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 June 30, 1998
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 0-2602
BLACKSTONE VALLEY ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0108587
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 W. Center Street, West Bridgewater, Massachusetts
(Address of principal executive offices)
02379
(Zip Code)
(508) 559-1000
(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 July 31, 1998
Common Shares, $50 par value 184,062 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BLACKSTONE VALLEY ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
(In Thousands)
June 30, December 31,
ASSETS 1998 1997
Utility Plant in Service $ 140,986 $ 140,572
Less: Accumulated Provision for Depreciation
and Amortization 58,573 55,851
Net Utility Plant in Service 82,413 84,721
Construction Work in Progress 3,064 1,037
Net Utility Plant 85,477 85,758
Current Assets:
Cash and Temporary Cash Investments 722 408
Accounts Receivable - Associated Companies 685 513
- Other - Net 18,519 14,609
Materials, Supplies and Other Current Assets 1,269 1,154
Total Current Assets 21,195 16,684
Deferred Debits and Other Non-Current Assets 29,058 28,391
Total Assets $ 135,730 $ 130,833
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Stock, $50 Par Value $ 9,203 $ 9,203
Other Paid-In Capital 17,908 17,908
Retained Earnings 12,486 10,981
Total Common Equity 39,597 38,092
Non-Redeemable Preferred Stock 6,130 6,130
Long-Term Debt - Net 33,500 33,500
Total Capitalization 79,227 77,722
Current Liabilities:
Current Maturities of Long-Term Debt 1,500 1,500
Notes Payable 6,120 1,400
Accounts Payable - Associated Companies 9,625 8,332
- Other 482 960
Taxes Accrued 1,454 2,065
Interest Accrued 791 842
Other Current Liabilities 6,145 9,138
Total Current Liabilities 26,117 24,237
Accumulated Deferred Taxes, Deferred Credits
and Other Non-Current Liabilities 30,386 28,874
Total Liabilities and Capitalization $ 135,730 $ 130,833
See accompanying notes to condensed financial statements.
BLACKSTONE VALLEY ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Operating Revenues $ 30,965 $ 34,150 $ 62,146 $ 68,681
Operating Expenses:
Purchased Power (principally from an affiliate) 19,551 22,286 38,615 44,704
Other Operation and Maintenance 5,495 5,327 10,811 10,482
Early Retirement Offer 363 363
Depreciation 1,585 1,441 3,124 2,882
Taxes Other Than Income 1,820 2,028 3,634 4,187
Income Taxes - Current 402 560 16 3,124
- Deferred (Credit) 205 71 0 1,577 (1,647)
Total 29,058 32,076 57,777 64,095
Operating Income 1,907 2,074 4,369 4,586
Other Income (Deductions) - Net (38) (15) (81) 158
Income Before Interest Charges 1,869 2,059 4,288 4,744
Interest Charges:
Interest on Long-Term Debt 777 816 1,546 1,621
Other Interest Expense 215 254 444 443
Allowance for Borrowed Funds Used 0 0
During Construction (Credit) (30) (22) (50) (28)
Net Interest Charges 962 1,048 1,940 2,036
Net Income 907 1,011 2,348 2,708
Preferred Dividend Requirements 72 72 144 144
Net Earnings $ 835 $ 939 $ 2,204 $ 2,564
See accompanying notes to condensed financial statements.
BLACKSTONE VALLEY ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 2,348 $ 2,708
Adjustments to Reconcile Net Income to Net
Cash Provided from Operating Activities:
Depreciation and Amortization 3,396 3,032
Deferred Taxes 1,577 (1,627)
Investment Tax Credit, Net (89) (90)
Other - Net (1,069) (1,341)
Change in Operating Assets and Liabilities (7,036) (3,248)
Net Cash Provided From Operating Activities (873) (566)
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (2,690) (1,979)
Net Cash (Used In) Investing Activities (2,690) (1,979)
CASH FLOW FROM FINANCING ACTIVITIES:
Common Stock Dividends Paid to EUA (699) (1,749)
Preferred Dividends Paid (144) (144)
Net Increase in Short-Term Debt 4,720 4,435
Net Cash Provided From Financing Activities 3,877 2,542
Net Increase (Decrease) in Cash and Temporary Cash Investments 314 (3)
Cash and Temporary Cash Investments at Beginning of Period 408 798
Cash and Temporary Cash Investments at End of Period $ 722 $ 795
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Amount Capitalized) $ 1,610 $ 1,766
Income Taxes $ 920 $ 2,850
See accompanying notes to condensed financial statements.
BLACKSTONE VALLEY ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying Notes should be read in conjunction with the Notes to
Financial Statements appearing in Blackstone Valley Electric Company's
(Blackstone or the Company) 1997 Annual Report on Form 10-K and the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1998.
Note A - In the opinion of the Company, the accompanying unaudited condensed
financial statements contain all normal and recurring adjustments
necessary to present fairly the financial position of the Company as
of June 30, 1998 and December 31, 1997, and the results of operations
for the three and six months ended June 30, 1998 and 1997 and cash
flows for the six months ended June 30, 1998 and 1997. The year-end
condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required under
generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Effective January 1, 1998, the Company adopted the Financial
Accounting Standards Board's Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains,
and losses) in a set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income of
the Company is immaterial and therefore no recognition is required by
the Company.
In March 1998, The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement
of Position 98-1, Accounting For the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1), effective in 1999.
SOP 98-1 provides specific guidance on whether to capitalize or
expense costs within its scope. The Company does not expect this SOP
98-1 to have a material impact on its financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Actives,"
which is effective in 2000. This statement requires the recognition
of all derivative instruments as either assets or liabilities in the
statement of financial positions and the measurement of those
instruments at fair value. The Company does not expect SFAS 133 to
have a material impact on its financial position or results of
operations.
Note B - Results shown for the respective interim periods being reported
herein 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 each year because more electricity is sold due to weather
conditions, fewer daylight hours, etc.
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
Net Earnings for the three months ended June 30, 1998 were $835,000 as
compared to $939,000 for the same period in 1997, a decrease of 11.1%. Net
earnings for the six months ended June 30, 1998 were $2.2 million versus $2.6
million for the six months ended June 30, 1997, a decrease of 14.0%. Both
second quarter and year-to-date 1997 earnings include the impacts of the
June 1997 early retirement offer which resulted in a charge of approximately
$400,000 (approximately $260,000 after-tax).
Operating Revenues
Operating Revenues for the three and six months ended June 30, 1998
decreased by approximately $3.2 million or 9.3% and approximately $6.5 million
or 9.5%, respectively, as compared to the same periods in 1997. These changes
were due primarily to recoveries of decreased purchased power expenses (see
below) and rate reductions pursuant to electric industry restructuring
legislation and approved settlements agreements. Offsetting these decreases
was the impact of a 3.6% increase in kilowatthour (kWh) sales in the second
quarter and an approximate 1% increase in year-to-date kWh sales. Also
offsetting these decreases somewhat was a 1.3% base rate increase pursuant to
the Rhode Island Utility Restructuring Act of 1996 (URA) effective
January 1, 1998.
Operating Expenses
Purchased Power expense for the quarter and six months ended June 30, 1998
decreased approximately $2.7 million or 12.3% and $6.1 million or 13.6%,
respectively, as compared to the same periods of 1997. The Company's purchased
power expense now reflects the contract termination charge and standard offer
billings from Montaup effective January 1, 1998, pursuant to electric industry
restructuring legislation and settlement agreements, resulting in lower costs.
Other Operation and Maintenance (O&M) expenses increased approximately
$200,000, or 3.2%, and approximately $300,000 or 3.1%, in the second quarter
and year-to-date period of 1998, respectively, as compared to the same periods
of 1997. These changes were primarily due to increased conservation and load
management (C&LM) expenses and uncollectible accounts expenses.
Other Income and (Deductions) - Net
Other Income and (Deductions) - Net was relatively unchanged in the second
quarter of 1998 as compared to the second quarter of 1997, and decreased by
approximately $200,000 in the year-to-date period ended June 30, 1998. This
decrease is due primarily to first quarter 1997 interest income allocated to
the Company by EUA Service Corporation related to the favorable resolution of a
Massachusetts corporate income tax dispute.
Effective Income Tax Rate
Blackstone's effective income tax rate for the six months ended June 30,
1998 increased from approximately 37.0% to 40.2%, when compared with the same
period of a year ago. Provisions of restructuring settlement agreements which
require acceleration of the catch-up of deferred tax deficiencies created under
prior regulatory practices are primarily responsible for this change.
Liquidity and Sources of Capital
Blackstone's need for permanent capital is primarily related to
investments in facilities required to meet the needs of its existing and future
customers.
Traditionally, construction requirements in excess of internally generated
funds are financed through short-term borrowings which are ultimately funded
with permanent capital. In July 1997, several EUA System companies, including
Blackstone, entered into a three-year revolving credit agreement allowing for
borrowings in aggregate of up to $145 million from all sources of short-term
credit. As of June 30, 1998, various financial institutions have committed up
to $75 million under the revolving credit facility. In addition to the $75
million available under the revolving credit facility, EUA System companies
maintain short-term lines of credit with various banks totaling $90 million for
an aggregate amount available of $165 million. At June 30, 1998, these unused
EUA System short-term lines of credit amounted to approximately $77.8 million.
Blackstone had $6.2 million of short-term debt at June 30, 1998.
During the first six months of 1998 Blackstone's internally generated
funds available after the payment of dividends amounted to approximately $6.4
million, while cash construction requirements for the same period amounted to
approximately $2.7 million.
Electric Utility Industry Restructuring
Rhode Island legislation along with approved electric utility industry
restructuring settlement agreements at both the state and federal level,
provided Blackstone's customers with choice of electricity supplier and
immediate rate reductions commencing January 1, 1998. Until a customer
chooses an alternative supplier, that customer will receive standard offer
service. Blackstone is required to arrange for standard offer service through
December 31, 2009 and Montaup has guaranteed standard offer supply at a fixed
price schedule for the duration of the standard offer period. The guaranteed
standard offer price will increase over time to encourage customers to leave
standard offer service and enter the competitive power supply market. Under
the approved settlement agreements, Blackstone agreed to subject its standard
offer requirements to a competitive bidding process in which competitive
suppliers would bid against the guaranteed price offered by Montaup. The
competitive process was completed in April 1998, and resulted in none of the
standard offer requirements being awarded to competitive suppliers. Montaup
will therefore continue to provide the unawarded standard offer requirement at
the indicated fixed price schedule. This wholesale standard offer service will
be assigned proportionately to purchasers of Montaup's generating capacity.
Provisions of the approved settlement agreements also allowed Montaup to
replace its all-requirements wholesale contract with Blackstone with a contract
termination charge (CTC) which permits Montaup to recover, among other things,
its above market investments and commitments in generation assets. Montaup
began billing the CTC to Blackstone coincident with retail access and
Blackstone is recovering the CTC through a non-bypassable transition access
charge to all of its distribution customers.
As part of the approved settlement agreements, Montaup agreed to divest
its entire generation portfolio. The net proceeds of the sale, as defined in
the settlement agreements, will be used to mitigate Montaup's CTC to its retail
affiliates, including Blackstone, via a Residual Value Credit (RVC). The RVC
will reduce the fixed component of the CTC for the net proceeds, with a return,
in equal annual amounts over the period commencing on the date the RVC is
implemented through December 31, 2009. See Divestiture below.
For a more detailed discussion of electric industry restructuring, refer
to Blackstone's 1997 Annual Report on Form 10K.
Divestiture
Montaup began marketing its entire generation portfolio in July 1997, and
subsequently received bids from a number of potential purchasers. On January
23, 1998, based on a review of the offers and discussions with potential
purchasers, Montaup announced that it was reopening the sales process on the
majority of its generating assets and expects to execute purchase and sale
agreements during the third quarter of 1998. In April 1998, EUA announced the
signing of agreements for the transfer of power purchase contracts for
approximately 160 megawatts (mw) between Montaup and Ocean State Power and the
sale of two diesel-powered generating units (totaling approximately 16 mw)
owned by Newport.
On May 27, 1998, EUA announced that Montaup has agreed to sell its 50
percent share (280 mw) of Unit 2 of the Canal Generating Station in Sandwich,
Massachusetts to Southern Energy for approximately $75 million. This sale is
expected to be finalized near the end of 1998.
On June 25, 1998, EUA announced that Montaup has agreed to sell its 2.9
percent share (34 mw) of the Seabrook Station nuclear power plant to the Great
Bay Power Corporation, a subsidiary of BayCorp Holdings, LTP for $3.2 million.
On August 4, 1998, EUA announced an agreement to sell its 2.6% (16 mw)
share of the W. F. Wyman Unit 4 in Yarmouth, Maine to the FPL Group for
approximately $2.4 million.
All of the sale agreements are subject to federal and state regulatory
approvals, including that of the Nuclear Regulatory Commission with respect to
the Seabrook sale.
Resources remaining in EUA's marketing efforts include wholly-owned
fossil-fueled and hydroelectric facilities and approximately 300 mw of power
purchase contracts from generating units throughout New England as well as two
sites providing potential power plant development opportunities. It is
anticipated that an announcement on the sale of EUA's Somerset, Massachusetts,
coal-fired generating station will be made in the third quarter.
Year 2000 Compliance
The "Year 2000" problem exists because some computer programs and embedded
microchips may not properly recognize a year that begins with "20" instead of
"19", and therefore may fail or create erroneous results. EUA is actively
engaged in identifying, assessing, and responding to the implications of this
problem for its operations.
EUA's State of Readiness:
The Company has identified all of its information technology systems and
is assessing and testing its Year 2000 compliance. EUA has established a
structured approach which ranks its mainframe applications, client server and
network applications, as well as desktop and personal computer applications.
To date, the Company has identified several critical systems which have been
corrected, however, there may be others.
EUA is in the process of identifying and assessing its embedded technology
and anticipates findings by October 1998. When the preliminary embedded chip
inventory and assessment process is complete, EUA will then prioritize the
results to address the most critical areas of its business first. EUA's goal is
that most, if not all, embedded chips that support its mission critical
operations will be compliant by mid-year 1999.
EUA's business is dependent upon external parties, including vendors,
suppliers and business partners, for the reliable delivery of its products and
services. The Company has inquired in writing to all of its suppliers and
service providers with regard to their Year 2000 compliancy, and has
established a follow-up process. EUA has identified the third parties with
which it has a material relationship in order to establish their Year 2000
status in a timely fashion, and is continuing to do so. EUA will attempt to
replace critical vendors that it knows or has indications are not likely to be
Year 2000 compliant within a reasonable time frame.
The Cost to Address the Company's Year 2000 Issues:
Since the beginning of its efforts in 1993 to address Year 2000 issues,
EUA has expended approximately $300,000 addressing Information Services-related
issues. During 1998, EUA will expend approximately $1.2 million in capital
expenditures for purchasing two new systems that are Year 2000 compliant -- a
new telephone system and a general ledger system. Based on information
reviewed to date, management does not believe the year 2000 compliance expense
will be material to EUA's future operating results or future financial
condition.
The Risks of EUA's Year 2000 Issues and EUA's Contingency Plans:
The Company is in the process of identifying and verifying realistic
failure scenarios which will require contingency plans. While EUA has not
completed its analysis, EUA anticipates establishing a prioritized list of
potential failures with a formal contingency plan for each one deemed critical
to its ongoing operations during the first half of 1999.
Based on information reviewed to date, EUA believes its plans of action
are adequate to secure Year 2000 compliance of its critical systems and to
reduce the risk of external impacts to its operations. Nevertheless, achieving
Year 2000 compliance is subject to the risks and uncertainties described above,
and adverse effects, should they occur, could be material despite the Company's
efforts to prevent or mitigate them.
Other
Blackstone occasionally makes forward-looking projections of expected
future performance or statements of our plans and objectives. These forward-
looking statements may be contained in filings with the SEC, press releases and
oral statements. Actual results could differ materially from these statements,
therefore, no assurances can be given that such forward-looking statements and
estimates will be achieved.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A Consent to Action in Lieu of Annual Meeting of Stockholders
(Consent to Action) was executed April 15, 1998 by Eastern
Utilities Associates, the holder of the entire issued and
outstanding Common Stock of the Company and the only class of
stock entitled to vote at the Annual Meeting of Stockholders.
(b) The Board of Directors as previously reported to the Securities
and Exchange Commission was re-elected in its entirety.
(c) The only matter voted on in the Consent to Action was the
election of directors.
Item 5. Other Information
NEPOOL is a voluntary organization open to any person engaged in the
electric business such as investor-owned utilities, municipals, cooperative
utilities, power marketers, brokers and load aggregators. On December 31, 1996,
NEPOOL, on behalf of its participants, filed a restructuring proposal with
FERC. The key elements of the restructuring proposal are the implementation of
a regional NEPOOL Open Access Transmission Tariff (NEPOOL Tariff), the creation
of an Independent System Operator (ISO), and the restatement of the NEPOOL
Agreement to establish a broader governance structure for NEPOOL and to develop
a more open competitive market structure.
On June 25, 1997, FERC issued an order conditionally authorizing the
establishment of an ISO by NEPOOL effective July 1, 1997, affirming that the
transfer of control of transmission facilities owned by the public utility
members of NEPOOL to the ISO is consistent with the public interest under
Section 203 of the Federal Power Act.
To give market participants more choice and to foster competition, the
restructured NEPOOL proposes the unbundling of electric service in the NEPOOL
control area. The restructured NEPOOL calls for the development of competitive
wholesale markets for installed capability, operable capability, energy,
automatic generation control, and reserves. These wholesale products will be
market priced based on bid clearing pricing rather than the current cost-based
pricing. Market participants will be able to meet their responsibility for
these products by buying or selling these various services through bilateral
transactions or through the regional power exchange that will be administered
through the ISO. The installed capability market was implemented in April
1998, and the operable capability, energy, automatic generation control and the
reserve markets are expected to start during the fourth quarter of 1998.
In general, the EUA System companies support the changes to NEPOOL because
much of the cross-subsidies for sharing costs will be eliminated. These changes
will have an impact on the Company's operating revenues and costs as NEPOOL
transitions from a cost based to a bid based system.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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.
Blackstone Valley Electric Company
(Registrant)
Date: August 13, 1998 /s/ Clifford J. Hebert, Jr.
Clifford J. Hebert, Jr., Treasurer
(on behalf of the Registrant and
as Principal Financial Officer)