ML20216E457

Eastern Utils Assoc 1986 Annual Rept

ML20216E457
Person / Time
Site:	Seabrook
Issue date:	12/31/1986
From:	Eichorn J, Pardus D EASTERN UTILITIES ASSOCIATES
To:
Shared Package
ML20216D932	List: ML20216D924 ML20216E046 ML20216E098 ML20216E324 ML20216E368 ML20216E420 ML20216E457 ML20216E508 ML20216E535
References
NUDOCS 8706300702
Download: ML20216E457 (45)

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. E Montaup Electric holesale Territory ;

' E Eastern EdisonMervice Area -

5. E Blackstone Valley Electric Service Area c , s1

.T A'B L E. OF .C O.N T E.N T S 1

1_ Highlights and EUISystem Profile a '

< ' 21.etter to Shareholders :

- 5 DoingWhat We Do Besti

.16, Review of Operations'

'/ l f J ' 23 Selected Consolidated Financial Data ,

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24' Management's Discussion'and Analysis t

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. 26 Consolidated Financial Statements -

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,30 Notes to Consolidated Financial Statements.

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{ A 345,000 volt transmission tower scars - 39 Quarterly Financial and Common Share skyward, symbolizing both the stabillty6 '

1Information '-

qand p,romise of the prihlary task of EUA ; s 739 Dividend Reinvestment and Common' Share -

.W_ g. . ] System companies: providing adequate .. . LPurchase Plan :

W f.and reliable electric servicel. , .

s;40 Consolidated Operating Statistics -

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1986 19M  % Change FinancialData (dollars in thousands) '

Operating Revenues $343,324 $333,510 +2.9 Operating Income . 61,725 48,072 + 28.4 Consolidated Net income 32,490 - 29,770- + 9.1 r , Net Utility Plant ~ 815.225 599,130 + 36.1 L- Cash Construction Expenditures '47.137 54,406 - 13.4 Internally Generated Funds 44,832 27,501 + 63.0

. Return on Average Common Equity 15.0 % 14.9 % +0.7 Common Share Data

~ Earnings per Average Common Share $2.82 $2.67 -+5.6 Dividends Paid per Share $2.15 $2.03 +5.9:

Average Common Shares outstanding 11.537,677 11,156,941- . +3.4

. Ikmk Value per Share (Year End) $19.28 $18.30 . + 5.4 Market Pitce (Year End) $38.50 $25.88 + 48.8 .

Operating Data . .

'Iotal Electric Sales (mwh) 4,664,000 4,509,000 _+3.4-System Requirements (mwh) - 3,971,000 '3,822,000 . +3.9 System Peak Demand (mw) 691 ~738 -6A System Reserve Margin (At Peak) 24.9 % 18.9% ' + 31.7-System I.oad Factor 65.6 % 59.1 % + 11.0. .

Customers (Year End) 243,550 238,898 +1.9 Empk)yees (Year End) 1,118 1,104 +1.3 1

EUA SYSTEM PROFILE Eastern Utilities Associates is a public utility holding wholesale power to other utilities within New England.

company and the parent company of the EUA System. About 7.5% of total 1986 consolidated operating reve-The EUA System is principally engaged in the genera- nues were regulated by the Federal Energy Regulatory tion, transmission, distribution and sale of electricity Commission.

g to 243,500 customers, covering an area of about 540 In addition to the above utility companies, the EUA i square miles. The EUA System includes two retail elec- System includes EUA Cogenex Corporation, an energy tric companies - Eastern Edison Company serving management and cogeneration company and EUA Ser-164,000 customers in southeastern Massachusetts and vice Corporation, which provides various accounting, Illackstone Valley Electric Company serving 79,500 cus- financial, engineering, planning, data processing and tomers in northern Rimde Island and two wholesale other services to all EUA System companies.

generation companies - Montaup Electric Canpany, Eastern Utilities Associates has paid common share which supplies electricity to Eastern Edison, lilackstone dividends for 58 consecutive years and has increased and three unaffiliated utilities for resale and EUA Power the amount paid in each of the last five years. i Corporation, a new subsidiary which will be selling i

1 )

TO OUR S li A R E li O L D E R Tand exciting ventures highlighted our a he successful culmination of many of our plans for El!A, and the commencement of some new Electric sales were up in all major categories throughout our retail service areas, sNwing a combined growth of 3.7% . Growth in the commercial sector was particularly strong, showing a gain of 6.3% over 1985. Sales to residential customers were up 4.1% , and industrial sales advanced 2.6%. j Earnings increased to $2.82 per share, up 15 cents, or 5.6% , in spite of the effect of a 15-cent charge against earnings for the cancellation of Seabrook linit II. Consolidated net income of the System reached a record high of $32.5 million,9% over 1985. .

The annual dividend rate was increased during the year from $2.06 to $2.18 per share. This k' marked the fifth consecutive year of increases in the dividend paid to shareholders. The pattern of

• steady income growth, coupled with strong prospects from new ventures, elevated the market value of your El!A common shares 49% above their value at year-end 1985. This amounts to almost twice 3

.N \ book value, an indication of the high level of investor interest in the Association.

Management's negotiations, over a seventeen month period, with five utilities, fourteen state l

John F G. Ekhorn.Jr and federal regulatory b0 dies, Commercial banks and an investment banker, have resulted in the estab-lishment of EUA Power Corporation. The new company now owns 12.1% , or 140 megawatts (mw), of

- the capacity of the Seabrook nuclear generating plant. Coupled with the 2.9% owned by Montaup Elec- I g tric Company, El!A has become the third largest owner of Seabrook Station.

k The favorable purchase price of our new ownership in Seabrook and the innovative financial I l

and rate treatment, which has been approved by the federal Energy Regulatory Commission, make this investment very promising for our shareholders. We are very pleased, also, that the timing and

, substance of our offers were such that they removed many of the financial obstacles to the coupletion Donald G. Pardus of Seabrook's ConstruClion.

The licensing process is still moving very slowly. Ilowever, we are encouraged by several recent announcements by the Nuclear Regulatory Commission which indicate their desire to end delays caused by individual states on this very important regional and even national issue. We remain opti-mistic and expect a full-power license in late 1987.

A sixth subsidiary, El!A Cogenex Corporation. was added to the System with the purchase of l Citizens lleat and Power Corporation (CilPC), on December 31,1986. CilPC was originally formed in 1983 byJoseph Kennedy,11, as part of Citizens Energy Corporation. The organization has grown to the point where it now monitors and controls the energy use of 150 commercial, governmental, and health facilities. The total of the energy bills managed by the new corporation is in excess of $12 million per 2

year. EUA Cogenex will continue to expand the business of energy management and cogeneration already well established by its predecessor. We expect Cogenex to make a positive contribution to our net income.

This latest addition to the EUA System provides us with an excellent vehicle for helping meet New England's rapidly increasing demand for electricity, from the customer's side of the meter. One major aspect of the region's dramatic economic recovery has been an electric demand growth 80%

higher than that of the nation as a whole. In order to meet this critical energy need, and to ensure con-tinued economic prosperity, both energy conservation and the addition of new generating facilities are absolutely essential. Cogenex puts EUA in a position to make significant contributions to both sides of this equation.

Along with other utilities in New England, we will be taking advantage of the vast hydroelectric resources of northern Canada. The first phase of the flydro Quebec interconnection entered commercial operation in October of 1986, and Phase 11 is scheduled for operation in 1990. By that time, Canadian resources will be able to supply approximately ten percent of New England's electric demand. As a par-ticipant in the New England Power Pool, Montaup Electric Company has access tc,26 mw of the power which is now flowing into the region. This power from Canada will also help diversify our sources of energy supply.

Further progress was made during the year with Ocean State Power Corporation. The planned 235 mw facility will utilize natural gas from Canada under a long-term, fixed contract. The plant is to be built adjacent to one of our major substations in Burrillville, Rhode Island. We expect to own 25%

of Ocean State's equity and may be responsible for its operation.

Our continuing support of Seabrook, expansion into the conservation and cogeneration fields, and participation in the import of Canadian power resources, are all dinered at assuring our cus-tomers an adequate supply of electricity, both now and in the future. th lo.stering conservation and further diversifying our fuel mix, we will enhance reliability and minimize fuel costs. The control of costs, in turn, enables us to encourage sales, thereby enhancing our shareholders' investment. l The past year was a ful; and productive one for EllA. We were able to build on the strong foun-dations of our past, and to develop new and exciting prospects for the future. To this end, our employ-ees, through their dedication and varied expertise, enabled us to fulfill the expectations of our  !

customers and shareholders in a most exemplary manner. Through their cooperative endeavor, we anticipate continued innovation and further progress in the coming year.

l Sincerely, l hnubf Ad h&u John F. G. Eichorn, Jr. Donald G. Pardus i

Chairman oftheBoard President 1

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DOING WHAT WE DO 13 E S T Emm crecu/iresto meter rve enjoyed working out- had to shift for themselves res/crs;from line con- side, the variety of work, dif- during a storm; so as i s/ructionpersonnelto ferent locations and, most approach retirement age accounhin/s from com- of all, the security that the they are looking forward to pulerprogranuners to position has offered myself my being with them.

Ctts/omerservice represen- and my family.

ht/it es, EUA employees Working outdoors has a ears ago - before demons / rale dai/r the lot to do with it. As does ,

.L the oil embargo -it direrseshi/hinrohn/in the variety of work- was easy to produce fairly theopera/irm(fan c/ectric different places, different accurate forecasts of energy utih/r. 7he seria ofcuays, assignments. use and peak demand. You terillen brSrslem emplor- There have been times simply looked at current ves, cremph]ies the dedica- during a severe storm when _ m growth trends and extrapo-li(m each brings to /belash we have been called in to cuotwmn lated those trends into 1.oad forecast ana-work around the clock. tyst: sconomics, the future.

demographics and That's always satisfying business trends are Today, we're much more important factors because you know that you in forecasting sophisticated. We consider I'm a kneman.

future needs for I hate been employed ,. are getting hospitals and electric sers ice." influences from many disci-with the EliA System for 37 other critical facilities run- plines, including econom-years- currently, fm a (' ning- as well as residen- ics, demographics and crew chiefin the overhead W tial customers. For the most engineering.

line section. My crew con- ,a part, I have found cus- Part of my responsibility sists of three people myself, m pgm.3 tomers to be very under- as a load forecast analyst IJne crew chief:

a lineman 1st class and a A carsexpc. standing about storm with the resource planning trainee. On a daily basis, my '$f o rhe dline pmblems. Most people are department includes work-crew does new construction, 1[pingIekp very grateful, and go out of ing with EUA's long-term j conversion work and (n their way to say thanks or forecast 1 rig model. This maintenance. offer you a cup of coffee. model allows us, as plan-I have ahvays worked in Throughout the years, ners, to consider relation-the overhead line section. my wife and children have ships between changing 5 l

economic conditions, cooperation with the New changing demographics and ,

England Power Pool-changing consumption pat- which oversees the genera-ment saves our customers terns on energy use. Then tion and transmission of money. You have to think of we measure how those fac- power in the region.

it in terms of buyers and tors affect demand on our Sometimes our transac-sellers.Forexample,if there i System.We develop a view tions willinvolve the swap-were a generating station of what the future may look ping of power between two that produced electricity for like for EUNs System power plants. Every plant {

a fuel cost of St a kilowatt-hour and another station Some of the factors we fixed costs and fuel costs. liv i

that produced electricity for  !

consider in forecasting adjusting purchases and a fuel cost of 3< a kilowatt- , -,., _y include service-area popula- sales of power between such hour- then it would be "n tion, household formation, . .

O plants, we can optimize saV-better for us to buy from the .

9 income and employment by j- >

ings to the customer and latter. On the other hand, type of industry. We also still protect the return to  !

ifwe were producing power .

consider how customers use shareholders.

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electricity, by including fac- Whether it's the day-to-day another utility- then it MmE DnDEDmo tors such as usage by appli- nanager of power buying of power er a trans-W0uld be better[or us to management:

anCetype. super,1ses day-to- action involving the swap-produce allwe could, even if day cuhange of l We make forecasts for bulk power with pingof power that will run it was more than we needed, other utilmes, different time periods: long- "What we do saves for several years, the point is i and sell the excess. Of course our customers term forecastslook ten to moneyt' to obtain the most economi-we would sellit for a price ,

fifteen years into the future; cal power available for our {

above ourcost in order to Short-term forecasts go out customers while protecting one to three years. the interests of our investors.

The forecastingprocess is ers' investment.

quite complex, but our goal On a given day - taking is simple. Ily accurately into account all the factors forecastingwhat the future -

f f"#18 "'"' #IIICI""CF' demand for electricity will customer demand and he, we can develop strategies reserves - that's what we  ;

to meet that demand reli-do. And it's all done in ably and at the most reason-

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d>le price.

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v shift is Mid-and amperes readings to see to rings - to anything that u night to 8 A.M.

if it willlast until morning. keeps the plant running.

I'm a troubleman. My main when a line crew can get to it. I m responsible for giving job is hne trouble. Wires Fve been doing this for 33 them the supplies they need.

down. A tree falls on a wire.

years Allline work. I like We either have it here - or A car hits a pole.

the challenge, I like to find it s at another Company in Troublemen work alone.

anstrers. I don't just leave the System. For example, if My job is to get as many something - even if I fixed we need shovels and we customers back in service - . - 9 . '

i. it. I want to know what went know the uher Companies in as short a time as possi- , g

'o wmng. have large supph.es, we 11 ble. My primacv responsibil-In fact, I do the same type transfer from the other ity is the safety of the public.

of work for the Navy- for Companies rather than Upon arrival, I assess the " " ~ " "

the Seabees - for the htst ordering direct from a damage. If there > a bad im sr.ruso Night troubleman: 28 years. I m a construction vendor, problem. I implement the " Restore scrince to as many customers electrician chief. All in all- we have necessary switching to have as possible . . . in as short a time as A very interesting part of 7,000 items at Montaup.

the smallest possible area possible, I like the challenge." my job is workingwith the That s 7,000 kinds of items.

out of service. I can call in other troublemen who are available. If I have to -

provide information about help in tracking supplies Ican callthe line supervisor lines and feeders and trans- and re-ordering when we're to get some additional help.

formers. I need them to cy, low. Ifs a whole new way of But, most of the time. I do C guide me. doing out work. It's some-it alone. For example, say a 7*

I work on the end of a e thing I wasn't at all familiar pole-type transformer burns telephone or a radio. Find- _ _ with. I ve been with the out. It's 3 A M. I get there as ing trouble. Fixing it. FR ANK lilBBERT,JR. Company for 23 years add fast as I can. Verify the prob- stockkeeper ist class: Controlling this is my first experience lem. Then I take the trans- costs using a com-here are about 100 with a computer system.

former offline. I look at the Tpeople aFMontaup puter estem to track supplies is a "whole new way of Once we gain more experi-i lines - I pick out an ad,ia- making sure m e who will have reason on any always have the ence, things will run more cent transformer- take a items we need."

day to come to the stock- smoothly. It's a learning readingon it to see ifit can room for something. From system- as we use it, we handle more load- and tools, to screws and nuts, to learn more about it and then I tie the secondarv '

learn how to use it in hnes into it It s a Judg-more ways.

9 i

It's a big system.When we overhead lines or under- revenue. That's what it's all added generation and trans- ground systems, whichever about -personal contact  ;

mission parts to the new is necessary. ensuring reliable service.

i computer, we more than A development project can l i

I doubled the number of itemsin the inventory for run from six months to two years. Right now, there are Theexcitingthing about my job is that the whole EUA System. two big condominium proj- it can help kth the share-llut my basic job stays the ects going on in my area - , , , , . , holders and the rate payers.

r<

same - when a person one with 177 units and the (

As a supervisor of System.

walks in and says, "I need a other with 144 units- and E , budgets,I monitor costs number-32 drill bit," l've they could take two years or from all the departments on I

, 1 got to find it for him. Only more to complete. There are a day-to-day basis. If I see a now, I've got a computer convenience stores going up h g$

%gu problem developing -let's l

helping me look. also- and those projects num.s say costs in one area are j McEtJHMV 1 will take six months or so. Supersisor of higher than projected-

,3 System budgets:

I follow up on everything. "our cost control then I'll bring it to the q or the past two or efforts benefit Jw three years, we've I talk to the architect, the shareholders attention of senior manage-through increased been very busy with the general contractor and the profitability and ment. And I'll help work out y

% customers through building boom going on A{ . , .. g' electrical contractor. I lower costs." ways to control those unex-in our service territory. review plans and go over pected costs right away.

' ' @3 I

As a commercial /indus- .. those plans with the engi- We'll come up with different trial representative, I work neering department to make scenarios- maybe the with the developer. I'm the u m. sure there will be adequate costs can be deferred for a primary contact between son camn power. while, or maybe there's a Consumer sertices, him and the Company. All this information is better vendor to use, or commerciat indu..

trial representative:

I,11 receive a call from a constantly going back and maybe there's a better way

.. Regular personal contact is a vital developer-after 38 years I part of the scevice forth- from the Company to of doing the job. We'lllook ut prmide our know almost all these devel- conunerciai the developer - through me. at any way to cut costs -

and industrial opers on a first-name bas.is. customers." Our most important func- that won't hurt the quality l'Iltake the preliminary tion, as far as I'm con- of service.

information, get an estimate cerned, is service. Service to These cost-control mea-l l

of the electric load they'll the customeris our top suresimprove our financial require, and, when I get the priority. As long as we pro- situation as the year pro-plans, I send them to engi- vide service, customers will gresses, and that's a benefit l

neering. They begin plan- use power. That brings in in earnings-per-share for ning construction of 10

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our shareholders. At the want EUA to treat any excess he Tax Reform Act same time, as these savings deferred tax reserves result-L of 1986will have a accumulate over the long ing fmm the tax ate reduc-significant impact on alj term,they become a benefit tion. Deferred taxes, related i businesses-including EUA.

to our customers through to the use of accelerated My position involves doing lower rates. depmciation for tax pur-tax research, the prepara-While we are in a regu. p ses, h ve been collected tion of tax returns and fil-latedindustry,there are our customers in prior ings with Internal Revenue aspects of our business that years on thebasis of a 46 Service personnel, as well as are very competitive.13ud, " percent tax rate and nor-processing monthly tax geting helps us keep the mauy would be returned to accruals and handling l edge. Sometimes it's hard to them at the same rate. lfow.

quarterly estimated tax make time for planning and ever,with the rate changing payments.

budgeting-but budgeting I 34 percent, a portion of One key issue facing EUA nam-forces people to look ahead the deferred tax reserve is the reduction of the cor. 313,goty,y,1,3 and think things out. Ig w uld not be returned to porate tax from 46 percent $l" ",rQ helps the System set goals. whaus rnost cust mers under normal t 34 percent, under the new equitabte for both After all, we have a respon. sa accounting procedures.

tax law. We've already seen [h sibility to our rate payers, to certain groups have pro-where one regulatory body our shareholders and to the posed that regulators require wants EUA to reflect this community. Te want to utihties to return the excess reduced tax inlower retail keep electricity the eco. reserves all at orce, but this l rates. flowever, there is a

' nomic choice. We want resi. would bein violation of the problem with that reason-dentialcustomers to stick pr visions of the new tax j

ing. You can't look at just with electricity and not law. It would be more equi-oneline item;you must switch to gas or oil. And we taNe to both shareholders takeinto account all the want commercial and and customers to return the other aspects of the tax law industrial customers to see excess reserves over the that may affect EUA's our rates as making the same period they would income, aswell as other region attractive for their have been had the tax rate changes that are always operations. n ! changed.

occurringin the cost of I take an awfullot of pride In implementing the new doing business.

in doing my job efficiently- tax rules,the challenge is to Another issue which we because it's important to others. do what is most equitable faceis how regulators will for both ratepayers and shareholders.

13

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call can be handled more This consolidation will s a customer service eff c ently. With the new sys- make it much easier to Irepresentative, my em,I sometimes answer coordinate our various pro-Jobis to talk with customers 120 calls a day. grams and operations; there of our two retail companies, Pm of our tminingis a will be quicker access to per-helping them with their coursein transactional sonnel and more face-to-questions. People call analysis. We learn how to face contact which will because they're moving and understand the customer's improve the decision-mak-need to have their power

{NTN point-of-view.Oneimpor- ing and implemer,tation tJrned on or off. There are m f1 9g tant aspect we learn is not.

process.

' j lots of general billinquiries: -

d

[  % g topredeterminewhatpeople I.m also looking forward they want to knowif they .

1 will say. Gradually, we find to workm.g with the new i

< have an account balance; i

n of construction of the third offer was made, which reduced Seabrook nuclear generating station 4 _ the price paid for the sunk costs by offering to buy the interests of through May 1985 to a level below four other owners in Maine and Ver. 2 _ the original offer. The addition of the mont. Subsequently,very early in ongoing expenditures, and interest, 1986, an offer was made to purchase -

fromJune 1,1985, brought the total "2 "' "4 "' "

the small interest owned by a Massa. amount paid to the sellers, at closing chusetts utility. in November 1986, to $174 million.

The five owners and their respec-tive shares of Seabrook ownership

(%)and capacity entitlements (mw) were:

17

As with any business decision, Construction Expenditures j however, there is a degree of finan-1 cial risk with_ this acquisition. To min-imize this risk, both to customers

""""'" )

and shareholders, we formed a new '

subsidiary, EUA Power Corporatlon. .

This subsidiary was initially financed

. with $149.5 million of non-recourse 75 ~-

notes issued to outside investors and

$45 million of EUAshareholder 60 -

equity. An additional $30.5 million of - '7 non recourse notes are expected to e -

be issued in March 1987. Federal reg-ulators have authorized a 25% return 30

---~~~~~~ -

on the EUA equity investment.The fact that EUA Power will operate ini- " _

tially as a wholesale supplier of elec-tricity to non-System utilities will protect our retail ratepayers from _

cost escalations due to further delay 76 77 78 79 80 s1 82 83 84- 85 86 of the project. Our relatively low ifYDRO QUEBEC equity contribution will similarly Phase I deliveries of 690 megawatts protect our shareholders. In the (mw)of electricity began flowing event that Seabrook Unit I had to be into the regional transmission net-cancelled, the equity investment in work of the New England Power Pool EUA Power would be at risk, on October 10,1986. Based on pres-

$EABRoOK STATUS cut fuel prices and production cost )

estimates,approximately $600 mil-Seabrook Unit I now stands com.

lion will be saved by New England l

plete, loaded with fuel, and ready to consumers over the eleven year  ;

generate power.The one remaining course of the contract.

obstacleis the delayin receiving a The EUA System is entitled to commercial operating license for ihe approximately four petcent of Phase facility. This is stlli an unresolved I power,or 150 million kwh per year.

issue,one that has delayed several This will provide cost savings and an )

Other reactors in the past few years.

energy-equivalent saving of 2.5 mil-  !

Recently the Nuclear Regulatory li n barrels of oil, over the life of the Commission has shown a willingness contract.

to challenge the stalemate caused by These savings are expected to states such as Massachusetts and New increase over the years, because the York in refusing to participate in cost of this power is based on 80% of emergency planning. EUA, along the cost of fossil fuel over the pre-with other joint owners of Seabrook, vious twelve months.Therefore,if )

is doing all we can to resolve this the cost of fossil fuel, particularly oil,  !

hsue in the interest of the electric increases, the 20% savings will consumers of New England as well as our own shareholders. It is not cer, increase proportionately, By further diversifying EUA's fuel tain, at this time, when this issue will mix, the Hydro Quebec interconnec-be reschrd. f tion will also help reduce New England's reliance on foreign oil.

18

l OCEAN STATE POWER ' The Center is being built to con.

Further progress was made during solidate the operations of employees the year as all key parties including - who currently share offices with our Montaup subsidiary, agreed to other subsidiary companies in Mas-20-year contracts for a supply of sachusetts and RhodeIsland.The 350 j

' Canadian natural gas for Ocean State employees Irwolved in theinitial Power's natural gas-fired generating move provide customer service, plant to be built in Rhode Island. Pro- accounting, communications, engi- f cedures are now underway to seek neering, data-processing and other ]

licenses and permits from state, fed- essentialservices common to all EUA )

eral and provincial officials in the' subsidiaries.

' United States and Canada. Consolidation at a singlelocation Ocean State Power willbe a joint near the geographic center of our venture,with EUA expected to own service area will enable EUA person.

25% of the equity.The 233-mw out- nel to provide more efficient service put of the plant will be sold under . to all customers of the System.The 20-year contracts to four New England building will be a three-story, utilit ies, ineluding Montacp, which 122,000-square-foot structure. Occu- ,

will purchase 21% ofits capacity. pancy is planned for Fall 1987. ]

. Electricity will be generated at I the facility through a "cornbined- GENER ATioN STR ATEGY 8Y" tern Capabillayereak cycle" process, Gas turbines will be The ownership of sharesin several j used to generate the electricity, and m generating units, and the utilization hot gases leaving the turbines will be of a diversified fuel mix, continues to

]

used to generate steam for another y,, _

serve EUA as an effective generating j turbine.The " combined" output of strategy. j both turbines produces still more vso _

The average cost of fuelfor EUA 1

( electricity, thus conserving the System generation declined during I

amount of fuel used per unit of out. 625 - the year from 2.6 to 2.1 cents per kilo-put. Natural gas, being the cleanest watt-hour. This is the lowest level it  !

burning of all fossil fuels, will also -

has reached in manyyears, and is minimize the environmentalimpact primarily due to reductions in the

]

of the unit. -

price of oil.

The facility will be built in EUA ,, The average cost of No. 6 oil, h service territory, on a 40-acre site in used at generating stations in New Burrillville, Rhode Island. If govern- J25 _

England, during 1986 was $13.60 per mentalapprovals areissued in a barrel, compared to an average cost timely fashion, the unit will begin of $24.60 per barrelin 1985. Coal l pmducing power in 1990. It will be 82 83 84 85 H6 prices, which tend to reflect the cost the first new power plant to be built ,, rg 37 ,cm apacy of oil, also declined, from $57 per in Rhode Island in almost 50 years. m ReserveMargin ton in 1984 to under $50 per ton in a amerim Unit sales 1986. We took full advantage of these NEW OPER ATING CENTER E EtM system Peak reductions in fossil fuel prices to Ground was broken at West Bridge- minimize the cost of electricity to water, Massachusetts, in June 1986, to consumers.

begin construction of the new East- While the price of oil is low at this ern Utilities Operating Center. time, most analysts expect it to rise in the near future. In any event, how-ever, we are much better able to take L

19

_ _ _ - _ ___ _ _______ _ _ _ _ _ _ _ _ _ . _. 3

Jadvantage of relative shifts in oil ver- EUA territory took part in the " Stay isus coalor nuclear costs now than Clear, Stay Alive" program. And 1986

we were in the mid-seventies. Since ' saw the launching of the " Fires and

' our coal conversion project at Mon. Wires" program, where specially L taup in 1983,we have been able to - trained EUA employees met with per.

' burn coal or oilinterchangeably. sonnelfrom local police and fire

. Therefore,we can now take advan- departments to discuss electric tage of price shifts, and burn which- safety concerning fires, downed

~

ever fuelwill offer the lowest cost wires and other emergencies.

per kilowatt-hour. Our access to gen- EUA was in the classroom in eration from six operating nuclear - many other ways.The EUA Teachers'

. plants and our participation in the Advisory Panel, involving teachers ownership of Seabrook willalso tend from area schools, continued work-to protect EUA customers from future - ing to develop and determine the escalation in the cost of fossil fuels. educationaltools which willbe most j

, helpful to classroom teachers. More l CUSTOMER AND COMMUNITY RELATIONS than 22,000 publications, audiovis.

While dependable electric service is uals and curriculum sets were pre-paramount, EUA System personnel sented, free-of-charge, to System area dedicate themselves to fulfilling an schools, equally great challenge-that of Inwrnaupnerated rund.

We also ran the first annual Edu-being responsible neighbors and a a % ofCah Constructlon cators' EnergyWorkshop,wherein Expenditures citizens. teachers were invited to learn about

' Our efforts span a wide range of ~ *$ electricity, how to present it in the activities and programs, bringing classroom and how to use the var-

"4 EUAemployees and their neighbors -

ious types of educationalmaterial together to work on projects of com._ y EUA offers.

- mon interest. To give students an idea of what a The EUA Speakers Club provides g career with a utility would be like,

~

an excellent opportunity for the the EUA Companies participated in effectiveinterchange ofideas a _

Career Day activities, such as the between the System and the commu- " Adopt A School" program- where nitles we serve. Our speakers go out,

• _ students were assigned to EUA

. not only to address a variety of employees and followed them 24 energy-related subjects, but also to -

through their work routines.

listen, to exchange ideas, and to find EUAwas also involvedinJunior out how we might better serve the ~

Achievement-sponsoring JA "Busi-needs ofour customers. Sixty-eight nesses" and providing employee vol-active members of the Club reached eu 83 84 es u, unteers who helped young people over 6,000 people in 1986, a 38% more fully understand what running increase over the previous year. a business is all about. To spark stu.

Our electric-safety programs for dent interest in energy matters, EUA schoolchildren continued to be wel! Companies ran National Energy Edu-received and highly successfulin cation Day contests. i 1986. Over 82% of the System's third. Retail customers continued to grade classes heard the " Electrical receive informative enclosures with Safety-From A to Zap" Program; their bills, which addressed a myriad j and 90% of the fifth graders in the of topics - from electric safety, to conservation, to discussions on elec-trical generation.

l

)

20 i l

l

lleing a good neighbor is part of what EUA is all about as well. In 1986, rwm>nu Eastern Edison Company donated an Fw ac*niu historic building it owned to the local Chamber of Commerce,in 2n, % ne39:

Ilrockton, Massachusetts, to be used as their new office facility. '""' "*"V9' In one of the most significant pro-gramsof all,EUAwholeheartedly ""' """* '*MI'"'" "

supports the Good Neighbor Energy 92, on v I'unds in both lunie Island and Mas-sachusetts. The I unds are sponsored by utilities and administered by The Sah'ation Army in both states.

Through it, funds are collected from xpeme

m. ene_i our customers, matched on a 50%

basis by EUA Companies and distrib- liU"r**'*"

uted to households in need. Iloth io oou mranon annainn n.me Good Neighbor Energy l'unds were ,y, ,, ,, ,,, ,, y ~

very successful, and should continue i22 Tam in the years ahead.

$ *1. (kgetlatkin aruf Arnortiration EMPt.oYMENT 9 n, ging The total number of employees in the EUA System went up to 1,118, from 1,104 in 1985.This modest increase has been occasioned by the rising demand for more diversified Management Consultants, where he i technical skills. became a senior vice president and i

Almost 20% of EUA System director. Mr. flatch returned to EUA l employees are represented by union in 1981, as vice president of EUA Ser-l bargaining units. Montaup Electric vice Corporation, where his respon-Company is currently operating sibilitles included power-supply under a 42 month contract, sched- planning, contracts and special duties.

uled to expire in March 1987. Mr. Ilatch succeeded the previous Another union local representing president of Eastern Edison .Allan employees in the l'all River division K. Ilamer. Mr. Ilamer retired on of Eastern Edison signed a 21 month August 1,1986, after more than 30 contract in September,1985, which years of service. Ile had been presi-will expire inJune 1987. dent since 1979.

CliffordJ. Ilebert,Jr., was named M ANAGEMENT APPOINTMENTS treasurer of EUA and of each of EUA's Arthur A ilatch was elected presi- subsidiaries in April 1986. Mr. I f ebert l

I dent of Eastern Edison Company in joined EUA in 1975 as a staff accoun-June 1986. Mr. Ilatch began his utility tant with EUA Service Corporation.

career in 1948 with Ilrockton Edison lie had most recently been man-Company, a ptedecessor to Eastern ager of financial reporting and Edison. l'or twenty years (1961-1981), forecasting.

he had been with Stone & Webster

[

21

F I -N A N C I A 1, _I N F O R M A T ! O N f

23 Selected Consolidated Financial Data 24 Management's Discussion and Analysis -

26 Corisolidated Financial Statements >

30 Notes to Consolidated Financial Statements {

39 Quarterly Financial and Common Share Information 39 Dividend Reinvestment and Common Share Purchase Plan 40 Consolidated Operating Statistics l

t i

8 I

l 22

S E L E C:T.E D C O N S O L 1 D A T E D- 1 1 N A N C'l A L D.A T A n>ars EnckdIkcember31,

' (In Tixnaands Except Common 93 ares and l Itr9xtre Amounn) 1986 1985 1984 1983 1982 incomeStatementData Operating Revenues $343,324 $333,510 ' $361,325 $302,450 $288,4' 17 Operating income 61,725 48,072 46,767 36,537 31,296 Consolidated Net income 32,490 29,770 30,053 25,364 16,941 BalanceSheetDatas Plant in Service 614,330 407,497 394,107 374,132 358,599 -

Construction Work in Progress 358,708 - 335,130 283,216 249,700 172,057 Gross Utflity Plant - 973,038 742,627 677,323 623,832 530,656 Accumulated Depreciation 157,813 143,497 134,077 .125,568 117,396 ,

Net Utility Plant 815,225 599,130 543,246 498,264 - 413,260 Total Assets 954,514 714,436 661,471 585,135 489,259 capitalization Long Term Debt 423,789 .285,491 '288,876 256,398 199,850 Redeemable Preferred Stock 29,852 31,457 33,240 34,155 - 34,457 Non-Redeemable Preferred Stock 15,079 15,079 15,079 15,079 15,079 Common Equity 225,156 208,211 191,619 172,327 140,973 Total Capitalization 693,876 540,238 528,814 477,959 390,359 Short-Term Debt 63,444 25,373 0 'O O Common StockData:

Earnings per Average Common Share $ 2.82 $ 2.67 $ 2.85 $ '2.80 $ 2.25 Average Number of Shares Outstanding 11,537,677 11,156,941 10,562,324 9,062,810 7,519,381 Return on Average Common Equity 15.0 % 14.9 % 16.5 % 16.2% 13.5%

Market Price-Iligh 39 % 26% 18 18 % 14 %

- Low 25 % 16% 12 % 13 % 11

- Year End 38 % 25% 18 14 % - 14 %

Cash Dividerals Paid per Share $ 2.15 .$ 2.03 . $ 1,91 $ 1.79 $ 1.70 t

23

1 M A' N A G E M'E N T

• S' ' D I S C.U S S I O N A'N D ANALYSIS O F .L F 1 N A N C I A 1; C O'N D 1 T l O N AND RESULTS~

O.F OPERATIONS l

overview ' by the 6% increase in kwh sales to our commercial Omsolidated Net income for 1986 increased 9.1% over customers and the nearly 4% increase to residential 1985 while 1985 decreased 0,9% from 1984. Earnings customers. Kilowatt hour sales also were up in 1985 per average common share of $2.82 in 1986 increased compared to 1984. The 1985 increase was primarily the l

- 5.6% over 1985, while 1985 decreased 6.3% from 1984. result of new shon-term unit contract sales. During Earnings per share for 1986 reflect a charge of $0.15 per 1985, EUA System primary sales were up less than 1%

share relating to that portion of Montaup's investment in reflecting a slowdown in the economic growth of our Seabrook Unit 2 which will not be recovered from its service territory.

customers. See Note I of Notes to Consolidated Finan- The table below sets forth the percent changes in kwh cial Statements for further details. These changes in sales by class of customers for the last two years:

earnings per share also are influenced by the increases in the number of average common shares outstanding inm w (vem w) of 3.4% and 5.6%, respectively. / tom /viorwars Positive evaluation of EUA's common shares by the sw6 19s5 1 investment community is reflected in the dramatic Residential 4.1% 0.6%

increase in the market price of EUA's shares. The price of EUA Common shares has steadily climbed from $18 Commercial 6.3 5.0 Industrial 2.6 (2.7) at year-end 1984 to $38% at year end 1986 - an increase of over 114%. In additlon, for the fifth consecutive year, Wholesale (2.6) (3.5) the common share dividend was increased.

Unit Contracts 0.9 40.8 Other 5.7 (7.8) operaung Revenues C ns lidated 3.4 4.8%

The table below sets forth estimates of the factors p ,,,

which caused Operating Revenues to change during the ,

I ** * *" Y""#8 continue to be Fuel and Purchased Power costs, which

, , in 1986 and 1985 amounted to about 53.7% and 60.9%

nom sytor nm of total operating expenses, respect h'ely. Fuel expense f r 1986 decreased $26.3 million or 20.9% from 1985,

(#in millions) sw6 19s5 reflecting principally lower fuel costs as a result of a ,1 Operating Revenue change dramatic decline in the price of oil and the Millstone j attributable to: Unit 3 nuclear generating unit being placed in service G Recovery of Fuel Costs $(28.7) $(46.0) in April 1986. The decrease of $38.5 million in 1985 .j Efhrt of Rateincreases 15.7 10.2 from 1984 was a result of expensive oil generation ' 1 Kwh Sales 32.7 .7 being replaced by lower cost nuclear generation with Unit Contracts (9.9) 7.3 the return to service of a nuclear facility which had Total $ 9.8 $(27.8) been out of service during most of 1984. Purchased Power Demand costs increased $3.6 million in 1986 and

]

$4.3 million in 1985, respecthely, over prior periods a The revenues attributable to fuel costs are the result of as a result ofincreases in operating costs at several f the recovery of such costs through the operation of nuclear generating units in which the System has  !

adjustment clauses. ownership interests or unit contracts. Other operatkm  !

' The estimated effect of rate increases for the periods expense increased each year primar ily as a result of shown, reflect the billing of higher wholesale rates of the effects ofinflation on labor, materials and other

$15.7 million in 1986 and $10.2 million in 1985. costs. In addition, the increase in 1986 reflects .

Kilowatt-hour sales for 1986 continued to improve Montaup's proportionate share of Millstone Unit 3 .I over 1985. The increase is primarily the resuh of a operating expenses. l resurgence in the economic growth within our service 1 territory. This growth is dramatically demonstrated j 24 o j

Allowance For Funds Used During Construction in the utility industry, cash construction require-(AFUDC) represents a non-cash element ofincome. ments not met with internally generated funds are cus-AFl?DC decreased $6.6 million in 1986 from 1985 pri- tomarily obtained tbrough short term borrowings mar ily due to a decrease in the base to which the which are ultimately funded wah permanent capital.

AFUDC rate is applied as a result of Millstone Unit 3 in 1986, internally generated funds amounted to $+i.8 being placed in service in April 1986 and a decrease million, or 95.1% of the cash construcoon require-in the cornposite AFL'DC rate from 11.50% to 13 61E ments. In 1985 and 1984, t he El'A System was able to AFUDC increased $1.7 million in 1985 over 198 i primar- generate 50.5% and 55.8% respectively, ofits cash con-ily as a result of an increase in the base to which the struction requirements with internally generated funds, AFUDC rate is applied and an increase in the composite with the balance coming from short term borrowings AFUDC rate from 11.25% to li.50E The System expects that in 1987 it will internally gener-Long term debt interest increased $1.7 million in ate a somewhat lesser amount of its cash construction 1986 over 1985 as a result of high interest rate notes requirements Ihan in 1986 because EUA Power and EUA issued by EUA Power Corporation in late 1986, partially Service will not internally generate any meaningful offset by lower interest rates on new securities issued to amount of cash.

refinance certain issues having higher interest rates. Permanent financing during 1986 included a $55 mil-The 1985 increase of $1.3 mdlion over 198-i was reflec- lion First Mortgage and Collateral Trust Ikinds issue and tive of higher interest rates on securities issued to refi- a $15 million Preferred Stock issue by Eastern Edison nance maturing issues. (See Consolidated Statement Company and the issuance of 299,758 common shares of Capitalization for details). Other Interest Expense ($9.2 million) through the EUA System's Dividend llein-increased $2.0 million in 1986 over 1985 and increased vestment and Employee Share Ownership Plans. The

$1.5 million in '1985 over 1984 in part as a result of proceeds from the Mortgage liond and Preferred $tock increases in t he levels of short-term borrowings. issues were used to Iedeem various high cost Mortgage Ahhough inflation has subsided somewhat it contin. Bonds and Preferred Stock issueslSee Consolidated ues to have an impact on the operation of our System. Statement of Capitalization for details.)

At the Federal level, wholesale rate-making practices pennit a forward looking test period which enables us neporto/ Management to anticipate inflationar) mcreases. The traditional use The management of Eastern L:tilities Associates is of an historical test period for retali rate mak;ng pur- responsible for the consolidated financial statements poses at tllc state level does not puxide us this and related information included in this annual report.

opport umtY- The financial statements are prepared in accordance

' The ta effect of the cumulative amount of tax / book with generally accepted accounting principles applica-timing differences which ham previously been flowed ble to rate-regulated utilities and include amounts through, has not been recorded inasmuch as the tax based on the best estimates and judgements of manage-liabilit y on those flow through !iming differences is ment giving appropriate consideration to materiahty.

recovered through rates as the timing differences Financial information included elsewhere in the annual rever c. The Tax Heform Act of 19% reduces the fedtral report is consistent with the financial statements. I statutory corporate income tax rate from i6% to 40% in The EUA System maintains an accounting system and 1987 and to N% in 1988 and Ilmeafter. EUA has deter- related system of internal cont rols which are designed mined that ihe reduced tax rates will cause the regu- to provide reasonable assurance as to the reliabilitv la.ed subsidiaries' accumulated deferred income taxes of financial records and the protection of assets. The to be adequate to provide for all timing differences, System's staff of internal auditors conducts reviews indufog those that were previously flowed through. to maintain the effectiveness of internal cont rol procedures.

nnancml Q>nditmn Coopers & Lybrand, the System's independent The EUA system's need for permanent capital is primar- certified public accountants,is engaged to examine and ily rehtut to the construction of facilities required to express their opinion on our financial statements Their meet the necd ofits existing customers and to meet the examination includes a review of internal cont rols to future requirements of these customers as well as new the extent required by generally accepted auditing mtomers. For 1986,1985 and 1984, the EUA System's standards.

cash construction expenditures (excluding AFUDC) The Audit Committee of the Board of Trustees which were $ C.1 million, $%4 million and $~12 mHlho, consists solely of outside Trustees, meets with manage-respectis ely. ment, internal auditors and Coopers & Lybrand to dis-The System espects cash const ruct ion expendu ures cuss auditing, internal controls and financial reporting to increase tu about $610 idlion in 198" principally matters. The internal auditors and Coopers & Lybrand due to the acquis tion of an additional 12.1% ownesip have free access to the Audit Committee wnhout man-interest in Fehmk I' nit I by EUA Power Corporation agement present.

and the construct on of a new office facility by EUA Service Corporation 25 Y "

m -

~

! .- , IC O N' S O 1. I D A-T E D ; I NLC O M E' S' T A T E M E N T

)Varslindedikcerbther)1, " . . .

(In 7k>u. sands lbrept Numbers c(9xuts andIVr M>are Amounts) 1986 1985 1984 l

L ' Operating Revenues . $343,324 . $333,510 $301,325 cy>cratinglywnsess Fuelc _ .

99,436 125,716' 164,258

. Purchased Power-Demand 51,818 ' '48,237 43,902 Other Operation. 54,722 48,710 45,639

- Maintenance : 11,134 : 10,771 10,764 Depreciation and Amortizatkm 20,423 16,752 14.953

< Taxes- Other Than income 14,694 13,719 13,700

. Income and Deferred Taxes 29,372 21,533 21,342 Total Operating Expenses ' 281,599 285,438 314,558 Operating income .

61,725 48,072 46,767 Equity in Earnings of Nuclear Generating Companies 1,692 1,657 1,428

. Allowance for Other Funds Used During Construction 6,852 11,694 11,536 Other (Dedoctions) Income- Net (745) 303 1,117 Irv%ne Before Interest Charges 69,524 61,726 60,848

-$nternt Cixarp's:

- Interest on 1.ong/rerm Debt . 37,460 35,757 34,470 Other Interest Expense 4,849 2,635- 1,106' Allowance for Dorrowed h ads Used During Construction

. (Credit) (10,381) (12,092) ' (10,516)

Net Interest Charges 31,928 26,300 25,060 .

Income After Interest Charges .. 37,596 35,426 35,788 Preferred Dividends of Subsidiaries 5,106 5,656 5,735 Consolidated Net income $ 32,490 $ 29,770 $ 30,053 Average Common Shares outstanding 11,537,677 11,156,941 10,562,324 Consolidated Earnings Per Average Common Share $2.82 $2.67 $2.85 Dividends Per Common Share $2.15 $2.03 $1.91 CONSOLIDATED RETAlNED EARNINGS STATEMENT fuars Endal (Wember:(1, (in ihnamdd 1986 1983 1984 Consolidated Retained Earnings - Beginning of Year $56,943 $49,727 $39,731 Consolidated Net income 32,490 29,770 30,053

' Total 89,433 79,497 69,784 Dividends Paid- EUA Common Shares 24,735 22,554 20,057 Consolidated Retained Earnings - End of Year $64,698 $56,943 $49,727

' Theaccom/wmymg natss an*an intqmipart c{thefinancialstatements.

26 i j

k 1 -

J

'C OlN S!O L I D A T E D .S T A T E M E N T OF C ll A N G E S IN FINANCIAL POS1 TION h>ars EndedIMember31, (in 1honuordsJ. 1986 1985 1984 sourre ofFunds -

Internally Generated:

Income After Interest Charges $ 37,5% $35,426 $ 35,788 Principal Non-Cash Charges (Credits) to Income:

Depreciation 17,335 13,650 .12,653 -

. Amortization 5,915 3,970 3,103 Deferred Taxes - .

16,577 6,263 14,521 Investment Tax Credits, Net 10,607 3,558 5,835

, Equity in Undistributed Earnings of Nuclear Generating Companies 318 (304) (13)

Allowance for Funds Used During Construction (17,234) (23,786) (22,052)

Funds from Operations 71,114 38,777 49,835 Proceeds from Oil Q)nservatkan Adjustment 3,559 16,934 16,815 Less: Dividends Declared:

EUA Common Dividends (24,735) (22,554) (20,057)

Subsidiary Preferred Dividends ' (5,106) (5,656) (5,735)

Internally Generated Funds 44,832 27,501 40,858 External Sources:

. Proceeds from Sale of Common Shares 9,224 9,377 9,443 Proceeds from Sale of Preferred Stock 15,000 i ' Proceeds from Sale of Long Term Debt - Net 211,438 750 66,081 Increase in Short Term Debt 38,071 25,373 Other- Net 4,269 421 3,602 Fonds from External Sources - 278,002 35,921 79,126

< Tbtal Source of Funds $322,834 $63,422 $119,984

. Appitcation qfrunds Construction Expenditures $ 64,371 $78,192 5 95,211

, Less: Allowance for Funds Used During Construction (17,234) (23,786) (22,052)

Cash Construction Expenditures 47,137 54,406 73,159 Acquisition of Additional Seabrook Ownership 176,484 Decommissk>ning Fund .

10,011 Retirement of Long Term Debt 49,125 1,125 36,925 Retirement of Preferred Stock - 17,690 1,800 310 Irwestment in Subsidiary Company 1,067 Increase (Decrease) in Working Capital 1,719 (8,764) 39 Other Applications- Net 19,601 14,855 9,551 lbtal Application of Funds $322,834 $63,422 $119,984

. Changes in Components ofWorking Capital

• Cash and Temporary Cash investments 5 (185) $ 824 $ 4.741 Accounts Receivable (2,017) (3,520) 4,767 Materials and Supplies 1,303 (2,945) (1,059)

Other Current Assets 1,639 621 435 Accounts Payable 3,676 1,352 (5,856)

Accrued Taxes 873 (1,223) 2,572 Other Current Liabilities (3,570) (3,87P -(5,561)

Increase (Decrease) in Torking Capital $ 1,719 $(8,764) $ 39

• (Ewfuding hbort Teran lM>t, Cum nt ikferrsvl Taus and kalmnable itsfsmst%k hinking FtuulRaturmnent) 1he acmnymyrng notes arv an integralfat ofthefiruenckdgatenu>nts 27 l

S ll E E T

~

C O N S O L 1 D A-T E D  !! A L A N C E December 31,

> (in Tixouwsmis) . 1986 1985

. Aserts Utility Plant and Other investments:

Utility Plant

. In service : $614,330 $407,497 ~

1.ess Accumulated Provisko for Depreciatkm and Anx>rtizat h o 157,813 143,497 Net Utility Plant in Service 4 % ,517 264,000 Ctmatruction Work in Progress 358,708 ' 335,130 -

Net !!tility Piaru 815,225 599,130 N(mutility Property- Net . 153 886' Inver,tments in Nuclear Gercrating Companies - 9,139 9,457 Decommisskming l'und .

10,011 Other investmerns (principally at equit y) 1,222 100 lbtal Utility Plant and Other investments 835,750 609,573 Current Awet*

Cash atxl Temporary Cash Investments 5,944 6,129 Accounts lkretvable:

Customers, Net 29,803 34,005 Accrued Unbilled Hevemws 9,839 7,799 Other 1,827 1.682 Materials and Supplies (at average cost)

Fuel 8,%9 8,131 Plant Materials an.1 Operating Supplies 6,882 6,417 Other Current Awts 3,083 1,444 lbtal Current hets 66,347 65,607.

Deferred Debits:

Unamortized Debt Expense 16,201 5,579 Extraordinary PropertyImsses 11,448 16,153 Other Deferred Ikbits 24,768 17,524 Itual DeferredIkbits 52,417 39,256 lixal Awts $954,514 $714,436 Liablitties and Capitalisation CapitaliAuton:

Commim Equity $225,156 $208,211 Nm lulcemable Preferred Stock of Subsidiaries 15,079 15,079 lledeetnable Preferred Stock of Sulv idtaries - Net 29,852 31,457 1.ang-Term Debt - Net 423,789 285,491

- Total Capitalizatko 693,876 540,238 Current habihties:

Notes Payable-llanks 63,444 25,373 1.ong Term Debt Due Within One Year 28,125 4,125 L

Accounts Payable 20,983 24,659 l

Itedeerrable Preferred Stock Sinking Fund Requirement 897 Customer Deposits 2,052 1,958 Taxes Accrued 5,009 5,881 Deferred Taxes 4,083 3,830

' Interest Aarued 12,348 10,032 Other Current uabilities 9,690 8,531 Total Current uabilities 145,734 85,286 Deferred Crnhti Unamurtized Investment Creda 41,253 30,647 Otler Deferrnt Cruitts 225 148 Total Deferred Credits 41,478 30,795 Accuinulated Defern=d Taxes 73,426 58J17 Commitments and ContingenciegNote 10 ltwal uabilities and Capitalizatkm $954,514 $714,436 in acumpmving nas av an turmralpus v{rtspnanctahrarenterm 28

4 <

C _O N.S O L 1 D A T E D S T A T. E M E N T O_F C A P I T A L I Z' A.T I O N .

t.

December 31,

' (Ik>llarAmountsin Thousand0 ' 1986 1985 Eastern Utitettes Associates:

Comnw;n Shares:

$5 par value, authorized 16,000,000 shares, outstanding, l'

~

11,676,229 shares in 1986 and 11,376,471 shares in 1985. $ 58,381 - $ 56882 other Paid in Capital 104,030  %,305 L Onnnum Shares Expense (1,953) (1,919)

Retained Earnings 64,698 56,943 TotalC(wnmon Equity 225,156 ' 32.4% 208,211 38.5% '

]

Preiferred stoch tdsubsidiaries:

NcxvRedeemable Preferrd lilacksu me Valley I'lectric Company:

4.25%, $100 par value 35,000 shares (1) 3,500 3,500 5.WL, #100 par value 25,000 shares (1) 2,500 2,500 Premium 129 129 lhstern Edison Company:

4 64%, $100 par value 60,000 shares (1) 6,000 6,000 H.32%, $100 par value 30,000 shares (1) 3,000- 3,000 Expense, Net of Premium (50) (50) 15,079 2.2 15,079 2.8 Redeemable Preferred Eastern Edison Company:

9M%, $100 par value 150,000 shares ( 1) 15,000 13.25%,8100 par value 150,000 shares (1) 15,000 15,000 13.60%, $100 par value (2) 3,890 15.48%,8100 par value (3) 13,800 Expense, Net of Premium (148) -(310)

Sinking Fund Requirement Due Within One Year (923) 29,852 4.3 31,457 5.8 Loseg4erm Debt Eastern Utilitles Associates.

Senkir Notes 10%% due 1999 19,125 20,250 EUA Servkr Corporatiort Notes Payable (Various Maturities at Akmiey Market rates)' 9,738 2,750 EUAlbwer Corporptut i

.17%% Serks ASecured Notes due 1991 149,450 111ackstone Valley Electric Company:

First hk>rtgage lkxids:

i' 14%% due 1995(Series A) 27,000 30,000 Variable Rate Demand ikvids duc 2014 (4) 6,500 6,500 Eastern Edison Company: . I First Mortgage and Collateral Trust ikods: l 4%% due 1987 3,000 3,000

.13 9% due 1987(second series) 10,000 10.000 13 9% due 1987(third scries) 11,000 11,000 14.2% due 1988 (second series) 19,000 19,000 4%% due 1988 3,000 3,000 14%% due 1990 15,000 17%% due 1991 30,000 16%% duc 1992 24,000 24,000 4%% due 1993 5,000 1000 6%% due Mx)7 7,000 7,000 8%% due 1999 5,000 5,000 T,a due 2002 8,000 8,000 8%% due 2003 10,000 10,000 12%% due 2013 40,000 40,000 9%% due 2016 55,000 lbilutkm Gotrol Revenue Iknh:

.10%% due 200H 40,000 40,000 Unamortized Premium 101 116 451,914 2H9,616 1.ess Ibrikm Due Within One Year 28,125 4,125 listal 423,789 61.1 285,491 52.9 TotalCapitahzatkzi $693,876 100.0 % $540,238 100.0%

tI) Analmrtmlaoutoutstarutum 138.tn>siwnin twS (2) Aurinwimibo.tkW)dwn outstandnw wmein 1986amt (4b WiQtedarvngeintenst rate sms 41)%fr IW6 and $ 4%

.WM)dums in kWi$ f w IWIS

' t3) Atalwwtznl!5tMMK)slumn t.kasganding noneIn 19M6and The accompan ytrw ones are an entegralpart eftbeftnancudslutements.

2

. N O.T E S TO .C O N S O L 1 D A T E D F I N A N C I A I. STATEMENTS ikcember31,1986,1985, and 1984 Note A -Summary ofS(gn(ftcant Accounting utility plant in the form ofincreased revenues collected Poitctes, as a result of higher depreciation expense. The com-bined rate used in calculating AFUDC was 13.61% in Ifasis ofCcmsolicht!!9n The consohdated financial statements include 1986,14.50% in 1985 and 14.25% in 1984. In accordance the accounts of Eastern LJtilities Associates (El!A) and with regulatory authority, Eastern Edison Company all subsidiaries except EUA Cogenex Corporation (Eastern Edison), Montaup and ElJA Power Corporation (Cogenex), which will be reflected on t he equity (El'A Power) provide deferred income taxes on the method of accounHng. Cogenex is a newly acquired borrowed funds component of AFUDC.

company involved in energy conservation and cogener- Nuclear fuel Disposal and Nuclear Plant Decommis-ation projects whose operations are not currently signif- sioning Cost icant. All material intercompany transactions hetween The Nuclear Waste Policy Act of 1982 establishes that ihe consolidated subsidiaries have been eliminated. the federal government is responsible for the disposal System ofAccounts of spent nuclear fuel. Under the provisions of this act, The accounts of EUA and its consolidated subsidiaries the federal government requires Montaup to pay a fee are maintained in accordance with the uniform system based on its share of the generation from the Millstone of accounts prescribed by the regulatory bodies having 3 nuclear generating unit. Montaup is recovering this jurisdiction. fee tbrough its fuel adjustment clause.

Also, Montaup is recovering through rates its share of Nuclear Generating Companies estimated decommissioning costs for Millstone Unit 3 Montaup Elect ric Company (Montaup) follows the Akmtaup's share of the estimated total cost to decom-equity method of accounting for its investments in four mission the unit is $7A million in 1986 dollars, which is regional nuclear generating companies. Montaup's based on studies performed by Northeast Utilities, the investments in tbese companies range from 2.50 to 4.50 lead owner of the unit.

percent. Montaup is entitled to electricity produced from these facilities based on its ownership interests Operating Recenues and is billed pursuant to contract ual agreements Revenues are based on billing rates authorized by which are approved by the Federal Energy Regulatory applicable Federal and state regulatory commissions.

Commission (FERC). Eastern Edison and Blackstone Valley Electric Company (Blackstone), the retail subsidiaries, follow the policy of i Utility Plant andDepmc/ation accruing the estimated amount of unbilled base rate Utility plant is stated at original cost. The cost of addi- revenues for electricity provided at the end of the tions to utility plant includes contracted work, direct month to more closely match costs and revenues. In labor and material, allocatable overhead, allowance for addition they also record the difference between fuel funds used during const ruction and indirect charges costs incurred and fuel costs billed.

for engineering and supervision. For financial state-ment purposes, depreciation is computed on the Federallncome Taxes straight 4ine method based on estimated useful lives of The general policy of EUA and its subsidiaries with i the various classes of property. Provisions for deprecia. respect to accounting for Federal income taxes is to {

tion, on a consolidated basis, were equivalent to a com. reflect in income the estimated amount of taxes cur- i posite rate of approximately 3 A% in 1986 and 1985 and rently payable and to provide for deferred taxes on cer- 1 3.2% in 1984 based on the average depreciable prop. tain items subject to timing differences to the extent j erty balances at the beginning and end of each year. permitted by ihe various regulatory commissions. See Note C for details of major deferred tax items. As per-AllouancejorFunds UsedDuring Construction mitted by the regulatory commissions it is the policy of MM the subsidiaries to defer the annual investment tax cred- l AFUDC represents the estimated cost of borrowed ts and to amortize these credits over the productive and equity funds used to finance the EUA System's lives of the related assets.

construction program. In accordance with regulatory

- accounting, AFUDC is capitalized, as a cost of utility plant, in the same manner as certain general and administrative costs. AFUDC is not an item of current cash income, but is recovered over the service life of 30

I I

Note B- Acquisitionst '

On November 25,1986 EUA completed the acquisition iions and was financed, in part, with t he $45,000,000 and financing of EUA Power, a New Ilampshire corpora- from equity funds described above and $149,450,000 of tion organized for the purpose of conducting business 17%% Series A Notes issued through a private place-as a public utility. EUA made an equit y investment of ment to institutional and private investors See also

$45,000,000 in this new subsidiary. Also on November NoteJ with respect to a $10,000,000 decommissioning 25,1986, EUA Power acquired its principal asset, a fund.

12.1324% ownership interest in the Seabrook Nuclear On December 31,1986 El'A completed the acquisi-Power Project for approximately $174,000.000. The own- tion of Cogenex at a cost of approximately $1,000,000 ership interest was acquired from fwe New England and its invesunent is included in the Consolidated Bal-electric utilities in independently negotiated transac- ance Sheet in the line captioned Other Investments.

Note C-Income and Deferred nsxes:

Components of income and deferred tax expense for ihe years 1986,1985 and 1984 are as follows:

(in 1hniumdo I986 1985 1984 Federal:

Current $ 647 $10,079 $ 140 Deferred 15,077 5,675 13,187 investment Tax Credit, Net 10,607 3,558 5,835 26,331 19,312 19,162 State:

Current 1,541 1,633 846 Deferred 1,500 588 1,334 3,041 2,221 2,180 Charged to Operations 29,372 21,533 21,342 Charged to Orher income 170 228 455 Total $29,542 $21,761 $21,797 Federal tax expense was less than the amounts com-puted by applying Federal income tax statutory rates to book income subject to tax for the following reasons:

1in Thnumdo 1986 1985 1984 Federal Income Tax Computed at Statutory Rates $30,175 $25,522 $26,054 (Decreases) Increases in Tax From:

Equity Component of AFUDC (3,152) (5,379) (5,307)

Excess Tax Depreciation 1,671 1,054 1,067 Other (2,193) (1,729) (2,297)

Federal Income Tax Expense $26,501 $19,468 $19,517 i

f l

31

i i

The provision for deferred taxes resulting from timing )

differences is comprised of the following:

(In Tkumdd 1986 1985 198-l Excess Tax Depreciation $ 5,379 $2,033 $ 1,758 Estimated Unbilled Revenue 228 691 (173)

Unbilled Fuel Costs 528 (1,037) (741)

Debt Component of AFl'DC 4,305 5,280 4,817 Abandonment 1.osses (964) (1,993) 6,562 Capitalized Overheads 902 321 1,022 Effect of State and Local Taxes 1,500 588 1,334 Deferred Charges 5,304 Other - Net (605) 380 (58)

Total $16,577 $6,263 $14,521 The tax etTect of the cumulative amount of timing differ- because the regulatory process is expected to allow ences at December 31,1986 for which deferred Federal such amounts to be recovered from customers when income taxes have not been provided, is approximately the taxes are ultimately payable.

$15.7 raillion.This amount ha3 not been recorded Note D -CapitalStock:

The changes in the number of common shares out- is entitled to $100 per share. In the event of voluntary standing and the increases in ot her paid-in capital dur- liquidation, or if redeemed at the option of those com-ing the years ended December 31,1986,1985 and 1984 panies, the non-redeemable preferred stock is entitled were as follows (dollars in thousands) to; lilackstone's 4.25% issue, $ 10440, lilackstone's 5.60%

issue,5103.82; Eastern Edison's 4.64% issue,5102.98,  !

Inridem/ /nowue rn /nowne Eastern Edison's 8.32% issue, $ 105.62, prior to October Reinresonent o>nunon /n odier 1,1988 and at reduced premiums in subsequent years.

/ i$ r II Under ihe terms and provisions of the issues of pre-ferred stock of lilackstone and Eastern Edison, certain 1986 299,758 $1,499 $7,725 restrictions are placed upon the payment of dividends 1985 483,585 2,418 6,959 on common stock by each company. At December 31, 1984 700,582 3,502 5,940 1986 and 1985 the respective capitalization ratios were in excess of the minimum which would make these in the event of involuntary liquidation the non-redeem' restrictions effective.

able preferred stock of illackstone and Eastern Edison Note E - Recleema ble Preferrect stock:

Eastern Edison's 13.25% and 9.00% preferred stock not exercise its option of redeeming an additional 7,500 issue 3 are entitled to mandatory sinking funds sufficient shares the holders of that preferred stock have the right to redeem 7,500 and 6,000 shares, respectively, during to exercise such option.

each Iwelve month period, commencing: January 31, in t he event of involuntary liquidation ihe redeem-1989 in the case of the 13.25% issue and.luly 1,1991 in able preferred stock of Eastern Edison is entitled to $100 I the case of the 9.00% issue. per share. In the event of voluntary liquidation, or if The redemption price for each issue is equal to the redeemed at the option of Eastern Edison, the 13.25%

initial public offering price ($100) plus accrued divi- issue of redeemable preferred stock is entitled to dends. Eastern Edison also has ihe noncumulative $111.52 prior toJanuary 31,1987 and the 9.00% issue is option of redeeming an additional 7,500 and 6,000 entitled to $109.00 prior tojuly 1,1991. The redemptloa shares, respectively, during each period at such price. premium reduces in subsequent years.

In the case of the 13.25% issue. if Eastern Edison does

]

n

T in connection with the early redemption of its ern Edison's next rate proceeding.

13.60% and 15.48% redeemable preferred stock (see The aggregate amount of redeemable preferred stock Onsolidated Statement of Capitalization), Eastern Edi- sinking fund requirements for each of the five years fol-son incurred $2,700,000 of redemption premiums. Such lowing 1986 are: none in 1987 and 1988, $750,000 in premiums are included in Other Deferred Debits and 1989 and 1990 and $1,350,000 in 1991.

management will seek recovery ofIhis amount in East-Note F-Retained Earnings:

Under the provi3 ions of EUA's Senior Note Agreement 3, December 31,1986 were unrest ricted as to the payment Retained Earnings in the amount of $57,219,790 as of of cash dividends on EUA Common Shares.

Note G-Long-krnt Debt:

Under terms of the Indentures securing their various The Series A notes are solely the obligation of EUA bond issues Illackstone and Eastern Edison are required Power and are not guaranteed by EUA or any other per-to deposit annually with their respective Trustee cash son and are secured pursuant to an indent ure by a first in an amount equal to: 1% of the aggregate principal mortgage lien on substantially all of EUA Power's utility amount of bonds previously authenticated and deliv- propertles except nuclear fuel.

ered,in the case of Eastern Edison and 2.25% of the The Series A Notes are non-redeemable until three average gross investment in depreciable property, in years following the commercial operation date of Sea-the case ofIllackstone. brook l' nit 1. EUA Power, unless it has issued Notes in Both companies have satisfied the above require- addition to the Series A Notes, has the option to redeem ments for 1986 under alternate provisions of their up to 59,000,000 in principal amount of the Series A respective Indentures by certifying to the Trustee Notes during a sixty day period following the commer-

"available property additions? cial operation date for the principal amount thereof, The various first mortgage bond inues of131ackstone plus accrued interest, if any, to the date of redemption, and Eastern Edison are secured by substantially all of by application of all or any part ofIhe proceeds of the their utility plant. In addition, Eastern Edison s bonds sale of the Series A Notes which remain unused at the are collateralized by securities of Montaup in the prin- commercial operation date. Following the date three cipalamount of $300,427,354. years after the commercial operation date of Unit 1, lilackstone's Variable Rate Demand llonds are colla- EUA Power has the option to redeem some or all of the teralized by an irrevocable letter of credit which expires Series A Notes at 104% of the principal amount thereof ,

on December 1,1989. The letter of credit permits exten- if such tedemption occurs during the period from sions on an annual basis upon mutual agreement ofIhe November 1,1989 through October 31,1990 and at hank and Blackstone. 100% of the principa: mount thereofif such redemp-EUA Power's Series A Secured Notes (Series A Notes) tion occurs thereaher, in either such case plus accrued were issued on November 25,1986 at an interest rate of interest, if any, to the date of redemption.

17%% and mature on November 15,1991. In connection The aggregate amount of EUA System cash sinking with the private placement of the Series A Notes, EUA fund requirements and maturities oflong-term debt for j Power incurred a placement fee of $5,978,000. These each of the five years following 1986 are: $28,125,000 costs have been deferred and will be amortized to in 1987, $26,125,000 in 1988, $4,125,000 in 1989 and expense over the life of the Series A Notes. 1990 and $153,575,000 in 1991.

Note H-Lines ofCredit:

El'A System companies had unused short-term informal agreements with the various banks, commit-lines of credit with various banks of approximately ment fees are required to maintain the lines of credit. ,

$31,300,000 at December 31,1986. In accordance with '

l l

33

1 Note!-Jot lly-Ou>nectfacilities:

At December 31,1986, EUA Power and Montaup owned 1 the folkaving interests in jointly-owned electric generat-  ;

ing facilities (dollars in thousands): l Net Pkmtin As cumidated Pkmtin Construction Itrcent Otened Service lhpwckstion Service Workin Progress i EUA Power:

Seabrook Unit 1 12.13 % $ 115 $ $ 115 5142,562 Montaup:

Canal Unit 2 50 00% 64,759 24,699 40,060 Wyman Unit 4 1.96% 3,988 960 3,028 Seabrook Unit 1 2.90% 62 13 49 134,655 Millstone Unit 3 4.01% 174,102 3,041 171,061 28 The foregoing amounts represent EUA Power's and celled Seabrook Unit 2 nuclear unit. Recovery of its Montaup's interest in each facilit y excluding nuclear costs has been over a ten year period. At December 31, fuel. In the case of Montaup, nuclear fuel for Seabrook 1986 Montaup had approximately $11,448,000 of unre-Unit 1 and Millstone Unit 3 amounts to $10.2 million, covered costs (including AFUDC) in connection with and $6.6 million, respectively. For EUA Power nuclear the Unit. ,

4 fuel for Seabrook Unit I amounts to $41.3 million. Montaup has entered into a rate case settiement rela-Financing for any such interest is provided by the tive to the cancelled Seabrook Unit 2 included in the respect h e company. Montaup's share of related operat- above rate proceedings. The settlement permits, among ing and maintenance expenses with respect to Mill- other things, that Montaup recover 82% ofits invest-stone Unit 3 are included in its operating expenses. ment in Seabrook Unit 2 over a 7% year period. The set.

Montaup and EUA Power did not incur operating and tlement has been approved by the FERC. Accordirigly, maintenance expenses for Seabrook Unit 1 in 1986 in December 1986 Montaup wrote-off approximately )

since the unit is not yet in service. See Note K for infor- $1,784,000 of Unit 2 costs, net of related taxes, which j mation with respect to recent developments affecting it will not recover from its customers. The charge had the Seabrook project, including the cancellation of the effect of reducing 1986 earnings per share by $0.15.

Seabrook Unit 2. Approximately $1,390,000 of the net writeoffis included Seahrook Unit 2 Recovery: Commencing inJune 1985 in the Consolidated income Statement in the line cap-Montaup began recovering, as part ofits rate proceed- tioned Other (Deductions) Income- Net and the bal-ings, and on a subject to refund basis, all of the costs ance was recorded as an adjustment to operating associated with its 2.90% ownership interest in the can- revenues.

Note]-Decommissioning runct:

Under the agreements of purchase and sale with each the decommissioning and cancellation obligations, or of the five sellers, EUA Power was required to establish upon the written agreement of EUA Power and the then a fund of $10,000,000 to secure payment of part of its joint owners who certify to the bank that they own at share of decommissioning costs of Seabrook Unit 1 and least 80% of the ownership shares in the Seabrook Prof any costs of cancellation of Unit 1 or Unit 2. Under an ect to terminate the agreement, or at such time as the agreement entered into among EUA Power, a bank and fund requirement is reduced to zero as a result of a wt i the other joint owners of Seabrook, the bank is empow- ten guarantee by EUA or a purchase or purchases il ered to use securitles of the fund should a default of of EUA Power's entillement from Unit 1, the agreen mot EUA Power occur with respect to its obligations to pay shall terminate and the bank shall immediately release such decommissioning and cancellation costs. The and return to EUA Power all collateral then in the

- agreement also provides that upon payment in full of possession or control of the bank.

k 34

Note K- Cornonittnents isred Cort tingers cless for hearings on the plans submitted by the State of New  ;

$1MOOK. Ilampshire and delay in submission of plans for six Mas- L

/kichgrutend sachusetts towns made it impossible to meet the Octo-hk>ntaup and EUA Power have 2.9% and 12.1% owner- ber 31,1986 planned commercial operation date. In

]

l ship interests, respectively,in the 1150 megawatt Sea- addition, in late April 1986, a nuclear accident occurred f l brook 1 nuclear generating unit being constructed in at the Chernobyl nuclear power plant in the Soviet Seabrook, New Ilampshire, on which construction is

)

Union. Media coverage of the Chernobyl accident has  !

virtually complete, raised Ihe public's awareness of the necessity of having Until the start up of commercial operation of adequate emergency response plans. On September 20, Unit 1, Montaup and EUA Power must make monthly 1986 the Governor of Massachusetis announced that he i cash expenditures of approximately $290,000 and would not submit to the appropriate federal authorities j

$1,200.000, respectively, in order to fund their respec- Seabrook emergency re3punse plans for the six Massa-tive share ofIhe cost of maintaining Unit 1 and of con- chusetts communities within the 10-mile zone required tinuing the regulatory process for obtaining an by current regulations. Montaup and EUA Power are amendment to the license permit ting commercial oper- l unable to predict what effect the Governor's action will l ation of Unit 1. Seabrook Unit I has experienced sub- have on the in-service date of Unit 1 or its ultimate cost. I stantial cost increases, due to, among ot her things, Other means of addressing the emergency evacua-outside intervention in various proceedings, design tion plan issue are being pursued, including efforts to changes, revisions of Nuclear Regulatory Commission develop a utility-sponosored emergency response plan (NRC) regulations, ext raordinarily high interest rates, for the six Massachusetts municipalities or to obtain inflation and construction delays. NRC approval to reduce the 10-mile evacuation plan-If, due to regulatory action, financial difficulties or ning zone. The NRC has reviewed studies, supplied by any other reason, one or more of the other Seabrook New Ilampshire %mkee, relating to potential radiologi-joint owners should be unable or unwilling to fulfill cal releases from the Unit No.1 reactor containment their contractual commitment to pay on a timely basis vessel, and the studies were recently confirmed by the their share of Unit 1 costs, completion and licensing of Ilrookhaven National 1.aboratory at the request of the Unit I could be jeopardized. NRC's staff. As a resuh of the NRC's review and subse-In October 1986 t he NRC issued a 40. year operat mg quent confirmation by llrookhaven of the New Ilamp-license for Seabrook Unit 1, subject to certain condi- shire Yankee studies, on December 18,1986 New tions which limit the presently licensed activities to fuel llampshire Yankee filed a request with the NRC to loading and precriticahty testing. The conditions for reduce the 10-mile evacuation planning zone to a one proceeding to low power testing (5% ) and ultimately to mile radius. This request, if approved, would exclude full commercial operat ion include: continual compli- the Massachusetts municipalitles. Massachusetts offi-ance wit h all technical specifications for operation; t he cials have stated that they will oppose any alternative Atomic Safety and 1.icensing floard (lhe "ASI.ll") must proposals. The NRC has established a procedural sched-render a decision on any outstanding on-site and safet v ule regarding this request which would call for the contentions, which decision will be evaluated by the commencement of hearings in late May 1987. The NRC NRC prior to allowing low power testing; and to pro- is also considering an amendment to its rules regarding ceed to full power, issues regarding emergency offsite emergency planning at nuclear power plant sites.

response planning must be resolved The amendment would, in circumstances such as those The NRC licensing process is being actively opposed encountered at Seabrook, allow the issuance of a full-by intervenors. Neither Montaup nor EUA Power can power license even if a utility cannot meet all NRC predict the extent to which such opposition may further emergency planning requirements due to Ihe lack delay or prevent commercial operation of Unit 1. of cooperation by state and'or local governments Consideration by the NRC of emergency response in the development or implementation of offsite and evacuation plans submitted by state authorities for emergency plans.

municipalities located within ten miles ofIhe Seabrook plant is prerequisite to the issuance of the required M"""*U ,.

operating license. The schedule announced by the NRC, The recovery of Montaup s mvestment in Seabrook Unit 1 through rates will be subject to final approval by FERC as part of a rate proceeding and the prudence of a portion of such investment could be at issue. Montaup continues to believe that its expenditures on this unit 35

were prudent; and that FERC will continue to permit the EUA for its equit y investment. EUA would thus be

. recovery over time of prudently incurred costs through required to charge off such equity imestment (net of rates. Montaup cannot predict the outcome of the rate related taxes) to retained earnings. Management . j

- proceeding involving its Seabrook Unit 1 investment; believes that should such a charge to retained earnings

, however,it believes that the amount of any potential occur, it would not adversely effect EUA's ability to pay disallowance of recovery of the expenditures would common share dividends.

not,under current generally accepted ac 'enting prin- As of the balance sheet date, EUA Power had not ciples, have a substantial adverse effect on me System's entered into any power contracts for its share of the

common equity. electricity to be generated by Seabrook Unit 1. Demand in December M,the financial Accounting Stan- for electricit y in New England has been exceeding pro-

' dards lkaard issued Flaancial Accounting 5tandard jections in recent years. New England Power Pool plan-1FAS) 90 " Regulated Enterprises- Accounting for ners have projected that with a conservative annual

, Abandonments and Disallowances of Plant Costs " FAS growth rate of 2%, significant amounts of additional 90 is effective for fiscal years beginningJaauary 1,1988 generating capacity beyond that already planned.

and among other things, revises the accounting require-(including Seabrook Unit 1), will be required by the ments for plant abandonments and regulatory disallow- mid 1990's. Ahhough there is no assurance that EUA ances of completed plant costs. When implemented, Power will be able to generate sufficient revenues to -

FAS 90 will require t hat, in t he event of a plant abandon- meet its contractual obligations, management is confi-ment where no return is authorized on the unamor- dent that because of the projected growth in demand as tized proper ty loss balance, Ihose unamortized stated above, it will be able to obtain power contracts amounts would be recorded at a discounted value and for the sale of its share of Seabrook Unit 1 power.

the effect of such discounting would be charged t -

Seabrook Unit 2 income and disallowances of recovery of investments in Montaup and EUA Power also have 2.9% and 12.1%

completed plants would require an immediate charge to income equal to the amount of such disallowance ownership interests in Unit 2, respectively. On Novem-  !

her 6,1986 the joint owners, recognizing that Unit 2 had Such potent tal charges to income could be mater al to been cancelled, voted to dispose of the Unit. Plans the results of operations or retained earnings of the Sys-regarding disposition of Unit 2 are now under consider- 1 tem in the year of the write-ofi. Also, FAS 90 will require I ation, but have not been finalized and approved. Mon-that AFUDC should be capitalized only if its subsequent t up and EUA Power are unable, therefore, to esu. mate inclusion in allowable costs for rate making purposes is probable.

the costs for which they would be responsible in con-nection with the disposition of

. EUA Power Unit 2. Monthly charges of approximately $4,000 and since inception on November 25,1986, EUA Power $15,000, respectively, are required to be paid by Mon-

. has principally been engaged in the acquisition and taup and EUA Power with respect to Unit 2 in order to

. financing ofits Seabrook ownership interest. Under the preserve and protect its components and various war-SeabrookJoint Ownership Agreement, EUA Power is ranties. See Note 1 -Jointly-Owned Facilities for infor-required to accept its share of power and pay for its marion relating to Montaup's recovery of its investment share of all operating costs of power generated from in Seabrook Unit 2.

the project once it commences operation. EUA's reew-ery ofits investment in EUA Power is contingent upon o'nilx the commercial operation of Unit I and EUA Power's Pensions ability to enter into cont racts to sell its share of the The EUA system companies participate in a defined power generated by Unit 1. benefit pension plan covering substantially all of their i

. EUA and EUA Power believe that Seabrook Unit I has employees. Plan benefits are based on years of service been designed and constructed in accordance with the and average compensation over the five years prior to most up-to-date standards of safety and reliability; its retirement. It is the EUA System's policy to fund the plan generating capacity is essential to New England; and the on a current basis in amounts determined to meet the unit will ultimately be licensed for commucial funding standards established by the Employee Retire-operation. ment income Security Act of1974.

' Should the commercial operation of Seabrook Unit 1 The EUA system has adopted the provisions of be significantly delayed or uhimately cancelled, EUA Statement of Financial Accounting Standards No. 87,

- IWer would most likely be unable to repay the princi- " Employers' Accounting For Pensions", for the year

- pal amount due on its Series A Notes. Such Notes are ended December 31,1986. The effect of the change was solely the obligation of EUA Power and are not guaran- not material to net earnings in 1986. The statement does teed by EUA or any other person. These circumstances not allow application to prior years. .

- would also result in Ihe inability of EUA Power to repay 1 36 P - -

-.n ...;6 . . . . . . - . . . . . ..................._.._....,,.,g-. -. -- - -

Net pension expense for 1986 included the following - Certain health care benefits are provided to substan-components (in thousands): tially all retired empkiyees. The cost of these benefits, which amounted to approximately $498,000 in 1986 and Service cost-benefits earned $524,000 in 1985, is charged to expense when paid.

during ihe period - $ 1,650

, pg ,,

Interest c ist on projected benefit The EUA System is committed under long-term purcW pown ainnacu, expiring on various dates Actual return on assets 7 Net amortization and deferrals (i,771)

,501 thmugh the year 2007, to pay demand charges whether or not energy is received. Under terms m effect at Net periodic pension expense (income) $ (349) December 31,1986, the aggregate annual minimum commitments for such contracts is approximately

$53,000,000 for 1987, $50,000,000 in 1988,1989 and 1990 The following table sets forth the actuarial present value of benefit obligations and funded status at December an w aggmgate $ 0,0W,WO for years aha M In additlon, the EUA System is required to pay additional 31,1986 (in thousands):

amounts depending on the actual amount of energy Accumulated benefit obligations, includ-

• # "" # 8"C" "'"""C" # *"" "

$(41,546) ciated with these contracts are reflected as Purchased ing vested benefits of $37,756 Power Demand on the Consolklated income Statement.

$(52,927)

Projected benefit obligations ,

The EUA System s construction program is estimated Plan assets at fair value, pri-at $ H 2,1%,000 for the year 1987 and $250,000,000 for marily stocks and bonds $69,722 the years 1987 through 1991 (including AFUDC). The Less: Unrecognized net 11,410 ainstruction pr gr m assumes that Seabrook Unit 1 will gain on aasets be commencing commercial operation in early 1988.

Unrecognized net assets atJanuary 1, Storm Restomtion 1986 5,036 53,276 in 1985 Blackstone and Eastern Edison incurred sWnificant expenditures relating to the restoration Net pension assets 5 349 of electric service following iIurricane Gloria. Black-stone has received a rate order allowing recovery of The weighted average discount rate and rate of increase these costs through rates over a 7 year period. Eastern j in future compensation levels used in determining the Edison has deferred $4,300,000 of such costs, which actuarial present value of accumulated benefit obliga- management anticipates will ultimately be recovered tions in 1986 were 8.25% and 6.0%, respectively.The through rates. Any recovery will be subject to determi-expected long-term rate of return on plan assets was nation made by the Massachusetts Department of 9.0% for 1986 and 1985. Public Utilitles.

The actuarial present value of vested and nonvested accumulated plan benefits as ofJanuary 1,1985 were ##*k The Comprehensive Environmental Response,

$32.1 millkin and $0.8 million, respectively; net assets Compensatkin and Liability Act of1980 and certam available for plan benefits amounted to $51.5 million.

"" "I State statutes authorize various governmental Pension expen;ses charged to operations amounted to authon. des m d amrt odas a>mp&ng mspoMe approximately $383 000 and $1,461,000 for the years parties to take clean-up action at disposal sites deter.

1985 and 1984, respectiveh. -

mmed to present an imminent and substantial danger to the public and to the environment because of an actual or threatened release ofluzardous substances. Because of the nature of EUA System's business, various by prod-ucts and substances are produced or handled which are i

l 37

l' l

classified as hazardous under these laws. The EUA Sys- 1986,1985, and 1984, respecth ely. Management believes tem generally provides for the disposal of such sub- that any amounts which may ultimately be refunded stances through licensed individual cont ractors but will not have a material effect on the consolidated these statutory provisions generally impose potential financial statements.

l Joint and several responsibility on the generators of the 6"""""####

wastes for cleanay costs. Blackstone has been notified l . Montaup, as one of the stockholders of each of tbree l wnh respect to a number of such sues, and the clean-up I

regional nuclear generating companies, has guaranteed of such wr :3, in general, is receiving increasing atten-its pro r ta share of obligations of those companies as tion from the governmental agencies involved. While follows: 2.5% of a $40,000,000 nuclear fuel fmancing of EUA ctmnot estimate the costs which may result from Vermont Yankee Nuclear Power Corporation: 4.5% of a these matters,it does not believe such costs will

$25,000,000 bank line of credit and of a $50,000,000 be matenal debenture issue of Connecticut Yankee Atomic Power RetvnueSubject to Refund Company; and 4.0% of a $50,000,000 nuclear fuel At December 31,1986 approximately $52,100,000 of financing of Maine Yankee Atomic Power Company.

Montaup's revenue collected since November 1,1981 is subject to possible refund. Of that amount, approxi-mately $3,700,000,59,200,000 and $15,400,000 relates to AUD1 TORS' REPORT to the Trustees andShareholders of l

Eastern Utilities Associates ,

l We h;ra. examined the consolidated balance sheets in our opinion, t he consolidated financial state-  !

and cu tolklated statements of capitalization of Eastern ments referred to above present fairly the consolidated Utilitio As3 ociates and subsidiaries as of December 31, financial position of Eastern Utilitles Associates and 1986 aad l',85, and the related consolidated statements subsidiaries as of December 31,1986 and 1985 and the ofincome, cetained earnings and changes in financial consolidated results of their operations and changes in l position for each of the three years in the period ended their consolidated financial position for each of the i

December 31,1986. Our examinations were made in three years in the period ended December 31,1986, in accordance with generally accepted auditing standards conformity with generally accepted accounting princi- l and, accordingly, included such tests of the accounting ples applied on a consistent basis.

l r records and such other auditing procedures as we con- i sidered necessary in the circumstances.

W Boston, Massachusetts February 27,1987 )

i, 4

Q 'U A R T E R L Y FINANCIAL -AND COMMON S il A R E INFORMATION l (Unaudited)

ThousandufDollars y, income Cwis<d. per Common Sharv After idated Attrage AfarketPrice Operating Oferating Intenst Net Common Dit ideruls l

Retemas income Charges income Situv Ittid High I.ow 8

^ Forthequarters ended 1986t December 31 $85531 $16,137 $ 8,761 $7,723* $0.66* $0.545 39 % 31 %

September 30 $80,548 $17,303 $ 9,907 $8,571 $0.74 $0.545 3T's 31 %

June 30 $84,483 $13,590 $ 7,995 $6,630 $0.58 $0.545 37 26 %

March 31 $92,762 $14,695 $10,933 $9,567 $0.84 $0.515 33 % 25 %

Forthe quarters ended 1985:

December 31 $84,338 $12,321 $ 8,684 $7,318 $0.65 $0.515 26 % 20 %

September 30 $83,107 $13,890 $10,032 $8/>02 $0.77 $0.515 23 % 18 %

June 30 . $76,588 $ 9,177 5 6,330 $4,900 $0.44 $0.515 23 % 18 %

March 31 $89,477 $12,683 $10,379 $8,949 $0.82 $0.485 18 % 16 %

The common slwurs ofEastern I 'tilitin kwclata are lhted on the New )brk Stock Erdvuq;e and the Pacjfic Stock Exchange under the ticker symbol 'TUC The appr<mmate number cfCommon kurbcdders ofnrordon February 1,1987 was 18,8cx)

• Indudes a dvuge of $ 1,783,883 or $015per situr which resultedfrom a rate case settlement relative to the cancelhti Seabrook Unit 2.

Ssv Note I<(Notes to Consolidated Hnancial Statementsforfurther details.

DIVIDEND RElNVESTMENT AND COMMON S II A R E P U R C 11 A S E PLAN A I)ividend Reinvestment and Common Share Purchase Complete details regarding t he Plan may be obtained Plan is available to all registered shareholders and by writing:

System company empk)yees. William E O'Connor, Secretary Participants in the Plan are given a 5% discount on Eastern Utilities Associates shares purchased with reinvested dividends. Partici. Post office 11ox 2333 pants may also make additional cash payments as fre- Boston, M A 02107 quently as once a month to purchase additional shares with no discount. Optional cash payments are limited to TrangerAgent a maximum of $5,000 per calendar quarter and must be The First National Bank of Boston received no later than the 5th day preceding the Invest. Post Office Box 644 ment Date to be invested in that month. Boston, MA 02102 The Investment Date for all shares purchased under (Common and Preferred Shares) the Plan is the dividend payment date for the months in which dividends are payable. For each month in which nond Trustee a dividend is not payable the Investment Date is the 15th State Street Bank and Trust Company of such month. The price of shares purchased is based 225 Franklin Street on the average closing price of EUA shares for the five ikwton, MA 02110 trading days preceding each investment date. (Bonds of all series) 39

, e OPERAT1NG S T A T l' S T 1 C S

' C O LN S O L I' D A T E D

i

-l harslindedthwnher31, 1986 1985 1984 1983 1982 1981 1976 I

Energy GeneratedandPurchased .l (millions qfkub):

- Generated .

- by Somerset Sta'.lon . 887 1,316 1,180 1,123 738 940 774

- by Nuclear Units ' . 543 1,065 458 1,019 861 869 523

' -byJaintly Owned Units 2,101 1,595 1,507 1,724 1,632 1,-'84 1,512

- by life of the Unit Contracts -. 667 697 814 452 706 675 1,134 Interchange with NEPOOL 157 (387) (136) (285) (49) (240) (187)

Purchased Power-Unit Power '309 223 480 168 161 240 285 Total Generated and Purchased 4,664 4,509 4.303 4,201 4,049 4,268 4,041 -

Operating Revenues (thousands): .

$115,744 $110,682 $121,623 $104,101 $ 97,161 $ 94,217 $ 53,036

~

Residential

' Commercial 105.777 98,826 105,310 89,225 83,519 82,515 41,104 Industrial . _

67,973 66,707 75,850 58,901 56,468 60,486 28,246 Other Electric Utflitles 16,189 15,779 23,909 16,212 18,289 '22,770 11,315 Other 15,019 8,990 9,396 13,463 10,761 9,081 7,154 l Total Primary Sales Revenues 320,702 300,984 336,088 281,902 266,198 269,069 140,855 Unit Contracts 22,622 32,526 25,237 20,548 22,219 28,862 11,325 Total Operating Revenues $343,324 $333,510 $361,325 $302,450 $288,417 $297,931 $152,180 l 1

EnergySales(millions ofkub):

- Residential: 2,262 1,212 1,205 1,197 1,137 1,122 1,098 Commercial 1,243 1,169 1,113 1,103 1,044 1,055 950 Industrial 855 833 .856 810 .772 841 776

. Other Electric Utilities ' 372 382- 396 386 365 431 434 Other 28 29 30 34 36 38 47

- Total Primary Sales . '3,760 3,625 3,600 3,530 3,354 3,487 3,305 1.osses and Company Use 211 197 215 . 201 206 196 276 Total System Requirements 3,971 3,822 3,815 3,731 3,560 3,683 3,581 Unit Contracts 693 687 488 470 489 585 460 lbtal Energy Sales 4,664 4,509 4,303 4,201 4,049 4,268 4,041 NumberofCustomers: i Residential 217,899 214,454 211,622 209,678 207,702 205,894 196,760 Commercial 24,356 23,161 22,177 21,605 21,133 20,732 21,066 Industrial 1,250 1,238 1,209 1,189 1,210 1,213 1,542 Other Elet tric Utilities 15 15 16- 12 18 14 16

' Other 29 229 30 30 31 31 34 lotal Customers 243,550 - 238.898 235,053 232,515 230,094 227,887 219,613 Average Revenue per Residential Customer ($) 531 516 575 496 468 458 270 Average Use per Residential Customer (1 wh) . 5,792 5,582 5,694 5,708 5,474 5,449 5,582

. AverageRevenneperkubt

. Residential 9.17f 9.134 10.094 8.704 8.55e "d.40e 4.83e Commercial 8.51f 8.454 9.46e 8.094 7.99c 7.82< 4.33e industrial 7.954 B 0lt 8.864 7.27* 7.31< 7.20e 3.64e 40 4

R \

f

, 'l, C O.N S OLL 1 D A T E D O. P E R A T I N.G S 'T A T I S T I C S - G E N E R A L .

i .y i

. MunEmledDecember31, 1986 198S 1984 1%) 1983 1981 1976

. Capitalization (thousands)

L Ikmds (Net) $246,500 : $263,500 $266,500' $226,219 $165,950 $155,964 $87,860  !

Other tong Term Debt 177,289 21,991 22,376 30,179 33,900 32,500 35,000 lbtal Long. Term Debt . 423,789 .285,491- 288,876_ 256,398 199,850 188,464 122,860 Preferred Stock 44,931 46,536 48,319 49,234 - 49,536 34,985 21,000

- Common Equity 225,156 208,211. 191,619 '172,327 140,973 109,875 64,917 Tbtal Capitalization $693,876 $540,238 $528,814 $477,959 ' ' $390,359 $333,324 $208,777 Common Sbare Datar h Earnings per Average Common Share ($) 2.82 2.67 2.85 2.80 2.25 2.03 2.07

~ Dividends per Share ($) 2.15 2.03 1.91 1.79 1.70 1.60 ~ 1.50 Payout (%) 76.2 ' 76.0 67.0 63 9 75.6 78.8 72.5' g:

(; . AverageCommonShares D

_ Outstanding 11,537,677 11,156,941 10,562,324 9,062,810 7,519,381 6,123,334 3,389,560 L Tbtal Common Shares l l- Outstanding 11,676,229 11,376,471 10,892,886 10,192,304 8,788,991 6,664,560 3,600,000 ,f L  !!ookValue per Share ($) 19.28 18.30 17.59 16.91 16.04 16.49 18.03

Percent Earned On Average

. Common Equity (%) 15.0 14.9 16.5 16.2 13.5 12.1 11.6 Market Prices ($):

liigh 39 % 26 % 18 18% . 14 % 12% - 18 %

Low . 25 % 16% 12 % 13 % 11 10 % ' 14%

Year End 38 % 25 % 18 14 % 14 % 11 % 18 %

Miscellaneous ($in thousands):

l Tbtal Construction Expenditures ($) 64,371 78,192 95.211 103,309 77,096 54,436 18,458 L

Cash Construction Expenditures ($) . 47.137 54,406 73,159 78,912 61,236 41,745 16,773 .;

Internally Generated Funds as a %

of Cash Construction (%) 95.1 50 5 55.8 34.5 20.7 22.5 86.3 Installed Capability-MW 971 987 931 931 927 927 984

' lassi Unit Contract Sales-MW 108 110 75 75 70 80 44 System Capability-MW - 863 877 856 856 857 847- 940 System Peak Demand- MW 691 738 716 700 680 661 687 Reserve Margin (%) 24.9 18.9 19.5 22.3 26.0 28.1 36.9 System load Factor (%) 65.6 59.1 60.6 60.8 59.8 63.6 59.5 Sources of Energy (%):

Nuclear 19.0 26.2 10.9 23.8 22.2 20.6 19.5 Coal 22.0 34.1 29.3 16.3 Oil 59.0 39.7 59.8 59.9 77.8 79.4 80.5 Cost of Fuel (Mills Per kwh):

Nuclear 8.6 7.0 8.9 6.5 6.3 5.4 2.6 h Coal ' 23.7 23.7 27.8 21.6 1, ~ Oil 23.6 41.2 43.6 41.5 41.5 47.0 17.8 lF All Fuels Combined 20.8 26.3 36.1 30.7 34.1 39.0 15.0 1

41 Y -_ ____ _ 1

p i

m- / '. S Y S T E M ' C O'M P A N I E S

?Eastern Utilities Associates EUA PosterCorporation EUA $crrice Corporation . One tiberty Square lloston,'M A 02107 Montaup Electric Comf>any One Liberty Square John E G. Eichorn,Jr.,Pnsident

. Post Office llox 2333

' llaston, M A 02107 The name Eastern Utilities Asociates is the designation

$tbe Thisteesfor the time being tender a Declaration

~ (617)357-9590

. John E G. Eichorn,)r., Chairman of 7 hist datedApril 2,1928, as amended, and allper-Donald G PaMus, President ' smu dealing teith Eastern Utilities Asociates naist loob solely to the trustproperty)br the enforcement ofany .

claims against Eastern Utilities Associates as neither Eastern Edison Company 110 Mulberty Strect the 7htstees OfficersnorSharrboldersassumeanyper-t1rockton, MA 02403 sanalliabilityfc>r obligations entervdinto on behalfof '

Ikutern Utilities Asociates.

(617) 580121$.

.. Artbur A. Ilatch,Prrsident -

AnnualMeeting The 1987 Annual Shareholders Meeting will be held on

' Blackstone Willey Electric Cornpany Washington iIlghway 'Ibesday, April 21,1987 at 10 a.m. in the lloard Room on Lincoln, R102865 the 33rd Floor at State Street fla..4 and '&ust Compus 225 Franklin St reet,Iloston, Massachusetts.

(401)333 1400 Willlam R. Ilisson, President

'i; financial 5upplement

. EUA Cogenex Corporation Upon request EUA will furnish a copy of its Financial One Liberty Square Supplement which includes financial statements of its floston, MA 02!07 major operating companies.

- Joseph S. Fitzpatrick,Pnsident s

42 l

n . ,

s

'.:s im'

T:. RJ.U1SXTJ Es E S 0"F F.1 C EJ R S?

[W <

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I' , ' Oliver E Ames (P, F) ! John E G. Eichorn,Jr.

iDinstar; Fiduciary Thist Company, and - Chairman and

[)j];i b,

, , J>ritatetrustee, Boston,Massachusetts

. ChiefExecutitv Officer ; ,

i

1. John E. Conway(C, F) : Donald G. Pardus -

0} L  ;

Chairman, Jack Conuay & Co.,Inc.

Presidentand

}i. llanocer, Massachusetts : ChicfFinancialOffster ;

0) l Robert I, Dexter (P, A);

%: . Robert E. Maguire =

}( Oxtirman, Abington MutualFire . Executhe VicePresident Insurance Company, Abington,; gg y W~Q. ' i Massachusetts '

VicePresident" b '

' John E G. Eichorn,Jr.

Richard M. Burns'

&vn Chairman andChhfExecuthe Officer '

' Comptmiler :

@ oftbeAssociatiori; ' '

. Peter B. Freeman (A, C) .

Cliffordj.ileber(Jr.'

@7 ^ N """'*'

[  :

CorporateDirectorand7htstee, l Pmvidence,RhodeIskand .

Willlam E O'Connor y$[ . Nathan li.' Garrick,Jr. ('A, F) ' ## 7

]; Rethed id D

[ ' Robert E. Maguire .. ... ._

d. Executhe VicePttsident ofthe :

[!}I; [Anociation y'

i IWesley W. Marple,Jr. (F,C);

fi Professor ofBusiness Administration, Northeastern

. Unitersity, Boston, Massachusetts hlf)

N l ' ' Donald G. Pardus

' PnsidentandChiefFinancialOfficer .

ofIbeAsociation '

Wl q A- Margaret M. Stapleton(A, P) :

nil Secorut Vice Prtsiderit, John hancock

?fn' ,,

' MutualL(feinsurance Company, '

Q .

. Baston, Massachusetts z.,

5. D. Reid Weedon,Jr. (C, P)

? Senior Vice President, ArthurD. Little, Inc.

ji. Cambridge, Massachusetts; 4r J . A ~ 1ndicates member tfAudit Committee l1 e 1;- Indicates member of c.bmpensation and NominatingCommittee F-Indicates member ofnnance Committee ls - P-Indicates member <fft nsion Dust Committee

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