-----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, ByvtCunmUpO0McNn4Yq4T8BhrL18LZYlS0M/Qe02KPOJTPAqwdogCb4iLbHniwW6 Vb0Uw0qbdGDHVLm07ufVdQ== 0000071297-98-000047.txt : 19980810 0000071297-98-000047.hdr.sgml : 19980810 ACCESSION NUMBER: 0000071297-98-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 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: SEC FILE NUMBER: 001-03446 FILM NUMBER: 98679566 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 BUSINESS PHONE: 5083669011 MAIL ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01582 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, 1998 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: 62,847,197 shares at June 30, 1998. 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 ------- ---------- 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) Operating revenue $572,008 $577,625$1,191,571 $1,215,771 -------- ------------------ ---------- Operating expenses: Fuel for generation 77,429 85,836 163,213 185,062 Purchased electric energy 122,393 127,183 245,068 271,713 Other operation 148,474 141,121 303,068 264,995 Maintenance 39,009 39,483 77,022 70,539 Depreciation and amortization 56,611 59,140 111,858 125,145 Taxes, other than income taxes 37,138 36,223 77,357 75,951 Income taxes 23,804 22,056 59,689 60,821 -------- ------------------ ---------- Total operating expenses 504,858 511,042 1,037,275 1,054,226 -------- ------------------ ---------- Operating income 67,150 66,583 154,296 161,545 Other income: Equity in income of generating companies 2,698 2,431 5,044 5,131 Other income (expense), net (28) (3,094) (8) (4,760) -------- ------------------ ---------- Operating and other income 69,820 65,920 159,332 161,916 -------- ------------------ ---------- Interest: Interest on long-term debt 24,424 26,753 49,463 54,281 Other interest 9,223 3,817 15,170 7,608 Allowance for borrowed funds used during construction (459) (397) (915) (1,040) -------- ------------------ ---------- Total interest 33,188 30,173 63,718 60,849 -------- ------------------ ---------- Income after interest 36,632 35,747 95,614 101,067 Preferred dividends of subsidiaries 571 1,833 1,142 3,666 Minority interests 1,652 1,682 3,185 3,349 -------- ------------------ ---------- Net income $ 34,409 $ 32,232$ 91,287 $ 94,052 ======== ================== ========== Average common shares - Basic 63,524,22264,969,65264,025,756 64,969,652 Average common shares - Diluted 63,584,78064,997,26464,097,824 65,011,570 Per share data: Net income - Basic $.55 $.50 $1.43 $1.45 Net income - Diluted $.54 $.50 $1.42 $1.45 Dividends declared $.59 $.59 $1.18 $1.18 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $973,521 $910,841 $954,518 $887,292 Net income 34,409 32,232 91,287 94,052 Dividends delcared on common shares (37,097) (38,248) (74,972) (76,519) -------- -------- -------- -------- Retained earnings at end of period $970,833 $904,825 $970,833 $904,825 ======== ======== ======== ======== 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)
1998 1997 ---- ---- (In Thousands) Operating revenue $2,478,391 $2,429,139 ---------- ---------- Operating expenses: Fuel for generation 350,612 373,324 Purchased electric energy 501,584 530,530 Other operation 594,731 524,489 Maintenance 149,855 131,403 Depreciation and amortization 223,205 240,618 Taxes, other than income taxes 147,900 145,063 Income taxes 150,892 138,137 ---------- ---------- Total operating expenses 2,118,779 2,083,564 ---------- ---------- Operating income 359,612 345,575 Other income: Equity in income of generating companies 10,153 9,978 Other income (expense), net (11,003) (12,435) ---------- ---------- Operating and other income 358,762 343,118 ---------- ---------- Interest: Interest on long-term debt 102,493 109,638 Other interest 24,502 16,562 Allowance for borrowed funds used during construction (1,783) (2,328) ---------- ---------- Total interest 125,212 123,872 ---------- ---------- Income after interest 233,550 219,246 Preferred dividends and net gain on reacquisition of preferred stock 9,794 5,964 Minority interests 6,483 6,791 ---------- ---------- Net income $ 217,273 $ 206,491 ========== ========== Average common shares - Basic 64,431,253 64,969,652 Average common shares - Diluted 64,499,067 65,010,804 Per share data: Net income - Basic and Diluted $3.37 $3.18 Dividends declared $2.36 $2.36 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $ 904,825 $ 850,939 Net income 217,273 206,491 Dividends declared on common shares (151,265) (153,055) Premium on redemption of preferred stock - 450 --------- --------- Retained earnings at end of period $ 970,833 $ 904,825 ========= ========= 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 1998 1997 ------ ---- ---- (In Thousands) Utility plant, at original cost $5,926,625$5,860,101 Less accumulated provisions for depreciation and amortization 2,068,995 1,995,017 -------------------- 3,857,630 3,865,084 Construction work in progress 50,194 48,708 -------------------- Net utility plant 3,907,824 3,913,792 -------------------- Oil and gas properties, at full cost - 1,299,817 Less accumulated provision for amortization - 1,128,659 -------------------- Net oil and gas properties - 171,158 -------------------- Investments: Nuclear power companies, at equity 47,443 49,825 Other subsidiaries, at equity 36,725 37,418 Other investments 132,769 117,645 -------------------- Total investments 216,937 204,888 -------------------- Current assets: Cash 23,040 14,264 Accounts receivable, less reserves of $19,877,000 and $17,834,000 255,522 257,185 Unbilled revenues 76,138 71,260 Fuel, materials, and supplies, at average cost 81,810 66,509 Prepaid and other current assets 104,224 64,265 -------------------- Total current assets 540,734 473,483 -------------------- Accrued Yankee nuclear plant costs 272,939 299,564 Deferred charges and other assets 560,932 248,762 -------------------- $5,499,366$5,311,647 ==================== 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 - 62,847,197 shares and 64,537,777 shares $ 64,970 $ 64,970 Paid-in capital 736,699 736,605 Retained earnings 970,833 954,518 Treasury stock - 2,122,455 shares and 431,875 shares (89,045) (16,415) Unrealized gain on securities, net 7,688 4,764 -------------------- Total common share equity 1,691,145 1,744,442 Minority interests in consolidated subsidiaries 42,637 43,062 Cumulative preferred stock of subsidiaries 39,087 39,113 Long-term debt 1,365,848 1,487,481 -------------------- Total capitalization 3,138,717 3,314,098 -------------------- Current liabilities: Long-term debt due within one year 27,920 89,910 Short-term debt 656,950 251,950 Accounts payable 161,567 136,218 Accrued taxes 19,065 14,831 Accrued interest 21,980 24,969 Dividends payable 35,457 36,162 Other current liabilities 121,869 120,002 -------------------- Total current liabilities 1,044,808 674,042 -------------------- Deferred federal and state income taxes 713,527 720,375 Unamortized investment tax credits 88,994 90,018 Accrued Yankee nuclear plant costs 272,939 299,564 Other reserves and deferred credits 240,381 213,550 -------------------- $5,499,366$5,311,647 ==================== 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)
1998 1997 ---- ---- (In Thousands) Operating Activities: Net income $ 91,287 $ 94,052 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 113,330 126,453 Deferred income taxes and investment tax credits, net (9,486) (28,052) Allowance for funds used during construction (915) (1,040) Minority interests 3,185 3,349 Prepayment for amended purchased power agreement (191,676) - Decrease (increase) in accounts receivable, net and unbilled revenues (3,104) 28,508 Decrease (increase) in fuel, materials, and supplies (15,268) (6,251) Decrease (increase) in prepaid and other current assets(34,849) 6,887 Increase (decrease) in accounts payable 25,319 (20,799) Increase (decrease) in other current liabilities 3,011 30,436 Other, net 7,872 36,936 --------- --------- Net cash provided by operating activities $ (11,294) $ 270,479 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $ (88,285) $(103,280) Oil and gas exploration and development - (4,627) Proceeds from sale of New England Energy Incorporated oil and gas properties 50,000 - Other investing activities (11,033) (6,125) --------- --------- Net cash used in investing activities $ (49,318) $(114,032) --------- --------- Financing Activities: Dividends paid to minority interests $ (3,391) $ (3,566) Dividends paid on NEES common shares (75,895) (76,327) Long-term debt - issues 30,000 - Long-term debt - retirements (213,790) (105,284) Changes in short-term debt 405,000 25,775 Repurchase of common shares (72,536) (1,567) --------- --------- Net cash used in financing activities $ 69,388 $(160,969) --------- --------- Net increase (decrease) in cash and cash equivalents $ 8,776 $ (4,522) Cash and cash equivalents at beginning of period 14,264 8,477 --------- --------- Cash and cash equivalents at end of period $ 23,040 $ 3,955 ========= ========= 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 or the Massachusetts Department of Environmental Protection for 20 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, mostly located in Massachusetts. The NEES companies have been identified as PRPs at 10 of these manufactured gas locations, which are included in the 20 PRP sites discussed above. NEES is engaged in various phases of investigation and remediation work at approximately 20 of the manufactured gas locations. 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 remedial costs related to these sites are paid out of a special fund established on Massachusetts Electric Company's (Massachusetts Electric) 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, 1998, the fund had a balance of $47 million. 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 recovered amounts from certain insurers and other third parties, 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, 1998, NEES had total reserves for environmental response costs of $57 million. This represents an increase from the $44 million balance at the end of 1997. Since most of the sites for which increased reserves were recognized are covered by rate agreements, this increase in the reserves did not have an adverse effect on net income. NEES believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. Note B - Nuclear Units - ---------------------- Nuclear Units Permanently Shut Down Three regional nuclear generating companies in which New England Power Company (NEP) has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows: NEP's Investment Future Estimated Unit Percent Amount($) Date Retired Billings to NEP($) - ----------------------------------------------------------------------------- Yankee Atomic 30 5 million Feb 1992 37 million Connecticut Yankee 15 15 million Dec 1996 86 million Maine Yankee 20 16 million Aug 1997 150 million - ----------------------------------------------------------------------------- In the case of each of these units, NEP has recorded an estimate of the total future payment obligation as a liability and an offsetting regulatory asset, reflecting estimated future billings from the companies. In a 1993 decision, the Federal Energy Regulatory Commission (FERC) allowed Yankee Atomic to recover its undepreciated investment in the plant as well as unfunded nuclear decommissioning costs and other costs. Connecticut Yankee and Maine Yankee have both filed similar requests with the FERC. Several parties have intervened in opposition to both filings. NEP's industry restructuring settlements allow it to recover all costs that the FERC allows the Yankee companies to bill to NEP. The Citizen's Awareness Network and Nuclear Information and Resource Service have indicated their intention to file a request with the Nuclear Regulatory Commission (NRC) designed to overturn a current NRC rule on decommissioning. NEP cannot predict what impact, if any, these activities, if successful, would have on the cost of decommissioning the plants. At Maine Yankee, the NRC has identified numerous apparent violations of its regulations, which may result in the assessment of substantial civil penalties. In the 1970s, NEP and several other shareholders (Sponsors) of Maine Yankee entered into 27 contracts (Secondary Purchase Agreements) under which they sold portions of their entitlement to Maine Yankee power output through 2002 to various entities, primarily municipal and cooperative systems in New England (Secondary Purchasers). Virtually all of the Secondary Purchasers have ceased making payments under the Secondary Purchase Agreements and have demanded arbitration, claiming that such agreements excuse further payments upon plant shutdown. The motion of the Secondary Purchasers to compel arbitration was denied by the Maine Superior Court on the grounds that the FERC has jurisdiction. The Secondary Purchasers are appealing this decision to the Maine Supreme Judicial Court. NEP has asked the FERC to enforce NEP's rights under the agreements. In the event that no further payments are forthcoming from Secondary Purchasers, NEP, as a primary obligor to Maine Yankee, would be required to pay an additional $8 million of future shutdown costs. These costs are not included in the $150 million estimate disclosed in the table above. Shutdown costs are recoverable from customers under the industry restructuring settlements. A Maine statute provides that if both Maine Yankee and its decommissioning trust fund have insufficient assets to pay for the plant decommissioning, the owners of Maine Yankee are jointly and severally liable for the shortfall. Operating Nuclear Units NEP has minority interests in three other nuclear generating units, Vermont Yankee, Millstone 3, and Seabrook 1. Uncertainties regarding the future of nuclear generating stations, particularly older units, such as 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. NEP performs periodic economic viability reviews of operating nuclear units in which it holds ownership interests. Millstone 3 In April 1996, the NRC ordered Millstone 3, which had experienced numerous technical and nontechnical problems, to shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. In July 1998 Millstone 3 returned to full operation. Millstone 3 remains on the NRC "Watch List," signifying that it continues to warrant increased NRC attention. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). NEP is not an owner of the Millstone 2 nuclear generating unit, which is temporarily shut down under NRC orders, or the Millstone 1 nuclear generating unit, which has been permanently shut down. During the Millstone 3 outage, NEP incurred an estimated $45 million in incremental replacement power costs. Through February 1998, when most of NEP's power sales were subject to a fuel clause, NEP recovered its incremental replacement power costs from customers through its fuel clause. Starting in March 1998, most of NEP's power sales are at a stated rate which is not subject to a fuel clause. However, certain true-up mechanisms exist in lieu of the fuel clause, which cover most of these costs. Several criminal investigations related to Millstone 3 are ongoing. In December 1997, the NRC assessed civil penalties totaling $2.1 million for numerous violations at the three Millstone units. NEP's share of this fine was less than $100,000. The Connecticut Department of Environmental Protection and Connecticut Attorney General have filed suit against NU for alleged wastewater discharge violations at the Millstone units, which may result in the assessment of substantial civil penalties. In August 1997, NEP sued NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU that caused the shutdown of Millstone 3. NEP's damages include the costs of replacement power during the outage and costs necessary to return Millstone 3 to safe operation. NEP also seeks punitive damages. NEP also sent a demand for arbitration to Connecticut Light & Power Company and Western Massachusetts Electric Company, both subsidiaries of NU, seeking damages resulting from their breach of obligations under an agreement with NEP and others regarding the operation and ownership of Millstone 3. The arbitration is scheduled for October 1999. NU moved to dismiss NEP's suit, or, in the alternative, stay the suit pending arbitration of NEP's claims against Connecticut Light & Power Company and Western Massachusetts Electric Company. NU also moved to consolidate NEP's suit with suits filed by other joint owners in Massachusetts Superior Court. On July 3, 1998, the court denied NU's motion to dismiss and its motion to stay pending arbitration. On July 21, 1998, NEP amended its complaint by, among other things, adding NU's Trustees as defendants. No ruling has been made on NU's motion to consolidate. Nuclear Decommissioning In New Hampshire, legislation was recently enacted which makes owners of Seabrook 1, of which NEP owns a 10 percent interest, proportional guarantors for decommissioning costs in the event that an owner without a franchise service territory fails to fund its share of decommissioning costs. Currently, a single owner of an approximate 12 percent share of Seabrook 1 is covered under this legislation. For more information on nuclear decommissioning, refer to the NEES Form 10-K for 1997. The Nuclear Waste Policy Act of 1982 establishes that the federal government (through the Department of Energy (DOE)) is responsible for the disposal of spent nuclear fuel. The federal government requires NEP to pay a fee based on its share of the net generation from the Millstone 3 and Seabrook 1 nuclear units. Through February 1998, NEP recovered this fee through its fuel clause. Subsequently, most of these costs are recovered through certain other true-up mechanisms in lieu of the fuel clause. Similar costs are incurred by the Vermont Yankee nuclear generating unit. These costs are billed to NEP and also recovered from customers through similar mechanisms. In November 1997, ruling on a lawsuit brought against the DOE by numerous utilities and state regulatory commissions, the Court of Appeals for the District of Columbia (the Court) held that the DOE was obligated to begin disposing of utilities' spent nuclear fuel by January 31, 1998. The DOE failed to meet this deadline, and is not scheduled to have a temporary or permanent repository for spent nuclear fuel for several years. In February 1998, Maine Yankee petitioned the Court to compel the DOE to remove Maine Yankee's spent fuel from the site. In May 1998, the Court rejected the petitions of Maine Yankee and the other utilities and state regulatory commissions. The utilities, including the operators of the units in which NEP has an obligation, are assessing their future options. Note C - Town of Norwood - ------------------------ 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 has been a wholesale power supplier for Norwood pursuant to rates approved by the FERC. Norwood alleges that NEP's proposed divestiture of its power generation assets would violate the terms of a 1983 power contract which settled 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 sought an injunction enjoining the divestiture and an unspecified amount of treble damages (a specific claim for $450 million was withdrawn). In September 1997, Norwood's motion for a preliminary injunction of the divestiture was denied. Norwood then filed an amended complaint making new allegations relating to the sale of NEP's generating assets and naming as additional defendants, NEES, USGen New England, Inc. (USGen) and USGen's affiliate, PG&E Corporation. Norwood later dropped USGen as a party to the complaint. On January 9, 1998, the defendants filed a motion to dismiss the lawsuit. In March 1998, Norwood gave notice of its intent to terminate its contract with NEP, without accepting responsibility for its share of NEP's stranded costs, and began taking power from another supplier commencing on April 1, 1998. NEP filed with the FERC for permission to assess a contract termination charge to its unaffiliated customers who choose to terminate their wholesale power contracts early. On May 15, 1998, the FERC ruled that NEP could assess such a contract termination charge to Norwood for its share of NEP's stranded costs. Norwood claimed that the contract termination charge approved by the FERC did not apply to Norwood; however, in denying Norwood's motion for rehearing, the FERC ruled that the charge did apply to Norwood. On August 3, 1998, Norwood appealed the FERC's orders approving the Massachusetts and Rhode Island industry restructuring settlement agreements (including modification of NEP's contracts with Massachusetts Electric and The Narragansett Electric Company) to the First Circuit Court of Appeals (the Court). NEP intends to seek leave to intervene and will advise the Court of FERC's determination that the challenged orders do not apply to Norwood. 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, of which NEP's share would have been approximately $6 million to $9 million. The claims involved a dispute over the components of a pricing formula and additional costs under the contract. With respect to ongoing 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. In October 1997, an arbitrator ruled in favor of the New England utilities in all respects. Hydro-Quebec has not yet refunded any monies and has appealed the decision. On June 15, 1998, the United States District Court issued an order affirming the 1997 arbitration decision in favor of NEP and the other utilities. Hydro-Quebec is appealing this order to the First Circuit Court of Appeals. On July 31, 1998 in a separate proceeding, an arbitrator denied the request of NEP and the other utilities that they be allowed to withhold payment of disputed amounts from Hydro-Quebec during the pendency of Hydro-Quebec's appeal. NEP and the other utilities intend to appeal this decision. Note E - Average Common Shares - ------------------------------ The following table summarizes the reconciling amounts between basic and diluted earnings per share (EPS) computations, in compliance with Statement of Financial Accounting Standards No. 128, Earnings per Share, which became effective during 1997, and requires restatement for all prior-period EPS data presented.
Quarter Ended Six Months Ended Twelve Months Ended - ------------------------------------------------------------------------------------------- Period ended June 30, 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------- Income after interest and minority interest (000's) $34,980 $34,065 $92,429 $97,718 $227,067 $212,455 Less: preferred stock dividends and net gain/loss on reacquisition of preferred stock of subsidiaries (000's) $ 571 $ 1,833 $ 1,142 $ 3,666 $ 9,794 $ 5,964 Income available to common shareholders (000's) $34,409 $32,232 $91,287 $94,052 $217,273 $206,491 Basic EPS $ .55 $ .50 $ 1.43 $ 1.45 $ 3.37 $ 3.18 Diluted EPS $ .54 $ .50 $ 1.42 $ 1.45 $ 3.37 $ 3.18 - ------------------------------------------------------------------------------------------- Average common shares outstanding for Basic EPS 63,524,222 64,969,652 64,025,75664,969,65264,431,25364,969,652 Effect of Dilutive Securities Average potential common shares related to share-based compen- sation plans 60,558 27,612 72,068 41,918 67,814 41,152 - ------------------------------------------------------------------------------------------- Average common shares outstanding for Diluted EPS 63,584,780 64,997,264 64,097,82465,011,57064,499,06765,010,804 - -------------------------------------------------------------------------------------------
Note F - Comprehensive Income - ----------------------------- In the first quarter of 1998, NEES adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS 130). FAS 130 establishes standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which, for NEES, consists of the change in unrealized holding gains on available-for-sale securities during the period. Total comprehensive income is calculated for all applicable periods in the table below:
Periods ended June 30 ------------------------------------- Three Months Six Months ------------ ---------- 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) Net income $34,409 $32,232 $91,287 $94,052 Other comprehensive income, net of tax: Unrealized holding gains 734 2,684 2,924 2,684 ------- ------- ------- ------- Total comprehensive income $35,143 $34,916 $94,211 $96,736 ======= ======= ======= =======
Note G - New Accounting Standards - --------------------------------- In 1997, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (FAS 131), which goes into effect in 1998. FAS 131 requires the reporting in financial statements of certain new additional information about operating segments of a business. Application of FAS 131 is not required for interim reporting in the initial year of application. NEES is currently evaluating the impact that FAS 131 will have on its future reporting requirements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (FAS 132), which revises disclosure requirements for pension and other postretirement benefits. NEES will adopt FAS 132 in its financial statements for the year ending December 31, 1998. The adoption of FAS 131 and FAS 132 will have no impact on NEES' operating results, financial position, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for such instruments. NEES, through its wholly owned indirect subsidiary, AllEnergy Marketing Company, L.L.C., (AllEnergy) uses derivative instruments to manage exposure from fluctuations in commodity prices. At this time, AllEnergy has only held exchange-traded futures contracts to manage risks associated with natural gas, propane, and oil price risks. FAS 133 requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. If certain conditions are met, derivatives may be treated as hedges under FAS 133 for income statement purposes. Gains or losses on a derivative which qualifies as a hedge are deferred until recognized in the income statement in the same period as the hedged item is recognized in the income statement. To the extent the derivative is not effective in offsetting changes in fair value of the hedged item, that portion of the gain or loss is reported in earnings immediately. As of June 30, 1998, all of AllEnergy's existing futures contracts qualified as hedges under Statement of Financial Accounting Standards No. 80, Accounting for Futures Contracts, which will be superseded by FAS 133 upon its implementation. FAS 133 is effective for fiscal years beginning after June 15, 1999. Note H - ------ In the opinion of NEES, 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 NEES' 1997 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 1997 Annual Report on Form 10-K. Earnings - -------- Earnings for the second quarter of 1998 were $.54 per diluted share, compared with $.50 per diluted share for the second quarter of 1997. For the six months ended June 30, 1998, earnings were $1.42 per diluted share compared to $1.45 per diluted share for the same period in 1997. Earnings decreased by approximately $.17 per share and $.30 per share for the second quarter and first six months of 1998, respectively, due to the effects of the restructuring of the electric utility business in Massachusetts and Rhode Island. These negative effects on earnings were offset by reduced operation and maintenance costs, primarily nuclear plant-related, and lower purchased power costs. Also, as described more fully in the "Operating Revenue" section below, earnings in 1997 had been reduced by refund provisions of $.04 per share and $.10 per share in the second quarter and first six months, respectively, which were reversed later in 1997. With the introduction of industry restructuring and consumer choice, settlement agreements related to the recovery of stranded costs limit the return on equity earned on the NEES companies' generating business to approximately 9.4 percent, before mitigation incentives, which is significantly lower than earned by the generating business in recent years. (The settlement agreements also cap earnings for the majority of NEES' electricity delivery business at 11.75 percent.) Following completion of the sale of the NEES companies' nonnuclear generating business, NEES earnings will be further affected by the return on the reinvestment of the sale proceeds, whether through retirement of debt, the repurchase of NEES shares, investments in new ventures, or otherwise. This reinvestment return is expected, at least in the near term, to be considerably less than the return historically earned by the generating business. This report contains statements that may be considered forward looking under the securities laws. Actual results may differ materially for reasons discussed in the "Industry Restructuring" section of the NEES Form 10-K for 1997. Industry Restructuring - ---------------------- For a full discussion of industry restructuring activities in Massachusetts, Rhode Island, and New Hampshire, stranded cost recovery, the NEES companies' proposed divestiture of its nonnuclear generating business, accounting implications of industry restructuring and divestiture, workforce reductions, and impact of industry restructuring on the distribution business, see the "Industry Restructuring" section of the NEES Form 10-K for 1997 and the NEES 1997 Annual Report. Industry Restructuring Update New Hampshire On July 13, 1998, the New Hampshire Public Utility Commission (NHPUC), approved the comprehensive settlement agreement reached between Granite State Electric Company (Granite State Electric), New England Power Company (NEP), the Governor's office of the State of New Hampshire, and a number of other parties. The Federal Energy Regulatory Commission (FERC) had previously approved a wholesale settlement in April, 1998. On July 27, 1998, NEP filed with the FERC to amend the wholesale settlement to conform to the settlement approved by the NHPUC. The settlement provides choice of power supplier to Granite State Electric's customers as of July 1, 1998. The principal terms of the settlement are substantially similar to the settlements reached in Massachusetts and Rhode Island. Divestiture of Generating Business NEES has received all state and federal regulatory approvals required for the sale of its nonnuclear generating business to USGen New England, Inc. (USGen). USGen is awaiting final FERC approval for exempt wholesale generator status for the facilities it is purchasing. The proposed sale is more fully described in the NEES Form 10-K for 1997 and the 1997 NEES Annual Report. Closing of the sale is expected in the third quarter of 1998. Risk Factors While the NEES companies believe that the industry restructuring settlements and the sale agreement with USGen and other developments constitute substantial progress in reducing the impacts associated with industry restructuring, significant risks remain. These include, but are not limited to: (i) the potential that ultimately the settlements will not be implemented in the manner anticipated by NEES, (ii) the possibility that a voter referendum in November 1998 could overturn the Massachusetts legislation, followed by materially adverse legislative or regulatory actions, (iii) the possibility of federal legislation that would increase the risk to shareholders above those contained in the settlements and the Massachusetts and Rhode Island statutes, (iv) the potential for adverse regulatory or judicial stranded cost recovery decisions involving wholesale customers with whom settlements have not yet been reached, and (v) the failure to complete the sale of the nonnuclear generating business to USGen. Year 2000 Computer Issues - ------------------------- For a full discussion of Year 2000 computer issues at NEES, including a description of the modification process, timeline, and estimated total costs, refer to the "Financial Review" section of the 1997 NEES Annual Report filed in conjunction with the NEES Form 10-K for 1997. AllEnergy Acquisition - --------------------- On July 9, 1998, NEES and AllEnergy Marketing Company, L.L.C. (AllEnergy), a wholly owned indirect subsidiary of NEES, acquired PAL Energy Corporation's (PAL) business and substantially all of PAL's assets. PAL is a full service distributor of petroleum and related products, and provides repair services and installation of heating and cooling equipment and related services. PAL also operates convenience stores and gas stations located primarily in western New York. For the twelve-month period ended August 31, 1997, PAL had revenues of approximately $125 million. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Second Quarter Six Months -------------- ------------ 1998 vs 1997 1998 vs 1997 -------------- ------------ (In Millions) Industry restructuring-related rate changes: Generation-related $(29) $(47) Distribution-related 13 19 Fuel cost-related (4) (31) Massachusetts Electric and Nantucket Electric Purchased Power Cost Adjustment (PPCA) mechanism 4 11 Oil and gas-related revenue (16) (36) AllEnergy revenue 22 58 Other 4 2 ---- ---- $ (6) $(24) ==== ==== Generation-related rate reductions reflect rate reductions to customers as part of industry restructuring and the implementation of customer choice of power supplier in Rhode Island on January 1, 1998 and in Massachusetts on March 1, 1998. These rate reductions also include the effect of various true-up mechanisms. These true- up mechanisms cover a number of items including stranded cost recovery billings, fuel expense, nuclear operating costs and decommissioning costs and the non-fuel component of purchased power expense. The increase in distribution revenues reflects a $45 million rate increase at Massachusetts Electric Company (Massachusetts Electric) in accordance with the provisions of the industry restructuring settlement in Massachusetts, which became effective March 1, 1998. The revenue increase also reflects a $7 million increase in distribution rates for The Narragansett Electric Company (Narragansett Electric) that became effective January 1, 1998 pursuant to Rhode Island's Utility Restructuring Act of 1996. For a discussion of the decrease in fuel recovery during 1998, see the fuel costs discussion in the "Operating Expenses" section. The increase in revenues related to Massachusetts Electric's and Nantucket Electric Company's (Nantucket Electric) PPCA mechanism during 1998 reflects the end of this mechanism in accordance with the Massachusetts industry restructuring settlement. PPCA refund provisions of approximately $4 million and $11 million had been accrued during the second quarter and first six months of 1997, respectively, and reversed into revenue in the fourth quarter of 1997. The decrease in oil and gas-related revenues reflects the sale of NEEI's oil and gas properties effective January 1, 1998. The inclusion of the AllEnergy revenue figure in the above table is due to AllEnergy becoming a wholly owned and fully consolidated subsidiary of NEES in the fourth quarter of 1997. NEES had previously accounted for its 50 percent ownership interest under the equity method of accounting, as a component of other income. For the second quarter and first six months of 1997, total AllEnergy revenues were $9 million and $31 million, respectively. The increase in other revenues during the second quarter is primarily due to the impact of a 0.6 percent increase in kilowatthour (kWh) deliveries to ultimate customers and increased transmission billings by NEP to the New England Power Pool (NEPOOL). A similar increase in NEPOOL transmission billings is included in operation and maintenance expense. KWh deliveries for the first six months of 1998 were essentially flat, as the second quarter increase was offset by a similar decrease in the first quarter, due to milder weather. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Second Quarter Six Months -------------- ------------ 1998 vs 1997 1998 vs 1997 -------------- ------------ (In Millions) Fuel costs $ (5) $(31) Purchased energy, excluding fuel (8) (17) Operation and maintenance: AllEnergy 25 68 NEP PBOP amortization (6) (12) Other (12) (12) Depreciation and amortization: Utility plant 13 22 Oil and gas properties (15) (35) Taxes 2 - ---- ---- $ (6) $(17) ==== ==== The decrease in fuel costs for the second quarter and year-to- date periods primarily represents reduced wholesale sales to other utilities and lower coal and oil prices. The decrease in purchased power costs, excluding fuel, is primarily due to reduced charges from the Maine Yankee nuclear power plant, which was closed in mid-1997, as well as reduced charges from the Ocean State Power II plant, which underwent a scheduled overhaul during the first and second quarters of 1997. Partially offsetting these lower costs were increased refueling and maintenance charges from the Vermont Yankee nuclear power plant. As previously described, the inclusion of AllEnergy costs in the above table is due to the consolidation of AllEnergy in 1998 due to the company becoming a wholly owned subsidiary of NEES. For the second quarter and the first six months of 1997, total AllEnergy expenses were $14 million and $37 million, respectively. The decrease in operation and maintenance expense associated with postretirement benefits other than pensions (PBOP) amortization reflects the completion of the accelerated PBOP amortization in 1997 under the terms of a 1995 rate agreement. This decrease in expense is offset by a corresponding increase in the accelerated amortization of Millstone 3 which is described in the depreciation and amortization expense section below. The decrease in other operation and maintenance expense reflects reduced maintenance costs from the partially owned Millstone 3 and Seabrook 1 nuclear generating facilities, lower charges related to ongoing PBOP costs, and reduced general and administrative costs related to industry restructuring and the proposed sale of NEES' nonnuclear generating business. This decrease was partially offset by the costs of a scheduled overhaul at the Manchester Street generating plant. The second quarter decrease also reflects 1997 charges for NEP's share of the costs of the restoration to service of previously idled generating facilities in response to a tightened regional power supply. The decrease in oil and gas property depreciation and amortization expense during 1998 reflects the end of the amortization of oil and gas costs as a result of the sale of NEEI's oil and gas properties effective January 1, 1998. The increase in utility plant depreciation and amortization expense is primarily due to the $11 million increase in annual depreciation expense provided for in the Massachusetts industry restructuring settlement, depreciation related to new utility plant expenditures, and the accelerated amortization of NEP's investment in the Millstone 3 nuclear unit, a portion of which was attributable to the completion of the PBOP amortization discussed above. This accelerated amortization is recorded as a regulatory liability. Liquidity and Capital Resources - ------------------------------- Plant expenditures for the first six months of 1998 amounted to $88 million. The funds necessary for utility plant expenditures during the period were primarily provided by increased short-term debt. The financing activities of NEES subsidiaries for the first six months of 1998 are summarized as follows: Issues Retirements ------ ----------- (In Millions) Long-term debt - -------------- NEP $ - $ 50 Massachusetts Electric 25 30 Narragansett Electric - 5 Granite State Electric 5 - NEEI - 122 Hydro-Transmission Companies - 6 Narragansett Energy Resources Company - 1 --- ---- $30 $214 === ==== In August 1997, the NEES Board of Directors authorized the repurchase of up to five million NEES common shares through open market purchases. Through June 30, 1998, NEES purchased approximately 2 million shares under the repurchase program. Massachusetts Electric and Narragansett Electric plan to issue an additional $30 million and $15 million of long-term debt, respectively, by the end of 1998. Massachusetts Electric and Narragansett Electric each plan to use the proceeds to refinance maturing bonds and fund capital expenditures. At June 30, 1998, NEES and its consolidated subsidiaries had lines of credit and standby bond purchase facilities with banks totaling $1.2 billion. These lines and facilities were used for liquidity support for $657 million of commercial paper borrowings and for $372 million of NEP mortgage bonds in tax-exempt commercial paper mode. As part of NEES' plan to divest its generating business, NEEI sold its oil and gas properties effective January 1, 1998 , for approximately $50 million. NEEI's loss on the sale of approximately $120 million, before tax, has been reimbursed by NEP. This loss has been recorded as a regulatory asset, which is recoverable under the terms of the restructuring settlements reached in Massachusetts, Rhode Island, and New Hampshire. In May 1998, NEP prepaid approximately $190 million in conjunction with the amendment of a long-term purchased power contract. A small portion of the prepayment is recoverable from USGen at divestiture while the balance is recoverable under the industry restructuring settlements reached in Massachusetts, Rhode Island, and New Hampshire. This latter balance is recorded in deferred charges and other assets on the balance sheet. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning a lawsuit brought by the Company's subsidiary, New England Power Company (NEP) against Northeast Utilities on August 7, 1997 in Massachusetts Superior Court, Worcester County concerning the Millstone 3 nuclear unit, discussed in this report in Note B of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning an arbitration between NEP and Connecticut Light & Power Company and Western Massachusetts Electric Company concerning the Millstone 3 nuclear unit, discussed in this report in Note B of Notes to Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning a lawsuit brought against NEP by the Town of Norwood, Massachusetts and a related Federal Energy Regulatory Commission proceeding, discussed in this report in Note C of Notes to the Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning two arbitration decisions and related appeals 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 and made a part hereof. Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------ On April 28, 1998, the Annual Meeting of Shareholders was held. The shareholders, by a vote of 53,731,535 in favor, 583,374 against, and 556,677 abstaining, approved a Company proposal setting the number of directors at thirteen. Directors were elected and received the following votes: Director Votes For Votes Withheld -------- --------- -------------- Joan T. Bok 53,751,129 1,119,760 William M. Bulger 53,734,624 1,136,265 Alfred D. Houston 54,199,323 681,566 Paul T. Joskow 53,964,849 906,040 John M. Kucharski 54,207,904 662,985 Edward H. Ladd 54,213,682 657,207 Joshua A. McClure 54,156,294 714,595 George M. Sage 54,132,579 738,310 Richard P. Sergel 54,181,395 689,494 Charles E. Soule 54,204,155 666,734 Anne Wexler 54,108,368 762,521 James Q. Wilson 54,133,960 736,929 James R. Winoker 54,127,525 743,364 The shareholders, by a vote of 4,823,893 in favor, 40,552,277 against, and 1,531,096 abstaining, rejected a shareholder proposal regarding the splitting of shares. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- 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, 1998 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND ELECTRIC SYSTEM s/John G. Cochrane John G. Cochrane Treasurer, Authorized Officer, and Chief Accounting Officer Date: August 7, 1998 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 Index ------------- Exhibit Description Page - ------- ----------- ---- 27 Financial Data Schedule Filed herewith EX-27 3 FINANCIAL DATA 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-31-1998 JUN-30-1998 6-MOS PER-BOOK 3,907,824 216,937 540,734 833,871 0 5,499,366 64,970 736,699 970,833 1,691,145 0 39,087 1,365,848 0 0 656,950 27,920 0 0 0 1,718,416 5,499,366 1,191,571 59,689 977,586 1,037,275 154,296 5,036 159,332 63,718 91,287 1,142 91,287 74,972 49,463 (11,294) $1.43 $1.42 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 includes treasury stock at cost and unrealized gain on securities. -----END PRIVACY-ENHANCED MESSAGE-----