SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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
(508-366-9011)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Common Shares, par value $1 per share, authorized and outstanding:
64,969,652 shares at March 31, 1994.
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Periods Ended March 31
(Unaudited)
Three Months Twelve Months
------------ -------------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
Operating revenue $576,906 $579,490 $2,231,395 $2,186,501
-------- -------- ---------- ----------
Operating expenses:
Fuel for generation 62,464 62,719 226,928 235,971
Purchased electric energy 120,999 126,567 521,739 516,692
Other operation 109,729 128,574 473,235 455,990
Maintenance 32,691 34,989 143,921 160,771
Depreciation and amortization 78,669 79,249 296,051 298,714
Taxes, other than income taxes 35,315 33,188 122,620 117,567
Income taxes 45,177 33,493 132,808 106,438
-------- -------- ---------- ----------
Total operating expenses 485,044 498,779 1,917,302 1,892,143
-------- -------- ---------- ----------
Operating income 91,862 80,711 314,093 294,358
Other income:
Allowance for equity funds used during
construction 2,054 757 5,092 2,634
Equity in income of generating companies 2,628 3,089 10,556 12,814
Other income (expense) - net (369) 839 (2,362) (225)
-------- -------- ---------- ----------
Operating and other income 96,175 85,396 327,379 309,581
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 22,358 26,077 97,059 111,726
Other interest 1,645 1,634 9,819 6,141
Allowance for borrowed funds used during
construction (1,185) (511) (3,490) (2,038)
-------- -------- ---------- ----------
Total interest 22,818 27,200 103,388 115,829
-------- -------- ---------- ----------
Income after interest 73,357 58,196 223,991 193,752
Preferred dividends of subsidiaries 2,180 2,643 10,122 10,572
Minority interests 1,904 1,967 7,959 8,945
-------- -------- ---------- ----------
Net income $ 69,273 $ 53,586 $ 205,910 $ 174,235
======== ======== ========== ==========
Average common shares 64,969,65264,969,65264,969,652 64,969,652
Net income per average common share $1.07 $.82 $3.17 $2.68
Dividends declared per share $ .56 $.54 $2.24 $2.16
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
ASSETS 1994 1993
------ ---- ----
(In Thousands)
Utility plant, at original cost $4,697,392 $4,661,612
Less accumulated provisions for depreciation and amortization1,540,1791,511,271
---------- ----------
3,157,213 3,150,341
Net investment in Seabrook 1 under rate settlement 87,725 103,344
Construction work in progress 287,022 228,816
---------- ----------
Net utility plant 3,531,960 3,482,501
---------- ----------
Oil and gas properties, at full cost 1,224,849 1,220,110
Less accumulated provision for amortization 909,301 884,837
---------- ----------
Net oil and gas properties 315,548 335,273
---------- ----------
Investments:
Nuclear power companies, at equity 46,559 46,342
Other subsidiaries, at equity 44,371 44,676
Other investments, at cost 32,599 28,836
---------- ----------
Total investments 123,529 119,854
---------- ----------
Current assets:
Cash 4,447 2,876
Accounts receivable, less reserves of $16,288,000 and
$14,551,000 273,481 275,020
Unbilled revenues 37,400 43,400
Fuel, materials, and supplies, at average cost 88,966 74,314
Prepaid and other current assets 64,491 69,004
---------- ----------
Total current assets 468,785 464,614
---------- ----------
Accrued Yankee Atomic costs 96,284 103,501
Deferred charges and other assets 293,875 290,135
---------- ----------
$4,829,981 $4,795,878
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common share equity:
Common shares, par value $1 per share:
Authorized - 150,000,000 shares
Outstanding - 64,969,652 shares $ 64,970 $ 64,970
Paid-in capital 736,823 736,823
Retained earnings 760,965 728,075
---------- ----------
Total common share equity 1,562,758 1,529,868
Minority interests in consolidated subsidiaries 55,092 55,855
Cumulative preferred stock of subsidiaries 147,528 147,528
Long-term debt 1,509,306 1,511,589
---------- ----------
Total capitalization 3,274,684 3,244,840
---------- ----------
Current liabilities:
Long-term debt due within one year 22,920 12,920
Short-term debt 60,370 71,775
Accounts payable 122,890 128,342
Accrued taxes 45,208 10,332
Accrued interest 19,138 23,278
Dividends payable 35,544 36,950
Other current liabilities 152,626 153,812
---------- ----------
Total current liabilities 458,696 437,409
---------- ----------
Deferred federal and state income taxes 700,723 705,026
Unamortized investment tax credits 98,713 99,355
Accrued Yankee Atomic costs 96,284 103,501
Other reserves and deferred credits 200,881 205,747
---------- ----------
$4,829,981 $4,795,878
========== ==========
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Quarters Ended March 31
(Unaudited)
1994 1993
---- ----
(In Thousands)
Operating activities:
Net income $ 69,273 $ 53,586
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 79,814 80,624
Deferred income taxes and investment tax credits - net(6,053) (18,106)
Allowance for funds used during construction (3,239) (1,268)
Minority interests 1,904 1,967
Early retirement program 23,922
Decrease (increase) in accounts receivable,
net and unbilled revenues 7,539 (1,477)
Decrease (increase) in fuel, materials, and supplies(14,652) 7,556
Increase (decrease) in accounts payable (5,452) (42,993)
Increase (decrease) in other current liabilities 29,550 69,620
Other, net (2,825) (5,235)
--------- ---------
Net cash provided by operating activities $ 155,859 $ 168,196
--------- ---------
Investing activities:
Plant expenditures, excluding allowance for
funds used during construction $(100,141) $ (60,314)
Oil and gas exploration and development (4,739) (3,807)
Other investing activities (5,267) 284
--------- ---------
Net cash used in investing activities $(110,147) $ (63,837)
--------- ---------
Financing activities:
Dividends paid to minority interests $ (2,171) $ (72)
Dividends paid on NEES common shares (38,285) (35,647)
Short-term debt (11,405) (42,250)
Long-term debt - issues 15,000 159,500
Long-term debt - retirements (7,280) (147,780)
Premium on reacquisition of long-term debt (1,127)
--------- ---------
Net cash used in financing activities $ (44,141) $ (67,376)
--------- ---------
Net increase in cash and cash equivalents $ 1,571 $ 36,983
Cash and cash equivalents at beginning of period 2,876 2,768
--------- ---------
Cash and cash equivalents at end of period $ 4,447 $ 39,751
========= =========
Supplementary information:
Interest paid less amounts capitalized $ 25,703 $ 25,274
--------- ---------
Federal and state income taxes paid $ 22,358 $ 10,540
--------- ---------
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Retained Earnings
Periods Ended March 31
(Unaudited)
Three Months Twelve Months
------------ -------------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
Retained earnings at beginning of period $728,075 $684,132 $ 702,635 $ 668,734
Net income 69,273 53,586 205,910 174,235
Dividends declared on common shares (36,383) (35,083) (145,533) (140,334)
Premium on redemption of preferred
stock of subsidiaries (2,047)
-------- -------- --------- ---------
Retained earnings at end of period $760,965 $702,635 $ 760,965 $ 702,635
======== ======== ========= =========
Consolidated Electric Operating Statistics
Periods Ended March 31
Three Months Twelve Months
------------ -------------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands of KWH)
Generated at nuclear power plants 476,725 503,355 1,670,047 1,674,277
Generated at system thermal plants 3,270,716 3,260,905 11,635,355 11,970,093
Generated at system hydro plants 301,764 289,433 1,266,256 1,145,218
Generated at pumped storage plant 119,970 134,915 533,413 554,669
Less energy for pumping 166,068 185,233 731,619 761,881
--------- --------- ---------- ----------
Total generated 4,003,107 4,003,375 14,373,452 14,582,376
Nuclear entitlements 559,391 695,425 2,060,964 2,635,181
Purchased electric energy 2,055,210 1,853,928 8,017,925 7,129,590
--------- --------- ---------- ----------
Total generated and purchased 6,617,708 6,552,728 24,452,341 24,347,147
Less losses, company use, etc. 344,652 247,584 1,694,351 1,557,662
--------- --------- ---------- ----------
Total sales 6,273,056 6,305,144 22,757,990 22,789,485
========= ========= ========== ==========
The accompanying notes are an integral part of these 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.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. 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. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System (NEES) subsidiaries currently have in place an
environmental audit program intended to enhance compliance with
existing federal, state, and local requirements regarding the
handling of potentially hazardous products and by-products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against NEES
and certain subsidiaries regarding liability for cleanup of sites
alleged to contain hazardous waste or substances. NEES and/or its
subsidiaries have been named as a potentially responsible party
(PRP) by either the U.S. Environmental Protection Agency (EPA) or
the Massachusetts Department of Environmental Protection (DEP) for
19 sites at which hazardous waste is alleged to have been disposed.
NEES and its subsidiaries are also aware of other sites which they
may be held responsible for remediating and it is likely that, in
the future, NEES and its subsidiaries will become involved in
additional proceedings demanding contribution for the cost of
remediating additional hazardous waste sites.
The most prevalent types of hazardous waste sites that NEES and
its subsidiaries have been connected with are former manufactured
gas locations. Until the early 1970's, NEES was a combined
electric and gas holding company system. NEES is currently aware
of approximately 40 locations (including one of the 19 locations
for which NEES companies are PRPs) at which gas may have been
manufactured and/or stored. Of the manufactured gas locations, 17
have been listed for investigation by the DEP. In a lawsuit
involving one of these sites, the United States Court of Appeals
for the First Circuit affirmed in 1993 an earlier adverse decision
Note A - Hazardous Waste - Continued
- ------------------------
against NEES, Massachusetts Electric Company (Massachusetts
Electric), and New England Power Service Company. The decision
held these companies liable for cleanup of the properties involved
in the case.
In 1993, the Massachusetts Department of Public Utilities
approved a rate agreement filed by Massachusetts Electric that
resolved all rate recovery issues related to Massachusetts
manufactured gas sites as well as certain other Massachusetts
hazardous waste sites. The agreement allows for environmental
remediation costs for such sites to be met from a special interest
bearing fund established on Massachusetts Electric's books. The
fund's initial balance of $30 million has come from previously
recorded reserves and is not recoverable from customers. Annual
contributions of $3 million, adjusted for inflation, are being
added to the fund by Massachusetts Electric and are recoverable in
rates. Under the agreement, any shortfalls in the fund will be
paid by Massachusetts Electric and be recovered through rates over
seven years, without interest.
One of the sites for which NEES has been named a PRP and has
been the subject of extensive litigation is the Pine Street Canal
Superfund site in Burlington, Vermont. Approximately 18 parties,
including NEES, have been notified by the EPA that they are PRPs
for cleanup of the Pine Street Canal site, at which coal tar and
other materials were deposited. Between 1931 and 1951, NEES and
its predecessor owned all of the common stock of Green Mountain
Power Corporation. Prior to, during, and after that time, gas was
manufactured at the Pine Street Canal site. Among the waste by-
products of that process were coal and oil tars. The EPA had
brought a lawsuit against NEES and other parties to recover all of
the EPA's past and future response costs at this site. In 1990,
the litigation ended with the filing of a final consent decree with
the court. Under the terms of the settlement, to which 14 entities
were party, the EPA recovered its past response costs. NEES
recorded its share of these costs in 1989. NEES remains a PRP for
ongoing and future response costs. In November 1992, the EPA
proposed a cleanup plan estimated by the EPA to cost $50 million.
In June 1993, the EPA withdrew this cleanup plan in response to
public concern about the plan and the cost. It is not known at
this time what the ultimate cleanup plan will be, how much it will
cost, or what portion NEES will have to pay.
Note A - Hazardous Waste - Continued
- ------------------------
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates 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. At March 31, 1994, NEES had total reserves for
environmental response costs of $52 million and a related
regulatory asset of $18 million.
NEES believes that hazardous waste liabilities for all sites of
which it is aware, and which are not covered by a rate agreement,
will not be material (10 percent of common equity) to its financial
position. Where appropriate, the NEES companies intend to seek
recovery from their insurers and from other PRPs, but it is
uncertain whether, and to what extent, such efforts would be
successful.
Note B
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the financial statements in NEES' 1993 Annual Report.
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Earnings
- --------
Earnings for the first quarter of 1994 were $1.07 per share as
compared to $.82 per share earned in the first quarter of 1993.
Earnings in the first quarter of 1993 included a one-time charge of
$.27 per share associated with an early retirement offer and
special severance program for non-union employees undertaken by New
England Electric System (NEES) subsidiaries as part of an
organizational review. Excluding the effect of this 1993 charge,
1994 first quarter earnings decreased $.02 per share from the first
quarter of the previous year. This decrease reflects a $6 million
seasonal reduction in accrued unbilled revenue recorded in the
first quarter of 1994 compared to the December 1993 level.
Massachusetts Electric Company (Massachusetts Electric) received
approval from regulators to begin accruing for electricity
delivered but not yet billed in the fourth quarter of 1993 as part
of a comprehensive rate agreement. (See Rate Activity section.)
The decrease in earnings was partially offset by increased
kilowatthour (KWH) sales. KWH sales billed to ultimate customers
in the first quarter of 1994 increased 2.1 percent over the same
period last year. The increased sales reflect the colder weather
conditions in the first quarter of 1994 and an improving economy,
partially offset by a reduction of one billing day due to meter
reading schedules.
Rate Activity
- -------------
In 1993, the Massachusetts Department of Public Utilities
(MDPU) approved a rate agreement filed by Massachusetts Electric,
the Massachusetts Attorney General, and two groups of large
commercial and industrial customers.
Under the agreement, effective December 1, 1993, Massachusetts
Electric began implementing an 11 month general rate decrease of
$26 million (annual basis), from the level of rates then in effect.
This rate reduction will continue in effect until October 31, 1994,
after which rates will increase to the previously approved levels.
The agreement also provides for rate discounts of up to $4 million
available for the period ending October 31, 1994 for large
commercial and industrial customers who sign agreements to give a
five year notice to Massachusetts Electric before they purchase
power from another supplier or generate any additional power
themselves. The notice provision may be reduced from five to three
years under certain conditions. These discounts will increase in
November 1994 to a level of $11 million per year, representing a
five percent discount on base rates, if all eligible customers sign
agreements. Approximately 80 percent of eligible customers have
signed agreements. Massachusetts Electric also agreed not to
increase its base rates before October 1, 1995. The decrease in
revenues is being offset by the recognition for accounting purposes
of revenues for electricity delivered but not yet billed. The
agreement provided that unbilled revenue at September 30, 1993 of
approximately $35 million be amortized over thirteen months
commencing December 1, 1993.
The agreement also resolved all issues associated with
providing funds and securing rate recovery for environmental
remediation costs of Massachusetts manufactured gas waste sites
formerly owned by Massachusetts Electric and its affiliates, as
well as certain other Massachusetts Electric environmental cleanup
costs (see Hazardous Waste section).
The Narragansett Electric Company (Narragansett) filed a rate
agreement with the Rhode Island Public Utilities Commission (RIPUC)
on April 27, 1994. The agreement between Narragansett and the
Rhode Island Division of Public Utilities and Carriers would
provide for a five percent base rate discount, excluding fuel costs
in base rates, for Narragansett's large commercial and industrial
customers who sign an agreement to give a five year notice to
Narragansett before they purchase power from another supplier or
generate any additional power themselves. The notice provision may
be reduced from five to three years under certain conditions. The
amount of the proposed discount, if all eligible customers sign
agreements, is estimated at $4 million per year. The agreement
would also provide for Narragansett to begin recognizing unbilled
revenues for accounting purposes. Unbilled revenues at December
31, 1993, of approximately $14 million would be amortized to income
over the twenty-one month period April 1994 through December 1995.
The agreement, which is being opposed by certain parties, is
subject to review and approval by the RIPUC.
In 1993, a new accounting standard for postretirement benefits
other than pensions (PBOPs) went into effect that requires
employers to establish a liability for the expected costs of PBOPs
during the working years of employees instead of recording such
costs when paid. Each of the NEES subsidiaries has received
regulatory approval to recover the effect of this standard on a
current and/or deferred basis. The Federal Energy Regulatory
Commission (FERC) has allowed New England Power Company (NEP) to
defer increased costs resulting from this new standard, pending its
next rate filing so long as such filing occurs before the end of
1995. Accordingly, the NEES subsidiaries recovered approximately
$5 million in rates in 1993 and are recovering approximately $9
million in 1994. The total amount of PBOP costs deferred for
future recovery at March 31, 1994 was approximately $30 million
including $5 million during the first quarter of 1994.
Demand-Side Management
- ----------------------
The retail companies file their conservation and load
management programs, also referred to in the industry as demand-
side management (DSM) programs, regularly with their respective
regulatory agencies and have received approval to recover in rates
estimated DSM expenditures on a current basis. The rates provide
for reconciling estimated expenditures to actual DSM expenditures,
with interest. Expenditures subject to the reconciliation
mechanism were $8 million in the first three months of 1994 and $62
million for the full year 1993. Since 1990, the retail companies
have been allowed to earn incentives based on the results of their
DSM programs. The retail companies must be able to demonstrate to
their respective state regulatory agencies the electricity savings
produced by their DSM programs before incentives are recorded.
During 1993, the retail companies recorded a total of $7.3 million
of incentives. The retail companies have received regulatory
approvals that will give them the opportunity to continue to earn
incentives on 1994 DSM program results.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
First Quarter
-------------
1994 vs 1993
-------------
(In Millions)
Fuel recovery $(4)
Rate changes (7)
Oil and gas sales (2)
Sales growth and other 8
Unbilled revenue amortized under
rate agreement 8
Change in accrued unbilled revenue (6)
---
$(3)
===
KWH sales to ultimate customers in the first quarter of 1994
increased by 2.1 percent over the same period last year. The
increased sales reflect the colder weather conditions in the first
quarter of 1994 and an improving economy, partially offset by a
reduction of one billing day due to meter reading schedules. KWH
sales in 1994 are expected to increase approximately one to one and
one-half percent as compared to 1993.
The decrease in revenue due to rate changes primarily reflects
Massachusetts Electric's general rate decrease implemented in the
fourth quarter of 1993 and will stay in effect until October 31,
1994 when rates will increase to their previously authorized level.
This decrease was offset by the amortization of $8 million of
unbilled revenue pursuant to the 1993 Massachusetts Electric rate
agreement. Massachusetts Electric is now recognizing quarterly
seasonal fluctuations in unbilled revenues on an ongoing basis
which for the first quarter of 1994 was a decrease of $6 million.
The decrease in oil and gas sales is primarily due to lower oil
and gas prices and decreased production.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses during the period:
Increase (Decrease) in Total Operating Expenses
First Quarter
-------------
1994 vs 1993
-------------
(In Millions)
Total fuel costs $ (4)
Purchased energy excluding fuel (2)
Other operation and maintenance (21)
Depreciation and amortization (1)
Taxes 14
----
$(14)
====
Total fuel costs represents fuel for generation and the portion
of purchased electric energy recovered through NEP's fuel
adjustment clause. Purchased energy excluding fuel represents the
remainder of purchased electric energy costs.
The decrease in other operation and maintenance expense
reflects the recording in the first quarter of 1993 of $28 million
of one-time costs associated with an early retirement offer and
special severance program, partially offset by increased computer
system development costs and general increases in other areas.
The increase in taxes is primarily due to increased income, the
effects of the increase in the Federal corporate income tax rate
from 34 percent to 35 percent which went into effect in the third
quarter of 1993 retroactive to January 1, 1993, and increased
property taxes.
Interest Expense
- ----------------
The decrease in interest expense is primarily due to
significant refinancings of corporate debt at lower interest rates
during 1993.
Oil and Gas Operations
- ----------------------
New England Energy Incorporated (NEEI) participates in a
rate-regulated domestic oil and gas exploration, development, and
production program consisting of prospects acquired prior to
December 31, 1983. NEEI is not acquiring any new prospects. Due
to precipitate declines in oil and gas prices, NEEI has incurred
operating losses since 1986, and expects to incur substantial
additional losses in the future. These losses are being passed on
to NEP under an intercompany pricing policy approved by the
Securities and Exchange Commission. NEP is allowed to recover
these losses from its customers under NEP's 1988 FERC rate
settlement, which covered all costs incurred by or resulting from
commitments made by NEEI through March 1, 1988. Other subsequent
costs incurred by NEEI are subject to normal regulatory review.
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.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. 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. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. NEES subsidiaries
currently have in place an environmental audit program intended to
enhance compliance with existing federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against NEES
and certain subsidiaries regarding liability for cleanup of sites
alleged to contain hazardous waste or substances. NEES and/or its
subsidiaries have been named as a potentially responsible party
(PRP) by either the U.S. Environmental Protection Agency (EPA) or
the Massachusetts Department of Environmental Protection (DEP) for
19 sites at which hazardous waste is alleged to have been disposed.
NEES and its subsidiaries are also aware of other sites which they
may be held responsible for remediating and it is likely that, in
the future, NEES and its subsidiaries will become involved in
additional proceedings demanding contribution for the cost of
remediating additional hazardous waste sites.
The most prevalent types of hazardous waste sites that NEES and
its subsidiaries have been connected with are former manufactured
gas locations. Until the early 1970's, NEES was a combined
electric and gas holding company system. NEES is currently aware
of approximately 40 locations (including one of the 19 locations
for which NEES companies are PRPs) at which gas may have been
manufactured and/or stored. Of the manufactured gas locations, 17
have been listed for investigation by the DEP. In a lawsuit
involving one of these sites, the United States Court of Appeals
for the First Circuit affirmed in 1993 an earlier adverse decision
against NEES, Massachusetts Electric, and New England Power Service
Company (NEPSCo). The decision held these companies liable for
cleanup of the properties involved in the case.
In 1993, the MDPU approved a rate agreement filed by
Massachusetts Electric (see Rate Activity section) that resolved
all rate recovery issues related to Massachusetts manufactured gas
sites as well as certain other Massachusetts hazardous waste sites.
The agreement allows for environmental remediation costs for such
sites to be met from a special interest bearing fund established on
Massachusetts Electric's books. The fund's initial balance of $30
million has come from previously recorded reserves and is not
recoverable from customers. Annual contributions of $3 million,
adjusted for inflation, are being added to the fund by
Massachusetts Electric and are recoverable in rates. Under the
agreement, any shortfalls in the fund will be paid by Massachusetts
Electric and be recovered through rates over seven years, without
interest.
One of the sites for which NEES has been named a PRP and has
been the subject of extensive litigation is the Pine Street Canal
Superfund site in Burlington, Vermont. Approximately 18 parties,
including NEES, have been notified by the EPA that they are PRPs
for cleanup of the Pine Street Canal site, at which coal tar and
other materials were deposited. Between 1931 and 1951, NEES and
its predecessor owned all of the common stock of Green Mountain
Power Corporation. Prior to, during, and after that time, gas was
manufactured at the Pine Street Canal site. Among the waste by-
products of that process were coal and oil tars. The EPA had
brought a lawsuit against NEES and other parties to recover all of
the EPA's past and future response costs at this site. In 1990,
the litigation ended with the filing of a final consent decree with
the court. Under the terms of the settlement, to which 14 entities
were party, the EPA recovered its past response costs. NEES
recorded its share of these costs in 1989. NEES remains a PRP for
ongoing and future response costs. In November 1992, the EPA
proposed a cleanup plan estimated by the EPA to cost $50 million.
In June 1993, the EPA withdrew this cleanup plan in response to
public concern about the plan and the cost. It is not known at
this time what the ultimate cleanup plan will be, how much it will
cost, or what portion NEES will have to pay.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates 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. At March 31, 1994, NEES had total reserves for
environmental response costs of $52 million and a related
regulatory asset of $18 million.
NEES believes that hazardous waste liabilities for all sites
of which it is aware, and which are not covered by a rate
agreement, will not be material (10 percent of common equity) to
its financial position. Where appropriate, the NEES companies
intend to seek recovery from their insurers and from other PRPs,
but it is uncertain whether, and to what extent, such efforts would
be successful.
Electric and Magnetic Fields (EMF)
- ---------------------------------
In recent years, concerns have been raised about whether EMF,
which occur near transmission and distribution lines as well as
near household wiring and appliances, cause or contribute to
adverse health effects. Numerous studies on the effects of these
fields, some of them sponsored by electric utilities (including
NEES companies), have been conducted and are continuing. Some of
the studies have suggested associations between certain EMF and
various types of cancer, while other studies have not substantiated
such associations. In February 1993, the EPA called for
significant additional research on EMF. It is impossible to
predict the ultimate impact on NEES subsidiaries and the electric
utility industry if further investigations were to demonstrate that
the present electricity delivery system is contributing to
increased risk of cancer or other health problems.
Several state courts have recognized a cause of action for
damage to property values in transmission line condemnation cases
based on the fear that power lines cause cancer. It is difficult
to predict what impact there would be on the NEES companies if this
cause of action is recognized in the states in which NEES companies
operate and in contexts other than condemnation cases.
A lawsuit concerning the proposed expansion of a transmission
line was filed on April 28, 1994 against NEES, Narragansett, and
NEPSCo, in the Superior Court of Rhode Island. The plaintiffs are
residents of property which borders existing Narragansett
transmission lines in East Greenwich, Rhode Island. Narragansett
has a proposal before the Rhode Island Energy Facilities Siting
Board (EFSB) to upgrade one of the lines and relocate the lines on
the existing right of way. The plaintiffs allege that fear of
health risks from exposure to high voltage power lines has devalued
their property and ask for unspecified damages. The plaintiffs
have also asked for an injunction to halt the proposed changes to
the transmission lines and an order to remove the existing power
lines. After preliminary review of the complaint, NEES,
Narragansett, and NEPSCo do not expect that the plaintiffs will
prevail. The EFSB is currently conducting hearings on
Narragansett's proposal to upgrade and relocate the transmission
lines.
Bills have been introduced in the Rhode Island legislature to
require that transmission lines be placed underground. In July
1993, two bills passed by the legislature restricting the
construction of overhead transmission lines were vetoed by the
governor. EMF-related legislation has also been introduced in
Massachusetts.
Clean Air Requirements
- ----------------------
NEP produces approximately 50 percent of its electricity at
eight older thermal generating units located in Massachusetts. The
1990 amendments to the federal Clean Air Act require a significant
reduction in the nation's sulfur dioxide (SO2) and nitrogen oxide
(NOx) emissions by the year 2000. Under the amendments, NEP is not
subject to Phase 1 of the acid rain provisions of the federal law
that will become effective in 1995. However, NEP is subject to the
Massachusetts SO2 acid rain law that will become effective in 1995.
Phase 2 of the federal acid rain requirements, effective in 2000,
will apply to NEP and its units.
Under the federal Clean Air Act, state environmental agencies
in ozone non-attainment areas were required to develop regulations
(also known as Reasonably Available Control Technology
requirements, or RACT) that will become effective in 1995 to
address the first phase of ozone air quality attainment. These
regulations were adopted in Massachusetts in September 1993. The
RACT regulations require control technologies (such as low NOx
burners) to reduce NOx emissions, an ozone precursor. Additional
control measures may be necessary to ensure attainment of the ozone
standard. These measures would have to be developed by the states
in 1994 and fully implemented no later than 1999. The extent of
these additional control measures is unknown at this time, but
could range from minor additions to the RACT requirements to
extensive emission reduction requirements, such as costly add-on
controls or fuel switching. Should the 1999 ozone attainment
requirements be extensive or additional Clean Air Act or other
environmental requirements be imposed, continued operation of
certain existing generating units beyond 1999 could be
uneconomical. NEP believes that premature retirement of
substantially all of its older thermal generating units would cause
substantial rate increases.
To date, NEP has expended $8 million of one-time operation and
maintenance costs and $55 million of capital costs in connection
with Massachusetts and federal Clean Air Act compliance
requirements. NEP expects to incur additional one-time operation
and maintenance costs of approximately $17 million and capital
costs of approximately $60 million in 1994 and 1995 to comply with
the federal and state clean air requirements that will become
effective in 1995. In addition, as a result of federal and state
clean air requirements, NEP will begin incurring increased fuel
costs which are estimated to reach an annual level of $13 million
by 1995.
The generation of electricity from fossil fuels may emit trace
amounts of hazardous air pollutants as defined in the Clean Air Act
Amendments of 1990. The Act mandates a study of the potential
dangers of hazardous air pollutant emissions from electric utility
plants. Such research is currently under way and is expected to be
complete in 1995. The study conclusions could result in new
emission standards and the need for additional costly controls on
NEP plants. At this time, NEES and its subsidiaries cannot
estimate the impact that findings of this research might have on
operations.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to increasing
competitive pressures, stemming from a combination of increasing
electric rates, improved technologies, and new regulations and
legislation intended to foster competition. Recently, this
competition has been most prominent in the bulk power market in
which non-utility generating sources have noticeably increased
their market share. For example, in 1984, less than one percent of
NEP's capacity was supplied by non-utility generation sources. By
the end of 1993, non-utility power purchases accounted for 380 MW
or seven percent of NEP's total capacity. In addition to
competition from non-utility generators, the presence of excess
generating capacity in New England has resulted in the sale of bulk
power by utilities at prices less than the total costs of owning
and operating such generating capacity.
Electric utilities are also facing increased competition in the
retail market. Currently, retail competition comes primarily from
alternative fuel suppliers (principally natural gas companies) for
heating and cooling, customer-owned generation to displace
purchases from electric utilities, and direct competition among
electric utilities to attract major new manufacturing facilities to
their service territories. In the future, the potential exists for
electric utilities and non-utility generators to sell electricity
to retail customers of other electric utilities. For example, the
California Public Utilities Commission recently announced a
proposal that would give certain large retail customers in that
state, by the year 1996, and all other retail customers by the year
2002, the option of selecting their electricity provider. Power
purchased from another provider would still be delivered over the
local utility's transmission network which, under the proposal,
would be subject to broader access. Other states, including
Massachusetts and Rhode Island have considered or are in the
process of considering options to foster increased competition.
The NEES companies are responding to current and anticipated
competitive pressures in a variety of ways including cost control
and a corporate reorganization into separate retail and wholesale
business units. The wholesale business unit is positioning itself
for increased competition through such means as terminating certain
purchased power contracts, past and future shutdowns of uneconomic
generating stations, and rapid amortization of certain plant
assets. NEP's rates currently include approximately $100 million
per year associated with the recovery of certain Seabrook 1 costs
under a 1988 rate settlement and coal conversion expenditures at
NEP's Salem Harbor station. The recovery of these costs will be
completed prior to the end of 1995. The retail business unit's
response to competition includes the development of value-added
services for customers and the offering of economic development
rates to encourage businesses to locate in our service territory.
In its recent rate settlement, Massachusetts Electric was able to
change the standard terms under which it offers service to
commercial and industrial customers to extend the notice period a
customer must give before purchasing electricity from others or
generating any additional electricity for the customer's own use
from one year to two. In addition, Massachusetts Electric began
offering a discount from base rates in return for a contract
requiring the customer to provide five years written notice before
purchasing electricity from others or generating any additional
electricity for the customer's own use. The discount is available
to customers with average monthly peak demands over 500 kilowatts.
A similar proposal is pending before Narragansett's regulators.
Electric utility rates are generally based on a utility's
costs. Therefore, electric utilities are subject to certain
accounting standards that are not applicable to other business
enterprises in general. These accounting rules allow regulated
entities, in appropriate circumstances, to establish regulatory
assets and to defer the income statement impact of certain costs
that are expected to be recovered in future rates. The effects of
competition could ultimately cause the operations of the NEES
companies, or a portion thereof, to cease meeting the criteria for
application of these accounting rules. While the NEES companies do
not expect to cease meeting these criteria in the near future, if
this were to occur, accounting standards of enterprises in general
would apply and immediate recognition of any previously deferred
costs would be necessary in the year in which these criteria were
no longer applicable.
Liquidity and Capital Resources
- -------------------------------
Plant expenditures in the first three months of 1994 amounted
to $100 million for the utility subsidiaries, including $53 million
related to the Manchester Street Station Repowering project. The
necessary funds were primarily provided by net cash from operating
activities after the payment of dividends.
The financing activities of NEES subsidiaries for the first
three months of 1994 are summarized as follows:
Issues Retirements
------ -----------
(In Millions)
Long-term debt
- --------------
Massachusetts Electric $10
Narragansett 5
Hydro-Transmission Companies $3
NEEI 4
--- --
$15 $7
=== ==
The interest rate on the new long-term debt issues shown above
was 7.05 percent. In May 1994, an additional $13 million of new
long-term debt was issued at rates ranging from 6.91 to 8.08
percent. NEP and the retail subsidiaries plan to issue $112
million of additional long-term debt in 1994.
Net cash from operating activities provided all of the funds
necessary for oil and gas expenditures for the first three months
of 1994. NEEI's capitalized oil and gas exploration and
development costs amounted to $5 million, including $2 million of
capitalized interest costs.
At March 31, 1994, NEES' consolidated subsidiaries had $60
million of short-term debt outstanding in the form of commercial
paper borrowings. NEES and its consolidated subsidiaries currently
have lines of credit with banks totaling $461 million. These lines
of credit are available to provide liquidity support for commercial
paper borrowings and for $252 million of NEP's outstanding variable
rate mortgage bonds in commercial paper mode and for other
corporate purposes. There were no borrowings under these lines of
credit at March 31, 1994. Cash and temporary cash investments at
March 31, 1994 were approximately $4 million.
The NEES subsidiaries' major construction project is the
repowering of Manchester Street Station, a 140 MW electric
generating station in Providence, Rhode Island. Repowering will
more than triple the power generation capacity of Manchester Street
Station and substantially increase the plant's thermal efficiency.
NEP owns a 90 percent interest and Narragansett owns a 10 percent
interest in the Manchester Street Station. The total cost for the
generating station, scheduled for completion in late 1995, is
estimated to be approximately $525 million, including allowance for
funds used during construction (AFDC). In addition, related
transmission work, which is the principal responsibility of
Narragansett, is estimated to cost approximately $75 million and is
scheduled for completion in late 1994. At March 31, 1994, $217
million, including AFDC, had been spent on the project which
includes the related transmission work. Substantial commitments
have been made relative to future planned expenditures for this
project.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning the rate agreement filed by The
Narragansett Electric Company (Narragansett) with the Rhode Island
Public Utilities Commission, discussed in Part I of this report in
Management's Discussion and Analysis of Financial Condition and
Results of Operations, is incorporated herein by reference and made
a part hereof.
Information concerning a lawsuit filed against NEES,
Narragansett, and New England Power Service Company in the Superior
Court of Rhode Island regarding the proposed expansion of a
transmission line, 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 rate filings for demand-side management
programs for each of the retail subsidiaries of NEES, 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.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-Q for
the quarter ended March 31, 1994 to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ENGLAND ELECTRIC SYSTEM
s/ Alfred D. Houston
Alfred D. Houston
Executive Vice President,
Authorized Officer, and
Principal Financial Officer
Date: May 11, 1994
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.