<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 September 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 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 November 1, 1995
Common Shares of Beneficial
Interest, $4 par value 10,762,906 shares
<PAGE 2>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
ASSETS
(Unaudited)
September 30, December 31,
1995 1994
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost
Electric $1 092 899 $1 047 140
Gas 341 309 338 111
Other 62 045 59 213
1 496 253 1 444 464
Less - Accumulated depreciation and
amortization 492 330 461 310
1 003 923 983 154
Add - Construction work in progress
and nuclear fuel in process 11 711 15 974
1 015 634 999 128
LEASED PROPERTY, net 15 356 15 729
EQUITY IN CORPORATE JOINT VENTURES
Nuclear electric power companies (2.5% to 4.5%) 10 043 9 818
Other investments 3 679 3 830
13 722 13 648
CURRENT ASSETS
Cash 3 610 7 722
Accounts receivable 69 959 92 157
Unbilled revenues 11 354 33 161
Inventories, at average cost 30 573 33 586
Prepaid taxes and other 20 433 14 664
135 929 181 290
DEFERRED CHARGES 153 755 134 921
$1 334 396 $1 344 716
<PAGE 3>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
CAPITALIZATION AND LIABILITIES
(Unaudited)
September 30, December 31,
1995 1994
(Dollars in Thousands)
CAPITALIZATION
Common share investment -
Common shares, $4 par value -
Authorized - 18,000,000 shares
Outstanding - 10,708,889 in 1995 and
10,525,897 in 1994 $ 42 836 $ 42 103
Amounts paid in excess of par value 109 632 103 168
Retained earnings 227 404 217 726
379 872 362 997
Redeemable preferred shares, less current
sinking fund requirements 13 840 14 660
Long-term debt, including premiums, less current
sinking fund requirements and maturing debt 396 551 418 307
790 263 795 964
CAPITAL LEASE OBLIGATIONS 13 737 14 098
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 22 675 44 850
Maturing long-term debt 35 000 25 000
57 675 69 850
Other Current Liabilities -
Current sinking fund requirements 6 793 6 793
Accounts payable 107 136 117 953
Accrued taxes 27 466 17 947
Other 39 677 38 504
181 072 181 197
238 747 251 047
DEFERRED CREDITS
Accumulated deferred income taxes 164 030 160 944
Unamortized investment tax credits and other 127 619 122 663
291 649 283 607
COMMITMENTS AND CONTINGENCIES
$1 334 396 $1 344 716
See accompanying notes.
<PAGE 4>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
Three Months Ended Nine Months Ended
1995 1994 1995 1994
(Dollars in Thousands)
OPERATING REVENUES
Electric $162 896 $174 421 $451 891 $493 500
Gas 41 393 46 251 216 443 244 557
Steam and other 2 638 2 627 11 910 11 780
206 927 223 299 680 244 749 837
OPERATING EXPENSES
Fuel and purchased power 85 624 95 279 247 540 277 190
Cost of gas sold 24 013 29 263 114 568 137 185
Other operation and maintenance 59 708 62 185 184 399 190 082
Depreciation 10 800 9 724 35 795 32 963
Taxes -
Local property and other 5 307 5 470 19 534 19 074
Federal and state income 3 955 3 502 12 772 23 022
189 407 205 423 614 608 679 516
OPERATING INCOME 17 520 17 876 65 636 70 321
OTHER INCOME (EXPENSE) 425 (996) 1 960 (297)
INCOME BEFORE INTEREST CHARGES 17 945 16 880 67 596 70 024
INTEREST CHARGES
Long-term debt 9 527 9 942 29 098 29 644
Other interest charges 1 675 830 4 992 2 804
Allowance for borrowed funds
used during construction (373) (108) (973) (351)
10 829 10 664 33 117 32 097
NET INCOME 7 116 6 216 34 479 37 927
Dividends on preferred shares 279 294 843 888
EARNINGS APPLICABLE TO
COMMON SHARES $ 6 837 $ 5 922 $ 33 636 $ 37 039
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10 686 900 10 440 347 10 626 009 10 383 895
EARNINGS PER COMMON SHARE $ .64 $ .57 $3.17 $3.57
DIVIDENDS DECLARED PER
COMMON SHARE $ .75 $ .75 $2.25 $2.25
See accompanying notes.
<PAGE 5>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 34 479 $ 37 927
Effects of noncash items -
Depreciation and amortization 45 308 43 066
Deferred income taxes and investment
tax credits, net (752) 6 506
Earnings from corporate joint ventures (1 208) (1 313)
Dividends from corporate joint ventures 1 134 962
Change in working capital, exclusive of cash
and interim financing 41 124 51 708
Buy-out of power contract (25 500) -
All other operating items 10 645 (31 450)
Net cash provided by operating activities 105 230 107 406
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) -
Electric (42 898) (19 818)
Gas (10 456) (11 351)
Other (2 660) (282)
Allowance for borrowed funds used during
construction (973) (351)
Net cash used for investing activities (56 987) (31 802)
FINANCING ACTIVITIES
Sale of common shares 7 197 6 985
Payment of dividends (24 801) (24 295)
Payment of short-term borrowings (22 175) (58 050)
Long-term debt issue refunded (10 000) -
Sinking funds payments (2 576) (2 576)
Net cash used for financing activities (52 355) (77 936)
Net decrease in cash (4 112) (2 332)
Cash at beginning of period 7 722 6 007
Cash at end of period $ 3 610 $ 3 675
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 30 578 $ 29 635
Income taxes $ 12 357 $ 14 088
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 1994 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, the
regulatory liabilities established by the system are required to be refunded
to customers over time. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Account-
ing 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 system
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
system will 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 as 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 at
September 30, 1995 and December 31, 1994 were as follows:
1995 1994
(Dollars in Thousands)
Purchased power contract buy-out $ 24 873 $ -
Postretirement benefit costs including pensions 23 977 20 129
Fuel charge stabilization 22 671 16 638
Yankee Atomic unrecovered plant and
decommissioning costs 15 791 18 368
Seabrook related costs 10 300 12 648
Deferred income taxes 9 667 5 537
Pilgrim nuclear plant litigation costs 6 733 7 001
FERC Order 636 transition costs 6 616 19 201
Cannon Street generating plant abandonment, net 4 394 4 400
Conservation and load management costs 3 187 3 773
Other 3 931 4 042
Total regulatory assets $132 140 $111 737
<PAGE 7>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The regulatory liabilities, reflected in the accompanying balance sheets
and principally related to deferred income taxes, were $24.4 million and
$17.3 million at September 30, 1995 and December 31, 1994, respectively.
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 September 30,
1995 and 1994, 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 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
consumption of energy and Commonwealth Gas' seasonal rate structure.
(2) Commitments and Contingencies
(a) Construction
The system is engaged in a continuous construction program presently
estimated at $357.4 million for the five-year period 1995 through 1999. Of
that amount, $87.7 million is estimated for 1995. 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 decommissioning fund to cover post opera-
tional decommissioning costs. The estimated cost to decommission the plant
is $394 million. Canal's share of this liability (approximately $13.6
million), less its share of the market value of the decommissioning trust
(approximately $1.4 million), is approximately $12.5 million.
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
and decommission the Yankee Nuclear Power Station (the plant). At September
30, 1995, Cambridge Electric Light Company's (Cambridge Electric) and
Commonwealth Electric Company's (Commonwealth Electric) respective 2% and
2.5% investment in Yankee Atomic was approximately $1.1 million. The most
recent cost estimate to permanently shut down the plant is approximately
$350 million. The companies' share of this liability is $15.8 million and
is currently reflected in the accompanying consolidated balance sheets as a
liability and corresponding regulatory asset.
<PAGE 8>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Other Nuclear Plants
Cambridge Electric also has equity ownership interests ranging from 2.5%
to 4.5% in three operating nuclear generating facilities located in New
England with contract expiration dates ranging from 2007 to 2012. Cambridge
Electric 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 plants at the end of their estimated service
lives. Cambridge Electric's estimated total decommissioning cost and
associated market value share of decommissioning trust assets for these
units is approximately $36 million and $13.3 million, respectively.
(c) FERC Order No. 636
In May 1995, the DPU allowed Commonwealth Gas to accelerate recovery of
its FERC Order No. 636 transition costs that were incurred to date. These
costs had been deferred and accumulated as a regulatory asset and were being
recovered through the cost of gas adjustment (CGA) over a four-year period
that began in November 1993. The costs are now being recovered through the
CGA over a one-year period that began May 1, 1995. The accelerated recovery
period was permitted by the DPU due to the minimal impact on customers'
bills. At September 30, 1995, a regulatory asset totaling $6.6 million was
reflected in deferred charges. In addition, a related liability of $6.6
million was included in deferred credits. Any further transition costs will
be recovered by Commonwealth Gas through the CGA as incurred.
<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. Arrangements for bank
lines of credit totaled $90 million in committed lines and $75 million in
uncommitted lines at September 30, 1995, at which time approximately
$142 million was available to the system. 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 current nine-month period, cash flows from operating activities
amounted to approximately $105.2 million and reflect net income of $34.5
million and noncash items such as depreciation ($35.8 million) and amort-
ization ($9.5 million). The change in working capital since December 31,
1994, exclusive of changes in cash ($4.1 million) and interim financing
($22.2 million), amounted to $41.1 million and had a significant positive
impact on cash flows from operating activities, reflecting lower levels of
unbilled revenues ($21.8 million), accounts receivable ($22.2 million) and
inventories ($3 million) and a higher level of accrued taxes ($9.5 million)
offset, in part, by an increase in prepaid taxes and other assets ($5.8
million) and a decline in accounts payable ($10.8 million). In addition,
the current nine-month period reflects $25.5 million relating to
Commonwealth Electric's power contract buy-out with an independent power
producer (IPP). This amount was paid in April 1995 and is being recovered
with carrying charges over a seven-year period that began in April 1995.
Construction expenditures for the current nine-month period were
approximately $57 million, including an allowance for funds used during
construction and nuclear fuel. Construction expenditures, preferred and
common dividend requirements of the System ($24.8 million), the payment of
short-term borrowings ($22.2 million) and the refunding of long-term debt
($10 million) were funded almost entirely with internally generated funds.
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 and nine months
ended September 30, 1995 and 1994 and unit sales for these periods are shown
below:
Three Months Ended Nine Months Ended
Increase (Decrease)
(Dollars in Thousands)
Operating Revenues -
Electric $(11 525) (6.6)% $(41 609) (8.4)%
Gas (4 858) (10.5) (28 114) (11.5)
Steam and other 11 0.4 130 1.1
(16 372) (7.3) (69 593) (9.3)
Operating Expenses -
Fuel and purchased power (9 655) (10.1) (29 650) (10.7)
Cost of gas sold (5 250) (17.9) (22 617) (16.5)
Other operation and maintenance (2 477) (4.0) (5 683) (3.0)
Depreciation 1 076 11.1 2 832 8.6
Taxes -
Local property and other (163) (3.0) 460 2.4
Federal and state income 453 12.9 (10 250) (44.5)
(16 016) (7.8) (64 908) (9.6)
Operating Income (356) (2.0) (4 685) (6.7)
Other Income 1 421 142.7 2 257 759.9
Income Before Interest Charges 1 065 6.3 (2 428) (3.5)
Interest Charges 165 1.5 1 020 3.2
Net Income 900 14.5 (3 448) (9.1)
Dividends on preferred shares (15) (5.1) (45) (5.1)
Earnings Applicable to Common Shares $ 915 15.5 $ (3 403) (9.2)
Unit Sales
Electric - Megawatthours (MWH)
Retail 8 624 0.4 (12 658) (0.4)
Wholesale (218 937) (25.3) (1 782 387) (57.8)
(210 313) (9.9) (1 795 045) (27.2)
Gas - Billions of British Thermal
Units (BBTU)
Firm 181 5.6 (2 364) (8.4)
Interruptible and other (2 076) (71.6) (579) (9.4)
(1 895) (26.7) (2 943) (8.6)
<PAGE 11>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The following is a summary of electric and gas unit sales for the three
and nine-month periods ended September 30, 1995 and 1994:
Three Months Ended Nine Months Ended
1995 1994 1995 1994
Electric Sales - MWH
Residential 471 063 468 998 1 321 173 1 360 515
Commercial 685 905 675 050 1 863 515 1 833 778
Industrial 108 621 113 108 310 871 314 505
Other 5 288 5 097 16 973 16 392
Total retail sales 1 270 877 1 262 253 3 512 532 3 525 190
Wholesale to other systems 646 624 865 561 1 302 934 3 085 321
Total 1 917 501 2 127 814 4 815 466 6 610 511
Gas Sales - BBTU
Residential 1 444 1 413 14 307 15 774
Commercial 1 044 953 7 207 7 874
Industrial 746 720 2 985 3 114
Other 153 120 1 253 1 354
Total firm sales 3 387 3 206 25 752 28 116
Off-system sales 976 - 3 356 -
Quasi-firm sales 579 - 1 449 -
Interruptible sales 267 3 898 794 6 178
Total sales 5 209 7 104 31 351 34 294
Transportation 653 300 1 945 1 031
Total 5 862 7 404 33 196 35 325
Electric Operating Revenues, Fuel and Purchased Power Costs
For the current quarter and nine-month period, electric operating
revenues decreased approximately $11.5 million (6.6%) and $41.6 million
(8.4%), respectively, as compared to the same periods in 1994 due mainly to
lower unit sales, primarily wholesale sales. However, fluctuations in the
level of wholesale sales have little, if any, impact on net income. In
addition, during the current nine-month period retail unit sales to
residential customers declined 2.9% reflecting the extremely mild weather
conditions during the first quarter of 1995 compared to the record cold
experienced during the same period in 1994. Somewhat offsetting the decline
in residential sales in the nine-month period were higher unit sales to
commercial customers (1.6%). Retail unit sales during the current quarter
were virtually unchanged compared to the same period in 1994.
The lower level of fuel and purchased power costs ($9.7 million and
$29.7 million) during the current three and nine-month periods was due
primarily to lower fuel oil costs at Canal Unit 1 reflecting a combination
of scheduled maintenance and other repairs to the Unit 1 turbine which kept
the unit out of service until August 1995. Also contributing to this
decrease was the reduced availability of Canal Unit 2 and the successful
renegotiation of a contract with an IPP completed earlier this year that
defers purchases for a six-year period. Also, in January 1995, Commonwealth
Electric terminated a long-term power contract with another IPP through a
buy-out arrangement which has reduced power costs and will provide greater
savings in the future. Slightly offsetting these reductions was greater
<PAGE 12>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
generation from Seabrook and an increase in power purchases from several
smaller power producers.
Commonwealth Electric and Cambridge Electric have received approval from
the 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. For
the current nine-month period, this item declined $1.8 million and $755,000
for Commonwealth Electric and Cambridge Electric, respectively.
Historically, revenues collected through base rates have been designed
to reimburse Commonwealth Electric and Cambridge Electric for all costs of
operation other than fuel, the energy portion of purchased power, trans-
mission 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 for
capacity-related costs associated with certain long-term purchased power
contracts, Commonwealth Electric and Cambridge Electric experience 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 settlement agreements approved by the
DPU in May 1995. (Refer to the "Rate Settlement Agreements" section for
additional details.) During the current three and nine-month periods,
approximately $2.2 million and $569,000 of revenues in excess of associated
capacity-related costs were deferred pursuant to the settlement agreements.
The current nine-month period also includes $969,000 of capacity-related
costs not recovered in revenues that were incurred prior to the implemen-
tation of the settlements. For the same periods in 1994, revenues included
approximately $1.9 million and $1.1 million in excess of associated
capacity-related costs due to the recovery mechanism. As a result of this
issue, net income was approximately $1.2 million lower in the current
quarter and $1.3 million lower in the current nine-month period.
Gas Operating Revenues and Cost of Gas Sold
Gas operating revenues decreased $28.1 million or 11.5% for the current
nine-month period due mainly to a $22.6 million reduction in the cost of gas
sold that reflected a lower level of firm unit sales. This decrease was
also attributed to lower interruptible unit sales offset, in part, by higher
transportation volume and off-system and quasi-firm sales that began in
1994. During the current quarter, gas operating revenues decreased by $4.9
million or 10.5% due to a $5.3 million decrease in the cost of gas sold and
lower interruptible unit sales partially offset by higher transportation
volume, off-system and quasi-firm sales and an increase in firm unit sales.
Firm unit sales decreased 8.4% during the current nine-month period as
sales to all customer classes declined due to mild weather experienced
throughout the region during the first quarter compared to a colder than
normal first quarter last year. Heating degree days for the current nine
months totaled 4,055 compared to 4,449 for the same period in 1994, a
decrease of 8.9%. Firm unit sales were 5.6% higher during the current
quarter as heating degree days were 249 compared to 207 for the same period
in 1994. Although interruptible sales decreased significantly during both
<PAGE 13>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
current periods, fluctuations in these sales have little, if any, impact on
net income. The contribution of off-system and quasi-firm sales to total
sales had no impact on net income. One-half of the margin realized on these
sales was used to reduce the cost of gas to firm customers. The remaining
half is being deferred pending DPU approval of margin sharing proposals that
are expected to be filed later this year for quasi-firm sales and early next
year for off-system sales.
Other Operating Expenses
Other operation and maintenance decreased by approximately 4% and 3%
during the current quarter and first nine months of 1995, respectively, due
primarily to lower C&LM costs ($1.5 million and $2.8 million) and a decline
in the provision for bad debts reflecting improved collection experience
($207,000 and $762,000) offset, in part, by higher labor costs ($630,000 and
$2.7 million) and employee benefit costs ($511,000 and $1.7 million). The
decrease during the current nine-month period was also offset by higher
maintenance costs ($1.2 million) reflecting scheduled maintenance and other
repairs to the Canal Unit 1 turbine. The higher level of benefit costs
reflects the full recognition of expenses relating to postretirement
benefits other than pensions and the amortization of previously deferred
postretirement benefits costs. (Refer to the "Rate Settlement Agreements"
section for additional details.)
Depreciation expense increased 11.1% and 8.6% in the current three and
nine-month periods due mainly to a higher level of depreciable property,
plant and equipment. The increase in the nine-month period also reflects an
adjustment to depreciation rates related to Canal Unit 1 during the second
quarter. Local property and other taxes increased 2.4% during the current
nine-month period due mainly to higher rates and assessments offset, in
part, by a $201,000 adjustment to the 1995 property tax estimate made by
Commonwealth Electric. The decrease in local property and other taxes
during the current three-month period reflects the aforementioned estimate
adjustment offset, in part, by higher rates and assessments. Federal and
state income taxes decreased $10.3 million or 44.5% during the current nine-
month period due to a significantly lower level of pretax income and a tax
adjustment in conjunction with the aforementioned settlement agreements with
the DPU. The increase in federal and state income taxes during the current
quarter reflects the level of pretax income.
Other Income and Interest Charges
The increase in other income for the current nine-month period was due
primarily to the partial reversal of a reserve related to certain costs
associated with Commonwealth Electric's energy conservation program, the
recovery of which was subsequently approved by the DPU. The increase in the
current quarter was due to the absence of the reserve recorded in the same
quarter in 1994.
Total interest charges for the current nine-month period increased 3.2%
due to an increase in interest on deferred gas costs ($1.6 million) and
higher interest rates on a greater level of short-term borrowings offset, in
part, by an increase in the debt component of allowance for funds used
during construction ($622,000).
<PAGE 14>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Regulatory Matters
Electric Industry Restructuring
On August 16, 1995, the DPU issued an order calling for the restruc-
turing of the electric utility industry in Massachusetts. The stated
purpose of the restructuring effort is to allow customers more flexibility
in choosing their electric service provider and to develop an efficient
industry structure and regulatory framework that minimizes long-term costs
to consumers while maintaining the safety and reliability of electric
services with minimum impact on the environment. The electric utility
industry will ultimately be functionally separated into three segments to
help meet this objective: generation, distribution and transmission. A
coalition of state agencies, businesses, environmental groups and utility
companies, including Commonwealth Electric and Cambridge Electric, worked
together sharing ideas and opinions and proposed eighteen principles for a
restructured electric utility industry. The DPU agreed with several of the
coalition's suggestions and, in its order, identified the following seven
principles:
(1) provide the broadest possible customer choice;
(2) provide all customers with an opportunity to share in the benefits
of increased competition;
(3) ensure full and fair competition in power generation markets;
(4) functionally separate generation, transmission and distribution
services;
(5) ensure electric service to all customers, including low-income
customers;
(6) support and further the goals of environmental regulation; and
(7) provide incentives for better utility performance.
Also, five principles to guide the transition from a regulated to a
competitive industry structure were established in the order. These
principles are:
(1) honor existing commitments;
(2) separate component costs of electricity on customer bills;
(3) seek to provide near-term rate relief;
(4) maintain conservation programs; and
(5) ensure that the transition is orderly and expeditious while
minimizing customer confusion.
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
In addition, the order cites that utilities should have a reasonable
opportunity to recover stranded costs associated with commitments previously
incurred to provide reliable electric service.
All utilities are required to submit proposals detailing how they plan
to move into a competitive market structure. Commonwealth Electric's and
Cambridge Electric's proposal is due by August 16, 1996.
Stranded Investment Charge Approved
On September 29, 1995, the DPU issued a ruling largely approving four
rate tariffs, including a Customer Transition Charge (CTC), that were filed
by Cambridge Electric on March 15, 1995. The CTC will protect remaining
customers from paying certain costs, often referred to as stranded
investment costs, that were incurred to provide electric service to large
customers that meet certain usage requirements and remain within Cambridge
Electric's service area but decide to purchase their power from another
source or generate their own power. These costs include long-term power
contracts entered into to meet projected energy requirements, investments in
substations, underground and overhead lines and current and future
decommissioning costs associated with nuclear plants. This ruling is
believed to be the first retail stranded cost charge approved nationally and
follows the aforementioned restructuring order which endorsed, in principle,
the recovery of stranded investment costs.
Through the CTC, Cambridge Electric will initially recover 75% of net
stranded investment costs as calculated by Cambridge Electric in its
proposal. Cambridge Electric's other rates include the Supplemental Service
Rate, the Standby Service Rate and the Maintenance Service Rate each of
which were approved with only minor changes. Cambridge Electric is
encouraged by the DPU's position on recovery of stranded investment costs
and expects to address recovery of the remaining 25% in its restructuring
filing.
Rate Settlement Agreements
In May 1995, the DPU approved settlement proposals sponsored jointly by
Commonwealth Electric, Cambridge Electric and the Attorney General of
Massachusetts which resolved issues related to cost of service, rates,
accounting matters and generating unit performance reviews. Commonwealth
Electric's agreement:
(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 refunded in May 1995 to
Commonwealth Electric by Canal. Further, the settlement imposes a
moratorium on retail rate filings until October 1998;
(2) limits Commonwealth Electric'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;
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COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
(4) amends Commonwealth Electric's current fuel charge stabilization
mechanism to include deferral (without carrying charges) of certain
long-term purchased power and transmission capacity costs within
the original limits established for the fuel charge stabilization
deferral ($16 million in any given calendar year and $40 million
over the life of the mechanism);
(5) requires Commonwealth Electric to fully expense costs relating to
postretirement benefits other than pensions in accordance with
Statement of Financial Accounting Standards No. 106 and amortize
the 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
Commonwealth Electric with a five-year notice if they intend to
self-generate or acquire electricity from another provider; and
(7) prohibits Commonwealth Electric from seeking recovery of the costs
incurred in realizing cost savings through a 1993 work force
reduction and restructuring, totaling approximately $3 million.
Cambridge Electric's agreement:
(1) implements a $1.5 million refund to Cambridge Electric's customers
through the Fuel Charge during the third and fourth quarters of
1995 including its share of excess deferred tax reserves related to
Seabrook Unit 1 refunded in May 1995 to Cambridge Electric by
Canal;
(2) allows Cambridge Electric to defer certain long-term purchased
power and transmission capacity costs in excess of the amount of
such capacity costs currently included in Cambridge Electric's base
rates up to an annual amount of $2 million for recovery in its next
general retail base rate case;
(3) prohibits Cambridge Electric from seeking recovery of costs it
incurred in obtaining cost savings through a work force reduction
and restructuring, totaling approximately $400,000; and
(4) includes the DPU's withdrawal of all related requests, appeals,
motions or other issues raised by parties regarding certain
generating unit performance reviews.
The system's management is encouraged by the support provided through
the Office of the Attorney General and believes that these settlements will
eliminate the need for potentially costly litigation and regulatory
proceedings and, by moderating rate impacts and enabling the system to
remain competitive in a changing environment, the settlements are in the
best interest of the system and its customers.
<PAGE 17>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
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. Commonwealth Gas and other system subsidiaries are also involved
in certain other known or potentially contaminated sites where the
associated costs may not be recoverable in rates. There were no significant
new developments that occurred during the current nine-month period. For
further information on these matters, refer to the System's 1994 Annual
Report on Form 10-K.
<PAGE 18>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The System is subject to legal claims and matters arising from its
course of business.
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
Effective October 1, 1995, John A. Whalen, formerly the System's
Comptroller, was appointed Vice President and General Manager of
COM/Energy Services Company, an affiliate of the System. James D.
Rappoli, the System's Financial Vice President and Treasurer, assumed
Mr. Whalen's former duties as Comptroller.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 - Declaration of Trust
Commonwealth Energy System (Registrant)
3.1.1 Filed herewith as Exhibit 1 is the Declaration of Trust of CES dated
December 31, 1926, as amended by vote of the shareholders and trustees
May 4, 1995.
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 2 is the Financial Data Schedule for the
nine months ended September 30, 1995.
Filed herewith as Exhibit 3 is the restated Financial Data Schedule
for the nine months ended September 30, 1994.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1995.
<PAGE 19>
COMMONWEALTH ENERGY SYSTEM
SIGNATURE
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 and
Accounting Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: November 13, 1995