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, 1996
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, 1996.
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
- ----------------------------
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Operating revenue $358,479 $355,431 $749,298 $728,523
-------- -------- -------- --------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 262,008 270,060 549,393 554,598
Other operation 52,404 46,527 99,602 91,438
Maintenance 7,241 7,508 15,297 14,940
Depreciation 12,038 11,465 24,075 22,930
Taxes, other than income taxes 7,738 7,136 16,483 15,490
Income taxes 3,267 1,562 9,978 4,605
-------- -------- -------- --------
Total operating expenses 344,696 344,258 714,828 704,001
-------- -------- -------- --------
Operating income 13,783 11,173 34,470 24,522
Other income (expense), net (40) (1,143) (2,077) (817)
-------- -------- -------- --------
Operating and other income 13,743 10,030 32,393 23,705
-------- -------- -------- --------
Interest:
Interest on long-term debt 6,736 6,476 13,461 12,581
Other interest 1,819 981 3,206 3,622
Allowance for borrowed funds used during
construction - credit (268) 6 (464) (191)
-------- -------- -------- --------
Total interest 8,287 7,463 16,203 16,012
-------- -------- -------- --------
Net income $ 5,456 $ 2,567 $ 16,190 $ 7,693
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $150,671 $135,264 $150,308 $136,911
Net income 5,456 2,567 16,190 7,693
Dividends declared on cumulative
preferred stock (778) (779) (1,557) (1,557)
Dividends declared on common stock (1,199) (2,398) (10,791) (8,393)
-------- -------- -------- --------
Retained earnings at end of period $154,150 $134,654 $154,150 $134,654
======== ======== ======== ========
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)
1996 1995
---- ----
(In Thousands)
Operating revenue $1,526,451 $1,488,995
---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 1,108,468 1,097,275
Other operation 214,824 212,679
Maintenance 29,882 35,203
Depreciation 45,974 44,055
Taxes, other than income taxes 31,015 28,826
Income taxes 24,670 15,945
---------- ----------
Total operating expenses 1,454,833 1,433,983
---------- ----------
Operating income 71,618 55,012
Other income (expense), net (1,801) (46)
---------- ----------
Operating and other income 69,817 54,966
---------- ----------
Interest:
Interest on long-term debt 26,781 23,382
Other interest 6,368 7,382
Allowance for borrowed funds used during
construction - credit (930) (430)
---------- ----------
Total interest 32,219 30,334
---------- ----------
Net income $ 37,598 $ 24,632
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 134,654 $ 138,317
Net income37,598 24,632
Dividends declared on cumulative preferred stock (3,114) (3,114)
Dividends declared on common stock (14,988) (25,181)
---------- ----------
Retained earnings at end of period $ 154,150 $ 134,654
========== ==========
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 1996 1995
------ ---- ----
(In Thousands)
Utility plant, at original cost $1,463,912 $1,420,069
Less accumulated provisions for depreciation 417,276 399,711
---------- ----------
1,046,636 1,020,358
Construction work in progress 18,628 21,118
---------- ----------
Net utility plant 1,065,264 1,041,476
---------- ----------
Current assets:
Cash 997 1,840
Accounts receivable:
From sales of electric energy 153,508 160,795
Other (including $2,714,000 and $1,776,000
from affiliates) 3,783 3,527
Less reserves for doubtful accounts 13,679 12,544
---------- ----------
143,612 151,778
Unbilled revenues 44,200 49,800
Materials and supplies, at average cost 10,878 10,602
Prepaid and other current assets 24,171 22,514
---------- ----------
Total current assets 223,858 236,534
---------- ----------
Deferred charges and other assets 61,147 65,090
---------- ----------
$1,350,269 $1,343,100
========== ==========
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 155,310 155,310
Retained earnings 154,150 150,308
---------- ----------
Total common equity 415,275 411,433
Cumulative preferred stock 50,000 50,000
Long-term debt 338,356 353,267
---------- ----------
Total capitalization 803,631 814,700
---------- ----------
Current liabilities:
Long-term debt due in one year 15,000
Short-term debt (including $5,375,000 and $1,000,000
to affiliates) 48,650 55,450
Accounts payable (including $154,490,000 and $165,515,000
to affiliates) 162,566 181,943
Accrued liabilities:
Taxes 13,840 7,371
Interest 9,376 9,502
Other accrued expenses 52,197 17,136
Customer deposits 4,407 4,633
Dividends payable 1,977 1,977
---------- ---------
Total current liabilities 308,013 278,012
---------- ----------
Deferred federal and state income taxes 173,887 184,575
Unamortized investment tax credits 17,125 17,684
Other reserves and deferred credits 47,613 48,129
---------- ----------
$1,350,269 $1,343,100
========== ==========
The accompanying notes are an integral part of these financial statements.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
1996 1995
---- ----
(In Thousands)
<C
Operating Activities:
Net income $ 16,190 $ 7,693
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 24,075 22,930
Deferred income taxes and investment tax credit, net (11,234) (3,478)
Allowance for funds used during construction (464) (191)
Decrease (increase) in accounts receivable, net
and unbilled revenues 13,766 17,769
Decrease (increase) in materials and supplies (276) 251
Decrease (increase) in prepaid and other current assets (1,657) 11
Increase (decrease) in accounts payable (19,377) (17,549)
Increase (decrease) in other current liabilities 41,178 4,876
Other, net 3,726 2,790
-------- --------
Net cash provided by operating activities $ 65,927 $ 35,102
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(47,425) $(45,454)
Other investing activities (197) (415)
-------- --------
Net cash used in investing activities $(47,622) $(45,869)
-------- --------
Financing Activities:
Dividends paid on common stock $(10,791) $(19,185)
Dividends paid on preferred stock (1,557) (1,557)
Long-term debt-issues 68,000
Long-term debt-retirements (25,000)
Changes in short-term debt (6,800) (11,545)
-------- --------
Net cash provided by (used in) financing activities$(19,148) $ 10,713
-------- --------
Net decrease in cash and cash equivalents $ (843) $ (54)
Cash and cash equivalents at beginning of period 1,840 1,225
-------- --------
Cash and cash equivalents at end of period $ 997 $ 1,171
======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 15,769 $ 15,174
-------- --------
Federal and state income taxes paid (refunded) $ 14,545 $ (5,775)
-------- --------
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 an environmental audit program in
place 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 19 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 eight of the 19 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
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 will be successful. At June 30, 1996,
Note A - Hazardous Waste - Continued
- ------------------------
the Company had total reserves for environmental response costs
of $38 million and a related regulatory asset of $15 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, are not material to its financial position.
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 1995
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 1995 Annual Report on
Form 10-K.
Earnings
--------
Net income for the second quarter and first six months of
1996 increased $3 million and $8 million, respectively, compared
with the corresponding periods in 1995. These increases are due
to sales growth and rate increases. Kilowatt-hour (kWh) sales to
ultimate customers increased 1.8 percent and 3.8 percent in the
second quarter and first six months of 1996, respectively.
Partially offsetting these increases in revenues are increased
operation and maintenance expenses.
Competitive Conditions
----------------------
The electric utility business is being subjected to rapidly
increasing competitive pressures, stemming from a combination of
trends, including the presence of surplus generating capacity, a
disparity in electric rates among regions of the country,
improvements in generation efficiency, 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, 1995.
In states across the country, including Massachusetts, there
have been an increasing number of proposals to allow retail
customers to choose their electricity supplier, with incumbent
utilities required to deliver that electricity over their
transmission and distribution systems (also known as "retail
wheeling"). In Rhode Island, such a proposal has been enacted
into law.
Massachusetts proceedings
In February 1996, the Company filed with the Massachusetts
Department of Public Utilities (MDPU) a plan for retail choice
similar to the Rhode Island legislation described below. Three
other utilities and the Massachusetts Division of Energy
Resources (DOER) also filed plans with the MDPU in February 1996.
The DOER's plan calls for direct access for all customers
beginning in 1998, with a pilot program beginning in 1997. The
DOER's plan, however, proposes that, in exchange for stranded
cost recovery, utilities divest their generating assets, either
through sale or spinoff.
On May 1, 1996, the MDPU issued a set of proposed rules and
regulations governing the implementation of retail choice. The
proposed rules would allow all customers of Massachusetts
investor-owned utilities to choose their electricity supplier
beginning in 1998 and would establish a price cap system for
regulating the rates for distribution service that would continue
to be provided by local utilities. The MDPU-proposed rules
affirm the principle of stranded cost recovery for utilities over
ten years, but create uncertainties concerning the extent of
actual stranded cost recovery. While the MDPU did not order
mandatory divestiture of generating assets, it stated that it
might provide utilities financial incentives to divest. Hearings
on the proposed rules were completed in July 1996. The MDPU has
stated that it will issue final regulations by year-end 1996 and
issue orders on the individual utility plans in 1997.
Rhode Island legislation
On August 7, 1996, the Governor of Rhode Island signed into
law legislation that will restructure the electric utility
industry in Rhode Island. Rhode Island is the first state to
pass comprehensive legislation providing retail customers with
access to alternative suppliers and providing utilities with
recovery of their stranded investments. The New England Electric
System companies supported this legislation which affects the
Company's affiliates, New England Power Company (NEP) and The
Narragansett Electric Company (Narragansett).
The legislation will allow all customers of electric
utilities to choose their power supplier under a phased-in
approach, while transmission and distribution rates will remain
regulated. This phase-in will begin on July 1, 1997 for
customers representing approximately 10 percent of Narragansett's
load, followed by another 10 percent on January 1, 1998, and the
balance of customers on July 1, 1998.
Under the new law, NEP's wholesale contract with Narragansett
will be terminated. In return, the cost of NEP's past generation
commitments to serve Narragansett's customers will be recovered
through a transition access charge on retail distribution rates.
Those commitments, which are currently estimated at approximately
$4 billion on a present value basis in total for NEP (of which
Narragansett's share is approximately $1 billion with the balance
primarily representing the Company's share), consist of (i)
generating plant commitments, (ii) regulatory assets, (iii) the
above market component of purchased power contracts, and (iv) the
operating cost of nuclear plants which cannot be mitigated by
shutting down the plants. The aggregate amount of the transition
access charge will be reduced by the fair market value of the
utilities' non-nuclear generating assets. The value of such
generating assets will be determined by leasing, selling,
spinning off, or otherwise disposing of at least a 15 percent
interest in such generating facilities.
Sunk costs associated with generating plants and regulatory
assets will be recovered over a period of 12 years. NEP's
purchased power contracts and nuclear decommissioning costs will
be recovered as incurred over the life of those obligations, a
period expected to extend beyond 12 years. The initial
transition access charge will be set at 2.8 cents per kWh through
December 31, 2000, and is expected to decline thereafter.
Implementation of various aspects of the Rhode Island legislation
is subject to Rhode Island Public Utilities Commission and
Federal Energy Regulatory Commission (FERC) approval.
FERC order
In April 1996, the FERC issued Order No. 888 addressing open
access transmission and indicated that those utilities that own
transmission facilities will be required to file open access
tariffs to make available transmission service to affiliates and
nonaffiliates at fair non-discriminatory rates. Order No. 888
also stated that public utilities will be allowed to seek
recovery of legitimate and verifiable stranded costs from
departing customers as a result of wholesale competition. The
FERC indicated that it will provide for the recovery of retail
stranded costs only if state regulators lack the legal authority
to address those costs at the time retail wheeling is required.
The FERC also stated that it would consider proposals for
stranded cost recovery under wholesale requirements contracts,
such as the contracts between NEP and its retail affiliates.
Risk factors
The major risk factors affecting the Company relate to the
possibility of adverse regulatory decisions or legislation which
limit the level of revenues the Company is allowed to charge for
its services. The Company's all-requirements purchased power
contract with NEP requires either party to give seven years
notice prior to terminating the contract. Termination of the
contract would create stranded costs at NEP that NEP would seek
to recover from the Company pursuant to the contract. In that
event, the Company would seek recovery of such stranded costs
from its customers. However, there is no assurance that the
final restructuring plans ordered by state regulatory bodies or
the state legislatures will include provisions that allow the
Company to fully recover any stranded costs passed on to the
Company by NEP. In such an event, the Company could be faced
with a significant amount of costs being billed to it by NEP that
the Company could not fully recover from retail customers, for
which the Company would seek a remedy in the courts. In
addition, there is no assurance that any performance incentive
system, which regulators might ultimately adopt with respect to
the Company's distribution activities, would allow the Company to
fully recover prudently incurred costs and earn a reasonable
return on investment.
Historically, electric utility rates have 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 effects
of regulatory, legislative, or utility 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 December 31, 1995, the Company had pre-tax
regulatory assets (net of regulatory liabilities) of
approximately $50 million.
This "Competitive Conditions" section contains forward-
looking statements as defined under the securities laws. Actual
results could differ materially from those projected. This
section, particularly under "Risk factors", lists some of the
reasons why results could differ materially from those projected.
Operating Revenue
-----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1996 vs 1995 1996 vs 1995
-------------- ------------
(In Millions)
Sales to ultimate customers $ 4 $15
Rate changes 8 15
Fuel recovery (7) (4)
Rate adjustment mechanisms (4) (6)
Demand Side Management (DSM) 1 -
Other 1 1
--- ---
$ 3 $21
=== ===
For a discussion of sales to ultimate customers, see the
"Earnings" section.
The increase in revenues due to rate changes is the result
of a $31 million base rate increase effective in October 1995.
The Company's rates contain a purchased power cost
adjustment mechanism which is designed to allow the Company to
pass on to its customers changes in purchased energy costs
resulting from rate increases or decreases by NEP, the Company's
affiliated wholesale power supplier. The mechanism is also
designed to pass on to customers the effects of NEP's seasonal
rates. While the Company experienced a decrease in purchased
power costs in the second quarter and first six months of 1996,
had it not been for NEP's seasonal rates, purchased power expense
would have increased. This savings is required to be passed on
to customers and is therefore reflected as a reduction in
revenues for both periods under rate adjustment mechanisms.
Operating Expenses
------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1996 vs 1995 1996 vs 1995
-------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $(7) $(4)
Other (1) (1)
Other operation and maintenance:
DSM 1 -
Other 4 9
Depreciation and amortization 1 1
Taxes 2 6
--- ---
$ - $11
=== ===
The increase in other operation and maintenance expense in
the second quarter and first six months of 1996 reflects
increased customer service expenses and increased distribution
system-related expenses. In addition, the increase for the six
months also reflects increased post-retirement benefit costs due
to the inclusion of additional amounts in rates that were
previously deferred.
The change in taxes is primarily due to increased income.
Utility Plant Expenditures and Financings
-----------------------------------------
Cash expenditures for utility plant totaled $47 million in
the first six months of 1996. The funds necessary for utility
plant expenditures during the period were provided by net cash
from operating activities, after the payment of dividends. The
Company did not issue any long-term debt during the first six
months of 1996. The Company plans to issue $20 million of long-
term debt later in 1996. On July 16, 1996, the Nantucket
Electric Company (Nantucket), a retail affiliate of the Company,
issued $28 million of long-term tax-exempt debt at rates ranging
from 4.10 percent to 6.75 percent. The Company guaranteed the
debt on behalf of Nantucket.
Citing the passage of the restructuring legislation in Rhode
Island, Moody's Investor Services lowered the credit rating of
the Company from A1 to A2 for senior secured debt.
At June 30, 1996, the Company had $49 million of short-term
debt outstanding including $43 million of commercial paper
borrowings. The Company currently has lines of credit with banks
totaling $90 million. There were no borrowings under these
lines of credit at June 30, 1996.
For the twelve-month period ending June 30, 1996, the ratio
of earnings to fixed charges was 2.85.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Information concerning the restructuring dockets before 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, 1996 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 14, 1996