<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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3446
(LOGO) NEW ENGLAND ELECTRIC SYSTEM
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1663060
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-389-2000)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Common Shares, par value $1 per share, authorized and
outstanding: 64,183,918 shares at March 31, 1998.
<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
------------ -------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $619,563 $638,146 $2,484,007 $2,402,625
-------- -------- ---------- ----------
Operating expenses:
Fuel for generation 85,784 99,226 359,019 359,928
Purchased electric energy 122,675 144,530 506,374 528,240
Other operation 154,594 123,874 587,378 509,443
Maintenance 38,013 31,056 150,329 126,558
Depreciation and amortization 55,247 66,005 225,734 246,708
Taxes, other than income taxes 40,219 39,728 146,985 144,836
Income taxes 35,885 38,765 149,144 138,786
-------- -------- ---------- ----------
Total operating expenses 532,417 543,184 2,124,963 2,054,499
-------- -------- ---------- ----------
Operating income 87,146 94,962 359,044 348,126
Other income:
Equity in income of generating companies 2,346 2,700 9,886 10,365
Other income (expense), net 20 (1,666) (14,067) (9,297)
-------- -------- ---------- ----------
Operating and other income 89,512 95,996 354,863 349,194
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 25,039 27,528 104,822 110,163
Other interest 5,947 3,791 19,096 19,051
Allowance for borrowed funds used during
construction (456) (643) (1,721) (2,381)
-------- -------- ---------- ----------
Total interest 30,530 30,676 122,197 126,833
-------- -------- ---------- ----------
Income after interest 58,982 65,320 232,666 222,361
Preferred dividends and net gain on
reacquisition of preferred stock 571 1,833 11,057 6,124
Minority interests 1,533 1,667 6,513 6,977
-------- -------- ---------- ----------
Net income $ 56,878 $ 61,820 $ 215,096 $ 209,260
======== ======== ========== ==========
Average common shares - Basic 64,532,863 64,969,652 64,791,620 64,969,652
Average common shares - Diluted 64,616,568 65,026,034 64,851,221 65,003,920
Per share data:
Net income Basic and Diluted $.88 $.95 $3.32 $3.22
Dividends declared $.59 $.59 $2.36 $2.36
Statements of Consolidated Retained Earnings
Retained earnings at beginning of period $954,518 $887,292 $ 910,841 $ 854,720
Net income 56,878 61,820 215,096 209,260
Dividends declared on common shares (37,875) (38,271) (152,416) (153,139)
-------- -------- --------- ---------
Retained earnings at end of period $973,521 $910,841 $ 973,521 $ 910,841
======== ======== ========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE> NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<CAPTION> March 31, December 31,
ASSETS 1998 1997
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $ 5,896,726 $5,860,101
Less accumulated provisions for depreciation
and amortization 2,030,580 1,995,017
----------- ----------
3,866,146 3,865,084
Construction work in progress 42,945 48,708
----------- ----------
Net utility plant 3,909,091 3,913,792
----------- ----------
Oil and gas properties, at full cost - 1,299,817
Less accumulated provision for amortization - 1,128,659
----------- ----------
Net oil and gas properties - 171,158
----------- ----------
Investments:
Nuclear power companies, at equity 50,638 49,825
Other subsidiaries, at equity 37,771 37,418
Other investments 124,807 117,645
----------- ----------
Total investments 213,216 204,888
----------- ----------
Current assets:
Cash 20,648 14,264
Accounts receivable, less reserves of $18,692,000
and $17,834,000 259,863 257,185
Unbilled revenues 62,907 71,260
Fuel, materials, and supplies, at average cost 78,733 66,509
Prepaid and other current assets 67,071 64,265
----------- ----------
Total current assets 489,222 473,483
----------- ----------
Accrued Yankee nuclear plant costs 285,273 299,564
Deferred charges and other assets 375,214 248,762
----------- ----------
$ 5,272,016 $5,311,647
=========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common share equity:
Common shares, par value $1 per share:
Authorized - 150,000,000 shares
Issued - 64,969,652 shares
Outstanding - 64,183,918 shares and 64,537,777 shares $ 64,970 $ 64,970
Paid-in capital 736,699 736,605
Retained earnings 973,521 954,518
Treasury stock - 785,734 shares and 431,875 shares (30,946) (16,415)
Unrealized gain on securities, net 6,954 4,764
----------- ----------
Total common share equity 1,751,198 1,744,442
Minority interests in consolidated subsidiaries 42,676 43,062
Cumulative preferred stock of subsidiaries 39,087 39,113
Long-term debt 1,367,173 1,487,481
----------- ----------
Total capitalization 3,200,134 3,314,098
----------- ----------
Current liabilities:
Long-term debt due within one year 25,320 89,910
Short-term debt 334,325 251,950
Accounts payable 167,664 136,218
Accrued taxes 59,612 14,831
Accrued interest 20,343 24,969
Dividends payable 36,215 36,162
Other current liabilities 103,534 120,002
----------- ----------
Total current liabilities 747,013 674,042
----------- ----------
Deferred federal and state income taxes 713,721 720,375
Unamortized investment tax credits 89,499 90,018
Accrued Yankee nuclear plant costs 285,273 299,564
Other reserves and deferred credits 236,376 213,550
----------- ----------
$ 5,272,016 $5,311,647
=========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Quarters Ended March 31
(Unaudited)
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Operating activities:
Net income $ 56,878 $ 61,820
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 55,992 66,895
Deferred income taxes and investment tax credits, net (9,249) (18,875)
Allowance for funds used during construction (456) (643)
Minority interests 1,533 1,667
Decrease (increase) in accounts receivable,
net and unbilled revenues 5,786 6,939
Decrease (increase) in fuel, materials, and supplies (12,224) (3,755)
Decrease (increase) in prepaid and other current assets (2,742) 7,479
Increase (decrease) in accounts payable 31,416 (21,414)
Increase (decrease) in other current liabilities 23,586 64,790
Other, net 10,032 14,457
--------- ---------
Net cash provided by operating activities $ 160,552 $ 179,360
--------- ---------
Investing activities:
Plant expenditures, excluding allowance for
funds used during construction $ (41,343) $ (54,075)
Oil and gas exploration and development - (1,769)
Proceeds from sale of New England Energy Incorporated
oil and gas properties 50,000 -
Other investing activities (6,045) (3,732)
--------- ---------
Net cash provided by (used in) investing activities $ 2,612 $ (59,576)
--------- ---------
Financing activities:
Dividends paid to minority interests $ (1,574) $ (1,751)
Dividends paid on NEES common shares (38,168) (38,143)
Short-term debt 82,375 (31,200)
Long-term debt - issues 25,000 -
Long-term debt - retirements (209,950) (47,445)
Repurchase of common shares (14,437) (1,426)
Preferred stock - redemptions (26) -
--------- ---------
Net cash used in financing activities $(156,780) $(119,965)
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 6,384 $ (181)
Cash and cash equivalents at beginning of period 14,264 8,477
--------- ---------
Cash and cash equivalents at end of period $ 20,648 $ 8,296
========= =========
The accompanying notes are an integral part of these financial statements.
</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 or the Massachusetts Department of
Environmental Protection for 20 sites at which hazardous waste is
alleged to have been disposed. Private parties have also contacted
or initiated legal proceedings against NEES and certain
subsidiaries regarding hazardous waste cleanup. The most prevalent
types of hazardous waste sites with which NEES and its subsidiaries
have been associated are manufactured gas locations. (Until the
early 1970s, NEES was a combined electric and gas holding company
system.) NEES is aware of approximately 40 such manufactured gas
locations, mostly located in Massachusetts. The NEES companies
have been identified as PRPs at 10 of these manufactured gas
locations, which are included in the 20 PRP sites discussed above.
NEES is engaged in various phases of investigation and remediation
work at approximately 20 of the manufactured gas locations. NEES
and its subsidiaries are currently aware of other possible
hazardous waste sites, and may in the future become aware of
additional sites, that they may be held responsible for
remediating.
In 1993, the Massachusetts Department of Public Utilities
approved a settlement agreement regarding the rate recovery of
remediation costs of former manufactured gas sites and certain
other hazardous waste sites located in Massachusetts. Under that
agreement, qualified costs related to these sites are paid out of
a special fund established on Massachusetts Electric Company's
(Massachusetts Electric) books. Massachusetts Electric made an
initial $30 million contribution to the fund. Rate-recoverable
contributions of $3 million, adjusted since 1993 for inflation, are
added annually to the fund along with interest and any recoveries
<PAGE>
from insurance carriers. At March 31, 1998, the fund had a balance
of $46 million.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by NEES or its
subsidiaries. The NEES companies have recovered amounts from
certain insurers, and, where appropriate, intend to seek recovery
from other insurers and from other PRPs, but it is uncertain
whether, and to what extent, such efforts will be successful. At
March 31, 1998, NEES had total reserves for environmental response
costs of $58 million. This represents an increase from the balance
at the end of 1997. Since the majority of the sites for which
increased reserves were recognized are covered by rate agreements,
this increase in the reserves did not have an adverse effect on net
income. NEES believes that hazardous waste liabilities for all
sites of which it is aware, and which are not covered by a rate
agreement, are not material to its financial position.
Note B - Nuclear Units
- ----------------------
Nuclear Units Permanently Shut Down
Three regional nuclear generating companies in which New England
Power Company (NEP) has a minority interest own nuclear generating
units which have been permanently shut down. These three units are
as follows:
NEP's Investment Future Estimated
Unit Percent Amount($) Date Retired Billings to NEP($)
- -----------------------------------------------------------------------------
Yankee Atomic 30 7 million Feb 1992 40 million
Connecticut Yankee 15 17 million Dec 1996 89 million
Maine Yankee 20 16 million Aug 1997 156 million
- -----------------------------------------------------------------------------
In the case of each of these units, NEP has recorded an estimate
of the total future payment obligation as a liability and an
offsetting regulatory asset, reflecting estimated future billings
from the companies. In a 1993 decision, the Federal Energy
Regulatory Commission (FERC) allowed Yankee Atomic to recover its
undepreciated investment in the plant as well as unfunded nuclear
decommissioning costs and other costs. Connecticut Yankee and
Maine Yankee have both filed similar requests with the FERC.
Several parties have intervened in opposition to both filings.
NEP's industry restructuring settlements allow it to recover all
costs that the FERC allows the Yankee companies to bill to NEP.
<PAGE>
The Citizen's Awareness Network and Nuclear Information and
Resource Service have indicated their intention to file a request
with the Nuclear Regulatory Commission (NRC) designed to overturn
a current NRC rule on decommissioning. NEP cannot predict what
impact, if any, these activities, if successful, would have on the
cost of decommissioning the plants.
At Maine Yankee, the NRC has identified numerous apparent
violations of its regulations, which may result in the assessment
of significant civil penalties.
In the 1970s, NEP and several other shareholders (Sponsors) of
Maine Yankee entered into 27 contracts (Secondary Purchase
Agreements) under which they sold portions of their entitlement to
Maine Yankee power output through 2002 to various entities,
primarily municipal and cooperative systems in New England
(Secondary Purchasers). Virtually all of the Secondary Purchasers
have ceased making payments under the Secondary Purchase Agreements
and have demanded arbitration, claiming that such agreements excuse
further payments upon plant shutdown. NEP has notified the
Secondary Purchasers that the shutdown does not relieve them of
their obligation to make payments under the Secondary Purchase
Agreements and that they are in default of such agreements. NEP
has asked the FERC to enforce NEP's rights under the agreements.
In the event that no further payments are forthcoming from
Secondary Purchasers, NEP, as a primary obligor to Maine Yankee,
would be required to pay an additional $9 million of future
shutdown costs. These costs are not included in the $156 million
estimate disclosed in the table above. Shutdown costs are
recoverable from customers under the industry restructuring
settlements.
A Maine statute provides that if both Maine Yankee and its
decommissioning trust fund have insufficient assets to pay for the
plant decommissioning, the owners of Maine Yankee are jointly and
severally liable for the shortfall.
Operating Nuclear Units
NEP has minority interests in three other nuclear generating
units, Vermont Yankee, Millstone 3, and Seabrook 1. Millstone 3 is
currently shut down and has been placed on the NRC "Watch List,"
signifying that its safety performance exhibits sufficient weakness
to warrant increased NRC attention. Millstone 3 may not restart
without NRC approval.
Uncertainties regarding the future of nuclear generating
stations, particularly older units, such as Vermont Yankee, are
increasing rapidly and could adversely affect their service lives,
availability, and costs. These uncertainties stem from a
<PAGE>
combination of factors, including the acceleration of competitive
pressures in the power generation industry and increased NRC
scrutiny. NEP performs periodic economic viability reviews of
operating nuclear units in which it holds ownership interests.
Millstone 3
In April 1996, the NRC ordered Millstone 3, which has experienced
numerous technical and nontechnical problems, to remain shut down
pending verification that the unit's operations are in accordance
with NRC regulations and the unit's operating license. Millstone
3 is operated by a subsidiary of Northeast Utilities (NU). NEP is
not an owner of the Millstone 1 and 2 nuclear generating units,
which are also shut down under NRC orders.
A number of significant prerequisites must be fulfilled prior to
restart of Millstone 3, including an independent verification of
corrective actions taken at the unit, an NRC assessment concluding
a safety conscious work environment exists, one or more public
meetings, and a vote of the NRC Commissioners. Based on
information currently available, NEP believes that, barring
unforseen further difficulties, restart of the unit is likely
during the summer of 1998.
Since April 1996, NEP has incurred an estimated $40 million in
incremental replacement power costs. During the outage, NEP is
incurring incremental replacement power costs of approximately $2
million per month. Through February 1998, when most of NEP's power
sales were subject to a fuel clause, NEP recovered its incremental
replacement power costs from customers through its fuel clause.
Starting in March 1998, most of NEP's power sales are at a stated
rate which is not subject to a fuel clause. Certain true-up
mechanisms exist in lieu of the fuel clause which cover most of
these costs.
Several criminal investigations related to Millstone 3 are
ongoing. In December 1997, the NRC assessed civil penalties
totaling $2.1 million for numerous violations at the three
Millstone units. NEP's share of this fine was less than $100,000.
The Connecticut Department of Environmental Protection and
Connecticut Attorney General have filed suit against NU for alleged
wastewater discharge violations at the Millstone units, which may
result in the assessment of substantial civil penalties.
In August 1997, NEP filed suit against NU in Massachusetts
Superior Court for damages resulting from the tortious conduct of
NU relating to Millstone 3. NEP is seeking compensation for the
losses it has suffered, including the costs of lost power and costs
necessary to assure that Millstone 3 can safely return to
operation. NEP also seeks punitive damages. NU has filed for
<PAGE>
dismissal of the suit and sought to consolidate it with suits filed
by other joint owners in Massachusetts Superior Court.
NEP also sent a demand for arbitration to Connecticut Light &
Power Company and Western Massachusetts Electric Company, both
subsidiaries of NU, seeking damages resulting from their breach of
obligations under an agreement with NEP and others regarding the
operation and ownership of Millstone 3.
Note C - Town of Norwood
- ------------------------
In April 1997, the Town of Norwood, Massachusetts filed a lawsuit
against NEP in the United States District Court for the District of
Massachusetts. NEP has been wholesale power supplier for Norwood
pursuant to rates approved by the FERC. Norwood alleges that NEP's
proposed divestiture of its power generation assets would violate
the terms of a 1983 power contract which settled an antitrust
lawsuit brought by Norwood against NEP. Norwood also alleges that
NEP's proposed divestiture plan and recovery of stranded investment
costs contravene federal antitrust laws. Norwood seeks an
injunction enjoining the divestiture and an unspecified amount of
treble damages (a specific claim for $450 million was withdrawn).
In September 1997, Norwood's motion for a preliminary injunction of
the divestiture was denied. In November 1997, Norwood filed an
amended complaint making new allegations relating to the sale of
NEP's generating assets and naming as additional defendants, NEES,
USGen New England, Inc. (USGen) and USGen's affiliate, PG&E
Corporation. NEP continues to believe that its divestiture plan
will promote competition in the wholesale power generation market
and that it has met and will continue to meet its contractual
commitments to Norwood. On January 9, 1998, the defendants,
including NEES and NEP, filed a motion to dismiss the lawsuit. On
April 29, 1998, Norwood filed a second amended complaint. This
complaint essentially makes the same allegations, but drops USGen
as a party.
In March 1998, Norwood gave notice of its intent to terminate its
contract with NEP, without accepting responsibility for its share
of NEP's stranded costs, and to begin taking power from another
supplier. NEP has filed with the FERC for permission to charge
Norwood a contract termination charge for its share of NEP's
stranded costs. In April 1998, Norwood moved to dismiss NEP's
filing with the FERC. In the event that a determination is made
which denies NEP the ability to charge Norwood a contract
termination charge, NEP may be required to take noncash write-offs
for certain portions of NEP's stranded costs that would otherwise
have been charged to Norwood.
<PAGE>
Note D - Hydro-Quebec arbitration
- ---------------------------------
In 1996, various New England utilities which are members of the
New England Power Pool, including NEP, submitted a dispute to
arbitration regarding their Firm Energy Purchased Power Contract
with Hydro-Quebec. In June 1997, Hydro-Quebec presented a damage
claim of approximately $37 million for past damages, of which NEP's
share would have been approximately $6 million to $9 million. The
claims involved a dispute over the components of a pricing formula
and additional costs under the contract. With respect to ongoing
claims, NEP has been paying Hydro-Quebec the higher amount
(additional costs of approximately $3 million per year) since July
1996 under protest and subject to refund. In October 1997, an
arbitrator ruled in favor of the New England utilities in all
respects. NEP has made a demand for refund. Hydro-Quebec has not
yet refunded any monies and has appealed the decision. In November
1997, NEP and the other utilities began a second arbitration to
enforce the first decision. Refunds received from Hydro-Quebec
will be passed on to customers.
<PAGE>
Note E - Average common shares
- ------------------------------
The following table summarizes the reconciling amounts between
basic and diluted earnings per share (EPS) computations, in
compliance with Statement of Financial Accounting Standards No.
128, Earnings per Share, which became effective during 1997, and
requires restatement for all prior-period EPS data presented.
<TABLE>
<CAPTION>
Quarter Ended Twelve Months Ended
- ----------------------------------------------------------------------------
Period ended March 31, 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
Income after interest and
minority interest (000's) $57,449 $63,653 $226,153 $215,384
Less: preferred stock dividends
and net gain/loss on
reacquisition of preferred
stock of subsidiaries (000's) $ 571 $ 1,833 $ 11,057 $ 6,124
Income available to common
shareholders (000's) $56,878 $61,820 $215,096 $209,260
Basic EPS $ .88 $ .95 $ 3.32 $ 3.22
Diluted EPS $ .88 $ .95 $ 3.32 $ 3.22
- ----------------------------------------------------------------------------
Average common shares
outstanding for
Basic EPS 64,532,863 64,969,652 64,791,620 64,969,652
Effect of Dilutive Securities
Average potential common
shares related to
share-based compensation
plans 83,705 56,382 59,601 34,268
- ----------------------------------------------------------------------------
Average common shares
outstanding for
Diluted EPS 64,616,568 65,026,034 64,851,221 65,003,920
- ----------------------------------------------------------------------------
</TABLE>
Note F - Comprehensive Income
- -----------------------------
In the first quarter of 1998, NEES adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
<PAGE>
Income (FAS 130). The statement establishes standards for
reporting comprehensive income and its components. Comprehensive
income for the period is equal to net income plus "other
comprehensive income," which, for NEES, consists of the change in
unrealized holding gains on available-for-sale securities during
the period. Total comprehensive income for the quarter ended March
31, 1998 totaled $59.1 million, which is comprised of net income of
$56.9 million and unrealized holding gains of $2.2 million. For
the same period in 1997, total comprehensive income was $61.8
million, and consisted solely of net income.
Note G - New Accounting Standards
- ---------------------------------
In 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information (FAS 131),
which goes into effect in 1998. FAS 131 requires the reporting in
financial statements of certain new additional information about
operating segments of a business. Application of FAS 131 is not
required for interim reporting in the initial year of application.
NEES is currently evaluating the impact that FAS 131 will have on
its future reporting requirements.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits (FAS 132), which revises
disclosure requirements for pension and other postretirement
benefits. NEES is currently evaluating the effects of FAS 132 on
its reporting requirements and will adopt FAS 132 in its financial
statements for the year ending December 31, 1998. The adoption of
FAS 132 will have no impact on NEES' operating results, financial
position, or cash flows.
Note H
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the consolidated financial statements in the Company's
1997 Annual Report.
<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 1997 Annual Report on
Form 10-K.
Earnings
- ----------
Earnings for the first quarter of 1998 were $.88 per basic and
diluted share, compared with $.95 per basic and diluted share for
the corresponding period in 1997.
Earnings decreased by approximately $.08 per share in the first
quarter of 1998 due to the effects of the restructuring of the
electric utility business in Rhode Island and Massachusetts, as
compared to what would have been earned under bundled rate
agreements existing prior to restructuring. On January 1, 1998 in
Rhode Island, and on March 1, 1998 in Massachusetts, customers
representing 22 percent and 73 percent, respectively, of NEES
revenues from the delivery of electricity gained the right to
choose their power supplier. NEES expects that earnings for the
balance of 1998 will be reduced by the effects of industry
restructuring. First quarter 1997 earnings were reduced by $.06
per share due to the recording of refund reserves, as more fully
described in the "Operating Revenue" section , which were reversed
later in 1997.
With the introduction of industry restructuring and consumer
choice, settlement agreements related to the recovery of stranded
costs limit the return on equity earned on the NEES companies'
generating business to approximately 9.4 percent, before mitigation
incentives, which is significantly lower than earned by the
generating business in recent years. (The settlement agreements
also cap earnings for the majority of NEES' electricity delivery
business at 11.75 percent.) Following completion of the sale of
the NEES companies' nonnuclear generating business, NEES earnings
will be affected by the return on the reinvestment of the sale
proceeds, whether through retirement of debt, the repurchase of
NEES shares, investments in new ventures, or otherwise. This
reinvestment return is expected, at least in the near term, to be
considerably less than the return historically earned by the
generating business.
This report contains statements that may be considered forward
looking under the securities laws. Actual results may differ
<PAGE>
materially for reasons discussed in the "Industry Restructuring"
section of the NEES Form 10-K for 1997.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island, and New Hampshire, stranded cost
recovery, the NEES companies' proposed divestiture of its
nonnuclear generating business, accounting implications of industry
restructuring and divestiture, workforce reductions, and impact of
industry restructuring on the distribution business, see the
"Industry Restructuring" sections of the NEES Form 10-K for 1997
and the NEES 1997 Annual Report.
Industry Restructuring Update
New Hampshire
On April 15, 1998, the Federal Energy Regulatory Commission
(FERC) approved the comprehensive settlement agreement reached
between Granite State Electric Company (Granite State Electric) New
England Power Company (NEP), the Governor's office of the State of
New Hampshire, and a number of other parties. The settlement
provides for choice of power supplier to Granite State Electric's
customers by no later than July 1, 1998. The principle terms of
the settlement are substantially similar to the industry
restructuring settlements reached in Massachusetts and Rhode
Island. The settlement agreement still requires New Hampshire
Public Utility Commission (NHPUC) approval. On May 1, 1998,
Granite State Electric submitted a filing to the NHPUC in
compliance with the March 20, 1998 Order of Rehearing which would
provide for retail access to begin July 1, 1998 even if Granite
State Electric's previously filed settlement were not accepted.
Risk Factors
While the NEES companies believe that the industry restructuring
settlements and the sale agreement with USGen New England, Inc.
(USGen) and other developments constitute substantial progress in
reducing the impacts associated with industry restructuring,
significant risks remain. These include, but are not limited to:
(i) the potential that ultimately the settlements will not be
implemented in the manner anticipated by NEES, (ii) the possibility
that a voter referendum in November 1998 could overturn the
Massachusetts legislation, followed by materially adverse
legislative or regulatory actions, (iii) the possibility of federal
legislation that would increase the risk to shareholders above
those contained in the settlements and the Massachusetts and Rhode
Island statutes, (iv) the potential for adverse stranded cost
<PAGE>
recovery decisions involving wholesale customers with whom
settlements have not yet been reached, and (v) the failure to
complete the sale of the nonnuclear generating business to USGen.
Year 2000 Computer Issues
- -------------------------
For a full discussion of Year 2000 computer issues at NEES,
including a description of the modification process, timeline, and
estimated total costs, refer to the "Financial Review" section of
the 1997 NEES Annual Report filed in conjunction with the NEES Form
10-K for 1997.
AllEnergy Acquisition
- ---------------------
On April 3, 1998, NEES and AllEnergy Marketing Company, L.L.C.
(AllEnergy), a wholly owned indirect subsidiary of NEES, entered
into a purchase and sale agreement with PAL Energy Corporation
(PAL) to acquire PAL's business and substantially all of PAL's
assets. PAL is a full service distributor of petroleum and related
products, and provides repair services and installation of heating
and cooling equipment and related services. PAL also operates
convenience stores and gas stations located primarily in western
New York. For the twelve- month period ended August 31, 1997, PAL
had revenues of approximately $125 million. Closing of the sale is
expected during the second quarter of 1998.
Operating Revenue
- -----------------
The following table summarizes the changes in operating revenues:
Increase (Decrease) in Operating Revenues
First Quarter
-------------
1998 vs 1997
-------------
(In Millions)
Industry restructuring-related rate changes:
Generation-related $(18)
Distribution-related 6
Fuel cost-related (27)
Massachusetts Electric Purchased Power
Cost Adjustment (PPCA) mechanism 6
Oil and gas-related revenues (20)
AllEnergy revenues 36
Other (2)
----
$(19)
====
<PAGE>
Generation-related rate reductions reflect rate reductions to
customers as part of industry restructuring and the implementation
of customer choice of power supplier in Rhode Island on January 1,
1998 and in Massachusetts on March 1, 1998. These rate reductions
include the effect of various true-up mechanisms. These true-up
mechanisms cover a number of items including, but not limited to,
fuel expense, nuclear operating costs and decommissioning costs and
the non-fuel component of purchased power expense.
The increase in distribution revenues reflects a $45 million rate
increase at Massachusetts Electric Company (Massachusetts Electric)
in accordance with the provisions of the industry restructuring
settlement in Massachusetts, which became effective March 1, 1998.
The revenue increase also reflects a $7 million increase in
distribution rates for The Narragansett Electric Company
(Narragansett Electric) that became effective in January 1998
pursuant to Rhode Island's Utility Restructuring Act of 1996.
For a discussion of the decrease in fuel recovery during the
first quarter, see the fuel costs discussion in the "Operating
Expenses" section.
The increase in revenues related to Massachusetts Electric's PPCA
mechanism in the first quarter reflects the end of this mechanism
in accordance with the Massachusetts industry restructuring
settlement. PPCA refund provisions of approximately $6 million had
been accrued during the first quarter of 1997 and reversed into
revenue in the fourth quarter of 1997.
The decrease in oil and gas-related revenues reflects the end of
New England Energy Incorporated's (NEEI) activities due to the sale
of its oil and gas properties effective January 1, 1998.
The inclusion of the AllEnergy revenue figure in the above table
is due to AllEnergy becoming a wholly owned and fully consolidated
subsidiary of NEES in the fourth quarter of 1997. NEES had
previously accounted for its 50 percent ownership interest under
the equity method of accounting, as a component of other income.
For the first quarter of 1997, total AllEnergy revenues were $21
million.
The decrease in other revenues partially reflects the impact of
lower kilowatthour deliveries to ultimate customers, as a result of
milder winter weather as compared to the first quarter of 1997.
<PAGE>
Operating Expenses
- ------------------
The following table summarizes the changes in operating expenses:
Increase (Decrease) in Operating Expenses
First Quarter
-------------
1998 vs 1997
------------
(In millions)
Fuel costs $(26)
Purchased energy, excluding fuel (10)
Operation and maintenance:
AllEnergy 43
NEP PBOP amortization (6)
Other 1
Depreciation and amortization:
Utility plant 9
Oil and gas properties (20)
Taxes (2)
----
$(11)
====
The decrease in fuel costs in the first quarter of 1998 primarily
represents reduced wholesale sales to other utilities, a decrease
in the cost of short-term power purchases and lower coal and oil
prices.
The decrease in purchased power costs, excluding fuel, during the
first quarter reflects reduced charges from the Connecticut Yankee
and Maine Yankee nuclear power plants, which were closed in
December 1996 and mid-1997, respectively, as well as reduced
charges from the Ocean State Power II plant, which underwent a
major overhaul during the first quarter of 1997.
As previously described, the inclusion of AllEnergy costs in the
above table is due to the consolidation of AllEnergy in 1998 due to
the company becoming a wholly owned subsidiary of NEES. For the
first quarter of 1997, total AllEnergy expenses were $23 million.
The decrease in operation and maintenance associated with
postretirement benefits other than pensions (PBOP) amortization
reflects the completion of the accelerated PBOP amortization in
1997 under the terms of a 1995 rate agreement. This decrease in
expense is offset by a corresponding increase in the accelerated
<PAGE>
amortization of Millstone 3 which is shown in depreciation and
amortization expense below.
The increase in other operation and maintenance expense reflects
the costs of a major scheduled overhaul at the Manchester Street
generating plant, partially offset by reduced general and
administrative costs, lower charges related to ongoing PBOP costs,
and lower bad debt related expenses.
The decrease in oil and gas property depreciation and
amortization expense during the first quarter reflects the end of
the amortization of oil and gas costs as a result of the sale of
NEEI's oil and gas properties. The increase in utility plant
depreciation and amortization expense is primarily due to the $11
million increase in annual depreciation expense provided for in the
Massachusetts industry restructuring settlement, depreciation
related to new utility plant expenditures, and the accelerated
amortization of NEP's investment in the Millstone 3 nuclear unit,
a portion of which was attributable to the completion of the PBOP
amortization discussed above. This accelerated amortization is
recorded as a regulatory liability.
Liquidity and Capital Resources
- -------------------------------
Plant expenditures for the first quarter of 1998 amounted to $41
million. The funds necessary for utility plant expenditures were
provided by net cash from operating activities, after the payment
of dividends.
<PAGE>
The financing activities of NEES subsidiaries for the first
quarter of 1998 are summarized as follows:
Issues Retirements
------ -----------
(In millions)
Long-term debt
- --------------
NEP $ - $ 50
Massachusetts Electric 25 30
Narragansett Electric - 5
NEEI - 122
Hydro-Transmission Companies - 3
--- ----
$25 $210
=== ====
In August 1997, the NEES Board of Directors authorized the
repurchase of up to five million NEES common shares through open
market purchases. Through March 31, 1998, NEES purchased
approximately 686,000 shares under the repurchase program.
Massachusetts Electric and Granite State Electric plan to issue
an additional $30 million and $5 million, respectively, of long-
term debt by the end of 1998. Massachusetts Electric plans to use
the proceeds to refinance maturing bonds and fund capital
expenditures. Granite State Electric plans to use the proceeds
principally to refinance short-term debt.
At March 31, 1998, NEES and its consolidated subsidiaries had
lines of credit and standby bond purchase facilities with banks
totaling $1.2 billion. These lines and facilities were used for
liquidity support for $334 million of commercial paper borrowings
and for $372 million of NEP mortgage bonds in tax-exempt commercial
paper mode.
As part of NEES' plan to divest its generating business, NEEI
sold its oil and gas properties in February 1998 for approximately
$50 million. NEEI's loss on the sale of approximately $120
million, before tax, has been reimbursed by NEP. This loss has
been recorded as a regulatory asset, which is recoverable under the
terms of the restructuring settlements reached in Massachusetts
and Rhode Island.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning a lawsuit brought by the Company's
subsidiary, New England Power Company (NEP) against Northeast
Utilities on August 7, 1997 in Massachusetts Superior Court,
Worcester County concerning the Millstone 3 nuclear unit, discussed
in this report in Note B of Notes to Unaudited Financial
Statements, is incorporated herein and made a part hereof.
Information concerning a demand for arbitration sent by NEP to
Connecticut Light & Power Company and Western Massachusetts
Electric Company concerning the Millstone 3 nuclear unit, discussed
in this report in Note B of Notes to Unaudited Financial
Statements, is incorporated herein and made a part hereof.
Information concerning a lawsuit brought against NEP by the Town
of Norwood, Massachusetts and a related Federal Energy Regulatory
Commission proceeding, discussed in this report in Note C of Notes
to Unaudited Financial Statements, is incorporated herein and made
a part hereof.
Information concerning an appeal of a favorable arbitration
decision for NEP by Hydro-Quebec regarding NEP's purchased power
contract with Hydro-Quebec, discussed in this report in Note D of
Notes to Unaudited Financial Statements, is incorporated herein and
made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed reports on Form 8-K dated February 6, 1998,
and February 25, 1998, both containing Item 5, Other Events.
The Company is filing Financial Data Schedules.
<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, 1998 to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ENGLAND ELECTRIC SYSTEM
s/Michael E. Jesanis
Michael E. Jesanis
Senior Vice President and
Chief Financial Officer
Date: May 13, 1998
The name "New England Electric System" means the trustee or
trustees for the time being (as trustee or trustees but not
personally) under an agreement and declaration of trust dated
January 2, 1926, as amended, which is hereby referred to, and a
copy of which as amended has been filed with the Secretary of the
Commonwealth of Massachusetts. Any agreement, obligation or
liability made, entered into or incurred by or on behalf of New
England Electric System binds only its trust estate, and no
shareholder, director, trustee, officer or agent thereof assumes or
shall be held to any liability therefor.
<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-31-1998
<PERIOD-END> MAR-31-1998
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,909,091
<OTHER-PROPERTY-AND-INVEST> 213,216
<TOTAL-CURRENT-ASSETS> 489,222
<TOTAL-DEFERRED-CHARGES> 660,487 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,272,016
<COMMON> 64,970
<CAPITAL-SURPLUS-PAID-IN> 736,699
<RETAINED-EARNINGS> 973,521
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,751,198 <F3>
0
39,087 <F2>
<LONG-TERM-DEBT-NET> 1,367,173
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 334,325
<LONG-TERM-DEBT-CURRENT-PORT> 25,320
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,754,913
<TOT-CAPITALIZATION-AND-LIAB> 5,272,016
<GROSS-OPERATING-REVENUE> 619,563
<INCOME-TAX-EXPENSE> 35,885
<OTHER-OPERATING-EXPENSES> 496,532
<TOTAL-OPERATING-EXPENSES> 532,417
<OPERATING-INCOME-LOSS> 87,146
<OTHER-INCOME-NET> 2,366
<INCOME-BEFORE-INTEREST-EXPEN> 89,512
<TOTAL-INTEREST-EXPENSE> 30,530
<NET-INCOME> 56,878
571 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 56,878
<COMMON-STOCK-DIVIDENDS> 37,875
<TOTAL-INTEREST-ON-BONDS> 25,039
<CASH-FLOW-OPERATIONS> 160,552
<EPS-PRIMARY> $.88
<EPS-DILUTED> $.88
<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 includes treasury stock at cost and
unrealized gain on securities.
</FN>
