-----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, Jh/hp9Kb+wwx/8SfuBxtY97e3C/z+T73FiXNHd3hnG3RbkPua9AvFSQ1ZLp2NORZ M4zU/IZDT2uKvwURn3kn7A== 0000071297-97-000047.txt : 19970801 0000071297-97-000047.hdr.sgml : 19970801 ACCESSION NUMBER: 0000071297-97-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970731 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: 97649055 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, 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: 64,820,414 shares at June 30, 1997. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Periods Ended June 30 (Unaudited)
Quarter Six Months ------- ---------- 1997 1996 1997 1996 ---- ---- ---- ---- (In Thousands) Operating revenue $577,625 $551,110$1,215,771 $1,137,330 -------- ------------------ ---------- Operating expenses: Fuel for generation 85,836 72,440 185,062 146,732 Purchased electric energy 127,183 124,893 271,713 250,583 Other operation 141,121 126,075 264,995 241,596 Maintenance 39,483 34,638 70,539 66,921 Depreciation and amortization 59,140 65,230 125,145 130,906 Taxes, other than income taxes 36,223 35,996 75,951 74,621 Income taxes 22,056 22,705 60,821 61,883 -------- ------------------ ---------- Total operating expenses 511,042 481,977 1,054,226 973,242 -------- ------------------ ---------- Operating income 66,583 69,133 161,545 164,088 Other income: Equity in income of generating companies 2,431 2,819 5,131 5,487 Other income (expense), net (3,094) 44 (4,760) (491) -------- ------------------ ---------- Operating and other income 65,920 71,996 161,916 169,084 -------- ------------------ ---------- Interest: Interest on long-term debt 26,753 27,278 54,281 55,122 Other interest 3,817 6,306 7,608 10,573 Allowance for borrowed funds used during construction (397) (450) (1,040) (958) -------- ------------------ ---------- Total interest 30,173 33,134 60,849 64,737 -------- ------------------ ---------- Income after interest 35,747 38,862 101,067 104,347 Preferred dividends of subsidiaries 1,833 1,993 3,666 4,165 Minority interests 1,682 1,868 3,349 3,685 -------- ------------------ ---------- Net income $ 32,232 $ 35,001$ 94,052 $ 96,497 ======== ================== ========== Average common shares 64,969,65264,898,27464,969,652 64,888,323 Net income per average common share $.50 $.54 $1.45 $1.49 Dividends declared per share $.59 $.59 $1.18 $1.18 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $910,841 $854,720 $887,292 $831,529 Net income 32,232 35,001 94,052 96,497 Dividends delcared on common shares (38,248) (38,332) (76,519) (76,637) Premium on redemption of preferred stock (450) (450) -------- -------- -------- -------- Retained earnings at end of period $904,825 $850,939 $904,825 $850,939 ======== ======== ======== ======== 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)
1997 1996 ---- ---- (In Thousands) Operating revenue $2,429,139 $2,317,179 ---------- ---------- Operating expenses: Fuel for generation 373,324 276,803 Purchased electric energy 530,530 513,168 Other operation 524,489 511,184 Maintenance 131,403 127,853 Depreciation and amortization 240,618 254,747 Taxes, other than income taxes 145,063 139,693 Income taxes 138,137 139,481 ---------- ---------- Total operating expenses 2,083,564 1,962,929 ---------- ---------- Operating income 345,575 354,250 Other income: Allowance for equity funds used during construction 2,471 Equity in income of generating companies 9,978 10,710 Other income (expense), net (12,435) (7,290) ---------- ---------- Operating and other income 343,118 360,141 ---------- ---------- Interest: Interest on long-term debt 109,638 110,343 Other interest 16,562 22,048 Allowance for borrowed funds used during construction (2,328) (8,378) ---------- ---------- Total interest 123,872 124,013 ---------- ---------- Income after interest 219,246 236,128 Preferred dividends and net gain on reacquisition of preferred stock 5,964 8,510 Minority interests 6,791 7,557 ---------- ---------- Net income $ 206,491 $ 220,061 ========== ========== Average common shares 64,949,413 64,906,229 Net income per average common share $3.18 $3.39 Dividends declared per share $2.36 $2.36 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $ 850,939 $ 784,549 Net income 206,491 220,061 Dividends declared on common shares (153,055) (153,221) Premium on redemption of preferred stock 450 (450) --------- --------- Retained earnings at end of period $ 904,825 $ 850,939 ========= ========= 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 1997 1996 ------ ---- ---- (In Thousands) Utility plant, at original cost $5,783,877$5,692,956 Less accumulated provisions for depreciation and amortization 1,921,852 1,853,003 -------------------- 3,862,025 3,839,953 Construction work in progress 50,178 56,652 -------------------- Net utility plant 3,912,203 3,896,605 -------------------- Oil and gas properties, at full cost 1,291,288 1,286,661 Less accumulated provision for amortization 1,114,345 1,081,940 -------------------- Net oil and gas properties 176,943 204,721 -------------------- Investments: Nuclear power companies, at equity 49,464 47,902 Other subsidiaries, at equity 43,213 40,124 Other investments 103,101 96,399 -------------------- Total investments 195,778 184,425 -------------------- Current assets: Cash 3,955 8,477 Accounts receivable, less reserves of $20,793,000 and $18,702,000 229,588 262,103 Unbilled revenues 63,100 59,093 Fuel, materials, and supplies, at average cost 80,362 74,111 Prepaid and other current assets 78,209 85,096 -------------------- Total current assets 455,214 488,880 -------------------- Deferred charges and other assets 403,566 448,620 -------------------- $5,143,704$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 904,825 887,292 Treasury stock - 149,238 shares and 102,957 shares (5,185) (3,618) Unrealized gain on securities, net 2,684 -------------------- Total common share equity 1,704,067 1,685,417 Minority interests in consolidated subsidiaries 46,195 46,293 Cumulative preferred stock of subsidiaries 126,166 126,166 Long-term debt 1,484,542 1,614,578 -------------------- Total capitalization 3,360,970 3,472,454 -------------------- Current liabilities: Long-term debt due within one year 104,710 79,705 Short-term debt 170,825 145,050 Accounts payable 127,793 148,592 Accrued taxes 25,357 14,911 Accrued interest 24,632 27,494 Dividends payable 37,350 37,276 Other current liabilities 132,434 109,582 -------------------- Total current liabilities 623,101 562,610 -------------------- Deferred federal and state income taxes 724,712 750,929 Unamortized investment tax credits 90,728 91,936 Other reserves and deferred credits 344,193 345,322 -------------------- $5,143,704$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 Six Months Ended June 30 (Unaudited)
1997 1996 ---- ---- (In Thousands) Operating Activities: Net income $ 94,052 $ 96,497 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 126,453 133,636 Deferred income taxes and investment tax credits, net (28,052) (26,626) Allowance for funds used during construction (1,040) (958) Minority interests 3,349 3,685 Decrease (increase) in accounts receivable, net and unbilled revenues 28,508 36,117 Decrease (increase) in fuel, materials, and supplies (6,251) (9,148) Decrease (increase) in prepaid and other current assets 6,887 (3,127) Increase (decrease) in accounts payable (20,799) (25,997) Increase (decrease) in other current liabilities 30,436 53,901 Other, net 36,936 16,525 --------- --------- Net cash provided by operating activities $ 270,479 $ 274,505 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $(103,280) $(121,307) Oil and gas exploration and development (4,627) (6,127) Other investing activities (6,125) (1,679) --------- --------- Net cash used in investing activities $(114,032) $(129,113) --------- --------- Financing Activities: Dividends paid to minority interests $ (3,566) $ (5,300) Dividends paid on NEES common shares (76,327) (77,239) Long-term debt - issues 41,850 Long-term debt - retirements (105,284) (83,330) Changes in short-term debt 25,775 (9,010) 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 (1,567) (958) --------- --------- Net cash used in financing activities $(160,969) $(149,697) --------- --------- Net increase (decrease) in cash and cash equivalents $ (4,522) $ (4,305) Cash and cash equivalents at beginning of period 8,477 7,064 --------- --------- Cash and cash equivalents at end of period $ 3,955 $ 2,759 ========= ========= The accompanying notes are an integral part of these financial statements. Changes in assets and liabilities for the six months ended June 30, 1996 shown above, other than cash, exclude the effects from the purchase of Nantucket Electric Company on March 26, 1996.
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 have an internal environmental audit program and an external waste disposal vendor audit and qualification program intended to enhance compliance with 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 Company's (Massachusetts Electric) (a wholly-owned retail subsidiary of NEES) 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 and other third parties. At June 30, 1997, the fund had a balance of $28 million. If a Massachusetts restructuring and Note A - Hazardous Waste - Continued ------------------------ rate settlement is approved by the Federal Energy Regulatory Commission (FERC), an additional $15 million will be transferred to the fund in 1997 out of existing reserves for refunds. 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. The NEES companies have received recovery amounts from certain insurers, and, where appropriate, intend to seek recovery from other insurers and from other PRPs, but it is uncertain whether, and to what extent, such efforts will be successful. At June 30, 1997, NEES had total reserves for environmental response costs of $47 million and a related regulatory asset of $3 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) (a wholly-owned wholesale subsidiary of NEES) is a 12 percent joint owner of the 1,150 megawatt (MW) Millstone 3 nuclear generating unit (Millstone 3). 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 the 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, Note B - Investments in Nuclear Units - Continued ------------------------------------- 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 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. Approximately $3 million of this increase is in connection with corrective actions and was, therefore, recorded in the second quarter of 1997. 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. Regulators in the states in which NEES subsidiaries operate have expressed concern regarding Millstone 3 and the related costs being recovered from ratepayers. 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. On May 27, 1997, the Maine Yankee Board of Directors announced that the economic viability of the station was under review and the station would likely be permanently shut down unless a buyer can be found. PECO Energy Co. has expressed Note B - Investments in Nuclear Units - Continued ------------------------------------- interest in purchasing the Maine Yankee plant, and discussions are currently ongoing. NEP cannot predict whether these discussions will result in the sale of the Maine Yankee plant. 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. Over the past few years, the Maine Yankee nuclear generating plant has experienced numerous technical and nontechnical problems. Prior to the May 27, 1997 announcement, and in response to an independent safety assessment conducted by the NRC, Maine Yankee had planned to spend more than $50 million in 1997 on operational improvements. In addition, management had identified approximately $34 million in additional expenditures it proposed to make in 1997. Following the announcement, expenditures were cut back substantially pending a decision on the future of the unit. 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. Because of regulatory and other uncertainties faced by Maine Yankee, as well as the unit's questionable economics, NEP cannot predict whether or when Maine Yankee will return to service, but it is not likely to return to service unless a buyer can be found. 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. In October 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, Note B - Investments in Nuclear Units - Continued ------------------------------------- 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. The NRC is still assessing the responses. 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 -------------------------------- In April 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 FERC. 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. Since the original filing, NEP has filed a motion to dismiss the lawsuit based on its belief that Norwood's claims are within the FERC's exclusive jurisdiction. Norwood has filed a motion for summary judgement and in the alternative for a preliminary injunction restraining the divestiture of NEP's generating business. The court has scheduled a hearing on NEP's and Norwood's motions in September. Norwood also opposed NEP's proposed restructuring settlements for Massachusetts and Rhode Island. In July 1997, a FERC administrative law judge (ALJ) certified NEP's proposed settlements to the full FERC commission. The FERC ALJ concluded that Norwood failed to present any genuine issues of material fact, the effects of the settlement on Norwood are indirect, and adequate remedies exist to protect Norwood against adverse consequences should they Note C - Town of Norwood Dispute - Continued -------------------------------- occur in the future. This certification now clears the way for the FERC Commissioners to rule on the restructuring settlements. A decision from the FERC is expected later in 1997. Note D - Hydro Quebec Arbitration --------------------------------- In 1996, various New England utilities which are members of the New England Power Pool, including NEP, submitted a dispute to arbitration regarding their Firm Energy Purchased Power Contract with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage claim of approximately $37 million for past damages. If Hydro- Quebec were to prevail, NEP's share of such damages would be approximately $6-$9 million. The claims involve a dispute over the components of a pricing formula and additional costs under the contract. With respect to on-going claims, NEP has been paying Hydro-Quebec the higher amount (additional costs of approximately $3 million per year) since July 1996 under protest and subject to refund. A decision by the arbitrator is expected in September 1997. Note E - 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. FAS 128 is not expected to have any significant impact on NEES' EPS calculations. Note F ------ 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 second quarter of 1997 were $.50 per share, compared with $.54 per share for the corresponding period in 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.
Period ending June 30, ---------------------- 3 Months 6 Months -------- -------- 1996 earnings $ .54 $1.49 Revenues .18 .22 Purchased power costs, excluding fuel (.04) (.06) Depreciation and amortization .06 .10 Operation and maintenance expense (.22) (.27) Other (.02) (.03) ----- ----- 1997 earnings $ .50 $1.45 ===== =====
The increase in revenues for the second quarter and first six months results from a distribution rate increase effective in January 1997 and a transmission rate increase that became effective in July 1996. Additionally, kilowatt-hour (kWh) deliveries increased during the second quarter by 2.3 percent, which offset a decrease in kWh deliveries of 0.3 percent in the first quarter of 1997, resulting in a year-to-date increase in kWh deliveries of 0.9 percent. This year the weather was warmer in the second quarter but milder in the first quarter compared to last year. The increase in purchased power costs, excluding fuel, during the first two quarters of 1997 reflects overhaul and repair costs relating to the Maine Yankee nuclear power plant and the Ocean State Power plant, partially offset by reduced capacity purchases and reduced purchased power costs from the Connecticut Yankee nuclear power plant. The decrease in depreciation and amortization expense reflects the completion of the amortization of New England Power Company's (NEP) (a wholly-owned wholesale subsidiary of NEES) pre-1988 investment in the Seabrook 1 nuclear unit and NEP's investment in the canceled 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 due in part to the increase in PBOP expenses as mentioned above, as well as increased maintenance costs of partially owned nuclear generating facilities, Millstone 3 and Seabrook 1. Other increases in operation and maintenance expenses resulted from our share of the costs associated with the restoration to service of previously idled generating facilities throughout New England, in response to a tightening regional power supply, as well as an overall increase in general and administrative costs. Industry Restructuring ---------------------- For a full 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. Industry Restructuring Update As previously reported, the Massachusetts settlement, and the Rhode Island statute and related settlement covering customer choice and electric utility restructuring provide for full recovery of the costs of generating assets and oil and gas related assets (including regulatory assets) not recoverable through the divestiture of NEP's generating business. The Massachusetts settlement was approved by the Massachusetts Department of Public Utilities (MDPU) and a companion wholesale settlement is now pending final approval before the Federal Energy Regulatory Commission (FERC). A Rhode Island settlement reached in May 1997 among The Narragansett Electric Company (Narragansett Electric)(a wholly-owned retail subsidiary of NEES), NEP, the Rhode Island Public Utilities Commission (RIPUC) and the Rhode Island Division of Public Utilities and Carriers to implement the stranded cost recovery provisions of the Utility Restructuring Act of 1996 is also pending before the FERC. FERC action is expected later in 1997. Divestiture of Generation Business Under the Massachusetts and Rhode Island settlements and the Rhode Island statute, the NEES companies must complete the divestiture of their nonnuclear generating business within six months of the later of the commencement of retail choice in Massachusetts or the receipt of all necessary regulatory approvals. In July 1997, the NEES companies received binding proposals for the purchase of their nonnuclear generating business. These proposals are currently being evaluated. The NEES companies hope to announce a purchase and sale agreement in the near future. Closing would be conditioned upon 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. 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 regarding benefits and other assistance, including early retirement and severance programs, to union employees that are affected by the restructuring of the electric utility industry and the NEES companies' divestiture of its generation business. The NEES companies have also announced similar early retirement and severance programs for management employees. The NEES companies anticipate that industry restructuring and divestiture will lead to workforce reductions. The expected cost of such programs will be substantially recovered from the proceeds of the sale of the generating business. Massachusetts On May 20, 1997, the Utility Workers Union of America and the Massachusetts Alliance of Utility Unions withdrew their appeal to the Massachusetts Supreme Judicial Court of the MDPU approval of the Massachusetts settlement. Several bills are pending before the Massachusetts legislature on electric utility industry restructuring, including comprehensive legislation introduced by former Governor William F. Weld and by the legislature's Joint Committee on Electric Restructuring. These bills cover many of the topics addressed in the settlement, including the extent to which stranded costs may be recovered, and could impact the implementation of the settlement. Rhode Island In July 1997, the Governor of Rhode Island signed in to law bills further implementing utility restructuring in Rhode Island. The Securitization Act establishes a framework at the RIPUC for utilities to seek approval for the issuance of bonds secured by customers obligations to pay stranded cost charges. The 1997 Amendments to the Utility Restructuring Act modify the law so that utilities will not have to transfer their transmission assets to another company and make other technical amendments. 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 31, 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. In response to concerns expressed by the staff of the Securities and Exchange Commission, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board took under consideration how FAS 71 should be applied in light of recent changes within the regulated utility industry. In July 1997, the EITF concluded that a utility whose ongoing generation operations would not permit the application of FAS 71, but had otherwise received approval to recover stranded costs through regulated transmission and distribution rates, would be permitted to continue to apply FAS 71 to the recovery of the stranded costs. The Massachusetts and Rhode Island settlements and the Rhode Island statute each provide for full recovery of the sunk 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. FERC approval is still required for the Massachusetts and Rhode Island settlements. 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. The principal exception is the provision of the settlements providing for a 80/20 sharing between customers and shareholders of the going forward costs and revenues related to NEP's operating nuclear interests. 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. Specifically, FERC Order No. 888 enables transmission companies to recover their specific costs of providing transmission service. NEES believes these factors and the EITF conclusion 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 gain or loss from the divestiture of generating assets and oil and gas assets will be recorded as a regulatory liability or asset to be recovered through the ongoing transition access charge. NEP will be required to cease to apply FAS 71 to the 20 percent of its ongoing nuclear operations described above. Despite the progress made to date in Massachusetts and Rhode Island, it is possible that the final restructuring plans ultimately ordered by regulatory bodies may 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 gain or 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). A RIDEM 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 substantial capital expenditures to construct equipment to address the concerns raised by the environmental agencies. Year 2000 Computer Issues ------------------------- In the next two-and-one-half years, most large companies will face a potentially serious information systems (computer) problem because most software application and operational programs written in the past will not properly recognize calendar dates beginning in the year 2000. This could force computers to either shut down or lead to incorrect calculations. The NEES companies began the process of identifying the changes required to their computer programs and hardware during 1996. The necessary modifications to the NEES companies' centralized financial, customer, and operational information systems are expected to be completed by the end of 1998. The NEES companies believe they will incur approximately $20 million of costs between now and January 1, 2000, associated with making the necessary modifications identified to date to the centralized systems. Noncentralized systems are currently being reviewed for Year 2000 problems. The NEES companies are unable to predict the costs to be incurred for correction of such noncentralized systems, but expect the scope and schedule for such work to be less complex than for its centralized information systems. Operating Revenue ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue
Second Quarter Six Months -------------- ------------ 1997 vs 1996 1997 vs 1996 -------------- ------------ (In Millions) Increase (decrease) in kWh deliveries $ 5 $ 3 Distribution rate increases 3 6 Rate adjustment mechanisms 7 8 Fuel recovery 11 51 Demand-Side Management (DSM) (3) (2) Oil and gas revenues (1) 6 Other (including transmission revenues) 5 6 --- --- $27 $78 === ===
For a discussion of kWh deliveries to ultimate customers, see the "Earnings" section. Retail rate increases for the second quarter and six months ended June 30, 1997 reflect an $11 million increase in distribution rates for 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. The provisions of the Massachusetts Electric restructuring settlement would have caused its Purchased Power Cost Adjustment (PPCA) mechanism to end effective July 31, 1996. However, since the Massachusetts settlement has not yet been approved by the FERC, Massachusetts Electric has continued to accrue refund provisions of $19 million related to the assumed operation of the PPCA mechanism since July 31, 1996 ($9 million in 1996 and $10 million in 1997 to date). In addition, at December 31, 1996 Massachusetts Electric had deferred approximately $8 million of storm damage costs. In accordance with the Massachusetts restructuring settlement, Massachusetts Electric will not be permitted recovery of approximately $2 million of such storm damage costs. For a discussion of fuel recovery, see the fuel costs discussion in the "Operating Expenses" section. Oil and gas revenues increased in the first six months due to increased gas prices in the first quarter. The increase in other revenues in the first two quarters of 1997 is primarily due to a transmission rate increase that went into effect in mid-1996. Operating Expenses ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses
Second Quarter Six Months -------------- ------------ 1997 vs 1996 1997 vs 1996 -------------- ------------ (In Millions) Fuel costs $12 $ 53 Purchased energy, excluding fuel 4 6 Operation and maintenance 20 27 Depreciation and amortization: Utility plant (6) (10) Oil and gas properties - 5 Taxes (1) - --- ---- $29 $ 81 === ====
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 1997 primarily 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 power costs, excluding fuel, during the first two quarters of 1997 reflects overhaul and repair costs relating to the Maine Yankee nuclear power plant and the Ocean State Power plant, partially offset by reduced capacity purchases and reduced purchased power costs from the Connecticut Yankee nuclear power plant, which were primarily due to a one- time property tax settlement. The decrease in depreciation and amortization expense reflects the completion of the amortization of New England Power Company's (NEP) (a wholly-owned wholesale subsidiary of NEES) pre-1988 investment in the Seabrook 1 nuclear unit and NEP's investment in the canceled 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 due in part to the increase in PBOP expenses as mentioned above, as well as increased maintenance costs of partially owned nuclear generating facilities, Millstone 3 and Seabrook 1. Other increases in operation and maintenance expenses resulted from our share of the costs associated with the restoration to service of previously idled generating facilities throughout New England, in response to a tightening regional power supply, as well as an overall increase in general and administrative costs. Other Income ------------ The decrease in other income in 1997 reflects losses incurred by NEES' new power marketing subsidiary, AllEnergy Marketing Company, L.L.C. Liquidity and Capital Resources ------------------------------- Plant expenditures in the first six months of 1997 amounted to $103 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 1997 are summarized as follows: Retirements ----------- (In Millions) Long-term debt -------------- NEP $ 35 Massachusetts Electric 15 Narragansett Electric 25 NEEI 23 Hydro-Transmission Companies 6 Narragansett Electric Resources Company 1 ---- $105 ==== NEES' retail subsidiaries plan to issue an additional $65 million of long-term debt by the end of 1997. Net cash from operating activities provided all of the funds for oil and gas expenditures for the first six months of 1997. NEEI's capitalized oil and gas exploration and development costs amounted to $5 million, which primarily represents capitalized interest costs. At June 30, 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 $171 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 the Federal Energy Regulatory Commission, 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 lawsuit against a Company subsidiary, New England Power Company (NEP), by the Town of Norwood, Massachusetts, 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 D 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 29, 1997, the Annual Meeting of Shareholders was held. The shareholders, by a vote of 53,604,587 in favor, 553,156 against, and 471,034 abstaining, approved a Company proposal setting the number of directors at twelve. Directors were elected and received the following votes: Director Votes For Votes Withheld -------- --------- -------------- Joan T. Bok 53,465,007 1,155,150 William M. Bulger 53,296,037 1,324,120 Paul T. Joskow 53,644,954 975,203 John M. Kucharski 53,889,463 730,694 Edward H. Ladd 53,892,294 727,863 Joshua A. McClure 53,824,332 795,825 John W. Rowe 53,692,961 927,196 George M. Sage 53,864,676 755,481 Charles E. Soule 53,884,305 735,852 Anne Wexler 53,810,495 809,662 James Q. Wilson 53,838,906 781,251 James R. Winoker 53,770,449 849,708 The shareholders, by a vote of 9,521,974 in favor, 36,908,874 against, and 1,981,790 abstaining, rejected a shareholder proposal regarding the splitting of shares. Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- The Company filed reports on Form 8-K dated April 16, 1997 and July 14, 1997, each 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, 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: July 31, 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 JUN-30-1997 6-MOS PER-BOOK 3,912,203 372,721 455,214 403,566 0 5,143,704 64,970 736,773 904,825 1,704,067 0 126,166 1,484,542 0 0 170,825 104,710 0 0 0 1,553,394 5,143,704 1,215,771 60,821 993,405 1,054,226 161,545 371 161,916 60,849 94,052 3,666 94,052 76,519 54,281 270,479 $1.45 $1.45 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 and unrealized gain on securities. -----END PRIVACY-ENHANCED MESSAGE-----