<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, 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: 64,825,921 shares at March 31, 1997.
<PAGE>
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
- ----------------------------
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Periods Ended March 31
(Unaudited)
<CAPTION>
Three Months Twelve Months
------------ -------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $638,146 $586,220 $2,402,625 $2,299,616
-------- -------- ---------- ----------
Operating expenses:
Fuel for generation 99,226 74,292 359,928 262,831
Purchased electric energy 144,530 125,690 528,240 528,565
Other operation 123,874 115,521 509,443 504,165
Maintenance 31,056 32,283 126,558 127,212
Depreciation and amortization 66,005 65,676 246,708 258,349
Taxes, other than income taxes 39,728 38,625 144,836 135,941
Income taxes 38,765 39,178 138,786 137,555
-------- -------- ---------- ----------
Total operating expenses 543,184 491,265 2,054,499 1,954,618
-------- -------- ---------- ----------
Operating income 94,962 94,955 348,126 344,998
Other income:
Allowance for equity funds used during
construction 5,238
Equity in income of generating companies 2,700 2,668 10,365 10,668
Other income (expense), net (1,666) (535) (9,297) (7,389)
-------- -------- ---------- ----------
Operating and other income 95,996 97,088 349,194 353,515
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 27,528 27,844 110,163 110,130
Other interest 3,791 4,267 19,051 19,507
Allowance for borrowed funds used during
construction (643) (508) (2,381) (11,200)
-------- -------- ---------- ----------
Total interest 30,676 31,603 126,833 118,437
-------- -------- ---------- ----------
Income after interest 65,320 65,485 222,361 235,078
Preferred dividends and net gain on
reacquisition of preferred stock 1,833 2,172 6,124 8,690
Minority interests 1,667 1,817 6,977 7,797
-------- -------- ---------- ----------
Net income $ 61,820 $ 61,496 $ 209,260 $ 218,591
======== ======== ========== ==========
Common shares 64,969,652 64,878,371 64,940,490 64,921,367
Net income per common share $.95 $.95 $3.22 $3.37
Dividends declared per share $.59 $.59 $2.36 $2.36
Statements of Consolidated Retained Earnings
Retained earnings at beginning of period $887,292 $831,529 $ 854,720 $ 789,350
Net income 61,820 61,496 209,260 218,591
Dividends declared on common shares (38,271) (38,305) (153,139) (153,221)
-------- -------- --------- ---------
Retained earnings at end of period $910,841 $854,720 $ 910,841 $ 854,720
======== ======== ========= =========
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 1997 1996
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $ 5,738,120 $5,692,956
Less accumulated provisions for depreciation
and amortization 1,887,725 1,853,003
----------- ----------
3,850,395 3,839,953
Construction work in progress 56,165 56,652
----------- ----------
Net utility plant 3,906,560 3,896,605
----------- ----------
Oil and gas properties, at full cost 1,288,430 1,286,661
Less accumulated provision for amortization 1,102,376 1,081,940
----------- ----------
Net oil and gas properties 186,054 204,721
----------- ----------
Investments:
Nuclear power companies, at equity 48,692 47,902
Other subsidiaries, at equity 43,561 40,124
Other investments 97,727 96,399
----------- ----------
Total investments 189,980 184,425
----------- ----------
Current assets:
Cash 8,296 8,477
Accounts receivable, less reserves of $20,435,000
and $18,702,000 265,942 262,103
Unbilled revenues 48,315 59,093
Fuel, materials, and supplies, at average cost 77,866 74,111
Prepaid and other current assets 77,617 85,096
----------- ----------
Total current assets 478,036 488,880
----------- ----------
Deferred charges and other assets 441,233 448,620
----------- ----------
$ 5,201,863 $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 910,841 887,292
Treasury stock - 143,731 shares and 102,957 shares (5,044) (3,618)
----------- ----------
Total common share equity 1,707,540 1,685,417
Minority interests in consolidated subsidiaries 46,236 46,293
Cumulative preferred stock of subsidiaries 126,166 126,166
Long-term debt 1,501,847 1,614,578
----------- ----------
Total capitalization 3,381,789 3,472,454
----------- ----------
Current liabilities:
Long-term debt due within one year 145,120 79,705
Short-term debt 113,850 145,050
Accounts payable 127,178 148,592
Accrued taxes 69,698 14,911
Accrued interest 22,807 27,494
Dividends payable 37,377 37,276
Other current liabilities 124,272 109,582
----------- ----------
Total current liabilities 640,302 562,610
----------- ----------
Deferred federal and state income taxes 731,607 750,929
Unamortized investment tax credits 91,331 91,936
Other reserves and deferred credits 356,834 345,322
----------- ----------
$ 5,201,863 $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
Quarters Ended March 31
(Unaudited)
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating activities:
Net income $ 61,820 $ 61,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 66,895 67,577
Deferred income taxes and investment tax credits, net (18,875) (19,097)
Allowance for funds used during construction (643) (504)
Minority interests 1,667 1,817
Decrease (increase) in accounts receivable,
net and unbilled revenues 6,939 20,807
Decrease (increase) in fuel, materials, and supplies (3,755) (4,228)
Decrease (increase) in prepaid and other current assets 7,479 (2,866)
Increase (decrease) in accounts payable (21,414) (35,111)
Increase (decrease) in other current liabilities 64,790 77,247
Other, net 14,457 7,319
--------- ---------
Net cash provided by operating activities $ 179,360 $ 174,457
--------- ---------
Investing activities:
Plant expenditures, excluding allowance for
funds used during construction $ (54,075) $ (62,530)
Oil and gas exploration and development (1,769) (2,396)
Other investing activities (3,732) (1,878)
--------- ---------
Net cash used in investing activities $ (59,576) $ (66,804)
--------- ---------
Financing activities:
Dividends paid to minority interests $ (1,751) $ (2,664)
Dividends paid on NEES common shares (38,143) (38,854)
Short-term debt (31,200) (38,701)
Long-term debt - issues 41,850
Long-term debt - retirements (47,445) (71,090)
Repurchase of common shares (1,426) (859)
--------- ---------
Net cash used in financing activities $(119,965) $(110,318)
--------- ---------
Net increase (decrease) in cash and cash equivalents $ (181) $ (2,665)
Cash and cash equivalents at beginning of period 8,477 7,064
--------- ---------
Cash and cash equivalents at end of period $ 8,296 $ 4,399
========= =========
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 in place an internal environmental
audit program and an external waste disposal vendor audit and
qualification program intended to enhance compliance with existing
federal, state, and local requirements regarding the handling of
potentially hazardous products and by-products.
NEES and/or its subsidiaries have been named as potentially
responsible parties (PRPs) by either the United States
Environmental Protection Agency (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's books.
Massachusetts Electric made an initial $30 million contribution to
the fund. Rate-recoverable contributions of $3 million, adjusted
since 1993 for inflation, are added annually to the fund along with
interest and any recoveries from insurance carriers. At March 31,
1997, the fund had a balance of $17 million. Under a 1996
Massachusetts restructuring and rate settlement, an additional $15
million will be transferred to the fund in 1997 out of existing
reserves for refunds. This settlement is pending approval with the
<PAGE>
Note A - Hazardous Waste - Continued
- ------------------------
Federal Energy Regulatory Commission.
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, 1997, NEES had total reserves for
environmental response costs of $48 million and a related
regulatory asset of $17 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) is a 12 percent joint owner of
the Millstone 3 nuclear generating unit (Millstone 3) a 1,150
megawatt (MW) unit. 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 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,
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
<PAGE>
Note B - Investments in Nuclear Units - Continued
- -------------------------------------
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. 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.
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. Over the past few years, the Maine Yankee
nuclear generating plant has experienced numerous technical and
nontechnical problems. In 1995, the plant had been shut down for
much of the year due to the discovery of cracks in its steam
generator tubes. The plant is currently shut down due to a cable
routing problem. In addition, due to leaking nuclear fuel rods, 68
fuel assemblies will be replaced. As a result, Maine Yankee
management does not expect the unit to restart until the summer of
1997.
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.
<PAGE>
Note B - Investments in Nuclear Units - Continued
- -------------------------------------
During 1996, the NRC conducted an independent safety assessment
(ISA) and identified a number of weaknesses, deficiencies, and
apparent violations which could result in fines. Yankee Atomic, in
which NEP has a 30 percent equity ownership interest, performed
professional services for Maine Yankee associated with the matters
being investigated. In response to the ISA results, Maine Yankee
has indicated that it will spend more than $50 million in 1997 on
operational improvements. In addition, management has identified
approximately $34 million in additional expenditures it proposes to
make in 1997. In February 1997, Entergy Corporation, an operator
of five nuclear units, commenced providing management services to
Maine Yankee.
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. The Maine Yankee
owners are reviewing the economic viability of the plant. Because
of regulatory and other uncertainties faced by Maine Yankee, NEP
cannot predict whether or when Maine Yankee will return to service.
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. At present, the Vermont Yankee and Seabrook
1 nuclear generating units appear to be operating routinely without
major problems.
On October 9, 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,
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.
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.
<PAGE>
Note C - Town of Norwood Dispute
- --------------------------------
On April 14, 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 Federal Energy
Regulatory Commission. 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. Further, NEP believes that
Norwood's lawsuit is without merit and will move to dismiss the
lawsuit.
Note D - 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. However, FAS 128 is not expected to
have any significant impact on NEES's EPS calculations.
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
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 first quarter of 1997 were $.95 per share.
These are the same earnings as the first quarter of 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.
1996 earnings $ .95
Revenues .04
Purchased power costs, excluding fuel (.02)
Depreciation and amortization .04
Operation and maintenance expense (.05)
Other (.01)
----
1997 earnings $ .95
=====
<PAGE>
The increase in revenues for the first quarter results from a
distribution rate increase effective in January 1997 and a
wholesale transmission rate increase that became effective in July
1996, partially offset by lower kilowatt-hour (kWh) deliveries due
to milder weather in the first quarter of 1997. KWh deliveries to
ultimate customers decreased 0.3 percent in the first quarter of
1997.
The increase in purchased power costs, excluding fuel, during
the first quarter of 1997 reflects overhaul and repair costs
relating to the Maine Yankee nuclear power plant and an overhaul at
the Ocean State Power gas-fired plant, partially offset by reduced
capacity purchases.
The decrease in depreciation and amortization expense reflects
the completion of the amortization of New England Power Company's
(NEP) pre-1988 investment in the Seabrook 1 nuclear unit and NEP's
investment in the cancelled 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 primarily due to this
increased PBOP amortization.
<PAGE>
Industry Restructuring
- ----------------------
For a 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.
Divestiture of Generation Business
Under the Massachusetts settlement and thus automatically under
the Rhode Island statute, the NEES companies must complete the
divestiture of their generating business within six months of the
later of the commencement of retail choice in Massachusetts or the
receipt of all necessary regulatory approvals.
The NEES companies have received preliminary proposals for the
purchase of its generation business from 25 potential buyers. The
NEES companies have reviewed the preliminary proposals and invited
a select group to submit formal, binding bids by the end of June.
The NEES companies hope to announce a purchase and sale agreement
by mid-year. Closing would follow 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 for all of the NEES
companies.
As part of the divestiture plan, NEP will endeavor to sell, or
otherwise transfer, its minority interest in four nuclear power
<PAGE>
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 - the Brotherhood of Utility Workers, the International
Brotherhood of Electrical Workers, and the Utility Workers Union of
America - regarding benefits and other assistance to union
employees that are affected by the restructuring of the electric
utility industry and the NEES companies divesture of its generation
business. The NEES companies anticipate that industry restructuring
and divestiture will lead to workforce reductions.
Rhode Island
The Rhode Island legislature is considering a number of
proposed bills relating to industry restructuring. Possible
legislation dealing with securitization of stranded costs has been
discussed; however, to date no such legislation has been
introduced.
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
<PAGE>
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 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.
Both the Massachusetts settlement and the Rhode Island statute
provide for full recovery of the 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. Federal Energy Regulatory Commission (FERC)
approval is still required for the Massachusetts and Rhode Island
stranded cost recovery filings. 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.
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. In addition, FERC Order
<PAGE>
No. 888 enables transmission companies to recover their specific
costs of providing transmission service. NEES believes these
factors 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 loss from the divestiture of generating
assets and oil and gas assets will be recorded as a regulatory
asset to be recovered through the ongoing transition access charge.
Although NEES believes that its subsidiaries will continue to
meet the criteria for continued application of FAS 71, NEES
understands that members of the Securities and Exchange Commission
(SEC) staff have raised questions concerning the continued
applicability of FAS 71 to certain other electric utilities facing
restructuring. In connection therewith, the Emerging Issues Task
Force of the Financial Accounting Standards Board has decided to
take under consideration how FAS 71 should be applied in light of
recent changes within the regulated utility industry. In addition,
despite the progress made to date in Massachusetts and Rhode
Island, it is possible that the final restructuring plans
ultimately ordered by regulatory bodies would 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
<PAGE>
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 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) that action be taken on the
Brayton Point permit prior to its 1998 renewal, based on concerns
raised in a final RIDEM report issued in October 1996. The 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
<PAGE>
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. However, permit changes may substantially
impact the plant's capacity and ability to produce energy and/or
require significant capital expenditures of tens of millions of
dollars to construct equipment to address the concerns raised by
the environmental agencies.
<PAGE>
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
First Quarter
-------------
1997 vs 1996
-------------
(In Millions)
Decline in kWh deliveries $(2)
Retail rate increase 3
Rate adjustment mechanisms 2
Fuel recovery 39
Demand Side Management (DSM)
program recovery 1
Oil and gas revenues 7
Other (including transmission revenues) 2
---
$52
===
For a discussion of kWh deliveries to ultimate customers, see
the "Earnings" section.
The retail rate increase reflects an $11 million increase in
distribution rates for The Narragansett Electric Company
(Narragansett Electric) that became effective in January 1997
pursuant to Rhode Island's Utility Restructuring Act of 1996.
<PAGE>
Rate adjustment mechanisms reflect true-ups for the pass-
through of purchased power billings between NEP and the retail
companies.
For a discussion of fuel recovery see the fuel costs discussion
in the "Operating Expenses" section.
The increase in oil and gas revenues is due to increased
production and an increase in gas prices.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
First Quarter
-------------
1997 vs 1996
-------------
(In Millions)
Fuel costs $42
Purchased energy excluding fuel 2
Operation and maintenance:
Retail DSM 1
Other 6
Depreciation:
Utility plant (4)
Oil and gas properties 4
Taxes 1
---
$52
===
<PAGE>
Total operating expenses increased $52 million in the first
quarter of 1997 compared with the same period in 1996. The
increase reflects increased fuel costs, purchased power costs, and
maintenance expense.
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
quarter of 1997 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 energy, excluding fuel, during the
first quarter of 1997 reflects overhaul and repair costs relating
to the Maine Yankee nuclear power plant and an overhaul at the
Ocean State Power gas-fired plant, partially offset by reduced
capacity purchases.
The decrease in depreciation and amortization expense reflects
the completion of the amortization of NEP's pre-1988 investment in
the Seabrook 1 nuclear unit and NEP's investment in the cancelled
Seabrook 2 nuclear unit. In accordance with a 1995 settlement
<PAGE>
agreement, upon completion of the amortization of Seabrook 1 and
Seabrook 2, NEP agreed to accelerate its amortization of previously
deferred costs associated with post-retirement benefits other than
pensions (PBOPs). The increase in operation and maintenance
expenses is primarily due to this increased PBOP amortization.
Liquidity and Capital Resources
- -------------------------------
Plant expenditures in the first three months of 1997 amounted
to $54 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.
The financing activities of NEES subsidiaries for the first
three months of 1997 are summarized as follows:
Retirements
-----------
(In Millions)
Long-term debt
- --------------
NEP $35
Hydro-Transmission Companies 3
NEEI 9
---
$47
===
Net cash from operating activities provided all of the funds
for oil and gas expenditures for the first three months of 1997.
NEEI's capitalized oil and gas exploration and development costs
<PAGE>
amounted to $2 million, which primarily represents capitalized
interest costs.
At March 31, 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 $114 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 a lawsuit against a Company subsidiary,
New England Power Company, by the Town of Norwood, Massachusetts,
discussed in PART I of 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 no reports on Form 8-K during the quarter.
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, 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: May 13, 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> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,906,560
<OTHER-PROPERTY-AND-INVEST> 376,034
<TOTAL-CURRENT-ASSETS> 478,036
<TOTAL-DEFERRED-CHARGES> 441,233 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,201,863
<COMMON> 64,970
<CAPITAL-SURPLUS-PAID-IN> 736,773
<RETAINED-EARNINGS> 910,841
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,707,540 <F3>
0
126,166 <F2>
<LONG-TERM-DEBT-NET> 1,501,847
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 113,850
<LONG-TERM-DEBT-CURRENT-PORT> 145,120
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,607,340
<TOT-CAPITALIZATION-AND-LIAB> 5,201,863
<GROSS-OPERATING-REVENUE> 638,146
<INCOME-TAX-EXPENSE> 38,765
<OTHER-OPERATING-EXPENSES> 504,419
<TOTAL-OPERATING-EXPENSES> 543,184
<OPERATING-INCOME-LOSS> 94,962
<OTHER-INCOME-NET> 1,034
<INCOME-BEFORE-INTEREST-EXPEN> 95,996
<TOTAL-INTEREST-EXPENSE> 30,676
<NET-INCOME> 61,820
1,833 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 61,820
<COMMON-STOCK-DIVIDENDS> 38,271
<TOTAL-INTEREST-ON-BONDS> 27,528
<CASH-FLOW-OPERATIONS> 179,360
<EPS-PRIMARY> $.95
<EPS-DILUTED> $.95
<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.
</FN>
