PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
(617) 225-4000
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report.)
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 August 1, 1994
Common Shares of Beneficial
Interest, $4 par value 10,457,064 shares
PAGE 2
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
JUNE 30, 1994 AND DECEMBER 31, 1993
ASSETS
(Unaudited)
June 30, December 31,
1994 1993
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost
Electric $1 028 100 $1 018 121
Gas 329 265 322 314
Other 58 459 58 473
1 415 824 1 398 908
Less - Accumulated depreciation and
amortization 447 593 425 483
968 231 973 425
Add - Construction work in progress and
nuclear fuel in process 13 265 11 089
981 496 984 514
LEASED PROPERTY, net 15 780 16 150
INVESTMENTS
Nuclear electric power companies (2.5% to 4.5%) 9 899 9 660
Other investments 3 957 3 889
13 856 13 549
CURRENT ASSETS
Cash and cash equivalents 7 070 6 007
Accounts receivable 103 223 93 663
Unbilled revenues 17 227 43 279
Inventories, at average cost 28 116 36 102
Prepaid taxes and other 4 750 15 231
160 386 194 282
DEFERRED CHARGES 124 521 106 668
$1 296 039 $1 315 163
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
JUNE 30, 1994 AND DECEMBER 31, 1993
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, December 31,
1994 1993
(Dollars in Thousands)
CAPITALIZATION
Common share investment -
Common shares, $4 par value -
Authorized - 18,000,000 shares
Outstanding - 10,402,523 in 1994 and
10,295,077 in 1993 $ 41 610 $ 41 180
Amounts paid in excess of par value 98 875 94 657
Retained earnings 216 788 201 233
357 273 337 070
Redeemable preferred shares, less current
sinking fund requirements 15 230 15 480
Long-term debt, including premiums, less current
sinking fund requirements and maturing debt 437 318 448 893
809 821 801 443
CAPITAL LEASE OBLIGATIONS 14 171 14 456
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks - 71 975
Maturing long-term debt 20 000 10 000
20 000 81 975
Other Current Liabilities -
Current sinking fund requirements 6 793 6 793
Accounts payable 117 195 90 006
Accrued taxes 12 542 9 090
Other 40 263 37 322
176 793 143 211
196 793 225 186
DEFERRED CREDITS
Accumulated deferred income taxes 160 602 156 851
Unamortized investment tax credits
and other 114 652 117 227
275 254 274 078
COMMITMENTS AND CONTINGENCIES
$1 296 039 $1 315 163
See accompanying notes.
PAGE 4
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
Three Months Ended Six Months Ended
1994 1993 1994 1993
(Dollars in Thousands)
OPERATING REVENUES
Electric $147 836 $146 416 $319 079 $297 477
Gas 62 757 53 809 198 306 174 669
Steam and other 3 039 3 122 9 153 8 103
213 632 203 347 526 538 480 249
OPERATING EXPENSES
Fuel and purchased power 79 891 81 565 182 020 164 645
Cost of gas sold 36 515 29 475 107 922 89 587
Other operation and
maintenance 65 174 67 415 127 897 131 771
Depreciation 10 350 9 116 23 239 22 268
Taxes -
Local property and other 5 716 6 075 13 604 13 948
Federal and state income 1 785 815 19 520 15 276
199 431 194 461 474 202 437 495
OPERATING INCOME 14 201 8 886 52 336 42 754
OTHER INCOME 198 4 129 808 4 580
INCOME BEFORE INTEREST CHARGES 14 399 13 015 53 144 47 334
INTEREST CHARGES
Long-term debt 9 852 9 638 19 702 18 245
Other interest charges 931 1 225 1 974 2 946
Allowance for borrowed funds
used during construction (144) (22) (243) (94)
10 639 10 841 21 433 21 097
NET INCOME 3 760 2 174 31 711 26 237
Dividends on preferred shares 297 312 594 624
EARNINGS APPLICABLE TO
COMMON SHARES $ 3 463 $ 1 862 $ 31 117 $ 25 613
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10 382 879 10 190 518 10 355 670 10 175 756
EARNINGS PER COMMON SHARE $ .32 $ .18 $3.00 $2.52
DIVIDENDS DECLARED PER
COMMON SHARE $ .75 $ .73 $1.50 $1.46
See accompanying notes.
PAGE 5
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 31 711 $ 26 237
Effects of non-cash items -
Depreciation and amortization 29 937 27 718
Deferred income taxes and investment
tax credits, net 1 093 3 228
Earnings from corporate joint ventures (849) (780)
Dividends from corporate joint ventures 543 687
Change in working capital, exclusive of cash,
cash equivalents and interim financing 68 541 41 814
All other operating items (24 208) (20 880)
Net cash provided by operating activities 106 768 78 024
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC)
Electric (11 771) (11 566)
Gas (8 303) (7 627)
Other (80) (633)
Allowance for borrowed funds used during
construction (243) (94)
Net cash used for investing activities (20 397) (19 920)
FINANCING ACTIVITIES
Sale of common shares 4 648 2 556
Payment of dividends (16 156) (15 498)
Payment of short-term borrowings (71 975) (83 425)
Long-term debt issues - 65 000
Long-term debt issues refunded - (21 300)
Sinking funds payments (1 825) (1 838)
Net cash used for financing activities (85 308) (54 505)
Net increase in cash and cash equivalents 1 063 3 599
Cash at beginning of period 6 007 1 522
Cash and cash equivalents at end of period $ 7 070 $ 5 121
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 20 570 $ 18 836
Income taxes $ 5 180 $ 10 586
See accompanying notes.
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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. Similarly, certain regulatory liabilities established by the system
are expected to be refunded to customers over time. As of June 30, 1994,
principal regulatory assets included in deferred charges were $20.8
million for transition costs associated with FERC Order 636, $16 million
for postretirement benefit costs including pensions, $13.9 million for
abandonment and nonconstruction costs related to the Seabrook project,
$13.8 million for unrecovered plant and decommissioning costs for the
Yankee Atomic nuclear plant, $11.2 million for Commonwealth Electric
Company's (Commonwealth Electric) rate stabilization plan, $7.3 million
related to deferred income taxes and $7.2 million in litigation costs
associated with a settlement agreement with Boston Edison Company relative
to the Pilgrim nuclear plant. The more significant regulatory
liabilities, reflected in deferred credits, include $17.7 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 June 30,
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.
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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 $374 million, in 1994 dollars,
through June 30, 1994. Canal's share, less its share of the market value
of the decommissioning trust, would amount to approximately $12.2 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 $307.0
System's decommissioning cost $ 14.6 $ 11.4 $ 5.7 $ 13.8
* 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 Electric) and Commonwealth Electric's respective
2% and 2.5% investment in Yankee Atomic is approximately $1.1 million
as of June 30, 1994. The companies' estimated decommissioning 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.
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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
As a result of implementing FERC Order No. 636 (Order 636), each
interstate pipeline company is allowed to collect certain transition costs
from their customers that resulted from the pipelines' need to buy out gas
supply contracts entered into prior to the issuance of Order 636.
Commonwealth Gas has been billed a total of approximately $21.1 million
from Tennessee Gas Pipeline Company (Tennessee), Algonquin Gas
Transmission Company (Algonquin) and Texas Eastern Transmission Company
(Texas Eastern) through June 30, 1994. It was initially anticipated that
as much as $45 million in transition costs would be sought by these
suppliers through a series of FERC filings over a 12 to 24 month period
that began on June 1, 1993.
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 $20.8 million is
reflected in deferred charges as of June 30, 1994. In addition, a related
liability of $8.9 million is reflected in deferred credits.
After extensive negotiations between Texas Eastern, Tennessee and
their customers (including Commonwealth Gas), settlements were reached
regarding a number of transition obligation issues. The settlement with
Texas Eastern, which was recently approved by FERC, calls for the pipeline
to absorb approximately 20% of all transition costs incurred from June
1993 forward. This agreement also provides for an extended billing period
and annual caps on the collection of future costs. Commonwealth Gas
believes that the absorption requirement will give the pipeline incentive
to minimize future costs.
The settlement with Tennessee, which has yet to be approved by FERC,
will lower one element of Commonwealth Gas' transition obligation by
approximately $1 million. Further negotiations are underway with
Tennessee to craft a total settlement similar to that achieved with Texas
Eastern.
Negotiations continue with the pipelines on several other issues. As
a result Commonwealth Gas is unable to predict its final transition
obligation at this time, however, based on these and subsequent settlement
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
activities, Commonwealth Gas will adjust its regulatory asset and
liability accounts accordingly.
(e) 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 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. 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. The deferred costs are
being charged to a regulatory asset to be recovered, with carrying
charges, over the subsequent six-year period beginning in 1998 pursuant to
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. As of June 30, 1994,
Commonwealth Electric has deferred $11.2 million, including carrying
charges.
The rate stabilization mechanism is part of a long-term plan to
control Commonwealth Electric's 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 better 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.
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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 six months of 1994, cash flows from operating
activities amounted to approximately $106.8 million and reflect net income
of $31.7 million and non-cash items such as depreciation ($23.6 million),
amortization ($6.3 million) and deferred income taxes (net of investment
tax credits) which amounted to $1.1 million. The change in working
capital since December 31, 1993, exclusive of cash ($3.5 million), cash
equivalents (a temporary cash investment at June 30, 1994 of $3.6 million)
and interim financing ($72 million), amounted to $68.5 million and had a
significant positive effect on cash flows from operating activities. The
working capital change reflects lower levels of inventory ($8 million),
unbilled revenues ($26.1 million), prepaid taxes ($8.6 million),
miscellaneous current assets ($1.9 million) coupled with higher levels of
accounts payable ($27.2 million), accrued income taxes ($3.5 million) and
other miscellaneous current liabilities ($2.8 million). These were
offset, in part, by a higher level of accounts receivable ($10 million).
The change in all other operating items of $24.1 million includes an $11.2
million regulatory asset established pursuant to Commonwealth Electric's
rate stabilization plan.
Construction expenditures for the first six months of 1994 were
approximately $20.5 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 ($16.2 million), were funded entirely with internally generated
funds. In addition to satisfying these capital requirements, the
reduction in short-term borrowings of $72 million was accomplished for the
most part with internal funds generated from higher unit sales experienced
by both the electric and gas divisions during the first half of this year
(including record gas sales during the first quarter) and continued cost
containment efforts. As of June 30, 1994, the system had no outstanding
short-term bank borrowings.
Results of Operations
The following is a discussion of certain significant factors which
have affected operating revenues, expenses and net income during the
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
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.
A summary of the period to period changes in the principal items
included in the condensed statements of income for the three and six months
ended June 30, 1994 and 1993 is shown below:
Three Months Six Months
Ended June 30, Ended June 30,
1994 and 1993 1994 and 1993
Increase (Decrease)
(Dollars in Thousands)
Operating Revenues -
Electric $ 1 420 1.0% $ 21 602 7.3%
Gas 8 948 16.6 23 637 13.5
Steam and other (83) (2.7) 1 050 13.0
10 285 5.1 46 289 9.6
Operating Expenses -
Fuel and purchased power (1 674) (2.1) 17 375 10.6
Cost of gas sold 7 040 23.9 18 335 20.5
Other operation and maintenance (2 241) (3.3) (3 874) (2.9)
Depreciation 1 234 13.5 971 4.4
Taxes -
Local property and other (359) (5.9) (344) (2.5)
Federal and state income 970 119.0 4 244 27.8
4 970 2.6 36 707 8.4
Operating Income 5 315 59.8 9 582 22.4
Other Income (3 931) (95.2) (3 772) (82.4)
Income Before Interest Charges 1 384 10.6 5 810 12.3
Interest Charges (202) (1.9) 336 1.6
Net Income 1 586 73.0 5 474 20.9
Dividends on preferred shares (15) (4.8) (30) (4.8)
Earnings Applicable to Common Shares $ 1 601 86.0 $ 5 504 21.5
Unit Sales
Electric - Megawatthours (MWH)
Retail 25 522 2.4 50 057 2.3
Wholesale 214 787 25.8 396 143 21.7
240 309 12.8 446 200 11.1
Gas - Billions of British
Thermal Units (BBTU)
Firm 113 2.0 1 132 4.8
Interruptible 1 741 393.0 1 716 333.2
1 854 30.1 2 848 11.7
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The following is a summary of electric and gas unit sales for the three
and six-month periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
Electric Sales - MWH
Residential 386 628 377 785 891 517 871 584
Commercial 486 574 472 389 975 970 946 967
Industrial 104 840 101 498 201 397 195 313
Other 91 884 92 732 194 054 199 017
Total retail sales 1 069 926 1 044 404 2 262 938 2 212 881
Wholesale to other systems 1 048 553 833 766 2 219 759 1 823 616
Total 2 118 479 1 878 170 4 482 697 4 036 497
Gas Sales - BBTU
Residential 3 238 3 294 14 361 13 921
Commercial 1 584 1 529 6 921 6 607
Industrial 711 612 2 394 2 197
Other 295 280 1 283 1 102
Total firm sales 5 828 5 715 24 959 23 827
Interruptible sales 2 184 443 2 231 515
Total 8 012 6 158 27 190 24 342
Electric Revenues, Fuel and Purchased Power and Electric Unit Sales
For the first six months of 1994, electric operating revenues increased
$21.6 million or 7.3% due primarily to an increase in fuel and purchased
power costs, a 2.3% increase in retail unit sales (discussed below) and new
retail rates for Cambridge Electric which became effective June 1, 1993.
This was slightly offset by a $900,000 reduction in Cambridge Electric's
and Commonwealth Electric's conservation and load management costs (C&LM),
which are being recovered in revenues. The recovery of lost base revenues
related to conservation and load management (C&LM) programs increased by
$408,000 for the six-month period but decreased $239,000 in the current
quarter when compared to the same period in 1993. The recovery of lost
base revenues is allowed by the DPU to encourage effective implementation
of C&LM programs. The KWH savings that are realized as a result of the
successful implementation of C&LM programs serve as the basis for
determining lost base revenues.
For the current six-month period, fuel and purchased power costs rose
$17.4 million or nearly 11% and reflects Commonwealth Electric's purchases
from higher-cost must-run non-utility generators contracted for in the
1980s when its customer base grew dramatically and forecasts predicted
continued growth. Commonwealth Electric is currently involved in the
renegotiation of various power contracts which include price restructuring,
contract buy-outs and/or generating unit shutdowns that could also reduce
its cost of power. Fuel and purchased power costs averaged 4.1 cents per
KWH for both the current and prior year six-month periods and reflects the
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
deferral in the current quarter of $11.1 million for costs related to
Commonwealth Electric's rate stabilization mechanism.
The cost of electricity purchased for resale for the six-month periods
ended June 30, 1994 and 1993 also included $836,000 and $4.8 million,
respectively, of capacity-related costs associated with certain purchased
power contracts that were not recovered in revenues due to the recovery
mechanism established by the DPU. The impact of this under-recovery
reduced net income by $508,000 and $2.9 million for the current quarter and
six-month periods. (Refer to the "Power Contracts" section to follow.)
The increase of 2.3% in retail unit sales for the first half of 1994
was due to higher unit sales to the residential (2.3%), commercial (3.1%)
and industrial (3.1%) sectors and reflects the impact of the extreme cold
weather conditions experienced in the system's service territory during the
first quarter. The significant increases in wholesale unit sales during
the current quarter and six-month period reflects the changing capacity
needs of the New England Power Pool and non-affiliated utilities.
Fluctuations in the level of wholesale electric sales have little, if any,
impact on net income.
Gas Revenues, Cost of Gas Sold and Gas Unit Sales
For the first six months of 1994, gas operating revenues increased
$23.4 million or 13.5% due to higher firm and interruptible unit sales, an
increase in the cost of gas sold ($18.3 million) and higher C&LM costs ($2
million) which Commonwealth Gas began recovering in late 1992. The average
cost of gas per MMBTU increased to $3.97 compared to $3.68 for the same
period in 1993 due to higher gas prices during the first quarter and, to a
lesser extent, the transition costs related to Order 636 and higher LNG
costs. For the first half of 1994, firm unit sales rose 4.8% as each
customer segment showed improvement due primarily to the extreme cold
weather during first quarter.
Other Operating Expenses
Other operation and maintenance declined during the current quarter and
first half of 1994 by 3.3% and 2.9%, respectively, due primarily to savings
resulting from a second quarter 1993 work force reduction ($2.7 million),
the absence of severance pay incurred in 1993 relative to the work force
reduction ($3.7 million), lower maintenance costs ($2.3 million), a decline
in the provision for bad debts due to improved collection experience
($757,000) and lower insurance and employee benefit costs ($524,000)
offset, in part, by a higher level of current C&LM charges incurred
primarily at Commonwealth Gas ($1.2 million).
Depreciation expense increased in both current periods due to a higher
level of plant in service and also reflects, in the current quarter, the
impact of a June 1993 adjustment that resulted from a revision to the
accrual rate to reflect the extension of the depreciable life of Canal's
Unit 1 from 1996 to 2002. Local property and other taxes declined by 5.9%
and 2.5% for the current quarter and year-to-date reflecting lower payroll
taxes ($462,000) offset somewhat by higher property tax rates and
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
assessments by various cities and towns in the system's service area
($118,000). The significant increase in federal and state income taxes in
both reporting periods reflects the higher level of pre-tax income and an
increase in the federal tax rate to 35%.
Other Income and Interest Charges
The significant decreases in other income during the current quarter
and six-month period were due primarily to the absence of a 1993 second
quarter reversal of a contingency reserve ($3.8 million pre-tax) related to
the system's Seabrook investment. The decision to eliminate the reserve
was prompted by the allowance in base rates of Seabrook costs at the state
level for Cambridge Electric. This was offset, in part, by an increase
($129,000) in the equity component of AFUDC.
For the first six months of 1994, long-term interest charges increased
by approximately 8% due to a higher level of long-term debt reflecting the
new debt issued by Commonwealth Electric, Commonwealth Gas and Hopkinton
LNG Corp. during 1993 ($1.5 million). Interest on short-term borrowings
decreased $972,000 due to the significantly lower average level of
borrowings resulting from the 1993 financing activity.
Environmental Matters
Commonwealth Gas is participating in the assessment of a number of
former manufactured gas plant (MGP) sites and alleged MGP waste disposal
locations to determine if and to what extent such 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
assessment and remediation activities identified to this point.
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 conditions 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 expected
costs associated with assessment and remediation activities. These
estimates will be adjusted as further investigation and assignment of
PAGE 15
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
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. All other capacity and energy-related purchased power costs are
recovered through their respective Fuel Charge.
Power Contract Negotiations
On May 2, 1994, Commonwealth Electric and Cambridge 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
requirements, Commonwealth Electric and Cambridge Electric agreed to buy
27% (50 MW and 33 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.
In a letter dated June 30, 1994, Eastern provided to Commonwealth Electric
and Cambridge Electric written notice of arbitration and its designation of
an arbitrator pursuant to the 1989 agreements. Commonwealth Electric and
Cambridge Electric by letter dated July 29, 1994 provided to Eastern notice
of the companies' designation of an arbitrator and on July 30, 1994 filed
an action in the Middlesex Superior Court (the Court) which seeks to have
the issues which are to be the subject of the arbitration decided by the
Court.
Commonwealth Electric has filed with the DPU for the approval of a buy-
out and termination of another power contract with a second independent
power producer. If this buy-out proposal is approved, the resulting net
replacement cost savings would be passed through to Commonwealth Electric's
customers.
PAGE 16
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended June
30, 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: August 12, 1994