SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 59,120,059 shares at June 30, 1999.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE> NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Periods Ended June 30
(Unaudited)
<CAPTION> Quarter Six Months
------- ----------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $595,287 $572,008$1,252,789 $1,191,571
-------- ------------------ ----------
Operating expenses:
Fuel for generation 2,215 77,429 5,273 163,213
Purchased electric energy 230,705 122,393 481,545 245,068
Cost of sales AllEnergy 71,676 18,561 160,435 55,655
Other operation 125,363 129,913 236,661 247,413
Maintenance 23,694 39,009 40,646 77,022
Depreciation and amortization 51,224 56,611 120,968 111,858
Taxes, other than income taxes 25,527 37,138 53,987 77,357
Income taxes 19,946 23,804 49,090 59,689
-------- ------------------ ----------
Total operating expenses 550,350 504,858 1,148,605 1,037,275
-------- ------------------ ----------
Operating income 44,937 67,150 104,184 154,296
Other income:
Allowance for equity funds used
during construction 546 - 1,134 -
Equity in income of generating companies 967 2,698 1,482 5,044
Other income (expense), net 2,098 (28) 6,764 (8)
-------- ------------------ ----------
Operating and other income 48,548 69,820 113,564 159,332
-------- ------------------ ----------
Interest:
Interest on long-term debt 17,312 24,424 34,645 49,463
Other interest 2,201 9,223 4,446 15,170
Allowance for borrowed funds used during
construction (299) (459) (646) (915)
-------- ------------------ ----------
Total interest 19,214 33,188 38,445 63,718
-------- ------------------ ----------
Income after interest 29,334 36,632 75,119 95,614
Preferred dividends and net gain/loss on
reacquisition of preferred stock of subsidiaries 273 571 530 1,142
Minority interests 1,475 1,652 2,850 3,185
-------- ------------------ ----------
Net income $ 27,586 $ 34,409$ 71,739 $ 91,287
======== ================== ==========
Average common shares - Basic 59,355,24863,524,22259,355,248 64,025,756
Average common shares - Diluted 59,465,39363,584,78059,484,008 64,097,824
Per share data:
Net income - Basic $.47 $.55 $1.21 $1.43
Net income - Diluted $.47 $.54 $1.21 $1.42
Dividends declared $.59 $.59 $1.18 $1.18
Statements of Consolidated Retained Earnings
(In Thousands)
Retained earnings at beginning of period$1,008,128 $973,521$ 998,912 $954,518
Net income 27,586 34,409 71,739 91,287
Dividends delcared on common shares (34,918) (37,097) (69,855) (74,972)
---------- ------------------ --------
Retained earnings at end of period $1,000,796 $970,833$1,000,796 $970,833
========== ================== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Twelve Months Ended June 30
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $2,481,751 $2,478,391
---------- ----------
Operating expenses:
Fuel for generation 71,782 350,612
Purchased electric energy 869,824 501,584
Cost of sales AllEnergy 267,109 67,522
Other operation 502,725 527,209
Maintenance 72,664 149,855
Depreciation and amortization 215,772 223,205
Taxes, other than income taxes 111,393 147,900
Income taxes 111,755 150,892
---------- ----------
Total operating expenses 2,223,024 2,118,779
---------- ----------
Operating income 258,727 359,612
Other income:
Allowance for equity funds used during construction 1,767 -
Equity in income of generating companies 5,875 10,153
Other income (expense), net 3,510 (11,003)
---------- ----------
Operating and other income 269,879 358,762
---------- ----------
Interest:
Interest on long-term debt 74,987 102,493
Other interest 17,098 24,502
Allowance for borrowed funds used during construction (1,485) (1,783)
---------- ----------
Total interest 90,600 125,212
---------- ----------
Income after interest 179,279 233,550
Preferred dividends and net gain/loss on reacquisition
of preferred stock of subsidiaries 2,842 9,794
Minority interests 5,943 6,483
---------- ----------
Net income $ 170,494 $ 217,273
========== ==========
Average common shares - Basic 60,043,062 64,431,253
Average common shares - Diluted 60,168,156 64,499,067
Per share data:
Net income - Basic $2.84 $3.37
Net income - Diluted $2.83 $3.37
Dividends declared $2.36 $2.36
Statements of Consolidated Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 970,833 $ 904,825
Net income 170,494 217,273
Dividends declared on common shares (140,531) (151,265)
---------- ---------
Retained earnings at end of period $1,000,796 $ 970,833
========== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $4,174,965$4,130,102
Less accumulated provisions for depreciation and amortization 1,737,811 1,694,653
--------------------
2,437,154 2,435,449
Construction work in progress 65,316 52,977
--------------------
Net utility plant 2,502,470 2,488,426
--------------------
Investments:
Nuclear power companies, at equity 47,496 48,538
Other subsidiaries, at equity 2,287 2,374
Non-utility property and other investments 195,440 169,196
--------------------
Total investments 245,223 220,108
--------------------
Current assets:
Cash 121,387 187,673
Marketable securities - 57,915
Accounts receivable, less reserves of $20,812,000 and
$18,196,000 259,045 294,943
Unbilled revenues 85,777 87,467
Fuel, materials, and supplies, at average cost 36,381 38,339
Prepaid and other current assets 71,280 57,081
--------------------
Total current assets 573,870 723,418
--------------------
Regulatory assets 1,448,641 1,599,657
Goodwill, net of amortization 92,038 13,681
Deferred charges and other assets 26,966 25,245
--------------------
$4,889,208$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 - 59,120,059 shares and 59,171,015 shares $ 64,970 $ 64,970
Paid-in capital 736,744 736,744
Retained earnings 1,000,796 998,912
Treasury stock - 5,849,593 shares and 5,798,637 shares (240,322) (237,767)
Accumulated other comprehensive income, net 8,230 7,144
--------------------
Total common share equity 1,570,418 1,570,003
Minority interests in consolidated subsidiaries 39,260 38,742
Cumulative preferred stock of subsidiaries 19,480 19,480
Long-term debt 1,043,879 1,055,740
--------------------
Total capitalization 2,673,037 2,683,965
--------------------
Current liabilities:
Long-term debt due within one year 39,312 36,307
Accounts payable 183,280 204,992
Accrued taxes 16,368 24,196
Accrued interest 16,110 16,680
Dividends payable 30,442 34,412
Other current liabilities 122,453 142,975
--------------------
Total current liabilities 407,965 459,562
--------------------
Deferred federal and state income taxes 465,994 472,140
Unamortized investment tax credits 57,877 65,292
Accrued Yankee nuclear plant costs 222,393 242,138
Purchased power obligations 761,165 832,668
Other reserves and deferred credits 300,777 314,770
--------------------
$4,889,208$5,070,535
====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 71,739 $ 91,287
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 123,523 113,330
Deferred income taxes and investment tax credits, net(5,848) (9,486)
Allowance for funds used during construction (1,780) (915)
Minority interests 2,850 3,185
Prepayment for amended purchased power agreement - (191,676)
Decrease (increase) in accounts receivable, net
and unbilled revenues 46,859 (3,104)
Decrease (increase) in fuel, materials, and supplies 3,337 (15,268)
Decrease (increase) in prepaid and other current assets (13,892) (34,849)
Increase (decrease) in accounts payable (25,136) 25,319
Increase (decrease) in other current liabilities (34,823) 3,011
Other, net (21,756) 7,872
--------- ---------
Net cash provided by (used in) operating activities $ 145,073 $ (11,294)
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $ (78,294) $ (88,285)
Proceeds from sale of New England Energy Incorporated
oil and gas properties - 50,000
Sale of available-for-sale securities, net 57,915 -
Other investing activities (103,297) (11,033)
--------- ---------
Net cash used in investing activities $(123,676) $ (49,318)
--------- ---------
Financing Activities:
Dividends paid to minority interests $ (2,664) $ (3,391)
Dividends paid on NEES common shares (73,493) (75,895)
Long-term debt - issues - 30,000
Long-term debt - retirements (8,989) (213,790)
Changes in short-term debt - 405,000
Repurchase of common shares (2,555) (72,536)
Return of capital to minority interests
and related premium 18 -
--------- ---------
Net cash provided by (used in)
financing activities $ (87,683) $ 69,388
--------- ---------
Net increase (decrease) in cash and cash equivalents $ (66,286) $ 8,776
Cash and cash equivalents at beginning of period 187,673 14,264
--------- ---------
Cash and cash equivalents at end of period $ 121,387 $ 23,040
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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 a number of 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 some 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
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 June 30, 1999, the fund had a balance of $48
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 June 30, 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:
<PAGE>
<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 17
Connecticut Yankee 15 16 Dec 1996 70
Maine Yankee 20 16 Aug 1997 135
</TABLE>
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 has filed a similar request with the FERC.
Several parties have intervened in opposition to the filing. 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. The recovery by Maine Yankee of its costs is in accordance
with settlement agreements approved by the FERC in May 1999.
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.
NEP's industry restructuring settlement agreements approved by
state and federal regulators in 1998 (Settlement Agreements)
allow it to recover all costs, including shutdown costs, that the
FERC allows these Yankee companies to bill to NEP.
<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, have
increased in recent years 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. In February 1999, the
Vermont Yankee Nuclear Power Corporation Board of Directors
(Board) granted an exclusive right to AmerGen Energy Company
(AmerGen), a joint venture by PECO Energy and British Energy, to
conduct a due diligence review and negotiate a possible agreement
to purchase the assets of Vermont Yankee. The period of
exclusivity expired in June 1999. On August 2, 1999, Vermont
Yankee announced that it had received an unsolicited expression
of interest from Entergy Nuclear, Inc. (Entergy) to buy the
Vermont Yankee plant. The Board authorized negotiations with
Entergy and continued negotiations with AmerGen. Provided the
negotiations for a sale are successful, 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. NEP has a 20 percent ownership interest
in Vermont Yankee and an equity investment of approximately $11
million at June 30, 1999.
Millstone 3
In July 1998, Millstone 3, which is operated by a subsidiary
of Northeast Utilities (NU), returned to full operation after
being on the NRC's "Watch List" since January 1996 and shut down
since April 1996. In April 1999, the NRC eliminated its "Watch
List" designation process and implemented a process that
<PAGE>
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. A criminal investigation of NU's operating
subsidiary related to Millstone 3 is ongoing.
In August 1997, NEP sued NU in Massachusetts Superior Court
(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 the Settlement
Agreements. NEP also seeks punitive damages. In July 1998, the
Superior 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
June 1999, the Superior Court denied NU's motion for summary
judgement. NEP's suit has been consolidated with suits filed by
other joint owners. The trial is scheduled for March 2000. Some
or all of the damages awarded from the lawsuit would be refunded
to customers.
In August 1997, 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. On July 21, 1999, the arbitrator dismissed NU's
motion for summary judgement. The arbitration hearing is
scheduled for October 1999.
Note C - Town of Norwood Dispute
- --------------------------------
From 1983 until 1998, NEP was the wholesale power supplier for
the Town of Norwood, Massachusetts (Norwood). In April 1998,
Norwood began taking power from another supplier. Pursuant to
tariffs approved by the FERC in May 1998, NEP has been assessing
<PAGE>
Norwood a contract termination charge (CTC). Through June 1999,
the charges assessed Norwood amount to approximately $10 million,
all of which remain unpaid. Norwood has appealed the FERC's
authorization of CTCs as well as the FERC's approval of the
Settlement Agreements and NEP's divestiture of its nonnuclear
generating assets to the First Circuit Court of Appeals (First
Circuit). NEP is pursuing a collection action in Massachusetts
Superior Court.
Separately, Norwood filed suit in Federal District Court
(District Court) in April 1997 alleging that NEP's divestiture
violated the terms of the 1983 power contract. Norwood has
appealed to the First Circuit the District Court's dismissal of
Norwood's lawsuit.
Note D - Marketable Securities
- ------------------------------
At June 30, 1999, NEES had no marketable securities. In past
periods, marketable securities had consisted primarily of
corporate debt, mortgage-backed government securities, and
collateralized mortgage obligations. Marketable securities were
categorized as available-for-sale and, as a result, were carried
at fair value, based generally on quoted market prices. Fair
value closely approximated cost. During the second quarter of
1999, the proceeds received from the sales of securities
previously held as available-for-sale totaled approximately $94
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.
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended Twelve Months Ended
- ------------------------------------------------------------------------------------------
Period Ended June 30, 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income after interest
and minority
interest (000s) $27,859 $34,980 $72,269 $92,429 $173,336 $227,067
Less: preferred stock
dividends and net
gain/loss on
reacquisition of
preferred stock of
subsidiaries (000s) $ 273 $ 571 $ 530 $ 1,142 $ 2,842 $ 9,794
Income available to
common shareholders
(000s) $27,586 $34,409 $71,739 $91,287 $170,494 $217,273
Basic EPS $ .47 $ .55 $ 1.21 $ 1.43 $ 2.84 $ 3.37
Diluted EPS $ .47 $ .54 $ 1.21 $ 1.42 $ 2.83 $ 3.37
- -------------------------------------------------------------------------------------------
Average common
shares outstanding
for Basic EPS 59,355,248 63,524,222 59,355,24864,025,75660,043,06264,431,253
Effect of Dilutive
Securities
Average potential
common shares related
to share-based compen-
sation plans 110,145 60,558 128,760 72,068 125,094 67,814
- -------------------------------------------------------------------------------------------
Average common shares
outstanding for
Diluted EPS 59,465,393 63,584,780 59,484,00864,097,82460,168,15664,499,067
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note F - Comprehensive Income
- -----------------------------
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. The following table summarizes
total comprehensive income in compliance with Financial
Accounting Standards No. 130, Reporting Comprehensive Income,
which became effective during 1998.
<TABLE>
<CAPTION> Periods Ended June 30,
-----------------------------------
Three Months Six Months
------------ ----------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Net income $27,586 $34,409 $71,739 $91,287
Other comprehensive income,
net of tax:
Unrealized gains/(losses), net
of tax expense of $442, $383,
$1,017, and $1,632, respectively 816 707 1,876 3,011
Less: Reclassification adjustments
for realized gains/(losses)
included in net income, net of
tax expense/(benefit) of $(13),
$(15), $428, and $47, respectively (24) (27) 790 87
------- ------- ------- -------
Total comprehensive income $28,426 $35,143 $72,825 $94,211
======= ======= ======= =======
</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> 1999 1998
---- ----
(In millions) Electric Unregulated Total Electric Unregulated Total
-------- ----------- ----- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Quarter ended June 30,
- ----------------------
Revenues from
external customers $508 $87 $595 $550 $22 $572
Net income (loss) $ 30 $(2) $ 28 $ 36 $(2) $ 34
Six months ended June 30,
- -------------------------
Revenues from
external customers $1,062 $191 $1,253 $1,134 $58 $1,192
Net income (loss) $ 74 $ (2) $ 72 $ 99 $(8) $ 91
June 30, 1999 December 31, 1998
------------- -----------------
Electric Unregulated Total Electric Unregulated Total
-------- ----------- ----- -------- ----------- -----
Total assets $4,668 $221 $4,889 $4,948 $123 $5,071
</TABLE>
<PAGE>
Note H - Derivative Instruments
- -------------------------------
NEES, through its wholly owned subsidiary, AllEnergy Marketing
Company, L.L.C. (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.
In June 1998, the Financial Accounting Standards Board (FASB)
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.
The FASB delayed the effective date of FAS 133 for one year, to
fiscal years beginning after June 15, 2000. As of June 30, 1999,
all of AllEnergy's derivative instruments qualified as hedges
under FAS 80 and are expected to qualify as hedges under FAS 133.
Note I - Unregulated Business Acquisition
- -----------------------------------------
On July 1, 1999, AllEnergy acquired Texas-Ohio Gas, Inc.
(Texas-Ohio), an unregulated natural gas provider with operations
and customers in 12 states. With annual revenue of approximately
$60 million, Texas-Ohio delivers natural gas to approximately
<PAGE>
3,000 commercial and industrial customers and maintains marketing
relations with business and trade organizations across the
region.
Note J
- ------
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>
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 1998 Annual Report on
Form 10-K.
Merger Agreements
- -----------------
On December 11, 1998, NEES and The National Grid Group plc
(National Grid) agreed to a merger whereby National Grid would
acquire all of the outstanding shares of NEES for $53.75 per
share (subject to upward adjustment up to a maximum of $54.35 per
share depending on the date of closing). On February 1, 1999,
NEES agreed to acquire Eastern Utilities Associates (EUA) for
$31.00 per share subject to upward adjustment depending on the
date of closing. For a full discussion of NEES' merger
agreements with National Grid and EUA, see the Merger Agreements
sections of the NEES Form 10-K for 1998 and the NEES 1998 Annual
Report.
Update of Merger Agreements with National Grid and EUA
On April 22, 1999, shareholders of National Grid approved the
proposed merger with 99 percent of those voting approving the
merger. On May 3, 1999, NEES received the approval of more than
the required majority of outstanding shares for the merger with
75 percent of outstanding shares voting in favor of the merger.
Of those shares voted, in excess of 94 percent voted in favor of
the merger.
The NEES/National Grid merger has received approval or
clearance from the Federal Trade Commission (FTC), the Committee
on Foreign Investment in the United States, the Federal Energy
Regulatory Commission (FERC), the Vermont Public Service Board
<PAGE>
(VPSB), and the Connecticut Department of Public Utility Control
(CDPUC). In addition, the New Hampshire Public Utilities
Commission approved the proposed merger in an oral order on
August 9, 1999, with a written order expected in several weeks.
NEES and National Grid have also filed for merger approval
with the Securities and Exchange Commission (SEC), under the
Public Utility Holding Company Act of 1935 (1935 Act). In
connection with the SEC application, the Massachusetts Department
of Telecommunications and Energy (MDTE) certified to the SEC that
the merger would not interfere with the MDTE's authority or
ability to protect customers of NEES' Massachusetts distribution
subsidiaries. NEES and National Grid have requested a similar
certification from state regulators in Rhode Island. In
addition, NEES and National Grid have also filed for merger
approval with the Nuclear Regulatory Commission (NRC) to transfer
ownership licenses for its minority ownership interests in
regional nuclear plants. On July 20, 1999, three subsidiaries of
Northeast Utilities filed a request for hearing with the NRC with
respect to financial qualifications and raising issues of foreign
ownership. NEES and National Grid responded, in a July 27, 1999
filing, opposing the request and asserting that the application
should be granted as a matter of law and there is no need for a
hearing. It is not known when the NRC will respond to the
request or how it will rule.
The NEES/National Grid merger is expected to be completed by
early 2000.
The NEES acquisition of EUA has also received clearance from
the FTC. NEES and EUA have made appropriate filings with the
FERC, SEC, under the 1935 Act, NRC, MDTE, VPSB, and the Rhode
Island Public Utilities Commission. In addition, the acquisition
of EUA requires approval by the CDPUC. On May 17, 1999, EUA
shareholders approved the acquisition of EUA by NEES. The
acquisition of EUA is expected to be completed by early 2000.
<PAGE>
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities,
NEES' divestiture of its nonnuclear generating business, stranded
cost recovery, accounting implications of industry restructuring
and divestiture, and the impact of restructuring on the
distribution business, see the "Industry Restructuring",
"Accounting Implications", and "Impact of Restructuring on
Distribution Business" sections of the NEES Form 10-K for 1998
and the NEES 1998 Annual Report.
Year 2000 Readiness Disclosure
- ------------------------------
Over the course of this year, most companies will face a
potentially serious information systems (computer) problem
because many software applications and operational programs
written in the past may not properly recognize calendar dates
associated with the year 2000 (Y2K). This could cause computers
to either shut down or lead to incorrect calculations.
During 1996, the NEES companies began the process of
identifying the changes required to their computer software and
hardware to mitigate Y2K issues. The NEES companies established a
Y2K Project team to manage these issues, which has consisted of
as many as 70 full-time equivalent staff at some points in time,
primarily external consultants being overseen by an internal Y2K
management team. To facilitate the Y2K Project, NEES entered
into contracts with Keane, Inc. and IBM to provide personnel
support to the Y2K Project. Through June 30, 1999, the NEES
companies have spent approximately $18 million with these
vendors, which is included in the cost figures disclosed below.
The Y2K Project team reports project progress to a Y2K Executive
Oversight Committee each month. The team also makes regular
reports to NEES' Board of Directors and its Audit Committee. The
NEES companies separated their Y2K Project into four parts as
shown below.
<PAGE>
<TABLE>
<CAPTION>
Substantial Contingency
Testing,
Completion Documentation,
of Critical and Clean
Category Specific Example Systems Management
- -------- ---------------- ----------- -------------------
<S> <C> <C> <C>
Mainframe/Midrange Accounting/Customer Completed Throughout 1999
systems service integrated
systems
Desktop systems Personal computers/ Completed Throughout 1999
Department software/
Networks
Operational/ Dispatching systems/ Completed Throughout 1999
Embedded Transmission and
systems Distribution systems/
Telephone systems
External issues Electronic Data Completed Throughout 1999
Interchange/Vendor
communications
</TABLE>
The NEES companies used a three-phase approach in coordinating
their Y2K Project for system-related issues: (I) Assessment and
Inventory, (II) Pilot Testing, and (III) Renovation, Conversion,
or Replacement of Application and Operating Software Packages and
Testing. Phase I, which was an initial assessment of all systems
and devices for potential Y2K defects, was completed in mid-1997.
These assessments included, but were not limited to, the review
of program code for mainframe and midrange systems, analysis of
personal computer hardware and network equipment for desktop
systems, reaching consensus with key "data exchange" partners
regarding the approach and execution of plans to address Y2K-
related issues, and coordination with other New England Power
Pool (NEPOOL) member utilities related to operational systems,
such as transmission systems. Phase II, which consisted of
renovation pilots for a cross-section of systems in order to
facilitate the establishment of templates for Phase III work, was
completed in late 1997. Phase III, which was completed on June
<PAGE>
30, 1999, required the renovation, conversion, or replacement of
the remaining applications and operating software packages.
Critical systems include major operational and informational
systems such as the NEES companies' financial-related and
customer information systems. These mission critical systems
were first addressed at an individual component level, and then,
upon satisfactory completion of that testing, reviewed at an
integrated level, during which the Y2K Project team tested for
Y2K problems which could be caused by various system interfaces.
Additionally, contingency plans are being implemented for mission
critical systems, as described below.
The overall Y2K Project was designed such that Y2K-related
work performed by external consultants was reviewed by NEES
employees, and vice-versa. The Y2K Project team management
periodically benchmarked its progress against the recommended
progress schedule documented by the North American Electric
Reliability Council (NERC), and has met all recommended
schedules, including the issuance of its Year 2000 Readiness
Letter to NERC on June 30, 1999.
The NEES companies also implemented a formalized communication
process with third parties to give and receive information
related to their progress in remediating their own Y2K issues,
and to communicate the NEES companies' progress in addressing the
Y2K issue. These third parties include major customers,
suppliers, and significant businesses with which the NEES
companies have data links (such as banks). The NEES companies
have identified standard offer generation service providers,
telecommunications companies, and the Independent System
Operator-New England (ISO New England) as critical to business
operations. The NEES companies have been in contact with all of
these parties regarding the progress of their Y2K remediation
efforts, and will continue to monitor their ongoing remediation
efforts through continued communications. The NEES companies
cannot predict the outcome of other companies' remediation
efforts. Therefore, contingency plans are being implemented, as
described below.
The NEES companies believe total costs associated with making
the necessary modifications to all centralized and noncentralized
systems will be approximately $28 million. These costs include
the replacement of approximately one thousand desktop computers.
<PAGE>
In addition, the NEES companies are spending $7 million related
to the replacement of the human resources and payroll system, in
part due to the Y2K issue. As of June 30, 1999, total Y2K-related
costs of approximately $33 million have been incurred, of which
approximately $6 million have been capitalized. The NEES
companies continually review their cost estimates based upon the
overall Y2K Project status, and update these estimates as
warranted.
The NEES companies have developed and are implementing Y2K
contingency plans to allow for critical information and operating
systems to function from January 1, 2000, forward. These plans
are intended to address both internal risks as well as potential
external risks related to suppliers and customers. Part of the
contingency plan implementation for accounting and desktop
systems will include taking extensive data back-ups prior to
year-end closing. For operational systems, the NEES companies
have in place an overall disaster recovery program, which already
includes periodic disaster simulation training (for outages due
to severe weather, for instance). As part of the Y2K contingency
plan implementation, the NEES companies are reviewing their
disaster recovery plans and modifying them for Y2K-specific
issues, such as a potential loss of telecommunication services.
The NEES companies expect to hold contingency plan drills during
the third quarter of 1999.
Interregional and regional contingency plans are being
finalized utility systems throughout the United States. At a
regional level, the NEES companies are participating and
cooperating with NEPOOL and ISO New England. Overall regional
activities, including those of NEPOOL and ISO New England, are
being coordinated by the Northeast Power Coordinating Council,
whose activities are being incorporated into the interregional
coordinating effort by NERC. Drills of these interregional and
regional contingency plans are expected to be held in September
1999.
The NEES companies believe that their mission critical systems
used to deliver electricity are ready for date changes associated
with Y2K, in accordance with the criteria specified by NERC.
Recognizing that neither the NEES companies nor any other
organization can make guarantees about something as complex as
Y2K, the NEES companies also have developed and are implementing
<PAGE>
the contingency plans described above (including contingency
plans in the event of temporary disruptions of electric service)
to address potential problems caused by Y2K. In the event that a
short-term disruption in service occurs, NEES does not expect
that such a disruption would have a material impact on its
financial position or results of operation.
Earnings
- --------
Earnings for the second quarter and first six months of 1999
were $.47 per share and $1.21 per share on 59.5 million average
diluted common shares, compared with $.54 per share on 63.6
million average diluted common shares and $1.42 per share on 64.1
million average diluted common shares for the second quarter and
first six months of 1998.
The decrease in earnings for the second quarter of 1999
reflects the continuing impact of the sale of NEES' nonnuclear
generating business as well as transaction and integration costs
incurred in connection with NEES' proposed merger with National
Grid and integration costs associated with NEES' proposed
acquisition of EUA, partially offset by revenues from increased
kilowatthour (kWh) deliveries and reduced administrative costs.
Year-to-date earnings reflect the same factors affecting the
second quarter as well as significant revenue reductions due to
the impact of the restructuring of the utility business,
partially offset by improved results from NEES' investments in
unregulated ventures.
Industry restructuring and the September 1, 1998 sale of NEES'
nonnuclear generating business reduced second quarter and
year-to-date revenues and operating expenses by a net of
approximately $.38 per share and $.88 per share, respectively,
partially offset by the elimination of certain liabilities
related to open access transmission tariffs of approximately $.03
per share and $.08 per share, respectively. In addition,
earnings for the second quarter and year-to-date periods also
decreased due to merger and acquisition costs (approximately $.08
per share and $.09 per share, respectively). These decreases
were partially mitigated by the effect of NEES' 1998 common share
repurchase program and reduced interest expense and increased
interest income due to the reinvestment of the proceeds from the
sale of the nonnuclear generating business (collectively,
<PAGE>
approximately $.20 per share and $.40 per share, respectively).
As stated above, increased kWh deliveries and reduced
administrative expenses improved second quarter and year-to-date
earnings. Deliveries increased approximately 5.7 percent and 4.2
percent, respectively, due primarily to significantly warmer
weather in June 1999 and the effect of a strong economy
(approximately $.08 per share and $.11 per share, respectively).
Administrative costs decreased due, in part, to workforce
reductions (approximately $.07 per share and $.10 per share,
respectively). In addition, on a year-to-date basis, growth in
NEES' unregulated businesses reduced losses in such businesses by
approximately $.09 per share.
Operating Revenue
- -----------------
Operating revenue increased $23 million and $61 million in the
second quarter and first six months of 1999, respectively,
compared with the corresponding periods in 1998. The revenue
increase resulted from increases of approximately $65 million and
$133 million, respectively, from NEES' unregulated businesses,
principally due to acquisitions by AllEnergy Marketing Company,
L.L.C. (AllEnergy), partially offset by reduced revenue in NEES'
core regulated business. The reduction in core business revenue
resulted from the continuing impacts of industry restructuring,
partially offset by the increase in kWh deliveries and the
elimination of certain liabilities related to open access
transmission tariffs discussed above.
Operating Expenses
- ------------------
Operating expenses for the second quarter and first six months
of 1999 increased $45 million and $111 million, respectively,
compared with the corresponding periods in 1998, reflecting
increases of approximately $65 million and $129 million,
respectively, in NEES' unregulated businesses due primarily to
the increased cost of sales associated with AllEnergy's
acquisitions. These increases were partially offset by reduced
expenses in NEES' core regulated business resulting from reduced
operation and maintenance expenses and reduced property and
payroll taxes, partially offset by increased combined purchased
<PAGE>
electric energy and fuel expenses. Depreciation and amortization
expense decreased for the second quarter and increased for the
first six months of 1999.
Fuel expense and purchased power costs on a combined basis
increased by $33 million for the second quarter and $79 million
on a year-to-date basis. These increases reflect the cost of
power purchased to meet obligations to those customers who
continue to take transition power supply service from the NEES
companies, partially offset by the elimination of fuel and
purchased power costs that existed prior to the September 1, 1998
divestiture of NEES' nonnuclear generating business. In
addition, New England Power Company remains obligated to pay
predetermined amounts for the above market cost of the purchased
power contracts that were assumed by the buyer of NEES'
nonnuclear generating business. Also partially offsetting the
increase in purchased power costs were reduced costs of $4
million and $9 million in the quarter and year-to-date period,
respectively, in connection with the permanent shutdown of the
Maine Yankee nuclear power plant as well as the absence of a
refueling outage at the Vermont Yankee nuclear power plant.
The increase in AllEnergy's cost of sales of $53 million and
$105 million, respectively, reflects acquisitions of new
businesses during 1998 and 1999.
The decrease in other operation and maintenance expenses
amounted to $20 million and $47 million, respectively, and was
primarily due to reduced nonnuclear generation-related costs of
$35 million and $67 million, respectively, resulting from the
September 1, 1998 sale of NEES' nonnuclear generating facilities,
as well as reduced adminisrative costs due in part to workforce
reductions. These decreases were partially offset by costs
incurred in connection with NEES' proposed merger with National
Grid and acquisition of EUA of approximately $5 million and $6
million, respectively, as well as increased transmission wheeling
expenses of $3 million and $5 million, respectively, increased
AllEnergy-related costs of $6 million and $11 million,
respectively, reflecting new business acquisitions in 1998 and
1999, and increased costs of $6 million and $4 million,
respectively, associated with the partially owned Millstone 3 and
Seabrook 1 nuclear generating facilities which experienced
refueling outages in the second quarter.
<PAGE>
Depreciation and amortization expenses decreased in the second
quarter but increased for the year-to-date period. The second
quarter decrease is due to the depreciation and amortization of
generation-related plant in 1998 being greater than the recovery
and amortization of generation-related stranded costs in 1999.
This relationship was just the opposite in the first quarter of
1999 compared to 1998 due to a one-time accelerated recovery of
stranded costs from customers in Rhode Island in the first
quarter of 1999. This second quarter decrease was partially
offset by increased depreciation of new plant expenditures and
increased goodwill amortization in connection with acquisitions
by AllEnergy. These latter factors account for the increase on a
year-to-date basis, combined with the effect of an $11 million
annual increase in depreciation rates in accordance with the
provisions of the industry restructuring settlement in
Massachusetts that went into effect in March 1998.
Interest Expense and Other Income
- ---------------------------------
The decrease in interest expense is principally due to reduced
interest on long-term and short-term debt as a result of the
defeasance or repayment of debt in conjunction with the sale of
NEES' nonnuclear generating business.
The increase in other income primarily represents interest
income as a result of the reinvestment of the proceeds from the
sale of the nonnuclear generating business, partially offset by
reduced equity income as a result of the sale of NEES' 100
percent interest in Narragansett Energy Resources Company, a 20
percent general partner in the Ocean State Power project. Other
income also increased on a year-to-date basis due to the impact
of a write-off of loss on reacquired debt by Massachusetts
Electric Company in 1998.
Liquidity and Capital Resources
- -------------------------------
Plant expenditures for the first six months of 1999 totaled
$78 million. The funds necessary for utility plant expenditures
were primarily provided by internal funds.
<PAGE>
In the first six months of 1999, The Narragansett Electric
Company retired $3 million of mortgage bonds and the Hydro-
Transmission Companies retired $6 million of long-term debt. In
the event that NEES' proposed acquisition of EUA occurs prior to
the proposed NEES/National Grid merger, the funds necessary for
the acquisition would be provided by internally generated funds
and external borrowings.
At June 30, 1999, NEES and its consolidated subsidiaries had
lines of credit and standby bond purchase facilities with banks
totaling approximately $900 million. These lines and facilities
were used for liquidity support for $372 million of NEP bonds in
tax-exempt commercial paper mode.
On February 12, 1999, AllEnergy acquired Griffith Consumers
Company (Griffith Consumers), a full-service distributor of
residential and commercial heating oil in Washington D.C., and in
parts of Maryland, Delaware, Virginia, and West Virginia. In
addition to heating oil sales, Griffith Consumers provides
related repair, maintenance, and installation services. Griffith
Consumers' annual revenue is approximately $100 million.
On July 1, 1999, AllEnergy acquired Texas-Ohio Gas, Inc.
(Texas-Ohio), an unregulated natural gas provider with operations
and customers in 12 states. With annual revenue of approximately
$60 million, Texas-Ohio delivers natural gas to approximately
3,000 commercial and industrial customers and maintains marketing
relations with business and trade organizations across the
region.
Operating Revenue
- -----------------
Operating revenue increased $38 million in the first quarter
of 1999 compared with the corresponding period in 1998. As
discussed in the "Earnings" section, this increase reflects
increased revenue of approximately $70 million as a result of
growth of NEES' unregulated businesses and a 2.8 percent increase
in kWh deliveries to ultimate customers, partially offset by the
effects of industry restructuring. First quarter 1999 revenues
were also favorably affected by a $41 million distribution rate
increase at Massachusetts Electric Company (Massachusetts
Electric) that went into effect on March 1, 1998 in accordance
<PAGE>
with the provisions of the industry restructuring settlement in
Massachusetts.
Operating Expenses
- ------------------
Operating expenses for the first quarter of 1999 increased $66
million compared with the corresponding period in 1998,
reflecting increased purchased electric energy expenses,
increased cost of sales for AllEnergy Marketing Company, L.L.C.
(AllEnergy), and increased depreciation and amortization
expenses. These increases were partially offset by reduced fuel
costs, reduced operation and maintenance expenses, and reduced
property and payroll taxes.
The increase in AllEnergy's cost of sales reflects
acquisitions of new businesses during 1998 and early in 1999.
The decrease in operation and maintenance expenses amounted to
$27 million and was primarily due to reduced generation-related
costs of $32 million resulting from the September 1, 1998 sale of
NEES' nonnuclear generating facilities and reduced charges of
approximately $2 million from the partially owned Millstone 3
nuclear generating facility. These decreases were partially
offset by increased transmission wheeling expenses of $2 million
and increased AllEnergy-related costs of $5 million.
Depreciation and amortization expenses increased during the
first quarter primarily due to the recovery and amortization of
generation-related stranded costs in 1999 being greater than
depreciation and amortization of generation-related plant in
1998. The increase was also due in part to the effect of an $11
million increase in annual depreciation expense provided for in
the Massachusetts settlement that went into effect in March 1998,
as well as increased depreciation expense due to new utility
plant expenditures.
<PAGE>
Interest Expense and Other Income
- ---------------------------------
The decrease in interest expense is principally due to reduced
interest on long-term debt as a result of the defeasement of debt
in conjunction with the sale of NEES' nonnuclear generating
business.
The increase in other income primarily represents interest
income as a result of the reinvestment of the proceeds from the
sale of the nonnuclear generating business and the impact of a
write-off of loss on reacquired debt by Massachusetts Electric in
1998.
Liquidity and Capital Resources
- -------------------------------
Plant expenditures for the first quarter of 1999 totaled $40
million. The funds necessary for utility plant expenditures were
primarily provided by internally generated funds.
In the first three months of 1999, the Hydro-Transmission
Companies retired $3 million of long-term debt.
At March 31, 1999, NEES and its consolidated subsidiaries had
lines of credit and standby bond purchase facilities with banks
totaling approximately $900 million. These lines and facilities
were used for liquidity support for $372 million of NEP bonds in
tax-exempt commercial paper mode.
On February 12, 1999, AllEnergy acquired Griffith Consumers
Company (Griffith Consumers), a full-service distributor of
residential and commercial heating oil in Washington D.C., and in
parts of Maryland, Delaware, Virginia, and West Virginia. In
addition to heating oil sales, Griffith Consumers provides
related repair, maintenance, and installation services. Griffith
Consumers' annual revenue is approximately $100 million.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning filings for approval of the proposed
mergers with The National Grid Group plc and Eastern Utilities
Associates, discussed in Part I of this report in Management's
Discussion and Analysis of Financial Condition and Results of
Operations, is incorporated herein by reference and made a part
hereof.
Information concerning a lawsuit 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 dismissal of a lawsuit brought
against the Company and NEP by the Town of Norwood, Massachusetts
and appeals of that lawsuit and related Federal Energy Regulatory
Commission orders, and NEP's collection action, discussed in this
report in Note C of Notes to Unaudited Financial Statements, is
incorporated herein and made a part hereof.
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, settlement agreements
<PAGE>
between the Sponsors and Secondary Purchasers were 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. In May 1999, the FERC approved the
settlement agreements which fully resolve the dispute between the
Sponsors and the Secondary Purchasers.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed reports on Form 8-K dated April 9, 1999,
April 29, 1999, and June 15, 1999 containing Item 5, 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 report on Form 10-Q
for the quarter ended June 30, 1999 to be signed on its behalf by
the undersigned thereunto duly authorized.
NEW ENGLAND ELECTRIC SYSTEM
s/John G. Cochrane
John G. Cochrane,
Vice President and Treasurer
Authorized Officer, and
Chief Accounting Officer
Date: August 13, 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> JUN-30-1999
<PERIOD-TYPE> 6-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,502,470
<OTHER-PROPERTY-AND-INVEST> 245,223
<TOTAL-CURRENT-ASSETS> 573,870
<TOTAL-DEFERRED-CHARGES> 1,567,645 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,889,208
<COMMON> 64,970
<CAPITAL-SURPLUS-PAID-IN> 736,744
<RETAINED-EARNINGS> 1,000,796
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,570,418 <F3>
0
19,480 <F2>
<LONG-TERM-DEBT-NET> 1,043,879
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 39,312
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,216,119
<TOT-CAPITALIZATION-AND-LIAB> 4,889,208
<GROSS-OPERATING-REVENUE> 1,252,789
<INCOME-TAX-EXPENSE> 49,090
<OTHER-OPERATING-EXPENSES> 1,099,515
<TOTAL-OPERATING-EXPENSES> 1,148,605
<OPERATING-INCOME-LOSS> 104,184
<OTHER-INCOME-NET> 9,380
<INCOME-BEFORE-INTEREST-EXPEN> 113,564
<TOTAL-INTEREST-EXPENSE> 38,445
<NET-INCOME> 71,739
545 <F2>
<EARNINGS-AVAILABLE-FOR-COMM> 71,739
<COMMON-STOCK-DIVIDENDS> 69,855
<TOTAL-INTEREST-ON-BONDS> 34,645
<CASH-FLOW-OPERATIONS> 145,073
<EPS-BASIC> $1.21
<EPS-DILUTED> $1.21
<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>
