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, 1997
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, 1997.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Periods Ended June 30
(Unaudited)
Quarter Six Months
-------- ----------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
Operating revenue $369,542 $358,479 $775,060 $749,298
-------- -------- -------- --------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 264,492 262,008 559,692 549,393
Other operation 49,534 52,404 98,080 99,602
Maintenance 8,880 7,241 16,304 15,297
Depreciation 12,438 12,038 25,076 24,075
Taxes, other than income taxes 8,041 7,738 16,914 16,483
Income taxes 6,460 3,267 15,056 9,978
-------- -------- -------- --------
Total operating expenses 349,845 344,696 731,122 714,828
-------- -------- -------- --------
Operating income 19,697 13,783 43,938 34,470
Other income (expense), net (211) (40) (2,107) (2,077)
-------- -------- -------- --------
Operating and other income 19,486 13,743 41,831 32,393
-------- -------- -------- --------
Interest:
Interest on long-term debt 7,004 6,736 14,087 13,461
Other interest 2,229 1,819 3,971 3,206
Allowance for borrowed funds used during
construction - credit (100) (268) (216) (464)
-------- -------- -------- --------
Total interest 9,133 8,287 17,842 16,203
-------- -------- -------- --------
Net income $ 10,353 $ 5,456 $ 23,989 $ 16,190
======== ======== ======== ========
Statements of Retained Earnings
Retained earnings at beginning of period $166,803 $150,671 $165,936 $150,308
Net income 10,353 5,456 23,989 16,190
Dividends declared on cumulative
preferred stock (779) (778) (1,557) (1,557)
Dividends declared on common stock (4,796) (1,199) (16,787) (10,791)
-------- -------- -------- --------
Retained earnings at end of period $171,581 $154,150 $171,581 $154,150
======== ======== ======== ========
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)
1997 1996
---- ----
(In Thousands)
Operating revenue $1,564,299 $1,526,451
---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 1,131,008 1,108,468
Other operation 210,141 214,824
Maintenance 32,109 29,882
Depreciation 48,358 45,974
Taxes, other than income taxes 30,990 31,015
Income taxes 30,264 24,670
---------- ----------
Total operating expenses 1,482,870 1,454,833
---------- ----------
Operating income 81,429 71,618
Other income (expense), net (1,243) (1,801)
---------- ----------
Operating and other income 80,186 69,817
---------- ----------
Interest:
Interest on long-term debt 27,715 26,781
Other interest 7,238 6,368
Allowance for borrowed funds used during
construction - credit (492) (930)
---------- ----------
Total interest 34,461 32,219
---------- ----------
Net income $ 45,725 $ 37,598
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 154,150 $ 134,654
Net income 45,725 37,598
Dividends declared on cumulative preferred stock (3,114) (3,114)
Dividends declared on common stock (25,180) (14,988)
---------- ----------
Retained earnings at end of period $ 171,581 $ 154,150
========== ==========
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 1997 1996
------ ---- ----
(In Thousands)
Utility plant, at original cost $1,536,422 $1,509,896
Less accumulated provisions for depreciation 446,458 430,585
---------- ----------
1,089,964 1,079,311
Construction work in progress 17,608 9,119
---------- ----------
Net utility plant 1,107,572 1,088,430
---------- ----------
Current assets:
Cash 1,163 2,356
Accounts receivable:
From sales of electric energy 145,463 165,866
Other (including $2,323,000 and $1,605,000
from affiliates) 3,076 2,600
Less reserves for doubtful accounts 14,539 13,146
---------- ----------
134,000 155,320
Unbilled revenues 46,284 43,390
Materials and supplies, at average cost 9,031 8,820
Prepaid and other current assets 26,471 25,923
---------- ----------
Total current assets 216,949 235,809
---------- ----------
Deferred charges and other assets 51,047 66,019
---------- ----------
$1,375,568 $1,390,258
========== ==========
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 171,581 165,936
---------- ----------
Total common equity 432,706 427,061
Cumulative preferred stock 50,000 50,000
Long-term debt 333,415 343,321
---------- ----------
Total capitalization 816,121 820,382
---------- ----------
Current liabilities:
Long-term debt due in one year 25,000 30,000
Short-term debt (including $5,700,000 and $5,275,000
to affiliates) 30,125 43,775
Accounts payable (including $164,905,000 and $157,603,000
to affiliates) 174,802 178,263
Accrued liabilities:
Taxes 5,323 961
Interest 9,154 9,635
Other accrued expenses 75,004 54,833
Customer deposits 4,413 4,308
Dividends payable 5,575 7,973
---------- ---------
Total current liabilities 329,396 329,748
---------- ----------
Deferred federal and state income taxes 170,592 177,778
Unamortized investment tax credits 16,015 16,566
Other reserves and deferred credits 43,444 45,784
---------- ----------
$1,375,568 $1,390,258
========== ==========
The accompanying notes are an integral part of these financial statements.
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Six Months Ended June 30
(Unaudited)
1997 1996
---- ----
(In Thousands)
<C
Operating Activities:
Net income $ 23,989 $ 16,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 25,076 24,075
Deferred income taxes and investment tax credits, net (7,710) (11,234)
Allowance for funds used during construction (216) (464)
Decrease (increase) in accounts receivable, net
and unbilled revenues 18,426 13,766
Decrease (increase) in materials and supplies (211) (276)
Decrease (increase) in prepaid and other current assets (548) (1,657)
Increase (decrease) in accounts payable (3,461) (19,377)
Increase (decrease) in other current liabilities 24,157 41,178
Other, net 13,036 3,726
-------- --------
Net cash provided by operating activities $ 92,538 $ 65,927
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(44,007) $(47,425)
Other investing activities (332) (197)
-------- --------
Net cash used in investing activities $(44,339) $(47,622)
-------- --------
Financing Activities:
Dividends paid on common stock $(19,185) $(10,791)
Dividends paid on preferred stock (1,557) (1,557)
Changes in short-term debt (13,650) (6,800)
Long-term debt - retirements (15,000)
-------- --------
Net cash provided by (used in) financing activities $(49,392) $(19,148)
-------- --------
Net decrease in cash and cash equivalents $ (1,193) $ (843)
Cash and cash equivalents at beginning of period 2,356 1,840
-------- --------
Cash and cash equivalents at end of period $ 1,163 $ 997
======== ========
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. Massachusetts Electric Company (the
Company) is a wholly-owned retail subsidiary of New England
Electric System (NEES). NEES subsidiaries have an internal
environmental audit program and an external waste disposal vendor
audit and qualification program intended to enhance compliance with
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 United States 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 manufactured gas locations in
Massachusetts (including eight of the 19 locations for which the
Company is a PRP). The Company is currently aware of other
possible hazardous waste 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 settlement agreement regarding the rate recovery of
remediation costs of former manufactured gas sites and certain
other hazardous waste sites located in Massachusetts. Under that
agreement, qualified costs related to these sites are paid out of
a special fund established on the Company's books. The Company
made an initial $30 million contribution to the fund. Rate-
recoverable contributions of $3 million, adjusted since 1993 for
inflation, are added annually to the fund along with interest and
any recoveries from insurance carriers and other third parties. At
June 30, 1997, the fund had a balance of $28 million. If a
Massachusetts restructuring and rate settlement is approved by the
Federal Energy Regulatory Commission, an additional $15 million
will be transferred to the fund in 1997 out of existing reserves
for refunds.
Note A - Hazardous Waste - Continued
- ------------------------
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. The NEES
companies have received recovery amounts from certain insurers,
and, where appropriate, the Company intends to seek recovery from
other insurers and from other PRPs, but it is uncertain whether,
and to what extent, such efforts will be successful. At June 30,
1997, the Company had total reserves for environmental response
costs of $37 million and a related regulatory asset of less than $1
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.
In October 1996, the American Institute of Certified Public
Accountants issued new accounting rules for Environmental
Remediation Liabilities which become effective in 1997. These new
rules do not have a material effect on the Company's financial
position or results of operations.
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 1996 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 (the Company) (a wholly-owned retail subsidiary
of New England Electric System (NEES)) 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 1996 Annual Report on
Form 10-K.
Earnings
- --------
Net income for the second quarter and first six months of 1997
increased $5 million and $8 million, respectively, compared with
the corresponding periods in 1996. These increases are due to an
increase in kilowatt-hour (kWh) deliveries to ultimate customers,
and the effects of the Company's purchased power cost adjustment
(PPCA) mechanism (see discussion in the "Operating Revenues"
section). KWh deliveries to ultimate customers increased 2.7
percent and 1.1 percent in the second quarter and first six months
of 1997, respectively. This year the weather was warmer in the
second quarter but milder in the first quarter compared to last
year.
Industry Restructuring
- ----------------------
For a full discussion of industry restructuring activities in
Massachusetts, Rhode Island and New Hampshire, see "Industry
Restructuring" in the Company's Form 10-K for 1996.
Industry Restructuring Update
As previously reported, the Massachusetts settlement covering
customer choice and electric utility industry restructuring
provides for full recovery of the costs of generating assets and
oil and gas related assets (including regulatory assets) not
recoverable through the divestiture of New England Power Company's
(NEP) (a wholly-owned wholesale subsidiary of NEES) generating
business. The Massachusetts settlement was approved by the
Massachusetts Department of Public Utilities (MDPU) and a companion
wholesale settlement is now pending final approval before the
Federal Energy Regulatory Commission (FERC). FERC action is
expected later in 1997.
The NEES companies have reached an agreement with all three of
its unions regarding benefits and other assistance including early
retirement and severance programs, to union employees that are
affected by the restructuring of the electric utility industry and
the NEES companies divestiture of its generation business. The
NEES companies have also announced similar early retirement and
severance programs for management employees. The NEES companies
anticipate that industry restructuring and divestiture will lead to
workforce reductions. The expected cost of such programs will be
substantially recovered from the proceeds of the sale of the
generating business.
On May 20, 1997, the Utility Workers Union of America and the
Massachusetts Alliance of Utility Unions withdrew their appeal to
the Massachusetts Supreme Judicial Court of the MDPU approval of
the Massachusetts settlement. Several bills are pending before the
Massachusetts legislature on electric utility industry
restructuring, including comprehensive legislation introduced by
former Governor William F. Weld and by the legislature's Joint
Committee on Electric Restructuring. These bills cover many of the
topics addressed in the settlement and could impact the
implementation of the settlement.
Accounting Implications
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. Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of
Regulation (FAS 71), requires regulated entities, in appropriate
circumstances, to establish regulatory assets, and thereby defer
the income statement impact of certain costs expected to be
recovered in future rates. At December 31, 1996 the Company had
approximately $16 million in net regulatory assets (regulatory
assets of $56 million offset by regulatory liabilities of $40
million) in compliance with FAS 71. The Company believes that the
continuing rate-making policies and practices of the MDPU and the
terms of the Massachusetts settlement will enable the Company to
recover both its specific costs of providing ongoing distribution
services and stranded costs billed to it by NEP. The Company
believes that these factors will allow it to continue to apply FAS
71. In the event that future circumstances should cause the
application of FAS 71 to be discontinued, a noncash write-off of
previously established regulatory assets would be required.
Year 2000 Computer Issues
- -------------------------
In the next two-and-one-half years, most large companies will
face a potentially serious information systems (computer) problem
because most software application and operational programs written
in the past will not properly recognize calendar dates beginning in
the year 2000. This could force computers to either shut down or
lead to incorrect calculations. The NEES companies began the
process of identifying the changes required to their computer
programs and hardware during 1996. The necessary modifications to
the NEES companies' centralized financial, customer, and
operational information systems are expected to be completed by the
end of 1998. The NEES companies believe they will incur
approximately $20 million of costs between now and January 1, 2000,
associated with making the necessary modifications identified to
date to the centralized systems. Noncentralized systems are
currently being reviewed for Year 2000 problems. The NEES
companies are unable to predict the costs to be incurred for
correction of such noncentralized systems, but expect the scope and
schedule for such work to be less complex than for its centralized
information systems.
Operating Revenue
- -----------------
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Second Quarter Six Months
-------------- ------------
1997 vs 1996 1997 vs 1996
-------------- ------------
(In Millions)
Deliveries to ultimate customers $ 5 $ 3
PPCA 6 8
Fuel recovery 2 15
Demand-Side Management (DSM) (2) (1)
Other - 1
--- ---
$11 $26
=== ===
For a discussion of deliveries to ultimate customers, see the
"Earnings" section.
The PPCA mechanism 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 mechanism is also designed
to pass on to customers the effects of NEP's seasonal rates. Due
to reduced peak demand levels, primarily in the month of May 1997,
refunds recorded under this mechanism were less in 1997 than in
1996. The provisions of the Company's restructuring settlement
would have caused the PPCA mechanism to end effective July 31,
1996. However, since the Massachusetts settlement has not yet been
approved by the FERC, the Company has continued to accrue refund
provisions of $19 million related to the assumed operation of the
PPCA mechanism since July 31, 1996 ($9 million in 1996 and $10
million in 1997, to date). In addition, at December 31, 1996 the
Company had deferred approximately $8 million of storm damage
costs. In accordance with the Massachusetts restructuring
settlement signed in 1997, the Company will not be permitted
recovery of approximately $2 million of such storm damage costs.
The increase in fuel recovery revenues is due to increased
replacement power fuel purchases by NEP due to reduced generation
by partially owned nuclear units. These costs are passed on to the
Company through NEP's fuel clause. The Company, in turn, passes
these costs on to its customers.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Second Quarter Six Months
-------------- ------------
1997 vs 1996 1997 vs 1996
-------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $ 2 $15
Other - (5)
Other operation and maintenance:
DSM (2) (1)
Other 1 -
Depreciation 1 1
Taxes 3 6
--- ---
$ 5 $16
=== ===
For a discussion of increased fuel costs, refer to the
"Operating Revenues" section.
The decrease in other purchased electric energy is principally
due to a reduction in peak demand charges, reflecting milder
weather in the first quarter of 1997.
Utility Plant Expenditures and Financing
- ----------------------------------------
Cash expenditures for utility plant totaled $44 million in the
first six months of 1997. 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
plans to issue $50 million of long-term debt in 1997, of which $30
million will be used to retire maturing bonds, and the balance used
to fund capital expenditures.
At June 30, 1997, the Company had $30 million of short-term
debt outstanding including $24 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, 1997.
For the twelve-month period ending June 30, 1997, the ratio of
earnings to fixed charges was 3.12.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Information concerning the restructuring dockets before the
Federal Energy Regulatory Commission, 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.
The Company filed a report on Form 8-K dated July 14, 1997
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 June 30, 1997 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: July 31, 1997