SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-5464
(LOGO) MASSACHUSETTS ELECTRIC COMPANY
(Exact name of registrant as specified in charter)
MASSACHUSETTS 04-1988940
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
Registrant's telephone number, including area code
(508-366-9011)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Common stock, par value $25 per share, authorized and
outstanding: 2,398,111 shares at June 30, 1994.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income (Loss)
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
Operating revenue $339,886 $340,293 $721,598 $718,734
-------- -------- -------- --------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate246,563 249,965 531,725 527,440
Other operation 47,990 68,999 94,553 121,391
Maintenance 7,389 4,705 15,239 17,899
Depreciation 10,825 10,400 21,650 20,800
Taxes, other than income taxes 7,019 6,607 15,328 14,365
Income taxes 5,046 (2,956) 10,925 435
-------- -------- -------- --------
Total operating expenses 324,832 337,720 689,420 702,330
-------- -------- -------- --------
Operating income 15,054 2,573 32,178 16,404
Other income:
Other income (expense) - net (311) 169 (1,766) (940)
-------- -------- -------- --------
Operating and other income 14,743 2,742 30,412 15,464
-------- -------- -------- --------
Interest:
Interest on long-term debt 5,163 6,105 10,166 12,134
Other interest 1,439 865 2,606 1,572
Allowance for borrowed funds used during
construction - credit (74) (84) (147) (158)
-------- -------- -------- --------
Total interest 6,528 6,886 12,625 13,548
-------- -------- -------- --------
Net income (loss) $ 8,215 $ (4,144) $ 17,787 $ 1,916
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period$137,475 $129,681 $135,276 $134,670
Net income (loss) 8,215 (4,144) 17,787 1,916
Dividends declared on cumulative
preferred stock (779) (857) (1,557) (1,714)
Dividends declared on common stock (6,594) (1,199) (13,189) (11,391)
-------- -------- -------- --------
Retained earnings at end of period $138,317 $123,481 $138,317 $123,481
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Twelve Months Ended June 30
(Unaudited)
1994 1993
---- ----
(In Thousands)
Operating revenue $1,471,405 $1,428,116
---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 1,086,203 1,063,488
Other operation 202,601 214,133
Maintenance 25,508 38,465
Depreciation 41,698 40,100
Taxes, other than income taxes 27,489 26,150
Income taxes 21,545 5,711
---------- ----------
Total operating expenses 1,405,044 1,388,047
---------- ----------
Operating income 66,361 40,069
Other income:
Other income (expense) - net (890) (572)
---------- ----------
Operating and other income 65,471 39,497
---------- ----------
Interest:
Interest on long-term debt 21,435 23,427
Other interest 4,673 4,277
Allowance for borrowed funds used during
construction - credit (286) (251)
---------- ----------
Total interest 25,822 27,453
---------- ----------
Net income $ 39,649 $ 12,044
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 123,481 $ 135,250
Net income 39,649 12,044
Dividends declared on cumulative preferred stock(3,614) (3,428)
Dividends declared on common stock (20,383) (20,385)
Premium on redemption of preferred stock (816)
---------- ----------
Retained earnings at end of period $ 138,317 $ 123,481
========== ==========
The accompanying notes are an integral part of these financial statements.
Per share data is not relevant because the Company's common stock is wholly
owned by New England Electric System.
MASSACHUSETTS ELECTRIC COMPANY
Balance Sheets
(Unaudited)
June 30, December 31,
ASSETS 1994 1993
------ ---- ----
(In Thousands)
Utility plant, at original cost $1,308,853 $1,279,194
Less accumulated provisions for depreciation 363,456 352,467
---------- ----------
945,397 926,727
Construction work in progress 23,068 18,558
---------- ----------
Net utility plant 968,465 945,285
---------- ----------
Current assets:
Cash 676 773
Accounts receivable:
From sales of electric energy 134,945 142,532
Other (including $1,780,000 and $3,517,000 from affiliates)14,99422,881
Less reserves for doubtful accounts 13,077 10,534
---------- ----------
136,862 154,879
Unbilled revenues 40,800 43,400
Materials and supplies, at average cost 12,846 10,601
Prepaid and other current assets 15,045 19,990
---------- ----------
Total current assets 206,229 229,643
---------- ----------
Deferred charges and other assets 57,768 57,376
---------- ----------
$1,232,462 $1,232,304
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $25 per share, authorized
and outstanding 2,398,111 shares $ 59,953 $ 59,953
Premiums on capital stocks 45,862 45,862
Other paid-in capital 141,310 141,310
Retained earnings 138,317 135,276
---------- ----------
Total common equity 385,442 382,401
Cumulative preferred stock 50,000 50,000
Long-term debt 259,651 264,719
---------- ----------
Total capitalization 695,093 697,120
---------- ----------
Current liabilities:
Long-term debt due within one year 25,000
Short-term debt (including $12,475,000 and $8,350,000
to affiliates) 37,245 37,925
Accounts payable (including $149,078,000 and $160,852,000
to affiliates) 160,144 178,117
Accrued liabilities:
Taxes 4,148 1,133
Interest 7,500 6,784
Other accrued expenses 65,000 69,823
Customer deposits 5,372 5,907
Dividends payable 7,373 5,575
---------- ----------
Total current liabilities 311,782 305,264
---------- ----------
Deferred federal and state income taxes 151,041 146,414
Unamortized investment tax credits 19,430 20,044
Other reserves and deferred credits 55,116 63,462
---------- ----------
$1,232,462 $1,232,304
========== ==========
The accompanying notes are an integral part of these financial statements.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
1994 1993
---- ----
(In Thousands)
Operating Activities:
Net income $ 17,787 $ 1,916
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 21,650 20,800
Deferred income taxes and investment tax credit - net4,027 (15,135)
Allowance for funds used during construction (147) (158)
Amortization of unbilled revenues (16,100)
Early retirement program 7,665
Decrease (increase) in accounts receivable, net
and unbilled revenues 20,617 8,931
Decrease (increase) in materials and supplies (2,245) (32)
Increase (decrease) in accounts payable (17,973) (12,071)
Increase (decrease) in other current liabilities 14,473 20,959
Other, net (180) 3,150
--------- --------
Net cash provided by operating activities $ 41,909 $ 36,025
--------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $ (44,893) $(37,336)
Other investing activities (3,485)
--------- --------
Net cash used in investing activities $ (48,378) $(37,336)
--------- --------
Financing Activities:
Dividends paid on common stock $ (11,391) $(15,588)
Dividends paid on preferred stock (1,557) (1,714)
Long-term debt-issues 20,000 80,000
Long-term debt-retirements (20,000)
Premium on reacquisition of long-term debt (208)
Changes in short-term debt (680) (40,825)
--------- --------
Net cash provided by financing activities $ 6,372 $ 1,665
--------- --------
Net increase (decrease) in cash and cash equivalents$ (97) $ 354
Cash and cash equivalents at beginning of period 773 738
--------- --------
Cash and cash equivalents at end of period $ 676 $ 1,092
========= ========
Supplementary Information:
Interest paid less amounts capitalized $ 11,303 $ 12,000
--------- --------
Federal and state income taxes paid $ (725) $ 9,045
--------- --------
The accompanying notes are an integral part of these financial statements.
Note A
- ------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. A number of states, including
Massachusetts, have enacted similar laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System (NEES) subsidiaries currently have in place an
environmental audit program intended to enhance compliance with
existing federal, state, and local requirements regarding the
handling of potentially hazardous products and by-products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. The Company has been named as a
potentially responsible party (PRP) by either the U.S.
Environmental Protection Agency or the Massachusetts Department of
Environmental Protection (DEP) for 14 sites at which hazardous
waste is alleged to have been disposed. The Company is also aware
of other sites which it may be held responsible for remediating and
it is likely that, in the future, the Company will become involved
in additional proceedings demanding contribution for the cost of
remediating additional hazardous waste sites.
The most prevalent types of hazardous waste sites that the
Company has been connected with are former manufactured gas
locations. Until the early 1970's, predecessors or affiliates of
the Company were in the gas business. There are approximately 35
locations in Massachusetts at which gas may have been manufactured
and/or stored. Of the manufactured gas locations, 17 have been
listed for investigation by the DEP. In a lawsuit involving one of
these sites, the United States Court of Appeals for the First
Circuit affirmed in 1993 an earlier adverse decision against the
Company, NEES and another subsidiary, New England Power Service
Company. The decision held these companies liable for cleanup of
the properties involved in the case.
Note A - Continued
- ------
In 1993, the Massachusetts Department of Public Utilities
approved a rate agreement filed by the Company that resolved all
rate recovery issues related to Massachusetts manufactured gas
sites formerly owned by the Company, its predecessors, and its
affiliates, as well as certain other Massachusetts hazardous waste
sites. The agreement allows for environmental remediation costs
for such sites to be met from a special interest bearing fund
established on the Company's books in 1993 of $30 million. The
initial fund balance was not recoverable from customers. Annual
contributions of $3 million, adjusted for inflation, are being
added to the fund by the Company and are recoverable in rates.
Under the agreement, any shortfalls in the fund will be paid by the
Company and be recovered through rates over seven years, without
interest.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. At June
30, 1994, the Company had total reserves for environmental response
costs of $40 million and a related regulatory asset of $12 million.
The Company believes that hazardous waste liabilities for all
sites of which it is aware, and which are not covered by a rate
agreement, will not be material (10 percent of common equity) to
its financial position. Where appropriate, the Company intends to
seek recovery from its insurer and from other PRPs, but it is
uncertain whether, and to what extent, such efforts will be
successful.
Note B
- ------
In the opinion of the Company, these statements reflect all
adjustments (which include normal recurring adjustments) necessary
for a fair statement of the results of its operations for the
periods presented and should be considered in conjunction with the
notes to the financial statements in the Company's 1993 Annual
Report.
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Earnings
- --------
Net income for the second quarter of 1994 increased $12 million
compared to the corresponding prior period. Earnings in the second
quarter of 1993 included the effects of the following two charges
against earnings totaling $14 million after taxes: a $9 million
after-tax ($14 million before tax) charge relating to potential
response costs for wastes associated with a number of manufactured
gas locations operated by Massachusetts gas utilities once owned by
the Company, or its predecessors (see Hazardous Waste section) and
a $5 million after-tax ($7 million before tax) charge relating to
a dispute with the Company's insurers over reimbursement of damages
(including interest) in connection with an unfavorable court
decision (see Operating Expenses section).
Earnings for the first six months of 1994 increased by
$16 million from the same period last year. In addition to the
second quarter charges described above, these earnings include a
one-time charge of $8 million, after tax ($13 million, before tax)
associated with an early retirement offer and a special severance
program for non-union employees undertaken by the Company as part
of an organizational review. Earnings for the first six months of
1994, excluding the charges described above, decreased $6 million.
This decrease reflects a $2 million seasonal reduction in accrued
unbilled revenue recorded in the first six months of 1994 compared
to the December 1993 level (see Rate Activity section) and
increased operation and maintenance expenses. Although the Company
experienced an increase in kilowatthour (KWH) sales, the resulting
increase in revenues was offset by increased purchased power costs.
Earnings for the twelve months ended June 30, 1994 include a
seasonal increase in unbilled revenues of approximately $6 million,
before tax. This reflects an $8 million seasonal increase in the
fourth quarter of 1993 offset by a $2 million decrease in the first
six months of 1994.
Rate Activity
- -------------
In 1993, the Massachusetts Department of Public Utilities
(MDPU) approved a rate agreement filed by the Company, the
Massachusetts Attorney General, and two groups of large commercial
and industrial customers.
Under the agreement, effective December 1, 1993, the Company
began implementing an 11 month general rate decrease of $26 million
(annual basis), from the level of rates then in effect. This rate
reduction will continue in effect until October 31, 1994, after
which rates will increase to the previously approved levels. The
agreement also provides for rate discounts totaling up to
$4 million available for the period ending October 31, 1994 for
large commercial and industrial customers who sign agreements to
give a five year notice to the Company before they purchase power
from another supplier or generate any additional power themselves.
The notice provision may be reduced from five to three years under
certain conditions. These discounts will increase in November 1994
to a total level of $11 million per year, representing a five
percent discount on base rates, if all eligible customers sign
agreements. Approximately 83 percent of eligible customers have
signed agreements. The Company also agreed not to increase its
base rates before October 1, 1995. The decrease in revenues is
being offset by the recognition, for accounting purposes, of
revenues for electricity delivered but not yet billed (unbilled
revenues). The agreement provided that unbilled revenues at
September 30, 1993 of approximately $35 million be amortized over
thirteen months commencing December 1, 1993.
The agreement also resolved all rate recovery issues associated
with environmental remediation costs of Massachusetts manufactured
gas waste sites formerly owned by the Company and its affiliates,
as well as certain other environmental cleanup costs (see Hazardous
Waste section).
Included in a $45.6 million general rate increase that went
into effect in October 1992, the MDPU authorized a $2.5 million
annual increase in rates representing the first step of a four year
phase-in of the Company's tax deductible costs associated with
postretirement benefits other than pensions (PBOPs). A second $2.5
million increase took effect in October 1993.
Demand-Side Management Programs
- -------------------------------
The Company files its conservation and load management
programs, also referred to in the industry as demand-side
management (DSM) programs, regularly with the MDPU and has received
approval to recover in rates estimated DSM expenditures on a
current basis. The rates provide for reconciling estimated
expenditures to actual DSM expenditures, with interest.
Expenditures subject to the reconciliation mechanism were
$16 million in the first six months of 1994 and $47 million for the
full year 1993. Since 1990, the Company has been allowed to earn
incentives based on the results of its DSM programs. Before
incentives are recorded, the Company must be able to demonstrate to
the MDPU the electricity savings produced by its DSM programs. The
Company recorded $6.7 million of before-tax incentives in 1993
including $2 million recorded in the second quarter. No incentives
were recorded during the first six months of 1994. The Company has
received orders from the MDPU that will give it the opportunity to
continue to earn incentives on 1994 DSM program results.
Operating Revenue
- -----------------
Operating revenue for the six months ended June 30, 1994
increased by $3 million from the corresponding period in 1993.
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1994 vs 1993 1994 vs 1993
-------------- ------------
(In Millions)
Fuel recovery $(5) $ (3)
DSM recovery (3) (2)
General rate changes (6) (13)
Unbilled revenues recognized
under rate agreement 8 16
Change in accrued unbilled revenue 3 (2)
Sales increase and other 3 7
--- ----
$ - $ 3
=== ====
KWH sales billed to ultimate customers increased by 1.4 percent
in the first six months of 1994 compared to the corresponding
period last year. The increased sales reflect the colder weather
conditions in the first quarter of 1994 over the same period last
year and an improving economy, partially offset by a reduction of
one billing day due to meter reading schedules. KWH sales in 1994
are expected to increase approximately 1.5 percent as compared to
1993.
The Company's rates contain a fuel clause and a purchased power
cost adjustment mechanism (PPCA) provision.
General rate changes for the second quarter and first six
months of 1994 reflect a general rate decrease that went into
effect in the fourth quarter of 1993 and will stay in effect until
October 31, 1994 when rates will increase to their previously
authorized level. This decrease was offset by the recognition of
$8 million in the second quarter and $16 million in the first six
months of 1994 of unbilled revenue pursuant to the 1993 rate
agreement. The Company is now recognizing on a quarterly basis,
seasonal fluctuations in unbilled revenues. General rate changes
also include the effect of rate increases for the recovery of
PBOPs. For a further discussion of rate changes, see the Rate
Activity section.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1994 vs 1993 1994 vs 1993
-------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $ (5) $ (3)
Purchases and demand
charges from NEP 2 7
Other operation and maintenance (18) (29)
Depreciation - 1
Taxes 8 11
---- ----
$(13) $(13)
==== ====
The increase in purchases and demand charges from New England
Power Company (NEP) primarily reflects increased peak demand levels
in the months of January and June 1994. The decrease in other
operation and maintenance for the second quarter primarily reflects
$14 million of reserves for hazardous waste costs and $7 million
associated with damages assessed in an unfavorable court decision,
both recorded in 1993. In addition to the items affecting the
second quarter, the decrease in operation and maintenance for the
six month period reflects the one-time costs amounting to
$13 million associated with an early retirement offer and special
severance program recorded in the first quarter of 1993. These
decreases in operation and maintenance were partially offset by
increased postretirement benefits costs, increased computer system
development costs, and general increases in other areas.
The increase in taxes in the second quarter and first six
months of 1994 is primarily due to increased income, the effects of
the increase in the Federal corporate income tax rate from 34
percent to 35 percent which went into effect in the third quarter
of 1993 retroactive to January 1, 1993, and increased property
taxes.
Hazardous Waste
- ---------------
The Federal Comprehensive Environmental Response, Compensation
and Liability Act, more commonly known as the "Superfund" law,
imposes strict, joint and several liability, regardless of fault,
for remediation of property contaminated with hazardous substances.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. A number of states, including
Massachusetts, have enacted similar laws.
The electric utility industry typically utilizes and/or
generates in its operations a range of potentially hazardous
products and by-products. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System (NEES) subsidiaries currently have in place an
environmental audit program intended to enhance compliance with
existing federal, state, and local requirements regarding the
handling of potentially hazardous products and by-products.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. The Company has been named as a
potentially responsible party (PRP) by either the U.S.
Environmental Protection Agency (EPA) or the Massachusetts
Department of Environmental Protection (DEP) for 14 sites at which
hazardous waste is alleged to have been disposed. The Company is
also aware of other sites which it may be held responsible for
remediating and it is likely that, in the future, the Company will
become involved in additional proceedings demanding contribution
for the cost of remediating additional hazardous waste sites.
The most prevalent types of hazardous waste sites that the
Company has been connected with are former manufactured gas
locations. Until the early 1970's, predecessors or affiliates of
the Company were in the gas business. There are approximately 35
locations in Massachusetts at which gas may have been manufactured
and/or stored. Of the manufactured gas locations, 17 have been
listed for investigation by the DEP. In a lawsuit involving one of
these sites, the United States Court of Appeals for the First
Circuit affirmed in 1993 an earlier adverse decision against the
Company, NEES and another subsidiary, New England Power Service
Company. The decision held these companies liable for cleanup of
the properties involved in the case.
In 1993, the MDPU approved a rate agreement filed by the
Company (see Rate Activity section) that resolved all rate recovery
issues related to Massachusetts manufactured gas sites formerly
owned by the Company, its predecessors, and its affiliates, as well
as certain other Massachusetts hazardous waste sites. The
agreement allows for environmental remediation costs for such sites
to be met from a special interest bearing fund established on the
Company's books in 1993 of $30 million. The initial fund balance
was not recoverable from customers. Annual contributions of
$3 million, adjusted for inflation, are being added to the fund by
the Company and are recoverable in rates. Under the agreement, any
shortfalls in the fund will be paid by the Company and be recovered
through rates over seven years, without interest.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates difficult. There are also
significant uncertainties as to the portion, if any, of the
investigation and remediation costs of any particular hazardous
waste site that may ultimately be borne by the Company. At June
30, 1994, the Company had total reserves for environmental response
costs of $40 million and a related regulatory asset of $12 million.
The Company believes that hazardous waste liabilities for all
sites of which it is aware, and which are not covered by a rate
agreement, will not be material (10 percent of common equity) to
its financial position. Where appropriate, the Company intends to
seek recovery from its insurer and from other PRPs, but it is
uncertain whether, and to what extent, such efforts will be
successful.
Electric and Magnetic Fields (EMF)
- ---------------------------------
In recent years, concerns have been raised about whether EMF,
which occur near transmission and distribution lines as well as
near household wiring and appliances, cause or contribute to
adverse health effects. Numerous studies on the effects of these
fields, some of them sponsored by electric utilities (including
NEES companies), have been conducted and are continuing. Some of
the studies have suggested associations between certain EMF and
various types of cancer, while other studies have not substantiated
such associations. In February 1993, the EPA called for
significant additional research on EMF. In July 1994, a study by
a University of Southern California professor suggested an
association between EMF and Alzheimer's disease. It is impossible
to predict the ultimate impact on the Company and the electric
utility industry if further investigations were to demonstrate that
the present electricity delivery system is contributing to
increased risk of cancer or other health problems.
Many utilities, including the Company, have been contacted by
customers regarding a potential relationship between EMF and
adverse health effects. To date, no court in the United States has
ruled that EMF from electrical facilities causes adverse health
effects and no utility has been found liable for personal injuries
alleged to have been caused by EMF. In any event, the Company
believes that it has adequate insurance coverage.
Several state courts have recognized a cause of action for
damage to property values in transmission line condemnation cases
based on the fear that power lines cause cancer. It is difficult
to predict what impact there would be on the Company if this cause
of action is recognized in Massachusetts and in contexts other than
condemnation cases.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to increasing
competitive pressures, stemming from a combination of trends,
including increasing electric rates, improved technologies, and new
regulations and legislation intended to foster competition.
Recently, this competition has been most prominent in the bulk
power market in which non-utility generating sources have
noticeably increased their market share. This change indirectly
affects the Company as it purchases all of its energy requirements
from NEP. Electric utilities are also facing increased competition
in the retail market. Currently, retail competition comes
primarily from alternative fuel suppliers (principally natural gas
companies) for heating and cooling, customer-owned generation to
displace purchases from electric utilities, and direct competition
among electric utilities to attract major new manufacturing
facilities to their service territories. In the future, the
potential exists for electric utilities and non-utility generators
to sell electricity to retail customers of other electric utilities
without regard to franchised service territories. For example, the
California Public Utilities Commission recently announced a
proposal that would give certain large retail customers, by the
year 1996, and all other retail customers, by the year 2002, the
option of selecting their electricity provider. Power purchased
from another provider would still be delivered over the local
utility's transmission network which, under the proposal, would be
subject to broader access. Other states, including several New
England states, have considered or are in the process of
considering options to foster increased competition.
The NEES companies are responding to current and anticipated
competitive pressures in a variety of ways, including cost control
and a corporate reorganization into separate retail and wholesale
business units. The retail business unit's response to competition
includes the development of value-added services for customers and
the offering of economic development rates to encourage businesses
to locate in the Company's service territory. Pursuant to its
recent rate settlement, the Company was able to change the standard
terms under which it offers service to commercial and industrial
customers to extend the notice period a customer must give before
purchasing electricity from others or generating any additional
electricity for the customer's own use from one year to two years.
In addition, the Company offered a discount from base rates in
return for a contract requiring the customer to provide five years
written notice before purchasing electricity from others or
generating any additional electricity for the customer's own use.
The discount is available to customers with average monthly peak
demands over 500 kilowatts. Approximately 83 percent of eligible
customers have signed agreements.
Since a large part of the Company's costs represent the cost of
power purchased from NEP, its competitive position is affected by
NEP's ability to control costs. NEP is controlling costs and
positioning itself for increased competition through such means as
terminating certain purchased power contracts, shutdowns of
uneconomic generating stations, and rapid amortization of certain
plant assets.
The Federal Energy Regulatory Commission (FERC) ruled in 1992,
in a proceeding not involving NEES subsidiaries, that a utility may
recover from a wholesale requirements customer, any legitimate,
prudent, and verifiable costs that the utility had incurred based
on a reasonable expectation that it would continue to sell
requirements service to the customer. The FERC has referred to
such costs as "stranded costs". On appeal, the United States Court
of Appeals for the District of Columbia Circuit has questioned
whether allowing utilities to recover stranded costs is anti-
competitive and the Court remanded the case back to the FERC for
further proceedings and development of the competitive issues. In
a separate development, the FERC issued a notice of proposed rule-
making on the recovery of investment costs stranded as a result of
increased competition.
Electric utility rates are generally based on a utility's
costs. Therefore, electric utilities are subject to certain
accounting standards that are not applicable to other business
enterprises in general. These accounting rules require regulated
entities, in appropriate circumstances, to establish regulatory
assets and liabilities, which defer the income statement impact of
certain costs that are expected to be recovered in future rates.
The effects of competition could ultimately cause the operations of
the Company, or a portion thereof, to cease meeting the criteria
for application of these accounting rules. While the Company does
not expect to cease meeting these criteria in the near future, if
this were to occur, accounting standards of enterprises in general
would apply and immediate recognition of any previously deferred
costs would be necessary in the year in which these criteria were
no longer applicable. In addition, if, because of competition,
utilities are unable to recover all of their costs in rates, it may
be necessary to write off those costs not recoverable.
Utility Plant Expenditures and Financings
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Cash expenditures for utility plant totaled $45 million in the
first six months of 1994. The funds necessary for utility plant
expenditures during the period were primarily provided by net cash
from operating activities, after the payment of dividends, and
proceeds from the issuance of long-term debt. During the first six
months of 1994, the Company issued $20 million of first mortgage
bonds bearing interest rates ranging from 7.05 percent to 8.08
percent. In August 1994, an additional $5 million of new long-term
debt was issued at a rate of 8.16 percent. The Company plans to
issue an additional $25 million of first mortgage bonds in 1994.
At June 30, 1994, the Company had $37 million of short-term
debt outstanding including $25 million in the form of commercial
paper borrowings. The Company currently has lines of credit with
banks totaling $63 million. These lines of credit are available to
provide liquidity support for commercial paper borrowings and other
corporate purposes. There were no borrowings under these lines of
credit at June 30, 1994.
For the twelve-month period ending June 30, 1994, the ratio of
earnings to fixed charges was 3.35.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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The Company is filing the following revised exhibit for
incorporation by reference into its registration statements on Form
S-3, Commission file Nos. 33-49453 and 33-50033:
12 Statement re computation of ratios
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-Q for
the quarter ended June 30, 1994 to be signed on its behalf by the
undersigned thereunto duly authorized.
MASSACHUSETTS ELECTRIC COMPANY
s/ Michael E. Jesanis
Michael E. Jesanis, Treasurer,
Authorized Officer, and
Principal Financial Officer
Date: August 10, 1994