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 September 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: 64,924,456 shares at September 30, 1995.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Periods Ended September 30
(Unaudited)
Quarter Nine Months
------- -----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
Operating revenue $599,126 $591,633 $1,690,989 $1,685,617
-------- -------- ---------- ----------
Operating expenses:
Fuel for generation 64,176 55,572 171,603 171,350
Purchased electric energy 133,757 139,279 419,542 379,304
Other operation 130,050 123,504 361,183 349,348
Maintenance 27,069 36,765 102,195 108,818
Depreciation and amortization 63,610 80,057 204,435 236,293
Taxes, other than income taxes 31,944 32,529 99,503 99,044
Income taxes 46,199 39,573 96,941 107,528
-------- -------- ---------- ----------
Total operating expenses 496,805 507,279 1,455,402 1,451,685
-------- -------- ---------- ----------
Operating income 102,321 84,354 235,587 233,932
Other income:
Allowance for equity funds used during
construction 2,361 2,540 7,742 7,221
Equity in income of generating companies2,566 2,664 7,895 7,925
Other income (expense) - net (771) 46 (278) (1,468)
-------- -------- ---------- ----------
Operating and other income 106,477 89,604 250,946 247,610
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 27,509 23,636 80,653 68,869
Other interest 5,410 5,518 13,761 10,098
Allowance for borrowed funds used during
construction (4,339) (2,419) (10,935) (5,234)
-------- -------- ---------- ----------
Total interest 28,580 26,735 83,479 73,733
-------- -------- ---------- ----------
Income after interest 77,897 62,869 167,467 173,877
Preferred dividends of subsidiaries 2,172 2,172 6,517 6,525
Minority interests 1,905 1,846 5,937 5,644
-------- -------- ---------- ----------
Net income $ 73,820 $ 58,851 $ 155,013 $ 161,708
======== ======== ========== ==========
Average common shares 64,924,45664,969,652 64,950,977 64,969,652
Net income per common share $1.14 $.91 $2.39 $2.49
Dividends declared per share $ .590 $.575 $1.755 $1.710
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Income
Twelve Months Ended September 30
(Unaudited)
1995 1994
---- ----
(In Thousands)
>
Operating revenue $2,248,401 $2,245,325
---------- ----------
Operating expenses:
Fuel for generation 221,209 232,616
Purchased electric energy 554,381 503,013
Other operation 506,576 466,638
Maintenance 154,850 145,946
Depreciation and amortization 269,265 303,663
Taxes, other than income taxes 126,299 126,298
Income taxes 117,670 139,551
---------- ----------
Total operating expenses 1,950,250 1,917,725
---------- ----------
Operating income 298,151 327,600
Other income:
Allowance for equity funds used during construction 10,690 8,597
Equity in income of generating companies 9,728 10,925
Other income (expense) - net (2,666) (5,063)
---------- ----------
Operating and other income 315,903 342,059
---------- ----------
Interest:
Interest on long-term debt 105,284 93,193
Other interest 14,961 15,052
Allowance for borrowed funds used during
construction (13,494) (6,198)
---------- ----------
Total interest 106,751 102,047
---------- ----------
Income after interest 209,152 240,012
Preferred dividends of subsidiaries 8,689 8,819
Minority interests 7,732 7,525
---------- ----------
Net income $ 192,731 $ 223,668
========== ==========
Average common shares 64,955,646 64,969,652
Net income per common share $2.97 $3.44
Dividends declared per share $2.330 $2.270
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
ASSETS 1995 1994
------ ---- ----
(In Thousands)
Utility plant, at original cost $ 5,240,449 $4,914,807
Less accumulated provisions for depreciation and amortization 1,701,562 1,610,378
----------- ----------
3,538,887 3,304,429
Net investment in Seabrook 1 under rate settlement 19,012 38,283
Construction work in progress 276,260 374,009
----------- ----------
Net utility plant 3,834,159 3,716,721
----------- ----------
Oil and gas properties, at full cost 1,260,927 1,248,343
Less accumulated provision for amortization 1,018,531 964,069
----------- ----------
Net oil and gas properties 242,396 284,274
----------- ----------
Investments:
Nuclear power companies, at equity 47,080 46,349
Other subsidiaries, at equity 40,790 42,195
Other investments, at cost 55,108 50,895
----------- ----------
Total investments 142,978 139,439
----------- ----------
Current assets:
Cash 7,795 3,047
Accounts receivable, less reserves of $18,910,000 and
$15,095,000 268,548 295,627
Unbilled revenues 47,300 55,900
Fuel, materials and supplies, at average cost 99,269 94,431
Prepaid and other current assets 78,507 76,718
----------- ----------
Total current assets 501,419 525,723
----------- ----------
Accrued Yankee Atomic costs 104,257 122,452
Deferred charges and other assets 322,592 296,232
----------- ----------
$ 5,147,801 $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 820,090 779,045
----------- ----------
1,621,883 1,580,838
Less 45,196 shares of treasury stock, at cost 1,516
----------- ----------
Total common share equity 1,620,367 1,580,838
Minority interests in consolidated subsidiaries 49,620 55,066
Cumulative preferred stock of subsidiaries 147,016 147,016
Long-term debt 1,639,356 1,520,488
----------- ----------
Total capitalization 3,456,359 3,303,408
----------- ----------
Current liabilities:
Long-term debt due within one year 22,520 65,920
Short-term debt 192,600 233,970
Accounts payable 141,414 168,937
Accrued taxes 25,731 11,002
Accrued interest 23,469 25,193
Dividends payable 39,262 37,154
Other current liabilities 92,562 93,251
----------- ----------
Total current liabilities 537,558 635,427
----------- ----------
Deferred federal and state income taxes 765,366 751,855
Unamortized investment tax credits 92,910 94,930
Accrued Yankee Atomic costs 104,257 122,452
Other reserves and deferred credits 191,351 176,769
----------- ----------
$ 5,147,801 $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
Nine Months Ended September 30
(Unaudited)
1995 1994
---- ----
(In Thousands)
Operating Activities:
Net income $155,013 $ 161,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 208,879 239,450
Deferred income taxes and investment tax credits - net 9,573 9,804
Allowance for funds used during construction (18,677) (12,455)
Amortization of unbilled revenues (6,156) (28,305)
Minority interests 5,937 5,644
Decrease (increase) in accounts receivable, net
and unbilled revenues 35,679 3,666
Decrease (increase) in fuel, materials, and supplies (4,838) (12,133)
Decrease (increase) in prepaid and other current assets (1,789) 4,043
Increase (decrease) in accounts payable (27,523) 9,050
Increase (decrease) in other current liabilities 18,472 18,445
Other, net (17,616) (25,164)
--------- ---------
Net cash provided by operating activities $ 356,954 $ 373,753
--------- ---------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(248,283) $(327,176)
Oil and gas exploration and development (12,584) (21,452)
Other investing activities (1,169) (15,995)
--------- ---------
Net cash used in investing activities $(262,036) $(364,623)
--------- ---------
Financing Activities:
Dividends paid to minority interests $ (8,897) $ (8,416)
Dividends paid on NEES common shares (112,983) (110,705)
Short-term debt (41,370) 75,700
Long-term debt - issues 370,000 53,000
Long-term debt - retirements (294,040) (17,040)
Preferred stock - redemption (512)
Return of capital to minority interests including
related premium (1,364)
Repurchase of common shares (1,516)
--------- ---------
Net cash used in financing activities $ (90,170) $ (7,973)
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 4,748 $ 1,157
Cash and cash equivalents at beginning of period 3,047 2,876
--------- ---------
Cash and cash equivalents at end of period $ 7,795 $ 4,033
========= =========
Supplementary Information:
Interest paid less amounts capitalized $ 80,802 $ 73,824
--------- ---------
Federal and state income taxes paid $ 40,070 $ 82,404
--------- ---------
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Retained Earnings
Periods Ended September 30
(Unaudited)
Quarter Nine Months
------- -----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
Retained earnings at beginning of period $784,549 $757,192 $ 779,045 $ 728,075
Net income 73,820 58,851 155,013 161,708
Dividends declared on common shares (38,279) (37,358) (113,968) (111,098)
-------- -------- --------- ---------
Retained earnings at end of period $820,090 $778,685 $ 820,090 $ 778,685
======== ======== ========= =========
Consolidated Electric Operating Statistics
Periods Ended September 30
Quarter Nine Months
------- -----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands of KWH)
Generated at nuclear power plants 536,216 413,229 1,417,603 1,207,259
Generated at system thermal plants 3,153,455 2,629,743 8,360,490 8,539,337
Generated at system hydro plants 112,520 228,994 818,297 1,116,801
Generated at pumped storage plant 136,978 119,575 390,105 392,276
Less energy for pumping 188,034 185,034 537,111 539,501
--------- --------- ---------- ----------
Total generated 3,751,135 3,206,507 10,449,384 10,716,172
Nuclear entitlements 371,687 525,668 884,282 1,835,397
Purchased electric energy 2,198,417 2,544,721 6,926,177 6,361,857
--------- --------- ---------- ----------
Total generated and purchased 6,321,239 6,276,896 18,259,843 18,913,426
Less losses, company use, etc. 490,078 350,730 1,088,156 1,170,956
--------- --------- ---------- ----------
Total sales 5,831,161 5,926,166 17,171,687 17,742,470
========= ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
NEW ENGLAND ELECTRIC SYSTEM AND SUBSIDIARIES
Statements of Consolidated Retained Earnings
Periods Ended September 30
(Unaudited)
Twelve Months
-------------
1995 1994
---- ----
(In Thousands)
Retained earnings at beginning of period $ 778,685 $ 703,314
Net income 192,731 223,668
Dividends declared on common shares (151,326) (147,481)
Premium on redemption of preferred stock of subsidiaries (816)
--------- ---------
Retained earnings at end of period $ 820,090 $ 778,685
========= =========
Consolidated Electric Operating Statistics
Twelve Months Ended September 30
Twelve Months
-------------
1995 1994
---- ----
(In Thousands of KWH)
Generated at nuclear power plants 1,978,303 1,584,184
Generated at system thermal plants 10,798,254 11,697,323
Generated at system hydro plants 1,054,096 1,466,432
Generated at pumped storage plant 523,482 528,780
Less energy for pumping 720,962 725,778
---------- ----------
Total generated 13,633,173 14,550,941
Nuclear entitlements 1,584,419 2,404,040
Purchased electric energy 9,245,680 8,087,697
---------- ----------
Total generated and purchased 24,463,272 25,042,678
Less losses, company use, etc. 1,590,100 1,742,526
---------- ----------
Total sales 22,873,172 23,300,152
========== ==========
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.
A number of states, including Massachusetts, have enacted similar
laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. New England Electric System (NEES)
subsidiaries currently have in place an internal environmental
audit program and an external waste disposal vendor audit and
qualification program intended to enhance compliance with existing
federal, state, and local requirements regarding the handling of
potentially hazardous products and by-products.
NEES and/or its subsidiaries have been named as 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
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
Note A - Hazardous Waste - Continued
- ------------------------
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. NEES has
been involved in settlement negotiations to determine NEES'
apportioned share of costs, which it expects to conclude by
year-end. NEES believes it has adequate reserves for this site.
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
uncertain whether and to what extent such efforts would be
successful. At September 30, 1995, NEES had total reserves for
environmental response costs of $46 million and a related
regulatory asset of $16 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 B - Purchased Power Contract Dispute
- -----------------------------------------
In October 1994, New England Power Company (NEP) was sued by
Milford Power Limited Partnership (MPLP), a venture of Enron
Corporation and Jones Capital that owns a 149 megawatt 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
Note B - Purchased Power Contract Dispute - Continued
- -----------------------------------------
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 before the
Federal Energy Regulatory Commission making similar allegations to
those asserted in MPLP's lawsuit. Hearings on this claim concluded
in October 1995. An Administrative Law Judge initial decision is
expected in early 1996.
Note C - 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 D - Shipping Charter Agreement Dispute
- -------------------------------------------
On August 17, 1995, the Massachusetts Superior Court dismissed
a lawsuit filed against NEP in May 1995 by Keystone Shipping
Company (Keystone). The Court held that Keystone's claims,
relating to a ship charter, were subject to mandatory arbitration
under the charter between NEP and Intercoastal Bulk Carriers, Inc.
Note D - Shipping Charter Agreement Dispute - Continued
- -------------------------------------------
(IBC), an affiliate of Keystone. On August 21, 1995, an
arbitration panel unanimously ruled in NEP's favor. In September
1995, the parties signed mutual releases. The ship is currently in
dry dock for routine maintenance and inspection. During the
inspection, it was determined that repair work is needed. Under
the releases, IBC is responsible for the cost of such repairs and
the arbitration panel would hear any disputes which arise
concerning the cost of repair.
Note E
- ------
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 third quarter and first nine months of 1995
were $1.14 per share and $2.39 per share, respectively, compared
with $.91 and $2.49 per share earned in the corresponding periods
in 1994.
Increase (Decrease) in Earnings
Period ending September 30,
--------------------------
3 months 9 months
-------- --------
1994 earnings $ .91 $2.49
Sales to ultimate customers .08 (.04)
Purchased power costs excluding fuel (.02) (.21)
Other operation and maintenance
expenses .08 .01
Depreciation and amortization of
utility plant .13 .23
Interest expense, net of allowance for (.02) (.08)
funds used during construction
Other (.02) (.01)
----- -----
1995 earnings $1.14 $2.39
===== =====
Earnings in the third quarter increased as a result of
increased sales to ultimate customers, reflecting warmer weather in
the summer of 1995. During the nine month period, lower sales to
residential customers were offset by higher sales to commercial and
industrial customers.
The increase in purchased power costs for the nine months is
primarily due to overhauls and refueling shutdowns at partially-
owned nuclear power facilities. This increase also reflects costs
to repair the steam generator tubes at the nuclear power plant
owned by Maine Yankee Atomic Power Company (Maine Yankee) in which
New England Power Company (NEP) has a 20 percent interest.
The reduction in other operation and maintenance expenses in
the third quarter reflects reduced overhaul activity at
wholly-owned generating units.
The decrease in depreciation and amortization reflects reduced
amortization of the Seabrook 1 nuclear unit (Seabrook 1) in
accordance with NEP's 1995 rate agreement(described below), and the
completion, in the second quarter of 1995, of the amortization of
the costs of certain coal conversion facilities. 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.
The increase in interest expense is primarily due to increased
long-term and short-term debt balances and higher interest rates.
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 that were recovering the costs
of a coal conversion project and a portion of NEP's investment in
Seabrook 1. These two surcharges 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 during the fourth quarter of 1995. 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 are being deferred and will be recovered in 1996.
The FERC's approval of this rate agreement applies to all of
NEP's customers except the Milford Power Limited Partnership
(MPLP). MPLP, which owns a gas-fired power plant in Milford,
Massachusetts, has protested this rate agreement based on issues
related to the Manchester Street Station Repowering project.
Hearings on this protest concluded in October 1995 and an
Administrative Law Judge initial decision is expected in early 1996
(for further discussion see Note B).
Retail Rate Activity
- --------------------
On September 29, 1995, the Massachusetts Department of Public
Utilities (MDPU) approved a $31 million increase to base rates for
Massachusetts Electric Company (Massachusetts Electric) which the
Company began billing effective October 1, 1995. Approximately $5
million of this increase relates to the amortization of previously
deferred PBOP costs. Massachusetts Electric and certain
intervenors to the rate case have each filed motions asking that
the MDPU reconsider certain rulings within its order.
On October 17, 1995, the Rhode Island Public Utilities
Commission (RIPUC) approved a settlement between The Narragansett
Electric Company (Narragansett), the Rhode Island Division of
Public Utilities and Carriers and a group of large commercial and
industrial customers that provides for a base rate increase of $15
million effective in December 1995. The RIPUC also approved $3
million of new discounts for manufacturing customers, the costs of
which are not being recovered from other customers.
In June 1995, the RIPUC opened a proceeding to reassess whether
fuel adjustment and purchased power cost adjustment (PPCA)
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 significant
risk regarding recovery of such costs. The RIPUC has not yet
scheduled hearings in this proceeding.
In July 1995, Granite State Electric Company (Granite State)
filed a $2.6 million rate increase request with the New Hampshire
Public Utilities Commission (NHPUC). On October 31, 1995, Granite
State received approval to collect an interim increase of $0.9
million, effective November 1, 1995, subject to refund or surcharge
pending the final outcome of the full case. A final decision is
expected during the first quarter of 1996.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1995 vs 1994 1995 vs 1994
------------- ------------
(In Millions)
Sales to ultimate customers $ 9 $ (4)
Rate changes 7 17
Fuel recovery (2) 17
Demand Side Management (DSM)
program recovery 5 6
Unbilled revenues recognized under
rate agreements (10) (22)
Oil and gas sales (3) (11)
Other 1 2
---- ----
$ 7 $ 5
==== ====
For a discussion of sales to ultimate customers, see the
Earnings section.
Rate changes for the three and nine months ended September 30,
1995 reflect the November 1994 expiration of Massachusetts
Electric's temporary rate decrease, partially offset by increased
discounts offered by NEES retail subsidiaries to large customers
who agreed to give a three to five year notice before changing
electricity suppliers.
For a discussion of fuel recovery see the fuel costs discussion
in the Operating Expenses section.
The decrease in the recognition of unbilled revenues is due to
completion of Massachusetts Electric's 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 that will end December 31, 1995. The
recognition of unbilled revenues was in accordance with rate
agreements.
The reduction in oil and gas sales is primarily due to
decreased gas production and lower gas prices.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1995 vs 1994 1995 vs 1994
------------- ------------
(In Millions)
Fuel costs $ 1 $ 18
Purchased energy excluding fuel 2 23
Operation and maintenance:
Retail DSM 5 6
Other (8) (1)
Depreciation and amortization (16) (32)
Taxes 6 (10)
---- ----
$(10) $ 4
==== ====
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 for the first
nine months of 1995 reflects increased short-term purchases by NEP
due to decreased nuclear generation, decreased hydro production due
to low water levels, and overhauls of fossil fuel generating
facilities.
Purchased energy excluding fuel represents the remainder of
purchased electric energy costs. The increase in purchased energy
excluding fuel for the first nine months of 1995 is the result of
increased costs associated with scheduled plant overhauls and
refueling shutdowns at partially-owned nuclear power facilities.
This increase also reflects costs to repair the steam generator
tubes at Maine Yankee in which NEP has a 20 percent interest. The
Maine Yankee nuclear unit has been shut down since January 1995,
but is expected to return to service by year end. NEP recorded the
full estimated incremental cost of the repairs in the first six
months of 1995 as a charge to purchased power expense. The
increase also includes amortization of previously deferred
purchased power contract termination costs. Under the existing
terms of certain purchased power contracts with other utilities,
NEP will be reducing its power purchases which will result in a $19
million reduction in 1996 purchased power expenses.
The decrease in other operation and maintenance expenses for
the third quarter is primarily due to reduced overhaul activity at
NEP's generating plants.
The decrease in depreciation and amortization is due to
decreased amortization of Seabrook 1 in accordance with NEP's 1995
rate agreement, the completion of the amortization of certain coal
conversion facilities in the second quarter of 1995, and decreased
oil and gas amortization rates due to decreased gas production.
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.
The change in taxes for the third quarter and first nine months
of 1995 is primarily due to the change in income for those periods.
Allowance For Funds Used During Construction (AFDC)
- --------------------------------------------------
AFDC increased for the third quarter and first nine months of
1995 due to increased construction work in progress, principally
associated with the Manchester Street Station repowering project.
In September 1995, the first of three generating units began
commercial operation at the power plant. The remaining units are
scheduled to commence commercial operation during the fourth
quarter of this year. AFDC ends for these projects when the units
go into commercial operation.
Interest Expense
- ----------------
The increase in interest expense is primarily due to increased
long-term and short-term debt balances and higher interest rates.
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.
Massachusetts, Rhode Island, and New Hampshire have been
considering various proposals for allowing electric customers
greater choice over their electricity supplier. Massachusetts
Electric and Narragansett proposed to the MDPU and RIPUC,
respectively, a set of interdependent principles for industry
restructuring which was agreed to by groups representing
environmental protection advocates, governmental agencies,
non-utility generators, investor-owned utilities, and large and
small customer interests. These principles included, among others,
provisions for increased customer choice while allowing utilities
the opportunity to recover the cost of their past commitments
(stranded costs). In August 1995, the MDPU adopted principles
similar to those filed by Massachusetts Electric, including a
reasonable opportunity for recovery of stranded costs over a period
not to exceed 10 years. The MDPU directed Massachusetts Electric
and two other utilities to file by February 16, 1996, a detailed
plan consistent with the MDPU decision. Also in August 1995, the
RIPUC adopted the principles proposed by Narragansett, except for
one regarding temporary support for renewable fuel technologies.
The RIPUC ordered Narragansett to file a report no later than
February 1, 1996 on its progress in negotiating a specific plan
consistent with the principles.
In October 1995, the NEES Companies began discussions with
interested parties regarding the plan to be filed pursuant to the
MDPU and RIPUC orders. That plan, to be called "Choice: New
England", will propose that all customers of electric utilities in
the three states served by NEES retail subsidiaries have the
ability to choose their power supplier beginning in 1998. Under
the plan, generation assets would become competitive, while
transmission and distribution assets would remain regulated. Among
other provisions, the plan would also propose a uniform access
charge so that all regional utilities will have an opportunity to
recover the cost of commitments made under the current regulated
system.
NEES believes that its "Choice: New England" proposal meets the
principles for industry restructuring adopted by the MDPU and RIPUC
for increased customer choice while providing utilities with an
opportunity to recover costs which may be stranded by such customer
choice. However, there can be no assurance that a final plan will
include an access charge which would recover all stranded costs.
Furthermore, market pricing of generation will increase the
volatility of NEES revenues and, because of competitive pressures,
may not result in full cost recovery.
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. Narragansett urged the Governor to exercise his veto,
because Narragansett believed 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 committed that, if the measures were
not enacted into law, Narragansett would provide a two year rate
discount to manufacturing customers (see Retail Rate Activity
section). In addition, Narragansett committed that if the measures
were not enacted, Narragansett would 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 issues, that filing would address the
proper means for recovering past costs incurred to serve exiting
customers through a compensatory access charge. If the charges
were approved by the RIPUC, the appropriate access tariffs would
then be filed with the FERC. The Rhode Island Legislature may
still override the vetoes.
In August 1995, the MDPU issued an order in a stranded cost
case involving another utility and one of its customers. This
customer, which previously purchased all of its requirements from
the utility, installed cogenerating equipment and requested that
the utility provide only backup service. In its order, the MDPU
required the customer to pay the utility 75 percent of the net
stranded costs attributable to serving the customer's load.
Because, in part, utilities have always been exposed to the risk of
customer cogeneration, the MDPU indicated that its order, which is
under appeal, did not set precedent for the issue of stranded cost
recovery in the context of utility industry restructuring.
In New Hampshire, the NHPUC has been 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 in which it found that franchise territories in New
Hampshire are exclusive as a matter of law. The order also stated
that 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. NHPUC
guidelines issued in October 1995 provide that each New Hampshire
utility must allow customers representing three percent of its peak
load (four megawatts for Granite State) to have access to
alternative suppliers of generation for three years, starting May
1, 1996. Customers participating in the pilot would be responsible
for paying 50 percent of the utility's stranded costs, with the
balance borne by utility shareholders. In comments filed on the
preliminary guidelines, Granite State requested that the guidelines
be revised to adopt "Choice: New England" as an alternative
approach to the proposed pilot. Granite State offered to file the
plan with the NHPUC in February, consistent with the filings
contemplated in Massachusetts and Rhode Island, so that the plan
could be implemented on a pilot basis by May 1, 1996. Granite
State's comments also challenged the legal basis for the proposed
assignment of stranded costs, arguing that the guidelines will
result in an unconstitutional taking without compensation, are
preempted by federal law, and are inequitable. The June 1995
legislation also established a legislative committee on retail
wheeling and restructuring. The committee is expected to issue an
interim report on its findings in November 1995 and a final report
by March 1, 1996.
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 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, or the NEES companies' own initiatives, such as
"Choice: New England", 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
September 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 C.
Liquidity and Capital Resources
- -------------------------------
Plant expenditures in the first nine months of 1995 amounted to
$248 million for the utility subsidiaries, including $93 million
related to the Manchester Street Station repowering project in
Providence, Rhode Island. In September 1995, the first of three
generating units began commercial operation at the power plant.
The remaining units are scheduled to commence commercial operation
during the fourth quarter of this year. The approximately 500
megawatt repowering project is estimated to cost approximately $455
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
nine months of 1995 are summarized as follows:
Issues Retirements
------ -----------
(In Millions)
Long-term debt
- --------------
Massachusetts Electric $ 88 $ 35
Narragansett 15
New England Power 60 10
Granite State 5 2
Hydro-Transmission Companies 9
NEEI 202 238
---- ----
$370 $294
==== ====
NEP refinanced $10 million of variable rate mortgage bonds in
the first nine months of 1995. Interest rates on the other new
long-term debt issues shown above ranged from 6.69 to 8.46 percent.
In October 1995, Narragansett issued $7 million of long-term debt
at a rate of 7.50 percent. Narragansett is planning to issue $16
million of first mortgage bonds during the fourth quarter of 1995,
at an interest rate of 7.30 percent, to refinance outstanding first
mortgage bonds. Narragansett Energy Resources Company is planning
to issue $32 million of long-term notes during the fourth quarter
of 1995 at an interest rate of 7.25 percent.
Net cash from operating activities provided all of the funds
necessary for oil and gas expenditures for the first nine months of
1995. New England Energy Incorporated's (NEEI) capitalized oil and
gas exploration and development costs amounted to $13 million,
including $8 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.
At September 30, 1995, NEES and its consolidated subsidiaries
had lines of credit and standby bond purchase facilities with banks
totaling $683 million. These lines and facilities were used for
liquidity support for $193 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 a Massachusetts Electric Company $31
million rate order from the Massachusetts Department of Public
Utilities, 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 The Narragansett Electric Company $14.9
million rate order from 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 New England
Power Company (NEP) by Milford Power Limited Partnership on October
28, 1994, and intervention into a NEP rate filing discussed in Part
I of this report in Management's Discussion and Analysis of
Financial Condition and Results of Operation and in Note B of Notes
to Unaudited Financial Statements, is incorporated herein by
reference and made a part hereof.
Information concerning dismissal of a lawsuit filed against
NEP in May 1995 by Keystone Shipping Company, discussed in Note D
of Notes to Unaudited Financial Statements, is incorporated herein
by reference and made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company filed reports on Form 8-K dated July 3, 1995,
August 16, 1995, September 8, 1995, and September 29, 1995, all
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 September 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: November 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.