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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 2-7749
COMMONWEALTH ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1659070
(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, 1995
Common Stock, $25 par value 2,043,972 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
ASSETS
(Unaudited)
June 30, December 31,
1995 1994
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $505 495 $496 166
Less - Accumulated depreciation 150 732 143 877
354 763 352 289
Add - Construction work in progress 8 270 5 216
363 033 357 505
INVESTMENTS
Equity in nuclear electric power company 616 654
Other 14 14
630 668
CURRENT ASSETS
Cash 967 1 637
Accounts receivable -
Affiliates 3 304 3 713
Customers 37 441 37 862
Unbilled revenues 5 528 8 899
Prepaid property taxes - 2 739
Inventories and other 6 071 6 032
53 311 60 882
DEFERRED CHARGES 90 006 57 831
$506 980 $476 886
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, December 31,
1995 1994
(Dollars in Thousands)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized and outstanding -
2,043,972 shares wholly-owned by
Commonwealth Energy System (Parent) $ 51 099 $ 51 099
Amounts paid in excess of par value 97 112 97 112
Retained earnings 14 773 15 350
162 984 163 561
Long-term debt, less current sinking
fund requirements 156 770 157 817
319 754 321 378
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 7 900 6 400
Advances from affiliates 30 010 200
37 910 6 600
Other Current Liabilities -
Current sinking fund requirements 1 053 1 053
Accounts payable -
Affiliates 6 849 7 716
Other 27 804 31 911
Accrued taxes -
Local property and other 304 3 721
Income 13 233 8 049
Other 12 481 13 691
61 724 66 141
99 634 72 741
DEFERRED CREDITS
Accumulated deferred income taxes 43 101 42 074
Unamortized investment tax credits 7 778 7 994
Other 36 713 32 699
87 592 82 767
COMMITMENTS AND CONTINGENCIES
$506 980 $476 886
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(Unaudited)
Three Months Ended Six Months Ended
1995 1994 1995 1994
(Dollars in Thousands)
ELECTRIC OPERATING REVENUES $ 97 226 $ 98 244 $210 434 $216 734
OPERATING EXPENSES
Electricity purchased for
resale, transmission and fuel 62 969 64 267 140 932 145 042
Other operation and maintenance 20 372 21 795 39 997 41 795
Depreciation 4 103 3 984 8 205 7 998
Taxes -
Income 1 701 1 011 4 365 4 021
Local property 1 382 1 240 2 764 2 524
Payroll and other 630 636 1 640 1 628
91 157 92 933 197 903 203 008
OPERATING INCOME 6 069 5 311 12 531 13 726
OTHER INCOME 1 122 208 2 782 295
INCOME BEFORE INTEREST CHARGES 7 191 5 519 15 313 14 021
INTEREST CHARGES
Long-term debt 3 520 3 544 7 041 7 090
Other interest charges 943 115 1 318 225
Allowance for borrowed funds
used during construction (123) (88) (236) (153)
4 340 3 571 8 123 7 162
NET INCOME 2 851 1 948 7 190 6 859
RETAINED EARNINGS -
Beginning of period 16 214 16 759 15 350 15 118
Dividends on common stock (4 292) (3 884) (7 767) (7 154)
End of period $ 14 773 $ 14 823 $ 14 773 $ 14 823
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 7 190 $ 6 859
Effects of noncash items -
Depreciation and amortization 9 597 9 481
Deferred income taxes and investment
tax credits, net 3 221 (350)
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 2 484 18 384
Buy-out of power contract (25 500) -
Fuel charge stabilization deferral (6 865) (11 087)
All other operating items (599) (6 061)
Net cash (used for) provided by operating activities (10 472) 17 226
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (12 458) (9 387)
Allowance for borrowed funds used during
construction (236) (153)
Payment from affiliates - (810)
Net cash used for investing activities (12 694) (10 350)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 1 500 -
Proceeds from affiliates 29 810 -
Payment of dividends (7 767) (7 154)
Sinking funds payments (1 047) (1 047)
Net cash provided by (used for) financing activities 22 496 (8 201)
Net decrease in cash (670) (1 325)
Cash at beginning of period 1 637 2 794
Cash at end of period $ 967 $ 1 469
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest (net of capitalized amounts) $ 7 792 $ 6 942
Income taxes $ (1 287) $ (821)
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Accounting Policies
Commonwealth Electric Company (the Company) is a wholly-owned subsid-
iary of 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 Company's significant accounting policies are described in Note 1
of Notes to Financial Statements included in its 1994 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company 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.
The Company has 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 regula-
tory liabilities established by the Company are required to be refunded
to its customers over time. In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 imposes stricter
criteria for regulatory assets by requiring that such assets be probable
of future recovery at each balance sheet date. Based on the current
regulatory framework, the Company accounts for the economic effects of
regulation in accordance with the provisions of SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation" and does not expect that
the adoption of SFAS 121, which the Company expects to adopt on January
1, 1996, will have a material impact on its financial position or results
of operations. However, this conclusion may change in the future if
changes are made in the current regulatory framework or as competitive
factors influence wholesale and retail pricing in this industry. The
principal regulatory assets included in deferred charges were as follows:
June 30, December 31,
1995 1994
(Dollars in Thousands)
Purchased power contract buy-out $25 539 $ -
Fuel charge stabilization 23 503 16 638
Postretirement benefit costs
including pensions 12 529 11 215
Yankee Atomic unrecovered plant
and decommissioning costs 8 982 10 204
Pilgrim nuclear plant litigation costs 6 822 7 001
Cannon Street generating plant
abandonment, net 4 400 4 400
Conservation and load management costs 3 307 3 659
Other 893 1 049
Total regulatory assets $85 975 $54 166
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COMMONWEALTH ELECTRIC COMPANY
The regulatory liabilities included in deferred credits - other,
principally related to taxes, amounted to $11.7 million and $3.7 million
at June 30, 1995 and December 31, 1994, respectively.
Income tax expense is recorded using the statutory rates in effect
applied to book income subject to tax recorded in the interim period.
The unaudited financial statements for the periods ended June 30, 1995
and 1994 reflect, in the opinion of the Company, all adjustments (consist-
ing of only normal recurring accruals) necessary to summarize fairly the
results for such periods. In addition, certain prior period amounts are
reclassified from time to time to conform 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 con-
sumption of energy.
(2) Commitments and Contingencies
(a) Construction and Financing Programs
The Company is engaged in a continuous construction program presently
estimated at $141 million for the five-year period 1995 through 1999. Of
that amount, $27.1 million is estimated for 1995. As of June 30, 1995,
the Company's construction expenditures amounted to approximately $12.7
million, including an allowance for funds used during construction. The
Company expects to finance these expenditures on an interim basis with
internally generated funds and short-term borrowings which are ultimately
expected to be repaid with the proceeds from sales of long-term debt and
equity securities.
The program is subject to periodic review and revision due to factors
such as changes in business conditions, rates of customer growth, effects
of inflation, maintenance of reliable and safe service, equipment delivery
schedules, licensing delays, availability and cost of capital and environ-
mental regulations.
(b) Decommissioning of Yankee Atomic Nuclear Power Plant
In February 1992, the Board of Directors of Yankee Atomic Electric
Company (Yankee Atomic) agreed to permanently discontinue power operation
of its plant and decommission the Yankee Nuclear Power Station (the
plant). The Company's 2.5% investment in Yankee Atomic is approximately
$616,000. The most recent cost estimate to permanently shut down the
plant is approximately $396 million. The Company's share of this liabili-
ty is $9 million and is currently reflected in the accompanying balance
sheets as a liability and corresponding regulatory asset.
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COMMONWEALTH ELECTRIC COMPANY
Item 2. Management's Discussion and Analysis of 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.
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, 1995 and 1994 and unit sales for these periods is shown below:
Three Months Ended Six Months Ended
June 30, June 30,
1995 and 1994 1995 and 1994
Increase (Decrease)
(Dollars in Thousands)
Electric Operating Revenues $ (1 018) (1.0)% $ (6 300) (2.9)%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel (1 298) (2.0) (4 110) (2.8)
Other operation and maintenance (1 423) (6.5) (1 798) (4.3)
Depreciation 119 3.0 207 2.6
Taxes -
Federal and state income 690 68.2 344 8.6
Local property and other 136 7.2 252 6.1
(1 776) (1.9) (5 105) (2.5)
Operating Income 758 14.3 (1 195) (8.7)
Other Income 914 439.4 2 487 843.1
Income Before Interest Charges 1 672 30.3 1 292 9.2
Interest Charges 769 21.5 961 13.4
Net Income $ 903 46.4 $ 331 4.8
Unit Sales (Megawatthours or MWH)
Retail 20 307 2.7 (32 049) (2.0)
Wholesale (215 380) (59.7) (330 547) (44.1)
Total unit sales (195 073) (17.5) (362 596) (15.3)
The following is a summary of unit sales (in MWH) for the periods
indicated:
Three Months Six Months
Period Ended Total Retail Wholesale Total Retail Wholesale
June 30, 1995 920 774 775 600 145 174 2 007 624 1 589 133 418 491
June 30, 1994 1 115 847 755 293 360 554 2 370 220 1 621 182 749 038
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel
Operating revenues for the three and six-month periods ended June 30,
1995 decreased by $1 million (1%) and $6.3 million (2.9%), respectively, from
the corresponding periods in 1994 due primarily to declines in wholesale unit
sales. However, fluctuations in the level of wholesale sales have little, if
any, impact on net income. In the first half of 1995, unit sales to residen-
tial customers declined 4.9% reflecting extremely mild weather in the first
quarter of this year as compared to the record cold experienced during the
same period of 1994. In the second quarter of 1995, total retail electric
revenues increased $3.8 million as unit sales increased 2.7%, and nearly
offset the $4.6 million revenue decline caused by lower wholesale sales.
The current three and six-month periods reflect the absence of power
purchases from Canal Electric Company's (Canal) Unit 1, the reduced purchases
from Canal Unit 2 and reduced power purchases from the non-affiliated Pilgrim
nuclear unit and an independent power producer (IPP) reflecting the restruc-
turing of a power contract that defers purchases for a six-year period that
began in early 1995. In January 1995, the Company terminated a long-term power
contract with another IPP through a buy-out arrangement which will reduce
future power costs. Somewhat offsetting these reduced power sources were
greater power purchases from Seabrook and several other non-utility genera-
tors.
The Company has received approval from the Massachusetts Department of
Public Utilities (DPU) to recover in revenues certain current costs associated
with conservation and load management (C&LM) programs through the operation of
a Conservation Charge decimal on a dollar-for-dollar basis. To the extent
that these expenses increase or decrease from period to period based on
customer participation, a corresponding change will occur in revenues. In
1995, the collection of these revenues declined $868,000 and $1.3 million in
the current quarter and six-month period when compared to the same periods
last year.
Historically, revenues collected through base rates have been designed to
reimburse the Company for all costs of operation other than fuel, the energy
portion of purchased power, transmission and C&LM costs, and provide a fair
return on capital invested in the business. However, as a result of a DPU-
mandated recovery mechanism implemented in July 1991 for capacity-related
costs associated with certain long-term purchased power contracts, the Company
has experienced a revenue excess or shortfall when unit sales and/or the costs
recoverable in base rates vary from test-period levels. This issue, which has
had a significant impact on net income, was addressed in a settlement agree-
ment approved by the DPU in May 1995. (Refer to the "Rate Settlement Agree-
ment" section for additional details.) For the current three and six-month
periods, in accordance with the settlement agreement, approximately $1.1
million was deferred for future recovery. The Company's undercollection of
these capacity-related costs up to the effective date of the settlement was
$1.6 million and $2 million for the current three and six-month periods,
respectively. As a result, net income was reduced by $322,000 and $589,000
for the current three and six-month periods, respectively, an improvement of
$868,000 and $818,000 from the same periods last year.
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COMMONWEALTH ELECTRIC COMPANY
Other Operation and Maintenance
Other operation and maintenance (O&M) declined in the current quarter and
six-month period of 1995 due to lower C&LM program costs ($843,000 and $1.3
million), a decline in maintenance expense of $564,000 and $315,000 (primarily
transmission and distribution facilities) and continued savings resulting from
other on-going cost containment measures. These decreases were offset, in
part, in the current quarter and six-month period, respectively, by higher
labor and benefit costs ($274,000 and $560,000), primarily reflecting the full
recognition of expenses relating to postretirement benefits other than
pensions and amortization of previously deferred postretirement benefits
costs. (Refer to the "Rate Settlement Agreement" section for additional
information.) Also, legal fees associated with power contract arbitration
proceedings ($380,000) were included in both current periods.
Depreciation and Taxes
Depreciation expense increased slightly in the current three and six-
month periods due to a higher level of depreciable property, plant and equip-
ment. The increases in federal and state income taxes was due to a higher
level of pretax income. Local property and other tax increases for the three
and six-month periods of 1995 primarily reflect higher rates and assessments
($142,000 and $240,000, respectively).
Other Income and Interest Charges
Other income for the current six-month period increased by $2.5 million
due primarily to the reversal of a contingency reserve related to certain
costs associated with the Company's energy conservation program ($1.4 mil-
lion), the recovery of which has since been approved by the DPU. Also
contributing to the increase in the current three and six-month periods was a
higher level of interest income related to the fuel charge stabilization
deferral ($369,000 and $759,000, respectively) and, for both current periods,
carrying costs associated with the April 1995 buy-out of a power contract
($684,000) with an IPP. The cost of the buy-out is being recovered from
customers over a seven-year period.
Total interest charges increased by $769,000 (21.5%) and $961,000 (13.4%)
during the current three and six-month periods reflecting an increases of
$732,000 and $966,000, respectively, in interest on short-term borrowings
which were not required during the first half of 1994.
Power Contract Arbitration
On June 7, 1995, a three-member panel of arbitrators upheld the termina-
tion by the Company of a power contract with Eastern Energy Corporation
(Eastern), the developer of a proposed 300 MW coal-fired plant. In June 1989,
the Company agreed to buy 16% (50 MW) of the power to be produced by the
proposed plant, originally scheduled to begin operation in January 1992.
However, in May 1994, the Company gave notice of termination of its power
contract with Eastern based upon its failure to meet the permitting, con-
struction or operation milestones established by the contract, obtain the
required permits, commence construction or sell any additional power from the
proposed plant. Efforts to reshape the power contract to provide a satisfac-
tory arrangement were unsuccessful. In a letter dated June 30, 1994, Eastern
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COMMONWEALTH ELECTRIC COMPANY
objected to the notice of termination and invoked arbitration seeking $31.2
million from the Company. The panel's decision is binding and prevents
Eastern from further litigating or contesting the termination of the contracts
in any other forum. This action is expected to save the Company's customers
approximately $60 million over the next ten years and as much as $135 million
over twenty years.
Rate Settlement Agreement
In May 1995, the DPU approved a settlement proposal sponsored jointly by
the Company and the Attorney General of Massachusetts which resolved issues
related to cost of service, rates, accounting matters and generating unit
performance reviews. The Company's settlement:
(1) implements a $2.7 million annual retail base rate decrease effective
May 1, 1995 including its share of excess deferred tax reserves
related to Seabrook Unit No. 1 which Canal refunded to the Company in
May. Further, the settlement imposes a moratorium on retail rate
filings until October 1998;
(2) limits the Company's return on equity, as defined in the settlement,
for the period through December 31, 1997;
(3) terminates several 1987-1994 generating unit performance review
proceedings pending before the DPU;
(4) amends the Company's fuel charge stabilization mechanism established
on April 1, 1994 to include the deferral (without carrying charges)
of certain long-term purchased power and transmission capacity costs
within the original limits established for the fuel charge stabiliza-
tion deferral ($16 million in any given calendar year and $40 million
over the life of the mechanism);
(5) requires the Company to fully expense costs relating to postretire-
ment benefits other than pensions in accordance with Statement of
Financial Accounting Standards No. 106 and amortize the current
deferred balance of $8.6 million over a ten-year period;
(6) provides eligible Economic Development Rate customers with a discount
of up to 30% but also requires these customers to provide the Company
with a five-year notice if they intend to self-generate or acquire
electricity from another provider; and
(7) prohibits the Company from seeking recovery of the costs incurred in
realizing costs savings through a 1993 work force reduction and
restructuring, totaling approximately $3 million.
The Company's management is encouraged by the support provided through
the Office of the Attorney General and believes that this settlement will
eliminate the need for potentially costly litigation and regulatory proceed-
ings and, by moderating rate impacts and enabling the Company to remain
competitive in a changing environment, is in the best interest of the Company
and its customers.
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COMMONWEALTH ELECTRIC COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal claims and matters arising from
its course of business, including its participation in a power
contract arbitration proceeding involving the recovery of excess fuel
charges billed to the Company for power purchases with Dartmouth
Power Associates Limited Partnership. Also, the Company's decision
to cancel a power contract with Eastern Energy Corporation was upheld
by a binding arbitration panel decision in June 1995 (refer to "Power
Contract Arbitration" in Part I, Item 2 - "Management's Discussion
and Analysis of Results of Operations" section of this report.)
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
10.1.35.1 System Power Sales Agreement by and between The Connecticut Light
and Power Co., Western Massachusetts Electric Co., and Public
Service Company of New Hampshire, as sellers, and the Company, as
buyer, of power for peaking capacity and related energy, dated
January 13, 1995, as effective June 1, 1995 and extending to
October 31, 2000 (Filed herewith as Exhibit 2).
10.1.46.2 First Amendment, dated November 7, 1994, to Power Sale Agreement
by and between the Company and Altresco Pittsfield, L.P. dated
February 20, 1992 (Filed herewith as Exhibit 3).
10.1.44.1 Second Amendment, dated June 23, 1994, to Power Purchase Agreement
by and between the Company and Dartmouth Power Associates, L.P.
dated September 5, 1989 (Filed herewith as Exhibit 4).
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
six months ended June 30, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 1995.
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COMMONWEALTH ELECTRIC COMPANY
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 ELECTRIC COMPANY
(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 14, 1995