<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 64,925,204 shares at June 30, 1995.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Periods Ended June 30
(Unaudited)
<CAPTION>
Quarter Six Months
------- ----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $533,547 $517,078 $1,091,863 $1,093,984
-------- -------- ---------- ----------
Operating expenses:
Fuel for generation 58,468 53,314 107,427 115,778
Purchased electric energy 140,290 119,026 285,785 240,025
Other operation 119,056 116,115 231,133 225,844
Maintenance 33,997 39,362 75,126 72,053
Depreciation and amortization 68,832 77,567 140,825 156,236
Taxes, other than income taxes 32,244 31,200 67,559 66,515
Income taxes 20,779 22,778 50,742 67,955
-------- -------- ---------- ----------
Total operating expenses 473,666 459,362 958,597 944,406
-------- -------- ---------- ----------
Operating income 59,881 57,716 133,266 149,578
Other income:
Allowance for equity funds used during
construction 2,771 2,627 5,381 4,681
Equity in income of generating companies 2,777 2,633 5,329 5,261
Other income (expense) - net (59) (1,145) 493 (1,514)
-------- -------- ---------- ----------
Operating and other income 65,370 61,831 144,469 158,006
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 27,065 22,875 53,144 45,233
Other interest 3,765 2,935 8,351 4,580
Allowance for borrowed funds used during
construction (3,272) (1,630) (6,596) (2,815)
-------- -------- ---------- ----------
Total interest 27,558 24,180 54,899 46,998
-------- -------- ---------- ----------
Income after interest 37,812 37,651 89,570 111,008
Preferred dividends of subsidiaries 2,173 2,173 4,345 4,353
Minority interests 2,108 1,894 4,032 3,798
-------- -------- ---------- ----------
Net income $ 33,531 $ 33,584 $ 81,193 $ 102,857
======== ======== ========== ==========
Average common shares 64,958,823 64,969,652 64,964,238 64,969,652
Net income per average common share $.52 $ .51 $ 1.25 $ 1.58
Dividends declared per share $.59 $.575 $1.165 $1.135
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Twelve Months Ended June 30
(Unaudited)
<CAPTION>
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $2,240,908 $2,230,337
---------- ----------
Operating expenses:
Fuel for generation 212,605 236,913
Purchased electric energy 559,903 507,139
Other operation 500,030 452,554
Maintenance 164,546 144,147
Depreciation and amortization 285,712 298,326
Taxes, other than income taxes 126,884 123,854
Income taxes 111,044 141,640
---------- ----------
Total operating expenses 1,960,724 1,904,573
---------- ----------
Operating income 280,184 325,764
Other income:
Allowance for equity funds used during construction 10,869 6,818
Equity in income of generating companies 9,826 10,483
Other income (expense) - net (1,849) (3,893)
---------- ----------
Operating and other income 299,030 339,172
---------- ----------
Interest:
Interest on long-term debt 101,411 94,860
Other interest 15,069 11,329
Allowance for borrowed funds used during
construction (11,574) (4,594)
---------- ----------
Total interest 104,906 101,595
---------- ----------
Income after interest 194,124 237,577
Preferred dividends of subsidiaries 8,689 9,652
Minority interests 7,673 7,577
---------- ----------
Net income $ 177,762 $ 220,348
========== ==========
Average common shares 64,966,945 64,969,652
Net income per average common share $ 2.74 $ 3.39
Dividends declared per share $2.315 $2.255
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
June 30, December 31,
ASSETS 1995 1994
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $5,007,112 $4,914,807
Less accumulated provisions for depreciation and amortization 1,672,143 1,610,378
---------- ----------
3,334,969 3,304,429
Net investment in Seabrook 1 under rate settlement 22,814 38,283
Construction work in progress 450,375 374,009
---------- ----------
Net utility plant 3,808,158 3,716,721
---------- ----------
Oil and gas properties, at full cost 1,257,126 1,248,343
Less accumulated provision for amortization 1,001,275 964,069
---------- ----------
Net oil and gas properties 255,851 284,274
---------- ----------
Investments:
Nuclear power companies, at equity 46,669 46,349
Other subsidiaries, at equity 41,070 42,195
Other investments, at cost 53,476 50,895
---------- ----------
Total investments 141,215 139,439
---------- ----------
Current assets:
Cash 4,103 3,047
Accounts receivable, less reserves of $17,716,000 and
$15,095,000 258,587 295,627
Unbilled revenues 46,900 55,900
Fuel, materials and supplies, at average cost 107,734 94,431
Prepaid and other current assets 77,649 76,718
---------- ----------
Total current assets 494,973 525,723
---------- ----------
Accrued Yankee Atomic costs 107,769 122,452
Deferred charges and other assets 319,251 296,232
---------- ----------
$5,127,217 $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 784,549 779,045
---------- ----------
1,586,342 1,580,838
Less 44,448 shares of treasury stock, at cost 1,490
---------- ----------
Total common share equity 1,584,852 1,580,838
Minority interests in consolidated subsidiaries 52,357 55,066
Cumulative preferred stock of subsidiaries 147,016 147,016
Long-term debt 1,630,248 1,520,488
---------- ----------
Total capitalization 3,414,473 3,303,408
---------- ----------
Current liabilities:
Long-term debt due within one year 32,520 65,920
Short-term debt 226,180 233,970
Accounts payable 130,665 168,937
Accrued taxes 13,118 11,002
Accrued interest 28,453 25,193
Dividends payable 38,435 37,154
Other current liabilities 95,525 93,251
---------- ----------
Total current liabilities 564,896 635,427
---------- ----------
Deferred federal and state income taxes 749,811 751,855
Unamortized investment tax credits 93,583 94,930
Accrued Yankee Atomic costs 107,769 122,452
Other reserves and deferred credits 196,685 176,769
---------- ----------
$5,127,217 $5,084,841
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
<CAPTION>
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 81,193 $ 102,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 143,559 158,245
Deferred income taxes and investment tax credits, net (3,703) (2,390)
Allowance for funds used during construction (11,977) (7,496)
Amortization of unbilled revenues (4,104) (16,100)
Minority interests 4,032 3,798
Decrease (increase) in accounts receivable, net
and unbilled revenues 46,040 20,778
Decrease (increase) in fuel, materials, and supplies (13,303) (13,880)
Decrease (increase) in prepaid and other current assets (931) 10,316
Increase (decrease) in accounts payable (38,272) 23,273
Increase (decrease) in other current liabilities 11,754 5,069
Other, net (8,628) (15,906)
--------- ---------
Net cash provided by operating activities $ 205,660 $ 268,564
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(181,766) $(222,261)
Oil and gas exploration and development (8,783) (13,725)
Other investing activities (465) (2,149)
--------- ---------
Net cash used in investing activities $(191,014) $(238,135)
--------- ---------
Financing Activities:
Dividends paid to minority interests $ (5,943) $ (4,838)
Dividends paid on NEES common shares (75,207) (74,095)
Short-term debt (7,790) 24,670
Long-term debt - issues 143,000 38,000
Long-term debt - retirements (66,160) (12,160)
Preferred stock - redemption (512)
Repurchase of common shares (1,490)
--------- ---------
Net cash used in financing activities $ (13,590) $ (28,935)
--------- ---------
Net increase in cash and cash equivalents $ 1,056 $ 1,494
Cash and cash equivalents at beginning of period 3,047 2,876
--------- ---------
Cash and cash equivalents at end of period $ 4,103 $ 4,370
========= =========
Supplementary Information:
Interest paid less amounts capitalized $ 51,499 $ 43,425
--------- ---------
Federal and state income taxes paid $ 22,743 $ 58,918
--------- ---------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Retained Earnings
Periods Ended June 30
(Unaudited)
<CAPTION>
Quarter Six Months
------- ----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Retained earnings at beginning of period $789,350 $760,965 $779,045 $728,075
Net income 33,531 33,584 81,193 102,857
Dividends declared on common shares (38,332) (37,357) (75,689) (73,740)
-------- -------- -------- --------
Retained earnings at end of period $784,549 $757,192 $784,549 $757,192
======== ======== ======== ========
Consolidated Electric Operating Statistics
Periods Ended June 30
Quarter Six Months
------- ----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands of KWH)
Generated at nuclear power plants 331,821 317,305 881,387 794,030
Generated at system thermal plants 2,803,427 2,638,878 5,207,035 5,909,594
Generated at system hydro plants 239,110 586,043 705,777 887,807
Generated at pumped storage plant 125,430 152,731 253,127 272,701
Less energy for pumping 172,113 188,399 349,077 354,467
--------- --------- ---------- ----------
Total generated 3,327,675 3,506,558 6,698,249 7,509,665
Nuclear entitlements 258,585 750,338 512,595 1,309,729
Purchased electric energy 2,175,696 1,761,926 4,727,760 3,817,136
--------- --------- ---------- ----------
Total generated and purchased 5,761,956 6,018,822 11,938,604 12,636,530
Less losses, company use, etc. 366,069 475,574 598,078 820,226
--------- --------- ---------- ----------
Total sales 5,395,887 5,543,248 11,340,526 11,816,304
========= ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Retained Earnings
Periods Ended June 30
(Unaudited)
<CAPTION>
Twelve Months
-------------
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Retained earnings at beginning of period $ 757,192 $ 685,398
Net income 177,762 220,348
Dividends declared on common shares (150,405) (146,507)
Premium on redemption of preferred stock of subsidiaries (2,047)
--------- ---------
Retained earnings at end of period $ 784,549 $ 757,192
========= =========
Consolidated Electric Operating Statistics
Periods Ended June 30
Twelve Months
-------------
1995 1994
---- ----
(In Thousands of KWH)
Generated at nuclear power plants 1,855,316 1,482,936
Generated at system thermal plants 10,274,542 12,244,974
Generated at system hydro plants 1,170,570 1,382,451
Generated at pumped storage plant 506,079 546,247
Less energy for pumping 717,962 729,770
---------- ----------
Total generated 13,088,545 14,926,838
Nuclear entitlements 1,738,400 2,209,487
Purchased electric energy 9,591,984 7,740,920
---------- ----------
Total generated and purchased 24,418,929 24,877,245
Less losses, company use, etc. 1,450,752 1,857,184
---------- ----------
Total sales 22,968,177 23,020,061
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Note A - Maine Yankee Atomic Power Company
------------------------------------------
New England Power Company (NEP) has a 20 percent interest in
Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880
megawatt (MW) nuclear generating station. Since January 1995, the
station has been shut down for refueling and inspection. During
the inspection, Maine Yankee detected substantial deterioration of
steam generator tubes. To correct the situation, Maine Yankee is
installing welded sleeves (involving the insertion of a partial new
tube inside the existing tube) on all of the steam generator tubes.
Similar repairs have been undertaken at other nuclear plants, but
not on the scale proposed at Maine Yankee. In the second quarter
of 1995, NEP accrued approximately $4 million for its portion of
the anticipated future incremental costs to repair the steam
generator tubes. These repair costs were charged to purchased
power expense. Replacement power costs incurred as a result of the
Maine Yankee shutdown are being recovered through NEP's fuel
clause. The station is expected to return to service by the end of
1995.
Note B - 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 environmental audit 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
<PAGE>
Note B - Hazardous Waste - Continued
------------------------
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
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.
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
<PAGE>
Note B - Hazardous Waste - Continued
------------------------
uncertain whether and to what extent such efforts would be
successful. At June 30, 1995, NEES had total reserves for
environmental response costs of $44 million and a related
regulatory asset of $14 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 C - Purchased Power Contract Dispute
-----------------------------------------
In October 1994, NEP was sued by Milford Power Limited
Partnership (MPLP), a venture of Enron Corporation and Jones
Capital that owns a 149 MW 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 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 making
similar allegations to those asserted in MPLP's lawsuit. Hearings
are expected to begin in October 1995. MPLP also intervened in a
recent Massachusetts Electric rate filing.
Note D - Shipping Charter Agreement Dispute
-------------------------------------------
In May 1995, NEP was sued by Keystone Shipping Company
(Keystone). The suit arose after NEP, which charters a vessel for
coal shipment purposes from Intercoastal Bulk Carriers, Inc. (IBC),
a Keystone affiliate, gave notice in November 1994 that it intended
to exercise its explicit contractual right under the charter
agreement to terminate the charter and purchase the vessel. NEP,
concurrently with the notice, initiated arbitration to resolve any
<PAGE>
Note D - Shipping Charter Agreement Dispute - Continued
-------------------------------------------
objections to its exercise of such a right. In arbitration, the
panel ruled in NEP's favor on several preliminary issues which were
appealed by Keystone in federal court, but later dismissed by the
court. Keystone's suit alleges that NEP induced Keystone to enter
into the charter agreement by making fraudulent misrepresentations
regarding the purchase option. Keystone alleges damages in excess
of $40 million. The complaint includes allegations that NEP
violated Massachusetts General Laws chapter 93A, which provides for
the possibility of treble damages. NEP believes that Keystone's
allegations are without merit and has filed a motion to dismiss the
lawsuit since the issues are the subject of arbitration. At
present, the vessel remains under the ownership of IBC and NEP is
continuing to pay the charter rate, subject to NEP's reservation of
its rights to seek damages and other relief against Keystone and
IBC.
Note E - 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 F
------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the financial statements in the Company's 1994 Annual
Report.
<PAGE>
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 second quarter and first six months of 1995
were $.52 per share and $1.25 per share, respectively, compared
with $.51 and $1.58 per share earned in the corresponding periods
in 1994.
<PAGE>
Increase (Decrease) in Earnings
Period ending June 30,
------------------------
3 months 6 months
-------- --------
1994 earnings $ .51 $1.58
Sales to ultimate customers .03 (.12)
Maine Yankee accrued expenses (.04) (.04)
Purchased power costs excluding fuel (.05) (.15)
Cost of overhauls of wholly-owned
generating units .07 (.01)
Other (.01)
----- -----
1995 earnings $ .52 $1.25
===== =====
Kilowatthour (KWH) sales to ultimate customers decreased by
about 1 percent for the six months ending June 30, 1995. This
reduction in KWH sales reflects a 3 percent decrease in the first
quarter of 1995, primarily in the residential sector, due to
unusually mild winter weather conditions when heating degree days
were approximately 9 percent below normal. This decrease was
partially offset by a 2 percent increase in KWH sales in the second
quarter of 1995, primarily in the commercial and industrial
sectors.
For a discussion of Maine Yankee accrued expenses see the Maine
Yankee Atomic Power Company section. The increases in purchased
power costs include costs of overhauls and refueling shutdowns at
Maine Yankee and two other partially-owned nuclear power
<PAGE>
facilities. The change in costs of overhauls of wholly-owned
generating units reflects the timing of overhauls in 1995 versus
1994.
Maine Yankee Atomic Power Company
---------------------------------
New England Power Company (NEP) has a 20 percent interest in
Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880
megawatt nuclear generating station. Since January 1995, the
station has been shut down for refueling and inspection. During
the inspection, Maine Yankee detected substantial deterioration of
steam generator tubes. To correct the situation, Maine Yankee is
installing welded sleeves (involving the insertion of a partial new
tube inside the existing tube) on all of the steam generator tubes.
Similar repairs have been undertaken at other nuclear plants, but
not on the scale proposed at Maine Yankee. In the second quarter
of 1995, NEP accrued approximately $4 million for its portion of
the anticipated future incremental costs to repair these steam
generator tubes. These repair costs were charged to purchased
power expense. Replacement power costs incurred as a result of the
Maine Yankee shutdown are being recovered through NEP's fuel
clause. The station is expected to return to service by the end of
1995.
<PAGE>
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 which were recovering the costs
of a coal conversion project and a portion of NEP's investment in
the Seabrook 1 nuclear unit (Seabrook 1). These two surcharges
would have 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 later this year. 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
<PAGE>
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 will be deferred and recovered in 1996.
The FERC's approval of this rate agreement applies to all of
NEP's customers except the Town of Norwood, Massachusetts and the
Milford Power Limited Partnership (MPLP), (which together represent
less than 2 percent of NEP's sales), who intervened in the rate
case. In June 1995, NEP and the Town of Norwood filed a settlement
agreement with the FERC. This settlement is subject to FERC
approval. A separate hearing will be conducted, beginning in
October 1995, to address the issues raised by MPLP.
Retail Rate Activity
--------------------
On March 15, 1995, Massachusetts Electric Company
(Massachusetts Electric) filed a request with the Massachusetts
Department of Public Utilities (MDPU) to increase its base rates by
$62 million. A decision by the MDPU on this filing will be issued
by October 1, 1995. Massachusetts Electric also filed an
alternative incentive rate plan which would have increased rates by
about $30 million this year with potential further increases in
subsequent years. The MDPU rejected this alternative rate plan in
July 1995.
<PAGE>
As part of its filing, Massachusetts Electric proposed a new
discount program for large industrial customers in the
manufacturing, computing, and biotechnology sectors that are
willing to make a minimum annual usage commitment for a period of
five years. The discounts, which Massachusetts Electric proposed
to be recovered from all customers, would range from 5 percent to
12.5 percent of base rates, depending on a customer's level of
commitment. These discounts are in addition to the 5 percent
service extension discounts (SEDs) that are currently available to
large commercial and industrial customers that agree to provide
three to five years notice before they purchase power from another
supplier or generate any additional power themselves.
Massachusetts Electric has also proposed lowering the minimum
average load threshold for the SED program from 500 kilowatts to
200 kilowatts.
On March 1, 1995, The Narragansett Electric Company
(Narragansett) filed a request with the Rhode Island Public
Utilities Commission (RIPUC) to increase its base rates by $30.5
million. In this filing, Narragansett proposed a $3 million
discount for manufacturers which would have been recoverable from
other customers. In connection with the Rhode Island Governor's
veto of legislation that would have allowed certain customers to
buy power from alternative suppliers, Narragansett has modified its
proposal by providing a two year rate discount to manufacturers
<PAGE>
amounting to $2 million per year, which will not be recovered from
customers (see Competitive Conditions section). A decision on
Narragansett's filing will be issued by December 1, 1995.
In June 1995, the RIPUC opened a proceeding to reassess whether
fuel adjustment and purchased power cost adjustment 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 risk regarding
recovery of such costs. The RIPUC has not yet scheduled hearings
in this proceeding.
In July 1995, Granite State Electric Company (Granite) filed a
request with the New Hampshire Public Utilities Commission (NHPUC)
to increase its base rates by $2.5 million, effective August 18,
1995. Granite has also petitioned the NHPUC to allow a portion of
the requested increase, approximately $1.2 million, to be effective
immediately as a temporary rate increase pending the investigation
of the full case. Granite expects the NHPUC to act on its
temporary rate request in September 1995 and on the filing in early
1996.
<PAGE>
Operating Revenue
-----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1995 vs 1994 1995 vs 1994
-------------- ------------
(In Millions)
Sales to ultimate customers $ 3 $ (7)
Seasonal change in unbilled revenues (6)
Fuel recovery 19 19
General rate change/SEDs 5 11
Unbilled revenues recognized under
rate agreements (6) (12)
Oil and gas sales (2) (8)
Other (3) 1
--- ----
$16 $ (2)
=== ====
For a discussion of KWH sales to ultimate customers, see the
Earnings section.
For a discussion of fuel recovery see the fuel costs discussion
in the Operating Expenses section.
General rate change/SEDs for the three and six months ended
June 30, 1995 reflects the November 1994 expiration of
Massachusetts Electric's temporary rate decrease, partially offset
by increased discounts under the retail companies' SED programs.
<PAGE>
The decrease in the recognition of unbilled revenues reflects
Massachusetts Electric's completion of the 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 to end December 31, 1995.
Both of these recognitions of unbilled revenues were in accordance
with rate agreements.
The reduction in oil and gas sales is primarily due to
decreased gas prices.
Operating Expenses
------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1995 vs 1994 1995 vs 1994
-------------- ------------
(In Millions)
Fuel costs $16 $ 17
Purchased energy excluding fuel 10 20
Operation and maintenance (2) 8
Depreciation and amortization (9) (15)
Taxes (1) (16)
--- ----
$14 $ 14
=== ====
<PAGE>
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 reflects
increased short-term purchases and alternate energy purchases due
to decreased generation from NEP's nuclear power suppliers,
decreased hydro production due to low water levels, and overhauls
of NEP's thermal generating facilities.
Purchased energy excluding fuel represents the remainder of
purchased electric energy costs. The increase in purchased energy
excluding fuel for the first six months of 1995 is the result of
increased costs associated with scheduled plant overhauls and
refueling outages as well as an accrual in the second quarter of
1995 of approximately $4 million relating to Maine Yankee (see
Maine Yankee Atomic Power Company section). The increase also
reflects amortization of previously deferred purchased power
termination costs.
The increase in operation and maintenance expenses for the six
months ended June 30, 1995, reflects increased maintenance costs
associated with overhauls of generating plants, in part to achieve
compliance with the Clean Air Act, increased general,
administrative and information system costs, and recognition of
currently incurred and previously deferred PBOP costs in accordance
with NEP's 1995 rate agreement. The decrease for the second
<PAGE>
quarter of 1995 reflects the timing of overhauls in 1995 versus
1994.
The decrease in depreciation and amortization is due to
decreased amortization of Seabrook 1 in accordance with NEP's 1995
rate agreement and decreased oil and gas amortization rates due to
increased reserve estimates. 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. A portion of NEP's Seabrook 1 amortization
and the amortization of NEP's Oil Conservation Adjustment was
completed in the second quarter of 1995. The amounts recorded in
the first six months related to these completed amortizations
totaled $12 million, before tax. A separate portion of the
Seabrook 1 amortization will continue through the end of 1996.
The decrease in taxes for the six months ended June 30, 1995 is
primarily due to decreased income.
In May 1995, the Brotherhood of Utility Workers of New England,
Inc., the International Brotherhood of Electrical Workers, and the
Utility Workers Union of America, AFL-CIO ratified new labor
agreements with the NEES companies effective May 1995 through May
1999.
<PAGE>
Allowance For Funds Used During Construction (AFDC)
--------------------------------------------------
AFDC increased for the second quarter and first six months of
1995 due to increased construction work in progress, principally
associated with the Manchester Street Station repowering project,
scheduled to commence commercial operation in late 1995.
Interest Expense
----------------
The increase in interest expense is primarily due to increased
long-term and short-term debt balances and higher interest rates in
the second quarter and first six months of 1995.
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.
The three states served by retail subsidiaries of NEES have
been considering various proposals for allowing electric customers
greater choice over their electricity supplier. The MDPU has been
holding hearings on the regulation and structure of the electric
<PAGE>
utility industry. The RIPUC convened a task force of utilities,
commercial and industrial customers, and other interested parties
to prepare a report on restructuring the industry. In these two
proceedings, Massachusetts Electric and Narragansett have filed
with the respective commissions a set of interdependent principles
for industry restructuring. These principles, which were agreed to
by groups representing environmental protection advocates,
governmental agencies, non-utility generators, investor-owned
utilities, and large and small customer interests, include
provisions for increased customer choice while allowing utilities
the opportunity to recover the cost of their past commitments, as
well as provisions for protecting residential customers,
encouraging renewable resources and energy conservation, and
honoring contracts with independent power producers. The parties
agreeing to the principles suggested to the MDPU and RIPUC that
they be permitted a six month period for discussions and
negotiations leading to the development of detailed, company-
specific plans. The MDPU and RIPUC are expected to issue separate
decisions this summer.
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. The Rhode Island Legislature may still override the
vetoes and it has indicated that it will consider alternative
<PAGE>
legislation in September 1995. Narragansett cannot predict whether
any such legislation will be enacted. Because Narragansett
believed that 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 urged the Governor to exercise his veto. Narragansett
committed that, if the measures were not enacted into law,
Narragansett would provide a two year rate discount to
manufacturing customers. In addition, Narragansett committed, if
the measures were not enacted, to 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 things, that filing would address the
proper means for recovering past costs incurred to serve exiting
customers through a compensatory access charge. If the charges are
approved by the RIPUC, the appropriate access tariffs would then be
filed with the FERC.
Also, as previously reported, the NHPUC is 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 addressing preliminary issues. The NHPUC found, in
a split decision, that it does not believe franchise territories in
<PAGE>
New Hampshire are exclusive as a matter of law. The order also
stated that it did not believe 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. The
program could be effective as early as January 1, 1996. The NHPUC
will first have to determine that a pilot program would be fair,
lawful, and in the public good. The size, scope, and other
characteristics of the pilot are not prescribed by the legislation
and will be subject to NHPUC determination. The legislation also
established a legislative committee on retail wheeling and
restructuring. The committee is to report its findings by November
1, 1995.
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
<PAGE>
statutory authority, and subject to FERC review if the state
commission does not have such authority. A final decision is
expected in mid-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 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 June 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
<PAGE>
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 E.
Liquidity and Capital Resources
-------------------------------
Plant expenditures in the first six months of 1995 amounted to
$182 million for the utility subsidiaries, including $68 million
related to the Manchester Street Station repowering project in
Providence, Rhode Island. The repowering of the Manchester Street
generating station, scheduled to commence commercial operation in
late 1995, is estimated to cost approximately $510 million,
excluding transmission facilities. The funds necessary for utility
plant expenditures were primarily provided by net cash from
<PAGE>
operating activities, after the payment of dividends, and from
proceeds of long-term debt issues.
The financing activities of NEES subsidiaries for the first six
months of 1995 are summarized as follows:
Issues Retirements
------ -----------
(In Millions)
Long-term debt
--------------
Massachusetts Electric $ 68 $25
Narragansett 15
New England Power 60 10
Granite State 2
Hydro-Transmission Companies 6
NEEI 23
---- ---
$143 $66
==== ===
NEP refinanced $10 million of variable rate mortgage bonds in
the first six months of 1995. Interest rates on the other new
long-term debt issues shown above ranged from 6.69 to 8.46 percent.
In July 1995, Granite issued $5 million of long-term debt at a rate
of 7.94 percent. The retail subsidiaries plan to issue $32 million
of additional long-term debt by the end of 1995.
Net cash from operating activities provided all of the funds
necessary for oil and gas expenditures for the first six months of
1995. New England Energy Incorporated's (NEEI) capitalized oil and
gas exploration and development costs amounted to $9 million,
including $5 million of capitalized interest costs. In April 1995,
NEEI refinanced its previous credit agreement with a group of
<PAGE>
banks. The new agreement provides for borrowings of up to $225
million. The amount available will decrease annually through 2002.
Collateral for the borrowings was unchanged.
At June 30, 1995, NEES and its consolidated subsidiaries had
lines of credit and standby bond purchase facilities with banks
totaling $663 million. These lines and facilities were used for
liquidity support for $226 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Information concerning requests to increase rates filed by
Massachusetts Electric Company with the Massachusetts Department of
Public Utilities, The Narragansett Electric Company with the Rhode
Island Public Utilities Commission, and Granite State Electric
Company with the New Hampshire 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 Note C of Notes to Unaudited Financial Statements, is
incorporated herein by reference and made a part hereof.
Information concerning a lawsuit filed against NEP by
Keystone Shipping Company on May 17, 1995, in the Massachusetts
Essex Superior Court, discussed in Note D of Notes to Unaudited
Financial Statements, is incorporated herein by reference and made
a part hereof.
Item 4. Submission of Matters to a Vote of Security-Holders
------------------------------------------------------------
On April 25, 1995, the Annual Meeting of Shareholders was held.
The shareholders, by a vote of 51,970,980 in favor, 635,351
against, and 470,378 abstaining, approved a Company proposal
setting the number of directors at eleven.
<PAGE>
Directors were elected and received the following votes:
Director Votes For Votes Withheld
-------- --------- --------------
Joan T. Bok 52,339,299 734,749
Paul T. Joskow 52,240,934 833,114
John M. Kucharski 52,437,024 637,024
Edward H. Ladd 52,495,786 578,262
Joshua A. McClure 52,446,815 627,233
John W. Rowe 52,363,260 710,788
George M. Sage 52,445,096 618,952
Charles E. Soule 52,393,796 680,252
Anne Wexler 52,409,761 664,287
James Q. Wilson 52,463,183 610,865
James R. Winoker 52,377,385 696,663
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
The Company filed a report on Form 8-K dated May 17, 1995,
containing Item 5, Other Events.
The Company is filing financial data schedules.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-Q for
the quarter ended June 30, 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: August 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.
<PAGE>
Exhibit Index
-------------
Exhibit Description Page
------- ----------- ----
27 Financial Data Schedule Filed herewith
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994
<PERIOD-END> JUN-30-1995 JUN-30-1994 JUN-30-1995 JUN-30-1994
<PERIOD-TYPE> 6-MOS 6-MOS QTR-2 QTR-2
<BOOK-VALUE> PER-BOOK PER-BOOK PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,808,158 0 0 0
<OTHER-PROPERTY-AND-INVEST> 397,066 0 0 0
<TOTAL-CURRENT-ASSETS> 494,973 0 0 0
<TOTAL-DEFERRED-CHARGES> 422,020 <F1> 0 0 0
<OTHER-ASSETS> 0 0 0 0
<TOTAL-ASSETS> 5,122,217 0 0 0
<COMMON> 64,970 0 0 0
<CAPITAL-SURPLUS-PAID-IN> 736,823 0 0 0
<RETAINED-EARNINGS> 784,549 0 0 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,584,852 0 0 0
0 0 0 0
147,016 <F2> 0 0 0
<LONG-TERM-DEBT-NET> 1,630,248 0 0 0
<SHORT-TERM-NOTES> 226,180 <F3> 0 0 0
<LONG-TERM-NOTES-PAYABLE> 0 0 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 32,520 0 0 0
0 0 0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0 0 0
<LEASES-CURRENT> 0 0 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,499,911 0 0 0
<TOT-CAPITALIZATION-AND-LIAB> 5,122,217 0 0 0
<GROSS-OPERATING-REVENUE> 1,091,863 1,093,984 533,547 517,078
<INCOME-TAX-EXPENSE> 50,742 67,955 20,779 22,778
<OTHER-OPERATING-EXPENSES> 907,855 876,451 452,887 436,584
<TOTAL-OPERATING-EXPENSES> 958,597 944,406 473,666 459,362
<OPERATING-INCOME-LOSS> 133,266 149,578 59,881 57,716
<OTHER-INCOME-NET> 11,203 <F2> 8,428 5,489 4,115
<INCOME-BEFORE-INTEREST-EXPEN> 144,469 158,006 65,370 61,831
<TOTAL-INTEREST-EXPENSE> 54,899 46,998 27,558 24,180
<NET-INCOME> 81,193 102,857 33,531 33,584
4,345 <F2> 4,353 <F2> 2,173 <F2> 2,173 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 81,193 102,857 33,531 33,584
<COMMON-STOCK-DIVIDENDS> 75,689 73,740 38,332 37,357
<TOTAL-INTEREST-ON-BONDS> 53,144 45,233 27,065 22,875
<CASH-FLOW-OPERATIONS> 205,660 268,564 61,152 112,705
<PAGE>
<EPS-PRIMARY> $1.25 $1.58 $.52 $.51
<EPS-DILUTED> $1.25 $1.58 $.52 $.51
<FN>
<F1> Total deferred charges includes other assets and accrued Yankee Atomic costs.
<F2> Preferred stock reflects preferred stock of subsidiaries. Preferred stock dividends reflect preferred stock
dividends of subsidiaries.
<F3> Short-term notes includes commercial paper obligations.
</FN>
