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 March 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-5464 (LOGO) MASSACHUSETTS ELECTRIC COMPANY (Exact name of registrant as specified in charter) MASSACHUSETTS 04-1988940 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 25 Research Drive, Westborough, Massachusetts 01582 (Address of principal executive offices) Registrant's telephone number, including area code (508-389-2000) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Common stock, par value $25 per share, authorized and outstanding: 2,398,111 shares at March 31, 1995. PART I FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- MASSACHUSETTS ELECTRIC COMPANY Statements of Income Periods Ended March 31 (Unaudited) Three Months Twelve Months ------------ ------------- 1995 1994 1995 1994 ---- ---- ---- ---- (In Thousands) Operating revenue $373,092 $381,712 $1,473,450 $1,471,811 -------- -------- ---------- ---------- Operating expenses: Purchased electric energy, principally from New England Power Company, an affiliate 284,538 285,162 1,073,778 1,089,605 Other operation 44,911 46,563 214,142 223,610 Maintenance 7,432 7,850 35,084 22,824 Depreciation 11,465 10,825 43,415 41,273 Taxes, other than income taxes 8,354 8,309 28,709 27,077 Income taxes 3,043 5,879 19,429 13,542 -------- -------- ---------- ---------- Total operating expenses 359,743 364,588 1,414,557 1,417,931 -------- -------- ---------- ---------- Operating income 13,349 17,124 58,893 53,880 Other income (expense) - net, including related taxes 326 (1,455) 786 (410) -------- -------- ---------- ---------- Operating and other income 13,675 15,669 59,679 53,470 -------- -------- ---------- ---------- Interest: Interest on long-term debt 6,105 5,003 22,069 22,377 Other interest 2,641 1,167 7,840 4,099 Allowance for borrowed funds used during construction - credit (197) (73) (510) (297) -------- -------- ---------- ---------- Total interest 8,549 6,097 29,399 26,179 -------- -------- ---------- ---------- Net income $ 5,126 $ 9,572 $ 30,280 $ 27,291 ======== ======== ========== ========== Statements of Retained Earnings Retained earnings at beginning of period $136,911 $135,276 $ 137,475 $ 129,681 Net income 5,126 9,572 30,280 27,291 Dividends declared on cumulative preferred stock (778) (778) (3,114) (3,693) Dividends declared on common stock (5,995) (6,595) (29,377) (14,988) Premium on redemption of preferred stock (816) -------- -------- ---------- ---------- Retained earnings at end of period $135,264 $137,475 $ 135,264 $ 137,475 ======== ======== ========== ========== 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) March 31, December 31, ASSETS 1995 1994 ------ ---- ---- (In Thousands) Utility plant, at original cost $1,368,285 $1,346,824 Less accumulated provisions for depreciation 380,707 373,501 ---------- ---------- 987,578 973,323 Construction work in progress 17,755 22,672 ---------- ---------- Net utility plant 1,005,333 995,995 ---------- ---------- Current assets: Cash 1,038 1,225 Accounts receivable: From sales of electric energy 147,937 137,431 Other (including $11,731,000 and $6,609,000 from affiliates) 24,983 36,022 Less reserves for doubtful accounts 11,542 10,394 ---------- ---------- 161,378 163,059 Unbilled revenues 32,800 42,800 Materials and supplies, at average cost 12,569 11,524 Prepaid and other current assets 20,535 21,583 ---------- ---------- Total current assets 228,320 240,191 ---------- ---------- Deferred charges and other assets 61,232 59,536 ---------- ---------- $1,294,885 $1,295,722 ========== ========== 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 135,264 136,911 ---------- ---------- Total common equity 382,389 384,036 Cumulative preferred stock 50,000 50,000 Long-term debt 313,413 265,631 ---------- ---------- Total capitalization 745,802 699,667 ---------- ---------- Current liabilities: Long-term debt due within one year 25,000 35,000 Short-term debt (including $8,050,000 and $8,650,000 to affiliates) 68,725 81,820 Accounts payable (including $152,891,000 and $157,076,000 to affiliates) 162,011 182,102 Accrued liabilities: Taxes 3,578 906 Interest 6,305 7,945 Other accrued expenses 31,387 27,132 Customer deposits 4,980 4,985 Dividends payable 6,774 13,968 ---------- ---------- Total current liabilities 308,760 353,858 ---------- ---------- Deferred federal and state income taxes 174,924 176,913 Unamortized investment tax credits 18,533 18,816 Other reserves and deferred credits 46,866 46,468 ---------- ---------- $1,294,885 $1,295,722 ========== ========== The accompanying notes are an integral part of these financial statements. MASSACHUSETTS ELECTRIC COMPANY Statements of Cash Flows Quarters Ended March 31 (Unaudited) 1995 1994 ---- ---- (In Thousands) Operating activities: Net income $ 5,126 $ 9,572 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 11,465 10,825 Deferred income taxes and investment tax credits - net (2,346) (544) Allowance for funds used during construction (197) (73) Amortization of unbilled revenues (8,000) Decrease (increase) in accounts receivable, net and unbilled revenues 11,681 9,283 Decrease (increase) in materials and supplies (1,045) (1,226) Decrease (increase) in prepaid and other current assets 1,048 1,348 Increase (decrease) in accounts payable (20,091) (20,373) Increase (decrease) in other current liabilities 5,282 11,318 Other, net (1,027) (4,073) -------- -------- Net cash provided by operating activities $ 9,896 $ 8,057 -------- -------- Investing activities: Plant expenditures, excluding allowance for funds used during construction $(20,605) $(19,612) Other investing activities (415) (5,616) -------- -------- Net cash used in investing activities $(21,020) $(25,228) -------- -------- Financing activities: Dividends paid on common stock $(13,190) $ (4,796) Dividends paid on preferred stock (778) (778) Long-term debt-issues 48,000 10,000 Long-term debt - retirements (10,000) Changes in short-term debt (13,095) 12,545 -------- -------- Net cash provided by financing activities $ 10,937 $ 16,971 -------- -------- Net increase (decrease) in cash and cash equivalents $ (187) $ (200) Cash and cash equivalents at beginning of period 1,225 773 -------- -------- Cash and cash equivalents at end of period $ 1,038 $ 573 ======== ======== Supplementary information: Interest paid less amounts capitalized $ 9,843 $ 6,714 -------- -------- Federal and state income taxes paid $ (9,000) $ (1,900) -------- -------- The accompanying notes are an integral part of these financial statements. Note A - Hazardous Waste - ------------------------ The Federal Comprehensive Environmental Response, Compensation and Liability Act, more commonly known as the "Superfund" law, imposes strict, joint and several liability, regardless of fault, for remediation of property contaminated with hazardous substances. A number of states, including Massachusetts, have enacted similar laws. The electric utility industry typically utilizes and/or generates in its operations a range of potentially hazardous products and by-products. New England Electric System 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. 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 for 17 sites at which hazardous waste is alleged to have been disposed. Private parties have also contacted or initiated legal proceedings against the Company regarding hazardous waste cleanup. The most prevalent types of hazardous waste sites with which the Company has been associated are manufactured gas locations. The Company is aware of approximately 35 such locations in Massachusetts (including seven of the 17 locations for which the Company is a PRP). The Company is currently aware of other sites, and may in the future become aware of additional sites, that it may be held responsible for remediating. In 1993, the Massachusetts Department of Public Utilities approved a rate agreement filed by the Company that allows for remediation costs of former manufactured gas sites and certain other hazardous waste sites located in Massachusetts to be met from a non-rate recoverable interest-bearing fund of $30 million established on the Company's books. Rate recoverable contributions of $3 million, adjusted for inflation, are added to the fund annually in accordance with the agreement. Any shortfalls in the fund would be paid by the Company and be recovered through rates over seven years. Predicting the potential costs to investigate and remediate hazardous waste sites continues to be difficult. There are also significant uncertainties as to the portion, if any, of the Note A - Hazardous Waste - Continued - ------------------------ investigation and remediation costs of any particular hazardous waste site that may ultimately be borne by the Company. Where appropriate, the Company intends to seek recovery from its insurers and from other PRPs, but it is uncertain whether and to what extent such efforts would be successful. At March 31, 1995, the Company has total reserves for environmental response costs of $35 million and a related regulatory asset of $11 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 to its financial position. Note B - New Accounting Standard - -------------------------------- In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121), effective for fiscal year 1996. This standard clarifies when and how to recognize an impairment of long- lived assets. In addition, FAS 121 requires that all regulatory assets be written off unless they continue to meet the criteria for initially recording such regulatory assets. In order to be initially recorded, a regulatory asset must have a high probability of future recovery. However, once written off, a regulatory asset can be restored if it again becomes probable of recovery. The impact of this standard will be driven by the facts and circumstances that exist when the standard is adopted and thereafter. Note C - ------ 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 1994 Annual Report. Item 2. Management's Discussion and Analysis of Financial --------------------------------------------------------- Condition and Results of Operations ----------------------------------- This section contains management's assessment of Massachusetts Electric Company's financial condition and the principal factors having an impact on the results of operations. This discussion should be read in conjunction with the Company's financial statements and footnotes and the 1994 Annual Report on Form 10-K. Earnings - -------- Earnings for the first quarter of 1995 decreased $4 million compared with the same period last year reflecting decreased kilowatthour (KWH) sales of 3.1 percent as a result of unusually mild weather conditions in the first quarter of 1995. Rate Activity - ------------- On March 15, 1995, the Company filed a request with the Massachusetts Department of Public Utilities (MDPU) to increase its base rates by $62 million, effective October 1, 1995. As an alternative to this proposed increase, the Company filed an incentive rate plan, which would increase rates by about $30 million, effective October 1, 1995. Under the proposed incentive rate plan, subsequent base rate adjustments could occur annually on May 1 and would be based on a comparison of the Company's rates to rates of all electric utilities in Massachusetts. The Company also proposed a new discount program for large industrial customers in the manufacturing, computing, and biotech sectors that are willing to make a minimum annual usage commitment for a period of five years. The discounts, which the Company proposed to be recovered from all customers, would range from 5 percent to 12.5 percent of base rates depending on a customer's level of commitment. These discounts are in addition to the 5 percent service extension discounts (SEDs) that are currently available to large commercial and industrial customers that agree to provide three to five years notice before they purchase power from another supplier or generate any additional power themselves. The Company has proposed lowering the minimum average load threshold for the SED program from 500 kilowatts to 200 kilowatts. Commencing in 1995, pursuant to a rate settlement, the cost of the SED programs are being passed on to New England Power Company (NEP), the Company's affiliated wholesale power supplier. The Company expects an MDPU decision on its filing in late September 1995. Operating Revenue - ----------------- The following table summarizes the changes in operating revenue: Increase (Decrease) in Operating Revenue First Quarter ------------- 1995 vs 1994 ------------- (In Millions) Sales decrease $(11) General rate change/service extension discounts 6 Unbilled revenues recognized under rate agreement (8) Fuel recovery 4 --- $(9) === KWH sales billed to ultimate customers decreased 3.1 percent in the first quarter of 1995, compared with the corresponding period last year. The decreased sales reflect unusually mild weather conditions in the first quarter of 1995. In view of the recent mild weather, the Company currently forecasts essentially flat KWH sales in 1995. General rate change/service extension discounts includes $7 million resulting from the November 1994 expiration of the Company's temporary rate decrease partially offset by $1 million of increased discounts under the Company's SED program. The amount shown for unbilled revenues recognized reflects the Company's completion of the amortization of $35 million over a 13 month period that ended December 31, 1994 in accordance with its October 1993 rate agreement. Operating Expenses - ------------------ The following table summarizes the changes in operating expenses which are discussed below: Increase (Decrease) in Operating Expenses First Quarter ------------- 1995 vs 1994 ------------- (In Millions) Purchased electric energy: Fuel costs $ 4 Purchases and demand charges from NEP (3) SED credits from NEP (2) Other operation and maintenance (2) Depreciation 1 Taxes (3) --- $(5) === The reduction in other operation and maintenance reflects decreased distribution operation and maintenance expenses and a reduction in uncollectible accounts expense offset in part by increased employee and retiree benefit-related costs, and general increases in other areas. The decrease in taxes in the first quarter of 1995 is primarily due to decreased income. Other Income and Interest Expense - --------------------------------- The increase in other income reflects increased interest income on rate adjustment mechanisms. The increase in interest expense is due to increased long-term and short-term debt outstanding in the first quarter of 1995, and increased interest related to the rate adjustment mechanisms referred to above. 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. See the Company's Annual Report on Form 10-K for the year ended December 31, 1994. On March 29, 1995, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rule-making in which it stated that recovery in rates of legitimate and verifiable stranded costs should be allowed and that direct assignment of stranded costs to departing customers is the appropriate method for recovery of costs stranded as the result of wholesale competition. Under the FERC policy proposal, costs stranded as a result of retail competition would be subject to state commission review if the state commission has the necessary statutory authority, and subject to FERC review if the state commission does not have such authority. A final decision is expected in late 1995 or early 1996. In February 1995, the MDPU initiated a proceeding regarding the structure and regulation of the electric utility industry. The Company, along with a coalition of environmental and independent power producer groups, filed a set of principles which the coalition proposes to be the basis for restructuring. The proposed principles included provisions to allow gradually increased customer choice while allowing utilities to recover the cost of their past commitments, as well as provisions for protecting residential customers, encouraging renewable resources and energy conservation, and honoring contracts with independent power producers. Hearings are underway. The Company cannot predict what action the MDPU may take in this proceeding or when such action would take place. New Accounting Standard - ----------------------- In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121), effective for fiscal year 1996. This standard clarifies when and how to recognize an impairment of long- lived assets. In addition, FAS 121 requires that all regulatory assets be written off unless they continue to meet the criteria for initially recording such regulatory assets. In order to be initially recorded, a regulatory asset must have a high probability of future recovery. However, once written off, a regulatory asset can be restored if it again becomes probable of recovery. The impact of this standard will be driven by the facts and circumstances that exist when the standard is adopted and thereafter. Utility Plant Expenditures and Financings - ----------------------------------------- Cash expenditures for utility plant totaled $21 million in the first three months of 1995. 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 three months of 1995, the Company issued $48 million of first mortgage bonds bearing interest rates ranging from 7.79 percent to 8.46 percent. The Company plans to issue an additional $40 million of first mortgage bonds in 1995. At March 31, 1995, the Company had $69 million of short-term debt outstanding including $61 million in the form of commercial paper borrowings. The Company currently has lines of credit with banks totaling $90 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 March 31, 1995. For the twelve-month period ending March 31, 1995, the ratio of earnings to fixed charges was 2.64. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Information concerning the Company's request to increase rates filed with the Massachusetts Department of Public Utilities, discussed in Part I of this report in Management's Discussion and Analysis of Financial Condition and Results of Operations, is incorporated herein by reference and made a part hereof. Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------ On March 15, 1995, the Annual Meeting of Stockholders was held. The following actions were taken by the unanimous vote of the 2,398,111 shares having general voting rights represented at the meeting: The number of directors for the ensuing year was fixed at eleven. The following were elected as directors: Urville J. Beaumont Joan T. Bok Sally L. Collins John H. Dickson Charles B. Housen Patricia A. McGovern John F. Reilly John W. Rowe Richard P. Sergel Richard M. Shribman Roslyn M. Watson Michael E. Jesanis was elected Treasurer and Robert King Wulff was elected Clerk. Coopers & Lybrand was selected as auditor for 1995. The indeminification provisions of the Company's by-laws were amended by changing the definition of officers covered by such provision. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- 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 33-59145. 12 Statement re computation of ratios The Company is filing Financial Data Schedules. The Company filed a report on Form 8-K dated March 15, 1995, containing Item 5, Other Events. 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 March 31, 1995 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: May 11, 1995