SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
AMENDMENT NO. 1
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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: 59,123,792 shares at March 31, 1999.
<PAGE>
The undersigned registrant hereby amends its Quarterly
Report on Form 10-Q for the quarterly period ending March 31,
1999 by properly reclassifying $51,395 (expressed in thousands)
from "Cash" to "Marketable securities" on the March 31, 1999
Consolidated Balance Sheet. The correct amounts for the two
categories, expressed in thousands, are identified below:
Cash $62,867
Marketable Securities $93,928
Two reclassifications are also made to properly reclassify
$346 and $402 (expressed in thousands) from "Deferred charges
and other assets" to "Goodwill" on the March 31, 1999 and
December 31, 1998 Consolidated Balance Sheets, respectively.
The correct amounts for the two categories, expressed in
thousands, are identified below:
3/31/99 12/31/98
------- --------
Goodwill $92,594 $13,681
Deferred charges and other assets $31,474 $25,245
The first reclassification also affects the Consolidated
Statements of Cash Flows. In addition, subsequent to filing
its Quarterly Report on Form 10-Q, the undersigned registrant
also identified that the Consolidated Statements of Cash Flows
did not properly reflect an acquisition made in the first
quarter of 1999. The affected lines in the Consolidated
Statements of Cash Flows and their new amounts, expressed in
thousands, are shown below:
<TABLE>
<CAPTION>
Operating Activities:
<S> <C>
Decrease (increase) in fuel, materials, and supplies $ 5,978
Other, net $ (32,840)
Net cash provided by operating activities $ 90,718
Investing Activities:
Purchase of available-for-sale securities, net $ (36,013)
Other investing activities $ (96,240)
Net cash provided by (used in) investing activities $ (171,787)
Net increase (decrease) in cash and cash equivalents $ (124,806)
Cash and cash equivalents at end of period $ 62,867
</TABLE>
In addition to its impact on the Consolidated Statements of Cash Flows,
the acquisition also affects the Financial Data Schedule which is filed in
Part 2 - Item 6 as an exhibit to the Form 10-Q. The affected line and its
new amount, expressed in thousands, is identified below:
Cash-flow-operations $ 90,718
Part 1 - Item 1 and Part 2 - Item 6 are restated in their entirety below.
<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
------------ -------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $657,502 $619,563 $2,458,472$2,484,007
-------- -------- --------------------
Operating expenses:
Fuel for generation 3,058 85,784 146,996 359,019
Purchased electric energy 250,840 122,675 761,512 506,374
Cost of sales AllEnergy 88,759 37,094 213,994 48,961
Other operation 111,298 117,500 507,275 538,417
Maintenance 16,952 38,013 87,979 150,329
Depreciation and amortization 69,744 55,247 221,159 225,734
Taxes, other than income taxes 28,460 40,219 123,004 146,985
Income taxes 29,144 35,885 115,613 149,144
-------- -------- --------------------
Total operating expenses 598,255 532,417 2,177,532 2,124,963
-------- -------- --------------------
Operating income 59,247 87,146 280,940 359,044
Other income:
Allowance for equity funds
used during construction 588 - 1,221 -
Equity in income of generating companies 515 2,346 7,606 9,886
Other income (expense), net 4,666 20 1,384 (14,067)
-------- -------- --------------------
Operating and other income 65,016 89,512 291,151 354,863
-------- -------- --------------------
Interest:
Interest on long-term debt 17,333 25,039 82,099 104,822
Other interest 2,245 5,947 24,120 19,096
Allowance for borrowed funds used during
construction (347) (456) (1,645) (1,721)
-------- -------- --------------------
Total interest 19,231 30,530 104,574 122,197
-------- -------- --------------------
Income after interest 45,785 58,982 186,577 232,666
Preferred dividends and net gain/loss on
reacquisition of preferred stock
of subsidiaries 257 571 3,140 11,057
Minority interests 1,375 1,533 6,120 6,513
-------- -------- --------------------
Net income $ 44,153 $ 56,878 $ 177,317$ 215,096
======== ======== ====================
Average common shares - Basic 59,355,248 64,532,86361,082,450 64,791,620
Average common shares - Diluted 59,502,829 64,616,56861,195,181 64,851,221
Per share data:
Net income Basic and Diluted $.74 $.88 $2.90 $3.32
Dividends declared $.59 $.59 $2.36 $2.36
Statements of Consolidated Retained Earnings
(In Thousands)
Retained earnings at beginning of period$ 998,912 $954,518$ 973,521 $ 910,841
Net income 44,153 56,878 177,317 215,096
Dividends declared on common shares (34,937) (37,875) (142,710) (152,416)
---------- ------------------ ---------
Retained earnings at end of period $1,008,128 $973,521$1,008,128 $ 973,521
========== ================== =========
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 1999 1998
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $4,144,766 $4,130,102
Less accumulated provisions for depreciation
and amortization 1,717,513 1,694,653
---------- ----------
2,427,253 2,435,449
Construction work in progress 68,505 52,977
---------- ----------
Net utility plant 2,495,758 2,488,426
---------- ----------
Investments:
Nuclear power companies, at equity 47,323 48,538
Other subsidiaries, at equity 2,136 2,374
Non-utility property and other investments 188,850 169,196
---------- ----------
Total investments 238,309 220,108
---------- ----------
Current assets:
Cash 62,867 187,673
Marketable securities 93,928 57,915
Accounts receivable, less reserves of $19,696,000
and $18,196,000 299,761 294,943
Unbilled revenues 67,187 87,467
Fuel, materials, and supplies, at average cost 33,696 38,339
Prepaid and other current assets 22,962 57,081
---------- ----------
Total current assets 580,401 723,418
---------- ----------
Regulatory assets 1,512,938 1,599,657
Goodwill, net of amortization 92,594 13,681
Deferred charges and other assets 31,474 25,245
---------- ----------
$4,951,474 $5,070,535
========== ==========
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 - 59,123,792 shares and 59,171,015 shares $ 64,970 $ 64,970
Paid-in capital 736,744 736,744
Retained earnings 1,008,128 998,912
Treasury stock - 5,845,860 shares and 5,798,637 shares (240,040) (237,767)
Accumulated other comprehensive income, net 7,390 7,144
---------- ----------
Total common share equity $1,577,192 $1,570,003
Minority interests in consolidated subsidiaries 39,034 38,742
Cumulative preferred stock of subsidiaries 19,480 19,480
Long-term debt 1,046,762 1,055,740
---------- ----------
Total capitalization 2,682,468 2,683,965
---------- ----------
Current liabilities:
Long-term debt due within one year 42,314 36,307
Accounts payable 183,269 204,992
Accrued taxes 21,389 24,196
Accrued interest 15,580 16,680
Dividends payable 31,989 34,412
Other current liabilities 125,252 142,975
---------- ----------
Total current liabilities 419,793 459,562
---------- ----------
Deferred federal and state income taxes 466,632 472,140
Unamortized investment tax credits 60,324 65,292
Accrued Yankee nuclear plant costs 232,770 242,138
Purchased power obligations 795,765 832,668
Other reserves and deferred credits 293,722 314,770
---------- ----------
$4,951,474 $5,070,535
========== ==========
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>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating activities:
Net income $ 44,153 $ 56,878
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 71,547 55,992
Deferred income taxes and investment tax credits, net (5,318) (9,249)
Allowance for funds used during construction (935) (456)
Minority interests 1,375 1,533
Decrease (increase) in accounts receivable,
net and unbilled revenues 24,733 5,786
Decrease (increase) in fuel, materials, and supplies 5,978 (12,224)
Decrease (increase) in prepaid and other current assets 34,416 (2,742)
Increase (decrease) in accounts payable (25,147) 31,416
Increase (decrease) in other current liabilities (27,244) 23,586
Other, net (32,840) 10,032
--------- ---------
Net cash provided by operating activities $ 90,718 $ 160,552
--------- ---------
Investing activities:
Plant expenditures, excluding allowance for
funds used during construction $ (39,534) $ (41,343)
Proceeds from sale of New England Energy Incorporated
oil and gas properties - 50,000
Purchase of available-for-sale securities, net (36,013) -
Other investing activities (96,240) (6,045)
--------- ---------
Net cash provided by (used in) investing activities $(171,787)$ 2,612
--------- ---------
Financing activities:
Dividends paid to minority interests $ (1,581) $ (1,574)
Dividends paid on NEES common shares (36,861) (38,168)
Short-term debt - 82,375
Long-term debt - issues - 25,000
Long-term debt - retirements (3,040) (209,950)
Repurchase of common shares (2,273) (14,437)
Preferred stock - redemptions - (26)
Return of capital to minority interests
and related premium 18 -
--------- ---------
Net cash used in financing activities $ (43,737) $(156,780)
--------- ---------
Net increase (decrease) in cash and cash equivalents $(124,806) $ 6,384
Cash and cash equivalents at beginning of period 187,673 14,264
--------- ---------
Cash and cash equivalents at end of period $ 62,867 $ 20,648
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Notes to Unaudited Financial Statements
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, including 10 for which the NEES
companies have been identified by either federal or state
regulatory agencies as PRPs, mostly located in Massachusetts.
NEES has reported the existence of all manufactured gas locations
of which it is aware to state environmental regulatory agencies.
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 that provides for 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. Rate-recoverable
<PAGE>
contributions of $3 million, adjusted since 1993 for inflation,
are added annually to the fund along with interest, lease
payments, and any recoveries from insurance carriers and other
third parties. At March 31, 1999, the fund had a balance of $47
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. In certain cases, agreements have been entered
into with other parties which establish the liabilities for NEES
and its subsidiaries. If, however, the other parties to these
agreements should seek protection under the bankruptcy laws,
NEES' liabilities could increase. 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, 1999, NEES had total reserves
for environmental response costs of $55 million, which includes
reserves established in connection with the Massachusetts
Electric hazardous waste fund referred to above. 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 that have been permanently shut down. These
three units are as follows:
<TABLE>
<CAPTION>
Future
Estimated
NEP's Billings
Investment Date to NEP
Unit % $ (millions) Retired $ (millions)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Atomic 30 5 Feb 1992 21
Connecticut Yankee 15 16 Dec 1996 72
Maine Yankee 20 16 Aug 1997 139
</TABLE>
<PAGE>
In the case of each of these units, NEP has recorded a
liability and an offsetting regulatory asset reflecting the
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. In August 1998, a FERC Administrative
Law Judge (ALJ) issued an initial decision which would allow for
full recovery of Connecticut Yankee's unrecovered investment, but
precluded a return on that investment. Connecticut Yankee, NEP,
and other parties have filed with the FERC exceptions to the
ALJ's decision. Should the FERC uphold the ALJ's initial decision
in its current form, NEP's share of the loss of the return
component would total approximately $12 million to $15 million
before taxes. In January 1999, parties in the Maine Yankee
proceeding filed a comprehensive settlement agreement with the
FERC, under which Maine Yankee would recover all unamortized
investment in the plant, including a return on its equity
investment of 6.5 percent, as well as decommissioning costs and
other costs. This settlement agreement requires FERC approval.
NEP's industry restructuring settlements allow it to recover all
costs that the FERC allows these Yankee companies to bill to NEP.
NEP and several other shareholders (Sponsors) of Maine Yankee
are parties to 27 contracts (Secondary Purchase Agreements) under
which they sold portions of their entitlements 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 had ceased
making payments under the Secondary Purchase Agreements, claiming
that such agreements excuse further payments upon plant shutdown.
In February 1999, a settlement agreement which fully resolves the
dispute between the Sponsors and Secondary Purchasers was filed
with the FERC, under which the Secondary Purchasers would be
required to make certain payments to Maine Yankee, and, in turn,
to NEP, related to both past and future obligations under the
Secondary Purchase Agreements. This settlement agreement requires
FERC approval. Shutdown costs are recoverable from customers
under the Settlement Agreements.
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.
<PAGE>
Operating Nuclear Units
NEP has minority interests in three other nuclear generating
units: Vermont Yankee, Millstone 3, and Seabrook 1. 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 combination of factors,
including the acceleration of competitive pressures in the power
generation industry and increased Nuclear Regulatory Commission
(NRC) scrutiny. NEP performs periodic economic viability reviews
of operating nuclear units in which it holds ownership interests.
Nuclear Divestiture
NEP is engaged in efforts to divest its interests in the three
operating nuclear units mentioned above. On February 25, 1999,
the Board of Directors of Vermont Yankee Nuclear Power
Corporation granted an exclusive right to AmerGen Energy Company
(AmerGen), a joint venture by PECO Energy and British Energy to
conduct a due diligence review over the next 120 days and
negotiate a possible agreement to purchase the assets of Vermont
Yankee. Provided the due diligence review leads to successful
completion of negotiations for a sale, consummation of such a
sale would be contingent on regulatory approvals by the NRC, the
Securities and Exchange Commission, under the Public Utility
Holding Company Act of 1935, and the Vermont Public Service
Board, among others. The regulatory process could take eight to
twelve months or longer. In past negotiations for the sale of
nuclear plants, due diligence review has not guaranteed that a
sale will occur. NEP has a 20 percent ownership interest in
Vermont Yankee and an investment of approximately $11 million at
March 31, 1999.
Millstone 3
In July 1998, Millstone 3 returned to full operation after
being shut down since April 1996. In April 1999, the NRC
eliminated its "Watch List" designation process and has
implemented a process that categorizes plants as requiring one of
three levels of attention: "agency focus", calling for the
attention of the Executive Director for Operations and/or the
Commission; "regional focus", calling for special attention from
the appropriate Regional Administrator; and "routine focus",
calling for normal everyday oversight. Millstone 3 has been
categorized as the subject of regional focus. Millstone 3 is
operated by a subsidiary of Northeast Utilities (NU). A criminal
investigation related to Millstone 3 is ongoing.
<PAGE>
In August 1997, NEP sued NU in Massachusetts Superior Court
for damages resulting from the tortious conduct of NU that caused
the shutdown of Millstone 3. NEP's damages include the costs of
replacement power during the outage, costs necessary to return
Millstone 3 to safe operation, and other additional costs. Most
of NEP's incremental replacement power costs have been recovered
from customers, either through fuel adjustment clauses or through
provisions in settlement agreements approved by state and federal
regulators in 1998 (Settlement Agreements). NEP also seeks
punitive damages. 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. The arbitration is scheduled for October 1999. In
July 1998, the court denied NU's motion to dismiss and its motion
to stay pending arbitration. NEP subsequently amended its
complaint by, among other things, adding NU's Trustees as
defendants. In December 1998, NU moved for summary judgement.
NEP's suit has been consolidated with suits filed by other joint
owners. The court is in the process of scheduling a trial date.
Some or all of the damages awarded from the lawsuit would be
refunded to customers.
Nuclear Decommissioning
NEP is liable for its share of decommissioning costs for
Millstone 3, Seabrook 1, and all of the Yankees. Decommissioning
costs include not only estimated costs to decontaminate the units
as required by the NRC, but also costs to dismantle the
uncontaminated portion of the units. NEP records decommissioning
costs on its books consistent with its rate recovery. NEP is
recovering its share of projected decommissioning costs for
Millstone 3 and Seabrook 1 through depreciation expense. In
addition, NEP is paying its portion of projected decommissioning
costs for all of the Yankees through purchased power expense.
Such costs reflect estimates of total decommissioning costs
approved by the FERC.
In New Hampshire, legislation was recently enacted which makes
owners of Seabrook 1, in which NEP owns a 10 percent interest,
proportional guarantors for decommissioning costs in the event
that an owner without a franchise service territory fails to fund
its share of decommissioning costs. Currently, a single owner of
an approximate 12 percent share of Seabrook 1 has no franchise
service territory.
<PAGE>
The New Hampshire Nuclear Decommissioning Finance Committee is
reviewing Seabrook Station's decommissioning estimate and
associated annual funding levels. Among the items being
considered is the imposition of joint and several liability among
the Seabrook joint owners for decommissioning funding. NEP cannot
predict what additional liability, if any, may be imposed on it.
The Nuclear Waste Policy Act of 1982 establishes that the
federal government (through the Department of Energy (DOE)) is
responsible for the disposal of spent nuclear fuel. The federal
government requires NEP to pay a fee based on its share of the
net generation from the Millstone 3 and Seabrook 1 nuclear
generating units. Prior to 1998, NEP recovered this fee through
its fuel clause. Under the Settlement Agreements, substantially
all of these costs are recovered through contract termination
charges (CTC). Similar costs are billed to NEP by Vermont Yankee
and also recovered from customers through the same mechanism. In
November 1997, ruling on a lawsuit brought against the DOE by
numerous utilities and state regulatory commissions, the U.S.
Court of Appeals for the District of Columbia (the Appeals Court)
held that the DOE was obligated to begin disposing of utilities'
spent nuclear fuel by January 31, 1998. The DOE failed to meet
this deadline, and is not expected to have a temporary or
permanent repository for spent nuclear fuel for many years. In
February 1998, Maine Yankee petitioned the Appeals Court to
compel the DOE to remove Maine Yankee's spent fuel from the site.
In May 1998, the Appeals Court rejected the petitions of Maine
Yankee and the other utilities and state regulatory commissions,
stating that the issue of damages was a contractual matter. The
operators of the units in which NEP has an obligation, including
Maine Yankee, Connecticut Yankee, and Yankee Atomic, continue to
pursue damage claims against the DOE in the Federal Court of
Claims (Claims Court). In October 1998, the Claims Court ruled
that the DOE violated a commitment to remove spent fuel from
Yankee Atomic. The Claims Court issued similar rulings in
November 1998 related to cases brought by Connecticut Yankee and
Maine Yankee. Further proceedings will be scheduled by the Claims
Court to decide the amount of damages. On April 6, 1999, a
federal judge with the Claims Court dismissed a lawsuit brought
by Northern States Power Company seeking damage payments
resulting from the DOE's failure to remove spent fuel from
nuclear power plants. It is unclear at this time what effect, if
any, this ruling will have on the independent separate lawsuits
brought by Yankee Atomic, Maine Yankee, and Connecticut Yankee.
<PAGE>
Note C - Town of Norwood Dispute
- --------------------------------
In September 1998, the United States District Court (District
Court) for the District of Massachusetts dismissed the lawsuit
filed in April 1997 by the Town of Norwood, Massachusetts against
NEES and NEP. NEP had been a wholesale power supplier for Norwood
pursuant to rates approved by the FERC. In the lawsuit, Norwood
had alleged that NEP's divestiture of its power generating assets
would violate the terms of a 1983 power contract. Norwood also
alleged that the divestiture and recovery of stranded investment
costs contravened federal antitrust laws. The District Court
judge granted NEES' and NEP's motion for dismissal on the grounds
that the contract did not require NEP to retain its generating
units, that the FERC-approved filed rates govern these matters,
and that Norwood had adequate opportunity at the FERC to litigate
these matters. Norwood filed a motion to alter or amend the order
of dismissal, which was denied. In December 1998, Norwood filed a
second motion to amend judgement and also filed an appeal with
the First Circuit Court of Appeals (First Circuit). In March
1999, the District Court denied Norwood's second motion to amend
judgement.
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 began taking power from
another supplier commencing in April 1998. In May 1998, the FERC
ruled that NEP could assess a CTC to any of NEP's unaffiliated
customers that choose to terminate their wholesale power
contracts early. Norwood claimed that the CTC approved by the
FERC did not apply to Norwood; however, in denying Norwood's
motion for rehearing, the FERC ruled that the charge did apply to
Norwood. Norwood has appealed this decision to the First Circuit.
NEP's billings to Norwood for this charge through March 1999 have
been approximately $7 million, which remain unpaid. NEP filed a
collection action with the Massachusetts Superior Court in
December 1998 to recover these amounts. Norwood filed a motion to
dismiss or stay in January 1999, which has been denied.
Norwood also appealed the FERC's orders approving the
divestiture and the Massachusetts and Rhode Island industry
restructuring settlement agreements (including modification of
NEP's contracts with Massachusetts Electric and The Narragansett
Electric Company) to the First Circuit, despite the FERC's
finding that those settlement agreements do not apply to Norwood.
The First Circuit has consolidated all three of Norwood's
appeals from the FERC's orders with two other appeals filed by
the Northeast Center for Social Issue Studies, which challenge
the FERC's approval of NEP's sale of its hydroelectric
facilities. The case is expected to be fully briefed by July
1999.
<PAGE>
Note D - Marketable Securities
- ------------------------------
At March 31, 1999, marketable securities consist primarily of
corporate debt, mortgage-backed government securities, and
collateralized mortgage obligations. Marketable securities have
been categorized as available-for-sale and, as a result, are
carried at fair value, based generally on quoted market prices.
At March 31, 1999, NEES had marketable securities with a fair
value of approximately $94 million. Fair value closely
approximated cost. Marketable securities are available for
current operations and are classified as current assets, and have
contractual maturities of less than two years. During the first
quarter of 1999, the proceeds received from the sales of
securities held as available-for-sale totaled approximately $53
million, which resulted in immaterial realized gains and losses.
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, 1999 1998 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income after interest and minority
interest (000s) $44,410 $57,449 $180,457 $226,153
Less: preferred stock dividends
and net gain/loss on reacquisition of
preferred stock of subsidiaries (000s) $ 257 $ 571 $ 3,140 $ 11,057
Income available to common
shareholders (000s) $44,153 $56,878 $177,317 $215,096
Basic EPS $.74 $.88 $2.90 $3.32
Diluted EPS $.74 $.88 $2.90 $3.32
- -------------------------------------------------------------------------------------
Average common shares
outstanding for Basic EPS 59,355,24864,532,86361,082,45064,791,620
Effect of Dilutive Securities
Average potential common shares
related to share-based
compensation plans 147,581 83,705 112,731 59,601
- -------------------------------------------------------------------------------------
Average common shares
outstanding for Diluted EPS 59,502,82964,616,56861,195,18164,851,221
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note F - Comprehensive Income
- -----------------------------
In the first quarter of 1998, NEES adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income (FAS 130). FAS 130 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 the
unrealized holding gains on available-for-sale securities during
the period. Total comprehensive income is calculated for the
quarters ended March 31, 1999 and 1998, respectively, in the
table below:
<TABLE>
<CAPTION>
Quarters Ended March 31,
------------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Net income $44,153 $56,878
Other comprehensive income, net of tax:
Unrealized gains, net of tax expense of
$575 and $1,249, respectively 1,060 2,304
Less: Reclassification adjustments for realized
gains included in net income, net of tax
expense of $441 and $62, respectively 814 114
------- -------
Total comprehensive income $44,399 $59,068
======= =======
</TABLE>
<PAGE>
Note G - Segment Information
- ----------------------------
NEES has two reportable segments: (1) regulated electric
operations and (2) unregulated subsidiaries. The unregulated
subsidiaries are principally engaged in the marketing of energy
commodities and services and the construction and leasing of
telecommunications infrastructure. All of the other NEES
companies are part of the electric operations segment, including
the parent company and the administrative services subsidiary.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
-------------- --------------
Electric Unregulated Total Electric Unregulated Total
-------- ----------- ----- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
(In millions)
Revenues from
external customers 553 105 658 584 36 620
Net income (loss) 44 - 44 63 (6) 57
March 31, 1999 December 31, 1998
-------------- -----------------
Electric Unregulated Total Electric Unregulated Total
-------- ----------- ----- -------- ----------- -----
Total assets 4,726 225 4,951 4,948 123 5,071
</TABLE>
Note H - Derivative Instruments
- --------------------------------
NEES, through its wholly owned subsidiary, AllEnergy, uses
derivative instruments to manage exposure in fluctuations in
commodity prices. At this time, AllEnergy uses derivative
instruments to manage risks associated with natural gas, propane,
and oil prices. Hedge criteria used and accounting for hedge
transactions are in accordance with Statement of Financial
Accounting Standards No. 80, Accounting for Futures Contracts
(FAS 80). FAS 80 states that in order to qualify as a hedge,
price movements in commodity derivatives must be highly
correlated with the underlying hedged commodity and must reduce
exposure to market fluctuations throughout the hedged period. Any
gain or loss on a derivative that qualifies as a hedge under FAS
80 is deferred until recognized in the income statement in the
same period as the hedged item is recognized in the income
statement.
<PAGE>
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (FAS 133),
which establishes accounting and reporting standards for such
instruments. FAS 133 requires recognition of all derivatives as
either assets or liabilities on the balance sheet and requires
measurement of those instruments at fair value. If certain
conditions are met, derivatives may be treated as hedges and
accounted for in the income statement in the same manner as under
FAS 80. To the extent these conditions are not met, that portion
of the gain or loss is reported in earnings immediately. FAS 133
is effective for fiscal years beginning after June 15, 1999. As
of March 31, 1999, all of AllEnergy's derivative instruments
qualified as hedges under FAS 80, with limited exceptions, and
are expected to qualify as hedges under FAS 133. The derivative
instruments that do not qualify as hedges under FAS 80 and are
recognized in income immediately are immaterial to NEES.
Note I
- ------
In the opinion of NEES, these financial 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 NEES'
1998 Annual Report.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed reports on Form 8-K dated February 1, 1999,
and February 23, 1999, containing Items 5 and 7 and Item 5,
respectively.
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 Amendment No. 1 to
Form 10-Q for the quarter ended March 31, 1999 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,
Authorized Officer, and
Principal Financial Officer
Date: May 24, 1999
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.
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-31-1999
<PERIOD-END> MAR-31-1999
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,495,758
<OTHER-PROPERTY-AND-INVEST> 238,309
<TOTAL-CURRENT-ASSETS> 580,401
<TOTAL-DEFERRED-CHARGES> 1,637,006 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,951,474
<COMMON> 64,970
<CAPITAL-SURPLUS-PAID-IN> 736,744
<RETAINED-EARNINGS> 1,008,128
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,577,192 <F3>
0
19,480 <F2>
<LONG-TERM-DEBT-NET> 1,046,762
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 42,314
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,265,726
<TOT-CAPITALIZATION-AND-LIAB> 4,951,474
<GROSS-OPERATING-REVENUE> 657,502
<INCOME-TAX-EXPENSE> 29,144
<OTHER-OPERATING-EXPENSES> 569,111
<TOTAL-OPERATING-EXPENSES> 598,255
<OPERATING-INCOME-LOSS> 59,247
<OTHER-INCOME-NET> 5,769
<INCOME-BEFORE-INTEREST-EXPEN> 65,016
<TOTAL-INTEREST-EXPENSE> 19,231
<NET-INCOME> 44,153
257 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 44,153
<COMMON-STOCK-DIVIDENDS> 34,937
<TOTAL-INTEREST-ON-BONDS> 17,333
<CASH-FLOW-OPERATIONS> 90,718
<EPS-BASIC> $.74
<EPS-DILUTED> $.74
<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>
