UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _________________ to ___________________
Commission File Number 0-8480
EASTERN EDISON COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1123095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Mulberry Street, Brockton, Massachusetts
(Address of principal executive offices)
02402
(Zip Code)
(508)580-1213
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes....X......No..........
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at October 31, 1996
Common Shares, $25 par value 2,891,357 shares
PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<CAPTION>
ASSETS September 30, December 31,
1996 1995
<S> <C> <C>
Utility Plant in Service $ 797,954 $ 795,200
Less: Accumulated Provision for Depreciation
and Amortization 258,842 241,673
Net Utility Plant in Service 539,112 553,527
Construction Work in Progress 17,816 3,506
Net Utility Plant 556,928 557,033
Current Assets:
Cash and Temporary Cash Investments 3,355 533
Accounts Receivable - Associated Companies 26,634 25,861
- Other 35,783 37,236
Fuel, Materials and Supplies 10,425 11,322
Other Current Assets 4,461 4,170
Total Current Assets 80,658 79,122
Deferred Debits and Other Non-Current Assets 99,836 103,043
Total Assets $ 737,422 $ 739,198
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Stock, $25 Par Value $ 72,284 $ 72,284
Other Paid-In Capital 47,249 47,249
Common Stock Expense (43) (43)
Retained Earnings 122,380 124,878
Total Common Equity 241,870 244,368
Redeemable Preferred Stock - Net 29,665 29,665
Preferred Stock Redemption Cost (2,774) (3,447)
Long-Term Debt - Net 222,380 222,313
Total Capitalization 491,141 492,899
Current Liabilities:
Long-Term Debt Due Within One Year 7,000
Notes Payable 4,158
Accounts Payable - Associated Companies 5,421 3,913
- Other 24,131 27,242
Taxes Accrued 9,561 3,219
Interest Accrued 4,704 4,999
Other Current Liabilities 18,585 8,435
Total Current Liabilities 62,402 58,966
Deferred Credits and Other Non-Current Liabilities 54,126 58,567
Accumulated Deferred Taxes 129,753 128,766
Total Liabilities and Capitalization $ 737,422 $ 739,198
See accompanying notes to consolidated condensed financial statements.
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Operating Revenues $ 101,671 $ 107,854 $ 298,537 $ 318,588
Operating Expenses:
Fuel 25,903 24,970 66,558 70,893
Purchased Power 27,463 30,570 86,034 94,015
Other Operation and Maintenance 23,798 23,172 69,298 70,924
Voluntary Retirement Incentive 0 0 0 2,413
Depreciation and Amortization 6,734 6,540 20,192 19,650
Taxes - Other than Income 2,535 2,462 8,183 7,812
Income Taxes - Current 3,118 4,458 11,464 9,702
- Deferred 580 892 636 3,163
Total 90,131 93,064 262,365 278,572
Operating Income 11,540 14,790 36,172 40,016
Allowance for Other Funds
Used During Construction 138 162 233 444
Other Income (Deductions) - Net 1,790 521 2,766 1,396
Income Before Interest Charges 13,468 15,473 39,171 41,856
Interest Charges:
Interest on Long-Term Debt 3,809 4,636 11,482 13,908
Other Interest Expense 899 952 2,667 2,555
Allowance for Borrowed Funds Used
During Construction(Credit) (150) (129) (290) (353)
Net Interest Charges 4,558 5,459 13,859 16,110
Net Income 8,910 10,014 25,312 25,746
Preferred Dividend Requirements 497 497 1,491 1,491
Consolidated Net Earnings $ 8,413 $ 9,517 $ 23,821 $ 24,255
See accompanying notes to consolidated condensed financial statements.
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 25,312 $ 25,746
Adjustments to Reconcile Net Income to Net
Cash Provided from Operating Activities:
Depreciation and Amortization 21,398 22,934
Amortization of Nuclear Fuel 1,310 2,774
Deferred Taxes 586 3,113
Investment Tax Credit, Net (704) (707)
Allowance for Other Funds Used During Construction (233) (444)
Other - Net (2,446) 2,672
Change in Operating Assets and Liabilities 15,880 (19,560)
Net Cash Provided From Operating Activities 61,103 36,528
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (19,986) (18,478)
Net Cash (Used in) Investing Activities (19,986) (18,478)
CASH FLOW FROM FINANCING ACTIVITIES:
Redemption:
Long-Term Debt (7,000)
Common Stock Dividends Paid to EUA (25,646) (9,888)
Preferred Dividends Paid (1,491) (1,491)
Net (Decrease) in Short-Term Debt (4,158)
Net Cash (Used in) Financing Activities (38,295) (11,379)
Net Increase in Cash and Temporary
Cash Investments 2,822 6,671
Cash and Temporary Cash Investments at
Beginning of Period 533 11,265
Cash and Temporary Cash Investments at
End of Period $ 3,355 $ 17,936
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Capitalized Interest) $ 11,665 $ 13,279
Income Taxes $ 7,346 $ 5,391
See accompanying notes to consolidated condensed financial statements.
</TABLE>
EASTERN EDISON COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying Notes should be read in conjunction with the
Notes to Consolidated Financial Statements appearing in Eastern
Edison Company's (Eastern Edison or the Company) 1995 Annual
Report on Form 10-K and the Company's Quarterly Report on Form 10-Q for the
periods ended March 31, and June 30, 1996.
Note A - In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial
position as of September 30, 1996 and December 31, 1995,
and the results of operations for the three and nine
months ended September 30, 1996 and 1995 and cash flows
for the nine months ended September 30, 1996 and 1995.
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 Company occasionally makes projections of expected
future performance or statements of its plans, objectives
and new business opportunities which are forward-looking
statements under federal securities law. Actual results
could differ materially from those discussed and there
can be no assurance that such estimates of future results
could be achieved.
Note B - Results shown above for the respective interim periods
are not necessarily indicative of results to be expected
for the fiscal years due to seasonal factors which are
inherent in electric utilities in New England. A greater
proportionate amount of revenues is earned in the first
and fourth quarters (winter season) of most years because
more electricity is sold due to weather conditions, fewer
day-light hours, etc.
Note C - Commitments and Contingencies:
Recent Nuclear Regulatory Commission (NRC) Actions
Millstone III:
Montaup Electric Company (Montaup), the wholesale generation
subsidiary of Eastern Edison, a wholly owned subsidiary of EUA,
has a 4.01% ownership interest in Millstone III, an 1154-MW
nuclear unit that is jointly owned by a number of New England
utilities, including subsidiaries of Northeast Utilities
(Northeast). Northeast is the lead participant in Millstone III,
and on March 30, 1996, Northeast determined to shut down the
unit following an engineering evaluation which determined
that four safety-related valves would not be able to
perform their design function during certain postulated
events.
The NRC has raised issues with respect to Millstone III
and certain of the other nuclear units in which Northeast
and its subsidiaries, either individually or
collectively, have the largest ownership shares,
including a 582-MW Nuclear unit owned by Connecticut
Yankee Atomic Power Company (Connecticut Yankee), in
which Montaup has 4.5% ownership share (see "Connecticut
Yankee" below).
In July 1996 Northeast reported that it has been
responding to a series of requests from the NRC seeking
assurance that the Millstone III unit will be operated in
accordance with the terms of its operating license and
other NRC requirements and regulations and dealing with a
series of issues that Northeast has identified in the
course of these reviews. Providing these assurances and
addressing these issues will be components of an
Operational Readiness Plan (ORP) to be developed for the
Millstone III unit. The ORP for Millstone III was
submitted to the NRC on July 2, 1996 and is presently
being implemented.
On October 18 1996, the NRC informed Northeast that it
will establish a Special Projects Office to oversee
inspection and licensing activities at Millstone. The
Special Projects Office will be 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 plants'
restart activities.
On October 24, 1996 the NRC issued another order
directing that prior to restart of Millstone III,
Northeast submit a plan for disposition of safety issues
raised by employees and retain an independent third-party
to oversee implementation of this plan. This third-party
oversight will continue until the situation is corrected.
There is no estimate of how long this will take.
Northeast Management has indicated it cannot presently
estimate the effect these efforts will have on the timing of
restarts or what additional costs, if any, these developments may
cause.
The most recent Northeast estimate of incremental costs related
to the outage of Millstone III is approximately $68.0 million
through December 1996. Montaup's share is $2.7 million, $1.7
million of which has been incurred through September.
While Millstone III is out of service, Montaup will
incur incremental replacement power costs estimated at
$0.4 million to $0.8 million per month. Montaup bills
its replacement power costs through its fuel adjustment
clause, a wholesale tariff jurisdictional to the Federal
Energy Regulatory Commission (FERC). However, there is
no comparable clause in Montaup's FERC-approved rates
which at this time would permit Montaup to recover its
share of the incremental costs incurred by Northeast.
Eastern Edison cannot predict the ultimate outcome of
the NRC inquiries or the impact which they may have on
Montaup and the EUA system. Montaup is also evaluating
its rights and obligations under the various agreements
relating to the ownership and operation of Millstone III.
Connecticut Yankee:
The Connecticut Yankee Nuclear Unit was taken off-line
in July 1996 because of issues related to certain
containment air recirculation and service water systems.
In October, Montaup, as one of the joint owners,
participated in an economic evaluation of Connecticut
Yankee which recommended permanently closing the unit and
replacing its output with less expensive energy sources.
As a result of the analysis, work at the plant has slowed
pending a final board decision, expected to occur in the
fourth quarter of 1996. The preliminary estimate of the
sum of future payments for the closing, decommissioning,
and recovery of the remaining investment in Connecticut
Yankee, assuming permanent shut down, is approximately
$797 million. Montaup's share of the total estimated
costs is $35.9 million. Montaup anticipates being able to
fully recover its remaining investment and
decommissioning costs in Connecticut Yankee, in which
event there would be no adverse impact on earnings.
Maine Yankee:
On June 7, 1996, the NRC commissioned an independent
Safety Assessment Team to assess the conformance of the
Maine Yankee Atomic Power Station to its design and
licensing basis. Montaup holds a 3.5% ownership interest
in the Maine Yankee Unit.
On October 7, 1996, the NRC released an Independent
Safety Assessment (ISA) report. In evaluating the
Plant's conformance to its licensing basis, the report
concluded that Maine Yankee was in general conformance
with its licensing basis although significant items of
nonconformance were identified stemming from two closely
related root causes: (1) economic pressure to be a low-cost
energy provider had limited available resources to address
corrective actions and some improvements and (2) a questioning
culture was lacking, which had resulted in a failure to identify
or promptly correct significant problems in areas perceived by
Maine Yankee to be of low safety significance.
A letter to Maine Yankee from the Chair of the NRC, accompanying
the ISA report directed Maine Yankee to provide to the NRC its
plans for addressing the root causes of the deficiencies
identified by the ISA.
The Plant's current allowed operating level may be limited to 90%
of capacity until completion of the Plant's next planned
refueling outage, which is now scheduled for September 1997.
Maine Yankee cannot predict, however, whether or when the Plant
will attain a 100-percent operating level, or the results of the
ongoing investigations and reviews.
General:
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.
Eastern Edison 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is Management's discussion and analysis of
certain significant factors affecting the Company's earnings and
financial condition for the interim periods presented in this Form
10-Q.
Overview
Consolidated Net Earnings for the three and nine months ended
September 30, 1996 were $8.4 million and $23.8 million,
respectively, as compared to $9.5 million and $24.3 million for
the respective periods of a year ago. The third quarter decrease
was due primarily to a 2.1% decrease in retail kilowatthour (kWh)
sales. Both the third quarter and year-to-date results were
impacted by increased expenses related to an unusual number of
severe storms which struck Eastern Edison's service territory
during the first nine months of 1996. Additionally, the 1996
year-to-date period was negatively impacted by an increase in
legal expense. Both 1996 period decreases in net earnings were
partially offset by decreases in interest expense from debt issues
that matured in 1995. The year-to-date decrease in earnings was
somewhat offset also by a 1.7% increase in retail kWh sales.
Also, the year-to-date period of 1995 includes a one-time charge
of approximately $1.5 million, on an after tax basis, related to
the voluntary retirement incentive offer.
Kilowatthour Sales
A 2.1% decrease in retail kWh sales in the third quarter of
1996 somewhat offset the sales increases experienced in the first
and second quarters of 1996. For the year-to-date period, retail
sales increased 1.7% compared to those of the same period of 1995.
Increases in kWh sales to industrial customers of 5.2% and 3.2% in
the respective third quarter and year-to-date periods, however,
are an indication of economic recovery in the Company's service
territory. Despite this strong sales performance, the Company
anticipates a continuing slow economic recovery for the
foreseeable future.
Operating Revenues
Operating Revenues for the quarter and year-to-date periods
ended September 30, 1996 decreased by approximately $6.2 million
and $20.1 million, respectively, as compared to the same period in
1995. The third quarter change was due primarily to lower
purchased power recoveries aggregating $3.8 million, lower
conservation and load management (C&LM) expense recoveries of
approximately $1.9 million and lower kWh sales. The year-to-date
change was primarily due to decreased purchased power recoveries
of $9.7 million, decreased C&LM expense recoveries of $5.2
million, lower fuel expense recoveries of $4.7 million, and
decreased contract demand sales of $1.5 million.
Operations Expense
Fuel expense increased by approximately $900,000 or 3.7% for
the third quarter and decreased by $4.3 million or 6.1% for the
year-to-date periods of 1996, respectively, as compared to the
same periods of 1995. The third quarter change was impacted by a
4.2% increase in total energy generated and purchased, partially
offset by 2.4% decrease in the average cost of fuel. Because the
EUA System requirements decreased in the third quarter, sales to
the New England Power Pool (NEPOOL) increased. These NEPOOL sales
recover fuel costs only and have little earnings impact. The
year-to-date period was impacted by 9.5% decrease in the average
cost of fuel offset by a 3.3% increase in total energy generated
and purchased.
Purchased Power demand expense for the third quarter of 1996
decreased $3.1 million or 10.2% and $8.0 million or 8.5% for the
nine months ended September 30, 1996. The third quarter change
was primarily due to the impact of a prior period refund of
approximately $2.0 million from the Pilgrim Nuclear unit,
subsequently refunded to retail customers, and decreased billings
from the Ocean State Power Project, offset somewhat by increased
billings of the Yankee nuclear units. The year-to-date decrease
is due primarily to the impact of lower billings of approximately
$3.9 million from the Pilgrim nuclear unit, including the
previously mentioned refund, and decreased billings from the Ocean
State Power Project and the Yankee nuclear units aggregating $3.1
million.
Other Operation and Maintenance expenses increased by
approximately $600,000 or 2.7% for the third quarter and decreased
by $1.6 million or 2.3% for the nine months ended September 30,
1996, respectively, from the same periods in 1995. The third
quarter change was primarily due to incremental outage costs of
the Millstone III nuclear unit of approximately $900,000 and
increases in storm related expenses, increased maintenance
expenses of the Canal unit and increased FAS106 expenses
aggregating $1.3 million. Offsetting these increases somewhat was
a decrease in C&LM expenses of $1.6 million. The year-to-date
change was primarily due to decreased C&LM expenses of $5.2
million and lower maintenance expenses of the Canal and Somerset
Units aggregating $1.4 million. Offsetting these year-to-date
decreases somewhat were increases in storm related, legal and
FAS106 expenses of approximately $2.3 million, $2.1 million and
$400,000, respectively.
Interest Charges
Net interest charges decreased by approximately $900,000 and
$2.3 million, respectively, in the third quarter and nine months
ended September 30, 1996 as compared to the same periods in 1995
due primarily to the December 1995 maturity of $25 million of
9-9 1/4% Unsecured Medium Term Notes and $10 million of 8.9% First
Mortgage and Collateral Trust Bonds of Eastern Edison.
Liquidity and Sources of Capital
Eastern Edison's and Montaup's need for permanent capital is
primarily related to the construction of facilities required to
meet the needs of their existing and future customers.
Traditionally, cash construction requirements not met with
internally generated funds are obtained through short-term
borrowings which are ultimately funded with permanent capital.
EUA System companies, including Eastern Edison and Montaup,
maintain short-term lines of credit with various banks aggregating
approximately $150 million. These credit lines are available to
other affiliated companies under joint credit line arrangements.
At September 30, 1996 and at December 31, 1995 these unused EUA
System short-term lines of credit amounted to approximately $98.5
million and $110.5 million, respectively. The Company had no
outstanding short-term debt at September 30, 1996 and had $4.2
million outstanding at December 31, 1995.
The Company's year-to-date September 30, 1996 internally
generated funds amounted to $20.4 million while its cash
construction requirements for the same period were $20.0 million.
Electric Utility Industry Restructuring
The electric industry is in a period of transition from a
traditional rate regulated environment to a competitive
marketplace. While competition in the wholesale electric market
is not new, electric utilities are facing impending competition in
the retail sector.
On March 5, 1996 the Rhode Island Public Utilities Commission
(RIPUC) required electric utilities subject to their jurisdiction
to file electric industry restructuring plans. On April 19, 1996
both Blackstone and Newport filed a restructuring plan called
"Choice and Competition", described below. Hearings on the
restructuring plans submitted to the RIPUC were to have started on
August 12, 1996. In view of the restructuring legislation
(described below) passed into law on August 7, 1996, however, the
RIPUC terminated its restructuring proceedings.
On August 7, 1996 the Governor of Rhode Island signed into law
the Utility Restructuring Act of 1996 (URA). The URA provides for
customer choice of electricity supplier commencing July 1, 1997
for large manufacturing customers, certain new commercial and
industrial customers, and State of Rhode Island accounts. Load,
accounting for no more than 10% of total electric distribution
company's kWh sales is to be released to retail access under this
provision. An additional 10% of kWh sales is to be released to
retail access by permitting municipal and smaller manufacturers to
choose an electricity supplier commencing January 1, 1998. By
July 1, 1998 or sooner, all customers will have retail access.
This legislation provides for recovery of "stranded costs" through
a non-by-passable transition charge initially set at 2.8 cents per
kWh. The transition charge covers costs of regulatory assets;
nuclear decommissioning; above market payments to power suppliers;
and depreciated generation net of its market value. Nuclear
decommissioning costs and above market payments to power suppliers
will be reconciled to actual costs annually and the transition
charge will be spread over the period from July 1, 1997 through
December 31, 2009.
The implementation of the URA will require approvals from
applicable regulatory agencies, including the Federal Energy
Regulatory Commission (FERC), the RIPUC, and the Securities and
Exchange Commission.
EUA believes that the URA settles much of the uncertainty
regarding "stranded cost" recovery related to serving the
customers of Blackstone and Newport.
In August 1995, the Massachusetts Department of Public
Utilities (MDPU) issued an order enumerating principles that
describe the key characteristics of a restructured electric
industry and provides for, among other things, customer choice of
electric service providers, services, pricing options and payment
terms, an opportunity for customers to share in the benefits of
increased competition, full and fair competition in the generation
markets and incentive regulation for distribution services where
regulation will still exist. This order sets out principles for
the transition from a regulated to a competitive industry
structure and identifies conditions for the transition process
which will require investor-owned utilities to unbundle rates,
provide consumers with accurate price signals and allow customers
choice of generation services. The order also provides, in
principle, for the recovery of net, non-mitigable stranded costs
by investor-owned utilities resulting from the industry
restructuring.
Each Massachusetts investor-owned utility is required to file
restructuring proposals for moving from the current regulated
industry structure to a competitive generation market. An initial
group of utilities was required to file their proposals in
February 1996. The second group is required to file within three
months of the MDPU's orders on the first group of submissions.
Eastern Edison Company filed its proposal, "Choice and
Competition" (see below) with the first group of proposals. On
March 15, 1996, the MDPU issued a Notice of Inquiry (NOI)
Rulemaking on electric industry restructuring. The NOI
incorporated by reference the restructuring proposals previously
submitted pursuant to the MDPU's earlier order. In its NOI order
the MDPU indicated that it planned to issue draft rules to provide
more specific guidance on the framework of a restructured electric
industry.
On May 1, 1996 the MDPU issued its proposed rules for the
restructuring of the electric industry. The MDPU stated the rules
are intended to reduce electricity costs over time and provide
broad customer choice of electric supplier promoting full and fair
competition in the generation of electricity. These proposed
rules, which amplify the principles set forth in the August 1995
order, were issued for public comment and hearing. Final rules
were originally scheduled to be issued in September 1996. On
August 9, 1996 the MDPU issued a notice extending the issuance
date of the final rules. The MDPU goal is to issue final rules by
the end of the calendar year 1996. The May 1st proposed rules
provide for, among other things:
- an independent system operator of the regional transmission
system in New England operating within established
reliability standards and a power exchange which would
facilitate a short-term pool for energy transactions;
- functional separation of electric companies into generation,
transmission and distribution corporate entities;
- a "reasonable" opportunity for recovery of net, non-
mitigable stranded costs periodically subject to some degree
of reconciliation;
- a price cap system for performance based regulation of
electric distribution companies;
- distribution company obligation to provide electric
distribution service to all customers within its service
territory;
- environmental protection and support for renewable energy
resources and energy efficiency;
- implementation of unbundled rates beginning January 1, 1997
and a competitive generation market by January 1, 1998;
EUA participated in hearings held during June and July of
1996, and on August 2, 1996, filed written comments addressing
restructuring issues. In its notice of August 9, 1996, the MDPU
encouraged stakeholders to work together toward consensual
resolution of restructuring issues. EUA is currently engaged in
settlement negotiations. One Massachusetts electric utility
company has submitted its offer of settlement on restructuring
issues to the MDPU. EUA cannot predict the ultimate outcome of
the restructuring process.
In January 1996, EUA unveiled its preliminary proposal for a
restructured electric utility industry called "Choice and
Competition" and began discussions with collaborative groups in
both Rhode Island and Massachusetts consisting of other utilities,
industrial users, environmental groups, governmental agencies and
consumer advocates. The plan proposed, among other things: choice
of power supplier by all customers as early as January 1998; open
access transmission services; performance based rates for electric
distribution services; all utility generation competing for power
sales; and a transition charge allowing regional utilities the
opportunity to recover, among other things, the costs of past
commitments to nuclear and independent power. The keystone to
"Choice and Competition" was the adoption of common electric
utility restructuring implementation for the New England states
operating with the region's power pool. As different
restructuring initiatives surfaced from state regulatory agencies
and state legislatures, it became apparent that a New England
region-wide approach to restructuring would be unlikely. Thus,
major elements of the "Choice and Competition" proposal have been
substantially modified to reflect that state by state, rather than
regional, plans will be adopted.
Historically, electric rates have been designed to recover a
utility's full costs of providing electric service including
recovery of investment in plant assets. Also, in a regulated
environment, electric utilities are subject to certain accounting
rules that are not applicable to other industries. These
accounting rules allow regulated companies, in appropriate
circumstances, to establish regulatory assets and liabilities,
which defer the current financial impact of certain costs that are
expected to be recovered in future rates. The Company believes
that its operations continue to meet the criteria established in
these accounting standards.
However, the potential exists that the final outcome of state
and federal agency determinations could require the Company to no
longer follow these accounting rules. Current or future
regulatory proposals regarding the electric delivery business and
the recovery of the Company's utility plant, stranded investment,
and regulatory assets could trigger the discontinuance of
Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" (FAS71). Should
it be required to discontinue the application of FAS71, the
Company would be required to take an immediate write down of the
affected assets in accordance with FAS101, "Accounting for the
Discontinuation of Application of FAS71".
In addition, if legislative or regulatory changes and/or
competition result in electric rates which do not fully recover
the company's costs, a write-down of plant assets could be
required pursuant to Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (FAS121) issued in March 1995,
effective for fiscal year 1996.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On December 15, 1995, Eastern Edison exercised its right to
terminate a Power Purchase Agreement (the PPA) entered into with
the Meridian Middleboro Limited Partnership (MMLP) and a related
entity on September 20, 1993. In February and May of 1996, MMLP
made demand for over $25 million under the termination provision
of the PPA. On June 17, 1996, Eastern Edison responded to MMLP's
demand stating that only approximately $170,000 was due under the
termination provision. On July 18, 1996, Eastern Edison filed a
declaratory judgement action in Suffolk Superior Court in Boston,
Massachusetts against MMLP seeking a declaration of the rights of
the parties under the PPA. MMLP's response to the complaint,
filed on August 8, 1996, included counter claims in excess of $20
million and a request for treble damages. In response to the
counter claim, Eastern Edison paid MMLP $191,828 as the amount
Eastern Edison considered to have been owed to MMLP. The Company
intends to vigorously defend itself from the counter claims. The
Company cannot determine the outcome of this proceeding at this
time.
Item 5. Other Information
On April 24, 1996, FERC issued orders on its March 24, 1995
Notice of Proposed Rulemaking (NOPR). FERC's purpose in proposing
the new rules was to encourage competition in the bulk power
market. The FERC's April 24th actions include:
- order No. 888, a final rule requiring open access
transmission and requiring all public utilities that own,
operate or control interstate transmission to file
tariffs that offer others the same transmission services
they provide themselves, under comparable terms and
conditions. Utilities must take transmission service for
their own wholesale transactions under the terms and
conditions of the tariff;
- recovery of prudently incurred stranded costs by public
utilities and transmitting utilities;
- order No. 889, a final rule requiring public utilities to
implement standards of conduct and an Open Access Same-time
Information System (OASIS). Utilities must obtain
information about their transmission the same way as
their competitors through the OASIS;
- a Notice of Proposed Rulemaking (NOPR) requesting comment
on replacing the single tariff contained in the final
open access rule with a capacity reservation tariff that
would reveal how much transmission is available at any
given time.
Open-access transmission tariffs for point-to-point and network
service filed with FERC by Montaup in February 1996 have been
approved and became effective April 21, 1996 for a period of at
least one year. These tariffs are in compliance with FERC's April
24th rulings. The Company remains committed to achieving a fair
and equitable transition to a competitive electric utility
marketplace.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
- None filed in the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Eastern Edison Company
(Registrant)
Date: November 13, 1996 /s/Clifford J. Hebert,Jr.
Clifford J. Hebert, Jr. Treasurer
(on behalf of the Registrant and
as Principal Financial Officer)
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