Annual Report 1996
Massachusetts Electric Company
A Subsidiary of
New England Electric System
[LOGO] Massachusetts Electric
A NEES Company
Massachusetts Electric Company
25 Research Drive,
Westborough, Massachusetts 01582
Directors
(As of January 1, 1997)
Urville J. Beaumont
Treasurer and Director of Beaumont and Campbell, P.A.
(Attorneys), Salem, New Hampshire
Joan T. Bok
Chairman of the Board of New England Electric System
Sally L. Collins
Director of Workplace Health Services, Greenfield, Massachusetts
Dr. Kalyan K. Ghosh
President of Worcester State College
Charles B. Housen
Chairman and President of Erving Industries, Erving,
Massachusetts
Patricia McGovern
Director of Goulston and Storrs, P.C., Boston, Massachusetts
John F. Reilly, Jr.
President and Chief Executive Officer of Fred C. Church, Inc.,
Lowell, Massachusetts
Lawrence J. Reilly
President of the Company and certain affiliates
John W. Rowe
President and Chief Executive Officer of New England Electric
System
Richard P. Sergel
Chairman of the Company and Senior Vice President of New England
Electric System
Roslyn M. Watson
President of Watson Ventures, Boston, Massachusetts
Officers
(As of January 1, 1997)
Richard P. Sergel
Chairman of the Company and Senior Vice President of New England
Electric System
Lawrence J. Reilly
President and Chief Executive Officer
John C. Amoroso
Vice President
Eric P. Cody
Vice President
Charles H. Moser
Vice President
Lydia M. Pastuszek
Vice President
Anthony C. Pini
Vice President
Christopher E. Root
Vice President
Nancy H. Sala
Vice President
Dennis E. Snay
Vice President
Michael E. Jesanis
Treasurer of the Company and Vice President and Treasurer
of New England Electric System
Thomas G. Robinson
Assistant Clerk and General Counsel of the Company
Robert King Wulff
Clerk of the Company and of certain affiliates
Howard W. McDowell
Controller and Assistant Treasurer of the Company, Treasurer of
certain affiliates, and Controller of certain affiliates
Transfer Agent, Dividend Paying Agent, and Registrar of Preferred
Stock
State Street Bank and Trust Company, Boston, Massachusetts
This report is not to be considered an offer to sell or buy or
solicitation of an offer to sell or buy any security.
Massachusetts Electric Company
Massachusetts Electric Company is a wholly-owned subsidiary of
New England Electric System operating in Massachusetts. The
Company's business is the distribution and sale of electricity at
retail. Electric service is provided to approximately 960,000
customers in 146 cities and towns having a population of
approximately 2,160,000 (1990 Census). The Company's service
area covers approximately 43 percent of Massachusetts. The
cities and towns served by the Company include the highly
diversified commercial and industrial cities of Worcester,
Lowell, and Quincy, the Interstate 495 high technology belt,
suburban communities, and many rural towns. The principal
industries served include computer manufacturing and related
businesses, electrical and industrial machinery, plastic goods,
fabricated metals and paper, and chemical products. In addition,
a broad range of professional, banking, medical, and educational
institutions is served. In February 1997, a settlement agreement
among the Company and two affiliates, the Massachusetts Attorney
General, the Massachusetts Division of Energy Resources, and 12
other parties was approved by the Massachusetts Department of
Public Utilities. This settlement provides for retail choice of
power supplier by Massachusetts customers beginning January 1,
1998 (see "Industry Restructuring" section of Financial Review).
The properties of the Company consist principally of
substations and distribution lines interconnected with
transmission and other facilities of New England Power Company
(NEP), a wholesale generating affiliate. The Company buys its
electric energy requirements from NEP under a contract which
obligates NEP to furnish such requirements at its standard resale
rate. In accordance with the settlement, NEP's wholesale
contract with the Company has been amended to allow for early
termination of all-requirements service. The amendment, which is
subject to regulatory approval, provides that upon early
termination, the Company's share of the cost of NEP's above-
market generation commitments will be recovered through a
contract termination charge. This charge will, in turn, be paid
by customers that use the Company's distribution facilities.
Report of Independent Accountants
Massachusetts Electric Company, Westborough, Massachusetts:
We have audited the accompanying balance sheets of
Massachusetts Electric Company (the Company), a wholly-owned
subsidiary of New England Electric System, as of December 31,
1996 and 1995 and the related statements of income, retained
earnings, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 28, 1997
Massachusetts Electric Company
Financial Review
Industry Restructuring
For the past several years, the electric utility business has
been subjected to rapidly increasing competitive pressures
stemming from a number of trends, including the presence of
surplus generating capacity, a disparity in electric rates among
regions of the country, improvements in generation efficiency,
increasing demand for customer choice, and new regulations and
legislation intended to foster competition.
In the recent past, this competition was most prominent in the
bulk power market, in which nonutility generators have
significantly increased their market share. Despite increased
competition in the bulk power market, competition in the retail
market has been limited as electric utilities have maintained
exclusive franchises for the retail sale of electricity in
specified service territories.
In states across the country, including Massachusetts, there
have been proposals to allow retail customers to choose their
electricity supplier, with incumbent utilities required to
deliver that electricity over their transmission and distribution
systems (also known as "retail wheeling"). When electricity
customers are allowed to choose their electricity supplier,
utilities across the country will face the risk that market
prices may not be sufficient to recover the costs of the
commitments incurred to supply customers under a regulated
structure. The amounts by which costs exceed market prices are
commonly referred to as "stranded costs."
The Company currently purchases electricity on behalf of its
customers under a wholesale all-requirements contract with the
Company's wholesale generating affiliate, New England Power
Company (NEP).
As described below, a settlement agreement was reached in
Massachusetts which, when all regulatory approvals are in place,
would allow recovery of NEP's above-market commitments to retail
customers in Massachusetts, which make up 73 percent of NEP's
all-requirements sales.
On February 26, 1997, the Massachusetts Department of Public
Utilities (MDPU) approved a settlement among the Company, NEP,
Nantucket Electric Company (Nantucket), a distribution affiliate,
the Massachusetts Attorney General, the Massachusetts Division of
Energy Resources, and 12 other parties, which provides for retail
choice by Massachusetts customers and the recovery of NEP's
above-market commitments to serve those customers.
The settlement provides for the commencement of retail choice
on January 1, 1998 (contingent on choice being available to the
customers of all Massachusetts investor-owned utilities).
Customers who do not choose an alternative supplier would receive
"standard offer" service, which would be priced to guarantee
customers at least a 10 percent savings in 1998 compared with
September 1996 bundled electricity prices.
In accordance with the settlement, NEP's wholesale contract
with the Company has been amended to allow for early termination
of all-requirements service. The amendment, which is subject to
regulatory approval, provides that upon early termination, the
Company's share of the cost of NEP's above-market generation
commitments (estimated at approximately $3 billion on a present-
value basis) will be recovered through a contract termination
charge. This charge will, in turn, be paid by customers that use
the Company's distribution facilities. Those commitments consist
of (i) the above-market portion of generating plant commitments,
(ii) regulatory assets, (iii) the above-market portion of
purchased power contracts, and (iv) the operating costs of
nuclear plants that cannot be avoided by shutting down the
plants, including nuclear decommissioning costs.
The above-market portion of costs associated with generating
plants and regulatory assets would be recovered over 12 years.
The above-market component of purchased power contracts and
nuclear decommissioning costs would be recovered as incurred over
the life of those obligations, a period expected to extend beyond
12 years. Initially, the transition access charge would be set
at 2.8 cents per kilowatt-hour (kWh) through December 31, 2000,
and is expected to decline thereafter. The initial transition
access charge assumes that the generating plants have no market
value. To measure their actual market value, the New England
Electric System (NEES) companies agreed to sell their generating
business. The net proceeds from the sale will be used to reduce
the transition access charge.
The settlement also establishes performance-based rates for
the Company. Under the settlement, the Company's nonfuel rates
(and NEP's wholesale rates to the Company) would be frozen at
current levels until the earlier of the commencement of retail
choice or January 1, 2001. Upon commencement of retail choice,
the Company's distribution rates would be set at a level
approximately $45 million above the level embedded in its current
bundled rates, with such rates then frozen through the year 2000.
This increase reflects changes to the distribution cost of
service that include an $11 million increase in annual
depreciation expense, a $3 million annual contribution to a storm
fund, and increased amortization of unfunded deferred income
taxes of $1 million over six years. The Company's return on
equity would be subject to a floor of 6 percent and a ceiling of
11 percent, effective upon commencement of retail choice.
Earnings over the ceiling would be shared equally between
customers and shareholders up to a maximum of 12.5 percent. This
sharing results in an effective cap on shareholder's return on
equity of 11.75 percent. To the extent that earnings fall below
the floor, the Company would be authorized to surcharge customers
for the shortfall.
The settlement would also eliminate the Company's purchased
power cost adjustment (PPCA) mechanism as of July 31, 1996. This
mechanism allows the Company to recover purchased power rate
changes from NEP and the effects of NEP's seasonal rates. The
settlement also stipulates that the Company's net $18 million
PPCA refund liability balance at July 31, 1996 will be used to
prefund a storm contingency fund with $3 million, while the
remainder will be used to offset regulatory assets for hazardous
waste costs.
The settlement is subject to approval by the Federal Energy
Regulatory Commission (FERC). The FERC accepted the filing to
become effective February 1, 1997, subject to refund, and ordered
hearings.
The Utility Workers Union of America and the Massachusetts
Alliance of Utility Unions, who intervened in the MDPU proceeding
on the settlement, have indicated they intend to appeal the
MDPU's order approving the settlement to the Massachusetts
Supreme Judicial Court. If an appeal is brought, the NEES
companies will oppose it.
Several bills are pending before the Massachusetts legislature
on electric industry restructuring, including comprehensive
legislation introduced by Governor William F. Weld and by the
legislature's Joint Committee on Electric Restructuring. These
bills cover many of the topics addressed in the settlement and
could impact the implementation of the settlement.
A number of proposals for federal legislation related to
industry restructuring have been brought forward for
consideration by the current Congress. The scope and aim of
these vary widely; however, the NEES companies and others will
argue that state settlements should be respected. The Company
cannot predict what federal legislation, if any, may be enacted.
Risk Factors
The major risk factors affecting the Company relate to the
possibility of adverse regulatory or judicial decisions or
legislation which limits the level of revenues the Company is
allowed to charge for its services. While substantial progress
has been made in resolving the uncertainty regarding recovery by
the Company of stranded costs billed to it by NEP, significant
risks remain. These risks are primarily attributable to the
potential that ultimately the settlement, referred to above, will
not be implemented in the manner anticipated by the Company
and/or the possibility of state or federal legislation which
would increase the risks to the Company above those contained in
the settlement.
Accounting Implications
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. 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, and thereby defer
the income statement impact of certain costs expected to be
recovered in future rates. The Company has recorded
approximately $16 million in net regulatory assets in compliance
with FAS 71. The Company believes that the continuing rate-
making policies and practices of the MDPU and the terms of the
Massachusetts settlement will enable the Company to recover both
its specific costs of providing ongoing distribution services and
stranded costs billed to it by NEP. The Company believes that
these factors will allow it to continue to apply FAS 71. In the
event that future circumstances should cause the application of
FAS 71 to be discontinued, a noncash write-off of previously
established regulatory assets and liabilities would be required.
Overview of Financial Results
Net income for 1996 increased $9 million compared with 1995,
reflecting a 1995 rate increase, growth in sales, and decreased
demand charges from NEP, partially offset by increased operation
and maintenance expense and reduced revenues due to rate
adjustment mechanisms.
Net income for 1995 decreased $6 million compared with 1994.
Although the Company experienced growth in sales and reduced
operation and maintenance costs, such increases in income were
more than offset by increased purchased power costs, increased
interest expense, and a decrease in revenue due to the operation
of the Company's PPCA mechanism.
Operating Revenue
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
1996 1995
---- ----
(In Millions)
Fuel recovery $ 13 $ 38
PPCA mechanism (6) (11)
Rate changes/service extension discount (SEDs) 23 26
Unbilled revenues recognized under rate agreement - (32)
Demand-side management (DSM) recovery (5) (8)
Sales and deliveries growth and other 8 11
--- ----
$33 $ 24
=== ====
In 1996, kWh deliveries to ultimate customers increased 1.6
percent while total kWh sales increased 1.0 percent compared with
a 0.9 percent increase in 1995. The difference is the result of
pilot programs in Massachusetts, whereby the Company delivered
power provided by other companies. Peak demand billing levels to
commercial and industrial customers decreased 0.8 percent in 1996
compared with a 2.0 percent increase in 1995. The increase in
kWh deliveries in 1996 reflects the effects of an improving
economy partially offset by the effects of milder weather in the
last half of the year.
The Company's rates contain a fuel clause and a PPCA
provision. These mechanisms are designed to allow the Company to
pass on to its customers changes in purchased energy costs
resulting from rate increases or decreases by NEP. The PPCA
mechanism is also designed to pass on to customers the effects of
NEP's seasonal rates. The provisions of the Massachusetts
settlement would have caused the PPCA mechanism for the Company
to end, effective July 31, 1996. However, since the
Massachusetts settlement had not been approved at the end of
1996, the Company accrued refund provisions of $9 million related
to assumed operation of the PPCA provision during the last five
months of 1996.
Rate changes reflect the November 1994 expiration of a $26
million temporary rate decrease, as well as a $31 million general
rate increase that went into effect on October 1, 1995.
Unbilled revenues recognized under the Company's rate
agreement reflect the Company's completion of the recognition of
$35 million of unbilled revenues over a 13-month period that
ended in December 1994 in accordance with an October 1993 rate
agreement.
The Company has received approval from the MDPU to recover DSM
program expenditures in rates on a current basis. These
expenditures were $48 million, $53 million, and $59 million in
1996, 1995, and 1994, respectively. Since 1990, the Company has
been allowed to earn incentives based on the results of its DSM
programs. The Company recorded before-tax incentives of $5.7
million, $5.1 million, and $7.1 million in 1996, 1995, and 1994,
respectively.
Operating Expenses
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
1996 1995
---- ----
(In Millions)
Purchased electric energy:
Fuel costs $13 $38
SED reimbursements - (9)
Purchases and demand charges from NEP (6) 10
Other operation and maintenance:
DSM (5) (6)
Other 12 (9)
Depreciation 3 2
Taxes 6 (1)
--- ---
$23 $25
=== ===
The increase in fuel costs from NEP in 1996 reflects increased
purchases as well as increased gas pipeline demand charges being
recovered by NEP through its fuel adjustment clause in connection
with NEP's Manchester Street Station entering service in the
second half of 1995. The increase in fuel costs in 1995 reflects
decreased nuclear generation due to overhauls and decreased hydro
production resulting from low water levels.
Other operation and maintenance expense increased in 1996
after a decline in 1995. The decline in 1995 had primarily been
in distribution system related costs, however, the Company
experienced an increase in these costs in 1996. The increase in
1996 also reflects increased customer service expenses, in part,
related to the start-up of a new customer service center. In
both 1995 and 1996, the Company also experienced increased
general and administrative expenses including increased
postretirement benefits expenses other than pensions (PBOPs)
commensurate with additional amounts being recovered from
customers. The Company is recovering deferred PBOP costs over
five years.
In the fourth quarter of 1996, the Company incurred
approximately $8 million of costs related to a severe winter
storm. The Massachusetts settlement provides for the recovery of
the costs associated with major storms; however, its application
to the 1996 storm is subject to clarification by the MDPU.
Because the Massachusetts settlement had not been approved as of
December 31, 1996, the Company deferred the 1996 storm costs
based upon long-standing regulatory practice allowing the
recovery over five years of costs of major storms.
The changes in taxes in 1996 and 1995 are primarily due to
changes in taxable income levels. The Company also experienced a
sizeable increase in municipal property taxes in 1995 and a
lesser increase in 1996.
Hazardous Waste
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. The most prevalent types of hazardous
waste sites with which the Company has been associated are
manufactured gas locations. The Company is aware of
approximately 35 such manufactured gas locations in
Massachusetts, including eight of the 19 locations for which the
Company has been identified by either federal or state
environmental regulatory agencies as a potentially responsible
party. In 1993, the MDPU approved a settlement agreement that
provides for rate recovery of remediation costs of former
manufactured gas sites and certain other hazardous waste sites in
Massachusetts. A more detailed discussion of this settlement
agreement and of potential hazardous waste liabilities is
contained in Note D-2 of the Notes to the Financial Statements.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. At December 31,
1996, the Company had total reserves of $38 million and a related
regulatory asset of $15 million. 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.
Electric and Magnetic Fields (EMF)
In recent years, concerns have been raised about whether EMF,
which occur near transmission and distribution lines as well as
near household wiring and appliances, cause or contribute to
adverse health effects. Numerous studies on the effects of these
fields, some of them sponsored by electric utilities (including
NEES companies), have been conducted and are continuing. In
October 1996, the National Research Council of the National
Academy of Sciences released a report stating no conclusive and
consistent evidence demonstrates that exposures to residential
EMF produce adverse health effects. It is impossible to predict
the ultimate impact on the Company and the electric utility
industry if further investigations were to demonstrate that the
present electricity delivery system is contributing to increased
risk of cancer or other health problems.
Several state courts have recognized a cause of action for
damage to property values in transmission line condemnation cases
based on the fear that power lines cause cancer. It is difficult
to predict what the impact on the Company would be if this cause
of action is recognized in Massachusetts and in contexts other
than condemnation cases.
Utility Plant Expenditures and Financing
Cash expenditures for utility plant totaled $94 million in
1996. The funds necessary for utility plant expenditures during
1996 were primarily provided by net cash from operating
activities, after the payment of dividends and long-term debt
issuances. Cash expenditures for utility plant for 1997 are
estimated to be approximately $95 million. Internally generated
funds are expected to fully meet capital expenditures in 1997.
In 1996, the Company issued $20 million of first mortgage
bonds, bearing an interest rate of 6.82 percent. In July 1996,
Nantucket, issued $28 million of tax-exempt long-term debt at
rates ranging from 4.10 percent to 6.75 percent to fund
construction of an undersea cable. The Company guaranteed the
debt on behalf of Nantucket. The Company plans to issue a net
$20 million of long-term debt in 1997 to fund capital
expenditures.
At December 31, 1996, the Company had $44 million of
short-term debt outstanding including $39 million of commercial
paper borrowings and $5 million of borrowings from affiliates.
As of December 31, 1996, the Company had lines of credit with
banks totaling $90 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 December 31, 1996.
Massachusetts Electric Company
Statements of Income
Year Ended December 31, (In Thousands) 1996 1995 1994
---------- ---------- ----------
Operating revenue $1,538,537 $1,505,676 $1,482,070
---------- ---------- ----------
Operating expenses:
Purchased electric energy, principally
from New England Power Company,
an affiliate 1,120,709 1,113,673 1,074,402
Other operation 211,663 206,660 215,794
Maintenance 31,102 29,525 35,502
Depreciation 47,357 44,829 42,775
Taxes, other than income taxes 30,559 30,022 28,664
Income taxes 25,186 19,297 22,265
---------- ---------- ----------
Total operating expenses 1,466,576 1,444,006 1,419,402
---------- ---------- ----------
Operating income 71,961 61,670 62,668
Other income (expense), net (1,213) (541) (995)
---------- ---------- ----------
Operating and other income 70,748 61,129 61,673
---------- ---------- ----------
Interest:
Interest on long-term debt 27,089 25,901 20,967
Other interest 6,473 6,784 6,366
Allowance for borrowed funds used during
construction - credit (740) (657) (386)
---------- ---------- ----------
Total interest 32,822 32,028 26,947
---------- ---------- ----------
Net income $ 37,926 $ 29,101 $ 34,726
========== ========== ==========
Statements of Retained Earnings
Year Ended December 31, (In Thousands) 1996 1995 1994
-------- -------- --------
Retained earnings at beginning of year $150,308 $136,911 $135,276
Net income 37,926 29,101 34,726
Dividends declared on cumulative
preferred stock (3,114) (3,114) (3,114)
Dividends declared on common
stock, $8.00, $5.25, and $12.50
per share, respectively (19,184) (12,590) (29,977)
-------- -------- --------
Retained earnings at end of year $165,936 $150,308 $136,911
======== ======== ========
The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company
Balance Sheets
At December 31, (In Thousands) 1996 1995
Assets ---------- ----------
Utility plant, at original cost $1,509,896 $1,420,069
Less accumulated provisions for depreciation 430,585 399,711
---------- ----------
1,079,311 1,020,358
Construction work in progress 9,119 21,118
---------- ----------
Net utility plant 1,088,430 1,041,476
---------- ----------
Current assets:
Cash 2,356 1,840
Accounts receivable:
From sales of electric energy 165,866 160,795
Other (including $1,605 and $1,776
from affiliates) 2,600 3,527
Less reserves for doubtful accounts 13,146 12,544
---------- ----------
155,320 151,778
Unbilled revenues (Note A-3) 43,390 49,800
Materials and supplies, at average cost 8,820 10,602
Prepaid and other current assets 25,923 22,514
---------- ----------
Total current assets 235,809 236,534
---------- ----------
Deferred charges and other assets (Note B) 66,019 65,090
---------- ----------
$1,390,258 $1,343,100
========== ==========
Capitalization and Liabilities
Capitalization:
Common stock, par value $25 per share,
authorized and outstanding 2,398,111 shares $ 59,953 $ 59,953
Premiums on capital stocks 45,862 45,862
Other paid-in capital 155,310 155,310
Retained earnings 165,936 150,308
---------- ----------
Total common equity 427,061 411,433
Cumulative preferred stock (Note G) 50,000 50,000
Long-term debt 343,321 353,267
---------- ----------
Total capitalization 820,382 814,700
---------- ----------
Current liabilities:
Long-term debt due in one year 30,000
Short-term debt (including $5,275 and $1,000
to affiliates) 43,775 55,450
Accounts payable (including $157,603 and
$165,515 to affiliates) 178,263 181,943
Accrued liabilities:
Taxes 961 7,371
Interest 9,635 9,502
Other accrued expenses (Note F) 54,833 17,136
Customer deposits 4,308 4,633
Dividends payable 7,973 1,977
---------- ----------
Total current liabilities 329,748 278,012
---------- ----------
Deferred federal and state income taxes 177,778 184,575
Unamortized investment tax credits 16,566 17,684
Other reserves and deferred credits 45,784 48,129
Commitments and contingencies (Note D)
---------- ----------
$1,390,258 $1,343,100
========== ==========
The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company
Statements of Cash Flows
Year Ended December 31, (In Thousands) 1996 1995 1994
Operating activities: -------- -------- --------
Net income $ 37,926 $ 29,101 $ 34,726
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 47,357 44,829 42,775
Deferred income taxes and
investment tax credits, net (7,850) 6,666 28,909
Allowance for borrowed funds
used during construction (740) (657) (386)
Amortization of unbilled revenues (32,300)
Decrease (increase) in accounts
receivable, net and unbilled revenues 2,868 4,281 (7,580)
Decrease (increase) in materials and
supplies 1,782 922 (923)
Decrease (increase) in prepaid and
other current assets (3,409) (931) (1,593)
Increase (decrease) in accounts payable (3,680) (159) 3,985
Increase (decrease) in other current
liabilities 31,095 (2,326) (10,379)
Other, net (2,430) (2,340) (12,982)
-------- -------- --------
Net cash provided by operating
activities $102,919 $ 79,386 $ 44,252
-------- -------- --------
Investing activities:
Plant expenditures, excluding allowance
for funds used during construction $(93,828) $(89,735) $(94,105)
Other investing activities (598) (1,972) (4,892)
-------- -------- --------
Net cash used in investing
activities $(94,426) $(91,707) $(98,997)
-------- -------- --------
Financing activities:
Capital contributions from parent $ 14,000
Dividends paid on common stock $(13,188) (24,580) $(21,584)
Dividends paid on preferred stock (3,114) (3,114) (3,114)
Long-term debt - issues 20,000 88,000 36,000
Long-term debt - retirements (35,000)
Changes in short-term debt (11,675) (26,370) 43,895
-------- -------- --------
Net cash provided by(used in)financing
activities $ (7,977) $ 12,936 $ 55,197
-------- -------- --------
Net increase in cash and cash equivalents $ 516 $ 615 $ 452
Cash and cash equivalents at beginning
of year 1,840 1,225 773
-------- -------- --------
Cash and cash equivalents at end of year $ 2,356 $ 1,840 $ 1,225
======== ======== ========
Supplementary information:
Interest paid less amounts capitalized $ 30,569 $ 29,130 $ 24,562
-------- -------- --------
Federal and state income taxes paid
(refunded) $ 39,174 $ (8,026) $ 1,645
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company
Notes to Financial Statements
Note A - Significant Accounting Policies
1. Nature of Operations:
The Company is a wholly-owned subsidiary of New England Electric
System (NEES) operating in Massachusetts. The Company's business
is the distribution and sale of electricity at retail. Electric
service is provided to approximately 960,000 customers in 146
cities and towns having a population of approximately 2,160,000
(1990 Census). The Company's service area covers approximately 43
percent of Massachusetts. The properties of the Company consist
principally of substations and distribution lines interconnected
with transmission and other facilities of New England Power
Company (NEP), the Company's wholesale generating affiliate. The
Company purchases all of its electric energy requirements from
NEP under a contract which obligates NEP to furnish such
requirements at its standard resale rate. This contract requires
either party to give seven years notice prior to terminating the
contract. (See Note B for a discussion of industry restructuring
and NEP's proposed divestiture of its generating business.)
2. System of Accounts:
The accounts of the Company are maintained in accordance with the
Uniform System of Accounts prescribed by regulatory bodies having
jurisdiction.
In preparing the financial statements, management is required to
make estimates that affect the reported amounts of assets and
liabilities and disclosures of asset recovery and contingent
liabilities as of the date of the balance sheets and revenues and
expenses for the period. These estimates may differ from actual
amounts if future circumstances cause a change in the assumptions
used to calculate these estimates.
3. Electric Sales Revenue:
The Company accrues revenues for electricity delivered but not
yet billed (unbilled revenues). Income in 1994 included $32
million, which represented the completion of the amortization
over 13 months of the initial effect of recording unbilled
revenues, in accordance with a rate agreement. Accrued revenues
are also recorded in accordance with rate adjustment mechanisms.
4. Allowance for Funds Used During Construction (AFDC):
The Company capitalizes AFDC as part of construction costs. AFDC
represents an allowance for the cost of funds used to finance
construction. AFDC is capitalized in "Utility plant" with
offsetting noncash credits to "Interest." This method is in
accordance with an established rate-making practice under which a
utility is permitted a return on, and the recovery of, prudently
incurred capital costs through their ultimate inclusion in rate
base and in the provision for depreciation. The composite AFDC
rates were 5.4 percent, 6.0 percent, and 4.8 percent, in 1996,
1995, and 1994, respectively.
5. Depreciation:
Depreciation is provided annually on a straight-line basis. The
provision for depreciation as a percentage of weighted average
depreciable property was 3.3 percent in each of the years 1996,
1995, and 1994.
6. Cash:
The Company classifies short-term investments with a maturity of
90 days or less at time of purchase as cash.
Note B - Industry Restructuring
For the past several years, the electric utility business has
been subjected to rapidly increasing competitive pressures
stemming from a number of trends, including the presence of
surplus generating capacity, a disparity in electric rates among
regions of the country, improvements in generation efficiency,
increasing demand for customer choice, and new regulations and
legislation intended to foster competition.
In the recent past, this competition was most prominent in the
bulk power market, in which nonutility generators have
significantly increased their market share. Despite increased
competition in the bulk power market, competition in the retail
market has been limited as electric utilities have maintained
exclusive franchises for the retail sale of electricity in
specified service territories.
In states across the country, including Massachusetts, there have
been proposals to allow retail customers to choose their
electricity supplier, with incumbent utilities required to
deliver that electricity over their transmission and distribution
systems (also known as "retail wheeling"). When electricity
customers are allowed to choose their electricity supplier,
utilities across the country will face the risk that market
prices may not be sufficient to recover the costs of the
commitments incurred to supply customers under a regulated
structure. The amounts by which costs exceed market prices are
commonly referred to as "stranded costs."
The Company currently purchases electricity on behalf of its
customers under a wholesale all-requirements contract with NEP.
As described below, a settlement agreement was reached in
Massachusetts which, when all regulatory approvals are in place,
would allow recovery of NEP's above-market commitments to retail
customers in Massachusetts, which make up 73 percent of NEP's
all-requirements sales.
On February 26, 1997, the Massachusetts Department of Public
Utilities (MDPU) approved a settlement among the Company, NEP,
Nantucket Electric Company (Nantucket), a distribution affiliate,
the Massachusetts Attorney General, the Massachusetts Division of
Energy Resources, and 12 other parties, which provides for retail
choice by Massachusetts customers and the recovery of NEP's
above-market commitments to serve those customers.
The settlement provides for the commencement of retail choice on
January 1, 1998 (contingent on choice being available to the
customers of all Massachusetts investor-owned utilities).
Customers who do not choose an alternative supplier would receive
"standard offer" service, which would be priced to guarantee
customers at least a 10 percent savings in 1998 compared with
September 1996 bundled electricity prices.
In accordance with the settlement, NEP's wholesale contract with
the Company has been amended to allow for early termination of
all-requirements service. The amendment, which is subject to
regulatory approval, provides that upon early termination, the
Company's share of the cost of NEP's above-market generation
commitments (estimated at approximately $3 billion on a present-
value basis) will be recovered through a contract termination
charge. This charge will, in turn, be paid by customers that use
the Company's distribution facilities. Those commitments consist
of (i) the above-market portion of generating plant commitments,
(ii) regulatory assets, (iii) the above-market portion of
purchased power contracts, and (iv) the operating costs of
nuclear plants that cannot be avoided by shutting down the
plants, including nuclear decommissioning costs.
The above-market portion of costs associated with generating
plants and regulatory assets would be recovered over 12 years.
The above-market component of purchased power contracts and
nuclear decommissioning costs would be recovered as incurred over
the life of those obligations, a period expected to extend beyond
12 years. Initially, the transition access charge would be set
at 2.8 cents per kilowatt-hour (kWh) through December 31, 2000,
and is expected to decline thereafter. The initial transition
access charge assumes that the generating plants have no market
value. To measure their actual market value, the NEES companies
agreed to sell their generating business. The net proceeds from
the sale will be used to reduce the transition access charge.
The settlement also establishes performance-based rates for the
Company. Under the settlement, the Company's nonfuel rates (and
NEP's wholesale rates to the Company) would be frozen at current
levels until the earlier of the commencement of retail choice or
January 1, 2001. Upon commencement of retail choice, the
Company's distribution rates would be set at a level
approximately $45 million above the level embedded in its current
bundled rates, with such rates then frozen through the year 2000.
This increase reflects changes to the distribution cost of
service that include an $11 million increase in annual
depreciation expense, a $3 million annual contribution to a storm
fund, and increased amortization of unfunded deferred income
taxes of $1 million over six years. The Company's return on
equity would be subject to a floor of 6 percent and a ceiling of
11 percent, effective upon commencement of retail choice.
Earnings over the ceiling would be shared equally between
customers and shareholders up to a maximum of 12.5 percent. This
sharing results in an effective cap on shareholder's return on
equity of 11.75 percent. To the extent that earnings fall below
the floor, the Company would be authorized to surcharge customers
for the shortfall.
The settlement would also eliminate the Company's purchased power
cost adjustment (PPCA) mechanism as of July 31, 1996. This
mechanism allows the Company to recover purchased power rate
changes from NEP and the effects of NEP's seasonal rates. The
settlement also stipulates that the Company's net $18 million
PPCA refund liability balance at July 31, 1996 will be used to
prefund a storm contingency fund with $3 million, while the
remainder will be used to offset regulatory assets for hazardous
waste costs.
The settlement is subject to approval by the Federal Energy
Regulatory Commission (FERC). The FERC accepted the filing to
become effective February 1, 1997, subject to refund, and ordered
hearings.
The Utility Workers Union of America and the Massachusetts
Alliance of Utility Unions, who intervened in the MDPU proceeding
on the settlement, have indicated they intend to appeal the
MDPU's order approving the settlement to the Massachusetts
Supreme Judicial Court. If an appeal is brought, the NEES
companies will oppose it.
Several bills are pending before the Massachusetts legislature on
electric industry restructuring, including comprehensive
legislation introduced by Governor William F. Weld and by the
legislature's Joint Committee on Electric Restructuring. These
bills cover many of the topics addressed in the settlement and
could impact the implementation of the settlement.
A number of proposals for federal legislation related to industry
restructuring have been brought forward for consideration by the
current Congress. The scope and aim of these vary widely;
however, the NEES companies and others will argue that state
settlements should be respected. The Company cannot predict what
federal legislation, if any, may be enacted.
Accounting Implications
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. 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, and thereby defer
the income statement impact of certain costs expected to be
recovered in future rates. The Company has recorded
approximately $16 million in net regulatory assets in compliance
with FAS 71. The Company believes that the continuing rate-
making policies and practices of the MDPU and the terms of the
Massachusetts settlement will enable the Company to recover both
its specific costs of providing ongoing distribution services and
stranded costs billed to it by NEP. The Company believes that
these factors will allow it to continue to apply FAS 71. In the
event that future circumstances should cause the application of
FAS 71 to be discontinued, a noncash write-off of previously
established regulatory assets and liabilities would be required.
The components of regulatory assets are as follows:
At December 31, (In Thousands) 1996 1995
--------- --------
Regulatory assets (liabilities) included in current
assets and liabilities:
Rate adjustment mechanisms (see Note F) $(40,264) $ (792)
--------- --------
Regulatory assets included in deferred charges:
Unamortized losses on reacquired debt 7,482 8,034
Deferred SFAS No. 106 costs (see Note E-2) 13,568 17,185
Deferred SFAS No. 109 costs (see Note C) 8,244 8,308
Environmental response costs (see Note D-2) 14,546 15,526
Deferred storm costs 11,221 4,433
Other 862 1,312
-------- --------
55,923 54,798
-------- --------
$ 15,659 $54,006
======== ========
Amounts included in "Deferred charges and other assets" on the
Company's balance sheets that do not represent regulatory assets
totaled $10,096,000 and $10,292,000 at December 31, 1996 and
1995, respectively.
Note C - Income Taxes
The Company and other subsidiaries participate with NEES in
filing consolidated federal income tax returns. The Company's
income tax provision is calculated on a separate return basis.
Federal income tax returns have been examined and reported on by
the Internal Revenue Service (IRS) through 1991. The returns for
1992 and 1993 are currently under examination by the IRS.
Total income taxes in the statements of income are as follows:
Year Ended December 31, (In Thousands) 1996 1995 1994
------- ------- -------
Income taxes charged to operations $25,186 $19,297 $22,265
Income taxes charged (credited) to
"Other income" (2,010) (901) (642)
------- ------- -------
Total income taxes $23,176 $18,396 $21,623
======= ======= =======
Total income taxes, as shown above, consist of the following components:
Year Ended December 31, (In Thousands) 1996 1995 1994
-------- -------- --------
Current income taxes $ 31,026 $ 11,730 $ (7,286)
Deferred income taxes (6,732) 7,798 30,137
Investment tax credits, net (1,118) (1,132) (1,228)
-------- -------- ---------
Total income taxes $ 23,176 $ 18,396 $ 21,623
======== ======== =========
Investment tax credits have been deferred and are being amortized over the
estimated lives of the property giving rise to the credits.
Total income taxes, as shown above, consist of federal and state components as
follows:
Year Ended December 31, (In Thousands) 1996 1995 1994
---- --- ---
Federal income taxes $18,697 $14,461 $16,942
State income taxes 4,479 3,935 4,681
------- ------- -------
Total income taxes $23,176 $18,396 $21,623
======= ======= =======
Consistent with rate-making policies of the MDPU, the Company has
adopted comprehensive interperiod tax allocation (normalization)
for temporary book/tax differences.
Total income taxes differ from the amounts computed by applying
the federal statutory tax rates to income before taxes. The
reasons for the differences are as follows:
Year Ended December 31, (In Thousands) 1996 1995 1994
---- ---- ----
Computed tax at statutory rate $ 21,386 $ 16,624 $ 19,722
Increases (reductions) in tax resulting from:
Amortization of investment tax credits (1,118) (1,132) (1,228)
State income taxes, net of federal income
tax benefit 2,911 2,558 3,043
All other differences (3) 346 86
-------- -------- --------
Total income taxes $ 23,176 $ 18,396 $ 21,623
======== ======== ========
The following table identifies the major components of total
deferred income taxes:
At December 31, (In Millions) 1996 1995
---- ----
Deferred tax asset:
Plant related $ 9 $ 9
Investment tax credits 7 7
All other 57 42
------ ------
73 58
------ ------
Deferred tax liability:
Plant related (216) (209)
All other (35) (34)
------ ------
(251) (243)
------ ------
Net deferred tax liability $ (178) $ (185)
====== ======
There were no valuation allowances for deferred tax assets deemed necessary.
Note D - Commitments and Contingencies
1. Plant Expenditures:
The Company's utility plant expenditures are estimated to be
approximately $95 million in 1997. At December 31, 1996,
substantial commitments had been made relative to future planned
expenditures.
2. 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. NEES subsidiaries currently have in place an
internal environmental audit program and an external waste
disposal vendor audit and qualification program intended to
enhance compliance with existing federal, state, and local
requirements regarding the handling of potentially hazardous
products and by-products.
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
19 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. The Company is aware of approximately 35 such
manufactured gas locations in Massachusetts (including eight of
the 19 locations for which the Company is a PRP). 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 MDPU approved a settlement agreement regarding the
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. The Company made an initial $30 million
contribution to the fund. Rate-recoverable contributions of $3
million, adjusted since 1993 for inflation, are added annually to
the fund along with interest and any recoveries from insurance
carriers and other third parties. At December 31, 1996, the fund
had a balance of $17 million. Under the 1996 Massachusetts
settlement, an additional $15 million will be transferred to the
fund in 1997 out of existing reserves for refunds.
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. Where
appropriate, the Company intends to seek recovery from its
insurers and from other PRPs, but it is uncertain whether, and to
what extent, such efforts will be successful. At December 31,
1996, the Company had total reserves for environmental response
costs of $38 million and a related regulatory asset of $15
million. 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.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which become effective in 1997. The
Company does not believe these new rules will have a material
effect on its financial position or results of operations.
Note E - Employee Benefits
1. Pension Plans:
The Company participates with other subsidiaries of NEES in
noncontributory, defined-benefit plans covering substantially all
employees of the Company. The plans provide pension benefits
based on the employee's compensation during the five years prior
to retirement. The Company's funding policy is to contribute each
year the net periodic pension cost for that year. However, the
contribution for any year will not be less than the minimum
contribution required by federal law or greater than the maximum
tax deductible amount.
Net pension cost for 1996, 1995, and 1994 included the following
components:
Year Ended December 31, (In Thousands) 1996 1995 1994
-------- -------- --------
Service cost - benefits earned during
the period $ 4,429 $ 3,992 $ 4,134
Plus (less):
Interest cost on projected
benefit obligation 16,935 17,576 16,435
Return on plan assets at expected
long-term rate (18,562) (18,122) (17,223)
Amortization 316 99 1,060
-------- -------- --------
Net pension cost $ 3,118 $ 3,545 $ 4,406
======== ======== ========
Actual return on plan assets $ 32,675 $ 47,717 $ 1,541
======== ======== ========
1997 1996 1995 1994
---- ---- ---- ------
Assumptions used to determine pension cost:
Discount rate 7.25% 7.25% 8.25% 7.25%
Average rate of increase in
future compensation levels 4.13% 4.13% 4.63% 4.35%
Expected long-term rate of
return on assets 8.50% 8.50% 8.75% 8.75%
The funded status of the plans cannot be presented separately for
the Company as the Company participates in the plans with other
NEES subsidiaries. The following table sets forth the funded
status of the NEES companies' plans:
At December 31, (In Millions) 1996 1995
---- ----
Union Non-Union Union Non-Union
Employee Employee Employee Employee
Plans Plans Plans Plans
-------- -------- -------- ---------
Benefits earned
Actuarial present value of
accumulated benefit liability:
Vested $298 $342 $293 $343
Nonvested 9 10 8 10
---- ---- ---- ----
Total 307 352 301 353
==== ==== ==== ====
Reconciliation of funded status
Actuarial present value of
projected benefit liability 355 398 346 402
Unrecognized prior service costs (6) (3) (7) (4)
SFAS No. 87 transition liability
not yet recognized (amortized) - (1) - (1)
Net gain (loss) not yet recognized
(amortized) 25 15 (1) (23)
---- ---- ---- ----
374 409 338 374
---- ---- ---- ----
Pension fund assets at fair
value 384 428 349 392
SFAS No. 87 transition asset
not yet recognized (amortized) (10) - (11) -
---- ---- ---- ----
374 428 338 392
---- ---- ---- ----
Accrued pension/(prepaid)
payments recorded on books $ - $(19) $ - $(18)
The plans' funded status at December 31, 1996 and 1995 were
calculated using the assumed rates from 1997 and 1996,
respectively, and the 1983 Group Annuity Mortality table.
Plan assets are composed primarily of corporate equity, debt
securities, and cash equivalents.
2. Postretirement Benefit Plans Other Than Pensions (PBOPs):
The Company provides health care and life insurance coverage to
eligible retired employees. Eligibility is based on certain age
and length of service requirements and in some cases retirees
must contribute to the cost of their coverage.
The total cost of PBOPs for 1996, 1995, and 1994 included the
following components:
Year Ended December 31, (In Thousands) 1996 1995 1994
-------- -------- --------
Service cost - benefits earned during
the period $ 2,232 $ 2,368 $ 2,840
Plus (less):
Interest cost on accumulated benefit
obligation 9,661 11,699 11,050
Return on plan assets at expected
long-term rate (5,455) (4,165) (3,306)
Amortization 5,267 6,628 7,287
-------- -------- --------
Net postretirement benefit cost $ 11,705 $ 16,530 $ 17,871
======== ======== ========
Actual return on plan assets $ 10,857 $ 12,209 $ 265
======== ======== ========
1997 1996 1995 1994
---- ---- ---- ----
Assumptions used to determine postretirement
benefit cost:
Discount rate 7.25% 7.25% 8.25% 7.25%
Expected long-term rate of return
on assets 8.25% 8.25% 8.50% 8.50%
Health care cost rate - 1994 - - - 11.00%
Health care cost rate - 1995 to 1999 8.00% 8.00% 8.50% 8.50%
Health care cost rate - 2000 to 2004 6.25% 6.25% 8.50% 8.50%
Health care cost rate - 2005 and beyond 5.25% 5.25% 6.25% 6.25%
The following table sets forth benefits earned and the plans'
funded status:
At December 31, (In Millions) 1996 1995
------ ------
Accumulated postretirement benefit obligation:
Retirees $ 94 $ 93
Fully eligible active plan participants 11 12
Other active plan participants 39 44
------ ------
Total benefits earned 144 149
Unrecognized prior service costs - (1)
Unrecognized transition obligation (117) (124)
Unrecognized net gain 40 26
------ ------
67 50
Plan assets at fair value 82 65
------ ------
Prepaid postretirement benefit costs recorded on books $ 15 $ 15
====== ======
The plans' funded status at December 31, 1996 and 1995 were
calculated using the assumed rates in effect for 1997 and 1996,
respectively.
The assumptions used in the health care cost trends have a
significant effect on the amounts reported. Increasing the
assumed rates by 1 percent in each year would increase the
accumulated postretirement benefit obligation as of December 31,
1996 by approximately $17 million and the net periodic cost for
1996 by approximately $2 million.
The Company funds the annual tax-deductible contributions. Plan
assets are invested in equity and debt securities and cash
equivalents.
Note F - Short-term Borrowings and Other Accrued Expenses
At December 31, 1996, the Company had $44 million of short-term
debt outstanding including $39 million in commercial paper
borrowings and $5 million of borrowings from affiliates. NEES
and certain subsidiaries, including the Company, with regulatory
approval, operate a money pool to more effectively utilize cash
resources and to reduce outside short-term borrowings. Short-term
borrowing needs are met first by available funds of the money
pool participants. Borrowing companies pay interest at a rate
designed to approximate the cost of outside short-term
borrowings. Companies which invest in the pool share the interest
earned on a basis proportionate to their average monthly
investment in the money pool. Funds may be withdrawn from or
repaid to the pool at any time without prior notice.
At December 31, 1996, the Company had lines of credit with banks
totaling $90 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
December 31, 1996. Fees are paid in lieu of compensating balances
on most lines of credit.
The weighted average rate on outstanding short-term borrowings
was 6.1 percent at December 31, 1996. The fair value of the
Company's short-term debt equals carrying value.
The components of other accrued expenses are as follows:
At December 31, (In Thousands) 1996 1995
------- -------
Rate adjustment mechanisms $39,863 $ 3,908
Accrued wages and benefits 12,591 11,066
Other 2,379 2,162
------- -------
$54,833 $17,136
======= =======
Note G - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1996 and 1995 is as follows
(dollar amount expressed in thousands except for share data):
Shares
Authorized Dividends Call
and Outstanding Amount Declared Price
--------------- ------------- --------------- -----
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- -----
$25 Par value -
6.84% Series 600,000 600,000$15,000 $15,000 $1,026 $1,026 (a)
$100 Par value -
4.44% Series 75,000 75,000 7,500 7,500 333 333$104.068
4.76% Series 75,000 75,000 7,500 7,500 357 357 103.730
6.99% Series 200,000 200,000 20,000 20,000 1,398 1,398 (b)
------- -------------- -------------- -------
Total 950,000 950,000$50,000 $50,000 $3,114 $3,114
======= ============== ============== =======
(a) Callable on or after October 1, 1998 at $25.80.
(b) Callable on or after August 1, 2003 at $103.50.
The annual dividend requirement for total cumulative preferred stock was $3,114,000 for
1996 and 1995.
There are no mandatory redemption provisions on the Company's cumulative preferred stock.
Note H - Long-term Debt
A summary of long-term debt is as follows:
At December 31, (In Thousands)
Series Rate % Maturity 1996 1995
- ---------------------------------------------------------------------------
First Mortgage Bonds:
R(92-4) 7.230 June 3, 1997 $ 10,000 $ 10,000
R(92-5) 7.210 June 3, 1997 5,000 5,000
S(92-6) 6.120 August 15, 1997 12,000 12,000
S(92-7) 6.010 August 15, 1997 3,000 3,000
U(95-3) 7.800 February 13, 1998 5,000 5,000
U(95-4) 7.790 February 16, 1998 5,000 5,000
R(92-1) 7.240 December 30, 1998 10,000 10,000
S(92-3) 6.630 August 12, 1999 7,500 7,500
S(92-4) 6.600 August 12, 1999 7,500 7,500
U(95-5) 7.930 February 14, 2000 6,000 6,000
S(92-2) 6.980 July 17, 2000 5,000 5,000
S(92-9) 6.310 September 15, 2000 10,000 10,000
R(92-6) 7.710 July 1, 2002 10,000 10,000
S(92-11) 7.250 October 28, 2002 5,000 5,000
S(92-12) 7.340 November 25, 2002 10,000 10,000
T(93-2) 7.090 January 27, 2003 20,000 20,000
T(93-5) 6.400 June 24, 2003 10,000 10,000
U(93-1) 6.240 November 17, 2003 5,000 5,000
U(94-6) 8.520 November 30, 2004 10,000 10,000
U(95-1) 8.450 January 10, 2005 10,000 10,000
U(95-2) 8.220 January 24, 2005 10,000 10,000
U(95-7) 7.920 March 3, 2005 9,000 9,000
V(95-1) 6.720 June 23, 2005 10,000 10,000
V(96-1) 6.780 November 20, 2006 20,000
T(93-7) 6.660 June 23, 2008 5,000 5,000
T(93-8) 6.660 June 30, 2008 5,000 5,000
T(93-10) 6.110 September 8, 2008 10,000 10,000
T(93-11) 6.375 November 17, 2008 10,000 10,000
R(92-3) 8.550 February 7, 2022 5,000 5,000
S(92-5) 8.180 August 1, 2022 10,000 10,000
S(92-10) 8.400 October 26, 2022 5,000 5,000
T(93-1) 8.150 January 20, 2023 10,000 10,000
T(93-3) 7.980 January 27, 2023 10,000 10,000
T(93-4) 7.690 February 24, 2023 10,000 10,000
T(93-6) 7.500 June 23, 2023 3,000 3,000
T(93-9) 7.500 June 29, 2023 7,000 7,000
U(93-2) 7.200 November 15, 2023 10,000 10,000
U(93-3) 7.150 November 24, 2023 1,000 1,000
U(94-1) 7.050 February 2, 2024 10,000 10,000
U(94-2) 8.080 May 2, 2024 5,000 5,000
U(94-3) 8.030 June 14, 2024 5,000 5,000
U(94-4) 8.160 August 9, 2024 5,000 5,000
U(94-5) 8.850 November 7, 2024 1,000 1,000
U(95-6) 8.460 February 28, 2025 3,000 3,000
V(95-2) 7.630 June 27, 2025 10,000 10,000
V(95-3) 7.600 September 12, 2025 10,000 10,000
V(95-4) 7.630 September 12, 2025 10,000 10,000
Unamortized discounts (1,679) (1,733)
-------- --------
Total long-term debt 373,321 353,267
======== ========
Long-term debt due in one year 30,000
-------- --------
$343,321 $353,267
======== ========
Substantially all of the properties and franchises of the Company
are subject to the lien of mortgage indentures under which the
first mortgage bonds have been issued.
In July 1996, Nantucket issued $28 million of tax-exempt long-
term debt at rates ranging from 4.10 percent to 6.75 percent to
fund construction of an undersea cable. The Company guaranteed
the debt on behalf of Nantucket.
The Company will make cash payments of $30,000,000 in 1997,
$20,000,000 in 1998, $15,000,000 in 1999, and $21,000,000 in 2000
to retire maturing mortgage bonds. There are no cash payments
required in 2001.
At December 31, 1996, the Company's long-term debt had a carrying
value of approximately $343,000,000 and had a fair value of
approximately $380,000,000. The fair market value of the
Company's long-term debt was estimated based on the quoted prices
for similar issues or on the current rates offered to the Company
for debt of the same remaining maturity.
Note I - Restrictions on Retained Earnings Available for
Dividends on Common Stock
As long as any preferred stock is outstanding, certain
restrictions on payment of dividends on common stock would come
into effect if the "junior stock equity" was, or by reason of
payment of such dividends became, less than 25 percent of "Total
capitalization." However, the junior stock equity at December 31,
1996 was 50 percent of total capitalization, and accordingly,
none of the Company's retained earnings at December 31, 1996 were
restricted as to dividends on common stock under the foregoing
provisions.
Under restrictions contained in the indentures relating to first
mortgage bonds, $20,113,000 of the Company's retained earnings at
December 31, 1996 were restricted as to dividends on common
stock.
Note J - Supplementary Income Statement Information
Advertising expenses, expenditures for research and development,
and rents were not material and there were no royalties paid in
1996, 1995, or 1994. Taxes, other than income taxes, charged to
operating expenses are set forth by classes as follows:
Year Ended December 31, (In Thousands) 1996 1995 1994
------- ------- -------
Municipal property taxes $23,304 $23,119 $21,186
Federal and state payroll and other taxes 7,255 6,903 7,478
------- ------- -------
$30,559 $30,022 $28,664
New England Power Service Company, an affiliated service company
operating pursuant to the provisions of Section 13 of the Public
Utility Holding Company Act of 1935, furnished services to the
Company at the cost of such services. These costs amounted to
$67,756,000, $67,680,000, and $71,107,000, including capitalized
construction costs of $9,330,000, $7,660,000, and $8,977,000 for
each of the years 1996, 1995, and 1994, respectively.
Massachusetts Electric Company
Operating Statistics (Unaudited)
Year Ended December 31, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Sources of Energy (Thousands of kWh)
Purchased energy:
From New England Power
Company, an affiliate 16,757,485 16,594,81216,455,77416,179,204 16,005,087
From others 3,570 2,887 3,364 12,676 13,916
---------- ------------------------------ ----------
Total purchased 16,761,055 16,597,69916,459,13816,191,880 16,019,003
Losses, company use, etc. (739,586)(730,608)(733,804) (740,390) (711,157)
---------- ------------------------------ ----------
Total sources of energy 16,021,469 15,867,09115,725,33415,451,490 15,307,846
========== ============================== ==========
Sales and Deliveries of
Energy (Thousands of kWh)
Residential 5,855,0545,768,6355,798,806 5,694,539 5,645,350
Commercial 6,141,6385,999,5555,936,170 5,743,924 5,645,867
Industrial 3,926,3313,998,5063,885,391 3,850,075 3,907,040
Other 86,186 89,759 95,382 99,991 105,842
Total sales to ---------- ------------------------------ ----------
ultimate customers 16,009,209 15,856,45515,715,74915,388,529 15,304,099
Sales for resale 12,260 10,636 9,585 62,961 3,747
---------- ------------------------------ ----------
Total sales of energy 16,021,469 15,867,09115,725,33415,451,490 15,307,846
---------- ------------------------------ ----------
Deliveries 97,141 - - - -
---------- ------------------------------ ----------
Total sales and deliveries
of energy 16,118,610 15,867,09115,725,33415,451,490 15,307,846
========== ============================== ==========
Maximum Demand
(kW - one hour peak) 2,855,0003,029,0003,016,000 2,819,000 2,791,000
Average Annual Use per
Residential Customer (kWh) 6,887 6,844 6,948 6,888 6,886
Number of Customers at
December 31
Residential 854,108 847,437 839,443 831,223 824,072
Commercial 99,085 97,211 95,430 93,414 92,281
Industrial 4,445 4,503 4,551 4,637 4,624
Other 824 854 880 906 952
---------- ------------------------------ ----------
Total ultimate customers 958,462 950,005 940,304 930,180 921,929
Other (for resale) 178 179 178 278 22
Deliveries 14 - - - -
---------- ------------------------------ ----------
Total customers 958,654 950,184 940,482 930,458 921,951
========== ============================== ==========
Operating Revenue (In Thousands)
Residential $ 612,134 $ 610,856$ 588,518$ 593,336 $ 549,884
Commercial 566,743 543,715 523,826 518,965 510,638
Industrial 312,539 312,057 301,502 316,140 319,905
Other 18,627 17,991 17,147 17,416 17,489
---------- ------------------------------ ----------
Total revenue from
ultimate customers 1,510,0431,484,6191,430,993 1,445,857 1,397,916
Amortization of unbilled revenues - - 32,300 2,700 -
Sales for resale 1,182 1,013 924 5,399 278
---------- ------------------------------ ----------
Total revenue from
electric sales 1,511,2251,485,6321,464,217 1,453,956 1,398,194
Other operating revenue 27,312 20,044 17,853 14,584 14,754
---------- ------------------------------ ----------
Total operating revenue $1,538,537 $1,505,676$1,482,070$1,468,540 $1,412,948
========== ============================== ==========
Massachusetts Electric Company
Selected Financial Information
Year Ended December 31, (In Millions) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating revenue:
Electric sales
(excluding fuel cost recovery) $1,084 $1,072 $1,088 $1,062 $1,012
Fuel cost recovery 427 414 376 392 386
Other 28 20 18 15 15
------ ------ ------ ------ ------
Total operating revenue $1,539 $1,506 $1,482 $1,469 $1,413
Net income $ 38 $ 29 $ 35 $ 24 $ 35
Total assets $1,390 $1,343 $1,296 $1,232 $1,015
Capitalization:
Common equity $ 427 $ 412 $ 384 $ 382 $ 331
Cumulative preferred stock 50 50 50 50 50
Long-term debt 343 353 266 265 266
------ ------ ------ ------ ------
Total capitalization $ 820 $ 815 $ 700 $ 697 $ 647
Preferred dividends declared $ 3 $ 3 $ 3 $ 4 $ 3
Common dividends declared $ 19 $ 13 $ 30 $ 19 $ 23
Selected Quarterly Financial Information (Unaudited)
First Second Third Fourth
(In Thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996
Operating revenue $390,819 $358,479 $398,542 $390,697
Operating income $ 20,687 $ 13,783 $ 13,538 $ 23,953
Net income $ 10,734 $ 5,456 $ 4,774 $ 16,962
1995
Operating revenue $373,092 $355,431 $392,575 $384,578
Operating income $ 13,349 $ 11,173 $ 11,799 $ 25,349
Net income $ 5,126 $ 2,567 $ 3,653 $ 17,755
Per share data is not relevant because the Company's common stock is
wholly-owned by New England Electric System.
A copy of Massachusetts Electric Company's Annual Report on Form 10-K to
the Securities and Exchange Commission for the year ended December 31, 1996
will be available on or about April 1, 1997, without charge, upon written
request to Massachusetts Electric Company, Shareholder Services Department,
25 Research Drive, Westborough, Massachusetts 01582.