ML20196B841
| ML20196B841 | |
| Person / Time | |
|---|---|
| Site: | Seabrook  |
| Issue date: | 12/31/1987 |
| From: | Bok J, Huntington S NEW ENGLAND ELECTRIC SYSTEM |
| To: | |
| Shared Package | |
| ML20196B791 | List: |
| References | |
| NUDOCS 8806300386 | |
| Download: ML20196B841 (44) | |
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FinancialHighlights
^ 1987 1986 1985 Earnings peroverageshare $ 3.05 $ 3.20 $ 3.15 Dividendsdedared pershare $2.01 $1.94 $1.83 Annualdividend rate-year end $ 2.04 $2.00 $1.92 Book value per share-year end $21.41 $20.24 $18.81 Market price per share-year end $22% $28 $25 Retumon overagecommon equity 14.6 % 16.4 % 17.3 %
New England Electric System (NEES) is a public New Eng!and Power Company, which operates 21 utility holding company headquortered in West- generating stations; on oil and gas explocation and borough, Massachusetts. Subsidiaries indude three fuels company, New England Energy Incorporated; e! ail operating companies-Massachusetts Electric three transmission service companies: New Eng-Company, which senes 871,000 customers in 146 land Electric Tmnsmission Corporation, New Eng-Massachusetts communities; The Normgansett land Hydro-Transmission Corpamtion, and New Electric Company, which serves 301,000 customers Eng!and Hydro-Tmnsmission Electric Company,
~ in 27 Rhode Island communities; and Granite State Inc.; a cogeneration and conservation service com-Electric Company, which serves 32,000 customers pony, NEES Energy, Inc.; and a service company, in 21 New Hampshire communities. Other subsid- New Eng!cnd Power Service Company.
iaries indude a wholesale genemting company, Contents letter to Shareholders 2 ,
t Alook to the Future 5 Financial Review 16 Financial $tatements 20 Notes to financial 5tatements 26 Report ofIndependent Certified
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Public Accountants 31 Supplementaryinformation 38 j
System Directors 40 System 0fficers and Subsidiaries 40 ShoreholderInformation bo<kcover
I lh !; f f f l f3 ! and the timely commissioning of needed new supply projects.
- for our par 1, we are vigorously pursuing our NEESPLAN ll pro-p 4 i
g; g grams to assure reliable service to our customers at the lowest possi- ,
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- , o ble cost. These programs, which are discussed in the report that t
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.j follows this letter, are aimed at encouraging our customers to use f electricity more efficiently and increasing supplies from a variety of ll sources. We are very much aware of the uncertainties we face in
! projecting demand and the costs and outcome of our various l N EESPLAN 11 progtams. Our plans therefore must incorporate i appropriate flexibility and diversity.
NEESPLAN ilis an important component of the NEES Agenda that was developed in 1986 and described in last year's annual
Dear Sh areholder:
report. The NETS Agenda spells out our commitments to our cus-1987 saw good eamings for our investors and stable rates for tomers, our sh reholders, our employees, and the nation, region, our customers. Our earnings per average share, while down from and communities that we serve; it is proving to be a very useful the prior two pars, were $3.05, yielding a 14.6 percent retum on blueprint as we strive to make good on those commitments. In the overage common equity. In November, the Board of Directors inaeased the annual dividend rcte from $2.00 to $2.04 per share, report that follows, we highlight our commitment to total customer satisfaction and the importance of providing all of our customers g
the ninthinaeasein seven years. with a reliable and low-cost supply of electricity.
The overage cost per kilowarthour to ultimate customers contin- Licensing activities are continuing for Phase 2 of the direct cur-ued to decline in 1987. Our customers have enjord stable rates for rent transmission interconnection between New England and the several years, with the 1987 cost per kilowatthour below the 1981 Hydro-0uebec system in Canada. New Eng!and Electric System sub-level. For the second year in a row, we are the second lowest-cost sidiaries are constructing the Phase 2 facilities in New England for provider among major utilities in New England. We continue to the benefit of the region as a whole. When Phase 2 is complete, believe that our attention to strict cost control makes it more likely which is cunently anticipated in late 1990, New England will be that our regulators will alk7a os to eam good returns on our core purchasing approximately 10 billion kilowarthours of electricity per utility business. year Over the interconnection, Or approximately nine percent of the System kilovatthour sales to ultimate customers inaeased a region's needs. The region imported approximately five billion kilo-robust 5.8 percent in 1987, bringing our average groxh over the worthours over the Phase 1 facilities in 1987.
last five years to 4.8 percent. With growth outstripping new sup- The Phase 2 project received a boost last month when the plies throughout the region, New England utilities had to ask cus. Canadian National Energy Board issued an export license to Hydro-tomers to reduce their usage during high peak demands experienced Quebec fcr the Phase 2 power. There are still several additional regu-in August 1987 and January 1988. We anticipate continued right supplies in the region for at least the next few years, and possibly lotory approvals needed for the project.
The Seabrook I nudear unit, in which we have a 10 percent h
longer depending upon the strength of the New England economy ownership interest, is stillin the licensing process. Although con-1
- struction of the unit was completed in 1986, controversy over eme.- Looking ahead, this month we commenced preliminary discus-sions with Public Service Company of New Hampshire (PSNH) about
/. _ ' gency response planning and other issues is likely to result in (f) protracted further licensing delays. We continue to believe our System the plantPSNH's operating assets. The contemplated acquiring is needed, is safe, and should be licensed promptly, but we cannot purchase would not include PSNH's share of the Seabrook nudear predict whether or when the Nudear Regulatory Commission will plant. We envision that any such purchase would leave PSNH with issue an operating license. Please see page 33 for further discussion its existing Seabrook ownership and able to meet its share of of Seabrook 1. ongoing project costs. We firmly believe that a consolidation would On Janumy 15,1988, the Federal Energy Regulatory Commis- be in the best interests of the customers, employees,and investors of sion (f ERC) issued a decision affirming a 1986 administrative law the two companies.
judge ruling that our wholesale generating subsidiary's investment In February, the Board of Directors elected Alfred D. Houston in the cancelled Seabrook 2 nudear unit was prudent and allowing senior vice president-finance and frederic E. Green non and us to recover our full investment without a retum over 10 years. In a George P. Sasdi senior vice presidents. Mr. Greenman continues as separate part of its decision, FERC announced a new rule for projects general counsel and secretary and Mr. Sasdi as chief engineer.
obandoned in the future, requiring utility shareholders to absab one- After 40 years of service with the System, Guy W. Nichols, for-half of the prudently incuned investment and allowing the other half mer System chairman, president, and chief executive officer, elected to be recovered with a retum from ratepaprs over the planned life of not to run for reelection to the Board of Directors. He had been a director since 1968. Mr. Nichols' many outstanding contributions to
{} the abandoned plant. We have applied for rehearing of this decision.
V the System have had a significant impact on our operations, as he Based on our cunent outlook for od and gas prices, we expect substantial operating losses over the next several wars from our oil served with great distinction and admirable leadership. We appreci-and gas subsidiory's inwstment in properties acquired prior to ate his many yems of inspired service. ,
January 1,1984. Under a pricing policy approved by the Securities We are proud of the dedicated service of our 5,3T cmplopes and Exchange Commission, the oil and gas subsidiary is entitled to throughout the year. Once again, they eamed financial bonuses pass those losses on to the System's generating subsidiary. The through our NEES Goals Program for meeting 1987 eamings, cus-ability of the generating subsidiary to recover those losses from tomer cost, safety, and other operational goals. Their outstanding customers is at issue before FERC. If FERC were to disallow recovery efforts continue to provide real benefits to our customers and share-of the losses, a substantial write-down against NEES earnings holders. We look forward to our employees' continued strong contri-would be required. Please see page 26 for further discussion of our butions as we tockle the challenges of an increasingly competitive oiland gas subsidiary. utilitybusiness.
Our wholesale generating subsidiary filed a proposed $21.5 million rate reduction with FERC, effective January 1,1988. The I rate reduction, which is being revewed by FERC, reflects the kwer Joan T. Bok, Chairman 1988 federal corporate tax rate prescribed by the 1986 Tax Reform g >
l p) Act.During1987,ourthree etailsubsidiariesreduced theirrates o~- M
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by on aggregate of $21 million, reflecting savings in taxes and other Samuel Huntington, President and Chief Executive Officer costs. Please see page 19 for further discussion of our rate activity. February 26,1988 3
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A Look to the Future O Ihe r0 bust econ 0my we have been enjoying in New Eng- 7 j 'g' r 93n, y,,,ison ;nwic.es a m.
men etnic wct" bcter land has brought about a growth in demand for electric- .4 ity that, for the past five years, has for exceeded the national average. As a result, the strong reserve mar-MU [ '[
gins we enjoyed in the 1970s and eady 1980s have now all but evaporated. We are implementing supply j '[
and demand programs to assure the continued reliabil- d ityof service to our customers.
The System is preparing for both the near and for customer satisfactsn. nr primary goal. NEESPLAN 11, terms by moving ahead now with actions on several which was developed in 1985, is the cornerstone of our fronts. To control demand, we have introduced major NEES Agenda commitment. Its key is balanced plan-nev conservation and load management programs that ning: the consistent economic evaluation of all resources encourage customers to use electricity efficiently. On the available to serve the electricity needs of our customers.
supply side, we are purchasing more power from alter- Our objective is to implement a variety of supply and l Oate energy sources, such as trash-to-energy demand plants programs as part d a balanced, diverse, and and cogeneration facilities. We are taking steps to flexible plan that will be effective under varying eco-extend the lives of our generating units and are making nomic conditions.
the necessary investr,ents to get the very best perfor- The NEESPLAN ll programs fallinto four maior cate-mance possible fron, all units. We are continuing to g0 ries: energy conserW bn and load management; life support major initiatives such as the licensing of the extension for existing generating plants; alternate Senbrook I nuclear unit (please see page 33 for further energy; and the addition of new generation sources.
discussion of the Seabrook 1 project) and the comple- In auordance with our balanced planning approach, tion of Phase 2 of the Hydro-Quebec interconnection. we have enluated on array of programs to meet our And, we are moving ahead with preliminary plans to customers' needs. The best mix of projects is being add new generating facilities. implemented to meet the N EESPIAN 11 goals.
The following report summarizes the progress of our NEESPi.tN ll programs during the past two years.
The NEE 5 Agenda nnd NEESPlAN 11 Our demand and supply outlook for the future is aisa discussed.
he N EES Agenda, described in last yar's annual report, confirms emphatically that we will strive for total l
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I Energy Censmation cad t r;cd Wnogement Some of the System's boldest initiatives to date ouurred tors who instdl conservation mec sures at customer in 1987. facilities.
In January, we implemented "Partners in Energy Planning," an intensified, multi-faceted, five-year The Lighting Rebate Program that gives subsidies to energy conservation and load management program. lighting dealers to encourage the sale of energy-efficient For the first year, we spent $6.8 million on this lamps, ballasts, and fixtures to all commercial and NEESPlAN 11 program. This amount will be increased industrialcustomers.
substantiallyin 1988.
The goalis to reduce electricity demand by 230 The Storage Cooling Program that links commercial megawatts and energy consumption by 335 million and industrial customers with architects, engineers, and kihvatthours per year by 1991. In our start-up year, developers who advocate using storage cooling technol-we achieved about l! percent of our five-year target. ogy in new construction or building renovation. The stor-We believe the pn yam is vital for two reasor s. age cooling process makes chilled water or ice during First, it will help redu 3 the amount of new capacity we evening hours and stores it in specially designed tanks need to serve our cus 'mers. Second, it will contribute until it is needed for cooling during the ne fa customer satisfactica by holding down their costs for program, we make a one-time incentive payment to such important services as lighting, heating, and air participating customers who shift usage from the time conditioning. of peak electricity consumption to Off-peak periods.
Among the specific conservation and load manage-ment proje ts that made their debut in 1987 are: The Standby Generation Program that pays customers to operate their own emergency generators when The large Commercial and Industrial Performance demand for electricity is greatest. Special communication Contracting Program that provides subsidies to contrac- equipment notifes the participating customer that we want the generator to operate.
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We also introduced four projects in 1987 aimed at er m i!& nt {j wt .
EL .f e ehcd Me Of M waMr Os.Dese are: a bTps in a rhoc:1 ci !!" i [p m h WscrP g Thee free insulation wrap of electric water heaters; rebates t th ;{ paid to deders for selling only energy-efficient models; ntm pm devices installed on the heaters to control the time of electricity use; and the distribution of highly efficient g
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electric water heaters ihrough our rental program. options based on our balanced planning evaluations.
Our second key objective is to achieve a high level of
(] "Partners in Energy Planning" also indodes rate programs designed to encourage conservation through performance from our units now as well as over their pfking schedules that more accurately reflect the true extended lives. This signifkant challenge will require a cost of oroviding electrical service to partkular customer commitment to excellence acoss the board to maintain classes, and, where possible, improve the level of availability We are pleased with our customers' positive and effkiency of our plants. Our employees are response to our energy conservation and load manage- responding to this challenge and are enthusiastic about ment initiatives. Our progress has placed us well on our the effort. A detailed comprehensive plan has been way to suuessfully meeting the goals for the "Partners developed that places equal emphasis on the equip-in Energy Planning progrom. ment, technical, and human resources committed to our plants. Program initiatives in such areas as training, preventive maintenance, and project management are life Extensian for Existing Genemting Plants proceeding in parallel with equipment improvement projects. As with other NEESP!AN il programs, we are Our existing generating facilities are among our most evaluating the economic merits of each initiative on a t duable resources in meeting our customers' present consistent basis to assure that it is cost effective and and future energy needs. Not only do our plants repre- makes good business sense.
sent a proven technology with many years of suuessful In 1987, the life extension program for our fossil seryke, they also vere built at a fraction of today's cost plants completed the first year of a multi-year critkal for new generating capacity. Previous conversions of six component evaluation phase. The detailed inspections of our fossil units from oil to coal have provided our of the past year provided the factual basis for key main-customers with signifkant savings-and the prospect of tenance and replacement decisions. Looking ahead, we morein theyears ahead. will continue to systematically search out and identify To realize tomorrow's savings from our existing the components that could restrkt unit life and take plants, two key NEESPLAN il objectives were developed.
The first seeks to counteract the effects of aging on our -
camst resa fud geremt.
g 27 7 plants. A program is underway to identify the equip-ment replacemeats required to extend p! ant life, and
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rams. The life extension project appears to compare 'l ,
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steps to minimize the impacts of the aging process. tmsh-to-energy, and other attematives to conventiona!
Although our performance initiatives are just under-generation.Today,wehave250megawattsof al way, we are pleased to repori that in 1987 the avail- nate energy capacity, with an additional 420 mega-ability targets for all four fossil generating stations Watts under contrad. Our expectation is that by 2001 were attained. We will have as much as 1,150 megawatts of alternate in addition, Brcyton Point Unit 3, our lorgest and energy projects.
most efficient generating unit, substantially exceeded These projects indude the installation of cogenera-its 1987 availability target and achieved the best avail- tion equipment at customer locations to reduce their
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ability level since its initial years of commercial opera- electricity purchases. Cogeneration is t4 simultaneous i
tion in the early 1970s. Much work remains to be done production of both electricity and usable heat from one l to achieve our long term objectives. We are optimistic fuelsourc9 that favorable developments in the post year are a posi- Many customers and project developers are ncm five sign for the future. evaluating cogeneration for the purpose of making elec-tricity sales to the Syste.a. Tha System signed contracts in 1987 for four gas cogenemtion projects totaling 236 Alternate Energy megawatts. Three of these projects are expected to The Sy+m has moved aggressively to incorporate eco-begin production in 1991. The System will purchase about 100 megawatts from the fourth project, tenta-nomical altemate energy projects into our supply mix. tive!y scheduled for a late 1989 operating date.
Under NEESPLAN il, alternate energy is an impor- Trash-to-energy plants are a significant existing fant source of generation to serve the increased needs of alternate energy source in our anice territory. We are our customers. By using these sources, we can expand currently purchasing energy from facilities in Millburi, our energy supply and help the New England region use Saugus, and North Andover, Massachusetts.
energy resources more efficiently. A new alternate energy technology provides the We purchase energy from sources such as hydro, power for projects planned for three locations: Billerica and Worcester, Massachusetts, and Johnston, Rhode M pdu 33 e;c*;m ga" r u. lsland. Methane 90s created by dec0mposition of land-hm rb;s c h s' ew;y a fil trash is collected, purified, and burned in a gas tur-em a em -
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A site sdedim. sMy fcr taining diversityof fuelsupplies. a I#8 I*0 k*W9 "Uh c' o ir.g un1 acs temp!c ed ir
- ~. O- 1987 *ith the ess!stme of ,
the enginee. ng fitn (hcles New Generc, ion Y -
/ L Mcin, In.. Sydm emp!cy. -
- / ,. I* ees Joseph Hmir;toa, New
,, h , ,
ingfend Peter vite president (onservation and load management, alternate energy, 'I bI aad extending the lives of our existing generating units (ri;st), evie, propoed ;cy.
al0ne con 00t assure we can meet the growing need for the assistance of &arles T. Main, Inc.. a Boston-based "I d"*in95 'o' " oI de siies with represer.tatives electricity in New England. The System must also have engineering firm. nmes t 9, ix ,
additional gene, ting options available, as well as the Our chief focus now is on base load units rather than ability to respond quickly to changes in the region's units designed for times of peak electricity use only.
energy pirture. Assuming that an economic supply of nctoral gas ca Therefore, providing for new sources of generating be secured, the optimum technology combines gene + <
capacity is a key element in our balanced plan. New tion of electricity by steam, already common on our f generating units are being evaluated consistent!y with system, with generation by means of gas comboFion other clemand- and supply-side programs and will be t nines. By ugng the hot exhaust gases from comb & i built either by is or by others when necessary to provide tion rebines to make steam for conventional steam reliable, low-cost service to customers. turbines, these (ombined-cyde plants achieve excellent Ei'ber continued high growth or the loss of planned fuel effkiency. The Ocean State Power project in Bur-capccity could accelerate the need for additional base tillville, Rhode Island, from which we will purchase 26 load generating capacity in New England. We are, percent of the output, is designed to make use of l therefore, moving ahead with preliminary plans for new combined-cyde technology. The first phase of the plant generationin the 1990s. is expected to bein service by 1990. ,
These activities are harmonious with a recommenda- An updated resource plan meeting the NEESPLAN ll l -
tion in late 1986 by the New England govemors thut criteria was developed in 1987. This study examined our !
utilities move aggressively to identify and begin the supply and demand resource options over a 20-year l licensing of sites for nev plants. period. It advocates a mix of power purchnes from l During 1987, our wholesale generating subsidiary projects with attractive economics under car NEE 5 PLAN ll I concentrated on identifying and selecting appropriate Lalanced planning criteria, and tha consideration of j technology and suitable sites for future fossil fueled 300 megawatts af ras-fired combined-cyde capacPy in l
generating units. The site selectsn study induded both the mid-1990s.
peaking and base lood unh, and was conducted with The study also recommends significant apansion of ,
13
I conservation and load management programs, use of suchusetts ballot in Nowmber 1988, for example, all amilable economic alternate energy resources, and could result in a shutdown of the tw continued plant life extension of our existing generating the state. Our wholesale subsidiary has a 30 percent units. stake h one of them, Yankee Atomic's 175-megomtt Besides initiating nav resource projects, we are plo Jin Rowe.
I movingaheadwiththeconstructionof Phase 2cf the la Nowmber, Maine wters defeated a similar ques-1 transmission interconnection between Hydto-Quebec tion that, if approwd, euld have forced a shutdown of and Nov England and are continuing to seek an coe of- Maine Yankee's 855-megamrt nuder power olm!in i ira license for the Seabrzk 1 nudear unit. Hydro- Wiscosset. Our wholesale subsidiary owns 20 percent of
{
Ouebec Phase 2 is now in the licensing stage. Seabrook 1 Maine Yankee, and we c:e pleased that this rc!erendum remains the subject of intense controvarsy and we are q;e tion as defeated.
unable to predict whehr or when an operating license The System and other member companies of the will be issued. (Please see page 33 for further discus- Nav England Power Pool, a consortium of 95 hv Eng-sion of Seabrook.) We bebe the prompt operation of land electric utility c wes, have introduced a public both projects is in the best interest of our customers and education elfort to inform citizens of the critkal impor- l New England as a wholo. tance of all existing supply fesources in meeting New .
England's crowing demand for energy. g h H 31, c - w:c' , V"""M" ^
00 UIO OE "( 0 ore r:rp d a ib da by utilities, cusI0mers, regulators, lawmakers, private Hg%JNwm '
W :n > : W m ne n' organizations, and environmental groups to discuss ad nprdm;m, e agree on mutually aueptable strategies for assuring m ea v. pm t' adequate supplies of electric?:/ throughout New England.
in e .d, t; He & G e%i hjh W. @, y The System's balanced use of fossil, nudear, hydro, ime M ih r, P t t : f i' 3 , and alternate energy plants-coupled with effective
" l l consery:tk,a and load management programs-will l allo / us to increase our energy rificiency, conserw our 5xuring Our herqy future energy resources, and da our part to help meet the needs of a growing regionaleconomy. j We are convinced that our N!ESPLAN 11 approach 6 the Diversity and flexibility ir, System planning are right one and that the pegrcms are elfective. But we essential in Wht of the uricedainties we face. We will l
I and the region face obstedes to ensuring the adequacy continue to ndiust the mix of our NEESPMN 11 program; l
2 1 of our future supp(.. to mee! our customers' forure energy needs at the A referendum question hkely to appear on de Mas- lowest overallcos'
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( 1 Financial Review O
Earnings and Earnings per overage share for 1987 were $3.03, compmed to dividends $3.20 earned in 1986. The ectned return on common equity was ings. In common with other t,tiliti ket pice of New England Eledrk System (NEES) common shores 14.6 percent, down from 16.4 percent in 1986. The annud dedined in 1987. The malet price of our common shmes was dMdend rate was raised four cents per shme in November 1987, $22b per share at par end, compared with $28 per share at and is now $2.04 per shme on an annud basis. OMdends of the end of1986.
$2.01 dedored in 1987 regewnt a 66 percent payout of earn-Operating revenue Operating rewnue inceased by $16 million in 1987. Umatthour are being billed to customers in 1988. The billing of these losses sales to ultimate customers inceased by 5.8 percent. Haever, rate to customers is part of a contested rate case. See Oil and Gas deceases and a decease in kilowarthour sdes to non-affiliated Operatbns sedbn and Note A 3. The System dso experienced wholesale customers essentidly offset this incease. fuel cost a dacease in oil and got revenues in 1987 primarily due to prke recoWry revenue induded $28 million related to losses fran the dednes.
System's oil and gas operations, which were aurued in 1987 and Operating expenses Totd operoring expenses deceased by $11 million in 1987, whkh incease in other operation and maintenance expense, induding reflects a decease in federal income tax expense due to the Tax inceased racintenance (9 ]n thermd generating units; costs Reform Act of 1986. In addition, depreciation and amortization associated with the tMstone 3 nudear unit going into servke; expense deceased as a result of amortizing the Seabrxk 2 pop- transmission suppet payments associated with Hydro-0uebec erty loss over 10 yems as part of a recent rate order, rother than a Phase 1 going into service; and inceased spenditures on lxd shmter period proposed by New England Power Company (NEP). management and conservation progtams.
These deceases in operating expenses were partidly offset by an Tax Reform Act The Tax Reform Ad reduced the 46 percent maximum corporate benefits of the new tax low are being passed on to customers of1986 federd income tax rate to an everage rate of 40 percent in 1987 through rate rodudions.
and 34 percent thereafter. This reduction in the tax rate was the in oddition to the reductions in the ta principd reason for the decease in federd income tax expense the Tax Reform Act repeded the investment ic< aedit, with certain during 1987. As discussed further in the Rate Activity section, the exceptions, beginning in 1986. (See Note B.)
Allowance for The decease in AfDC since 1985 was prireipdly due to the indu- The indusion of CWIP in rate base inaeased NEP's cash flow, but funds used dunng sion of htillstone 3 in rate base, without any delay or disdlowance, did not incease income as AfDC was not recorded on amounts construction effective with its commercid vperation in April 1986. Also contrib- indudedin rate base. (See Note A-5.)
(AFDC) uting to the decease us the indusion by NEP of inceased Patbily offsetting the decease in 1987 was the ruogNtbn i amounts of construction work in progress (CWIP) in rate base pur- appraximately $8 millbn of Af0C, retrxdive to April 1984, oa suant to a federd Energy Regdatory Commission (FERC) pnky certain costs redlaated from Seabrxk Unit 2 to Seabrmk Unh which dlows utilties under its jurisdicion to indude 50 percent of as part of a rate case. AfDC had not been recorded on Seabrmk CWIP in rate base. In 1987, NEP induded an average of $252 Unit 2 since April 1984. (See Note A-5.)
million of CWlP in rate base, compared with $185 million in 1986.
Oiland gas As more fully descibed in Note A-3, New England Energy Incorpo- exceeded the aosswer reserve by $278,000, and wee passed on operations rated (NEEI) incurred operating losses in 1987 and 1986 due pin- to NEP in 1987 and ultimately to retail customers through the fuel cipdly to precipitous dedines in ohnd gas prkes. In addition, adjustment dause. 0argin: h losses to the cossover reserve NEEl expeds to incur substantial losses in the future. The unfavor- during 1986 resulted in an c Nting incease in other income. In able oil and gas marhet conditions and the outixk for the future 1987, operating losses totded !?8 millbn ($17 mi!! inn a'ter tax) pompted NEEl's decision that, effedive December 31,1986, it and are being passed on to NEP (and ultirretely to customers would not acquire any new oil and gas poveds. through NEF's fuel adjustment dause) in 1988.
losses on prospects entered into through December 31,1983 In an August 1986 rate filing Wih t'e FERC, NEP indkated it (dd program) are passed on to NEP under a modified intercom- would pass N eel losses through its fuei adjustment dause to its.
pany picing polWag Pdicy) apptwed by the Securities and customers commencing in 1987. This pass-thr Exchange Comn. , pt(). In 1986, operating losses were first issue in the case. NEP does not have assurance tha: the FERC wil' applied against on aucunting reserve peviously established on dlow recovery and it connor predid the outcome of the rate pro-NEEl's books, whkh amounted to $24 million before tax ($13 ceedings. Howeer, NEP believes that it is likely that it will ulti-mi! hon after tax) at December 31,1985. Pretar losses in 1986 mate y be able to recover at least its costs in connedbn with NEEI's a
prospects entered into through the end of 1982. The commitments proed resenes at Decembei 31,1987, this mite-down is esti-
. fa the 1983 pospects were made offer the date that the FEK mated to be about $185 million aftu tax fa the gospects entered '
issued a darse that, it now asserts, adopted a market yke into through the end of 1982 and about $25 miDion after tax fa standad fa the recovery ofintercompany fuel costs, the 1983 prospects. The NEES System would dso be required to dp ' : In the event of disoHowance by the FEK of recovery by NEP of mite off ou carved rewnues and refund al billed revenues fa NEEl losses, a of a pia determination that such reconry would be ! asses dready redized, whkh totded approximately $17 million disdiowea, the NEES System would be required to write down afta tax ($29 milla before tax) at December 31,1987; this against eamings the value of the oil and gas popert s in onad- inciudes on estimated $2 milton after tax which is attributable to once with the SK's eiling te<r, and NEEl might terminate the the1983 pospect>.
modified Pricing Potg. Due to this uncertainty, our independent losses on prospects entered into since December 31,1983 auditas how, gudified their opinion on the System's financid (new proniam) are borne by sharehdders and totded $0.8 milhon statements since 1985. Based on oil and gas prices and NEEl's - and $6.2 milBon after tax in 1987 t,ad 1986, respectnely Otherincome/ Other income deceased by $26 miHion in 1987. This decease other income in 1986, as discussed abwe. (See Note A-3.)
(expense)-net primarly reflects the indusion of NEEl's oil and gas operations in Newaaounting As mae fully descibed in Note F 1, effective in 1988, new eamings by SS million after tax.
. rules ocounting rules issued by the financial kcounting Standards In addition, the System cunentt/ does not plan to capitchze, fa Board (FASB) established st icter requirements for the continued aaounting purposes, interest and other costs on a pation of NEEl's capitahzation d AfDC and certain simHar items. These new rules od und gas explaation program. As a result, it is estimated that ir.
dso require mite-downs of utikty assnts in certain circumstances. 1988 appoximately $10 miHion after tax of such costs wiH be In addition, a January 1988 FEK ader aHows utilities to recmer in expensed rather than capitdized far a ounting purposes.
ratesonly 50 percentof pruden.c. icurredcostsif a generating While NEES wiR not be capitanzing these Senbrook 1 and oil unit is conceHed. However, this new f EK poDcy oDous utilities to and gas related items for cunent earnings purposes, it wal seek to indude in rare base, and eam a tetum on, the amount being inov- recover'them through rates.
ered from customers. N EP assumes that the FEK intends this new These new aaounting rules also change the way utuities porg to apply to NEP's imestment in Seabrook I if the unit is aaount for abandoned plants. NEP is being allowe'i by its regula-f'd 1 cancelled. NEP has requested the FEK to reconsider its ader which fors to recoer, mer time, its full imestment in two abandoned issubjecttojudkidreview. .
nudear units (Seabrook 2 and Pilgrim 2). However, it has not been 6d on the fASB's new anounting rules and the new FEK allowed to indude the unreco ered balances of such inwstments in policy mentioned abme, as weH os crudence audits fa state com- rate base and has, therefore, not been ailoned to eam a retum on missions in rate poceedings invdving other joint owners, NEP wiX such balances during the recovery period. In this situation, the new capitdize less AfDC in 1988. NEP estiroates that the amount of anounting rules require a discounting mite-down of the bdance Seabrook 1 AfDC that wGl be capitdized fa aaounting ;urposes in yet to be recovered. NEES wiu restate income la prior years to 1988 will be appoximately $17 milhon after tax less than the reflect these mite-downs, whkh wn1 have an offer tax impact on amount that would have been capitdized under the old aaounting cunent retained eamings of approximately $9 milton. This restate-rules. NEP wal dso charge to expense 50 percent of a0 other Sea- ment wil have tfe relcted effect of inaeasing 1988 eamings by brook I costs incuned in 1988, whkh is estimated to reduce 1988 approximately $2 miHion after tax.
Earnings Per Average Shore Di4dends Dodored Per Shore-Annual Rote 3g
$3.05
$3.02 3j ,,
w ;
$U4 l qDyg $1.80 t N 1 Suo h $1.so Q h Ep yd Su,gtgg 4 j
.o $"Q A$ br
,4?ig M; M]&M y
$.97 U sMilh 79 81 83 25 87 79 61 83 85 87 7
Seabrook1 Although constructon d Seabrxk I was completed in 1986, ing unit is canceHed. However, it dkws utilities to indude the nudear unit receipt from the Nudear Regulatay Commission (NK) of an oper- recoverable amount in rate base and eam a return on the unamm ating Ikense is necessary in ader to commence commercid opera- tized bdance. NEP assumes that the FEK intends this new pdKy tion of the unit. A license may not be issued unless the NK finds to apply to N EP's investment in Seabrxk 1 if the unit is canceded.
that the emergency response phns are adequate. Numerous pw Under the old pdKy, utilities were dlowed to recover, over time, all ties, induding many elected federo: and state offKials, are opposed of their prudently incurred costs, but were not dkwed to earn a to approval of the emergency response plans and operation of the return on the amount being recovered from customers. Both pdi-plant. Problems related to obtaining an operating license are likely cies are designed to share the costs of a cancJed plant bermen to result in signifkant further delays in the operation of Seabrmk I customers andinvestors.
and, therefae, in signifkant cost increases, and may prevent com- in the event that Seabrxk l is canceHed a canceHation mercbl operation. Financial diffkulties of joint owners, induding becomas probable, NEP would be required to write off, in addition the January 1988 bankruptcy bling by Public Service Company of to any costs determined to be imprudent, 50 perrmt of t? pru-New Hampshire (PSNH), or other problems pertaining to regdatbn dent y incurred costs. Due to these uncertainte, onhadent of nudear power plants could dso result in concehtion of the unit. auditors how qudified their opinion on the SystemWacid The FEK recently changed its pdKy regading the recovery of statements. See Note F 2 for a further d;scussion of Seabrxk and peperty losses incuned in the future. The new pdicy dlows utilitics theimpactof anywrite-off.
to recover only 50 percent of prudently incuned costs if a genemt-1987 capital Cash construction expendihstes for NEP and the retail electric sub- expenditures, and dso enabled NEEl to reduce its long-term notes expenditures and sidiaries totded $165 milibn. These expenditures induded approx- by $23 miHion.
finanJng imateh $17 midion for Seabrmk 1. Internd y generated cash During 1987, NEP redeemed $25 millbn of high cost prefened provided approximately 80 percent of the funds necessary fa capi- stock and retired $11.5 million principd amount ollong-term debt.
td expenditures in 1987. In 1986 and 1985, interndly genemted in addition, Granite State Ekctric issued $5 million of long-term cash povided substantidly di of the funds necessary fa capitd notes, Nanagonsett Electric issued $20 million principd amount of expenditures. long-term debt, and Massachusetts Electric retired $750,000 In 1987, oil and gcaxplcration and development expenditures principd amount oflong-term debt.
torded $55 million, induding caoitdized interest costs of $29 NEES mised $44 miHion of equity during 1987 through theisso million. Interndly genemted cash and $7 million of equity contri- ance of new common shares under the System's Dividend Reimest-butions by NEES provided di of the funds necesary for these ment and Common Share Purchase Plan and employee shae plans.
1988 capitd Cash construction expenditures for N EP and the retail electric sub- direct cunent facilities in connection with a second phase of the expenditures and sidiaries are estimated to be $255 million in 19M. Internaby interconnection botween the Hydro-Quebec system and the New financing genemted funds are estimated to meet 75 percent of NEP's England regica. Cash construction expenditures for these facilities construction expenditures and 55 percent af the retail electric sub- are estimated to be $115 million in 1988. Long-term bancmings sidiaries' constructbn expenditures i 38. These estimates are are expected to finance 60 percent of these expenditures. The based on the continued indusion of a portbn of CWIP in mie base. remainder will be provided by equity contributions from NEES (51 (See Note F-6.) percent) and non-affiliated utilities (49 percent). In addition, NEP Two subsidiaries were formed in 1986 to build and operate will build and operate certain facilibes which will reinforce and IGlowatthour SalesGrowth to Number of Customers Ultimate Customers (thovsonds) 58%
s.s% 1204 54%
m y-~j 5.2% [m;j p-N$ f$j $fj Ld 1123 i
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expand its existing diernating current trcnsmission system assai- During 1988, N EP plans to refinance $30 minion of poHution oted with the interconnecton. Cash cmstruction costs la these contrd bonds. Ma<sochusetts Electrk currently plans to issue $40 facilities are estirnated to be $50 minion and are induded aboe asmi!! ion of first matgage bonds. Bond ratings la NEP, Massachu-(3 part of NEP's estimated 1988 construction expenditures. setts Electtk, and Norrogansett Electric are single A a double A.
V in 1988, expenditures la our oH and gas activities are esti- In 1988, the System expects to raise about $35 miHion of moted to be $50 miHion, induding interest costs of $30 milion. equity through the issuance of new comnon shares under its Intemd funds are estimated to povide all of these needdc 1988, Dividend Reinvestment and Common Shore Purchase Plan and as weX as to enable NEEl to further reduce bank debt. employeeshare plans.
Rate activity in November 1987, NEf filed with the FEK its W-9 :ote case rep- was authorized to incease its rates by $40 minion on an annud resenting a $21.5 mkon rate reduction. This decrease was basis as of Mnrch 1,1986. Under the portid settlement, NEP dlowed by the FEK to go into effect, subject to investigaton, on induded in rate base its iJ investment in the MiHstone 3 nudear January 1,1988. This rate filing indudes the effect of the federd unit effective with its in-servke date of Agil 23,1986.'
tax rate reo fion frun 40 percent in 1987 to 34 percent in 1988. In January 19C3, the FEK is ved an ader relating to the one In August 1986, NEP f;ied #s W-8 rate case with the FEK. In unsettled issue in the W-7 rate case, the recovery cf costs of the early 1987, NEP revised this rate case to reflect the impact oi the canceHed Seabrmk 2 nudear unit. The FEK ruled that NEP's new tax law. This revised inciease of $11 million per year oecarne expendtures were sudently incuned rmd the eatire innstment effective Agi l,1987, subject to refund pending the FEK's inves- could be recovered over a 10 1 ear period, after redlocation of cer-tigation. Howewr, NEP has recaded on estimated povision for f ain costs to Seabrmk 1. However, the FEK denied NEP's request refunds of oppoximately $19 miHion Iw the period ApH 1,1987 to eam a retum on its investment whHe it is being recovered from through December 31,1987, which amounts to approximately customers. The FEK also adopted a reased pdky on recovery of
$25 million on an annual basis. This filing indudes the issue c' costs of future cancelled plants. (See Seabrmk 1 Nudear Unit sec.
NEP's recovery through its fuel douse of the gevously mentioneJ tion and Note C.) NEP has requested the FEK to reconsider its losses assodated with N eel's oH and gas pogram (see Oil and Gas order which is subiect to judicial review.
Operations section and Note A-3), as weH as additiond onounts of As peviously mentioned, the Systern's retal electrk subsidiar-Seabrmk CWIP in rate base under a FEK pdky aHowing 50 per- ies hcve reduced their rates pimarily to reflect the impact of the g
centof CWIPin rate base. new tax low and savings in other costs. Massachusetts Electric i'j On february 15,1988, the Rhode Island Attorney Generd filed receiwd permission to lower its rates by $16.75 million effecthe with the ff K petitions to require NEP to cease conecting CWIP on July 1,1987. Narrogansett Electric was allowed to lower its rates Seabrmk l in both the W-8 and W-9 rates and to cease possing by $3.6 miHion effective July 30,1987, and Gmnite State Electrk NEEllossesthioughitsfueldause. agreed to a rate reduction of $500,000 effective July 1,1987.
In 1986, a partid settlement was approed by the FEK in in addition, Granite State Electric egreed to a further rate reduc.
NEP's W 7 whdesde rate case. Under the partid settlement, NEP tion of $500,000 effective January 1,1988.
Preliminary in February 1988, NEES and PSNH canmenced geliminary discus- nudear plant. It i< envrsoned that any NEES acquisition of assets ocquisition sions about NEES ocquiring PSNH's operating assets. The contem- would leow PSN H with its eusting Seabrmk ownership and able to
- discussions plated purchase would not indude PSNH's shcre of the Seabrmk meet its share of ongoing project costs.
Regulation-Percent of Cost Per KWH to UltimateCustomers 1987 Electrk Revenue r ' u ktualDollars gg I [,g
, Rs
- O FederalEnugy yh ,
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u 1987 Dollars l Regulatory (ommission g .
4 ys
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J10clacq 83 84 85 86 81 !
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New England Electric System and Subsidiaries Selected Financial Data Year ended December 31 (millions of dodors, except per shore data) 1987 1986 1985 1984 1983 Operating revenue:
Sectric sdes (exduding fuel cost recoery) $ 942 $ 940 $ 908 $ 882 $ 802 Mcostrecoery 432 407 462 530 507 Other utdity rewnue 28 29 25 26 23 00sdes 7 10 16 13 13 Gassdes 39 46 33 35 29 Totdoperating rewnue $1,448 $1,432 $1,444 $1,486 $1,374 Totalfuelcost' $ 424 $ 421 $ 475 $ 543 $ 522 Netincome $ 169 $ 172 $ 164 $ 152 $ 133 karogecommon shares 55,377,967 53,794,323 52,083,490 50,176,454 48,366,894 Per share data:
Netincome $ 3.05 $ 3.20 $ 3.15 $ 3.02 $2.74 Dividends dedored $ 2.01 $1.94 $1.83 $1.725 $1.625 Totolassets $3,989 $3,810 $3,687 $3,441 $3,131 Capitalization:
Common shore equity $1,200 $1,101 $ 993 $ 888 $ 792 Cumulatin preferred stock subject to mandatory redemption 25 43 43 45 Othercumulatiw preferredstock long-term debt 162 1,387 162 1,401 162 1,364 162 162h
___ 1,361 1,220 Totdcopitalization $2,749 $2,689 $2,562 $2,454 $2,219 Totd electric sdes (millions of kilantthours) 19,741 19,574 18,338 18,256 17,025 Cost per KWH to ultimate customers (cems) 7.04 7.10 7.58 7.94 7.87 System maximum demand (megcatts) 3,798 3,520 3,555 3,379 3,234 Numberofemplopes 5,256 5,131 5,0.4 4,989 5,058 Numberofcustomers 1,204,189 1,175,307 1,147,399 1,122,930 1,102,470 (Indudes fuel component of purchased electric gy, fuel handling, and other related costs (Ustomers ServeiPerimployw Nils Energy Mix Wb li $
~
kJ cry 225 R
229 [hj 11_J g[ k g
c Hydroond Alternates 207 (:. ;] G I:: Nudeor 33% ' 00
- 26%
189 .
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165 . l h 18%
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? 42% . 45% :
L Li. aou(..
M 75 78 81 84 87 79 83 87
u
- N$v England Electric System and Subsidiaries Statements of Consolidated Income Year ended December 31 (thousands of dollars) i k
V 1987 1986 1985 Operating revenue (Note A) $1,448,193 $1,431,943 $1,444,279 Operating expenses:
Fueifor generation 316,775 304,344 375,997 Purchasedelectricenergy:
Fossilandinterchange 104,711 117,793 111,896 Nudearentithers 100,258 88,855 87,535 Other operation 246,660 . 214,540 196,295 Maintenance 101,250 88,564- 99,401 Depreciation and ornatization (Notes A and () 178,918 203,502 166,867 Taxes,other than federalincome 91,316 05,975 94,711-
. Federalincune toxes(Note B) 80,227 117,629 110,078 Totaloperatingexpenses 1,220,115 1,231,202 1,242,780 Operatingir:ome 228,078 200,741 201,499 Otherincome(Note A):
Allowance for equity funds used during construction 25,318 30,985 38,404 Equity in income of nudear power companies 6,616 7,799 7,615 Other incane/(expense)-net (Notes A-3 and () 2,268 28,567 4,351 Federal taxes on other income-cedit (Note 8) 6,235 9,465 11,671 3
d Operatingandotherincome 268,51) 277,557 263,540 -
Interest:
Interest onieng-term debt 87,273 93,028 94,148 Otherinteest .
9,763 9,131 4,170 A!!awance fa barowed funds used during construction, net of deferred federolincome taxes of $5,968, $9,717, and $12,408(Note A) (9,607) (11,587) (14,731)
Totalinterest 87,429 90,572 83,587 Incomeafterinterest 181,086 186,985 179,953 Preferreddividendsofsubsidaies 12,314 14,989 15,875 Netincome $ 168,772 $ 171,996 $ 164,078 l
Averagecommonshares 55,377,967 53,794,323 52,083,490 Pershare data:
Netincome $ 3.05 $ 3.20 $ 3.15 Dividendsdedored $ 2.01 $ 1.94 $ 1.83 ne cuomporying notes are on integral part of these finondal statements.
p 2i L- , -_
New England Electric System and Subsidiaries
{0nsolidated 80 lance Sheets At December 31(thovsonds of donors) 1987 1986 Assets Utility plant, at original cost (Note A) $3,277,430 $3,117,148 Constructionwkin progress (Note F) 593,555 514,987 5,870,985 3,632,135 less aaumulated provisions fa depreciation and anatization 1,008,215 717,743 Net utility plant 2,862,770 2,714,392 Proved oil cad gas properties, at full cost (Note A) 1,024,914 965,805 Unprowd pniperties 18,993 23,368 1,043,907 989,173 Less ouumulated provision fa amatizaton 403,797 326,907 Netoilandgas properties 640,110 _ 662,266 Investments (Note A):
Nodear power companies, at equity 44,736 44,979 h subsidiaries, atequity 27,342 27,240 Otherinvestments,at cost 18,064 7,459 Totalinvestments 90,142 79,678 Current assets:
Cash, including tempaary cash investments of $32,100 in 1987 34,656 1,691 kcounts receivable, less reserws (Note A) 174,530 139,562 fuel, materials, and supplies, at average cost (Note f) 62,043 77,806 Othercunentassets 9,565 6,084 $
Totalcurrentassets 280,794 225,143 Unanortized property losses (Notes C and f) 69,661 87,207 Defer edchargesandother assets 45,1i8 41,731
$3,988,595 $3,810,417 Capitalizatien Capitalization (see anompan@g statements);
andliabilities Common shareoquity $1,199,505 $1,100,694 Cumulative prefened ak subject to mandatory redemption 25,000 W cumulative prefened stak 162,528 162,528 tong-term deb' 1,387,041 1,401,177 Totalcapitalization 2,749,074 2,689,399 Currentliabilities:
Long-tern debt duewithin onewar 14,150 10,000 Short-term debt (Note D) 28,750 45,050 kcountspayable(Note f) 138,050 115,593 kcrued taxes 31,878 20,410 kcruedinterest 21,027 21,273 Dividends dalared 29,816 28,442
& currentliabilities 54,521 26,070 Totalcunentliabilities 318,192 266,838 Deferred federal and state income taxes (Note B) 674,329 654,V6 linamortized investment tax credits (Note B) 149,493 152,131 h Other reserves and defened credits (Notes C and f) 97,507 47,473 Commitments and contingencies (Notes A and f)
$3,988,595 $3,810,417
. The enempanying notes ore on integral part of these financial staternents.
New England Electric System and Subsidiaries
' Statements of Changesin Consolidated Financial Position Year ended December 31 (thousands of donors)
U 1987 1986 1985 Sci .csof Netincome S 168,772 $ 171,996 $ 164,078 intemoly Depreciation and amortimtion 178,918 203,5(12 166,867 generated funds Amortimtionof nudeor fuel 5,662 4,905 investment tax aedits-net (2,619) 6,553 8,485 Deferred federal and state income taxes 1 ,785 60,139 88,955 Alkwance for funds used during construction, net of deferred federalincome taxes of $5,968, $9,717, and $12,408 (34,925) (42,572) (53,135) 329,593 404,523 375,250 Dividendson NEEScommon shares (111,390) (104,442) (95,412)
Net funds frominternalsources 218,203 300,081 _ 279,838 Sourcesof NEEScommon shores 43,891 42,086 35,888 externally long-term debt-issues 25,000 249,520 59,125 generated funds long-term debt-retirements (35,250) (213,762) (78,408)
Premium on reocquisition of long-term debt (21,087) (7,695)
Preferred stock-retirements (25,000) (17,500) (1,250)
Changesin short-term deot (16,300) (35,857) /3.354 Netfunds from extemolsources (7,659) 3,400 68,014 Sourcesoffunds $ 210,544 $ 303,481 $ 347,852 Construction expenditures, exduding allowance n)
( ofApplications funds for fundsused duringconstruction $ 165,217 $ 188,014 $ 200,659 Oil and gas exploration and dewtopment 54,134 77,332 122,118 Investments 10,464 11,823 3,627 Changes in working capital (exduding short-term debt)and otheritems (19,871) 26,312 21,448 Applicationsoffunds $ 210,544 $ 303,481 $ 347,852 Detailofchanges Cash, induding temporary cash investmer,ts $ 32,965 $ (4,653) $ (26,056) in working capital Aaounts receivable 34,968 (39,029) 42,169 (exduding short-term Fuel,naterials, and supplies (15,763) 12,760 (12,838) debt)andotheritems Other current assets 3,481 2,896 1,258 Anountspayable (22,457) 30,482 (19,094)
Currentliabilities-other (41,047) (9.490) 30,316 Otheritems (12,018) 33,346 3,693 ;
$ (19,871) g,312 $ 21,448 New England Electric System and Subsidiaries Statements of Consolidated Retained Earnings Year ended December 31 (thousent of donors) 1987 1986 1985 Retained cornings at beginning of year $ 568,294 $ 502,388 $ 433,722 O) 1, Netincome 168,772 171,996 164,078 Cashdividendsoncommonshores (111,390) (104.442) (95,412)
Premium on reacquisition v! preferred stock (Note H) (2,445) (1,648)
Retainea wrnings at end of year S 623,231 $ 568,294 $ 502,388 The onompanying notes are nn intearal part of these hnoncial statenents.
New England Electric System and Subsidiaries
' {0nsolidated Statements of (opitalization At Decernber 31 (thousands of douets)
Common share equity (Note E) 1987 1986 Common shms, por value $1 per share Authorized-150,000,000 and 75,000,000 shares Outstanding-56,022,422 and 54,393,371 shores $ 56,022 $ 54,393 Poid-in wpital 520,252 478,007 Retained earnings 623,231 568,294 Totalcommon shoreequity $1,199,505 $1,100,694 Cumulative preferred stock of subsidiaries 1987 1986 Shores outstanding Company Por value 1987 1986 Cumulative preferredstocksubject to mandatoryredemption(Note H)
New England PowerCompany 13.48% Series $100 250,000 $ 25,000 g Othercumulative preferredstock Massachusetts Electric Company 4.44% Series 100 75,000 75,000 $ 7,500 7,500 4.76% Series 100 75,000 75,000 7,500 7,500 7.80% Series 100 150,000 150,000 15,000 15,000 7.84% Series 100 200,000 200,000 20,000 20,000 The Na..aansett Electric Company 4 y2% Series 50 180,000 180,000 9,000 9,000 4.64% Series 50 150,000 150,000 7,500 7,500 8.00% Serin 50 200,000 200,000 10,000 10,000 Nm%hd Pcer Company 6.00 % 100 80,140 80,140 8,014 8,014 i
l 4.56% Series 100 100,000 100,000 10,000 10,000 l
4.60% 5eries 100 80,140 80,140 8,014 8,014 4.64% 5eries 100 100,000 100,000 10,000 10,000 6.08% Series 100 100,000 100,000 10,000 10,000 l
7.24% Series 100 150,000 150,000 15,000 15,000 8.40% Series 100 150.000 150,000 15,000 15,000 8.68% Series 100 100,000 100,000 10,000 10,000 1,890,280 1,890,?80 162,5 8 162,528 Total cuntj,ative preferred stock of subsidiarias (annual dividend requiranent of $10,572 h
for 1987 ond $13,942 for 1986) 1,890,280 2,140,280 $162,528 $187,528
- i
i
- L_ ong term debt (Nee G) 1987 1986 Company Rate Maturity GraniteState Bectrk Compcq 8.55 % 1996 $ 5,000
(")
v Notes GroniteState Dectrk Company 12.55 % 2000 4,000 $ 4,000 New England Energy Incorporated (Note G) niable 1994 319,000 402,000
~
Firstmortgagebonds Massachusetts %F 5% 1991 17,490 17,490 Dectrk %6 4ys% 1992 60,000 60,000 Company %H IYs% 1993 10,000 10,000 Se6esi 5 74 % 1996 10,000 10,000 SeriesJ 7ys% 1998 15,000 15,000
%K 7%% 1999 15,000 15,000
%M 77,% 2002 20,000 20,000 Series 0 12y2% 2012 2,129 2,879 Series P 9 74 % 2016 25,000 25,000
-The %R 8 74 % 1992 20,000 Narragansett %F 4Ya% - ;994 4,600 4,600 Dectrk %G 6 74 % 1998 7,500 7,500 Company Se6esI 7 74 % 2002 7,500 7,500
%1 9% 2004 9,700 9,700
%0 9 74 % 2014 25,000 25,000 Series P 10%% 2016 40,000 40,000 New England %G 4ys% 1987 10,000 Peer %H 4% 1988 10,000 10,000 Company Seriesl 4ys% 1991 20,000 20,000 (cmj %J 4ys% 1992 12,000 12,000
'~"'
%K 4y2% 1993 10,000 10,000
%l 67s% 1996 10,000 10,000
%M 6%% 1997 15,000 15,000
%N 7W% 1998 20,000 20,000
%0 71s% 1998 20,000 20,000 Series P 8 78 % 1999 15,000 15,000
%R 7ye% 2002 25,000 25,000
%S 8ys% 2003 40,000- 40,000
%T 8 78 % 2003 40,000 40,000 Garoland New England Se6esH 8% 1988 4,150 4,150 re'unding Power WN 8ys% 1993 40,000 40,000 mortgage bonds Company %A 8ys% 2007 50,000 50,000
%B y/2% 2008 50,000 50,000 SenesF 16ys% 2012 1,991 3,491 Series 0 9%% 2013 90,000 90,000 h6 9%% 2013 16,150 16,150
%I 10y2% 2013 16,600 16,600
%J 10ys% 2013 19,250 79,250
%K siable 2015 38,500 38,500 Series t 7.80 % 2016 29,850 29,853
%M 9y2% 2016 80,000 80,000 Unamoiiized discounts and premiunts (9,2!9) (9,483)
N Totallong-term debt 1,401,191 1,411,177
('d ongaerm
~
l debt due within one year (14,150) (10,000)
$1,387,041 $1,401,177 long-term &bt The accompanying notes are on integral part of these financial statements.
[
New England Electric System and Subsidiaries NotesDFinancial Statements NoteA
- Significant h
onounting policies
- 1. Basis of The consolidated financid statements indude the aaounts of New partkipating New Engbnd utilities, induding New Engbnd Pcwer consdidation England Electrk System (NEES) and d subsidiaries except NEES Company (N EP). Presentation of these subsidiaries on the equity Energy, Inc. and New Engbnd Elatric Transmission (orporation basis is not materid to the consdidated financid statements. In (NEET), whkh are recordcd at equity. NEE 5 Energy is a company addition, four regiond nudear genero:ing compcnies, in which NEP invohrd in c0 generation and energy conservation servkes and NEET has a minority ownership interest, and a shipping joint venture is a transmission seake company that owns and operates a tie line inydving New England Energy Incorporated (NEEI) are dse vdued used to transmit hydroelectric power between the Hydro-Quebec at equity. A2 signifkant intercompany transactions between con-electrk system and New England. NEET has entered into agree- sdidated subsidiaries have been eliminated.
ments providing for the financial support of the facilities by
- 2. System of The accounts cf NEES and its utility subsidiaries are maintained in regubtory bodies having jurisdiction.
onounis accordance with the Uniform $ystem of Aucunts presaibed by
- 3. Oiland gas N!El is engaged in various activitss rebting to fuel supply for t% posed of prospects entered into through December 31,1983. The operations System cunpanies as authaized by the Securities and Exchange second part (new pogram) is composed of prospects entered into Canmissbn (SEC). These activities presently indude (a) partkipa- since December 31,1983.
tion in domestk oil and gas explaation, devebpment, and produc- On aucunt of the hking Pdq, NEEl's dd pogram is consid-tion (principnify through a partnership with a non-offiliated oil company, samedan Oil Capaction (Samedan), a subsidiary of ered to be rate regulated. As such, it has not been subject to certain SEC aucunting rules, appikable to non-rate regukted g
Noble Afhliates), (b) sde of fuel oil purchased in the open trokci companies, whic'. limit the costs of oil and gas property that could to NEP, and (c) owning and operating, through a joint venture, a be capitdzed. The Pricing Pdq has dlowed NEEl to capitdize d cmi-fired, cod-carrying ship, chartered to NEP (See Note M.) costs incurred in connection with its dd progrom fuel expbration Effective December 31,1986, NEEl decided that it would not activities, induding interest paid to banks and a limited return paid acquire new oil and gas pospects. The decision was pompted by to N EES on its investment in NEEl. The SEC rules appikable to non-oil and gas market conditions and the outbok for the future. The rate regulated companies do not permit certain costs to be capitd-decision will not affect NEEl's interests and commitments in oil and ized. In addition, the SEC's fur cost "ceiling test" rule requires gas properties sesently owned by its portarship with Snmedan. non-rate regukted compones to write down capitdized tests to a Samedan is continuing to explore, develop, and manage Oese leal which approximates the pesent value of their proed oil and properties on behdf of the partnership. gas reserves.
NEEl fdlows the full cost method of aucunting for its oil and The old pogram will continue to operate in a rate regubted gas operations, under which capitalized costs rekting to wells and status until the modified Prking Pdq is terminated. Consistent leases determined to be either commercid or non-commercid are with the modifkations appoved by the SEC, the terminction of amortized using the unit of poduction method. the modifed Pricing Pdq will not occur until (i) the old program NE El operates under an intercompany pkinc pdky (Pricing properties are substantidly produced out, (ii) NEEl terminates the Pdq) appromd by the SEC under the Pubik Utility Hoiding Com- modified Pricing Pdicy under circumstances desaibed below, or pony Act of 1935 (19^ 5 kt). Until bte 1985, the Prking Polky (iii) an cuounting reserve (ac,ssover reserve) becomes suffkient povided that any excess (or defkiency) in the prmeeds fran the to offset any required writehn. At that time, the old pogram sale of NEEl poduction (dl of whkh te date has been sold to non- will become non-rate regukted fa SEC aounting purposes.
affiliated third parties) cer costs was passed on to (or recovered The aossover reserve currently has a tero bdance and it is not from) NEP. Under the Pricbg Pdky, NEEl passed appoximately expected that this reserve will ever be sufficient to offset any
$10 million of savings on to NEP and ultimately to retail customers. required write-down.
In October 1985, the SEC approwd the System's poposd for Vader the terms of the modifed Pricing Pd the modificntion and phasing out of the Pricing Pdicy and the even- oting pofits realized ftom the dd pogtom would fat be used to tudconwrsionof NEEltoanon-rateregubtedcompany Asa reimburse NEP's customers la net bsses dready passed on to result of the mod.fied Prking Pdq, NEll's oil and gas explaction them. NEEl would then be requted to make a per bonel compen-progtom ronsists of two parts. The first part Iold progrom) is com- sating payment to NEP's custonus wt of any remaining pohts.
P
6* Any pofits remaining after the compensating payment would go to Act. Whib NEP does not how assurance that the FEK wil allow the aosswer reserw. Through December 31,1985, the old got recoery and it cannot predkt the outcome of ihe raft proceedings, p gram had generated customer savings and, at December 31, NEP betees that it is $kely that it wiu ultimately be able to recoer Q 1985, the cossoer reserw amounted to $24 miHion ($13 milhon aber tax). However, due to guipitous dedines in oil and gas mar-at least its costs in connection with N!E!'s pospects entered into through the end of 1982. The canmiwnts for 1y83 prospects ket prices, the old gogram generated operating losses which were made offer the date that the FEK issued a decision that, it exceeded the cossover reserve by $278,000 in 1986. Charging now asserts, adopted a market price standoid for the recoery of the losses to the aossoer reserve resulted in an offsetting incease etercompany fuelcosts.
in other income. During 1987, NEEl incuned ad6tional bsses in the eent of 6sdkwonce by the FEK of recovery by NEP of which wiu be passed on to NEP in 1988 omounting to $28 million. NEEl bsses, or of a pior determination that such recovery would be Based on the cunent level of oil and gas pkes, the dd pogram is 6sdowed, the NEES System would be required to write down expected to generare substantial bsses in the future, which will be against earnings the vdue of the ci and gas poperties in aamd-passed on to NEP. At December 31,1937, approximately 85 per- ance with the SK's ceding test, and NEEl might terminate the cent of NEEl's poved reserves were naturd gas and the remainder modfied Pricing Pdky. Based on oil and gas pkes and NEEl's .
was aude on and condensate. In its 1986 rata filing with the fed- prowd reserves at December 31,1987, this write-down wouid erof Energy Regubtay Commission (f EK), NEP in6cated it *ould have approximated $210 mHkon offer tax. This indudes on esti-pass the $270,000 losscuned in 1986 through its fuel adjust- mated $185 miUion for the gospects entered into through the end ment dause in 1987. MP intends to pass the 1987 bss of $28 of 1982 and on estimated $25 miHion fa the 1983 gospects. Gas miHion through its fuel dause in 1988. NEP's recovery of these prices are expect d to dedine over the next severd months. The lossee is a cmtested issue in its pending rate poceeding. NEES System would dso be required to write off oH aurued reve-la Agil 1987, in a case not invdving NEP, the FEK issued an nues and refund d biHed revenues for losses dready redized, order disdowing recovery by Ohio Power Company in its rates of a which totded appoximately $17 miHion offer tax ($29 miHion portion of prices paid for cod porchased from a subsi6ary si,pplier. before tax) at December 31,1987; this indudes an estimated $2 The prkes were based on the subsidiary's costs, in cuadance with miUion after tax which is attributable to the 1983 prospects. If a prking method presaibed by the SK under the 1935 Act. Under NEEl terminated the mo6fied Pricing Pdky, from then on pofits q the circumstances of the case, the EEE disoHowed recovery of the and losses from the dd nrogram would be retained by NEES.
() fuel pices to the extent that they exceeded a maket based stan- Under the mo6fied Pricing Pohcy, NEES does not expect to earn dard. Specificdy, the FEK held that it will judge the reasonable- e return on its investment of approximately $40 miHion in NEEl's ness of a utility's acquisition of fuel from an affiliate by compming dd pegram. NEES has not recognized any return on its inwstment '
the acquisition prke with the pice that would have been paid to o in NEElover thelastfive yees.
non-offifete fa comparable fuel. In considering compmability, the Under NEEl's new program, psts and bsses are retained by f ERG order suggests that it is appopriate to consider security of NEES. Therefae, the new program is considered to be non-rate supply. Ohio Power has filed with the FEK a motion for rehearing . regulated and is subject to the SK aucunting rules descibed The Ohio Power dedsion invdwd some issocs sbib to thosa above. !n 1987,1986, and 1985, the System recaded after tax presented in N!P's current rate case froro the point of view of net losses from the new progrom of $0.8 miHion, $6.2 milhon, NEES, the decision was not a favaable development and causes and $10.3 mi". ion, respectively. Since January 1,1984, NEll's additiond concern about the outcome of NE?'s case. Meerthebss, totd expen6tures on the new pogrom have amounted to $52 NEES beliews that NEP's particub circumstances 6ffer in impor- miHion. Although NEEl wH1 continue to incur costs in cornection tant Pspects from 0hin Pcmer's. In seeking to recover the NEEl with activities rebted to existing prospects, it stopped acquiring bsses from its custnmers, NEP is relying en these 6fferences and new 00 a gas pospats offer December 31,1986. ,
its behef that the FEK locks authority to impose a 6fferent recoe NEEl's costs incuned and capitdzed in connection with its oil ery standard for a transaction regubted by the SK under the 1935 and gas expbation and development activties are as fdows:
1987 1986 1985 Year ended December 31 (thousands o' ddlars)_
leases $1,395 $ 9,395 $ 12,187 ,
Expbation 9,152 33,535 31,629 Development 11,920 1,298 44,584 Capitdzedinterestcosts 28,660 33,083 38,128 l
Other 3,607 21 _{4,410)
Totd $54,734 $77,332 $122.118 l w l
l Indoded in the abow a:aounts b 1987,1986, and 1985, and $10,557,000, devebpment costs of $2,858,000, l respctnely, are lease costs of $1,';1,000, $2,414,000, and $1,700,000, and $390,000, and other costs of $(399,000),
$7,456,000, expbarbn costs of $2,752,000, $5,852,000, $949,000, and $-0 , whkh relate to % new pogtom.
F
- 4. Revenue The utility subsidiaries record revenue as biBed on a cyde billing when receiwd from its partners. At the end of 1987, NEP had $28 basis. No rwenue is recorded for electrkity that has been delivered mi!! ion d ocaued re,enue, representing NEEl bsses incuned in 1987 but not billed. NEEl recognizes revenue from sales to thkd parties whkh are being passed on to customers in 1988. (See Note A 3.)
- 5. Utility plant The utility subsidiaries capitdize, as part of construction costs, prwision for depreciation. (See Note F-1.) The composite rates an item cdled dbwance for funds used during construction approximate the pre-tax costs of funds (11.3 percent in 1987, (Af 0C), whkh regesents the canposite interest and equity costs of 11.4 percent in 1986, and 11.9 percent in 1985). Consistent with capitd funds used to finance Act pation of construction costs not past reguktay apptwds, tax benefits on the barowed funds com-eligible la indusion in rate bu In 1987, an average of $252 ponent of AfDC are defened and amatized over the estimated lives minion of constructbn erk in progress (CWIP) was induded in rate of the prgerties giving rise to the tax benefits.
base. AFK is recognized as . at of "Utility plant." Aaordingly, in the "Statements of Consolidated Income," the borrowed Af K is capitalized in the same manner as construction bba and funds component of AfK is presented net of rebted defened fed-mcterbl costs, with offsetting cedits to "Other income" and erd income taxes, as detailed bebw. An additional effect of this "Interest." This method is in aaordance with an established regu- pesentatbn is the chation of a cedit of equd amount, resulting ktay appowd rate-making practke under whkh a utdity is per- from the deductibility of a pation of capitalized interest expense, mitted a return on, and the recovery of ; 3 'enth incuned capitd to "Other income: Federd taxes on other income-cedit."
costs through their ultimate indusion in 6 rate base and in the Year ended December 31 (thousands of ddbrs) 1987 1986 1985 Albwance fa bonowed funds used during construction $15,575 $21,304 $ 27,139 Rebted defened federd income taxes (Note 8) (5,968) _ (9,717) _(12J08)
Albwnnce for bmwed funds used during construction-net 9,607 11,587 14,731 Albwance for equity funds used during construction 25,318 30,985 38A04 Totd dlowance fa funds used during construction-net $34,925 $42,572 $ 53,135 In June 1987, AFK was inceased by approximately $8 million was immediateh oble to indude its full inestment in the facility before tax (appioximateh $7 million offer tax). This incease in rate base, which resulted in a reduction in AfK during 1986 resulted from the recognition of AFK, retr @che to April 1984, andI"7 on certain costs redlaated from the conceHed Seabrmk Unit 2 to Co. nurret.! repairs and minor replacements of pknts Seabrmk Unit 1. This cost redlaation was adopted by the FERC and pr% nes are charged to maintenance expense oueunts as in a rare case invdkng NEP. AfK had not been recognized on incuned. Plant retired a otherwise dispced oi, together with costs Seabrxk 2 since Api 1984. (See Note C.) of removd less sdvoge, is charged to "Anumukted pwisions for in April 1986, the Mi!! stone 3 nudear generating unit, of depreciation and amatizaton."
which NEP is a joint owner, went into rnnucid operation. NED
- 6. Depreciation The depre:iation and amatizatbn expense induded in the "Statements of Consdidated Income" is composed of the fdlowing:
and amortization _ . _ _ _ _ _ _ _ _ _ _ _ _ _ . . _ _ . . . . _ _ _ - - _
yea ended Daember 31 @ousands of ddlars)_ ._ 1987- - . - .___
_ . . 1986.__
_ _ . _ _ _ _ - - ._ .._ 19_85 Depreciation S 98,626 $ 90,549 $ 77,450 Amatization:
Oiland gas properries 76,890 87,263 60,770 Propertylosses(Note () (1,184) 22,944 13,213 OilConservation Adjustment 4,586 _ 2,746 _ 15,434 Totd depeciation and amortizaron expense $178.918 $203,502 $166,867 Depreciarbn is pavided annudh on a strcight-line basis in lives. The prwisions fa depreciation as a percentage of weightc omounts at least suffkient to amortize the undepreciated cost of average degeciable property by plant category are as fdlows:
depreciable utility poperties over their estimated remaining service e
u
^f.
+ , . harended December 31 1987 1986 1985
- : Hydro produchon 1.4% 1.5% . 1.5%
N Thermalgoduction 4.6% . 4.6% ' 4.4%
Nudear poduction 2.5% 2.5%
(") - Other ' 3.2% 3.2% 3.2%
Overalweightedaverage 3.3% 3.3% 3.4%
00 and gas property amortization is based on a percentage caku- the net amount recovered from custorers for the amortization of lated by dividing each year's production by total estimated prowed certain cod conversion facilities. This cunent charge to customers and probable reserves (unit of production method). In addition, (0CA) was designed to dlow the ouelerated recovery d expendi-omortization indudes a writedf of NEEl's new pogram of appros tures for cml conversion focuities at the Salem Harbor Station, both mately $10.1 mulion in 1986 and $16.3 marm in 1985 under during and offer the conersion period, out of savings from buming i SEC ruies oppfable to non-rate regul;ted os and gas companies. cml. Toto; expenditures though December 31,1987 were (See Note A-3.) $104,165,000. At December 31,1987, auumulated povisions The amortization of property losses relates to conceHed nudear fa OCA amortization amounted to $40,547,000. The difference,-
poner plants. In December 1987, rlEP reversed a portion of its . amounting to $63,618,000, remains to be recovered. The OCA Seabrook 2 amortization and estabfrshed refund provisions, pri- amatizou deceased significantly since 1985 due to the dedine ma'ily to reflect on extension of the recovery period to 10 wars as in oil prices. In the event that these circumstances continue and ordered bythe fEK.(See Note C.)- prevent the accelerated recovery of coal comersion costs, the OCA The Oil Conservation Adjustment (0CA) amortization repesents provisions aBow NEP to revert to traditiond rneans of cost recovery.
- 7. Nudear fuel The Nudear Waste Policy Act of 1982 estabtrsnes that the federal agreement regotiated by the lead ownen in a FEK rate proceed-disposaland government is responsible for the disposal c' spent f*udear fuel, ing. In a 1988 state commission decision, the lead owner received
' nudeer plant (Jnder the provtsons of this act, the federd gowrnment requires rate-making appovd of a higher decommissioning cost estimate, decommissioning NEP to pay a fee based on its share of the generation from the of which NEP's share is $24 million in 1987 ddlars. In a future FEK rate filing, NEP wiO seek to incease annud coilectons to A- MiUstone 3 nudear generating unit. NEP is recowring this fee ij throughitsfueladjustmentdouse.
~
reflect this higher totd estimated cost. Nf.P's decommissoning cost ouruds wiH continue to be recorded on its books consistently with Also, NEP is recovering through depreciation expense its share of estimated decommissioning costs for Miustune 3, amonting to its aterecovery.
$16 milion in 1985 ddicts. This estirnate is basd on a settlement
- 8. Retirement plans The System's plans are noncontributay defined benefit plans cover-piemental plans. During 19U, the System revised its method of ing substantiaDy al emplopes. The plans provide pension benefits ascounting for pensions, which dso contributed to thisinaeasc.
based on the emplope's compensation during the five years before These revisions, the net effect of which was not signifkont, were retirement. The System's funding policy is to contribute each war made to comply with new rules issued by the Financid Auounting the net periodic pension cost fa tSt par. However, the contribu- Standeds Board (FASB). The decease in pension cost in 1986 was tion fa any por wiR not be less than the minimum required contri- principdly due to actuarial gains on plan investments, partially bution under federd law or greater than the maximum tax offset by the cost of plan improaments. In addition, costs associ-deductible amount. ated with certain add;tiond benef ts paid to retirees deceased Total pension cost was $4.8 million in 1987, $3.6 mi! Ton in in1986.
1986, and $6.3 million in 1985. The incease in pension ccst in Totd pension cost fw 1987 induded the fd!ouing components:
1987 wa; due to inceased costs recognized on certain brmal sup-1987 Year ended December 31 (thousands of dolars)
Service cost-benefits earned during the period $ 7,808 Plus-interest cost or, p oiected benef I obligation 32,476 less-octud return on plan assets 28,523 Less-net amatization and deferrd 6,931 Totd pensioncost $ 4,830 m
h Assumptions used to determine pension est were:
Discountrcte 8.5%
Rate of inaease in future compensation lewis 6.7%
Expected long-term rate of return on assets 9.0%
29
The fdloning table sets fath the plans' funded status. Plans in from plans in which auumulated benefits exceed assets. ,
which assets exceed auumulated benefits are shoxn separctch (thousandsof dollars) December 31,1987 Assets Benefits January 1,1987 Assets Benefits g
(xceed Exceed Exceed Exceed Benefits Assets Benefits Assets Actuaiid presentvdue of:
kcumu/cledbenefit obligate:
Vested $334,636 $11,362 $317,731 $10,535 Non wsted 13,667 575 13,007 535 Totd $348,303 $11,937 $330,738 $11,070 hojectedbenefitobligation $411,753 $15,161 $389,136 $14,007 Planassetsat fairvdue 424,922 410,776 hojected benef t obligation in excess of (lessthan) plan assets (13,169) 15,161 (21,640) 14,007 Unrecognizednetloss (7,638)
Unrecognized net asset a (obligation)at transition 21,801 (7,536) 23,243 _{8,075)
Net ourved pension licbility recaded on books $ 994 $ 7,625 $ 1,603 $5,932
- Plan assets are composed primarily of guaranteed insurance con- the System. The cost of these benehts, which amounted to trocts and corpacte equity and debt securities. $6,542,000 in 1987, $5,672,000 in 1986, and $5,241,000 l
Certain hedth care and life insurance benehts are presided to substantidly all retired emplopes. Such benehts are not funded by in 1985, is choged to expense when paid.
g Note B Totd federalincome taxes in the "Statements of Consdidated Income" are as fouows:
Federdincome taxes Year ended Decen ber 31 (thousands of ddlars) 1987 1986 1985 income taxes charged to operations $ B0,227 $117,629 $110,078 income taxes credited to "Other income" (6,235) (9,465) (11,671)
Income taxes netted against AfDC-barosed funds (Note A5) 5,968 9,717 12,408 Totd federclincometaxes $ 79,960 $117,881 $110,815 Totd federd income taxes, as shown abwe, consist of the fdlowing components:
v 1987 1986 1985 ear ended December 31 (thousands of ddlars)
Cunentincome tcxes $ 64,928 $ 48,429 $ 11,103 Cafenedincome taxes 17,651 62,899 91,227 i, Investment tax cedits-net (2,619) 6,553 8,485 Tetd federdincome taxes $ 79,960 $117,881 $110,815 Investment tax credits of subsidiaries are deferred and amortized federcl income taxcs attributable to investment tax (redits which !
owr the estimated lives of the property giving rise to the credits. have been defened. The icx Reform Ac' of 1986 generally el aina-Investment tcx credits-net principdy ieflects reductions in current fed investment tax credits.
Certain subsidiares, with regulatory approvol, how adopted can- tchle details the components of the defened federd income taxes O
prehenshe interperiod tax diocation (normdization). The fdbwing of thesesubsidiaries: !
w_ _ - _ _ _ _ _ _ _ _ _ _ - _ . . _ _
c
+ ,
Year ended December 31 (thousands of ddlors) 1987 1986 1985 AHowance la bonowed funds used during construction (Note A-5) $ 5,968 $ 9,717 $ 12,408 -
X . Other construction costs capitdized for book purposes and deducted
'_! for tax purposes .
Excess tax depreciation and amortization 7,818 27,087 6,211 30,814 4,637 22,905 -
Od and gas costs capitdized fur book purposes and deducted fa tax purposes 31,198 58,810 49,026 Anrued revenue for NEEllosses (Note A) 11,286 128 Refunds _
(20,127) (359) (310)
Unamatized propertylosses(NoteC) _429 783 24,352 Lossonreacquireddebt 17 10,611 3,856 Other (4,059) (6,572) (4,229) -
Resersolohriorpor taxdeferrds (41,964) J47,244) (21,418)
Deferred federalincome taxes $ 17,651 5 62,899 $ 91,227 The Tax Reform Act of 1986 reduced the corporate tax rate from 46 restored at the 34 percent rate and wiu require any excess to be percent to on overage iate of 40 percent in 1987 and 34 percent redassifsd fran a deferred tax liability aucunt to a customer-thereafter. As a te, ult, using the 34 percent tax icte, the System related habHity onount. in addition, the new rules wQl require would b excess reserves la deferred income taxes of oppoxi- utihties to establish new defened tax resenes related to the equity -
mately $95 miHion at December 31,1987. Approximately $61 component of AfDC and NEP's 0CA amatization, which have not minion of this excess rdates to NEEl. It is expected that through the previously been considered subject to deferred tax onounting. This regulatay praess, any euess reserves la deferred income taxes additional tax resene wiH be offset by the estabtrshment of a regu-will be passed back to ratepayers with no significant impact on latory asset repesenting amounts ultimately'recmable from rate-netitKome. payers. Therefore, the application of this new rule is not expected q New accounting rules issued by the FA58, which wiH become to have anyimpacton netincome.
Q effectiw in 1989, WHI require ou deferred tax balonces to be Total federalincome taxes differ from the amounts computed by for the differencesareasfoHows:
opplying the statutory tax rate to income before taxes. The reasons Year ended December 3Mthousands of douars) 1987 1986 1985 Computed tax at statutory rate of 40 percent in 1987 and 46 percent in1986and1985 $104,288 $140,238 $133,753 Inceases/(reductions) in tax resulting from:
Allowance fa equity funds used during construction (10,115) (14,253) (17,666)
Amortization of inestment tax cedits (6,978) (6,617) (6,302)
Allother differnes (7,235) (1,487) 1,030 Totalfederalincometaxes $ 79,960 $117,881 $110,815 Effective federalincome tax rate 30.6 % 38.7 % 38.1 %
federal incane tax returns fa NEES and its subsidiaries have through 1983.
been examined and repated on by the Internd Revenue Service Note C Induded in the "Consdidated Bdonce Sheets" under "Unama- of this loss was completed in February 1987.
Propertylosses fized property losses" are the unamatized pations of the costs in 1981, a non-offiliated company announced conceDation of of three cancelled nudear generating orojects, plans to build the Pilgrim 2 nuclear generating unit in Plymouth, in 1980, o non-ofhlicted company announced canceHation Massachusetts. As a part-owner, NEP had expended oppoximately
, ,_) $50 mHlion ($29 minion after tax) on the unit. In 1982, NEP l (
l of plans to bund two nudear generating units in Montague, Massachusetts. As a part-owner, NEP had expended approxi- began to amortize and rece through rates these costs over on mately $5 miUion ($3 milhan after tax) on the Montogue eight-year period, subject to refund pending the outcome of proceed-units. In 1982, NEP began to amatize and rece through rates ings before the FERC. In May 1984, a FERC odministrative law these costs a a five year period. Tha omatization and recay judge ruled that NEP could not recover approximately $8 miHion of 31
I its expenditures fa Pilgrim 2 which were in 6spute. Pnor to the commencing #crch 1,1986, subject to refund pending inwstiga ,
end of 1983, NEP wrote off the disputed pation to "Other income / tien. In January 1988, after its investigation, the FERC issued on (expeirse)-net." However, in 1985, the f ERC issu on opinion and order stating NEP's entke investment in the unit us prudent and ader re.ersing the administratiw law judge's du.ision, and ruled that NEP could recowr it ont a 10-pa period, after rediaatbn cA' that NEP could reaNer its entire inwstment in Pilgrim 2. As a certain costs to Seabrmk 1. The amounts shown abme for tofd W result, NEP's net income in 1985 was inceased by approximately costs at December 31,1987 reflect this redlaation. (See Notes A-
$5 million. 5 and A-6.) In December 1987, NEP rewrsed a pation of its Sea-NEP is a joint owner of the cocened Seabrook 2 nudear brmk 2 omatization and established refund povisions, which generating unit. At December 31,1987, NEP had expended reduced revenues, in ader to reflect the 10-year recoery period approximately $69 millbn ($39 miHion o'ter tax) on the unit. In adered by the FERC. This adjustment had no impact on net NEP's W-7 rate case, the FERC permitted the amatization and income. k EP's request to earn a retum on the unamatized pation recovery through rates of Seabrook 2 costs over a five-War period of its Seabrmk 2 innstment was denied. (See Notes F 1 cr.d Note D N EES and its subsidiaries have lines of cedit with banks totding At December 31, lY87 and 1986, $28,750,000 of shat-Short term $205 mi!! ion, none of which was being used at December 31, term pdlution contid rewnue bonds issued on behc!f of NEP borrowing 1987. There me no compensating bdance amngements. fees are were outstanding.
paid in lieu of compensating bdances on most lines of cedit.
Note E NEE 5 issued and sdd additiond common shaes, $1 par vdue, Purchase Plan and employee share fans, as fdlows:
Share capitalof pursuant to its Dividend Reinvestment and Common Share New England _ ___ ___ _. . _ _.. _._._ _ _ _ _ _ _ _ _ _ _ _ _ _
Electric 5ystem l_987 __
1986 _ _ 1985 Paid-in Paid-in Paid-in (thousandsof ddlas) _ Par capitd Pa capitd Par c_apitd Dividend Reinvestment and CommonShore Purchase Plan $1,165 $29,816 $1,198 $29,561
$1,383 $25,24g Emplore share pbas 464 12,446 415 10,912 461 8,799 Premium on reacqui ted pefened stak (17) (222) (16)
$1,629 $42,245 $1,613 $40,251 $1.844 $34,028 Note f (1) In December 1986, the fASB issued new rules fa regulated of Seabrmk 1 expenditures as imprudent as weH as the f ERC's new Commitments enterprises goveming the anounting fa poperty losses and fa pdicy. Prudence audits of the Seabrxk project conducted by inde-and contingencies newly completed pbnts Thxe rul6 will opply to the System pendent consultants for state commissions in rate poceedings beginning in 1988. As desaibed below, in cerfain circumstances invdving other hint owners have conduded that varying amounts such rules require write-downs of utility assets and limit the contin- of Seabrook 1 expenditures have been imprudently incuned. (See ued capitdizaton of costs. Note F-2.)
in ad& tion, in a january 1988 order, the FERC changed its Based on the FASB's new acounting rules, as well as the pro-pdicy regording the recovery of property losses incuned in the dence aud ts and the new FERC pdicy refened to above, NEP plans future. The new FERC pdicy dlows utilities to recover only 50 pe - to discontinue capitalizing AfDC on about $165 million of cent of prudently incuned costs if a genemiing unit is conceBed. Seabrxk l investments on its bxks at December 31,1987. The However, it cBows utilities to indede the recommble amount in rate amount of AfDC, net of defened taxes, to be capitdized for base and ean a return on the unamortized balance. NEP assumes aucunting purposes in 1988 is cunstly estimated to be apprcxi-that the FERC intends this new pdicy 9 apply to its inwstment in mately $17 million less than the amount that muld have been Seabrock l in the event of cancenation. NEP has requested the capitdized under the old rules. In additbn, NEP will dsa chage to FERC to reconsider its orde' which is subject to ju6cial review. expense 50 percent of di other costs incuned which are estimated As a result, under the new a ounting rules, if Seabrxk l is to be $5 million cher taxin 1988.
concened a canallatbn becomes "probable," NEP wiu be required In ad6tsn, pursuant to the new fA5B ouounting rules, the to immediately write off di costs "probable" of being discuowed System does not cunently plan to capitdize, c: imprudent, as well as 50 percent of di prudently incuned costs. poses, interest and other costs on a patbn of NEEl's dd The fASB ruks dso established stricter requirements fa the progtam As a result, it is estimated that in 1988 approximately continued capitdization of Af DC. The amount of Af DC to be capi- $10 million cher tax of NEEl costs will be expensed rather than tdized by NEP is affected by bom the potentid fa disdlowance capitdized fa aucunting purposes.
L
.While NEES viH not be capitdizing these Seabrook I and oil this change. Therefue, undei the new fASB anounting rules, NEP and gas related items fa cunent earnings purposes, it d seek to wiH be required to recad the unamatued balance of these poperty '
recover them through rates. The System wiH continue to enluate losses at a discounted wlue. This requiiement wiu result in a (N
V the impact of the new ouounting rules on its inwstment in Sea-brmk and NEEI.
charge toincane equal to the effect of such discounting. As per.
mined by the new rules, NEP intends to charge pia years'irrome NEP has been dkwed in the past to amatize and recoer by restating its financid statements rather than charging 1988 through rates oer time costs incuned in connection with its pop- eamings. The after tax effect of the discounting mite-down m -
erty losses. Howewr, it has not been dkwed to indude any of retained earnings la the Seabrook 2 and P3 grim 2 property losses these amo"nts in rate base and has, therefore, not eamed a retum os of January 1,1988 is appoximately $9 million. This restate-on the unomatized bdance during the recoery period. Although ment of pia years' eamings wiD have the related effect of increasing the FEK has ruently changed this pdicy, N EP's Seabrook 2 and 1988 earnings by appaximately $2 mulion after tax.
Pilgrirn 2 poperty loss recoery is not expected to be offected by (2) NEP is a partkipant, with a joint ownership share of approxi- unit goes into canmercid operation, NEP will be permitted to mately 10 percent, in Seabr@k 1, on 1150 MW nudear generating recoer al expenditures that the FEK finds to have been pudently unit in Seabrook, New Hampshire. Through December 31,1987, incuned. While NEP continues to beta that its expenditures on NEP's expenditures, induding AfDC, for Seabrmk I and common Seabrmk I were pudent, the amount of any imprudence disdlow-facilities were $514 mimon, exduding nudear fuel. ance by the FEKis uncertain.
' Although construction of Seabrmk 1 has been complete for some in its January 15,1988 order, the FEK also revised its porg time, controversy over emergency response planning, financid concerning recovery of costs of concelled plants. The order provides difficulties of joint owners, and other problems pertaining to regula- that for future plant concellations, a utility would be diowed to tion oi nudear power plants are likely to result in protracted further rece on y 50 percent of its prudently incurred costs. However, the delay in the licensing process fa the unit and, therefore, in subston- utility would be aHowed to indude in rate base, and eam a rerum tid additional cost. Whether or when the unit wiH operate remains on, the partion of in investment being recovered from customers encertain. NEP continues to beteve that prompt operation of over the expected life of the plant had it gone into service. The Seabrook 1 is in the best interest of its customers and New England. FEK's prior pdicy onowed utdities to recover d of the prudently
'h. 3 The pudence of NEP's innstment in the cancelled Seabrook 2 nudear unit was decided favorably in on initid decision by a FEK incuned costs a time, but did not onow them to earn a return on the amount being recovered from customers. Both pdicies are administrative law judge in October 1986, which was affirmed by designed to share the costs of plant canceHations between custan-the Commission on January 15,1988. The decision dlowed NEP, ers and inwstas. NEP expects the new pdicy to apply to its invest-offer allocating certain costs to Seabrmk 1, to recover its full ment in Seabrmk l if the unit is canceHed. NEP has applied for investment in Seabrmk 2 oer ten years, but did not dow N EP reheming on both parts of the FEK ader (the recoery of to earn a return on the unamatued bdance of its investment Seabrook 2 costs and the revised pdicy for the recovery of future during the recoveryperiod. investments). The FEK ader could dso be the subject of court In May 1987, the Vermont Pubk Service B@rd (VPSB) issued appeds byvarious partes.
its decision in a case concerning recovery by Centrd Vermont Public if Seabrmk 1 is canceHed or becomes pobable of conceHation, Service Corpaation (CVPS) of its Seabrmk 1 investment. The VPSB new aaounting rules, effective in 1988, wiH require that some i
conduded that 20 percent of CVPS' investment should be disd- portion of NEP's inestment in the unit be mitten off. Under these lowed as impudently incuned and 20 percent should be disaHowed rules (assuming the new FEK pdicy on the recovery of costs of as not used and useful. CVPS sdd its ownership interest in the canceHed plants applies), NEP would have to write off against project to EUA Power Caporation in November 1986. eamings the after tax amount of its investment that it is not in September 1987, a report of an audit of the Seabrmk project diowed to conect from customers. Since the new poky would, at conducted by on independent consultant for the Connecticut Depst- a minimum, disaHa recovery of 50 percent of NEP's investment, ment of Public Utility Contid conduded that 17 percent of project such a mite-off would have a substantid adverse effect (reduction costs were unreasonably incurred because of serious and pervasive of more than 10 percent), when recaded, on NEP and NEES com-mismanagement of various aspects of the project pria to 1984 mon share equity Even if the dd FEK pdky appres to any cancel- l and that an additional eight percent of the costs of the project were lation of Seabrmk 1, the new oucunting rules would require a l unreasonably incuned because of a failure to cancel the mite-down. Be ouse NEP would not be oHowed to earn a retum l Seabrmk 2 nudear unit in a timely rnannet A report submittad to on its investment during the recay period, NEP's investment in g the New Hampshire Public Utilities Commission in July 1987 by Seabrmk I would be required to be mitten down and recerded at U another independent consultant found that about seen percent of Seabrmk 1 costs were imprudently incuned.
a dscounted vdue. If this 6scounting mite-down is required, it could, depending on the length of the recovery period, how a sub-The pudence of NEP's inestment in Seabrmk 1 is at issue in a stantid adverse effect, when recerded, on NEP and N EES common !
pen 6ng FEK rate procee&ng. Under cunent iEK policies, if the share equity.
n 7 d- g -,,n- --- ---
,-- ,n,,- .--.- ---..,,-.na-.,- , . - - , , -, . , . -,c--.
Background in September 1986, the Coema of Abssachusetts stated that ,
Construction of Seabrmk 1 us essentidly completed in kte 1981 he will not submit emergency plans for Abssachusetts because he Homer, receipt from the Nudear Regubtory Commission (hRC) of believes, in light of the auident ci the ChemoW power plant, that an operating Ikense is necessary in ader to commence commerdd no pbns could provide adequate protection. The Coernor's deci-opemtie of the unit. A ikense may not be issued unless a finding sion, which has been suppated by a majaity of the Abssahusetts is made by the NRC that there is recsonable assumnce that ade- congressbnd delegotbn, has heightened the 6ffkulty of obtaining quote protective measures can and will be taken in the event of a an operating license and has inceased the possibility that the unit radidogicd emergency. The NRC will base its condusion in pert on wi!lnot be dbwd to opercte.
the findings of the Federd Emergency Abnogement Agency The six Abssachusetts towns in the emergency response (FEAM) as to whether off site emergency responsa pbns, induding pbnning zone are refusing to participate in the planning process.
evacuation plcos, are adequate and capable of being implemented Seeral municipdities outside the 10-mile zone have asked to protect the public within the emergency pbnning zone required to be induded in the planning process.
by the NRC. Currently, this zone is a 10-mile mdius around the In February 1986, a drill was held to test the New Mcmpshire pknt encompassing 23 municipdities in New Hampshire and pbns. Seven New Hampshire municipdities refused to participcte Abssahusetts. in the drill. A report issued by the FEMA in April 1986 indicated The auident ct the Soviet Union's Chernobyi nudear power that the state failed to demonstrate that it had adequcte compen-plant in April 1986 and devebpments invdving opemting nudear satory plans for these municipdities and that ce'toin pations of the facilites in this country have heightened the widesprecd public drill may how to be performed again. Because NRC regulations concern over the safety of nudear generating stations and the currently require that a suaessful drill be held withir,13 months effectiveness of emergency response plans. The safety of Seabrxk prior to the issuance of an opemting license, the entire dri!! will and the effectiwness of Seabrxk emergency response plans have have to be repeated. Hemings before on NRC licensing board on become the subjects of intensiw public controversy in Massachu- the New Hampshire plan are proceeding. In supplementd testi-setts and New Hampshire. Numerous parties, induding many mony in these proceedings, the FEMA stated that it cannot con-elected federd, state, and bcd officids, are opposed to operation dude that the New Hampshire plan is adoquate with respect to the ni the plant and cpprovd of emergency response plans. epanded summer beach popubtion until New Hampshire has considered the use of sheltering.
Public SefYice Company of New Hampshire Bankruptcy In January 1987, a New Hampshire Super On January 28,1988, Public Service Company of New Hampshire order uphdding the right of a town to require the removal fmm (PSNH), owner of a 35.6 percent shme of the unit, filed a vdun- public property of pdes carying Seabrxk emergency woming tory petition for protection from its credtas under Chcpter 11 of the sirens. This decision has been appected. In December 1987, the federd Bcnkruptcy Code. The filing was a result of financid stress United States Court of Appeds for the first Circuit upheld the right associmed with PSNH's Seabrxk shme. In addition, a knuary 26, of Akssachusetts fans to remove Seabrmk warning sirens, and 1988 decision by the New Hampshire Supreme Court effectively seerd tans are doing so. Pmiect management had p!cnned to preduded a 15 percent emergency rate increase that PSNH had rely on the sirens to satisfy NRC regirements for an early notifica-said was integral to a proposed restructuring of the company out- tion system in the event of an accident. Project management has side of bankruptcy. stated that it is preparing attemative steps to comply with NRC The impact of the PSNH bankruptcy on the status of Secbrxk 1 requirements regording eody notificatsn.
is uncertain. Tha bankruptcy court has brxd discretion as to which In October 1987, the NRC adopted a rule that mu!d permit of its obligations, induding its Seabrmk 1 payments, PSNH should issuance of a full-power operating ikense in the face of state and honor The bankrupey praeeding is expected to be a lengthy one. bcd noncmperation on emergency response pbnning. Under the In adition, opponents of Seabr@k I had raised before the NRC the rule, the NRC could issue a license if a utility has made a gmd faith issue of the financid con 6 tion of PSNH and its effect on licensing und sustained effort to obtain the czpectsn of state and bcci even befae the recent bankruptcy filing. On February 2,1988, officids, and if a utility-prepared plan indudes effective compensa-the Ate,ic Safety and licensing Appeal Board (Appeal Board) tay measures for the lack of such cmpemtion. In August 1987, announced that intervenors in the licensing proceeding would be legislation that would have prnented the NRC from adopting this allowd to reopen the financid quclifkations issue. rule was defeated in the U.S. House of Representatives. Abni state end federd officids how stated their opposmon to the rule.
Emergency Response Planning The ruk hos bxn appeded to the United States Court of Appeds Undar current rules, the Gcvernas of New Hampshire and Abssa- for the first Circuit. In licensing procee6ngs involving long Island chusetts are narndly responsible fa the prepomtsn of emergency Lighting Company's (ULC0) Shoreham nudes pow plant, response pkns for Seabrwk and their submission to the NRC for another NRC Ikensing bxtd recently found th resiew. The New Hampshi:e plans were famdly submitted to the drill to test illC0's utility pbn reweled sersus deficiencies where NRC for revim in December 1985. Some modfketsns to the pbas utility personnel we perfaming as emergency mkers. The bxrd have been submitted. stated that tilC0's plan may be inherently unwakcble.
- 1. Low Power License wak practkes during construction of the plant. The NK conduded in October 1986, the NK issued a Ikense authuizing the Imding that none of the diegations of impooer wak proctices raised any of fuelinto the Seabrmk 1 reactor and testing at zero power. Fuel safety concerns becauw they either were unsubstantiated or had
_N loading was completed in the same month. In krch 1987, on been remedied by poiect management. In response to renewed (U NK Atomic Safety lkensing Bmtd (lkensing Bmtd) gave condi- aRegations of impoper wak practkes, the NK commenced .
timd appovd for a low-power license for the unit. Howewr, the another inspection of the poject in Apri l987. The NK again issuance of a low-power Ikense had been stayed by the NK in conduded that none of the aRegations required further independent January 1987. inspecton of construction and work putkes at the goiect. In in September 1987, Seabrmk project management submitted 1988, a Massachusetts congressman again raised aRegations of a utgity emergency response plan la Massachusetts, designed to drugand akohd abuseattheplant.
meet the NK's requirements for a utihty-pepared plan submitted There is a potential fa litigation invdving management of the in lieu of a state-sponsored plan. In November 1987, the NK construction of the project. One possible defendant is Yankee lifted the stay it had imposed on issuance of a low power license. Atomic Electric Company, which has povided services to the po-However, on February 3,1988, the Apped Bmtd granted the iect. Yankee is the onmer of a 175 MW nudear unit. NEP owns motion of the Massochusetts Attaney Generd to reopen prxeed- percent of the common stak of Yankee and is entitled to purchase ings on the eady notifkation system in Lght of the siren renads 30 percent ofits power. In Mach 1987, the joint owners and sev-descnted above. The Appul Board indicated that this issue must eral conttxtas, induding Yankee, entered into an agreement to be resdved pior to the issuance of a low-power Lcense. Project suspend the limitorions periods on any potentid daims among the management has appeded the Apped Bmrd's decision to the parties to the agreement. Under the agreement, no such daim con NK Massachusetts offkids how stated that they will apped any be filed until the eadier of commercid operation of the unit or favorable NK ruling on a low-power license. Members of the November 30,1988. As a result of PSNH's bankruptcy filing, Massachusetts and New Hampshire congressiond delegations how daims by or against PSNH may be c;serted eorier.
urged the NK not to issue a low-power license until emergency Various municipd lighting departments throughout New Eng-planningissues are resolved. land have entered into power sdes agreements with MWEC.
MMWEC owns an 11.6 percent share of the unit, and the power g Joint Owner FinandalConcerns In November 1986, EUA Power Capaation (EUA Power), a newly sdes agreements entitle the municipd hghting departments to a pation of MMWEC's share and obligate them to make payments g~y .
created subsidiary of Eastem Utihties Assuiates (EUA), purchased therefor. The high courts of Vermont and Massachusetts are consid-joint cwnership shares totding approximately 12 percent from five ering the validity of these agreements on appeds from decisions of partkipants in Maine, Massachusetts, and Vermont. EUA Power is lower courts that held the agreements to be enfaceable, a single purpose capaation whose sole asset is its Seabrmk shares. EUA har indicated that EUA Paer will not have suffkient Operating Nudear Units cash to pay interest to bondhdders in May, and is negotiating with The continuing pubbc controversy concerning nudear power could them. EUA has dso indkated that it intends to seek regulatay dso affect the fiw opersing nudear units in which NEP has an ,
approvd to invest equity in EUA Power to enable it to meet its share ownedip interest. The state of Vermont has recently completed a of ongoing Seabrmk costs. study to determine the econank and legalimplications of a prema-Massachusetts Munkipd Wholesde Electric Company ture shutdown of the Verrnant Yankee plant. The study condudes (MWEC) has stated that, beyond the end of 1988, its ability to that Verrnant ratepayers and taxpaytes would face costs exceeding meet its share of ongoing Seabrook costs becanes uncertain. $600 muhon, bestimates that caefuDy crafted legislation to MMWEC has applied to the Massachusetts Department of Public shut down the unit may have a reasonable chance of surviving Utihties la approvd of a $98.5 minion hnancing. legd chdlenges. A binding statewide referendum in Massachusetts Certain entities that participate in Seabrook 1, through caHing for the shutdown of nudear poner plants, induding the MMWEC, have discontinued paying their share of ongoing costs. Yankee Atomic plant, is expected to be on the boHot in November in January 1988, the New Hampshire Electric Cmp, hdder of 1988. A refe endum in Maine ca!hng for the shutdown of the a 2.2 percent share, stopped paying its portion of ongoing Sea- Maine Yankee plant was defected in Noember 1987. NEP has an brmk costs. ownership interest in each c I these units. Whue the ultimate effect of this contmersy cannot be pedicted, it is possible that it will Other Matters result in the premature shutdown of one or more of the units. This in December 1986, the NK issued reports of its inwstigcrion of would result h NEP seeking recoery la the undepreciated invest a certain charges regarding drug and akohd abuse and impoper ment in the unit and any unfunded decommissioning costs.
b (3) fa a discussion relating to the uncertainty conceming the see Note A 3.
recoery by the System of its investments in oil and gas poperties,
(4) NEEl receMd a demand for orbitration in 1987 fran Keystone acted propedy in ausdance with the agreements of the paths,
- Shipping Co., a prWte shipping company with its headquarters in and plans to assert substantid legd and equitable defenses to Phikdelphia. NEEI and Keystone are participants in New Eng!and Keystone's daim. Keystone has not yet submitted a detailed stateg Cdlier Company (NECC0), a joint venture that owns the Energy ment ofits chim. W Independence. The Energy Independence is a cod-fited ship that Due to disagreement among the parties, no charter rate has delivers cod, under a long-term thater to NEP, to NEP's generating been set for 1988. On Daember 29,1987, NEP canmenced foolities. mbittatbn against NECC0 for determination of such chater rate in l in its demand for abittation, Keystone has asserted that NEEl occadance with the charter NEP is also seeking a court uder con-has breached its duty, as a joint wnturer, to Keystone concerning sdidating the two abitration proceedings and oppointing on arbi-the charter mies paid by NEP for the Energy Independence. Key- trcrion panel. Pending a daisbn in the abittation, UEP has elected stone seeks damages in the amount of $17,600,000, p!vs puni- to pay N ECC0 during 1988 at on estimated rate.
tive damages, costs, and attomeys' fees. N eel beheves that it has (5) The System's largest generating unit, Brcyton Point Unit 3, outage was proper. This decision is now being raiewed by the fuD expenenced three major eg ipment failures during 1983,1985, Canmission. Regeding the 1985 outage, NEP is seeking to and 1986. In each case, the incementd cost of replacement recer damages from 5 tone & Webster Engineering Corporation pce us induded in N EP's fuel adjustment douse billings. Such (S&W) in Massachusetts Superia Court on the grounds, among others, that S&W is responsible for the equipment failure. In
) incemenid costs amounted to $20 milhon, $16 million, and $13 Nwember 1986, NEP executed an agreement with the Rhode milhon for the 1983,1985, and 1986 outoges, respectively.
The FERC initiated an investigation of the 1983 outage and, in isknd Attomey Generd wheeby the Attaney Generd agreed not to Nwomber 1985, on administrative kw judge ruled that NEP's initiate any regulatory proceeding conceming the 1985 outage until recwery of the inuementd repbcement po6er costs related to this NEP's dispute with S&Wis resdved.
(6) In August 1986, NEP filed its W-8 rate case with the f ERC. In F 2 for a discussion of Seabrook.)
emly 1987, NEP raised this rate filing to reflect the impact of the NEP fJed its W-6 rate case in 1983. The only amount subject to new tax law This raised inaease of $11 milhon per )em became refund in this rate case is the revenue conected from knumy 198 effective April 1,1987, subject to refund pending the FERC's inves- through Februmy 1986 associated with the indusion of OVIP in tigation. Hw.ever, NEP has raorded an estimated provision fa rate base rekted to 5eabrook 1. This raenue amounted to $21 refunds of approximately $19 million fa the period April 1,1987 milhon on an annual basis. This amount would be refunded only if, through December 31,1987, which amounts to approximately pria to the in-service date oi seabrook 1, the FERC issues on uder
$25 million on an annud basis. This filing indudes the issue of requiring NEP to make refunds as a result of the FERC changing a NEP's recwery through its fuel dause of the praio', sly rnentbned ehminating its OVIP in rate base rdes. These rules codd change as losses associated with NEEl's oil and gas progrom 'see Note A 3), a resdt of petitions fJed with the U.S. Court of Appeds to review as well as additiond amounts of Seabrook GYlP in rate base under the d!eged antkompetitive effects.
a FERC pohcy dkwing 50 percent of GVIP in rate base. (See Note (7) The utJity subsidiaries' construction expenditures, exduding ton and daelopment progtoms in 1988 me estimated to be $50 Af 0C, me estimated to be $370 milhon in 1988, induding $16C milhon (See Note A 3.) At December 31,1987, substantid com-s million related to the Hydro-0uebec Phase 2 project. The oil ana gas mitments had been made rektive to these construction and explo-subsidiary's expenditures, induding costs of capitd, fa its expbra- ration and development progroms.
(8) Under NEP's current anongements for fuel supply, certain of its ment can be terminated on three months' notke. fuelinventory fuel controcts me assigned to a non affihate which purchases fuel held by the non-offJiate fa NEP amounted to $11,341,000 at under these contracts and in the open maket, hdds the fud in December 31,1987. This amount is induded in the "Consondated inventay, as owner, and setts the fuel to NEP at the time of burn at Bdance Sheets" in "fuel, matenals, and supphes" and in prices raflecting its cost of the fuel. In addition, NEP pays monthly "Aaounts payable."
chages to cwer the costs of the non affJiate's services. The agree-(9) in add tion to the matters discussed abwe, the utitty subsid- im'es and their customers. g iaries, in canmon with other companies, me subject generally to The utity subsidiodes have been contacted by federd and stM other safety, environmentd, and regubtory requirentnts, which environmental agencies regording potential statutory joint and may result in the modifkation or deky in, or cancellaton of con- saeral liability for deanup of sites at whkh such subsidictes 6ther structen a operation of, their existog or pbnned focihties. Any of have, or me dieged to have, disposed of materid designated as these requirements could result in inaeossd costs to these subsid- hazardous waste.
+
Ao eG The indentures relating to mortgoge bonds of utility subsiddie: banks providing fa borrowings of up to a total of $500 miltm in
. Long term debt require sinking fund instdments totdng $7,145. 000 in 1988, four different patas. The first porta is secured by a pledge of n $7,345,000 in 1989, $7,345,000 in 1990, $7,170,000 in NEEl's rights with respect to NEP u der the Prking Pdicy on behdf
() 1991, and $7,220,000 in 1992. The issuers of the matgage bonds may elect to satisfy these instdments in cash, in bonds, or of dd program pospects (see Note A-3). The second portion is secured by a natgage on selected dd pogram oil and gas poper-by evidencing to the trustees additional poperty in amounts os ties. The third pation, which appres to the nex pogrom, is sup-povided therein. Substantially d the poperties of the utsty sub- ported by a Capital Maintenonce Agreement between NEES and sidiaries are subject to the lien of the indentures under whkh the NEEl. The fourth pation is .2ured by a mortgage on selected ou first matgage bonds and generd and refunding matgage bonds and gas poperties in the new pogram. Al four pxtions operate os have beenissued. rewhnng uedit loans through December 31,1989, at whkh time The aggregate cash payments to retire maturing mortgage they convert to five-war term loons with equd quarterly amortiza-bonds and for cash sinking fund requirements on iong-term notes tion. The totd amount of borrowings that may be outstanding of NEES' utility subsidiaries fa the pars ended December 31, under the second and fourth patons of the agreement at any one 1988 through 1992 are os foRows: $14,150,000 in 1988, time is a function of the vdue assigned to the currently mortgaged
$37,890,000 in 1991, and $93,400,000 in 1992. There are no oil and gas popert'es. NEEl is dso required to maintain a mini-requirements for 1989 and 1990. Holders of pdlution contrd reve- mum net wath of $40 million, induding subadinated notes pay-nue bonds secured by N EP's Series K general and refunding mort- able to NEES. At December 31,1987, interest rates on bonowings gage bonds con require NEP to repurchase the bonds in 1988 and of $379 miUion ($368 miilion under the first pation, S under annudy thereafter. In such event, NEP would expect to remarket the second portion, $11 miHion under the third pation, and $ such bonds at prevailing interest rates. under the fourth pation) ranged from 6.7 percent to 9.6 percent.
The annud interest requirement on the outstanding long-term Based on the oil and gas poperties matgaged at December 31, debt of NEES' utility subsidiaries at December 31,1987 is 1987, NEEl had additional barowing capacity of $34 million
$85,669,000. . under this agreement.
N eel has revdving cedit and term loon agreements with three te H During 1987, aR of NEP's 13.48% Series of cumulative pefened resulted in charges to retained earnings in 1987 and 1986 of moble stock was redeemed. During 1986, d of NEP's 11.04% Series of $2,445,000 and $1,648,000, respectively.
preferred stock cumulative peferred stock was redeemed. These redemptions Report of Independent Certified Public Aaountants To the Board of Directas and Shoreholders of New England Electric System:
We have examined the consadated bdonce sheets and the consondated statements of capitdzation of New England Electric System and subsidiaries (the Company) as of December 31,1987 and 1986 cnd the related consolidated statements of income, refaired earnin changes in financid position for each of the three years in the period ended December 31,1987. 0ur examinations were made in with generdy auepted auditing standards and, ouordingly, induded such tests of the onounting records and wh other auditing po as we considered necessary in the circumstances.
Our opinion on the financid statements of the Company fa 1986 and 1985 was qudfed with respect to recovery cf a subsidiary's ment in certain oil and gas properties. The Federd Energy itegulatay Canmission is reviewing issues surrounding the extent of sn and will dso be ieviewing the recowry through rates of a subsidiary's inwstment in the Seabrook I r er pte picot. As more fully descibed in Notes A-3 and F 2 of "Notes to financid Statements," there are uncertintes with respect to the extent of ult; mate recovery of the amounts invested in these assets.
l In out opinion, subject to the effects an the condidated financial statements of such adjustnents, if any, as might have been req the outcome of the uncertainties referred to in the peceding porograph been known, the consdidated financial statements referred to abo present fairly the consolidated financid positm of New Eng!and Electric System and subsidiaries as of December 31,198 p consolidated results of their operatons and changes in their consolidated financid position fa each of the three years in the period December 31,1987, in conformity with generdy auepted oaconting principles appted on a consistent basis.
\
V l
l Boston, Massachusetts February 26,1988 fu f
O New England Electric System and Subsidiaries c Supplementary Information on Business Segments (unou&ted)
The consdidated group operates in two principd domestk industry segments.
(thousandsofddlars) Doctric Oiland gas Consdidated Y6ar ended Operating revenue $1,401,726 $ 46,467 $1,448,193 !
December 31,1987 Depreciation and amortization 102,028 76,890 178,918 Other operating expenses 953,869 7,101 960,970 !
101,113 (20,886) 80,227 !
federalincome taxes Operatingincome/(loss) 244,716 (16,638) 228,078 Interest expense 80,321 1,140 81,461 income from equityinvestmems 8,723 8,723 Otherincome-net 13,426 6 13,432 Netincome/(loss) $ 186,544 $(17,772) $ 168,772 Totdassets $3,348,110 $640,485 $3,988,595 l
l Investments at equity $ 72,078 $ 72,078 l Capitd expenditures $ 165,217 5 54,734 $ 219,951 Yearended Operating revenue $1,375,821 $ 56,122 $1,431,943 December 31,1986 Depreciation and amortization 116,239 87,263 203,502 Other operating expenses 903,286 6,785 910,071 federdincome taxes 126,370 (8,741) 117,629 Operatingincome/(loss) 229,926 (29,185) 200,741 Interest expense 79,720 1,135 80,85 Income from equityinvestments 12,808 12,80 Otherin:ome-net 15,152 24,150 39,302 Netincome/(loss) $ 178,166 $ (6,170) $ 171,996 Totd assets $3,147,659 $662,758 $3,810,417 investments at equity $ 72,219 $ 72,219 Capitd expenitutes $ 188,014 $ 77,332 $ 265,346 Yearended Operating revenue $1,394,936 $ 49,343 $1,444,279 December 31,1985 Depreciorion and amortization 106,097 60,770 166,867 Other operating expenses 958,458 7,377 965,835 federdincome taxes 124,691 (14,613) 110,078 Operatingincome/(loss) 205,690 (4,191) 201,499 Interest expense 68,907 2,272 71,179 income from equityinvestments 10,056 10,056 Otherincome/(expense)-net 29,109 (5,407) _ 23,702 Netincomel(loss) $ 175.948 $(11,870) $ 164,078 Totd assets $3,012,147 $674,740 $3,686,887 Investments at equity $ 60,545 $ 60,545 Capitd expen6tures $ 200,659 $122,118 $ 322,777 See Note A-3 of "Notu to financid 5tetements" for o rnore lated program, whkh will be passed on to customers in 1988.
complete &scussion of od and gas opchs. The net k.ss for 1986 of 56.2 miltsn re!!ects the efter tcx n In 1985, the SEC granted cpprovd to dmde hill's od and loss from operctons on the non-rcte regulated progtom.
gas explorcron and development octmhes into two progroms: The net loss for 1985 of 511.9 meon indudes (c) a 516 a rete regulated progtom and a non-rate regulated progtom. mAon ofter tax od&tsn to on accounting reserve (cossover The net ioss for 1987 of 517.8 mAon indudes (c) a 50.8 reserve) and (b) a Sh3 mAon ofter tai net loss from opero-million efter tax net loss from operations on the nom ". regu- tons on the non-rcte regulcted progrom.
L Icted progtcm and (b) a 517.0 milton loss from the rate regu-
JiewIngland Electric Systerr end Subsidiaries Supplementory Information oa Oil and Gas Activities
_(unou6ted)
The estimates c8 NFEl's poved reserves and proved devel- States, and changes to the estimated poved reserves for oped reserves of oil and gas, c5 located within the United 6785,1986,and 1987 are as folkws:
~
Gudeoiland condensate Naturalgas I (thousandsof Bbl) (thousandsofEF)
Praed reserves as of December 31,1984 4,362 147,363 Revisionsof previous estimates (48) 4,531 Extensions, discoveries, and other additions 323 22,920 Production (685) (9,848)
Promd reserves as of December 31,1985 3,952 164,966 Revrsions of gevious estimates (449) (4,352)
Extensions, discoveries, and other additions 223 17,847 Production (589) (19,893)
Proved reserves as of December 31,1986 3,137 158,568 Revisloas of pevious estimates 2,087 17,380 Extensions, discoveries, and other additions 119 13,808 Production (461) (21,839)
Proved reserves as of December 31,1987 4,882 167,917 (g f Yer,r end overage Proved selling price deeloped resenes Gudeoiland Gude oiland condensate NLturalgas condensate Neuralgas (per Bbi) (perEF) (thousands (,busands of 8bl) ofEF)
December 31,1984 $28.52 $3.73 3,122 94,897 December 31,1985 $26.19 $2.97 2,980 157,443 December 31,1986 $12.95 $1.68 2,121 141,257 December 31,1987 $17.96 $1.77 149,385 5.52 l
l Prwed reserves cre estimcted quenhties of crude oil, condensate, 1985 are cpproximately 137,000 Bbis,200,400 Bbls, and end naturof ges which geological and engineering dato demon- 140,000 Bbls, respectively, of crude oil and cendesate and strate with reasonable certcinty to be recwerable in future years 13,228,000 MCF, 4,070,000 MCF, and 1,30?,000 MCF, fam inown oil and gas reservoirs under existeg economic c,d respectrvely, of naturalgas which relate to the ew prograra.
operating condinons. Proved developW reserves are those prwed The estimates of N((l's prwed and proved Jevelopehserves reserves reasonably expected to be r~. overed through exsting were prepared by independent penoleum ergineering ionsul-wells with exishng equipment and operot. ng methods. Induded in fonts. Bennert and Westerman,Inc cf Diles Texas prepared the proved reserves at December 31,1987,1986, and 1985 these eshmates for 1987 cnd K & A [ngy Consukents, Inc.
are approximately 137,000 Bbis,210,000 Bbis, and 140,000 (formerly Keplinger and Associates, hc.) of Do!!as, Texas per-Q V
Bbis, respectively, of crude oil and coadenscte end 13,228,000 MCF, 5,028,000 MCF, and 1,302,000 MCF, respectively, of formed the eshmotes for the years 1984 through 1986. The reserves ore eshmates only and hold not be construed as exact natural ges which relate to the new program. Included in the quantities. Future condhons rrJy oflect the recovery of estimated prwed deloped reserves at December 31,1987,1986, cnd reserves.
O System DiteCiors System 0 iCers
\ Asof December 31,1987 As nf December 31,1987 W. Douglas Bell Joshua A. McClure Joan T. Bok Famer hitman and Chief ExecutiveOffker President Amerkon Custan Kitchens,irg.
Chairman h State Mutuallife Assurunce Co. Prwidence, RhodeIsland SamuelHuntington ofAmerka OSd*I"d Au61 Committee
%cester,Mctsachusetts Gief ExecutiveOffker htma SmiceCamina ExecutiveComminee John F. Koslw Malcolm McLane Executive VKe hesident Joan T. Bok Orr & Reno, PA., Attorneys md Gief Operating Officei Chairman Concad,New Hampshire New England ElectrkSystem Audit Cemittee Frederic E. Greenman Westborough, Massachusetts Senior V(e President, Compensation Canmittee Felix A. Mirando, Jr. Genero! Counsel,and Secetay Executive Committee Privateinvestor New Yak, New Yuk Alfred D. Houston
"" Senior VK3 President-Finance Compensation Committee n t James Hunter Machine Co.,Inc. George P. Sasdi John D Ritch
Textile mchinery manufacturer Se V(c hesident Nath Adams,ksscchusetts M C0"SEGNYJN-Management consultants Robert 0. Bigelow Compensatim Committee Stone Ridg'e, New York VKe President SamuelHuntington Custma 5mke Cein*
Exative Caminee G enn R. Schleede hesident and Gief ExecutiveOffker New England ElectrkSystem 6
- 9' M 5"9' V(e President h hesident Robert C. Smith Westborough, Massachusetts Bonanza Buslines,Inc.
V(e President Compensation Comm. i nee Providence, RhodeIsland hetMemina John H. Dicksan Executrve Committee I'""
PaulL. Joskow Anne Wexler Prdem-d Ecmmics Chairman MassochusettsInstitute of Wexler, Reynolds, Harrism tecg & Schule,Inc. System Subsidm. .nes Cambridge'hssachusetts New England Electrk Transmission Management consultants Massachusetts Electric Company Corporation AuditComm.ittee Washington, D.C.
25 Research Drive 4 Park Street Cusf0mer SerYke Committee CepesatimCem. nee Westborough, Mossochuwts 01582 Concord,New Hampshire 03301 Wwm M , Pr&t John F. Koslow New England Hydro-Transmission James 0. Wilson ExetheVKe Preidet The Narrogansett ElectricCompany (orporation Prdes55 l and Gief Operating Offker 280 Melrose Street 4 Parkstreet TheIJnivasity d Californ.ia New England ElectrkSystem Providence, RhodeIsland 02901 (oncord, New Hampshire 03301 at Los Ang&s R ben L. McCabe, President Westborough, Massachusetts New England Hydro Transmission Ad ,'nin" Granite state Electric Company Electric Company,Inc.
Customer Servke Canmittee 33 West Lebanon Road 25 Research Drive lebanon, New Hampshire 03166 Westborough, Massahusetts 01582 Edward H. Ladd RusseH A. Holden, President President '
Standish, Ayer & Wmd,Inc. New England Power Company 82 " ?St n
Imtmentcouas 25 Research Deve Marlborough, Massachusetts 017 Bostm, Mass &husens Westborough, Massachusens 01582 George P. Sckellaris, President Au61 Committee New England EnergyIncorporated New England Power Service Company 25 Research Drive 25 Research Ddve Westborough, Massachusetts 01582 Westborough, Massachusetts 01582
, 40
p'w ,* e "
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lU -
r n Mlnformation : ~
y 1987 :1986
- m. . Price range . Prke range -
' ' DMdend DMdend :
icommon shores :
High - low 1 dedored - High low . dedored ,
First quarter . $32% ' L$28ys' $.50 $28y2 $247s $.48
. 5econd quarter $2974 $25y2- S.50' $28ya_ $25ys $.48 Thirdquarter $28ys ~!$2474- S.50 '. $35y4 . $26y: : $.48 Fourthquater $2674 $20' ; $.51 ' $31% . -$28 S.50 The fotol number d shmeholders at Decem'rt 31,1987 was 74,241.
x Selated quartuly .
- First Second ' Third Fourth .-
. financialinformation .
(thousandsof dolars) . ! quater quarter. . quarter quarter f(unoudited) L 1937 Operating rewnue . $392,444 - $354,218 : $361,195 - $340,336
' ' Ope'ratingincome . $ 67,460; . S 46,625 - . S 53,524 5 60,469 Netincome: ._ '$53,136 .$ 36,518 'S 38,210 ' - $ 40,908 -
Wetincome peroverogeshme $ .97 .$ .66 $- .69 $ .73 1986'-
L Operatingrevenue . $413,078 - $331,814 $342,707 $344,344 0peratingincome ' .5 54,117' $ 42,134 5 51,099 $ 53,391 Netincome ' $ 49,328 $ 34,990 5 42,558 - .$ 45,120 '
-A Netincomeperoverages!ure $. .93 - S .65 $ .79 $- .83 D .see see A.5 Shoreholder Queshons about shareholder records, quartedyn d' ndend NewEngland ElectrkSystem savices payments, reinvestment d dividends, and optional cash ShwehdderServkes Department paymentsshould bedirectedtoi Postoffice Box 770.
Westbaough, Massachusetts 01581-0770 Transferogentand The First Nationd Bankof Boston ,
registror 100 Federal 5treet ,
Boston,kssachusetts02110 Stockexchange NeyVxkStock Exchange
~ ; listings 80stonStock Exchange :
Trading symbol NES Annualmeeting . The annud meeting of New EngFnd Bectrk System will be notice held at New England life HaO,225 Gorendon Street, Boston, Massachusetts, on Apri 26,1988, at 10:30 a.m. ,
Copies of the annud report on Fam 10K to the Securities and New EnglandSectrkSystem 4
. Form 10K and -
StatisticalReport Exchange Commission and o statistkal Repat fa 1987 con Sharehdder Services Department be obtained, free of charge, by writing to: Postoffice Box 770 L Westborough, kssachusetts 01581-0770 M,
- The nome New [ngland Decnic System" rneans the trustee a tutees lar the trne besg (as trustee or kustees but not per$ncly) under on Agreement and as amended, whkh is hereby relened to, and a copr al whih, as amended, has been feed with the Secretary of The Commonwealth of Mossochusetts. Any agreement, obrigson, a hab entered into, or incuned by a on beholf of New England Dectrk System binds och its tevst estate, and no shareholder, director, irsee, offcer, or ogent thereof assumes or shal be h therefor.
This report is not to be considered as on offer WI a boy a sohcdeon of an offer to set or buy any secwdy.
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