UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _________________ to ___________________
Commission File Number 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.)
750 W. Center Street, West Bridgewater, Massachusetts
(Address of principal executive offices)
02379
(Zip Code)
(508)559-1000
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes....X......No..........
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at July 31, 1998
Common Shares, $25 par value 2,891,357 shares
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<CAPTION>
ASSETS June 30, December 31,
1998 1997
<S> <C> <C>
Utility Plant in Service $ 820,350 $ 822,990
Less: Accumulated Provision for Depreciation
and Amortization 289,805 279,711
Net Utility Plant in Service 530,545 543,279
Construction Work in Progress 7,571 2,248
Net Utility Plant 538,116 545,527
Current Assets:
Cash and Temporary Cash Investments 445 461
Accounts Receivable - Other 36,750 40,777
- Associated Companies 13,255 14,143
Fuel, Materials and Supplies 7,416 7,982
Other Current Assets 4,526 3,688
Total Current Assets 62,392 67,051
Deferred Debits and Other Non-Current Assets 191,743 164,546
Total Assets $ 792,251 $ 777,124
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Stock, $25 Par Value $ 72,284 $ 72,284
Other Paid-In Capital 47,250 47,249
Common Stock Expense (44) (44)
Retained Earnings 97,564 98,979
Total Common Equity 217,054 218,468
Redeemable Preferred Stock - Net 29,665 29,665
Preferred Stock Redemption Cost (1,853) (2,053)
Long-Term Debt - Net 162,533 162,491
Total Capitalization 407,399 408,571
Current Liabilities:
Long - Term Debt Due Within One Year 40,000 60,000
Notes Payable 18,145 4,675
Accounts Payable - Associated Companies 8,799 7,317
- Other 24,770 27,113
Taxes Accrued 1,083 2,325
Interest Accrued 4,772 4,923
Other Current Liabilities 12,220 15,011
Total Current Liabilities 109,789 121,364
Deferred Credits and Other Non-Current Liabilities 131,510 107,714
Accumulated Deferred Taxes 143,553 139,475
Total Liabilities and Capitalization $ 792,251 $ 777,124
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Operating Revenues $ 97,342 $ 103,716 $ 206,270 $ 214,304
Operating Expenses:
Fuel 23,471 23,662 49,876 53,131
Purchased Power 27,895 30,180 55,786 62,664
Other Operation and Maintenance 22,907 27,221 46,475 49,681
Early Retirement Offer 0 737 737
Depreciation and Amortization 7,462 6,891 14,926 13,781
Taxes - Other Than Income 2,749 2,782 5,666 5,668
Income Taxes - Current 634 3,059 4,372 10,571
- Deferred (Credit) 2,853 (340) 5,436 (3,740)
Total 87,971 94,192 182,537 192,493
Operating Income 9,371 9,524 23,733 21,811
Allowance for Other Funds
Used During Construction 12 21 52 59
Other Income - Net 40 453 294 1,606
Income Before Interest Charges 9,423 9,998 24,079 23,476
Interest Charges:
Interest on Long-Term Debt 3,556 3,752 7,307 7,503
Other Interest Expense 616 969 1,464 1,798
Allowance for Borrowed Funds Used
During Construction (Credit) (52) (59) (85) (96)
Net Interest Charges 4,120 4,662 8,686 9,205
Net Income 5,303 5,336 15,393 14,271
Preferred Dividend Requirements 497 497 994 994
Consolidated Net Earnings $ 4,806 $ 4,839 $ 14,399 $ 13,277
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
EASTERN EDISON COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 15,393 $ 14,271
Adjustments to Reconcile Net Income to Net
Cash Provided from Operating Activities:
Depreciation and Amortization 15,855 14,447
Amortization of Nuclear Fuel 409 586
Deferred Taxes 5,441 (3,711)
Investment Tax Credit, Net (651) (468)
Allowance for Other Funds Used During Construction (52) (59)
Other - Net (6,475) (1,487)
Change in Operating Assets and Liabilities (403) 7,377
Net Cash Provided From Operating Activities 29,517 30,956
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (6,396) (5,819)
Net Cash (Used in) Investing Activities (6,396) (5,819)
CASH FLOW FROM FINANCING ACTIVITIES:
Common Stock Dividends Paid to EUA (15,613) (32,613)
Preferred Dividends Paid (994) (994)
Net (Decrease) in Long-Term Debt (20,000)
Net Increase in Short-Term Debt 13,470 7,471
Net Cash (Used in) Financing Activities (23,137) (26,136)
Net (Decrease) in Cash and Temporary
Cash Investments (16) (999)
Cash and Temporary Cash Investments at
Beginning of Period 461 2,105
Cash and Temporary Cash Investments at
End of Period $ 445 $ 1,106
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Capitalized Interest) $ 7,711 $ 7,572
Income Taxes $ 7,708 $ 10,026
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 incorporated in Eastern Edison Company's
(Eastern Edison or the Company) 1997 Annual Report on Form 10-K and the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998.
Note A - In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly its financial position as of June 30, 1998 and December 31,
1997, and the results of operations for the three and six months
ended June 30, 1998 and 1997 and cash flows for the six months ended
June 30, 1998 and 1997. The year-end consolidated condensed balance
sheet data was derived from audited financial statements but does not
include all disclosures required under generally accepted accounting
principles.
As more fully discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," customer choice of
electricity supplier commenced on January 1, 1998 and March 1, 1998
for EUA's Rhode Island and Massachusetts retail distribution
customers, respectively. Coincident with retail access, Montaup
Electric Company (Montaup), EUA's generation and transmission
company, began billing its affiliated EUA electric distribution
companies, Blackstone Valley Electric Company (Blackstone) and
Newport Electric Corporation (Newport), in Rhode Island, and Eastern
Edison Company (Eastern Edison), in Massachusetts, a contract
termination charge (CTC).
The CTC permits Montaup to recover, among other things, its above
market investment in generation assets over a period of twelve years,
a period shorter than the expected useful lives of these assets. As
a result, Montaup is deferring revenue in an amount equal to the
difference between depreciation expense recorded pursuant to
generally accepted accounting principles and the level of asset
recovery included in the CTC. In addition, provisions of the CTC
formula require Montaup to accrue and/or defer revenues related to
recovery of certain of its generation-related expenses.
Effective January 1, 1998, the Company adopted the Financial
Accounting Standards Board's Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
comprehensive income and its components (revenues, expenses,
gains, and losses) in a set of general-purpose financial statements.
This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive
income of the Company is immaterial and therefore no recognition is
required by the Company.
In March 1998, The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants 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 results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Actives,"
which is effective in 2000. This statement requires the recognition
of all derivative instruments as either assets or liabilities in the
statement of financial positions and the measurement of those
instruments at fair value. The Company does not expect SFAS 133 to
have a material impact on its financial position or results of
operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Note B - Results shown for the respective interim periods being reporting
herein are not necessarily indicative of results to be expected for
the fiscal years due to seasonal factors which are inherent in
electric utilities in New England. A greater proportionate amount of
revenues is earned in the first and fourth quarters (winter season)
of most years because more electricity is sold due to weather
conditions, fewer day-light hours, etc.
Note C - Commitments and Contingencies:
Recent Nuclear Regulatory Commission (NRC) Actions
General:
Recent actions by the NRC indicate that the NRC has become more
critical and active in its oversight of nuclear power plants.
Montaup 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 the Company has an ownership interest or power
contract.
Millstone 3:
Montaup has a 4.01% ownership interest in Millstone 3, an 1,154-
megawatt (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 Nuclear Regulatory Commission (NRC), which had
raised numerous issues with respect to Millstone 3 and certain of the
other nuclear units in which Northeast and its subsidiaries, 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
(ICAVP), (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. 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 n on-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 two-year shutdown of Millstone 3. The
non-operating owners conservatively estimate that their losses exceed
$200 million. In December 1997, Northeast filed a motion to dismiss
the non-operating owner's claims, or alternatively to stay pending
arbitration. These requests were denied in July 1998.
Montaup pays its share of Millstone 3's O&M expenses on a reservation
of right basis. The fact that Montaup makes payment for these
expenses is not an admission of financial responsibility for expenses
incurred or to be incurred due to the outage.
Montaup cannot predict the ultimate outcome of the legal proceedings
brought against CL&P, WMECO and Northeast or the impact which they
may have on the Company and the EUA system.
Maine Yankee:
On August 6, 1997, as the result of an economic evaluation, the Maine
Yankee Board of Directors voted to permanently close that nuclear
plant. Montaup has a 4.0% equity ownership in Maine Yankee.
On November 5, 1997, Maine Yankee submitted a rate filing to the FERC
to provide for recovery of its costs during the decommissioning
period. The filing provides for the investment in plant, nuclear
fuel and associated facilities to continue to be recovered through
October 2008.
On November 6, 1997, Maine Yankee submitted an estimate of its costs
to the FERC reflecting the fact that the plant was no longer
operating and had entered the decommissioning phase. On January 14,
1998, the FERC accepted the new rates, subject to refund, and amounts
of Maine Yankee's collections for decommissioning. FERC also granted
intervention requests and ordered a public hearing on the prudency of
Maine Yankee's decision to shut down the plant and on the
reasonableness of the proposed rate amendments. On May 20, 1998,
FERC issued a schedule which set the discovery and testimony phase of
the case through the remainder of 1998, with a settlement conference
set for February 15, 1999, and a hearing scheduled for April 1, 1999.
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.
Also, as a result of the August 1997 shutdown, Montaup and the other
equity owners have been notified by the Secondary Purchasers that
they will no longer make payments for purchased power to Maine
Yankee. The Secondary Purchase Contracts are between the equity
owners as a group and 30 municipalities throughout New England.
Presently, the equity owners are making payments to Maine Yankee to
cover the payments that would be made by the municipals.
On November 28, 1997, the Secondary Purchasers sent a Notice of
Initiation of Arbitration to the equity owners of Maine Yankee. On
December 15, 1997, the equity owners as a group filed at FERC a
Complaint and Petition for Investigation, Contract Modification, and
Declaratory Order. On April 7, 1998, a Maine judge denied the
Secondary Purchasers' motion to compel arbitration and indicated the
jurisdictional question should be first decided by FERC. On April
15, 1998, the Secondary Purchasers notified FERC of the judge's
decision and asked for expedited action on the pending complaint
against them for non-payment. The equity owners are seeking an order
from FERC declaring that the Secondary Purchasers remain responsible
for payments due under the Purchase Contracts and directing the
Secondary Purchasers to make such payments.
The equity owners also seek a modification of the Secondary Purchase
Contracts to extend the termination date or otherwise to ensure that
the equity owners may fully recover from the Secondary Purchasers a
share of the costs of shutting down and decommissioning the Maine
Yankee plant that is proportionate to the Secondary Purchasers'
entitlements to energy from the plant. Management does not believe
that this contract issue will have a material effect on Montaup's
future operating results or financial position and cannot predict its
ultimate outcome at this time.
Department of Energy Actions:
In addition to its 4.0% equity ownership in Maine Yankee, Montaup
also has a 4.5% equity ownership interest in both the Yankee Atomic
and Connecticut Yankee nuclear generating stations. Both of these
facilities have permanently ceased power generation operations and
are in the process of decommissioning the sites.
In early 1998, Yankee Atomic, Maine Yankee and Connecticut Yankee,
individually, as well as a number of other utilities, filed suit in
federal appeals court seeking a court order to require the Department
of Energy (DOE) to immediately establish a program for the disposal
of spent nuclear fuel. Yankee Atomic and Connecticut Yankee are also
seeking damages of approximately $70 million and $90 million,
respectively. Under the Nuclear Waste Policy Act of 1992, the DOE
was to provide for the disposal of radioactive wastes and spent
nuclear fuel starting in 1998 and has collected funds from owners of
nuclear facilities to do so. On February 19, 1998, Maine Yankee also
filed a petition in the U.S. Court of Appeals seeking to compel the
Department of Energy to remove and dispose of the spent fuel at the
Maine Yankee site. Under their Standard Contract, the DOE had a
deadline for beginning the removal process at all nuclear plants on
January 31, 1998, which was not met. On May 5, 1998, the Court of
Appeals denied several motions brought in the proceeding, including
several motions for injunctive relief brought by the utility
petitioners. In p articular, the Court denied the requests to
require the DOE to immediately establish a program for the disposal
of spent nuclear fuel. On June 3, 1998, Maine Yankee filed a lawsuit
against the DOE for $128 million in the U.S. Court of Claims for
damages as a result of the DOE's refusal to accept the spent nuclear
fuel. Management cannot predict the ultimate outcome of this issue.
Other
See Massachusetts Referendum, in Item 2. Managements's Discussion and
Analysis of Financial Condition and Results of Operations for a
discussion of a referendum in Massachusetts to repeal deregulation
legislation that will be presented to voters on the November 1998
ballot.
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 second quarter of 1998 were
approximately $4.8 million, relatively unchanged compared to the net earnings
of the second quarter 1997. For the six months ended June 30, 1998, net
earnings were approximately $14.4 million, compared to net earnings of $13.3
million for the respective period of 1997. Both second quarter and year-to-
date 1997 results include the impacts of the June 1997 early retirement offer
which resulted in a charge of approximately $700,000 (approximately $500,000
after-tax) to second quarter and year-to-date 1997 earnings.
Operating Revenues
Operating Revenues for the second quarter and year-to-date periods of 1998
decreased approximately $6.4 million or 6.1% and $8.0 million or 3.8%,
respectively as compared to the same periods of 1997. These decreases were due
primarily to recoveries of decreased fuel and purchased power expense of
approximately $2.5 million and $10.1 million for the respective periods, and,
in the second quarter, an unbilled revenue timing adjustment of approximately
$2.5 million resulting from restructured rates. Also, rate reductions
coincident with retail access which became effective March 1, 1998 negatively
impacted revenues in both periods. Offsetting these decreases somewhat were
increased recoveries of conservation and load management (C&LM) expenses of
approximately $500,000 and $1.0 million in the respective periods, a less than
1% and a 1.5% increase in kilowatthour (kWh) sales for the respective periods,
and revenues accrued by Montaup pursuant to approved settlement agreements.
Operations Expense
Fuel expense for the second quarter and year-to-date periods decreased by
approximately $200,000 or almost 1% and $3.3 million or 6.1%, respectively, as
compared to the same periods in 1997. For the second quarter, nuclear units
provided a greater share of kWh requirements and a 11% decrease in the cost of
fossil fuels contributed to a 11% decrease in average fuel costs. For the year-
to-date period, the cost of fossil fuels decreased 13%, which contributed
to a 15% decrease in the average cost of fuel as compared to the six months
ended June 30, 1997. Offsetting these decreases in fuel expense for the second
quarter and year-to-date periods were increases in total energy generated and
purchased of 12.9% and 9.4%, respectively.
Purchased Power demand expense for the second quarter and the six months
ended June 30, 1998 decreased approximately $2.3 million or 7.6% and $6.9
million or 11%, respectively, as compared to the same periods in 1997. These
decreases are due primarily to decreased billings from Maine Yankee,
Connecticut Yankee and the Ocean State Power project.
Other Operation and Maintenance (O&M) expenses decreased approximately
$4.3 million or 15.8%, and approximately $3.2 million or 6.5%, for the second
quarter and year-to-date periods of 1998, as compared to the same periods of
1997. Jointly owned units expense decreased $1.8 million and $2.1 million in
the second quarter and year-to-date periods, respectively, largely due to
decreased expenses at Millstone 3, Canal 2 and Seabrook. Also affecting both
periods were decreased expenses from the April 1997 storm which struck Eastern
Edison's service territory and decreased expenses as a result of extensive
scheduled maintenance outages at Montaup's Somerset Station and the Canal 2
Unit in 1997. These decreases were offset by increased C&LM expenses of
$500,000 in the second quarter and $1.0 million in the year-to-date period.
Also impacting the second quarter decrease was decreased transmission expenses
from other utilities and decreased legal expenses aggregating approximately
$1.5 million.
Income Taxes
Eastern Edison's effective tax rate for the six months ended June 30, 1998
was approximately 40.4% compared to 34.0% for the same period of a year ago.
Provisions of restructuring settlement agreements which require the
acceleration of the catch-up of deferred tax deficiencies created under prior
regulatory practices are primarily responsible for this change.
Depreciation and Amortization Expense
Depreciation and Amortization expense increased approximately $600,000 or
8.3% in the second quarter and $1.1 million or 8.3% in the year-to-date period
as compared to the same periods of 1997 due largely to amortization of certain
regulatory assets pursuant to restructuring settlement agreements.
Other Income and (Deductions) - Net
Other Income and (Deductions) - Net decreased by approximately $400,000 in
the second quarter of 1998, and $1.3 million in the year-to-date period, as
compared to the same periods of 1997. The year-to-date decrease is primarily
due to first quarter 1997 interest income allocated to the Company by EUA
Service Corporation related to the favorable resolution of a Massachusetts
corporate income tax dispute.
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. 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 June 30, 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 June 30, 1998 these unused EUA System short-term lines of credit amounted to
approximately $77.8 million. The Company had $18.1 million of short-term debt
at June 30, 1998.
The Company's year-to-date June 30, 1998 internally generated funds
available after the payment of dividends amounted to $15.1 while its cash
construction requirements for the same period were $6.4 million.
Electric Utility Industry Restructuring
Legislation in both Rhode Island and Massachusetts along with approved
electric utility industry restructuring settlement agreements in both states
and at the federal level, provided EUA's Rhode Island and Massachusetts
electric customers with choice of electricity supplier and immediate
rate reductions commencing January 1, 1998 and March 1, 1998, respectively.
Until a customer chooses an alternative supplier, that customer will receive
standard offer service. Blackstone and Newport are required to arrange for
standard offer service through December 31, 2009 and Eastern Edison must
arrange for this service through December 31, 2004. Montaup has guaranteed
standard offer supply at a fixed price schedule for the duration of the
standard offer periods. The guaranteed standard offer price will increase over
time to encourage customers to leave standard offer service and enter the
competitive power supply market. Under the approved settlement agreements,
Blackstone, Newport and Eastern Edison agreed to subject their standard offer
requirements to a competitive bidding process in which competitive suppliers
would bid against the guaranteed price offered by Montaup. The competitive
process was completed in April 1998, and resulted in none of the standard offer
requirements being awarded to competitive suppliers. Montaup will therefore
continue to provide the unawarded standard offer requirement at the indicated
fixed price schedule. This wholesale standard offer service will be assigned
proportionately to purchasers of Montaup's generating capacity.
Provisions of the approved settlement agreements also allowed Montaup to
replace its all-requirements wholesale contracts with its affiliated retail
distribution companies with a contract termination charge (CTC) which permits
Montaup to recover, among other things, its above market investments and
commitments in generation assets. Montaup began billing the CTC coincident
with retail access. The distribution companies are recovering the CTC through
a non-bypassable transition access charge to all of their distribution
customers.
As part of the approved settlement agreements, Montaup agreed to divest
its entire generation portfolio. The net proceeds of the sale, as defined in
the settlement agreements, will be used to mitigate Montaup's CTC to its retail
affiliates via a Residual Value Credit (RVC). The RVC will reduce the fixed
component of the CTC for the net proceeds, with a return, in equal annual
amounts over the period commencing on the date the RVC is implemented through
December 31, 2009. See Divestiture below.
For a more detailed discussion of electric industry restructuring, refer
to the Company's 1997 Annual Report on Form 10K.
Massachusetts Referendum
In Massachusetts, a referendum to repeal comprehensive deregulation
legislation that became law on November 25, 1997 will be presented to voters on
the November 1998 ballot. A coalition formed to oppose the referendum
unsuccessfully challenged the petition's signatures and the constitutionality
of the repeal effort and has now begun to focus on opposing the question on the
November ballot. Although EUA does not believe this legislation will be
repealed, in the event that it is, the impact on restructuring efforts is
unknown. It is clear, however, that it would be very difficult to unwind the
mandated 10 percent discount customers have been receiving since March 1,
1998 and the sale of generation assets already closed or pending. Since the
Federal Energy Regulatory Commission approved EUA's restructuring settlement
agreements, it is possible that little change would occur. Moreover, it is
also possible that the Massachusetts Legislature could pass another bill early
next year to preserve essential terms of the existing law or that the
Department of Telecommunications and Energy could decide that it has the
requisite authority to keep EUA's present settlements in place. Management
cannot predict the outcome of the November ballot question.
Divestiture
Montaup began marketing its entire generation portfolio in July 1997, and
subsequently received bids from a number of potential purchasers. On January
23, 1998, based on a review of the offers and discussions with potential
purchasers, Montaup announced that it was reopening the sales process on the
majority of its generating assets and expects to execute purchase and sale
agreements during the third quarter of 1998. In April 1998, EUA announced the
signing of agreements for the transfer of power purchase contracts for
approximately 160 mw between Montaup and Ocean State Power and the sale of two
diesel-powered generating units (totaling approximately 16 mw) owned by
Newport.
On May 27, 1998, EUA announced that Montaup has agreed to sell its 50
percent share (280 mw) of Unit 2 of the Canal Generating Station in Sandwich,
Massachusetts to Southern Energy for approximately $75 million. This sale is
expected to be finalized near the end of 1998.
On June 25, 1998, EUA announced that Montaup has agreed to sell 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, LTP for $3.2 million.
On August 4, 1998, EUA announced an agreement to sell its 2.6% (16 mw)
share of the W. F. Wyman Unit 4 in Yarmouth, Maine to the FPL Group for
approximately $2.4 million.
All of the sale agreements are subject to federal and state regulatory
approvals, including that of the Nuclear Regulatory Commission with respect to
the Seabrook sale.
Resources remaining in EUA's marketing efforts include wholly-owned
fossil-fueled and hydroelectric facilities and approximately 300 mw of power
purchase contracts from generating units throughout New England as well as two
sites providing potential power plant development opportunities. It is
anticipated that an announcement on the sale of EUA's Somerset, Massachusetts,
coal-fired generating station will be made in the third quarter.
Year 2000 Compliance
The "Year 2000" problem exists because some computer programs and embedded
microchips may not properly recognize a year that begins with "20" instead of
"19", and therefore may fail or create erroneous results. EUA is actively
engaged in identifying, assessing, and responding to the implications of this
problem for its operations.
EUA's State of Readiness:
The Company has identified all of its information technology systems and
is assessing and testing its Year 2000 compliance. EUA has established a
structured approach which ranks its mainframe applications, client server and
network applications, as well as desktop and personal computer applications.
To date, the Company has identified several critical systems which have been
corrected, however, there may be others.
EUA is in the process of identifying and assessing its embedded technology
and anticipates findings by October 1998. When the preliminary embedded chip
inventory and assessment process is complete, EUA will then prioritize the
results to address the most critical areas of its business first. EUA's goal
is that most, if not all, embedded chips that support its mission critical
operations will be compliant by mid-year 1999.
EUA's business is dependent upon external parties, including vendors,
suppliers and business partners, for the reliable delivery of its products and
services. The Company has inquired in writing to all of its suppliers and
service providers with regard to their Year 2000 compliancy, and has
established a follow-up process. EUA has identified the third parties with
which it has a material relationship in order to establish their Year 2000
status in a timely fashion, and is continuing to do so. EUA will attempt to
replace critical vendors that it knows or has indications are not likely to be
Year 2000 compliant within a reasonable time frame.
The Cost to Address the Company's Year 2000 Issues:
Since the beginning of its efforts in 1993 to address Year 2000 issues,
EUA has expended approximately $300,000 addressing Information Services-related
issues. During 1998, EUA will expend approximately $1.2 million in capital
expenditures for purchasing two new systems that are Year 2000 compliant -- a
new telephone system and a general ledger system. Based on information
reviewed to date, management does not believe the year 2000 compliance expense
will be material to EUA's future operating results or future financial
condition.
The Risks of EUA's Year 2000 Issues and EUA's Contingency Plans:
The Company is in the process of identifying and verifying realistic
failure scenarios which will require contingency plans. While EUA has not
completed its analysis, EUA anticipates establishing a prioritized list of
potential failures with a formal contingency plan for each one deemed critical
to its ongoing operations during the first half of 1999.
Based on information reviewed to date, EUA believes its plans of action
are adequate to secure Year 2000 compliance of its critical systems and to
reduce the risk of external impacts to its operations. Nevertheless, achieving
Year 2000 compliance is subject to the risks and uncertainties described above,
and adverse effects, should they occur, could be material despite the Company's
efforts to prevent or mitigate them.
Other
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. Actual results could differ materially from these statements.
Therefore, no assurances can be given that such forward-looking statements and
estimates will be achieved.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Note C - Commitments and Contingencies: Recent Nuclear Regulatory
Commission (NRC) Actions" for a discussion of pending legal actions involving
several of the nuclear plants in which Montaup has an ownership interest.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A Consent to Action in Lieu of Annual Meeting of Stockholders
(Consent to Action) was executed April 15, 1998 by Eastern
Utilities Associates, the holder of the entire issued and
outstanding Common Stock of the Company and the only class of
stock entitled to vote at the Annual Meeting of Stockholders.
(b) The Board of Directors as previously reported to the Securities
and Exchange Commission was re-elected in its entirety.
(c) The only matters voted on in the Consent to Action was the
election of directors.
Item 5. Other Information
NEPOOL is a voluntary organization open to any person engaged in the
electric business such as investor-owned utilities, municipals, cooperative
utilities, power marketers, brokers and load aggregators. On December 31, 1996,
NEPOOL, on behalf of its participants, filed a restructuring proposal with
FERC. The key elements of the restructuring proposal are the implementation of
a regional NEPOOL Open Access Transmission Tariff (NEPOOL Tariff), the creation
of an Independent System Operator (ISO), and the restatement of the NEPOOL
Agreement to establish a broader governance structure for NEPOOL and to develop
a more open competitive market structure.
On June 25, 1997, FERC issued an order conditionally authorizing the
establishment of an ISO by NEPOOL effective July 1, 1997, affirming that the
transfer of control of transmission facilities owned by the public utility
members of NEPOOL to the ISO is consistent with the public interest under
Section 203 of the Federal Power Act.
To give market participants more choice and to foster competition, the
restructured NEPOOL proposes the unbundling of electric service in the NEPOOL
control area. The restructured NEPOOL calls for the development of competitive
wholesale markets for installed capability, operable capability, energy,
automatic generation control, and reserves. These wholesale products will be
market priced based on bid clearing pricing rather than the current cost-based
pricing. Market participants will be able to meet their responsibility for
these products by buying or selling these various services through bilateral
transactions or through the regional power exchange that will be administered
through the ISO. The installed capability market was implemented in April
1998, and the operable capability, energy, automatic generation control and the
reserve markets are expected to start during the fourth quarter of 1998.
In general, the EUA System companies support the changes to NEPOOL because
much of the cross-subsidies for sharing costs will be eliminated. These changes
will have an impact on the Company's operating revenues and costs as NEPOOL
transitions from a cost based to a bid based system.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K.
- June 26, 1998, the Registrant filed a Current Report on
Form 8-K with respect to Item 5 (Other Events).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastern Edison Company
(Registrant)
Date: August 13, 1998 /s/ Clifford J. Hebert, Jr.
Clifford J. Hebert, Jr., Treasurer
(on behalf of the Registrant and
as Principal Financial Officer)
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