<PAGE>
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, 1994
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
(508-366-9011)
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, 1994.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Periods Ended September 30
(Unaudited)
<CAPTION>
Quarter Nine Months
------- -----------
1994 1993 1994 1993
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Operating revenue $376,582 $376,137 $1,098,180 $1,094,871
-------- -------- ---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate287,038294,684 818,763 822,124
Other operation 51,220 45,789 145,773 167,180
Maintenance 8,881 9,623 24,120 27,522
Depreciation 10,825 10,400 32,475 31,200
Taxes, other than income taxes 7,669 6,484 22,997 20,849
Income taxes 829 1,169 11,754 1,604
-------- -------- ---------- ----------
Total operating expenses 366,462 368,149 1,055,882 1,070,479
-------- -------- ---------- ----------
Operating income 10,120 7,988 42,298 24,392
Other income (expense) - net (19) 627 (1,785) (313)
-------- -------- ---------- ----------
Operating and other income 10,101 8,615 40,513 24,079
-------- -------- ---------- ----------
Interest:
Interest on long-term debt 5,334 5,843 15,500 17,977
Other interest 3,447 643 6,053 2,215
Allowance for borrowed funds used during
construction - credit (111) (75) (258) (233)
-------- -------- ---------- ----------
Total interest 8,670 6,411 21,295 19,959
-------- -------- ---------- ----------
Net income $ 1,431 $ 2,204 $ 19,218 $ 4,120
======== ======== ========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period$138,317$123,481 $ 135,276 $ 134,670
Net income 1,431 2,204 19,218 4,120
Dividends declared on cumulative
preferred stock (778) (1,165) (2,335) (2,879)
Dividends declared on common stock (3,598) (2,398) (16,787) (13,789)
-------- -------- ---------- ----------
Retained earnings at end of period $135,372 $122,122 $ 135,372 $ 122,122
======== ======== ========== ==========
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.
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Statements of Income
Twelve Months Ended September 30
(Unaudited)
<CAPTION>
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Operating revenue $1,471,850 $1,460,358
---------- ----------
Operating expenses:
Purchased electric energy, principally from
New England Power Company, an affiliate 1,078,557 1,084,279
Other operation 208,032 217,652
Maintenance 24,766 39,991
Depreciation 42,123 40,550
Taxes, other than income taxes 28,675 26,984
Income taxes 21,205 8,041
---------- ----------
Total operating expenses 1,403,358 1,417,497
---------- ----------
Operating income 68,492 42,861
Other income (expense) - net (1,536) (238)
---------- ----------
Operating and other income 66,956 42,623
---------- ----------
Interest:
Interest on long-term debt 20,926 23,398
Other interest 7,476 3,877
Allowance for borrowed funds used during
construction - credit (323) (284)
---------- ----------
Total interest 28,079 26,991
---------- ----------
Net income $ 38,877 $ 15,632
========== ==========
Statements of Retained Earnings
Retained earnings at beginning of period $ 122,122 $ 129,411
Net income 38,877 15,632
Dividends declared on cumulative preferred stock (3,228) (3,736)
Dividends declared on common stock (21,583) (19,185)
Premium on redemption of preferred stock (816)
---------- ----------
Retained earnings at end of period $ 135,372 $ 122,122
========== ==========
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.
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Balance Sheets
(Unaudited)
<CAPTION>
September 30, December 31,
ASSETS 1994 1993
------ ---- ----
(In Thousands)
<S> <C> <C>
Utility plant, at original cost $1,324,641 $1,279,194
Less accumulated provisions for depreciation 369,583 352,467
---------- ----------
955,058 926,727
Construction work in progress 25,025 18,558
---------- ----------
Net utility plant 980,083 945,285
---------- ----------
Current assets:
Cash 2,060 773
Accounts receivable:
From sales of electric energy 129,969 142,532
Other (including $2,021,000 and $3,517,000 from affiliates)20,617 22,881
Less reserves for doubtful accounts 12,733 10,534
---------- ----------
137,853 154,879
Unbilled revenues 35,700 43,400
Materials and supplies, at average cost 12,632 10,601
Prepaid and other current assets 18,583 19,990
---------- ----------
Total current assets 206,828 229,643
---------- ----------
Deferred charges and other assets 59,761 57,376
---------- ----------
$1,246,672 $1,232,304
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common stock, par value $25 per share, authorized
and outstanding 2,398,111 shares $ 59,953 $ 59,953
Premiums on capital stocks 45,862 45,862
Other paid-in capital 141,310 141,310
Retained earnings 135,372 135,276
---------- ----------
Total common equity 382,497 382,401
Cumulative preferred stock 50,000 50,000
Long-term debt 254,653 264,719
---------- ----------
Total capitalization 687,150 697,120
---------- ----------
Current liabilities:
Long-term debt due within one year 35,000
Short-term debt (including $2,500,000 and $8,350,000
to affiliates) 42,570 37,925
Accounts payable (including $158,508,000 and $160,852,000
to affiliates) 174,645 178,117
Accrued liabilities:
Taxes 1,845 1,133
Interest 6,048 6,784
Other accrued expenses 60,016 69,823
Customer deposits 5,420 5,907
Dividends payable 4,376 5,575
---------- ----------
Total current liabilities 329,920 305,264
---------- ----------
Deferred federal and state income taxes 157,660 146,414
Unamortized investment tax credits 19,123 20,044
Other reserves and deferred credits 52,819 63,462
---------- ----------
$1,246,672 $1,232,304
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Statements of Cash Flows
Nine Months Ended September
(Unaudited)
<CAPTION> 1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 19,218 $ 4,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 32,475 31,200
Deferred income taxes and investment tax credit - net 10,222 (9,764)
Allowance for borrowed funds used during construction (258) (233)
Amortization of unbilled revenues (24,200)
Early retirement program 7,665
Decrease (increase) in accounts receivable,
net, and unbilled revenues 24,726 794
Decrease (increase) in materials and supplies (2,031) 55
Increase (decrease) in accounts payable (3,472) (11,358)
Increase (decrease) in other current liabilities 13,882 11,395
Other, net (6,689) 32,659
-------- --------
Net cash provided by operating activities $ 63,873 $ 66,533
-------- --------
Investing Activities:
Plant expenditures, excluding allowance for
funds used during construction $(67,225) $(57,890)
Other investing activities (4,685)
-------- --------
Net cash used in investing activities $(71,910) $(57,890)
-------- --------
Financing Activities:
Capital contributions from parent $ 50,571
Dividends paid on common stock $(17,986) (16,787)
Dividends paid on preferred stock (2,335) (2,571)
Preferred stock - issues 35,000
Long-term debt-issues 25,000 90,000
Long-term debt-retirements (70,000)
Premium on reacquisition of long-term debt (3,780)
Changes in short-term debt 4,645 (45,700)
-------- --------
Net cash provided by financing activities $ 9,324 $ 36,733
-------- --------
Net increase in cash and cash equivalents $ 1,287 $ 45,376
Cash and cash equivalents at beginning of period 773 738
-------- --------
Cash and cash equivalents at end of period $ 2,060 $ 46,114
======== ========
Supplementary Information:
Interest paid less amounts capitalized $ 21,121 $ 18,352
-------- --------
Federal and state income taxes paid $ (2,214) $ 12,090
-------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. 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. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System (NEES) 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.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. 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 (DEP) for 14 sites at which hazardous
waste is alleged to have been disposed. The Company is also aware
of other sites which it may be held responsible for remediating and
it is likely that, in the future, the Company will become involved
in additional proceedings demanding contribution for the cost of
remediating additional hazardous waste sites.
The most prevalent types of hazardous waste sites that the
Company has been connected with are former manufactured gas
locations. Until the early 1970's, predecessors or affiliates of
the Company were in the gas business. There are approximately 35
locations in Massachusetts at which gas may have been manufactured
and/or stored. Of the manufactured gas locations, 17 have been
listed for investigation by the DEP. In a lawsuit involving one of
these sites, the United States Court of Appeals for the First
Circuit affirmed in 1993 an earlier adverse decision against the
Company, NEES and another subsidiary, New England Power Service
Company. The decision held these companies liable for cleanup of
the properties involved in the case.
<PAGE>
Note A - Hazardous Waste - Continued
- ------------------------
In 1993, the Massachusetts Department of Public Utilities
approved a rate agreement filed by the Company that resolved all
rate recovery issues related to Massachusetts manufactured gas
sites formerly owned by the Company, its predecessors, and its
affiliates, as well as certain other Massachusetts hazardous waste
sites. The agreement allows for environmental remediation costs
for such sites to be met from a special interest bearing fund
established on the Company's books in 1993 of $30 million. The
initial fund balance was not recoverable from customers. Annual
contributions of $3 million, adjusted for inflation, are being
added to the fund by the Company and are recoverable in rates.
Under the agreement, any shortfalls in the fund will be paid by the
Company and be recovered through rates over seven years, without
interest.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates 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. At
September 30, 1994, the Company had total reserves for
environmental response costs of $40 million and a related
regulatory asset of $12 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 (10 percent of common equity) to
its financial position. Where appropriate, the Company intends to
seek recovery from its insurer and from other PRPs, but it is
uncertain whether, and to what extent, such efforts will be
successful.
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 1993 Annual
Report.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
---------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Earnings
- --------
Earnings for the first nine months of 1994 increased by $15
million from the same period last year. Earnings for the first
nine months of 1993 included a $9 million after-tax ($14 million
before tax) second quarter charge relating to potential response
costs for wastes associated with a number of Massachusetts
manufactured gas locations (see Hazardous Waste section), a $5
million after-tax ($7 million before tax) charge recorded in June
relating to a dispute with the Company's insurers over
reimbursement of damages (including interest) in connection with an
unfavorable court decision (see Operating Expenses section), and an
$8 million after tax ($13 million before tax) charge recorded in
the first quarter associated with an early retirement offer and a
special severance program for non-union employees undertaken by the
Company as part of an organizational review. Earnings for the
first nine months of 1994, excluding the charges described above,
decreased $7 million. This decrease primarily reflects other
increases in operation and maintenance costs.
Although the Company experienced an increase in kilowatthour
(KWH) sales in 1994, the resulting increase in revenues was offset
by seasonal decreases in accrued unbilled revenues and by an
<PAGE>
increase in purchased power costs. The Company commenced the
recognition of accrued unbilled revenues in the fourth quarter of
1993 in connection with a rate agreement (see Rate Activity
section), therefore earnings in the first nine months of 1993
included no effects of unbilled revenues.
Rate Activity
- -------------
In 1993, the Massachusetts Department of Public Utilities
(MDPU) approved a rate agreement filed by the Company, the
Massachusetts Attorney General, and two groups of large commercial
and industrial customers.
Under the agreement, effective December 1, 1993, the Company
began implementing an 11 month general rate decrease of $26 million
(annual basis), from the level of rates then in effect. This rate
reduction continued in effect through October 31, 1994, at which
time rates increased to the previously approved levels.
The agreement also provided for rate discounts totaling up to
$4 million on an annual basis for the period ended October 31, 1994
for large commercial and industrial customers who signed agreements
to give a five year notice to the Company before they purchase
power from another supplier or generate any additional power
themselves. The notice provision may be reduced from five to three
years under certain conditions. These discounts increased in
<PAGE>
November 1994 to an annual level of $11 million, representing a 5
percent discount on base rates, if all eligible customers sign
agreements. Customers representing approximately 87 percent of all
eligible revenues have signed agreements. The Company also agreed
not to increase its base rates before October 1, 1995. These
decreases in revenues are being offset by the recognition, for
accounting purposes, of revenues for electricity delivered but not
yet billed (unbilled revenues). The agreement provided that
unbilled revenues at September 30, 1993 of approximately $35
million would be amortized over thirteen months commencing December
1, 1993. In addition, the Company now recognizes seasonal
fluctuations in unbilled revenues on a quarterly basis.
The agreement also resolved all rate recovery issues associated
with environmental remediation costs of Massachusetts manufactured
gas waste sites formerly owned by the Company and its affiliates,
as well as certain other environmental cleanup costs (see Hazardous
Waste section).
Included in a $45.6 million general rate increase that went
into effect in October 1992, the MDPU authorized a $2.5 million
annual increase in rates representing the first step of a four year
phase-in of the Company's tax deductible costs associated with
postretirement benefits other than pensions (PBOPs). Increases of
$2.5 million also took effect in October 1993 and November 1994
representing the second and third steps of this phase-in.
<PAGE>
Demand-Side Management Programs
- -------------------------------
The Company files its conservation and load management
programs, also referred to in the industry as demand-side
management (DSM) programs, regularly with the MDPU and has received
approval to recover in rates estimated DSM expenditures on a
current basis. The rates provide for reconciling estimated
expenditures to actual DSM expenditures, with interest.
Expenditures subject to the reconciliation mechanism were $29
million in the first nine months of 1994 and $47 million for the
full year 1993. Since 1990, the Company has been allowed to earn
incentives based on the results of its DSM programs. Before
incentives are recorded, the Company must be able to demonstrate to
the MDPU the electricity savings produced by its DSM programs. The
Company recorded $6.7 million of before-tax incentives in 1993
including $2 million recorded in the first nine months. No
incentives were recorded during the first nine months of 1994. The
Company has received orders from the MDPU that will give it the
opportunity to continue to earn incentives on 1994 DSM program
results.
<PAGE>
Operating Revenue
- -----------------
Operating revenue for the nine months ended September 30, 1994
increased by $3 million from the corresponding period in 1993.
The following table summarizes the changes in operating
revenue:
Increase (Decrease) in Operating Revenue
Third Quarter Nine Months
------------- ------------
1994 vs 1993 1994 vs 1993
------------- ------------
(In Millions)
Sales increase $ 7 $ 13
Fuel recovery (6) (9)
DSM recovery 2 1
General rate reduction/service
extension discounts (7) (22)
Unbilled revenues recognized
under rate agreement 8 24
Seasonal fluctuation in
accrued unbilled revenue (5) (8)
Other 1 4
--- ----
$ - $ 3
=== ====
KWH sales billed to ultimate customers increased by 3.7 and 2.1
percent in the third quarter and first nine months of 1994,
respectively, compared to the corresponding periods last year. The
increased sales primarily reflect weather conditions and an
improving economy, partially offset in the first nine months of
<PAGE>
1994 by a reduction of one billing day due to meter reading
schedules. KWH sales in 1994 are expected to increase
approximately 2.5 percent as compared to 1993.
The Company's rates contain a fuel clause and a purchased power
cost adjustment mechanism provision.
For a further discussion of general rate reduction/service
extension discounts and unbilled revenues, see the Rate Activity
section.
Operating Expenses
- ------------------
The following table summarizes the changes in operating
expenses which are discussed below:
Increase (Decrease) in Operating Expenses
Third Quarter Nine Months
------------- ------------
1994 vs 1993 1994 vs 1993
------------- ------------
(In Millions)
Purchased electric energy:
Fuel costs $(7) $ (9)
Purchases and demand
charges from NEP (1) 7
Other operation and maintenance:
DSM 2 3
Other 3 (28)
Depreciation - 1
Taxes 1 12
--- ----
$(2) $(14)
=== ====
<PAGE>
The increase in purchases and demand charges from New England
Power Company (NEP) for the nine month period primarily reflects
increased peak demand levels primarily in the first quarter of
1994. Other operation and maintenance expense for the nine months
ended September 30, 1993 included $14 million of reserves
established for hazardous waste costs, $7 million associated with
damages assessed in an unfavorable court decision, and $13 million
associated with an early retirement offer and special severance
program. Excluding the effect of these 1993 items, other operation
and maintenance expense increased $6 million, primarily reflecting
increased pension and other retiree benefit costs, increased
computer system development costs, and general increases in other
areas.
The increase in taxes in the third quarter and first nine
months of 1994 is primarily due to increased income and increased
property tax accruals.
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,
<PAGE>
for remediation of property contaminated with hazardous substances.
Parties liable include past and present site owners and operators,
transporters that brought wastes to the site, and entities that
generated or arranged for disposal or treatment of wastes
ultimately disposed of at the site. 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. These products or by-products may not
have previously been considered hazardous, and may not currently be
considered hazardous, but may be identified as such by federal,
state, or local authorities in the future. The New England
Electric System (NEES) 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.
Federal and state environmental agencies, as well as private
parties, have contacted or initiated legal proceedings against the
Company regarding liability for cleanup of sites alleged to contain
hazardous waste or substances. The Company has been named as a
potentially responsible party (PRP) by either the U.S.
Environmental Protection Agency (EPA) or the Massachusetts
Department of Environmental Protection (DEP) for 14 sites at which
hazardous waste is alleged to have been disposed. The Company is
<PAGE>
also aware of other sites which it may be held responsible for
remediating and it is likely that, in the future, the Company will
become involved in additional proceedings demanding contribution
for the cost of remediating additional hazardous waste sites.
The most prevalent types of hazardous waste sites that the
Company has been connected with are former manufactured gas
locations. Until the early 1970's, predecessors or affiliates of
the Company were in the gas business. There are approximately 35
locations in Massachusetts at which gas may have been manufactured
and/or stored. Of the manufactured gas locations, 17 have been
listed for investigation by the DEP. In a lawsuit involving one of
these sites, the United States Court of Appeals for the First
Circuit affirmed in 1993 an earlier adverse decision against the
Company, NEES and another subsidiary, New England Power Service
Company. The decision held these companies liable for cleanup of
the properties involved in the case.
In 1993, the MDPU approved a rate agreement filed by the
Company (see Rate Activity section) that resolved all rate recovery
issues related to Massachusetts manufactured gas sites formerly
owned by the Company, its predecessors, and its affiliates, as well
as certain other Massachusetts hazardous waste sites. The
agreement allows for environmental remediation costs for such sites
to be met from a special interest bearing fund established on the
Company's books in 1993 of $30 million. The initial fund balance
<PAGE>
was not recoverable from customers. Annual contributions of $3
million, adjusted for inflation, are being added to the fund by the
Company and are recoverable in rates. Under the agreement, any
shortfalls in the fund will be paid by the Company and be recovered
through rates over seven years, without interest.
Predicting the potential costs to investigate and remediate
hazardous waste sites continues to be difficult. Factors such as
the evolving nature of remediation technology and regulatory
requirements and the particular characteristics of each site,
including, for example the size of the site, the nature and amount
of waste disposed at the site, and the surrounding geography and
land use, make precise estimates 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. At
September 30, 1994, the Company had total reserves for
environmental response costs of $40 million and a related
regulatory asset of $12 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 (10 percent of common equity) to
its financial position. Where appropriate, the Company intends to
seek recovery from its insurer and from other PRPs, but it is
uncertain whether, and to what extent, such efforts will be
successful.
<PAGE>
Electric and Magnetic Fields (EMF)
- ---------------------------------
In recent years, concerns have been raised about whether EMF,
which occur near transmission and distribution lines as well as
near household wiring and appliances, cause or contribute to
adverse health effects. Numerous studies on the effects of these
fields, some of them sponsored by electric utilities (including
NEES companies), have been conducted and are continuing. Some of
the studies have suggested associations between certain EMF and
various types of cancer, while other studies have not substantiated
such associations. In February 1993, the EPA called for
significant additional research on EMF. In July 1994, a study by
a University of Southern California professor suggested an
association between EMF and Alzheimer's disease. It is impossible
to predict the ultimate impact on the Company and the electric
utility industry if further investigations were to demonstrate that
the present electricity delivery system is contributing to
increased risk of cancer or other health problems.
Many utilities, including the NEES companies, have been
contacted by customers regarding a potential relationship between
EMF and adverse health effects. To date, no court in the United
States has ruled that EMF from electrical facilities cause adverse
health effects and no utility has been found liable for personal
injuries alleged to have been caused by EMF. In any event, the
Company believes that it has adequate insurance coverage.
<PAGE>
Several state courts have recognized a cause of action for
damage to property values in transmission line condemnation cases
based on the fear that power lines cause cancer. It is difficult
to predict what impact there would be on the Company if this cause
of action is recognized in Massachusetts and in contexts other than
condemnation cases.
Legislation has been introduced in Massachusetts that, if
passed, would require state agencies to study existing EMF-related
research and make recommendations for further legislation.
Competitive Conditions
- ----------------------
The electric utility business is being subjected to increasing
competitive pressures, stemming from a combination of trends,
including increasing electric rates, improved technologies, and new
regulations and legislation intended to foster competition. To
date, this competition has been most prominent in the bulk power
market in which non-utility generating sources have noticeably
increased their market share. This change indirectly affects the
Company as it purchases all of its energy requirements from NEP.
Electric utilities are also facing increased competition in the
retail market. Currently, retail competition comes primarily from
alternative fuel suppliers (including natural gas companies) for
heating and cooling, customer-owned generation to displace
purchases from electric utilities, and direct competition among
<PAGE>
electric utilities to attract major new manufacturing facilities to
their service territories. Some state regulatory agencies, other
entities, and individuals have developed proposals under which
electric utilities and non-utility generators may sell electricity
to retail customers of other electric utilities without regard to
franchised service territories. For example, the California Public
Utilities Commission recently announced a proposal that would give
certain large retail customers, by the year 1996, and all other
retail customers, by the year 2002, the option of selecting their
electricity provider. Power purchased from another provider would
still be delivered over the local utility's transmission network
which, under the proposal, would be subject to broader access.
Other states (including several New England states), federal
agencies regulating the NEES companies, and state and federal
legislative bodies have considered or are in the process of
considering options to foster increased competition.
The NEES companies are responding to current and anticipated
competitive pressures in a variety of other ways, including cost
control and a corporate reorganization into separate retail and
wholesale business units. The retail business unit's response to
competition includes the development of comprehensive value-added
services customized to customers' needs and the offering of
economic development rates to encourage businesses to locate in the
Company's service territory. Further, pursuant to its recent rate
<PAGE>
settlement, the Company was able to change the standard terms under
which it offers service to commercial and industrial customers to
extend the notice period a customer must give before purchasing
electricity from others or generating any additional electricity
for the customer's own use from one year to two years. In
addition, the Company offered a discount from base rates in return
for a contract requiring the customer to provide five years written
notice before purchasing electricity from others or generating any
additional electricity for the customer's own use (the notice
provision may be reduced from five years to three years under
certain conditions). The discount is available to customers with
average monthly peak demands over 500 kilowatts. Customers
representing approximately 87 percent of all eligible revenues have
signed agreements.
Since a large part of the Company's costs represent the cost of
power purchased from NEP, its competitive position is affected by
NEP's ability to control costs. NEP is controlling costs and
positioning itself for increased competition through such means as
terminating certain purchased power and gas pipeline contracts,
shutdowns of uneconomic generating stations, and rapid amortization
of certain plant assets.
Observers of the electric utility business have recommended
various (and sometimes conflicting) strategies for electric
utilities to deal with these competitive pressures. These
<PAGE>
suggestions include business combinations with other companies,
restructurings involving separation or sales of portions of the
retail and/or wholesale businesses, and diversification into
unrelated businesses. For example, the NEES companies have
proposed one possible framework for increasing customer choice of
suppliers and achieving environmental goals, while preserving
shareholder value. This increase in customer choice could decrease
the value of generation related assets and purchased power
contracts. However, the replacement value of transmission assets
likely far exceeds their historic cost. The NEES companies have
suggested that utilities should have the ability to offset this
decrease in the value of generation related assets by realizing the
higher value of transmission assets. As one part of this possible
framework, the NEES companies have stated that, in order to
accomplish this realization, they would be willing to consider
selling their transmission system at replacement cost to entities
not in the generation business. This sale would facilitate the
transition to a fully competitive generating market. As part of
their routine long-term planning process, the NEES companies may,
from time to time, be engaged in analysis, either internally or
with third parties, of these and other strategies.
The Federal Energy Regulatory Commission (FERC) ruled in 1992,
in a proceeding not involving NEES subsidiaries, that a utility may
recover from a wholesale requirements customer, any legitimate,
<PAGE>
prudent, and verifiable costs that the utility had incurred based
on a reasonable expectation that it would continue to sell
requirements service to the customer. The FERC has referred to
such costs as "stranded costs". On appeal, the United States Court
of Appeals for the District of Columbia Circuit has questioned
whether allowing utilities to recover stranded costs is anti-
competitive and the Court remanded the case back to the FERC for
further proceedings and development of the competitive issues. In
a separate development, the FERC issued a notice of proposed rule-
making on the recovery of investment costs stranded as a result of
increased competition.
Electric utility rates are generally based on a utility's
costs. Therefore, electric utilities are subject to certain
accounting standards that are not applicable to other business
enterprises in general. These accounting rules require regulated
entities, in appropriate circumstances, to establish regulatory
assets and liabilities, which defer the income statement impact of
certain costs that are expected to be recovered in future rates.
The effects of competition could ultimately cause the operations of
the Company, or a portion thereof, to cease meeting the criteria
for application of these accounting rules. While the Company does
not expect to cease meeting these criteria in the near future, if
this were to occur, accounting standards of enterprises in general
would apply and immediate recognition of any previously deferred
<PAGE>
costs would be necessary in the year in which these criteria were
no longer applicable. In addition, if, because of competition,
utilities are unable to recover all of their costs in rates, it may
be necessary to write off those costs not recoverable.
Utility Plant Expenditures and Financings
- -----------------------------------------
Cash expenditures for utility plant totaled $67 million in the
first nine months of 1994. The funds necessary for utility plant
expenditures during the period were primarily provided by net cash
from operating activities, after the payment of dividends, and
proceeds from the issuance of long-term and short-term debt.
During the first nine months of 1994, the Company issued $25
million of first mortgage bonds bearing interest rates ranging from
7.05 percent to 8.16 percent. The Company plans to issue an
additional $25 million of first mortgage bonds in 1994 or early
1995.
At September 30, 1994, the Company had $43 million of short-
term debt outstanding including $40 million in the form of
commercial paper borrowings. The Company currently has lines of
credit with banks totaling $62 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, 1994.
For the twelve-month period ending September 30, 1994, the
ratio of earnings to fixed charges was 3.12.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company is filing the following revised exhibit for
incorporation by reference into its registration statements on Form
S-3, Commission file Nos. 33-49453 and 33-50033:
12 Statement re computation of ratios
The Company is filing Financial Data Schedules.
<PAGE>
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, 1994 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 10, 1994
Exhibit Index
<PAGE>
Exhibit Index
-------------
Exhibit Description Page
- ------- ----------- ----
12 Statement re computation of Filed herewith
ratios
27 Financial Data Schedule Filed herewith
Exhibit 12
<PAGE>
<TABLE>
MASSACHUSETTS ELECTRIC COMPANY
Computation of Ratio of Earnings to Fixed Charges
(SEC Coverage)
(Unaudited)
<CAPTION>
12 Months
Ended
September 30, 1994 Years Ended December 31,
Actual -------------------------------------------------------------
(Unaudited) 1993 1992 1991 1990 1989
-------------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income $38,877 $23,779 $34,905 $25,243 $35,192 $19,389
- ----------
Add income taxes and fixed charges
- ----------------------------------
Current federal income taxes (2,487) 5,606 3,977 8,568 14,681 8,169
Deferred federal income taxes 19,920 3,430 13,451 3,889 1,044 (845)
Investment tax credits - net (1,228) (1,228) (1,228) (1,194) (1,225) (1,412)
Massachusetts franchise tax 5,093 3,348 3,858 2,920 3,765 2,165
Interest on long-term debt 20,926 23,403 21,910 20,157 20,626 17,602
Interest on short-term debt and other7,476 3,638 3,657 3,643 3,090 5,257
------- ------- ------- ------- ------- -------
Net earnings available for fixed charges$88,577$61,976 $80,530 $63,226 $77,173 $50,325
------- ------- ------- ------- ------- -------
Fixed charges:
Interest on long-term debt $20,926 $23,403 $21,910 $20,157 $20,626 $17,602
Interest on short-term debt and other7,476 3,638 3,657 3,643 3,090 5,257
------- ------- ------- ------- ------- -------
Total fixed charges $28,402 $27,041 $25,567 $23,800 $23,716 $22,859
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 3.12 2.29 3.15 2.66 3.25 2.20
- ----------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER>1,000
<S> <C> <C> <C> <C>
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1993 DEC-31-1994 DEC-31-1993
<PERIOD-END> SEP-30-1994 SEP-30-1993 SEP-30-1994 SEP-30-1993
<PERIOD-TYPE> 9-MOS 9-MOS QTR-3 QTR-3
<BOOK-VALUE> PER-BOOK PER-BOOK PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 980,083 0 0 0
<OTHER-PROPERTY-AND-INVEST> 0 0 0 0
<TOTAL-CURRENT-ASSETS> 206,828 0 0 0
<TOTAL-DEFERRED-CHARGES> 59,761 <F1>0 0 0
<OTHER-ASSETS> 0 0 0 0
<TOTAL-ASSETS> 1,246,672 0 0 0
<COMMON> 59,953 0 0 0
<CAPITAL-SURPLUS-PAID-IN> 187,172 0 0 0
<RETAINED-EARNINGS> 135,372 0 0 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 382,497 0 0 0
0 0 0 0
50,000 0 0 0
<LONG-TERM-DEBT-NET> 254,653 0 0 0
<SHORT-TERM-NOTES> 42,570 <F2>0 0 0
<LONG-TERM-NOTES-PAYABLE> 0 0 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 35,000 0 0 0
0 0 0 0
<CAPITAL-LEASE-OBLIGATIONS> 0 0 0 0
<LEASES-CURRENT> 0 0 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 481,952 0 0 0
<TOT-CAPITALIZATION-AND-LIAB> 1,246,672 0 0 0
<GROSS-OPERATING-REVENUE> 1,098,180 1,094,871 376,582 376,137
<INCOME-TAX-EXPENSE> 11,754 1,604 829 1,169
<OTHER-OPERATING-EXPENSES> 1,044,128 1,068,875 365,633 366,980
<TOTAL-OPERATING-EXPENSES> 1,055,882 1,070,479 366,462 368,149
<OPERATING-INCOME-LOSS> 42,298 24,392 10,120 7,988
<OTHER-INCOME-NET> (1,785) (313) (19) 627
<INCOME-BEFORE-INTEREST-EXPEN> 40,513 24,079 10,101 8,615
<TOTAL-INTEREST-EXPENSE> 21,295 19,959 8,670 6,411
<NET-INCOME> 19,218 4,120 1,431 2,204
2,335 2,879 778 1,165
<EARNINGS-AVAILABLE-FOR-COMM> 16,883 1,241 653 1,039
<COMMON-STOCK-DIVIDENDS> 16,787 13,789 3,598 2,398
<TOTAL-INTEREST-ON-BONDS> 15,500 17,977 5,334 5,843
<CASH-FLOW-OPERATIONS> 63,873 66,533 21,964 30,508
<EPS-PRIMARY> 0 <F3> 0 <F3> 0 <F3> 0 <F3>
<EPS-DILUTED> 0 <F3> 0 <F3> 0 <F3> 0 <F3>
<FN>
<F1> Total deferred charges includes other assets.
<F2> Short-term notes includes commercial paper obligations and short-term debt to affiliates.
<F3> Per share data is not relevant because the Company's common stock is wholly owned by New England Electric System.
</FN>
