Annual Report 1997
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 March 18, 1998)
Cheryl A. LaFleur
Senior Vice President, General Counsel, and Secretary of New
England Electric System
Robert L. McCabe
Chairman of the Company and of certain affiliates
Lydia M. Pastuszek
Senior Vice President of the Company
and of certain affiliates
Lawrence J. Reilly
President and Chief Executive Officer of the Company and of
certain affiliates
Christopher E. Root
Senior Vice President of the Company
and of certain affiliates
Richard P. Sergel
President and Chief Executive Officer of New England Electric
System
Dennis E. Snay
Senior Vice President of the Company and of an affiliate
Officers
(As of March 18, 1998)
Robert L. McCabe
Chairman of the Company and of certain affiliates
Lawrence J. Reilly
President and Chief Executive Officer of the Company and of
certain affiliates
Lydia M. Pastuszek
Senior Vice President of the
Company and of certain affiliates
Christopher E. Root
Senior Vice President of the Company and of certain affiliates
Dennis E. Snay
Senior Vice President of the Company
and of an affiliate
John C. Amoroso
Vice President of the Company and of an affiliate
William J. Flaherty
Vice President of the Company
Andrea Foley-Stapleford
Vice President of the Company
Richard W. Frost
Vice President of the Company and of certain affiliates
Charles H. Moser
Vice President of the Company
Joseph D. Newman*
Vice President of the Company
Kwong O. Nuey
Vice President of the Company
Nancy H. Sala
Vice President of the Company
John G. Upham II
Vice President of the Company
John G. Cochrane
Treasurer of the Company and of certain affiliates, Assistant
Treasurer of an affiliate, Vice President of an affiliate 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, Secretary or
Assistant Clerk of certain affiliates and Assistant Secretary of
an affiliate
Howard W. McDowell
Assistant Treasurer and Controller of the Company and of certain
affiliates, Treasurer or Controller of certain affiliates and
Assistant Secretary of an affiliate
* Effective April 1, 1998
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 (the Company) is a wholly owned
subsidiary of New England Electric System (NEES) operating in
Massachusetts. The Company's business is the distribution of
electricity at retail. Electric service is provided to
approximately 970,000 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, and many suburban communities and 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 November
1997, legislation was enacted in the Commonwealth of
Massachusetts which provides the Company's customers with choice
of power supplier beginning on March 1, 1998.
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 generation and transmission affiliate. The
Company purchased all of its electrical requirements from NEP
under a contract which obligated NEP to furnish such requirements
at its standard resale rate. In accordance with a settlement
reached in February 1997 and approved in November 1997, this
contract has been amended, effective March 1, 1998. The
amendment both terminates the all-requirements provision of the
contract and allows NEP to recover its above-market generation
commitments through a transition access charge, which the Company
will collect from its customers.
For further information, please refer to the "Industry
Restructuring" section of Financial Review.
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,
1997 and 1996 and the related statements of income, retained
earnings, and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
March 2, 1998
Massachusetts Electric Company
Financial Review
Industry Restructuring
Historically, electric utilities have provided their customers
bundled electric service within exclusive service territories.
As a result of a number of trends, including a disparity in
electric rates among regions of the country and new regulations
and legislation intended to foster competition, distribution
customers are being allowed to choose their power supplier, with
incumbent utilities required to deliver that electricity over
their transmission and distribution systems.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments (generation related)
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs." The Company and NEP reached a
settlement agreement with parties representing all of the
Company's distribution customers (the Massachusetts Settlement).
The Massachusetts Settlement provides for the recovery of
stranded costs.
In November 1997, legislation was enacted which provides
customers of Massachusetts' investor-owned utilities with the
ability to choose their power supplier beginning on March 1,
1998. The legislation requires electric companies to provide
customers who do not choose a power supplier with a transition
rate (or "standard offer generation service") which results in a
10 percent rate reduction, with the discount increasing to 15
percent on or before September 1, 1999. The legislation also
provides a mechanism for the recovery of stranded costs resulting
from the introduction of customer choice.
In December 1997, the Massachusetts Department of
Telecommunications and Energy (MDTE) (formerly the Massachusetts
Department of Public Utilities (MDPU)) found that the
Massachusetts Settlement substantially complies with or is
consistent with the Massachusetts statute. The Massachusetts
Settlement was also conditionally approved by the Federal Energy
Regulatory Commission (FERC) in November 1997, subject to a
compliance filing to clarify the impact of the settlement on
nonsettling parties.
In accordance with the Massachusetts Settlement, NEP's
wholesale contract with the Company has been amended effective
March 1, 1998. The Massachusetts Settlement provides that NEP's
stranded costs (the Company's share is 73 percent) will be
recovered from distribution customers through a transition access
charge, which will be collected by the Company. Under the
Massachusetts Settlement, the recovery of NEP's stranded costs is
divided into several categories. Unrecovered costs associated
with generating plants and regulatory assets would be recovered
over 12 years and would earn a return on equity of 9.4 percent.
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 was set at 2.8
cents per kilowatthour (kWh). The MDTE has approved a reduction
of the initial transition access charge to 2.7 cents per kWh.
NEP's filing with the FERC to approve this reduction is pending.
The Company has already reflected the lower transition access
charge amount in its rates. The transition access charge would
be reduced further upon completion of the sale of NEP's
nonnuclear generating business, as described below.
In addition to addressing customer choice and the recovery of
stranded costs, the Massachusetts Settlement also required the
NEES companies to divest their nonnuclear generating business.
In August 1997, NEP and the Company's Rhode Island affiliate, The
Narragansett Electric Company (Narragansett Electric), entered
into an agreement to sell substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an
indirect wholly owned subsidiary of PG&E Corporation. See
"Divestiture of Generating Business" below. The net proceeds
from the sale of the nonnuclear generating business to USGen will
be used to reduce the transition access charge to approximately
1.5 cents per kWh. In addition, the FERC accepted the NEES
companies' proposal in conjunction with their divestiture filing
that the recovery of the remaining above-market nuclear
generating plant investment and regulatory assets be completed by
the end of the year 2000.
The Massachusetts Settlement also establishes distribution
rates for the Company. On March 1, 1998, the Company's
distribution rates were set at a level approximately $45 million
above the level embedded in its previously 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 approximately
$1 million over six years. The Massachusetts restructuring
legislation also expanded the eligibility for certain rate
discount programs, the cost of which is uncertain at this time.
From 1998 through 2000, the Company's return on equity will be
subject to a floor of 6 percent and a ceiling of 11 percent.
Earnings over the ceiling will be shared equally between
customers and shareholders up to a maximum of 12.5 percent. This
sharing results in an effective cap on the Company's return on
equity of 11.75 percent, excluding certain limited incentive
opportunities. To the extent that earnings fall below the floor,
the Company will be authorized to surcharge customers for the
shortfall. The statute also imposes an inflation cap through
March 1, 2005 on the total rates for customers who have not
chosen a power supplier. If this inflation cap is triggered,
under the Massachusetts Settlement the recovery of stranded
investment costs would be deferred. This inflation cap does not
apply to any surcharge triggered by the rate of return floor.
The Massachusetts Settlement also eliminated the Company's
purchased power cost adjustment (PPCA) mechanism as of July 31,
1996. This mechanism allowed the Company to recover purchased
power rate changes from NEP and the effects of NEP's seasonal
rates. The Massachusetts Settlement required that the Company's
net $18 million PPCA refund liability balance at July 31, 1996 be
transferred on its books to establish a storm contingency fund
account of $3 million initially, with the remainder applied to
reduce regulatory assets for hazardous waste costs.
A referendum question which asks voters to repeal the
Massachusetts statute is expected to be on the ballot in November
1998. The Company is unable to predict the outcome. While by
itself, repeal of the statute is not expected to materially
impair the effectiveness of the previously approved Massachusetts
Settlement, the potential exists that following repeal, there
could be legislative or regulatory actions which could be
materially adverse to the Company.
Divestiture of Generating Business
As described above, in August 1997, NEP and Narragansett
Electric (collectively, the Sellers) reached an agreement to sell
their nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
megawatts (MW) of capacity, as well as NEES' 100 percent interest
in Narragansett Energy Resources Company, a 20 percent general
partner in the Ocean State Power project, all of which has a book
value of $1.1 billion. USGen will pay the Sellers $1.59 billion
in cash, of which $225 million will be contingent upon the
introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. USGen will
also reimburse the NEES companies for $85 million of costs
associated with early retirement and special severance programs
for employees affected by industry restructuring.
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale, and
conditionally approved most supporting filings. While the timing
of receipt of final regulatory approvals is uncertain, receipt of
all approvals is unlikely before mid-1998. Closing is contingent
upon all regulatory approvals being obtained by February 1999.
Upon completion of the divestiture of NEP's nonnuclear
generating business, the Company's share of NEP's stranded costs
that will be recovered from the Company's customers through the
transition access charge will be reduced from approximately $3.3
billion to $1.5 billion.
Workforce Reduction
The NEES companies expect to implement substantial workforce
reductions beginning in 1998 as a result of industry
restructuring and the sale of the nonnuclear generating business.
The NEES companies are in the process of offering early
retirement programs to their union and non-union employees,
contingent upon the closing of the sale of the nonnuclear
generating business to USGen. In addition, the NEES companies
intend to offer enhanced severance benefits to affected
employees. As previously described, the costs of the early
retirement and severance programs for all NEES companies are
expected to be substantially recovered from the proceeds of the
sale of the nonnuclear generating business. Since the early
retirement program is contingent upon the divestiture, its cost
will not be accrued until that time.
Risk Factors
This annual report contains statements that may be considered
forward looking statements as defined under the securities laws.
Actual results may differ materially for the reasons discussed in
this Financial Review. While the Company believes that the
previously described settlement and legislation and the sale
agreement with USGen and other developments constitute
substantial progress in reducing the impacts associated with
industry restructuring, significant risks remain. These include,
but are not limited to: (i) the potential that ultimately the
Massachusetts Settlement will not be implemented in the manner
anticipated by the Company, (ii) the possibility that a voter
referendum in November 1998 could overturn the Massachusetts
legislation, followed by materially adverse legislative or
regulatory actions, (iii) the possibility of federal legislation
that would increase the risks above those contained in the
Massachusetts Settlement and statute, and (iv) the failure of NEP
and Narragansett Electric to complete the sale of the nonnuclear
generating business to USGen. The major risk factors affecting
the Company relate to the possibility of adverse regulatory or
judicial decisions or legislation which limit the level of
revenues the Company is allowed to charge for its services or
affect the costs the Company incurs.
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. 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, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the Company had approximately $18
million in net regulatory assets in compliance with FAS 71.
The Company believes the Massachusetts Settlement and statute
will enable the Company to recover through rates its specific
costs of providing ongoing distribution services and stranded
costs billed to it by NEP. The Company believes these factors
will allow it to continue to apply FAS 71.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations.
Overview of Financial Results
Net income for 1997 increased $28 million compared with 1996.
The increase was primarily due to the reversal of prior period
refund accruals related to the Company's rate mechanisms and a
2.0 percent increase in kWh deliveries. Partially offsetting the
higher earnings were increased operation and maintenance costs,
increased depreciation, and increased income taxes.
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.
Operating Revenue
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
(In millions) 1997 1996
---- ----
Sales and deliveries growth $19 $ 5
Fuel recovery 26 13
PPCA mechanism 35 (6)
Rate changes - 23
Demand-side management (DSM) recovery 4 (5)
Other 2 3
--- ---
$ 86 $ 33
=== ===
For a discussion of fuel recovery, see the fuel costs
discussion in the "Operating Expenses" section.
The PPCA rate mechanism was 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 mechanism
was eliminated as of July 31, 1996 upon approval of the
Massachusetts Settlement in November 1997. Pending final
approval of the settlement, the Company accrued additional
potential refund provisions of $9 million for the last five
months of 1996 and $7 million for the first nine months of 1997.
Upon approval of the settlement, these refund provisions were all
reversed in the fourth quarter of 1997, thereby increasing
revenues. The Company had accrued refund provisions of $17
million during the first seven months of 1996, which were part of
the net $18 million PPCA balance at July 31, 1996 discussed in
"Industry Restructuring." In the future, to the extent the
Company is required to purchase energy for customers, a
reconciliation mechanism will allow the Company to recover its
purchased energy costs.
KWh deliveries increased 2.0 percent in 1997 and reflects the
effects of an improving regional economy.
The Company received approval from the MDPU to recover demand-
side management (DSM) program expenditures in rates on a current
basis through 1997. These expenditures were $51 million, $48
million, and $53 million in 1997, 1996, and 1995, respectively.
The Massachusetts Settlement and statute provide for recovery of
DSM-related costs. The Company has filed DSM program expenditure
plans with the MDTE for the period 1998 through 2002, and has
received interim MDTE approval, subject to further MDTE review
and modification based on comments by the Massachusetts Division
of Energy Resources (DOER) and other parties. The Company
subsequently filed a comprehensive Offer of Settlement with the
MDTE resolving all issues raised by the DOER and other settling
parties relating to the Company's DSM program for the period
1998-2002. Since 1990, the Company has been allowed to earn
incentives based upon the results of its DSM programs. The
Company recorded before-tax incentives of $7.0 million, $5.7
million, and $5.1 million in 1997, 1996, and 1995, respectively.
Operating Expenses
The following table summarizes the changes in operating
expenses:
Increase (Decrease) in Operating Expenses
(In millions) 1997 1996
---- ----
Purchased electric energy:
Fuel costs $26 $13
Purchases and demand charges from NEP (2) (6)
Other operation and maintenance:
DSM 3 (5)
Other 9 12
Depreciation 2 3
Taxes 18 6
--- ---
$56 $23
=== ===
The increase in fuel costs in 1997 is due to increased
replacement power fuel purchases by NEP due to the reduced
generation from partially owned nuclear units. These costs were
passed on to the Company through NEP's fuel clause. The Company,
in turn, passed these costs on to its customers. The 1996
increase 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
plant entering service in the second half of 1995. Effective
March 1, 1998, the Company terminated its power purchases under
NEP's fuel clause, and the rates in effect for sales on and after
March 1, 1998 no longer include a fuel clause.
Other operation and maintenance expenses increased in 1997
primarily due to increased distribution-system related costs,
including increased tree-trimming expenditures. The increase
also reflects increased transmission wheeling charges from NEP
related to the use of NEP's transmission network for the
Company's pilot program. The increase in 1996 reflects start-up
costs of a new customer service center, and increased general and
administrative expenses including increased postretirement
benefits other than pensions (PBOPs) commensurate with additional
amounts being recovered from customers. The Company is
recovering deferred PBOP expenses over five years.
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. (Until the early 1970's, NEES was a
combined electric and gas holding company system.) The Company
is aware of approximately 35 such manufactured gas locations,
including eight for which the Company has been identified by
either federal or state environmental regulatory agencies as a
potentially responsible party, located in Massachusetts. 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 they may be held responsible for
remediating.
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,
1997, the Company had total reserves of $35 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.
Year 2000 Computer Issues
In the next two years, most large companies will face a
potentially serious information systems (computer) problem
because most software applications and operational programs
written in the past will not properly recognize calendar dates
beginning in the year 2000. This could force computers to either
shut down or lead to incorrect calculations. The NEES companies
began the process of identifying the changes required to their
computer programs and hardware during 1996. The necessary
modifications to the NEES companies' centralized financial,
customer, and operational information systems are expected to be
completed by the end of 1998. Noncentralized systems are also
being reviewed for Year 2000 problems. The NEES companies
believe total costs associated with making the necessary
modifications to all centralized and noncentralized systems will
be approximately $25 million, of which approximately $8 million
has been incurred as of December 31, 1997. Most of the remaining
costs are expected to be incurred prior to December 31, 1998.
The Company's share of the total costs is expected to be
approximately $12 million.
New Accounting Standards
In 1997, the Financial Accounting Standards Board released two
new Statements of Financial Accounting Standards (FAS), FAS 130
and FAS 131, both of which will go into effect in 1998. FAS 130,
Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
does not believe these new accounting standards will have a
significant impact on its future reporting requirements.
Utility Plant Expenditures and Financing
Cash expenditures for utility plant totaled $88 million in
1997. The funds necessary for utility plant expenditures during
1997 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 1998 are
estimated to be approximately $85 million. Internally generated
funds are expected to meet approximately 80 percent of capital
expenditure requirements in 1998.
In 1997, the Company issued $15 million of first mortgage
bonds, bearing an interest rate of 7.39 percent. In 1997, the
Company also retired $30 million of maturing long-term debt. The
Company plans to issue $15 million of long-term debt in 1998 to
fund capital expenditures and $40 million to retire $20 million
of maturing debt and refinance higher rate bonds. The Company
has issued $25 million of this long-term debt to date in 1998.
In 1997, the Company retired preferred stock with an aggregate
par value of $34 million. Total premiums paid of $3.7 million in
connection with the preferred stock retirement were charged to
retained earnings.
At December 31, 1997, the Company had $35 million of
short-term debt outstanding including $30 million of commercial
paper borrowings and $5 million of borrowings from affiliates.
As of December 31, 1997, the Company had lines of credit with
banks totaling $65 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, 1997.
Massachusetts Electric Company
Statements of Income
Year Ended December 31,
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
Operating revenue $1,624,085 $1,538,537 $1,505,676
---------- ---------- ----------
Operating expenses:
Purchased electric energy, principally
from New England Power Company,
an affiliate 1,145,047 1,120,709 1,113,673
Other operation 217,150 211,663 206,660
Maintenance 36,906 31,102 29,525
Depreciation 49,694 47,357 44,829
Taxes, other than income taxes 31,143 30,559 30,022
Income taxes 42,454 25,186 19,297
---------- ---------- ----------
Total operating expenses 1,522,394 1,466,576 1,444,006
---------- ---------- ----------
Operating income 101,691 71,961 61,670
Other income (expense), net (1,536) (1,213) (541)
---------- ---------- ----------
Operating and other income 100,155 70,748 61,129
---------- ---------- ----------
Interest:
Interest on long-term debt 27,612 27,089 25,901
Other interest 7,214 6,473 6,784
Allowance for borrowed funds used during
construction - credit (429) (740) (657)
---------- ---------- ----------
Total interest 34,397 32,822 32,028
---------- ---------- ----------
Net income $ 65,758 $ 37,926 $ 29,101
========== ========== ==========
Statements of Retained Earnings
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Retained earnings at beginning of year $ 165,936 $ 150,308 $ 136,911
Net income 65,758 37,926 29,101
Dividends declared on cumulative
preferred stock (2,821) (3,114) (3,114)
Dividends declared on common stock,
$10.00, $8.00, and $5.25 per
share, respectively (23,981) (19,184) (12,590)
Premium on redemption of preferred stock (3,736) - -
---------- ---------- ----------
Retained earnings at end of year $ 201,156 $ 165,936 $ 150,308
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company
Balance Sheets
At December 31, (In thousands) 1997 1996
- ------------------------------------------------------------------------------
Assets
Utility plant, at original cost $1,579,309 $1,509,896
Less accumulated provisions for depreciation 465,796 430,585
---------- ----------
1,113,513 1,079,311
Construction work in progress 13,363 9,119
---------- ----------
Net utility plant 1,126,876 1,088,430
---------- ----------
Current assets:
Cash 6,743 2,356
Accounts receivable:
From sales of electric energy 158,627 165,866
Other (including $1,321 and $1,605 from affiliates) 2,112 2,600
Less reserves for doubtful accounts 12,808 13,146
---------- ----------
147,931 155,320
Unbilled revenues (Note A-3) 49,513 43,390
Materials and supplies, at average cost 9,599 8,820
Prepaid and other current assets 22,255 25,923
---------- ----------
Total current assets 236,041 235,809
---------- ----------
Deferred charges and other assets (Note B) 45,450 66,019
---------- ----------
$1,408,367 $1,390,258
========== ==========
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 45,945 45,862
Other paid-in capital 193,224 155,310
Retained earnings 201,156 165,936
Unrealized gain on securities, net 129 -
---------- ----------
Total common equity 500,407 427,061
Cumulative preferred stock (Note H) 15,739 50,000
Long-term debt 338,387 343,321
---------- ----------
Total capitalization 854,533 820,382
---------- ----------
Current liabilities:
Long-term debt due in one year 20,000 30,000
Short-term debt (including $4,800
and $5,275 to affiliates) 34,700 43,775
Accounts payable (including $179,211
and $157,603 to affiliates) 195,023 178,263
Accrued liabilities:
Taxes 8,275 961
Interest 9,183 9,635
Other accrued expenses (Note G) 22,081 54,833
Customer deposits 4,487 4,308
Dividends payable 5,036 7,973
---------- ----------
Total current liabilities 298,785 329,748
---------- ----------
Deferred federal and state income taxes 179,474 177,778
Unamortized investment tax credits 15,463 16,566
Other reserves and deferred credits 60,112 45,784
Commitments and contingencies (Note D)
---------- ----------
$1,408,367 $1,390,258
========== ==========
The accompanying notes are an integral part of these financial statements.
Massachusetts Electric Company
Statements of Cash Flows
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Operating activities:
Net income $ 65,758 $ 37,926 $ 29,101
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 49,694 47,357 44,829
Deferred income taxes and investment
tax credits, net 478 (7,850) 6,666
Allowance for borrowed funds
used during construction (429) (740) (657)
Amortization of unbilled revenues
Decrease (increase) in accounts
receivable, net and unbilled revenues 1,266 2,868 4,281
Decrease (increase) in materials
and supplies (779) 1,782 922
Decrease (increase) in prepaid
and other current assets 3,668 (3,409) (931)
Increase (decrease) in accounts payable 16,760 (3,680) (159)
Increase (decrease) in other
current liabilities (25,711) 31,095 (2,326)
Other, net 36,902 (2,430) (2,340)
-------- -------- --------
Net cash provided by
operating activities $147,607 $102,919 $ 79,386
-------- -------- -------
Investing activities:
Plant expenditures, excluding allowance
for funds used during construction $(87,998) $(93,828) $(89,735)
Other investing activities (1,408) (598) (1,972)
-------- -------- --------
Net cash used in investing activities $(89,406) $(94,426) $(91,707)
-------- -------- --------
Financing activities:
Capital contributions from parent $ 37,914 $ - $ 14,000
Dividends paid on common stock (26,380) (13,188) (24,580)
Dividends paid on preferred stock (3,359) (3,114) (3,114)
Long-term debt - issues 15,000 20,000 88,000
Long-term debt - retirements (30,000) - (35,000)
Preferred stock - retirements (34,178) - -
Premium on redemption of preferred stock (3,736) - -
Changes in short-term debt (9,075) (11,675) (26,370)
-------- -------- --------
Net cash provided by(used in)
financing activities $(53,814) $ (7,977) $ 12,936
-------- -------- --------
Net increase in cash and cash equivalents $ 4,387 $ 516 $ 615
Cash and cash equivalents at
beginning of year 2,356 1,840 1,225
-------- -------- --------
Cash and cash equivalents at end of year $ 6,743 $ 2,356 $ 1,840
======== ======== ========
Supplementary information:
Interest paid less amounts capitalized $ 31,251 $ 30,569 $ 29,130
-------- -------- --------
Federal and state income taxes
paid (refunded) $ 31,711 $ 39,174 $ (8,026)
-------- -------- --------
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 of electricity at retail. Electric
service is provided to approximately 970,000 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 generation and
transmission affiliate. The Company purchased 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 has been amended to terminate the all-
requirements provision of the contract and to allow NEP to
recover its above-market generation commitments through a
transition access charge, which the Company will collect from its
customers. See Note B for a discussion of industry restructuring
and Note C for a discussion of NEP's planned divestiture of its
nonnuclear 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). Accrued revenues are also
recorded in accordance with rate adjustment mechanisms, which
include the Company's purchased power cost adjustment (PPCA)
mechanism. Upon approval of the Massachusetts Settlement in
November 1997, the PPCA mechanism was eliminated as of July 31,
1996. Pending final approval of the settlement, the Company had
accrued refund reserves of $9 million for the last five months of
1996 and an additional $7 million in the first nine months of
1997. Upon final approval of the settlement, these refund
reserves were reversed in the fourth quarter of 1997, thereby
increasing revenue.
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 5.7 percent, 5.4 percent, and 6.0 percent, in 1997,
1996, and 1995, 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
1997, 1996, and 1995.
6. Cash:
The Company classifies short-term investments with a maturity
of 90 days or less at time of purchase as cash.
7. New Accounting Standards:
In 1997, the Financial Accounting Standards Board released
two new Statements of Financial Accounting Standards (FAS), FAS
130 and FAS 131, both of which will go into effect in 1998. FAS
130, Reporting Comprehensive Income, requires the reporting in
financial statements of a new additional item called
comprehensive income, which will incorporate amounts not
previously included in reported net income. FAS 131, Disclosure
about Segments of an Enterprise and Related Information, requires
the reporting in financial statements of certain new additional
information about operating segments of a business. The Company
does not believe these new accounting standards will have a
significant impact on its future reporting requirements.
Note B - Industry Restructuring
Historically, electric utilities have provided their
customers bundled electric service within exclusive service
territories. As a result of a number of trends, including a
disparity in electric rates among regions of the country and new
regulations and legislation intended to foster competition,
distribution customers are being allowed to choose their power
supplier, with incumbent utilities required to deliver that
electricity over their transmission and distribution systems.
When customers are allowed to choose their power supplier,
utilities face the risk that market prices may not be sufficient
to recover the costs of the commitments (generation related)
incurred to supply customers under a regulated structure. The
amounts by which such costs exceed market prices are commonly
referred to as "stranded costs." The Company and NEP reached a
settlement agreement with parties representing all of the
Company's distribution customers (the Massachusetts Settlement).
The Massachusetts Settlement provides for the recovery of
stranded costs.
In November 1997, legislation was enacted which provides
customers of Massachusetts' investor-owned utilities with the
ability to choose their power supplier beginning on March 1,
1998. The legislation requires electric companies to provide
customers who do not choose a power supplier with a transition
rate (or "standard offer generation service") which results in a
10 percent rate reduction, with the discount increasing to 15
percent on or before September 1, 1999. The legislation also
provides a mechanism for the recovery of stranded costs resulting
from the introduction of customer choice.
In December 1997, the Massachusetts Department of
Telecommunications and Energy (MDTE) (formerly the Massachusetts
Department of Public Utilities (MDPU)) found that the
Massachusetts Settlement substantially complies with or is
consistent with the Massachusetts statute. The Massachusetts
Settlement was also conditionally approved by the Federal Energy
Regulatory Commission (FERC) in November 1997, subject to a
compliance filing to clarify the impact of the settlement on
nonsettling parties.
In accordance with the Massachusetts Settlement, NEP's
wholesale contract with the Company has been amended effective
March 1, 1998. The Massachusetts Settlement provides that NEP's
stranded costs (the Company's share is 73 percent) will be
recovered from distribution customers through a transition access
charge, which will be collected by the Company. Under the
Massachusetts Settlement, the recovery of NEP's stranded costs is
divided into several categories. Unrecovered costs associated
with generating plants and regulatory assets would be recovered
over 12 years and would earn a return on equity of 9.4 percent.
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 was set at 2.8
cents per kilowatthour (kWh). The MDTE has approved a reduction
of the initial transition access charge to 2.7 cents per kWh.
NEP's filing with the FERC to approve this reduction is pending.
The Company has already reflected the lower transition access
charge amount in its rates. The transition access charge would
be reduced further upon completion of the sale of NEP's
nonnuclear generating business, as described below.
In addition to addressing customer choice and the recovery of
stranded costs, the Massachusetts Settlement also required the
NEES companies to divest their nonnuclear generating business.
In August 1997, NEP and the Company's Rhode Island affiliate, The
Narragansett Electric Company (Narragansett Electric), entered
into an agreement to sell substantially all of their nonnuclear
generating business to USGen New England, Inc. (USGen), an
indirect wholly owned subsidiary of PG&E Corporation. See
"Divestiture of Generating Business" below. The net proceeds
from the sale of the nonnuclear generating business to USGen will
be used to reduce the transition access charge to approximately
1.5 cents per kWh. In addition, the FERC accepted the NEES
companies' proposal in conjunction with their divestiture filing
that the recovery of the remaining above-market nuclear
generating plant investment and regulatory assets be completed by
the end of the year 2000.
The Massachusetts Settlement also establishes distribution
rates for the Company. On March 1, 1998, the Company's
distribution rates were set at a level approximately $45 million
above the level embedded in its previously 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 approximately
$1 million over six years. The Massachusetts restructuring
legislation also expanded the eligibility for certain rate
discount programs, the cost of which is uncertain at this time.
From 1998 through 2000, the Company's return on equity will be
subject to a floor of 6 percent and a ceiling of 11 percent.
Earnings over the ceiling will be shared equally between
customers and shareholders up to a maximum of 12.5 percent. This
sharing results in an effective cap on the Company's return on
equity of 11.75 percent, excluding certain limited incentive
opportunities. To the extent that earnings fall below the floor,
the Company will be authorized to surcharge customers for the
shortfall. The statute also imposes an inflation cap through
March 1, 2005 on the total rates for customers who have not
chosen a power supplier. If this inflation cap is triggered,
under the Massachusetts Settlement the recovery of stranded
investment costs would be deferred. This inflation cap does not
apply to any surcharge triggered by the rate of return floor.
The Massachusetts Settlement also eliminated the Company's
PPCA mechanism as of July 31, 1996. This mechanism allowed the
Company to recover purchased power rate changes from NEP and the
effects of NEP's seasonal rates. The Massachusetts Settlement
required that the Company's net $18 million PPCA refund liability
balance at July 31, 1996 be transferred on its books to establish
a storm contingency fund account of $3 million initially, with
the remainder applied to reduce regulatory assets for hazardous
waste costs.
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. 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, and thereby defer the income statement impact of certain
items of income and expense expected to be reflected in future
rates. At December 31, 1997, the Company had approximately $18
million in net regulatory assets in compliance with FAS 71.
The Company believes the Massachusetts Settlement and statute
will enable the Company to recover through rates its specific
costs of providing ongoing distribution services and stranded
costs billed to it by NEP. The Company believes these factors
will allow it to continue to apply FAS 71.
Despite the progress made to date, it is possible that future
regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which would result in a
noncash write-off of previously established regulatory assets
related to the affected operations.
The components of regulatory assets are as follows:
At December 31, (In thousands) 1997 1996
- ------------------------------------------------------------------------------
Regulatory assets (liabilities) included
in current assets and liabilities:
Rate adjustment mechanisms (see Note G) $ 2,960 $(40,264)
-------- --------
Regulatory assets included in deferred charges
and other reserves and deferred credits:
Unamortized losses on reacquired debt 6,939 7,482
Deferred FAS No. 106 costs (see Note E-2) 9,950 13,568
Deferred FAS No. 109 costs (see Note F) 8,275 8,244
Environmental response costs (see Note D-2) (18,294) 14,546
Deferred storm costs 8,108 11,221
Other 412 862
-------- --------
15,390 55,923
-------- --------
$ 18,350 $ 15,659
======== ========
Note C - Divestiture of Generating Business
As described above, in August 1997, NEP and Narragansett
Electric (collectively, the Sellers) reached an agreement to sell
their nonnuclear generating business to USGen. The nonnuclear
generating business includes three fossil-fueled and 15
hydroelectric generating stations, totaling approximately 4,000
megawatts (MW) of capacity, as well as NEES' 100 percent interest
in Narragansett Energy Resources Company, a 20 percent general
partner in the Ocean State Power project, all of which has a book
value of $1.1 billion. USGen will pay the Sellers $1.59 billion
in cash, of which $225 million will be contingent upon the
introduction of customer choice of power supplier in
Massachusetts. Based on the enactment of the Massachusetts
statute, the NEES companies believe that the conditions for
payment of the full purchase price have been met. USGen will
also reimburse the NEES companies for $85 million of costs
associated with early retirement and special severance programs
for employees affected by industry restructuring.
In addition to the purchase of the nonnuclear generating
stations, USGen will purchase NEP's entitlement to approximately
1,100 MW of power procured under long-term contracts. NEP will
make a monthly fixed contribution towards the above-market cost
of the purchased power of between $12.5 million and $14.2 million
per month from closing through January 2008. USGen will be
responsible for the balance of the costs under the purchased
power contracts.
The sale is subject to approval by various state and federal
regulatory agencies. Several parties have objected to the sale
on various grounds, including allegations that following the
sale, USGen would be able to exercise unlawful levels of market
power. On February 25, 1998, the FERC issued an order that
rejected the market power allegations, approved the sale, and
conditionally approved most supporting filings. While the timing
of receipt of final regulatory approvals is uncertain, receipt of
all approvals is unlikely before mid-1998. Closing is contingent
upon all regulatory approvals being obtained by February 1999.
Note D - Commitments and Contingencies
1. Plant Expenditures:
The Company's utility plant expenditures are estimated to be
approximately $85 million in 1998. At December 31, 1997,
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
16 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 1970s, NEES was a combined electric and
gas holding company system.) The Company is aware of
approximately 35 such manufactured gas locations in
Massachusetts. The Company has been identified as a PRP at eight
of these manufactured gas locations, which are included in the 16
PRP sites discussed above. 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 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. At December 31, 1997, the fund had a balance of $45
million, including $15 million transferred to the fund in 1997
out of existing reserves for refunds under terms of the 1996
Massachusetts Settlement.
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 December
31, 1997, the Company had total reserves for environmental
response costs of $35 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 became effective in 1997. These
new rules did not have a material effect on the Company's
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.
The Company's net pension cost for 1997, 1996, and 1995
included the following components:
Year ended December 31,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Service cost - benefits earned during
the period $ 4,474 $ 4,429 $ 3,992
Plus (less):
Interest cost on projected
benefit obligation 17,413 16,935 17,576
Return on plan assets at
expected long-term rate (19,961) (18,562) (18,122)
Amortization (95) 316 99
-------- -------- --------
Net pension cost $ 1,831 $ 3,118 $ 3,545
======== ======== ========
Actual return on plan assets $ 46,452 $ 32,675 $ 47,717
======== ======== ========
1998 1997 1996 1995
---- ---- ---- ----
Assumptions used to determine pension cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Average rate of increase in future
compensation levels 4.13% 4.13% 4.13% 4.63%
Expected long-term rate of return
on assets 8.50% 8.50% 8.50% 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) 1997 1996
---- ----
Benefits earned
Actuarial present value of
accumulated benefit liability:
Vested $647 $640
Nonvested 18 19
--- ----
Total $665 $659
==== ====
Reconciliation of funded status
Actuarial present value of
projected benefit liability 757 753
Unrecognized prior service costs (8) (9)
FAS No. 87 transition liability
not yet recognized (amortized) (1) (1)
Net gain (loss) not yet
recognized (amortized) 61 40
---- ----
809 783
---- ----
Pension fund assets at fair value 834 812
FAS No. 87 transition asset
not yet recognized (amortized) (8) (10)
---- ----
826 802
---- ----
Accrued pension/(prepaid)
payments recorded on books $(17) $(19)
==== ====
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates from 1998 and 1997,
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 Company's total cost of PBOPs for 1997, 1996, and 1995
included the following components:
Year ended December 31, (In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Service cost - benefits earned
during the period $ 2,164 $ 2,232$ 2,368
Plus (less):
Interest cost on accumulated
benefit obligation 9,486 9,661 11,699
Return on plan assets at expected
long-term rate (6,871) (5,455) (4,165)
Amortization 4,465 5,267 6,628
------- ------- -------
Net postretirement benefit cost $ 9,244 $11,705 $16,530
======= ======= =======
Actual return on plan assets $16,189 $10,857 $12,209
======= ======= =======
1998 1997 1996 1995
==== ==== ==== ====
Assumptions used to determine
postretirement benefit cost:
Discount rate 6.75% 7.25% 7.25% 8.25%
Expected long-term rate of
return on assets 8.25% 8.25% 8.25% 8.50%
Health care cost rate - 1995 to 1999 5.25% 8.00% 8.00% 8.50%
Health care cost rate - 2000 to 2004 5.25% 6.25% 6.25% 8.50%
Health care cost rate - 2005 and beyond 5.25% 5.25% 5.25% 6.25%
The following table sets forth the Company's benefits earned and the plans'
funded status:
At December 31, (In millions) 1997 1996
---- ----
Accumulated postretirement benefit obligation:
Retirees $ 87 $ 94
Fully eligible active plan participants 12 11
Other active plan participants 37 39
----- -----
Total benefits earned 136 144
Unrecognized transition obligation (109) (117)
Unrecognized net gain 60 40
----- -----
87 67
----- -----
Plan assets at fair value 98 82
----- -----
Prepaid postretirement benefit costs recorded on books $ 11 $ 15
===== =====
The plans' funded status at December 31, 1997 and 1996 were
calculated using the assumed rates in effect for 1998 and 1997,
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,
1997 by approximately $17 million and the net periodic cost for
1997 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 - 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 through 1993.
Total income taxes in the statements of income are as follows:
Year Ended December 31, (In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
Income taxes charged to operations $42,454 $25,186 $19,297
Income taxes charged (credited)
to "Other income" (887) (2,010) (901)
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
Total income taxes, as shown above, consist of the following components:
Year Ended December 31, (In thousands) 1997 1996 1995
---- ---- ----
Current income taxes $41,089 $31,026 $11,730
Deferred income taxes 1,581 (6,732) 7,798
Investment tax credits, net (1,103) (1,118) (1,132)
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
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) 1997 1996 1995
---- ---- ----
Federal income taxes $34,053 $18,697 $14,461
State income taxes 7,514 4,479 3,935
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
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) 1997 1996 1995
---- ---- ----
Computed tax at statutory rate $37,564 $21,386 $16,624
Increases (reductions) in tax resulting from:
Amortization of investment tax credits (1,103) (1,118) (1,132)
State income taxes, net of federal
income tax benefit 4,884 2,911 2,558
All other differences 222 (3) 346
------- ------- -------
Total income taxes $41,567 $23,176 $18,396
======= ======= =======
The following table identifies the major components of total deferred
income taxes:
At December 31, (In millions) 1997 1996
---- ----
Deferred tax asset:
Plant related $ 9 $ 9
Investment tax credits 6 7
All other 57 57
----- -----
72 73
----- -----
Deferred tax liability:
Plant related (223) (216)
All other (28) (35)
----- -----
(251) (251)
----- -----
Net deferred tax liability $(179) $(178)
===== =====
Note G - Short-term Borrowings and Other Accrued Expenses
At December 31, 1997, the Company had $35 million of
short-term debt outstanding including $30 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, 1997, the Company had lines of credit with
banks totaling $65 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, 1997. Fees are paid in lieu of
compensating balances on most lines of credit.
The weighted average rate on outstanding short-term
borrowings was 5.6 percent at December 31, 1997. 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) 1997 1996
- ----------------------------------------------------------------
Rate adjustment mechanisms $ 4,227 $ 39,863
Accrued wages and benefits 15,244 12,591
Other 2,610 2,379
------- -------
$22,081 $54,833
======= =======
Note H - Cumulative Preferred Stock
A summary of cumulative preferred stock at December 31, 1997
and 1996 is as follows (dollar amounts expressed in thousands
except for share data):
Shares
Authorized Dividends Call
and Outstanding Amount Declared Price
- -----------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------
$25 Par value -
6.84% Series 192,161 600,000 $ 4,804$15,000 $ 931 $1,026 (a)
$100 Par value -
4.44% Series 27,815 75,000 2,782 7,500 305 333 $104.068
4.76% Series 27,530 75,000 2,753 7,500 326 357 $103.730
6.99% Series 54,000 200,000 5,400 20,000 1,259 1,398 (b)
- -----------------------------------------------------------------------------------
Total 301,506 950,000 $15,739$50,000 $2,821 $3,114
===================================================================================
<FN>
(a) Callable on or after October 1, 1998 at $25.80.
(b) Callable on or after August 1, 2003 at $103.50.
</FN>
The annual dividend requirement for total cumulative preferred stock
was $961,000 for 1997 and $3,114,000 for 1996.
There are no mandatory redemption provisions on the Company's
cumulative preferred stock.
In 1997, the Company retired preferred stock with an aggregate par value
of $34 million. Total premiums paid of $3.7 million in connection with the
preferred stock retirement were charged to retained earnings.
Note I - Long-term Debt
A summary of long-term debt is as follows:
At December 31, (In thousands)
- ---------------------------------------------------------------------------
Series Rate % Maturity 1997 1996
===========================================================================
First Mortgage Bonds:
R(92-4) 7.230 June 3, 1997 $ 10,000
R(92-5) 7.210 June 3, 1997 5,000
S(92-6) 6.120 August 15, 1997 12,000
S(92-7) 6.010 August 15, 1997 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 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
V(97-1) 7.390 October 1, 2027 15,000
Unamortized discounts (1,613) (1,679)
-------- --------
Total long-term debt 358,387 373,321
======== ========
Long-term debt due in one year 20,000 30,000
-------- --------
$338,387 $343,321
======== ========
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 Electric 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 Electric.
The Company will make cash payments of $20,000,000 in 1998, $15,000,000
in 1999, $21,000,000 in 2000, and $25,000,000 in 2002 to retire maturing
mortgage bonds. There are no cash payments required in 2001.
At December 31, 1997, the Company's long-term debt had a carrying value
of approximately $360,000,000 and had a fair value of approximately
$377,000,000. 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 J - 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, 1997 was 57 percent of total capitalization, and
accordingly, none of the Company's retained earnings at December 31, 1997
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, 1997 were restricted as to dividends on common stock.
Note K - Supplementary Income Statement Information
Advertising expenses, expenditures for research and development, and
rents were not material and there were no royalties paid in 1997, 1996, or
1995. Taxes, other than income taxes, charged to operating expenses are
set forth by classes as follows:
Year Ended December 31, (In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Municipal property taxes $23,796 $23,304 $23,119
Federal and state payroll
and other taxes 7,347 7,255 6,903
------- ------- -------
$31,143 $30,559 $30,022
======= ======= =======
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 $73,145,000, $67,756,000, and
$67,680,000, including capitalized construction costs of $7,907,000,
$9,330,000, and $7,660,000 for each of the years 1997, 1996, and 1995,
respectively.
Selected Financial Information
Year Ended December 31, (In millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------
Operating revenue:
Electric sales (excluding fuel
cost recovery) $1,132 $1,084 $1,072 $1,088 $1,062
Fuel cost recovery 453 427 414 376 392
Other 39 28 20 18 15
------ ------ ------ ------ ------
Total operating revenue $1,624 $1,539 $1,506 $1,482 $1,469
Net income $ 66 $ 38 $ 29 $ 35 $ 24
Total assets $1,408 $1,390 $1,343 $1,296 $1,232
Capitalization:
Common equity $ 500 $ 427 $ 412 $ 384 $ 382
Cumulative preferred stock 16 50 50 50 50
Long-term debt 339 343 353 266 265
------ ------ ------ ------ ------
Total capitalization $ 855 $ 820 $ 815 $ 700 $ 697
Preferred dividends declared $ 3 $ 3 $ 3 $ 3 $ 4
Common dividends declared $ 24 $ 19 $ 13 $ 30 $ 19
Selected Quarterly Financial Information (Unaudited)
- ---------------------------------------------------------------------------
First Second Third Fourth
(In Thousands) Quarter Quarter Quarter Quarter
===========================================================================
1997
Operating revenue $405,518 $369,542 $404,990 $444,035
Operating income $ 24,241 $ 19,697 $ 17,621 $ 40,132
Net income $ 13,636 $ 10,353 $ 8,041 $ 33,728 *
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
<FN>
* See "Overview of Financial Results" and "Operating Revenue" sections of
Financial Review for a discussion of factors contributing to the fourth
quarter increase in net income over prior year.
</FN>
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, 1997 will be available on or about April 1,
1998, without charge, upon written request to Massachusetts
Electric Company, Shareholder Services Department, 25 Research
Drive, Westborough, Massachusetts 01582.