ML20248L767

From kanterella
Jump to navigation Jump to search
North Atlantic 1997 Annual Rept
ML20248L767
Person / Time
Site: Millstone, Seabrook  Dominion icon.png
Issue date: 12/31/1997
From:
NORTH ATLANTIC ENERGY SERVICE CORP. (NAESCO)
To:
Shared Package
ML20248L749 List:
References
NUDOCS 9806110347
Download: ML20248L767 (34)
v • d • e


Text

- -, - - , - - - - - - - - - - - - - - - - - - - , - - - , - , _ , - - - - - - - - - - - - - - _ _ - - -

4 p

l b'

  • ~

e, 2

V

[j f

/

/

i

[

% Difro

/

k 5 W/Akl f"%q,

%ec

,^\ k

1 John H. Forsgren Michael G. Morris Deborah L. Canyock Executive Vice President and Chairman Assistant Controller-l' Management Information and l Chief Financial Omcer Bruce D. Kenyon Budgeting Services Bruce D. Kenyon President and President and Chief Executive Omcer Lori A.Mahler Chief Executive Officer Assistant Controller-Ted C. Feigenbaum Accounting Services Michael G. Morris Executive Vice President and Chairman Chief Nuclear Omcer Michael J. Mahoney .

Assistant Controller-John H. Forsgren Rate Regulation Executive Vice President and Chief Financial Omcer -

Theresa H. Allsop Assistant Secretary Cheryl W. Gris6 Senior Vice President and Robert A. Bersak Chief Administrative Omcer Assistant Secretary Rokn P. Wax

0. Kay Comendul Sem,or Vice President, Secretary g,;, 3 and General Counsel Roben C. Aronson John B. Keane Assistant Treasurer-Vice President and Treasurer Treasury Operations John J. Roman David R. McHale Vice President and Controller Assistant Treasurer-Finance Dennis E. Welch Vice President-Environmental, Safety and Ethics I

l I

February 28,1998

l l

i l

1997 Annual Report North Atlantic Energy Corporation l

Index l

Contents Pace 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.................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 26 Selected Financial Data..................................... 32 Statistics.................................................. 32 Statements of Quarterly Financial Data...................... 32 Bondholder Information...................................... Back Cover a

9 I

4 u________________._____._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - J

PART I. FINANCIAL INFORMATION-i NORTH ATLANTIC ENERGY CORPORATION BALANCE SHEETS-l l

At December 31, 1997 1996-(Thousands of Dollars)

ASSETS .

. Utility Plant, at original cost:

Electric (Note 1G)...................................... $ 779,111 $ 775,794 -

Less: Accumulated provision for depreciation.... .... 143,778 124,530 635,333 651,264 Construction work in progress........................... 4,616 8,887 Nuclear fuel, net....................................... 27,413 31,765 Total net utility plant............................. 667,362 691,916

-Other Property and Investments:  ;

' Nuclear decommissioning trusts, at-market...... ........ 26,547 19,744 j

]

26,547

......'19,744 .......

Current Assets: j

-Czsh.................................................... 13 299 l Special deposits........................................ - 7,039

-Receivables from affiliated companies.................... 25,695 16,422 Texes receivable........................................ 4,613 -

Materials and supplies, at average cost................. 13,003 13,093 Prepayments and other. ................................. 4,220 4,302 i l

47,544 41,155 1

)

= i, I

Deferred Charges: 'l Regulatory assets (Note 1H)............................. 269,484 259,881 Unamortized debt expense................................ 3,702 4,692 +

273,186 264,573 Total Assets........................................ $ 1,014,639 $ 1,017,388 Th2 accompanying notes are an integral part of these financial statements.

2

l l

l

}

l NORTH ATL*LNTIC ENERGY CORPORATION BALANCE SHEETS At December 31, 1997 1996 (Thousands of Dollars)

. CAPITALIZATION AND LIABILITIES l C: vitalization: )

Common stock--$1 par value. Authorized cnd outstanding 1,000 shares............. .... ....... $ 1 $ 1 C;pital surplus, paid in................................ 160,999 160,999 R;tained earnings....................................... 58,702 53,749 Total common stockholder's equity.............. 219,702 214,749 Long-term debt.......................................... 475,000 495,000 Total capitalization. ......................... 694,702 709,749 Current Liabilities:

Notes payable to affiliated company.................... 9,950 2,500 Long-term debt--current portion........................ 20,000 20,000 Accounts payable........................................ 7,912 20,714 Accounts payable to affiliated companies................ 6,040 5,073 l Accrued interest........................................ 3,025 2,888 i Accrued taxes........................................... - 3,486 i Other................................................... 1,055 271 j 47,982 54,932 Defstred Credits: 4

, Accumulated deferred income taxes....................... 216,701 196,650 Deferred obligation to affiliated company (Note 6)...... 32,472 33,284 Other................................................... 22,782 22,773

  • 271,955 252,707 Commitments and Contingencies (Note 7)

Total Capitalization and Liabilities......... . $ 1,014,639 $ 1,017,388 Th'a accompanying notes are an integral part of these financial statements.

3

i NORTH ATLANTIC ENERGY CORPORATION STATEMENTS OF INCOME For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars)

Operating Revenues................................. $ 192,381 $ 162,152 $ 157,183 Operating Expenses:

  • Operation --

13,405 15,013 12,030 Fuel............ .............................

39,091 34,356 36,737 Other.........................................

24,146 9,154 12,442 Maintenance......................................

25,170 24,056 23,406 Depreciation.....................................

Amortization of regulatory assets, net........... 6,270 - -

14,845 12,341 10,187 Pederal and state income taxes (Note 5) . . . . . . . . . .

12,393 12,343 10,987

'Eaxes other than income taxes....................

Total operating expenses................... 135,320 107,263 105,789 Operating Income................................... 57,061 54,889 51,394 Other Income:

Deferred Seabrook return--other funds... ........ 7,205 7,700 9,405 Other, net..... ................................. (747) 1,200 1,556 Income taxes..................................... 4,394 5,052 2,776 Other income, net.......................... 10,8S2 13,952 13,737 Income before interest charges.......... .. 67,913 68,841 65,131 Interest Chargss:

Interest on long-term debt....................... 50,722 52,414 62,721 Other interest................... ............... 649 (697) (519)

Deferred Seabrook return--borrowed funds......... (13,411) (14,948) (21,517)

Interest charges, net...................... 37,960 36,769 40,690 Net Income.................... .................... $ 29,953 $ 32,072 $ 24,441

====...... .......... ........--

ThQ accompanying notes are an integral part of these financial statements.

4

10RTH ATLAN1'IC ENERGY CORPORATION STATDE2US OF CASH FIDWS 1

l For the Years Ended December 31, 1997 1996 1995

! (Thousands of Dollars)

Operating Activities:

l Net Income................ ................................. $ 29,953 $ 32,072 $ 24,441 Adjustments to reconcile to net cash from operating activities:

Depreciation.............................. ............... 35,170 24,056 23,406 Amortization of nuclear fuel.............................. 10,705 11,668 9,183

, Deferred income taxes and investment tax credits, net..... 22,649 15,749 46,114 Deferred return - Seabrook................................ (20,616) (22,648) (30,917)

Sale of Seabrook 2 steam generator........................ - 20,931 -

Loss on reacquired debt...................... ............ - - (31,886)

. Other sources of cash..................................... 11,052 9,175 2,957 Other uses of cash........................................ (2,224) (2,582) (3,375)

Changes in working capital:

Receivables...................................... ........ (9,273) 2,270 (4,709)

Materials and supplies...... ......................... ... 90 (824) (2,233)

Accounts payable.......................................... (11,835) 19,509 2,167 Accrued taxes............................................. (3,486) 2,140 (93)

Other working capital (excludes cash) . . . . . . . . . . . . . . . . . . . . . 3,429 (7,675) (12,161)

Net cash flows from operating activities...................... 55,614 103,841 22,894 Financing Activities:

Issuance of long-term debt.................................. - - 225,000 Net increase /(decrease) in short-term debt................... 7,450 (5,500) 8,000 i Reacquisitions and retirements of long-term debt............ (20,000) (45,000) (225,000) i Cash dividends on common stock.... ......................... (25,000) (38,000) (24,000)

Net cash flows used for financing activities... .............. (37,550) (88,500) (16,000)

Investment Activities:

Investment in plant:

Electric utility plant...................... ............. (6,606) (5,921) (6,906)

Nuclear fuel.............................................. (6,147) (15,752) (16,609)

Net cash flows used for investments in plant................ (12,753) (21,673) (23,515)

NU System Money Pool........................................ - 2,500 26,250 Investment in nuclear decommissioning trusts................ (5,597) (4,404) (3,824)

Other investment activities, net............................ -

222 -

o Net cash flows used for investments................. ......... (18,350) (23,355) (1,089)

Net (Decrease) / Increase In Cash For The Period. . . . . . . . . . . . . . . . (286) (8,014) 5,805 Cash - beginning of period.................................... 299 8,313 2,508 Carh - end of period.......................................... $ 13 $ 299 $ 8,313 Supplemental Cash Flow Information:

Cash paid /(refunded) during the year for:

Interest, net of amounts capitalized........................ $ 45,297 $ 46,322 $ 73,923 Income taxes................................................ $ - $ (13,160) $ (36,679)

The accompanying notes are an integral part of these financial statements.

5 1

i I

l J

- _ _ . _ _ _ _ _ _ - _ - - _ _ - _ _ . _ _ _ _ - _ - _ - _ - - - - _ _ - - - _ . .- _- . _ - _ - - - . - _ . _ - _ _ _ = _ _ _ _ - _ - _ _ -- - - - - _

' NORTH ATLANTIC ENERGY CORPORATION STATEMENTS OF COMMON STOCKHOLDER'S EQUITY-l l

................__.............__....__..........___.____.......................... Capital Retained l Common Surplus, Earnings Stock Paid In (a) Total (Thousands of Dollars)

Balcnce at January 1, 1995 ............. $ 1 $ 160,999 $ 59,236 $ 220,236 ,

24,441 24,441 Net income for 1995................. (24,000) (24,000) l' Cash dividends on common stock...... ........__ .......... ......... ........... .

Bslance at December 31, 1995............ 1 160,999 59,677 220,677 32,072 32,072 Net income for 1996................. (38,000) 1

)

(38,000)

Cash dividends on common stock...... .. ____... ......___. .......__ ...... ___

Balance at December 31, 1996............ 1 160,999 53,749 214,749 Net income for 1997................. 29,953 29,953 (25,000) (25,000)

Cash dividends on common stock......

I-Balance at December 31, 1997............ $ 2 $ 160,999 $ 58,702 $ 219,702 1

(a) All retained earnings are available for distribution, plus an allowance of

$10 million.

Tha accompanying notes are an integral part of these financial stateme.nts.

  • 6 4

North Atlantic Energy Corporation NOTES TO FINANCIAL STATEM.ENTS'

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 l operating subsidiaries comprising the Northeast Utilities l

. system (the. NU system) and are wholly owned by Northeast Utilities (NU).

, The NU system furnishes franchised retail electric service in l Connecticut, New Hampshire, and western Massachusetts through I CL&P, PSNH, WMECO, and HWP. NAEC sells all of its entitlement to the capacity and output of the Seabrook nuclear power plant, (Seabrook, a 1,148-megawatt nuclear generating unit) to PSNH.

In addition to its franchised . retail service, the NU system 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 about 30 percent of New England's electric needs and is one of the 25 largest electric utility: systems in the country as measured by revenues.

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, I 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.

e 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 j of-cost basis which may include amounts representing a return  ;

l on ~ equity and are subject to approval by various federal and l state regulatory agencies.  ;

7

North Atlantic Energy Corporation NOTES TO FINANCIAL STATEMENTS C. Public Utility Regulation NU is registered with the Securities and Exchange Commission (SEC) - l as a holding company under the Public Utility Holding Company Act of 1935 (1935 Act), and it and its subsidiaries, including NAEC, are subject to the provisions of the 1935 Act.

Arrangements among the 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) J 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.

For information 'regarding proposed changes in the nature of industry regulation, see Note 7A, " Commitments and

-Contingencies - Restructuring and Rate Matters."

D. New Accounting Standards The Financial Accounting Standards Board (FASB) issued a new.

accounting standard in February 1997: Statement of Financial Accounting Standards (SFAS) 129, " Disclosure of Information about Capital Structure . " ' SFAS 129 establishes standards for disclosing information about an entity's . capital structure.

NAEC's current disclosures are consistent with the requirements of SFAS 129.

During June 1997, the FASB issued SFAS 130, " Reporting Comprehensive Income." SFAS 130 establishes standards for the i reporting and disclosure of comprehensive income. To date, NAEC has not had material transactions that would be required l to be reported as comprehensive income. Management believes  ;

that the implementation of SFAS 130 will not have a material i impact on NAEC's current disclosures.

E. 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 share of the power generated by Seabrook to PSNH under two' long-term contracts (the Seabrook Power Contracts) . As of December 31, 1997 and 1996, plant-in-service included i approximately $723.2 million and $718.7: million, respectively, and the accumulated provision for depreciation included approximately $116.1 million and $102.0 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.

F. Depreciation The . provision for depreciation is calculated using the straight-line method based on estimated remaining lives of 8

North Atlcntic Energy Corporation NOTES TO FINANCIAL STATEMENTS depreciable utility plant-in-service, adjusted for salvage value and removtl costs, as approved by the appropriate regulatory agency. Except for major facilities, depreciation rates are applied to the average plant-in-service during the l 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 depreciation rates for the several classes of electric plant-in-service are equivalent to a composite rate.of 3.5 percent in 1997, 3.4 percent in 1996 and 3.3 percent in 1995. See Note 2, " Nuclear Decommissioning," for additional

. 'information on nuclear plant decommissioning.

.G. Seabrook Power Contracts PSNH and NAEC have entered into two power contracts that L

obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook 1 for the term of Seabrook l's Nuclear Regulatory Commission (NRC) operating license. Under these contracts, PSNH is obligated to pay NAEC's cost of service during this period, regardles 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 with the State of New Hampshire (Rate Agreement), as of May 1, 1996, NAEC phased into rates 100 percent of the recoverable portion 1 of its investment in Seabrook 1. From June 5, 1992 (the date NU  !

acquired PSNH and NAEC acquired Seabrook 1 f rom . 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 l' plant assets to NAEC on the Acquisition Date. Beginning on December 1, 1997, the deferred return, including the portion

. transferred to NAEC is currently being billed through the Seabrook Power Contracts to PSNH, and will be fully recovered ,

from customers by May 2001. NAEC is depreciating its initial i 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 J Power Contracts at the time the subsequent additions are placed ,

in service. 1 L

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 -i which Seabrook 1 has operated. These termination costs will reimburse NAEC- for its share of Seabrook 1 shut-down and 9

L_--______________-_______--_____-_____

North Atlcntic Energy Corporation NOTES TO FINANCIAL STATEMENTS 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 j (net of any tax benefits to NAEC attributable to the cancellation).

H. Regulatory Accounting and Assets

  • The accounting policies of the company and the accompanying i 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 no longer were 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 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 approved stranded costs and to maintain the cost-of-service basis for the remaining regulated operations. 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 court systems. The outcome of these court proceedings will impact NAEC due to NAEC's contractual relationship with PSNH through the Seabrook Power Contracts. However, management believes that NAEC's use '

of regulatory accounting remains appropriate while this issue remains in litigation.

For more information on NAEC ' s regulatory environment and the potential impacts of restructuring, see Note 7A, " Commitments and Contingencies -

Restructuring and Rate Matters," and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

SFAS 121, " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires the evaluation of long-lived assets, including regulatory 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 long-lived assets which are no longer probable of recovery through future 10

l I

North Atle.ntic En2rgy Corporation l NOTES TO FINANCIAL STATEMENTS l

l revenues be revalued based on estimated future cash flows. If this revaluation is less than the book value of the asset, an l impairment loss would be charged to earnings. SFAS 121 did not have a material impact on the company's financial position or results of operations as of December 31, 1997. Management

, continues to believe that it is probable that the company will

( recover its investments in long-lived assets through future l revenues. This conclusion may change in the future as the

! implementation of restructuring plans within New Hampshire l

  • will subject NAEC to competitive market conditions. As a l result, NAEC will be required to assess the carrying amounts of its long-lived assets in accordance with SFAS 121.

i

  • i The components of NAEC's regulatory assets are as follows:

l At December 31, 1997 1996 l

(Thousands of Dollars)

Deferred costs-Seabrook 1 l (Note 1K) .......................... $199,753 $185,078 Income taxes, net (Note II) .......... 48,736 47,185 l_ Recoverable energy costs (Note IJ) ... 2,057 2,217 l Unamortized loss on reacquired l debt.............................. 18,938 25,401 1 $269,484 $259,881 .

I. Income Taxes

[ The tax effect of temporary differences (differences between l 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 l with . the ratemaking treatment of the applicable regulatory l commissions. See Note 5, " Income Tax Expense" for the components of income tax expense.

l The tax effect of temporary differences, including timing differences accrued under previously approved accounting l

  • standards, which give rise to the accumulated deferred tax obligation is as follows:

2 At December 31, 1997 1996 (Thousands of Dollars) i Accelerated depreciation and other plant-related differences .... $159,251 $136,234 Regulatory assets - income tax gross up........................... 17,094 16,516 Other................................ 40,356 43,900 S216,701 S196,650 J.- 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 11

North Atlcntic Energy Corporation NOTES TO FINANCIAL STATEMENTS 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, l to be fully recovered in rates, like any other fuel cost. NAEC l is currently recovering these costs through the Seabrook Power Contracts. As of December 31, 1997, NAEC's total D&D deferral was approximately S2.0 million.

K. Deferred Cost -

Seabrook 1 As prescribed by the Rate Agreement as of May 1, 1996, NAEC )

phased into rates 100 percent of the recoverable portion of its investment in Seabrook 1. This plan is in compliance with SFAS 92, " Regulated Enterprises -

Accounting for Phase-In . l Plans." See Note 1G, " Summary of Significant Accounting I Policies - Seabrook Power Contracts," for terms of Seabrook l's phase-in. See Note 7A, " Commitments and Contingencies -

Restructuring and Rate Matters," for the possible impacts of the NHPUC's decision related to industry restructuring.  ;

I L .~ 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 recei'vable or payable under interest-rate management  !

instruments are accrued and offset- against interest expense. j NAEC does not use market risk-management instruments for i speculative purposes. For further information, see Note 8,

" Market Risk Management."

i M.' Spent Nuclear Fuel 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 i 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 l costly alternatives. The company has primary responsibility for the interim storage of its spent nuclear fuel. Current capability to store spent fuel at Seabrook is estimated to be l adequate until the year 2010. Meeting spent fuel storage 1 12

North Atlcntic Ensrgy Corporation NOTES TO FINANCIAL STATEMENTS 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. District 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. Currently, the DOE has not taken the spent a nuclear fuel as scheduled, and, as a result, may have to pay contract damages. The ultimate outcome of this legal proceeding is uncertain at this time.

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 1997 dollars, is $170.2 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 $4.5 million in 1997, $3.5 million in 1996, and $3.0 million in 1995. Nuclear decommissioning, as a cost of removal, is included in the accumulated provision for depreciation on the Balance Sheets. At December 31, 1997 and 1996, the balance in the accumulated reserve for depreciation amounted to

$26.5 million and $19.7 million, respectively. J Under the terms of the Rate Agreement, PSNH is obligated to pay o NAEC's share of Seabrook l's decommissioning costs, even if the j 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 I assumes escalated collections for Seabrook 1 and after-tax earnings on the Seabrook decommissioning fund of 6.5 percent.

As of December 31, 1997, NAEC (including payments made prior to the Acquisition Date by PSNH) had paid approximately $21.1 million into i Seabrook l's decommissioning financing fund. Earnings on the l decommissioning financing fund increase the decommissioning trust balance and the accumulated reserve for depreciation. Unrealized  ;

gains and losses associated with the decommissioning financing fund also impact the balance of the trust and the accumulated reserve for depreciation.

13 J

North Atlc.ntic EnGrgy Corporation NOTES TO FINANCIAL STATEMENTS 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 a fund will be substantially funded when seabrook 1 is retired from service.

Proposed Accounting: The staff of the SEC has questioned certain current accounting practices of the electric utility industry, including NAEC, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements. In response to these questions, the FASB has agreed to review the accounting for closure and removal costs, including decommissioning. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Management believes that NAEC will continue to be allowed to recover decommissioning costs through the Seabrook Power Contracts.

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, 1998, 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. Effective during May 1997, NAEC became a full participant of the NU Money Pool. At December 31, 1997 and 1996, NAEC had $9.95 million and $2.5 million, respectively, of borrowings outstanding from the Pool. The 14

i l

j. North Atltntic' Energy Corporation NOTES TO FINANCIAL STATEMENTS i.

interest rate on borrowings from the Pool at December 31, 1997 and j 1996 was 5.8 percent and 6.3 percent, respectively.

Maturities of NAEC's short-term debt obligations were for periods of three months or less. >

i L. For-further information on short-term debt, see the MD&A.

l 4. . LONG-TERM DEBT ,

-Details of long-term debt outstanding are:

December 31, a 1997 1996 (Thousands of Dollars)

, First Mortgage Bonds:

9.05%-Series A, due 2002........... $295,000 $315,000 Notes:

i Variable - Rate Facility, due 2000 200,000 200,000 Less: Amounts due within one year.. 20,000 20,000 l

Long-term debt, net.......... $475,000 $495,000 Long-term debt maturities and cash sinking-fund requirements on debt outstanding at December 31, 1997 is $20 million for the year

. 1998, .$70 million for 1999, $270 million for 2000, $70 million for

! 2001, and $65 million for 2002.

Market risk management instruments with financial institutions l

l 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."

l The Series A Bonds.are not redeemable prior to maturity except out l l of proceeds of sales'of property subject to the lien of the series l l

A First Mortgage Bond Indenture (Indenture), at general redemption j p prices established by the Indenture, and out of condemnation or l insurance proceeds and through the operation of the sinking fund.

l0 Essentially all of NAEC's utility plant is subject- to the lien of

its Indenture.

\

\

l > l l

15

North:Atlcntic.Ensrgy Corporation NOTES TO FINANCIAL STATEMENTS

5. INCOME TAX EXPENSE The components of the federal and state income tax provisions charged to operations are:

For the Years Ended December 31, 1997 1996 1995 Current income taxes:

  • Fede ral . . . . . . . . . . . . . . . . . . . . . . $ ( 11, 8 9 0 ) $(8,570) $ (38,703)

State........................ (309) 110 -

Total current ................. (12,199) (8,460) (38,703)

Deferred income taxes, net:

Federal....................... 21,528 14,884 41,885 State......................... 1.121 865 4,229 1 Total deferred...... ...... 22,64.1 15,749 46,114 Total-income tax expense... $10,450 $ 7,289 j_ 7,411 The components of total income tax expense are classified as follows:

For the Years Ended-December 31, 1997 1996 1995 (Thousands of Dollars)

Income taxes charged to operating expenses..................... .$14,844 $12,341 $10,187 Other income taxes............. (4,394) (5,052) (2,776)

Total income tax expense..... $10,450 $ 7,289 $ 7,411 .

1 Deferred income taxes are comprised of the tax effects of temporary differences as follows:

For the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars) =

-Depreciation................... $20,823 $12,730 $24,444 Alternative minimum tax. ...... - - -

Bond redemptions............... (2,351) (2,359) 12,087 6 Seabrook 1 return.............. 3,338 5,438 8,109 Other........................... 839 (60) 1,474

' Deferred income taxes, net. $22,649 $15,749 $46,114 i

16

.. . . _ . . _ . _ _ _m. . . . _ . _ . . _ _ _ _

North Atlantic Energy Corporation NOTES _TO FINANCIAL STATEMENTS A reconciliation between income tax expense and the expected tax expense at the applicable statutory rate is as follows:

Eor the Years Ended December 31, 1997 1996 1995 (Thousands of Dollars)

Expected federal income tax at 35 percent of pretax income ............. $14,141 $13,776 $11,148 Tax effect of differences:

Depreciation.. ... .......... (1,049) (1,143) (2,159)

Deferred Seabrook 1 return.. (2,522) (2,695) (3,292) e State income taxes, net of federal benefit., .. 718 634 2,74 9 Sale of Seabrook 2 steam generator....... ...... .... -

(2,516) -

Other, net.... . ...... ...... (838) (567) (1,035)

Total income tax expense....... $10,450 $ 7,289 $ 7,411

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 o through ten of the Rate Agreement, it will be obligated to make corresponding payments to PSNH.

See Note 1G, "Seabrook Power Contracts" for further information on 2 the phase-in of the Seabrook power plant and see Note 7A,

" Commitments and Contingencies - Restructuring and Rate Matters" for the possible impacts on NAEC from the NHPUC's decision related to industry restructuring.

7. COMMITMENTS AND CONTINGENCIES A. Restructuring and Rate Matters New Hampshire: The 1996 restructuring legislation that the NHPUC is charged with implementing provides that the NHPUC may-not adopt a restructuring plan that imposes a severe financial hardship on a utility. Management believes that PSNH is entitled to full recovery of its prudently incurred costs, 17

North Atlcntic Enargy Corporation NOTES TO FINANCIAL STATEMENTS I

l including regulatory assets and strandable costs. 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.

On February 28, 1997, the NHPUC issued its decision related to restructuring the state's electric utility industry and

  • setting interim stranded cost charges for PSNH pursuant to legislation enacted in New Hampshire in 1996. In the decision, the NHPUC announced a departure from cost-based ratemaking and ,

instead adopted a market-priced approach to ratemaking and stranded cost recovery. Accordingly, unless the NHPUC modifies its position or the litigation described below results in necessary modifications to the final plan which leads management to conclude that the ratemaking approach utilized in the NHPUC's restructuring decision will not go into effect, PSNH no longer will be subject to the provisions of SFAS 71. That would result in PSNH writing off frota its balance sheet substantially all of its regulatory assets. The amount of the potential write-off triggered by the order is currently estimated at over $400 million, after taxes. PSNH does not believe that under the decision, it would be required to recognize any additional loss resulting from the impairment of the value of its other long-lived assets under the provisions of SFAS 121.

On March 3, 1997, PSNH, NU, NAEC and NUSCO filed for a temporary restraining order, preliminary and permanent injunctive relief and for declaratory judgment in the United States District Court for New Hampshire (District Court)

The case was subsequently transferred to Rhode Island. On March 10, 1997, the Chief Judge of the Rhode Island federal court issued a temporary restraining order which stayed the NHPUC's February 28, 1997 decision to the extent it established a rate setting methodology that is not designed to a recover PSNH's ccsts of providing service and would require PSNH to write off any regulatory assets.

During 1997, a mediation process ended without a resolution.

The District Court has suspended the procedural schedule associated with this court proceeding pending the resolution of appeals of certain preliminary rulings by the U.S. Circuit Court of Appeals for the First Circuit (First Circuit). On February 3, 1998, the First Circuit denied the appeals taken by would-be interveners in PSNH's federal court proceeding concerning the NHPUC's final plan on restructuring. The First Circuit affirmed a previous court decision stating that the opposing interests in this case were adequately represented by the NHPUC or by PSNH. As a result of this decision, the proceedings in the District Court may resume. On February 17, 1998, the NHPUC filed a petition for rehearing with the First 18

North Atlcntic Energy Corporation NOTES TO FINANCIAL STATEMENTS Circuit. The temporary restraining order issued by the District Court in March 1997 will remain in effect until further orders by either court.

During 1997, the NHPUC reopened its proceeding to reconsider certain limited matters in its restructuring orders. The scope of the PSNH-specific re-hearing proceedings included alternative rate-setting methodologies proposed by the interveners; to decide the appropriate methodology to be used O to determine PSNH's interim stranded costs; and to set PSNH's interim stranded cost charges utilizing the determined methodology. In testimony filed with the NHPUC in

,, November 1997, PSNH proposed a new methodology to quantify its l

strandable costs. Under this proposal, PSNH would divest all owned generation and purchased power obligations via auction.

To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased-power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates.

On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998. Management believes that industry restructuring will not take place in New Hampshire until the courts resolve the issues brought before them, or the parties involved reach a settlement.

PSNH and NAEC are parties to a variety of financing agreements providing that the credit thereunder can be terminated or accelerated if they do not maintain specified minimum ratios of common equity to capitalization (as defined in each l agreement). In addition, PSNH and NAEC are parties to a variety of financing agreements providing in effect that the credit thereunder can be terminated or accelerated if there are actions taken, either by PSNH or NAEC or by the state of a New Hampshire, that deprive PSNH and/or NAEC of the benefits of the Rate Agreement and/or the Seabrook Power Contracts.

If the NHPUC's February 28, 1997 decision were to become effective, it would, unless PSNH and NAEC receive waivers from their respective lenders, result in (i) write-offs that would cause PSNH's common equity to fall below the contractual minimums (ii) reductions in income that would cause PSNH's income to fall below the contractual minimums, (iii) potential violation of the contractual provisions with respect to actions depriving PSNH and NAEC of the benefits of the Rate l Agreement and (iv) the potential for cross defaults to other l

PSNH and NAEC financing documents. Substantially all of PSNH's and NAEC's debt obligations would be affected.

l If these events transpired and if the creditors holding PSNH and NAEC debt obligations decide to exercise their rights to 19 l

North Atlantic Energy Corporation NOTES TO PINANCIAL STATEMENTS demand payment, then either creditors or PSNH and NAEC could initiate proceedings under Chapter 11 of the bankruptcy laws.

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. The accounts of PSNH and NAEC are included in the consolidated financial statements of NU on the basis of a going concern. While the effect of the implementation of that decision would have a material adverse impact on NU's financial position, results of e.

operations, ard cash flows, it would not in and of itself result in defaults under borrowing or other financial agreements of NU or its other subsidiaries. j 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. NAEC 1 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 investigation in the enviro. aental 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 otorage, 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 accurately be~ estimated.

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. 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 20

i l

t North At1cntic Enargy Corporation

! NOTES TO FINANCIAL STATEMENTS 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 i

units up to $75.5 million. Payments of this assessment would l

be limited to $10.0 million in any one year per nuclear incident based upon the owner's pro rata ownership interest in each of its nuclear units. In addition, the owner would be subject to an additional five percent of $3.8 million, in proportion to its ownership interests in each of its nuclear

> units, if the sum of all claims and costs from any one nuclear incident exceeds the maximum amount of financial protection.

Based upon its ownership interest in Seabrook 1, NAEC's maximum

, liability, including any additional assessments, would be $28.5 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 or premature decommissioning 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 $2.6 million.

Insurance has been purchased to cover the excess cost 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. j The maximum potential assessment against NAEC with respect to loeses arising during current policy years is approximately

$3.8 million. The cost of a nuclear incident could exceed available insurance proceeds.

1 Insurance has been purchased aggregating $200 million on an i industry basis for coverage of worker claims. All participating I y reactor operators insured under this coverage are subject to  ;

retrospective assessments of $3 million per reactor. The maximum potential assessment against NAEC with respect to

, losses arising during the current policy period is approximately $1.1 million. Effective January 1, 1998, a new worker policy was purchased which is not subject to retrospective assessments.

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."

21

-___-___ ___-__ - ___ a

North At1cntic Ensrgy Corporation.

NOTES TO FINANCIAL STATEMENTS D. 'Seabro>k 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

$35.0 million for the years' 1998-2002, including approximately

$8.9 million for 1998. In addition, NAEC estimates that its share of Seabrook i nuclear fuel requirements will be approximately $51.5 million for the years 1998-2002, including

$12.9 million for 1998. <

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, 1997, NAEC had outstanding agreements with a total notional value of $200 million and a positive mark-to-market position of approximately $104 thousand.

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 nuclear decommissioning fund: The carrying amounts approximate fair value.

(

SFAS 115, " Accounting for Certain Investments in Debt and Equity Securities," requires investments in debt and equity securities to be presented at fair value. As a result of this requirement, the

. investments held in NAEC's nuclear decommissioning fund were adjusted to market by approximately $1.5 million as of December 31, 1997 and adjusteK to market by approximately $0.3 million as of December 31, 1996, with corresponding offsets to the accumulated provision for depreciation. The amounts adjusted in 1997 and 1996 represent cumulative gross unrealized holding gains. The cumulative

. gross unrealized holding losses were immaterial for 1997 and 1996.

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.

22

North Atltntic Enargy Corporation NOTES TO FINANCIAL STATEMENTS The adjustable rate security is assumed to have a fair value equal to its carrying amount.

The carrying amounts of NAEC's financial instruments and the estimated fair values are as follows:

Carrying Fair At December 31, 1997 Amount Value 3

(Thousands of Dollars)

First Mortgage Bonds............. ....... $295,000 $301,599

, Other long-term debt... ... ..... ....... $200,000 $200,000 Carrying Fair At December 31, 1996 Amount Value (Thousands of Dollars)

First Mortgage Bonds.................... $315,000 $316,197 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 The three Millstone units are managed by NNECO. Millstone 1, 2, and 3 have been out of service since November 4, 1995, February 21, 1996 and March 30, 1996, respectively, and are on the NRC's watch list. NU has restructured its nuclear organization and is currently implementing comprehensive plans to restart the units.

7 Subsequent to its January 31, 1996 announcement that Millstone had been placed on its watch list, the NRC stated that the units cannot return to service until independent, third-party verification teams 3 have reviewed the actions taken to improve the design, configuration, and employee concerns issues that prompted the NRC to place the units on its watch list. The actual date of the return to service for each of the units is dependent upon the completion of independent inspections and reviews by the NRC and a l vote by the NRC commissioners. NU hopes to return Millstone 3 to service in early spring of 1998 and Millstone 2 three to four i months after Millstone 3. Millstone 1 is currently in extended ,

maintenance status.

i l

23 1

j o_ J

l f

North Atlcntic Encrgy Corporation l

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of North Atlantic Energy Corporation:

We have audited the accompanying balance sheets of North Atlantic Energy Corporation (a New Hampshire corporation and a wholly owned subsidiary of Northeast Utilities) as of December 31, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an e 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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 t Company of New Hampshire (PSNH). PSNH is the sole customer cf the Company. The final plan, if implemented, would require PSNH to discontinue the application of Financial Accounting Standard No. 71, (

"Accoun ting for the Effects of Certain Types of Regula tion, " (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 approxitcately $686 million of PSNH's indebtedness and approximately $495 million of the Company's 1

24

North Atlantic Energy Corporation REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS indebtedness. These conditions raise substantial doubt about the CG32 Company's ability to continue as a going concern. The financial i statements referred to above do not include any adjustments that might l result from the outcome of this uncertainty.

' /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP S Hartford, Connecticut February 20, 1998 D

D 25

North Atlantic Energy Cc.goration 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 t

Earnings Overview Public Service Company of New Hampshire (PSNH) and NAEC have entered into two power contracts that unconditionally obligate PSNH to purchase NAEC's 35.98 percent ownership of the capacity and output of Seabrook Unit 1 (Seabrook or the plant) for a period equal to the length of the Nuclear Regulatory Commission (NRC) full-power operating license for Seabrook (through 2026) whether or not Seabrook is operating and without regard to the cost of alternative sources of power (the Power Contracts). 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. North Atlantic Energy Service Corporation (NAESCO) is the managing agent and represents the Seabrook joint owners, including NAEC, in the operation of the plant.

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 company's only assets are Seabrook and other Seabrook-related assets and its only source of revenues are the Power Contracts. PSNH's obligations under the Power Contracts are solely its own and have not been guaranteed by NU. The Power Contracts contain nc provisions t entitling PSNH to termina*.e 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. e A temporary restraining order issued by a U.S. District Court is currently blocking the New Hampshire Public Utilities Commission (NHPUC) from implementing a February, 1997 restructuring order that would have resulted in a write-off by PSNH of more than $400 million.

i4anagement hopes to negotiate an a].ternative restructuring proposal in 1998 that will produce significant PSNH race reductions and allow retail customers to choose their electric suppliers, but still give PSNH and NAEC an opportunity to maintain an adequate financial condition and earn fair returns on their investments.

NAEC had net income of approximately $30 million in 1997 compared to approximately $32 million in 1996. The decrease in net income for 26

I 1997 was primarily due to deferred tax benefits in 1996 associated with the proceeds from the sale of Seabrook Unit 2 steam generators, ,

l as well as lower earnings in temporary cash investments in 1997.  !

Liquidity and Capital Resources Cash provided from operations decreased by approximately $48 million in 1997, compared to 1996, as a result of the pay down of the 1996 year end accounts payable balance aN proceeds in 1996 from the sale of the Seabrook Unit 2 steam generaters. The year end accounts 3

payable balance was relatively high due to purchases in preparation for the Seabrook outage that had been incurred but not yet paid by the end of 1996. Cash used for financing activities decreased by approximately $51 million in 1997, compared to 1996, primarily due to

> lower reacquisitions and retirements of long-term debt, the utilization of the NU system money pool in 1997 and lower cash dividends on common stock. Cash used for investments decreased by approximately $5 million in 1997, compared to 1996, primarily due to lower 1997 nuclear fuel expenditures.

Each major subsidiary of NU finances its own needs. Neither The Connecticut Light and Power Company (CL&P) nor Western Massachusetts Electric Company (WMECO) has any financing agreements containing cross defaults based on financial defaults by NU, PSNH or NAEC. Similarly, neither PSNH nor NAEC has any financing agreements containing cross defaults based on financial defaults by NU, CL&P or WMECO.

Nevertheless, it is possible that investors will take negative operating results or regulatory developments at one company in the NU system into account when evaluating other companies in the NU System.

That could, as a practical matter and despite the contractual and legal separations among the NU companies, negative 3y affect each company's access to financial markets.

PSNH Restructuring In February, 1997, the NHPUC issued orders to restructure the state's electric utility industry and set interim stranded cost charges for PSNH. In the orders, the NHPUC announced a departure from cost-based ratemaking and adopted a market-priced approach to stranded cost recovery. PSNH, NU , NAEC and Northeast Utilities Service company 8

(NUSCO) filed for a temporary restraining order, preliminary and permanent injunctive relief and a declaratory judgment in the United States District Court of New Hampshire. The case subsequently was i

transferred to the United States District Court of Rhode Island (District Court) where a temporary restraining order was granted, staying, indefinitely, the enforcement of the NHPUC's restructuring orders as they affected PSNH. Certain appeals to the preliminary ruling have been denied and proceedings in the District Court are expected to resume.

The NHPUC conducted rehearing proceedings in 1997 to decide the appropriate methodology to be used to determine PSNH's interim stranded costs and to set PSNH's interim stranded cost charges utilizing the determined methodology. The NHPUC has not indicated when it will issue a decision in these proceedings. On December 15, 1997, the NHPUC officially announced that industry restructuring would not take place on January 1, 1998.

27

As part of the rehearing proceedings, PSNH proposed a new methodology to quantify its stranded costs. Under this proposal, PSNH would divest its owned generation and purchased power obligations via auction. To the extent that the auction fails to produce sufficient revenues to cover the net book value of owned generation and contractual payment obligations of purchased power, the difference would be recovered from customers through a non-bypassable distribution charge. The new proposal also relies upon securitization of certain assets to further reduce rates.

On February 20, 1998, PSNH forwarded a settlement offer to c representatives from the state of New Hampshire that was consistent with PSNH's Droposal in the rehearing proceedings, including among other things, a 20 percent rate reduction at the beginning of 1999, an ',

aucticn of PSNH's non-nuclear generating units and securitization of approximately $1.15 billion of PSNH's stranded costs.

See the " Notes to Financial Statements", Note 7A, for the potential accounting impacts of restructuring.

Seabrook Performance Seabrook operated at a capacity factor of 78.3 percent through December 1997, compared to 96.8 percent for the same period in 1996.

The lower 1997 capacity factor is due primarily to the 50-day scheduled refueling and maintenance outage which began on May 10, 1997, and an unplanned outage vhich began on December 5, 1997. The unplanned outage occurred when the unit was shut down to repair leaks in a three inch stainless steel pipe in the residual heat removal system. The pipe was replaced, but problems were subsequently discovered in the control building air conditioning system. Design changes were implemented and the plant returned to service on January 16, 1998.

Seabrook Decommissioning NAEC's estimated cost to decommission its share of Seabrook is approximately $170 million in year end 1997 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, 1997, the market value of the contributions already made to the decommissioning trusts, including their investment returns, was (

approximately $26 million.

See the " Notes to Financial Statements," Note 2, for further information on nuclear decommissioning.

Environmental Matters NAEC is potentially liable for environmental cleanup costs at a number of sites inside and outside its service territory. NAEC cannot estimate the potential liability for these costs or for future claims, including environmental remediation costs, that may be brought against j it. However, considering known facts, existing laws and regulatory 1 practices, management does not believe that these costs will have a 28

material effect on NAEC's financial position or future results of operations.

See the " Notes to Financial Statements" Note 7B, for further information on environmental matters.

Ycar 2000 Issue The Year 2000 issue exists because many computer systens and applications currently use two-digit date fields to designate a year.

As the change of the century occurs, date-sensitive systems may 4

recognize the year 2000 as 1900, or not recognize it at all. This inability to recognize or properly treat the year 2000 may cause NU's systems to process critical financial and operational information 5 incorrectly. The company has assessed and continues to assess the impact of the Year 2000 issue on its operating and reporting systema.

The assessment of the nuclear operating systems is continuing and is expected to be completed in the summer of 1998.

The NU system will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The total estimated remaining cost of the Year 2000 project is estimated at $37 million and is being funded through operating cash flows. This estimate does not include any costs for the replacement or repair of equipment or devices that may be identified during the assessment process. The majority of these costs will be expensed as incurred over the next two years. To date, the NU system has incurred and expensed approximately $4 million related to the assessment of, and preliminary efforts in connection with, its Year 2000 project.

The costs of the project and the date on which the cotroany 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 i remediation plan is not successful, there could be a significant

) disruption of the NU system's operation.

Risk Management Instruments '

) The following discussion about the company's risk-management activities includes forward looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward looking statements.

This analysis presents the hypothetical loss in earnings related to the interest rate market risks not covered by the risk-management l instruments at December 31, 1997. The company uses swaps to manage the market risk. The company does not use these risk-management i instruments for speculative purposes.

NAEC holds a variable rate long-term note, exposing the company to interest rate risk. In order to hedge this risk, interest rate risk- ,

management instruments have been entered into on NAEC's $200 million I 29

variable rate note, effectively fixing the interest on this note at 7.823 percent.

For further information on risk management instruments, see the " Notes to Financial Statements," Note 8.

RESULTS OF OPERATIONS Income Statement Variances (

Increase /(Decrease)

Millions of Dollars

(

1997 over/ (under)1996 1996 over/ (under)1995 Amount Percent Amount Percent Operating revenues $30 19% $5 3%

Fuel Expense (2) (11) 3 25 Other operation and maintenance expense 20 45 (5) (12)

Amortization of Regulatory Assets, net 6 (a) - -

Federal and State Income Taxes 3 43 - -

Deferred Seabrook return (other and borrowed funds) (2) (9) (8) (27)

Other, net (2) (a) - -

Interest on Long-term Debt (2) (3) (10) (16)

Net income (2) (7) 8 31 (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 1997 primarily due to higher operation and maintenance expenses and the increased return associated with the 7 phase-in of the final 15 percent of the Seabrook plant investment in May, 1996.

l Operating revenues increased in 1996, primarily due to the increased return associated with the phase-in of the Seabrook investment, partially offset by a lower return due to lower debt costs.

Fuel Expense Fuel expenses decreased in 1997, primarily due to lower Seabrook capacity factors as a result of the Seabrook outages in 1997.

Fuel expenses increased in 1996, primarily due to higher Seabrook capacity factors.

30

Other Operation and Maintenance Expense Other operation and maintenance expenses increased in 1997 primarily

.due to higher costs associated with the Seabrook outages in 1997.

Other operation and. maintenance expenses decreased in 1996, primarily due to a planned refueling and maintenance outage in 1995.

Amortization of Regulatory Assets, not

, ~ Amortization of Regulatory Assets, net increased in 1997.primarily due

3. to the.beginning of the amortization of the Seabrook deferred return in December 1997.

, Faderal and-State Income Taxes 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.

{

Dsferred Seabrook Return e not Deferred Seabrook return, net decreased in 1997 primarily due to the final phase-in of Seabrook investment into rates in May, 1996.

Deferred Seabrook return, net decreased in 1996, primarily due to the additional Seabrook investment phased into rates in May, 1996, and May, 1995, partially offset by a one-time adjustment in June, 1995, to the deferred-Seabrook return balance.

l Other, net

! Other, net 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.

Interest on Long-term Debt  ;

, JAlthough the change in 1997 was not significant, interest on long-term L

_debtTdecreased in~1996 primarily due to the 1995 ' refinancing of -its

$205 million 15.23-percent variable-rate bank note.

s b

'n L

'O 31

_--_:-_ _ _ _ _ _ _ _ _ . _ _ _ _ - ._- . __a

l North Atlantic Energy Corporation l SELECTED FINANCIAL DATA (a) 1997 1996 1995 1994 1993 (Thousands of Dollars) 192,3R1 $ 162,152 $ 157,1R3 $145,751 $125,408

' Operating Revenues ... j L 57,061 54,AR9 $ 51,194 $ 42,950 $ 33,71R Operating Income . .. .. $

i

$ 29,953 $ 32,072 $ 24,441 $ 30,535 $ 25,998 Net Income .... .... .... ...

(

Cash Dividends on 25,000 $ 38,700 $ 24,000 $ 10,000 $ -

Common Stock . . .. . $

$1,014,639 $1,017,388 $1,014,649 $963,579 $900,R21 [

Total Assets . ... . . j 515,000 $ 560,000 $560,000 $560,000 Long-Term Debt (b) . . . .

$ 495,000 $

STATISTICS 1997 1996 1995 1994 1993 Gross Electric Utility.

Plant at December 31;

$811,140 $d16,446 $R06,R92 $792,RRO $7R9,127 (Thousands of Dollars.' ..

kWh Sales (Million0) for the twelve taonth period 2,R59 1,542 3,016 2,229 3,218 endt.ng December 33, .t .

- STATEMENTS OF QUARTERLY FINANCIAL DATA (Unaudited) (Thousands of Dollars)

Quarter Ended (a) 1997. March 31 June 30 Sept. 30 Dec. 31

$41,976 p50,129 $45,943 $54,334 Operating Revenues .. . .

$14,1R3 $14,124 $14,34A Operating Income . . ... .

$14,406

$ 7,240 $ 6,958 $ 8,086 $ 7,669 Net Income . . . ... .

0 1996

$36,663 $39,107 $41,565 $44,R17 Operating Revenues . ..

Operating Income . .

$12,075 $13,7R6 $14,639 $14,389

$ 7,190 $ 7,356 $ 9,918 $ 7,608 Net Income. .. . . . .

(

(a) Reclassifications of prior data have been made to conform with the current presentation.

(b) Includes portion due within one year.

32

North Atlantic Energy Corporation C First MortgageBonds Trustee and Interest Paying Agent United States Trust Company of New York 114 West 47th Street New York, New York 10036 I.

Address General Correspondence in Care of:

Nonheast Utilities Service Company Investor Relations Department P.O. Box 270 Hartford, Connecticut 06141-0270 Telephone: (860) 665-5000 e

V

-f ammmmmmmmuumus General Offices Data containedin this AnnualReport are submitted * '

for the sole purpose ofproviding sqformation to P.O. Box 330 present security holders about the Company. Manchester, New Hampshire 03105-0330

Retrieved from "https://kanterella.com/w/index.php?title=ML20248L767&oldid=3147059"