-----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, O5wXpGh8tWJPJv+3LP3zjieKU7zhr2cdndh+yKsekssBV7GyehZ7rvF/SWVnggdD /VwSpllBu2BhwX2oDmZsPg== 0000071297-98-000033.txt : 19980514 0000071297-98-000033.hdr.sgml : 19980514 ACCESSION NUMBER: 0000071297-98-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 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: 98618239 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 5083669011 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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: 64,183,918 shares at March 31, 1998. PART I FINANCIAL STATEMENTS Item 1. Financial Statements - ---------------------------- NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Periods Ended March 31 (Unaudited)
Three Months Twelve Months ------------ ------------- 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) Operating revenue $619,563 $638,146 $2,484,007 $2,402,625 -------- -------- ---------- ---------- Operating expenses: Fuel for generation 85,784 99,226 359,019 359,928 Purchased electric energy 122,675 144,530 506,374 528,240 Other operation 154,594 123,874 587,378 509,443 Maintenance 38,013 31,056 150,329 126,558 Depreciation and amortization 55,247 66,005 225,734 246,708 Taxes, other than income taxes 40,219 39,728 146,985 144,836 Income taxes 35,885 38,765 149,144 138,786 -------- -------- ---------- ---------- Total operating expenses 532,417 543,184 2,124,963 2,054,499 -------- -------- ---------- ---------- Operating income 87,146 94,962 359,044 348,126 Other income: Equity in income of generating companies 2,346 2,700 9,886 10,365 Other income (expense), net 20 (1,666) (14,067) (9,297) -------- -------- ---------- ---------- Operating and other income 89,512 95,996 354,863 349,194 -------- -------- ---------- ---------- Interest: Interest on long-term debt 25,039 27,528 104,822 110,163 Other interest 5,947 3,791 19,096 19,051 Allowance for borrowed funds used during construction (456) (643) (1,721) (2,381) -------- -------- ---------- ---------- Total interest 30,530 30,676 122,197 126,833 -------- -------- ---------- ---------- Income after interest 58,982 65,320 232,666 222,361 Preferred dividends and net gain on reacquisition of preferred stock 571 1,833 11,057 6,124 Minority interests 1,533 1,667 6,513 6,977 -------- -------- ---------- ---------- Net income $ 56,878 $ 61,820 $ 215,096 $ 209,260 ======== ======== ========== ========== Average common shares - Basic 64,532,863 64,969,652 64,791,620 64,969,652 Average common shares - Diluted 64,616,568 65,026,034 64,851,221 65,003,920 Per share data: Net income Basic and Diluted $.88 $.95 $3.32 $3.22 Dividends declared $.59 $.59 $2.36 $2.36 Statements of Consolidated Retained Earnings Retained earnings at beginning of period $954,518 $887,292 $ 910,841 $ 854,720 Net income 56,878 61,820 215,096 209,260 Dividends declared on common shares (37,875) (38,271) (152,416) (153,139) -------- -------- --------- --------- Retained earnings at end of period $973,521 $910,841 $ 973,521 $ 910,841 ======== ======== ========= ========= The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
March 31, December 31, ASSETS 1998 1997 ------ ---- ---- (In Thousands) Utility plant, at original cost $ 5,896,726 $5,860,101 Less accumulated provisions for depreciation and amortization 2,030,580 1,995,017 ----------- ---------- 3,866,146 3,865,084 Construction work in progress 42,945 48,708 ----------- ---------- Net utility plant 3,909,091 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 50,638 49,825 Other subsidiaries, at equity 37,771 37,418 Other investments 124,807 117,645 ----------- ---------- Total investments 213,216 204,888 ----------- ---------- Current assets: Cash 20,648 14,264 Accounts receivable, less reserves of $18,692,000 and $17,834,000 259,863 257,185 Unbilled revenues 62,907 71,260 Fuel, materials, and supplies, at average cost 78,733 66,509 Prepaid and other current assets 67,071 64,265 ----------- ---------- Total current assets 489,222 473,483 ----------- ---------- Accrued Yankee nuclear plant costs 285,273 299,564 Deferred charges and other assets 375,214 248,762 ----------- ---------- $ 5,272,016 $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 - 64,183,918 shares and 64,537,777 shares $ 64,970 $ 64,970 Paid-in capital 736,699 736,605 Retained earnings 973,521 954,518 Treasury stock - 785,734 shares and 431,875 shares (30,946) (16,415) Unrealized gain on securities, net 6,954 4,764 ----------- ---------- Total common share equity 1,751,198 1,744,442 Minority interests in consolidated subsidiaries 42,676 43,062 Cumulative preferred stock of subsidiaries 39,087 39,113 Long-term debt 1,367,173 1,487,481 ----------- ---------- Total capitalization 3,200,134 3,314,098 ----------- ---------- Current liabilities: Long-term debt due within one year 25,320 89,910 Short-term debt 334,325 251,950 Accounts payable 167,664 136,218 Accrued taxes 59,612 14,831 Accrued interest 20,343 24,969 Dividends payable 36,215 36,162 Other current liabilities 103,534 120,002 ----------- ---------- Total current liabilities 747,013 674,042 ----------- ---------- Deferred federal and state income taxes 713,721 720,375 Unamortized investment tax credits 89,499 90,018 Accrued Yankee nuclear plant costs 285,273 299,564 Other reserves and deferred credits 236,376 213,550 ----------- ---------- $ 5,272,016 $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 Quarters Ended March 31 (Unaudited)
1998 1997 ---- ---- (In Thousands) Operating activities: Net income $ 56,878 $ 61,820 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 55,992 66,895 Deferred income taxes and investment tax credits, net (9,249) (18,875) Allowance for funds used during construction (456) (643) Minority interests 1,533 1,667 Decrease (increase) in accounts receivable, net and unbilled revenues 5,786 6,939 Decrease (increase) in fuel, materials, and supplies (12,224) (3,755) Decrease (increase) in prepaid and other current assets (2,742) 7,479 Increase (decrease) in accounts payable 31,416 (21,414) Increase (decrease) in other current liabilities 23,586 64,790 Other, net 10,032 14,457 --------- --------- Net cash provided by operating activities $ 160,552 $ 179,360 --------- --------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $ (41,343) $ (54,075) Oil and gas exploration and development - (1,769) Proceeds from sale of New England Energy Incorporated oil and gas properties 50,000 - Other investing activities (6,045) (3,732) --------- --------- Net cash provided by (used in) investing activities $ 2,612 $ (59,576) --------- --------- Financing activities: Dividends paid to minority interests $ (1,574) $ (1,751) Dividends paid on NEES common shares (38,168) (38,143) Short-term debt 82,375 (31,200) Long-term debt - issues 25,000 - Long-term debt - retirements (209,950) (47,445) Repurchase of common shares (14,437) (1,426) Preferred stock - redemptions (26) - --------- --------- Net cash used in financing activities $(156,780) $(119,965) --------- --------- Net increase (decrease) in cash and cash equivalents $ 6,384 $ (181) Cash and cash equivalents at beginning of period 14,264 8,477 --------- --------- Cash and cash equivalents at end of period $ 20,648 $ 8,296 ========= ========= 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 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. At March 31, 1998, the fund had a balance of $46 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, 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 March 31, 1998, NEES had total reserves for environmental response costs of $58 million. This represents an increase from the balance at the end of 1997. Since the majority of the sites for which increased reserves were recognized are covered by rate agreements, this increase in the reserves did not have an adverse effect on net income. NEES believes that hazardous waste liabilities for all sites of which it is aware, and which are not covered by a rate agreement, are not material to its financial position. Note B - Nuclear Units - ---------------------- Nuclear Units Permanently Shut Down Three regional nuclear generating companies in which New England Power Company (NEP) has a minority interest own nuclear generating units which have been permanently shut down. These three units are as follows: NEP's Investment Future Estimated Unit Percent Amount($) Date Retired Billings to NEP($) - ----------------------------------------------------------------------------- Yankee Atomic 30 7 million Feb 1992 40 million Connecticut Yankee 15 17 million Dec 1996 89 million Maine Yankee 20 16 million Aug 1997 156 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 significant 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. NEP has notified the Secondary Purchasers that the shutdown does not relieve them of their obligation to make payments under the Secondary Purchase Agreements and that they are in default of such agreements. 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 $9 million of future shutdown costs. These costs are not included in the $156 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. Millstone 3 is currently shut down and has been placed on the NRC "Watch List," signifying that its safety performance exhibits sufficient weakness to warrant increased NRC attention. Millstone 3 may not restart without NRC approval. 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 has experienced numerous technical and nontechnical problems, to remain shut down pending verification that the unit's operations are in accordance with NRC regulations and the unit's operating license. Millstone 3 is operated by a subsidiary of Northeast Utilities (NU). NEP is not an owner of the Millstone 1 and 2 nuclear generating units, which are also shut down under NRC orders. A number of significant prerequisites must be fulfilled prior to restart of Millstone 3, including an independent verification of corrective actions taken at the unit, an NRC assessment concluding a safety conscious work environment exists, one or more public meetings, and a vote of the NRC Commissioners. Based on information currently available, NEP believes that, barring unforseen further difficulties, restart of the unit is likely during the summer of 1998. Since April 1996, NEP has incurred an estimated $40 million in incremental replacement power costs. During the outage, NEP is incurring incremental replacement power costs of approximately $2 million per month. 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. 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 filed suit against NU in Massachusetts Superior Court for damages resulting from the tortious conduct of NU relating to Millstone 3. NEP is seeking compensation for the losses it has suffered, including the costs of lost power and costs necessary to assure that Millstone 3 can safely return to operation. NEP also seeks punitive damages. NU has filed for dismissal of the suit and sought to consolidate it with suits filed by other joint owners in Massachusetts Superior Court. 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. 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 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 seeks 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. In November 1997, Norwood 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. NEP continues to believe that its divestiture plan will promote competition in the wholesale power generation market and that it has met and will continue to meet its contractual commitments to Norwood. On January 9, 1998, the defendants, including NEES and NEP, filed a motion to dismiss the lawsuit. On April 29, 1998, Norwood filed a second amended complaint. This complaint essentially makes the same allegations, but drops USGen as a party. 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 to begin taking power from another supplier. NEP has filed with the FERC for permission to charge Norwood a contract termination charge for its share of NEP's stranded costs. In April 1998, Norwood moved to dismiss NEP's filing with the FERC. In the event that a determination is made which denies NEP the ability to charge Norwood a contract termination charge, NEP may be required to take noncash write-offs for certain portions of NEP's stranded costs that would otherwise have been charged 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. NEP has made a demand for refund. Hydro-Quebec has not yet refunded any monies and has appealed the decision. In November 1997, NEP and the other utilities began a second arbitration to enforce the first decision. Refunds received from Hydro-Quebec will be passed on to customers. 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 Twelve Months Ended - ---------------------------------------------------------------------------- Period ended March 31, 1998 1997 1998 1997 - ---------------------------------------------------------------------------- Income after interest and minority interest (000's) $57,449 $63,653 $226,153 $215,384 Less: preferred stock dividends and net gain/loss on reacquisition of preferred stock of subsidiaries (000's) $ 571 $ 1,833 $ 11,057 $ 6,124 Income available to common shareholders (000's) $56,878 $61,820 $215,096 $209,260 Basic EPS $ .88 $ .95 $ 3.32 $ 3.22 Diluted EPS $ .88 $ .95 $ 3.32 $ 3.22 - ---------------------------------------------------------------------------- Average common shares outstanding for Basic EPS 64,532,863 64,969,652 64,791,620 64,969,652 Effect of Dilutive Securities Average potential common shares related to share-based compensation plans 83,705 56,382 59,601 34,268 - ---------------------------------------------------------------------------- Average common shares outstanding for Diluted EPS 64,616,568 65,026,034 64,851,221 65,003,920 - ----------------------------------------------------------------------------
Note F - Comprehensive Income - ----------------------------- In the first quarter of 1998, NEES adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS 130). The statement 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 for the quarter ended March 31, 1998 totaled $59.1 million, which is comprised of net income of $56.9 million and unrealized holding gains of $2.2 million. For the same period in 1997, total comprehensive income was $61.8 million, and consisted solely of net income. 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 is currently evaluating the effects of FAS 132 on its reporting requirements and will adopt FAS 132 in its financial statements for the year ending December 31, 1998. The adoption of FAS 132 will have no impact on NEES' operating results, financial position, or cash flows. Note H - ------ In the opinion of the Company, these statements reflect all adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of its operations for the periods presented and should be considered in conjunction with the notes to the consolidated financial statements in the Company's 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 first quarter of 1998 were $.88 per basic and diluted share, compared with $.95 per basic and diluted share for the corresponding period in 1997. Earnings decreased by approximately $.08 per share in the first quarter of 1998 due to the effects of the restructuring of the electric utility business in Rhode Island and Massachusetts, as compared to what would have been earned under bundled rate agreements existing prior to restructuring. On January 1, 1998 in Rhode Island, and on March 1, 1998 in Massachusetts, customers representing 22 percent and 73 percent, respectively, of NEES revenues from the delivery of electricity gained the right to choose their power supplier. NEES expects that earnings for the balance of 1998 will be reduced by the effects of industry restructuring. First quarter 1997 earnings were reduced by $.06 per share due to the recording of refund reserves, as more fully described in the "Operating Revenue" section , 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 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" sections of the NEES Form 10-K for 1997 and the NEES 1997 Annual Report. Industry Restructuring Update New Hampshire On April 15, 1998, the Federal Energy Regulatory Commission (FERC) 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 settlement provides for choice of power supplier to Granite State Electric's customers by no later than July 1, 1998. The principle terms of the settlement are substantially similar to the industry restructuring settlements reached in Massachusetts and Rhode Island. The settlement agreement still requires New Hampshire Public Utility Commission (NHPUC) approval. On May 1, 1998, Granite State Electric submitted a filing to the NHPUC in compliance with the March 20, 1998 Order of Rehearing which would provide for retail access to begin July 1, 1998 even if Granite State Electric's previously filed settlement were not accepted. Risk Factors While the NEES companies believe that the industry restructuring settlements and the sale agreement with USGen New England, Inc. (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 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 April 3, 1998, NEES and AllEnergy Marketing Company, L.L.C. (AllEnergy), a wholly owned indirect subsidiary of NEES, entered into a purchase and sale agreement with PAL Energy Corporation (PAL) to acquire PAL's 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. Closing of the sale is expected during the second quarter of 1998. Operating Revenue - ----------------- The following table summarizes the changes in operating revenues: Increase (Decrease) in Operating Revenues First Quarter ------------- 1998 vs 1997 ------------- (In Millions) Industry restructuring-related rate changes: Generation-related $(18) Distribution-related 6 Fuel cost-related (27) Massachusetts Electric Purchased Power Cost Adjustment (PPCA) mechanism 6 Oil and gas-related revenues (20) AllEnergy revenues 36 Other (2) ---- $(19) ==== 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 include the effect of various true-up mechanisms. These true-up mechanisms cover a number of items including, but not limited to, 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 in January 1998 pursuant to Rhode Island's Utility Restructuring Act of 1996. For a discussion of the decrease in fuel recovery during the first quarter, see the fuel costs discussion in the "Operating Expenses" section. The increase in revenues related to Massachusetts Electric's PPCA mechanism in the first quarter reflects the end of this mechanism in accordance with the Massachusetts industry restructuring settlement. PPCA refund provisions of approximately $6 million had been accrued during the first quarter of 1997 and reversed into revenue in the fourth quarter of 1997. The decrease in oil and gas-related revenues reflects the end of New England Energy Incorporated's (NEEI) activities due to the sale of its 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 first quarter of 1997, total AllEnergy revenues were $21 million. The decrease in other revenues partially reflects the impact of lower kilowatthour deliveries to ultimate customers, as a result of milder winter weather as compared to the first quarter of 1997. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses First Quarter ------------- 1998 vs 1997 ------------ (In millions) Fuel costs $(26) Purchased energy, excluding fuel (10) Operation and maintenance: AllEnergy 43 NEP PBOP amortization (6) Other 1 Depreciation and amortization: Utility plant 9 Oil and gas properties (20) Taxes (2) ---- $(11) ==== The decrease in fuel costs in the first quarter of 1998 primarily represents reduced wholesale sales to other utilities, a decrease in the cost of short-term power purchases and lower coal and oil prices. The decrease in purchased power costs, excluding fuel, during the first quarter reflects reduced charges from the Connecticut Yankee and Maine Yankee nuclear power plants, which were closed in December 1996 and mid-1997, respectively, as well as reduced charges from the Ocean State Power II plant, which underwent a major overhaul during the first quarter of 1997. 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 first quarter of 1997, total AllEnergy expenses were $23 million. The decrease in operation and maintenance 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 shown in depreciation and amortization expense below. The increase in other operation and maintenance expense reflects the costs of a major scheduled overhaul at the Manchester Street generating plant, partially offset by reduced general and administrative costs, lower charges related to ongoing PBOP costs, and lower bad debt related expenses. The decrease in oil and gas property depreciation and amortization expense during the first quarter reflects the end of the amortization of oil and gas costs as a result of the sale of NEEI's oil and gas properties. 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 quarter of 1998 amounted to $41 million. The funds necessary for utility plant expenditures were provided by net cash from operating activities, after the payment of dividends. The financing activities of NEES subsidiaries for the first quarter of 1998 are summarized as follows: Issues Retirements ------ ----------- (In millions) Long-term debt - -------------- NEP $ - $ 50 Massachusetts Electric 25 30 Narragansett Electric - 5 NEEI - 122 Hydro-Transmission Companies - 3 --- ---- $25 $210 === ==== In August 1997, the NEES Board of Directors authorized the repurchase of up to five million NEES common shares through open market purchases. Through March 31, 1998, NEES purchased approximately 686,000 shares under the repurchase program. Massachusetts Electric and Granite State Electric plan to issue an additional $30 million and $5 million, respectively, of long- term debt by the end of 1998. Massachusetts Electric plans to use the proceeds to refinance maturing bonds and fund capital expenditures. Granite State Electric plans to use the proceeds principally to refinance short-term debt. At March 31, 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 $334 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 in February 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 and Rhode Island. 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 a demand for arbitration sent by NEP to 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 Unaudited Financial Statements, is incorporated herein and made a part hereof. Information concerning an appeal of a favorable arbitration decision for NEP by Hydro-Quebec 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 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The Company filed reports on Form 8-K dated February 6, 1998, and February 25, 1998, both 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 March 31, 1998 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND ELECTRIC SYSTEM s/Michael E. Jesanis Michael E. Jesanis Senior Vice President and Chief Financial Officer Date: May 13, 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 MAR-31-1998 3-MOS PER-BOOK 3,909,091 213,216 489,222 660,487 0 5,272,016 64,970 736,699 973,521 1,751,198 0 39,087 1,367,173 0 0 334,325 25,320 0 0 0 1,754,913 5,272,016 619,563 35,885 496,532 532,417 87,146 2,366 89,512 30,530 56,878 571 56,878 37,875 25,039 160,552 $.88 $.88 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-----