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, 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 June 30, 1995.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
Operating revenue $355,431 $339,886 $728,523 $721,598
-------- -------- -------- --------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate270,060 246,563 554,598 531,725
Other operation 46,527 47,990 91,438 94,553
Maintenance 7,508 7,389 14,940 15,239
Depreciation 11,465 10,825 22,930 21,650
Taxes, other than income taxes 7,136 7,019 15,490 15,328
Income taxes 1,562 5,046 4,605 10,925
-------- -------- -------- --------
Total operating expenses 344,258 324,832 704,001 689,420
-------- -------- -------- --------
Operating income 11,173 15,054 24,522 32,178
Other income (expense) - net (1,143) (311) (817) (1,766)
-------- -------- -------- --------
Operating and other income 10,030 14,743 23,705 30,412
-------- -------- -------- --------
Interest:
Interest on long-term debt 6,476 5,163 12,581 10,166
Other interest 981 1,439 3,622 2,606
Allowance for borrowed funds used during
construction - credit 6 (74) (191) (147)
-------- -------- -------- --------
Total interest 7,463 6,528 16,012 12,625
-------- -------- -------- --------
Net income $ 2,567 $ 8,215 $ 7,693 $ 17,787
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period$135,264 $137,475 $136,911 $135,276
Net income 2,567 8,215 7,693 17,787
Dividends declared on cumulative
preferred stock (779) (779) (1,557) (1,557)
Dividends declared on common stock (2,398) (6,594) (8,393) (13,189)
-------- -------- -------- --------
Retained earnings at end of period $134,654 $138,317 $134,654 $138,317
======== ======== ======== ========
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)
1995 1994
---- ----
(In Thousands)
Operating revenue $1,488,995 $1,471,405
---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 1,097,275 1,086,203
Other operation 212,679 202,601
Maintenance 35,203 25,508
Depreciation 44,055 41,698
Taxes, other than income taxes 28,826 27,489
Income taxes 15,945 21,545
---------- ----------
Total operating expenses 1,433,983 1,405,044
---------- ----------
Operating income 55,012 66,361
Other income (expense) - net (46) (890)
---------- ----------
Operating and other income 54,966 65,471
---------- ----------
Interest:
Interest on long-term debt 23,382 21,435
Other interest 7,382 4,673
Allowance for borrowed funds used during
construction - credit (430) (286)
---------- ----------
Total interest 30,334 25,822
---------- ----------
Net income $ 24,632 $ 39,649
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 138,317 $ 123,481
Net income 24,632 39,649
Dividends declared on cumulative preferred stock(3,114) (3,614)
Dividends declared on common stock (25,181) (20,383)
Premium on redemption of preferred stock (816)
---------- ----------
Retained earnings at end of period $ 134,654 $ 138,317
========== ==========
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 1995 1994
------ ---- ----
(In Thousands)
Utility plant, at original cost $1,382,933 $1,346,824
Less accumulated provisions for depreciation 387,618 373,501
---------- ----------
995,315 973,323
Construction work in progress 23,396 22,672
---------- ----------
Net utility plant 1,018,711 995,995
---------- ----------
Current assets:
Cash 1,171 1,225
Accounts receivable:
From sales of electric energy 155,239 137,431
Other (including $1,065,000 and $6,609,000 from affiliates)10,142 36,022
Less reserves for doubtful accounts 11,991 10,394
---------- ----------
153,390 163,059
Unbilled revenues 34,700 42,800
Materials and supplies, at average cost 11,273 11,524
Prepaid and other current assets 21,572 21,583
---------- ----------
Total current assets 222,106 240,191
---------- ----------
Deferred charges and other assets 58,167 59,536
---------- ----------
$1,298,984 $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 141,309 141,310
Retained earnings 134,654 136,911
---------- ----------
Total common equity 381,778 384,036
Cumulative preferred stock 50,000 50,000
Long-term debt 333,327 265,631
---------- ----------
Total capitalization 765,105 699,667
---------- ----------
Current liabilities:
Long-term debt due within one year 10,000 35,000
Short-term debt (including $2,700,000 and $8,650,000
to affiliates) 70,275 81,820
Accounts payable (including $156,162,000 and $157,076,000
to affiliates) 164,553 182,102
Accrued liabilities:
Taxes 922 906
Interest 9,052 7,945
Other accrued expenses 30,975 27,132
Customer deposits 4,895 4,985
Dividends payable 3,177 13,968
---------- ----------
Total current liabilities 293,849 353,858
---------- ----------
Deferred federal and state income taxes 173,900 176,913
Unamortized investment tax credits 18,250 18,816
Other reserves and deferred credits 47,880 46,468
---------- ----------
$1,298,984 $1,295,722
========== ==========
The accompanying notes are an integral part of these financial statements.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
1995 1994
---- ----
(In Thousands)
Operating Activities:
Net income $ 7,693 $ 17,787
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 22,930 21,650
Deferred income taxes and investment tax credit, net (3,478) 4,027
Allowance for funds used during construction (191) (147)
Amortization of unbilled revenues (16,100)
Decrease (increase) in accounts receivable, net
and unbilled revenues 17,769 20,617
Decrease (increase) in materials and supplies 251 (2,245)
Decrease (increase) in prepaid and other current assets 11 4,945
Increase (decrease) in accounts payable (17,549) (17,973)
Increase (decrease) in other current liabilities 4,876 14,473
Other, net 2,790 (5,125)
-------- --------
Net cash provided by operating activities $ 35,102 $ 41,909
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(45,454) $(44,893)
Other investing activities (415) (3,485)
-------- --------
Net cash used in investing activities $(45,869) $(48,378)
-------- --------
Financing Activities:
Dividends paid on common stock $(19,185) $(11,391)
Dividends paid on preferred stock (1,557) (1,557)
Long-term debt-issues 68,000 20,000
Long-term debt-retirements (25,000)
Changes in short-term debt (11,545) (680)
-------- --------
Net cash provided by financing activities $ 10,713 $ 6,372
-------- --------
Net decrease in cash and cash equivalents $ (54) $ (97)
Cash and cash equivalents at beginning of period 1,225 773
-------- --------
Cash and cash equivalents at end of period $ 1,171 $ 676
======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 15,174 $ 11,303
-------- --------
Federal and state income taxes refunded $ (5,775) $ (725)
-------- --------
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 in 1993. 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 June 30, 1995, the Company
had total reserves for environmental response costs of $35 million
and a related regulatory asset of $10 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, which must have a high probability of recovery to be
initially established, must continue to meet that high probability
standard to avoid being written off. However, if written off, a
regulatory asset can be restored if it again has a high probability
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
--------
Net income for the second quarter and first six months of 1995
decreased $6 million and $10 million, respectively, compared with
the corresponding periods in 1994. The decrease reflects reduced
kilowatthour (KWH) sales billed to customers in the first quarter
of 1995 and a seasonal reduction in unbilled revenues. The
reduction in KWH sales in the first quarter was partially offset by
an increase in the second quarter of 1995. In addition, the
Company experienced a decrease in revenues in the second quarter of
1995 due to the operation of its purchased power cost adjustment
(PPCA) mechanism. For a further discussion of the Company's PPCA
mechanism see the Operating Revenue section.
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. A decision by the MDPU on this filing
will be issued by October 1, 1995. The Company also filed an
alternative incentive rate plan which would have increased rates by
about $30 million this year with potential further increases in
subsequent years. The MDPU rejected this alternative rate plan in
July 1995.
As part of its filing the Company proposed a new discount
program for large industrial customers in the manufacturing,
computing, and biotechnology sectors that are willing to make a
minimum annual usage commitment for a period of five years. These
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 also proposed
lowering the minimum average load threshold for the SED program
from 500 kilowatts to 200 kilowatts.
Operating Revenue
-----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1995 vs 1994 1995 vs 1994
-------------- ------------
(In Millions)
Sales billed to ultimate customers $ 3 $ (4)
Seasonal change in unbilled
revenues (2) (6)
Fuel recovery 22 27
General rate change/SEDs 5 11
Unbilled revenues recognized under
rate agreement (8) (16)
Purchased power cost adjustment (5) (5)
--- ----
$15 $ 7
=== ====
KWH sales billed to ultimate customers decreased by about 1
percent for the six months ending June 30, 1995. This reduction in
KWH sales reflects a 3 percent decrease in the first quarter of
1995, primarily in the residential sector, due to unusually mild
winter weather conditions when heating degree days were
approximately 8 percent below normal. This decrease was partially
offset by a 2 percent increase in KWH sales in the second quarter
of 1995, primarily in the commercial and industrial sectors.
For a discussion of fuel recovery see the fuel costs discussion
in the Operating Expenses section.
The increases in revenues due to the general rate change/SEDs
are the result of the November 1994 expiration of the Company's
temporary rate decrease as well as increased revenues for recovery
of postretirement benefits other than pensions, partially offset by
increased discounts under the Company's SED program.
The amount shown for unbilled revenues reflects the Company's
completion of the amortization of $35 million of unbilled revenue
over a 13 month period that ended December 31, 1994 in accordance
with an October 1993 rate agreement.
The Company's PPCA mechanism is designed to recover the effects
of rate increases from the Company's affiliated power supplier, New
England Power Company (NEP). The mechanism also passes on to
customers the seasonal effects of NEP's rates. In the second
quarter of 1995, the Company experienced an increase in its
purchased power expense due to increased usage, particularly its
peak demand levels. However, NEP's seasonal rates reduced the
impact of this increase and these savings were passed on to
customers through the Company's PPCA mechanism.
Operating Expenses
------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1995 vs 1994 1995 vs 1994
-------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $22 $27
Other NEP charges 1 (4)
Other operation and maintenance (1) (3)
Depreciation 1
Taxes (3) (6)
--- ---
$19 $15
=== ===
The increase in fuel costs from NEP in the second quarter and
six months reflects increased short-term purchases and alternate
energy purchases which flow through NEP's fuel clause. This was
the result of decreased generation from NEP's nuclear power
suppliers, decreased hydro production due to low water levels, and
overhauls of NEP's thermal generating facilities.
The reduction in other operation and maintenance for the first
six months of 1995 reflects decreased distribution related expenses
and a reduction in uncollectible accounts expense, partially offset
by increased general, administrative and information system costs.
The decrease in taxes in the second quarter and first six
months of 1995 is primarily due to decreased income.
Interest Expense
----------------
The increase in interest expense is due to increased long-term
and short-term debt balances and higher interest rates in the first
six months of 1995.
Competitive Conditions
----------------------
The electric utility business is being subjected to rapidly
increasing competitive pressures, stemming from a combination of
trends, including surplus generating capacity, increasing electric
rates, improved technologies, increasing demand for customer
choice, 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.
The state of Massachusetts has been considering various
proposals for allowing electric customers greater choice over their
electricity supplier. The MDPU has been holding hearings on the
regulation and structure of the electric utility industry. In this
proceeding, the Company filed with the MDPU a set of interdependent
principles for industry restructuring. These principles, which were
agreed to by groups representing environmental protection
advocates, governmental agencies, non-utility generators, investor-
owned utilities, and large and small customer interests, include
provisions for increased customer choice while allowing utilities
the opportunity 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. The parties
agreeing to the principles suggested to the MDPU that they be
permitted a six month period for discussions and negotiations
leading to the development of detailed, company-specific plans.
The MDPU is expected to issue a decision this summer.
In March 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 from
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 mid-1996.
Electric utility rates have historically been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Financial Accounting Standard No.
71, Accounting for the Effects of Certain Types of Regulation (FAS
71), requires regulated entities, in appropriate circumstances, to
establish regulatory assets and liabilities, and thereby defer the
income statement impact of certain costs that are expected to be
recovered in future rates. The Company believes that its
operations currently meet the criteria established in FAS 71.
However, the effects of regulatory and/or legislative initiatives
could, in the near future, cause all or a portion of the Company's
operations to cease meeting the criteria of FAS 71. In that event,
the application of FAS 71 to such operations would be discontinued
and a non-cash write-off of previously established regulatory
assets and liabilities related to such operations would be
required. At June 30, 1995, the Company had pre-tax regulatory
assets (net of regulatory liabilities) of approximately $50
million. In addition, if the Company's revenues are insufficient
to recover its costs, a write-down of plant assets could be
required pursuant to Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of (FAS 121). This standard, effective
for fiscal year 1996, clarifies when and how to recognize an
impairment of long-lived assets. For further discussion of FAS 121
see Note B.
Utility Plant Expenditures and Financings
-----------------------------------------
Cash expenditures for utility plant totaled $45 million in the
first six months of 1995. The funds necessary for utility plant
expenditures during the period were provided by net cash from
operating activities, after the payment of dividends, and from
proceeds of long-term debt issues. During the first six months of
1995, the Company issued $68 million of first mortgage bonds at
interest rates ranging from 6.72 percent to 8.46 percent. The
Company plans to issue an additional $22 million of first mortgage
bonds in 1995.
At June 30, 1995, the Company had $70 million of short-term
debt outstanding including $68 million 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 June 30, 1995.
For the twelve-month period ending June 30, 1995, the ratio of
earnings to fixed charges was 2.30.
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 6. Exhibits and Reports on Form 8-K
-----------------------------------------
The Company is filing the following revised exhibit for
incorporation by reference into its registration statement on Form
S-3, Commission File No. 33-59145:
12 Statement re computation of ratios
The Company is filing Financial Data Schedules
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, 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: August 10, 1995