ML20206J040
| ML20206J040 | |
| Person / Time | |
|---|---|
| Site: | Millstone, Seabrook, 05000000 |
| Issue date: | 12/31/1985 |
| From: | Childs F, Tenney C FITCHBURG GAS & ELECTRIC LIGHT CO. |
| To: | |
| Shared Package | |
| ML20206H943 | List: |
| References | |
| NUDOCS 8606260388 | |
| Download: ML20206J040 (35) | |
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l FITCIlllURG GAS AND ELECTRIC LIGIIT COMPANY 1985 ANNUAL REPORT i
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m FG&E serves an area of approximately 170 square miles in north central Massachusetts with a population of approximately 80.000 The Company provides gas and electnc service to Fitchburg Lunenburg. Townsend and Ashby and gas service to the communities of West-mins *er ar.d Gardner FG&E serves approximately 24 000 electric and 15.000 gas customers Annual Meeting The annual meeting of common shareholders is scheduled to be held at The First National Bank of Boston, 100 Federal Street, Boston, Massachusetts,in the Directors' Room on the Second Floor, on Thursday, April 10,1986, at 10.30 A.M.
10 K The Company's annual report for 1985 on Form 10-K, as filed with the Securities and Exchange Comission, is available without charge upon written request to Peter J. Stuigis, Vice President and Treasurer, Fitchburg Gas and Electric Light Company,40 Constitution Drive, Bedford, New Hampshire 03102.
Transfer of Stock The Company's Transfer Agent is The First National Bank of Boston, RO. Box 644, Boston, Massachusetts 02102.
Dividend Reinvestment Plan A Dividend Reinvestment and Stock Purchase Plan (Plan) is available to all holders of record of the Com-pany's Common and $4 00 Preferred Stocks. This Plan provides thesa shareholders with a simple and eco-nomical way to increase their investments in the Company automatically each quarter by reinvesting their dividends and/or making optional cash payments quarterly towards the purchase of additional shares of Common Stock. The price of shares so purchased - whether through reinvested dividends or optional cash payments - will be the average cost of the shares purchased for all Plan participants, plus a pro rata share of any brokerage commission, For information wnte to: The First National Bank of Boston, FGE Divi-dond Reinvestment Plan. PO Box 1681, Boston, Massachusetts 02105.
Trustee The State Street Bank and Trust Company, PO Box 5303, Boston, Massachusetts 02200,is Trustee under indentures covenng the Company's Notes due March 1,1995 and May 1,1999, respectively.
.gu FITCHBURG GAS AND
- w ELECTRIC LIGHT COMPANY FINANCIAL HIGHLIGHTS OF 1985
_1985 1984 (119.488)
$ 3.592.660 Net (Loss) income (Loss) Earnings per Average Common Share...
$(0.81)
$2.02 Dividends Paid per Common Share...
$0.00
$2.30 Electric Operating Revenues..
$ 33.254,246
$ 36,510,187 Gas Operating Revenues
$ 20.733.297
$ 19.650,463 Total Operating Revenues.
$ 53,987,543
$ 56.160,650 Kilowatt-Hours of Electricity Sold...
344.025.897 361,389,273 Average Annual Kilowatt-Hour Sales per Residential Customer......
4.999 5.046 Number of Electric Customers..
23,914 23,542 Thousands of Cubic Feet of Gas Sold..
2.661,566 2.783.616 Average Annual Cubic Feet Sales per Residential Customer.......
91.769 95.342 Number of Gas Customers...
15.160 15,059 Net Utility Plant....
$ 47,779.984
$ 74,626,748 Number of Employees 122 146 Number of Common Shareholders of Record 2.808 3,346 Number of Preferred Shareholders of Record..
298 330 TABLE OF CONTENTS 1
Financial Highlights......
Litter to Shareholders.
.2 Y;ar in Review 3
Consolidated Balance Sheets...
.... 10 Consolidated Statements of Operations..............
.. 12 Consolidated Statements of Changes in Financial Position....
.13 Consolidated Statements of Retained Earnings.....................................
. 14 Notes to Consolidated Financial Statements.................
.14 Report of Independent Certified Public Accountants..
.. 26 Management's Discussion and Analysis cf Financial Condition and Results of Operations....... 27 Selected Financial Data.
.. 30 Quarterly Financial Data.....
...................................................31 This report. includmg the financial statements contained herein, is submitted for the general information of theshareholdersof theCompany,andis notintended toinduce,orforuseinconnection with,any saleor purchase of securities.
1
i TO OUR SHAREHOLDERS:
i j
The logo on the cover of the Company's 1985 annual report portrays Fitchburg Gas and Electric Light l
Company emerging from the most difficult chapter in its history, a year which saw the Company's very i
existence threatened. Neve' before had the Company's shareholders, management, employees and f
customers faced as many aaversities as were dealt with in 1985. The "1985 Year In Review" section of i
this annual report presents in detail the events of the past year. Rather than go into those specifics in j
this letter to you, we will focus on where your Company is now and where it is going.
While the Company has reached an agreement in principle to sell its interest in the Seabrook Project, i
the execution of a definitive agreement and the actual completion of this transaction are important to j
1 the ongoing financial recovery which began with the long-term debt financing in August 1985. A sale of the Company's Seabrook interest would provide an influx of cash to further reduce outstanding bank I
indebtedness, but, more importantly, would also allow consideration for resuming payment of'a l
dividend on the Common Stock. We recognize that payment of a dividend is very important to our shareholders and you can be assured that such action will be taken as soon as it is appropriate to do so. If a sale of the Company's Seabrook interest were to be ccasummated by June 1986 and based upon our present projections, a common dividend payment could be considered during the third j
quarter of 1986.
i As we enter 1986, the Company's management is poised to continue the recovery begun in the second 3
i half of 1985. Many arduous decisions had to be made during 1985 which again reinforced the delicate i
balance required in the regulated utility business between shareholders, customers, regulators and po-l litical consideration. We believe the achievement of this sensitive balance has led to the financial re-l covery evidenced to date and has provided a direction for the Company's future. The challenges that i
faced the Company are not totally behind us, but we believe that we are well positioned to overcome those remaining in the future. Our objectives will always be aimed toward enhancing your investment in the Company while recognizing the need to provide quality service to our customers at a reasonable i
j cost. We are committed to the achievement of both objectives and have in place a fine management team that has brought the Company through the darkest days in its history. Our team is amply prepared to perform in an excellent fashion for you in the future.
it is with a great deal of pleasure, and the feeling of accomplishment, that we present in this report the
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current outlook of your Company. Realizing that the past two yers has been a difficult period for us all, i
but optimistically looking forward to 1986 and the future, the Company's management and Board of Directors express their utmost thanks to each of you for your continuing support of the Company.
1 i
,2 % ~A4 M s_
Chairman of the Board j
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I President i
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v 1985 YEAR IN REVIEW EARNINGS sely affecting earnings was the nonrecurr.ag adjustment to reflect the write-off of the Com-Net (loss) income applicable to Common Stock pany's investment in a cancelled customer for 1985, after Preferred Stock dividend require-accounting system, an increase in the amortiza-ments, was a loss of $1.1 million, a decrease of tion of cost of abandoned properties, an increase 141% from 1984. Loss per share of Common in other operating expenses, an increase in inter-Stock, on a greater number of shares outstand-est on long-term debt, an increase in electric ing, was $(0.81) as compared to earnings of demand charges and a decrease in kilowatt hour
$2.02 in 1984.
(KWH) sales. Earnings were favorably affected by a full year of the electric and gas rate The decrease in Net income in 1985 reflects increases granted in December of 1984, the primarily the nonrecurring adjustment to record electric rate increase granted in November of the partial write-off of the Company's net invest.
1985, an increase in non-operating income and ment in the abandoned nuclear generating facili.
an increase in firm gas sales volume.
ties, Seabrook Units No.1 and No. 2. Also adver-COMMON STOCK MARKET PRICE AND DIVIDENDS The Common Stock of the Company is listed on the American Stock Exchange (Symbol: FGE) and the Boston Stock Exchange. The number of holders of record of the Compar.y's Common Stock at December 31,1985 was 2,808.
CASH DIVIDENDS PAID PER SHARE ON THE COMMON STOCK OF THE COMPANY 1st 2nd 3rd 4th The Quarter Quader Quarter Quarter Year 1985.......
1984..
$.65 S.65 S.65
$.35
$2.30 PRICE RANGE OF COMMON STOCK 1st 2nd 3rd 4th Quader Quader Quader Quader 1985.....
High 11 %
9%
10%
13 Low 7%
6%
8%
8%
1984..
High 19 %
17%
17 %
18 Low 17 13 %
15%
8%
The Company's actions with respect to payment of future dividends will be dependent on an evaluation of future earnings, capital requirements, cash position and financial condition, including the fulfillment of dividend restriction provisions contained in the Company's long term debt instruments (described in Note 4 of Notes to Consolidated Financial Statements) and a resumption of Common Stock dividend payments is contingent upon resolution of the uncertainties surrounding the Company's involvement in the Seabrook Project (seo Management Discussion and Analysis of Financial Condition and Results of Operations).
3 i
y Sales of electric energy to approximately 24.000 years of the recovery period and appronimately electric customers on the Company's system
$3.5 million for the subsequent thirty years. Re-decreased by 4.8% in 1985. This reduction covery of such amounts will be from retail cus-occurred because of a decrease in industrial tomers of the Company through a Seabrook sales, while there was modest growth in residen-amortization surcharge that will apply to all kilo-tial and commercial sales. Firm gas sales in 1985 watthours (KWH) billed to such customers.
increased 1% over those of 1984, reflecting rela-tively similar weather conditions between the two The Settlement Agreement is conditioned upon years.
the Company not making any further payments to the Seabrook Project and certain other stipula-tions. It further requires the Company to attempt TAXABILITY OF PREFERRED DIVIDENDS to sell its interest in the Seabrook Project. If the J
Company makes payments to the Seabrook Proj-The Company presently estimates that, subject ect after the rate surcharges provided for in the to a final review by the Internal Revenue Service, Settlement Agreement and the tariffs go into 100% of the dividends paid on its Cumulative effect, then any amounts previously collected by Preferred Stocks in 1985 are a return of capital the Company in connection with such rate sur-for Federal income tax purposes and accordingly charges are subject to forfeiture and the Com-are not taxable as dividend income.
pany may be barred under certain circumstances from seeking any recovery of its Seabrook investment through rates. To the extent the RECOVERY OF INVESTMENT IN SEABROOK Company realizes any proceeds from the sale or UNITS NO.1 AND NO. 2 other disposition of its interest in the Seabrook On October 3,1985, the Company and the Project,60% of those proceeds will be applied to Attorney General of The Commonwealth of Mas-reduce the amount that the Company may re-sachusetts (Attorney General) jointly submitted a cover through the Seabrook Unit No.1 amortiza-Motion for Entry of Order According to the tion rate surcharge. If the Company does not Terms as Stipulated by the Parties and Set Forth enter into a definitive agreement for the sale of Herein (Settlement Agreement) to the Depart-its Seabrook interest by May 1,1986, then for ment of Public Utilities (DPU) with respect to each month thereafter that the Company has not recovery of the Company's investment in Sea-entered into an agreement an additonal 8% of brook Units No.1 and No. 2. On October 30, the proceeds to the Company from any such 1985, the DPU issued an order approving the sale will be applied to reduce the amount of the Settlement Agreement and the Company's pro-Company's recoverable Seabrook investment. If posed tariffs which were submitted to the DPU a sale of the Company's Seabrook interest is not along with the Settlement Agreement. The tariffs consummated until after October 1,1986, then are designed to increase the Company's base 100% of the proceeds to the Company will be electric revenues to recover a portion of the applied to reduce the amount of the Company's costs associated with the Company's investment recoverable Seabrook investment.
in the Seabrook Project pursuant to the Settle-ment Agreement.
As previously reported, the Company has with-l held its payment of construction and other costs The Settlement Agreement provides, among of the Seabrook Project since May 15,1985, in other things, that the Company will be allowed to the aggregate amount of $2,641,960 at December recover 55% of its after-tax investment in Sea-31,1985. On May 29,1985, the Company brook Unit No. 2 over the two-year period commen-received a Request for Arbitration pursuant to cing November 1,1985, with no carrying charges the Joint Ownership Agreement dated May 1, over such period, and 60% of its after-tax invest-1973, as amended, (JOA), for the Seabrook Pro-ment in Seabrook Unit No.1 over the subse-ject in which six of the Seabrook participants quent thirty-year period, with carrying charges of asserted that the Company's withholding of its 14% allowed on the averaged unamortized bal-May 15,1985 Seabrook payment constituted a ance during such period of time. Based upon the breach of the JOA. The Company cannot predict Company's investment as of October 31,1985, what impact,if any, the Settlement Agreement less accrued liabilities to the Seabrook Project, will have on this arbitration proceeding.
as defined in the Settlement Agreement, the Company will receivo annual revenuo increases The financial statements in this report reflect the of approximately $2.6 million for the first two rate treatment accorded the Company in the 4
above-mentioned DPU order dated October 30, including the interest rate, on July 30,1985. The 1985. The Company's investment in Seabrook proceeds from the financing were used to reduce Unit No.1 has been reclassified from Utility the short-term indebtedness of the Company.
Plant-Construction Work in Progress to Deferred Debits-Unamortized Cost of Abandoned Prop-erty and the investment in Seabrook Unit No. 2 CAPITAL REQUIREMENTS has been transferred from Deferred Debits-Other Capital expenditures in 1985, including an al-to Deferred Debits-Unamortized Cost of Aban-lowance for funds used during construction doned Property. During the third quarter of 1985, (AFUDC), amounted to $10.8 million compared the Company charged against operations that to $11.5 million and $12.3 million in 1984 and portion of its net investment in Seabrook Units 1983, respectively. These amounts related to No.1 and No. 2, amounting to $3,041,480 and costs associated with the continued investment
$1,678,753, respectively, which had been deter-in jointly-owned nuclear plants and expenditures mined to be non-recoverable for accounting for transmission, distribution and other general purposes. (For further details see discussion of lant facilities. (See section regarding " Recovery this transaction in Note 9 to the Consolidated of Investment in Seabrook Units No.1 and No. 2" Financial Statements.) This wnte-off reduced, on for discussion of withheld construction payments an aggregate basis, earnings per average com-relating to the Seabrook Project.)
mon share by $3.59 for 1985.
Capital expenditures for 1986, inclouang AFUDC, The Company began amortizing the remaining are estimated to be $4.6 million. This amount recoverable costs of Unit No. 2 over two years includes $967,000 relating to 1986 construction beginning November 1,1985. The remaining requirements and AFUDC for Millstone Unit No.
recoverable costs of Unit No.1 will be amortized 3, with the remainder directed to local construc-over thirty years beginning November 1,1987.
tion requirements. (See section regarding " Mill-stone Unit No. 3" for discussion of construction PROPOSED SALE OF SEADROOK INTEREST With the completion of Millstone Unit No. 3 in On January 3,1986 the Company and Eastern 1986 and the rate recovery allowed for the Sea-Utilities Associates, a Massachusetts business brook Project in 1985, the Company,s ongoing trust (EUA), jointly announced that they had capital requirements will no longer include agreed in principle to a sale of the Company's amounts for construction of jointly-owned interest in the Seabrook Project to a New Hamp-nuclear plants. The completion of the Company's shire subsidiary of EUA.
financial requirements for nuclear construction p
C a em poe ns n
ego at on an exe u i of a def nitive agree-its franchised service territory.
ment and to the fulfillment of a number of condi-tions, including the receipt of certain regulatory approvals. The Company cannot predict whether or when a definitive agreement with EUA will be SEABROOK-RELATED DEVELOPMENTS cxecuted, or whether the conditions in said agreement will be satisfied and the sale ulti-Public Service Company of mately consummated.
New Hampshire (PSNH)
On September 13,1985, the New Hampshire Public Utilities Commission (NHPUC) issued an FINANCING order allowing PSNH to increase its weekly cash On August 8,1985, the Company sold $9 million construction expenditures on the Seabrook Proj-of its 14%% Notes due August 1,1992 (Notes) at ect, effective September 1,1985, and to issue a price of 89.5% of the principal amount of the
$345 million of long-term debt securities to Notes, resulting in proceeds of approximately finance its share of the remaining construction
$8,055,000 prior to expenses of issue. Merrill costs of the Seabrook F^oject. On January 31, Lynch Capital Markets secured a buyer for the 1986, the New Hampshire Supreme Court Notes which will have a yield to maturity of (NHSC) rejected appeals from the NHPUC's 17.13% over the seven-year period. The DPU September 13 order which had challenged that approved the terms and conditions of the sale, order on a variety of grounds. PSNH thereupon 5
announced that it would seek to sell an amount treatment of their unrecovered investment in the of long-term bonds sufficient to permit it to Seabrook Project from their respective state finance its share of the remaining construction regulatory authorities. The Company cannot costs of the Seabrook Project within the follow-predict whether all required regulatory approvals ing several weeks. While the Company cannot will be obtained or whether, even if such predict whether PSNH will be able to success-approvals are obtained, the purchases and sales fully sell such amount of long-term bonds, the will be consummated.
NHSC's decision permitting PSNH to issue such bonds removed a major impediment to the suc-cessful completion of Seabrook Unit No.1.
Licensing Purchase of Interests of Maine and In order for Seabrook Unit No.1 to commence commercial operat,on, it is necessary that the i
Vermont Participants Nuclear Regulatory Commission (NRC) issue an On July 12,1985, EUA announced that it was operating license. As a condition to the issuance negotiating to acquire the 6% interest of Central of the license, the states of Massachusetts and Maine Power Company (CMP) in the Seabrook New Hampshire must certify plans to the Federal Project. On July 24,1985, EUA signed letters of Emergency Management Agency (FEMA) for intent with Bangor Hydro-Electric Company evacuation of areas within a ten-mile radius of (Bangor Hydro), Maine Public Service Company the Project in the event of an emergency.
(MPS) and Central Vermont Public Service Cor-poration (Central Vermont) for the purchase by All seventeen New Hampshire municipalities EUA of such companies' 2.2%,1.5% and 1.6%
which are affected by the evacuation plan have interests, respectively, in the Seabrook Project.
participated in the planning process, and New l
EUA agreed to pay approximately $56 million in Hampshire has submitted several drafts of an I
the aggregate for the interests of CMP, Bangor evacuation plan to the FEMA for its review. All six Hydro and MPS, and approximately $9.3 million of the affected Massachusetts municipalities for the interest of Central Vermont. EUA also have also participated, but the Town of Ames-agreed to reimburse CMP, Bangor Hydro, MPS bury, Massachusetts, voted at a town meeting in and Central Vermont for all payments made by November 1985 to prohibit town officials from them for their respective shares of the construc-further participating in the planning process. The tion costs of the Seabrook Project from June 1, refusal of the Town of Amesbury to further par-1985 through the dates of the closings of the ticipate in the planning process may adversely respective purchases and sales, and to pay inter-affect the willingness of The Commonwealth of est and certain other amounts at the closings.
Massachusetts to approve an evacuation plan, since the Governor of Massachusetts has stated On January 27,1986, EUA announced that it was that he will not certify a plan to the FEMA unless willing to increase the amounts it would pay for all affected Massachusetts municipalities have the interests of CMP, Bangor Hydro, MPS and approved their respective plans. An evacuation Central Vermont by an aggregate of $30.9 mil-drill to test the effectiveness of the most recent lion. EUA stated that the higher prices were draft of the plan is scheduled for February 26, because EUA did not perceive the Seab,ook Pro-1986, but Massachusetts officials have stated that ject to be as risky an investment as when it first Massachusetts will not participate in that drill j
offered to buy the additional interests, and because of the lack of sufficient time to review because it felt that it would improve the attrac-the evacuation plan and prepare for the drill.
tiveness of the proposed purchases and sales to the Maine Public Utilities Commission and the An internal memorandum from the Attorney Vermont Public Service Board, which must General's office which was made public on Feb-approve the purchases and sales.
ruary 12,1986, stated that, as a condition to certi-fication of an evacuation plan, Massachusetts i
EUA has stated that consummation of the should require that the owners of the Seabrock purchases and sales is conditioned upon the Project commit to protect summertime beach receipt of all necessary state and Federal populations in the evacuation area from a regulatory approvals, and CMP, Bangor Hydro, nuclear accident at Seabrook Unit No.1, either MPS and Central Vermont have stated that by not operating Unit No.1 during the summer consummation of the sales is also conditional or by providing shelters on affected beaches.
Upon the receipt of adequate rate-making The Company cannot predict whether such a I
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6
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commitment can or will be made, or what effect HYDRO-QUEBEC ENERGY this might have on the willingness of Massachu-Phase 1 setts officials to certify an evacuation plan to the FEMA.
Construction of Phase 1 of the Quebec Hydro-Electric Corporation (Hydro-Quebec) intercon-It is possible that the NRC will not grant an oper-nection with New England utilities is approach-ating license for Seabrook Unit No.1 until Massa-ing completion with testing expected to be con-chusetts certifies an evacuation plan acceptable ducted in April 1986. The 450 kilovolt direct to the FEMA. If Massachusetts fails to certify current (DC) transmission line extends from the such a plan or delays its certification, it would Comerford switching station in Monroe, New adversely affect the commencement of commer-Hampshire, to the DesCantons substation in cial operation of Seabrook Unit No.1 and the Sherbrooke, Quebec, with AC/DC converter sta-total cost of Unit No.1, which are presently pro-tions at each end of the transmission line.
jected by PSNH to be October 31,1986 and
$4.56 billion, respectively. Because of delays in All required state and Federal regulatory appro-completing the evacuation plans, the current vals to build and finance the facilities, as well as NRC schedule for hearings on the licensing of permission to engage in the purchase and sale of Unit No.1 and the refusal of Massachusetts to electricity with Hydro-Quebec, have been participate in the February 26,1986 evacuation obtained. Commercial operation of Phase I is drill, it appears that Seabrook Unit No.1 may not expected to begin as early as July 1986.
begin commercial operation on October 31, 1986. PSNH has stated that each month's delay After the payment is made for the Phase i trans-thereafter might increase the total cost of Unit mission facilities, it is expected that nearly $700 No.1 by approximately $50 million. State and million in fuel savings will result from the pur-local opposition has delayed licensing of another chase of 33 billion KWH of electricity from nuclear generating plant located on Long Island, Hydro-Quebec for New England's electric cus-New York, for such an extended period that the tomers for approximately eleven years.
inability of the constructing utility to earn a cash return on its investment in the plant threatens that utility's solvency.
Phase 11 A ten-year contract for 7 billion KWH of guaran-The Company cannot predict whether or when teed energy annually was executed between the NRC will issue an operating license for Sea-Hydro-Quebec and the New England Power Pool brock Unit No.1.
(NEPOOL) on October 14,1985.
MILLSTONE UNIT NO. 3 Under the terms of the contract, kr'own as Phase ll of Hydro-Quebec, the guaranteed deliveries of Progress on Millstone Unit No. 3 during 1985 7 billion KWH annually to all the participants will indicates that the nuclear generating unit in be made according to schedules established in Waterford, Connecticut, should meet its in-advance with predetermined limits. The monthly service target date of May 1986. The operating delivery schedules are to be fixed by Hydro-license was received from the NRC on November Quebec with the weekly and hourly deliveries 25,1985. Fuel loading into the reactor has been scheduled by the New England Utilities, the completed and low-power operational testing is designation for the electric utilities in New Eng-under way. On January 29,1986, the NRC land belonging to NEPOOL.
unanimously granted a full-power operating license for Unit No. 3.
The annual price of energy from Hydro-Quebec Phase ll for the first five years of the contract will The Company has a 0.217% ownership interest be based on 80% of NEPOOL's average fossil in the Unit which represents 2.5 megawatts of fuel cost for the previous year. During the next electric capacity. No further base rate increases five years, the price will be based on about 95%
to reflect the Company's costs for its ownership of the average fossil fuel cost in New England for share of the Unit are anticipated for the near the previous year.
future. This is expected to be accomplished by a revamping of the Company's power supply con-It is estimated that Phase ll will save the con-tracts due to the expiration in late 1986 of a con-sumption of approximately 12 million barrels of tract for capacity from Boston Edison Company.
oil annually in New England, resulting in a net l
7
l fuci cost savings estimated to be in excess of $1 serving the Company's service territory will par-billion over the ten-year agreement.
ticipate in these new Federal programs or the potential effect on natural gas prices, natural gas The Company's share of the combined Phase I availability, or competition in the natural gas and Phase 11 projects is expected to be approxi-industry.
mately 8.5 megawatts.
As a result of these Federal policies favoring transportation of gas from all sources by pipeline facilities, some industrial customers in Massa-GAS OPERATIONS chusetts have petitioned the DPU to require local In order to provide for future growth and reduce distribution companies to transport gas for cus-our dependence C1 supplemental supplies, the tomers who may choose to purchase their gas Company is engaged in an active gas supply supplies from other sources. The Company can-program. During 1985, the Company executed n t predict what action the DPU may take in l
an agreement with Penn-York Energy Corpora-response to this petition or the resulting effect on f
tion which would increase our underground the Company s sales.
storage capacity from 136,257 MCF (thousand cubic feet) of natural gas to 300,000 MCF begin-The Company remains an active participant in t
ning April 1,1986 and ending March 31,1995.
two Canadian gas supply projects, Boundary The Company also executed a letter of intent Gas Inc. and Sable Island. On December 9,1985, with Steuben Gas Storage Company to purchase the Company executed a precedent agreement m
50,000 MCF of storage capacity for a twenty-year with Tennessee to provide an, terim transporta-i period in the proposed Thomas Corners Storage tion service for the Company's volumes from the Project scheduled for operation in 1987. Suc-Boundary Project. The agreement will provide cessful completion of the latter project would the Company with 514 MCF of daily capacity increase the Company's total underground stor, and an annual volume entitlement of 181,610 age capacity to 400,000 MCF of natural gas.
MCF of natural gas beginning on November 1, 1986.
The Company has traditionally relied on natural gas supplied by Tennessee Gas Pipeline Com-HUMAN RESOURCES pany (Tennessee) to meet the major portion of its gas supply needs. Gas prices have reacted For the employees of the Company,1985 will be favorably to increasing competition from alterna-remembered as a year in which their patience 4
tive fuels and Federal regulatory policies and endurance were tested. The Company's very designed to increase competition in the natural existence was threatened due to the inability to 1
gas industry. In an effort to foster even greater secure regulatory approval for long-term finan-competition in the natural gas industry, the Fed-cing in a timely manner, which resulted in the eral Energy Regulatory Commission (FERC),
implementation of a severe cash conservation which regulates interstate natural gas pipeline program. Initiation of the conservation measures companies, issued new regulations and adopted resulted in the furloughing of approximately 32%
new policies in 1985 resulting in new programs.
of the Company's workforce. For fourteen weeks if pipelines choose to participate in the new pro-operations were slowed with primary focus on grams established in this proceeding, local dis-only emergency construction and system main-tribution companies and end-users will be able to tenance, elimination of all outside contractors reduce their existing purchase obligations from and overtime except for emergencies and a pipeline suppliers up to 100% over the next five freeze on management salaries. Employees who years, purchase gas from other producers or remained during the fourteen-week layoff pipelines, and require existing pipeline suppliers excelled in the face of adversity, despite the to transport the gas supplies. These new pro-numerous restrictions placed on the Company's grams would offer the Company new gas supply operations.
opportunities, but would also result in greater competition among pipelines and distribution in August, following completion of the long-term companies, among two or more distribution financing, permanent employees who had been companies, and between producers and pipe-laid-off were recalled and faced the challenge of lines or distributors. Because of continuing returning to provide the excellence of service to i
j uncertainties at the Federal and state regulatory which our customers have been accustomed levels, it is too early to predict whether pipelines over the past 133 years.
8
The 122 women and men of the Company con-H: ward W. Evirs, Jr.
tinue to serve the six communities in our service Accepts State Department Assignment territory, not only in the workplace, but in many Howard W. Evirs, Jr., a Director since 1969 and voluntary positions. Many employees actively former President of the Company, resigned from participate,n municipal committees, church the Board following his appointment by the i
groups and fraternal and civic organizations United States Agency for international Develop-which allows them to interact with customers of ment as a management and financial advisor to the Company, thus bringing about a better the Belize Electricity Board in Belize, Central understanding of the utility industry.
America, in his new assignment, Mr. Evirs, among other duties, is responsible for restructur-in May 1985, the Company and The Brotherhood ing the Electricity Board's debt, creating a of Utility Workers of New England, incorporated, budget system and establishing a diversion pol-Local No. 340, agreed to a new two-year con-icy to reduce the amount of unaccounted-for tract. In addition to resolving work-related issues, electricity.
wage increases were granted amounting to 4%
I and 3.8% effective May 1,1985 and May 1,1986.
Mr. Evirs began his career with the Company in respectively.
1948 as a student engineer prior to receiving both his Bachelor of Science and Master of Bus-Rising medical insurance costs dictated the need iness Administration Degrees from Northeastern to reassess the benefits offered to employees University. Mr. Evirs rose through the ranks as he and to provide health insurance coverage at was promoted to general superintendent of reasonable costs. As a result, the Company now the Company,n 1%3, Vice President in 1965,,
i offers three health plans to employees, two of Executive Vice President in 1969 and President in which focus on prevention as well as hospital 1970, a title he held until his ret,rement in late i
coverage through health maintenance 1983.
organizations.
The Company congratulates Mr. Evirs on his The employees' Activities Association continues newest endeavor with the Belize Electricity to remain energetic in sponsoring activities for Board and is appreciative of his many contribu-employees and retirees. The Association pro-tions to the Company during his thirty-seven motes fellowship and goodwill by conducting years of seMce.
events which include social gatherings and trips to sporting events.
ORGANIZATION Howard W. Evirs, Jr. and J. Parker Rice, Jr. were elected as Directors of the Company for five-year terms at the annual meeting of common share-holders on April 11,1985. Approximately 71% of the common shares were represented.
At the Directors' meeting on December 11,1985, G. Arnold Haynes was elected a Director of the Company to fill the unexpired term of Howard W.
Evirs, Jr., whose resignation as a Director was accepted by the Board.
Mr. Rice is a Director, President and Treasurer of Hyland/ Rice Office Products, Inc., an office prod-ucts dealer, and a Director and President of Hyland/ Rice Business Systems, Inc., a small bus-iness computer dealer. Both firms are located in Fitchburg. Mr. Haynes is President and Principal of Haynes Management Inc., a real estate devel-opment and management firm located in Welles-ley Hills, Massachusetts.
9
CONSOLIDATED BALANCE SHEETS ASSETS December 31, 198.5 198_4 Utility Plant (at cost):
Electric
$32.807.665
$32,409,270 Gas 15,662.835 15.499,874 Common 699,674 655,961 Construction work in progress (Note 10) 13.426,775 39.723,105 Utility Plant.
62,596,949 88,288,210 Less: Accumulated depreciation (Note 1).
14.816, % 5 13,661.462 Net Utility Plant 47,779,984 74.626.748 Miscellaneous Physical Property (at cost) 32,387 32.387 Investments (Note 1).
55,304 55,304 Current Assets:
Cash.
981,082 1,337,474 Accounts receivable-less allowance for doubtful accounts of
$571,694 and $471,189..
7,277,851 6,778,726 Refundable income taxes.
121,024 88.150 Materials and supplies (at average cost)..........
801.456 908,750 Prepayments....
1,434,192 699,301 Total Current Assets.
10,615.605 9,812,401 Deferred Debits:
Unamortized debt expense (amortized over term of securities)...
1,676,279 514,837 Unamortized cost of abandoned properties (Note 2)....
37,152,575 1,036.626 Other (Note 2).
451.994 9.046,823 Total Deferred Debits....
39,280,848 10.598.286 4
TOTAL.......
$97,764,128
$95,125,126 (The accompanying notes are an integral part of these statements) 10
LIABILITIES December 31, 1985 1984 Capitalization:
Common Stock Equity (Notes 3 and 4):
Common Stock, $10 par value Authorized-2,000,000 shares Outstanding-1,316,724 and 1,315,547 shares.
$13,167,240
$13,155,470 Premium on common stock 10,777,377 10,775,465 Capital stock expense.
(2,014,830)
(2.088,747)
Retained earnings..
5,102,169 6,175,176 27,031,956 28.017,364
. Total Common Stock Equity...
Redeemable Preferred Stock (Note 5):
Cumulative preferred stock, $100 par value Authorized-99,820 shares 5%% Series Outstanding-13,940 and 14,360 shares...
1,394.000 1,436,000 8% Series Outstanding-19,750 and 20,500 shares...
1,975,000 2,050,000 Cumulative preferred stock, $1 par value Authorized-1,000,000 shares
$4.00 Series Outstanding-180,000 shares.
180,000 180,000 Premium on preferred stock.......
4,320,000 4,320,000 Total Redeemable Preferred Stock.
7,869.000 7,986,000 Long-term Debt (Note 6) 29,491.250 22,065,000 Total Capitalization 64,392.206 58,068,364 Current Liabilities:
Long-term debt due within one year.
610,000 280,000 Notes payable (Note 7).
11,400,000 17,150,000 Accounts payable..
8,911,556 6,646,308 Customer deposits and refunds...............
1,246,740 1,235,729 Taxes accrued.............
87,207 73,420 Interest accrued.....................
1,460,669 1,037,751 Total Current Liabilities............
23,716,172 26,423,208 Deferred Credits:
Unamortized investment tax credit (Note 1) 2,484,386 3,820,735 Other......................................
149,084 85,244 Total Deferred Credits.........................
2,633,470 3,905,979 Deferred income Taxes (Notes 1 and 8)................................
6.952,910 6,630,405 i
Reserves-Other....
69,370 97,170 Commitments and Contingencies (Notes 9,10 and 11)............
e TOTAL............................................
$97,764,128
$95,125,126 (The accompanying notes are an integral part of these statements) 11
CONGOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 1985 1984 1983 Operating Revenues (Notes 1 and 9):
Electric.
$33,254,246
$36,510,187
$29.119,262 Gas 20,733,297 19,650,463 19,757,977 Total Operating Revenues.
53,987,543 56,160.650 48,877,239 Operating Expenses:
Operating expenses, other.
9,033,783 7,824,156 7,607,616 Electricity purchased for resale.
15,272,470 19,238,981 13,076,317 Fuel used in electric generation.
4,964,008 6,095,374 5,154,998 Gas purchased for resale.
13,578,882 13,324,797 14,215,765 Maintenance..
1,389,569 1,340,838 1,379,097 Depreciation (Note 1) 1,579,387 1,560.839 1,500,012 Amortization of cost of abandoned properties (Note 2) 3,149,411 435,077 171,981 Provisions (credits) for taxes (Notes 1 and 8):
Federal income tax on net operating income..
(111,273)
(371,160)
(164,358)
Deferred Federal income tax.
(926,999) 1,795,885 1,225.211 Amortization of investment tax credit (106,602)
(106,811)
(102,716)
State franchise (19.877)
Deferred state franchise 154,650 205,494 67,488 Local property.
1,016,986 900,644 950,099 Other.
262,156 256,573 268,241 Total Operating Expenses.
49,236.551 52,500.681 45,349.751 Operating Income 4,750,992 3,659,969 3,527,488 Non-operating income:
Allowance for other funds used during construction (Note 1) 2,120,795 2,343,571 1,845,261 Other (net of income taxes) (Note 8) 448,073 120,040 68,152 Total Non-operating income.
2,568,868 2,463.611 1,913.413 Gross Income...
7,319,860 6,123,580 5.440.901 Interest and Other Expenses:
Interest on long-term debt 3,344,557 2,887,265 3,055,582 Other interest charges.
1,633,757 1,654,701 935,203 Amortization of debt expense..
183,093 35,071 36,582 Write-off of investment in abandoned properties (Note 2) 5,220,286 679,834 326,401 Discount on long-term debt purchased for sinking fund (15,000)
(14,910)
(15,568)
Other..
2,008 2,310 2,008 Gross Interest and Other Expenses..
10,368,701 5,244,271 4,340,208 Allowance for borrowed funds used during construction (Note 1)..
(2,929,353)
(2,713,351)
(2,187,552)
Net interest and Other Expenses.
7,439,348 2,530,920 2,152,656 Net (Loss) Income..
(119,488) 3,592,660 3,288,245 7
Dividend Requirements on Preferred Stock...........
953.519
% 1,671 969,824 Net (Loss) income Applicable to Common Stock
$J1,073,0_07)
$_2,63_0,989
$_2 318A21_
1 Average Number of Common Shares Outstanding.
1,316,608 1,305,228 954,087 (Loss) Earnings per Average Common Share Outstanding
$(0.81)
$2.02
$2.43 (The accompanying notes are an integral part of these statements) 12
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Year Ended December 31, 1985 1984 1983 Funds Provided By:
Funds from Operations Net (Loss) locome.
(119,488)
$ 3,592,660
$ 3,288,245 Principal Non-cash Charges (Credits) to Operations Depreciation.
1,579,387 1,560,839 1,516,449 Deferred Federal income tax.
(926,999) 1,795,885 1,225,211 Deferred state franchise tax.
154,650 205,494 67,488 Amortization of investment tax credit (106,602)
(106,811)
(102,716)
Carrying Charges.
(326,265)
Allowance for other and borrowed funds used during construction.
(5,050,148)
(5,056,922)
(4,032,813)
Amortization of deferred debits.
4,590,530 673,136 436,313 Write-off of Investment in abandoned property 5,220,286 Funds Provided by Operations.
5,015,351 2,664,281 2,398,177 Sale of (Investment in) Non-utility Operations.
1,721 59,569 Net Proceeds from issuance of Long-term Debt.
8,055,000 Net Proceeds from Sale of Common Stock..
13,682 410,453 8,645,321 Decrease (Increase) in Working Capital, Excluding Short-term Debt.
1,909,760 1,094,094 (256,539)
Total Funds Provided.
$14,993,793
$ 4,170,549
$10.846,528 Funds Applied To:
Additions to Plant.
$ 6,412,842
$ 6,456,740
$ 8,320,207 Common Stock Dividends.
2,991,377 2,527,543 Preferred Stock Dividends.
953,519 961,671 969,824 Funds Used for Retirement of Securities:
Long-term Debt 355,000 3,362,000 402,000 Preferred Stock.
117,000 117,000 117,000 Increase in Unamortized Debt Expense.
1,288,286 Decrease (Increase) in Short-term Debt 5,750,000 (10,450,000)
(1,000,000)
Other Applications (Sources)-Net.
117,146 731,761 (490,046)
Total Funds Applied
$14,993,793
$ 4,170,549
$10,846,528 increase (Decrease)in Components of Working Capital, Excluding Shortiterm Debt:
Cash.
$ (356,392)
$ 489,122 270,618 499,125 (576,458) 1,082,580 Accounts receivable-net 32,874 (144,732)
(421,684)
Refundable income taxes....
(107,294)
(81,167)
(219,743)
Materials and supplies..
Prepayments.
734,891 121,816 (148,659)
Property tax refunds.
(130,320)
Accounts payable.
(2,265,248)
(512,208) 163,582 Customer deposits and refunds.
(11,011)
(764,450) 58,500 (13,787) 335,526 (354,725)
Taxes accrued Interest accrued.
(422,918) 38,457 (43,610)
(Decrease) Increase in Working Capital
$ (1,909,760)
$(1,094,094)
$ 256,539 (The accompanying notes are an integral part of these statements) 13
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Year Ended December 31, 1985 1984 1983 Retained Earnings, Beginning of Year.
S 6,175,176 $ 6,535,564 $ 6,744,686 Net (Loss) Income.
(119,488) 3,592,660 3,288,245 Total.
6,055,688 10,128,224 10.032,931 Deduct:
Cash dividends declared:
Cumulative preferred stock:
5%% Series at an annual rate of $5.125 per share.
72,519 74,671 76,824 8% Series at an annual rate of $8.00 per share.
161,000 167,000 173,000
$4.00 Series at an annual rate of $4.00 per share,
720,000 720,000 720,000 Common stock at an annual rate of $0.00, $2.30 and
$2.60 per share.
2,991,377 2,527,543 Total Deductions.
953,519 3,953,048 3,497,367 Retained Earnings, End of Year (Note 4).
S 5,102,169 $ 6,175.176 $ 6,535,564 (The accompanying notes are an integral part of these statements)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Summary of Significant Accounting Policies-The Company is subject to regulation by the Massachusetts Department of Public Utilities (DPU) with respect to its rates, operations and accounting. The Company's accounting policies conform with generally accepted accounting principles, as applied in the case of regulated public utilities, and are in accordance with the accounting requirements of the DPU. A description of the Company's significant accounting policies follows.
Principles of Consolidation-On February 24,1978, the Company invested $20,000 in the Common Stock of a wholly-owned subsidiary, Fitchburg Energy Development Company (FEDCO). FEDCO has invested in oil and gas drilling projects, which investments have been recorded on the equity method. All inter-company transactions have been eliminated in consolidation.
Revenue Recognition-The Company records unbilled f uel adjustment revenue currently to properly match revenues with related costs. Such unbilled revenue aggregated $1,526,088, $1,309,306 and
$483,428 at December 31,1985,1984 and 1983, iespectively.
Depreciation-Annual provisions are determined on a group straight-line basis. Provisions for depreciation were equivalent to the following composite rates based on the average depreciable property balances at the beginning and end of each year: 1985-3.30%,1984-3.32% and 1983-3.31 %.
Federal Income Taxes-The general policy of the Company with respect to accounting for Federal income taxes is to reflect in income the estimated amount of taxes currently payable and to provide for deferred taxes on certain items subject to timing differences to the extent permitted by the regulatory authorities (see Note 8 of Notes to Financial Statements for details of major deferred tax items).
14
Nate 1: Summary cf Significant Acc:unting Policies-(C:ntinued)
As permitted by the regulatory atahorities it is the policy of the Company to defer the annual investment tax credits and to amortize these credits over the productive lives of the related assets.
Such deferrals for the years 1985,1984 and 1983 amounted to $(1,229,748), $(161,604) and $568,927, respectively, net of recapture of ITC in 1985 and 1984 for the abandonments for tax purposes of Seabrook Unit No.1 and Seabrook Unit No. 2, respectively.
Allowance for Funds Used During Construction-AFUDC, a non-cash item reflected in the consoli-dated statements of operations is included in construction work in progress. The objective of AFUDC is to present the earnings that would result in the absence of construction programs and the related financing requirements during the period of construction. Accordingly, AFUDC capitalizes the cost of debt and equity employed in meeting these financing requirements based upon a composite rate applied to construction work in progress which assumes that funds used for construction were provided by borrowings, preferred stock and common equity. AFUDC is anticipated to be recovered in rates through depreciation charges over the lives of the related assets.
Tfie combined rates used in calculating AFUDC were approximately 14%,14% and 13% for the years ended December 31,1985,1984 and 1983, respectively. AFUDC amounted to approximately 192%
and 174% of the net income applicable to Common Stock for the years ended December 31,1984 and 1983, respectively. The equity components of AFUDC equaled approximately 89% and 80% of net income applicable to Common Stock for the years ended December 31,1984 and 1983, respectively.
The percentages of AFUDC to net income are not applicable for the year ended December 31,1985, as there was a net loss applicable to common stock.
Note 2: Deferred Debits Unamortized Cost of Abandoned Properties-The unamortized cost of abandoned properties is being amortized at various rates as ordered by the DPU:
On September 23,1981, the Board of Directors of Boston Edison Company voted to cancel Pilgrim Unit No. 2 due to increased costs resulting from regulatory delays. On October 22,1981, the Unit was officially cancelled. In the March 1983 electric rate order, the DPU allowed the recovery over a three-year period of all costs associated with the Unit incurred prior to July 1,1980, amounting to approximately $537,000, net of the deferred taxes related thereto. However, approximately $305,000 of costs were not includable for recovery purposes and were written-off in March 1983.
In the Company's rate order issued on January 31,1985, the DPU determined that Seabrook Unit No. 2 was effectively cancelled and that for rate-making purposes it was appropriate to treat the investment as abandoned. The DPU ruled that the Company was prudent with respect to its involvement in Seabrook Unit No. 2 but determined that it would not allow the Company rate recovery until it had reviewed the prudence of Public Service Company of New Hampshire (PSNH) with respect to Seabrook Unit No. 2. The DPU further ordered the reallocation of certain indirect costs and denied recovery of the equity component of AFUDC, amounting to approximately $680,000, which was written-off in December 1984.
On October 3,1985, the Company and the Attorney General of the Commonwealth of Massachusetts (Attorney General) jointly submitted a Motion for Entry of Order According to the Terms as Stipulated by the Parties and Set Forth Herein (Settlement Agreement) to the DPU with respect to recovery of the l
Company's investment in Seabrook Units No.1 and No. 2. On October 30,1985, the DPU approved the Settlement Agreement and the Company's proposed tariffs, which were submitted to the DPU along i
with the Settlement Agreement and which are designed to increase the Company's base electric revenues to recover the costs associated with the Company's investment in the Seabrook Project, l
which the Company is permitted to recover pursuant to the Settlement Agreement.
The financial statements reflect the rate treatment accorded the Company in a DPU order dated October 30,1985. The Company's investment in Seabrook Units No.1 and No. 2 has been reclassified from Utility Plant-Construction Work in Progress and Deferred Debits-Other to Deferred Debits-15
Note 2: DCferred Debits-(Continued)
Unamortized Cost of Abandoned Property. The Company charged against earnings that portion of its net investment in Seabrook Units No.1 and No. 2, amounting to $3,041,480 and $1,678,753 respectively, that it had determined to be non-recoverable for rate making purposes. (See Note 9 of Notes to Consolidated Financial Statements.) The Company also charged against earnings the costs of a customer accounting system under development amounting to $500,053.
The amounts to be amortized for all properties over the next five years are as follows: 1986-$2,467,889; 1987-$2,357,938; 1988-$1,159,790; 1989-$1,159,790; 1990-$1,159,790.
Other Deferred Debits-Other deferred debits are composed of the following:
December 31, 1985 1984 Property tax abatements receivable,..
$ 129,626
$ 129,626 Deferred maintenance costs (amortized based upon generation).
158,821 162,371 Turbine maintenance expense.
59,910 Rate case expenses.
17,697 816,911 Seabrook Unit No. 2.
7,696,388 Accrued vacation payroll 125,239 103,452 Miscellaneous.
20,611 78,165 Total other deferred debits.
$ 451,994
$9,046,823 Note 3: Common Stock-During the first quarter of 1985, the Company sold 1,177 shares of Common Stock, at an average price of $11.62 per share, in connection with its Employee Stock Ownership Plan (ESOP). Net proceeds of $13,682 were used to reduce short-term borrowings incurred in connection with the Company's construction program. No additional shares were sold during the remaining three quarters of the year. At various times during 1984, the Company sold 25,483 shares of Common Stock in connection with ESOP and its Dividend Reinvestment and Stock Purchase Plan at an average price of $16.11 per share. Aggregate net proceeds of approximately
$410,000 were used to reduce short-term borrowings incurred in connection with the Company's ongoing construction program.
Note 4: Restriction on Retained Earnings-Under the most restrictive provisions of indentures and note purchase agreements relating to the Company's long-term debt, $1,079,732, $2,160,839 and
$2,529,278 of retained earnings were available for the payment of cash dividends on Common Stock at December 31,1985,1984 and 1983, respectively.
Note 5: Redeemable Cumulative Preferred Stock-Both classes of Cumulative Preferred Stock rank equally and are preferred over Common Stock in voluntary liquidation at the redemption price in effect at the time of such voluntary liquidation and in involuntary liquidation at $100 per share with respect to the 5%% and 8% Series and at $25 per share with respect to the $4.00 Series, all plus accrued dividends.
i Shares of the 5%% Series are redeemable at the Company's option at $101.28 per share. The Company is required to purchase on June 1 of each year not less than 420 shares of the 5%% Series, unless a lesser amount of shares is tendered, at $100 per share plus accrued dividends.
Shares of the 8% Series are redeemable at the Company's option at $104.00 per share on or before August 31,1986 and at diminishing premiums thereafter. The Company is required to purchase on June 1 of each year not less than 750 shares of the 8% Series, unless a lesser amount of shares is tendered, at $100 per share plus accrued dividends.
Shares of the $4.00 Series are redeemable at the Company's option at $29.00 per share on or before June 1,1987 and at diminishing premiums thereafter. The Company is required to purchase on June 1 of each year, commencing in 1988,9,000 shares of the $4.00 Series at $25 per share plus accrued dividends.
l 16
N:t2 5: Redeemibla Cumul:tiva Pr:f.rr:d Stock-(Crntinuzd)
Purchases of redeemable Cumulative Preferred Stock during 1985,1984 and 1983 consisted of the following:
Sedes 1985 1984 1983 5%%,
$42,000
$42,000
$42,000 8%.
$75,000
$75,000
$75,000 The aggregate amount of sinking fund requirements of the redeemable Cumulative Preferred Stock for each of the five years following 1985 are: 1986-1987-$117,000 and 1988-1990-$342,000.
Note 6: Long-term Debt-Details of Long-term Debt at December 31,1985 and 1984 are shown below:
December 31, 1985 1984 Seven year Notes,14%%, due August 1,1992
$ 9,000,000 Ten year Notes,17%%, due August 15,1992.
5,000,000 5,000,000 Twenty-five year Notes,9%%, due March 1,1995.
6,450,000 6,525,000 Twenty year Notes,10%, due September 1,1996, 2,200,000 2,400,000 Twenty-five year Notes,10%%, due May 1,1999, 3,340,000 3,420,000 Twenty year Notes,15%%, due September 1,2000.
5,000,000 5,000,000 Total.
30,990,000 22,345,000 Less: Installments due within one year.
610,000 280.000 Unamortized Note discount.
388,750 Total Long-term Debt.
$29,491,250
$22.C65,000 On August 8,1985, the Company sold $9,000,000 of its 14%% Notes due August 1,1992 at a prica of 89.5% of the principal amount of the Notes. The DPU approved the terms and conditions of the sale, including the interest rate on July 30,1985.
Certain of the loan agreements contain provisions which among other things, limit the incurrence of additional long-term debt.
The aggregate amount of sinking fund requirements remaining for each of the five years following 1985 are: 1986-$610,000; 1987-1989-$685,000; 1990-$1,685,000. The Company has satisfied through advance purchases $75,000 of the annual sinking fund requirement for 1986.
Note 7: Credit Arrangements-Under line of credit arrangements for short-term debt with four banks, the Company may borrow up to $14,000,000 on such terms as the Company and the banks may mutually agree upon.
These arrangements do not have termination dates, but are reviewed periodically. At December 31, 1985 and 1984, the unused portion of the credit lines outstanding was $2,600,000 and $850,000, respectively. The Company was not required to maintain compensating balances at December 31, 1985. At three of the banks, the Company pays certain fees in lieu of compensating balances, and the fourth bank does not require fees or compensating balances.
Note 8: Federal lncome Tax-Federal income tax expense is comprised of the following components:
Year Ended December 31, 1985 1984 1983 Current expense charged (credited):
S (111,273)
$ (371,166)
$ (164,358)
Operating expenses.
Non-operatng income..
(2,573)
(7,053)
(276)
Amortization of investment tax credit.,
(106,602)
(106,811)
(102,716)
(220,448)
(485,030)
(267,350) 17
N::128: F;deralIne:m3 Tax-(C ntinu:d)
Year Ended December 31, 1985 1984 1983 Deferred tax expense charged (credited):
Deferred unbilled revenue.
111,273 371,166 23,856 Accelerated tax depreciation.
191,208 274,574 284,638 Abandoned properties (2,762,817)
(152,755)
(108,324)
Allowance for funds used during construction (Note 1) 1,260,620 1,152,095 758,754 Overheads and other.
297,804 141,225 235,951 i
Deferred maintenance cost (29,111)
(17,319)
(15,479)
Percentage repair allowance.
4,024 26,899 45,815 (926,999) 1,795,885 1,225,211 Total (Benefit) Expense.
$(1,147,447)
$1,310,855
$ 957,861 The Federal income tax amounts included in the Consolidated Statements of Operations differ from the amounts which result from applying the statutory Federal income tax rate to Net (Loss) Earnings before income tax. The reasons, with related percentage effects, are shown below:
Year Ended December 31, 1985 1984 1983 Statutory Federal income tax rate.
(46)%
46%
46%
Income tax effects of:
Allowance for other funds used during construction (77)
(22)
(25)
Carrying charges on Seabrook Unit No.1 (12)
Excess cost of abandonment write-off on which deferred taxes have not been provided 57 Other items, net.
(12) 3 1
Effective Federal income tax rate (90)%
27 %
22 %
The cumulative net amount of income tax timing differences for which deferred income taxes have not been provided as of December 31,1985 is $1,635,455.
The Company incurred net operating losses of approximately $16,600,000 and $7,400,000 for Federal income tax purposes for the years ended December 31,1985 and 1984, respectively. These net operating losses may be used to offset future taxable income through the years 2000 and 1999 respectively.
Note 9: Regulatory Matters-Settlement Agreement and Sale of Seabrook Asset. On October 3, 1985, the Company and the Attorney General of the Commonwealth of Massachusetts (Attorney General) jointly submitted a Motion for Entry of Order According to the Terrns as Stipulated by the Parties and Set Forth Herein (Settlement Agreement) to the DPU with respect to recovery of the Company's investment in Seabrook Units No.1 and No. 2. On October 30,1985, the DPU approved the Settlement Agreement and the Company's proposed tariffs, which were submitted to the DPU along with the Settlement Agreement and which are designed to increase the Company's base electric revenues to recover the amortization costs associated with the Company's investment in the Seabrook Project through a Seabrook amortization surcharge that applies to all kilowatthours billed to retail customers of the Company (Tariffs). The Tariffs went into effect on November 1,1985.
The Settlement Agreement provides, among other things, that the Company will be allowed to recover 55% of its after-tax investment in Seabrook Unit No. 2 over the two year period commencing l
November 1,1985, with no carrying charges over such period, and 60% of its af ter-tax investment in Seabrook Unit No.1 over the subsequent thirty-year period, with carrying charges of 14% allowed on the average unamortized balance during such period of time. Based upon the Company's estimated investment in the Seabrook Project as of October 31,1985, the Company will receive annual revenue 18
N:ta 9: Regul;ttry Mitiars-(Continued) increases of approximately $2,619,413 for the first two years of the recovery period and of approxi-mately $3,482,290 for the subsequent thirty years.
The Settlement Agreement provides that it is conditional upon the Company's not making any further payments to the Seabrook Project, and requires the Company to attempt to sell its interest in the Seabrook Project. If the Company makes payments to the Seabrock Project, then any amounts previously collected by the Company in connection with the Seabrook rate surcharges are subject to forfeiture and the Company may be barred under certain circumstances from seeking any recovery through rates of its Seabrook investment. To the extent the Company realizes any proceeds from the sale or other disposition of its interest in the Seabrook Project,60% of those proceeds will be applied to reduce the amount that the Company may recover through the Seabrook amortization rate surcharges.
I If the Company does not enter into a definitive agreement for the sale of its Seabrook interest by May 1, 1986, then for each month thereafter that the Company has not entered into an agreement an additional 8% of the proceeds to the Company from any such sale will be applied to reduce the amount of the Company's recoverable Seabrook investment. If a sale of the Company's Seabrook interest is not consummated until after October 1,1986, then 100% of the proceeds to the Company will be applied to reduce the amount of the Company's recoverable Seabrook investment.
On January 3,1986, the Company and Eastern Utilities Associates, a Massachusetts business trust (EUA), jointly announced that they had agreed in principle to a sale of the Company's interest in the Seabrook Project to a New Hampshire subsidiary of EUA.
The agreement in principle is subject to the negotiation and execution of a definitive agreement and to the fulfillment of a number of conditions, including the receipt of certain regulatory approvals. The Company cannot predict whether or when a definitive agreement with EUA will be executed or whether the conditions in said agreement will be satisfied and the sale ultimately consummated.
The Company has withheld its payment of construction and other costs of the Seabrook Project since May 15,1985, in the approximate aggregate amount through December 31,1985 of $2.600,000. On May 29,1985, the Company received a Request for Arbitration pursuant to the Joint Ownership Agreement (JOA) dated May 1,1973, as amended, for the Seabrook Project, in which six of the Seabrook participants asserted that the Company's withholding of its May 15,1985 Seabrook payment constitutes a breach of the JOA. The Company cannot predict what,if any, impact the Settlement Agreement will have on this arbitration proceeding. In the event that the sale of the Company's Seabrook interest, discussed above, is consummated, the Company expects that the arbitration proceeding will be terminated.
The financial statements reflect the rate treatment accorded the Company in the DPU order. The Company's investment in Seabrook Units No.1 and No. 2 has been reclassified from Utility Plant-Construction Work in Progress and Deferred Debits-Other to Deferred Debits-Unamortized Cost of Abandoned Property. In addition, the Company, during the third quarter of 1985, charged against earnings that portion of its net investment in Seabrook Units No.1 and No. 2, amounting to $3,041,480 and $1,678,753 respectively, that it had determined to be non-recoverable for rate-making purposes.
This write-off has reduced, on an aggregate basis, Earnings per Average Common Share for the year ended December 31,1985 by $3.59.
i In determining for accounting purposes the non-recoverable portion of the net investment in Seabrook Unit No.1 that should be charged against earnings, a computation was utilized allowing for the discounting of the projected future cash flows related to the recovery, including the carrying charges. This methodology (which appears to be different from that permitted by the Financial Accounting Standards Board (FASB] Statement No. 71) has been utilized reflecting the length of the recovery period (approximately 3C7 ears) and for the purpose of recognizing certain proposed modifications to FASB Statement No. 71,Ivhich may, if adopted, require generating unit abandonments to be accounted for utilizing a form of discounting of future cash flows. The Company cannot predict whether, or in what manner, FASB willjaltimately modify existing accounting pronouncements, or what the form or timing 19
N:ts 9: R:gulitary Mittgrs-(C:ntinu*,d) of any required accounting treatment might be. Any such modification may have an impact on the financial position of the Company, including its ability to pay dividends Financing Plans-Decision oiMassachusetts Supreme Judicial Court (SJC) with respect ro Seabrook
- Related Financing. On September 12, 1985, the SJC issued its decision in the appeal by the Company and three other Massachusetts utilities of the DPU's April 4,1985 order setting certain conditions upon which Seabrook-related financings would be approved by the DPU.
As previously reported, the DPU's April 4 order found that the degree of risk associated with increased costs and potential future abandonment of the Seabrook Project precludes a finding that Seabrook
)
Unit No.1 is reasonably necessary. As a result of this finding, the DPU stated that it would approve i
Seabrook-related financings only subject to conditions which place the risk of future Seabrook
]
expenditures on the shareholders of the Massachusetts participants, and not their ratepayers.
On April 12,1985, the Company filed with the DPU a reply to the April 4 order in which the Company stated, among other things, that the DPU's conditions to approval of a Seabrook-related financing petition were unacceptable to the Company. Also on April 12,1985 the Company and two other Massachusetts Seabrook participants appealed the April 4 order to the SJC, claiming, among other things, that the DPU order exceeds its statutory authority, is an abuse of discretion, is arbitrary and capricious, as a matter of law, and is confiscatory.
The SJC's September 12 decision upheld the DPU's April 4 order in all material respects. As a result, the Company would be able to undertake Seabrook-related financings in the future only on the conditions stated in the DPU's April 4 order. The Company does not presently intend to undertake any such financings, especially in light of the Settlement Agreement between the Company and the Attorney General and the proposed sale of its interest in the Seabrook Project, as discussed above.
Seabrook-Related Developments-Public Service Company of New Hampshire (PSNH). On Septem-ber 13,1985, the New Hampshire Public Utilities Commission (NHPUC) issued an order allowing PSNH to increase its weekly cash construction expenditures on the Seabrook Project, effective September 1,1985, and to issue $345 million of securities to finance its share of the remaining construction costs of the Seabrook Project. On January 31,1986, the New Hampshire Supreme Court (NHSC) rejected appeals from the NHPUC's September 13 order which had challenged that order on a variety of grounds. PSNH thereupon announced that it would seek to sell an amount of long-term bonds sufficient to permit it to finance its share of the remaining construction costs of the Seabrook Project within the following several weeks. While the Company cannot predict whether PSNH will be able to successfully sell such amount of long-term bonds, the NHSC's decision permitting PSNH to issue such bonds removed a major impediment to the successful completion of Seabrook Unit No.1.
Purchase of Interests of Maine and Vermont Participants. On July 12,1985, EUA annoused that it was negotiating to acquire the 6% interest of Central Maine Power Company (CMP) in the Seabrook Project. On July 24,1985, EUA signed letters of intent with Bugor Hydro-Electric Company (Bangor i
Hydro), Maine Public Service Company (MPS) and Central Vermont Public Service Corporation (Central Vermont) for the purchase by EUA of the 2.2%,1.5% and 1.6% interests, respectively, in the Seabrook Project. EUA agreed to pay approximately $56 million in the aggregate for the interests of CM P, Bangor Hydro and MPS, and approximately $9.3 million for the interest of Central Vermont. EU A also agreed to reimburse CMP, Bangor Hydro, MPS and Central Vermont for all payments made by j
them for their respective shares of the construction costs of the Seabrook Project from June 1,1985 through the dates of the closings of the respective purchases and sales, and to pay interest and certain other amounts at the closings.
On January 27,1986, EUA announced that it was willing to increase the tmounts it would pay for the interests of CMP, Bangor Hydro, MPS and Central Vermont by an aggregate of $30.9 million. EUA stated that the higher prices were because EUA did not perceive the Seabrook Project to be as risky an investment as when it first offered to buy the additional interests, and because it felt that it would 20
Nat29: Regul;t:ry MIttirs-(Crntinued) improve the attractiveness of the proposed purchases and sales to the Maine Public Utilities Commission (MPUC) and the Vermont Public Service Board (VPSB), which must approve the purchases and sales.
EUA has stated that consummation of the purchases and sales is conditioned upon the receipt of all necessary state and Federal regulatory approvals, and CMP, Bangor Hydro, MPS and Central Vermont have stated that consummation of the sales is also conditional upon the receipt of adequate rate-making treatment of their unrecovered investment in the Seabrook Project from their respective state regulatory authorities. The Company cannot predict whether all required regulatory approvals will be obtained or whether, even if such approvals are obtained, the purchases and sales will be consummated.
Licensing. In order for Seabrook Unit No.1 to commence commercial operation,it is necessary that the Nuclear Regulatory Commission (NRC) issue an operating license. As a condition to the issuance of the license, the states of Massachusetts and New Hampshire must certify plans to the Federal l
Emergency Management Agency (FEMA) for evacuation of areas within a ten-mile radius of the Project in the event of an emergency.
All seventeen New Hampshire muncipalities which are affected by the evacuation plan have participated in the planning process, and New Hampshire has submitted several drafts of an evacuation plan to the FEMA for its review. All of the seven Massachusetts municipalities have also participated, but the Town of Amesbury, Massachusetts, voted at a town meeting in November 1985 to prohibit town officials from further participating in the planning process. The refusal of the Town of Amesbury to further participate in the planning process may adversely affect the willingness of The Commonwealth of Massachusetts to approve an evacuation plan, since the Governor of Massachusetts has stated that he will not certify a plan to the FEMA unless all affected Massachusetts municipalities have approved their respective plans. An evacuation drill to test the effectiveness of the most recent draft of the plan was scheduled for February 26,1986, but Massachusetts officials have stated that Massachusetts will not participate in that drill because of the lack of sufficient time to review the j
evacuation plan and prepare for the drill.
An internal memorandum from the Attorney General's of fice which was made public on February 12, 1986, stated that, as a condition to certification of an evacuation plan, Massachusetts should require that the owners of the Seabrook Project commit to protect summertime beach populations in the evacuation area from a nuclear accident at Seabrook Unit No.1, either by not operating Unit No.1 during the summer or by provia 1g shelters on affected beaches. The Company cannot predict whether such a commitment can or will be made, or what effect this might have on the willingness of Massachusetts officials to certify an evacuation plan to the FEMA.
It is possible that the NRC will not grant an operating license for Seabrook Unit No.1 until Massa-chusatts certifies an evacuation plan acceptable to the FEMA. If Massachusetts fails to certify such a pla e, delays its certification, it would adversely affect the commencement of commercial operation of Seabrook Unit No.1 and the total cost of Unit No.1, which are presently projected by PSNH to be 1
October 31,1986 and $4.56 billion, respectively. Because of delays in completing the evacuation plans, the current NRC schedule for hearings on the licensing of Unit No.1 and the refusal of Massachusetts to participate in the February 26,1986 evacuation drill, it appears that Seabrook Unit No.1 may not begin commercial operation on October 31,1986. PSNH has stated that each month's delay thereafter might increase the total cost of Unit No.1 by approximately $50 million. State and local opposition has delayed licensing of another nuclear generating plant located on Long Island, New York, for such an extended period that the inability of the constructing utility to earn a cash return on its investment in the plant threatens that utility's solvency.
i The Company cannot predict whether or when the NRC will issue an operating license for Seabrook Unit No.1.
Millstone Unit No. 3.
Progress on Millstone Unit No. 3 during 1985 indicates that the nuclear 21
N:t39: Regul:t::ry Mitters-(Crntinued) generating unit in Waterford. Connecticut, should meet its in-service target date of May 1986. The operating license was received f rom the NRC on November 25,1985. Fuel loading into the reactor has been completed and low-power operational testing is under way. On January 29,1986, the NRC granted a full power operating license for Unit No. 3.
The Company has a 0.217% ownership interest in the Unit which represents 2.5 megawatts of electric capacity. No further base rate increases to reflect the Company's costs for its ownership share of the Unit are anticipated for the near future. This is expected to be accomplished by a revamping of the Company's power supply contracts due to the expiration in late 1986 of a contract for capacity from Boston Edison Company.
Note 10: Joint Ownership Units-The Company is participating on a tenancy-in-common basis with other New England utilities in the construction and ownership of three generating units. The Company estimates that its construction program expenditures (including AFUDC) with respect to such units for the five-year period ended December 31,1990 will be $701,000. New Haven Harbor and Wyman 4
Unit No. 4, both oil-fired stations, have been in commercial operation since August 1975 and December 1978, respectively. Millstone Unit No. 3, a nuclear generating unit, is under construction.
Information with respect to Millstone Unit No. 3, Wyman Unit No. 4 and New Haven Harbor is set forth in the table below.
Company's Share in Thousando of Dollars Proportionate Eh*'*
Amount of Accum-Amount mated Ut6hty ulated Espended Cost of Ownership Plant in Depre-through Construc-Jomt Ownership Umts State MW Serv 6ce cletion 12/31/85 t6cn Millstone Unit No. 3 Connecticut 0.217 2.50
$ - $10,447 $11,148 Wyman Unit No. 4.
Maine 0.1822 1.13 408 106 New Haven Harbor.
Connecticut 4.5 20.12 6,972 2,257 l
23.75
$7,380 $2.363 $10.447 $11,148 l
The right to cancel Millstone Unit No. 3 is solely the responsibility of the utility that is supervising construction of that Unit. In the event that Millstone Unit No.3 were cancelled, the Company would file a petition with the DPU seeking to amortize its investment in Unit No. 3 Operating expenses of the joint ownership units included in the consolidated statements of operations and proportionate amounts charged to specific operating expenses are as follows:
j Percentage of Total Electric New Haven Espense Wyman Unit No. 4 Harbor Category (In thousands of dollars)
Operating Expense Other..
$ 19
$ 392 7%
Fuel Used in Electric Generation.
121 4,670 97 %
Maintenance.
6 202 21 %
Local Property Tax.
5 210 28 %
Other Taxes.
12 8%
1 Total Operating Expenses.
$151
$5.486 1
22 i
N;t)11: C:mmitments and C:ntingencies Lease Obligations-In accordance with the guidelines of FASB Statement No.13 issued by the Financial Accounting Standards Board, the Company is disclosing pertinent information regarding its capital leases. The Securities and Exchange Commission requires, for rate-regulated enterprises, disclosure of the effect on the balance sheet and on expenses as if such leases had been capitalized.
The Company has a twenty-five year lease which began April 1,1973 for a combustion turbine and a liquefied natural gas storage and vaporization facility. The lease is subject to a ten-year renewal period at the option of the Company at an annual rental of 14%% of the aggregate fair market value at the end of the initial lease term. Under certain conditions, the Company has the right to purchase these facilities at an independently appraised market value. Under the lease, the Company has the obligation to maintain the equipment in good operating condition and pay all taxes and insurance thereon.
The Company leans its service center in Fitchburg under a sale and leaseback arrangement. The twenty-two year piimary term of the lease began in February 1981 with annual rental payments increasing over the initial term of the lease from approximately $184,000 to $537,000. The lease is subject to five five-year renewal periods at the option of the Company. The Company has the option to purchase the service center on the last day of the primary term or any extended term at a price equal to its f air market value. The Company has a right of first refusal to purchase the service center during the term of the lease if a bona fide offer is made to the lessor. Should the service center be purchased by another party, this right expires after the transfer of ownership resulting from this offer. The lease requires that the Company maintain the service center and pay all taxes and insurance thereon.
Had the Company capitalized its capital leases at December 31,1985 and 1984, the asset and related liability which would have been recorded on the balance sheets for the Company's capital leases would have been as follows:
December 31, 1985 1984 Asset
$3,804,640
$4,066,262 Liability.
$5,178,304
$5,319,834 Had the Company capitalized its capital leases, depreciation and other interest charges would have increased and operating expenses, other, would have (decreased) as follows:
Year Ended December 31, 1985 1984 1983 Depreciation.
$ 250,883
$ 272.361
$ 305,103 Other Interest Charges...
$ 693,169
$ 718,516
$ 698,001 Operating Expenses, Other.
$(809,045)
$(837,278)
$(876,079)
The minimum commitments under all non-cancellable long-term leases in effect at December 31, 1985 are as follows:
1986.
891,691 1987.....
870,415 1988....
814,790 1989...
728,971 1990.
682,474 1991-1995.
3,653.972 1996 2000...
3,193.003 2001-2003 1.119,285
$11,954,601 23
N:ts 11: C:mmitments and Crntingencies-(Continued)
Total rental expense for the years ended December 31,1985,1984 and 1983 amounted to $1,119,138,
$1,104,424 and $956,850, respectively.
Long-term Obligations-The Company maintains contracts for both natural and supplemental gas supplies and the storage and delivery of natural gas stored underground. These contracts contain minimum purchase provisions which the Company is obligated to pay. The minimum purchase provisions of the natural gas contracts may increase or decrease on action by the Federal Energy Regulatory Commission with regard to curtailment of supply. All of the supplemental supply contracts contain a minimum purchase provision subject to product availability from the supplier.
The minimum commitments under all non-cancellable gas contracts in effect at December 31,1985 are as follows: 1986-$5,279,342; 1987-$4,971,018; 1988-$4,375,098; 1989-$3.267,018; 1990-
$3,267,018; 1991 -1995-$15,426.891 aggregate for the period; 1996-2000-$9,953,484 aggregate for the period.
The Company has entered into agreements with other New England utilities to support the operation of a terminal facility and transmission line wh:ch are planned to permit the interchange of electricity between such utilities and Quebec Hydro-Electric Corporation. Related support charges, which will commence in 1986. are expected to cost the Company approximately $200,000 per year.
Pension Plans-The Company has in effect two funded pension plans and related Trust Agreements to provide retirement annuities for participating employees at age 65.The entire amount of the annual contribution under the actuarial requirements of the plans is borne by the Company.The Company's contribution related to the plans for the years ended December 31,1985,1984 and 1983 amounted to
$831,601, $813,929 and $579.283 respectively. The Company's policy is to fund the pension cost accrued which includes amortization of prior service costs over a period of thirty years except actuarial gains or losses which are amortized over a period of fifteen years. The following additional information is presented as of the most recent benefit information dates:
January 1, 1985 1984 Actuarial present value of accumulated plan benefits:
Vested.
$7,314,419
$7,179,976 Non-Vested 42,498 72,478
$7,356.917
$7,252,454 j
Net assets available for benefits......
$3.517,219
$3,412.822 The weighted average assumed rate of return used in determining the actuariat present value of accumulated plan benefits was 8% for both 1985 and 1984.
1 The Company provides health care and life insurance benefits to retirees as well as health care for their dependents. The retirees and their dependents receive medical benefits based on age and a
Medicare eligibility.
The life insurance benefits are provided by making monthly premium payments to a life insurer. The health insurance benefits are provided by making monthly payments of the actual claims, administration, reinsurance and Medicare supplement premiums. The cost of these benefits for 1985 and 1984 was as follows:
1985 1984 i
Health Care.....
$181,410
$148,192 Life Insurance...
23,991 27,122 Total Benefits..
$205,401
$175.314 24
Not) 11: C:mmitments and Conting;ncies-(C:ntinued)
Environmental Matters-For many years, the Company and its predecessor operated coal gasification plants in Fitchburg and Gardner. The Massachusetts Division of Environmental Quality Engineering has suggested that the Company may have to study and/or clean up these sites. The Company believes that its insurance with a variety of carriers provides it with sufficient insurance to handle these matters. Several of the carriers are disputing this coverage. The Company is negotiating with these insurers in an effort to make certain that whatever actions are necessary will be covered by insurance.
Note 12: Segment Information-In accordance with FASB Statement No.14, the following information is presented relative to the gas and electric operations of the Company:
Electric Operations 1985 1984 1983 Operating revenues.
$33,254,246
$36,510,187
$29,119,262 Operating income before income taxes...
$ 1,041,169
$ 3.036,967
$ 3,010,161 Identifiable assets as at December 31
$73,044,226
$71,933,610
$61.493,038 Depreciation.
$ 1,017,125
$ 1.051,249 966,008 Construction expenditures.
S 5,813,412
$ 5,677,514
$ 7,506,987 Gas Operations 1985 1984 1983 Operating revenues..
$20,733,297
$19,650,463
$19,757,977 Operating income before income taxes.
$ 2,699,722
$ 2.146,404
$ 1,542,952 Identifiable assets as at December 31
$14,248,261
$14,006,319
$13,622,946 Depreciation.
562,262 509,590 534,004 Construction expenditures.
599,430 781,142 813.220 Total Company 1985 1984 1983 Operating revenues.
$53,987,543
$56,160,650
$48,877,239 Operating income before income taxes..
$ 3,740,891
$ 5,183,371
$ 4,553,113 Income tax benefit (expense).
1,010,101 (1,523,402)
(1,025,625)
Non-operating income...
2,568,868 2,463 611 1,913,413 Net interest and other expenses........
(7,439,348)
(2,550,920)
(2,152,656)
Net (loss) income....
$ (119,488)
$ 3,592,660
$_3,288.245 Identifiable assets as at December 31.......
$87,292,487
$85,939,920
$75,115,984 Unallocated assets, primarily working capital.
10,471,641 9,185,197 10,672,016 Total assets as of December 31.
$97,764,128
$95,125,126
$85,788,000 Depreciation.....
.. $ 1,579,387
$ 1,560.839
$ 1,500,012 Construction expenditures.
$ 6,412,842
$ 6,458,656
$ 8,320,207 Expenses used to determine operating income before taxes are charged directly to either segment or are allocated in accordance with factors contained in cost of service studies which were included in rate applications approved by the DPU. Assets allocated to each segment are based upon specific identification of such assets provided by Company records. Assets not so identified represent primarily working capital items.
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF FITCHBURG GAS AND ELECTRIC LIGHT COMPANY We have examined the consolidated balance sheets of Fitchburg Gas and Electric Light Company and subsidiary as of December 31,1985 and 1984, and the related consolidated statements of operations, retained earnings and changes in financial position for each of the three years in the period ended December 31, 1985. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances, in our report dated February 4,1985, our opinion on the 1984 financial statements was qualified as being subject to the effects on the 1984 financial statements of such adjustments, if any, as might have been required had the outcome of (1) the uncertainty about the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities caused by the Company's uncertainty about securing sufficient long-term financing, or to receive the necessary regulatory approval related thereto, and (2) the uncertainty about the recovery of the Company's investment in the Seabrook Project. These uncertainties could have affected the Company's ability to continue in existence. As explained in Note 6, the Company received approval to complete long-term financing on July 30,1985, and completed the financing on August 8,1985. As explained in Note 9, the Company has received an order from the Massachusetts Department of Public Utilities (DPU) providing, among other things, a partial recovery of the Company's investment in the Seabrook Project. Accordingly, our present opinion on the 1984 financial statements, as presented herein, is different from that expressed in our previous report.
As discussed in Note 9, the Company has withheld its payment of construction and other costs of the Seabrook Project since May 15,1985. The Company received a request for araitration pursuant to the Joint Ownership Agreement (JOA) for the Project, in which it is asserted that the Company's withholding of its Project payment constitutes a breach of the JOA. The Company cannot predict what, if any, impact its Settlement Agreement as approved by the DPU will have in this arbitration proceeding, or when or wnether the Company will be able to sell or otherwise dispose of its interest in the Seabrook Project or what the terms of any such sale or disposition might be.
The Company's treatment of the recovery of its investment in the Seabrook Project is different from that permitted by the Financial Accounting Standards Board (FASB) Statement No. 71, Accounting for The Effects of Certain Types of Regulation (FAS 71). This opinion appears not to permit the discounting to present value, future cash flows (see Note 9). If FAS 71 had been followed, net income and retained earnings would have been increased by $3,041,480. The Company has adopted the discounting method in that this accounting treatment recognizes the economics of the rate regulation provided for in the Settlement Agreement as approved by the DPU and furthermore, the Company's treatment is in conformity with FASB's exposure draft which would amend FAS 71 to require the probable future revenue expected to result from a regulator's inclusion of the cost of an abandoned plant in allowable costs for rate-making purposes be recorded at its present value. In our opinion, the Company's treatment has substantial authoritative support and is an acceptable practice, with which we concur.
In our opinion, subject to the effect on the aforementioned financial statements of such adjustments, if any, as might have been required had the outcome of the uncertainty about the arbitration proceeding on the Company's withholding of its Seabrook Project payments since May 15, 1
1985, been known, the aforementioned financial statements present fairly the financial position of Fitchburg Gas and Electric Light Company and subsidiary at December 31,1985 and 1984, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31,1985, in conformity with generally accepted accounting principles applied on a consistent basis.
Boston, Massachusetts GRANT THORNTON February 7,1986 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Requirements and Liquidity The liquidity and capital resources of the Company are significantly influenced by the level of the Company's construction expenditures for new facilities. Under the rate-making practices of the Massachusetts Department of Public Utilities (DPU), the financing costs incurred during the construction of new facilities are treated as part of the cost of such facilities. The inclusion of financing costs in the cost of new facilities is accomplished by recording an allowance for funds used during construction (AFUDC) in the Statement of Operations (See Note 1 of Notes to Consolidated Financial Statements). Although this accounting treatment allows recovery of the cost of funds used during construction through depreciation over the life of the facilities (along with an allowed return on the undepreciated portion) and results in current credits to income,it is not immediately accompanied by cash flow. As a result, the level of reported earnings may not be greatly reduced during periods of heavy construction, but the cash flow content of earnings is substantially reduced, necessitating a large amount of external financing.
During the first half of 1985 the Company experienced a liquidity crisis due in part to its inability to secure regulatory approval for the issuance of additional long-term indebtedness to support the Company's ongoing construction program, including its share of the costs of the Seabrook Project.
The Company took several extraordinary measures to alleviate the crisis, including withholding of payments to the Seabrook Project, the layoff of 32% of its work force, the elimination of all but emergency construction and system maintenance, ceasing to add new gas customers and adding electric customers only as resources permitted, the institution of a wage freeze and the elimination of the use of outside contractors and all but emergency overtime. On May 15,1985, the Company began withholding its payment of construction and other costs to the Seabrook Project, attributing its decision to the recent determinations of the DPU and the Massachusetts Supreme Judicial Court, as well as the determinations of regulatory bodies and courts in other jurisdictions, the agreements and conditions contained in the May 14,1984 resolution of the Seabrook participants, and the serious financial and legal issues raised by the foregoing. These actions helped to temporarily ease the Company's liquidity problems.
These liquidity problems were significantly reduced by the completion of the sale of $9 million of long-term notes (resulting in net proceeds to the Company of approximately $8.055 million) in August,1985, and the approval by the DPU in October,1985, of an agreemerit between the Company and the Massachusetts Attorney General permitting the Company to recover through rates a portion of its investment in the Seabrook Project (Settlement Agreement). (See Note 9 of Notes to Consolidated Financial Statements.) These improvements in the Company's liquidity allowed it to recall its workforce and to resume a more normal level of operations. The Settlement Agreement prohibits the Company from making any further payments to the Seabrook Project and requires the Company to attempt to sell its interest in the Project.
The Company has reached an agreement in principle with Eastern Utility Associates (EUA), a Massachusetts business trust, for the sale by the Company to a subsidiary of El!A of the Company's Seabrook interest. The agreement in principle is subject to the negotiation and execution of a definitive agreement, and the Company cannot predict whether or when a definitive agreement will be reached and the sale consummated. However, the Company hopes that the sale will be consummated and that the Company's involvement in the Seabrook Project would thereby be effectively ended. The Company also hopes that a sale of its Seabrook interest would resolve the claims made against the Company in the arbitration proceeding initiated in May,1985, by certain other Seabrook participants alleging that the Company's withholding of its Seabrook payments constitutes a breach of the Joint Ownership Agreement for the Seabrook Project. The Company cannot predict, however, whether a sale of its Seabrook interest would resolve such claims. (See Note 9 of Notes to Consolidated Financial Statements.)
The Company's cash flow requirements related to its ongoing construction program should decline significantly in 1986 because of the Company's effective disengagement from the Seabrook 27
Project and the projected completion of Millstone Unit No. 3. The Company should enperience a major reduction in the level of AFUDC accruals during 1986 and, because the Company has no plans at this time to participate in future jointly owned nuclear plants or other large construction projects, AFUDC accruals should decline to a minimal level and remain at that level for the foreseeable future.
Therefore, the Company expects that the cash flow component of earnings willincrease over the next five years and that, as a result, the Company will have no need for long-term financings and will be able to significantly reduce short-term borrowings during that period.
Capital expenditures in 1985, including AFUDC, amounted to approximately $10.8 million, compared to approximately $11.5 million and $12.3 million in 1984 and 1983, respectively. These amounts relate to costs associated with the continued investment in jointly-owned nuclear plants and j
expenditures for transmission, distribution and other general plant facilities. (See Notes 9 and 10 of Notes to Consolidated Financial Statements.) Capital expenditures for 1986, including AFUDC, are estimated to be approximately $4.6 million. This amount includes approximately $967,000 relating to
}
1986 construction requirements and AFUDC for Millstone Unit No. 3, with the remainder directed to local construction requirements. In future years, the Company plans to concentrate its resources on capital projects and system improvements within its franchised service territory.
l During the first quarter of 1985, the Company sold 1,177 shares of Common Stock, at an average i
price of $11.62 per share,in connection with its Employee Stock Ownership Plan (ESOP). On August l
8,1985, the Company sold $9,000,000 of its 14%% Notes due August 1,1992 at a price of 89.5% of the j
principal amount of Notes. At various times during 1984, the Company sold 25,483 shares of Common Stock in connection with its Dividend Reinvestment and Stock Purchase Plan and ESOP.
Operating Results in 1985, Net income decreased by approximately $3,700,000 (103%), after increasing by j
approximately $304,000 (9%) in 1984. This decrease in 1985 produced a Net Loss of approximately
$119,000. The loss per average common share for 1985 was $(0.81), a 140% decrease on a slightly larger number of shares outstanding, as compared to $2.02 earned in 1984. During 1983, earnings per 1
average common share were $2.43. The decrease in Net income in 1985 reflects primarily the i
nonrecurring adjustment to record the partial write-off of the Company's investment in the abandoned nuclear generating facilities, Seabrook Units No.1 and No. 2, amounting to a reduction in earnings per share of $3.59. Also adversely affecting earnings was the nonrecurring adjustment to reflect the write-off of the Company's investment in a cancelled customer accounting system, an increase in the amortization of cost of abandoned properties, an increase in other operating expenses, an increase in interest on long-term debt, an increase in electric demand cnarges and a decrease in KWH sales.
j Earnings were favorably affected by a full year of the electric and gas rate increases granted in i
December of 1984, the electric rate increase granted in November of 1985, an increase in non-operating income and an increase in firm gas sales volume.
Electric Operating Revenues were lower by 9% in 1985, reflecting a 5% decrease in KWH sales and lower energy costs for electricity purchased, which cost reductions are pacsed on to customers
{
through the operation of a cost of fuel adjustment clause. This decrease in KWH was caused by a substantial reduction in industrial sales, while there was modest growth in residential and commercial i
sales. In 1984, electric operating revenues increased by 25%, reflecting the impact of 1983 and 1984 4
electric rate orders and a 4% KWH growth in sales.
Gas Operating Revenues increased by 6% in 1985 and decreased by.5% in 1984. In 1985, gas operating revenues increased due to a full year of the rate increase granted in December 1984 and a 1% increase in firm gas sales volume. In 1984, firm gas sales volume increased by 6%.
Electricity Purchased for Resale decreased by 21% in 1985 principally reflecting the 5% decrease in KWH sales and lower energy costs for electricity purchased. Electricity Purchased for Resale increased by 47% in 1984 principally reflecting increased contract demand charges along with the 4%
increase in KWH sales. Fuel Used in Electric Generation decreased by 19% in 1985 reflecting the i
decreased demand for electricity. This compares with an 18% increase in 1984, which had reflected increased demand in that year.
1 28
Operating Expenses, Other increased by 8% and 3% in 1985 and 1984, respectively, resulting primarily from higher expenses associated with regulatory proceedings in 1985 and higher payroll and related benefit costs in 1984. Amortization of Cost of Abandoned Properties increased in 1985, primarily due to the recording of amortization on the recoverable portion of the Seabrook Unit No. 2 investment (see Note 2 of Notes to Consolidated Financial Statements).
Deferred Federal Income Tax decreased significantly as a result of the October,1985 Settlement Agreement which allowed the write-off and amortization of the Company's investment in Seabrook Units No.1 and No. 2 (see Note 9 of Notes to Consolidated Financial Statements).
AFUDC remained approximately the same in 1985 as compared to 1984, which had a 25%
increase. AFUDC increased by 38% in 1983.
The 1985 write-off of Investment in Abandoned Properties resulted from the nonrecurring adjustment to reflect the write-off of the unrecoverable portion of the Company's net investments in the abandoned Seabrook Units No.1 and No. 2 amounting to approximately $3,000,000 and
$1,700,000, respectively. Also included in the 1985 write-off of Investment in Abandoned Properties was approximately $500,000 related to the cancelled customer accounting system (see Notes 2 and 9 of Notes to Consolidated Financial Statements).
Interest on Long-term Debt increased by 16% in 1985 as a result of the sale of the 14%% Notes in August,1985. Interest on Long-term Debt decreased by 6% in 1984 as a result of the redemption of the 4%% Notes in February,1984. Other Interest Charges decreased by 1% in 1985 primarily due to a decrease in average daily interest rates. Other Interest Charges increased by 77% in 1984 primarily due to the increase in average daily bank borrowings. Average daily bank borrowings were approximately $13,895,000 and $11,954,000 in 1985 and 1984, respectively. Average daily interest rates on these borrowings on an annual basis were 10.9% and 11.9% for 1985 and 1984, respectively.
29
SELECTED FINANCIAL DATA Results of Operations (000's) 1985 1984 1983 1982 1981 Operating Revenues:
Electric.
$33,254
$36,510
$29,119
$28,194
$31,555 Gas.
20,734 19,651 19,758 18.289 16,583 Total Operating Revenues.
$53,988
$56,161
$48,877
$46,483
$48,138 Electricity Purchased for Resale.
$15.272
$19,239
$13,076
$13,517
$14,466 Fuel Used in Electric Generation.
$ 4,964
$ 6.095
$ 5,155
$ 4.731
$ 6.242 l
Gas Purchased for Resale
$13,579
$13,325
$14,216
$13.346
$11,174 Amortization of Cost of Abandoned Properties.
$ 3,149 435 172
$ 694 766 Local Property Tax-Net.
$ 1,017 901 950
$ 1,484
$ 1,415 AFUDC: Borrowed and Other Funds,
S 5,050
$ 5,057
$ 4.032
$ 2,919
$ 2,206 Write-off of Investment in Abandoned Properties.
$ 5,220
$ 6E 326 Net (Loss) Income
$ (119)
$ 3,593
$ 3,288
$ 1,990
$ 2,590 Dividend Requirements on Preferred Stock.
954 962 970 549 265 Net (Loss) Income Applicable to Common Stock
$ (1,073)
$ 2,631
$ 2,318
$ 1,441
$ 2,325 Common Stock Data Shares of Common Stock:
Year end (000's).
1,317 1,316 1,290 861 688 Average (000's) 1,317 1,305 954 773 625 (Loss) Earnings per Average Common Share
$ (.81)
$2.02
$2.43
$1.86
$3.72 Dividends Declared per Common Share.
$ 0.00
$2.30
$2.60
$2.60
$2.60 Balance Sheet Data (000's)
Utility Plant (at cost)
$62,597
$88,288
$85,738
$73,895
$63,114 Accumulated Depreciation
$14,317
$13,661
$12,648
$11,529
$10,441 j
Total Assets
$97,764
$95,125
$85,788
$75,511
$69,059 Capitalization and Short-term Notes:
Common stock equity.
$27,032
$28,017
$28,048
$19,615
$17,604 ReJeemable preferred stock equity.
$ 7,869
$ 7,986
$ 8,103
$ 8,220
$ 3,837 Long-term debt.
$29,491
$22,065
$22,416
$25,786
$21,182 Short-term notes payable
$11,400
$17,150
$ 6,700
$ 5,700
$10,300 30
SELECTED FINANCIAL DATA (CONTINUED) 1985 1984 1983 1982 1981 Electric Statistics Sales-Thousands of KWH..
344,026 361,389 348,488 336,367 360,272 Electric Customers-Year End 23,914 23,542 23,233 22,869 22,674 Average Annual KWH Sales per Residential Customer 4,999 5,046 4,929 4,852 4,788 Average Revenue per Hundrea KWH-Residential
$10.92
$11.59
$9.57
$9.47
$10.48 Gas Statistics Sales-Thousands of MCF.
2,662 2,784 2,551 2,653 2,819 Gas Customers-Year End 15,160 15,059 15,023 14,955 14,767 Average Annual Cubic Feet Sales Per Residential Customer 91,769 95,342 91,438 99,291 97,914 Average Revenue per MCF-Residential.
$9.04
$7.98
$8.78
$7.28
$6.31 QUARTERLY FINANCIAL DATA Summarized quarterly financial data for 1985 and 1984 is as follows:
Three Months Ended March 31, June 30, 1985 1984 1985 1984 l
Total operating revenues.
$17,324,881
$17,211,261
$12,049,384 $12,676,815 l
Operating income.
$ 1,859,303
$ 1,565,467
$ 851,161 668,297 Net income.
$ 2,052,526
$ 1,920,442
$ 1,156,102 $
870,822 Earnings per average common share.
$1.38
$1.30
$.70
$.48 Three Months Ended September 30, December 31, 1985 1984 1985 1984 Total operating revenues.
$10,389,713
$11,733,098
$14,223,565 $14,539,476 Operating income..
596,003 482,870
$ 1,444,525 $
943,335 Net (loss) income.
$ (3,899,927) 513,460 571,811 287,936 Earnings (loss) per average common share
$(3.14)
$.21
$.25
$.04 31
Board of Directors j
Philip H. Bradleyt*
Robert V. Shupet Robert L. Waret" R6 tired; formerly Resident Menager, President of R. L. Gourley Co., Inc.,
Lawyer;partnerin law firm of Ware &
Northeart of IBM Corporation, Wellesley, Mass. (distributors of heat-Ware, Fitchburg, Mass.
Waltham, Mass.
ing, air conditioning and water heat-ing equipment); President of Franklin Wyman, Jr.* "
Hydronic Technology,Inc., Wellesley, Chairman and Treasurer of Wright Richard L. BrickleY Mass. (manufacturer of gas boilers)
Wyman, Inc., Boston, Mass. (corpo-Lawyer;partnerin the law firm of rate financial consu *nnts); Director B
^
Pcter J. Stuigis and Chairman of the Board of B ston Mass.
Vice President and Treasurer of the Directors of Bailey's of Boston, Inc.,
Company; Director, Vice President Boston, Mass. (manufacturing con-Frank L. Childs and Treasurer of UNITIL Corporation, fectioner); Trustee and Vice President President of the Company Bedford, N.H.
of Brookline Savings Bank, Brookline, Mass.
G. Arnold Haynes Charles H. Tenney ll*
President and Principal of Haynes Chairman o'the Board of Directors Management Inc., WeIIesley Hills, and Chief Executive Officer of the Mass. (real estate development and Company: Director, Chairman of the management)
Board of Directors and Chief Execu-tive Officer of Bay State Gas Ccm-J. Parker Rice, Jr."
pany, Canton, Mass., and UNITIL Director, President and Treasurer of Corporation, Bedford, N.H.
Hyland! Rice Office Products, Inc.,
Fitchburg, Mass. (office planning, supplies and equipment); Director t Member Aust Commettee and President of Hyland/ Rice Busi-
- Member of Compensation ness Systems, Inc., Fitchburg, Mass.
Comm\\ttee (small business computer dealer)
" Member of Committee on 3
Corporate Organization j
Thomas W. Sherman
}
Director, Executive Vice President and j
Controller of Bay State Gas Company, Canton, Mass.
J i
i Officers I
Charles H. Tenney ll Charles J. Kershaw, Jr.
William D. MacGillivray I
Chairman of the Board of Directors Assistant Treasurer; Assistant Treas-Assistant Clerk; Assistant Clerk of I
and Chief Executive Officer *"
urer and Secretary of UNITIL Corpo-Bay State Gas Company, Canton, ration, Bedford, N.H.
Mass.
Frank L. Childs President Angela P. Carlson Allen R. Damren l
Clerk: Clerk of Bay State Gas Com-ControIIer Peter J. Stutgis pany Canton, Mass.; Secretary of the Board of Directors of UNITIL Corpo-Vice President and Treasurer *..
ration Bedford, N.H.
I Lawrence T. Gingrow, Jr.
" see Director listing for otner
[
Vice President principal occupassons.
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l FITCIIBURG GAS AND ELECTRIC LIGIIT COMPANY 2QlOlIN l'I I ClI IIIGIIW.\\Y, P.O. lion 2070. I I I Cli111'RG, AI.\\SS.. UI 120-WJO TEI.I PIIONF pil7):llt@:ll
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