PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________________ to ________________
Commission File Number 1-7316
COMMONWEALTH ENERGY SYSTEM
(Exact name of registrant as specified in its Declaration of Trust)
Massachusetts 04-1662010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street, Cambridge, Massachusetts 02142-9150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 225-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 1, 1994
Common Shares of Beneficial
Interest, $4 par value 10,398,990 shares
PAGE 2
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
MARCH 31, 1994 AND DECEMBER 31, 1993
ASSETS
(Unaudited)
March 31, December 31,
1994 1993
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost
Electric $1 020 578 $1 018 121
Gas 324 430 322 314
Other 58 399 58 473
1 403 407 1 398 908
Less - Accumulated depreciation and
amortization 438 513 425 483
964 894 973 425
Add - Construction work in progress
and nuclear fuel in process 14 323 11 089
979 217 984 514
LEASED PROPERTY, net 15 951 16 150
EQUITY IN CORPORATE JOINT VENTURES
Nuclear electric power companies (2.5%
to 4.5%) 9 870 9 660
Other investments 4 017 3 889
13 887 13 549
CURRENT ASSETS
Cash 5 412 6 007
Accounts receivable 131 269 93 663
Unbilled revenues 35 728 43 279
Inventories, at average cost 20 948 36 102
Prepaid taxes and other 8 862 15 231
202 219 194 282
DEFERRED CHARGES 110 272 106 668
$1 321 546 $1 315 163
PAGE 3
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
MARCH 31, 1994 AND DECEMBER 31, 1993
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1994 1993
(Dollars in Thousands)
CAPITALIZATION
Common share investment -
Common shares, $4 par value -
Authorized - 18,000,000 shares
Outstanding - 10,345,619 in 1994 and
10,295,077 in 1993 $ 41 382 $ 41 180
Amounts paid in excess of par value 96 720 94 657
Retained earnings 221 127 201 233
359 229 337 070
Redeemable preferred shares, less current
sinking fund requirements 15 420 15 480
Long-term debt, including premiums, less current
sinking fund requirements and maturing debt 447 659 448 893
822 308 801 443
CAPITAL LEASE OBLIGATIONS 14 309 14 456
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 19 475 71 975
Maturing long-term debt 10 000 10 000
29 475 81 975
Other Current Liabilities -
Current sinking fund requirements 6 793 6 793
Accounts payable 110 710 90 006
Accrued taxes 21 385 9 090
Other 37 378 37 322
176 266 143 211
205 741 225 186
DEFERRED CREDITS
Accumulated deferred income taxes 159 298 156 851
Unamortized investment tax credits
and other 119 890 117 227
279 188 274 078
COMMITMENTS AND CONTINGENCIES
$1 321 546 $1 315 163
See accompanying notes.
PAGE 4
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
Three Months Ended
1994 1993
(Dollars in Thousands)
OPERATING REVENUES
Electric $171 243 $151 061
Gas 135 549 120 860
Steam and other 6 114 4 981
312 906 276 902
OPERATING EXPENSES
Fuel and purchased power 102 129 83 080
Cost of gas sold 71 407 60 112
Other operation and maintenance 62 723 64 356
Depreciation 12 889 13 152
Taxes -
Local property and other 7 888 7 873
Federal and state income 17 735 14 461
274 771 243 034
OPERATING INCOME 38 135 33 868
OTHER INCOME 610 451
INCOME BEFORE INTEREST CHARGES 38 745 34 319
INTEREST CHARGES
Long-term debt 9 850 8 607
Other interest charges 1 043 1 721
Allowance for borrowed funds
used during construction (99) (72)
10 794 10 256
NET INCOME 27 951 24 063
Dividends on preferred shares 297 312
EARNINGS APPLICABLE TO COMMON SHARES $ 27 654 $ 23 751
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10 328 461 10 160 994
EARNINGS PER COMMON SHARE $2.68 $2.34
DIVIDENDS DECLARED PER COMMON SHARE $ .75 $ .73
See accompanying notes.
PAGE 5
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 27 951 $ 24 063
Effects of non-cash items -
Depreciation and amortization 16 678 15 670
Deferred income taxes and investment
tax credits, net 478 165
Earnings from corporate joint ventures (399) (409)
Dividends from corporate joint ventures 62 84
Change in working capital, exclusive of cash
and interim financing 24 523 14 580
All other operating items (1 616) (5 075)
Net cash provided by operating activities 67 677 49 078
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC)
Electric (4 511) (4 190)
Gas (4 069) (3 303)
Other (8) (181)
Allowance for borrowed funds used during
construction (99) (72)
Net cash used for investing activities (8 687) (7 746)
FINANCING ACTIVITIES
Sale of common shares 2 266 1 267
Payment of dividends (8 057) (7 739)
Payment of short-term borrowings (52 500) (77 175)
Long-term debt issues - 65 000
Long-term debt issues refunded - (21 300)
Sinking funds payments (1 294) (214)
Net cash used for financing activities (59 585) (40 161)
Net increase (decrease) in cash (595) 1 171
Cash at beginning of period 6 007 1 522
Cash at end of period $ 5 412 $ 2 693
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 9 179 $ 8 054
Income taxes $ 2 214 $ 3 433
See accompanying notes.
PAGE 6
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Accounting Policies
Commonwealth Energy System, the parent company, is referred to in
this report as the "System" and, together with its subsidiaries, is
collectively referred to as "the system."
The system's significant accounting policies are described in Note 1
of Notes to Consolidated Financial Statements included in its 1993 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
For interim reporting purposes, the system follows these same basic
accounting policies but considers each interim period as an integral part
of an annual period and makes allocations of certain expenses to interim
periods based upon estimates of such expenses for the year.
Regulated subsidiaries of the System have established various
regulatory assets in cases where the Massachusetts Department of Public
Utilities (DPU) and/or the Federal Energy Regulatory Commission (FERC)
have permitted, or are expected to permit, recovery of specific costs over
time. At March 31, 1994, principal regulatory assets included in deferred
charges were $21.4 million for transition costs associated with FERC Order
636, $14.9 million for unrecovered plant and decommissioning costs for the
Yankee Atomic nuclear plant, $14.7 million for abandonment and noncon-
struction costs related to the Seabrook project, $14.2 million for post-
retirement benefits costs including pensions, $7.3 million in litigation
costs associated with a settlement agreement with Boston Edison Company
relative to the Pilgrim nuclear plant and $7.3 million related to deferred
income taxes. The more significant regulatory liabilities, reflected in
deferred credits, include $17.8 million related to income taxes.
Generally, expenses which relate to more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Principal items of expense which are allocated other than on
the basis of passage of time are depreciation and property taxes of the
gas subsidiary, Commonwealth Gas Company (Commonwealth Gas). These
expenses are recorded for interim reporting purposes based upon projected
gas revenue. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax for each interim period.
The unaudited financial statements for the periods ended March 31,
1994 and 1993, reflect, in the opinion of the System, all adjustments
necessary to summarize fairly the results for such periods. In addition,
certain prior period amounts are reclassified from time to time to con-
form with the presentation used in the current period's financial
statements.
The results for interim periods are not necessarily indicative of
results for the entire year because of seasonal variations in the
consumption of energy and Commonwealth Gas' seasonal rate structure.
PAGE 7
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
(2) Commitments and Contingencies
(a) Construction
The system is engaged in a continuous construction program presently
estimated at $358.3 million for the five-year period 1994 through 1998.
Of that amount, $71.9 million is estimated for 1994. The program is
subject to periodic review and revision.
(b) Decommissioning of Nuclear Power Plants
The system, through Canal Electric Company (Canal), has a 3.52%
joint-ownership interest in the Seabrook nuclear power plant. Canal and
the other joint owners have established a Seabrook Nuclear Decommissioning
Financing Fund to cover post operational decommissioning costs. The
estimated cost to decommission the plant is $370 million, in 1994 dollars,
through March 31, 1994. Canal's share, less its share of the market value
of the decommissioning trust, would amount to approximately $12.1 million.
The system also has ownership interests in four nuclear generating
facilities in New England and is obligated to pay its proportionate share
of the capacity and energy costs associated with these units, which
include depreciation, operations and maintenance, a return on invested
capital and the estimated cost of decommissioning the nuclear plants at
the end of their estimated service lives. Pertinent information with
respect to projected decommissioning costs, in 1993 dollars, resulting
from life-of-the-unit contracts from these units is as follows:
Connecticut Maine Vermont Yankee
Yankee Yankee Yankee Atomic*
(Dollars in Millions)
Equity ownership 4.50% 4.00% 2.50% 4.50%
Plant entitlement 4.50% 3.59% 2.25% 4.50%
Plant capability (MW) 560.0 870.0 496.0 -
System entitlement (MW) 25.2 31.2 11.2 -
Contract expiration date 1998 2008 2012 -
Decommissioning cost estimate (100%) $325.0 $316.6 $253.0 $331.7
System's decommissioning cost 14.6 11.4 5.7 14.9
* On February 26, 1992, the Board of Directors of Yankee Atomic
Electric Company agreed to permanently discontinue power operation of
its plant and decommission the facility. Cambridge Electric Light
Company's (Cambridge) and Commonwealth Electric Company's (Common-
wealth Electric) respective 2% and 2.5% investment in Yankee Atomic
is approximately $1 million. The companies' estimated decommission-
ing costs include their unrecovered share of all costs associated
with the shutdown of the facility, recovery of its plant investment,
and decommissioning and closing the plant. This amount is reflected
in the accompanying Balance Sheets as a liability and a corresponding
regulatory asset.
PAGE 8
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
(c) Environmental
The system is subject to laws and regulations administered by
federal, state and local authorities relating to the quality of the
environment. These laws and regulations affect, among other things, the
siting and operation of electric generating and transmission facilities
and can require the installation of expensive air and water pollution
control equipment. These regulations have had an impact upon the System's
operations in the past and will continue to have an impact upon future
operations, capital costs and construction schedules of major facilities.
For additional information, see "Environmental Matters" in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(d) FERC Order No. 636
On April 8, 1992, the FERC issued Order No. 636 (Order 636),
requiring interstate pipelines to unbundle (separate) existing gas sales
contracts into separate components (gas sales, transportation and storage
services). Order 636 provides mechanisms that will allow customers such
as Commonwealth Gas to reduce the level of firm services from pipelines
and permits the "brokering" of excess capacity on a temporary or permanent
basis. Order 636 also requires pipelines to provide transportation
services which allow customers to receive the same level of service they
had with bundled contracts. Pipelines were required to be operating under
Order 636 by November 1, 1993.
As a result of implementing Order 636, each pipeline company is
allowed to collect certain "transition costs" from their customers.
Commonwealth Gas has been billed a total of approximately $18.2 million
from Tennessee Gas Pipeline Company, Algonquin Gas Transmission Company
and Texas Eastern Transmission Company through March 31, 1994. It is
anticipated that as much as $45 million in transition costs could be
sought by these suppliers through a series of FERC filings over the 12 to
24 month period that began on June 1, 1993. The largest element of the
aforementioned transition costs results from the pipelines' need to buy
out gas supply contracts entered into prior to Order 636. The total
amount of such costs ultimately billed to Commonwealth Gas will vary
depending on the success of the pipelines in negotiating settlements with
their former suppliers, and final review by the FERC. Commonwealth Gas is
actively reviewing the prudency of transition costs billed in order to
minimize costs to its customers. Commonwealth Gas has recorded its
estimated liability based on amounts incurred by the respective pipelines
as of March 31, 1994.
As of October 29, 1993, Commonwealth Gas received preliminary DPU
authorization to recover these costs, with carrying charges, through the
cost of gas adjustment (CGA) over a four-year period that began in
November 1993. As a result, a regulatory asset totaling $21.4 million is
reflected in deferred charges as of March 31, 1994. In addition, a
related liability of $11.8 million is reflected in deferred credits.
Also, approximately $7.9 million of the amount paid to the pipeline
companies relates to gas inventory costs being allocated new storage
services under Order 636. Commonwealth Gas will recover these inventory
costs through the CGA.
PAGE 9
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Capital resources of the System and its subsidiaries are derived
principally from retained earnings and equity funds provided through the
System's Dividend Reinvestment and Common Share Purchase Plan (DRP).
Supplemental interim funds are borrowed on a short-term basis and, when
necessary, replaced with new equity and/or debt issues through permanent
financing secured on an individual company basis. The system purchases
100% of all subsidiary common stock issues and provides, to the extent
possible, a portion of the subsidiaries' short-term financing needs.
These capital resources provide the funds required for the subsidiary
companies' construction programs, current operations, debt service and
other capital requirements.
For the first three months of 1994, cash flows from operating
activities amounted to approximately $67.7 million and reflect net income
of $28 million and non-cash items such as depreciation ($13.2 million),
amortization ($3.5 million) and deferred income taxes (net of investment
tax credits) which amounted to $478,000. The change in working capital
since December 31, 1993, exclusive of cash and interim financing, amounted
to $24.5 million and had a significant positive effect on cash flows from
operating activities, reflecting lower levels of inventory ($15.2
million), unbilled revenues ($7.6 million), prepaid taxes ($4.9 million),
miscellaneous current assets ($1.5 million) coupled with higher levels of
accounts payable and accrued income taxes of $20.7 million and $13.3
million, respectively These were offset, in part, by a higher level of
accounts receivable ($37.6 million).
Construction expenditures for the first three months of 1994 were
approximately $8.7 million, including an allowance for funds used during
construction (AFUDC) and nuclear fuel. Construction expenditures for the
period, together with the preferred and common dividend requirements of
the System ($8.1 million), were funded entirely with internally generated
funds. In addition to satisfying these capital requirements, the
reduction in short-term borrowings of $52.5 million was accomplished with
internal funds generated from higher unit sales (due to the extreme cold
weather) experienced by both the electric and gas divisions during the
first quarter of this year.
Results of Operations
The following is a discussion of certain significant factors which
have affected operating revenues, expenses and net income during the
periods included in the accompanying condensed statements of income. This
discussion should be read in conjunction with the Notes to Condensed
Financial Statements appearing elsewhere in this report.
PAGE 10
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
A summary of the period to period changes in the principal items
included in the condensed statements of income for the three months ended
March 31, 1994 and 1993 is shown below:
Three Months
Ended March 31,
1994 and 1993
Increase (Decrease)
(Dollars in Thousands)
Operating Revenues -
Electric $20 182 13.4%
Gas 14 689 12.2
Steam and other 1 133 22.7
36 004 13.0
Operating Expenses -
Fuel and purchased power 19 049 22.9
Cost of gas sold 11 295 18.8
Other operation and maintenance (1 633) (2.5)
Depreciation (263) (2.0)
Taxes -
Local property and other 15 0.2
Federal and state income 3 274 22.6
31 737 13.1
Operating Income 4 267 12.6
Other Income 159 35.3
Income Before Interest Charges 4 426 12.9
Interest Charges 538 5.2
Net Income 3 888 16.2
Dividends on preferred shares (15) (4.8)
Earnings Applicable to Common Shares $ 3 903 16.4
Unit Sales -
Electric - Megawatthours (MWH)
Retail 24 535 2.1
Wholesale 181 356 18.3
205 891 9.5
Gas - Billions of British Thermal Units (BBTU)
Firm 1 019 5.6
Interruptible (25) (34.7)
994 5.5
PAGE 11
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The following is a summary of electric and gas unit sales for the
three-month periods indicated:
Three Months Ended
March 31,
1994 1993
Electric Sales - MWH
Residential 504 889 493 799
Commercial 489 396 474 578
Industrial 96 557 93 815
Other 102 170 106 285
Total retail sales 1 193 012 1 168 477
Wholesale to other systems 1 171 206 989 850
Total 2 364 218 2 158 327
Gas Sales - BBTU
Residential 11 123 10 627
Commercial 5 337 5 078
Industrial 1 683 1 585
Other 988 822
Total firm sales 19 131 18 112
Interruptible sales 47 72
Total 19 178 18 184
Electric Revenues, Fuel and Purchased Power Costs
For the first three months of 1994, electric operating revenues
increased approximately $20.2 million or 13.4% due primarily to higher fuel
and purchased power costs, new retail rates for Cambridge which became
effective June 1, 1993 and a 2.1% increase in retail electric unit sales.
Fuel and purchased power costs rose $19 million or 22.9% and
reflects the increase in retail unit sales and the higher cost of fuel oil
at Canal's generating facility, which is the major supplier of electricity
to the system. The cost of oil at Canal for the three-month period ended
March 31, 1994 averaged 2.7 cents per KWH compared to 2.3 cents per KWH for
the same period in 1993. Fuel and purchased power costs averaged 4.3 cents
per KWH compared to 3.8 cents per KWH for the same period in 1993 and
reflect the impact of Commonwealth Electric's contractual obligations to
purchase higher-cost power contracted for in the 1980s when its customer
base grew dramatically and forecasts predicted continued growth. The
contracts, which are typically long-term power purchases from certain gas-
fired independent power producing facilities, will continue to drive costs
up as additional capacity comes on line. Commonwealth Electric is
currently involved in the renegotiation of several existing contracts which
include price restructuring, contract buy-outs and/or generating unit
shutdowns that could also reduce its cost of power.
The 2.1% increase in retail electric unit sales was due primarily to
higher unit sales in the residential and commercial sectors and reflects
the colder than normal weather conditions experienced in our service
territory during the first quarter. The 18.3% increase in wholesale sales
had little, if any, impact on net income.
PAGE 12
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Gas Revenues and Cost of Gas Sold
For the first three months of 1994, gas operating revenues increased
$14.7 million or 12.2% due primarily to an increase in the cost of gas
sold, higher firm unit sales and a higher level of conservation and load
management costs ($974,000). During the current three-month period, the
average cost of gas increased to $3.72 per MMBTU from $3.31 per MMBTU for
the same period of 1993 due, in part, to the billing of transition costs
associated with the implementation of FERC Order No. 636. During the
current three-month reporting period, firm gas unit sales increased 5.6% as
each customer segment showed improvement due to the colder than normal
winter.
Other Operating Expenses
For the first three months of 1994, other operation and maintenance
decreased $1.6 million or 2.5% due primarily to cost savings of
approximately $2 million that resulted from a second quarter 1993 work
force reduction offset, in part, by a higher level of current and amortized
conservation and load management costs incurred primarily at Commonwealth
Gas ($1.1 million). Other factors contributing to the overall decline
include a decrease in insurance and employee benefit costs ($485,000) and a
lower provision for bad debts due to improved collections ($115,000).
Despite a higher level of depreciable plant for the current three-month
period, depreciation expense decreased 2% due to an adjustment in the
second quarter of 1993 to Canal's accrual rate to reflect an extension of
the depreciation recovery period for Unit 1 from 1996 to 2002. Local
property and other taxes increased 2.2% due primarily to higher tax rates
and assessments. A higher level of pretax income and, to a lesser extent,
an increase in the federal tax rate to 35% contributed to the $3.3 million
or 22.6% increase in federal and state income taxes.
Other Income and Interest Charges
For the first quarter of 1994, other income increased 35.3% due
primarily to interest income related to a Massachusetts sales tax abatement
($159,000) and the absence in 1994 of a loss (recorded in January 1993) in
connection with the system's equity investment in Yankee Atomic Electric
Company ($74,000). The impact of these items was offset, in part, by
decreases in non-operating rents ($88,000) and accretion relating to the
abandonment of Seabrook Unit 2 ($37,000).
Total interest charges for the current quarter increased 5.2% due
primarily to a higher level of long-term debt reflecting the new debt
issued by Commonwealth Electric, Commonwealth Gas and Hopkinton LNG Corp.
during 1993 and the interest to be refunded to the system's retail
customers in connection with the aforementioned sales tax abatement. The
impact of these items was offset, somewhat, by the decline in short-term
interest costs reflecting a lower average level of short-term borrowings.
Environmental Matters
Commonwealth Gas is participating in the assessment of a number of
former manufactured gas plant sites to determine if and to what extent such
PAGE 13
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
sites have been contaminated and whether Commonwealth Gas may be
responsible for remedial actions.
The costs associated with the clean-up of these sites are
recoverable in rates through the cost of gas adjustment clause pursuant to
a 1990 DPU order that provides for recovery of these expenditures over a
seven-year amortization period without carrying costs. Commonwealth Gas
has recorded an estimated $2.3 million liability that reflects its best
estimate (based on current information) of the costs to be incurred in
connection with the various activities to be undertaken at these sites.
Commonwealth Gas has also recorded a regulatory asset in anticipation of
recovery of these costs in rates. Commonwealth Gas is unable to predict
the total cost to ultimately resolve these matters due to significant
uncertainty as to the actual site condition and the extent of any
associated remediation activities and the assignment of responsibility.
However, it is expected that all such costs will continue to be recovered
in rates as described above.
Commonwealth Gas and certain other system subsidiaries are also
involved in other known or potentially contaminated sites with costs which
may not be recoverable in rates and have recorded an estimated liability
(and a charge to operations) of $560,000 in total to cover the costs
associated with assessment and remediation activities. These estimates
will be adjusted as further investigation and assignment of responsibility
occurs. As noted above, the system is unable to predict at this time the
ultimate cost to resolve these matters due to the uncertainties inherent in
the site investigation and remediation process.
Power Contracts
Cambridge and Commonwealth Electric have long-term contracts for the
purchase of electricity from various sources. Generally, these contracts
are for fixed periods and require that Cambridge and Commonwealth Electric
pay a demand charge for their capacity entitlement in each unit and an
energy charge to cover the cost of fuel. Cambridge and Commonwealth
Electric collect a portion of their capacity-related purchased power costs
associated with certain long-term power arrangements through their base
rates. The recovery mechanism for these costs uses a per KWH factor which
is calculated using historical (test-period) capacity costs and unit sales.
This factor is then applied to current monthly KWH sales. When current
period capacity costs and/or unit sales vary from test-period levels,
Cambridge and Commonwealth Electric experience a revenue excess or short-
fall. This recovery mechanism had a positive impact on net income of
$417,000 for the current quarter compared to a net loss of $581,000 for the
first quarter of 1993. All other capacity and energy-related purchased
power costs are recovered through their respective Fuel Charge.
Power Agreement Cancelled
On May 2, 1994, Cambridge and Commonwealth Electric gave notice of
termination of power purchase agreements with Eastern Energy Corp.
(Eastern), the developer of a proposed 300 MW coal-fired plant in New
Bedford, Massachusetts. In June 1989, in order to meet rising energy
PAGE 14
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
requirements, Cambridge and Commonwealth Electric agreed to buy 27% (33 MW
and 50 MW, respectively) of the power to be produced by the proposed plant,
originally scheduled to begin operation in January 1992. That date and
later revised scheduled operating dates have not been achieved, and the
proposed plant has still not received the necessary permits. Efforts to
reshape the Eastern power purchase agreements to provide a satisfactory
arrangement were unsuccessful. The companies' actions are based on
Eastern's failure to meet its contractual obligations. Cambridge and
Commonwealth Electric are unable to predict whether or not Eastern will
contest their termination of these agreements.
Rate Stabilization Plan
Commonwealth Electric implemented a Fuel Charge (FC) rate settlement
on April 1, 1994 that will stabilize its quarterly FC rate during the years
1994 through 1996 at 6.5 cents per KWH and between 6.5 cents and 6.7 cents
per KWH during 1997. This rate stabilization results from the use of a
cost deferral mechanism that was sponsored jointly by Commonwealth Electric
and the Massachusetts Attorney General and approved by the DPU. The
stabilized FC rate could save customers between 1.75% and 5% on their
annual electric bills from 1994 through 1997. Deferred costs will be set
up as a regulatory asset to be recovered, with carrying charges, over the
subsequent six-year period beginning in 1998 under a recovery schedule to
be approved by the DPU. The deferred amount, excluding carrying charges,
is restricted to a maximum of $40 million during the settlement period
(1994 through 1997) and is further limited to an annual cost deferral of
$16 million which is the amount Commonwealth Electric anticipates will be
deferred in 1994.
The rate stabilization mechanism is part of a long-term plan to con-
trol Commonwealth Electric retail rates. This plan will help to eliminate
the disincentive for economic development resulting from a volatile and
unpredictable FC rate. The stabilized FC rate will enable current and
prospective customers to plan their business and personal finances in a
more efficient and effective manner. In addition to the Massachusetts
Attorney General, this proposal has been widely supported by various
business and customer groups and other political interests.
The settlement results in Commonwealth Electric billing its
customers a significantly lower rate than would have been in effect on
April 1, 1994 had the DPU not approved the proposal. Commonwealth
Electric's customers would have been billed for increased costs that
resulted from certain higher-priced, long-term contract obligations.
Commonwealth Electric is currently involved in contract renegotiations, as
mentioned previously in this discussion.
PAGE 15
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The system is not a party to any pending material legal proceeding.
Item 2. Changes in the Rights of the Company's Security Holders
None
Item 3. Defaults by the Company on its Senior Securities
None
Item 4. Results of Votes of Security Holders
(a) The Annual Meeting of Shareholders was held on May 5, 1994.
(b) The three nominees, Henry Dormitzer, Franklin M. Hundley and
Gerald L. Wilson listed in the System's Notice of 1994 Annual Meeting,
Proxy Statement and 1993 Financial Information dated April 1, 1994
were elected to the Board of Trustees of Commonwealth Energy System.
(c) As set forth in the System's Notice of 1994 Annual Meeting, Proxy
Statement and 1993 Financial Information dated April 1, 1994 as Item
2, a proposal to consent to an amendment to Section 22 of the System's
Declaration of Trust, which Section sets forth the conditions under
which presently authorized but unissued Common Shares of the System
may be issued by the Trustees without the vote or written consent of a
majority of the Common Shares outstanding at the time was voted upon
and approved at the 1994 Annual Shareholders' Meeting. There were
6,954,409 (67.2%) Common Shares voted for this proposal, 509,582
(4.9%) Common Shares voted against, 181,393 (1.8%) Common Shares
abstained and 2,700,235 (26.1%) Common Shares were not voted. The
affirmative vote of the holders of a majority of the outstanding
Common Shares was required for approval of this proposal.
(d) As set forth in the System's Notice of 1994 Annual Meeting, Proxy
Statement and 1993 Financial Information dated April 1, 1994 as Item
3, seeking shareholders' approval of Commonwealth Energy System and
Subsidiary Companies Long-Term Incentive Compensation Plan for key
employees of the System and its subsidiaries which was approved and
adopted by the Board of Trustees on February 16, 1994 was voted upon
and approved at the 1994 Annual Shareholders' Meeting. There were
7,728,684 (74.7%) Common Shares voted for this proposal, 736,838
(7.1%) Common Shares voted against, 204,216 (2.0%) Common Shares
abstained and 1,675,881 (16.2%) Common Shares were not voted. The
affirmative vote of the holders of a majority of the outstanding
Common Shares was required for approval of this proposal.
(e) As set forth in the System's Notice of 1994 Annual Meeting, Proxy
Statement and 1993 Financial Information dated April 1, 1994 as Item
4, a shareholder proposal, which was also presented at the 1991, 1992
PAGE 16
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
and 1993 Annual Meeting, requesting the Board of Trustees to repeal
the classified board and institute annual election of trustees was
voted upon and failed to pass at the 1994 Annual Shareholders'
Meeting. There were 1,483,947 (14.4%) Common Shares voted for this
proposal, 5,917,813 (57.2%) Common Shares voted against, 272,511
(2.6%) Common Shares abstained and 2,671,348 (25.8%) Common Shares
were not voted. The affirmative vote of the holders of a majority of
the outstanding Common Shares was required for approval of this
proposal.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4. Instruments defining the rights of security holders,
including indentures.
Incorporated herein by reference:
4.4.18 Eighteenth Supplemental Indenture dated December 1, 1993
to Indenture of Trust and First Mortgage Dated as of
February 1, 1949 (Exhibit 1 to Commonwealth Gas' Form
10-Q (March 1994) File No. 2-1647).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1994.
PAGE 17
COMMONWEALTH ENERGY SYSTEM
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH ENERGY SYSTEM
(Registrant)
Principal Financial Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Principal Accounting Officer:
JOHN A. WHALEN
John A. Whalen,
Comptroller
Date: May 13, 1994