<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-5464
(LOGO) MASSACHUSETTS ELECTRIC COMPANY
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1988940
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-389-2000)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Common stock, par value $25 per share, authorized and outstanding: 2,398,111
shares at September 30, 1999.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
<CAPTION>
Quarter Nine Months
------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $353,732 $380,409 $1,021,948 $1,139,012
-------- -------- ---------- ----------
Operating expenses:
Purchased electric energy:
Non-affiliates 144,140 42,647 420,147 42,821
New England Power Company, an affiliate - 95,920 -
465,237
Contract termination charges from New
England Power Company 60,342 100,026 171,145
241,800
Other operation 73,202 74,818 227,786 201,816
Maintenance 10,530 7,867 25,753 25,215
Depreciation 16,613 16,171 49,838 46,865
Taxes, other than income taxes 8,795 13,444 27,064 30,382
Income taxes 12,276 9,166 28,648 23,195
-------- -------- ---------- ----------
Total operating expenses 325,898 360,059
950,381 1,077,331
-------- -------- ---------- ----------
Operating income 27,834 20,350 71,567 61,681
Other income (expense), net 2,537 (91) (19) (3,418)
-------- -------- ---------- ----------
Operating and other income 30,371 20,259 71,548
58,263
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 6,718 6,673 20,428 20,214
Other interest 5,063 1,848 8,692 5,179
Allowance for borrowed funds used during
construction (163) (182) (537) (473)
-------- -------- ---------- ----------
Total interest 11,618 8,339 28,583 24,920
-------- -------- ---------- ----------
Net income $ 18,753 $ 11,920 $ 42,965 $ 33,343
======== ======== ========== ==========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $172,487 $196,918
$208,537 $201,156
Net income 18,753 11,920 42,965 33,343
Dividends declared on cumulative
preferred stock (155) (240) (464) (720)
Dividends declared on common stock - (11,990) (59,953)
(37,171)
Premium on redemption of preferred stock - (29) - (29)
-------- -------- -------- --------
Retained earnings at end of period $191,085 $196,579 $191,085
$196,579
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
</TABLE>
<PAGE>
<TABLE>MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Twelve Months Ended September 30
(Unaudited)
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $1,373,353 $1,583,047
---------- ----------
Operating expenses:
Purchased electric energy:
Non-affiliates 552,416 42,882
New England Power Company, an affiliate (217) 747,935
Contract termination charges from
New England Power Company 229,975 241,800
Other operation 318,479 269,488
Maintenance 34,060 37,632
Depreciation 64,673 58,845
Taxes, other than income taxes 34,665 36,991
Income taxes 41,772 45,661
---------- ----------
Total operating expenses 1,275,823 1,481,234
---------- ----------
Operating income 97,530 101,813
Other income (expense), net (111) (2,649)
---------- ----------
Operating and other income 97,419 99,164
---------- ----------
Interest:
Interest on long-term debt 27,287 27,051
Other interest 10,881 5,632
Allowance for borrowed funds used during
construction (757) (590)
---------- ----------
Total interest 37,411 32,093
---------- ----------
Net income $ 60,008 $ 67,071
========== ==========
Statements of Retained Earnings
(In Thousands)
Retained earnings at beginning of period $196,579 $176,445
Net income 60,008 67,071
Dividends declared on cumulative preferred stock (617) (1,205)
Dividends declared on common stock (64,749) (41,967)
Premium on redemption of preferred stock (136) (3,765)
-------- --------
Retained earnings at end of period $191,085 $196,579
======== ========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
</TABLE>
<PAGE><TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
- ------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $1,665,238 $1,626,569
Less accumulated provisions for depreciation 533,333 499,975
---------- ----------
1,131,905 1,126,594
Construction work in progress 21,216 16,575
---------- ----------
Net utility plant 1,153,121 1,143,169
---------- ----------
Current assets:
Cash 7,490 6,994
Accounts receivable:
From electric energy services 150,285 188,956
Other (including $14,028,000 and $6,629,000
from affiliates) 14,641 7,358
Less reserves for doubtful accounts 13,537 12,450
---------- ----------
151,389 183,864
Unbilled revenues 55,643 56,133
Materials and supplies, at average cost 8,895 9,281
Prepaid and other current assets 1,691 13,886
---------- ----------
Total current assets 225,108 270,158
---------- ----------
Deferred charges and other assets 34,699 41,235
---------- ----------
$1,412,928 $1,454,562
========== ==========
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization:
Common stock, par value $25 per share, authorized
and outstanding 2,398,111 shares $ 59,953 $ 59,953
Premium on capital stock 45,942 45,942
Other paid-in capital 193,498 193,498
Retained earnings 191,085 208,537
Unrealized gain on securities, net 259 273
---------- ----------
Total common equity 490,737 508,203
Cumulative preferred stock 10,674 10,674
Long-term debt 332,458 353,329
---------- ----------
Total capitalization 833,869 872,206
---------- ----------
Current liabilities:
Long-term debt due within one year 21,000 15,000
Short-term debt to affiliates 54,700 80,725
Accounts payable (including $55,393,000 and $34,506,000
to affiliates) 149,666 127,621
Accrued liabilities:
Taxes 11,028 -
Interest 7,853 8,509
Other accrued expenses 61,554 40,626
Customer deposits 3,638 4,456
Dividends payable 155 4,951
---------- ----------
Total current liabilities 309,594 281,888
---------- ----------
Deferred federal and state income taxes 177,531 200,965
Unamortized investment tax credits 13,574 14,377
Other reserves and deferred credits 78,360 85,126
---------- ----------
$1,412,928 $1,454,562
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE><TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Nine Months Ended September 30
(Unaudited)
<CAPTION> 1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 42,965 $ 33,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 49,838 46,865
Deferred income taxes and investment tax credit, net
(22,650) 6,010
Allowance for borrowed funds used during construction (537)
(473)
Decrease (increase) in accounts receivable, net
and unbilled revenues 32,965 (50,308)
Decrease (increase) in materials and supplies 386 325
Decrease (increase) in prepaid and other current assets
12,195 7,158
Increase (decrease) in accounts payable 22,045 2,169
Increase (decrease) in other current liabilities 30,482
35,214
Other, net (1,379) 7,755
--------- --------
Net cash provided by operating activities $
166,310 $ 88,058
--------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $ (59,236) $(54,805)
Other investing activities (340) (3,539)
--------- --------
Net cash used in investing activities $ (59,576)
$(58,344)
--------- --------
Financing Activities:
Capital contributions from parent $ - $ 274
Dividends paid on common stock (64,749) (41,967)
Dividends paid on preferred stock (464) (720)
Long-term debt - issues - 25,000
Long-term debt - retirements (15,000) (30,000)
Changes in short-term debt (26,025) 18,250
Premium on reacquisition of preferred stock - (29)
--------- --------
Net cash used in financing activities $(106,238)
$(29,192)
--------- --------
Net increase (decrease) in cash and cash equivalents $ 496 $
522
Cash and cash equivalents at beginning of period 6,994 6,743
--------- --------
Cash and cash equivalents at end of period $ 7,490 $ 7,265
========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>MASSACHUSETTS ELECTRIC COMPANY
Notes to Unaudited Financial Statements
Note A - Hazardous Waste
- ------------------------
The Federal Comprehensive Environmental Response, Compensation and
Liability Act, more commonly known as the "Superfund" law, imposes strict,
joint and several liability, regardless of fault, for remediation of property
contaminated with hazardous substances. A number of states, including
Massachusetts, have enacted similar laws.
The electric utility industry typically utilizes and/or generates in its
operations a range of potentially hazardous products and by-products.
Massachusetts Electric Company (the Company) currently has in place an
internal environmental audit program and an external waste disposal vendor
audit and qualification program intended to enhance compliance with existing
federal, state, and local requirements regarding the handling of potentially
hazardous products and by-products.
The Company has been named as a potentially responsible party (PRP) by
either the United States Environmental Protection Agency or the Massachusetts
Department of Environmental Protection for a number of sites at which
hazardous waste is alleged to have been disposed. Private parties have also
contacted or initiated legal proceedings against the Company regarding
hazardous waste cleanup. The most prevalent types of hazardous waste sites
with which the Company has been associated are manufactured gas locations.
(Until the early 1970s, New England Electric System (NEES) was a combined
electric and gas holding company system.) The Company is aware of
approximately 35 such manufactured gas locations in Massachusetts, including
some for which the Company has been identified as a PRP. The Company has
reported the existence of all manufactured gas locations of which it is aware
to state environmental regulatory agencies. The Company is engaged in various
phases of investigation and remediation work at 17 of the manufactured gas
locations. The Company is currently aware of other possible hazardous waste
sites, and may in the future become aware of additional sites, that it may be
held responsible for remediating.
In 1993, the Massachusetts Department of Public Utilities approved a
settlement agreement that provides for rate recovery of remediation costs of
former manufactured gas sites and certain other hazardous waste sites located
in Massachusetts. Under that agreement, qualified costs related to these
sites are paid out of a special fund established on the Company's books.
Rate-recoverable contributions of $3 million, adjusted since 1993 for
inflation, are added annually to the fund along with interest, lease payments,
and any recoveries from insurance carriers and other third parties. At
September 30, 1999, the fund had a balance of $49 million.
Predicting the potential costs to investigate and remediate hazardous
waste sites continues to be difficult. There are also significant
uncertainties as to the portion, if any, of the investigation and remediation
costs of any particular hazardous waste site that may ultimately be borne by
the Company. The NEES companies have recovered amounts from certain insurers,
and, where appropriate, the Company intends to seek recovery from other
insurers and from other PRPs, but it is uncertain whether, and to what extent,
such efforts will be successful.
<PAGE>At September 30, 1999, the Company had total reserves for environmental
response costs of $47 million which includes reserves established in
connection with the Company's hazardous waste fund referred to above. The
Company believes that hazardous waste liabilities for all sites of which it is
aware, and which are not covered by a rate agreement, are not material to its
financial position.
Note B - Derivative Instruments
- -------------------------------
Under the provisions of industry restructuring settlement agreements
approved by state and federal regulators implemented on March 1, 1998, the
Company is required to offer a default service option on a fully recoverable
basis to those customers who, for a variety of reasons, are not purchasing
power from a competitive supplier. The Company is required to procure this
power supply through competitive bidding. In March 1999, the Company entered
into a six month power supply contract with a third party to provide the
physical supply of this power at a variable market rate. This contract was
replaced with a similar contract upon its expiration in September 1999. In
May 1999, the Company entered into an eight month financial contract with
another third party to convert this variable rate into a fixed rate for the
majority, if not for all, of the physical supply. This contract was entered
into to provide price protection for customers and is therefore fully
recoverable. Purchases under these contracts related to default service and
other services are expected to be less than $7 million per month based on
September 1999 service requirements.
Note C
- ------
In the opinion of the Company, these financial statements reflect all
adjustments (which include normal recurring adjustments) necessary for a fair
statement of the results of its operations for the periods presented and
should be considered in conjunction with the notes to the financial statements
in the Company's 1998 Annual Report.
<PAGE>Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------------
This section contains management's assessment of Massachusetts Electric
Company's (the Company) financial condition and the principal factors having
an impact on the results of operations. This discussion should be read in
conjunction with the Company's financial statements and footnotes and the 1998
Annual Report on Form 10-K.
Merger Agreements
- -----------------
For a full discussion of New England Electric System's (NEES) merger agreem
ents with The National Grid Group plc (National Grid) and Eastern Utilities
Associates (EUA), see the Merger Agreements sections of the Company's Form
10-K for 1998 and the Company's 1998 Annual Report.
Update of Merger Agreements with National Grid and EUA
The NEES/National Grid merger has received approval or clearance from
shareholders of both National Grid and NEES, the Federal Trade Commission
(FTC), the Committee on Foreign Investment in the United States, the Federal
Energy Regulatory Commission (FERC), the Vermont Public Service Board (VPSB),
the Connecticut Department of Public Utility Control (CDPUC), and the New
Hampshire Public Utilities Commission (NHPUC).
On November 3, 1999, the Office of the Consumer Advocate for New
Hampshire filed a motion seeking rehearing or reconsideration of the merger
approval by the NHPUC with respect to the treatment of the acquisition premium
and stranded costs. NEES and National Grid have opposed the motion for
rehearing.
NEES and National Grid have also filed for merger approval with the
Securities and Exchange Commission (SEC), under the Public Utility Holding
Company Act of 1935 (1935 Act). In connection with the SEC application, the
Massachusetts Department of Telecommunications and Energy (MDTE) and the Rhode
Island Public Utilities Commission (RIPUC) certified to the SEC that the
merger would not interfere with their authority or ability to protect
customers of NEES' distribution subsidiaries in Massachusetts and Rhode
Island, respectively.
In addition, NEES and National Grid have also filed for merger approval
with the Nuclear Regulatory Commission (NRC) to transfer ownership licenses
for its minority ownership interests in regional nuclear plants. In July
1999, three subsidiaries of Northeast Utilities (NU) filed a request for
hearing with the NRC with respect to financial qualifications and issues of
foreign ownership. In October 1999, the NRC issued an order granting the
request for hearing and directed NEES, National Grid, and the NU subsidiaries
to promptly determine whether the proceeding could be settled without a
hearing. In November 1999, NEES, National Grid, and the NU subsidiaries
executed an agreement with respect to these issues. As part of this
agreement, the NU subsidiaries agreed to withdraw their intervention and
request for hearing. Assuming the NRC grants the motion to withdraw, NEES and
National Grid anticipate that the remaining required regulatory approvals from
the SEC, under the 1935 Act, and the NRC will be obtained in a time frame that
will allow the merger to be completed by early 2000.
<PAGE> The NEES acquisition of EUA has received approval or clearance from EUA
shareholders, the FTC, the CDPUC, and the FERC. NEES and EUA have also made
appropriate filings with the SEC, under the 1935 Act, NRC, MDTE, VPSB, and the
RIPUC. The acquisition of EUA is expected to be completed by early 2000.
Impact of Mergers on Distribution Rates
- ---------------------------------------
In April 1999, the Company and Eastern Edison Associates (Eastern
Edison), a wholly owned subsidiary of EUA, filed a rate consolidation plan
with the MDTE, reflecting the acquisition of EUA by NEES and the merger of
Eastern Edison into the Company. In the filing, the companies proposed that
effective January 1, 2001, Eastern Edison's customers would pay the same
delivery rates as customers of the Company. The filing calls for an extension
of the Company's distribution rate freeze through December 31, 2002. The
freeze would be extended an additional two years upon completion of the
NEES/National Grid merger.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, the NEES companies' divestiture of its nonnuclear generating
business, stranded cost recovery, and the impact of restructuring on the
distribution business, see the "Industry Restructuring" and "Impact of
Restructuring on Distribution Business" sections of the Company's Form 10-K
for 1998 and the Company's 1998 Annual Report.
Regulatory Asset Recovery
- -------------------------
Historically, electric utility rates have been based on a utility's
costs. As a result, electric utilities are subject to certain accounting
standards that are not applicable to other business enterprises in general.
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation (FAS 71), requires regulated entities, in
appropriate circumstances, to establish regulatory assets or liabilities, and
thereby defer the income statement impact of these charges because they are
expected to be included in future customer charges. At September 30, 1999, the
Company had net regulatory liabilities of approximately $13 million.
Under existing ratemaking practices and provisions of industry
restructuring settlement agreements approved by state and federal regulators
(Massachusetts Settlement), the Company has the ability to recover through
rates its specific costs of providing ongoing distribution services and
stranded costs billed to it by New England Power Company (NEP). To date, the
Company believes these factors allow it to continue to apply FAS 71.
Currently, there is much regulatory and other movement toward
establishing performance-based rates. It is possible that the adoption of
performance-based rates, future regulatory rules, or other circumstances could
cause the application of FAS 71 to be discontinued. Absent the circumstances
described in the next paragraph, this discontinuation would result in a
noncash write-off of previously established regulatory assets or liabilities.
In addition, reserves for depreciation may also have to be increased to comply
with unregulated accounting practices.
<PAGE>
In April 1999, the Company filed a rate plan which, if approved, may cause
the application of FAS 71 to be discontinued upon consummation of the
NEES/National Grid merger. Because the discontinuation of FAS 71 would be
coincident with the completion of the NEES/National Grid merger, the NEES
companies believe the appropriate accounting treatment would be that the
regulatory assets or liabilities would not be written off but instead
reclassified to either an intangible asset account or a goodwill account.
Year 2000 Readiness Disclosure
- ------------------------------
Over the course of this year, most companies have faced and will continue
to face a potentially serious information systems (computer) problem because
many software applications and operational programs written in the past may
not properly recognize calendar dates associated with the year 2000 (Y2K).
This could cause computers to either shut down or lead to incorrect
calculations.
The NEES companies believe that their mission critical systems used to
deliver electricity are ready for date changes associated with Y2K, in
accordance with the criteria specified by the North American Electric
Reliability Council (NERC). Recognizing that neither the NEES companies nor
any other organization can make guarantees about something as complex as Y2K,
the NEES companies have also developed and implemented the contingency plans
described below (including contingency plans in the event of temporary
disruptions of electric service) to address potential problems caused by Y2K.
In the event that a short-term disruption in service occurs, NEES does not
expect that such a disruption would have a material impact on its financial
position or results of operation.
During 1996, the NEES companies began the process of identifying the
changes required to their computer software and hardware to mitigate Y2K
issues. The NEES companies established a Y2K Project team to manage these
issues, which consisted of as many as 70 full-time equivalent staff at some
points in time, primarily external consultants being overseen by an internal
Y2K management team. To facilitate the Y2K Project, NEES entered into
contracts with Keane, Inc. and IBM to provide personnel support to the Y2K
Project. Through September 30, 1999, the NEES companies have spent
approximately $18 million with these vendors, which is included in the cost
figures disclosed below. The Y2K Project team reports project progress to a
Y2K Executive Oversight Committee each month. The team also makes regular
reports to NEES' Board of Directors and its Audit Committee. The NEES
companies separated their Y2K Project into four parts as shown on the
following page.
<PAGE><TABLE>
<CAPTION>
Substantial Contingency Testing,
Completion Documentation,
of Critical and Clean
Category Specific Example Systems Management
- -------- ---------------- ----------- -------------------
<S> <C> <C> <C>
Mainframe/Midrange Accounting/Customer Completed Throughout 1999
systems service integrated
systems
Desktop systems Personal computers/ Completed Throughout 1999
Department software/
Networks
Operational/ Dispatching systems/ Completed Throughout 1999
Embedded Transmission and
systems Distribution systems/
Telephone systems
External issues Electronic Data Completed Throughout 1999
Interchange/Vendor
communications
</TABLE>
The NEES companies used a three-phase approach in coordinating their Y2K
Project for system-related issues: (I) Assessment and Inventory, (II) Pilot
Testing, and (III) Renovation, Conversion, or Replacement of Application and
Operating Software Packages and Testing. Phase I, which was an initial
assessment of all systems and devices for potential Y2K defects, was completed
in mid-1997. These assessments included, but were not limited to, the review
of program code for mainframe and midrange systems, analysis of personal
computer hardware and network equipment for desktop systems, reaching
consensus with key "data exchange" partners regarding the approach and
execution of plans to address Y2K-
related issues, and coordination with other New England Power Pool (NEPOOL)
member utilities related to operational systems, such as transmission
systems. Phase II, which consisted of renovation pilots for a cross-section
of systems in order to facilitate the establishment of templates for Phase III
work, was completed in late 1997. Phase III, which was completed on June 30,
1999, required the renovation, conversion, or replacement of the remaining
applications and operating software packages.
Critical systems include major operational and informational systems such
as the NEES companies' financial-related and customer information systems.
These mission critical systems were first addressed at an individual component
level, and then, upon satisfactory completion of that testing, reviewed at an
integrated level, during which the Y2K Project team tested for Y2K problems
which could be caused by various system interfaces. Additionally, contingency
plans have been implemented for mission critical systems, as described below.
The overall Y2K Project was designed such that Y2K-related work performed
by external consultants was reviewed by NEES employees, and vice-versa. The
Y2K Project team management continuously benchmarked its progress against the
recommended progress schedule documented by NERC, and has met all recommended
schedules, including the issuance of its Year 2000 Readiness Letter to NERC on
June 30, 1999.
<PAGE>
The NEES companies also implemented a formalized communication process with
third parties to give and receive information related to their progress in
remediating their own Y2K issues, and to communicate the NEES companies'
progress in addressing the Y2K issue. These third parties include major
customers, suppliers, and significant businesses with which the NEES companies
have data links (such as banks). The NEES companies have identified standard
offer (transition service) generation service providers, telecommunications
companies, and the Independent System Operator-New England (ISO New England)
as critical to business operations. The NEES companies have been in contact
with all of these parties regarding the progress of their Y2K remediation
efforts, and will continue to monitor their ongoing remediation efforts
through continued communications. The NEES companies cannot predict the
outcome of other companies' remediation efforts. Therefore, contingency plans
have been implemented, as described below.
The NEES companies believe total costs associated with making the
necessary modifications to all centralized and noncentralized systems will be
approximately $28 million, including the replacement of approximately one
thousand desktop computers. In addition, the NEES companies have spent $7
million (of which approximately $6 million has been capitalized) related to
the replacement of the human resources and payroll system, in part due to the
Y2K issue. As of September 30, 1999, substantially all Y2K-related costs have
been incurred. The NEES companies continually review their cost estimates
based upon the overall Y2K Project status, and update these estimates as
warranted.
The NEES companies developed and implemented Y2K contingency plans to
allow for critical information and operating systems to function from January
1, 2000, forward. These plans are intended to address both internal risks as
well as potential external risks related to suppliers and customers. Part of
the contingency plan implementation for accounting and desktop systems will
include taking extensive data back-ups prior to year-end closing. For
operational systems, the NEES companies have in place an overall disaster
recovery program, which already includes periodic disaster simulation training
(for outages due to severe weather, for instance). As part of the Y2K
contingency plan implementation, the NEES companies have reviewed their
disaster recovery plans and modified them for Y2K-specific issues, such as a
potential loss of telecommunication services. The NEES companies conducted
contingency plan drills on September 8, and 9, 1999.
Interregional and regional contingency plans have been finalized for
utility systems throughout the United States. At a regional level, the NEES
companies have participated and cooperated with NEPOOL and ISO New England.
Overall regional activities, including those of NEPOOL and ISO New England,
are being coordinated by the Northeast Power Coordinating Council, whose
activities have been incorporated into the interregional coordinating effort
by NERC. Drills of these interregional and regional contingency plans were
also conducted on September 8 and 9, 1999.
<PAGE>Earnings
- --------
Net income for the third quarter and first nine months of 1999 increased
$7 million and $10 million, respectively, compared with the corresponding
periods in 1998. The increase is due primarily to increased kilowatthour
(kWh) deliveries and reduced property tax expense, partially offset by
increased operation and maintenance expenses on a combined basis. Earnings
for the year-
to-date period are also positively affected by a $41 million distribution rate
increase implemented in March 1998 in accordance with the Massachusetts
Settlement, partially offset by increased depreciation expense.
Operating Revenue
- -----------------
Operating revenue decreased $27 million and $117 million in the third
quarter and first nine months of 1999, respectively, compared with the
corresponding periods in 1998, reflecting the net rate reductions required in
1998 and 1999 by legislation enacted in Massachusetts in 1997 and the
Massachusetts Settlement. Partially offsetting these decreases are increased
kWh deliveries of 4.5 percent in both the third quarter and year-to-date
period as a result of significantly warmer weather and the effect of a strong
economy. The Massachusetts Settlement also put into place fully reconciling
rate adjustment mechanisms covering purchased power costs, transmission costs,
demand-side management costs, and NEP contract termination charge costs. In
the third quarter of 1999, certain corrections were recorded of amounts
calculated under these rate adjustment mechanisms which increased revenues by
$2 million.
Operating Expenses
- ------------------
Operating expenses for the third quarter and first nine months of 1999
decreased $34 million and $127 million, respectively, compared with the
corresponding periods in 1998, primarily due to reduced purchased electric
energy and property tax expense. These decreases are partially offset by
increased operation and maintenance expenses on a combined basis, increased
depreciation expense, and increased income taxes.
The decrease in purchased electric energy for the third quarter and first
nine months of 1999 reflects reduced transition access charge billings from
NEP, partially offset by increased costs associated with contracts established
to meet continuing transition service obligations to customers. In addition,
on a year-
to-date basis, the decrease in purchased electric energy is also due to the
termination of the Company's former all-requirements contract with NEP.
The increase in other operation and maintenance expenses is primarily due
to increased transmission wheeling costs of $3 million and $24 million for the
third quarter and first nine months of 1999, respectively, reflecting
increased billings from ISO New England and, for the year-to-date period, the
fact that these costs were a component of purchased power expense prior to
March 1, 1998. In addition, the increase in other operation and maintenance
expenses is due to transition costs incurred in connection with NEES' proposed
acquisition of EUA, increased regulatory assessments, and the allocation of
additional New England Power Service Company costs after NEP's divestiture of
its nonnuclear generating business. For the third quarter of 1999, the
increase also reflects increased distribution maintenance costs as a result of
severe weather. These increases are partially offset by reduced Y2K-related
costs and reduced charge-offs related to uncollectible accounts.
<PAGE>
The increase in depreciation expense for the first nine months of 1999 is
primarily due to the $11 million increase in annual depreciation expense
provided for in the Massachusetts Settlement, which went into effect on March
1, 1998, and depreciation expense on new utility plant expenditures.
The decrease in property tax expense for the third quarter and
year-to-date period reflects the impact of one-time property tax payments made
during the third quarter of 1998 to certain municipalities to reflect
corrections identified by the Company related to plant valuation amounts used
in the calculation of property taxes by those municipalities. The decrease is
partially offset by the continuing impact of those revised valuation amounts.
Interest Expense and Other Income
- ---------------------------------
The increase in interest expense and other income for the third quarter
and first nine months of 1999 is due principally to increased interest expense
and interest income associated with rate adjustment mechanisms, as well as the
effect of costs incurred in 1998 in connection with the Massachusetts industry
restructuring legislation. For the year-to-date period, the increase in other
income also reflects a premium on the reacquisition of debt incurred in 1998.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $59 million for the first
nine months of 1999. The funds necessary for utility plant expenditures
during the period were provided by net cash from operating activities, after
the payment of dividends.
In the first nine months of 1999, the Company retired $15 million of
mortgage bonds.
At September 30, 1999, the Company had $55 million of short-term debt
outstanding to affiliates. The Company has received regulatory approval from
the SEC, under the 1935 Act, to issue up to $150 million of short-term debt.
At September 30, 1999, the Company had lines of credit with banks totaling $55
million which are available to provide liquidity support for commercial paper
borrowings and other corporate purposes. There were no borrowings under these
lines of credit at September 30, 1999.
For the twelve-month period ending September 30, 1999, the ratio of
earnings to fixed charges was 3.64.
<PAGE>PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning a rate filing by the Company with the
Massachusetts Department of Telecommunications and Energy on April 30, 1999,
discussed in Part I of this report in Management's Discussion and Analysis of
Financial Condition and Results of Operations, is incorporated herein by
reference and made a part hereof.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing the following revised exhibit for incorporation by
reference into its registration statement on Form S-3, Commission File No.
33-59145.
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
<PAGE>SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 1999 to be signed on its behalf by the undersigned thereunto
duly authorized.
MASSACHUSETTS ELECTRIC COMPANY
s/John G. Cochrane
John G. Cochrane, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: November 10, 1999
Exhibit Index
<PAGE>
Exhibit Index
- -------------
Exhibit Description Page
- ------- ----------- ----
12 Statement re computation of Filed herewith
ratios
27 Financial Data Schedule Filed herewith
<PAGE><TABLE>
<CAPTION>
MASSACHUSETTS ELECTRIC COMPANY
Computation of Ratio of Earnings to Fixed Charges
(SEC Coverage)
(Unaudited)
12 Months
Ended
September 30, 1999 Years Ended December 31,
Actual
- -------------------------------------------------------------
(Unaudited) 1998 1997 1996 1995 1994
-------------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Net Income $ 60,008 $ 50,386 $ 65,758 $37,926 $29,101
$34,726
- ----------
Add income taxes and fixed charges:
- ----------------------------------
Current federal income taxes 39,381 10,978 34,244
25,867 9,437 (6,762)
Deferred federal income taxes (5,468) 18,558 912
(6,052) 6,156 24,932
Investment tax credits - net (1,075) (1,086) (1,103)
(1,118) (1,132) (1,228)
Massachusetts franchise tax 8,018 6,999 7,514 4,479
3,935 4,681
Interest on long-term debt 27,287 27,073 27,612
27,089 25,901 20,967
Interest on short-term debt and other 10,881 7,368 7,214
6,473 6,784 6,366
-------- -------- -------- -------
- ------- -------
Net earnings available for fixed charges $139,032 $120,276
$142,151 $94,664 $80,182 $83,682
======== ======== ======== =======
======= =======
Fixed charges:
Interest on long-term debt $ 27,287 $ 27,073 $ 27,612
$27,089 $25,901 $20,967
Interest on short-term debt and other 10,881 7,368 7,214
6,473 6,784 6,366
-------- -------- -------- -------
- ------- -------
Total fixed charges $ 38,168 $ 34,441 $ 34,826
$33,562 $32,685 $27,333
======== ======== ======== =======
======= =======
Ratio of earnings to fixed charges 3.64 3.49 4.08 2.82
2.45 3.06
- ----------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE><ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND RELATED STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH
FLOWS OF MASSACHUSETTS ELECTRIC COMPANY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,153,121
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 225,108
<TOTAL-DEFERRED-CHARGES> 34,699 <F1>
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,412,928
<COMMON> 59,953
<CAPITAL-SURPLUS-PAID-IN> 239,440
<RETAINED-EARNINGS> 191,085
<TOTAL-COMMON-STOCKHOLDERS-EQ> 490,737 <F3>
0
10,674
<LONG-TERM-DEBT-NET> 332,458
<SHORT-TERM-NOTES> 54,700
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 21,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 503,359
<TOT-CAPITALIZATION-AND-LIAB> 1,412,928
<GROSS-OPERATING-REVENUE> 1,021,948
<INCOME-TAX-EXPENSE> 28,648
<OTHER-OPERATING-EXPENSES> 921,733
<TOTAL-OPERATING-EXPENSES> 950,381
<OPERATING-INCOME-LOSS> 71,567
<OTHER-INCOME-NET> (19)
<INCOME-BEFORE-INTEREST-EXPEN> 71,548
<TOTAL-INTEREST-EXPENSE> 28,583
<NET-INCOME> 42,965
464
<EARNINGS-AVAILABLE-FOR-COMM> 42,501
<COMMON-STOCK-DIVIDENDS> 59,953
<TOTAL-INTEREST-ON-BONDS> 20,428
<CASH-FLOW-OPERATIONS> 166,310
<EPS-BASIC> 0 <F2>
<EPS-DILUTED> 0 <F2>
<FN>
<F1>Total deferred charges includes other assets.
<F2>Per share data is not relevant because the Company's common stock is
wholly owned by New England Electric System.
<F3>Total common stockholders equity includes the unrealized gain on
securities.
</FN>
