SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of the
Securities Exchange Act of 1934
Date of Earliest Event Reported: August 6, 1997
NEW ENGLAND ELECTRIC SYSTEM
(exact name of registrant as specified in charter)
Massachusetts 1-3446 04-1663060
(state or other (Commission (I.R.S. Employer
jurisdiction of File No.) Identification No.)
incorporation)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
(508) 389-2000
(Registrant's telephone number, including area code)
Item 5. Other Events
- ---------------------
Industry Restructuring and Sale Agreement
- -----------------------------------------
On August 6, 1997, New England Electric System (NEES)
announced that its subsidiaries, New England Power Company (NEP)
and The Narragansett Electric Company, have reached an agreement
to sell their non-nuclear generating business to U.S. Generating
Company (US Gen), an affiliate of PG & E Corporation, for $1.59
billion in cash. NEES also announced that its Board of Directors
had authorized the repurchase of up to five million of its common
shares. The exact timing of the share repurchase, to be
accomplished through open market purchases, will depend on market
conditions.
The sale is subject to approval by various state and federal
regulatory agencies, which may take at least six to twelve
months. One of the contingencies to the sale is that all
regulatory approvals must be obtained within eighteen months.
The principal terms of the sale are:
(a) US Gen will pay the NEES companies a purchase price of $1.59
billion. There is a holdback of $225 million. If retail choice
is in place by January 1, 1999 (defined as retail choice for
customers representing 89 percent of kilowatt-hour (kWh) sales of
investor owned utilities in Massachusetts or 50 percent of kWh
sales in New England), the NEES companies will be paid the
holdback upon the later of closing or choice date. If retail
choice is delayed beyond January 1, 1999, then US Gen will retain
part of the holdback at the rate of $75 million for the first
year of delay and $50 million per year of delay thereafter. The
portion of any holdback to be retained will be pro rated for any
partial year;
(b) US Gen will reimburse the NEES companies for $85 million of
costs associated with early retirement and special severance
programs for employees impacted by industry restructuring;
(c) US Gen will assume NEP's entitlements to approximately 1,100
megawatts (MW) of capacity procured under power contracts with
other utilities and independent power producers. NEP will make
payments of approximately $150 million to $170 million per year
through 2007 toward the above market portion of power contracts.
These payments have a net present value of approximately $1.1
billion; and
(d) US Gen will assume certain existing collective bargaining
agreements through their expiration.
Upon closing of the sale, the balance of the after-tax cash
proceeds will be used to retire NEP's generation related debt,
and for possible additional share repurchases and for other
investments.
Under Rhode Island's Utility Restructuring Act of 1996 and
the Consumers First plan approved by the Massachusetts Department
of Public Utilities earlier this year, the proceeds from the sale
will be used to offset the stranded costs which the NEES
companies have been authorized to recover from customers.
Settlement agreements that would implement the Rhode Island
statute and the Consumers First plan are pending before the
Federal Energy Regulatory Commission (FERC). The NEES companies
estimate that, upon completion of the sale, prices for their
customers will drop on average by approximately 15 percent below
today's prices.
The NEES companies non-nuclear generating business includes
three fossil-fuel generating stations and 15 hydroelectric
stations, totaling approximately 4,000 MW of capacity, with a
book value of $1.1 billion.
This Form 8-K contains statements that may be considered
forward looking statements as defined under the securities laws.
Actual results may differ materially. As disclosed in the NEES
Form 10-K for the year ended 1996, there are several risk factors
which could affect actual results. While the NEES companies
believe that this sale agreement and other developments
constitute substantial progress in resolving the uncertainty
regarding the impact on shareholders from industry restructuring,
significant risks remain. These include, but are not limited to:
(i) the potential that ultimately the Massachusetts and Rhode
Island settlements and the Rhode Island statute will not be
implemented in the manner anticipated by NEES, (ii) the
possibility of state or federal legislation that would increase
the risks to shareholders above those contained in the
settlements and Rhode Island statute, and (iii) the potential for
adverse stranded cost recovery decisions involving its
subsidiary, Granite State Electric Company, and NEP's
unaffiliated customers.
Even if these risks do not materialize, the implementation
of the sale agreement and the Massachusetts and Rhode Island
settlements and the Rhode Island statute regarding restructuring
will negatively impact financial results for NEES starting in
1998. Upon completion of the sale, the NEES companies' earnings
will be much more dependent upon the earnings generated by its
transmission and retail distribution subsidiaries. The major
risk factors affecting these companies relate to the possibility
of adverse regulatory or judicial decisions or legislation which
limit the level of revenues the companies are allowed to charge
for their services. The returns on equity permitted on the
subsidiaries' distribution operations (up to 11.75%) and on the
unrecovered commitments in the generating business (generally
9.4% before mitigation incentives) are less than those
historically earned by NEES. In addition, starting in 1998,
earnings will be affected by the return on the reinvestment of
the proceeds from the sale of the generation business. Such
reinvestment return is likely, at least in the near term, to be
less than is currently earned by the generation business. 1998
will be a transition year. To the extent that retail choice is
not in place by January 1, 1998 in Massachusetts, approximately
73 percent of the amount of NEP's earnings in excess of 11.75
percent return on equity must be refunded to Massachusetts
Electric Company until its earnings cap is met, and then to
reduce stranded costs. In addition, the NEES companies will also
incur costs associated with the transition after the sale is
completed.
Maine Yankee
- ------------
NEP has a 20 percent equity ownership interest in Maine
Yankee Atomic Power Company (Maine Yankee) which owns an 880 MW
nuclear generating station. On August 6, 1997, the Maine Yankee
board of directors announced it will permanently shut down and
decommission the station.
As reported earlier, the board had announced in May that it
was reviewing the economic viability of the station and that the
station would likely be permanently shut down unless a buyer
could be found. PECO Energy Co. had expressed an interest in
purchasing the station. But on August 1, 1997, the Maine Yankee
board announced that although considerable progress was made
during the negotiations, the parties could not arrive at a
mutually beneficial agreement.
At June 30, 1997, NEP's net investment in Maine Yankee was
$14.9 million. NEP estimates that Maine Yankee's future billings
to NEP, including decommissioning of the plant, will be at least
$140 million and will be subject to FERC approval. These
estimated costs will be recorded as an accrued liability with an
offsetting regulatory asset in the expectation that the costs
would be recoverable from customers. Maine Yankee is conducting
a decommissioning study and the decommissioning figures included
in the estimated billing amount shown above may increase
substantially.
There is also an on-going review by the Department of
Justice of a Nuclear Regulatory Commission (NRC) investigatory
report for possible criminal violations related to the Maine
Yankee station. Civil fines might also be assessed by the NRC
based upon several inspections, including its independent safety
assessment.
Millstone 3 Litigation
- ----------------------
On August 7, 1997, NEP filed suit against Northeast
Utilities (NU) in Massachusetts Superior Court, Worcester County
for damages resulting from the tortious conduct of NU relating to
the Millstone 3 nuclear generating unit (Millstone 3). NEP is a
12 percent joint owner of Millstone 3, which is operated by
Northeast Nuclear Energy Company, a subsidiary of NU. As
previously reported and detailed in the press, Millstone 3 has
experienced numerous technical and nontechnical problems. By
order of the NRC, Millstone 3 has remained shut down since April
1996, pending verification that the unit's operations are in
accordance with NRC regulations and the unit's operating license.
NEP is seeking compensation for the losses it has suffered,
including the costs of the lost power and costs necessary to
assure that Millstone 3 can safely return to operation. NEP also
seeks punitive damages.
NEP, on August 7, 1997, also sent a demand for arbitration
to Connecticut Light & Power Company and Western Massachusetts
Electric Company, both subsidiaries of NU, seeking damages
resulting from their breach of obligations under an agreement
with NEP and others regarding the operation and ownership of
Millstone 3.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this Current Report on
Form 8-K to be signed on its behalf by the undersigned thereunto
duly authorized.
NEW ENGLAND ELECTRIC SYSTEM
s/Alfred D. Houston
By
Alfred D. Houston
Executive Vice President and
Chief Financial Officer
Date: August 7, 1997
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.