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, 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 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 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, 1996
Common Shares, $5 par value 20,435,997 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
June 30, December 31 ,
ASSETS 1996 1995
Utility Plant and Other Investments:
Utility Plant in Service $ 1,040,086 $ 1,037,662
Less: Accumulated Provision for Depreciation
and Amortization 340,543 324,146
Net Utility Plant in Service 699,543 713,516
Construction Work in Progress 19,691 7,570
Net Utility Plant 719,234 721,086
Investments in Jointly Owned Companies 71,908 70,210
Non-Utility Plant - Net 84,597 82,347
Total Plant and Other Investments 875,739 873,643
Current Assets:
Cash and Temporary Cash Investments 7,197 4,060
Accounts Receivable, Net 82,205 84,376
Notes Receivable 18,375 18,663
Fuel, Materials and Supplies 13,818 16,516
Other Current Assets 12,564 11,804
Total Current Assets 134,159 135,419
Deferred Debits and Other Non-Current Assets 192,442 197,068
Total Assets $ 1,202,340 $ 1,206,130
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shares, $5 Par Value $ 102,180 $ 102,184
Other Paid-In Capital 220,979 220,730
Common Share Expense (3,918) (3,913)
Retained Earnings 53,159 56,228
Total Common Equity 372,400 375,229
Non-Redeemable Preferred Stock - Net 6,900 6,900
Redeemable Preferred Stock - Net 26,735 26,255
Long-Term Debt - Net 429,176 434,871
Total Capitalization 835,211 843,255
Current Liabilities:
Long-Term Debt Due Within One Year 19,510 19,506
Notes Payable 48,182 39,540
Preferred Stock Sinking Fund 50 50
Accounts Payable 29,948 35,769
Taxes Accrued 2,195 4,544
Interest Accrued 9,729 10,861
Other Current Liabilities 25,082 19,931
Total Current Liabilities 134,696 130,201
Deferred Credits and Other Non-Current Liabilities 92,748 91,934
Accumulated Deferred Taxes 139,685 140,740
Total Liabilities and Capitalization $ 1,202,340 $ 1,206,130
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,
1996 1995 1996 1995
Operating Revenues $ 122,785 $ 146,736 $ 257,585 $ 284,703
Operating Expenses:
Fuel 17,464 23,643 40,659 45,927
Purchased Power 28,613 31,481 58,616 63,455
Other Operation and Maintenance 49,211 53,957 89,941 95,257
Voluntary Retirement Incentive 0 4,505 0 4,505
Depreciation and Amortization 11,675 11,741 22,798 23,498
Taxes - Other Than Income 5,939 4,485 12,409 11,042
- Current Income 530 851 6,802 4,074
- Deferred Income (Credit) (671) 1,056 (1,945) 3,117
Total 112,761 131,719 229,280 250,875
Operating Income 10,024 15,017 28,305 33,828
Other Income - Net 3,032 3,691 6,400 7,116
Income Before Interest Charges 13,056 18,708 34,705 40,944
Interest Charges:
Interest on Long-Term Debt 8,620 9,658 17,269 19,318
Other Interest Expense 1,576 1,483 3,196 2,730
Allowance for Borrowed Funds Used
During Construction (Credit) (439) (838) (985) (1,396)
Net Interest Charges 9,757 10,303 19,480 20,652
Net Income 3,299 8,405 15,225 20,292
Preferred Dividends of Subsidiaries 578 580 1,157 1,161
Consolidated Net Earnings $ 2,721 $ 7,825 $ 14,068 $ 19,131
Weighted Average Number of
Common Shares Outstanding 20,436,122 20,210,861 20,436,438 20,105,183
Consolidated Earnings Per
Average Common Share $ 0.13 $ 0.38 $ 0.69 $ 0.95
Dividends Paid $ 0.415 $ 0.40 $ 0.815 $ 0.785
See accompanying notes to consolidated condensed financial statements.
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
1996 1995
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 15,225 $ 20,291
Adjustments to Reconcile Net Income
to Net Cash Provided from Operating Activities:
Depreciation and Amortization 26,542 29,307
Deferred Taxes (1,472) 3,410
Non-cash (Gains)/Expenses on Sales of Investments
in Energy Savings Projects 2,350 (3,946)
Investment Tax Credit, Net (604) (606)
Allowance for Funds Used During Construction (102) (299)
Coll. and sales of project notes and leases rec. 3,954 10,064
Other - Net 5,849 5,246
Change in Operating Assets and Liabilities 1,243 (22,837
Net Cash Provided From Operating Activities 52,985 40,630
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (33,046) (43,572
Coll. on Notes and Lease Receivables of EUA Cogenex 2,149 939
Increase in Other Investments (4,036)
Net Cash (Used in) Investment Activities (34,933) (42,633
CASH FLOW FROM FINANCING ACTIVITIES:
Issuances:
Common Stock 3,050
Redemptions:
Long-Term Debt (5,737) (4,125)
Premium on Reacquisition and Financing Expenses (6) (50)
EUA Common Share Dividends Paid (16,656) (15,775
Subsidiary Preferred Dividends Paid (1,157) (1,162)
Net Increase in Short-Term Debt 8,641 11,397
Net Cash (Used in) Financing Activities (14,915) (6,665)
Net Increase (Decrease) in Cash and Temp. Cash Investments 3,137 (8,668)
Cash and Temporary Cash Investments at Beginning of Period 4,060 20,109
Cash and Temporary Cash Investments at End of Period $ 7,197 $ 11,441
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Capitalized Interest) $ 17,742 $ 20,794
Income Taxes $ 10,987 $ 4,622
Supplemental schedule of non-cash investing activities:
Conversion of Investments in Energy Savings
Projects to Notes and Leases Receivable $ 3,195 $ 9,248
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) 1995 Annual Report on Form 10-K and the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1996.
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, 1996 and December 31, 1995, and the results of
operations for the three and six months ended June 30,
1996 and 1995 and cash flows for the six months ended June
30, 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.
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.
EUA occasionally makes projections of expected future performance
or statements of its plans, objectives and new business
opportunities which are forward-looking statements under federal
securities law. Actual results could differ materially from
those discussed and there can be no assurance that such estimates
of future results could be achieved.
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 EUA, has a 4.01% ownership interest in Millstone
III, 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 III, 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 III 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 nuclear unit owned
by Connecticut Yankee Atomic Power Company (Connecticut Yankee),
in which Montaup has 4.5% ownership share.
In July 1996 Northeast reported that it has been responding to a
series of requests from the NRC seeking assurance that the
Millstone III unit will be operated in accordance with the terms
of its operating license and other NRC requirements and
regulations and dealing with a series of issues that Northeast
has identified in the course of these reviews. Providing these
assurances and addressing these issues will be components of an
Operational Readiness Plan (ORP) to be developed for the
Millstone III unit. The ORP for Millstone III was submitted to
the NRC on July 2, 1996 and is presently being implemented.
Northeast now estimates that it will fully implement the
Millstone III ORP during October 1996. Following implementation
of the ORP, Northeast expects to file a letter with the NRC
expressing its belief that the unit is ready to restart. This
letter will be followed by extensive NRC staff inspections. The
NRC Commissioners will then have to affirmatively vote to allow
restart. On August 6, 1996, the NRC indicated that it will
require an independent review team to evaluate corrective actions
taken by Northeast before the Millstone III unit will be allowed
to restart.
The most recent Northeast estimate of incremental direct costs
related to the outage of Millstone III is approximately $41
million. Montaup's share is $1.6 million, about half of which
has been incurred through June.
While Millstone III is out of service, Montaup will incur
incremental replacement power costs estimated at $0.4 million to
$0.8 million per month. Montaup bills 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.
EUA cannot predict the ultimate outcome of the NRC inquiries or
the impact which they may have on Montaup and the EUA system.
EUA is also evaluating its rights and obligations under the
various agreements relating to the ownership and operation of
Millstone III.
The Connecticut Yankee Nuclear Unit was taken off-line in July
because of issues related to certain containment air
recirculation and service water systems. At the time the unit
was taken off-line, it was anticipated that it would return to
service in August.
On August 2, the NRC informed Connecticut Yankee that until their
safety questions were satisfied, the Connecticut Yankee Unit
could not return to service.
As a result of the NRC's action, Connecticut Yankee announced
that it would immediately commence other maintenance work at the
unit and commence the refueling outage that was scheduled to take
place later in the year.
At this time, Connecticut Yankee is unable to predict a definite
restart date for the Connecticut Yankee unit.
The NRC has commissioned a Safety Assessment Team to assess the
conformance of the Maine Yankee Atomic Power Station to its
design and licensing basis. Montaup holds a 3.5% ownership
interest in the Maine Yankee Unit. The Assessment Team commenced
their activity at the Maine Yankee site on July 15, 1996 and it
is expected that the assessment will continue through early
October, 1996.
Maine Yankee is unable to predict what, if any, further actions
will be required as a result of the Safety Assessment.
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.
Cogenex charge to earnings
Difficulties in turning project proposals into signed contracts, the
virtual elimination of utility sponsored Demand Side Management (DSM)
programs and the termination of the AYP Capital and Westar joint ventures
has hampered EUA Cogenex earnings results. As a result, a write-off of
certain start-up costs of abandoned joint ventures, and expenses related to
certain project proposals along with a reduction in carrying value of
certain on-going projects necessitated by current market conditions
resulted in a $5.9 million pre-tax ($3.7 million after-tax or 18 cents per
share) charge to earnings in the second quarter of 1996.
In an effort to revitalize its sales activity, EUA Cogenex has replaced
virtually all of its sales staff with individuals possessing more
experience and proven sales capability in the energy efficiency market.
Cogenex has also restructured its NOVA Division because of changing market
conditions. While EUA believes that the energy efficiency market still
provides a viable business opportunity for EUA Cogenex, it will be
important for EUA Cogenex to improve its sales activity.
Overview
Consolidated Net Earnings for the quarter ended June 30, 1996 were $2.7
million compared to $7.8 million in the second quarter of 1995. The second
quarter 1996 results include a $5.9 million pre-tax charge to earnings
recorded by EUA Cogenex in June (see above) while the second quarter 1995
earnings include a one-time charge of $4.5 million pre-tax ($2.7 million
after-tax or 14 cents per share) related to the Voluntary Retirement
Incentive (VRI) offer recorded in June of last year. Net Earnings
contributions by Business Unit for the second quarter of 1996 and 1995 were
as follows (000's):
Increase
1996 1995 (Decrease)
Core Electric Business* $ 7,001 $ 9,203 $(2,202)
Energy Related Business (3,999) 1,337 (5,336)
Corporate (281) 32 (313)
Subtotal 2,721 10,572 (7,851)
Voluntary Retirement Incentive (2,747) 2,747
Consolidated $ 2,721 $ 7,825 $(5,104)
======== ======== ========
*Net of 1995 VRI charge.
Net Earnings of the Core Electric Business net of the 1995 VRI charge
for the second quarter of 1996 decreased by approximately $2.2 million due
primarily to an unusual number of severe storms which struck the retail
service territory in the first half of this year along with increased
property tax and legal expenses. Mitigating these negative impacts
somewhat were increased primary kilowatthour (kWh) sales of 1.4% for the
quarter, expense savings related to the 1995 VRI and lower interest expense
resulting from maturing debt issues in 1995.
Net Earnings of the Energy Related Business Unit decreased by
approximately $5.3 million in the second quarter of 1996 as compared to the
same period of a year ago of which $5.0 million relates to EUA Cogenex.
The decline in EUA Cogenex earnings is due primarily to lower than
anticipated sales and the $5.9 million pre-tax charge to earnings
(discussed above).
The Corporate Business Unit Net Earnings for the second quarter of 1996
compared to the same period in 1995 decreased by approximately $300,000 due
primarily to increased short-term debt interest expense.
Consolidated Net Earnings for the six months ended June 30, 1996 were
$14.1 million compared to $19.1 million for the same period of 1995. Net
Earnings contributions by Business Unit for the first six months of 1996
and 1995 were as follows (000's):
Increase
1996 1995 (Decrease)
Core Electric Business* $18,613 $19,839 $(1,226)
Energy Related Business (4,091) 1,845 (5,936)
Corporate (454) 194 (648)
Subtotal 14,068 21,878 (7,810)
Voluntary Retirement Incentive (2,747) 2,747
Consolidated $14,068 $19,131 $(5,063)
======= ======= ========
*Net of 1995 VRI charge.
Net Earnings of the Core Electric Business net of VRI for the first
half of 1996 decreased by $1.2 million. The factors that negatively
impacted second quarter results also suppressed year-to-date results. The
primary kWh sales increase of 3.3% for the year-to-date period, VRI savings
and lower interest expense softened these negative impacts.
Net Earnings of the Energy Related Business Unit decreased by
approximately $5.9 million in the first six months of 1996 as compared to
the same period of a year ago, $6.1 million of which related to EUA
Cogenex. EUA Cogenex's lower sales and $5.9 million pre-tax charge were
offset somewhat by decreased losses of approximately $500,000 at EUA Energy
Investment as compared to 1995.
The Corporate Business Unit Net Earnings for the first six months of
1996 compared to the same period in 1995 decreased by approximately
$600,000 due primarily to increased short-term debt interest of
approximately $300,000 and a legal expense reversal of approximately
$300,000 recorded in the first quarter of 1995.
Operating Revenues
Operating Revenues for the second quarter of 1996 decreased by
approximately $24.0 million or 16.3% when compared to the same period of
1995. Revenues by Business Unit operations were as follows (000's):
Three Months Ended June 30,
Increase
1996 1995 (Decrease)
Core Electric Business $107,331 $119,217 $(11,886)
Energy Related Business 15,454 27,519 (12,065)
Corporate 0 0 0
Consolidated $122,785 $146,736 $(23,951)
======== ======== ========
Core Electric Business revenues include the impact of recoveries of
decreased fuel, purchased power and conservation and load management (C&LM)
expenses (see Operations Expense below).
EUA Cogenex revenues, which account for virtually all of the Energy
Related Business Unit revenues, decreased by $12.1 million due primarily to
decreases in project sales and Nova division revenues aggregating $10.9
million. Also the impact of the September 1995 discontinuance of
cogeneration operations contributed $2.7 million to this decline.
Offsetting these impacts somewhat were additional revenues related to the
Highland and Citizens acquisitions in 1995 aggregating $1.2 million.
Operating Revenues for the first six months of 1996 decreased by $27.1
million or 9.5% when compared to the same period of 1995. Operating
Revenues by Business Unit for the first six months of 1996 and 1995 were as
follows (000's):
Six Months Ended June 30,
Increase
1996 1995 (Decrease)
Core Electric Business $229,535 $241,955 $(12,420)
Energy Related Business 28,050 42,748 (14,698)
Corporate 0 0 0
Consolidated $257,585 $284,703 (27,118)
======== ======== =======
Core Electric Business revenues decreased by $12.4 million due
primarily to recoveries of lower fuel, purchased power and C&LM expenses,
offset by an increase in primary kWh sales of 3.3%.
EUA Cogenex revenues decreased by approximately $14.7 million due
primarily to lower project sales and decreased EUA Nova division revenues
aggregating $13.5 million. The September 1995 discontinuance of
cogeneration operations of EUA Cogenex contributed $5.5 million to this
decline. Offsetting these negative impacts somewhat were increased
revenues related to the 1995 Highland and Citizens acquisitions and
increased EUA Day revenues aggregating approximately $4.0 million.
Kilowatthour Sales
Primary kWh sales of electricity by EUA's Core Electric Business Unit
increased 1.4% in the second quarter of 1996, and increased 3.3% for the
year-to-date period compared to the same periods last year due largely to
weather. These increases were led by sales growth in the residential and
commercial classes which are typically more weather sensitive. The first
quarter of 1996 was significantly colder than the unusually mild first
quarter of 1995, while the second quarter of this year saw a return to a
more normal weather pattern. Sales to industrial customers were
essentially flat for the first half of this year indicating continued slow
economic improvement in EUA's core electric service territories.
Operations Expense
Fuel expense of the Core Electric Business for the second quarter and
first half of 1996 decreased from that of the same periods in 1995 by
approximately $6.2 million or 26.1% and $5.3 million or 11.5%,
respectively. The second quarter's decrease was largely due to a 23.8%
decrease in the average cost of fuel as a result of the increased use of
less expensive nuclear fuel and a 3.6% decrease in total energy generated
and purchased. For the year-to-date period, the decrease in the average
cost of fuel was 13.5% which was offset somewhat by a 2.7% increase in
total energy generated and purchased.
Purchased Power demand expense for the second quarter of 1996 decreased
$2.9 million or 9.1% and decreased $4.8 million or 7.6% for the six months
ended June 30, 1996. These changes are due primarily to the impact of
decreased billings from the Yankee nuclear units and the Ocean State Power
project.
Other Operation and Maintenance expenses for the quarter and six months
ended June 30, 1996 decreased approximately $4.7 million or 8.8% and $5.3
million or 5.5%, respectively, from the same periods in 1995.
Direct expenses of the Core and Corporate Business units increased by
$1.7 million and $3.7 million in the second quarter and year-to-date
periods of 1996 due primarily to respective period increases in legal
expenses of $2.0 million and $2.7 million and storm related expenses of
$1.4 million and $1.6 million offset somewhat by savings related to the
1995 VRI.
Indirect expenses, items over which there is limited short-term control
or items which are fully recovered in rates, decreased by $2.3 million and
$4.2 million in the second quarter and year-to-date periods of 1996 as
compared to the same periods of 1995. In the second quarter and year-to-
date periods, C&LM expenses decreased $1.7 million and $3.3 million, and
jointly owned unit expenses decreased approximately $900,000 and $1.4
million, respectively. The decrease in jointly owned unit expenses was
mitigated somewhat by incremental outage costs of the Millstone III
unit.
Expenses of the Energy Related Business unit decreased by $3.9 million
and $4.8 million for the second quarter and year-to-date periods of 1996,
respectively. These changes are primarily due to decreased expenses
aggregating $7.0 million and $7.3 million in the respective periods
directly related to lower EUA Cogenex project sales and lower EUA Nova
division revenues. In addition, as a result of the September 1995
discontinuance of cogeneration operations, EUA Cogenex expenses fell by
$2.3 million and $4.6 million in the three and six-month periods ended June
30, 1996, respectively. Lower research, development and operating expenses
of EUA Energy investment of $500,000 and $1.4 million also contributed to
the respective period declines. The $5.9 million EUA Cogenex charge,
previously discussed, somewhat offset these expense decreases along with
increased expenses of $1.0 million and $2.7 million in the respective
periods related to the Highland and Citizens acquisitions.
Taxes Other Than Income
Taxes other than income increased $1.4 million in the three and six
month periods ended June 30, 1996 compared to the same periods of 1995 due
primarily to the June 1995 reversal of previously over-accrued property
taxes and lower Rhode Island gross receipts taxes, directly related to a
lower rate and lower revenues.
Other Income (Deductions) - Net
Other Income and (Deductions)-Net decreased by approximately $700,000
in the second quarter and year-to-date periods of 1996 as compared to the
corresponding periods in 1995 primarily due to the impact of the write-off
of Cogenex's AYP Capital and Westar joint venture start-up costs, included
in the $5.9 million charge previously discussed.
Interest Charges
Net interest charges for the quarter and six months ended June 30, 1996
decreased approximately $600,000 and $1.2 million respectively, as compared
to the same periods of 1995. These decreases were primarily due 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, offset slightly by higher interest expense on
short-term debt.
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, 1996, EUA System
companies maintained short-term lines of credit with various banks
aggregating approximately $150 million. Outstanding short-term debt at
June 30, 1996 and December 31, 1995 by Business Unit was as follows
(000's):
June 30, 1996 December 31, 1995
Core Electric Business $ 145 $ 6,761
Energy Related Business 23,058 14,421
Corporate 24,680 18,358
Consolidated $47,883 $39,540
======= =======
For the six months ended June 30, 1996 internally generated funds
available after the payment of dividends amounted to approximately $35.8
million while the EUA System's cash construction requirements amounted to
approximately $33.0 million for the same period. 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.
The $5.9 million charge to earnings along with lower than anticipated
sales puts EUA Cogenex out of compliance with the interest coverage
covenant contained in certain of its unsecured note agreements and
therefore EUA Cogenex is in default under said note agreements. EUA
Cogenex has notified the noteholders and will meet with them to discuss
ways to cure this situation including a request for temporary waiver of the
interest coverage requirement.
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, governmental agencies
and consumer advocates in submitting similar sets of interdependent
principles to their respective state regulatory commissions which were
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 state regulators.
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.
On March 5, 1996 the RIPUC required electric utilities subject to their
jurisdiction to file electric industry restructuring plans. On April 19,
1996 both Blackstone and Newport filed a restructuring plan called "Choice
and Competition", described below. Hearings on the restructuring plans
submitted to the RIPUC were to have started on August 12, 1996. In view of
the restructuring legislation (described below) passed into law on August
7, 1996, however, the RIPUC terminated its restructuring proceedings.
On August 7, 1996 the Governor of Rhode Island signed into law the
Utility Restructuring Act of 1996 (URA). The URA provides for customer
choice of electricity supplier commencing July 1, 1997 for large
manufacturing customers, certain new commercial and industrial customers,
and State of Rhode Island accounts. Load, accounting for no more than 10%
of total electric distribution company's kWh sales is to be released to
retail access under this provision. An additional 10% of kWh sales is
released to retail access by permitting municipal and smaller manufacturers
to choose an electricity supplier commencing January 1, 1998. By July 1,
1998 or sooner, all customers will have retail access. This legislation
provides for recovery of "stranded costs" through a non-by-passable
transition charge initially set at 2.8 cents per kWh. The transition
charge covers costs of regulatory assets; nuclear decommissioning; above
market payments to power suppliers; and depreciated generation net of its
market value. Nuclear decommissioning costs and above market payments to
power suppliers will be reconciled to actual costs annually and the
transition charge will be spread over the period from July 1, 1997 through
December 31, 2009.
The implementation of the URA will require approvals from applicable
regulatory agencies, including the Federal Energy Regulatory Commission
(FERC), the RIPUC, and the Securities and Exchange Commission.
EUA believes that the URA settles much of the uncertainty regarding
"stranded cost" recovery related to serving the customers of Blackstone and
Newport.
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. On March 15,
1996, the MDPU issued a Notice of Inquiry (NOI) Rulemaking on electric
industry restructuring. The NOI incorporated by reference the
restructuring proposals previously submitted pursuant to the MDPU's
earlier order. In its NOI order the MDPU indicated that it planned
to issue draft rules to provide more specific guidance on the framework of
a restructured electric industry.
On May 1, 1996 the MDPU issued its proposed rules for the restructuring
of the electric industry. The MDPU stated the rules 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.
Final rules were originally scheduled to be issued in September 1996. On
August 9, 1996 the MDPU issued a notice extending the issuance date of the
final rules. The MDPU goal is to issue final rules by the end of the
calendar year 1996. The May 1st 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 participated in
hearings which were held in June and July, and on August 2, 1996, filed
comments and responded to MDPU discovery. EUA cannot predict the ultimate
outcome of this issue.
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 proposed, 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 keystone
to "Choice and Competition" was the adoption of common electric utility
restructuring implementation for the New England states operating with the
region's power pool. As different restructuring initiatives surfaced from
state regulatory agencies and state legislatures, it became apparent that a
New England region-wide approach to restructuring would be unlikely. Thus,
major elements of the "Choice and Competition" proposal have been
substantially modified to reflect that state by state, rather than
regional, plans will be adopted.
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. EUA believes that its Core Electric
operations continue to meet the criteria established in these accounting
standards.
However, the potential exists that the final outcome of state and
federal agency determinations could require EUA to no longer follow these
accounting rules. Current or future regulatory proposals regarding the
electric delivery business and the recovery of EUA's utility plant,
stranded investment, and regulatory assets could trigger the discontinuance
of Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (FAS71). Should it be required to
discontinue the application of FAS71, EUA would be required to take an
immediate write down of the affected assets in accordance with FAS101,
"Accounting for the Discontinuation of Application of FAS71."
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 1. Legal Proceedings
On December 15, 1995, Eastern Edison exercised its right to terminate
a Power Purchase Agreement (the PPA) entered into with the Meridian
Middleboro Limited Partnership (MMLP) and a related entity on September 20,
1993. In February and May of 1996, MMLP made demand for over $25 million
under the termination provision of the PPA. On June 17, 1996, Eastern
Edison responded to MMLP's demand stating that only $170,000 were due under
the termination provision. On July 18, 1996, Eastern Edison filed a
declaratory judgement action in Suffolk Superior Court in Boston,
Massachusetts against MMLP seeking a declaration of the rights of the
parties under the PPA. MMLP's response to the complaint, filed on August
8, 1996, included counter claims in excess of $20 million and a
request for treble damages. The Company intends to vigorously defend
itself from the counter claims. The Company cannot determine the outcome of
this proceeding at this time.
Item 3. Defaults Upon Senior Securities
The $5.9 million charge to earnings as discussed in Part I - Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations along with lower than anticipated sales puts EUA Cogenex out of
compliance with the interest coverage covenant contained in its $31.5
million 10.56%, $15 million 7.22% and $17.6 million 9.6% unsecured note
agreements and therefore EUA Cogenex is in default under said note
agreements. EUA Cogenex has notified the noteholders and will meet with
them to discuss ways to cure this situation including a request for
temporary waiver of the interest coverage requirement.
Item 5. Other Information
On April 24, 1996, the 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 have been approved and
became effective April 21, 1996 for a period of at least one year. These
tariffs are 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
- none filed in the quarter ended June 30, 1996.
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 14, 1996 /s/ Clifford J. Hebert, Jr.
Clifford J. Hebert, Jr., Treasurer
(on behalf of the Registrant and
as Principal Financial Officer)