Text

Massachusetts Municipal Wholesale Electric Co 1986 Annual Rept
	ML20216E098
Person / Time
Site:	Seabrook
Issue date:	12/31/1986
From:	Huehmer H, Leary G; MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC CO.
To:	;
Shared Package
ML20216D932	List: ML20216D924; ML20216E046; ML20216E098; ML20216E324; ML20216E368; ML20216E420; ML20216E457; ML20216E508; ML20216E535;
References
	NUDOCS 8706300639
	Download: ML20216E098 (43)
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l 19 The MMWEC Membership

1. Ashburnham Municipal Light Plant

2. Belmont Municipal Ught Department

3. Bolyston Municipal Lighting Plant

4. Chicopee Municipal Lighting Plant

5. Concord Municipal Light Department

6. Danvers Electric Department

7. Georgetown Municipal Light Department

8. Groton Electric Light Department

9. Hingham Municipal Lighting Plant

10. Holden Municipal Ught Department

11. Holyoke Gas & Electric Department

12. Hudson Light & Power Department

13. Hull Municipal Ughting Plant

14. Ipswich Municipal Ught Department

15. Uttleton Electric Light & Water Department

16. Mansfield Municipal Electric Department

17. Marblehead Municipal Ught Department

18. Merrimac Municipal Light Department

19. Middleborough Gas & Electric Department

20. Middleton Municipal Light Department

21. North Attleborcugh Electric Department

22. Paxton Municipal Ught Department

23. Peabody Municipal Light Plant

24. Princeton Municipal Light Department

25. Reading Municipal Light Department

26. Rowley Municipal Lighting Plant

27. Shrewsbury Electric Light Plant

28. South Hadley Electric Ught Department

29. Sterling Municipal Electric Light Department

30. Templeton Municipal Ughting Plant

31. Wakefield Municipal Ught Department

32. West Boylston Municipal Lighting Plant

33. Westfield Gas & Electric Light Department

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.i Letter from the President and Chairman............ 2 g_

Program Development.

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_ Contents omthedemend eide..............

.4 On the supply side............

8 Policy and Structural Development

........ 12 Legislative policy development.

........ 15 Financial Highlights........................ 18 Letter from the General Manager.

.. 21 Treasurer's Statement......

24 Auditors' Report..

....... 26 Financial Statements..........

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New England's electric utility industry is in a state of transition. Regulatory, financial and legislative forces Om me has emerged es the only absolute characteri

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The challenge facing MMWEC is to act on this dB d. knowledge to help its 33 member municipal electric systems remain strong, independent and competitive d [.lUdM for many years to come.

In accepting this challenge, MMWEC is developing programs and policies mtended to keep the company and its members in step with chant;e. To this end, MMWEC has, among other things, adopted a flexible approach to power supply planning that will help us accommodate new regulatory standards and other uncertainties in the industry.

An important part of this approach is an increased emphasis on energy conservation programs and efforts ceorge E. trarv. Presiscut to manage the demand for electricity. MMWEC's Power Management Division has been restructured to focus more attention on these areas, and a management audit j

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organized to carry out specific objectives. Along with 4-these and other initiatives, the MMWEC Board of Direc-tors is shaping policy to incorporate change.

MMWEC also has increased its involvement in legis-

r lative activities to protect the interests of its members.

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At the national level, MMWEC was able to secure an exemption from certain provisions of the Tax Reform Horst I(uchmer. Chairman of the Board Act of 1986 that will save the MMWEC members mil-lions of dollars in financing costs. At the state level, MMWEC has proposed changes to its enabling legisla-tion that will strengthen the company both financially

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A and structurally.

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.3 i As these different elements of the MMWEC pro-gram mature, we expect that MMWEC will be ready

and able to provide' the guidance and support its mem-

- bers will need in the years ahead. We are listening to ourl members and adapting the MMWEC program to their current and future needs.

As we look to the future, MMWEC will be concen-p trating on efficient use of resources, conserving energy L

and adding to the power supply in smaller increments.

Conservation and demand management programs will

' be'used to the maximum extent possible to moderate

. the demand for electricity. However, forecast projec-

> tions indicate there also will be a nee'd for additions to

the supply MMWEC is investigating a number of new

-project possibilities, including the addition of a unit similar to MMWEC's Stony Brook combined-cycle power plant,- which is among the most efficient fossil-fueled generating stations in the United States.

In planning for an electric supply that is capable of d

supporting continued economic grmvth, MMWEC will

. be analyzing a greater erray of demand management Land supply possibilities and selecting the least-cost

. approach to satisfying each member's power require-

. ments.

Interest in the affairs of electric utilities has broad-ened to an unprecedented degree, and it will require strength, flexibility and cooperation to address the

, concerns of all. These are long-standing characteristics

'of MMWEC, where we are shaping a future with ade-iguate, reliable, and economic power supplies for the municipal utilities of Massachusetts.

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hk W~<f George _E. Leary Horst Huehmer i

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PTO TaID There were a number of conflictin* reports on New England's future power supply in 1936. Most of the -

DWdOnm m t reports agreed that new supplies of electricity will be r

- needed at some point in the 1990s. The conflicts arose over the method of meeting the region's electric re-quirements.

MMWEC members will need approximately 240 '

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megawatts of new capacity to satisfy their power require-ments in the early 19,90s, assuming an annual growth in demand of 2.3 percent. Basically, there are two ways to l

satisfy these requirements. The growth in demand for electricity can be influenced through additional load management and conservation programs, and the sup-ply can be increased by adding new power projects or extending the life of old ones. These are referred to as demand-side and supply-side options, respectively.

MMWEC intends to look at all options-supply and demand-before determining the least-cost method of meeting each member's power requirements. This least-cost approach to power supply planning will in-volve a comprehensive analysis of each option's many variables, including such things as cost, reliability and -

customer acceptance.

On the demand side..............

There are many ways to manage the demand for electricity. Some are relatively simple and inexpensive, but others require a great deal of research and analysis.

With the dernand /or electricity in In 1986, MMWEC Eroduced and distributed to its -

' htMnTC member cornmunities joc,,,,,,, y,, 3,,,,3 y p, c,,

members a No-Cost, Low-Cost Programs Report, which Muwrc is-namining a wide details a variety of energy conservation and load man-

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agement techniques that can be implemented at little or hers'futurepowerrequirements. A

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technoroxie, are being,tudied to restrictors and weather stripping fall into this category, shc"te$s$.tNha$trjh['

and many MMWEC members are using these techniques.

i nunic',1 east-cost arrroach to MMWEC also has developed residential and com-j power,urrly rianniax Mil h le mercial energy audit programs that make it easier for

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i he$stccInonYI, Ire members to identify and work with consumers to cor-i ower available.-

rect energy inefficiencies in their communities. In addi-

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.g tion, MMWEC commissioned a report with follow-up 7p<

seminars on incentive rates, offering its members still another method of managing demand. Many MMWEC members already have implemented incentive rate pro-grams, which encourage customers to use equipment and appliances during off-peak hours, reducing peak demand and helping to defer the need for new capacity.

Many of the more sophisticated load management o

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techniques, such as remote control of appliance usage, require extensive data collection and analysis before a decision can be made on their cost-effectiveness. To h

meet these needs, MMWEC upgraded its automated

.g data collection system considerably in 1986 and is a sponsor of the Joint Utility Monitoring Project, which involves the monitoring of electric appliance usage in l

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50 homes throughout Massachusetts. The project will help in establishing a reliable, statewide database on how much electricity different appliances use and when they use it. Independently, MMWEC is conducting a

"'i heat pump monitoring project that will provide impor-

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tant data on these energy conservation devices.

Also in 1986, MMWEC developed individual reports for all its members on the costs and benefits of control-ling the operation of electric water heaters in their h'

service territories. To expand on this initiative, the g

.k MMWEC Board of Directors has authorized the hiring i

of a consultant to conduct a study that will assess the

' potential benefits for individual members of numerous other demand management strategies.

b These charts show graphically the objective of load l

managernent and conservation prograrns designed to reduce the peak demand for electricity. By providing the proper incentives, utilities can encourage cus-tomers to use electricity during periods of the day

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when demand is lower. Th is is in tend:d to con tain the l

need for newpower plants to meet peak demand and increase the usage of eristing plants during off-peak periods.

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AIM \\\\TC efforts in the areas ofload managernent vyeny and conservation are expanding. A number of new projects and programs were snstiated in 1986 to help hih!\\\\TC rr. ember utilities unanage the de-

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n '$ G. \\l' 1 g,, l f [; ,L, . I s dM & .dl d44 ;. o l-j; N gh . b&4dif .. J l) D dds M., g {h g ;;j ! Many h1MWEC members have M > l6 h byP' Q ~' 1 sieveloped programs that en- ? "ht' N s l, l 3dWMik ! ,, courage customers to conserve 1% ~ M k g ";a.L ., I? W j. ) ',, }J % %QH' f y 9, energy, in Danvers, at left, w.aanam. R' y y Energy Conservation Adviser f, .N,) y s Pamela Jrwin, right, congrat-ulates a homeowner on receiv-w. ', f.y

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_ * ** Danvers municipal system for .i ~'%? '**m ing an award given by the w,> " _,.. g a,.,,,ng. wn ,d.- e 3 s ' W;g_l&.. w%,l,.; ~ ' "7'i 'h. tw.'._. gygy y j(jggf hyggy. gm yyyg. .g lG .t } Il';' 5.. ' 'f ' bNheuaEuk:s:sbni Y, 5 Y t. A$!$ l}$$'kOk N?ELN ments. ~

8 On the supply side.............. ~ Utilities today are unwilling to build major new power projects because of uncertainties related primar-ily to cost recovery and licensing. Unfavorable regulatory decisions on these issues are inhibiting the construction of major generating and transmission facilities at a time -when new power supplies are desperately needed. Work is progressing to reach agreement on the issues x- - involved, but near-term solutions are not expected. It is against this backdrop that MMWEC is planning the power supply future of its members. Without the option of joint ownership in large projects, MMWEC is pursuing a number of other power supply possibilities. Potential additions to the supply include the purchase of power from cogenerators, small power producers and other utilities in the Northeast, I including Canada. Involvement in programs to extend siurt ust the ninuton municipalsystem has bun the life of existing power plants is also a possibility. In reuirins a rottion olits cansy/ rom this wind / arm, addition, MMWEC has been discussing options for new which can meet up to M rercent of the town', generating projects sized to meet the needs of the energy needs. MMWEC members. At present, MMWEC's power supply planning as-sumptions include commercial operation of Seabrook Unit No. I and Phase 11 of the Hydro-Quebec project. While there are uncertainties regarding operation of both of these projects, MMWEC believes their opera-tion is essential to maintaining an adequate supply of electricity for New England. The 1986 operating additions to the MMWEC pc,wer supply include a 55-megawatt share of Millstone Unit No. 3 and a 25-megawatt interest in the Hydro-Quebec Phase I project. In addition to these projects, MMWEC negotiated contracts with two New England utilities that will satisfy a large portion of the members' intermediate power requirements through the early 1990s. Early in j 1986, a 20-year contract to purchase 11.4 megawatts from an operating resource recovery plant in lawrence, MA was implemented. MMWEC also is examining the possibility of extending an existing power purchase

9 contract for 100 megawatts with the 'New Brunswick Electric Power Commission. \\ The amount of capacity available for contract pur-l chases has become extremely limited, however, with l the demand for electricity rapidly encroaching on the region's power supplies. ' Cogeneration and small power projects are expec-ted to fill a portion of the void in New England's energy future. With full recognition of the contribution these projects can make to its members' power supply, - MMWEC in 1986 became the first utility in Massachu-setts to issue a standard offer contract for the purchase of power from cogeneration and small power projects. Such projects are generally owned and operated by p;. ~g .o. 6 g. L o U _/ g.'... 0 e.'. e, i 5 4 ^ o (., ,.a 4, j v . 6, . 7,, ur. i 4 .s g d L .. r ... s' l- 'I c t .e 'g.. .,.2,.. a. [',f [- 1 (.- e c -5s - p,. f l', ' y,. * : J 'g .i,,..,p,.: ' '.i-s' 4' i...? - ], : p '.' ". J. ?} ,.%, llRy ' " ' /' ' \\;y:;' 5 b.lfl' [9;$'i% '\\ r. .h... $( hff. 'fh',hs.[MM .. Ih,',. ?): f ,ay ggggggggpgg,,_.gg~. ss ,m._.m .m

m 10' independent, non-utility entities, and regulations have been developed to help utilities address some of the uncertainties involving the cost, reliability and transmis-sion of power from these facilities. Currently, MMWEC is evaluating responses to its standard offer contract from three potential developers. MMWEC has been investigating options for the con-struction of about 150 megawatts of new capacity for more than a year. Projects fueled with oil, natural gas, coal and trash are under review, including improve-ments that would expand the capability of MMWEC's Stony Brook plant. The financing, construction and oper-ation of a new project could be handled by MMWEC, or, as a means of limiting risks, by other parties with MMWEC purchasing the project's output. The Stony Brook Energy Center is a potential construction site. During 1987, detailed analyses will be performed on all the options available to MMWEC, from demand management programs to new construction, as MMWEC prepares to meet its members' future power require-ments with the least-cost and most practical options available. The end result will be a diversified and economic power supply program for the MMWEC members.

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. $[;$Q,, ',' '. MU.j{g"}hdikT ' 'Q C .c $ '. ;. l ?Y;v!; ~ gc ; m; gy'u h ?'. .k :_ Nf;;;h.ff0$ i9k, ' f 1,~- kNdhNE E .v.A yl'd s ,+u..a t 1 This1204ilowatt hydroelectric p.,lY O ' u. ~ project on the Warc River in ?YQ ' &fe:am h a 5- . k, k! South Barre, ALA is helping to ya = meet the needs of two MMWEC -K ~ members,iloiden and Princeton, %N 4.- by tchich hat >e agreed to purchase gpfvi w rcent of the project's }

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..g a Uarter l.i w. w ); Report E T3 Three months ending \\ k; March 31,1987 i 1 k ,1*. I -Y m' 'y i e j

l Massachusetts Municipal Wholesale Electric Company f Statements of Financial Position j March 31,1987 and 1986 (Unaudited) l (Dollars in Thousands) March 31, .1987 1986 ASSETS E Electric Plant in Service. $ 386,934 $ 210,047 Accumulgted Depreciation (48,351) (34,832) 338,583 175,215 Under Construction 582,317 657,421 Nuclear Fuel-net of amortization.. 36,483 36,523 Total Electric Plant.,.... 957,383 869,159 Specia1 Funds... 305,374 405,776 Current Assets Cash and Temporary Investments. 11,976 13,338 Accounts Receivable.,....... 5,143 2,849 } Unbilled Revenues. 7,534 7,218 i Inventories. 7,737 4,250 Prepaid Expenses. 1,811 (09 33,701 28,264 j Total Special Funds and Current Assets. 339,075 434,040 ( Deferred Charges I Amounts Recoverable in the Future Under Terms of the Power ~ Sales Agreements.. 116,103 118,824 Unamortized Debt Discount i and Expenses,... 39,857 43,718 9 Other. 945 773 156,905 163,315 51,453,363 $1,466,514 k LIABII.1 TIES Long-Term Debt l Bonds ... $1,261,445 51,270,295 Notes........... 1,928 4,819 1,263,373 1,275,114 Bond Anticipation Notes Payable.. 110,000 120,000 i Other Current Liabilities i Current Maturities of long. Term Debt 10,906 8,986 Notes Payable.... 162 687 Accounts Payable. 23,488 22,842 Accrued Expenses..... 45,434 38,885 79,990 71,400 i Total Notes Payable and Other i Cunent liabihties.. 189,990 191,400 $1,453,363 $1,466,514 j l i 9 j i o

Financing package aimed at protecting consumers MMWEC plans to issue up to $374.5 million in long-13 percent for Nuclear Project No. 3 (Millstone No. 3) and term revenue bonds in the near future in three separate Nuclear Project Nos. 4 and 5 (Seabrook) are candidates for ] series, including $366 million in tax-exempt issues and $8.5 million in taxable issues. refinancing at this time. If favorable market conditions pre-vail, MMWEC has estimated the refinancing bonds could ) The financing plans include the issuance of up to $200 carry an interest rate averaging around 8 percent, resulting million in long-term bonds to refinance existing, high-in substantial savings for project participants. The DPU interest debt. lssuance of the $200 million in refinancing bonds is contingent upon favorable market conditions at granted authorization to issee the refinancing bonds in i March and, April of 1986. l the time of the bond sale. The balance of the financing is In preparation for the bond sale, the MMWEC Finance I! primarily for rate mitigation purposes. Team met with Moody's Investors Service and Standard & The Massachusetts Department of Public Utilities (DPU) Poor's Corp. on Feb.19 to provide an update on events on Jan.14 authorized MMWEC to issue up to $131.2 million in long-term bonds for Project No. 6 and $33.3 million for impacting MMWEC's financial condition and credit rating. Nuclear Project No. 4. An additional $10 million in financ-Preparations to market the bonds have included meetings with security analysts in Boston and New York. Meetings ing a uthority for these projects remains from previous DPU with investor groups also are planned. decisions, bringing the total to $174.5 million. Moody's reinstated and upgraded MMWEC's credit rat-The bulk of proceeds from this portion of the financir:g ing on April 15 from Ba to Baa as a result of the DPU's will be used to retire $110 million in bond anticipation January financing authorization, the completion of Sea-notes (BANS) issued in September 1986. Issuance of the brook Station and recent court decisions that reaffirmed the BANS enabled MMWEC to continue its phase-in of Sea-brook costs in 1987. MMWEC began billing its Seabrook validity of MMWEC's power sales contracts. On April 17, Duff & Phelps, Inc., a Chicago-based rating agency, also participants for a portion of the interest costs on outstand-issued an investment-grade rating for MMWEC's bonds, ing debt in 1986. The phase-in will continue until 1989 Less than a week later, Standard & Poor's raised MMWEC's when nearly all of MM WEC's Seabrook costs will be funded credit rating from BB to BBB, completing the return to with revenue from project participants. investment grade. Remaining proceeds, which will include the $8.5 mil-In February, the Board of Directors selected Dillon, lion in taxable debt, will be used to fund a portion of the Read & Co.,Inc. as MM WEC's new financial adviser. Merrill interest on outstanding bonds, issuance costs and deposits Lynch Ca pital markets is the lead managing underwriter for required under MMWEC's General Bond Resolution. the 1987 bonds and Wood Dawson Smith & Hellman of MMWEC bonds issued at interest rates averaging about New York is bond counsei. e Contract for cogeneration purchase under negotiation MMWEC is negotiating a contract to purchase up to 22.5 date of the second unit. megawatts of electricity from a cogeneration project to be built in Springfield, MA. ANR is planning construction of a combined cycle cogeneration plant next to the Connecticut Rivw In a MMWEC and ANR Venture Management Co. executed highly efficient operation that willinclude two natural gas-a Memorandum of Understanding in February outlining fired combustion turbines, waste heat recovery systems the terms of the purchase. Signing of a final contract is con-and a steam turbine generator, the plant will be capable of tingent upon approval by the MMWEC Board of Directors generating 22.5 megawatts of electricity and producing and execution of Power Purchase Agreements with mem-approximately 34,000 pounds of steam per hour. ber municipal electric systems. In addition to generating electricity for members, the ANR has offered to provide MWMEC with a corporate project will produce thermal energy for a district heating guarantee from its parent company, The Coastal Corpora-tion, a Houston-based diversified energy company with and cooling system in downtown Springfield. Project con-total assets of $7.5 billion. Energy Networks, Inc., a wholly struction is set to begin in early 1988, with the first generat-owned subsidiary of Connecticut Natural Gas Co., will be ing unit operational by July 1989 and the second unit responsible for operating the Springfield cogeneration pro-operational no later than November 1992. According to the ject. Energy Networks has operated a district heating and Memorandum of Understanding, MMWEC's power pur-cooling system in downtown Hartford, CT since 1962. chase agreement extends for 20 years from the operation e

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sur es n rd r n y f pm mml t t o hE d 's nh gc e t t nd 0 s r e o .f p oov lt iv nai im gi ic e a o yws 1 Mt otsf s g h r e o cf e 0 gbli t 5 s t iWaCat t y u f sl o ct e s rCop t a enaf nhih t cee0 n pl sd er r wtoin ea e 'e M o W n wi in t sMmE J Wh a p a si e y o a n h r p, at v 9 er u r n9iopve b uiSt c i i c u od l d e t - i a1 t c o 7, fedt esi ec e ic yr rh uf l t r t u e s ueb e e ein k ah r . y. va s vo c qoi oa t t n psd mo 1 A. a nt rt o d noh f t mMiat nMCe. e jed r. t t r u e t t et r we y os sen eor esh c t e t a e e u nt miaJd t eME a r cl e s lu i r a h i h es c n st l d s r t tsh t i mf d o me d ge r Wijb e sd n ae e ph i c pi mpns y, o d t n a r t t wime e u r eoet n s r al nen h luuch gwiMt s oa r r s a J a i em me i d ad dt si o aMnh o og nye r t a r n s ef a .d omemo ob oat le u sdl t f t l s i r r t s uia a f ios ni l s r n s s n i s olt, nsdMs por o J l m wtnn r t h n e v ub e ps s s e s epeh msCcmt muf cmiu t t ci s t l oi it i d i t r e nt e uelvt t k o c a ot s e u c a a e e 'T n m i e g s m gt onh eeednCh a sc ed aCoe a i s c el a na st e yl s a of Ch r ct ad r o o np monr o me v ud a p ini eps ye a nb di e ka d pne c otomird ar ig el o sf k e iega wrt b i ei oEt c ed l ol ut c6 ut egp no pm.d sit r e M. t ol gi neWf DecWdr Ct oo n m a 'e t e c a r goa erl R MisWmt s r a r a d ed is a en s h s e a r einMo or yn ot oMumn r f h n - yt 8 r j ah df e ta c e ei v ea yl r e el eb t r eSi pip s s s wt i r c a otna9 unpt j t r r i pd M C a a t f uib n tmaneOnsd t e t sMo mea e id ad p h p icCaf moih e euc a E y e es s m p

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.o ~ %W ' tr W T :', 6 "' ' ~ .J Stony Brook Energy Center The Peabody rnunicipal system has converted the heating sys-a, tem of a city-owned barn at 'I Brooksby f arm, left, to solar f j in an effort to reduce energy . r costs and educate consumers y;3 ~. about solar energy. Inside the O%,. b barn. which is used for apple (($$k.lW ' pl; k;;=.gsl ~ ~' XQv j cider making and sales, display n ::i > > at panels describe the solar system y .g. z, fy-m .{ h, y 4~'. gQh-{;L and how it works.

12 ( Policy an d ors menn speciai session to aiscuss, among othe Early in August 1986, the MMWEC Board of Direc-t pg {fg7g[ things, the objectives and direction for MMWEC and its members. After assessing the existing state of affairs, pg[yg gg { both internal and external, the board adopted a series of f resolutions that have led to a number of structural and _ policy changes at MMWEC. Some of the changes include:

The establishment of a load Management and Con-

- servation Committee to oversee the development'of MMWEC's demand management and conservation programs.

The establishment of a Power Resource Development.

Committee to oversee the evaluation and development of new generating resources for MMWEC. -

MMWEC's agreement to abide by Department of Public Utilities (DPU) regulations regarding cogenera-tion and small power projects, although such regulations legally apply only to investor-owned utilities in Massa-chusetts.
A commitment to expand the opportunities for mem-bers to become more actively involved in decisions regarding specific power supply projects.
A commitment to enhance relations with the state Executive Office of Energy Resources and the DPU by reporting regularly to these agencies on MMWEC activities in which they have expressed an interest.
A commitment to file and support legislation that will enhance MMWEC's ability to finance load management and conservation efforts.

cooperation and flexibility are The adoption of these resolutions is just a begin-extremery important in AfAmic's . ning, as the board also authorized a management audit efforts to meet the diverse needs I _.,f g,,,,,3,,,, c,,3,y,,,,,, of MMWEC to ensure that the proper management l unique, and d is AfArnTC's fob ro structure is in place to carry out specific goals and i rrovide a cost-ef/ective prosra'" objectives for the future. The audit is expected to be that benefits all. The diversity of .,s,,,,y,,,s ip,,,f;,,,,s i,,n g, complete m, mnd-1987. g chart, which shows the peak de-In October 1986, MMWEC's Power Management mand for electricity in AtAtMTC O...lVision Was restructured, enabling the dw...ision to focus member systems during the ralen- ' dar year 1986. Inore clearly on the needs of the membership in the i

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},[ x .3 ; 7 1990s. The restructuring replaced the Regulatory Ser-vices and Optional Services departments with three .new departments: Resource Planning, Resource Devel- [ opment and Resource Management. These new depart-i, ments will concentrate on integrating demand-side and L, supply-side resources into the MMWEC power supply while' ensuring that existing resources are managed as i L efficiently as possible. In addition, the board has approved policy.modifi-cations that resolve problems encountered when attempt-ing to spread the benefits of smaller power resources equitably among the 33 MMWEC members. Beyond these internal improvements, MMWEC sup-ported changes in the New England Power Pool (NEPOOL) Agreement that provide new incentives for - j utilities to improve the availability c,f power plants. The H changes also address the seasonal pattern of electrical j use in New England and will help to ensure the relia ' i bility of 'he region's power supply system. .j l The ability and willingness to change demonstrated - by MMWEC in the past year is extremely important during these unsettled times for the electric utility industry. Such flexibility.will be an asset and strength as MMWEC develops an economic power supply program for its members in the years to come. 4 i

15 l Legislative policy ~ i development........... With lawmakers becoming more involved with elec-0 tric utility issues, MMWEC in 1986 developed a [ ~ y its communication with elected officials. comprehensive legislative action program to improve ' / Workshops have been conducted for MMWEC mem-A. ' ~j '~ w lative process and how to communicate with legislators. / ber managers and commissioners explaining the legis- .[ ,lj .~ } A procedure to develop positions and disseminate i,1

11

? information on legislation affecting MMWEC has been J 7g established, and extensive letter-writing and lobbying 1 f campaigns have been implemented to address specific (pp[ [ concerns. 0 Ta x Refonn................................... p MMWEC and its members carried out a successful campaign to limit the impacts of federal tax reform on the company's financing capabilities. The year-long lob-uassuamsett, state nou,, bying effort culminated with MMWEC securing an exemption from certain provisions of the new tax bill that will save MMWEC and its members millions of dollars in financing costs. The exemption allows MMWEC to issue $145 million in tax-exempt bonds for a power supply project that was ineligible for tax-exempt financing under the bill. While the tax bill places many new restrictions on the financing capabilities of tax-exempt entities, including MMWEC, the exemption enables MMWEC to keep its most critical financing plans in order. MM WEC Legisla tion........................... At the state level, a special committee appointed by the MMWEC Board of Directors developed a legislative proposal that will strengthen MMWEC and enhance the company's ability to meet the needs of its members. The proposal would, among other things, enable MMWEC to finance load management and conservation projects, broaden representation on the Board of Direc-

i i i tors and expedite the approval process for MMWEC D financing regnests before the DPU. -With membership and board approval,'the proposal was filed on Dec. 3,1986 for consideration in the 1987. 88 session of the state Legislature. MMWEC is not alone, however,in seeking changes to Chapter 775 of the Acts of 1975, MMWEC's enabling legislation. On May 27,1986, Massachusetts Gov. Michael Dukakis filed a sweeping proposal to restructure MMWEC and the way it' operates. Several MMWEC members feared the membership would lose control _ of. r h .MMWEC if the Dukakis bill passed, and as a result filed notices of intent to withdraw from membership. The ) Dukakis bill did not make it beyond the Joint Commit-1' tee on Government Regulations in 1986, but a similar proposal has been filed for consideration in 1987. The Braintree Electric Light' Department withdrew from membership in December 1986, citing legislative and other concerns. Braintree intends to terminate its Service Agreement with MMWEC in mid-1987. Three other MMWEC members have stated their intention to withdraw if legislation jeopardizing membership control of MMWEC is passed. During 1987, MMWEC will aggressively seek approv-al of its own legislative proposal, which proposes posi-tive changes to make MMWEC more competitive and should gather a broad base of support in the Legisla-ture. With the same tenacity, MMWEC will oppose ] changes that will divide the membership or inhibit the j L efficient and economic operation of the organization. Supporting Energy Efficiency................... MMWEC also gave its support in 1986 to energy efficiency standards for appliances and buildings. MMWEC was part of a diverse coalition supporting appliance efficiency legislation in Massachusetts, which was signed into law in October 1986. The legislation requires that as of Jan.1,1988, refrigerators, freezers, showerheads, water heaters and fluorescent ballasts

17 l l sold in the state must meet minimum energy efficiency standards. MMWEC also supported an upgrading of state build-ing standards that increases the minimum insulation requirements for residential construction, including the introduction of a more stringent insulation requirement for homes that use electric heat as the primary heat source. The Danvers mrnicipal system en-I While these new standards have no d.irect impact on ,,,,,y,,,3, m,,,,,,,f,,,,,yy,,y MMWEC, they will help to promote the efficient use of oyering e $50 ret, ate to customers energy in MMWEC member communities, particularly "ho r"rchdS' '*KF 'I/'ci'"' "/ri - t where new construction continues at record levels. It is erators. MMWEC in 1986 supported ,f,,,,,,,,,, u,,,,,y y,ff,,,,,,y,, this kind of cooperation among utilities, legislators, arrliances the law in Massachusetts, regulators, Consumers, manufacturers and other elements 'II'c'iv' '" Id"ua ry 29ss. iiere, van-vers Energy Conservation Adviser of society that MMWEC believes is needed to get the p,,,,,,, f,,,,, a f,,,,,,, ,3,,,,,,,, most out of the region's energy resources. program with a consumer. m _ _ _ _

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18: In 1986, MMWEC demonstrated its abilitu to. manage the finanC3 mmpany's debt soundly and prudency. MdWEC's finmial I-Ilgllligl1IS position improved considerably with the successfuli

~

~ y L mentation of a comprehensive financial plan that is sensitive - to member concerns. In addition, the MMWEC members showed their ability and willingness to satisfy their financial. ibligations to MMWEC under the plan, which is structured to strengthen MMWEC's financial position and minimize the rate impacts of MMWEC members' investments. l. Early in 1987, the Massachusetts Department of Public Utilities (DPU) approved MMWEC's request to issue $164.5. million in long-term bonds-a key component of MMWEC's overall financing plan. The primary financial accomplish-ment for MMWEC in 1986 was the issuance of $110 million l in short-term bond anticipation notes (BANS) on Sept.10. The BANS will be retired with a portion of the bond issue. authorized by the DPU. .j The 1986 BANS financing enabled MMWEC to continue its phase-in of Seabrook costs in 1987. The phase-in has j significantly reduced MMWEC's financing requirements for i Seabrook and provided a mechanism for member systems to_ gradually phase the cost of the project into rates. Under the plan, regardless of whether Seabrook is operating, nearly all of MMWEC's Seabrook costs will be incorporated into member billings by 1989. In 1986, the MMWEC members paid approximately $32.9 million in interest on bonds issued for Seabrook, with the balance of interest costs funded with bonds or notes issued by MMWEC. In 1987, member billings for Seabrook interest will increase to approximately $53.8 million, with - the billings increasing to about $75.I6 million in 1988. The { projected 1989 billings of $87.4 million represent nearly full { .As part of the effort ta improve its debt service on MMWEC's outstanding Seabrook bonds. 9 iia te$<gte Costs for MMWEC's share of the Millstone Unit No. 3 pro-I bei to reduce its reliance on extcena; ject are also being phased in to minimize rate impacts. credit facilities. rhis chart shows MMWEC was planning to issue long-term bonds in 1986 the significant progress M.mnc to retire $120 million in BANS issued in 1985, but action on has made toward this objective. MMWEC's request for DPU authon.ty to issue the bonds The increase in votuntary contri-butions to worung capitalfunds was delayed. Without approval of its request, MMWEC was by themnvre members reflects forced to issue new short-term debt in 1986 to avoid default their commitment to this effort, on the 1985 BANS and other Seabrook-related costs. which willinject more equity into - DPU approval of the request came on Jan. 14,1987.A -movrcana reducc interest, debt smice and commitment fu costs. bond sale planned for the first half of 1987 will enable --.----.-j

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i 1 ~i MMWEC to retire its short-term debt' obligations, effectively - converting the BANS to long-term debt;This will result'in significant sa./ings for MMWEC's Seabrook participants'duef H to the anticipated lower interest cost of long-term debt... l Proceed, of the sale also will be used to fun'd. MMWEC's share of ongoing Seabrook costs, which~ involve maintenance,' - I . testing and other activities prior to commercial operation of. j the plant. -l The complex nature of MMWEC's financial condition is ~ j

explained in greater detail in the Treasurer's Report and j

t Financial Statements accompanying this report. It is impor-l l. tant to note here, hoivever, that the financial plan developed 1 j by MMWEC has virtually. eliminated financing uncertainties - .. j related to MMWEC's involvement in the Seabrook project.- j Future Seabrook financing requirements,will be minimal if f j the unit is on line by late 1988, as currently projected by .j MMWEC. MMWEC staff maintains close contact with its member systems to assist in implementing the financial plan at the local level and to address individdal concerns. As the issues 4 affecting commercial operation of Seabrook are addressed,- ' ']T MMWEC wil! keep its members informed of any potential impacts on their revenue requirements and assist them in .f' I. finding ways to ameliorate any problems. In a separate area, MMWEC in 1986 retired more of its bonds prior to their scheduled maturities, resulting in savings of $2.35 million for participants in two different projects Since 1981, MMWEC has repurchased ind retired bonds valued at approximately $41.8 million, resulting in savings to. project participants of nearly $125.7 million over the life of l-the bonds. MMWEC also received DPU approval in 1986 to refin-ance high-interest bonds' issued for the Seabrook and Mill-. stone projects. While the Tax Reform Act of 1986 has limited MMWEC's ability to refinance its.Seabrook Project No. 6 debt, allowable refinancings, at the appropriate time, could - save project participants millions of dollars. A basic objective of MMWEC's financing plan is to j regain an investment-grade credit rating for MMWEC debt ! The major credit rating agencies are kept informed of MMWEC's improving situation, and the company's ongoing i financial accomplishments could very well lead to an im-l proved credit rating in 1987, d

~ o j.- c y 9 .a, I f' i />- Q[# 1 We have concentrated so far in this report on what [Q[ MMWEC is doing to assist in shaping a future with ade- ~ a quate, reliable and economic power supplies for its member utilities. The future is full of uncertainties, and the needs of l General of these facts and is developing new programs and poh the MMWEC members are changing. MMWEC is fully aware e e,- cies N b that will help to keep the members strong and competitive far into the future. x We have not devoted much ink to Seabrook, and for good } reason: MMWEC's future is not tied to the fate of Seabrook. 1<< Sefore elaborating, I want to emphasize that the many positive changes at MMWEC are largely due to the personal sacrifices and dedication of many MMWEC member manag-ers, commissioners and their staffs. As a group, the MMWEC members once again have shown their collective strength in working cooperatively for the benefit of municipal electric t, systems and their consumers. The many hours devoted to managing MMWEC's involvement in Seabrook are paying y off. ' - Richard K. Byrne, General % nager To begin with, Seabrook Unit No. I was completed in (f %) July ahead of the schedule and under the budget established pp, .in 1984. In October, the project received clearance to load Mjpen fuel and conduct a series of "no-power" tests. Early in 1987, i Q Seabrook was awaiting approval to proceed with low-power testing-the final testing required prior to commercial opera-y\\ ( . tion of the plant. Full-power operation hing;es on how the. Nuclear Regula-3 Y. tory Commission (NRC) deals with the Seabrook emergency I )9/ response plan issues. Based on a safety report endorsed by the Brookhaven National Laboratory, Seabrook's owners in ,g/ December requested a reduction in Seabrook's emergency 1 planning zone from 10 miles to one mile. The request has g provided a new direction for full-power licensing proceed- 'l ings, which stalled temporarily with the rejection by Gov. f Michael Dukakis of emergency response plans for Massachu-setts comm6nities within the 10-mile zone. Massachusetts would be eliminated from the smaller zone. In a more recent development, the NRC is considering a proposal frorn its staff that would change the requirement for state submittal of emergency plans for nuclear plants. /. Under the proposal, the NRC could grant a full-power h

m ) l 22 9 1 r 'y ,{ .,{ I.; j.. ~ license if plans submitted by the utility meet federal stan-dards. If the proposal is approved, New Hampshire Yankee,: E which is managing the Seabrook project, could submit its. E g. Jown emergency plans for Massachtisetts communities. a E f Opposition to such licensing alternatives will cause further delays, but it is MMWEC's belief that Seabrook will operate ' eventually because it is needed to meet the rising demand for electricity in. ew England and it has met or exceeded { N NRC safety requirements. Bringing the project closer to commercial operation has . helped MMWEC contain its Seabrook problems, but most significant is the work done in-house to protect the MMWEC members and their Seabrook investment. 'The' decision of the memb' rs to begin a phase-in of e MMWEC's Seabrook costs in 1986 was extremely important. Under the phase-in plan, nearly all of the' debt service on - MMWEC's outstanding Seabrook bonds will be funded with revenues from member systems in 1989, regardless of

whether Se'abrook is operating.

. This.will be accomplished with reasonable impacts on: rates in member communities. Department of Public Utilities

(DIfU) approval of MMWEC's request to issue $164.5 million

A in long-term bonds for Seabrook will allow.MMWEC to. retire its high-interest, short-term debt, resulting in further savings for consumers. Members' revenue requirements ' have been significantly less than previously anticipated due to.MMWEC's acquisition of low-cost hydroelectric power from New York and the reduction in power costs resulting from lowt oil prices. If Seabrook is operating in 1989, rate reductions will be possible for most participants. There also have been important decisions from the courts .1 regarding the validity of MMWEC's Power Sales Agreements l . (PSAs). In November 1986, Vermont Superior Court Judge I John P. Meaker ruled that the PSAs between MMWEC and the Vermont participants in the Seabrook project are valid under Vermont law. The PSAs are the backbone of MMWEC's financing program, providing assurances that MMWEC bonds will be repaid regardless of unit status. MMWEC provided a vigorous defense of the agreements after the Vermont Department of Public Service challenged K a their validity in October 1985. Judge Meaker's decision has sm,

,c s).- 23 '~ 1 been appealed.to the Vermont Supreme Court, with a deci-sion on the appeal expected before the end of 1987. - And in February 1987, Middlesex (MA) Superior Court nChief Justice Thomas R. Morse, Jr. ruled that municipal light- . boards have exclusive authority to enter into PSAs with MMWEC, and that such authority cannot be restricted by mtmicipalities. This decision was the result of an action filed by a group of Groton, MA residents seeking a court ruling on the validity of two Groton Town Meeting articles that would have limited the Groton Electric Light Department's authority to enter into PSAs with MMWEC. In' declaring the town meeting articles null and void, Jus-tice Morse cited the overriding authority provided in Chap-ter 775 of the Acts'of 1975, MMWEC's enabling legislation. The legislation gives MMWEC and its members specific legis-lative authority to enter into the agreements.

MMWEC now is looking beyond Seabrook, tapping new: resources to ensure the adequacy of its members' future power supplies. We are developing new programs and' special services that focus ~more on the needs of individual members.
Member communities vary greatly in size, population -

' an'd demographics. They include small, coastal resort com-1 munities, fannlands, residential communities and commercial / - industrial centers. Flexibility has been an important part of MMWEC's success in meeting their diverse needs. Equally important has been the enduring commitment to working cooperatively through MMWEC for mutual benefit. These h' allmarks of the MMWEC program-flexibility, m' ember commitment and unified action-will serve MMWEC well in dealing with the many changes occurring in the electric utility industry. We are working to improve and strengthen MMWEC so that it can be even more re-sponsive.to its members' changin'g needs. This work will continue in 1987, as the.MMWEC ' 3 members shape their organization to meet the demands of an increasingly complex and challenging future. x g

gm-i

24 MMWEC continued to implement its comprehensive rea s arer /s,1nanc,a,,,an eu,ing 19e. T,e,,an ca,ls,o, ame1,o,a,,on o, revenue requirement impacts on participant ratepayers S em D through reduced construction borrowings, gradually phas-m ing the cost of new generating facilities into the rate bases of the project participants and the refunding of outstanding high-coupon debt. Under the plan, reduced borrowing requirements for construction will result from the phasing in of Seabrook project-related debt service billings between 1986, when approximately 45 percent of debt service on outstanding bonds was billed, and 1989, when substantially all will be billed. MMWEC is using a November 1988 com-mercial operation date for Seabrook Unit No.1 for financial planning purposes. Substantial bond refunding authority was approved by the Massachusetts Department of Public Util-ities (DPU) during 1986. The provisions of the Tax Reform Act of 1986 are being researched relative to such refundings. In September, MMWEC issued $110 million of Bond Anticipation Notes (BANS) to retire its $120 million of 1985 wauer cacNer it Treasurer BANS issued for Nuclear Project No. 4 and Project No. 6. These projects, along with Nuclear Project No. 5, contain the bulk of MMWEC's Seabrook ownership interest. Both issues of BANS were sold to bridge a gap in MMWEC's financing program while the DPU was considering MMWEC's long-term Seabrook financing plan. The DPU approved MMWEC's $164.5 million request for 3 , long-term financing in January 1987. MMWEC plans to issue long-term bonds during 1987 to retire the 1986 BANS and pro-vide funds for its financing plan through at least mid-1988. e 7 g j. The approval of long-term financing by the DPU, favor-m sj able decisions in certain litigation covered in the footnotes to the financial statements, the completion of construction of Seabrook Unit No.1, ahhough its operation date is uncer-tain, MMWEC's power supply and financial planning efforts, and the Commonwealth's strong economy have all contrib-uted to an improved perception of MMWEC by the financial community. MMWEC continued to work toward its long-term objec-tive of reducing its working capital borrowing requirements to improve its financial condition. The term loan for oil inventory was paid down by $2.9 million to a balance of $5.5 million, and the power purchase line of credit was ___ ___j

25E 1 u .j I',,

reduced from $9 millionLio $8 million. MMWEC raised -

, $10.9 million in working capital in 1986 thr' ugh retain' d o e project funds and participant advances for power purchases. In addition, project participants unanimously elected to use certain excess project funds'to repurchase bonds. MMWEC .' bond repurchases during 1986 amounted to $835,000, bring- ?ing total repurchases to $41.8 million from excess project - . and construction fund' s since 1981. The 130ard of Directors continued the appointment of ' Arthur Andersen & Co. as independent certified public - 'I - accountants. The auditor's opinion and MMWEC's financial statements for the years ended December 31;1986 and 1985 are included as a separate section'of the Annual Report. Bonds Issued ' Principal Amount- . Net Interest -Issue (in thousands) Sale Date Cost (%) 1976 Series A 5 75,000 8/26/76-7.2 1977 Series A 117,370 7/27/77 6.4. 1977 Series B - 83,500 12/7/77-6.1 1978 Series A ' 75,000 ' 9/13/78 6.8 '1979 Series A - 150,000 8/16/79 7.0 - 1980 Series A 112,000 8/6/80 10,2 - 1981 Series A 100,000 - 5/28/81 12.3 .1981 Series B 100,000 8/6/81 13.4 .j - 1982 Series A, 115,000 ' 4/16/82 13.4 .1982 Series D .130,000-10/15/82 10.2 1984 Series A 95,000 1/11/84 11.0 1985 Series A-61,500 2/6/85 13.5 1985 Series B 53,200' 2/6/85 .13.5 i Long-term Financing Data (in thousands) Approximate Estimated Capability Bonds flonds Additional Project Description (MW) Issued Outstanding Bonds" . Stony Brook intermediate 311.3' $177,000 $167,520 ...' Stony Brook Peaking Project 170.0 85,000 62,785 ' Wyman Project - 22.7 9.400 7,765 Nuclear Mn No. I'- 20.3 180,200 177,145

Nuclear project No. 3 36.8-183,100 181,505

. Nuclear Project No,4 '49.8 220,100 219,630 42,700 - l Nuclear Project No. 5 12.6 75,000 '74,910 1,500 , Nuc! car Project.No. 6' 69 0 378,200 378,200 138,000

-. The cancellation of Pilgrim Unit No.2 included in NucIcar Mix No. I has reduced the financ-s L ing requirements for' Nuclear Mix No.1 to an amount less than the amount previously issued.

I L

Pnceeds remaining after completion of the project will be used to retire bonds issued for the LPmject.

MMWEC is using a November 1988 commercial operation date for Seabmok Unit No.1. J Amounts shown include financing' necessary to retire the $110 million 1986 BANS out-stemding at December 31,1986. Walter Gaebler A

' assar use s ' unicipa o esa e : ec ric ompany 27 .+ glxl .am. ~ .[,.h'l 's %E@%gy fO% ~ a ykNf W h & t i ,e M hO gd h (In Thousands) y ASSETS 1986 1985 o h.A X s,f i Electric Plant kdA hfh +*h g p lay.T l h* W In Service $ 386,454 $ 209,540 WM Accumulated Depreciation (Note 3) (44,891) (32,743) i, i i jg%%%m yyg@a% dD b,, 341,563 176,797 bk Under Construction (Notes 2 and 6) 556,630 613,280 %wQ y, s$y'WWghg Nuclear Fuel-net of amortization (Note 2) 35,243 34,758 by h Q Total Electric Plant 933,436 824,835 f pgQ@h NhhF, A h S ecial Funds (Notes 2,4 and 10) k k P 294,294 407,218 nv-A m kN 4 MW M Current Assets 7 F $$wh$gdhdh[h hi kh Cash and Temporary Investments (Notes 2 and 10) 9,838 9,593 i W h dM W e % N@dk Accounts Receivable 4,625 4,204 e hhNhd%Mhe Unbilled Revenues (Note 2) 6,271 7,405 (i Lf)jdf@hNM[$p@g% i kr $%$ M a Inventories (Note 2) 4,697 4,504 NO Prepaid Expenses 1,549 626 4 4$1gd;&@g'h Total Special Funds and Current Assets ilj 26,980 26,332 h kNNhh . &m[;:ng,jf h$hhh 321,274 433,550 s% y hkhfh i %y' x yy hbiD@ggg %gjs f ugq uxup V m CMyg Deferred Charges Nk/g$ Am unts Recoverable in the Future Under Terms of Ig pih4y/p@p%ghh]Mj' My@! the Power Sales Agreements (Notes 2 and 5) 121,747 126,727 Nh ?i h@p/p%hh h M9 Unamortized Debt Discount and Expenses 40,724 45,580 1 f Other 824 799 dM@WM e M*MMp k A pky $ Q, h / W 1 4 Q 163,295 173,106 m$mbj y r yy jaMWyA M p,$A 4% [ QpiE $1,418,005 $1,431,491 l I MdM8MjhN{%%]/ pdm $U Mb ' h long-Term Debt (Note 4) 1 LIABILITIES i hhhhhM@hh fNh Bonds $1,261,445 $1,270,295 !:hgqyk p% 5 Notes 2,650 5,542 $hdhk k 1,264,095 1,275,837 h[f Bond Anticipation Notes Payable (Note 4) 110,000 120,000 M Mp.p@hjk,kh hlh{Mphgh-Q-i z m s dS N: Other Current Liabilities g2ard hfHQ WM qy Current Maturities of Long-Term Debt 10,906 8,986 a g ^ 3 N g,$% i iggh Notes Payable (Note 4) 769 %y wy/@m$M,OD Accounts Payable 25,204 19,237 F . y@up[ qh Accrued Expenses 7,800 6,662 pMjMj h@y@hh h h@hhh hg[x k p hh y$Mg,3. d l 43,910 35,654 g ~ Q q m# Y Total Notes Payable and Other Current Liabilities 153,910 155,654 d p m a J yp? a j@khhk h Commitments and Contingencies (Notes 6 and 9) MMi%M] i4 $1,418,005 $1,431,491 " > 4{nr y e w %lun 1 9 h ~,s[1 .><y

mpyfhfh,%%' YqlpMpAj f.ag: ,',~% g[

m m, QQ Yf W % GWUU g 4 Aph, ^ .6rygg6g> h fglV%QW j RAwMk tM m q t,0W?%[fgQ q a y D 1 "4 w }3 y&g 4 i A mi i NQd i& N ym p i W.:~dj M 3 l D dks (i&g ty & +. }/hm %rg >g The accompanying notes are an integral part of these financial statements. c - -." )q .a.. .wdda.. ba. [ .c u.. # .f y

'assar upetts ' unicipa o esa

ec ric ompany l

l (in Thousands) l 1986 1985 ! Revenues (Note 2) $172,180 $153,885 . Interest income 39,724 44,982 Total Revenues and Interest Income $211,904 $198,867 Operating and Service Expenses: Fuel Used in Electric Generation 5 26,956 $ 33,044 n Purchased Power 72,390 81,152 ] Other Operating 10,177 6,663 4 Maintenance 2,668 3,148 Depreciation (Note 3) 12,000 8,332 4 Taxes Other Than Income 2,449 1,619 i 126,640 133,958 { ] Interest Expense: Interest Charges 147,971 127,581 Interest Charged to Projects During .g Construction (Note 2) (73,437) (62,579) 74,534 65,002 Total Operatint; Costs and Interest Expense 201,174 198,960 Loss on Cancelled Units - net (Note 5) 5,968 (637) (Gain) on Retirement of Debt (Notes 4 and 5) (218) (1,170) 5,750 (1,807) l D$ crease in Amounts Recoverable in the Future Under Terms of the Power Sales Agreements (includes i $3.045 million refunded in 1985 to Project Partici-I pants in cancelled Projects) (Notes 2 and 5) 4,980 1,714 $211,904 $198,867 l s 44@:ahlpga 9pu? 'u sc -g g ad ? g!($h y Mh . Ak@ i The accompanying notes are an integral part of these financial statements.

' assac use s ' unicipa o esa e ; ec ric.ompany 29 w $$ M A i @ J M k' 9 " h j I.Y U' l T Q j 1 bna ~ (In Thousands) c , q m&@aL '.y ga

o; 1986 1985

@g.. m egg r ' M.., g(h Sources of Funds: [s yk f p, TN 1 ~w s n, Ry[@@MN$.$yg hM$y>.$yy Internal Sources: @ gM kh PQ Revenues and Income $ 211,904 $ 198,867 Qp%gQh b.W Expenses (211,904) (198,867) M(($E NfMD$j[f! 2@ Charges Not involving Funds: f $ M@M{%h N Depreciation (Note 3) 12,000 8,332 Amortization (Note 2) 8,848 2,391 V bMN$hs@m 3$,%@M W~wyW %p %h wm 4% my$ C g4 (Increase) Decrease in Amounts Recoverable in the %5f QWim P Future Under Terms of the Power Sales QE W$8M'WM@g%yMk Agreements (Notes 2 and 5) 4,980 (1,331) &p % y %a n.g / y p.am g WM 3d EM 25,828 9,392 n.4.a w gy~w Q W n y h Ihhhh@9p@.AW@c,y,a, 't Qy External Sources: l a. a .n ggpy:LR: aky%j;[:$ wm y p' Bond Proceeds 114,700 Qf # fp %Q$.fMy@hggfhhhh Total Sources of Funds 25,828 124,092 h@h: N. hM9%M,' I+W @%ppkf Uses of Funds: C Additions to Plant and Construction Work in Progress 122,465 139,245 $m.f n %a % % t a WM Note Repayments 2,891 2,891 h k.3PSd]$d1o % AW L h[yN: $ h[K.lM%gpMy@N Bond Redemptions 8.850 12,275 hhNbkW 4 Increase in Debt Discount (including Bond Anticipation M hM $ Notes) 2,277 11,889 D WMQ;@w$ M i $w?MM,w.e%rE Q, &u Increase (Decrease) in Other Deferred Charges 25 (444) ) g hR Other (148) (173) 9 ph[ypGW W WM Af3@$ M g g g W M W M5 136,360 165,683 bN h Decrease in Working Capital, including hhk hbk)sk*$$f@[M$}h kkhbh h Notes Payable and Special Funds $(110,532) $ (41,591) k pf Change in Working Capital Consists of: $h*.Nh$hdkhMjg increase (Decrease) in Special Funds $(112,924) $ 78,754 f$ increase (Decrease) in Current Assets-hhhgg% 4 IDhN idb[NER, W$M i 1{ b Cash and Temporary Investments 245 2,740 }yNW&UlWMMMN Unbilled Revenues (1,134) (14) Accounts Receivable 421 (1,596) %3W3 Mp$yMwmy: Sh%%%g$$gN7MR$# yd 47 e' w N Inventories 193 (625) am d F hy : d Prepaid Expenses 923 (137) khhThbh khshh (112,276) 79,122 app @$r Msp;W& m + YM. D.dN?g M M. jydd (Increase) Decrease in Bond Anticipation Notes Payable 10,000 (120,000) N g",n $} p@q#p@ @~L, M d C @ (Q NW $ W3n (Increase) Decrease in Other Current Liabilities-4 Current Maturities of 1.ong-Term Debt (1,920) 630 ,pr awn ~.gmk> m 4 - u $p iifl.4 Q Notes Payable 769 1,137 3@M %qpdQ$ Accounts Payable (5,967) (3,266) % yM@gg[gg,by@Rjy,e? f kjp h Jp g? Mig Accrued Expenses (1,138) 786

q 1fQg iTQ

'? 1,744 (120,713) n 'f*G/4. ;Q M R O / h.A u ggr y J WN $(110,532) $ (41,591) G~hg,yp:y<g"gggNpg$ knf M p yhWW y l O&W&echh_N (hh&&2& w e hhh0k hh?k lp mu a$i's m pa w w 4 G 4 fg g ,5 v Sdffy 4y ly yl l&yfg(1ff ;y , L,_ %gpQg%QQgg"gyj $$lA&& AWWQp.3% a

'assac usetts unicipa W o esa e I lectric Company 30 f 'T QM gM&p: S T pG . mma% kW w$ m J-g t _gm 9 k.l ? Y!t %x.Q; MWW ~$ $M $ ME ;

p m mM y

3 M gy;^ j Mmyf"bQ' : h L ind M ( 1) Massachusetts Municipal Wholesale Electric Company (MMWEC) i ngwa mw n 4p g<gg : q g %mWg#E ized to issue revenue bonds secured by revenues derived from Power Sales Agree-v Cj4 i MMWEC is a political subdivision of the Commonwealth of Massachusetts, author-j ,o N @%f ^$ f %. h M ments with its members and other electric systems to finance the construction and l h[Qh[h @h hhhgf ownership of electric power facilities. $(Mg hfMk A Massachusetts municipal electric department authorized by majority vote of the %fjfM@f MMWEC and agreeing to comply with the terms and con $ city's or town's governing body may become a member by applying for admission to M$Ag , f@g M$ hj%[hy M 04 outlined within the MMWEC By-Laws. As of December 31,1986, thirty-three Massa-i . : p$h chusetts municipalities were members. 4 Tgf, 4 y -m h h,4Qf hh Power Supply System hh[y's h q g tt MMWEC obtains power supply capacity by acquiring interests in various generat- ] s[@h [ghhMg% ing units from investor-owned utilities and p

h6[ Y h

i 3 f Qb $ facilities (Projects). See Note 6 for a discussion of MMWEC's construction program and @4 N{ N{f $$[]N[M g*M f h commitments related to these facilities. In addition, MMWEC contracts for power for jfx1 resale to its members. h p Working Capital Advances (MMhd 9y MMWEC's Board of Directors has authorized working capital advances of up to Md b J%@M M Y I $2,000,000 from Project Construction Funds. At December 31,1986 and 1985, working h% capital advances from the project construction funds amounted to $500,000 and gh)@jjq h pf l > %K N $750,000, respectively. These inter-fund advances have been eliminated for primary l k~ kNIY Mh financial statement reporting purposes. g 7%[gg ;g< Mg ( 2) Significant Accounting Policies h qg i N bd Mj f Certain amounts presented in the prior year's financial statements have been R Py h 7"y@4 Ch i &j ghlq pl '$; j,@ipug% -] reclassified for the purpose of co AMM b y+1: Interest Charged to Projects During Construction a WL' J14ph. M[1 MMWEC capitalizes interest as an element of the cost of electric plant and other [ D, k%$h tedasareductionofinterestexpense.Theamountofinterestcap t property during the period it is under construction. A correspor ding amount is reflec-QL:i N ($h & M4 KM$ cost of debt, including amortization of debt discount and expenses, related to each Pro-4% Q d %q 3 [fgg% % ject, net ofinvestment gains and losses and interest in dh hq 'g WB Ni Project funds. gg W+ 9; y, b $y / @ g&' L Nuclear Fuel M M; ann h F h j h [ [@n "W " +gi4 Nuclear fuelincludes fuel in use,in stock and in process for M 11 stone Unit No. 3 and M h d fuel in process for Seabrook Unit No. l. Fuelin use for Millstone Unit No. 3 is included l yh@dh g fg%p p g; y April 23,1986 through Dece Qj /j % qpg net of amortization of $1.716 million from commencement of commercial operation on y Rg Used in Electric Generation based on the relationship of energy p soduced in the current 3lh(yg M[ylWhh @M Period to total expected energy production for nuclear fuelin th e reactor. A provision gg 'h g j[ [ s [ for fuel disposal cost is also included in Fuel Used in Electric G meration based upon MM T '[hb g y Department of Energy Guidelines. 7;& p(g[g;g fg g 1(dgj, ypp w pf% p %q3@5 y S ecial Funds P SO@eq f% Proceeds from the sales of revenue bonds or bond anticipatic n notes are deposited h q q pf7 f pg? with Trustees to be invested until they are required for construction or debt service s gMgm 4" p ;ff p m 'A

'assac use s ' unicipa o esa e. ec ric ompany e 31 1 $$@[S Ikj@f a .a . o,3 N9p g p ' YM h['%'hg#h 5 f y Q & f jf&_ ( 2) Significant Accounting Policies, continued 34 3% x@mMMW mm p a S ecial Funds, continued P r b hh2 MNhk 'y payments As defined in MMWEC's General Bond Resolution, investments are limited hh Q kh to direct obligations of, or obligations the principal of and interest on which are uncon-Njsh[MSC " s,NMMM $h ditionally guaranteed by the United States, Federal government agency securities, new h[d%jh 3%hh@h@d, obligations of certain states or certain political subdivisions, bank time deposits eviden-hp housing authority bonds issued by public agencies or municipalities, direct and general p 34*2P 7 d ced by certificates of deposits issued by banks, and repurchase agreements with Mb@MN primary dealers secured by certain securities. Certain special funds are more restricted MANN/@ hh(h.Mjhh as to which of the aforementioned investments can be purchased. (See Note 10.) 'W @%g@&y j,m@M, ;$$hf! v ~ g~jW ' Cash and Temporary Investments }. gg %g yMON[ %h capital requirements of MMWEC. These funds are not governed by the General Bond NMh hk Certain other funds are used for power and fuel purchases as well as for working N,tMNFT 4 PjM Resolution. In addition to the investment securities delineated in the General Bond ?g<% $ @g %p % g%p @N M m @n g$ M y d$$ Resolution, MMWEC is authorized by the Board of Directors to Purchase Canadian A mf 3 J @E MR currency for cash and forward settlement and to invest in repurchase agreements with h Q banks where MMWEC has established accounts. (See Note 10.) q yb@kW J' e spha; E s y %ggy gy Unbilled Revenues % fs kNk h h.g?tyk MMWEC bills its members for costs incurred in providing services and purchased hh kNsk k Power obtained on their behalf under terms of the Service Agreement and the Power % %[ Q g h [gk Sales Agreements. Revenues are recorded in the accounts as the expenses are incurred. key;k ggy Amounts which are not yet billed are included in Unbilled Revenues on the Statements a A< & y6 9 m, ggpQ% of Financial Position. yA n y %J Inventories $@h@hhh kh,g tory is recorded at cost At December W 4 Fuel oil inventory is accounted for by the average cost method. Spare parts inven-fuel oil inventory was valued at $2 2 A C;d@ L.y, M b N hj million and spare parts inventory amounted to $2.5 million. pfhM@% d%$ iN Amounts Recoverable in the Future Under Terms of the jeg% % ,PM >d Power Sales Agreements hh Under the terms of the Power Sales Agreements with Project Participants, revenues %$@E #@y E@ $d Mf Q.g include billings to Project Participants for debt principal and interest payments in the <7 d @hp$ [@j f period in which they are due. For financial reporting purposes, MMWEC recognizes O 3a d currently the depreciation and amortization expense of assets financed by bond prin-h d % ph h[by ?. ljf Q ',#( cipal. The differences between current expenses and amounts billed currently under M Ma q~ m %~~ j terms of the Power Sales Agreements are deferred to the future periods in which these kg QC 'dkh@kyW,y pj$ Q amounts will be recovered through revenues. Other item k)"h$@N kh @$ ]N@ include net costs as lhg$ 1985 charges to this account include $3.045 million refunded to Project Participants in cancelled Projects. See Note 5-Unit Cancellations for further details regarding these .%Qf MN@$$@y@M P refunds. gf ,s Q[& p Kr ; J Revenues ps % h$,,b @fMd Revenues include electric sales for resale provided from MMWEC's operating units j b $$hb( Na and power purchases; receipts from administrative, general and special services pro-l j$$f ff f7 vided to MMWEC's service participants; and billings of debt service on certain projects f bb..yf.s u t s....,h...,. &h. k ____ ____ _______ ______ __________ _______ ___ ___ _ _ ______ hh-a 7 Addb

. ' assac usetts ' unicipa o esa e ; ectric 'ompany 32 i M;iy P% i u y y y g; se 4 l pa }$. + i ( 2) Significant Accounting Policies, continued &fQ Luk h; 'h @h Oh k/ Priortocommercialoperationoftheunitswithinthoseprojects.Thedetailsofrevenues Revenues, continued %M p are as follows: M$$g ~ g ggEp W Sk *f 9 4)M6;h, C (In Thousands) 3H 1986 1985 $[% d h} jkk 1F Electric sales for resale $134,899 $150,055 Ny$fMpRh['g=9 d% M Service 2,527 2,400 p Pre-operation debt service 34,754 1,430 b NN/@g[fgMf@f 2 s <+ o $172,180 $153,885 ( %Qg j %g ( 3) Depreciation I k h Sh $f Electric plant in service is depreciated using the straight-line method. The aggregate hhhdefJf d annual provisions for depreciation for 1986 and 1985 averaged 3% and 4%, respec-4 MyhDg ?%g jjh tively, of the original cost of depreciable prope LHM hh Ap&egd M %s-( 4). Debt M g % L'Ry[k.K y[e@ f htNSMQu m m 4 _ W - $ by Power Supply System Revenue Bonds ihg]yQ@i MMWEC issues Power Supply System Revenue Bo k To finance construction of ownership interests in electric generating projects, Jf y hhUkk[$dhh secured by a pledge of the revenues derived by MMWEC, under terms of Power Sales I. [@Q@QMg{d@M@Af Agreements, from the ownership and operation of the Projects in its power supply sys-W 6 M$g Q tem. Pursuant to the Power Sales Agreements with the Project Participants, each Project f h h Participant is obligated to pay its share of the actual costs relating to the generating V j$#pigd{@[h@y$q planned, under construction, or in operation. The Pro r y AyhktfQ/ j% Q not contingent upon the completion or operational status of the units. MMWEC finan-MEM#$g@h N@h cings, other than obligations maturing within one yea akkMM ' ipW h hbENI' h %g) ment of Public Utilities (DPU) approval. d The Bonds consist of Serial and Term Bonds and are comprised of the following p%h E h[%N $d%@M issues,whicharesubjecttooptionalredemptionapproxim h hhhh{h % date, at 103% of the principal amount, descending perio QT %spg 4 December 31, j lS p3g o q 1986 1985 g OJ U MMl ' dh@$ h m Issue Net Interest Cost (Dollars in Thousands) lfN gg p Sdb$ 1976 Series A 7.2% $ 65,335 $ 66,135 2 M]Ny MF e < i S NWd 1977 Series A 6.4% 170,780 172,445 p 1977 Series B 6.1% 83,500 83,500 ' gi ' g gg g JN MAU 1978 Series A 6.8% 65,500 65,500 qNSlMi e ' 9% 1979 Series A 7.0% 141,530 144,520 4 hd Mi /%k$ N.ri$fM$ddkkh Nh 1980 Series A 10.2 % 88,775 90,250 3 dig pf gh[fy]{N; 1981 Series A 12.3 % 100,000 100,000 g 1981 Series B 13.4 % 100,000 100,000 Nb 3 y % [ Nly Q g E.t $ W { 1982 Series A 13.4 % 115,000 115,000 k < hh!M g-1982 Series B 10.2 % 129,340 129,340 7h gqqg[$ $gj,M@E ' Wl}k a g 1984 Series A 11.0 % 95,000 95,000 c i M"- ] g%rE ( m BS g A ? 1985 Series A 13.5 % 61,500 61,500 NMg*4@h S 1985 Series B 13.5 % 53,200 53,200 %$qp nw '&p%gs [g,itkhP less: Current Maturities (8,015) (6,095) R S9 y 1,269,460 1,276,390 y ff[k S Total Pncr Supply System Revenue Bonds $1,261,445 $1,270,295

' assar use s ' u np o pa o esa e ec ric ompany 3 d, V jI % ~- ]~L g q t h ( 4) Debt, continued y. 1 l M i 3 nM Power Supply System Revenue Bonds, continued yh The aggregate annual principal payments duc on the Bonds in the next five years are i ~ ;,ki f [W-I as follows: 1987-$8,015,000; 1988-$11,190,000; 1989-$13,975,000; 1990-$16,490,000 l and 1991-$17,535,000. k b $k On October 18,1985, MMWEC issued $120 million of Revenue Bond Anticipation hp[A Notes (1985 BANS) at an annual interest rate of 16.4%, payable monthly, to fund

3 [QQjpMpgg MMWEC's share of Seabrook construction costs for its Nuclear Project No. 4 and Pro-ject No. 6, to fund interest on the 1985 BANS and to fund a portion of the 1986 interest on fh Nff8 hf g [g'g7y%bjyy O{ Project No. 6 debt outstan F

fl 1986, were redeemed via the issuance of $110 million of 1986 BANS and the use of $10 f fh khh millionofavailablefunds.The1986BANscarryanaverageannualinterestrateof13.9% dd$dp b QN and are scheduled to mature on September 9,1987. The 1985 and 1986 BANS were f hhhhhh b issuedtobridgeafinancinggapuntilregulatoryapprovalof along-termfinancingplan h g)9 y[ppQ @Qifh wasreceived. Arequestforlong-termfinancinghadbeenfiledinFebmary1986and,on e gd gg January 14,1987, the DPU authorized long-term financing up to MMWEC's requested ($$i g gi amount of $164,500,000. MMWEC is currently analyzing the method and timing of the ? pg issuznce of the newly authorized amount of financing. m c y hfh[h h Jkh Net Revenue Available For Debt Service Jp0 In accordance with the provisions of MMWEC's General Bond Resolution, .g MMWEC covenants that it shall fix, revise and collect rates, tolls, rents and other fees h$hhf@bM[ 7$$ a .g 9 and charges, sufficient to produce revenues to pay all operating and maintenance 7 y pff[nhh expenses and principal of, premium,if any, and the interest on the Bonds and to pay all jdh Qd other obligations against its revenue. Revenues, which include applicable interest earn-fM hhhg e ings from investments, are required to equal 1.10 times the annual debt service, for each d, Phqy S)fh$k contract year ending June 30, after deduction of operating and maintenance expenses - ]M$4f M@[%[' $q MMWEC met the Bond Resolution and exclusive of depreciation. For the contract years ended June 30,1986 and 1985, b % fyg f 7 M.J&m y,W q$ jd able MMWEC Projects.

g$g g$ w $ % g' g g %e g 7

$ff # yj. R' Mh4 Contract Year Ended June 30, . @% ' M f$M;x, Debt Service Coverage: 1986 1985 ghMk Yh fgg $[jgW([]%l Revenues $79,581,000 $66,326,000 s Other Billings 732,000 676,000 gI hkhs,WD Reserve and Contingency Fund Billings 4,167,000 2,555,000 j' U Mh k!$Mhhb,%# Total 84,480,000 69,557,000 i ?MhhbMN[ Jh Deduct-Operating and Maintenance Expenses 38,646,000 41,450,000 fh %f>mfb Available Revenues Net of Expenses $45,834,000 $28,107,000 y h .k )kk h y Debt Service Requirement $41,667,000 $25,552,000 y NL g$yO'Nf&yugW5 '""**d " * "'9"'"'") L lj p yf@gq <yk h $M Notes Payable 4h%(%% MMWEC maintained with a group of banks a $30,000,000 revolving line of credit to jj } >[ be used to finance fuel oil for the Stony Brook Projects. MMWEC's Board of Directors 9 } gb. h, y p voted in June 1984, not to extend the line of credit beyond July 1,1984, and exercised its u ,a,,b.,

' assac usetts ' u nicipa o esa e ; ectric ompany 34 SR n '/$ y{ 51$ z Q bMk W4 Pp s ! p s4 y F e f [ a I b y ( 4) Debt, continued ,f'y}j N Notes Payable, continued $[$ NMyk }hh Option in the agreement to convert it to a term loan. This conversion allows MMWEC to ? N%@6 j@K $ % Pay off the remaining balance over a four year period in equa M hig k

installments amounting to $2,891,000 per year, plus interest at 70% of the lead bank's hgM$g g j, MGQ4Myg %d prime rate beginning December 1984. Under this line of cr 1

4 j ing balances of $5,542,000 and $8,433,000 as of December 31,1986 and 1985, respec-i b MpM@j$N$@[f~yy tively. Borrowings unde , e g& p M E q

4 ym I

h %. 1 Mk I Payable from revenues derived by MMWEC from fuel charges under the Power Sales % Agreements for the Stony Brook Projects. MMWEC decreased its $9,000,000 revolving line of credit to $8,000,000 in Decem-Mh []g[$ p ber 1986. This line of credit is used to temporarily finance certain power purchases bh[4f@. m de by MMWEC for resale under power purchase contracts. Borrowings are secured $df hgMh December 31,1986. The balance outstanding at year-end 1985 was $769,000. Borrow-G by the corresponding receivables. No borrowings were outstanding on this line at N]$2 Mh QMM.7[ggp& 4 ings under the line are at a rat 3 hk$hh 1986. Beginning January 1,1987, the rate becomes the bank's prime rate. In addition, a g %f commitment fee of 3/8 of 1% per annum is charged on the unused portion of the line ~ y fdh hbhg based upon the average daily principal amount of the loan outstanding. hfhbkNd f ( 5) Unit Cancellations =' p4 ugh yp g$ is ' fk Mhhf MMWEC's investment in Seabrook Station included equivalent participation in f@4Ohy(NN W&[hd{ 0 gt Units Nos.1 and 2. Seabrook's j oint owners have authorized the sale of all salvageable $ M/ N dS%hef components and equipment from the cancelled Scabrook Unit No. 2 and the return of the Unit No. 2 construction permit to the Nuclear Regulatory Commission. hh[k@kfM Gh [3Q, MMWEC's cumulative net investment in Sea $I dgf h $74,435,000 as of December 31,1986 and 1985, respectively, has been deferred as an bK GMEVW C 0 Amount Recoverable in the Future Under Terms of the Power Sales Agreements. On October 22,1981, the Boston Edison Company cancelled Pilgrim Unit No. 2, k M3 HEM @b NM {llI] with the Unit, which aggregated $49,756,000 ?y which is included in MMWEC's Nuclear Mix No.1. MMWEC's net costs associated $hMkhhYhb nIf,P g&,,n Q1 y %Fq$ AWN:g 1986 and 1985, respectively, were deferr m W ;((Wg. the Power Sales Agreements. V ' khy%ggggp;n - 4 mp G The generating units in MMWEC's Nuclear Mix No. 2 Project (NEP Nos.1 and 2 [QMg7@8 <hp'%) @j and Montague Nos. I and 2 sponsor pqCp R. $ j ggMjg A - Northeast Utilities, respectively) were cancelled. The $10,060,000 of bonds issued for M h that Project were subsequently.edeemed with remaining Project funds at a gain J Le M totalling $3,558,000. On March 15,1984, the Board of D? rectors of Central Maine Power Company, the k@ @@hhn y% A ril 19,1984. MMWEC issued $9,500,l 00 of bond k lead owner of the Sears Island Coal Unit No.1, voted to cancel that unit effective h hl h Pdf P %hy h 4 which were redeemed subsequent to cancellation at a gain totalling $3,332,000. Hf (pdfer?MfM M The excess of gains over accumulated amounts recoverable in the future for any ' MhhfNN Proj ect are credited to the Project Participants in accordance with their interests in the b QLc :,..

' assac usetts ' unicipa o esa e ; ec nc ompany 5 aqsp.. ~agg i- %.!]MA M'& e 1L 44%l b A ( 5) Unit Cancellations, continued M %h i

M 9%

Project, in the cases of Nuclear Mix No. 2 and Sears Island, excess amounts of y $582,000 and $2,463,000, respectively, were refunded to Project Participants in 1985. - f hhN$$+fhf ' gqQ p. E & jg ( 6) Construction and Financing yh U i ' p A substantial portion of MMWEC's construction and financing program is gWykh Qk attributable to its ownership interests in Millstone Unit No. 3 in Waterford, Connec-j{dg@K / $ $q[j $p p ticut and Seabrook Station in Seabrook, New Hampshire. bl .e g d % h %e@ Wl17Ngbh Millstone No. 3 E 7 Oh# y Millstone Unit No. 3, of which MMWEC has a 4.8% (55 megawatts) ownership 1 h j h@ pap h hf@k@@h interest, was declared commercially operable in April 1986. MMWEC's share of the g cost of construction through its Nuclear Mix No.1 and Nuclear Project No. 3 totaled g $pT4( ~ g@ $176 million, exclusive of nuclear fuel. Seabrook Station "[b ( MMWEC has an 11.6% ownership interest in the Seabrook project, which con-h;g Ni % g @ y% @ @f % p. sists of two proposed nuclear units of 1,150 megawatts each. Unit No. 2 has been y%. g jhMM cancelled. (See Note 5 - Unit Cancellations for further details regarding Seabrook jd q jgk p(N Unit No. 2.) Unit No.1 is completed and fuelloading has occurred.Seabrook Station M f r7 is being constructed by New Hampshire Yankee (NH Yankee) which is currently a b kN6 hki%. division of Public Service Company of New Hampshire (PSNH), the project's lead k Ihkh R jk h Participant and lead owner holding a 35.6% share. g M WMLOkiTi The Seabrook nuclear station has experienced persistent and substantial cost hl hkk Mf h3-[ increases and significant schedule delays, has been the source of continuing con-3NMb*lNh y troversy and opposition from government officials, regulators, intervenors and h# ' udg 9 others and has created serious problems for many of its joint owners, including EM }M f $er ; v3hg Mf MMWEC. Although problems relating to the Seabrook Unit No. I construction h [Mm.7qgb schedule and financing by the joint owners have been substantially overcome and the a $hh[lNh [h2hj brook remain. unit is now completed, significant problems and uncertainties relating to Sea-NDbh[l$ "@9[Ej M Nyp d Seabrook Unit No. I has received an operating license from the Nuclear hhkbkh d[ Regulatory Commission (NRC). The operating license is subject to conditions which f4(MgM$fhf gd[g do not permit commercial operation until emergency response plans, includ QQ 4 g, Ti evacuation plans, are submitted for Massachusetts and the New Hampshire and (k k n h h w g Q Massachusetts plans are approved by federal authorities. Opposition to the plans, gygaQplQ; refusal of Massachusetts to submit a plan and delays in scheduling federal approvals s"12hN My % /i have delayed and could prevent licensing and commercial operation of Seabrook

%@.F Q)M M p$g@$g[h[@MPhMNhNp Unit No.1.

s egs e s k d L W Power testing of the unit has been delayed pending a decision by the NRC on p j g 7s gy whether the filing of emergency response plans is a prerequisite to issuance of a low O$@h D M f 7 k ijdfhg{NE5% Power testing license. The Seabrook joint owners have requested that the NRC reduce L 4S the emergency planning zone from ten miles to one mile, which would exclude d$ g M kNf17 9 Massachusetts from the zone. This request has rr.et active opposition from Seabrook [O hgd g.h[ opponents. The NRC has proposed a rule amendment that would permit owners of h nuclear plants to submit emergency response plans on their own if they cannot get

' assac use s ' unicipa o esa e ectric Company 36 e Yml k i I ll ( 6) Construction and Financing, continued Seabrook Station, continued i governmental cooperation. This proposal has also encountered opposition. Even if . ; g adopted, the process of developing and obtaining approval of owner prepared i emergency response plans could be lengthy. In view of the active opposition to the Seabrook project of various Massachusetts officials including the Governor, there can g be no assurance as to whether or when Unit No. I will become operational. I ?}% Information regarding MMWEC's financing activities relating to the Seabrook . b,j[ Project is presented in Note 4-Debt. Details of other events affecting MMWEC and p$$d lN@h. the Seabrook project in general are presented in Note 9-Commitments and .fh '@# "f U dP Contingencies. ^ The cost estimates and completion dates for Seabrook Unit No.1 listed on the 9 45 c h(?!padjustedbyMMWECtoreflectvariousconsiderationsforpowersupplyandfinancial - [g following table are based on the latest information available from PSNH/NH Yankee, l P anning purposes. For these purposes, MMWEC is utilizing a commercial operation A di date of November 1988 for Seabrook Unit No.1. (Dollars in Thousands) MMWEC Costs to Total Capability December 31, Estimated MMWEC Project (MW) 1986 1985 MMWEC Cost I I Nuclear Mix No. I 1.9 $ 6,715 $ 5,533 $ 7,000 f Nuclear Project No. 4 49.8 196,736 162,995 242,000 k Nuclear Project No. 5 12.6 51,163 42,958 65,000 Project No. 6 69.0 330,963 265,615 451,000 V [h Total 133.3 $585,577 $477,101 $765,0g i "l AM g q+ss ; 3g kk( h 'l h (fQ $$@'%j Retirement benefits, through December 31,1985, were provided to MMWEC's elig-6 &j y h ible employees through its participation in the Retirement and Security Program spon- -( i sored by the National Rural Electric Cooperative Association (NRECA). Effective 'hhj h January 1,1986, MMWEC discontinued the NRECA group plan and adopted its own gh&((*j g defined benefit pension plan administered by a major insurance co M g plan is equivalent to the NRECA plan in regards to the benefits to be provided. Total

g$ %$ $py k pension expense for 1986 was $288,300. MMWEC makes b hk}h[y the amounts recorded as pension expense. As of January 1,1986, the d gNidk recent actuarial valuation, the accumulated plan benefits and plan net assets are as f ['

J: h # Nu. follows: m mm h$b

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A g ( 7) Retirement Plan, continued (~rmyer, n January 1,1986 j d>Q MN d k 1 @ Actuarial present value of accumulated plan benefits: 4 7r wu p. - Vested $229,300 Sp&Mghh$$p{ . k Pfhyg - Nonvested 124,400 N %w e /i W @4g ;M y [w my w

y'F Qi

$353,700 @Ggyf$$Dgy )g fy m n y .. Aqq p. w 4 :2 Net assets available for benefits $393,100 ?$AkfWhk$N Y y@ The assumed average rate of return used to determine the actuarial present value of .fy p f [QQapMM accumulated plan benefits was 8.5% p&y%VQ{sud Li% Q bfQ W$$?& P ( 8) Deferred Compensation Plan p [L3 pQ[p - c i um(y$MMWEC offers its eligible employees a deferred compensation plan created in 4 W ' g% h$f accordance with Internal Revenue Code Section 457. The deferred compensation plan . M q N h % $g M M Q [ UMEM assets are administered by MMWEC and are not available to employees until termina-MM H$$ tion, retirement, death or unforeseeable emergency. Under Section 457, all assets in the (/j #jdh $hd@@kh$$ k plan remain the property of MMWEC subject only to the claims of general creditors. i ' 5 $[hhh N hhd gM Accumulated plan assets, which include investments at market value, accrued interest h and cash as of December 31,1986 and 1985 amounted to $483,000 and $371,000, $f[Mg pi! dChgk included in accrued expenses.Nihgf kBQ fM respectively. Plan assets are included in deferred charges with the related liability M y QQ&py[ y ( 9) Commitments and Contingencies gy m sy m h kS Power Purchases h hhkk jhhf[NkfM@g[]f @hl(] mission (NBEPC) for the purch MMWEC has entered into a contract with the New Brunswick Electric Power Com- $hMNhh 4 g$%% M:n %mk[$fhk j } and is effective through October 1987, with options fo cised ore option, extending the contract through October 1988. The contract payment b mf nuclear unit. The contract became effective in February 1983, the unit's in-service date, M ' pp Mpghj$ Y @j provisiens require MMWEC to payin all events certain fixed, operating, maintenance W@ M y! [ h dh M[ r and other charges telating to the unit.The future fixed minimum payments as estimated MMy&b gg]j by MMWEC for its planning purposes are as follows: 1987-$36,000,000; and 1988-M yph!M$M$kpq $30,000,000. MMWEC has entered into corresponding agreements, w M[by hMf@hhf%g g and other utilities, to resell the power. WhJ MMWEC entered into agreements for participation in the interconnection between Mh% hhp 2QMimgs hhh h [ 'j New England utilities and the Hydro-Quebec electric system near Sherbrooke, Quebec W Q #WSM %gk (Phase I) which entered commercial operation in October 1986. New England Electric I hWs h Mkkh Transmission Corporation and Vermont Electric Transmission Company constructed %pb M4.xM% i y theNewEnglandportionof theinterconnectionatatotalcostof about $140million,of f hhk $$ N hh which3.65%or$5.1millionisMMWEC'sshare.MMWEChasalsoenteredintosimilar !gQh agreements for the expansion of the Hydro-Quebec interconnection (Phase II). Com- %khhS [Mgh h]i of which approximately.75% or $4.5 mill d ggM!g(6 meg id pletion of Phase II isinitially scheduled for 1991 at a total estimated cost of $600 million, J F gp 7e e g4 h m(( Q y g :h i pMu a uf g a y &; & + ; O

' assac u set t s Y unicipa Wholesale Electric Comp;iny 38 gy V

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, w %D;g@W, e m% ') WWL/ TW Q; & m, y v ..pw a hhWSO906and1900 ( 9) Commitments and Contingencies, continued NAy%[hh hhh hk$f Power Sales Agreements $$p ) A Town of Groton Municipal Light Department, the Town of Groton In January 1985 certain residents of the Town of Groton brought suit aga nst the i ,h(N$ g.[Vdh i$ @k $ $jj$ challenging the validity of the Nuclear Mix No.1, Nuclear Projects Nos. 3,4 and 5 and I h'VNN Project No. 6 Power Sales Agreements. On February 4,1987, the Massachusetts k[% h, l N h % Superior Court granted the defendants' mo'tions for summary judgement and upheld l,Jj'JM $l gp p v., a % o% the validity of Groton's Power Sales Agreements with MMWEC. The d been appealed as of this date. @hk fMh[%,'g%y g In October 1985 the Vermont Department of Public Service (VDPS), an agency of g[g $$$ kn the state separate from the Public Service Board, brought an action agairst the Vermont d0 $$f bqf Participants in MMWEC's Project No. 6 and MMWEC challenging the validity of the h@h$h($ $,@u l [r ' d tooktheVDPS'sviewof theprocee k dg Power Sales Agreements, on a number of grounds, of those participants in Project No. 6. ,M baf . &~w+WOfy$p s - a w u pyn J W to its direct 0.41% ownership interest in the Seabrook project,is involved in Seabrook ghg we my Mgf k Qh, Msyy through its 7.2% interest in MMWEC's Project No. 6 and has failed to make its monthly W g$ p$ payments to MMWEC since February,1986. It has attributed its default to its general @N GM0M F h[M D M h [h p financial difficulties. The Village of Stowe, which is not a Participant in Project No. 6 but

d. N which has contracted with the Village of Morrisville fora portion ofMorrisville's Project hhk[VdM7h M No. 6 capability, entered the action as a plaintiff to assert h

k $%gM ! hk [Qgd with Morrisville on the basis of the alleged invalidity of Mo ? )(@hdEfhh Mkhd ment, the Superior Court entered [ j g Q. withhold its payments to Morrisville. After hearing cross-motions for summary judg-p @[@[kCh[' 6R % ' [hy j gj Q that the Vermont Participants had statutory authority to enter into the Project No. 6 3 Power Sales Agreements and that these agreements do not violate any provision of 6 $ Vermont law. The plaintiffs have appealed this judgment to the Vermont Supreme h N[fd wl, N/ g i In addition, in January 1986, MMWEC brought an action against the Village of h@ Court. g[ $ C N [5 W !] Stowe in the United States District Court in Massachusetts seeking a declaration that its '~ wwn 4 c V A,% < f Stony Brook Intermediate Project Power Sales Agreement with Stowe is valid and has e @ g\\ y (gp]p% brought an action against the State of Vermont and certain of the Vermont Participants b{k.. g@si 7 @ qg y in Vermont Superior Court seeking a declaration of MMWEC's rights and obligations ] under its Stony Brook Intermediate Project Power Sales Agreements with them. No hh bg.jh Q decision has been rendered in either action. M Mh(h N2}d j@] ing a declaration that its Power Sa h In January 1986 the Hull Municipal Lighting Plant filed suit against MMWEC seek- $$$ j;;f J y@h Q[ y [gMp M jects Nos. 4 and 5 and Project No. 6 rela %W 4 /j against MMWEC collecting any amounts from Hull under the agreements and mon-j[$g 4[*$k]f $ etary damages. The suit challenges the validity of these Power Sales fE af Mh various grounds and alleges, among other things, various misrepresentations, breaches $%[$(f[ % jdf @[N? and imprudencies by MM 2 [ f ,[MMjM granted MMWEC's motions to stay the legal proceedings and compel arbitration of the Cf ' M4 j 4 q' - QQ, k%% suit and for a preliminaryinjunction requiring Hull to pay its share of monthly powe A i

Massa husetts Municipa W o esa e : ectric ompany 39 k - I y $. I$ m$"2 ..t [ gk h h gg .<m Mk./wj ( 9) Commitments and Contingencies, continued h.M'NUh Mh)j Power Sales Agreements, continued f h%dd h{Q$gM costs as required by the Power Sales Agreements. On March 21,1986, a single justice of fj $%g$h@f9f hfM the Massachusetts Appeals Court denied Hull's petition for relief from the orders of the 4 bVM Superior Court, and the matter is now in arbitration. After withholding payments, Hull l S 43kMhM5 J QQh iscurrentlymakingpaymentsunderprotestinaccordancewiththecourtorderbuthas QMgg QNgdgy appealed that order. The appeal has been argued before the Massachusetts Supreme jkN WQ$ Q($h iYj Judicial Court and a decision is awaited. Hull has continued its request that MMWEC f$h j Mg use its best efforts, as provided in the Power Sales Agreements, to find a buyer for Hull's Lbk M fM Seabrook interests, but there can be no assurance that a buyer will be found. % f ff/(pfi g g g g y Based on the opinions of Bond Counsel and other legal counsel, discussions with (Mhh5hkhhM/ hhdNN[h [hgfgp such counsel and other considerat f pg yf ultimate resolution of the actions described above will have a material adverse effect on y gapMhrh khhN. the financial position of MMWEC. NDYY Other Issues igen%%A hg qhhhbSMNb hhgJ, k Legislation amending Chapter 775 of the Acts of 1975, the Act making MMWEC a MR Public corporation and defining its powers and duties, was filed by the Massachusetts %gq(kMMM Governor's office in 1986. The proposed legislation would have restructured the board h fM9dk$p b 6N 4 Q4hbg ofdirectors,expandedDPUauthorityoverMMWEC,includingapprovalofshort-term hN Phdhhhh debt over $20 million and certain contracts, permit local referenda on certain contracts p% NN WMV M k l k jf$h% d%jj with MMWEC and require majority approval of participants before MMWEC could 9jh(bh k kf[hhh. [ increase the financing for a Project. The proposed legislation was not enacted; however, [ similar bills have been filed in 1987. Since the filing by the Governor's office, five of WNwa MMWEC's members have given notice of their intention to withdraw from MMWEC. n @ya@n$ py v } d y$ /Nq w/Q p[MD 4 d Two members that gave notice subsequently rescinded their notices, two will become , MP g @hM effective in 1987 unless extended or rescinded and one withdrew. Withdrawal from gg%g$ #4,,whhh MMWEC membership does not affect the obli Ehh Agi my

mqry a de gm

+4 Sales Agreements. E p g M my4 ph d As a joint owner of the Millstone Unit No. 3 nuclear unit, MMWEC is required to set M kp h ggw%.hgyd g 3yg d5 aside funds for its eventual decommissioning. MMWEC's policy is to fund this reserve W mp -A g g, w fg QgdlQQ[ requirement over the licensed life of the unit (39 years) through mo WG N{ h WG ? k MMWEC participants in the unit. MMWEC's share of the total estimated reserve Nhd requirement is $6,350,000 of which $126,000 has been funded as of December 31,1986, yrmp,3W Mi [1 A i, M O h and is included in other deferred charges and accrued liabilities. kMSfMP Mi[& y <, m9 Mp >{ d The federal Price-Anderson Act limits liability for a nuclear incident. Liability D MhM h. F h%q insurance against this exposure is presently obtained thro %kl/ W insurance (presently limited to $160,000,000) and a federalindemnity program which W hGM% % [ hfW includes provision for self-insurance by owners of operating nuclear facilities through $hf MM kb h assessments of up to $5,000,000 perlicensed reactor owned in the event of any nuclear $NS9 4 % incident in the United States, with a maximum of $10,000,000 per year per reactor N ]h { gh@fhh owned.The joint owners of a unit would be proportionately liable for the amount of any N f hAUh Ly such assessment. As a result, MMWEC would be billed its ownership share of Millstone kkgh kwdyk Unit No. 3 in the event of any such. assessment. The present limitation ofliability under dhg $$MjW ? 4 the act is $700,000,000 which increases as assessments available under the federal pro-l w%~QXXyg ?% yn~ 1 gn.yQfG1% f pL hh{MD

' assac use s ' unicipa o esa e. ectric ompany i i ( 9) Commitments and Contingencies, continued Other Issues, continued gram exceed that amount. legislation to increase liabilitylimitations is being considered y by Congress. []g Due to rising insurance premiums, MMWEC is not currently covered under direc-tors and officers liability insurance or gradual pollution liability insurance related to MMWEC's power plant. In 1986 MMWEC began billing members in an effort to { establish a reserve fund relating to these possible contingencies. At December 31,1986, i funds totalling $400,000 had been received. A b Additional information regarding commitments and contingencies relative to U%g $Note 6-Construction and Financing. g MMWEC's debt and involvement in nuclear projects is discussed in Note 4-Debt and MBE g ~ ?g (10) Investments and Deposits All bank deposits, which amounted to $1,042,000 at December 31,1986, are main- . j tained at a single financial institution. The Federal Deposit Insurance Corporation currently insures up to $100,000 per depositor. MMWEC's uninsured deposits ranged from zero to $16,000,000 during 1986 due to seasonal cash flows, the timing of daily cash receipts and favorable earnings offered on these demand deposits. 1[I { Investments are stated at cost adjusted for accretion (amortization) of the discount J j (premium). At December 31,1986, all securities underlying repurchase agreements, and all other investments, were held in MMWEC's name by independent custodians f consisting of the Construction Fund Trustees, Bond Fund Trustee or MMWEC's depository bank. All such repurchase agreements were with entities other than such custodians. Investments, including accrued interest, at December 31,1986 are de-w $ tailed below: 7h @p$Qf Type of Investment Amount Value Carrying Market ?$W5 ( llars in thousands) hfbNDk Repurchase agreements $ 19,909 $ 20,056 h, ? > @ W3 Other Investments: gyrge Treasury notes 90,127 93,193 b]g@7 Treasury bills 136 137 l L Agency bonds 88,347 91,405 gh Agency discount notes 105,474 105,942 yo Total Other Investments 284,084 290,677 jg TotalInvestments $303,993 $310,733 gg g 7 $h h Due to seasonal cash flows during 1986, MMWEC, from time to time, invested in [ M((d} i repurchase agreements with its depository bank that were collaterahzed by securities in .g MMWEC's name held by the depository bank. MMWEC's practice is to monitor the . ]' l market value of the underlying securities to ensure that the market value equals or ' exceeds the amount invested. d

y a . 5,r 5 j. - T. ras tee Co,,,,,,e,,,a, n,,,,ois na,,k a,,d Bond Fund Trustee. Tntst Co,npany of Chicago, Illinois y Paying Agents fg jy - ContinentalIllinois Bank and Trust Bank of New England, N.A.,. .l Co,npany of Chicago, Illinois Boston, Massachusetts Agen fS. 2976 Series A Bonds 1976 Series A Bonds 1977 Senes A Bonds 1977 Sedes A Bonds. 1977 Series B Bonds 1977 Series B Bonds - = 1978 Series A Bonds Shaw, nut Bank of Boston, '1979 Series A Bonds N.A., Boston, Massachusetts. 1980 Series A Bonds 1978 Series A Bonds 1981 Series A Bonds 1979 Series A Bonds 1981 Series B Bonds 1980 Series A Bonds ) 1982 Series A Bonds I 1981 Series A Bonds 1982 Series B Bonds. 1981 Series B Bonds 1984 Series A Bonds 1982 Series A Bonda. .1985 Series A Bonds 1982 Series B Bonds ' 1985 Series B Bonds 1985 Sedes A Bond Anticipation Notes

Citibank, N.A.,

New York, New York 1976 Series A Bonds j 1977 Series A Bonds .J 1977 Series B Bonds i 1978 Series A Bonds 1979 Series A Bonds ..1980 Series A Bonds 1981 Series A Bonds 1981 Series B Bonds j~- 1982 Series A Bonds 1982 Sedes B Bonds L i-l-

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l: lc l.- f-I i I - l 2 l i I I . j 1 I l l l l The 1986 MMWEC Annual Report was produced by the Public Affairs Office r of the Massachusetts Municipal Wholesale Electric Company. l . Copies of this report and supplementalfinancialinformation can be obtained,

free of charge, by writing to the Public Affairs Office, Massachusetts Municipal j

Wholesale Electric Company, P. O. Box 426, Ludlow, MA 01056. All requests for information about MMWEC should be directed to this office..

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