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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 March 31, 1996
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 May 1, 1996
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
MARCH 31, 1996 AND DECEMBER 31, 1995
ASSETS
(Unaudited)
March 31, December 31,
1996 1995
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $523 782 $520 714
Less - Accumulated depreciation 157 653 154 170
366 129 366 544
Add - Construction work in progress 4 173 1 912
370 302 368 456
INVESTMENTS
Equity in nuclear electric power company 609 590
Other 14 14
623 604
CURRENT ASSETS
Cash 1 354 1 430
Accounts receivable -
Affiliates 3 111 2 570
Customers 46 022 41 951
Unbilled revenues 6 097 5 795
Prepaid property taxes 1 422 2 843
Inventories and other 4 787 5 262
62 793 59 851
DEFERRED CHARGES 72 146 77 916
$505 864 $506 827
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1996 1995
(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 16 792 20 708
165 003 168 919
Long-term debt, less current sinking
fund requirements 153 225 154 275
318 228 323 194
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 10 325 17 300
Advances from affiliates 12 725 1 545
23 050 18 845
Other Current Liabilities -
Current sinking fund requirements 3 553 3 553
Accounts payable -
Affiliates 11 131 8 987
Other 31 062 32 699
Accrued taxes -
Local property and other 2 418 3 068
Income 20 749 18 721
Other 10 350 11 742
79 263 78 770
102 313 97 615
DEFERRED CREDITS
Accumulated deferred income taxes 44 657 44 211
Unamortized investment tax credits 7 451 7 559
Other 33 215 34 248
85 323 86 018
COMMITMENTS AND CONTINGENCIES
$505 864 $506 827
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1996 1995
(Dollars in Thousands)
ELECTRIC OPERATING REVENUES $117 896 $113 598
OPERATING EXPENSES
Electricity purchased for resale,
transmission and fuel 79 230 77 963
Other operation and maintenance 20 113 19 625
Depreciation 4 290 4 102
Taxes -
Income 2 996 2 664
Local property 1 434 1 382
Payroll and other 1 040 1 010
109 103 106 746
OPERATING INCOME 8 793 6 852
OTHER INCOME 28 1 270
INCOME BEFORE INTEREST CHARGES 8 821 8 122
INTEREST CHARGES
Long-term debt 3 492 3 521
Other interest charges 504 375
Allowance for borrowed funds
used during construction (48) (113)
3 948 3 783
NET INCOME 4 873 4 339
RETAINED EARNINGS -
Beginning of period 20 708 15 350
Dividends on common stock (8 789) (3 475)
End of period $ 16 792 $ 16 214
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1996 1995
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 4 873 $ 4 339
Effects of noncash items -
Depreciation and amortization 5 384 4 413
Deferred income taxes and investment
tax credits, net (694) (464)
Change in working capital, exclusive of cash
and interim financing (2 525) (6 406)
All other operating items 4 105 (116)
Net cash provided by operating activities 11 143 1 766
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (5 537) (6 757)
Allowance for borrowed funds used during
construction (48) (113)
Net cash used for investing activities (5 585) (6 870)
FINANCING ACTIVITIES
Payment of short-term borrowings (6 975) (6 400)
Advances from affiliates 11 180 15 705
Payment of dividends (8 789) (3 475)
Sinking funds payments (1 050) (1 050)
Net cash provided by (used for) financing activities (5 634) 4 780
Net decrease in cash (76) (324)
Cash at beginning of period 1 430 1 637
Cash at end of period $ 1 354 $ 1 313
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 5 183 $ 5 009
Income taxes $ 639 $ 315
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
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 collec-
tively referred to as "the system." The System is an exempt public
utility holding company under the provisions of the Public Utility Holding
Company Act of 1935 and, in addition to its investment in the Company, has
interests in other utility and several non-regulated companies.
The Company has 879 regular employees including 568 (65%) represented
by three collective bargaining units. New agreements were reached with
two bargaining units (representing approximately 54% of regular employees)
that were scheduled to expire on October 1, 1996 and November 1, 1997.
These new agreements will remain in effect until 2002 and 2001, respec-
tively.
(2) Significant Accounting Policies
(a) Principles of Accounting
The Company's significant accounting policies are described in Note 2
of Notes to Financial Statements included in its 1995 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting poli-
cies 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 unaudited financial statements for the periods ended March 31,
1996 and 1995 reflect, in the opinion of the Company, all adjustments
(consisting 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 presenta-
tion used in the current period's financial statements.
Income tax expense is recorded using the statutory rates in effect
applied to book income subject to tax recorded in the interim period.
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.
(b) Regulatory Assets and Liabilities
The Company is regulated as to rates, accounting and other matters by
various authorities including the Federal Energy Regulatory Commission
(FERC) and the Massachusetts Department of Public Utilities (DPU).
Based on the current regulatory framework, the Company accounts for
the economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The Company has established
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COMMONWEALTH ELECTRIC COMPANY
various regulatory assets in cases where the DPU and/or the FERC have
permitted or are expected to permit recovery of specific costs over time.
Similarly, the regulatory liabilities established by the Company are
required to be refunded to customers over time. On January 1, 1996, the
Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 imposes
stricter criteria for regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. As of March 31,
1996, SFAS No. 121 did not have an impact on its financial position or
results of operations. However, this result may change as modifications
are made in the current regulatory framework pursuant to electric utility
restructuring orders issued by the DPU.
The principal regulatory assets included in deferred charges were as
follows:
March 31, December 31,
1996 1995
(Dollars in Thousands)
Purchased power contract buy-out $ 23 185 $ 23 838
Fuel charge stabilization 17 901 22 063
Postretirement benefit costs including pensions 12 180 12 283
Yankee Atomic unrecovered plant and
decommissioning costs 5 331 5 630
Pilgrim nuclear plant litigation costs 6 554 6 644
Conservation and load management costs 2 806 2 968
Other 760 804
$ 68 717 $ 74 230
The regulatory liabilities included in deferred credits were as
follows:
March 31, December 31,
1996 1995
(Dollars in Thousands)
Excess Seabrook-related deferred income taxes $ 4 363 $ 4 887
Other deferred income taxes 2 182 2 182
Excess replacement power refunds 1 535 1 719
$ 8 080 $ 8 788
(3) Commitments and Contingencies
The Company is engaged in a continuous construction program presently
estimated at $110 million for the five-year period 1996 through 2000. Of
that amount, $24.1 million is estimated for 1996. As of March 31, 1996,
the Company's construction expenditures amounted to approximately $5.6
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.
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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 months ended March 31,
1996 and 1995 and unit sales for these periods is shown below:
Three Months Ended
March 31,
1996 and 1995
Increase (Decrease)
(Dollars in Thousands)
Electric Operating Revenues $ 4 298 3.8%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel 1 267 1.6
Other operation and maintenance 488 2.5
Depreciation 188 4.6
Taxes -
Federal and state income 332 12.5
Local property and other 82 3.4
2 357 2.2
Operating Income 1 941 28.3
Other Income (1 242) (97.8)
Income Before Interest Charges 699 8.6
Interest Charges 165 4.4
Net Income $ 534 12.3
Unit Sales (Megawatthours or MWH)
Retail 44 628 5.5
Wholesale (42 855) (15.7)
Total unit sales 1 773 0.2
The following is a summary of unit sales (in MWH) for the periods
indicated:
Unit Sales (MWH)
Three Months Ended Total Retail Wholesale
March 31, 1996 1 088 624 858 162 230 462
March 31, 1995 1 086 851 813 534 273 317
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel
Operating revenues for the first quarter of 1996 increased by $4.3 million
(3.8%) from the corresponding period in 1995 due primarily to a 5.5% increase
in retail unit sales, including a 6.6% increase in residential unit sales that
resulted from a colder than normal first quarter this year compared to a very
mild first quarter last year. The Company's residential customer class
provided approximately 57% of its total retail sales revenue and approximately
10% of those customers rely on electricity for space heating. Revenues from
wholesale sales were lower by 7.2% reflecting the changing capacity needs of
non-affiliated utilities and NEPOOL. Fluctuations in the level of wholesale
electric sales have no impact on net income.
The current quarter reflects a reduced amount of power purchased from
several higher-cost non-utility generators (approximately 5%) that was
replaced with lower-cost generation from affiliate Canal Electric Company's
Units 1 and 2 (approximately 44%). Purchases from these units were signifi-
cantly lower in 1995 due to a combination of both scheduled and unscheduled
maintenance.
Other Operation and Maintenance
The 2.5% increase in other operation and maintenance was primarily due to
higher costs for postretirement benefits ($995,000) and conservation and load
management programs ($535,000), offset somewhat by lower employee health and
life insurance costs ($579,000) and a lower provision for bad debt expense.
Depreciation and Taxes
Depreciation expense increased 4.6% due to a higher level of depreciable
property, plant and equipment. The increase in federal and state income taxes
($332,000) was due to a higher level of pretax income. Local property and
other taxes increased $82,000 (3.4%) primarily reflecting higher tax rates and
assessments in the Company's service area and, to a lesser extent, slightly
higher payroll taxes.
Other Income and Interest Charges
Other income decreased $1.2 million in the current quarter from the same
period in 1995 due to the reversal of a reserve last year related to certain
costs associated with the Company's energy conservation program, the recovery
of which was subsequently approved by the DPU.
Total interest charges increased $165,000 (4.4%) for the current three-
month period due to a higher average amount of short-term borrowings during
the period, and a decrease in the allowance for borrowed funds used during
construction.
Electric Industry Restructuring
On August 16, 1995, the DPU issued an order calling for the restructuring
of the electric utility industry in Massachusetts in order 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
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COMMONWEALTH ELECTRIC COMPANY
services with a minimum impact on the environment. Each of the state's
electric utilities, together with other interested parties, participated in
this proceeding that initially established a set of principles that would
govern the restructuring of the electric industry in Massachusetts.
In February 1996, certain utilities submitted required proposals detailing
how they would plan to move into a competitive market structure. Since that
time, the DPU held a generic proceeding that focused on many of the policy
issues raised in its original order. On April 12, 1996, the Company and
Cambridge Electric (the Companies), in response to the generic proceeding,
filed comments with the DPU on several issues that should be addressed in
creating a restructured electric utility industry which, together with
comments from other interested parties, provided valuable input to the DPU in
its development of proposed rules that were summarized in its order issued on
May 1, 1996. The proposed rules, which are subject to public comment and
hearings prior to adoption of final rules in October 1996, are based on the
following policies:
(1) An Independent System Operator which: (a) operates the regional
transmission system reliably; (b) is independent and unaffiliated
with electric companies; and (c) applies comparable transmission
rates, terms and conditions to all generators;
(2) A Power Exchange to manage a competitive bidding pool for short-term
power sales;
(3) Functional separation of electric companies into generation, trans-
mission and distribution corporate entities;
(4) Preservation of discounts for low-income customers, shut-off protec-
tions and provision of service to all customers;
(5) Registration requirements for generation suppliers, including market-
ers and aggregators;
(6) A reasonable opportunity for recovery of stranded costs, including a
proposal to protect municipalities from loss of utility property
taxes associated with diminished generation plant value;
(7) Options for phased incentives for electric companies to divest their
generation assets to stimulate a robust competitive market;
(8) Promotion of environmental goals;
(9) Support for energy efficiency and renewable energy resources;
(10) Encouragement, but not a requirement, for towns with Municipal
Electric Companies to participate in the restructured industry;
(11) A price cap system of economic incentive regulation for the remaining
distribution and transmission monopolies;
(12) Unbundling of rates on bills by January 1, 1997 into separate
components of transmission, distribution and a market proxy for
energy costs. Implementation of competitive generation market by
January 1, 1998.
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COMMONWEALTH ELECTRIC COMPANY
In its May 1, 1996 order, the DPU acknowledged that it does not have
jurisdiction in such areas as environmental regulation and the establishment
of an Independent System Operator or a Power Exchange. Federal and state
environmental agencies and the Federal Energy Regulatory Commission have the
requisite authority in these areas. However, the DPU determined that it was
important for it to express its initial views regarding these components of a
restructured electric industry.
In accordance with the DPU's schedule, the Companies will file revenue-
neutral unbundled rates in October 1996 for effect in January 1997. Also,
during 1997, the Companies will file their comprehensive restructuring
proposal. One element of the Companies' proposal (announced on February 15,
1996) would require the Companies to voluntarily put their power capacity
entitlements (1,140 MW) to a market test in an effort to develop a competitive
market whereby customers would have the flexibility of choosing their electric
supplier. The proposal calls for the auctioning in a competitive market of
entitlements in all twenty-one contracts, including contracts held by the
Companies involving the System's generating subsidiary Canal Electric. The
proposal provides for total recovery of the difference between the current
market value of the Companies' power contracts and their original unavoidable
costs. This difference, considered to be a stranded cost, would be recovered
through a non-bypassable access charge paid over an appropriate time period by
all customers in the Companies' service areas. The auction approach has
received initial positive reviews from the Commonwealth of Massachusetts
Division of Energy Resources and the Office of the Attorney General. Manage-
ment is unable to predict the ultimate outcome of the overall proceedings or
the Companies' specific proposal.
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COMMONWEALTH ELECTRIC COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending material legal proceeding.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 1 is the Financial Data Schedule for
the three months ended March 31, 1996.
Filed herewith as Exhibit 2 is the restated Financial Data
Schedule for the three months ended March 31, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1996.
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COMMONWEALTH ELECTRIC COMPANY
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 ELECTRIC COMPANY
(Registrant)
Principal Financial and
Accounting Officer:
Date: May 14, 1996 JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer