UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _________________ to ___________________
Commission File Number 1-5366
EASTERN UTILITIES ASSOCIATES
(Exact name of registrant as specified in its charter)
Massachusetts 04-1271872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Liberty Square, Boston, Massachusetts
(Address of principal executive offices)
02109
(Zip Code)
(617)357-9590
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes...X.......No..........
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at April 30, 1996
Common Shares, $5 par value 20,435,997 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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<CAPTION>
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
March 31, December 31,
ASSETS 1996 1995
<S> <C> <C>
Utility Plant and Other Investments:
Utility Plant in Service $ 1,038,425 $ 1,037,662
Less: Accumulated Provision for Depreciation
and Amortization 332,820 324,146
Net Utility Plant in Service 705,605 713,516
Construction Work in Progress 12,568 7,570
Net Utility Plant 718,173 721,086
Investments in Jointly Owned Companies 69,145 70,210
Non-Utility Plant - Net 84,754 82,347
Total Plant and Other Investments 872,072 873,643
Current Assets:
Cash and Temporary Cash Investments 13,767 4,060
Accounts Receivable, Net 79,133 84,376
Notes Receivable 19,259 18,663
Fuel, Materials and Supplies 14,167 16,516
Other Current Assets 10,148 11,804
Total Current Assets 136,474 135,419
Deferred Debits and Other Non-Current Assets 191,652 191,211
Total Assets $ 1,200,198 $ 1,200,273
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shares, $5 Par Value $ 102,184 $ 102,184
Other Paid-In Capital 220,853 220,730
Common Share Expense (3,917) (3,913)
Retained Earnings 59,160 56,228
Total Common Equity 378,280 375,229
Non-Redeemable Preferred Stock - Net 6,900 6,900
Redeemable Preferred Stock - Net 26,496 26,255
Long-Term Debt - Net 431,873 434,871
Total Capitalization 843,549 843,255
Current Liabilities:
Long-Term Debt Due Within One Year 19,508 19,506
Notes Payable 42,521 39,540
Preferred Stock Sinking Fund 50 50
Accounts Payable 26,641 35,769
Taxes Accrued 10,821 4,544
Interest Accrued 8,283 10,861
Other Current Liabilities 23,918 19,931
Total Current Liabilities 131,742 130,201
Deferred Credits and Other Non-Current Liabilities 84,844 86,077
Accumulated Deferred Taxes 140,063 140,740
Total Liabilities and Capitalization $ 1,200,198 $ 1,200,273
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Number of Shares and Per Share Amounts)
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Operating Revenues $ 134,800 $ 137,967
Operating Expenses:
Fuel 23,195 22,284
Purchased Power 30,003 31,974
Other Operation and Maintenance 40,730 41,300
Depreciation and Amortization 11,123 11,757
Taxes - Other Than Income 6,470 6,557
- Current Income 6,272 3,223
- Deferred Income (1,274) 2,061
Total 116,519 119,156
Operating Income 18,281 18,811
Other Income - Net 3,368 3,425
Income Before Interest Charges 21,649 22,236
Interest Charges:
Interest on Long-Term Debt 8,649 9,660
Other Interest Expense 1,620 1,248
Allowance for Borrowed Funds Used
During Construction (Credit) (546) (558)
Net Interest Charges 9,723 10,350
Net Income 11,926 11,886
Preferred Dividends of Subsidiaries 578 581
Consolidated Net Earnings $ 11,348 $ 11,305
Weighted Average Number of
Common Shares Outstanding 20,436,755 19,998,331
Consolidated Earnings Per
Average Common Share $ 0.56 $ 0.57
Dividends Paid $ 0.40 $ 0.385
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 11,926 $ 11,886
Adjustments to Reconcile Net Income
to Net Cash Provided from Operating Activities:
Depreciation and Amortization 13,181 14,721
Deferred Taxes (877) 2,262
Non-cash (Gains)/Expenses on Sales of Investments
in Energy Savings Projects 928 (278)
Investment Tax Credit, Net (302) (303)
Allowance for Funds Used During Construction (40) (146)
Collections and sales of project notes and leases receivable 1,587 1,427
Other - Net (420) 359
Change in Operating Assets and Liabilities 6,777 (9,773)
Net Cash Provided From Operating Activities 32,760 20,155
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (14,733) (21,147)
Collections on Notes and Lease Receivables of EUA Cogenex 552 487
Equity Investment in Joint Ventures (75) 0
Net Cash (Used in) Investment Activities (14,256) (20,660)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuances:
Common Stock 1,509
Redemptions:
Long-Term Debt (3,019) (2,219)
Premium on Reacquisition and Financing Expenses (5) (30)
EUA Common Share Dividends Paid (8,175) (7,679)
Subsidiary Preferred Dividends Paid (578) (581)
Net Increase in Short-Term Debt 2,980 3,204
Net Cash (Used in) Financing Activities (8,797) (5,796)
Net Increase (Decrease) in Cash and Temporary Cash Investments 9,707 (6,301)
Cash and Temporary Cash Investments at Beginning of Period 4,060 20,109
Cash and Temporary Cash Investments at End of Period $ 13,767 $ 13,808
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Capitalized Interest) $ 8,543 $ 11,980
Income Taxes $ 973 $ 1,914
Supplemental schedule of non-cash investing activities:
Conversion of Investments in Energy Savings
Projects to Notes and Leases Receivable $ 712 $ 933
See accompanying notes to consolidated condensed financial statements.
</TABLE>
EASTERN UTILITIES ASSOCIATES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying Notes should be read in conjunction with the
Notes to Consolidated Financial Statements incorporated in the
Eastern Utilities Associates (EUA or the Company) 1995 Annual
Report on Form 10-K.
Note A - In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring
accruals) necessary to present fairly its financial
position as of March 31, 1996 and the results of
operations and cash flows for the three months ended
March 31, 1996 and 1995. Certain reclassifications have
been made to prior period financial statements to conform
to current period classifications. The year-end
consolidated condensed balance sheet data was derived
from audited financial statements but does not include
all disclosures required under generally accepted
accounting principles.
Note B - Results shown above for the respective interim periods are not
necessarily indicative of results to be expected for the fiscal years
due to seasonal factors which are inherent in electric utilities in
New England. A greater proportionate amount of revenues is earned in
the first and fourth quarters (winter season) of most years because
more electricity is sold due to weather conditions, fewer day-light
hours, etc.
Note C - Commitments and Contingencies:
Recent Nuclear Regulatory Commission (NRC) Actions
Montaup Electric Company (Montaup), the wholesale generation
subsidiary of EUA, has a 4.01% ownership interest in Millstone 3, 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 3, 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 3 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
unit owned by Connecticut Yankee Atomic Power Company, in
which Montaup has 4.5% ownership share.
In April 1996 Northeast reported that the NRC will require, among
other things, certain technical issues to be resolved before
Millstone 3 can be restarted, and that Northeast's management cannot
predict when Millstone 3 will return to service or the amount of the
incremental direct costs which will be incurred to address the issues
raised by the NRC.
While Millstone 3 is out of service, Montaup will incur incremental
replacement power costs estimated at $0.4 million to $0.8 million per
month. Montaup would bill its replacement power costs through its
fuel adjustment clause, a wholesale tariff jurisdictional to the
Federal Energy Regulatory Commission (FERC). However, there is
no comparable clause in Montaup's FERC-approved rates which at this
time would permit Montaup to recover Montaup's share of the
incremental direct costs incurred by Northeast. Northeast has not
yet estimated such costs but it is likely Montaup would be billed for
its 4.01% share of such costs.
Northeast reported that the NRC has requested certain information
concerning the 582-MW nuclear unit owned by Connecticut Yankee Atomic
Power Company, but that the NRC letter requesting the information
does not currently require that the requested information be provided
prior to restarting the unit, were it to shut down.
EUA cannot predict the ultimate outcome of the NRC inquiries or the
impact which they may have on Montaup and the EUA system. EUA is
also evaluating its rights and obligations under the various
agreements relating to the ownership and operation of Millstone 3 and
Connecticut Yankee Atomic Power Company.
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 quarters ended March 31, 1996 and March
31, 1995 were $11.3 million. Net Earnings contributions by Business Unit for
the first three months of 1996 and 1995 were as follows (000's):
Three Months Ended March 31,
1996 1995
Core Electric Business $11,613 $10,636
Energy Related Business (92) 507
Corporate (173) 162
Consolidated $11,348 $11,305
======= =======
Net Earnings of the Core Electric Business for the first quarter of 1996
increased by $1.0 million primarily due to increased kilowatthour (kWh) sales,
expense savings related to the June 1995 voluntary retirement incentive and
lower interest expense resulting from debt issues which matured in 1995.
Partially offsetting these positive impacts were restoration expenses related
to a series of storms which produced record-setting snows in the winter of
1996. Total primary kWh sales increased by 5.0% in this year's first quarter
due primarily to colder weather compared to the same period of a year ago.
Net Earnings of our Energy Related Business Unit decreased by approximately
$0.6 million in the first quarter of 1996 as compared to the same period of a
year ago. This decrease is primarily due to a decrease of $1.1 million in EUA
Cogenex Corporation's (EUA Cogenex) earnings contribution in the first quarter
resulting primarily from lower project sales and decreased earnings of its Nova
Division. This decrease was offset somewhat by a $0.9 million decrease in EUA
Energy Investment Corporation (EUA Energy) research and development expenses
recorded in the first quarter of 1996.
Operating Revenues
Operating Revenues for the first three months of 1996 decreased by $3.2
million to approximately $134.8 million when compared to the same period of
1995. Operating Revenues by Business Unit for the first quarter of 1996 and
1995 were as follows (000's):
Three Months Ended March 31,
1996 1995
Core Electric Business $122,209 $122,738
Energy Related Business 12,591 15,229
Corporate 0 0
Consolidated $134,800 $137,967
======== ========
Core Electric Business revenues decreased $0.5 million due primarily to
recoveries of decreased purchased power and conservation and load management
expenses aggregating $3.3 million as discussed below, offset by the impacts of
increased kWh sales and recoveries of higher fuel expense in this year's first
quarter.
EUA Cogenex revenues, which account for nearly all of the Energy Related
Business Unit revenues, decreased by $2.6 million due primarily to the
discontinuance of cogeneration operations in the third quarter of 1995. A $2.3
million decrease in EUA Nova Division revenues in the first quarter were offset
by increased revenues of EUA Day and the impacts of the EUA Citizens and EUA
Highland acquisitions in 1995.
Operating Expenses
Fuel expense of the Core Electric Business for the first quarter of 1996
increased from that of the same period in 1995 by approximately $900,000 or
4.1% due primarily to the increase in kWh sales and requirements, offset
somewhat by a 2.6% decrease in the average cost of fuel in the first quarter of
1996 as compared to the same period of a year ago.
Purchased Power expense for the first quarter of 1996 decreased $2.0
million or 6.2% as compared to last year's first quarter. Higher maintenance
costs billed to Montaup by the Maine Yankee and Connecticut Yankee plants in
1995's first quarter were primarily responsible for this change.
Other Operation and Maintenance (O&M) expenses for the quarter ended March
31, 1996 decreased approximately $0.6 million or 1.4% from the same period in
1995 due to the following:
Direct expenses of the Core and Corporate Business units increased by $1.3
million in this year's first quarter due primarily to increased storm
restoration expenses aggregating approximately $0.6 million and increased
employee benefits expensed as a result of lower capitalized costs.
Indirect expenses, items in which we have limited short-term control or
items which are fully recovered in rates, decreased by $1.1 million in the
first quarter of 1996 as compared to the same period of 1995. This change was
due primarily to a decrease in C&LM expenses.
Expenses of the Energy Related Business unit decreased by $0.8 million for
the period. This decrease is primarily due to lower research and development
costs expensed by EUA Energy Investment.
Depreciation and Amortization Expense
Depreciation and Amortization expense decreased $0.6 million or 5.4% in
the first quarter of 1996 when compared to last year's first quarter.
Decreased EUA Cogenex depreciation expense related to the 1995 discontinuance
of cogeneration operations was largely responsible for this change.
Interest Charges
Interest expense on long term debt decreased by $1.0 million in the first
quarter of 1996 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 Company.
Liquidity and Sources of Capital
The EUA System's need for permanent capital is primarily related to
investments in facilities required to meet the needs of its existing and future
customers.
Traditionally, cash construction requirements not met with internally
generated funds are financed through short-term borrowings which are ultimately
funded with permanent capital. At March 31, 1996, EUA System companies
maintained short-term lines of credit with various banks aggregating
approximately $150 million. Outstanding short-term debt at March 31, 1996 and
December 31, 1995 by Business Unit was as follows (000's):
March 31, 1996 December 31, 1995
Core Electric Business $ 0 $ 6,761
Energy Related Business 19,886 14,421
Corporate 21,669 18,358
Consolidated $41,555 $39,540
======= =======
For the three months ended March 31, 1996, internally generated funds
available after the payment of dividends amounted to approximately $18.8
million while the EUA System's cash construction requirements amounted to
approximately $14.7 million for the same period. Various laws, regulations and
contract provisions limit the use of EUA's internally generated funds such
that the funds generated by one subsidiary are not generally available to fund
the operations of another subsidiary.
On April 15, 1996, the Trustees of EUA voted to increase the quarterly
dividend 1.5 cents per share from 40.0 cents per share to 41.5 cents per share.
The first quarterly dividend at the new rate of will be payable May 15, 1996 to
shareholders of record on May 1, 1996.
Electric Utility Industry Restructuring:
The electric industry is in a period of transition from a traditional rate
regulated environment to a competitive marketplace. While competition in the
wholesale electric market is not new, electric utilities are facing impending
competition in the retail sector.
In 1995, Eastern Edison, Blackstone and Newport participated with
collaborative groups in their respective states consisting of other utilities,
industrial users, environmental groups, governmental agencies and consumer
advocates in submitting similar sets of interdependent principles with their
respective state regulatory commissions addressing electric utility industry
restructuring. These filings were intended to be statements of the consensus
position by the signatories of the principles that should underlie any electric
industry restructuring proposal and include but are not limited to principles
addressing stranded cost recovery, unbundling of services and demand side
management programs. Each set of principles was submitted on the condition
they be approved in full by the respective Commissions.
The Rhode Island Public Utilities Commission (RIPUC) accepted all but one
of the principles submitted by the Rhode Island Collaborative with minor
modifications to certain language in others and added a new principle which
supports negotiation (as opposed to litigation) to resolve conflicts as
restructuring moves forward and directed the Rhode Island Collaborative to
proceed with negotiations on the issues presented in the principles and to
submit a progress report, which was submitted in February 1996. The one
principle that was not accepted provided for subsidization of renewable energy
sources.
In February 1996 a bill was introduced in the Rhode Island legislature
that, if enacted, would allow customer choice of electricity supplier
commencing January 1, 1998 for large industrial customers and phasing in all
customers by January 1, 2001. The proposed legislation also provides for
recovery of "stranded investments" through a transition charge initially set
at three cents per kWh.
EUA believes that development of the proposed legislation should have been
conducted in a public forum so that all interested stakeholders could have
participated. However, EUA believes that competition, if done right, whether
through legislation or regulation can benefit customers. There are substantial
issues about the proposed legislation which EUA is currently reviewing.
In August 1995, the Massachusetts Department of Public Utilities (MDPU)
issued an order enumerating principles, similar to those submitted by the
Massachusetts Collaborative, that describe the key characteristics of a
restructured electric industry and provides for, among other things, customer
choice of electric service providers, services, pricing options and payment
terms, an opportunity for customers to share in the benefits of increased
competition, full and fair competition in the generation markets and incentive
regulation for distribution services where regulation will still exist. This
order sets out principles for the transition from a regulated to a competitive
industry structure and identifies conditions for the transition process
which will require investor-owned utilities to unbundle rates, provide
consumers with accurate price signals and allow customers choice of generation
services. The order also provides for the principle of recovery of net, non-
mitigable stranded costs by investor-owned utilities resulting from the
industry restructuring.
Each Massachusetts investor-owned utility is required to file restructuring
proposals for moving from the current regulated industry structure to a
competitive generation market. The schedule for the filing requirement is
staggered. The initial group of utilities was required to file their proposals
in February 1996. The second group is required to file within three months of
the MDPU's orders on the first group of submissions. Eastern Edison Company
filed its proposal, "Choice and Competition" (see below) with the first group
of proposals and is awaiting MDPU review.
On May 1, 1996 the MDPU issued proposed rules for the restructuring of the
electric industry which 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 before final rules are adopted in September 1996.
The proposed rules provide for, among other things:
- an independent system operator of the regional transmission system in
New England operating within established reliability standards and a
power exchange which would facilitate a short-term pool for energy
transactions;
- functional separation of electric companies into generation,
transmission and distribution corporate entities;
- a reasonable opportunity for recovery of net, non-mitigable
stranded costs periodically subject to some degree of reconciliation;
- a price cap system for performance based regulation of electric
distribution companies;
- distribution company obligation to provide electric distribution service
to all customers within its service territory;
- environmental protection and support for renewable energy resources and
energy efficiency;
- implementation of unbundled rates beginning January 1, 1997 and a
competitive generation market by January 1, 1998;
The order also encourages settlements of outstanding company specific
electric restructuring filings discussed above. EUA is currently reviewing the
order and will continue to be an active participant in this proceeding.
In January 1996, EUA unveiled its preliminary proposal for a restructured
electric utility industry called "Choice and Competition" and began discussions
with the Rhode Island and Massachusetts Collaboratives. The plan proposes,
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 company believes the plan, which requires participation
by all New England parties, satisfies the principles adopted in both Rhode
Island and Massachusetts, and provides a fair and equitable transition to a
competitive electric utility marketplace for all parties.
Historically, electric rates have been designed to recover a utility's
full costs of providing electric service including recovery of investment in
plant assets. Also, in a regulated environment, electric utilities are subject
to certain accounting rules that are not applicable to other industries. These
accounting rules allow regulated companies, in appropriate circumstances, to
establish regulatory assets and liabilities, which defer the current financial
impact of certain costs that are expected to be recovered in future rates. EUA
believes that its Core Electric operations continue to meet the criteria
established in these accounting standards. Effects of legislation and/or
regulatory initiatives or EUA's own initiatives such as "Choice and
Competition" could ultimately cause EUA's Core Electric companies to no longer
follow these accounting rules. In such an event, a non-cash write-off of
regulatory assets and liabilities could be required at that time.
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.
Item 5. Other Information
On April 24, 1996, the Federal Energy Regulatory Commission (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 became effective April 21, 1996
subject to refund. Montaup believes these tariffs, scheduled for review by
FERC later in 1996, to be in compliance with FERC's April 24th rulings. EUA
remains committed to achieving a fair and equitable transition to a competitive
electric utility marketplace.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - On April 11, 1996, the Registrant
filed a current report of Form 8-K with respect to Item 5
(Other Events).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastern Utilities Associates
(Registrant)
Date: May 15, 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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