-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AeM3fgIvlUzRsXqOwBwUapcCQI3+mG+n15ra99aFT7PWrVqkTO+wQ6HReSN0YW9n 0lxzOfLYTUdX+8XIrdPKhg== 0000071297-96-000055.txt : 19960816 0000071297-96-000055.hdr.sgml : 19960816 ACCESSION NUMBER: 0000071297-96-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: BSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND ELECTRIC SYSTEM CENTRAL INDEX KEY: 0000071297 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663060 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03446 FILM NUMBER: 96611532 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 5083669011 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-3446 (LOGO) NEW ENGLAND ELECTRIC SYSTEM (Exact name of registrant as specified in charter) MASSACHUSETTS 04-1663060 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 25 Research Drive, Westborough, Massachusetts 01582 (Address of principal executive offices) Registrant's telephone number, including area code (508-389-2000) 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 ( ) Common Shares, par value $1 per share, authorized and outstanding: 64,898,262 shares at June 30, 1996. PART I FINANCIAL STATEMENTS Item 1. Financial Statements - ---------------------------- NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Periods Ended June 30 (Unaudited)
Quarter Six Months ------- ---------- 1996 1995 1996 1995 ---- ---- ---- ---- (In Thousands) Operating revenue $551,110 $533,547$1,137,330 $1,091,863 -------- ------------------ ---------- Operating expenses: Fuel for generation 72,440 58,468 146,732 107,427 Purchased electric energy 124,893 140,290 250,583 285,785 Other operation 126,075 119,056 241,596 231,133 Maintenance 34,638 33,997 66,921 75,126 Depreciation and amortization 65,230 68,832 130,906 140,825 Taxes, other than income taxes 35,996 32,244 74,621 67,559 Income taxes 22,705 20,779 61,883 50,742 -------- ------------------ ---------- Total operating expenses 481,977 473,666 973,242 958,597 -------- ------------------ ---------- Operating income 69,133 59,881 164,088 133,266 Other income: Allowance for equity funds used during construction 2,771 5,381 Equity in income of generating companies 2,819 2,777 5,487 5,329 Other income (expense), net 44 (59) (491) 493 -------- ------------------ ---------- Operating and other income 71,996 65,370 169,084 144,469 -------- ------------------ ---------- Interest: Interest on long-term debt 27,278 27,065 55,122 53,144 Other interest 6,306 3,765 10,573 8,351 Allowance for borrowed funds used during construction (450) (3,272) (958) (6,596) -------- ------------------ ---------- Total interest 33,134 27,558 64,737 54,899 -------- ------------------ ---------- Income after interest 38,862 37,812 104,347 89,570 Preferred dividends of subsidiaries 1,993 2,173 4,165 4,345 Minority interests 1,868 2,108 3,685 4,032 -------- ------------------ ---------- Net income $ 35,001 $ 33,531$ 96,497 $ 81,193 ======== ================== ========== Average common shares 64,898,27464,958,82364,888,323 64,964,238 Net income per average common share $.54 $.52 $1.49 $ 1.25 Dividends declared per share $.59 $.59 $1.180 $1.165 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $854,720 $789,350 $831,529 $779,045 Net income 35,001 33,531 96,497 81,193 Dividends delcared on common shares (38,332) (38,332) (76,637) (75,689) Premium on redemption of preferred stock (450) (450) -------- -------- -------- -------- Retained earnings at end of period $850,939 $784,549 $850,939 $784,549 ======== ======== ======== ======== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Twelve Months Ended June 30 (Unaudited)
1996 1995 ---- ---- (In Thousands) Operating revenue $2,317,179 $2,240,908 ---------- ---------- Operating expenses: Fuel for generation 276,803 212,605 Purchased electric energy 513,168 559,903 Other operation 511,184 500,030 Maintenance 127,853 164,546 Depreciation and amortization 254,747 285,712 Taxes, other than income taxes 139,693 126,884 Income taxes 139,481 111,044 ---------- ---------- Total operating expenses 1,962,929 1,960,724 ---------- ---------- Operating income 354,250 280,184 Other income: Allowance for equity funds used during construction 2,471 10,869 Equity in income of generating companies 10,710 9,826 Other income (expense), net (7,290) (1,849) ---------- ---------- Operating and other income 360,141 299,030 ---------- ---------- Interest: Interest on long-term debt 110,343 101,411 Other interest 22,048 15,069 Allowance for borrowed funds used during construction (8,378) (11,574) ---------- ---------- Total interest 124,013 104,906 ---------- ---------- Income after interest 236,128 194,124 Preferred dividends of subsidiaries 8,510 8,689 Minority interests 7,557 7,673 ---------- ---------- Net income $ 220,061 $ 177,762 ========== ========== Average common shares 64,906,229 64,966,945 Net income per average common share $3.39 $ 2.74 Dividends declared per share $2.360 $2.315 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $ 784,549 $ 757,192 Net income 220,061 177,762 Dividends declared on common shares (153,221) (150,405) Premium on redemption of preferred stock (450) --------- --------- Retained earnings at end of period $ 850,939 $ 784,549 ========= ========= The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
June 30, December 31, ASSETS 1996 1995 ------ ---- ---- (In Thousands) Utility plant, at original cost $5,581,144$5,480,001 Less accumulated provisions for depreciation and amortization 1,783,968 1,710,991 -------------------- 3,797,176 3,769,010 Net investment in Seabrook 1 under rate settlement 7,605 15,210 Construction work in progress 84,323 71,682 -------------------- Net utility plant 3,889,104 3,855,902 -------------------- Oil and gas properties, at full cost 1,272,417 1,266,290 Less accumulated provision for amortization 1,063,471 1,032,777 -------------------- Net oil and gas properties 208,946 233,513 -------------------- Investments: Nuclear power companies, at equity 47,524 47,056 Other subsidiaries, at equity 38,322 40,259 Other investments 90,134 87,992 -------------------- Total investments 175,980 175,307 -------------------- Current assets: Cash 2,759 7,064 Accounts receivable, less reserves of $20,226,000 and $18,308,000 255,710 284,033 Unbilled revenues 60,139 66,300 Fuel, materials, and supplies, at average cost 83,385 73,724 Prepaid and other current assets 81,014 77,673 -------------------- Total current assets 483,007 508,794 -------------------- Deferred charges and other assets 389,639 417,360 -------------------- $5,146,676$5,190,876 ==================== CAPITALIZATION AND LIABILITIES ------------------------------ Capitalization: Common share equity: Common shares, par value $1 per share: Authorized - 150,000,000 shares Issued - 64,969,652 shares Outstanding - 64,898,262 shares and 64,923,721 shares $ 64,970 $ 64,970 Paid-in capital 736,814 736,823 Retained earnings 850,939 831,529 Treasury stock - 71,390 shares and 45,931 shares (2,501) (1,543) -------------------- Total common share equity 1,650,222 1,631,779 Minority interests in consolidated subsidiaries 47,697 48,912 Cumulative preferred stock of subsidiaries 132,016 147,016 Long-term debt 1,609,179 1,675,170 -------------------- Total capitalization 3,439,114 3,502,877 -------------------- Current liabilities: Long-term debt due within one year 52,585 23,960 Short-term debt 195,902 203,250 Accounts payable 132,163 157,486 Accrued taxes 31,289 15,894 Accrued interest 26,857 27,455 Dividends payable 37,626 38,683 Other current liabilities 113,743 73,104 -------------------- Total current liabilities 590,165 539,832 -------------------- Deferred federal and state income taxes 755,666 780,451 Unamortized investment tax credits 92,575 93,408 Other reserves and deferred credits 269,156 274,308 -------------------- $5,146,676$5,190,876 ==================== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 30 (Unaudited)
1996 1995 ---- ---- (In Thousands) Operating Activities: Net income $ 96,497 $ 81,193 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 133,636 143,559 Deferred income taxes and investment tax credits, net (26,626) (3,703) Allowance for funds used during construction (958) (11,977) Amortization of unbilled revenues (4,104) Minority interests 3,685 4,032 Decrease (increase) in accounts receivable, net and unbilled revenues 36,117 46,040 Decrease (increase) in fuel, materials, and supplies (9,148) (13,303) Decrease (increase) in prepaid and other current assets (3,127) (931) Increase (decrease) in accounts payable (25,997) (38,272) Increase (decrease) in other current liabilities 53,901 11,754 Other, net 16,525 (8,628) --------- --------- Net cash provided by operating activities $ 274,505 $ 205,660 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $(121,307) $(181,766) Oil and gas exploration and development (6,127) (8,783) Other investing activities (1,679) (465) --------- --------- Net cash used in investing activities $(129,113) $(191,014) --------- --------- Financing Activities: Dividends paid to minority interests $ (5,300) $ (5,943) Dividends paid on NEES common shares (77,239) (75,207) Long-term debt - issues 41,850 143,000 Long-term debt - retirements (83,330) (66,160) Changes in short-term debt (9,010) (7,790) Redemption of preferred stock (15,000) Premium on redemption of preferred stock (450) Premium on reacquisition of long-term debt (260) Repurchase of common shares (958) (1,490) --------- --------- Net cash used in financing activities $(149,697) $ (13,590) --------- --------- Net increase (decrease) in cash and cash equivalents $ (4,305) $ 1,056 Cash and cash equivalents at beginning of period 7,064 3,047 --------- --------- Cash and cash equivalents at end of period $ 2,759 $ 4,103 ========= ========= Supplementary Information: Interest paid less amounts capitalized $ 61,972 $ 51,499 --------- --------- Federal and state income taxes paid $ 80,653 $ 22,743 --------- --------- Changes in assets and liabilities shown above, other than cash, exclude the effects from the purchase of Nantucket Electric Company on March 26, 1996. The accompanying notes are an integral part of these financial statements.
Note A - Hazardous Waste - ------------------------ The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. A number of states, including Massachusetts, have enacted similar laws. The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. New England Electric System (NEES) subsidiaries currently have an environmental audit program in place intended to enhance compliance with existing federal, state, and local requirements regarding the handling of potentially hazardous products and by-products. NEES and/or its subsidiaries have been named as potentially responsible parties (PRPs) by either the U.S. Environmental Protection Agency (EPA) or the Massachusetts Department of Environmental Protection for 23 sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against NEES and certain subsidiaries regarding hazardous waste cleanup. The most prevalent types of hazardous waste sites with which NEES and its subsidiaries have been associated are manufactured gas locations. (Until the early 1970's, NEES was a combined electric and gas holding company system.) NEES is aware of approximately 40 such locations (including nine of the 23 locations for which NEES companies are PRPs) mostly located in Massachusetts. NEES and its subsidiaries are currently aware of other sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. NEES has been notified by the EPA that it is one of several PRPs for cleanup of the Pine Street Canal Superfund site in Burlington, Vermont, where coal tar and other materials were deposited. Between 1931 and 1951, NEES and its predecessor owned all of the common stock of Green Mountain Power Corporation (GMP). Prior to, during, and after that time, gas was manufactured at the Pine Street Canal site by GMP. In 1989, NEES was one of 14 parties required to pay the EPA's past response costs related to this site. NEES remains a PRP for ongoing and future response costs. In November 1992, the EPA proposed a cleanup plan estimated by the EPA to cost $50 million. In June 1993, the EPA withdrew this cleanup plan in response to public concern about the plan and its cost. The cost of any cleanup plan is uncertain at this time. NEES signed a settlement agreement in March 1996 establishing NEES's apportionment percentage of these costs. NEES believes it has adequate reserves for this site. Note A - Hazardous Waste - Continued - ------------------------ In 1993, the Massachusetts Department of Public Utilities approved a Massachusetts Electric Company (Massachusetts Electric) rate agreement that allows for remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts to be met from a non-rate-recoverable, interest-bearing fund of $30 million established on Massachusetts Electric's books in 1993. Rate-recoverable contributions of $3 million, adjusted for inflation, are added to the fund annually in accordance with the agreement. Any shortfalls in the fund would be paid by Massachusetts Electric and be recovered through rates over seven years. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by NEES or its subsidiaries. Where appropriate, the NEES companies intend to seek recovery from their insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. At June 30, 1996, NEES had total reserves for environmental response costs of $49 million and a related regulatory asset of $19 million. NEES believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. Note B - Investments in Nuclear Units - ------------------------------------- Millstone 3 and Connecticut Yankee NEP is a 12 percent joint owner of the Millstone 3 nuclear generating unit (Millstone 3), a 1,150 megawatt (MW) unit and has a 15 percent ownership interest in Connecticut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 MW nuclear generating plant. Both plants are operated by subsidiaries of Northeast Utilities (NU). In March 1996, the Millstone 3 unit was shut down as the result of an internal safety review. On April 4, 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone 3 to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. NEP is not a joint owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. Note B - Investments in Nuclear Units - Continued - ------------------------------------- On June 28, 1996, the NRC notified NU that the Millstone units had been reclassified from Category 2 facilities to Category 3 facilities on the NRC "watch list". The NRC deems Category 3 plants as having significant weaknesses that require them to remain shut down until it is demonstrated that adequate programs have been established and implemented to ensure substantial improvement. A Category 3 designation also requires a vote of the NRC Commissioners to restart the units. On August 6, 1996, the NRC Chairman described problems at the Millstone units as pervasive and indicated that a culture change is required. The NRC Chairman has also announced that independent verification of corrective actions taken at the units will be required prior to restart. It is uncertain when Millstone 3 will be allowed by the NRC to restart, although NEP believes that delays well beyond the end of 1996 are likely. Based on an estimate provided by NU, NEP accrued approximately $3 million in the second quarter of 1996 for its portion of the future incremental operation and maintenance costs related to corrective actions at the Millstone 3 unit. These costs were charged to other operation and maintenance expense. Additional costs may be incurred beyond those already recognized. NEP has been, and expects to continue until the unit is returned to service, incurring approximately $1.5 million per month in replacement power costs, which it has been recovering through its fuel clause. The Connecticut Yankee station was shut down on July 22, 1996 after a potential problem with the cooling systems was identified. On July 31, 1996, the NRC identified in an inspection report several additional issues which must be resolved prior to restart. The report addressed numerous programmatic weaknesses, significant deficiencies and errors, as well as issues similar to some identified at the Millstone 1 unit. As a result, Connecticut Yankee began a scheduled refueling outage early. On August 9, 1996, the NRC wrote to NU concerning recently identified safety concerns that raise questions regarding the continued operation of Connecticut Yankee. The NRC letter requires NU to resubmit under oath its basis for continued operation of the unit. NEP cannot predict when restart of Connecticut Yankee will occur. Maine Yankee NEP has a 20 percent ownership interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear generating station. The Maine Yankee station shut down on July 20, 1996 after identifying a potential problem with the cooling system. The station is in the process of returning to service. Maine Yankee is also subject to an NRC independent safety assessment (ISA) that began in June 1996. The ISA will be extensive and Note B - Investments in Nuclear Units - Continued - ------------------------------------- results are not expected until the Fall of 1996. Other nonaffiliated facilities which have been the subject of similar assessments have incurred substantial additional capital and operating expenditures. Prior to the shutdown, Maine Yankee had been operating at only 90 percent power. Upon its return to service, Maine Yankee will continue operating at 90 percent power until the NRC authorizes operation at a higher level. The New England Power Pool (NEPOOL) has indicated that with several nuclear units in New England not in service, there could be insufficient power supply available in New England to meet demand during the remainder of the summer peak-load period. NEPOOL members have taken steps to mitigate the load situation. In general, it is unknown what the total ultimate impact of the increased NRC scrutiny on the nuclear plants mentioned above will have on NEP's operations and costs. Note C - Purchased Power Contract Disputes - ------------------------------------------ As previously reported, in October 1994, NEP was sued by, and later filed counterclaims against, Milford Power Limited Partnership (MPLP), a venture of Enron Corporation and Jones Capital that owned a 149 MW gas-fired power plant in Milford, Massachusetts. NEP purchased 56 percent of the power output of the facility under a long-term contract with MPLP. On April 24, 1996, NEP and MPLP executed a settlement agreement under which each party agreed to the dismissal of the lawsuit and the counterclaims, the restructuring of their power and fuel purchase arrangements, and the payment by MPLP to NEP in the third quarter of 1996 of an undisclosed amount of money. MPLP withdrew all allegations it made against NEP, including claims that NEP deceived its regulators and violated federal criminal statutes. The settlement has been approved by the Federal Energy Regulatory Commission. On August 1, 1996, MPLP sold its partnership interest in the plant to subsidiaries of American National Power, Inc. On July 11, 1996, various New England utilities that are members of NEPOOL, including NEP, submitted a dispute to arbitration regarding their Firm Energy Purchased Power Contract with Hydro-Quebec. The dispute concerns the components of a pricing formula. Based on NEP's interpretation of Hydro-Quebec's claims, NEP's share of additional billings owed to Hydro-Quebec would be approximately $3.5 million on a retroactive basis and an estimated $3.8 million per year on a prospective basis through 2001. An arbitrator has not yet been appointed. Note D - ------ In the opinion of the Company, these statements reflect all adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of its operations for the periods presented and should be considered in conjunction with the notes to the consolidated financial statements in the Company's 1995 Annual Report. Item 2. Management's Discussion and Analysis of Financial --------------------------------------------------------- Condition and Results of Operations ----------------------------------- This section contains management's assessment of New England Electric System's (NEES) financial condition and the principal factors having an impact on the results of operations. This discussion should be read in conjunction with the consolidated financial statements and footnotes and the 1995 Annual Report on Form 10-K. Earnings - -------- Earnings for the second quarter of 1996 were $.54 per share compared with $.52 per share for the corresponding period in 1995. The table below details the primary factors affecting consolidated earnings: Period ending June 30, ---------------------- 3 Months 6 Months -------- -------- 1995 earnings $ .52 $1.25 Increased revenues .09 .25 Decreased purchased power costs, excluding fuel .13 .24 Seabrook 1 and Oil Conservation Adjustment (OCA) amortization .06 .15 Increased depreciation, including Manchester Street (.04) (.08) Allowance for funds used during construction (AFDC) (.07) (.14) Other operation and maintenance expenses (.05) (.02) Taxes, other than income taxes (.04) (.07) Increased interest expense (.01) (.03) Other (.05) (.06) ----- ----- 1996 earnings $ .54 $1.49 ===== ===== The increase in revenues reflects sales growth and retail rate increases. Kilowatt-hour (kWh) sales to ultimate customers increased 1.9 percent and 3.5 percent for the second quarter and first six months of 1996, respectively. The increase for the first six months is due, in part, to a return to more normal weather conditions in the first quarter of 1996 as compared with unusually mild weather experienced in the first quarter of 1995. For a discussion of other items affecting earnings, see the "Operating Revenue" and "Operating Expenses" sections. Competitive Conditions - ---------------------- The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including the presence of surplus generating capacity, a disparity in electric rates among regions of the country, improvements in generation efficiency, increasing demand for customer choice, and new regulations and legislation intended to foster competition. See the Company's Annual Report on Form 10-K for the year ended December 31, 1995. In states across the country, including Massachusetts and New Hampshire, there have been an increasing number of proposals to allow retail customers to choose their electricity supplier, with incumbent utilities required to deliver that electricity over their transmission and distribution systems (also known as "retail wheeling"). In Rhode Island, such a proposal has been enacted into law. Rhode Island legislation On August 7, 1996, the Governor of Rhode Island signed into law legislation that will restructure the electric utility industry in Rhode Island. Rhode Island is the first state to pass comprehensive legislation providing retail customers with access to alternative suppliers and providing utilities with recovery of their stranded investments. The NEES companies supported this legislation which affects New England Power Company (NEP) and The Narragansett Electric Company (Narragansett). The legislation will allow all customers of electric utilities to choose their power supplier under a phased-in approach, while transmission and distribution rates will remain regulated. This phase-in will begin on July 1, 1997 for customers representing approximately 10 percent of Narragansett's load, followed by another 10 percent on January 1, 1998, and the balance of customers on July 1, 1998. Under the new law, NEP's wholesale contract with Narragansett will be terminated. In return, the cost of NEP's past generation commitments to serve Narragansett's customers will be recovered through a transition access charge on retail distribution rates. Those commitments, which are currently estimated at approximately $4 billion on a present value basis in total for NEP (of which Narragansett's share is approximately $1 billion), consist of (i) generating plant commitments, (ii) regulatory assets, (iii) the above market component of purchased power contracts, and (iv) the operating cost of nuclear plants which cannot be mitigated by shutting down the plants. The aggregate amount of the transition access charge will be reduced by the fair market value of the utilities' non-nuclear generating assets. The value of such generating assets will be determined by leasing, selling, spinning off, or otherwise disposing of at least a 15 percent interest in such generating facilities. Sunk costs associated with generating plants and regulatory assets will be recovered over a period of 12 years, with an initial return on equity of one percentage point over the interest rate on long-term "BBB" rated utility bonds. Once the transition access charge is adjusted to reflect the market valuation of the non-nuclear generating plants, the return on equity will be retroactively increased to 11 percent. Purchased power contracts and nuclear decommissioning costs will be recovered as incurred over the life of those obligations, a period expected to extend beyond 12 years. The initial transition access charge will be set at 2.8 cents per kWh through December 31, 2000, and is expected to decline thereafter. Implementation of various aspects of the Rhode Island legislation is subject to Rhode Island Public Utilities Commission and Federal Energy Regulatory Commission (FERC) approval. The legislation also establishes performance-based rates for distribution utilities, such as Narragansett. Under the legislation, Narragansett will be entitled to increase its distribution rates by approximately $10 million annually for 1997 and 1998. In addition, for those two years, Narragansett's return on equity will be subject to a floor of 6 percent and a ceiling of 11 percent. Earnings over the ceiling will be shared equally between customers and shareholders up to an absolute cap on return on equity of 12.5 percent. To the extent that earnings fall below the floor, Narragansett will be authorized to surcharge customers for the shortfall. Massachusetts and New Hampshire proceedings In February 1996, Massachusetts Electric Company (Massachusetts Electric) filed with the Massachusetts Department of Public Utilities (MDPU) a plan for retail choice similar to the Rhode Island legislation described above. Three other utilities and the Massachusetts Division of Energy Resources (DOER) also filed plans with the MDPU in February 1996. The DOER's plan calls for direct access for all customers beginning in 1998, with a pilot program beginning in 1997. The DOER's plan, however, proposes that, in exchange for stranded cost recovery, utilities divest their generating assets, either through sale or spinoff. On May 1, 1996, the MDPU issued a set of proposed rules and regulations governing the implementation of retail choice. The proposed rules would allow all customers of Massachusetts investor- owned utilities to choose their electricity supplier beginning in 1998 and would establish a price cap system for regulating the rates for distribution service that would continue to be provided by local utilities. The MDPU-proposed rules affirm the principle of stranded cost recovery for utilities over ten years, but create uncertainties concerning the extent of actual stranded cost recovery. While the MDPU did not order mandatory divestiture of generating assets, it stated that it might provide utilities financial incentives to divest. Hearings on the proposed rules were completed in July 1996. The MDPU has stated that it will issue final regulations by year-end 1996 and issue orders on the individual utility plans in 1997. The New Hampshire Public Utilities Commission (NHPUC) is expected to issue a preliminary restructuring plan for the electric utility industry in New Hampshire in August 1996. FERC order In April 1996, the FERC issued Order No. 888 addressing open access transmission and required those utilities that own transmission facilities to file open access tariffs to make available transmission service to affiliates and nonaffiliates at fair non-discriminatory rates. Order No. 888 also stated that public utilities will be allowed to seek recovery of legitimate and verifiable stranded costs from departing customers as a result of wholesale competition. The FERC indicated that it will provide for the recovery of retail stranded costs only if state regulators lack the legal authority to address those costs at the time retail wheeling is required. The FERC also stated that it would permit stranded cost recovery under wholesale requirements contracts, such as the contracts between NEP and its retail affiliates. In response to the FERC Notice of Proposed Rulemaking issued in advance of Order No. 888 discussed above, NEP and NEES Transmission Services, Inc. (NEES Trans), a proposed new subsidiary of NEES, filed transmission tariffs in March 1996 at the FERC. On July 9, 1996, NEP, on behalf of the NEES companies, filed a transmission tariff with the FERC that conforms with the requirements of Order No. 888. This tariff became effective immediately upon filing, subject to refund, and supersedes the NEES Trans tariff that was previously filed in March 1996. If approved as filed, the implementation of the tariff would not have a significant impact on NEP's revenues. Risk factors The major risk factors affecting recovery of at-risk assets are: (i) regulatory and legal decisions, (ii) the market price of power, and (iii) the amount of market share retained by the NEES companies. First, there can be no assurance that a final restructuring plan ordered by regulatory bodies, or the courts, or through legislation will include an access charge that would fully recover stranded costs and include a fair return on those costs as they are being recovered. If laws are enacted or regulatory decisions are made that do not offer an opportunity to recover stranded costs, NEES believes it has strong legal arguments to challenge such laws or decisions. Such a challenge would be based, in part, on the assertion that subjecting utility generating assets to competition without compensation for stranded costs, while requiring utilities to open access to their wires at historic cost-based rates, would constitute an unconstitutional taking of property without just compensation. Second, the access charge included in the Rhode Island legislation, as well as the one proposed by the NEES companies in Massachusetts and New Hampshire, recovers only the above market components of sunk costs, such as plant expenditures and contractual commitments. Because of a regional surplus of electric generation capacity, current wholesale power prices in the short-term market are based on the short-run fuel costs of generating units. Such wholesale prices are not currently providing a significant contribution toward other marginal costs, such as operation and maintenance expenses. NEES expects this situation to continue in a retail market. Third, revenues will also be affected by the NEES companies' ability to retain existing customers and attract new customers in a competitive environment. Pilot programs underway in New Hampshire and Massachusetts have been highly competitive, with many competitors and very low power prices being offered to participants. As a result of the pressure on market prices and market share, it is likely that, even with a fully compensatory transition access charge, the generating business will experience revenue losses and increased revenue volatility for an indeterminate period, which will limit its ability to contribute to consolidated earnings and dividend growth during that period. Historically, electric utility rates have been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Financial Accounting Standard No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The effects of regulatory, legislative, or utility initiatives, could, in the near future, cause all or a portion of the operations of NEES subsidiaries to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At December 31, 1995, NEES had consolidated pre-tax regulatory assets (net of regulatory liabilities) of approximately $600 million, of which about $500 million is related to its subsidiaries' generation business (including approximately $200 million related to oil and gas properties regulated as part of the generation business), and about $100 million is related to its subsidiaries' transmission and distribution businesses. In addition to the potential write-down of regulatory assets, write- downs of plant assets could be required if competitive or regulatory change should cause a substantial revenue loss, or lead to the permanent shutdown or sale of any generating facilities. This "Competitive Conditions" section contains forward-looking statements as defined under the securities laws. Actual results could differ materially from those projected. This section, particularly under "Risk factors", lists some of the reasons why results could differ materially from those projected. Investments in Nuclear Units - ---------------------------- Millstone 3 and Connecticut Yankee NEP is a 12 percent joint owner of the Millstone 3 nuclear generating unit (Millstone 3), a 1,150 megawatt (MW) unit and has a 15 percent ownership interest in Connecticut Yankee Atomic Power Company (Connecticut Yankee) which owns a 580 MW nuclear generating plant. Both plants are operated by subsidiaries of Northeast Utilities (NU). In March 1996, the Millstone 3 unit was shut down as the result of an internal safety review. On April 4, 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone 3 to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. NEP is not a joint owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. On June 28, 1996, the NRC notified NU that the Millstone units had been reclassified from Category 2 facilities to Category 3 facilities on the NRC "watch list". The NRC deems Category 3 plants as having significant weaknesses that require them to remain shut down until it is demonstrated that adequate programs have been established and implemented to ensure substantial improvement. A Category 3 designation also requires a vote of the NRC Commissioners to restart the units. On August 6, 1996, the NRC Chairman described problems at the Millstone units as pervasive and indicated that a culture change is required. The NRC Chairman has also announced that independent verification of corrective actions taken at the units will be required prior to restart. It is uncertain when Millstone 3 will be allowed by the NRC to restart, although NEP believes that delays well beyond the end of 1996 are likely. Based on an estimate provided by NU, NEP accrued approximately $3 million in the second quarter of 1996 for its portion of the future incremental operation and maintenance costs related to corrective actions at the Millstone 3 unit. These costs were charged to other operation and maintenance expense. Additional costs may be incurred beyond those already recognized. NEP has been, and expects to continue until the unit is returned to service, incurring approximately $1.5 million per month in replacement power costs, which it has been recovering through its fuel clause. The Connecticut Yankee station was shut down on July 22, 1996 after a potential problem with the cooling systems was identified. On July 31, 1996, the NRC identified in an inspection report several additional issues which must be resolved prior to restart. The report addressed numerous programmatic weaknesses, significant deficiencies and errors, as well as issues similar to some identified at the Millstone 1 unit. As a result, Connecticut Yankee began a scheduled refueling outage early. On August 9, 1996, the NRC wrote to NU concerning recently identified safety concerns that raise questions regarding the continued operation of Connecticut Yankee. The NRC letter requires NU to resubmit under oath its basis for continued operation of the unit. NEP cannot predict when restart of Connecticut Yankee will occur. Maine Yankee NEP has a 20 percent ownership interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear generating station. The Maine Yankee station shut down on July 20, 1996 after identifying a potential problem with the cooling system. The station is in the process of returning to service. Maine Yankee is also subject to an NRC independent safety assessment (ISA) that began in June 1996. The ISA will be extensive and results are not expected until the Fall of 1996. Other nonaffiliated facilities which have been the subject of similar assessments have incurred substantial additional capital and operating expenditures. Prior to the shutdown, Maine Yankee had been operating at only 90 percent power. Upon its return to service, Maine Yankee will continue operating at 90 percent power until the NRC authorizes operation at a higher level. The New England Power Pool (NEPOOL) has indicated that with several nuclear units in New England not in service, there could be insufficient power supply available in New England to meet demand during the remainder of the summer peak-load period. NEPOOL members have taken steps to mitigate the load situation. In general, it is unknown what the total ultimate impact of the increased NRC scrutiny on the nuclear plants mentioned above will have on NEP's operations and costs. Retail Rate Activity - -------------------- On May 6, 1996, the NHPUC approved a settlement agreement for a $1.1 million rate increase for Granite State Electric Company (Granite) which the Company began billing effective June 1, 1996. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Second Quarter Six Months -------------- ------------ 1996 vs 1995 1996 vs 1995 -------------- ------------ (In Millions) Sales growth $ 9 $ 24 Retail rate increases 11 22 Rate adjustment mechanisms (7) (14) Fuel recovery 10 27 Accrued New England Energy Incorporated (NEEI) revenues (6) (10) Unbilled revenues recognized under rate agreements (2) (4) Other 3 - --- ---- $18 $ 45 === ==== For a discussion of sales growth to ultimate customers, see the "Earnings" section. Retail rate increases for the second quarter and six months ended June 30, 1996 reflect a Massachusetts Electric $31 million base rate increase effective in October 1995, a Narragansett $12 million base rate increase effective in December 1995, and a Granite $850,000 interim increase effective in November 1995 that was later replaced by a $1.1 million rate increase, effective on June 1, 1996. Rate adjustment mechanisms include true-ups for the pass-through of purchased power billings between NEP and the retail companies. For a discussion of fuel recovery see the fuel costs discussion in the "Operating Expenses" section. Accrued NEEI fuel revenues reflect losses incurred by NEEI on its rate-regulated oil and gas operations. These revenues are accrued in the year of loss, but are billed to customers through NEP's fuel adjustment clause in the following year. The decrease in NEEI losses in the quarter and six months is principally due to increased gas prices as well as a reduced level of production. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Second Quarter Six Months -------------- ------------ 1996 vs 1995 1996 vs 1995 -------------- ------------ (In Millions) Fuel costs $ 12 $ 30 Purchased energy, excluding fuel (14) (25) Operation and maintenance 8 2 Depreciation and amortization: Seabrook 1 and OCA amortization (5) (12) Depreciation, including Manchester Street 4 9 Oil and gas properties (3) (7) Taxes, other than income taxes 4 7 Income taxes 2 11 ---- ---- $ 8 $ 15 ==== ==== Fuel costs represent fuel for generation and the portion of purchased electric energy permitted to be recovered through NEP's fuel adjustment clause. The increase in fuel costs in the second quarter and first six months of 1996 reflects increased kWh sales and additional fixed pipeline demand charges. These increases were partially offset by reduced purchases of power from nonaffiliates reflecting increased hydro generation and increased generation from affiliated nuclear power suppliers. In accordance with a 1992 rate agreement, approximately 50 percent of NEP's fixed pipeline demand charges in prior years were deferred pending completion of the Manchester Street Station repowering project. The remainder of the fixed pipeline demand charges were passed through NEP's fuel clause. The project was completed in the second half of 1995 and, accordingly, no further amounts have been deferred. The deferred amounts are currently being amortized over 25 years. The portion of purchased electric energy costs not recovered through NEP's fuel clause is shown as purchased energy, excluding fuel. The decrease in purchased energy, excluding fuel, is principally due to 1995 overhauls and refueling shutdowns at Maine Yankee and two other partially-owned nuclear power units, as well as reduced purchases of capacity from other suppliers. Purchased power costs in 1995 also included NEP's portion of incremental costs to repair steam generator tubes at Maine Yankee. Two of these nuclear units, Connecticut Yankee, which is currently shutdown, and Vermont Yankee are scheduled for refueling shutdowns in the second half of 1996. See "Investments in Nuclear Units" section. The increase in other operation and maintenance expenses for the second quarter of 1996 includes costs associated with Millstone 3. These costs reflect NEP's portion of future incremental operation and maintenance costs related to corrective actions at the unit. The decrease in Seabrook 1 and OCA amortization reflects the completion in mid-1995 of the amortization of a portion of Seabrook 1 costs and certain coal conversion costs. These decreases were partially offset by increased depreciation of other utility plant, including the Manchester Street Station. The increase in taxes, other than income taxes in 1996 is due to increased property taxes, including taxes on the Manchester Street Station. Allowance For Funds Used During Construction - -------------------------------------------- AFDC decreased for the second quarter and first six months of 1996 due to the completion of the Manchester Street Station repowering project in 1995. Liquidity and Capital Resources - ------------------------------- Plant expenditures in the first six months of 1996 amounted to $121 million for the utility subsidiaries. The funds necessary for utility plant expenditures were provided by net cash from operating activities, after the payment of dividends. The financing activities of NEES subsidiaries for the first six months of 1996 are summarized as follows: Issues Retirements ------ ----------- (In Millions) Long-term debt - -------------- Narragansett $ 2 $ 2 NEP 40 50 Hydro-Transmission Companies 5 Narragansett Energy Resources Company 1 NEEI 25 --- --- $42 $83 === === NEP refinanced $40 million of variable rate mortgage bonds and Narragansett refinanced $2 million of long-term debt at an interest rate of 7.24 percent in the first six months of 1996. On July 16, 1996, the Nantucket Electric Company (Nantucket), a retail subsidiary, issued $28 million of long-term tax-exempt debt at rates ranging from 4.10 percent to 6.75 percent. Massachusetts Electric guaranteed the debt on behalf of Nantucket. The retail subsidiaries plan to issue an additional $30 million of long-term debt by the end of 1996. Citing the passage of the restructuring legislation in Rhode Island, Moody's Investor Services lowered the credit rating of NEP, Massachusetts Electric and Narragansett from A1 to A2 for senior secured debt. Standard & Poor's downgraded NEP's senior secured debt credit rating from A+ to A for similar reasons. Duff & Phelps Credit Rating Company had previously downgraded NEP's senior secured debt from AA- to A+ in March 1996 in anticipation of increasing competitive forces in the Northeast. In the second quarter of 1996, NEP redeemed all of its 7.24 percent series of cumulative preferred stock. A premium of $450,000 in connection with this redemption was charged to retained earnings in the second quarter. Net cash from operating activities provided all of the funds for oil and gas expenditures for the first six months of 1996. NEEI capitalized oil and gas exploration and development costs of $6 million in the first six months of 1996 which includes approximately $4 million of capitalized interest costs. At June 30, 1996, NEES and its consolidated subsidiaries had available lines of credit and standby bond purchase facilities with banks totaling $714 million. These lines and facilities were used for liquidity support for $194 million of commercial paper borrowings and for $372 million of NEP mortgage bonds in tax-exempt commercial paper mode. Fees are paid on the lines and facilities in lieu of compensating balances. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning restructuring dockets before state and federal regulatory agencies, discussed in Part I of this report in Management's Discussion and Analysis of Financial Condition and Results of Operations, is incorporated herein by reference and made a part hereof. Information concerning a settlement agreement regarding a lawsuit filed against New England Power Company (NEP) by Milford Power Limited Partnership on October 28, 1994, discussed in this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Information concerning arbitration of a dispute regarding NEP's purchased power contract with Hydro-Quebec discussed in this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------ On April 23, 1996, the Annual Meeting of Shareholders was held. Directors were elected and received the following votes: Director Votes For Votes Withheld -------- --------- -------------- Joan T. Bok 52,557,700 1,256,397 Paul T. Joskow 52,735,875 1,078,222 John M. Kucharski 52,932,556 881,541 Edward H. Ladd 53,003,940 810,157 Joshua A. McClure 52,918,624 895,473 John W. Rowe 52,894,019 920,078 George M. Sage 52,966,685 847,412 Charles E. Soule 52,881,694 932,403 Anne Wexler 52,844,879 969,218 James Q. Wilson 52,891,201 922,896 James R. Winoker 52,904,273 909,824 The shareholders by a vote of 7,804,770 in favor, 37,464,474 against, and 2,130,221 abstaining, rejected a shareholder proposal regarding the splitting of shares. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The Company filed a report on Form 8-K dated May 30, 1996, containing Item 5, Other Events. The Company is filing Financial Data Schedules. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q for the quarter ended June 30, 1996 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND ELECTRIC SYSTEM s/Alfred D. Houston Alfred D. Houston Executive Vice President and Chief Financial Officer Date: August 14, 1996 The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an agreement and declaration of trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which as amended has been filed with the Secretary of the Commonwealth of Massachusetts. Any agreement, obligation or liability made, entered into or incurred by or on behalf of New England Electric System binds only its trust estate, and no shareholder, director, trustee, officer or agent thereof assumes or shall be held to any liability therefor. EX-99 2 Exhibit Index ------------- Exhibit Description Page - ------- ----------- ---- 27 Financial Data Schedule Filed herewith EX-27 3 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF NEW ENGLAND ELECTRIC SYSTEM, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 JUN-30-1996 JUN-30-1995 JUN-30-1996 JUN-30-1995 QTR-2 QTR-2 QTR-2 QTR-2 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 3,889,104 0 0 0 384,926 0 0 0 483,007 0 0 0 389,639 0 0 0 0 0 0 0 5,146,676 0 0 0 64,970 0 0 0 736,814 0 0 0 850,939 0 0 0 1,650,222 0 0 0 0 0 0 0 132,016 0 0 0 1,609,179 0 0 0 0 0 0 0 0 0 0 0 195,902 0 0 0 52,585 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,506,772 0 0 0 5,146,676 0 0 0 1,137,330 1,091,863 551,110 533,547 61,883 50,742 22,705 20,779 911,359 907,855 459,272 452,887 973,242 958,597 481,977 473,666 164,088 133,266 69,133 59,881 4,996 11,203 2,863 5,489 169,084 144,469 71,996 65,370 64,737 54,899 33,134 27,558 96,497 81,193 35,001 33,531 4,165 4,345 1,993 2,173 96,497 81,193 35,001 33,531 76,637 75,689 38,332 38,332 55,122 53,144 27,278 27,065 274,505 205,660 100,048 61,152 $1.49 $1.25 $.54 $.52 $1.49 $1.25 $.54 $.52 Total deferred charges includes other assets. Preferred stock reflects preferred stock of subsidiaries. Preferred stock dividends reflect preferred stock dividends of subsidiaries. Total common stockholders equity is reflected net of treasury stock at cost. -----END PRIVACY-ENHANCED MESSAGE-----