Company Profile
Eastern Edison Company (Eastern Edison or the Company) is a retail
electric utility company. Eastern Edison supplies retail electric service to
approximately 185,000 customers in 22 cities and towns in southeastern
Massachusetts. The largest communities served are the cities of Brockton and
Fall River, Massachusetts. Eastern Edison is a wholly owned subsidiary of
Eastern Utilities Associates (EUA). EUA owns directly all of the shares of
common stock of Eastern Edison, Blackstone Valley Electric Company (Blackstone)
and Newport Electric Corporation (Newport). These EUA subsidiaries are
collectively referred to as the Retail Subsidiaries. Blackstone and Newport
are retail electric utility companies operating in northern Rhode Island and
south coastal Rhode Island, respectively. Eastern Edison owns all of the
permanent securities of Montaup Electric Company (Montaup), a generation and
transmission company, which supplies electricity to Eastern Edison, to
Blackstone, to Newport and to two unaffiliated utilities for resale. EUA also
owns directly all of the shares of common stock of EUA Service Corporation (EUA
Service), EUA Cogenex Corporation (EUA Cogenex), EUA Energy Investment
Corporation (EUA Energy), EUA Ocean State Corporation (EUA Ocean State), EUA
Energy Services Corporation (EUA Energy Services), and EUA Telecommunications
Corporation (EUA Telecommunications). EUA Service provides various accounting,
financial, engineering, planning, data processing and other services to all EUA
System companies. EUA Cogenex is an energy services company. EUA Energy was
organized to invest in energy related projects. EUA Ocean State owns a 29.9%
interest in Ocean State Power's two gas-fired generating units in northern
Rhode Island. EUA Energy Services owns an interest in a limited liability
company which markets energy and energy services. EUA Telecommunications
provides telecommunications and information services. The holding company
system of EUA, the Retail Subsidiaries, Montaup, EUA Service, EUA Cogenex, EUA
Energy, EUA Ocean State, EUA Energy Services, and EUA Telecommunications is
referred to as the EUA System. The Core Electric Business consists of the
Retail Subsidiaries and Montaup. (See Electric Utility Industry Restructuring
for a discussion of changes taking place in the utility industry in the
territories served by EUA's Core Electric Business.)
Form 10-K
A copy of EUA's, Eastern Edison's and Blackstone's Co-Registrant 1998
Annual Report on Form 10-K, which is filed with the Securities and Exchange
Commission, is available without charge by contacting us at:
EUA Service Corporation
Post Office Box 2333
Boston, MA 02107
(617) 357-9590
Internet Address
Visit EUA's Home Page on the worldwide web at: http://www.eua.com.
MARKET FOR EASTERN EDISON'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of Eastern Edison's common stock is owned beneficially and of record
by Eastern Utilities Associates (EUA).
The dividends paid on Eastern Edison's common stock during the past two
years are as follows:
Dividends Paid Dividends Paid
1998 Per Share 1997 Per Share
First Quarter $2.70 First Quarter $2.70
Second Quarter 2.70 Second Quarter 2.70
Third Quarter 1.45 Third Quarter 2.70
Fourth Quarter -0- Fourth Quarter 2.70
No dividend may be paid on Eastern Edison's common stock unless full
dividends on Eastern Edison's outstanding Preferred Stock for all past and the
current quarterly dividend periods have been paid or declared and set apart for
payment, nor may any dividends be paid on Eastern Edison's common stock if
Eastern Edison is in default on any sinking fund obligation provided for its
Preferred Stock. See also Notes C, D and E of Notes to Consolidated Financial
Statements.
SELECTED CONSOLIDATED FINANCIAL DATA
For the Years Ended December 31,
(In Thousands) 1998 1997 1996 1995 1994
___________________________________________________________________________________
Operating Revenues $408,230 $435,014 $404,808 $420,069 $418,424
Net Earnings 27,718 27,059 30,983 31,455 31,395
Total Assets 831,622 777,124 775,082 739,198 756,045
Capitalization:
Long-Term Debt-Net 162,550 162,491 222,402 222,313 229,224
Redeemable Preferred
Stock-Net 27,995 27,612 27,035 26,218 25,257
Common Equity 225,998 218,468 240,213 244,368 225,064
Total Capitalization $416,543 $408,571 $489,650 $492,899 $479,545
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND REVIEW OF
OPERATIONS
Overview
Consolidated Net Earnings were $27.7 million in 1998, an increase of
approximately $700,000 or 2.4% from 1997 Net Earnings. Decreased jointly owned
unit expenses due largely to the return to service of the Millstone 3 nuclear
generating plant in July 1998 and increased kilowatthour (kWh) sales were
offset by rate reductions pursuant to approved utility restructuring agreements
effective March 1, 1998. See Generation Divestiture below for a discussion of
Montaup's agreements to divest of its generation assets and power purchase
contracts.
Consolidated Net Earnings were approximately $27.1 million in 1997, a
decrease of $3.9 million or 12.7% as compared to 1996. The 1997 results
include the impacts of increased jointly owned units expenses, primarily
related to the extended Millstone 3 outage, and increased expenses due to a
June 1997 voluntary retirement incentive offer (VRI) discussed below.
Proposed Merger Agreement
On February 1, 1999, EUA and New England Electric System (NEES) announced
a merger agreement under which NEES will acquire all outstanding shares of EUA
for $31 per share in cash. The merger agreement, which is subject to the
approval of EUA shareholders and various regulatory agencies, values the equity
of EUA at approximately $634 million, which represents a 23% premium above the
price of EUA shares on December 4, 1998, the last trading day before other
regional merger announcements affected EUA's share price. Closing of the
merger is expected to occur by early 2000.
kWh Sales
KWh sales in 1998 increased by 2.5% as compared to 1997. This increase
was led by sales to industrial and commercial classes of 5.4% and 3.4%,
respectively. KWh sales in 1997 increased less than 1% compared to 1996.
Comparison of Financial Results
Operating Revenues
Operating Revenues of approximately $408.2 million decreased by $26.8
million in 1998 due to the following: Generation related revenues decreased by
$24.6 million as a result of restructured rates, which provided rate reductions
to all of EUA's retail customers, pursuant to electric industry restructuring
legislation and settlement agreements effective March 1, 1998. Of this
decrease, $21.5 million relates to decreased fuel and purchased power expenses
in 1998. The remaining change in generation related revenues was due to the
net impacts of rate reductions and accrued revenues as prescribed in the
previously mentioned settlement agreements. Distribution revenues decreased by
$3.6 million in 1998 due to the net impacts of restructured rates, a 2.5%
increase in kilowatthour sales and a $2.0 million increase in conservation and
load management (C&LM) recoveries.
Operating Revenues of approximately $435.0 million increased approximately
$30.2 million or 7.5% in 1997 as compared to 1996. This change was primarily
due to increased recoveries of purchased power, fuel and C&LM expenses
aggregating approximately $23.2 million. Also impacting revenues was increased
base rate recoveries and increased short-term contract demand sales.
1997 Voluntary Retirement Incentive
In June of 1997, an early retirement offer was accepted by a group of
employees who were eligible for, but not offered a VRI completed in 1995,
resulting in a charge of approximately $700,000 (approximately $500,000 after-
tax) to second quarter 1997 earnings.
Expenses
The Company's most significant expense items continue to be fuel and
purchased power expenses which together comprised about 58% of total operating
expenses for 1998.
Fuel expense decreased by approximately $10.9 million or 9.9% in 1998 as
compared to 1997. Increased nuclear generation and a 17.1% decrease in the
cost of fossil fuels resulted in an 18.7% decrease in the average cost of fuel
compared to 1997. Somewhat offsetting the decrease in the average price of
fuel was a 9.5% increase in total energy generated and purchased in 1998
compared to 1997. Fuel expense increased by approximately $18.6 million or
20.1% as compared to 1996. Outages of nuclear units in 1997 contributed to
a greater dependence on higher cost fossil fuels for energy requirements,
resulting in an increase in average fuel costs of 16.3% in 1997. Also
impacting fuel expense was an increase in total energy generated and
purchased of 4.6% in 1997.
Purchased Power demand expense decreased approximately $10.5 million or
8.8% in 1998 compared to 1997. This decrease was primarily due to decreased
billings from the Maine Yankee, Connecticut Yankee and Pilgrim Nuclear units
aggregating approximately $8.5 million, and from Ocean State Power (OSP) of
approximately $1.9 million. Purchased Power demand expense increased
approximately $600,000 or less than 1% in 1997.
Other Operation and Maintenance expenses (O&M) are comprised of two
components, Direct Controllable and Indirect. Direct Controllable expenses
include expense items such as salaries, fringe benefits, insurance,
maintenance, etc. Indirect expenses include items over which the Company has
limited short-term control and include such expense items as Montaup's joint
ownership interests in generating facilities such as Seabrook I and Millstone
3, power contracts where transmission rental fees are fixed, conservation and
load management expenses that are fully recovered in revenues and expenses
related to accounting standards such as Statement of Financial Accounting
Standard No. 106, "Employers' Accounting for Post Retirement Benefits Other
Than Pensions" (FAS106).
Other O&M expenses, including affiliated company transactions, decreased
by $13.1 million or 12.4% in 1998 as compared to 1997. Jointly-owned units
expenses decreased approximately $9.4 million in 1998, due largely to the
return to service of the Millstone 3 Nuclear unit in July 1998 and decreased
expenses of Canal Unit 2 and Seabrook I. Also, charges from other utilities
decreased approximately $1.9 million, Other Post-Retirement Benefits and
Pension expenses decreased approximately $300,000 collectively due to personnel
reductions in 1998, and storm related expenses decreased as a result of an
April 1997 storm which struck Eastern Edison's service territory. These 1998
decreases were offset by increased C&LM expense of approximately $2.0 million
consistent with provisions of electric utility industry restructuring
legislation in Massachusetts. Other O&M expenses, including affiliated company
transactions, increased approximately $14.1 million or 15.3% in 1997. This
change was primarily due to increased jointly owned unit expense of
approximately $9.0 million, of which $5.0 million was related to the Millstone
3 outage and the remainder was due to increased expenses related to the
scheduled maintenance outages at the Canal and Seabrook units. Also impacting
the change was increased C&LM expenses of approximately $1.8 million, increased
legal expenses of approximately $1.3 million and $1.2 million of transmission
expenses related to new transmission tariffs implemented by FERC in 1997 to
accommodate utility industry restructuring.
Depreciation and Amortization expense increased by approximately $2.1
million or 7.8% in 1998 versus 1997. This increase was due largely to
amortization of certain regulatory assets pursuant to restructuring settlement
agreements.
Eastern Edison's effective tax rate for 1998 was approximately 37.5%
compared to 34.4% for 1997. The effects of accelerated reversal of differences
pursuant to restructuring settlement agreements were offset somewhat by the
reversal of unamortized investment tax credits related to Canal 2 at the time
of its sale, which occurred on December 30, 1998.
Other Income and (Deductions) - Net decreased by approximately $800,000 in
1998 as compared to 1997. This decrease is due largely to the 1997 favorable
resolution of a Massachusetts corporate income tax dispute. Also contributing
to the 1998 decrease were non-operating expenses of $1.0 million related to
Montaup's divestiture efforts and approximately $800,000 of expenses related to
opposition of a 1998 Massachusetts referendum to repeal deregulation
legislation.
Net Interest charges decreased by approximately $700,000 or 4.0% in 1998
compared to 1997. Interest on long term debt decreased as a result of the
maturities of Eastern Edison's $20 million 5 7/8% First Mortgage Bonds in May
1998 and $40 million 5 3/4% First Mortgage Bonds in July 1998. This decrease
was partially offset by interest expense on increased short term borrowings,
which were used to finance Eastern Edison's long-term debt maturities.
Financial Condition and Liquidity
Eastern Edison's and Montaup's need for permanent capital is primarily
related to the construction of facilities required to meet the needs of
existing and future customers. For 1998, 1997 and 1996, Eastern Edison's and
Montaup's combined cash construction expenditures were $14.0 million, $15.7
million, and $26.0 million, respectively. Internally generated funds provided
approximately 791%, 123%, and 118% of these combined cash construction
requirements in 1998, 1997 and 1996, respectively.
Cash construction expenditures are expected to be approximately $21.3
million in 1999, $20.1 million in 2000, $20.6 million in 2001, and are expected
to be financed with internally generated funds.
In the utility industry, cash construction requirements not met with
internally generated funds are obtained through short-term borrowings which are
ultimately funded with permanent capital. In July 1997, several EUA System
companies, including Eastern Edison and Montaup, entered into a three-year
revolving credit agreement allowing for borrowings in aggregate of up to $145
million from all sources of short-term credit. As of December 31, 1998,
various financial institutions have committed up to $75 million under the
revolving credit facility. In addition to the $75 million available under the
revolving credit facility, EUA System companies maintain short-term lines of
credit with various banks totaling $90 million for an aggregate amount
available of $165 million. At December 31, 1998, under the revolving credit
agreement the EUA System had unused short-term lines of credit of approximately
$101.4 million. At December 31, 1998, Eastern Edison and Montaup had zero
outstanding short-term debt.
During 1998, Eastern Edison used available funds and short-term borrowings
to fund $60 million of long-term debt maturities. On December 30, 1998,
Montaup received $75.9 million of proceeds from the sale of its 50% ownership
share of the Canal 2 Generating Station to Southern Energy and redeemed $55
million of Montaup debenture bonds and paid a special dividend to its parent
company, Eastern Edison. Eastern Edison used these proceeds to repay its
outstanding short-term debt and make short-term investments of $25.6 million.
In January 1999, Eastern Edison used those investments to retire 551,956
shares of its outstanding, $25 par value, common shares at a price of $41.67
per share.
In addition to construction expenditures, projected requirements for
maturing long-term debt securities through 2003 are $35 million in 2002 and $48
million in 2003. The Company has no sinking fund requirements through 2002,
and $1.5 million in 2003. Eastern Edison is exposed to minimal
interest rate risk, given that all of its outstanding long-term debt is fixed-
rate. Refer to the Statements of Capitalization for a listing of Eastern
Edison's debt.
See Generation Divestiture below.
Electric Utility Industry Restructuring
Legislation enacted in Rhode Island in 1996 and Massachusetts in 1997
along with approved electric utility industry restructuring settlement
agreements in both states and at the federal level granted EUA's Rhode Island
and Massachusetts electric customers with choice of electricity supplier and
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 from the retail distribution company. Blackstone and
Newport are required to arrange for standard offer service through December
31, 2009 and Eastern Edison must arrange for this service through February 28,
2005. Under the approved settlement agreements, Montaup had guaranteed
standard offer supply at a fixed price schedule for the duration of the
standard offer periods and 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. Through
its successful divestiture process, combined with a competitive bidding process
conducted in late 1998, Montaup has assigned 100% of its standard offer
obligation to purchasers of its generating assets. The guaranteed standard
offer price will increase over time to encourage customers to leave standard
offer service and enter the competitive power supply market.
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 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 by an amount equal to the net proceeds, with a return,
over the period commencing on the date the RVC is implemented through December
31, 2009. On February 12, 1999, Montaup filed to implement the RVC effective
April 1, 1999 and is awaiting approval.
Generation Divestiture
Montaup now has agreements to sell all of its non-nuclear power generation
assets and its 2.9% ownership share of the Seabrook Nuclear Station and has
agreements to transfer all of its remaining purchased power contracts with the
exception of its purchase power commitment with the Vermont Yankee Nuclear
Station.
On January 5, 1999, EUA announced that Montaup had agreed to transfer its
remaining non-nuclear power purchase contracts (amounting to approximately 177
mw) to Constellation Power Source, Inc. In addition, Montaup has entered into
agreements to sell: its 160-mw Somerset, Massachusetts electric generating
station for approximately $55 million to NRG Energy, Inc.; its 2.6% (16 mw)
share of the W. F. Wyman Unit 4 in Yarmouth, Maine to the Florida based FPL
Group for approximately $2.4 million; and its 2.9 percent share (34 mw) of the
Seabrook Station nuclear power plant to the Great Bay Power Corporation, a
subsidiary of BayCorp Holdings, Ltd. for $3.2 million. Montaup has also signed
agreements for the transfer of power purchase contracts for approximately 170
mw between Montaup and Ocean State Power and for the buyout of its 11% (73 mw)
power entitlement from the Pilgrim Nuclear Power Station in Plymouth,
Massachusetts. All of the sale and contract transfer agreements are subject to
federal and/or state regulatory approvals, including that of the Nuclear
Regulatory Commission with respect to the Seabrook sale. Closing of the non-
nuclear sale agreements are anticipated to take place in the first quarter of
1999. The Seabrook sale and Pilgrim buyout are expected to take place later in
1999.
Also, the sale of EUA's 50 percent share (280 mw) of Unit 2 of the Canal
Generating Station in Sandwich, Massachusetts to Southern Energy for $75
million, which was announced in May 1998, was completed on December 30, 1998,
and the sale of two diesel-powered generating units (totaling approximately 16
mw) owned by Newport to Illinois-based Wabash Power Equipment Co. for $1.5
million closed on October 1, 1998.
Montaup's remaining generating capacity includes approximately 46 mw from
its 4.0% joint ownership share of Millstone 3 nuclear unit and 12 mw from its
2.25% equity ownership of the Vermont Yankee nuclear facility.
Environmental Matters
Eastern Edison, Montaup and other electric utilities owning generating
units from which power is obtained are subject to environmental and land use
regulations at the federal, state and local levels. The federal Environmental
Protection Agency (EPA), and certain state and local authorities, have
jurisdiction over releases of pollutants, contaminants and hazardous substances
into the environment and have broad authority to set rules and regulations in
connection therewith, such as the Clean Air Act Amendments of 1990, which could
require installation of pollution control devices and remedial actions. In
1994, EUA instituted an environmental audit program to ensure compliance with
environmental laws and regulations and to identify and reduce liability with
respect to those requirements.
Because of the nature of Eastern Edison's and Montaup's business, various
by-products and substances are produced or handled which are classified as
hazardous under the rules and regulations promulgated by such authorities.
Eastern Edison and Montaup typically provide for the disposal of such
substances through licensed contractors, but statutory provisions may impose
joint and several responsibility on the generators of the wastes for cleanup
costs. Montaup has been notified with respect to one site, where it may be
responsible for such costs, and Eastern Edison may be considered an innocent
downgradient landowner, pursuant to Massachusetts regulations, of another site
requiring cleanup. It is the policy of Eastern Edison and Montaup to notify
liability insurers and to initiate claims related to such costs. However,
Eastern Edison and Montaup are unable to predict whether liability, if any,
will be assumed by, or can be enforced against, insurance carriers in these
matters.
As of December 31, 1998, Eastern Edison and Montaup have incurred minimal
costs in connection with these sites. Eastern Edison and Montaup estimate
that additional costs of up to $700,000 may be incurred at these sites through
1999. Estimates beyond 1999 cannot be made since site studies, which are the
basis of these estimates, have not been completed. Eastern Edison and Montaup
does not believe that the ultimate impact of environmental costs will be
material to its financial position and thus, no loss provision is required at
this time.
A number of scientific studies in the past several years have examined the
possibility of health effects from electric and magnetic fields (EMF) that are
found wherever there is electricity. Research to date has not conclusively
established a direct causal relationship between EMF exposure and human health.
Additional studies, which are intended to provide a better understanding of the
subject, are continuing. Management cannot predict the ultimate outcome of the
EMF issue.
Nuclear Power Issues
Montaup has a 4.01% ownership interest in Millstone 3, a 1,154-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.
In October 1996, the NRC, which had raised numerous issues with respect to
Millstone 3 and certain of the other nuclear units in which Northeast and its
subsidiaries, who either individually or collectively have the largest
ownership shares, informed Northeast that it was establishing a Special
Projects Office to oversee inspection and licensing activities at Millstone.
The Special Projects Office was responsible for (1) licensing and inspection
activities at Northeast's Connecticut plants, (2) oversight of an Independent
Corrective Action Verification Program, (3) oversight of Northeast's corrective
actions related to safety issues involving employee concerns, and (4)
inspections necessary to implement NRC oversight of the plant's restart
activities. Also, the NRC directed Northeast to submit a plan for disposition
of safety issues raised by employees and retain an independent third-party to
oversee implementation of this plan.
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. On June 29, 1998, the NRC authorized Northeast to begin
restart activities of Millstone 3. The authorization was given after the
NRC staff verified that several final technical and programmatic issues were
resolved. Millstone 3 was restarted during the first week of July, and on July
14, 1998, Millstone 3 returned to full power operations. The NRC will continue
to closely monitor Millstone 3's performance.
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 exceed $200 million. Montaup's share of this estimate is approximately
$8.0 million. In December 1997, Northeast filed a motion to dismiss the non-
operating owners' claims, or alternatively to stay the pending arbitration
until after the resolution of the arbitration case. These requests were denied
in July 1998.
Montaup paid its share of Millstone 3's O&M expenses during the prolonged
outage on a reservation of right basis. The fact that Montaup paid these
expenses is not an admission of financial responsibility for expenses incurred
during the outage.
EUA cannot predict the ultimate outcome of legal proceedings brought
against CL&P, WMECO and Northeast or the impact they may have on Montaup and
the EUA system.
Montaup has a 4.5% equity ownership in Connecticut Yankee, a nuclear
generating facility in the process of decommissioning. Montaup's share of the
total estimated costs for the permanent shutdown, decommissioning, and recovery
of the investment in Connecticut Yankee is approximately $23.8 million and is
included with Other Liabilities on the Consolidated Balance Sheet as of
December 31, 1998. Also, due to anticipated recoverability, a regulatory asset
has been recorded for the same amount and is included with Other Assets.
On August 31, 1998, a FERC law judge rejected Connecticut Yankee's plan to
decommission the plant. The judge claimed that estimates of clean-up costs
were flawed and certain restoration costs were not supported. The judge also
said Connecticut Yankee could not pass on spent fuel storage costs to rate-
payers. The judge recommended that Connecticut Yankee withdraw its
decommissioning plan and submit a new plan which addresses the issues cited by
him. FERC will review the judge's recommendations and issue a decision on this
case in the coming months. If FERC concurs with the judge's recommendation,
this may result in a write down of certain of Connecticut Yankee plant
investments. Montaup cannot predict the ultimate outcome of FERC's review.
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. Montaup's share of the
total estimated costs for the permanent shutdown, decommissioning, and recovery
of the remaining investment in Maine Yankee is approximately $31.0 million and
is included with Other Liabilities on the Consolidated Balance Sheet as of
December 31, 1998. Also, due to recoverability, a regulatory asset has been
recorded for the same amount and is included with Other Assets.
On November 6, 1997, Maine Yankee submitted an estimate of its costs,
including recovery of unamortized plant investment (including fuel), to FERC
reflecting the fact that the plant was no longer operating and had entered the
decommissioning phase. On January 14, 1998, 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. On January 19, 1999,
Maine Yankee and the active intervening parties, including the Secondary
Purchasers, filed an Offer of Settlement with FERC which was supported by FERC
trial staff on February 8, 1999. Upon commission approval, this agreement will
constitute full settlement of issues raised in this proceeding.
As a result of the August 1997 shutdown, Montaup and the other equity
owners had been notified by the Secondary Purchasers that they would 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. At present, the equity owners are making payments to
Maine Yankee to cover the payments that would be made by the municipals. Prior
to shutdown, the municipals had been assigned 0.41% of Montaup's 4.0% share and
Montaup had retained a 3.59% share.
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. A separately negotiated Settlement Agreement filed with FERC on
February 5, 1999, upon approval, would resolve issues raised by the Secondary
Purchasers by limiting the amount they will pay for decommissioning and
settling other points of contention.
Management does not believe that these settlements, if approved, will have
a material effect on EUA's future operating results or financial position.
On August 4, 1998, the Maine Yankee Board of directors selected Stone &
Webster Engineering Corporation to execute a $250 million contract for the
decommissioning and decontamination of Maine Yankee. The decommissioning plan
includes an option for Stone & Webster to repower the Maine Yankee site with a
gas-fired plant.
Recent actions by the NRC, some of which are cited above, 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.
Montaup is recovering through rates its share of estimated decommissioning
costs for the Millstone 3 and Seabrook I nuclear generating units. Montaup's
share of the currently allowed estimated total costs to decommission Millstone
3 is approximately $22.4 million in 1998 dollars and Seabrook I is
approximately $14.4 million in 1998 dollars. These figures are based on
studies performed for the lead owners of the units. Montaup also pays into
decommissioning reserves, pursuant to contractual arrangements, at other
nuclear generating facilities in which it has an equity ownership interest or
life-of-unit entitlement. Such expenses are currently recovered through rates.
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.
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.
Also, Yankee Atomic, Connecticut Yankee, and Maine Yankee filed lawsuits
against the DOE in the U.S. Court of Federal Claims seeking damages of $70
million, $90 million and $128 million, respectively, as a result of the DOE's
refusal to accept the spent nuclear fuel.
In late October and early November 1998, the U.S. Court of Federal Claims
issued rulings with respect to Yankee Atomic, Maine Yankee, and Connecticut
Yankee finding that the DOE was financially responsible for failing to accept
spent nuclear fuel. These rulings clear the way for Yankee Atomic, Connecticut
Yankee and Maine Yankee to pursue at trial their individual damage claims.
Management cannot predict at this time the ultimate outcome of these actions.
Year 2000 Issue
EUA is addressing the Year 2000 issue on an EUA System basis, which
includes Eastern Edison and Montaup. EUA's Year 2000 Program (the Program) is
proceeding on schedule. The Program is addressing the potential impact on
computer systems and embedded systems and components resulting from a common
software program code convention that utilizes two digits instead of four to
represent a year. If not addressed, the year 2000 may be systemically
recognized as the year 1900, which could cause system or equipment failures or
malfunctions, and ultimately result in disruptions to Company operations.
EUA's State of Readiness:
To address potential Year 2000 issues, EUA has divided the focus of its
Year 2000 Program into three major categories of business activity: the
generation and delivery of electricity to customers, the acquisition of goods
and services (including purchased power) and, ongoing general and
administrative activities relating to the corporate infrastructure and support
functions, which includes among other things, billings and collections.
EUA has adopted a four phase approach in addressing information technology
(IT) issues. As of January 31, 1999, each phase was at the following percentage
of completion: analysis - 100%; remediation - 79%; unit testing - 78%; and
integrated testing - 11%. EUA is on schedule to achieve Year 2000 readiness
for 100% of mission critical projects by June 30, 1999. For non-IT projects,
approximately 90% are either Year 2000 ready or not affected by the Year 2000.
The remaining items are in the process of being remediated and tested and are
scheduled to be Year 2000 ready by June 30, 1999.
EUA has an ongoing process to identify and assess the Year 2000 readiness
of third parties with which it has a material relationship. Where necessary,
contingency plans will be developed. This process is on schedule to be
completed by June 30, 1999.
Costs to Address EUA's Year 2000 Issues:
Through December 31, 1998, EUA has incurred costs of approximately $3.0
million to address Year 2000 issues, including approximately $1.5 million of
non-incremental labor, $1.2 million of capital expenditures and $300,000 of
consulting and other costs. EUA estimates it will incur additional costs
approximating $7.0 million during the period January 1, 1999 through March 31,
2000, to complete its resolution of Year 2000 issues including approximately
$5.5 million of non-incremental labor, $500,000 of capital expenditures and
$1.0 million of consulting and other costs. Because 70% of the total estimated
costs associated with the Year 2000 issue relate to non-incremental internal
labor, management continues to believe that the Year 2000 will not present a
material incremental impact to future operating results or financial condition.
Risks of EUA's Year 2000 Issues:
EUA's first priority continues to be the minimization of any potential
disruptions to electric service as a result of the Year 2000. The provision of
electric service depends in large part on the viability of the New England
power grid which is managed by ISO/NEPOOL. EUA is actively participating on
ISO/NEPOOL's Year 2000 operating and oversight committees. EUA's assessment of
its own transmission and distribution equipment and facilities indicated that
the risk of failure of this equipment does not appear to be significant.
However, due to the interconnectivity of the New England power grid, and the
reliance on many other entities also connected to the grid, it is not possible
to conclude with certainty that there will be no significant interruptions in
service.
In addition, dependable voice and data telecommunications are critical to
EUA's ongoing operations. EUA's internal telecommunication systems are either
Year 2000 ready now, or on schedule to become Year 2000 ready by June 30, 1999.
EUA also relies heavily on external telecommunication systems, i.e., the local
and regional telephone systems, and has identified these providers as critical
vendors. EUA has made direct contact with representatives of the telephone
companies on which EUA depends, each of which anticipates being Year 2000 ready
and devoid of major system failures.
No other significant reasonably likely failure scenarios stemming solely
from Year 2000 related problems have been identified thus far. Accordingly,
EUA does not currently believe that any Year 2000 related risks in and of
themselves constitute reasonably likely worst case scenarios. Rather, EUA's
most reasonably likely Year 2000 related worst case scenario would be the
occurrence of isolated Year 2000 failures such as described above in
conjunction with a severe winter storm. However, EUA believes that such Year
2000 failures would not likely affect whether the storm event would have a
material impact on EUA's business or financial condition.
Year 2000 Contingency Plans:
Contingency planning teams consisting of managers and employees
experienced in system reliability, disaster recovery and risk have been
established and are responsible for developing contingency plans. The overall
strategy will be to identify Year 2000 risks, both internal and external to
EUA, that could have a material impact on EUA's operations or financial well
being. Preliminary plans are expected by the end of the first quarter of 1999.
Final plans are scheduled to be in place and ready to implement, if necessary,
by June 30, 1999.
Summary:
The amount of effort and resources necessary to address Year 2000 issues
and make EUA Year 2000 ready is significant. There are dedicated teams in place
to ensure EUA's transition into the next century occurs with minimal
disruption. EUA's Year 2000 program is on schedule and in accordance with
timetables and progress points published by the North American Electric
Reliability Council. In addition, EUA is utilizing outside technical
consultants and other experts to help ensure EUA's Year 2000 program remains on
schedule and effective. Management believes EUA's Year 2000 project is well
managed and has the appropriate resources and plans in place to ensure the
Company is positioned for a successful transition to the Year 2000.
The foregoing constitutes a Year 2000 Statement and Readiness Disclosure
subject to the protections afforded by the federal Year 2000 Information and
Readiness Disclosure Act of 1998.
New Accounting Standards
In March 1998, The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use (SOP 98-1), effective in 1999. SOP 98-1 provides
specific guidance on whether to capitalize or expense costs within its scope.
The Company does not expect SOP 98-1 to have a material impact on its financial
position or result of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective in 2000. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. The Company
is currently evaluating the impact SFAS 133 will have on its financial position
or results of operations.
Other
A pending class action, filed on March 2, 1998, in the Massachusetts
Supreme Judicial Court naming all Massachusetts electric distribution
companies, including Eastern Edison, and certain Massachusetts state agencies
as defendants, seeks to invalidate certain sections of the Electric Utility
Restructuring Act of 1997. The Act directs the Massachusetts Department of
Telecommunications and Energy to impose mandatory charges on all electricity
sold to customers, except those served by a municipal lighting plant, to fund
energy efficiency activities and to promote renewable energy projects. In
addition to declaratory judgment, plaintiffs seek remittance of monies paid to
each distribution company by customers along with any interest earned. The
outcome of this class action is unknown at this time, however, Eastern Edison
is vigorously defending the lawsuit.
The Company 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. This report contains information about the Company's future
business prospects including, without limitation, statements about the
potential impact of Year 2000 issues on the Company's financial condition or
results. These statements are considered "forward-looking" within the meaning
of the Private Securities Litigation Reform Act. These statements are based
on the Company's current plans and expectations and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the forward-
looking statements. The Company expressly undertakes no duty to update any
forward-looking statement.
Management's Discussion and Analysis of Financial Condition and Review of
Operations provides a summary of information regarding the Company's financial
condition and results of operation and should be read in conjunction with the
"Consolidated Financial Statements" and "Notes to Consolidated Financial
Statements" in arriving at a more complete understanding of such matters.
Financial Table of Contents
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Retained Earnings . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flow . . . . . . . . . . . . . . . . . . 17
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Capitalization . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 21
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . 38
[This page left blank intentionally]
Eastern Edison Company and Subsidiary
Consolidated Statements of Income
Years Ended December 31,
(In Thousands)
1998 1997 1996
Operating Revenues:
From Affiliated Companies $ 114,248 $ 127,882 $ 127,981
Other 293,982 307,132 276,827
Total Operating Revenues 408,230 435,014 404,808
Operating Expenses:
Fuel 99,775 110,717 92,159
Purchased Power - Demand 108,889 119,434 118,843
Other Operation and Maintenance 64,806 78,232 66,311
Affiliated Company Transactions 28,397 28,119 25,908
Voluntary Retirement Incentive 0 737
Depreciation and Amortization 29,636 27,489 26,810
Taxes - Other than Income 10,780 10,844 10,705
- Income 19,834 14,247 16,058
Total Operating Expenses 362,117 389,819 356,794
Operating Income 46,113 45,195 48,014
Equity in Earn. of Jointly Owned Companies 1,390 1,599 1,587
Allowance for Other Funds Used During
Construction 173 162 365
Other (Deductions) Income - Net (130) 666 1,583
Income Before Interest Charges 47,546 47,622 51,549
Interest Charges:
Interest on Long-Term Debt 13,072 15,006 15,233
Other Interest Expense 5,029 3,792 3,653
Allowance for Borrowed Funds Used During
Construction (Credit) (261) (223) (308)
Net Interest Charges 17,840 18,575 18,578
Net Income 29,706 29,047 32,971
Preferred Dividend Requirements 1,988 1,988 1,988
Consolidated Net Earnings Applicable
to Common Stock $ 27,718 $ 27,059 $ 30,983
Consolidated Statements of Retained Earnings
Years Ended December 31,
(In Thousands)
1998 1997 1996
Retained Earnings - Beginning of Year $ 98,979 $ 120,724 $ 124,878
Net Income 29,706 29,047 32,971
Amortization of Preferred Stock Redemption (383) (577) (817)
Total 128,302 149,194 157,032
Dividends Paid:
Preferred 1,988 1,988 1,988
Common 19,805 48,227 34,320
Retained Earnings - End of Year $ 106,509 $ 98,979 $ 120,724
The accompanying notes are an integral part of the financial statements.
Eastern Edison Company and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31,
(In Thousands)
1998 1997 1996
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 29,706 $ 29,047 $ 32,971
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Act.:
Depreciation and Amortization 31,091 28,592 28,607
Amortization of Nuclear Fuel 1,265 1,067 1,676
Deferred Taxes (17,279) (4,872) 5,217
Investment Tax Credit, Net (2,817) (935) (939)
All. for Funds Used During Const. (173) (162) (365)
Other - Net 2,524 (4,215) (2,333)
Changes to Operating Assets and Liabilities:
Accounts Receivable (8,264) 10,038 (1,862)
Fuel, Materials and Supplies (1,982) 2,666 673
Accounts Payable 60 3,088 186
Accrued Taxes 15,036 (653) (241)
Other - Net 1,284 (2,282) 9,266
Net Cash Provided from Operating Activities 50,451 61,379 72,856
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (14,047) (15,662) (26,006)
Proceeds from Div. of Generation Assets 75,307
Decrease in Other Investments 248 219 148
Net Cash Provided
From (Used in) Investing Activities 61,508 (15,443) (25,858)
CASH FLOW FROM FINANCING ACTIVITIES:
Redemptions of Long-Term Debt (60,000) 0 (7,000)
Common Stock Dividends Paid (19,805) (48,227) (34,320)
Preferred Dividends Paid (1,988) (1,988) (1,988)
Net (Dec.) Inc. in Short Term Debt (4,675) 2,635 (2,118)
Net Cash (Used in) Financing Activities (86,468) (47,580) (45,426)
Net Increase (Decrease) in Cash
and Temporary Cash Investments 25,491 (1,644) 1,572
Cash and Temporary Cash Investments at
Beginning of Year 461 2,105 533
Cash and Temporary Cash Investments at
End of Year $ 25,952 $ 461 $ 2,105
Cash paid during the year for:
Interest (Net of Amts Capitalized) $ 16,188 $ 13,993 $ 15,241
Income Taxes $ 22,446 $ 21,291 $ 13,267
The accompanying notes are an integral part of the financial statements.
Eastern Edison Company and Subsidiary
Consolidated Balance Sheets
December 31,
(In Thousands)
ASSETS
1998 1997
Utility Plant and Other Investments:
Utility Plant $ 744,593 $ 825,238
Less Accumulated Provision for Depreciation 252,301 279,711
Net Utility Plant 492,292 545,527
Non-Utility Property - Net 2,488 2,705
Investment in Jointly Owned Companies 12,881 13,524
Other Investments (at cost) 56 55
Total Utility Plant and Other Investments 507,717 561,811
Current Assets:
Cash and Temporary Cash Investments 25,952 461
Accounts Receivable:
Customers 25,175 27,801
Others 13,155 4,486
Accrued Unbilled Revenue 6,226 8,490
Associated Companies 18,628 14,143
Fuel (at average cost) 5,971 4,248
Plant Matls and Op. Supplies (at average cost) 3,994 3,734
Prepayments and Other Current Assets 4,754 3,688
Total Current Assets 103,855 67,051
Other Assets (Note A) 220,050 148,262
Total Assets $ 831,622 $ 777,124
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Equity $ 225,998 $ 218,468
Redeemable Preferred Stock - Net 29,665 29,665
Preferred Stock Redemption Cost (1,670) (2,053)
Long-term Debt - Net 162,550 162,491
Total Capitalization 416,543 408,571
Current Liabilities:
Long-term Debt Due Within One Year 0 60,000
Notes Payable 0 4,675
Accounts Payable:
Public 25,502 27,113
Associated Companies 8,987 7,317
Customer Deposits 1,408 1,258
Taxes Accrued 17,361 2,325
Interest Accrued 3,561 4,923
Other Current Liabilities 17,317 13,753
Total Current Liabilities 74,136 121,364
Other Liabilities 58,502 68,345
Deferred Credits:
Unamortized Investment Credit 13,150 15,967
Other Deferred Credits 149,648 23,402
Total Deferred Credits 162,798 39,369
Accumulated Deferred Taxes 119,643 139,475
Commitments and Contingencies (Note J)
Total Liabilities and Capitalization $ 831,622 $ 777,124
The accompanying notes are an integral part of the financial statements.
Eastern Edison Company and Subsidiary
Consolidated Statements of Capitalization
December 31,
(In Thousands)
1998 1997
Common Stock:
$25 par value, authorized, issued and outstanding
2,891,357 shares $ 72,284 $ 72,284
Other Paid-In Capital 47,249 47,249
Common Stock Expense (44) (44)
Retained Earnings 106,509 98,979
Total Common Equity 225,998 218,468
Redeemable Preferred Stock:
6 5/8%, $100 par value, 300,000 shares (1) 30,000 30,000
Expense, Net of Premium (335) (335)
Preferred Stock Redemption Cost (1,670) (2,053)
Total Redeemable Preferred Stock 27,995 27,612
Long-Term Debt:
First Mortgage and Collateral Trust Bonds:
5 7/8% due 1998 0 20,000
6 7/8% due 2003 40,000 40,000
8% due 2023 40,000 40,000
5 3/4% due 1998 0 40,000
6.35% due 2003 8,000 8,000
7.78% Secured Medium-Term Notes due 2002 35,000 35,000
Pollution Control Revenue Bond:
5 7/8% due 2008 40,000 40,000
Unamortized (Discount) - Net (450) (509)
162,550 222,491
Less Portion Due Within One Year 0 60,000
Total Long-Term Debt 162,550 162,491
Total Capitalization $ 416,543 $ 408,571
(1) Authorized, Issued and Outstanding.
The accompanying notes are an integral part of the financial statements.
EASTERN EDISON COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(A) Nature of Operations and Summary of Significant Accounting Policies:
General: Eastern Edison Company (Eastern Edison or the Company) and its wholly
owned subsidiary, Montaup Electric Company (Montaup) are principally engaged in
the generation, transmission, distribution and sale of electric energy. See
Generation Divestiture below for a discussion of Montaup's divestiture of
generating capacity.
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.
The accounting policies and practices of Eastern Edison and of Montaup are
subject to regulation by the Federal Energy Regulatory Commission (FERC) and
the Massachusetts Department of Telecommunications and Energy (formerly
Massachusetts Department of Public Utilities) with respect to their rates and
accounting. Eastern Edison and Montaup conform with generally accepted
accounting principles, as applied in the case of regulated public utilities,
and conform with the accounting requirements and ratemaking practices of the
regulatory authority having jurisdiction.
Principles of Consolidation: The consolidated financial statements include the
accounts of Eastern Edison and its subsidiary, Montaup. All material
intercompany balances and transactions have been eliminated in consolidation.
Jointly Owned Companies: Montaup follows the equity method of accounting for
its stock ownership investments in jointly owned companies including four
regional nuclear generating companies. Montaup's investments in these nuclear
generating companies range from 2.5% to 4.5%. Three of the four facilities,
Yankee Atomic, Connecticut Yankee and Maine Yankee, have been permanently shut
down and are in the process of decommissioning. Montaup's share of total
estimated costs for the permanent shutdown, decommissioning and recovery of the
investment in Yankee Atomic, Connecticut Yankee and Maine Yankee is $3.7
million, $23.8 million and $31.0 million, respectively. These amounts are
included with Other Liabilities on the Consolidated Balance Sheet as of
December 31, 1998. Also, due to anticipated recoverability, a regulatory asset
has been recorded for the same amount and is included with Other Assets.
Montaup is entitled to electricity produced from the remaining facility,
Vermont Yankee, based on its ownership interest and is billed for its
entitlement pursuant to a contractual agreement which is approved by FERC.
(A) Nature of Operations and Summary of Significant Accounting Policies:
(continued)
Montaup also has a stock ownership investment of 3.27% in each of the two
companies which own and operate certain interconnection facilities used to
transmit hydroelectric power between the Hydro-Quebec Electric System and New
England.
Transactions with Affiliates: Eastern Edison is a wholly owned subsidiary of
Eastern Utilities Associates (EUA). In addition to its investment in Eastern
Edison, EUA has interests in two other retail companies, a service corporation,
and five other non-utility companies.
Transactions between Montaup and other affiliated companies include the
following: sales of electricity by Montaup to Blackstone Valley Electric
Company (Blackstone) and Newport Electric Corporation (Newport) aggregating
approximately $114,248,000 in 1998, $127,882,000 in 1997, and $127,536,000 in
1996; accounting, engineering and other services rendered by EUA Service
Corporation to Eastern Edison and Montaup of approximately $33,287,000,
$32,190,000 and $30,886,000, in 1998, 1997 and 1996, respectively; and
operating expense from the rental of transmission and generation facilities by
Blackstone and Newport to Montaup aggregating approximately $3,559,000 in 1998,
$4,197,000 in 1997, and $3,960,000 in 1996. Transactions with affiliated
companies are subject to review by applicable regulatory commissions.
Utility Plant and Depreciation: Utility plant is stated at original cost. The
cost of additions to utility plant includes contracted work, direct labor and
material, allocable overhead, allowance for funds used during construction and
indirect charges for engineering and supervision. For financial statement
purposes, depreciation is computed on the straight-line method based on
estimated useful lives of the various classes of property. Provisions for
depreciation, on a consolidated basis, were equivalent to a composite rate of
approximately 3.4% in 1998, and 3.2% in 1997 and 1996 based on the average
depreciable property balances at the beginning and end of each year. Beginning
in 1998, coincident with billing a contract termination charge (CTC) to its
retail affiliates, Montaup commenced recovery of its investment in generation
related assets through the CTC over a twelve-year period. The difference
between the annual recovery and annual depreciation expense pursuant to
Generally Accepted Account Principles is being deferred.
Allowance for Funds Used During Construction (AFUDC): AFUDC represents the
estimated cost of borrowed and equity funds used to finance Eastern Edison's
and Montaup's construction program. In accordance with regulatory accounting,
AFUDC is capitalized, as a cost of utility plant, in the same manner as certain
general and administrative costs. AFUDC is not an item of current cash income,
but is recovered over the service life of utility plant in the form of
increased revenues collected as a result of higher depreciation expense. The
combined rate used in calculating AFUDC was 8.3% in 1998, 8.2% in 1997, and
8.9% in 1996.
Operating Revenues: Revenues are based on billing rates authorized by
applicable federal and state regulatory commissions. Eastern Edison accrues
the estimated amount of unbilled revenues at the end of each month to match
costs and revenues more closely. Montaup recognizes revenues when billed. In
1998, Eastern Edison and Montaup also began recording revenues in an amount
management believes to be recoverable pursuant to provisions of approved
settlement agreements and the Massachusetts Electric Industry Restructuring
Act.
Income Taxes: The general policy of Eastern Edison and Montaup with respect to
accounting for federal and state income taxes is to reflect in income the
estimated amount of taxes currently payable, as determined from the EUA
consolidated tax return on an allocated basis, and to provide for deferred
taxes on certain items subject to temporary differences to the extent permitted
by the various regulatory commissions. As permitted by the regulatory
commissions, it is the policy of Eastern Edison and Montaup to defer
recognition of the annual investment tax credits and to amortize these credits
over the productive lives of the related assets. Beginning in 1998, Montaup
is amortizing previously deferred ITC related to generation investments
recoverable through the CTC over a twelve-year period. Unamortized ITC related
to the Canal 2 generating unit was reversed at the time of the Canal 2 sale,
December 30, 1998.
Cash and Temporary Cash Investments: Eastern Edison and Montaup consider all
highly liquid investments and temporary cash investments with a maturity of
three months or less, when acquired, to be cash equivalents.
Other Assets: The components of Other Assets at December 31, 1998 and 1997 are
detailed as follows:
(In Thousands) 1998 1997
Regulatory Assets:
Unamortized losses on reacquired debt $10,338 $11,588
Unrecovered plant and
decommissioning cost 66,934 68,345
Deferred SFAS 109 costs (Note B) 40,279 46,806
Deferred SFAS 106 costs (Note J) 7,900 1,726
Unrecovered CTC assets 33,161
Accrued CTC assets 32,198
Other regulatory assets 13,641 5,875
Total regulatory assets 204,451 134,340
Other deferred charges and assets:
Unamortized debt expenses 1,809 2,092
Other 13,790 11,830
Total Other Assets $220,050 $148,262
Regulatory assets represent deferred costs for which future revenues are
expected in accordance with regulatory precedent. These costs are expensed
when the corresponding revenues are received in order to appropriately match
revenues and expenses.
Regulatory Accounting: Eastern Edison and Montaup 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. In light of
approved restructuring settlement agreements and restructuring legislation in
both Massachusetts and Rhode Island, the Company has determined that Montaup no
longer will apply the provisions of Financial Accounting Standards Board's
(FASB) Statement of Financial Accounting Standards No. 71 (FAS71), "Accounting
for the Effects of Certain Types of Regulation" to the generation portion of
its business. Due to the recoverability of regulatory assets granted in the
approved restructuring plans, the company believes that the discontinuation of
FAS71 for the generation portion of Montaup's business will not have a material
impact on the Company's results of operation or financial condition. The
Company believes its transmission and retail distribution businesses continue
to meet the criteria for continued application of FAS71.
Generation Divestiture: Terms of approved electric utility restructuring
settlement agreements provide that Montaup exit the electric generation
business. Through separately negotiated agreements, Montaup has agreements to
divest all of its generation assets and power purchase contracts, with the
exception of its 4.0% (46 mw) ownership interest in the Millstone 3 nuclear
station and its 12-mw entitlement from Vermont Yankee. All of the agreements
are subject to approval of various state and federal regulatory agencies.
Montaup has agreed to sell generating assets totaling 509 mw to various
parties for $133.2 million in aggregate. The net proceeds from the sales, as
defined in the settlement agreements, will be recorded as a regulatory
liability at the time of sale and will be returned to customers via a Residual
Value Credit (RVC) through the year 2009.
Montaup has also agreed to make contribution payments to two parties in
exchange for their assumption of all future obligations under six purchased
power contracts. These fixed monthly payments ranging from $850,000 to $2.6
million, will be made from the effective date through 2009. Montaup may be
required to record a liability for these fixed contributions, but in such an
event would record a regulatory asset for a like amount due to recoverability.
In addition, Montaup agreed to a buyout of its obligations under the Pilgrim
Nuclear purchased power contract in conjunction with the sale of the unit by
Boston Edison Co. (BEC) to Entergy Nuclear Generating Co. (Entergy). This
agreement provides for a buyout payment by EUA to BEC of $115.8 million,
assuming a June 30, 1999 closing, along with a short-term, fixed-price
purchased power agreement with Entergy for declining shares of the unit's
output beginning with 11% in 1999 and ending with 5.5% in 2004. Entergy will
assume all future operating and decommissioning obligations.
Montaup will continue to attempt to sell and/or transfer its minority
interests in Millstone 3 and Vermont Yankee. Until such time as these units
are divested, Montaup will share 80% of the operating costs and revenues
associated with the units with customers and 20% with shareholders.
(B) Income Taxes:
Components of income tax expense for the years 1998, 1997, and 1996 are
as follows:
_________________________________________________________________________
(In Thousands) 1998 1997 1996
Federal:
Current $32,348 $16,427 $9,111
Deferred (15,575) (4,031) 5,152
Investment Tax Credit, Net (1,301) (935) (939)
15,472 11,461 13,324
State:
Current 5,177 3,505 2,612
Deferred (815) (719) 122
4,362 2,786 2,734
Charged to Operations 19,834 14,247 16,058
Charged to Other Income:
Current 444 1,175 1,233
Deferred (921) (219) (67)
Investment Tax Credit, Net (1,516)
Total $17,841 $15,203 $17,224
Total income tax expense was different than the amounts computed by
applying federal income tax statutory rates to book income subject to tax for
the following reasons:
______________________________________________________________________________
(In Thousands) 1998 1997 1996
Federal Income Tax Computed
at Statutory Rates $16,642 $15,487 $17,568
(Decreases) Increases in Tax from:
Equity Component of AFUDC (60) (56) (128)
Consolidated Tax Savings (25) (156)
Depreciation Differences 1,050 (348) (452)
Amortization of ITC (2,818) (935) (939)
State Taxes, Net of Federal
Income Tax Benefit 2,833 1,919 1,897
Cost of Removal 326
Other (107) (864) (566)
Total Income Tax Expense $17,841 $15,203 $17,224
(B) Income Taxes (continued)
Eastern Edison and Montaup adopted Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (FAS109) which required
recognition of deferred income taxes for temporary differences that are
reported in different years for financial reporting and tax purposes using the
liability method. Under the liability method, deferred tax liabilities or
assets are computed using the tax rates that will be in effect when temporary
differences reverse. Generally, for regulated companies, the change in tax
rates may not be immediately recognized in operating results because of rate
making treatment and provisions in the Tax Reform Act of 1986. The total
deferred tax assets and liabilities at December 31, 1998 and 1997 are comprised
as follows (In Thousands):
Deferred Tax Deferred Tax
Assets Liabilities
1998 1997 1998 1997
Plant Related Plant Related
Differences $16,230 $11,997 Differences $150,011 $154,025
Deregulation 23,301 Deregulation 11,861
Employee Benefit Refinancing
Accruals 2,040 1,837 Costs 1,197 1,264
Other 4,999 5,974 Employee Benefit
Accruals 2,008 1,685
Other 1,136 2,309
Total $46,570 $19,808 Total $166,213 $159,283
As of December 31, 1998 and 1997, the Company had recorded on its
Consolidated Balance Sheet a regulatory liability to ratepayers of
approximately $11.5 million and $15.2 million, respectively. This amount
primarily represents excess deferred income taxes resulting from the reduction
in the federal income tax rate and also includes deferred taxes provided on
investment tax credits. Also at December 31, 1998 and 1997, a regulatory asset
of approximately $40.3 million and $46.8 million, respectively, has been
recorded, representing the cumulative amount of federal income taxes on
temporary depreciation differences which were previously flowed through to
ratepayers.
(C) Capital Stock:
There were no changes in the number of shares of common or preferred stock
during the years ended December 31, 1998, 1997 and 1996. In January 1999,
Eastern Edison retired 551,956 shares of its outstanding, $25 par value, common
shares at a price of $41.67 per share.
Under the terms and provisions of the issues of preferred stock of Eastern
Edison, certain restrictions are placed upon the payment of dividends on common
stock by Eastern Edison. At December 31, 1998, 1997 and 1996, the respective
capitalization ratios were in excess of the minimum requirements which would
make these restrictions effective.
(D) Redeemable Preferred Stock:
Eastern Edison's 6-5/8% Preferred Stock issue is entitled to an annual
mandatory sinking fund sufficient to redeem 15,000 shares commencing September
1, 2003. The redemption price is $100 per share plus accrued dividends. All
outstanding shares of the 6 5/8% issue will be subject to mandatory redemption
on September 1, 2008 at a price of $100 per share plus accrued dividends.
In the event of liquidation, the holders of Eastern Edison's 6 5/8%
Preferred Stock are entitled to $100 per share plus accrued dividends.
(E) Retained Earnings:
Under the provisions of Eastern Edison's Indenture securing the First
Mortgage and Collateral Trust Bonds, retained earnings in the amount of
$100,903,949 as of December 31, 1998 were unrestricted as to the payment of
cash dividends on its Common Stock.
(F) Long-Term Debt:
The various mortgage bond issues of Eastern Edison are collateralized by
substantially all of their utility plant. In addition, Eastern Edison's bonds
are collateralized by securities of Montaup, which are wholly-owned by Eastern
Edison. On December 30, 1998, Montaup redeemed $55 million of debenture bonds
and paid a special dividend to Eastern Edison of $19 million with proceeds
received from the sale of its 50% ownership share of the Canal 2 generating
station. The principal amount of Montaup securities wholly-owned by Eastern
Edison at December 31, 1998 was approximately $181 million.
In July, Eastern Edison used short-term borrowings to redeem $20 million
of 5 7/8% and $40 million of 5 3/4%, First Mortgage and Collateral Trust Bonds
at maturity. On December 30, 1998, Eastern repaid outstanding short-term
borrowings with proceeds received from the redemption of Montaup securities.
The Company's requirements for the maturities of long-term debt (excluding
amounts that may be satisfied by available property additions) for each of the
five years following 1998 are: none in 1999, 2000, and 2001, $35 million in
2002 and $48 million in 2003. The Company has no sinking fund requirements
through the year 2002 and $1.5 million in 2003.
(G) Lines of Credit:
In July 1997, several EUA System companies, including Eastern Edison,
entered into a three-year revolving credit agreement allowing for borrowings in
aggregate of up to $145 million from all sources of short-term credit. As of
December 31, 1998, various financial institutions have committed up to $75
million under the revolving credit facility. In addition to the $75 million
available under the revolving credit facility, EUA System companies maintain
short-term lines of credit with various banks totaling $90 million for an
aggregate amount available of $165 million. At December 31, 1998, under the
revolving credit agreement the EUA System had unused short-term lines of credit
of approximately $101.4 million. Eastern Edison had zero outstanding short-
term debt at December 31, 1998. In accordance with the revolving credit
agreement commitment fees are required to maintain certain lines of credit.
During 1998, the weighted average interest rate for short-term borrowings by
the Company was 5.9%.
(H) Jointly Owned Facilities:
At December 31, 1998, in addition to the stock ownership interests
discussed in Note A, Summary of Significant Accounting Policies - Jointly Owned
Companies, Montaup had direct ownership interests in the following electric
generating facilities:
Accumulated
Provision For Net Construc-
Utility Depreciation Utility tion
Percent Plant in and Plant in Work in
($ In Thousands): Owned Service Amortization Service Progress
Montaup:
Wyman Unit 4 1.96% $4,041 $2,388 $1,653
Seabrook Unit I 2.90% 194,169 47,277 146,892 $480
Millstone Unit 3 4.01% 178,598 65,705 112,893 347
Newport:
Wyman Unit 4 0.67% 1,312 805 507
The foregoing amounts represent Montaup's interest in each facility,
including nuclear fuel where appropriate, and are included on the like-
captioned lines on the Consolidated Balance Sheet. At December 31, 1998,
Montaup's total net investment in nuclear fuel of the Seabrook and Millstone
units amounted to $2.5 million and $1.9 million, respectively. Montaup's
shares of related operating and maintenance expenses with respect to units
reflected in the table above are included in the corresponding operating
expenses on the Consolidated Statement of Income.
Montaup has entered into agreements to sell its joint ownership shares in
Wyman Unit 4 and Seabrook Unit I. Closing of the Wyman sale is expected in the
first quarter of 1999 and the Seabrook sale is expected to close later in 1999.
Both agreements are subject to approval of various regulatory agencies.
(I) Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate:
Cash and Temporary Cash Investments: The carrying amount approximates
fair value because of the short-term maturity of those instruments.
Redeemable Preferred Stock and Long-Term Debt: The fair value of the
Company's redeemable preferred stock and long-term debt is based on quoted
market prices for such securities.
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 were as follows (In Thousands):
Carrying Amount Fair Value
1998 1997 1998 1997
Cash and Temporary Cash Investments $25,952 $461 $25,952 $461
Redeemable Preferred Stock 30,000 30,000 32,625 31,613
Long-Term Debt 163,000 223,000 167,723 235,190
(J) Commitments and Contingencies:
Nuclear Fuel Disposal and Nuclear Decommissioning Costs: The owners (or lead
participants) of the nuclear units in which Montaup has an interest have made,
or expect to make, various arrangements for the acquisition of uranium
concentrate, the conversion, enrichment, fabrication and utilization of nuclear
fuel and the disposition of that fuel after use. The owners (or lead
participants) of United States nuclear units have entered into contracts with
the Department of Energy (DOE) for disposal of spent nuclear fuel in accordance
with the Nuclear Waste Policy Act of 1982 (NWPA). The NWPA requires (subject
to various contingencies) that the federal government design, license,
construct and operate a permanent repository for high level radioactive wastes
and spent nuclear fuel and establish a prescribed fee for the disposal of such
wastes and nuclear fuel. The NWPA specifies that the DOE provide for the
disposal of such waste and spent nuclear fuel starting in 1998. Objections on
environmental and other grounds have been asserted against proposals for
storage as well as disposal of spent nuclear fuel. The DOE now estimates that
a permanent disposal site for spent fuel will not be ready to accept fuel for
storage or disposal until as late as the year 2010. In early 1998, a number of
utilities filed suit in federal appeals court seeking, among other things, an
order requiring the DOE to immediately establish a program for the disposal of
spent nuclear fuel. 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. In late October and early November 1998, the
U.S. Court of Federal Claims issued rulings with respect to Yankee Atomic,
Maine Yankee, and Connecticut Yankee finding that the DOE was financially
responsible for failing to accept spent nuclear fuel. These rulings
clear the way for Yankee Atomic, Connecticut Yankee and Maine Yankee to pursue
at trial their individual damage claims. Montaup owns a 4.01% interest in
Millstone 3 and a 2.9% interest in Seabrook I. Northeast Utilities, the
operator of the units, indicates that Millstone 3 has sufficient on-site
storage facilities which, with rack additions, can accommodate its spent fuel
for the projected life of the unit. At the Seabrook Project, there is on-site
storage capacity which, with rack additions, will be sufficient to at least the
year 2011.
The Energy Policy Act of 1992 requires that a fund be created for the
decommissioning and decontamination of the DOE uranium enrichment facilities.
The fund will be financed in part by special assessments on nuclear power
plants in which Montaup has an interest. These assessments are calculated
based on the utilities' prior use of the government facilities and have been
levied by the DOE, starting in September 1993, and will continue over 15 years.
This cost is passed on to the joint owners or power buyers as an additional
fuel charge on a monthly basis and is currently being recovered by Montaup
through rates.
Montaup has a 4.5% equity ownership in Connecticut Yankee, a nuclear
generating facility which is in the process of decommissioning. Montaup's
share of the total estimated costs for the permanent shutdown, decommissioning,
and recovery of the investment in Connecticut Yankee is approximately $23.8
million. On August 31, 1998, a FERC law judge rejected Connecticut Yankee's
filed plan to decommission the plant. The judge claimed that estimates of
clean-up costs were flawed and certain restoration costs were not supported.
The judge also said Connecticut Yankee could not pass on spent fuel storage
costs to rate-payers. The judge recommended that Connecticut Yankee withdraw
its decommissioning plan and submit a new plan which addresses the issues cited
by him. FERC will review the judge's recommendations and issue a decision on
this case in the coming months. If FERC concurs with the judge's
recommendation, this may result in a write down of certain of Connecticut
Yankee plant investments. Montaup cannot predict the ultimate outcome of
FERC's review.
In August 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. Montaup's share of the total
estimated costs for the permanent shutdown, decommissioning, and recovery of
the remaining investment in Maine Yankee is approximately $31.0 million. In
January 1998, FERC accepted Maine Yankee's rate filing, subject to refund, for
the recovery of its costs during the decommissioning period. On January 19,
1999, Maine Yankee and the active intervening parties filed an Offer of
Settlement with FERC which was supported by FERC trial staff. Upon commission
approval, this agreement will constitute full settlement of issues raised in
this proceeding.
Also, Montaup is recovering through rates its share of estimated
decommissioning costs for Millstone 3 and Seabrook I. Montaup's share of the
current estimate of total costs to decommission Millstone 3 is $22.4 million in
1998 dollars, and Seabrook I is $14.4 million in 1998 dollars. These figures
are based on studies performed for the lead owners of the units. Montaup also
pays into decommissioning reserves pursuant to contractual arrangements with
other nuclear generating facilities in which it has an equity ownership
interest or life of the unit entitlement. Such expenses are currently
recoverable through rates.
Pensions: Eastern Edison and Montaup participate with the other EUA System
companies in a non-contributory defined benefit pension plan covering
substantially all of their employees (Retirement Plan). Retirement Plan
benefits are based on years of service and average compensation over the
four years prior to retirement. It is the EUA System's policy to fund the
Retirement Plan on a current basis in amounts determined to meet the funding
standards established by the Employee Retirement Income Security Act of 1974.
Total pension (income) expense for the Retirement Plan, including the
amount related to the 1997 voluntary retirement incentive offer, for 1998, 1997
and 1996 includes the following components ($ In Thousands):
1998 1997 1996
Service cost $1,711 $1,635 $1,641
Interest cost 5,963 5,891 5,607
Expected return on assets (9,012) (8,181) (7,580)
Net amortization:
Prior Service cost 458 456 455
Net actuarial (gain) (227) (106) -
Transition obligation (asset) (272) (272) (272)
Total periodic pension (income) expense $(1,379) $(577) $(149)
Assumptions used to determine pension cost:
1998 1997 1996
Discount Rate 7.25% 7.50% 7.25%
Compensation Increase Rate 4.25% 4.25% 4.25%
Long-Term Return on Assets 9.50% 9.50% 9.50%
The discount rate used to determine pension obligations was changed from
7.25% to 6.75% effective January 1, 1999. The projected benefit obligation,
fair value of assets and funded status of the Retirement Plan cannot be
presented separately for Eastern Edison and Montaup as they participate in the
Retirement Plan with other subsidiaries of EUA.
The voluntary retirement incentive also resulted in non-qualified pension
benefits of approximately $752,000 in 1997. At December 31, 1998,
approximately $416,000 is included in other liabilities for these unfunded
benefits.
EUA also maintains non-qualified supplemental retirement plans for certain
officers and trustees of the EUA System (Supplemental Plans). Benefits
provided under the Supplemental Plans are based primarily on compensation at
retirement date. EUA maintains life insurance on the participants of the
Supplemental Plans and policy cash values and death benefits may be available
to offset EUA's obligations. For the years ended December 31, 1998, 1997 and
1996 Eastern Edison's and Montaup's expenses related to the Supplemental Plan
were approximately $511,000, $805,000, and $717,000, respectively.
The Company also provides a defined contribution 401(k) savings plan for
substantially all employees. The Company's matching percentage of employees'
voluntary contributions to the plan, amounted to approximately $343,000 in
1998, $321,000 in 1997, and $306,000 in 1996.
Post-Retirement Benefits: Retired employees are entitled to participate in
health care and life insurance benefit plans. Health care benefits are subject
to deductibles and other limitations. Health care and life insurance benefits
are partially funded by EUA System companies for all qualified employees.
The total cost of Post-Retirement Benefits other than Pensions, including
the Company's allocated share of EUA Service Corporation costs and the amount
related to the 1997 voluntary retirement incentive offer, for 1998, 1997 and
1996 includes the following components (In Thousands):
1998 1997 1996
Service cost $608 $587 $637
Interest cost 2,738 2,701 2,688
Expected return on plan assets (990) (669) (462)
Net amortization:
Net actuarial (gain) (472) (513) (373)
Transition obligation 1,958 1,952 1,954
Net periodic post-retirement benefit cost 3,842 4,058 4,444
Voluntary retirement incentive 102
Total post-retirement benefit costs $3,842 $4,160 $4,444
Assumptions:
Discount rate 7.25% 7.50% 7.25%
Health care cost trend rate - near-term 6.00% 7.00% 9.00%
- long-term 5.00% 5.00% 5.00%
Compensation increase rate 4.25% 4.25% 4.25%
Rate of return on plan assets - union 8.50% 8.50% 8.50%
- non-union 7.50% 7.50% 7.50%
Reconciliation of Accumulated Post-Retirement Benefit Obligation
(In Thousands) 1998 1997
Beginning of Year Benefit Obligation (January 1) $28,471 $27,623
Service Cost 292 292
Interest Cost 1,930 1,963
Participant Contributions 62 68
Actuarial Loss (Gain) 622 44
Disbursements (1,830) (1,519)
End of Year Benefit Obligation (December 31) $29,547 $28,471
Reconciliation of Fair Value Assets
(In Thousands) 1998 1997
Beginning of Year Fair Value of Assets (January 1) $6,991 $5,161
Actual return on plan assets 800 391
Company contributions 2,855 2,889
Participant contributions 62 68
Disbursements (1,830) (1,518)
End of Year Fair Value of Assets (December 31) $8,878 $ 6,991
Reconciliation of Funded Status
(In Thousands) 1998 1997
Accumulated post-retirement benefit obligation (APBO) $(29,547) $(28,471)
Fair value of plan assets (FVA) 8,878 6,991
APBO (in excess of) less than FVA (Funded Status) (20,669) (21,480)
Unrecognized net transition obligation (asset) 22,833 24,464
Unrecognized net actuarial loss/(gain) (8,210) (8,925)
Net amount recognized $(6,046) $(5,941)
Effect of 1% Change in Assumed Health Care Cost Trend Rate
One-Percentage Point
(In Thousands) Increase (Decrease)
Effect on 1998 Service and
Interest Cost Components of Net-Periodic cost 498 (397)
Effect on 1998 Accumulated Post-retirement 3,640 (2,969)
Benefit Obligation
The discount rate used to determine post-retirement benefit obligations
was changed from 7.25% to 6.75% effective January 1, 1999, and was used to
calculate the funded status of Post-Retirement Benefits at December 31, 1998.
Long-Term Purchased Power Contracts: The EUA System is committed under long-
term purchased power contracts, expiring on various dates through September
2021, to pay demand charges whether or not energy is received. Under terms in
effect at December 31, 1998, the aggregate annual minimum commitments for such
contracts are approximately $111 million in 1999, $109 million in 2000, $111
million in 2001, $108 million in 2002, $101 million in 2003 and will aggregate
approximately $927 million for the ensuing years. In addition, the EUA System
is required to pay additional amounts depending on the actual amount of energy
received under contracts in effect. The demand costs associated with these
contracts are reflected as Purchased Power-Demand on the Consolidated Statements
of Income. Such costs are currently recoverable through rates. Pending
regulatory approval, certain power contract transfers related to the
divestiture of EUA's generating assets will become effective in 1999. Upon
completion of the power contract transfers, the demand charges will be reduced
to $54 million in 1999, $43 million in 2000, $40 million in 2001, $42 million
in 2002, $26 million in 2003, and $162 million in the ensuing years.
Environmental Matters: There is an extensive body of federal and state statutes
governing environmental matters, which permit, among other things, federal and
state authorities to initiate legal action providing for liability,
compensation, cleanup, and emergency response to the release or threatened
release of hazardous substances into the environment and for the cleanup of
inactive hazardous waste disposal sites which constitute substantial hazards.
Because of the nature of the Eastern Edison business, various by-products and
substances are produced or handled which are classified as hazardous under the
rules and regulations promulgated by the United States Environmental Protection
Agency (EPA) as well as state and local authorities. The Company generally
provides for the disposal of such substances through licensed contractors, but
these statutory provisions generally impose potential joint and several
responsibility on the generators of the wastes for cleanup costs. Eastern
Edison and Montaup have been notified with respect to two sites, one of which
Eastern Edison may be considered an innocent downgradient landowner pursuant
to Massachusetts regulations, where they are allegedly responsible for such
costs. It is the policy of Eastern Edison and Montaup to notify liability
insurers and to initiate claims related to such costs. However, Eastern Edison
and Montaup are unable to predict whether liability, if any, will be assumed
by, or can be enforced against, insurance carriers in these matters.
As of December 31, 1998, Eastern Edison and Montaup have incurred
minimal costs in connection with these sites. Eastern Edison and
Montaup estimate that additional costs of up to $700,000 may be incurred at
these sites through 1999. Estimates beyond 1999 cannot be made since site
studies, which are the basis of these estimates, have not been completed.
Eastern Edison and Montaup does not believe that the ultimate impact of
environmental costs will be material to its financial position and thus, no
loss provision is required at this time.
As a general matter Eastern Edison and Montaup would seek to recover costs
relating to environmental proceedings in their rates. Montaup is currently
recovering certain of the incurred costs in its rates.
The Clean Air Act Amendments created new regulatory programs and generally
updated and strengthened air pollution control laws. These amendments expanded
the regulatory role of the EPA regarding emissions from electric generating
facilities and a host of other sources. EUA System generating facilities were
first affected in 1995, when EPA regulations took effect for facilities owned
by the EUA System. Montaup's coal-fired Somerset Unit 6 is utilizing lower
sulfur content coal to meet the 1995 air standards. EUA does not anticipate
the impact from the Amendments to be material to the financial position of the
EUA System.
In July, the EPA issued a new and more stringent rule covering ozone
particulate matter which is to be followed by promulgation of more stringent
ozone and particulate matter standards. The effect that such standards will
have on the EUA System cannot be determined by Management at this time.
Eastern Edison, Montaup, the Massachusetts Attorney General and Division
of Energy Resources entered into a settlement regarding electric utility
industry restructuring in Massachusetts. The settlement includes a plan for
emissions reductions related to Montaup's Somerset Station Units 5 and 6. The
basis for SO2 and NOx emission reductions in the proposed settlement is an
allowance cap calculation. Montaup may meet its allowance caps by any
combination of control technologies, fuel switching, operational changes,
and/or the use of purchased or surplus allowances. The settlement was approved
by FERC on December 19, 1997.
In April 1992, the Northeast States for Coordinated Air Use Management
(NESCAUM), an environmental advisory group for eight northeast states including
Massachusetts and Rhode Island, issued recommendations for NOx controls for
existing utility boilers required to meet the ozone non-attainment requirements
of the Clean Air Act. The NESCAUM recommendations are more restrictive than
the Clean Air Act requirements. The Massachusetts Department of Environmental
Management has amended its regulations to require that Reasonably Available
Control Technology (RACT) be implemented at all stationary sources potentially
emitting 50 tons or more per year of Nox. Similar regulations have been issued
in Rhode Island. Montaup has initiated compliance, through, among other
things, selective noncatalytic reduction processes.
See Note A regarding Montaup's divestiture of generation assets.
A number of scientific studies in the past several years have examined the
possibility of health effects from EMF that are found wherever there is
electricity. While some of the studies have indicated some association between
exposure to EMF and health effects, many others have indicated no direct
association. Some states have enacted regulations to limit the strength of
magnetic fields at the edge of transmission line rights-of-way. Rhode Island
has enacted a statute which authorizes and directs the Energy Facility Siting
Board to establish rules and regulations governing construction of high voltage
transmission lines of 69 kv or more. Management cannot predict the ultimate
outcome of the EMF issue.
Guarantee of Financial Obligations: Montaup is a 3.27% equity participant in
two companies which own and operate transmission facilities interconnecting New
England and the Hydro Quebec system in Canada. Montaup has guaranteed
approximately $4.1 million of the outstanding debt of these two companies. In
addition, Montaup has a minimum rental commitment which totals approximately
$11.2 million under a noncancellable transmission facilities support agreement
for years subsequent to 1998.
Other: Since early 1997, fourteen plaintiffs brought suits against numerous
defendants, including EUA, for injuries and illness allegedly caused by
exposure to asbestos over approximately a thirty-year period, at various
premises, including some owned by EUA companies. The total damages claimed in
all of these complaints is $34 million in compensatory and punitive damages,
plus exemplary damages and interest and costs. Each complaint names between
fifteen and twenty-eight defendants, including EUA. These complaints have been
referred to the applicable insurance companies. Counsel has been retained by
the insurers and is actively defending all cases. Four cases have been
dismissed as against EUA companies. EUA cannot predict the ultimate outcome of
this matter at this time.
A pending class action, filed on March 2, 1998, in the Massachusetts
Supreme Judicial Court naming all Massachusetts electric distribution
companies, including Eastern Edison, and certain Massachusetts state agencies
as defendants, seeks to invalidate certain sections of the Electric Utility
Restructuring Act of 1997. The Act directs the Massachusetts Department of
Telecommunications and Energy to impose mandatory charges on all electricity
sold to customers, except those served by a municipal lighting plant, to fund
energy efficiency activities and to promote renewable energy projects. In
addition to declaratory judgment, plaintiffs seek remittance of monies paid to
each distribution company by customers along with any interest earned. The
outcome of this class action is unknown at this time, however Eastern Edison is
vigorously defending the lawsuit.
EASTERN EDISON COMPANY
Quarterly Financial Information (unaudited)
Consolidated
Operating Operating Net Net
($ in Thousands) Revenues Income Income Earnings
FOR THE QUARTERS
ENDED 1998:
December 31 $100,191 $11,462 $ 7,635 $7,138
September 30 101,769 10,918 6,678 6,181
June 30 97,342 9,371 5,303 4,806
March 31 108,928 14,362 10,090 9,593
FOR THE QUARTERS
ENDED 1997:
December 31 110,739 11,671 7,244 6,747
September 30 109,971 11,713 7,532 7,035
June 30 103,716 9,524 5,336 4,839
March 31 110,588 12,287 8,935 8,438
Basic and Diluted Earnings Per average Common Share, Dividends Paid per Common
Share and Common Share Market Price information is not meaningful as Eastern
Edison's Common Stock is wholly-owned by Eastern Utilities Associates.
Report of Independent Accountants
To the Directors and Shareholder of
Eastern Edison Company and Subsidiary:
In our opinion, the accompanying consolidated balance sheets and
consolidated statements of capitalization present fairly, in all material
respects, the financial position of Eastern Edison Company (the "Company") and
its subsidiary at December 31, 1998 and 1997, and their consolidated statements
of income, retained earnings and cash flows present fairly their results of
operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidences supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 5, 1999
[This page left blank intentionally]
[This page left blank intentionally]