1 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, 1994 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 1-5366 EASTERN UTILITIES ASSOCIATES (Exact name of registrant as specified in its charter) Massachusetts 04-1271872 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Liberty Square, Boston, Massachusetts (Address of principal executive offices) 02109 (Zip Code) (617)357-9590 (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 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, 1994 Common Shares, $5 par value 19,611,430 shares PART I - FINANCIAL INFORMATION Item 1. Financial Statements EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands) June 30, December 31, ASSETS 1994 1993 Utility Plant and Other Investments: Utility Plant in Service $ 1,021,769 $ 1,016,453 Less: Accumulated Provision for Depreciation and Amortization 313,356 296,995 Net Utility Plant in Service 708,413 719,458 Construction Work in Progress 15,990 8,728 Net Utility Plant 724,403 728,186 Investments in Jointly Owned Companies 72,021 73,632 Non-Utility Plant - Net 110,972 104,462 Total Plant and Other Investments 907,396 906,280 Current Assets: Cash and Temporary Cash Investments 10,066 4,180 Accounts Receivable, Net 84,727 84,839 Notes Receivable 14,569 11,736 Materials and Supplies 11,440 13,133 Other Current Assets 16,817 16,340 Total Current Assets 137,619 130,228 Deferred Debits and Other Non-Current Assets 162,706 166,629 Total Assets $ 1,207,721 $ 1,203,137 LIABILITIES AND CAPITALIZATION Capitalization: Common Shares, $5 Par Value $ 98,541 $ 95,163 Other Paid-In Capital 209,292 202,182 Common Share Expense (3,832) (3,822) Retained Earnings 50,549 39,642 Total Common Equity 354,550 333,165 Non-Redeemable Preferred Stock - Net 6,900 6,900 Redeemable Preferred Stock - Net 25,188 25,053 Long-Term Debt - Net 493,962 496,816 Total Capitalization 880,600 861,934 Current Liabilities: Long-Term Debt Due Within One Year 5,306 5,415 Notes Payable 35,476 37,168 Preferred Stock Sinking Fund 50 50 Accounts Payable 28,887 36,111 Taxes Accrued 5,387 12,299 Interest Accrued 11,407 10,688 Other Current Liabilities 21,351 19,285 Total Current Liabilities 107,864 121,016 Deferred Credits and Other Non-Current Liabilitie 84,315 82,747 Accumulated Deferred Taxes 134,942 137,440 Total Liabilities and Capitalization $ 1,207,721 $ 1,203,137 <FN> See accompanying notes to consolidated condensed financial statements. EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In Thousands Except Number of Shares and Per Share Amounts) Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Operating Revenues $ 137,269 $ 135,263 $ 287,466 $ 272,945 Operating Expenses: Fuel 23,246 20,413 46,429 40,852 Purchased Power 29,907 33,655 64,809 68,665 Other Operation and Maintenance 44,920 44,289 89,211 82,413 Depreciation and Amortization 11,534 10,893 22,929 22,053 Taxes - Other Than Income 6,127 5,358 12,998 11,786 - Current Income (Credit) 2,558 (473) 8,380 4,532 - Deferred Income 730 3,797 2,893 4,132 Total 119,022 117,932 247,649 234,433 Operating Income 18,247 17,331 39,817 38,512 Other Income - Net 4,470 4,400 9,780 8,595 Income Before Interest Charges 22,717 21,731 49,597 47,107 Interest Charges: Interest on Long-Term Debt 9,746 10,834 19,519 21,801 Other Interest Expense 2,405 1,415 3,684 2,970 Allowance for Borrowed Funds Used During Construction (Credit) (204) (517) (549) (904) Net Interest Charges 11,947 11,732 22,654 23,867 Net Income 10,770 9,999 26,943 23,240 Preferred Dividends of Subsidiaries 584 880 1,167 1,874 Consolidated Net Earnings $ 10,186 $ 9,119 $ 25,776 $ 21,366 Weighted Average Number of Common Shares Outstanding 19,652,160 18,583,771 19,521,353 17,937,279 Consolidated Earnings Per Average Common Share $ 0.52 $ 0.49 $ 1.32 $ 1.19 Dividends Paid $ 0.385 $ 0.36 $ 0.745 $ 0.70 <FN> See accompanying notes to consolidated condensed financial statements. EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands) Six Months Ended June 30, 1994 1993 CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 26,943 $ 23,240 Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities: Depreciation and Amortization 27,498 27,678 Deferred Taxes 3,505 4,477 Gains on Sales of Investments in Energy Savings Projects Paid for with Notes Receivable (1,830) (1,588) Investment Tax Credit, Net (590) (667) Allowance for Other Funds Used During Construction (129) (158) Other - Net 1,622 3,811 Change in Operating Assets and Liabilities (10,159) (18,371) Net Cash Provided From Operating Activities 46,860 38,422 CASH FLOW FROM INVESTING ACTIVITIES: Construction Expenditures (15,654) (33,523) Acquisition of Northeast Energy Management, Inc. (8,567) Increase in Other Investments (327) Net Cash (Used in) Investment Activities (24,548) (33,523) CASH FLOW FROM FINANCING ACTIVITIES: Issuances: Common Stock 4,584 41,237 Long-Term Debt 7,927 100,000 Redemptions: Preferred Stock 0 (15,600) Long-Term Debt (10,954) (112,528) Premium on Reacquisition and Financing Expenses (607) (8,381) EUA Common Share Dividends Paid (14,572) (12,573) Subsidiary Preferred Dividends Paid (1,167) (1,989) Net Increase in Short-Term Debt (1,637) (22,254) Net Cash Provided from (Used in) Financing Activities (16,426) (32,088) Net Increase (Decrease) in Cash and Temporary Cash Inves 5,886 (27,189) Cash and Temporary Cash Investments at Beginning of Period 4,180 29,614 Cash and Temporary Cash Investments at End of Period $ 10,066 $ 2,425 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (Net of Capitalized Interest) $ 20,356 $ 26,406 Income Taxes $ 5,159 $ 6,336 Supplemental schedule of non-cash investing activities: Conversion of Investments in Energy Savings Projects to Notes and Leases Receivable $ 3,536 $ 2,843 <FN> See accompanying notes to consolidated condensed financial statements. EASTERN_UTILITIES_ASSOCIATES NOTES_TO_CONSOLIDATED_CONDENSED_FINANCIAL_STATEMENTS The accompanying Notes should be read in conjunction with the Notes to Consolidated Financial Statements incorporated in the Eastern Utilities Associates (EUA or the Company) 1993 Annual Report on Form 10-K and the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1994. 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 its financial position as of June 30, 1994 and December 31, 1993, and the results of operations for the three and six months ended June 30, 1994 and 1993 and cash flows for the six months ended June 30, 1994 and 1993. Certain reclassifications have been made to prior period financial statements to conform to current period classifications. The Consolidated Condensed Statement of Income and the Consolidated Condensed Statement of Cash Flows for the 1993 periods being reported herein have been restated to reflect consolidation of EUA Cogenex Partnerships which were previously accounted for as equity investments. This restatement had no impact on Consolidated Net Earnings. In November 1992, the Financial Accounting Standards Board issued Statement No. 112, "Employers' Accounting for Post-employment Benefits." EUA was required to adopt this standard no later than January 1, 1994. The estimated impact of this standard on EUA is immaterial and therefore no liability has been recorded. 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 EUA, 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 Company, Blackstone Valley Electric Company and Newport Electric Corporation (Newport) - and to two non-affiliated municipal utilities. This application is 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 capital costs and successful cost control efforts. As part of the rate filing, Montaup is seeking authorization to become an "all-requirements" supplier for Newport. Previously Montaup provided only a portion of Newport's electricity requirements. FERC allowed Montaup to implement the rate reduction effective May 21, 1994 and Montaup began billing Newport as and all-requirements customer on that date, pending final adjudication and approval. 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 quarter ended June 30, 1994 increased $1.1 million or 11.7% to $10.2 million from second quarter 1993 earnings. Net Earnings contributions by Business Unit for the second quarter of 1994 and 1993 were as follows (000's): Three Months Ended June 30, Increase 1994 1993 (Decrease) Core Electric Business $ 7,415 $ 6,109 $1,306 Energy Related Business 3,476 2,240 1,236 Corporate (705) 770 (1,475) Consolidated $10,186 $ 9,119 $1,067 ======= ======= ======= Net Earnings of the Core Electric Business for the second quarter of 1994 increased by $1.3 million primarily due to a significant decrease in long-term debt interest expense and preferred dividend requirements as a result of system refinancings, and increased kilowatthour (kWh) sales. Net Earnings of the Energy Related Business Unit increased by approximately $1.2 million in the second quarter of 1994 as compared to the same period of a year ago due primarily to investment tax credits utilized in the second quarter of 1994 by EUA Ocean State Corporation (EUA Ocean State). The Corporate Business Unit Net Earnings for the second quarter of 1994 compared to the same period in 1993 decreased by approximately $1.5 million due primarily to the 1993 recognition of investment tax credits by Eastern Utilities Associates (the Parent Company) related to the EUA Power Corporation settlement agreement. 2 Consolidated Net Earnings for the six months ended June 30, 1994 increased $4.4 million or 20.6% to $25.8 million from the same period of 1993. Net Earnings contributions by Business Unit for the first six months of 1994 and 1993 were as follows (000's): Six Months Ended June 30, Increase 1994 1993 (Decrease) Core Electric Business $20,642 $15,717 $4,925 Energy Related Business 5,725 4,205 1,520 Corporate (591) 1,444 (2,035) Consolidated $25,776 $21,366 $4,410 ======= ======= ======= Net Earnings of the Core Electric Business for the first half of 1994 increased by $4.9 million primarily due to a significant decrease in long-term debt interest expense and preferred dividend requirements as a result of 1993 EUA System refinancings and increased kWh sales. Net Earnings of the Energy Related Business Unit increased by approximately $1.5 million in the first six months of 1994 as compared to the same period of a year ago due primarily to tax credits utilized by EUA Ocean State in the second quarter of the current year, as previously discussed, and increased business activity of EUA Cogenex Corporation (EUA Cogenex). The Corporate Business Unit Net Earnings for the first six months of 1994 compared to the same period in 1993 decreased by approximately $2.0 million due primarily to the 1993 recognition of $2.5 million of investment tax credits as previously discussed. Offsetting this decrease somewhat was the Parent Company's recovery of approximately $0.9 million in the first quarter of 1994 resulting from a settlement with the Vermont Electric Generation and Transmission Cooperative, Inc. (Vermont Co-op) relating to Seabrook Nuclear Project payments previously withheld by Vermont Co-op. Operating_Revenues Operating Revenues for the second quarter of 1994 increased by $2.0 million or 1.5% when compared to the same period of 1993 and may be segmented by Business Unit operations as follows (000's): Three Months Ended June 30, Increase 1994 1993 (Decrease) Core Electric Business $119,255 $120,013 $ (758) Energy Related Business 18,014 15,250 2,764 Corporate 0 0 0 Consolidated $137,269 $135,263 $2,006 ======= ======= ======= Core Electric Business revenues decreased by $0.8 million due primarily to a decrease in recoveries of purchased power expense, including the effect of Montaup Electric Company's (Montaup) rate reduction effective May 21, 1994, offset somewhat by an increase in the period's recoveries of fuel expense and increased base revenues (See Operations Expense, below.) A 1.9% increase in kWh sales caused the base revenue increase in the period. EUA Cogenex revenues, which account for all of the Energy Related Business Unit revenues, increased by $2.8 million due primarily to the recognition of additional energy savings project sales of approximately $1.6 million and to the acquisition of James L. Day Co. (Day Co.) and Northeast Energy Management, Inc. (NEM) in December, 1993 and January, 1994, respectively. Operating Revenues for the first six months of 1994 increased by $14.5 million or 5.3% when compared to the same period of 1993. Operating Revenues by Business Unit for the first six months of 1994 and 1993 were as follows (000's): Six Months Ended June 30, Increase 1994 1993 (Decrease) Core Electric Business $251,703 $246,098 $ 5,605 Energy Related Business 35,763 26,847 8,916 Corporate 0 0 0 Consolidated $287,466 $272,945 14,521 ======== ======== ====== Core Electric Business revenues increased by $5.6 million due primarily to increased recoveries of conservation and load management costs of $2.9 million, an increase in fuel cost recoveries of $4.6 million and increased base revenues of $2.5 million by EUA's retail subsidiaries, as a result of a 2.4% increase in kWh sales. Partially offsetting these increases was a decrease of $4.4 million in recoveries of purchased power expense. (See Operations Expense, below) EUA Cogenex revenues increased by $8.9 million due primarily to the recognition of additional energy savings project sales of approximately $6.1 million and to the acquisitions of Day Co. and NEM, as previously discussed. KWH Sales Total primary kWh sales of electricity by EUA's Core Electric Business Unit increased by 1.9% in the second quarter of 1994 compared to the same period last year driven by an increase of 5.3% to industrial customers. Year-to-date June 30, 1994 sales of electricity increased by 2.4% compared to the same period of 1993 with increases of 1.8% in residential sales, 1.3% in commercial sales and 4.0% in industrial sales. The 1994 industrial sales performance is an indication of improving economic conditions in EUA's service territory. Despite the strong performance of kWh sales, the Company anticipates that the economic recovery will remain slow for the foreseeable future. 3 Operations_Expense Fuel expense of the Core Electric Business for the second quarter and first six months of 1994 increased from that of the same periods in 1993 by approximately $2.8 million or 13.9% and $5.6 million or 13.7%, respectively. These increases are due primarily to increased generation by company owned units in 1994 as a result of scheduled outages experienced in the first half of 1993. Offsetting these increases somewhat were decreases in the average cost of fuel in the respective periods of 10% and 4.3%. Canal Unit 2, a 584 megawatt unit, which is 50% owned by EUA's indirect subsidiary Montaup, began a scheduled outage on February 13, 1993 and returned to service on April 5, 1993. Somerset Unit No. 6, a wholly-owned unit of Montaup was out of service for essentially all of 1993 due to unanticipated waterwall restoration. Purchased Power demand expense for the second quarter and six months ended June 30, 1994 decreased $3.7 million or 11.1% and $3.9 million or 5.6%, respectively. These decreases are attributable primarily to decreases in amounts billed to Montaup and Newport Electric Corporation (Newport) by their suppliers aggregating approximately $4.5 million and $4.2 million for the respective periods. Newport is being billed as an all requirements customer of Montaup as a part of Montaup's current application to the Federal Energy Regulatory Commission, implemented on May 21, 1994 pending final adjudication and approval. Offsetting these decreases somewhat were increases in conservation and load management costs recorded as purchased power expense of $0.7 million in both the three and six month periods ended June 30, 1994. Other Operation and Maintenance expenses for the quarter and six months ended June 30, 1994 increased approximately $0.6 million or 1.4% and $6.8 million or 8.2%, respectively, from the same periods in 1993. The six month increase is due primarily to increased EUA Cogenex expenses of approximately $5.3 million due, in part, to its aforementioned acquisitions of Day Co. and NEM. Core Electric Business expenses for the six month period increased due primarily to increased conservation and load management expenses of $2.2 million, increased maintenance expense at Seabrook Unit 1 of $0.6 million due to an unscheduled outage on April 5, 1994, originally scheduled for April 16 and an increase of $0.5 million in insurance expense. Seabrook Unit 1 returned to service July 31, 1994. These increases were partially offset by a $2.4 decrease in Canal Unit 2 maintenance expenses due to its February - April 1993 outage (see above). Income Taxes The EUA System's composite federal and state effective tax rate was approximately 26.2% and 32.7%, respectively, for the quarter and six months ended June 30, 1994 compared to approximately 29.5% and 31.4%, respectively, for the same periods in 1993. The decrease in the quarter is primarily due to $1.3 million of tax credits recorded by EUA Ocean State related to its partnership investment in Ocean State Power Corporation. This amount represent approximately one-third of the total investment tax credits available to EUA Ocean State and it is anticipated that similar amounts will be recognized in the third and fourth quarters of 1994. The six month increase is primarily attributable to the recognition by the Parent Company of $2.5 million of investment tax credits in the first half of 1993 related to the EUA Power settlement agreement. 4 Other_Income_and (Deductions) -_Net Other Income and (Deductions)-Net increased $1.2 million or 13.8% in the current year-to-date period as compared to the corresponding period in the prior year due primarily to the $0.9 million Vermont Co-op settlement previously discussed. The second quarter of 1994 did not significantly change from the like period of 1993. Interest_Charges Interest on Long-Term Debt for the second quarter and six months ended 1994 decreased approximately $1.1 million or 10.0% and $2.3 million or 10.5%, respectively, as compared to the same periods of 1993. The periods' decreases are due primarily to Eastern Edison Company's (Eastern Edison) refinancings of $195 million of long-term debt in 1993 at substantially lower interest rates. An additional refinancing by Newport for its 12% and 8.5% Series Energy Facilities Revenue Bonds aggregating $7.9 million in January 1994 in exchange for its currently outstanding variable rate Electric Energy Facilities Revenue Bonds also contributed to the periods' decrease. Offsetting these decreases somewhat was additional interest incurred since the issuance in October 1993 by EUA Cogenex of $50 million of Unsecured Notes at 7% . Preferred Dividends of Subsidiaries Preferred Dividend requirements in the second quarter and first half of 1994 decreased $0.3 million or 33.6% and $0.7 million or 37.7%, respectively, as a result of Eastern Edison's redemption of all of its outstanding 4.64%, 8.32%, 9.00% and 9.80% series of Preferred Stock aggregating $41.6 million. Eastern Edison subsequently issued $30 million of 6 5/8% series Preferred Stock. Liquidity_and_Sources_of_Capital The EUA system's need for permanent capital is primarily related to investments in facilities required to meet the needs of its existing and future customers. Traditionally, cash construction requirements not met with internally generated funds are financed through short-term borrowings which are ultimately funded with permanent capital. At June 30, 1994, EUA System companies maintained short-term lines of credit with various banks aggregating approximately $140 million. Outstanding short-term Debt at June 30, 1994 and December 31, 1993 by Business Unit was as follows (000's): June 30, 1994 December 31, 1993 Core Electric Business $ 0 $ 0 Energy Related Business 21,204 8,588 Corporate 14,272 28,580 Consolidated $35,476 $37,168 ======= ======= For the six months ended June 30, 1994 and 1993, internally generated funds available after the payment of dividends amounted to approximately $42.2 and $40.2 million, respectively, while the EUA System's cash construction requirements amounted to approximately $15.6 million and $33.5 million, respectively, for the same period. In addition to construction expenditures, energy related investments of EUA Cogenex amounted to approximately $8.6 million in the first half of 1994. Various laws, regulations and contract provisions limit the use of EUA's internally generated funds such that the funds generated by one subsidiary are not generally available to fund the operations of another subsidiary. On January 6, 1994 Newport issued $7.9 million of variable rate Electric Energy Facilities Revenue refunding Bonds due 2011. With the proceeds, Newport redeemed its 12% and 8.5% Series Energy Facilities Revenue Bonds aggregating $7.9 million. PART II - OTHER INFORMATION Item 1. Legal Proceedings On June 15, 1994, EUA Cogenex Corporation (EUA Cogenex) commenced a lawsuit in the United States District Court for the District of Massachusetts (the EUA Cogenex lawsuit) against Onsite Energy Corporation (Onsite) in connection with the partnership between EUA Cogenex and Onsite known as EUA/Onsite L.P. (the Partnership). In addition to damages for breach of fiduciary duties and breach of the partnership agreement by Onsite and other matters, the EUA Cogenex lawsuit seeks to enforce two agreements between EUA Cogenex and Onsite relating to the management of the partnership and cash and accounting control functions for the partnership. On June 27, 1994, Onsite commenced a lawsuit (the Onsite lawsuit) against EUA Cogenex in the California Superior Court for the County of San Diego seeking dissolution of the Partnership and a partnership accounting as well as bringing various claims for damages against EUA Cogenex for not less than $8,000,000. On July 21, 1994, the U.S. District Court for the District of Massachusetts approved an agreement and stipulation between Onsite and EUA Cogenex. Such stipulation was entered as an order of the court and returned to EUA Cogenex the accounting and cash control functions for the Partnership, which Onsite had attempted to assume. The agreement can be terminated by either party upon fourteen days notice to the other. Unless EUA Cogenex and Onsite are able to reach an overall settlement satisfactory to EUA Cogenex, EUA Cogenex intends vigorously to pursue its claims against Onsite as well as its defenses against Onsite's allegations. Item_6. Exhibits_and_Reports_on_Form_8-K (a) Exhibits - None (b) Reports on Form 8-K - none filed in the quarter ended June 30, 1994 5 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_Utilities_Associates______ (Registrant) Date: August_11,_1994 /s/ Richard M. Burns Richard M. Burns, Comptroller (on behalf of the Registrant and as Chief Accounting Officer) 6