-----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, IJ5+hYVyhuzc2W/82/nmpwAuhpF2DebEtAiBmzaeQOTzQLNfKYvGU9dBXvEfsJws H+ku4gEBZeVpBcB2WXxi0w== 0000071297-95-000076.txt : 19951118 0000071297-95-000076.hdr.sgml : 19951118 ACCESSION NUMBER: 0000071297-95-000076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951109 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: 95589016 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 September 30, 1995 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: 64,924,456 shares at September 30, 1995. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Periods Ended September 30 (Unaudited)
Quarter Nine Months ------- ----------- 1995 1994 1995 1994 ---- ---- ---- ---- (In Thousands) Operating revenue $599,126 $591,633 $1,690,989 $1,685,617 -------- -------- ---------- ---------- Operating expenses: Fuel for generation 64,176 55,572 171,603 171,350 Purchased electric energy 133,757 139,279 419,542 379,304 Other operation 130,050 123,504 361,183 349,348 Maintenance 27,069 36,765 102,195 108,818 Depreciation and amortization 63,610 80,057 204,435 236,293 Taxes, other than income taxes 31,944 32,529 99,503 99,044 Income taxes 46,199 39,573 96,941 107,528 -------- -------- ---------- ---------- Total operating expenses 496,805 507,279 1,455,402 1,451,685 -------- -------- ---------- ---------- Operating income 102,321 84,354 235,587 233,932 Other income: Allowance for equity funds used during construction 2,361 2,540 7,742 7,221 Equity in income of generating companies2,566 2,664 7,895 7,925 Other income (expense) - net (771) 46 (278) (1,468) -------- -------- ---------- ---------- Operating and other income 106,477 89,604 250,946 247,610 -------- -------- ---------- ---------- Interest: Interest on long-term debt 27,509 23,636 80,653 68,869 Other interest 5,410 5,518 13,761 10,098 Allowance for borrowed funds used during construction (4,339) (2,419) (10,935) (5,234) -------- -------- ---------- ---------- Total interest 28,580 26,735 83,479 73,733 -------- -------- ---------- ---------- Income after interest 77,897 62,869 167,467 173,877 Preferred dividends of subsidiaries 2,172 2,172 6,517 6,525 Minority interests 1,905 1,846 5,937 5,644 -------- -------- ---------- ---------- Net income $ 73,820 $ 58,851 $ 155,013 $ 161,708 ======== ======== ========== ========== Average common shares 64,924,45664,969,652 64,950,977 64,969,652 Net income per common share $1.14 $.91 $2.39 $2.49 Dividends declared per share $ .590 $.575 $1.755 $1.710 The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Twelve Months Ended September 30 (Unaudited)
1995 1994 ---- ---- (In Thousands) > Operating revenue $2,248,401 $2,245,325 ---------- ---------- Operating expenses: Fuel for generation 221,209 232,616 Purchased electric energy 554,381 503,013 Other operation 506,576 466,638 Maintenance 154,850 145,946 Depreciation and amortization 269,265 303,663 Taxes, other than income taxes 126,299 126,298 Income taxes 117,670 139,551 ---------- ---------- Total operating expenses 1,950,250 1,917,725 ---------- ---------- Operating income 298,151 327,600 Other income: Allowance for equity funds used during construction 10,690 8,597 Equity in income of generating companies 9,728 10,925 Other income (expense) - net (2,666) (5,063) ---------- ---------- Operating and other income 315,903 342,059 ---------- ---------- Interest: Interest on long-term debt 105,284 93,193 Other interest 14,961 15,052 Allowance for borrowed funds used during construction (13,494) (6,198) ---------- ---------- Total interest 106,751 102,047 ---------- ---------- Income after interest 209,152 240,012 Preferred dividends of subsidiaries 8,689 8,819 Minority interests 7,732 7,525 ---------- ---------- Net income $ 192,731 $ 223,668 ========== ========== Average common shares 64,955,646 64,969,652 Net income per common share $2.97 $3.44 Dividends declared per share $2.330 $2.270 The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
September 30, December 31, ASSETS 1995 1994 ------ ---- ---- (In Thousands) Utility plant, at original cost $ 5,240,449 $4,914,807 Less accumulated provisions for depreciation and amortization 1,701,562 1,610,378 ----------- ---------- 3,538,887 3,304,429 Net investment in Seabrook 1 under rate settlement 19,012 38,283 Construction work in progress 276,260 374,009 ----------- ---------- Net utility plant 3,834,159 3,716,721 ----------- ---------- Oil and gas properties, at full cost 1,260,927 1,248,343 Less accumulated provision for amortization 1,018,531 964,069 ----------- ---------- Net oil and gas properties 242,396 284,274 ----------- ---------- Investments: Nuclear power companies, at equity 47,080 46,349 Other subsidiaries, at equity 40,790 42,195 Other investments, at cost 55,108 50,895 ----------- ---------- Total investments 142,978 139,439 ----------- ---------- Current assets: Cash 7,795 3,047 Accounts receivable, less reserves of $18,910,000 and $15,095,000 268,548 295,627 Unbilled revenues 47,300 55,900 Fuel, materials and supplies, at average cost 99,269 94,431 Prepaid and other current assets 78,507 76,718 ----------- ---------- Total current assets 501,419 525,723 ----------- ---------- Accrued Yankee Atomic costs 104,257 122,452 Deferred charges and other assets 322,592 296,232 ----------- ---------- $ 5,147,801 $5,084,841 =========== ========== CAPITALIZATION AND LIABILITIES ------------------------------ Capitalization: Common share equity: Common shares, par value $1 per share: Authorized - 150,000,000 shares Issued - 64,969,652 shares $ 64,970 $ 64,970 Paid-in capital 736,823 736,823 Retained earnings 820,090 779,045 ----------- ---------- 1,621,883 1,580,838 Less 45,196 shares of treasury stock, at cost 1,516 ----------- ---------- Total common share equity 1,620,367 1,580,838 Minority interests in consolidated subsidiaries 49,620 55,066 Cumulative preferred stock of subsidiaries 147,016 147,016 Long-term debt 1,639,356 1,520,488 ----------- ---------- Total capitalization 3,456,359 3,303,408 ----------- ---------- Current liabilities: Long-term debt due within one year 22,520 65,920 Short-term debt 192,600 233,970 Accounts payable 141,414 168,937 Accrued taxes 25,731 11,002 Accrued interest 23,469 25,193 Dividends payable 39,262 37,154 Other current liabilities 92,562 93,251 ----------- ---------- Total current liabilities 537,558 635,427 ----------- ---------- Deferred federal and state income taxes 765,366 751,855 Unamortized investment tax credits 92,910 94,930 Accrued Yankee Atomic costs 104,257 122,452 Other reserves and deferred credits 191,351 176,769 ----------- ---------- $ 5,147,801 $5,084,841 =========== ========== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30 (Unaudited)
1995 1994 ---- ---- (In Thousands) Operating Activities: Net income $155,013 $ 161,708 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 208,879 239,450 Deferred income taxes and investment tax credits - net 9,573 9,804 Allowance for funds used during construction (18,677) (12,455) Amortization of unbilled revenues (6,156) (28,305) Minority interests 5,937 5,644 Decrease (increase) in accounts receivable, net and unbilled revenues 35,679 3,666 Decrease (increase) in fuel, materials, and supplies (4,838) (12,133) Decrease (increase) in prepaid and other current assets (1,789) 4,043 Increase (decrease) in accounts payable (27,523) 9,050 Increase (decrease) in other current liabilities 18,472 18,445 Other, net (17,616) (25,164) --------- --------- Net cash provided by operating activities $ 356,954 $ 373,753 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $(248,283) $(327,176) Oil and gas exploration and development (12,584) (21,452) Other investing activities (1,169) (15,995) --------- --------- Net cash used in investing activities $(262,036) $(364,623) --------- --------- Financing Activities: Dividends paid to minority interests $ (8,897) $ (8,416) Dividends paid on NEES common shares (112,983) (110,705) Short-term debt (41,370) 75,700 Long-term debt - issues 370,000 53,000 Long-term debt - retirements (294,040) (17,040) Preferred stock - redemption (512) Return of capital to minority interests including related premium (1,364) Repurchase of common shares (1,516) --------- --------- Net cash used in financing activities $ (90,170) $ (7,973) --------- --------- Net increase (decrease) in cash and cash equivalents $ 4,748 $ 1,157 Cash and cash equivalents at beginning of period 3,047 2,876 --------- --------- Cash and cash equivalents at end of period $ 7,795 $ 4,033 ========= ========= Supplementary Information: Interest paid less amounts capitalized $ 80,802 $ 73,824 --------- --------- Federal and state income taxes paid $ 40,070 $ 82,404 --------- --------- The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Retained Earnings Periods Ended September 30 (Unaudited)
Quarter Nine Months ------- ----------- 1995 1994 1995 1994 ---- ---- ---- ---- (In Thousands) Retained earnings at beginning of period $784,549 $757,192 $ 779,045 $ 728,075 Net income 73,820 58,851 155,013 161,708 Dividends declared on common shares (38,279) (37,358) (113,968) (111,098) -------- -------- --------- --------- Retained earnings at end of period $820,090 $778,685 $ 820,090 $ 778,685 ======== ======== ========= ========= Consolidated Electric Operating Statistics Periods Ended September 30 Quarter Nine Months ------- ----------- 1995 1994 1995 1994 ---- ---- ---- ---- (In Thousands of KWH) Generated at nuclear power plants 536,216 413,229 1,417,603 1,207,259 Generated at system thermal plants 3,153,455 2,629,743 8,360,490 8,539,337 Generated at system hydro plants 112,520 228,994 818,297 1,116,801 Generated at pumped storage plant 136,978 119,575 390,105 392,276 Less energy for pumping 188,034 185,034 537,111 539,501 --------- --------- ---------- ---------- Total generated 3,751,135 3,206,507 10,449,384 10,716,172 Nuclear entitlements 371,687 525,668 884,282 1,835,397 Purchased electric energy 2,198,417 2,544,721 6,926,177 6,361,857 --------- --------- ---------- ---------- Total generated and purchased 6,321,239 6,276,896 18,259,843 18,913,426 Less losses, company use, etc. 490,078 350,730 1,088,156 1,170,956 --------- --------- ---------- ---------- Total sales 5,831,161 5,926,166 17,171,687 17,742,470 ========= ========= ========== ========== The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Retained Earnings Periods Ended September 30 (Unaudited)
Twelve Months ------------- 1995 1994 ---- ---- (In Thousands) Retained earnings at beginning of period $ 778,685 $ 703,314 Net income 192,731 223,668 Dividends declared on common shares (151,326) (147,481) Premium on redemption of preferred stock of subsidiaries (816) --------- --------- Retained earnings at end of period $ 820,090 $ 778,685 ========= ========= Consolidated Electric Operating Statistics Twelve Months Ended September 30 Twelve Months ------------- 1995 1994 ---- ---- (In Thousands of KWH) Generated at nuclear power plants 1,978,303 1,584,184 Generated at system thermal plants 10,798,254 11,697,323 Generated at system hydro plants 1,054,096 1,466,432 Generated at pumped storage plant 523,482 528,780 Less energy for pumping 720,962 725,778 ---------- ---------- Total generated 13,633,173 14,550,941 Nuclear entitlements 1,584,419 2,404,040 Purchased electric energy 9,245,680 8,087,697 ---------- ---------- Total generated and purchased 24,463,272 25,042,678 Less losses, company use, etc. 1,590,100 1,742,526 ---------- ---------- Total sales 22,873,172 23,300,152 ========== ========== 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 a potentially responsible party (PRP) by either the U.S. Environmental Protection Agency (EPA) or the Massachusetts Department of Environmental Protection for 22 sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against NEES and certain subsidiaries regarding hazardous waste cleanup. The most prevalent types of hazardous waste sites with which NEES and its subsidiaries have been associated are manufactured gas locations. (Until the early 1970's, NEES was a combined electric and gas holding company system.) NEES is aware of approximately 40 such locations (including eight of the 22 locations for which NEES companies are PRPs) mostly located in Massachusetts. NEES and its subsidiaries are currently aware of other sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. NEES has been notified by the EPA that it is one of several PRPs for cleanup of the Pine Street Canal Superfund site in Burlington, Vermont, at which coal tar and other materials were deposited. Between 1931 and 1951, NEES and its predecessor owned all of the common stock of Green Mountain Power Corporation (GMP). Prior to, during, and after that time, gas was manufactured at the Pine Street Canal site by GMP. In 1989, NEES was one of 14 parties required to pay the EPA's past response costs related to this site. NEES remains a PRP for ongoing and future response costs. In November 1992, the EPA proposed a cleanup plan estimated by the EPA Note A - Hazardous Waste - Continued - ------------------------ to cost $50 million. In June 1993, the EPA withdrew this cleanup plan in response to public concern about the plan and its cost. It is uncertain at this time what the cost of any ultimate cleanup plan will be or what NEES's share of such cost will be. NEES has been involved in settlement negotiations to determine NEES' apportioned share of costs, which it expects to conclude by year-end. NEES believes it has adequate reserves for this site. In 1993, the Massachusetts Department of Public Utilities approved a rate agreement filed by Massachusetts Electric Company (Massachusetts Electric) that allows for remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts to be met from a non-rate recoverable interest-bearing fund of $30 million established on Massachusetts Electric's books in 1993. Rate recoverable contributions of $3 million, adjusted for inflation, are added to the fund annually in accordance with the agreement. Any shortfalls in the fund would be paid by Massachusetts Electric and be recovered through rates over seven years. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by NEES or its subsidiaries. Where appropriate, the NEES companies intend to seek recovery from their insurers and from other PRPs, but it is uncertain whether and to what extent such efforts would be successful. At September 30, 1995, NEES had total reserves for environmental response costs of $46 million and a related regulatory asset of $16 million. NEES believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, will not be material to its financial position. Note B - Purchased Power Contract Dispute - ----------------------------------------- In October 1994, New England Power Company (NEP) was sued by Milford Power Limited Partnership (MPLP), a venture of Enron Corporation and Jones Capital that owns a 149 megawatt gas-fired power plant in Milford, Massachusetts. NEP purchases 56 percent of the power output of the facility under a long-term contract with MPLP. The suit alleges that NEP has engaged in a scheme to cause MPLP and its power plant to fail and has prevented MPLP from Note B - Purchased Power Contract Dispute - Continued - ----------------------------------------- finding a long-term buyer for the remainder of the facility's output. The complaint includes allegations that NEP has violated the Federal Racketeer Influenced and Corrupt Organizations Act, engaged in unfair or deceptive acts in trade or commerce, and breached contracts. MPLP also asserts that NEP deliberately misled regulatory bodies concerning the Manchester Street Station repowering project. MPLP seeks compensatory damages in an unspecified amount, as well as treble damages. NEP believes that the allegations of wrongdoing are without merit. NEP has filed counterclaims and crossclaims against MPLP, Enron Corporation, and Jones Capital, seeking monetary damages and termination of the purchased power contract. MPLP also intervened in a recent NEP rate filing before the Federal Energy Regulatory Commission making similar allegations to those asserted in MPLP's lawsuit. Hearings on this claim concluded in October 1995. An Administrative Law Judge initial decision is expected in early 1996. Note C - New Accounting Standard - -------------------------------- In March 1995, the Financial Accounting Standards Board issued 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), effective for fiscal year 1996. This standard clarifies when and how to recognize an impairment of long-lived assets. In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. However, if written off, a regulatory asset can be restored if it again has a high probability of recovery. The impact of this standard will be driven by the facts and circumstances that exist when the standard is adopted and thereafter. Note D - Shipping Charter Agreement Dispute - ------------------------------------------- On August 17, 1995, the Massachusetts Superior Court dismissed a lawsuit filed against NEP in May 1995 by Keystone Shipping Company (Keystone). The Court held that Keystone's claims, relating to a ship charter, were subject to mandatory arbitration under the charter between NEP and Intercoastal Bulk Carriers, Inc. Note D - Shipping Charter Agreement Dispute - Continued - ------------------------------------------- (IBC), an affiliate of Keystone. On August 21, 1995, an arbitration panel unanimously ruled in NEP's favor. In September 1995, the parties signed mutual releases. The ship is currently in dry dock for routine maintenance and inspection. During the inspection, it was determined that repair work is needed. Under the releases, IBC is responsible for the cost of such repairs and the arbitration panel would hear any disputes which arise concerning the cost of repair. Note E - ------ In the opinion of the Company, these statements reflect all adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of its operations for the periods presented and should be considered in conjunction with the notes to the financial statements in the Company's 1994 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 1994 Annual Report on Form 10-K. Earnings - -------- Earnings for the third quarter and first nine months of 1995 were $1.14 per share and $2.39 per share, respectively, compared with $.91 and $2.49 per share earned in the corresponding periods in 1994. Increase (Decrease) in Earnings Period ending September 30, -------------------------- 3 months 9 months -------- -------- 1994 earnings $ .91 $2.49 Sales to ultimate customers .08 (.04) Purchased power costs excluding fuel (.02) (.21) Other operation and maintenance expenses .08 .01 Depreciation and amortization of utility plant .13 .23 Interest expense, net of allowance for (.02) (.08) funds used during construction Other (.02) (.01) ----- ----- 1995 earnings $1.14 $2.39 ===== ===== Earnings in the third quarter increased as a result of increased sales to ultimate customers, reflecting warmer weather in the summer of 1995. During the nine month period, lower sales to residential customers were offset by higher sales to commercial and industrial customers. The increase in purchased power costs for the nine months is primarily due to overhauls and refueling shutdowns at partially- owned nuclear power facilities. This increase also reflects costs to repair the steam generator tubes at the nuclear power plant owned by Maine Yankee Atomic Power Company (Maine Yankee) in which New England Power Company (NEP) has a 20 percent interest. The reduction in other operation and maintenance expenses in the third quarter reflects reduced overhaul activity at wholly-owned generating units. The decrease in depreciation and amortization reflects reduced amortization of the Seabrook 1 nuclear unit (Seabrook 1) in accordance with NEP's 1995 rate agreement(described below), and the completion, in the second quarter of 1995, of the amortization of the costs of certain coal conversion facilities. These decreases were partially offset by the effects of increased depreciation rates approved in NEP's 1995 rate agreement, increased charges associated with the dismantlement of a retired generating facility, and depreciation of new plant expenditures. The increase in interest expense is primarily due to increased long-term and short-term debt balances and higher interest rates. Wholesale Rate Activity - ----------------------- In February 1995, the Federal Energy Regulatory Commission (FERC) approved a rate agreement filed by NEP. Under the agreement, which became effective January 1995, NEP's base rates are frozen until 1997. Before this rate agreement, NEP's rate structure contained two surcharges that were recovering the costs of a coal conversion project and a portion of NEP's investment in Seabrook 1. These two surcharges fully recovered their related costs by mid-1995, however, under the rate agreement they have been continued as part of base rates. The agreement also allows for full recovery of costs associated with the Manchester Street Station repowering project, which is scheduled for completion during the fourth quarter of 1995. In addition, the agreement allows NEP to recover approximately $50 million of deferred costs associated with terminated purchased power contracts and postretirement benefits other than pensions (PBOPs) over seven years. Under the agreement, NEP is fully recovering currently incurred PBOP costs. The agreement further provides for the recovery over three years of $27 million of costs related to the dismantling of a retired generating station in Rhode Island and the replacement of a turbine rotor at one of NEP's generating units. The agreement also increases NEP's recovery of depreciation expense by approximately $8 million annually to recognize costs that will be incurred upon the eventual dismantling of its Brayton Point and Salem Harbor generating plants. Under the agreement, approximately $15 million of the $38 million in Seabrook 1 costs due to be recovered in 1995 pursuant to a 1988 settlement agreement are being deferred and will be recovered in 1996. The FERC's approval of this rate agreement applies to all of NEP's customers except the Milford Power Limited Partnership (MPLP). MPLP, which owns a gas-fired power plant in Milford, Massachusetts, has protested this rate agreement based on issues related to the Manchester Street Station Repowering project. Hearings on this protest concluded in October 1995 and an Administrative Law Judge initial decision is expected in early 1996 (for further discussion see Note B). Retail Rate Activity - -------------------- On September 29, 1995, the Massachusetts Department of Public Utilities (MDPU) approved a $31 million increase to base rates for Massachusetts Electric Company (Massachusetts Electric) which the Company began billing effective October 1, 1995. Approximately $5 million of this increase relates to the amortization of previously deferred PBOP costs. Massachusetts Electric and certain intervenors to the rate case have each filed motions asking that the MDPU reconsider certain rulings within its order. On October 17, 1995, the Rhode Island Public Utilities Commission (RIPUC) approved a settlement between The Narragansett Electric Company (Narragansett), the Rhode Island Division of Public Utilities and Carriers and a group of large commercial and industrial customers that provides for a base rate increase of $15 million effective in December 1995. The RIPUC also approved $3 million of new discounts for manufacturing customers, the costs of which are not being recovered from other customers. In June 1995, the RIPUC opened a proceeding to reassess whether fuel adjustment and purchased power cost adjustment (PPCA) mechanisms should be continued after 1995 or whether such costs should be included in base rates. These adjustment mechanisms currently allow Narragansett to pass through the costs of fuel and purchased power and do not require Narragansett to take significant risk regarding recovery of such costs. The RIPUC has not yet scheduled hearings in this proceeding. In July 1995, Granite State Electric Company (Granite State) filed a $2.6 million rate increase request with the New Hampshire Public Utilities Commission (NHPUC). On October 31, 1995, Granite State received approval to collect an interim increase of $0.9 million, effective November 1, 1995, subject to refund or surcharge pending the final outcome of the full case. A final decision is expected during the first quarter of 1996. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Third Quarter Nine Months ------------- ------------ 1995 vs 1994 1995 vs 1994 ------------- ------------ (In Millions) Sales to ultimate customers $ 9 $ (4) Rate changes 7 17 Fuel recovery (2) 17 Demand Side Management (DSM) program recovery 5 6 Unbilled revenues recognized under rate agreements (10) (22) Oil and gas sales (3) (11) Other 1 2 ---- ---- $ 7 $ 5 ==== ==== For a discussion of sales to ultimate customers, see the Earnings section. Rate changes for the three and nine months ended September 30, 1995 reflect the November 1994 expiration of Massachusetts Electric's temporary rate decrease, partially offset by increased discounts offered by NEES retail subsidiaries to large customers who agreed to give a three to five year notice before changing electricity suppliers. For a discussion of fuel recovery see the fuel costs discussion in the Operating Expenses section. The decrease in the recognition of unbilled revenues is due to completion of Massachusetts Electric's recognition of $35 million of unbilled revenues over a 13 month period that ended December 31, 1994, partially offset by Narragansett's recognition of $14 million over a 21 month period that will end December 31, 1995. The recognition of unbilled revenues was in accordance with rate agreements. The reduction in oil and gas sales is primarily due to decreased gas production and lower gas prices. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Third Quarter Nine Months ------------- ------------ 1995 vs 1994 1995 vs 1994 ------------- ------------ (In Millions) Fuel costs $ 1 $ 18 Purchased energy excluding fuel 2 23 Operation and maintenance: Retail DSM 5 6 Other (8) (1) Depreciation and amortization (16) (32) Taxes 6 (10) ---- ---- $(10) $ 4 ==== ==== 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 for the first nine months of 1995 reflects increased short-term purchases by NEP due to decreased nuclear generation, decreased hydro production due to low water levels, and overhauls of fossil fuel generating facilities. Purchased energy excluding fuel represents the remainder of purchased electric energy costs. The increase in purchased energy excluding fuel for the first nine months of 1995 is the result of increased costs associated with scheduled plant overhauls and refueling shutdowns at partially-owned nuclear power facilities. This increase also reflects costs to repair the steam generator tubes at Maine Yankee in which NEP has a 20 percent interest. The Maine Yankee nuclear unit has been shut down since January 1995, but is expected to return to service by year end. NEP recorded the full estimated incremental cost of the repairs in the first six months of 1995 as a charge to purchased power expense. The increase also includes amortization of previously deferred purchased power contract termination costs. Under the existing terms of certain purchased power contracts with other utilities, NEP will be reducing its power purchases which will result in a $19 million reduction in 1996 purchased power expenses. The decrease in other operation and maintenance expenses for the third quarter is primarily due to reduced overhaul activity at NEP's generating plants. The decrease in depreciation and amortization is due to decreased amortization of Seabrook 1 in accordance with NEP's 1995 rate agreement, the completion of the amortization of certain coal conversion facilities in the second quarter of 1995, and decreased oil and gas amortization rates due to decreased gas production. These decreases were partially offset by the effects of increased depreciation rates approved in NEP's 1995 rate agreement, increased charges associated with the dismantlement of a retired generating facility, and depreciation of new plant expenditures. The change in taxes for the third quarter and first nine months of 1995 is primarily due to the change in income for those periods. Allowance For Funds Used During Construction (AFDC) - -------------------------------------------------- AFDC increased for the third quarter and first nine months of 1995 due to increased construction work in progress, principally associated with the Manchester Street Station repowering project. In September 1995, the first of three generating units began commercial operation at the power plant. The remaining units are scheduled to commence commercial operation during the fourth quarter of this year. AFDC ends for these projects when the units go into commercial operation. Interest Expense - ---------------- The increase in interest expense is primarily due to increased long-term and short-term debt balances and higher interest rates. Competitive Conditions - ---------------------- The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including surplus generating capacity, increasing electric rates, improved technologies, increasing demand for customer choice, and new regulations and legislation intended to foster competition. See the Company's Annual Report on Form 10-K for the year ended December 31, 1994. Massachusetts, Rhode Island, and New Hampshire have been considering various proposals for allowing electric customers greater choice over their electricity supplier. Massachusetts Electric and Narragansett proposed to the MDPU and RIPUC, respectively, a set of interdependent principles for industry restructuring which was agreed to by groups representing environmental protection advocates, governmental agencies, non-utility generators, investor-owned utilities, and large and small customer interests. These principles included, among others, provisions for increased customer choice while allowing utilities the opportunity to recover the cost of their past commitments (stranded costs). In August 1995, the MDPU adopted principles similar to those filed by Massachusetts Electric, including a reasonable opportunity for recovery of stranded costs over a period not to exceed 10 years. The MDPU directed Massachusetts Electric and two other utilities to file by February 16, 1996, a detailed plan consistent with the MDPU decision. Also in August 1995, the RIPUC adopted the principles proposed by Narragansett, except for one regarding temporary support for renewable fuel technologies. The RIPUC ordered Narragansett to file a report no later than February 1, 1996 on its progress in negotiating a specific plan consistent with the principles. In October 1995, the NEES Companies began discussions with interested parties regarding the plan to be filed pursuant to the MDPU and RIPUC orders. That plan, to be called "Choice: New England", will propose that all customers of electric utilities in the three states served by NEES retail subsidiaries have the ability to choose their power supplier beginning in 1998. Under the plan, generation assets would become competitive, while transmission and distribution assets would remain regulated. Among other provisions, the plan would also propose a uniform access charge so that all regional utilities will have an opportunity to recover the cost of commitments made under the current regulated system. NEES believes that its "Choice: New England" proposal meets the principles for industry restructuring adopted by the MDPU and RIPUC for increased customer choice while providing utilities with an opportunity to recover costs which may be stranded by such customer choice. However, there can be no assurance that a final plan will include an access charge which would recover all stranded costs. Furthermore, market pricing of generation will increase the volatility of NEES revenues and, because of competitive pressures, may not result in full cost recovery. In July 1995, the Governor of Rhode Island vetoed two bills that would have allowed certain industrial customers to buy power from alternative suppliers, rather than through the local electric utility. Narragansett urged the Governor to exercise his veto, because Narragansett believed the proposed legislation would result in piecemeal deregulation that would not be fair to customers or shareholders and would circumvent the comprehensive proceedings mentioned above. Narragansett committed that, if the measures were not enacted into law, Narragansett would provide a two year rate discount to manufacturing customers (see Retail Rate Activity section). In addition, Narragansett committed that if the measures were not enacted, Narragansett would submit by July 1, 1996, a specific and detailed proposal to the RIPUC addressing the issues associated with providing open access to Narragansett's distribution system for its large commercial and industrial customers. Among other issues, that filing would address the proper means for recovering past costs incurred to serve exiting customers through a compensatory access charge. If the charges were approved by the RIPUC, the appropriate access tariffs would then be filed with the FERC. The Rhode Island Legislature may still override the vetoes. In August 1995, the MDPU issued an order in a stranded cost case involving another utility and one of its customers. This customer, which previously purchased all of its requirements from the utility, installed cogenerating equipment and requested that the utility provide only backup service. In its order, the MDPU required the customer to pay the utility 75 percent of the net stranded costs attributable to serving the customer's load. Because, in part, utilities have always been exposed to the risk of customer cogeneration, the MDPU indicated that its order, which is under appeal, did not set precedent for the issue of stranded cost recovery in the context of utility industry restructuring. In New Hampshire, the NHPUC has been considering the proposal of a new company, Freedom Energy Company (Freedom Energy), to sell electricity at retail rates to large customers of another utility. In June 1995, the NHPUC issued an order in the Freedom Energy docket in which it found that franchise territories in New Hampshire are exclusive as a matter of law. The order also stated that federal law precluded the NHPUC from authorizing retail wheeling. However, the order makes clear that Freedom Energy must obtain additional regulatory approvals at the state and federal level before it could operate as a public utility in the franchise territory of another utility. In addition, in June 1995, the Governor of New Hampshire signed into law a bill which instructs the NHPUC to establish a retail competition pilot program open to all classes of customers. NHPUC guidelines issued in October 1995 provide that each New Hampshire utility must allow customers representing three percent of its peak load (four megawatts for Granite State) to have access to alternative suppliers of generation for three years, starting May 1, 1996. Customers participating in the pilot would be responsible for paying 50 percent of the utility's stranded costs, with the balance borne by utility shareholders. In comments filed on the preliminary guidelines, Granite State requested that the guidelines be revised to adopt "Choice: New England" as an alternative approach to the proposed pilot. Granite State offered to file the plan with the NHPUC in February, consistent with the filings contemplated in Massachusetts and Rhode Island, so that the plan could be implemented on a pilot basis by May 1, 1996. Granite State's comments also challenged the legal basis for the proposed assignment of stranded costs, arguing that the guidelines will result in an unconstitutional taking without compensation, are preempted by federal law, and are inequitable. The June 1995 legislation also established a legislative committee on retail wheeling and restructuring. The committee is expected to issue an interim report on its findings in November 1995 and a final report by March 1, 1996. In March 1995, the FERC issued a notice of proposed rule-making in which it stated that recovery in rates of legitimate and verifiable stranded costs from departing customers is the appropriate method for recovery of costs stranded as the result of wholesale competition. Under the FERC policy proposal, costs stranded as a result of retail competition would be subject to state commission review if the state commission has the necessary statutory authority, and subject to FERC review if the state commission does not have such authority. A final decision is expected in 1996. Electric utility rates have historically been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Financial Accounting Standard No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. NEES believes that the operations of its utility subsidiaries currently meet the criteria established in FAS 71. However, the effects of regulatory and/or legislative initiatives, or the NEES companies' own initiatives, such as "Choice: New England", could, in the near future, cause all or a portion of the operations of one or more of its subsidiaries to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At September 30, 1995, NEES had consolidated pre-tax regulatory assets (net of regulatory liabilities) of approximately $600 million, of which about $500 million is related to its subsidiaries' generation business (including approximately $200 million related to oil and gas properties regulated as part of the generation business), and about $100 million is related to its subsidiaries' transmission and distribution businesses. In addition, if competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a substantial write-down of plant assets could be required pursuant to Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). This standard, effective for fiscal year 1996, clarifies when and how to recognize an impairment of long-lived assets. For further discussion of FAS 121 see Note C. Liquidity and Capital Resources - ------------------------------- Plant expenditures in the first nine months of 1995 amounted to $248 million for the utility subsidiaries, including $93 million related to the Manchester Street Station repowering project in Providence, Rhode Island. In September 1995, the first of three generating units began commercial operation at the power plant. The remaining units are scheduled to commence commercial operation during the fourth quarter of this year. The approximately 500 megawatt repowering project is estimated to cost approximately $455 million, excluding transmission facilities. The funds necessary for utility plant expenditures were primarily provided by net cash from operating activities, after the payment of dividends, and from proceeds of long-term debt issues. The financing activities of NEES subsidiaries for the first nine months of 1995 are summarized as follows: Issues Retirements ------ ----------- (In Millions) Long-term debt - -------------- Massachusetts Electric $ 88 $ 35 Narragansett 15 New England Power 60 10 Granite State 5 2 Hydro-Transmission Companies 9 NEEI 202 238 ---- ---- $370 $294 ==== ==== NEP refinanced $10 million of variable rate mortgage bonds in the first nine months of 1995. Interest rates on the other new long-term debt issues shown above ranged from 6.69 to 8.46 percent. In October 1995, Narragansett issued $7 million of long-term debt at a rate of 7.50 percent. Narragansett is planning to issue $16 million of first mortgage bonds during the fourth quarter of 1995, at an interest rate of 7.30 percent, to refinance outstanding first mortgage bonds. Narragansett Energy Resources Company is planning to issue $32 million of long-term notes during the fourth quarter of 1995 at an interest rate of 7.25 percent. Net cash from operating activities provided all of the funds necessary for oil and gas expenditures for the first nine months of 1995. New England Energy Incorporated's (NEEI) capitalized oil and gas exploration and development costs amounted to $13 million, including $8 million of capitalized interest costs. In April 1995, NEEI refinanced its previous credit agreement with a group of banks. The new agreement provides for borrowings of up to $225 million. The amount available will decrease annually through 2002. At September 30, 1995, NEES and its consolidated subsidiaries had lines of credit and standby bond purchase facilities with banks totaling $683 million. These lines and facilities were used for liquidity support for $193 million of commercial paper borrowings and for $342 million of NEP mortgage bonds in tax-exempt commercial paper mode. Fees are paid on the lines and facilities in lieu of compensating balances. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning a Massachusetts Electric Company $31 million rate order from the Massachusetts Department of Public Utilities, 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 The Narragansett Electric Company $14.9 million rate order from the Rhode Island Public Utilities 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 filed against New England Power Company (NEP) by Milford Power Limited Partnership on October 28, 1994, and intervention into a NEP rate filing discussed in Part I of this report in Management's Discussion and Analysis of Financial Condition and Results of Operation and in Note B of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Information concerning dismissal of a lawsuit filed against NEP in May 1995 by Keystone Shipping Company, discussed in Note D of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The Company filed reports on Form 8-K dated July 3, 1995, August 16, 1995, September 8, 1995, and September 29, 1995, all 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 September 30, 1995 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: November 9, 1995 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-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 SEP-30-1995 SEP-30-1994 SEP-30-1995 SEP-30-1994 9-MOS 9-MOS 3-MOS 3-MOS PER-BOOK PER-BOOK PER-BOOK PER-BOOK 3,834,159 0 0 0 385,374 0 0 0 501,419 0 0 0 426,849 0 0 0 0 0 0 0 5,147,801 0 0 0 64,970 0 0 0 736,823 0 0 0 820,090 0 0 0 1,620,367 0 0 0 0 0 0 0 147,016 0 0 0 1,639,356 0 0 0 192,600 0 0 0 0 0 0 0 0 0 0 0 22,520 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,525,942 0 0 0 5,147,801 0 0 0 1,690,989 1,685,617 599,126 591,633 96,941 107,528 46,199 39,573 1,358,461 1,344,157 450,606 467,706 1,455,402 1,451,685 496,805 507,279 235,587 233,932 102,321 84,354 15,359 13,678 4,156 5,250 250,946 247,610 106,477 89,604 83,479 73,733 28,580 26,735 155,013 161,708 73,820 58,851 6,517 6,525 2,172 2,172 155,013 161,708 73,820 58,851 113,968 111,098 38,279 37,358 80,653 68,869 27,509 23,636 356,954 373,753 151,294 105,189 $2.39 $2.49 $1.14 $0.91 $2.39 $2.49 $1.14 $0.91 Total deferred charges includes other assets and accrued Yankee Atomic costs. Preferred stock reflects preferred stock of subsidiaries. Preferred stock dividends reflect preferred stock dividends of subsidiaries. Short-term notes includes commercial paper obligations and notes payable to banks. Total common stockholders equity is reflected net of treasury stock at cost. -----END PRIVACY-ENHANCED MESSAGE-----