<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, 1997
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: 64,820,414 shares at June 30, 1997.
<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
------- ----------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $577,625 $551,110$1,215,771 $1,137,330
-------- ------------------ ----------
Operating expenses:
Fuel for generation 85,836 72,440 185,062 146,732
Purchased electric energy 127,183 124,893 271,713 250,583
Other operation 141,121 126,075 264,995 241,596
Maintenance 39,483 34,638 70,539 66,921
Depreciation and amortization 59,140 65,230 125,145 130,906
Taxes, other than income taxes 36,223 35,996 75,951 74,621
Income taxes 22,056 22,705 60,821 61,883
-------- ------------------ ----------
Total operating expenses 511,042 481,977 1,054,226 973,242
-------- ------------------ ----------
Operating income 66,583 69,133 161,545 164,088
Other income:
Equity in income of generating companies 2,431 2,819 5,131 5,487
Other income (expense), net (3,094) 44 (4,760) (491)
-------- ------------------ ----------
Operating and other income 65,920 71,996 161,916 169,084
-------- ------------------ ----------
Interest:
Interest on long-term debt 26,753 27,278 54,281 55,122
Other interest 3,817 6,306 7,608 10,573
Allowance for borrowed funds used during
construction (397) (450) (1,040) (958)
-------- ------------------ ----------
Total interest 30,173 33,134 60,849 64,737
-------- ------------------ ----------
Income after interest 35,747 38,862 101,067 104,347
Preferred dividends of subsidiaries 1,833 1,993 3,666 4,165
Minority interests 1,682 1,868 3,349 3,685
-------- ------------------ ----------
Net income $ 32,232 $ 35,001$ 94,052 $ 96,497
======== ================== ==========
Average common shares 64,969,65264,898,27464,969,652 64,888,323
Net income per average common share $.50 $.54 $1.45 $1.49
Dividends declared per share $.59 $.59 $1.18 $1.18
Statements of Consolidated Retained Earnings
Retained earnings at beginning of period $910,841 $854,720 $887,292 $831,529
Net income 32,232 35,001 94,052 96,497
Dividends delcared on common shares (38,248) (38,332) (76,519) (76,637)
Premium on redemption of preferred stock (450) (450)
-------- -------- -------- --------
Retained earnings at end of period $904,825 $850,939 $904,825 $850,939
======== ======== ======== ========
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>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $2,429,139 $2,317,179
---------- ----------
Operating expenses:
Fuel for generation 373,324 276,803
Purchased electric energy 530,530 513,168
Other operation 524,489 511,184
Maintenance 131,403 127,853
Depreciation and amortization 240,618 254,747
Taxes, other than income taxes 145,063 139,693
Income taxes 138,137 139,481
---------- ----------
Total operating expenses 2,083,564 1,962,929 ---------- ----------
Operating income 345,575 354,250
Other income:
Allowance for equity funds used during construction 2,471
Equity in income of generating companies 9,978 10,710
Other income (expense), net (12,435) (7,290)
---------- ----------
Operating and other income 343,118 360,141
---------- ----------
Interest:
Interest on long-term debt 109,638 110,343
Other interest 16,562 22,048
Allowance for borrowed funds used during construction (2,328) (8,378)
---------- ----------
Total interest 123,872 124,013
---------- ----------
Income after interest 219,246 236,128
Preferred dividends and net gain on reacquisition
of preferred stock 5,964 8,510
Minority interests 6,791 7,557
---------- ----------
Net income $ 206,491 $ 220,061
========== ==========
Average common shares 64,949,413 64,906,229
Net income per average common share $3.18 $3.39
Dividends declared per share $2.36 $2.36
Statements of Consolidated Retained Earnings
Retained earnings at beginning of period $ 850,939 $ 784,549
Net income 206,491 220,061
Dividends declared on common shares (153,055) (153,221)
Premium on redemption of preferred stock 450 (450)
--------- ---------
Retained earnings at end of period $ 904,825 $ 850,939
========= =========
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 1997 1996
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $5,783,877$5,692,956
Less accumulated provisions for depreciation and amortization 1,921,852 1,853,003
--------------------
3,862,025 3,839,953
Construction work in progress 50,178 56,652
--------------------
Net utility plant 3,912,203 3,896,605
--------------------
Oil and gas properties, at full cost 1,291,288 1,286,661
Less accumulated provision for amortization 1,114,345 1,081,940
--------------------
Net oil and gas properties 176,943 204,721
--------------------
Investments:
Nuclear power companies, at equity 49,464 47,902
Other subsidiaries, at equity 43,213 40,124
Other investments 103,101 96,399
--------------------
Total investments 195,778 184,425
--------------------
Current assets:
Cash 3,955 8,477
Accounts receivable, less reserves of $20,793,000 and
$18,702,000 229,588 262,103
Unbilled revenues 63,100 59,093
Fuel, materials, and supplies, at average cost 80,362 74,111
Prepaid and other current assets 78,209 85,096
--------------------
Total current assets 455,214 488,880
--------------------
Deferred charges and other assets 403,566 448,620
--------------------
$5,143,704$5,223,251
====================
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common share equity:
Common shares, par value $1 per share:
Authorized - 150,000,000 shares
Outstanding - 64,969,652 shares and 64,969,652 shares $ 64,970 $ 64,970
Paid-in capital 736,773 736,773
Retained earnings 904,825 887,292
Treasury stock - 149,238 shares and 102,957 shares (5,185) (3,618)
Unrealized gain on securities, net 2,684
--------------------
Total common share equity 1,704,067 1,685,417
Minority interests in consolidated subsidiaries 46,195 46,293
Cumulative preferred stock of subsidiaries 126,166 126,166
Long-term debt 1,484,542 1,614,578
--------------------
Total capitalization 3,360,970 3,472,454
--------------------
Current liabilities:
Long-term debt due within one year 104,710 79,705
Short-term debt 170,825 145,050
Accounts payable 127,793 148,592
Accrued taxes 25,357 14,911
Accrued interest 24,632 27,494
Dividends payable 37,350 37,276
Other current liabilities 132,434 109,582
--------------------
Total current liabilities 623,101 562,610
--------------------
Deferred federal and state income taxes 724,712 750,929
Unamortized investment tax credits 90,728 91,936
Other reserves and deferred credits 344,193 345,322
--------------------
$5,143,704$5,223,251
====================
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>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 94,052 $ 96,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 126,453 133,636
Deferred income taxes and investment tax credits, net (28,052) (26,626)
Allowance for funds used during construction (1,040) (958)
Minority interests 3,349 3,685
Decrease (increase) in accounts receivable, net
and unbilled revenues 28,508 36,117
Decrease (increase) in fuel, materials, and supplies (6,251) (9,148)
Decrease (increase) in prepaid and other current assets 6,887 (3,127)
Increase (decrease) in accounts payable (20,799) (25,997)
Increase (decrease) in other current liabilities 30,436 53,901
Other, net 36,936 16,525
--------- ---------
Net cash provided by operating activities $ 270,479 $ 274,505
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(103,280) $(121,307)
Oil and gas exploration and development (4,627) (6,127)
Other investing activities (6,125) (1,679)
--------- ---------
Net cash used in investing activities $(114,032) $(129,113)
--------- ---------
Financing Activities:
Dividends paid to minority interests $ (3,566) $ (5,300)
Dividends paid on NEES common shares (76,327) (77,239)
Long-term debt - issues 41,850
Long-term debt - retirements (105,284) (83,330)
Changes in short-term debt 25,775 (9,010)
Redemption of preferred stock (15,000)
Premium on redemption of preferred stock (450)
Premium on reacquisition of long-term debt (260)
Repurchase of common shares (1,567) (958)
--------- ---------
Net cash used in financing activities $(160,969) $(149,697)
--------- ---------
Net increase (decrease) in cash and cash equivalents $ (4,522) $ (4,305)
Cash and cash equivalents at beginning of period 8,477 7,064
--------- ---------
Cash and cash equivalents at end of period $ 3,955 $ 2,759
========= =========
The accompanying notes are an integral part of these financial statements.
Changes in assets and liabilities for the six months ended June 30, 1996 shown above,
other than cash, exclude the effects from the purchase of Nantucket Electric Company on
March 26, 1996.
</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 have an internal environmental audit program and an
external waste disposal vendor audit and qualification program
intended to enhance compliance with federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
NEES and/or its subsidiaries have been named as potentially
responsible parties (PRPs) by either the United States
Environmental Protection Agency (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 1970s, NEES was a
combined electric and gas holding company system.) NEES is aware
of approximately 40 such manufactured gas 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 possible hazardous waste sites, and may
in the future become aware of additional sites, that they may be
held responsible for remediating.
In 1993, the Massachusetts Department of Public Utilities
approved a settlement agreement regarding the rate recovery of
remediation costs of former manufactured gas sites and certain
other hazardous waste sites located in Massachusetts. Under that
agreement, qualified costs related to these sites are paid out of
a special fund established on Massachusetts Electric Company's
(Massachusetts Electric) (a wholly-owned retail subsidiary of
NEES) books. Massachusetts Electric made an initial $30 million
contribution to the fund. Rate-recoverable contributions of $3
million, adjusted since 1993 for inflation, are added annually to
the fund along with interest and any recoveries from insurance
carriers and other third parties. At June 30, 1997, the fund had
a balance of $28 million. If a Massachusetts restructuring and
<PAGE>
Note A - Hazardous Waste - Continued
------------------------
rate settlement is approved by the Federal Energy Regulatory
Commission (FERC), an additional $15 million will be transferred
to the fund in 1997 out of existing reserves for refunds.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by NEES or its
subsidiaries. The NEES companies have received recovery amounts
from certain insurers, and, where appropriate, intend to seek
recovery from other insurers and from other PRPs, but it is
uncertain whether, and to what extent, such efforts will be
successful. At June 30, 1997, NEES had total reserves for
environmental response costs of $47 million and a related
regulatory asset of $3 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.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which became effective in 1997. These
new rules do not have a material effect on NEES's financial
position or results of operations.
Note B - Investments in Nuclear Units
-------------------------------------
Millstone 3
New England Power Company (NEP) (a wholly-owned wholesale
subsidiary of NEES) is a 12 percent joint owner of the 1,150
megawatt (MW) Millstone 3 nuclear generating unit (Millstone 3).
In April 1996, the Nuclear Regulatory Commission (NRC) ordered
Millstone 3, which has experienced numerous technical and
nontechnical problems, to remain shut down pending verification
that the unit's operations are in accordance with NRC regulations
and the unit's operating license. Millstone 3 is operated by a
subsidiary of Northeast Utilities (NU). NEP is not an owner of
the Millstone 1 and 2 nuclear generating units, which are also
shut down under NRC orders.
A number of significant prerequisites must be fulfilled prior
to restart of Millstone 3, including certification by NU that the
unit adequately conforms to its design and licensing bases, an
independent verification of corrective actions taken at the unit,
<PAGE>
Note B - Investments in Nuclear Units - Continued
-------------------------------------
an NRC assessment concluding a culture change has occurred,
public hearings, and a vote of the NRC Commissioners. NU has
announced that it expects Millstone 3 to be ready for restart
around the end of 1997, subject to review by the NRC
Commissioners. NEP cannot predict when Millstone 3 will be
allowed by the NRC to restart, but believes that the unit will
remain shut down for a very protracted period.
In 1996, NEP incurred $10 million of actual costs related to
corrective actions associated with the outage and also accrued a
liability at December 1996 of approximately $3 million for its
share of future corrective action costs. In May 1997, NEP was
informed by NU that additional costs are likely to be incurred in
1997, of which NEP's share is approximately $10 million.
Approximately $3 million of this increase is in connection with
corrective actions and was, therefore, recorded in the second
quarter of 1997. There is no assurance that NEP's share of the
actual additional costs will be limited to $10 million. During
the outage, NEP is also incurring approximately $1.6 million per
month in incremental replacement power costs, which it has been
recovering from customers through its fuel clause.
Several criminal investigations related to Millstone 3 are
ongoing. The NRC has identified numerous apparent violations of
its regulations which may result in the assessment of civil
penalties. Regulators in the states in which NEES subsidiaries
operate have expressed concern regarding Millstone 3 and the
related costs being recovered from ratepayers. NEP and other
minority owners of Millstone 3 are assessing their legal rights
with respect to NU's operation of Millstone 3.
Maine Yankee
NEP has a 20 percent equity ownership interest in Maine
Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW
nuclear generating station. On May 27, 1997, the Maine Yankee
Board of Directors announced that the economic viability of the
station was under review and the station would likely be
permanently shut down unless a buyer can be found. PECO Energy
Co. has expressed
<PAGE>
Note B - Investments in Nuclear Units - Continued
-------------------------------------
interest in purchasing the Maine Yankee plant, and discussions
are currently ongoing. NEP cannot predict whether these
discussions will result in the sale of the Maine Yankee plant.
In late 1995, allegations were made to the NRC that
inadequate analyses of the plant's emergency core cooling system
had been performed. As a result of the allegations, the NRC
limited the plant's operation to 90 percent of full capacity. In
September 1996, the NRC asked the Department of Justice (DOJ) to
review, for potential criminal violations, an NRC investigatory
report on the allegations. The DOJ is not limited in its
investigation to the matters covered in that report.
Over the past few years, the Maine Yankee nuclear generating
plant has experienced numerous technical and nontechnical
problems. Prior to the May 27, 1997 announcement, and in
response to an independent safety assessment conducted by the
NRC, Maine Yankee had planned to spend more than $50 million in
1997 on operational improvements. In addition, management had
identified approximately $34 million in additional expenditures
it proposed to make in 1997. Following the announcement,
expenditures were cut back substantially pending a decision on
the future of the unit.
Under a confirmatory action letter issued by the NRC on
December 18, 1996, and supplemented on January 30, 1997, Maine
Yankee must fulfill certain commitments before its plant will be
allowed by the NRC staff to return to service. Because of
regulatory and other uncertainties faced by Maine Yankee, as well
as the unit's questionable economics, NEP cannot predict whether
or when Maine Yankee will return to service, but it is not likely
to return to service unless a buyer can be found. During the
outage, NEP is incurring approximately $1.8 million per month in
incremental replacement power costs, which it has been recovering
from customers through its fuel clause.
General
The Millstone 3 and Maine Yankee nuclear generating units are
currently shut down and have been placed on the NRC "Watch List",
signifying that their safety performance exhibits sufficient
weakness to warrant increased NRC attention. Neither may restart
without NRC approval.
In October 1996, the NRC issued letters to operators of
nuclear power plants requiring them to document that the plants
are operated and maintained within their design and licensing
bases,
<PAGE>
Note B - Investments in Nuclear Units - Continued
-------------------------------------
and that any deviations are reconciled in a timely manner. The
Seabrook 1, Maine Yankee, and Vermont Yankee nuclear power plants
responded to the NRC letters in February 1997. The NRC is still
assessing the responses.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Maine Yankee and
Vermont Yankee, are increasing rapidly and could adversely affect
their service lives, availability, and costs. These
uncertainties stem from a combination of factors, including the
acceleration of competitive pressures in the power generation
industry and increased NRC scrutiny.
Note C - Town of Norwood Dispute
--------------------------------
In April 1997, the Town of Norwood, Massachusetts filed a
lawsuit against NEP in the United States District Court for the
District of Massachusetts. NEP is the wholesale electric
supplier for Norwood pursuant to rates approved by the FERC.
Norwood alleges that the Company's proposal to divest its power
generation assets violates the terms of a 1983 agreement settling
an antitrust lawsuit brought by Norwood against NEP. Norwood
also alleges that NEP's proposed divestiture plan and recovery of
stranded investment costs contravene Federal antitrust laws.
Norwood seeks that NEP be permanently enjoined from refusing to
comply with the terms of the 1983 settlement agreement by
divesting its generation assets or from charging unjust and
unreasonable rates to Norwood. Norwood also seeks to recover
treble damages of $450,000,000. NEP believes that its
divestiture plan will promote competition in the wholesale
power generation market and that it has met and will continue to
meet its contractual commitments to Norwood. Since the original
filing, NEP has filed a motion to dismiss the lawsuit based on
its belief that Norwood's claims are within the FERC's exclusive
jurisdiction. Norwood has filed a motion for summary judgement
and in the alternative for a preliminary injunction restraining
the divestiture of NEP's generating business. The court has
scheduled a hearing on NEP's and Norwood's motions in September.
Norwood also opposed NEP's proposed restructuring settlements
for Massachusetts and Rhode Island. In July 1997, a FERC
administrative law judge (ALJ) certified NEP's proposed
settlements to the full FERC commission. The FERC ALJ concluded
that Norwood failed to present any genuine issues of material
fact, the effects of the settlement on Norwood are indirect, and
adequate remedies exist to protect Norwood against adverse
consequences should they
<PAGE>
Note C - Town of Norwood Dispute - Continued
--------------------------------
occur in the future. This certification now clears the way for
the FERC Commissioners to rule on the restructuring settlements.
A decision from the FERC is expected later in 1997.
Note D - Hydro Quebec Arbitration
---------------------------------
In 1996, various New England utilities which are members of
the New England Power Pool, including NEP, submitted a dispute to
arbitration regarding their Firm Energy Purchased Power Contract
with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage
claim of approximately $37 million for past damages. If Hydro-
Quebec were to prevail, NEP's share of such damages would be
approximately $6-$9 million. The claims involve a dispute over
the
components of a pricing formula and additional costs under the
contract. With respect to on-going claims, NEP has been paying
Hydro-Quebec the higher amount (additional costs of approximately
$3 million per year) since July 1996 under protest and subject to
refund. A decision by the arbitrator is expected in September
1997.
Note E - New Accounting Standard
--------------------------------
In 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, Earnings Per
Share (FAS 128), which changes the calculation and presentation
of earnings per share (EPS). FAS 128 is effective for periods
ending
after December 15, 1997 and requires restatement of all prior-
period EPS data presented. FAS 128 is not expected to have any
significant impact on NEES' EPS calculations.
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 consolidated financial statements in the
Company's 1996 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 1996 Annual Report on
Form 10-K.
Earnings
--------
Earnings for the second quarter of 1997 were $.50 per share,
compared with $.54 per share for the corresponding period in
1996. The table below details the primary factors affecting
consolidated earnings:
Items in parentheses reduce earnings and are either increased
expenses or decreased revenues; items not in parentheses increase
earnings and are either increased revenues or decreased expenses.
<TABLE>
<CAPTION>
Period ending June 30,
----------------------
3 Months 6 Months
-------- --------
<S> <C> <C>
1996 earnings $ .54 $1.49
Revenues .18 .22
Purchased power costs, excluding fuel (.04) (.06)
Depreciation and amortization .06 .10
Operation and maintenance expense (.22) (.27)
Other (.02) (.03)
----- -----
1997 earnings $ .50 $1.45
===== =====
</TABLE>
The increase in revenues for the second quarter and first six
months results from a distribution rate increase effective in
January 1997 and a transmission rate increase that became
effective in July 1996.
Additionally, kilowatt-hour (kWh) deliveries increased during
the second quarter by 2.3 percent, which offset a decrease in kWh
deliveries of 0.3 percent in the first quarter of 1997, resulting
in a year-to-date increase in kWh deliveries of 0.9 percent.
This year the weather was warmer in the second quarter but milder
in the first quarter compared to last year.
<PAGE>
The increase in purchased power costs, excluding fuel, during
the first two quarters of 1997 reflects overhaul and repair costs
relating to the Maine Yankee nuclear power plant and the Ocean
State Power plant, partially offset by reduced capacity purchases
and reduced purchased power costs from the Connecticut Yankee
nuclear power plant.
The decrease in depreciation and amortization expense
reflects the completion of the amortization of New England Power
Company's (NEP) (a wholly-owned wholesale subsidiary of NEES)
pre-1988 investment in the Seabrook 1 nuclear unit and NEP's
investment in the canceled Seabrook 2 nuclear unit. In
accordance with a 1995 settlement agreement, upon completion of
the amortization of Seabrook 1 and Seabrook 2, NEP agreed to
accelerate its amortization of previously deferred costs
associated with postretirement benefits other than pensions
(PBOPs).
The increase in operation and maintenance expense is due in
part to the increase in PBOP expenses as mentioned above, as well
as increased maintenance costs of partially owned nuclear
generating facilities, Millstone 3 and Seabrook 1. Other
increases in operation and maintenance expenses resulted from our
share of the costs associated with the restoration to service of
previously idled generating facilities throughout New England, in
response to a tightening regional power supply, as well as an
overall increase in general and administrative costs.
Industry Restructuring
----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island, and New Hampshire, see the "Industry
Restructuring" section in the Company's Form 10-K for 1996.
Industry Restructuring Update
As previously reported, the Massachusetts settlement, and the
Rhode Island statute and related settlement covering customer
choice and electric utility restructuring provide for full
recovery of the costs of generating assets and oil and gas
related assets (including regulatory assets) not recoverable
through the divestiture of NEP's generating business. The
Massachusetts settlement was approved by the Massachusetts
Department of Public Utilities (MDPU) and a companion wholesale
settlement is now pending final approval before the Federal
Energy Regulatory Commission (FERC). A Rhode Island settlement
reached in May 1997 among The Narragansett Electric Company
(Narragansett Electric)(a wholly-owned retail subsidiary of
NEES), NEP, the Rhode Island Public Utilities Commission (RIPUC)
and the Rhode Island Division of Public Utilities and Carriers to
implement the stranded cost recovery provisions of the Utility
Restructuring Act of 1996 is
<PAGE>
also pending before the FERC. FERC action is expected later in
1997.
Divestiture of Generation Business
Under the Massachusetts and Rhode Island settlements and the
Rhode Island statute, the NEES companies must complete the
divestiture of their nonnuclear generating business within six
months of the later of the commencement of retail choice in
Massachusetts or the receipt of all necessary regulatory
approvals.
In July 1997, the NEES companies received binding proposals
for the purchase of their nonnuclear generating business. These
proposals are currently being evaluated. The NEES companies hope
to announce a purchase and sale agreement in the near future.
Closing would be conditioned upon the receipt of regulatory
approvals, which are expected to take at least six to 12 months
following the execution of purchase and sale agreements. At
December 1996, the undepreciated book value of nonnuclear net
generating plant was approximately $1.1 billion.
As part of the divestiture plan, NEP will endeavor to sell,
or otherwise transfer, its minority interest in four nuclear
power
plants to nonaffiliates. In addition, New England Energy
Incorporated (NEEI) is planning to sell its oil and gas
properties, the cost of which is supported by NEP through fuel
purchase contracts.
The NEES companies have reached an agreement with all three
of its unions regarding benefits and other assistance, including
early retirement and severance programs, to union employees that
are affected by the restructuring of the electric utility
industry and the NEES companies' divestiture of its generation
business. The NEES companies have also announced similar early
retirement and severance programs for management employees. The
NEES companies anticipate that industry restructuring and
divestiture will lead to workforce reductions. The expected cost
of such programs will be substantially recovered from the
proceeds of the sale of the generating business.
Massachusetts
On May 20, 1997, the Utility Workers Union of America and the
Massachusetts Alliance of Utility Unions withdrew their appeal to
the Massachusetts Supreme Judicial Court of the MDPU approval of
the Massachusetts settlement.
Several bills are pending before the Massachusetts
legislature on electric utility industry restructuring, including
comprehensive legislation introduced by former Governor William
F. Weld and by the legislature's Joint Committee on Electric
Restructuring. These bills cover many of the topics addressed in
the settlement,
<PAGE>
including the extent to which stranded costs may be recovered,
and could impact the implementation of the settlement.
Rhode Island
In July 1997, the Governor of Rhode Island signed in to law
bills further implementing utility restructuring in Rhode Island.
The Securitization Act establishes a framework at the RIPUC for
utilities to seek approval for the issuance of bonds secured by
customers obligations to pay stranded cost charges. The 1997
Amendments to the Utility Restructuring Act modify the law so
that utilities will not have to transfer their transmission
assets to another company and make other technical amendments.
Accounting Implications
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. Statement of 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 thereby defer
the income statement impact of certain costs expected to be
recovered in future rates. At December 31, 1996, the NEES
companies had approximately $550 million in regulatory assets in
compliance with FAS 71, of which approximately $75 million relate
to the transmission and distribution business.
In response to concerns expressed by the staff of the
Securities and Exchange Commission, the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board took
under consideration how FAS 71 should be applied in light of
recent changes within the regulated utility industry. In July
1997, the EITF concluded that a utility whose ongoing generation
operations would not permit the application of FAS 71, but had
otherwise received approval to recover stranded costs through
regulated transmission and distribution rates, would be permitted
to continue to apply FAS 71 to the recovery of the stranded
costs.
The Massachusetts and Rhode Island settlements and the Rhode
Island statute each provide for full recovery of the sunk costs
of generating assets and oil and gas related assets (including
regulatory assets) not recoverable from the proceeds of the
divestiture of NEP's generating business. FERC approval is still
required for the Massachusetts and Rhode Island settlements. The
cost of these assets would be recovered as part of a transition
access charge imposed on all distribution customers. After the
proposed divestiture, substantially all of NEP's business,
including the recovery of its stranded costs, would remain under
cost-based rate regulation. The principal exception is the
<PAGE>
provision of the settlements providing for a 80/20 sharing
between customers and shareholders of the going forward costs and
revenues related to NEP's operating nuclear interests. NEES
believes the Massachusetts settlement and the Rhode Island
statute will enable the NEES distribution companies operating in
those states to recover through rates their specific costs of
providing ongoing distribution services. Specifically, FERC Order
No. 888 enables transmission companies to recover their specific
costs of providing transmission service. NEES believes these
factors and the EITF conclusion will allow its principal
subsidiaries to continue to apply FAS 71 and that no impairment
of plant assets will exist under 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). Any gain or loss from the divestiture of generating
assets and oil and gas assets will be recorded as a regulatory
liability or asset to be recovered through the ongoing transition
access charge. NEP will be required to cease to apply FAS 71 to
the 20 percent of its ongoing nuclear operations described above.
Despite the progress made to date in Massachusetts and Rhode
Island, it is possible that the final restructuring plans
ultimately ordered by regulatory bodies may not reflect full
recovery of stranded costs, including a fair return on those
costs as they are being recovered. In the event that future
circumstances should cause the application of FAS 71 to be
discontinued, a noncash write-off of previously established
regulatory assets related to the affected operations would be
required. In addition, write-downs of plant assets under FAS 121
could be required, including a write-off of any gain or loss from
the divestiture of the generating business.
Brayton Point
-------------
In October 1996, the Environmental Protection Agency (EPA)
announced it was beginning a process to determine whether to
modify or revoke and reissue NEP's water discharge permit for its
Brayton Point 1,576 megawatt power plant. This action came two
years before the permit expiration date. The EPA stated it took
this step in response to a request from the Rhode Island
Department of Environmental Management (RIDEM). A RIDEM report
asserted a statistical correlation between the decline in the
fish population in Mount Hope Bay and a change in operations at
Brayton Point that occurred in the mid-1980's.
In April 1997, NEP signed a memorandum of agreement
negotiated with the various federal and state environmental
agencies under which NEP will voluntarily operate under more
stringent conditions than under its existing permit. The
agreement is in lieu of any immediate action on the permit, and
will remain in effect until a renewal permit is issued. NEP
cannot predict at this time what permit changes will be required
or the impact on Brayton Point's operations and economics.
<PAGE>
However, permit changes may substantially impact the plant's
capacity and ability to produce energy and/or require substantial
capital expenditures to construct equipment to address the
concerns raised by the environmental agencies.
Year 2000 Computer Issues
-------------------------
In the next two-and-one-half years, most large companies will
face a potentially serious information systems (computer) problem
because most software application and operational programs
written in the past will not properly recognize calendar dates
beginning in the year 2000. This could force computers to either
shut down or lead to incorrect calculations. The NEES companies
began the process of identifying the changes required to their
computer programs and hardware during 1996. The necessary
modifications to the NEES companies' centralized financial,
customer, and operational information systems are expected to be
completed by the end of 1998. The NEES companies believe they
will incur approximately $20 million of costs between now and
January 1, 2000, associated with making the necessary
modifications identified to date to the centralized systems.
Noncentralized systems are currently being reviewed for Year 2000
problems. The NEES companies are unable to predict the costs to
be incurred for correction of such noncentralized systems, but
expect the scope and schedule for such work to be less complex
than for its centralized information systems.
<PAGE>
Operating Revenue
-----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------- ------------
1997 vs 1996 1997 vs 1996
-------------- ------------
(In Millions)
<S> <C> <C>
Increase (decrease) in
kWh deliveries $ 5 $ 3
Distribution rate increases 3 6
Rate adjustment mechanisms 7 8
Fuel recovery 11 51
Demand-Side Management (DSM) (3) (2)
Oil and gas revenues (1) 6
Other (including
transmission revenues) 5 6
--- ---
$27 $78
=== ===
</TABLE>
For a discussion of kWh deliveries to ultimate customers, see
the "Earnings" section.
Retail rate increases for the second quarter and six months
ended June 30, 1997 reflect an $11 million increase in
distribution rates for Narragansett Electric that became
effective in January 1997 pursuant to Rhode Island's Utility
Restructuring Act of 1996.
Rate adjustment mechanisms reflect true-ups for the pass
through of purchased power billings between NEP and the retail
companies. The provisions of the Massachusetts Electric
restructuring settlement would have caused its Purchased Power
Cost Adjustment (PPCA) mechanism to end effective July 31, 1996.
However, since the Massachusetts settlement has not yet been
approved by the FERC, Massachusetts Electric has continued to
accrue refund provisions of $19 million related to the assumed
operation of the PPCA mechanism since July 31, 1996 ($9 million
in 1996 and $10 million in 1997 to date). In addition, at
December 31, 1996 Massachusetts Electric had deferred
approximately $8 million of storm damage costs. In accordance
with the Massachusetts restructuring settlement, Massachusetts
Electric will not be permitted recovery of approximately $2
million of such storm damage costs.
<PAGE>
For a discussion of fuel recovery, see the fuel costs
discussion in the "Operating Expenses" section.
Oil and gas revenues increased in the first six months due to
increased gas prices in the first quarter.
The increase in other revenues in the first two quarters of
1997 is primarily due to a transmission rate increase that went
into effect in mid-1996.
Operating Expenses
------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------- ------------
1997 vs 1996 1997 vs 1996
-------------- ------------
(In Millions)
<S> <C> <C>
Fuel costs $12 $ 53
Purchased energy, excluding fuel 4 6
Operation and maintenance 20 27
Depreciation and amortization:
Utility plant (6) (10)
Oil and gas properties - 5
Taxes (1) -
--- ----
$29 $ 81
=== ====
</TABLE>
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 second
quarter and first six months of 1997 primarily reflects increased
power supply to other utilities and increased replacement power
costs due to the reduced generation from partially owned nuclear
units. See "Investments in Nuclear Units" section in the "Notes
to the Unaudited Financial Statements".
The portion of purchased electric energy costs not recovered
through NEP's fuel clause is shown as purchased energy, excluding
fuel. The increase in purchased power costs, excluding fuel,
during the first two quarters of 1997 reflects overhaul and
repair costs relating to the Maine Yankee nuclear power plant and
the Ocean State Power plant, partially offset by reduced capacity
<PAGE>
purchases and reduced purchased power costs from the Connecticut
Yankee nuclear power plant, which were primarily due to a one-
time property tax settlement.
The decrease in depreciation and amortization expense
reflects the completion of the amortization of New England Power
Company's (NEP) (a wholly-owned wholesale subsidiary of NEES)
pre-1988 investment in the Seabrook 1 nuclear unit and NEP's
investment in the canceled Seabrook 2 nuclear unit. In
accordance with a 1995 settlement agreement, upon completion of
the amortization of Seabrook 1 and Seabrook 2, NEP agreed to
accelerate its amortization of previously deferred costs
associated with postretirement benefits other than pensions
(PBOPs).
The increase in operation and maintenance expense is due in
part to the increase in PBOP expenses as mentioned above, as well
as increased maintenance costs of partially owned nuclear
generating facilities, Millstone 3 and Seabrook 1. Other
increases in operation and maintenance expenses resulted from our
share of the costs associated with the restoration to service of
previously idled generating facilities throughout New England, in
response to a tightening regional power supply, as well as an
overall increase in general and administrative costs.
Other Income
------------
The decrease in other income in 1997 reflects losses incurred
by NEES' new power marketing subsidiary, AllEnergy Marketing
Company, L.L.C.
Liquidity and Capital Resources
-------------------------------
Plant expenditures in the first six months of 1997 amounted
to $103 million for the utility subsidiaries. The funds
necessary for utility plant expenditures were provided by net
cash from operating activities, after the payment of dividends.
<PAGE>
The financing activities of NEES subsidiaries for the first
six months of 1997 are summarized as follows:
Retirements
-----------
(In Millions)
Long-term debt
--------------
NEP $ 35
Massachusetts Electric 15
Narragansett Electric 25
NEEI 23
Hydro-Transmission Companies 6
Narragansett Electric Resources
Company 1
----
$105
====
NEES' retail subsidiaries plan to issue an additional $65
million of long-term debt by the end of 1997.
Net cash from operating activities provided all of the funds
for oil and gas expenditures for the first six months of 1997.
NEEI's capitalized oil and gas exploration and development costs
amounted to $5 million, which primarily represents capitalized
interest costs.
At June 30, 1997, NEES and its consolidated subsidiaries had
lines of credit and standby bond purchase facilities with banks
totaling $702 million. These lines and facilities were used for
liquidity support for $171 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 the
Federal Energy Regulatory 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 against a Company
subsidiary, New England Power Company (NEP), by the Town of
Norwood, Massachusetts, discussed in this report in Note C of
Notes to Unaudited Financial Statements, is incorporated herein
by reference and made a part hereof.
Information concerning arbitration of a dispute regarding
NEP's purchased power contract with Hydro-Quebec, discussed in
this report in Note D of Notes to Unaudited Financial Statements,
is incorporated herein by reference and made a part hereof.
Item 4. Submission of Matters to a Vote of Security-Holders
------------------------------------------------------------
On April 29, 1997, the Annual Meeting of Shareholders was
held.
The shareholders, by a vote of 53,604,587 in favor, 553,156
against, and 471,034 abstaining, approved a Company proposal
setting the number of directors at twelve.
Directors were elected and received the following votes:
Director Votes For Votes Withheld
-------- --------- --------------
Joan T. Bok 53,465,007 1,155,150
William M. Bulger 53,296,037 1,324,120
Paul T. Joskow 53,644,954 975,203
John M. Kucharski 53,889,463 730,694
Edward H. Ladd 53,892,294 727,863
Joshua A. McClure 53,824,332 795,825
John W. Rowe 53,692,961 927,196
George M. Sage 53,864,676 755,481
Charles E. Soule 53,884,305 735,852
Anne Wexler 53,810,495 809,662
James Q. Wilson 53,838,906 781,251
James R. Winoker 53,770,449 849,708
The shareholders, by a vote of 9,521,974 in favor, 36,908,874
against, and 1,981,790 abstaining, rejected a shareholder
proposal regarding the splitting of shares.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
The Company filed reports on Form 8-K dated April 16, 1997
and July 14, 1997, each 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, 1997 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: July 31, 1997
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>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> 6-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,912,203
<OTHER-PROPERTY-AND-INVEST> 372,721
<TOTAL-CURRENT-ASSETS> 455,214
<TOTAL-DEFERRED-CHARGES> 403,566 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,143,704
<COMMON> 64,970
<CAPITAL-SURPLUS-PAID-IN> 736,773
<RETAINED-EARNINGS> 904,825
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,704,067 <F3>
0
126,166 <F2>
<LONG-TERM-DEBT-NET> 1,484,542
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 170,825
<LONG-TERM-DEBT-CURRENT-PORT> 104,710
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,553,394
<TOT-CAPITALIZATION-AND-LIAB> 5,143,704
<GROSS-OPERATING-REVENUE> 1,215,771
<INCOME-TAX-EXPENSE> 60,821
<OTHER-OPERATING-EXPENSES> 993,405
<TOTAL-OPERATING-EXPENSES> 1,054,226
<OPERATING-INCOME-LOSS> 161,545
<OTHER-INCOME-NET> 371
<INCOME-BEFORE-INTEREST-EXPEN> 161,916
<TOTAL-INTEREST-EXPENSE> 60,849
<NET-INCOME> 94,052
3,666 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 94,052
<COMMON-STOCK-DIVIDENDS> 76,519
<TOTAL-INTEREST-ON-BONDS> 54,281
<CASH-FLOW-OPERATIONS> 270,479
<EPS-PRIMARY> $1.45
<EPS-DILUTED> $1.45
<FN>
<F1> Total deferred charges includes other assets.
<F2> Preferred stock reflects preferred stock of subsidiaries. Preferred stock dividends
reflect preferred stock dividends of subsidiaries.
<F3> Total common stockholders equity is reflected net of treasury stock at cost and unrealized
gain on securities.
</FN>
