-----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, Pk1fvprUzvOyiaA6sNiTwAY/WmxqOONH3VL8bJ9DpuFP8WCyCeYPfsYNvhqKTSb5 Ngi3qbKhkrRBHFMy3M0/og== 0000071297-97-000030.txt : 19970514 0000071297-97-000030.hdr.sgml : 19970514 ACCESSION NUMBER: 0000071297-97-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97601995 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 March 31, 1997 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: 64,825,921 shares at March 31, 1997. PART I FINANCIAL STATEMENTS Item 1. Financial Statements - ---------------------------- NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Periods Ended March 31 (Unaudited)
Three Months Twelve Months ------------ ------------- 1997 1996 1997 1996 ---- ---- ---- ---- (In Thousands) Operating revenue $638,146 $586,220 $2,402,625 $2,299,616 -------- -------- ---------- ---------- Operating expenses: Fuel for generation 99,226 74,292 359,928 262,831 Purchased electric energy 144,530 125,690 528,240 528,565 Other operation 123,874 115,521 509,443 504,165 Maintenance 31,056 32,283 126,558 127,212 Depreciation and amortization 66,005 65,676 246,708 258,349 Taxes, other than income taxes 39,728 38,625 144,836 135,941 Income taxes 38,765 39,178 138,786 137,555 -------- -------- ---------- ---------- Total operating expenses 543,184 491,265 2,054,499 1,954,618 -------- -------- ---------- ---------- Operating income 94,962 94,955 348,126 344,998 Other income: Allowance for equity funds used during construction 5,238 Equity in income of generating companies 2,700 2,668 10,365 10,668 Other income (expense), net (1,666) (535) (9,297) (7,389) -------- -------- ---------- ---------- Operating and other income 95,996 97,088 349,194 353,515 -------- -------- ---------- ---------- Interest: Interest on long-term debt 27,528 27,844 110,163 110,130 Other interest 3,791 4,267 19,051 19,507 Allowance for borrowed funds used during construction (643) (508) (2,381) (11,200) -------- -------- ---------- ---------- Total interest 30,676 31,603 126,833 118,437 -------- -------- ---------- ---------- Income after interest 65,320 65,485 222,361 235,078 Preferred dividends and net gain on reacquisition of preferred stock 1,833 2,172 6,124 8,690 Minority interests 1,667 1,817 6,977 7,797 -------- -------- ---------- ---------- Net income $ 61,820 $ 61,496 $ 209,260 $ 218,591 ======== ======== ========== ========== Common shares 64,969,652 64,878,371 64,940,490 64,921,367 Net income per common share $.95 $.95 $3.22 $3.37 Dividends declared per share $.59 $.59 $2.36 $2.36 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $887,292 $831,529 $ 854,720 $ 789,350 Net income 61,820 61,496 209,260 218,591 Dividends declared on common shares (38,271) (38,305) (153,139) (153,221) -------- -------- --------- --------- Retained earnings at end of period $910,841 $854,720 $ 910,841 $ 854,720 ======== ======== ========= ========= The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
March 31, December 31, ASSETS 1997 1996 ------ ---- ---- (In Thousands) Utility plant, at original cost $ 5,738,120 $5,692,956 Less accumulated provisions for depreciation and amortization 1,887,725 1,853,003 ----------- ---------- 3,850,395 3,839,953 Construction work in progress 56,165 56,652 ----------- ---------- Net utility plant 3,906,560 3,896,605 ----------- ---------- Oil and gas properties, at full cost 1,288,430 1,286,661 Less accumulated provision for amortization 1,102,376 1,081,940 ----------- ---------- Net oil and gas properties 186,054 204,721 ----------- ---------- Investments: Nuclear power companies, at equity 48,692 47,902 Other subsidiaries, at equity 43,561 40,124 Other investments 97,727 96,399 ----------- ---------- Total investments 189,980 184,425 ----------- ---------- Current assets: Cash 8,296 8,477 Accounts receivable, less reserves of $20,435,000 and $18,702,000 265,942 262,103 Unbilled revenues 48,315 59,093 Fuel, materials, and supplies, at average cost 77,866 74,111 Prepaid and other current assets 77,617 85,096 ----------- ---------- Total current assets 478,036 488,880 ----------- ---------- Deferred charges and other assets 441,233 448,620 ----------- ---------- $ 5,201,863 $5,223,251 =========== ========== CAPITALIZATION AND LIABILITIES ------------------------------ Capitalization: Common share equity: Common shares, par value $1 per share: Authorized - 150,000,000 shares Outstanding - 64,969,652 shares and 64,969,652 shares $ 64,970 $ 64,970 Paid-in capital 736,773 736,773 Retained earnings 910,841 887,292 Treasury stock - 143,731 shares and 102,957 shares (5,044) (3,618) ----------- ---------- Total common share equity 1,707,540 1,685,417 Minority interests in consolidated subsidiaries 46,236 46,293 Cumulative preferred stock of subsidiaries 126,166 126,166 Long-term debt 1,501,847 1,614,578 ----------- ---------- Total capitalization 3,381,789 3,472,454 ----------- ---------- Current liabilities: Long-term debt due within one year 145,120 79,705 Short-term debt 113,850 145,050 Accounts payable 127,178 148,592 Accrued taxes 69,698 14,911 Accrued interest 22,807 27,494 Dividends payable 37,377 37,276 Other current liabilities 124,272 109,582 ----------- ---------- Total current liabilities 640,302 562,610 ----------- ---------- Deferred federal and state income taxes 731,607 750,929 Unamortized investment tax credits 91,331 91,936 Other reserves and deferred credits 356,834 345,322 ----------- ---------- $ 5,201,863 $5,223,251 =========== ========== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Statements of Cash Flows Quarters Ended March 31 (Unaudited)
1997 1996 ---- ---- (In Thousands) Operating activities: Net income $ 61,820 $ 61,496 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 66,895 67,577 Deferred income taxes and investment tax credits, net (18,875) (19,097) Allowance for funds used during construction (643) (504) Minority interests 1,667 1,817 Decrease (increase) in accounts receivable, net and unbilled revenues 6,939 20,807 Decrease (increase) in fuel, materials, and supplies (3,755) (4,228) Decrease (increase) in prepaid and other current assets 7,479 (2,866) Increase (decrease) in accounts payable (21,414) (35,111) Increase (decrease) in other current liabilities 64,790 77,247 Other, net 14,457 7,319 --------- --------- Net cash provided by operating activities $ 179,360 $ 174,457 --------- --------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $ (54,075) $ (62,530) Oil and gas exploration and development (1,769) (2,396) Other investing activities (3,732) (1,878) --------- --------- Net cash used in investing activities $ (59,576) $ (66,804) --------- --------- Financing activities: Dividends paid to minority interests $ (1,751) $ (2,664) Dividends paid on NEES common shares (38,143) (38,854) Short-term debt (31,200) (38,701) Long-term debt - issues 41,850 Long-term debt - retirements (47,445) (71,090) Repurchase of common shares (1,426) (859) --------- --------- Net cash used in financing activities $(119,965) $(110,318) --------- --------- Net increase (decrease) in cash and cash equivalents $ (181) $ (2,665) Cash and cash equivalents at beginning of period 8,477 7,064 --------- --------- Cash and cash equivalents at end of period $ 8,296 $ 4,399 ========= ========= 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 in place an internal environmental audit program and an external waste disposal vendor audit and qualification program 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 United States 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 1970s, NEES was a combined electric and gas holding company system.) NEES is aware of approximately 40 such manufactured gas 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 possible hazardous waste sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. In 1993, the Massachusetts Department of Public Utilities approved a settlement agreement regarding the rate recovery of remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts. Under that agreement, qualified costs related to these sites are paid out of a special fund established on Massachusetts Electric's books. Massachusetts Electric made an initial $30 million contribution to the fund. Rate-recoverable contributions of $3 million, adjusted since 1993 for inflation, are added annually to the fund along with interest and any recoveries from insurance carriers. At March 31, 1997, the fund had a balance of $17 million. Under a 1996 Massachusetts restructuring and rate settlement, an additional $15 million will be transferred to the fund in 1997 out of existing reserves for refunds. This settlement is pending approval with the Note A - Hazardous Waste - Continued - ------------------------ Federal Energy Regulatory Commission. 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 March 31, 1997, NEES had total reserves for environmental response costs of $48 million and a related regulatory asset of $17 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. In October 1996, the American Institute of Certified Public Accountants issued new accounting rules for Environmental Remediation Liabilities which became effective in 1997. These new rules do not have a material effect on NEES's financial position or results of operations. Note B - Investments in Nuclear Units - ------------------------------------- Millstone 3 New England Power Company (NEP) is a 12 percent joint owner of the Millstone 3 nuclear generating unit (Millstone 3) a 1,150 megawatt (MW) unit. In April 1996, the Nuclear Regulatory Commission (NRC) ordered Millstone 3, which has experienced numerous technical and nontechnical problems, to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). NEP is not an owner of Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. A number of significant prerequisites must be fulfilled prior to restart of Millstone 3, including certification by NU that the unit adequately conforms to its design and licensing bases, an independent verification of corrective actions taken at the unit, an NRC assessment concluding a culture change has occurred, public hearings, and a vote of the NRC Commissioners. NU has announced that it expects Millstone 3 to be ready for restart around the end Note B - Investments in Nuclear Units - Continued - ------------------------------------- of 1997, subject to review by the NRC Commissioners. NEP cannot predict when Millstone 3 will be allowed by the NRC to restart, but believes that the unit will remain shut down for a very protracted period. In 1996, NEP incurred $10 million of actual costs related to corrective actions associated with the outage and also accrued a liability at December 1996 of approximately $3 million for its share of future corrective action costs. In May 1997, NEP was informed by NU that additional costs are likely to be incurred in 1997, of which NEP's share is approximately $10 million. There is no assurance that NEP's share of the actual additional costs will be limited to $10 million. During the outage, NEP is also incurring approximately $1.6 million per month in incremental replacement power costs, which it has been recovering from customers through its fuel clause. Several criminal investigations related to Millstone 3 are ongoing. The NRC has identified numerous apparent violations of its regulations which may result in the assessment of civil penalties. NEP and other minority owners of Millstone 3 are assessing their legal rights with respect to NU's operation of Millstone 3. Maine Yankee NEP has a 20 percent equity ownership interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW nuclear generating station. Over the past few years, the Maine Yankee nuclear generating plant has experienced numerous technical and nontechnical problems. In 1995, the plant had been shut down for much of the year due to the discovery of cracks in its steam generator tubes. The plant is currently shut down due to a cable routing problem. In addition, due to leaking nuclear fuel rods, 68 fuel assemblies will be replaced. As a result, Maine Yankee management does not expect the unit to restart until the summer of 1997. In late 1995, allegations were made to the NRC that inadequate analyses of the plant's emergency core cooling system had been performed. As a result of the allegations, the NRC limited the plant's operation to 90 percent of full capacity. In September 1996, the NRC asked the Department of Justice (DOJ) to review, for potential criminal violations, an NRC investigatory report on the allegations. The DOJ is not limited in its investigation to the matters covered in that report. Note B - Investments in Nuclear Units - Continued - ------------------------------------- During 1996, the NRC conducted an independent safety assessment (ISA) and identified a number of weaknesses, deficiencies, and apparent violations which could result in fines. Yankee Atomic, in which NEP has a 30 percent equity ownership interest, performed professional services for Maine Yankee associated with the matters being investigated. In response to the ISA results, Maine Yankee has indicated that it will spend more than $50 million in 1997 on operational improvements. In addition, management has identified approximately $34 million in additional expenditures it proposes to make in 1997. In February 1997, Entergy Corporation, an operator of five nuclear units, commenced providing management services to Maine Yankee. Under a confirmatory action letter issued by the NRC on December 18, 1996, and supplemented on January 30, 1997, Maine Yankee must fulfill certain commitments before its plant will be allowed by the NRC staff to return to service. The Maine Yankee owners are reviewing the economic viability of the plant. Because of regulatory and other uncertainties faced by Maine Yankee, NEP cannot predict whether or when Maine Yankee will return to service. During the outage, NEP is incurring approximately $1.8 million per month in incremental replacement power costs, which it has been recovering from customers through its fuel clause. General The Millstone 3 and Maine Yankee nuclear generating units are currently shut down and have been placed on the NRC "Watch List," signifying that their safety performance exhibits sufficient weakness to warrant increased NRC attention. Neither may restart without NRC approval. At present, the Vermont Yankee and Seabrook 1 nuclear generating units appear to be operating routinely without major problems. On October 9, 1996, the NRC issued letters to operators of nuclear power plants requiring them to document that the plants are operated and maintained within their design and licensing bases, and that any deviations are reconciled in a timely manner. The Seabrook 1, Maine Yankee, and Vermont Yankee nuclear power plants responded to the NRC letters in February 1997. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as Maine Yankee and Vermont Yankee, are increasing rapidly and could adversely affect their service lives, availability, and costs. These uncertainties stem from a combination of factors, including the acceleration of competitive pressures in the power generation industry and increased NRC scrutiny. Note C - Town of Norwood Dispute - -------------------------------- On April 14, 1997, the Town of Norwood, Massachusetts filed a lawsuit against NEP in the United States District Court for the District of Massachusetts. NEP is the wholesale electric supplier for Norwood pursuant to rates approved by the Federal Energy Regulatory Commission. Norwood alleges that the Company's proposal to divest its power generation assets violates the terms of a 1983 agreement settling an antitrust lawsuit brought by Norwood against NEP. Norwood also alleges that NEP's proposed divestiture plan and recovery of stranded investment costs contravene Federal antitrust laws. Norwood seeks that NEP be permanently enjoined from refusing to comply with the terms of the 1983 settlement agreement by divesting its generation assets or from charging unjust and unreasonable rates to Norwood. Norwood also seeks to recover treble damages of $450,000,000. NEP believes that its divestiture plan will promote competition in the wholesale power generation market and that it has met and will continue to meet its contractual commitments to Norwood. Further, NEP believes that Norwood's lawsuit is without merit and will move to dismiss the lawsuit. Note D - New Accounting Standard - -------------------------------- In 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 128, Earnings Per Share (FAS 128), which changes the calculation and presentation of earnings per share (EPS). FAS 128 is effective for periods ending after December 15, 1997 and requires restatement of all prior- period EPS data presented. However, FAS 128 is not expected to have any significant impact on NEES's EPS calculations. Note E - ------ 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 1996 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 1996 Annual Report on Form 10-K. Earnings - -------- Earnings for the first quarter of 1997 were $.95 per share. These are the same earnings as the first quarter of 1996. The table below details the primary factors affecting consolidated earnings: Items in parentheses reduce earnings and are either increased expenses or decreased revenues; items not in parentheses increase earnings and are either increased revenues or decreased expenses. 1996 earnings $ .95 Revenues .04 Purchased power costs, excluding fuel (.02) Depreciation and amortization .04 Operation and maintenance expense (.05) Other (.01) ---- 1997 earnings $ .95 ===== The increase in revenues for the first quarter results from a distribution rate increase effective in January 1997 and a wholesale transmission rate increase that became effective in July 1996, partially offset by lower kilowatt-hour (kWh) deliveries due to milder weather in the first quarter of 1997. KWh deliveries to ultimate customers decreased 0.3 percent in the first quarter of 1997. The increase in purchased power costs, excluding fuel, during the first quarter of 1997 reflects overhaul and repair costs relating to the Maine Yankee nuclear power plant and an overhaul at the Ocean State Power gas-fired plant, partially offset by reduced capacity purchases. The decrease in depreciation and amortization expense reflects the completion of the amortization of New England Power Company's (NEP) pre-1988 investment in the Seabrook 1 nuclear unit and NEP's investment in the cancelled Seabrook 2 nuclear unit. In accordance with a 1995 settlement agreement, upon completion of the amortization of Seabrook 1 and Seabrook 2, NEP agreed to accelerate its amortization of previously deferred costs associated with postretirement benefits other than pensions (PBOPs). The increase in operation and maintenance expense is primarily due to this increased PBOP amortization. Industry Restructuring - ---------------------- For a discussion of industry restructuring activities in Massachusetts, Rhode Island, and New Hampshire, see the "Industry Restructuring" section in the Company's Form 10-K for 1996. Divestiture of Generation Business Under the Massachusetts settlement and thus automatically under the Rhode Island statute, the NEES companies must complete the divestiture of their generating business within six months of the later of the commencement of retail choice in Massachusetts or the receipt of all necessary regulatory approvals. The NEES companies have received preliminary proposals for the purchase of its generation business from 25 potential buyers. The NEES companies have reviewed the preliminary proposals and invited a select group to submit formal, binding bids by the end of June. The NEES companies hope to announce a purchase and sale agreement by mid-year. Closing would follow the receipt of regulatory approvals, which are expected to take at least six to 12 months following the execution of purchase and sale agreements. At December 1996, the undepreciated book value of nonnuclear net generating plant was approximately $1.1 billion for all of the NEES companies. As part of the divestiture plan, NEP will endeavor to sell, or otherwise transfer, its minority interest in four nuclear power plants to nonaffiliates. In addition, New England Energy Incorporated (NEEI) is planning to sell its oil and gas properties, the cost of which is supported by NEP through fuel purchase contracts. The NEES companies have reached an agreement with all three of its unions - the Brotherhood of Utility Workers, the International Brotherhood of Electrical Workers, and the Utility Workers Union of America - regarding benefits and other assistance to union employees that are affected by the restructuring of the electric utility industry and the NEES companies divesture of its generation business. The NEES companies anticipate that industry restructuring and divestiture will lead to workforce reductions. Rhode Island The Rhode Island legislature is considering a number of proposed bills relating to industry restructuring. Possible legislation dealing with securitization of stranded costs has been discussed; however, to date no such legislation has been introduced. Accounting Implications 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. Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets, and thereby defer the income statement impact of certain costs expected to be recovered in future rates. At December 1996, the NEES companies had approximately $550 million in regulatory assets in compliance with FAS 71 of which approximately $75 million relate to the transmission and distribution business. Both the Massachusetts settlement and the Rhode Island statute provide for full recovery of the costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable from the proceeds of the divestiture of NEP's generating business. Federal Energy Regulatory Commission (FERC) approval is still required for the Massachusetts and Rhode Island stranded cost recovery filings. The cost of these assets would be recovered as part of a transition access charge imposed on all distribution customers. After the proposed divestiture, substantially all of NEP's business, including the recovery of its stranded costs, would remain under cost-based rate regulation. NEES believes the Massachusetts settlement and the Rhode Island statute will enable the NEES distribution companies operating in those states to recover through rates their specific costs of providing ongoing distribution services. In addition, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. NEES believes these factors will allow its principal subsidiaries to continue to apply FAS 71 and that no impairment of plant assets will exist under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). Any loss from the divestiture of generating assets and oil and gas assets will be recorded as a regulatory asset to be recovered through the ongoing transition access charge. Although NEES believes that its subsidiaries will continue to meet the criteria for continued application of FAS 71, NEES understands that members of the Securities and Exchange Commission (SEC) staff have raised questions concerning the continued applicability of FAS 71 to certain other electric utilities facing restructuring. In connection therewith, the Emerging Issues Task Force of the Financial Accounting Standards Board has decided to take under consideration how FAS 71 should be applied in light of recent changes within the regulated utility industry. In addition, despite the progress made to date in Massachusetts and Rhode Island, it is possible that the final restructuring plans ultimately ordered by regulatory bodies would not reflect full recovery of stranded costs, including a fair return on those costs as they are being recovered. In the event that future circumstances should cause the application of FAS 71 to be discontinued, a noncash write-off of previously established regulatory assets related to the affected operations would be required. In addition, write-downs of plant assets under FAS 121 could be required, including a write-off of any loss from the divestiture of the generating business. Brayton Point - ------------- In October 1996, the Environmental Protection Agency (EPA) announced it was beginning a process to determine whether to modify or revoke and reissue NEP's water discharge permit for its Brayton Point 1,576 megawatt power plant. This action came two years before the permit expiration date. The EPA stated it took this step in response to a request from the Rhode Island Department of Environmental Management (RIDEM) that action be taken on the Brayton Point permit prior to its 1998 renewal, based on concerns raised in a final RIDEM report issued in October 1996. The report asserted a statistical correlation between the decline in the fish population in Mount Hope Bay and a change in operations at Brayton Point that occurred in the mid-1980's. In April 1997, NEP signed a memorandum of agreement negotiated with the various federal and state environmental agencies under which NEP will voluntarily operate under more stringent conditions than under its existing permit. The agreement is in lieu of any immediate action on the permit, and will remain in effect until a renewal permit is issued. NEP cannot predict at this time what permit changes will be required or the impact on Brayton Point's operations and economics. However, permit changes may substantially impact the plant's capacity and ability to produce energy and/or require significant capital expenditures of tens of millions of dollars to construct equipment to address the concerns raised by the environmental agencies. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue First Quarter ------------- 1997 vs 1996 ------------- (In Millions) Decline in kWh deliveries $(2) Retail rate increase 3 Rate adjustment mechanisms 2 Fuel recovery 39 Demand Side Management (DSM) program recovery 1 Oil and gas revenues 7 Other (including transmission revenues) 2 --- $52 === For a discussion of kWh deliveries to ultimate customers, see the "Earnings" section. The retail rate increase reflects an $11 million increase in distribution rates for The Narragansett Electric Company (Narragansett Electric) that became effective in January 1997 pursuant to Rhode Island's Utility Restructuring Act of 1996. Rate adjustment mechanisms reflect 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. The increase in oil and gas revenues is due to increased production and an increase in gas prices. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses First Quarter ------------- 1997 vs 1996 ------------- (In Millions) Fuel costs $42 Purchased energy excluding fuel 2 Operation and maintenance: Retail DSM 1 Other 6 Depreciation: Utility plant (4) Oil and gas properties 4 Taxes 1 --- $52 === Total operating expenses increased $52 million in the first quarter of 1997 compared with the same period in 1996. The increase reflects increased fuel costs, purchased power costs, and maintenance expense. 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 first quarter of 1997 reflects increased power supply to other utilities and increased replacement power costs due to the reduced generation from partially owned nuclear units. See "Investments in Nuclear Units" section in the "Notes to the Unaudited Financial Statements". The portion of purchased electric energy costs not recovered through NEP's fuel clause is shown as purchased energy, excluding fuel. The increase in purchased energy, excluding fuel, during the first quarter of 1997 reflects overhaul and repair costs relating to the Maine Yankee nuclear power plant and an overhaul at the Ocean State Power gas-fired plant, partially offset by reduced capacity purchases. The decrease in depreciation and amortization expense reflects the completion of the amortization of NEP's pre-1988 investment in the Seabrook 1 nuclear unit and NEP's investment in the cancelled Seabrook 2 nuclear unit. In accordance with a 1995 settlement agreement, upon completion of the amortization of Seabrook 1 and Seabrook 2, NEP agreed to accelerate its amortization of previously deferred costs associated with post-retirement benefits other than pensions (PBOPs). The increase in operation and maintenance expenses is primarily due to this increased PBOP amortization. Liquidity and Capital Resources - ------------------------------- Plant expenditures in the first three months of 1997 amounted to $54 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 three months of 1997 are summarized as follows: Retirements ----------- (In Millions) Long-term debt - -------------- NEP $35 Hydro-Transmission Companies 3 NEEI 9 --- $47 === Net cash from operating activities provided all of the funds for oil and gas expenditures for the first three months of 1997. NEEI's capitalized oil and gas exploration and development costs amounted to $2 million, which primarily represents capitalized interest costs. At March 31, 1997, NEES and its consolidated subsidiaries had lines of credit and standby bond purchase facilities with banks totaling $702 million. These lines and facilities were used for liquidity support for $114 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 a lawsuit against a Company subsidiary, New England Power Company, by the Town of Norwood, Massachusetts, discussed in PART I of this report in Note C of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The Company filed no reports on Form 8-K during the quarter. 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 March 31, 1997 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: May 13, 1997 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
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-31-1997 MAR-31-1997 3-MOS PER-BOOK 3,906,560 376,034 478,036 441,233 0 5,201,863 64,970 736,773 910,841 1,707,540 0 126,166 1,501,847 0 0 113,850 145,120 0 0 0 1,607,340 5,201,863 638,146 38,765 504,419 543,184 94,962 1,034 95,996 30,676 61,820 1,833 61,820 38,271 27,528 179,360 $.95 $.95 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-----