<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 March 31, 1996
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: 64,899,369 shares at March 31, 1996.
<PAGE>
PART I FINANCIAL STATEMENTSItem 1. Financial Statements
- ----------------------------
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Periods Ended March 31
(Unaudited)
<CAPTION>
Three Months
Twelve Months
------------
-------------
1996 1995
1996 1995
---- ----
- ---- ----
(In
Thousands)
<S> <C> <C> <C>
<C>
Operating revenue $586,220 $558,316
$2,299,616 $2,224,439
-------- --------
- ---------- ----------
Operating expenses:
Fuel for generation 74,292 48,959
262,831 207,451
Purchased electric energy 125,690 145,495
528,565 538,639
Other operation 115,521 112,077
504,165 497,089
Maintenance 32,283 41,129
127,212 169,911
Depreciation and amortization 65,676 71,993
258,349 294,447
Taxes, other than income taxes 38,625 35,315
135,941 125,840
Income taxes 39,178 29,963
137,555 113,043
-------- --------
- ---------- ----------
Total operating expenses 491,265 484,931
1,954,618 1,946,420
-------- --------
- ---------- ----------
Operating income 94,955 73,385
344,998 278,019
Other income:
Allowance for equity funds used during
construction (4) 2,610
5,238 10,725
Equity in income of generating companies 2,668 2,552
10,668 9,682
Other income (expense), net (531) 552
(7,389) (2,935)
-------- --------
- ---------- ----------
Operating and other income 97,088 79,099
353,515 295,491
-------- --------
- ---------- ----------
Interest:
Interest on long-term debt 27,844 26,079
110,130 97,221
Other interest 4,267 4,586
19,507 14,239
Allowance for borrowed funds used during
construction (508) (3,324)
(11,200) (9,932)
-------- --------
- ---------- ----------
Total interest 31,603 27,341
118,437 101,528
-------- --------
- ---------- ----------
Income after interest 65,485 51,758
235,078 193,963
Preferred dividends of subsidiaries 2,172 2,172
8,690 8,690
Minority interests 1,817 1,924
7,797 7,458
-------- --------
- ---------- ----------
Net income $ 61,496 $ 47,662 $
218,591 $ 177,815
======== ========
========== ==========
Common shares 64,878,371
64,969,652 64,921,367 64,969,652
Net income per common share $ .95 $ .73
$3.37 $2.74
Dividends declared per share $.590 $.575
$2.36 $2.30
Statements of Consolidated Retained Earnings
Retained earnings at beginning of period $831,529 $779,045 $
789,350 $ 760,965
Net income 61,496 47,662
218,591 177,815
Dividends declared on common shares (38,305) (37,357)
(153,221) (149,430)
-------- --------
- --------- ---------
Retained earnings at end of period $854,720 $789,350 $
854,720 $ 789,350
======== ========
========= =========
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>
March 31,
December 31,
ASSETS 1996
1995
------ ----
----
(In
Thousands)
<S> <C>
<C>
Utility plant, at original cost
$5,534,437 $5,480,001
Less accumulated provisions for depreciation
and amortization
1,753,950 1,710,991
- ---------- ----------
3,780,487 3,769,010
Net investment in Seabrook 1 under rate settlement
11,408 15,210
Construction work in progress
86,785 71,682
- ---------- ----------
Net utility plant
3,878,680 3,855,902
- ---------- ----------
Oil and gas properties, at full cost
1,268,686 1,266,290
Less accumulated provision for amortization
1,048,516 1,032,777
- ---------- ----------
Net oil and gas properties
220,170 233,513
- ---------- ----------
Investments:
Nuclear power companies, at equity
47,302 47,056
Other subsidiaries, at equity
38,802 40,259
Other investments
89,032 87,992
- ---------- ----------
Total investments
175,136 175,307
- ---------- ----------
Current assets:
Cash
4,399 7,064
Accounts receivable, less reserves of $19,909,000
and $18,308,000
277,378 284,033
Unbilled revenues
53,781 66,300
Fuel, materials, and supplies, at average cost
78,465 73,724
Prepaid and other current assets
80,753 77,673
- ---------- ----------
Total current assets
494,776 508,794
- ---------- ----------
Deferred charges and other assets
406,299 417,360
- ---------- ----------
$5,175,061 $5,190,876
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common share equity:
Common shares, par value $1 per share:
Authorized - 150,000,000 shares
Outstanding - 64,899,369 shares and 64,923,721 shares
$ 64,970 $ 64,970
Paid-in capital
736,823 736,823
Retained earnings
854,720 831,529
Treasury stock - 70,283 shares and 45,931 shares
(2,401) (1,543)
- ---------- ----------
Total common share equity
1,654,112 1,631,779
Minority interests in consolidated subsidiaries
47,947 48,912
Cumulative preferred stock of subsidiaries
147,016 147,016
Long-term debt
1,658,291 1,675,170
- ---------- ----------
Total capitalization
3,507,366 3,502,877
- ---------- ----------
Current liabilities:
Long-term debt due within one year
17,085 23,960
Short-term debt
164,711 203,250
Accounts payable
123,049 157,486
Accrued taxes
72,802 15,894
Accrued interest
21,947 27,455
Dividends payable
38,197 38,683
Other current liabilities
100,486 73,104
- ---------- ----------
Total current liabilities
538,277 539,832
- ---------- ----------
Deferred federal and state income taxes
762,765 780,451
Unamortized investment tax credits
93,097 93,408
Other reserves and deferred credits
273,556 274,308
- ---------- ----------
$5,175,061 $5,190,876
========== ==========
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
Quarters Ended March 31
(Unaudited)
<CAPTION>
1996
1995
----
----
(In
Thousands)
<S>
<C> <C>
Operating activities:
Net income $ 61,496
$ 47,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 67,577
73,721
Deferred income taxes and investment tax credits, net (19,097)
(2,434)
Allowance for funds used during construction (504)
(5,934)
Amortization of unbilled revenues
(2,052)
Minority interests 1,817
1,924
Decrease (increase) in accounts receivable,
net and unbilled revenues 20,807
39,260
Decrease (increase) in fuel, materials, and supplies (4,228)
(2,865)
Decrease (increase) in prepaid and other current assets(2,866)
3,882
Increase (decrease) in accounts payable (35,111)
(34,696)
Increase (decrease) in other current liabilities 77,247
33,727
Other, net 7,319
(7,687)
---------
---------
Net cash provided by operating activities $ 174,457
$ 144,508
---------
---------
Investing activities:
Plant expenditures, excluding allowance for
funds used during construction $ (62,530)
$ (79,556)
Oil and gas exploration and development (2,396)
(4,578)
Other investing activities (1,878)
28
---------
---------
Net cash used in investing activities $ (66,804)
$ (84,106)
---------
---------
Financing activities:
Dividends paid to minority interests $ (2,664)
$ (1,983)
Dividends paid on NEES common shares (38,854)
(37,859)
Short-term debt (38,701)
(70,595)
Long-term debt - issues 41,850
88,000
Long-term debt - retirements (71,090)
(36,280)
Repurchase of common shares (859)
---------
---------
Net cash used in financing activities $(110,318)
$ (58,717)
---------
---------
Net increase (decrease) in cash and cash equivalents $ (2,665)
$ 1,685
Cash and cash equivalents at beginning of period 7,064
3,047
---------
---------
Cash and cash equivalents at end of period $ 4,399
$ 4,732
=========
=========
Supplementary information:
Interest paid less amounts capitalized $ 35,366
$ 31,308
---------
---------
Federal and state income taxes paid (refunded) $ 9,727
$ (20,622)
---------
---------
Changes in assets and liabilities shown above, other than cash,
exclude the effects from
the purchase of Nantucket Electric Company.
The accompanying notes are an integral part of these financial
statements.
</TABLE>
<PAGE>
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 an environmental audit program in
place
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 U.S. Environmental
Protection Agency (EPA) or the Massachusetts Department of
Environmental Protection for 23 sites at which hazardous waste is
alleged to have been disposed. Private parties have also
contacted
or initiated legal proceedings against NEES and certain
subsidiaries regarding hazardous waste cleanup. The most
prevalent
types of hazardous waste sites with which NEES and its
subsidiaries
have been associated are manufactured gas locations. (Until the
early 1970's, NEES was a combined electric and gas holding
company
system.) NEES is aware of approximately 40 such locations
(including nine of the 23 locations for which NEES companies are
PRPs) mostly located in Massachusetts. NEES and its subsidiaries
are currently aware of other 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, where 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.
The cost of any cleanup plan is uncertain at this time. NEES
signed a settlement agreement in March 1996 establishing NEES's
apportionment percentage of these costs. NEES believes it has
adequate reserves for this site.
<PAGE>
Note A - Hazardous Waste - Continued
- ------------------------
In 1993, the Massachusetts Department of Public Utilities
approved a Massachusetts Electric Company (Massachusetts
Electric)
rate agreement that allows for remediation costs of former
manufactured gas sites and certain other hazardous waste sites
located in Massachusetts to be met from a non-rate-recoverable,
interest-bearing fund of $30 million established on Massachusetts
Electric's books in 1993. Rate-recoverable contributions of $3
million, adjusted for inflation, are added to the fund annually
in
accordance with the agreement. Any shortfalls in the fund would
be
paid by Massachusetts Electric and be recovered through rates
over
seven years.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by NEES or its
subsidiaries. Where appropriate, the NEES companies intend to
seek
recovery from their insurers and from other PRPs, but it is
uncertain whether, and to what extent, such efforts will be
successful. At March 31, 1996, NEES had total reserves for
environmental response costs of $50 million and a related
regulatory asset of $19 million. NEES believes that hazardous
waste liabilities for all sites of which it is aware, and which
are
not covered by a rate agreement, are not material to its
financial
position.
Note B - Millstone 3 Nuclear Generating Unit
- --------------------------------------------
New England Power Company (NEP) is a 12 percent joint owner
of
the Millstone 3 nuclear generating unit, a 1,150 megawatt unit
operated by subsidiaries of Northeast Utilities (NU). In March
1996, the unit was shut down as the result of an internal safety
review. On April 4, 1996, the Nuclear Regulatory Commission
(NRC)
ordered Millstone 3 to remain shut down pending safety
verification. The order also requires that specific technical
issues be resolved prior to restarting the unit. Based on
preliminary estimates provided by NU, NEP expects to incur
approximately $1 million in incremental operation and maintenance
costs related to Millstone 3. Replacement purchased power costs
of
approximately $1.5 million per month are also being incurred by
NEP. NEP is not a joint owner of the Millstone 1 and 2 nuclear
generating units, which are also shut down under NRC orders. NU
has stated that the work required to comply with the NRC
requirements for Millstone 3 is expected to be completed by July
<PAGE>
Note B - Millstone 3 Nuclear Generating Unit - Continued
- --------------------------------------------
will be allowed to restart. The New England Power Pool (NEPOOL)
has indicated that if the Millstone units do not return to
service
during the summer peak-load period, there could, under certain
circumstances, be insufficient power supply available in New
England to meet demand. NEPOOL members are taking steps to
prepare
to meet summer load contingencies.
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 megawatt gas-fired power plant in
Milford,
Massachusetts. NEP purchased 56 percent of the power output of
the
facility under a long-term contract with MPLP. The suit alleged
that NEP engaged in a scheme to cause MPLP and its power plant to
fail and prevented MPLP from finding a long-term buyer for the
remainder of the facility's output. MPLP sought compensatory
damages in an unspecified amount, as well as treble damages. NEP
had filed counterclaims and crossclaims against MPLP, Enron
Corporation, and Jones Capital, seeking monetary damages and
termination of the purchased power contract. On April 24, 1996,
NEP and MPLP executed a settlement agreement under which each
party
agreed to the dismissal of the lawsuit and the counterclaims, the
restructuring of their power and fuel purchase arrangements and
the
payment by MPLP to NEP of an undisclosed amount of money. MPLP
will withdraw all allegations made by it against NEP, including
claims that NEP deceived its regulators and violated federal
criminal statutes. The settlement is contingent upon approval by
the Federal Energy Regulatory Commission (FERC) of the
restructured
arrangements between MPLP and NEP, and a proposed sale of the
MPLP
partnership interests in the plant to subsidiaries of American
National Power, Inc.
MPLP also intervened in a NEP rate filing before the FERC
making similar allegations to those asserted in MPLP's lawsuit.
In
April 1996, an Administrative Law Judge from the FERC strongly
rejected all claims by MPLP. The settlement referred to above
also
resolves this dispute before the FERC.
Note D - 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
<PAGE>
Note D - New Accounting Standard - Continued
- --------------------------------
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. This standard did not have a
material impact on the financial condition or results of
operations
upon adoption. However, the impact in future periods may change
as
competitive factors and restructuring influence the electric
utility industry.
Note E
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments)
necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with
the
notes to the consolidated financial statements in the Company's
1995 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 1995 Annual Report on
Form 10-K.
Earnings
- --------
Earnings for the first quarter of 1996 were $.95 per share
compared with $.73 per share earned in the first quarter of 1995
and $1.07 per share earned in the first quarter of 1994.
<PAGE>
The table below details the primary reasons for the change in
consolidated earnings over the first quarter of last year:
1995 earnings $ .73
Increased revenues .16
Decreased purchased power costs
excluding fuel .11
Other operation and maintenance expenses .03
Seabrook 1 and Oil Conservation Adjustment
(OCA) amortization .09
Manchester Street depreciation
.03)
Allowance for funds used during construction
(.07)
Taxes, other than income taxes
(.03)
Other
(.04)
----
1996 earnings $ .95
====
The increase in revenues is primarily due to sales growth
and
retail rate increases. Kilowatt-hour (kWh) sales to ultimate
customers increased 5 percent in the first quarter of 1996, in
part
due to a return to more normal weather conditions as compared
with
the unusually mild weather experienced in the first quarter of
1995.
The decrease in purchased power costs excluding fuel in 1996
was principally due to first quarter 1995 overhauls and refueling
shutdowns of three partially-owned nuclear power units. Two of
these units are scheduled for refueling shutdowns in the second
half of 1996. The decrease in other operation and maintenance
<PAGE>
expenses reflects overhauls at wholly-owned generating units in
the
first quarter of 1995.
The decrease in Seabrook 1 and OCA amortization reflects the
completion in mid-1995 of the recovery of a portion of Seabrook 1
costs and certain coal conversion costs. These decreases were
partially offset by the depreciation of the Manchester Street
Station, which began commercial operation in the second half of
1995.
Allowance for funds used during construction decreased due
to
the completion of the Manchester Street Station in 1995.
The increase in taxes, other than income taxes in 1996 was
due
to increased property taxes, including taxes on the Manchester
Street Station.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to rapidly
increasing competitive pressures, stemming from a combination of
trends, including the presence of surplus generating capacity, a
disparity in electric rates among regions of the country,
improvements in generation efficiency, 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, 1995.
<PAGE>
In states across the country, including Massachusetts, Rhode
Island, and New Hampshire, there have been an increasing number
of
proposals to allow retail customers to choose their electricity
supplier, with incumbent utilities required to deliver that
electricity over their transmission and distribution systems
(also
known as "retail wheeling").
Choice: New England
In October 1995, the NEES companies announced a plan,
Choice:
New England, to allow all customers of electric utilities in
Massachusetts, Rhode Island, and New Hampshire to choose their
power supplier beginning in 1998. Under Choice: New England, the
pricing of generation would be deregulated; however, transmission
and distribution rates would remain regulated.
Under Choice: New England, New England Power Company's (NEP)
wholesale contracts with its affiliates would be terminated. In
return, the plan proposes that the cost of NEP's past generation
commitments be recovered through a wires access or transition
charge to retail customers. Those commitments, which are
currently
estimated at approximately $4 billion on a present value basis,
primarily consist of (i) generating plant commitments, (ii)
regulatory assets, (iii) purchased power contracts, and (iv) the
operating cost of nuclear plants which cannot be mitigated by
shutting down the plants (otherwise referred to as "nuclear costs
independent of operation"). Sunk costs associated with utility
<PAGE>
generating plants, such as past capital investments, and
regulatory
assets would be recovered over ten years, but at a return on
equity
of one percentage point over the interest rate on long-term "BBB"
rated utility bonds. Purchased power contract costs and nuclear
costs independent of operation would be recovered as incurred
over
the life of those obligations, a period expected to extend beyond
ten years. Under Choice: New England, the access charge would be
set at three cents per kWh for the first three years.
Thereafter,
the access charge would vary, but is expected to decline. The
provisions of Choice: New England, including the proposed access
charge, are subject to state approval and Federal Energy
Regulatory
Commission (FERC) approval.
Choice: New England was formally filed by Massachusetts
Electric Company (Massachusetts Electric) with the Massachusetts
Department of Public Utilities (MDPU) in February 1996. Three
other utilities and the Massachusetts Division of Energy
Resources
(DOER) also filed plans with the MDPU in February 1996. The
DOER's
plan also calls for direct access for all customers beginning in
1998, with a pilot program beginning in 1997. The DOER plan,
however, proposes that, in exchange for stranded cost recovery,
utilities divest their generating assets, either through sale or
spinoff.
On May 1, 1996, the MDPU issued a set of proposed rules and
regulations governing the implementation of retail choice. The
proposed rules would allow all customers of Massachusetts
<PAGE>
investor-owned utilities to choose their electric supplier
beginning in 1998 and would establish a price cap system for
regulating the rates of distribution service that would continue
to
be provided by local utilities. The MDPU proposed rules affirm
the
principle of stranded cost recovery for utilities over ten years,
but create uncertainties concerning the extent of actual stranded
cost recovery. While the MDPU did not order mandatory
divestiture
of generating assets, it stated that it might provide utilities
financial incentives to divest. Hearings on the proposed rules
are
scheduled for June and July. The MDPU has stated that it will
issue final regulations in September 1996 and issue orders on the
individual utility plans in 1997.
The Narragansett Electric Company (Narragansett) filed
Choice:
New England with the Rhode Island Public Utilities Commission
(RIPUC) in April 1996. The RIPUC has not yet scheduled hearings
on restructuring plans.
Other legislative and regulatory initiatives
As described in the 1995 Annual Report on Form 10-K,
legislation was proposed by the Speaker and Majority Leader of
the
House of Representatives of the Rhode Island Legislature that
would
allow electric customers in Rhode Island to choose their power
supplier. This legislation, which is similar to Choice: New
England, is pending and is expected to be amended prior to final
consideration by the House of Representatives. Final
consideration
is expected to be completed by the summer of 1996.
<PAGE>
In April 1996, the New Hampshire Legislature passed
legislation requiring a restructuring of the electric utility
industry. The legislation sets forth principles for
restructuring
which are modeled after the principles adopted in Massachusetts
and
Rhode Island. The legislation directs the New Hampshire Public
Utilities Commission (NHPUC) to conduct a proceeding to establish
criteria for restructuring plans to be filed by each utility in
June 1997 and to establish an interim stranded cost recovery
charge
for each utility, pending a final determination of the
appropriate
level of stranded cost recovery in the context of a rate
proceeding. The bill allows the NHPUC significant discretion in
determining the appropriate level of stranded cost recovery and
is
expected to be signed by the Governor.
In response to legislation enacted in 1995, the NHPUC has
initiated a retail competition pilot which involves up to 3
percent
of each utilities' load, the recovery of an access charge for
stranded cost recovery and the unbundling of rates. Suppliers
could
begin providing service by late May 1996.
In April 1996, the FERC issued Order No. 888 addressing open
access transmission and indicated that those utilities that own
transmission facilities will be required to file open access
tariffs to make available transmission service to affiliates and
nonaffiliates at fair non-discriminatory rates. Order No. 888
also
stated that public utilities will be allowed to seek recovery of
legitimate and verifiable stranded costs from departing customers
<PAGE>
as a result of wholesale competition. The FERC indicated that it
will provide for the recovery of retail stranded costs only if
state regulators lack the legal authority to address those costs
at
the time retail wheeling is required. The FERC also stated that
it
would consider proposals for stranded cost recovery under
wholesale
requirements contracts, such as the contracts between NEP and its
retail affiliates.
In response to the FERC Notice of Proposed Rulemaking issued
in advance of Order No. 888 discussed above, NEP and NEES
Transmission Services, Inc. (NEES Trans), a proposed new
subsidiary
of NEES, filed transmission tariffs in March 1996 at the FERC
that,
if accepted by the FERC, will become applicable for all
wholesale
transmission transactions, including those of the NEES retail
distribution affiliates. Under the proposed tariffs and
accompanying support agreements, NEES Trans will provide all
wholesale transmission services involving the NEES companies'
facilities under comparable, nondiscriminatory transmission
rates.
The existing NEES companies, including NEP, would turn
operational
control of their transmission facilities over to NEES Trans in
exchange for support payments from NEES Trans for these
facilities.
NEP may, at a later date, transfer its transmission assets to
NEES
Trans. NEP is requesting that its filing become effective by
June
1, 1996 or upon approval by the Securities and Exchange
Commission,
for the establishment of this new company. The filing will be
amended to conform to Order No. 888. If approved as filed, the
<PAGE>
implementation of the tariffs would not have a significant impact
on NEP's revenues.
Risk factors
The major risk factors affecting recovery of at-risk assets
are: (i) regulatory and legal decisions, (ii) the market price of
power, and (iii) the amount of market share retained by the NEES
companies. First, there can be no assurance that a final
restructuring plan ordered by regulatory bodies, or the courts,
or
through legislation will include an access charge that would
fully
recover stranded costs and include a fair return on those costs
as
they are being recovered. If laws are enacted or regulatory
decisions are made that do not offer an opportunity to recover
stranded costs, NEES believes it has strong legal arguments to
challenge such laws or decisions. Such a challenge would be
based,
in part, on the assertion that subjecting utility generating
assets
to competition without compensation for stranded costs, while
requiring utilities to open access to their wires at historic
cost-based rates, would constitute an unconstitutional taking of
property without just compensation. Second, the access charge
proposed under Choice: New England recovers only sunk costs, such
as plant expenditures and contractual commitments. Because of a
regional surplus of electric generation capacity, current
wholesale
power prices in the short-term market are based on the short-run
fuel costs of generating units. Such wholesale prices are not
<PAGE>
currently providing a significant contribution toward other
marginal costs, such as operation and maintenance expenses. NEES
expects this situation to continue in a retail market. Third,
revenues will also be affected by the NEES companies' ability to
retain existing customers and attract new customers in a
competitive environment. As a result of the pressure on market
prices and market share, it is likely that, even if Choice: New
England is implemented, the generating business will experience
revenue losses and increased revenue volatility for an
indeterminate period, which will limit its ability to contribute
to
consolidated earnings and dividend growth during that period.
Historically, electric utility rates have been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation
(FAS 71), requires regulated entities, in appropriate
circumstances, to establish regulatory assets and liabilities,
and
thereby defer the income statement impact of certain costs that
are
expected to be recovered in future rates. The effects of
regulatory, legislative, or utility initiatives, such as the
proposed Rhode Island legislation, the proposed rules in
Massachusetts, or Choice: New England, could, in the near future,
cause all or a portion of the operations of its subsidiaries to
cease meeting the criteria of FAS 71. In that event, the
<PAGE>
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
December 31, 1995, NEES had consolidated pre-tax regulatory
assets
(net of regulatory liabilities) of approximately $600 million, of
which about $500 million is related to its subsidiaries'
generation
business (including approximately $200 million related to oil and
gas properties regulated as part of the generation business), and
about $100 million is related to its subsidiaries' transmission
and
distribution businesses. In addition to the potential write-down
of regulatory assets, write-downs of plant assets could be
required
if competitive or regulatory change should cause a substantial
revenue loss, or lead to the permanent shutdown or sale of any
generating facilities.
Millstone 3 Nuclear Generating Unit
- -----------------------------------
NEP is a 12 percent joint owner of the Millstone 3 nuclear
generating unit, a 1,150 megawatt unit operated by subsidiaries
of
Northeast Utilities (NU). In March 1996, the unit was shut down
as
the result of an internal safety review. On April 4, 1996, the
Nuclear Regulatory Commission (NRC) ordered Millstone 3 to remain
shut down pending safety verification. The order also requires
that specific technical issues be resolved prior to restarting
the
unit. Based on preliminary estimates provided by NU, NEP expects
<PAGE>
to incur approximately $1 million in incremental operation and
maintenance costs related to Millstone 3. Replacement purchased
power costs of approximately $1.5 million per month are also
being
incurred by NEP. NEP is not a joint owner of the Millstone 1 and
2 nuclear generating units, which are also shut down under NRC
orders. NU has stated that the work required to comply with the
NRC requirements for Millstone 3 is expected to be completed by
July 1996. However, it is uncertain when any of the Millstone
units will be allowed to restart. The New England Power Pool
(NEPOOL) has indicated that if the Millstone units do not return
to
service during the summer peak-load period, there could, under
certain circumstances, be insufficient power supply available in
New England to meet demand. NEPOOL members are taking steps to
prepare to meet summer load contingencies.
Retail Rate Activity
- --------------------
In July 1995, Granite State Electric Company (Granite State)
filed a $2.6 million rate increase request with the NHPUC.
Granite
State received approval to collect an interim increase of $0.9
million effective November 1, 1995, subject to refund or
surcharge
pending the final outcome of the full case. On May 6, 1996, the
NHPUC approved a settlement agreement for a $1.1 million rate
increase effective June 1, 1996.
<PAGE>
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
First Quarter
-------------
1996 vs 1995
-------------
(In Millions)
Sales growth $16
Retail rate increases 11
Purchased Power Cost Adjustment (PPCA) (5)
Fuel recovery 13
Demand Side Management (DSM)
program recovery (2)
Other (5)
---
$28
===
For a discussion of sales to ultimate customers, see the
Earnings section.
Retail rate increases for the three months ended March 31,
1996
reflect a Massachusetts Electric $31 million base rate increase
effective October 1, 1995, a Narragansett $12 million base rate
increase effective in December 1995, and a Granite State $850,000
interim increase effective November 1, 1995. The PPCA
mechanisms,
in general, are designed to true-up the pass through of purchased
power billings between NEP and the retail companies.
<PAGE>
For a discussion of fuel recovery see the fuel costs
discussion
in the Operating Expenses section.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
First Quarter
-------------
1996 vs 1995
-------------
(In Millions)
Fuel costs $ 17
Purchased energy excluding fuel (12)
Operation and maintenance:
Retail DSM (2)
Other (3)
Depreciation and amortization:
Seabrook 1 and OCA amortization (7)
Manchester Street depreciation 4
Oil and gas properties (3)
Taxes 12
----
$ 6
====
Fuel costs represent fuel for generation and the portion of
purchased electric energy permitted to be recovered through NEP's
fuel adjustment clause. The increase in fuel costs in the first
<PAGE>
quarter of 1996 reflects increased kWh sales and additional fixed
pipeline demand charges. In accordance with a 1992 rate
agreement,
50 percent of most of NEP's fixed pipeline demand charges in
prior
years were deferred pending completion of the Manchester Street
Station repowering project. The project was completed in the
second half of 1995 and accordingly no further amounts are being
deferred. The deferred amounts are currently being amortized
over
25 years.
Purchased energy excluding fuel represents the remainder of
purchased electric energy costs. The decrease in purchased
energy
excluding fuel for the first quarter of 1996 is principally due
to
first quarter 1995 overhauls and refueling shutdowns of three
partially-owned nuclear power units. Two of these units are
scheduled for refueling shutdowns in the second half of 1996.
Under the existing terms of certain purchased power contracts
with
other utilities, NEP is reducing its power purchases in 1996,
which
will result in a $19 million reduction in 1996 purchased power
expenses.
The decrease in other operation and maintenance expenses
reflects overhauls of wholly-owned generating units in the first
quarter of 1995 partially offset by general increases in costs in
other areas.
The decrease in Seabrook 1 and OCA amortization reflects the
completion in mid-1995 of the recovery of a portion of Seabrook 1
costs and certain coal conversion costs. These decreases were
<PAGE>
partially offset by the depreciation of the Manchester Street
Station.
Amortization of oil and gas properties decreased due to
decreased production.
The increase in taxes in 1996 was primarily due to the change
in income for those periods and partially due to increased
property
taxes, including taxes on the Manchester Street Station.
Allowance For Funds Used During Construction (AFDC)
- --------------------------------------------------
AFDC decreased for the first quarter of 1996 due to decreased
construction work in progress associated with the Manchester
Street
Station repowering project. The accrual of AFDC ended for this
project when the units began commercial operation.
Liquidity and Capital Resources
- -------------------------------
Plant expenditures in the first three months of 1996 amounted
to $63 million for the utility subsidiaries. The funds necessary
for utility plant expenditures were primarily provided by net
cash
from operating activities, after the payment of dividends.
<PAGE>
The financing activities of NEES subsidiaries for the first
three months of 1996 are summarized as follows:
Issues
Retirements
------
- -----------
(In Millions)
Long-term debt
- --------------
Narragansett $ 2
$ 2
NEP 40
50
Hydro-Transmission Companies
3
New England Energy
Incorporated (NEEI)
16
---
- ---
$42
$71
===
===
NEP refinanced $40 million of variable rate mortgage bonds
and
Narragansett refinanced $2 million of long-term debt at an
interest
rate of 7.24 percent in the first three months of 1996.
Net cash from operating activities provided all of the funds
for oil and gas expenditures for the first three months of 1996.
NEEI's capitalized oil and gas exploration and development costs
amounted to $2 million, which primarily represent capitalized
interest costs.
At March 31, 1996, NEES and its consolidated subsidiaries had
lines of credit and standby bond purchase facilities with banks
totaling $683 million. These lines and facilities were used for
liquidity support for $165 million of commercial paper borrowings
and for $372 million of NEP mortgage bonds in tax-exempt
commercial
paper mode. Fees are paid on the lines and facilities in lieu of
compensating balances.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning restructuring dockets before state and
federal regulatory agencies, 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 settlement agreement regarding 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 this report in Note C of
Notes
to Unaudited Financial Statements, is incorporated herein by
reference and made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed reports on Form 8-K dated February 1, 1996,
and February 16, 1996, both 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 March 31, 1996 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: May 10, 1996
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
<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.
<MULTIPLIER> 1,000
<S>
<C> <C>
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<PERIOD-TYPE> 3-MOS 3-MOS
<BOOK-VALUE> PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,878,680 0
<OTHER-PROPERTY-AND-INVEST> 395,306 0
<TOTAL-CURRENT-ASSETS> 494,776 0
<TOTAL-DEFERRED-CHARGES> 406,299 <F1>
0
<OTHER-ASSETS> 0
0
<TOTAL-ASSETS> 5,175,061
0
<COMMON>
64,970 0
<CAPITAL-SURPLUS-PAID-IN> 736,823
0
<RETAINED-EARNINGS> 854,720
0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,654,112 <F4>
0
0
0
147,016 <F2>
0
<LONG-TERM-DEBT-NET> 1,658,291
0
<SHORT-TERM-NOTES> 164,711 <F3>
0
<LONG-TERM-NOTES-PAYABLE> 0
0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
0
<LONG-TERM-DEBT-CURRENT-PORT> 17,085
0
0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
0
<LEASES-CURRENT> 0
0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,533,846
0
<TOT-CAPITALIZATION-AND-LIAB> 5,175,061
0
<GROSS-OPERATING-REVENUE> 586,220
558,316
<INCOME-TAX-EXPENSE> 39,178
29,963
<OTHER-OPERATING-EXPENSES> 452,087
454,968
<TOTAL-OPERATING-EXPENSES> 491,265
484,931
<OPERATING-INCOME-LOSS> 94,955
73,385
<OTHER-INCOME-NET> 2,133
5,714
<INCOME-BEFORE-INTEREST-EXPEN> 97,088
79,099
<TOTAL-INTEREST-EXPENSE> 31,603
27,341
<NET-INCOME> 61,496
47,662
2,172 <F2>
2,172 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 61,496
47,662
<COMMON-STOCK-DIVIDENDS> 38,305
37,357
<TOTAL-INTEREST-ON-BONDS> 27,844
26,079
<CASH-FLOW-OPERATIONS> 174,457
144,508
<EPS-PRIMARY> $.95
$.73
<EPS-DILUTED> $.95
$.73
<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.
<F4> Total common stockholders equity is reflected net of
treasury stock at
cost.
</FN>
