant's telephone number, including area code)
Not Applicable
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(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
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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
----- April 30, 1996
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Common Shares, $1.00 par value 1,000 shares
NORTH ATLANTIC ENERGY CORPORATION
TABLE OF CONTENTS
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 1996 and December 31, 1995 2
Statements of Income - Three Months Ended
March 31, 1996 and 1995 4
Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1995 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 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
PART I. FINANCIAL INFORMATION
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
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(Thousands of Dollars)
ASSETS
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Utility Plant, at original cost:
Electric................................................ $ 774,474 $ 771,794
Less: Accumulated provision for depreciation......... 104,804 99,772
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669,670 672,022
Construction work in progress........................... 4,619 7,616
Nuclear fuel, net....................................... 25,337 27,482
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Total net utility plant............................. 699,626 707,120
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Other Property and Investments:
Nuclear decommissioning trusts, at market............... 16,121 15,312
Other, at cost.......................................... 222 222
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16,343 15,534
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Current Assets:
Cash.................................................... - 8,313
Special deposits (Note 1B)<F1B>......................... 4,018 71
Notes receivable from affiliated companies.............. 6,500 2,500
Receivables from affiliated companies................... 24,309 18,692
Taxes receivable........................................ 3,608 -
Materials and supplies, at average cost................. 12,610 12,269
Prepayments and other................................... 2,051 4,157
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53,096 46,002
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Deferred Charges:
Regulatory assets:
Deferred costs--Seabrook............................... 170,008 162,430
Income taxes, net...................................... 43,231 43,231
Recoverable energy costs............................... 2,300 2,349
Other regulatory assets................................ 30,264 31,886
Unamortized debt expense................................ 5,381 5,619
Other................................................... 358 478
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251,542 245,993
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Total Assets........................................ $ 1,020,607 $ 1,014,649
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See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
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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....................................... 61,367 59,677
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Total common stockholder's equity.............. 222,367 220,677
Long-term debt.......................................... 540,000 540,000
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Total capitalization........................... 762,367 760,677
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Current Liabilities:
Notes payable to affiliated company..................... - 8,000
Long-term debt--current portion......................... 20,000 20,000
Accounts payable........................................ 4,808 6,278
Accrued interest........................................ 10,987 3,452
Other................................................... 1,118 1,616
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36,913 39,346
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Deferred Credits:
Accumulated deferred income taxes....................... 185,836 179,135
Deferred obligation to affiliated company............... 33,284 33,284
Other................................................... 2,207 2,207
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221,327 214,626
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Commitments and Contingencies (Note 5)<F5>
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Total Capitalization and Liabilities........... $ 1,020,607 $ 1,014,649
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See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
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1996 1995
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(Thousands of Dollars)
Operating Revenues.................................... $ 36,663 $ 33,984
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Operating Expenses:
Operation --
Fuel............................................. 3,326 3,269
Other............................................ 7,849 7,706
Maintenance......................................... 1,649 1,638
Depreciation........................................ 6,071 5,905
Federal and state income taxes...................... 2,663 2,144
Taxes other than income taxes....................... 3,030 2,348
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Total operating expenses...................... 24,588 23,010
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Operating Income...................................... 12,075 10,974
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Other Income:
Deferred Seabrook return--other funds............... 2,577 3,380
Other, net.......................................... 102 330
Income taxes........................................ 755 881
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Other income, net............................. 3,434 4,591
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Income before interest charges................ 15,509 15,565
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Interest Charges:
Interest on long-term debt.......................... 13,407 16,005
Other interest...................................... (87) (99)
Deferred Seabrook return--borrowed funds............ (5,001) (7,842)
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Interest charges, net......................... 8,319 8,064
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Net Income............................................ $ 7,190 $ 7,501
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See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
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1996 1995
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(Thousands of Dollars)
Operating Activities:
Net Income................................................ $ 7,190 $ 7,501
Adjustments to reconcile to net cash
from operating activities:
Depreciation............................................ 6,071 5,905
Deferred income taxes and investment tax credits, net... 6,701 8,487
Deferred return - Seabrook.............................. (7,578) (11,221)
Other sources of cash................................... 4,762 2,766
Other uses of cash...................................... - (616)
Changes in working capital:
Receivables............................................. (9,225) (2,431)
Materials and supplies.................................. (341) (352)
Accounts payable........................................ (1,470) (3,272)
Accrued taxes........................................... (511) (604)
Other working capital (excludes cash)................... 5,707 1,704
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Net cash flows from operating activities.................... 11,306 7,867
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Financing Activities:
Net decrease in short-term debt........................... (8,000) -
Cash dividends on common stock............................ (5,500) (6,000)
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Net cash flows used for financing activities................ (13,500) (6,000)
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Investment Activities:
Investment in plant:
Electric utility plant.................................. (738) (824)
Nuclear fuel............................................ (390) (1,437)
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Net cash flows used for investments in plant.............. (1,128) (2,261)
NU System Money Pool...................................... (4,000) (1,250)
Investments in nuclear decommissioning trusts............. (991) (864)
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Net cash flows used for investments......................... (6,119) (4,375)
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Net Decrease In Cash For The Period......................... (8,313) (2,508)
Cash - beginning of period.................................. 8,313 2,508
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Cash - end of period........................................ $ - $ -
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See accompanying notes to financial statements.
NORTH ATLANTIC ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRESENTATION
The accompanying unaudited financial statements should be read in
conjunction with the Annual Report of North Atlantic Energy
Corporation (NAEC) on Form 10-K for the year ended December 31, 1995
(1995 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 March 31, 1996, the results of
operations for the three months ended March 31, 1996 and 1995, and the
statements of cash flows for the three months ended March 31, 1996 and
1995. All adjustments are of a normal, recurring, nature. The
results of operations for the three months ended March 31, 1996 and
1995 are not necessarily indicative of the results expected for a full
year.
Northeast Utilities (NU) is the parent company of the Northeast
Utilities system (the system). The system furnishes retail electric
service in Connecticut, New Hampshire, and western Massachusetts
through four wholly owned subsidiaries, The Connecticut Light and
Power Company (CL&P), Public Service Company of New Hampshire (PSNH),
Western Massachusetts Electric Company (WMECO), and Holyoke Water
Power Company. A fifth wholly owned subsidiary, NAEC, sells all of
its capacity to PSNH. In addition to its retail service, the system
furnishes firm and other wholesale electric services to various
municipalities and other utilities. The system serves about 30
percent of New England's electric needs and is one of the 20 largest
electric utility systems in the country as measured by revenues.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Certain reclassifications of prior period data have been made to
conform with the current period presentation.
B. SPECIAL DEPOSITS
Special deposits represent funds set aside to meet certain pre-funding
requirements established by the joint owners (including NAEC) of the
Seabrook project. The funds are used currently to meet the operation
and maintenance requirements of the Seabrook project.
2. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March
1995. SFAS 121 establishes accounting standards for evaluating and
recording asset impairment. The company adopted SFAS 121 as of January 1,
1996. SFAS 121 requires the evaluation of long-lived assets for impairment
when certain events occur or when conditions exist that indicate the
carrying amounts of assets may not be recoverable.
SFAS 121 requires that any assets, including regulatory assets, that are no
longer probable of recovery through future revenues be revalued based on
estimated future cash flows. If the revaluation is less than the book
value of the asset, an impairment loss would be charged to earnings. Based
on the current regulatory environment in the system's service areas, as of
March 31, 1996, SFAS 121 did not have a material impact on the company's
financial position or results of operations. This conclusion may change in
the future as competitive factors influence wholesale and retail pricing in
the electric utility industry or if the cost-of-service based regulatory
structure were to change. For further information on the company's
regulatory environment, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A), and Part II, Item 5,
"Other Information," in this Form 10-Q and the Notes to Financial
Statements in NAEC's 1995 Form 10-K.
3. NUCLEAR DECOMMISSIONING
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry,
including the company, regarding the recognition, measurement, and
classification of decommissioning costs for nuclear generating stations in
the financial statements of electric utilities. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning, and has issued a proposed statement "Accounting
for Liabilities Related to Closure or Removal of Long-Lived Assets" in
February 1996. If current electric utility industry accounting practices
for such decommissioning are changed: (1) annual provisions for
decommissioning could increase, (2) the estimated cost for decommissioning
could be recorded as a liability rather than as accumulated depreciation,
and (3) trust fund income from the external decommissioning trusts could be
reported as investment income rather than as a reduction to decommissioning
expense.
4. DERIVATIVE FINANCIAL INSTRUMENTS
NAEC uses interest-rate swap agreements with financial institutions to
hedge against interest-rate risk associated with its $225 million variable-
rate bank note. The interest-rate swaps minimize exposure associated with
rising interest rates, and effectively fix the interest rate for this
borrowing arrangement. Under the swap agreement, 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 March 31, 1996, NAEC
had outstanding agreements with a total notional value of approximately
$225 million and a positive mark-to-market position of approximately $2.4
million.
These swap agreements have been made with various financial institutions,
each of which are rated "BBB+" or better by Standard & Poor's rating group.
NAEC is exposed to credit risk on its interest-rate swaps if the
counterparties fail to perform their obligations. However, NAEC
anticipates that the counterparties will be able to fully satisfy their
obligations under the contracts. For further information on Derivative
Financial Instruments see the MD&A in this Form 10-Q and the Notes to
Financial Statements in NAEC's 1995 Form 10-K.
5. COMMITMENTS AND CONTINGENCIES
A. Seabrook 1 Construction Program: For information regarding NAEC's
construction program, see the Notes to Financial Statements in NAEC's
1995 Form 10-K.
B. Environmental Matters: For information regarding environmental
matters, see the Notes to Financial Statements in NAEC's 1995 Form
10-K.
C. Nuclear Insurance Contingencies: For information regarding nuclear
insurance contingencies, see the Notes to Financial Statements in
NAEC's 1995 Form 10-K.
NORTH ATLANTIC ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section contains management's assessment of 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 discussion should be read in conjunction with NAEC's consolidated
financial statements and footnotes in this Form 10-Q, the 1995 Form 10-K, and
the Form 8-Ks dated January 31, 1996 and March 30, 1996.
FINANCIAL CONDITION
OVERVIEW
On June 5, 1992 (the Acquisition Date), NU acquired Public Service Company of
New Hampshire (PSNH), and PSNH's 35.58 percent share of the Seabrook 1 nuclear
power plant (Seabrook 1) and other Seabrook-related assets were transferred to
the company. At the Acquisition Date, PSNH and the company entered into the
Seabrook Power Contract (the Contract), under which PSNH is obligated to buy
from the company, and the company is obligated to sell to PSNH, all of the
company's capacity and output of Seabrook 1 for a period equal to the length of
the Nuclear Regulatory Commission (NRC) 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
1 is operating and without regard to the cost of alternative sources of power.
In addition, PSNH will be obligated to pay decommissioning and project
cancellation costs after the termination of the operating license. NAEC does
not have any employees of its own and does not operate Seabrook 1. North
Atlantic Energy Service Corporation is the managing agent and represents the
Seabrook 1 joint owners, including NAEC, in the operation of Seabrook 1.
On February 15, 1994, NAEC acquired Vermont Electric Generation and Transmission
Cooperative's 0.4 percent ownership interest of Seabrook 1 for approximately
$6.4 million, giving NAEC a total joint-ownership interest in Seabrook 1 of
35.98 percent.
The company's "cost of service" includes all of its prudently incurred Seabrook
1-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 1 investment. The Contract established
the initial recoverable investment in Seabrook 1 at $700 million (Initial
Investment), plus any capital additions, net of depreciation.
The company's only assets are Seabrook 1 and other Seabrook 1-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.
NUCLEAR PERFORMANCE
On January 31, 1996, the NRC placed Millstone units 1, 2, and 3 (Millstone) on
its watch list, which calls for increased NRC inspection attention. The
Millstone units are operated by Northeast Nuclear Energy Company, a wholly-owned
subsidiary of NU. The NRC's action referred to a number of performance concerns
that have arisen since 1990, including the inability to resolve employee safety
concerns.
As a result of the Millstone units being on the watch list, Seabrook 1 has also
received increased NRC attention. On April 22, 1996, the NRC announced the
results of a recent inspection at Seabrook 1. The NRC indicated that it found
Seabrook 1 to be a well-operated facility and found no major safety issues or
weaknesses. The NRC noted that it would reduce inspections in a number of areas
at Seabrook 1 as a result of its findings.
In the first quarter of 1996, Seabrook 1 operated at a capacity factor of 86.7
percent, as compared to 100 percent for the same period in 1995. The lower
capacity factor was primarily the result of a three day unplanned outage
beginning on January 27, 1996, and a one-day unplanned outage on February 1,
1996.
RATE MATTERS
As of March 31, 1996, NAEC has included in rates $595 million of its Seabrook 1
Initial Investment. The remaining investment ($105 million) will be phased into
rates in May 1996. An additional amount of deferred Seabrook 1 return of
approximately $51 million is recorded as utility plant. The deferred amounts
associated with the Seabrook 1 phase-in will be recovered under the Contract
with PSNH over the period December 1997 through May 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations increased approximately $3 million for the first
three months of 1996, from 1995, primarily due to the increased cash return
associated with the phase-in of additional Seabrook 1 plant. Cash flows used
for financing activities increased approximately $8 million for the first three
months of 1996, from 1995, primarily due to the 1996 repayment of short-term
debt. Cash flows used for investments increased approximately $2 million for the
first three months of 1996, from 1995, primarily due to an increase in loans to
affiliated companies in the NU system Money Pool, partially offset by a decrease
in nuclear fuel expenditures.
In April 1996, Standard & Poor's Ratings Group placed the ratings of PSNH and
NAEC on CreditWatch with negative implications. These rating actions could
adversely affect the future availability and cost of funds.
NAEC has entered into an interest-rate-swap agreement to reduce its interest-
rate risk associated with its $225 million variable rate bank note. This swap
agreement is not used for trading purposes. The differential paid or received
as interest rates change is recognized in income when realized. As of March 31,
1996, NAEC had an outstanding agreement with a total notional value of
approximately $225 million. The settlement amount associated with the swap
increased interest expense by approximately $0.1 million for NAEC. This swap
effectively fixes the interest rate for NAEC's variable-rate bank note at 7.05
percent.
RESULTS OF OPERATIONS
Comparison of the First Quarter of 1996 with the First Quarter of 1995
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Operating revenues represent amounts billed to PSNH under the terms of the
Contract and billings to PSNH for decommissioning expense. Operating revenues
increased approximately $3 million in the first quarter of 1996, from 1995,
primarily due to the increased return associated with the phase-in of additional
Seabrook 1 plant in May 1995.
Deferred Seabrook return - other and borrowed funds decreased approximately $4
million in the first quarter of 1996, from 1995, primarily due to the additional
Seabrook investment phased into rates in May 1995.
Interest on long-term debt decreased approximately $3 million in the first
quarter of 1996, from 1995, primarily due to the 1995 refinancing of its $205
million 15.23%-rate note.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
1. On April 9, 1996, Northeast Nuclear Energy Company ("NNECO") and the
Nuclear Regulatory Commission ("NRC") staff filed a joint motion to
terminate the NRC proceeding which began in 1995 when several New
England based public interest groups requested a hearing on the
Millstone 1 license amendment which explicitly authorized the practice
of offloading the full reactor core during refueling outages. The joint
motion was based on representations by counsel for the petitioners that
the matter would no longer be pursued. On April 15, 1995, the NRC's
Atomic Safety and Licensing Board granted the joint motion to terminate
the proceeding.
For additional information on this proceeding, see "Item 1. Business -
Electric Operations - Nuclear Generation - Millstone Units" in NAEC's
1995 Form 10-K.
2. On May 3, 1996, NU was advised by the Office of the U.S. Attorney for
the District of Connecticut (U.S. Attorney) that it had received a
report by the NRC Office of Investigations (OI) relating to full core
off-load procedures and certain related matters at Millstone Station.
The OI had referred the report to the U.S. Attorney for possible
criminal prosecution and NU has been informed that the U.S. Attorney is
in the early stages of reviewing its conduct and that of certain unnamed
employees. NU does not have the OI's report and therefore cannot
evaluate either whether the report is accurate or what any civil or
criminal consequences may be. Despite the possibility that some form of
prosecutorial action might be initiated, management does not believe
that any System company or officer has engaged in conduct that would
warrant a federal criminal prosecution and intends to fully cooperate
with the U.S. Attorney in the investigation.
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:
1. NAEC filed a Form 8-K dated January 31, 1996 disclosing that the NRC had
placed Millstone station on its "watch list."
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
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Registrant
Date May 8, 1996 By: /s/ Bernard M. Fox
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Bernard M. Fox
Chairman, Chief Executive Officer
and Director
Date May 8, 1996 By: /s/ John J. Roman
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John J. Roman
Vice President and Controller