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, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-3446 (LOGO) NEW ENGLAND ELECTRIC SYSTEM (Exact name of registrant as specified in charter) MASSACHUSETTS 04-1663060 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 25 Research Drive, Westborough, Massachusetts 01582 (Address of principal executive offices) Registrant's telephone number, including area code (508-389-2000) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Common Shares, par value $1 per share, authorized and outstanding: 64,925,204 shares at June 30, 1995. PART I FINANCIAL INFORMATION Item 1. Financial Statements ---------------------------- NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Periods Ended June 30 (Unaudited) Quarter Six Months ------- ---------- 1995 1994 1995 1994 ---- ---- ---- ---- (In Thousands) Operating revenue $533,547 $517,078 $1,091,863 $1,093,984 -------- -------- ---------- ---------- Operating expenses: Fuel for generation 58,468 53,314 107,427 115,778 Purchased electric energy 140,290 119,026 285,785 240,025 Other operation 119,056 116,115 231,133 225,844 Maintenance 33,997 39,362 75,126 72,053 Depreciation and amortization 68,832 77,567 140,825 156,236 Taxes, other than income taxes 32,244 31,200 67,559 66,515 Income taxes 20,779 22,778 50,742 67,955 -------- -------- ---------- ---------- Total operating expenses 473,666 459,362 958,597 944,406 -------- -------- ---------- ---------- Operating income 59,881 57,716 133,266 149,578 Other income: Allowance for equity funds used during construction 2,771 2,627 5,381 4,681 Equity in income of generating companies 2,777 2,633 5,329 5,261 Other income (expense) - net (59) (1,145) 493 (1,514) -------- -------- ---------- ---------- Operating and other income 65,370 61,831 144,469 158,006 -------- -------- ---------- ---------- Interest: Interest on long-term debt 27,065 22,875 53,144 45,233 Other interest 3,765 2,935 8,351 4,580 Allowance for borrowed funds used during construction (3,272) (1,630) (6,596) (2,815) -------- -------- ---------- ---------- Total interest 27,558 24,180 54,899 46,998 -------- -------- ---------- ---------- Income after interest 37,812 37,651 89,570 111,008 Preferred dividends of subsidiaries 2,173 2,173 4,345 4,353 Minority interests 2,108 1,894 4,032 3,798 -------- -------- ---------- ---------- Net income $ 33,531 $ 33,584 $ 81,193 $ 102,857 ======== ======== ========== ========== Average common shares 64,958,823 64,969,652 64,964,238 64,969,652 Net income per average common share $.52 $ .51 $ 1.25 $ 1.58 Dividends declared per share $.59 $.575 $1.165 $1.135 The accompanying notes are an integral part of these financial statements. NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Income Twelve Months Ended June 30 (Unaudited) 1995 1994 ---- ---- (In Thousands) Operating revenue $2,240,908 $2,230,337 ---------- ---------- Operating expenses: Fuel for generation 212,605 236,913 Purchased electric energy 559,903 507,139 Other operation 500,030 452,554 Maintenance 164,546 144,147 Depreciation and amortization 285,712 298,326 Taxes, other than income taxes 126,884 123,854 Income taxes 111,044 141,640 ---------- ---------- Total operating expenses 1,960,724 1,904,573 ---------- ---------- Operating income 280,184 325,764 Other income: Allowance for equity funds used during construction 10,869 6,818 Equity in income of generating companies 9,826 10,483 Other income (expense) - net (1,849) (3,893) ---------- ---------- Operating and other income 299,030 339,172 ---------- ---------- Interest: Interest on long-term debt 101,411 94,860 Other interest 15,069 11,329 Allowance for borrowed funds used during construction (11,574) (4,594) ---------- ---------- Total interest 104,906 101,595 ---------- ---------- Income after interest 194,124 237,577 Preferred dividends of subsidiaries 8,689 9,652 Minority interests 7,673 7,577 ---------- ---------- Net income $ 177,762 $ 220,348 ========== ========== Average common shares 64,966,945 64,969,652 Net income per average common share $ 2.74 $ 3.39 Dividends declared per share $2.315 $2.255 The accompanying notes are an integral part of these financial statements. NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) June 30, December 31, ASSETS 1995 1994 ------ ---- ---- (In Thousands) Utility plant, at original cost $5,007,112 $4,914,807 Less accumulated provisions for depreciation and amortization 1,672,143 1,610,378 ---------- ---------- 3,334,969 3,304,429 Net investment in Seabrook 1 under rate settlement 22,814 38,283 Construction work in progress 450,375 374,009 ---------- ---------- Net utility plant 3,808,158 3,716,721 ---------- ---------- Oil and gas properties, at full cost 1,257,126 1,248,343 Less accumulated provision for amortization 1,001,275 964,069 ---------- ---------- Net oil and gas properties 255,851 284,274 ---------- ---------- Investments: Nuclear power companies, at equity 46,669 46,349 Other subsidiaries, at equity 41,070 42,195 Other investments, at cost 53,476 50,895 ---------- ---------- Total investments 141,215 139,439 ---------- ---------- Current assets: Cash 4,103 3,047 Accounts receivable, less reserves of $17,716,000 and $15,095,000 258,587 295,627 Unbilled revenues 46,900 55,900 Fuel, materials and supplies, at average cost 107,734 94,431 Prepaid and other current assets 77,649 76,718 ---------- ---------- Total current assets 494,973 525,723 ---------- ---------- Accrued Yankee Atomic costs 107,769 122,452 Deferred charges and other assets 319,251 296,232 ---------- ---------- $5,127,217 $5,084,841 ========== ========== CAPITALIZATION AND LIABILITIES ------------------------------ Capitalization: Common share equity: Common shares, par value $1 per share: Authorized - 150,000,000 shares Issued - 64,969,652 shares $ 64,970 $ 64,970 Paid-in capital 736,823 736,823 Retained earnings 784,549 779,045 ---------- ---------- 1,586,342 1,580,838 Less 44,448 shares of treasury stock, at cost 1,490 ---------- ---------- Total common share equity 1,584,852 1,580,838 Minority interests in consolidated subsidiaries 52,357 55,066 Cumulative preferred stock of subsidiaries 147,016 147,016 Long-term debt 1,630,248 1,520,488 ---------- ---------- Total capitalization 3,414,473 3,303,408 ---------- ---------- Current liabilities: Long-term debt due within one year 32,520 65,920 Short-term debt 226,180 233,970 Accounts payable 130,665 168,937 Accrued taxes 13,118 11,002 Accrued interest 28,453 25,193 Dividends payable 38,435 37,154 Other current liabilities 95,525 93,251 ---------- ---------- Total current liabilities 564,896 635,427 ---------- ---------- Deferred federal and state income taxes 749,811 751,855 Unamortized investment tax credits 93,583 94,930 Accrued Yankee Atomic costs 107,769 122,452 Other reserves and deferred credits 196,685 176,769 ---------- ---------- $5,127,217 $5,084,841 ========== ========== The accompanying notes are an integral part of these financial statements. NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 30 (Unaudited) 1995 1994 ---- ---- (In Thousands) Operating Activities: Net income $ 81,193 $ 102,857 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 143,559 158,245 Deferred income taxes and investment tax credits, net (3,703) (2,390) Allowance for funds used during construction (11,977) (7,496) Amortization of unbilled revenues (4,104) (16,100) Minority interests 4,032 3,798 Decrease (increase) in accounts receivable, net and unbilled revenues 46,040 20,778 Decrease (increase) in fuel, materials, and supplies (13,303) (13,880) Decrease (increase) in prepaid and other current assets (931) 10,316 Increase (decrease) in accounts payable (38,272) 23,273 Increase (decrease) in other current liabilities 11,754 5,069 Other, net (8,628) (15,906) --------- --------- Net cash provided by operating activities $ 205,660 $ 268,564 --------- --------- Investing Activities: Plant expenditures, excluding allowance for funds used during construction $(181,766) $(222,261) Oil and gas exploration and development (8,783) (13,725) Other investing activities (465) (2,149) --------- --------- Net cash used in investing activities $(191,014) $(238,135) --------- --------- Financing Activities: Dividends paid to minority interests $ (5,943) $ (4,838) Dividends paid on NEES common shares (75,207) (74,095) Short-term debt (7,790) 24,670 Long-term debt - issues 143,000 38,000 Long-term debt - retirements (66,160) (12,160) Preferred stock - redemption (512) Repurchase of common shares (1,490) --------- --------- Net cash used in financing activities $ (13,590) $ (28,935) --------- --------- Net increase in cash and cash equivalents $ 1,056 $ 1,494 Cash and cash equivalents at beginning of period 3,047 2,876 --------- --------- Cash and cash equivalents at end of period $ 4,103 $ 4,370 ========= ========= Supplementary Information: Interest paid less amounts capitalized $ 51,499 $ 43,425 --------- --------- Federal and state income taxes paid $ 22,743 $ 58,918 --------- --------- The accompanying notes are an integral part of these financial statements. NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Retained Earnings Periods Ended June 30 (Unaudited) Quarter Six Months ------- ---------- 1995 1994 1995 1994 ---- ---- ---- ---- (In Thousands) Retained earnings at beginning of period $789,350 $760,965 $779,045 $728,075 Net income 33,531 33,584 81,193 102,857 Dividends declared on common shares (38,332) (37,357) (75,689) (73,740) -------- -------- -------- -------- Retained earnings at end of period $784,549 $757,192 $784,549 $757,192 ======== ======== ======== ======== Consolidated Electric Operating Statistics Periods Ended June 30 Quarter Six Months ------- ---------- 1995 1994 1995 1994 ---- ---- ---- ---- (In Thousands of KWH) Generated at nuclear power plants 331,821 317,305 881,387 794,030 Generated at system thermal plants 2,803,427 2,638,878 5,207,035 5,909,594 Generated at system hydro plants 239,110 586,043 705,777 887,807 Generated at pumped storage plant 125,430 152,731 253,127 272,701 Less energy for pumping 172,113 188,399 349,077 354,467 --------- --------- ---------- ---------- Total generated 3,327,675 3,506,558 6,698,249 7,509,665 Nuclear entitlements 258,585 750,338 512,595 1,309,729 Purchased electric energy 2,175,696 1,761,926 4,727,760 3,817,136 --------- --------- ---------- ---------- Total generated and purchased 5,761,956 6,018,822 11,938,604 12,636,530 Less losses, company use, etc. 366,069 475,574 598,078 820,226 --------- --------- ---------- ---------- Total sales 5,395,887 5,543,248 11,340,526 11,816,304 ========= ========= ========== ========== The accompanying notes are an integral part of these financial statements. NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES Statements of Consolidated Retained Earnings Periods Ended June 30 (Unaudited) Twelve Months ------------- 1995 1994 ---- ---- (In Thousands) Retained earnings at beginning of period $ 757,192 $ 685,398 Net income 177,762 220,348 Dividends declared on common shares (150,405) (146,507) Premium on redemption of preferred stock of subsidiaries (2,047) --------- --------- Retained earnings at end of period $ 784,549 $ 757,192 ========= ========= Consolidated Electric Operating Statistics Periods Ended June 30 Twelve Months ------------- 1995 1994 ---- ---- (In Thousands of KWH) Generated at nuclear power plants 1,855,316 1,482,936 Generated at system thermal plants 10,274,542 12,244,974 Generated at system hydro plants 1,170,570 1,382,451 Generated at pumped storage plant 506,079 546,247 Less energy for pumping 717,962 729,770 ---------- ---------- Total generated 13,088,545 14,926,838 Nuclear entitlements 1,738,400 2,209,487 Purchased electric energy 9,591,984 7,740,920 ---------- ---------- Total generated and purchased 24,418,929 24,877,245 Less losses, company use, etc. 1,450,752 1,857,184 ---------- ---------- Total sales 22,968,177 23,020,061 ========== ========== The accompanying notes are an integral part of these financial statements. Note A - Maine Yankee Atomic Power Company ------------------------------------------ New England Power Company (NEP) has a 20 percent interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 megawatt (MW) nuclear generating station. Since January 1995, the station has been shut down for refueling and inspection. During the inspection, Maine Yankee detected substantial deterioration of steam generator tubes. To correct the situation, Maine Yankee is installing welded sleeves (involving the insertion of a partial new tube inside the existing tube) on all of the steam generator tubes. Similar repairs have been undertaken at other nuclear plants, but not on the scale proposed at Maine Yankee. In the second quarter of 1995, NEP accrued approximately $4 million for its portion of the anticipated future incremental costs to repair the steam generator tubes. These repair costs were charged to purchased power expense. Replacement power costs incurred as a result of the Maine Yankee shutdown are being recovered through NEP's fuel clause. The station is expected to return to service by the end of 1995. Note B - 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 environmental audit 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 a potentially responsible party (PRP) by either the U.S. Environmental Protection Agency (EPA) or the Massachusetts Department of Environmental Protection for 22 sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated Note B - Hazardous Waste - Continued ------------------------ 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 1970's, NEES was a combined electric and gas holding company system.) NEES is aware of approximately 40 such locations (including eight of the 22 locations for which NEES companies are PRPs) mostly located in Massachusetts. NEES and its subsidiaries are currently aware of other sites, and may in the future become aware of additional sites, that they may be held responsible for remediating. NEES has been notified by the EPA that it is one of several PRPs for cleanup of the Pine Street Canal Superfund site in Burlington, Vermont, 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 (GMP). Prior to, during, and after that time, gas was manufactured at the Pine Street Canal site by GMP. In 1989, NEES was one of 14 parties required to pay the EPA's past response costs related to this site. 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 its cost. It is uncertain at this time what the cost of any ultimate cleanup plan will be or what NEES's share of such cost will be. In 1993, the Massachusetts Department of Public Utilities approved a rate agreement filed by Massachusetts Electric Company (Massachusetts Electric) that allows for remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts to be met from a non-rate recoverable interest-bearing fund of $30 million established on Massachusetts Electric's books in 1993. Rate recoverable contributions of $3 million, adjusted for inflation, are added to the fund annually in accordance with the agreement. Any shortfalls in the fund would be paid by Massachusetts Electric and be recovered through rates over seven years. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by NEES or its subsidiaries. Where appropriate, the NEES companies intend to seek recovery from their insurers and from other PRPs, but it is Note B - Hazardous Waste - Continued ------------------------ uncertain whether and to what extent such efforts would be successful. At June 30, 1995, NEES had total reserves for environmental response costs of $44 million and a related regulatory asset of $14 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 to its financial position. Note C - Purchased Power Contract Dispute ----------------------------------------- In October 1994, NEP was sued by Milford Power Limited Partnership (MPLP), a venture of Enron Corporation and Jones Capital that owns a 149 MW gas-fired power plant in Milford, Massachusetts. NEP purchases 56 percent of the power output of the facility under a long-term contract with MPLP. The suit alleges that NEP has engaged in a scheme to cause MPLP and its power plant to fail and has prevented MPLP from finding a long-term buyer for the remainder of the facility's output. The complaint includes allegations that NEP has violated the Federal Racketeer Influenced and Corrupt Organizations Act, engaged in unfair or deceptive acts in trade or commerce, and breached contracts. MPLP also asserts that NEP deliberately misled regulatory bodies concerning the Manchester Street Station repowering project. MPLP seeks compensatory damages in an unspecified amount, as well as treble damages. NEP believes that the allegations of wrongdoing are without merit. NEP has filed counterclaims and crossclaims against MPLP, Enron Corporation, and Jones Capital, seeking monetary damages and termination of the purchased power contract. MPLP also intervened in a recent NEP rate filing making similar allegations to those asserted in MPLP's lawsuit. Hearings are expected to begin in October 1995. MPLP also intervened in a recent Massachusetts Electric rate filing. Note D - Shipping Charter Agreement Dispute ------------------------------------------- In May 1995, NEP was sued by Keystone Shipping Company (Keystone). The suit arose after NEP, which charters a vessel for coal shipment purposes from Intercoastal Bulk Carriers, Inc. (IBC), a Keystone affiliate, gave notice in November 1994 that it intended to exercise its explicit contractual right under the charter agreement to terminate the charter and purchase the vessel. NEP, concurrently with the notice, initiated arbitration to resolve any Note D - Shipping Charter Agreement Dispute - Continued ------------------------------------------- objections to its exercise of such a right. In arbitration, the panel ruled in NEP's favor on several preliminary issues which were appealed by Keystone in federal court, but later dismissed by the court. Keystone's suit alleges that NEP induced Keystone to enter into the charter agreement by making fraudulent misrepresentations regarding the purchase option. Keystone alleges damages in excess of $40 million. The complaint includes allegations that NEP violated Massachusetts General Laws chapter 93A, which provides for the possibility of treble damages. NEP believes that Keystone's allegations are without merit and has filed a motion to dismiss the lawsuit since the issues are the subject of arbitration. At present, the vessel remains under the ownership of IBC and NEP is continuing to pay the charter rate, subject to NEP's reservation of its rights to seek damages and other relief against Keystone and IBC. Note E - New Accounting Standard -------------------------------- In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121), effective for fiscal year 1996. This standard clarifies when and how to recognize an impairment of long- lived assets. In addition, FAS 121 requires that all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. However, if written off, a regulatory asset can be restored if it again has a high probability of recovery. The impact of this standard will be driven by the facts and circumstances that exist when the standard is adopted and thereafter. Note F ------ 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 the Company's 1994 Annual Report. 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 1994 Annual Report on Form 10-K. Earnings -------- Earnings for the second quarter and first six months of 1995 were $.52 per share and $1.25 per share, respectively, compared with $.51 and $1.58 per share earned in the corresponding periods in 1994. Increase (Decrease) in Earnings Period ending June 30, ------------------------ 3 months 6 months -------- -------- 1994 earnings $ .51 $1.58 Sales to ultimate customers .03 (.12) Maine Yankee accrued expenses (.04) (.04) Purchased power costs excluding fuel (.05) (.15) Cost of overhauls of wholly-owned generating units .07 (.01) Other (.01) ----- ----- 1995 earnings $ .52 $1.25 ===== ===== Kilowatthour (KWH) sales to ultimate customers decreased by about 1 percent for the six months ending June 30, 1995. This reduction in KWH sales reflects a 3 percent decrease in the first quarter of 1995, primarily in the residential sector, due to unusually mild winter weather conditions when heating degree days were approximately 9 percent below normal. This decrease was partially offset by a 2 percent increase in KWH sales in the second quarter of 1995, primarily in the commercial and industrial sectors. For a discussion of Maine Yankee accrued expenses see the Maine Yankee Atomic Power Company section. The increases in purchased power costs include costs of overhauls and refueling shutdowns at Maine Yankee and two other partially-owned nuclear power facilities. The change in costs of overhauls of wholly-owned generating units reflects the timing of overhauls in 1995 versus 1994. Maine Yankee Atomic Power Company --------------------------------- New England Power Company (NEP) has a 20 percent interest in Maine Yankee Atomic Power Company (Maine Yankee) which owns an 880 megawatt nuclear generating station. Since January 1995, the station has been shut down for refueling and inspection. During the inspection, Maine Yankee detected substantial deterioration of steam generator tubes. To correct the situation, Maine Yankee is installing welded sleeves (involving the insertion of a partial new tube inside the existing tube) on all of the steam generator tubes. Similar repairs have been undertaken at other nuclear plants, but not on the scale proposed at Maine Yankee. In the second quarter of 1995, NEP accrued approximately $4 million for its portion of the anticipated future incremental costs to repair these steam generator tubes. These repair costs were charged to purchased power expense. Replacement power costs incurred as a result of the Maine Yankee shutdown are being recovered through NEP's fuel clause. The station is expected to return to service by the end of 1995. Wholesale Rate Activity ----------------------- In February 1995, the Federal Energy Regulatory Commission (FERC) approved a rate agreement filed by NEP. Under the agreement, which became effective January 1995, NEP's base rates are frozen until 1997. Before this rate agreement, NEP's rate structure contained two surcharges which were recovering the costs of a coal conversion project and a portion of NEP's investment in the Seabrook 1 nuclear unit (Seabrook 1). These two surcharges would have fully recovered their related costs by mid-1995, however, under the rate agreement they have been continued as part of base rates. The agreement also allows for full recovery of costs associated with the Manchester Street Station repowering project, which is scheduled for completion later this year. In addition, the agreement allows NEP to recover approximately $50 million of deferred costs associated with terminated purchased power contracts and postretirement benefits other than pensions (PBOPs) over seven years. Under the agreement, NEP is fully recovering currently incurred PBOP costs. The agreement further provides for the recovery over three years of $27 million of costs related to the dismantling of a retired generating station in Rhode Island and the replacement of a turbine rotor at one of NEP's generating units. The agreement also increases NEP's recovery of depreciation expense by approximately $8 million annually to recognize costs that will be incurred upon the eventual dismantling of its Brayton Point and Salem Harbor generating plants. Under the agreement, approximately $15 million of the $38 million in Seabrook 1 costs due to be recovered in 1995 pursuant to a 1988 settlement agreement will be deferred and recovered in 1996. The FERC's approval of this rate agreement applies to all of NEP's customers except the Town of Norwood, Massachusetts and the Milford Power Limited Partnership (MPLP), (which together represent less than 2 percent of NEP's sales), who intervened in the rate case. In June 1995, NEP and the Town of Norwood filed a settlement agreement with the FERC. This settlement is subject to FERC approval. A separate hearing will be conducted, beginning in October 1995, to address the issues raised by MPLP. Retail Rate Activity -------------------- On March 15, 1995, Massachusetts Electric Company (Massachusetts Electric) filed a request with the Massachusetts Department of Public Utilities (MDPU) to increase its base rates by $62 million. A decision by the MDPU on this filing will be issued by October 1, 1995. Massachusetts Electric also filed an alternative incentive rate plan which would have increased rates by about $30 million this year with potential further increases in subsequent years. The MDPU rejected this alternative rate plan in July 1995. As part of its filing, Massachusetts Electric proposed a new discount program for large industrial customers in the manufacturing, computing, and biotechnology sectors that are willing to make a minimum annual usage commitment for a period of five years. The discounts, which Massachusetts Electric proposed to be recovered from all customers, would range from 5 percent to 12.5 percent of base rates, depending on a customer's level of commitment. These discounts are in addition to the 5 percent service extension discounts (SEDs) that are currently available to large commercial and industrial customers that agree to provide three to five years notice before they purchase power from another supplier or generate any additional power themselves. Massachusetts Electric has also proposed lowering the minimum average load threshold for the SED program from 500 kilowatts to 200 kilowatts. On March 1, 1995, The Narragansett Electric Company (Narragansett) filed a request with the Rhode Island Public Utilities Commission (RIPUC) to increase its base rates by $30.5 million. In this filing, Narragansett proposed a $3 million discount for manufacturers which would have been recoverable from other customers. In connection with the Rhode Island Governor's veto of legislation that would have allowed certain customers to buy power from alternative suppliers, Narragansett has modified its proposal by providing a two year rate discount to manufacturers amounting to $2 million per year, which will not be recovered from customers (see Competitive Conditions section). A decision on Narragansett's filing will be issued by December 1, 1995. In June 1995, the RIPUC opened a proceeding to reassess whether fuel adjustment and purchased power cost adjustment mechanisms should be continued after 1995 or whether such costs should be included in base rates. These adjustment mechanisms currently allow Narragansett to pass through the costs of fuel and purchased power and do not require Narragansett to take risk regarding recovery of such costs. The RIPUC has not yet scheduled hearings in this proceeding. In July 1995, Granite State Electric Company (Granite) filed a request with the New Hampshire Public Utilities Commission (NHPUC) to increase its base rates by $2.5 million, effective August 18, 1995. Granite has also petitioned the NHPUC to allow a portion of the requested increase, approximately $1.2 million, to be effective immediately as a temporary rate increase pending the investigation of the full case. Granite expects the NHPUC to act on its temporary rate request in September 1995 and on the filing in early 1996. Operating Revenue ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue Second Quarter Six Months -------------- ------------ 1995 vs 1994 1995 vs 1994 -------------- ------------ (In Millions) Sales to ultimate customers $ 3 $ (7) Seasonal change in unbilled revenues (6) Fuel recovery 19 19 General rate change/SEDs 5 11 Unbilled revenues recognized under rate agreements (6) (12) Oil and gas sales (2) (8) Other (3) 1 --- ---- $16 $ (2) === ==== For a discussion of KWH sales to ultimate customers, see the Earnings section. For a discussion of fuel recovery see the fuel costs discussion in the Operating Expenses section. General rate change/SEDs for the three and six months ended June 30, 1995 reflects the November 1994 expiration of Massachusetts Electric's temporary rate decrease, partially offset by increased discounts under the retail companies' SED programs. The decrease in the recognition of unbilled revenues reflects Massachusetts Electric's completion of the recognition of $35 million of unbilled revenues over a 13 month period that ended December 31, 1994, partially offset by Narragansett's recognition of $14 million over a 21 month period to end December 31, 1995. Both of these recognitions of unbilled revenues were in accordance with rate agreements. The reduction in oil and gas sales is primarily due to decreased gas prices. Operating Expenses ------------------ The following table summarizes the changes in operating expenses: Increase (Decrease) in Operating Expenses Second Quarter Six Months -------------- ------------ 1995 vs 1994 1995 vs 1994 -------------- ------------ (In Millions) Fuel costs $16 $ 17 Purchased energy excluding fuel 10 20 Operation and maintenance (2) 8 Depreciation and amortization (9) (15) Taxes (1) (16) --- ---- $14 $ 14 === ==== Fuel costs represent fuel for generation and the portion of purchased electric energy permitted to be recovered through NEP's fuel adjustment clause. The increase in fuel costs reflects increased short-term purchases and alternate energy purchases due to decreased generation from NEP's nuclear power suppliers, decreased hydro production due to low water levels, and overhauls of NEP's thermal generating facilities. Purchased energy excluding fuel represents the remainder of purchased electric energy costs. The increase in purchased energy excluding fuel for the first six months of 1995 is the result of increased costs associated with scheduled plant overhauls and refueling outages as well as an accrual in the second quarter of 1995 of approximately $4 million relating to Maine Yankee (see Maine Yankee Atomic Power Company section). The increase also reflects amortization of previously deferred purchased power termination costs. The increase in operation and maintenance expenses for the six months ended June 30, 1995, reflects increased maintenance costs associated with overhauls of generating plants, in part to achieve compliance with the Clean Air Act, increased general, administrative and information system costs, and recognition of currently incurred and previously deferred PBOP costs in accordance with NEP's 1995 rate agreement. The decrease for the second quarter of 1995 reflects the timing of overhauls in 1995 versus 1994. The decrease in depreciation and amortization is due to decreased amortization of Seabrook 1 in accordance with NEP's 1995 rate agreement and decreased oil and gas amortization rates due to increased reserve estimates. These decreases were partially offset by the effects of increased depreciation rates approved in NEP's 1995 rate agreement, increased charges associated with the dismantlement of a retired generating facility, and depreciation of new plant expenditures. A portion of NEP's Seabrook 1 amortization and the amortization of NEP's Oil Conservation Adjustment was completed in the second quarter of 1995. The amounts recorded in the first six months related to these completed amortizations totaled $12 million, before tax. A separate portion of the Seabrook 1 amortization will continue through the end of 1996. The decrease in taxes for the six months ended June 30, 1995 is primarily due to decreased income. In May 1995, the Brotherhood of Utility Workers of New England, Inc., the International Brotherhood of Electrical Workers, and the Utility Workers Union of America, AFL-CIO ratified new labor agreements with the NEES companies effective May 1995 through May 1999. Allowance For Funds Used During Construction (AFDC) -------------------------------------------------- AFDC increased for the second quarter and first six months of 1995 due to increased construction work in progress, principally associated with the Manchester Street Station repowering project, scheduled to commence commercial operation in late 1995. Interest Expense ---------------- The increase in interest expense is primarily due to increased long-term and short-term debt balances and higher interest rates in the second quarter and first six months of 1995. Competitive Conditions ---------------------- The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including surplus generating capacity, increasing electric rates, improved technologies, increasing demand for customer choice, and new regulations and legislation intended to foster competition. See the Company's Annual Report on Form 10-K for the year ended December 31, 1994. The three states served by retail subsidiaries of NEES have been considering various proposals for allowing electric customers greater choice over their electricity supplier. The MDPU has been holding hearings on the regulation and structure of the electric utility industry. The RIPUC convened a task force of utilities, commercial and industrial customers, and other interested parties to prepare a report on restructuring the industry. In these two proceedings, Massachusetts Electric and Narragansett have filed with the respective commissions a set of interdependent principles for industry restructuring. These principles, which were agreed to by groups representing environmental protection advocates, governmental agencies, non-utility generators, investor-owned utilities, and large and small customer interests, include provisions for increased customer choice while allowing utilities the opportunity to recover the cost of their past commitments, as well as provisions for protecting residential customers, encouraging renewable resources and energy conservation, and honoring contracts with independent power producers. The parties agreeing to the principles suggested to the MDPU and RIPUC that they be permitted a six month period for discussions and negotiations leading to the development of detailed, company- specific plans. The MDPU and RIPUC are expected to issue separate decisions this summer. In July 1995, the Governor of Rhode Island vetoed two bills that would have allowed certain industrial customers to buy power from alternative suppliers, rather than through the local electric utility. The Rhode Island Legislature may still override the vetoes and it has indicated that it will consider alternative legislation in September 1995. Narragansett cannot predict whether any such legislation will be enacted. Because Narragansett believed that the proposed legislation would result in piecemeal deregulation that would not be fair to customers or shareholders and would circumvent the comprehensive proceedings mentioned above, Narragansett urged the Governor to exercise his veto. Narragansett committed that, if the measures were not enacted into law, Narragansett would provide a two year rate discount to manufacturing customers. In addition, Narragansett committed, if the measures were not enacted, to submit by July 1, 1996, a specific and detailed proposal to the RIPUC addressing the issues associated with providing open access to Narragansett's distribution system for its large commercial and industrial customers. Among other things, that filing would address the proper means for recovering past costs incurred to serve exiting customers through a compensatory access charge. If the charges are approved by the RIPUC, the appropriate access tariffs would then be filed with the FERC. Also, as previously reported, the NHPUC is considering the proposal of a new company, Freedom Energy Company (Freedom Energy), to sell electricity at retail rates to large customers of another utility. In June 1995, the NHPUC issued an order in the Freedom Energy docket addressing preliminary issues. The NHPUC found, in a split decision, that it does not believe franchise territories in New Hampshire are exclusive as a matter of law. The order also stated that it did not believe federal law precluded the NHPUC from authorizing retail wheeling. However, the order makes clear that Freedom Energy must obtain additional regulatory approvals at the state and federal level before it could operate as a public utility in the franchise territory of another utility. In addition, in June 1995, the Governor of New Hampshire signed into law a bill which instructs the NHPUC to establish a retail competition pilot program open to all classes of customers. The program could be effective as early as January 1, 1996. The NHPUC will first have to determine that a pilot program would be fair, lawful, and in the public good. The size, scope, and other characteristics of the pilot are not prescribed by the legislation and will be subject to NHPUC determination. The legislation also established a legislative committee on retail wheeling and restructuring. The committee is to report its findings by November 1, 1995. In March 1995, the FERC issued a notice of proposed rule-making in which it stated that recovery in rates of legitimate and verifiable stranded costs from departing customers is the appropriate method for recovery of costs stranded as the result of wholesale competition. Under the FERC policy proposal, costs stranded as a result of retail competition would be subject to state commission review if the state commission has the necessary statutory authority, and subject to FERC review if the state commission does not have such authority. A final decision is expected in mid-1996. Electric utility rates have historically been based on a utility's costs. As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in general. Financial Accounting Standard No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. NEES believes that the operations of its utility subsidiaries currently meet the criteria established in FAS 71. However, the effects of regulatory and/or legislative initiatives could, in the near future, cause all or a portion of the operations of one or more of its subsidiaries to cease meeting the criteria of FAS 71. In that event, the application of FAS 71 to such operations would be discontinued and a non-cash write-off of previously established regulatory assets and liabilities related to such operations would be required. At June 30, 1995, NEES had consolidated pre-tax regulatory assets (net of regulatory liabilities) of approximately $600 million, of which about $500 million is related to its subsidiaries' generation business (including approximately $200 million related to oil and gas properties regulated as part of the generation business), and about $100 million is related to its subsidiaries' transmission and distribution businesses. In addition, if competitive or regulatory change should cause a substantial revenue loss or lead to the permanent shutdown of any generating facilities, a substantial write-down of plant assets could be required pursuant to Financial Accounting Standard No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121). This standard, effective for fiscal year 1996, clarifies when and how to recognize an impairment of long-lived assets. For further discussion of FAS 121 see Note E. Liquidity and Capital Resources ------------------------------- Plant expenditures in the first six months of 1995 amounted to $182 million for the utility subsidiaries, including $68 million related to the Manchester Street Station repowering project in Providence, Rhode Island. The repowering of the Manchester Street generating station, scheduled to commence commercial operation in late 1995, is estimated to cost approximately $510 million, excluding transmission facilities. The funds necessary for utility plant expenditures were primarily provided by net cash from operating activities, after the payment of dividends, and from proceeds of long-term debt issues. The financing activities of NEES subsidiaries for the first six months of 1995 are summarized as follows: Issues Retirements ------ ----------- (In Millions) Long-term debt -------------- Massachusetts Electric $ 68 $25 Narragansett 15 New England Power 60 10 Granite State 2 Hydro-Transmission Companies 6 NEEI 23 ---- --- $143 $66 ==== === NEP refinanced $10 million of variable rate mortgage bonds in the first six months of 1995. Interest rates on the other new long-term debt issues shown above ranged from 6.69 to 8.46 percent. In July 1995, Granite issued $5 million of long-term debt at a rate of 7.94 percent. The retail subsidiaries plan to issue $32 million of additional long-term debt by the end of 1995. Net cash from operating activities provided all of the funds necessary for oil and gas expenditures for the first six months of 1995. New England Energy Incorporated's (NEEI) capitalized oil and gas exploration and development costs amounted to $9 million, including $5 million of capitalized interest costs. In April 1995, NEEI refinanced its previous credit agreement with a group of banks. The new agreement provides for borrowings of up to $225 million. The amount available will decrease annually through 2002. Collateral for the borrowings was unchanged. At June 30, 1995, NEES and its consolidated subsidiaries had lines of credit and standby bond purchase facilities with banks totaling $663 million. These lines and facilities were used for liquidity support for $226 million of commercial paper borrowings and for $342 million of NEP mortgage bonds in tax-exempt commercial paper mode. Fees are paid on the lines and facilities in lieu of compensating balances. PART II. OTHER INFORMATION Item 1. Legal Proceedings -------------------------- Information concerning requests to increase rates filed by Massachusetts Electric Company with the Massachusetts Department of Public Utilities, The Narragansett Electric Company with the Rhode Island Public Utilities Commission, and Granite State Electric Company with the New Hampshire 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 New England Power Company (NEP) by Milford Power Limited Partnership on October 28, 1994, and intervention into a NEP rate filing, discussed in Note C of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Information concerning a lawsuit filed against NEP by Keystone Shipping Company on May 17, 1995, in the Massachusetts Essex Superior Court, discussed in Note D of Notes to Unaudited Financial Statements, is incorporated herein by reference and made a part hereof. Item 4. Submission of Matters to a Vote of Security-Holders ------------------------------------------------------------ On April 25, 1995, the Annual Meeting of Shareholders was held. The shareholders, by a vote of 51,970,980 in favor, 635,351 against, and 470,378 abstaining, approved a Company proposal setting the number of directors at eleven. Directors were elected and received the following votes: Director Votes For Votes Withheld -------- --------- -------------- Joan T. Bok 52,339,299 734,749 Paul T. Joskow 52,240,934 833,114 John M. Kucharski 52,437,024 637,024 Edward H. Ladd 52,495,786 578,262 Joshua A. McClure 52,446,815 627,233 John W. Rowe 52,363,260 710,788 George M. Sage 52,445,096 618,952 Charles E. Soule 52,393,796 680,252 Anne Wexler 52,409,761 664,287 James Q. Wilson 52,463,183 610,865 James R. Winoker 52,377,385 696,663 Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- The Company filed a report on Form 8-K dated May 17, 1995, containing Item 5, Other Events. The Company is filing financial data schedules. 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, 1995 to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND ELECTRIC SYSTEM s/ Alfred D. Houston Alfred D. Houston Executive Vice President and Chief Financial Officer Date: August 9, 1995 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.