SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1995.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
Quarter Nine Months
------- -----------
1995 1994 1995 1994
---- ---- ---- ----
(In Thousands)
Operating revenue $392,575 $376,582 $1,121,098 $1,098,180
-------- -------- ---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 296,745 287,038 851,343 818,763
Other operation 56,092 51,220 147,530 145,773
Maintenance 7,373 8,881 22,313 24,120
Depreciation 11,464 10,825 34,394 32,475
Taxes, other than income taxes 7,043 7,669 22,533 22,997
Income taxes 2,059 829 6,664 11,754
-------- -------- ---------- ----------
Total operating expenses 380,776 366,462 1,084,777 1,055,882
-------- -------- ---------- ----------
Operating income 11,799 10,120 36,321 42,298
Other income (expense) - net 58 (19) (759) (1,785)
-------- -------- ---------- ----------
Operating and other income 11,857 10,101 35,562 40,513
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 6,651 5,334 19,232 15,500
Other interest 1,774 3,447 5,396 6,053
Allowance for borrowed funds used during
construction - credit (221) (111) (412) (258)
-------- -------- ---------- ----------
Total interest 8,204 8,670 24,216 21,295
-------- -------- ---------- ----------
Net income $ 3,653 $ 1,431 $ 11,346 $ 19,218
======== ======== ========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $134,654 $138,317 $ 136,911$ 135,276
Net income 3,653 1,431 11,346 19,218
Dividends declared on cumulative
preferred stock (778) (778) (2,335) (2,335)
Dividends declared on common stock (2,998) (3,598) (11,391) (16,787)
-------- -------- ---------- ----------
Retained earnings at end of period $134,531 $135,372 $ 134,531 $ 135,372
======== ======== ========== ==========
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 September 30
(Unaudited)
1995 1994
---- ----
(In Thousands)
Operating revenue $1,504,988 $1,471,850
---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 1,106,982 1,078,557
Other operation 217,551 208,032
Maintenance 33,695 24,766
Depreciation 44,694 42,123
Taxes, other than income taxes 28,200 28,675
Income taxes 17,175 21,205
---------- ----------
Total operating expenses 1,448,297 1,403,358
---------- ----------
Operating income 56,691 68,492
Other income (expense) - net 31 (1,536)
---------- ----------
Operating and other income 56,722 66,956
---------- ----------
Interest:
Interest on long-term debt 24,699 20,926
Other interest 5,709 7,476
Allowance for borrowed funds used during
construction - credit (540) (323)
---------- ----------
Total interest 29,868 28,079
---------- ----------
Net income $ 26,854 $ 38,877
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 135,372 $ 122,122
Net income 26,854 38,877
Dividends declared on cumulative preferred stock (3,114) (3,228)
Dividends declared on common stock (24,581) (21,583)
Premium on redemption of preferred stock (816)
---------- ----------
Retained earnings at end of period $ 134,531 $ 135,372
========== ==========
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)
September 30, December 31,
ASSETS 1995 1994
------ ---- ----
(In Thousands)
Utility plant, at original cost $1,399,150 $1,346,824
Less accumulated provisions for depreciation 396,060 373,501
---------- ----------
1,003,090 973,323
Construction work in progress 25,486 22,672
---------- ----------
Net utility plant 1,028,576 995,995
---------- ----------
Current assets:
Cash 3,201 1,225
Accounts receivable:
From sales of electric energy 148,576 137,431
Other (including $1,747,000 and $6,609,000 from affiliates) 13,687 36,022
Less reserves for doubtful accounts 12,243 10,394
---------- ----------
150,020 163,059
Unbilled revenues 35,400 42,800
Materials and supplies, at average cost 10,938 11,524
Prepaid and other current assets 20,935 21,583
---------- ----------
Total current assets 220,494 240,191
---------- ----------
Deferred charges and other assets 61,570 59,536
---------- ----------
$1,310,640 $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 151,310 141,310
Retained earnings 134,531 136,911
---------- ----------
Total common equity 391,656 384,036
Cumulative preferred stock 50,000 50,000
Long-term debt 353,223 265,631
---------- ----------
Total capitalization 794,879 699,667
---------- ----------
Current liabilities:
Long-term debt due within one year 35,000
Short-term debt (including $13,350,000 and $8,650,000
to affiliates) 41,650 81,820
Accounts payable (including $165,924,000 and $157,076,000
to affiliates) 178,869 182,102
Accrued liabilities:
Taxes 4,243 906
Interest 6,225 7,945
Other accrued expenses 29,694 27,132
Customer deposits 4,846 4,985
Dividends payable 3,776 13,968
---------- ----------
Total current liabilities 269,303 353,858
---------- ----------
Deferred federal and state income taxes 178,520 176,913
Unamortized investment tax credits 17,967 18,816
Other reserves and deferred credits 49,971 46,468
---------- ----------
$1,310,640 $1,295,722
========== ==========
The accompanying notes are an integral part of these financial statements.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Nine Months Ended September
(Unaudited)
1995 1994
---- ----
(In Thousands)
Operating Activities:
Net income $ 11,346 $ 19,218
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 34,394 32,475
Deferred income taxes and investment tax credit - net 910 10,222
Allowance for borrowed funds used during construction (412) (258)
Amortization of unbilled revenues (24,200)
Decrease (increase) in accounts receivable,
net, and unbilled revenues 20,439 24,726
Decrease (increase) in materials and supplies 586 (2,031)
Decrease (increase) in prepaid and other current assets 648 (1,407)
Increase (decrease) in accounts payable (3,233) (3,472)
Increase (decrease) in other current liabilities 4,040 13,882
Other, net 2,323 (5,282)
-------- --------
Net cash provided by operating activities $ 71,041 $ 63,873
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(66,562) $(67,225)
Other investing activities (1,415) (4,685)
-------- --------
Net cash used in investing activities $(67,977) $(71,910)
-------- --------
Financing Activities:
Capital contributions from parent $ 10,000
Dividends paid on common stock (21,583) $(17,986)
Dividends paid on preferred stock (2,335) (2,335)
Long-term debt-issues 88,000 25,000
Long-term debt-retirements (35,000)
Changes in short-term debt (40,170) 4,645
-------- --------
Net cash provided by (used in) financing activities$ (1,088) $ 9,324
-------- --------
Net increase in cash and cash equivalents $ 1,976 $ 1,287
Cash and cash equivalents at beginning of period 1,225 773
-------- --------
Cash and cash equivalents at end of period $ 3,201 $ 2,060
======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 24,795 $ 21,121
-------- --------
Federal and state income taxes paid $(10,340) $ (2,214)
-------- --------
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 internal environmental audit program and
an external waste disposal vendor audit and qualification program
intended to enhance compliance with existing federal, state, and
local requirements regarding the handling of potentially hazardous
products and by-products.
The Company has been named as a potentially responsible party
(PRP) by either the 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 September 30, 1995, the
Company had total reserves for environmental response costs of $36
million and a related regulatory asset of $13 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 third quarter of 1995 increased $2 million
over the corresponding period in 1994 as a result of increased
sales to ultimate customers, reflecting warmer weather in the
summer of 1995 and reduced operation and maintenance costs.
Net income for the nine months decreased $8 million. Increased
sales to commercial and industrial customers were offset by reduced
sales to residential customers. Increased purchased power costs,
increased interest expense, and a decrease in revenues, primarily
in the second quarter, due to the operation of its purchased power
cost adjustment (PPCA) mechanism, all contributed to the decrease
in earnings. These decreases in earnings were partially offset by
reduced operation and maintenance expenses. For a further
discussion of the Company's PPCA mechanism, see the Operating
Revenue section.
Rate Activity
-------------
On September 29, 1995, the Massachusetts Department of Public
Utilities (MDPU) approved a $31 million increase to base rates for
the Company which the Company began billing effective October 1,
1995. Approximately $5 million of this increase relates to the
amortization of previously deferred postretirement benefits other
than pensions (PBOPs) costs. The Company and certain intervenors
to the rate case have each filed motions asking that the MDPU
reconsider certain rulings within its order.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1995 vs 1994 1995 vs 1994
------------- ------------
(In Millions)
Sales to ultimate customers $ 8 $ (1)
PPCA mechanism (1) (6)
Fuel recovery 6 32
Rate changes/Service Extension
Discounts (SEDs) 6 17
DSM 6 6
Unbilled revenues recognized under
rate agreement (8) (24)
Other (1) (1)
--- ----
$16 $ 23
=== ====
The increase in sales to ultimate customers in the third
quarter reflects warmer weather in the summer of 1995. During
the nine month period, lower sales to residential customers were
offset by higher sales to commercial and industrial customers.
The increases in revenues due to the rate changes/SEDs are
the result of the November 1994 expiration of the Company's
temporary rate decrease as well as increased revenues for
recovery of PBOPs, partially offset by increased discounts
offered to large customers who agreed to give a three to five
year notice before changing electricity suppliers under the
Company's SED program. The cost of these discounts is being
reimbursed to the Company by New England Power Company (NEP),
the Company's affiliated power supplier, beginning in 1995 as a
credit on its purchased power bill.
For a discussion of fuel recovery see the fuel costs
discussion in the Operating Expenses section.
The Company's PPCA mechanism is designed to recover the
effects of rate increases from 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
at 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.
The decrease in the recognition of unbilled revenues
reflects the Company's completion of the recognition of $35
million of unbilled revenues over a 13 month period that ended
December 31, 1994 in accordance with an October 1993 rate
agreement.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1995 vs 1994 1995 vs 1994
------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $ 6 $32
SED reimbursement (2) (6)
Other 6 7
Other operation and maintenance
DSM 6 6
Other (3) (6)
Depreciation 1 2
Taxes (6)
--- ---
$14 $29
=== ===
The increase in fuel costs from NEP in the third quarter and
nine months reflects increased short-term purchases which flow
through NEP's fuel clause. This increase was the result of
decreased generation from NEP's nuclear power suppliers,
decreased hydro production due to low water levels, and, in the
second quarter of 1995, overhauls of NEP's thermal generating
facilities.
The reduction in other operation and maintenance in the
third quarter and first nine months of 1995 reflects decreased
distribution system related expenses, and a reduction in
uncollectible accounts expense, partially offset by increased
general, administrative, and information system costs.
The decrease in taxes is primarily due to decreased income
in the first nine months of the year.
Interest Expense
- ----------------
The increase in interest expense is due to increased
long-term and short-term debt balances and higher interest
rates.
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.
Massachusetts has been considering various proposals for
allowing electric customers greater choice over their
electricity supplier. The Company proposed to the MDPU a set of
interdependent principles for industry restructuring which was
agreed to by groups representing environmental protection
advocates, governmental agencies, non-utility generators,
investor-owned utilities, and large and small customer
interests. These principles included, among others, provisions
for increased customer choice while allowing utilities the
opportunity to recover the cost of their past commitments
(stranded costs). In August 1995, the MDPU adopted principles
similar to those filed by the Company, including a reasonable
opportunity for recovery of stranded costs over a period not to
exceed 10 years. The MDPU directed the Company and two other
utilities to file by February 16, 1996, a detailed plan
consistent with the MDPU decision.
In October 1995, the Company began discussions with
interested parties regarding the plan to be filed pursuant to
the MDPU order. That plan, to be called "Choice: New England",
will propose that all customers of electric utilities in
Massachusetts have the ability to choose their power supplier
beginning in 1998. Under the plan, NEP's generation assets
would become competitive, while the Company's transmission and
distribution assets would remain regulated. Among other
provisions, the plan would also propose a uniform access charge
so that all regional utilities will have an opportunity to
recover the cost of commitments made under the current regulated
system.
NEES believes that its "Choice: New England" proposal meets
the principles for industry restructuring adopted by the MDPU
and RIPUC for increased customer choice while providing
utilities with an opportunity to recover costs which may be
stranded by such customer choice. However, there can be no
assurance that a final plan will include an access charge which
would recover all stranded costs.
In August 1995, the MDPU issued an order in a stranded cost
case involving another utility and one of its customers. This
customer, which previously purchased all of its requirements
from the utility, installed cogenerating equipment and
requested that the utility provide only backup service. In its
order, the MDPU required the customer to pay the utility 75
percent of the net stranded costs attributable to serving the
customer's load. Because, in part, utilities have always been
exposed to the risk of customer cogeneration, the MDPU indicated
that its order, which is under appeal, did not set precedent for
the issue of stranded cost recovery in the context of utility
industry restructuring.
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 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, or its own initiatives, such as
"Choice: New England", 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 September 30,
1995, the Company had pre-tax regulatory assets (net of
regulatory liabilities) of approximately $50 million. In
addition, if competitive or regulatory change should cause the
Company's revenues to be 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 $67 million in
the first nine 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 nine
months of 1995, the Company issued $88 million of first mortgage
bonds at interest rates ranging from 6.72 percent to 8.46
percent.
At September 30, 1995, the Company had $42 million of
short-term debt outstanding including $28 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 September 30, 1995.
For the twelve-month period ending September 30, 1995, the
ratio of earnings to fixed charges was 2.43.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning the Company's $31 million rate order
from 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 August 17, 1995, a Special 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 was increased from eleven to
twelve.
Dr. Kalyan K. Ghosh was elected as a director.
The following are the other directors of the Company:
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
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.
The Company filed reports on Form 8-K dated August 16, 1995
and September 29, 1995, each 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 September 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: November 13, 1995