UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 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 April 30, 1998 Common Shares, $5 par value 20,435,997 shares PART I - FINANCIAL INFORMATION EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands) March 31, December 31, ASSETS 1998 1997 Utility Plant and Other Investments: Utility Plant in Service $ 1,075,958 $ 1,079,361 Less: Accumulated Provision for Depreciation and Amortization 382,546 376,722 Net Utility Plant in Service 693,412 702,639 Construction Work in Progress 9,666 5,538 Net Utility Plant 703,078 708,177 Investments in Jointly Owned Companies 71,528 69,749 Non-Utility Plant - Net 71,427 71,516 Total Plant and Other Investments 846,033 849,442 Current Assets: Cash and Temporary Cash Investments 12,838 7,252 Accounts Receivable, Net 93,282 92,646 Notes Receivable 25,013 27,693 Fuel, Materials and Supplies 11,402 11,201 Other Current Assets 9,566 7,177 Total Current Assets 152,101 145,969 Deferred Debits and Other Non-Current Assets 302,674 275,341 Total Assets $ 1,300,808 $ 1,270,752 LIABILITIES AND CAPITALIZATION Capitalization: Common Shares, $5 Par Value $ 102,180 $ 102,180 Other Paid-In Capital 217,706 219,156 Common Share Expense (3,931) (3,931) Retained Earnings 58,588 56,062 Total Common Equity 374,543 373,467 Non-Redeemable Preferred Stock - Net 6,900 6,900 Redeemable Preferred Stock - Net 27,721 27,612 Long-Term Debt - Net 330,297 332,802 Total Capitalization 739,461 740,781 Current Liabilities: Long-Term Debt Due Within One Year 72,520 72,518 Notes Payable 70,766 61,484 Accounts Payable 29,983 35,036 Taxes Accrued 3,709 3,063 Interest Accrued 7,837 8,624 Other Current Liabilities 34,123 33,327 Total Current Liabilities 218,938 214,052 Deferred Credits and Other Non-Current Liabilities 175,271 152,526 Accumulated Deferred Taxes 167,138 163,393 Total Liabilities and Capitalization $ 1,300,808 $ 1,270,752 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 March 31, 1998 1997 Operating Revenues $ 139,306 $ 141,753 Operating Expenses: Fuel 26,406 29,471 Purchased Power 27,891 32,509 Other Operation and Maintenance 41,015 41,342 Depreciation and Amortization 12,858 11,630 Taxes - Other Than Income 6,060 6,376 Income Taxes - Current 2,118 8,915 - Deferred (Credit) 4,467 (4,696) Total 120,815 125,547 Operating Income 18,491 16,206 Other Income - Net 2,758 4,429 Income Before Interest Charges 21,249 20,635 Interest Charges: Interest on Long-Term Debt 7,682 8,226 Other Interest Expense 1,971 1,594 Allowance for Borrowed Funds Used During Construction (Credit) (96) (240) Net Interest Charges 9,557 9,580 Net Income 11,692 11,055 Preferred Dividends of Subsidiaries 576 576 Consolidated Net Earnings $ 11,116 $ 10,479 Weighted Average Number of Common Shares Outstanding $20,435,997 $20,435,997 Consolidated Basic and Diluted Earnings Per Average Common Share $ 0.54 $ 0.51 Dividends Paid $ 0.415 $ 0.415 See accompanying notes to consolidated condensed financial statements. EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands) Three Months Ended March 31, 1998 1997 CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 11,692 $ 11,055 Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities: Depreciation and Amortization 14,386 13,153 Deferred Taxes 4,175 (4,600) Non-cash Expenses on Sales of Investments in Energy Savings Projects 1,730 2,652 Investment Tax Credit, Net (391) (300) Allowance for Funds Used During Construction (40) (46) Collections and sales of project notes and leases rec. 4,145 2,605 Other - Net (5,325) 337 Change in Operating Assets and Liabilities (3,943) 3,024 Net Cash Provided From Operating Activities 26,429 27,880 CASH FLOW FROM INVESTING ACTIVITIES: Construction Expenditures (16,130) (20,373 Collections on Notes and Lease Receivables of EUA Cogenex 744 2,922 Increase in Other Investments (3,157) (107) Net Cash (Used in) Investment Activities (18,543) (17,558 CASH FLOW FROM FINANCING ACTIVITIES: Redemptions: Long-Term Debt (2,525) (3,022) EUA Common Share Dividends Paid (8,481) (8,482) Subsidiary Preferred Dividends Paid (576) (576) Net Increase (Decrease) in Short-Term Debt 9,282 (4,675) Net Cash Used in Financing Activities (2,300) (16,755 Net Increase (Decrease) in Cash and Temporary Cash Invest. 5,586 (6,433) Cash and Temporary Cash Investments at Beginning of Period 7,252 12,455 Cash and Temporary Cash Investments at End of Period $ 12,838 $ 6,022 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (Net of Capitalized Interest) $ 9,885 $ 10,086 Income Taxes $ 7,599 $ 7,263 Supplemental schedule of non-cash investing activities: Conversion of Investments in Energy Savings Projects to Notes and Leases Receivable $ 735 $ 2,189 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) 1997 Annual Report on Form 10-K. Note A -In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly its financial position as of March 31, 1998 and the results of operations and cash flows for the three months ended March 31, 1998 and 1997. 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. As more fully discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations", customer choice of electricity supplier commenced on January 1, 1998 and March 1, 1998 for EUA's Rhode Island and Massachusetts retail distribution customers, respectively. Coincident with retail access, Montaup Electric Company (Montaup), EUA's generation and transmission company, began billing its affiliated EUA electric distribution companies, Blackstone Valley Electric Company (Blackstone) and Newport Electric Corporation (Newport), in Rhode Island, and Eastern Edison Company (Eastern Edison), in Massachusetts, a contract termination charge (CTC). The CTC permits Montaup to recover, among other things, its above market investment in generation assets over a period of twelve years, a period shorter than the expected useful lives of these assets. As a result, Montaup is deferring revenue in an amount equal to the difference between depreciation expense recorded pursuant to generally accepted accounting principles and the level of asset recovery included in the CTC. In addition, provisions of the CTC formula require Montaup to accrue and/or defer revenues related to recovery of certain of its generation-related expenses. Effective January 1, 1998, EUA 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 EUA is immaterial and therefore no recognition is required. 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. 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 General: Recent actions by the NRC indicate that the NRC has become more critical and active in its oversight of nuclear power plants. EUA is unable to predict at this time, what, if any, ramifications these NRC actions will have on any of the other nuclear power plants in which Montaup has an ownership interest or power contract. Millstone 3: Montaup has a 4.01% ownership interest in Millstone 3, an 1154-mw nuclear unit that is jointly owned by a number of New England utilities, including subsidiaries of Northeast Utilities (Northeast). Subsidiaries of Northeast are the lead participants in Millstone 3. On March 30, 1996, it was necessary 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. On April 8, 1998, Northeast announced that Millstone 3 was ready for NRC inspection indicating that virtually all of the restart-required physical work had been completed. Various independent inspections are required prior to restart. EUA cannot predict when the plant will be restarted. While Millstone 3 is out of service, Montaup will incur incremental replacement power costs estimated at up to $1 million per month. In August 1997, nine non-operating owners, including Montaup, who together own approximately 19.5% of Millstone 3, filed a demand for arbitration against Connecticut Light and Power (CL&P) and Western Massachusetts Electric Company (WMECO) as well as lawsuits against Northeast and its Trustees. CL&P and WMECO, owners of approximately 65% of Millstone 3, are Northeast subsidiaries that agreed to be responsible for the proper operation of the unit. The non-operating owners of Millstone 3 claim that Northeast and its subsidiaries failed to comply with NRC regulations, failed to operate the facility in accordance with good utility operating practice and attempted to conceal their activities from the non-operating owners and the NRC. The arbitration and lawsuits seek to recover costs associated with replacement power and operation and maintenance (O&M) costs resulting from the shutdown of Millstone 3. The non-operating owners conservatively estimate that their losses will exceed $200 million. Montaup pays its share of Millstone 3's O&M expenses on a reservation of right basis. The fact that Montaup makes payment for these expenses is not an admission of financial responsibility for expenses incurred or to be incurred due to the outage. EUA cannot predict the ultimate outcome of the NRC inquiries or legal proceedings brought against CL&P, WMECO and Northeast or the impact which they may have on Montaup and the EUA system. Maine Yankee: On August 6, 1997, as the result of an economic evaluation, the Maine Yankee Board of Directors voted to permanently close that nuclear plant. Montaup has a 4.0% equity ownership in Maine Yankee. On November 5, 1997, Maine Yankee submitted a rate filing to the FERC to provide for recovery of its costs during the decommissioning period. The filing provides for the investment in plant, nuclear fuel and associated facilities to continue to be recovered through October 2008. On November 6, 1997, Maine Yankee submitted an estimate of its costs to the FERC reflecting the fact that the plant was no longer operating and had entered the decommissioning phase. On January 14, 1998, the FERC accepted the new rates, subject to refund, and amounts of Maine Yankee's collections for decommissioning. FERC also granted intervention requests and ordered a public hearing on the prudency of Maine Yankee's decision to shut down the plant and on the reasonableness of the proposed rate amendments. Also, as a result of the August 1997 shutdown, Montaup and the other equity owners have been notified by the Secondary Purchasers that they will no longer make payments for purchased power to Maine Yankee. The Secondary Purchase Contracts are between the equity owners as a group and 30 municipalities throughout New England. Presently, the equity owners are making payments to Maine Yankee to cover the payments that would be made by the municipals. On November 28, 1997, the Secondary Purchasers sent a Notice of Initiation of Arbitration to the equity owners of Maine Yankee. On December 15, 1997, the equity owners as a group filed at FERC a Complaint and Petition for Investigation, Contract Modification, and Declaratory Order. On April 7, 1998, a Maine judge denied the Secondary Purchasers' motion to compel arbitration and indicated the jurisdictional question should be first decided by FERC. On April 15, 1998, the Secondary Purchasers notified FERC of the judge's decision and asked for expedited action on the pending complaint against them for non payment. The equity owners are seeking an order from FERC declaring that the Secondary Purchasers remain responsible for payments due under the Purchase Contracts and directing the Secondary Purchasers to make such payments. The equity owners also seek a modification of the Secondary Purchase Contracts to extend the termination date or otherwise to ensure that the equity owners may fully recover from the Secondary Purchasers a share of the costs of shutting down and decommissioning the Maine Yankee plant that is proportionate to the Secondary Purchasers' entitlements to energy from the plant. Management does not believe that this contract issue will have a material effect on EUA's future operating results or financial position and cannot predict its ultimate outcome at this time. Department of Energy Actions: In addition to its 4.0% equity ownership in Maine Yankee, Montaup also has a 4.5% equity ownership interest in both the Yankee Atomic and Connecticut Yankee nuclear generating stations. Both of these facilities have permanently ceased power generation operations and are in the process of decommissioning the sites. In early 1998, Yankee Atomic, Maine Yankee and Connecticut Yankee, individually, as well as a number of other utilities, filed suit in federal appeals court seeking a court order to require the Department of Energy (DOE) to immediately establish a program for the disposal of spent nuclear fuel. Yankee Atomic and Connecticut Yankee are also seeking damages of approximately $70 million and $90 million, respectively. Under the Nuclear Waste Policy Act of 1992, the DOE was to provide for the disposal of radioactive wastes and spent nuclear fuel starting in 1998 and has collected funds from owners of nuclear facilities to do so. On February 19, 1998, Maine Yankee also filed a petition in the U.S. Court of Appeals seeking to compel the Department of Energy to remove and dispose of the spent fuel at the Maine Yankee site. Under their Standard Contract, the DOE had a deadline for beginning the removal process at all nuclear plants on January 31, 1998, which was not met. On May 5, 1998, the Court of Appeals denied several motions brought in the proceeding, including several motions for injunctive relief brought by the utility petitioners. In particular, the Court denied the requests to require the DOE to immediately establish a program for the disposal of spent nuclear fuel. Management cannot predict the ultimate outcome of this issue. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is Management's discussion and analysis of certain significant factors affecting the Company's earnings and financial condition for the interim periods presented in this Form 10-Q. Overview Consolidated net earnings for the first quarter of 1998 were $11.1 million compared to first quarter 1997 net earnings of $10.5 million. Net Earnings contributions by Business Unit for the first three months of 1998 and 1997 were as follows (in thousands): Three Months Ended March 31, 1998 1997 Core Electric Business $11,890 $10,901 Energy Related Business (428) (510) Corporate (346) 88 Consolidated $11,116 $10,479 The increase in the net earnings contribution of the Core Electric Business in the first quarter of 1998 was primarily due to increased base revenues resulting largely from a 0.7% increase in electricity sales in this year's first quarter and revenues which were accrued pursuant to approved settlement agreements. The 0.7% increase was led by a 5.4% increase in sales to industrial customers signaling an improvement in economic conditions in the Company's service territory. Net Earnings of our Energy Related Business Unit increased by approximately $100,000 in the first quarter of 1998 as compared to the same period of a year ago. EUA Cogenex operated at a loss of approximately $240,000 in the first quarter of 1998, an improvement of approximately $400,000 from its first quarter 1997 operating loss. The 1997 operating loss included a first quarter 1997 net gain of approximately $500,000 resulting from a change in EUA Cogenex pension and post-retirement welfare benefit plans. Losses incurred by the BIOTEN partnership and Transcapacity L.P. aggregated approximately $900,000 for the quarter, approximately $100,000 less than the losses incurred in the first quarter of 1997. Net Earnings of the Corporate Business Unit decreased by approximately $400,000. This change is due primarily to an increase in general business reserves for certain claims recorded by EUA, the parent company, in the first quarter of 1998. Operating Revenues Operating Revenues for the first three months of 1998 decreased by approximately $2.4 million to approximately $139.3 million when compared to the same period of 1997. Operating Revenues by Business Unit for the first quarter of 1998 and 1997 were as follows (in thousands): Three Months Ended March 31, 1998 1997 Core Electric Business $126,590 $128,224 Energy Related Business 12,716 13,529 Corporate 0 0 Consolidated $139,306 $141,753 Core Electric Business revenues decreased approximately $1.6 million due primarily to decreased recoveries of fuel, purchased power and conservation and load management (C&LM) expenses aggregating approximately $7.3 million and rate reductions pursuant to electric industry restructuring legislation and approved settlements agreements. Offsetting these decreases somewhat were 1.3% base rate increases for Blackstone and Newport effective January 1, 1998 pursuant to the Rhode Island Utility Restructuring Act of 1996 (URA), increased retail kilowatthour sales and revenues accrued pursuant to approved settlement agreements. EUA Cogenex revenues, which account for nearly all of the Energy Related Business Unit revenues, decreased by approximately $800,000 due primarily to decreased revenue of EUA Cogenex-West and Cogenex partnerships aggregating approximately $2 million and decreased project sales at the Cogenex Division of approximately $400,000 offset by increased revenue of EUA Citizens Corporation of approximately $1.5 million. Operating Expenses Fuel expense of the Core Electric Business for the first quarter of 1998 decreased from that of the same period in 1997 by approximately $3.1 million or 10.4%. Nuclear units provided a greater share of system requirements and a 14% decrease in the cost of fossil fuels resulted in a 15% decrease in average fuel costs. Purchased Power expense for the first quarter of 1998 decreased approximately $4.6 million or 14.2% as compared to last year's first quarter. Lower costs billed to Montaup by Maine Yankee, Connecticut Yankee, and Ocean State Power in 1998's first quarter were primarily responsible for this change. Other Operation and Maintenance (O&M) expenses for the quarter ended March 31, 1998 decreased approximately $300,000 or less than 1% from the same period in 1997 due to the following: Direct expenses of the Core and Corporate Business units increased by approximately $800,000 in this year's first quarter due primarily to increased customer accounts and increased legal expenses. Indirect expenses, items in which we have limited short-term control or items which are fully recovered in rates, increased by approximately $100,000 in the first quarter of 1998 as compared to the same period of 1997. Expenses of the Energy Related Business unit decreased by approximately $1.3 million for the period. This decrease is primarily due to decreased expenses at EUA Cogenex of approximately $1.6 million as a result of decreased operating activity and on going cost control efforts, offset by increased expenses at EUA Transcapacity of approximately $200,000. Income Taxes EUA's effective tax rate for the quarter ended March 31, 1998 was approximately 40.1% compared to 35.3% for the same period of a year ago. Provisions of restructuring settlement agreements which require the acceleration of the catch-up of deferred tax deficiencies created under prior regulatory practices are primarily responsible for this change. Depreciation and Amortization Expense Depreciation and Amortization expense increased approximately $1.2 million or 10.6% in the first quarter of 1998 when compared to last year's first quarter due largely to increased Core Electric plant in service and increased depreciation at EUA Cogenex. Other Income and (Deductions) - Net Other Income and (Deductions) - Net decreased by approximately $1.7 million in this year's first quarter. This decrease is due primarily to an increase in general business reserves for certain claims recorded by EUA, the parent company, in this year's first quarter and to the non-recurrence of interest income recorded in last year's first quarter related to the favorable resolution of a Massachusetts corporate income tax dispute. 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. In July 1997, several EUA System companies entered into a three-year revolving credit agreement allowing for borrowings in aggregate of up to $120 million. As of March 31, 1997, various financial institutions have committed up to $75 million under the revolving credit facility. Outstanding short-term debt at March 31, 1998 and December 31, 1997 by Business Unit was as follows (in thousands): March 31, 1998 December 31, 1997 Core Electric Business $10,360 $ 7,075 Energy Related Business 44,496 44,609 Corporate 15,910 9,800 Consolidated $70,766 $61,484 For the three months ended March 31, 1998, internally generated funds amounted to approximately $25.8 million while the EUA System's cash construction requirements amounted to approximately $16.1 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. In March 1998, EUA's Board of Trustees authorized the repurchase of up to $3 million of EUA's outstanding common shares. The program authorizes EUA to purchase shares from time to time in the open market or through privately negotiated transactions in conformity with the rules of the Securities and Exchange Commission. Electric Utility Industry Restructuring The electric utility industry in both Massachusetts and Rhode Island, the states in which EUA provides electric services, is transitioning from a traditional rate regulated environment to a competitive marketplace. Traditional electric utility services - generation, transmission and distribution - have been unbundled into separate and distinct services. The generation, or supply, function is now competitive with customers able to choose their own electricity supplier at market prices. The transmission and distribution functions remain regulated services. The local distribution company is responsible for providing distribution services to the ultimate electricity consumer within its franchised service territory and the transmission company is required to provide open access, non-discriminatory transmission services to generation or supply companies. Legislation in both Rhode Island and Massachusetts along with approved electric utility industry restructuring settlement agreements in both states and at the federal level, provided EUA's Rhode Island and Massachusetts electric customers with choice of electricity supplier and immediate rate reductions commencing January 1, 1998 and March 1, 1998, respectively. Until a customer chooses an alternative supplier, that customer will receive standard offer service. Blackstone and Newport are required to arrange for standard offer service through December 31, 2009 and Eastern Edison must arrange for this service through 2004. Montaup has guaranteed standard offer supply at a fixed price schedule for the duration of the standard offer periods. 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, Newport and Eastern Edison agreed to subject their 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, 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 contracts with its affiliated retail distribution companies 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 coincident with retail access and the distribution companies are recovering the CTC through a non-bypassable transition access charge to all of their 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 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 EUA's 1997 Annual Report on Form 10K. Massachusetts Referendum The Office of the Attorney General has certified a referendum petition to repeal the Electric Industry Restructuring Act (the Act) as a matter appropriate for a referendum initiative. The Act was signed into law in November 1997. A petition was filed with the Election Division of the Office of the Secretary of State in February 1998. A question on repealing the Act will be presented to voters on the November 1998 ballot. EUA and the electric industry in Massachusetts are actively opposing repeal. Management cannot predict the outcome of the November ballot question. 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 by mid 1998. In March 1998, Montaup announced it would combine the marketing of its 50% share (approximately 290 mw) in Unit 2 of the Canal Generating station on Cape Cod with sales efforts of the plant's co-owner and operator, Canal Electric Company. By doing this, potential purchasers are offered an expandable site that includes 1,100 mw of existing generating capacity, an excellent operating record and the capability of burning either natural gas or oil as a fuel. In April 1998, EUA announced the signing of agreements for the transfer of power purchase contracts for approximately 160 mw between Montaup and Ocean State Power and the sale of two diesel-powered generating units (totaling approximately 16 mw) owned by Newport. Both the transfer of the power contracts and sale of the diesel generating units are subject to regulatory approval. EUA Cogenex Sale Negotiations In March 1998, EUA announced that it had entered into exclusive negotiations with an unnamed potential purchaser for the sale of EUA's energy services subsidiary, EUA Cogenex. On May 7, 1998, EUA announced that it had ceased discussions on the potential sale. With its industry leadership position, over 1,000 customers, a substantial book of business for 1998 and the increasing consumer demand for efficiency services, EUA felt that continued discussion with the unnamed potential purchaser would not maximize shareholder value. EUA believes that Cogenex is a valuable asset to EUA and, under the right conditions, could be of even more value to a national power marketer, facilities service company or equipment supplier. The immediate plans for EUA Cogenex are to continue the efforts that proved successful in 1997. PART II - OTHER INFORMATION Item 1. Legal Proceedings See "Note C - Commitments and Contingencies: Recent Nuclear Regulatory Commission (NRC) Actions" for a discussion of pending legal actions involving several of the nuclear plants in which Montaup has an ownership interest. Other EUA 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 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 of 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 - On March 24, 1998, the Registrant filed a current report on Form 8-K with respect to Item 5 (Other Events). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Eastern Utilities Associates (Registrant) Date: May 15, 1998 /s/Clifford J. Hebert, Jr. Clifford J. Hebert, Jr. (on behalf of the Registrant and as Principal Financial Officer)