UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _________________ to ___________________ Commission File Number 0-8480 EASTERN EDISON COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1123095 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 110 Mulberry Street, Brockton, Massachusetts (Address of principal executive offices) 02402 (Zip Code) (508)580-1213 (Registrant's telephone number including area code) 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.......... Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at October 31, 1995 Common Shares, $25 par value 2,891,357 shares PART I - FINANCIAL INFORMATION PART I - FINANCIAL INFORMATION Item 1. Financial Statements EASTERN EDISON COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands) ASSETS September 30, December 31, 1995 1994 Utility Plant in Service $ 785,526 $ 782,837 Less: Accumulated Provision for Depreciation and Amortization 246,351 228,241 Net Utility Plant in Service 539,175 554,596 Construction Work in Progress 19,719 6,759 Net Utility Plant 558,894 561,355 Current Assets: Cash and Temporary Cash Investments 17,936 11,265 Accounts Receivable - Associated Companies 30,013 18,061 - Other 33,649 37,979 Materials and Supplies 9,342 9,644 Other Current Assets 4,673 5,952 Total Current Assets 95,613 82,901 Deferred Debits and Other Non-Current Assets 101,896 111,789 Total Assets $ 756,403 $ 756,045 LIABILITIES AND CAPITALIZATION Capitalization: Common Stock, $25 Par Value $ 72,284 $ 72,284 Other Paid-In Capital 47,249 47,249 Common Stock Expense (43) (43) Retained Earnings 119,220 105,574 Total Common Equity 238,710 225,064 Redeemable Preferred Stock - Net 29,665 29,665 Preferred Stock Redemption Cost (3,687) (4,408) Long-Term Debt - Net 222,290 229,224 Total Capitalization 486,978 479,545 Current Liabilities: Long-Term Debt Due Within One Year 42,000 35,000 Accounts Payable - Associated Companies 3,843 5,749 - Other 22,966 24,578 Taxes Accrued 761 1,411 Interest Accrued 5,790 5,486 Other Current Liabilities 6,705 16,360 Total Current Liabilities 82,065 88,584 Deferred Credits and Other Non-Current Liabilities 63,899 68,260 Accumulated Deferred Taxes 123,461 119,656 Total Liabilities and Capitalization $ 756,403 $ 756,045 See accompanying notes to consolidated condensed financial statements. EASTERN EDISON COMPANY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In Thousands) Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 Operating Revenues $ 107,854 $ 108,154 $ 318,588 $ 320,544 Operating Expenses: Fuel 24,970 24,077 70,893 70,458 Purchased Power 30,570 33,105 94,015 90,829 Other Operation and Maintenance 23,172 24,385 70,924 74,207 Voluntary Retirement Incentive 2,413 Depreciation and Amortization 6,540 6,391 19,650 19,263 Taxes Other Than Income 2,462 2,506 7,812 8,071 Income Taxes - Current 4,458 2,844 9,702 10,605 - Deferred 892 1,431 3,163 3,870 Total 93,064 94,739 278,572 277,303 Operating Income 14,790 13,415 40,016 43,241 Allowance for Other Funds Used During Construction 162 56 444 167 Other Income (Deductions) - Net 521 798 1,396 1,618 Income Before Interest Charges 15,473 14,269 41,856 45,026 Interest Charges: Interest on Long-Term Debt 4,636 4,636 13,908 13,852 Other Interest Expense 952 923 2,555 3,695 Allowance for Borrowed Funds Used During Construction(Credit) (129) (61) (353) (212) Net Interest Charges 5,459 5,498 16,110 17,335 Net Income 10,014 8,771 25,746 27,691 Preferred Dividend Requirements 497 496 1,491 1,490 Consolidated Net Earnings $ 9,517 $ 8,275 $ 24,255 $ 26,201 See accompanying notes to consolidated condensed financial statements. EASTERN EDISON COMPANY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands) Nine Months Ended September 30, 1995 1994 CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 25,746 $ 27,691 Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities: Depreciation and Amortization 22,934 21,811 Amortization of Nuclear Fuel 2,774 2,225 Deferred Taxes 3,113 3,820 Investment Tax Credit, Net (707) (690) Allowance for Other Funds Used During Construction (444) (167) Other - Net 2,672 (1,644) Change in Operating Assets and Liabilities (19,560) 2,600 Net Cash Provided From Operating Activities 36,528 55,646 CASH FLOW FROM INVESTING ACTIVITIES: Construction Expenditures (18,478) (15,632) Net Cash (Used in) Investing Activities (18,478) (15,632) CASH FLOW FROM FINANCING ACTIVITIES: Common Stock Dividends Paid to EUA (9,888) (20,731) Preferred Dividends Paid (1,491) (1,491) Premium on Reacquisition & Financing Expenses (62) Net Cash (Used in) Financing Activities (11,379) (22,284) Net Increase in Cash and Temporary Cash Investments 6,671 17,730 Cash and Temporary Cash Investments at Beginning of Period 11,265 697 Cash and Temporary Cash Investments at End of Period $ 17,936 $ 18,427 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (Net of Capitalized Interest) $ 13,279 $ 13,291 Income Taxes $ 5,391 $ 12,292 See accompanying notes to consolidated condensed financial statements. EASTERN_EDISON_COMPANY NOTES_TO_CONSOLIDATED_CONDENSED_FINANCIAL_STATEMENTS The accompanying Notes should be read in conjunction with the Notes to Consolidated Financial Statements appearing in Eastern Edison Company's (Eastern Edison or the Company) 1994 Annual Report on Form 10-K and the Company's Quarterly Report on Form 10-Q for the periods ended March 31, and June 30, 1995. Note A - In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 1995 and December 31, 1994, and the results of operations for the three and nine months ended September 30, 1995 and 1994 and cash flows for the nine months ended September 30, 1995 and 1994. Certain reclassifications have been made to prior period financial statements to conform with current classifications. Note B - Results shown above for the respective interim periods are not neces- sarily indicative of results to be expected for the fiscal years due to seasonal factors which are inherent in electric utilities in New England. A greater proportionate amount of revenues is earned in the first and fourth quarters (winter season) of most years because more electricity is sold due to weather conditions, fewer day-light hours, etc. Note C - Commitments and Contingencies: Rate Activity On March 21, 1994, Montaup Electric Company (Montaup), the wholesale electric generating and transmission subsidiary of Eastern Edison, filed an application with the Federal Energy Regulatory Commission (FERC) for authorization to reduce its wholesale rates by $10.1 million, or three percent. Montaup supplies electricity at wholesale to EUA's retail electric utilities - Eastern Edison, Blackstone Valley Electric Company (Blackstone) and Newport Electric Corporation (Newport) - and to two non-affiliated municipal utilities. This application was designed to match more closely Montaup's revenues with its decreasing cost of doing business resulting from, among other things, a reduced rate base, lower interest costs and successful cost control efforts. On May 21, 1994, Montaup began billing the reduced rates and on April 14, 1995 FERC approved a settlement agreement between Montaup and the intervenors in the case calling for an annual reduction of approximately $13.9 million (inclusive of the filed $10.1 million reduction). Montaup refunded to its customers the difference collected between the $10.1 million filed reduction and the $13.9 million settled reduction in April 1995. Montaup had previously reserved for this refund. Item_2. Management's_Discussion_and_Analysis_of_Financial_Condition_and Results_of_Operations The following is Management's discussion and analysis of certain significant factors affecting the Company's earnings and financial condition for the interim periods presented in this Form 10-Q. Overview Consolidated Net Earnings for the three and nine months ended September 30, 1995 were $9.5 million and $24.3 million, respectively, as compared to $8.3 million and $26.2 million for the respective periods of a year ago. The third quarter increase was due primarily to decreased operation and maintenance expenses resulting from on going savings related to the voluntary retirement incentive offer, as discussed below, and other cost control efforts. The year-to-date period of 1995 includes a one-time charge of approximately $1.5 million, on an after tax basis, related to the voluntary retirement incentive offer. Also impacting 1995 earnings was Montaup's $13.9 million annual wholesale rate reduction effective May 21, 1994. Offsetting these year-to-date impacts somewhat were lower litigation expenses resulting from favorable court decisions rendered in 1995, lower interest expense and successful cost control efforts including ongoing savings of the voluntary retirement incentive. Kilowatthour Sales A 2.2% increase in retail sales in the third quarter of 1995 coupled with the 1.4% increase in second quarter sales offset dismal first quarter sales results. For the year-to-date period, retail sales were relatively flat compared to those of the same period of 1994. Increases in kWh sales to industrial customers of 3.1% in the year-to-date period, however, is an indication of economic recovery in the Company's service territory. Despite this strong sales performance, the Company anticipates a continuing slow economic recovery for the foreseeable future. Total Energy sales for the three and nine months ended September 30, 1995 decreased 10.4% and 23.0%, respectively, due mainly to decreased energy sales to the New England Power Pool and decreased short-term unit contract energy sales. Power purchase contracts of Montaup totaling 41 MW which expired in October 1994 resulted in lower kilowatthours available to Montaup for interchange and short-term energy sales. These interchange and short-term energy sales essentially recover fuel costs only and have little or no earnings impact. Voluntary Retirement Incentive Offer On March 15, 1995, EUA announced a corporate reorganization which, among other things, consolidated management of Eastern Edison, Blackstone and Newport. As part of the reorganization, a voluntary retirement incentive was offered to sixty-six EUA System employees, including 22 employees of Eastern Edison and Montaup. Forty-nine of those eligible for the program, including 16 employees of Eastern Edison and Montaup, accepted the incentive and retired effective June 1, 1995. The cost to the Company of this incentive program amounted to a one-time $2.4 million pre-tax ($1.5 million after-tax) charge to second quarter 1995 earnings. The estimated payback period is approximately 18 months. Operating_Revenues Operating Revenues for the third quarter and year-to-date periods ended September 30, 1995 decreased by approximately $0.3 million and $2.0 million, respectively, as compared to the same period in 1994. The third quarter change was due primarily to lower purchased power, fuel and Conservation and Load Management (C&LM) expense recoveries aggregating $1.6 million offset by increased Eastern Edison base rate recoveries aggregating approximately $0.7 million related to the increase in kWh sales, for the period and increases in other operating revenues of Eastern Edison and Montaup. The year-to-date change is primarily due to decreased C&LM expense recoveries of $2.6 million and the negative impact of Montaup's wholesale rate reduction implemented on May 21, 1994 offset somewhat by increased purchased power and fuel expense recoveries aggregating $3.2 million. Operations_Expense Fuel expense increased by $0.9 million or 3.7% and $0.4 million or almost 1.0% for the third quarter of 1995 and year-to-date periods, respectively, as compared to the same periods in 1994. These changes were caused by the increases of 12.5% and 17.2% in the average cost of fuel offset by decreases in total energy generated and purchased of 10.4% and 23.0% for the quarter and year-to-date periods, respectively. Purchased Power demand expense for the third quarter and for the year-to-date period ended September 30, 1995 decreased approximately $2.5 million or 7.7% and increased $3.2 million or 3.5%, respectively, as compared to the same periods in 1994. The third quarter change was primarily due to a decrease of approximately $1.7 million related to purchase power contracts totaling 41 MW which expired in October 1994, and decreased purchases from other power suppliers or $0.8 million. The year-to-date increase is due primarily to the impact of Newport's purchased power contracts assumed by Montaup effective May 21, 1994 coincident with Newport becoming an all-requirements customer of Montaup, aggregating approximately $5.3 million and increased billings from the Ocean State Power Project and the Yankee nuclear units aggregating $5.6 million. These increases were offset somewhat by decreases of approximately $6.0 million resulting from the previously mentioned purchase power contract expirations and a $1.7 million reduction in purchases from other power suppliers. Other Operation and Maintenance expenses for the third quarter and nine months ended September 30, 1995 decreased by approximately $1.2 million or 5.0% and $3.3 million or 4.6%, respectively, from the same periods in 1994. The third quarter change was due primarily to lower C&LM and FAS106 expenses aggregating $1.3 million. The year-to-date decrease includes lower C&LM expense totaling $2.7 million and decreased direct controllable expenses aggregating $2.1 million, which includes the on-going savings related to the VRI offer. Offsetting these year-to date decreases somewhat were increases in Montaup power contract expenses and jointly owned unit expenses totaling $1.2 million. Interest Charges Net interest charges were relatively unchanged for the third quarter of 1995 and decreased by $1.1 million for nine months ended September 30, 1995 as compared to the same periods in 1994. Other Interest expense was greater in 1994 due to interest expense provisions recorded in June 1994 aggregating $1.0 million related to Internal Revenue Service audits. Electric Utility Industry Restructuring On July 17, 1995, Eastern Edison Company, along with other members of the Electric Industry Restructuring Roundtable (the Massachusetts Roundtable) in Massachusetts filed a set of principles with the Massachusetts Department of Public Utilities (MDPU) addressing industry restructuring. The Massachusetts Roundtable consists of a number of different utilities, industrial users, environmental groups and consumer advocates. These principles are intended to be statements of the consensus position by the signatories of the interdependent principles that should underlie any electric industry restructuring proposal and include but are not limited to principles addressing stranded cost recovery, unbundling of services and demand side management programs. The filing was submitted on the condition it be approved in full by the MDPU. The MDPU is assessing the principles and is expected to make recommendations to implement a competitive environment in the industry. On August 16, 1995, the MDPU issued an order (the "MDPU Order") in Docket No. 95-30, the MDPU's investigation into electric industry restructuring. The MDPU Order develops principles that describe the key characteristics of a restructured electric industry and provides for, among other things, customer choice of service providers, services, pricing options and payment terms, an opportunity for customers to share in the benefits of increased competition, full and fair competition in the generation markets and incentive regulation where competition cannot exist. The MDPU Order sets out principles for the transition from a regulated to a competitive industry structure and identifies conditions for the transition process which will require investor-owned utilities to unbundle rates, provide consumers with accurate price signals and allow customers' choice of generation services. The MDPU Order also provides for the principle of recovery of net, non-mitigable stranded costs by investor-owned utilities resulting from the industry restructuring. Each investor-owned utility will be required to file restructuring proposals for moving from the current regulated industry structure to a competitive generation market. The schedule for the filing requirement is staggered, with an initial group of utilities required to file within six months of the date of the Order and a second group required to file within the three months of the MDPU's orders on the first group of submissions. Eastern Edison Company is in the second group and is currently preparing a plan for submission. Liquidity_and_Sources_of_Capital Eastern Edison's and Montaup's need for permanent capital is primarily related to the construction of facilities required to meet the needs of their existing and future customers. Traditionally, cash construction requirements not met with internally generated funds are obtained through short-term borrowings which are ultimately funded with permanent capital. EUA System companies, including Eastern Edison and Montaup, maintain short-term lines of credit with various banks aggregating approximately $150 million. These credit lines are available to other affiliated companies under joint credit line arrangements. At September 30, 1995 and at December 31, 1994 these unused EUA System short-term lines of credit amounted to approximately $121.3 million and $118.3 million, respectively. The Company had no outstanding short-term debt at September 30, 1995 and December 31, 1994, respectively. The Company's year-to-date September 30, 1995 internally generated funds amounted to $42.2 million while its cash construction requirements for the same period were $18.5 million. PART II -- OTHER INFORMATION Item_6. Exhibits_and_Reports_on_Form_8-K (a) Exhibits - None (b) Reports on Form 8-K - None filed in the quarter ended September 30, 1995 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the under signed thereunto duly authorized. Eastern_Edison_Company___________ (Registrant) Date: November 13,_1995 /s/Richard_M._Burns_______________ Richard_M._Burns,_Vice_President (on_behalf_of_the_Registrant_and as Chief_Accounting_Officer)