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 March 31, 1996
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 April 30, 1996
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)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
ASSETS March 31, December 3 1,
1996 1995
Utility Plant in Service $ 795,510 $ 795,200
Less: Accumulated Provision for Depreciation
and Amortization 247,997 241,673
Net Utility Plant in Service 547,513 553,527
Construction Work in Progress 7,039 3,506
Net Utility Plant 554,552 557,033
Current Assets:
Cash and Temporary Cash Investments 6,794 533
Accounts Receivable - Associated Companies 21,440 25,861
- Other 36,754 37,236
Fuel, Materials and Supplies 9,312 11,322
Other Current Assets 4,471 4,170
Total Current Assets 78,771 79,122
Deferred Debits and Other Non-Current Assets 102,381 103,043
Total Assets $ 735,704 $ 739,198
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 125,821 124,878
Total Common Equity 245,311 244,368
Redeemable Preferred Stock - Net 29,665 29,665
Preferred Stock Redemption Cost (3,207) (3,447)
Long-Term Debt - Net 222,335 222,313
Total Capitalization 494,104 492,899
Current Liabilities:
Long-Term Debt Due Within One Year 7,000 7,000
Notes Payable 4,158
Accounts Payable - Associated Companies 4,746 3,913
- Other 20,720 27,242
Taxes Accrued 7,711 3,219
Interest Accrued 4,701 4,999
Other Current Liabilities 10,826 8,435
Total Current Liabilities 55,704 58,966
Deferred Credits and Other Non-Current Liabilities 57,036 58,567
Accumulated Deferred Taxes 128,860 128,766
Total Liabilities and Capitalization $ 735,704 $ 739,198
See accompanying notes to consolidated condensed financial statements.
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands)
Three Months Ended
March 31,
1996 1995
Operating Revenues $ 105,019 $ 106,319
Operating Expenses:
Fuel 23,193 22,282
Purchased Power 29,972 31,976
Other Operation and Maintenance 22,759 23,109
Depreciation and Amortization 6,729 6,555
Taxes - Other Than Income 2,865 2,881
- Current Income 5,350 3,229
- Deferred Income (Credit) (23) 2,186
Total 90,845 92,218
Operating Income 14,174 14,101
Allowance for Other Funds
Used During Construction 37 131
Other Income (Deductions) - Net 493 331
Income Before Interest Charges 14,704 14,563
Interest Charges:
Interest on Long-Term Debt 3,837 4,636
Other Interest Expense 941 724
Allowance for Borrowed Funds Used
During Construction (Credit) (52) (92)
Net Interest Charges 4,726 5,268
Net Income 9,978 9,295
Preferred Dividend Requirements 497 497
Consolidated Net Earnings $ 9,481 $ 8,798
See accompanying notes to consolidated condensed financial statements.
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
1996 1995
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 9,978 $ 9,295
Adjustments to Reconcile Net Income to Net
Cash Provided from Operating Activities:
Depreciation and Amortization 7,211 7,408
Amortization of Nuclear Fuel 637 1,205
Deferred Taxes (40) 2,170
Investment Tax Credit, Net (235) (236)
Allowance for Other Funds Used During Construction (37) (131)
Other - Net (1,352) (243)
Change in Operating Assets and Liabilities 7,507 (7,956)
Net Cash Provided From Operating Activities 23,669 11,512
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (4,455) (8,710)
Net Cash (Used in) Investing Activities (4,455) (8,710)
CASH FLOW FROM FINANCING ACTIVITIES:
Common Stock Dividends Paid to EUA (8,298) (7,315)
Preferred Dividends Paid (497) (497)
Net (Decrease) in Short-Term Debt (4,158)
Net Cash (Used in) Financing Activities (12,953) (7,812)
Net Increase (Decrease) in Cash and Temporary
Cash Investments 6,261 (5,010)
Cash and Temporary Cash Investments at
Beginning of Period 533 11,265
Cash and Temporary Cash Investments at
End of Period $ 6,794 $ 6,255
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Capitalized Interest) $ 4,159 $ 4,060
Income Taxes $ 1,070 $ 1,422
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) 1995 Annual Report on Form 10-K.
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 March 31, 1996 and the results of
operations and cash flows for the three months ended
March 31, 1996 and 1995. Certain reclassifications have
been made to prior period financial statements to conform
to current period classifications. The year-end
consolidated condensed balance sheet data was derived
from audited financial statements but does not include
all disclosures required under generally accepted
accounting principles.
Note B - Results shown above for the respective interim periods
are not necessarily 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:
Recent Nuclear Regulatory Commission (NRC) Actions
Montaup Electric Company (Montaup), the wholesale generation
subsidiary of Eastern Edison, has a 4.01% ownership interest in
Millstone 3, an 1154-MW nuclear unit that is jointly owned by a
number of New England utilities, including subsidiaries of Northeast
Utilities (Northeast). Northeast is the lead participant in
Millstone 3, and on March 30, 1996, Northeast determined to shut down
the unit following an engineering evaluation which determined that
four safety-related valves would not be able to perform their design
function during certain postulated events.
The NRC has raised issues with respect to Millstone 3 and certain of
the other nuclear units in which Northeast and its subsidiaries,
either individually or collectively, have the largest ownership
shares, including a 582-MW unit owned by Connecticut Yankee
Atomic Power Company, in which Montaup has 4.5% ownership share.
In April 1996 Northeast reported that the NRC will require, among
other things, certain technical issues to be resolved before
Millstone 3 can be restarted, and that Northeast's management cannot
predict when Millstone 3 will return to service or the amount of the
incremental direct costs which will be incurred to address the issues
raised by the NRC.
While Millstone 3 is out of service, Montaup will incur incremental
replacement power costs estimated at $0.4 million to $0.8 million per
month. Montaup would bill its replacement power costs through its
fuel adjustment clause, a wholesale tariff jurisdictional to the
Federal Energy Regulatory Commission (FERC). However, there is no
comparable clause in Montaup's FERC-approved rates which at this time
would permit Montaup to recover Montaup's share of the incremental
direct costs incurred by Northeast. Northeast has not yet estimated
such costs but it is likely Montaup would be billed for its 4.01%
share of such costs.
Northeast reported that the NRC has requested certain information
concerning the 582-MW nuclear unit owned by Connecticut Yankee Atomic
Power Company, but that the NRC letter requesting the information
does not currently require that the requested information be provided
prior to restarting the unit, were it to shut down.
Eastern Edison cannot predict the ultimate outcome of the NRC
inquiries or the impact which they may have on Montaup and the EUA
system. Eastern Edison is also evaluating its rights and obligations
under the various agreements relating to the ownership and operation
of Millstone 3 and Connecticut Yankee Atomic Power Company.
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 first quarter of 1996 were $9.5 million,
a 7.8% increase over first quarter 1995 net earnings of $8.8 million. This
change reflects a 6.6% increase in retail kilowatthour (kWh) sales due largely
to colder weather in this year's first quarter. Also impacting 1996's 1st
quarter earnings was lower interest expense resulting from debt issues which
matured in 1995. Partially offsetting these positive impacts were restoration
expenses related to a series of storms which produced record-setting snows in
the winter of 1996.
Operating Revenues
Operating Revenues decreased $1.3 million to $105.0 million in the first
quarter of 1996 compared to the same period in 1995. This decrease is
primarily due to recoveries of decreased purchased power and conservation and
load management expenses aggregating $3.5 million. Offsetting this decrease
somewhat were recoveries of increased fuel expenses and increased base rate
revenues resulting from the kWh sales increase.
Operating Expenses
Fuel expense for the first quarter of 1996 as compared to the same period
in 1995 increased $0.9 million or 4.1%. This increase was due primarily to
increased kWh sales and requirements offset somewhat by a 2.7% decrease in the
average cost of fuel.
Purchased Power expense for the first quarter of 1996 decreased
approximately $2.0 million or 6.3% as compared to the same period in 1995.
Higher maintenance costs billed to Montaup by the Maine Yankee and Connecticut
Yankee plants in 1995's first quarter were primarily responsible for this
change.
Other Operation and Maintenance (O&M) expenses for the first quarter of
1996 decreased approximately $0.4 million from the same period in 1995. This
decrease is due primarily to a decrease in conservation and load management
expenses of approximately $1.5 million offset somewhat by increased storm
restoration expenses and increased employee benefits expensed as a result of
decreased capitalized costs in this year's first quarter.
Interest Charges
Interest expense on long term debt decreased by $0.8 million in the first
quarter of 1996 due primarily to the December 1995 maturity of $25 million of
9-9 1/4% Unsecured Medium Term Notes and $10 million of 8.9% First Mortgage and
Collateral Trust Bonds of Eastern Edison Company.
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 March 31, 1996,
these unused EUA System short-term lines of credit amounted to approximately
$108 million. Eastern Edison and Montaup had no short-term debt outstanding at
March 31, 1996. In the first quarter of 1996, internally generated funds
amounted to $8.6 million while cash construction requirements for the same
period were $4.5 million.
Electric Utility Industry Restructuring
The electric industry is in a period of transition from a traditional rate
regulated environment to a competitive marketplace. While competition in the
wholesale electric market is not new, electric utilities are facing impending
competition in the retail sector.
In 1995, Eastern Edison, Blackstone and Newport participated with
collaborative groups in their respective states consisting of other utilities,
industrial users, environmental groups and consumer advocates in submitting
similar sets of interdependent principles with their respective state
regulatory commissions addressing electric utility industry restructuring.
These filings were intended to be statements of the consensus position by the
signatories of the 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. Each set of principles was submitted on the condition they be
approved in full by the respective Commissions.
The Rhode Island Public Utilities Commission (RIPUC) accepted all but one
of the principles submitted by the Rhode Island Collaborative with minor
modifications to certain language in others and added a new principle which
supports negotiation (as opposed to litigation) to resolve conflicts as
restructuring moves forward and directed the Rhode Island Collaborative to
proceed with negotiations on the issues presented in the principles and to
submit a progress report, which was submitted in February 1996. The one
principle that was not accepted provided for subsidization of renewable energy
sources.
In February 1996 a bill was introduced in the Rhode Island legislature
that, if enacted, would allow customer choice of electricity supplier
commencing January 1, 1998 for large industrial customers and phasing in all
customers by January 1, 2001. The proposed legislation also provides for
recovery of "stranded investments" through a transition charge initially set
at three cents per kWh.
EUA believes that the development of the proposed legislation should have
been conducted in a public forum so that all interested stakeholders could have
participated. However, EUA believes that competition, if done right, whether
through legislation or regulation can benefit customers. There are substantial
issues about the proposed legislation which EUA is currently reviewing.
In August 1995, the Massachusetts Department of Public Utilities (MDPU)
issued an order enumerating principles, similar to those submitted by the
Massachusetts Collaborative, that describe the key characteristics of a
restructured electric industry and provides for, among other things, customer
choice of electric 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 for distribution services where regulation will still exist. This
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
order also provides for the principle of recovery of net, non-mitigable
stranded costs by investor-owned utilities resulting from the industry
restructuring.
Each Massachusetts investor-owned utility is 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. The initial group of utilities was required to file
their proposals in February 1996. The second group is required to file within
three months of the MDPU's orders on the first group of submissions. Eastern
Edison Company filed its proposal, "Choice and Competition" (see below) with
the first group of proposals and is awaiting MDPU review.
On May 1, 1996 the MDPU issued proposed rules for the restructuring of the
electric industry which are intended to reduce electricity costs over time and
provide broad customer choice of electric supplier promoting full and fair
competition in the generation of electricity. These proposed rules, which
amplify the principles set forth in the August 1995 order, were issued for
public comment and hearing before final rules are adopted in September 1996.
The proposed rules provide for, among other things:
- an independent system operator of the regional transmission system in
New England operating within established reliability standards and a
power exchange which would facilitate a short -term pool for energy
transactions;
- functional separation of electric companies into generation,
transmission and distribution corporate entities;
- a reasonable opportunity for recovery of net, non-mitigable stranded
costs periodically subject to some degree of reconciliation;
- a price cap system for performance based regulation of electric
distribution companies;
- distribution company obligation to provide electric distribution
service to all customers within its service territory;
- environmental protection and support for renewable energy resources
and energy efficiency;
- implementation of unbundled rates beginning January 1, 1997 and a
competitive generation market by January 1, 1998;
The order also encourages settlements of outstanding company specific
electric restructuring filings discussed above. EUA is currently reviewing the
order and will continue to be an active participant in this proceeding.
In January 1996, EUA unveiled its preliminary proposal for a restructured
electric utility industry called "Choice and Competition" and began discussions
with the Rhode Island and Massachusetts Collaboratives. The plan proposes,
among other things: choice of power supplier by all customers as early as
January 1998; open access transmission services; performance based rates for
electric distribution services; all utility generation competing for power
sales and; a transition charge allowing regional utilities the opportunity to
recover, among other things, the costs of past commitments to nuclear and
independent power. The company believes the plan, which requires participation
by all New England parties, satisfies the principles adopted in both Rhode
Island and Massachusetts, and provides a fair and equitable transition to a
competitive electric utility marketplace for all parties.
Historically, electric rates have been designed to recover a utility's full
costs of providing electric service including recovery of investment in plant
assets. Also, in a regulated environment, electric utilities are subject to
certain accounting rules that are not applicable to other industries. These
accounting rules allow regulated companies, in appropriate circumstances, to
establish regulatory assets and liabilities, which defer the current financial
impact of certain costs that are expected to be recovered in future rates.
Eastern Edison believes that its operations continue to meet the criteria
established in these accounting standards. Effects of legislation and/or
regulatory initiatives or EUA's own initiatives such as "Choice and
Competition" could ultimately cause Eastern Edison to no longer follow these
accounting rules. In such an event, a non-cash write-off of regulatory assets
and liabilities could be required at that time.
In addition, if legislative or regulatory changes and/or competition result
in electric rates which do not fully recover the Company's costs, a write-down
of plant assets could be required pursuant to Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (FAS121) issued in March 1995, effective for fiscal
year 1996.
PART II -- OTHER INFORMATION
Item 5. Other Information
On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued
orders on its March 24, 1995 Notice of Proposed Rulemaking (NOPR). FERC's
purpose in proposing the new rules was to encourage competition in the bulk
power market. The FERC's April 24th actions include:
- order No. 888 , a final rule requiring open access transmission
and requiring all public utilities that own, operate or control
interstate transmission to file tariffs that offer others the same
transmission services they provide themselves, under comparable terms
and conditions. Utilities must take transmission service for their
own wholesale transactions under the terms and conditions of the
tariff;
- recovery of prudently incurred stranded costs by public utilities and
transmitting utilities;
- order No. 889, a final rule requiring public utilities to implement
standards of conduct and an Open Access Same-time Information System
(OASIS). Utilities must obtain information about their transmission
the same way as their competitors through the OASIS;
- a Notice of Proposed Rulemaking (NOPR) requesting comment on
replacing the single tariff contained in the final open access rule
with a capacity reservation tariff that would reveal how much
transmission is available at any given time.
Open-access transmission tariffs for point-to-point and network service
filed with FERC by Montaup in February 1996 became effective April 21, 1996
subject to refund. Montaup believes these tariffs, scheduled for review by
FERC later in 1996, to be in compliance with FERC's April 24th rulings. EUA
remains committed to achieving a fair and equitable transition to a competitive
electric utility marketplace.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - On April 11, 1996, the Registrant
filed a current report of form 8-K with respect to Item
5 (Other Events).
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
undersigned thereunto duly authorized.
Eastern Edison Company
(Registrant)
Date: May 15, 1996 /s/Clifford J. Hebert, Jr.
Clifford J. Hebert, Jr., Treasurer
(on behalf of the Registrant and
as Principal Financial Officer)