SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-5464
(LOGO) MASSACHUSETTS ELECTRIC COMPANY
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1988940
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-389-2000)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Common stock, par value $25 per share, authorized and outstanding: 2,398,111
shares at June 30, 1999.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
Operating revenue $323,452 $361,889 $668,216 $758,603
-------- -------- -------- --------
Operating expenses:
Purchased electric energy:
Contract termination charges from
New England Power Company, an affiliate 55,055 104,952
110,803 141,774
Other New England Power Company - 122,640 - 369,317
Other 128,207 91 276,007 174
Other operation 79,053 76,216 154,584 126,998
Maintenance 7,997 8,596 15,223 17,348
Depreciation 16,612 16,441 33,225 30,694
Taxes, other than income taxes 8,669 7,989 18,269 16,938
Income taxes 7,718 6,476 16,372 14,029
-------- -------- -------- --------
Total operating expenses 303,311 343,401
624,483 717,272
-------- -------- -------- --------
Operating income 20,141 18,488 43,733 41,331
Other income (expense), net (366) (449) (2,556) (3,327)
-------- -------- -------- --------
Operating and other income 19,775 18,039 41,177
38,004
-------- -------- -------- --------
Interest:
Interest on long-term debt 6,857 6,670 13,710 13,541
Other interest 1,718 1,912 3,629 3,331
Allowance for borrowed funds used during
construction - credit (179) (155) (374) (291)
-------- -------- -------- --------
Total interest 8,396 8,427 16,965 16,581
-------- -------- -------- --------
Net income $ 11,379 $ 9,612 $ 24,212 $ 21,423
======== ======== ======== ========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $221,216 $197,139
$208,537 $201,156
Net income 11,379 9,612 24,212 21,423
Dividends declared on cumulative
preferred stock (155) (240) (309) (480)
Dividends declared on common stock (59,953) (9,593) (59,953)
(25,181)
-------- -------- -------- --------
Retained earnings at end of period $172,487 $196,918 $172,487
$196,918
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Twelve Months Ended June 30
(Unaudited)
1999 1998
---- ----
(In Thousands)
Operating revenue $1,400,030 $1,607,628
---------- ----------
Operating expenses:
Purchased electric energy:
Contract termination charges from New
England Power Company, an affiliate 269,659 141,773
Other New England Power Company 95,703 954,328
Other 450,923 519
Other operation 320,095 246,068
Maintenance 31,397 37,950
Depreciation 64,231 55,312
Taxes, other than income taxes 39,314 31,167
Income taxes 38,662 41,427
---------- ----------
Total operating expenses 1,309,984 1,508,544
---------- ----------
Operating income 90,046 99,084
Other income (expense), net (2,739) (2,756)
---------- ----------
Operating and other income 87,307 96,328
---------- ----------
Interest:
Interest on long-term debt 27,242 27,066
Other interest 7,666 6,574
Allowance for borrowed funds used during
construction - credit (776) (504)
---------- ----------
Total interest 34,132 33,136
---------- ----------
Net income $ 53,175 $ 63,192
========== ==========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $ 196,918 $ 171,581
Net income 53,175 63,192
Dividends declared on cumulative preferred stock (702) (1,744)
Dividends declared on common stock (76,739) (32,375)
Premium on redemption of preferred stock (165) (3,736)
---------- ----------
Retained earnings at end of period $ 172,487 $ 196,918
========== ==========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
MASSACHUSETTS ELECTRIC COMPANY
Balance Sheets
(Unaudited)
June 30, December 31,
ASSETS 1999 1998
- ------ ---- ----
(In Thousands)
Utility plant, at original cost $1,646,343 $1,626,569
Less accumulated provisions for depreciation 520,470 499,975
---------- ----------
1,125,873 1,126,594
Construction work in progress 22,294 16,575
---------- ----------
Net utility plant 1,148,167 1,143,169
---------- ----------
Current assets:
Cash 5,205 6,994
Accounts receivable:
From electric energy services 158,679 188,956
Other (including $16,373,000 and $6,629,000
from affiliates) 16,909 7,358
Less reserves for doubtful accounts 14,029 12,450
---------- ----------
161,559 183,864
Unbilled revenues 60,847 56,133
Materials and supplies, at average cost 9,420 9,281
Prepaid and other current assets 7,084 13,886
---------- ----------
Total current assets 244,115 270,158
---------- ----------
Deferred charges and other assets 36,114 41,235
---------- ----------
$1,428,396 $1,454,562
========== ==========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock, par value $25 per share, authorized
and outstanding 2,398,111 shares $ 59,953 $ 59,953
Premium on capital stock 45,942 45,942
Other paid-in capital 193,498 193,498
Retained earnings 172,487 208,537
Unrealized gain on securities, net 303 273
---------- ----------
Total common equity 472,183 508,203
Cumulative preferred stock 10,674 10,674
Long-term debt 347,415 353,329
---------- ----------
Total capitalization 830,272 872,206
---------- ----------
Current liabilities:
Long-term debt due in one year 21,000 15,000
Short-term debt 31,575 80,725
Accounts payable (including $57,842,000 and $34,506,000
to affiliates) 148,720 127,621
Accrued liabilities:
Taxes 2,141 -
Interest 8,352 8,509
Other accrued expenses 51,760 40,626
Customer deposits 3,914 4,456
Dividends payable 60,108 4,951
---------- ----------
Total current liabilities 327,570 281,888
---------- ----------
Deferred federal and state income taxes 182,702 200,965
Unamortized investment tax credits 13,842 14,377
Other reserves and deferred credits 74,010 85,126
---------- ----------
$1,428,396 $1,454,562
========== ==========
The accompanying notes are an integral part of these financial statements.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
1999 1998
---- ----
(In Thousands)
Operating Activities:
Net income $ 24,212 $ 21,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 33,225 30,694
Deferred income taxes and investment tax credits, net
(17,765) 3,121
Allowance for funds used during construction (374) (291)
Decrease (increase) in accounts receivable, net
and unbilled revenues 17,591 (19,149)
Decrease (increase) in materials and supplies (139) 263
Decrease (increase) in prepaid and other current assets
6,802 5,170
Increase (decrease) in accounts payable 21,099 18,611
Increase (decrease) in other current liabilities 12,576
3,126
Other, net (6,697) 5,451
-------- --------
Net cash provided by operating activities $ 90,530
$ 68,419
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(37,854) $(42,919)
Other investing activities (210) (2,115)
-------- --------
Net cash used in investing activities $(38,064)
$(45,034)
-------- --------
Financing Activities:
Capital contributions from parent $ - $ 245
Dividends paid on common stock (4,796) (20,385)
Dividends paid on preferred stock (309) (480)
Changes in short-term debt (49,150) 775
Long-term debt - issues - 25,000
Long-term debt - retirements - (30,000)
-------- --------
Net cash used in financing activities $(54,255)
$(24,845)
-------- --------
Net decrease in cash and cash equivalents $ (1,789) $ (1,460)
Cash and cash equivalents at beginning of period 6,994 6,743
-------- --------
Cash and cash equivalents at end of period $ 5,205 $ 5,283
======== ========
The accompanying notes are an integral part of these financial statements.
MASSACHUSETTS ELECTRIC COMPANY
Notes to Unaudited Financial Statements
Note A - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation and
Liability Act, more commonly known as the "Superfund" law, imposes strict,
joint and several liability, regardless of fault, for remediation of property
contaminated with hazardous substances. A number of states, including
Massachusetts, have enacted similar laws.
The electric utility industry typically utilizes and/or generates in its
operations a range of potentially hazardous products and by- products.
Massachusetts Electric Company (the Company) currently has in place an
internal environmental audit program and an external waste disposal vendor
audit and qualification program intended to enhance compliance with existing
federal, state, and local requirements regarding the handling of potentially
hazardous products and by-products.
The Company has been named as a potentially responsible party (PRP) by
either the United States Environmental Protection Agency or the Massachusetts
Department of Environmental Protection for a number of sites at which
hazardous waste is alleged to have been disposed. Private parties have also
contacted or initiated legal proceedings against the Company regarding
hazardous waste cleanup. The most prevalent types of hazardous waste sites
with which the Company has been associated are manufactured gas locations.
(Until the early 1970s, New England Electric System (NEES) was a combined
electric and gas holding company system.) The Company is aware of
approximately 35 such manufactured gas locations in Massachusetts, including
some for which the Company has been identified as a PRP. The Company has
reported the existence of all manufactured gas locations of which it is aware
to state environmental regulatory agencies. The Company is engaged in various
phases of investigation and remediation work at 17 of the manufactured gas
locations. The Company is currently aware of other possible hazardous waste
sites, and may in the future become aware of additional sites, that it may be
held responsible for remediating.
In 1993, the Massachusetts Department of Public Utilities approved a
settlement agreement that provides for rate recovery of remediation costs of
former manufactured gas sites and certain other hazardous waste sites located
in Massachusetts. Under that agreement, qualified costs related to these
sites are paid out of a special fund established on the Company's books.
Rate-recoverable contributions of $3 million, adjusted since 1993 for
inflation, are added annually to the fund along with interest, lease payments,
and any recoveries from insurance carriers and other third parties. At June
30, 1999, the fund had a balance of $48 million.
Predicting the potential costs to investigate and remediate hazardous
waste sites continues to be difficult. There are also significant
uncertainties as to the portion, if any, of the investigation and remediation
costs of any particular hazardous waste site that may ultimately be borne by
the Company. The NEES companies have recovered amounts from certain insurers,
and, where appropriate, the Company intends to seek recovery from other
insurers and from other PRPs, but it is uncertain whether, and to what extent,
such efforts will be successful. At June 30, 1999, the Company had total
reserves for environmental response costs of $42 million which includes
reserves established in connection with the Company's hazardous waste fund
referred to above. The Company believes that hazardous waste liabilities for
all sites of which it is aware, and which are not covered by a rate agreement,
are not material to its financial position.
Note B - Derivative Instruments
- -------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133), which establishes accounting and
reporting standards for such instruments. The FASB delayed the effective
date of FAS 133 for one year, to fiscal years beginning after June 15, 2000.
Under the provisions of industry restructuring settlement agreements
approved by state and federal regulators implemented on March 1, 1998, the
Company is required to offer a default service option to those customers who,
for a variety of reasons, are not purchasing power from a competitive
supplier. The Company is required to procure this power supply through
competitive bidding. In March 1999, the Company entered into a power supply
contract with a third party to provide the physical supply of this power at a
variable market rate. In May 1999, the Company entered into an eight month
financial contract with another third party to convert this variable rate into
a fixed rate for substantially, if not for
all, of the physical supply. The Company will bill its retail customers at
the fixed rate under the financial contract. Purchases under these contracts
are expected to be less than $5 million per month based on June 1999 service
requirements.
Note C
- ------
In the opinion of the Company, these financial statements reflect all
adjustments (which include normal recurring adjustments) necessary for a fair
statement of the results of its operations for the periods presented and
should be considered in conjunction with the notes to the financial statements
in the Company's 1998 Annual Report.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------------
This section contains management's assessment of Massachusetts Electric
Company's (the Company) financial condition and the principal factors having
an impact on the results of operations. This discussion should be read in
conjunction with the Company's financial statements and footnotes and the 1998
Annual Report on Form 10-K.
Merger Agreements
- -----------------
For a full discussion of New England Electric Systems' (NEES) merger
agreements with The National Grid Group plc (National Grid) and Eastern
Utilities Associates (EUA), see the Merger Agreements sections of the
Company's Form 10-K for 1998 and the Company's 1998 Annual Report.
Update of Merger Agreements with National Grid and EUA
On April 22, 1999, shareholders of National Grid approved the proposed
merger with 99 percent of those voting approving the merger. On May 3, 1999,
NEES received the approval of more than the required majority of outstanding
shares for the merger with 75 percent of outstanding shares voting in favor of
the merger. Of those shares voted, in excess of 94 percent voted in favor of
the merger.
The NEES/National Grid merger has received approval or clearance from the
Federal Trade Commission (FTC), the Committee on Foreign Investment in the
United States, the Federal Energy Regulatory Commission (FERC), the Vermont
Public Service Board (VPSB), and the Connecticut Department of Public Utility
Control (CDPUC). In addition, the New Hampshire Public Utilities Commission
approved the proposed merger in an oral order on August 9, 1999, with a
written order expected in several weeks.
NEES and National Grid have also filed for merger approval with the
Securities and Exchange Commission (SEC), under the Public Utility Holding
Company Act of 1935 (1935 Act). In connection with the SEC application, the
Massachusetts Department of Telecommunications and Energy (MDTE) certified to
the SEC that the merger would not interfere with the MDTE's authority or
ability to protect customers of NEES' Massachusetts distribution subsidiaries.
NEES and National Grid have requested a similar certification from state
regulators in Rhode Island. In addition, NEES and National Grid have also
filed for merger approval with the Nuclear Regulatory Commission (NRC) to
transfer ownership licenses for its minority ownership interests in regional
nuclear plants. On July 20, 1999, three subsidiaries of Northeast Utilities
filed a request for hearing with the NRC with respect to financial
qualifications and raising issues of foreign ownership. NEES and National
Grid responded, in a July 27, 1999 filing, opposing the request and asserting
that the application should be granted as a matter of law and there is no need
for a hearing. It is not known when the NRC will respond to the request or
how it will rule.
The NEES/National Grid merger is expected to be completed by early 2000.
The NEES acquisition of EUA has also received clearance from the FTC.
NEES and EUA have made appropriate filings with the FERC, SEC, under the 1935
Act, NRC, MDTE, VPSB, and the Rhode Island Public Utilities Commission. In
addition, the acquisition of EUA requires approval by the CDPUC. On May 17,
1999, EUA shareholders approved the acquisition of EUA by NEES. The
acquisition of EUA is expected to be completed by early 2000.
Impact of Mergers on Distribution Rates
- ---------------------------------------
In April 1999, the Company and Eastern Edison Associates (Eastern
Edison), a wholly owned subsidiary of EUA, filed a rate consolidation plan
with the MDTE, reflecting the acquisition of EUA by NEES and the merger of
Eastern Edison into the Company. In the filing, the companies proposed that
effective January 1, 2001, Eastern Edison's customers would pay the same
delivery rates as the Company. The filing calls for an extension of the
Company's
distribution rate freeze through December 31, 2002. The freeze would be
extended an additional two years upon completion of the NEES/National Grid
merger.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, the NEES companies' divestiture of its nonnuclear generating
business, stranded cost recovery, and the impact of restructuring on the
distribution business, see the "Industry Restructuring" and "Impact of
Restructuring on Distribution Business" sections of the Company's Form 10-K
for 1998 and the Company's 1998 Annual Report.
Regulatory Asset Recovery
- -------------------------
Historically, electric utility rates have been based on a utility's
costs. As a result, electric utilities are subject to certain accounting
standards that are not applicable to other business enterprises in general.
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation (FAS 71), requires regulated entities, in
appropriate circumstances, to establish regulatory assets or liabilities, and
thereby defer the income statement impact of these charges because they are
expected to be included in future customer charges. At June 30, 1999, the
Company had net regulatory liabilities of approximately $1 million.
Under existing ratemaking practices and provisions of industry
restructuring settlement agreements approved by state and federal regulators
(Massachusetts Settlement), the Company has the ability to recover through
rates its specific costs of providing ongoing distribution services and
stranded costs billed to it by New England Power Company (NEP). To date, the
Company believes these factors allow it to continue to apply FAS 71.
Currently, there is much regulatory and other movement toward
establishing performance-based rates. It is possible that the adoption of
performance-based rates, future regulatory rules, or other circumstances could
cause the application of FAS 71 to be discontinued. Absent the circumstances
described in the next
paragraph, this discontinuation would result in a noncash write-off of
previously established regulatory assets or liabilities. In addition,
reserves for depreciation may also have to be increased to comply with
unregulated accounting practices.
In April 1999, the Company filed a rate plan which, if approved, may
cause the application of FAS 71 to be discontinued upon consummation of the
NEES/National Grid merger. Because the discontinuation of FAS 71 would be
coincident with the completion of the NEES/National Grid merger, the NEES
companies believe the appropriate accounting treatment would be that the
regulatory assets or liabilities would not be written off but instead
reclassified to either an intangible asset account or a goodwill account.
Year 2000 Readiness Disclosure
- ------------------------------
Over the course of this year, most companies will face a potentially
serious information systems (computer) problem because many software
applications and operational programs written in the past may not properly
recognize calendar dates associated with the year 2000 (Y2K). This could cause
computers to either shut down or lead to incorrect calculations.
During 1996, the NEES companies began the process of identifying the
changes required to their computer software and hardware to mitigate Y2K
issues. The NEES companies established a Y2K Project team to manage these
issues, which has consisted of as many as 70 full-time equivalent staff at
some points in time, primarily external consultants being overseen by an
internal Y2K management team. To facilitate the Y2K Project, NEES entered
into contracts with Keane, Inc. and IBM to provide personnel support to the
Y2K Project. Through June 30, 1999, the NEES companies have spent
approximately $18 million with these vendors, which is included in the cost
figures disclosed below. The Y2K Project team reports project progress to a
Y2K Executive Oversight Committee each month. The team also makes regular
reports to NEES' Board of Directors and its Audit Committee. The NEES
companies separated their Y2K Project into four parts as shown below.
Substantial Contingency Testing,
Completion Documentation,
of Critical and Clean
Category Specific Example Systems Management
- -------- ---------------- ----------- -------------------
Mainframe/Midrange Accounting/Customer Completed Throughout 1999
systems service integrated
systems
Desktop systems Personal computers/ Completed Throughout 1999
Department software/
Networks
Operational/ Dispatching systems/ Completed Throughout 1999
Embedded Transmission and
systems Distribution systems/
Telephone systems
External issues Electronic Data Completed Throughout 1999
Interchange/Vendor
communications
The NEES companies used a three-phase approach in coordinating their Y2K
Project for system-related issues: (I) Assessment and Inventory, (II) Pilot
Testing, and (III) Renovation, Conversion, or Replacement of Application and
Operating Software Packages and Testing. Phase I, which was an initial
assessment of all systems and devices for potential Y2K defects, was completed
in mid-1997. These assessments included, but were not limited to, the review
of program code for mainframe and midrange systems, analysis of personal
computer hardware and network equipment for desktop systems, reaching
consensus with key "data exchange" partners regarding the approach and
execution of plans to address Y2K- related issues, and coordination with other
New England Power Pool (NEPOOL) member utilities related to operational
systems, such as transmission systems. Phase II, which consisted of
renovation
pilots for a cross-section of systems in order to facilitate
the establishment of templates for Phase III work, was completed in late 1997.
Phase III, which was completed on June 30, 1999, required the renovation,
conversion, or replacement of the remaining applications and operating
software packages.
Critical systems include major operational and informational systems such
as the NEES companies' financial-related and customer information systems.
These mission critical systems were first addressed at an individual component
level, and then, upon satisfactory completion of that testing, reviewed at an
integrated level, during which the Y2K Project team tested for Y2K problems
which could be caused by various system interfaces. Additionally, contingency
plans are being implemented for mission critical systems, as described below.
The overall Y2K Project was designed such that Y2K-related work performed
by external consultants was reviewed by NEES employees, and vice-versa. The
Y2K Project team management periodically benchmarked its progress against the
recommended progress schedule documented by the North American Electric
Reliability Council (NERC), and has met all recommended schedules, including
the issuance of its Year 2000 Readiness Letter to NERC on June 30, 1999.
The NEES companies also implemented a formalized communication process
with third parties to give and receive information related to their progress
in remediating their own Y2K issues, and to communicate the NEES companies'
progress in addressing the Y2K issue. These third parties include major
customers, suppliers, and significant businesses with which the NEES companies
have data links (such as banks). The NEES companies have identified standard
offer generation service providers, telecommunications companies, and the
Independent System Operator-New England (ISO New England) as critical to
business operations. The NEES companies have been in contact with all of
these parties regarding the progress of their Y2K remediation efforts, and
will continue to monitor their ongoing remediation efforts through continued
communications. The NEES companies cannot predict the outcome of other
companies' remediation efforts. Therefore, contingency plans are being
implemented, as described below.
The NEES companies believe total costs associated with making the
necessary modifications to all centralized and noncentralized systems will be
approximately $28 million. These costs include the replacement of
approximately one thousand desktop computers. In addition, the NEES companies
are spending $7 million related to the replacement of the human resources and
payroll system, in part due to the Y2K issue. As of June 30, 1999, total
Y2K-related costs of approximately $33 million have been incurred, of which
approximately $6 million have been capitalized. The NEES companies
continually review their cost estimates based upon the overall Y2K Project
status, and update these estimates as warranted.
The NEES companies have developed and are implementing Y2K contingency
plans to allow for critical information and operating systems to function from
January 1, 2000, forward. These plans are intended to address both internal
risks as well as potential external risks related to suppliers and customers.
Part of the contingency plan implementation for accounting and desktop systems
will include taking extensive data back-ups prior to year-end closing. For
operational systems, the NEES companies have in place an overall disaster
recovery program, which already includes periodic disaster simulation training
(for outages due to severe weather, for instance). As part of the Y2K
contingency plan implementation, the NEES companies are reviewing their
disaster recovery plans and modifying them for Y2K-specific issues, such as a
potential loss of telecommunication services. The NEES companies expect to
hold contingency plan drills during the third quarter of 1999.
Interregional and regional contingency plans are being finalized to
address emergency scenarios due to the interconnection of utility systems
throughout the United States. At a regional level, the NEES companies are
participating and cooperating with NEPOOL and ISO New England. Overall
regional activities, including those of NEPOOL and ISO New England, are being
coordinated by the Northeast Power Coordinating Council, whose activities are
being incorporated into the interregional coordinating effort by NERC.
Drills of these interregional and regional contingency plans are expected to
be held in September 1999.
The NEES companies believe that their mission critical systems used to
deliver electricity are ready for date changes associated with Y2K, in
accordance with the criteria specified by NERC.
Recognizing that neither the NEES companies nor any
other organization can make guarantees about something as complex as Y2K, the
NEES companies also have developed and are implementing the contingency plans
described above (including contingency plans in the event of temporary
disruptions of electric service) to address potential problems caused by Y2K.
In the event that a short-term disruption in service occurs, NEES does not
expect that such a disruption would have a material impact on its financial
position or results of operation.
Earnings
- --------
Net income for the second quarter and first six months of 1999 increased
$2 million and $3 million, respectively, compared with the corresponding
periods in 1998. The increase is due primarily to increased kilowatthour
(kWh) deliveries, partially offset by increased operation and maintenance
expense, property tax expense, and income taxes. Earnings for the first six
months of 1999 were also positively affected by a $41 million distribution
rate increase implemented in March 1998 in accordance with the Massachusetts
Settlement, partially offset by increased depreciation expense.
Operating Revenue
- -----------------
Operating revenue decreased $38 million and $90 million in the second
quarter and first six months of 1999, respectively, compared with the
corresponding periods in 1998, reflecting the net rate reductions required in
1998 by the Massachusetts Settlement. Partially offsetting the decrease in
both periods were increased kWh deliveries of 5.8 percent and 4.4 percent,
respectively, as a result of significantly warmer weather in June 1999 and
the effect of a strong economy.
Operating Expenses
- ------------------
Operating expenses for the second quarter and first six months of 1999
decreased $40 million and $93 million, respectively,
compared with the corresponding periods in 1998, primarily due to reduced
purchased electric energy expenses, partially offset by increased operation
and maintenance costs, and increased property
and income tax expense. Year-to-date operating expenses were
also affected by increased depreciation expense.
The decrease in purchased electric energy for the second quarter and
first six months of 1999 reflects reduced transition access charge billings
from NEP. In addition, on a year-to-date basis, the decrease in purchased
electric energy is also due to the termination of the Company's former
all-requirements contract and the establishment of new contracts to meet
continuing obligations to customers.
The increase in other operation and maintenance expenses is primarily due
to additional transition costs associated with NEES' proposed acquisition of
EUA, increased regulatory assessments, and the allocation of additional New
England Power Service Company costs after NEP's divestiture of its nonnuclear
generating business. These increases were partially offset by reduced charge-
offs related to uncollectible accounts. On a year-to-date basis, the increase
in other operation and maintenance expenses is also due to increased
transmission billings of approximately $21 million, which, prior to March 1,
1998, were a component of purchased power expense.
The increase in depreciation expense in the first six months of 1999 is
primarily due to the $11 million increase in annual depreciation expense
provided for in the Massachusetts Settlement, which went into effect on March
1, 1998, and depreciation expense on new utility plant expenditures.
The increase in property tax expense for the second quarter and first six
months of 1999 reflects the continuing impact of corrections identified by the
Company in the third quarter of 1998 related to plant valuation amounts used
in the calculation of property taxes by certain municipalities.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $38 million for the first six
months of 1999. The funds necessary for utility plant expenditures during the
period were provided by net cash from operating activities, after the payment
of dividends.
At June 30, 1999, the Company had $32 million of short-term debt
outstanding representing borrowings from affiliates. The Company's ability
to issue short-term debt is limited by the need to obtain regulatory approval
from the SEC under the 1935 Act. Approval has been granted for up to $150
million. At June 30, 1999, the Company had lines of credit with banks totaling
$55 million which are available to provide liquidity support for commercial
paper borrowings and other corporate purposes. There were no borrowings under
these lines of credit at June 30, 1999.
For the twelve-month period ending June 30, 1999, the ratio of earnings
to fixed charges was 3.61.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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Information concerning a rate filing by the Company with the
Massachusetts Department of Telecommunications and Energy on April 30, 1999,
discussed in Part I of this report in Management's Discussion and Analysis of
Financial Condition and Results of Operations, is incorporated herein by
reference and made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
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The Company is filing the following revised exhibit for incorporation by
reference into its registration statement on Form S-3, Commission File No.
33-59145.
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q for the quarter ended June
30, 1999 to be signed on its behalf by the undersigned thereunto duly
authorized.
MASSACHUSETTS ELECTRIC COMPANY
s/John G. Cochrane
John G. Cochrane, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: August 13, 1999